XCHRX YU LAI PING WANDY v. CHAN KUEN AND OTHERS

HCCW 1147/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO. 1147 OF 1999

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REASONS FOR DECISION

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1. This is an application for a validation order under Section 182 of the Companies Ordinance, Cap. 32. I have dismissed the application at the end of the hearing and ordered that the costs of the application be borne by the 2nd Respondent Pun King Tim ("Mr Pun"), to be paid forthwith and taxed if not agreed. The reasons for my decision appear below.

2. On 24 May 2000, a summons in Chinese was taken out by Perfect Trade Limited ("the Company"), the 3rd Respondent in these proceedings to wind up the Company on just and equitable grounds alternatively for relief under Section 168A of Cap. 32. The summons was signed by Mr Pun on behalf of the Company and the relief sought in the summons was for an order to dismiss the petition for winding-up. Prior to the issue of the summons and on 15 May 2000, Mr Pun had applied to Master Poon for an order under the Rules of the High Court O. 5 r. 6(3) for leave to be given to him to represent the Company in these proceedings and leave was granted accordingly.

3. The summons taken out by the Company was set down for hearing before Mrs Justice Le Pichon on 1 June 2000, in the course of which it was ascertained that what the Company was in fact seeking was an order that it be allowed to incur certain expenses for the operation of the business of the Company, which is in fact an application for a validation order. Directions were given by Mrs Justice Le Pichon for the parties to file evidence for the purpose of such an application and the hearing was adjourned to 19 June 2000.

4. The intended dispositions of the Company being the subject of this application are set out in Mr Pun's affirmation in Chinese filed on 3 June 2000 and they are as follows:

(1) the balance of the purchase price for a set of machinery at HK$114,277.80 (equivalent to US$14,651.00);

(2) the deposit and advance rental payment for factory premises in the sum of HK$40,698.00;

(3) expenses for plumbing and electrical works to be carried out in connection with the machinery and factory premises in the sum of HK$20,000.00;

(4) miscellaneous operation expenses of the Company in the sum of HK$5,000.00 a month;

(5) rental, management fees and rates for factory premises in the sum of HK$17,420.80 per month;

(6) salaries for 4 employees in the sum of HK$53,000.00 per month.

5. Items (1) to (3) are one-off expenses and the total sum is HK$174,975.80. Items (4) to (6) are recurrent expenses and the total is HK$75,420.80 per month.

6. I should mention that in the course of the hearing, Mr Pun had attempted to rely on further evidence not adduced in the five affirmations he has filed in support of this application, i.e. on 24 May 2000, 27 May 2000, 31 May 2000, 3 June 2000 and 14 June 2000. After it was explained to him that leave is required to do so and the Petitioner might need an adjournment to deal with his new evidence, Mr Pun decided not to seek leave to file further evidence and indicated that he would just rely on the evidence before the court.

7. Before I deal with the Company's case in the application for a validation order, it is necessary to set out briefly the history and past business activity of the Company up to the time when the Petition was presented as well as the financial position of the Company at present.

8. The Company was incorporated on 19 May 1994 with 2 shareholders. They were the Petitioner Yu Lai Ping Wandy ("Madam Yu") and a company incorporated in the British Virgin Islands known as Freeside Investments Ltd which was beneficially owned by Madam Yu and her husband Mr Chan Ping Kwong. On 17 October 1998, 51% of the shares of the Company was transferred to the 1st Respondent Madam Chan Kuen. On 13 August 1999, Madam Yu and the 1st Respondent each transferred 100 shares in the Company to Mr Pun, who is the 1st Respondent's husband. The plan of Madam Yu and Mr Pun was to set up a medicine refining factory in Hong Kong and in order to finance the establishment of the factory, the Company was to invest in the property market here.

