KONG YUNG AND ANOTHER v. THE REGISTRAR OF COMPANIES AND ANOTHER

HCMP 709/2023

[2024] HKCFI 2315

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 709 OF 2023

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JUDGMENT

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Introduction

1.  This is the substantive hearing of the Applicants’ application by Originating Summons dated 9 May 2023 (“OS”) for:

(1)  An Order declaring the dissolution of Centre Rise Trading Ltd (“Company”) on 10 October 2018 to have been void pursuant to section 290(1) Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32 (“Ordinance”).

(2)  An Order extending the deadline of the 2-year period within which the said Order could be made to the date of the Order to be made herein pursuant to section 290(1A) of the Ordinance.

(3)  The 2^nd Respondent (“Jong” and “Lam” individually and “R2” collectively) be reappointed as joint and several liquidators of the Company.

(4)  Various consequential orders, including in particular costs of the application be paid out of the Company’s assets.

2.  The application is supported inter alia by 2 affirmations of the 1^st Applicant (“Kong” “Kong 1” and “Kong 2”) respectively. Kong is a director of the 2^nd Applicant (“Yuetan”) and was a shareholder of the Company prior to its dissolution.

3.  The 1^st Respondent viz Registrar of Companies (“Registrar ”) had indicated in correspondence that it (i) adopted a neutral stance, (ii) had no comments on the orders sought in the OS, and (iii) had been excused from appearing at the hearing.

4.  R2 had explained in the Affirmation of Jong Yat Kit Victor (“Jong 1”) dated 18 July 2023 at para 39 that they also adopted a neutral stance to the present application, subject to the issue of their costs of the present application. The same is repeated in the letter dated 31 January 2024 in the next paragraph.

5.  In a letter dated 31 January 2024 from R2’s solicitors to this court, they inform this court that (i) Lam has retired and does not accept re-appointment as liquidator, (ii) Jong is agreeable to be re-appointed subject to agreement on funding - to this end, the Applicant and Jong had subsequently entered into a funding agreement on 8 February 2024 for initial funding up to HK$300,000 (“Funding Agreement”), and (iii) given the only issue disputed by R2 is on the costs of the OS, R2 asks for their attendance at the hearing of the OS be excused.

6.  In Ms So’s skeleton, she submits Jong requests liberty to apply for directions on payment by the Applicants of his proper and reasonable expenses and remuneration in the performance of his duties and responsibilities in relation to the winding up of the Company to be incurred from the date of restoration onwards, citing Re Greatbo Investment Ltd unrep., HCMP 1676/2010, 5 October 2010 at [17]. But she immediately goes on to submit that at present, no order is required in this regard given the execution of the Funding Agreement.

7.  Be that as it may, given the above, Mr Wong submits and this court agrees that the present application is unopposed, subject to the incidence of R2’s costs of the application. On this issue of costs, R2’s position is that their costs should be payable by the Applicants in any event, to be taxed if not agreed. They also suggest the Applicants be entitled to recover such costs out of the assets of the Company.

8.  R2 having indicated they are neutral to the present application and Jong and the Applicants had already entered into the Funding Agreement, Ms So nevertheless goes on to submit, for reasons which can only go to costs as far as this court can comprehend, that:

(1)  The only major asset of the Company ie its 80% shareholding in Yuetan[1] had been subject to a freezing order of the Guangzhou Railway Transport Intermediate Court (“GZ Court”) made sometime in May 2007 as a result of legal actions taken by the Company’s sole creditor viz China Merchants Bank Company Limited[2] (“Bank”) in the PRC.

(2)  In turn, Yuetan holds properties and land use rights in the North Block of Yuetan Building in Beijing (“Yuetan Building”).

(3)  As early as 2014, R2 had already indicated their hands were tied as to any further realisation of the Company’s assets given, inter alia, the freezing order and the ongoing proceedings in the PRC between the Company and the Bank:

(4)  That situation subsisted till 2018, when R2 applied for and obtained an Order for their release and for the dissolution of the Company on 10 October 2018.

(5)  There has been no change in the circumstances since the Company’s dissolution in 2018.

(6)  In circumstances where R2 are owed over HK$4 million unpaid fees and the Company does not appear to have any realisable assets, if this court is persuaded that the Company should be revived, R2 submits the Applicants should be liable upfront for their costs, so that they will not be required to indefinitely fund the liquidation of the Company.

