RE HONG KONG PAK TAT TRADING CO

HCCW 236/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 236 OF 2011

____________

____________

(Heard together)

______________

J U D G M E N T

______________

Introduction

1.  I have before me a Petition to wind up Hong Kong Pak Tat Trading Co (“Company”) on the grounds of insolvency and also an application by Mr Li Shu Chung (“Ken Li”) under section 168BC of the Companies Ordinance for leave to intervene in High Court Action 672 of 2011.  The second application turns on the outcome of the first.  It is a judgment in the High Court Action, which lead to the service of a statutory demand which is relied on to prove insolvency in the winding up proceedings.  If there is no bona fide defence to the Petition the question of Ken Li having leave to intervene in the High Court Action becomes otiose.

2.  The Company was incorporated in the Republic of Mauritius on 7 May 1999.  It is registered in Hong Kong under Part XI of the Companies Ordinance.  As this section requires, it has registered its principal place of business in Hong Kong and an authorised representative.  The Company has 2 shareholders, who each have 50% of the issued capital: Mr Lee Sai Nam (“Father”) and his son Ken Li.  They are both directors of the Company along with another son, namely, Mr Lee Shu Hang, Richard (“Richard Lee”).

3.  The applications before me form part of a larger dispute between Father and Richard Lee on the one part and Ken Li on the other.  Ken Li contests the Petition as an opposing contributory.  The issues that arise in the Petition are first, whether the court had jurisdiction and secondly, whether or not a bona fide defence on substantial grounds has been established.

4.  Initially, Ken Li suggested that the Petition may not have been properly served, but this argument was not pursued before me by Mr Jean-Paul Wou, who appeared for Ken Li.  He did dispute jurisdiction.  I am, however, satisfied that, assuming that the Company is insolvent, the court has jurisdiction for the following reasons:

(1) The Company has registered under Part XI.

(2) Its directors are resident in Hong Kong.

(3) The petitioning creditor is resident in Hong Kong.

(4) The Company’s only assets are its shares in a Mainland company.  It is, however, clear that a liquidator appointed in Hong Kong will be in a position to take action to realise the Company’s assets for the benefit of the petitioning creditor, who appears likely to be the largest creditor of the Company.

5.  Father says that the debt relied on by him arose in the following way.  He originally established as a sole proprietorship a company called Pak Tat Trading Co (“Pak Tat”).  Through Pak Tat Father built up a successful business manufacturing and selling stainless steel watch bands and accessories.  In about June 1992 Pak Tat acquired a company incorporated in the Mainland called Shenzhen Lianda.  Shenzhen Lianda had a registered capital of HK$53,000,000.  Shenzhen Lianda holds valuable land in the Mainland.  Father provided all funds to purchase the land and to fund Pak Tat and Shenzhen Lianda’s operations.  In 2002 Father decided to incorporate his business.  On 23 December 2002 a share transfer agreement was entered into between Pak Tat and the Company, which provided for the sale by Pak Tat of its 100% interest in Shenzhen Lianda to the Company for HK$53,000,000.  Father was never paid HK$53,000,000 by the Company.

6.  In September 2006 Father transferred 50% of the shares in the Company to Ken Li.  Subsequently, their relationship began to deteriorate and litigation between them concerning ownership of the Company resulted.  This lead to Father deciding to pursue recovery of the sum he was owed by the Company with a view, as I understand it, of putting the Company into liquidation as a means of resolving the larger disputes that he has with his son.  The claim was characterised in the Statement of Claim in the resulting High Court Action as a shareholder’s loan to the Company.  A point that is taken against Father is that he has never produced any documents showing he ever made the loan.  This is correct, although he had produced management accounts, which record the payment.  It seems to me highly likely, although Mr William Wong who appeared for Father was unable to confirm it, that HK$53,000,000 was never paid to Pak Tat (i.e. Father), as this would have been a circular payment and that Father is owed HK$3,000,000 by the Company pursuant to the share transfer agreement.

7.  The documents that have been produced in evidence are consistent with Father’s case.  They show that Pak Tat was owned by him as was Shenzhen Lianda.  They show the sale of the shares in Shenzhen Lianda to the Company in whose books he was, until September 2006, shown as the only shareholder.  There is nothing to suggest that anybody else financed Pak Tat and Shenzhen Lianda’s business and the acquisition of land.  Shenzhen Lianda’s corporate documents, signed by Ken Li, record a registered capital of HK$53,000,000 and, as I understand the position, in the Mainland the authorities require to be satisfied that a company does have the capital recorded in its corporate documents.  It may be that Father’s claim has not been properly formulated, but on the face of the evidence to which I have referred it would appear that he is owed HK$53,000,000 and there is no dispute that the Company does not have the money to repay him.  Prima facie he is entitled to a winding-up order.

