RE: SAINT POWER INDUTSRIAL LTD

HCCW 1309/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1309 OF 2002

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J U D G M E N T

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The proceedings

1. This is a petition to wind up Saint Power Industrial Limited ("the Company") presented on 28 November 2002 by Mr Hsu Lap Foo ("Mr Hsu"), a shareholder and director of the Company. The petition was opposed by the Company's only other shareholder and director, Madam Shum Siu Han ("Madam Shum"), in her capacity as a contributory. The Company itself took no part at the trial, and has taken no part in these proceedings since about March 2003, when it transpired that the Company had not validly resolved to instruct lawyers to act on its behalf, no board resolution to this effect having been passed, as a result of the differences which had arisen between Mr Hsu and Madam Shum.

2. The petition was originally based only on an allegation that the Company was insolvent, as it had failed to comply with a statutory demand dated 31 October 2002 served on behalf of Mr Hsu, claiming the sum of HK$5,574,942.47, which was said to be owed to him by the Company as a result of advances which he made to the Company between 6 March 1992 and 30 June 2002. It was amended on 13 May 2003 to seek, in the alternative, a winding up order on the just and equitable ground under section 177(1)(f) of the Companies Ordinance, it being alleged by Mr Hsu that there had been a breakdown in the mutual trust and confidence which had previously existed between himself and Madam Shum, in the light of various matters of which complaint was made against Madam Shum, and also that the Company was in a state of deadlock, as he and Madam Shum (who were its only two directors) could no longer co-operate with each other. The petition was re-amended shortly before the trial, on 27 November 2003, to add further complaints as to Madam Shum's actions in relation to the Company's assets, arising out of the discovery by Mr Hsu of what appeared to be a diversion of the business of the Company's main asset, a business in Shanghai, to an entity with which Madam Shum appeared to be associated. The petition was further re-amended at the conclusion of the trial to add an allegation that the commercial substratum of the company had been lost, in the light of matters revealed by the evidence at the trial, and in a recent report by provisional liquidators who had been appointed by Chung J on 29 August 2003. This was relied on as a further basis for the making of a winding up order under section 177(1)(f).

3. Insofar as it was based on the Company's indebtedness to Mr Hsu, the petition was opposed on the basis that the debt relied upon by Mr Hsu was disputed. Madam Shum contended that some HK$3.03 million of the alleged debt was not a debt at all, as it represented a contribution by Mr Hsu to the capital of the Company, and that the balance of HK$2.54 million was not presently repayable, having regard to a letter dated 6 September 2002 signed by both Mr Hsu and Madam Shum at the request of the Company's auditors, in which they both stated that they would not demand repayment of any loans made by them to the Company until the Company was able to independently finance its operations.

4. So far as the just and equitable ground was concerned, the petition was also opposed, notwithstanding that Madam Shum accepted that the relationship between herself and Mr Hsu had broken down and that they no longer trusted each other. Madam Shum said, first, that she still felt that it was possible for one of them to buy the other out. Secondly, Madam Shum denied that she was responsible for the breakdown or herself guilty of any wrongdoing, claiming that the responsibility for the breakdown lay with Mr Hsu and suggesting that his objective was to drive her out of the Company and take it over for himself.

5. At the trial, the evidence consisted of a number of affirmations made in the course of the proceedings by Mr Hsu and Madam Shum respectively and oral evidence from each of them. Mr Hsu was represented by Mr Harris, while Madam Shum appeared in person.

The factual background

6. The background to these proceedings is as follows. Mr Hsu and Madam Shum are the only directors and shareholders of the Company. At the date of the petition, Mr Hsu held 8,647 shares in the Company (representing 49% of its issued share capital), and Madam Shum held 9,000 shares (representing 51% of its issued share capital). The Company was set up as a holding company, and has never carried on business in Hong Kong. It was from the outset intended that it should set up wholly foreign owned enterprises on the Mainland to carry on the business of the design and production of moulds for use in industrial manufacturing processes. It was common ground that the respective families of Mr Hsu and Madam Shum had known each other for many years, and that when Madam Shum wished to start her own business in about 1992, she went to Mr Hsu for assistance. Mr Hsu was prepared to assist by providing funding for the business, and did so.

