Re S. Zhong Shan International Investments Co Ltd

CACV000157/1989

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Coram: Hon. Cons, V.-P., Kempster & Clough, JJ.A.

Date of hearing: 1 March 1990

Date of judgment: 2 March 1990

Date of handing down reasons of judgment: 9 March 1990

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REASONS FOR JUDGMENT

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Clough, J.A.:

1. S. Zhong Shan International Investment Company Limited ("the company") appealed against the winding up order made against it on the 29th September 1989 by Mayo J. under the Companies Ordinance (Cap. 32) on a creditor's petition presented by Mr. Percy Chan ("the petitioner") with the support of another creditor, Grandwin Company Inc. ("Grandwin"), a Liberian company. Grandwin appeared below and on appeal by the same solicitors and counsel as the petitioner. By a respondent's notice filed on behalf of the petitioner and Grandwin they sought to support the judge's winding up order made on the petition, but in the event of the appeal succeeding they sought an order of the court substituting Grandwin as petitioner with leave to amend the petition and an order affirming the judge's order or a winding up order to be made by this court on the amended petition. In the alternative they sought an order remitting the matter to the companies court for an application by Grandwin to be substituted as petitioner.

2. At the conclusion of the hearing of the appeal, on the 2nd March 1990, this court made an order allowing the company's appeal against the Judge's order to the extent only that it was made on the application of the petitioner but substituting Grandwin as the petitioner under rule 33 of the Companies (winding-up) Rules, giving leave to Grandwin to amend and verify the petition within 7 days and affirming the winning up order on that basis and treating the hearing of the appeal as the hearing of Grandwin's petition: c.f. Re Turf Enterprises Pty. Ltd. (1975) Qd.R.266. We now give our reasons for our decision.

3. The petition was presented on the 21st July 1989 and relied on the grounds for a winding up order contained in section 177(1)(d) (inability of the company to pay its debts) and (f) (just and equitable) of the Companies Ordinance. It also relied on the neglect of the company to pay the petitioner the sum of $404,666.66 demanded under a statutory notice served on the company on the 21st March 1989 pursuant to section 178(1)(a) of the Ordinance. In its notice of intention to appear on the petition Grandwin claimed to be a creditor of the. company for $6.8 million.

4. The petitioner's entitlement to present the petition was based on two alleged debts of the company. The first debt amounted to $114,666.66 comprising arrears of salary in respect the months of January and February 1989 claimed by the petitioner as executive adviser to the company at an annual salary of $1 million, payable monthly pro rata, under a letter of appointment dated the 16th November 1988. The second debt related to the sum of $290,000 claimed to be the balance of the sum of $390,000 (the Hong Kong dollar equivalent of (US) $50,000) owing by the company to the petitioner under an invoice submitted by him on the 13th January 1989 in respect of "additional services" rendered by him to the company.

5. In addition to non-compliance with the statutory notice the petition relied on admissions of liability to the extent of $404,666.66 alleged to have been made to the petitioner by Mr. Luis Chang So ("Chang") a director of the company at meetings held on the 23rd February, 1st March and 15th March 1989.

6. A substantial body of evidence was filed by and on behalf of the petitioner and Grandwin and on behalf of the company which opposed the petition. The company's evidence in opposition to the petition was to the effect that he was not a creditor of the company. As to the first debt, Chang affirmed that the petitioner's appointment had been terminated in mid-December 1988 because he had failed to give any sound advice to the company. Chang's evidence was also that the petitioner had "made various misrepresentations resulting the Company suffered great loss." He added that the company "is considering instituting legal proceedings against" the petitioner.

7. As to two payments made to the petitioner by the company in February and two such payments made in March 1989, amounting to a total of $52,000, which the petitioner said were made in respect of part of his salary for January 1989, Chang's evidence was that on a few occasions he had personally given him cash amounting to a total of $50,000. According to Chang these payments were made when the petitioner had come to his office begging to be re-instated and saying he was in financial difficulty.

