Re The Amery China Building Co Ltd

HCCW000008/1982

Petition for a compulsory winding-up - Guidance as summed up by Upjohn L.J. in In re P. & J. Macrae followed -

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Coram: Hon. LIU, J. in Court

Date: 3 April 1982

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JUDGMENT

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1. This is a petition by a judgment creditor to wind up the Amery China Building Company Limited (hereinafter referred to as "the company"). The judgment debt is in the sum of $2,000,000 which carries interest at the rate of 15% per annum from the 25th March, 1981, being the date on which an action was commenced by the petitioner against the company intituled High Court Action No.1936 of 1981. On the 9th June 1981, judgment was by consent entered against the company with a stay of execution for eight weeks thereafter. Execution on the judgment debt was levied on the 1st September 1981, and a nil return was made. The said judgment had remained wholly unsatisfied. Hence this petition for winding up the company was presented on the 20th January 1982.

2. The petition was opposed by the company and its Managing Director in both his dual capacity of as well a contributory of 225,000 paid-up shares as an alleged creditor in the sum of $764,155.60 plus a further loan of $200,000.

3. The company was incorporated in April 1980, with a $6,000,000 paid-up capital, and soon after its formation a contract to build 75 units in two stages in the Lai Chee Bay area of Canton was signed with the Chinese District Authority in mid May 1980. The projection prepared by the company forecast proceeds of sale for the first stage units to reach $90M, of which about $28.5M would represent net profit. It was claimed that under the contract with the Chinese District Authority, upon importation of construction machinery onto the building site, the company would be entitled to sell its share of the first stage units in advance. The Court was told that site formation had been completed at the cost of $2.1M and that deposits to the extent of $2.3M were paid for "materials" which was corrected to "machinery". This development project was said to have been delayed for a year and a half by the sheer weight of its enormous and involved undertaking. Whilst it was deposed to by the Managing Director of the company in its defence of the petitioner's application for summary judgment in the said High Court Action that the company was expressly authorized under contract then to sell units in stage one, he has since affirmed in these proceedings that the company was not so entitled before the introduction of construction machines to the building site. It was finally alleged by the company through its Managing Director that as soon as piling machinery was delivered to and piling work commenced on the site, units could be marketted. These prevarications aside, it was delay in progress and the opportunity to sell that allegedly led the company into insolvency.

4. The company and its Managing Director in his said dual capacity offered little real opposition on the merits, but it was urged on behalf of the company that the circumstances truly warranted sixmonths' grace. Much play was made of the assertions that there were on assets available for the benefit of the creditors and that the investments represented by the $2.1M spent on site formation and the $2.3M deposits made on materials/machinery would be wholly irretrievable in a compulsory winding-up. It was emphasized that the company was about to overcome all its obstacles in Lai Chee Bay and that its Managing Director only returned from a Canton discussion on the 18th February 1982. It was alleged by the company's Managing Director that he was informed by one Mr. Lo Siu Lam, an officer of the Chinese District Authority that permission would be forthcoming from higher authorities for importing construction machinery to the Lai Chee Bay area. It was further disclosed that the same contractor for site formation had been retained as the piling contractor who would in due course supply the requisite machinery and equipment. Thus it was submitted that the prospects of the company weathering the storm were reasonably good and that an immediate order for winding up would bring about nothing short of a total disaster and irreversible loss to all without exception.

5. On all this, counsel pivoted his application for a six months' adjournment, and on instructions he offered the following undertakings:

6. The company was willing to submit to further undertakings in terms akin to those given in In re St. Thomas' Dock Company, ⁽¹⁾ that is to say, "first of all, not to consent to a winding-up order on the petition of any other creditor, or to a voluntary winding-up; secondly, to give notice to the petitioner of the presentation of any other petition for a winding-up; and, thirdly, to consent that on the presentation of any such other petition the present application may be renewed notwithstanding the suspension, so that the Court may be able to deal with it as if no suspension had been made.

