GARY BRUCE SOLOMON v. NTG LTD

HCCW 86/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 86 OF 2011

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BETWEEN

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J U D G M E N T

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Introduction

1.  On 25 January 2011 the Petitioner served, through his solicitors, a statutory demand on the Company claiming a debt of HK$1,859,302.81 (“Debt”).  The debt was not paid and on 4 March 2011 the Petitioner issued a winding-up Petition.

2.  The debt is alleged to have arisen as follows. In about 2008 the Petitioner, his son-in-law Nicola Santini and Pang Chi Chuen, who had worked with the Petitioner for many years, agreed to establish a new business designing and manufacturing jewellery.  It was agreed that 3 new companies would be established for this purpose.  A company, which became Beautiful Choice Limited (“Beautiful Choice”), which for tax reasons was to be incorporated in the British Virgin Islands and which was to be the holding company for a company in Hong Kong through which the design and manufacturing was to be done for, as I understand it, jewellery for the American market.  Another company, LVB Mfg LLC (“LVB”), was established in the United States to distribute jewellery.  It was intended that Beautiful Choice and LVB had the same shareholding structure.  Mr Santini and the Petitioner would own 40% each and the remaining 20% would be held by Mr Pang.  Although it is not in dispute that this is what was intended in fact no shares were allotted to the Petitioner in Beautiful Choice.

3.  The Company is a subsidiary of Beautiful Choice and Mr Pang is its sole director.  Mr Pang is apparently, I say apparently because neither party filed any evidence about this, the sole director of Beautiful Choice.

4.  Between 27 February and 1 October 2008 the Petitioner paid US$216,000 (HK$1,684,800) to Mr Pang’s brother, Pang Chi Ming. There is a dispute about precisely why the money was paid, which I address below.  It is common ground, however, that the money was paid to Pang Chi Ming with the intention that it be used to finance the Company’s business.  It was paid to Pang Chi Ming as neither Beautiful Choice nor the Company had a bank account at the time.

5.  The Company says that the money was transferred to Beautiful Choice and then to the Company, although I have been shown no documents tracing the flow of money.  This is a subject to which I return later.

6.  The Petitioner says that the money was a loan to the Company to provide initial working capital, which it was agreed would be repaid when it was profitable.  The Company disputes this.  It says that the money was the Petitioner’s capital contribution to Beautiful Choice in return for the allotment of 40% of its shares.

7.  Between 4 February 2009 and 16 March 2009 the Petitioner made 3 further payments totalling US$25,200 directly to the Company.  The Company accepts that this was a loan and immediately prior to the hearing paid this sum to the Petitioner.

8.  The Petitioner says the Company is profitable and able to repay the Debt, which is not in dispute.  The Company does not dispute that it is able to repay the Debt, but denies it is liable to do so for the reasons summarised in paragraph 6.

9.  Before turning to consider the issues in the case in more detail, I should deal with the Company’s last minutes attempts to file additional evidence.

Late Evidence

10.  At the hearing of the Petition before me on 4 July 2011 the Company sought leave to file evidence in response to the reply affirmation of the Petitioner filed on 24 June 2011.  The Company did not have a draft of the evidence and I refused the application and made orders that the Petition be set down for trial, no further evidence be filed without the leave of the court and hearing bundles and the Petitioner’s opening submissions be filed 7 clear days before trial.  A date for trial of 22 September 2011 was fixed on 13 July 2011.  It, therefore, followed that the Petitioner had to file its opening submissions on 13 September 2011, which it duly did.

11.  On 12 September 2011 the Company issued a summons to strike out the Petition returnable for 15 minutes on 22 September 2011, and a 2^nd affirmation of Mr Pang in support, which in reality was simply an affirmation in reply to the Petitioner’s affirmation filed on 24 June 2011.  On 14 September 2011 the Company issued a summons for leave to file a 3^rd affirmation of Mr Pang.  On 21 September 2011 the Company’s solicitors sent to court a 4^th affirmation of Mr Pang.  The 4^th affirmation is formal and I granted leave for it to be filed.

12.  By the 12 September 2011 there was clearly no need to file a strike out application as the Petition was about to come on for trial and the issues for determination on the Petition are for all practical purposes the same as those on a strike out application.  The only reason for issuing such an application could be to try and justify filing late evidence.

