Re HKSTC Warrington Fire Research Ltd.

HCCW 684/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 684 OF 2001

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JUDGMENT

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1. This is a petition for the winding-up of a company by the name of HKSTC Warrington Fire Research Ltd ("the Company").

The Company

2. The Company was incorporated in July 1997. As its name implies, it is a joint venture between the HK Standards and Testing Centre Ltd ("HKSTC"), a "not-for-profit" organization with an interest in promoting public safety, with established resources and premises in Hong Kong, and Warrington Fire Research Group Ltd ("Warrington"), a U.K. company specialising in services connected with fire resistance.

3. HKSTC and Warrington each holds 50% of the shares in the Company. HKSTC and Warrington initially appointed two directors each to the board of the Company, although since May 2001, with the resignation of the last remaining HKSTC-appointee on the board of the Company, HKSTC has not been represented on the board.

4. The Company was incorporated pursuant to a "Cooperation Agreement" signed by the parties in June 1997. The Cooperation Agreement was not drafted with as much detail as one would normally find in a commercial shareholders agreement and it may have been this lack of detail which contributed to later disagreements between HKSTC and Warrington.

The Petition

5. The Petition for the winding-up of the Company was presented on 5 July 2001 by HKSTC. The Petition is based on the Company's failure or refusal to pay a total sum of $291,255.64 arising under 16 debit notes presented between October 2000 and May 2001 ("the Debt"). A statutory demand was served on the Company on 5 June 2001 but no payment was made.

6. On 20 June 2001, after the service of the statutory demand but before the presentation of the petition, a Hong Kong company by the name of Warrington Fire Research (Hong Kong) Ltd was incorporated. It is controlled by Warrington and is apparently in the same line of business as the Company.

7. Although there is a paragraph in the Petition asserting that "in the circumstances it is just and equitable that the Company should be wound-up" (which is not uncommon in petitions based on a company's inability to pay its debts), it is clear from the Petition that the sole ground relied upon to wind-up the Company is its alleged inability to pay its debts under s.177(1)(d) Companies Ordinance.

Opposition to petition

8. The Petition is opposed by the Company and (albeit at a late stage) also by Warrington as contributory and as a creditor to whom (Warrington alleges) the Company owes some $2.9m.

9. The Company has opposed the Petition, alleging that:-

(a) the quantum of the Debt is excessive;

(b) in any event, the Debt is not due and payable as HKSTC had on 8 May 2000 agreed to provide a short-term loan of $800,000 to the Company but has not done so;

(c) HKSTC has not presented the petition in good faith.

10. Warrington has opposed the Petition and has submitted that the Court should not, in the exercise of its discretion, wind-up the Company as:-

(a) under the Cooperation Agreement, HKSTC was bound to equally share the Company's operating expenses, and HKSTC's demand for payment of the Debt is in breach of that Agreement;

(b) HKSTC had on 19 December 2000 agreed to inject $1.09m into the Company to equalize its (HKSTC's) investment to that made by Warrington, but has only paid $500,000;

(c) the only asset of the Company is the Zhuhai subsidiary, which, if sold upon the Company's liquidation, would be worth nothing or at least substantially less than what it would be worth when it starts operations;

(d) Warrington has offered to buy HKSTC's shares in the Company.

Proceedings

11. Evidence in support of the Petition was adduced in the form of affirmations of Mr Richard Fung, Chief Executive of HKSTC and one of the two directors originally nominated by HKSTC to the Company's board. Mr Fung was cross-examined on his affirmation.

12. Evidence in opposition to the Petition was adduced by the Company in the form of an affirmation of Miss Virginia Lok, the Company Secretary.

13. Evidence on behalf of Warrington was adduced in the form of two affirmations of Miss Julmie Kan. Miss Kan used to be an employee of HKSTC. She had been seconded by HKSTC to the Company as its Operations Director and was originally the other HKSTC-appointee to the Company's board. She has since left HKSTC and is in litigation with it. HKSTC did not seek to cross-examine Miss Lok or Miss Kan on their affirmations.