7. The Company first set up a wholly foreign owned enterprise in Panyu ("the Panyu WFOE"), which acquired factory premises and commenced business. It was common ground that at the beginning, Mr Hsu did not have any management role in relation to the Company or the business of the Panyu WFOE in which it had invested, this being run by Madam Shum, although Madam Shum said that she would from time to time consult him on major decisions. Mr Hsu said that he regarded the business as being really Madam Shum's, and he agreed that (at this stage, at least) he did not involve himself to any real extent in its affairs.

8. As further funding was required for this business, Mr Hsu and Madam Shum each contributed further amounts to the Company, which used these contributions to provide further funding for the Panyu WFOE. By the end of 1993, Mr Hsu's contributions totalled slightly over HK$3 million, whereas Madam Shum's contributions were just over HK$850,000.00. Along with the increased funding which they provided, their respective shareholdings changed over time. Initially, Mr Hsu had a 10% interest in the Company, which increased first to a 25% interest, and finally to the 49% which he now holds.

9. The nature of the respective contributions up to this stage was, however, the subject of controversy. Madam Shum said that the contributions were capital contributions, and that the increasing capital commitment by Mr Hsu was the reason for the gradual increase in the level of his shareholding in the Company. Mr Hsu, however, said that the parties respective contributions were shareholders' loans, and were always intended to be repaid in due course. I shall deal with this aspect of the dispute later, when considering the merits of Mr Hsu's claim that he is a creditor of the Company.

10. The Panyu WFOE was not particularly successful, and in around 1998, Madam Shum proposed to Mr Hsu that a new WFOE ("the Shanghai WFOE") should be established in Shanghai, where prospects appeared to be better. In the event, the Shanghai WFOE was established on 26 March 1999. At the time that the Shanghai WFOE was established its directors were Madam Shum and Mr Hsu. There was a dispute as to whether a Mr Wang Yie, who its General Manager, was also a director. Be that as it may, Mr Wang retired towards the end of 1999, since when Madam Shum has served as the General Manager of the Shanghai WFOE. After his retirement, it seems that Madam Shum's mother, a Madam Lam Yuen Yee ("Madam Lam") was appointed as a director of the Shanghai WFOE (either in his place, or as a third director). This appointment was also the subject of controversy, Mr Hsu saying that he knew nothing about it, and contending that his signature on documents relating to the appointment had been forged. These matters formed one of bases on which Mr Hsu claimed (in the amended petition) that there had been a breakdown in the mutual trust and confidence that had previously existed between Madam Shum and himself.

11. Unlike the Panyu WFOE, the Shanghai WFOE soon proved to be profitable. It was operating out of rented premises, but sometime in 2000, Madam Shum proposed that it should acquire its own factory and workshop premises. It seems that Mr Hsu was agreeable to this course, and steps were then taken for the Shanghai WFOE to acquire property, which it did in 2001. However, this appears to have resulted in the expenditure of its entire reserves, and it was accordingly necessary for means to be found to fund the construction of the factory. In connection with this, Mr Hsu says that he made further advances to the Company totalling some HK$2.54 million, the most recent of such advances being some US$100,000.00 on about 27 June 2002. It is accepted by Madam Shum that these advances were loans to the Company, although she contends that Mr Hsu was not entitled to demand repayment of them when he did.

