RE THE SUN'S GROUP LTD

HCCW 425/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 425 OF 2003

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(Heard Together)

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J U D G M E N T

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The petitions

1. There are before me two creditors' winding-up petitions, both presented on 11 April 2003 and are heard together.

2. The subject company in HCCW No. 425 of 2003 is The Sun's Group Limited, formerly known as Pearl Oriental Holdings Limited until its change of name in May 2002 ("Sun's Group"). Sun's Group was incorporated in Bermuda on 9 July 1993 and was registered in Hong Kong on 20 September 1993 under Part XI of the Companies Ordinance, Cap. 32. It is the holding company of the entire group ("the Group"). Since January 1994, its shares have been listed on The Stock Exchange of Hong Kong Limited ("the Stock Exchange"). The subject company in HCCW No. 426 of 2003 is The Sun's Group (HK) Limited, formerly known as Pearl Glorious Investment Limited ("Sun's Group HK"). Sun's Group HK was incorporated in Hong Kong on 26 February 1985 and is a wholly owned subsidiary within the Group.

3. The petition in HCCW No. 425 of 2003 was presented by Wong Kwan, also known as Wong Yuk Kwan, and Charcon Assets Limited ("Charcon"), a company wholly owned by Wong Kwan beneficially. Wong Kwan was the founder of the Group and prior to 29 January 2002, the majority shareholder, the chairman and chief executive, and a director of Sun's Group. He alleged in the petition that Sun's Group is indebted to him in the sum of HK$2,590,000.00, made up of outstanding salary of HK$2,072,000.00 and year-end bonus of HK$518,000.00, under his contract of employment with the company dated 23 September 1993. Charcon's debt in the petition is HK$10 million; this comprised outstanding principal of a loan advanced to Sun's Group on 29 January 2002, pursuant to a loan agreement of the same date between, inter alios, Charcon and Sun's Group. Under the terms of that agreement, the loan was repayable in full, with interest, on the first business day immediately after the lapse of six months from the drawdown date, which was 29 January 2002. The outstanding interest, calculated as at 18 March 2003, amounted to HK$576,780.82.

4. The petition in HCCW No. 426 of 2003 was presented by Wong Kwan, on the basis of a debt of HK$49,294,635.07, representing the outstanding principal of various loans advanced to Sun's Group HK between 31 March 2000 and 28 February 2001, pursuant to short-term loan agreements between Wong Kwan and Sun's Group HK. The interest outstanding, as at 18 March 2003, amounted to HK$3,210,113.37.

5. Demands for the debts in the petitions were served on Sun's Group and Sun's Group HK on 19 March 2003. The petitioners contended that they are each creditors of the subject companies by virtue of section 179(1) or section 327(1) (in respect of the oversea company, Sun's Group), and that the companies are unable to pay their debts under section 177(1)(d) or section 327(3)(b). In respect of the inability to pay debts, the petitioners relied on the deeming provision in section 178(1)(a) or section 327(4)(a); alternatively, it was contended that the companies are demonstrably insolvent and acknowledged to be so, under section 178(1)(c) or section 327(4)(d).

6. In each of the petitions, the company's position was that there is a bona fide dispute of the petitioning debts on substantial grounds ("the disputed debt issue"). In HCCW No. 425 of 2003, an alternative argument was raised in that even if the petitioning debts were established, there are cross claims, at least against the debts of Wong Kwan, upon which the court should exercise its discretion to dismiss or stay the petition presented by Wong Kwan ("the cross claim issue").

7. Only one creditor has filed a notice of intention to appear and that is a supporting creditor with a claim of HK$1,761,544.50. Sun's Group made an announcement on 13 January 2004 that statutory demands were served on the Group by a creditor bank on 29 December 2003 demanding payments of HK$266 million odd.

The background

8. I propose to set out some of the relevant background matters and key events before going into the two issues raised in opposition to the petitions.

9. The Group was originally engaged in the business of property trading and development, hotel investment and management, finance and marketing. In or about 1998, it developed the internet and telecom business and Pearl Oriental Holdings Limited changed its name to Pearl Oriental Cyberforce Limited. When the internet bubble burst, it reverted to its original name. As in September 2002, the major asset of the Group comprised properties in Hong Kong, being nine floors of The Sun's Group Centre in Wanchai, two development projects on the Peak and Des Voeux Road West.

10. The Group had suffered badly from the Asian financial crisis, the property crash and the internet bubble burst. From June 2001 until the termination of his employment at the end of January 2002, Wong Kwan deferred the receipt of his salary of HK$259,000.00 a month in view of the financial difficulties. Other senior staff had similarly deferred their rights. Wong Kwan's outstanding salaries for eight months remain unpaid, along with year-end bonus for 2001 being two extra months' salary.

11. In December 2001, the Bank of East Asia Limited ("BEA"), a major creditor of Sun's Group, foreclosed on the Genesis property on the Peak. After foreclosure, the outstanding indebtedness of the Group (being that of a wholly owned subsidiary, Pearl Century Limited) due to BEA was HK$102 million odd.

