RE ZHUANG PP HOLDINGS LTD

HCCW 321/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 321 OF 2004

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D E C I S I O N

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1. On 13 March 2004, Umbrella Finance Company Limited ("Umbrella Finance") applied ex parte on notice for provisional liquidators to be appointed for Zhuang PP Holdings Limited, formerly known as China United Holdings Limited ("the Company"). I gave directions that the application should be heard inter partes on an early date with a timetable for evidence to be filed in opposition and in reply. This is the hearing of the inter partes summons for the appointment of provisional liquidators.

The background

2. The Company was incorporated in Bermuda in March 1989 and registered in Hong Kong under Part XI of the Companies Ordinance, Cap. 32. Prior to 3 January 2003, its shares were listed on The Stock Exchange of Hong Kong Limited ("the Stock Exchange"). The Company and its subsidiaries had two main lines of business before January 2003, property investment and the provision of financial services and stock brokerage.

3. In July and October 1997, the Company and its subsidiaries obtained facilities from the Kwangtung Provincial Bank and the China and South Sea Bank Limited for the purchase of landed properties. The Bank of China (Hong Kong) Limited ("BOC") became the successor corporation of, inter alia, these two banks in a merger in October 2001.

4. In August 2002, the Company announced its intention of undergoing a reorganisation for the purpose of changing its domicile from Bermuda to Hong Kong by way of a scheme of arrangement under the Companies Act of Bermuda. In the announcement dated 27 August 2002, it was stated that the directors considered it in the best interests of the Company and its shareholders as a whole that the holding company of the group be established in Hong Kong, being a common law jurisdiction familiar to international investors and the principal place of operation of the Company. It was further stated that "implementation of the scheme of arrangement will not of itself alter the underlying assets, business, management of financial position of [the Company] and its subsidiaries, other than as a result of the payment of expenses relating to the scheme of arrangement."

5. The reorganisation proposal by way of the scheme of arrangement was published on 26 November 2002. The reorganisation involved the following measures:

(1) a newly incorporated company in Hong Kong known as China United International Holdings Limited ("CUI") would hold all the issued shares of the Company;

(2) the existing shareholders of the Company would be issued shares in CUI;

(3) all the existing subsidiaries of the Company would become indirect subsidiaries of CUI; and

(4) the listing of the shares of the Company on the Stock Exchange would be withdrawn and simultaneously the shares of CUI would be listed by way of introduction.

6. The scheme of arrangement became effective on 3 January 2003. On that day, the Company became a wholly owned subsidiary of CUI and the listing of the shares of the Company was withdrawn. On 6 January 2003, the shares in CUI were listed on the Stock Exchange.

7. The annual report for the Company and its subsidiaries for the year ended 31 December 2002 ("the 2002 Annual Report") was presented by the board of CUI on 16 April 2003.

8. On 29 April 2003, BOC served demands on the Company and two of its subsidiaries for immediate repayment of the bank loans. On 10 May 2003, BOC issued a writ in High Court Action No. 1666 of 2003 against the Company and the two subsidiaries claiming inter alia a total sum of HK$206 million. A defence and counterclaim was filed on 20 June 2003 in which it is admitted that the Company owes BOC approximately HK$19 million. The High Court Action remains active.

9. On 20 August 2003, CUI made an announcement that it had on that day entered into an agreement with Sunderland Properties Limited to sell the entire issued share capital of the Company for an aggregate consideration of HK$10 million. As the disposal was a "connected transaction" within the Listing Rules and subject to the approval by the independent shareholders, it was announced that the shareholders of CUI would be provided with details of the disposal and other relevant information in a circular.

10. On 19 September 2003, CUI published an interim report of CUI and its subsidiaries for the six months ended 30 June 2003 ("the 2003 Interim Report"). In that report, it was stated that during the period concerned, the Company had not reached agreement with BOC for restructuring of the loans and in view of the writ issued, CUI and its subsidiaries had taken or would take the following measures to enable the group to operate as a going concern:

(1) CUI "has undertaken" a series of restructuring of shareholdings in the subsidiaries held by the Company whereby the Company's equity interests in "certain major subsidiaries" were transferred or sold to "the New Group" (this was defined in the 2003 Interim Report as CUI and its subsidiaries excluding the Company) and to a "third party". After the restructuring, the Company became an insignificant part of the net assets of CUI and its subsidiaries and accordingly, the directors considered that CUI and its subsidiaries were not "expected to suffer from any material losses resulting from disposal or liquidation of [the Company]"; and

(2) the Company would endeavour to re-negotiate with its lenders to restructure its loans and it would not resume repayment of the loans and related interest until agreements for the loan restructuring could be reached with the lenders.

