Re Datacom Cable System Co. Ltd.

HCCW 347/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 347 OF 2000

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JUDGMENT

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1. This is a petition for the winding-up of Datacom Cable System Company Limited ("the Company").

2. The petitioner is Mrs Mary Chi Man-li ("the Petitioner"), who is a director and shareholder of the Company.

Basis of petition

3. The petition is based on a judgment debt. On 18 February 2000, summary judgment was given in HCA 16548/99 in favour of the Petitioner against the Company in the sum of $1,000,000 together with interest thereon at the rate of 18% p.a. from 5 April 1999 to the date of judgment, and thereafter at judgment rate until payment, together with costs to be taxed if not agreed.

4. No part of that judgment debt has been paid. The Company made an application for a stay of execution, but that application was dismissed on 18 August 2000.

5. On 21 August 2000, the Company made an application for leave to appeal out of time. On 30 August 2000, that application was dismissed by Suffiad, J.

6. On 28 September 2000, the Company filed a Notice of Appeal against the order of Suffiad, J. The Petitioner, as respondent to the intended appeal, sought an order for security for costs. On 10 November 2000, Stock JA ordered the Company to pay security for costs of the appeal in the sum of $200,000 within 14 days, failing which the appeal should stand dismissed without further order. The amount was not paid. The effect is that there is no appeal from the judgment.

7. On 14 March 2000, after summary judgment was given, the Petitioner served a statutory demand on the Company for payment of the judgment debt . As stated above, no payment was made.

8. On 7 April 2000, this petition was presented. It is opposed by Mr Wu Ching Chen, a shareholder of the Company, and by the Company itself.

Issues

9. The issues that have arisen in this petition can be summarized as follows:-

(1) whether the Petitioner's debt is liquidated and presently due and payable;

(2) whether the Company has given authority to solicitors purportedly acting for it, or put another way, whether Mr Wu can properly instruct solicitors on behalf of the Company;

(3) whether the Company has raised any bona fide dispute by way of its counterclaim in HCA 16548/99;

(4) whether the Company is insolvent.

(1) Petitioner's debt liquidated and due and payable

10. The Petitioner relies on the judgment debt, which is for a liquidated sum. There having been no stay of execution, it is presently due and payable.

11. The Company has alleged that the judgment has been obtained by fraud. As stated above, there is no appeal from that judgment. At the pre-trial review of this petition held last month, in the light of the submission made on behalf of the Company that the judgment was obtained by fraud, I inquired of Mr George Chu, counsel appearing for the Company, whether the Company had applied to set aside the judgment. The reply was that no application has been made by the Company to set aside the judgment.

12. It was only in the Company's closing submissions at the conclusion of the hearing of this petition that Mr Chu informed the Court that he has now been instructed that the Company would be applying to set aside the judgment, and he asked the Court to stand over this petition to await the outcome of that proposed application.

13. In my view, it is far too late for the Company to take this step now. It is incumbent on any litigant who seeks to assert that a judgment has been obtained by fraud to act with all due diligence to apply to set it aside. No reason has been offered for the delay in this case. Even if the Company (or those advising it) had not been aware that that was the correct procedure to adopt, it (or they) became aware of it at the pre-trial review a month before the hearing of the petition, but nevertheless decided not to proceed along those lines.

14. In any event, an allegation that a judgment has been obtained by fraud should be subjected to the closest scrutiny. Any party alleging it must give the particulars of the fraud exactly and the fraud must be established by strict proof (Jonesco v Beard [1930] AC 298).

15. Here, the only evidence the Company has put forward in support of its allegation that the judgment had been obtained by fraud is that the Petitioner had previously given a different date as to when the 5 cheques the subject-matter of the action had been given to her.

16. The 5 cheques the subject-matter of the action, each for $200,000, were dated 17 April 1998. The Petitioner's case was that she had made a loan to the Company of $1,000,000 in August 1997. A cheque for that amount had been given to her for repayment. That cheque was later exchanged for the 5 cheques the subject-matter of the action. She had stated previously in her affirmations that the 5 cheques were post-dated and had been given to her by Cheung Sing-kuen, another director of the Company, in September 1997.

17. The Petitioner has now accepted that the 5 cheques had been given to her, not in September 1997, but on or about 17 April 1998, the date of the cheques. She says that she had made a mistake in her earlier affirmations as she had not had access to the Company's documents since June 1999 and her memory was at fault as to the date when the cheques were given to her.