12. In late 2001, Wong Kwan was on the lookout for a new investor to steer the Group back to a healthier financial state. His beneficial shareholding in Sun's Group at the time was 50.17%. On 6 December 2001, Wong Kwan and Charcon entered into a sale and purchase agreement ("the Share Sale and Purchase Agreement") with China Wanan Group Limited ("China Wanan") for Charcon to sell 29.9% of the issued shares in Sun's Group to China Wanan at HK$112 million odd. China Wanan was a joint venture company set up for this purpose and was owned 50% by a listed company, Sun Man Tai Holdings Company Limited ("Sun Man Tai"), and 50% by Wei Wu beneficially. In consideration of China Wanan entering into the Share Sale and Purchase Agreement, Wong Kwan agreed to waive his rights in respect of the loan amount in the sum of HK$48 million, being part of the loan amount of approximately HK$96.58 million owed to him by Sun's Group as at the date of the agreement. It was also provided that of the HK$50 million payable by China Wanan on the completion date, Charcon was to release and advance HK$30 million to Sun's Group as a loan forthwith.

13. On 29 January 2002, a supplemental agreement was entered into to bring forward the completion date of the share sale and purchase from 30 January 2002 to 29 January 2002. In consideration of China Wanan agreeing to completion on an earlier date, Charcon agreed to waive its right in respect of its HK$30 million loan to Sun's Group as aforesaid to the amount of HK$20 million and to assign the same to China Wanan, leaving Charcon's loan to Sun's Group at HK$10 million. To give effect to this, a loan agreement was made on 29 January 2002 between Charcon, China Wanan and Sun's Group, by which Charcon was to lend Sun's Group HK$10 million (this advance formed the subject of the petitioning debt of Charcon in HCCW No. 425 of 2003, on the terms as mentioned earlier) and China Wanan was to lend Sun's Group HK$20 million.

14. The commercial rationale for the above arrangement was to provide Sun's Group with extra liquidity of HK$30 million. In addition, Sun's Group raised another HK$30 million by selling certain non-performing assets (being the internet and telecom businesses) on 7 December 2001 to Dynamic Brilliant Group Limited, an investment vehicle of Wong Kwan, so as to concentrate on its property and development business.

15. Wong Kwan resigned as a director of Sun's Group on 29 January 2002. As a condition of the Share Sale and Purchase Agreement, the old management of Sun's Group comprising Wong Kwan, Wong Wai Hay, Wong Yau Kuen were replaced by the new management comprising Wei Wu (the new chairman), Qian Yong Wei (director and chairman of Sun Man Tai), He Hui Min (another director of Sun Man Tai until he resigned in September 2002), Peter Siu King Nin, and others. Similar changes in management were made for the subsidiaries in the Group.

16. On 30 January 2002, the indebtedness of Pearl Century Limited to BEA of HK$102 million odd was assigned by BEA to On Fat Limited ("On Fat"), a company incorporated in the British Virgin Islands only on 2 January 2002, for HK$30 million, payable in two instalments on 30 January 2002 and 25 February 2002. On the same day, Sun's Group made an announcement of the completion of the Share Sale and Purchase Agreement, disclosing the assignment of the aforesaid indebtedness to On Fat and asserting that the latter was an independent third party.

17. In May 2002, Sun's Group under the new management published the Group annual report including the audited accounts for the year ended 31 December 2001.

18. In June 2002, a deed of settlement was entered into between Sun's Group and On Fat regarding the settlement of the debt of HK$102 million by means of subscription of shares in Sun's Group and cash.

19. On 19 September 2002, Sun's Group published the interim report for six months ending 30 June 2002, showing a turnaround from losses of HK$234 million in 2001 to a profit of HK$34 million for the period. On the same day, He Hui Min resigned his position as the chief executive officer of Sun's Group and Wei Wu took over the position.

20. Following the presentation of these winding-up petitions in April 2003, several announcements were made in 2003 for the delay in publication of the audited annual results for the year ended 31 December 2002 and of the interim results for the six months ended 30 June 2003. Eventually, the audited annual accounts for the year ended 31 December 2002 were published on 9 December 2003. An announcement was made on 2 March 2004 in relation to the resignation of Wei Wu, Chiang Ho Wai and Wei De Zhong as directors of Sun's Group and the appointment of Ms Liu Xiu Juan as an executive director. On 23 April 2004, the unaudited interim results for the six months ended 30 June 2003 were published, showing a loss before taxation of HK$19 million for the period.

The disputed debt issue

21. The appropriate test was not in dispute. The onus is on the companies to adduce "sufficiently precise factual evidence" to satisfy the court that they have bona fide disputes on substantial grounds (Re ICS Computer Distribution Ltd [1996] 1 HKLR 181 at 182J to 184B). By "substantial grounds", it is meant that there must be "both legal and factual substance to the dispute that is raised". "As in applications for summary judgment, it is not sufficient for the company simply to assert the existence of a dispute, or to baldly assert the existence of a claim which is said to be available as a set off. Similarly, the court will ask itself whether the evidence put forward by the company is believable (as distinct from whether or not it should be believed). However, there are also differences - whereas a defendant will be entitled to leave to defend if he can show that he has a fair probability of establishing a bona fide defence, a company resisting a winding-up petition must go further, and establish that it actually has a substantial defence (meaning a defence of substance), and not just a fair probability of one." (Re Fully Well Investment Ltd., HCCW No. 1056 of 2002, 17 June 2003, paras. 24 and 25).

22. The disputed debt issue in respect of Wong Kwan's debt and Charcon's debt in HCCW No. 425 of 2003 and Wong Kwan's debt in HCCW No. 426 of 2003 may be dealt with shortly, as although disputes were raised in the evidence filed on behalf of the companies, Mr Jonathan Wong, who appeared for the companies, did not make any submission at the hearing on this issue. He merely asked the court to "note the evidence" and relied on this as a "fallback position" if his main contention on the cross claim issue should fail.

