RE PLASTEEL INTERNATIONAL LTD.

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP)

No. 224 of 1987

--------------

--------------

-----------------

JUDGMENT

------------------

1. I have before me a motion issued on behalf of Plasteel International Limited (the company) to dismiss the petition presented against it on the 16th November 1987 by the receiver and manager of Plasteel Window Industries Pty. Ltd. (the petitioner) on the grounds that it is insolvent and unable to pay its debts.

2. The motion is based on three grounds - (1) that the company has a right of set off that will extinguish the debt; (2) the debt is disputed on substantial grounds; and (3) the company is solvent.

3. The company was incorporated in Hong Kong in November 1981 for the purposes of land and building investment with a nominal capital of HK$15m. divided into 15 million shares of HK$l each of which HK$10,450,000.75 has been paid up or credited as paid up.

4. In April 1983 the company decided to expand its business operations to Australia and set up a group of associate companies there including the petitioner. The holding company for the group was Montez Pty. Ltd. (Montez) which was set up for the purpose of administration and management and held the shares in all the companies in the group. Montez was in turn a wholly owned subsidiary of the company. Mr Charles Liu who is the managing director of the company was also a director of Montez and all the other companies in the group including the petitioner. According to Mr Liu the business of the group in Australia has always been financed by the company, the practice being for money to be channelled from the company through Montez to the other members as and when required. Of the five companies in the group, the petitioner always received the bulk of the cash advanced as it was the major operating company for the manufacture of aluminium windows and related products.

5. On the 31st March 1986, a loan of A$612,225.00 was made by the company to Montez which Mr Liu claims was mainly distributed to the petitioner. The company contends that the petitioner has never repaid any part of this sum nor any interest. It is not in dispute that a loan of this sum was made to Montez, but it is contended by the petitioner that it was used for the purchase price of all the issued share capital of Montez from Zink Industries Limited.

6. The Australian companies, including Montez, are now in receivership and all their assets have been sold. However, the company is still actively trading and the assets, according to Mr Liu, amount to a sum in excess of HK$45m.

7. By the petition, the petitioner alleges that the company owes A$244,226.85 of which sum it is claimed that A$243,575.10 was admitted to be due by a letter from the company's solicitors to the petitioner's solicitors dated the 19th October 1987. Prior to this letter, a statutory demand was served on the company on the 1st October 1987 claiming A$269,926.57 under section 178(1)(a) of the Companies Ordinance. As the demand was not complied with within the statutory period of three weeks, the company was deemed to be unable to pay its debts.

8. Mr Liu contends that the amount claimed is not owed by the company, but by Plasteel China Limited (P.C.L.) which was a joint venture company between a wholly owned subsidiary of Montez and the Shenzhen University authority in China. The joint venture was formed to promote the company's Australian products in China, but was subsequently discontinued due to the failure of the group in Australia. Mr Liu produced a number of documents, exhibit CLGS-2, containing, an auditor's letter, invoices and credit notes which revealed that A$211,655.95 of the sum claimed was for goods supplied to P.C.L. It is alleged that the petitioner owes the company a sum far in excess of the amount claimed so that the company seeks to set off so much of the sum owed to it by the petitioner as will extinguish the claim. However, the company did not produce any figures as to what sum is in fact alleged to be due by the petitioner.

9. Two affidavits in support of the petition have been made by Mr R.V. Morosin, a chartered accountant employed by the accountants Peat, Marwick, Hungerfords, who was appointed on the 8th August 1986 by the National Australia Bank to be the receiver and manager of the Australian companies including Montez and the petitioner. He says that the companies in the group kept separate books and records of account submitted separate tax returns, kept separate debtors and creditors ledgers and operated separate bank accounts. An examination of the books and records of the companies which had dealings with the company, revealed that each one had rendered separate invoices and maintained separate debtor accounts in their ledgers for the company. Although he agreed that the loan of A$612,225.00 from the company to Montez is recorded as a liability in the accounting records of Montez, he was not aware of any agreement or other dealing between the petitioner and the company by which the petitioner could be liable to the company for the repayment of the loan. Mr Morosin claimed that he had not seen or heard anything, prior to Mr Liu's affirmation which suggested that Montez or any of its subsidiaries had an interest in a company called P.C.L. or any other entity with that name or carrying on business under that name. According to Mr Morosin, the goods for which invoices were rendered to P.C.L. prior to the 16th January 1986 were ordered by the company and delivered in the same manner as all goods sold to the company and the invoices in respect of those goods were rendered to the company. However, those invoices were subsequently reinvoiced as deliveries to P.C.L.