18. Be that as it may, I do not see how the fact that the Petitioner had earlier given a wrong date as to when the 5 cheques were given to her taints the judgment with fraud. Mr Wu, in his evidence for the Company, did not dispute that the Petitioner had lent the Company a sum of $1,000,000 in 1997 to help its cash flow. The Petitioner's evidence was that the loan was to be repaid in 6 months (i.e. by February 1998) and that this had been agreed by Cheung Sing-kuen. Cheung Sing-kuen has not filed any evidence to deny this. There was no evidence that the term of the loan had not expired when the 5 cheques were presented for payment in September 1998. As such, I do not see how it could be said by the Company that the judgment has been obtained by fraud just because the Petitioner had given a wrong date as to when the 5 cheques were given to her.

19. Accordingly, by reason of the Company's delay and by reason of the lack of substance in the Company's allegation that the judgment had been obtained by fraud, I decline to exercise my discretion to stay this petition so that the Company may issue proceedings to set aside the judgment.

(2) Authority to represent the Company

20. The second issue was one raised by the Petitioner. As it concerned the authority of solicitors to represent a party, I directed that it should be dealt with first. After hearing submissions, I decided that there was nothing in the Petitioner's objection to the lack of authority of Messrs B. C. Chow & Co to represent the Company.

21. The issue arose from the following facts. On 22 August 2000, B.C. Chow & Co filed a notice with the Court that the Company would oppose the petition.

22. The next day, the Petitioner's solicitors wrote to B.C. Chow & Co asking for the Company's board resolution appointing B.C. Chow & Co. as its solicitors, asserting that the Petitioner and her husband (who were both directors of the Company) had not received notice of any board meeting.

23. That was followed by an equivocal letter from B.C. Chow & Co. which on the one hand, denied that no notice had been given to the Petitioner and her husband, but on the other hand, asserted that the Company could not contact the Petitioner and her husband, as "purportedly, she was not in Hong Kong". Nothing was said about whether the Petitioner's husband was in Hong Kong. The solicitors said that the Petitioner and her husband would be conflicted out, but then proceeded to ask if the Petitioner would vote for or against the board's decision to defend the winding-up.

24. The Petitioner's solicitors pressed for the board resolution, and eventually were provided with a notice dated 15 August 2000 addressed to all 4 directors of the Company (including the Petitioner and her husband) and minutes of a board meeting held on 18 August 2000 signed by 2 of the directors, with the Petitioner and her husband listed as being absent.

25. When the Petitioner's solicitors asked how and when the notice had been served, B.C. Chow & Co replied with another equivocal letter stating their instructions that the Petitioner was "either not in Hong Kong nor [sic] could not be reached". B.C. Chow & Co also asked for discovery of the Petitioner's travel documents. These were not supplied, but no order for discovery was sought.

26. Article 100 of Table A (which applied to the Company) provides that it would not be necessary for notice of a directors' meeting to be given to a director who was not present in Hong Kong.

27. At the hearing of the petition, it was submitted on behalf of the Petitioner that the tenor of the correspondence from the Company's solicitors showed that no notice had been sent to the Petitioner and her husband, and that even if the Petitioner and her husband were not present in Hong Kong, Article 100 would not avail the Company unless it had made reasonable efforts to discover whether the directors were in fact in Hong Kong. It was submitted on the authority of Re Portuguese Consolidated Mines (1889) 42 Ch D 160 that the failure to give notice of the meeting invalidated the business transacted at the meeting, in this case the appointment of solicitors to represent the Company in these proceedings.

28. It was submitted on behalf of the Company that even if that was correct as a matter of principle, any failure to give notice to the Petitioner and her husband would only have been an irregularity as the same resolution would have been passed had notice been given to them (Peter Yip v Asian Electronics Ltd [1998] 2 HKC 96, 102-3). Even if notice had been given, and they had attended, the Petitioner would have been conflicted out, and her husband would still have been outvoted by the two directors in the other camp, i.e. Mr Wu and Cheung Sing-kuen.

29. In my view, this is a sterile issue. Lack of authority can always be cured by ratification. Irrespective of whether notice should have been, or had in fact been, given to the Petitioner and her husband, the Company can always convene a meeting to ratify the solicitors' authority with retrospective effect (as the Petitioner would remain conflicted out, and Mr Wu and Cheung Sing-kuen would out-vote the Petitioner's husband).

30. Further, this was not a case in which the Company was the only opponent to the petition. The petition was also opposed by Mr Wu in his capacity as contributory, instructing the same solicitors.

31. Accordingly, the argument about the solicitors' authority from the Company made little difference to the true issue at hand, which was whether the Company should be wound-up.

(3) No bona fide dispute by way of its counterclaim

32. The law is clearly stated in McPherson's Law of Company Liquidation 4th ed p100 that where the company can show bona fide that it has a counterclaim against the petitioner based on a substantial ground, the Court would refuse in the exercise of its discretion to wind up the company.

