RE HKSC FOODS LTD

HCCW 456/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 456 OF 2008

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J U D G M E NT

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The petition and the strike out application

1.  This is the hearing of a creditor’s petition to wind up HKSC Foods Limited (“the Company”) and a summons issued by the Company to strike out the petition on the ground that it was an abuse of the process of the court.

2.  The petition was presented by Mrs Li Kwan Fung Yee Brenda on 2 October 2008, based on a statutory demand served on the Company on 9 September 2008 for A$283,372.80.  The claim was made up of the principal balance outstanding to the petitioner in the sum of A$280,000 being the loan facilities she granted to the Company, within interest calculated up to the date of the demand.

3.  The petition came before this court for directions on three occasions.  The Company and the petitioner had each served two rounds of evidence in opposition and in reply pursuant to the directions given.  The Company issued its summons to strike out the petition on 29 January 2009, prior to the second directions hearing on 2 February 2009.  At the third directions hearing on 9 March 2009, it was ordered that the petition and the strike out application were to be heard together.

4.  As stated in Re ICS Computer Distribution Limited [1996] 1 HKLR 181 at 184B:

“As a matter of practice there does not appear to be any difference in approach between the determination of the validity of a defence to a petition and an application to strike out a petition.  Frequently, the two are heard and decided at the same time without distinction being drawn.”

5.  The Company opposed the petition on the basis it has raised a bona fide dispute to the petitioning debt on substantial grounds.  Further, it alleged that it has a cross claim against the petitioner which is in excess of the petitioning debt.

6.  I will first relate the relevant background matters.

The background

7.  The Company was incorporated in Hong Kong on 30 April 2005 under its former name.  Initially, it was owned and controlled by Mrs. Christine Barros, the sister of the petitioner, and did not actively carry on business.  In May or June 2006, Mrs Barros sold the Company to an Australian, Peter John O’ Dea, who had just incorporated his company in Australia called ASC Foods Pty Limited.  Mr O’Dea was engaged in the business of supplying food to various international cruise line companies and wanted to set up a company in Hong Kong to expand his business to Asian markets.  He acquired the Company from Mrs Barros to save the trouble of setting up a new company.  The registered office of the Company remained at Rooms 602 to 603 Bonham Trade Centre in Sheung Wan, which was at all times the office address of Mrs Barros’s accountant, until after the statutory demand was served on the Company.

8.  Additional shares of the Company were issued and allotted in October 2007.  Two other individuals became shareholders, but Mr O’Dea remained the major shareholder holding 75% of the issued shares.  He was and is the sole director of the Company.  The Company specialised in supplying food and beverage to cruise liners.

9.  In 2006, an oral agreement (“the Oral Agreement”) was made between Mr O’Dea acting on behalf of the Company, Mrs Barros acting on behalf of Bashan Limited (“Bashan”) and the petitioner, for business co-operation between them.

10.  Bashan was a company incorporated in Hong Kong in May 2004.  At all material times, its sole shareholder and director was a company incorporated in the British Virgin Islands called ITB Enterprises Inc (“ITB”).  According to the petitioner, ITB was a company owned by her brother-in-law Mr Barros.  On 29 August 2008, after the Oral Agreement was allegedly terminated, the petitioner and Mrs Barros were appointed directors of Bashan.

11.  Bashan carried on business in the name of “Lee Seng Heng”.  Lee Seng Heng used to be the name in which Lee Seng Heng Fish Gravy and Canning Fty Ltd (“LSH”) had carried on business.  LSH was incorporated in Hong Kong in 1973.  The late husband of the petitioner used to be a major shareholder.  The petitioner inherited the shares and the business of LSH from her husband in 2003.  The petitioner was appointed a director of LSH in 2003, and Mrs Barros was made a director of LSH in November 2002 but her appointment was filed with the Companies Registry only in October 2003.  Unlike Mrs Barros who was a business woman, the petitioner had not been involved in business before, she had been working as a teacher for over 30 years until she retired in 2004.  In September 2004, the petitioner sold the goodwill, stock-in-trade, trademarks, intellectual property rights and other assets of LSH to Bashan.  That was how Bashan came to use the name of Lee Seng Heng in doing business.  Both LSH and Bashan shared the same registered office at Room 601 Bonham Trade Centre.

