FUJI PHOTO FILM CO LTD v. JAZZ PHOTO (HONG KONG) LTD

HCCW1165/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1165 OF 2003

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J U D G M E N T

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1.  This is an application to wind-up Jazz Photo (Hong Kong) Ltd (“the Company”) by Fuji Photo Film Co., Ltd (‘the petitioner”) based upon a judgment obtained in the United States.

The Company

2.  The Company was incorporated under the Laws of Hong Kong on 19 May 1994.  It changed its name to the present name on 30 December 1996.  Jazz Photo Corp. Inc. (“Jazz US”) holds 99.9% of the shares in the Company, with the remaining 0.1% being held by Miss Szeto Suk Yee. 

3.  Apart from the Company, Jazz US also beneficially holds 100% of three other companies.  Two of these companies were incorporated in the UK, being Jazz Photo Europe Ltd (“Jazz Europe”), which has now been dissolved, and Jazz Photo Limited (“Jazz UK”).  The third is a Canadian company called Jazz Canada Corp (“Jazz Canada”). 

4.  The Jazz group of companies, including the Company, is controlled by Mr Jack Brenun (“Brenun”), who is the chief operating officer of Jazz US.

5.  Jazz US and the Company had been engaged in the business of selling and refurbishing for resale single use or reusable cameras that are also known as “Lens-Fitted Film Packages” (“LFFPs”).

Proceedings in the United States

6.  On 23 June 1999, the petitioner commenced proceedings in the United States District Court for the State of New Jersey (“the US Action”) against the Company, Jazz US and Brenun claiming damages for infringement of 15 patents owned by the petitioner relating to LFFPs, which the petitioner and its licensees manufacture for sale in the United States and other countries. 

7.  After a contested trial that took place from 24 October to 20 November 2002, during which the Company, US Jazz and Brenun were legally represented, the US District Court on 13 March 2003 handed down a Final Order and Judgment in favour of the petitioner.  Under the Final Order and Judgment, the Company, US Jazz and Mr Brenun were held jointly and severally liable to the petitioner in the sum of US$29,765,280.60 (equivalent to approximately HK$232, 169,189) together with interest (“the US Judgment”).

8.  On 19 March 2003, the Company, Jazz US and Brenun applied for a stay of execution of the US Judgment pending the outcome of their appeal against.  On 8 April 2003, the New Jersey District Court refused the application, but granted a short stay until 14 April 2003 to enable a stay application be made to the United States Court of Appeals for the Federal Circuit (“the Federal Circuit”).  

9.  On 9 April 2003, the Company, Jazz US and Brenun filed a Notice of Appeal to the Federal Circuit against the US Judgment and the refusal of stay.  On 14 April 2003, the petitioner filed a Notice of Cross Appeal against the US Judgment.

10.  On 13 April 2003, an application for stay pending appeal was made to the Federal Circuit.  On 1 May 2003, the Federal Circuit refused the application.

11.  On 20 May and 2 July 2003 respectively, Jazz US and Brenun petitioned for bankruptcy relief under Chapter 11 of United States Bankruptcy Code (“Chapter 11 proceedings”).  As a result, the petitioner cannot levy execution on the assets of US Jazz or Brenun.  The stay on the appeal and cross appeal that followed from the Chapter 11 proceedings was lifted by consent on 12 June 2003.

12.  The appeal and cross appeal were heard on 3 May 2004.  At the hearing of the present petition, the judgment of the Federal Circuit was pending.  Subsequently on 14 January 2005, the Federal Circuit handed down its judgment whereby both the appeal and the cross-appeal were dismissed.

HCA2697 of 2003

13.  On 23 July 2003, the petitioner had issued proceedings against the Company in the Court of First Instance under HCA 2697 of 2003 to recover the amount due under the US Judgment.  On the same day, the petitioner applied and obtained ex parte a Mareva injunction that was subsequently discharged on 4 August 2003 by Deputy High Court Judge Gill.  The petitioner had applied for summary judgment, but had taken no further step since 18 September 2003. 

The petition

14.  On 22 October 2003, the petitioner presented the present petition to enforce the US Judgment.  The petition is brought under section 178(1)(c) of the Companies Ordinance and on the basis that the Company is insolvent and is unable to pay its debt.