12. Mr Hsu says that prior to making this last advance, he came to the view that having regard to the very substantial amounts of funding which he had already made available to the Company for its investments in the Panyu and Shanghai WFOEs, he should have a majority shareholding in the Company (even if not one that was fully proportionate to the amount of funding which he and Madam Shum had respectively provided), to reflect the loans which he had made, and that he and Madam Shum agreed that his shareholding should be increased to 60% of the issued shares in the Company. Mr Hsu says that it was in reliance on this agreement that he made the advance of US$100,000.00 in June 2002, and also provided personal guarantees for temporary banking facilities provided to the Shanghai WFOE by the Hongkong & Shanghai Banking Corporation Ltd. Ms Shum did not really dispute that such an agreement had been made. Her position in her affirmations was that having reflected on it, it did not seem to her to be right that Mr Hsu should have both a majority shareholding and at the same time treat the advances which he had made to the Company as loans, and that she therefore did not regard herself as bound to carry it out and arrange for the shareholdings to be altered as agreed. At trial, Madam Shum sought to justify her failure to carry out the agreement on the basis that certain conditions had not been fulfilled. However, despite being pressed as to what these unfulfilled conditions were, Madam Shum was unable to explain them. The failure on Madam Shum's part to honour this agreement appears to have been the factor which precipitated the breakdown in the relationship between herself and Mr Hsu, and it was one of the factors that Mr Hsu relied upon in support of his case that the Company should be wound up on the just and equitable ground.

13. Earlier in 2002, it was agreed between Mr Hsu and Madam Shum that Mr Hsu should take a greater role in the affairs of the Company and the Shanghai WFOE. Madam Shum was to remain responsible for the business and day to day operations of the Shanghai WFOE, while Mr Hsu was asked to take charge of financial matters, and to be more involved with the construction of the new factory premises. Mr Hsu says that from then on, he tried to take a more participatory role in the affairs of the Shanghai WFOE. Mr Hsu says that although at first this appeared to be welcomed by Madam Shum, by mid-September 2002, her attitude had changed, and she was unwilling to allow him any real degree of participation in its affairs. In October 2002, Mr Hsu visited Shanghai, and by the end of that visit on 18 October 2002, it had become plain to him that his involvement in the operations and affairs of the Shanghai WFOE was unwelcome. He says that he then returned to Hong Kong, realising that the relationship with Madam Shum had broken down, and having decided that he should seek to recover his loans and wind up the Company. Accordingly, he caused a statutory demand to be served on the Company on 31 October 2002, demanding repayment of the loans which he had made to the Company.

14. Madam Shum's position was that she felt that Mr Hsu was seeking to take over the whole management of the Shanghai WFOE, and to acquire a majority interest in it, only after it had become profitable, and that she perceived that he wanted to oust her from its management. She was of the view that the situation that had arisen was one which was making it very difficult to run the business of the Shanghai WFOE, and that this was why she had made it clear that Mr Hsu's increased involvement in the business was unwelcome.

15. Thereafter, Mr Hsu made a further trip to Shanghai in mid-November 2002. On this occasion, he met Madam Shum, and there was some discussion of one party buying out the other, or of selling the Shanghai WFOE to a third party. On the last day of his visit, Mr Hsu says that Madam Shum insisted on seeing him, and presented him with an agreement which she wanted him to sign. This provided that matters involving Mr Hsu's loans and equity should be resolved together, that the assets of the Company should be valued, that its net asset value after deduction of all liabilities (including loans by Mr Hsu and Madam Shum) should be ascertained, that Madam Shum should acquire Mr Hsu's loans and his 49% shareholding in the Company (valued at 49% of its net asset value) for cash, within the course of 2003. Mr Hsu says that he refused to sign this document, since he had not reached any agreement in its terms with Madam Shum. About a fortnight after he returned to Hong Kong, he presented his petition for the winding up of the Company.

