RE TRIPOLI INVESTMENTS LTD

HCCW 779/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 779 OF 2003

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J U D G M E N T

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1. This is a creditor's petition to wind up Tripoli Investments Limited ("the Company") presented on 17 July 2003 by Princesa Holdings Limited ("Princesa"), on the basis that the Company is unable to pay its debts. The petition is founded on three debts amounting to HK$43,125,092.00 made up of the following:

(1) three loans totalling HK$34 million made by Well Green Group Limited ("Well Green") to the Company and assigned to Princesa on 28 June 2003;

(2) a deposit of HK$9 million paid by Princesa to Terabit Access Technology International Limited (formerly known as Welback Holdings Limited; "Terabit") on behalf of the Company for the acquisition of a 49% interest in Welback International Investments Limited ("WIIL"); and

(3) miscellaneous expenses totalling HK$125,092.00 paid by Princesa on behalf of the Company.

2. The petition is opposed by Wang Jun as a contributory, who claims to be a 100% shareholder of the Company. His status is disputed by Princesa, although no point was taken in these proceedings if he has a right to appear and be heard. Wang Jun opposes the petition on the ground that there is a bona fide dispute on each of the debts in the petition.

3. The Company has not filed any evidence and did not take part in these proceedings.

The background

4. The Company was incorporated in the British Virgin Islands on 20 June 2001, with an authorised share capital of US$50,000.00 divided into 50,000 shares of US$1 each. The amount of the capital paid up or credited as paid up is US$100.00.

5. Terabit was a company incorporated in Bermuda with its principal place of business in Hong Kong. It is an investment holding company. Its shares are listed on the main board of The Stock Exchange of Hong Kong Limited.

6. On 23 November 2001, the Company was acquired from the subscriber by Lee Chun Kwok ("Lee") and Fong Wing Seng ("Fong") and they became the only directors and shareholders holding 53.94 shares and 46.06 shares respectively. On the following day, Lee and Fong as directors of the Company resolved to approve the transfer of their respective shares in the Company to unit trusts owned by trusts the beneficiaries of which are their respective families. Lee's shares were transferred to Otta Trading Limited as trustee of the LCK Unit Trust and Fong's shares were transferred to Primecone Inc. as trustee of the WN Fong Unit Trust. The Company was intended by Lee and Fong to be a vehicle to hold investments for their respective family trusts.

7. The Company had no financial resources of its own and had been financed by loans from or guaranteed by Lee, Fong and companies associated with them including Princesa. The shares in Princesa were held by the same shareholders as those of the Company for the same family trusts in the same proportions. Lee and Fong have since fallen out. Princesa is now wholly controlled by Lee. Fong has made affirmations in these proceedings on behalf of Wang Jun.

8. Prior to 2002, Princesa had been the majority shareholder of Terabit and its shareholding in Terabit was ultimately held for the benefit of the respective family trusts of Lee and Fong. Lee and Fong were two of the directors of Terabit and of WIIL. WIIL was then wholly owned by Terabit and together with its own subsidiaries were engaged in the manufacture and sale of electronic and LCD products and trading in telecommunications products.

9. By an agreement dated 30 January 2002 ("the Agreement") made between Terabit as the vendor, the Company as the purchaser, Lee and Fong as the guarantors, it was agreed inter alia that:

(1) Terabit was to transfer to the Company 49% shareholding in WIIL in consideration of HK$1.00; and

(2) Terabit was to assign to the Company 49% of the shareholder's loans due from WIIL and four subsidiaries of WIIL, Welback Enterprises Limited, Timlex International Limited, Modern Gala Industrial Limited and Quidde Limited, in consideration of HK$43 million.

10. A deposit of HK$9 million was paid to Terabit by Princesa for the Company by appropriating this amount from a sum of HK$9,454,336.93 which Princesa had on 15 November 2001 deposited with Terabit in anticipation of the acquisition by the Company of the 49% interest in WIIL. It was acknowledged in the Agreement that earnest money of HK$9 million had been paid by the Company to Terabit before the signing of the Agreement and upon the signing would be changed into the deposit for the sale and purchase.

