EXCEL NOBLE DEVELOPMENT LTD. AND ANOTHER v. WAH NAM GROUP LTD.

HCCW 130/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 130 OF 2000

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DECISION

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1. On 12 April 2000, I gave an order for validation of a proposed allotment of new shares by the Company. Shortly thereafter, on the basis of new evidence, I was asked not to allow that order to be perfected. This is my decision on that request. Before I deal with that however, I should set out briefly the events that have taken place.

2. On 7 April 2000, the Company applied for a Validation Order under s.182 Companies Ordinance. The transaction sought to be validated was the issue by the Company of 150m. new shares to a company called China Zone at 10 cents each. The shares were to be paid for in cash.

3. The application was part-heard and adjourned to 10 April 2000 when further submissions were made. I directed that certain statements from the Bar table made by counsel for the Company on instructions should be included in affirmations to be filed.

4. On 11 April 2000, the Company filed the 8th affirmation of Alfred Cheung Tze-Fat in support of the application for validation. Exhibited to this affirmation was a Schedule which showed, amongst other things, that (a) there should be deleted from the previous version of the Schedule the sum of HK$9.3m from the sale of a bridge, and (b) that there should be added to the Cash Outflow the sum of HK$6.87m for "renovation of Barney's Fuyong Factory". Barney Technologies is a subsidiary of the Company.

5. The result of these two adjustments was to decrease the funds available to the Company. This was presented in support of the Company's application for validation of the allotment so that the Company could obtain more funds.

6. On 12 April 2000, I delivered a short decision orally, ordering that the transaction should be validated on the only ground that the new shares were to be paid for in cash. That decision has been transcribed and I shall not repeat it here.

7. On 15 April 2000, however, the Petitioners in HCCW 130/2000 filed the 4th affirmation of Terence Ho Pui Tin. In that affirmation, Mr Ho says that after the hearing on 12 April 2000, he had been given information that:-

(i) Barney had closed down and its staff laid off as at 1 March 2000;

(ii) its plant and machinery had been sold to a company controlled by a Mr Ronald Lye and

(iii) no renovation had taken place at the Fuyong Factory.

8. On 17 April 2000, the petitions for the winding-up of the Company were called on. However, in a chambers application made prior to the petitions, the Petitioners asked that the Court's order of 12 April 2000 should not be perfected as a result of the new information in Mr Ho's 4th affirmation, which, the Petitioners submitted, showed that the Company was less than frank with the Court.

9. The Company applied for time to file an affirmation in reply to Mr Ho's 4th affirmation, which had been filed only on the previous Saturday. Given the serious nature of parts of the affirmation, I gave the Company leave to file evidence in reply.

10. On 28 April 2000, an affirmation of Matthew Chan was filed on behalf of the Company. In this affirmation, Mr Chan stated that:-

(i) Barney had not ceased business; rather, the Company had entered into a joint venture with Mr Lye's company Titron Media whereby Barney would be serviced by Titron's staff, resulting in the laying off of Barney's Hong Kong staff;

(ii) there was an agreement for the sale of certain of Barney's plant and machinery to a company called Kinhua, which was related to Titron, but no Formal Sale and Purchase Agreement had taken place and no money had passed hands; and

(iii) there had been a delay in the construction of the planned new factory in Fuyong due to lack of funds, but deposit money for the construction was eventually paid to a local contractor out of the proceeds of the sale of the bridge. There was a change of plans for the factory, and it was subsequently decided that the premises should be let for rental income, instead of being used for Barney itself.

11. On 10 May 2000, the Petitioner in HCCW 130/2000 filed the 5th affirmation of Mr Terence Ho containing refutations of Mr Chan's affirmation which will be referred to later.

12. Neither party sought a further hearing. Neither party sent any submissions relating to the new evidence filed since the previous hearing on 17 April 2000.

13. On 13 May 2000, having read and considered the new evidence, I directed that the order of 12 April 2000 could be perfected as neither party wished to make submissions. (It would appear that the Petitioner in HCCW 130/2000 did indicate its wish to do so in a letter, which however was not received by this Court until the hearing of the Petition in HCCW 130/2000 which was called on again on 15 May 2000).

14. On 15 May 2000, I gave directions for written submissions to be sent to Court. These have been done.

15. Having considered the new evidence and the submissions, I remain of the view that the provision of cash to the Company justifies the validation of the allotment of new shares in the circumstances of this case. On the face of the Schedule exhibited to Alfred Cheung's 8th affirmation, the Company is short of funds. The subscriber was prepared to pay cash of 10 cents for shares when the net asset value of the Company was only 3 cents per share. If the Company is wound up, it is unlikely that the contributories would be prejudiced by the increase in the share capital in these circumstances.

16. The Petitioners' submission was that Mr Ho's affirmations show that the materials supplied by the Company to the Court in support of the application are untrue, and therefore the Court should not, in the exercise of its discretion, accede to the application.

17. In this respect, I note that there are numerous disputes on the facts from the evidence adduced by the respective parties. An application for validation is an interlocutory procedure, presented on affidavit evidence; the court cannot and should not embark on making findings of fact such as whether a meeting really took place (although signed minutes have been exhibited), or whether documents are truly what they purport to be (especially when they have purportedly come from third parties). If the Petitioners allege that this Company is being run by persons resorting to "fraudulent means", one would expect that an application for the appointment of a provisional liquidator would be made - that has not been done.

18. Consequently I take the view that unless it is clear that the evidence presented in support of the application is false or cannot support the Company's case, the Court should not exercise its discretion to refuse validation when otherwise validation is justified.

19. First, in relation to the business of Barney, it would appear that whilst the staff in Hong Kong had been laid off, there is no evidence that business has ceased also on the Mainland. Questions raised by Mr Ho as to the profitability of Barney cannot be decided by the Court on the existing materials.

20. As for the plant and machinery, it would appear that no Formal Sale and Purchase Agreement has been signed and it has been submitted by the Company that the effect of the letter of agreement has lapsed. That may or may not be so, as the letter is not that clear, but on one reading, it may be so.

21. As for the construction of the factory in Fuyong, there are exhibited a document purporting to be minutes of a meeting of Barney signed or initialed by a number of persons resolving to proceed with the project, detailed supporting documents done by executive staff relating to relocation, architectural plans for the new factory building, a document purporting to be a construction contract with a local contractor, remittances of two payments and a document purporting to be a receipt by the contractor for an instalment payment. These are all prima facie evidence that relocation had been planned and was in the process of being undertaken, and that is in my view sufficient to rebut the Petitioners' case that the renovation was a fabrication by the Company.

22. The fact that the construction of the factory was not in Deloittes' Cash Flow Forecast is not, in my view, sufficiently clear evidence that the payments to the contractor were never made, contrary to the documents evidencing the payments. The omission may be due to other reasons, such as incompetence, inadvertence or concealment. Stronger evidence would be required before the Court could find, in the present application, that the construction contract and payments are a "fabrication".

23. Finally, I note from the Company's Circular that the proceeds from the sale of the bridge would not have been available as early as August 1999, the dates of the remittances to the contractor. However, the remittances showed that they were made by another company related to the then majority shareholder of the Company, and so a bridging or short-term loan of the expected proceeds of sale would not be impossible or improbable. I accept that there is no evidence of such a loan, but the discrepancy in dates is not necessarily inexplicable, and it is not a sufficiently strong pointer for the Court to decide, in the present application, that the construction contract, remittances and receipt, which are documents involving a third party, have been concocted.

24. In the circumstances, I would direct that the order I made on 12 April 2000 be perfected.