Wong Kwan's debt in HCCW No. 425 of 2003

23. There was no dispute as to the quantum of the outstanding salary and year-end bonus for Wong Kwan. The contention of Sun's Group was two-fold: (1) the obligation to pay was conditional on the financial performance of the company; and (2) there was a collateral oral agreement made with Wong Kwan in December 2001 by which he agreed to waive his claim for outstanding salary and bonus against Sun's Group.

24. On the first contention, Mr Bartlett submitted on behalf of Wong Kwan as follows:

(1) There is no such condition expressed in the contract of employment of Wong Kwan dated 23 September 1993.

(2) There is no evidential basis for implying such a term into the employment contract. The wording of the relevant parts at clauses 4(1) and (2) of the contract is straightforward, clearly and simply expressed and contradicts the notion that either the salary or the year-end bonus was conditional in nature. Whilst the incentive bonus in clause 4(3) is discretionary, the year-end bonus under clause 4(2) is not.

(3) The contention of the company offends the parol evidence rule and does not satisfy the rule as to the conditions to be fulfilled for a term to be implied into a contract; in particular, the implied term must not contradict any express written term of the contract.

(4) The company's contention also falls foul of the "entire agreement" clause in clause 10 of the employment contract.

25. I accept Mr Bartlett's submissions. I find that in not drawing his salary from June 2001 to January 2002, Wong Kwan did so not in recognition of any condition precedent but was merely deferring payment due to the financial difficulties of Sun's Group and his desire to assist the company.

26. As to the contention of an oral collateral agreement of waiver, Mr Bartlett made the following points:

(1) The initial contention of Sun's Group was based on an alleged oral agreement to waive made in or around December 2001 between Wong Kwan, He Hui Min and various other unspecified directors of Sun Man Tai and China Wanan. Later this contention was elaborated upon as a collateral agreement to the Share Sale and Purchase Agreement and that the waiver was conditional on completion of that share sale. There was no explanation by Sun's Group why the alleged collateral agreement was not documented along with the Share Sale and Purchase Agreement. In any event, the bald assertion of an oral collateral agreement of waiver is contradicted by subsequent documentation emanating from Sun's Group under the new management as stated below.

(2) In the penultimate round of evidence being the 4th affirmation of He Hui Min filed on 29 September 2003, the company sought to rely also on correspondence dating from Wong Kwan's resignation as a director of Sun's Group in support of the allegation of waiver. It is however clear from the resignation letter dated 29 January 2002 that the resignation relates to Wong Kwan's resignation from his office as a director of Sun's Group. The letter contained a standard waiver of claim qua director, relating solely to compensation or remuneration as a director, as borne out by the separate standard form letter lodged with the Companies Registry, waiving claims only "in respect of fees ... [and] compensation for loss of office". Further, the circumstances of execution of these letters showed that the form of letter was specifically amended to delete any reference to resignation or waiver regarding Wong Kwan's status as an employee.

(3) It is provided in clause 13 of the employment contract that no waiver of any provision of the agreement shall be effective unless it is in writing signed by the parties. This requirement was not complied with.

(4) In the audited Group annual report for the year ended 31 December 2001, prepared and published under the new management in May 2002, it was stated that "no directors waived any emoluments during the year".

(5) The allegations are contradicted by the following contemporaneous evidence:

(i) a letter of Sun's Group to Wong Kwan dated 16 January 2003 signed by He Hui Min and copied to Wei Wu acknowledging liability for outstanding salary of HK$2,072,000.00 and identifying correspondence from June to November 2002 between Sun's Group and the Inland Revenue Department acknowledging this liability;

(ii) a faxed letter from Wong Kwan to Sun's Group dated 22 January 2003 in which Wong Kwan referred to his telephone conversations with Wei Wu on 21 January 2003 and subsequent meeting with He Hui Min and Peter Yuen Wai Kuen on his outstanding salaries and bonus and confirmed the agreement of Sun's Group to pay him on or before 10 February 2003; and

(iii) a letter from Wong Kwan to the Inland Revenue Department dated 27 June 2003 with enclosure (including an employer's return dated 12 June 2002 from the new management) and copied to Sun's Group regarding outstanding salary and the reply of the Inland Revenue Department dated 1 September 2003. The Inland Revenue Department decided not to assess the salary not yet received and indicated it would do so as and when such amount was received.

27. There was no answer to Mr Bartlett's submissions. I agree that the assertions of He Hui Min of an oral collateral agreement in December 2001, that his letter of 16 January 2003 was made on "an erroneous basis", and that the employer's return in June 2002 was authorised by parties acting in concert with Wong Kwan, are simply not credible.

28. I hold that there is no bona fide dispute of the debt of Wong Kwan in HCCW No. 425 of 2003.

Charcon's debt in HCCW No. 425 of 2003

29. The debt to Charcon arose out of the loan agreement dated 29 January 2002 between Charcon, China Wanan and Sun's Group and was related to the transaction under the Share Sale and Purchase Agreement as mentioned earlier. The opposition was limited to one narrow technical argument, namely, whether Sun's Group was authorised to enter into the loan.

