RE OUTBOARD MARINE CORPORATION ASIA LTD.

HCMP 2871/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2871 OF 2002

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REASONS FOR JUDGMENT

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1. This is an ex parte application by way of an originating motion issued on 23 July 2002 by the joint and several liquidators ("the Liquidators") of Outboard Marine Corporation Asia Company Limited (in creditors' voluntary liquidation) ("the Company") for an order that the voluntary liquidation of the Company pursuant to a resolution passed by the members at an extraordinary general meeting on 7 January 2001 be stayed permanently. The application is made under section 255(1) of the Companies Ordinance, Cap. 32, which applies to every voluntary winding up by virtue of section 249. Section 255 provides inter alia as follows:

"(1) The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls, or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court.

(2) The court, if satisfied that the determination of the question or the required exercise of the power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just."

2. In the case of a winding up by the court, the power to stay proceedings in relation to the winding up is found in section 209(1), which reads as follows:

"The court may at any time after an order for winding up, on the application either of the liquidator, or the Official Receiver, or any creditor or 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, either altogether or for a limited time, on such terms and conditions as the court thinks fit."

3. The power to stay the liquidation of a company under section 209(1) applies to a voluntary winding up by virtue of section 255(1). Where the application for a stay is made by the liquidator, the application may be made ex parte in an appropriate case and it would not be necessary to serve the application on any one (see Boyle and Marshall on the Practice and Procedure of the Companies Court, 1997 ed., paras. 9.169 and 9.170). I am satisfied that it is appropriate in the present case for the Liquidators to proceed ex parte, as the application is supported by all the contributories and it is not envisaged for good reasons that there would be opposition from any creditor.

4. The purpose of the application is to make the Company a going company again. It is necessary to obtain a court order for a stay because liquidation, albeit voluntary, effects an alteration in the status of a company (Thomson v. Henderson's Transvaal Estates Ltd. [1908] 1 Ch. 765 at 776, 778). Once a resolution for voluntary winding up is duly passed, this "immediately confers the irrevocable status of being in liquidation, with all the legal incidents thereof" (Ross v. P.J. Heeringa Ltd. [1970] N.Z.L.R. 170 at 172 to 173). Although a company can de facto stop the liquidation from going forward, it cannot thereafter function further because its status has been changed by reason of the liquidation, and it is necessary to have a court order to restore the company to its full capacity ((1957) 107 L.J. 145).

5. Once a permanent stay of the winding up proceedings is granted, the liquidation is for all practical purposes at an end. The liquidator may be discharged, control of the company reverts to the directors and the company may resume its business (Boyle and Marshall, op. cit. at para. 9.175; Palmer's Company Law, para. 15.164). Any winding up order that has been made in relation to the company becomes inoperative without being revoked; the company is no longer being wound up and does not have to comply with the requirement of notification of liquidation on company documents (Krextile Holdings Pty. Ltd. v. Widdows [1974] V.R. 689 at 693).

6. The power to grant a stay of winding up proceedings is discretionary. The burden is on the applicant to make out a sufficient case for a stay that carries conviction (In re Calgary and Edmonton Land Co. Ltd. [1975] 1 WLR 355 at 358H to 359A). Before granting a stay, section 209(1) requires "proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed". Hence, it is not merely sufficient for the applicant to establish that a stay is reasonable in the circumstances. He must satisfy the court that it ought to grant a stay (Krextile Holdings, supra. at 694). Where there are sufficient assets to pay all the creditors and the expenses of the liquidation, the interests of the members, in addition to those of the creditors and the liquidator, would be considered (In re Calgary and Edmonton Land, supra. at 360C to G). The court would also consider whether the stay is "conducive or detrimental to commercial morality and to the interests of the public at large" (Re Telescriptor Syndicate Ltd. [1903] 2 Ch. 174 at 180; Krextile Holdings, supra. at 694 to 695; Re Hua Hin (S) Co. Ltd., HCMP No. 3965 of 1999, 6 December 1999, Yuen J.).

7. I turn to the facts giving rise to this application.

The corporate information

8. The Company is a private company incorporated in Hong Kong in 1973 with an authorised share capital of HK$69,759,240.00, divided into 6,975,924 ordinary shares of HK$10.00 each, all of which were issued and fully paid up. 6,975,923 of the shares are owned by Outboard Marine Corporation Inc. ("OMC"), a company incorporated in the state of Delaware in the United States of America, and the remaining share is held by OMC Distributors, Inc. OMC used to be one of the world's leading manufacturers of outboard marine engines. On 22 December 2000, OMC sought the protection of Chapter 11 of the Bankruptcy Laws of the United States of America and a trustee in bankruptcy ("the Trustee") was appointed pursuant to Chapter 7 of the Bankruptcy Laws on 23 August 2001. OMC is insolvent, it is a debtor in Chapter 7, and bankruptcy proceedings are pending in the United States District Court for the Northern District of Illinois.

