RE ZHUANG PP HOLDINGS LTD

HCCW 56/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 56 OF 2005

____________

____________

_____________________

DECISION

_____________________

1.  This is an application taken out by Zhuang PP Holdings Limited (“the Company”) on 3 June 2005 under the inherent jurisdiction of the court, Order 18 rule 19 of the Rules of the High Court, and section 180 of the Companies Ordinance, Cap. 32.

2.  The Company seeks the following relief:

(1)	the winding-up proceedings be stayed or adjourned pending conclusion of High Court Action No. 1589 of 2003 (“the High Court Action”) or further order;
(2)	further or alternatively, the petition be struck out on the ground that it is frivolous, vexatious and/or an abuse of the process of the court.

3.  There is no need to deal with the application for striking out, I see no basis for it.  It was not dealt with by Mr Mok, who appeared for the Company, in his written or oral submissions.  I would first set out the relevant background matters.

The background

4.  The petition herein was presented by International Bank of Asia Limited, now known as Fubon Bank (Hong Kong) Limited.  I shall refer to it as the petitioner.

5.  In 1997, the petitioner made a five-year loan of $235 million (“the loan”) to East Champion Limited (“East Champion”), a subsidiary of the Company, to be used as 50% of the purchase price of commercial premises at Marble Road, North Point, Hong Kong (“the Property”).

6.  The loan was secured by a guarantee from the Company and by an all monies first mortgage on the Property.

7.  In March 2003, East Champion defaulted on the loan and in May 2003, the petitioner demanded repayment.  Shortly thereafter, the petitioner also made a demand on the Company’s guarantee.  The loan was not repaid by East Champion or the Company.

8.  In the same month, the Company issued proceedings in the High Court Action against the petitioner and others, claiming that its former directors had conspired with the vendors of the Property to procure its purchase at a gross over value in breach of their fiduciary duties.  It was alleged against the petitioner that it had “dishonestly assisted” in the breach of the former directors by making the loan to East Champion when it knew or should have known that the purchase price of the Property was a gross over-valuation.  The claim against the petitioner was for damages or for equitable compensation.

9.  In June 2003, the petitioner served a statutory demand on the Company in respect of the sums due on the loan, giving credit for the estimated value of the Property held as security at that time.  The amount demanded was $3.5 million odd.

10.  In July 2003, the Company began proceedings in High Court Action 2832 of 2003 seeking an injunction to restrain the petitioner from presenting a winding-up petition on the basis of the statutory demand, on the ground that if its claim against the petitioner in the High Court Action was successful, its indebtedness on the loan would be extinguished.

11.  The Company was successful.  On 15 August 2003, Waung J decided that the petitioner should obtain a judgment first before presenting a petition in reliance on the statutory demand.  He granted an injunction that the Company be restrained from presenting or otherwise prosecuting or pursuing any petition or originating process in Hong Kong or Bermuda for the winding up of the Company or any similar proceedings, based on the statutory demand in June 2003, or on the outstanding loan set out in such statutory demand until trial of the action or further order.

12.  After the decision of Waung J was given, the petitioner added its claim on the loan as a counterclaim to the High Court Action and did not pursue the statutory demand.

13.  On 27 October 2003, the petitioner applied for summary judgment on its counterclaim in the High Court Action.  In January 2004, a Master gave the Company unconditional leave to defend the counterclaim.

14.  On 21 January 2004, the petitioner issued a summons in the High Court Action to strike out the claim on the ground that it is scandalous, frivolous, vexatious or an abuse of the process of the court. The petitioner’s solicitors said it was not a “substantive” application, but merely a tactical move in connection with an application to seek security for costs against the Company which is a company incorporated abroad.  That application was dismissed by a Master in April 2003.  Security for costs was not ordered against the Company, but against two other plaintiffs, one being East Champion.

15.  In March 2004, another creditor of the Company, Umbrella Finance Company Limited (“Umbrella”) commenced winding-up proceedings against the Company on the ground that it is unable to pay its debts and on the just and equitable ground, based on concerns about the asset stripping activities of the Company, which I shall come to.  This is HCCW No. 321 of 2004.

16.  Umbrella then applied for appointment of provisional liquidators.  I heard that application and dismissed it on 21 April 2004.  I should mention that it was never in dispute in that application that Umbrella had made out a good prima facie case for a winding-up order.  The reason for dismissing the application was because I could not determine on affidavit evidence alone if the Company’s explanation that transfers of valuable assets were made in good faith and for adequate consideration should be believed.  And in view of the fact that the transfers had already taken place some time ago, I was not persuaded there was a real need or urgency for provisional liquidators to be appointed to investigate right away the allegations of asset stripping to defeat the creditors of the Company.

