RE GREENWALLS BIOENGINEERING LTD

HCCW 1032/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1032 OF 2003

____________

____________

_______________

J U D G M E N T

_______________

1. This was the hearing of a creditor's petition to wind up Greenwalls Bioengineering Limited ("the Company"), presented by Silver Ben Development Limited ("the Petitioner") on 17 September 2003. The petition is based on an alleged debt of HK912,856.29, which is described as "the amount paid by the Petitioner on behalf of the Company and advance[d] to the Company during the period from March 2000 to September 2002". A statutory demand ("the Statutory Demand") in respect of the alleged debt was served on the Company on 5 August 2003, but no payments were made in response to it. Attached to the statutory demand was a breakdown of the payments and advances relied upon, from which it appears that the running balance was reduced from time to time by payments which were described as receipts from the Company. The petition was opposed by the Company, and by Mr William Auyeung ("Mr Auyeung"), a director and opposing contributory.

2. The Company was incorporated in Hong Kong on 23 July 1997. It would appear to be common ground that it was at first intended to be used as a vehicle by which Kenly Hong Kong Limited ("Kenly"), Mr Brian Cheng Leung Yan ("Mr Cheng") and a Dr Yoon Pooi Kong ("Dr Yoon") were to pursue a business involving slope stabilisation works by the use of vetiver grass. However, at some point before March 2000, Kenly pulled out of the project. Thereafter, Mr Ronnie Tang Yung Yiu ("Mr Ronnie Tang") and Mr Auyeung became shareholders in the Company. The nature of Mr Ronnie Tang's interest and role in the Company was a matter of controversy between the parties, as I shall explain below.

3. As at January 2001, the shareholders in the Company were Modern Investment Limited (a company that was wholly owned by Mr Cheng), Mr Auyeung and Mr Ronnie Tang. The authorised share capital was HK$3 million, of which HK$300,000 had been issued, with Mr Ronnie Tang holding 10% of the issued shares, and Modern Investment Limited and Mr Auyeung holding 45% each. At the end of March 2003, the company structure was reorganised, with the introduction of a holding company called GreenWalls Holdings Limited ("the holding company"), to which all but one of the existing shareholders' shares in the Company were transferred (the remaining share was retained by Mr Ronnie Tang, apparently on trust for the holding company). Following the reorganisation, the shares of the holding company were held as to 38% by Modern Investment Limited, as to a further 38% by Kingsfield (2000) Limited (a company that appears to have been wholly owned by Mr Auyeung) and as to the remaining 24% by the Petitioner. At all material times, Mr Cheng, Mr Auyeung and Mr Ronnie Tang were the only directors of the Company.

4. The Petitioner itself is owned in equal shares by Mr Ronnie Tang and Mr Tang Kun Ping. It was incorporated on 27 November 2000, and as I have noted above, it became a shareholder of the holding company at about the end of March 2003.

5. The Company disputes that it is indebted to the Petitioner. It makes two points. First, it is said that the Petitioner is not a creditor of the Company at all, in that it was not the Petitioner who made any advances to the Company, but Mr Ronnie Tang. Secondly, it is said that such advances as were made (whether by the Petitioner or by Mr Ronnie Tang) were made on the basis of a mutual understanding between Mr Ronnie Tang, Mr Cheng and Mr Auyeung that they were not to be repaid, but were intended as capital injections into the Company by Mr Tang, with a view to their ultimate capitalisation by the issue of new shares, to bring the issued share capital of the Company up to its authorised limit of HK$3 million. The Company also contends that the true amount of advances made was substantially less than that claimed in the Statutory Demand and the Petition, amounting to no more than HK$295,705.87.

6. Before turning to consider whether or not the grounds on which the Petitioner's debt is disputed by Company are such that the Petitioner should not be regarded as a creditor for the purposes of presenting a winding up petition, I should note that in his skeleton argument, Mr Wou, appearing for the Petitioner, indicated that the winding up of the Company was sought, not only on the ground that it was to be deemed to be insolvent, by reason of its failure to meet the Statutory Demand, pursuant to the provisions of section 178(1)(a) of the Companies Ordinance ("the Ordinance"), but also on the grounds that it could (pursuant to section 178(1)(c) of the Ordinance) be proved that the company was unable to pay its debts, and also on the just and equitable ground under section 177(1)(f).

