RE HONG KONG BREWING & RESTAURANTS LTD.

HCCW 664/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.CW 664 OF 1999

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J U D G M E N T

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1. This petition was presented by Henry Cornell ("Mr Cornell") based on an unpaid judgment debt. The petition first came on for hearing on 4 October 1999. Counsel for the Hong Kong Brewing & Restaurants Limited ("the Company") applied for an adjournment on the basis that a restructuring was likely. The petition was adjourned for three weeks for evidence to be filed.

2. At the adjourned hearing on 25 October, a further two weeks' adjournment was granted. On that occasion counsel for the Petitioner complained about the lack of evidence of the debt of $19 million allegedly owing to Cox Investment Corporation ("Cox") who, for present purposes, will be assumed to be the largest creditor. The circumstances of this debt will be referred to later. The Petitioner also asked for management accounts, but that request has simply been ignored.

3. At the hearing before me today, counsel for the Company sought an adjournment of one week to file further evidence after the court had commented adversely on certain aspects of the evidence before it. I will now outline briefly the background to those comments.

4. Various affidavits have been filed by both the Petitioner and Mr Glenn James Kerrigan, who is a shareholder and director of the Company, the subject of this winding-up petition. The Company is owned by Mr Kerrigan and a certain Ms Rosemary Lee who have been operating restaurants in the Lan Kwai Fong area. The evidence of Mr Cornell was that he was approached in 1995 and entered into an oral joint venture agreement with Mr Kerrigan and Ms Lee in relation to the Company. He agreed to lend up to $8 million to the Company and the loan carried with it an option to convert it into shares subject to the execution of a formal shareholder/share purchase agreement. According to Mr Cornell, the intention was that the three of them, i.e. Mr Cornell, Mr Kerrigan and Ms Lee, would become partners with Mr Cornell owning 50% and Mr Kerrigan and Ms Lee together the other 50%. No such agreement was ever executed.

5. Pursuant to that oral joint venture agreement, Mr Kerrigan advanced various sums of money to the Company between 11 September 1995 and 15 May 1996. It is not disputed that as at 15 May 1996, his advances totalled over $6 million. After 15 May 1996, no further advances were made. Mr Cornell considered that Mr Kerrigan and Ms Lee had reneged upon their joint venture agreement in that they had not accounted to him for any of his entitlement to profits. Be that as it may, legal proceedings were commenced by him and that resulted in summary judgment being entered against the Company for approximately $5.4 million. That judgment debt is the basis of the petition before me today.

6. I now turn to deal with Cox and the debt allegedly owed to it.

Cox and the Company

7. Cox is a BVI company. It now emerges from the evidence filed by Mr Kerrigan that Cox was first registered in the BVI on 25 March 1996. On that day, one share was issued to each of Mr Kerrigan and Ms Lee. The first meeting of the board of Cox was also held on the same day. On 21 April 1997, each of Mr Kerrigan and Ms Lee was issued a further share. On the occasion, other entities, namely, Vergoda Limited ("Vergoda") and Light Crown Company Limited ("Light Crown") were each issued with one share. Vergoda and Light Crown are independent of either Mr Kerrigan or Ms Lee.

8. I do not intend to go further into the history of the shareholding of Cox. Seemingly, there are difficulties with the evidence that has been filed. Be that as it may, I will proceed on the basis of the present composition of its shareholders. According to the Mr Kerrigan's 3rd affidavit, the present shareholders of Cox are himself, holding 28.57%, Ms Lee, Light Crown and Vergoda, each holding 28.57%, 28.57% and 14.29% respectively. What is clear is that Mr Kerrigan and Ms Lee together still control Cox.

9. As regards the shareholding of the Company, the only shareholders and directors are Mr Kerrigan and Ms Lee. The Company has two subsidiaries : Fruitful Technologies Limited ("Fruitful") which runs and operates the Wyndham Street Deli and Lettuce Chat Limited ("Lettuce") which operates the Zip Bar.

The Management Agreement

10. The Company entered into a management agreement with Cox on 12 July 1996 (the "Management Agreement"), expressed to be "effective on and from 1 May 1994". But what is disturbing is the fact that the Company itself was not incorporated as at 1 May 1994, the date the Management Agreement was supposed to become effective. In fact, the Company was incorporated in the BVI on 18 August 1994, some 3 1/2 months later. Nor was Cox which only came into existence in March 1996. Mr Kerrigan executed the Management Agreement on behalf of the Company and Ms Lee on behalf of Cox. Under that agreement, a monthly management fee of $250,000 was payable to Cox. It is to be observed that although the fee payable was "subject to Clause 7.2 and Clause 14", no such clauses can be found in the Management Agreement.

11. The effect of the Management Agreement was to create an immediate debt of some $6.5 million. The backdating or retrospective effect of the Management Agreement is a feature about which the Petitioner complains. He said that he knew nothing of this arrangement : the information relating to the Management Agreement only emerged in these proceedings.

12. As noted above, the immediate effect of the Management Agreement was to absorb (for want of a better word) all the advances that had been made to the Company by Mr Cornell. Cox is apparently owed over $19 million by the Company at the present time. Of this sum, it appears that $8.7 million relates to management fees payable and the remainder consists of amounts that were advances to the Company which, according to Mr Kerrigan, are unsecured, interest free and have no fixed terms of repayment.

