RE PO WING (INTERNATIONAL) CONSTRUCTION LTD

HCCW 414/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 414 OF 2005

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D E C I S I O N

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1.  I have before me two applications.  The first application is an inter partes summons issued by the petitioning creditor and contributory, Chow Yan Wei, on 2 June 2005 for provisional liquidators to be appointed to Po Wing (International) Construction Limited (“the Company”).  The second summons was issued by a contributory, Chan Cheung, the 2^nd respondent herein, on 30 June 2005 for a validation order to be made under section 182 of the Companies Ordinance, Cap. 32, in respect of various payments set out in three schedules in the ordinary course of business of the Company.

2.  The petitioner seeks to wind up the Company on two bases, that the Company is unable to pay its debts under section 177(1)(d) of Cap. 32 and on the just and equitable ground under section 177(1)(f).

3.  For the purpose of its application for appointment of provisional liquidators, the petitioner will only rely on section 177(1)(d) to establish that he has a good prima facie case that a winding-up order would be made, although he also seeks to rely on matters relevant under section 177(1)(f) to the extent that they support his case that it is just and convenient for provisional liquidators to be appointed.

4.  The relevant background matters may be stated as follows.

5.  The Company was incorporated on 1 June 2001 with a nominal paid up capital of $2 divided into two shares, one held by the petitioner and the other by the 2^nd respondent.  They were and are the only directors of the Company.  The business of the Company is to carry out civil engineering contracts.  Since incorporation, the Company has only been involved in two government contracts, DC/98/11 and DC/98/04.  I will refer to the latter as “the Sub-contract”.  In both contracts, the Company was the principal sub-contractor to the main contractor, Chiu Hing Construction and Transportation Company Limited (“Chiu Hing”), and was engaged to carry out works on main drainage channels.  The Company is still engaged in carrying out variation orders and remedial works for the Sub-contract.

6.  The petitioner used to be the contract manager of the Sub-contract and the 2^nd respondent has been responsible for supervision of works under the Sub-contract including monitoring works and site labour.

7.  When the Company was set up, it was verbally agreed that the petitioner and the 2^nd respondent would contribute equally to the working capital.  The petitioner said that it was agreed their contribution would be director’s loans, at an initial sum of $500,000 each, up to a maximum of $2.5 million.  Later, the amount of working capital proved to be insufficient, and the petitioner wanted to withdraw from the Sub-contract but the 2^nd respondent was not minded to do so.  In February or March 2002, it was further agreed verbally that the Company would not surrender the Sub-contract to Chiu Hing but the 2^nd respondent would be personally responsible to fund the Sub-contract on his own and if the Company should end up with a loss on the Sub-contract or make insufficient profits to repay the petitioner’s loans to the Company in full, the 2^nd respondent agreed to indemnify the petitioner for his loss.

8.  The 2^nd respondent denied the above.  He said the oral agreement was that each shareholder was to contribute equally to meet the expenses of the Company without limit, and although contributions were recorded as director’s loans in the accounts of the Company, it was their understanding that they would only be repaid if there should be a net profit at the completion of a project by the Company.

9.  It is not in dispute that the petitioner had in fact injected funds to the Company in excess of $2.5 million.  By 31 March 2004, his contribution was in the region of $3.9 million.

10.  Disputes between the parties arose since January 2004 when the petitioner refused to inject any further funds into the Company.

11.  The petitioner claimed that since then he was gradually excluded from the management of the Company.  A very important part of his complaints is that he was kept in the dark of the financial position of the Company as the 2^nd respondent had failed to prepare up-to-date accounts and failed to answer queries raised by the Company’s auditors in early 2005, so the audited accounts could not be finalized.  Up to present, the latest audited accounts prepared were for the year ended 31 March 2003.

12.  The petitioner also claimed that the 2^nd respondent had misappropriated funds of the Company for the benefit of Po Wing H. P. Drainpipe and Construction Company Limited (“Po Wing HP”), which is owned by the 2^nd respondent and members of his family.  The petitioner further alleged that his signature to a cheque and six withdrawal by auto credit from the Company’s bank account had been forged, and suspected that part of the funds had been used to settle expenses not related to the Company.  He had notified the bank of the forged signatures by letter in November 2004.

13.  During October 2004 to December 2004, there were negotiations between the petitioner and the 2^nd respondent to buy out the share of each other, but the negotiations broke down.

14.  On 11 April 2005, the petitioner served a demand on the Company for $4,213,007.55, being the amount he has injected into the Company as director’s loans.