7. In the event, neither of these further grounds were pursued in argument before me. In my view this was the right course to take. Reliance on section 178(1)(c) was unnecessary in the light of the Company's admitted failure to make payment in response to the Statutory Demand, and would make no difference in relation to the question of whether or not the Petitioner could establish its standing as a creditor. So far as section 177(1)(f) was concerned, there was no indication in the petition that this was an alternative ground on which a winding-up order was sought, and although the evidence in the various affirmations filed by the parties traversed some ground which might be thought to be relevant to an attempt to wind up on this basis, it was not at all clear that such evidence was complete, nor did it seem to me possible to reach any views as to where the merits lay without oral evidence and cross-examination of the various persons involved, a course which Mr Wou did not seek to adopt.

8. The parties were broadly in agreement as to the approach to be adopted in considering whether or not the debt relied upon by the Petitioner was one which could found a creditor's petition - namely that the question for determination was whether or not the Company had demonstrated by sufficiently precise factual evidence (the onus being upon it to do so) that the debt was bona fide disputed on substantial grounds. It was also, I think, common ground that in considering this question, the court would not approach the matter in a wholly uncritical way, but would consider the Company's case against the undisputed or undisputable background (see e.g. Re ICS Computer Distribution Limited [REF]; Re Hong Kong Construction (Works) Limited [REF]).

9. I shall deal first with the question of whether the Company has raised a bona fide dispute on substantial grounds in relation to the identity of the lender (or more accurately, the provider of the funds to it, it not being accepted by the Company that such funds were provided by way of loan).

10. Mr Smith, appearing for the Company, submitted that there was ample contemporaneous evidence to demonstrate that the Petitioner was not the source of the funds provided to the Company. He relied, in particular, on the following matters:-

(1) The breakdown of the advances provided together with the Statutory Demand shows that substantial advances had been made between March and November 2000, before the Petitioner was even incorporated.

(2) The Company's financial statements, at least two of which were signed and approved by Mr Ronnie Tang, do not show any amount due to the Petitioner, but by contrast, record amounts due to directors. The Petitioner was not (and had never been) a director of the Company, but Mr Ronnie Tang was.

(3) The Petitioner's own balance sheet as at 31 August 2001 did not show any sum as being due from the Company, when on the Petitioner's case there should at that stage have been a significant amount due (of HK$685,000 odd), having regard to the state of the running account attached to the Statutory Demand.

(4) Evidence adduced by the Petitioner itself, in the form of a trial balance as at January 2002 exhibited to the affirmation of Ms Kwan Au Chi Har ("Ms Kwan"), an employee of the Petitioner who for a time was responsible for the preparation and maintenance of the Company's books and accounting records, describing an amount identical to that alleged by the Petitioner to be a debt due to it as a capital injection by Mr Ronnie Tang.

(5) Correspondence from solicitors acting on behalf of Mr Ronnie Tang in mid 2003, shortly before the presentation of the Petition, described him, and not the Petitioner, as a shareholder in the Company.

11. Taken at face value, these matters would indeed appear to indicate that there was, to put it no higher, some real substance to the Company's contention that the funds which form the basis of the Petitioner's alleged debt had been provided to it not by the Petitioner, but by Mr Ronnie Tang personally.

12. Mr Wou, however, sought to persuade me that these matters should not be taken at face value. He suggested first, that the evidence clearly disclosed that Mr Ronnie Tang was in fact simply a nominee for the Petitioner, so that the debt apparently due to Mr Ronnie Tang was in fact one which was owed to the Petitioner. In support of this argument, he relied on the evidence of Mr Ronnie Tang and Mr Tang Kun Ping, which was to the effect that after the withdrawal of Kenly from the vetiver grass slope stabilisation business venture, Dr Yoon approached them and persuaded them to invest in the proposed venture. They said that the two of them decided to form a partnership to invest in the venture, and that the initial funding for the venture was provided by them jointly. Following the incorporation of the Petitioner as a corporate vehicle for their partnership, Mr Ronnie Tang represented the interests of the Petitioner in the Company.

