RE: GOLD FACE HOLDINGS LTD

HCCW1413/2003 &
HCCW1414/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NOS.1413 and 1414 OF 2003

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J U D G M E N T

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1. These petitions were heard together.  They have common petitioners.  The company in HCCW1413/2003 is True Gold Investments Ltd (“True Gold”).  The company in HCCW1414/2003 is Gold Face Holdings Ltd (“Gold Face”), a company listed on the Hong Kong Stock Exchange.  Gold Face were the guarantors of the liabilities of True Gold.

2. It was agreed that the same issues were involved in both petitions so that if a winding-up order is made in one, a similar order should be made in the other, and vice versa.

3. The parties’ submissions were made in HCCW1413/2003.  Hence, I shall concentrate on the petition against True Gold. 

HCCW1413/2003, True Gold

4. The petitioners and True Gold were parties to a joint venture agreement (“the J.V. Agreement”) dated 18 May 1998.  The petition was based on an alleged debt in the sum of HK$27,871,098.  The debt which was said to be immediately due and payable comprised :

23. The question before me is, no final accounts having been prepared, whether as at the date of the petition there was a debt then due and payable to the petitioners in respect of the shortfall under Clause 9.3.  

24. In my opinion, there was no immediate obligation to pay as at the date of the petition.  First, I do not believe there was sufficient evidence that True Gold was responsible for the failure of the project manager to prepare the final accounts following the termination date.  As for True Gold failing to cause and procure the Project Manager to prepare the final accounts, damages for breach of that obligation under Clause 2.4.4 was likely to be only the interest cost as a result of the delay.  Thus, that cause of action would not support a case of an immediate obligation to pay the shortfall.  Secondly, even if under Clause 2.4.4 upon the default of the Project Manager to prepare the final accounts, True Gold was itself obliged to do so, and True Gold was entitled to only one month to produce the final accounts, it had until 23 December to do so.  The petition was presented on 17 December.  So as at that date, payment was not yet due. 

25. Insofar as the petitioners relied on the first limb of Clause 9.3 for their contention that as at the date of the petition, there was a debt due and payable by True Gold to the petitioners, that is not supported by my construction of Clause 9.3.

26. As I have said, Mr Li’s main arguments were based on Clause 10.  It is necessary for me to set out Clause 10 in its entirety :

“	10.	Termination
		10.1	In the event that :-
			10.1.1	any order shall be made by a competent court or other appropriate authority or any resolution shall be passed by the Company or Wing Tung Yick or Crestsale for liquidation, winding-up or dissolution or for the appointment of a liquidator or receiver or similar official of all or a substantial part of their respective assets (otherwise than for the purposes of solvent amalgamation, merger or reconstruction Provided the same shall not adversely affect the ability of the said company to perform its obligations hereunder); or
			10.1.2	the Company or Wing Tung Yick or Crestsale stops payment to creditors generally or admits inability to pay their respective debts as they fall due or enters into any composition, accommodation or other arrangement with creditors generally; or
			10.1.3	the Company abandons and does not proceed with completing the Development in accordance with the terms of this Agreement; or
			10.1.4	there is any material breach by either of the Joint Venturers of this Agreement which remains unremedied for one month after written notice of such breach has been given to such Joint Venturer by the other;

then and in any of such event the Joint Venturer may, after having given seven (7) days’ written notice to the defaulting Joint Venturer, terminate this Agreement whereupon Final Account shall be prepared by the Project Manager within 1 month thereof and be submitted to the Auditor for auditing and failing agreement on the contents of the account to submit the same for determination under Clause 15 thereof.  Within 1 month of acceptance by the Joint Venturers of the Final Account or of the said determination and Subject to Clause 9.3 any sum due from one Joint Venturer to the other according to the Final Account or the said determination shall be paid or settled otherwise the same shall be a debt carrying interest at the rate of 2% over the best lending rate of The Hongkong and Shanghai Banking Corporation Limited until full payment or settlement thereof.”

