eSCHOOL LTD v. ePLAZA LTD

HCCW 1122/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1122 OF 2002

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J U D G M E N T

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1. This is a petition presented by eSchool Limited ("the petitioner") against ePlaza Limited ("the Company") on the ground that the Company is unable to pay its debts, under section 177(1)(d) of the Companies Ordinance, Cap. 32. The debts alleged in the amended petition owed to the petitioner are in the sums of HK$7,620.00 and HK$535,304.60.

2. The petitioner served two demands for the above debts on the Company on 14 September 2002 and 8 October 2002. The petition was presented on 7 October 2002 and amended on 20 January 2003.

3. I should say right away that insofar as reliance is sought to be placed on the demand served on the Company on 8 October 2002 for HK$535,304.60 to invoke the deeming provision under section 178(1)(a) of Cap. 32, this is not in order as the service of the second demand was one day after the presentation of the petition. However, the petitioner can still rely on this debt, if it is established that this debt was indeed due to the petitioner from the Company, to give the petitioner the locus of a creditor and to prove to the satisfaction of the court under section 178(1)(c) that the Company is unable to pay its debts.

4. The Company has opposed the petition on these grounds:

(1) the deeming provision in section 178(1)(a) cannot be invoked as the debts in the amended petition in the total sum of HK$542,924.60 were not due at the material time when the demands were served on the Company under that provision;

(2) the petitioner has failed to discharge its burden under section 178(1)(c) to establish that the Company was unable to pay its debts when the petition was filed.

5. Accordingly, it was contended that the petitioner had no locus to present the petition on 7 October 2002.

6. The debts in the petition arose in this way.

7. Since 1999, the Company has been carrying on business as an online shopping platform provider. Users of the Company's platform can offer goods and services to customers without actually having a shop. The Company also provides a "payment gateway" service, by which users of the Company's platform can accept online credit card payment through the Company. In essence, the Company serves as a middleman between the users of its platform and the buyers of the goods and services.

8. The petitioner carries on business as a provider of online training courses and maintains a website.

9. In January 2001, the petitioner engaged the service of the Company as its shopping platform provider and signed an agreement in Chinese dated 30 January 2001 ("the Agreement") by which the petitioner agreed to use the Company's platform and the payment gateway service. No English translation of the Agreement was provided. The material terms regarding payment were given in English in the 1st affirmation of Tso Yiu Chuen ("Mr Tso") filed on behalf of the Company on 26 November 2002 and there is no dispute as to the English translation of these material provisions which read as follows:

" Retention money: 0%

Payment of non-retained sum: 3 days after tendering of proof that delivery has been duly effected"

10. My only observation about this translation is that "3 days" should read "3 working days".

11. During February 2001 to May 2002, the petitioner used the platform of the Company for its online training courses and issued invoices to the Company from time to time for the transactions carried out. The proofs submitted by the petitioner with the invoices were documents headed "Payment details summary for normal user", stating among other things the identity of the student and the class enrolled, or documents headed "Transaction Statement" with similar information. It is common ground that only a very small volume of business was conducted by the petitioner during this period and the Company was prepared to release to the petitioner payments received from the students who enrolled in the petitioner's courses and had settled by credit cards, and did not ask the petitioner to provide any further information as "proof that delivery [of services] has been duly effected" before payment was made to the petitioner.

12. It is the petitioner's stance that the evidence it has provided thus far constituted satisfactory evidence of due delivery of services, whereas the Company's position is that it had merely granted an indulgence to the petitioner in view of the small amounts involved in the transactions from February 2001 to May 2002.

13. All was well until the petitioner presented an invoice for payment dated 27 August 2002 for HK$7,620.00, which is the subject of the 1st statutory demand.

