RE ADVANCED GENERAL PRINTING INKS LTD

HCCW 1342/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1342 OF 2002

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J U D G M E N T

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1. This is a petition to wind up Advanced General Printing Inks Limited ("the Company") on two grounds, under s. 177(1)(d) of the Companies Ordinance, Cap. 32 that the Company is unable to pay its debts, and under s. 177(1)(f) that it is just and equitable to wind up the Company. The petition is presented by a contributory Sun Chemical Group B.V. ("SCG"), a company incorporated in the Netherlands, holding 50% of the shares in the Company and it is opposed by the other 50% shareholder, being Advanced Ink and Coating Limited ("AICL").

2. It is not in dispute that the Company is insolvent. AICL opposes the petition on these grounds.

3. Firstly, it is asserted that SCG has an ulterior motive to wind up the Company and the petition is not presented in good faith and is an abuse of the process of the court. It is alleged that the petition is presented to evade SCG's liability to reimburse AICL or the Company for SCG's share of the operating costs and expenses of the Company and to prevent the Company from bringing proceedings against Sun Chemical Corporation ("SCC"), a company incorporated in Delaware, the United States and a wholly owned subsidiary of SCG, for SCC's breach of a contract of sale and/or the Licence and Technical Assistance Agreement made in 1994. It is further alleged that the insolvency of the Company was caused by the wrongful acts of SCC in supplying defective goods and by the failure of SCG to contribute further capital. On this basis, it is submitted that the petition should be dismissed.

4. Secondly, if it should be found that it is just and equitable to wind up the Company, it is contended that there is some other remedy available to SCG under s. 168A and SCG is acting unreasonably in seeking to have the Company wound up. Hence, the court should refuse to make a winding-up order under s. 180(1A).

The background

5. The background matters may be stated as follows.

6. The Company was incorporated under the name of Balcorton Limited on 29 May 1981, with an authorised share capital of HK$1,000 divided into 100 shares of HK$10 each. Two subscriber shares were issued. The Company was in effect a shelf company. In August 1981, it changed its name to Swire General Printing Inks Limited.

7. In 1994, SCG and AICL entered into a joint venture agreement ("the Shareholders Agreement") by which they agreed to cause a Hong Kong limited company to be incorporated on a joint venture basis to engage in the manufacture, use, sale and marketing of printing inks. They procured the Company, which had not previously traded, to be the joint venture company and on 29 April 1994, the name of the Company was changed to its present name. The authorised share capital of the Company was increased to HK$500,000 and SCG and AICL each took up 50% of the shares in the Company.

8. The material terms of the Shareholders Agreement are as follows:

(1) The issued share capital of the Company shall at all times be beneficially owned as to 50% by AICL and 50% by SCG. The directors of the Company can only issue additional shares to the existing shareholders and only in proportion to their existing holdings. They may not deal with the unissued shares in any other way (clauses 1.05 and 1.06).

(2) The Company's board shall comprise six directors, three appointed by AICL and three by SCG. No board of directors' decision is valid unless SCG and AICL are represented throughout the meeting by at least one director appointed by each of them. No resolution of the board of directors is passed unless one director appointed by SCG and one appointed by AICL have voted in favour of the resolution (clauses 2.01, 2.06 and 2.07).

(3) No shares in the Company may be transferred or otherwise disposed of except with the mutual consent of the parties unless the circumstances in clause 7.04 apply (clause 7.01).

(4) One shareholder may purchase the shares of the other shareholder on the conditions set out in clause 7.04 if either (a) the ultimate control or ownership of SCG should change in a manner unacceptable to AICL or (b) SCG or AICL should become insolvent or go to liquidation (clause 7.04).

(5) "Either party may give written notice to the directors of the Company that the Company shall be put into liquidation subject to any prior notice delivered to the directors by a proposed purchaser pursuant to clause 7.04 above. In the event of a notice to liquidate the Company being issued [SCG] and [AICL] shall subject as aforesaid procure that the Company is wound up and in particular that an extraordinary general meeting of the shareholders of the Company is convened and held within a period of 30 days to resolve to put the Company into liquidation." (clause 7.05).

(6) The agreement is not assignable except to wholly owned subsidiaries bound by all of the terms of the agreement (clause 10).

(7) Profits are to be distributed equally to AICL and SCG (clause 12.01).

(8) "Any additional capital required by the Company and approved by its board of directors shall be provided by [SCG] and [AICL] in equal proportions on request." (clause 12.02).