10. A document in Chinese without a certified English translation was produced by the petitioner which purported to be a joint venture contract between the Plasteel group of Companies and a Chinese party. The name of the joint venture company to be formed pursuant to the joint venture agreement was Plasteel China Limited. However, the evidence shows that the joint venture contract which was required to be registered before it could have any legal effect was not registered, with the result that the contract was never approved and no business licence was granted.

11. Searches made on behalf of the petitioner reveal that no company by the name of Plasteel China Limited has been incorporated in Hong Kong, New South Wales, Australia, or the People's Republic of China.

12. In correspondence and accounts, including a debtors trial balance, P.C.L. is treated as a separate entity. In particular, in a letter from the receiver of the petitioner to Mr Liu, in his capacity as a director of P.C.L. dated the 3rd December 1986, both the company and P.C.L. are treated as separate entities. In this letter a sum of A$212,118.95 is claimed to be due from P.C.L. and A$15,118.24 from the company. Further, in a fax dated the 27th February 1987 from the receiver to Mr Liu, in his capacity as a director of the company, the receiver enclosed reconciliations of the indebtedness of P.C.L. and the company to Montez and the petitioner, but that as a result of a fire mentioned that some records had been destroyed, and that the amount of the debts due from the company to the petitioner could not be completely reconciled.

13. On the 25th March 1987, the company's solicitors in Sydney wrote to the solicitors for the receiver referring to the receiver's letter of the 3rd December 1986 to the effect that the trade debts of the company to the Australian companies were A$227,237.19 which had been incurred in relation to a shipment of some steel to the company, some of which was obsolete and of no value and that the amount of the debt attributable to the stock was A$60,000 and that the company wished to return the goods to the Australian companies. In another letter from the company's solicitors in Sydney to the receiver's solicitors dated the 13th August 1987, the company stated that it was prepared to pay the full amount of the trade debt owing to the Australian companies in the sum of A$253,702.74 and sought to settle this amount independently of all other claims and was prepared to make an offer of 40% of the trade debt owing in cash within 30 days and the balance to be paid within six months. A reply to this letter was requested by 5 p.m. on the 14th August, but no reply was received.

14. Mr Eddis who appeared for the company submitted that the contents of the letter did not amount to an admission of liability, but only to a recognition and a proposition to pay.   This letter does not refer to any specific amount alleged to be due to the petitioner, but only refers to the group of companies as a whole.

15. The next communication was the statutory demand which as I have said was served on the 1st October 1987. The notice of demand claimed the sum of A$269,926.57 whereas the petition refers to a lesser amount to which I have already referred. I set out for ease of reference the contents of the letter of the 19th October 1987 which the petitioner contends amounts to an admission of liability:

"

19th October 1987

16. Mr Tang, counsel for the petitioner, submitted that the company's contention in that letter is correct if which he disputes it is entitled to a right of set off.

17. The issue of set off that has been argued on behalf of the company relates to the moneys loaned to Montez for the benefit of the group, the major part of which, the company maintains was passed on to the petitioner. As I have said, no evidence has been produced to show whether the moneys were in fact received by the petitioner whilst there is contrary evidence that the moneys were used for the purpose of purchasing, the issued share capital of Montez from Zink Industries Limited. It is trite law that there can be no right of set off unless the debts are mutual and between the same parties. In the instant case, the evidence shows that the loan is due from Montez to the company and not from the petitioner and that the company had written off all debts due from the Australian group of companies as at the 31st March 1986 when they were written down to HK$1. Accordingly, the argument on the basis of set off must fail.

