恩平宏中塑胶制品有限公司 v. MP ENGINEERING CO LTD (宏塑制品有限公司)

HCCW 712/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 712 OF 2009

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J U D G M E N T

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Introduction

1.  On 14 December 2009 (amended on 19 February 2010) a Petition was presented for the winding up of the Company for failure to satisfy a statutory demand served on the Company on 10 July 2009 requiring it to be paid a debt of $1,959,700.40.

2.  The presentation of the Petition was unusual because it is common ground that the Company is the ultimate beneficial owner of at least 78% of the Petitioner.  The Company argues, for reasons that I address in more detail later, that in reality it is the Petitioner’s sole beneficial owner.

3.  The Petitioner is incorporated in the Mainland.  Its legal representative is Hau Shek Wah (“Mr. Hau”), who is one of 3 shareholders in the beneficial owner of the Company, namely, CHL Enterprises Ltd. (“CHL”).  Mr. Hau did not consult his fellow shareholders in CHL before instructing solicitors to issue the statutory demand and the Petition.  As these facts suggest, this Petition forms part of a wider dispute and is one of a number of actions commenced by the opposing interests in CHL.

4.  On 29 March 2010 the Company issued a summons to dismiss the proceedings on the grounds that the debt relied on in the Petition was bona fide disputed on substantial grounds.

Legal Principles

5.  The relevant principles applicable to a creditor’s petition are well established.  If an alleged debt is bona fide disputed on substantial grounds the creditor does not have locus to present a winding-up petition: Re Jackin Total Fulfilment Services Ltd [2008] 3 HKLRD 475 at §§ 4-5.  Where liability is not in dispute, but it is not known with certainty how much is owed, a statutory demand cannot be served and a petitioner must be able to prove a company’s inability to pay its debts otherwise than by failure to comply with a statutory demand: Re Jackin Total ibid at §§ 9, 22.

6.  In Re Hong Kong Construction Works Limited (HCCW 670/2002, unreported, 7 January 2003), Kwan J (as she then was) described the principles relevant to an application to strike out a petition on the grounds that the underlying debt is bona fide disputed on substantial grounds as follows:

“(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, ‘substantial’ means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely ‘raising a cloud of objections on affidavits’ or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.

(The above principles are taken principally from Re ICS Computer Distribution Ltd [1996] 3 HKC 440; Re Welsh Brick Industries Ltd [1946] 2 All ER 197; Re Claybridge Shipping Co. S.A. [1997] a BCLC 572; Re a Company No. 006685 of 1996 [1997] BCC 830).

(5) If there is a debt which in part above the statutory minimum is indisputable, a petition can validly be presented even if the debt as claimed in the petition is for a larger sum, part of which is bona fide disputed.  The court would not as a general rule strike out a petition or restrain its advertisement even though the petition also refers to sums claimed by the petitioner in relation to which there is a dispute (Re Tweeds Garages Ltd [1962] Ch. 406 at 411 to 414; Re Taylor’s Industrial Flooring Ltd [1990] BCC 44 at 48H; Re Pendigo Ltd [1996] BCC 608 at 610B to D).”

The debt

7.  The Petitioner manufactures in the Mainland plastic products, principally water filled barriers.  Until about March 2009 these were supplied to the Company, which distributed them in Hong Kong.  The Petitioner says that 22 orders for goods remain unpaid.  It divides these into 3 groups:

(1)  Fourteen orders prefixed “MP” for the period from 8 October 2008 to 13 March 2009.  These total $1,327,902.67.

(2)  Five orders prefixed “MP” for the period 25 March 2009 to 9 June 2009.  These total $405,622.77.

(3)  Three orders prefixed “GZ”. These total $226,174.96.

8.  The first 2 groups are proved, says the Petitioner, by tables, purchase orders and invoices that it has adduced in evidence.  In addition the 2^nd group is proved by letters of guarantee issued by the Company corresponding to the delivery of the 2^nd group and bills of lading in respect of them.  The 3^rd group is proved by purchase orders and a table, which has been adduced by the Petitioner.  Taken at face value I accept that these documents prove the total debt.