11. On 30 September 2003, CUI sent a circular to its shareholders ("the Circular") in respect of the "connected transaction" aforesaid. It was stated that since the beginning of 2003, CUI and its subsidiaries had undergone "a series of internal restructuring" and as a result the Company has become the "property investment arm" and holds most of the landed properties of CUI and its subsidiaries. The circular further explained that CUI intends to concentrate on "its primary line of businesses of investment in trading securities and provision of brokerage and financial services".

12. On 23 December 2003, Umbrella Finance took an assignment of, inter alia, that part of the bank loans due to BOC as admitted in the High Court Action and gave notice in writing of the assignment to the Company on 29 December 2003. At a meeting with the Company on 27 February 2004, Umbrella Finance requested information and details in relation to the "internal restructuring" after the scheme of arrangement had become effective in January 2003. This was followed up by the letters from the solicitors for Umbrella Finance dated 2 and 8 March 2004, in which the Company was asked to provide details of the transactions in the internal restructuring with supporting documents and to show that any assets sold were for proper consideration. The Company merely asserted in its replies dated 4 and 10 March 2004 that the internal restructuring was "carried out openly and in compliance with the relevant laws and regulations" and that "all transfers and/or sales of the equity interests in certain subsidiaries to the new group were made at arm's length, bona fide and with good value", taking the stance that it was not obliged to provide the information sought as long as its queries on the status of Umbrella Finance as assignee and the validity of the notice of assignment had not been answered.

13. On 16 March 2004, Umbrella Finance filed the petition herein to wind up the Company on the basis of that part of the debt admitted by the Company in the High Court Action of approximately HK$19 million. The petition was presented on two grounds: the Company is unable to pay its debts, and it is just and equitable to wind up the Company in that its affairs require investigation. On the same day, the summons for the appointment of provisional liquidators was issued. Of the financial creditors consulted by Umbrella Finance, DBS Bank (Hong Kong) Limited has no objection to this application and the International Bank of Asia supports the application.

The legal principles

14. The principles governing the appointment of a provisional liquidator are not in dispute. The court has a wide and unfettered discretion under section 193 of Cap. 32 whether or not to appoint a provisional liquidator and two matters are relevant for consideration. The first is whether the petitioner has made out a "good prima facie case" for a winding-up order at the hearing of the petition. This is to be considered on the basis that any views expressed by the court on the merits are provisional only and it is for the petitioner to show, "by believable evidence, facts which if eventually proved at the hearing of the petition will entitle it to a winding up order". If a good prima facie case is made out, the second matter is whether it is right that a provisional liquidator should be appointed in all the circumstance. This is a question to be decided "on the basis of commercial realities, the degree of urgency and need established by the petitioner and the balance of convenience according to the circumstances" (Re Five Lakes Investment Co. Ltd [1985] HKLR 273 at 283J to 284E).

15. Mr Yu, SC, who appeared for the Company, has not disputed that Umbrella Finance has made out a good prima facie case for a winding-up order. It is unnecessary to say anything further about this. I am only concerned with whether it is right to appoint provisional liquidators in this situation.

The case for appointment

16. In summary, Miss Ismail contended on behalf of Umbrella Finance that provisional liquidators should be appointed to investigate fully the affairs of the Company as soon as possible and to protect the remaining assets pending the determination of the petition. Even though Umbrella Finance cannot point to any future transaction that may take place to establish the need for appointment and the degree of urgency, reliance is placed on the "history of events" of a potential risk to assets.

