Re Universal Dockyard Ltd

HCCW000663/2002

HCCW 663/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 663 OF 2002

____________

____________

Coram: Hon Kwan J in Court

Date of Hearing: 4 March 2003

Date of Handing Down of Judgment: 9 June 2003

_______________

J U D G M E N T

_______________

1.This is a petition to wind up Universal Dockyard Limited ("Dockyard") presented by Fonfair Company Limited ("Fonfair") on the ground that Dockyard is unable to pay its debts. The debt in the petition is a judgment debt in High Court Action No. 1886 of 2001 ("the High Court Action") in the sum of HK$3,671,250.00 and mesne profits at HK$226,000.00 per month from 1 May 2001 to the date of delivery up of vacant possession of the property known as Yau Tong Marine Lots Nos. 2, 3 and 4 situate at No. 44 Ko Fai Road, Yau Tong Bay, Kowloon ("the Property"). The judgment was entered on 11 December 2001, upon Dockyard's failure to comply with the condition upon which leave was granted to Dockyard to defend by an order of a Master on 5 November 2001, on the basis of payment into court of all claimed arrears of rent and further rent or mesne profits at the rate of HK$226,000.00 per month until trial. Dockyard appealed against the order of the Master and the appeal was dismissed by Deputy Judge To in a decision handed down on 25 January 2002. The petition herein was presented on 21 June 2002.

2.Dockyard seeks dismissal of the petition, alternatively, an order for the stay or adjournment of the petition. The main ground of opposition relied upon is that the judgment in the High Court Action would fall within a scheme of arrangement between the Company and its creditors ("the Scheme") which was sanctioned by the court pursuant to an order made on 18 April 2000, by which the court sanctioned the schemes of arrangement (collectively "the Schemes") relating to UDL Holdings Limited ("Holdings") and 24 of its subsidiaries, including Dockyard (see Re UDL Holdings Ltd (No. 3) [2000] 3 HKC 405). The Schemes are in identical terms and form part of a global scheme and the terms are embodied in a composite scheme document. They came into effect on 28 April 2000 ("the Effective Date"). It is contended that by virtue of the provisions in the Scheme, the execution of and further proceedings on the judgment, including the winding up proceedings against Dockyard, should be stayed as the Scheme operates as a bar to all proceedings in respect of the claims of creditors, save for pending arbitrations.

3.I will first give the background matters leading to the petition.

The background

4.Fonfair is the registered owner of the Property. Dockyard had occupied the Property for over 40 years. The Property was originally acquired by Mr Leung Man Kwong, who was the father of Mr Leung Yuet Keung ("YK Leung") and Mr Leung Yat Tung ("YT Leung"). When Mr Leung Man Kwong passed away, his personal representatives assigned the Property to Fonfair in 1980. Fonfair used to be a subsidiary of Dockyard until 1991.

5.When Holdings became a public company in 1991, Fonfair was spun off from Dockyard, in order that the Property should remain in the private hands of the Leung family. The Property was occupied by the companies in the UDL Group and was used as a shipyard and office. Dockyard remained as the tenant of the Property under successive tenancy agreements with Fonfair. On 10 September 1999, Fonfair entered into a tenancy agreement with Dockyard for a term of one year, which was to expire on 31 August 2000 with an option to renew for one year, and the rental payable was HK$226,000.00 a month. There is no dispute that since 1 December 1999, Dockyard had not paid rent to Fonfair but continued to occupy the Property, until vacant possession was recovered in late 2002 after the execution of a writ of possession in June 2002. The sum of HK$3,671,250.00 being part of the judgment sum in the High Court Action was rent for the period from 1 January 2000 to 25 April 2001 at the rate of HK$226,000.00 per month. With mesne profits at the same rate from May 2001 up to the delivery of vacant possession in mid December 2002, the total judgment debt with interest calculated up to the hearing of this petition is in the region of HK$8.5 million.

6.It is necessary to point out that as a result of the re-organisation of Fonfair in 1991, 32.96 % of its shares were and are held by Harbour Front Limited ("Harbour Front"), which is a trustee company of a discretionary trust set up by YT Leung, the former chairman of Holdings, for the benefit of his wife and children. 65.79% of the shares in Fonfair were and are held by Money Facts Limited ("Money Facts"), and Money Facts was and is owned by Harbour Front as to 50% and YK Leung as to the balance. Owing to disputes between YT Leung and YK Leung, Harbour Front has presented a petition to wind up Fonfair on the just and equitable ground in HCCW No. 246 of 2002 and a similar petition to wind up Money Facts in HCCW No. 880 of 2001. These two petitions have not been heard and one of the grounds of opposition advanced by Dockyard before me is that this petition should be stayed or adjourned until the determination of the petitions to wind up Fonfair and Money Facts as these petitions, if successful, would have the effect of "changing the management of [Fonfair] and thereby its stance as regards ... the present proceedings".

