TEAMEDICS ENTERPRISE (HOLDINGS) CO., LTD v. JB ENERGY INTERNATIONAL LTD

HCMP682/2009
& HCCW195/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 682 OF 2009

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(HEARD TOGETHER)

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J U D G M E N T

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1. There are two related proceedings before this court. In each proceeding, there is an application made by Teamedics Enterprises (Holdings) Limited (“the Company”). In HCMP 682/2009, there is an application to restrain the issue or advertising of winding-up petition to be lodged against the Company. Since a winding-up petition was subsequently issued against the Company, there is then the further application made by the Company in HCCW 195/2009 to strike out the petition lodged by the petitioner (JB Energy International Limited). 

Background

2. The prelude to these proceedings was a statutory demand dated 21 January 2009. This was followed by a letter dated 22 January 2009 by the Company to the petitioner stating out that the Company has nothing to do with the invoices which gave rise to the claim made by the petitioner. The petitioner did not proceed with this, if I may call, the “1^st Statutory Demand”. There was subsequently another statutory demand dated 17 March 2009 (“2^nd Statutory Demand”) issued by the petitioner. It is pursuant to this 2^nd Statutory Demand that the winding-up petition was eventually presented by the petitioner. 

3. After the 2^nd Statutory Demand was served, the Company issued the Originating Summons in HCMP 682/2009 on 7 April 2009.  Two days later, the petitioner presented the winding-up petition in HCCW 195/2009 on the basis that the Company was unable to pay the debt claimed therein.

4. At this juncture, it may be convenient to note that counsel for the Company sought to highlight paragraph 5 of the winding-up petition, which stated as follows :

“The company is in debt to your Petitioner in the sum of HK$1,932,820.08 being the value of goods (rechargeable battery, Lithium Button Cells and others) supplied at the request of the Company to its subsidiary or associate company during the period of 27^th June 2008 to 12^th December 2008 under 44 invoices after deduction of 5 lots of returned goods which has been due and payable immediately to your Petitioner.”

5. As far as I see, the claim made in the winding-up petition is largely consistent with the claim made in the 2^nd Statutory Demand. Ms Lam, counsel for the Company, invited this Court to compare paragraph 5 of the petition with the 2^nd Statutory Demand and made certain observations on the differences in their wording. The 2^nd Statutory Demand stated that the debt are in relation to goods sold and delivered within the period from 27 June to 12 December 2008 less goods returned and the same amount as claimed in the petition was stated there. In Annex A thereto, the particulars and the breakdown for the sum claimed in the 2^nd Statutory Demand are set out. In short, I do not think there is much point in conducting that exercise and I say no more.

6. On 20 April 2009, Deputy High Court Judge To directed the Originating Summons in HCMP 682/2009 be heard together with the application to strike out the winding-up petition made in HCCW 195/2009. The learned Deputy Judge also granted an interim injunction restraining the petitioner from advertising or publicizing the petition or proceeding with the winding-up proceeding until the final determination of the Originating Summons and the Summons for striking out the winding-up petition or until further order. 

The Law

7. There is not much, if any, dispute between the parties on the applicable legal principles. Whilst counsel for the parties had helpfully cited quite a number of authorities, I do not think it is necessary to deal with each and every of them. It will be sufficient for me to quote from a few of those authorities which set out the relevant legal principles so as to illustrate how those principles may be applied to the facts of this case. 

8. The first case relied on by counsel is Re ICS Company Distribution Ltd [1996] 3 HKC 440, where Rogers J. (as he then was) expounded as follows (pp. 442G-443C):

“  The procedure of winding up a company for ‘insolvency’ by petition is a summary one. The test which the Court applies is whether the debt is bona fide disputed on substantial grounds.  These are words which appear time after time in the cases. As a matter of practice, and not it may be noted as a matter of law, where the Court is satisfied that this criteria is satisfied the Companies Court should not embark on a trial to determine the issue of the validity of the debt. The petition is therefore dismissed or ‘taken off the file’ unless there are unusual circumstances about the case or the issues involved can be disposed of very simply. In that event the Companies Court may determine the dispute itself or the Petition may be stayed and left on file pending determination.

   There are a number of reasons for this practice. Important amongst those are that it is undesirable that a Company should remain with a petition hanging over its head, so to speak, whilst lengthy and complex litigation is conducted. Winding-up proceedings can also potentially put too great a pressure on the company concerned which thus might be forced to make an unjust settlement. One of the reasons that previously has been advanced, namely that the procedure on petition in the Companies Court does not lend itself to trials and potentially complex actions, seems to me to be no longer applicable. The advent of extremely long and often involved litigation following presentation of petitions on the just and equitable ground has demonstrated that a petition in the Companies Court can be disposed of as well as any other litigation. Indeed, I detect in the more recent decisions a leaning towards a robustness of approach evidencing a greater willingness by the Companies Court to look at the claim put forward by the company with a more critical eye.”

