Re Gw Electronics Co Ltd

Read the full judgment text of CACV 24/2017 on BabelCite. This Court of Appeal judgment was delivered on 2 April 2020 before Yuen JA, McWalters JA, L Chan J.

Civil appeal – winding up – statutory demand – bona fide dispute on substantial grounds – Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) s.178 – petitioner Toshiba Electronics Asia Ltd ('TEAL') presented petition to wind up GW Electronics Co Ltd ('the Company') on grounds of failure to pay statutory demand and inability to pay its debts – Company applied to strike out petition alleging bona fide dispute on substantial grounds as to debt and seeking stay for arbitration – Company claimed oral settlement agreement whereby Distribution Agreement terminated by mutual consent, Company to deliver stored products and provide trade secrets/confidential information, in exchange for TEAL waiving outstanding invoices totalling approximately HKD244 million – application dismissed by Anthony Chan J with costs – petition heard and Winding-Up Order made by Harris J, Official Receiver appointed provisional liquidator – Company appealed both decisions – four grounds of appeal considered: (1) petition is for unliquidated sum; (2) statutory demand failed to comply with s.178 of Cap. 32 as sum not ascertainable; (3) Company not insolvent; (4) bona fide dispute on substantial grounds as to liability and quantum – held petition not for unliquidated sum because amount ascertained in accordance with contractual machinery under Article 17.2 of Distribution Agreement (Re Grande Holdings Ltd applied) – held statutory demand compliant as TEAL provided detailed statements showing calculation, Company never made inquiries (In re A Debtor (No. 1 of 1987) applied) – held Company insolvent on cash flow test (Paulin v Paulin applied) as at date of termination given 'very desperate situation', banks threatening to shut credit lines, shareholders refusing further funds, s.178(1)(c) requiring consideration of contingent and prospective liabilities – held no bona fide dispute on substantial grounds because no contemporaneous written record of alleged oral settlement despite large sum involved, customer lists allegedly provided before price agreement made no commercial sense, whiteboard photograph not conclusive, demand for payment sent day after alleged settlement not protested by Company – appeal against Anthony Chan J's strike-out decision dismissed with costs – appeal against Winding-up Order to be dismissed but court invited submissions on form of order in light of subsequent change in Company's financial position as disclosed in Official Receiver's report.

Legal issues: Whether winding-up petition is for an unliquidated sum · Whether statutory demand complied with s.178 of Cap. 32 · Whether the Company was insolvent at the material time · Whether there was a bona fide dispute of the debt on substantial grounds

Outcome: CACV 84/2017 (appeal against Anthony Chan J's strike-out Decision) dismissed with costs. CACV 24/2017 (appeal against the Winding-Up Order) to be dismissed, with the court inviting written submissions on the form of order given the subsequent change in the Company's financial position; in the absence of submissions, the stay would be lifted and CACV 24/2017 dismissed with costs.

Cited by 7 cases · Cites 3 cases

Case No.CACV 24/2017[2020] HKCA 180
Court
Court of Appeal
Date02 Apr 2020
JudgeYuen JA, McWalters JA, L Chan J
Case Document
100%Judiciary

CACV 24/2017
CACV 84/2017
(Heard Together)

[2020] HKCA 180

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 24 OF 2017 AND NO 84 OF 2017

(ON APPEAL FROM HCCW NO 81 OF 2016)

________________________

  IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32)
  and
  IN THE MATTER of GW Electronics Company Limited (弘威電子有限公司)

________________________

Before:  Hon Yuen and McWalters JJA and L Chan J

Dates of Hearing:  18 & 19 January 2018

Date of Judgment:  2 April 2020

________________________

J U D G M E N T

________________________


Hon Yuen JA (giving the Judgment of the Court):

1.On 15 March 2016, Toshiba Electronics Asia Ltd (“TEAL”) presented a petition to wind up GW Electronics Co Ltd (“the Company”) on the grounds that:

(1)  the Company had failed to pay a sum set out in a demand for payment dated 19 January 2016 (“the SD”) which the Petitioner had served on the Company on 21 January 2016[1], and

(2)  the Company was unable to pay its debts[2].

2.1.On 12 May 2016, the Company applied by summons to strike out the petition on the ground that it was an abuse of the process, as the Company claimed there was a bona fide dispute on substantial grounds as to the alleged debt on which the petition is founded, or alternatively that there should be a stay for arbitration[3]. Essentially, the Company’s case was that it did not owe any money to TEAL, originally its supplier under a Distribution Agreement (“Dist Agrmt”), because the parties had entered into an oral settlement agreement.   

2.2.The application was heard on 9 December 2016.  On 30 December 2016, Anthony Chan J handed down a written decision (“Decision”) dismissing the application with costs.