11. On 11, 12 and 15 April 2002, the respective sums of HK$11 million, HK$11 million and HK$12 million were paid for the Company by Yicko Finance Limited ("Yicko") to Terabit in settlement of the balance of the purchase price by the Company of the 49% interest in WIIL. Yicko had provided a revolving loan facility to the Company to finance the balance of the purchase price.

12. On 11, 12 and 15 April 2002, Well Green repaid Yicko on behalf of the Company the respective sums of HK$11 million, HK$11 million and HK$12 million. Well Green did so pursuant to an arrangement for "bridging finance". As a result, the Company became indebted to Well Green for HK$34 million. There is no dispute in these proceedings that the Company was indebted to Well Green for HK$34 million as at 28 June 2003.

13. On 19 April 2002, Terabit duly transferred 49% of the shares in WIIL to the Company. On the same date, Terabit assigned to the Company shareholder's loans due from WIIL and the four subsidiaries of WIIL in the total amount of HK$55,287,047.11.

14. Under a deed of assignment of debt dated 28 June 2003 ("the Deed") between Well Green as the assignor and Princesa as the assignee, the debt of HK$34 million due to Well Green from the Company was assigned to Princesa. The validity of the Deed is the subject of dispute in these proceedings.

15. On 10 July 2003, Princesa issued a demand against the Company for immediate repayment of HK$43,125,092.00.

The applicable principles

16. The applicable principles are not in dispute. Mr Ling, counsel for Wang Jun, accepted that the burden is on the opposing party to establish that there is a genuine dispute of the debt on substantial grounds and that an honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order. The opposing party should put forward "sufficiently precise factual evidence" to substantiate its allegations. The court should look at the evidence adduced against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye. The court does not try the dispute on affidavit but is to determine if a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the opposing party is merely "raising a cloud of objections on affidavits" or whether there really is substance in the dispute raised (Re ICS Computer Distribution Ltd [1996] 3 HKC 440; Re Claybridge Shipping Co. S.A. [1997] BCLC 572; Re Hong Kong Construction (Works) Ltd, HCCW No. 670 of 2002, 7 January 2003, paragraph 6).

The debt of HK$34 million

17. By the Deed, Princesa and Well Green agreed to an exchange of debts in this manner. According to the recitals, the Company owed Well Green HK$34 million and Kimasset Holdings Limited ("Kimasset") also owed Princesa HK$34 million, being part of the proceeds due to Princesa for sale of some of the shares of Princesa in Terabit to Kimasset in 2001 and 2002. The operative part of the Deed provided that:

(1) in consideration of the assignment by Princesa to Well Green of Kimasset's debt, Well Green assigned the Company's debt to Princesa; and

(2) in consideration of the assignment by Well Green to Princesa of the Company's debt, Princesa assigned Kimasset's debt to Well Green.

18. The disputes raised by Wang Jun here are that the Deed is liable to be set aside on the ground of non est factum, and that the person who executed the Deed on behalf of Well Green had no or no proper authority to do so.

19. The law is well established for a plea of non est factum. The essential matters that must be established may be stated as follows:

(1) there was a radical or fundamental difference between what a person signed and what he thought he was signing;

(2) the mistake was as to the general character of the document, as opposed to its legal effect; and

(3) there was lack of negligence in that the person who signed had taken all reasonable precautions in the circumstances to find out what the document was.

(See Chitty on Contracts, 28th ed., vol. 1, paras. 5-057 and 5-059; Saunders v. Anglia Building Society [1971] AC 1004.)

20. Wang Jun adduced evidence from Li Kwok Ying ("Li"), who made an affirmation on 22 August 2003. Li, as the sole director of Well Green, had executed the Deed on its behalf. At the outset of the hearing, I had refused leave to Wang Jun to adduce another affirmation from Li, which sought to deal with an omission in his affirmation and commented upon in the skeleton submission served seven days before the hearing by Mr Chua, SC, who appeared for Princesa. I did so because there was no or no proper explanation why the omission was not addressed in the further round of evidence filed in answer on behalf of Wang Jun pursuant to an order made on 27 October 2003 and no leave was sought to adduce such further evidence at the last call-over hearing on 15 December 2003.

