RE SUN FUNG TIMBER CO LTD

HCCW 313/2017

[2018] HKCFI 2756

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 313 OF 2017

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J U D G M E N T

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Introduction

1.  This is the petition for the winding up of Sun Fung Timber Co Ltd (“Sun Fung Timber”) presented by a creditor in October 2017.

2.  The petition was presented based on about RMB52 million said to be a debt owed by Sun Fung Timber to the petitioner.  The said sum was an arbitral award made in the Mainland on 19 May 2017.

3.  The petition is opposed by Mr Lee (“Lee”), who is the person behind the company holding 50% of the shares of Sun Fung Timber.  For convenience, (in the paragraphs below) Lee is treated as the 50% shareholder.

Background

4.  The largely undisputed background is summarized below.

5.  Sun Fung Timber was set up in October 1989.  Its shares are jointly owned by Lee and Mr Tsang (“Tsang”).  The business of Sung Fung Timber was operated by Tsang; Lee remained as a non-participating shareholder.

6.  Sun Fung Timber acquired a shop in Wellington Street in October 1992, and operated its business from there (“the shop property”).  The shop property was sold in May 2017 for $50 million.

7.  Sun Fung Timber acquired a workshop in an industrial building in Tsuen Wan in December 1997, which has since been rented out.  This would now seem to be Sun Fung Timber’s only business; another firm with a very similar name (unrelated to Lee) has been set up in March 2017 under the name of Tsang’s wife.

8.  According to the audited reports of Sun Fung Timber, its annual business turnover before April 2017 was no more than $5.7 million (2011) and no less than $4.3 million (2015).  Further, Sun Fung Timber’s “cash and bank balances” over the years was less than $12,000.

9.  Against the above business background, the banking facilities of Sun Fung Timber were comprised of “overdraft facility” of $10 million and “revolving term loan” of $6 million.

The petitioner’s debt

10.  According to the petitioner, the transaction leading to the debt on which this petition is based was as follows.

11.  The petitioner was set up in October 2016 as a Mainland wholly-owned foreign enterprise (it seems to be the petitioner’s case it is managed by Mr Wu (“Wu”)).  It was set up in connection a marble stone trading transaction, the details of which are set out in para 15 to 17 below.

12.  For convenience, in view of para 11 above and 16 below (and where it is appropriate to do so), Wu and the petitioner may be referred to below interchangeably.

13.  Wu has been in the construction materials trade in the Mainland since 2006.  He has been carrying on that business through a Mainland sole proprietorship.  The Mainland business does not have a permit for carrying on import/export trade.

14.  Wu began to have business dealings with Sun Fung Timber since about mid-1990s, during which Sun Fung Timber supplied Wu various construction materials including marble stones.  Tsang (not Lee) has always been Wu’s business contact.

15.  Wu was approached by a customer in September 2016 for an order to supply a large quantity of marble stone.  The marble stone was to be delivered from the Mainland to Macau for use there.  Wu approached Tsang for samples, which Wu later showed to his customer.  The customer was satisfied with the samples and wanted to place his order with Wu.

16.  Because Wu’s Mainland company could not carry on export trade, he set up the petitioner to implement the deal (para 11 above) (set up work was completed in January 2017).

17.  The transaction between Wu and his customer was in fact concluded in September 2016, although the contract document was signed on 14 April 2017 (delivery was to be effected on 20 April 2017).  Payment to Sun Fung Timber (RMB220 million, and delivery costs of $338,015) was effected on 14 April 2017 (“the subject agreement”).

18.  Inspection of the goods by Wu and his customer disclosed cracks in the goods; the customer rejected them.

19.  Despite repeated demands, Sun Fung Timber failed to deliver the goods.  The petitioner commenced Mainland arbitration proceedings on 15 May 2017.

20.  At the arbitration hearing (17 May 2017) (summary arbitration procedure), Tsang acted for Sun Fung Timber and admitted liability but contested the quantum of loss.  In an award delivered on 19 May 2017, the Mainland arbitration body required Sun Fung Timber (among other things) to pay the petitioner RMB59 million.

