XCHRX KWAN KAM WAH v. CHAN WAI MING AND OTHERS

HCCW 632/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 632 OF 1999

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D E C I S I O N

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1. This is an application for variation of a validation order.

2. The petition was issued in July 1999. The Company appears to be solvent and on 26 July 1999, a summons was issued on behalf of the 1st, 3rd and 4th Respondents asking for a validation order.

3. On 29 July 1999, Ribeiro J (as he then was) made an order by consent that the Company be at liberty to make certain payments which had already been incurred, and upon the undertaking given by the 1st, 3rd and 4th Respondents as set out in Schedule B to the order, further ordered that the Company shall, until further order of the Court, be at liberty to pay and discharge any and all business expenses and/or liabilities incurred in its ordinary course of business.

4. The payments to be made were agreed to be made in a particular manner, namely, by cheques drawn on a particular bank account and to be signed pursuant to a board resolution in January 1999.

5. Schedule B to that Consent Order contained various undertakings given to the Court by the 1st, 3rd and 4th Respondents. These undertakings included the provision of a schedule on each Monday to the Petitioner setting out various information, namely, the list of payments made by the Company during the preceding week, the date and amount of each of such payments, the names and addresses of the payees and the purpose of the payments. There was also an undertaking given by the 1st, 3rd and 4th Respondents that they would allow the Petitioner to inspect supporting documents relating to the payments upon the Petitioner giving 3 working days' notice in writing to the 1st, 3rd and 4th Respondents.

6. By a summons issued on 9 January 2001, the Petitioner has sought variation of the validation order in various respects. The Petitioner has submitted that the validation order has, so to speak, been abused by the 1st, 3rd and 4th Respondents, in that various payments have been made which the Petitioner says ought not to have been made.

7. The first complaint by the Petitioner is of transportation expenses. The Petitioner says that it is suspicious that the Company pays transportation companies various expenses when all poultry imported to Hong Kong have now to be imported through two companies being Ng Fung Hong and Kwong Nam Hong. Therefore, the Petitioner says, the Company's assets are being depleted by the 1st, 3rd and 4th Respondents causing the Company to pay transportation expenses to various companies.

8. The 1st, 3rd and 4th Respondents' evidence is that the situation is not as simple as that. These Respondents say that there is a system whereby poultry from China is imported through import-export companies and that various import formalities imposed by Ng Fung Hong and Kwong Nam Hong make it extremely inconvenient for the Company to ensure that it gets the required quantity of poultry, and therefore it has been importing poultry through various transportation companies.

9. These transportation companies do not simply deliver the poultry from China to Hong Kong. They also arrange import formalities in that they are able to acquire the quotas for the quantities required by the Company, and they also do not require payment of a daily deposit of $100,000 which Ng Fung Hong and Kwong Nam Hong require. The further administrative inconvenience of only going through Ng Fung Hong and Kwong Nam Hong is that deposits are repaid at the end of the month, and therefore there are exchange risks involved by the payment of such deposits.

10. It seems to me that looking at the evidence adduced on behalf of these Respondents and also by third parties filed in December 2000 explaining the difference between mere delivery expenses and these extra fees for import clearance, such as quotas and permit fees and deposits, that there is sufficient evidence of valid business reasons for engaging these transportation companies. It is not possible for the Court at an interlocutory hearing such as that today to decide on the veracity, or otherwise, of the allegations of fact made by either party. As far as the Court is concerned, there is evidence of sufficient business reasons as to fall within the principles laid out in Burton v. Deakin [1977] 1 WLR 390 that payments such as these should be amenable to a validation order.

11. In any event, I note that the employment of these transportation companies is no more than the continuance of the status quo, because that has been the practice of the Company since before the petition, and indeed it is one of the business practices that is a subject of complaint by the Petitioner.

12. Accordingly, I do not see any ground for making a variation to the validation order such that no payment for transportation expenses can be made.

13. I then deal with another complaint made by the Petitioner which is in relation to the repayment of shareholders or directors' loans. As I have indicated above, Ribeiro J's validation order was to enable the payment and discharge of any and all business expenses and/or liabilities incurred in the ordinary course of business of the Company. It would appear to me that repayment of shareholders' loans or directors' loans would not be included in the terms of that validation order, insofar as they are not business expenses and/or liabilities incurred in the ordinary course of business given that the purpose of a validation order is simply to enable the Company to carry on with its day to day business in the interim period between the issue of a petition and its hearing date.

14. As far as these shareholders' loans are concerned, I am informed by counsel for the Respondents that as far as the 1st, 3rd and 4th Respondents are concerned, they have repaid the funds back to the Company. Counsel for these Respondents have drawn the Court's attention to a payment of nearly $4.3 million made to the Petitioner by the Company after the validation order was made. I leave it to these Respondents to take such action as they may be advised as to the recovery of this amount from the Petitioner.

15. Suffice it for me to say that given the repayment that has been made by these Respondents to the Company, I see no need to make any variation to the validation order. As I have said, the validation order does not, in my view, permit the repayment of shareholders' loans. Therefore, it is not necessary to vary it to say that the repayment of shareholders' loans is not permitted.

16. The third area of complaint are entertainment expenses. In this regard, the Respondents have indicated that they are prepared to no longer charge entertainment expenses to the Company and upon that undertaking, I do not need to make any order varying the validation order although it may be argued that entertainment expenses may be usual business expenses.

17. Fourthly, there is the question of legal fees. The summons seeks an order that no payment be made for any legal professional fees incurred for the Company's engagement of legal services. I can see no ground for making an order such as this. This is a company which is trading. Clearly for any trading company carrying on business, legal services may be required from time to time for perfectly legitimate business reasons. Accordingly, I cannot see the rationale for placing such a restriction.

18. Accordingly, in respect of the summons issued by the Petitioner on 9 January 2001, I would make the following order:- upon the undertaking of the 1st, 3rd and 4th Respondents through their counsel not to charge entertainment expenses to the Company, I would dismiss para.1 of the summons as well as paras. 2 and 3.

19. In relation to para.2 of the summons, this seeks a variation that no payments pursuant to the validation order could be made without the written consent of the Petitioner. That would, in my view, be impracticable and it would also be unjust to have the business subjected to a veto power by one person only.

20. I would also indicate that it would be quite impossible for the Court to give approval or otherwise to any expenses that may be incurred by the Company. The Court exists for the adjudication of disputes between parties, in this case between various shareholders, and the principle of judicial non-interference in the running of businesses makes it quite clear that the Court does not have the right to, nor should it, interfere in the day-to-day running of businesses.

21. Accordingly, I would dismiss this summons in relation to paras. 1, 2 and 3. Para.3 requires the listing of expenses and liabilities of the Company during the week proceeding the schedule. I see no ground for having to vary the validation order in that respect, the validation order having been made by consent of the parties.

22. Finally, in relation to para.4, it seems to me that that is really an application for discovery. There is already an order for discovery in this case, and I leave it to the parties, if they say that that order has not been complied with, to deal with it accordingly.