The course of these proceedings

16. Following the presentation of the petition, Mr Hsu applied by summons dated 20 February 2003 for the appointment of a provisional liquidator, on the basis that the assets of the Company were in jeopardy having regard to the behaviour of Madam Shum which was later to form the basis of the claim to have the Company wound up on the just and equitable ground under the amended petition. This application was heard by Chung J in May 2003, but before judgment was delivered, Mr Hsu learned from a Mr Chen Zuying, formerly the chief engineer of the Shanghai WFOE, that another WFOE called Sun Power Mould (Shanghai) Company Limited ("Sun Power Shanghai") had been set established, and that the entire business of the Shanghai WFOE appeared to have been taken over by Sun Power Shanghai, which was a subsidiary of a Hong Kong company called Sun Power Industrial Limited ("Sun Power"). Further investigations revealed many connections with Madam Shum, which I will refer to below. This discovery led to the making of a successful ex parte application for appointment of provisional liquidators before Chung J on 29 August 2003. The matters relied on in support of the ex parte application were subsequently introduced into the petition by the re-amendments made on 27 November 2003. Shortly before the hearing of the petition, the provisional liquidators made a report to the court from which it appeared that the Shanghai WFOE was no longer operational.

17. Against this background, I now turn to consider the various grounds for the making of a winding up order relied upon in the petition as it now stands.

Loss of substratum

18. I shall deal first with the ground introduced by the latest amendment to the petition, that there has been a loss of the substratum of the Company. In support of this ground, Mr Harris relied upon the statement at paragraph 15.219 of Palmer's Company Law, Vol. 3, to the effect that a winding up order under the just and equitable ground may be made where the substratum of the company has been lost, in the sense that the main object for which the company was formed has become impracticable.

19. It is clear from the report of the provisional liquidators that the Shanghai WFOE is no longer in operation. Although Madam Shum made a number of criticisms of this report, it was clear even upon her own evidence that the Shanghai WFOE is now to all intents and purposes defunct. She agreed that all of its customers have been lost, having gone over to Sun Power Shanghai, and that its employees have (with perhaps one or two exceptions) left and joined Sun Power Shanghai - indeed, Madam Shum agreed that she herself has joined Sun Power Shanghai as a technical consultant. Moreover, she accepted that the Shanghai WFOE had vacated its former premises, that its new factory was still not completed and that the Company had no funds with which to complete it. The Shanghai WFOE's plant and equipment has been sold (and is now in the possession of Sun Power Shanghai). Madam Shum has said that she spends part of her time at the Company, dealing with claims against it and the rest of her time at Sun Power Shanghai, as its technical consultant. Although Madam Shum suggested that she or Mr Hsu could still buy out the other, or that the Company could be sold to a third party, it seems to me that these suggestions are wholly implausible. On the evidence before me, the Shanghai WFOE has no business, no undertaking, and virtually no staff. It is clearly not an operating concern that would attract any third party interest. In these circumstances, the Company, whose only significant asset is the Shanghai WFOE, would not, in my view, be capable of being sold to a third party buyer. For the same reason, it does not seem to me to be reasonable to expect Mr Hsu to buy out Madam Shum. So far as Madam Shum is concerned, she does not appear to have the funds with which to buy out Mr Hsu's interest in the Company. In these circumstances, where the Shanghai WFOE is effectively defunct, it seems clear that the substratum of the Company has been lost, and that it would therefore be appropriate to make a winding up order on this ground.

Diversion of Company's business by Madam Shum

20. Mr Hsu also contends that the loss of the substratum of the Company is due to the fault of Madam Shum. It is his case that she is behind Sun Power, and that she and her family set up Sun Power and Sun Power Shanghai after the breakdown in her relations with him, with a view to diverting the business of the Shanghai WFOE to Sun Power Shanghai. In support of this allegation, Mr Hsu points to the matters of which he was informed by Mr Chen, information that is revealed by company searches in Hong Kong and China, and to material that can be found on Sun Power Shanghai's website.

21. These matters include the fact that the English names of Sun Power and Saint Power (and their respective counterparts in Shanghai) are very similar, and that there is a corresponding similarity in their names in Chinese, which differ in respect only of one character (which although rather different in sound and meaning is nonetheless close in appearance). Sun Power has, as its only shareholders and directors, members of Madam Shum's family - her husband, son and daughter. As I have noted, virtually all the staff of the Shanghai WFOE, including Madam Shum's son, now appear to be employed by Sun Power Shanghai, and Madam Shum has been engaged by Sun Power Shanghai as its technical consultant.