17.  It should also be noted that in considering the Company’s evidence on affidavit regarding the transfers impugned, I dealt with the quality of the Company’s evidence in a guarded way, such as: “I do not think the explanation given by the Company is seemingly unreliable”; “I am inclined to think that the explanation given by the Company is a plausible one”; “I do not think the explanation provided by the Company is apparently unacceptable”; “again, I do not think the above explanation is inherently unreliable”.  These comments I made in my decision on 21 April 2004 should not be taken or construed to mean that no prima facie case was made out on the allegations of asset stripping or that the allegations were without merits.  There is no basis for the suggestion that Umbrella had attempted to wind up the Company on just and equitable ground based on the allegations of asset stripping and had failed.  All that happened was that I had dismissed its application to appoint provisional liquidators.

18.  In January 2005, Umbrella sold its debt due from the Company, so an order was made by consent to dismiss the petition in HCCW No. 321 of 2004 on 10 January 2005.

19.  The petitioner had supported the petition in HCCW No. 321 of 2004, but was not informed beforehand of Umbrella’s decision to withdraw its petition.  Notwithstanding the same firm of solicitors had acted for Umbrella in the winding-up proceedings and for the petitioner in the High Court Action, there was no sharing of information.  The petitioner had no opportunity to apply to be substituted as a petitioner in the place of Umbrella before the latter’s petition was dismissed.  So the petitioner began its own petition to wind up the Company in these proceedings two weeks later on 21 January 2005.

20.  It is important to note the grounds for winding up stated in the petition.  This is not a petition to wind up the Company on the ground it is unable to pay its debts under section 327(3)(b), which applies to the winding up of unregistered companies.

21.  The petition was founded on section 327(3)(a), that the Company had ceased to carry on business in Hong Kong, and on section 327(3)(c), the just and equitable ground.  The matters relied on in support of the just and equitable ground are as follows and they are taken from the published financial information of the Company, as the shares of the Company were at one time listed on the Stock Exchange of Hong Kong Limited.

22.  At 31 December 2002, the Company was the holding company of the China United Group (“the Group”) with 66 subsidiaries. The interests in the subsidiaries were valued at $557 million, and the Company had shareholders’ funds of $297 million.

23.  In January 2003, the Group was re-orgainsed.  A new company, China United International Holdings Limited (“China United International”) was made the ultimate holding company of the Group in place of the Company.  The Company became a wholly owned subsidiary of China United International.

24.  China United International had not commenced operation and had no significant assets.  It had subsidiaries which were not the subsidiaries of the Company (“the New Group”).  The Company’s listing on the Stock Exchange was withdrawn on 3 January 2003 and dealings in the shares of China United International on the Stock Exchange commenced on 6 January 2003.  By a series of restructuring of shareholdings in subsidiaries, the Company’s equitable interests in certain major subsidiaries were transferred or sold to the New Group and to a third party.  The Company thereafter became an insignificant part of the Group’s net assets.  The Company’s net asset position deteriorated by $523 million in seven months from January to July 2003, completely writing off the shareholders’ funds.  These transfers took place at the time when the Company was heavily indebted and loans of $369 million had become repayable on demand.  In June 2003, the Company had received a writ demanding payment of $206 million.  In the interim report of the Company for the six months ended June 2003, the auditors qualified their opinion because of fundamental uncertainty as to the going concern basis and because of reservations whether the transfers of the Company assets to the New Group were lawful.  In October or November 2003, the Company, stripped of valuable assets, was sold to a company wholly owned by the brother of the chairman of China United International for $10 million.

25.  The petitioner alleges that the purpose of the transfers to the New Group was to put the assets of the Company beyond the reach of its creditors whilst keeping them in the same control and ownership.  It asserts that the affairs of the Company had been conducted with such lack of probity as to make it necessary for the court to intervene.  On that basis, it would be just and equitable to wind up the Company for an independent liquidator and the court to investigate its affairs.  Further, the Company had filed with the Companies Registry on 9 March 2004 a notice of cessation of place of business in Hong Kong with effect from 10 February 2004, so the Company should also be wound up on the ground in section 327(3)(a).