7. During the course of the submissions, in fact after the close of the address of counsel for the petitioner, attention was drawn to the receipt of $3.3M for share capital revealed in the particulars contained in a tentative Balance Sheet of the company as at the 30th October 1981 known as "Trial Balance". Thus, it would appear that of the $6M alleged paid-up capital or capital credited as paid-up, $2.7M was unaccounted for. This missing $2.7M was sought to be explained in a further affirmation of the Managing Director of the company filed shortly before the resumed hearing. It transpired that one of the former shareholders/directors, Mr. Yeung Ngan Foo, with an allotment of 270,000 shares at $10 each had allegedly defaulted on his calls and that the shares so allotted to him had been forfeited. However, Mr. Yeung remained indebted to the company in the full sum of $2.7M. It was the belief of the Managing Director of the company that Mr. Yeung was not a worthly target of litigation. In counteracting the turn of events, counsel for the company and its Managing Director opposing in his said dual capacity spared no time in offering further undertakings, namely:-

8. In the two cases cited, where the wishes of a mass of opposing creditors were acceded to for granting a six months' adjournment on a petition to compulsorily wind up a company, the future prospects of the company were not beyond salvation after an initially luckless set-back. One of the companies in these cases was virtually beginning to show profit, and other ancillary conditions were also favourable. I do not propose to descend more into the facts of these two cases, In re St. Thomas' Dock Company ⁽¹⁾ and In re Great Western (Forest of Dean) Coal Consumers' Company⁽²⁾.

9. It is trite law that the absence of assets is not by itself a sufficient ground for refusing a winding-up order (vide s. 180 Companies Ordinance) and that other matters including the wishes of the creditors and contributories - the latter of which would obviously attract less weight and generally become material only "if the debts are not likely to exhaust the assets" - must all be taken into account (vide s.287 Companies Ordinance and 31-41 Gore-Browne on Companies, 43rd edition). It was common ground that the petitioning creditor was prima facie entitled to, as between itself and the debtor company, a winding-up order, an entitlement frequently referred to as a right ex debito justitiae. However, it was submitted on behalf of the petitioner that other circumstances aside, the wishes of the other creditors could be ignored in a creditor's petition unless they represented the majority and were well supported by valid reasons. In other words, it was contended that however valid were the reasons for the opposition, the order sought could not be withheld at the instance of opposing creditors in minority. Leaving briefly this contrasting view, it was the consensus that a petitioning creditor even in minority could override the wishes of the majority upon showing special circumstances. Perhaps, I should set out a passage in paragraph 31-41 of Gore Browne on Companies 43rd edition -

"The wishes of a majority are not conclusive but they possess great weight. Where those wishes are supported by valid reasons the court will follow them in the absence of special circumstances. Examples of special circumstances are when the petition has stood over for three months and nothing has been done, on where the opinion of the real majority is not ascertained, or where a single person has a controlling influence, or where the petitioner establishes that the company is insolvent and has no assets to pay its depts."

The authority cited in support of the last of the examples above listed is In re Vuma Limited.⁽³⁾ I will return to that case shortly, but in the very paragraph of Gore-Browne relied upon by counsel for the petitioner for stifling the voices of the minority opposing creditors, insufficient prominence would seem to have been accorded to certain passages which clearly emphasize the unfettered judicial discretion of the Court in considering a petition for winding-up including the power to stand over the proceedings:

"Court of Appeal stated that section 346 of the 1948 Act (equivalent to section 287 of our Companies Ordinance) confers an unfettered jurisdiction on the court whether or not to make an order and the Court of Appeal will only interfere where the discretion has been exercised on wrong principles."

and a later further down,

10. Mr. Lee, couneel for the company and its Managing Director, sought to derive support from In re Southard & Co. Ltd.⁽⁴⁾ for the proposition that due regard must be given even to the wishes of the opposing minority creditors. In that case, such wishes were justified by the events and consequently succeeded in securing a dismissal of a creditor's petition for a compulsory winding-up. However, the presentation of the petition in In re Southard & Co. Ltd.⁽⁴⁾ was described by Bridge, L.J. as "wholly exceptional, if not indeed unique": There, the petitioning creditor and the supporting creditor belonged to the same camp under the same umbrella of a group of companies; the petitioning company as a creditor itself initiated a voluntary liquidation and only after it had failed to procure one of its officers as liquidation in the course of a dispute, it manoeuvred to acquire the rights of the debenture holder by an assignment and thereafter appointed the same officer as receiver under the debenture taking charge of all the assets and books of the company. Thus, it was decidedly desirable to have the matter investigated by the independent liquidators in the voluntary winding-up, partly for fear that the Official Feceiver in a compulsory liquidation might not receive sufficient finance, in view of the adverse controlling interests, to launch but into an exhaustive and possibly expensive enquiry. When these majority creditors sought to wind-up the company compulsorily in the course of a voluntary winding-up, the wishes of the minority creditors in opposition were preferred. In that demonstrably unique situation, the inevitable result was that creditors in minority succeeded.

