RE HIGHFIT DEVELOPMENT CO LTD

HCCW 61/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 61 OF 2008

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J U D G M E N T

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1.   On 22 February 2008, Messrs Oldham Lie & Nie, a firm of solicitors in Hong Kong (“the Petitioners”) presented a winding up petition against a former client of theirs, Highfit Development Co. Ltd (“the Company”). The petition was based on a debt of about HK$1 million, said to be in respect of the balance of legal fees payable by the Company to the Petitioners. Following a number of adjournments to enable evidence to be filed, the petition was listed for hearing before me on 10 September 2008. On that date, the Company unsuccessfully applied for an adjournment of the hearing, which went ahead and resulted in the making of a winding up order against the Company, for the reasons explained in my judgment of the same date.

2.   Immediately after the making of the winding up order, the Company and the Petitioners entered into negotiations for the settlement of the debt. Agreement as to this was reached the following day, 11 September 2008. Payment of the sum agreed was effected, not by the Company, but by a different company by the name of Highfit Holdings Ltd (“Highfit Holdings”), which appears to be a BVI company associated with two of the shareholders of the Company, Ms Pearl Ling, and Madam Koo Siu Ying (who is Ms Ling’s mother).

3.   On 18 September 2008, Ms Ling and the Company took out an application seeking either the rescission of the winding up order, under to the court’s inherent jurisdiction, or a permanent stay of the winding up pursuant to section 209(1) of the Companies Ordinance (Cap. 32). At the hearing, Mr Suen, appearing for Ms Ling and the Company, indicated that while both applied for the rescission of the winding up order, only Ms Ling applied for a stay pursuant to section 209(1), as the Company was not a person who could make an application thereunder.

4.   Shortly before the applications were due to be heard, the Executor of the estate of the late Mr Lim Por Yen (who was the late father of Ms Ling) (“the Executor”) filed evidence in opposition to the applications. The Executor claimed to be a creditor of the Company in two respects – as a judgment creditor in HCA No. 1700/2002 and in respect of sums claimed against the Company in another set of proceedings, HCA No. 1942/2002. In addition, the Executor claimed to be entitled to be heard as a contributory of the Company, as Mr Lim was registered as a shareholder of the Company at the time of his death.

5.   The relationship between Mr Lim, Madam Koo, Ms Ling and the Company can be summarised as follows:-

(1) Mr Lim had a relationship with Madam Koo (to whom he was not married). Ms Ling is their daughter.

(2) When the Company was incorporated, Mr Lim and Madam Koo were its only shareholders and directors. Subsequently, Ms Ling also became a shareholder in and director of the Company.

(3) At present, Mr Lim, Madam Koo and Ms Ling remain the registered shareholders of the Company. However, they ceased to be directors of it some time ago, in 2001. The only present director of the Company is a BVI company called Metro Millennium Limited, which the Executor believes to be controlled by or associated with Madam Koo and Ms Ling.

(4) The Company was the developer of a luxury property project in Shanghai, which (until September 2000) it held through a PRC subsidiary known as Shanghai Huifa Property Company Limited (“Huifa”). The financing for the project was provided by Mr Lim (who advanced some HK$573 million odd to the Company) and through an overdraft facility made available to the Company by the Hang Seng Bank Limited (“the Bank”), which was secured by a personal guarantee from Mr Lim.

(5) Madam Koo and Ms Ling allege that the sums advanced by Mr Lim, and his acceptance of liability as guarantor of the overdraft granted by the Bank, constituted gifts by Mr Lim to Madam Koo. This was disputed by Mr Lim prior to his death, in the proceedings referred to in paragraph 4 above, and continues to be disputed by the Executor.

(6) The Company never made any repayment to either Mr Lim or the Bank.

(7) In May 2002, the Bank commenced proceedings (HCA No. 1700/2002) against the Company to recover the amount outstanding under the overdraft. The Company joined Mr Lim as a third party, contending that Mr Lim had agreed to be responsible for the repayment of the facility as a gift to Madam Koo. In February 2003, the Bank obtained summary judgment against the Company for just over HK$155 million plus interest. It then recovered the amount due from Mr Lim as guarantor, and assigned its claim against the Company to Mr Lim, who thereby became the judgment creditor in HCA No. 1700/2002. The Company’s third party claim was ordered to proceed as a counterclaim. Mr Lim undertook not to enforce the judgment pending resolution of the Company’s counterclaim against him.

