XCHRX Re Taipao Resins Chemical Co. Ltd.

HCCW 590/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 590 OF 1998

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D E C I S I O N

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1. This is an application by Taipao Resins Chemical Company Limited (which I shall refer to as "the Company") for a validation order under Section 182 of the Companies Ordinance.

2. The first point to note in the application for a validation order is that the Company is solvent and is trading. The principles applicable in the Court's consideration of such an application have been set out clearly in the case of Re: Burton and Deakin Limited (1977) 1 All ER 631. Should the directors consider that a particular disposition falling within their powers as directors was necessary or expedient in the interests of the company and if the Court considered that the reasons given were such as an intelligent and honest person could reasonably hold, the Court would normally sanction the disposition notwithstanding the opposition of a contributory, unless the contributory had adduced compelling evidence which proved that disposition was likely to injure the company. The Court would not interfere with the discretion conferred on the directors by a company's Articles of Association at the instance of a contributory, even if a winding-up petition had been presented, unless there is evidence of proven bad faith or other exceptional circumstances.

3. There have been a number of substantial affirmations filed in support of the Summons and also in opposition thereto. The summons deals with a total of 9 proposed dispositions, and I shall deal with each of them in turn.

(i) Transfer of money in a non-interest bearing Hong Kong dollar account to an interest bearing account.

4. The Petitioners have no objection as such to the transfer of such money so long as it was within the same bank, namely Nanyang Commercial Bank Limited. However, they object to the transfer into any accounts with the Shanghai Commercial Bank Limited because they say they would then have no control over the disposition of funds at the Shanghai Commercial Bank Limited.

5. In her 3rd affirmation, Miss Leung Suk Han says that any funds that would be transferred to Shanghai Commercial Bank would be dissipated, and she alleges that the balance in an account with the Shanghai Commercial Bank as at 30th June 1999 was nearly nil.

6. That does not appear to be borne out in the evidence, because the bank balance there shown is in the total of about HK$3.4 million. Mr. Lam appearing for the Petitioners has tried to explain that by saying that the trade debts of the Company were in the region of $4 million and therefore the effective balance is nil.

7. But be that as it may, I do not see any prejudice to the Company if they were to retain their account with the Nanyang Commercial Bank, and Mr. Yip appearing for the Company, has not given any reasons why it is necessary for those amounts to be transferred into interest bearing accounts with the Shanghai Commercial Bank as opposed to the Nanyang Commercial Bank.

8. Therefore, in relation to paragraph 1 of the Summons, I would order that any sum or sums now in the Company's account with the Nanyang Commercial Bank Limited account nos. 043-477-0-0101796-6 and 043-477-5-162367-1 be transferred into a Hong Kong dollar or a US dollar account so long as they are interest bearing accounts with the Nanyang Commercial Bank Limited.

(ii) Payments for Purchase of raw materials and semi-finished products.

9. Mr. Yip has set out very clearly the reason why the present limit of $800,000 under the 1st Validation Order made by Le Pichon J. is inadequate.

10. The figure of $800,000 appeared to have come from a formula applied by Miss Leung of juxtaposing the cost of raw materials and semi-finished products as a percentage of the gross turnover. In paragraph 10 of the 3rd affirmation of Luh Chung-pei, there is in Table II, a series of figures which show that the average cost for the purchase of raw materials and semi-finished products was about 73.7% of the gross turnover.

11. Mr. Lam, for the Petitioners, says it is fallacious to assume that all the raw materials and semi-finished goods would be used up within that month to produce the turnover for that month, and therefore one should not apply that percentage.

12. However, as I have said, the present limit of $800,000 for the purchase of raw materials and semi-finished products given under the 1st Validation Order was also based on the same formula used by Miss Leung. Mr. Lam says that that was because Miss Leung based her average on a number of years and not just a number of months, and she used her experience in arriving at that percentage. However, I note that she is only a personal assistant to the 1st Petitioner when he was the general manager of the Company. Therefore, she is not in any position of an expert as such, and it is difficult to see what, if any, adjustments she had made when she arrived at that basis which she said was based on a number of years. So I am prepared to accept the same formula as that used by Mr. Leung previously and by Mr. Luh in the present application.

13. I have asked the parties to include in Table II the figures pertaining to the months of May and June 1999. I understand that if one were to add to the existing Table II at paragraph 10 of Mr. Luh's 3rd affirmation the data for the months of May and June 1999, the new average is not 73.7% but is 66%, and that is the figure which I think I should apply to the turnover in the determination of the amount that should be permitted for the purchase of raw materials and semi-finished products.