9. In addition to the passages quoted above, counsel for the petitioner, Ms Chan, relied on this authority to support the proposition that the burden rests with the Company to adduce cogent evidence to show that there are substantial disputes of the debt in question. I do not think this proposition can be disputed and I do not understand counsel for the Company disputed it. 

10. The next relevant case is Re Shenhua Sheng Yu Coal & Energy Corp Ltd [2001] 2 HKLRD 452, where Yuen J (as she then was) observed as follows (pp. 454B-455C):

“  Before I consider the circumstances of the present petition, it may be helpful to first set out the relevant principles. In Re Claybridge Shipping Co SA [1980] Com LR 107, the Court of Appeal first considered the approach to be adopted when a debt, alleged as the basis of a winding-up petition, is disputed.

   Lord Denning MR's view was that "a petition for winding-up should not be used as the means of getting in a debt which is bona fide disputed on substantial grounds --- on which the company would get unconditional leave to defend" in an application for summary judgment under O. 14. He held that if only conditional leave would be granted, then the petition should be allowed to stand.

   In the same case, Oliver LJ refrained from drawing a direct comparison with O. 14, and held that the Court should take a view whether, on the evidence, there really was substance in the dispute raised. Where there was a bona fide and substantial dispute as to the existence of a debt, the parties should be left to fight out the matter in an action, not on the hearing of a petition.

   In Re ICS Computer Distribution Ltd [1996] 3 HKC 440, Rogers J (as he then was) adopted Oliver LJ's approach and declined to apply the Order 14 analogy. He held that as the procedure to wind up a company was summary, as a matter of practice the Court would not embark on a trial to determine the issue of the validity of the debt where it was bona fide disputed on substantial grounds, unless the issue could be disposed of very simply.

  The latest full discussion of the approach to which I have been referred is in Re a Company No. 006685 of 1996 [1997] BCC 830. Chadwick J held that the Court had to take a view on the evidence before it, to see if the debtor was just raising a cloud of objection to claim a dispute of fact existed which could not be determined without cross-examination, or if there was a genuine dispute founded on substantial grounds in which event the Court would not allow a winding-up petition to be used.

   From the above, it would appear that the Court's approach should be to examine the evidence adduced, and to see from the evidence whether the company has discharged its onus to show that there are substantive (and not merely perceived) grounds which support its bona fide belief that it is not indebted to the petitioner. In other words, mere belief by the company that it is not indebted to the petitioner (however genuinely held) would not do, there must be some substance to the belief. However, once the Court sees that there is some substance in the company's stand, it would not (unless the dispute is capable of being determined simply) undertake a trial at the hearing of the petition. The petitioner would have to start an action to establish its claim to the alleged debt.

   The policy behind this approach balances the interests of the company and the public with which it deals. The company should not have to labour under the threat of a winding-up if the alleged debt is disputed on substantive grounds. At the same time, if there was no real dispute and the company was indebted, then it should not be allowed to continue trading.”

11. The third and last case I would mention is Re Phoenix Telecommunication Limited, unrep., HCMP 514/2002 (2 September 2002), where Yuen J (as she then was) reiterated the principles as follows:

“36. It is well-established law that a petition to wind-up a company is a summary procedure, and if the company can show that there are substantial grounds which support its bona fide dispute of the alleged debt, the Court would not (unless the dispute is capable of being determined simply) undertake a trial at the hearing of the petition, but would strike out the petition.

37.    The petition would be struck out on the basis that a petitioner with a debt which is disputed on substantial grounds has no locus standi to present the petition, and the presentation of a petition in those circumstances would be an abuse of the process of the Court. The same approach should be taken on a company's application to restrain the presentation of a petition (Mann v Goldstein [1968] 1 WLR 1091, 1098).

38.    Thus, if a company can show, before a petition is presented by a particular alleged creditor, that the presentation of a petition by that creditor would be such an abuse of process, then the company would be entitled "as of right" to restrain the presentation (Stonegate Securities Ltd v Gregory [1980] 1 Ch 576).

39.    Of course, in considering the company's evidence disputing the debt, the Court does not simply accept the company's allegations in isolation, but would see whether they are believable in the context of documents or evidence which are beyond any reasonable dispute (Re Safe Rich Industries Ltd CA 81/94, unrep.).

40.    But if the company can show a bona fide substantial dispute, then in my view the Court should restrain the presentation of the petition without taking into account the question of the company's solvency. If a petitioner's debt is bona fide disputed on substantial grounds, he has no locus standi to present a petition anyway. To suggest (as in the discussion in McPherson's Law of Company Liquidation 112-121) that the Court should not restrain the presentation of such a petition or that it should not strike it out, on the basis of protecting other creditors who have chosen not to present a petition themselves or to apply to be substituted as petitioners, would be to enable officious persons, by manipulating the Court's process, to inquire into a company's financial position and to disrupt its business activities. That would obviously not be right.”

