The Hong Kong & Shanghai Banking Corporation Ltd. v. K & R Wong Construction Co. Ltd.

1997, No.CWU 594

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP

------------

---------------

------------------------

J U D G M E N T

------------------------

1. This Petition was originally filed on 25 November 1997 by Yu Kang Wing trading as Wing Kee Construction Company. On 16 February 1997, The Hongkong & Shanghai Banking Corporation Limited was substituted as Petitioner.

2. The Petitioner bases this Petition on a debt of $46.35 million as at 4 February 1998. The amount arises out of banking facilities granted to the Company. The Petitioner made a demand for repayment on 15 September 1997. There has been no response to that demand and it became the substituted Petitioner upon the original petitioner's debt being satisfied.

3. When the matter first came before me on 16 February 1998, the Company indicated that it wished to oppose the Amended Petition and sought an adjournment. I granted an adjournment for seven days. At the adjourned hearing when it became apparent that the Petition was being seriously opposed, the matter was further adjourned for proper argument to be advanced to the Court. So the matter was adjourned from 23 February until today. At the hearing on 23 February, I gave leave to the Petitioner to file further evidence and directed that no further evidence be filed without the leave of this court. On 26 February, Mr Simon Richard Harris filed a 3rd affidavit on behalf of the Petitioner.

4. At today's hearing, the Company sought a 10-day adjournment in order to deal with the matters appearing in Mr Harris' 3rd affidavit. Amongst the exhibits to Mr Harris' affidavit are valuations of certain properties as at November 1997. In opposition to this Petition, the Company had filed an affidavit relying on a valuation of these properties as at August 1997. Counsel for the Company based the application on two grounds : first, that the Company is in a position to raise $16 million in a week's time, and secondly, it is still awaiting a valuation from Jones, Laing & Wootton. The application was refused.

5. The relevance of the valuations of various properties arises in the following way. The Petitioner was prepared to grant the banking facilities to the Company upon security being furnished by third parties. In total, some six or eight properties, depending on how they are identified, were charged to the Petitioner. There is in fact no discrepancy arising from the evidence of the Company and the Petitioner as to the specific properties over which the Petitioner has a legal charge.

6. The evidence of the Company in this regard contained in the affirmation of Mr Simon Wong is that these properties were valued by Wayfoong Property Limited ("Wayfoong") in August 1997 at $48.2 million. Although Mr Wong believed that another surveyor had given a much higher valuation of $62 million, there is no evidence before this court of the higher valuation. For present purposes, it must be disregarded.

7. The most recent affidavit filed on behalf of the Petitioner shows that the same valuer, i.e. Wayfoong was asked to value the properties as at November 1997. Wayfoong has given the properties a market value as at that date of $38.75 million and a value on a forced sale basis of $33.185 million. In February 1998, Wayfoong confirmed that certain of the properties had fallen in value since the earlier valuation dates, and as at 26 February 1998, the aggregate market value of these properties is put at $34.15 million and the value on a forced sale basis at $29.735 million.

8. It is common ground that the Company does owe the Petitioner some $46 million as at 4 February 1998. It is also common ground that there are other unsecured creditors of the Company to the tune of some $32 million. The Petition has the support of Kin Wing Company, who is represented by counsel at this hearing and Yu Kang Wing, the original petitioner, who is also represented by counsel although its position at this hearing was a neutral one. The value of the supporting creditors' debts come to about $2 million.

9. The Petition is opposed by the Company as well as three of its creditors. Those creditors who are owed sums in the aggregate of $3.5 million have filed affirmations which say little more than that in the deponents' belief, the Company "has the ability and capable (sic) to settle all its outstanding debts".

Grounds of opposition

Secured creditor

11. The Petition is opposed essentially on two grounds. First it is said that the Petitioner is a secured creditor because the Petitioner has legal charges over the properties. Counsel for the Company submitted that on that basis, the Petitioner has security and whilst that security may possibly not be sufficient - although he did not say so, I assume that he was praying in aid the earlier suggestion that the Company would be in a position to come up with $16 million in a week's time - it has little if anything to gain from winding-up the Company. Counsel for the Petitioner submitted that it is not a 'secured creditor' because the properties in question belong, not to the Company but, to third parties.