7.Until YT Leung was made bankrupt on 1 March 2001, he was a director of Fonfair and had control over its affairs, as found by Deputy Judge To in paragraph 16 of his decision, as well as control over the management of the companies in the UDL Group, including Dockyard. It was also found by the Deputy Judge in paragraph 13 of his decision that for the period up to December 1999, almost all the rental income received by Fonfair from Dockyard was "misappropriated" by YT Leung into the account of YT Leung Trading Company Limited ("YTL Trading"), a company controlled by YT Leung. There was deadlock in the management of Fonfair until after YT Leung had lost his seat on the board of directors of Fonfair as a result of being made bankrupt. Thus, notwithstanding that it was stipulated in clause 1 of the third schedule to the tenancy agreement made on 10 September 1999 that if Dockyard shall enter into an arrangement or composition for the benefit of its creditors, it shall be lawful for Fonfair to exercise its right of re-entry, Fonfair did not exercise that right when the Scheme was sanctioned by the court in April 2000. It was only in June 2001 that the writ in the High Court Action was issued, claiming possession of the Property and arrears of rent.

8.The lines of defence raised by Dockyard before the Deputy Judge, which were all rejected by him, were as follows:

(1) it was alleged that a new tenancy agreement was entered into between Fonfair and Dockyard on 31 August 2000 for a term of two years commencing 1 September 2000 at a reduced rental of HK$150,000.00 per month;

(2) the rent due under the alleged tenancy agreement in August 2000 had been paid in full by way of set off against a debt of HK$6,350,695.14 allegedly owed by Fonfair to YTL Trading, which had assigned the debt to Dockyard in August 2000; and

(3) Fonfair was not authorised to bring the High Court Action.

9.These defences, founded upon allegations of fact advanced on behalf of Dockyard, were rejected by the Deputy Judge in no uncertain terms. He found there was a "lack of credence" in the defence of new tenancy and came to the view that the document was a "recent creation" and an "afterthought". He concluded that "not only that the defence of new tenancy agreement is blatantly incredible in the light of the circumstances, it has no merit at all". The defence of assignment and set-off fared no better, notwithstanding Dockyard had produced a series of documentation in support. The Deputy Judge found that this defence was "another recent creation", that it was "unbelievable and could not be genuine", and was bound to fail as the alleged assignment and set-off would be in violation of the terms of a shareholders' agreement dated 5 June 1990 between YK Leung and YT Leung and, if brought into effect, would be a misappropriation of the rental proceeds. It was also held that the resolution passed by the board of directors of Fonfair to commence proceedings against Dockyard, after YT Leung was disqualified to act as a director, was valid. The rights and obligations of the parties were to be determined in accordance with the tenancy agreement made in September 1999.

10.As the above defences have been distinctly raised by Dockyard and decided against it by the Deputy Judge in a reasoned decision from which there is no appeal, it is simply not open to Dockyard to raise these allegations again in the 1st affirmation of Li Kam Wa filed in these proceedings on 13 September 2002, as if those factual allegations had not been determined against Dockyard.

11.The main ground of opposition relied on by Dockyard to oppose this petition, that the Scheme has in effect imposed a bar or moratorium upon claims during the period of operation of the Scheme, was not however raised as a defence by Dockyard in the High Court Action.

Res judicata in the wider sense

12.It was submitted by Mr Anthony Chan on behalf of Fonfair that Dockyard should not be allowed to raise this ground of opposition as this is plainly a point which properly belonged to the subject of litigation in the High Court Action and it might have been brought forward by Dockyard as part of its defence in those proceedings, as was done by another subsidiary of Holdings just a few months earlier in a personal injuries action before Suffiad J that I shall be referring to. Unless there are special circumstances, Dockyard should be shut out from raising this new point which it had omitted to raise in the High Court Action (Yat Tung Investment Co. Ltd v. Dao Heng Bank Ltd [1975] AC 581).

