RE FIVE STAR WINE LTD

HCCW 1208/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1208 OF 2002

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REASONS FOR JUDGMENT

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1. On 1 April 2003, I heard an application by the contributories of Five Star Wine Limited ("the Company") by Summons dated 21 March 2003 seeking a "stay of execution of the winding-up order made on 15 January 2003 against the Company. At the conclusion of the hearing, I made an order staying all further proceedings in the winding-up of the Company, such order being conditional on certain payments being made by the contributories. Thus, the stay will not take effect unless and until such payments are made within the periods specified later in these Reasons. When making the order, I indicated that I would give brief written reasons for my decision later. This I now do.

2. The Company appears, prior to the making of the winding-up order against it, to have carried on the business of wine merchants. On 1 November 2002, the Petitioner presented a creditor's petition seeking the winding-up of the Company. The petition was based on a debt in respect of unpaid costs and interest on such unpaid costs arising out of a claim which the Petitioner, a former employee of the Company, had made against the Company in the Labour Tribunal, and a subsequent appeal to the High Court. I was informed at the hearing that the amount of the claim itself had been settled or otherwise dealt with, but that the taxed costs of the proceedings which were payable to the Petitioner (who was legally aided) had not been paid by the Company.

3. The Company did not appear and was not represented at the hearing of the petition, and on 15 January 2003, Master Ho made a winding-up order against it in its absence. Following the making of the winding-up order, Kenny Tam and Shum Lap Chi of Messrs. Kenny Tam & Co. were appointed as Joint and Several Provisional Liquidators ("the Provisional Liquidators") pursuant to section 194(1)(A) of the Companies Ordinance, Cap. 32 ("the Ordinance").

4. At the hearing, Mr Sit, who appeared for the contributories, submitted that I had discretion to order a stay of the winding-up proceedings under section 209(1) of the Ordinance. This section provides as follows:

"The court may at any time after an order for winding up on the application of ... any ... contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, whether altogether or for a limited time, on such terms and conditions as the court thinks fit."

5. Mr Sit submitted that while the discretion was one which I should exercise having regard to the interests of the public at large, guidance as to the basis on which I should exercise that discretion could be found in the decision of Megarry J. in Re Calgary & Edmonton Land Company Limited [1975] 1 All ER 1046, a decision under section 256(1) of the Companies Act 1948, which is materially identical to section 209(1) of the Ordinance. In that case, Megarry J referred to the persons whose interests have to be considered on an application for a stay of winding-up proceedings in the following terms (at pages 1051d to 1052a of the judgment):

"That brings me to the third point, that of the persons whose interests have to be considered on an application for a stay. These must, of course, depend on the circumstances of each case; but where, as here, there is a strong probability, if not more, that the assets of the company will suffice to pay all the creditors and the expenses of the liquidation and so leave a surplus for the members of the company, there are plainly three categories to consider. First there are the creditors. Their rights are finite, in that they cannot claim more than 100p in the ￡. I cannot see that in normal circumstances any objection to a stay could be made on behalf of the creditors if for each of them it is established either that he has been paid in full, or that satisfactory provision for him to be paid in full has been or will be made, or else that he consents to the stay or is otherwise bound not to object to it. Second, there is the liquidator. By s 309, all costs, charges and expenses properly incurred in the winding-up, including the liquidator's remuneration, are made payable out of the assets of the company in priority to all other claims. Where a liquidator has accepted office on this footing, I cannot see that in normal circumstances it would be right to stay the winding-up unless his special position had been fully safeguarded, either by paying him the proper amount for his expenses or by sufficiently securing payment. A liquidator who loses control of the assets by reason of a stay ought normally to be properly safeguarded in relation to his expenses. Third, there are the members of the company. No question of satisfying them by immediate payment of all that they are entitled to can very well arise; for unlike the creditors, with their ascertained or ascertainable debts, the rights of the members cannot be quantified until the liquidation is complete. Accordingly, in normal circumstances, I think that no stay should be granted unless each member either consents to it, or is otherwise bound not to object to it, or else there is secured to him the right to receive all that he would have received had the winding-up proceeded to its conclusion. Each member has a right of a proprietary nature to share in the surplus assets, and each should be protected against the destruction of that right without good cause.

"It will be observed that each of the heads is qualified by the words 'in normal circumstances'. I am not suggesting that in these cases there are hard-and-fast rules; but I am saying that the circumstances that I have mentioned will usually be at least highly material in deciding how the court's discretion should be exercised. ..."