3.The petition came on for hearing before Harris J on 9 January 2017.  He refused the Company’s application for an adjournment and wound up the Company, delivering brief reasons (“Winding-up Order”).  The Official Receiver (“OR”) was appointed provisional liquidator.   

4.The Company lodged appeals against both decisions. 

-  CACV24/2017 is its appeal against the Winding-up Order. 

-  CACV84/2017 is its appeal against the Decision. 

5.1.Leave was given on 27 March 2017 by Anthony Chan J to appeal his Decision, not because he considered that there were merits in the appeal, but on the “some other reason” ground[4], because in the appeal against the Winding-up Order (for which leave is not required), the merits of his Decision would necessarily be considered. 

5.2.On the same day, the judge also stayed execution of the Winding-Up Order pending determination of the appeals, provided that the stay shall not prevent the OR from receiving moneys on the Company’s behalf.  The OR has been providing reports to the court periodically[5]

6.Both appeals were heard together.

7.As one of the grounds of appeal is that Anthony Chan J erred in finding that there was no bona fide dispute on substantial grounds of the debt on which the petition is based, it is necessary to set out some background facts which are common ground or are from contemporaneous documents.     

Background

8.1.The petitioner TEAL is a supplier of own (Toshiba) brand semi-conductor products. The products included completed products (“X3” and “X4”) but also individual components (“X6” SLC[6] wafers).

8.2.The Company was incorporated in Hong Kong in August 2012, its shareholders being a BVI subsidiary of a Taiwan listed company (“GMI”) which held 51% of the Company’s shares, and a BVI subsidiary of a Hong Kong listed company (“WAE”) which held the remaining 49%.  The total paid-up capital was HKD200 million.        

Distribution Agreement

9.1.By the Dist Agrmt dated 1 January 2013, TEAL appointed the Company as non-exclusive distributor of its products for a period of 1 year, automatically renewed for successive 1-year periods[7].  According to the Dist Agrmt, the territory for which the Company was appointed distributor was the PRC (including Hong Kong)[8].  However, business in Shanghai was done between Toshiba Electronics (Shanghai) Ltd (“TELS”) and the Company’s subsidiary GW Electronics (Shanghai) Ltd (“GWSH”).

9.2.The Dist Agrmt included the following relevant terms.

Article 10.  TRANSFER OF TITLE

10.1  Applicable Incoterms[9]

The Products shall be delivered by [TEAL] to [the Company] on DDU[10] Hong Kong.

10.2.  Timing of Transfer

Title of the Products and risk of loss shall transfer from [TEAL] to [the Company] upon delivery of the Products to [the Company] in accordance with Section 10.1. (Emphasis added).

Article 11.  WARRANTY

11.1.  [TEAL] warrants that for a period of one (1) year from the date of the delivery of each Product, the Product shall: (a) conform to the specifications mutually agreed upon by the parties; and (b) be free from defects in material or workmanship. ...

Article 17.  TERMINATION

17.1.  If one or more of the following events occur with regard to either party hereto, the other party may, without prejudice to the other rights and remedies which it may have, terminate this Agreement and/or any PO and in case such events occur to [the Company], [TEAL] may withhold shipment of Products or accelerate any payment outstanding for Products already shipped, thereby causing it to become immediately due and payable:

i.  ...

ii.  Insolvency ...

17.2.  If this Agreement is terminated, then at [TEAL’s] option, [the Company] shall resell to [TEAL] [the Company’s] inventory of Products, at the lower of either:

i.  the actual price paid to [TEAL] (less any credits previously issued by [TEAL]) for such Product, or

ii.  [TEAL’s] then prevailing prices.” (Emphasis added).

Pursuant to Clause 5.7 of the Dist Agrmt, after delivery of products, TEAL would invoice the Company, with payment due within 30 days from the 25th day of the month after the invoices were received.

The Company’s financial position in August 2015

10.1.One of the Company’s customers was a PRC company called DTT Technology (China) Co Ltd (“DTT”). 

10.2.In 2014-2015, DTT fell substantially behind in payments to the Company (as at 31 August 2015, the aggregate outstanding due from DTT to the Company was HKD234,212,411)11

10.3.As a result of the substantial amounts due from DTT, the Company stopped deliveries to it.  This resulted in large quantities of products ordered by DTT and delivered by TEAL being kept in the Company’s warehouse. 

10.4.With large sums outstanding (referred to in the Company’s documents as “account receivables” or “AR”), and depreciation of the warehoused products (“stock”), the Company had to make substantial provisions in its accounts.

10.5.In consequence, on 19 August 2015, a profit warning was issued by WAE, the Company’s Hong Kong listed parent company, for the 6 months ending 30 September 2015, the explanation being:

“the said share of loss of associated companies was primarily due to significant debtor provisions for doubtful debts and significant stock provisions for slow-moving stocks which the associated companies have made and/or will be likely to make during the said six-month period”.

