XCHRX IN RE ELITE ENTERPRISES LIMITED ("the Company")

HCCWU 622/96

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H E A D N O T E

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Petition to wind-up company on the ground that the company is unable to pay its debts. Where a company has an undisputed obligation to pay and fails to pay, the court can infer that it is unable to pay its debts. The rule of practice in the Companies Court is that the court will not allow a winding-up petition to be used for the purpose of deciding a bona fide dispute on substantial grounds. The rule only applies where the court is satisfied that the dispute is founded on substantial grounds. Held, court not satisfied that the company has a bona fide dispute on substantial grounds. The company ordered to be wound up.

HCCWU 622/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 622 OF 1996

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J U D G M E N T

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1. The Petitioner, Collins Industrial Corporation of the Philippines, seeks to wind up the Company, Elite Enterprise Limited (" the Company") on the ground that it is unable to pay its debts. Collins Industrial Corporation in fact was substituted as the Petitioner pursuant to an Order of Rogers J. made on 10th March 1997.

2. The matter first came before me for hearing on 5th and 6th May 1998. At that time, the Company was represented by counsel. On the second day of the hearing, I allowed an application by the Company made through its counsel to put in, at a late stage, evidence in the form of two further affirmations. I did this in the interests of justice. This necessitated an adjournment as the Petitioner had to be given an opportunity to respond to the additional evidence. The matter was resumed before me yesterday. The Company was unrepresented on this occasion as the Company's solicitors had come off the record in August 1998. No one appeared on behalf of the Company at the resumed hearing.

3. The petition is based on the ground that the Company is unable to pay its debts. In particular, the Petitioner relies on the fact that the Company has failed to pay it the sum of US$57,728.41 owing to it for goods sold and delivered by the Petitioner under eight contracts placed by the Company with the Petitioner. The Company's opposition to the making of a winding-up order is on the basis that it disputes that it is indebted to the Petitioner.

4. As evidence of inability to pay its debts, the Petitioner also relies on the fact that the Company has failed to pay other creditors. For instance, there was a judgment in favour of Banque Nationale de Paris in HCA A10630 of 1996 where judgment was entered against, inter alia, the Company for the sums of US$214,787.61 and HK$5,489,886.42 with interest and costs.

5. Apart from this, there were other actions instituted against, inter alia, the Company. Hang Sang Bank Limited in HCA A12137 of 1996 claimed payment of the sums of HK$2,974,477.53, HK$12,610,000.00 and US$399,888.46 or the Hong Kong dollar equivalent with interest and costs. Also, Eleda Development Co. commenced proceedings against the Company on 24th September 1996 in HCA A10923 of 1996 claiming payment of US$30,502.80.

6. Mr. Burns, counsel for the Petitioner, referred me to Cornhill Insurance Plc. v. Improvement Services Ltd. and Others [1986] 1 WLR 114, a decision of Harman J. It was held by Harman J. that where a company was under an undisputed obligation to pay a specified sum and failed to do so, it could be inferred that it was unable to do so.

7. I would observe that in respect of one of the other creditors of the Company, namely Banque Nationale de Paris, judgment has already been entered in its favour in HCA A10630 of 1996. Mrs. Lam of the Company in para. 18 of her second affirmation stated that the Company was actively negotiating with Banque Nationale de Paris and Hang Sang Bank Limited regarding settlement of their actions and it was proposed to use assets belonging to other companies for the purposes of the settlement. This demonstrates, in my view, that the Company itself has no available assets to pay off those creditors and that it is unable to pay its debts. There is no evidence that those actions have in fact been settled or that the judgment which Banque Nationale de Paris has obtained has been satisfied.

8. In the circumstances, I think it is proper to infer that there was at least an undisputed obligation on the part of the Company to pay the judgment creditor, namely Banque Nationale de Paris which the Company has failed to pay and that the Company was unable to pay that debt. This I readily infer.

9. Quite apart from this, the Petitioner relies on the fact that on a proper analysis of the evidence, there is an undisputed debt owing to the Petitioner by the Company and that it therefore has locus standi to present the winding-up petition and to seek a winding-up order.

10. The Company disputes that it is indebted to the Petitioner. The Company's case is simply that the contracts were entered into with the Petitioner as agent for and on behalf of Ben Franklin Retail Stores Inc. of the United States of America ("Ben Franklin") and that it incurred no personal liability to the Petitioner.

