RE ASAHI IWASAWA & ASSOCIATES MANAGEMENT CONSULTANTS LTD

HCCW 122/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 122 OF 2015

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DECISION

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1. I have before me an application to strike out a petition to wind up Asahi Iwasawa & Associates Management Consultants Limited (“Company”) on the grounds of insolvency. The Company provides accounting and related services to Japanese companies in Hong Kong. The Petitioner and its associated companies provide similar services.

2. The Petitioner relies on a statutory demand dated 24 March 2015 to establish insolvency.  The statutory demand refers to an oral agreement made on 18 February 2015 between Daniel Kung, who is the principal shareholder of the Petitioner and its associated companies, and Mr. Iwasawa, who along with his Wife and children are the majority shareholders of the Company, for the Mr. Kung’s group to acquire the Company for $350,000.  As the Company had financial problems the statutory demand records Mr Iwasawa requesting a loan of $350,000 to pay outstanding wages and rent, which it was agreed would be repaid upon completion of the sale.  This sum was paid.  The sale of the business did not proceed and the Petitioner has requested repayment.

3. There is no dispute that $350,000 was handed in cash by Mr. Kung on 18 February of this year to Mr. and Mrs. Iwasawa and that Mrs. Iwasawa signed a receipt for this sum from Mr. Kung on the back of one of the Company’s cheque.  There is no dispute that the sum should be repaid.  The dispute is over to whom and by whom.  The Petitioner says that Mr. Kung drew cash out of its account with HSBC and gave it to the Iwasawas in order that they could immediately pay in cash outstanding salaries it being Chinese New Year.  This is what happened.  The Petitioner says the money was clearly a loan to the Company pending completion of the purchase of the business.  As the completion has not taken place it is entitled to have its money back.

4. The Company tells a different story.  In Mr. Iwasawa’s affirmation in support of the strike out application he explains that he is bankrupt and that in February the Company had run out of cash.  He ran into Mr. Kung, who was an old friend, on 16 February in the street and arranged to see him the next day.  On 17 February they met at Mr. Kung’s office. Mr. Iwasawa explained his predicament and asked for a loan of $500,000.  Mr. Kung agreed to lend Mr. Iwasawa’s Wife, who is the Company’s sole director, $350,000 to pay rent and staff until his bankruptcy was discharged. He says that there was never any discussion about the Petitioner acquiring the Company’s business.  Mr. Iwasawa accepts that the loan is repayable, but repayable by his Wife.  This the Company says is supported by the receipt which records receipt by Mrs. Iwasawa of $350,000 from Mr. Kung.

5. In Mr. Kung’s affirmation in reply a different picture emerges.  Mr. Kung accepts that he has known Mr. Iwasawa for many years.  He disputes that they can be categorized as friends.  He sued Mr. Iwasawa (which is not disputed) in 1993/4 and says that he has had contact with him in recent years in the company of colleagues because of his interest in buying his business, which because Mr. Iwasawa is 80 he assumed would become available.  He says the idea that he would have lent Mr. Iwasawa $350,000 simply out generosity is fanciful.  When they met on 17 February Mr. Iwasawa talked about selling his business and asked if Mr. Kung would like to buy it.  They had a discussion and Mr. Kung agreed to do so for $350,000.