27. It will be seen that even if the agreement had been terminated pursuant to Clause 10, payment by True Gold to the petitioners was governed by the last sentence in that clause.  In other words, any sum payable must be paid “within one month of acceptance by the joint venturers of the final accounts” or of the determination by the expert under Clause 15, “otherwise the same shall be a debt carrying interest …. until full payment or settlement thereof”.

28. The events relied on by the petitioners for the purpose of Clause 10 are as follows :

(1)    Misappropriation of sale proceeds

29. Mr Li argued that although the petitioners did not have direct evidence on the misappropriation of sale proceeds, newspapers and media reports constituted prima facie evidence.  Such media reports included reports that charges of conspiracy to defraud having been brought against the managing director, Tai Chi Wah and financial controller, Lim Hau Chun of Gold Face.  I do not believe I can rely on such evidence.

30. It was also said that the fact that True Gold was in the hands of receivers and that officers had been charged with fraud cried out for an explanation.  But as Mr Clifford Smith, who appeared for True Gold, submitted, the fact that they had been charged did not mean that they were guilty, and appointment of receivers was not evidence of misappropriation.

31. Another point relied on was failure to hold progress meetings and to render accounts.  Progress meetings were dealt with under Clause 4 of the J.V. Agreement.  They were to be held as often as might be necessary or desirable for the disposal of business of the joint venture but not less frequently than once in every calendar month.  But these allegations, even if true, did not prove even on a prima facie basis, misappropriation of sales proceeds.  I will deal with the allegation regarding accounts in (2) below.

32. Mr Li argued that the burden was on True Gold to produce credible evidence to rebut the accusation that the sale proceeds had been misappropriated.  I do not think that is right.  True Gold cannot be required to prove a negative.  It has denied misappropriation.  A bare allegation has been refuted by a bare denial.  Moreover, as the affirmation of Lau Ip Keung, Kenneth, filed in support of the petition, shows (see paras.15-17) whether there had been misappropriation would depend on whether there had been cost overrun or inflation of costs to hide misappropriation.  This was not something which I could decide on the petition.

(2)     Management accounts and progress meetings

33. True Gold’s alleged failure to provide monthly management accounts was relied on as a material breach of the agreement under Clause 10.1.4.  Management accounts were dealt with by True Gold in the affirmation of Tai Chi Wah of 20 March 2004 at para.50.  So far as progress meetings were concerned, Mr Tai also dealt with them at para.47 of his affirmation.  There are factual disputes which I cannot resolve. 

34. The petitioners relied on the letter written by their solicitors, Ng & Shum, dated 17 June 2003.  The letter, after enumerating their complaints, went on to say :

“… The breaches included, inter alia, misappropriation of the sale proceeds received from the sale of the units in ‘Villa Pinada’, failure to hold progress meetings, failure to present monthly management accounts, income and expenditure statements and other accounting documents under the Agreement, presenting accounting statements which were either untrue or which did not accurately reflect the true financial position of the Joint Venture, you have been placed in receivership since about 23^rd May 2003, and the Project ‘Villa Pinada’ has now been abandoned by you uncompleted.  The breaches stated here are not exhaustive and our clients reserve the right in relation thereto when full information about the Joint Venture is made available by you.

Of the aforesaid breaches, your misappropriation of the sale proceeds is particularly serious.  It has been widely reported in the press in the past few weeks that, of the more than $500 million in sale proceeds received, less than $2 million remained in the banks when the Project ‘Villa Pinada’ was placed into liquidation in about mid May 2003.  A vast portion of the $500 million odd sale proceeds remains unaccounted for.  Our clients will hold you responsible to give a full account of all the sale proceeds misappropriated, which remains the trust property of our clients, or which you hold on trust for our clients.

By reason of the above, our clients hereby accept your repudiation of the Agreement and the same is terminated.  All our clients’ rights and remedies thereunder are reserved.

