RE KING PACIFIC INTERNATIONAL HOLDINGS LTD.

HCCW 164/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 164 OF 2002

____________

____________

_________________________

REASONS FOR JUDGMENT

_________________________

1. This is a petition brought by Goodragon Ltd to wind up King Pacific International Holdings Ltd ("the Company") on the ground that the Company is unable to pay its debts. The Company is incorporated in Bermuda with a principal place of business in Hong Kong. It is registered under Part XI of the Companies Ordinance, Cap. 32. The shares of the Company have been listed on the Stock Exchange of Hong Kong since 1991. I understand trading in the shares has been suspended since November 2000. The Stock Exchange has written to the Company on 3 March 2002 that the second stage of de-listing has been commenced, for the reason that the Company has not shown that it has a sufficient level of operations or tangible assets of sufficient value or intangible assets of sufficient potential value to justify a listing. Unless appropriate steps are taken, the shares of the Company will be de-listed from the Stock Exchange on 4 September 2002.

2. The petition is brought on the basis that the Company is indebted to the petitioner in the sum of HK$8 million and for which a statutory demand was served on the Company on 8 January 2002. As there is some evidence before this court disputing the debt in the petition, Mr Godfrey Lam, who appeared for the petitioner, did not rely on this at the hearing but he sought to establish, on the evidence available to the court, that the Company is indeed insolvent and unable to pay its debts. After hearing submissions, I find that the petitioner has established to the satisfaction of the court, under section 327(4)(d) of Cap. 32 that the Company is unable to pay its debts, and that the ground for winding up the Company in section 327(3)(b) is made out. I therefore made a winding-up order against the Company and these are the reasons for my judgment.

3. Before I go to the substantive merits of the petition, I would like to give an account of the parties who have appeared on this hearing.

4. The petition is supported by a total of 13 creditors, who have given notice of intention to appear. Nine of them are former employees of the Company. They have obtained judgment against the Company in the Labour Tribunal, on the admission of liability of the directors of the Company then in control of the board. The total claim of these judgment creditors is in the region of HK$2.6 million. These nine judgment creditors and a creditor known as Whole Earth Holdings Ltd ("Whole Earth") are represented by the same firm of solicitors and the same counsel, Mr Chris Cheng. The debt allegedly owed to Whole Earth is in the sum of HK$5 million and there is some evidence before the court disputing this debt, but not the judgment debt of the former employees.

5. The 11th supporting creditor is a company known as Winbest Resources Ltd ("Winbest"), represented by Mr Dennis Law at the hearing. Winbest has served a statutory demand on the Company in February 2002 for a debt of HK$4,334,402.46. There is some evidence before me disputing the debt of Winbest.

6. The 12th supporting creditor is a firm of solicitors, Messrs Stevenson Wong & Co., and it has obtained a judgment debt against the Company on 19 January 2002 in High Court Action No. 5496 of 2001 in the sum of HK$2,396,174.00. This creditor has not appeared at the hearing. There is no evidence disputing the judgment debt in question.

7. The last creditor is the Industrial and Commercial Bank of China, to whom is owed US$4,360,000.00. The bank has not appeared at the hearing. There is no evidence disputing the debt to the bank.

8. As for the representation of the Company, I have a bizarre situation in which two firms of solicitors have instructed different counsel, each has claimed to have been properly authorised by the board of directors to act for the Company in these proceedings, and the position adopted by one is opposite to the other. The solicitors who instructed Mr Jonathan Harris are retained by a group of directors including Mr Chen Vee Yong Frederick, who has filed an affidavit purportedly on behalf of the Company stating that the petitioner's debt is not in dispute and that the Company is insolvent. These directors were in control of the board before mid April 2002. The solicitors who instructed Miss Janine Cheung are retained by a different group of directors including Mr Cheung Yiu Wing and Mr Samuel Cheung Wing Keung. Both have made affirmations opposing the winding-up petition and disputing the debts of the petitioner, Winbest and Whole Earth. These directors are what Miss Janine Cheung has called "the new management".

9. I understand there is ongoing litigation in the High Court arising out of the dispute whether certain directors have been properly elected and whether they do have authority to act on behalf of the Company. In these winding-up proceedings, I have refused to be drawn into the question of who is properly authorised to represent the Company before this court. I have allowed both Mr Harris and Miss Cheung to address the court. If there were any question as to who should bear the costs of representing the Company at this hearing, this would be sorted out on a subsequent occasion. I should also mention that Mr Cheung Yiu Wing is a minority shareholder and has locus to appear and oppose the petition as a contributory in any event.