12. I will now turn to consider the question as to whether the Petitioner is a secured creditor. This is the only issue as to which the parties differed. Counsel for the Petitioner as well as counsel for the Company were unable to find any authority which would cast light on the meaning of 'secured creditor'. Thorough though their research may have been, it would appear that section 248 of the Insolvency Act 1986 had been overlooked. So far as relevant, it reads :

"In this Group of Parts, except in so far as the context otherwise requires-

(a) 'secured creditor', in relation to a company, means a creditor of the company who holds in respect of his debt a security over property of the company, ...." (emphasis added)

This provision was introduced in England in 1986. Prior to 1986, it had no counterpart in the companies legislation of the U.K. Hong Kong, of course, does not have the Insolvency Act of 1986, so the pre-1986 position under English law is plainly relevant in construing and deciding what 'secured creditor' means in the Companies Ordinance as well as the subsidiary legislation enacted thereunder. It would appear that prior to 1986, the definition of 'secured creditor' in the Bankruptcy Act 1914, section 167 (which has since been repealed) applied in the winding up of insolvent companies. Section 167 provided that a 'secured creditor' meant a person who held a mortgage, charge or lien on the company's property or any part of it as a security for a debt due to him from the company.

13. There are two Irish cases which support the proposition that that meaning applied in the winding up of insolvent companies prior to 1986 : see Re Lough Neagh Ship Company ex parte Thompson (1896) 1 IR 29, Re Leinster Contract Corporation Ltd. (1903) 1 IR 517, Halsbury's Laws, Vol.7(3), 4th Edition, para.2556.

14. Quite apart from the pre-1986 position under English law which, in my judgment, reflects the position in Hong Kong, the Hong Kong legislation is entirely consistent with such an interpretation. See, for example, rules 84 and 127 of The Winding-Up Rules. For these reasons, I come to the conclusion that the Petitioner is not a 'secured creditor' for the purposes of the companies legislation. Having third party securities is different from having security over assets owned by the Company. As the properties do not belong to the Company, I am unable to accept Mr Yuen's submission that the Petitioner is a 'secured creditor'.

Opposition by three creditors

16. The next ground of opposition is that the Petition is opposed by three creditors. Again, it is common ground between the parties that, prima facie, a petitioning creditor is entitled to a winding-up order but that the prima facie rule may be displaced. A useful summary of the position may be found in French on Applications to Wind-up Companies at 237-238 where it is stated :

"... as between the company and an unpaid admitted creditor, the creditor is entitled to a winding-up order as a matter of course, but, as between the petitioning creditor and the other creditors, the majority's opposition to compulsory liquidation may prevail. ... But those who oppose the petition of an unpaid admitted creditor must actually produce reasons to persuade the court to vary its normal practice of making a winding-up order on such a petition; the court does not simply abide by a majority decision that there should not be a compulsory liquidation."

17. In Re Vuma Limited [1960] 1 WLR 1283 at 1286, Harman LJ said :

"... it was at least incumbent upon those who opposed [the petition] to say why they opposed it and to explain to the court what it was that induced them, ....., to leave this hopelessly insolvent and assetless company encumbering the ground."

The affirmations of the three opposing creditors do not disclose any good reason. They appear to state an opinion or view, but the grounds upon which the view or opinion was based are not apparent.

18. Unless the reasons are stated, the simple fact of opposition is not enough. Thus in Re Chyau Fwu Investment Limited [1986] HKLR 374 Mayo J (as he then was) said (at 378J - 379A) :

"... one could normally assume that creditors who oppose a petition are in a very good position to know what is in their best interests ....... this in no way precludes the court from itself analysing the position on the basis of the evidence available. In some cases the opposing creditors have not seen fit to deduce any evidence in support of their opposition."

In the present case there are three opposing creditors whose debts come to about $3.5 million. There are two supporting creditors of about $2 million in addition to the Petitioner's claim of some $46 million. In terms of value, the opposing creditors are plainly outweighted. But whether the majority of opposition has to be in number and/or value, no good reasons have been advanced.

How should the court's discretion be exercised?

19. As stated earlier, the petitioning creditor is prima facie entitled to a winding-up order. That proposition is clearly stated in the Court of Appeal's decision in Re Esquire (Electronics) Limited [1996] 3 HKC 309. It is of no avail to the Company to say that if only it is given time, it would be able to pay, nor is it any answer to say that the Company has no assets to meet the Petitioner's claim. See Re Esquire (supra) at 312.

20. The fact that the Petitioner has third party securities does not render it a 'secured creditor'. Even if I were to have some regard to the fact that it has third party securities, there is the problem for the Company that the values of the properties are nowhere near the amount of the outstanding loan. In this context, it is relevant to say that several of the properties have been on the market since August 1997 and there have been no buyers. According to Mr Wong who filed evidence on behalf of the Company, active steps have been taken to sell the properties, but "given the present market condition, it is difficult to give an estimation on when they may be sold". That being the case, the court can really only have regard to the forced sale valuation of the properties.

21. As no valid reasons have been advanced by the opposing creditors and there are unsecured creditors apart from the Petitioner of some $32 million, I think there is only one way in which the discretion can properly be exercised, and that is to make a winding-up order.