GLOBAL CREDIT SECURITIES LTD. v. PERFORMANCE PROPERTIES LTD.

HCMP 234/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS ACTION NO. 234 OF 1999

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J U D G M E N T

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1. This is an application by the applicant for an order that the respondent may be restrained, whether by itself, or by its servants or agents or otherwise howsoever, from presenting any petition to this Honourable Court, or any Court, for the winding-up of the applicant based on the sum of HK$14,999,990 claimed in the statutory demand dated 24th December 1998 served on the applicant on 24th December 1998. The applicant is a company formerly known as Kenlap Securities Ltd. ("Kenlap Securities"). The respondent is a company known as Performance Properties Ltd. ("Performance").

2. The background to this matter is that in 1998, Michael Yip Kim Po ("Yip"), Anthony Cheung ("Cheung") and Ronald Cheng ("Cheng") wanted to set up a company to carry on the business of securities dealer and money lender. The company that the three of them wanted to set up was eventually called Global Credit Holdings Ltd. ("Holdings"). It was formerly called Gaintime Investment Ltd. This was the joint venture company. Yip, Cheung and Cheng would own Holdings in the respective portions of 40%, 30% and 30%. Each would use a BVI company to hold his interest in Holdings. To put into effect the plan of the three of them, a joint venture agreement ("JV Agreement") was signed by each of Yip, Cheung and Cheng together with their BVI companies.

3. There were six parties to the JV Agreement, namely Rochester Securities Limited ("Rochester"), which was Yip's BVI company, New China Management Ltd. which was Cheung's BVI company, Performance which was Cheng's BVI company, and Yip, Cheung and Cheng.

4. Yip had existing dealers and money lending businesses in the form of Kenlap Securities and Kenlap Finance Company Ltd. ("Kenlap Finance"). Cheung also had an existing dealers business, namely Berlin Financial Corporation Ltd. ("Berlin"). It was agreed that Yip, Cheung and Cheng would respectively contribute $20,000,000, $15,000,000, and $15,000,000 as working capital of Holdings. As Yip had Kenlap Securities and Kenlap Finance, these two businesses were valued at $44,000,000 and would be injected into Holdings. Yip's $20,000,000 capital contribution was to be set off against the $44,000,000. As for the balance of $24,000,000, it was agreed that Rochester would be paid $9,000,000 by Holdings and the balance of $15,000,000 would be recorded as a shareholder's loan owed by Holdings to Rochester. Berlin was valued at $7,500,000 and this was also to be injected into Holdings. As Cheung's contribution was $15,000,000, he would have to put in $7,500,000 to contribute to the working capital of Holdings. Cheng had no existing business to inject into Holdings and he would have to pay $15,000,000 to Holdings.

5. By Clause 4.5(c) of the JV Agreement, it was provided as follows:

"It is also expressly agreed by the Shareholders that all the capital contribution in cash to the Company by the Shareholders as contemplated in Clauses 4.1, 4.2 and 4.3 shall be made within 14 days from the date of this Agreement."

So, under the Agreement, Cheng had to pay the $15,000,000 to Holdings by 4th May 1998 which was within 14 days from the date of the Agreement.

6. Under the JV Agreement, the completion date ("completion date") meant the date for the completion of the sale and purchase of Kenlap Securities and Kenlap Finance as contemplated in Clause 4.5. By Clause 4.5(a), it was provided, inter alia, that Rochester should procure Yip, and New China should procure Cheung to enter into respective agreements with Holdings in respect of the sale and purchase of Kenlap Securities, Kenlap Finance and Berlin within 14 days from the date of the Agreement. Within 14 days of obtaining of all necessary approvals, completion of sale and purchase of Kenlap Securities, Kenlap Finance and Berlin would take place simultaneously on the completion date provided that the completion date should not be later than 8 months from the date of the Agreement. However, it was provided by Clause 4.5(b) that notwithstanding the completion date, the parties acknowledged that as from 1st April 1998 ("commencement date"), Holdings was entitled to receive 100% of profit and be responsible for all losses of Kenlap Securities, Kenlap Finance and Berlin as if the sale and purchase of Kenlap Securities, Kenlap Finance and Berlin were completed on the commencement date. Thus, it was clear that notwithstanding that the completion date could be postponed to not later than 8 months from the date of the Agreement, as from the commencement date Holdings was entitled to receive 100% of profit and be responsible for all the losses of the three companies which were to be injected into Holdings as if the sale and purchase of those three companies were completed on the commencement date. It seems that the commencement date of the business of Holdings was deemed to be 1st April 1998 by Clause 4.5(b) of the JV Agreement.

