Re Comtowell Ltd.

HCCW270/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.270 OF 1998

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J U D G M E N T

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1. This is a petition by Comtowell Limited ("the Company") that it be wound up by the court.

2. On 24 April 1998, at a duly convened extraordinary general meeting of the Company, a special resolution was duly passed in accordance with section 116 of the Companies Ordinance to the following effect :

"That Comtowell Limited be wound up by the Court pursuant to section 177(1)(a) of the Companies Ordinance."

3. Section 177(1)(a) of Cap.32 provides that :

"177. Circumstances in which company may be wound up by court

(1) A company may be wound up by the court if-

(a) the company has by special resolution resolved that the company be wound up by the court;"

4. In addition, two other grounds have been put forward for winding up the Company. They are (1) that the Company is unable to pay its debts under section 177(1)(d) and (2) that it is just and equitable that the Company be wound up under section 177(1)(f).

Background

5. The Company was incorporated on 16 February 1990. As at 20 March 1998, Malcolm Basil Maydwell held 9,999 shares in the Company and the remaining issued share was held by his sister Marjorie Christiana Maydwell. Until 12 October 1997, Mr Maydwell and Miss Maydwell were the only two directors of the Company. From 12 October 1997 until 24 April 1998, there were no directors of the Company.

6. The petition is opposed by Mr Maydwell who claims to be a major creditor of the Company. In the event of the 9,999 shares in the Company being worth more than what is the amount due from Mr Maydwell to WFM Motors Pty Limited ("WFM") on the judgment obtained by WFM against Mr Maydwell on 22 October 1993 referred to below, including interest and costs up to the amount of HK$5.5 million, Mr Maydwell has a reversionary interest in those shares.

7. The genesis of the present proceedings can be traced to a guarantee of the liabilities of a company called Skink given by Mr Maydwell to WFM in 1992. This has spawned litigation in three jurisdictions. Skink was wound-up the following year and there is a New South Wales judgment against Mr Maydwell on the guarantee. This judgment was registered in Hong Kong in June 1994. In order to set aside the New South Wales judgment and its registration and enforcement in Hong Kong, since October 1994, Mr Maydwell has mounted one challenge after another. This is apparent from the chronology of relevant events set out below which serves to put the present petition in context.

8. Pending his appeal to the Privy Council, Mr Maydwell had obtained a stay of execution on terms subject to detailed undertakings relating to his depositing the share certificates in the Company with the Registrar and seeking replacement certificates where they were missing, to deposit a signed undated letter of resignation as a director of the Company, and to use his best endeavours to obtain an undated letter of resignation as a director of the Company from his sister. Mr Maydwell also gave undertakings not to oppose the registration of the shares in the name of WFM or its nominees should WFM become entitled to transfer the shares into its name and sell them upon determination of Mr Maydwell's appeal to the Privy Council. The Court of Appeal further ordered that the interest of Mr Maydwell in the shares of the Company including all dividends stand charged with the payment of the amount due from Mr Maydwell to WFM on the judgment including interest and costs up to the amount of $5.5 million.

9. Upon the dismissal of Mr Maydwell's appeal to the Privy Council, WFM became a creditor for HK$2,896,946.22 plus interest of HK$204,605.84 up to and including 3 June 1994. The taxed cost of the first setting aside summons amounts to approximately HK$63,000, the estimated taxed costs of the second setting aside summons in the Court of Appeal and below of approximately $983,000, and the estimated taxed costs of the Privy Council appeal incurred in Hong Kong of approximately HK$1.1 million (the costs of the Privy Council appeal incurred in London have been taxed and paid by the Director of Legal Aid). There are taxed costs of approximately HK$254,000 in respect of an action in Hong Kong against WFM and others alleging that the New South Wales judgment had been obtained by fraud which action was taken after the Court of Appeal in Hong Kong dismissed his appeal, but this action has since been dropped. In addition, approximately HK$1.745 million of interest has been accruing on the judgment debt. Therefore an amount of HK$7.2 million is owing to WFM of which $1.1 million is to be paid by the Director of Legal Aid.

10. On 21 May 1997, the Privy Council dismissed Mr Maydwell's challenge to the registration of the New South Wales judgment in the following terms :

"Their Lordships can see no trace of any fraud by WFM in this case. There is every indication of an attempt by Mr Maydwell to avoid paying his just debts. The allegation of fraud, being groundless, should never have been made. In the circumstances their Lordships will humbly advise Her Majesty that the appeal should be dismissed. Mr Maydwell must pay the respondent's costs before their Lordships' Board, to be taxed in the absence of agreement between the parties on the indemnity basis."

