RUDY SETIAWAN v. TRIUMPH SKY TRADING LTD

HCCW 265/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 265 OF 2013

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J U D G M E N T

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Background

1. This is a petition to wind up the Company, Triumph Sky Trading Limited, on the ground that the Company is insolvent and unable to pay its debts.

2. Triumph Sky was incorporated in January 2003.  It carried on business as an importer of rice and food stuff from the Mainland and other Southeast Asian countries to be supplied to restaurants in Hong Kong. 

3. Mr Chan Chak Fai (now deceased) was the majority shareholder of the Company.  At the time of its incorporation there were three directors, namely, the said Mr Chan, Mr Chui Kai Ming and Mr Chan Yung.  As will be discussed later, sometime in 2005, Mr Chan Yung ceased to be a director and relinquished his shares in the Company.  Since then, the late Mr Chan had been responsible for the business development and all major decisions for the Company and Mr Chui was responsible for the sales and accounting matters. 

4. Mr Chan Chak Fai died in February 2012 in Mozambique whilst travelling on Company’s business.  Mr Chan’s widow, Madam Wong, became the administratrix of his estate.  Madam Wong presently holds about 45.8% of the Company’s issued shares.

5. The petitioner is an Indonesian resident.  He and the late Mr Chan were cousins.  According to the record, the petitioner has been the holder of 300,000 shares since July 2005, amounting to 25% of the Company’s issued share capital. 

6. The petitioner served a statutory demand on the Company on 25 July 2013, claiming that the Company was indebted to him for a sum of $5,970,089.92. Having received no response to the statutory demand, he issued the present petition on 23 September 2013 to wind up the Company.

7. The petition is not opposed by the Company.  It is Madam Wong who defends the petition as an opposing contributory on the basis that the alleged petitioning debt is bona fide disputed on substantial grounds.

The petitioning debt

8. The petitioner’s case is that between May 2003 and June 2004, he has advanced various sums totalling $1,408,610 to the Company.  Of these sums, $300,000 was attributable to his subscription of the 300,000 shares while the balance of $1,108,610 were loans booked into his long‑term current account.  In addition, between July 2005 and December 2011, he has made further advancements totalling $10,994,892.70, and such sums had been booked into his short‑term current account. 

9. The Company was managed in a rather informal manner.  It appears that the accounts of the Company have remained unaudited since 2009.  As the petitioner was mainly residing in Indonesia, he has left the management largely to the late Mr Chan, and before 2012 the petitioner has paid little attention to the running of the Company.  It was not until the death of Mr Chan that the petitioner decided to look more closely into the Company’s financial records and has as a result discovered a number of wrong debit entries in the accounts under his name. 

10. According to the petitioner, there were 33 wrong entries plus other unidentified debit entries in his short‑term account, totalling $5,228,896.20.  He says that he has neither given instructions nor consented to these debit entries. According to him, even though the short‑term account shows a debit balance of $297,316.28 due from him as at 19 June 2012, the true state of account ought to be that a sum of $4,931,579.92 [1] was owing by the Company to him under his short‑term account. 

11. As for the long‑term account, according to the petitioner there were 39 wrong debit entries, totalling $793,150.  Therefore, instead of showing only $245,360 as being due to him as at 29 February 2012, the true state of the account ought to be that a total of $1,038,510 was owing by the Company to him under his long‑term account. 

12. On the petitioner’s reckoning, he should be an overall creditor of the Company in the total sum of $5,970,089.92, being the subject of the statutory demand and the petitioning debt. 

13. It may be convenient to note at this stage that Madam Wong does not take issue with the fact that the petitioner has advanced various sums to the Company throughout the years.  It is not disputed that such sums totalled $1,408,610 and $10,994,892.70.  Madam Wong, however, joins issue with petitioner that the impugned entries were wrongly debited in the petitioner’s accounts.  Her specific contentions will be dealt with in more detail when I discuss the evidence.

14. Madam Wong also draws attention to the fact that this winding‑up is part of a larger dispute she has with the petitioner and invites the court to take note of the broader context of their dispute in considering the allegations in this petition. 

