RE CHYAU FWU INVESTMENT LIMITED

HEADNOTE

Company Winding-up - opposition by some creditors. Right of Petitioning Creditor ex debito justitiae to a winding-up order or is it a representative right as one of a class. Extent to which a majority right can prevail.

Factors which have to be considered -

HELD Winding-up Order made.

 

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

No. 172 of 1985

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JUDGMENT

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1. The petitioning creditor lodged a petition for the winding-up of the company based upon the company's failure to comply with the notice which was served upon it pursuant to section 178(a) of the Companies Ordinance Cap. 32. The notice which was dated the 2nd of April, 1985 required the company to effect payment of the judgment debt it had obtained for $47,500,000 together with interest thereon. The company and various other creditors filed notices of opposition to the winding-up.

2. Barclays Asia Limited (Barclays) and the Bangkok Bank both filed their notices of opposition in good time. They also by their respective representatives gave short reasons for the grounds of their opposition by way of affidavit. Barclays and the Bangkok Bank are both members of a syndicate who agreed to provide the company a floating rate revolving credit facility of up to $60,000,000. In round terms Barclays agreed to advance $20,000,000 and the Bangkok Bank agreed to advance $15,000,000. During the course of the proceedings, Mr Mills-Owens, who was representing Barclays and the Bangkok Bank, sought special leave to file a notice of opposition on behalf of Schroders Asia Limited who are apparently another member of the syndicate. Mr Mills-Owens informed me that Schroders' contribution to the syndicate was $15,000,000.

3. The reason Mr Mills-Owens gave for the late filing of Schroders' notice was that he was under the impression that Barclays were representing the syndicate as a whole in these proceedings. After hearing objections from Mr Ching for the petitioning creditor I decided to grant the special leave which was sought.

4. The consequence of this ruling was that the total of the amounts claimed by the Bangkok Bank, Barclays and Schroders amount to $50,000,000 which is an amount slightly in excess of the $47,500,000 which is being claimed by the petitioning creditor. Mr Mills-Owens did not have instructions to represent the other member of the syndicate whose claim would be for approximately $10,000,000 on the assumption that all of the members of the syndicate advanced monies under the syndicate agreement.

5. There was no evidence before me of any other substantial claims and accordingly it would appear that the total indebtedness of the company was something in the order of $107,500,000.

6. It may be helpful if I attempt to outline the main grounds of opposition. The first objection which was raised was that the petitioning creditor had some security for the monies it owed. It is common ground that the petitioning creditor has a mortgage which is secured on leasehold premises being the 11/F. of Worldwide Tower, Pedder Street, Hong Kong.

7. Although this security was initially sufficient to protect the interests of the petitioning creditor this was no longer the case as the value of the premises had been much reduced as a result of the recent fall in the value of properities in Hong Kong. Various valuations had been made of the premises and it appears to be unlikely that the present value of the premises is in excess of $30,000,000. The value could even be as low as $23,000,000 if it was necessary for there to be a forced sale of the property.

8. Taking an optimistic view of the matter, the premises might be worth $30,000,000 which would mean that the petitioning creditor was unsecured in respect of $17,500,000. If a more pessimistic view was taken, the amount unsecured could be as much as $25,000,000. Mr Mills-Owens argued that if the petitioning creditors exercised the power of sale contained in the mortgage they would be able to recover a substantial part of the amount which was due and owing to them. He also pointed out that they had pursuant to their rights in the mortgage appointed a receiver who had received the rents of the premises which had amounted to $227,000 per month thus mitigating the losses which they suffered. None of the other creditors were in such a favourable position. He argued that it was realistic to consider the position of the petitioning creditor in the light that they had this security and that the amount of the unsecured claim was much less than the amount which was being claimed by his clients.

9. The main ground of opposition related to another matter. It is evident that the monies which were advanced to the company both by the syndicate and by the petitioning creditor were "passed" to Chyau Fwu Properties Limited, an associated company of the company. Chyau Fwu Properties had a 70% stake in a joint venture company, called Tri-View Limited, which was involved in a large land development scheme in the Tai Tam Reservoir area. The original cost of the scheme was something in the region of $2,760,000,000.