8. The petitioner deposed that he had resigned in March 1989 due to non-payment of his consultancy fees. He subsequently exhibited a letter of resignation dated the 2nd March 1989 signed by him and addressed to the company which he said had been mislaid at the time when he first deposed to his resignation. Chang affirmed his belief that this letter was a sham, adding that he had never seen it before and that there was no record of it ever having been received by the company.

9. Chang's evidence concerning the second debt was that in January 1989 post-dated cheques for $100,000 (dated the 21st January) and $290,000 (dated the 26th January) had been given to the petitioner for services undertaken by the petitioner in connection with an agreement entered into by the company to purchase the Shui On Centre for $2.5 billion, of which $50 million had been paid by the company by way of deposit. Chang affirmed that the company wanted to extend the date for completion of this transaction and to defer the payment of a further deposit of $562,000 which was due from the company under the agreement on the 18th March 1988.

10. According to Chang the petitioner had represented to him that he could obtain the postponement of the completion date for the agreement and of the payment of the further deposit and also raise finance to pay the deposit and effect completion. For these services the company paid the petitioner the equivalent in Hong Kong dollars of (US) $50,000 by the post dated cheques for (HK) 100,000 and $290,000. Chang affirmed that the cheques were made out at Chang's request by Mr. Richard Chin ("Chin"), the company's former general manager on behalf of the company because Chin owed the company money and the cheques were to be set off against Chin's debt. They were post dated "beyond the 18th January 1989", Chang deposed, as a safeguard to ensure that the petitioner performed his part of the bargain. The 18th January 1989 was evidently the completion date for the Shui On Centre agreement.

11. Chang's evidence was that the petitioner failed to perform his part of the bargain and the result was that the company forfeited its $50 million deposit paid under the Shui On Centre agreement. He affirmed that by then Chin had left the company's service and Chang was unable to locate him in time to prevent the petitioner from cashing the first cheque for $100,000. He said that he had, however, located Chin in time to stop the second cheque.

12. The petitioner had affirmed that the cheques in question had been given to him "in connection with services I rendered in Kuala Lumpur" on the company's behalf and had nothing to do with the Shui On Centre agreement. Chin affirmed that he had drawn the cheques at the request of the company but said that this was because the company did not have sufficient funds. He denied that Chang had instructed him to stop the second cheque (for $290,000) and confirmed the petitioner's evidence to the effect that Chin had instructed the petitioner not to cash the cheque because there were insufficient funds in Chin's account to meet it. Chin also confirmed the petitioner's evidence that he had not been dismissed but had resigned.

13. The evidence which was admitted at the hearing of the petition relating to Grandwin's claim to be a creditor of the company was contained in two affidavits of a director, Mr. Fok Chun Wah ("Fok"). He produced a copy of a cheque for $4.7 million dated the 22nd December 1988 drawn by Grandwin in favour of the company, together with a corresponding paying in slip showing that sum to have been credited by reference to that cheque to the company's account with the Overseas Trust Bank Limited ("O.T.B."). Fok deposed that when the sum of $4.7 million was advanced to the company it was agreed between him on behalf of Grandwin and Chang on behalf of the company that the principal sum advanced with interest. of $300,000 would be repaid "by/or on 21st January 1989".

14. Fok's evidence was that on or about the 21st January it was agreed that the loan would be rolled over until the 21st March 1989 with interest continuing to accrue at the rate of $300,000 per month. He produced a copy of a cheque for $5 million (representing the principal sum plus one month's interest) dated the 5th January 1989 drawn by the company in favour of Grandwin which he deposed had been disnonoured when presented by Grandwin on the 22nd March 1989. Fok produced copies of two subsequent cheques drawn by the company in favour of Grandwin. A cheque dated the 21st April 1989 for $5 million (representing the principal sum plus one month's interest) had, he deposed, been given to Grandwin by the company on that date, it being agreed that it would be presented on the 1st May. Another cheque drawn by the company, for $60U,000 (representing interest from the 21st January to the 21st March) and dated the 25th April had, Fok deposed, been given to Grandwin. His evidence was that both these cheques had been dishonoured on due presentation.

