RE TOMEI SHOJI (HONG KONG) LTD

HCCW 413/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 413 OF 2008

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J U D G M E N T

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1.  This is a creditor’s petition to wind up Tomei Shoji (Hong Kong) Limited (“the Company”), which was formerly known as Tomei Shoji Limited 東茗商事有限公司.  The petitioner is S H S Harness Manufacture Limited.  The petition was founded on trade debts allegedly owed by the Company to the petitioner for goods sold and delivered pursuant to invoices issued between November 2007 and March 2008 in the sum of $774,157.25.  A demand for the debt was served on the Company at its registered office on 28 May 2008.  This petition was presented on 10 September 2008.

2.  The Company opposed the petition on the ground it was not the entity that had contracted with the petitioner for the goods sold and delivered for which the debt was incurred.  It was contended that this was a case of mistaken identity and that the purchaser in the transactions in question was not the Company but its parent company by the same name of Tomei Shoji Limited.

3.  As stated by Lord Millett in Homburg Houtimport BV v Agrosin Limited (The Starsin) [2004] 1 AC 715 at para 175:

“The identity of the parties to a contract is fundamental.  It is not simply a term or condition of the contract.  It goes to the very existence of the contract itself.  If it is uncertain, there is no contract.  Like the nature and amount of the consideration and the intention to create legal relations it is a question of fact and may be established by evidence.  Such evidence is admissible even where the contract is in writing, at least so long as it does not contradict its express terms, and possibly even where it does.”

4.  It is not in dispute that the burden is on the Company to establish there is a bona fide dispute of the petitioning debt on substantial grounds by adducing “sufficiently precise factual evidence”.  If this criterion is satisfied, the petition will be dismissed (Re ICS Computer Distribution Limited [1996] 1 HKLR 181 at 183I).

5.  I will first set out the relevant background matters not in dispute or should not be controversial.

The background

6.  The Company was incorporated in Hong Kong on 2 July 1991 under its former name, Maxfoo Trading Limited.  Its name was changed to Tomei Shoji Limited in August 1991.

7.  In 1994, the Company reached an agreement with the Toshiba group in Japan by which the Company would manufacture VCR/VCP and VCR mechanism for Toshiba in the PRC.  The manufacturing process commenced in 1995.  At that time the Company and Toyo Holdings Limited 東茗集團有限公司were part of the Toyo group of companies and carried on business in the manufacturing and sale of audio and video equipment with factories in China.  One of the Toyo group’s manufacturing units was Zhongshan Tomei Audio & Video Products Company Limited中山東茗影音電子有限公司 (“Zhongshan Tomei”), which was a joint venture between the Company and a PRC entity.

8.  On 11 November 1999, Grande (Nominees) Limited, a wholly owned subsidiary of The Grande Holdings Limited, took over Toyo Holdings Limited by acquiring its shares.  As a result, the Company and all other subsidiaries in the Toyo group became part of the Grande group.

9.  On 21 June 2000, Evermount Limited, a company incorporated in the British Virgin Islands (“BVI”), changed its name to Tomei Shoji Limited.  This entity became the parent company of the Company when in 2002 all the shares in the Company except for one share were transferred from Tomei (Industrial) Holdings Limited to it.  To differentiate this entity from the Company, I will refer to it in this judgment as “TSBVI”.  TSBVI has not been registered in Hong Kong as a foreign company under Part XI of the Companies Ordinance, Cap. 32.  It shared the same office premises in Hong Kong with the Company and some other companies in the Grande group.

10.  It is not in dispute that between July 2000 and September 2002, the Company did business with the petitioner.  The petitioner is a major manufacturer of wire harnesses which are used in the assembly of DVD players.  The petitioner was an approved supplier of Toshiba and sold wire harnesses to the Company for the manufacture of DVD players sold to Toshiba.

11.  On 15 August 2003, the Company changed its name to its present name Tomei Shoji (Hong Kong) Limited.

12.  Until the Company changed its name, when the petitioner did business with the Company between July 2000 and September 2002, there were two entities known by the name of Tomei Shoji Limited, one incorporated in Hong Kong and one incorporated in the BVI.  The petitioner was not aware of the entity incorporated in the BVI.

13.  The petitioner continued to supply wire harnesses to an entity bearing the name of Tomei Shoji Limited after September 2002 and after the Company had changed its name on 15 August 2003.  It stopped doing so only in March 2008.  The petitioning debt was for goods sold and delivered between November 2007 and March 2008.  As mentioned earlier, it is the Company’s case that the entity to which goods were supplied after September 2002 was not the Company but was TSBVI.  This is disputed by the petitioner.

14.  There is no dispute that the Company did not send out notice of termination of its operations to the petitioner.

The Company’s case

15.  The Company’s case may be summarised as follows.

16.  In mid 2002, the management of the Grande group decided that all of the Company’s operation should be streamlined and eventually ceased, and to be taken over by a new company operating in the PRC for tax and costs saving purposes.  The new company was TSBVI.  The management responsible for the operation of TSBVI was and is based in the PRC.

17.  The entire purchasing department of the Company was one of the first to be taken over by TSBVI in the PRC and ceased in Hong Kong.  The Company ceased trading after September 2002.  For tax saving purposes, as from October 2002, all purchase orders were signed and issued from the PRC and not by the Company.

18.  After the cessation of the Company’s operation in September 2002, all the staff remained employed by the Company to assist in the winding down.  The Company’s office in Hong Kong remained occupied by such staff, who was then assisting in the wrapping up of the Company’s operation, as well as helping TSBVI to start up its operation in the PRC.  From October 2002 to April 2004, staff salaries were charged to TSBVI.  When the staffs placed purchase orders with the petitioner as from October 2002, they did so on behalf of TSBVI.  Suppliers, including the petitioner, were required to acknowledge receipt of the purchase orders and send their acknowledgement to an address and fax number in the PRC being the factory in China of Zhongshan Tomei.