12. Applying the approach expounded in these cases, the ultimate question is whether the Company has demonstrated a bona fide dispute on substantial grounds in respect the debt claimed by the petitioner. The key question in this case is whether the Company is legally liable to pay for the debt arising from the 44 invoices, or whether it is the Company’s subsidiary, a company incorporated in Mainland China and known as Teamedics (Tai Shan) Manufacturing Co. Ltd. (“PRC Subsidiary”), which should be liable for the debt in question. The petitioner contended that the Company is liable whilst the Company denied such contention.

Bona Fide Disputes

13. Having considered the matter and applying the approach in those cases, I am satisfied that Company has demonstrated a bona fide dispute of the debt on substantial grounds and that the present winding-up petition should not be allowed to proceed. Instead the petitioner, if it so wishes, may start another action to sue for the debt. Since the issues in dispute may be ventilated in further proceedings, I shall not, in this judgment, go into the arguments or the evidence in detail. Instead, I will only briefly summarize the reasons why I consider there is a bona fide dispute of the debt in question.

14. As stated above, the claim by the petitioner is for the prices for goods sold and delivered. The contemporaneous documents are not really in dispute between the parties. Rather, the key issues are: what are the effects and implications of those documents and whether there are agreements extrinsic to those contemporaneous documents. On the one hand, the key features of the contemporaneous documents can be summarized as follows:

(1) all the purchase orders pursuant to which the goods were sold and delivered were issued by the PRC Subsidiary (as opposed to the Company) to the petitioner;

(2) all the delivery notes were issued by the petitioner to the PRC Subsidiary (and not the Company);

(3) all the invoices were issued by the petitioner to the PRC Subsidiary (as opposed to the Company);

(4) the documents evidencing receipt of the goods, as pointed out by Ms Lam at the hearing, were also issued by the PRC Subsidiary. 

15. In addition to the documents mentioned above, there are statements covering the period from June to September 2008 issued by the petitioner to the PRC Subsidiary summarising the transactions by reference to the purchase orders, the invoices and the delivery notes as well as setting out the shipping dates and the payment due dates in respect of each transaction and also the amounts due under those transactions. Hence, at least on the face of the contemporaneous documents, the PRC Subsidiary is the relevant entity who had the contractual obligation to pay for the goods so ordered.

16. On the other hand, it is pertinent to note the following features of the contemporaneous evidence. First, the 44 invoices, though all issued to the PRC Subsidiary, were addressed to the registered address in Hong Kong, which is the same address of the Company. Second, the 44 invoices specified the amounts payable in Hong Kong currency instead of in Renminbi. Third, for about 20 months up to the end of 2008, the Company had been settling invoices issued by the petitioner to the PRC Subsidiary by way of letters of credit. As pointed out by the petitioner, there had been part-payment of the 44 invoices by the Company by way of letters of credit. 

17. Against the backdrop of these contemporaneous documents, the petitioner raised mainly two arguments. The first argument is that there is an underlying agreement by the Company to pay for the goods purchased by the PRC Subsidiary. As I understand, it is the petitioner’s case that the transactions are evidenced by the purchase orders issued to the PRC Subsidiary but there is an additional underlying agreement whereby the Company agreed or undertook to be responsible for paying for the goods ordered by the PRC Subsidiary.

18. Secondly and in the alternative, it is the petitioner’s case that in the event there is no underlying agreement then there will be a case of agency, i.e. the PRC Subsidiary at all material times acted as the agent of the Company. The way in which the agency is claimed to have arisen is explained in the Affirmation of May Wang filed on 2 June 2009. The relevant paragraphs start at paragraph 8 (which is on page 17 of the hearing bundle) and then went all the way to paragraph 14.

19. I shall not repeat the details of the explanation set out in May Wang’s Affirmation. Put shortly, it is suggested that there had been certain previous course of dealing between the individuals of these two groups of company. It was suggested that at the very initial stage, it was made clear to Mr. Alex Wong of the Company that the petitioner (or rather the predecessor of the petitioner) preferred to deal with companies incorporated in Hong Kong instead of companies incorporated in Mainland China. And then it went on to set out the particulars of various previous dealings and the modus operandi of those dealings between the two companies.   

20. And then in paragraph 12 of May Wang’s Affirmation, it was said that as time went by the previous company served a lesser and lesser role of the production or receiving agent of goods supplied by JB Hong Kong and subsequently the petitioner. It then suggested that the PRC Subsidiary exercised a larger role as a production agent of another associate company of the Company and eventually the Company for goods supplied by JB Hong Kong or the petitioner. It is said that although there are documents such as the purchase orders, delivery notes or invoices which borne the name of the PRC Subsidiary, the PRC Subsidiary was only an agent of the Company. It asserted that such an influence is clearly evidenced by and can safely be drawn upon studies of the various exhibits mentioned in that particular paragraph. In other words, insofar as the case of agency is concerned, the petitioner’s case is one of influence. 

