RE K VISION INTERNATIONAL INVESTMENT (H.K.) LTD

HCCW282/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 282 OF 2011

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DECISION

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1.  This is an application for the appointment of provisional liquidators in respect of K Vision International Investment (Hong Kong) Limited (“the Company”).

2.  The application is made by Madam Chow Fu Hsien, who is a judgment creditor of the Company.  She is a judgment creditor pursuant to a judgment obtained by her in previous High Court proceedings in which the Company was, following appeals, ultimately adjudged liable to Madam Chow in the sum of some $37 million in respect of an account of her share of profits arising out of an asset held by the Company which it held as to 35 per cent on trust for Madam Chow.  The asset in question was a building project in Beijing.

3.  Madam Chow said in the course of previous proceedings that she had been given a 35 per cent interest in the project as compensation or remuneration for having introduced the project to the Company and for having assisted the Company in developing and realising the project in Beijing.

4.  There is a considerable procedural history to the disputes between Madam Chow, a Mr Qu, who is the majority shareholder of the Company, and the Company itself.  This spans a number of applications in the course of the previous High Court proceedings, including an application by Madam Chow for summary judgment which was strenuously resisted, ultimately unsuccessfully, by Mr Qu, and an application for an account to be taken as to the amount of the profit that was properly attributable to Madam Chow, pursuant to the trust arrangement that had been agreed, which proceeded from an assessment by Master Lung to an appeal to Deputy Judge Benjamin Yu, SC, followed by a further appeal to the Court of Appeal with the ultimate result that the order of Master Lung awarding some HK$37 million to Madam Chow was reinstated.

5.  Thereafter there was further litigation in relation to the appointment of a receiver over the trust assets, that is to say the interest of the Company in the Beijing property and in the Beijing company through which the property was held.

6.  It appears from the history as recounted in the various judgments in the course of those proceedings that every step was strenuously resisted by Mr Qu and it is quite clear from the views expressed, in particular by Master Lung in the course of the assessment or an account of profits that was taken and by Master Lai and Deputy Judge Seagroatt in the context of the application for the appointment of receivers and an appeal from it, that the courts have taken a dim view of Mr Qu’s conduct in respect of his relationship with Madam Chow and in relation to the litigation before the courts.

7.  The matter that has triggered this particular application is that having acquired what appeared to be the benefits of the receivership order, Madam Chow found that there was considerable delay in the actual appointment taking effect because of further difficulties that had arisen as a result of arguments about the level and type of security that was to be provided by the receivers.

8.  While these disputes were being resolved, Madam Chow came to know in the course of the receivership application that there had apparently been an arbitration in the Mainland which had been resolved with the effect that the Company would appear to have lost its interest in the Beijing project, including such part of that interest as had been previously found to be held on trust for Madam Chow.

9.  Not surprisingly, Madam Chow was alarmed by this state of affairs and investigations subsequently showed that the basis of the arbitration appeared to have been founded on a cooperation agreement said to have been entered into between the Company and a company called Orient Patron Nominees Limited (“OPNL”), back in 1994.

10.  This agreement apparently provided that in consideration of OPNL lending some $12 million to the Company, the Company would undertake to repay OPNL with interest and if it did not do so progressively larger proportions of the Company’s interest in the project would be held by it on behalf of OPNL.

11.  Madam Chow suggests that there is much to be suspicious about this agreement, particularly since its existence was never alluded to at a time when the Company sold off part of its interest in the Beijing project generating the profit which was the subject matter of the claim for the accounts to profits and resulting in the monetary part of the judgment which Madam Chow has obtained against the Company.  Nor was it mentioned at the time when the Company executed a declaration of trust in respect of 35 per cent of its interest in the project in favour of Madam Chow, that declaration of trust being the foundation for her claims against the Company. Nor, for that matter, was it mentioned until a fairly late stage in the proceedings between Madam Chow and the Company, that is to say at the point when the account of profits was being taken by Master Lung, and even then it was not raised in the context of having given rise to a claim against the Company but as affecting the amount of profit that the Company had earned from the project for which it should be accounting to Madam Chow.

12.  There would therefore appear to be some substance to the position taken by Madam Chow so that the cooperation agreement should be viewed with at least a modicum of suspicion.

13.  Leaving that aside, thereafter, steps appear to have been taken for the agreement to be assigned first to a company called Orient Patron Holding Limited (“OPHL”) (I pause at this stage to add that it appears from the evidence that both OPNL and OPHL are companies associated with Mr Qu) and thereafter, rather more recently, by OPHL to Beijing Hua Mei, a company about which relatively little is known.

