Secretary for Justice v. Goldco Development Ltd

HCCW 711/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 711 OF 2005

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BETWEEN

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Before: Hon Kwan J in Chambers (not open to public)

Date of Hearing: 27 October 2005

Date of Decision: 27 October 2005

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D E C I S I O N

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1.I have before me two applications.  One is an application for appointment of provisional liquidators made by the Hong Kong Government, the petitioner herein.  The other is an application by the company in question, Goldco Development Limited (“the Company”), to stay the winding-up petition pending an appeal to the Court of Appeal against the order of Deputy Judge Muttrie dismissing the Company’s appeal against the order of Master J Wong for interim payments.

2.The Company is in the business of operation and management of fee-paying public car-parks and the Government has through the Lands Department leased various plots of land to the Company for such purpose under short term tenancies (“STT” or STTs”).

3.The Company had failed to pay rent of STTs 3491, 3514 and 3473 for the last quarter of 2003.  The Government took the position that this amounted to a repudiation of the STTs under common law and triggered its right of re-entry in clause 4(a) of the STTs.

4.On 21 November 2003, the District Lands Office gave notice to the Company to terminate the STTs in question with effect from 3 December 2003.  The Company refused to deliver up vacant possession and continued to occupy the sites without payment.

5.On 14 November 2003, the Company issued writs against the Government in High Court Action Nos. 4219 to 4221 of 2003, claiming damages for financial losses allegedly suffered as a result of:

(1) negligent misrepresentation by the Lands Department to the Company as to future supply of land for use as fee-paying public car-parks in Kwai Tsing;

(2) the “blacklisting” of the Company from bidding for any further STTs because of its dispute with the Lands Department regarding the Company’s performance under STT KX2102; and

(3) the Government’s refusal or failure to apply to the Company an alleged policy of granting rent concessions.

6.The Government denied the claims in the High Court Actions and filed a defence and counterclaim.  The counterclaim was for arrears of rent for the last quarter of 2003 (which had already accrued), damages for rent lost to the Government during the unexpired term of each of the three STTs, mesne profits for continued use and occupation of each of the sites after expiry of the respective contractual fixed term, and interests thereon.  The three sites were not surrendered to the Government until 12 April 2005, 1 September 2005 and 21 October 2005.

7.By a summons filed on 4 August 2004, the Government applied for interim payments in the three consolidated actions, High Court Action Nos. 4219 to 4221 of 2003.  By then, the accumulated arrears of rent, damages for lost rent and mesne profits added up to about HK$30 million, exclusive of interests, and thereafter at HK$4.9 million odd per quarter.

8.Master J Wong made the interim payments order aforesaid on 29 April 2005.  The Company was ordered to pay the Government, inter alia, interim payments of HK$18,504,000.00 with interests within 14 days from 29 April 2005, and of HK$3,084,000.00 on the first day of each quarter save that the first payment form 1 April 2005 to 30 June 2005 was to be made on or before 17 May 2005.

9.Save for HK$2,277,328.24 received on 27 August 2005 by a garnishee order absolute on 17 August 2005, the interim payments order was unsatisfied to the extent of HK$22,670,576.84 as at 31 August 2005.

10.As at 31 August 2005, the Company owed the Government HK$38,350,894.55, made up of:

(1) HK$22,670,576.84, being the outstanding interim payments due with interests up to and including 31 August 2005; and

(2) HK$15,680,317.71, being the arrears of rent due for the periods from 1 April 2004 to 30 June 2005 and from 1 July 2004 to 30 June 2005 respectively under STTs 3545 and 3548 with interests up to and including 31 August 2005.

The only securities held by the Government are rental deposits received in respect of the five STTs totaling HK$8.5 million odd.

11.On 8 September 2005, the Government presented this winding-up petition on the ground that the Company is unable to pay its debts and on the next day issued a summons for appointment of provisional liquidators on the basis that the assets of the Company are in jeopardy.

12.I will first deal with the Company’s application to stay the winding-up petition pending its appeal to the Court of Appeal.  It must be remembered this is not the first time the Company has lodged an appeal against the interim payments order.  This is already its second appeal.  I have read the judgments of the Master and of Deputy Judge Muttrie and I have noted the three grounds of appeal set out in the Notice of Appeal in CACV No. 330 of 2005 and further developed in a written submission made by Mr Simon Lam for the Company today.

13.I understand the basis for the stay is that if the petition were not stayed, this would stifle the Company’s appeal to the Court of Appeal.  I do not see why that should follow.  If the appeal is of any merit and if the liquidators are funded, the Company could still pursue its appeal by the liquidators after a winding-up order is made.