Further or alternatively, the aforesaid breaches constituted events of termination under clause 10 of the Agreement (such as you being placed in receivership and abandoning the Project), and our clients hereby give the written notice under clause 10 to terminate the Agreement.”

35. I do not think this was a notice to remedy the breach under Clause 10.1.4.  So I do not believe the petitioners could rely on Clause 10.1.4.

36. The petitioners also relied on what they called untrue accounting statements.  Again, there is no evidence to substantiate this allegation.  It seems to me that they in turn depend on whether there had been cost overruns or inflation of costs, see para.32.

(3)     Clause 10.1.2 

37. The petitioners also relied on the additional ground that True Gold has stopped payment to creditors generally under Clause 10.1.2.

38. The first reference to the stoppage of payment to creditors generally and Clause 10.1.2 was the letter of 28 November 2003 :

“Without prejudice and in addition to the grounds already stated in our previous letters dated 17 June 2003 and 20 September 2003 to True Gold, we write to put on record that True Gold had stopped payment to creditors generally within the meaning of clause 10.1.2 of the JV Agreement since around May or June 2003.  The creditors whom True Gold failed to pay generally included, but not limited to, the following:-

a.         Bank of China (Hong Kong) Limited, which must be the largest and most important creditor of True Gold;

b.         China Overseas Building Construction Limited, the sum owing exceeded HK$50 million;

c.         Yuen Cheong Engineering Co. Ltd., the sum owing exceeded HK$6.3 million;

d.         CWF Piling & Civil Engineering Co. Ltd., the sum owing exceeded HK$6.3 million; and

e.         Midland Realty International Ltd., the sum owing exceeded HK$248,000.

f.          Yellow River Engineering Co., the sum of around HK$273,000.

On a related matter, we note that True Gold and Gold Face have commenced proceedings HCMP Nos. 4464 and 4463 of 2003 against our clients, seeking an injunction to restrain the presentation of winding up petition against them.  We consider that such proceedings constitute an abuse of court process and are completely devoid of merits.  Our clients will respond to such unmeritorious proceedings in the appropriate manner in due course.

In the meantime, all our clients’ right are reserved.”

39. It will be noted that no seven days’ notice was given in relation to this particular clause.  No argument had been addressed to me on the effect of this letter.  Nor when True Gold became liable to pay to the petitioners based on a breach of Clause 10.1.2.  In this context I should mention Mr Smith’s argument that the final accounts had not been prepared under Clause 10 because there had been no valid termination under Clause 10.  But even if the petitions could rely on Clause 10.1.2, notice was only given on 28 November 2003.  No payment was due as at the date of the petitions.

40. Mr Li had not argued that although there was no reliance on Clause 10.1.2 until 28 November 2003, time should begin to run even as regards this ground from the earlier letter of 17 June 2003.

(4)     The project under receivership

41. It is not denied that since May 2003, True Gold has been placed into receivership by the Bank of China.  But this was not covered by Clause 10.1.1.  

42. However, Mr Li also argued that this would enable the petitioners to treat the J.V. Agreement as having been repudiated, and it is said the petitioners relied on their common law right to terminate the agreement.  Mr Li relied on Woomera Co. Ltd & Anr v. Provident Centre Development Ltd [1985] HKLR 263.  That was a case where the Court of Appeal held that certain amendments seeking to claim common law damages were properly allowed since the express provisions in the agreement was not an exhaustive statement of the vendor’s rights and did not preclude a claim for common law damages.

43. Here, we are not concerned with whether the petitioners have a right to common law damages.  We are concerned with whether an event which fell outside Clause 10 could give rise to a right on the part of the petitioners to terminate the J.V. Agreement.  I am of the opinion that either the appointment of receivers by the mortgagee bank in this case constituted a material breach of the J.V. Agreement, in which event, it would be covered by Clause 10.1.4, or there was no room for the implication of any further right outside of the express provisions of the J.V. Agreement to terminate the J.V. Agreement.