21. On the part of Princesa, evidence on the execution of the Deed was adduced from Lee, his daughter Lee Kun Shirley ("Shirley Lee") and the solicitor of Princesa, Wong Chun Nam ("the solicitor").

22. The evidence from the only affirmation of Li admitted in these proceedings may be summarised as follows.

23. He is a fung shui master and was educated to the level of secondary school form two; he has low proficiency in English. He has been acquainted with Lee and Fong for many years and they had arranged for him to be employed by a Hong Kong company, Mega Grade Limited ("Mega Grade") as a sales manager. As a condition of his employment, he was appointed a director of Mega Grade, until he resigned in August 2003. He came to know an Indonesian Chinese, Soedarsono Tansewidjaja ("Soedarsono"), through Lee and Fong, and was asked by Soedarsono in about March 2002 to be the sole director of Well Green, which he understood was a company incorporated in the British Virgin Islands and owned by Soedarsono, as the latter was seldom in Hong Kong.

24. On an occasion in June 2003, Lee arranged to meet him in a coffee shop in Central. Shirley Lee was also present. Lee told him that an action brought by one Lie Kim Kui ("Lie") against Lee was shortly to be tried in the Hong Kong court and Lie was tracing and investigating the financial background of Lee and Princesa. Lee asked Li to help him "to consolidate some transactions so that the background of his case would be clear", otherwise Lee "would have to pay a lot of legal fees to continue with this litigation". Shirley Lee then showed Li a one-page document (the Deed consisted of four pages) and asked Li to sign. Neither Shirley Lee nor Lee interpreted to Li the document, which was in English.

25. Later, the solicitor came to join them and he repeated what Lee had said. Li asked the solicitor what would be his responsibility if he signed. The solicitor said he would have no responsibility and gave an explanation, which Li did not understand. Shirley Lee then showed Li another page of the document with Lee's signature showing that Lee had already signed. Li decided to sign so that Lee could save a lot of legal fees in the litigation. He did so in the belief that he was signing in his "personal capacity". He thought that even if he were to incur personal liability, Lee would help him out and the solicitor and Shirley Lee, who is an accountant, would not get him into trouble. After he had signed, the solicitor asked Li where was the company kit of Well Green and Li said he did not know. Lee told the solicitor it was with a firm of accountants and Shirley Lee said she would go there and ask about the company kit.

26. A copy of the Deed was not provided to Li afterwards and he only learned about this in early August 2003, when Fong showed him a copy of the Deed which was exhibited to Lee's affirmation filed on behalf of Princesa on 18 July 2003. The common seal of Well Green affixed to the Deed was not affixed by Li. He was "shocked" to learn of the contents of the Deed. He remembered that the figure of "HK$34,000,000.00" did not appear on the page that he signed. He had heard of the name of the Company and knew that Well Green was a creditor of the Company.

27. Li's allegations were denied by Lee, Shirley Lee and the solicitor. They maintained that each of them had by drawing diagrams explained the Deed to Li before he signed it as a complete document, and the solicitor was called to the meeting by Lee and Shirley Lee to explain the Deed to Li again. Although Lee had mentioned to Li his litigation with Lie before the arrival of the solicitor, he did not suggest at all that the assignment of debt had anything to do with the litigation. The reason for the exchange of debts, according to Lee, was to "formalise the inter-company loans". Princesa had in 2001 and 2002 sold some of its shares in Terabit to various companies controlled by Lam Chin Chun ("Lam"), one of them being Kimasset. Princesa had not received the proceeds for the sale of its shares in Terabit, instead Lam arranged to apply part of the outstanding proceeds to pay for the acquisition by the Company of a 49% interest in WIIL. That was why Well Green, which was also controlled by Lam, repaid HK$34 million to Yicko on behalf of the Company in April 2002. After the assignment of debt, Well Green could use the debt due from Kimasset assigned by Princesa to set off the loan of HK$34 million Well Green had obtained from Kimasset and which it had on-lent to the Company in April 2002. These matters were all explained to Li.