17. In support of its case, Umbrella Finance has made these principal allegations:

(1) The audited consolidated accounts of the Company for the year ended 31 December 2002 in the 2002 Annual Report showed net assets of HK$345 million, whereas the Circular stated that the unaudited consolidated net liabilities of the Company as at 31 July 2003 amounted to approximately HK$231.1 million. In contrast, the balance sheet position of CUI and its subsidiaries in the six-month period ended 30 June 2003 as shown in the 2003 Interim Report showed net assets of HK$252 million. It is alleged that "China United's [i.e. the Company] net asset position ... [suffered] a deterioration of HK$576 million over a period of seven months", whereas the whole group of companies only suffered a deterioration of HK$93 million in the six-month period from 31 December 2002.

(2) There was dilution of the Company's interest in Hennabun Management Inc. ("HMI") from 93.04% as at 31 December 2002 to 20.05% as at 30 June 2003. The acquisition by CUI of 67.46% interest of HMI from the Company, allegedly in return for an injection of funding of HK$150 million, was at a substantial undervalue to the detriment of the creditors of the Company. The further sale of the Company's 18.68% interest in HMI to CUI on 30 June 2003, together with its 48.53% interest in China United Finance Limited ("CUF") as mentioned below, in exchange for a perpetual enjoyment and entitlement of 22% of all declared dividends and assets distribution by HMI, was also for inadequate consideration.

(3) There was dilution of the Company's interest in CUF from 100% as at 31 December 2002 to 49.77% as at 30 June 2003. The acquisition by CUI of 50.23% of the Company's interest, allegedly in return for an injection of funding of an unspecified amount, raises a serious question if the Company had received adequate consideration. The further sale of the Company's 48.53% interest in CUF to CUI on 30 June 2003 was also for inadequate consideration.

(4) There was writing off of a debt of HK$111 million owed by Long Bloom Enterprises Limited ("Long Bloom"), a subsidiary of CUI, to First Asia (China) Limited ("First Asia"), a subsidiary of the Company. A deed of waiver was entered into by First Asia in favour of Long Bloom on 29 September 2003 to "confirm" the waiver with effect from 15 January 2003.

(5) The Company transferred its two shares in New Star International Inc. ("New Star") to Top Emerald Limited ("Top Emerald"; re-named China United Financial Services Limited), a subsidiary of CUI, on 4 July 2003 for only HK$100.00, notwithstanding that these shares were acquired by the Company on 2 July 2003 at HK$13 million.

18. I will consider each of the allegations in the order set out above.

Apparent deterioration in asset position

19. On behalf of the Company, Mr Yu has made the following submissions.

20. Firstly, Umbrella Finance's allegation rests on comparing apples with oranges, thereby resulting in a wholly distorted picture. Because of the internal restructuring that had taken place since January 2003, the group of companies referred to as "the Group" as at 30 December 2002 in the 2002 Annual Report was different from the group of companies referred to "the Group" as at 30 June 2003 in the 2003 Interim Report. Hence, a comparison of the net asset position of "the Group" in the 2002 Annual Report with the net asset position of "the Group" in the 2003 Interim Report is not a comparison of identical entities. Such a comparison cannot give rise to any inference with regard to significant deterioration in the financial position of the Company.

21. Secondly, the apparent change in the net asset position has been explained in the evidence filed by the Company with the assistance of a chart, which was prepared by the former financial controller of the Company, Tsang Wing Ki. Mr Tsang explained that the balance sheet in the 2002 Annual Report was prepared by adopting a consolidation accounting policy in that all the assets and liabilities of HMI, CUF, Long Bloom, Simply Best Limited and other companies ("the Simply Best group") were amalgamated with the other remaining assets and liabilities of the Company. He has performed the exercise of separating the assets and liabilities of HMI, CUF, Long Bloom and the Simply Best group from the consolidated balance sheet by referring to the statements of account of the four entities individually and making adjustments to the assets/liabilities position of the Company as at 31 December 2002 without its investments in the said four entities. After such adjustments, the result he arrived at is that the remaining assets of the Company as at 31 December 2002 amounted to HK$273,893,000.00 whilst the liabilities were HK$469,483,000.00, giving rise to net liabilities of HK$195,590,000.00.

