Re Glory Sky (Hong Kong) Ltd.

HCCW817/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.817 OF 2001

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J U D G M E N T

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1. This is a winding up petition against Glory Sky (Hong Kong) Limited ("the Company) on the ground that it is insolvent and unable to pay its debts.

INTRODUCTION

2. The Company was incorporated on 3 April 2000 to run the business of a club house, known as The Best Club, situated at the Club House of Maple Garden, Yuen Long, New Territories. The nominal capital of the Company is HK$10,000 divided into 10,000 shares of HK$1 each. The amount of the capital paid up or credited as paid up is HK$2. Its founder, Mr Leung Kai Fai ("Mr Leung") and Mr Chan Man Tat ("Mr Chan") held one of the two issued shares. They were also directors.

3. The petitioner, Ms Elaine Leung Ngai Ling, is the elder sister of Mr Leung. She became a director of the plaintiff on 27 February 2001. At the same time, Mr Chan resigned as director. It is the petitioner's case that she regarded herself as a shareholder after she agreed to buy the share of Mr Chan in about March 2001; that she had paid on behalf of the Company a total sum of $207,491.10 to defray its expenditure in March 2001 and that the Company had repaid her $7,491.10, having a balance of $200,000. She further alleged that the Company owed her $5,690 being her pro rata salary for the month of May 2001.

4. By a statutory demand dated 22 June 2001 ("the Statutory Demand"), the petitioner demanded the Company to pay up a total sum of $450,000 within three weeks. (According to the petitioner's first affirmation dated 6 August 2001, the said sum of HK$450,000 consisted of HK$200,000 owed to her as stated above and HK$250,000 owed to her and Mr Kwan Wing Sing ("Mr Kwan"). In the event, the Company did not pay as demanded. She therefore presented the petition on 6 August 2001.

5. The Company admitted that the petitioner did pay its expenditure in March 2001 and that it had repaid her partly, leaving a balance of HK$200,000, but denied that it was a loan from the petitioner. It further alleged that the payment was made by the petitioner pursuant to an agreement in March 2001 to subscribe the Company's shares to be allotted. Lastly, there was no agreement to pay the petitioner salary at all.

6. At the hearing before me, Mr Yam, counsel for the petitioner, did not seek to rely on the alleged pro rata salary any more. What remains is thus the disputed expenditure of HK$200,000 only. It is the petitioner's case that there was no agreement to purchase the Company's shares to be allotted. She had only agreed to buy the share to be transferred from Mr Chan.

7. Mr Kwan had appeared in these proceedings as an opposing creditor from the outset. His case is that he had paid HK$200,000 on 15 May 2001 to the petitioner on behalf of the Company for shares to be allotted to him. The petitioner admitted that she had received HK$200,000 from Mr Kwan but it was paid pursuant to an agreement whereby Mr Kwan agreed to buy the share the petitioner was about to receive from Mr Chan. Mr Kwan's locus as an opposing creditor was never challenged until Mr Yam took the point at the hearing before me. Mr Au-yeung, appearing for the Company, took a neutral stance on this point as it is the Company's case that it was not aware of any agreement made between Mr Kwan and the petitioner. After hearing the parties, I ruled the Mr Kwan did have locus. I will reduce my oral reasons in writing later. It is, in my view, convenient to first set out the parties' evidence.

EVIDENCE

8. Quite a number of factual disputes have been raised in the affirmations. But I do not consider it necessary to set them all out. I will only concentrate on those matters that are pertaining to the disposal of the main issues before me. I gather from the way counsel made their submissions that this is how they approached the evidence as well.

9. Mr Leung's evidence on how the petitioner agreed to buy shares to be allotted by the Company and the share from Mr Chan is summarized in paragraphs 10 to 14 below.

(1) The Allotment Agreement

10. In about January 2001, Mr Leung and Mr Chan discussed about the recruitment of potential investors to the business. They proposed to restructure the Company and allot 300 further shares in the value of $10,000 each so as to raise a total sum of $3 million. They would hold 65 shares respectively in light of their investment in the Company thus far and the rest of the shares would be held by the new investors.