11.1.On 25 August 2015, the Company failed to pay TEAL a sum of USD8.678 million on invoices due.  Although it later transpired[12] that the failure was the result of an error on the part of the Company’s bank, it is pertinent that on 26 August 2015, the Company said the following in an email to TEAL:

“We just contact Standard Charter Bank on this issue, the status is like this.

1.  Their credit department conduct credit control due to recent RMB depreciation and the stock market erosion.

Furthermore our mother company made a ‘profit warning’ due to the high provision of [the Company] (DTT issues).

Hence the fund remittance is hold in credit without inform to [the Company’s] account manager.

2.  With involvement of Mr Kwok[13], the remittance will be made tomorrow”. (Emphasis added).

11.2.This prompted TEAL to reply by email on the same day, asking (among other things) “could you please explain your company’s financial situation to us in detail?”

The Company’s Presentation of financial situation on 27.8.2015

12.The next day 27 August 2015, there was a meeting at which the Company made a written presentation of its financial situation to TEAL.  It disclosed the following (among other things):

-  for the 1st half of 2015, there was a net loss of HKD28.669 million;

-  for the 2nd half of 2015,

-  provisions for account receivables (HKD40.426 million) and stock (HKD18.385 million) up to 30 June 2015 amounted to HKD58.811 million;

-  estimated provisions for accounts receivables (HKD105.360 million) and stock (HKD36.354 million) for the rest of that period amounted to HKD141.714 million;

-  thus, total provisions for that period amounted to HKD200.525 million;

-  in respect of the Company’s funding status,

-  the shareholders had previously injected a total of HKD200 million;

-  total banking facilities were in the sum of HKD300 million;

-  in respect of the Company’s financial status,

-  doubtful debts amounted to HKD145 million[14] and

-  slow moving stock amounted to HKD55 million[15],

-  thus, “total of HK$200M operating fund is tied up”;

-  for the period August - December 2015 monthly, the net profit before tax would be HKD660,000, but the Company was “in need of banking finance of at least 2 months for the normal business from Aug - Dec 2015”;

-  under the title “Pivotal Supports to [the Company] are Crucial”, the Company listed:

“1.  Support from [TEAL]

2.  Support from Bank

3.  Support from mother company”.

Emails on 4-5.9.2015

13.There was a meeting on 4 September 2015 between the parties at which the Company asked TEAL to “take back some of the SLC wafer (worth US$19,000,000.00) that the Company purchased from [TEAL] for DTT and stocked in the Company’s warehouse ... in order to reduce the Company’s then ‘high provisions’ in its account”[16].

14.1There followed email discussions, in which (among other things) TEAL suggested the Company sell its inventory to its parent companies GMI and WAE. 

14.2However Mr Kwok replied in an email of the same day:

“Both GMI and WAE cannot further help. ... We cannot meet the stock exchange criteria to make further investments. On top of this, we are using the bank money to finance the current AR and inventory to support other customers” ...

“[TEAL] help can definitely a big help to solve the stock issue, our bankers will definitely reconsider our bank credit lines and we may be able to meet the stock exchange requirement to assist [the Company]. Your help can make our banks to understand the support from [TEAL] and to release the bank lines to us”. (Emphasis added).

15.1.The next day (5 September 2015), TEAL emailed the Company asking if it (TEAL) could trust GMI/WAE to add to their investments in the Company.  However, the reply from the Company was as follows:

[The Company] is definitely in very desperate situation, all our supporting banks will shut down us if we cannot solve the inventory issue & AR issue immediately. Your help for inventory is our only solution at the moment for our banks, and we will try all we can to push DTT to settle at least a portion of overdue AR as soon as possible even [the Company] have to hair-cut/lost; then we should have confidence to get approval from shareholders meeting for financial support to [the Company]”. (Emphasis added).

15.2.In the Company’s own words, resolution of its “very desperate situation” depended on TEAL alone.  If TEAL did not assist, the banks would shut the Company down, and the Company’s shareholders were not presently providing further financial support.       

Company’s position on 8 September 2015

16.On 8 September 2015, there was another meeting in which the Company indicated the following:

-  its net accounts receivables (after making provisions for the DTT account) were HKD199 million;

-  its outstanding bank loans amounted to HKD189 million; and

-  its debt to TEAL alone amounted to HKD218 million.

Oral settlement agreement?

17.1.There was then a meeting on 11 September 2015 at which (according to the Company) the parties had an oral settlement agreement, which the Company summarized as follows:

“The [Dist Agrmt] was terminated by mutual consent and replaced with the new 2015 Agreement which has binding legal effect, where, in consideration for the Company’s delivery of stored products and provision of trade secrets and confidential information, [TEAL] has expressly[17] agreed to waive its right to claim for the outstanding invoices”[18]. (Emphasis added).

