TAI HING (ENGINEERS & BUILDERS) LTD. v. HONWELL HOLDINGS LTD.

HCCW 354/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 354 OF 2000

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D E C I S I O N

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1. This is an application by Honwell Holdings Limited ("the Company") to strike out a petition presented against it by Tai Hing (Engineers & Builders) Ltd, a company which is itself in compulsory liquidation ("the Petitioner"). The application is made on the ground that the petition has been presented with a view to enforce a disputed debt and was thus an abuse of the process of the Court.

2. The petition is based on the failure by the Company to pay a sum of nearly $14.4m. after a statutory demand was made against it on 4 June 1999. There is a considerable lapse of time between the statutory demand and the presentation of the petition on 19 April 2000, but to an extent that is explained by the fact that the Petitioner needed leave from the Court to commence proceedings. The application was made in late December 1999. Leave was obtained on 30 March 2000.

Principles

3. Before I consider the circumstances of the petition, it may be helpful to first set out the relevant principles. It is not disputed that if there is a bona fide and substantial dispute as to the existence of a debt, the parties should be left to litigate the matter in an action, not on the hearing of a petition.

4. In Re ICS Computer Distribution Ltd [1996] 3 HKC 440, Rogers J (as he then was) held that as the procedure to wind up a company was summary, as a matter of practice the Court would not embark on a trial to determine the issue of the validity of a debt where it was bona fide disputed on substantial grounds, unless the issue could be disposed of very simply.

5. On an application to strike out a petition, the Court has to examine the evidence adduced, and to see from the evidence whether the company has discharged its onus to show that there are substantive grounds (and not merely perceived grounds, however honest that view may be) which support its belief that it is not indebted to the petitioner.

6. As this Court has held in previous cases, the policy behind this approach balances the interests of the company and of the public with which it deals. The company should not have to labour under the threat of a winding-up if the alleged debt is disputed on substantive grounds. At the same time, if there was no real dispute and the company was insolvent, then it should not be allowed to continue trading.

Parties' respective cases

7. The Petitioner's case against the Company is very simple. It alleges that a business called Tai Hing Food Centre ("Food Centre") is indebted to it in the sum of $14.4m. The Company is a partner in this business together with a company called Tai Hing Group Ltd ("THGL"). Therefore, under ordinary partnership principles whereby a partner is jointly and severally liable for the partnership's debts, the Company is indebted to the Petitioner for that sum.

8. The Company's case is that it was never a partner in Food Centre. Even if it had been a partner, there had been an agreement between itself and the Petitioner and later THGL that its liability would be restricted to a sum of $12.88m. which it had paid in May 1995 for the acquisition of properties of which it and THGL were tenants-in-common. This agreement was known to the Petitioner as it was related to THGL. In any event, the Company says, the Petitioner has not proven that Food Centre owes the Petitioner the sum claimed or any sum.

Issues

9. Applying the principles set out in paragraphs 3-6 above, the Court would not in the exercise of its discretion allow the petition to proceed if there was a bona fide and substantial dispute on any of the following questions:-

(a) was the Company a partner of Food Centre?

(b) was Food Centre indebted to the Petitioner?

(c) even if the answers to both issues above are `Yes', was the debt incurred outside the scope of the agreement between the partners, to the knowledge of the lender (the Petitioner)?

Partnership

10. As for (a), it appears clear from the present evidence that the Company was a partner of Food Centre. Contemporaneous documentary evidence signed by directors of the Company are to that effect.

11. There is first a Facility Letter from the Yien Yieh Bank dated 19 May 1995 addressed to Food Centre which the Company executed twice, once as mortgagor and once as part of the signature of "the Borrower".

12. There are also two resolutions of the board of directors of the Company made on 18 July 1995, one of which specifically resolved that the Company together with THGL "are the partners of Tai Hing Food Centre". The other also specifically acknowledged that relationship.

13. Further the financial statements of Food Centre for the period from commencement to 31 March 1996 were also signed by the Company as "Partner".

14. No explanation was forthcoming from the directors who had executed the above documents on behalf of the Company as to why they did so if the Company were not in truth a partner of Food Centre. As such, I find no bona fide and substantial dispute raised regarding the Company's relationship with the partnership known as Food Centre.

Substantial dispute over indebtedness

15. As for (b) however, the evidence before me is such that I find there is a bona fide and substantial dispute as to Food Centre's indebtedness to the Petitioner.

16. The Petitioner's case is that it had made various payments on behalf of Food Centre, as follows:-

Nature	Rounded up sums
(a) Bank payments	$4.577m.
(b) Salary payments	$0.125m.
(c) Decoration	$4.700m.
(d) Restaurant payments	$0.060m.
(e) "Legal fees"	$4.965m.
(f) Sundry	$0.407m
Less
Income from car parking	$0.495m.
Total:	$14.4m.

17. No vouchers have been disclosed but the Petitioner relies on its audited accounts for the year ended 31 March 1996 to show that as at that date Food Centre was indebted to it in a sum of about $14.4m. Having said that, the Petitioner has conceded that the current position of indebtedness is not clear. In Mr David Kennedy's Affidavit filed on behalf of the liquidators, he says that according to Gary Ho, the former Financial Controller of the Petitioner, the current indebtedness is between $5m. and $6m.