30. He Hui Min simply referred to an apparent absence of board minute authorising the company to enter into the loan. As pointed out by Mr Bartlett, this was not a situation of Sun's Group lending but borrowing, in circumstances where it was common ground that the company needed to improve its liquidity. Further, the undisputed facts are that the loan agreement contained representations as to authority by Sun's Group in clauses 5.1 and 5.2; the loan agreement was executed by Sun's Group; the loan agreement involved another loan to the Company by China Wanan and it was He Hui Min who executed the agreement on behalf of China Wanan; the loan agreement along with other contemporaneous documents was a related part of the wider share sale transactions which was completed and not challenged by Sun's Group; last but not least, there is no question that the loan was made and money was received by Sun's Group.

31. In any event, Sun's Group had previously acknowledged the indebtedness to Charcon in the audited accounts for the year ended 31 December 2001 published in May 2002 with the authority and approval of the new management. The debt was also acknowledged in the interim report for the six months ended 30 June 2002 and the audited Group annual accounts for the year ended 31 December 2002.

32. I agree with Mr Bartlett that the argument raised by Sun's Group is divorced from the commercial reality of the situation. I hold that there is no genuine dispute as to the debt of Charcon in HCCW No. 425 of 2003.

Wong Kwan's debt in HCCW No. 426 of 2003

33. The loans totalling HK$49,294,635.07 made by Wong Kwan to Sun's Group HK between 31 March 2000 and 28 February 2001 were evidenced by various loan agreements in writing. A similar argument was raised as to absence of authority of Sun's Group HK to enter into the loan agreements. These loans, being part of the original debt of HK$96.58 million (waived by Wong Kwan as to HK$48 million), were an integral part of the share sale transactions and have been repeatedly referred to in various documents and even in the announcements of the Stock Exchange.

34. It is clear from the documents showing the bank transfers that the loans were made and received by Sun's Group HK. As with Charcon's loan, these loans have appeared in the accounts published under the new management and acknowledged as a liability of the Group, being the audited accounts for the year ended 31 December 2001, the interim report for the six months ended 30 June 2002, and the audited accounts for the year ended 31 December 2002.

35. There is no bona fide dispute in respect of Wong Kwan's debt in HCCW No. 426 of 2003.

The cross claim issue

36. The cross claims relied on by Sun's Group are not the claims of the company itself against Wong Kwan. One is the subject of HCA No. 2829 of 2003 commenced on 31 July 2003 by Rossmore Profits Limited ("Rossmore") against Wong Kwan as the 1st defendant and Siu King Nin Peter as the 2nd defendant, claiming damages of HK$268,354,325.81, alternatively damages to be assessed. Rossmore is a company incorporated in the British Virgin Islands and an indirectly owned subsidiary of Sun's Group HK, which in turn is indirectly owned by Sun's Group. The other cross claim is the subject of HCA No. 3582 of 2003 commenced on 26 September 2003 by Margaux Finance Limited ("Margaux") against Wong Kwan as the 1st defendant and Yuen Hon Ming Edwin as the 2nd defendant, claiming damages in the amount of HK$300,087,353.27, alternatively damages to be assessed. Margaux is a licensed moneylender and is indirectly owned by Sun's Group. A third possible cross claim mentioned in the evidence filed by Sun's Group, being the claim of Super Delight Enterprises Limited ("Super Delight"), another indirectly owned subsidiary of Sun's Group HK, was not relied upon at the hearing.

37. It was submitted by Mr Wong that despite the cross claims are not claims maintained by Sun's Group or Sun's Group HK, in the context of winding-up petitions, the court should view them as sufficient to trigger off the application of the principles enunciated in Re Bayoil SA [1999] 1 Lloyd's Rep 211. Alternatively, the court should not completely ignore these cross claims simply because they lack mutuality.

38. The principles in Bayoil were not in dispute and there are four elements to be established, which I have set out in Re Keen Lloyd Resources Ltd [2003] HKEC 932 at para. 9 as follows:

(1) the debtor company has a genuine and serious cross claim;

(2) it has been unable to litigate the cross claim;

(3) the cross claim exceeds the amount of the petitioner's debt; and

(4) where the requirements in (1) to (3) are met, the court should exercise its discretion to dismiss or stay the petition in the absence of special circumstances.

39. As in Keen Lloyd, the petitioners in this instance did not seek to rely on non-compliance with the requirement in (2), so I do not need to say anything further about this.

40. I will first set out Mr Bartlett's submissions on mutuality before I deal with Mr Wong's submissions. Mr Bartlett submitted that the cross claims of Rossmore and Margaux are not valid cross claims for the purpose of opposition to winding up, whether on the basis of non-compliance with requirement (1) in Bayoil (that the genuine and serious cross claim is of the debtor company), or that the cross claims lack the requisite mutuality (were a legal or equitable set-off to be asserted) because, in each instance, the same two parties are not involved in the claims with each having an interest in the claimed amounts in their own right. He referred to The Law of Set-off, by Rory Derham, 3rd ed., para. 11.01; and Title Finance, Derivatives, Securitisations, Set-off and Netting, by Philip R Wood, 1995 ed., paras. 8-1 to 8-3. In the latter work, the author commented on the wide application of the doctrine of mutuality to corporate law, group trading and the veil of incorporation and stated at para. 8-3 as follows:

"Thus it goes without saying that reciprocal claims owing by separate corporate personalities, such as parent and subsidiary companies, are not eligible for set-off unless the veil of incorporation can be pierced and there are many international decisions upholding this basic proposition. Each case requires a detailed examination of the substantive law to ascertain precisely if sole beneficial ownership and sole personal liability apply both ways."

