RE VALUE FOOD SUPPLY LTD

HCCW 149/2020

[2020] HKCFI 2776

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 149 OF 2020

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D E C I S I O N

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1.  On 5 June 2020 Win-Chain (Hong Kong) Co, Limited (“WC HK”) and Shanghai Win-Chain Supply Chain Management Co, Ltd (“WC Shanghai”) issued a petition to wind up the Company on the grounds of insolvency [i]. The Petitioners rely on two statutory demands totalling approximately US$21m arising from non-payment, so they allege, of a series of purchase orders for substantial quantities of fish. The purchase orders are detailed in a schedule to the statutory demand. There is no dispute that the fish ordered was delivered on time and in a satisfactory condition. On the face of the matter the Company owes the Petitioners the purchase price of the fish. However, the Company contends that it has a bona fide defence to the claim for payment of the purchase orders. Put very briefly the Company says that the obligation to pay does not arise from the terms of the purchase orders, but another agreement, which was intended to regulate the payment obligations, the obligation to pay under that agreement is in dispute and as it contains an arbitration clause the dispute should be resolved by arbitration. Before considering that argument in detail I will deal with the principles that guide the determination of petitions to wind up a company on the grounds of insolvency, which are well-established and uncontroversial.

2.  As explained in my judgment in Re Yueshou Environmental Holdings Ltd [1]:

(i) A winding-up petition can be successfully resisted if there is a bona fide dispute on substantial grounds on the petition debt.  The onus is on the company to prove the same.

(ii) The company must put forward sufficiently precise factual evidence to substantiate its allegations and cannot merely raise a cloud of objections on affidavits.

(iii) The company’s assertions must be believable in the context of so much of the background as is either undisputed or beyond reasonable dispute.  In other words, the evidence is to not to be approached with a wholly uncritical eye.

3.  Bare oral allegations, uncorroborated by documentary evidence or contrary to common and commercial sense, are insufficient to raise a bona fide dispute on substantial grounds: see e.g. Re GW Electronics Co Ltd [2] and Re Kinston Entertainment (HK) Ltd [3].

4.  Where there is opposition as to the amount of the debt, the company must demonstrate that it has a bona fide defence on substantial grounds to a claim that the petitioner is owed at least $10,000: see Re China Cultural City Limited [4].

5.  Although the principles that apply generally to petitions to wind up a company on the grounds of insolvency are uncontroversial, what is more complicated is the relevance of an arbitration clause in a contract giving rise to a debt.  This is an issue of some controversy. However, it is only relevant if it can be demonstrated that the relevant agreement contains an arbitration clause.  As I have concluded that it does not it is not a controversy, which I need to explore in this decision.

6.  As I have already explained if all one looks at are the purchase orders it would appear that the sums claimed are due and payable.  Ms So accepted that if I were to conclude that the purchase orders governed the parties’ payment rights and obligations it followed that the Company has no defence to the claim.

7.  The purchase orders signed by the Petitioners and the Company commence in July 2018 and run through until September 2019. The periods are not exactly the same for both of the Petitioners, but nothing turns on that.  Prior to this period commencing other agreements had been entered into.  On 3 April 2018 WC Shanghai and Pacific Andes Food Limited, which is part of the same group of companies as the Company, signed what is called a Framework Cooperative Agreement.  This recorded the terms upon which the parties intended at that time to establish a joint venture company to conduct a seafood supply business.  A joint venture company, in the sense of a new limited company, was established for this purpose.  However, it never commenced business.

8.  On 12 July 2018 the Company and WC Shanghai entered into what is called a Sales Framework Agreement (“SFA”).  It is a short agreement.  The recitals are relevant and state as follows:

“A) Party B will arrange for the imported raw materials to be delivered to Pacific Andes Food Limited (or other processing factories as the parties may agree) to be processed into finished products (‘Finished Products’) through the ‘consignment processing’ arrangements.

B) Party B agrees to export and sell the Finished Products to Party A at an agreed price (‘Agreed Finished Product Price’), and Party A agrees to purchase such Finished Products at the Agreed Finished Product Price.

C) Party B and Party A agree to enter into a specific agreement on the sales arrangement of each Finished Product.

Now, based on the above, both parties hereby agree on the arrangement for the price calculation of Finished Products as follows:

…”

9.  The operative terms of the SFA are short. Clause 1 has nothing to do with payment.  Clause 2 contains a method for determining the price to be paid for the Finished Products.  Clause 2(3) provides a profit mechanism relevant to the onward sale by the Company of Finished Products, but is not relevant to the payment for products delivered by WC Shanghai to the Company.  Clause 2(4) provides that the SFA expires on 30 September 2018 or as extended by agreement.  I have not been taken to any evidence that shows it was extended, although as will become apparent nothing turns on this.  Clause 2(6) provides that the SFA is governed by the laws of the People’s Republic of China, which it is not in dispute must mean the laws of the Mainland.  Clause 7 is an arbitration clause, which is in the following terms:

“7) Any dispute or claim arising out of the performance or breach of this agreement that cannot be settled amicably within 30 days from the date of negotiation between the parties shall be submitted to the Shanghai International Economic and Trade Arbitration Commission for arbitration, and the award shall be final and legally binding on both parties.”

10.  It seems to me clear from the terms of the SFA that the SFA was intended only to regulate the price to be charged for the sale of Finished Products.  From its terms it appears that it was not intended to have any application at all to the provision of raw materials (fish) by WC Shanghai. Even in the case of the Finished Products Recital (C) makes it clear that separate agreements would be entered into.  The purchase orders to which I have referred were all drafted by the Company and are in terms that clearly indicate that they are free standing agreements containing payment provisions that apply to the goods to which the purchase order relates.  I can see no basis from a reading of the SFA and the purchase orders for concluding that the SFA took precedence over the purchase orders and that WC Shanghai and WC HK (which was not a party to the SFA) were not entitled to be paid in accordance with the provisions of the purchase orders, which the Company had drafted and signed.

11.  Ms So did a respectable job at trying to obscure the clarity provided by the terms of the SFA and the purchase orders themselves by taking me to correspondence and accounts, which show that the parties possibly contemplated at some stage that the proceeds of sale would be ploughed by WC Shanghai and WC HK into the prospective joint venture, but this seems to me to fairly obviously be irrelevant to the issue of entitlement to payment.

12.  In my view, the Company has clearly not demonstrated a bona fide defence on substantial grounds and I will make the normal winding up order.