RE GREENWALLS BIOENGINEERING LTD

HCCW 1032/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1032 OF 2003

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D E C I S I O N

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1. I have before me an application for a validation order by Greenwalls Bioengineering Ltd ("the Company"). The Company asserts that the Petition that has been presented against it is of no merit and is capable of being struck out. That is not a matter which is before me today, and it will have to be determined in due course in an appropriate manner. What I do have before me is the application for a validation order, which initially appeared to have been consented to by the Petitioner, although there was some discussion at the last hearing and today as to the precise form of the undertaking that the Company should give, if such an order is made.

2. Having considered the material and the further evidence in the recent affirmation by the director of the Company, I have come to the view that on balance, it is in the interest of the creditors that the Company should be permitted to carry on trading, pending the resolution of the winding-up petition.

3. It seems to me that in this case, although the Company was unprofitable in its first year of operation, it appears from the Company's audited accounts that it was profitable by the second year. Its management accounts indicate an improvement in the level of profitability in the current, third, year of its operation. That is a matter which gives me some comfort as to the manner in which the Company's business is progressing.

4. Although I note, as Miss Chung for the Official Receiver has pointed out, that the actual orders on hand in the form of existing contracts are not likely to be able to cover all of the expenses of the Company over the next year, the Company does rely on anticipated contracts in the next year that are expected to provide further income, sufficient to cover the balance of the expenses over that period, with sufficient profit left over to make it desirable in the interest of creditors that the Company should be allowed to carry on its business.

5. Although I recognise that that income is not certain to be achieved, it seems to me that having regard to the Company's track record so far, that record is rather different from the situation in Lee Po Wang Samson v Ever-rise Engineering Limited (HCCW 714/2001, unreported, 30 October 2001, Kwan J) to which Ms Chung referred me. In that case there were very substantial losses in the initial years and only a recent change in that company's fortunes. In this case, however, the Company is a relatively young company - it has only been in operation for some 2 1/2 years and it has been profitable, it seems, in the second and the current (third) year of its operation. That being so, it seems to me that it is not unreasonable for me to take the view that there are reasonably good prospects that its continued trading will be for the benefit of its creditors as a whole.

6. I would therefore propose to make a validation order in the usual form in relation to payments in the ordinary course of the Company's business out of its bank account. I would also make a validation order in the ordinary form relating to dispositions of property in the ordinary course of business at full market value.

7. It seems to me that in terms of paragraph 3 of the proposed draft order, this is more appropriately worded as a proviso. It seems to me that in accordance with the practice in Hong Kong, which is in my view a reasonable one, the banks themselves should not be under any obligation to have to check the appropriateness of any transactions which are put through the bank accounts of the Company.

8. In the event that any payments are made that are not in the ordinary course of business, these will be subject to challenge if the Company is made the subject of a winding-up order, and any payments made will be recoverable, if not made in the ordinary course of business, from the recipients thereof.

9. So far as the undertaking is concerned, although I have some sympathy for the position of the directors of the Company who, it is said, have provided from their own funds further advances in the interim period between the presentation of the Petition and the hearing of this application for a validation order, it seems to me that having regard to the fact that the Company's financial position in terms of confirmed future receipts is still a little uncertain, although I have accepted that on the balance of profitabilities, it will be in the interest of the creditors for it to continue trading, I think in all the circumstances that having regard to the relatively small amount of the further advances against the overall advances that have already been made, it would not be an undue hardship if I were not to permit those amounts specifically to be validated, and except them from the terms of the proposed undertaking.

10. I would therefore require an undertaking, which I understand will be given, that no repayments will be made in respect of any directors' or shareholders' loan pending the resolution of this winding-up petition. That means, in effect, that the additional advances that have been made will be caught by that undertaking and will not be repayable in the meantime.

11. So far as the further refinement as proposed by Mr Wou is concerned, I am inclined to think that although Mr Wou is probably entitled to raise the point for argument today, and is not strictly precluded from doing so by his clients' earlier indication of their being agreeable to the undertaking in the form proposed by the Company, it seems to me that the additional wording he proposes (to prevent payments to directors) is not strictly necessary in this case, in that there do not appear to be any items of regular expenditure which are described as being in the ordinary course of business which are on their face payable to directors by way of fees or other payments.

12. In the circumstances, I think it will be sufficient if the validation order takes the usual form, so that if any payments are made which are not in the ordinary course of business, these can be dealt with and avoided in due course in the event that the Company is wound up.

13. In terms of the precise wording of the order, I have a number of comments on the draft order submitted which I will deal with, after which I shall hear the parties on costs.