Pevonia International Llc v. Pevonia Asia Ltd

HCCW 417/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 417 OF 2012

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J U D G M E N T

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Introduction

1.This is the hearing of a winding-up petition presented on 16 November 2012.  The petitioner, Pevonia International LLC (“Pevonia LLC” or the “Petitioner”), seeks a winding-up order against the respondent, Pevonia Asia Limited (“Pevonia Asia” or the “Company”), on the ground of the Company’s inability to repay its debts set out in the statutory demand dated 24 October 2012.  One of its contributories, Cheung Koon Man (“Cheung”), contests the petition as a related party.

2.The petition arose as a result of an on-going shareholders’ dispute between Cheung on the one part and Hennessy and Macoule on the other.  The Company is also involved in two other sets of proceedings: HCMP 827/2013 commenced by Cheung and a second winding-up petition in HCCW 326/2013 presented by Hennessy and Macoule.

Background

3.Pevonia LLC is a United States company manufacturing skincare products under the brand name of Pevonia (“Pevonia products”).  On 13 February 2008, it entered into a merging arrangement with entities including Hennessy and some investors in Pevonia LLC under a Contribution and Merger Agreement.  The process involved sale of all the business assets of a number of companies belonging to Hennessy (the “precursor companies”) to Pevonia LLC, and a merger in which Pevonia LLC merged with those entities.  The net result is that Pevonia LLC emerged as the only surviving merged entity owning all the business assets of the precursor companies; while the other entities involved did not survive but became part of the surviving merged entity.  The precursor companies include Pevonia International Inc (“Pevonia Inc”), Cosmopro Inc (“Cosmopro”), Cosmopro West Inc, Biotechna Research Inc. Pevonia Inc and Cosmopro, however, survived the merger and retained their separate corporate personalities with a change of their names respectively to CPRO Inc and PV LIGNE Inc.

4.As early as 2003, Hennessy and Macoule had started business dealing with Cheung in Pevonia products.  On 7 January 2006, Hennessy, on behalf of Cosmopro, and Cheung, on behalf of PA Wellness Consultancy Ltd (“PA Wellness”), entered into a distribution agreement for sale and purchase of Pevonia products (the “2006 Distributorship Agreement”). 

5.On 17 November 2006, Hennessy, Macoule and Cheung entered into a joint venture agreement using the Company as a corporate vehicle to develop the market for Pevonia products in mainland China, Hong Kong, Taiwan and Macau.  Cheung owns 49% of the shares in the Company. Hennessy and Macoule together own the remaining 51%.  Being resident in Hong Kong, Cheung is vested with the day-to-day management of the Company.  On the same day, PA Wellness transferred its interest and benefit under the 2006 Distributorship Agreement to the Company.  Thus, Cosmopro and the Company entered into contractual relationship since 17 November 2006.

6.By a distribution agreement dated 1 August 2007 (the “2007 Distribution Agreement”), “Pevonia International” as the exclusive distributor of Pevonia products manufactured by Pevonia Inc agreed to sell Pevonia products to the Company for sale in China, Hong Kong, Taiwan and Macau.  Though the seller was described as “Pevonia International”, it is clear from the above context that it referred to Pevonia Inc, before the merger in 2008.  

7.On 23 January 2008, Pevonia LLC was incorporated.  Cosmopro and Pevonia Inc sold all their business assets to Pevonia LLC under the merger arrangement as described in paragraph 3.  As result of the merger, Pevonia LLC and the Company became parties to the 2007 Distribution Agreement.

8.The Company’s business was prospering in 2011. Cheung alleged that at that time Hennessy and Macoule began to oust him from management of the Company. 

9.On 18 October 2011, Nelson Chan on behalf of the Company issued an audit confirmation (the “Company’s audit confirmation”), together with a statement dated 31 December 2010 (the “12/2010 statement”), requesting the Petitioner to confirm that as at 31 December 2010 the Company owed the Petitioner US$358,545.51. On 25 June 2012, the Petitioner signed and returned the audit confirmation to the Company confirming the amount owed to the Petitioner was correct.      

10.On 8 June 2012, the Petitioner’s external auditor issued an audit confirmation (the “Petitioner’s audit confirmation”), together with a statement dated 31 March 2012 (the “3/2012 statement”), requesting the Company to confirm that as at 31 March 2012 the Company owed the Petitioner US$490,790.31.  The amount owing included most of the sum of US$358,545.51 stated in the Company’s audit confirmation.  On 22 June 2012, Nelson Chan confirmed via email that the amount owing was correct.

11.On 24 August 2012, Hennessy and Macoule made a written offer to Cheung to acquire his shares in the Company.  Cheung rejected the offer.  On 28 August 2012, Pevonia China Limited (“Pevonia China”) was incorporated.  On 24 October 2012, the Petitioner issued a statutory demand requiring the Company to pay the sum of US$421,006 being the amount owing under eighty-two invoices, which included the outstanding invoices mentioned in the statement dated 31 March 2012.  The Company did not pay.

12.At a board meeting on 13 November 2012, Hennessy and Macoule renewed their offer to purchase Cheung’s shares.  Despite that Cheung’s solicitors accepted the offer on behalf of Cheung, Hennessy’s and Macoule’s solicitors informed Cheung over the telephone later that day that the offer had been withdrawn.

13.In the same month, Nelson Chan discovered an airway bill relating to Pevonia products issued by the Petitioner to Pevonia China.  Some of the staff of the Company left to join the Petitioner.  Cheung suspected the Petitioner was diverting business to Pevonia China.  On 16 November 2012, the Petitioner presented the petition herein.

