XCHRX LEE PO WANG SAMSON v. EVER RISE ENGINEERING LTD.

HCCW 714/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 714 OF 2001

____________

____________

_________________________________

REASONS FOR DECISION

_________________________________

1. This is an application by Ever Rise Engineering Limited ("the Company") for a validation order under section 182 of the Companies Ordinance, Cap. 32. The Company sought an order that payments may be made into or out of the bank account of the Company for the purpose of paying the debts of the Company incurred in the ordinary course of its business from the date of its summons issued on 1 September 2001 up to and including the conclusion of the hearing of the petition for winding-up and that dispositions of the property of the Company involved in the ordinary course of its business during the period aforesaid shall not be avoided by section 182 in the event of a winding-up order being made.

2. The petitioner has opposed the application on the ground that the Company is insolvent and there is no evidence to show that the continued trading of the Company is likely to benefit all the creditors as a class. The Official Receiver has expressed concern about the solvency of the Company and regarded this as a border line case for a validation order.

3. At the conclusion of the hearing, I made a limited form of validation order and these are the reasons for my decision.

4. The petition for winding-up was filed on 16 July 2001 by a shareholder and director, Mr Lee Po Wang Samson who had advanced a sum of HK$1.4 million to the Company. A statutory demand was served on the Company and the Company had failed to pay the debt or any part thereof. The petition was presented on the basis that the Company is insolvent and unable to pay its debts.

5. The Company has filed evidence to resist the petition alleging that there was an agreement or understanding between the petitioner and the Company that when the petitioner became a shareholder, he had agreed to lend money in proportion to the percentage of his shareholding to finance the business of the Company. The loans were to be made on the basis that all shareholders should financially support the Company by such interest-free shareholders' loans and that the loans would only be repayable when the Company was in a financial position to repay. The Company's allegations are denied by the petitioner in his affirmation in reply. The petition is to be heard on 11 November 2001.

6. As at the date the petition was presented, there are only two shareholders and directors of the Company. They are the petitioner who holds 10% of the shares and Mr Chan Kam Biu Richard, who holds the other 90%. The Company has an authorized and paid up share capital of HK$1 million. The Company has been carrying on business as a building services engineering contractor. It is pertinent to note the following matters about the financial position of the Company.

7. Firstly, the Company has accumulated significant losses over the years and it has been kept afloat simply because of substantial loans made to the Company by its shareholders. Other than the petitioner who had advanced HK$1.4 million to the Company, Mr Chan, Mr Chan's wife and a company controlled by Mr Chan and his wife, Boca International Limited ("Boca"), had advanced a total of about HK$8.3 million to the Company as shown in the loan account of the Company up to 30 September 2001. One other substantial creditor who had advanced money to the Company to finance its business with no fixed repayment term is a Madam Hu Ye whose business is associated with building projects in Shanghai in which the Company is a sub-contractor. The total amount owed to Madam Hu Ye as in September 2001 is about HK$2 million. It was stated in the audited accounts of the Company for the years ended March 1999 and March 2000 that the accounts had been prepared on the going concern basis on the assumption that the shareholders would provide such financial assistance as necessary to maintain the Company as a going concern. Mr Chan has also stated in his second affirmation that he, his wife and Boca will not demand repayment from the Company of the amounts owed to them in the sum of HK$8.3 million.

8. Secondly, it is apparent from the financial statements of the Company that it has been suffering significant losses although the financial position might have improved for the year ended 31 March 2001 and the six months from April to September 2001. Audited accounts have been disclosed up to March 2000 only. The relevant figures may be set out as follows:

* Unaudited financial statements

9. Thirdly, the Company is currently engaged in seven building services engineering contracts. It is estimated that four of them would be completed in three to four months' time and the others would be completed in 15 to 18 months' time. The work in progress being the work done on the site but for which the Company has not received payment is in the region of HK$9.2 million. Further payments of approximately HK$18.9 million are expected to be received by the Company if and when the work on the seven existing contracts is to be completed in 18 months' time. A breakdown of the relevant figures is as follows:

10. Mr Philip Tam, who appeared on behalf of the Company, has informed me that the Company is not seeking a validation order in respect of the repayments made by the Company to Mr Chan, Mrs Chan and Boca since the presentation of the petition for their advances to the Company to finance its business. The Company is merely seeking a limited form of validation order solely to enable the Company to continue its business for the purpose of paying salaries to its employees and making payments to sub-contractors and suppliers so that the existing contracts may be completed by the Company. It was submitted by Mr Tam that it would be in the interest of the Company and ultimately in the interest of all its creditors that the Company should be allowed to complete the existing jobs as the Company would receive substantial sums from the projects upon their completion. If the Company is not allowed to continue trading and to complete the existing jobs, the Company would be in breach of contract and it would suffer substantial loss and damage as a result.

