FIRST WELL CHEMICAL LTD v. H.K. FULLSON CO LTD

HCCW 672/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 672 OF 2005

____________

____________

____________

______________

D E C I S I O N

______________

1.  This is an application made by Law Kwok Kei to stay a creditor’s petition presented by First Well Chemical Limited (“First Well”) to wind up H.K. Fullson Limited (“the Company”), until conclusion of the hearing of an earlier petition presented by Mr Law in HCCW No. 374 of 2005 to wind up the Company on just and equitable ground, alternatively for relief under section 168A of the Companies Ordinance, Cap. 32.

2.  I understand that although a winding-up order is sought in the alternative, the primary relief sought by Mr Law is a buy out of his shares.  His main complaints against the other shareholder, Siu Chi Keung, are that Mr Siu had diverted the business of the Company to a company of Mr Siu’s daughter and that Mr Siu had refused to provide books and records and other information of the Company sought by Mr Law.

3.  This summons to stay the winding-up petition is issued under section 181.  Under section 181(a), it is provided that at any time after the presentation of the winding-up petition and before a winding-up order is made, the company or any creditor or contributory may “where any action or proceeding against the company is pending in the Court of First Instance or the Court of Appeal, apply to the court in which the action or proceeding is pending for a stay of the proceedings therein”.

4.  I have reservations if section 181(a) is applicable in this situation, as this provision is to stay a pending action or proceeding, not the winding-up petition itself.  But I have no doubt that I do have power, under section 180(1), to do so.  This other section provides that on hearing a winding-up petition, the court may “dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit…”.

5.  The summons to stay the petition and the winding-up petition came before Deputy Judge Poon on 17 November 2005.  He adjourned both matters to the judge hearing HCCW No. 374 of 2005, expressing concern that the court has not heard from the Company on its stance regarding the stay application or the creditor’s petition.

6.  It was submitted on behalf of First Well that the petitioning debt is undisputed.  A demand under section 178 for the debt of HK$302,065.00, being the outstanding balance of the price of goods sold and delivered, was served on the Company on 6 August 2005.  To date, the Company has not disputed this debt.  Counsel for First Well submitted that the Company should be wound up and there is no reason why disposal of this petition should be deferred until the shareholders’ dispute in the earlier petition has been dealt with.

7.  I see very cogent reasons, in the special circumstances of this case, not to proceed to make a winding-up order today and that I should adjourn the petition until after the earlier petition is disposed of.

8.  In coming to this view, I have had regard to the evidence filed in the earlier petition, and it is important that I should look at the evidence in the earlier petition as Mr Siu, who has control of the Company, has not appeared in the summons to stay or the creditor’s petition.  His stance as regards the Company could only be gleaned from the evidence he filed as the 2^nd respondent in the earlier petition.  It is pertinent to note these matters in Mr Siu’s evidence.

9.  In his 1^st affirmation filed on 13 June 2005 in support of the respondents’ application for a validation order, he stated as follows:

(1)	The earlier petition was presented in May 2005.  Within a month, Mr Siu issued the summons for a validation order seeking permission to sell a landed property of the Company worth HK$1.3 million, as without a validation order this would result in “the business of the Company… completely paralysed resulting in loss of jobs of the Company’s employees in Hong Kong, and the operations of the said Factory [this is a factory operated by the Company with a Chinese party in Shenzhen] would need to be stopped resulting in loss of jobs of over 250 workers.”
(2)	He produced the valuation report of the Factory in Shenzhen.  The total replacement costs of plant and equipment as of April 2004 were RMB 7.9 million, and the value of all plant and equipment as of April 2004 amounted to RMB 4.5 million.
(3)	He produced unaudited profit and loss accounts of the Company from April 2004 to January 2005, according to which the Company had a turnover of over HK$23 million during 11 months.  It had purchased raw materials of over HK$9.5 million and paid wages of over HK$3.3 million.  Last but not least, it had paid over HK$21 million of costs of production, including the purchase of raw materials.
(4)	He asserted that before the presentation of the petition in May 2005, the Company was solvent and actively trading, and it was able to pay all expenses as and when they fell due.

10.  It would appear from Mr Siu’s 1^st affirmation that the Company at the time of his affirmation in June 2005 was solvent and viable and, as stated by him, it would be “for the benefit of creditors for the Company to continue trading”.