22. Mr Tsang has prepared another chart showing the net assets and liabilities of the Company as at 31 July 2003. By that time, the Company had disposed of its 18.68% interest in HMI and 48.53% interest in CUF to CUI for a perpetual enjoyment and entitlement of 22% of all declared dividends and assets distribution by HMI. Mr Tsang did not record this entitlement as contingent asset in his chart. Further, the Company had also transferred its ownership in Long Bloom and properties owned by the Simply Best group to CUI. The transfer of Long Bloom to CUI was at a nominal value. Mr Tsang concluded that the assets of the Company as at 31 July 2003 amounted to HK$291,984,000.00 and the liabilities were HK$523,087,000.00, giving rise to net liabilities of HK$231,103,000.00. He further stated that during December 2002 to July 2003, there was a downward adjustment of the value of the landed properties held by the Company to the extent of HK$41.3 million and a loss of HK$10 million odd on disposal of the properties mortgaged to a lender, which were also mentioned in the Circular.

23. In the 1st affirmation of Wilson Chung, the former managing director of the Company, he explained that five major events had affected the accounting position of the Company from 31 December 2002 to 31 July 2003 and they were as follows: (1) the transfer of the Company's interest in Long Bloom to CUI at nominal value and the writing off of Long Bloom's debt of HK$111 million owed to First Asia; (2) the transfer of properties owned by the Simply Best Group to CUI for the consideration of HK$23 million at the request of a bank in January 2003; (3) the transfer of the Company's interest in HMI to CUI; (4) the transfer of the Company's interest in CUF to CUI; and (5) a series of book exercise conducted by which receivables and payables among subsidiaries transferred to CUI and those that remained in the Company were set off, as a result CUI was obliged to pay the Company HK$110 million odd and the Company was obliged to pay CUI HK$96 million odd and that the net amount of HK$14 million odd was settled by CUI on 15 October 2003 and 24 March 2004. He asserted that the alleged deterioration of the net asset position of the Company from December 2002 to July 2003 was the result of the five major events referred to and for no other reason.

24. Miss Ismail made the point that this begs the question if the Company had disposed of its interests in subsidiaries and its assets for good value. She submitted that the apparent deterioration in the net asset position should give rise to the inference that the Company has lost its assets without receiving good value. Criticism was also made of the methodology in making adjustments in the chart of Mr Tsang. According to the balance sheet of the Company, not of the group, in the 2002 Annual Report, the Company had net assets of HK$297 million odd as at 31 December 2002, a far cry from the adjusted figure of net liabilities of HK$195 million put forward by Mr Tsang.

25. Mr Yu submitted that instead of merely focusing on the apparent difference in the net asset position, a more appropriate approach would be to concentrate on the key transactions identified by Mr Chung, which overlap in some respects with the other allegations of Umbrella Finance, and to examine the reason for disposal and the consideration received in each instance. It does seem to me that the seriousness of the complaints against the Company ultimately boils down to whether the disposal of its assets was in the interest of the Company and whether proper consideration was received. Further, I am not prepared to conclude on the available evidence that the methodology adopted by the Company in making the adjustments is self-evidently incorrect. It would be more fruitful for present purpose to examine the key transactions to see whether the circumstances justify the appointment of provisional liquidators.

The Company's interest in HMI

26. HMI is a financial services provider and its principal activities are securities and commodities brokerages, asset management, corporate financial advisory, proprietary trading and licensed money lending business. I will first look at the acquisition by CUI of 67.46% interest of the Company in HMI as the result of injection of funding of HK$150 million between January 2003 and mid June 2003. According to the Company, the injection of funding was prompted by the traumatic impact caused by SARS on the economy and HMI had suffered a substantial loss in revenue. At that time, the management of HMI was pessimistic about its future performance and had expected the situation would be worse in the months to come. HMI had to call for additional working funds by way of capitalisation. The Company was not in a position to raise funds as it has lost its listed status. Apart from an acquisition of 5.95% interest in HMI (in subscribing to 10 million new shares at HK$20 million) on 26 June 2003 by a third party investor China Sci-Tech Holdings Limited, all the additional funding to HMI from January to June 2003 had come from CUI of HK$150 million by injection in the intermediate companies.

27. It was contended by Umbrella Finance that on the basis CUI had acquired 67.46% interest in HMI for HK$150 million this would give an estimated value of HMI at HK$222 million as in the first half of 2003, by using a calculation with reference to the percentage of shareholding acquired and the price per share paid for by CUI. It was further contended that this acquisition by CUI was at a substantial undervalue having regard to the following:

(1) The audited net asset value of HMI according to the balance sheet as at 31 December 2002 was approximately HK$353 million.