22. Further, it would appear from the Sun Power Shanghai website that it holds itself out as effectively the same business as that which was formerly operated by the Shanghai WFOE. Sun Power Shanghai holds itself out as having existed since 1992, and having started operations in Panyu (despite its very recent incorporation). It lists among its customers all the customers, present and former, of the Panyu and Shanghai WFOEs. It has an address that appears to be the same as that of the Shanghai WFOE's former address, and it appears on the basis of the material in the provisional liquidators' report to be making use of the Shanghai WFOE's plant and equipment. There is a reference to its intended relocation to new premises in precisely the location in which the Shanghai WFOE's new premises were to be situated.

23. Madam Shum did not dispute any of these matters. However, she said that she knew nothing of the setting up of Sun Power, or of Sun Power Shanghai. She professed only to have found out about these entities some time towards the middle of 2003, after she met former employees of the Shanghai WFOE and learnt that they had joined Sun Power. She says that she did not know that her husband and family members were involved in or interested in Sun Power and Sun Power Shanghai and that it was not until summer 2003 that she realised that her son had joined Sun Power after leaving his employment with the Shanghai WFOE. She says that although the address of the Shanghai WFOE and Sun Power appear to be the same, that is because the address is in fact an industrial development or estate, with a number of different factories and workshops. However, on being pressed by Mr Harris in cross-examination, she eventually accepted that whatever may have been the position earlier, Sun Power was now in occupation of the premises formerly occupied by the Shanghai WFOE, and that it was using the plant and machinery formerly owned by the Shanghai WFOE. She said, however, that she had nothing to do with this, having sold the plant and machinery to a third party, from whom Sun Power must have leased it. She sought to dismiss the matters set out in the Sun Power Shanghai website, which gave the clear impression that Sun Power Shanghai was essentially the same company or the successor of the Shanghai WFOE, as being a common occurrence in China.

24. I am unable to accept Madam Shum's evidence in these respects. She was clearly anxious to play down her involvement with Sun Power and Sun Power Shanghai. I find it incredible that she should have displayed such a lack of interest in what was happening in relation to the business of the Shanghai WFOE, especially having regard to her close involvement and control over its affairs, and her role in the development of its business. For these reasons, I am also unable to accept that she was not involved in the transfer of the Shanghai WFOE's customers to Sun Power Shanghai, or that she was unaware of the movement of its staff to Sun Power Shanghai when this occurred, apparently from March 2003 onwards, particularly as she was herself soon involved in the business and operations of Sun Power Shanghai as its technical consultant.

25. Moreover, it is not credible to suppose that she was unaware of her family's involvement with Sun Power. There is, so far as I am able to see, no evidence to suggest that her husband had any particular experience with the business, and I am satisfied that it is no coincidence that she is now Sun Power's technical consultant, although she does not, on the face of it, hold any shares in that company. Although Madam Shum sought to suggest that she does not keep in close touch with her other family members, a brief examination of the correspondence between the dates of steps in these proceedings and the dates on which events occurred in the setting up of Sun Power and Sun Power Shanghai provides, in my view, clear support for the conclusion that Madam Shum was closely involved in the affairs of Sun Power and its taking over of the business of the Shanghai WFOE through Sun Power Shanghai.

26. Thus, it is to my mind significant that the acquisition by Madam Shum's family of Sun Power, and the appointment of her husband, son and daughter as directors of that company, took place at the end of November 2002, less than a month after the service of the statutory demand, and just before the service of the petition, and that shares were allotted to them days after the service of the petition. Similarly, a matter of days after filing and service in February 2003 of Mr Hsu's application for the appointment of provisional liquidators to the Company, an application was made to the relevant authorities in Shanghai for the formation and setting up of Sun Power Shanghai. My attention was also drawn to the constitution of Sun Power Shanghai, which appears to have been copied from that of the Shanghai WFOE, to the extent that in one place at least, the name of the Shanghai WFOE appears in that document. Finally, it appears from the information provided by Mr Chen to Mr Hsu that the recruiting of most of the Shanghai WFOE's staff and the request to two of its customers to transfer their contracts with it to Sun Power Shanghai took place at about the same time as an initial hearing of the application for the appointment of provisional liquidators on 13 March 2003. In my view, the close correspondence of these dates strongly suggests that Madam Shum was in regular contact with her family members in connection with the setting up and development of Sun Power and Sun Power Shanghai.