11. In late January 2001, the Company needed cash to pay off certain expenditure. Mr Leung on behalf of the Company approached the petitioner in early February 2001 to borrow HK$ $100,000 from her, with the security of an undated cheque drawn by another potential investor Ms Pang Ching Yee. The petitioner agreed and the sum was made available on 2 February 2001. On the same occasion, Mr Leung told the petitioner about the restructuring plan and invited her to invest in the Company. The petitioner said the proposed amount was too high and should be reduced to HK$2.4 million. The shares to be allotted should accordingly be reduced to 240 shares of HK$10,000 each. The petitioner's proposal was accepted by Mr Leung and Mr Chan. Mr Leung then prepared an investment plan for the petitioner's consideration.

12. Mr Leung and the petitioner had further discussions in February and March 2001. Eventually they reached an agreement in about early March 2001, whereby the petitioner agreed to invest $550,000 for 55 shares in the Company. In return, the Company agreed that (1) the petitioner shall be appointed director and financial controller of the Company; (2) her previous loan to the Company of HK$100,000 shall be treated as part of the consideration for the purchase of the shares; (3) a bank account of the Company be opened with Wing Hang Bank Limited; (4) the petitioner shall inject a further sum of HK$50,000 into the Company which shall be treated as further part payment for the purchase of shares; (5) the balance of the purchase price shall be by way of the petitioner's further injection of funds to meet the Company's daily or recurring expenses from time to time; and (6) upon full payment of HK$550,000, the 55 shares shall be allotted to the petitioner. I will call this the Allotment Agreement.

(2) The Transfer Agreement

13. At the same time, Mr Chan also intended to sell his shares as he had engaged in some other business activities. He was willing to sell his interest in the Company at the discounted price of $450,000 although he had invested HK$650,000. The petitioner agreed to purchase Mr Chan's shares and offered to pay by three instalments in the respective sums of HK$100,000, $150,000 and HK$200,000 payable on the 4th day of May, June and July 2001. Upon full payment, Chan's share would be transferred to the petitioner. The petitioner requested Mr Chan to sign in escrow the bought and sold note and the instrument of transfer, which he did. Mr Leung was also required to sign the board minutes approving such transfer, which he did as well. I will call this the Transfer Agreement. Pursuant to the Transfer Agreement, the petitioner paid Mr Chan the first instalment of HK$100,000 by a cheque dated 1 May 2001. Upon the petitioner's request, Mr Leung's wife issued three posted cheques for the price as security. The petitioner had however failed to effect payment on the 2nd and 3rd instalment.

14. Pursuant to the Allotment Agreement, the petitioner paid $200,000 on the Company's behalf in March 2001. The petitioner had further lent another sum of HK$50,000 to the Company which was deposited into the bank account of Mr Leung. This sum was treated as the further part payment of HK$50,000 under the Allotment Agreement.

(3) The Petitioner's Transfer Agreement

15. The petitioner described how she was involved in the Company thus. On 2 February 2002, Mr Leung and his wife asked her to lend HK$100,000 using a cheque drawn by Ms Pang dated 15 February 2002 for HK$100,000 as security. The petitioner agreed but when the cheque was dishonoured upon presentment on the due date. She denied that Mr Leung had ever made any proposal to her for allotment of shares. Nor did she make any proposal as alleged. Instead, she repeatedly asked Mr Leung for repayment. Mr Leung and his wife kept on asking her to invest in the Company and make use of the HK$100,000 to purchase shares in the Company. Mr Leung told her that Mr Chan held the remaining one share in the Company, and that Mr Chan had invested HK$650,000 but was willing to sell his share at a reduced price of HK$450,000. The petitioner refused the proposal. However, her demand for repayment was ignored by Mr Leung. In such circumstances, she was forced to agree that the sum of HK$100,000 be treated as being used to purchase shares in the Company.

16. Knowing that Mr Leung was not a trustworthy person, the petitioner agreed to purchase the shares on the following conditions : (1) she had to be appointed as a director of the Company and she had to control all the finance of the Company; (2) any share transfer in the Company must be approved by her and Mr Leung; (3) director and shareholder of the Company would no longer received commission for customers introduced to the Club; (4) Mr Leung had to purchase the share from Mr Chan first and then the petitioner would pay him the remaining HK$400,000. (Mr Yam in his submission said that there was a typing mistake in the figure of HK$400,000 in paragraph 16(iv) of the petitioner's 3rd affirmation dated 16 January 2002. The correct figure should be HK$350,000.) I will call this the Petitioner's Transfer Agreement.