26.  The petition first came before a judge on 29 March 2005.  Directions were given for the Company to file evidence in opposition.  The directions were not complied with.  At the adjourned hearing of the petition before me on 9 May 2005, the Company submitted that the petition should be dismissed, relying on the injunction granted by Waung J in High Court Action No. 2832 of 2003.  I declined to dismiss the petition which was presented on a different basis and was not, in my view, covered by the injunction.  Directions were given for the Company to file evidence in opposition.  Again, the directions were not complied with.

27.  At the adjourned hearing of the petition before Barma J on 6 June 2005, there was before him the petitioner’s summons for the Company to file and serve a list of documents under Order 24 rule 3 and the Company’s summons for striking out, alternatively for a stay or an adjournment, of the proceedings.

28.  Both summonses are before me today.  I should mention that on 3 June 2005, the Company applied to Waung J seeking a “clarification” of the injunction granted in High Court Action No. 2832 of 2003 that the order on 15 August 2003 was intended to cover all petitions or originating process in Hong Kong or Bermuda for the winding up of the Company and all similar proceedings based on the statutory demand in June 2003 or on the outstanding loan set out in such demand, including the petition herein.  This application was dismissed by Waung J, without prejudice to the Company’s application to the Judge hearing the petition to stay or adjourn the petition.

The Company’s case for stay or adjournment of the petition

29.  As I understand from the evidence filed by the Company in support of its application, the grounds for asking the court to exercise its discretion to stay or adjourn the petition are as follows.

30.  The Company and other plaintiffs have discontinued the High Court Action against various parties.  The only defendants left in the High Court Action are the petitioner and the surveyors.  The High Court Action has reached a stage that witness statements have been exchange by the petitioner and the Company, although I understand the surveyors have not yet filed witness statements.

31.  Security for the petitioner’s costs has been paid.  Solicitors acting for the Company in the High Court Action anticipated that a trial may take place in six months’ time, subject to the availability of dates from the court.  The Company has alleged that from the history of the High Court Action (that the petitioner had unsuccessfully applied for summary judgment on the counterclaim and to strike out the claim), and from the service of the statutory demand and the injunction granted in High Court Action No. 2832 of 2003, that the petitioner has attempted to “stifle” the High Court Action.

32.  If the petition is not stayed, the Company would be “irreversibly” prejudiced by having to divert time and efforts in dealing with the petition.  If the Company is successful in the High Court Action, it is claimed that all the steps taken in this petition would have been wasted.  Even if the High Court Action were unsuccessful, the petitioner would be largely protected as it holds security over the Property.  The debt demanded in the statutory demand in June 2003 was only for $3.5 million.

33.  None of these are good grounds for a stay or an adjournment of the petition until the conclusion of the High Court Action.  It is understandable that the petitioner should try to enforce repayment of its debt in an expeditious and cost-effective way.  This explains why the petitioner had resisted the Company’s application to restrain it from presenting a winding-up petition on the basis of the unpaid debt in the statutory demand, and the petitioner’s attempts at seeking summary judgment on its counterclaim and to strike out the High Court Action.  I decline to find any improper or ulterior motive of the petitioner in prosecuting this petition.

34.  Proceeding with the petition at the same time as the High Court Action may well cause difficulty to the resources of the Company, but there is nothing special about this to justify a stay or an adjournment or why one proceeding should be stayed until the conclusion of the other.  There is no reason why the petition and the High Court Action should not both continue.  There is no basis for the suggestion that the petition may interfere with the speedy resolution of the High Court Action.  Even if the petition were to be resolved before the High Court Action, and if the petitioner were successful in winding up the Company, the High Court Action may still be pursued by the liquidator, if he thinks the claim is meritorious and he has funding from creditors for the litigation, particularly as a number of creditors have appeared today to give their support for the Company in proceeding with the High Court Action.

35.  I fail to see why all the steps taken in the petition would have been wasted if the Company were successful in the High Court Action.  This is due to the failure to recognise the basis on which the petition was presented, namely, that the affairs of the Company were conducted with such a lack of probity as to make it necessary that the court should intervene, for the protection of creditors and the public.

36.  As for the assertion that a large part of the petitioner’s debts is secured and so the petitioner would be “protected”, this does not seem to be correct factually, as according to a valuation report made by the court appointed expert, the current market value of the Property in April 2005 was only $40.5 million, just about 50% of the debt due to the petitioner.  In any event, I fail to see any relevance of this.

37.  So on the facts, I see no good reason at all to exercise my discretion to stay or adjourn the petition.  I will deal with the contention of the supporting creditors separately.