14.As I see it, the problem is that the appeal is quite simply devoid of merits.  It is not necessary to say anything further about this.  I see no basis for a stay of the winding-up petition at all.

15.I turn to the application for the appointment of provisional liquidators.

16.This summons was issued on 9 September 2005 and the papers were served on the registered office of the Company the same day.  It was not until 26 October 2005, a day before the hearing, that the Company chose to put in an affirmation of Chow Yiu Wah Joseph, asking the court to give it further time to explain some of the matters raised in the supporting evidence of the Government and to explain why its business would be in jeopardy if provisional liquidators were appointed.

17.This is clearly an attempt to buy time.  It is not entirely correct to say that the Company has only changed solicitors in these proceedings on 24 October 2005.  I note that there was a letter from the present solicitors of the Company to the Department of Justice on 3 October 2005 stating that they have firm instructions to act for the Company in the appeal, but they did not yet have firm instructions to act in the winding-up proceedings as the clients were out of town.

18.As regards the schedule of operating expenses which the Company would wish to answer, this issue was already raised two months ago in the application made by the Company to stay the execution of the order of the Master, which was heard on 30 August 2005.  No explanation was given by the Company at that time of the query raised by the Government regarding the sharp increases in the operating expenses for the year ended August 2004.  As for the intention of the Company to instruct its auditors to audit and review its accounts up to August 2005, I do not see how this could assist.

19.I decline to adjourn the application for appointment of provisional liquidators for the Company to file further evidence.

20.I am satisfied the Government has a good prima facie case for a winding-up order.  I am also satisfied that the Government has made out an appropriate case for the appointment of provisional liquidators.

21.The Company would appear to be insolvent.  In the High Court Actions, there was produced an extract of the financial statements of the Company for the year ended 31 August 2004 showing that as at that date, the Company had net liabilities of HK$21 million odd.

22.The execution of the garnishee order absolute in August 2005 had yielded only HK$2.2 million odd.  Further, in support of its application for a stay of execution of the order for interim payments before the Master, the Company filed evidence admitting that “the two interim payments will undoubtedly result in a financial ruin of the [Company] which is in a critical financial situation already”, and “the [Company] has no means to pay for the said interim payments.  The [Company] will be forced to be wound up then”.

23.The only income and assets of the Company are derived from its revenue in the operation of the public car-parks.  In the same extract of the financial statement of the Company for the year ended 31 August 2004, there is a steep increase in the operating expenses for that year of 142.56% from HK$6.7 million odd in the previous financial year to HK$16.4 million odd, an increase of HK$9.6 million odd.  This accounted for the loss suffered by the Company in the year ended August 2004 of HK$21 million odd.  The Company had not expanded its operation in the year ended August 2004.  This sharp increase clearly calls for an explanation.  None was forthcoming despite the Company had been given sufficient opportunity to deal with this.

24.There was also evidence from the Government of diversion of the parking fees receivable by the Company in one of the sites to another entity called On Park Property Management Limited (“On Park”).  This would appear to be in breach of the standard term in the STTs not to sub-let or part with possession of the sites.

25.The sole shareholder and director of On Park, Wan Chi Hing, shares the same residential address as Madam Chan Kwan Yee, who holds 1% shares in the Company and was a director of the Company until May this year. Mr Wan and Madam Chan also jointly owned and controlled another company called Kenney Finance Limited.

26.The Company has produced a management agreement showing that On Park was permitted to acquire “management rights” over the site in question by paying a management fee of HK$280,000.00 a month to the Company.  The management agreement showed that this was for a period of three months from 1 November 2004 to 31 January 2005.  According to the affirmation filed by the Company, the management agreement was extended to 31 August 2005. In support of that, the Company produced a Chinese letter dated 30 June 2005.  This letter does not make sense at all, nor does it satisfy the court of the bona fides of the arrangement with On Park.  There is no or no satisfactory explanation given for any commercial rationale for entering into this arrangement.  It seems to me there is proper basis for the concern of the Government that this management agreement would seem to be a device to divert the receivables of the Company to another entity to the prejudice of unsecured creditors in the event of a winding up.

27.Until such time as the Company is wound up, it is appropriate that independent professionals be appointed as provisional liquidators to take charge of the operations of the Company and to ensure that the assets of the Company are properly preserved in the interim.

28.I will hear counsel on the terms of the draft order for the appointment of provisional liquidators.

Miss Lisa K Y Wong, instructed by Department of Justice, for the Petitioner

Mr Simon H W Lam, instructed by Messrs David Hui & Co, for the Company

Ms P Mckenna, for the Official Receiver