17. Mr Leung agreed with her proposal and did the following acts to show his consent. First, she was appointed as director on 27 February 2001. Second, she took over the finance of the Company and was asked to open a bank account for the Company. Third, Mr Leung asked his wife to issue and gave Mr Chan three post-dated cheques dated the 4th day of May, June and July 2001 in the total sum of HK$450,000 payable to him. Fourth, Mr Leung arranged Mr Chan to execute the instrument of transfer and the bought and sold note and prepared the board minutes to approve the share transfer from Mr Chan to the petitioner. It should be noted that all the instrument of transfer, bought and sold note and board minutes were not dated.

(4) The petitioner's payment of further sums

18. The petitioner went on to say that she believed at that time that she had become a shareholder and director of the Company. Thus, she paid for the Company's expenditure for March 2001.

19. On 7 March 2001, the petitioner paid a further sum of HK$50,000 to Mr Leung's wife for partial payment of the purchase of the shares. She did not specify what shares were these. Presumably, it must be the share of Mr Chan.

(5) Banking with Wing Hang Bank

20. The petitioner said she had a good relationship with Wing Hang Bank. Thus, the Company was able to open a bank account with and obtain overdraft facility from the bank. By a guarantee dated 11 April 2001, Mr Leung and the petitioner agreed to be joint and several guarantors of the overdraft facility. In November 2001, she was forced by Wing Hang Bank to repay as guarantor a sum of HK$71,176.94 being the overdraft of the Company.

(6) Payment to Mr Chan

21. In early May 2001, Mr Chan told the petitioner that the 1st cheque issued by Mr Leung's wife (dated 4 May 2001) could not be honoured. Mr Chan was then in great financial difficulties. He begged the petitioner to give him HK$100,000 first to meet his needs. Out of sympathy, the petitioner paid Mr Chan as requested. It should be noted, however, the cheque for such payment was dated 1 May 2001.

(7) Mr Kwan's involvement

22. Referring to the involvement of Mr Kwan, the petitioner had this to say. Mr Leung was a mutual friend of hers and Mr Leung's. In March 2001, she mentioned to Mr Kwan, who was then unemployed, that he might consider to invest some monies in the Company so that he could work in the club as a minor shareholder. Mr Kwan said he was interested but did not have money at the time. The petitioner told Mr Kwan that when he had the monies, she would sell him part of her shares in the Company to him. He agreed and told her to hold his interest in her share for him. He did not want to show his name as he did not want his creditors know about it.

23. Mr Kwan's version of the events differed. He said that the petitioner invited him to invest HK$200,000 in the Company. On 15 May 2001 he gave the petitioner a cash cheque of HK$200,000 issued by his brother, Mr Kwan Wing Chung. (This the petitioner did not deny in her affirmations.) At that time, the petitioner confirmed to him that the said sum of HK$200,000 would be deposited into the bank account of the Company as purchase price for the intended new allotment of shares of the Company for the same value. The petitioner further confirmed that she would arrange the procedure and formality of the issuing of share certificate of the Company to him in due course.

24. On 14 June 2001, the petitioner, Mr Kwan and Mr Chan signed two documents. The first is an agreement purporting to restrict the disposal or transfer of the shares of the petitioner, Mr Kwan and Mr Chan until the transfer of their shares was all completed. The second is a letter authorizing the petitioner to represent Mr Kwan and Mr Chan to deal with the affairs of the Club until the transfer of their shares was all completed. It is however not clear from both documents what exactly "the transfer of their shares was all completed" meant.

25. Mr Kwan said he signed the agreement notwithstanding that he had not received any share certificate because he believed that once the formality was completed by the petitioner, the agreement would take effect.