14.On 19 April 2013, Cheung presented a section 168A petition under HCMP 827/2013 against Hennessy, Macoule and the Company seeking, inter alia, an order for buying-out of his shares in the Company or damages.  He complains of oppression by the majority shareholders and of diversion of the Company’s business to Pevonia China.

15.Two weeks before this hearing, Hennessy and Macoule took out another petition in HCCW 326/2013 seeking an order that the Company be wound up, pursuant to section 177(1)(b) of the Companies Ordinance on the ground that its business has been suspended for more than one year.  They also applied for abridgment of time for advertising that petition to enable it to be heard together with the present petition.  That application was dismissed by Master Leong on 27 November 2013.

The applicable legal principle

16.The applicable legal principle is very well settled.  Pursuant to section 178 of the Companies Ordinance, a company is deemed to be unable to pay its debts if it failed to pay the debt specified in a statutory demanded served on it within a period of three weeks.  Thus, to resist a petition to wind up a company on the ground that it is unable to pay its debt, the company must show that it has a bona fide defence on substantial grounds, and not just a fair probability of a defence: see Periwin Development Ltd v Grandfield Pacific Hotel Ltd[1]. The burden is a very onerous one.  The Company has to show not only that it has a defence to the debt on substantial grounds, but also there is sufficiently precise factual evidence in support of that defence which is believable: see Re ICS Computer Distribution Limited[2].

17.In addition, where there is a genuine cross-claim with substance in excess of or equal to the petitioning debt, the petition should be dismissed or stayed except where there are special circumstances: see Re Sinom (Hong Kong) Ltd[3].

An overall view of the background relevant to the defence

18.It is Cheung’s case that Hennessy, who is a shareholder of the Petitioner, procured it to present the petition against the Company in the midst of their on-going shareholders’ dispute and that it was taken out with an ulterior motive to further curtail or destroy the Company and cause oppression and exert pressure on him.  The shareholders’ dispute is the subject matter of HCMP 827/2013. 

19.According to Cheung, their dispute arose under the following circumstances.  The Company had been operating on shareholders’ loans corresponding to the shareholding of the three shareholders.  By April 2007, it had exhausted all the funds raised from two rounds of shareholders’ loans of US$463,869.40.  At a board meeting of the Company held on 9 June 2007, it was agreed to raise a third round of loans with Cheung contributing US$245,000, and Hennessy and Macoule contributing a total of US$255,000 (the “First 2007 Agreement”).  But Hennessy and Macoule reneged on their agreement and offered to cause the Petitioner to supply Pevonia products to the Company on credit terms instead of on cash payment term (the “Second 2007 Agreement”).  Again, they reneged on this new agreement and caused the Petitioner to insist on payment by cash.  To keep the Company going, Cheung caused his company, P & A Engineering Company Limited (“P&A”), to advance funds to the Company. 

20.In November 2009, Hennessy exerted further financial pressure on the Company.  He intimated that at the time the Company owed the Petitioner US$385,648 and in order to convince the Petitioner that the Company could repay he demanded the Company to pay an extra 5% on all new invoices which would be applied towards payment of the outstanding sum.  It was then agreed that so long as this extra 5% was paid, the Petitioner would refrain from demanding for payment of the outstanding sum (the “2009 Agreement”). Thus, Cheung arranged for more loans from P&A to meet this obligation.  Between 31 December 2007 and 31 December 2012, six advances totalling HK$12,956,421 was advanced by P&A.

21.It is against the above background that Cheung argued that the Company has a bona fide dispute on the petitioning debt.  The defences are premised on the First 2007 Agreement, the Second 2007 Agreement and the 2009 Agreement.  In addition, there are other defences raised in respect of three specific groups of invoices. 

The defence premised on the First 2007 Agreement and the Second 2007 Agreement (invoice number 48-50, 52, 53, 60-63, 65 and 68-77)

22.Cheung’s case is that Hennessy and Macoule reneged on the First 2007 Agreement to advance more funds to the Company and then in breach of the Second 2007 Agreement, they procured the Petitioner to issue these invoices which resulted in the Company’s difficulty in settling the same.  Hennessy and Macoule denied there were such agreements. 

23.Mr Khaw, counsel for Cheung, submitted that these are disputes of fact which is not appropriate for summary disposal and should be left to be considered in conjunction with the shareholders’ dispute in HCMP 827/2013.  With respect, I disagree.  This defence can be summarily disposed of under the principle of privity of contract without resolving the factual dispute.

24.It is Cheung’s case that he, Hennessy and Macoule were the parties to the First 2007 Agreement and the Second 2007 Agreement and that in breach of Second 2007 Agreement Hennessy and Macoule caused the Petitioner to issue the invoices.  It was not part of Cheung’s case that Hennessy and Macoule entered into the Second 2007 Agreement with the Company as directors of and representing the Petitioner.  Thus, assuming Cheung’s allegations were all true, he or the Company has a good cause  of action for breach of contract against Hennessy and Macoule.  As the Petitioner was not a party to the Second 2007 Agreement, that Agreement was not binding on the Petitioner and cannot prevent the Petitioner from issuing invoices for products ordered by and supplied to the Company and from demanding payment in accordance with the terms of the 2007 Distribution Agreement.  This defence must fail as a matter of law. His or the Company’s remedy is against Hennessy and Macoule.

