RE DIYON DEVELOPMENT LTD

HCCW 178/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 178 OF 2006

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D E C I S I O N

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1.  This is a summons for the appointment of provisional liquidators to Diyon Development Limited (“the Company”) issued by Kong Yick Ming (“Mr Kong”) on 29 May 2006.  I will first set out the background matters giving rise to the application.

The Company and its ultimate parent

2.  The Company was incorporated in Hong Kong on 14 September 1990.  Only 3 shares in the Company were issued.  According to the annual return made up to 14 September 2005, 2 shares were held by Magician Investment (BVI) Limited (“Magician BVI”), and 1 share was held by Mr Kong, and that the 2 directors of the Company were Mr Kong and his daughter Kong Suk Ching.

3.  It is not in dispute that Mr Kong held his 1 share on trust for Magician BVI.  What is in dispute is whether the transfer of Mr Kong's share back to Magician BVI in 2006 was valid and whether the appointment by Magician BVI of 3 additional directors to the board of the Company in May 2006 was valid.  I will come back to these matters later, and continue with an account of the background matters.

4.  Magician BVI is the immediate parent company of the Company and the ultimate parent company is Magician Industries (Holdings) Limited (“Magician”).  Magician was incorporated in Bermuda and its shares are listed on the main board of the Hong Kong Stock Exchange.  It was founded by Mr Kong's father in the early 1970s and it holds interest in subsidiaries mainly through Magician BVI.  There are approximately 20 companies in the group.

5.  The main business of the group is the manufacture and sale of plastic and metal products, in particular general household products, through the subsidiaries.

6.  The main function of the Company is the sourcing and purchasing of supplies of raw materials for other subsidiaries.

7.  The manufacturing arm of the group is Jinda Plastic Metal Products (Shenzhen) Company Limited (“Jinda”), with a factory in Shenzhen.  Products manufactured by Jinda are sold to Magician and other subsidiaries and they in turn sell to distributors worldwide.

Mr Kong's interest and involvement

8.  Mr Kong used to hold 33% of the shares in Magician through his company Concept Developments Limited until 2005.  He had been the chairman and executive director of Magician since it was first listed in 1995.  Except for short periods, he remained as chairman and executive director of Magician for 10 years, until October 2005, when he was removed and re-designated a non-executive director.  He was also the Chief Executive Officer of Magician up to December 2004.  He also acted as a director of a number of subsidiaries including the Company, and he holds shares in a number of subsidiaries on trust for Magician BVI.

9.  In September 2005, Mr Kong's shareholding was reduced from 33% to 16.5% and then to nil in November 2005.  I understand his shares were sold by banks or financial institutions by forced sale when realizing the securities put up by him for securing loans made to him for his personal businesses.

10.  Because Mr Kong has ceased to hold shares in Magician and was removed as chairman and executive director, he was asked to and did sign an instrument of transfer for his 1 share in the Company to be transferred back to Magician BVI.

11.  The current management of Magician only took over the group in late March 2006.

Restructuring of the group

12.  The group ran into financial difficulties in 1999.  As a substantial shareholder and executive director of Magician, Mr Kong executed personal guarantees in favour of Dao Heng Bank Limited and The Sanwa Bank Limited to guarantee the liabilities of the Company and other companies in the group to these 2 banks.  In 2000, there was a massive debt restructuring with 18 banks including Dao Heng Bank and Sanwa Bank.  The banks that took part in the debt restructuring became convertible note holders of Magician.

13.  In 2003, Jinda procured a loan of HK$100 million and other credit facilities from the Bank of China, Shenzhen Baoan branch, to pay off the banks in the debt restructuring.  The loan was transmitted by Jinda to the Company for onward lending to Magician, and Magician paid off all of the convertible notes held by the 18 banks.

14.  Notwithstanding the debt restructuring, the guarantees executed by Mr Kong to Dao Heng Bank and Sanwa Bank remained in full force and effect, so the 2 banks were entitled to call on his guarantees to pay up the shortfall after the restructuring.

Changes in top management

15.  In 2004 and 2005, there were unsettling changes in the top level of management of the group.

16.  Mr Kong claimed that after the annual general meeting of Magician in September 2004, he was precluded from taking any decisions on behalf of Magician, the Company and other subsidiaries.  The control fell to the nominees of other substantial shareholders, even though Mr Kong was re-appointed chairman and executive director of Magician for the first 10 months in 2005.  He alleged that he was made a scapegoat for the poor performance of the group which led to a significant write off for the year 2005.

The winding-up petition presented by Man Tat Manufactory Company

21.  On 29 May 2006, Mr Kong issued the present summons for the appointment of provisional liquidators, on the ground that the assets of the Company are in jeopardy and independent professionals should be appointed to take control of the Company so as to investigate wrongdoings and recover assets.  The application first came before Barma J on 2 June 2006, he adjourned it to today and gave directions for filing of evidence.

