SEALY BEDDING AND FURNITURE (HONG KONG) LTD. v. LANDTRADE ENGINEERING AND DEVELOPMENT CO. LTD.

1991, CWU No.418

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H E A D N O T E

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    Petition for compulsory winding-up order on the grounds of insolvency where the debt was undisputed. Court's discretion exercised in favour of the petitioner despite the wishes of some opposing creditors whose views were taken into consideration.

IN THE SUPREME COURT HONG KONG

COMPANY (WINDING UP) NO.418 OF 1991

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J U D G M E N T

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1. This is a petition by Sealy Bedding and Furniture (Hong Kong) Limited (the petitioner) for a compulsory winding-up order against Landtrade Engineering and Development Limited (the company) on the grounds that it is insolvent and unable to pay its debts. The petition was presented on the 23rd December 1991 based upon a judgment obtained by consent on the 29th January 1991 for the sum of $808,469. A sum of $400,000 has been paid in part satisfaction of the debt leaving a balance due of $408,469 as set out in the petition plus interest and costs. In fact the claim now amounts to almost $700,000.

2. Liability for the debt is not disputed. The company is also commercially insolvent and unable to pay its debts. Four other creditors whose debts, by their notices of opposition, amount to over US$1.5m oppose the making of a winding-up order. Although the company did not formally oppose the petition, Mr Chan Yuen Hum and Madam Ng Ying Kwan, two of its directors have filed affirmations supporting the opposing creditors. Other creditors who are owed substantial sums by the company have taken no steps either to support the petitioner or to oppose the making of a winding-up order. The sole issue for determination is whether the company should be permitted further time to negotiate the sale of its only substantial asset being the shares that it holds in a hotel in Xian, China for there is no other alternative open other than to make a winding-up order.

3. The evidence of the opposing creditors is set out in affirmations of Mr Chan, made on the 17th February 1992 and 6th April 1992, Madam Ng Ying Kwan made on the 17th July 1992 and a director of each of the four opposing creditors made on the 18th February 1992. The opposing creditors are Comin Wealth Limited whose original claim in its notice of opposition was for US$156,722.18 but has since been reduced to US$47 310 Golden Ocean Engineering Company Limited, whose original claim was for US$136 979.31 but has since been reduced to US$77 167.33 Cornwell Industries Company whose claim is for US$310 435.20 which sum has not changed, and Hong Fat Engineering Development Company Limited (Hong Fat) whose original claim was for US$919 999.37 but has now been reduced to US$458 006.30.

4. Mr Chan states that the company was incorporated in August 1983 for the purpose of carrying out a joint venture contract with a Chinese party Shaanxi Provincial Travel and Tourism Company for the development and management of the A'Fang Palace Hotel, also known as the Hyatt Hotel in Xian. By the agreement, the company agreed to raise a loan of US$30m for the costs of construction. The loan was made by the Sumitomo Bank Limited (Sumitomo) and guaranteed by the Shenzhen International Trust and Investment Corporation (SITIC) in China. The company also entered into a counter guarantee with the guarantor on the 16th February 1987. The company was in addition responsible for the purchase of various equipment and supplies and entered into contracts with a number of contractors and sub-contractors for this purpose. One of those contracts was with the petitioner for the supply of bedding which relates to the present claim.

5. The company encountered financial difficulties following the massacre in Tiananmen Square on the 4th June 1989 which delayed the soft opening of the hotel from the early part of 1990 until June 1990. This resulted in demands being made by Sumitomo for repayment of the loan whilst nine of the company's contractors instituted proceedings for amounts due, four of whom have obtained judgment. Apart from these nine creditors and the petitioner, there are about ten other creditors who have not instituted proceedings-against the company.

6. According to an unaudited balance sheet of the 31st December 1991, the company's total liabilities exceeded $26m. Mr Chan went on to say that the only valuable asset of the company is its share in the hotel under the joint venture agreement which was valued at over $250m at the 31st December 1989. However, he said that according to his Chinese legal adviser, the company's share is liable to be forfeited by SITIC under clause 9 of the counter guarantee if a winding-up order is made, so that the unsecured creditors, including the petitioner, will recover nothing. Clause 9 of the counter guarantee reads :

" 9. During the joint management period, should A'Fang Palace Hotel not be able to continue its business due to certain reasons and should the board of directors decide to terminate and wind up the business, and should you have completed all the duties and obligations of the guarantee, we shall repay you with all the properties which belong to us in this hotel and you shall be the first creditor. This clause has already been specially confirmed by the joint venture partner, Shaanxi Provincial Travel and Tourism Company."