(5)     Abandonment, Clause 10.1.3

44. The petitioners also relied on the abandonment of the project under Clause 10.1.3.  The appointment of receivers took place after the completion of the building, so, by itself, it could not be described as an abandonment of the project by the petitioners.   

45. True Gold’s case is that the project had already been completed, so there was no question of True Gold abandoning the project.  This is a question of fact, on the material available to me, I am unable to conclude that there has been a breach of Clause 10.1.3. 

(6)     Debt immediately due and payable

46. I turn to consider whether even if the petitioners were entitled to terminate the J.V. Agreement under Clause 10 and had done so, whether by reason thereof, the petitioners could claim to be entitled to be paid the shortfall as at the date of the petition.  On termination under Clause 10, the final accounts should be prepared “by the Project Manager within one month” of the termination of the J.V. Agreement.

47. As I have said above, the obligation on the part of True Gold to pay under Clause 10 also depended on the preparation of the final accounts.  No final accounts had been prepared. 

48. Clause 10 envisages in the event of termination under Clause 10.1.1, 10.1.2 and 10.1.3, seven days’ notice to terminate the Agreement. 

49. Insofar as the petitioners relied on Clause 10.l.1 and 10.1.3, the notice was given on 17 June 2003.  Time for the preparation of the final accounts would run within one week of 17 June 2003.  No accounts had been prepared.  As noted in para.18 above, failing the Project Manager, True Gold was obliged to prepare the final accounts, and I am of the view that should be done within a reasonable time.  I believe, one month would be a reasonable time.  That being the case, True Gold was in breach as from about August 2003 for which the petitioners were entitled to damages.  I am of the view that the petitioners were entitled to damages for the failure to prepare the final accounts and for the payment of any sum which might be found due on the taking on the final accounts.

50. Mr Li argued that since under Clause 9.3, the petitioners were entitled to recoup the development costs or the shortfall, the petitioners were entitled to sue, as part of their claim, for the development costs or its shortfall by way of a liquidated claim.  Liquidated damages of course are damages which have been agreed and fixed by the parties, whereas unliquidated damages refer to damages which are at large and are to be assessed by the court.  See Chitty on Contracts, General Principles, 27-009.  Here, it is said that development costs and the contribution to development costs can be ascertained from the J.V. Agreement.

51. The petitioners have given credit for advance payments received.  It was argued that the shortfall is a liquidated claim.  I would approach the matter in this way.  I ask myself if an event of default had taken place under Clause 10 but that no advance payment had been made to the petitioners, whether the petitioners would have a liquidated claim against True Gold in respect of the development costs upon the failure on the part of True Gold to prepare the final accounts.  In my opinion, the answer is “Yes”.  That is because under Clause 9.3, that was the minimum which the petitioners were entitled to be paid.  Assuming that the venture was hopelessly unsuccessful and that there was no question of any profit at all, in which event, on the assumption that the J.V. Agreement had been validly terminated under Clause 10 and that there had been no advance payment, I see no reason why the petitioners’ claim against True Gold could not be regarded as a claim under the J.V. Agreement for a liquidated sum.  Nor do I believe that it makes any difference if there had been some advance payments.  No doubt the petitioners would have to give credit for the advance payments received, but the claim for the balance is nevertheless a claim for a liquidated sum.

52. However, for the reasons given above, I do not believe any termination pursuant to Clauses 10.1.1, 10.1.3 and 10.1.4 had been made out.

53. So far as Clause 10.1.2 was concerned, there was no reference to this until 28 November 2003.  So even if this was made out, time for the preparation of the final accounts had not expired when the petitions were presented.

(7)     Further submissions

54. Subsequent to the oral hearing before me, I referred counsel to certain authorities and invited their further submissions.  Those authorities are Re Steel Wing Co. Ltd [1921] 1 Ch. 349, Re Dollar Land Holdings [1993] BCC 823 and National Australia Bank v. Market Holdings (2000) 35 ACSR 572.

55. Both counsel have responded with their submissions.

56. Mr Li’s submission is that the word “creditors” for the purpose of winding-up petition should be construed liberally, and he said that it included “one who had a certain and liquidated claim against True Gold which had no defence to the claim”.