13.For Dockyard, Mr Kenneth Chan submitted that the new point sought to be raised was not clearly part of the litigation in the High Court Action and so clearly should have been raised in those proceedings, citing the dicta of Somervell LJ in Greenhalgh v. Mallard [1947] 2 All ER 255 at 257. I do not accept this. If the Scheme should have the effect of imposing a bar or moratorium on the claims of creditors during the period it is in operation, this could have provided a defence to Dockyard in the High Court Action. If the argument on the new point were accepted by the court in the High Court Action, it would not even be necessary for Dockyard to rely on the defences which were raised and rejected.

14.Mr Kenneth Chan also submitted that there are special circumstances here for not applying res judicata in the wider sense. Once a scheme of arrangement is sanctioned by the court under section 166 of the Companies Ordinance, Cap. 32, it would be binding on all creditors who are entitled to vote upon the scheme. Whether Dockyard is permitted to raise this new point in opposing the petition would not only affect the company itself but all its creditors who are bound by the Scheme, even though no creditor has given notice of intention to appear in these proceedings and the Scheme Administrator, who is aware of the petition, has not taken any position. I am persuaded that special circumstances do exist in this situation. I will allow Dockyard to raise the new point in these proceedings.

The Scheme

15.Before I consider the arguments raised on both sides on the effect and construction of the Scheme, it will be appropriate to give a brief account of the mechanism of the Scheme and set out the salient provisions.

16.Pursuant to the terms of the Scheme, a Scheme Administrator was appointed to deal with claims made against Holdings and the participating subsidiaries including Dockyard. The unencumbered assets of each of the participating companies in the Schemes will be pooled to form a fund for the payment of all external claims other than debts covered by security held by secured creditors. Pending completion of realisation of the assets and distributions, there is a moratorium on enforcement of claims by creditors although pending arbitrations will be allowed to continue. A specified procedure is set out in Part 3 of the Scheme for dealing with proof and determination of claims of creditors. Creditors are required to submit their claims with the Scheme Administrator on or before the Cut-Off Date, which was 5 July 2000. Any creditor dissatisfied with the decision of the Scheme Administrator could have the matter reviewed by the Adjudicators under the Scheme and the decision of the Adjudicators will be final. Any claim not proved in accordance with Part 3 of the Scheme or which are rejected, shall be treated for all purposes as wholly and irrevocably released.

17.Clause 1 of the Scheme is in these terms:

"Save as provided in Part 3 of this Scheme of Arrangement, during the period in which the Scheme of Arrangement is effective, no Creditor shall be entitled to make any demand or exercise any right of set-off against the Company [i.e. Holdings] or any of the Scheme Participating Subsidiaries [which include Dockyard] in respect of, or shall seek to recover from the Company or the Scheme Participating Subsidiaries by legal process or otherwise, or take any step or proceedings against the Company or any of the Scheme Participating Subsidiaries or their properties or aspects for the purpose of enforcing or recovering by way of execution or otherwise, any Claim or Secured Debt or to commence or join in any proceedings to wind up the Company or any of the Scheme Participating Subsidiaries provided that nothing in this Scheme of Arrangement shall prevent any Secured Creditor from realising its security or affect any arbitration between the Company or any Scheme Participating Subsidiary and any claimant against the Company or such Scheme Participating Subsidiary which has commenced and is continuing as at the Effective Date but so that the amount recoverable pursuant to any order made in such arbitration proceedings shall be limited in accordance with the provisions of this Scheme of Arrangement." (emphasis supplied)

18."Creditors" in the Scheme is defined to mean:

"the Creditors of the Company or any Subsidiary including, where the Company or any subsidiary has Secured and/or Preferential Creditors, such Secured and/or Preferential Creditors, being in each case Creditors whose claims arose out of or had their origin in any matter occurring before the Effective Date and whether present, future or contingent, whether sounding in equity, contract, tort or under statute and whether liquidated or yet to be ascertained." (emphasis supplied)

19."Claim" is defined in the Scheme to mean "the claims of Proving Creditors against the Company or any subsidiary". "Proving Creditors" is defined to mean "Preferential Creditors and Unsecured Creditors (other than the Company and the Scheme Participating Subsidiaries)". And "Unsecured Creditors" is defined to mean "Creditors of the Company or the Subsidiaries or any of them other than Secured Creditors and Preferential Creditors ...".