Brief background

9.  The following is taken largely from Kong 1 and the summary[3] in Mr Wong’s skeleton.

10.  The Company was incorporated in Hong Kong in January 1995. It used to be an investment holding company. The Company held and still holds 80% shareholdings in Yuetan.

11.  Yuetan was established in July 1995. It is a Sino-Foreign Cooperative Joint Venture in the PRC, and owned properties and land use rights in Yuetan Building in Beijing.

12.  In October 1997, the Bank advanced US$32,366,000 to the Company under a loan agreement. The loan agreement was secured by a mortgage executed in November 1997 by Yuetan in respect of 27,113 sq m of property and land use rights in the North Block of Yuetan Building.

13.  The Company defaulted under the loan agreement and proceedings were brought in Hong Kong. In July 2000, The Bank obtained Judgment against the Company for US$34 million odd plus interest.

14.  The Bank subsequently commenced an action against the Company and Yuetan in the Guangdong Higher People’s Court for monies advanced to the Company and the enforcement of the security provided by Yuetan.

15.  On 29 December 2000, a settlement agreement was reached among the Bank, the Company and Yuetan. The settlement agreement was embodied in the “Guangdong Mediation Decision” (民事调解书) of the Guangdong Higher People’s Court dated 3 January 2001.

16.  The Guangdong Mediation Decision contained inter alia these salient terms:

(1)  The Company acknowledged that it owed to the Bank a sum of US$32,366,000.00, interest of US$6,408,596.90, default interest of US$778,520.44 and compound interest of US$618,789.03. The Company and Yuetan undertook to pay the legal costs and asset preservation costs incurred by the Bank.

(2)  The Bank agreed that Yuetan could sell 10,435.02 sq m out of the 27,113 sq m of the mortgaged properties to China Great Wall Asset Management Corporation (“China Great Wall”) at a price of RMB 14,000.00 per sq m for RMB 146,090,280.00. The whole of the purchase price should be deposited into the Bank’s account, of which RMB 120 million would be used for the repayment of the Company’s debts. The balance would be used to repay the legal costs and preservation costs incurred by the Bank. Thereafter, upon examination and subject to approval by the Bank, a sum of RMB 25 million would be used to pay the relevant transaction costs of Yuetan.

(3)  A gross floor area of 14,535 sq m of the mortgaged properties valued at US$1,488.00 per sq m in the total sum of US$21,628,080.00 (“Set-Off Properties”) was to be set-off against the liabilities owed by the Company to the Bank. The rent from the Set-off Properties would belong to the Bank and Yuetan agreed to assist the Bank to collect the rent.

…

(5)  Yuetan undertook that within six months from the date on which the mediation agreement became operative, it would assign the Set-off Properties to the Bank, and would complete the formalities for obtaining the relevant housing ownership certificates, and would simultaneously deliver the housing ownership certificates of the remaining secured properties to the Bank for its safe custody.

(6)  Any outstanding principal and interest was to be repaid by the Company within two years of the date of the mediation agreement. Yuetan undertook to continue to secure such outstanding sums by the remaining mortgaged properties with a gross floor area of 2,237.29 sq m.

(7)  The Bank agreed to appoint Yuetan to sell the remaining mortgaged properties during the two years from the effective date of the mediation agreement. The price of the properties which Yuetan was entrusted to sell should not be lower than the price of the Set-off Properties. If there should be funds or properties remaining after Yuetan had used the proceeds to pay off all the indebtedness, such funds or properties would be regarded as remuneration for Yuetan.

17.  Also, on 29 December 2000, the Company issued a “Letter of Undertakings” (承诺函) to Yuetan (“Undertakings”). Para 1 of the Undertakings provides that upon Yuetan’s performance of clauses 2 and 3 of the settlement agreement, the Company shall transfer 80% shareholding of Yuetan held by it to Yuetan’s board for disposal.

18.  On 19 January 2001, Yuetan deposited to the Bank’s account RMB 138,785,766, being 95% of the purchase price of 10,435.02 sq m out of the 27,113 sq m of the properties mortgaged by Yuetan to the Bank received from China Great Wall. Out of this amount, RMB 120m was applied by the Bank to settle part of the Company’s indebtedness pursuant to clause 2 of Guangdong Mediation Decision.