21. Amongst the contemporaneous documents relied on by the petitioner, there is one document which I think I should highlight, and that is the e-mail dated 16 January 2009 from an accountant, Ms Kitty Chu, to May Wang of the petitioner. This e-mail reads as follows :

“  Regarding the payment issue, we are intending to issue an L/C in the value of HKD400,000 in the very near future. 

   We would also like to suggest an alternative payment plan which might be to our mutual benefit in the current economic climate. We would be able to clear our entire outstanding account with you with a one time payment if you were to offer us a reasonable discount on this amount of say 20-30%. We understand this is not an ordinary request but these are not ordinary times. We are receiving similar requests from many of our customers and in the interest continuous business relationships, we are willing to consider such requests. I hope you also take our request into consideration.”

22. On the whole it is quite clear that the underlying agreement suggested by the petitioner as well as the case of agency put forward by the petitioner are fact-sensitive matters. Neither of them are clearly or conclusively evidenced by the contemporaneous documents. Indeed, amongst the various pieces of evidence put before this court (especially the contemporaneous evidence), some of them are clearly in favour of the Company whereas others are in favour of the petitioner. Such conflicts of evidence highlights the disputes of fact involved in these proceedings. 

23. In the absence of cross-examination, it will be difficult, if not impossible, for this court to say that the defence put forward by the Company is not a bona fide one. Nor can the court comfortably conclude that the factual and legal matters raised by the Company are bound to fail and therefore it has no defence to the claim made by the petitioner. 

24. The mere fact that the Company had made payments in the past for the goods ordered by the PRC Subsidiary is relevant but not conclusive. It is one thing to assume a legal liability to pay (such as entering into the underlying agreement alleged by the petitioner, if there be one) and a wholly different thing to just make logistical arrangement to effect payment on behalf of an associate or a subsidiary company. In cases involving group of companies, payment made by one entity within the group for the benefit of another entity also within the group is not unusual.

25. Ms Chan, on behalf the petitioner, has pointed to this court the features of the various letters of credit, i.e. that the Company (as opposed to the PRC Subsidiary) was the applicant of the various letters of credit. Ms Chan is also correct in pointing out that the cargo receipts issued in relation to those transactions were issued by the Company as opposed to the PRC Subsidiary. However, those documents must be seen, in my view, in their proper context. Given the letters of credit were applied for by the Company, it is not surprising that the cargo receipts were also signed or issued by the Company. At the end of the day, those letters of credit were no more than part of the payment mechanics adopted by the parties to effect payments on behalf of the PRC Subsidiary. Such an arrangement is far from being conclusive to show that the Company has assumed the legal liability to pay for those goods as contended by the petitioner. The important question remains why the Company paid for the goods: whether it had the legal liability to do so or whether it was just making arrangement on behalf of its subsidiary. The fact that the Company had procured the issue of the various letters of credit is consistent either way.

26. Lastly, in relation to the e-mail dated 16 January 2009 which I have quoted above, I have to say that initially this e-mail has caused me concern. However, having considered the matter in the round, I agree with Ms Lam that this is only one of the various pieces of evidence that the court will have to take into account in deciding whether or not it is the Company or the PRC Subsidiary which had assumed the legal liability to pay for the goods. 

27. Further, in a case involving a group of companies, the fact that the accountant of the holding or parent company sent an e-mail to a supplier of its subsidiaries to negotiate a discount of payment is certainly understandable. The question of whether or not such an email demonstrates that it is the holding company who is legally liable to pay for the goods ordered by the subsidiary can, in my view, only be answered by considering all the other relevant evidence and only after the court has the benefit of seeing the witnesses being cross-examined. 

28. For these reasons, I will dismiss the petition and I so order. For the avoidance of doubt, the dismissal of the petition will be without prejudice to the petitioner to commence a new action against either the Company or alternatively the PRC Subsidiary if it so wishes. 

29. In the circumstances, I do not think I need to make any order in relation to the Summons issued in HCMP 682/2009, save and except an order dealing with the question of costs which I would hear further submissions from the parties. 

30. The only other point I wish to make is this. I fully appreciate that in this economic climate, speedy and punctual payments is very important to suppliers. Bearing in mind the amount involved in this case, the nature of the disputes as well as the fact that further litigation will certainly take time, I would invite the parties to consider the alternative of mediation which I believe would be a speedy and more effective way to resolve the matters. In particular, in a mediation the parties can take a more robust practical view of the overall situation instead of focusing on the question of whether the Company or the PRC Subsidiary is legally liable to make payment. Lastly, I thank counsel for both sides for their assistance.