33. In considering whether there is a bona fide counterclaim, I have taken into account the fact that although a counterclaim had been filed in HCA 16548/99 in 1999, the Company has done nothing to progress the counterclaim since then. No explanation has been given for its inertia. That unexplained failure on the part of the Company to take any further steps in the counterclaim is an important factor acting against the Company in the Court's balancing process.

34. Further, having read the affirmation evidence and considered the evidence given under cross-examination of the deponents (the Petitioner and Mr Wu), it is clear to me that the counterclaim in this case lacks substance.

35. In his 1st affirmation, Mr Wu alleged that the total amount of the Company's counterclaim against the Petitioner was $6,010,827.92, which of course would have outweighed the judgment debt. The counterclaim comprised of 5 claims. I shall deal with each in turn.

(i) Weltek payments

36. The Company alleged that a trade debtor of the Company by the name of Weltek Company Ltd had paid New Taiwan Dollars (NTD) 472,861 (equivalent to $97,252.80) into the Petitioner's bank account in Taiwan, and the Petitioner had not accounted to the Company for this sum.

37. It is clear, however, from the documentary evidence that the exact amount of money in question had been paid into the bank account of a company called Yan Chit Yan Trading Co. Ltd ("YCY") in Taiwan. The documentary evidence comprised of cheques made out by Weltek in favour of YCY and an account prepared by YCY.

38. It was asserted by the Petitioner on affirmation that YCY was owned by a Miss Chan Shuk Man, and that it had been agreed by the Company that YCY would act as the Company's agent to receive payments by the Company's debtors in Taiwan (of which Weltek was one) in NTD and to make payments to the Company's suppliers in Taiwan in NTD.

39. The Petitioner's assertions that YCY was owned by Miss Chan and that the Company had agreed on the arrangement with YCY were not challenged in cross-examination. No evidence was adduced by the Company in support of its allegation that the Weltek money was paid into a bank account of the Petitioner.

40. I fail to see, in the light of that evidence, how it could be said that in respect of the money paid by Weltek (or any balance thereof after deduction of payments made to the Company's suppliers in Taiwan), the Company has any counterclaim against the Petitioner.

(ii) Machines

41. The Company's 2nd allegation was that "the Petitioner took away the property of the Company, namely 8 machines". This was alleged in Mr Wu's 1st affirmation.

42. The Petitioner's evidence was that the Company had never bought the machines, although they had been stored temporarily at the Company's factory on the Mainland. Mr Wu, in his 2nd affirmation, acknowledged that the Company "had never bought the said machines".

43. In the light of that admission, and in the absence of any evidence to show how those machines could be said to be "the property" of the Company when it had never bought them, I see no substance whatsoever in this claim against the Petitioner.

(iii) Debt owed by Tri-Wire International Ltd

44. The Company's 3rd allegation was that a company of which the Petitioner was a director, Tri-Wire International Ltd, owed the Company some $327,000 odd. The Petitioner is no longer a director of that company.

45. The Petitioner has denied that Tri-Wire International Ltd owed that sum of money to the Company, and in any event, has denied that any debt owed by that company could constitute a counterclaim against her personally.

46. Mr Wu in his evidence before the Court asserted that Purchase Orders had been issued by Tri-Wire International Ltd to the Company for goods for that amount, and that he has exhibited them in some other action which he could not identify. However, no such Purchase Orders had been exhibited or produced in the proceedings before me.

47. In any event, even if there were any such Purchase Orders and even if Tri-Wire International Ltd were indebted to the Company, that cannot be transformed into a counterclaim against the Petitioner. That a limited company is a separate legal entity, separate from its shareholders and directors, is one of the most fundamental concepts in company law. It has not been suggested that the corporate veil of Tri-Wire International Ltd should be lifted so as to impose personal liability on the Petitioner, and no evidence has been adduced before this Court to show that any grounds exist to warrant the lifting of its corporate veil.

48. Insofar as it may be said that the Company's claim against the Petitioner is based on a breach of fiduciary duty in failing or neglecting to recover that debt from Tri-Wire International Ltd (assuming it exists) , no evidence has been led in this Court to show that the Petitioner should have been aware that it exists and that it would have been recoverable if she had taken any action.

49. Mr Wu accepts that the Petitioner was only 1 of 5 directors, but he says that the Petitioner had (prior to August 1999) been in charge of the financial side of the Company. However, it should be noted that Mr Wu has himself been in charge of the management of the Company for more than 11/2 years since August 1999, and the board under his direction has not taken any action to seek to recover the debt from Tri-Wire International Ltd. No reason has been given why that is so, which must raise a question as to whether such a debt in truth exists.

50. In the light of the above, I am not satisfied that there is a bona fide substantial counterclaim against the Petitioner on account of any debt owed to the Company by Tri-Wire International Ltd.