7. Performance served a statutory demand on Kenlap Securities on 24th December 1998 in the prescribed form for payment of the sum of $14,999,990 ("the said sum") demanding that Kenlap Securities pay the said sum to Performance within 21 days after service and threatening to petition the Court to wind-up Kenlap Securities if it failed to comply with the demand.

8. There is no dispute that this statutory demand was served. There is also no dispute that the said sum was paid by Performance to Kenlap Securities on 29th April 1998. It is disputed that the same was repayable on demand. It is disputed that there was a debt owing by Kenlap Securities to Performance.

9. It is well settled that where a debt is disputed on substantial grounds, then a winding-up order should not be made and the petition should not be proceeded with. In Mann and Another v. Goldstein and Another [1968] 1 WLR 1091, the Court granted an injunction to restrain the defendants from advertising or taking any further steps in the prosecution of their petitions. It was held that the debts upon which the petitions were founded were substantially disputed and that neither of the petitioners were established as creditors and accordingly, neither was entitled to present a petition as neither had any locus standi in the Companies Court. It was also held to that to invoke the winding-up jurisdiction when a debt was disputed on substantial grounds after it had become clear that it was so disputed was an abuse of the process of the Court.

10. In Stonegate Securities Ltd. v. Gregory [1980] 1 Ch. 577, it was held that the Companies Court was not the forum for resolving the question whether the debt was due and since there was a bona fide dispute the company was entitled to an injunction restraining the Defendant from presenting a petition based on a failure to pay within 21 days of the receipt of the statutory demand for payment of a debt.

11. In re Par Excellence Co. Ltd. [1990] 2 HKLR 277 it was held that when a debt is substantially disputed, the winding-up procedure is an abuse of the process of the court. Before winding-up proceedings are commenced the debt must be clearly established; until this is done, the petitioner has no locus standi.

12. The question I have to consider is whether there is a bona fide dispute on substantial grounds as to whether the debt is due.

13. Kenlap Securities case is that as the joint venture company was acquired off the shelf there was no bank account in the company's name at that time. The evidence shows that it was only on 12th May 1998 that $2,050 was paid for the Business Registration certificate of Holdings. Under the JV Agreement, Cheng's BVI company Performance had an obligation to pay to Holdings the sum of $15,000,000 as capital contribution under Clause 4.2. Under Clause 4.5(c), the capital contribution payable in cash to Holdings by the shareholders should be made within 14 days from the date of the Agreement.

14. According to the 1st affirmation of Yip, Cheng wanted to remit the sum of $15,000,000 to Holdings in compliance with his obligation under the JV Agreement. Cheng informed Yip a few days prior to 29th April 1998 that Performance would pay the sum of $15,000,000 to Holdings and deposit the same to Kenlap Securities' bank account with the China State Bank Ltd.

15. On 29th April 1998, Kenlap Securities received the sum of $15,000,000 less $100 (being charges deducted by the bank) from a company by the name of Well Champ Investment Ltd. He understood from Cheng subsequently that the remittance by Well Champ Investment Ltd. was made on behalf of Performance. Cheng requested a receipt be issued by Kenlap Securities to Performance formally acknowledging receipt of the remitted amount by Kenlap Securities for and on behalf of Holdings and that Kenlap Securities would hold the same temporarily for the use of Holdings or words to that effect.

16. Yip said that he suggested that Cheng approach Christie Yip, who was one of the directors of Holdings and Kenlap Securities for this purpose. Christie Yip is the sister of Michael Yip. The receipt that was given to the secretary of Cheng a few days after 29th April 1998 was prepared and signed by Christie Yip. The receipt provided as follows:

"acknowledge receipt a sum of HK$14,999,900 on 29th April 1998 for temporary custody."

Yip went on to say that he was further informed by Christie Yip that the words in the receipt meant to say that the said sum paid by Performance to Kenlap Securities on 29th April 1998 was received by Kenlap Securities for and on behalf of Holdings and would be kept temporarily for the use of Holdings.

17. The receipt voucher dated 30th April 1998 in the books of Kenlap Securities shows that the said sum was received from Holdings in the former name of Gaintime Investment Ltd. Together with $100.00 which is described as bank charges, the total sum of $15,000,000 was credited to the account of Holdings in Kenlap Securities on 30th April 1998. This is a contemporaneous document which shows that $15,000,000 was treated as having been received from Holdings.

18. So, it is the case of Kenlap Securities that the said sum was paid by Performance into its bank account on 29th April 1998 in fulfilment of the obligation of Cheng's BVI company to contribute $15,000,000 towards Holdings working capital and meant for use by Holdings to meet its financial commitments.

