Re Golden Sand Trading Ltd
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HCCW 85/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 85 OF 2009 ____________
____________ Before: Hon Kwan JA (sitting as an additional Judge of the Court of First Instance) in Court Date of Hearing: 21 January 2010 Date of Handing Down of Judgment: 4 February 2010 ______________ JUDGMENT ______________ 1.This is a petition presented by Golden Sand Contracting Company Limited金沙營造有限公司(“the petitioner”), which is in liquidation and acting by its liquidators, to wind up Golden Sand Trading Limited金沙貿易有限公司(“the Company”). 2.The petition was based on a demand dated 2 January 2009 for $2,235,010.63 served by the petitioner pursuant to section 178(1)(a) of the Companies Ordinance, Cap. 32. The demand stated that upon the liquidators’ investigation, they discovered that the Company was indebted to the petitioner in the said sum. Particulars were set out in the schedule annexed to the demand (“the Schedule”). 3.The Schedule listed the transfers made from the bank account of the petitioner to the Company between 12 January 2006 to 11 January 2007 in the total sum of $2,745,030.63, less the sums paid by the Company to the petitioner between 27 January 2006 and 14 February 2007 in the total sum of $510,020. The net sum arrived at was the debt demanded. By adding up all the transfers from the petitioner to the Company, less the sums paid by the Company to the petitioner, the liquidators came to the conclusion that the Company owed the petitioner the net sum, being advances made by the petitioner to the Company. 4.As the Company did not make any payment pursuant to the statutory demand, the winding-up petition was presented on 10 February 2009. 5.The Company’s position is that there is a bona fide dispute of the petition debt on substantial grounds. It does not dispute the withdrawals from the petitioner’s bank account or the payments made by it to the petitioner, as set out in the Schedule. In gist, its contention is that the petitioner was using the banking facilities obtained by the Company. The withdrawals of $2,745,030.63 comprised (1) payments made by the petitioner to the Company for purchases of materials by the petitioner directly from the Company; and (2) repayments by the petitioner to the Company as the Company had been supporting the petitioner financially either by making payments for the petitioner, or by making advances to the petitioner. 6.The liquidators do not accept the Company’s contention. After the initial affirmation in opposition was filed by the Company in April 2009, the liquidators have made further enquiries. They allege that the Company’s contention is not capable of belief. 7.Voluminous evidence was filed on both sides, with documents exhibited by both running to over 2,000 pages. One of the liquidators, Lau Siu Hung (“Mr. Lau”), made two substantive affirmations. The Company filed a total of five affirmations, three of them were made by its directors Tso Man Tsun Gordon (“Mr. Tso”) and Leung Po Tim Timmy (“Mr. Leung”), one was by Kwok Kam Fai of Spring Warm Engineering Limited (“Spring Warm”), which was a supplier of construction materials, and one was by Lin King Wai, who was the former auditor of the petitioner (“the Auditor”). In one of the directions hearings, as is usual where a creditor’s petition is opposed on the ground of bona fide dispute of the petition debt, I directed that there should be no cross-examination on the evidence filed. The background 8.I will first set out the relevant background matters. They are taken from evidence that is not or ought not to be in dispute. 9.The petitioner and the Company were associated companies with common directors. The parent company of both entities is Golden Sand (Holdings) Limited 金沙集團有限公司(“Holdings”). The shares of Holdings are held in equal shares by Mr. Leung and by Mr. Tso through a company beneficially owned by him. Mr. Tso and Mr. Leung are the only individuals serving as directors of all three companies. Holdings is also a director of the petitioner. 10.The Company was incorporated in 1991. At all times, its paid-up capital is $100. The petitioner was incorporated in 2002 under its former name Golden Sand Marble Engineering Limited金沙雲石工程有限公司and changed its name to its present name in 2004. Its initial paid-up capital, when it commenced operations in 2005, was $5. This was increased to $50,000 in October 2006. The principal activities of the petitioner were marble trading and sub-contracting work. 11.The petitioner had no working capital when it commenced business in 2005. At the time, the Company had available banking facilities for an overdraft, and for the issuance of documentary credit to suppliers, as evidenced by two letters from its bank in 2005 and 2006. The banking facilities were secured by, inter alia, a legal charge over a property of Holdings. The Company, Holdings and another associated company, Golden Sand Marble Factory Limited, were the joint borrowers. The petitioner was not named as a borrower of the banking facilities. 