The Debt

14. The Debt is the total sum under 16 debit notes issued by HKSTC to the Company over a period of 6 months from 24 October 2000 to 14 May 2001. I should record as a matter of completeness that although there was a reference in the evidence that the sum now owing by the Company to HKSTC is larger, HKSTC has not sought to amend the Petition and its case remains based on the Company's failure or refusal to pay the sum of $291,255.64 only.

Rent and service fees and disbursements

15. The Debt evidenced by the 16 Debit Notes comprises a "rent and service fee" of $22,800 monthly, plus disbursements of various sums paid by HKSTC on the Company's behalf, such as overseas telephone charges, postage, external courier charges and provident fund contributions on account of the Company.

16. The Company had from its start-up in 1997 to late July 2001 occupied space in a part of HKSTC's office premises. Office equipment in the form of computer stations and office furniture were provided, and the Company was allowed to use common facilities such as photocopiers and meeting rooms. Book-keeping and company secretarial work was done by HKSTC staff. Other personnel were seconded from HKSTC. HKSTC paid "third party" charges, such as overseas telephone charges and postage, for the Company's account. In other words, HKSTC was the Company's landlord, service provider and agent.

17. It is HKSTC's case that it had reached an agreement with the Company for payment for the space and services provided at two board meetings of the Company, first, on 21 May 1998 and then on 8 May 2000.

18. The minutes of the 1998 meeting, at which all four directors were present, recorded that "figures given in the document referenced DO-006 were discussed and agreed. The rent and the rates will be HK$10,000 per month for a larger office than previously used. The total charges for secretarial support, administration, EPD, bookkeeping, Company Secretary and miscellaneous services will be a total of HK$10,000 per month".

19. The minutes of the 2000 meeting, at which Mr Geoff Deakin of Warrington was present, as was Miss Grace Chiu of HKSTC's accounts department, recorded that Miss Chiu "reported the new charges of STC to the JV [Company]". Rental was increased by $3,000 for the accommodation of additional staff, and various other items relevant to the handling of the staff provident fund, book-keeping and company secretary work were increased. Sums as small as $100 were referred to and explained. The total revised charges were $19,700 in May 2000 and $22,800 starting from June 2000. The minutes recorded that Mr Deakin "had no comment on the STC charges".

20. From the Company's start-up in 1997 until October 2000, HKSTC had issued regular debit notes for rent and service fees and disbursements to the Company, and the Company had paid the debit notes regularly. That fact is common ground.

21. The Company has now disputed the quantum of the Debt. It has alleged first, that the agreement in May 2000 was that the sum of $22,800 was to be "all-inclusive" so that HKSTC was not entitled to charge the Company additionally for disbursements. The Company relied on the use of that term by Mr Fung in his 2nd affirmation.

22. I do not accept that contention. Mr Fung's use of that term in paragraph 9(iii) of his 2nd affirmation must be considered in its context, which was answering Miss Lok's assertion that rental charged by HKSTC was higher than market rates. When Mr Fung used the term "all-inclusive", it was with reference to the services provided by HKSTC which were listed in exhibit "RF-8". That exhibit did not include disbursements.

23. To see whether HKSTC was entitled to charge the Company disbursements, one should look to the agreement made between the parties, and for that, one must look to the minutes evidencing that agreement. In the absence of clear evidence to the contrary, it is straining the language of the minutes to suggest that possibly high-expense disbursements payable to third parties (such as travelling expenses, overseas telephone charges and provident fund contributions) were included in "miscellaneous services". In the context of paragraph 8.1 of the minutes of the 1998 meeting, the term "miscellaneous services", following "secretarial support, administration, EPD, bookkeeping, company secretary ", must mean services only of a similar nature provided by HKSTC staff and would not include fees charged by and payable to third parties.