19.  In 2002 and 2003, the Bank obtained orders to enforce the Guangdong Mediation Decision from the Guangdong Higher People’s Court, which appointed the Guangzhou Railway Court to execute the said decision. Since 25 May 2007, the 80% shareholding of Yuetan have been frozen by the Guangzhou Railway Court for the purported reason that the Company and Yuetan have not fully complied with their legal obligations (“Freezing Order”). The Freezing Order was most recently extended until 17 October 2026.

20.  As recorded in para 1 of the “Beijing Mediation Decision” dated 20 December 2007 in the context of proceedings subsequently brought by the Company against Yuetan in the Beijing Intermediate People’s Court,[4] the Company confirmed that Yuetan has performed its obligations under clauses 2 and 3 of the Guangdong Mediation Decision “in large part” (大部分合同义务). Para 2 of the Beijing Mediation Decision further reiterates the Company’s obligations under the Letter of Undertakings.

21.  On 15 January 2008, a premises ownership certificate was issued by the Beijing authorities showing that the Bank has become the legal owner of the Set-off Properties, substantively satisfying Yuetan’s obligation under clause 3 of the Guangdong Mediation Decision.

22.  After the winding up of the Company on 22 July 2008:

(1)  On 28 August 2009, Jong and Lam were appointed joint and several liquidators of the Company.

(2)  Previously, in January 2007, Yuetan’s claim against the Bank claiming compensation for the Bank’s breaches of the Guangdong Mediation Decision, as well as the Bank’s counterclaim against Yuetan for its breaches of the Guangdong Mediation Decision, was litigated through the Beijing Courts. The litigation culminated in the Supreme People Court’s decision in May 2015, dismissing both Yuetan’s claim and the Bank’s counterclaim. However, the relevant decision did not concern the status of Yuetan’s performance of its obligations under clauses 2 and 3 of the Guangdong Mediation Decision and the transfer of the 80% of Yuetan’s shares from the Company to Yuetan’s Board was not an issue.

(3)  On 9 July 2014, R2 notified the Company’s creditors and contributories of their intention to apply for their release as liquidators.

(4)  On 30 July 2014, solicitors for the Board of Directors of Yuetan viz Li & Partners gave notice of their intention to object on the ground that the aforesaid Supreme People Court’s decision was still pending.

(5)  By letter dated 22 August 2014 to Li & Partners, R2 stated that:-

“…Even if a decision in favour of Yuetan is made by the Supreme People Court of the PRC… the transfer of the [80% of Yuetan’s shares] will still be subject to the [Guangzhou Railway Court’s] decision in due course. Accordingly, the Company and its Liquidators no longer have any control over the Shares…Continuation of the Liquidation will result in further costs being incurred in a situation where there is no realisable asset in the Company to benefit the creditor and defray liquidation costs. Accordingly, the Liquidators have decided to proceed to close the Liquidation.”

(6)  On 25 May 2018, R2 applied to the Court for:

(a)  their release as liquidators of the Company under section 205 of the Ordinance on the bases that:

(i)  they had realised all the property of the Company to which they had access;

(ii)  all remaining assets of the Company ie the 80% of Yuetan shares were in the PRC which were subject to the Freezing Order in respect of which they had no control; and

(iii)  there were no surplus assets for distribution;

(b)  dissolution of the Company under section 227 of the Ordinance.

(7)  On 10 October 2018, the Court ordered the release of R2 and the dissolution of the Company.

Deliberation

23.  Given the application is unopposed, this court’s deliberation shall be brief.

24.  Sections 290(1) and (1A) of the Ordinance provide:

“(1) Subject to subsection 1(A), in the case of a company which has been dissolved under section 226A, 227, 239 or 248, the court may at any time within 2 years of the date of the dissolution, on an application being made for the purpose by the liquidator of the company or by any other person who appears to the court to be interested, make an order, upon such terms as the court thinks fit, declaring the dissolution to have been void, and thereupon such proceedings may be taken as might have been taken if the company had not been dissolved.

(1A) The liquidator of the company or other person who appears to the court to be interested may at any time apply to extend the period of 2 years referred to in subsection (1) and the court may so extend, on such terms and conditions as seem to it just and expedient, if it is satisfied that there are exceptional circumstances justifying the extension.”

25.  The power under s 290(1) is discretionary and the court’s discretion is unfettered. However, while the section appears to confer an unrestricted discretion on the court, the judicial exercise of any statutory discretion is impliedly limited to the purposes for which it is conferred: Stanhope Pension Trust Ltd v Registrar of Companies [1994] BCC 84, 87A (Hoffmann LJ). His Lordship then held that ordinarily the purposes of the English equivalent of s 290(1) were to enable the liquidator to distribute an overlooked asset or to enable a creditor to make a claim which he has not previously made.

