RE VERNALTEX CO LTD

HCCW 86/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 86 OF 2004

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D E C I S I O N

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1. On 22 March 2004, Vernaltex Company Limited ("the Company") made an ex parte application for the appointment of provisional liquidators for the Company. I directed the application to be made by an inter partes summons for two reasons. Firstly, I see no urgency about the application. Secondly, there are, to my mind, a number of questionable aspects about this application. I will first give the background matters relating to the application.

2. The Company was incorporated in June 1988 and is engaged in the business of construction and road surfacing works through an unincorporated company known as Wing Wo (Asphalt) Engineering Co. ("Wing Wo (Asphalt)"). Wing Wo (Asphalt) is an approved contractor on two lists for public construction works. Since September 1993, Wing Wo (Asphalt) has been suspended from tendering for government construction projects on the ground that it has failed to meet the requirements as regards working capital. Unless the working capital of Wing Wo (Asphalt) is restored to the required level within 12 months, it will automatically be removed from the list of approved contractors.

3. On 28 January 2004, a creditor's petition to wind up the Company was presented by an employee who had obtained an award in the Labour Tribunal against the Company. I understand there are a total of 30 employees and they are owed an aggregate sum of HK$476,979.88. In the management accounts of the Company made up to 30 November 2003, the Company was recorded to have assets in the amount of HK$66.9 million. Since then two major assets were lost or have become non-recoverable. The first major assets are account receivables in the sum of HK$39 to HK$40 million owed by Trinity (Asphalt Surfacing) Engineering Co., a sub-contractor of the Company, and by Hung Mau Realty & Construction Ltd ("Hung Mau"), which is a related company. Provisional liquidators have been appointed for Hung Mau. Both companies are insolvent and are unable to repay their debts to the Company. The second major asset relates to work in progress with a value of HK$16.2 million. The value of such work had been lost as the contracts in question had been terminated by the principal contractors in June 2003 and the benefits and liabilities of these contracts have been assigned to another company.

4. Taking the above losses into account, the Company's available assets are in the region of HK$11.7 million, far below its liabilities which are presently at the level of HK$90 million. The Company has cash deposits to date of HK$310,000.00. According to the supporting affirmation of the Company's director, the Company would expect to receive further sums of less than $1,000,000.00 in about 3 months for works completed and the release of retention money. It would appear that the Company is insolvent and unless there is injection of new funds to restore the working capital to an acceptable level before September 2004, the licences held by Wing Wo (Asphalt) estimated to be in the value of HK$3 million would be lost.

5. The Company has adduced evidence to show that the application for appointment of provisional liquidators is made with the support of a great majority of its creditors. It has offered an undertaking by its two shareholders, Mr Cheuk King and Mr Ho Kwok Poon, that they would bear the costs of the appointment of the provisional liquidators personally in the event that the Company is not successful in the restructuring of its debts and that the Company is wound up by the court. I have declined to accept this personal undertaking. The court has no information as regards the assets and resources of these two shareholders.

6. In any event, it does not appear to me that this is an appropriate case to appoint provisional liquidators. A number of grounds have been advanced by the Company to justify the need for appointing provisional liquidators and I will deal with each of them.

7. Firstly, it is said that there is a need to appoint provisional liquidators to carry on the business of the Company and very wide powers are sought in the summons for the provisional liquidators to carry on the business of the Company, associated companies or other entities in which the Company has an interest for the purpose of preserving the assets of the Company.

8. Specifically, I am told that there are two contracts which have not been assigned by the Company to other entities and the Company would like to resume work for these two contracts. In respect of one of the contracts called the "CED Contract" in the supporting affirmation, it is stated that since mid February 2004, Wing Wo (Asphalt) has ceased all works at the site. Before that, a trench was excavated on the road and at a meeting with the employer on 10 March 2004, an oral warning was given to Wing Wo (Asphalt) to resume work within 21 days, failing which the employer would re-enter the site and claim liquidated damages against Wing Wo (Asphalt).

9. It is stated that the trench is "an obvious danger to the public" as it lies on a road without any cover and that the employer has received letters of complaint from the public about the potential danger posed by the trench. The Company's bank accounts have been frozen as a result of the presentation of the winding-up petition, it is unable to operate its bank accounts without obtaining a validation order.

10. What is curious is that in the supporting affirmation, it is stated that although the Company was advised by its legal advisers that it can apply to court for a validation order, the directors believe that it is not in the interest of the Company to do so, given the time and costs involved in making an application for a validation order. I am afraid I do not see the matter in that light and I do not understand Miss Linda Chan, who appeared for the Company in this application, to have suggested that the expenses of engaging provisional liquidators to carry on the business of the Company are likely to be less than the expenses of applying to court for a validation order. I see no good reason why provisional liquidators should be involved in this situation, if the main purpose or one of the purposes of having provisional liquidators is to enable the Company to operate its bank accounts to complete the two contracts. Furthermore, the court is not provided any information as to the likely expenses to be incurred if the two contracts are to be completed. I have some concern about this in view of the limited cash deposits held by the Company. I have reservations whether there would be adequate protection for the unsecured creditors.

11. If an application for a validation order is to be made, proper evidence should be provided to the court to enable the court to form a view whether it would be in the interest of the unsecured creditors that the Company should be allowed to complete the two contracts in question. So on the first ground, I am not persuaded it would be appropriate for provisional liquidators to be appointed.

12. Next, it is said that there is a need to appoint provisional liquidators to preserve assets. The Company has kept its materials, vehicles, plant and equipment at various construction sites for the purpose of carrying on the two construction contracts. It is stated that these assets should be safeguarded pending the negotiation and implementation of a debt restructuring proposal. There is no suggestion from anyone that the Company itself could not have taken the steps required to preserve its assets for this purpose. I do not see the justification of incurring another layer of expenses to engage provisional liquidators for this purpose.

13. Lastly, it is said that provisional liquidators should be appointed to facilitate the implementation of a restructuring proposal. The Company has borrowed HK$1.5 million from Citi-Pine Investment Ltd ("Citi-Pine") in November 2003 and executed a debenture in favour of Citi-Pine charging all its property and assets to this creditor. Citi-Pine has indicated its interest in acquiring the Company for HK$1 million which would be injected for the purpose of restructuring the indebtedness of the Company. There is no indication in the supporting affirmation whether Citi-Pine is to bear the expenses of the professional accountants engaged to implement the scheme of arrangement with creditors, regardless of the success or otherwise of the restructuring.

14. In my view, if professional accountants are to be engaged specifically for the purpose of facilitating a restructuring, I see no good reason why these expenses should come out of the assets of the Company in the first place or that such expenses should be borne ultimately by the Company. The Company and the potential investor are free to engage such professional assistance as they see fit for the purpose of restructuring, but I do not think this should be done at the expense of the unsecured creditors of an insolvent company.

15. For the above reasons, I am not persuaded that this is an appropriate case to appoint provisional liquidators. I therefore dismiss this application. I order that the costs of the Official Receiver and of the petitioner in this application are to be paid by the Company.