14. The written response of the Company was an e-mail from Mr Tso to the petitioner dated 5 September 2002, stating that the Company preferred to follow the "original arrangement that the net transaction amount will be transferred to [the petitioner's] bank account after receiving evidence of completion of goods delivery and/or service provision". Mr Tso also offered a variation of the Agreement in paying an advance payment of 50% of the gross transaction amount on a number of conditions, including the following:

(1) the net transaction amount (the gross transaction amount less transaction fees and retention amount) would be transferred to the petitioner's bank account after 5 working days from the date of the transaction or the date of receiving a copy of the student's registration form, whichever was later;

(2) the transaction fee was to be increased retrospectively to 6.5% of the gross transaction amount for transactions from 1 July 2002 to 6 September 2002 and thereafter to 7% of the gross transaction amount;

(3) the retention amount would be 50% of the gross transaction amount and would be transferred to the petitioner's bank account after 5 working days from the day of receiving evidence of completion of goods delivery and/or service provision;

(4) a personal guarantee of the directors of the petitioner was required.

15. The petitioner did not accept the offer to vary the Agreement. On 6 September 2002, the petitioner sent 2 letters to the Company. In one letter, the petitioner stated that if the "overdue balance" of HK$7,620.00 was not paid in full within 7 days, legal action would be taken against the Company for recovery. In the other letter, the petitioner gave one month's notice to the Company for termination of the Agreement and requested the Company to forward the balance of transaction within 14 days after termination of the Agreement. I will return to the question of what contractual obligation was imposed on the Company regarding the payment of retention money upon termination of the Agreement on one month's notice.

16. The Company replied on 12 September 2002, stating that according to the Agreement the net transaction amount would be transferred to the petitioner after "3 working days from the date of receiving evidences [sic] for the satisfactory completion of goods delivery" and requested the petitioner to provide the required evidence as soon as possible to facilitate the process of the transaction settlement.

17. The petitioner consulted solicitors who issued a statutory demand on the petitioner's behalf for HK$7,620.00 and effected service of the demand on the Company on 14 September 2002, no doubt taking the stance that the proof tendered by the petitioner with the invoice for this amount would have complied with the requirement in the Agreement that "delivery [of service] has been duly effected".

18. On 18 September 2002, the Company wrote to the petitioner again requesting to be supplied with evidence for the "satisfactory completion of goods delivery" as soon as possible.

19. On 20 September 2002, the petitioner replied to the letters of the Company dated 12 and 18 September 2002 and referred to its "normal practice of business" to the effect that upon issuing its invoice to the Company, the latter should make payment. It is clear from this statement that the petitioner considered that no further proof was required that the delivery of service had been "duly effected". By this letter, the petitioner also enclosed 2 further invoices to the Company dated 17 and 18 September 2002 for HK$496,249.60 and HK$39,055.00 respectively, making a total of HK$535,304.60. The petitioner requested the Company to settle the two invoices within 3 working days.

20. The Company replied on 3 October 2002, asking the petitioner to explain how the 3 invoices could be regarded as evidence for "satisfactory completion" of the services rendered by the petitioner to its customers. On the same day, the solicitors for the Company wrote to the petitioner's solicitors in response to the statutory demand of 14 September 2002, stating that under the Agreement, the petitioner was required to submit proof of "satisfactory delivery of goods" before the Company was to arrange payment and as the petitioner had failed and refused to submit such proof, the petitioner was not entitled to any payment. The Company's solicitors also gave notice to the petitioner's solicitors if the petitioner should bring winding-up proceedings before establishing its claim against the Company in ordinary litigation, the Company would seek indemnity costs against the petitioner.

21. Before turning to consider the Company's grounds of opposition as outlined above, it would be appropriate to set out matters now no longer in dispute or cannot be seriously disputed.

22. Firstly, it is accepted by the Company that it had received payment from the petitioner's customers through the payment gateway service in the total sum of HK$542,924.60, being the subject of the three invoices issued by the petitioner to the Company in August and September 2002 and the 2 statutory demands served on the Company.

