XCHRX LEE TAK (or TUCK) YAN AND OTHERS v. SAMUEL TAK LEE AND OTHERS

HCCW 594/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 594 OF 1999

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D E C I S I O N

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The Application before me is on behalf of the Company seeking validation orders for certain proposed payments: firstly to the Hongkong & Shanghai Banking Corporation under a loan agreement dated 18th July 1996 made between the Company and the Bank; secondly, certain obligations pursuant an Interest Rate Swap Agreement dated 26th June 1997, again with the HSBC and thirdly, payment of rent due under a lease made between the Company and the Hong Kong Land Property Company Limited. Validation is also sought for payment of an amount not exceeding $50,000.00 per month to meet the recurrent expenses of the Company incurred in the ordinary course of its business.

2. The Petitioner has indicated that there is no objection to a validation order for rental payments under the existing lease which expires on the 1st June 2000. The Official Receiver, however, points out that it will be unsatisfactory if a validation order is given in blank, as it were, in relation to such further lease as might be negotiated after expiry of the present lease. This would be the effect of the Order presently sought in the summons. On this aspect of the Application, I will make a validation order in respect of rental payments but limited to the existing lease.

3. In relation to the other payments, the Petitioner objects to any validation order being made at the present time. I am invited by Mr. Cheung, who appears for the Petitioner, to adjourn the matter to enable full argument to be heard on this issue. He points out that there is no urgency because the payments in question do not fall due until the end of September 1999.

4. Three grounds of objection have been raised. The first is that the Company has refused and failed to disclose the source of the funds that would be used for repayment of the sums mentioned to the Bank. It is said that the Company has only shown a potential ability to pay but that there has been no disclosure of the bank accounts from which the monies will actually come.

5. In my judgment there is nothing in this point as the evidence has indicated that the Company is in receipt of regular income from dividends and other payments from subsidiaries and intends to make such payments from its internal resources deriving from its usual sources of income. I do not see that this is a sound objection to a validation order.

6. The second objection taken by Mr Cheung relates to the treatment of the Company's financial statements by its auditor. As Mr Cheung points out, for the year ended 31st January 1997, the Company's auditors attached a qualification to the accounts. However, as Mr. Godwin, who appears for the Company, points out, this qualification had disappeared in the year ended 31st January 1998. Nonetheless, in respect of the latter year, Mr. Cheung points out in his skeleton that the auditors included the following words which he describes as a qualification:-

"In our opinion, there is insufficient information concerning the subsidiaries and the associated companies in these financial statements to give a true and fair view of the state of affairs of the Group as at January 31, 1998 and of its results and cash flows for the Group as a whole for the year then ended."

In my view, as these words themselves suggest, this statement is merely a qualification as to the extent of the audit. They make it clear that the scope of the audit relates to the Company and not to the Group and that, up to the date of the audit opinion, the auditors do not have sufficient information to express a view as to the position of Group as a whole. They do not suggest any doubts as to the financial position of the Company itself. Accordingly, I do not regard the audit opinion as a ground for objecting to a validation order in the present case.

7. The third ground of opposition is that the Company has refused to disclose the purpose of the underlying loans from the Bank. This is one of the issues substantively raised in the Petition, complaint being made as to the level of information available regarding the underlying purposes of the loans. This appears to be Mr. Cheung's primary objection to the validation order.

8. With respect to Mr. Cheung, the purpose of the underlying loans is a matter that is to be canvassed and investigated at the hearing of the Petition as a substantive issue therein. It does not appear to me relevant to the exercise of my discretion in relation to the present validation order application. What is at stake here is validation of loan repayments to be made pursuant to existing contractual obligations entered into by the Company, whatever the underlying purposes may have been.

9. The Court is faced primarily with a shareholders' dispute and relief is sought under Section 168A and on a winding-up on the just and equitable ground. The object of a validation order is to maintain the status quo and to avoid the Company suffering from additional problems in what one might describe as its present vulnerable state resulting from presentation of the Petition. To maintain the status quo it seems to me that it is in the interests of all parties that the repayments be validated to avoid a default being incurred on the contracts of loan and the interest rate swap contracts in question. It has been pointed out that these are secured by assets of the subsidiaries and it would be in nobody's interests if either cross-defaults were triggered or if enforcement action was taken against assets of trading subsidiaries because of the default.

10. In such circumstances, I will make an Order in terms of the summons in respect of paragraph 1(a), (b), (c) (i) but not (c)(ii). I also make Orders in terms of paragraph (d) as well as paragraph of 2.

11. I ought to mention that the Official Receiver has expressed reservations about a validation order permitting regular payments in discharge of the said contractual obligations and it was suggested that it may be desirable to make a validation order only in respect of the immediately payable or the next payable instalment, requiring the parties to return each time an instalment falls due. In my judgment, this is an unnecessary procedure since, in the absence of any new circumstances, one would anticipate merely a rehearsal of exactly the same arguments as were raised today on each occasion.

12. Liberty to apply is given to all the parties and if new circumstances arise casting doubt on the desirability of the validation orders being continued in respect of future payments, then the Petitioner, the Official Receiver and anyone else interested is free to come back to the Court to raise any difficulties met and to invite the Court if necessary to review the orders made today.

13. I will hear the counsel as to costs.