RE FIRST DRAGON FASHION (HONG KONG) LTD

HCCW 41/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 41 OF 2010

____________

____________

_____________

D E C I S I O N

_____________

Introduction

1.  Four applications have been taken out by the respondent (“First Dragon”) in this petition for First Dragon’s winding up (commenced in January 2010 by the petitioner (“Shunde Jinfeng”)):-

(a)     two applications for the court’s approval to dispose of First Dragon’s properties (“validation order”), brought pursuant to s. 182, Companies Ordinance (Cap. 32);

(b)    an application for Shunde Jinfeng to provide security for costs;

(c)     an application that, unless Shunde Jinfeng pays $9,000 in satisfaction of the costs awarded in First Dragon’s favour, this petition be dismissed.

These applications will be dealt with below.

Background

2.  Shunde Jinfeng alleges in the amended petition that First Dragon failed to pay it about RMB1 million being the agreed fee for work done and services rendered.  Judgment was entered against First Dragon for that sum by the court in the Mainland in December 2007.  The petition was commenced based on First Dragon’s inability to pay its debts.

3.  In its opposing affirmation, First Dragon denies the debt, and claims Shunde Jinfeng wrongfully retained raw materials which belonged to First Dragon.  Those materials are said to worth about HK$1.58 million.

4.  A supporting creditor, one Gold Grace (China) Ltd. (“Gold Grace”), was given leave on 9 July 2010 to take part in the s. 182 applications.  Unless otherwise stated, Shunde Jinfeng and Gold Grace are collectively called “the opposing parties” below.

5.  The Official Receiver (“the OR”) asked to be excused from attending the hearing of the above applications, but set out in summary his view by way of letters dated 9 March and 14 July 2010.

S. 182 Applications

6.  The main dispute here is whether First Dragon is solvent.  First Dragon contends that it is while the opposing parties contend that it is not.

7.  First Dragon relies heavily on its audited accounts for the financial year ending June 2009 (“the 2009 audited accounts”), especially the balance sheet which shows a net asset value of about HK$2.86 million.

8.  The opposing parties, on the other hand, dispute the accuracy of that figure.  They argue the validity of the net asset value depends on the accuracy of 2 items: “inventories” (about HK$2.45 million) and “trade debtors and bills receivable” (about HK$7.83 million).  Without those sums, First Dragon’s balance sheet would show a net liability value.

9.  In relation to “inventories”, they refer to the auditors’ qualified opinion:-

“We were not invited to attend the inventory taking ... In consequence we ... were unable to carry out auditing procedures necessary to obtain adequate assurance regarding the quantities and condition of inventories ... There were no other satisfactory audit procedures that we could adopt to obtain sufficient evidence regarding the existence of inventories” (emphasis supplied).

In the audited accounts for the previous financial year, the auditors’ qualified opinion relating to inventories was similar.

10.  In relation to “trade debtors and bills receivable”, they point out First Dragon’s affirmations only mention $520,000 was received in February 2010 by way of bills receivable.  It has carefully not mentioned its cash flow for any other period.  When that criticism was specifically raised during the hearing, First Dragon did not contend (even through its legal representative) that other sums had been received.  The balance in its bank account (HK$15,000) suggests that no other payment has been received.

11.  The OR, while trying to put it as neutrally as he could, also expressed reservations regarding First Dragon’s solvency.

12.  By reason of the criticisms summarised above, I agree with the opposing parties.

13.  Accordingly, I am not satisfied First Dragon is, or was at the time of the commencement of this petition, solvent.

14.  The relevant legal principles are undisputed:-

“[In relation to an insolvent company] ... the court should grant a validation order to enable the [company] to carry on trading only if it is satisfied that the continuation of trading is likely to generate net income for the [company]” (emphasis supplied): Re Century Group Ltd., HCCW 59/2004 (18 March 2004), para. 9;

“... where there are doubts as to the solvency of the company, the court would not sanction the proposed transactions unless it was satisfied by affirmative evidence that they would be beneficial and advantageous for the company and ‘for practical purposes therefore, ... the court would regard a fairly heavy onus in relation to evidence as falling on persons seeking to justify a disposition not in the ordinary course of the company’s business’”: Re Burton & Deakin Ltd. [1977] 1 All ER 631 quoted in the OR’s letters dated 9 March and 14 July 2010.

15.  There is no evidence (or other valid basis) to show that the continuation of trading by First Dragon is likely to generate net income for its own benefit or the benefit of its creditors.

