XCHRX RICHMAN RESOURCES LTD. v. SHENHUA SHENG YU COAL AND ENERGY CORPORATION LTD.

CWU 822/00

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. CWU 822 OF 2000

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DECISION

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1. This is an application by Shenhua Sheng Yu Coal and Energy Corporation Limited ("the Company") to strike out a petition presented against it by Richman Resources Limited ("the Petitioner"). The application is made on the ground that the petition has been presented with a view to enforce a disputed debt and was thus an abuse of the process of the Court.

2. It is common ground that the Company is controlled by Sabine Zhang Soi Fan alias Sabina Wan Soi Fan ("Zhang") and that the Petitioner is controlled by Chun Kam Chiu ("Chun"), who was a friend and business associate of Zhang. It is also common ground that there have been other proceedings involving the same two persons or companies controlled by them.

Statutory demand

3. The present petition is based on a statutory demand allegedly served at the registered office of the Company on 8 March 1999 by a member of staff of the Petitioner. The Company denies that it has been served.

4. The Petitioner has adduced in evidence the affirmation of a person by the name of Maggie Fung, who claims she was Zhang's secretary and who acknowledges having signed receipt for the statutory demand. There is an affirmation from Zhang, however, denying that Fung was her secretary and alleging that Fung was on Chun's staff instead. Zhang's affirmation is supported by an affirmation of Sun Ching Wei, who says that she was Zhang's secretary and that Fung was not. This is but one of the several unusual disputes of fact that has arisen in these proceedings.

5. The statutory demand was for a total sum of HK$4,000,000. According to the Petition, the Company is indebted to the Petitioner in this total sum "being money fraudulently obtained and received by the Company" as evidenced by two customer's advices of the Sin Hua Bank, one dated 11 December 1998 and the other dated 22 December 1998.

6. It is common ground that no money was paid to the Petitioner by the Company after the date of the alleged statutory demand. The petition was presented in September 2000, one and a half years after the statutory demand. The usual verifying affirmation was made by a director of the Petitioner.

Payment into Court of sum claimed as condition of validation order

7. An ex parte application for a validation order under s.182 of the Companies Ordinance was made by the Company, and on 5 October 2000, Chu, J. gave the Company a validation order conditional upon payment into Court of the sum of HK$4,000,000. The sum was paid into Court the next day and the Company has since been carrying on trading under the validation order.

Summons to strike out petition

8. On 13 November 2000, the present summons was issued.

9. Before I consider the circumstances of the present petition, it may be helpful to first set out the relevant principles. In Re Claybridge Shipping Co SA [1980] Comm LR 107, the Court of Appeal first considered the approach to be adopted when a debt, alleged as the basis of a winding-up petition, is disputed.

10. Lord Denning MR's view was that "a petition for winding-up should not be used as the means of getting in a debt which is bona fide disputed on substantial grounds - on which the company would get unconditional leave to defend" in an application for summary judgment under Order 14. He held that if only conditional leave would be granted, then the petition should be allowed to stand.

11. In the same case, Oliver LJ refrained from drawing a direct comparison with Order 14, and held that the Court should take a view whether, on the evidence, there really was substance in the dispute raised. Where there was a bona fide and substantial dispute as to the existence of a debt, the parties should be left to fight out the matter in an action, not on the hearing of a petition.

12. In Re ICS Computer Distribution Ltd [1996] 3 HKC 440, Rogers J (as he then was) adopted Oliver LJ's approach and declined to apply the Order 14 analogy. He held that as the procedure to wind up a company was summary, as a matter of practice the Court would not embark on a trial to determine the issue of the validity of the debt where it was bona fide disputed on substantial grounds, unless the issue could be disposed of very simply.

13. The latest full discussion of the approach to which I have been referred is in Re a Company No. 006685 of 1996 [1997] BCC 830. Chadwick J held that the Court had to take a view on the evidence before it, to see if the debtor was just raising a cloud of objection to claim a dispute of fact existed which could not be determined without cross-examination, or if there was a genuine dispute founded on substantial grounds in which event the Court would not allow a winding-up petition to be used.

14. From the above, it would appear that the Court's approach should be to examine the evidence adduced, and to see from the evidence whether the company has discharged its onus to show that there are substantive (and not merely perceived) grounds which support its bona fide belief that it is not indebted to the petitioner. In other words, mere belief by the company that it is not indebted to the petitioner (however genuinely held) would not do, there must be some substance to the belief. However, once the Court sees that there is some substance in the company's stand, it would not (unless the dispute is capable of being determined simply) undertake a trial at the hearing of the petition. The petitioner would have to start an action to establish its claim to the alleged debt.

15. The policy behind this approach balances the interests of the company and the public with which it deals. The company should not have to labour under the threat of a winding-up if the alleged debt is disputed on substantive grounds. At the same time, if there was no real dispute and the company was indebted, then it should not be allowed to continue trading.

Disputed debt

16. Applying the above approach, I take the view that there is some substance in the Company's dispute of indebtedness to the Petitioner. I will not repeat here the detailed allegations and counter-allegations made between the parties as set out in the various affirmations filed. What is pertinent for present purposes is that the Company has thrown sufficient doubt upon the Petitioner's allegations and has adduced sufficient evidence in support for its own case to persuade me that the alleged debt is bona fide disputed on substantial grounds, such that the full rigours of a witness action with discovery and cross-examination at trial should be applied to the determination of the disputes of fact between the Petitioner and the Company.