The approach

15. The approach in dealing with a winding‑up on the ground of insolvency is not seriously disputed.  I do not think it is necessary to set out the principles here and it suffices to say that I will follow the approach discussed in the following authorities: Re Hong Kong Construction (Works) Ltd, HCCW 670 of 2002, at para 6; Re NTG Limited, HCCW 86 of 2011, paras 27 to 30; Re Hong Kong Pak Tat Trading Company, HCCW 236 of 2011, at para 8. 

16. At the outset, it is worth bearing in mind that the petitioning debt is founded on the petitioner’s own reckoning of the state of account between himself and the Company.  The petition is built upon his challenge to a substantial number of entries in the Company accounts spanning a number of years.  However, it is not the petitioner’s case that the accounts were made up otherwise than in good faith.  In fact, neither the petitioner nor Madam Wong was involved in the day‑to‑day management of the Company during the time when the impugned items were incurred. 

17. It is important to appreciate that the task of the winding‑up court is only to decide whether a substantial dispute exists and not finally to determine whether the petitioning debt is payable: Re NTG Limited, supra, para 30. The latter question must be resolved through the normal process of an action. This reminder has particular significance in the present case when the petitioner is disputing the Company accounts (with the exception of the subscription issue) but the court is not presented with full information and details regarding the underlying transactions. 

18. With those observations in mind, I will now deal with the disputed matters in turn.

Subscription for 300,000 shares

19. The first issue relates to the amount to be deducted for the petitioner’s 300,000 shares. It is the petitioner’s case that he subscribed for the shares at the invitation of the late Mr Chan in July 2003.  He made payment to the Company soon after the invitation and his shares were therefore subscribed at nominal value, and therefore $300,000 in total. 

20. Madam Wong contends, on the other hand, that the petitioner was not a subscriber of the Company shares, but he has in fact acquired the 300,000 shares in 2005.  Hence, out of his various payments to the Company between 2003 and 2004, rather than deducting only $300,000 as subscription, the sum of $1,410,000 should be deducted instead based on the acquisition price at $4.70 per share. The sum $1,410,000 should be treated as the petitioner’s capital injection into the Company. 

21. The petitioner refers to the Company ledgers, which show only $300,000 as the petitioner’s capital injection, with $1,108,610 treated as advancements in the long‑term account.

22. Madam Wong however refers to the annual returns of the Company as evidence of the fact that the petitioner’s shares were obtained through acquisition in 2005 rather than subscription in 2003.  According to the Company’s returns, the petitioner did not hold any shares before 2005.  It appears from the 2006 return that although 200,000 new shares were issued in the year between 2005 and 2006 (thus increasing the total number of issued shares to 1.2 million), the petitioner did not subscribe for the new shares.  It appears that the petitioner’s 300,000 shares were transferred to him from the late Mr Chan (for 100,000 shares) and from Mr Chan Yung (for 200,000 shares) on 13 July 2005. 

23. Madam Wong also refers to the board minutes of 26 April 2005.  According to the minutes, Chan Yung and another shareholder had “withdrawn” from the Company (退股) at the end of 2004 and there would be “new distribution” of shares among the shareholders.  The “capital payable” (應付股本) by each shareholder was specified in the minutes, calculated on the basis of a value of $4.70 per share.  There was also a note in the minutes as to whether the particular shareholder had paid up his contribution and the amount outstanding from him (as the case may be). 

24. It is material to note from the minutes that the newly‑distributed proportions (including the 200,000 newly issued shares) were to be adopted as the basis of distribution of dividend.  The individual shareholder’s entitlement to receive dividend was dependent on his having paid up his share of the capital.  Significantly, it was recorded that the amount payable by the petitioner, corresponding to his 300,000 shares, was $1,410,000 and that amount was already paid up. 

25. Madam Wong further produced a document entitled “memorandum of share transfer” (股份轉讓書) (“the Memorandum”).  The Memorandum records “a sale” by Chan Yung of his shares to the Company (or at least 150,000 of them) in December 2004 and it appears that the Company had paid $600,000 for the shares (and not simply at their nominal value). 