12.  Under the Oral Agreement, Bashan agreed to provide networking, administrative and bookkeeping services to the Company, and the petitioner agreed to provide bridging finance to the Company from time to time to the extent not exceeding A$500,000, to enable the Company to settle outstanding accounts from its suppliers before it received payment from the cruise ship companies.  In return, Bashan would share with the Company half of the profits generated from the business of the Company.  There is dispute between the Company and Bashan as to what sums were to be deducted from the gross receipts before the profits were to be shared equally.  The Company agreed to pay interest to the petitioner at 11% per annum on the outstanding loans.  It is not in dispute that all payments received from the cruise ship companies would first be utilised to repay the outstanding principal and interest to the petitioner.

13.  As Mr O’Dea was frequently travelling, on 7 January 2007, Mrs Barros was made a signatory of the Company’s bank account at the United Overseas Bank.  On 22 May 2007, the petitioner was added as a third signatory, to protect her interest in providing finance to the Company.

14.  The accounting period of the Company was divided up in accordance with the voyage schedules of cruises in each financial year.  For present purpose, the first season in Hong Kong was from November 2006 to June 2007 and the second season was from October 2007 to June 2008.

15.  On 25 August 2008, Mrs Barros and the petitioner were informed by the bank they had been removed as authorised signatories to the bank account of the Company.  They regarded this as a breach of the Oral Agreement that would entitle them to terminate the Oral Agreement.  On 29 August 2008, Mrs Barros wrote to the Company on behalf of Bashan and the petitioner demanding payment of all sums to the petitioner under the loan facilities she granted and payment of the net profits due to Bashan.

16.  On 6 September 2008, the petitioner and Bashan brought proceedings against the Company and Mr O’Dea in HCA No. 1683 of 2008, claiming A$282,447.12 being the outstanding principal and interest due to the petitioner under the loan facilities, and other sums due to Bashan for its share of the net profits and in respect of remuneration or service fee incurred by it in carrying out the Oral Agreement.  Mr O’Dea was sued as the guarantor in respect of the Company’s liability to the petitioner for the outstanding sums due under the loan facilities.

17.  As mentioned earlier, the statutory demand was issued by the petitioner and served on the Company on 9 September 2008.  This was in respect of the debt which was one of the claims in the High Court Action.

The legal principles

18.  The legal principles are well established.  To resist a winding-up petition on the basis there is a bona fide dispute of the debt on substantial grounds, the onus is on the company to adduce sufficiently precise factual evidence.  The company must establish a substantial case and it cannot discharge the onus by arguing hypotheses of fact on which it is said that such a case exists or could exist (Re ICS Computer, supra. at 183I to J).  It is not sufficient to raise a cloud of objections on affidavits and to claim that because a dispute of fact cannot be decided without cross-examination, the petition should not be heard but the matter should be determined in some other proceedings (Re Claybridge Shipping Company S.A., English Court of Appeal, unreported, 9 March 1981, per Oliver LJ).

19.  Where a cross claim not less than the amount of the petitioning debt is relied on by the company, it has to show that the cross claim is genuine and serious and one of substance.  The onus is again on the company to adduce sufficiently precise factual evidence to satisfy the court that is the case (Re Standard Kitchen Cabinets Engineering Company Limited, HCCW No. 425 of 2008, 6 May 2009, Kwan J, para 7).

20.  Where it is clear and obvious either that the debt is bona fide disputed on substantial grounds, or that there exist genuine and serious cross claims in excess of the petitioning debt, it is open to a company to apply to strike out the petition.  Although the power to strike out the petition is one that should be exercised sparingly and with caution, where the court is satisfied it is clear and obvious the petition will fail, the court can and will exercise its discretion to strike out (Re Unibo Trading Limited, HCCW No. 733 of 2005, 27 January 2006, Barma J, paras 12 and 13).

