Re Modern Century Forwarding Ltd. (Number 280162)

HCCW000306/2001

HCCW 306/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 306 OF 2001

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Coram: Hon Yuen J in Court

Dates of Hearing: 21 and 24 December 2001

Date of Decision: 24 December 2001

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D E C I S I O N

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1.This is an application issued on 26 July 2001 for an order under the inherent jurisdiction of the court for the rescission of an order winding up a company by the name of Modern Century Forwarding Limited ("the Company"). The application was initially made by the Company itself, but the application was then amended with two contributories, Mr K F Chan and Mr Y M Chan, joining as applicants.

2.The winding-up order had been made by the Master in an uncontested hearing on 6 June 2001. The order had not been filed because of a settlement between the petitioner and the Company and its contributories. The application for rescission was made 7 weeks (approximately) after the winding up order was made.

3.It is established law that before an order has been perfected and filed, the court has an inherent jurisdiction to rescind its order. This is the case even for orders winding up a company. I shall not repeat here the relevant principles which I have set out in the case of Asean Interests Ltd (HCCW 1233/2000). The question is whether in the circumstances of this case, the court should exercise its discretion in favour of the application.

4.I shall first turn to the history of the matter. In 1995, Sonu, being a sole proprietorship, and another company by the name of Miltex entered into contracts of carriage with the Company. Sonu is the petitioner in the present winding-up. Both cargoes were misdelivered. In June 1995, a writ was issued by Sonu and Miltex against the Company. I need not bother any further with Miltex. The claims were for unliquidated damages for conversion of goods misdelivered by the Company. The action was defended.

5.In May 2000, judgment was entered in favour of Sonu against the Company for US$267,000 odd (which I am told converts to about $2.2m) and costs. An oral examination of the directors took place in February and June 2001 but that examination has not been concluded.

6.In the meantime, before the trial, on 31 March 1999 there was a meeting of the board of directors of the Company, the applicants, the two Messrs Chan, being the only directors. The directors acknowledged that the Company was unable to pay its debts and it resolved to cease the business of the Company. More importantly it resolved to transfer the business of the Company to a new company by the name of Modern Century Sea Freight Limited ("Sea Freight") which was associated with the two Messrs Chan. The total consideration of about $1.15m was to be paid by Sea Freight to the Company by way of promissory notes, and the Company resolved to endorse these promissory notes to the two Messrs Chan. The Company owed the two Messrs Chan some money by virtue of various loans made by them to the Company, but it is clear that in so doing, the Company was preferring these two director-shareholders to other creditors of the Company. The fact that the promissory notes have to-date not been paid, as I am told, is irrelevant. The fact is that the assets of the Company have been thereby transferred for a consideration which has gone to the directors to the detriment of other creditors.

7.I take the view that Sonu was at that time at least a contingent or prospective creditor (see Re a Company [1974] 1 All ER 256 at 261b). Sonu would have been entitled to present a petition if at a preliminary hearing, it could establish a prima facie case and could provide security for costs (see Re Fitness Centre (SouthEast) Limited [1986] BCLC 518). The fact that Sonu could have established a prima facie case may be assumed by the fact that judgment was given later in its favour. The cause of action and the Company's liability to Sonu had accrued in 1995 when the goods were misdelivered although the exact amount of damages was not known until judgment. As to the aspect whether Sonu could have provided security for costs, the burden is on the applicants to show that Sonu would not have been able to.

8.In fact there is nothing in the applicants' affirmations to show any reason or excuse why they considered themselves justified in passing those resolutions taking the assets of the Company outside the reach of its creditors including contingent or prospective creditors. What the directors ought to have done was to have put the Company in creditors' voluntary winding-up and what they ought not to have done was to have transferred the business to a new company in which they were themselves interested and to appropriate the proceeds of sale for their own benefit.

9.I accept that the two Messrs Chan had lent money to the Company and were the Company's creditors, but the point remains that when a company is insolvent, there should be a distribution of the Company's assets pari passu to all creditors and it was wrong for these directors to have acted in their own interests. Instead of dealing with all the liabilities (actual, prospective or contingent) fairly and distributing the assets fairly, these directors "walked away" from the Company, walking away not empty-handed but walking away with the assets of the Company leaving an empty shell for other creditors.

10.As far as the outside creditors were concerned, after Sonu obtained judgment in May 2000, it was not until March 2001 that the petition was presented.

11.The applicants now say that that is all water under the bridge because after the winding-up order was made and after some oral examination of the directors in June 2001, the applicants using their own resources have settled with all the creditors including the petitioner Sonu. Therefore, Mr Remedios submits, the Company can now turn over a new leaf and the winding-up order can now be rescinded.

12.The Official Receiver has opposed this application on the basis that these directors should not have acted in the way that they did. At first, the Official Receiver relied on s.271 to 277 of the Companies Ordinance although it may now appear that the Company has not suffered any actual loss.

13.It appeared to the court from the Official Receiver's submission that he was concerned about the activities of the directors rather than recovery of assets for the Company, and when the court reminded the Official Receiver that there were other weapons available to him if he wished to proceed against the directors, the Official Receiver referred to the possibility of disqualification proceedings against these directors. However it has to be said that this possibility has not been subjected to mature consideration and examination, and the directors have not yet had the opportunity to answer the various points made on behalf of the Official Receiver. It is not right for me to prejudge any application for disqualification today and therefore I would indicate that for the purpose of this decision, I have not considered the possibility or otherwise of any disqualification proceedings against the directors.

14.In my view, the application should be declined upon consideration of the following factors. First of all, I take into account the fact that there was no explanation by the directors as to any possible justification or reason or excuse for their having passed the resolutions which they did. I have taken into account that in this case, the shareholders and the directors are the same persons, so that there is no question of any innocent shareholders being disadvantaged by the acts of directors. I have also taken into account the fact that there is no real benefit to the shareholders in the order which they are seeking, except they say that they wished to keep their reputations as businessmen. I have to say that they themselves jeopardised their own reputations when they did what they did in 1999, when they transferred their business to benefit themselves instead of outside business creditors to whom there was a substantial (at least, contingent) liability and of which contingent liability they were well aware since 1995. I have also taken into account the fact that the private resources now used to pay off the creditors were only put forward after the presentation of the petition and oral examination of the directors, and there is no evidence before me to show that these private resources were not previously available to these directors and shareholders.

15.It is a matter for the discretion of the court whether to exercise its inherent jurisdiction to order the rescission of the winding-up of the Company. In my view, taking into account the matters I have set out above, I would decline to exercise my discretion.

16.Accordingly, the amended application filed on 12 October 2001 is dismissed. I will now hear the parties as to costs.

Representation:

Mr Leo Remedios and Mr P K Chan, instructed by Chan and Cheng, for the Company.

Mr J Glen from the Official Receiver's Office

Deacons, Solicitors for the Petitioner, absent.