17.2.TEAL denied that there was any oral settlement agreement.  What is common ground is that at the end of the meeting that day, TEAL produced to the Company a draft termination letter dated 11 September 2015 which said:

“In accordance with Article 17.1 of the [Dist Agrmt] we hereby terminate the Agreement with immediate effect.

As a result of the termination, all outstanding payments for our Products become immediately due and payable by you.

Also, we exercise our option under Article 17.2 requiring you to return to us the inventory of Products kept by you.  For those Products which have not been paid by you, you shall return them to us immediately (and no later than 16 September 2015). ...”

17.3.After this, there were some further emails between TEAL and the Company which will be discussed later in this Judgment[19

Termination Letter

18.On 14 September 2015, the formal termination letter was sent to Company in the same terms as the draft, save that the date was changed from the 11th to the 14th

Meeting on 15 September 2015

19.1.There followed another meeting the next day, at which (according to the Company) TEAL proposed (and the Company agreed) as part of the oral settlement agreement:

“that the return of such products[20], subject to agreed variations of types and quantities during the performance, would fully and finally settle [TEAL]’s account receivable (stated by [TEAL] to be HK$244 millions)”[21]. (Emphasis added).

19.2.This was denied by TEAL.  In fact, what TEAL did that day was to send to the Company a letter entitled “Demand for payment” which said (among other things):

“Also, we exercise our right to demand immediate payment from you. Please find attached the outstanding Account Receivable that is due to us.

The amount is not final, and it is subject to change at [TEAL]’s discretion”. (Emphasis added)

Subsequent events

20.There then followed various other emails and the delivery of products from the Company to TEAL for counting and inspection.  Some products were rejected by TEAL.  This eventually led to TEAL issuing a demand to the Company for a balance of USD16,926,582.49 in the SD.

The Company’s case

21.The Company’s case was that:

(1)  there had been an oral agreement that the Dist Agrmt would be terminated by consent[22],

(2)  the Company would deliver all stored products (more than half of which had been paid by the Company) to TEAL “at prices to be determined by the parties”[23], which prices were subsequently agreed on 15 September 2015[24],

(3)  the Company would provide “trade secrets and confidential information” to TEAL[25], and

(4)  TEAL agreed to waive invoices due for payment by the Company on 25 September 2015 (USD14,781,085.18) and 25 October 2015 (USD16,590,174.95), totaling USD31,371,260.13 (approximately HKD244 million)[26].

TEAL’s case

22.TEAL denied that there was such an oral settlement agreement.  Its case was simply that:

(1)  in light of the Company’s insolvent position as revealed by the Company itself, TEAL terminated the Dist Agrmt pursuant to its rights under Article 17.1[27],

(2)  pursuant to its rights under Article 17.2[28], TEAL then re-purchased some (but not all) of the products after inspection, at prices it determined in accordance with its rights under that article, applying devaluation rates in accordance with internal accounting policies[29] to “slow-moving” stock or stock for which the warranty had expired,

(3)  the so-called “trade secrets and confidential information” were essentially customer lists which would have been of no value to the Company, and was for end-customer management, 

(4)  there was no agreement, express or implied, for waiver of the outstanding invoices,

(5)  consequently, after deducting payment due to the Company for those products which TEAL re-purchased, there was still an outstanding sum due by the Company to TEAL of USD15,263,129.39 as at the date of the Re-Amended Petition, the figures having been set out in an annex to that petition[30].       

The Decision

23.1.There is no dispute between the parties that Anthony Chan J had set out the correct legal principles at §4(1)-(7) of the Decision.

23.2.Having reminded himself of those principles, the judge found that the Company had failed to satisfy the court that it had a bona fide dispute of the debt on substantial grounds, when viewed against the backdrop of the following matters:

(a)  the Company was insolvent at the material time[31],

(b)  TEAL was accordingly entitled to terminate the Dist Agrmt under Article 17.1, and did not need the Company’s consent to terminate it under the alleged oral settlement agreement[32],

(c)  the customer lists were of no value to the Company after the termination of the distributorship, their provision was just for end-customer management, and if there was any confidential information, one would have expected there to be some written record of discussions regarding such information, but there was none[33],

(d)  the Company alleged that at the meeting of 15 September 2015, TEAL agreed to re-purchase all stock at acquisition price, but TEAL’s inspection of the stock was not complete until 29 September 2015, and many of the products were more than a year old and not covered by warranty, and subject to price fluctuation[34],

(e)  there was no contemporaneous written record in support of the alleged oral settlement agreement (even though it involved a very substantial sum of money[35]), whereas there were documents contradicting the Company’s case[36].

23.3.Accordingly, the judge refused to strike-out the petition.