19. Thereafter, according to Yip, expenses were incurred on behalf of Holdings and money was taken from the said sum held by Kenlap Securities on behalf of Holdings to pay for the same. Examples of these that were given were:

(1) On or about 6th May 1998, $9,000,000 was paid by Holdings to Yip from the said sum pursuant to Clause 4.1(a) of the JV Agreement.

(2) $956,400.00 being rental and service charges were paid to Sino Land (HK) Ltd. on 24th June 1998.

(3) Kenlap Securities reimbursed Cheng and Cheung for entertainment expenses incurred on behalf of Holdings.

20. It is also alleged that Kenlap Securities submitted to the accountant of Holdings, Miss Lau, voucher receipts, telephone bills and documents evidencing payments settled by Kenlap Securities on behalf of Holdings for her verification. Yip said that monthly management accounts were prepared by Ms. Chiu, the accountant of Kenlap Securities and copies thereof were given to Cheng and Cheung. I observe that this has not been specifically denied by Cheng.

21. The monthly management accounts which have been produced in evidence show that the sum of $15,000,000 was credited to Holdings in its former name Gaintime Investment Ltd. on 30th April 1998. These also show the expenses paid out from the said sum on behalf of Holdings and the balance remaining in the current account with Holdings from month to month.

22. The monthly statement dated 22nd October 1998 for the period up to 31st July 1998 shows that the current account of Holdings in Kenlap Securities was already in debit in the sum of $801,554.25.

23. Yip has also produced a summary of the current account of Holdings for the period from 1st April 1998 to 31st December 1998 which shows that the whole of the $15,000,000 has already been used up.

24. Performance's case as set out in the affirmation of Cheng is that although it is admitted that $15,000,000 was to be paid by Performance as capital contribution under the JV Agreement, it is denied that the payment of the said sum to Kenlap Securities was for that purpose. Cheng said that it was due to Yip's insistence that he should show sincerity in their business dealings and to prove that he had the requisite financial resources that he paid the said sum which was $15,000,000 less $100 bank charges to Kenlap Securities for temporary custody on or around 29th April 1998. He said that it was Yip's repeated insistence that he should transfer monies to Kenlap Securities to show his financial capabilities because at that time he was unemployed and had no substantial assets in Hong Kong. He said it was agreed that he would transfer monies to show his financial capabilities but that the money would be held by Kenlap Securities to his order and that Kenlap Securities could not utilize the monies without his consent or approval. Kenlap Securities was not authorized by Performance to deal or part with any of the money, and he relies on the words "temporary custody" in the receipt. It is his case that Holdings never authorized Kenlap Securities to receive, hold or utilise any part of the money on behalf of Holdings and that neither he nor Performance had authorized the release of any part of the money by Kenlap Securities whether for the use of Holdings or otherwise. There was no documentation produced showing that Holdings had authorized Kenlap Securities to receive the said sum on its behalf and to incur expenses on its behalf. However, I do not find it surprising that there was no written resolution or formal documentation to that effect. Cheng and Yip together constituted 70% of Holdings and it is not surprising that the agency alleged was an oral one. Furthermore, the monthly management accounts were also shown to Cheung and Cheng and they knew how the $15,000,000 was treated by Kenlap Securities at the outset.

25. It is also Performance's case that Kenlap Securities and Berlin would advance payments to Holdings for cash payment like salaries, entertainment expenses, and that the allocation of the expenses amongst the different business entities would be finalized at the end of the financial year, 31st March.

26. Kenlap Securities have raised what are essentially issues of fact between the parties. These cannot, in my view, be resolved without cross-examination. The question is: are the assertions made on behalf of Kenlap Securities believable? In my judgment, they are. They are supported by the contemporaneous monthly management accounts which to the knowledge of Cheng and Cheung show that the sum of $15,000,000 was treated at the outset by Kenlap Securities as money coming from Holdings and expended on its behalf. The words "temporary custody" in the receipt that was issued by Kenlap Securities are equivocal. They can support either Kenlap Securities' case or the case of Performance but this is a matter which can only, in my view, be investigated at trial in an ordinary writ action.

27. I observe that the statutory demand was preceded by a letter dated 17th December 1998 from Messrs. Wilde Sapte, solicitors for Performance to Kenlap Securities which stated, inter alia, as follows:

"We are instructed that on 29th April 1998, our client deposited the sum of HK$14,999,900 with you for temporary custody. Almost 8 months have lapsed and no proposals have been made for the return of this sum.

