RE KANDARA LTD

HCCW 596/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES （WINDING-UP）NO. 596 OF 2003

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D E C I S I O N

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1. This is an application for a creditor's petition to wind up Kandara Ltd ("the Company") be struck out in the inherent jurisdiction of the court on the basis that there is a bona fide dispute of the petition debt on substantial grounds. The petition to wind up the Company was presented on 28 May 2003 by Kwan Kan Kai Kee Holdings Ltd ("the petitioner"), which is the holder of 71.42% of the issued shares of the Company, holding 10,000 out of 14,000 issued shares. The summons to strike out was issued on 10 July 2003 by Sky Treasure Enterprise Ltd ("Sky Treasure"), as the opposing contributory and creditor. Sky Treasure holds the remaining 28.57% of the issued shares of the Company, that is 4,000 of the issued shares.

2. The debt in the petition is HK$8.7 million and is alleged to be advances made by the petitioner to the Company due and payable. A demand for the debt was served on the Company under section 178(1)(a) of the Companies Ordinance (Cap. 32) on 6 May 2003 at its registered office, although this demand was not disclosed to Sky Treasure until 30 May 2003, 2 days after the presentation of the petition.

3. The background to the petition may be given as follows.

4. The Company was incorporated in April 1982 specifically for the purpose of running the business of a mahjong school in Temple Street, Kowloon. Before its incorporation, the mahjong school was operated by a partnership of two brothers, Lam Kwok Leung Albert and Lam Kwok Keung Alex. Alex Lam did not appear to have taken an active part in the business, although he was the licence holder of the mahjong school until March 2002. It was Albert Lam and his son Lam Wai Ping Gordon who had played an active role in the management. Albert Lam passed away in 1996. Gordon Lam became the de facto managing director of the Company.

5. The board of directors of the Company is made up of Gordon Lam, Sky Treasure, Lam Kwan Realty Ltd ("Lam Kwan Realty") and Lam Sui King. Sky Treasure is owned by Alex Lam and his children. Lam Kwan Realty and Lam Sui King, who is a sister of Alex Lam, hold shares in the petitioner. Gordon Lam, Lam Sui King and Lam Kwan Realty are the directors of the petitioner.

6. In 1999, Alex Lam made an offer to sell his interest in the Company and two other companies which are part of the family business to other members of the family. Agreement was reached to sell his interest in the other two companies and the transfer of interest was made in September 2000, but no agreement was reached to sell his interest in the Company and Sky Treasure has remained a shareholder and director of the Company.

7. In September 2000, Sky Treasure received a letter dated 1 September 2000 from the Company enclosing draft accounts, stating that it had suffered a net trading loss of HK$4 million odd for the year ended March 2000. Sky Treasure wrote to the Company on 9 September 2000, expressing surprise at the amount of the loss and requesting Gordon Lam to provide monthly accounts of the Company. On 12 September 2000, Sky Treasure requested inspection of the books and records of the Company.

8. After some delay and arguments, Gordon Lam allowed the accountant engaged by Sky Treasure to inspect some, but not all, of the books and accounts of the Company in October 2000 and April 2001.

9. In October 2000, Alex Lam requested that he should cease to be the licence holder of the mahjong school. At a directors meeting in October 2000, the board approved that the licence was to be transferred from Alex Lam to Lam Sui King and an application for transfer of licence was made to the Television and Entertainment Licensing Authority ("TELA").

10. On 16 January 2001, it was resolved in a board meeting that the Company should cease business from 18 January 2001 onwards, pending the processing of the transfer of licence to Lam Sui King by TELA. On 18 March 2002, TELA granted a new licence to operate the mahjong school to Lam Sui King, but the Company has not resumed business.

11. On 27 March 2002, a directors meeting was held and a resolution was passed by Gordon Lam and Lam Sui King that the shareholders be required to inject working capital of HK$5 million to the Company to pay the renovation expenses and HK$330,000.00 to pay the additional profits tax for the year 1995/1996 and to convene an extraordinary general meeting for the above purpose on 30 April 2002. Sky Treasure objected to the proposed requirement to inject working capital, taking the stance that the question of additional capital should only be considered after Sky Treasure had been given an opportunity to inspect all the books and records of the Company. In the end, no extraordinary general meeting was held to discuss the injection of working capital.

12. On 29 April 2002, Sky Treasure issued an originating summons against the Company and Gordon Lam in HCMP No. 1664 of 2002 under section 121 of Cap. 32, seeking inspection of all the books of account, management accounts, working papers, bank statements and other documents of the Company as listed, for the period from 1 April 1995 to 31 March 2002. On 24 June 2002, Deputy Judge Woolley made an order requiring Gordon Lam to produce certain documents of the Company for inspection by Sky Treasure within 28 days thereof. Costs of that application were ordered against Gordon Lam on an indemnity basis.