15. Fok also produced a letter of guarantee dated the 22nd April 1989 which he deposed had   been given to Grandwin by Chang. This document is addressed to Grandwin. It is signed by Chang and refers to "the outstanding amount of HK$5,000,000 due and payable" by the company to Grandwin. It is expressed to be given in consideration of Grandwin granting further time and indulgence for the repayment of the loan and contains Chang's unconditional and irrevocable agreement to guarantee the repayment of the loan followed by his undertaking to pay the amount of the loan and interest on demand in the event of the company failing to make repayment within 3 days of the letter.

16. Fok's evidence was that, with accruing interest, $6.8 million was outstanding on the 31st July 1989, and that was the figure referred to in Grandwin's notice of intention to appear.

17. Fok produced a copy of a writ which Grandwin had issued on the 4th August 1989 claiming to recover the amount of the company's loan with interest from Chang under the guarantee. Fok also produced a copy of Chang's affirmation filed on the 9th August 1989 in the course of proceedings in that action to discharge a prohibition order made against him. The affirmation indicates inter alia that Chang had been advised to confine his evidence at that stage to his "clear and obvious" defence of illegality under section 24 of the Money Lenders Ordinance (Cap. 163). In paragraphs 7 and 8 of the affirmation Chang affirms that he has been advised that the loan agreement is void and unenforceable under section 24 and that this applies to "all securities as well".

18. The evidence in rebuttal on behalf of the company was that of Chang and of Mr. Wilson Chan Wing Shing ("Chan"), a manager in the employ of the company. Chang's evidence was confined to the following four paragraphs in his last affirmation, made on the 25th September 1989:

19. Chan's evidence was directed to showing, by reference to the company's records, that there had been a series of loan transactions involving Fok, Grandwin, the company and Chang between the 19th September 1988 and the 9th February 1989. In particular Chan produced a copy of a cheque for $300,000 dated the 19th September 1988 drawn in favour of the company by Grandwin. He also produced a copy of the ledger entry relating to that cheque in the company's records. This evidence was in rebuttal of Fok's evidence that Grandwin's advance of $4.7 million to the company on the 22nd December 1988 had been the first and only occasion on which Grandwin had advanced monies to another company or entity.

20. At the hearing of the petition Grandwin invoked rule 33 of the Companies (winding-up) Rules if the judge should hold that the petitioner was not entitled to present a petition. In that event Grandwin applied to be substituted as petitioner as a creditor who in the opinion of the court would have a right to present a petition. On appeal this application was renewed in the terms of the respondent's notice already mentioned.

21. Mayo J. did not find it necessary to deal with Grandwin's application below because he was satisfied on the evidence before him that a winding up order should be made on the petition. The judge accepted that the onus was on the company to bring forward a prima facie case that there was an issue to be tried This approach is clearly based on the dictum of Jessel M.R. in similar terms in In re Great Britain Mutual Life Assurance Society (1880) 16 Ch.D.247 (C.A.) at p.253 cited inter alia in Palmer's Company Law, 24th edition, at p.[1366] and McPherson on The Law of Company Liquidation, 3rd edition, at p.64 where it is pointed out, citing Re Welsh Brick Industries Ltd. [1946] 2 All ER 197 (C.A.), that the burden on the company is somewhat heavier than that resting upon a defendant who seeks leave to defend an action under Order 14.

22. In relation to the conflict of affidavit evidence before him as to whether the company was the petitioner's debtor and therefore entitled to present the petition, the judge considered that the position was analogous to a conflict of affidavit evidence in Order 14 proceedings and adopted the following test adumbrated by Ackner L.J. in Banque de Paris v. de Naray [1984]1 Lloyd. Rep. 21 (C.A.) at p.23

23. This test has been followed by this court : see Chung Khiaw Bank v. Intertrading Manufactory (Civil Appeal No. 6 of 1987) and Bank of India v. B.K. Murjani & Ors. (Civil Appeal No. 84 of 1989) (Unreported).