9. The Company was set up by the OMC Group to operate production and manufacturing facilities in Dongguan in the People's Republic of China and in Hong Kong. It became a substantial and successful business by 2000. Although the Company had operated profitably, the demise of OMC had placed the Company under considerable financial pressure because it was owed US$34 million by OMC. Shortly after OMC entered Chapter 11 protection, the directors of the Company convened an extraordinary general meeting of the Company on 7 January 2001 and a resolution was passed by the shareholders to wind up the Company on the ground that it could not continue its business by reason of its liabilities. On 8 January 2001, at a meeting of the creditors held pursuant to section 241(1) of Cap. 32, the majority of the creditors resolved to appoint the Liquidators and a committee of inspection. Thus, the liquidation commenced on 7 January 2001 and proceeded as a creditors' voluntary liquidation.

The Land

10. In the 1970s, the Hong Kong Government granted a lease to the Company of two pieces of land in Tsing Yi, being Tsing Yi Town Lot No. 54 and Tsing Yi Town Lot No. 67. In 1994, the Company agreed with the Government to surrender the original leases by way of an in-situ exchange for a new lease of Tsing Yi Town Lot No. 128, which covered a site with an area of 28,353 square metres ("the Land"). Prior to the surrender and exchange, the Company had discussions with a developer, New World Development Asia Ltd. ("New World") to develop the Land jointly with it. An agreement was reached by the Company with New World on 11 March 1994 ("the Development Agreement"), shortly after the Government granted a lease of the Land to the Company on 7 March 1994.

11. By the new lease, the Land is divided into the manufacturing area and the godown area. The use of the Land is highly restricted and is essentially confined to use for the manufacture of internal combustion engines and use as godown. The grantee is obliged to erect buildings on the Land with a total gross floor area of not less than 85,060 square metres and not greater than 141,765 square metres, of which not less than 20,000 square metres shall be the gross floor area of the manufacturing area. The lease also contains a non-alienation clause, which effectively prohibits the Company from assigning any interest in the manufacturing area to any person. It is pertinent to note that the lease had received approval by the Executive Council of the Government, so any amendments thereto would also have to receive approval from that body.

12. Under the Development Agreement, the scheme of co-operation and development was as follows. New World was to pay the premium to the Government for the grant of the new lease in the sum of HK$209.48 million; it was to demolish existing buildings and design and construct new ones on the Land; and it was to pay the Company HK$95 million for the grant of the development right. The Company would be entitled to use the factory built by New World in the manufacturing area with ancillary offices. New World would have an option to require the Company to assign to it undivided shares in the Land representing the godown area. The development in the godown area would be sold by New World and the Company may be entitled to a portion of the proceeds of sale.

13. In accordance with the conditions of grant in the new lease, a master layout plan was submitted to the Government for the development of the Land, which provided for the completion of the development of the godown area with a proposed gross floor area of 121,765 square metres by June 2000. While the development of the manufacturing area was completed in that the OMC Centre was built in 1997, the development of the godown area has not been commenced. In November 2001, the Lands Department wrote to the liquidators warning of re-entry action, as the godown area with the proposed gross floor area had not been built, and urging the liquidators to take immediate action to proceed with the development without delay. The Company would risk forfeiture of the lease if nothing were done. It is not entirely clear from the Development Agreement if New World is obliged to develop the godown area within a specific time limit.

The Share Sale Agreement

14. The liquidators and the Trustee recognised that in order to maximise the return to the shareholders of the Company (for the liquidation of the Company is a solvent liquidation as discussed below), and in turn the creditors of OMC, significant value would have to be realised for the Land. As is clear from the above, there are a number of obstacles to a sale of the Land by the Company, owing to the non-alienation clause, the restricted use of the manufacturing area, and the complexities associated with the contractual relationship with New World. It was also recognised by the Liquidators that there were problems if negotiations were to be conducted with the Government for a modification of the terms of the lease. Firstly, the Government was likely to require the payment of a substantial land premium if the terms of the lease were to be changed to permit a wider use and alienation. Secondly, any modification of the lease would require the endorsement of the Executive Council, and this would be a time-consuming and uncertain process. Besides, the market for substantial industrial sites in Hong Kong has been depressed for some time and there was very limited interest in the Land when the Liquidators marketed it through property valuers.

15. As a result, the Liquidators invited New World to consider an acquisition of the Land, principally for the latter to protect its already considerable investment in the Land. After negotiation, New World offered a price of HK$38.8 million, subject to contract. This was later turned into an offer for the shares in the Company and formed the basis of the Share Sale Agreement dated 17 May 2002 ("the Share Sale Agreement") executed by the two shareholders of the Company, the Trustee, the Liquidators and the buyer, which is a nominee of New World, Trade Port Enterprises Limited. By this device, the problems that might arise from a direct disposal of the Land would be avoided. After the sale of the shares, New World would remain as one party to the Development Agreement and it would acquire control of the other party, i.e. the Company, which is the grantee of the lease. New World would then be able to enter into discussions with the Government freely for any modification of the terms of the lease to develop the Land. The Lands Department has been notified of the share sale and has not raised any objection to this.

16. Under the Share Sale Agreement, completion of the sale and purchase is conditional upon, inter alia, the approval of the transaction by the United States Bankruptcy Court for the Northern District of Illinois and the granting of an order by the Hong Kong court for a stay of the voluntary liquidation. An order was obtained from the Bankruptcy Court in the United States on 17 July 2002 approving the Share Sale Agreement.

