Re Eureca Corporation Ltd.

HCCW 1341/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1341 OF 2001

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D E C I S I O N

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1. I have before me an application taken out by four contributories of Eureca Corporation Limited ("the Company") on 24 June 2002 for an order that all further proceedings in the winding up of the Company be stayed pending the determination of the petition in HCMP No. 5303 of 2000 ("the HCMP"). I shall refer to these contributories as "the Opposing Contributories". The application is made under section 209(1) of the Companies Ordinance, Cap. 32 and it arose in this way.

2. On 3 June 2002, I made an order to wind up the Company on the petition of Fortis Bank Asia HK ("the petitioner"). The petition was presented on 13 December 2001 on the ground that the Company was unable to pay a debt of US$4,315,843.18 owed by the Company to MeesPierson NV Hong Kong branch ("MeesPierson") and assigned by MeesPierson to the petitioner. When the petition was adjourned by a Master to a Judge due to the opposition of the Opposing Contributories, directions were given on 4 March 2002 for evidence to be filed by the Opposing Contributories and by the petitioner and the petition was adjourned to 3 June 2002. When the petition came before me that day, no evidence in opposition was filed by the Opposing Contributories and they did not appear. In those circumstances, I made a winding up order against the Company.

3. Two days later, the Opposing Contributories issued a summons to set aside the winding up order. It would appear from the supporting affidavit filed by their solicitor that it was due to the changes in the organisation of the solicitors' firm and in the employment of the handling solicitor that there was an inadvertent omission in failing to file evidence in opposition and in failing to arrange for legal representation for the Opposing Contributories at the adjourned hearing of the petition. I heard the summons on 14 June 2002 and indicated to the parties that I have no jurisdiction to set aside the winding up order which was perfected on 10 June 2002. Hence, on 18 June 2002, an order was made by consent to dismiss that application.

4. On 24 June 2002, the Opposing Contributories took out the present application for a stay of all further proceedings in the winding up. The only reason for seeking a stay is because the Opposing Contributories have presented an earlier petition in the HCMP on 16 October 2000, seeking relief under section 168A of Cap. 32, that their shares be purchased by the 16 respondents or any of them, or that they may purchase the respondents' shares. Alternatively, they seek to wind up the Company on just and equitable grounds. It was alleged in the petition that there was a common agreement or understanding that some of the Opposing Contributories or their representatives should participate in the management of the Company, that they were wrongfully excluded from the management, that there was total breakdown of mutual trust and confidence and that the affairs were conducted in a manner unfairly prejudicial to the Opposing Contributories. A substantial amount of evidence has been filed in that petition and on 14 March 2002, directions have been given for the further conduct of proceedings including the filing of a list of issues and a pre-trial review. It was submitted by Mrs Newall for the Opposing Contributories that the winding up order should be stayed in order to preserve the status quo pending the outcome of the HCMP so as not to frustrate those proceedings.

5. The application to stay all further proceedings in the winding up is opposed by the petitioner. The Official Receiver has adopted a neutral attitude.

6. The application first came before me on 17 July 2002. I was concerned that the other shareholders of the Company, and they are the 2nd to 16th respondents in the HCMP, should have a right to be heard in this application and they had not been given notice of it. I therefore adjourned the application and gave directions for the solicitors for the Opposing Contributories to serve the necessary papers on these shareholders with a covering letter informing them of the date of the adjourned hearing, their right to be heard on this application and that they should apply to be joined as respondent in this application if they wish to be heard. I also gave directions for the Official Receiver to furnish a report on the financial position of the Company and on any other matters relevant to this application 3 days before the adjourned hearing.

7. Those directions have been complied with. No response has been received from any of the other shareholders. The Official Receiver filed a report on 1 August 2002.

