RE ICS COMPUTER DISTRIBUTION LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING-UP) NO. 615 OF 1995

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JUDGMENT

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1. This is a winding-up petition. This matter came before this Court previously on an application to strike out the petition. I gave my Decision in respect of that on 2nd April 1996. In order to avoid repetition that Decision should be read in conjunction with this judgment. I will not set out the facts herein other than is necessary.

2. As I indicated in my earlier Decision, the test which the Court applies is whether there is a bona fide (in the sense of genuine) dispute on substantial grounds as to the existence of the debt. As I also indicated in my previous Decision, it is for the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the Court that it has a genuine dispute on substantial grounds.

3. As regards this case, the petition is resisted on the basis that the Company has substantial claims against the petitioner arising out of the transactions giving rise to the debt relied on. In my previous Decision, I referred specifically to three of the heads of claim. These were the damages for delay in shipment of goods, the claim in respect of unmarketable goods and the claim for damages caused by parallel imports. Those claims in themselves amount to over US$25 million. In consequence, both parties before me on the petition confined their arguments to those claims since the success or otherwise of the Company in establishing a bona fide claim on substantial grounds in respect thereof was likely to be determinative of the Company's defence to the petition.

CLAIM FOR DELAY IN SHIPMENT

4. In my previous Decision, I considered the nature of the Company's claim as presented in the evidence then filed. Having regard to the difficulties faced by the Company by the manner in which their case was presented and the indefinite nature of the evidence, I concluded that unless and until the Company could provide proper evidence as to what it said the contracts were the claim by the Company is not one that I could or should give credence to as constituting a basis of a bona fide substantial claim.

5. Whereas the hearing of a petition for winding up a company usually takes place at the same time as an application to strike out the petition and the Decision on the strike-out application is usually determinative of the winding-up petition, I allowed the Company further time in which to file evidence. I did so primarily because Counsel for the Company having heard the bulk of the submissions on behalf of the Petitioner on the strike-out indicated that the Company wished to file further evidence. I was not disposed to allow that on the strike-out application which had been launched on the basis that the evidence was complete. Primarily because Counsel for the Company had urged me that the Company’s evidence had been badly prepared, I considered it fair in all the circumstances to allow the Company a locus poenitentiae in which to try to rectify the situation.

6. The Company sought to improve its position by filing evidence including the 5th affirmation of Mr. Lam Chi Man. Paragraph 22 of that affirmation provides the sole clue as to what the Company now relies upon as the all important contractual provision or representation upon which it bases its claim for delay. It is said: "Both prior to and subsequent to signing the Distributor Agreement Mr. Bingley Ngai and Mr. Peter Wong had promised/assured me that the Petitioner would deliver the goods in Hong Kong to the Company in less than 30 days from the date of the purchase order. "

7. The first thing that must be noted in respect of this alleged contractual provision which is raised for the first time in the Company's third attempt to provide evidence is that it raises an alleged contractual provision or representation which clearly did not govern by far the bulk of the supply of goods which constitute the basis of the claim upon which the petition is founded.

8. It can be seen from all the documentation in relation to the Letters of Credit which has been exhibited that the goods were not delivered by the petitioner to the Company in Hong Kong but were supplied "ex works", "ex factory" or "ex warehouse" i.e. in Singapore. They were shipped according to the Bills of Lading and as required by the Letters of Credit "freight collect". Furthermore, there is no support for this alleged contractual provision anywhere in all the documents which are before the Court other than the barest allegations in paragraph 22 of Mr. Lam's 5th affirmation made, as I have said, after some of the defects and deficiencies in the case put up on the strike-out application had been pointed out. The mention of the 30 day delivery period is again something not to be found in the documents relating to the supply. Sti1lless is it to be found in any document emanating from the Company and one seeks in vain indication of a claim having been made by the Company on the strength of this promise/assurance. Furthermore, paragraph 22 of Mr. Lam's 5th affirmation does not accord with paragraphs 6 and 7 of Mr. Lam's 1st affirmation. The reader of those paragraphs is lead to believe that at least the initial orders were put in up to 6 months ahead. Paragraph 15 of Mr. Lam's 1st affirmation refers to the 90% of the orders having been worded "as soon as possible". This might show a desire to achieve early delivery but it is no support for the contractual provision which is now said to have existed.