14. In a sense, I accept that the use of a percentage like that cannot be accurate, but in the context of a company which is trading from day-to-day, it is difficult to have anything other than a rough and ready percentage to be used in order to avoid the parties having to come back to Court from time to time for validation orders. So applying the new average of 66% and given that the average gross turnover for the last 3 months, that is to say, from April to June 1999, is in the region of $2.568 million, I would order that the payments for future purchase of raw materials and semi-finished products may be made provided that the monthly expenses on such purchase shall not exceed $1.7 million. This $1.7 million is worked out by applying 66% to the average turnover for the months of April, May and June being the more recent months (i.e. applying 66% to the average of $1.984 million for April 1999, $2.491 million for May 1999 and $3.23 million for June 1999).

15. I should also point out that Miss Leung has challenged those figures and her calculations had been counter-challenged in the 4th affirmation of Mr. Luh. Suffice to say that the burden is on the Petitioner contributories to show any inaccuracies or mistakes in the Company's figures. I find that on the evidence presented, the Petitioner have failed to show that they have compelling evidence that the figures presented by the Company are incorrect.

16. Miss Leung in her affirmation and Mr. Lam in his submission have asserted that the Company is being run into the ground because they say the figures appeared to show that the greater the turnover, the greater the trading loss, and she said from that it appears that the Company is buying at market cost and selling below market cost.

17. However, it is at least arguable from Tables IX and X that that is not the case that the gross profits are decreasing with greater turnover. In any event, it is a very serious allegation to make where a company is admittedly solvent. Indeed if the Petitioners thought that the directors were trading deliberately to make a loss, no doubt the Petitioners can take such steps as they may be advised in this respect, but until that is done, the Court cannot assume such a gross breach of fiduciary duties.

18. As I have indicated, the Court is not in the business of trading resin. That has to be left to the directors unless there is evidence of bad faith. It is normal for a company to wish to increase its turnover especially when there is substantial competition in the market.

19. In my view, the Petitioners have failed to discharge the burden on them that any expansion in the business of the Company in the past few months is evidence of bad faith.

(iii) Payment for future operating costs.

20. In so far as operating costs are concerned, the present validation order made by Le Pichon J. was for a limit of $500,000 p.m.. It is clear from the management accounts for September 1998 to April 1999 that the average operating costs came up to more than $877,000 p.m., and there have been two new offices opened since then. So Mr. Yip has applied for an amendment to the Summons for an amount in the region of $1 million.

21. Miss Leung, on the other hand, has questioned why there should be an increase in salaries in a time of economic recession, although in her evidence, there is no reference to the new offices and any possible effect on salaries.

22. Working on the figures made available in the evidence, it is clear from the management accounts that an average of $877,000 odd had been incurred between September 1998 and April 1999. There is no substantial evidence before me in relation to an addition in operating costs as a result of the two new offices and therefore, I would order in this regard that payment for future operating costs may be made provided that the total sum of these payments shall not exceed $880,000 per month.

(iv) Payment of outstanding trade debts.

23. In this summons, the figure given is $3.6 million. That has since been amended to $4.5 million pursuant to the evidence shown in the 資產負債表 exhibited as "LCP-15" to the 4th affirmation of Mr. Luh. As the costs of the materials and operating costs had exceeded the payments permitted under the previous Validation Order, it is understandable that the trade debts have been mounting.

24. Of course, there is a limit to the extent of credit which a company can enjoy from its trade suppliers, and it is obvious, not only as a matter of commercial morality, but also to maintain a solvent company's viability pending determination of litigation, that trade debts ought to be settled.

25. Miss Leung in her affirmation has only referred to "reservations" that she has about the trade debts, but she has not provided any evidence to contradict the figures provided. Mr. Lam has quite frankly said in his submissions that they cannot say that these are not bona fide trade debts: simply that they do not know if these are bona fide trade debts.

26. In view of the burden being on the Petitioners and in view of the accounts which had been provided by the Company showing that there is a total liability of $4.5 million, I would order that payment of $4.5 million in settlement of outstanding sums now owed by the Company to trade creditors may be made in accordance with the terms of each trade creditor.

(v) Reimbursement of legal fees.

27. A sum of $1.2 million has been paid by a director (Mr. Huang) on behalf of the Company and obviously Mr. Huang wishes to be reimbursed. It is said in the evidence that this $1.2 million refers to fees paid to Richards Butler and other solicitors for 4 separate pieces of litigation including the present winding-up petition.

28. However, no bills have been exhibited and the only evidence before the Court is that one director has considered it reasonable to pay the amounts in question.

29. I shall now deal with each of the 4 pieces of litigation for which validation is sought for reimbursement to be made to Mr. Huang.

30. The first is in relation to the present winding-up proceedings. According to the 3rd affirmation of Mr. Luh, the amount in question is $375,000. In so far as any of those fees were referable to the Company's applications for validation orders, certainly the Company ought to reimburse Mr. Huang for whatever he has paid on behalf of the Company. However, I do not know to what extent any of the $375,000 was for the purposes of general advisory work on the petitioners' affirmations in the present Petition.