26.  In re Matrix Industries Limited [2004] 1 HKLRD 44 at [47], Kwan J (as she then was) held that the purpose of s 290(1) is not limited to the two identified by Hoffmann LJ. As an example, the learned Judge cited Re Oakleague Ltd [1995] 2 BCLC 624 where Robert Walker J held that the provision should not be limited to a situation in which a liquidator was quite unaware of an asset belonging to a company, and that it is apt to cover analogous situations such as where a liquidator was aware of an asset but unaware that the asset has any realisable value.

27.  As far as an applicant’s locus to make an application under section 290(1) as “any other person who appears to the court to be interested” is concerned, he must be able to show a sufficient pecuniary or proprietary interest in the restoration of the company. Although his pecuniary or proprietary interest does not need to be firmly established or highly likely to prevail, the purported interest must not be “merely shadowy”: Re Central Pacific Enterprises Ltd [2021] 2 HKLRD 477 at [27] and [32].

28.  Mr Wong submits the application is brought on the basis that (i) R2 were unaware that the Company’s 80% shareholding in Yuetan had substantial realisable value, and (ii) Yuetan qua creditor could make a substantial claim against the Company that had not been previously made.

29.  For the present purpose, it is sufficient to focus on (ii) ie Yuetan could make a substantial claim against the Company that had not been previously made, which is one of the purposes for which the statutory discretion under section 290 is conferred: Stanhope Pension Trust Ltd.

30.  Mr Wong submits it is arguable that Yuetan has complied with clauses 2 and 3 of the Guangdong Mediation Decision. In this regard, the Applicants rely on 2 documents.

31.  First, as recorded in para 1 of the Beijing Mediation Decision dated 20 December 2007, the Company confirmed that Yuetan had performed its obligations under clauses 2 and 3 of the Guangdong Mediation Decision “in large part” (大部分合同义务).

32.  Second, the Special Audit Report (专项审计报告) dated 5 July 2015 (“Audit Report”) issued by Beijing Henghao Certified Public Accountants Co Ltd (“Auditors”) on both the Company’s and Yuetan’s instructions. In the Audit Report, the Auditors opined on the performance status of the Guangdong Mediation Decision. The report concluded that, excluding the trivial sum of US$35,725.05 comprising default and compound interest up to 31 December 2000, Yuetan had repaid all outstanding loans owed by the Company to the Bank in the sum of US$40,136,181.32.

33.  Hence, under the Undertakings, the Company is prima facie obliged to transfer the 80% Yuetan shares to Yuetan’s board for disposal to reap their value.

34.  In this regard, it is estimated that the realisable value of the 80% Yuetan Shares is at least RMB 1,414,104,990, being the market value of Yuetan’s existing land rights in the Yuetan Building.

35.  In order to effect such a transfer, it is necessary for the Company to be revived because under PRC law, Yuetan and the Company have to enter into a written agreement to such effect before the transfer could be registered. This should be fairly obviously but Yuetan also has the support of the Legal Opinion issued by Beijing Jincheng Tongda & Neal Law Firm (“Firm”) dated 14 June 2023 (“Opinion”).

36.  Further, even if the Auditors’ opinion that Yuetan had repaid all outstanding loans owed by the Company to the Bank is for whatever reason disputed, the precise amount of any outstanding liabilities could be ascertained once the Company is revived.

37.  As for the Freezing Order, as identified in the Opinion, at pp. 2-4 which is undisputed, there are various ways by which the Company and/or Yuetan may challenge or determine the Guangzhou Railway Court’s proceedings enforcing the Guangdong Mediation Decision, including:-

(a)  complaining to a higher court in the PRC;

(b)  reaching a tri-partite settlement with the Bank;

(c)  providing security for the outstanding indebteness; and/or

(d)  demonstrating to the PRC Court that all their obligations under the Guangdong Mediation Decision have been performed.

38.  In view of the above, the prospect of lifting the Freezing Order to facilitate the transfer of the 80% Yuetan Shares cannot be dismissed as shadowy.

39.  In these circumstances, this court is of the view that the Applicants have a sufficient pecuniary interest in reviving the Company so that the Yuetan Shares could be transferred by it to Yuetan’s board for disposal.

