RE B F CONSTRUCTION CO LTD

HCCW 691/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 691 OF 2004

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J U D G M E N T

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1.  This is a hearing of a petition to wind up BF Construction Company Limited (“the Company”).  The petition was brought by the only two contributories of the Company, Maintain Profits Limited (“MPL”) and Myriad Gold Corporation (“MGC”) on 12 June 2004.  Provisional liquidators were appointed for the Company on 18 June 2004.  For the background matters giving rise to the petition, I refer to my decision on 18 June 2004.

2.  The petition was presented on two grounds:

(1)	under section 177(1)(a) of the Companies Ordinance, Cap. 32, pursuant to a special resolution passed on 11 June 2004 by the contributories that the Company be wound up by the court; and
(2)	under section 177(1)(f), on the just and equitable ground.

3.  The matters relied on for the just and equitable ground are as follows:

(1)	the Company has not entered into any new construction project since the marital dispute of Dr Chan Shiu Chick and Madam Law Wai Duen, thus resulting in a monthly cash deficit of HK$1.2 million to the Company;
(2)	the poor corporate governance of the Company;
(3)	to allow for investigation into possible misfeasance by Dr Chan; and
(4)	to prevent a possible takeover of the Company by Bomina Limited under an option agreement.

4.  As for the basis of passing a special resolution to wind up the Company, this is because there is little prospect of the Company resolving its financial problems and governance issues due to the deadlock of the board of the directors, namely the two factions of Dr Chan and Madam Law.  So the provisional liquidators believe it would be in the best interest of the Company and its creditors that the Company be wound up.

5.  The hearing of the petition was adjourned from 13 August 2004 to 17 November 2004 to hear substantive arguments if a winding-up order should be made or whether the petition should be adjourned, as proposed by the petitioners and the provisional liquidators.  On 17 November 2004, I adjourned the petition to today for the provisional liquidators to file further evidence on the financial position of the Company and on an informal meeting of the creditors on 11 October 2004.

6.  Only Dr Chan and Madam Law have filed notices of intention to appear in these proceedings.  Several creditors have written to the provisional liquidators stating they are opposed to an immediate winding up and supporting the application for an adjournment. 

7.  Neither Dr Chan nor Madam Law is a contributory or creditor.  They do not have the right to be heard in this petition.  I am satisfied from the cases cited by Mr Poon, SC that the court does have discretion to hear them, if satisfied that they have sufficient interest in the proceedings, as amici curiae (Re Bradford Navigation Co. (1869) LR 9 Eq. 80 at 82; Re Bradford Navigation Co. (1870) LR 10 Eq. 331 at 337 and Re Bradford Navigation Co. (1870) 5 Ch App 600 at 603).  This is an appropriate case to exercise my discretion to hear Dr Chan and Madam Law, who, between them, hold all the shares of the contributories of the Company.  Furthermore, Madam Law has presented petitions to wind up MPL and MGC, in HCCW Nos. 345 and 346 of 2002, for the purpose of protecting and extricating the investment of these companies in the Company.

8.  I should mention that for good measure, Madam Law has issued a notice of motion in each of the petitions she has brought to wind up MPL and MGC, seeking orders that the provisional liquidators of these companies be directed to withdraw their application to adjourn the petition herein and that they should seek the immediate winding up of the Company.  As I have exercised my discretion to hear Madam Law, it would not be necessary to make an order on the notices of motion.

9.  In the correspondence exchanged between the solicitors for the provisional liquidators and the solicitors for Madam Law, a number of grounds have been raised by the provisional liquidators to justify their decision to seek an adjournment.  I am informed by Mr Harris for the petitioners and the provisional liquidators that he would only be relying on one ground to adjourn the petition, so it would not be necessary to deal with the other grounds, which have been addressed in the written submission of Mr Poon.

10.  The petitioners and provisional liquidators seek an adjournment because they have ascertained the views of “third party” creditors known to them, namely, creditors other than those in the Cheung Kong group, and a majority has voted in favour of seeking an adjournment for six months at the meeting on 11 October 2004.  Dr Chan supports the application for adjournment.  Madam Law seeks an immediate winding up.