12.In late 2005, the petitioner successfully tendered for a construction project at STTL 465 Shatin, New Territories (“the Shatin Heights project”), for the design, supply and fixing of external stone cladding. This was the principal business of the petitioner before its liquidation. The main contractor was Chatwin Engineering Limited (“Chatwin”). 13.Disputes arose between the petitioner and Chatwin in late 2006. By a notice of arbitration served in January 2007, the petitioner referred certain disputes arising out of or in connection with its sub-contract to arbitration. The petitioner sought to have the arbitrator removed on the ground of potential bias and failed. It was ordered to pay costs of this application to Chatwin, taxed at $44,800. The petitioner did not proceed with the arbitration. In September 2007, Chatwin issued a statutory demand to the petitioner for the taxed costs and presented a winding-up petition on 6 November 2007 when the demand was not met. The petition was unopposed. The court wound up the petitioner on 16 January 2008 and the liquidators were appointed on 30 April 2008, with an order for summary procedure of the liquidation, as it was envisaged that the assets of the petitioner were not likely to exceed $200,000. 14.The liquidators carried out investigation and requested the directors to submit books and records of the petitioner. The directors took several months to supply documents and to submit the statement of affairs, despite repeated requests of the liquidators. The accounting records delivered to the liquidators were not complete in that the general ledger for the year ended 31 March 2007 was not provided by the Auditor until April 2009, after the presentation of this petition against the Company. The liquidators were informed by the Auditor earlier that the general ledger had been lost, they had chased the Auditor to provide them with the re-constituted ledger as they had released vouchers and documents to the Auditor to re-produce the ledger in November 2008 but to no avail, and they were not told of the circumstances how the ledger came to be found in April 2009. 15.The petitioner’s directors through their solicitors had written to the liquidators on 20 February 2008 alleging that the most valuable assets of the petitioner were accounts receivable from Chatwin of about $2.6 million and provided the liquidators with a summary of the demand notes issued to Chatwin in December 2006 and supporting documents. Chatwin on the other hand filed a proof of debt on 22 February 2008 claiming over $5 million against the petitioner, of which $1.3 million odd was reimbursement for settlement of arrears of wages paid by Chatwin to the workers of the sub-contractors of the petitioner from September to November 2006. 16.The petitioner’s directors had also, by the same letter of their solicitors on 20 February 2008, informed the liquidators that the petitioner was indebted to the Company for $208,741.10 as per a schedule enclosed and that a proof of debt would be submitted in due course. This amount was made up of the balance carried forward from the previous financial year and the payments made by the Company for the petitioner from April 2007 to January 2008. 17.The liquidators were constrained by limited resources to conduct a complete check of all the transactions of the petitioner. They confined their investigation to transactions of substantial amounts within two years of the commencement of the winding up, from 6 November 2005. The first drawing in the Schedule in favour of the Company from the petitioner’s bank account within that period was made on 12 January 2006. 18.The first communication to the Company of any amount claimed by the liquidators was the letter of the liquidators’ solicitors to the Company’s solicitors dated 12 December 2008. Thisalleged that the Company owed the petitioner $2,235,010.63 being advances made by the petitioner to the Company as particularised in the Schedule, which was enclosed. It was further stated that if payment was not made within 7 days, legal proceedings would be brought against the Company without further notice. 19.The Company replied by letter of its solicitors dated 22 December 2008 denying the debt. It queried how the liquidators could have concluded it was indebted just based on the bank statements. It relied on the petitioner’s audited financial statements for the year ended 31 March 2007 that no debt was due. Lastly, it gave an “initial reply” to the withdrawals and payments in the petitioner’s bank account in that the Company’s banking facilities were used to purchase stocks for the petitioner, as the latter did not have such facilities and the petitioner’s bank statements showed the repayments made by the petitioner and the advances made by the Company. 