Winding-Up Order

24.1.At the hearing of the petition, the Company applied to the companies judge for leave to file further evidence.  The judge refused.  There is no appeal from this decision.  Thus the state of the evidence at the hearing of the strike-out application and at the petition was identical, and the companies judge took the view that the strike-out effectively determined the substantive issue in the petition[37]. Accordingly, the Winding-up Order was made, and the OR appointed provisional liquidator.

24.2.As noted earlier in this Judgment, Anthony Chan J subsequently granted a stay of the Winding-up Order on conditions set out in his order of 27 March 2017 pending determination of the appeals.

Appeal

25.The following arguments were advanced on behalf of the Company.

(1)  the petition ought to be dismissed as a claim for an unliquidated sum;

(2)  the SD failed to comply with s.178 of the Ordinance as the sum demanded was not ascertainable by the Company and TEAL failed to show the actual basis of calculation of the demanded sum[38];

(3)  Anthony Chan J erred in finding that the Company was insolvent;

(4)  the judge erred in finding there was no bona fide dispute on substantial grounds in relation to the Company’s liability as well as quantum.

Discussion

26.The 1st and 2nd arguments had not been taken before either Anthony Chan J or Harris J.  No reason has been offered as to why it had not been raised for some 10 months since the presentation of the petition until the Winding-Up Order.  It is well established that new points not taken in the court below and raised for the first time on appeal should be most jealously scrutinized[39]. However, since a petition to wind up a company has public dimensions (unlike litigation between private parties), we would in the exercise of this court’s discretion consider these arguments.

(1) Claim for unliquidated sum?

27.1.In relation to the 1st argument, contrary to the Company’s contention, the petition is not for an unliquidated sum.  The Company has based its argument on the assumption that TEAL’s claim is for damages for breach of contract and an assessment of the quantum of damages by reference to a market price (as was the case in Longmay International Ltd[40]). 

27.2.However it is clear from the petition, and confirmed by Mr Mizuma’s affirmation, that the sum claimed by TEAL was calculated with reference to TEAL’s own prevailing price, as per Article 17.2 of the Dist Agrmt[41].  As this court[42] held in Re Grande Holdings Ltd[43], a contractual liability where the amount due was to be ascertained in accordance with contractual machinery is a liquidated debt.  And as Barma JA held in Tian Yao (Xiamen) Property Development Co Ltd[44], the fact that further information might be required in order to establish the amount, and that there might be some dispute as to what the position actually was, or that the calculations might be complicated, did not make the claim an unliquidated one, and this applies to winding up proceedings as well as ordinary litigation.      

(2) Compliance with s178?

28.1.The Company’s 2nd argument was that the sum demanded was not ascertainable by it and that TEAL failed to show the actual basis of calculation of the demanded sum.  This argument also has no merits. 

28.2.First, TEAL has provided to the Company many documents showing how the sum demanded was arrived at. 

(A)  On 15 September 2015 TEAL sent a statement to the Company showing invoices due on 25 September 2015 (USD14,781,085.18) and 25 October 2015 (USD16,590,174.95), totaling USD31,371,260.13.  This was verified by the Company[45].

(B)  On 29 September 2015, after inspection of the products delivered by the Company back to TEAL for re-purchase at TEAL’s option, TEAL sent a further statement to the Company showing it would be deducting the following sums from the adjusted amount due from the Company (ie USD31,099,964.92)[46]:

-  for returned inventory acceptedUSD 2,618,561.27
-  for inventory re-purchased by TEALUSD 3,010,265.67
-  for devalued productsUSD 8,544,555.49
  USD14,173,382.43

(C)  That left a balance payable by the Company of USD16,926,582.49 (ie USD31,099,964.92 less USD14,173,382.43) which was the sum demanded in the SD[47]

(D)  The lesser sum claimed in the Petition of USD15,263,129.39 reflected further deductions in favour of the Company as per the annex to the petition.

28.3.Secondly, the Company had never made inquiries to TEAL regarding any figures in any of the statements, or the SD, or the petition.  If the Company did not understand how certain figures had been arrived at, it should have set out its specific queries (well ahead of the strike-out application and the petition).  Nor has it suggested that had any figures been clarified after query, it would have satisfied the demand or part thereof.  Its case was solely that no amount was due at all because of the oral settlement agreement. 

28.4.The situation is similar to In re A Debtor (No. 1 of 1987)[48], where the English Court of Appeal considered an SD in which the amount of money outstanding had been calculated incorrectly.  Nicholls LJ rejected the debtor’s argument, as follows:

“In the present case, there is no evidence that the error as to the amount due, or the misleading features of the calculation, have resulted or will result in the debtor being prejudiced in any way. There is, for example, no evidence that had the correct amount been stated in the statutory demand, the debtor would have taken steps to satisfy the demand, or that he had been deprived of this or any other opportunity by his perplexity, either as to the precise amount of the debt due, or as to anything else contained in the demand. ...