10. Due amongst other things to the fall in the value of property since the inception of the scheme all parties concerned had experienced severe financial embarrassment. It had been necessary to re-structure the finances of the scheme and the numerous banks involved had entered into a re-structuring agreement dated the 17th of May, 1985 which was 127 pages in length. A considerable amount of development had already taken place. If no untoward events occurred, it was hoped that the entire project would be completed sometime in 1987. Mr Victor Hwang, a director of the company gave some sketchy details of the scheme in an affirmation which was filed on the 23rd of October, 1985. At the conclusion of the affirmation, he makes a forecast that if Tri-View is able to recover its investment by the sale or renting of the apartments which are built, any surplus would be held by Chyau Fwu Properties which could then after discharging its liabilities repay the monies which were payable to the company. According to Mr Hwang all of the banks involved in the matter with the exception of the petitioning creditor had agreed to hold their hands until the completion of the Tri-View project.

11. Mr Mills-Owens argued that his clients who formed a majority of the creditors of the company had decided that it was in their best interests to await the finalization of the Tri-View project and their views and wishes should prevail over the wishes of the petitioning creditor. Indeed he went further than this and he suggested that the petitioning creditor was attempting to pressurize the other creditors into paying off their indebtedness in full. He referred to discussions and negotiations which had taken place between the parties and to a conditional offer which had been made by Barclays to provide a further $13,000,00 to the petitioning creditor if they withdrew their petition.

12. Mr Mills-Owens also emphasised the fact that other than the interest in Tri-View the company had no assets. This being the case no useful function would be served by the appointment of a liquidator. Although this was not of itself a conclusive factor, it was a matter which should be weighed heavily in the exercise of the court's discretionary powers. When this was taken in conjunction with the views of the majority of creditors that they did not want a winding-up order to be made it would clearly be wrong for the court to insist upon the company being wound-up.

13. It is clear from section 177 that the powers which are exercisable by the court are of a discretionary nature. This can be seen particularly by section 177(f) which refers to the court being of the opinion that it is just and equitable that the company should be wound-up. What I have to consider is the way in which this discretion is exercised. A large number of cases were cited to me by both Mr Ching and Mr Mills-Owens. These cases illustrated a wide range of circumstances and how the court had dealt with the situations referred to. What becomes clear is that each case has to be decided on its particular facts. I have been unable to derive much assistance from some of the earlier cases referred to as they were decided before important amendments were made to the Companies Act in England in 1908. A number of recent cases do however provide a great deal of assistance in determining the factors which should be weighed by the court.

14. In considering the exercise of the court's discretionary power, it is also necessary to take cognizances of the provisions contained in section 287(1) of the Ordinance :

"The court may, as to all matters relating to the winding-up of the company, have regard to the wishes of the creditors or contributors of the company, as proved to it by any sufficient evidence, and may, if it thinks fit, for the purpose of ascertaining their wishes, to order meetings of the creditors or contributories to be called, held, and conducted in such manner as the court directs, and may appoint a person to act as chairman of any such a meeting and to report the result thereof to the court."

It is accordingly clear that the range of matters which have to be considered by the court is a wide one. Certainly the wishes of the majority of creditors is a relevant consideration.

15. The extent to which these wishes should prevail was considered by the Court of Appeal in re Vuma. ⁽¹⁾ Lord Evershed attempted to reconcile passages appearing in Palmer's Company Law 20th edition and Buckley 13th edition. At p.1285, he said:

"In Palmer's Company Law, 20th ed. (1959), p.700, it is stated thus : A petitioning creditor who cannot get paid a sum presently payable has, as against the company, a right, ex debito justitiae, to a winding-up order; even though the assets are overcharged by debentures. This right to a winding-up order is, however, qualified by another rule, viz., that the court will regard the wishes of the majority in value of the creditors, and if, for some good reason, they object to a winding-up order, the court in its discretion may refuse the order.' It is manifest, if that is a correct statement, that it is very far removed from the proposition submitted by Mr Instone. In the last edition of Buckley, 13th ed. (1957), p.450, on the Companies Act the matter is put more as Mr Instone has stated it : 'This right of the creditor, however, is not his individual right but his representative right as one of a class. If a majority of the class, viz., the creditors of like degree, take a different view, the court, in the absence at all events of special circumstances making an order 'just and equitable', gives effect to such right as the majority desire to exercise.'."