Seemingly, even a judgment of the Privy Council against him did not mean the end of litigation for Mr Maydwell. For, notwithstanding that judgment, Mr Maydwell pursued a second application for leave to appeal the New South Wales judgment and he issued a third setting aside summons in Hong Kong. Mr Maydwell's application for leave was dismissed on 26 February 1998. Mr Justice Einstein of the Supreme Court of New South Wales who dismissed Mr Maydwell's application found that the application was a forensic tactic designed to stay off an inevitable bankruptcy in Hong Kong, that Mr Maydwell was not a satisfactory witness and that his evidence could not be accepted unless corroborated by written material supportive of what he asserted or sought to assert had been contemporaneous. Mr Maydwell is appealing from the order of Mr Justice Einstein dismissing his application for leave to appeal and that appeal is now scheduled to be heard on 17 August 1998.

11. The stay of execution granted by the Court of Appeal was revoked on 31 July 1997 and the share certificates and instruments for Mr Maydwell's shares in the Company together with the signed undated letters of resignation as directors of the Company were delivered to WFM's solicitors. WFM became the transferee of the shares transferred by Mr Maydwell pursuant to the order of the Court of Appeal. On 16 October 1997, WFM and Denis Alan Aitken duly completed an instrument of transfer in order to transfer one of the shares to Mr Aitken as nominee for WFM. It is common ground that the letters of resignation took effect on 13 October 1997.

12. On 12 March 1998, I heard an application by the Company for rectification of its register. The order was granted so that Mr Maydwell's name was struck off the register of members and in lieu thereof 9,998 of the shares became registered in the name of WFM and the remaining one of the shares in the name of Mr Aitken. Suffice to say that I found Mr Maydwell's opposition to be ill-advised and designed to frustrate the implementation of the order of the Court of Appeal.

Position of Company as at 23 April 1998

13. It may be summarized as follows :

(i) For five consecutive years during which time it was under the control of Mr Maydwell, no annual return as required by the Companies Ordinance has been filed : the last annual return was made up to 14 December 1992;

(ii) The Company does not appear to be trading;

(iii) The Secretary of the Company resigned whilst Mr Maydwell was in control and has not been replaced;

(iv) The Company's only asset is a residential property in Macdonnell Road ("the Property") believed to be worth in the region of HK$12 million prior to the fall in the property market in October 1997 and before taking into account the claims of the mortgagees believed to be about HK$7 million;

(v) The Company also owned a small commercial property in Mody Road, the proceeds of sale of which are believed to have been taken in their entirety by the mortgagee;

(vi) Both properties are the subject of an action HCCA3514 of 1993 brought against the Company by Skink which is now in liquidation and in which action the Official Receiver is seeking to avoid an earlier transfer of properties from Skink to the Company under section 60 of the Conveyancing and Property Ordinance. Further, the Company is Plaintiff in two other actions, one with Mr Maydwell against Delta Asia Credit Limited, the mortgagee of the Property and the other is an action against Hericson Industries Limited;

(vii) The present directors do not have full information of the Company's liabilities due to Mr Maydwell's failure to respond to a request for the production of the accounts of the Company. According to a statement of affairs of 17 February 1993 deposed to by Mr Maydwell in the liquidation of Skink, the Company owes Skink HK$722,170.56. Further, Skink claims against the Company some HK$2.1 million.

Grounds for winding up

14. The petitioner advances three grounds for winding up the Company. The first and principal ground is the special resolution passed so that prima facie, subject to the discretion of the court, the Company should be wound-up under section 177(1)(a). Second, the Company is unable to pay its debts. Third, that it is just and equitable that the Company should be wound-up in that (i) the affairs of the Company require investigation, (ii) there would be an automatic stay of the litigation involving the Company; (iii) the Company has no funds to fund a voluntary liquidation; and (iv) to ensure that justice may be seen to be done in HCA3514 of 1993.

15. I now turn to consider the grounds of opposition advanced by Mr Maydwell. On 7 July 1998, he filed an affidavit in opposition to the petition. Although at the first hearing of the petition on 13 July 1998, I had directed that no further affidavits were to be filed without the leave of the court, at the adjourned hearing, Mr Maydwell sought leave to file a second affidavit in response to the second affidavit of Mr Aitken which was filed in reply to Mr Maydwell's affidavit in opposition. Every possible indulgence were shown to Mr Maydwell. The Company, which had initially objected to the filing of Mr Maydwell's second affidavit, eventually waived its objection and the court granted leave for that affidavit to be filed.