7. As a result, Mr Chan states that it will be in the interest of the creditors to arrange for the sale of the shares while the company remains solvent. He said that negotiations for the sale had reached an advanced stage with a potential purchaser. However, due to stock exchange regulations and the need to maintain confidentiality, the company was required not to disclose the identity of the potential buyer although he revealed that the proposed purchase price was in the region of US$40m He estimated that it would take about nine months to comply with all necessary requirements before completion could take place.

8. The directors of the four opposing creditors made their affirmations based upon information received by them from Mr Chan and couched in similar terms supporting the opposition to the petition on the same ground. Madam Ng Ying Kwan, in her affirmation stated that following a press announcement made on the 10th June, Hong Kong & Macau (Holdings) Limited (Hong Kong Macau) had agreed to purchase the company's share in the hotel for US$42.8m which is equivalent to about HK$333.8m to be paid in part in cash and part in Hong Kong Macau shares. However, the agreement was stated to be subject to a number of conditions precedent including the approval of the company's creditors In a reference to the company's financial position, Madam Ng said that the company's share in the hotel was valued at HK$363m and that the sale to Hong Kong Macau at HK$333.8m represents an 8% discount on the book value. As the long term loan secured by the shares amounts to HK$249m this will leave HK$84.8m to be shared between the unsecured creditors that amounted to HK$115m in December of 1991. This should result in the unsecured creditors receiving more than half of the sums due to them.

9. Madam Ng said that when the company began to have financial difficulties, Sumitomo called in the guarantee given by SITIC so that SITIC now stands in the place of Sumitomo as the company's secured creditor. By the counter guarantee, the company's rights and benefits in the hotel are mortgaged to SITIC until the company has repaid all monies paid by SITIC under the guarantee. Madam Ng asserted that the sale of the company's share to Hong Kong Macau was negotiated with the consent of SITIC, and that if the company is wound up, the proposed sale will fall through and all the company's rights and benefits in the hotel will belong to SITIC until the guarantee money is paid.

10. An oral examination of Mr Chan under 0.48 of the Rules of the Supreme Court took place before Master Cannon on the 23rd August 1991. During the examination, Mr Chan said he had very little knowledge of the running of the company's business. In fact, a previous petition for a winding-up order was presented against the company by the petitioner on the 5th August 1991, but was withdrawn on the 9th October after the company had agreed to pay the balance of the debt then due by four instalments between September and December 1991. Two instalments were paid, but default was made in payment of the other two which led.to the presentation of the present petition.

11. The petitioner's solicitor Mr Davidson, made an affidavit on the 14th July in which he said that he wrote on the 12th June to the company and to Hong Kong Macau requesting full details of the agreement for sale but none were provided. He further adverts to the fact that as a result of a company search, he has ascertained that Mr Chan and Madam Ng are not only directors and shareholders of the company, but they are also shareholders of Hong Fat, one of the four opposing creditors.

12. Despite the petitioner's right ex debito justitiae as a judgment creditor to a winding-up order, the court may, nevertheless, by virtue of s.287 of the Companies' Ordinance have regard to the wishes of the creditors of the company as proved to it by any sufficient evidence, and to have regard to the value of each creditor's debt. By their opposition, the opposing creditors must show that there are good reasons for the court to exercise its discretion not to make a winding-up order, see In re A.B.C. Coupler and Engineering Co. Ltd. [1961] 1 WLR 243. In considering the wishes of creditors where there is a conflict, Upjohn L.J. in In re P. & J. Macrae Ltd. [1961] 1 WLR 229 interpreted the relevant words which were at that time contained in s.346 of the Companies Act 1948 at 237 as follows :-

"Where a creditor has proved his right against the company to a winding-up order ex debito justitiae, but other creditors of the company have expressed conflicting views as to the desirability of winding it up, the judge has conferred on him a discretion by section 346 of the Companies Act, 1948, which, leaving out immaterial words, provides: 'The court may have regard to the wishes of the creditors as proved to it by any sufficient evidence.' The discretion is permissive and not mandatory, and is in terms complete and unfetterd. However, it is a discretion which must be exercised judicially, and the court is not entitled arbitrarily to,disregard the wishes of the creditors as proved to it."