15.  The Company’s primary position is that the petition is improperly made use of for ulterior motive and should be dismissed.  Alternatively, the Company asks that the petition be adjourned to await the result of the appeal against the US Judgment to the Federal Circuit, which was pending at the time the petition was heard. 

16.  Subsequent to the hearing, the petitioner had, with the consent of the Company, informed the court of the outcome of the appeal to the Federal Circuit by way of the First Affidavit of Randall Ivan Arthur filed on 25 January 2005.   By agreement between the parties, the court was further informed of two recent developments.  The first is that there will be a hearing on the petitioner’s application to convert the Chapter 11 proceedings into what is called “Chapter 7 proceedings”, the effect of which, in short, is to put Jazz US into compulsory liquidation.  The hearing was initially scheduled for 28 January 2005, but has to be postponed by reason of the indisposition of the presiding judge.  The second up-to-date development is that the trial of the action brought by Jazz US and the Company in the United States against Imation Corp. and Imation S.p.A (“Imation Action’), a matter that I shall return to in details in the latter part of this Judgment, has commenced and the jury verdict is expected in about four weeks’ time.  The petitioner has indicated that further submissions are not required.  The Company has also not requested for an opportunity to make further submissions.

17.  In view of the recent judgment of the Federal Circuit dismissing the appeal against the US Judgment, it has become unnecessary for me to deal with the alternative of staying the petition advocated by the Company.  I need only observe that for reasons set out below, there are no merits in the Company’s request to stay the petition pending the appeal in the United States.

The Company’s oppositions

18.  It is not disputed that the petitioner is entitled to enforce the US Judgment by way of the present winding-up petition.  There is also no dispute that the US Judgment remains wholly unsatisfied.  The opposition of the Company appeals to the discretion of the court to refuse a winding-up order.  In summary, the Company relies on three matters:

(1)	The petition was brought by the petitioner with an ulterior motive.
(2)	A winding-up order will enable the petitioner to flout the “breathing space” sanctioned by the US Bankruptcy Court under the Chapter 11 proceedings.
(3)	Jazz US stands to recover substantial damages in the Imation Action.

Ulterior motive

19.  The Company’s first argument against a winding-up order is that in bringing the present petition, the petitioner is seeking to put the Company and ultimately Jazz US out of business to eliminate competition in the market.  The Company points to the fact that under the Chapter 11 proceedings, Jazz US is permitted to continue its operation as a debtor in possession and to undergo financial reorganization.  It is said that the successful re-organization of Jazz US is dependent upon the continuation of its business in the ordinary course, the successful appeal against the US Judgment and the success of the Imation Action.  The second factor is no longer relevant in view of the dismissal of the appeal.  In relation to the continuation of Jazz US’s business, the Company contends that its operations and existence is necessary for the benefits of Jazz such that by seeking to wind up the Company, the petitioner is furthering its objective of wiping out competition.  As to the Imation Action, it is also suggested the petitioner had colluded with the defendants in the Imation Action. 

20.  The Company has referred to a number of matters as evidencing the ulterior motive of the petitioner to eliminate competition.  They include the hostile conduct against Jazz US in the course of the Chapter 11 proceedings, the comments of Deputy Judge Gill in the judgment discharging the ex parte Mareva injunction and the failure to take further action in HCA 2697/2003.  The petitioner denies the allegations of ulterior motive.

21.  As observed by Stern J in the US Bankruptcy Court in his written opinion dated 3 August 2004 in connection with Jazz US’s motions for sanctions against the petitioner and its counsel, out of ill will and without reasonable factual basis, for pursuing motion to appoint a chapter 11 trustee, “[the petitioner] would like to see the demise of [Jazz US] for marketplace reasons” (at p.26).   Stern J went on to conclude (at p.28) that the petitioner’s marketplace motivation sub judice does not require it to “stand down” where it is justified in pursuing its legal rights. 

22.  Similar comments had been expressed by Buckley LJ in Bryanston Finance Ld v. de Vires (No.2) [1976] Ch 63 at 75D-F and Ungoed Thomas J in Mann v. Goldstein [1968] 1 WLR 1091 at 1095F-G.  In both judgments, it was pointed out if a petitioner or claimant has a proper and sufficient ground for pursuing a substantial claim, and he has acted in accordance with the procedure and in the normal manner, then it matters not that he has a personal hostility or some ulterior motive in bringing the petition or the claim.  