6. In this case, the evidence before me disclosed that the Company had but two creditors, the Petitioner and one of the contributories, Mr Fong Kit Jack ("Mr Fong"). So far as the Petitioner is concerned, as at 31 March 2003 he was owed a total of HK$198,451.72 in respect of the taxed costs (which amounted to HK$178,271) and interest thereon down to 31 March 2003, these being the debt on which his petition was founded. Interest continues to accrue on such taxed costs at the rate of HK$39.07 per day. As for Mr Fong, he was, according to his affirmation made in support of this application, owed some HK$5,235,334.44 in respect of director's loans made by him to the Company. Mr Fong said in his affirmation that he had waived this loan, exhibiting a document to this effect dated 13 March 2003 which was signed by him. He also said that he would personally undertake to pay all amounts owing to the Petitioner on or before 31 May 2003.

7. So far as the Company's assets are concerned, these appeared to be limited. Some HK$61,000 odd was recovered by the Provisional Liquidators from its bank accounts. To date, there had been no recoveries in respect of its accounts receivables, which had a book value in excess of HK$1.6 million, but which were not (to my mind, somewhat surprisingly) expected to produce anything on the liquidation of the Company.

8. On this basis, the Company was clearly insolvent at the date when the winding-up order was made. However, Mr Sit initially submitted that, as Mr Fong's director's loan had been waived, and he had undertaken to pay the amounts due to the Petitioner, the Company is no longer insolvent. In my view, however, this was not quite right, as the promise embodied in the proposed undertaking would not of itself extinguish the Company's liability to the Petitioner. Until the Company's debt to the Petitioner is discharged by payment (whether by Mr Fong or someone else), the Company would remain insolvent, as its realisable assets appear to amount to less than that debt. Mr Sit, accepting that this was so, accepted that it would not be appropriate to grant an unconditional stay of the proceedings immediately, but suggested that this could be dealt with by making a conditional order for a stay of the winding-up proceedings, conditional on payment of the debt owed to the Petitioner on or before 31 May 2003.

9. Mr Ting, appearing for the Director of Legal Aid on behalf of the Petitioner, indicated that the Petitioner would accept payment if tendered, and would consent to a conditional order, provided that the payment included not only the taxed costs and interest down to the date of eventual payment, but also included a further sum of HK$43,985 in respect of the Petitioner's costs of these winding-up proceedings. Mr Sit accepted that this further sum should also be paid, on or before 31 May 2003.

10. Mr Lam, who appeared in person, but had earlier submitted a brief report to the court dated 22 March 2003 setting out the progress of the liquidation to date, and making certain observations on the application, indicated that the Provisional Liquidators would have no objection to the proposed stay, so long as provision was made to secure payment of the costs, charges and expenses of the winding up, including their fees and those payable to the Official Receiver. He indicated that these were at present thought to be in the region of HK$120,000 odd, but suggested that a sum of HK$150,000 should be lodged by payment into the client account of his firm, this higher figure being needed to cover the possibility that the costs would turn out to be higher than his estimate, whether because of any underestimate in relation to the costs incurred so far, or because of additional costs that might be incurred by the Provisional Liquidators or the Official Receiver between now and the coming into effect of the proposed order, on any conditions that might be imposed being satisfied. Any surplus would be refunded at the end of the day. Mr Sit was agreeable to this course being taken.

11. Having accepted, as he had to, the points made by Mr Ting and Mr Lam respectively, Mr Sit suggested that I should grant a stay of proceedings in relation to the winding-up of the Company subject to and conditional upon (1) the sum of HK$150,000 being paid to the Provisional Liquidators for deposit into the client account of Messrs. Kenny Tam & Co. on or before 15 April 2003, as security for the costs, charges and expenses of the liquidation, including the fees or remuneration of the Provisional Liquidators and the Official Receiver; and (2) payment of the sum of HK$198,451.72, additional sums of HK$39.07 per day from 1 April 2003 until payment, and the further sum of HK$43,985 to the Petitioner on or before 31 May 2003.

12. In my view, having regard to the fact that the Petitioner, who appeared to be the only remaining creditor of the Company, and the Provisional Liquidators each consented to the making of such an order, which is sought on the joint application of all the contributories, and given also that the Company would, on the material before me, be solvent upon payment of its debts to the Petitioner, it would be appropriate for me to exercise my discretion by making the order in the conditional form in which it is now sought. I should make it clear, however, that these winding-up proceedings remain on foot until such time as the conditions which have been imposed have been complied with. In these circumstances, it will not be open to the Company to resume trading before the stay of the winding up proceedings becomes effective. That being so, I do not consider that there is anything that the public interest would require that would weigh against the making of the order sought. I therefore made an order staying these winding-up proceedings subject to the conditions referred to above.

13. I shall also make a costs order nisi that the contributories shall pay to the Petitioner and the Provisional Liquidators their costs of this application, such costs to be taxed on the party and party basis if not agreed.