After a consideration of the facts of the case, he said at p. 1286 :

"With great respect to Buckley J. I do not think it was right simply to treat the fact of the majority opposition as conclusive. I am persuaded on the material in this case that the court in the exercise of its discretion ought to order a winding up, and I would accordingly, allow the appeal."

The Court of Appeal considered in re Vuma ⁽¹⁾ and in P. & J. Macrae Ltd. ⁽²⁾ They were satisfied that the judge at first instance had asked the right question. They referred to what he said at p.236:

"As I see it, it is for the court to weigh up all relevant matters and decide whether the prima facie right of the petitioning creditors to an order should give way to the wishes of a majority of creditors expressed by the bare fact of opposition coupled with the nature of their debts."

The Court was not prepared to interfere with the judge's discretion if he had arrived at its decision on the correct principles. I am satisfied that this is the correct approach to adopt and I will attempt to follow it in the present case.

16. I will deal first with the fact that the majority of creditors opposed this petition. I accept that the headnote of in re Lubin, Rosen & Associates Ltd⁽³⁾ does correctly record the judgment in the case and that such opposition does constitute a formidable obstacle. Clearly the extent of the opposition is a relevant factor. In re Lubin⁽³⁾  the amount of the opposition to the petition was overwhelming. It was also overwhelming in in Airfast Services Pty Ltd⁽⁴⁾ and several other of the cases which were referred to me. In the present case, the position is different. I accept that Mr Mills-Owens is right in his contention that the most realistic way of calculating the interests of the parties is to have regard to the unsecured part of the petitioning creditor's claim. We do not know the exact amount which is unsecured. It may be the case that the 11/F. of Worldwide House is worth $30,000,000 which would mean that only approximately $17,500,000 is unsecured. If the said premises are only worth $23,000,000 the amount secured would be approximately $24,500,000. As against this, the three creditors who have filed notices of opposition have in total claimed something in the region of $50,000,000. However the matter is regarded the opposing creditors are in a majority. I do not though consider that the majority could be described as an overwhelming majority. I accept however that it is a formidable obstacle which has to be surmounted and it is essential for me to attach considerable weight to the views of the opposing creditors.

17. The next matter I will consider is the quality of the opposition. There is much merit in Mr Mills-Owens' contention that one could normally assume that creditors who oppose a petition are in a very good position to know what is in their best interests. Support for this view can be found from the judgment of Upjohn, L.J. at p.241 of P. & J. Macrae Ltd.⁽²⁾ However I am satisfied that this in no way precludes the court from itself analysising the position on the basis of the evidence available. In some cases the opposing creditors have not seen fit to deduce any evidence in support of their opposition. In re Vuma ⁽¹⁾ and in re P. & J. Macrae Ltd. ⁽²⁾ are both examples of this situation. In the present case Barclays and the Bank of Bangkok have both given a very brief indication of their reasons for opposition. Mr Victor Hwang in his latest affidavit did go into more detail in describing the background situation. Unfortunately the reasons which have been given by the creditors and the company are notable more for what is not said than what is said. No satisfactory details have been given of the transactions whereby the monies advanced by the petitioning creditor and the syndicate had found their way to the Tri-View project. This means that it is impossible to know how any claim could be formulated for the return of monies from Tri-View assuming funds are available.

18. In any consideration of this matter, it is essential to differentiate between the interests of the company and the interests of the creditors of the Tri-View project. During the course of his submission, Mr Mills-Owens referred to the anxiety of creditors of the Tri-View project that if a winding-up order is made against the company, their interests may be prejudiced. In particular he referred me to the Re-Scheduling agreement and the various circumstances which could trigger the operation of the rather comprehensive default provisions. I do not think that these submissions are of very much relevance. Even if a winding-up order is made against the company and a liquidator is appointed there is no reason to suppose that the liquidator would be insensitive to the company's interests or indeed to the interests of any of the creditors of the Tri-View project. It has certainly not been demonstrated to me that there would inevitably be any untoward consequences in this connection if a winding-up order is made. Indeed I would go further and say that no good reason has been put forward by any party to justify opposition to a winding-up order being made.

