IN RE SINOAMERICAN TELECOM INC.

CACV 265/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

(On appeal from High Court Companies Winding-up No. 329 of 1998)

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J U D G M E N T

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Rogers, J.A. :

Introduction

1. This is an appeal from an order of Mrs. Justice Le Pichon of the 27th October on the 5th hearing of the Petition. Having admitted the 9th Affidavit of the Opposing Contributory, Mr. Yuen, the Judge ordered the Petitioner to provide discovery to the Opposing Contributory of all documents relating to the joint venture known as Shenzhen ("Ligao") Technology Limited since the date of the appointment of the Provisional Liquidators and that the Opposing Contributory should likewise provide similar discovery. It was also ordered that mutual lists of documents should be filed and served within 14 days of the 27th October and that inspection should take place 7 days thereafter. The deponents were required to attend for cross-examination failing which their affidavits would be excluded from evidence and the matter was adjourned for mention in Chambers on 19th November, that is 2 weeks from today.

2. The reasons for the Judge's decision were handed down this morning.

3. The defence, or more accurately the opposition, to the winding-up order, which is raised in the 9th Affidavit of Mr. Yuen is that Petition has been presented for an ulterior purpose, i.e., not with the object of an equitable and rateable distribution of the assets amongst the creditors, but with the aim of the acquisition of the major asset by a group of investors. As the Judge said at page 5 of her Reasons for Decision :

"In essence, the allegation is that the Petition was not presented for the purpose of collecting the debt. Rather, it was presented for the purpose of having provisional liquidators appointed in the expectation, to put it at its lowest, that they could be persuaded to agree or support the petitioning creditor and the investors' bid to obtain the joint venture for themselves to the exclusion of Mr Yuen and certain other creditors and shareholders."

4. The company in question is an investment company. It is 84.7% owned by Mr. Yuen, the Opposing Contributory. There are a number of investors who have put in some US$17 million in the form of bridging notes and convertible loans. It would seem that the notes, or some of them, are convertible to shares and carried warrant options. The investors had been found primarily outside Hong Kong mainly from the United States but also, it is understood, from the Middle East. In addition to being the major shareholder, Mr. Yuen was a director of the company.

5. The Petitioning Creditor is a Cayman Island company. Of the US$17 million, the Petitioning Creditor has invested approximately $10 million which is owing to it. The debt upon which the Petition is founded is not the full amount which is said to be owing, but nothing turns on that.

6. The Petition was presented on the 14th May this year and Provisional Liquidators were appointed on the same day. I would note in passing that the Petition was not advertised straight away. On the 5th June, Madam Justice Beeson made an order to which I shall refer later. The order was made at the behest of the Provisional Liquidators; amongst other things it enabled them to invite offers by way of private treaty from each and all the shareholders and each and all the noteholders of the company as appearing in the company's registers of shareholders and noteholders on 22nd April 1996 and Star Telecom Overseas Limited for all the company's interest in all the shares and loans to its subsidiaries RHKL and Goldremart (Holdings) Limited and the company's loans to Rightone Telecom (HK) Limited.

7. As I observed when another part of these proceedings came before this Court in July of this year, this was a very strange order, the like of which is unlikely to be found in any authorities. It has now transpired that it was obtained after Court hours in a restaurant in Wanchai. Whether or not the application had been made in accordance with the Practice Direction requiring ex parte applications in winding-up matters to be applied for before the Companies Judge in the first instance is not known. Enquiries were made in the course of this hearing but no answer has been forthcoming.

8. On the 30th June, an urgent ex parte application was made before the Companies Judge under section 182 of the Companies Ordinance to sanction the sale of assets. The Judge gave her Decision on the 3rd July. There was then an urgent appeal on the 7th July and that appeal was dismissed. I will refer further to that application below.

