KWONG FAT MOON EDKO v. THE OFFICIAL RECEIVER

1995, No. CWU 627

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H E A D N O T E

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Application for stay of winding-up order - assent of creditors not conclusive - opposition by Official Receiver

Proposed sale by Official Receiver at a value which would leave little for creditors - limited stay granted to enable creditors to apply to set aside Master's order that company be wound up in a summary manner

1995, NO. CWU 627

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP)

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J U D G M E N T

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1. This is an application to stay the Winding Up Order made by Rogers J. on 5 February 1996. The application for a stay was made on 14 February 1996. On 10 July 1996 Master Woolley made an Order that the Company be wound up in a summary manner. As a result there has been no creditors' meeting and no committee of inspection has been appointed.

2. After various adjournments the application came before me on 20 March 1997. The hearing had to be adjourned twice to 26 March and today to enable the parties, particularly the Applicant, to file further evidence to deal with outstanding issues and to make further submissions.

3. The application is not opposed by any of the creditors. The Official Receiver opposes the application.

4. The grounds of objection can be summarised as follows : First, there has been non-disclosure by the Applicant of various matters, such as (1) the arbitration proceedings taken by the Chinese party in Beijing before CIETEC; (2) the claim by Shenzhen Baodelichang Transportation Co. Ltd. for RMB 4 million ("the Shenzhen claim"), and, (3) various assignments of the Company's shareholding in the joint venture company that had been made by the Applicant on behalf of the Company in 1994 and 1996. The Applicant has put in evidence to deal with these three matters.

5. So far as the arbitration proceedings are concerned although there was no wilful concealment, as such, of the existence of these proceedings, what troubles the court is that a representation has been made in the affirmations of the Applicant and Mr Oswald Wong that once the winding-up proceedings are stayed, the arbitration will go away. This is far from the case as appears from a recent letter received by the Official Receiver on 1 April 1997 written on the notepaper of the joint venture company, viz. Beijing Kennington Tyres Company Limited ("BKT") which can be construed as stating the position of the Chinese party.

6. So far as the Shenzhen claim is concerned, the Applicant's evidence that this debt has been taken over by him personally and settled does not appear to be borne out by orders made by a PRC court ("PRC court orders"). Again, this only came to light at the end of last week. A "judgment" was rendered in a civil suit in the Guangdong Shenzhen Fujian Qu People's Court in favour of the Plaintiff in the Shenzhen claim, freezing properties owned by the Company to the value of RMB 2 million. The date is not legible from the photocopy before the court, except that it was made in 1997. The judgment was effective immediately although it was open to the Company to apply for a review. (This part of the judgment does not appear in the uncertified translation provided.) In addition to the judgment there is a "Notice Requiring Assistance for Execution" rendered by the same tribunal and addressed to BKT which recited that no application for review of the order was made by the Company and that the Company had an interest in BKT. BKT was notified that the Company's interest and profits therein up to a value of RMB 2 million were frozen and no transfer, charge or gift could be made whilst that order was in effect. Notwithstanding the recital (which must prima facie imply notice of the judgment on the part of the Company), the court was informed by the Applicant's counsel, on instructions, that neither the Applicant nor the Company knew anything about any of the PRC court orders.

7. What I find equally, if not more, troubling is the failure on the part of the Applicant to disclose a Contract between the Company and the Shenzhen company charging the Company's shareholding in BKT to the value of US$3 million. This forms part of the annexures to the letter BKT sent to the Official Receiver.

8. I now turn to the transactions between the Applicant on behalf of the Company with companies owned or controlled by a Mr Keung Wah.

9. In 1994 the Company entered into an agreement with Kennington International Consultants Limited ("KIC"), agreeing to assign its right and interest in BKT to a new company and allot 25% of the shareholding in the new company to KIC in consideration of HK$3 million. The company and KIC subsequently acquired 75% and 25% respectively of a thousand issued shares in Luck Express Limited. By an assignment dated 6 October 1994 which would appear to be a typographical error for 6 December 1994, the Company assigned all its interest in BKT to Luck Express Limited. Then on 31 January 1996 the Company entered into an agreement in Chinese with Kenworth Holdings Limited whereby the Company agreed to assign 25% of its shareholding in BKT to Kenworth.

10. The Applicant filed evidence to explain these transactions, and I have to say that I find the explanations somewhat incomprehensible and bewildering. The status or effect of these agreements are wholly at large, and not surprisingly Mr Keung Wah has sought to capitalise on this state of affairs by making an offer for the Company to which I will refer below.

11. The second concern of the Official Receiver relates to the capital contribution made by the Company to the joint venture. Under the Joint Venture Agreement, the Company was obligated to put up capital of US$4.8 million within 6 months of the joint venture being granted a business registration. The Capital Contribution Report (2nd Capital Contribution Certificate Report) which was dated 7 March 1996, admittedly an interim rather than a final report, shows the Company having only put up capital of US$2.152 million. The shortfall is in the region of US$2.67 million. This is the subject matter of the arbitration proceedings initiated by the Chinese party and which is still ongoing.