40.  Alternatively, even if for whatever reason, para 1 of the Undertakings is not triggered or engaged, Yuetan would still have a claim under PRC as a creditor against the Company to the extent that its shares had been mortgaged to the Bank and were realised in satisfaction of the debt owed to the Bank. This view is supported by the Opinion.

41.  On this basis, Yuetan would arguably have become a creditor of the Company to the extent of at least RMB 120 million, being the amount out of the purchase price received from China Great Wall for sale of some of the Mortgaged Properties plus US$21,628,080, the value of the Set-Off Properties. In other words, Yuetan has substantial debt claims against the Company which it has not previously made.

42.  In view of the Opinion, the prospects of the Company meeting Yuetan’s claims out of the realisable value of Yuetan’s shares upon lifting the Freezing Order could also not be dismissed as shadowy.

43.  The next question is whether this court should exercise its discretion under section 290(1A) to extend the 2-year period.

44.  In compliance with this Court’s direction on 27 February 2024, Kong had made an 3^rd affirmation dated 13 March 2024 in which he gave detailed explanation for the Applicants’ failure to invoke section 290 to revive the Company within the 2-year period. This court accepts the explanation. This court also accepts Mr Wong’s submission that no prejudice would be caused to anyone by the extension of time, especially R2 in light of their neutral stance.

45.  For these reasons, this court is prepared exercise its discretion under section 290(1A) to extend time to enable this application be made.

46.  As far as costs are concerned, this court has carefully considered the submissions of Mr Wong and Ms So in this regard. Having considered both, this court is of the view that (i) the Applicants should not have to bear the risk of non-recovery of their costs out of the Company’s assets, (ii) while the Applicants’ pecuniary interest in reviving the Company is not shadowy, it is not firmly established or highly likely to prevail either, (iii) while it was not the fault of the Applicants as such that the Company was dissolved, equally R2 are obviously not to blame for their decision to apply for release and dissolution given the circumstances back in 2018 – their grounds for doing so and their stance was endorsed by the Court, (iv) R2 ought not be out of pocket for their participation in these proceedings given that all they have done is to assist the Court in light of the somewhat unusual features of this case.

47.  Jong’s potential request for further funding after the initial HK$300,000 is depleted need not involve the Court. If no further funding is forthcoming, Jong will know what to do – presumably, he will stop working on the case. Liberty to apply is redundant.

Disposition and costs order

48.  This court hereby makes the following Orders:

(1)  The period of 2 years referred to in section 290(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“Ordinance”) be extended to the date of this Order.

(2)  The dissolution of Centre Rise Trading Limited (中升貿易有限公司)(Business Registration No. 18919718) (“Company”) be declared to have been void pursuant to section 290(1) of the Ordinance.

(3)  JONG YAT KIT VICTOR, c/o PricewaterhouseCoopers of 22/F, Prince's Building, Central, Hong Kong be re-appointed as liquidator of the Company (“Liquidator”).

(4)  LAM HOK CHUNG RAINIER , c/o 3802-06, 38/F, One Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong be released and discharged as liquidator of the Company.

(5)  A sealed copy of this Order be delivered by the Applicants to the Registrar of Companies for registration of the Company within 7 days of the date of this Order pursuant to section 290(2) of the Ordinance.

(6)  The Applicants shall cause the Liquidator to file all outstanding liquidator’s statements with the Registrar of Companies pursuant to section 284 of the Ordinance within 180 days of the date of this Order.

(7)  The Applicants shall cause the Company to change its company name in Chinese and file with the Registrar of Companies a Notice of Change of Company Name (Form NNC2) within 28 days from the date of this Order.

(8)  Upon delivery of this Order to the Companies Registry, if the name of the Company is the same as or, in the opinion of the Registrar of Companies, too like a name appearing at the time in the index of company names maintained by the Registrar of Companies, the Applicants shall cause the name of the Company to be changed within 30 days of the notice that may be issued by the Registrar of Companies directing the Company to change its name.

(9)  The Applicants shall pay the costs of the Registrar of Companies in the sum of HK$5,000, being the agreed costs of this application in lieu of taxation within 7 days from the date of this Order.

(10)  The 2^nd Respondents’ costs should be payable by the Applicants in any event, to be taxed if not agreed; and the Applicants be entitled to recover such costs out of the assets of the Company.