15.  The 2^nd respondent countered with a letter on 18 April 2005 in which he alleged that he had contributed $22 million odd to the Company as capital and that the petitioner is liable to contribute an equal amount.  The 2^nd respondent demanded the petitioner to pay $17,997,592.45.

16.  On 2 June 2005, the petitioner presented this petition, on the two bases mentioned above.

17.  I first consider if the petitioner has established a good prima facie case that the Company would be wound up on the ground it is unable to pay its debts.

18.  On the available evidence, it would seem that the 2^nd respondent has accepted tacitly that the petitioner had injected $4.2 million odd to the Company.  This is also consistent with the audited accounts for the year ended March 2003.

19.  The 2^nd respondent’s only contention is that the petitioner is required to contribute much more, and that the amount injected was not to be treated as a loan but a contribution to capital and the shareholders would not receive their return unless and until the Company has made a profit.

20.  As against the 2^nd respondent’s contention, Mr Maurellet for the petitioner made these points:

(1)	The 2nd respondent’s allegation does not sit well with the statement in the accounts that these contributions were loans to the Company.
(2)	The 2nd respondent’s allegation that he had contributed $22 million odd is not supported by primary evidence.  The 2nd respondent has only produced 2 schedules setting out the payments purportedly made by him and by Po Wing HP, there was no audit confirmation to back up his assertion.
(3)	The petitioner was repaid by the Company $1.9 million on 31 May 2003 and $400,000 on 31 July 2003.  This is not consistent with the 2nd respondent’s allegation that the contribution was of a capital nature, and that there would be no repayment until the Company has made a profit in a project.

There are all valid points.

21.  Mr Maurellet further submitted that even if there were an oral agreement between the petitioner and the 2^nd respondent to contribute to the Company as alleged, at most the petitioner would have breached his agreement with the 2^nd respondent.  This does not affect the petitioner’s entitlement to recover the money lent to the Company.

22.  I turn to consider the financial position of the Company on the available evidence.  The only audited accounts placed before me are the audited accounts for the year ended 31 March 2003.  Other than that, the 2^nd respondent produced in his affirmation made yesterday so-called internal management accounts for the period of 1 October 2004 to 30 June 2005.  These accounts do not give a complete picture of the financial position of the Company for the period they purported to cover.

23.  No accounts have been produced for the period from 1 April 2003 to 30 September 2004.  It would seem that these accounts have not been prepared.  I note that it is a period in which complaints are made by the petitioner and disputes had arisen.

24.  In the auditors’ report for the period ended 31 March 2003, it was stated that there was fundamental uncertainty whether the Company could trade on a going concern basis, as the validity of the Company would depend on its obtaining future funding by the shareholders.  The audited accounts showed an operating loss before tax for the year of $9.8 million odd, net current liabilities of $11.2 million odd, net liabilities of $8.6 million odd, and a capital deficiency of $9.8 million odd.  The amount due to directors was $4.7 million odd.

25.  With the help of the Company’s auditors, the petitioner tried to project the present financial position of the Company based on the information available to him.  He estimated the assets at $8.7 million odd, made up of a property owned by the Company, motor vehicles, plant and machinery and receivables of about $5 million; the receivables are made up of the retention sum of the Sub-contract of $2.1 million odd and $3 million being the estimated total value of the work done that is likely to exceed the contract sum of the Sub-contract.  As for the liabilities, the petitioner estimated liabilities to outside creditors at $7.2 million odd, liabilities to other sub-contractors at $2 million, director’s loans (on the assumption that the 2^nd respondent is owed $22.2 million odd as alleged) at $26.4 million.  The total estimated liabilities come up to $35.6 million.

26.  The 2^nd respondent has chosen not to place before the court the full picture of the present financial position of the Company.  I note that one of the 2^nd respondent’s daughters has been put in charge of the accounts since 2001.  The 2^nd respondent has not make any direct comments in his evidence on the petitioner’s projection of the Company’s present financial position.

27.  In the latest affirmation of the 2^nd respondent, he acknowledged that but for the fact that he and Po Wing HP have continued to inject funds into the Company, the Company would not have been able to pay its expenses.  He also admitted there is “very little chance of any recovery” for the Company.

28.  I have no difficulty in coming to the view on the available evidence that the Company is insolvent or must be deemed to be insolvent.

29.  I am satisfied that the petitioner has made out a good prima facie case that the Company is unable to pay its debts.