21.  The mere fact that the petition was presented after the petitioner had brought an action in the High Court Action claiming the same debt in the petition does not of itself make the petition an abuse of process, as the Company’s counsel Mr Bruce Lau had suggested.  If there is really no bona fide dispute of the debt on substantial grounds, the earlier writ action is immaterial.  Besides, there are other claims and there is an additional defendant in the High Court Action.  Nor do I accept Mr Lau’s submission that if I were to rule against the Company in its reliance on cross claims to resist the petition, the principle of res judicata would bar the Company’s right to resist the petitioner’s claim in the High Court Action by raising a counterclaim.  As Mr Maurellet had submitted for the petitioner, if the court should find the Company has failed to adduce sufficiently precise factual evidence to establish a believable counterclaim to resist the winding-up petition, this would not constitute a substantive determination of the merits of the counterclaim for the principle of res judicata to apply.  Furthermore, even if the Company were to be wound up, the liquidators of the Company may still litigate against the petitioner any claim on behalf of the Company that they consider meritorious, with the funding provided by any creditor.

22.  I reject Mr Lau’s contention it would be unfair to the Company if it should be held that the evidence it has adduced does not satisfy the court its cross claims are genuine and serious and of substance.

Is there a bona fide dispute of the petitioning debt on substantial grounds

23.  Mr Maurellet submitted on behalf of the petitioner that of the petitioning debt of A$283,372.80, at the very least it is indisputable that A$240,000 is due from the Company to the petitioner.

24.  The petitioner set out in her 2^nd affirmation in table form the various sums she had advanced to the Company and the sums she had received from the Company in repayment.  The supporting documents being remittance advices, cheques and payment slips were exhibited.

25.  In his 1^st affirmation, Mr O’Dea raised four grounds to dispute the petitioning debt.  He alleged that the petitioner deliberately caused extra interest to accrue on loans made to the Company and disputed the calculation of interest by charging interest at 11% per annum on the basis of the highest outstanding daily balance of the loans advanced in every month.  These two grounds relate to the interest element.

26.  Mr O’Dea also alleged that in some instances the loans provided by the petitioner were not used for the purpose agreed, which was to pay the food suppliers of the Company, and there were instances when money was advanced even though the Company had the cash.  Unauthorised payments were made out of the loans provided and these amounts, which were paid to Bashan, came up to HK$797,507.98.  These payments were set out in his 2^nd affirmation.  He claimed that the petitioner is accountable and liable to the Company for the unauthorised payments.  I will deal with the alleged unauthorised payments when I come to examine the cross claims.  He alleged that in these instances where money was advanced to the Company not for the purpose as alleged, the petitioner did so at the expense of the Company as the Company had to pay her interest at 11% per annum.  So the latter allegation again relates to interest.

27.  The last ground for disputing the debt was that Bashan and the petitioner had failed to collect accounts receivable for the Company, with the result that the Company had to rely on the petitioner for bridging finance.  I do not think this is a ground for disputing liability to pay outstanding principal, at most this contention goes to the interest for the loan unnecessarily incurred.

28.  Having considered the grounds of opposition advanced in the Company’s evidence, if, for the purpose of this argument, all repayments by the Company were treated as repayments of principal, and discounting the amounts attributable to the disputes based on interest, I would agree with Mr Maurellet at the very least there could be no serious dispute that A$240,000 is due from the Company to the petitioner for outstanding principal.

29.  In his written submission, Mr Lau raised other grounds for disputing the petitioning debt not raised in the Company’s evidence.  He contended as it was agreed in the Oral Agreement that any amount received from the cruise ship companies would first be utilised to repay the outstanding principal and interest to the petitioner, the petitioner would not be entitled to repayment of her loans unless and until the Company had received repayment from the cruise ship companies.  I reject this contention which was counsel’s interpretation not supported by evidence and was not the case advanced by the Company.