38.  Mr Mok cited a number of cases to support his contention that a stay or an adjournment should be granted where a cross-claim is made by the company.  I have considered his authorities, I do not mention them as I think they are irrelevant and the dicta set out in his submissions are taken wholly out of context.

39.  There is no question about the locus of the petitioner to present a winding-up petition.  The petitioner had lent money to East Champion guaranteed by the Company, East Champion had defaulted, and the petitioner had made a demand on the Company’s guarantee for repayment.  As stated succinctly in Butterworths Hong Kong Company Law Handbook, 6^th ed, at paragraph [178.03]:

“	The existence of a counterclaim does not deprive the petitioner of the status of creditor, but where the counterclaim prima facie has substance, it will provide a reasonable cause for not complying with the demand.”

40.  As a creditor, the petitioner is entitled to petition for winding up of the Company on any of the grounds in section 327(3), including the just and equitable ground.

41.  Mr Mok has not cited a single decision in which the court has stayed or adjourned a petition presented by a creditor on the just and equitable ground merely because the company has brought a cross-claim against the petitioner.

42.  All the “cross-claim cases” in which the court exercised its discretion to stay or adjourn a winding-up petition were situations in which the petitioning creditor had petitioned for winding up on the basis that the company is unable to pay its debts.  One can readily see in this situation why the discretion should be exercised in that way.  Where there appears to be a genuine and serious cross-claim and this overtops the petitioning debt, even though the petitioning debt may be undisputed, if the cross-claim is successfully established in separate litigation, this would extinguish the entire petitioning debt and therefore, remove the basis for the petition.

43.  Where a petition is presented by a creditor on the just and equitable ground, the above consideration does not apply.  A winding-up petition is not a lis just between the petitioner and the company.  The court always has regard to the interest of others who have been or may be affected by the dealings and affairs of the company in deciding whether a winding-up order should be made.

44.  What is to be resolved in another forum in the High Court Action related to a particular property transaction, it has no bearing on the issues to be resolved in this petition.

45.  For the above reasons, the Company simply has not made out any case for an adjournment or stay of this petition, on the facts or on the law.

The support of creditors

46.  Four creditors have given notice of intention to appear at this hearing and to support the Company’s application.  They are Biocity Limited (with a claim of $31 million odd), Super Sharp Investments Limited (with a claim of $41 million odd), Zhuang BH Holdings Limited (with a claim of $123 million odd) and Sunderland Properties Limited (with a claim of $14 million odd).  I understand the debts owed to these four creditors would amount to about 64% of the total liabilities of the Company as at 30 June 2005.

47.  The petitioner has expressed scepticism of the bona fides of these supporting creditors, and alleged that they do not seem to be independent.  Two of them, Super Sharp Investments Limited and Zhuang BH Holdings Limited, took their assignments of debt from Umbrella, and the assignees from Umbrella are connected to the Company.  The address of Super Sharp Investments Limited is also the address that had been used by the directors of the Company on their affirmations.  Other than these creditors which, according to the petitioner, would appear to be connected parties, there are only two independent creditors, being the petitioner and another bank.  That other bank has written to the petitioner on 5 August 2005 stating that they have no objection to the petition.

48.  Each of the four creditors mentioned above has filed evidence in support of the Company’s application.  They say that they have been advised by legal advisers that the Company has a “good arguable case” against the petitioner in the High Court Action.  It is not clear if these are the Company’s legal advisers.

49.  The petitioner has appointed receivers over the Property in exercise of its powers under the mortgage in May 2005.  In response, East Champion issued a writ against the petitioner on 8 June 2005 claiming a declaration that it is the legal and beneficial owner of the Property and claiming all sums paid by it to the petitioner in partial repayment of the loan.

50.  The supporting creditors say if the Company should succeed in the High Court Action or if East Champion should succeed in the new action, the petitioner would be liable to pay damages to the Company and the Property would revert back to East Champion and could then be used to satisfy the claims of all creditors of the Company.  So they support the Company’s application to stay or adjourn the petition until after the conclusion of the High Court Action.

51.  These grounds put forward by the supporting creditors simply do not bear scrutiny.  Mr Mok reminded the court that in matters of winding up, the court should have regard to the wishes of the creditors under section 287(1) and that there is a substantial proportion of the creditors in favour of a stay or an adjournment.

52.  The court should always look at the bases or reasons for the position taken by creditors.  If there is no justification or merit for the position taken by creditors, the court would not give weight to their wishes.

53.  I therefore dismiss the Company’s application for a stay or an adjournment of the petition.

54.  I order that the petitioner’s costs in this application are to be paid by the Company in any event.