9. On the 18th July, the Companies Judge was requested by a letter to vacate the hearing of the Petition. The Judge refused to vacate the hearing. The reason that had been advanced was that the Petition had not been advertised. The Judge quite naturally required an explanation. In the Reasons for Decision given this morning, the Judge sets out the history of that in the following terms :-

"Pursuant to the court's direction, an affidavit was filed on behalf of the petitioning creditor for the hearing on 20 July to explain why the Petition had not been advertised. These are set out in paragraphs 11-13 of the affidavit of David Arthur Willis. It would appear that the decision not to advertise was a deliberate and conscious decision (to leave matters open and as flexible as possible) rather than one of oversight. According to the affidavit of Mr Willis, the issue of timing for the advertisement was raised and considered again at the time of making the ex parte application on 30 June :

'It was decided that the advertisement of the petition should await the result of the application for sale so that further strategic decisions could be made once the Petitioner knew its position in relation to the ongoing funding and structure of any new arrangement.'"

10. On the 20th July, the Petitioning Creditor gave an undertaking to advertise the Petition no later than the 7th August. The hearing of the Petition was adjourned until the 18th August.

11. On the 3rd August, Barnett, J. was asked to make another order in these proceedings and again that is a matter to which I will refer later. Again, that application was made after Court hours on an urgent basis. That application authorised a loan of up to US$6 million. The interest rate was to be at 18% with a 1% commitment fee of the whole amount namely approximately HK$1/2 million.

12. The terms to which the loan were subject included the following provision clearly favouring Phoenix :-

"Phoenix (which is the vehicle set up by the Petitioning Creditor) will also require RHKL to grant in favour of Phoenix pre-emptive rights in respect of the shares in RCL (or, if the interest in Li Gao is not effectively assigned to RCL, RHKL's interest in Li Gao). The RCL loan agreement will include a provision to the effect that RHKL will agree not to dispose of the RCL shares or its interest in Li Gao to any third party without first giving Phoenix the right to acquire the RCL shares or the interest (as the case may be) at a price no less than the price offered by the third party."

13. Turning to the present matters, it is conceded by Mr. Whitehead, who appears on behalf of the Petitioning Creditor, that the orders made by the Judge were matters of discretion. Indeed, it seems that the admission of the 9th Affidavit of Mr. Yuen was not strenuously objected to before the Judge below but it is said that the Judge did not take into account the paramount rule that where there is a petition on the ground of insolvency based on an undisputed debt the petitioner is entitled to a winding-up order as of right.

14. The Petitioning Creditor relies on a number of authorities for that well-known proposition including, in particular, Re Esquire (Electronics) Ltd [1996] 3 HKC 311 and Re Cambourn Petroleum Products Ltd [1980] 1 WLR 86. Those are cases where those opposing the winding-up order wished to have lengthy adjournments to see, whether for one reason or another, the means of satisfying the admitted debt would be forthcoming.

15. This case is a different case where the basis of the Petition is challenged, as I have already indicated. It is no doubt a difficult matter for the Opposing Contributory to make out his case. I make no comments on the likelihood or otherwise of the ultimate success of the Opposing Contributory in this matter, but this is not a frivolous point which could be dismissed.

16. The Judge below took into account the doctrines enunciated in the Esquire and the Cambourn cases. She carefully distinguished also between the motives whether it be malice or anything else which are irrelevant as to the bringing of a winding-up petition and the question as to whether the Petition has been presented for an improper purpose. The Judge referred, in particular, to the decision of Harman, J. in the case of Re a Company [1983] BCLC 492 at 495 F-H where Harman, J. explained that the decision in Bryanston Finance :-

"..... never sought to overrule the basic law that the only proper purpose for which a petition can be presented is for the proper administration of the company's assets for the benefit of all in the relevant class. To hold otherwise would be to confuse motive, which is past, with purpose, which is future.