27. In the circumstances, I am satisfied that the loss of the Company's substratum was the result of the acts of Madam Shum. Even if this had not been the case, I would have concluded that it was appropriate to wind up the Company having regard to the loss of its substratum, for which Mr Hsu cannot be held responsible.

Other bases for winding up on the just and equitable ground

28. I am also satisfied that quite apart from the loss of substratum, it would have been appropriate to wind up the Company having regard to the fact that it was accepted by both Mr Hsu and Madam Shum in the course of their evidence at the hearing that they no longer trust each other and cannot work together, and that this has led to deadlock in the Company.

Whether Mr Hsu was at fault

29. However, Madam Shum says that the breakdown in the relationship is due to the fault of Mr Hsu, and that he is not, therefore, entitled to present a petition on this basis. Madam Shum was of the view that the breakdown in the relationship was engineered by Mr Hsu when his request to be given a majority shareholding in the Company was rebuffed by Madam Shum.

30. Again, I am unable to accept that the fault for the breakdown lies with Mr Hsu. As I have mentioned above, it appears that Madam Shum had in fact agreed to the change in shareholding, but subsequently thought better of it and reneged on the agreement which she had reached with Mr Hsu. Although she appeared to accept this in her affirmations, at trial she sought to suggest that the agreement was in some way conditional, and that the conditions had not been fulfilled. She was, however, unable to explain what these conditions were, and I am satisfied that having initially agreed with Mr Hsu that he should have a majority shareholding to reflect the substantial financial commitment that he had made to the Company, she subsequently went back on this agreement. While it is perhaps understandable that Madam Shum should feel that it was unsatisfactory that Mr Hsu should be entitled to a majority shareholding and at the same time be entitled to recover his loans in due course, it seems to me that this overlooks the fact that shareholder's loans, even though repayable, still involve a very real amount of risk, since they are only ever likely to be repaid if the Company proves so successful that it is able to repay such loans without affecting its ability to continue in business. The provision of finance may be as important as the provision of skills and know how, if a company is to develop and grow into a profitable long term operation. Each of these contributions is of value, and there is to my mind nothing particularly surprising in financial contributions being recognised by way of shareholding, just as much as contributions in terms of skills and effort. Where the parties do not contribute equally in these respects, it is often necessary for a value to be placed on their different forms of contributions when shares in the enterprise are allotted. I therefore do not accept that having agreed to the change in shareholdings, it was open to Madam Shum to change her mind simply because the finance that Mr Hsu was providing was to be by way of shareholders loan.

31. I am also unable to see that Mr Hsu can be criticised for seeking to participate in the affairs of the Company and the Shanghai WFOE to a greater extent than he had previously done, as this seems to have been something that the parties had agreed on earlier. While I can understand that Madam Shum may have felt dissatisfied that Mr Hsu appeared likely to reap the benefits of her earlier hard work, this overlooks his financial contributions and cannot, in my view, justify the course of conduct on which I have found that she embarked in relation to Sun Power and its taking over (through Sun Power Shanghai) of virtually the whole of the business and operations of the Shanghai WFOE.