Extended credit defence under the 2009 Agreement

25.This defence was raised by Cheung in relation to invoice number 48 to 67.  In brief, the defence is that the Petitioner agreed under the 2009 Agreement that as long as an extra 5% on the new invoices was paid, it would refrain from demanding for payment of the outstanding sum. Hence, Cheung argued that as the Company had paid the additional 5% on top of the purchase price for Pevonia products since making of the 2009 Agreement, the Petitioner is precluded from claiming for payment of the outstanding sum due from the Company.  Having regard to the nature of the defence, I think this defence could apply to all the invoices. 

26.Mr Wong, counsel for the Petitioner, submitted that the burden is on the Company to show that the extra 5% had been paid on the purchases since November 2009, but the Company produced no supporting document.  He argued that had this 2009 Agreement been in place, Nelson Chan would not have signed the two audit confirmations but would have raised objection to them because of the 5% extra payment. 

27.With respect, I disagree.  First, though I have not made an item by item comparison of the two monthly statements attached to the two audit confirmations, I notice that there are seventy-nine invoices listed in the 12/2010 statement but seventy-four in the 3/2012 statement and five 2010 invoices listed in the 12/2010 statement are missing in the 3/2012 statement, suggesting that those five 2010 invoices were paid.  Next, I notice there are seven new 2012 invoices in the 3/2012 statement, suggesting these seven new invoices were added and another seven were taken out of the 3/2012 as having been paid.  The inference is that twelve invoices were settled.  They might or might not have been paid by the extra 5% payment, but most probably they were.  The inference is that the extra 5% payment had been made and used to settle at least twelve outstanding invoices.

28.Second and more importantly, there are email transmittals issued by the Petitioner from January 2010 through to October 2011 showing directions for payment of new purchases plus an additional item described as “5% of Order Applied to Prior Debt”.  These are documents exhibited in Cheung’s affirmation in HCMP 827/2013 “for reference” but objected to by the Petitioner.  The two sets of proceedings are intertwined.  The 2009 Agreement is an issue in both sets of proceedings.  The documents were issued by the Petitioner.  There is no dispute as to their authenticity.  They have been produced, though objected to.  I do not see why I should turn a blind eye to them and blindly accept Mr Wong’s argument that there are no supporting documents.  Clearly, the Company and the Petitioner have been conducting business partly on the basis of the 2009 Agreement.  I think these documents sufficiently prove the existence of the 2009 Agreement.  The questions are who were the parties to this agreement and what were its terms.

29.The 2009 Agreement as pleaded in paragraphs 25 and 27 of the Amended Petition under HCMP 827/2013 is as follows:

“25. At a board meeting of the Company held in November 2009, [Hennessy] intimated that the Company still owed [the Petitioner] the sum of US$385,648 for the Pevonia products that it had ordered from [the Petitioner]. [Hennessy] said he needed to show the third party investor of [the Petitioner] that the Company could repay the outstanding sum. He therefore proposed that the outstanding sum should be repaid by the imposition of an additional 5% on the price of new orders of Pevonia products. [Macoule] supported [Hennessy’s] proposal.

27. It was the understanding of [Hennessy], [Macoule] and [Cheung] that so long as the Company kept on repaying the outstanding sum owed by it to [the Petitioner] by paying an additional 5% on the price of new orders of Pevonia products, [Hennessy] would cause [the Petitioner] to refrain from demanding for the immediate repayment of the outstanding sum from the Company.”

30.In paragraphs 29 and 31 of Hennessy’s and Macoule’s Amended Points of Defence, they replied as follows:

“29. Paragraph 25 is admitted. The proposal to require the Company to pay additional 5% on the price of the new orders was for the benefit of the Company to enable the Company to incrementally pay down the current outstanding liability due to [the Petitioner] which would thus benefit the Company by incrementally increasing the availability of credit for future purchases by the Company.

31. Paragraph 27 is not admitted. Paragraph 40 herein is repeated.  It is averred that the credit terms extended by [the Petitioner] is not unlimited and there was a need for the Company to remain current on its payment of its liability to [the Petitioner] for the credit terms to continue to be extended by [the Petitioner].”

31.Paragraph 25 of the Amended Petition was admitted by Hennessy and Macoule.  But even on the basis as pleaded by Cheung, the 2009 Agreement reached at the meeting was one reached among the shareholders or directors of the Company at a board meeting of the Company.  It was a shareholders’ agreement or board resolution.  By no reading of paragraph 25 can I find there was any mention of an agreement reached between the Company and the Petitioner.  Cheung did not allege that Hennessy was appearing at the meeting on behalf of the Petitioner as its director.  Even what Hennessy allegedly said, as pleaded by Cheung, was very carefully worded to show that his proposal was one made on behalf of the Company to impress the Petitioner or its investors that the Company could repay its debt.  It was not a demand or proposal by the Petitioner.  As pleaded by Hennessy and Macoule in their Amended Points of Defence, the proposal was made for the purpose of incrementally reducing its outstanding indebtedness and thereby restoring or increasing the credit available under the payment terms with the Petitioner (see paragraphs 54, 55 and 61).  At that time, the credit limit and the ninety days credit period had expired.  The agreement was more like a company’s voluntary resolution to reduce its indebtedness and improve its credit position.  The Company was making an internal management or financial decision.  At the highest, the agreement was a shareholders’ agreement, bearing in mind that it was pleaded by Cheung in the context of a section 168A petition, a shareholders’ dispute. 