(9) The agreement shall not be amended, supplemented or modified except by a written instrument signed by or on behalf of SCG and AICL (clause 15).

9. Thus, under the Shareholders Agreement, the Company is to be operated as a quasi partnership, with profits to be shared equally, SCG and AICL are to have equal right of participation in the management, the shares are not to be transferable except by mutual consent, and either party would have the right to give notice to wind up the Company.

Insolvency of the Company

10. There are adduced in evidence the audited accounts of the Company for the year ended 31 December 2000, the audited accounts for the year ended 31 December 2001 and the management accounts for the six-month period ending 30 June 2002. I am satisfied that the Company is insolvent, whether on a cash flow test or a balance sheet test. It was submitted by Mr Chan Pak Kong, who appeared for AICL, that the insolvency is technical. I cannot regard the insolvency as such. As to his submission that AICL is the only or only substantial creditor of the Company, this is not relevant to the consideration if the Company should be wound up on the ground of insolvency, there being no evidence before the court that AICL is prepared to waive its claim of HK$1,219,271.32 against the Company.

11. In the audited accounts for the year ended 31 December 2000, the auditors noted that there was fundamental uncertainty as to whether the accounts could be prepared on a going concern basis and that the validity of this assumption required the injection of funds. The auditors also noted that they had not been able to obtain adequate assurances regarding the valuation of the inventories credited in the balance sheet at the value of approximately HK$1 million.

12. With regard to the auditors' note, SCG has made it clear that it will not inject further funds. As for AICL, its position has been stated by Mr Thomas Cheuk, a director of AICL, in his letter to SCC dated 15 April 2000 as follows: "The Company simply lived on overdraft from [AICL] since 1998 and the directors of [AICL] have just informed [him] that they are unwilling to finance such a non-moving business any more without immediate dramatic improvement from [SCG]".

13. It would appear that neither shareholder is willing to inject further funds into the Company. AICL has also admitted in the above letter dated 15 April 2000 that the Company "has been insolvent since 1997". In another letter dated 15 November 2000 from AICL to SCC, it was stated that AICL understood that the Company could not survive alone without the continuous support of SCG.

14. The Company's position has not changed significantly since December 2000. Its financial position has only worsened.

15. In the management accounts for the six-month period ending 30 June 2002, no sales were recorded during that period, there was an accumulated trading loss of HK$908,482.72 and a balance sheet deficit of HK$408,482.64.

16. I am satisfied that the ground to wind up the Company under s. 177(1)(d) has been made out.

The just and equitable ground

17. These matters are common ground between SCG and AICL:

(1) the Company is insolvent;

(2) there is no effective working relationship between SCG and AICL;

(3) the Company is in a deadlock by virtue of the provisions governing the constitution and operation of the board of directors such that it cannot make decisions;

(4) the petitioner has exercised its contractual right to give notice that the Company is to be wound up.

18. Given the insolvency of the Company, there are only two options available to the shareholders, either there should be an injection of additional capital or the Company is to be wound up. The first alternative, as I have mentioned, has been rejected by both parties.

19. As to the alternative of winding up the Company, this has been raised by SCG for some time in correspondence. According to the affidavit of Mr Melvin Cox, a director appointed to the Company by SCG, SCG first sought to wind up the Company in 2000 or 2001.

20. It made the decision to do so because the Company was insolvent and had ceased trading. The joint venture had not been commercially successful since its inception. In addition, SCG's relationship with AICL had deteriorated making the prospect of reviving the joint venture very remote.

21. On 6 December 2000, in a letter from Mr Cheuk to SCC, he stated that AICL would agree to wind up the Company only on the basis that firstly SCC was to accept and pay for the raw material ink paste in the Company's stock, and secondly the shares of SCG in the Company were to be sold to AICL for HK$1 each, failing that AICL threatened to dump and trade the Company's stock around the world "to further jeopardize [SCG's] image".

22. In another letter of AICL to SCC dated 29 December 2001, it was stated that AICL would wind up the Company on SCG paying to it US$100,000 on account of winding up costs and HK$1 million to repurchase the stock provided to the Company by SCC. Further, AICL would take legal proceedings against SCC for its losses.

23. Eventually on 14 June 2002, SCG served formal notice on the Company to wind up the Company pursuant to clause 7.05 of the Shareholders Agreement.

24. In a letter dated 17 June 2002, AICL requested a director of SCC to attend a meeting to discuss and finalize the liquidation. By a letter dated 19 June 2002, SCG's solicitors sent a copy of the notice served under clause 7.05 to AICL informing it that the shareholders were obliged to wind up the Company forthwith.