The question, therefore, is not 'does the petitioner genuinely wish to wind up this company', as counsel for the petitioner (Mr Littman) submitted. It would be hard for me to find that this petitioner, which has taken all regular steps to prosecute its petition and which plainly has reasons to desire the winding-up of this company, since that must put beyond much cavil the future of the company's lease, does not in truth desire to wind up the company. In my judgment the true question is 'for what purpose does the petitioner wish to wind up this company'. A Judge has to decide whether the petition is for the benefit of the class of which the petitioner forms a part or is for some purpose of his own. If the latter, then it is not properly brought."

17. The Judge took into account the failed attempt to utilise the provisions of s.182 which this Court agreed was tantamount to a scheme of arrangement and one where there was reason to query whether the Provisional Liquidator had acted in a partisan manner favouring one group of creditors over others. The reason given for not advertising the Petition was also taken into account by the Judge. The Judge held that those matters together with the order of Barnett, J. were prima facie consistent with and supported the allegations made by the Opposing Contributory. Once it had been decided that the matter was a proper matter to be considered, it followed almost as a matter of course that there should be discovery and cross-examination.

18. The Judge fully considered the question of whether the Petitioner had a virtually indefeasible right to a winding up order and decided the grounds alleged by the Opposing Contributory had to be considered properly.

19. Against that, it is said that there is an urgency to have the Petition heard but in that respect the Order of Barnett, J. of 3rd August has provided finance of up to US$6 million. Less than 20% of that appears to have been utilised, even if one takes into account the amount apparently provided before the date of the Order. It is difficult to see from the Order itself and the annexed letter thereto precisely what the obligations of the various parties are, but for the purposes of this judgment, I consider that there is a facility there for up to US$6 million.

20. The Petitioner has, since the hearing before the Judge below, filed a further affidavit of Mr. Maurice Vallat seeking to show some urgency arising from the funding arrangements or lack thereof; it was argued that if a winding-up order is not made, the joint venture would disappear. But that does not appear on the face of what is said in Mr. Vallat's affidavit to be the conclusion to which I would arrive.

21. It seems clear on the face of the papers before the Court that the Petitioning Creditor, in the guise of at least Ms. Rose-Marie Fox, has been in control of the company's interest in the joint venture since at least last year. There does not appear to be any pressing urgency in the provision of funds which cannot, in the immediate future at least, be met out of the facilities which are available to the Provisional Liquidators as a result of the loan agreement.

22. The Opposing Contributory says that he intends to apply to set aside or vary the order of Barnett, J. Clearly, there may be grounds for challenging it but whether they would be successful is another matter.

23. In my view, no urgency has been made out in this matter that requires any action to be taken prior to this matter coming before the Companies Judge on the 19th November. If the directions which have been given are followed, the matter should be ready for hearing by then. If hearing dates cannot be found in time for available financing to be sufficient, and there is proved to be a genuine need for advancing the hearing, then application can be made to the Companies Judge or other persons in charge of the list to have the matter heard earlier. That is not a ground for denying the Opposing Contributory the right to put his case.

24. In my view, there have been no grounds here for showing that this Court could in any way interfere with the discretion of the Judge below.

25. I wish to add a few words in respect of the way this application has been made. This Court has been convened at short notice and times have been considerably abridged in order to hear this appeal today. This is not the first such occasion. On the last occasion these proceedings were before the Court of Appeal, Madam Justice Yuen pointed out that the supposed urgency was illusory.

26. Almost every application in these proceedings seems to have been made as a matter of urgency (that is apart from the application to vacate the original hearing date of the Petition on the 20th July which was made because the Petitioner had deliberately decided not to advertise the Petition.) I note, in particular, that the order sought by the Provisional Liquidator before Madam Justice Beeson on the 5th June. I have already made observations as to the unusual nature of that order.

27. The order of the 3rd August was another order that was made out of hours. Mr. Whitehead has argued strenuously that there was a full skeleton argument, but it places an enormously high burden on a Judge to be asked to make a complicated order in a case which has a long history with which he is unfamiliar and to be asked to make that order after a heavy day in Court. It would have been quite impossible for the Judge to have been able to have familiarised himself with the papers in the case and then given the matter full consideration in the time which was available.