24. In our view this is not a case in which onus is decisive on the relevant issue but, in deference to leading counsel's argument, we mention that Mr. Tang for the company contended that the judge erred in putting the onus on the company. Mr. Tang relied on In re Imperial Guardian Life Assurance Society (1869) 9 Eq. Cas.447 where Sir. W.M. James V.C. is reported at p.449 to have said to counsel for petitioning creditors (before standing over the petition until after the trial of a pending action between the petitioners and the company in which the debt was already in issue) that the petitioners had to satisfy him ".... that the defence is a sham defence." Mr. Tang also stressed that in Order 14 proceedings rule 3(1) expressly put the onus of establishing a triable issue, or some other reason for a trial, on the defendant.

25. Whilst we accepted that the overall persuasive or legal burden must be on a petitioning creditor to satisfy the court that the company is his debtor before he can have any locus standi in the winding up proceedings, we can see no reason for not following the dictum of Jessel M.R. in the Great Britain Mutual Life Assurance Society Case cited above which we do not regard as irreconcilable with the above cited observation of Sir. W.M. James V.C.

26. The petitioner is required to verify his petition on affidavit under rule 26 of the Companies (winding-up) Rules and that rule provides that the petitioner'saffidavit "shall be sufficient prima facie evidence of the statements in the petition". It follows that the evidential burden then shifts to the company to show that there is a substantial ground for disputing the debt or that it is bona fide disputed: see Phipson, 13th edition at paragraph 4-20. If the company adduces no evidence the evidential and legal burden imposed upon the petitioner will have been discharged. If the company adduces evidence it may or may not, depending on the opinion of the court on the cogency of the company's evidence shift the evidential onus back to the petitioners; but certainly at the stage where a petitioner verifies his petition under rule 26, it must be right that the evidential onus shifts to the company.

27. It is well settled that a creditor's petition will fail if the company's debt is bona fide disputed or (which is the same thing) disputed on some substantial ground: Re Welsh Brick Industries Ltd. [1946] 2 All ER 197 (C.A.). The judge in the present case regarded himself as:

28. In the light of the evidence before him he answered this question in the negative and made an order to wind up the company. In arriving at this conclusion he relied upon the following matters:

29. On the hearing of the petition the judge was initially (i.e. before considering Grandwin's application under rule 33) required to determine two issues of fact arising on the petition, namely (1) whether there was a bona fide dispute as to the company's indebtedness upon which the petition was founded, and (2) whether the company was unable to pay its debts. As Morton L.J. observed in the Welsh Brick Industries case at p.200 A, if both these facts were found against the company, the judge would have a discretion to make a winding up order under section 177 of the ordinance.

30. This is not an appeal against the exercise of the judge's discretion but against the   judge's findings of fact on issues (1) and (2) (with special emphasis on issue (1) relating to the locus standi of the petitioner) which gave rise to the judge's exercise of his discretion against the company. As Lord Greene M.R. observed in the Welsh Brick Industries case at p.198H, on an appeal from the companies court this court is not tied by the decisions of fact of the companies judge. Furthermore on appeal it is entitled, under Order 59 rule 10(3), to draw inferences of fact.

31. In the present case we accept that the matters identified by the judge, and set out above, justify a high degree of scepticism regarding the company's evidence in opposition to the petition, but, with respect to the judge, we considered that he went too far in concluding that, on the evidence before him, there was no bona fide dispute as to the company's indebtedness to the petitioner. In our judgment there were not sufficient documents, agreed facts, or facts established by reliable independent evidence which entitled him to conclude that Chang's affidavit evidence regarding the dismissal of the petitioners and the true nature of the second debt transaction was so inherently improbable as to be dismissed as incredible without being tested by cross-examination and weighed against the affidavit evidence of the petitioner after the same testing.