21.  In partial payment of the said award, and to seek time indulgence from Wu, Tsang assigned to the petitioner a contract which effectively was valued at $7.5 million (“the assigned contract”).

Is the dispute bona fide?

22.  It is trite law (and this is undisputed) a winding up order ought not be made where there is a bona fide dispute of the debt on which the winding up petition is based.

23.  Because Tsang has not taken part in this petition, and the petitioner is not in a position to challenge Lee’s various allegations against Tsang for his wrongdoings in managing Sun Fung Timber, those allegations (not being inherently implausible, or inconsistent with documentary evidence before the court) cannot be rejected as unbelievable, or be given little or no weight.

24.  However, in order to raise a bona fide dispute in this petition, the above is not enough.  What Lee has to show is a bona fide case that the petitioner (or Wu, who seems to be the person managing it) has entered into a sham transaction with Tsang to harm Sun Fung Timber (or has taken part in a conspiracy to such effect, or has at least knowingly assisted Tsang to harm Sun Fung Timber), for example, to deprive Sun Fung Timber of valuable assets (such as the sale proceeds of the shop property, and/or the value of the assigned contract).

25.  In short, this is a case where the documents presented to support this petition appear to be in good order at first glance, but display some rather unusual (perhaps even disturbing) features when they are looked at closer (and/or when they are looked at in the surrounding circumstances).

26.  First, the subject agreement has dubious features. It is unusual for Wu, who claims to have about 20 years’ business dealings with Sun Fung Timber, to place an order for marble stones which:

(a)   was very large in quantity (a total of 13,750 slabs (measuring 2.2M x 2.8M each)), relative to the size of Sun Fung Timber (para 8 and 9 above) and the frequency and size of their earlier marble stone transactions (para 27 below);

(b)   (related to sub-para (a) above) has a very large contract sum (of RMB220 million);

(c)   required delivery within a very short period (of several days).  It is also noted that Sun Fung Timber was only paid several days before delivery.  Judging from its size, it is unlikely Sun Fung Timber would have the financial resources to confirm a corresponding order (or orders) from its supplier(s) before it was paid by Wu;

(d)   the subject agreement stipulated a delay penalty of 1% per day (and a maximum delay penalty of 50% of the contract sum).

27.  Documents relied on by the petitioner to evidence earlier marble stone transactions with Sun Fung Timber show:

(1)   a contract in November 2010 for (among other goods) 83 slabs of marble stone (of a value of RMB626,700);

(2)   a contract in July 2013 for (among other things) 125 slabs of marble stone (of a value of RMB909,400).

Both contracts specified the place (but not the date) of delivery; the lack of any specified date of delivery may mean these were contracts for the supply of stock-in-trade (there was no delay penalty provision either).

28.  Unless Wu has for some unknown reason withheld other marble stone transactions with Sun Fung Timber from the evidence, these were the only two marble stone transactions during his 20-year or so business dealings with Sun Fung Timber. The size and mode of sale of the two earlier transactions (smaller and possible stock-in-trade) would seem to be quite different from the subject agreement (much larger and future delivery).

29.  There is also another feature which makes one hesitate to unreservedly accept the subject agreement:

(a)   the subject agreement was signed “before a PRC lawyer” allegedly because of “the substantial value of the contract and such large sums of monies changing hands” (Wu’s 6^th affirmation, para 25).  This gives an impression that (i) it was expected the subject agreement may in future be challenged in some way, and/or (ii) Wu was not confident Sun Fung Timber would be able to perform the subject agreement;

(b)   despite Wu’s “prudence”, the subject agreement contained a rather shocking mistake in the marble stone’s measurement (centimeters instead of meters).  This necessitated the signing of an “addendum” (Wu’s 6^th affirmation, para 25 and 28).