24. The position was known to the Warrington-appointees on the board. At the meeting of the board of directors of the Company held on 8 May 2000, Mr Deakin had asked whether the staff of the Company and the Zhuhai subsidiary were on HKSTC's payroll or on the Company's payroll. It was explained to him that the Company's staff was on HKSTC's payroll in order to enjoy the minimum charges for provident fund, autopay and workmen's insurance, but that at the end of the month, "[HK]STC would charge back to the [Company] at actual costs". There would have been no question of "charging back" to the Company at actual cost if the rent and service fees charged by HKSTC was inclusive of all disbursements.

25. The fact that disbursements were not included in the rent and service fee is supported by the Company's audited accounts for the year ended 1999 (those for the year ended 1998 were not before the Court, and the accounts for the year ended 2000 were in draft form only). The Profit and Loss Account showed that disbursements such as telephone charges and postage were treated separately and had not been included as the Company's related-party transactions with HKSTC. In the ordinary course of business, these audited accounts would have been made available to the Warrington directors and there is no evidence that they were not made available. Warrington never queried these audited accounts. That is consistent with the agreed arrangement that disbursements were not to be included in the flat-rate rent and service fees agreed between the Company and HKSTC.

Excessive disbursements

26. Secondly, the Company has asserted that the Debt was excessive. The disbursements included travelling expenses incurred for Mr Fung's trip to Zhuhai, which was allegedly not approved by the Company's board, and provident fund contributions paid for Miss Kan, who has not been paid any provident funds upon her departure from HKSTC.

27. There has been no evidence to suggest that Mr Fung's trip to Zhuhai was not on company business, or that prior board approval was necessary, or that board approval would not have been granted. As for provident fund contributions, it is not suggested that those contributions had not in fact been made by HKSTC. The issue whether, in the circumstances of Miss Kan's departure, HKSTC is liable to credit her with them is subject to the litigation between them which I understand has not been determined.

28. In any event, even if these two items ($4,480 in the case of travelling expenses, and $31,889 in the case of provident fund contributions for 3 employees, including Miss Kan) were excluded from the Debt, the statutory minimum for the presentation of a petition to wind-up the Company would still have been satisfied and there has been no offer on the part of the Company to pay any sum to HKSTC at all.

Short-term loan

29. It is common ground that on 8 May 2000, HKSTC indicated its agreement to make available to the Company a "short-term loan of HK$800,000" at the interest rate of 10% p.a. This is evidenced in paragraph 4.7 of the minutes of the Company's board meeting at which Mr Fung was present.

30. It is however clear from the minutes that these funds were needed for the establishment in Zhuhai, not for the Company's day to day expenses in Hong Kong and that was the reason behind HKSTC's agreement to provide them.

31. In any event, HKSTC was willing to provide the Company with facilities but the Company declined to sign the agreement put forward by HKSTC. It is noted that the interest rate provided in the agreement was at prime + 1% p.a. Mr Fung's evidence was that this was more favourable than the flat rate of 10% p.a. referred to in the board meeting, and he was not challenged on this aspect in cross-examination. The only explanation in Miss Kan's affirmation for the Company's failure or refusal to sign the agreement was that it "had not been the practice for shareholder funding to the Company". It is also to be noted that the Company had never gone after HKSTC for the loan on different terms. I fail to see how that could provide the Company with any ground to dispute its indebtedness to HKSTC in relation to the 16 debit notes.

Good faith

32. Nor can I see how that episode regarding the short-term loan of $800,000 for the Zhuhai subsidiary would show that HKSTC was not presenting this petition in good faith. As stated above, its debit notes for rent and service fees and disbursements had until October 2000 always been met by the Company. It was not until after the service of the statutory demand that the Company began to allege that disbursements were included in the flat-rate monthly fee, contrary to the parties' past understanding as evidenced by the audited accounts. That allegation is indicative more of a lack of good faith on the part of the Company rather than of the petitioner.

33. I should also add for the sake of completeness that there have been complaints that Mr Fung had "mishandled" a lease agreement of laboratory plant. However these complaints were completely lacking in particularity and proof and there were no substantive grounds for an allegation of lack of good faith.