(2) According to a table provided by Mr Chung in his 2nd affirmation containing details of injection by eight third party investors that have subscribed to new shares in HMI between 26 June 2003 and 4 March 2004, and using the same method of calculation, the estimated value of HMI would be in the range of HK$336.3 million to HK$486.4 million during the period of these acquisitions.

(3) On 30 June 2003, the Company sold 1.37% of the shares in HMI to an independent third party, Fabulous Resources Limited ("Fabulous"), for the consideration of HK$10 million. This would give a value of HMI at HK$730 million as at that date by the same method of calculation.

(4) On 10 March 2004, CUI entered into an agreement with an independent third party, Top Result Limited ("Top Result"), to buy 9.64% of the shares in HMI for the consideration of HK$72 million. This would give a value of HMI at HK$746.89 million as at that date by the same method of calculation.

28. Mr Yu reminded the court that the earlier part of 2003 was one of the most difficult times in the Hong Kong economy and that one should bear in mind it was extremely difficult for HMI to raise funds in those circumstances. Only CUI was prepared to provide financial support. Moreover, it was contemplated by the management of HMI that there would be further calls for injection of funding (which did in fact occur). As for the other transactions relied on by Umbrella Finance to support its contention that the acquisition by CUI of its 67.46% interest in HMI was at a gross undervalue, Mr Yu made the following points:

(1) The sale of 1.37% interest by the Company to Fabulous was not based on the net asset value of HMI, but on its future earning potential. Evidence in support of this was adduced from a director of Fabulous and that Fabulous had never thought HMI would have had an asset position of HK$730 million as at 30 June 2003. Similar comments were made concerning the purchase by Fabulous of a 1.24% interest in CUF, which was part of the same transaction.

(2) The purchase by CUI of 9.64% interest in HMI from Top Result was not a cash transaction. CUI was to issue 40 million new shares at HK$1.80 per share in consideration of the acquisition. The net asset value of HMI was not a factor or a significant factor when the management of CUI agreed on the consideration for acquisition.

(3) The other transactions of subscription of new shares in HMI from June 2003 to March 2004 and the draft audited accounts of HMI as at 31 December 2003 showed that the suggested value of HMI of over HK$700 million is totally unrealistic. Further, by the time the first of these investors had subscribed for new shares on 26 June 2003, CUI would already have injected most of its funding of HK$150 million.

(4) It should also be noted that on 7 August 2002, the Company acquired 100 million shares in HMI (a 63% interest) at HK$1.30 per share. The shares were issued for the purpose of providing additional working capital. If the same method of calculation were adopted on the basis of the price paid, HMI would be worth HK$205.6 million at that time. This was not very different from the projected value of HMI by the same method, based on the funding of HK$150 million by CUI to acquire 67.46% shares during January to June 2003.

(5) It would be a dangerous exercise for the court to embark on to evaluate the worth of HMI without the benefit of expert evidence.

29. It does not appear to me that a firm view can be reached at this stage if the acquisition by CUI of the Company's 67.46% in HMI was made in bad faith or for inadequate consideration. I do not think the explanation given by the Company is seemingly unreliable.

30. I turn to consider the subsequent transfer of the Company's 18.68% interest in HMI to CUI on 30 June 2003. This could be considered conveniently with the transfer of the Company's 48.53% interest in CUF to CUI on the same date, as the aggregate consideration was for a perpetual enjoyment and entitlement of 22% of all future declared dividends and distributed capital of HMI.

31. The agreement signed by the Company, CUI and HMI dated 30 June 2003 was disclosed. According to the agreement, the purpose of disposing of the remaining interests of the Company in HMI and CUF in exchange for a perpetual right of 22% of all declared dividends of HMI was to protect the Company from further dilution had it continued to hold shares in HMI. If the Company had not taken steps to lock its entitlement at 22%, its interest in HMI would inevitably be diluted due to anticipated further capitalisation required by HMI and the incapacity of the Company to provide funding. Further, by the agreement, CUI agreed to undertake and sponsor all future capitalisation of HMI and at all time remain as the controlling shareholder. HMI agreed to be bound by the terms of the agreement, and in the event for whatever reason HMI should fail to pay the Company its entitlement to declared dividends and/or distributed capital and assets, CUI covenanted that it should pay the same to the Company within the stipulated time. Further, to safeguard the interest of the Company in the 22% declared dividends and/or distributed capital and assets in HMI, CUI was to issue 1,000 preference shares in Top Emerald which in turn would hold the 18.68% interest in HMI transferred by the Company under the agreement. It was expressly provided that the 1,000 preference shares in Top Emerald "shall entitle [the Company] to all Top Emerald's rights to declared dividends and capital and assets distribution by HMI".

