TSOI KWONG SHI v. GUO XIN AND ANOTHER

HCCW 227/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 227 OF 2015

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D E C I S I O N

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1.  This is the 2^nd respondent’s (“AFM”) application filed on 11 August 2015 for a validation order pursuant to s 182 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”).

2.  This application is necessary by reason of the Petition presented by the petitioner (“Tsoi”) to have AFM wound-up under s 177(1)(d) and (f) of the Ordinance (“Petition”).

3.  AFM was founded in 2012 by the 1^st respondent (“Guo”) with the aim of developing it into a multimedia group.  Gou is currently 1 of the directors of AFM and is responsible for the operation and management of that company. 

4.  In 2014, Tsoi was interested in getting involved with AFM.  In due course, he became a shareholder of that company, having acquired 40% of the shares in it from Guo.  After the acquisition, Gou has been holding 60% of the shares in AFM.  In addition to becoming a shareholder, Tsoi became a director of AFM. 

5.  It is common ground that Tsoi had transferred a total sum of HK$10.2 million (“Sum”) to AFM when he became a shareholder and director of that company.  However, the parties are in dispute whether the Sum was a loan (alleged by Tsoi) or an injection of capital by Tsoi as a condition for becoming a shareholder and director of AFM (contended by the respondents). After the relationship between Tsoi and Guo turned sour in the middle of this year, Tsoi demanded the repayment of the Sum, followed by the Petition filed on 13 July 2015.

6.  It is fair to say that the primary case contained in the Petition is that AFM is unable to pay its debts (s 177(1)(d)).  I say so because if the alleged loan is in fact a capital injection, it will take much wind out of the just and equitable ground complaint (s 177(1)(f)). 

7.  For obvious reasons, the court normally endeavours to deal with a s 182 application without delay.  In this case, AFM has an operating business and there are employees and contractors to be paid.

8.  I need to say a few words about the practical difficulties for the court in trying to deal with the present application. First of all, this is a 30 minute hearing, which is hopelessly inadequate for a contested application.  It must not be overlooked that the court normally has very little preparation time for a 30 minute application listed at 9:30 am. 

9.  Secondly, AFM is seeking to obtain the validation order at this hearing, and has deployed before the court its arguments in full set out in a 13-page skeleton submissions with 8 supporting authorities.  It is therefore surprising, to say the least, that no hearing bundle has been provided for this application.  It defies common sense that those responsible have not seen fit to try to assist the court with such basic necessity. 

10.  Turning to the merits of this application.  The applicable principles of law are fairly well-established.  They have been succinctly stated recently by Madam Justice Au-Yeung in Hui Wah Chuen v Siu Kwok Sun & Anr, HCCW 318/2014, unrep, 29 May 2015, §§3-9.

11.  The key dispute here is whether AFM is solvent. There is no dispute that it has over HK$5 million sitting in its bank account. If not for the alleged loan of Tsoi, there can be no dispute that AFM is solvent. 

12.  In these circumstances, the court must do its best to form at least a very provisional view on the merits of the alleged loan.  Otherwise, AFM may be destroyed on the strength of an untested allegation by Tsoi.  Mr Fan, who appears for Tsoi, agrees with this approach. I have examined the evidence filed in the Petition and, for 2 reasons, I am not convinced on the strength of Tsoi’s case.  Firstly, there are some minutes of conferences, albeit alleged by Tsoi to be fabrications, which support the version of events put forward by Gou.  Secondly, and perhaps more importantly, it is inherently likely that Tsoi had to provide something in return for becoming a shareholder and director of AFM. 

13.  Once the court takes the view that AFM is a solvent company, the onus is on Tsoi to demonstrate that the disposition of AFM’s property is likely to injure it or damage the interest of its unsecured creditors.  I am not satisfied that either case has been made out by him. 

14.  In respect of Tsoi’s allegations about the lack of information concerning AFM’s books and accounts and the improper expenditure by Guo, those problems can be alleviated to a considerable extent by the monthly provision by AFM to Tsoi of a brief statement of accounts which summarises the expenses and payments of AFM (see Chan Mei Chun v K & A International Co Ltd & Anr, HCCW 317/2013, unrep, 27 November 2013, §7).  In addition, AFM can be required to obtain, where feasible, receipts for all its expenses.  Further, Mr Chan, appearing for AFM, has agreed to provide an affirmation from Gou to verify the fact that, apart from the payment of salaries, he has no personal benefit in any of the expenses approved under this application. 

15.  Finally, in respect of Tsoi’s proposal that this application be adjourned for argument with 1 day reserved and that directions be given for the filing of evidence by Tsoi to oppose this application, this would turn the application into a full blown satellite litigation.  I see no justification for agreeing to the proposal.  Validation order application should not normally be approached as an adversarial application : see Re Emagist Entertainment Ltd [2012] 5 HKLRD 703, §7 and Chan Mei Chun, supra, §6. 

16.  Tsoi is represented by counsel, who has put before the court a 16-page skeleton submissions setting out all the conceivable arguments.  It is right to say that the evidence in support of this application was only served on Tsoi on 21 August 2015.  This is very unfortunate because such delay is not conducive to speedy resolution of this application. 

17.  However, the need for this application had been ventilated in solicitors’ correspondence prior to the filing of the same.  Some information regarding the monthly expenses of AFM had been supplied to Tsoi in the correspondence.  Therefore, it cannot be said that Tsoi is taken by surprise by this application.  Further, Mr Fan has been given the opportunity to inform the court as to what evidence Tsoi would like to file in opposition to this application.  I am satisfied that there is nothing which may justify the delay in the resolution of these matters.  In particular, the court does not act as an auditor in examining the expenses of AFM. 

18.  For these reasons, I allow the validation order application and I shall hear counsel on the precise terms of the order and on costs. 

[Submissions as to costs of the application]

19.  As indicated in this decision, Tsoi has taken an unreasonable stance in respect of this application, which is inconsistence with the applicable law.  There was no attempt by him to try to reach a reasonable agreement with AFM to avoid this application.  His position is such that AFM should cease operation immediately so that its assets can be preserved to repay his alleged debt.  He has vigorous contested this application and failed.  I see no reason not to deal with costs in the usual manner in a contentious application.

20.  I order that the costs of this application be borne by Tsoi, to be taxed if not agreed.