28. Princesa produced two other documents also signed by Li on behalf of Well Green. One was a director's resolution dated 28 June 2003 in which Li approved the Deed and resolved that any one director of Well Green be authorised to execute the Deed and affix the common seal thereon. This was signed on the same occasion as the Deed and was explained to Li. The other was a memorandum dated 28 June 2003 in which Li resolved to adopt a new common seal for Well Green. This was signed by Li on 7 July 2003 at the request of Shirley Lee who had ordered a new common seal as the company kit of Well Green was destroyed. After Li signed the memorandum, Shirley Lee affixed the common seal to the Deed.

29. It does not seem to me there is an arguable plea of non est factum.

30. Li knew he was signing a document with legal effect, as on his own account it had occurred to him he might incur some personal liability. If his allegation is accepted, he had signed a legal document in a language he does not understand without any attempt to find out its contents when he was shown only one or two pages of the document. It could hardly be said there was no negligence on Li's part or that he had taken all reasonable precautions in the circumstances.

31. Furthermore, Li's allegation that he had never thought that he was signing a document on behalf of Well Green is plainly not credible, nor is his allegation that the figure of HK$34 million did not appear on the Deed when he signed it. Li admitted that he was asked about the company kit of Well Green on the occasion that he signed the Deed. The sum of HK$34 million appeared twice in the Deed in block letters and figures without any gap and also appeared twice in figures without any gap in the director's resolution signed by Li on the same occasion. His assertion that to his recollection he had never executed any document for Well Green is shown to be wrong. Lee has produced an undated agreement for sale and purchase in Chinese of Well Green's shares in Terabit to Achieve Well Group Limited and a letter of authorisation to Yicko Securities Limited dated 2 January 2003 for the delivery of the share certificates of these shares with a blank form of transfer from Well Green, all executed by Li as the sole director.

32. I turn to consider the other dispute as to the lack of authority of Li to execute the Deed. There is no dispute that Li was the sole director of Well Green and he was validly appointed. There is no evidence from Soedarsono. No dispute was raised that Li had executed the resolution approving the making of a new common seal for Well Green. That Li was appointed as a director to represent the interest of someone else is insufficient, as there is no evidence of any restriction imposed on Li's authority to execute any document as the sole director of Well Green, whether in the articles of association or otherwise, or that any such restriction was made known to any one or there were circumstances that should have put any one on inquiry of any irregularity. In relation to other documents signed by Li and produced in evidence, being the undated agreement for sale and purchase, the blank transfer form, and the letter of authorisation, it was not suggested that Li needed the authority or consent of any one before he signed such documents.

33. There is no bona fide dispute on the lack of authority of Li to execute the Deed. The burden of adducing sufficiently precise factual evidence is not discharged.

34. It is not necessary to go into the question if the Deed was a legal assignment or an equitable assignment, as it was accepted by Mr Ling that the Deed was a valid assignment in equity and this would give Princesa sufficient locus as a creditor.

The debt of HK$9 million

35. There is no dispute that HK$9 million was provided by Princesa and applied towards the payment of the deposit under the Agreement. Wang Jun disputes that this was a loan of Princesa to the Company and has adduced evidence from Fong who asserted that the money should be regarded as an investment by Fong and Lee in the Company.

36. Fong's evidence may be summarised as follows. As at 30 June 1992, a number of shares in Terabit were held by various corporate vehicles owned by Lee and Fong, including Princesa, which was then wholly owned by Lee. A share restructuring exercise took place on 27 January 1999, whereby the shares in Terabit held by such corporate vehicles were all transferred to Princesa and in consideration of the transfer Princesa allotted 41 out of a total of 100 shares to a vehicle beneficially owned by Fong. On 15 February 2000, Princesa sold part of its shares in Terabit and held the proceeds of HK$14 million in its bank account. On 21 February 2001, the respective shareholdings of Lee and Fong in Princesa through their corporate vehicles were adjusted to the ratio of 53.94: 46.06. Towards the end of 2001, Lee and Fong were interested in acquiring a 49% interest in WIIL. On 15 November 2001, Lee and Fong caused Princesa to transfer to Terabit as earnest money HK$9 million out of the proceeds of HK$14 million referred to earlier, in anticipation of the acquisition. As already mentioned, the Company was acquired by Lee and Fong on 23 November 2001 and the shares of the Company allotted to them were in the same ratio as their respective shareholdings in Princesa.