11. It is well-settled that where a debt is disputed on substantial grounds then a winding-up order should not be made and the petition should not be proceeded with. See, for example, Mann v. Goldstein [1968] 1 WLR 1091.

12. Chadwick J. in the case of Re a Company (No. 006685 of 1996) [1997] 1 BCLC 639 helpfully and succinctly set out what he considered to be the true rule in his judgment at 642. He said this:

"It is, in my view, important to re-emphasise that there is no rule of practice in this court that a petition will be struck out or dismissed merely because the company alleges that the debt is disputed. The true rule, which has existed for many years, is that this court will not allow a winding-up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds. It will not do so, as a matter of practice, because the effect of presenting a winding-up petition and advertising that petition is to put upon the company a pressure to pay (rather than to litigate) which is quite different in nature from the effect of an ordinary writ action. The pressure arises from the fact that once the existence of the petition is known amongst those having dealings with the Company, they are likely to withdraw credit or refuse to continue to trade with the company on the ground that, if the company is wound up on the petition, their dealings with it will be subject to the provisions in s. 127 of the Insolvency Act 1986. In those circumstances it may well be commercially necessary for the company to pay a debt which is disputed on substantial grounds rather than to run the risk that the whole of the company's business will be destroyed.

The rule of practice that this court will not allow a winding-up petition to be used for the purpose of exerting that sort of pressure has been recognised for well over 50 years; but in all the statements of the rule over that period it is made clear that it only applies where the court is satisfied that the dispute is founded on substantial grounds."

I respectfully agree with Chadwick J. The rule is, it is emphasised, as a matter of practice in the Companies Court and not as a matter of law and only applies where the court is satisfied that the dispute is founded on substantial grounds.

13. In Re Claybridge Shipping Co. SA [1997] 1 BCLC 572, a decision of the Court of Appeal on 9th March 1981, Lord Denning MR had this to say about the rule at 575:

"I entirely agree that a petition for winding up should not be used as the means of getting in a debt which is bona fide disputed on substantial grounds - on which the company would get unconditional leave to defend. But I think the Companies Court should be able to look into bona fides of the defence. If it is obviously a "put-up job" - or if it is so insubstantial that a Queen's Bench master would only give conditional leave to defend - then I should think the petition to wind up should stand."

It is therefore necessary, in my judgment, to consider whether the Company has satisfied the court that the debt is bona fide disputed on substantial grounds.

14. The eight contracts relied on up by the Petitioner are contained in the eight purchase orders pleaded in para. 11 of the amended petition and which have been produced in evidence. These purchase orders were placed by the Company with the Petitioner and were accepted by the Petitioner. There is no doubt that goods were shipped pursuant to those purchase orders. Each of these purchase orders was issued by the Company with the Company's name and address printed at the top of each page. The vendor's name and address given on the orders is that of the Petitioner. Ben Franklin is also mentioned in the purchase orders as follows:

"Elite customer: Ben Franklin Retail Stores In."

Thus, it can be seen that Ben Franklin is clearly described as the customer of the Company in the purchase orders. This must mean that the goods were onsold by the Company to Ben Franklin.

15. All the said purchase orders have been signed by a representative of the Company. Of the purchase orders relied on, five of them have also been signed by a representative of the Petitioner, namely purchase orders 008994, 008995, 009006, 015462 and 015463. Although purchase orders Nos. 017931, 017932 and 017727 were not signed by a representative of the Petitioner, they were nevertheless all accepted by the Petitioner and goods were shipped under those purchase orders.

16. It is clear to me that on the contracts relied on, namely the purchase orders, no question of agency was ever disclosed. It is true that the Petitioner knew of the existence of Ben Franklin and that the goods were destined for Ben Franklin. This, however, does not assist the Company in establishing that the Company was acting only in a representative capacity in contracting with the Petitioner. As I have pointed out, the Company itself described Ben Franklin as its customer in the purchase orders. This negatives, in my judgment, any suggestion that Ben Franklin was the principal under the said contracts, and that the Company was contracting with the Petitioner in a representative capacity as agent for Ben Franklin.