9. In November 1998, the Company purchased a property known as Flat B, 3/F, Block 3, Regency Park, 3 Wah King Hill Road, Kwai Chung, New Territories at the price of HK$6,380,000.00 ("the 1st Property") and this was used at all material times as the residence of the 1st Respondent and Mr Pun. In May 1999, the Company bought another property known as Flat B, 12/F, Block 5, Wonderland Villas, 9 Wah King Hill Road, Kwai Chung, New Territories ("the 2nd Property") at HK$3,250,000.00. It is alleged by Madam Yu that the deposit payments for the 1st and 2nd Properties were advanced by her and they were purchased with mortgage loans from banks guaranteed by her husband. Further, it is alleged in the Petition that the Company did not carry on any trading activity at all material times and it was just an investment company for the purpose of holding the 1st and 2nd Properties.

10. Mr Pun alleged that there was a third property known as Flat B, 18/F, Block 5, Wonderland Villas, 9 Wah King Hill Road, Kwai Chung, New Territories ("the 3rd Property) which was beneficially owned by the Company although Madam Yu is the registered owner and that he had advanced the money for the down payment of this property on behalf of the Company as well as several mortgage loan instalments. These allegations are denied by Madam Yu. This dispute would have to be resolved at the hearing of the Petition. It is not relevant for the purpose of the application that I am concerned with.

11. The 1st and 2nd Properties were sold by the Company in November and December 1999. Madam Yu alleged that the sales were made without her prior knowledge and consent. She also claimed that she was excluded from management of the Company's affairs and from access to information about the Company's affairs. Further, she alleged that she was forced by Mr Pun to sign various documents in August and September 1999 under duress. These documents related to the employment of the 1st Respondent's father and Mr Pun's nephew by the Company, and a loan allegedly made by Mr Pun to the Company for the purchase of the 1st and 2nd Properties. These matters are all disputed by the Respondents and they would have to be resolved in time at the hearing of the Petition.

12. It would be apparent from the above that the true financial position of the Company would be the subject of enquiry at the hearing of the Petition. Madam Yu and her husband alleged that they had advanced sums to the Company in the amounts of HK$2,530,000.00 and HK$399,400.00 respectively. This is denied by the Respondents who alleged that the Company did not owe any money to Madam Yu and her husband but instead they had misappropriated the assets of the Company. Mr Pun also claimed that he was owed HK$1,400,000.00 by the Company being his contribution towards the purchase of the 1st and 2nd Properties. This has been denied by Madam Yu. Who is a creditor of the Company and what amount is owed by the Company are matters to be resolved at the hearing of the Petition. What is not in dispute is that the only remaining assets of the Company at present are the sale proceeds of the 1st Property in the sum of HK$465,977.57 kept in the savings account of the Company with the Hang Seng Bank. That account has been frozen by the bank after the Petition was presented.

13. Given the present financial position of the Company, it is unlikely that it would be able to satisfy all the debts of its creditors that may be ascertained. The solvency of the Company and the protection of unsecured creditors are material considerations in the exercise of my discretion whether to make a validation order.

14. There are other matters material to the exercise of my discretion against the Company in making a validation order.

15. It is asserted by Mr Pun on behalf of the Company that the purchase of machinery from a mainland company known as Changshu Foreign Trade Corporation would be vital to the business operated by the Company, and this was to make a production line to produce Chinese medicine using western methods. Mr Pun claimed that the Company was involved for years in the research and development of the manufacturing process of Chinese medicine in western ways and had provided technical skills and technical designs to Chinese entities for that purpose. He claimed that as a result of the research and development work over the years, the time is ripe for the necessary machinery to be purchased and a factory to be set up in Hong Kong for the production of medicine. He alleged that the machinery would bring about high productivity and generate substantial revenue for the Company. It is therefore necessary and desirable for the Company to purchase the machinery, to rent factory premises to house the machinery and set up a production line, and to carry out electrical and plumbing works to put the machinery and the factory in operation.

16. Regarding the purchase of machinery, Mr Pun has produced documents to show that agreements were signed with the Chinese entities by the 1st Respondent's father Mr Chan Yuk Fan on behalf of the Company in October 1998; a customer advice from his bank to show that US$6,280.00 was remitted from his personal account to the Chinese entity in October 1998; a receipt issued by the Chinese entity in November 1998 acknowledging the payment of US$6,280.00 as advance payment for the machinery on behalf of the Company; and a supplemental agreement dated 30 January 1999 with the Chinese entity signed on behalf of the Company by the 1st Respondent's father to the effect that the delivery date of the machinery was to be postponed to June 2000.

