RE NAM TAI TRADING CO LTD

HCCW 193/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 193 OF 2011

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J U D G M E N T

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Grounds for the petition and the objections

1. Before me is the substantive hearing of a winding-up petition against Nam Tai Trading Company Ltd (“the Company”) presented by the Commissioner of Inland Revenue on 10 June 2011.  The main ground relied on is the Company’s inability to pay outstanding judgment debts which exceed HK$41.6 million in aggregate, plus post-judgment interest.  This followed a statutory demand served by the petitioner for the  judgment debts on 29 March 2011.  Alternatively, the petitioner relies on the ground that it is just and equitable that the Company should be wound up.

2. The grounds raised by the Company in opposition to the petition are as follows:-

(1)  that it is neither just nor equitable to wind up the Company under section 177(1)(f);

(2)  the company is able to pay its debts; and

(3)  there is support from the Nam Tai Group Management Ltd, the 100% direct holding company of the Company and a creditor of the Company.

Company’s application for adjournment

3. In the skeleton argument filed on behalf of the Company prior to the hearing, Counsel for the Company stated their acceptance that the petitioner is prima facie entitled to seek a winging-up order.  The Company however sought an adjournment of the petition to a date to be fixed not less than 3 months from the date of the hearing, for the purpose of:-

(1)  allowing the petitioner to reconsider whether to seek an immediate winding-up order, given that there has been fresh evidence in proceedings related to those which account for part of the aggregate judgment debts leading to the petition; and

(2)  allowing the Company to sell certain assets to see if it can pay the amount sought.

4. From the above, it was clear that the Company was not pursuing the grounds of objection to the petition to resist a winding-up order, but was asking the court to exercise its discretion to adjourn the hearing.  In effect, the request was to delay the making of the winding-up order, in the hope that there may either be a change of mind on the part of the petitioner regarding whether to enforce one of the judgment debts, or there may be a change in the liquidity of certain assets of the Company that may enable it to pay its debts.

5. The petitioner did not agree to an adjournment of the hearing of the petition.  He indicated through Counsel that he would seek an immediate winding-up order, and did not need time to reconsider its position.

6. In considering the Company’s application for adjournment, I am to bear in mind that some of the judgment debts have been outstanding for 6 years, and others for over 3 years.  It is common ground that the assessments which led to the judgment debts are final and conclusive, and all avenues of appeal have either been exhausted or not been pursued.

Fresh evidence relating to one of the judgment debts

7. The Company was set up in 1983 as a member of a group of companies ultimately owned by Nam Tai Electronics Inc (“NTEI”), a BVI incorporated company.  It initially functioned as a trading company in electronic products. Since the sales operation was relocated to mainland China, the Company’s activities have been limited to supporting customer relations and sales co-ordination.

8. In 2007, the petitioner raised additional profits tax assessment for the years of 1996/1997 to 1998/1999, and for the year 1999/2000.  These were objected to by the Company on the basis that the management fees paid to NTEI, and the legal and professional fees paid to NTEI and subsidiary NTSZ, were deductible under sections 16 and 17 of the Inland Revenue Ordinance, Cap 112 (“the IRO”).  The petitioner accepted that the receipt of the management fees by the Company from the PRC subsidiaries formed part of the income of the Company, but refused to accept that the payment of management fees by the Company to NTEI was necessary for the same business.  The Deputy Commissioner for Inland Revenue ruled that fees were not demonstrated to have been incurred in the production of the Company’s profits, and the purported payments of fees were transactions carried out by the Company for the sole or dominant purpose of enabling the Company to obtain a tax benefit under section 61A of the IRO.  The Additional Profits Tax Assessment was confirmed.

9. The Company appealed to the Board of Review.  The Board of Review upheld the Determination in its Decision (Case No. B/R 66/07) dated 9 December 2008.  The Company’s application to state a case was refused by the Board of Review.  The additional tax was the subject of tax recovery action DCTC 4250/2008.

10. The Company uncovered fresh evidence in May 2011 which, it claimed, would have demonstrated the Board of Review erred in its ruling on the issue of deductibility of the management and other fees.  The fresh evidence is in the form of board resolutions and various back-to-back services agreements, all amongst the Company’s own records.  I note, however, that these recently discovered documents are alleged to be relevant only to one of the numerous judgment debts set out in the Particulars of Debt served with the Statutory Demand, albeit the largest item.  Even if that item were taken out entirely, there remains nearly HK$18 million in terms of outstanding judgment debts.