32.Cheung has not pleaded any agreement was reached at the meeting or its terms. He only pleaded that the three of them had an understanding.  Assuming the meeting was one between the Company and Hennessy in his capacity as director of the Petitioner and representing the Petitioner, what agreement had the parties reached?  What was that understanding, assuming it to be an understanding between the Company and the Petitioner?  What did the parties mean by “so long as the Company kept on repaying the outstanding sum owed … by paying an additional 5% on the price of new orders”?  How frequent and how much was the Company required to order?  Would one order a year for any value of products, no matter how minimal (say, US$1,000) and a 5% additional payment (say, US$50) be sufficient to require the Petitioner to refrain from demanding payment of the very substantial outstanding sum?  All these questions point to a lack of a legally binding agreement.  The understanding was so vague and devoid of content that it is incapable of constituting a concluded agreement.  Nor do I think these uncertainties could be cured by implying terms to their understanding as to the frequency and size of the orders?  What terms can the court imply for the parties who were too lazy to agree the terms themselves?  The court cannot rewrite an agreement for them. 

33.On the basis of the email transmittal, the Petitioner and the Company had given effect to this understanding.  The Petitioner gave directions on payment of new purchases including the additional 5% payment, the Company paid and the Petitioner refrained from demanding payment of the outstanding balance.  The arrangement continued for two years. Despite that, I do not think there was a binding agreement due to lack of certainty of its terms.  The parties’ conduct can best be construed as forbearance on the part of the Petitioner, which it exercised as a matter of discretion depending on its view of the Company’s performance under the 2007 Distribution Agreement in terms of the number and size of new orders placed and the progress of repayment.  The so called 2009 Agreement was only a resolution made by the Company to induce the Petitioner to refrain from demanding the outstanding sum and to keep the 2007 Distribution Agreement alive.

34.Accordingly, I find that the 2009 Agreement reached at the meeting of the board of the Company was no more than a voluntary resolution by the Company to reduce its indebtedness and improve its credit position.  There was no agreement between the Petitioner and the Company as pleaded by Cheung.  This defence fails.

The first group of outstanding invoices (invoice number 1 to 47)

35.The eighty-two outstanding invoices can be conveniently divided into four groups.  The debt in respect of the first group of forty-seven invoices amounted to US$294,139.19.  The Company’s defence is that these invoices were issued by Cosmopro, an entirely different entity from the Petitioner.  Hence, the Petitioner is not the proper claimant for these invoices and the Company has no obligation to pay this third party. 

36.Though not specifically raised by Cheung, I note from the background, which I set out in paragraphs 4 to 7 above, that of the forty-seven invoices, the first thirty-eight were issued by Cosmopro under the 2006 Distribution Agreement, the next eight were issued by Pevonia Inc under the 2007 Distribution Agreement and one was issued either by Pevonia Inc or the Petitioner.  The position of the invoices issued by Pevonia Inc is exactly the same as those issued by Cosmopro.  I shall include Pevonia Inc in my consideration.

37.Mr Khaw drew my attention to the fact that Cosmopro has never been mentioned in the statutory demand or in the petition and to the three contradictory explanations advanced by the Petitioner in respect of this group of invoices.  First, Hennessy said in his 3^rd affirmation dated 2 April 2013 that Cosmopro changed its name to Pevonia Inc in or about January 2008 and then to that of the Petitioner in or about February 2008.  Thus Cosmopro and the Petitioner is the same entity, ie the Petitioner.  Second, in his 5^th affirmation dated 10 July 2013, Hennessy produced a certificate of merger in an attempt to show that the Petitioner is the surviving entity after the merger with various entities including Cosmopro and Pevonia Inc, but the name of Cosmopro did not appear in the certificate.  Third, the Petitioner produced an affirmation dated 1 October 2013 affirmed by Christy Harris, an attorney in a United States law firm and an attorney representing Cosmopro.  In that affirmation, Harris described the merger in broad terms as summarised in paragraph 3 above.  He confirmed that Cosmopro, now renamed CPRO Inc, is an entity distinct from the Petitioner.

38.I can well understand that being a layman, Hennessy might have readily assumed the state of affairs to be what he thought it to be without realising the need for precision in respect of an issue which is not material.  On the other hand, Harris is an attorney. He was the attorney who orchestrated the transactions bringing about the merger.  He knew how the merger was brought about.  Of the three versions, I accept Harris’ as being more reliable and reflective of the true situation.  I ignore Hennessy’s evidence about the identity of Cosmopro and the Petitioner as his erroneous assumption.

39.Harris gave a concise description of how the Petitioner merged with other entities under the Contribution and Merger Agreement and then emerged as the surviving merged entity owning all the business assets purchased from the precursor companies including Cosmopro and Pevonia Inc.  He did not exhibit the Contribution and Merger Agreement because it was too voluminous and contained confidential information not relevant in these proceedings.  He exhibited the bill of sale under which the business assets of Cosmopro and Pevonia Inc were transferred to the Petitioner.  Mr Khaw criticised Harris for not exhibiting the Contribution and Merger Agreement.  I do not think there is any substance in that criticism.  The issue is how the Petitioner became entitled to sue for Cosmopro’s and Pevonia Inc’s invoices and not how those two companies metamorphosed to become the Petitioner.  On the case of the Petitioner, its entitlement to sue arose out of its purchase of Cosmopro’s and Pevonia Inc’s business assets and not out of the merger.  In fact, according to Harris, Cosmopro and Pevonia Inc did not merge with the Petitioner.  They only sold their business assets to the Petitioner.  They retained their individual corporate personality after the merger and later changed their names to CPRO and PV LIGNE Inc respectively.  These facts are documented.  In my view, the merger is not material.  There is no need to exhibit the Contribution and Merger Agreement.   I accept Harris’ explanation for not doing so.