41. Mr Bartlett also relied on the decision of the Court of Appeal in Wong Wai Lin v. Heung Wah Wing & Ors. [2001] HKEC 664, which was concerned with the setting aside of a statutory demand under Rule 48(5)(a) of the Bankruptcy Rules (this provides that the court may grant the application to set aside a statutory demand if "the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand"). I do not think there is any material difference in the underlying principles in this respect where a cross claim is relied on to resist a winding-up petition. In Wong Wai Lin, the Court of Appeal allowed an appeal from an order setting aside a statutory demand and held that the jurisdiction under Rule 48(5) was not engaged, as there was no mutuality to support a set-off or cross claim in that the debt in the statutory demand was owed to three creditors jointly whereas the debtor's claim was against only one of the joint creditors personally.

42. The relevant extracts are in the judgment of Le Pichon JA, with whom Rogers VP and Keith JA concurred and read as follows:

"13.	As I understand it, counsel for the applicant submitted that because the present case did not involve a right of set-off but only a cross claim which the applicant has against the 1st respondent, mutuality is not an essential ingredient. He relied on In Re Bayoil SA [1999] 1 WLR 147 which was a case that concerned a winding-up petition based on an undisputed debt but the company had a genuine and serious cross claim against the petitioner which it had been unable to litigate and which exceeded the amount of the petitioner's debt. The court held that in the absence of special circumstances it would exercise its discretion to dismiss or stay the petition. The other cases also relied on, namely, In Re Portman Provincial Cinemas Limited (Note) [1999] 1 WLR 157 and In Re L.H.F. Wools Limited [1970] Ch 27 do not add anything to the decision In Re Bayoil. For my part, I do not see how these cases assist the applicant since in each of them, the parties involved were the same: in other words, there was mutuality. The question now under consideration did not therefore arise in those cases. On any view, they cannot be regarded as authority for the proposition that mutuality is not an essential ingredient.
...
15.	As a matter of construction, paragraph (a) of Rule 48(5) must contemplate that the counterclaim, set-off or cross demand in question be against the petitioning creditor since the fact that the debtor appears to have a counterclaim, set-off or cross demand against someone else would be entirely irrelevant. This is reinforced by the phrase 'equals or exceeds the amount of the debt'. The significance of this is that if the amount of the counterclaim, set-off or cross demand equals or exceeds the amount of the debt, then in the event of the counterclaim etc., succeeding, the debt supporting the petition would be extinguished. Indeed, the injustice of not setting aside the statutory demand where the debt is capable of being extinguished by the counterclaim, set-off or cross claim is apparent and, undoubtedly, is the rationale underlying the provision. Certainly, extinguishment of the debt requires that there be mutuality. Whilst a characteristic of the legal right of set-off, it is not the preserve of the right of set-off. In my judgment, mutuality is an essential ingredient of paragraph (a) and it make no difference that what the debtor appears to have is a counterclaim, or cross demand rather than a set-off."

43. Although the above statements were made in the context of Rule 48(5)(a) of the Bankruptcy Rules, I would be very slow to differ from the Court of Appeal and hold that mutuality is not an essential ingredient in respect of a cross claim in the context of a winding-up petition, as I am unable to discern any material difference between the two in this situation to justify applying different principles.

44. Mr Bartlett made a further point that Sun's Group (or Sun's Group HK) cannot assert damage arising to itself from the cross claims of Rossmore and Margaux, in which the subsidiaries or indirectly owned subsidiaries are the shareholders. That is no doubt the reason why Sun's Group or Sun's Group HK had not been joined as a plaintiff in HCA No. 2829 of 2003 and in HCA No. 3582 of 2003. It is established law that a shareholder is not able to sue for loss which is merely reflective of a company's loss, unless that company has no claim or where the loss which the shareholder suffered was additional to and different from that suffered by the company (Prudential Assurance Co. Ltd v. Newman Industries Ltd (No. 2) [1982] 1 Ch 204; Johnson v. Gore Wood & Co. (No. 1) [2002] 2 AC 1; Day v. Cook [2002] 1 BCLC 1; Re Keen Lloyd, supra. at para. 45).

45. Mr Wong relied on two English decisions at first instance in support of his contention that mutuality is not a requirement implicit in the Bayoil principles. They are Tottenham Hotspur plc v. Edennote plc [1995] 1 BCLC 65 and Atlantic & General Investment Trust Ltd v. Richbell Information Services Inc. [2000] 2 BCLC 778.

46. In Tottenham, one of the grounds raised in opposition was that the court should exercise its discretion against making a winding-up order because the effect of such an order would be to stifle an action which the company had commenced against the wholly owned subsidiary of the one of the petitioners. Tottenham was decided before Bayoil but LHF Wools was cited to the court. It was argued the fact that the claim brought by the company was not against the petitioners or any of them but against a wholly owned subsidiary of one of them should make no difference to applying the approach in LHF Wools. At 71f to 72f, the judge went through ten matters which he had regard to in considering whether he should exercise his discretion to make a winding-up order. One of the matters was that the company had an alleged substantial claim against a wholly owned subsidiary of one of the petitioners, which claim had been made in proceedings commenced before the presentation of the petition. Another matter the judge took into account was that the company did not purport to have any cross-claim against any of the petitioners themselves. On the facts, Rattee J considered it right to exercise his discretion in favour of making a winding-up order; in particular, he was not satisfied that it would be right to refuse a winding-up order merely because the company might have a claim, not against the petitioners or any of them, but against a subsidiary of one of them, which claim, if the liquidator considered to be prima facie a good claim, could be pursued by him with an indemnity for costs from the indirect beneficial owner of the company.