57. The relevant provision is section 179(1), under which :

“Any creditor or creditors (including any contingent or prospective creditor or creditors) could present a petition for the winding up of a company.”

58. Mr Smith argued that although a winding up petition may be presented by a contingent or prospective creditor, the petitioners in this case did not petition as such.  They petitioned on the basis that they were creditors of a debt which was then due and payable.  So the point here is not whether the petitioners could have petitioned as a contingent or prospective creditor but whether they petitioned as such.

59. Mr Li relied on In re Steel Wing Co. Ltd [1921] 1 Ch. 349.  There, the petitioner was the assignee of half of the debt of a company and, as such, was only a creditor of the company in equity.  He could not have served an effective demand for payment.  This was what P.O. Lawrence J said at p.356 :

“      In my judgment, however, the fact that the petitioner cannot serve an effective demand for payment under s. 130, sub-s. 1, does not necessarily imply that the petitioner is not a creditor entitled to present a winding up petition under s. 137.  Sect. 130 is devoted entirely to describing in what circumstances a company shall be deemed to be unable to pay its debts within the meaning of s. 129 (v), and in my opinion the mere fact that a creditor is unable to serve an effective demand under sub-s. 1 of s. 130 does not prevent him from being a creditor within the meaning of s. 137.  It only amounts to this, that the petitioner cannot rely upon non-compliance with his demand as evidence of inability on the part of the company to pay its debts.”

The learned judge then concluded at p.358 :

“ In these circumstances it seems to me that it would be oppressive if I were to accede to the company’s request and to dismiss the petition.  The result of such dismissal would be that the petitioner would be compelled to incur the useless expense and delay of bringing an action against an insolvent company and of then again presenting a winding up petition founded on the judgment which ex concessis he is bound to obtain in such action.

 In the result I hold that all the objections taken by the company to this petition fail and I make the usual winding up order.”

60. But In re Steel Wing Co. Ltd is not an authority that if the petitioners were contingent creditors, a winding-up order should be granted although they had not petitioned as contingent creditors and that section 179(1)(c) had not been complied with.

61. Mr Li has referred me in his further submission to Re: A Company [1974] 1 All ER 256, a decision of Megarry J (as he then was). The learned judge was there dealing with the company’s application to have the petition struck out as being an abuse of the process of the court, and he had this to say at page 260 of his judgment :

“ … But he said that the petitioning creditor was merely a contingent or prospective creditor, and so had to satisfy s 224(1)(c).  This provides that the court is not to hear a winding-up petition presented by a contingent or prospective creditor until security for costs has been given and a prima facie case has been established; and this, he said, had not been done.  However, as counsel for the petitioning creditor pointed out, this is no bar to the presentation of a petition, and certainly no ground for striking out a petition as being an abuse of the process of the court; and I agree.  It is enough if s 224(1)(c) is satisfied by the time the petition comes on for hearing.

 There was some discussion of Re Pen-y-Van Colliery Co.  Buckley’s Companies Acts cities this case as authority for saying that —

‘A claim for unliquidated damages (e.g. for fraudulent misrepresentation) will not support a petition.  The claimant must make himself a creditor by changing his claim for damages into a judgment before he can petition.’

However, that case was decided on the Companies Act 1862, s 82, where the words were ‘any One or more Creditor or Creditors, Contributory or Contributories of the Company’, and so on, with nothing about contingent or prospective creditors; and I very much doubt whether that decision is an authority for the proposition stated in Buckley that under the Companies Act 1948, s 224, ‘a claim for unliquidated damages … will not support a petition’.  Counsel for the company, I think, was quite right to accept that he could not contend that the petitioning creditor could not present any petition.”

62. However, I am here dealing with the hearing of the petition and section 179(1)(c) has not yet been complied with.  Mr Li argued that there has been no application for security for costs.  But then the petition was not expressly made by the petitioners as contingent creditors, so it is not surprising that no application had been made. 