16. Section 177(1)(a)

17. There is very little case law on the operation of paragraph (a) and certainly there is no reported Hong Kong authority. There is Canadian authority to the effect that the court should not refuse to make an order when a special resolution for compulsory liquidation has been adopted unless it can be shown that the majority were acting fraudulently or in bad faith in adopting the resolution : see Re United Fuel Investments Ltd. (1961) 31 DLR (2nd) 331 at 349, affirmed (1963) 40 DLR (2nd) 1; French on Applications to Wind Up Companies, 1993 Ed. at 8.1.1.

18. In the present case, it is common ground that the special resolution was duly passed, there having been only one vote against the resolution. Cf. Re Langham Skating Rink Company (1877) 5 Ch D 669 and Re Anglo-Continental Produce Company Limited [1939] 1 All ER 99 where petitions brought by the directors of a company at the instigation of a simple majority of the members of a company were dismissed. The Company accepts that whilst it has demonstrated that paragraph (a) has been satisfied, it is not entitled as of right to a winding-up order. Nevertheless, unless there are special circumstances militating against the making of such an order, in my judgment, the Company is prima facie entitled to have an order made in its favour. In that regard, I agree with and respectfully adopt the holding in Re United Fuel Investments Ltd. (supra).

19. The gravamen of Mr Maydwell's opposition is that it would be detrimental to both the creditors and the beneficial owners of the share capital of the Company to have it wound up. Essentially, Mr Maydwell sought to challenge the valuation of the Company's sole asset. The Company relies on a valuation provided by Multiple Surveyors Limited dated 19 June 1998 valuing the property at HK$8.5 million. Instead of adducing expert evidence to challenge that valuation, Mr Maydwell sought to do it via data obtained from Centreline Property Agency with respect to price trends for secondary market properties situated in the Mid-Levels. This information was apparently obtained from the internet. In addition, Mr Maydwell said that in response to enquiries he made at the Land Office, another apartment situated on the 9th Floor of the same building was sold in September 1997 for HK$15.2 million. However, nothing was exhibited to substantiate the information allegedly obtained from the Land Office. In my judgment, the evidence relied upon by Mr Maydwell to challenge the valuation is of little assistance to the court even assuming (which I doubt) that it were admissible.

20. Mr Maydwell placed considerable reliance on In re Chapel House Colliery Company [1883] 24 Ch D 259. At p.266, Baggallay LJ held that the provision in the Companies Act equivalent to section 287 of the Companies Ordinance is applicable not only in proceedings under a winding-up order, but whenever a winding-up petition is before the court. In other words, the wishes of the creditors are relevant. Mr Maydwell as the major creditor opposes the present petition. In Chapel House, although the mortgage exceeded the value of the colliery, the colliery was being worked at a profit, sufficient to meet the instalments of the mortgaged debt although there was nothing left to pay interest to the debenture holders. Mr Maydwell sought to draw an analogy on the basis that the Hong Kong property market is bound to rise again and that he might succeed in his litigation against the mortgagee of the Property to set aside the mortgage. He placed reliance on the holding of Bowen LJ that :

"The case may be decided on the simple principle that no one can be entitled to ask for a winding-up order when it is impossible that he should obtain anything by it. Here, if a winding-up order were made, there are no assets on which it could take effect."

21. But the facts in the Chapel House case are wholly different and distinguishable. For one thing, it was a creditor's petition and not a petition by the Company itself. For another, the colliery was being worked at a profit which is a far cry from the Property in question. Moreover, it would appear to be part of Mr Maydwell's case that the Company is not insolvent. If that is so, there would be a surplus and therefore something to be gained if the Company were put in liquidation.

22. Suffice to say that no special circumstances have been made out that would affect the exercise of the court's discretion under section 177(1)(a). Accordingly, the Company is entitled to a winding-up order under paragraph (a).

23. Investigation of the Company's affairs

24. It is part of the Company's contention that the Company's affairs require investigation.

25. Whilst Mr Maydwell accepted that he had not complied with the statutory obligations regarding annual returns for five years, he sought to submit that it made no difference because the information would not have been materially different from the last annual return that was filed at the Companies Registry. Mr Maydwell also sought to impugn Mr Aitken's evidence relating to the financial condition of the Company in that he criticized Mr Aitken of not having read the accounts and records of the Company supplied by him on 11 May 1998. Those criticisms appear to be misconceived in that there are no audited accounts of the Company upon which Mr Aitken could rely. The failure to file audited accounts is another contravention of the Companies Ordinance (section 122) for which Mr Maydwell is responsible.