11. I will turn back to In re Vuma Ltd.,⁽³⁾ which does not seem to lend full support to the sweeping statement in Gore-Browne. The petitioning creditor in that case was opposed by two other creditors who were major creditors in value by fivefold in the sum of over ?,000 as against the petitioning creditor's ?03 9s. There was no affidavit filed by or on behalf of the opposing majority, who had also given notice supporting the petition but chose to oppose it at the hearing, to show that the company had assets or any prospects of successful business. The petitioning creditor exposed circumstances which "gave grounds for the gravest suspicion as to the company's trading and as to its position in the commercial community. Thus, the wishes of the majority creditors in number and value were not followed.

12. Ultimately, it is really a question of relevance and weight. Regad should be paid to all the material considerations including each faction's interest, big or small, which must be examined in its own context and proper perspective against the given scenario. I must not, therefore, lose sight of the interest and wishes of the Managing Direction both as a minority creditor and a contributory.

13. The guiding principles as summarised by Upjohn, L.J. in In re P. & J. Macrae⁽⁵⁾ were quoted with approval by Templeman, L.J. in In re Southard & Co. Ltd.⁽⁴⁾

14. The opposition in this case came from the company and a minority creditor who is also a substantial contributory. Prior to the forfeiture of the shares of Mr. Yeung, he was one of two main contributories, and he is the only substantial shareholder to-day. I hardly need say more than that "contributory" in its wider sense would include a shareholder. See p.681 Penington's Companies Law 4th edition; 81-44 Palmer's Company Law Vol.1 22nd edition.

15. It was strenuously urged upon me that the company was an assetless company. There is a $2.7 million claim against Mr. Yeung whose alleged financial incapability was sought to be supported merely by the belief of the Managing Director of the company. The disclosure of information has throughout this case been piecemeal and segmented. In fact, the minutes of a Directors' Meeting of the company held on the 6th September, 1980 referred to Mr. Yeung's "failure or refusal to pay the respective calls on his 270,000 shares." From the minutes of an earlier Directors' Meeting held on the 16th July, 1980, it would appear that Mr. Yeung was probably at one time a guarantor for an overdraft account and that he was a signatory to operate the company's accounts. It was also recorded that Mr. Yeung considered "his share capital should be paid as a loan by Mr. Chan" who was then quite willing to finance such payment on the giving of "sufficient material guarantees" or "a guarantee from a respectable Hong Kong resident with sound financial background" to be approved by Mr. Chan. There was only an oblique reference to Mr. Yeung's inability to pay. It was left unexplained whether Mr. Chan was under any unconditional obligation to lend the share capital to Mr. Yeung, whether Mr. Yeung had accepted Mr. Chan's demand for guarantee or whether any such demand was met. The further disclosure as to Mr. Yeung's alleged indebtedness in the sum of $2. million was made after the matter was raised by the Official Receiver and canvassed by counsel for the petitioner, but I am no wiser now than I was as to the precise arrangements between Mr. Yeung and Mr. Chan and as to whether Mr. Yeung is financially sound to pay any of his debt to the company. The Court was given the information that one of Mr. Yeung's limited companies was being wound up with the other far from being prosperous. This evidently relates to Mr. Yeung's commercial activities under the sheller of limited liability of our Company Law and does not necessarily reflect his personal capability.

16. Dwelling further on the availability of assets, I have been shown various sales contracts for bath tubs and accessories, lifts, floor tiles and tearwood doors, for which over $2 million were allegedly paid by way of deposits. There is no provision in any of the sales contracts for the contingency of cancellation. Again, here I have only the bare and very general allegation of Mr. Chan that none of these deposits would be recoverable in the event of a liquidation. In his earlier allegation of authority to sell prior to either introduction of machines onto the building site or commencement of piling, Mr. Chan has been shown to be grossly inaccurate by his own subsequent affirmation. Moreover, by no means can Mr. Chan be taken as having made any full disclosure in these proceedings. I cannot accept that the company's investments in these alleged deposits would inevitably be lost in a compulsory liquidation.

17. I turn next to the question as to whether there are any good prospects of recovery. The claim of the petitioning company in its said High Court Action commenced on the 25th of March, 1981 was founded on the company's inability to deliver the purchased properties on account of a termination of its contract with Chinese District Authority in February, 1981. The companyprobably consented to judgment on that basis in June 1981. It sought and successfully obtained an eight weeks' stay. After such a long lapse of time, apart from an assertion that Mr. Chan attended a meeting in Canton and was supplied with some information prior to his return in February, 1982, not one single official communication has been produced as concrete proof of the subsistence of this contract. Little was the Court briefed on the details of the alleged meeting.

