Re Swiss Cosmeceutics (Asia) Ltd

HCCW 124/2017

[2019] HKCFI 336

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 124 OF 2017

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D E C I S I O N

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1.I have before me a petition to wind up the Company on the grounds of insolvency relying on a statutory demand requiring repayment of debts of CHF110,915.96 and HK$280,000. Ms Lam, who appeared for the Petitioner, explained at the commencement of the hearing that part of the CHF debt had been wrongly included and the total was overstated by CHF5,388.96. In Hong Kong dollars (at I assume the current spot rate or thereabouts) the debt totals HK$1,213,600. This is made up of seven advances made by the Petitioner, Mr Yip Hai Tak, to the Company between 26 September 2011 and 21 March 2012.

2.When the petition came on before me it had ceased to be in dispute that the Petitioner had advanced by way of loan the debts relied on in the statutory demand.  The Company’s defence to the claim is that at the time that the current owner of the Company, Ms Kan Pui Kwan, acquired the Company’s share capital from Mr Yip, Mr Yip had told her that the Company had no debts other than those about which she had been told and that subsequently Mr Yip received a payment from a third party to settle the debts, which would otherwise have been received by the Company.

3.As seems to be the norm in dealings between business people operating small companies they did not see fit to record their agreements, whatever they may have been, and the court is thus left trying to assess the veracity of the Company’s contentions against a rather messy background.  It is uncontroversial that in order to defeat the petition the Company must demonstrate that it has a bona fide defence on substantial grounds.  It is convenient to start by summarising the principles by reference to which the court determines whether or not a bona fide defence on substantial grounds has been demonstrated.  These are summarised in my decision in Re Yueshou Environmental Holdings Ltd [1] at [8]:

“8. It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment. If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed. Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated. I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

‘Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.’

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

(2) I have to be satisfied that the Company’s assertions are believable. The test

‘... is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised – because failure to recognise it would create a debt‑dodgers’ charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, §13

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

‘(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.’ ”

4.The Company was incorporated in May 2011.  There are no contemporary documents that evidence why it was established other than the financial statements amongst the other evidence or what it did during the initial period in which the advances were made.  It is Ms Kan’s case that Mr Yip’s principal business interests relate to the manufacture in Switzerland of cosmetics and their sale in Hong Kong and the Mainland.  Ms Kan had been a distributor.  Ms Kan says that the Company was established at a time when Mr Yip had suggested that the distribution and retail of Mr Yip’s cosmetics could be developed into a business of sufficient substance to allow a listing.  Mr Yip seems to have been the driving force behind this idea.  Ms Kan transferred her business to Mr Yip by some means which is not clear on the evidence to advance this project.  The Company was established by Mr Yip, who was its owner and a director.  Ms Kan had an involvement with the Company from the outset, although it was limited to being the Company secretary.  The Company leased two premises and, if I have understood the evidence correctly, operated sales outlets, two of which were in Harvey Nicholls.  So far as I can glean from the audited financial statements for the years ending 31 March 2012 and 2013, the advances went largely to pay for the Company’s administrative expenses, although it would appear that not until April 2012 did the Company begin to buy significant inventory and commence the business described in the director’s report, namely, selling cosmetics.

5.This is relevant because on 27 February 2012 Mr Yip transferred his shares to Ms Kan, who became the owner of the Company.  Ms Kan says that this took place because by that time it had become clear that Mr Yip’s proposal to list the business was not viable and that the Company was transferred to her as part of the process of unravelling the operations that had come under Mr Yip’s control at the inception of the project and returning to her control of her distribution business.  This is not contradicted by Mr Yip.

6.As at 31 March 2012 the statement of financial position shows a director’s loan of HK$1,543,977.  I have no evidence about what accounts were available to Ms Kan when she acquired the Company.  The audited financial statement for the period ending 31 March 2012 was signed on 15 January 2013 and would not have been available until long after the shares had been transferred.

7.I have already alluded to Ms Kan’s second line of defence.  Ms Kan says that in November 2011 she agreed with Mr Yip that ownership of the Company would be transferred back to her for the reasons I have already explained.  She says that in anticipation of this she began to look for new business opportunities.  She met a Mr Simon Hon at the launch of a counter in Harvey Nicholls in Pacific Place in about November 2011.  They discussed his company, Do-Well, becoming the distributor for a cosmetics brand, Bellefontaine, produced by Mr Yip and at that time, I assume, it is not entirely clear, distributed in Hong Kong and the Mainland by Ms Kan.  The agreement that they reached involved Do‑Well taking over the Harvey Nicholls counters for which Do-Well was to pay HK$2,000,000.  Ms Kan says that on learning this, Mr Yip suggested that the HK$2,000,000 be paid to him and he would use it to settle the loans owed to him and pay the balance to the Company.