Other complaints

32. Mr Hsu also complained of a number of other matters in relation to Madam Shum's conduct, which I do not propose to deal with in any great detail as it is unnecessary to do so in the light of the views I have already expressed. Of these, perhaps the most significant related to the appointment of Madam Shum's mother as a director of the Shanghai WFOE. It is Mr Hsu's case that he was not informed of this, and that his signature on various documents of the Shanghai WFOE had been forged. Madam Shum accepted that Mr Hsu's signature had been placed on a number of corporate documents of the Shanghai WFOE by staff of the Shanghai WFOE, but said that this had been done with the authority of Mr Hsu. However, the statement of Ms Guo Li, which Madam Shum relied upon as demonstrating this, merely indicates that Mr Hsu had agreed to board resolutions being prepared and filed with the relevant authorities in respect of an increase of capital and change of address of the Shanghai WFOE, and that he authorised Ms Guo and another member of the Shanghai WFOE's staff to handle these matters, including the filing of documents with the relevant authorities in Shanghai, which required the signature of three directors. Quite apart from the fact that this statement does not indicate that Mr Hsu was aware that Madam Lam was a director of the Shanghai WFOE, it seems to me that Mr Hsu was justified in saying that while he might have agreed to the changes in capital and address, and to their being notified to the relevant authorities, there was nothing to suggest that he had authorised the forging of his signature on particular documents. He said that his own experience in relation to his own business affairs was that where his signature was needed, the documents would be sent to him for him to sign. Madam Shum was of the view that since Mr Hsu was not physically present in Shanghai at the time, there was nothing wrong with the staff of the WFOE purporting to sign documents in his name. She said that this was normal practice on the Mainland. I am unable to accept that this is acceptable commercial practice, and I am satisfied that these matters too caused a justifiable loss of confidence in Madam Shum, so far as Mr Hsu was concerned.

33. For all of the foregoing reasons, I am satisfied that the Company should be wound up on the just and equitable ground.

Whether winding up order should be made on basis of insolvency

34. Finally, I turn to consider whether the Company should also be wound up on the ground that it is insolvent. This calls for a consideration of whether or not the shareholders' loans advanced by Mr Hsu were repayable at the time that the statutory demand was served and when the petition was presented. Mr Harris accepted that for present purposes, it would suffice for Madam Shum to satisfy me that the Company's liability to repay the shareholder's loan was disputed bona fide on substantial grounds.

35. This gives rise to two issues. The first relates to the status of the HK$3.03 million odd that had been advanced by Mr Hsu during the time when the Panyu WFOE was in operation. As I have noted above, it was Madam Shum's case that this amount was a capital contribution by Mr Hsu, and not a loan.

36. At the end of the day, I do not think that a great deal turns on this particular dispute, since regardless of whether this part of the debt claimed by Mr Hsu was recoverable by him, there still remained some HK$2.54 million which Madam Shum did not dispute was truly advanced by Mr Hsu by way of loan. Nonetheless, on balance, I accept the version put forward by Mr Hsu, having regard to the fact that the advances were consistently recorded as loans in the Company's audited accounts, which were approved by both Mr Hsu and Madam Shum. It is also to be noted that at no time did the parties' respective shareholdings correspond in percentage terms with the amount of funding provided by each of them - throughout, the amount of funding made available by Mr Hsu substantially exceed that provided by Madam Shum. Had the advances that each made been by way of capital, one would ordinarily have expected this to be reflected in the number of shares issued, or perhaps by the shares being issued at a stated premium, thus making it clear that the contributions were by way of capital, and not loan. Finally, given the different roles of Mr Hsu and Madam Shum, as financier and operator of the underlying business respectively, it seems to me that it was reasonable for Madam Shum to have tried to place some value on the contribution made by each, whether in money or in the form of expertise, and to reflect this in their respective shareholdings. Even if monetary contributions made were in the form of shareholders' loans, there was nonetheless a real element of risk involved, in that if the Company proved to be unsuccessful, such loans might prove to be largely irrecoverable, so that it is not unreasonable that this element of risk should be rewarded by a more substantial degree of participation in any profits that might be made in the event that the Company's investment in the business of the WFOE proved successful.

