RE MASTER MACHINERY ENGINEERING LTD

HCCW 997/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 997 OF 2002

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REASONS FOR DECISION

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The application

1. This is an application to strike out a petition to wind up Master Machinery Engineering Limited ("the Company") on the ground that there is a bona fide dispute of the debt on substantial grounds. At the end of the hearing, I granted the Company's application and ordered the petition be struck out. These are the reasons for my decision.

2. The petition was presented by Chu Tik Kwong, who is a shareholder and director of the Company. It is alleged in the petition that the Company is indebted to the petitioner in sum of HK$1,223,859.53, which is made up as follows:

(1) HK$629,636.00 being the price of goods sold and delivered to the Company by the petitioner trading as a sole proprietor in the name of Master Engineering Company ("MEC");

(2) HK$294,239.53 being a loan advanced by the Nanyang Commercial Bank to the Company, which was guaranteed by the petitioner and settled by him on behalf of the Company on 8 July 2002; and

(3) HK$299,984.00 being a shareholder's loan advanced by the petitioner to the Company, after giving credit for HK$300,000.00 being drawings made by the petitioner from the Company in respect of the original shareholder's loan in the sum of HK$599,984.00.

3. A demand for the above debt was served on the Company on 6 August 2002. The petition was presented on 31 August 2002. The summons to strike out the petition was issued on 9 October 2002. Evidence in respect of the summons has been filed by both sides pursuant to the directions given.

4. The Company does not dispute the 2nd item of the debt but alleges that the amount of HK$300,000.00 which was improperly withdrawn by the petitioner is sufficient to set off this item. The 1st and 3rd items are disputed by the Company. It is alleged that there is false accounting and forgery on the part of the petitioner for which the Company has made a report to the police in April 2002 (in respect of the $300,000.00 withdrawn by the petitioner) and to the Independent Commission Against Corruption on 22 August 2002 (in respect of the invoices issued for the 1st item of the debt) and the matter is still under investigation as appears from a letter of the police to the Company's solicitors dated 29 September 2002.

The Background

5. The Company has been engaged in the business of leasing and hiring of machinery to contractors.

6. There is dispute as to the beneficial ownership of part of the shares registered in the petitioner's name, which is irrelevant to the issues I am concerned with. As mentioned earlier, the petitioner is also a director. The other two registered shareholders and directors are Tang Ping Kwan and Law Tung On. It is alleged in the evidence filed by the Company that the petitioner was until 30 September 2001 responsible for the accounts and office work of the Company, whereas Mr Tang and Mr Law were responsible for the repair and maintenance of machinery at the Company's warehouse and for helping out other workmen at various construction sites. On 30 September 2001, the petitioner resigned from the management of the Company.

7. It is alleged by the Company that after the petitioner's resignation, the other directors began to look into the accounting records and discovered three payment vouchers all dated 23 July 2001 for the total sum of HK$300,000.00 which would appear to relate to an earlier transfer of HK$300,000.00 from the bank account of the Company to the account of a firm of solicitors as directed by the petitioner on 14 July 2001. The other directors suspected there was false accounting and misappropriation of funds on the part of the petitioner.

8. I turn to consider each of the three items that make up the petitioning debt.

The settlement of the bank loan

9. It is not disputed by the Company that the petitioner has settled a bank loan of HK$294,239.53 of the Company, which was guaranteed by him. It is also not in dispute that the sum of HK$300,000.00 transferred from the Company's bank account to an account of a firm of solicitors in July 2001 was received by the petitioner. The Company's position is that regardless of whether the sum of HK$300,000.00 was properly withdrawn or misappropriated, this amount could be set off against the bank loan settled by the petitioner on behalf of the Company in July 2002.

10. For present purpose, it is unnecessary to resolve the dispute whether the sum of HK$300,000.00 was properly withdrawn by the petitioner from the Company's bank account. I am satisfied that this amount can be set off against the bank loan settled by the petitioner on the Company's behalf.

The price for goods sold and delivered

11. The amount claimed by the petitioner in the sum of HK$629,636.00 was supported by 11 invoices. According to the invoices, the goods therein being spare parts of machinery were supplied by the plaintiff to the Company. It is alleged by the Company that these 11 invoices were prepared by the plaintiff and also signed by him in acknowledgment as the recipient, except for the last invoice numbered 1062. It has not been denied by the petitioner that he had issued the invoices and signed on them to acknowledge receipt of the goods.

12. The Company's case is a complete denial that the goods in the 11 invoices were supplied. It is alleged that Mr Tang and Mr Law were responsible for the repair and maintenance of machinery and if spare parts were needed, it would be Mr Tang or Mr Law who would make the request for the purchase of spare parts and if spare parts were indeed delivered to the Company, they would certainly know about this. They also made the point that upon their search of the Company's records, no quotations, purchase orders or delivery notes were found which related to the supply of the spare parts in question. These assertions on affidavit of Mr Tang and Mr Law might not have been sufficient in themselves to warrant a striking out of the petition. However, the Company has also raised a number of matters giving rise to reasonable suspicion that the invoices might not be evidence of genuine transactions.