(8) Also in May 2002, Mr Lim commenced proceedings (HCA No. 1942/2002) against the Company and Madam Koo, claiming repayment of the advances he had made, which he said had been paid to one or other of them as loans to finance the project. The Company and Madam Koo have alleged, by way of defence, that the sums paid were gifts by Mr Lim to Madam Koo.

(9) Following Mr Lim’s death, the Executor has obtained leave to carry on both sets of proceedings.

(10) Meanwhile, in September 2000, the Company agreed to transfer its shareholding in Huifa to Highfit Holdings. The Executor alleges that this was done by Madam Koo and Ms Ling without the knowledge or agreement of Mr Lim. Madam Koo and Ms Ling were directors of Highfit Holdings, whereas Mr Lim was neither a director nor a shareholder of that company. The stated sale price was HK$192 million, which was substantially less than the amount of funding for the project (over HK$700 million) made available through Mr Lim and the overdraft facility which he had guaranteed. According to the Executor, there is no evidence that the sale price was ever received by the Company – or, even if it was, what has become of it, as the Company appears now to have no significant amounts of cash (the Official Receiver, as liquidator of the Company, has only identified bank balances of slightly over HK$6,000).

(11) Having discovered these matters, the Executor brought a further set of proceedings (HCA No. 1700/2006) against the Company and Highfit Holdings, claiming that the transfer of the Company’s interest in Huifa to Highfit Holdings was a fraudulent conveyance, made with intent to defraud the Company’s creditors.

6.   At the hearing, Mr Suen submitted that the Executor was not entitled to be heard on the application, as he could not be considered a creditor of the Company, having regard to the undertaking which Mr Lim had given in respect of the non-enforcement of the judgment debt pending the resolution of the Company’s counterclaim in HCA No. 1700/2002. He submitted further that the Executor could not be regarded as a creditor as the debts on which he sought to rely were the subject of a bona fide and substantial dispute arising out of the Company and Madam Koo’s claims that the advances by Mr Lim and his guarantee of the overdraft were effectively gifts by him to Madam Koo.

7.   Mr Lam S.C., appearing for the Executor, disputed this. He submitted that there could be no question but that the Executor was interested in the application, having regard to the judgment debt in his favour, albeit that it was not one that was immediately enforceable. That said, however, Mr Lam also pointed out that the Company had been ordered in January 2008 to provide security for costs in favour of the Executor in respect of its counterclaim, but had failed to do so. In these circumstances, he submitted, it would be open to the Executor to seek leave in the winding up to proceed with HCA No. 1700/2002 against the Company, and apply for the counterclaim to be dismissed as a result of the failure to provide the security ordered. There would thereupon be no impediment to the enforcement of the judgment debt, and no basis for declining to recognise the Executor as a creditor of the Company.

8.   Mr Lam also said that, if necessary, the Executor would seek leave to be substituted as a petitioner in place of the Petitioners.

9.   Finally, on this aspect of the matter, Mr Lam suggested that the question of the Executor’s entitlement to be heard was something of a red herring, since the burden of demonstrating that the court should rescind the winding up order, or stay the winding up, rested with the applicants, who had in any case failed to make out a good case for doing so, as the Company was not shown to be solvent, and there was, having regard particularly to the transaction relating to Huifa, a need for investigation into its affairs.

10.   The tests for whether a winding up order should be rescinded, and whether a stay of the winding up should be granted pursuant to section 209 are similar in many respects.

11.   In relation to the application for rescission of the winding up order, this must be made before the winding up order has been perfected. This is not a problem in the present case, as the winding up order had not yet been sealed when the application was made. However, the court will only rescind a winding up order where it is satisfied that:-

(1) The debts to the Petitioner and any other supporting creditors have been paid in full or provided for;

(2) The court is satisfied as to the solvency of the Company; and

(3) The affairs of the Company do not require investigation (a matter on which the Official Receiver’s stance should be ascertained).

12.   So far as staying a winding up order is concerned, the court will take into consideration such matters as whether the debts and expenses of the liquidation have been paid, whether the debts of the Company are paid or satisfactorily provided for, and whether the affairs of the Company call for investigation (see Re Huaqing Oriental Mining (Holdings) Ltd (in liquidation), unreported, HCCA 930/2002, Kwan J, 26 June 2003). However, it is for the applicant to make out a case for a stay that carries conviction, and to satisfy the court that a stay ought to be granted (see Re Outboard Marine Corp Asia Ltd [2003] 1 HKLRD 585 at 588C-E). Where there is doubt as to whether or not the Company is solvent, a stay is unlikely to be granted (see e.g. Boyle & Marshall, Practice and Procedure of the Companies Court, para 9.173; Lai Kam-hung v Guangdong (HK) International Co. Ltd [1995] 2 HKLR 211 at 214).

