INTERNATIONAL BANK OF ASIA LTD now known as FUBON BANK (HONG KONG) LTD v. ZHUANG PP HOLDINGS LTD

CACV 387/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 387 OF 2005

(ON APPEAL FROM HCCW 56 OF 2005)

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J U D G M E N T

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Hon Cheung JA (giving judgment of the court) :

The appeal

1. On the application by the petitioner (International Bank of Asia Limited, now known as Fubon Bank (Hong Kong) Limited), Kwan J. on 3 November 2005 ordered Zhuang PP Holdings Limited (‘the Company’) to provide discovery of documents.  The Company now appeals.

The history

2. To understand the nature of the application, it is necessary to go back to an earlier judgment of the judge delivered on 5 August 2005.

3. The petitioner is a creditor of the Company.  It commenced the present petition for winding up against the Company on 21 January 2005.  The application was on the grounds that the Company had ceased to carry out business and also on the just and equitable ground under sections 327(3)(a) and (c) respectively of the Companies Ordinance.  The grounds have been summarised in the judgment of 5 August 2005 :

‘21. .......The matters relied on in support of the just and equitable ground are as follows and they are taken from the published financial information of the Company, as the shares of the Company were at one time listed on the Stock Exchange of Hong Kong Limited.

22.  At 31 December 2002, the Company was the holding company of the China United Group (“the Group”) with 66 subsidiaries. The interests in the subsidiaries were valued at $557 million, and the Company had shareholders’ funds of $297 million.

23. In January 2003, the Group was re-orgainsed.  A new company, China United International Holdings Limited (“China United International”) was made the ultimate holding company of the Group in place of the Company.  The Company became a wholly owned subsidiary of China United International.

24. China United International had not commenced operation and had no significant assets.  It had subsidiaries which were not the subsidiaries of the Company (“the New Group”).  The Company’s listing on the Stock Exchange was withdrawn on 3 January 2003 and dealings in the shares of China United International on the Stock Exchange commenced on 6 January 2003.  By a series of restructuring of shareholdings in subsidiaries, the Company’s equitable interests in certain major subsidiaries were transferred or sold to the New Group and to a third party.  The Company thereafter became an insignificant part of the Group’s net assets.  The Company’s net asset position deteriorated by $523 million in seven months from January to July 2003, completely writing off the shareholders’ funds.  These transfers took place at the time when the Company was heavily indebted and loans of $369 million had become repayable on demand.  In June 2003, the Company had received a writ demanding payment of $206 million.  In the interim report of the Company for the six months ended June 2003, the auditors qualified their opinion because of fundamental uncertainty as to the going concern basis and because of reservations whether the transfers of the Company assets to the New Group were lawful.  In October or November 2003, the Company, stripped of valuable assets, was sold to a company wholly owned by the brother of the chairman of China United International for $10 million.

25. The petitioner alleges that the purpose of the transfers to the New Group was to put the assets of the Company beyond the reach of its creditors whilst keeping them in the same control and ownership.  It asserts that the affairs of the Company had been conducted with such lack of probity as to make it necessary for the court to intervene.  On that basis, it would be just and equitable to wind up the Company for an independent liquidator and the court to investigate its affairs.  Further, the Company had filed with the Companies Registry on 9 March 2004 a notice of cessation of place of business in Hong Kong with effect from 10 February 2004, so the Company should also be wound up on the ground in section 327(3)(a).’

4. To complete the picture the petitioner had previously served a statutory demand on the company for sums due on a loan granted to the company.  Waung J on 15 August 2003 in High Court Action 2832 of 2003 granted an injunction against the petitioner restraining it from presenting a winding up petition based on the statutory demand.

5. In March 2004, another creditor of the Company Umbrella Finance Co. Ltd. (‘Umbrella’) commenced a winding up proceedings against the Company (HCCW No. 321 of 2004).  That petition was withdrawn by consent on 10 January 2005.  The petitioner’s present petition was presented shortly thereafter.

The Company’s stance

6. The Company accepted that disposals had taken place but contented that the disposal was for good value, in good faith and for the best interest of the Group without depriving the creditors’ interest.  It actually asserted that the creditors and lenders of the Company including the petitioner are better off as a result of the transaction.

The petitioner’s position

7. The petitioner stated that this contention was inconsistent with the stated purpose of the transfer which was to place the assets outside the reach of creditors.  The Interim Report for the six months period ended 30 June 2003 of China United International stated that,

‘ .....the directors consider that the Group is not expected to suffer from any material losses resulting from disposal or liquidation of [the Company and/or its subsidiaries]....the New Group will not be subject to challenge by any party as to the validity of the restructuring and/or to possible claims for compensation for any loss suffered by [the Company] as a result of the restructuring....the New Group has no legal obligation to assume the liabilities of [the Company and/or its subsidiaries] as the New Group has not given any guarantees and collateral security to the lenders of [the Company and/or its subsidiaries].’  

8. The petitioner further stated that the transfers of assets to the New Group took place at a time when the Company was heavily indebted.  The Interim Report shows that as at 30 June 2003 the Company was in default of loans totalling (with interest) HK$161.7 m.