26. The petitioner said that she had a dispute with Mr Leung and his wife in May 2001, when they told her that they had to receive 20% commission on clients introduced by them to the Club. On 22 May 2001, she told them that she would close the club if they did not co-operate in running it. Mr Leung then told her that she was on a director and the share transfer and bought and sold note were never presented for stamping. Mr Leung went on to say that Mr Chan was still a shareholder and they, as shareholders, could remove her from the board at any time and sell the business to a third party without her consent. The petitioner and Mr Leung had a heated quarrel. On 14 June 2001, the petitioner met Mr Kwan and Mr Chan and discussed how to solve the problem created by Mr Leung. Mr Chan wanted to get the remaining balance of HK$350,000 from Mr Leung. And the petitioner wanted to get back the money she paid the Company (presumably, the expenditure she paid on behalf of the Company) and the sum of HK$150,000 she paid to Mr Leung's wife. After discussion, the parties signed the aforesaid agreement and the authorization letter.

27. Mr Leung's evidence is that he was not aware of the agreement made between the petitioner and Mr Kwan. In particular, he referred to a letter he issued on behalf of the Company to the petitioner on 5 July 2001 ("the Letter"). There, Mr Leung repeated the petitioners' agreement to buy the Company's shares for HK$550,000 and stated that no share certificate was issued to her because she had not paid the price in full. He went on to refer to Mr Kwan's enquiries about his entitlement to allotment of shares for which he had paid HK$200,000 to the petitioner. Mr Leung stated that the Company had no record of such promise to allot share to Mr Kwan and asked the petitioner for an explanation.

(8) Statutory Demand

28. The petitioner said that at their request, Mr Chan proposed to Mr Leung to allot shares in proportionate to the monies Mr Chan, the petitioner and Mr Kwan had made to the Company. Mr Leung refused as he would cease to be the majority shareholder after the allotment. The petitioner became concerned. On 22 June 2002, she went to see her solicitors with Mr Kwan. As a result, the solicitors issued a letter to Mr Leung's solicitors stating her interest. On the same day, the petitioner also served the Statutory Demand on the Company. It is the petitioner's evidence that Mr Kwan asked to include his claim in the Statutory Demand, which the petitioner agreed.

29. Mr Kwan however denied that he had asked to or agreed to include his claim of HK$200,000. He said in August 2001, he attended a meeting with the solicitors at the request of the petitioner. At the meeting, the petitioner told him that she would file a winding up petition against the Company. Mr Kwan was shocked and disagreed. He asked the petitioner to explain the whereabouts of the sum of HK$200,000. She said the sum was used to buy her shares of the Company. Mr Kwan disagreed with her, saying that he would institute legal proceedings against her. It is Mr Kwan's evidence that it would not be fair or just to wind up the Company unless the petitioner could provide a satisfactory explanation as to his application for allotment of shares and the whereabouts of the said sum of HK$200,000.

(9) The District Court action

30. In November 2001, the petitioner commenced proceedings in the District Court against Mr Leung's wife for the sum of HK$150,000 and against Ms Pang for HK$100,000 on the dishonoured cheque ("the District Court Action"). In the Statement of Claim, the sum of HK$150,000 was said to be a loan to Mr Leung's wife. It is, however, her own evidence herein that the sum actually represented the two payments of HK$100,000 and HK$50,000 previously advanced by the petitioner for the purpose of requiring Mr Chan's share. Concerning this action, the petitioner had this to say in paragraph 53 of her 3rd affirmation dated 18 January 2002 :

"I agreed that $150,000 was in partial payment of the share of the Company in accordance with [the Petitioners' Transfer Agreement]. However, Leung Ka Fai failed to fulfil that agreement, it shall be fair and justice (sic) for me to institute legal proceedings to recover the payments I made to his wife. Up to the time of making this affirmation, I never received any share of the Company nor repayment from them. I had the legal right to institute legal proceedings for recovery of the same."

31. The petitioner expended further in paragraph 27 of her 4th affirmation dated 19 February 2002 :

"In the Statutory Demand, I demanded the Company to pay $450,000 as [Mr Kwan] agreed to join me in the winding up proceedings. Without proper legal advice, I put all my claim in the Statutory Demand, i.e. $150,000 under DCCJ Action No. 19481, $200,000 for company expenditure and $100,000 paid to [Mr Chan]. I prepared the Statutory Demand in a very rush way as I worried that [Mr Leung] would sell the Company. At the time of preparation of the petition, my solicitors advised us that the sum of $150,000 and $100,000 relates to the sale and purchase of shares among [Mr Leung], [Mr Kwan], [Mr Chan] and me and should not be dealt in the Company Winding Up proceedings. Therefore, I instructed my solicitors to amend the sum in the petition and instituted DCCJ Action No. 19481 for the recovery of $150,000. I may also institute legal proceedings against [Mr Chan] for the repayment of $100,000. I made all the effort to recover the sums in order to repay $200,000 to [Mr Kwan]."