40.The case of the Petitioner is that it had purchased the business assets of Cosmopro and Pevonia Inc.  Harris exhibited a copy of Assignment and Assumption of Contracts and the bill of sale under which Cosmopro’s and Pevonia Inc’s account receivable was sold to the Petitioner.  Mr Khaw submitted that the term “account receivable” was not defined in the bill of sale which referred extensively to the Contribution and Merger Agreement.  Hence, he submitted that it is plainly wrong to assume that “account receivable” included the sums billed under the forty-seven invoices without sight of the Contribution and Merger Agreement.  He repeated his criticism of the Petitioner’s failure in producing that document.  For reasons as will become obvious, I reject such criticism as frivolous. 

41.Though the bill of sale does not contain a list of account receivable, the amount due and payable under the forty-seven invoices was clearly account receivable in both the ordinary and technical meaning of the term and formed part of the current assets of Cosmopro and Pevonia Inc.  Accordingly, the debt has been assigned by Cosmopro and Pevonia Inc to the Petitioner under the bill of sale.

42.Until the presentation of this petition, this debt has never been disputed.  In fact, on 18 October 2011, Nelson Chan on behalf of the Company requested the Petitioner to confirm to the Company’s auditor that it owed the Petitioner US$358,545.51 as at 31 December 2010 as shown in the 12/2010 statement attached to the Company’s audit confirmation.  The Petitioner confirmed the amount was correct.  On 8 June 2012, in a reciprocal exercise, the external auditor of the Petitioner requested the Company to confirm that the Company owed the Petitioner US$490,790.31 as at 31 March 2012 as shown in the 3/2012 statement attached to the Petitioner’s audit confirmation.  Nelson Chan signed the confirmation on behalf of the Company.  The debt referred to in the two audit confirmations included the forty-seven invoices. 

43.Cheung argued that the confirmations are not evidence that the Company received the forty-seven invoices or is liable to pay them.  He said that when Nelson Chan signed the request for audit confirmation in December 2010 and the 2012 audit confirmation in March 2012, he did not have before him the matters disclosed in the petition and in Hennessy’s 3^rd affirmation.  He argued that had those matters been brought to the attention of Nelson Chan or himself, Nelson Chan would not have been given any authority to sign and would not have signed those documents.  This is all very speculative.  Nelson Chan was not asked to give an affirmation to that effect.  I do not see how the matters disclosed in the petition and in Hennessy’s 3^rd affirmation would have made any difference.  This is particularly so as the request for confirmation in December 2010 was made by the Company, not by the Petitioner.  The Company must have issued the request after verifying the monthly statement, its books and accounts and satisfied itself that the Petitioner was the party to whom the Company owed the various sums stated in the invoices listed in the 12/2010 statement.  I think it is clear beyond any doubt that in the Company’s or Cheung’s mind, this debt has all along been acknowledged as owed by the Company.

44.Next, Mr Khaw argued that even if there was an assignment of Cosmopro’s debt in this group of invoices, the assignment is invalid for want of a written notice of the assignment as required by section 9 of the Law Amendment and Reform (Consolidation) Ordinance.  Mr Wong, seemingly unable to answer that challenge, simply attempted to avoid dealing with it by arguing that it is a technical issue involving foreign law which the Company ought to have properly raised and called evidence from a foreign law expert.

45.I think the issue raised is one of local law.  The Petitioner either has evidence of service of the notice or it has not.  If it has such evidence but was ambushed for not having been alerted in advance, it may ask for an adjournment.  The issue has to be dealt with.  I assume no notice of the assignment had been given to the Company.

46.But I do not think that fatal to the Petitioner. Since November 2006, it was Cosmopro which supplied Pevonia products to the Company under the 2006 Agreement.  Since 1 August 2007, it was Pevonia Inc which supplied the product.  Since January 2008, the Petitioner replaced Pevonia Inc.  There was no dispute that monthly statements had all along been issued to the Company.  Through Hennessy and Macoule, the Company knew of the change in the identity of its contracting party.  It had notice that since January or early 2008 the Petitioner had been claiming the debt in respect of the invoices issued by Cosmopro and Pevonia Inc.  It raised no objection.  This state of affairs continued into 2011.  On 18 October 2011, the Company issued the Company’s audit confirmation in effect requesting the Petitioner to confirm that the Company was owing the Petitioner the debt stated in the invoices issued by Cosmopro and Pevonia Inc.  The Petitioner signed the confirmation. Then, six months later, the Petitioner issued its own audit confirmation, practically requesting the Company to confirm again that the debt in the Cosmopro and Pevonia Inc invoices were owed by the Company to the Petitioner. The Company so confirmed.  The parties continued their business with monthly statements being issued every month until the issue of the statutory demand in October 2012.  For almost five years since the Petitioner replaced Cosmopro and Pevonia Inc as supplier of Pevonia products, the Company never for once denied its liability to the debt in these forty-seven invoices.  This is a classical case of estoppel by convention.

47.Under the doctrine of estoppel by convention, where both parties to a transaction act on the assumed state of facts or law, the assumption being either shared by both or made by one and acquiesced in by the other, the parties are precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them or either one of them to go back on it: see Chitty on Contracts[4]. The estoppel arises by virtue of a common assumption which was not induced by the party alleged to be estopped but was based on a mistake spontaneously made by the party relying on it to its detriment and acquiesced in by the other party.  There is no need for any promise or representation to have been made by the party estopped.