The defence

9.  The Company says, first of all, that the Petitioner’s claim needs to be looked at in context.  The Petitioner was established in the Mainland in February 1998.  From November 2001, the Company and another Mainland company called Enping Yue Zhong Shi Ye Company Ltd. (“Mainland Party”) have been registered owners of 78% and 22% of the Petitioner’s capital respectively although, as I have already mentioned, the Petitioner says that in reality it is solely owned by the owner of the Company, namely, CHL, a fact it says was admitted by Mr. Hau in his 2^nd affirmation in HCCW 348/2009 dated 5 November 2009.

10.  CHL is in turn owned by Mr. Hau (40%),  Mr. Chan Chak Sang Simon (“Mr. Chan”) (40%) and Mr. Li Kam Ming (20%).  It has operating subsidiaries other than the Company and the Petitioner.  In about June 2008, Mr. Hau indicated that he wished to leave the CHL group.  Negotiations began and broke down in early 2009.  On 11 June 2009 Mr. Hau presented winding-up petitions against the Company and another subsidiary of CHL.  On 10 July 2009 the Petitioner, through its purported solicitors, issued a statutory demand against the Company (“First Statutory Demand”).  On 2 December 2009 the Petitioner issued another statutory demand (“Second Statutory Demand”).

11.  The Company responded through its solicitors to the Second Statutory Demand on 11 December 2009 pointing out that the Company, as sole beneficial owner of the Petitioner, had not authorised issue of the Second Statutory Demand and disputing the debt on the grounds that many of the consignments had not been received and that any sums owed were not payable on demand.

12.  The petitions issued by Mr. Hau were dismissed by consent with costs on 14 December 2009.  On the same day Mr. Hau caused the Petitioner to issue the present Petition relying on the First Statutory Demand, although the time for compliance with the Second Statutory Demand had not expired.  The Petition caused the Company’s bank accounts to be frozen, but it was not served until 5 January 2010. 

13.  The relevance of this, so the Company submits, is that it demonstrates, first, that this case does not involve a normal debt claim and, secondly, that the Petition has been brought without shareholders approval and for ulterior motives.  The Company advances 3 specific reasons why it says the Petition should be struck out.

14.  First, that Mr. Hau had no proper authority to cause the Petitioner to present the Petition.  It appears that Mr. Hau did not seek the approval of Mr Chan and Mr Li to issue either the statutory demands or the Petition.  I accept that given the ownership of the Company the way he chose to proceed is surprising and consistent with Mr. Hau using what he saw as an opportunity to put pressure on a member of the CHL group to advance his own attempts to exit CHL on favourable terms.  However, given that the Petitioner is incorporated in the Mainland and Mr. Hau is its legal representative I am not satisfied that he was unable lawfully to instruct solicitors to issue the statutory demands and the Petition.

15.  Secondly, the reason given by Mr. Hau for taking what the Company characterises as the unilateral step of issuing the Petition, namely, the protection of the rights of the Mainland Party under a joint venture agreement and avoidance of the risk of it terminating the joint venture and putting the Petitioner into liquidation, is bogus.  As I have already mentioned the Company points to Mr. Hau’s evidence in other proceedings as demonstrating that in reality the Mainland Party was a nominee shareholder and Mr. Hau was well aware of this.  It also says that the nominal nature of the Mainland Party’s interest in the Company is demonstrated by the fact that even when the Company has made substantial net profits the Mainland Party has not been paid a dividend.  Instead the entire Petitioner’s surplus cash was transferred to the Company in Hong Kong to be used as part of the CHL group’s cash and to finance the group’s operations. 

16.  The Mainland Party did not, as required by the joint venture agreement, inject any capital into the Petitioner, certainly not its factory, for the use of which the Company paid rent.  Neither did it take part in the management of the Petitioner, which was under Mr. Hau’s control.  Mr. Hau in turn reported to the Company’s Board and from 2008 onwards, the Management Committee of the CHL group.  Thus, submits the Company, it is clear that the reason Mr. Hau has given for issuing the Petition is a fabrication.

