RE SURPLUS TRADER LTD

HCCW 826/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 826 OF 2004

____________

____________

AND

HCCW 827/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 827 OF 2004

____________

____________

_______________

J U D G M E N T

_______________

1.  There are two petitions presented by The Standard Chartered Bank (Hong Kong) Limited to wind up two companies incorporated in Hong Kong, Surplus Trader Limited (“Surplus Trader”) and Sino Trade Asia Limited (“Sino Trade”) (collectively “the Companies”), on the ground that the Companies are unable to pay their debts.

2.  The debt in both petitions is in the amount of US$17,860,028.72, calculated up to 26 July 2004.  This arose out of advances made by the Petitioner pursuant to trade finance facilities granted by the Petitioner to the Companies.

3.  The Petitioner first offered to provide Sino Trade with a trade finance facility on 20 May 2003.  This was increased on various occasions, most recently to US$20 million on 17 February 2004 and offered to both Companies.  The offer required the Companies to sign various agreements:

(1)	General customer agreements (“GCA”).  The GCA signed by Sino Trade was dated 20 June 2003 and the GCA signed by Surplus Trader was dated 19 February 2004.
(2)	Unlimited cross guarantees given by each company in respect of the liabilities of the other.  The guarantees given by both Companies were dated 19 February 2004.
(3)	Receivables purchase agreements (“RPA”).  The RPA executed by both Companies were dated 19 February 2004.
(4)	Personal guarantees by Mr Chan Kwok Wah (“Mr Chan”) and his wife.  They were both dated 19 February 2004.

4.  The facility offered was for purchase of documents against acceptance bills of exchange with approved insurance cover up to 90%.  This allowed the Companies to draw down up to US$20 million against accepted bills of exchange drawn on approved buyers in Korea that had purchased mobile phone parts from the Companies.

5.  The facility was only available in respect of bills drawn on and accepted by buyers that had been pre-approved by the Petitioner, as a result of such customers having been accepted by the Petitioner’s creditor insurer with the acronym COFACE.

6.  Pursuant to the trade finance facility, the Petitioner advanced in excess of US$30 million to the Companies. 

7.  In May 2004, a number of bills that had fallen due went unpaid.  As in July 2004, the total amount of the unpaid bills came up to US$19.5 million.  Resulting enquiries suggested that the transactions underlying the bills were bogus and that the relevant approved customers had not accepted the bills.  

8.  Mr Chan had been investigated by the Commercial Crime Bureau in relation to his actions on behalf of Sino Trade.  Sino Trade’s representative in Seoul is serving a term of imprisonment for embezzlement and the branch manager of Sino Trade’s bank in Korea has been convicted of corruption.

9.  The agreements signed by the parties allowed the Petitioner to demand immediate payment by the Companies of the sums drawn down under the facility generally and, in particular, if a bill was to be dishonoured.  The relevant provisions are in the facility letter under the “Availability and Repayment” section; the GCA, clauses 1(a) and (b), 6(c); and the RPA, clauses 8 and 10. 

10.  On 22 July 2004, the Petitioner sent letters of demand to the Companies requiring the provision of cash collateral in the amount of the debt being US$17.8 million odd by the close of business the same day.  On 27 July 2004, the Petitioner’s solicitors sent letters to the Companies demanding payment of the debt by 28 July 2004.  As the demand was not met, the petitions were presented on 29 July 2004 and provisional liquidators were appointed the same date. 

11.  The Companies have filed evidence in opposition disputing the locus standi of the Petitioner as a creditor, on the basis that there is a bona fide dispute of the petitioning debt on substantial grounds.

12.  At the hearing today, counsel appeared for the Companies on the basis of “limited instructions to appraise the court with the Companies’ latest position and the reasons therefor”.

13.  The Companies no longer wish to resist a winding-up order, the reason is that on the accounts prepared by the provisional liquidators, Sino Trade has only HK$81,000.00 odd and Surplus Trader has only HK$15,000.00 odd.  The available assets are insufficient even to discharge the costs and expenses of the provisional liquidators.  The Companies have also failed in their application for a validation order to use the available assets to oppose the petitions at the hearing today.  Their application was dismissed on 4 May 2005. 

14.  In his written submissions made on behalf of the Companies, Mr Wou submitted that the Companies have raised a bona fide dispute of the petitioning debt on substantial grounds.  Notwithstanding this, he submitted that if the court is satisfied that the Companies are unable to pay their debts and in view of the Companies’ stance they no longer wish to resist a winding-up order, the court can dispose of the matter summarily and make winding-up orders against the Companies.

15.  I cannot see how this can be right.  If there is a bona fide dispute of the petitioning debt on substantial grounds, the petitioning creditor would have no locus standi to present a winding-up petition, as a creditor’s petition can only be presented by a creditor (Mann v Goldstein [1968] 1 WLR 1091).

