IN RE SINOAMERICAN TELECOM INC.

HCCW329/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.329 OF 1998

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REASONS FOR DECISION

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1. At the adjourned hearing of the Petition of Dragon Investment Company II, LLC ("Dragon II"), the petitioning creditor, to wind up Sinoamerican Telecom Inc. ("the Company"), I declined to make a winding-up order and, instead, upon the application of the opposing contributory, adjourned the hearing of the Petition and gave directions for the further conduct of the winding-up proceedings. This included discovery and cross-examination of the deponents. My reasons appear below.

Chronology

2. The Petition was filed on 14 May 1998. On the same day, the petitioning creditor applied for the appointment of provisional liquidators. Contrary to normal practice, at the time the Petition was filed, the petitioning creditor sought and was granted a return date before a judge. The ground was apparently the impending application for the appointment of provisional liquidators. The Petition therefore never came before a Master. It is to be noted that the return date sought, being some nine weeks after the date of the Petition, is much later than would have been the case had the Petition taken its normal route.

3. Three days prior to the return date of the Petition, by letter dated 17 July 1998, the solicitors for the petitioning creditor requested an adjournment of the Petition to 18 August. It transpired that :

(1) the Petition had not been advertised; and

(2) negotiations were continuing between the petitioning creditor and the opposing contributory Mr Allan Yuen Shek Sang.

Again, had the normal route been followed, the omission to advertise would have emerged and put right by the Master much earlier. The court did not accede to the written request of Herbert Smith and the Petition therefore came on for hearing on 20 July 1998. Before dealing with the hearing on 20 July, it is necessary to digress to mention certain intervening events.

4. On 30 June 1998, the Provisional Liquidators made an application under section 182 of the Companies Ordinance for leave to accept the offer of Phoenix Telecommunications Ltd. ("Phoenix"), a specially formed vehicle in which the investors in the Company including Dragon II, the petitioning creditor, to acquire the only valuable asset of the Company which was its interest (through a subsidiary Remoco (HK) Ltd.) in a joint venture in Shenzhen Ligao Telecom Technology Co. Ltd. Earlier, on 5 June 1998, the Provisional Liquidators had obtained an order from Beeson J authorising them to accept a loan from the petitioning creditor and others and to invite offers from shareholders or noteholders. The application came before me on 30 June and 3 July. It was dismissed for reasons set out in my decision dated 3 July 1998. The appeal against this decision was heard and dismissed by the Court of Appeal on 7 July 1998. Written reasons were handed down by the Court of Appeal on 25 July 1998.

5. Pursuant to the court's direction, an affidavit was filed on behalf of the petitioning creditor for the hearing on 20 July to explain why the Petition had not been advertised. These are set out in paragraphs 11-13 of the affidavit of David Arthur Willis. It would appear that the decision not to advertise was a deliberate and conscious decision (to leave matters open and as flexible as possible) rather than one of oversight. According to the affidavit of Mr Willis, the issue of timing for the advertisement was raised and considered again at the time of making the ex parte application on 30 June :

"It was decided that the advertisement of the petition should await the result of the application for sale so that further strategic decisions could be made once the Petitioner knew its position in relation to the ongoing funding and structure of any new arrangement". (emphasis added)

6. At the hearing on 20 July, upon the undertaking by the petitioning creditor to advertise the Petition no later than 7 August, the Petition was adjourned for hearing on 18 August.

7. Some two weeks later, on 3 August, the Provisional Liquidators obtained an order from Barnett J ("the Barnett Order") sanctioning a loan proposal by the petitioning creditor and others through Phoenix to the Company (via its subsidiary, Remoco (HK) Ltd.) in the sum of up to US$6 million, inter alia, to enable it to fulfill its funding obligations in respect of the joint venture. The loan proposal provided for interest at 18% (with a commitment fee of 1% on the facility amount, payable on the first drawdown). The ex parte application on notice was made on an urgent basis and Mr Yuen, in response to notice of the application, appeared in person but, apparently, he did not arrive in court until the hearing was about to conclude.

8. On 12 August 1998, Mr Yuen filed a notice of intention to oppose the Petition. On 15 August, Mr Chan Chih Yun Andrew, a creditor, also filed a notice of intention to appear and to oppose the Petition. There were further call-over hearings on 18 and 31 August and 29 September at which directions were given for the filing of evidence. At all those hearings, Mr Yuen had no legal representation. Prior to this hearing, the only occasion when Mr Yuen was legally represented was on 21 May in relation to his application for the discharge of the order appointing provisional liquidators in respect of one of the Company's wholly owned subsidiaries.

Mr Yuen's 9th affirmation

9. At the adjourned hearing before me, Mr Yuen appeared by counsel who applied for leave to file Mr Yuen's 9th affirmation.

10. Mr Chain, who appeared for Mr Yuen, submitted that first, the court had to be satisfied that the 9th affirmation raised an arguable case, and secondly, that no prejudice would be caused to the petitioning creditor. In this connection, it was submitted that the position regarding the loan sanctioned by the Barnett Order would be particularly relevant on the question of urgency and prejudice.