22.  On 19 June 2006, which was the first hearing of the winding-up petition of Man Tat in this court, I was told that the Company had fully paid up Man Tat's claim and that Man Tat would withdraw the petition.  At the same hearing, Mr Kong applied to be substituted as petitioner.  As the application for substitution was not opposed by the Company, I granted the application and directed Mr Kong to file and serve an amended petition on 20 June 2006.

23.  I should also mention that another supporting creditor Wing Ko Paper Products Industrial Company Limited has reached a settlement with the Company, and has received payment in full of HK$2.5 million odd on 20 June 2006.

The amended petition of Mr Kong

24.  In the amended petition, Mr Kong claimed that the Company is indebted to him of HK$1,077,220.67 and RMB1,751,319.00, being the amounts he paid and arising under his personal guarantees dated 8 February 1999 and 10 March 1999 to DBS Bank Limited (formerly Dao Heng Bank Limited) and the Bank of Tokyo-Mitsubishi UFJ Limited (formerly The Sanwa Bank Limited), in support of the Company's indebtedness to these banks and in exercise of the rights of subrogation and indemnity.  On 19 May 2006, he served 2 demand letters on the Company for the aforesaid amounts and the Company has not repaid the debts owing.

25.  With the above background, I turn to consider the appointment of provisional liquidators to the Company.  I bear in mind the legal principles, which are well established.

If there is a good prima facie case for a winding-up order

26.  The first requirement Mr Kong must satisfy to obtain an order for appointment of provisional liquidators is to show a good prima facie case for a winding-up order on his amended petition.

27.  Mr Patrick Fung, SC submitted that this requirement is not made out.  I am not able to agree with him.

28.  The onus of an applicant to make out a good prima facie case is not an onerous one.  The court is not trying the petition at this stage and any view formed on the merits of the petitioner's case is provisional.  If Mr Kong can show, by believable evidence, facts which if eventually proved will entitle him to a winding-up order and if the contrary is not proved at this time, he would have made out a prima facie case.

29.  I am not going to take into account the fact that Mr Kong has only produced supporting documents from the banks and an assignee of one of the banks showing that he had made payment under the guarantees at a very late stage, when he made his 2^nd affidavit in reply to the Company's evidence in opposition on 17 June 2006.  It is not necessary to go into this for present purpose.

30.  The fact remains there are now documents from the 2 banks in question, showing that a total sum of HK$1 million odd was paid by Mr Kong under the guarantees to discharge the liabilities of the Company and other subsidiaries in the group between March 2002 and April 2005.  There is nothing to indicate any irregularity about these documents coming from the banks or any other reason why the documents should not be accepted at face value.

31.  As for the amount of RMB1.7 million odd paid by Mr Kong to an assignee of the remaining balance of the claim from Bank of Tokyo-Mitsubishi UFJ Limited, it may be that at a later stage enquiry would need to be made about the assignment made by the bank in April 2006 (by which a debt of US$218,000.00 odd was assigned by the bank to an assignee for only HK$20,000.00), the alleged repayment proposal between the assignee Sze Shun Kin and Mr Kong on 4 April 2006 (by which Mr Kong was to repay the debt assigned by instalments which would take 13 years), and how it came about that Mr Kong was able to pay off RMB1.7 million odd (equivalent to about US$218,000.00) in full to Mr Sze on 6 May 2006.  The documents produced by Mr Kong at this stage do show, on the face of it, the remaining balance of the debt had been assigned and that the assignee has been paid in full by him.

32.  I hold that Mr Kong has made out a good prima facie case for a winding-up order on the amended petition.

If it is right to appoint provisional liquidator in all the circumstances

33.  The other question I need to consider is whether is would be right to appoint provisional liquidators in all the circumstances of this case.

34.  I would first mention the matters I regard as irrelevant and do not propose to take into account, as a lot of evidence has been filed on both sides.

35.  I have mentioned earlier there is dispute if Mr Kong's 1 share in the Company has been validly transferred back to Magician BVI and whether the 3 additional directors were validly appointed by Magician BVI to the board of the Company in May 2006.  Mr Kong has alleged that this was an attempt to oust him and his daughter from the board of the Company, so they would not be able to demand payment on behalf of the Company from its parent company of the substantial inter-company debts.  I do not think these disputes on the validity of the share transfer and the appointment of additional directors are relevant for present purpose.  It seems to me there is a power struggle going on between Mr Kong and the current management of the group, and that steps taken by Mr Kong since April and May 2006 are for some tactical purpose, including his demand of the debts owed to him and his company, and his demand on behalf of the Company of the inter-company debts owed to the Company.  But power struggle aside, if I am satisfied the circumstances are appropriate for provisional liquidators to be appointed, an order will be made.

36.  Likewise, the alleged attempt to remove Mr Kong and his daughter as directors of the Company by calling a board meeting on 29 May 2006 and the alleged exclusion of Mr Kong from the management of the Company are not relevant.  I bear in mind Mr Kong's position and involvement in the affairs of the group until he lost his share in Magician in late 2005.  He may well feel aggrieved but that is neither here nor there.

37.  I turn to the grounds advanced for appointment of provisional liquidators.  As I have mentioned, this was put on the basis that assets are in jeopardy and that provisional liquidators should be appointed to investigate wrongdoings and recover assets without delay.