9. In Safe Rich Industries Limited, Court of Appeal 3rd November 1994, Bokhary J.A. pointed out that whether, drawing an analogy with Order 14, a Defendant's assertions are believable must be judged in the context of the indisputable background to the case and not in isolation. Otherwise, as was pointed out, a debt-dodgers' charter would be created. Here, it seems to me that the Company is in the position of not having established a bona fide dispute. As Morton L.J. pointed out in Re Welsh Brick Industries Limited [1946] 2 AER 197 @ 200 it is possible that a Company might on Order 14 convince a Court that it has a fair probability of a defence but at the Petition stage it might not be able to establish that it has a bona fide defence. The distinction as I understand it is that a winding up petition is a summary procedure in which the Court comes to a conclusion. The Court does not dismiss a petition on the basis that a Company might be able at some stage in the future to scrape together a case that might be arguable. If by the winding up stage it does not have a defence then the company is wound up and the putting together of some cross-claim which has yet to be formulated is left to be done during the winding-up.

10. This claim by the Company seems to be in no better position now, following the Company's latest round of evidence than it was before. Having been taken through the documents that have been exhibited and the various charts prepared, if there is any claim at all, it must be minimal.

CLAIM IN RESPECT OF PARALLEL IMPORTS

11. In their second round of evidence i.e. that which was filed for the strike out application the Company relied upon the Distributor Agreement as creating an obligation on the Petitioner to protect the interests of the distributors by taking steps to curb parallel imports. Mr. Lam's 1st. affirmation was not handicapped by any reference to precisely what provision in the Distributor Agreement was said to give rise to that obligation. As I pointed out in my earlier Decision the point was all but abandoned on the strike out application. It had to be because the terms of the Distributor Agreement made clear that it was in no sense an exclusive distributorship. The Petitioner reserved the right to distribute its own goods in the distribution territory.

12. In his 5th affirmation Mr. Lam raises a completely different argument. In paragraph 16 he says that Bingley Ngai orally agreed with him that the Company would tell Mr. Ngai the price of parallel import goods and then sell its own stock at an agreed reduced price and the Company would then be reimbursed by the Petitioner. Whereas in his 1st affirmation Mr. Lam exhibited a chart which was said to be a schedule of loss prepared by Mr. Ho, this was on the basis of loss recoverable because of some unspecified terms in the Distributor Agreement. Mr. Lam's 5th affirmation does not itemise what he says were the figures agreed by Mr. Ngai. The instance given of an agreement by Mr. Ngai to reduce the price of sales made Synset relate to one type. But neither in respect of that nor in respect of the sales of the Contura Aero does Mr. Lam say what the price compensation was that was agreed. Again, there is not one scrap of paper to support this new assertion. The Company in my view has not adduced sufficiently precise factual evidence to satisfy the Court that it has a genuine dispute on substantial grounds on this ground.

UNMARKETABLE STOCK

13. In my earlier Decision I found it impossible to give credence to the nearly US$6 million claim for unmarketable goods. One of the items to which I referred was the very heavy claim in this respect founded upon the SVGA colour monitors. Again without a great deal more it would be impossible to accept that an item such as that was unmarketable at any price. It is hardly to be supposed that such an item is even to-day out of date.

14. Paragraph 38 of Mr. Lam's 5th affirmation is a series of disjointed statements. The final 2 sentences of the paragraph are clearly irrelevant. In so far as Mr. Lam is attempting to say that monitors are un-sellable on their own, however, when consideration is then given to the list of goods including SVGA colour monitors that the Company was still trying to order late last year, the goods actually ordered last year by the Company including the SVGA colour monitors and the list of goods ordered by other distributors of the Petitioner in the People's Republic including for example SVGA colour monitors the only conclusion that can be come to is that the Company is a long way from establishing a bona fide dispute on substantial grounds on this basis.

CONCLUSION

15. On the basis of the Company's evidence on these 3 heads of alleged cross-claim I would not be prepared to hold even on the new evidence that it had established a bona fide dispute on substantial grounds. The claims apart from the delay in shipment come to US$21,622,636.00 a shortfall of something over US$7. 5 million of the amount owing to the Petitioner. Hence, even if consideration proceeds on the basis that the Company has a bona fide dispute on substantial grounds for the remaining claims and possibly a legitimate claim in respect of a very small proportion of the delay claim there is still a substantial shortfall. But I have held that the Company has failed to establish the existence of a satisfactory claim in respect of at least 3 heads. The deficiency as I pointed out in my previous Decision is therefore even greater.