14.  Notwithstanding that there appears to have been no arbitration clause in the cooperation agreement, Mr Qu appears to have agreed to enter into arbitration with Beijing Hua Mei as to the Company’s liability under the cooperation agreement. 

15.  Although it is fair to say that Mr Qu did take various points in opposition to Beijing Hua Mei’s claim to be entitled to the entirety of the Company’s interests in the Beijing project pursuant to the cooperation agreement, on the grounds of the Company’s failure to comply with its obligations under it, the ultimate position was that the Company was unsuccessful in the arbitration resulting in an arbitral award in China having the effect of declaring that Beijing Hua Mei was entitled to the Company’s entire interest in the Beijing project.

16.  The result of this would be that if the arbitration award is left unchallenged that the Company will have, in effect, no assets, as the only asset of the Company that is now known to exist is its interest in the Beijing project, both in the land itself and in the company through which it is held.

17.  The effect of this will be that there would appear to be little prospect of Madam Chow recovering anything from her litigation against the Company.

18.  On learning of this information it appears that Madam Chow took steps to have the Company wound up.  She launched the present petition on the basis of the judgment debt for some $37 million, plus interest, which totals now something in excess of $67 million.

19.  Having lodged the petition on 24 August 2011, two days later, on 26 August 2011, Madam Chow took out the present application for the appointment of provisional liquidators.

20.  The application was made primarily on the basis that it was necessary for provisional liquidators to be appointed as a matter of urgency to enable the Company to take steps to try to challenge the arbitral award in China so as to recover for itself, and ultimately for Madam Chow’s benefit as well, the assets of which it would be deprived if the arbitration award were to stand.

21.  At today’s hearing, Miss Chan, who appears for Madam Chow submitted that the application was made on the basis that there were a number of factors that pointed to the appropriateness of appointing provisional liquidators.  She said first, that there was a need to protect the Company’s assets by the appointment of provisional liquidators so as to enable the provisional liquidators to take steps to set aside the arbitral award.  She submitted that Madam Chow justifiably had no confidence that Mr Qu would take any steps himself seriously to contest the arbitration award.  Second, she submitted that in any event the Company was in deadlock, and that this provided a further reason for the appointment of provisional liquidators.  Third, she said that a winding-up order was almost inevitable. Finally, she submitted that having regard to all the circumstances the appointment of a provisional liquidator would in fact do little damage to the interests of the Company.

22.  Both Miss Chan and Mr Jonathan Wong, who appeared for the Company, were agreed as to the relevant test to apply when considering whether or not provisional liquidators should be appointed. 

23.  In essence there are two stages to be considered.  The first is whether or not there is a prima facie case for the making of a winding-up order; and the second is, if so, whether in all the circumstances of the case it would be right to appoint provisional liquidators.

24.  I have no doubt that a prima facie case for the making of a winding-up order has been established.

25.  The company is a judgment debtor in respect of a judgment debt of some $67 million.  A statutory demand has been served in respect of it.  The statutory demand has gone unanswered and the company is therefore deemed to be unable to pay its debts.

26.  Although Mr Wong valiantly tried to persuade me that in the circumstances I should look not just at the ability of the company to pay the judgment immediately, but also take into account the prospects of it being able to pay it in the future, having regard to the fact that it is contended that its interest in the Beijing project was in the region of RMB 200 million, and that assuming its share to be 65 per cent, this would be more than sufficient to cover the judgment. 

27.  He submitted that in those circumstances, although the Company might not now be able to pay the debt immediately, it was on a balance sheet basis at least, solvent and therefore should not be wound up.

28.  In my view, insolvency can be established both by the cash flow test and by a balance sheet test.  Where a company is insolvent on a cash flow test it does not follow that because it is solvent on a balance sheet test that there is no prima facie case for a winding-up order.  Quite the contrary.  If a company is unable to pay its debts as they fall due, i.e. on the cash flow test, the general practice is for a winding-up order to be granted.  The fact that it may have an excess of assets over liabilities will not generally prevent a winding-up order being made where the company cannot, in fact, pay its debts when they are due.

29.  Secondly, it seems to me that the proposition put forward by Mr Wong suffers from a flaw in that the Company’s current position, in the light of the arbitration award, is that it is not, in fact, entitled to the assets in question.  The result would then be that the Company will have no assets out of which to satisfy the debts owed to Madam Chow and in those circumstances it does not seem to me that, on either the balance sheet basis or the cash flow basis, it can be said that the Company is so clearly solvent that no winding-up order would be made.

30.  Even if one accepts that there is a possibility that the winding-up order would not be made at the end of the day, I do not think that it can be seriously gainsaid that at this stage at least there is a prima facie case for making of up of a winding-up order against the Company.