Our client now demands the return of the sum of HK$14,999,900 forthwith and in any event within 5 days from today."

This was the first letter of demand made for the return of the sum and it is surprising that if indeed the sum of $15,000,000 was simply left with Kenlap Securities to show the sincerity of Cheng as he has said, why was there only a demand for the return of the money made 8 months later? This is a matter which ought to be investigated at a trial.

28. I observe also that in the letter dated 12th January 1999 from Messrs. Wilde Sapte on behalf of Performance to the solicitors for Kenlap Securities, it was stated, inter alia, that:

"We are instructed by our clients Performance Properties Ltd. and Mr. Ronald Cheng who are parties to the Agreement to put on record that your clients were in repudiatory breaches of the Agreement shortly after its signing and our clients have accepted or hereby accept such breaches."

If there were repudiatory breaches of the Agreement shortly after its signing on 20th April 1998 these do not appear to have been accepted then. It appears that by 16th October 1998 Performance had not accepted any repudiation of the agreement on the part of Yip. The letter from Messrs. Stevenson Wong & Lai to Yip dated 16th October 1998 queried certain payments made and Cheng and Cheung were seeking an explanation as to how those monies were expended. By the letter dated 25th November 1998 also from Messrs. Stevenson, Wong & Lai, it was stated, inter alia, that Cheng and Cheung were considering the possibility of terminating the joint venture contract and reserved the right to recoup all the capital of the joint venture. There was no allegation then that the sum of $15,000,000 was a debt due to Performance by Kenlap Securities. Cheng was reserving his right to recoup his capital contribution. It is reasonably arguable that this must mean the said sum which Cheng had paid to Kenlap Securities on 29th April 1998. So, by that letter it was regarded as his capital contribution under the JV Agreement.

29. Complaint has been made on behalf of Performance in respect of some of the expenses incurred on behalf of Holdings, in particular, $9,000,000 paid to Kenlap Securities, $4,000,000 paid to Christie Yip and $900,000 paid to Yip as salary. It is also alleged that there are discrepancies in the summarised current account dated 12th January 1999 when compared with the current account of Holdings for the period 30th April 1998 to 22nd December 1998 particularly, in respect of salaries. I would observe, however, that in the accounting documents of Kenlap Securities there appear to have been adjustments made to salaries for some months by the issuance of debit notes and which seem to provide support for the total figures for salaries and allowances in the summarised current account dated 12th January 1999.

30. As regards the $9,000,000 paid to Kenlap Securities, Performance's case is that there was no obligation by Holdings to pay the same under the JV Agreement as the sale of shares in Kenlap Securities was never completed. This is, in my view, a matter for trial. It appears that the sale of Kenlap Finance was in fact completed as the shares were transferred in July 1998 pursuant to a resolution which was also signed by Cheng on 10th July 1998. The $4,000,000 paid to Christie Yip was credited back to Holdings when it was discovered and confirmed by the auditors that it had been paid under a mistake of fact as explained by Yip in his 2nd affirmation. The net result of the crediting back of the $4,000,000 showed that the current account of Holdings with Kenlap Securities was still in debit. And as regards the $900,000 salary, this was said by Yip to be the salary to which it had been agreed by Cheng and Cheung that he was entitled to at $150,000 per month. Both Cheng and Cheung each drew $120,000 per month. Cheng also acted as managing director.

31. There are, in my view, triable issues. Needless to say, if expenses have been wrongly debited to Holdings, Holdings would no doubt have a claim. It cannot be right at this stage to conduct a minute examination of the accounts. These are, in my view, matters to be resolved at trial.

32. I am satisfied that Kenlap Securities' assertions are believable. In my view, Kenlap Securities would be entitled to unconditional leave to defend in an ordinary writ action. In the circumstances, I am satisfied that the debt is bona fide disputed on substantial grounds. Kenlap Securities is a dealer registered under the Securities Ordinance. It carries on business as a securities dealer and depends on credit with financial institutions. The presentation of a petition to wind it up would have drastic consequences on its credit worthiness.

33. In my judgment, Kenlap Securities is entitled to the injunction it seeks. I make an order that Performance may be restrained whether by itself, or by its servants or agents or otherwise howsoever, from presenting any petition to this Honourable Court, or any Court, for the winding-up of Kenlap Securities based on the sum of HK$14,999,990 claimed in the statutory demand dated 24th December 1998 served on it on 24th December 1998. I also make an order nisi that Performance pay the costs of the application to Kenlap Securities, such costs to be taxed and paid forthwith.