Re Golden Dragon Land Development Ltd.

HCCW236/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.236 OF 1999

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R E A S O N S

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1. At the hearing of the creditors' petition to wind-up Golden Dragon Land Development Limited (formerly known as Soundwill Investments Limited) ("the Company"), I made an order winding-up the Company pursuant to the Companies Ordinance, Cap.32. The reasons appear below.

2. The petition which was presented on 19 March 1999 is based on unpaid judgment debts totalling approximately $9.7 million. The Company obtained a stay of execution pending appeal on 14 April 1999. The stay extended to the petition. The appeal was dismissed on 24 June 1999, the Company having failed to comply with an order for the payment of the sum of $400,000 as security for costs on or before 22 June 1999. It is common ground that the Company is not in a position to discharge its debts.

Grounds of opposition

Service of the statutory demand

4. Mr Tony Tan Chip Sum, a director of the Company was present in court. He was allowed to make representations on behalf of the Company. He submitted that the statutory demand was not properly served on the Company and that the Company never received it.

5. As to the Company's assertion that it never received the statutory demand, the Petitioner has produced a copy of the statutory demand dated 28 January 1999 served on the Company at its then registered office which bears the Company's chop and the time it was received.

6. It would appear that at the end of December 1998, the Company resolved to change its registered office with effect from 31 December 1998. However, this notification was not lodged with the Companies Registry until 8 February 1999. The statutory demand was served on the Company on 28 January 1999 at its registered office as it appeared in the Companies Registry. In other words, it was served at the "old" address but which, according to the records at the Companies Registry as at that date was the Company's registered office.

7. As a matter of law, having regard to the decision of Hoffmann J (as he then was) in Re Garton (Western) Ltd. [1989] BCLC 304, the Company's submission that service was defective is unsustainable at law. In that case, the statutory demand was served at the company's registered office as it then appeared in the Companies Registry. The notice of change of registered office was given to the Registrar of Companies on the day following service. It was held that the statutory demand was "duly served" and that although the actual change of office probably took effect on the passing of the resolution, Hoffmann J held (at 305g) that :

"... the outside world however is entitled to treat the register as conclusive evidence of the site of the registered office."

Both factually and as a matter of law, the objection based on service is misconceived.

Proposed restructuring

9. The Company and Soundwill Finance Limited ("SFL"), the opposing creditor opposed the making of a winding-up order and, instead, sought an adjournment. SFL, a registered money lender, is the Company's largest unsecured creditor but it is itself a company within the group. Both the Company and SFL are owned beneficially by Soundwill (BVI) Limited which, in turn, is wholly owned by Soundwill Holdings Limited ("Holdings"), a Hong Kong listed company. The Company's business consisted of trading in real properties and development of land, financed by SFL to whom approximately $48 million is due. The loan is wholly unsecured.

10. The properties owned by the Company have all been charged to its various bank creditors to whom, as at 10 March 1999, $155 million was owing. When SFL's unsecured debt is added to that, the amount owing to financial institutions exceeds $200 million. This figure does not include other debts such as that owed to the Petitioner.

11. The burden of the evidence filed in opposition is that :

(1) the Petitioner has nothing to gain by a winding-up order since it is an unsecured creditor : the Company has no assets other than the properties which have all been charged and are insufficient to discharge the Company's indebtedness to its bank creditors;

(2) negotiations are currently taking place between the Company and Holdings to redevelop a property owned by the Company together with an adjacent site held by another of Holdings' subsidiaries;

(3) if the Company is wound up, it will be forced to sell all its properties at a hugely discounted price and lose the development potential of the merged site referred to in (2);

(4) Holdings is undergoing extensive negotiations for the financial restructuring of the Group which includes the Company and the winding-up of the Company will have a huge negative impact and adverse effect towards the restructuring scheme proposed by Holdings to its bank creditors which include the bank creditors of the Company;

(5) a standstill agreement proposed between Holdings and its bankers have a support of 70% (in terms of debt value) of the banks provided that Holdings satisfies various conditions.