19.  Because of the size of the Company’s operation, the closure of the Company and the taking over by TSBVI was gradual, and this was completed only in early 2004.  All the staff of the Company was gradually transferred and relocated to the PRC.  The lay-off process was spread out between September 2003 and September 2006.  Staff unwilling to be relocated was made redundant.  Staff who remained signed employment contracts with The Grande Group (Hong Kong) Limited and with Zhongshan Tomei.  Despite the change in job titles and the entity of the employers, the staffs were responsible for more or less the same duties.

20.  It has been the intention of the management that the Company would be closed after its entire operation was taken over by TSBVI.  Due to some outstanding tax issues, the Company is not yet able to close completely.

The Company’s evidence

21.  In support of its case, the Company filed a total of five affirmations made by various former staff members and directors.  They produced documentary evidence in support of the Company’s case.  Of particular importance are the following documents.

22.  The audited accounts of the Company from 2003 to 2006 and the management accounts for 2007 stated that during 2002, the Company ceased its activities of manufacturing and trading of mechadesks and video products.  Turnover of the Company from 2003 onwards was nil.  Its subsidiary Zhongshan Tomei was disposed of in the financial year ended December 2004 and the Company has since become inactive.  The auditors gave unqualified opinion that the financial statements gave a true and fair view of the Company’s affairs.

23.  Mr Bernard Man for the petitioner drew attention of the court to an entry in the management accounts for 2007 under “Cost of Goods Sold” which read “Manufacturing O/H” with an amount of $2.4 million odd.  He submitted this showed production costs were incurred up to the year ended December 2007 and does not support the Company’s case it had ceased purchasing activities since September 2002.

24.  I understand from the Company’s counsel Mr Thomas Lai that “Manufacturing O/H” stood for “Manufacturing Overheads”.  Mr Lai speculated the amount of $2.4 million recorded might be due to plant and machinery but he has no instructions about this.  In any event, he submitted it is unlikely this figure would be the result of any manufacturing activity, as under the heading of “Cost of Goods Sold”, one could readily see that for “Raw Materials” and “Direct Labour”, these entries were recorded as nil.  I would decline to attach significance to the item of Manufacturing Overheads, the meaning of which was unclear.

25.  Separate bank accounts were opened by TSBVI in September 2002 and January 2004.  Earlier bank statements were not available, but the bank statements in 2004, 2006 and 2007 showed that payment for the goods supplied by the petitioner was made from the accounts of TSBVI.  The bank accounts of the Company’s account in 2004, 2007 and 2008 showed that the account had been dormant.  This, in my view, is significant, as the bank statements of TSBVI showed that for a long time, it had been paying for the goods ordered from the petitioner.

26.  As for the purchase orders issued to the petitioner, the Company’s staffs explained that these documents, with all the basic information, were generated by the Company’s computer.  The information or format of the database programme was set by the management information system department and could not be changed by the purchasing department.  That was why the purchaser’s contact information after September 2002 was not changed to a location in the PRC.  However, from the latter part of 2002, all signed purchase orders were faxed to the petitioner from the PRC.  From March 2003, a chop was applied to each of the purchase orders stating that the acknowledgement for the purchase order and the account statement or invoice should be sent to “our China Factory” with the name and address of the factory of Zhongshan Tomei in the PRC, and a telephone and fax number in the PRC.  And from August 2006, the purchase orders gave the Hong Kong address of “Tomei Shoji Limited”, but with a telephone and fax number in the PRC instead of a Hong Kong number.

27.  Employment contracts and other documents of various staff members were produced showing the transfer of their employment to other entities in the Grande group and the termination of employment of those who were unwilling to be relocated to China.

The petitioner’s contention

28.  The petitioner filed evidence from its sales executive seeking to cast doubt on the Company’s case that the entity which contracted with the petitioner in 2007 and 2008 for the sale of goods was a different entity.

29.  I can readily appreciate why it might have appeared to the petitioner’s sales executive that the petitioner was dealing with the same entity throughout by reason of the identical name of the purchaser, the same office address in Hong Kong, the delivery of goods to the same factory in China, the same handling staff of the purchaser, the same format of the purchase orders (except for the differences mentioned above), the payment by cheques from the purchaser with the same name as before.  As mentioned earlier, it is common ground that no one had ever informed the petitioner of the change that the operation of the Company was to be taken over by its parent company.  The first that the petitioner learned of the change of name of the Company was in April 2008 when the petitioner instructed solicitors to bring proceedings to recover the outstanding debt and a company search was made.

30.  Mr Man submitted the change in identity of the purchaser was merely a unilateral, subjective change that had not been communicated to the petitioner.  The identity of the purchaser is a question of fact to be objectively ascertained.  He contended that given the steady and continuous trading before and after September 2002 and by reason of the matters aforesaid, it should be inferred objectively from the surrounding circumstances there was no change in the identity of the purchaser in 2007 and 2008.

Is there a bona fide dispute on substantial grounds

31.  The onus of the Company at this stage is to establish a bona fide dispute on substantial grounds.  It is to demonstrate that its case is believable.  I am satisfied that the onus is discharged, applying the objective test urged on the court by Mr Man.  It is not necessary to express a firm view as to the identity of the purchaser for present purpose.  Looking at the surrounding circumstances and the known facts, I am inclined to think there are sufficient countervailing considerations that the purchaser might not be the same entity that had a course of dealings with the petitioner between July 2000 and September 2002.

32.  For the above reasons, I dismiss the petition.

33.  I order the petitioner to pay the Company’s costs in this petition.