11. The background to the dispute is set out in the decision of 3 July and I do not propose to rehearse the facts here. Suffice to say that Mr Yuen is an 85% shareholder of the Company, but that the investors of which the petitioning creditor is one, have made substantial investments into the Company, no doubt because of its interest in the joint venture. It is apparent from the 9th affirmation that the Petition is opposed on the ground that it was not presented bona fide and is an abuse of the court's process.

12. In essence, the allegation is that the Petition was not presented for the purpose of collecting the debt. Rather, it was presented for the purpose of having provisional liquidators appointed in the expectation, to put it at its lowest, that they could be persuaded to agree or support the petitioning creditor and the investors' bid to obtain the joint venture for themselves to the exclusion of Mr Yuen and certain other creditors and shareholders. The unsuccessful attempt by Phoenix to acquire the joint venture interest in early July, the reason why the petitioning creditor had chosen not to advertise the petition until it was forced to do so by the court on 20 July, and the Barnett Order are prima facie consistent with and support that allegation.

13. Apart from setting out the basis of opposition, Mr Yuen has intimated in the 9th affirmation that :

(1) steps will be taken to appeal and/or to vary the Barnett Order; and

(2) an application will also be made for the removal of the Provisional Liquidators on the ground that they are not impartial.

14. So far as the Barnett Order is concerned, Mr Chain submitted that the effect of the loan proposal put before Barnett J is to allow a preferential distribution within section 265(5B) of the Companies Ordinance. Re Companies Ordinance and Kiu May Construction Co. Ltd. [1986] HKLR 165 establishes that there is no jurisdiction to make such an order prior to the recovery of assets and any order made would be without jurisdiction. By analogy, it was submitted that the Barnett Order ought to be varied or set aside because its effect was to authorize a preferential distribution which would wholly undermine or by-pass section 265(5B). As regards the partiality of the Provisional Liquidators, Mr Chain referred to observations made in the judgment of the Court of Appeal.

15. Whether or not the opposing contributory can make good his opposition at the end of the day is another matter, but for present purposes, it is plain that he has shown that he has an arguable case. Since the 9th Affirmation does disclose an arguable case, justice would require that it be admitted into evidence.

16. Counsel for the petitioning creditor was unable to identify any prejudice in admitting the 9th affirmation into evidence that cannot be addressed by means of a costs order. It is of course a fact that Mr Yuen has had ample time to file this affirmation. That criticism is legitimate so far as it goes, but it has to be borne in mind that Mr Yuen has been acting in person until this hearing and it is plain from his earlier affirmations that, not being legally qualified, he was not able to articulate his objections in any readily intelligible manner.

17. After hearing submissions, the court intimated that it was minded to admit the 9th affirmation into evidence. Mr Whitehead then stated that he did not wish to take the point further except to seek leave (which was granted) to file a reply affidavit by Maurice Vallat to deal with the position of advances under the loan sanctioned by the Barnett Order. Since the date of that Order, a sum of US$555,000 has been advanced. Prior to that date, other sums totalling some $600,000 have also been advanced which, according to the petitioning creditor, is covered by the terms of the loan. In other words, the sanction was to that extent retrospective.

The opposing contributory's application for an adjournment

18. Mr Chain sought an adjournment on the basis that the court is not in a position to come to any determination as to whether the ground of opposition raised by Mr Yuen is substantiated in the absence of any discovery regarding events that have actually happened since the appointment of the Provisional Liquidators and, in particular, any communication between the Provisional Liquidators and the lender since the date of the Barnett Order. In addition, it will be necessary for the deponents who have filed affidavits in support of the Petition, namely, Mr Collins-Taylor, Miss Rosemary Fox and the Provisional Liquidators to be cross-examined. It is the opposing contributory's position that the Provisional Liquidators have been acting closely with Phoenix and have not taken steps for any proper realization of the assets of the Company.

19. Mr Whitehead opposed the application for an adjournment and submitted that the court should proceed to make a winding-up order forthwith since this is a creditor's petition, the debt is not disputed and the Company is insolvent. He relied upon the Court of Appeal's decision in Re Esquire (Electronics) Ltd. [1996] 3 HKC 309. As to the opposing contributory's attack on the petitioning creditor's motives, or ulterior purpose, reliance was placed on the following passage in Palmer's Company Law 24th Edn. at 88-06 :

" Where a debt is not disputed or the claim is substantial a creditor may present a petition with the object of forcing the company to pay. 'Substantial' here means having substance. In such a case pursuit of the claim with personal hostility, even venom and an ulterior motive, do not constitute an abuse of the process of the court."