47. I do not consider Tottenham to be of much assistance here. As recognised by Mr Wong, Tottenham was decided before Bayoil and some of the matters taken into consideration by Rattee J were expressly stated in Bayoil as not amounting to special circumstances for the purpose of considering if the court should exercise its discretion to dismiss or stay the petition where a genuine and serious cross claim exceeding the petitioning debt is raised by the debtor company. It was unclear what significance should be attached to the matter of the company having an alleged claim against a subsidiary of one of the petitioners, as the judge had also taken into account that the company did not purport to have any cross claim against any of the petitioners themselves. Mutuality was not discussed at all in the judgment. The prejudice that might be occasioned in the stifling of the cross claim does not arise here, as Rossmore and Margaux are not the subject of the petitions and can still pursue their claims against Wong Kwan even if Sun's Group and Sun's Group HK were wound up. Lastly, the cross claim in Tottenham was a claim brought by the debtor company against the subsidiary of one of the petitioners, unlike the present situation where the claims were brought, not by Sun's Group or Sun's Group HK, but by their indirect subsidiaries.

48. Mr Wong placed greater reliance on Atlantic & General. In that case, the company had a genuine and serious cross claim not only against the petitioner but also against its parent company. Notwithstanding this, a winding-up order was made by Judge Weeks, QC sitting as a judge of the High Court, as it was held that there were special circumstances not to exercise the discretion to stay or dismiss the petition applying Bayoil. At 790g to 791b, the judge had this to say:

"I am not entirely persuaded that it is right to confine my attention, for this purpose, to the claims against [the petitioner] alone. Of course, the basis for the decision in Re Bayoil SA [1999] 1 BCLC 62 is that a cross-claim is very similar to a disputed debt and, in principle, therefore, a cross-claim by a third party can be ignored. However, there does seem to me to be, in circumstances where the court has a discretion, a possible spectrum of cross-claims, as it were, starting with the simple cross-claim against the petitioner and ending with a cross-claim which has nothing to do with the petitioner.

This cross-claim is not only against the petitioner but also against its parent company and, although I must give full weight to the doctrine of corporate identity established by the House of Lords in Salomon v. A Salomon & Co Ltd [1897] AC 22, there is, in my judgment, reason to say that the cross-claim against [the petitioner's] parent company is a relevant factor for the exercise of the present jurisdiction: see Tottenham Hotspur plc v. Edennote plc [1995] 1 BCLC 65, a case decided by Rattee J before Re Bayoil SA. Among the factors which Rattee J took into account in the exercise of his discretion was an alleged substantial claim by the company against a wholly owned subsidiary of one of the petitioners. He held that that was outweighed by other competing factors but it was a material factor. So I have to take into account, I think, not only the claim against [the petitioner] but also the claim against its parent company, bearing in mind, of course, that it is, in law, a different identity." (Emphasis supplied.)

49. As in Tottenham, the cross claim in Atlantic & General was a claim brought by the debtor company. It is not an authority for the proposition that where the cross claim was brought not by the debtor company, but by a related entity, the principles in Bayoil should nevertheless apply. I do not read the dicta referring to "a possible spectrum of cross-claims" as meaning that any cross claim within the possible spectrum, notwithstanding it has "nothing to do with the petitioner", should be taking into consideration in applying the Bayoil principles, merely because the court is charged with the exercise of a discretion. Again, mutuality was not discussed in the judgment. It seems to me that one should seek the rationale for applying the Bayoil principles and ask what are the reasons for the exercise of the discretion in staying or dismissing the petition, similar to the approach of the Court of Appeal in para. 15 of the judgment in Wong Wai Lin. The reason for staying or dismissing a petition where there is a genuine cross claim exceeding the petitioning debt is the possible extinguishment of the petitioning debt by the cross claim and for this to happen, there must be mutuality.

50. Mr Wong has prayed in aid certain principles applied in other areas of law.

51. Firstly, he referred to a passage in Burnet v. Francis Industries plc [1987] 1 WLR 802 at 811B to G (which was cited in Tottenham, supra. at 70d to e), in which it was held that the court does have jurisdiction, under Order 47 rule 1(1)(a) of the Rules of the Supreme Court, to order a stay of execution of a judgment in favour of A against a company B, to await the outcome of an unresolved claim by C, an associated company of B, against A, although the court declined to exercise its discretion in favour of a stay on the facts of that case. Burnet was cited by the Court of Appeal in Credit Lyonnais v. SK Global Hong Kong Ltd., [2003] 4 HKC 104, which was also concerned with the stay of execution of a judgment, as an example in which the corporate veil should be pierced in the exercise of this jurisdiction (at 107I to 108A).

52. Secondly, Mr Wong referred to The Coral Rose [1991] l Lloyd's Rep 563, which was concerned with the variation of a Mareva injunction to allow the defendant to pay over the sum covered by the injunction owed to its ultimate parent company. In dismissing the appeal from the refusal to vary the injunction, Neill LJ said at 569 that "in the exercise of a discretion in relation to injunctive relief 'the eye of equity' ... can ... look behind the corporate veil in order to do justice" and "when it comes to considering the exercise of a discretion and the scope of injunctive relief it is then legitimate to look at all the circumstances and to examine the nature of the debt and the identity of the creditor". The English Court of Appeal did not find it necessary to pierce the corporate veil in that instance (so that one company is regarded as the alter ego of the other) but merely to lift the corporate veil or to look behind it and have regard to the fact that the intended recipient was 100% the ultimate parent of the defendant (at 569, 571 and 572).