18. It is now alleged the same building contractor for site formation has been retained as piling contractor. We have not been told whether the building contractor's charges have wholly been settled or on what terms he "will bring the necessary machinery to the site to commence piling". The Court was also not given sight of contract documents, if any, signed with the piling contractor.

19. The project in Lai Chee Bay was evidently the only commercial venture of the company, and no time limit was ever suggested for piling work to begin. The company has nothing but debts and problems. In the end, I am left with the firm impression that the company has little likelihood of survival letting alone prospects of success.

20. Except in generality, the cause or causes for delay in the site formation was not specified. The impasse with and the attitude of the Chinese Authorities including their reaction to these proceedings, the adjournment sought and the undertakings proposed were left unexplored. No reference was made to the market condition and public confidence in the company. Despite Mr. Bokhary's daunting invitation for information on the subsistence or cancellation of the company's contract with the Chinese District Authority, no further information of any real assistance was volunteered. Indeed Mr. Chan's statements on affirmation can best be described as only half-truths. The company is hopelessly insolvent, and I am not entirely satisfied that the company is in the circumstances wholly assetless.

21. The petitioner is a majority creditor in value who desires an immediate compulsory winding up. The opposing creditor's debt stands at a lesser value and his interest as a shareholder must be second to that of the creditors. In addition, Mr. Chan now controls the company in votes and position. Any attempt to distinguish Mr. Chan's interest from that of company can only be artificial. Despite the many undertakings offered through Mr. Lee, counsel for the company and its Managing Director, there is no satisfactory assurance that introduction of machinery to or commencement of works on the building site or, for that matter, the sales of the first stage units can be implemented by a certain deadline. Balancing all these, it cannot be in the real interest of any party that the wishes of the majority petitioning creditor are to be disregarded. I take the view that it is right and proper for my discretion to be exercised only one way, and that is in favour of making an order to wind up the company.

22. It is quite unnecessary for me to deal with the application for appointment of a provisional liquidator. Had I seen fit to grant the application for a six months' adjournment, I would have been very reluctant, in view of the undertakings given on behalf of the parties in opposition, to accede to the petitioning creditor's application. On the proposed undertakings, it was not seriously pressed before me that any property of the company would be or remained in jeopardy. There was no suggestion that the assets of the company were being or would be misappropriated or wasted. Moreover, there is some substance in the submission that an appointment of a provisional liquidator would have the effect of defeating the purpose for which the six months' adjournment was sought.

23. The petitioning creditor is to have costs against the company and the opposing creditor and contributory, Mr. Chan.

(1)    [1876] 2 Ch. D. 116

(1)    [1876] 2 Ch. D. 116

(2)    [1882] 21 Ch. D. 769.

(3)    [1961] W.L.R. 1283

(4)    [1979] 1 W.L.R. 1198

(5)    [1961] 1 W.L.R. 229 at pp. 237-240

(4)    [1979] 1 W.L.R. 1198 at p. 1209 H et seq.

Representation:

Mr. Kemal Bokhary with Mr. Sammy Lee instructed by Johnson, Stokes & Master for the Petitioner.

Mr. Martin Lee, Q.C. with Mr. Philip Lee instructed by Messrs. Hastings for the opposing creditor, Chan Hak Kong and the Respondent Company.

Mr. Nicholls for the Official Receiver.

Date of Hearing/Trial: 22nd, 23rd & 27th of March, 1982

Date when Judgment Was Delivered: 3rd April, 1982

Case Cited by Connsel for the Peritioner but not mentioned in the Judgment:

1. In re J.D. Swain Ltd. (1965) 1 W.L.R. 909

Cases Cited by Counsel for the Opposing Creditor and the Respondent Company but not mentioned in the Judgment;

NIL

Actual Cases Cited in the Judgment:

1. In re St. Thomas' Dock Company [1876] 2 Ch. D. 116

2. In re Great western (Forest of Dean) Coal Consumers' Company [1882] 21 Ch. D. 769

3. In re Vuma Limited [1961] W.L.R. 1283

4. In re Southad & Co Ltd [1979] 1 W.L.R. 1198

5. In re P. & J. Macrae [1961] 1 W.L.R. 229 at pp. 237-240