23. Secondly, although it was raised in the 1st affirmation of Mr Tso that the 3 Putonghua courses in the invoice in August 2002 were not listed on the petitioner's website and were not courses offered by the petitioner, it cannot seriously be disputed that these courses were listed in the petitioner's website with hyperlink. The relevant courses were provided by the petitioner in conjunction with the Hong Kong Putonghua Vocational School. I would add that insofar as the Putonghua courses in the invoices in September 2002 are concerned, there can also be no serious dispute that these courses were offered by the petitioner and the Putonghua school.

24. Thirdly, none of the students who had enrolled in these courses between August to October 2002 had made any complaints to the petitioner that the courses were not properly conducted or had sought refund of the course fees for that reason.

25. I turn to the Company's contention. It is alleged that the Company is justified in not making payment to the petitioner of the funds received from the students who had enrolled in the courses offered until three working days after the Company has received evidence that each and every session in a particular course was concluded or completed. It was submitted by Mr Jimmie Ho on behalf of the Company that the contractual requirement of proof that "delivery has been duly effected" meant "completion of the courses".

26. I do not think one has to go so far. The onus on the Company is to show, at the time of the statutory demand, there was a bona fide and substantial dispute about the obligation of the Company to pay the invoice dated 27 August 2002. It is not necessary to establish positively in these proceedings that the Company's interpretation of the payment provision in the Agreement is correct in that due delivery should be equated with completion of the courses. At the time the statutory demand was served on the Company on 14 September 2002, the only proof tendered to the Company in respect of the invoice in August 2002, other than the invoice itself, was a document listing the classes in which the students had enrolled, the names of the credit card holders who had made payment, the payment date and the price.

27. Mr Simon Yip, who appeared for the petitioner, submitted that as there is evidence that students had enrolled and there is evidence that course fees are non-refundable except when a course is over subscribed or cancelled, the above documents should constitute satisfactory evidence that the delivery of the service has been "duly effected".

28. In my view, even if it is not necessary to show that the courses were completed as contended by the Company, and it would only be necessary to show that the student is permitted to participate in the course he enrolled as contended by the petitioner, it would still be necessary or at least seriously arguable that it would be necessary to prove that the course had commenced, so that the permission conferred on the student to participate in the course had materialised. This, I think, is the least that could be said about the words "duly effected" in the contractual term for payment.

29. No proof was adduced by the petitioner to show that the courses had commenced, let alone completed, until the 3rd affirmation of Pang Chor Fu ("Mr Pang") filed on behalf of the Company on 17 February 2003. I am satisfied as there is a genuine and substantial dispute of the Company's obligation to pay the invoice in August 2002, the petitioner cannot rely on the statutory demand served on 14 September 2002.

30. I ought also to mention that I have not overlooked the previous payments made by the Company notwithstanding insufficient proof was furnished. I have reservations if the parties had varied the payment terms of the Agreement by conduct (which would require consideration), as the petitioner would appear to suggest, or whether the Company had merely waived compliance with the provision for small amounts and so was at liberty to insist on proper compliance with the payment provision upon giving notice to the petitioner.

31. Insofar as reliance is placed on the deeming provision in section 178(1)(a) is concerned, the petition must fail. That leaves the question whether the petitioner can discharge the burden under section 178(1)(c) and establish to the satisfaction of the court that the Company is unable to pay its debts. Under this provision, the court shall take into account the contingent and prospective liabilities of the Company.

32. After the petition was presented, and when the 3rd affirmation of Mr Pang was filed on behalf of the Company in February 2003, evidence was adduced that the courses offered have duly commenced and some of them have been completed. By the time the 4th affirmation of Mr Pang was filed on 20 March 2003, he stated that 20 out of the 28 courses have been duly completed and the remaining courses would be completed in April and May 2003. Even if the Company were right in its interpretation of the Agreement, it would seem that the obligation to pay the petitioner the sums which the Company admitted it has received from the students would have arisen after the presentation of the petition. No payment has been made of the debts which by now would appear to be due. Is this satisfactory proof that the Company is unable to pay its debts?