25. AICL responded by a letter of its solicitors dated 24 June 2002. It was alleged that AICL had provided "additional capital" on its own behalf and on behalf of SCG to the Company in the total sum of HK$1,255,959, and half of which being HK$627,980 should be borne by SCG. AICL demanded payment of HK$627,980, thereafter AICL would deal with the matter of putting the Company into liquidation.

26. Ms Myint submitted on behalf of SCG that there is no legal or factual basis for the alleged debt of HK$627,980, as the obligation of SCG to provide funding is set out exhaustively in clause 12.02 of the Shareholders Agreement.

27. Under the terms of this provision, a shareholder cannot unilaterally impose funding obligations on the other shareholder. The board of directors did not approve any additional funding allegedly provided by AICL and did not pass any resolution regarding the advance made. I agree with this submission.

28. On 27 June 2002, the solicitors for SCG wrote to the solicitors of AICL to try to obtain the latter's cooperation to the Company being wound up by means of a written resolution or extraordinary general meeting. No reply was received except a letter dated 13 August 2002 in which AICL reduced its demand for payment to HK$609,635.61.

29. In a further letter dated 6 September 2002, AICL's solicitors made clear the position of AICL was that unless SCG was to make payment of HK$609,635.61, AICL would be under no obligation to procure the winding up of the Company.

30. SCG presented the petition to wind up the Company on 7 December 2002. I am satisfied that the just and equitable ground to wind up the Company has been established. Quite apart from the restriction on the transfer of shares in the Shareholders Agreement, there would be no prospect of SCG exiting by selling its shareholding, given the Company's financial position.

Grounds of Opposition

31. It is alleged that there was ulterior motive of SCG in presenting the petition for the reasons I have stated earlier.

32. Regarding the claim of AICL against SCG for any breach of the Shareholders Agreement, even if there were a breach which in my view is doubtful having regard to clause 12.02, such claim would not be affected by the winding up of the Company.

33. Likewise, any claim that the Company or AICL may have against SCC for breach of the contract of sale of the defective goods in 1997 and/or the Licence and Technical Assistance Agreement would not be affected by the winding up of the Company, as the liquidator can pursue such claim against SCC if it is found to be meritorious and if he is put in funds to bring such liquidation.

34. Regarding the allegation that the defective coke red inks supplied by SCC to the Company in 1997 was one of the reasons for the failure of the business of the Company, the coke red inks supplied to the Company had a value of HK$214,902.33, as against a total value of inks supplied at that time being August 1997 of HK1.5 million (of which no complaint of defective quality is made). Further, SCC had waived its right to payment for the coke red inks. The alleged claim for loss of profits of HK$250,000 in Mr Cheuk's affirmation, which is not particularized or substantiated, would not have returned the Company to solvency on the state of its financial statements.

35. I reject the allegation of ulterior motive in presenting the petition on the part of SCG.

36. The alternative remedy suggested by AICL is that SCG should sell its shares to AICL at a nominal value and SCG should pay AICL half of the amount that AICL had contributed towards the Company's operating expenses. It was submitted by Mr Chan that this is the remedy that SCG should pursue under s. 168A. I am wholly unable to see how it could be said that SCG was behaving unreasonably in refusing to sell its shares to AICL practically free of charge in a situation not provided for under clause 7 of the Shareholders Agreement, or in refusing to pay any further contribution of capital in circumstances not governed by clause 12.02 of the Shareholders Agreement. I am not persuaded that SCG has behaved unreasonably in seeking to wind up the Company, whether in the exercise of its right under clause 7.05 of the Shareholders Agreement or under the provisions of Cap. 32.

37. For the above reasons, I make an order to wind up the Company both on the ground of insolvency and on the just and equitable ground.

38. As for costs, Ms Myint seeks an order that the costs of SCG be paid by AICL instead of being paid out of the Company's assets, and that the costs should be taxed on a common fund basis instead of the party and party basis, on the ground that AICL has been given extensive chances to the proposal of SCG to wind up the Company without resort to the process of the court. Mr Chan does not oppose an order that AICL should pay the costs of SCG. This is clearly right, as these proceedings are essentially a shareholders' dispute, so the costs should not have been borne by the Company.

39. In my view, this is an appropriate case to order costs to be taxed on a higher scale, because the grounds of opposing the petition as advanced by AICL are wholly without merit, and AICL has been given adequate opportunity by SCG before the commencement of these proceedings to bring about the liquidation of the Company without a petition to court.