53. Mr Wong submitted that the above principles in other areas of law should be applied by way of analogy. In asking the court to have regard to the claims brought by Rossmore and Margaux, he was not seeking to pierce the corporate veil but merely to look behind it and have regard to the shareholding of these entities and their relationship with Sun's Group and Sun's Group HK in exercising a discretionary jurisdiction.

54. I am not persuaded I should apply such principles by way of analogy. In the first place, merely lifting the corporate veil (instead of piercing it) would not assist the companies here, because the cross claims of other entities, although these entities are closely related to Sun's Group and Sun's Group HK, could not extinguish the petitioning debt, and that is the rationale for the requirement of mutuality in this situation. If there were nothing to distinguish between the debt owed to a parent company and the debt owed to a subsidiary, this would be tantamount to treating all the assets and liabilities of a group of companies as a whole, irrespective of the rights and interests of the creditors of each company. There is no foundation for such a proposition in any of the authorities cited by Mr Wong. Besides, in a winding-up petition, the court is concerned with a class remedy for the protection of the general body of creditors of a company. This is entirely different from an ordinary civil action, in the context of which a discretionary jurisdiction is exercised on the stay of execution of the judgment or the variation of a Mareva injunction. There is also the hurdle of the principle in Prudential Assurance and Johnson v. Gore Wood, which Mr Wong has not sought to address.

55. I am satisfied that on a proper analysis of the Bayoil principles, the cross claim relied on must be the claim of the company which is the subject of the winding-up petition.

56. As for the further submission of Mr Wong that Sun's Group might still satisfy the requirement of mutuality, if it should be held to be a requirement, in that it is possible for Rossmore and Margaux to assign their claims in the High Court actions to Sun's Group, the short answer is that there is no such assignment. I doubt very much if the court should take into account an assignment of claims made to the parent company, for no valuable consideration, merely as a device to enable the parent company to set up a cross claim against a petitioning creditor.

The claim of Rossmore

57. I turn to the factual side of the claim brought by Rossmore. I will begin with some general remarks applicable to both the claims of Rossmore and Margaux.

58. It should be noted that the writs in both actions brought by Rossmore and Margaux were issued after the petitions were presented. Given the delay in initiating the proceedings and the timing of the writs, I am inclined to agree with Mr Bartlett that these claims would appear to be knee-jerk reactions launched for the purpose of assisting the efforts of Sun's Group and Sun's Group HK in staving off a winding up and that the plaintiffs had in mind the value of the claims in their respective actions as a basis for resisting the petitions. There is no inter-relationship between the petitioning debts and the claims of Rossmore and Margaux against Wong Kwan.

59. The claim against Wong Kwan was for damages of HK$268 million odd for breach of his fiduciary duties as a director of Rossmore. The loss allegedly suffered, as pleaded in the statement of claim, was that of Rossmore. I do not propose to set out the details of the claim of Rossmore in HCA No. 2829 of 2003. In summary, it is alleged that in respect of the development of a hotel project in Des Voeux Road West carried out by Super Delight, Wong Kwan and another director had made decisions on behalf of Rossmore in breach of their fiduciary duties. HK$268 million odd was advanced by Rossmore to Excel Yield Holdings Limited ("Excel Yield") in 1996 to 2001, which was used by Excel Yield to provide its share of funding for the development cost of the hotel as a shareholder of Super Delight. Then in December 2001, Rossmore agreed to accept an assignment of Super Delight's indebtedness to Excel Yield of HK$268 million odd in return for discharging Excel Yield's indebtedness to Rossmore of the same amount. It is alleged that there was no commercial reason for these transactions of Rossmore.

60. A defence was filed by Wong Kwan in the High Court Action denying the allegations of breach of fiduciary duties. He also filed evidence herein giving an explanation of the strategy adopted which led to extraordinary profits of Rossmore in boom times and the measures he had to adopt in 2001 to cut loss after the property crash. Excel Yield later transferred all its shareholding in Super Delight to Rossmore at no consideration.

61. It is not necessary to analyse the merits of Rossmore's claim, as for the reasons I have given, this claim cannot be taken into consideration as a cross claim for applying the Bayoil principles.

The claim of Margaux

62. The claim of Margaux arose out of transactions in relation to a hotel project in Shanghai Street. In 1995, the hotel property was purchased by Rich Lord International Limited ("Rich Lord") at HK$850 million, with a loan facility of HK$425 million provided by Margaux, repayable within two years, secured by a mortgage over the property. Rich Lord soon defaulted in repayment of the loan and a receiver was appointed over the property in 1997. It was eventually sold in October 2000 at HK$238 million. Wong Kwan was a director of Rich Lord and Margaux. It is alleged that Rich Lord's financial condition was known to him by reason of his being a director. The complaint is that Wong Kwan failed in his duties as a director of Margaux to take sufficient and prompt action to pursue Rich Lord when the latter defaulted in payment, such as to foreclose the property in 1996, or to require Rich Lord to provide additional security.