23.  In the present case, the petitioner is the judgment creditor of a very substantial amount and the judgment debt has remained wholly unsatisfied.  As such, the petitioner is quite entitled to enforce the judgment by way of the present petition.  The fact that a winding-up order has the attending consequence of putting the Company and/or Jazz US out of business and that the latter happens to be competitors of the petitioner is therefore not a reason for refusing the order.  

24.  So far as the comments made by Deputy High Judge Gill in his judgment is concerned, the judge had in paragraph 24 indicated that the material non-disclosure and unexplained delay in making the application      had called into question the bona fides of the petitioner in making the ex parte application in the first instance.  That is not the same as suggesting bad faith or ulterior motive on the petitioner’s part in relation to all other proceedings to enforce the US Judgment.  It does not lend support to the assertion that the petitioner’s petition is actuated by ill will.

25.  As for the pending High Court Action, that is one of the modes open to the petitioner to enforce the US Judgment.  Subject to question of costs, as a judgment creditor, the petitioner is entitled to choose what it considers to be the best option of enforcing the judgment.   No ulterior motive can be inferred from the petitioner’s decision to present a winding-up petition after issuing the Writ action, or from the fact that the petitioner has since not taken any step to further the Writ action. 

Imation Action

26.  It is convenient to deal with the opposition based upon the Imation Action before dealing with the arguments relating to the Chapter 11 proceedings as it is a short point.

27.  The Imation Action is a claim for damages for fraud.  The Company is a party in the counterclaim brought by Imation.  The claim by Jazz US against Imation is estimated to be in excess of US$85 million.  The parties had filed cross applications for summary judgment.  Jazz US’ motion was refused in its entirety whereas that of Imation had been allowed in part with a judgment of more than US$ 1 million against Jazz US.  As mentioned above, the trial has commenced before a jury and the verdict will not be known until some weeks later.

28.  The Company has suggested that the petitioner had worked closely with Imation in the defence of the claim by for passing to Imation documents obtained by discovery whereas Imation had passed on information about settlement.  This is denied by the petitioner, who says that the documents were released under the compulsion of a court order and the information about settlement was obtained in the bankruptcy proceedings.

29.  In my view, even if the petitioner has as alleged actively assisted Imation in defending the Imation Action, that does not preclude a winding-up order from being made if the other necessary conditions are present.  The Company argues that if it were put into liquidation, the petitioner will exercise undue influence over the liquidators in relation to the Imation Action.  That is a speculative assertion.  There is no material before the court to show the liquidators, who are professional people and subject to the court’s supervision, will not faithfully carry out the fiduciary duty they owe to all the creditors.  At the same time, pursuant to the orders of the US Bankruptcy Court, the litigation is now solely funded by Jazz US.  There is no reason to suspect that the liquidators will not act in the best interest of the creditors with regard to the Imation Action.  At any rate, given that the trial of the Imation Action has commenced, the risks of the petitioner acting to jeopardize the claim against Imation are to say the least minimum.

30.  As to the suggestion that the Company will be able to pay off the judgment debt if Jazz US succeeds in the Imation Action, it is, as matters now stand, speculative.  Among other things, as a result of an order dated 11 June 2003, the Company had subordinated whatever interest it has in the Imation lawsuit to Jazz US.   In any event, the debt under the US Judgment is due and the Company has not been able to pay.  The Company is not entitled to say that there is a possibility that, given time, it will be able to pay: Re Esquire Electronics [1996] 3 HKC 309 at 312F-I. 

Chapter 11 proceedings

31.  I now return to deal with the argument in connection with the Chapter 11 proceedings.  The Company’s case is that under the Chapter 11 proceedings, all proceedings against Jazz US will be stayed in order that it can re-organize its financial affairs for the benefit of all the creditors.   The operations and the affairs of Jazz US are in the meantime under the supervision of the US Trustee and the Committee of Creditors appointed by the Trustee.  It is argued that Company is a valuable asset of Jazz US and its existence is vital to the reorganization of Jazz US.  The present petition is therefore said to be working against the Chapter 11 proceedings.  It is further argued that the petitioner had not obtained the approval of the Creditors Committee in bringing the petition when it is also bound by the Chapter 11 proceedings from seeking enforcement against Jazz US.  On this basis, it is said that this court should also take into account the Chapter 11 proceedings and refuse the winding-up relief.