11.  Detailed evidence has been filed by the provisional liquidators how they went about ascertaining the wishes of the third party creditors.

12.  On 14 September 2004 and 7 October 2004, the provisional liquidators wrote to all known third party creditors inviting them to a meeting.  The creditors were informed that the provisional liquidators had issued arbitration notices against the employers, which are the companies in the Cheung Kong group.  The purpose of the meeting was to discuss the arbitration process and to determine with the third party creditors the most efficient approach, to inform them of the current position of the winding up of the Company, and to ascertain their wishes as to the future winding-up proceedings of the Company.

13.  Out of 67 third party creditors known to the provisional liquidators, 27 responded by returning their slips confirming they would attend the meeting.

14.  The meeting on 11 October 2004 was attended by 25 creditors.  Also in attendance were the quantity surveyors retained by the provisional liquidators to advise them on the claims against the employers.  The meeting lasted for two and a half hours.  The provisional liquidators briefed the creditors on the arbitration process with the Cheung Kong group, the dispute between Madam Law and Dr Chan regarding the beneficial ownership of the shares in MPL and MGC, the misfeasance allegations against Dr Chan, the financial position of the Company and the liquidation process.  The creditors were advised of the available options, to support the petition or to oppose it.  The provisional liquidators answered questions raised by various creditors and a vote was then taken as to whether the creditors would support or oppose a six-month adjournment of the petition.  The creditors were asked to indicate the appropriate period of adjournment on their voting slips if they should think six months were not appropriate.

15.  Of the 25 creditors, two left the meeting without returning the voting slips, two abstained, two voted against and 19 voted in favour of the adjournment.  Those who voted in favour did not change the proposed period of adjournment of six months.

16.  According to the letter of the solicitors for the provisional liquidators dated 2 November 2004, the aggregate claims of the 25 creditors that had attended the meeting were about HK$218 million and this was about 92% in value of the claims of all the third party creditors that had been invited.

17.  The aggregate claims of those who voted in favour of an adjournment were about HK$186 million.  This was 85% in value of the claims of those who had attended the meeting.

18.  The provisional liquidators have indicated that if the petition is to be adjourned, the arbitration proceedings with members of the Cheung Kong group and their investigations into the misfeasance allegations against Dr Chan would continue, so the adjournment of the petition would not hinder or prevent the continuing investigations.  The provisional liquidators are also mindful of the limitation period if claims are to be pursued against Dr Chan.

19.  The reason why a majority of third party creditors have voted in favour of an adjournment is to facilitate the recovery of sums due to the Company from the Cheung Kong group which will eventually be used to pay the sums owed by the Company to the third party creditors.  They feel that an immediate liquidation may jeopardize the prospects of settlement of the Company’s claims against the Cheung Kong group.

20.  The Company undertook work as a main contractor exclusively for the Cheung Kong group.  It sub-contracted all its physical work to nominated and domestic sub-contractors.  The Company had never gone to arbitration with members of Cheung Kong group in the past on any dispute over the projects undertaken, as Dr Chan has enjoyed a very good relationship with Cheung Kong and the disputes were resolved in an amicable way.

21.  Neither Dr Chan nor Madam Law has filed a statement of affairs of the Company, notwithstanding they should have done so within 28 days of the appointment of the provisional liquidators on 18 June 2004.  The reason for this delay would appear to be due to the difficulty in determining the claims of Cheung Kong and the third party creditors.

22.  It is stated in paragraph 26 of the petition that the provisional liquidators believe that the Company is “currently solvent”.  The basis for such belief according to the petition is as follows.  In paragraph 29, the provisional liquidators gave an estimate of the financial position as at 31 July 2003, which was a net liability of HK$117 million odd.  The Company’s current liabilities comprise a contingent liability item of HK$317 million which are the claims of the Cheung Kong group for liquidated damages.  If the claims of the Cheung Kong group are proved in full, the Company would be insolvent.  The provisional liquidators had obtained advice from quantity surveyors on the merits of the claims of the Cheung Kong group and that is set out in paragraph 31.  The experts were of the view that on a worst case scenario, the Cheung Kong claims might be reduced from HK$317 million to HK$158 million.  If that should be correct, the Company would be solvent.