13. The inspection exercise has still not been completed after a year. Lengthy correspondence was exchanged between the solicitors and accountants for Sky Treasure and the solicitors and accountants for Gordon Lam. The accountant for Sky Treasure raised requisitions with Gordon Lam on the accounting records disclosed and the transactions of the Company as revealed in those records. Some of the requisitions raised by Sky Treasure's accountant on 14 March 2003 in relation to the transactions of the Company with Gordon Lam and the petitioner in paragraphs 9.1 to 9.4 of that letter and the answers provided by Gordon Lam's accountant dated 29 April 2003 are particularly relevant to the present application. It is also pertinent to note that on 27 May 2003, the day before the presentation of this petition, Sky Treasure's accountant had sent three letters to Gordon Lam seeking an explanation why so many cheques issued by the Company had a blank for the payee and why certain payments purportedly made by the Company were not recorded in the ledger. Supporting vouchers were again sought by Sky Treasure's accountant. These requisitions raised on 27 May 2003 have not been answered, apparently because the petition was presented on the following day.

14. Gordon Lam has complained that the inspection exercise was a harassment campaign waged against him by Alex Lam to make trouble for him, but I am not able to discern any clear indication from the correspondence exchanged that the inspection carried out by Sky Treasure's accountant at its considerable expense and subsequent requisitions raised on its behalf was not a serious and genuine exercise.

15. I start with the basic proposition that for a creditor's petition to be presented on the ground that a company is unable to pay its debts, it must be established that the petitioner has locus standi to present the petition in that he has an undisputed claim against the company for a debt presently due (Mann v Goldstein [1968] 1 WLR 1091 at 1094D). If the debt is disputed in good faith on substantial grounds, the petitioner cannot claim to be a creditor within section 179(1). Mr Douglas Kwok, who appears on behalf of the petitioner, pointed out that the petition debt is not disputed by the Company, in that a resolution was passed by the board of directors on 15 July 2003 to the effect that the Company does not dispute the petition debt, as appears from the letter dated 18 July 2003 signed by Gordon Lam on behalf of the Company and addressed to the petitioner. The board of directors of the Company is controlled by individuals who are also directors of the petitioner. It was contended by Mr Kwok that Sky Treasure, as the opposing contributory and creditor, has no locus to oppose the petition on the basis that the petition debt is disputed on substantial grounds, and that an opposing contributory or creditor may only dispute the petition debt at the stage of the adjustment exercise by the liquidator. In support of this contention, Mr Kwok relied on the following dicta in Re Perak Pioneer Ltd (No. 1) [1985] 2 HKC 403 at 409C:

"Where the company is obviously insolvent, the directors have no further interest in the company. They are functus officio so that the company has no locus standi. The interests to be protected are those of the creditors. In these circumstances if the debt is in dispute it is a matter for proof by the creditor in the liquidation."

16. I reject Mr Kwok's submission. I do not think the court in that case was specifically directing itself to the question whether an opposing contributory or creditor is permitted to raise a dispute of the petition debt in opposing the petition. Mr Kwok did not and cannot contend that a contributory or creditor has no locus to appear at the hearing of a creditor's petition to oppose it, as that is allowed under r. 30 of the Companies (Winding-up) Rules. Mr Kwok was at a loss to tell me on what ground an opposing creditor or contributory can oppose a creditor's petition, if he is not allowed to challenge the petition debt which goes to the fundamental question whether the petitioner has locus to present the petition.

17. I also reject the submission of Mr Kwok that in seeking to make use of the information gained as a result of the inspection carried out pursuant to the order in HCMP No. 1664/2002, Sky Treasure is acting in contempt of court in that it has not sought leave of the court to use the information in other proceedings. The information obtained by Sky Treasure was not obtained in the exercise of discovery in litigation. That information was obtained by Sky Treasure by virtue of its right as a director of the Company, it must be permitted to use such information for the discharge of its duty as a director.

18. I turn to the central issue if there is a bona fide dispute of the debt on substantial grounds.

19. The case for Sky Treasure in disputing the petition debt of HK$8.7 million may be stated as follows.

20. The petition debt must be looked at in the history of the inspection of accounting records and the requisitions raised by Sky Treasure's accountant. In the requisition raised in March 2003, under the section relating to transactions of the Company with Gordon Lam and the petitioner, Gordon Lam was specifically requested to advise the "nature and explanations for the transactions", being four transactions in March 2001 involving substantial payments made by the petitioner to the Company and payments of identical sums shortly thereafter by the Company to Gordon Lam as listed in a schedule. He was requested to provide "supporting voucher or evidence in support of each transaction". Further, he was asked in respect of a receipt of the Company of HK$1.72 million in cash from the petitioner according to the Company's ledger on 31 January 2001 and the immediate repayment of HK$1 million to the petitioner, why the Company "needed so much cash after the business had been suspended on 19 January 2001 and why $1 million cash was repaid immediately". He was asked to provide supporting documents or receipts in respect of HK$3.18 million paid to him by the Company by cheque issued on 27 March 2001 and to explain why three cheque deposits in the total sum of HK$520,000.00 in December 1999 and January 2000 were recorded as cash received in the ledger.