34. There was also an allegation that Mr Fung had immobilized the Zhuhai subsidiary by holding on to the company seal. However it transpired in the course of Mr Fung's oral evidence that he was the company's representative at law, and that whilst he had offered to resign from that position, in the same way as he had resigned as director of the Company, no-one from the Company or Warrington had offered to take his place.

Cooperation agreement

35. As for Warrington's submission that the Cooperation Agreement provided that HKSTC and Warrington should share the Company's operating expenses equally, it cannot in my view be inferred from that that HKSTC was thereby disentitled from seeking payment of the regular rent and service fees and disbursements as the Company's landlord, service provider and agent. There was nothing in the Cooperation Agreement which provided that those expenses did not need to be paid as and when due, in the present case, after a credit period of 30 days. That position could be contrasted with loans made by HKSTC as shareholder, as shown in the audited accounts, and which HKSTC has not included in the petition.

36. Indeed it may be the case that even with the shareholders loans, the loans could be recalled by HKSTC since the Cooperation Agreement did not lay down any period within which the loans could not be recoverable. However it is not necessary to decide whether there was such an implied term in the present case, as the petition concerned only the rent and service fees and disbursements, which had hitherto always been paid when they fell due.

The equalizing sum

37. As for Warrington's submission that HKSTC had only injected a sum of $500,000 instead of $1,098,630.63 to equalize the two shareholders' investments, this was proposed by Miss Kan in an e-mail message to Mr Fung sent on 19 December 2000. It was expressly stated that before this was proceeded with, the approvals of both investors were sought.

38. On the same day, Mr Fung replied stating that upon Miss Kan's consolidation of views from the shareholders, HKSTC agreed to inject the $1m figure into the Company's account, with $500,000 being directly transmitted to Zhuhai to facilitate asset inspection for the purposes of renewal of its business licence.

39. It would thus be seen that HKSTC's agreement was conditional upon both shareholders agreement. There was no evidence that that occurred. However, even if Warrington's agreement were assumed, the fact remained that these related to shareholders loans to the Company, not the provision of accommodation and services for which regular rent and service fees and disbursements were payable by the Company to HKSTC as and when they fell due.

Presumption of insolvency

40. The effect of the above discussion is that the Company has failed to discharge the burden of showing that the debt due to HKSTC was bona fide disputed on substantial grounds.

41. The statutory presumption is that a company is deemed to be unable to pay its debts upon its failure to satisfy a statutory demand. There is no satisfactory evidence before the court that the Company is solvent. No management accounts have been put forward. The draft audited accounts for the year ended 31 December 2000 show an accumulated loss of about $1m, with a capital deficit of about $475,000.

Zhuhai subsidiary

42. I now come to the question whether in the exercise of the court's discretion, the Company should be wound-up as it might have an adverse effect on the value of the Zhuhai subsidiary.

43. There is no adequate evidence before the Court to show why the Zhuhai subsidiary cannot be sold separately as an asset of the Company. There is no evidence to show that only a break-up value could be obtained. With nothing more, there is insufficient material to cause the court to decline to order the Company to be wound-up.

Offer to buy shares

44. Finally there is Warrington's late offer to buy HKSTC's shares in the Company. This had come too late and was rejected by HKSTC. More importantly, there is some evidence that Warrington had prior to the presentation of the petition, incorporated Warrington Fire Research (Hong Kong) Ltd to service clients of the Company.

45. As such, Warrington is by no means an independent creditor and its opposition to the petition should be given less weight than if it were an independent creditor (Re Lowestoft Traffic Services Ltd [1986] BCLC 81). I do not make any findings of fact regarding this issue now, but it would appear to be a matter which should be left to an independent liquidator to consider. Given the Company's refusal or failure to pay the rent and service fees and disbursements as and when they fell due, and the lack of grounds justifying an exercise of discretion not to order the Company to be wound-up, I would make the usual order.