13. However, it is necessary, when considering the wishes of the opposing creditors, to take into account their quality. In this case, the largest debt is owed to Hong Fat of which company Mr Chan and Madam Ng are shareholders. That company's debt has as I have said been reduced from over US$900 000 to US$458,000 since the notice of opposition was filed. Not only does that raise the question of a fraudulent preference, but indicates by the connection of Mr Chan and Madam Ng that it has an interest to serve by opposing the winding up. I do not attach any weight to Hong Fat's opposition.

14. That leaves the debts due to the other three opposing creditors, two of which have been reduced since the filing of the notice of opposition which again raises the question of a fraudulent preference. Even without discounting the two opposing creditors whose debts have been reduced, the total amount due to these three opposing creditors will be just over US$434,000 which is about HK$3.3m. The total value of the other debts due to the other creditors who have instituted proceedings against the company, including the petitioner is over HK$9m whilst the total amount due to unsecured creditors according to the unaudited balance sheet of the company to the 31st December 1991 is HK$115m. The majority of the creditors have therefore taken no steps either to support or to oppose the petition.

15. A further issue to be considered is the submission of Mr Lam, counsel for the petitioner, who said that the loan made by Sumitomo to the company was made specifically for the costs of the construction so that the insufficiency of the loan for this purpose may support an allegation that the company has been guilty of fraudulent trading. Mr Miu, counsel for the opposing creditors, in reply disputed that there were any grounds from which an inference of fraudulent trading could be drawn as it was necessary to incur further costs in order to operate the hotel.

16. The credibility of Mr Chan was seriously undermined by virtue of the evidence that he gave at the examination before the master in August 1991 when he said that the amounts owed by the company were small, and that set out in his affirmation- six months-later when he listed details of substantial sums that are actually due.

17. Another matter of significance has been'the continued failure by the company to produce the agreement or provisional agreement for the sale, and correspondence relating to the transaction despite a consent order made on the 27th March 1992 for the production of these documents. The only reaction to that order was an affirmation by Mr Chan on the 6th April admitting that the company had in its possession correspondence relating to the potential sale. Indeed, it is extraordinary that the evidence adduced in support of the proposed sale of the company's share has been so lacking in particularity. There is, for instance, no evidence of all the terms of the conditions precedent or as to the likelihood of those terms being fulfilled while no professional valuation of the share in the hotel has been produced to support the figure that . Madam Ng referred to in her evidence of $363m which was based on an unaudited account. The assertion by Mr Chan that the company's interest in the hotel will be forfeited by SITIC under clause 9 of the counter guarantee is not supported by any expert evidence, but upon reading the clause, it does not appear to have the meaning ascribed to it by Mr Miu. Clause 2 of the agreement in fact states that SITIC is only entitled to be paid for the debts actually due from the company which now appears to have been accepted by Madam Ng in her recent affirmation.

18. With regard to the alleged agreement for the sale, no particulars have been given as to how much will be paid in cash and how much by way of shares or how the shares are to be valued, and when payment is to be made.

19. Mr Miu said that the reduction of the debts claimed by three of the opposing creditors was due to mistakes in the original figures, but no evidence was filed to support this contention, Mr Miu asserted that if the company is allowed to proceed with the negotiations for.the sale, the creditors will receive payment more quickly and with less expense than if the company is wound up whilst the Official Receiver is unlikely to obtain a better price. As there was no evidence to support this submission, it amounts to pure speculation.

20. In fact, the evidence presented does not indicate that there is an imminent prospect of a sale taking place. Promises have continually been made by the company for over two years including one that led to the withdrawal of the first petition, and negotiations even continued throughout the first day of the hearing of this petition with no positive result. It is clear that the only hope for the creditors is to sell the company's share in the hotel. However, I do not consider that in the circumstances of this case that the interests of the general body of creditors will be best served by allowing the present management to remain for the conduct of the sale. Further, in the absence of any explanation, preferential payments appear to have been made to three of the opposing creditors that requires investigation whilst there may be evidence of fraudulent trading.

21. As a result, I am satisfied, in the exercise of my discretion, that a compulsory winding-up order should be made.