The status of the liquidation

17. The Liquidators have advertised twice in each of the Government Gazette, an English and a Chinese newspaper, in April and November 2001 for creditors to submit proofs of debt. In addition, the Liquidators wrote to all creditors of whom they were aware on five occasions between 31 January 2001 and 23 May 2002. All employees' claims were settled in or about December 2001. The claims of the OMC Group creditors were adjudicated and paid in full. All trade creditors' claims were duly dealt with or paid as appropriate. The two remaining potential liabilities of the Company have been dealt with in the following manner.

18. Firstly, there was a claim submitted recently by IBM China/Hong Kong Ltd. in the amount of US$26,916.41 and of which US$23,600.20 was rejected by the Liquidators. By a written resolution of the members of the Company dated 28 August 2002 ("the first written resolution"), provision was made to ensure that if the liquidation is stayed, the remaining liabilities of the Company, the costs and expenses of the liquidation and the remuneration of the Liquidators would be paid from the proceeds of realisation held as cash at bank by the Liquidators. An agency agreement dated 28 August 2002 ("the Agency Agreement") was entered into between the two shareholders of the Company and RSM Nelson Wheeler Corporate Advisory Services Ltd. ("RSM Corporate") by which RSM Corporate was appointed to act as agent in respect of the collection of debts owed by the debtors of the Company to the Company. By the first written resolution, notice was given by the shareholders of the Company to RSM Corporate designating the cash at bank held by the Liquidators and the debts owed to the Company and other receivables as forming part of the assets for which RSM Corporate is responsible under the Agency Agreement.

19. The other potential liability of the Company relates to the licence fee deposits of four licensees who have the Company's permission to occupy various parts of the Land. Provision is made for this in that the total sum of HK$319,600.00 is provided as the current liabilities of the Company in the draft completion accounts to be delivered by the sellers to the buyer under the Share Sale Agreement. The terms relating to the payment of consideration in that agreement provides for the retention and release of part of the purchase price in accordance with the completion accounts. Hence, the Company's liability to return the deposits to the licensees would be dealt with by the stakeholders under the provisions for payment of consideration in the Share Sale Agreement.

20. The Liquidators declared first, second and final dividends on 24 July 2001, 28 September 2001 and 11 January 2002 respectively. A dividend in respect of interest under section 264A of Cap. 32 was declared to all known creditors on 27 May 2002. Some of the creditors did not collect or present their cheques in respect of the first, second and final dividends for over six months. The amount of such uncollected or unpresented cheques being HK$68,549.91 was paid by the Liquidators on 29 August 2002 to the Companies Liquidation Account in accordance with section 285 of Cap. 32 and the Official Receiver is in control of these funds. As for the dividend in respect of interest, unclaimed amounts of HK$16,371.63 were transferred to a trust account of RSM Corporate on 29 August 2002 and will be held there until November 2002, six months from the declaration of the dividend, when the money would be paid over to the Companies Liquidation Account.

21. The Company is solvent and there is a surplus of assets, even without taking into account the value given under the Share Sale Agreement.

22. The solvency of the Company has enabled the Liquidators to make distributions to the shareholders. Accordingly, certain assets that are not readily realisable, such as debts owed to the Company and old inventory, have been distributed to the shareholders in specie on 29 August 2002, as authorised by Article 134 of the Articles of Association of the Company and pursuant to the first written resolution. Prior to the hearing of this application and on 3 September 2002, a further written resolution ("the second written resolution") was passed by the members of the Company authorising the Liquidators to distribute the remaining property to the shareholders in specie. Deeds of assignment have been executed by the Liquidators on behalf of the Company in favour of OMC in respect of receivables owed to the Company so as to perfect the authority contained in the written resolutions for the Liquidators to distribute the receivables in specie.

23. With the above transactions, as at the hearing of this application, the lease in the Land is the only asset held by the Company after any stay of the liquidation. The remaining potential liabilities of the Company, the costs and expenses of the liquidation and the unpaid remuneration of the Liquidators have been provided for by the first written resolution, the second written resolution and the Agency Agreement in the manner indicated above.

Exercise of the discretion

24. The Liquidators have deposed that there are no irregular matters or transactions which should be investigated, nor is there any misconduct of any officer of the Company.

25. In my judgment, the Liquidators have established an appropriate case for a stay to be granted. There is no unpaid creditor in the liquidation and potential outstanding liabilities of the Company have been provided for satisfactorily. The two members of the Company are in favour of a stay. There is a genuine commercial reason why a stay is sought. A stay would allow the Land to be properly dealt with and managed by the developer, instead of by a company in liquidation, with the risk of forfeiture of the lease. This would also enable the Trustee to realise the value of OMC's shareholding in the Company for the benefit of the creditors of OMC. Lastly, there is no irregularity in the affairs of the Company that should be investigated in the interest of the public.

26. For the above reasons, I have granted the permanent stay of the voluntary liquidation sought by the Liquidators and ordered that the costs of the Liquidators in this application be paid out of the assets of the Company.