RE KING'S DYEING & WEAVING FACTORY LTD

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

CWU NO. 217 Of 1986

__________

______________

___________

JUDGMENT

___________

1. On the 15th July 1986 a petition was presented by Yat Sun Dyestuffs & Chemicals Company Limited (the petitioner) to wind-up King's Dyeing & Weaving Factory Limited (the company) on the grounds that it is insolvent and unable to pay its debts and also on the just and equitable ground. The petition is due to be heard on the 15th September 1986. The petitioner claims that the company is indebted to it for the sum, of $1,092,088.40 in respect of goods sold and delivered between December 1985 to June 1986 which sum remain unpaid. Two cheque dated the 9th lay 1986 and the 9th July 1986 for $159,598.90 and $222,094 in payment of part of the debt were drawn by the company in favour of the petitioner, but were dishonoured upon presentation.

2. The petitioner issued an ex-parte summons for the appointment of a provisional liquidator on the 23rd July 1986 which came before me at 11:30 a. m. on that day. Notice of the hearing was given to the solicitors acting for the company with whom the petitioner's solicitors had previously been in correspondence, and the company appeared that morning by Mr. Brandt. In support of the application for the appointment was an affidavit sworn by Mr. Li Sai On, a director of the petitioner in which he sets out particulars of the debt and exhibits to his affidavit some of the correspondence between the solicitors, in which it is revealed that the company was suffering from cash flow problems. It is not in dispute that the liabilities of the company exceed $158,000,000.

3. On the 9th July 1986 the company's solicitors wrote to all the creditors with brief details of the current financial position of the company together with proposals for a restructuring scheme. The company asserted that if it was put into liquidation the unsecured creditors could expect to recover less than 1 cent in the dollar. Accordingly it is clear that the company is hopelessly insolvent. In fact receivers have been appointed by the Nanyang Commercial Bank Limited under a debenture in respect of the plant and machinery charged to the debenture holder. Mr. Li says that the company is still operating and has about 2000 employees. He believes that the assets of the company will be in jeopardy for employees may cause unrest in the factory whilst the directors or the employees may dispose of or dissipate the assets.

4. Mr. Brandt addressed me on Wednesday to the effect that the company wished to oppose the application for it was hoped, following a creditors' meeting that was held on the 15th July 1986, to draw up a scheme of arrangement for the benefit of the creditors that would enable the company to keep afloat. He said that approval in principle had been received from 43% in number of the body of the creditors which amounted to about 41% in value and that the time limit for creditors to submit their votes would not expire until the 6th August. Mr. Brandt also said that a creditors meeting had been arranged to take place on that afternoon to discuss inter alia, the application for the appointment of the Official Receiver as provisional liquidator and whether the petitioner should be bought out by the other creditors. He said that he was not in a position to deal with the substantive issues that had been addressed to me by 'Mr. Yu who appeared on behalf of the petitioner, but emphasised that the company should be entitled to answer the allegations as the matter was not one of urgency, and should, therefore be dealt with on an inter pastes basis.

5. I considered that the appropriate course was to adjourn the summons until today to enable the company to file evidence in opposition to the application. However, since Wednesday, I have been informed, with much surprise, both to the petitioner and myself, that a meeting was held yesterday by the directors who made a statutory declaration under section 228A of the Companies Ordinance for the company to be wound-up voluntarily on the grounds that by reason of its liabilities, it cannot continue in business. I am informed that two members of the firm of Arthur Andersen & Partners have been appointed to act as provisional liquidators and that they have arranged for a meeting of creditors to be held on the 15th August 1986. No evidence has been filed by any of the directors tc explain this change of course. In fact no evidence has been filed by the company.

6. Mr. Yu for the petitioner renewed his application today for the appointment of the Official Receiver as provisional liquidator and invites me if I accede to ante date the order to Wednesday under the provisions of Order 42, rule 3 of the Rules of the Supreme Court which applies by virtue of Rule 210 of the Companies Winding-Up Rules. I am satisfied that I have power to do so which was not in fact challenged by counsel for the other parties who appeared before me.