12. The Applicant's explanation that the interim report or certificate was obtained for the limited purpose of obtaining the renewal of the business licence and should not be viewed as definitive of the party's actual contribution requires some believing. It would appear that the Report was prepared by auditors from a professional Beijing accountancy firm. It made no such qualification as to the purpose of providing the Report.

13. Even if the Report was prepared for the limited purpose alleged (which is unlikely), the explanation given that the certificate omitted various items and that certain payments have been made since the date of the certificate gives rise to difficulties.

14. The explanation appears at paragraph 4 of the 5th affirmation of Mr Kwong. There he refers to various tools, etc., that had been provided with the Company's money to a value of approximately US$1 million; that a deposit of approximately US$0.4 million was paid by the Company to the Italian supplier in February of 1994; that various cash payments had been made by the Applicant or on his behalf since the date of the contribution certificate totalling US$200,000 and various travelling and entertainment expenses of approximately US$0.5 million. The problem is that these omitted and/or additional items which would increase the Company's capital contribution to about US$4.2 million are not reflected in the Defence filed in the arbitration proceedings. If it was indeed the case that they properly form and should be treated as part of the Company's capital contribution, the least one would expect is to find these matters reflected in the Defence. They are not.

15. Finally, the third general ground of opposition is that Mr Kwong has not been co-operating with or rendering assistance to the Official Receiver in this liquidation, in particular, by not providing relevant information.

16. In an application of this kind the burden is on the Applicant to satisfy the court that it is right to stay the winding-up proceedings. The test is that set out in Re Telescriptor Syndicate Limited [1903] 2 Ch 74 at 180. There Buckley J. said :

"The court does not act upon the mere assent of the creditors in the matter. It has to consider whether it is conducive or detrimental to commercial morality and to the interests of the public at large. The court has a duty with regard to the commercial morality of a country."

17. This view has recently been adopted by Harman J. in Re Lowston Ltd. [1991] BCLC 570. There the learned judge said that in an application of this nature he has to be satisfied that it is proper to allow a company with this history to re-emerge back as an unencumbered company able to trade and carry on business.

18. On the evidence before me, I have considerable reservations about staying the winding-up proceedings arising from the transactions entered into by Mr Kwong (which really cannot be very satisfactorily explained) and the other matters referred to above which have a bearing on whether it would be proper to allow the Company to resume business with the Applicant at its helm. Against this I now have to consider the proposed sale by the Official Receiver. There is an offer from a company owned by Keung Wah to buy the Company's interest in BKT for HK$2,060,000. It has been suggested that this is a gross undervalue of that asset.

19. There was apparently an offer from Lucky Man made on 8 March 1996 that, subject to contract, it was willing to pay HK$40 million for 30.6% in the joint venture, or 51% of the Company's interest in the joint venture. This "interest" of Lucky Man was recently confirmed in their letter dated 12 March 1997. I have to stress that this so-called offer is merely subject to contract. Yet, when solicited by the Official Receiver as to whether it was prepared to make any offer for the Company's interest in the joint venture, Lucky Man gave no response whatsoever.

20. The only offer that has been received by the Official Receiver is that from a company owned by Mr Keung Wah. I have already referred to the transactions that he as entered into with Mr Kwong. He has apparently had many dealings previously with Mr Kwong, and I have to say that those transactions are somewhat troubling to the court.

21. The factory is on the verge of being able to go into production; everything is ready, the machinery is there, and apparently it has been suggested that, subject to four weeks' training of certain technicians in Italy, production could start. It has also been suggested that production could go forward even without this training.

22. Now on any view the Company has injected over US$2 million into this joint venture. On another view it has injected US$4.2 million. One of the major creditors of the Company, Kincheng Banking Corporation has written to the Official Receiver suggesting that the proposed sale to Target World Development Ltd., the company owned by Mr Keung Wah would be at an undervalue and would grossly prejudice the interest of the creditors. I have to say that if the proposed sale were to go forward the creditors are likely to end up with very little indeed.

23. In these circumstances, and taking into account the fact that there has been no creditors' meeting and no committee of inspection appointed, I will grant a limited stay for a period of six weeks to enable the creditors, if they so desire, to take such steps as they deem appropriate to either set aside the Order of Master Woolley, or to make an application under s.209(1) of the Companies' Ordinance.

[The parties addressed the Court as to the
conditions to be attached to the limited stay]

24. There is to be an undertaking by the Applicant not to dispose of the Company's interest in BKT. The summons is adjourned for further hearing on 19 May 1997.

25. Costs are to be dealt with at the adjourned hearing.