9. BDO International, the auditors of China United International and of the Company, in the interim report qualified their opinion concerning the China United International’s interim accounts because of, amongst other reasons, their fundamental uncertainty about whether the ‘going concern’ basis was appropriate and whether the transfer of the Company’s assets to the New Group was lawful.

The judge’s view on disposal

10. As recorded in the judgment of 5 August 2005, Umbrella had previously applied before the judge to appoint a provisional liquidator based on the disposal of assets by the Company.  The judge refused the application because as she said,

‘ I could not determine on affidavit evidence alone if the Company’s explanation that transfers of valuable assets were made in good faith and for adequate consideration should be believed.’ 

The Order

11. The petitioner issued the application for discovery asking the Company to serve a list of document and the Order made by the judge required the Company to serve a list,

‘specifying which of the following documents, which relate to the restructuring of the respondent Company and the respondent Company Group (‘China United Group’) and the transfer away of the respondent Company’s principal assets, are or have been in the possession, custody or power of the respondent Company :

(a) all internal memoranda/minutes of the respondent Company/China United Group relating to :

(i) the background to the Scheme of Arrangement implemented in January 2003 whereby the respondent Company was de-listed and replaced as the holding company of the China United Group by China United International Holdings Limited (‘China United International’); and

(ii) the decision to restructure the China United Group and the motivation for that decision.

(b)   all documents, including internal memoranda and company minutes, relating to the matters mentioned in the following two statements in China United International’s Interim Report for the six months ended 30 June 2003 :

‘[China United International] has undertaken a series of restructuring of shareholdings in subsidiaries held by [the respondent Company] whereby [the respondent Company]’s equity interests in certain major subsidiaries were transferred to the New Group and to a third party.  After the restructuring [the respondent Company and its subsidiaries] became an insignificant part of the Group’s net assets.’

(c)  all documents relating to :

(i)   the deterioration of the respondent Company’s net asset position between 31 December 2002 and 31 July 2003;

(ii)  the dilution and transfer of the respondent Company’s shareholding in :

(1)   Hennabun Management Inc; and

(2)   China United Finance Limited; and

(iii)  the writing off of the debt of HK$111 million owed by Long Bloom Enterprises Limited to first Asia (China) Limited; and

(iv)  the transfer of the respondent Company’s two shares in New Star International Inc. to Top Emerald Limited (re-named China United Financial Services Limited).

Relevance is satisfied

12. Once the background facts are identified, one can see immediately that the documents that the petitioner seeks to be disclosed by the Company are clearly relevant to the issues in the winding up petition.  The documents related specifically to the reorganization and the disposal of assets by the Company.  They are relevant to determine the purpose behind these steps.  The only real issue in this appeal is whether despite the relevance, the scope of the discovery is such that the application should be refused because it is not necessary either for disposing fairly of the cause of the matter or for saving costs.

Items (a)

13. There were of course 66 subsidiaries of the Company but the Company was the holding company.  When it comes to the question of reorganization, one would expect the Company to have possession and control of documents relating to itself and those subsidiaries which were part of the group (described as the ‘China United Group’ under the order of Kwan J).

14. The documents under Item (a) of the Order are clearly relevant to the issue in dispute.  In our view their discovery is not oppressive and is not used to fish for evidence.  Since the affidavit evidence is not sufficient to reveal the true nature of the transactions, the primary documents relating to them are needed. 

15. As to the meaning of ‘internal memoranda’, it must in the context include memoranda, working papers, proposals, financial statements and agreements.

Item (b)

16. As to Item (b), despite our initial reaction, we have come to the view that these documents are different from the ones under Item (a) which cover the background of the Scheme of Arrangement and the decision and purpose to restructure the China United Group.  On the other hand Item (b) deals with the interest of the Company in individual companies which had been disposed of.  While the Company had identified the disposal of assets in five companies (four of which have been stated in Item (c)), in view of the massive reduction in assets of the Company to the extent of over $500 million over a seven month period, the judge was correct not to confine the Order to the transactions relating to these five companies only. 

17. Likewise for this item, the meaning of ‘internal memoranda’ should bear the same meaning as used in Item (a).

Item (c)

18. Given the ambit of Item (b), there will be a duplication in respect of the documents sought under Item (c)(ii) and (c)(iv).  As such, under Item (c), the Company is only required to disclose documents under Item (c)(i) and (c)(iii).  The other two items should be deleted from the order.

Documents disclosed

19. Ms Liu, counsel for the Company, argued that the Company had already disclosed voluminous documents to the petitioner by way of affidavit evidence.  In our view this is not a ground for not disclosing in a list the relevant documents which should contain an additional note of what documents had been already been disclosed.

Conclusion

20. Apart from two types of documents in Item (c) we have affirmed the decision of the judge.  Accordingly we shall dismiss the appeal save for Item (c)(i) and (c)(iii) which should be deleted from the order.  There will be an order nisi that the Company is to bear the costs of the appeal.