13.   Dealing first with the question of whether or not the Executor is entitled to be heard on this application, I am satisfied that he is. Having regard to his status as a judgment creditor in HCA No. 1700/2002, it seems to me that notwithstanding that he may not at present be in a position to enforce the judgment, he is nonetheless a contingent (or at least a potential) creditor of the Company, and as such legitimately interested in the outcome of these applications, so as to be entitled to be heard in relation to them. It seems to me that the same can be said of his claims in HCA No. 1942/2002, notwithstanding that they are the subject of a defence put in by the Company. The question at this stage is not whether a winding up order should be made (it already has been), but whether the Executor has a sufficient interest to be entitled to be heard in relation to the present applications.

14.   Mr Suen submitted that the fact that the Executor has not presented any statutory demand against the Company, or sought to support the petition prior to the making of the winding up order means that he should not be regarded as a creditor of the Company. However, I do not see that the Executor’s failure to take these steps should necessarily lead to this conclusion. The Executor may not have been aware of the petition, or may have had good reasons not to appear in relation to it.

15.   Mr Lam, for his part, contended that it was not appropriate to apply for rescission of the winding up order in this case, where there was no reason to suppose that the winding up order had been made on some mistaken or erroneous basis. He suggested that where the petition debt had only been paid or provided for after the making of the winding up order, the appropriate course would be to make an application for a stay under section 209 (see Re Baxters Ltd [1898] WN 60). While I think there is some force in this suggestion, I do not think it necessary to come to a concluded view as to this, since it seems to me that both applications must fail for the reasons which I shall explain below.

16.   Turning to the merits of the applications, it seems to me that it is not possible for the court to be satisfied either that the Company is in fact solvent, or that its affairs are not in need of investigation. Having regard to the principles to which I have referred above, either of these matters would necessitate the dismissal of the present applications.

17.   Dealing first with the solvency of the Company, the following matters are to be noted:-

(1) The Company has put forward no evidence as to its current financial position, other than a bare assertion by Ms Ling to the effect that it is in a “healthy financial condition”

(2) On the Company’s own evidence, it has no audited accounts that are later than 1995 – its financial affairs and position after that date are simply unknown.

(3) No management or unaudited accounts have been provided, nor have any bank statements or information as to the Company’s bank accounts.

(4) Even though they are disputed, no provision has been made for the claims by the Executor.

(5) The Company has failed to put up the security that it has been ordered to provide (in the amount of HK$600,000) in respect of the costs of its counterclaim in HCA No. 1700/2002.

(6) The Official Receiver has indicated that it has only been possible to identify cash balances of some HK$6,000 – this is an amount which would not seem sufficient to meet the expenses of the liquidation to date, however low they may be.

(7) According to the Official Receiver, despite a number of requests for accounts and financial information, no response has been received from the Company or its directors, leading to the Official Receiver being unable to form a view as to the Company is solvent.

18.   In these circumstances, it is not possible for the court to be satisfied that the Company is solvent, and it would not, I think, be appropriate for the court to infer (or assume) that the Company is solvent simply on the basis that no other creditors (apart from the Executor) have emerged. That being so, it is not possible for me to be satisfied that the winding up ought to be stayed pursuant to section 209, or that I should exercise my discretion to rescind the winding up order.

19.   Nor do I think that I can be satisfied that the Company’s affairs are not in need of investigation. The Official Receiver has felt unable so to state, and it seems to me that the matters raised by the Executor in relation to the circumstances of the disposal by the Company of its interest in Huifa to Highfit Holdings are such as would merit independent examination. Thus, for this reason also, the application (whether under section 209 or the inherent jurisdiction) would fail.

20.   Finally, I should just mention a submission by Mr Suen to the effect that the circumstances of this case were, from the Company’s point of view, somewhat unfortunate, in that had it not been for the refusal of the adjournment for which it had applied at the hearing of the petition, it might have been possible for the matter to have been settled without a winding up order having been made. With respect, it seems to me that in this regard, the Company was the author of its own misfortune, having had ample time and opportunity prior to the hearing of the petition to make arrangements for settlement with the Petitioner had it been minded to do so.

21.   I shall therefore dismiss both applications, and make an order nisi that the applicants are to pay the costs of the Executor and of the Official Receiver, such costs to be taxed on the party and party basis in default of agreement. The Official Receiver has indicated in his Second Report that his costs in relation to the application amount to HK$10,400, an amount which appears reasonable, and I shall therefore assess his costs in this amount.