8. The broad guiding principles applicable to the exercise of the discretion to grant a stay of winding up proceedings are fairly well established. The burden is on the applicant to satisfy the court that it is right to grant a stay and if there be material matters as to which the court has doubts, it should not grant a stay (Re Telescriptor Syndicate Ltd [1903] 2 Ch. 174; Re Lowston Ltd [1991] BCLC 570 at 572; Guangdong (HK) International Co. Ltd v. Gleeful Investment Ltd [1995] 2 HKLRD 211 at 214). The applicant must make out a sufficient case that carries conviction (In Re Calgary and Edmonton Land Co. Ltd [1975] 1 WLR 355 at 358-359).

9. In the normal circumstances where there is a strong probability that the assets of a company will suffice to pay all the creditors and the expenses of the liquidation and there will be a surplus for the members of the company, in considering whether to exercise the discretion to grant a stay, the interests of three categories of persons would need to be considered, namely, the creditors, the liquidator and the members of the company. The court would need to be satisfied that the interests of each of these categories have been safeguarded before a stay would be granted (Re Calgary and Edmonton Land, supra. at 360).

10. It was submitted by Mrs Newall that the above considerations would only apply in normal circumstances, the persons whose interests would need to be considered would depend on the circumstances in each case and there are no hard and fast rules governing the exercise of the discretion.

11. I am prepared to accept that there should be some flexibility in considering the interests of those who may be affected by the stay of the winding up proceedings. I do not think Mrs Newall is suggesting that it would not be material to consider the solvency of the Company in this situation. In that regard, she has accepted that the Opposing Contributories would have a heavy burden to discharge because the general principle is that an insolvent company should be wound up.

12. I turn to consider the financial position of the Company.

13. The Company is an investment holding company incorporated in Hong Kong with three subsidiaries in the mainland, Shanghai Coline Cocoa Products Co. Ltd. ("Shanghai Coline"), Zhejiang Coline Chocolate Products Co. Ltd. ("Zhejiang Coline") and Jiangsu Coline Chocolate Products Co. Ltd. ("Jiangsu Coline"). The first two are wholly owned by the Company, Jiangsu Coline is 90% owned by the Company. Shanghai Coline has been the only operating subsidiary of the Company and its main investment. It has operated a chocolate production plant in Shanghai. The other two subsidiaries were in a planning or construction stage.

14. The Company has an authorised share capital of HK$700 million and the amount of capital paid up or credited as paid up is HK$362,050,366.00. The Opposing Contributories hold 39% of the shares of the Company. The next largest shareholder is Cemoi SA, the 2nd respondent in the HCMP, holding 46% of the shares. It is alleged in the petition in the HCMP that there would be a substantial surplus for the shareholders in a winding up.

15. In the evidence filed by the 2nd respondent in the HCMP in June 2001, the 2nd respondent has disputed that the Company is profitable. It is alleged by the 2nd respondent that the Company and its subsidiaries are "seriously insolvent" and that the 2nd respondent has been negotiating with bank creditors for a debt restructuring of the group. Because of this and as there is total breakdown of mutual trust and confidence, the 2nd respondent does not oppose a winding up of the Company. In support, the 2nd respondent has produced the balance sheet of the Company as at 30 October 2000 and the financial statement of the subsidiaries as at the same date.

16. The Opposing Contributories have filed evidence in the HCMP to rebut the 2nd respondent's allegation that the Company is insolvent. A report from Ferrier Hodgson was exhibited commenting on the financial statements put forward by the 2nd respondent and the accountants gave an opinion that on the last audited balance sheets of the Company as at 31 July 1998 and of Shanghai Coline as at 31 December 2000 and the management accounts of the Company as at 31 October 2000, the Company and Shanghai Coline were solvent on a "balance sheet test". However, it would not be possible to say if these companies were solvent on a "cash flow basis" without further investigation. It is asserted by the Opposing Contributories that the buying out of shares, as opposed to a winding up, is the primary relief sought and that they are entitled to have the petition in the HCMP heard and the court's determination as to the appropriate remedy in the circumstances of this case.

