RE WILFRED MARBLE ENGINEERING LTD

HCCW 293/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.293 OF 2000

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D E C I S I O N

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1. This is an application by Wilfred Marble Engineering Limited ("the Company") to strike out the petition presented by Guangdong International Trust and Investment Corporation Hong Kong (Holdings) Limited (in creditors' voluntary liquidation) ("GITIC HK") on 28 March 2000 to wind up the Company pursuant to section 177(1)(d) of Cap.32. The Company's case is that there is a bona fide dispute as to the debt of HK$9,600,940.26 said to underlie the petition ("the debt").

2. The petition alleged that the debt arose pursuant to trade facilities provided by GITIC HK to the Company by issuing letters of credit between 19 November 1997 and 2 June 1998 at the Company's request and on its behalf as particularised in Appendix A of the petition. The letters of credit particularised amounted to the sums of lHK$1,750,669.61 and US$1,196,669.98. Using an exchange rate of HK$7.74 to US$1, these sums total HK$11,012,895.25. The debt was arrived at after giving credit for HK$1,411,955 allegedly due from GITIC HK to the Company. It is common ground that the letters of credit pleaded were issued to the order of the Company. In each of them, GITIC HK was the applicant.

3. By way of background, it is relevant to note that GITIC HK and the Company were part of the same group, namely, the GITIC Group of companies. The diagram below shows the corporate structure of the companies in the GITIC Group relevant to the matters arising in this application.

4. The Company submitted that the evidence adduced did not establish conclusively the existence of the debt immediately prior to the transaction whereby Elegant Stone International Limited ("Elegant Stone") acquired the entire issued capital of GITIC Industrial (BVI) Limited ("GITIC Industrial") from GITIC Enterprises Limited ("GITIC Enterprises") ("the Transaction"). The agreement was entered into on 19 December 1999 and completion took place in early 2000. It was further submitted that if it did so exist, it was discharged as a consequence of the Transaction.

5. The issues which arise are :

(1) whether the Debt was in existence immediately prior to the Transaction; and if so,

(2) whether it was discharged upon completion of the Transaction.

EXISTENCE OF THE DEBT

6. The crux of the Company's submissions was that, taken together or separately, the documentary evidence did not establish conclusively that the debt was in existence immediately prior to the Transaction. Leading counsel for the Company undertook a meticulous review of the documentary evidence which (other than the letters of credits about which no dispute arises) are considered below :

(a) Audit confirmation

7. On or about 16 March 1999, the Company sent to GITIC HK a bilingual letter seeking confirmation for audit purposes. The English version, in pertinent part, is as follows :

" Date: 16/03/1999
Our Reference : K6/ TSF

Dear Sir(s),

Wilfred Marble Engineering Ltd.
CONFIRMATION FOR AUDIT PURPOSES

Ernst & Young are in the process of conducting their regular audit of the financial statements of our Company and wish to confirm the balance of your account with us as follows:-

Balance at 31/12/1998	Due from you	HK$ NIL
THIS IS NOT A REQUEST FOR PAYMENT	Due to you	HK$9,600,940.00"

It went on to request a written confirmation by completing what was set out at the foot of the confirmation that the balance stated agreed with GITIC HK's records and if it did not, for GITIC HK to state its position according to its records. The audit confirmation was signed by Tony Lam Yau Pui ("Mr Lam"), a director of the Company.

8. GITIC HK did not respond to the audit confirmation. That apart, it was submitted that pursuant to normal accounting practice, if as was alleged, the debt was a netted off amount, under the items headed "due from you" and "due to you" separate entries would have been made rather than simply a netted off amount and that, in any event, it could not have established the state of the account as at the end of 1999 even if it were evidence of the balance as at the end of 1998.

9. The points taken are purely technical. They do not negate the fact that as at the end of 1998, the Company sought confirmation from GITIC HK that the debt was due from the Company. It is reasonable to infer from that fact that the Company believed that the debt was extant, at any rate, as at the end of 1998.

(b) Debit notes

10. Debit notes were sent to the Company between 1 November 1997 and 2 June 1998. After that date, there were no further demands. The Company accepted that these constituted some evidence of the existence of the debt but contended that they did not establish conclusively that the debt was in existence immediately prior to the Transaction.

