Re Yat Chau Co. Ltd.

HCCW 961/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.961 OF 1999

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R E A S O N S

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1. There are two petitions before me. The first is a creditors' petition to wind up Yat Chau Company Limited ("the Company"). The underlying indebtedness arises under two lease agreements entered into between the petitioner which was a finance company providing credit facilities to its customers and the Company which was the hirer of the machinery the subject matter of those agreements.

2. In April 1995, credit facilities were granted by the petitioner to the Company to purchase certain equipment ("the Equipment") and this resulted in two lease agreements being entered into by the parties. The Equipment consisted of (a) one complete Blister-forming and Packaging line consisting of a thermoforming machine, a cartoner, a labeller and a stretchbanding machine and (b) a Capsule Filler. Under the 1st Agreement dated 12 April 1995, the credit given was some $2.8 million and the hire term 60 months. The Company failed to pay the monthly payments as from 30 October 1997. Under the 2nd Agreement dated 10 November 1995, the hire term was again 60 months and the credit given some $7.3 million. The Company failed to make monthly payments under the 2nd Agreement as from 4 November 1997.

3. A consent judgment was entered against the Company on 18 May 1998 in the sum of $1.3 million in respect of arrears of monthly payments up to February 1998 only. As at the date of the consent judgment, the outstanding principal, interest and charges amounted to some $7.4 million.

4. On 21 July 1998, with the knowledge and consent of the Company, the petitioner repossessed the Equipment. Shortly thereafter, on 22 September 1998, the Company entered into a contract to sell to Rieckermann, the original supplier of the Equipment, two items of the Equipment which had been repossessed, namely, the thermoforming machine and the cartoner for $986,688.75. The remaining items of the Equipment could not be sold or re-let. On 4 June 1999, the petitioner which by then was in a creditor's voluntary liquidation terminated the two agreements and demanded repayment of the outstanding sums. As at the time of the hearing, the amount outstanding under the 1st Agreement was $2,517,409.06 and under the 2nd Agreement (as revised) was $5,449,863.21.

5. The petition was opposed. The grounds are, first, that the credit given in respect of the repossessed Equipment was too low. The Company complained about the sale of the two items of machinery to Rieckermann suggesting that it was not bona fide or at arm's length. It attacked the 'valuation' obtained by the petitioner as being an ex post facto justification exercise. Further, there is evidence that property, namely, medicine owned by the Company was removed at the time the Equipment was repossessed. The Company complained that its value had not been accounted for. Counsel for the Company sought an adjournment for the purpose of adducing evidence (1) to attack the 'valuation' obtained by the petitioner, (2) as to the Company's property that had been removed and its value and (3) as to the Company's ability to repay any shortfall.

6. It is common ground that the Equipment was repossessed with the knowledge and consent of the Company. Consent was given in February 1998 and repossession took place in July. The sale to Rieckermann followed two months later in September 1998. Counsel for the Company commented adversely on the 'valuation' which he said was an ex post facto justification exercise since it post-dated the Rieckermann sale by about a year. What is in evidence is a report prepared by Henry Butcher International (HK) Ltd entitled "Ocular Inspection Report of Machines and Chattels". It did not purport to be a valuation at all. The report dated 7 October 1999 stated that the inspection was carried out for the purpose of formulating an opinion regarding the salability of the Equipment located in a godown in Fanling. A careful reading of the report revealed that neither the thermoforming machine nor the cartoner (the two items purchased by Rieckermann) was mentioned. Accordingly the complaint of ex post facto justification is wholly misconceived. The Henry Butcher valuation did not touch upon the subject matter of the Rieckermann sale. Other than a bare allegation, there is not a shred of evidence to suggest that the Rieckermann sale was other than bona fide and at arm's length.

7. Henry Butcher opined that the Capsule Filler together with parts (packed in three separate boxes) and the labeller were in salable condition although the sale realization was expected to be low because they had been in storage for some time. On 24 January 2000, Henry Butcher valued the Capsule Filler and the labeller for insurance purposes as being worth $260,000 and $80,000 respectively. In its October 1999 Report, Henry Butcher also opined that the stretchbanding machine was unsalable and in their recent valuation, a nil value is ascribed to it. In addition, the paper packaging, blister packaging and the pill content being the property of the Company was, in Henry Butcher's opinion, unsalable. Attached to the Report is a detailed description of these items including the gross and net weight and contents. Each of the boxes was open at the top and had water marks. So, on the evidence, the items covered by the Report had limited value, of the order of $340,000.

8. It is to be noted that despite the fact that repossession occurred in July 1998, the Company has done nothing to ascertain the value or condition of its property which had been removed from the godown when the Equipment was repossessed. The suggestion that it had any significant value would appear to be of recent invention and wholly unsubstantiated.

9. The petitioner has given credit for the sale proceeds realized from the Rieckermann sale and is prepared to give credit for the labeller and the Capsule Filler as valued by Henry Butcher for insurance purposes.

10. The Company is only too well aware of the nature of the Equipment that has been repossessed. If such Equipment were of a value that could extinguish the debt, no doubt the evidence would already have been forthcoming. The same applies to the Company's property that was removed at the same time. The present request that a two-week adjournment be granted for the purposes of, inter alia, obtaining its own valuation and adducing evidence as to the property removed (when full details are to be found in Henry Butcher's report) is nothing but a transparent attempt to delay the inevitable. It is of course still open to the Company (if so advised) to take issue with the value of the repossessed Equipment and of its property at the proof of debt stage.

11. In my judgment, there is no genuine dispute as to the debt. By no stretch of the imagination could the Company hope to adduce evidence to satisfy the court that the value of what the petitioner had removed in July 1998 equalled or exceeded the debt so as to extinguish it. So far as it is suggested that the Company is in a position to file evidence regarding its ability to pay any "shortfall", that evidence could have been filed before the hearing. The defence is wholly unmeritorious and in all the circumstances, it would not be right to postpone matters further by granting an adjournment and increasing costs.

12. So far as the bankruptcy petition is concerned, the debtor, a director of the Company, guaranteed the due and prompt performance of the Company's obligations under the two agreements. Counsel for the debtor accepted that the debtor's position is no different from that of the Company's.

13. Orders accordingly.