XCHRX PERIWIN DEVELOPMENT LTD. v. GRANDFIELD PACIFIC HOTEL LTD.

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. HCCW 29 OF 2001

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D E C I S I O N

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1. This is an application by the Provisional Liquidators for directions from the court that they be allowed to cease operation of the hotel business carried on by Grandfield Pacific Hotel Limited ("the Company") pursuant to the provisions of liberty to apply made by Hartmann J on 29 January this year.

2. For the jurisdiction of the court to give such a direction if expedient, I was referred by Mr Bartlett to various authorities and they are as follows: firstly, Palmers Company Precedents Part 2, 17th Edition, page 103 in which no authority was cited for the proposition that a provisional liquidator may apply for a direction from the court to cease the business operation of a company if expedient; secondly, there is the case of Re Union Accident Insurance Co Ltd [1972] 1 Lloyd's Report 297 at 302 in which the court expressed the view that it was within the power of the provisional liquidator to close down the branch office of the company in question; and lastly, there is the Australian case of Re M L Industries Pty Ltd (1981) 5 ACLR 769 in which the court refused the application taken out by the provisional liquidator on the basis that the petition for winding up would be heard a mere five days away and also because of the paucity of information provided by the provisional liquidator in support of his application. I am satisfied that this court does have jurisdiction to give such a direction if appropriate and indeed it has not been seriously challenged by Mr William Wong who appeared for the Company that I do have this jurisdiction.

3. On 18 January this year, Cheung J made an order on the ex parte application of the Petitioner appointing provisional liquidators with powers to do everything necessary to preserve the assets and to carry on the business of the Company until the further order of the court.

4. On the return date of the inter partes summons for continuation of Cheung J's order before Hartmann J on 29 January, it was ordered that the appointment of the provisional liquidators be continued until varied or discharged by the court. The court was informed at that hearing that the petition for winding up would be contested and the Company would seek a discharge of the order appointing the provisional liquidators, hence directions were given for the parties to file evidence. As at present, all the evidence has been filed for the application to discharge which is to be heard on 7 March 2001. The petition for winding up would be heard on 10 April.

5. The Company's principal activity is to operate a hotel in Causeway Bay. The provisional liquidators have encountered difficulties in carrying out their duties due to the lack of co-operation of the directors and senior staff and the failure to provide material information and records to the provisional liquidators despite repeated requests. The hostility shown towards the provisional liquidators is such that the provisional liquidators have seen fit to engage security guards for the protection of their staff working at the hotel premises. I shall not go into the details of non co-operation which are set out in full in the two reports provided to this court by the provisional liquidators. The Company has made allegations that the provisional liquidators had not been behaving impartially. Suffice it to say at this stage that I do not accept such allegations.

6. This is by way of background, and is not the primary reason for the provisional liquidators' application today. The Provisional Liquidators are concerned with the tight cash flow situation of the Company and the Company's ability to continue trading without additional funding from directors or shareholders. That is why directions are sought from the court that they be permitted to cease trading unless further funding is received.

7. I appreciate that it is a draconian order to direct that the provisional liquidators be allowed to cease trading before the Company's application for discharge of the appointment of the provisional liquidators is heard. I bear in mind that this would be heard fairly soon and the petition for winding up would be heard on 10 April.

8. In my judgment, the provisional liquidators' concerns are justified. The professional view of the provisional liquidators on the liquidity of the Company and the cash flow forecast is entitled to respect. I shall, however, make some adjustments to the provisional liquidators' estimates and forecast for the reasons given below. At this stage, I am not looking at the broad picture but at a very limited scope to see if the Company is able to discharge its liabilities in the operation of the hotel business in the short term until the end of April, which I think is a reasonable period.

9. The first adjustment that I am going to make relates to the provision of legal costs in the sum of $570,000.00. In the order of Cheung J, the order as to costs was that the question of which party is to bear the costs of the appointment of the provisional liquidators is to be reserved. There is no reason why the fees of the legal advisers of the provisional liquidators should be treated differently from the provisional liquidators' costs. There seems to me to be no or no sufficient reason why the Company should make provision for the fees of the provisional liquidators' legal advisers at this stage when it is not clear who would bear the costs ultimately. In my view, the provision of the legal costs should be removed from the Provisional Liquidators' cash flow forecast.

10. The second adjustment that I am going to make arises out of the additional information disclosed by the Company in the third affirmation of Leung Kai Man filed on 23 February 2001 on the latest booking records supplied by the front desk reservation of the hotel for March and April this year. These figures have been set out in table form in the submissions of Mr Wong. According to the latest information supplied, the occupancy rate for March and April based on the bookings made as at 22 February 2001 would be 51% and 48% respectively, not 39% and 51% as forecast by the Provisional Liquidators. That would bring in room revenues of $703,373.00 for March and $660,820.00 for April 2001. However, it should be borne in mind that the room revenues would not be received by the Company all at one go. Mr Bartlett has given me a revised table on the basis that the Company's new figures on bookings are taken into account. The net result is that there would be a cash flow deficit of about $426,000.00 if the Company is to continue operation to the end of April. This is the adjustment I should make to the cash flow forecast.

11. In addition to the above cash flow deficit as forecast, there are two additional items that should be added to provide for payment of arrears of wages for the hotel employees in January 2001 and the liability to pay maintenance costs for the air-conditioning system. These figures added to the figure of cash flow deficit as forecast would bring the total deficit to $808,452.00.

12. In my judgment, there should be additional funding provided to the Company if it is to carry on the hotel operation. I will round down the figure for additional funding to $800,000.00. As I have indicated to the parties earlier, in view of the fact that the application for discharge is going to be heard on 7 March, much earlier than we all expected, I will order that the order I make today is not to take effect until after the determination of the application for discharge on 7 March. I will hear the parties on the exact terms of the order that I am to make on the basis of the decision given.