63. Having regard to the language of section 179(1) that a creditor includes any contingent or prospective creditor, it seems to me that a petitioner who has a claim for unliquidated damages could petition as a contingent creditor under section 179(1).  In a suitable case, a winding-up order would be made.  Of course the fact that the amount payable had not been ascertained and hence no statutory demand for payment could be made, might make it more difficult for the petitioner to prove that the company was unable to pay its debt.  Also, on occasions, the dispute over the quantum could be so substantial that the company might be insolvent or not depending on the quantum.  Otherwise, a mere dispute over quantum is not by itself a sufficient reason to refuse a petition.  See In re CDCP International Ltd [1987] 2 HKC 324, Jones J at 329E to I.

64. Mr Li also relies on In re Dollar Land Holdings plc. [1994] 1 BCLC 404.  There, Sir Donald Nicholls V-C (as he then was) was concerned with an application by the company to strike out the petition and an injunction to restrain its advertisement.  The learned judge held that a person with an undisputed claim for unliqudated damages for more than a nominal amount qualified as a prospective creditor and, as such, could present a petition for the winding-up of the company.  I do not think there is anything in that judgment which helps Mr Li.  There is no dispute that a contingent or prospective creditor could petition.

65. As Mr Smith submitted, his submissions on behalf of the respondent company were directed to whether any debt was due at the date of the presentation of the petition.  It is not right that after the conclusion of the hearing and in response to authorities referred by me to counsel, that the petitioners should be permitted to petition as a contingent creditor.

66. Since the petitioners did not petition as contingent creditors, the petitions would have to be amended and non-compliance with section 179(1)(c) excused.  Mr Li argued that I have a discretion to make a winding-up order if it is just and equitable to do so.  The petitioners are seeking the winding-up of True Gold as well as Gold Face, which is a listed company.  I would be very slow to exercise my discretion in favour of a winding-up.  I am also mindful the fact that this petition is not supported by any other creditor.  I have been reminded that in HCA2011/2003, China Overseas Building Construction Ltd obtained judgment on 9 June 2004 against True Gold and Gold Face in the sum of HK$50,644,791 together with interest from 1 May 2003, and that in HCA2008/2003, Gold Face was adjudged liable to pay China Overseas Building Construction Ltd the sum of HK$21,402,800 together with interest from 29 January 2003.  Those judgments have not been appealed.   I am told that China Oversea had petitioned for the winding-up of both True Gold and Gold Face.  I was informed by letter dated 26 November 2004 that the hearing of those petitions has been adjourned to the first Monday after my judgment here. 

67. Bearing in mind that there are available creditors who could cause True Gold and Gold Face to be wound up but they so far have forborne to do so, I do not believe it would be right for me to exercise my discretion in favour of granting a winding-up order.  In other words, since the petitions were based solely on a debt which was allegedly due and payable on the date of the petition and there being no debt due and payable at that date the petitions should be dismissed.

(8)     Scheme of arrangement

68. By letter dated 26 November 2004, I was informed that Gold Face were in the process of preparing for an application under section 166 and that the management of the Gold Face considered that there was a real prospect of the scheme succeeding.

69. By summons dated 14 December 2004 which was heard by me on 20 December 2004, Gold Face applied to have the petition adjourned until after the disposal of the section 166 application in HCMP3190 of 2004.

70. On 20 December 2004, I adjourned the matter to Monday, 17 January 2005 to await further information on the progress of the section 166 application.  I thought there was reasonable prospect of a scheme.

71. The matter was left on the basis that the judgment in relation to True Gold should not be delayed but that unless I was minded to dismiss both petitions, I should not deliver my judgment in relation to Gold Face.

72. Since I have decided to dismiss both petitions, it was unnecessary for me to delay handing down my decision.

CONCLUSION

73. Both petitions are dismissed.

74. I make an order nisi that the petitioners are to bear the costs of the petitions, to be taxed if not agreed.