CHIAPHUA INDUSTRIES LTD v. AMCOR HOLDINGS LTD

HCCW104/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 104 OF 2010

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BETWEEN

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JUDGMENT

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1.  I have heard this morning the Petitioner’s amended petition filed on 3 March 2010 and amended on 15 September 2010 for the winding-up of Amcor Holdings Limited (“company”) due to its inability to pay its outstanding debt of HK$4,653,966.45 allegedly owed to the Petitioner, Chiaphua Industries Limited, for the manufacture and supply of air purification products on a sale-by-sample basis to the company’s subsidiary, Amcor Limited.

2.  The Petitioner relies on a statutory demand, dated 14 December 2009, which was served on the company pursuant to section 178(1)(a) of the Companies Ordinance and for which no payment was made within 21 days of its service.

3.  The background to this petition can be summarised as follows.  On 1 March 2005 a Frame Supply and Sales Agreement (“Agreement”) was entered into between the Petitioner and the company pursuant to which the Petitioner agreed to manufacture and supply air purification products to the company and its subsidiaries or affiliated companies.

4.  It appears to be common ground that Clause 2.2 of the Agreement envisaged that, for the most part, the orders for the production and sale of the products covered by the Agreement would be made by the Company’s subsidiaries and affiliates, which were listed in Appendix C to the agreement.  Amcor Limited was one of the subsidiaries listed in Appendix C.  It is also common ground that the provisions of Clause 2.2 of the Agreement envisaged that any subsidiary or affiliate which was to place an order covered by the Agreement would countersign it.

5.  Clauses 3 and 5 of the Agreement show that the sale and purchase was on the basis of a sale by sample.  I do not understand this to be disputed by the Company.

6.  From about 2005, Amcor Limited placed a large number of orders with the Petitioner.  During the course of the following three years a significant sum accumulated and, by early 2009, unpaid invoices totalling approximately US$900,000 were outstanding. 

7.  By an email dated 19 February 2009, following a meeting between the parties, Mr Moshe Avrahami, the Company’s Chief Financial Officer, accepted the Company’s liability to pay the Petitioner and a settlement proposal was made for monthly instalments of US$50,000 to US$70,000.  Mr Richard Zimmern, who appeared on behalf of the Petitioner, points out, and this is relevant to an issue in the proceedings which I will address in more detail later, that the email did not contain any complaint about defects with any of the products which had been supplied to Amcor Limited and to which the outstanding invoices related.  On the contrary, points out Mr Zimmern, the email refers to the feedback from the ultimate customer for the goods, a company called Lux, as being positive.

8.  Subsequent to this agreement, the company made two payments, each of US$50,000 on 5 March and 15 May 2009 respectively.  However, it failed to make any further payments.  The Petitioner became increasingly concerned about this state of affairs and on 28 July 2009 wrote to the company demanding payment of its outstanding indebtedness in the sum of HK$6,968,850.10.  On 31 July 2009 the Company responded to that letter stating that, due to the global financial crisis, it was not in a financial position to pay the outstanding debt.  Again, Mr Zimmern points out that that letter made no reference to there being any defects or claims in respect of any of the products to which the claim for payment related.

9.  A further demand was made on 5 August 2009 by the Petitioner for payment to which no reply was received.  As I have already mentioned, subsequently a statutory demand was served and, following its non-payment, the petition before me was issued.

10.  However, before the statutory demand was issued, the parties had signed a side letter, dated 25 September 2009, recording the termination of the Agreement.  It is relevant, for reasons which I address later, that this side letter was signed not only by the Company but also by Amcor Limited.  That side letter expressly provides that the termination of the Agreement does not affect the liability of the parties to each other which have arisen prior to the termination of the Agreement.

11.  In the original form of the petition issued on 3 March 2010 the alleged debt was HK$6,046,166.99.  This sum was less than had previously been claimed because the Petitioner wanted to exclude from the amount of the claim what it anticipated might be sums that would be subject to challenge.  Mr Zimmern says that this was in the nature of a voluntary deduction to exclude an item which might complicate the prosecution of the petition.

12.  The petition was subsequently amended after it was discovered by the Petitioner that the sum stated in the petition also included debts arising from transactions with the Company’s subsidiaries and affiliates that were unrelated to the products supplied, so the Petitioner alleges, pursuant to the terms of the Agreement.  As a result, the amount of the debt claimed in the amended petition was reduced to HK$4,653,966.45.