32. This completes the evidence pertaining to the main factual disputes.

Locus of Mr Kwan

33. Before dealing with the petition proper, I digress at this juncture to set out my oral reasons why I ruled that Mr Kwan had locus in these proceedings as an opposing creditor.

34. It would appear from the petitioner's own evidence that she must have regarded Mr Kwan as a creditor of the Company; otherwise, she would not have included his claim of $200,000 in the Statutory Demand. Indeed, as noted, Mr Kwan's position was never challenged until Mr Yam took the point at the hearing on 6 June 2002. Mr Au-Yeung for the Company took a neutral stance as it is the Company's case that it was not aware of the agreement between the petitioner and Mr Kwan at all and all the Company's books had been taken away by the petitioner.

35. In my view, there are inherent difficulties in the petitioner's case on Mr Kwan's involvement. At the time when Mr Kwan allegedly agreed to buy her share, the petitioner did not have any share at all. She or Mr Leung had not paid in full for the price of Mr Chan's share under the Petitioner's Transfer Agreement. The bought and sold note and the instrument of transfer were all undated. Apparently, the procedure for the transfer had yet to be completed. It defies commercial sense that Mr Kwan would agree to pay $200,000 to the petitioner for a share she was only expecting to receive upon the contingency that she would fully fulfill her own obligations under the Petitioner's Transfer Agreement. Further, it is not in dispute that Mr Chan on record owned only one share. Thus, the most the petitioner could obtain from Mr Chan was only one share. How could she then able to transfer any share to Mr Kwan without relinquishing her own share altogether? It is therefore not surprising that in her 4th affirmation, the petitioner said that she would hold her share for Mr Kwan's interest. Thus, even on her own evidence, the alleged agreement that she had with Mr Kwan began as a transfer agreement of her share in the Company and ended up as a trust agreement.

36. Mr Kwan's evidence on the other hand sounds more reasonable. Further, it is in a way corroborated by the Letter. There, it was said that Mr Kwan did make enquiry about the allotment of shares to him.

37. For these reasons, I was satisfied that the evidence, when considered in the round, showed that Mr Kwan is prima facie a creditor of the Company. But as will be seen in a moment, Mr Kwan's involvement is not a main issue and the determination of this petition does not depend on this part of the evidence at all. Having disposed of this preliminary point, I now return to the petition proper.

Approach

38. The approach that the court should adopt in petitions based on inability to pay is well settled :

(1) The Companies Court should dismiss a petition founded on a substantially disputed debt the validity of which it cannot conveniently decided even though the company is insolvent. When a petition is based on a debt which is disputed on substantial grounds, the petitioner is not a "creditor" within the meaning of section 179(1) of the Companies Ordinance : Perak Pioneer Ltd v. Carrian Holdings Ltd [1984] HKLR 349, at 351.

(2) The procedure of winding up a company for "insolvency" by petition is a summary one. The test which the court applies is whether the debt is bona fide disputed on substantial grounds. As a matter of practice, where the court is satisfied that this criteria is satisfied the Companies Court should not embark on a trial to determine the issue of the validity of the debt. The petition is therefore dismissed or "taken off the file" unless there are unusual circumstances about the case or the issues involved can be disposed of very simply : Re ICS Computer Distribution Ltd [1996] 3 HKC 440, at 442G-444H; Re Shenhua Sheng Yu Coal and Energy Corp Ltd [2001] 2 HKLRD 452, at 454B-455F.

(3) The burden is on the company to adduce sufficiently precise factual evidence that it had a bona fide dispute on substantial grounds : Re ICS Computer Distribution Ltd, at 443C-H.

39. On the evidence before me, has the Company shown a bona fide dispute on substantial grounds on the payment of $200,000? In my view, the answer is yes. I will explain why below.

