K & R WONG CONSTRUCTION CO. LTD. v. SIMPSON DEVELOPMENT INVESTMENT (H.K.) CO. LTD.

HCCW422/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINGING-UP)

ACTION NO. CW 422 OF 1998

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J U D G M E N T

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The petition

1. This is a petition by K & R Wong Construction Company Limited ("K & R Wong") for winding-up of Simpson Development Investment (HK) Company Limited ("Simpson Development"). K & R Wong was ordered to be wound up on 5th March 1998 upon a petition by the Hong Kong & Shanghai Banking Corporation Ltd. ("Hong Kong & Shanghai Bank") and it is now acting by the liquidators.

2. Under the audited accounts of K & R Wong for the year ending 31st March 1997, the sum of $33,245,549 was stated to be due from a related company. The auditors of the accounts, on enquiry by the liquidators, stated that the related company was Simpson Development. Statutory demand for repayment of the $33 million odd dollars was made on 27th March 1998. No payment was made by Simpson Development and the petition was accordingly presented.

Affirmations of Simpson Development

3. Two affirmations were filed by Mr Wong Kam-shing, a director of Simpson Development in opposition to the petition. The first affirmation stated that these two companies were associated companies. Mr Wong Yau-tai was the Chairman of the Board of Directors of both companies. On 17th March 1997, by four mortgage agreements, Mr Wong Yau-tai as the mortgagor, and Simpson Development as the borrower secured $47,249,656.79 from Hong Kong & Shanghai Bank. It was a tripartite agreement between Mr Wong Yau-tai, K & R Wong and Simpson Development that the $47 million would be transferred to Simpson Development for investment purposes. For this reason, the $33 million referred to in the petition did not carry any interest.

4. Simpson Development further denied receiving the statutory demand although this is not a point now relied upon by Simpson Development.

5. The four mortgage agreements clearly showed that the borrower was K & R Wong and not Simpson Development. Mr Wong Kam-shing then filed a further affirmation stating that the four properties were held by Mr Wong Yau-tai upon trust for Simpson Development because Simpson Development provided the purchase price. He then further stated that Simpson Development had mortgaged three properties to Hong Kong & Shanghai Bank and money was lent by the bank on the security of the seven properties (namely the four earlier mortgaged properties and these three properties) to K & R Wong. Under the tripartite agreement, K & R Wong was to repay the money to the bank, it had failed to do so and the bank had taken actions against the seven properties and Simpson Development had lost the seven properties. It is said that Simpson Development has a good counterclaim against K & R Wong.

The principle

6. The principle in this area is dealt with by the Court of Appeal in Re S. Zhong Shan International Investments Co. Ltd. [1990] 1 HKC 90. The starting point is that the petitioner bears the overall persuasive or legal burden to satisfy the Court that the company is its debtor before it can have any locus standi in the winding-up proceedings. Clough J.A. at page 97 further stated that:

" The petitioner is required to verify his petition on affidavit under r 26 of the Companies (Winding-up) Rules and that rule provides that the petitioner's affidavit 'shall be sufficient prima facie evidence of the statements in the petition'. It follows that the evidential burden then shifts to the company to show that there is a substantial ground for disputing the debt or that it is bona fide disputed : see Phipson, Evidence (13th Ed) at para 4-20. If the company adduces no evidence, the evidential and legal burden imposed upon the petitioner will have been discharged. If the company adduces evidence, it may or may not, depending on the opinion of the court on the cogency of the company's evidence, shift the evidential onus back to the petitioner; but certainly at the stage where a petitioner verifies his petition under r 26, it must be right that the evidential onus shifts to the company.

It is well settled that a creditor's petition will fail if the company's debt is bona fide disputed or (which is the same thing) disputed on some substantial ground : Re Welsh Brick Industrial Ltd. [1946] 2 All ER 197 (CA). The judge in the present case regarded himself as :

... concerned to ascertain whether there is any reasonable possibility that the company has a bona fide defence to the claim being made by the petitioner."

Evidence of indebtedness

7. It is necessary to examine in this proceeding the evidence pointing to the indebtedness of Simpson Development. All that K & R Wong can show is an entry in its own account that the money is due from Simpson Development. The notes of the auditors in the audited report stated that the amount was unsecured, interest free and had no fixed repayment terms. K & R Wong said that the money was an inter-company loan.

8. I have great difficulties in accepting that what was disclosed in this account is sufficient to show that a debt is due from Simpson Development. In the first place, these statements in the account did not even show that the money was in the nature of a loan. One would expect to see documents such as minutes of meetings dealing with the use of the money. None was produced.

9. It is said that the auditors had adopted the standard accounting practice and examined the books of K & R Wong. This, in my view, does not carry the matter further. One just does not know what documents had been examined by the auditors. There is no evidence that they have examined the books of Simpson Development.

10. It is said that the two companies are related companies. There is certainly no evidence disclosed of any acknowledgment of the debt from Simpson Development. The fact that the two companies are related does not mean that Simpson Development had acknowledged the debt.

11. It is said that the two companies shared common directors. This might be so at some stage, but certainly was not the position when the audited account was signed on 13th February 1998. The audited account was for the year ending 31st March 1997. The two directors who signed the accounts, namely, Ho Hung-hoi and Ng Sui-wing were appointed on 1st December 1997 and 2nd February 1998 respectively. Mr Ho only became a director of Simpson Development on 18th March 1998. Nothing more can be said on this. In my view, the verifying affidavit does not carry the matter further.

Criticism of evidence of Simpson Development

12. Simpson Development admitted that it had the money but contended that it was transferred to it for investment purposes. Criticism was made of the flimsy nature of Simpson Development's evidence. Certainly, Mr Wong Kam-shing had been making some assertions without supporting documents. He asserted that Simpson Development was the borrower of the four earlier agreements when the documents in fact showed K & R Wong was the borrower. He then asserted Simpson Development was the mortgagor of the three other properties when the mortgage documents produced by him showed that it was the mortgagor of only one of the three properties. No evidence was produced to show the purchase price of the four earlier mortgaged properties came from Simpson Development.

Substantial dispute of the debt

13. However, the crux of the dispute is whether the money was a loan to Simpson Development and whether Simpson Development was indebted to K & R Wong. While Simpson Development did not produce documents in support of its assertion, the same criticism can be made of K & R Wong. The two companies were obviously closely related and at one time sharing common directors. On the evidence, I just cannot say that the money received by Simpson Development must necessarily be a loan which it was liable to repay on demand. Nor can I say that Simpson Development's contention that the money was intended for it to be used in investment is a matter so obviously frivolous or unsustainable that I ought to dismiss it out of hand.

14. On the evidence, there is a substantial dispute to the debt. I am not prepared to make a winding-up order based on the evidence presented. I would adopt the approach of Jones J. in Re Par Excellent Co. Ltd. (CWU No.128/1989) and Re Kailey Development Co. Ltd. (CWU No.27/1984) and hold that the Company Court is not the appropriate forum to try the dispute. Neither is an adjournment or stay of the petition to let the dispute being determined an appropriate step because a long delay will make the process of liquidation more complex : Re Esquire (Electronics) Co. [1996] 3 HKC 309.

15. The appropriate order in this case is to dismiss the petition.

Other matter

16. There is one matter I ought to mention, it is said that the arrangement between Simpson Development and its creditor showed that it is unable to pay its debt. I am unable to draw such a conclusion from the evidence before me.