32. The picture of tile company that emerged from the evidence as a whole was of a property dealing organisation which lacked liquidity and was in desperate need of a source of funds, with particular reference to the Shui On transaction where the company stood at risk of forfeiting a deposit of $50 million in January 1989 if it could not get the completion date extended. This hazard facing the company was stressed in Chang's second affirmation where he sought to emphasise in capital letters the fund raising nature of the petitioner's duties. Thus he affirmed inter alia that the petitioner:

33. It seemed to us that it was not possible to rule out the reasonable possibility that a court, after seeing and hearing the relevant witnesses, might accept the evidence of Mr. Chang, on the dismissal of the petitioner, in preference to that of the petitioner himself whose letter of resignation dated the 2nd March 1989 was not produced until the 18th September 1989 and of which Chang denied any knowledge. Moreover we were not in agreement with the judge that it was necessarily beyond reasonable belief that Chang might have agreed to commit the company to incur the second debt as the price for the actual achievement of the postponement of the completion date for the Shui On Centre agreement and the date for payment of the instalment of $562,000 together with the necessary finance to pay the instalment and effect completion by the postponed dates. If, as Chang alleged, the transaction giving rise to the second debt only obliged the company to pay the petitioner if he achieved results which were vital to the company, the fact that he had previously been dismissed for being ineffective seemed to us to be of materially less significance than the judge had indicated.

34. Furthermore, we were concerned by the petitioner's evidence concerning the nature of the transaction giving rise to the second debt, which he claimed had nothing to do with the Shui On Centre transaction. In a letter dated the 13th January 1989, addressed to the company for the attention of Chang, the petitioner had claimed fees of (US)$50,000 for "services rendered as per your verbal instructions". These services were referred to as "additional services rendered to your company" in the petitioners statutory demand and in his petition. After Chang had affirmed that the second debt had arisen in connection with the Shui On Centre transaction the petitioner confined his evidence in rebuttal regarding the nature of his services for the (US)$50,000 fees to saying that:

35. The evidence of the petitioner had been that these services were rendered by him at a time when he was still in the company's employ as its executive adviser at an annual salary of (HK) $1 million ($83,333.33 per month). No reason was given why the services in question were outside his salaried duties and no indication was given at all as to what the services were. In our opinion no liquidator should admit, without further inquiry, a claim in the winding up of a company which is disputed by the company and is made in respect of "services rendered as per your verbal instructions". The effect of the judge's order was to uphold such a claim.

36. For these reasons we considered that on the evidence before the judge it was unsafe to reject as wholly incredible the admittedly unsatisfactory evidence of Chang regarding both the debts. We considered that if regard was had to the blemishes and possible reasonable adverse inferences arising from the petitioner's evidence, the judge should have concluded that on the evidence as a whole there was a bona fide dispute between the petitioner and the company regarding both debts. Although there was ample evidence of the company's inability to pay its debts we considered that there were no special circumstances (c.f. the Russian Bank cases referred to in note 11 in Gore-Browne, 44th edition, Vol. 2 para 32.6.4) to justify departing from the general rule (applied in Mann v. Goldstein [1968] 1 W.L.R.1091) that a bona fide disputed debt may not be the basis of a creditor's petition. We therefore allowed the appeal against the judge's order in so far as it was based on the petition in its original form.

37. As to Grandwin's application under rule 33, this had not been adjudicated upon by the judge, but we entertained the renewed application in the respondent's notice and determined the issues raised by the evidence of the parties pursuant to section 13(4) of. the Supreme Court Ordinance (Cap. 4) and Order 59 rule 10(3).

38. The evidential basis upon which the company sought to dispute Grandwin's debt was Chang's affirmation that the original loan of $4.7 million was "in reality" advanced to him through the company at the insistence of Fok who had insisted that the company should draw the cheques in favour of Grandwin which were mentioned in Fok's evidence. The rest of the company's case was based on legal technicality under the Money Lenders Ordinance.