20.Fonfair was listed as an unsecured creditor of Dockyard in the composite scheme document, with a claim of HK$933,250.00. It is a "Proving Creditor". There is no explanation how this amount was arrived at, but looking at the particulars in the Notice of Claim that was submitted by Fonfair dated 8 July 2000, it is clear that this amount could not have included rent due after the Effective Date.

21.It is also pertinent to note clauses 32 and 37 in Part 3 of the Scheme and they provide as follows:

"32. A Claim for which the Company or the Scheme Participating Subsidiary is liable at the Effective Date shall be proved by any party claiming to be entitled thereto delivering to the Scheme Administrator at such party's own expenses:

(a) not later than the Cut-Off Date, a Notice of Claim in respect of his Claim completed in accordance with the instructions printed thereon; and

(b) such documents or other evidence as the Scheme Administrator shall reasonably require for the purpose of substantiating the whole or any part of such Claim." (emphasis supplied)

"37. Where before the Effective Date, there have been mutual credits, mutual debts or other mutual dealings between the Company or the relevant Scheme Participating Subsidiary and any Proving Creditor, an account shall be taken of what is due from one party to the other in respect of such mutual dealings and the sum due from one party shall be set off against any sum due from the other party and only the balance, if any, of the account shall be provable as a Claim if such balance is payable by the Company or the Scheme Participating Subsidiary or, as the case may be, shall be paid by the Proving Creditor to the Company or the Scheme Participating Subsidiary." (emphasis supplied)

22.The Notice of Claim that Proving Creditors are required to submit by the Cut-Off Date must be in the form or substantially in the form set out in the Appendix to the Scheme. In the form for the Notice of Claim, item 3 provided as follows: "Total amount of claim as at the Effective Date".

23.Having set out the salient provisions, and before I turn to the arguments, it is important to note a concession made by Fonfair. It is accepted by counsel for Fonfair that the bar to proceedings in clause 1 of the Scheme would apply to proceedings in respect of Dockyard's liability as at the Effective Date. However, it would have no application to proceedings in respect of Dockyard's liability incurred after the Effective Date. As regards the judgment debt upon which the petition is founded, the major part of it is in respect of Dockyard's liability incurred after the Effective Date.

The contention of Dockyard

24.It is the contention of Dockyard that the old tenancy agreement in September 1999, being a contract entered into before the effective date of the Scheme, is subject to the effect of the Scheme and as for future rentals as from 28 April 2000, they would fall under "future or contingent" claims of the creditors as defined in the composite scheme document. Dockyard has prayed in aid another instance in which it was held by Suffiad J that the personal injury claims of a sub-contractor's employee which accrued prior to the Effective Date, and whose claims must have included damages continuing after the Effective Date, should be stayed against a particular subsidiary of Holdings pursuant to the terms of the scheme relating to that subsidiary, but the plaintiff was free to proceed against the insurers directly (Lin Kai Hsuan v. Szeto Foon trading as Wah Cheuk Constructing Co. & Ors, High Court Personal Injuries Action No. 480 of 2000, 21 June 2001, paragraphs 5, 18 to 26). It does not, however, appear from the judgment that the parties had specifically raised the question of future or contingent claims and this was not expressly dealt with in the judgment.

25.Mr Kenneth Chan submitted that on a proper construction of the definition of "Creditors" in the Scheme, what is material is that the claims "arose out of or had their origin in any matter occurring before the Effective Date". So long as this requirement is satisfied, it does not matter when the claim is due, as this would have been caught by the words that follow "and whether present, future or contingent". There is no basis for limiting future claim so as to stop at liabilities which were incurred as at the Effective Date. One should bear in mind that debts or claims due in future, in the sense that they have not become due and payable by the time winding up commences, are provable in a liquidation, under section 263 of Cap. 32, and a landlord is entitled to prove in the liquidation in respect of future rent payable under a lease that the liquidator has failed to disclaim (McPherson's Law of Company Liquidation by Andrew R Keay, 1st ed., para. 12.19; cf. Re New Oriental Bank Corp. (No. 2) [1895] 1 Ch. 753). As for a contingent claim, a "contingent creditor" in section 124(1) of the Insolvency Act 1986 (equivalent to section 179(1) of Cap. 32 and provides that a contingent or prospective creditor may petition to wind up a company) has been held to denote "a person towards whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future event or at some future date" (Re Williams Hockley Ltd [1962] 1 WLR 555 at 558). So the expression of a contingent claim is of equally wide import.