13. In answer to this, both Mr Cheng and Mr Auyeung said that they were unaware of any such arrangement. Mr Auyeung said that Mr Cheng had approached both him and Mr Ronnie Tang to invest in the Company, and that there had never been any indication from Mr Ronnie Tang that he was doing so other than in his own personal capacity. So far as the provision of funding to the Company was concerned, their belief was that all such funding had been provided by Mr Ronnie Tang personally as well. They refer to correspondence from Mr Ronnie Tang and also his legal representatives over a period of time, none of which appears to suggest that Mr Ronnie Tang was a nominee for the Petitioner. Mr Auyeung also refers to discussions at a meeting on 24 March 2003, in which he says he suggested that Mr Tang Kun Ping should be invited to assist in the Company's operations, a suggestion which according to minutes recorded by Mr Auyeung was rejected by Mr Ronnie Tang. Mr Auyeung says that if Mr Tang Kun Ping was in fact a partner of Mr Ronnie Tang's, there would have been no reason for Mr Ronnie Tang to have rejected his suggestion.

14. Neither Mr Ronnie Tang nor Mr Tang Kun Ping appear to suggest in their affirmations that Mr Ronnie Tang's alleged position as a nominee for first, the partnership, and later, the Petitioner was ever expressly mentioned or disclosed by Mr Ronnie Tang to either Mr Cheng or Mr Auyeung. Indeed, it would appear from Mr Tang Kun Ping's 5th affirmation (paragraph 40) that their position is that there was no obligation for them to do so. In view of this, it is perhaps understandable that Mr Cheng and Mr Auyeung might not have been aware of the position which is now asserted by the Petitioner.

15. Reliance is, however, placed by Mr Wou on the fact that payments which were credited to Mr Ronnie Tang's account appear to have been effected by cheques drawn on a joint account of the two Mr Tangs, that repayments have from time to time been made of the balance outstanding on the current account of Mr Ronnie Tang, by cheques payable to Mr Tang Kun Ping or the Petitioner, such cheques being signed by Mr Cheng.

16. It seems to me that neither of these points is sufficient to establish that Mr Cheng, or the Company, must have been aware that Mr Ronnie Tang's position was throughout as now alleged. It is not at all clear that Mr Cheng would have been aware of the source from which funds which were treated in the Company's records as being from Mr Ronnie Tang came. Even if he was, there would appear to be no particular reason for him to think that such funds were not advanced by, or on behalf of Mr Ronnie Tang, particularly since they were recorded by Ms Kwan as being advances by Mr Ronnie Tang. Similarly, even though Mr Cheng might reasonably be taken to have been aware that payments were being made to Mr Tang Kun Ping or the Petitioner, it is far from obvious why he should have attached any particular significance to this fact - it would seem equally possible to regard such payments as having been made at the request or direction of Mr Ronnie Tang, particularly as they were recorded as reductions of the amount standing to the credit of his account with the Company.

17. Mr Wou also placed much reliance on a declaration made by Mr Ronnie Tang on 5 August 2003 in which he declares that he has throughout been acting as a nominee for the Petitioner, and that all sums standing to the credit of his account with the Company are in fact sums provided by and due to the Petitioner. It seems to me that this declaration is of little assistance in the present context. It was not made until at least the date on which the Statutory Demand was issued, and was not provided to the Company until 31 August 2003, after the Company's solicitors had written (on 20 August 2003) pointing out that the Company's records contained nothing to indicate that the Petitioner was in fact a creditor of the Company. The declaration does not purport to have been made until well after all the advances which are relied upon in support of the debt had been made. In these circumstances, it is not, in my view, possible to regard it as being in any way conclusive in favour of the Petitioner.