26. It is common ground that neither the petitioner nor Madam Wong was directly involved in the affairs of the Company at the time in 2005, and hence neither party was able to explain fully how the new distribution of shareholding was effected.  Miss Lau (representing the petitioner) submitted that the board minutes showed at most the market value of the shares and it was not expressly stated that the shares were transferred to the petitioner at that value.  Miss Lau also referred to the ledgers which showed only a sum of $300,000 as capital injection by the petitioner.

27. I readily accept that the information to be gathered from the documents do leave us with many questions regarding the way how Chan Yung’s shares were dealt with upon his “withdrawal”, as well as questions regarding the exact manner of the “new distribution” of shares and the manner of how the petitioner’s 300,000 shares came to be transferred to him.  Yet, when one has regard to the totality of the evidence, in particular the Memorandum, the board minutes and the annual returns, there is at least a plausible contention that the petitioner’s shares were acquired in 2005 pursuant to the “new distribution” rather than by way of subscription in 2003. 

28. Further, the Memorandum is material in that Chan Yung’s shares were apparently acquired by the Company at a premium rather than at their nominal value.  This is some support for the contention that whoever then acquired the shares in the “new distribution” would likely have to make his capital contribution based on the shares’ market value rather than nominal value.  This was indeed borne out by the board minutes under the column “capital payable”.  

29. I am not required, at this stage, to make specific findings on the issue as to the petitioner’s contribution to the capital.  On the evidence, it suffices for me to say that Madam Wong has at least set up a bona fide case that the amount deductible as the petitioner’s contribution to the capital of the Company should be $1,410,000, rather than $300,000.

Short-term account – items (15) to (33)

30. Among the 33 items of alleged wrong entries in the short‑term account, I propose to deal first with items (15) to (33).  They were all of $15,000 each and were incurred between September 2005 and March 2007.  They preceded items (1) to (14) in terms of time.

31. In response to the petitioner’s allegation that these sums were incurred without his knowledge or consent, Madam Wong explained that they were the petitioner’s contribution towards mortgage payments for the Company’s purchase of the property, namely, the Workshop Units on the 6^th floor and the roof of Wah Lee Industrial Building. 

32. The petitioner, however, denies that shareholders should ever be liable to contribute towards mortgage payments for the Company’s property.

33. From the documents produced in evidence, it is noted that the purchase price for the property, according to the assignment, was $2.8 million.  In the minutes of the board meeting (of the same date as the assignment, that is, 26 April 2005), it was recorded that the shareholders would have to make contributions totalling $1,760,000 towards the purchase price in proportion to their shareholdings.  For the petitioner, it was stated that his share of the contribution would be $480,000. 

34. When considering the evidence, I am conscious that the board minutes do not completely answer the question whether the petitioner was bound to make monthly contributions towards mortgage payments, nor do the minutes specify the monthly sums to be contributed. 

35. I am however mindful that the winding‑up court is not required to form a definite view on these issues.  The Company’s accounts have been audited at least until 2009, which would have covered this period relating to items (15) to (33). The evidence as a whole is not so clear as to enable me to find that such entries in the petitioner’s account were wrong in the first place.  In my view, insofar as the validity of the deductions is challenged, there must exist a bona fide dispute in respect of the same. 

Short-term account – items (1) to (14)

36. Turing then to items (1) to (14) in the short‑term account.  These impugned entries comprise payments of various sums to different individuals, with items (1) to (13) having been booked in the year 2011 and item (14) in April 2012. 

37. In response to the petitioner’s challenge to these entries, Madam Wong’s case is that the petitioner has his own business in the PRC and for that purpose needed capital to be transferred from Indonesia to the Mainland.  The various entries in the Company ledgers represent the drawings pursuant to instructions given by the petitioner to the late Mr Chan for transfer of funds.  In this connection, Madam Wong has produced the diary of the late Mr Chan containing records of the names of the individuals and the amount to be transferred on various occasions.  Those entries appear to relate to items (1), (4), (5), (6), and (9) of the challenged items. 