23.  The financial position of the Company has since been up-dated.  There is a balance sheet as at 18 June 2004 and updated to 5 November 2004.  The estimated net liability was reduced from HK$117 million to HK$70 million.

24.  Apart from the claims of the Cheung Kong group, the major creditors are the sub-contractors.  Their claims have increased from HK$82 million to HK$246 million. 

25.  The provisional liquidators say it is difficult to determine if the Company is currently solvent as there are three possible scenarios:

(1)	if all information as stated on the balance sheet of the Company as at 18 June 2004 is correct, i.e. that all receivables from Cheung Kong are realizable and all creditors claims and Cheung Kong liquidated damages claims are valid, the Company is insolvent with net liabilities of HK$70 million;
(2)	if all the creditors claims are valid and all Cheung Kong liquidated damages claims are valid, but some creditors claims may be valid against the Company and cannot be passed onto Cheung Kong, this would render the Company insolvent;
(3)	if all creditors claims are valid and can be passed to Cheung Kong and the Cheung Kong liquidated damages claims against the Company would be reduced from HK$315 million through negotiations (the provisional liquidators have opined that if the claims of Cheung Kong could be reduced through negotiation, this would increase the chance of passing on the third party creditors claims to Cheung Kong), the financial position of the Company would be improved and the Company may become solvent.

26.  I should also mention that the quantity surveyors have given a further report since the filing of the petition in which they have painted a much bleaker picture on the recovery in the arbitration proceedings as compared to their earlier advice.  They have identified other problems in the arbitration which I will not go into.

27.  The majority of the creditors and the provisional liquidators believe that notwithstanding the arbitration process with Cheung Kong, the best way to proceed is to negotiate with Cheung Kong, as the Company has done in the past, as this would give the best prospect for the Company to become solvent.

28.  The face value of the claims of the third party creditors, on the latest available information, has increased to HK$246 million, more than double the amount in July 2003.  The provisional liquidators have yet to investigate the reason for this.  The provisional liquidators reported to the meeting of creditors in October 2004 that the Company’s cash balance was in the region of HK$130 million.

29.  I am mindful that the quantity surveyors retained by the provisional liquidators had advised, on a worst case scenario, that the Company would still be solvent, but that was before the claims of the third party creditors have more than doubled and before their further report after the petition was presented.  I am also mindful that the Company may have a substantial claim against Dr Chan on account of the alleged misfeasance.  But if the claims against Dr Chan were ultimately successful, it could be quite some time for significant recoveries to be made by the Company, assuming that Dr Chan is in a position to satisfy the claims against him.

30.  As for the criticism that it should make no difference whether the negotiations with the Cheung Kong group are done by the provisional liquidators or the liquidators, there are nevertheless the commercial views taken by the majority of the creditors that because of the way things have been done by the Company in the past, the chances of a successful settlement would be more likely if the Company were not immediately wound up.  It is entirely understandable that the creditors should wish to explore the possibility of negotiations with Cheung Kong which if successful would lead to an early settlement of their own claims. 

31.  There is no direct authority dealing with the situation where a petition is presented by a contributory and some of the creditors of the company are opposed to an immediate winding up.  Where the views of creditors were taken into consideration, it was in the situation where the petition was presented by a creditor, as in the cases cited by Mr Harris and Mr Poon.

32.  Section 287(1) provides that court may, as to all matters relating to the winding up of the company, have regard to the wishes of creditors or contributories of the company, as proved by sufficient evidence.  I see no reason in principle I should not have regard to the wishes of a majority of the creditors in the present situation, as their interest would be affected if the Company should be insolvent were I to order an immediate winding up.

33.  I do not propose to wind up the Company today.  I would adjourn the petition for a reasonable period.  Six months sought by the petitioners would appear to me to be too long.  The provisional liquidators should be able to gauge, from the progress of the negotiations, what would be the prospects of a successful settlement.

34.  I therefore adjourn the petition to a date not earlier than three months from now, with two hours reserved.  I give leave to the petitioners to fix a hearing date forthwith.  If is necessary to adjourn further, the petitioners should apply accordingly.  I further direct that evidence should be filed by the provisional liquidators not less than seven days before the adjourned hearing.

35.  I would reserve the costs of the hearing today.