(c) 1998 Audited Financial Statements

11. Note 16 to the Company's 1998 Audited Financial Statements stated that there was an "interest bearing advance" of HK$9,601,000 bearing "interest at the costs of fund to an intermediate holding company" which was not identified. The Company sought to discredit the reliability of the Financial Statements on the basis that there was a disclaimer of opinion by the auditors and, further, the nature of the liability stated (viz. "interest bearing advance") was inconsistent with that pleaded in the petition.

12. However, it is to be noted that the Financial Statements were signed by Mr Lam. It would follow that the information contained in them could only have emanated from the Company. Further, each of the debit notes contained a remark to the effect that trust receipts loan interest would be calculated on the repayment date. On that basis, the facilities advanced could properly be viewed as "interest bearing".

(d) The 1999 Consolidated Balance Sheet

13. This was a document, unsigned and undated, described as the Consolidated Balance Sheet for the Wilfred Marble Engineering Group ("the WME Group") for the period ended 30 September 1999 of which the Company is comprised in the WME Group including the Company. It contained the following entry :

- current a/c- GITIC HK

(9,600,940)

It was submitted that as the Balance Sheet was "consolidated" and related to the WME Group, it was not cogent evidence of the debt.

14. It is to be noted that whilst described as a Consolidated Balance Sheet, the items listed not only dealt with the global position for the WME Group but each entry was broken down and ascribed to the relevant subsidiary or subsidiaries of the Group. In fact, the entry referred to earlier was specifically ascribed to the Company. The Company's criticisms would thus appear to be misplaced.

(e) The PwC Review

15. This was undertaken to assess the financial position of GITIC Enterprises under a liquidation scenario. It dealt, inter alia, with the estimated statement of assets and liabilities of GITIC Enterprises and its subsidiaries as at 30 September 1999. Appendix I.5 contained the estimated statement of assets and liabilities of the WME Group and under the item described as "related party payables" is the following entry :

- GITIC HK

(9,601)

Whilst the company within the Group incurred the liability was not specifically identified and the Review was unaudited, the fact that the amount due reflected the amount of the debt is not without significance. Had it stood alone, I would agree that it would carry little weight but as will become apparent that is not the case. The weight to be accorded to it can only be assessed by having regard to the totality of the evidence which is considered below.

(f) The 1998 Management Accounts

16. These contained an entry in respect of the Company as follows :

"C/A with GITIC

(9,600,940)"

The criticism was that the precise company within the GITIC Group was not identified. The observations made under (e) appear to be equally applicable here.

(g) The Circular

17. This was issued in connection with the Transaction. The general point made was the absence of any specific reference to the debt in Appendix II to the Circular which contained Financial Information on the Group (viz. GITIC Enterprises and its subsidiaries) which of course included the Company. In this connection, Notes 16 and 26 are relevant.

18. In Note 16 it was stated that the sum of HK$9,637,000 was due to an intermediate holding company of the Group. It was submitted that this was not the amount of the debt and the difference was not explained. That may be true but the debt could certainly have formed part of the sum of HK$9,637,000. Note 16 itself is not inconsistent with the existence of the debt.

19. Under "Related Party Transactions" (Note 26), it was stated that commission and handling expense was due to GITIC HK which had provided letters of credit to the Company and the commission or handling expense charged represented not more than 2% of the amount of the credit. That is consistent with the debit notes issued by GITIC HK which showed handling charges of 2% in relation to the letters of credit provided to the Company and substantiates the existence of the debt as at the date of the Circular which was 12 January 2000.

(h) The Draft 1999 Accounts

20. Note 18 to the draft accounts read :

"18. DUE TO INTERMEDIATE HOLDING COMPANIES

	Group	and Company
	1999	1998
	HK$'000	HK$'000
Interest bearing advance	-	9,601"

The Company relied heavily on the fact that the interest bearing advance was shown as no longer subsisting as at the end of 1999 notwithstanding the fact that these were unaudited and subject to the same disclaimer that qualified the 1998 Financial Statements which the Company invoked as reasons for attributing little weight to the 1998 Financial Statements. Be that as it may, it was specifically stated that the 1999 Accounts were :

"... in DRAFT form and INCOMPLETE. It is subject to review and change and therefore cannot be relied upon as being accurate."

In view of this specific qualification, no great weight falls to be attached to the 1999 Accounts.