11. On behalf of the petitioner, it was submitted by Miss Linda Chan that the Company is clearly insolvent as appeared from the latest unaudited financial statements for 2001 even though the accumulated losses have been much reduced. Miss Chan further submitted that notwithstanding that Mr Chan and other creditors associated with him would not demand repayment of their loans to the Company in the sum of HK$8.3 million, these loans remain prospective liabilities of the Company. Moreover, the petitioner's debt of HK$1.4 million has not been paid by the Company. Miss Chan has queried whether the Company has shown by credible evidence that the continued trading of the Company is to the benefit of all its creditors.

12. Miss McKenna for the Official Receiver has impressed upon me that if a validation order is to be made, the terms of the order should be restricted in view of legitimate concerns about the solvency of the Company.

13. Whether a validation order is to be made so as to allow a company to continue trading after the presentation of a winding-up petition would depend on the particular circumstances of each case. In the present situation, I think it is material to the exercise of my discretion that the majority shareholder and other creditors associated with him have stated on affidavit and given an undertaking through counsel that they would not call in their loans to the Company in the total sum of HK$8.3 million until after the determination of the winding-up petition. It is also material to my consideration that if the Company is allowed to continue trading and complete the jobs on hand, it is anticipated that a total net income of approximately HK$2.5 million would be generated in the relatively short period of four months. Provided that the terms of the validation order are clearly restricted so that the order does not extend to validate any advances of the majority shareholder and those associated with him, I think it would be for the benefit of creditors generally that the Company should continue trading pending the hearing of the petition.

14. I wish to make clear two other matters. Firstly, it is stated in the 1st affirmation of Mr Richard Chan that after the Company's bank account was frozen when the petition for winding-up came to the knowledge of the Company's bank, in order to maintain the business operation of the Company, Mr Chan had requested the Company's clients to make payments in cash or by way of cash cheques. Such cash payments or cash cheques were apparently paid into other bank account or accounts as it was stated in Mr Chan's affirmation that he had then made payments for the Company in cash or by personal cheques issued by him. I would like to state that once the validation order is made and the Company is allowed to operate its bank account for deposits and withdrawals in the ordinary course of its business, there would be no justification for Mr Chan to continue the above practice. Henceforth, all payments made by the Company's clients should be paid into the Company's bank account. Secondly, I would like to make clear that I have not made any definite ruling on the solvency of the Company for the purpose of the petition which was made on the basis that the Company is insolvent and unable to pay its debts. Whether any of the shareholders and those associated with the shareholders are entitled to call in their loans to the Company and, if so, when they could do so, are matters in dispute to be resolved at the hearing of the petition. All that I am saying, for the purpose of the present application, is that the Court is entitled to take into consideration that a substantial part of the advances made to the Company, in the total sum of HK$8.3 million, would not be called in by the creditors until after the determination of the petition.

15. I have made the following orders on this application:

(1) Notwithstanding the presentation of the petition, and subject to paragraph (2) hereof,

(a) payments may be made into or out of the bank account of the Company with the Bank of China (Hong Kong) Limited (formerly known as the Hua Chiao Commercial Bank Limited) for the purpose of paying the debts of the Company incurred in the ordinary course of its business from the date of this application up to and including the conclusion of the hearing of the petition; and

(b) dispositions of the property of the Company involved in the ordinary course of business to its contractors and sub-contractors in the implementation of the existing building services engineering contracts

shall not be avoided by the provisions of section 182 of the Companies Ordinance, Cap. 32 in the event of an order for the winding-up of the Company being made on the petition.

(2) For the avoidance of doubt, paragraph (1) hereof does not apply to any of the loans that had been made to the Company as recorded in the loan account exhibited as Exhibit "CKB-36" to the 2nd affirmation of Chan Kam Biu Richard affirmed on 11 October 2001 or to any loan that may be made to the Company in future save and except for credit given to the Company by a trade creditor in the ordinary course of business of the Company.

(3) Bank of China (Hong Kong) Limited shall be under no obligation to verify for itself whether any transaction through the Company's bank account with it is for the purpose of paying the Company's debts or in the ordinary course of the Company's business or whether paragraph (2) hereof applies to such transaction.

(4) Costs of this application be in the cause of the petition.