7. Mr. Fan, counsel for the directors, submitted that the action taken yesterday was in the best interests of the creditors for the decision represented about 41% of their value whereas the debt due to the petitioner amounts to less than 1%.

8. Mr. Allman-Brown who appeared on behalf of the provisional liquidators, drew my attention to some authorities which set out the principles upon which the court will make an order for a compulsory winding-up where a voluntary winding-up is in progress. He cited In re J.D. Swain Ltd.⁽¹⁾, Re Medisco Equipment Ltd. ⁽²⁾, Re Lowerstoft Traffic Services Ltd.⁽³⁾ and Re Palmer Marine Surveys Ltd.⁽⁴⁾ However, all those cases concerned the actual hearing of a petition when the voluntary winding-up had been in progress for some period of time. The Court also had the advantage of evidence from the creditors who supported and opposed the petitions.

9. It is trite law that a creditor of a company in a voluntary liquidation on proving his judgment debt and that the debt has not been satisfied, is entitled ex debito justitiae to an order for the compulsory winding-up of the company see In re James Millward and Company Limited⁽⁵⁾. In this case the debt due to the petitioner has not been challenged whilst it is clear that the company is hopelessly insolvent and unable to pay its debts. Accordingly the petitioner would be entitled to a compulsory order to wind-up the company unless the majority of the creditors opposed the petition in which event the petitioner would be required to establish special circumstances why the minority should prevail.

10. On the assumption that 41% of the creditors do favour the present course for a voluntary winding-up, upon which as I have said, there is no evidence before me, I do not have any evidence from the other 59%. It has been submitted by counsel that as the present train of events is in motion, it should not be interrupted for the, liquidators are members of a firm of accountants of high repute and they will necessarily take all steps in the best interests of the general body of creditors. They have also called the meeting of creditors to which I have referred.

It was also submitted that there is no evidence to indicate that the directors have not acted bona fide. A further matter to be considered as was pointed out to me is the work force.

11. Mr. Woollard on behalf of the Official Receiver presented a most helpful submission. He submitted that if the present provisional liquidators continue to act, they will not be limited in the powers that they can exercise. They will not be subject to the powers that can be authorised by the Court and will not be answerable to the Court, for their actions. It is also pertinent to observe that the cost and expenses properly incurred in a voluntary winding-up will, by section 256 of the Companies Ordinance, be payable out of the assets of the company in priority to all other claims. It is indeed as was submitted by Mr. Woollard, a matter for comment as to how section 228A can be invoked in the circumstances of this case as the company still appears to be operating.

12. Upon the evidence before me on Wednesday, the petitioner had established a prima facie case for a winding-up order and had put forward sufficient grounds to show that the assets of the company may be in jeopardy. The application was adjourned at the request of the company to enable evidence to be filed in opposition and for their case to be fully argued. No explanation has been provided by the directors for the clandestine action that was taken by them yesterday. As the provisional liquidators were only appointed yesterday, only minimal costs can so far have been incurred for little by way of investigation can have taken place in so short a time.

13. I do not agree that the appointment of the voluntary provisional liquidators is in the best interests of the general body of the creditors, for indeed the views of the majority have not even been canvassed.

14. The interests of the work force can as easily be safeguarded by the Official Receiver as provisional liquidator as well as by the voluntary provisional liquidators, for the Official Receiver can, if necessary, apply for the appointment of Special Massagers, for them to continue the operation of the business if they think fit to do so. The case made out for the appointment of voluntary provisional liquidators was quite unjustified. In fact, I had cause to rebuke both the directors of the company and their solicitors for the devious way in which they attempted to flout the jurisdiction of the Court.

15. In all the circumstances of this case and in the exercise of my discretion, I shall make an order for the appointment of the Official Receiver as provisional liquidator of the company with effect from the 23rd July 1986.

(1)     [1965] 1 W. L.R. 909
(2)    [1983] BCLC 305
(3)    [1986] BCLC 81
(4)    [1986] BCLC 106
(5)    [1940] 1 Ch. D. 333