RE CHARM TREE CO LTD

HCCW 15/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 15 OF 2011

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J U D G M E N T

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Introduction

1.  This is a petition for the winding up of the company (“the Company”) pursuant to s. 177(1)(d), Companies Ordinance (Cap. 32) on the ground that the Company is unable to pay its debts.

2.  A debt of about US$1.1 million is referred to in this petition.  However, by the hearing of this petition, the petitioner accepted:-

(a)  US$724,351.48 has been paid between the date of this petition (10 January 2011) and April 2011;

(b)  certain deductions claimed by the Company,

but claimed that at least US$203,900.43 is due and owing.

3.  The Company says it is solvent and able to pay its debts.  It opposes this petition contending that this petition ought not be brought because the debt is disputed on substantial grounds.  The petitioner naturally contends otherwise.

4.  The legal principles for resolving such a disagreement are not in dispute: if there is a bona fide and substantial dispute as to the debt, it should be litigated in an action, and not on the hearing of a petition for winding up; in such case, as a matter of practice, the court would not embark on a trial to determine the validity of a debt; such a petition would be dismissed when a company can show it has a genuine cross claim which can extinguish the debt; the burden is on the company to demonstrate that there is a bona fide dispute on substantial grounds.

5.  The matters raised by the Company in attempting to show a bona fide dispute and a genuine cross claim are:-

(1)  no debt was due at the date of this petition;

(2)  the debt was subject to various deductibles, and what can be deducted is in dispute;

(3)  there is a serious counterclaim arising out of the petitioner’s breach of fiduciary and other duties owed to the Company and/or dishonest assistance of breach of duties.

6.  To better understand the dispute, a few words should be spent on the parties’ relationship.  The Company is in short an exporter of artificial Christmas trees and the petitioner was its US agent. The petitioner would be paid commission by the Company for orders introduced by the petitioner.  The debt on which this petition is based is said to be the commission outstanding since about May 2010.

Premature Petition

7.  According to the Company, the petitioner’s commission was only payable in arrears in January of each year.

8.  The petitioner points out that the above is inconsistent with what was said on the Company’s behalf in contemporaneous documents including:-

(a)  “The reason I T/T your commission right away, because that was what we agreed, you told me that you wanted to get your profit right away after we received payment from your customer, & of course I have to deduct any amount you owed us” (e-mail dated 25 May 2010 from the Company to the petitioner);

(b)  “I just received payment from Hobby Lobby …, do you want me to T/T your commission asap?” (e-mail dated 31 May 2010 from the Company to the petitioner);

(c)  “Rick, sorry to tell you this, in the future, you don’t have to waste your time telling me, how much payment we get from your customers, how much we owe you, etc. & etc.  Just tell me straight how much you want me to T/T to USA & then I will see if how much I have to pay you.  It’s a lot easier.  I have all the records here. … ” (e-mail dated 29 October 2010 from the Company to the petitioner).

9.  I agree with the petitioner that the above contents of the contemporaneous documents render this part of the Company’s opposition unbelievable.

Deductibles

10.  The major item of deductibles relied upon by the Company is the amount of defect claim made by customers introduced by the petitioner.

11.  In particular, the above includes an alleged potential claim which may be made by a customer called True Value Company.  It is accepted by the Company that US$113,798.20 would be payable if suitable undertakings can be provided by the petitioner and True Value.

12.  I agree with the petitioner that the correspondence adduced in evidence shows that such an undertaking has already been provided.  The relevant correspondence includes:-

(1)  a signed undertaking given by the petitioner by way of letter dated 7 March 2011;

(2)  an undated letter signed by True Value (but attached to the letter dated 18 March 2011 from the petitioner).

Breach of Duties/Dishonest Assistance of Breach

13.  It is alleged that the petitioner has assisted individuals involved in this petition to attempt to divert business away from the Company.

14.  In about November 2010, a former director of the Company is said to have started a new company which competes with the Company. Allegedly, the petitioner assisted that director by transferring some of the Company’s customers to the new company since then.

15.  The amount of loss has not been disclosed by the Company.  It is therefore unknown if this is more or less than the amount due to the petitioner.

Conclusion

16.  By reason of the matters set out above, I am not satisfied that the Company has established this is a case falling within para. 4 above.

Other Matters

17.  The Company submitted during the hearing it is in fact able to pay the debt but refused to do so purely because it considered there is a substantial dispute regarding the debt.  It asked that any winding up order be stayed or suspended so that it can pay off the debt to avoid being wound up.

18.  No authority has been put forth in support of such a request.  There is no express provision in Cap. 32 conferring such power.  The closest provision appears to be s. 180(1), Cap. 32 which reads:-

“On hearing a winding-up petition the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit … ”.

19.  Because the Company is adamant of its ability to pay off the debt (which is small relative to its profits (about HK$16.7 million) and net assets (about HK$17.6 million)), and its accounts ending 31 March 2010 show that it is an apparently solvent company, I will invite the parties’ submissions regarding whether other orders are more appropriate than a winding up order.

20.  The parties are at liberty to do so by way of written submissions within 14 days from the date of this judgment.

21.  To promote efficiency, those submissions should also deal with the costs of this petition.