Legal Principles

8.  It is well established that in order to defend a petition a company must show that it has a bona fide defence on substantial grounds.  The legal principles relevant to a case such as the present were summarised by me in paragraphs 27 to 29 of my judgment in NTG Limited HCCW 86 of 2011 (unreported) 10 October 2011:

“27. The onus is on the Company to show that it disputes the debt on substantial grounds:

“Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable.  Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable.  It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.”

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

28. I have to be satisfied that the Company’s assertions are believable. The test

“ ... is indeed as simple as whether the defendant’s assertions are believable.  But it must be recognised ─ because failure to recognise it would create a debt-dodgers’ charter — that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.”

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, § 13

29. The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

“(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, “substantial” means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.””

9.  Mr Wong submitted that where a petition is opposed by a contributory, as in the present case, the court will give little weight to the views of the contributory and referred me to Boyle & Marshall: Practice & Procedure of the Companies Court, § 9-102 and Re Camburn Petroleum Products Ltd. [1980] 2 WLR 86, 93H-94A.  I accept this proposition, but it is relevant to cases in which the petitioner has a prima facie case for a winding-up order and a contributory opposes it.  In the present case Ken Li is arguing that the Company has a bona fide defence to the claim.  I now turn to this question.

The alleged defence

10.  Ken Li argues that his Father’s version of events is wrong.  He says that he owned half of Pak Tat and half of the Company from the outset.  I note in passing that he originally argued his Father held the whole of the Company’s shares on trust for him when they were acquired.  He says that he also contributed to investment in Pak Tat and Shenzhen Lianda.  He claims that HK$53,000,000 was never invested in Shenzhen Lianda, which never had any external funding.  He also points out that his Father has not produced any documents evidencing payments to Pak Tat, Shenzhen Lianda or the Company.

11.  Ken Li has provided no evidence at all explaining why prior to 2006 he did not insist in having his interest in the Company recognised by allotment to him of shares or why Pak Tat was on the face of its business registration certificate operated as a sole proprietorship.  He has produced no evidence that he provided any finance to Pak Tat, Shenzhen Lianda or the Company.  He has provided no explanation of how Shenzhen Lianda was able to finance the purchase of land.  The substance of the defence he advances on behalf of the Company is that Shenzhen Lianda never needed the money Father seeks to recover and Father has failed to demonstrate that he made a loan to the Company.  The latter point is correct.  However, I am not satisfied that Ken Li has demonstrated that the underlying basis for the claim, namely, that Father did not own Pak Tat, did not finance Shenzhen Lianda’s acquisition of land and, therefore, did not sell Shenzhen Lianda to the Company for HK$5,300,000, is doubtful.  It seems on the basis of the evidence before me coherent and credible.

12.  So far as the lack of documents are concerned, as I have already noted the likely explanation is that Father’s claim is for non-payment by the Company of the purchase price for Pak Tat’s interest in Shenzhen Lianda.  It is not a claim for repayment of a loan to the Company.  Is this a reason to treat Father’s claim that he is owed HK$53,000,000 by the Company as open to substantial and bona fide dispute?  I think not.  Ken Li argues that the whole basis of his Father’s claim is fallacious and fabricated.  It does not seem that he has adduced evidence that suggests that this argument has substance or is bona fide.  If Father’s description of the financing of Pak Tat and Shenzhen Lianda and the Company’s acquisition of Shenzhen Lianda is correct it follows that Father would probably be owed a considerable amount by the Company by way of the purchase price for Shenzhen Lianda’s shares.  As Father owned both Pak Tat and the Company it is unsurprising that he did not cause the Company to pay for the shares it acquired, because he was the owner of both companies and he would simply have been moving money from one pocket to the other.  The result is that he is still owed money by the Company whether as the outstanding price of Shenzhen Lianda’s shares or as a loan to the Company to pay that price: as I have already indicated it seems likely that the former reflects the true position.  The absence of documents showing that he paid money to the Company is, viewed practically, nothing to the point.

13.  Mr Wou did make one further point, which I should address.  He points out, correctly, that the agreement provides for the payment of the purchase price within 30 days of the effective date of the agreement, which occurred when all government approval had been obtained.  Mr Wou submits that if Father’s claim is for payment of the purchase price such a claim is now time barred.  Generally, this would be the correct analysis; however, I do not accept that it is so in the present case.  The only sensible interpretation of why the purchase price was not paid is that Father did not require it, because in practice it did not involve him receiving any money.  There is nothing to suggest that he waived the right to payment.  Certainly up until September 2006 when he transferred 50% of his shares in the Company to Ken Li it seems to me to be artificial to treat the arrangement between Pak Tat and the Company as anything other than an understanding that the date for payment be extended until otherwise agreed.  If the transfer of shares to Ken Li is treated as bringing that position to an end with the result that Father’s cause of action accrued in September 2006, his claim is not time-barred.

14.  I, therefore, will make the normal winding up order.