11. I also note that the Affirmation of Koo Ming Kown (“Koo”) filed on behalf of the Company makes no attempt to explain why the search which uncovered the fresh evidence was not undertaken until May 2011, some two years after the assessment in question had reached finality with no further appeal pursued.  There was no suggestion that the Company’s documents were inaccessible to the Company or its directors at the relevant time, or that any reasonable effort were made to search for relevant records earlier.

12. At the hearing, the Company was merely calling upon the petitioner to agree to an adjournment in order to reconsider whether to pursue a winding-up order.  It was argued that the petitioner should not rely on its strict legal right to do so in the light of the new evidence.  Since the petitioner did not agree to an adjournment, it was not for this court to pass any judgment on the rights or wrongs of the petitioner asserting its entitlement to the judgment debt that has only now been put into question.  I would however observe that the petitioner has a duty to the public to pursue debtors for unpaid taxes, and I do not see any justification for its foregoing any judgment debt on the basis of any new and untested evidence adduced after both the assessment and appeal processes have been completed.

13. For the foregoing reasons, regardless of the probative value of the fresh evidence, it has no place or purpose to serve in these winding-up proceedings.  As the petitioner was not prepared to agree to an adjournment to reconsider his stance on the relevant judgment debt in the light of the fresh evidence, it would be futile for me to impose an adjournment on this account.  I decline to do so.

Section 82A(4) notices against two directors

14. Mr Koo in his affirmation relies on a further ground in support of the adjournment application which was not pursued in Counsel’s skeleton argument or at the hearing.  This relates to the section 82A(4) notices issued by the petitioner against him and another director Mr Murakami notifying them of an intention to assess additional taxes on account of the errors contained in the tax returns of the Company for the years 96/97, 97/98 and 99/00 which they signed.  For the sake of completeness, I shall deal with this ground as well.

15. Liability under section 82A of the IRO is a personal liability against the directors, and is separate and independent from the judgment debts upon which the petition is based.  It is not a potential liability of the Company.  Having read the evidence of Mr Koo, I do not agree with him that the outcome of the determination of the notices intertwine with the petition in any way, even if the issues raised by him regarding the fresh evidence may be relevant to the final assessment which led to the pronouncement of one of the judgment debts forming part of the subject of the petition.

16. There is accordingly no reason to grant an adjournment of the petition on this ground.

Allowing time to sell the company’s plots of land

17. Next, the court was called upon to consider granting an adjournment of three months so as to allow time for the Company to sell off certain plots of agricultural land, instead of having the land put under “force sale”.  It was the Company’s belief that if over the adjourned period a buyer could be found to pay market price for the plots of mortgaged land, the proceeds could well pay off both the mortgagee and the petitioner.

18. In order to consider this ground of application, it is necessary to consider whether there is any real prospect that an adjournment might help in the way envisaged, ie that it would significantly increase the prospect of the Company fetching a higher price for the land than what a “force sale” might fetch.

19. According to the evidence of Koo, the 13 plots of agricultural land in Yuen Long with a total area of 84,878 sq ft have great development potential, both for sale and purchase, and for resumption by the government.  He however recognized that they were no liquid asset, as the plots were “of a very special nature”.  The market situation and timing of the sale would make a huge difference to the price they will fetch. Relying on an email purportedly sent to a potential buyer by the Corporate Secretary on 18 May 2011, he estimated the land was worth HK$10,000 per sq ft.

20. There was no evidence whatsoever on how the Company arrived at the valuation of HK$1,000 per sq ft from HK$650 per sq ft estimated two years before.  The valuation was doubted by the petitioner.  It was said on behalf of the Company that if the petitioner did not accept the valuation relied on in the evidence of Koo, the petitioner could well have obtained its own valuation.

21. As the Company is no longer denying the validity of the grounds in support of the petition, but merely asking for an adjournment of the hearing, it was for the Company to substantiate its valuation of the land in so far as it might be relied on to support its application for adjournment.  In view of the quality of the evidence, or rather the absence of evidence, I am not satisfied that $1,000 per sq ft is an accurate or reliable valuation.

22. Even more importantly, there was no correspondence adduced in evidence regarding any follow-up on that single enquiry, or of any other enquiry from other parties that might be regarded as interested buyers.  Neither was there evidence of any steps that might have been taken by the Company to step up the marketing of the land to increase the chance of finding a buyer.  Regarding the possibility of land resumption by the government, there were no materials in evidence as might shed light on how likely it was to happen in the foreseeable future.  There was no other evidence adduced to explain why the land could be expected to attract offers for the alleged market price or any compatible sum within the next few months.