26.It was further pointed out that in the Notice of Claim submitted by Fonfair on 8 July 2000 (when Fonfair was still under the control of YT Leung) for a total claim of HK$42,440.94, rentals for May and June 2000 were taken into account and apparently set off under some kind of arrangement (there is no explanation in the evidence why rentals for these two months were deducted, this was not the set-off arrangement as alleged in the High Court Action, which was entered into in August 2000), so the claims put in by Fonfair did not in fact stop at the Effective Date. The claim submitted by Fonfair was fully admitted by the Scheme Administrator, notwithstanding that it was submitted after the Cut-Off Date. There is as yet no distribution under the Scheme. It was suggested that Fonfair could have put in a claim to the effect that Dockyard has remained in occupation of the Property based on the tenancy agreement made in September 1999, and the claim is for arrears of rent and future rent until the date when Fonfair is to recover possession and this claim, if put in, is "not impossible for adjudication".

The Contention of Fonfair

27.The argument of Fonfair runs as follows.

28.Under Part 3 of the Scheme, Fonfair would only be entitled to submit a claim in respect of arrears of rent or other liabilities incurred up to the Effective Date. It could not have been the intention of the parties to the Scheme that Dockyard should be allowed to continue in occupation of the Property without any payment of rent and any proceedings commenced by Fonfair for recovery of rent would be stayed pursuant to the terms of the Scheme.

29.It was submitted that on a proper construction of the Scheme, future claims would only cover claims payable in future but the liability for which had been incurred as at the Effective Date. This would not cover rent which was not yet due as at the Effective Date.

30.In support of this contention, Mr Anthony Chan referred me to the decision of Judge Roger Cooke in Burford Midland Properties Ltd v. Marley Extrusions Ltd & Ors [1995] 1 BCLC 102. At issue in that case was the rent accruing due after the critical date in the voluntary arrangement (equivalent to the Effective Date in our case) entered into by a company under Part I of the Insolvency Act 1986 (our equivalent is the procedure under section 166 of Cap. 32). It was contended by the original tenant and by the company, to whom the lease was assigned, that the landlord's only rights are rights under the arrangement and those would have the effect of inhibiting immediate and full recovery of rents and the landlord would only receive the rent partly in shares and partly in rescheduled instalments. This argument was rejected by the Judge and it is necessary to set out his reasoning in some detail.

31.Under the arrangement in Burford, "liabilities" was defined to mean "from time to time to the extent that they are still subsisting, any and all liabilities of [the company] at [the arrangement date] are creditors howsoever such liabilities arise and whether at that date they were liquidated or unliquidated, their value ascertained or otherwise, present or future, contingent or otherwise, but excluding preferential debts" (emphasis supplied). "Creditors" was defined in the arrangement as "any creditor of [the company] as at [the arrangement date] bound by the voluntary arrangement by virtue of the provisions of [the Insolvency Act] whose claims were at that date liquidated or unliquidated, ascertained in value or otherwise present or future, contingent or otherwise ..." (emphasis supplied). Further, there was a provision in clause 4.1 which read as follows:

"The provisions of Clauses 5, 6 and 7 shall have effect in full and final settlement of all claims against and obligations of [the Company] present and potential in relation to the liabilities including, without limitation, in respect of damages, interest, costs or any other matters relating to the liabilities whether such claims or obligations are liquidated or unliquidated, their value ascertained or unascertained, future or present, contingent or otherwise".

32.The Judge went through the exercise of considering the authorities on the meanings given to future and contingent claims in the context of the companies legislation, similar to what Mr Kenneth Chan had referred me to. He remarked that oddly enough, no authority had been discovered by counsel, despite considerable industry, that relates directly to the position of rent under an existing lease in the context of these definitions. He came to the conclusion that as the authorities stand, the following is clear: "(1) A future prospective debt cannot include a debt that arises out of a future transaction; (2) that it can and will include a debt that arises out of an existing transaction as a result of which the basic liability is incurred which depends on the reaching of a future date or the happening of a future event to make it payable if it is ever to be payable". What is less clear is whether a prospective future debt includes a liability under a subsisting series of obligations when the future event "goes to the whole root of the obligation". He took the view that even in the context of the companies legislation, this kind of case would fall outside the category of prospective debts, because "what one is really concerned with is what (time and contingency apart) the company is known to owe at the relevant date as opposed to what the company will owe at a future date when it receives some benefit which at present it does not have - for example, continued possession under a subsisting lease and the continued benefit of the landlord's covenant". He would construe the expressions in the arrangement in conformity with what he regarded as the right way of construing the Companies Act approach, rather than as something that is radically different (at 109d to h).