37. There is no satisfactory explanation why the HK$9 million which was applied as payment of deposit under the Agreement should be treated as an investment by Lee and Fong in the Company, whereas the balance of the purchase price of HK$34 million should be treated differently.

38. The case advanced by Fong that the amount of HK$9 million was regarded as the investment of himself and Lee in the Company is not supported by any contemporaneous document, nor is it a valid defence in law. The shareholders of Princesa do not have any interest, legal or beneficial, in the assets of Princesa. Their interest is in their shares, and their rights and obligations are as shareholders. Neither Fong nor Lee would have any interest, legal or beneficial, in the Terabit shares sold by Princesa in February 2000 or the proceeds of sale.

39. I hold that there is no bona fide dispute for this debt.

The debt of HK$125,092.00

40. The debt of HK$125,092.00 comprised three sums paid by Princesa on behalf of the Company: (1) HK$92.00 paid on 3 December 2001 for a rubber chop of the Company; (2) HK$5,000.00 paid on 9 April 2002 to Tengis Limited for the annual fee of the Company; and (3) HK$120,000.00 paid to Commerzbank pursuant to a letter of engagement dated 27 August 2002 for its advisory fee in acting as the Company's financial adviser in connection with the restructuring of WIIL including the purchase of shares in Terabit and the purchase of shares and other equity-linked instruments of WIIL, its subsidiaries and affiliates (there is an error in the petition that the professional service to be provided by Commerzbank was in relation to the acquisition of the 49% interest in WIIL, which was in late 2001 and early 2002).

41. It was accepted by Fong that Princesa had paid the said sums for the Company for the above purposes. Again, he contended that these sums should not be treated as a loan by Princesa to the Company but should be treated as investments of himself and Lee in the Company. This contention must fail for the same reason I have given.

If the Company should be wound up

42. I find that there is no bona fide dispute in respect of any of the debts owed to Princesa as stated in the petition.

43. Princesa has relied on an acknowledgment of the above debts by a letter dated 10 July 2003 (the same date as the demand for the debt served on the Company by Princesa), which was signed by Shirley Lee as a director of the Company, and in which she also admitted inability to repay. Wang Jun denies that there was any acknowledgment of the debts of Princesa by the Company, claiming that Shirley Lee was not validly appointed a director of the Company on 27 May 2003 and that he was and is the sole shareholder and director of the Company in that the shares of the Company were charged by Lee and Fong as security for a loan of RMB 10 million advanced by Charter Capital Investment and Holding Company Limited ("Charter") to Ruian Weiye Technology (Shenzhen) Limited, an indirect subsidiary of WIIL, in February 2003. Charter demanded early repayment of the debt in May 2003 and enforced the charge when there was no repayment. Charter has allegedly sold the shares in the Company to Wang Jun and the security documentation executed by Lee and Fong in escrow was backdated to 19 February 2003. Hence, Wang Jun claimed that he has been the sole director and shareholder of the Company as from that date.

44. There is no need to resolve the dispute of the validity of the appointment of Wang Jun or of Shirley Lee for the purpose of this petition.

45. Leaving aside the acknowledgment of debt made by Shirley Lee on behalf of the Company, I am satisfied on the evidence that the Company is unable to pay its debts under section 327(3)(b) of the Companies Ordinance, Cap. 32. Where a creditor's debt is clearly established, and there is persistent non-payment by the company, inability to repay may be inferred (Cornhill Insurance plc v. Improvement Services Ltd [1986] BCLC 26). Furthermore, there is adduced in evidence an unaudited balance sheet of the Company prepared by Shirley Lee as at 30 June 2003. Of the total assets in the sum of HK$57 million odd, about HK$50 million were loans due from WIIL and its subsidiaries, which have not been repaid despite repeated demands. The credit balance in the bank account was in the region of HK$348,000.00. No evidence has been adduced by Wang Jun impugning the accuracy of the unaudited balance sheet.

46. In the circumstances, I make a winding-up order against the Company. I make an order nisi that Princesa's costs should be paid by the opposing party, Wang Jun, as I take the view that the petition is unreasonably opposed by the alleged contributory.