Petitioner's allegations

17. The Petitioner's allegation was that in October 1998, it agreed to join in an investment in a mining project in Africa to be called China & Africa Mining ("CAM") in which it and the Company, which Zhang controlled, were each to hold 35% of the shares. CAM was incorporated on 28 December 1998.

18. In the first half of December 1998, certain equipment was needed for the project and the Company entered into an agreement for the purchase of the equipment as CAM had not been incorporated. An amount of US$1,100,000 (converted to HK$8,580,000) had to be provided.

19. The Petitioner claimed its share was, as it were, rounded down to HK$4,000,000 which it arranged for Keen Lloyd (Holdings) Ltd ("Keen Lloyd"), another company controlled by Chun, to pay to the Company in two tranches on 11 December and 22 December 1998.

20. The Petitioner claims it later discovered the US$1.1m was not remitted to the contracting party and consequently the Company was liable to repay the sums to it.

21. I note that the Company's contract for the purchase of equipment and the payment of the two tranches all occurred within the space of a few weeks in December 1998.

Company's allegations show substantive dispute

22. Briefly, the Company's case is that it never agreed to be a shareholder of CAM, and it points to the fact that when CAM was incorporated, the Company was not alloted any shares, nor has there been any declaration of trust or other document evidencing that the Company was beneficially interested in any shares in CAM.

23. In support of this allegation, it has exhibited an article in October 1999 containing an interview with Chun which quoted him as saying that the mining project in Africa was not a joint investment with Zhang. In the absence of any evidence that Chun had more than one mining project in Africa, the assumption must be that this was CAM. The Company's evidence was that it entered into the contract for the equipment merely to assist Chun, as Zhang had good connections in Africa and she had introduced the other contracting party.

24. The Company accepts that Keen Lloyd had made the two payments of HK$2,000,000 each into its bank account. However, the Company's case (as set out in an affirmation made on its behalf by Zhang) is that this was not payment on behalf of the Petitioner for the equipment contract which fell through for non-payment by the Petitioner of the US$1.1m, but part repayment by Chun (who controlled Keen Lloyd) to Zhang (who controlled the Company) of a sum of US$93,000,000 which she had lent to Chun by giving him a bag of diamonds to dispose of in October 1998. I note that the payment of lump sums such as $2m. each is more likely to be part repayments rather than a "rounding down" (by nearly 7%) of a half share in a specific liability which would have come to HK$4,290,000.

25. Chun has denied this allegation of a diamond arrangement. However Zhang's allegation of the arrangement is supported in affirmations made by Zhang's husband and sister.

26. Further, the Company's case on the diamond arrangement is not confined to merely oral evidence from persons close to Zhang. There is a document purportedly signed by Chun confirming the diamond arrangement.

27. Chun has alleged that the signature appearing on the document was forged. However, there is an affirmation from a third party, who claims he was the interpreter who interpreted the document to Chun and who has identified Chun as the signatory.

28. Moreover, the Company's case that the two sums were intended as payments to Zhang and not to itself for the equipment is supported by the entries in the Petitioner's journal vouchers. The journal vouchers contain no references to the Company. Instead, the funds are said to be funds transferred "from Keen Lloyd to C/a Sabine Wan".

29. The Company points to the fact that Zhang's personal account is involved and it says that supports the case that the money was repayment to her by Chun. Whilst it is true that Zhang is debited with that amount, still there was no reason why her personal account would be involved at all on the Petitioner's case, as the shareholder in CAM was to be the Company, not herself. Zhang was not involved even as a conduit in the transfer of funds, which went directly from Keen Lloyd to the Company.

30. No explanation has been proffered by the Petitioner for these journal vouchers. Whilst it is true that these documents were exhibited in an affirmation in reply from the Company, no leave was sought by the Petitioner to adduce evidence in answer to these new exhibits.

31. In my view, quite apart from the evidence from the third party deponents as to the diamond arrangement, the unusual feature in the discrepancy between the Petitioner's alleged half share of the equipment price and the sums paid, the unexplained feature in the introduction of Zhang's personal current account in the Petitioner's own journal vouchers and the inconsistency in Chun's versions as to the interests in the mining project lend sufficient substance to the Company's case, such as to lead me to hold that the summary procedure of a winding-up petition is completely unsuitable to the determination of the issues between these parties.

32. As a matter of completeness, I would add that whilst the parties made submissions before me on the financial state of the Company, it seems to me that if there is a substantial dispute on the Petitioner's locus standi at this stage, the Court need not and should not embark on an examination of the Company's financial position in vacuuo. To do so would mean that any officious person could present a baseless petition and yet put a company to the expense and anxiety of proving its solvency before the Court.

33. I would accordingly give an order in terms of paragraph (1) of the summons. It would follow that the Company would be entitled to payment out of Court of the sum paid in under the validation order. As for costs, I would give an order nisi that costs follow the event i.e. that the Petitioner bear the Company's costs.