17. The Company relied on affirmations made by Mrs. Lam and Mr. Frank Koo which were filed on behalf of the Company. However, counsel for the Petitioner has rightly criticised Mrs. Lam for affirming to matters on which she could not have had personal knowledge and where she does not disclose her source of information. Simply producing documents from the Company's records does not take the matter any further.

18. The Company's stance was that the Petitioner knew from its previous course of dealing that it was at all times dealing with the Company as agent for Ben Franklin and that when the eight purchase orders were placed, the Petitioner knew that the Company was acting only as agent for Ben Franklin.

19. Counsel for the Petitioner submitted that extrinsic evidence is inadmissible to contradict the written contracts, namely the purchase orders. Counsel referred to para. 9-37 of Bowstead and Reynolds on Agency 16th Ed. where Article 102 is stated as follows:

"Where it is clear from the terms of a written contract made by an agent that he contracted personally, extrinsic evidence is not admissible to show that, notwithstanding the terms of the contract, it was the intention of the parties that he should not be personally liable on it, because such evidence would be contradictory to the written contract."

I accept counsel's submission. It is clear from the terms of the written contracts that the Company contracted as principal. Ben Franklin was clearly described as the Company's customer. As I have said, this must mean that the goods were onsold by the Company to Ben Franklin. The extrinsic evidence relied on by the Company would clearly tend to contradict the written contracts. In my judgment, such evidence is inadmissible to show that the written contracts contained in the eight purchase orders were made by the Company as agent for Ben Franklin.

20. Quite apart from the question of admissibility, I do not attach much weight to the evidence filed on behalf of the Company. There was an order made by Rogers J. on 10th March 1997 granting leave to the parties to serve notices for witnesses to attend for cross-examination. Notices were duly served but the deponents who made affirmations on behalf of the Company have failed to attend for cross-examination. In the circumstances, I do not think I can attach much weight to what they have said in their affirmations. Additionally, Mrs. Lam of the Company did not herself deal with the transactions in respect of the said purchase orders and it is difficult to see how she can profess to have personal knowledge of the matters she deposed to in her fourth affirmation.

21. One important matter relied on by the Company is the fact that in the course of dealing between the parties the practice was for the Company to send to the Petitioner Ben Franklin's own purchase order issued by Ben Franklin and then for the Company to follow it up with the Company's own formal purchase order issued to the Petitioner. It is said that this shows that the Petitioner knew all along that the Company was acting merely as agent for Ben Franklin when sending out its own purchase orders to the Petitioner. It is, of course, denied by the Petitioner that it ever received Ben Franklin's own purchase orders. The evidence filed on behalf of the Petitioner shows that the only purchase orders it ever received were those issued by the Company. As the deponents who made affirmations on behalf of the Company have not attended for cross-examination, I do not think I can attach much weight to what they have said about this.

22. It is clear on the evidence that payment under purchase orders placed by the Company with the Petitioner were made at all times by the Company to the Petitioner until about May 1996 when new arrangements were proposed by the Company. By a fax from the Company to the Petitioner dated 17th May 1996, the Petitioner was requested to collect payment from Ben Franklin direct and this related to five of the eight purchase orders, namely 008994, 008995, 008996, 015462 and 015463. Counsel for the Petitioner submitted that this was a unilateral statement from the Company as to a change in payment terms. That may be so but the Company's request to the Petitioner requesting it to collect payment directly from Ben Franklin was acceded to by the Petitioner. The Petitioner subsequently drew bills of exchange on Ben Franklin and amended shipping documents to substitute Ben Franklin's name for the Company's name. These bills were, however, not accepted by Ben Franklin nor did Ben Franklin agree to accept any of them and the Petitioner has not received payment under any of the bills.

23. Parties to a contract may, of course, vary the terms of a contract including payment terms by mutual agreement. However, the agreement which varies the terms of an existing contract must be supported by consideration. (para. 22-031 Vol. 1 Chitty on 'Contracts' 27th edition).

24. On the evidence, it does not appear to me that the agreement to vary the terms of payment was supported by consideration. That being so, the later arrangements as to payment by Ben Franklin directly did not operate as a release of the liabilities of the Company to pay the Petitioner the sums owing to the Petitioner under the said purchase orders.

25. I am not satisfied that the debt is bona fide disputed on substantial grounds.

26. In the circumstances, I see no reason why the Company should not be wound up. I order that the Company be wound up.