30.  Mr Lau also submitted as there was no basis for the petitioner to terminate the Oral Agreement, the petitioner was not entitled to demand immediate repayment of the outstanding loan.  I also reject this submission.  On the evidence, there was no specifically agreed time for repayment of the petitioner’s loans.  I agree with Mr Maurellet’s submission that in this situation, the loan was to be treated to be generally repayable at once without any previous demand.  At the highest, it could perhaps be said that it was implicitly agreed that the loan was repayable on demand (Chitty on Contracts, 30^th ed, vol 2, paras 38-247).

31.  Unless the Company could establish there are serious and genuine cross claims not less than A$240,000, there is no valid basis to oppose the winding-up petition.

The cross claim for HK$797,507.98

32.  The amount of HK$797,507.98 paid to Bashan was made up of three items:

(1) HK$480,308, which represented the 50% net profit sharing to Bashan for the first season of the cruise liner MS Costa Allegra;

(2) HK$70,865, which represented the 50% net profit sharing to Bashan for the first season of the cruise liner MS Statendam; and

(3) HK$246,334.98, which were the payments made to Bashan’s staff for the second season calculated by a formula agreed at a meeting between Mr O’Dea and Mrs Barros on 31 October 2007.

33.  Mr O’Dea claimed in his 2^nd affirmation that the petitioner is accountable and liable to the Company for the payments of HK$797,507.98 to Bashan as she had signed the cheques of the Company to Bashan (except for the last cheque of HK$23,047.92 which was signed by Mrs Barros) and the payments were unauthorised and without his agreement.  He claimed he had no idea of the debit notes for “service fees for Bashan’s share of profits” and the Company had never agreed to make any payment towards the payroll of four employees of Bashan.  There was one instance in which the petitioner issued a cheque on behalf of the Company one day before the debit note of Bashan was issued.

34.  The petitioner deposed in her affirmation she only signed cheques of the Company as directed by Mrs Barros.  Mrs Barros made an affirmation to explain each of the payments that made up the figure of HK$797,507.98.  Mrs Barros claimed she was the one who was in charge of the Company’s day-to-day operations in Hong Kong, not the petitioner, and it was she who approved the payments in each instance where the petitioner had signed a cheque on behalf of the Company.

35.  Mrs Barros adduced documentary evidence to show the three items that made up the total figure were all authorised and known to Mr O’Dea.

36.  For the sum of HK$480,308, there was a contemporaneous meeting note of the meeting attended by Mr O’Dea on 31 October 2007 recording an agreement of an equal split on HK$960,616 for the net profit for MS Costa Allegra, so the Company and Bashan would each get HK$480,308.  It was also recorded that of its share of profits, the Company had already withdrawn HK$394,748.38.  This left a sum of HK$85,559.66 to be paid to the Company.  On 15 November 2007, A$12,000 which was the rounded up figure, was remitted to Mr O’Dea being the balance of the 50% net profit due to the Company.  The general ledger of the Company and bank advices were exhibited, showing payments corresponding to HK$480,308 were made to the Company.

37.  For the second item of HK$70,865, documentary evidence showed that there was agreement with Mr O’Dea for the payment of this sum to each of the Company and Bashan, being their equal share of the net profits for MS Statendam before the accounts for this liner were finalised, pending verification of claims for expenses incurred by Mr O’Dea and his staff.  The relevant email, a note of computation, the general ledger of the Company, and the remittance advice showing payment of A$10,000 (which was equivalent to HK$70,865) to Mr O’Dea’s company in Australia were produced.

38.  For the third item of HK$246,334.98, there were the meeting notes of the said meeting on 31 October 2007, part of which was in Mr O’Dea’s own handwriting, and he had written “100” against the names of two staffs of Bashan, Nichole Cheung and Chu Bo King, indicating his agreement to pay 100% of the salaries of these two.  Mrs Barros deposed in her affirmation there was also agreement at the meeting that two other staff members of Bashan, who did not do as much work for the Company, were to be paid by the Company on a daily basis.  But there did not appear to be any record in the meeting notes about the salaries of the other two staff members.