38.  It was said in Mr Kong's 1^st affidavit that Magician has started to put assets of the Company out of reach of creditors by physically removing and attempting to dispose of them secretly in China.  He said that the Company owns plant and machinery at cost of HK$24 million as shown in the audited accounts as at March 2005, and that Jinda has tried to sell 68 of the injection moulding machines in China, 9 days after the winding-up petition was presented by Man Tat.

39.  This assertion seems to me to be misleading, to say the least.  It is unacceptable to say that the value of these machines at cost was HK$24 million as shown in the audited accounts, without mentioning that it was clearly shown in the audited accounts that the net book value of these machines is nil, due to the complete writing off of accumulated depreciation, as these machines are very old and were acquired between 1987 to 1994.

40.  The machines are now kept in the factory of Jinda, it is unclear on the evidence if the machines belong to the Company or to Jinda.  There is no documentary evidence to establish that they do belong to the Company, except for Mr Kong's assertion.  As pointed out by Mr Fung, according to Mr Kong, he recalled that his brother had written out the cheques for the Company when these machines were purchased.  The machines were purchased between 1987 and 1994, the Company was only incorporated in 1990, it is doubtful if Mr Kong's brother had indeed written out cheques for the Company as alleged.  There is evidence before me that 51 of the 68 machines are currently registered under the ownership of Jinda, and according to the Company, the remaining 17 machines had been written off.

41.  More importantly, the memorandum of the factory manager of Jinda to the management of the group on 19 April 2006 set out the reasons why the machines should be disposed of.  I am not satisfied that the attempted disposition was to keep the assets of the Company, if they are indeed the assets of the Company, out of reach of creditors in the event of a winding up.  It would appear from the memorandum there are good reasons for disposal.  The machines are old, they are little or no use, there is not enough space to house them, and expenses are incurred for utilities supplies if they should continue to be used.  I agree with Mr Fung the attempted disposition seems to be a genuine and normal operational exercise to replace old machines to improve production efficiency.  I do not see anything sinister in the attempt to dispose of them.

42.  Mr Jonathan Chang for Mr Kong drew my attention to the latest affirmation filed by Mr Kong in which he exhibited a letter from a Chinese lawyer showing that the creditors of Jinda in Shenzhen are seeking to levy execution on the assets of Jinda and that this may lead to a forced sale of its assets.  Mr Chang submitted that there is urgency which calls for the intervention of provisional liquidators.  If the machines are indeed the assets of the Company and not of Jinda, I have no reason to think that the Company would not take necessary steps to avoid a wrongful attachment of its assets.  If these assets are Jinda's assets and not that of the Company, it does not seem to me there is anything much that provisional liquidators of the Company can do in this situation.

43.  Next, it is alleged that the management of Magician had tried to manipulate the inter-company debts owed to the Company, so the inter-company debts of HK$151 million (before netting off; the net sum due to the Company on inter-company debts according to management accounts in January 2006 is HK$39.6 million) due to the Company from Magician, a listed company, are now due from Magician BVI, which is not listed. 

44.  According to the Company's evidence, this was due to a consolidation of inter-company accounts in January 2006.  This exercise was carried out by the management at that time and the persons involved had all since left the group.  The current management took over in late March 2006.  They could not find any record in the minutes reflecting such consolidation, so the current management does not know the precise reason for consolidation.

45.  The current management takes the view that there are good reasons for this exercise resulting in liabilities to subsidiaries being assumed by Magician BVI, which is the immediate parent company of the subsidiaries, rather than by Magician.  They also explained how the inter-company debts of HK$151 million owed to the Company had come about.  This was due to the consolidation of inter-company debts in January 2003, when Mr Kong was a chairman and executive director of Magician, and the loan of HK$100 million obtained by Jinda which was transmitted to the Company and on-lent to Magician to pay off the bank creditors in the restructuring, as mentioned earlier.

46.  All along, it was not anticipated that this inter-company debt of HK$151 million due to the Company would be paid off within any specific period.  There is evidence from the audited accounts of the Company for the years ended March 2004 and March 2005.  Both were signed by Mr Kong as chairman.

47.  It seems to me that Mr Kong's present concern that with the winding-up petition this substantial inter-company debt due to the Company might be manipulated or might be at risk somehow is somewhat unreal and opportunistic.  This matter may need further investigation if the Company is in liquidation.  But I do not think an immediate investigation is required to be carried out by provisional liquidators.

48.  Lastly, it is alleged that the disposal of the Company's car parking space in 2005 may be questionable.  I see nothing improper about this on the evidence before me.

49.  I am not satisfied there is a real risk that assets are in jeopardy to justify the appointment of provisional liquidators.

50.  There is nothing but a bare allegation that the records and books of the Company might be destroyed or concealed by the current management.  I do not attach weight to this.

51.  In short, I do not think it is right in these circumstances to appoint provisional liquidators to the Company.  I would dismiss the application.  I order Mr Kong to pay the costs of the Company and of the Official Receiver in any event.  For the Company's costs, I grant a certificate for two counsel.