18. Even if this declaration were accepted at face value, it would still have to be set against the rest of the documentation and evidence relied upon by the Company. The Petitioner was not able to provide clear or cogent explanations in respect of this documentation and evidence. It is incontrovertible that the Petitioner did not exist when the advances which it now relies upon began to be made. So far as the Company's audited accounts are concerned, although it was pointed out that Mr Ronnie Tang did not sign the latest set of such accounts, it was clear that he had signed the earlier sets of accounts, which were to like effect. The Petitioner was only able to allege that the audited accounts misstated the position, and that what were described as loans from directors should have properly been described as loans from shareholders. So far as the Petitioner's own balance sheet was concerned, it was suggested by Mr Tang Kun Ping that this should not be given much weight as it was the first balance sheet, prepared at a time when its records were not as well put together as they might have been. No explanation was offered in respect of the trial balance as at January 2002, or of Mr Ronnie Tang's solicitors correspondence in which it was suggested that he and not the Petitioner was a shareholder in the Company.

19. In this state of the evidence, it does not seem to me to be possible to conclude that Mr Ronnie Tang's declaration can possibly be preferred to such other documentation and evidence, without the matter being at least tested by oral evidence and cross-examination from the parties concerned.

20. In these circumstances, it seems to me that the Company has clearly established that there exists at least a bona fide dispute of substance in relation to the question of the identity of the creditor, assuming the advances relied upon to have been by way of loan rather than capital injection. On this ground alone, I would hold that the Petitioner has failed to establish its locus to present a creditor's petition and dismiss the petition accordingly.

21. Although it is not strictly necessary for me to do so, I shall also deal briefly with the Company's other ground for disputing that it is indebted to the Petitioner, namely, that the advances made were intended as capital contributions and not as loans which were to be repaid.

22. In support of this contention, Mr Smith relied on the affirmation evidence of Mr Cheng and Mr Auyeung to this effect. He also relied on a letter to Dr Yoon dated 19 March 2003, signed by Mr Cheng, Mr Auyeung and Mr Ronnie Tang, in which there are references to there having been a mutual agreement that the Company's shareholders (Mr Cheung, Mr Auyeung and Mr Ronnie Tang) should provide working capital of HK$3 million to the Company, and references in a number of minutes of meetings of the Company's board to injections or proposed injections of funds by the directors. Finally, he relied on the terms of the trial balance of January 2002, which described the amount relied on in the Statutory Demand as a capital injection. Mr Smith suggested that the notion of an injection of funds (and certainly a capital injection) carried with it the implication that it was not something which should be too readily withdrawn, as it might otherwise not serve its purpose.

23. Mr Wou submitted that the terms "working capital" and "injection" did not carry with them any particular implication that the funds so provided were to be regarded as capital in the true sense rather than loans. He placed considerable reliance on the fact that the Company's audited accounts described these balances as directors' loans, which had no fixed terms of repayment. He suggested that this meant that they were necessarily repayable on demand. He relied also on a statement by a Ms Lo Kit Ying, an employee of the Company's auditors who said she had been informed by Ms Kwan that the amount in question was a loan from Mr Ronnie Tang (a piece of evidence which, incidentally, cut across the Petitioner's case in respect of the identity of the provider of the funds). He relied also on what he suggested were admissions in the affirmations of Mr Cheng and Mr Auyeung that these were advances or loans. Finally, Mr Wou placed particular emphasis on the fact that there appeared from time to time to have been repayments made in respect of the balance on Mr Ronnie Tang's account, in particular a number of substantial repayments of some HK$529,000 odd in May 2001, and two repayments of HK$200,000 odd in April and September 2002.

24. I would tend to agree with Mr Wou that the terms "working capital" and "injection" do not necessarily imply that the funds that are so described may not be advanced by way of loan. However, it seems to me that in order to determine what the status of the advances relied upon in this case were, it is necessary to look at the intention of the parties. In this case, this inevitably involves a consideration of what was agreed between Messrs. Cheng, Auyeung and Ronnie Tang. In my view, this is not a matter that can properly be resolved on the basis of conflicting affirmation evidence, particularly as it seems to me that in the context of a company which is in the early stages of its development, it is not uncommon for those interested in the company to provide funds which they would not expect to be repaid until such time as the company is in a position to do so.