20.There was no further communication between the parties and the statutory demand was issued on 2 January 2009, followed by the presentation of the petition on 10 February 2009. 21.Before I turn to consider the conflicting evidence and contentions to determine if the Company has raised a substantial dispute, it is convenient that I should first deal with a legal point raised by Mr. Andrew Mak for the Company. If the petition has set out a sufficient case 22.Mr. Mak submitted there was an irregularity in that the petition merely stated the Company was indebted to the petitioner in the amount claimed being advances made by the petitioner to the Company and went on to allege insolvency on the basis of the Company’s failure to comply with the demand. Prior to the despatch of the statutory demand on 2 January 2009, the Company had denied by letter dated 22 December 2008 that the petitioner had made advances to the Company. It was only in the affirmations filed by the petitioner in reply to the Company’s affirmations that the liquidators addressed the Company’s denial of the advances and made a number of allegations, attacking the correctness of the audited financial statements of the petitioner and alleging that certain invoices issued by the Company to the petitioner were for fictitious goods or were not for the projects of the petitioner. 23.Mr. Mak relied on a number of authorities which established the principle that a petition must set out a sufficient case and any defect or omission in the petition could not be cured by an affidavit (Re Wear Engine Works Co. (1875) 10 Ch App 188 at 191; In re Fildes Bros. Ltd. [1970] 1 WLR 592 at 597G to 598C; Re Tourmaline Ltd. [2000] 4 HKC 348 at 354C to D; Re Linea Trading Co. Ltd. [2005] HKEC 2024, para. 9). He submitted that the principle applies to both a creditor’s petition to wind up on the ground of insolvency and a shareholder’s petition to wind up on the just and equitable ground, Re Wear Engine Works was concerned with a creditor’s petition. 24.I reject his contention this petition has not stated a sufficient case. The essential matters being the petitioner’s claim against the Company as set out in the statutory demand, the service of the demand, and the failure to comply with the demand have all been stated. These matters are relevant to establishing the petitioner’s locus as a creditor and the basis for deeming the Company to be insolvent. The petitioner is not required to do more. There is no need to amend the petition to incorporate allegations in reply to the matters raised in opposition by the Company at various times. The allegations in reply are not matters germane to the grounds and basis for presenting the creditor’s petition. 25.I turn to the factual disputes. The Company’s evidence in summary 26.The broad picture presented by the Company is that it had financed the petitioner’s operations, as, which is not in dispute, the latter had no banking facilities. 27.The Company exhibited its bank statements from July 2006 to January 2007, and marked the withdrawal entries which were debits for the payment of materials by letters of credit obtained by the Company. The Company would pay the bank charges and interest at the end of the month and would invoice the petitioner for the purchase of materials, with a mark-up for the Company to make a profit. 28.Mr. Tso produced in his affirmation a table headed “Sales Invoices to [the petitioner]” (“the Invoices Table”), setting out particulars of the delivery orders to site, the Company’s invoices to the petitioner, the bank bills, the suppliers’ names, the loan amounts of the Company vis-à-vis the bank, and the dates of repayment to the bank. He also exhibited copies of the supporting vouchers, delivery orders and invoices that he could retrieve. The transactions in the Invoices Table were from 28 July 2006 to 23 March 2007. In summary, the total loan amount of the Company for the payment of purchases from suppliers was $2,350,063.27, the total amount debited by the bank from the Company’s account in repayment was $2,358,920.89, and the total amount the petitioner was invoiced with a mark-up element was $3,046,228.93. 29.The suppliers in the Invoices Table were: Sunway Metal Manufactory Ltd. (“Sunway”), Ka Yu Marble Engineering Co. (“Ka Yu”), Sun Kwong (Fung’s) Trading Co. (“Sun Kwong”), Teambo Engineering Ltd. (“Teambo”), Savema S.p.A. (“Savema”) and Spring Warm referred to earlier. 30.As for the withdrawals from the petitioner’s bank account set out in the Schedule in the total figure of $2,745,030.63, the Company had checked these withdrawals against the accounts of the Company and the general ledger of the petitioner for the year ended 31 March 2007. Of the total figure, transfers from the petitioner to the Company amounted to $659,178 only. This was partial repayment by the petitioner to the Company of the amounts owing on the invoices (the total amount invoiced as at 23 March 2007 was $3,046,228.93) and for wages and expenses incurred by the Company for the petitioner. The remaining sum of $2,085,852.63 ($2,745,030.63 less $659,178) was represented by direct purchases made by the petitioner from the Company and other sums which the petitioner owed directly to the Company. 