32.  The petitioner questions the factual assertion that the company is necessary for the benefit of Jazz US.  I agree.  In the first place, the evidence filed on behalf of the Company in the section 182 application stated that the Company had started to wind down its operation since late 2003 and had ceased operation since January 2004.  Secondly, the evidence also shows that Jazz US has secured an alternative company and has operated through another agency.  Any importance that the Company assumes in relation to Jazz US has clearly fallen away. Thirdly, it has been pointed out by Stern J at the hearing of Jazz US’ application to restrain the petitioner from taking enforcement action against the Company on 22 August 2003 that it is not to the detriment of Jazz US for the petitioner to recover part or whole of the Judgment Sum from the Company.  Stern J was of the opinion that it is to the benefit of Jazz US, and in turn its creditors, in that its liability to the petitioner will be reduced if the enforcement action against the Company is partly or wholly successful.  I respectfully agree.  Fourthly, given that the Company does not have a source of income outside the Jazz group, the Company’s argument that it is to Jazz US’ benefit that the Company had provided services but without payment cannot stand.  Apart from the fact that it is a matter of time that the payments would have to be met, with no payment from Jazz US, the Company would have to look to other companies within the group for survival and will in turn have an impact on the financial strength of Jazz US, who is the parent company.

33.  As to whether the court should enforce the US judgment by granting the petition in view of the Chapter 11 proceedings, Mr Hingorani for the Company relies heavily on the case of Hong Kong Institute of Education v. Aoki Corp (No.2) [2004] 2 HKC 397.  It was held in that case that international comity and fairness required a judicially sanctioned foreign corporate debt restructuring scheme should be granted recognition by a Hong Kong court.  The onus is on the debtor to show that it was on balance fair and equitable to do so in order to prevent a creditor from gaining an unfair advantage over other creditors and that due process had been observed in those proceedings. 

34.  Central to the holding in Aoki is that a creditor should not be allowed to obtain unfair advantage over other creditors by litigating in disregard of the foreign debt restructuring scheme.  There is nothing of the kind in the present case.  The Company has made a deliberate decision not to join in the Chapter 11 proceedings.  It is not a party to the debt restructuring scheme in the US.  As noted above, the petition does not operate to the prejudice of Jazz US.  Quite the contrary, recovery against the Company will operate to Jazz US’s benefit by reducing its liabilities.  The evidence also does not that the petition and the winding-up will cause disruption to the orderly administration of Jazz US under the Chapter 11 proceedings.  It is also not a case that one can argue that the petition had not been sanctioned or authorized by the US court in view of the hearing before Stern J on 22 August 2003: cf. Banque Indosuez SA v. Ferromet Resources Inc. [1993] BCLC 112 at 118.  

35.  In short, I do not consider that because of the Chapter 11 proceedings, the court should exercise its discretion and refuse the winding-up order.

36.  The Company also contends that the petitioner’s conduct in the Chapter 11 proceedings had been obstructive.  This has been denied by the petitioner.  I need only say that that is a matter that Jazz US can have redress in the US Bankruptcy Court and is not a matter that will operate to deny the petitioner of the relief sought here.     

Insolvency of the Company

37. Finally, it is apparent from the audited account of the Company for the year ending 31 December 2001 and the unaudited account for 2002 that the Company is unable to pay the debt in question.  In 2002, the Company was operating at a loss of HK$ 6.8 million.  The bulk of the Company’s assets comprise HK$ 74 million receivables from Jazz US and another HK$ 5 million debt due from two PRC subsidiaries that had ceased operations.  The net book value of HK$ 40,924,422.43 has not included the amount due under the US Judgment.  Plainly the Company is insolvent and is unable to pay its debt.

Conclusion

38. For the reasons set out above, there is no merit in the Company’s oppositions to the petition.  The Company is insolvent and unable to pay its debt.  There is no basis for exercising the court’s discretion to refuse the winding-up relief.  Accordingly, I make a compulsory winding-up order against the Company.  Applying the rule of costs follow event, I make an order nisi that the Company pays the costs of the petitioner and the Official Receiver.