Moreover, had the debtor genuinely been perplexed on some point which actually affected what he did after he was served with the statutory demand, he ... would surely have approached the [petitioner] for clarification. Instead this point, of the debtor genuinely being misled and perplexed, was not even taken before the deputy registrar or the judge”.

(3)  Was the Company insolvent?

29.1.In relation to the 3rd argument, there was in our view clear evidence before the judge that the company was insolvent at the time TEAL issued the termination letter based on Article 17.1[49].

29.2.Insolvency may be tested by either the cash flow test (also called the commercial insolvency test) or the balance sheet test.  The cash flow test is normally used and there is no reason why it should not be used in the present case.  As Wilson LJ[50] held in Paulin v Paulin[51]:

“It is well established that the inquiry into whether on the relevant date the bankrupt was able to pay his debts is an inquiry not into whether his liabilities exceeded his assets [‘balance sheet insolvency’] but into whether he could meet his liabilities when they were due [‘commercial insolvency’]”.

30.It was argued on behalf of the Company that as the amounts payable to TEAL were not due until 25 September and 25 October 2015 respectively, as at the date of the termination letter (14 September 2015), the Company was not insolvent.

31.1.However, that is looking at the financial position of the Company in a vacuum.  The Company’s financial position at the time was clear on the evidence.  On 27 August 2015, the Company’s financial presentation[52] spoke for itself.  It showed how the Company, in its own words in the 5 September 2015 email, was in a “very desperate situation”.  It mattered not that the Company had credit lines with its banks because they were liable to be shut down.  The Company itself told TEAL that “all our supporting banks will shut down us if we cannot solve the inventory issue & AR issue immediately”.  And in response to TEAL’s requests that it approach its parent companies (eg in purchasing the stock) the Company admitted that its shareholders were not then ready to inject further funds.  In other words, if TEAL would not take back the products it had sold the Company, the Company would not be able to pay for them, and no help would be forthcoming from the Company’s bankers or shareholders.

31.2.Further s.178(1)(c) of the Ordinance provides that “in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company”.  As the September and October invoices were for products which had already been delivered to the Company, in which title and risk had passed[53], they were at least prospective liabilities within the reasonably near future[54].  As was noted in the authoritative text McPherson & Keay, The Law of Company Liquidation[55], the court may take into account a debt falling due within 1 month’s time, and possibly even one falling due in 6 months’ time.  What is important is whether the evidence showed that the Company was or was not able to pay its way from current revenue.  On the Company’s own case, its main customer DTT had fallen substantially behind in payments, and as at 31 August 2015, the aggregate outstanding due from DTT was HKD234,212,411.

32.In view of the above, it is clear that the Company was insolvent on the cash flow test as at the date of termination, with no significant improvement up to and including the hearing of the strike-out application and the winding-up petition.   

(4) Was there a bona fide dispute of the debt on substantial grounds?

33.The 4th argument was that there was a bona fide dispute on substantial grounds in relation to the Company’s liability as well as quantum, and Anthony Chan J erred in failing to so find.

34.The quantum aspect has been discussed above[56].  

35.As for liability, to an extent, this argument is related to the 3rd argument, because as the Company was clearly insolvent on the documents it had provided to TEAL at the time, TEAL was entitled to terminate the Dist Agrmt in accordance with Article 17.1 (as it expressly did in the termination letter) and there would have been no commercial reason for it to make the alleged oral settlement agreement.

36.1.The Company accepted that the only advantage to TEAL by making the alleged oral settlement agreement was the “confidential information”[57].  However it should be noted that the alleged confidential information in the form of customers lists, payment terms and prices etc were sent by the Company to TEAL between 11-14 September 2015[58], when (even on the Company’s own case) the parties had not yet agreed on the price of the products to be returned (on the Company’s own case, the price was agreed only on 15 September 2015[59]).  It does not make commercial sense for the Company, supposedly still in negotiations with TEAL over the important matter of price, to have provided the supposedly confidential information first, leaving itself with no bargaining power at all.  On the contrary, the Company’s provision of the information is consistent with the fact that TEAL had on 11 September 2015 indicated that it would be terminating the Dist Agrmt (as shown by the production of the draft termination letter that day). 

36.2.As the judge noted[60],

“Furthermore, I am unable to find in the contemporaneous documents any suggestion that the Company was parting with its confidential information upon the termination of the Agreement. This was an important issue because it was the only chip with which to bargain with [TEAL]. Not only would one expect some record of the bargain, there ought to be some record of discussion of the kind of confidential information to be provided. There is none”. (Emphasis added).

37.1.Indeed, the judge was entitled to note that he had “not been able to find any contemporaneous document which might be in support of the Oral Agreement”.  He observed “it would be surprising not to have a paper trail for such a transaction”[61]. That is clearly right.  It defied common and commercial sense to have no written record of an important settlement involving a very large sum of money.

