TSOI KWONG SHI v. GUO XIN AND ANOTHER

HCCW 227/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 227 OF 2015

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D E C I S I O N

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1. This is the 2^nd application by the 2^nd respondent (“AFM”) for a validation order pursuant to s.182 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap 32.

2. The material background facts had been set out, and the applicable principles of law identified, in the decision of this court on the 1^st validation order application dated 27 August 2015.

3. There are 2 main arguments, and they are not unrelated.  Firstly, the petitioner (“Tsoi”) complains that he has been deprived of the right to inspect AFM’s books and accounts as a director of that company (“Inspection Allegation”).   It was pointed out by this court in a decision on Tsoi’s application for provisional liquidators to be appointed for AFM (dated 23 September 2015, §14) that lack of transparency as a result of the refusal to allow inspection gives rise to scepticism.

4. The Inspection Allegation is hotly contested and serious allegations of impropriety have been made by both sides.  It is impossible, and unnecessary, to resolve this dispute in this application.  For the present purpose, this court may form a very provisional view on the same.

5. I have examined the evidence before the court on the Inspection Allegation. Whilst I believe that the inspection given by AFM is not entirely satisfactory, I have no reason to doubt, subject to 1 particular deficiency, that the company has made real efforts to answer Tsoi’s requests.  In particular, it has to be said that AFM took the initiative of audio-recording the inspection on 29 October 2015 to avoid further argument.  In addition, the latest inspection on 23 December 2015 was video-recorded at AFM’s suggestion for the same purpose.  Regrettably, such measures have not put an end to the dispute.

6. However, it is undisputed that no disclosure has been made by AFM to Tsoi in respect of the revenue received by it.  Tsoi is a director of the company.  His entitlement to be informed of the same cannot be doubted.  It is apparent that AFM is reluctant to make such disclosure because it would lend weight to Tsoi’s case that it has no viable business.  This brings me to the next issue.

7. The evidence in support of the 1^st validation application was that although AFM only started its publication business in November 2014, it was a viable business which might break even or return a profit in the 4^th quarter of 2015.  Under the 1^st validation order, expenses in the total sum of HK$1,970,000 had been sanctioned. 

8. In the evidence in support of this application, it can be seen that AFM’s monthly expenses for July to October 2015 were, in round sums, respectively HK$668,000, HK$769,000, HK$1.643 million (inclusive of legal expenses of HK$463,000) and HK$812,000.  The monthly budget for November 2015 to January 2016 is between HK$937,000 and HK$787,000. 

9. On any view, these are significant expenses, especially for a company which has no asset apart from a cash deposit of “over HK$3 million”. 

10. The lack of any evidence on the revenue received by AFM, and any evidence on how the publication business is doing compared to what was projected, lend considerable weight to Tsoi’s case that this company has no viable business and those in control is aiming to run down its cash. 

11. In addition, this court is troubled by the “undertaking” offered by AFM that there will be no further application of this type, and consequently there will be at least HK$1.1 million left of the cash (after deducting the HK$1.9 million applied for under this application).  It has been said that the undertaking is offered to answer a concern expressed by this court previously that the company appears to be in the course of exhausting its assets.  However, such a stance seems to suggest that AFM will not be able to, or will not, continue its business after January 2016. 

12. In summary, the financial picture before this court is quite opaque and the information that is available to the court does not bode well for the business prospects of AFM. 

13. The circumstances of this case are unusual.  It would be wrong for this court to accede to AFM’s application because I am not satisfied that the validation order is in the interest of the company or its creditors[1].

14. In the premises, AFM’s summons filed on 27 November 2015 is dismissed. 

[Submissions on costs of the application]

15. Costs of this application be to Tsoi, to be taxed if not agreed.