21. The answers provided by the accountant of Gordon Lam to the requisitions are far from satisfactory. In summary, Gordon Lam asserts that in the beginning he personally had made advances to the Company, later the petitioner had also made advances to the Company and the Company had used part of the advances made by the petitioner to repay the entire indebtedness to him in the total sum of HK$7.13 million, although the total amount of payment by cheques to Gordon Lam in March 2001 was in the sum of HK$8.07 million. No supporting vouchers or documents were ever disclosed, whether in the answers to the requisitions or in these proceedings, of the advances made by Gordon Lam personally to the Company or of the advances made by the petitioner to the Company. All that was produced was a four-page document headed "Director's current account" and "Shareholders' current accounts" setting out the date and amount of advances made and repayments received. Some of the dates do not tally with the dates of the cheques disclosed on inspection. This four-page document was not audited. As pointed out earlier, and as noted by Sky Treasure's accountant, on various dates in March 2001, very substantial sums constituting a large part of the petition debt paid to the Company in March 2001 in the total sum of HK$8.07 million have in fact been paid over to Gordon Lam.

22. It was submitted by Ms Linda Chan on behalf of Sky Treasure that no cogent evidence has been adduced to show that the petition debt had in fact been advanced to the Company and received. I agree that a bona fide dispute on substantial ground is raised in this instance, not just a cloud of objection with no or little substance. Five substantial advances in the total sum of HK$8.79 million were allegedly made to the Company by the petitioner between 31 January 2001 and 27 March 2001 and advances in the total sum of HK$380,000.00 were allegedly made to the Company by the petitioner between 10 May 2001 and 25 March 2002. All these advances were made after the undisputed cessation or suspension of business of the Company on 18 January 2001. No explanation was given for the purpose of these alleged advances, save that a large part of the advances was apparently used to repay previous advances allegedly made by Gordon Lam personally when no supporting documents or explanation was ever furnished for Gordon Lam's personal advances despite previous requests.

23. It was submitted by Mr Kwok that of the total indebtedness of HK$8.7 million, HK$0.63 million is not disputed on any substantial ground. I do not think that is the case, for the reasons given above.

24. Ms Chan has also made the point that the petition debt, even if advanced and received by the Company, is not presently due and payable. If that were the only ground for challenging the debt, I do not think there is a bona fide or substantial dispute here. The Company has ceased business for some time. I think there is at least a prima facie case for the petitioner that there was an agreement, whether express or to be inferred, that the advance to the Company as working capital was repayable on demand upon cessation of business.

25. I do not think I need go into the alleged motive of the petitioner in presenting the petition.

26. I should also say that I do not think it is the position that the petitioner would be left without a remedy at law if the present petition is struck out.

27. The insolvency or otherwise of the Company does not come into the picture if the petitioner has no locus to present the creditor's petition.

28. As I am of the view that the opposing creditor has raised a bona fide dispute of the petition debt on substantial grounds, it would be an abuse of process to present the petition and it must be dismissed. I therefore make an order to strike out the petition and dismiss the proceedings.

29. Ms Chan sought costs against the petitioner on an indemnity basis. This was resisted by Mr Kwok on the ground that the present case is not a clear case in which the petitioner has presented a petition to inflict maximum damage to the Company, bearing in mind that the Company has ceased business since January 2001.

30. For the reasons I have given earlier, I have come to the view that there is an abuse of process in this instance. Of particular relevance is the history of the inspection of books and records and the requisitions raised which have not been answered or fully answered, so the petitioner must have knowledge that the debt on which the petition was founded is the subject of a serious dispute. Even after the petition was presented and in the face of this strike out petition, the petitioner has not adduced satisfactory evidence in support of the petition debt, knowing that the petition debt has been and will be challenged vigorously. Further, no explanation is given why the demand served on the Company for the petition debt was not disclosed to Sky Treasure until after the presentation of the petition, when Gordon Lam and Sky Treasure have been engaged in correspondence on the very debts for some time.

31. Having regard to the above matters, I am of the view that the petitioner should be penalized in costs for adopting a high-risk strategy which is an abuse of the process of the court. I therefore order the petitioner to pay the costs of Sky Treasure on this petition including the costs of this application to be taxed on an indemnity basis.