13.  I read the 2^nd affirmation of Mr Pang de bene esse.  The 3^rd affirmation is very short and adds little, if anything, of substance to the material evidence.  In the 2^nd affirmation of Mr Pang the only matter dealt with which is directly relevant to the issues before me is the reason why the Company’s auditors sent on 15 March 2010 a confirmation for audit purposes showing a balance due to the Petitioner of HK$1,855,350 and the reason for there apparently being a ledger of the Company showing the same thing. Assuming that these were matters which Mr Pang and Mr Santini were not alive to when the Company’s evidence in reply was filed on 17 May 2011, and for this reason did not address it in Mr Pang’s 1^st affirmation, they became aware of them on receipt of the Petitioner’s affirmation of 14 June 2011.  They are not complicated matters and no good reason has been advanced why an affirmation dealing with these matters could not have been prepared much earlier.  The matter is made worse by virtue of the fact that first, the Company knew full well that the Petitioner lives in the United States and therefore preparing evidence quickly in response would be difficult.  Secondly, the Petitioner’s legal team were put at a tactical disadvantage.  The Petitioner’s submissions had to be prepared prior to receipt of the new evidence and could not sensibly be expected to address it adequately.  Thirdly, the attempt to file substantial new evidence on 12 September 2011 is flagrantly inconsistent with the directions I made for the trial of the Petition.

14.  Since the introduction of the Civil Justice Reforms the court has been insistent that litigation is conducted in a timely and efficient manner and is increasingly less tolerant and indulgent of failures to do so.  Practice Direction 3.4 paragraph 3 states:

“Parties should give thought to the evidence to be filed on affidavit and avoid excessive rounds of affidavits. They are expected to comply with directions given and the timetable laid down the Court. Unless sufficient grounds have been made out, the Court will not grant extensions of time or allow additional affidavits to be filed.”

15.  The only excuse advanced for the late filing of evidence is that the Company’s auditors had to be contacted to explain the audit confirmation and that a large number of documents had to be gone through.  I do not accept that much time at all was required to deal with the auditors over a very narrow issue and it does not seem to me that much in the way of documentation needed to be considered.  The Company suggests that it was necessary because of all the Petitioner’s extraneous allegations.  I do not accept this.  Mr Pang’s affirmation made a large number of allegations against the Petitioner, which for the most part he declined to deal with in his reply affirmation.  What seems to have happened is that the Company has spent the last 2 months or so going through documents trying to find additional documents that support its allegations and muddy the waters; not find documents that respond directly to what the Petitioner says in his 2^nd affirmation.

16.  I, therefore, will deal with the Petition and not hear the strike out application and do not give leave for the Company to rely on the 2^nd, and 3^rd affirmations of Mr Pang.

17.  I would finish this section of the judgment with this observation.  An application to wind up a company on the grounds of insolvency is a very serious matter.  It has more serious consequences for a company than a writ to recover a disputed debt.  The Companies Court expects companies that wish to contest winding-up petitions issued against them for non payment of a debt to take them very seriously and deal with them promptly and properly.  In practice the Companies Court is likely to be less indulgent of failures of the sort that have arisen in the present Petition than might be the case if the court was dealing with a writ action.

Dispute

18.  The Petitioner says that his claim that the payments he made between 27 February and 1 October 2008 to Pang Chi Ming were loans to the Company is supported by 3 documents.  The first is a ledger that records “director’s Funding – Gary Solom” totalling H$1,524,237.97 and dated 8 December 2010.  The 2^nd is the audit confirmation to which I have already referred.  The 3^rd is the audited financial statement for the year ending 31 March 2009, which shows shareholders loans totalling HK$2,445,298.  The Petitioner says that the Debt forms part of this sum and the financial statement is consistent with his claim.

19.  It seems to me that the documents are themselves equivocal.  The Petitioner was not a shareholder of the Company and the financial statement is more consistent with the Company’s case that the sums advanced by the Petitioner was intended to be a capital contribution to Beautiful Choice which in turn would advance money to the Company.  Secondly, the ledger is also equivocal.  The Petitioner was not a director of the Company.  It is agreed that the ledger was a record prepared by Mr Santini in December 2010 not by an accountant.  I accept that the audit confirmation is consistent with the Petitioner’s claim, but in due course the auditors appear to have either accepted an explanation from Mr Pang that the advances were not loans to the Company by the Petitioner, and I note this would appear to have occurred at a time, pre March 2010, before Mr Pang suggests he began to distrust the Petitioner, or the auditors decided themselves that it was not appropriate to treat the advances as loans by the Petitioner.

20.  The Petitioner also points out that the payments that he made were not dealt with consistently with what the Company says was the purpose for which he was making them.  The Company has produced pages from Beautiful Choice’s share register, which record Mr Pang and Mr Santini as being shareholders.  It has not adduced records showing that the Petitioner was allotted shares.  It was unclear to me whether in fact the Company was suggesting that shares had been allotted.  It would appear that they were not.