38. As for items (2) and (3), they relate to a transaction involving the Company’s purchase of several sets of generators from a Shenzhen supplier to be sub‑sold to the petitioner in the Mainland.  Madam Wong has produced the sub‑sale contract and the bank advice, which evidenced the remittance of the sum of RMB2 million (equivalent of HK$2,362,000) to the supplier in question.  There is also an entry in the diary of the late Mr Chan in relation to the transaction.

39. The petitioner does not deny the transaction but explains that he has initially advanced $2,325,000 to the Company for the purpose of paying the deposit. Eventually the sub‑sale was aborted but the Company has failed to repay him the $2,325,000.  However, there is no documentary evidence in support for the petitioner’s explanation. 

40. As for item (11), Madam Wong has produced a memorandum written by the petitioner giving instructions to the late Mr Chan to remit RMB to a certain bank account of an individual in the Mainland.  The petitioner’s explanation is that the remittance was for the purchase of spare parts but the individual has in fact delivered the goods to the Company rather than to him. 

41. The available evidence regarding the several items mentioned above is clearly inconclusive as to whether the impugned entries were rightly or wrongly made in the petitioner’s account.  However, it is clear that the Company did keep a running account between itself and the petitioner in relation to the drawings attributable to the petitioner’s own affairs and it cannot be said that such entries were made up completely without basis.  It is noteworthy that no allegation of bad faith was made against the late Mr Chan, Mr Chui or indeed any person in the keeping of the accounts.  In all circumstances and also bearing in mind my preliminary observations in paragraphs 16 and 17 above, I am of the view that there is a bona fide dispute at least in respect of the above‑mentioned items in the petitioner’s short‑term account. 

42. In relation to the other items, that is, items (7), (8), (10), (12), (13), (14) and the unidentified entries of $165,000, while there is no clear evidence to explain the payment of these sums, I am prepared to accept that they appear at least on their face to be similar in nature as the other impugned entries and hence should be treated on the same basis.  I am therefore prepared to accept that such items are subject to a bona fide dispute between the parties as well.

Long-term account – 39 items  

43. The alleged wrong entries in the long‑term account spanned the period between April 2009 and January 2012, and totalled $793,150.  Among those, there were a number of payments of $30,000 each.  The petitioner says that these were the Company’s distributions to shareholders and should not have been booked as loans from the Company.  He refers to the board minutes dated 26 April 2005 and the minutes of the members’ meeting dated 5 April 2012.

44. According to the board minutes of 26 April 2005, the sums were apparently repayments to shareholders for their contributions towards the purchase price for the Company’s property.  However, it is noted that such repayments would continue only up to January 2008.  The minutes mentioned nothing about the Company making continuous distribution to shareholders. 

45. On the other hand, while the minutes of the members’ meeting on 5 April 2012 did mention payments to shareholders, it is not clear as to whether such payments were in the nature of distribution of profits.  But even if that were the intention, it is still unclear whether the minutes were meant to relate back to payments already made between 2009 and end of 2011. 

46. In short, neither of those minutes are particularly helpful to enable me to determine the nature of the impugned entries of the $30,000 payments.  The nature of those payments and hence the debit entries in the petitioner’s long‑term account are clearly subject to a bona fide dispute.

47. In respect of the 39 impugned debit entries, Madam Wong was able to produce 24 bank advices for an aggregate amount of $680,318, showing that the various sums were indeed received by the petitioner.  The petitioner, however, contends that as some of the bank advices show transfer of funds from the late Mr Chan and not from the Company, they should not be considered as the Company’s payments.  I disagree.  There was clearly a pattern of money transfers between them involving the use of the Company accounts, for example, as a means to facilitate transfer of capital for use in connection with the petitioner’s Mainland business.  For the present purpose when I am required only to consider whether a bona fide dispute exists in relation to the impugned entries, it would be wholly artificial to ignore the relationship between the late Mr Chan and the petitioner and to disregard the transfers from the late Mr Chan. 