19. I will consider next the other main ground advanced by Mr Mills-Owens. He argued that on the evidence available no useful purpose would be achieved by my making a winding-up order. He referred to the uncontroverted evidence of Mr Victor Hwang to the effect that there are presently ho assets of the company. I regret that I do not find this to be a convincing argument. I accept that there may not be any assets at this point in time. However it would be quite unrealistic to disregard the potential benefits which might be derived from the Tri-View project. I have earlier in this judgment been critical of the nature and quality of the material which is available concerning the Tri-View project. The fact remains that the opposing creditors must be convinced that there is some prospect of obtaining benefits from the project as otherwise they would not be so concerned with this matter. I assume that the main factor which will determine whether or not any benefit is received will be the state of the property market in 1987. If market values have substantially increased there will presumably be some prospect of sufficient funds being generated to repay at least in part some of the claims which are being made. I do not therefore consider that it can convincingly be argued that no useful purpose is likely to be achieved if a winding-up order is made. As matters stand, we simply don't know.

20. It is possible to see that many advantages could accrue if a winding-up order is made. If a liquidator is appointed he would, on behalf of all creditors, be able to consider what action could be taken to further the interests of all creditors including considering the possibility of pursuing claims against the Tri-View Joint Venture Company. It is certainly more satisfactory that an independent person should consider such matters rather than leaving the present directors of the company to make any decisions. It is noted that Chyau Fwu Properties Ltd is an associate company of the company and there might at some stage be a conflict between the interests of Chyau Fwu Properties and the company, particularly having regard to the fact that the directors of both companies are apparently the same people. A further advantage which would accrue would be that the liquidator is by virtue of his office accountable for everything he does. He would keep all creditors fully informed of developments and would be able to assert their rights whenever necessary.

21. The final matter that I will deal with is the question of the petitioning creditor's motives and the suggestion that they are not acting bona fides. There is no direct evidence to support such an allegation. If I understood him correctly Mr Mills-Owens inferred the petitioning creditor's lack of good faith from their refusal to accept the proposition put forward by Barclays to make available a further $13,000,000 in respect of the unsecured part of their claim on certain conditions. He went on to argue that the petitioning creditor's motive in presenting a petition was to pressurize other creditors to pay them off in full. There is no direct evidence to support such a conclusion. It would clearly be quite wrong for the court to attempt to usurp the function of the management of the petitioning creditor. Support for this can be found in the speech of Lord Wilberforce on p.832 of Howard Smith v. Ampol Petroleum & others.⁽⁵⁾ The petitioning creditor may have had a number of good reasons for not accepting the proposals which were put to them. One possible reason might be an unwillingness to wait until 1937 before they would recover the monies which were due to them. They may also have been dissatisfied with the attitude adopted by other creditors and have considered that if a liquidator is appointed he may advance the interests of creditors more effectively than the company would. I accept that when the court exercises a discretion it is necessary to have regard to the motives of all interested parties. I do not consider that it has been established that the petitioning creditors are lacking in good faith.

22. I have attempted to weigh all the factors I have considered to be relevant. I have been particularly mindful of the interests of the majority of creditors who have filed notices of opposition and of the interests of the petitioning creditor. I have also considered the submissions which were made to me on behalf of the company and of course have had regard to the evidence deduced on its behalf. I have though attached less weight to the interests of the company than I have to the other parties. Mr Elrington for the Official Receiver expressed the view that if a winding-up order was made he did not envisage any difficulties in discharging the functions of a liquidator. Doing the best I can in all the circumstances I have come to the conclusion that the most satisfactory order for me to make is to order that the company be wound-up. I make an order accordingly. I will hear the parties as to costs.

(1) [1960] 1 W.L.R. 1283

(2) [1961] 1 W.L.R.

(3) [1975] 1 W.L.R. 122

(4) [1976] 2 ACLR 1

(5) [1974] A.C. 821