31.Mr. Tso produced a second table headed “Loans to [the petitioner]” (“the Loans Table”), in which he set out the payments made by the Company for the petitioner for wages and administrative expenses during 18 November 2005 to 30 March 2007 in the total sum of $307,665.02. He also exhibited supporting documents for the Loans Table. 32.In his affirmation filed in April 2009, Mr. Tso invited the liquidators to inspect the documents in the Company’s possession relevant to the Company financing the petitioner. The liquidators did not appear to have taken up the invitation. 33.The Company requested for inspection of documents in the liquidators’ possession including relevant bank payment vouchers which evidenced the payments in and out of the petitioner’s bank account. Inspection was arranged by the liquidators in July 2009. Mr. Leung filed a supplementary affirmation deposing to the inspection and exhibiting those bank payment vouchers showing the purchase of materials from the Company and the Company’s invoices issued to the petitioner, which were omitted from the liquidators’ evidence. The audited financial statements of the petitioner 34.The Company relied on the audited financial statements of the petitioner for the year ended 31 March 2007, which were not qualified by the Auditor. According to the audited accounts, no money was due from the Company to the petitioner. On the contrary, the accounts showed that the petitioner owed $4,532 to the Company. 35.The liquidators do not regard the audited accounts as reliable evidence of the matters alleged aforesaid, treating the financial statements as self-assertions of the directors. The liquidators further pointed to the failure to take into account the effect of subsequent events up to the date of the financial report, being 31 October 2007. From February to May 2007, Chatwin had informed the petitioner and its solicitors by letter that the petitioner did not pay its sub-contractors or workers for work done. In the proof of debt filed subsequently by Chatwin, a claim was made for reimbursement of $1.3 million odd being wages paid to the petitioner’s sub-contractors and workers from September to November 2006. The liquidators are of the view that the audited accounts are unreliable for failing to include the wages claim under “Trade Payable” and “Accruals and Other Payable”. 36.The Auditor filed an affirmation in July 2009 to say that before he completed the auditor’s report, he had obtained sufficient evidence and had conducted sufficient enquiry according to the Guidelines issued by the Hong Kong Institute of Certified Public Accountants. Subsequent to this affirmation, the liquidators contacted the Auditor by telephone and by letters to clarify with him if he had perused documents relating to the wages claim before he issued the auditor’s report and whether he would agree with the liquidators this claim should be included in the financial statements as costs and expenses and recorded as liabilities of the petitioner. The Auditor confirmed he had not received or perused the documents relating to the wages claim before his report was issued but declined to give an unqualified answer to the question if the wages claim should have been included in the financial statements. 37.I decline to be drawn into the debate between the liquidators and the Auditor, nor do I think it necessary to express any view on the claims of Chatwin against the petitioner for present purpose. No adjudication has yet been made by the liquidators on Chatwin’s proof of debt. These subsidiary matters do not help to resolve directly the principal issue of contention, which is whether the Company had financed the petitioner in various ways resulting in the withdrawals and payments in the Schedule. 38.The transactions in the Invoices Table may be considered under these five categories:
The Sunway transaction 39.According to the Invoices Table put forward by the Company, the Company issued 7 invoices to the petitioner relating to goods supplied by Sunway. The dates of these invoices were from 12 July 2006 to 20 November 2006 and the total amount invoiced was $788,345. 40.Also according to the Invoices Table, in respect of the same goods (save for the last batch for which no invoice was issued), Sunway had issued 6 invoices to the Company. The dates of these invoices were from 23 March 2006 to 14 August 2006 and the total amount invoiced was $600,000. The numbers of these invoices were hand-written and they were numbered 0024, 0026 to 0030. 