37. This leaves the second point taken by Madam Shum. This was that, having regard to Mr Hsu's signing of a letter of financial support dated 6 September 2002 at the request of the Company's auditors in connection with the preparation of the accounts for the year ended 31 December 1999, it was not open to Mr Hsu to demand repayment of his shareholder's loan, as the Company was not yet in a position to support itself from its own operations. In his evidence, Mr Hsu's position on this was that the letter was a formality that was required in connection with the particular set of accounts, to enable the accountants to provide an audit report on the basis that the company was a going concern. In his submissions, Mr Harris (while not accepting that the representation contained in this letter was binding on Mr Hsu) said that this representation would in any event only hold good until the next representation letter was sought, at which time it would be open to Mr Hsu to change his mind.

38. In my view, although the letter was not addressed to the Company, it was nonetheless a representation to the auditors, and to the Company (since the letter, like those in respect of previous sets of accounts, was addressed to the directors of the Company, and would have been seen by Madam Shum, who was also required to sign it), of Mr Hsu's intentions in relation to his shareholder's loan at the time when the letter was provided. It seems to me that it is at least arguable that the Company was entitled to rely on that representation in carrying on its business. I do not think that the letter can be read as being limited to the particular accounting year with which the accounts in question were concerned, since it seems to me that it was necessary for Mr Hsu to give the representation as a true statement of his intentions at the time when it was given (i.e. on 6 September 2002), in order for the auditors to be able to provide an audit report in respect of the Company on the going concern basis as at that date. If the position had been that Mr Hsu had (on 6 September 2002) told the auditors that he had not had, as at the relevant year end, any intention to call in his shareholder's loan as long as the Company required his financial support, but that this was not the case any longer, this would have been something that the auditors would have had to consider in determining whether or not the going concern basis was an appropriate one for the preparation of the accounts of the Company.

39. It is also notable that Mr Hsu said that when the auditors approached him sometime in November 2002 in connection with the next set of accounts, for the year ended 31 December 2000, he made it clear to them that, unlike the position in relation to previous accounts, he would not sign such a letter, as he no longer intended to support the Company (having by then served a statutory demand on the Company). In the event, a letter dated 16 December 2002 was signed by Madam Shum alone, and Mr Hsu's refusal to confirm his continuing support for the Company was reflected in the notes to the audited accounts of the Company for the year ended 31 December 2000. Thus, by the time that Madam Shum came to sign the letter dated 16 December 2002, she and the Company would have been aware that Mr Hsu's position had changed.

40. However, in these circumstances, it seems to me to be at least arguable that the representation was one which was binding on Mr Hsu, at the time that it was given, and cannot be regarded as being of no effect whatsoever. On this basis, it would appear that it is accepted by Mr Harris that that it was binding on Mr Hsu until the time came for the next set of accounts to be prepared. But it was not until around 16 December 2002, after the presentation of the petition, that Madam Shum signed a support letter on her own, without Mr Hsu's signature.

41. For these reasons, I would have been of the view that as at the date of presentation of the petition, the debt relied upon by Mr Hsu was capable of being disputed in good faith on substantial grounds, and therefore would not have supported the petition as at that date.

Conclusions

42. I do not think that this means that it is not open to me to make a winding up petition on the basis of the matters which have emerged thereafter, since it seems clear that a winding up order should be made on the just and equitable ground, particularly in the light of the subsequent developments in relation to the Company. It seems to me that in considering whether or not to make a winding up order, it is appropriate to have regard to the state of affairs at the time when the petition is heard (see Re Fildes Bros Ltd [1970] 1 WLR 592).

43. I therefore conclude that it would be appropriate to make the usual winding up order in relation to the Company. However, so far as the costs are concerned, having regard to my conclusion that it would not have been appropriate to make the order on the basis of the debt relied upon by Mr Hsu, I propose to make an order nisi that Madam Shum should pay Mr Hsu his costs as from the date when the petition was amended to introduce the just and equitable ground as a basis for the making of a winding up order, but that there should be no order as to costs prior to that, such costs to be taxed on the party and party basis if not agreed.