17.  As I have already indicated I accept that Mr. Hau’s conduct may well have been motivated by his own personal commercial interests rather than out of a genuine desire to obtain payment of a debt due to the Petitioner from the Company.  However, I do not think this is relevant.  As Ungoed-Thomas J said in Mann v Goldstein [1968] 1 WLR 1091 at 1095F-G:

“…It seems to me that to pursue a substantial claim in accordance with the procedure provided and in the normal manner, even though with personal hostility or even venom, and for some ulterior motive, such as the hope of compromise or some indirect advantage, is not an abuse of the process of the court or acting mala fide but acting bona fide in accordance with the process ….”

I agree with this view.  If the debt is presently payable the fact that Mr. Hau has demanded settlement of it for some ulterior reason does not give rise to a defence on which the Company can rely or constitute an abuse of process, which justifies striking out the Petition.

18.  Thirdly, the Company says that there is a bona fide defence to the debt.  The Company argues that a number of the orders were neither placed nor delivered to the Company.

(1)  Three orders with prefix “GZ” were placed by an associated company of the Company, which engages in sale of water-filled barriers manufactured by the Petitioner.  They had nothing to do with the Company.  These total $226,174.96.

(2)  At least 5 orders were not placed by the Company and were not delivered to it.  These total $405,622.77.

19.  It also complains that Mr. Hau has withheld information from Mr. Chan and Mr. Li thus preventing them checking the underlying documents to see whether the remaining orders were placed by the Company rather than for other companies and also to reconcile them with payments that have been made.  Ms. Linda Chan, who appeared for the Company, took me through documents during her address to demonstrate that between November 2009 and February 2010 the Company paid the Petitioner $477,608. The Company cannot identify how this has been taken into account.

20.  Several rounds of affirmations were exchanged.  Mr. Chan’s evidence contains many references to evidence in other proceedings and doubts that he has about the propriety of the way in which Mr. Hau has managed the relationship between the Petitioner and the Company and accounting of the transactions between them.  What I cannot find is any evidence that identifies a particular problem in respect of the claim for the balance of the debt after deduction is made for the 8 orders I have referred to above, which is $1,959,700.40 – ($226,174.96 + $405,622.77) = $1,327,902.67.

21.  I accept that the Company has shown a bona fide defence on substantial grounds to the 8 orders about which it can specifically give evidence, but not in respect of the others.  The Company should by now be able to ascertain from its own records what it ordered and received with sufficient precision to demonstrate that there is some problem with the remainder of the claim.  This is particularly true, if as is suggested in paragraph 49 of Mr. Chan’s 2^nd affirmation, it was responsible for financial control and resource allocation of the group of companies of which the Company was the parent.  Simply saying that if the Company had more information perhaps it would be able to contest other orders does not satisfy the onus which Re Hong Kong Construction ibid, and the cases referred to in it, explain lies upon a company attempting to demonstrate a bona fide defence on substantial grounds.

22.  Fourthly, there had been an established arrangement accepted by Messrs. Hau, Chan and Li and the Mainland Party that any surplus cash and net profits of the Petitioner would be transferred to, and kept by, the Company and used to finance the business and operations of the CHL group.  From 2003 to 2007, Mr. Li was responsible for reviewing and monitoring the cash flow position of the Petitioner based on its operational needs.  On 18 April 2008 a “MP Group Management Committee” was formed, which, according to Mr. Chan’s 2^nd affirmation, was responsible for financial control and resource allocation.  He says in paragraph 49 of that affirmation: “In other words, it is not up to the Petitioner to demand payment for goods supplied to the Respondent … but rather the Respondent is to have the final say in determining how much of the invoices issued by the Petitioner should be settled”.