Conclusion

21. The Company's submission would have considerable force if the documentary evidence GITIC HK relied on was confined to the documents considered at (a) to (g) above and nothing else. That is not the case : the letters of credit are not disputed. It is common ground that GITIC HK caused them to be issued for the Company's benefit. That being so, they constitute evidence of the debt which unless rebutted by the Company would be sufficient evidence. Contrary to the Company's submission, GITIC HK did not have to establish conclusively that the debt remained undischarged. The onus having shifted to the Company, it was incumbent on it to show how the debt ceased to exist, for example, by reason of waiver or cancellation or payment if indeed such was the case.

22. So far as the documents reviewed in (a) to (h) above are concerned, all but (h) are consistent with the existence of the debt. The cogency of item (h), viz. the 1999 accounts is debatable for the reasons already stated. Whilst certain of the criticisms of items (a) to (g) are legitimate, they are not of a substantive nature. The documentary evidence viewed in its totality support the continuing existence of the debt as at the dates to which they relate. In my judgment, the Company has failed to show that the debt was not extant immediately prior to the Transaction.

THE TRANSACTION AND THE DEBT

23. On 19 December 1999, GITIC Enterprises entered into an agreement with Elegant Stone and Mr Lam ("the Share Sale Agreement") to sell to Elegant Stone the issued shares in GITIC Industrial (BVI) Limited and to assign to it all the rights and interests in the "Loan", defined as the loan to be provided for to the completion of the Transaction, on by GITIC Enterprises or its subsidiaries other than GITIC Industrial and its subsidiaries. The debt was not the subject matter of the Share Sale Agreement. But the share disposal was part of the restructuring exercise undertaken by the GITIC Group which has been in financial difficulties since 1998.

24. The Company alleged that it was agreed between Elegant Stone and the GITIC Group that as part of the Transaction, all debts due to the GITIC Group would be waived and/or assigned to Elegant Stone upon completion of the acquisition. Mr Lam who was the guarantor deposed to the effect that if there was no such waiver and/or assignment, he would not have agreed to be a guarantor and Elegant Stone would not have purchased GITIC Industrial and its subsidiaries at the price stated or at all if it was required to pay the debt. Mr Lam's evidence was that such an agreement between the GITIC Group (including GITIC HK) and Elegant Stone was reached in the fourth quarter of 1999. Counsel for GITIC HK submitted that there was no extraneous evidence to the Company's assertion : GITIC HK which was in voluntary liquidation could not have divested itself of the debt without the sanction of the committee of inspection or the court and if there was a side agreement, it had to be supported by consideration and it was inconceivable that there would not have been a record of such an agreement. He also criticised the lack of particulars of the agreement to waive and/or assign the debt as alleged.

25. The test is whether the defence put up by the Company that an agreement was reached as to the waiver and/or assignment of the debt ("the alleged agreement") is believable. See Re Safe Rich Industries Ltd CA81/94, 3 November 1994 (unreported) at p.4. In my judgment, it is not for the reasons stated below.

26. Viewed from a commercial perspective, whether or not the debt had to be repaid after the Transaction would have been an important consideration in the equation for the purchaser. That being so, one would have expected the discharge of the debt to have been specifically dealt with in writing whether as part of the Share Sale Agreement by way of condition or by entering into a side agreement. There was no evidence that that was the case. Rather, the defence advanced appears to be based on an oral agreement. However, no particulars were given as to the circumstances in which the alleged agreement was reached, the parties to it or its terms.

27. It is unclear whether it is the Company's case that Mr Lam was present at the meeting when the alleged agreement was reached. The only evidence of any meeting attended by him in the fourth quarter of 1999 prior to completion of the Transaction was with the liquidators of GITIC HK on 30 November 1999. What transpired at the meeting is a matter of dispute : according to Mr Lam, it was to resolve the repayment of his personal debt; according to the liquidators, it was to discuss the outstanding indebtedness of the Company as well as Mr Lam's personal debt. Be that as it may, it was not Mr Lam's evidence that the alleged agreement was reached at that meeting.

28. Mr Lam's evidence as to the alleged agreement is far from satisfactory : whilst alleging that the negotiations and agreements were reached in the fourth quarter of 1999, he went on to say that he "did not personally attend some of the meetings for negotiations" leaving it entirely ambiguous as to whether he was present at the meeting at which the alleged agreement was reached or concluded. Perhaps this was deliberate. Be that as it may, if he was present, the absence of particulars of the meeting renders it unbelievable. If he was not, then his assertion of the existence of such an agreement is also not believable in the absence of any evidence as to the source and basis for his belief.

29. For these reasons, the Company's application is dismissed with an order nisi that costs be to GITIC HK.