37.2.As noted above, the Company was in dire financial straits.  The Company had no one else to turn to, its bankers threatening to shut down credit lines, and its parent companies not prepared to inject further funds.  If there had indeed been a settlement with its largest creditor TEAL on the terms alleged, the Company would have been immensely relieved.  One would have expected the Company to immediately record it in writing for TEAL’s confirmation.  There was no such documentary record, despite the large amount of email correspondence generated between the parties during that period.  

37.3.The Company sought to rely on a photograph[62] Mr Lo took of a whiteboard with some words and figures written by Mr Mizuma and himself on 15 September 2015.  Mr Lo relied on the writing by Mr Mizuma of “INV x TTL” totaling HKD244 million and “A/R” of HKD244 million, and “0” as indicating that “the ‘INV x TTL’ for the return of the goods ‘244.0’ (HK$ million) would fully and finally settle the ‘A/R’ ‘244.0’ (HK$ million”)[63].

37.4.However, as the judge noted, as at 15 September 2015, the products had yet to be fully delivered, counted and inspected by TEAL.  It was the Company’s own evidence that it had a large inventory and some of the products were “slow-moving” and their warranties had expired.  So it would have defied common and commercial sense for TEAL to have simply taken the round figure of HKD244 million as the re-purchase price.  Indeed, Mr Lo’s affirmation said that the return of the products was “subject to agreed variations of types and quantities during performance”[64].  So on 15 September 2015 the parties would still have been in discussions only, and the photograph was consistent with that.  If there had been an oral settlement agreement of such great importance to the Company and its future, one would have expected to find documentary evidence of a kind far more comprehensive than one image of figures appearing on a whiteboard, especially when the parties were emailing one another continuously during that period. 

38.Pausing here, the Company also argued that as part of the oral settlement agreement, it gave 1m pieces of SLC wafers to TEAL for free.  However, as can be seen from the short note on this point handed up to the judge[65], the evidence showed that that was not in fact the case.

39.1.Further, the allegation of the oral settlement agreement on 11 September 2015 (with prices agreed on 15 September 2015) is also contradicted by contemporaneous documents.  It would be noted that

-  the next day (16 September 2015) TEAL still sent the original of a demand for payment dated 15 September 2015 saying “the amount is not final”; and

-  on 17 September 2015, TEAL sent an email to the Company saying “TKY HQ [Tokyo Headquarters] ... instructed me to request [the Company] to pay cash to TEAL until the end of this month even though 20 MHKD, 30 MHKD”. 

39.2.If there had been an oral settlement agreement as the Company alleged, one would have expected it to immediately protest that demand, expressly stating in writing its understanding of the “full and final settlement”, but it did not do so. 

39.3.It was not until 30 September 2015 when the Company received TEAL’s claim for an outstanding sum of HKD131 million that the Company alleged a “consensus” on 15 September 2015 that:

“the AP owed by [the Company] to [TEAL] shall be offset in full by [the Company’s] acceptance of the termination of distributorship and returning [the Company’s] inventories (at cost value of HK$244 million) to [TEAL] plus around HK$10 million payment in cash to Toshiba (Shanghai)”.

40.Pausing here, a brief word about the Company’s argument that the settlement was analogous to that between TELS and GWSH.  As the judge noted, the termination of the Dist Agrmt was not linked to that of the Shanghai distributorship[66] and these companies were represented by different persons. 

41.More importantly, in respect to the Company’s email above[67], it would be noted immediately that there was no mention at all of the alleged condition that the Company would give TEAL the “confidential information”.  The judge was therefore entitled to find that “the Company’s case that [TEAL] entered into the Oral Agreement by reason of the alleged confidential information is flimsy”, and given that that was the “only advantage” that the Company said TEAL received from the oral settlement agreement, the judge was clearly right to conclude that the Company had not shown a bona fide dispute of the debt on substantial grounds.

42.At the hearing of the winding-up petition, no new evidence was admitted, and although the companies judge was not bound by Anthony Chan J’s Decision, in practice it is difficult to see (having read Anthony Chan J’s clear and focused decision) how the companies judge would have arrived at any other result than that the Company should be wound up.  

Conclusion

43.In conclusion, CACV 84/2017 (the appeal against Anthony Chan J’s Decision) is dismissed with costs.

44.As for CACV24/2017 (the appeal from the Winding-up Order), it will be seen from this Judgment that Harris J was also correct in making that order.  However, the Winding-up Order was stayed on 27 March 2017, and the OR was appointed the Company’s provisional liquidator.  It would appear from the latest report[68] that in the meantime, the Company has been able to recover certain funds, and that the Company was (as at the date of the report) solvent.  That being the case, even though CACV24/2017 should likewise be dismissed, the Company may wish, in light of the subsequent change of circumstances, to apply to the court to discharge the Winding-up Order.  Accordingly, this court invites submissions[69] from the parties (including the OR) as to the form of order that the court should make in CACV24/2017.  In the absence of such submissions, the stay would be lifted and CACV24/2017 dismissed with costs.