48.Here, the parties continued their business on the obvious assumption that the debt under the Cosmopro invoices and Pevonia Inc invoices had been assumed by the Company and that the Company was liable to the Petitioner in respect of the debt.  The Petitioner continued supplying Pevonia products to the Company and suffered the forty-seven invoices to remain outstanding until 16 November 2012 when it sought to enforce repayment of the debts.  Now in December 2013, the Company raised for the first time that it was not liable for the debt when most of it was time-barred.  The natural persons behind these corporate entities conducting the transactions giving rise to the debt are the same persons.  In the circumstances, it would be unjust or unconscionable to allow the Company to go back on its assumption. 

49.Furthermore, the assignment of the debt in this group of invoices has been proved.  Despite the lack of notice, the assignment nevertheless remains valid in equity: see Brandt’s Sons & Co v Dunlop Rubber Co[5]. The assignee is entitled to sue in his own name, though it remains the practice that the assignee is normally required to join the assignor: see Brandt’s Sons & Co v Dunlop Rubber Co.  Joining the assignor would serve a useful purpose, if the assignor has not disposed of the whole of his interest in the chose in action assigned.  But where the assignor retains no interest in the chose in action and the assignment only fails to be statutory because it was not in writing or because no notice has been given, joining the assignor would serve no useful purpose.  In the United Kingdom, there has been a move to dispense with joining the assignor under those circumstances: see Chitty on Contracts[6]; The Aiolos[7]; Weddell v JA Pearce & Major[8]; and Raiffeisen Zentralbank Osterreich AG v Five Star General Trading LLC[9].  As Cosmopro and Pevonia Inc had retained no interest in the debt and for the obvious reasons as stated in paragraph 46, I consider joining Cosmopro and Pevonia Inc in this petition wholly unnecessary and a waste of costs.

50.In conclusion, I find that there is no bona fide defence to the debt claimed under this group of invoices.

The second group of outstanding invoices (invoice number 51, 54, 55-57, 59, 64, 66, 79, 80 and 82)

51.The primary defence raised by Cheung in respect of this group of invoices is that the Company never received them.  Mr Khaw argued that whether the invoices had actually been delivered to the Company is a question fact which cannot be resolved summarily.  I think this principle is not to be applied rigidly without regard to all the other evidence.  Merely raising a factual issue is not sufficient.  The Company has to show there is sufficiently precise factual evidence in support of a defence which is believable[10]. It is very well established that if one makes an allegation, it must be credible or believable in the light of the evidence placed before the court: see Re Safe Rich Industries Ltd[11].

52.These invoices were in respect of contributions by distributors to advertisements in respect of Pevonia products.  Cheung’s daughter, Yvonne, confirmed the Company’s agreement to participate in the advertisement by email dated 29 May 2005.  The contribution was at the rate of US$500 per month for a period of two years.  Presumably, the arrangement continued to August 2012 or thereafter.  There is no dispute by the Company that it had not agreed to participate in the advertisement or that its name was not included in the advertisement of any particular month for which the contribution was invoiced.  Invoices and statements were issued monthly.  It is difficult to see how a bare denial of receipt of the invoices could be a bona fide defence. 

53.Furthermore, except for the last three invoices, the other eight invoices were included in the two audit confirmations and the two monthly statements attached thereto.  For same reasons as explained above, the amounts due under these invoices were acknowledged and accepted by the Company.  This defence in respect of these eight invoices is not credible.

54.As for the last three invoices, they were issued on 15 August, 20 September and 12 October 2012 respectively.  Mr Khaw argued that pursuant to section 5.1 and Exhibit D of the 2007 Distribution Agreement, the Company had a credit period of ninety days to pay and payment was not yet due on 24 October 2012, the date of issue of the statutory demand.  The terms of payment provided by Exhibit D provides are as follows:

“Credit Limit: $350,000

Terms of Payment: Net 90 days

Credit Limit and Terms of Payment are in effect only if Distributor is performing satisfactorily according to the terms of the Agreement.”

55.As the outstanding amount under these eight-two invoices was US$421,066.21, clearly at the time of issue of these three invoices, which were the last few invoices in question, the credit limit must have been well exceeded and the payment terms in Exhibit D were not applicable for such reason or because of unsatisfactory performance of the agreement by the Company.  Indeed on 25 April 2012, the Petitioner advised the Company that its then current order plus balance of “Net 90” invoices exceeded the credit limit.  In any event, as the total amount under these three invoices was US$1,500 only, the dispute as to this amount could not be a bona fide dispute on substantial ground.

The third group of outstanding invoices (invoice number 58, 67 and 81)

56.The parties have no dispute over invoices number 67 and 81.  The former invoice had been paid except for US$91 and the latter had been fully settled. 

57.Cheung’s case in respect of invoice number 58 is that he had searched the records of the Company but could find no record of the Company having ever ordered the boxes.  The item was described in the invoiced as:

“PROMO BOXES DROP SHIPPED TO PEVONIA ASIA BY CHUNG BOR”

He made enquiries from his daughter, Yvonne, who confirmed to him that the Petitioner ordered the promotional boxes from a supplier in Shanghai for shipment to the USA for its own use, but for unknown reasons they were delivered to the Company’s office in Shanghai.   Yvonne then made enquiries from the Petitioner and was given the boxes to her as a gift on the understanding that neither she nor the Company was required to pay for them. But Yvonne was not asked to give an affirmation to that effect.

58.The Petitioner relied on two emails issued by Yvonne.  By an email dated 18 July 2008, Yvonne requested Jim Wojciechowski of the Petitioner for the boxes and gave him the Company’s warehouse address in Shanghai.  Then, by a second email on 21 July 2008, she doubled her order.  These emails totally rebutted Cheung’s case that the boxes were mis-delivered.  Cheung argued that there was nothing in the two emails evidencing any agreement by the Company to pay for the boxes. 