39. Mr. Tang for the company conceded that if the loan had in fact been made to the company, then, as the company had a paid up share capital of $49,950,000, the loan, although made at the effective interest rate of 76.59 per cent, would have been exempted from section 24(1), (2) and (4) pursuant to section 24(5) and paragraph 12 of Part 2 to Schedule 1 of the Ordinance. However, on the basis that Chang said that the loan was made to him through his company and that he now said he suspected Fok had insisted on payment being effected to Chang though the company to evade the Money Lenders Ordinance, Mr. Tang contended that there was a genuine dispute concerning the recoverability of the loan by Grandwin which was not capable of resolution in these proceedings.

40. In support of this contention Mr. Tang pointed to a number of matters affecting the credibility of Fok's evidence. Thus Fok's evidence that the loan of $4.7 million to the company had been "the first and only occasion on which Grandwin has advanced monies to another company or entity" had been contradicted by Chan's evidence. Also there was a distinct lack of particularity in Fok's evidence when he said:

41. A further point raised by Mr. Tang was that Mr. Fok had offered no explanation for the very high rate of interest charged by Grandwin on the loan in question when, on his evidence, it was proposed that Grandwin and the company were to become, in effect, partners in ventures together.

42. However these criticisms of Fok's evidence paled into insignificance when we came to consider Chang's evidence concerning the crucial question whether Grandwin had made the loan to the company or to Chang. Chang's evidence has to be considered in the light of the fact that all the documents point to the loan having been made to and paid by the company into its account with O.T.B. All the exhibited cheques given to Grandwin in purported repayment of the loan and arrears of interest purport to have been drawn by the company. Furthermore the guarantee acknowledging the company's liability in respect of $5 million, and dated the 22nd April 1989, was signed by Chang after the company's cheques given in purported repayment had been dishonoured.

43. In rebuttal of this clear documentary evidence Chang's evidence consisted wholly of general assertions wholly unsupported by any evidence of supporting facts which might reasonably be expected to exist if his evidence were true. Thus there was documentary evidence from Fok that the company received the money, but Chang gave no explanation and produced no documentary or other evidence to show how the money found its way from the company's account with O.T.B. to him or to any account in his name.

44. Chang asserted that he had fully repaid the sum of $4.7 million with interest. The only factual evidence in support of this mere assertion was that "In fact" on the 13th January 1989 he had paid interest of $200,000 and on the 9th February 1989 he had paid interest of $500,000. No attempt was made to produce any document or other supporting evidence in relation to these assertions of interest payments. As Mr. Faulkner pointed out, even if interest. was paid as alleged, Chang was silent as to how and when the principal loan had been repaid. Furthermore no attempt was made by Chang to explain why he came to sign the letter of guarantee which, as Mr. Faulkner rightly contended, was inexplicable if the loan had not been made to the company.

45. In the absence of any documentary or other evidential support we considered that the generalised assertions of Chang (made at a time when the company faced a fully documented claim intended to put it into compulsory liquidation) bore the hall marks of evasion and mendacity. On the evidence as a whole we were left in no doubt that there was no bona fide dispute of the company's debt to Grandwin and that there was ample evidence of the company's inability to pay its debts.

46. Accordingly we made the order indicated above on the respondent's notice being satisfied that, as the relevant issues concerning the company's debt to Grandwin had already been canvassed by the evidence before the judge, the amendment and verification of the petition by Grandwin would be a formality.

47. As to costs, both "sides" having been unsuccessful to some extent, we make an order nisi that there be no order as to the costs of this appeal.

Representation:

Robert Tang, Q.C. & P. Loughran (M/s Alick Au & Massie) for Appellant/Company

Raymond Faulkner (M/s. Herbert Smith) for Respondent/Petitioner and Grandwin Company Inc.

Duncan McInnes for Official Receiver