13. Firstly, the 11 invoices of MEC were issued to the Company on various dates over a two-year period from 30 August 1999 to 3 August 2001. The odd thing about these invoices is that they are numbered consecutively, from 1052 to 1062. During this two-year period, the petitioner had issued invoices to other customers. Indeed, it was asserted in the petitioner's affirmation that at all material times, MEC had supplied spare parts and equipment to various customers including the Company and that MEC was the main supplier of the Company. There is produced in evidence an invoice of MEC numbered 1103 dated 4 September 1999 to another customer. A debit note of MEC dated 6 September 1999 to yet another customer referred to an invoice in September 1999 numbered 1104. These invoices issued to two other customers in September 1999 were in sequence but at odds with the invoices issued by MEC to the Company in the same period. The invoice dated 15 September 1999 issued to the Company was numbered 1053 and the next invoice in time issued to the Company dated 11 October 1999 was numbered 1054.

14. Secondly, it was drawn to my attention by counsel for the Company that the invoice numbered 1059 was dated "May 2001". The invoice before that numbered 1058 was dated "1 April 2000", and the invoice after that numbered 1060 was dated "1 June 2000". If the date of "May 2001" were an error and that it should have been May 2000, it is very odd that a mistake should be made about the year if the invoice was indeed issued in the middle of year 2000. If the date of "May 2001" were not an error, it is odd that the invoice numbered 1059 was skipped over when an invoice came to be issued in June 2000.

15. Thirdly, there was a price discrepancy found in the some of the invoices issued to the Company. I do not propose to refer to the price discrepancy as compared to the invoices issued by MEC to other customers, as these invoices were not issued at around the time when MEC issued invoices to the Company for goods of the same kind. However, I do note that in the invoice to the Company dated 11 October 1999, the unit price for a particular item was HK$19,600.00, whereas in the invoice to the Company dated 7 November 1999, goods of the same kind were sold at the unit price of HK$23,000.00.

16. Fourthly, the sale of the goods to the Company as evidenced by the 11 invoices was not reflected or not accurately reflected in the Financial Statement and Tax Report of MEC for the year ended 31 March 2000. The total amount of the invoices to the Company prior to 31 March 2000 (being part of the 11 invoices claimed) was in the sum of HK$190,796.00. However, in the profit and loss account, only HK$171,606.00 was recorded for sales for the year ended 31 March 2000. Further, in the balance sheet, HK$191,445.00 was recorded for the entry of trade debtors. There is evidence in the ledger accounts of the Company (alleged by the Company to have been prepared by the petitioner) that by other transactions, the Company had paid HK$197,650.00 to the petitioner in the year ended 31 March 2000 for transportation services, this does not tally with the figures recorded in the profit and loss account and the balance sheet.

17. Lastly, the last invoice numbered 1062 dated 3 August 2001 for HK$9,140.00 was not even addressed to the Company.

18. In his affirmation in reply, the petitioner did not deal with any of the above matters raised by the Company in the affirmation of Mr Tang. Essentially, what the petitioner did was to rely on the extracts from a report of a firm of certified public accountants commissioned by the Company in respect of the accounts covering the period from 1 January 2001 to 31 July 2001. On behalf of the petitioner, it was submitted that it is not open to the Company to dispute the authenticity of the 11 invoices having regard to the findings in the auditor's report. Under the heading of debts due to the Company and unpaid, it was stated in that report there was an accumulated overdue amount of HK$472,025.00 to MEC and this was followed by four invoices numbered 1058 to 1061, being four of the invoices claimed by the petitioner.

19. The Company's answer to this is that the auditor's report was prepared solely on the basis of documents and information provided by the petitioner, who was responsible for the accounting records until he resigned in September 2001. In any event, it is not apparent that the auditor had considered any of the matters now raised by the other directors in their affirmations. I agree with this submission. If the petitioner had provided some explanation to the matters queried by the Company, I might have taken a different view. As it is, I am left in the position where reasonable suspicions are raised on the authenticity of the invoices and there is no explanation from the petitioner on any of the matters giving rise to suspicion.