59.I find it most disingenuous to argue that one does not have to pay for goods order if payment was not mentioned in the order.  I would have thought as a matter of commercial sense, an obligation to pay is readily implied in commercial transactions.  Furthermore, under clause 3.3 of the 2007 Distribution Agreement, the Company shall pay for all marketing and advertising materials.  Yvonne specifically ordered the boxes.  It was disingenuous for Cheung to argue that they were gifts. 

60.Cheung’s story of mis-delivery and gift is hopelessly rebutted by the Company’s own contemporaneous documents issued by the person whom Cheung claims was the source of his information.  The Company has no defence to the claim under this invoice and the claim for the outstanding balance of US$91 under invoice number 67.

The fourth group of outstanding invoices (Invoice No 78)

61.Cheung’s defence in respect of this invoice is that as the invoice was issued on 13 August 2012, it was not yet due for payment at the time of issue of the statutory demand.  This defence is based on section 5.1 and Exhibit D of the 2007 Distribution Agreement.  This defence is misconceived.  On a proper construction of the terms of payment provided in Exhibit D, the Company could only be entitled to the benefit of the ninety days credit period in respect of amounts owed within the credit limit of US$350,000. As at the date of issue of the invoice, this limit had already been exceeded. The invoice is due and payable upon issue.

Overcharging and cross-claim

62.Cheung alleged that under section 3.2 of the 2007 Distribution Agreement, the Petitioner “shall offer the most favourable price” to the Company but in breach of that section the Petitioner stopped giving the Company the most favourable price for the period from April 2008 to April 2012.  He said that he caused Nelson Chan to check the invoices issued by the Petitioner against the price lists and Nelson Chan confirmed to him that the Company had been given 10% discount for invoices issued before April 2008 but the discount was stopped from April 2008.  It was only resumed in April 2012 as evidenced by two emails from the Company and the Petitioner and a credit memo dated 30 May 2012 issued by the Petitioner.  On that basis, he estimated the amount overcharged was US$177,918 and argued that the Company has a cross-claim of that amount.  Again, Nelson Chan was not called to give an affirmation to support his assertion and no invoices showing the discount was exhibited.

63.Hennessy averred that all along the Company had been given the most favourable price in accordance with section 3.2 of the 2007 Distribution Agreement.  He said that the most favourable price was not a straight discount of 10% off the invoice price, but was as defined in section 3.2 which reads as follows:

“[the Petitioner] shall offer the most favourable price possible, which shall be determined and established at its sole discretion, taking into consideration such factors as competition and market conditions in Territory as well as the nature and extent of the sales promotion support that [the Company] and [the Petitioner] shall each provide. …”

64.He exhibited price lists of Pevonia products for the various years from 2008 to 2012.  The lists showed eight different prices for the same product.  These are: Salon List Price, Canadian Price, National Distributor Price, International Price, Favoured International Price, Prestige Price, New Zealand Price and International Plus Price.  He said that the Favoured International Price which is abbreviated “IT” was the most favourable price, which is also the lowest of the eight prices.  He also referred to some representative invoices to demonstrate that the Company had in fact been given the most favourable price throughout the years.  Cheung doubted if the price lists were comprehensive and accused the Petitioner of being persistently secretive about its prices.  I can find no evidence to support these speculative accusations. 

65.As for the credit memo relied on by Cheung, Hennessy explained that the 10% discount in the credit memo was a discretionary discount applicable to retail and professional products to cover the Company’s advertising expenses and that no such discount was given before that date.  He referred to two contemporaneous emails from the Petitioner and the Company evidencing the purpose of the discount.  To make sense, the emails have to be read in the reverse order of the date as shown on the emails.  Presumably, the clock in the computer of either of the writers had been mis-set.  In the first email dated 12 April 2012, Annette Liles wrote to a number of recipients as follows:

“[Hennessy] has decided to extend a 10% discount on all Pevonia Asia invoices for Pevonia products (retail & professional) for a period of one year starting with their next order. (Currently, there is no Pevonia Asia order in house.) This additional discount is for marketing support.”

(Emphasis added.)

In the email dated 11 April 2012, Rosalinda Hong of the Company wrote to Hennessy as follows:

“We really appreciated that [Macoule] took the time to visit us last week.

We had some productive discussions on business issues, as well as ideas for moving forward.

I am working with Beijing Alan and QTCCC on registrations and renewals. I have regular communications with both companies and will make sure that we do not miss any important deadlines.

I would also like to thank you for extending the 10% promotional support to Pevonia Asia.  We will make very good use of the support to offer more attractive promotions and marketing programs to our clients.”

(Emphasis added.)

66.Cheung argued that the word “extend” conveyed the meaning that the discount which had all along been given had been stopped and was then resumed.  The word “extend” has very many different meanings depending on the context.  According to the Shorter Oxford English Dictionary, it means stretch, lengthen, pull out, stretch or span over or over a period of time or a distance, prolong in duration, make longer, continue further in space, spread out, cause to cover a space or area, offer, grant, etc.  I think in the context of the two emails, the last two of these meanings are the most apposite.  Also, in the context of the two emails, it is amply clear that this 10% discount was something new for the special purpose of providing marketing support, which was what Hennessy meant by covering advertising expenses.  I do not think it conveyed the meaning of resuming after having been stopped as submitted by Cheung.

