RE LOK TIN (HOLDINGS) LTD.

HCCW90/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.90 OF 1999

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J U D G M E N T

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1. This is a petition to wind up Lok Tin (Holdings) Limited ("the Company ") presented by the Hongkong & Shanghai Banking Corporation Limited ("the Petitioner") based on an unpaid debt. It is common ground that the Company is insolvent. The net amount owing to the Petitioner is $28.7 million. The other creditors of the Company are its directors who are also the opposing contributories. On the accounts as they stand, it is agreed that the amount owing to them is a net sum of $24.3 million.

2. It is relevant to mention that in the course of last year, an officer of the bank had suggested to the directors to capitalize part of their loans as the bank was then reviewing and tightening up credit extended to companies generally due to the economic down-turn affecting Asia. As a result of that suggestion, $20 million of amounts advanced by the directors had been capitalized. The relevance of this fact is that had the capitalization not occurred, they would be the majority creditors rather than the bank. However, for today's purposes, I do not think anything turns on this fact.

3. Counsel for the Company and the opposing contributories invited the court to accept that there are special circumstances that would justify a refusal to make a winding-up order to which the Petitioner is entitled ex debito justitiae. The special circumstances relied on are these. First, the directors are willing to give an undertaking to continue the business of the Company but only to recover debts and not to conduct business. In other words, the undertaking is meant to protect prospective creditors. Second, the directors and opposing contributories are willing to subordinate their debt to that of the Petitioner. Third, one of the largest trade debtors of the Company is a mainland company by the name of Zhong Mao, which owes the Company $42.2 million. There is a letter from Zhong Mao, which is exhibited to the 3rd affirmation of Kwok Chok Yee to the effect that Zhong Mao is willing to repay that debt by 36 monthly instalments, or, approximately $1.17 million per month. The net effect would be that the Petitioner would be repaid 100% in 24 to 25 months, not taking into account any interest on the debt outstanding from time to time. Finally, it was submitted that if a winding-up order were to be made, in practice, it would be extremely difficult for the liquidators to recover anything since virtually all the trade debts are from entities in the PRC.

4. To sum up, essentially what has been said is that the Petitioner would be better off accepting the instalment payments rather than getting a virtually 'zero' distribution by liquidating the Company.

5. The Petitioner's position is that it does not find the proposal acceptable. For practical purposes, the only assets of the Company now are trade debts amounting to $53 million. The Petitioner has invited attention to the fact that the evidence filed on behalf of the Company has not been entirely satisfactory. Mr Kwok's evidence suggested that the trade debtors other than Zhong Mao have been trade debtors since about 1997. However, the unaudited provisional balance sheet as of 31 March 1999, which has been relied on by the Company, showed that excluding Zhong Mao's debt of $42.4 million, other trade debts of approximately $54 million have been run up for the year ended 31 March 1999. Moreover, there is no independent verification of who these trade debtors are and the precise amount owing by each other than a list provided by the Company. It was submitted that the proposed undertaking is rendered meaningless because these trade debts will have to be sorted out. More importantly, there are some unsatisfactory features regarding the Company's recent activities which emerged from a comparison of the audited accounts of the Company for the financial years ended 1997 and 1998. These matters are dealt with in paragraph 7 of the 2nd affirmation of Chang Pui Ling, Alison. It would appear that despite dramatic increase in turnover for 1998, the Company still made a loss of approximately $13 million. Further, the management accounts show that the expenses of the Company, both in respect of selling and distribution expenses and general and administrative expenses, have increased substantially for the financial year ended March 1998 when compared to the previous year. Notably, there is an increase in bad debt and in commission paid. Together they amount to over $29 million.

6. It really comes to this : the Petitioner has no trust or confidence in the directors given the evidence that has emerged. To accept the proposal requires an acceptance that the Company has been properly run and that full disclosure has been made. There has been no attempt to explain the difficulties arising from the evidence to which I have referred.

7. Taking all these matters into account, in my judgment, exceptional circumstances have not been made out to deprive the Petitioner of a compulsory winding-up order. Accordingly, I will make that order.

[Submission as to costs]

8. The costs are to be borne by the opposing contributories personally.