41.After receiving the ledger of the petitioner from the Auditor on 9 April 2009, the liquidators made enquiries with Sunway. One Miss Yiu, the accountant of Sunway, provided the liquidators with the relevant extracts of the accounts receivable in Sunway’s ledger in respect of “Golden Sand” (being the petitioner and the Company) for the year ended 31 March 2007, and copies of all the invoices in the relevant extracts. There were 36 invoices in total. The three last invoices had all been settled promptly in the exact amount as and when each invoice was issued. The other 33 invoices, which were all issued to the petitioner, were issued during 8 April 2006 to 21 October 2006. The numbers of these invoices were printed and they ranged from 5852 to 6666. 23 of these 33 invoices had been settled by 7 payments in round figures in the total sum of $600,000 (which corresponded to the amounts and dates of the invoices issued by Sunway to the Company according to the Invoices Table) and another sum of $92,772.70. As for the 10 remaining invoices, Sunway had obtained default judgment against the petitioner for $272,149 in the District Court on 31 January 2008, after the winding-up order was made against the petitioner. 42.The liquidators noted that the description of the goods mentioned in the invoices issued by Sunway to the Company (supplied by the Company with the Invoices Table) was different from the goods in the 33 invoices issued by Sunway to the petitioner (supplied by Miss Yiu). The description of the goods in Sunway’s invoices to the petitioner supplied by Miss Yiu did not match the description in a letter of credit arranged by the Company in favour of Sunway, although it matched the description in Sunway’s invoices to the Company. Miss Yiu informed the liquidators the goods in this letter of credit did not exist and were not delivered by Sunway to the petitioner or to the Company, and that these goods were stated in the invoices “to obtain Letter of Credit facilities from bank”. 43.Armed with this information, the liquidators’ solicitors wrote to the Company’s solicitors on 4 and 7 May 2009 asking if the Company had settled Sunway’s 33 invoices issued to the petitioner. The Company’s solicitors replied on 18 May 2009 stating that for the 1st to 23rd invoices, the invoices were originally issued to the petitioner by Sunway but as the petitioner did not have banking facility to make payment, it was agreed by Sunway, the petitioner and the Company that the original invoices should be cancelled and replaced by substituted invoices issued by Sunway to the Company, numbered 0026 to 0030 and 0035. A table was enclosed setting out the original invoices, the substituted invoices for each of them, the numbers of the letter of credit by which payment was made, the order reference numbers and dates, and enclosing other supporting documents. As payment for these 23 invoices had been made by the Company, the petitioner was not liable to pay Sunway any of these invoices. For the remaining 10 invoices, the Company admitted it had not made payment. 44.The liquidators’ solicitors responded by a letter dated 20 May 2009. They asserted there was evidence to show that 4 of the 23 invoices (balance of invoice No. 6234, and 6281, 6302 and 6313) were settled by the petitioner by its cheque of $92,772.70 and not by the Company, so the Company’s allegation that there was cancellation of the original invoices and substitution of Sunway’s invoices to the Company “must not be genuine”. The liquidators made the point that the invoice amounts and description of goods in the substituted invoices were different from the original invoices and asked the Company to state its case whether the goods in the original invoices or those in the substituted invoices were delivered and whether the goods in the substituted invoices were all “fictitious goods”. 45.The Company did not reply by letter. It chose to reply in an affidavit of Mr. Leung filed in July 2009. He asserted that the liquidators “are clearly wrong”, and attacked the liquidators’ allegations which were based on the information of Miss Yiu, who is “only a book-keeper without any authority or knowledge”. The liquidators had not obtained information from Sunway’s director Mr. Sung who had dealt with Mr. Leung all along. However, he did not mention whether the goods in the substituted invoices were not delivered by Sunway, and gave no explanation for the different descriptions of the goods in the original invoices, the letters of credit and the substituted invoices. 46.In the last round of affidavit filed by the petitioner, Mr. Lau of the liquidators asserted their investigations proved that the substituted invoices should not be “bona fide and genuine transactions”, that it is “beyond doubt” the goods of Sunway as per the invoices of the Company to the petitioner in the Invoices Table are “fictitious goods”, and that the Company never delivered the goods in those invoices to the petitioner. Hence, the Company was not entitled to be paid on those invoices issued to the petitioner in the total sum of $788,345. 47.The following matters were relied on in the last affidavit of Mr. Lau and the submissions of Mr. Jerry Chung for the petitioner as casting doubt on the transactions in the substituted invoices and the Company’s invoices to the petitioner:
48.Mr. Chung submitted that the Company has failed to provide any explanation to the above matters and has not discharged its onus by adducing sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds. Of the above four matters, (2) to (4) were raised in the letter of the liquidators’ solicitors dated 20 May 2009, so the Company had the opportunity of answering them in the affirmation of Mr. Leung filed in July 2009. 49.These points were made on behalf of the Company:
50.I do not think the Company has given a full explanation of the Sunway transaction. It has not explained why it did not apply for letters of credit based on the actual information in the cancelled original invoices. Notwithstanding this, I am not prepared to say on the existing evidence that the Company’s evidence is not capable of belief. I hold that the Company has raised a substantial dispute whether it had indeed financed the petitioner in making payment for the goods supplied by Sunway to the petitioner by making available the banking facilities it had obtained. 51.As for the mark-up of about 30% in the invoices issued by the Company to the petitioner, I will deal with this after I have considered all the transactions covered in the Invoices Table as this is an element common to the transactions. The King Lam Street transaction 52.In the second affirmation of Mr. Lau filed in May 2009, he drew attention to Sunway’s invoice numbered 6879 for $21,980 issued to the petitioner on 1 December 2006 which was paid on 6 December 2006 and was stated to be for the project in King Lam Street. He made the point the Shatin Heights project had ceased work on 25 November 2006 as confirmed by Chatwin, so he deduced the goods supplied by Sunway under this invoice “should be used for [the Company’s] other site of King Lam Street”. He alleged that “it was the job and income of [the Company] but the costs of purchasing of such goods were paid and recorded as purchases by [the petitioner]” and asserted it is “totally unacceptable”, as it is “a shift of the liability of [the Company] to [the petitioner]”. 53.Mr. Leung denied this allegation in his affirmations in July and August 2009. He deposed that the King Lam Street project was a project of the petitioner, not of the Company and produced documents in support, being the quotation of the petitioner in June 2006 accepted by King Fine Development Limited (“King Fine”), the relevant pages of the petitioner’s general ledger, the invoices and payment record of the King Lam Street transaction in the petitioner’s documents that the liquidators made available for inspection in July 2009. 54.In the affirmation of Mr. Lau in reply, he changed tack and queried the propriety of the petitioner’s directors recording the receipt of $180,000 from King Fine in the general ledger as “Deposits Received” and not as income. Further, he noted that of the amounts recorded in the ledger under “Deposits Received”, a sum of $70,000 was debited being “refund of deposit” to one Wang Ho. The payment voucher indicated that the refund to Wang Ho was in relation to the liabilities of the Company. 55.Mr. Chung submitted that of the income from King Fine in the King Lam Street transaction of $180,000, the petitioner only recorded a net sum of $110,000 (i.e. less the $70,000 paid to Wang Ho on behalf of the Company), so the Company should be indebted to the petitioner of $70,000. 56.After the second round of evidence was filed by the Company, the liquidators would seem to have abandoned their earlier allegation that the King Lam Street transaction was not a project of the petitioner. As to the matters raised in the last affirmation of Mr. Lau, the Company has no opportunity of dealing with them. Even if the petitioner had paid $70,000 on behalf of the Company, I do not think it would assist the petitioner unless it could be shown that a debt in this sum was due to the petitioner after an account of all the transactions between them has been taken. The Ka Yu Marble transaction 57.According to the Invoices Table, the Company issued 5 invoices to the petitioner in respect of goods supplied by Ka Yu in the total sum of $752,690. The corresponding invoices issued by Ka Yu to the Company were in the total sum of $570,000. 58.Mr. Lau alleged in his affirmation in May 2009 that the goods in the invoices of the Company to the petitioner should either be “fictitious goods” or that the goods supplied by Ka Yu were not used by the petitioner in the Shatin Heights project as alleged by the Company. He pointed to the fact that the goods in the invoices bore the description of “Golden Beige” and “Grey Sardinia” and Chatwin had confirmed to the liquidators that such materials were not used in the Shatin Heights project. Moreover, there is a discrepancy in that the invoices from Ka Yu to the Company were for goods supplied, whereas the invoices issued by the Company to the petitioner also bore the words “installation fee” apart from a description of such goods. 