30.  Lee also criticizes the petitioner for failing to provide information such as:

(1)   the identity of the (Macau) purchaser (albeit there was a letter dated 28 April 2017 to rescind the sale contract from a Mainland lawyer acting for a client whose name has been redacted);

(2)   the particulars of (what may be a sizeable) construction project in Macau;

(3)   the supporting documents about the (Macau) transaction;

(4)   the complete lack of information of whether (and if so, how) the alleged breach of the subject agreement was remedied by Wu;

(5)   what made Wu so confident that Sun Fung Timber would be able to perform a supply agreement of such size, and within such time frame.

When considered together with the matters set out in para 26 to 29 above, these are also matters which raise questions about the subject agreement.

31.  The petitioner’s case regarding the arbitration award is similarly not as straight-forward as it may look like initially.

32.  In the petitioner’s application for arbitration (dated 15 May 2017), the complaint put forth was “… 時至今日 [Sun Fung Timber] 仍然未將貨物交付 [the petitioner] … [Sun Fung Timber] 每次均以多種理由拖延 … [Sun Fung Timber] 的行為已屬明顯違約,並已導致 [the petitioner] 産生了巨大的經濟損失 …”.

33.  In the arbitration award (dated 19 May 2017), effectively the same complaint was repeated (under the parts respectively described as “案情” and “查明事實”).  Further, according to the arbitration body’s “findings of fact”, the delay ran up to the date of the award.

34.  Thus, it is clear that the petitioner’s only complaint in the arbitration proceedings was non-delivery.  It would also appear that the petitioner has decided not to rescind the subject agreement until (or at least up to) the date of the arbitration award.

35.  Rather inexplicably, Wu still went to inspect the marble stones with his customer on 19 May 2017 (Wu corrected the date to “19 April 2017” after the date inconsistency has been pointed out by Lee (Wu’s 7^th affirmation, para 18)).  In this connection, as has been stated in para 30(1) above, Wu’s customer has already given a notice to rescind the (Macau) contract as early as 28 April 2017 (also based on non-delivery only).

36.  If, as has been put forth in Wu’s latest version, the inspection by Wu and his customer had been in mid-April 2017 (in fact, one day before the contractual delivery date), it would be, to put it mildly, very unusual, for both Wu and his customer not to have mentioned the defect found on the inspection (cracked marble stones) and to have only mentioned non-delivery.

37.  The stipulated date of delivery was 20 April 2017 (para 17 above).  By 19 May 2017, the delay in delivery would therefore be 29 days.  A 1% per day penalty for such a period of delay would amount to RMB63.8 million (RMB2.2 million x 29) (which is equal to 29% of the RMB220 million price).  On the other hand, the amount of the arbitration award (RMB59 million) would equal to about 26.8 days’ delay (or 26.8% of the contract price).

38.  The arbitration award recorded RMB59 million as (part of) the settlement agreement reached between the parties.  As a matter of mathematics, RMB59 million would be about 92.4% of RMB63.8 million.  There is no explanation as to why the petitioner was willing to accept a lesser sum (the petitioner appears to be contending herein it has an overwhelming case against Sun Fung Timber; hence the specific reference to Tsang not contesting liability before the arbitration body).

Conclusion

39.  By virtue of the matters set out above, I conclude that Lee has succeeded in showing a bona fide dispute regarding the debt on which this petition is based.

40.  At the end of the hearing on 27 November 2018, the parties were directed to lodge written submissions regarding the disposal of this petition, should the court conclude that there is a dispute on the debt on substantial grounds (as has been done in para 39 above).  Those submissions were lodged on 4 December 2018.

41.  The petitioner seeks to have this petition stood over until Lee has successfully established his claim (para 24 above) (s 180, Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)).

42.  On the other hand, Lee submits that this petition should be dismissed.

43.  Each of the options will have its own advantages and disadvantages.  At the end, I conclude the appropriate course is to dismiss this petition, having taken into account the unusual features of the subject agreement and the arbitration award discussed above.

Other matters

44.  The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the judgment and its easier comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order

45.  There is no apparent reason to depart from the usual rule that costs should follow the event.  There will accordingly be a costs order that the costs of this petition (including any reserved costs) be paid by the petitioner to Lee to be taxed if not agreed.  However, contrary to Lee’s submissions, I do not consider this petition to justify the court attendance of more than one counsel.