RE WINFUL INTERNATIONAL (HOLDING) LTD

HCCW 8/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 8 OF 2003

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J U D G M E N T

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1. This is an application by Mr Chau Leung, a director and contributory of Winful International (Holding) Ltd ("the Company"), to rescind a winding-up order made against the Company by a Master on 26 February 2003. As the order has not been sealed or perfected, the court has inherent jurisdiction to rescind the winding-up order in this situation.

2. The application first came before me on 27 March 2003, the hearing has been adjourned several times because insufficient evidence was filed as to the financial position and solvency of the Company.

3. The petition was presented by an employee who was owed HK$150,367.00 in respect of arrears of wages, severance pay, wages in lieu of notice and year end pay. Apart from the petitioner, the Company was indebted to five other employees in the aggregate sum of over HK$3 million for similar reasons.

4. The petition was presented on 3 January 2003. It did not come to the notice of the applicant until after the winding-up order was made, for reasons I do not propose to go into. On 11 March 2003, the applicant issued the present summons for rescission of the winding-up order.

5. According to the applicant's first affirmation in support filed on 11 March 2003, a settlement arrangement has been reached with the petitioner and other employees referred to in the petition and that they have no objection to the rescission of the winding-up order.

6. The Company has not been in business since it vacated its registered office in October 2002. The reason why the Company was unable to pay its debt was because its major shareholder and former director, Mr Cheng Wai Kei, was detained in the Mainland since January 2002. Mr Cheng was adjudged bankrupt by an order made in July 2002. He was released by the Mainland authority in March 2003 and has since retuned to Hong Kong. The applicant expressed belief that with the assistance of Mr Cheng, the Company could revive its business and could become profitable again. He has also expressed belief that after the Company has repaid its debt to the petitioner, the Company is solvent.

7. In an affirmation made on 24 March 2003 filed by the Director of Legal Aid on behalf of the petitioner, a statement signed by the applicant dated 13 November 2002 was exhibited, in which the Company admitted its inability to pay the amounts due and owing to six employees including the petitioner in the sum of about HK$3.2 million. In that affirmation, the petitioner has denied that she has come to a settlement arrangement with the Company.

8. On 26 March 2003, the petitioner filed a Notice to act in person and the Legal Aid certificate issued to her was discharged on 9 April 2003.

9. On 27 March 2003, the applicant filed his second affirmation giving further information on the business of the Company. Since about 1996, the Company has been focusing on the development of business as a manufacturer and exclusive distributor of "Philco" split-type air-conditioners in China and countries in Southeast Asia through its subsidiary known as Philco Air Conditioning (Hefei) Industry & Commerce Co. Ltd ("PAC"), which was established in Hefei, Anhui, China. The Company holds 91% shares in this subsidiary. PAC seems to be a viable company and has a substantial business. The applicant deposed that the Company's cash flow problem was temporary and was merely due to Mr Cheng's misfortune, and Mr Cheng is in the course of arranging necessary funds to be transferred from PAC to ease off the liquidity problem of the Company. Hence, the applicant believes that the Company is a solvent going concern.

10. On 25 and 26 March 2003, the applicant met the seven employees who have claims against the Company and reached a compromise with them. The agreement arrived at was that the Company was to pay HK$20,000.00 to each of the employees on 26 March 2003, and the balance in the aggregate sum of about HK$3.3 million would be paid on or before 26 September 2003 for six employees and on or before 30 June 2003 for one employee. The applicant exhibited the letters signed by each of these employees to the Director of Legal Aid dated 25 or 26 March 2003 stating that they agree to the rescission of the winding-up order and dismissal of the petition.

11. After the first hearing of this application on 27 March 2003, the applicant provided further documents and information to the Provisional Liquidators regarding the Company and PAC and exhibited further documents to the two affirmations he made in April 2003. I now have the audited account of PAC for three years up to December 2002 and have a better idea as to its financial position. The last audited account of the Company was only made up to the year ended 31 March 2000, but the applicant has made available the management account for the period from January 2001 to 26 February 2003.

12. According to the latest audited account of PAC, it has a net asset value of RMB 299 million. There was a drop in business in 2002 resulting in a loss of RMB 41 million, this I understand was due to the detention of Mr Cheng. PAC has a registered capital of US$40 million, all of which has been paid up.

13. As for the Company, according to its management account, it has non-current assets of HK$250 million being its interest in PAC and current liabilities of HK$172 million. The Company would appear to have a net asset value of about HK$78 million.