39.  The Company did not seek leave to file evidence to answer any of the above matters in Mrs Barros’s affirmation, which was supported to a very large extent by contemporaneous documents.

40.  Even if allowance were made for the payment of salaries for the two staff members where no record of any agreement to pay their wages was made in the meeting notes, the total figure to be discounted was only in the region of HK$15,855.

41.  I am inclined to think that in respect of the cross claim of HK$797,507.98, a large part of this claim, to the extent of HK$781,652, cannot be regarded as a serious and genuine cross claim.

The cross claim for unliquidated damages

42.  Mr O’Dea deposed in his 2^nd affirmation the Company has a cross claim against the petitioner for unliquidated damages for an amount in excess of A$84,501, being the petitioning debt less the cross claim of HK$797,507.98 and an amount attributed to the dispute based on interest.

43.  The claim was premised on breach of fiduciary duty on the petitioner’s part.  In July 2008, the Company was asked by its major customer, Costa, to submit a tender for food and beverage for 2008/09 before the deadline of 5 August 2008.  Mr O’Dea alleged that Bashan or LSH or a related company placed a tender with Costa, using confidential information and connection of the Company, and successfully obtained the contract from Costa for the new season.

44.  In support of this allegation, Mr O’Dea referred to the record of a conversation he had with a supplier in September 2008 and this supplier told him Mrs Barros had asked him about the price of food supplies.  He said this was done to undercut the Company’s pricing in her own tender.  He also mentioned he had seen the staff of Bashan/LSH handling the monitoring of deliveries of beverages supplies to a Costa ship at dock on various occasions when the new season began in October 2008.

45.  The petitioner has denied any involvement in any tender submission to Costa.

46.  I am unable to see how the petitioner was said to have owed fiduciary duties to the Company.  All that she was authorised to do for the Company was to sign cheques for the Company, and she had performed some administrative tasks for the Company.  She did not undertake functions in relation to the Company which could probably be discharged only by a director, and it was insufficient to show that she undertook tasks in relation to its business which could probably be discharged by a manager below board level.  She could not be said to be a de facto director of the Company in any sense (Re Hydrodam (Corby) Limited [1994] 2 BCLC 180 at 183b).

47.  Mr Lau emphasised in his submission an inference should be drawn that the petitioner had an interest in and was involved in Bashan, and that Bashan was closely connected to LSH, in which the petitioner holds shares as a major shareholder and was at all times a director.  I cannot see how this could be used to found a case of personal liability against the petitioner, as distinguished from Bashan.

48.  On the available evidence, any claim of the Company against Mrs Barros or Bashan for breach of fiduciary duty or in tort rested on the bare allegation of Mr O’Dea.  There was merely unsubstantiated suspicions and no evidence of wrongdoing.  The claim against the petitioner, which is even weaker, is clearly not a cross claim of substance.

49.  Mr O’Dea also raised a cross claim against the petitioner on the basis she had mismanaged the accounts of the Company in that there was failure to collect overdue payments from the Company’s suppliers.  This was again a bare assertion of Mr O’Dea.  On his case in his 1^st affirmation, under the Oral Agreement, it was Bashan that was responsible for providing administrative services to the Company.  Even if the petitioner were somehow responsible in collecting outstanding payments from the Company’s suppliers, she would be discharging her duty on behalf of Bashan.  There was no basis to support the contention that the petitioner had assumed any personal responsibility to the Company in that regard.

50.  The Company has failed to establish any credible counterclaim of substance against the petitioner.

Conclusion

51.  For the above reasons, I dismiss the Company’s summons to strike out the petition.  I make an order that the Company be wound up.  The petitioner’s costs in these proceedings are to be paid out of the Company’s assets.