In re Charmart Ltd.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING-UP) NO. 62 OF 1996

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J U D G M E N T

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1. This is a creditors petition to wind-up the company Charmart Ltd. on the basis that it is just and equitable so to do.

2. The Petitioner is the assignee of debts alleged to be owed to a company known as Golden Stream Holdings Ltd. in respect of a loan procured by MKI and payable in instalments each of US$375,000. There was to have been a third instalment of US$500,000 advanced on or before 31st December 1993, but this was never handed over.

3. The Petitioner became the assignee of the alleged loan by deeds of assignment dated 30th December 1995.

4. The background to the agreement between the company and MKI and Golden Stream needs to be examined.

5. The company was acquired by husband and wife, Liu Chang Wen and Sun Kin Wa, in July 1991. Each took two shares in the company which had a share capital of HK$10,000.

6. On the 30th March 1993 a Letter of Intent was signed between the company and MKI whereby MKI agreed to purchase 75% of the company's 25% interest in a joint venture, for the sum of US$1.25m represented by the issue of shares. MKI were to take up 12 shares in the company that is 75% of the issued share capital. There is no doubt that Mr. Liu and Madam Sun needed a substantial investment in the company in order to take part in the joint venture.

7. In June 1993 the draft agreement was received from MKI. That provided only for the purchase of 12 shares by Golden Stream a wholly owned subsidiary of MKI at $1 each. Further discussion produced the next draft in which Golden Stream was to make a loan of US$1.25m to finance the company's investment in the joint venture.

8. It is alleged on behalf of the company that Messrs. Tsang and Lai for MKI, stated that the investment had to be described as a loan in order to justify the investment to the shareholders in MKI. In short it was accepted by the company as a loan but the oral understanding alleged to have been reached with Tsang and Lai for MKI and the company was that no repayment would be sought until the joint venture began to make profits. Then there would be negotiation between the parties to decide how the profits would be applied i.e. by inference, how, when and in what proportions, the loan would be repaid. It is relevant to note that MKI's wholly owned subsidiary, Golden Stream, was to purchase 75% of the issued capital of the company, leaving Madam Sun and Mr. Liu as minority shareholders. MKI were clearly in the driving seat.

9. What exactly did the signed agreement of 23rd June 1993 provide for? In the first instance, Mr. Liu was to waive his director's loan to the extent of over HK$46,000. Clause 5 dealt with the loan by Golden Stream. It was to be advanced in three instalments: US$375,000 on or before 30th June 1993, a further US$375,000 on or before 31st October 1993 and US$500,000 on or before the 31st December 1993. It was for the purpose of financing the company's investment. It is wholly silent as to any provisions for repayment. The inference from this is clearly that some agreement was either yet to be reached as to repayment, or there had already been some oral agreement in principle as to the circumstances under which the loan would become repayable, or both. As a matter of common sense, since the loan was clearly expressed to be to finance the investment in the joint venture, any repayment would be dependent upon the progress or outcome of that.

10. In the event the third instalment was never paid. Golden Stream became the holder of 75% of the issued share capital. The company made repeated requests it is said, for payment of the last instalment. Since it represented about 40% of the originally intended investment, I can well understand the company's position on the evidence as it stands.

11. Towards the end of November 1995, a company of corporate advisers, Somerley Limited made contact with the company. The Petitioner was going to take over MKI's interests in the joint venture. The actual assignments of any debt due to Golden Stream (and Ruby Park who actually provided one of the instalments of the loan) did not take place until the 30th December 1995.

12. Nonetheless there were clearly meetings and negotiations between the minority shareholders of the company and representatives of the Petitioner concerning the loan, the joint venture, its progress and its viability. The outstanding instalment of the loan was in fact paid into a bank account in order not to prejudice the joint venture, or at least the company's interest in it.

13. There is clearly in my view a 'bona fide' believable case to be argued on behalf of the company. There are matters to be resolved, which cannot be the subject of these proceedings, as to the loan and where and how it is to be paid, and what is to be done about the third instalment. My attention has been directed to a number of authorities. The principles are quite clear. It is not necessary for me to review those authorities. It would be unjust and inequitable to wind up this company. The basis of the loan is so imprecise, and there are matters in relation to it to be determined, perhaps ultimately by settlement between the parties, but the Petitioner has been quite unable to establish the essential first base. The petition is accordingly dismissed with costs.