14. Of the current liabilities of HK$172 million, the bulk of the liabilities in the sum of HK$135 million is owed to one of the directors, Mr Shum Hoi Ying. The amounts due to Mr Shum are long term and unsecured loans advanced by him before he became a director of the Company in July 2002. He was appointed a director because of his substantial stake in the Company and because of stalemate in the affairs of the Company due to Mr Cheng's absence. Mr Shum has provided written confirmation dated 16 April 2003 of the amounts outstanding to him, that he is aware of the winding-up order and the present application for rescission of the order, and he has no objection. By another letter to the Provision Liquidators and the applicant's solicitors dated 2 May 2003, Mr Shum confirmed that for the time being he does not intend to make any call on the loans he had advanced to the Company.

15. I turn to consider the other liabilities of the Company. There are three groups of creditors, the bank creditors, the employees and miscellaneous creditors.

16. There are three bank creditors in all: Commerzbank Shanghai branch, the Bank of East Asia Ltd ("BEA") and the Liu Chong Hing Bank Ltd ("LCH"). The liabilities to the banks are secured in part by landed properties owned by the Company, PAC or the directors or companies controlled by them. Steps have been taken by the banks to repossess and realise their securities in March 2003.

17. Commerzbank has granted facilities to PAC under a credit agreement and the loan is secured by among other things a corporate guarantee of the Company. There is a letter from Commerzbank to PAC dated 28 April 2003 stating that as 31 March 2003, the balance of the outstanding debt of PAC is in the sum of US$6 million odd. Two repayments have since been made by PAC, reducing its indebtedness to Commerzbank to about US$4.6 million odd. There is produced a letter dated 10 April 2003 from the management committee of Hefei State New and High Technology Industrial Development Zone stating that the Committee with the Anhui Provincial Foreign Economics Authority had held discussion with Commerzbank on 9 April 2003 about PAC's indebtedness and the bank has indicated support to PAC's restructuring and would provide a written proposal shortly. To date, no action has been taken by Commerzbank against the Company regarding PAC's indebtedness.

18. Neither BEA nor LCH has filed a proof of debt in this liquidation.

19. As of 24 June 2003, BEA is owed HK$6,868,270.72 and US$1,284,138.77 plus interest accrued from 2 April 2003. BEA's officer in the Creditor Control Department has verbally indicated support for the application to rescind the winding-up order but has declined to provide written confirmation.

20. LCH is owed HK$18,352,328.34 as at 24 June 2003. There is a letter from the solicitors of LCH stating that the bank has no objection to the present application.

21. As for the seven employees, they have provided letters to the court after the hearing on 27 March 2003. Some stated that they have received payment to their satisfaction, some stated they had been paid in full and some stated that they waive their claims against the Company. All have indicated clearly and firmly in their letters they do not wish to proceed with the winding-up of the Company.

22. There were outstanding mandatory contributions due from the Company to the Mandatory Provident Fund Schemes Authority. It is confirmed by the letter of the Official Receiver dated 20 June 2003 that the further proofs of debt lodged by the authority in the sums of HK$174,914.23 and HK$12,154.47 have been superseded by a proof of debt for the sum of HK$2,653.56. This amount was paid on 23 June 2003, not out of the funds of the Company.

23. There is the evidence that debts to other creditors, Zung Fu Co. Ltd, The Water Authority, Treasure Land Property Consultants (Holdings) Ltd have all been settled in May 2003, not out of the funds of the Company.

24. A notice was put out by the Provisional Liquidators in the gazette, one English newspaper and one Chinese newspaper informing creditors of the present proceedings and inviting them to submit proofs of debt before the adjourned hearing today. All proofs of debt lodged have been paid or withdrawn by the creditors.

25. For a winding-up order to be rescinded and the petition to be dismissed where the debt in the petition is not in dispute, the court would need to be satisfied of three things:

(1) the petitioning debt and the sums owed to all supporting creditors have been paid or arrangements have been made to pay them;

(2) the Company is established to be solvent; and

(3) the Official Receiver does not consider the affairs of the Company would require investigation and that costs are paid.

26. Here, arrangements have been made to pay off all the supporting creditors. I have had a satisfactory explanation as to the financial position of the Company and PAC. According to the unaudited accounts, the assets of the Company would appear to exceed its liabilities, and the director to whom is owed a very substantial sum has confirmed that he has no intention of calling on the loans for the time being. I am satisfied that the Company is established to be solvent. The Official Receiver has not considered that the affairs of the Company would require investigation.

27. In the circumstances, I am satisfied that it would be appropriate to make an order to set aside the winding-up order. I make the following orders:

(1) the winding-up order made on 26 February 2003 is rescinded;

(2) the winding-up petition is dismissed;

(3) the Official Receiver and the Provisional Liquidators are directed not to take any further steps in the liquidation;

(4) the applicant is to pay the costs of the Director of Legal Aid in this petition agreed at HK$52,150.00 within 14 days hereof;

(5) the applicant is to pay the costs of the Official Receiver and the Provisional Liquidators in this liquidation and on this application, to be taxed if not agreed. The Official Receiver's costs of HK$12,150.00 are to be deducted from the petitioner's deposits.