16.  Further, one of the 2 applications concerns legal costs which First Dragon has incurred, or will incur, for resisting this petition.

17.  In relation to this aspect, the parties dispute whether First Dragon was still carrying on its business since February 2010.  First Dragon mentions 2 orders, respectively placed in January and February 2010.  The January order was priced at US$5,915 and the February order at US$760.  It also blames the petition for impeding the fulfilment of the orders.

18.  It is obvious the said orders were of relatively small value.  First Dragon has not shown other orders have been placed.  The petition has not been said to be an impediment to First Dragon’s ability to obtain orders.  Looking at the totality of the evidence, I also agree with the opposing parties concerning this dispute.

19.  In these circumstances, I do not find the application relating to legal costs to be expenses which First Dragon needs to incur in the ordinary course of its business, namely, expenses to be incurred to preserve and bring in its assets: Re Parnip Investment Ltd., Civ. App. No. 83/1991 (29 November 1991), especially at para. 12 and 14 to 16.

20.  For the above reasons, my discretion should be exercised to dismiss the applications.

Security for Costs Application

21.  Shunde Jinfeng does not dispute it is a Mainland company and, to that extent, therefore falls within the terms of RHC Ord. 23 r. 1(1)(a) and s. 357, Cap. 32.  It defends this application principally on the ground that there is no merit in First Dragon’s opposition to this petition and hence its has a very strong case against First Dragon.

22.  As stated above, judgment has already been entered against First Dragon in the Mainland.  Its subsequent appeal has been dismissed by the Mainland court.

23.  First Dragon does not seek to challenge the Mainland judgments (albeit it states that those judgments are not automatically enforceable in Hong Kong).  It relies rather on its set-off and counterclaim which is based on the raw materials which Shunde Jinfeng sold in the Mainland for RMB157,000.  Those materials were valued at HK$1.58 million in its affirmation filed in March 2010 (they were probably the whole or part of the “inventories” valued at about HK$2.45 million in the 2009 audited accounts).

24.  I agree with the opposing parties the value was given by way of a mere assertion in the affirmation; there is no independent verifying evidence.  It should be noted First Dragon also claimed during the Mainland hearing those materials were worth about HK$1 million, but again failed to adduce substantiating evidence.  The qualified opinion of First Dragon’s auditors set out in both the 2008 audited accounts and the 2009 audited accounts (see para. 9 above) militates against the assertion.

25.  I also agree with Shunde Jinfeng that the criticisms of First Dragon’s Mainland law expert levied against the enforcement process, which concern apparently technical deficiencies, cannot substantially advance First Dragon’s case.

26.  By reason of the matters above, this is a case where my discretion should be exercised in refusing this application: Hong Kong Civil Procedure 2010, Vol. 1, para. 23/3/3 ( at p. 493, citing cases such as Wong Kwok Mei Sanrita & Others v. Eversonic Inc. [1992] 2 HKC 62; Re Greater Beijing Region Expressways Ltd. (No. 3) [2000] 2 HKLRD 776).

“Unless” Order Application

27.  This application is based on an order made herein on 11 June 2010 in First Dragon’s favour.

28.  Shunde Jinfeng does not dispute the judgment debt, but it relies on the following:-

(1)    it was awarded $800 in an order made herein on 26 April 2010;

(2)    it was awarded $800 in an order made on 1 April 2010 in HCSD 1/2010;

(3)    a taxation bill which sets out costs totalling about $79,000 has been served on First Dragon in June 2010.  Those costs are admittedly pending taxation.

29.  First Dragon alleges that there is inherent jurisdiction to make the order sought in this application; but no supporting authorities have been referred to by First Dragon.

30.  Assuming First Dragon’s above allegation is correct, I do not consider this an appropriate case for such a drastic order to be made in view that First Dragon’s costs liability to Shunde Jinfeng is likely to be greater than $9,000 which Shunde Jinfeng presently owes to it.

31.  Accordingly, this application is also dismissed.

Costs Order

32.  The parties agree the usual rule that costs should follow the event is applicable.  There will accordingly be a costs order that the costs of these applications be paid by First Dragon to the opposing parties and the OR.

33.  Having considered Ord. 62 r. 9A(1), this appears to be a case appropriate for summary assessment of costs to be directed.  For such purpose:-

(a)     the receiving parties be at liberty to lodge with court and serve their respective statement of costs within 7 days;

(b)    First Dragon be at liberty to lodge with court and served a statement of objections within 7 days thereafter.