Mr Whitehead also referred to the decision of the English Court of Appeal in Bryanston Finance Ltd. v. de Vries (No.2) [1976] 2 WLR 41,50H-51B :

" Mr Bateson says that the defendant's object is simply to wreck the plaintiff company and that his only motive is enmity against Mr Smith. The judge, rightly in my opinion, thought that a petition could not be an abuse simply because the petitioner was actuated by malice. If a petitioner has a sufficient ground for petitioning, the fact that his motive for presenting a petition, or one of his motives, may be antagonism to some person or persons cannot, it seems to me, render that ground less sufficient. If, on the other hand, he has no sufficient ground, his petition would be an abuse, whether he be actuated by malice or not. I personally feel no doubt that the defendant, whether rightly or wrongly, is genuinely of the opinion that Mr Smith is conducting the affairs of the plaintiff company and of the group for his own personal advantage and in a manner oppressive to the other shareholders. If the defendant were able to make this good, he would be very likely to succeed in obtaining a winding up order. The fact hat his belief was coupled with, or even fed or generated by, personal animosity against Mr Smith would not, I think, disentitle him to such an order."

20. In response, Mr Chain submitted that Esquire is irrelevant since this is not a classic creditor's petition. In that connection, I would observe that it must be rare indeed for a petitioning creditor after presenting a petition to inject funds into a company that it seeks to wind up. In my judgment, Esquire is not authority for the proposition that a winding-up order must be made. The court retains a discretion and how this ought to be exercised must depend on the facts and whatever else, this is an exceptional case. To treat this case as nothing more than a standard creditor's petition is to ignore the true nature of the defence raised. Mr Chain submitted, correctly, in my view, that Mr Yuen's complaints, if upheld, go to the very basis of the winding-up petition.

21. On the ulterior motive point, Mr Chain relied on Vol.7, (3) Halsbury's Laws of England at para.2241 which states that :

" Although a petition on sufficient grounds will not be dismissed merely because it is motivated by malice, a petition may be dismissed or struck out if the purpose of the petition is not to share in the process of equitable distribution of the company's assets which arises on a winding up, but an ulterior purpose."

The reasons are clearly set out in Re a Company [1983] BCLC 492, at 495F-H where Harman J explained :

"....The decision in Bryanston Finance [1976] 1 All ER 25 never sought to overrule the basic law that the only proper purpose for which a petition can be presented is for the proper administration of the company's assets for the benefit of all in the relevant class. To hold otherwise would be to confuse motive, which is past, with purpose, which is future.

The question, therefore, is not 'does the petitioner genuinely wish to wind up this company', as counsel for the petitioner (Mr Littman) submitted. It would be hard for me to find that this petitioner, which has taken all regular steps to prosecute its petition and which plainly has reasons to desire the winding-up of this company, since that must put beyond much cavil the future of the company's lease, does not in truth desire to wind up the company. In my judgment the true question is 'for what purpose does the petitioner wish to wind up this company'. A judge has to decide whether the petition is for the benefit of the class of which the petitioner forms a part or is for some purpose of his own. If the latter, then it is not properly brought."

It is 'purpose' rather than 'motive' which is the key issue here.

22. Where, as in the present case, the facts are disputed, and the good faith of the petitioning creditor is put in question, "the ordinary and obvious course" for the opposing contributory to take is to require the deponents who have filed evidence in support to submit themselves to cross-examination. See In re Smith and Fawcett Ltd. [1942] 1 Ch 304 at 308. Where the evidence is disputed, the court cannot really decide on affidavit evidence alone and I agree with Mr Chain's submission that to disallow cross-examination in those circumstances would be unfair to both parties.

23. Mr Whitehead submitted that the petitioning creditor would be seriously prejudiced if a winding-up order were not made forthwith. He informed the court that the crucial date is 31 December when the licences for Ligao have to be renewed. In the next two months, i.e. November and December, it is estimated that some US$3.5 million will have to be injected into the joint venture. He stressed the commercial reality which is that the investors will not continue to fund until the winding-up is resolved.

24. For my part, I fail to see how Dragon II's decision whether or not to continue to fund the joint venture turns on whether or not a winding-up order is made forthwith. At the time the Petition was presented, a winding-up order was plainly not a priority. Nor was it when it injected further funds upon obtaining the Barnett Order. Quite why the petitioning creditor would be prejudiced if the Petition were to be adjourned to enable discovery to take place and for dates to be fixed so that the deponents can be cross-examined is not readily apparent. So far as the opposing contributory is concerned, once the winding-up order is made, he is likely to be prejudiced as it is improbable that the liquidator will be able to take any action in respect of any previous wrong-doing : he will simply not have the funds with which to take any such action.

25. It is plain that the court is in no position to make a winding-up order in view of the disputed facts which can only be determined after discovery and cross-examination. No case of urgency has been made out by the petitioning creditor nor has it been established that it would be prejudiced by any further adjournment. Having regard to all those matters, I have little hesitation in deciding how my discretion is to be exercised. It would not be appropriate for a winding-up order to be made at this stage. The directions given on 27 October set a time-table for the further conduct of the Petition which is to be restored for mention on 19 November 1998.