16. Despite the reference in my previous Decision to the absence of any accounts even in draft, the only attempt to show some kind of solvency has been the production in the new evidence of copies of tax demands. Rightly, Mr. Chan Q.C. did not rely on these as establishing anything. In my view the only conclusion that can be drawn is that the Company is insolvent and unable to pay its debts.

INHERENT IMPROBABILITY OF THE COMPANY'S CASE

17. In my view, in addition to the analysis of the case presented by the Company as I have made above, and as a distinct and separate matter in itself, the Court in my view has to consider the Company's cross-claims with such circumspection as on an Order 14 application would give rise to an order for payment in of in this case at least half the amount of the Petitioner's claim.

18. The history of the matter shows a mounting debt problem as regards the Company's account with the Petitioner. The most graphic demonstration of this is exhibit "LTC 12" to the affirmation of Lau Tin Chi. It is a chart which shows the various Letters of Credit which were opened by on behalf of the Company in favour of the Petitioner. Initially the bills drawn under the Letters were payable at sight. The Letters of credit from January 1994 provided for a 60 day payment period. From August 1994 the period was 90 days. In practice payment seems to have become increasingly delayed as time went by. Eventually, under Letters of Credit LCB39400129 and LCB39400159 no payment was over received.

19. On pages 7 to 9 of my earlier Decision I set out some of the history of the correspondence up to the time of the first hearing of the Petition. It is unnecessary to set it out again here. I am treating it, as I have said at the beginning, as part of this Judgment. This does not show the Company having anything like the claims that have now been put forward. The explanation for the contents of the correspondence, or rather lack of it, prior to the first hearing have been guarded and have been heavily criticised in the course of argument. 1 find that they do not inspire the conviction that the Company had any belief that it had sound claims of the nature now put forward, particularly in respect of the delay claim. The manner in which the evidence has emerged and the shifting nature of it have done nothing to rectify that. The change in stance taken on many of the issues at the different stages of the evidence is something which must be held against the Company.

20. In Re Claybridge Shipping Company Court of Appeal transcript 9th March 1991, Lord Denning said that

"I entirely agree that a petition should not be used as the means of getting a debt which is bona fide disputed on substantial grounds on which a company would get unconditional leave to defend. But I think that the Companies Court should be able to look into the bona fides of the defence. If it is obviously a "put up job" - or if it is so insubstantial that a Queen's Bench master would only give conditional leave to defend - then I should think the petition should stand."

21. In my view, should I be wrong about the Company not having established a defence, this is just such a case. The facts point to a situation where the defence put up is for the purpose of delaying the Petitioner. Whereas I proceed on the basis that the Company does have some claims against the Petitioner sufficient to give it a set-off, that is only to a limited extent. There is a large proportion of the debt owing to the Petitioner that is uncovered. The history of the matter shows the Company, which had operated on what would apparently seem to have been very slender margins, slowly and belatedly attempting to pay off in the last months of 1995 some of the amount that was owing. This in itself demonstrates the inability of the Company to pay its debts as they become due. Everything, down to the production of the tax forms in lieu of any accounts points to the fact that this is a company without any current assets to pay its debts.

22. In reaching the conclusion that the Company is insolvent and should therefore be wound up I do not in any way underestimate the seriousness of winding up a company. The conclusion to which I find I have no alternative but to arrive, is one taken having given full consideration to the comprehensive submissions of Counsel on both sides. It is also in the light of the fact that the Company has been given a full second chance to present its case. The protestations that there is a mass of documentation which has yet to be analysed and marshaled before the Company's case can be known is an argument to which I cannot accede. The public interest and the commercial interests of the community demand that a company should only be wound up in circumstances where it is justified, but those interests also require that if the company cannot pay its debts it should cease to exist. If a company is to withhold payment of its debts then it must know why it is doing so. If it is not able to demonstrate valid reasons why payment is being withheld, then if it is also unable to show that it can pay those debts and if necessary give security therefor, then winding up is likely to follow.

23. In my view it would be right in those circumstances to order the winding up of the Company and leave it to the liquidator to bring such claims as he thinks proper in the liquidation.