32. 1,000 preference shares in Top Emerald were duly issued to the Company on 13 August 2003. Mr Yu submitted that it could not be demonstrated in the circumstances that it was clearly wrong for the Company to exchange its interest of 18.68% in HMI and 48.53% in CUF for a 22% perpetual entitlement in the declared dividends and distribution of assets and capital of HMI.

33. Miss Ismail queried if there was adequate consideration for the said transfers. There is no assurance that dividends will be declared by HMI, nor does the Company have any ability to influence the decision of the board of HMI to do so. As regards the 1,000 preference shares in Top Emerald issued to the Company, it would appear from the ordinary and special resolutions of Top Emerald dated 4 July 2003 that it was authorised to increase its share capital by the creation of an additional 20,000 shares and each of the additional 20,000 authorised and unissued shares be converted and designated non-voting preference shares. From the resolutions, Umbrella Finance made the assumption in its affidavit in reply that there were in fact issued 20,000 preference shares and went on to query how a 5% (i.e. 1,000 shares) of the preference shares held by the Company would entitle it to all Top Emerald's rights to the declared dividends in HMI as provided in the agreement.

34. It is unfortunate that the assumption of Umbrella Finance was not refuted by the Company when it obtained leave to file further evidence in answer to the affidavit in reply of Umbrella Finance and the point was only made in Mr Yu's submissions that the assumption was erroneous and there was no evidence that 20,000 preference shares were actually issued by Top Emerald. However I am not prepared to infer in this instance that just because no challenge was made to that assumption on affidavit, the Company should be taken to have accepted its correctness. It does not seem to me, on the wording of the resolutions, that the assumption of Umbrella Finance is justified.

35. On this allegation that the transfers of the Company's interests in HMI and CUF in June 2003 were for inadequate consideration, I am inclined to think that the explanation given by the Company is a plausible one.

The Company's interest in CUF

36. The main business of CUF was money lending. As at 31 December 2002, the main asset of CUF was a debt of HK$179 million due from HMI and some loan receivables of HK$61 million. The Company's interest in CUF through intermediate companies was reduced from 100% as at 31 December 2002 to 49.77% as at 30 June 2003. The reduction was caused by the acquisition of 50.23% by CUI by an injection of funding. As at 30 June 2003, it was considered by the management of CUF that the most of the loan receivables were unrecoverable due to the impact caused by SARS.

37. It is most unsatisfactory that the Company, in its opposing affidavits, made no mention of the amount of funding injected by CUI for the acquisition of a 50.23% interest, notwithstanding that this omission was specifically pointed out in the one of the affidavits filed on behalf of Umbrella Finance. This is a factor that I will take into account. I do not attach so much importance to the fact that the Company had sold 1.24% of its interest in CUF to Fabulous at HK$3 million on 30 June 2003, and that on the contention of Umbrella Finance this would value CUF at HK$242 million.

38. I have dealt with the allegation concerning the transfer of 48.53% interest to CUI in June 2003.

Writing off Long Bloom's debt

39. According to the Company, the debt owed by Long Bloom to First Asia of HK$111 million was waived on 15 January 2003, when Long Bloom was a wholly owned subsidiary of First Asia and First Asia was in turn wholly owned by the Company. It was contended that in that situation, the waiver of debt could have no effect at all on the assets and liabilities of the Company. It was only in June 2003 that Long Bloom became a wholly owned subsidiary of CUI while First Asia remained a wholly owned subsidiary of the Company and the deed of waiver was made on 29 September 2003 just to formalise the waiver of debt resolved upon in January 2003.