18. However, the above are subject to considerable dispute. First, the financial statements of Food Centre ending the same period do not show any liability at all to the Petitioner. This is despite the fact that the same accountants' firm had been responsible for preparing both sets of financial statements and even though Food Centre's financial statements were signed later in time (28 November 1996) to the Petitioner's audited accounts (17 May 1996).

19. Although Food Centre's financial statements were not audited, they had been prepared according to instructions and they were signed by THGL, the Company's partner in Food Centre. As THGL was related to the Petitioner, it would seem unlikely that THGL would have given instructions to the accountants inconsistent with the interests of the Petitioner, its related company, unless there was good reason for it. The Company says that this shows that Food Centre was not indebted to the Petitioner. No explanation from the accountants or indeed from any officer or staff of the Petitioner or THGL has been offered to explain this discrepancy between the two sets of financial statements (the Petitioner's and Food Centre's).

20. The Petitioner has also sought to rely on a Confirmation of Balance dated 10 May 1996. Although this was addressed to Food Centre, it was signed by Chung Siu Man, who was an accountant of the Petitioner itself. Although the signature appears under the words "for and on behalf of Tai Hing Food Centre", there is no evidence of any such authorization. There is no evidence from Mr Chung explaining the circumstances behind his execution of the Confirmation of Balance on behalf of the purported debtor. As such, this piece of evidence is of little assistance to the Petitioner.

21. As for the alleged current balance of $5m. - $6m., the only source of this estimated figure is Gary Ho. However, in a letter dated 31 August 1998 to the liquidators, he made it clear to the liquidators that what he had said was "based on my glance of Tai Hing's [the Petitioner's] accounting records more than 1 year ago. As you may appreciate that the accounting records have not been audited and might contain some wrongful entries, therefore the telephone conversation shall not be construed as any admission of liability on the part of Tai Hing [the Petitioner] or Tai Hing Food Centre." According to the liquidators, Ho is now working for the Company.

22. In the light of the inconsistent financial statements of the Petitioner and Food Centre, the liquidators' lack of information of any current indebtedness and Gary Ho's stand, I take the view that the Company has thrown sufficient doubt upon the alleged indebtedness to warrant a thorough investigation of the matter by way of a writ action and not be means of a summary procedure such as a petition for winding-up.

Debts incurred outside scope of partnership agreement with knowledge of third party

23. There is then the Company's contention that it had agreed with the Petitioner that it (the Company) would not be liable for any further amounts after its payment of $12.88m.

24. The evidence in respect of this aspect is not easy to understand but it appears to be consistent. As evidenced in a written "agreement of joint purchase" made on 7 April 1995 between the Company and the Petitioner (who later nominated THGL to take its place), it was agreed that of the down payment of $19,880,000 for the properties to be held by them as tenants-in-common (i.e. $9,940,000 each), the Company would pay $12,880,000 and the Petitioner would pay $7,000,000. The extra sum of $2,940,000 paid by the Company to the developer would be treated as a loan by the Company to the Petitioner. According to the Company, it was agreed that its (the Company's) share of the initial mortgage instalments would be paid by the Petitioner or THGL out of the loan of nearly $3m.

25. Further, the Company had allowed the properties to be used as security for banking facilities granted by the Yien Yieh Bank to the Petitioner. In a memorandum dated 21 August 1996 it was agreed between the Company and THGL that the facility of $5m. obtained by the Petitioner was also to be used for the repayment of the mortgage instalments.

26. In the same memorandum, it was noted that as from April 1996, rental should be received from Tai Hing Entertainment and Restaurant Group Ltd which occupied Shop Units R1 and R2. It was also noted in the memorandum that the rental income should be used to pay management expenses and mortgage loans, with any shortfall to be borne by THGL. Should the amount advanced by THGL be greater than the Company's share in the properties as fixed at purchase, then the latter's share in the properties was to be decreased accordingly.

27. The consistent line running through these documents is that the Company did not intend to be liable for anything over the sum of $12.88m. it had paid in May 1995, even at the risk of reducing its share in the properties. This was known to THGL. As for the Petitioner, it was originally intended to be the tenant-in-common and it had nominated THGL to take its place. It was also the beneficiary of the banking facilities. There is at least a substantial dispute that it must also have known of the agreement evidenced in the memorandum even though it was not a signatory. Therefore, even if the Petitioner had advanced any amounts which might have been used to defray any expenses connected with Food Centre, there is a bona fide substantial dispute whether the Company would be liable for them.

28. In these circumstances, the issue of the Company's liability to the Petitioner cannot be said to be capable of being disposed of easily in a petition to wind-up. I would accordingly strike out the petition and make an order nisi that the costs follow the event, i.e. that the Company's costs be borne by the Petitioner.

29. As for the Petitioner's own costs, the liquidators had obtained leave from the Court to present the petition. This was of course without the benefit of seeing the Company's evidence, and it should also be noted that the Company's case has failed in part. Accordingly, I do not think that the liquidators can be faulted for having initiated these proceedings and if necessary, I would order that the liquidators' own costs be costs in the liquidation.