RE YING FAI FISHERY INTERNATIONAL LTD

HCCW 286/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 286 OF 2012

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J U D G M E N T

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1. The petitioner, Golden Sea Development Group Limited, is seeking to wind up Ying Fai Fishery International Limited (“the Company”) on the ground that the Company was insolvent and unable to pay its debts. The petition is based on a statutory demand served by the petitioner on the Company on 21 June 2012, demanding payment of $14,419,360.

2. The petitioning debt was said to be made up of several sums advanced by the petitioner to the Company between August 2011 and March 2012, allegedly pursuant to a Trade Cooperation Agreement made between the parties dated 23 August 2011 (“the Cooperation Agreement”).

3. The Company did not dispute that it had received the sums.  The Company alleged, however, that the sums were paid to the Company as part of the funding arrangement between the parties as agreed under the Cooperation Agreement.  The petitioner was in fact guilty of breaching the Cooperation Agreement by failing to honour its promises to provide capital, and as a result the Company had sustained substantial loss.  The Company defended the petition on the ground that there was substantial and bona fide dispute in relation to the petitioning debt, or alternatively the Company has substantial cross-claims against the petitioner.

The Cooperation Agreement

4. The Company has been in the business of trading in fishery products, including the import and export of high-value dried seafood such as abalone and sea cucumber.  It has an operation at the Tai Po Wholesale Fish Market.

5. The Company was keen to expand its business. One of the Company’s directors, Mr Yeung, was introduced to one Mr Huang and his assistant Madam Wong of a Mainland company called Zhuhai Duty Free Enterprises Group Co Ltd. (“Zhuhai Duty Free”).  Zhuhai Duty Free was said to be involved in the business of a fishery wholesale market known as the White Ivy Lake Project in the Mainland.

6. After a few rounds of negotiation, the parties reached agreement concerning the provision of capital by the petitioner to the Company in return for the petitioner being given, inter alia, a 20% shareholding in the Company and a share of the Company’s profits at quarterly intervals.

7. The agreement, embodied in the Cooperation Agreement, contains the following material terms:

“2. The Amount and purpose of [the petitioner’s] investment:

(A) [The petitioner] shall after signing this ‘Agreement’ pay to [the Company] by 3 installments and a total sum of HK$5,000,000 into [the Company’s] designated account (including payment of a lump sum of HK$1,500,000 in the first 15 days, another payment of a lump sum of HK$1,500,000 within 15 days thereafter, payment of a lump sum of HK$2,000,000 within 20 days thereafter), to serve as deposit for ordering fishery products from East Timor. After 60 days from the termination of ‘the Agreement’, [the Company] shall repay the fishery product deposit (HK$5,000,000) into [the petitioner’s] designated account.

(B) Upon signing this Agreement by [the petitioner] and [the Company], the term of the agreement shall be one year, [the petitioner] promises that during the subsistence of the agreement, it will provide a lawful credit facility for the fishery products trade in the sum of HK$50,000,000, to cooperate with [the Company] in its fishery product business. ……

(1) ……

(2) 60% of the net profit generated from the fishery product trade enjoyed by [the Company] in the first year shall belong to [the petitioner] while 40% will belong to [the Company], the minimum return is stipulated in clause 2(B)(4) ……

(3) [the Company’s] account department shall compute the profit generated from trading in fishery product every 3 months, and to deposit the net profit which [the petitioner] is entitled to as provided in clause 2(B)(2) into [the petitioner’s] designated account within 10 days from the expiry of every 3 months …….

(4) [the Company] undertakes to pay [the petitioner] every 3 months the minimum return of trading profits not less than 7.5% of HK$50,000,000, i.e. HK$3,750,000. If [the Company] fails to pay 60% of the net profit or HK$3,750,000 (whichever is higher) to [the petitioner] in accordance with the time schedule, [the petitioner] has the right to terminate the cooperation of this Project, and to recover the investment funds provided by [the petitioner] ahead of time, the trade deposit stipulated in clause 2(A) and to claim for compensation.

3. Shareholdings

Within 5 days from signing this Agreement by [the petitioner] and [the Company], [the Company] shall transfer 20% of the shareholdings to [the petitioner].  …….”

8. On the same day as the Cooperation Agreement, the Company also signed a Supply Agreement with one Cheer Signal Development Ltd (“Cheer Signal”), the latter being apparently a subsidiary of Zhuhai Duty Free.

Dispute over performance under the Cooperation Agreement

9. The petitioner had, on four separate occasions between 31 August and 22 November 2011, provided the Company with the deposit totalling $5,025,000.  Although only the first two sums were paid strictly in accordance with the time stipulated in clause 2(A), I do not think anything turns on the delay in relation to the balance of the deposit. More relevantly, the deposit of $5 million was not due for repayment until 60 days after “termination of the agreement”, which I would interpret as meaning 60 days after the end of the one-year term referred to in clause 2(B).

10. In addition to the deposit, on three subsequent occasions the petitioner had provided further funds to the Company, namely, $3,000,000 on 12 December 2011; $3,060,000, on 6 January 2012; and $3,334,360 on 7 March 2012.  As noted earlier, the total amount advanced by the petitioner to the Company (including the deposit) aggregated $14,419,360. 

11. It is the petitioner’s complaint that the Company has failed to calculate the petitioner’s share of the profits as set out in clause 2(B)(2) and (3); and has further defaulted in paying the agreed quarterly minimum of $3.75 million or any part of the petitioner’s profits under clause 2(B)(2) and (4).  The petitioner relied on the Company’s default as entitling it to terminate the Cooperation Agreement and to demand for the return of the total amount advanced. 