17. I need to be satisfied on credible evidence of the past business activity conducted by the Company (given the allegation in the Petition that the Company was merely an investment company for holding properties) and the new business activity that the Company was about to embark upon. I have reservations on the adequacy of the evidence adduced to the court at present. As pointed out by Miss Doris To who appeared for Madam Yu and her husband, who is the supporting creditor in this application, the Respondents had never denied that the Company was merely a property holding company in their affirmations or had alleged that the Company had been carrying on research and development work in Chinese medicine for years. An allegation to that effect was only raised for the first time in Mr Pun's affirmation on 24 May 2000. More importantly, no documentary evidence was adduced by Mr Pun as to the research and development work that had been carried out by the Company for years, such as working documents or records of such research or development work, plans of technical designs of machinery, correspondence with Chinese entities or other parties, records of expenses incurred for the research and development work. There was no record in the Company's accounts or ledgers of the alleged purchase of the machinery notwithstanding that the agreements were entered into in October 1998 and that an advance payment of US$6,280.00 was allegedly made by Mr Pun for the Company. The accounts disclosed by the Company being the Account of Miscellaneous Expenses merely showed expenses incurred from September 1998 to December 1999 in the form of business registration fees, expenses for preparing the Company's annual report, legal fees and out-goings such as telephone bills and other utility expenses. It would appear from the utility bills disclosed with these accounts that they related to the utility expenses of the 1st Property, which was then occupied as a residence by the 1st Respondent and Mr Pun. The only other accounting record that may be relevant to any business activity conducted by the Company in the past was the Staff Salaries Account and that merely showed the salaries paid to Mr Pun, the 1st Respondent, the 1st Respondent's father and Mr Pun's nephew from September 1998 to December 1999 in the total sum of HK$827,163.00.

18. Even if I had no reservations on the quality of the evidence adduced as to the past business activity of the Company, it seems to me on the evidence available that the line of business that the Company is about to embark upon with the purchase of the machinery and the renting of factory premises is but a speculative venture. There is no evidence of any contract or orders placed by customers for the medicine to be produced. There is no information placed before the court on the type or types of medicine that would be produced using the new machinery. There is no detail on the expenses likely to be incurred for the purchase of the raw materials required. All that Mr Pun had put forward at this stage as recurrent expenses for the factory was the rental, out-goings and miscellaneous expenses and staff salaries. This is simply insufficient to demonstrate that the line of business to be developed is likely to be profitable and would increase the Company's assets and so be beneficial to creditors.

19. Mr Pun has not adduced evidence of any tenancy agreement for the factory premises. I have merely a letter from an estate agent to the Company confirming that the Company would be prepared to accept certain terms and conditions for a 2-years lease of premises in Kwai Chung. It is disputed by Madam Yu in her affidavit whether there was any agreement to rent the premises as Madam Yu was given contrary information by the estate agent. On the HK$20,000.00 required for electrical and plumbing works, Mr Pun stated that this is merely an estimate and there is no quotation from any contractor as to the type of work to be carried out or the likely cost thereof. As for the staff's salaries, they are the salaries of Mr Pun, the 1st Respondent, the 1st Respondent's father and the nephew of Mr Pun. The total salaries of the four came up to HK$53,000.00 a month. It is a matter of dispute in the Petition if the salaries were payable.

20. Given the funds presently held by the Company, if a validation order is to be made, there would be a high probability if not a certainty that the funds would run out before the proceedings would be concluded with the intended depositions of the Company. Further, I am not satisfied at this stage that the payment of salaries to the 1st Respondent, Mr Pun and their close relatives is not an attempt to prefer the disponees.

21. For the reasons given above, it would not be appropriate to make a validation order as sought by the Company. I therefore dismiss the application.