(iv) Debt owed by Datacom Wire and Cable Ltd

51. The Company's 4th allegation is that a related company by the name of Datacom Wire and Cable Ltd ("DWC") owes the Company more than $4m. A judgment debt has been obtained and DWC has been put into liquidation. According to Mr Wu's 1st affirmation, the Petitioner was "in charge" of this company as well as the Company.

52. However, that was as far as the evidence went. There is no evidence adduced before me to suggest that DWC's corporate veil should be lifted to impose personal liability on the Petitioner, or that the Petitioner has been in breach of any fiduciary duty to the Company in connection with its dealings with DWC.

53. Businesses either succeed or fail, and if they fail, they may fail for any number of reasons. It is not enough for the Company to simply point to DWC's failure, or indeed to the losses that the Company has been suffering, and without any further evidence attribute that loss to a breach of fiduciary duty on the part of a director even if she had been responsible for overseeing the financial side of the Company's business.

(v) Bad debt of All Success

54. Finally, the Company said it had suffered a loss of some NTD5,000,000 (HK$1.2m odd) as a result of the failure of a company in Taiwan called All Success. In itself, that can hardly be cause for any counterclaim against the Petitioner.

55. It was only in re-examination that Mr Wu tried to explain the Company's case. He said that when he heard that All Success was on the brink of collapse, he went to Taiwan and made a proposal which he considered would enable the Company to recover some money from All Success. Mr Wu's complaint was that the Petitioner did not travel to Taiwan to adopt and implement his proposal until 2 weeks later, by which time, according to Mr Wu, it was too late, and the Company could only obtain from All Success one machine which the Company then transferred to its premises on the Mainland.

56. The Company has not adduced any actual evidence as to the value of the machine taken, although by inference, the balance outstanding may be the $900,000 odd which the Company sought to deduct in its returns to the Revenue. The Company has apparently not taken any steps to recover that balance. When Mr Wu was asked why he had not, since he took over management of the Company, lodged any proof of debt or even contacted the liquidator of All Success, Mr Wu's explanation was simply that he was not aware how the matter had been handled when the machine was obtained and he left it at that.

57. I am conscious that the Petitioner did not seek leave to be recalled to answer the evidence given by Mr Wu in re-examination seeking to substantiate the Company's allegations that the Petitioner had been "negligent and reckless", resulting in the Company's loss in All Success' collapse. However, the onus is on the Company to show that there is a bona fide substantial ground of counterclaim and I am not satisfied, in the light of the very sketchy evidence that has been given by Mr Wu in re-examination, that the Company has discharged that onus simply by asserting that the Petitioner went to Taiwan after 2 weeks. In any event, the amount of that counterclaim is less than the judgment debt (Re Futile Pty Ltd (1988) 13 ACLR 412).

58. My conclusion therefore is that in the light of all the matters discussed above, I would not exercise my discretion to refuse to wind-up the Company on the basis of the alleged counterclaims. Further, it would appear to me that if there is anything at all in any of the counterclaims, it would be in the interests of the Company to have a liquidator pursue them instead of continuing the inert attitude taken by the Company under Mr Wu. That is particularly since the Company has a number of trade creditors.

(4) Company is insolvent

59. That leads me to the final issue, which is whether the Company is insolvent. That the Company is insolvent had been asserted in the Petition, and in an affirmation of the Petitioner's solicitors filed in June 2000, evidence of the Company's other debts has been adduced. A late affirmation by the Petitioner asserting the Company's general insolvency (to which the Company did not object) was not therefore a new allegation (cf Ng Tai Tuan v Chng Gim Huat Pte Ltd [1991] 1 MLJ 338).

60. It is clear from the evidence that whichever test one adopted, the Company is insolvent. Both in May 2000 and June 2000, documents emanating from the Company itself have confirmed that it is in dire financial straits. This was also confirmed in the figures disclosed in the oral evidence of Mr Wu who said that the Company owes its creditors about $4m but has cash of $15,000 and some undisclosed receivables. Although I am aware that some 200-300 employees are according to Mr Wu employed by the Company in its factory on the mainland, it is clear that the Company has been operating as if it had been treading a high-wire. Whatever Mr Wu may have heard from the Company's creditors, no creditors have appeared to oppose this petition.

61. This case is clearly distinguishable from LHF Wools Ltd [1970] 1 Ch 27. In the present case, there are assets other than the action against the Petitioner, and it is not a case where the Company's existing directors would be better placed than the liquidator to pursue that action. Indeed, this Company has failed to pursue any of the alleged claims, whether against the Petitioner or other parties, with any efficiency.

Order

62. In the circumstances, I would make the usual winding-up order with an order nisi that the costs of the petition be borne by the opposing contributory pursuant to the rationale set out in Boyle and Marshall's Practice and Procedure of the Companies Court at paragraph 7.8.18