40. Long Bloom was used as a vehicle by the Company to meet various payments relating to staff and to provide administrative services. It would appear from its audited accounts as at 31 December 2002 that its assets were mainly amounts due from fellow subsidiaries and it had net liabilities of HK$180 million odd. The Company contended that realistically the debt of HK$111 million owed by Long Bloom could not have been recovered as Long Bloom was worthless. The reason why the management had decided to transfer Long Bloom to CUI at a nominal value and procured the waiver of the debt to First Asia, as explained by the Company, was to keep the continuity of the staff expenses recorded in Long Bloom as basically CUI absorbed all the employees of the Company with the liabilities of some long service contracts.

41. Umbrella Finance challenged the above and pointed to the book exercise conducted as regards the receivables and payables among subsidiaries transferred to CUI and those remaining in the Company that I have mentioned earlier in the first affirmation of Mr Chung. It was contended that Long Bloom had debts owed to it from other companies that remained subsidiaries of the Company and these debts could have been used to set off Long Bloom's debt to First Asia of HK$111 million.

42. Mr Yu pointed out that the evidence disclosed that it was only after the waiver of debt was resolved on 15 January 2003 that CUI had advanced HK$53.7 million to the Company through Long Bloom, so this could not have been set off against Long Bloom's debt to First Asia.

43. I do not think the explanation provided by the Company is apparently unacceptable.

Transfer of the New Star shares

44. The Company gave this explanation why its two shares in New Star, acquired at the consideration of HK$13 million, were transferred to Top Emerald two days later in consideration of HK$100.00 paid by CUI. The agreement made between CUI and the Company dated 30 June 2003 was produced. The recital referred to the agreement also dated 30 June 2003 entered into by the Company, CUI and HMI that I have mentioned earlier. The operative part provided that Top Emerald shall remain the legal owner of the two shares in New Star so long as Top Emerald shall have full regard of the rights and entitlement of the preference shares in Top Emerald owned by the Company. Further, in the event that the rights and entitlement of the Company as the holder of such preference shares shall be depleted or affected in any manner for whatever reason, it was agreed that CUI shall be responsible to repay to the Company HK$13 million being the consideration paid by the Company when it acquired the New Star shares.

45. According to the subscription agreement also dated 30 June 2003 made between New Star and the Company, New Star owned 40.94% interest in Infocast Limited ("Infocast") and it was intended that an application would be made for the shares of Infocast to be listed in Hong Kong or New York. The Company explained that by the agreements in June 2003, it was intended that CUI was to provide the financial services in the intended flotation of the Infocast shares and the benefit intended to be generated to CUI was the potential fees earned. It was not intended that CUI would acquire any proprietary interest relating to dividends, profits and distribution of the Infocast shares, which should remain with the Company and insofar as the preference shares in Top Emerald issued to the Company did not define the rights to reflect accurately the intention of the Company and CUI, the management of CUI have agreed to procure the amendment of the articles of Top Emerald.

46. Again, I do not think the above explanation is inherently unreliable.

Exercise of the discretion

47. I have considered each of the principal allegations made against the Company by Umbrella Finance to justify its case to appoint provisional liquidators. I should mention that there are other allegations, which I have considered but do not propose to go into in detail save for the following allegation.

48. It was alleged that the "internal restructuring" that took place after January 2003 was part of the exercise carried out by the scheme of arrangement for the re-domicile and de-listing of the Company. The proximity in time between the scheme of arrangement and the internal restructuring was relied upon, it was suggested that the management of the Company could not have been unaware that the ability of the Company to raise funds as working capital would have been affected by its de-listing. It was alleged that there was a scheme to strip the Company of assets, to spin off the debt-laden subsidiaries and the property investment business to the Company, and to set up a new holding company as the raiser of funds.

49. In answer to the above allegation, Mr Yu has drawn my attention to the fact that on 7 August 2002, the Company had increased its shareholding in HMI substantially and acquired a 63% interest at a cash consideration of HK$130 million. This was less than 3 weeks before the announcement of the proposal to re-domicile by the scheme of arrangement and would appear to contradict the suggestion that the scheme of arrangement was carried out with nefarious intent. Further, Mr Yu submitted that when the scheme was announced and proposed in the latter part of 2002, the management of the Company could not have envisaged the impact of SARS on the economy and that there would be a substantial need to raise working capital for various companies in the group.