18. I will now deal with the question as to whether the debt claimed is the subject matter of a dispute based on substantial grounds. The law was conveniently set out by Ungoed-Thomas J. in Mann v. Goldstein⁽¹⁾ at 1098-1099 where he said:-

19. Accordingly, if there is a genuine bona fide dispute on substantial grounds with regard to the debt the petitioner cannot take advantage of the winding-up petition to obtain payment of the debt. Upon the facts, there was undoubtedly an agreement for a joint venture with a company P.C.L. although it does not appear to have been incorporated whilst the joint venture did not proceed. Goods were originally supplied by the petitioner which were invoiced to the company and were later apart from three invoices reinvoiced to P.C.L. The accounts of the company reveal an indebtedness of the company to the petitioner, but also show separate amounts to be due from P.C.L. The correspondence indicates that the company undertook to be responsible for debts due to the Australian companies, but not specifically to the petitioner, and an offer of payment by the letter of the 13th August 1987 met with no response. Although there was no evidence that P.C.L. was incorporated, nevertheless, there could well be, as was argued by Mr Eddis, a partnership between the Australian party and the Chinese party.

20. Liability at the inception would appear to rest with the company, but that later it was transferred to P.C.L. and accepted by the petitioner. Whilst the company gave the appearance of accepting responsibility for the debts due to the petitioner by the letter in August 1987, the offer which was made did not result in a reply. In any event, the letter was the subject of an offer, as I have said, to the Australian companies in general and not specifically to the petitioner.

21. The question as to whether P.C.L. had a separate existence independent of the company and the argument that there has been an admission of liability in the correspondence cannot be decided without an examination of witnesses by way of evidence in chief and cross-examination. There is, therefore, in my judgment a genuine dispute on substantial grounds with regard to the major part of the debt that has been claimed by the petitioner on the grounds that there is evidence that the sum of A$223,722.44 is owed not by the company, but by P.C.L. Further I do not accept that the contents of the letter of the 19th October 1987 amount to an admission of liability.

22. There remains the sum of A$19,852.66 which is shown in the accounts of the company to be due to the petitioner as at the 8th August 1986. This document also shows a sum of A$223,722.44 owed by P.C.L. to the petitioner. Mr Tang submitted that as this debt had been admitted, the motion should be dismissed as the company had failed to make payment in accordance with the statutory demand within the three weeks period so was deemed to be unable to pay its debts. In support of his submission, Mr Tang cited Cornhill Insurance PLC v. Improvement Services Limited & Others⁽²⁾ where Harman J. held that he could draw an inference that a company which had failed to pay an undisputed debt was unable to do so and that accordingly the company could properly be said to be unable to pay its debts and could be the subject of the presentation of a petition to wind up despite the fact that it was clearly solvent and had large assets. However, in the instant case, the petitioner by the statutory demand claimed a very much larger sum as being due, the major part of which I have found is the subject of a disputed debt on substantial grounds so that the Companies Court is not the appropriate forum to determine liability. Although the sum admitted is not in dispute, it was not referred to specifically in the statutory demand independently of the larger figure. In fact there has been some dispute as to the exact amount of the petitioner's claim as evidenced by the different amounts set out in the statutory demand and that in the petition.

23. If the amount which is undisputed had been clearly referred to separately by the petitioner in the statutory demand, the company may have made arrangements for it to have been paid. The object of a statutory demand is to provide clear and unqualified details of the amount of the claim. Here, that has not been done. There is no evidence of a persistent or even a deliberate failure to pay this sum which arose in the Cornhill case whilst there have been negotiations for payment of a larger sum to the Australian companies as a whole. Further there is evidence that the company is solvent and is able to pay its debts. Indeed Mr Eddis submitted that the motion should succeed and a fresh statutory demand be made.

24. In my judgment, upon the facts the demand made was ambiguous in view of the dispute as to quantum, irrespective of the question as to liability, for it is not a case where the company has refused to make payment of an undisputed debt. The statutory demand was not couched in sufficiently clear terms that would have alerted the company to this particular sum as distinct from the overall amount that was claimed. The circumstances can therefore be distinguished from the facts in Cornhill. I consider that the statutory demand was ineffective for the purposes of section 178(1)(a), with the result that the company has rebutted the presumption that it was deemed to be unable to pay its debts.

25. Accordingly, the motion succeeds and the petition is dismissed.

(1)    [1968] 1 W.L.R. 1091

(2)    [1986] 1 W.L.R. 114