The Issues

13.  The Company contests the petition on two grounds.  Firstly, it says that, on a proper construction of the material terms of the Agreement, it has no liability to indemnify the Petitioner for any sums which are owed by Amcor Limited to the Petitioner.  Secondly, it says that if it is wrong in that regard Amcor Limited has cross-claims against the Petitioner which constitute a bona fide defence on substantial grounds.  That particular issue needs to be resolved in separate proceedings and, in those circumstances, the petition fails.  I will deal with each of these issues in turn.

The company’s liabilities for the debts of its subsidiaries.

14.  Clause 2.2 of the agreement provides as follows:

“2.2 Purchase

Each proposed purchase order submitted by AMCOR must be received by CIL no later than eighty three (83) days prior to the desired date of shipment of the products which are the subject matter thereof. All proposed purchase orders submitted by AMCOR to CIL shall be deemed to be confirmed and approved if CIL does not send a written notice indicating that the purchase order is rejected, specifying the reasons for the reject within seven (7) days following the receipt of the proposed purchase order from AMCOR. To avoid any doubt CIL shall not be entitled to reject any purchase order which follows the conditions of the Agreement.

It is understood that purchases of Products and sale and delivery of Products may be by and to the subsidiaries or affiliates of AMCOR listed in Appendix C, provided that such subsidiaries or affiliates countersign this Agreement to indicate their agreement to be bound by the terms and conditions hereof. Purchases by any such subsidiary or affiliate of AMCOR shall be subject to this master Agreement but may be effected by a local purchase order initiated by such AMCOR’s subsidiary or affiliate. All advantages of the terms and conditions contained in this Agreement shall be extended to any such AMCOR subsidiary or affiliate purchasing Products under this Agreement. In the event local law prohibits CIL from giving to any such AMCOR subsidiary or affiliate full advantage of this Agreement, AMCOR and CIL shall make appropriate adjustments at the AMCOR-CIL level.

Any default with the terms of this Agreement by any such subsidiary or affiliate (including any failure to pay for the goods under its respective purchase orders) will be deemed a default by AMCOR.  AMCOR hereby undertakes to procure full performance by each such subsidiary or affiliate of its obligations under this Agreement and its respective purchase orders, and to indemnify CIL against all costs, expenses, damage, losses and claims and any other liabilities suffered by CIL (including but not limited to legal expenses) which arise from or in connection with any breach by any such subsidiary or affiliate of its obligations under this Agreement or its respective purchase orders.”

15.  Mr Zimmern accepts, as Mr Danny Fung, who appeared on behalf of the Company submits, that, on its face, Clause 2.2 of the Agreement envisages that subsidiaries of the company who are to place orders for products from the Petitioner which are covered by the Agreement would countersign the Agreement.  It seems to me that that is clearly what Clause 2.2 does envisage.

16.  The third paragraph of Clause 2.2 contains a guarantee of the Company’s subsidiaries’ liabilities to the Petitioner in respect of sums due under purchase orders that they place with the Petitioner which are covered by the Agreement.  However, Mr Fung argues that on a fair reading of the entirety of Clause 2.2, it is apparent that that guarantee only extends to those subsidiaries listed in Appendix C which have countersigned the Agreement.  Mr Zimmern contests this construction of Clause 2.2. It seems to me, however, that on a fair reading of Clause 2.2, the guarantee does only extend to those subsidiaries and affiliates that are listed in Appendix C and which have, as the clause clearly envisages that they should, countersigned the Agreement.

17.  Mr Zimmern, however, further argues that if, contrary to his principal argument I were to take the view that as a matter of construction of the language of Clause 2.2 the company has not guaranteed Amcor Limited’s liabilities, I should have a regard to the way in which the parties had conducted their affairs since the date upon which the Agreement was signed, namely 10 March 2005, which demonstrate, so he argues, that they have conducted those affairs on the basis that the relevant terms of the Agreement do apply to Amcor Limited.

18.  It is apparent that the purpose of the Agreement is to provide an umbrella arrangement negotiated by the parent company of the group for goods to be supplied by the Petitioner to the group.  It contains the principal terms which are to govern those arrangements.  Those include, in Clause 2.3 a degree of exclusivity in the provision by the Petitioner of products, in Clause 3.1 price and payment terms, in Clause 3.2 a testing period in respect of the products, in Clause 4 delivery, in clause 5.1 technical specifications and quality requirements, in Clause 5.3 reference samples, in Clause 5.5 spare parts and, in Clause 5.6, labelling and trademark protection.