6. Mr. Kung has exhibited to his affirmation various internal emails which record him informing staff of the acquisition of the business on 18 February.  He has also exhibited a copy of an employment contract for an employee of the Company called Mr. Poon signed on 6 January 2015 which he was given at his request because immediately after 18 February he took steps, as the emails record, to start to effect the transfer of the business.  Following Chinese New Year, which was from 19 to 21 February, on 23 February Mr. Kung’s staff began to move documents and stationary from the Company’s office to Mr. Kung’s companies’ offices and on the next day Mr. Iwasawa and some of the Company’s staff went to work at those offices.  He says that on 2 March Mr. Iwasawa then told him that he had changed his mind. This would appear to be borne out by a series of emails commencing with an email from Mr. Iwasawa dated 5 March, to which Mr. Kung replied on 6 March. Mr. Iwasawa wrote again on 6 March.  I think it is apparent from the emails that Mr. Kung and Mr. Iwasawa had had discussions about the sale of the business, Mr. Kung had clearly got the impression that Mr. Iwasawa wanted to sell and Mr. Iwasawa had changed his mind.  In Mr. Kung’s email of 6 March he expressly states that the payments was not a gift and that the money had been paid because Mr. Kung and one of his colleagues, Mr. Kawamura, had been talking with Mr. Iwasawa about acquiring the business and they had been told that it was in urgent need of cash.  He asked Mr. Iwasawa to confirm that the Company would repay the sum.  In his reply Mr. Iwasawa does not comment on the loan or the request for repayment.

7. In order for the Company to succeed in its application it is necessary for it to establish that it has a bona fide defence on substantial grounds.  There is no dispute about the relevant principles which I summarise as follows in my decision in Yueshou Environmental Holdings Limited HCCW 142/2013 (16 July 2014) in paragraphs 8 and 9:

“8. It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment. If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed. Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated. I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

‘Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.’

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

(2) I have to be satisfied that the Company’s assertions are believable. The test

‘… is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised – because failure to recognise it would create a debt-dodgers’ charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, §13

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

‘(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, “substantial” means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.’

9. These judgments demonstrate that it is necessary for a company contending that it has a bona fide defence on substantial grounds to put before the court not just a series of assertions of fact that if made out at trial would constitute a defence, but credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at trial.”

8. The Company says, first, that it has not been established that the Petitioner is the party entitled to payment by whoever is the debtor.  I disagree.  Mr. Kung has deposed that the cash was withdrawn from the Petitioner’s bank account.  No reason has been advanced for thinking that this is incorrect and, therefore, as the party who advanced the cash it is entitled to repayment.  Secondly, is the question of who was the borrower.  If the only evidence was the receipt and there was simply a dispute about what the parties said to one another I would probably conclude that there was a bona fide defence, but that is not the case.  In my view it is clear that in his first affirmation Mr. Iwasawa was economical with the truth.  In his second affirmation he attempts to explain away the partial removal of the Company’s business to the Mr. Kung’s groups’ offices on the grounds that this was suggested by Mr. Kung who suggested that there might be a risk of the landlord taking possession of the premises.  It was only after he was shown a draft announcement recording the acquisition of the Company’s business by one of Mr. Kung’s staff that he realised that Mr. Kung had a “hidden agenda” and on 2 March asked to take back the Company’s documents and other items that had been transferred.

9. I find Mr. Iwasawa’s version of events unbelievable. He seems to be suggesting that Mr. Kung immediately on being told of Mr. Iwasawa’s financial difficulties hatched a plot to acquire the business and this is why he advanced $350,000, whilst at the time disguising what he was doing by appearing very generous and helpful.  He does not, however, seem to have acted surruptiously; on the contrary he seems to have acted quite openly.  There seems to be no reason to think that Mr. Kung would have advanced $350,000 and offered to allow the Company to operate out of his group’s offices for free unless it was part of some broader commercial arrangement.

10. In my view the Company had not demonstrated a bona fide defence on substantial grounds.  I dismiss the summons to strike out and the Petition will be listed for hearing on Monday 23 November at which time I shall make a winding up order unless the debt is paid. 

11. I will hear the parties on costs.

[Submissions]

12. I will order the Company pay the Petitioner’s costs on an indemnity basis.  It seems to me that the Company’s defence of the Petition has been disingenuous.  There has been no evidence from Mrs. Iwasawa and no attempt to repay any part of the debt.  It seems to me that in these circumstances the Petitioner should recover its costs on a more generous basis which reduces the amount by which it is out of pocket.