12. What is clear from that affirmation is that the restructuring negotiations are being conducted by Holdings and not the Company. Yet, Holdings, which must have known of the hearing of the petition, has not appeared. Further, the evidence suggests that Holdings has given up on the Company. As explained in the Court of Appeal's judgment dated 24 June 1999 dismissing the Company's appeal against the judgment obtained by the Petitioner, it was not even prepared to advance $400,000 to the Company to enable it to comply with the order of Rogers JA dated 8 June 1999 for security for costs to be given by 22 June for the appeal to proceed. This is against the background of the Group having net assets of $2.35 billion. According to the evidence before the Court of Appeal, the Company considered that the only avenue for funds was assistance from its PRC shareholders.

13. The Company did not exhibit a balance sheet. It simply asserted that its assets have an estimated realizable value of $51.6 million. Accepting that figure for present purposes, given that the amount due to its creditors is currently approximately $213 million, a shortfall in excess of $160 million arises. In the circumstances, it stretches one's credulity to think that the Company would be in any position to finance a re-development : it could not even find $400,000 for security for costs.

14. As to the alleged proposed restructuring, as noted above, it is at the level of the holding company. In October 1998, some eight months ago, Holdings issued an announcement about the need for a debt restructuring proposal and KPMG were retained to review the financial position of the Group and to issue a report. Yet, neither the terms of any restructuring proposal nor the report is in evidence. No particulars have been given of the scheme, its current status or the "various conditions" that Holdings will have to satisfy in order to gain the support of its bank creditors. In short, there is no evidence, inter alia, that there is a proposed scheme and that the continued survival of the Company is an indispensable part of it.

15. It is also significant that none of the bank creditors of the Company (which may also be bank creditors of Holdings through guarantees required) has seen fit to appear. As leading counsel for the Petitioner pointed out, there have been three hearings before the Master, i.e. on 5 May, 30 June and 7 July. Yet no notice of intention to appear has been filed by any of the bank creditors and/or Holdings. I agree that in these circumstances the only proper inference is that they are indifferent to the outcome of the petition. Further, as the properties said to have development potential have been mortgaged and on the evidence the relevant secured bank creditor(s) hold considerable negative equity, it makes no commercial sense to suggest that such secured creditors would want to give up their security to benefit unsecured creditors.

16. There is one further matter that gives rise to some concern. The Company made an annual return as at 15 December 1998 to the effect that the total amount outstanding at that date on all mortgages and charges which should be registered with the Registrar of Companies was $45 million. As noted above, that amount now stands at $155 million. No explanation has been given as to how the indebtedness could have increased so significantly in the space of several months. That is prima facie a matter that calls for further investigation by the liquidators.

17. Companies that cannot discharge their debts cannot legitimately hope to buy time simply by asserting that there is a restructuring proposal. In terms of value, SFL's debt greatly exceeds that of the Petitioner. However, counsel for SFL accepted that whilst the court is to have regard to the wishes of the majority of creditors, their wishes do not necessarily prevail. In that connection, it has to be borne in mind that the position of an intra-group creditor may be markedly different from that of an ordinary creditor. Moreover, its reasons for seeking an adjournment must be bona fide reasons. See Re P & J Macrae Ltd [1961] 1WLR 229 at 235 recently considered in In re UDL Holdings Limited, HCCW 756 of 1998, unreported, 10 May 1999.

18. Before the court would accede to any adjournment, even a short one, there has to be good reason for doing so, for example there are the makings of a viable scheme with evidence of adequate support (both in number and value) from the creditors. The present case is just not such a case. In my judgment, nothing is to be achieved by granting an adjournment of a week or two which is sought by the opposing creditor.

Order

19. Accordingly, no valid reason for an adjournment has been made out and the application is refused. The Petitioner is entitled to have the Company wound up.

20. So far as costs are concerned, I will reserve that question for further argument and the matter should be restored in due course for that purpose.