19.  It is also clear from Clause 2.2 that the parties envisaged that the orders for products would be made, not by the parent company but by its operating subsidiaries and these operating subsidiaries were identified in Appendix C to the Agreement.  As I have already noted, it was one of those subsidiaries, and I understand only one of those subsidiaries, which in fact did place orders for the products; namely Amcor Limited.  No orders were placed by the Company itself.

20.  It has not been suggested by the Company that any contractual arrangements were put in place by Amcor Limited with the petitioner to deal with the important commercial terms which were included in the agreement and to which I have already referred.  It seems to me that, in those circumstances, it is clear that the parties, by which I mean the Petitioner, the Company and Amcor Limited allowed their relationship to be conducted on the basis that the Agreement governed it.  Any ambiguity about this was removed by the fact that the parties signed the side letter, dated 25 September 2009, recording the termination of the Agreement and that it was thought necessary for Amcor Limited to sign that side agreement, which it in fact did.

21.  In those circumstances, it seems to me that the Company is estopped from now denying that it is liable, under Clause 2.2, to pay the Petitioner for any sums owed to the Petitioner by any of the Company’s subsidiaries in respect of products which have been supplied under the Agreement.

22.  The second matter relied upon by the Company is the alleged claims that Amcor Limited has against the Petitioner in respect of defective goods.  I have already noted that no complaints were made in respect of any defects in any products supplied to Amcor Limited and in respect of which payment is claimed prior to the issue of the petition and despite the fact that the communications between the Company and the Petitioner were such that one would have expected, if such complaints and claims existed, that they would have been raised at some point during these communications.  Mr Zimmern points to this and suggests that it indicates that the claims, which I will describe in a little detail later, have not been advanced bona fide.

23.  On 4 May 2010 Amcor Limited issued a writ against the Petitioner claiming loss and damage.  The claim for loss and damage is pleaded in paragraphs 9 to 11 of the writ as follows:

“9. In breach of the aforesaid term or terms, some of the goods were not delivered within the stipulated time for delivery and/or were defective and/or were not in conformity with the Lux specifications and designs and/or were not suitable or fit for the Lux purpose and/or were not of merchantable quality and/or became defective within the two-year period of warranty as averred in paragraph 5.b hereof.

10. By reason of the aforesaid breaches, the Plaintiff has suffered loss and damages - particulars of loss and damage - Lux made deductions by way of charge-back in respect of the aforesaid defective goods. Details of the charge-back are separately set out in schedule 2 hereto.

11. In the premises, the Plaintiff claims against the Defendant for the sums of US$209,694.42, Euros 524,925.20, Swiss Francs 22,777.20, and Norwegian Krona 43,393.12, and Czech Koruna 86,191.”

24.  Mr Zimmern makes various submissions in respect of this claim which constitutes the bona fide defence on substantial grounds which the Company relies on, as arising from claims that Amcor Limited allegedly has against the Petitioner.  First, he points out the fact that no agreement has been adduced demonstrating the two-year warranty period referred to in paragraph 5.b of the writ.  Secondly, that it seems more than coincidental that the total amount claimed in the writ is just over what at the time was the amount being claimed in the petition before me.  And thirdly, and most importantly, that if one looks at the charge-backs which are listed in schedule 1 and the invoices supporting the items which have been exhibited to the evidence filed by the Company, it is not apparent that the claims, which it suggested Lux has made against Amcor Limited, arose as a result of any defect in any of the products delivered by the Petitioner or any delay in their delivery. 

25.  Mr Zimmern points out the fact that it is well established (see, for example, the decision of Rogers J in ICS) that, for a company to demonstrate that it has a bona fide defence on a substantial ground to a claim by a Petitioner, the company must descend to sufficient particulars to demonstrate that the claim is not a convenient fabrication but has genuine substance.  I accept Mr Zimmern’s submissions that the degree of detail that the claim is presented in, in the writ and in the evidence that has been filed by the Company, falls short of satisfying that test and that the Company has not demonstrated that Amcor Limited has claims which at least arguably extinguish the amount that is owed to the Petitioner.

26.  In conclusion, I am not satisfied that the Company has demonstrated that it has a bona fide defence on substantial grounds to this petition and I therefore make a winding-up order.

(Submissions on costs)