63. Wong Kwan filed a defence in Margaux's action denying all allegations he was in breach of fiduciary duties. As in Rossmore's action, there is no need to go into the merits of Margaux's claim. The loss and damage allegedly suffered in the sum of HK$300 million odd, as pleaded in the statement of claim, was that of Margaux. There is no basis for taking this claim into consideration as a cross claim in applying the Bayoil principles.

64. In summary, I rule against the companies in respect of the disputed debt issue and the cross claim issue.

The insolvency of the companies

65. The undisputed debts of the companies have remained unpaid. The deeming provisions in sections 178(1)(a) and 327(4)(a) with regard to the failure to comply with a demand for a debt apply. Further, it is clear from the evidence filed, including the financial statements of the Group and the information prepared for the restructuring attempts initiated by Sun's Group, that the companies are insolvent. In the latest audited accounts as at 31 December 2002, there is a disclaimer opinion by the auditors. The balance sheet of Sun's Group as at 31 December 2002 showed net liabilities of over HK$567 million. According to the latest schedule produced by the companies for the purpose of debt restructuring, Sun's Group had total liabilities of HK$1.387 billion as at 3 February 2004, secured by properties valued at HK$639 million based on the market value as at 31 December 2002, and the amount of unsecured indebtedness was about HK$748 million. Just before the hearing, the hotel development of the Group in Des Voeux West was sold at HK$350 million, enabling the secured financial creditor with a debt of HK$330 million to be paid in full.

The restructuring proposal

66. The petitions were presented on 11 April 2003 and an adjournment was granted at the first hearing on 16 June 2003 on the basis of a proposed restructuring initiated by the companies. At the hearing of the petitions a year later, the companies have still not come up with a restructuring proposal with reasonable prospects of securing the support of the required majority of unsecured creditors.

67. On 10 March 2004, Sun's Group made an announcement that on 27 February 2004, an offer was received from an independent potential investor to subscribe for new shares of the company, conditional on, amongst others, resumption of trading, creditors approval on a debt restructuring plan and relevant shareholders approval. The trading of the shares has been suspended since 24 April 2003 and the company is now in the third stage of de-listing. No further announcements have been made regarding this conditional offer up to the date of the hearing.

68. The companies have also adduced evidence of the correspondence between their financial adviser, Baron Capital Limited ("Baron") and the Stock Exchange in respect of the above conditional offer of the potential investor. The Stock Exchange required several issues to be addressed to satisfy the Listing Agreement. The offer of the investor was revised on 16 April 2004 and comments to this were received from the Stock Exchange on 22 April 2004. The financial creditors are reviewing the rescue proposal. There is a letter to Baron dated 22 April 2004 from a major financial creditor, Umbrella Finance Company Limited (the liabilities to this creditor amounted to HK$468 million), expressing dissatisfaction over the proposal and the inadequate information supplied.

69. The petitioners have indicated to the court that in view of the listed status of Sun's Group and the potential for restructuring, in the event that the court should find in their favour on the issues raised in opposition, rather than seeking an immediate winding-up order, they wish to apply for independent provisional liquidators to be appointed to take charge of the proposals for restructuring. They are opposed to leaving the restructuring in the hands of the existing management, in view of the lack of progress over the course of one year and their concern about the integrity of the management due to the transaction relating to On Fat that I have mentioned earlier.

70. On Fat took an assignment of the indebtedness of Pearl Century Limited to BEA of HK$102 million at the price of HK$30 million in January 2002 and entered into a settlement with Sun's Group in June 2002, under which On Fat was repaid a major part of the indebtedness being HK$97 million in cash and in shares between September 2002 and November 2002, notwithstanding that the debt to On Fat was not due until June 2005. The petitioners have raised questions if On Fat was connected to Wei Wu, the chief executive officer of Sun's Group until he resigned recently. Even if there were no such connection, On Fat was apparently paid in preference to other creditors. Correspondence on this was exchanged between the petitioners, the companies, and their respective solicitors in April and May 2003. The companies have denied any impropriety in the On Fat transactions.

71. I understand from Mr Bartlett that Umbrella Finance Company Limited supports the petitioners' application for appointment of provisional liquidators.

72. I propose to consider the viability of the restructuring proposal put forward by Sun's Group and the appropriateness of having independent provisional liquidators to take charge of this when I hear the application for appointment of provisional liquidators.

Orders

73. For the above reasons, I will not order the companies to be wound up at this stage. I understand that the petitioners are ready with their application for the appointment of provisional liquidators. I therefore give the following directions in respect of both petitions:

(1) the petitioners are to issue a summons for the appointment of provisional liquidators, to be served with the supporting evidence, within 7 days hereof, and give notice of this application to all parties who have filed a notice of intention to appear on the petitions;

(2) the companies are to file and serve evidence in opposition within 7 days thereafter;

(3) the petitioners are to file and serve evidence in reply within 3 days thereafter;

(4) where any party intends to rely on evidence already filed, notice should be given to the opposite party when new evidence is served pursuant to paragraphs (1) to (3) hereof, indicating the relevant parts of the affirmations and the relevant exhibits;

(5) no further evidence is to be filed without leave of the court;

(6) the summons is to be set down for hearing with three hours reserved, on compliance with paragraphs (1) to (4) hereof;

(7) the petitions are to be restored for hearing in court after the determination of the application for appointment of provisional liquidators or as otherwise ordered; leave to all parties to restore the petitions to an earlier date upon seven days' notice; and

(8) the question of costs of the hearings on 27 and 28 April 2004 is to be adjourned to the restored hearing of the petitions.