25. I do not think that the fact that the advances were booked as directors' loans, with no fixed terms of repayment, is necessarily conclusive in favour of the view that these advances were in fact loans. If the agreement were as alleged by Mr Cheng and Mr Auyeung, the advances would remain booked as loans on current account until such time as they were capitalised. Their being shown as advances or loans on current account pending this step being taken is not inconsistent with an agreement that they should not be withdrawn or repaid, pending capitalisation by an issue of shares.

26. So far as Ms Lo's evidence is concerned, this appears to have been based on information from Ms Kwan, who had herself apparently regarded the advances at one stage as being by way of capital injection (as appears from the trial balance which she prepared in January 2002). I would not therefore regard this evidence as conclusive against the Company either. As for the evidence of Mr Cheng and Mr Auyeung, it seems to me that on a fair reading of that evidence, it is quite clear that they do not accept that the Company is liable to make any repayments to either Mr Ronnie Tang or to the Petitioner.

27. Finally, so far as the repayments shown on the statement of account attached to the Statutory Demand is concerned, this was explained by Mr Cheng and Mr Auyeung as follows. In relation to the first repayment of HK$529,000, the situation was that at that stage, the Company's records showed that Mr Ronnie Tang had advanced some HK$829,000 to the Company. As he was at that time only a 10% shareholder in the Company, and it had been agreed that the total working capital to be contributed was HK$3 million, it was thought right that the Company should return the excess over HK$300,000 that had been advanced by Mr Ronnie Tang. As far as the other repayments are concerned, the Company's position is that these were all repayments of specific advances made by the Petitioner on behalf of the Company. I do not think it possible to come to any concluded view on the basis of the documents alone, without hearing from the various deponents, as to the status of such advances.

28. In these circumstances, it seems to me that the Company has also demonstrated that there is substance to its contention that the advances were intended to be capitalised and not repaid. It may be that this case will ultimately prove not to be well founded, but it is not one which can be summarily rejected in the context of a winding up petition.

29. Finally, I should briefly touch on the dispute as to the amount advanced by Mr Ronnie Tang. This was potentially of relevance since, had I concluded that there was no substance to the Company's case that the Petitioner was not the person who had advanced the funds in question to it, even accepting that there was substance to the Company's case in relation to the nature of the advances, the amount of the outstanding balance exceeded the amount that had (on the Company's case) been agreed to be advanced by way of funds to be capitalised in future.

30. As I have noted, the Company is of the view that the amount advanced is in fact some HK$295,705.87. This amount is arrived at by deducting from the amount alleged to be due by the Petitioner slightly in excess of HK$615,000 in respect are what are alleged by Mr Cheng and Mr Auyeung to be questionable entries on the current account of Mr Ronnie Tang. The allegedly questionable nature of these entries is disputed by Mr Ronnie Tang and the Petitioner. At the end of the day, I did not understand Mr Wou to suggest (nor do I think it could seriously have been suggested) that this was a matter which could be resolved on the hearing of the petition, and in these circumstances, I do not propose to deal with it further.

31. Thus, in the result, I am satisfied that the Company has established that it disputes the debt allegedly due to the Petitioner bona fide and on substantial grounds. I shall therefore dismiss the Petition, and make an order nisi that the Company's costs of the Petition should be borne by the Petitioner, to be taxed on the party and party basis if not agreed, notwithstanding Mr Smith's suggestion that these should be taxed on a higher basis. So far as the costs of Mr Auyeung are concerned, I would propose to allow him his costs of his affirmation, to be paid by the Petitioner on the same basis. It does not appear to me that he has incurred any costs in relation to the hearing of the Petition, but, in the event that he has, I would be inclined to think that only one set of costs should be awarded against the Petitioner in respect of the hearing, and would not propose to award any further costs to Mr Auyeung in respect thereof.