17. An affirmation in reply was served by 2nd respondent in September 2001 in which it is alleged that the financial situation of the Company and its subsidiaries had become "increasingly precarious". In the audited report of the Company for the 7-month period ending July 1998, the auditors had given an opinion that there was fundamental uncertainty about the Company on a going concern basis. The audited report of Shanghai Coline for the year ended 1998 showed current liabilities of RMB 289 million odd with current assets of RMB 156 million odd. In 1999, current liabilities of that Company had grown to RMB 389 million odd with current assets of RMB 63 million odd. In 2000, current liabilities had increased to RMB 425 million odd. It is further stated that in order to prevent further loss and to protect the interest of workers, Shanghai Coline had resolved to apply for winding up and had decided to cease operation on 15 May 2001. The application for winding up was submitted to the Shanghai authorities on 28 April 2001 and approved on 2 August 2001. At the time of the affirmation, the winding up process was under way and a full valuation of Shanghai Coline was being conducted.

18. The up-to-date financial position is given in the Official Receiver's report of 1 August 2002, based on the preliminary examination questionnaire completed by five of the directors of the Company, who have connection with the 2nd respondent in the HCMP. No statement of affairs has been filed as yet.

19. According to the information provided, the debts owed to the Company amounted to HK$239 million of which HK$196 million are liabilities due from Shanghai Coline. In addition, HK$12 million is owed by the directors and officers to the Company. Other assets are the Company's 100% shareholdings in Shanghai Coline and Zhejiang Coline and the 90% shareholding in Jiangsu Coline. The shareholding of Shanghai Coline is estimated at a nil value because the assets of Shanghai Coline were sold by public auction in Shanghai for RMB 95 million in April 2002. The sale proceeds were not sufficient to cover the debts of the Company at RMB 425 million. Since taking over the management from the Opposing Contributories in November 2000, the 2nd respondent had attempted to obtain the consensus of creditors of Shanghai Coline to a debt restructuring but was unsuccessful. As for the shareholding in Zhejiang Coline, it is also estimated at no value because the capital contribution that the Company should have injected had not been fully paid and the business licence had been revoked by the authorities. The shareholding of Jiangsu Coline is likewise estimated at no value because the assets are not sufficient to cover its liabilities. The total assets of the Company, made up of debts owed to the Company, are about HK$252 million. As for debts due to unsecured creditors, they amounted to HK$269 million.

20. It would appear from the above that the Company is insolvent, although Mr Glen who appeared for the Official Receiver wishes to clarify that the Official Receiver has not formed a definitive view that the Company is indeed insolvent, albeit that it may well be so.

21. Regarding the debt in this petition in the sum of about US$4.3 million, the solicitor for the Opposing Contributories has filed an affidavit on 12 July 2002 disputing the correctness of the amount due. According to the summary of borrowing in that affidavit, the total amount drawn down by the company from MeesPierson or the petitioner was US$4.5 million and the total repayments made were US$3 million. Even on that affidavit, there is an amount outstanding of US$1.5 million. There is no mention by the Opposing Contributories of any proposal to repay at least the amount of the outstanding indebtedness that is not in dispute.

22. Having regard to the apparent insolvency of the Company, both at the time when the alleged wrongdoings took place in 2000 and at present, it seems to me that there is just no real possibility that if the HCMP should proceed the court would make an order for the Opposing Contributories' shares in the Company to be bought out by the respondents or for the Opposing Contributories to purchase the shares of the respondents. If the Opposing Contributories should succeed in the HCMP, the only appropriate relief would be to wind up the Company. In any event, I have serious doubts whether it is right in these circumstances to launch an insolvent company back upon the waters.

23. In the circumstances, I decline to exercise my discretion to grant a stay of all further proceeding in the winding up. I order that the costs of the petitioner and the Official Receiver in this application be borne by the Opposing Contributories, including the costs reserved on 17 July 2002.