13. Under the Management Agreement, the manager, i.e. Cox, was to provide services. Clause 3 set out in detail the services to be provided. It is quite clear that if either of the relevant corporate entities did not exist at the relevant time, no such services could have been provided. Yet, the net effect of the retrospective provision of the Management Agreement was to give rise to a debt of about $6 million in respect of a period when Cox did not even exist and therefore could not have provided any services.

14. Another feature to note is that the management fees payable to the Company by each of its subsidiaries Fruitful and Lettuce amount to no more than $84,000 per month. It will be seen that there is quite a significant shortfall in management fees between what the Company was expecting to receive in fees from these two subsidiaries and what it was obliged to pay Cox under the Management Agreement. So there are serious and troubling features arising out of this Management Agreement which have a direct impact on whether Cox is indeed the substantial creditor it claims to be, matters which the Company has simply failed to address.

15. Counsel for the Company now seeks one week's adjournment to deal with those matters. But for reasons which will appear, I think it is far too late.

The proposed restructuring

16. I now turn to the proposed restructuring that has been outlined for the court. There are two prospective investors, one is Light Crown and the other is a company called Intercontinental Assets Limited ("Intercontinental"). Intercontinental is willing to inject $2.5 million into the Company in return for a 50% shareholding. The proposal is described in a letter from the Company's solicitors dated 2 November 1999 sent to each of the creditors. It is proposed that Cox takes over the debts of the Company which are due to employees, totalling approximately $693,000 and pays them in full and the new funds (i.e. the $2.5 million from the investor) used to pay all debts (totalling some $698,000) due to trade creditors in full. The remainder of the new funds is to be paid to Mr Cornell, representing a payment to him of about 34% of his debt. The existing shares of the Company would be cancelled and 5 million new shares issued. The investor would get 50% of the shareholding in return for its investment, and Cox, upon cancelling all of the debt due from the Company to it except for $2.5 million, would be the remaining 50% shareholder of the Company.

17. Whilst it was unclear from this document whether the Petitioner would stand to receive any more for the remainder of his debt, counsel for the Company stated that the proposal did envisage that the balance of the Petitioner's debts would be repaid out of future profits.

18. The proposal is not something that is bound to materialize. The investment is dependent on due diligence to the satisfaction of Intercontinental. The present position is that Light Crown has recently, on 1 November 1999, made an offer of $3 million for 50% of the issued capital of the Company. But this is again dependent on satisfactory accounts duly audited up to the end of August 1999, and due diligence to be conducted by their solicitors for that proposal.

19. So far as due diligence on the part of Intercontinental is concerned, there is exhibited a due diligence questionnaire which Mr Kerrigan said he has not had time to deal with because of having to file evidence in relation to this petition. The due diligence questionnaire is a staggering document. It is nothing more than a precedent pulled off the files of the solicitors concerned. Everything is in blank. It is a standard questionnaire, not tailored to any particular company. For example, under 'profits and losses', we find the following description :

"(a) Summary of the results of the Group covering the period from _____ to _____."

Then under 'Assets and liabilities' :

"(a) A summary statement of the balance sheet of the Group at ______."

This is not a serious document. I do not believe for one moment that parties who are serious about a restructuring would proceed on the basis of documents of that kind. It is simply a farce.

20. As regards the proposed restructuring, I find it troubling that the Petitioner should be singled out and put at a particular disadvantage when compared to the other trade creditors who are being paid in full.

21. The present case is not at all on all fours with the factual situation in Re UDL Holdings Ltd. [1999] 2 HKLRD 817. There, the framework of a viable restructuring was in evidence before the court and it had the 'in principle' support of a significant majority of the creditors who wished to see the restructuring proposal proceed further. In the present case, for practical purposes, there are only two creditors : one is the Petitioner and the other is Cox. The Company's position is that Cox being the substantial creditor entitled to some 76% of the overall indebtedness supports the scheme. In other words, the Petitioner is bound to be outvoted. On this basis, the court was invited to conclude that the proposal had the requisite 'in principle' support.

22. In UDL I sought to explain my understanding of the holding in Re Esquire (Electronics) Ltd. [1996] 3 HKC 309. An adjournment is really only justified if a restructuring proposal is shown to have the necessary 'in principle' support within the first few weeks of the first hearing. This case is not in that position. For one thing there are serious doubts as to whether Cox is entitled to 76% of the indebtedness. The requisite majority is entirely contingent on Cox being owed $19 million. Given the circumstances concerning the debt alleged to be owed to Cox of $19 million, the retrospective effect of the Management Agreement, the absence of any attempt to address the concerns that had been expressed and the fact that Mr Kerrigan and Ms Lee control both the Company and Cox, I do not find the two-line confirmation from the Company's accountants confirming the amount due to Cox of any assistance without an explanation regarding,inter alia, the matters arising from the Management Agreement. I do not think that another week's adjournment is going to serve any useful purpose.

23. The Company has had every opportunity of dealing with the concerns - and I say serious and well-founded concerns of the Petitioner : it has chosen not to address them. In these circumstances, I see no basis for further adjourning this petition and I make the usual compulsory winding-up order. The Petitioner's costs are to be paid as an expense of the liquidation.