RE THREE STARS KNITTING FACTORY LTD

HCCW 234/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 234 OF 2009

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D E C I S I O N

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1.  There are two summonses issued by Three Stars Knitting Factory Limited (“the Company”) on 25 May 2009 and 12 June 2009 for validation orders under section 182 of the Companies Ordinance, Cap. 32 in respect of the sale of a total of twelve landed properties.  With the exception of one property, which is a car-parking space, all other properties are mortgaged to four banks, one being the petitioning creditor.

2.  The petitioning creditor has no objection to the 1^st summons and takes a neutral stance to the 2^nd summons.  It has not attended the hearing today.

3.  The Official Receiver has written two letters to the court on 12 and 16 June stating that he is “sceptical towards the application but would leave it to the Company to make out its case” and mentioning a number of matters which “arouse [his] concern as to whether the transactions are of benefit to the Company and its creditors”.

4.  The sale and purchase agreement of the property in the 1^st summons was entered into before the winding-up petition was presented on 24 April 2009, completion of the sale and purchase was to take place after the presentation of the petition.  For the eleven properties in the 2^nd summons, the sale and purchase agreements were all made after the presentation of the petition.

5.  Leaving aside the property that is not under mortgage, the sale of all these properties was made with the consent of the mortgagee banks.  Valuation reports have been obtained by the banks, and all were satisfied the prices at which the properties were to be sold were sufficiently close to the market value, certainly much higher than the forced sale value.  In all these instances, the whole of the proceeds of the properties under mortgage would be used to pay off the secured creditors.

6.  For the property not under mortgage, being a car-parking space, it was proposed by the Company that an amount representing the market value of this property would be stakeheld by an independent person pending the outcome of the petition.

7.  It was submitted by Mr Cheung on behalf of the Company that the disposals of the twelve properties are advantageous to the Company in that there would be savings in interest accrued to the respective mortgagee banks, after paying the proceeds of sale to discharge the mortgages, and the liabilities of the Company would be reduced.  Besides, the Company and the mortgagee banks would lose out if the properties were to be sold under repossession, as there are significant differences between the market value and the forced sale value.

8.  Furthermore, as the proceeds of sale of the mortgaged properties would all be used to pay off the secured creditors and there is a proposal for the proceeds of the only property not under mortgage to be stakeheld, it was contended on behalf of the Company that the disposal of the properties would not affect the pari passu distribution of assets to unsecured creditors in the event of liquidation.

9.  The above matters seem to me to be valid points that would justify a validation order.  What then are the Official Receiver’s grounds for concern that the transactions might not be of benefit to the Company and its creditors?

10.  The Official Receiver pointed to the fact that the provisional agreements for sale and purchase of the eleven properties in the 2^nd summons were all made after the petition had been presented and all the conveyancing transactions would have been completed before the hearing of the petition scheduled for 8 July 2009.  It was pointed out that for three of the properties, only a provisional sale and purchase agreement was made.  It was queried why the Company did not seek a validation order before entering into the provisional agreements and it was submitted there is no need for the properties to be sold in a rush.  The Official Receiver expressed doubt if the transactions were on arm’s length basis.

11.  The fact that the agreements were entered into before the application was made is not a factor in favour of the exercise of the discretion whether to grant a validation order.  The court looks at the substance and merits of the transactions.  If a company chooses to enter into a binding agreement without a provision to protect its position should a validation order be refused, it bears the consequence of being rendered liable to the other contracting party.

12.  The Company has adduced evidence it had taken steps to put the subject properties on the market for some time.  In respect of the eleven properties in the 2^nd summons, the 1^st to 3^rd properties were put on the market since August last year, likewise the 4^th to 8^th properties.  The 9^th to 11^th properties were put on the market for sale since December 2008.  The fact that the agreements were all made after the petition was presented is not a cause for concern, provided that the properties were sold at market value.  Nor was the fact that only a provisional sale and purchase agreement, and no formal sale and purchase agreement, was made in respect of three of the properties.  The fact that the petition was presented might well give an impetus to the Company to make greater efforts to dispose of its mortgaged properties at the best prices it could obtain, to reduce its liabilities to the secured creditors.  Whether the provisional liquidator or liquidator might be able to realise the properties at higher prices is neither here nor there, as this is very much a matter of speculation in the present state of the property market in Hong Kong.  On the available evidence, I am satisfied in all these instances that the prices at which the properties were sold were close to the market value on the valuation obtained by the various mortgagee banks.  I see no sufficient basis for thinking that the transactions might not be at arm’s length.

13.  The Official Receiver also made the point that the purchase prices of some of the properties are just fit to cover the amounts of the outstandingmortgage loans.  Further, in the case of the property in the 1^st summons, the purchase price shown in the provisional agreement had been changed from $14 million to $14.18 million, which is sufficient for repayment of the mortgage loan.  It was submitted these matters should give rise to suspicion that not everything may be above board.

14.  The Company’s solicitors and the mortgagee bank of the property in the 1^st summons have given explanation in their letters both dated 15 June 2009 regarding the purchase price of $14.18 million.  The purchase price of $14.18 million was the open market value in the valuation obtained by the mortgagee bank.  Based on the valuation, the bank agreed to release the property to the Company against its receipt of the redemption money of $14.18 million, being the whole proceeds of sale, for partial settlement of the outstandingindebtedness due to it by the Company.

15.  It does not seem to me there are solid grounds for thinking that the transactions to dispose of the twelve properties involving four different mortgagee banks should give rise to suspicion.

16.  I am inclined to think that the transactions are for the benefit of the Company and its creditors.  It would be appropriate in the circumstances to make a validation order.

17.  I make an order in terms of paragraph 1 of the summons issued on 25 May 2009.  In respect of the 2^nd summons issued on 12 June 2009, upon the undertaking of the Company’s solicitors to pay into court within three days of the completion of the sale and purchase $350,000 being the attributed market value of the car-parking space that is not under mortgage to abide by the outcome of the winding-up petition, that will be an order in terms of paragraph 1 of the amended summons.

18.  In respect of the costs of both summonses, save that the Official Receiver’s costs in the amount assessed at $4,000 are to be costs in the cause of the petition, I make no order as to the costs of the applications.