30.  I next consider if it is just and convenient to appoint provisional liquidators.

31.  The petitioner says there is a need for independent professionals to be appointed to monitor the receipts expected to be received for the Sub-contract in the estimated sum of $5 million and to monitor and verify the payments to be made to discharge legitimate expenses of the Company incurred in the Sub-contract.  The petitioner claims that he has lost all trust and confidence in the 2^nd respondent’s management of the Company’s affairs, and there is risk that the 2^nd respondent may cause payments to be made not related to the expenses of the Company or that unfair preference may be given to some creditors, such as Po Wing HP.  Provisional liquidators should also take charge of the books, records and other documents of the Company which the petitioner has not been able to have access to, to verify the progress of the Sub-contract.  It is feared that the equipment of the Company may be removed by unpaid creditors if provisional liquidators were not appointed to safeguard the assets.  Lastly, the provisional liquidators could also carry out investigation into the allegations of misappropriation of the Company funds.

32.  For some time, the petitioner has been unable to verify the amount and nature of payments and for this reason, he has refused to sign cheques drawn on the bank account of the Company, without proper supporting documents and explanation of the expenses incurred.  Because of the petitioner’s refusal to sign cheques, the 2^nd respondent has made an arrangement with Chiu Hing by which Chiu Hing was to pay expenses directly to sub-contractors, suppliers and other recipients, out of the interim payments received from the government.  Chiu Hing had paid out in this manner $9.4 million odd during October 2004 to June 2005, and still holds the sum of $717,277.54 for the Company.  No evidence from Chiu Hing has been filed by the respondents as to what Chiu Hing’s intention is as regards the amount it still holds.

33.  The petitioner’s concern whether payments were legitimately incurred and paid was due to, inter alia, the following matters:

(1)	The petitioner was denied access to the books and accounts of the Company.  To date no proper and up-to-date accounts have been furnished by the 2nd respondent, despite all the voluminous evidence he chose to file in opposition.
(2)	The petitioner is unable to visit the site office because of fear to his personal safety due to harassment of unpaid creditors.  He referred to an incident in January 2005 when he attended the site office and was harassed by a supplier and he had to make a report to the police.
(3)	The petitioner discovered in October 2004 that his signatures on some of the documents for the use of the bank had been forged.  For that he had written to the bank in November 2004 and made a report, somewhat belatedly, to the police in June 2005.
(4)	In January 2005 and February 2005, the Company’s auditors raised queries on the accounts for the year ended March 2004.  The 2nd respondent did not provide any answer to the auditors and as a result audited accounts cannot be prepared.  It was only when the auditors’ queries were repeated by the petitioner in his evidence in support of this application that the 2nd respondent has sought to answer to some extent these queries.
(5)	One of the queries raised by the auditors related to site labour being paid twice or even 3 times for daily work.  The 2nd respondent’s daughter sought to explain in her affirmation this was due to her inadvertence.  Her explanation is unsatisfactory and unconvincing.

34.  I have considered the 2^nd respondent’s evidence in answer to the petitioner’s allegations and the submissions made by Mr Simon Yip on the respondents’ behalf.  It is not possible to make any finding at this stage if all the petitioner’s allegations of misappropriation of funds are completely addressed by the 2^nd respondent’s evidence in answer.  However, I can say at this stage there is some basis for the petitioner’s concern.

35.  It would be appropriate to appoint provisional liquidators in this situation, to preserve the assets of the Company and maintain the status quo pending the resolution of the dispute.

36.  As for the choice of provisional liquidators, the 2^nd respondent has objected to the individuals proposed by the petitioner.  There is no evidence that the individuals sought to be appointed were directly involved with the negotiations on behalf of the petitioner for the purchase of the 2^nd respondent’s share.  Even if they were involved, I am not persuaded that they would have come into possession any information that may compromise their independence or impartiality in acting as provisional liquidators.

37.  I propose to appoint the individuals proposed by the petitioner as provisional liquidators.  A validation order would not be made as provisional liquidators are to be appointed.  Even if the application for validation order is made on its own, I am not minded to grant the application on the materials that the 2^nd respondent has placed before this court.

38.  It would appear on the available evidence that the Company is insolvent.  The accounts produced are incomplete.  I know nothing of the total liabilities of the Company.  The amounts sought to be paid in the three schedules annexed to the summons totalled $711,000 odd.  Schedules 2 and 3 are for expenses incurred in May 2005.  There is no application for a validation order of any payment of expenses of a similar nature to those in schedules 2 and 3 on a recurrent basis.

39.  A number of questions were raised by the petitioner on the payments sought to be validated in his 4^th affirmation.  There is no or no satisfactory answer to the questions raised, even with the latest affirmation of the 2^nd respondent.  So for the above reasons, I would have dismissed the application for a validation order on its own.

40.  The 2^nd respondent’s summons issued on 30 June 2005 is dismissed with costs to the petitioner in any event.  I will hear the parties on the terms of the order for appointment of provisional liquidators.