31. In so far as the present winding-up petition is a dispute between two camps of shareholders, it is well established law that the Company should be in the position of a neutral party, and therefore the Company should not be seeking advice from the solicitors in relation to substantive matters in dispute between the 2 camps of shareholders. See Crossmore Electrical and Civil Engineering Ltd. (1989) BCLC 137.

32. What Mr. Yip, on behalf of the Company's solicitors, has undertaken is that his firm will reimburse with interest any fees taxed off if not agreed. As it is clear that the Company has instructed solicitors in respect of the applications for validation orders, I think it would be right in the present case to make an order that Mr. Huang be reimbursed $375,000 subject to the undertaking by Richards Butler to reimburse the Company with interest any fees paid to them which may be subsequently taxed off if not agreed.

33. The 2nd tranche of legal fees relates to the recovery of debts from trade debtors. The legal fees paid on behalf of the Company by Mr. Huang is said to be $440,000. The work that has been set out in Mr. Luh's affirmation seems to have been successful as quite substantial amounts have been recovered by the Company. However, in the absence of a bill showing how this not insubstantial amount of $440,000 had been incurred, I would not be prepared at the present stage to order that the Company reimburse Mr. Huang in relation to this tranche of legal fees.

34. The 3rd tranche is $430,000 in relation to High Court Action No. 16246 of 1998. There is a summons before Le Pichon J. on 1st September 1999 concerning this Action and I have for the reasons given earlier in the hearing, adjourned this part of the application for validation to be heard by Le Pichon J. on 1st September.

35. The 4th tranche is in relation to Action No. 5077 of 1999. This amount is only $13,325, it is against a company called Tecnic Point with an amount claimed in excess of $400,000 and for which $343,000 had been recovered. Since this amount is quite small and since the action appears to be successful, clearly a validation order would be in order.

(vi) Payment of legal costs for A6875/1999

36. In relation to another action, High Court Action No. 6875 of 1999, $100,000 is said to be owing to Messrs. Simon Siu, Wong, Lam & Chan. This is an action taken by the Company against a previous customer for $3.4 million.

37. No bill has been provided, no Statement of Claim has been exhibited and there is no evidence at the moment as to what if anything has been recovered.

38. As I had said earlier, the Court would sanction payment if reasons given by the directors are such that an intelligent and honest person could reasonably hold that view but here, there is inadequate evidence before me for consideration of this issue and I would make no order on the state of the present evidence in relation to this aspect.

(vii) Distribution of dividends & (viii) Travelling Expenses

39. As far as distribution of dividends to shareholders of $2 million and travelling expenses to directors of $20,000 each is concerned, this had been resolved by the shareholders at the Annual General Meeting. There is no challenge made by the Petitioner that such resolution has been passed. Miss Leung says that even though there were profits for the year 1997 to 1998 of $9.6 million, it would appear that there has been a loss suffered by the Company of $4.5 million for the period from September 1998 to April 1999.

40. However, even if one does take this loss into account, there would still be funds available, and this dividend had been declared and approved. Therefore I would grant an order validating the distribution of dividends to be made in the sum of $2 million to all shareholders on a pari passu basis and I would also sanction payment of travelling expenses to be made to each of the directors in the sum of $20,000 as they are resident abroad.

(ix) Payment of future legal costs

41. In relation to payment of future legal costs which the Company seeks in the sum of $50,000 per month, no specific use has been indicated in the evidence and in my view, it would be more appropriate that if and when the occasion arises for a specific sum to be required for any particular step to be taken in any particular litigation, a validation order application should be taken out then, when there would be evidence to hand of what sum would be required for what purpose.

42. Mr. Yip's submission was that that would lead to more costs because the Petitioners would object to the same. However, if the Petitioners were to make unreasonable objections to any proper applications for validation then no doubt they would be mulcted in costs and therefore, I would not grant any orders for payment of future legal costs at this stage.

43. I would order that all payments referred to above be made from the 1st Respondent's account with the Shanghai Commercial Bank Limited account no. 329-82-14533-3 and that these payments would not be avoided in the event a winding-up order is made.

44. Before I finish, I wish to say a word about the gross underestimate of the length of hearing of the present summons. The time estimated for the hearing of the present summons was 30 minutes. No re-estimate was made notwithstanding the filing of substantial evidence in opposition and evidence in reply. In my view, it is the responsibility of solicitors having the carriage of the summons to revert to the Court with a new estimate of the length of hearing, instead of leaving the estimate at its original length. It is unfair to other litigants to have to wait whilst the summons is heard in its entirety. In so far as the parties consider that it is necessary to have a hearing as soon as possible, the correct procedure to adopt is to apply to Court for an earlier date with a properly estimated length of hearing, rather than to (as it were) get one's foot in the door by using a completely unrealistic short estimate and hope that the Court would continue once it has started hearing the summons.

45. Finally, in relation to the costs of the application, I would make an order nisi that the costs of the application be costs in the cause of the Petition and I will give liberty to apply.