59.Mr. Leung denied in his affirmation that the goods were fictitious. He stated that apart from the Shatin Heights project, the petitioner had other smaller projects. He obtained confirmation from the sole proprietor of Ka Yu, as set out in the letter of the Company’s solicitors to Ka Yu dated 15 July 2009. Ka Yu confirmed it had provided materials to the Shatin Heights project and a project at No. 8 Tai Tam Road. Mr. Leung referred to extracts in the petitioner’s general ledger showing that the latter was also a project of the petitioner. 60.In the last affirmation in reply made by Mr. Lau, he drew attention to the delivery note of the Company to the petitioner naming Shatin Heights as the site for delivery of Ka Yu’s goods, not No. 8 Tai Tam Road as alleged by the Company. 61.I do not know if the Company would have any answer to this discrepancy in the delivery note; it has no opportunity of responding to this matter. Nevertheless, I take the view that the Company has adduced sufficient evidence to raise a substantial dispute it had financed the petitioner by making payment of the goods supplied by Ka Yu in a project of the petitioner. There is undisputed evidence that Ka Yu had received payment from the letters of credit applied for by the Company. The Sun Kwong transaction 62.Sun Kwong was a supplier for the project at No. 8 Tai Tam Road. The owner was Tan Fok Engineering Company (“Tan Fok”). 63.According to the Invoices Table, the Company issued three invoices to the petitioner from March 2006 to January 2007 in the total sum of $602,201.30. Corresponding invoices were issued by Sun Kwong to the Company during the same period in the total sum of $486,251. The goods mentioned in these invoices were “Capri limestone”. The invoices and delivery orders stated that the goods were for No. 8 Tai Tam Road. 64.The liquidators contended that for the second and third invoices, which were issued in January 2007, the petitioner had by then received no income from No. 8 Tai Tam Road, the income from Tan Fok was received by the Company instead, so the petitioner should not be held responsible for the payment of goods under Sun Kwong’s invoices in this period. As for the first invoice issued in March 2006, the petitioner’s directors have not supplied to the liquidators any books, vouchers or documents for the period prior to 1 April 2006 so the liquidators are not able to verify this invoice from the petitioner’s documents. The liquidators have opined that the first invoice is “very questionable”. 65.The Company has adduced evidence of the confirmation it obtained from the sole proprietor of Sun Kwong that he had supplied construction materials to the petitioner in the project at No. 8 Tai Tam Road in 2005 and 2006. As for the income received by the Company from Tan Fok of $13,355.89 in December 2006, Mr. Leung claimed that the Company was entitled to receive payment as by then the petitioner had owed a lot of money to the Company and that income from Tan Fok was used to set off in part the debt owed by the petitioner to the Company. There is undisputed evidence Sun Kwong had obtained payment by the letters of credit applied for by the Company. 66.I am of the same view that the Company has established a substantial dispute in respect of the payments it had made for the benefit of the petitioner in the Sun Kwong transaction. The Teambo, Savema and Spring Warm transactions 67.The invoices issued by Teambo, Savema and Spring Warm in these transactions came up to $693,812.27 and the corresponding invoices issued by the Company to the petitioner amounted to $932,992.63 in total. 68.In his affirmation in May 2009, Mr. Lau asserted that in view of the substantial invoices of “fictitious goods” issued by the Company to the petitioner for other transactions, the invoices for the Teambo, Savema and Spring Warm transactions are “highly suspicious” and the liquidators are “unable to accept that these invoices were for goods truly delivered to the project of [the petitioner].” 69.In answer to these allegations, the Company produced documents in July 2009 showing that the petitioner was indebted to Teambo for goods supplied to the Shatin Heights project, that Savema had supplied materials for the petitioner’s projects in King Lam Street and the Tuen Mun Rehabilitation Complex. Further, an affirmation was obtained from Kwok Kam Fai, a manager of Spring Warm, and Mr. Kwok confirmed that his company had supplied materials to the Company for the project at the Tuen Mun Rehabilitation Complex in 2005 and 2006. 