10. I turn to the substantive merits of the petition. The evidence before me is all one way.

11. On an application made by Mr Cheung Yiu Wing in High Court Action No. 10063 of 2000, the court appointed Messrs Price Waterhouse Coopers as the interim receiver of the Company in February 2001 to preserve its assets. Since then, the receivers have filed a total of five reports in that action. I understand from Miss Cheung that a sixth report would be filed by the receivers in about two weeks' time. The petitioner has no access to these reports, as it is not a party to that action. Mr Cheung Yiu Wing has however exhibited to his affirmation in these winding-up proceedings the fifth report without the appendices. He has chosen not to exhibit any of the previous reports, in particular the first report, in which the receivers have formed the opinion, shortly after their appointment on 24 February 2001, that the Company was insolvent and this was explained in some detail in the first report and expanded upon in the second to fourth reports. The receivers' opinion was formed on the basis of an analysis of both the cash flow and balance sheet of the Company.

12. I have been taken by Mr Lam for the petitioner to the fifth report of the receivers in some detail. I note in particular the following matters:

(1) The Company does not operate any profitable business. It has no cash flow and it has not met the January or February 2002 wage payments to its employees. The employees have not been paid from the funds of the Company held by the receivers since November 2001. Apparently, some or all of these employees have obtained judgment against the Company in the Labour Tribunal and they are amongst the supporting creditors in this petition.

(2) On 14 December 2001, the China International Economic and Trade Arbitration Commission (Shenzhen) ("CIETAC") handed down judgment in the arbitration between the Company and San Zheng Infrastructure Development Co. Ltd in the latter's favour. It was held that Ocean Essence Holdings Ltd ("Ocean Essence"), a wholly owned subsidiary of the Company, did not invest amounts required under the joint venture contract. Hence, Ocean Essence and the Company would have no interest in the water factory in question. The Company's interest in the water factory appeared as a non-current asset in the audited accounts as at 31 March 2001 with a value of about HK$148 million. As a result of the judgment, the entire sum of HK$148 million would have to be written off from the assets.

(3) In February 2002, the receivers received a notice dated 28 January 2002 from the Suizhou Bureau of Foreign Trade and Economic Cooperation advising that the Company's interest in Changzhou Power Plant Development Co. Ltd had been diluted from 40% to 27.2 %, due to the issue of new shares. The power plant's license to produce electricity expires in 2003 and investment is required to convert it to a co-generating plant before 2003 to comply with environmental restrictions. This is estimated to cost RMB 50 million. Besides, this company in Changzhou has no cash and would require funding of working capital. In the audited accounts of the Company for the year ended 31 March 2001, the Company's interest in the Changzhou company appeared as a non-current asset with a value of HK$168 million. In view of recent events, the value attributable to this asset would have to be reduced substantially.

(4) Yiu Wing Construction Co. Ltd, one of the main subsidiaries of the Company, has laid off all staff and is no longer operating. It is involved in a number of legal actions and the claim by the Housing Authority against this company has risen to HK$850 million.

13. I have considered the affirmations of Mr Cheung Yiu Wing and Mr Samuel Cheung Wing Keung made in opposition of the petition. They have not put forward any material to challenge the views of the receivers that the Company is insolvent. I was referred by Miss Cheung to the audited accounts of the Company as at 31 March 2001. Far from supporting any suggestion that the Company might not be insolvent, the audited accounts showed quite clearly that the Company was insolvent as at the date of the accounts. Not only were the accounts heavily qualified by the auditors who considered the evidence made available to them limited, the auditors had formed the view that the fundamental uncertainty relating to going concern of the Company and its subsidiaries was such that they had disclaimed their opinion whether the financial statements gave a true and fair view of the state of affairs of the Company and of the group as at 31 March 2001. I note that the consolidated balance sheet in the audited accounts showed net current liabilities of HK$146 million. I have already mentioned the adjustments that would probably be required to be made to two substantial items that appeared in the non-current assets.

14. Miss Cheung has sought an adjournment of three weeks to file further evidence to show that the Company is not insolvent. She submitted that the new management of the Company is handicapped in providing information on the financial position of the Company as they have only assumed control in mid April 2002. She further submitted that the receivers have relied on the previous board of directors for information in preparing their first to fifth reports. Assuming that to be the case, I see no basis for rejecting the conclusion of the receivers that the Company is insolvent, bearing in mind that they are independent of any party and they are answerable to the court, they have been investigating the affairs of the Company for over a year, they have not stated in their report that they are handicapped in any way in the evidence made available to them, and they have not qualified their professional opinion as to the insolvency of the Company. There is no basis for impugning the independent professional view of the receivers and I declined to grant any adjournment for the new management of the Company to file further evidence on the financial position of the Company.

15. For the above reasons, I am satisfied that the Company is unable to pay its debts. I have therefore made a winding-up order against the Company. The costs of the petitioner are to be paid out of the assets of the Company. There would be one set of costs for all the supporting creditors to be shared by them on the basis of their separate legal representation and these costs are to be paid out of the assets of the Company.