21.  The Company did not produce any evidence that the advances were channelled through Beautiful Choice or ever entered in its books as capital contribution.  Mr Pang states in his first affirmation that the payments that were made by the Petitioner first went through Beautiful Choice, but the Petitioner disputes this and says that Beautiful Choice did not have a bank account.  I note that the Company has adduced no evidence to demonstrate that it did.

22.  What appears to have happened is that at least the first 5 payments were made to Pang Chi Ming, who paid the money to the Company.  Neither party has explained why these particular sums were paid or what they were used for.  There is a dispute about whether the 6^th payment went directly to the Company or not.  This is a matter I cannot assess thoroughly on the material before me as neither party has produced any of the transfer documents recording the flow of money.  The Petitioner says that there is no reason why the 6 payments should be treated any differently to the 3 payments made between 4 February and 16 March 2009, which the Company has accepted are loans and which have now been repaid.  The Petitioner also says that the only reason for the Company accepting that at least the last 3 payments were loans to the Company was that the payments went directly to it.  But, he says, this provides no real distinction as the earlier payments were clearly not to Beautiful Choice.  I can see the force in this point. However, the difficulty I have is that neither party recorded the purpose for which any of the payments were made at the time they were made.  Even now there are many unanswered questions about what took place; the identity of the recipient of the 6^th payment being one such example.

23.  The Petitioner further says that it simply does not make sense for him to have been making capital contributions to Beautiful Choice, which would have tied up his capital when he is in his late sixties.  I do not find this argument convincing.  It does not seem to me that what the Petitioner says took place makes any more sense than investing capital in Beautiful Choice in return for an allotment of 40% of the shares.  On his own case the Petitioner made substantial loans to an overseas company for an indeterminate period, which he did not record in writing.

24.  The objection also seems to me to be inconsistent with the Petitioner’s response to the Company’s case that he was always intended to be a passive investor.  In paragraph 8 of his 2^nd affirmation he says that “I was approached by Mr Pang and Mr Santini in 2007 with a proposal that we set up a business to establish a manufacturing facility for ladies lockets in China.  In its simplest form, the agreement was that Mr Pang would be primarily responsible for managing the facility, Mr Santini would pursue sales and marketing in the United States and I would oversee the overall management of company, given my reputation and connections in, and expert knowledge of, the industry”.  In paragraph 25 he says that “my role was to actively manage the Company as well as to provide loan financing”.

25.  The Petitioner was not, however, a director of either the Company or Beautiful Choice.  This seems inconsistent with him having overall management responsibility for the Company.  Paradoxically the Company had advanced a reason why the Petitioner did not want to take a visible role in the management of the Company and its associated companies.  Mr Pang says that he understood that between June 2004 and June 2009 the Petitioner was subject to a non-competition clause.  The Petitioner expressly denies this in paragraph 28 of his 2^nd affirmation.  Why the Petitioner, an experienced businessman, did not insist on being a director is left unexplained.

26.  Similarly, no explanation is advanced by the Petitioner for his failure to ensure that the arrangements he entered into, particularly the advances, were properly documented.  It seems to me that this is rather more consistent with an arrangement involving him agreeing to invest in a new business venture with his son-in-law (together with him they would own 80% of the Company, Beautiful Choice and LVB), which because of the personal element in the relationships (the Petitioner had worked with Mr Pang for over 20 years) the parties did not take the trouble to document properly.  It seems quite possible that they failed to agree with any precision precisely what their roles were to be and how advances by the Petitioner were to be treated.  Some support for this view is provided by the rather odd arrangement by which the first 6 payments were made.  It has not been explained by either party why the payments were made to Pang Chi Ming rather than Mr Pang or why they had to be made before Beautiful Choice or the Company had a bank account.  As I have already observed in these circumstances one would have expected the Petitioner to have recorded the payments somewhere. Presumably he did not feel the need to do so.

Legal Principles

27.  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

28.  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

29.  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.”

Conclusion

30.  I do not have to decide whether or not the Debt is payable.  I have to decide whether having reviewed the evidence and heard argument I am persuaded that a substantial dispute exists.

31.  There are no contemporaneous records explaining why the Petitioner paid the Debt or any other sums to the Company.  There are inconsistencies in the Company’s financial records of such payments.  The Petitioner relies on an oral agreement.  The Company asserts a different oral agreement.  The background facts are unclear and messy.  It seems to me, however, that the Company’s assertion that the Petitioner agreed to subscribe for shares in return for contributing working capital is plausible.  There are difficulties with the Company’s version of events, but as I have demonstrated there are also difficulties with the Petitioner’s explanation for what has taken place.  I am satisfied that in these circumstances the Company has demonstrated that a substantial dispute exists.

32.  I, therefore, dismiss the Petition with costs to the Company.