48. There remain items (9), (11), (12), (16), (21), (22), (25), (27), (29), (33), (34) and (39), for which no evidence has been produced to explain the entries.  Item (9), being another payment of $30,000, appears to fall within the category of the $30,000 payments, and I am prepared to treat it in the same way as the other $30,000 payments.  Of the other items, they appear mostly to relate to travelling expenses and of relatively small amounts.  There is no evidence one way or the other, but nothing indicate that they were obvious false entries.  In short, I am left merely with an assertion by the petitioner that he has not authorized those deductions.  I do not think, however, that they should be treated in isolation from the context of the whole dispute.  I am prepared to accept them as subject to a bona fide dispute. 

Other amounts paid to petitioner

49. In coming to the view I did, I am also mindful of Madam Wong’s evidence that throughout the years, the Company and the late Mr Chan had made various payments to the petitioner for over $7 million.  For this purpose, bank advices and bank statements have been produced.  While I take note of the petitioner’s contention that some of these payments (items (19) to (27) referred to in paragraph 37 of Madam Wong’s Affirmation) were not included as part of the petitioner’s calculation of the Company’s alleged indebtedness to him, yet these payments (items (1) to (23)) show at least a history of money transfers between the parties. It reinforces my view that the exact account for payments and repayments between them clearly cannot be determined on the materials presented in this petition.  The alleged inaccuracy of the accounts cannot be determined based primarily on the petitioner’s assertion that he has not authorised or consented to a number of those debit entries.   

50. As for items (24) to (27), they were transfers made after the death of the late Mr Chan.  The exact nature of these payments is unclear, but I do not think I need to have regard to them for the present purpose.

Solvency of the Company

51. Madam Wong accepts that the Company had an outstanding debt of over $890,000 owed to the Bank of China, which, with interest, would have exceeded $1 million by the time she filed her evidence.  She maintains, however, that the Company has sufficient resources to cover the debt and in particular points to the Company’s property as having a market value over $25 million. 

52. While the petitioner on the other hand points to the fact that the Company has failed to meet the statutory demand and is therefore presumed to be unable to pay its debts, it suffices to note, for the reasons already discussed, that there exists a bona fide dispute as to the Company’s alleged indebtedness. 

53. On the whole, the court has only an incomplete picture of the financial status of the Company.  There is no clear evidence to suggest that the Company is insolvent or otherwise unable to pay its debts. 

A broad view over the dispute

54. As I have noted earlier, I do not think the court should be oblivious to the fact that apart from the present winding‑up, Madam Wong and the petitioner have been embroiled in a multi‑faceted dispute.  It suffices to note that Madam Wong is accusing the petitioner for misconducting the Company’s affairs which eventually led to the cessation of its profitable business, a course which Madam Wong says has been highly prejudicial to her interest as a shareholder.  She also accuses the Company, allegedly under the influence of the petitioner, of preventing her from being registered as the holder of the shares previously held the late Mr Chan and has started proceedings against the Company, which are still pending before the court.  She has also challenged the validity of the petitioner’s appointment as director.  In turn, the petitioner accuses Madam Wong of removing records from the Company, which has made it impossible for a proper audit to be carried out in respect of its accounts at least from 2009. These allegations and cross‑allegations do not, of course, fall for determination in the present winding‑up.  But they do provide the wider context in which the petitioner is now challenging the validity of the Company’s accounts. 

55. Given the fact that the alleged indebtedness of the Company arises only on a successful challenge to a number of entries in the Company’s accounts in the first place, and given also the fact that only scanty evidence is available on many of the underlying transactions, there is at least a dispute on bona fide grounds regarding the alleged petitioning debt, and I so find.  The winding‑up procedure is not meant to enable petitioners to achieve some tactical advantage in a summary way by shifting the onus to the opposing parties to defend the petition.  In a case like the present, I am of the clear view that the validity of the impugned entries in the accounts should first be established by an inquiry through the normal process of an action and the invoking of the winding‑up procedure is ill‑conceived.

Conclusion

56. For the foregoing reasons, I would dismiss the petition.

57. I would also make an order nisi that Madam Wong’s costs of the petition (and also any costs that the Company may have incurred) be paid by the petitioner, to be taxed if not agreed.