28. The application before Mrs. Justice Le Pichon on the 13th June which led to the previous appeal was likewise said to be an urgent matter. As I have just pointed out, Madam Justice Yuen has already made observations on that.

29. The urgency of this appeal, too, is illusory when it is considered that it was the Petitioner's contention that if successful, this Court could have made a winding-up order.

30. I appreciate that the previous applications have been made by the Provisional Liquidators but there can be no doubt, both from the nature of those applications and the fact that the Provisional Liquidators have been funded by the Petitioning Creditor that those two parties are working closely together.

31. I would point out that urgent hearings in which time limits are abridged or ignored altogether carry the inherent danger of unfairness to other parties and injustice.

32. For my part, I would say that "wolf" has now been cried once too often in these proceedings and it is unlikely that this Court will dance to the beck and call of the parties if, in future, urgency is used as a pretext for requesting early hearings or otherwise gaining priority over other litigants.

33. For those reasons, I would dismiss this appeal.

Leong, J.A. :

34. I agree that this appeal should be dismissed. The opposing contributory Mr. Yuen has raised the objection that the has been presented not for the purpose of pari passu distribution of the company's assets but it was aimed at putting the sole asset of the company, the Ligao joint venture, into the hands of the petitioner to the exclusion of Mr. Yuen and other creditors. The judge found, on an analysis of the history of these proceedings, including the Barnett Order, the failure to advertise the Petition until such time as ordered by the court, evidence consistent with and supporting that allegation. In these circumstances, it was right for the judge to consider it necessary that these allegations should be investigated and she was perfectly justified to treat this as an exception to the general rule that a petitioner in a petition on insolvency ground based on an undisputed debt is entitled to a winding-up Order. Further it has not been shown that an adjournment which probably will postpone the hearing of the Petition to early next year would result in the dissipation of the sole asset of the company and that would be prejudicial to the petitioner or other creditors. For my part, I see no urgency in this appeal.

35. The judge's exercise of her discretion in ordering an adjournment with the consequential directions was one which this court should not interfere. I would dismiss the appeal.

Nazareth, V-P:

36. I agree with what my Lords have said. I add the following.

37. The matter went before Mrs Justice Le Pichon on an adjourned hearing of the appellant's petition for winding-up. It was in the course of this that Mr Chain made his application to put in Mr Yuen's 9th affidavit. The judge came to the conclusion that she should grant leave and having announced it, Mr Whitehead stated that the petitioner would want to put in an affidavit of Mr Maurice Vallat. That led to the directions the judge gave which were essentially consequential in nature.

38. Before us Mr Whitehead has spent little time in attacking the leave that was granted to put in Mr Yuen's 9th affidavit. He has instead saved his powder and shot for an attack on the actual adjournment and even more in aid of an immediate winding-up order sought from this Court. The latter was pursued upon the basis of Mr Vallat's 2nd affidavit sworn on 3 November to the effect that the value of the company's only remaining asset would be lost if there was not an immediate order to wind up the company.

39. As I indicated at the outset, I agree with my Lords' reasons in particular those Rogers JA has given in respect of Mr Whitehead's submissions on the matter of adjournment.

40. So far as the new ground of urgency, because the value of the only remaining asset would otherwise evaporate, is concerned this is an entirely new matter that has been raised since Mrs Justice Le Pichon made her order. I do not think it should have been raised for the first time in this Court. That application, it seems to me, should have been made before the Companies Judge or the court in which the substantive petition for winding-up is on foot and which has not ruled on this particular matter.

41. The appeal is accordingly dismissed.

42. [Having heard counsel's submissions on costs]

43. The opposing contributory (Mr Yuen Shek Sang) is to have his costs of the appeal to be taxed if not agreed and paid forthwith.