26. Mr Aitken has identified certain deficiencies in the balance sheet and profit and loss account prepared by Mr Maydwell for the Company for the last seven years. Plainly why the Company has failed to have proper audited accounts is something that requires investigation as also the failure to submit the annual return. Moreover, Mr Maydwell's "income statement" shows a net income of $2.1 million over a seven year period but there is nothing left by way of cash to speak of in the Company. There appeared to have been "unsecured interest free advances" to companies wound up in 1993. To the extent that the income has been applied to make those advances, the question then arises as to whether there was any genuine commercial purpose in the Company making them. As noted above, the Company is unable to pay the filing fees. It has also not been able to pay management fees since September 1993. It appears that the Company was primarily a vehicle for Mr Maydwell's own purposes, in particular the holding of the Property. The mortgagee has now obtained possession of the property, so that that purpose may no longer be extant. In the circumstances, the majority shareholder has come to the view, not unreasonably, that the Company's affairs be scrutinized by the independent process which follows a compulsory winding-up order.

27. Mr Tam for the Official Receiver invited the court's attention to the decision of Chadwick J in Bell Group Finance (Pty) Limited (in Liquidation) v. Bell Group (UK) Holdings Limited [1996] 1 BCLC 304. There it was held (at p.314) that even in the absence of a provision such as the proviso to section 125(1) of the Insolvency Act 1986 (being the equivalent provision to section 180(1) of Cap.32,) :

"...it was recognised, as early as 1892, that the need for an investigation was itself of sufficient advantage to justify the making of a winding-up order in the interests of an unsecured creditor. That principle was reaffirmed by Buckley J and by the Court of Appeal in Re Crigglestone Coal Co Ltd [1906]2 Ch 327. Buckley J said (at 332) :

' The company will often put forward, as if it were a matter of defence, that there are no assets to wind up. It is not a matter of defence at all. The Court has often refused an order upon that ground, but not because it lies in the debtor's mouth to say that he is not amenable to the jurisdiction because he has no property, but because the Court does not make an order where no benefit can result. If the order will be useful (not necessarily fruitful) there is jurisdiction to make it. This view is illustrated by the fact that in many cases, and particularly since the Act of 1890, the Court will make an order, not because there are assets, but in order to provide the machinery for ascertaining whether there cannot be shewn to be assets. Re Krasnapolsky Restaurant and Winter Garden Co is an illustration of this.' "

28. In my judgment, the Company has established a prima facie case that the affairs of the Company require investigation. There is clear authority that that in itself is reason enough for a winding-up order to be made and I so hold.

29. Inability to pay debts

30. The financial position of the Company as disclosed in Mr Aitken's affidavit is as follows. There is a valuation of the sole asset of the property at $8.5 million. There is an informal valuation done by the mortgagee in February 1997 indicating that the property was worth $8 million. Liabilities of the Company disclosed by Mr Maydwell together with the amount owed to the mortgagee amount to approximately $7.6 million. To this must be added the mortgagee's costs of sale, continuing interest and legal costs. It is therefore likely that the Company's liabilities will exceed the Company's assets. Although there are no precise figures for interest and costs, it is at least problematic whether the Company's assets do exceed its liabilities at the present time. In any event, the Company is not in a position to pay the penalties that a late filing of the annual returns would attract. It has no cash or other readily available assets to do so.

31. Were it necessary to do so, I would also hold that a winding-up order should be made on the ground that the Company is unable to pay its debts.

Conclusion

32. Although paragraph (a) of section 177(1) can only be invoked by a registered company for its own compulsory liquidation if a special resolution has been duly passed, there is nothing in section 177(1) to prevent the Company from relying on any of the other grounds in section 177(1) in support of its petition. Consequently, the Company may, in addition to paragraph (a), also rely on paragraphs (d) and (f). Conversely, the other grounds are not essential to the making of a winding-up order.

33. For the reasons set out above, I order that the Company be wound-up.

Costs

34. Counsel for the Company sought an order for costs incurred after 10:45 a.m. of the adjourned hearing be on a higher scale. The fact that Mr Maydwell's lengthy submissions almost exhausted the court's patience would not appear to be a sufficient reason.

35. There is to be no order as to costs for the hearing on 13 July. The costs of the Company and the Official Receiver of and incidental to today's hearing are to be paid by Mr Maydwell.