70.In Mr. Lau’s affirmation in reply, he claimed that the Company had not addressed the issue if the income in respect of the projects for these invoices was received by the petitioner rather than by the Company or other associated companies. He also pointed to a discrepancy in the Company’s invoice and the delivery order for Savema’s goods; in the former, the goods were for “Shatin Project – 1113”, in the latter, the goods were to be delivered to the King Lam Street site. Likewise, for the goods of Spring Warm, there is a discrepancy between the Company’s invoice (which stated that the goods were for the Tuen Mun Rehabilitation Complex) and the delivery order (which stated that the goods were for the Shatin Heights project). 71.The Company is not able to respond to the queries and discrepancies raised in the last round of affirmation made by Mr. Lau. 72.I am of the same view the Company has adduced sufficient evidence to raise a dispute of substance it had made payment in the above transactions for expenses incurred by the petitioner in projects undertaken by the petitioner. The 30% mark-up 73.The liquidators asserted the Company had no right to charge a 30% mark-up even if the invoices issued by the Company to the petitioner were for goods truly delivered to the projects of the petitioner. They alleged the petitioner’s lack of funds was “caused by [the Company] withdrawn [sic] monies from [the petitioner’s] bank account every time when [the petitioner] received incomes from the main contractor.” 74.Mr. Leung refuted these allegations. He stated that the Company had provided financial and administrative support to the petitioner. In addition, the Company had to pay interest to the bank for the facilities used for the petitioner’s benefit. 75.In Mr. Lau’s affirmation in reply, he raised other queries in respect of “Related Party Transactions” in the audited accounts of the petitioner for the year ended 31 March 2007, and disputed the entitlement of Holdings to charge the petitioner $720,000 (for rental expenses of $600,000 and management fees of $120,000). He further argued as Holdings had already charged a management fee, there was no reason why the Company should have to provide administrative support to the petitioner as well and the Company should not be entitled to a 30% mark-up. 76.There is no reason why these queries were not raised in the first round of evidence filed by the liquidators, as the audited accounts were in their possession all along. Again, the Company has no opportunity to address the subsequent queries and challenges made by the liquidators. 77.On this issue as well, I hold there is a dispute of substance raised by the Company as to its entitlement to a mark-up and the quantum of the mark-up. Conclusion 78.The petition must be dismissed as the Company has discharged its onus and established a bona fide dispute of the petition debt on substantial grounds. 79.I make an order nisi that the petitioner should pay the costs of the Company in this petition, as costs should follow the event and costs would be taxed on a party and party basis. 80.I decline to exercise my discretion to award costs to the Company on an indemnity basis. The liquidators have acted precipitously in presenting this petition against the Company without investigating further the claim of the petitioner. Once they presented the petition, they seemed to have adopted an entrenched position, so much so that when the Company adduced evidence to meet some of their allegations, they changed their line of attack and sought to cast doubt in respect of new matters. I am not saying new queries should not have been raised, but the liquidators should not have resorted to a winding-up petition before they could make a proper assessment if it is suitable to pursue the claim by presenting a petition or by a writ action. 81.However, I do not think the liquidators were entirely to blame. They were hampered in their investigation in that they did not receive the petitioner’s general ledger from the Auditor until 9 April 2009, after the presentation of the petition. They were stalled by the Company in their initial investigation of this claim. The Company should have been more forthcoming from the start. It has not provided a full explanation to the liquidators in respect of the Sunway transaction, despite the liquidators’requests for explanation by letter and in Mr. Lau’s affirmation filed in May 2009. There are also a number of matters raised in Mr. Lau’s last affirmation in September 2009, to which the Company has provided no answer, whether by a further affirmation with the leave of the court, or by letter. That could be a reason why the liquidators continued to pursue this petition. 82.Taking into account the above matters, justice would be served by ordering the petitioner to bear the costs of the Company in these proceedings, including all costs reserved, on a party and party basis.
Mr. Jerry Chung, instructed by Messrs. Johnnie Yam, Jacky Lee & Co., for the Petitioner Mr. Andrew Mak, instructed by Messrs. Chung & Kwan, for the Company The Official Receiver, attendance excused |
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