23. In the circumstances, there was nothing to persuade me that by granting the adjournment applied for, the Company was likely to find a buyer for the plots of land in the few months ahead, and even less likely so at the market price referred to in Koo’s evidence.

24. The application for adjournment is refused.

Winding-Up order

25. I now proceed to consider if a winding-up order should be made.  As referred to above, at the hearing the Company no longer argued that the petitioner’s grounds for obtaining a winding-up order were not made out.  However, for the sake of completeness, I shall examine the grounds below

26. I am satisfied that the Company is unable to pay its debts within the meaning of sections 177(1)(d), 178(1)(a) and 178(1)(c) of the Companies Ordinance, Cap 32.

27. The latest audited financial statement of the Company shows that as at 31 October 2010, its current liabilities exceed its total assets by $62,035,198.  A staggering amount of $64,204,408 is due to its holding company NTGM, for which the Company is charged interest at 30% pa.  There was no evidence showing that the parent company supported the Company financially or was otherwise going to forbear its debt.

28. As regards the 13 plots of land, they have a book value of around $600,000 to $700,000, and fetch a modest annual rental income of $219,088 in 2010, which is entirely disproportionate to its alleged market value.  As neither sale nor resumption is in the horizon, and enquiries appear to be few and far in between, a “force sale” appears to be inevitable in order to realize the assets to pay the Company’s debts. The plots of land are mortgaged to NTGM.  Even if it were able to sell the land, the Company will be obliged to repay the holding company NTGM as its secured creditor first. It remains the position that the Company has been unable to sell the land to repay the judgment debts.

29. The Company owns two golf club memberships with a second-hand market value of $854,000 (as opposed to a book value of $1,702,800), also charged to the holding company under a debenture. Sale of the memberships would attract a transfer fee of RMB163,000.  In addition, it also holds “prepaid lease payments” in the sum of $661,290 and $16,129. Apart from the above, it has no other assets.

30. Mr Koo as a representative of the Company asserted in his evidence that NTGM, the majority in debt value of the Company’s creditors, believes that the Company has sufficient assets to cover its debt owed to NTGM “provided that these assets are sold at a good time”.  He exhibits a letter signed on behalf of Nomitor Limited, a corporate director of NTGM, stating the above belief, and that the interest of NTGM as a secured creditor would be jeopardized by a force sale of the Company’s assets.

31. I am not prepared to give much weight to the contents of the letter nor the evidence of Mr Koo in this regard.  Not only was the unsupported valuation of the land inherently unreliable, NTGM had not found itself able to put forward any sworn testimony on its belief that the Company was in fact solvent.  In my view, what was put forward did not constitute “sufficient evidence” for the purpose of ascertaining NTGM’s wish under section 287 of the Companies Ordinance, Cap 32.

32. Further, bearing in mind what has been said by Kwan J in Kam Kuen Construction Co Ltd [2002] 3 HKC 547 at paragraphs 19 to 25, I am not bound to follow the wish of NTMG even if it were sufficiently proved.  I am entitled to have regard to the fact that the relationship between the NTGM as an opposing creditor and the Company makes the former less than truly independent.  In the circumstances, unless convincing evidence has been put forward, I am not prepared to give any significant weight to the bare and unsworn assertions from NTGM in opposition to the petition.

33. I am also satisfied that the “just and equitable” ground under section 177(1)(f) is made out.  According to what has been said regarding the discovery of fresh evidence, nothing about it affects my ruling on this ground.  Neither do I find the potential additional assessment of tax against Mr Koo and Mr Murakami personally of any relevance to this ground.

34. Mr Koo’s affirmation also obliquely refers to a loss of goodwill as a reason for the order sought not being “just and equitable”. It is said that the Company is the “major window of business” of the Nam Tai Group and its winding up would cause great loss to the business goodwill of the Company and the Group as a whole.

35. In answer to this point, Counsel for the petitioner points out that the report of the Directors in the latest annual reports of the Company, the Company’s principal activity was said to be “an owner of prepaid lease payments and golf club memberships”.  They reflected what the Company’s audited financial statements reveal, ie that in the past 3 or 4 years, the Company had merely been an asset holding Company receiving an average of about $20,000 per month from the plots of agricultural land in Yuen Long.

36. Without further elaboration or other evidence, it is impossible to see what valuable goodwill the Company could claim to lose as would make a winding-up order unjust or inequitable

Orders

37. I make a winding-up order against the Company, and that the petitioner’s costs be paid out of the assets of the Company.

Mr Paul H M Leung , instructed by Department of Justice, for the petitioner
Mr Kumar Ramanathan, SC and Mr Jose Antonio Maurellet, instructed by Wilkinson & Grist, for the company