20. I hold that the Company has raised a bona fide dispute on substantial grounds on this item.

The Shareholder's loan

21. The petitioner has alleged that he had advanced loans to the Company from time to time. The amount outstanding, according to the petitioner, should be HK$684,095.20. However, he has decided to pursue the Company only for the sum of HK$599,984.00, in view of the finding in the aforesaid report of the auditor that HK$599,984.00 is due. This amount was stated in the auditor's report to be made up as follows:

22. It is the Company's case that it is not indebted to the petitioner for any amount allegedly due as shareholder's loan. It is asserted that the figures in the director's account under the petitioner's name are inaccurate. The Company made the same answer that the auditor's report is unsatisfactory in that it was based solely on the documents and information provided by the petitioner to the auditor. In addition, the Company has raised the following matters in the affirmation of Mr Tang as casting doubt on the authenticity of the accounting records kept by the petitioner and the petitioner has not sought to address any of the matters of suspicion raised by the Company.

23. Firstly, it would appear from the Company's ledgers that there was an "Incoming and Outgoing Cash Accounting Record" ("the Cash Account"). In the Cash Account, a total of HK$588,592.00 was recorded as receivables received by the petitioner on behalf of the Company during June 1999 to March 2001During the same period, a total of HK$537,101.00 was recorded as amounts paid by the petitioner on behalf of the Company. It is alleged that the transactions in the Cash Account are not shown on the general ledgers of the Company and that some of the moneys received by the petitioner on behalf of the Company were returned to the Company and falsely recorded as loans from the petitioner to the Company.

24. By way of an example that an item of receivable in the Cash Account was wrongly recorded as a loan from the petitioner, the Company has pointed to two entries alleged as loans from the petitioner to the Company recorded in the director's account under the name of the petitioner. These are the entries dated 10 and 18 May 2000 in the respective sums of HK$33,000.00 and HK$30,000.00, which are among the items mentioned in the auditor's report as amounts due to the petitioner. There is no record of payment into the bank accounts of the Company of the amounts of HK$33,000.00 or HK$30,000.00 in May 2000. It is alleged by the Company that these amounts were moneys received by the petitioner on behalf of the Company, as recorded in the Cash Account in two entries dated 26 April 2000, and falsely recorded as loans from him when the sums of HK$33,000.00 and HK$30,000.00 were returned by the petitioner to the Company in May 2000.

25. Secondly, in respect of some of the amounts allegedly advanced by the petitioner, it can be demonstrated by documentary evidence that these amounts were advanced by someone else. They related to the following entries in the director's account alleged to be loans from the petitioner to the Company:

26. There are documents adduced by the Company to show that all three amounts were paid out of the bank account of one Mr Chow Chung Hei and there is an affirmation from Mr Chow deposing that these amounts were advanced by him to the Company.

27. Thirdly, it would appear from the Cash Account that on 12 July 1999, HK$100,000.00 was paid by the petitioner on behalf of the Company. The bank ledger of the Company showed that on 20 July 1999 and by voucher numbered BK0724, a sum of HK$100,000.00 was paid by the petitioner to the Company. However, the ledger account of the Company for an entity named "Cheuk Fung" showed that by voucher numbered BK0724, HK$100,000.00 was paid to the Company by Cheuk Fung. This would appear to suggest that the amount of HK$100,000.00 was paid into the Company's account by Cheuk Fung instead of by the petitioner.

28. Fourthly, one of the items in the Cash Account recorded as paid by the petitioner on behalf of the Company was a deduction made on 4 July 2000 in the sum of HK$15,600.00 being interest due to Sun Fook Kong in respect of a debt of HK$130,000.00 from July 1999 to July 2000. It is alleged by the Company that the general ledger accounts of the Company for this period did not reveal any money due to Sun Fook Kong for which interest should be paid.

29. Lastly, even in the report of the auditor, which was prepared on the basis of information and documents provided by the petitioner, it was found that there was a discrepancy of about HK$530,000.00 from the figures provided by the petitioner as amounts due to him and the amount the auditor found due to the petitioner.

30. It was submitted on behalf of the petitioner that the Company is able to challenge only some of the figures in the shareholder's loan and the fact that the amount due might have been over-stated in the demand for payment should not affect the validity of that demand. This, however, is not a situation in which there was an error of accounting but allegations of false accounting have been made. In my view, the Company has raised sufficient materials to give rise to reasonable grounds of suspicion. At the moment, I do not know whether there is any answer to the allegations of the Company because the petitioner has chosen not to address them at all in his affirmation in reply.

31. I also find that the Company has established a bona fide dispute of this item of the debt on substantial grounds.

Orders

32. For the above reasons, I am of the view that the petitioner should first establish his entitlement to the debt claimed in an action by writ. I therefore order the petition to be struck out. As for the costs of the application, I have made an order that the petitioner should pay the Company's costs of this application on a party and party basis. I have rejected a submission of the Company for costs on an indemnity basis, as there is nothing to suggest in the evidence before me that the petitioner had known when the petition was presented that the petitioning debt would be disputed on the grounds raised in the Company's evidence filed two months after the petition. Besides, the petitioner had relied on the report of the auditor, which, on the face of it, would seem to support the petitioner's claim.