50. I cannot say the Company's answer must be rejected as wholly implausible.

51. As submitted by Mr Yu, I think it is fair to say that the court cannot determine on the affidavit evidence if there has been improper disposition of the assets of the Company. He referred to the decision of Australia and New Zealand Banking Group Limited v. Ringrong Pty. Ltd, unreported, Federal Court of Australia, 15 October 1992, cited in McPherson, The Law of Company Liquidation, 4th edition, page 196. There, Lee J said as follows:

" 12.	... The discretion [to appoint provisional liquidator] is not limited to particular circumstances. The main purpose of the appointment of provisional liquidator is to preserve the assets of a corporation for its creditors and to maintain the status quo pending the determination of the winding up application. A provisional liquidator may be appointed where there is a need for specified property to be dealt with by putting it into the immediate possession of a provisional liquidator to prevent it being dealt with in a way that is threatened and is inimical to the interests of the creditors.
13.	Such an appointment also may be appropriate where there is no ability to specify particular property that is at risk but there is a well-founded concern in respect of the manner of administration of the corporation. A court may appoint a provisional liquidator for the purpose of obtaining a swift report on how the company has been administered and what further steps should be taken by the Court. The Court may mould its order to meet the circumstances of the case before it.
14.	When a creditor who has applied for a winding up of a company seeks the appointment of a provisional liquidator and the company opposes the appointment, the Court must assess whether the need for intervention is urgent, whether the applicant creditor has established that such an appointment would be appropriate and determine where the balance of convenience lies (Re Club Mediterranean Pty. Ltd (1975) 11 SASR 481 at 484)."
[The judge then turned to examine the response proffered by the company to the allegations made by the petitioning creditor.]
21.	Whether the explanations provided are to be believed is impossible to determine at this point. It is enough to say that issue has been joined. Where the ground relied upon for the appointment of a provisional liquidator is a general apprehension as to the conduct of the affairs of a corporation rather than direct evidence of maladministration or of conduct to defeat creditors, the presentation of an explanation in response to the concerns of the petitioner will be likely to render the appointment of a provisional liquidator inappropriate unless the explanation fails to answer material issues or appears to be unreliable."

52. It seems to me that the above observations are particularly apt in the present situation. As I have indicated earlier, I have found plausible explanations to most of the allegations made against the Company and I am not inclined to draw clear inferences one way or other. Even if there may be a prima facie case that the affairs of the Company should be fully investigated, I should still look at the commercial realities and ask if urgency is made out to warrant the appointment of provisional liquidators so that the investigation should be carried out right away. Almost all of the specific transactions impugned (with the possible exception of the writing off of the Long Bloom debt, if the suggestion of Umbrella Finance were to be accepted that the waiver only took place in September 2003) had occurred by early July 2003. There is no evidence that further transactions are proposed. If any investigation is required, this could be carried out by the liquidator if and when a winding-up order is made. And what are the remaining assets of the Company that would require immediate protection by provisional liquidators? The assets are substantially landed properties that have been mortgaged to financial creditors.

53. I am not persuaded in this situation there is any real need or urgency to justify the appointment of provisional liquidators. I do not need to consider the Company's contention there was delay in making the application or that there would be prejudice to the Company over and above the usual prejudice that may be suffered if provisional liquidators are appointed. The application of Umbrella Finance is dismissed.

54. Usually, costs should follow the event but I am not minded in this instance to award the entire costs to the Company. The application was brought after Umbrella Finance had sought explanation from the Company of the transactions in the internal restructuring in a meeting and by solicitors' letters. The Company declined to provide any meaningful explanation and queried the entitlement of Umbrella Finance to the debt assigned. It seems to me that the Company was stalling for time. No issue was taken as to the status of Umbrella Finance as a creditor when information was requested at the meeting with the Company on 27 February 2004, which was attended by the Company's solicitor who is a former director. In view of the failure or refusal of the Company to give any or any proper explanation of the transactions in the internal restructuring, I am inclined to think that there was initial justification in applying for the appointment of provisional liquidators.

55. I make the following order nisi as to costs. The costs of and occasioned by the application, including the costs incurred in the evidence filed and the costs reserved in the ex parte application on 13 March 2004, are to be costs in the cause of the petition. The Company is to have the costs of the hearing on 21 April 2004 in any event, with a certificate for two counsel.