45.Finally, it remains to thank counsel for their assistance and to apologize for the time taken to render this Judgment.   

(Maria Yuen) (Ian McWalters) (Louis Chan)
Justice of Appeal Justice of Appeal Judge of the Court of First Instance

Mr Russell Coleman, SC and Ms Andrea Yu, instructed by Fung Wong Ng & Lam LLP Solicitors, for the Respondent (the Company)

Mr John Bleach, SC and Mr Samuel Chan, instructed by Fred Kan & Co., for the Petitioner

The Official Receiver was absent



1  S.178(1)(a) Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 (“the Ordinance”).

2  S.178(1)(c) of the Ordinance.

3  This ground was not pursued: Anthony Chan J’s Decision, 30.12.2016, §2.

4  S.14AA(4)(b) High Court Ordinance, Cap. 4.

5  See §44 below.

6  Single Level Cell.

7  Dist Agrmt, Article 16.1.

8  Exhibit B to the Dist Agrmt.

9  International Commerce terms.

10  Delivery Duty Unpaid.

11  Lo Chi Tak Lewis, affirmation, 12.5.2016, §9.

12  On 27.8.2015.

13  Kwok Chan Cheung, a director of the Company and a director of WAE. 

14  i.e. total provisions for account receivables (HKD145.786 million) for the 2nd half of 2015.

15  i.e. total provisions for stock (HKD54.739 million) for the 2nd half of 2015.

16  Lo, affirmation, 12.5.2016, §13.

17  cf.  In §19(1) of the same affirmation, he referred to “an implied meaning” of such a waiver.

18  Lo, affirmation, 12.5.2016, §42(2). 

19  See §36.1 below.  

20  Provisionally based on the contents of an email “LCTL-6". 

21  Lo, affirmation, 12.5.2016, §33.

22   According to Mr Lo, it was TEAL who proposed this “1st condition”: Lo, affirmation, 12.5.2016, §16(1).

23  Lo, affirmation, 12.5.2016, §16(2). 

24  See fn 22, the “2nd condition”, §16(2).

25  See fn 22, the “3rd condition”, §16(3).

26  Lo, affirmation, 12.5.2016, §34.

27  See §19.2 above.

28  See §19.2 above.

29  Makoto Mizuma (managing director of TEAL), affirmation, 15.7.2016, §58.

30  19 May 2016.

31  Decision, §§15-19.

32  Decision, §20.

33  Decision, §§21-25.

34  Decision, §§26-27.

35  Decision, §30.

36  Decision, §31.

37  Winding-Up Order §4.

38  A further argument that the SD was not validly served was abandoned on appeal, and the court made an order on 18 January 2018 that there would be no order on TEAL’s summons filed on 28 December 2017 save that the Company is to pay TEAL’s costs of the summons. 

39  Hong Kong Civil Procedure 2019, vol 1 §59/10/7. 

40  HCCW268/2012, Ng J. 29.5.2013, §12.

41  See §9.2 above.

42  (Cheung, Yuen, Chu JJA).

43  [2016] 1 HKLRD 435, §6.5.

44  [2016] 2 HKLRD 175, §§20, 23.

45  Lo, affirmation, 12.5.2016, §18(1). 

46  Adjusted by including invoices for earlier deliveries and by deducting credit notes (comparing the statement at CB/275-284 with that at CB/305-315). 

47  See §20 above.

48  [1989] WLR 271, 279-280.

49  And at the hearing of the winding-up petition.

50  Now Lord Wilson SCJ

51  [2010] 1 WLR 1057, §41.

52  See §12 above. 

53  See §9.2 above.

54  BNY Corporate Trustee Services Ltd v Eurosail - UK - 2007 - 3BL Plc [2013] UKSC28, §37. 

55  4th ed. §3-030.

56  See §28 above.

57  Decision, §21.

58  “LTCL-5(a)” and “LCTL-5(b)”.

59  Lo, affirmation, 12.5.2016, §§36-37.

60  Decision, §24.

61  Decision, §30.

62  “LCTL-7”.

63  Lo, affirmation, 12.5.2016, §34.

64  Lo, affirmation, 12.5.2016, §33.

65  Later provided to this court on 5.1.2018.

66  Decision, §34.

67  See §39.3 above.

68  29.12.2017.

69  In writing, restricted to 3 pages, to be provided within 7 days of the handing down of this Judgment.

Other Judgments in This Case

Further hearings and rulings under CACV 24/2017