Bona fide dispute on substantial grounds

40. The petitioner's evidence, like her evidence on Mr Kwan's involvement, is flawed with some inherent difficulties.

41. First, it is the effect of the petitioner's evidence that she became a reluctant investor when her repeated requests for repayment of HK$100,000 was refused by Mr Leung. But she did not explain why she would be persuaded to increase her investment substantially by agreeing to pay HK$350,000 more for Mr Chan's share. She could well have limited her exposure to HK$100,000 only.

42. Second, she regarded her payments totalling HK$150,000 to Mr Leung's wife as purchase money for Mr Chan's share. But when at the end, no share was transferred to her, she treated this as a loan again. This is why she started the District Court Action. But she also included the same amount in the Statutory Demand. The exact nature of the payment could conveniently change to suit her case against different parties. Her explanation why she started the District Court Action does not sit well with her case on the petition.

43. Third, pursuant to the Petitioner's Transfer Agreement, she would not pay for Mr Chan's share direct. Mr Leung first would pay for the share first and would then transfer the share to her. But it is her evidence that she did not trust Mr Leung. Further, the requisite board minutes, the bought and sold note and the instrument of transfer had all been prepared and executed in escrow. There is simply no reason why the petitioner had to involve Mr Leung at all. Presumably, upon full payment by her, the procedure for transfer would be completed.

44. Fourth, the petitioner's evidence why she paid HK$100,000 to Mr Chan is hardly convincing. She said she made the payment because the 1st cheque issued by Mr Leung's wife dated 4 May 2001 was dishonoured. But her cheque was dated 1 May 2001. Apparently, it was given before the 1st cheque issued by Mr Leung's wife was even due for payment. If this was not the case, the petitioner did not explain why she had to back date her cheque. It is more consistent with Mr Leung's case that she agreed to pay and did pay Mr Chan direct and that the cheques issued by his wife were for security only.

45. Fifth, her evidence on the Statutory Demand is convoluting, to say the least. I do not accept her evidence that she did not have legal advice when issuing the Statutory Demand on 22 June 2001. On the very same date, she consulted her solicitors and issued a letter to the solicitors of Mr Leung to protect her interests. It defies common sense that she did not obtain legal advice on the Statutory Demand at the same time.

46. On the other hand, I find Mr Leung's evidence on the Allotment Agreement and the Transfer Agreement more convincing. It is not unreasonable that after the petitioner was convinced that the club business was attractive, she decided to invest into the Company; and that she wanted to become a majority shareholder by acquiring shares to be allotted from the Company and the share to be transferred from Mr Chan. Mr Yam first submitted that there was no agreement in writing to evidence the two Agreements. Given the close relationship of the parties, it is not surprising that they did not reduce everything into writing. I do not find the absence of any written agreement fatal. Mr Yam next submitted that under section 57B(1) of the Companies Ordinance, Mr Leung as a director is not entitled to exercise the power of the Company to allot shares. The Allotment Agreement, even if existed, was illegal. The court should not give effect to such an illegal agreement. Counsel, however, had not cited any authority to support his proposition that the Allotment Agreement is caught by the section. More importantly, his submission ignored the real possibility that, if the Allotment Agreement did exist, the parties would in due course convene the necessary general meeting to deal with the allotments and thereby rectifying what Mr Leung did in connection with the Allotment Agreement.

47. Mr Au-Yeung submitted that there is serious dispute between the parties as to the true nature of the payment made by the petitioner. The Companies Court is not an appropriate forum to resolve the same. 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. With respect, I entirely agree.

48. Lastly, Mr Yam submitted that Company is clearly insolvent as it was unable to pay the overdraft facility. Inability or refusal to pay overdraft is one thing. Insolvency, in my view, is quite another. On the evidence before me, I am not prepared to draw the inference that the Company is insolvent simply because it had failed to pay the overdraft facility. I note that Wing Hang Bank had not joined in these proceedings to support the petition. In any event, the proposition summarized in paragraph 38(1) applies.

Conclusion

49. For the above reasons, I will dismiss the petition.

50. This is sufficient to dispose of the petition. I therefore do not propose to further deal with the factual disputes between Mr Kwan and the petitioner regarding the true nature of his payment of $200,000.

Costs

51. I see no reason why costs should not follow the event. I will therefore make an order nisi that the Company and the opposing creditor shall have this costs of the petition against the petitioner, to be taxed if not agreed. The order nisi will become absolute 14 days after handing down.