31.  That being so, I pass on to the second stage of the test – whether or not in all the circumstances of the case it would be appropriate to appoint provisional liquidators.

32.  In this regard, it seems to me that having regard to the history of the litigation between the parties there is a great deal of force in the submission that Mr Qu cannot be regarded as capable of being relied upon to take such steps as are necessary to ensure that the Company does all that it can to contest the arbitration award by seeking to appeal it or take it further.  

33.  That being so, it seems to me that the balance of convenience would point fairly firmly in favour of the appointment of provisional liquidators.  There are, however, a number of other points that have been taken by Mr Wong which I shall deal with briefly.

34.  First, Mr Wong pointed out that in relation to the arbitration the position now was that the Company had undertaken to take such steps as the receivers might wish to take in respect of that arbitration.  It seems to me that this is at best a minor factor against the appointment of provisional liquidators.  The fact is that even if Mr Qu proves now to have had a change of heart and is willing to cooperate wholeheartedly with the receivers, there can, having regard to the past history of the matter, be no certainty that this will continue to be the position.

35.  Further, it seems to me that having regard to the fact that the Company has now effectively completed its business, is no longer running as a going concern and its only remaining business is to realise its interest, if any, in the Beijing project, it cannot be said that the appointment of provisional liquidators over it is likely to result in much disruption or other detriment to the Company.  In fairness to Mr Wong, he did not really suggest that it would.

36.  As far as the point relating to deadlock is concerned, it appears to me that this, too, does provide a basis for appointing provisional liquidators, although I do not think, given the other factors that exist in this case, that it is one on which I need to rely.

37.  Thus, as I am satisfied that the assets of the company would be in jeopardy if no steps are taken to do what, if anything, can be done to overturn the arbitration award that has the effect of depriving the Company of all of its assets and as there are real grounds, I think, to doubt Mr Qu’s willingness to take such steps of his own motion, or even at the instigation of the receivers, it seems to me that the more convenient course in all of the circumstances, particularly since I have concluded that it would do no real detriment to the company, would be for provisional liquidators to be appointed.

38.  If provisional liquidators are appointed they will be in a position to act on their own without requiring any cooperation from Mr Qu to take such steps as they may think are appropriate to challenge the arbitral award.

39.  Finally, Mr Wong did take the point that there might be a conflict of interest in relation to the receivers being appointed as provisional liquidators.  As I understood the point it arose in this way: the petitioner has taken steps in Mainland legal proceedings to seek to enforce her judgment on the Mainland.  In support of that application she seeks recognition of the receivers’ appointment in the Mainland and has also obtained an interim freezing order to prevent the Company from dealing with its assets in the Mainland up to a value of some RMB 21 million.  It is, I think, suggested that as a result of that application it would be undesirable for control of the Company to be removed from the hands of Mr Qu, in that the control of that litigation would then pass to the provisional liquidators – the same persons as the receivers, for whose appointment recognition in China is sought.  Although Miss Chan suggested that there was no real conflict, the receivers have, it seems, indicated that they are prepared to resign as receivers if provisional liquidators are appointed.

40.  That being the case, it seems to me that to avoid any possibility of any conflict arising, it would be desirable for the receivers to resign on their appointment as provisional liquidators.

41.  For the reasons that I have given, I am satisfied that this is an appropriate case in which provisional liquidators should be appointed and I shall therefore do so.

42.  So far as the identity of the provisional liquidators is concerned, I am satisfied that there is no reason why the receivers should not be appointed as such provisional liquidators. There would, it seems to me, be some benefit in their being appointed because they have now been acting as receivers of the assets of the Company, although not the Company itself, for a period of some six weeks, during which time they will have gained a measure of familiarity with the assets which are the subject of the arbitration.  There would therefore be some saving in terms of costs and time if they were to continue in the new office of provisional liquidators of the Company, on their undertaking to step down as receivers.

43.  In addition, given that steps need to be taken in relation to the arbitration award by 5 January 2012, it seems to me that the appointment of some other persons to hold the office of provisional liquidators would be likely to be detrimental to the interests of the Company since those persons would have to familiarise themselves with the situation before they would be in a position to take any steps in relation to the arbitration.  Given the limited amount of time between now and the expiry of the time limit for lodging any appeal against the arbitration award, it seems to me that the interests of the Company would, in fact, be best served by the appointment of the receivers to be its provisional liquidators.

44.  So, for all of those reasons, I am satisfied that it would be appropriate in this case to appoint provisional liquidators in respect of the company and that the receivers are the candidates who should be so appointed.

(Discussion re costs)

45.  I will make an order for costs against the Company with certificate for two counsel, to be taxed on a party and party basis if not agreed.