RAINBOW BRIGHT HOLDINGS LTD. v. MATSUBA (HK) LTD.

HCCW 17/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 17 OF 2000

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J U D G M E N T

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1. This is an application by the petitioner staying the enforcement of a garnishee order absolute made against the first respondent in favour of Michael Sivan, pending the hearing of the petitioner's petition that the first respondent be wound up.

Background

2. The petitioner Rainbow Bright Holdings Limited (Rainbow) is a BVI registered company controlled by Mr Johnny Fassi (Fassi). The second respondent Boracay International Holdings Limited (Boracay) is also a BVI registered company controlled by Mr Michael Sivan (Sivan). The first respondent Matsuba (HK) Limited (Matsuba) is a company incorporated in Hong Kong.

3. Although much of the facts as to how and why Fassi and Sivan came to enter into a business relationship are disputed, broadly speaking they agreed in 1997 that they should join forces to design, build, manufacture and market electronic toys. To this end Matsuba was acquired or incorporated. The parties used their respective BVI companies to hold the shares and represent them on the Board. Rainbow took 80% of the company and was committed to provide start up and working capital until Matsuba became self-funding. Boracay took the remaining 20% with the right within a prescribed time and subject to stated conditions to acquire up to 49% of the company. Sivan was employed by Matsuba under the title Managing Director for an agreed salary and other stated terms. He was to provide expertise and technical knowhow in the development and manufacture of the toys. These terms were settled and set out in a document called the shareholders agreement which was signed and dated 15 September 1997.

4. Business got underway in October 1997. Rainbow paid into Matsuba's account funds totalling $482,920.95. Sivan took office, and began development of a toy called "Puppy Love with Family". A deal was struck with a company called Playmates Toys (Hong Kong) Limited (Playmates) whereby Playmates were licensed to manufacture Puppy Love upon payment of royalties of not less than US$300,000.00.

5. For reasons which are disputed Rainbow declined to provide any additional funding to Matsuba from January 1998. This effectively prevented any further business activity. Matsuba's staff was laid off in March 1998. Whether this included Sivan is disputed.

6. Thereafter there were attempts to resolve the differences that had arisen but these were not successful.

7. Sivan claiming to be still on the payroll and entitled to his agreed salary paid himself that up to 25 February 1999 out of company funds which included the royalties Matsuba was receiving from Playmates. The final payment from that source of US$100,000.00 was received in December 1999.

8. Claiming material breach of the shareholder's agreement and in particular that Matsuba's funds were being misappropriated, Rainbow petitioned by petition dated 6 January 2000 to wind up Matsuba. On 27 March 2000 Sivan filed a claim with the Labour Tribunal for salary, including severance pay, from 26 February 1999 to 24 March 2000. On 24 May 2000 the Tribunal awarded him the sum of $730,307.00. He took that judgment to the District Court and by garnishee order absolute of 22 September 2000 Matsuba's bankers the Hong Kong and Shanghai Banking Corporation (HSBC) were ordered to pay him the judgment debt of $730,307.00 from Matsuba's account. Neither Rainbow nor Fassi had notice of Sivan's claim and subsequent judgment until HSBC notified Rainbow that it had received the garnishee order and was preparing to pay. Rainbow forthwith filed this application and was granted a stay ex parte at first instance on 11 October 2000. As a consequence there has been no payment by HSBC.

9. Meanwhile Rainbow's petition to wind up Matsuba has been set down for trial on 27 April 2001.

The law

10. The application has been brought under Section 181(b) of the Companies Ordinance, Cap.182 (CO) which reads as follows:-

"At any time after the presentation of a winding-up petition and before a winding-up order has been made, the company or any creditor or contributory may-

(a) .......

(b) where any action or proceeding against the company is pending in any court or tribunal other than the Court of First Instance or the Court of Appeal, apply to the Court of First Instance to restrain further proceedings in the action or proceeding,

and the court to which application is so made may, as the case may be, stay or restrain the proceedings accordingly on such terms as it thinks fit."

11. First I have to establish whether Section 181(b) applies. Is Sivan's action brought in the District Court pending, or has the making of a garnishee order absolute completed the process?

12. I am satisfied the stay asked for can be granted so long as execution has not been carried out. Section 269(2)(b) CO states that execution by way of attachment of debts is not complete until the creditor has received the money.

13. In Attlee Investments Limited v Lee Chuen [1983] 1 HKLR 420 the Court of Appeal held that the power under Section 181 to stay any action extended to execution, post judgment, by way of a writ of fifa.

14. I see no distinction between the circumstances of this case and those in Attlee.

15. Now I have to consider how to exercise my discretion as to whether to grant or decline this application.

16. The general principle is that where a winding up petition has been presented, no creditor should thereafter gain priority over other creditors of the same class unless there are exceptional circumstances; see Attlee at p.422, where the principles laid down in Bowkett v Fullers United Electrical Works Limited [1923] 1KB 160, were stated and applied.

17. In this case there is an undoubted dispute to be resolved between two creditors. Sivan claims priority as his judgment is for unpaid salary. But Rainbow challenges that and would have done so, given the opportunity, before the Tribunal. It is its case that the dispute is in reality between two shareholders, thus creditors of the same class.

18. Furthermore there is Section 269(1) CO to consider. That provides that where a creditor has attached any debt due to a company he shall not be entitled to retain that against the liquidator in the winding up of the company unless attachment was complete before the commencement of the winding up, i.e., the filing of the petition to wind up. So, in the event that I were to refuse this application to stay and Sivan were to receive his debt, if the company on Rainbow's petition is wound up he will be bound to pay it all back to the liquidator; see Attlee at p.422.

The outcome

19. In the circumstances I exercise my discretion to grant Rainbow's application for a stay pending the outcome of its petition to wind up Matsuba.

20. As far as costs are concerned I order that Rainbow's costs of this application be in the cause, taxed if not agreed, payable by Sivan in the event that its petition to wind up Matsuba is successful. This order as to costs shall be nisi at first instance.