23.  The balance of the amount due for goods supplied by the Petitioner was recorded in the Company’s accounts under “C/A – Enping”.  The balance sheet for the Company as at 28 February 2010 reads, under liabilities and capital, $3,259,122.93 as the balance of the current account between the Petitioner and the Company.  This shows that far more was owed by the Company to the Petitioner than the amount which is claimed in respect of unpaid deliveries of goods.  The Petitioner says that this serves to demonstrate that it is owed considerable sums and supports its case.  The Petitioner says that the outstanding balance did not reflect an agreed accounting and commercial arrangement, but arose as a result of a new venture by the CHL group, which proved a financial burden and absorbed the group’s subsidiaries’ surplus funds and left the Petitioner short of cash.  He points to several emails as suggesting that the reason that the Petitioner was not paid the sums due to it was because of the Company’s financial problems and that the implication of the emails is that when those problems had been resolved the outstanding sums would be paid.  The emails are from Mr. Chan to Mr. Hau and are dated 28 October 2008, 9 and 11 June 2009.  I accept that they appear to acknowledge that the CHL group has financial difficulties, but I do not think that they go any further than that.

24.  The balance sheet suggests that the Company played a treasury role in relation to the Petitioner and other companies within the CHL group.  It would be consistent with this and, in particular, the fact that the Company appears to have owed the Petitioner more than the amount of the outstanding invoices, if funds that were not required by a subsidiary were “parked” in the Company’s account.  It may be that in practice the position was much as described by Mr. Chan, but it does not follow that the Petitioner is not entitled to demand repayment if it so wishes.  The Company is not able to point to an agreement, as opposed to a loose, implicit understanding, between the Company and the Petitioner, which governs the Company’s right to payment.  The Company and the Petitioner are 2 distinct legal entities and absent an enforceable agreement the statement that I have quoted above from paragraph 49 of Mr. Chan’s 2^nd affirmation cannot as a matter of law be correct.  For example, if the Petitioner were to be put into liquidation it cannot be right that a liquidator would be unable to recover payment for goods supplied on the basis that it was for the Company to decide how much and when it should pay for goods that have been supplied to it and for which uncontested invoices have been issued.

25.  In order for the Petitioner to demonstrate a bona fide defence on substantial grounds it needs to adduce evidence of an enforceable agreement that allows it to determine how much and when payment is made.  In my view its evidence falls far short of this.  In the absence of such an agreement it seems to me that payment of such sum as is due must be payable, if not on demand, then within a reasonable period.  The date of the delivery of the goods in all cases appear to be in excess of 6 months prior to the date of issue of the First Statutory Demand and in my view the Company has been given a reasonable time in which to pay.  As I have already held that the Company has only adduced evidence to call into question a limited number of orders it follows that it has failed to show a bona fide defence on substantial grounds.

26.  Lastly, the Company suggests that Mr. Hau has acted improperly in trying to circumvent a resolution passed by the Company on 26 March 2010 to remove Mr. Hau and Mr. Chen Ze Shen as legal representative and directors of the Petitioner with a view to bringing these proceedings to a halt.  In order to avoid this Mr. Hau has caused the Petitioner to be put into liquidation.  I am unclear how it is suggested that this impacts on the decision that I have to make.  If Mr. Hau by behaving in this manner has breached some agreement or duty presumably some application could have been made to enjoin him.  I note in passing that according to his affirmations he is resident in Hong Kong.  If Mr. Hau’s actions are lawful, albeit perhaps smacking of sharp practice, I cannot see why it should deflect me from reaching the conclusion that a bona fide defence on substantial grounds has not been demonstrated.  In fact a puzzling feature of the Company’s case is why if, as Mr. Chan claims in his evidence (see for example paragraph 38 of his 1^st affirmation), Mr. Chan and Mr. Li had become increasingly concerned about Mr. Hau’s conduct in relation to the Petitioner and the Company from as early as 2009 they did not take steps earlier to take control of the Petitioner and avoid the messy situation in which they now find themselves in.

Conclusion

27.  I dismiss the Company’s summons with costs.