33.The judge then posed the question of what is a debt or liability and gave the answer as "an obligation to pay that is no longer dependent on executory matters on either side but where subject only either to date or to some uncertain inhibiting factor it is fully crystallised". Thus, if someone will be entitled to payment only when executory matters have been performed, he cannot properly be called a creditor. As for liability for future rent, "this is a right, essentially one of property tied into a bundle of rights and obligations, the enjoyment of the estate for a period by the tenant and also consideration of the landlord's covenants." This is no different from the executory contract scenario (at 110a to b).

34.He then turned to the principles of construction, which supported the approach he suggested of construing the relevant expressions in a Companies Act context. As a matter of ordinary language, he found considerable difficulty in saying that as at the arrangement date the company had a liability (defined as a liability at the arrangement date) to its landlord for rent, "when that rent has not become due in any sense at the arrangement date but is payable in the future in respect of a quarter's, a future quarter's, enjoyment of the estate created by the lease". Nor could he see why it obviously fits into a compromise of liabilities at the arrangement date when there is no suggestion of compromising the rights, including the covenant under the lease, which continues to be performable in consideration of, inter alia, the rent. Essentially compromise of debts is a concept whereby the only obligation is the debt itself. Therefore the ambit of the compromise relates to the way in which the debt may be paid or postponed, while compromise of a future payment which is in consideration of other executory obligations would involve compromise of those obligations which the arrangement does not. He concluded that the scheme of arrangement makes at best dubious sense, defining the liabilities as including future rent, and he did not think future rents, as opposed to past rents, would fit into either the definitions or the compromise with ease or consistency (at 111d to h).

35.The factual matrix of the arrangement was considered. The explanatory document made it clear that the object of the exercise was to enable the company to trade for five years according to a business plan and secure that its existing debts would be dealt with in a tightly structured way which would not unduly interfere with its ability to trade. The other side of the coin must inevitably mean that for the five-year period it would be business as usual, trade would take place, current trade debts would be paid as and when they fall due. Part of the trading business pattern of the post-arrangement would be the continued occupation of business premises with the landlord performing his covenants and the tenant paying the rent. In that factual matrix and given that objective of the scheme, it would be totally inconsistent with the concept and purpose of the scheme that the landlord should be made to give the tenant continuing credit, some of it in the form of shares, and continue to perform all his obligations under the lease and take the risk that the company would be able to pay at the postponed date. The tenants' construction would not make commercial sense because "it forces giving continuing future credit for obligatory future services within what is meant to be a moratorium scheme with business as usual and the landlord's construction makes commercial sense, i.e. it is consistent with drawing a line at the arrangement date and thereafter trading normally" (at 112a to e).

36.It was submitted on behalf of Fonfair that the reasoning in Burford would apply equally to the present situation and the relevant expressions in the Scheme and the objective of the Scheme are not materially different from the arrangement there. For Dockyard, it was merely submitted that the relevant provisions in the Scheme are different from the arrangement in Burford.

37.From my own research, Burford was cited in a number of cases which were concerned with different issues for decision, including Mytre Investments Ltd v. Reynolds [1995] 3 All ER 588 (which relates to the liability of a lessee for past rent where the assignee of the lease had entered into an individual voluntary arrangement ("IVA") and the IVA did not affect the obligations under the lease for rent due for the future); Doorbar v. Alltime Securities Ltd [1995] 1 BCLC 316 (which relates to whether the liability to pay future rent is capable of being included in an IVA and the proper construction of rule 5.17(3) of the Insolvency Rules 1986); and Re Cancol Ltd [1996] 1 All ER 37 (which relates to whether a company voluntary arrangement can as a matter of law bind persons entitled to the benefit of present as opposed to future or contingent liabilities such as future payments of rent and the proper construction of rule 1.17(3) of the 1986 Rules). There was no disapproval of Burford in subsequent cases.

Construction of the Scheme

38.It seems to me the logical approach would be to start with the question whether future rent under a lease is, as a matter of law, capable of being included in a scheme of arrangement under section 166. If it were legally impossible to include future payments of rent in a scheme of arrangement, the question of construction of the Scheme does not arise. Similar questions were considered by Knox J in the contexts of an IVA and a company voluntary arrangement in Doorbar and Cancol. Knox J decided that a liability to future rent is capable of inclusion as a matter of law in an IVA and a company voluntary arrangement.

