XCHRX Re Rhine Jewellery Ltd. (In Liquidation)

HCCW 511/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 511 OF 1998

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D E C I S I O N

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1. This is an application under section 199 (1)(f) and the inherent jurisdiction of the Court for an order that the Joint and Several Liquidators of Rhine Jewellery Limited be at liberty to accept the sum of US$70,000.00 by way of compromise and in full discharge of a debt claimed by the Company from a company called Imperial World Incorporated, hereafter referred to as "IWI".

2. This Company was wound up in September 1998 and the Official Receiver was, as in the normal course, appointed provisional liquidator. Subsequently, Messrs Kennic Lui & Co. were appointed Joint and Several Agents of the Official Receiver as Provisional Liquidator and they were then appointed as Joint and Several Special Managers of the Company. That appointment was subsequently discharged by order of the Court and they were appointed Joint and Several Liquidators of the Company in November 1998.

3. The order which appointed them as Joint and Several Liquidators also provided that there should not be a Committee of Inspection and accordingly, the sanction of the Court is required for any compromise of a debt owing to the Company.

4. IWI is a company in the United States of America which was previously associated with, but was not controlled by, the Company. According to the information provided by the directors in the Statement of Affairs, there was a substantial amount due from IWI to the Company. However, due to various recourse claims from banks, it would appear that the estimated realisation value made by the directors in relation to trade debts due from IWI was in the region of HK$4.9 million.

5. Thereafter, attempts were made by the Liquidators to obtain payment from IWI. IWI has through its lawyers in the United States disputed the Company's claims on basically four grounds. The first was that the Company was prevented from making demands on IWI by the terms of certain agreements, namely, a Forbearance Letter Agreement and a Subordination and Supply Agreement. Secondly, that IWI had a counterclaim against the Company for an amount in the region of US$4 million in respect of outstanding royalties under a "Marketing and Territorial Agreement". Thirdly, that in any event, IWI and its holding company were in a precarious financial position; and fourthly that IWI was restricted from making any payments of inter-company debts unless it obtained express consent from its primary secured lender.

6. In relation to the first two grounds, the Liquidators have obtained legal advice from its American lawyers to the effect that the Company was not subject to the Forbearance Agreement or the Subordination Agreement, and also that the royalties had been waived by the directors of IWI in 1995. There is some support for this waiver in that royalties were not accounted for in either the accounts of the Company or the accounts of IWI. In place, there were payments of a service charge by the Company to IWI in lieu of royalties.

7. That leaves the last two grounds which is that IWI and its holding company were in a precarious financial position, and that IWI was restricted from making payments except with the express consent of its primary secured lender. In relation to the former ground that IWI was in a precarious financial position, there has been exhibited a summary of the financial statements of IWI for the years 1997 and 1998. They show that in 1997 there was a net loss after tax of US$3.9 million which was reduced in 1998 to a net loss after tax of some US$1.1 million. No further information for subsequent years has been made available. It would appear that financial statements are available in respect of IWI's holding company but not for IWI itself, and further, requests for IWI or its lawyers to supply these have been refused. So the available information shows that IWI is indeed not in a healthy financial state.

8. In relation to the restriction from making payments by reason of the secured lending, there has been advice received from the Liquidators' American lawyers. The considered view of those lawyers is that it would appear that the debt is presently "uncollectible". The American lawyers' advice is to the effect that BACC has a perfected security interest in all of IWI's assets. The hierarchy of interests in IWI's assets was said to be as follows:- firstly, a creditor who has a perfected security interest, (that is to say, BACC); secondly, a lien creditor; thirdly, a creditor with a security interest (presumably unperfected); and fourthly, other creditors.

9. The Company before me falls into the 4th category and it would appear from the advice from the American lawyers of the Liquidators that any other proceedings such as seeking to obtain a judgment against IWI or petitioning for IWI's bankruptcy may well jeopardise any payment at all.

10. In the circumstances, the Liquidators have asked the Court for sanction of a compromise in that IWI has offered (subject to the express consent of its secured lender) to pay US$70,000.00 in full and final settlement. When one compares that with the directors' estimated realisation value of nearly HK$5 million, this represents a recovery of about 11% only. However, in view of the fact that all the assets of IWI are subject to the interest of BACC, its secured lender, and given the Company's position in the lowest of the hierarchy of interests in the assets of IWI, I can see no further commercial option but to accept this offer which, it should be noted, appears to be still subject to the express consent of the secured lender.

11. Accordingly, I would give an order in terms of paras. 1 and 2 of the summons.