SINGASIA HOLDINGS LTD v. 劉新生

HCCW 257/2019

[2019] HKCFI 2555

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 257 OF 2019

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D E C I S I O N

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Introduction

1.  The Company is a company listed on the GEM Board of the Stock Exchange of Hong Kong. On 28 August 2019, the petitioner (Mr Liu) petitioned for the winding-up of the Company on the ground of inability to repay a debt of HK $12 million.  The Company intends to oppose the petition and has engaged a firm of solicitors and a firm of forensic accountants for such purpose.

2.  On 23 and 24 September 2019, the Company entered into a Subscription Agreement and a Supplemental Agreement with Eden Publishing Pte Ltd for a proposed allotment of shares for the purpose of raising HK$13 million.  The amount raised would be used as general working capital and for repayment of liabilities of the Company.

3.  The Company seeks a validation order in respect of:

(1)  The transfer of the fully paid up shares of the Company since 28 August 2019;

(2)  The allotment of 250 million ordinary shares to Eden Publishing Pte Ltd for the purpose of raising HK$13 million;

(3)  Payment of professional fees incurred since 28 August 2019 and to be incurred on the Company’s solicitor;

(4)  Payment of professional fees incurred since 28 August 2019 and to be incurred on the Company’s forensic accountant; and

(5)  Payment of the ordinary business expenses incurred since 28 August 2019 and to be incurred by the Company.

(1)   Validation order in respect of transfer of shares

4.  In respect of an application for validation of transfer of shares, the court should ask whether or not the creditors might be better or worse off in the event of a winding up order being made and the transfer not having been sanctioned. A transfer of fully paid up share cannot be objectionable: Re Belgravia Properties Ltd [2015] 1 HKLRD 509, §§6-8, Harris J.

5.  The issued shares of the Company listed on the GEM Board are fully paid up. The creditors would not be worse off if the validation order in respect of the transfer of shares in the Company is granted or a winding up order is made.

6.  Mr Liu does not objection to a validation order being made and I grant one accordingly.

(2)   Validation order in respect of the proposed allotment of shares

7.  In relation to an insolvent company, the court should grant a validation order to enable the Company to carry on trading only if it is satisfied that the continuation of trading is likely to generate net income for the Company: Re Century Group Ltd., HCCW 59/2004 (18 March 2004), §9, Barma J (as he then was).

8.  Where there are doubts as to the solvency of the company, the court would not sanction the proposed transaction unless it was satisfied by affirmative evidence that the transaction would be beneficial and advantageous for the company and, for all practical purposes therefore, the court would require a fairly heavy onus in relation to evidence as falling on persons seeking to justify a disposition not in the ordinary course of the company’s business: Re First Dragon Fashion (Hong Kong) Limited[2010] 4 HKLRD 592, at §14, Chung J.

9.  In the present case, the Official Receiver queried the solvency of the Company in that the Company’s current assets at S$780,727.34 and net assets at S$2,330,988.75 were based on unaudited figures as at 31 July 2019.  The annual report of the Company for 31 July 2018 revealed that the Company had recorded a comprehensive loss of S$3.08 million in 2018, about 5 times that of 2017.

10.  Mr Lai, counsel for the Company, drew my attention to the 2018 Chairman’s Statement which explained that the comprehensive loss was for staff cost and administrative expenses for strengthening the project team and higher business development expenses.  The comprehensive loss had in fact been taken into account in computing the net assets of S$5,854,487 for the year ending 31 July 2018.    Although the net assets for 2019 was a substantial drop from 2018, the Company still had a unaudited net equity of over S$2.33 million for 2019.  The S$2.33 million had already taken into account the amount allegedly due to the Petitioner who claimed to be the assignee of a series of debts from Anthony Yeung and Wang Chunyang to the Company.

11.  I am satisfied from Mr Lai’s submission that the Company is solvent. 

12.  The proposed allotment is to raise funds for the Company to keep it going.  The Company intends to use the funds raised for general working capital and for repayment of liabilities. This will be beneficial to the Company and has the effect of preserving and/or enlarging its assets for the general body of creditors. 

13.  The proposed allotment is unobjectionable and Mr Liu does not object to it.  I grant a validation order accordingly. 

(3)  Validation order in respect of professional fees of the Company’s solicitor

14.  Where the Company is solvent which has a valuable ongoing business, the directors should be allowed to continue to operate the business normally and without close supervision by the Companies Court: Re Emagist Entertainment Ltd [2012] 5 HKLRD 703, at §5, Harris J.

15.  Loeb & Loeb solicitors, gave advice in connection with the fund raising exercise.  The professional fees for the proposed allotment were estimated to be about HK$150,000 and the amount was published in an announcement of the Company.  I grant a validation order up to HK$150,000.

16.  In respect of professional fees for the present litigation, the court has not been informed of the estimated amount except that Mr Lai asked for a sum of $350,000 at the bar table.  Without the estimates and breakdown for the amount, and using the court’s experience on costs estimates, I am not prepared at this stage to grant a validation order for a sum beyond $100,000.

(4)  Validation of professional fees in respect of the forensic accountant

17.  The Company claims that the occurrence of the underlying debt in the petition was “suspicious’ and there was a concern that certain personnel in the management level engaged in conduct which amounted to mismanagement of the Company. Allegedly the forensic accountant (FTI Consulting (Hong Kong) Limited) has already uncovered a number of suspicious transactions in support of the Company’s counterclaim against the defaulting directors who caused the Company to incur the debt, the assignors of the alleged debt and the Petitioner. 

18.  The draft defence to the petition has not been placed before this court.  It is simply not possible to decide if forensic accounting evidence is required or not.  I am not prepared to grant a validation order in this respect.

(5)  Validation order in respect of ordinary business expenses

19.  Paragraph 25 of the supporting affirmation referred to 2 recurring monthly sums of HK$20,000 and S$65,000 for directors’ remuneration; and HK$139,230 for monthly fees and charges for compliance and regulatory expenses.  The rest are one off payments for various running expenses.  They all appear to be ordinary business expenses.  The court grants a validation order in accordance with paragraph 25 of the affirmation.

Conclusion

20.  I order that the following transactions shall not be avoided by s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) in the event of a winding-up order being made against the Company:

(1)  All and any transfer of issued and fully paid up shares in the Company since 28 August 2019;

(2)  A proposed allotment of 250,000,000 ordinary shares to Eden Publishing Pte Ltd pursuant to a share subscription agreement dated 23 September 2019 (as amended by a supplement agreement dated 24 September 2019) for the amount of HK$13,000,000;

(3)  Payment of professional fees already incurred and to be incurred by the Company to its Solicitors Messrs. Loeb & Loeb LLP in connection with the proposed allotment exercise up to the amount of HK$150,000; and up to HK$100,000 in relation to giving advice to the Company, the filing of a defence to the petition and appearing before the companies judge for call over; and

(4)  Payments of the Company, including but not limited to the payments made into or out of the Company’s bank account, for the purpose of paying the debts of the Company incurred in the ordinary course of its business from 28 August 2019 as set out in paragraph 25 of the affirmation of Sim Hak Chor filed on 8 October 2019.

21.  The application for a validation order for payment of professional fees already incurred and to be incurred by the Company on FTI Consulting (Hong Kong) Limited in connection with services of forensic accounting is refused.

22.  Costs of this application shall be in the cause of the petition.