39.In Cancol, reference was made to Re Midland Coal, Coke and Iron Co., Craig's Claim [1895] 1 Ch 267, which was decided in relation to section 2 of the Joint Stock Companies Arrangement Act 1870 (the direct ancestor of section 425 of the Companies Act 1985, our equivalent is section 166). It was held that the word of "creditor" in the Act is used in the widest sense, that it includes all persons having pecuniary claims against the company, whether actual or contingent.

40.Knox J cited with approval a note in Buckley on the Companies Acts, and the note in the current edition at [425.19] on section 425 reads as follows:

"Every person who has a pecuniary claim against the company, whether actual or contingent, is a creditor within the Act."

41.I hold that claims to future rent are capable of being included as relevant claims in a scheme of arrangement under section 166.

42.It is entirely possible for a scheme of arrangement to provide for the claim of the landlord for future payment of rent where the company remains in occupation, or the claim of the landlord for loss and damage for the unexpired term of the lease where the company offers to surrender the lease, as was done in the proposals considered in Cancol. In this way, the value of the landlord's claims could be determined for voting purposes when the scheme is put to a vote at the creditors' meeting.

43.No such provision was made in respect of the landlord's claims in the present case.

44.It would appear from the explanatory statement to the Scheme that the plan for restructuring and reorganization was that the UDL Group would continue in business with trimmed down operations so as to preserve the Group's asset value so that the assets would eventually be made available to the creditors. It would concentrate on its core marine engineering business, which had a profitable track record. There was no mention in the explanatory statement that the Group would give up the business premises at the Property or of any plans that the Group would move to smaller premises with a trimmed down operation. One can only infer that it was envisaged, with the implementation of the Scheme, that the Group would continue to be in occupation of its business premises.

45.The factual matrix and purpose of the Scheme are similar to Burford. I do not find any material difference between the provisions in the arrangement in that case and the relevant provisions in our case. I agree with the reasoning in Burford. Applying that reasoning, I hold that as a matter of construction, rents which accrued due after the Effective Date are not included in the claims affected by the Scheme. Further, the definition of "Creditors" in the Scheme must be read with other provisions in Part 3, such as clauses 32 and 37. In my view, having regard to other provisions and the regime under the Scheme, it is fairly clear that a line is meant to be drawn at the Effective Date and liability that accrued after that date arising out of the continuation of the business of the Group on a trimmed down scale is not caught under the Scheme. I should also mention that I have attached no significance at all to the way in which Fonfair had made its claim in the Notice of Claim that was submitted. The main ground of opposition to the petition fails.

Other grounds of opposition

46.I should also record that there were other grounds of opposition raised by Dockyard in the evidence filed and in the written submissions of counsel, seeking a stay or adjournment of the petition on the grounds that there are pending proceedings to wind up Fonfair and Money Facts and that Harbour Front has put up a proposal for investment in Dockyard to keep it as a going concern. In his oral submissions, Mr Kenneth Chan indicated that he would not rely on these other grounds. I do not propose to deal with them except to say that I would not have granted a stay or adjournment on any of the other grounds.

47.I am mindful of the fact that in the event a winding-up order is made, this would upset the Scheme. Dockyard is clearly insolvent. According to the annual report of the UDL Group dated 29 November 2002, Dockyard has "at present no business nor net tangible assets of substance". The unaudited balance sheet of one page put forward by Dockyard giving its financial position as at 31 December 2002, with "other receivable" of over HK$29 million under current assets, but containing no particulars of these receivables or their recoverability, does not show that the company is solvent or that it has a positive net worth. No viable proposal to salvage the company has been placed before the court. The proposal of Harbour Front, as contained in the letter of its solicitors to the Official Receiver dated 4 February 2003, is completely lacking in details to merit any serious consideration.

Orders

48.For the above reasons, I make an order to wind up Dockyard. Fonfair's costs in the petition will be paid out of the assets of Dockyard.

Representation:

Mr Anthony Chan and Ms Sarah Sin, instructed by Messrs Ho & Ip, for the Petitioner

Mr Kenneth Chan and Mr David Chum, instructed by Messrs Joseph C T Lee & Co., for the Company

The Official Receiver, attendance excused