16.  I turn to consider the evidence filed in opposition by the Companies, which was not elaborated upon in the submissions made by their counsel today, to determine if there is indeed a bona fide dispute of the Petitioner’s debt on substantial grounds.

17.  In summary, the Companies raised 2 matters:

(1)	No debt is due from the Companies to the Petitioner, because in granting the trade finance facilities to the Companies, the Petitioner’s staff had orally represented to Mr Chan that in no circumstances would the Petitioner have recourse to the Companies and that the Companies would not be exposed to any default or financial risks.  The Companies were merely “handling agents” for the approved buyers in Korea and the Petitioner had never attached importance to the financial standing of the Companies.  The Petitioner would have recourse against the approved buyers in Korea as acceptors of the bills of exchange, and any credit risks associated with these buyers were covered by the Petitioner’s export credit insurance policy.  So the Petitioner was in substance lending to these approved buyers and had regarded them as its debtors, not the Companies.  It was on this basis that Mr Chan had executed various documents for the Companies when the facility was granted, with the agreement of the Petitioner that the cross guarantees and the personal guarantees would not be enforced and the documents executed were merely for formality.  I call this the “no-recourse defence”.
(2)	In respect of the bills of exchange that were unpaid when they fell due, any liability of the Companies to the Petitioner had been discharged by operation of law, due to the failure of the Petitioner to give a notice of dishonour or to protest for non-payment of the bills.

18.  I will deal with the second matter first.  The Petitioner is not making claims against either of the Companies as drawer of the bills of exchange per se but under the facility documents.  Money was lent to the Companies under the facility documentation that requires money to be repaid to the Petitioner, if the relevant sums are not received from the acceptors of the bills of exchange.  Clause 6(c) of the GCA made clear that the liability of the customer to repay to the Petitioner any sum paid in respect of a dishonoured bill remains in place, whether or not any notice of dishonour was given.

19.  I turn to the no-recourse defence.  Mr Harris for the Petitioner submitted that despite considerable evidence filed by the Companies, the following matters do not appear to be in dispute:

(1)	The agreements mentioned earlier were validly executed.
(2)	The Petitioner credited considerable sums to the accounts of the Companies.
(3)	A very considerable amount is outstanding.
(4)	On their face, the agreements allow the Petitioner to demand repayment of all outstanding sums.
(5)	Neither Company is able to repay the sums outstanding.

20.  Mr Harris also made these submissions:

(1)	The alleged oral representation is clearly inconsistent with the provisions of the various agreements signed by the Companies, clauses 8 and 10 in the RPA and the “entire agreement clause” in clause 24 of the RPA.
(2)	The no-recourse defence was raised for the first time in the 3rd affirmation of Mr Chan filed on 27 September 2004, two months after the petitions were presented.  There is no suggestion he had told the Petitioner that this was his understanding before that.  Moreover, this was contrary to the clear admission in the statement of affairs filed on 28 August 2004, affirming that considerable sums were owed to the Petitioner.  For Sino Trade, it was in the amount of HK$68.8 million odd; for Surplus Trader, it was in the sum of HK$70 million odd.  Mr Chan filed a number of affirmations subsequently, seeking to correct errors and omissions in the statement of affairs.  However, there is no specific withdrawal of the admission of liability in respect of the debts to the Petitioner, at least not clearly, in my view.  I was also referred to the observations made by the Court of Appeal in Re ICS Computer Distribution Limited,CACV No. 95 of 1996, 8 November 1996, on the admission of liability in the statement of affairs.
(3)	If the facility had been non-recourse, there would have been no reason for the shareholders to give personal guarantees; there would be no need to include in the facility letter provisions for repayment; and no reason to include in the facility letter provisions for accrual of interest on overdue bills.
(4)	Even if the facility were non-recourse, it cannot sensibly be suggested that if the Companies did not deliver what they had agreed to “sell” the Petitioner, namely, genuine bills drawn on approved buyers in Korea, the Petitioner is not entitled to recover what it had paid for them.  The Companies do not appear to dispute some of the bills were bogus and drawn against buyers with whom they had not signed contracts for the sale of goods.  No evidence was advanced by the Companies to demonstrate they had signed genuine contracts of sale, other than a bare assertion of belief in Mr Chan’s 6th affirmation that the contracts were genuine.
(5)	As for the suggestion that the Petitioner had become a creditor of the approved buyers in Korea, Mr Chan did not explain in his affirmations how this could be the case if these buyers did not in fact accept the bills.

21.  I accept the above submissions of Mr Harris.  I do not think the no-recourse defence is credible.  There is no bona fide dispute of the petitioning debt on any substantial ground.

22.  I am satisfied that the Petitioner has established its locus standi as a creditor and the Companies are unable to pay their debts.  I make a winding-up order against each of the Companies.  The Petitioner’s costs in the petitions are to be paid out of the assets of the company concerned.