67.Cheung said that there were other instances in which this discount had been given but the Petitioner persistently failed and refused to issue the credit memo.  He said there was specifically another credit memo dated 13 August 2012 in the amount of US$717.68 which is no longer in the possession of the Company.  Hence the credit memo dated 30 May 2012 is the only one he could produce.  According to Hennessy, these were the only two occasions when credit memos were issued to the Company.  However, as the Company’s account was already severely in arrears in August 2012, he considered the Company as not having performed well and decided not to give the discount. Cheung argued that that explanation is not credible because the Company’s arrears were not any better in May than it was August 2012.  Be that as it may, if the Petitioner had, in breach of the promise expressed in its email dated 12 April 2012, withheld the 10% discount for 2012, the Company’s cross-claim for that year as asserted by Cheung would only be US$25,103.

68.Against the totality of the evidence, I find Cheung’s case unbelievable.  First, his case is based on finding by Nelson Chan.  Nelson Chan was not asked to give an affirmation to support his finding.  Second, his case of the most favourable price was 10% off the invoice price and that this discount had been given for invoices issued before April 2008.  He had control of the Company.  Nelson Chan had searched the record and found the invoices based on which Nelson Chan confirmed to Cheung about the 10% discount.  But not a single invoice bearing out this fact was exhibited. Cheung could offer no explanation for this deficiency.  He only said he could not find any credit memo other than the one dated 30 May 2012.  Third, for four years when the Company was deprived of this discount, he made no protest.  On the contrary, Nelson Chan signed the two audit confirmations acknowledging the debt.  Fourth, his reliance on the two emails, as I have explained, is misconceived.  His construction of the word “extend” is very much strained and out of context.  Fifth, I can hardly see any nexus between the most favourable price which is the lowest price on the price list and this 10% discount expressly given for a one year period, not to mention Hennessy’s evidence that it was given to cover the Company’s advertising expenses.

69.In conclusion, I find Cheung’s case of overcharging based on the most favourable price utterly incredible.  The Company might possibly have, subject to production of satisfactory evidence, a cross-claim in the amount of US$25,103 for the Petitioner’s withholding the 10% discount promised for 2012.  But that cross-claim is far from being anywhere near the petitioning debt.  Even if I were to accept that the Company has a cross-claim for the entire amount of US$177,918, it is still very much less than the petitioning debt proved.

Solvency of the Company

70.According to Cheung, the Company is solvent.  It has stock in hand worth around HK$300,000 in Hong Kong and stock worth HK$1,800,000 stored in P&A which could be sold at retail for over HK$1,000,000 and HK$5,500,000, respectively.  Mr Khaw referred me to French, Applications to Wind Up Companies (2^nd Ed 2008)[12]; and Mine Exc Pty Ltd v Henderson Drilling Services Pty Ltd[13] and submitted that solvency is a relevant factor in determining whether the petitioning debt is disputed on substantial ground as it has been said that the court would more readily conclude that the dispute is bona fide when it is shown that the company in question is manifestly solvent than would otherwise be the case. 

71.Though the Petitioner did not challenge Cheung’s assertion as to the solvency of the Company, the fact remains that a statutory demand had been served on the Company and the debt demanded was not paid.  The Company is deemed to be unable to pay its debts under section 178 of the Companies Ordinance.  Its stock on hand is not relevant.  Besides, the stock being skin care products which have a limited period of effectiveness, its value decreases with time.  By now, more than two years have lapsed since ordering or delivery.  The stock is probably worthless.  But more importantly, the authorities quoted by Mr Khaw would only assist where the evidence is nicely balanced, but are inapplicable if the court can come to a view that the company is unable to show a bona fide dispute to the petitioning debt on substantial ground.  In the present case, for reasons as explained, I am able to reach that conclusion.

Conclusion

72.Discounting invoice number 81 in the amount of US$35,345.22 which has been fully paid and invoice number 67 which has been substantially paid to the extent of US$72,493.24, the balance of the petitioning debt is US$313,227.75. Even if I were to exclude the debt under the first group of invoices due to want of notice of assignment to the Company, the balance of the petitioning debt would be US$126,927.02.  The Company has failed to show a credible or bona fide defence to the balance of the petitioning debt on substantial grounds.  At most, the Company might have a cross-claim of US$25,103.  But that is far from being equal to or in excess of the balance of petitioning debt.

73.I am mindful of the outstanding section 168A petition taken out by Cheung in HCMP 827/2013.  Though the dispute in that petition arose out of the same factual matrix, the issues are different and the remedies sought are different.  However, a winding up order issued under this petition may have the effect of pre-empting that petition.  But, I think ultimately even if Cheung is to succeed in that petition, it would not make much difference, except for the costs of the winding-up.  Now, Pevonia China has probably replaced the Company as the Petitioner’s distributor in Asia.  The fiduciary basis on which the Company was founded has been eroded.  The Company could probably only survive as long as its stock of Pevonia products lasts, which I think had by now become worthless.  In the circumstances, even if Cheung succeeds in obtaining a buy-out order, he would get a price of no more than 49% of what the Company is now worth, which would not be much different from what he would receive as a contributory at the conclusion of the winding-up.  I therefore would not exercise my discretion not to order its winding-up. 

74.Accordingly, I order that the Company be wound up with a costs order nisi that the costs of the Petition be paid out of the assets of the Company.

Mr William Wong SC and Mr Alan Kwong, instructed by Angela Wang & Co for the petitioning creditor

Mr Richard Khaw and Mr Anthony Chan, instructed by Fan Wong & Tso for Cheung Koon Man, a contributory of the Respondent

The Respondent was not represented and did not appear

Attendance of the Official Receiver was excused