RIGHT STAR INVESTMENT CO LTD v. GRAND PALACE LTD

cacv 356/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 356 OF 2007

(ON APPEAL FROM HCCW NO. 908 OF 2005)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal by Grand Palace Ltd (“the company”) from the winding up order made against it by Barma J on 5 October 2007.  At the conclusion of the hearing, the appeal was dismissed with written reasons to be handed down which we now do.

Background

3.  Right Star Investment Company Ltd petitioned as creditor for a winding up order on the basis that the company was unable to pay its debts.  The petition was founded on debts amounting to $5,977,974.60 in respect of arrears of rental said to be due to Right Star under three tenancy agreements between itself and the company.

4.  As the judge observed, although the indebtedness is denied, the company’s case was ‘somewhat convoluted’.  In broad outline, it contended that the first two tenancy agreements were of no effect and having regard only to the third tenancy agreement, the company had in fact overpaid the petitioner in respect of rental due under that tenancy agreement.

5.  The main issue below was whether the company had established that the alleged debt was bona fide disputed on substantial grounds.  Both sides filed a number of affirmations.  There was no application made to the judge for the cross-examination of any of the witnesses.  After a three-day trial and further written submissions, the judge concluded that he was not satisfied that the company had come close to establishing the existence of a bona fide dispute of substance as to the debt asserted by Right Star.  The judge went further: in case he were wrong in reaching this conclusion, he went on to consider the company’s case having regard only to the third tenancy agreement.  After going into the evidence, the judge concluded that even on the basis put forward by the company, monies were due to Right Star under the third tenancy agreement and that a winding up order remained appropriate.

6.  The detailed facts are recorded in the judgment of Barma J to which reference should be made.  For present purposes, the following outline will suffice.  In the 1990s, Dr Huang and Mr Hui each owned 50% of Right Star.  After acquiring land in Yau Ma Tei, Right Star caused a commercial building to be built comprising a ground floor, three units on each of the first to third floors (totalling 9 units) and two units on each of the 19 floors above (totalling 38 units).  Only 18 of the units on the upper floors could be sold.  The remaining 20 were divided between Dr Huang and Mr Hui.  Dr Huang disposed of one of the 10 units allocated to him and Mr Hui four out of the 10 allocated to him.  That left 15 units which became the subject of one of the 1996 tenancy agreements and of the 1998 tenancy agreement.

7.  It was then decided that those units would be converted into hotel rooms with a view to operating a guest house and the company was incorporated for that purpose in 1995.  Initially there were three shareholders including Dr Wong and Mr Hui but by 1997 there were two other shareholders.  An application was submitted for conversion of the building into a guest house consequent upon which some work had to be undertaken before business could commence.

8.  Both of the 1996 tenancy agreements were signed by Mr Hui on behalf of Right Star and by Dr Huang on behalf of the company.  The first dated 1 October 1996 related to the ground to third floors of the building for a period of two years at a rent of $145,000 per month.  The second of the same date related to the 15 units mentioned above but for the same period at the same monthly rent.  As regards the first two tenancy agreements, initially there had been an issue as to whether the terms had been varied in April 1991 to reduce the rent payable under both agreements to $150,000 per month.  That was resolved when Right Star agreed to proceed on the basis that there was a rent reduction.  The third tenancy agreement recorded a lease of the ground floor and the 15 units for a term of just over 10 years from 16 May 1998 at a monthly rental of $80,000.

9.  The company sought to contend that the tenancy agreements of 1996 were not genuine tenancy agreements but did not dispute the fact that (1) they had been signed by Dr Huang on behalf of the company and (2) the audited accounts of the company included a balance sheet containing a reference to the debt owed by the company to Right Star in the amount which would have been outstanding on the basis that the 1996 agreements were genuine agreements.  In the court below, counsel who appeared for the company below relied on a number of documents said to provide support for the company’s case that the debt was substantially disputed.  It is apparent from the judgment that the judge gave consideration to those documents but, for the most part found it impossible to understand their significance.

This appeal

10.  Prior to the appeal hearing, this court received what was said to be a revised version of the submissions from counsel then appearing for the company on this appeal and who had appeared below.  I regret to say that notwithstanding several attempts, I was unable to fathom the points sought to be made.  The written submissions were simply not intelligible.  Then two days prior to the hearing itself, for reasons which it is unnecessary to go into at this stage, Mr Leung withdrew his representation and a new counsel was instructed to conduct the appeal before us.

11.  At the hearing itself, the court first dealt with the application of Ms Yang who appeared for the company to adduce new evidence.  This application was refused given that the Ladd v Marshall conditions had not been satisfied.  No more needs be said about that or the new evidence sought to be adduced.

12.  The first point taken by Ms Yang was that the judge had overlooked certain evidence of waiver.  However, it is clear from the documents referred to by Ms Yang that the documents said to have been overlooked had in fact been considered in some detail by the judge in §§ 39 - 40 of the judgment.

13.  Next, exception was taken to § 42 of the judgment which reads:

“   The third document to which Mr Leung referred was a handwritten note, apparently signed (perhaps by way of acknowledgment only) by Mr Hui, which is dated 31 March 1998.  It was suggested that this indicated that the 1996 tenancy agreements were not signed in 1996, but later.  However, that does not appear to be in any way apparent from this document.”

14.  It was suggested that the court should infer from that document that the 1996 tenancy agreements had not been signed in 1996.  The problem with this is that the document which bears a date of 13 March 1998 is difficult to understand.  Without the benefit of oral evidence from the author of that document (namely Mr Hui), it is well-nigh impossible to discern either the purpose of the document or what it was meant to record.  Nor do I think it can be said that its natural meaning is that the 1996 tenancy agreements had not been signed as at the date of the document.  The company could have applied to the judge to cross-examine Mr Hui but it chose not to avail itself of that opportunity.  For my part, it has not been shown that the judge had misunderstood the evidence when he said what he did in § 42 of his judgment.

15.  Finally Ms Yang referred to a letter dated 7 September 1998 from a Mr Poon Nai Leung addressed to the company for the attention of Mr Huang.  That letter recorded that Mr Poon had agreed at the general meeting of the company held on 12 June 1997 to inject monies into the company on the basis that he would be made a director.  It was said that this letter demonstrated that there were no tenancy agreements for the period 1 January 1997 to March 1998.  Ms Yang referred to the following extract from the letter:

“ …Even worse, Mr Hui Kwok Wah requested [the company] to pay rent to the owners of 1/F to 3/F for the period 1/1/1997 to 3/1998 …”

16.  I am unable to see how that passage throws any light on the existence or otherwise of the 1996 tenancy agreements.  Ms Yang’s reliance on this document was misguided.  This letter was simply an exhibit to one of the affirmations filed by Mr Huang and there is no evidence from Mr Poon himself to explain what he meant.

Conclusion

17.  This appeal was simply hopeless from the start.  It should never have been brought.

18.  Right Star applied for costs on an indemnity basis.  The Official Receiver who did not attend the hearing had applied by letter for his costs on the same basis.  The court was advised that it was Mr Huang who had funded this appeal.

19.  The general practice is that the backer of an unsuccessful appeal against a winding up order would be ordered to pay costs on an indemnity basis.  Re SY Engineering Co Ltd, unreported, CACV 1896/2001, 20 February 2002.  It was therefore ordered nisi that Right Star and the Official Receiver do have their costs on an indemnity basis to be paid by Dr Huang, that the order be served on Dr Huang who has 14 days from the date of the service of the order on him to make such application as he sees fit.

Hon Cheung JA:

20.  I agree.