12. In response, the Company pointed to the petitioner’s obligation under clause 2(B) to provide capital in the sum of $50 million.  It is Mr Yeung’s evidence that the said Madam Wong had devised a rather tortuous scheme to enable capital to be made available to the Company.  Instead of the Company making requests directly to the petitioner for funding, the requests were to be made by the Company ostensibly in the form of placing “purchase orders” with Cheer Signal in relation to supply of fishery products.  To illustrate the actual working of the scheme, Mr Yeung had exhibited correspondence to illustrate how the petitioner had inflated the “purchase price” on the purchase orders so as to account for the interest payable under the Cooperation Agreement and as a “handling fee for Orthodox”. Evidence was produced to show the connection between Madam Wong and one Mr Jason Ng of the said Orthodox Ltd.  As a matter of fact, according to Mr Yeung, the Company had never received any fishery products from Cheer Signal at all. 

13. It is the Company’s case that it had made numerous requests for capital by way of these “purchase orders”, totalling over $56.5 million between August 2011 and 22 February 2012.  Despite such requests, only $14.4 million was provided, leaving a deficit of over $42 million.  This deficit, says the Company, constituted a breach of the Cooperation Agreement on the part of the petitioner, and in turn had rendered the Company unable to fulfil its purchase contracts with the suppliers of fishery products. 

Discussion

14. The approach to determining whether a bona fide dispute against the petitioning debt has been made out on substantial ground is well established.  I would follow the principles set out in Re Hong Kong Construction (Works) Ltd, HCCW 670 of 2002, at §6; Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487 at §§11 - 15; Re Hong Kong Pak Tat Trading Company, HCCW 236 of 2011, at §8. 

15. In the present case, there is no dispute that the petitioner was to make a financial investment in the Company’s operation on the terms of the Cooperation Agreement. 

16. In terms of the evidence, the petitioner does not seriously dispute Mr Yeung’s allegation that the “purchase orders” were in truth the Company’s requests for capital, and that they were made according to the petitioner’s promise of funding to the order of $50 million during the one-year term of the Cooperation Agreement.

17. On behalf of the petitioner, Mr James Sherry argued that the petitioner was entitled to terminate the Cooperation Agreement – which it did by sending the statutory demand to the Company on 21 June 2012 – based on the breaches of the Company’s obligation to calculate the petitioner’s share of the profits and also the Company’s default in making the minimum quarterly payments.  The petitioner’s commitment to provide capital was conditional only upon the Company’s compliance with clause 2(B)(2), (3) and (4) in making quarterly payments. It was also argued that the petitioner’s obligation to provide capital had ceased in any event upon the termination of the agreement.

18. Mr Robin D’souza for the Company, on the other hand, emphasised the shortfall in the capital which the petitioner had provided and the substantial loss to the Company resulting from the lack of promised funding. 

19. I bear in mind that I am only required to consider whether the Company has made out a defence to the petitioning debt or setting up genuine cross-claims on substantial ground and therefore need not finally determine the dispute between the parties. 

20. In the absence of evidence to the contrary, I am prepared to proceed on the basis that the “purchase orders” were indeed the Company’s requests for funding under the Cooperation Agreement. There is no dispute that the petitioner did not fully comply with the funding requests from time to time and that there had been a shortfall during the operative term of the agreement. 

21. Contrary to Mr Sherry’s argument, it seems to me at least arguable that the petitioner’s obligation to provide funding was independent of the Company’s obligation to calculate and make quarterly payments. 

22. The shortfall was not insubstantial.  The loss allegedly occasioned to the Company has been set out in Mr Yeung’s evidence.  Mr Yeung referred to a few of those transactions where the Company had made commitments to procure supply of fishery products from various suppliers, for instance, a commitment to obtain supply of six 40-foot-containers’ worth of mussels from a supplier within a 12- month period; another commitment to purchase 30 tons of sharks fin said to be worth over $20 million from another supplier within a two-year period; and an exclusive sole agency agreement to procure and purchase six 20-foot-containers’ worth of frozen abalone for a 12-month period.  It is Mr Yeung’s evidence that because of the Company’s lack of funds to fulfil these contracts, the Company was liable to claims from suppliers and would also suffer loss of profits, amounting to well over $15 million. 

23. The petitioner did not seriously challenge the evidence tendered by the Company regarding its potential loss. 

24. I am satisfied in all circumstances that notwithstanding the $14 million advanced by the petitioner and the apparent failure by the Company to make quarterly payments, the Company has demonstrated that it has bona fide cross-claims against the petitioner to an extent at least equal to the petitioning debt herein. 

25. The dispute between the parties in the circumstances should properly be resolved through the usual writ action(s) in Court.  The present petition should be dismissed.

26. In view of my conclusion, it is strictly unnecessary to consider whether the petitioner was a money lender within the Money Lenders Ordinance which, if so found, would have the effect of rendering its advancements to the Company unrecoverable.  My view, however, is that the evidence falls short of showing the business of the petitioner was that of making loans, and therefore had it been necessary to decide the point, I would not have considered the argument with reference to the Ordinance to be of assistance to the Company.  

Miscellaneous

27. Lastly, I have indicated at the beginning of the hearing that I would consider the additional evidence sought to be adduced by the Company on a de bene esse basis.  The additional evidence comprised the pleadings filed in HCA 1095/2012 and the Company’s annual return filed in August 2012.  Having now had the opportunity of considering the additional evidence, I do not think such evidence is relevant to the issues nor of assistance to me in my determination of the present petition.  I would therefore disallow the evidence sought to be adduced, and I would order any costs incurred in relation to that summons (dated 4 February 2013) to be paid by the Company to the petitioner.

Conclusion

28.  For the foregoing reasons, the petition is dismissed. 

29. Subject to the costs mentioned in paragraph 27 above, I would make an order nisi that the costs of the petition are to be paid by the petitioner.