8.The Company and Mr Yip entered into agreements dated 1 March 2012 with Do-Well and HK$2,000,000 was paid to Mr Yip.  Some subsequent payments were made by Mr Yip to Ms Kan, totalling Ms Kan says in her 2^nd affirmation between HK$600,000 or HK$700,000, and consisting of two payments.  The first was made on 20 February 2012 and was for HK$300,000, which is supported by a transaction advice exhibited by Ms Kan. The second was a payment of between HK$300,000 to HK$400,000 made sometime around April 2012 according to Ms Kan, although at the time of making her 2^nd affirmation she was unable to produce any document to support the transfer.

9.Thus says Ms Kan nothing is now owed to Mr Yip.

10.There is nothing surprising, in fact it is what one would expect, for the acquirer of a company to ask about its existing liabilities and to seek warranties in respect of them.  To that extent the suggestion that the loans were discussed is plausible.  I note that Mr Yip has not explained why Ms Kan would have agreed to be liable to repay him or whether it was discussed.  Neither has he explained why he did not demand repayment until March 2017.

11.Ms Lam submitted that to focus on the oddities in Mr Yip’s claim was to adopt the wrong approach to determining the Petition.  She argued that the burden was on the Company to demonstrate a bona fide defence on substantial grounds and that Ms Kan’s story, that has developed during the course of her three affirmations, contains inconsistencies and falls short of satisfying the burden which the Company is under.  In particular she pointed to the following:

(1)   Ms Kan in her 1^st affirmation did not admit that the advances had been made.  She only conceded they had been when documentary evidence was adduced contradicting her evidence.

(2)   Ms Kan’s initial defence was that she had agreed with Mr Yip that any liabilities should be waived.  It was not until her 2^nd affirmation that she mentioned the payment from Do-Well to Mr Yip and argued it has been made to settle the sums due to him from the Company.

(3)   There is no corroboration of Ms Kan’s story.  There are no contemporaneous documents to support her version of events.  On the contrary the documents show two of the advances being made on 21 March 2012 and 17 July 2013 for CHF12,026 and CHF5,394 respectively, which was after the share transfer.  Also the supplemental agreement dated 1 March 2012 pursuant to which HK$2,000,000 was paid by Do-Well to Mr Yip was made between him and Do-Well and was signed by Ms Kan on Mr Yip’s behalf.  There is no reference to the Company in the supplemental agreement.

(4)(i) Ms Lam sought to demonstrate that the payments alleged to have been payments by Mr Yip to Ms Kan in respect of the difference between the sums owed to him and HK$2,000,000 were not a settlement of sums owed by him to the Company.  Mr Yip says that the first transfer was to help Ms Kan finance a down payment on a flat and he has exhibited a memorial showing a purchase by Ms Kan in March of 2012.  It was also Mr Yip’s recollection in his 2^nd affirmation that the second payment made to Ms Kan was a payment to her, which was intended to be a loan to her Brother Matthew.  This seemed to be supported by an email that he exhibited.

(ii)  In her 3^rd affirmation Ms Kan exhibited bank transfer documents showing that Mr Yip had made transfers totalling HK$200,000 to Ms Kan, which according to the notes on the documents were not repayment of a sum due to the Company, but a loan to her Brother Matthew in June 2012.  There was a further payment of HK$100,000 in December 2012 and the note on the advice says “settlement of divers outstandings up to the end of 2012”.  What Ms Kan does not explain is when and how the shortfall between the amount of the loan and the HK$2,000,000 was repaid.  Clearly what she says in her 3^rd affirmation is inconsistent with her 2^nd affirmation.

(iii)   Thus, submitted Ms Lam, the suggestion that the HK$2,000,000 was paid as a means to settle the debt owed to Mr Yip under an arrangement that he repay the difference is not supported by the payments to Ms Kan in 2012.  This being the case it is inherently unlikely that the HK$2,000,000 payment was made to settle the loans.

12.As Ms Lam argued, the onus is on the Company to demonstrate a bona fide defence on substantial grounds.  This requires some precision.  Although it does seem odd that Mr Yip has waited five years to try and obtain repayment and the circumstances in which Ms Kan came to acquire the Company is unclear it seems to me that the Company has failed to establish a bona fide defence on substantial grounds.  As the Company has paid HK$1,200,000 into court pursuant to an order of Mr Justice Godfrey Lam dated 3 July 2017 as security for the debt I will not make a winding up order at this juncture, but hear the parties on the form of order that should be made in the light of my decision.

Ms Rachel Lam, instructed by C T Chan & Co, for the petitioner

Mr Jason Lee, instructed by Lam & Co, for the respondent