11.  Less than 2 months later, Mr Siu filed his 2^nd affirmation in which he took a very different view regarding the future of the Company.  This may be stated as follows:

(1)	Far from wanting to continue the business of the Company, on 21 July 2005, the respondents’ solicitors wrote to the petitioner’s solicitors informing them that the respondents have no objection to wind up the Company “for saving costs”, and, without admitting the allegations in the earlier petition, they would not oppose a winding up and would be willing to pay the costs of the petition for winding up.  They would hold Mr Law responsible for any further costs incurred, should the court deny the relief he seeks for his shares to be bought out and the Company is ordered to be wound up instead.
(2)	Mr Siu claimed that the financial position of the Company had deteriorated after the petition, as the bank had terminated facilities and frozen the Company’s account due to the petition. He asserted that it is now “impossible for the Company to make any payment”.  The Company had to terminate employment contracts of 3 employees, and it was not able to pay the salaries of the remaining 2 employees.
(3)	Mr Siu exhibited creditors’ letters demanding payment, from Foundation Plastics Electroplating Company Limited, Hop Lik Trading Company and First Well.  The letters from Hop Lik Trading Company and First Well were both dated 28 July 2005.  I note that the contents of the letters of these two creditors, even down to the figures demanded for the debts, are identical.  This is curious to say the least.
(4)	Mr Siu asserted that the business was “completely paralysed” and the Company is now “actually dormant”.  He said neither side has use of the Company as a going concern, and he gave up the application for a validation order, as he found the financial situation very difficult and Mr Law had opposed the application.

12.  I pause here to note that First Well issued the statutory demand on 6 August 2005 and presented its petition to wind up the Company on 29 August 2005.

13.  In the meantime, Mr Law engaged private investigators to ascertain what was going on in the Factory in Shenzhen. The investigators reported that the Factory was operating with a lot of workers.

14.  In reply, Mr Siu filed his 3^rd affirmation on 10 November 2005 stating as follows.

15.  The Factory had mainly received orders from the Company and the Company had paid the Factory every month sufficient money to pay wages, materials and overhead costs.  In June 2005, 280 workers were employed in the Factory.  After the petition, the Company was not able to carry on business as a going concern, so the Company did not place orders with the Factory, and the Factory was in great difficulty.  Mr Siu claimed he would have been responsible personally if the Factory was unable to pay wages, and he estimated that sum to be about RMB 2.3 million. He had to look into alternative channel to get business for the Factory and he requested other companies to place orders with the Factory.  Mr Siu also reduced the number of employees at the Factory to 160.

16.  I find this somewhat difficult to understand, if Mr Siu is contending that the profit made by the Factory from carrying out production orders of others would not or should not be regarded as part of the profits of the Company.

17.  Mr Law contended there is collusion between First Well and Siu and that the creditor’s petition presented by First Well is to make it difficult for him to pursue a buy out order.

18.  The petitioning debt of First Well would seem to pale into insignificance, given the assets of the Company and the substantial and ongoing operations of the Factory in Shenzhen.  I note the complete change in stance of Mr Siu regarding the Company in the short space of 2 months.  This change in stance would seem to coincide with an apparent concerted move of First Well and another creditor to demand payment from the Company.  Mr Siu’s position that the Company is not a “going concern” does not appear to sit well with what is known about the operations of the Factory in Shenzhen.  It seems that those in control of the Company, namely Mr Siu and the other director or directors who take his side, would not do anything to oppose the creditor’s petition, as Mr Siu has already expressed a preference to have the Company wound up instead of buying out Mr Law’s shares in the Company.  I do not think it would be right in these circumstances to allow the creditor’s petition to proceed first, as this would be to deprive Mr Law of his relief under section 168A, if he should be able to establish a case for relief.

19.  I am going to give directions in the earlier petition presented by Mr Law to ensure that the petition is to be set down for hearing without any further delay.

20.  I make the following orders on the summons to stay and the petition presented by First Well:

(1)     The petition is to be adjourned until after the determination of HCCW No. 374 of 2005.

(2)     The costs of the summons and of the petition today be in the cause of the petition.

(3)     There is liberty to apply generally and to restore the petition for hearing to an earlier date on cause being shown.