33. I should mention first that I do not agree with Mr Ho's submission that once the petition has been presented, it would be reasonable for the Company to withhold making payment to the petitioner. If another debt is indisputably due, although there is a genuine dispute about the petitioning debt, the presentation of a winding up petition would not give the debtor company a valid ground to withhold or refuse payment of a debt not in dispute.

34. But let me go back to the question whether no payment should be regarded as inability to make payment in this situation. In some instances, even if there is no evidence as to the solvency of a company or if there is evidence of apparent solvency, the persistent failure to pay a debt that is indisputably due would suggest inability to pay (Mann v. Goldstein [1968] 1 WLR 1091 at 1069C to D; Cornhill Insurance plc v. Improvement Services Ltd [1986] 1 WLR 114).

35. On the evidence before me, I am not prepared to draw the inference of inability to pay. I am not satisfied there was persistent failure to pay. The debt, as I have found, was seriously disputed when the invoices and the 2 statutory demands were issued. Proof was not provided by the petitioner that the courses had commenced and were completed in some instances until well after the proceedings were commenced. It may be that the petitioner would have good grounds to found another petition against the Company if it should fail or refuse to pay the debts which would appear to be due by now, but I am not prepared to wind up the Company on the ground of inability to pay its debt on the present petition.

36. As for the relatively small amount of HK$27,868.00 being the sum which certain customers had overpaid to the Company and which the petitioner had repaid these customers so the amount could not be said to be in dispute, it was not until the 3rd affirmation of Mr Pang was filed in February 2003 that evidence was adduced of such repayment by the petitioner. I am not prepared to draw the inference of inability to pay arising out of this failure to pay a relatively small amount, when the Company and the petitioner have been engaged in a serious dispute over a much larger amount.

37. I also reject the petitioner's submission that there was any admission of liability on the part of the Company to pay 50% of the transaction amount. That is just not the effect of the e-mail of the Company to the petitioner dated 5 September 2002.

38. I come to the contractual obligation to pay the retention money upon termination of the Agreement. As mentioned earlier, the petitioner served one month's notice to terminate the Agreement on 6 September 2002, as it was entitled to do under the provisions of the Agreement. Counsel for the Company submitted that the Company was obliged to pay all the non-retention sum of HK$542,924.60 within 14 days of the termination taking effect, i.e. on 20 October 2002, shortly after the petition was presented. If this submission is right, this would be a prospective or contingent liability of the Company that the court could properly take into account under section 178(1)(c).

39. However, I do not think this submission of counsel for the Company is correct, as that was not what was provided in the terms of the Agreement. It is regrettable that no English translation was provided and counsel did not seem to have read the Chinese document carefully. On the first page of the Agreement, under the heading of "retention money", it was stated that this was "0%" of the transaction amount and under the heading of "period of retention", it was stated that this was "0 days". Hence, there was no retention money according to the terms of the Agreement and there was no retention period. The second page of the Agreement provided in clause (i) that upon termination of the Agreement, the Company is obliged to return the retention money to the petitioner 14 days of the expiry of the retention period. This provision does not deal with any "non-retention sum" as understood by the Company's counsel. I do not think reliance can be placed on clause (i) to found an obligation to pay the amount of HK$542,924.60 to the petitioner.

40. For completeness sake, I should mention that if I had been of the view that there is contingent or prospective liability of the Company that is not in dispute, the petitioner would have locus to present the petition as a contingent or prospective creditor under section 179(1), provided that the requirements in proviso (c) of section 179 are met, namely, that the court shall not give a hearing to a winding up petition presented by a contingent or prospective creditor until such security for costs has been given as the court thinks reasonable, and until a prima facie case for winding up has been established to the satisfaction of the court.

41. It is not necessary to consider this provision in the present situation.

42. For the above reasons, as I am not satisfied the petitioner has proved that the Company is unable to pay its debts, whether under section 178(1)(a) or (c), I must dismiss the petition.

43. The Company's costs in this petition are to be paid by the petitioner, to be taxed if not agreed.