RE GRACE GARMENTS LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING-UP) NO. 231 OF 1995

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JUDGMENT

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 This is a petition presented by the Bank of Credit and Commerce Hong Kong Limited (in liquidation) against Grace Garments Limited. The petition is based on a statutory demand for the payment of the sum of US$305,855.51 and interest. The statutory demand was made on the 12th December 1994 and the petition was presented on the 31st May 1995. The Respondent company was a customer of the Petitioner prior to its liquidation.

1. The indebtedness in this matter arises in two respects. The first is under a letter of credit which the company had requested the bank to open in favour of manufacturers in Bangladesh. The Bangladesh manufacturers were apparently only entitled to receive payment for the manufacturing process. The fabrics used in the manufacturing process were supplied by the company. Due to foreign exchange control regulations in Bangladesh, an arrangement was apparently arrived at whereby the letter of credit documentation would show the manufacturers entitled to the full value of the goods but there would be a corresponding letter of credit from the manufacturer in respect of payment of the cost of the materials.

2. The arrangement was that one would be offset against the other and only the net amount which would represent the cutting and manufacturing would be paid to the Bangladesh customer. For the purposes of today's argument it was conceded on behalf of the Petitioner that the Respondent company was entitled to contest the sum of US$65,304.76 being the amount in respect of the cost of the fabric.

3. The other portion of the amount which is the subject of the statutory notice arose out of bills which were discounted by the bank. The drawee of the bills was a company by the name of Everbest Limited of New York. Amongst the correspondence exhibited is a letter of the 13th October 1992 from the company to the Petitioner stating, inter alia:

"We understand that we have liabilities to settle the captioned bills if our client, the Everbest Limited, are not willing to pay. However, we have already negotiated with Everbest about the repayment and have got their promise to settle the bills with accrued interest. In addition, we have got 18 US dollar cheques issued by them favouring your company as settlement of the outstanding amount."

4. There were then enclosed cheques for the total amount of US$416,848.33 which were said to be the total value of the discounted bills. The interest was promised on the basis of computation to be made by the bank. There is then a letter which is headed "By registered mail" dated 27th of October 1992. This letter is from the Petitioner to the company and it states that the Petitioner was not prepared to accept postdated cheques which were said to be returned. The company disputes receipt of that letter and avers that it never received the cheques.

5. In 1993 the Petitioner presented a petition no. 167 of 1993 against the company. That petition was, as far as I can tell, never advertised nor indeed served. The company, however, was well aware of its existence. At the time the company was negotiating with a number of other banks in relation to restructuring its indebtedness. The Petitioner was apparently, the only entity which presented a petition. Exhibited to the affidavit in this case is a copy of the opening and closing pages of an advice from counsel. This has been exhibited because it is said that it shows that the company believed it had a good defence to the Petitioner's claims and indeed was entitled to a substantial sum in its favour. The opinion was given to the company at the end of April and is referred to in a telex of the 11th of May 1993 to one of the other banks in the perhaps not too enthusiastic terms 'as advised by our legal counsel, we have a good case to fight in this matter. At least, BCC should not be able to obtain winding-up order immediately upon first hearing due to a technical error they have made.' I am unable to test the full strength of the company's case at that stage or its then belief in the strength of it for two reasons. In the first place, I do not have the full opinion and in the second place the strength of any opinion is dependent entirely upon the instructions which are given and again I do not have the instructions.

6. It is clear however that the company was anxious that the 1993 winding-up petition should not proceed and should be withdrawn at the earliest stage to enable the company to negotiate with the other banks. The Petitioner was unwilling to withdraw the petition unless it had some satisfaction. It insisted upon receiving two cheques for HK$600,000.00 each and upon the company, through its solicitors, acknowledging the indebtedness of the company to the Petitioner in the sum of US$479,950.35 as at the 16th of March 1993 less the payment of HK$1.2m. already made, together with interest at the bank's prime rate for US dollars plus 3%. That acknowledgement was given in a letter dated the 12th May 1993. Subsequent to that the petition was withdrawn, payment of $30,000 costs was made and a schedule for repayment of the outstanding balance in 10 equal instalments was drawn up.

7. The first two instalments under the schedule were duly paid. The remaining instalments have, as I understand it, never been paid. The further dispute between the company and the Petitioner arose because there was a substantial quantity of goods which were retained in Bangladesh and could not be released because liabilities of the Bangladesh manufacturers on bills held by the Petitioner would not be released. On the 6th of August 1993, the solicitors for the company wrote a letter, the material parts of which are as follows

The letter proceeds to seek the Petitioner's assistance, I note as a matter of reasonableness and not as a matter of right.

8. I approach this matter on the basis that it appears to be agreed between the parties that the Court need only be satisfied that the company has a rational prospect of success in opposing the debt in order for the company to succeed in having the petition dismissed or at any rate stayed. It is not the function of this Court to decide disputed debts. However, if it is clear that a debt is owed the fact that the quantum may be in dispute does not dictate that a winding-up order should not follow.

9. It has been urged upon me strongly that a winding-up order should not be made since there is a substantial dispute as to the liability. In respect of the letter of credit it is said that the bank has not shown that it has made payment under the letter of credit. In respect of the bills of exchange it is said that the company can avoid liability because notice of dishonour was not given and there is reason to believe that in any event Everbest Limited had paid the Petitioner in respect of the bills. It was said that the strength of the case was such that further inquiry was called for. It was urged upon me that the admission which was given by the company was not a pure question of fact within the knowledge of the company and the question was what weight should be given to the admission.

10. I approach this case, first of all, on the basis that this was a serious and considered admission. It was made by solicitors properly instructed on behalf of the company. There may have been good reasons why the company wished to make that admission but it made that admission in the light of an opinion given by counsel the strength of which the company alone could assess. In my view, in the circumstances of this case the Court should only disregard this admission if it is satisfied that there is a properly arguable case based on proper evidence. I regret that I am not so satisfied.

11. Turning to the bills of exchange as Mr. Chan Q.C. on behalf of the Petitioner pointed out, it would in any event not necessarily be a final answer to the claim on the bills of exchange that no notice of dishonour were given. The company seeks to rely upon two letters from Everbest Limited to show that Everbest Limited may have paid upon the bills of exchange. The first is a letter of the 27th April 1993. That states that 'all the bills had been paid through BCC in accordance with the terms and conditions of our acceptance'. That statement must be wrong in view of the earlier correspondence relating to the 18 cheques to which I have referred.

12. The more recent fax of the 15th November 1995 from Everbest Limited again does not help. That emanates from somebody who professedly has no knowledge of past transactions nor was the writer able to locate the relevant records. All that was stated is that the records show that there are no unpaid cheques outstanding. I do not consider that it is correct to draw the inference from that letter that the 18 cheques sent to the Petitioner were duly paid. After such a long lapse of time the fact that Everbest Limited has no record of unpaid cheques which would, if unpaid, obviously now be long overdue, seems to me to be of no weight. In respect of the letters of credit, I do not consider that the mere fact that there is absence of evidence of payment by the Petitioner in respect thereof constitutes a good defence. The Petitioner's liability in respect of the letters of credit may well be a matter which was provable in a liquidation.

13. In the circumstances, I do not consider that the company has surmounted the obstacle with which it is faced namely, the acknowledgement of the debt, which acknowledgement was given for good consideration and indeed appears consistent with the contemporaneous correspondence. In my view, I have no alternative but to make the usual winding-up order.