HCCW286/1990

HCCW000286/1990 CWU 286 of 1990 ----------------- HEADNOTE ----------------- Winding up petition struck out on the grounds that the debt claimed against the company was the subject of a bona fide dispute on substantial grounds. The company had also shown substantial grounds in respect of a set-off and counter-claim. IN THE SUPREME COURT OF HONG KONG COMPANIES (WINDING UP) NO. CWU 286 OF 1990 ------------------------- IN THE MATTER of Companies Ordinance Chapter 32 and IN THE MATTER of PIONEER INDUSTRIES (HOLDINGS) LIMITED ------------------------- Coram : Hon. Jones J. in Court Dates of hearing : 30th and 31st May 1991 Date for handing down judgment : 12th June 1991 ---------------- JUDGMENT ---------------- I have before me a motion by Pioneer Industries (Holdings) Limited (the company) to strike out a winding up petition presented by Dennis Tan Chin Yong (the petitioner) on the grounds that it is inter alia an abuse of the process of the court as there is a bona fide dispute on substantial grounds with regard to the debt claimed in the petition. In the alternative, an order is sought for the petition to be stayed pending the final determination by the court of High Court action No. 3890 of 1991 instituted by the company against the petitioner. The petition was presented on the 25th September 1990 in which the petitioner alleges that the company is indebted to him for the sum of $4,460,734.96 under an agreement dated the 25th April 1990. The petition is based upon the company's failure to pay the debt within three weeks of a statutory demand dated the 3rd September 1990 served under s.178(1)(a) of the Companies ordinance after which time the company was deemed to be unable to pay its debts. The company denies that it is indebted in the sum claimed or that it is insolvent and contends that there is a bona fide dispute as to liability on substantial grounds. It is also alleged by the company that it has a cross-claim or set off in the High Court action that exceeds the debt. Affidavits in opposition to the petition have been filed by Mr Anthony Gaw, the company's chairman and managing director and Mrs Rossana Gaw, who is also a director of the company. The background reveals that the petitioner is a Malaysian Chinese whose father Tan Boon Paw was the best friend of Mrs Gaw's late father-in-law, Gaw Siong Chwan, who died in 1983. The two families were both very close, and were distant relatives. Mr Gaw and the petitioner have known each other since they were young children. The two families had separate businesses, the petitioner's family being engaged in palm oil refinery through holdings in Socoil Corporation Bhd. (Socoil) and related companies whilst Mr Gaw's interest was in real estate and investments through the company and its related companies. The petitioner was a director and chief executive officer of Socill. The company was incorporated in July 1970 and became a listed company in August of that year. The company's main activity is in investment holdings. The company became a subsidiary of Pioneer Industries International (Holdings) Limited in 1989 when the company was delisted. Until the company was delisted, it had shown good business results and satisfactory profits. Socoil went into receivership in August 1984 because of heavy financial losses which it is alleged were caused by the petitioner's speculation in palm oil in the commodity market. This led to Mr Gaw arranging financial assistance for Socoil which resulted in the receivership being lifted in November 1985. The company injected $10,000,000 into Socoil through two associate companies, Bonaview Co. Ltd. and Bonalink Co. Ltd., whilst two other investors each contributed $10,000,000. The investments were made upon representations made by the petitioner as to Socoil's financial position and future prospects. However, the business performance proved to be very poor for Socoil suffered large losses. Allegations have been made with regard to the state of the accounts of Socoil and to sums of money that appeared to have gone missing. It has been alleged that the poor performance of Socoil was due to misrepresentations and breach of trust by the petitioner which is the subject matter of the proceedings instituted by the company in the High Court action. Apart from the difficulties encountered by Social, the petitioner had also incurred personal debts to banks. Mr Gaw made a payment of M$150,000 on the 20th October 1988 to settle part of the petitioner's indebtedness. The petitioner's claim relates to one of the company's subsidiaries Double Wealth Company Inc. (Double Wealth). Double Wealth holds 100% of the issued share capital of Pudu Sinar Sdn. Bhd. (Pudu Sinar) which is a Malaysian company that owned 100% interest of the Park Avenue Hotel in Kuala Lumpur, now known as the Melia Hotel (the hotel). The company purchased an 80% interest in the hotel in November 1988 at about the same time when it was increasing its investment in Socoil. As Mr Gaw was anxious to assist the petitioner to rebuild his financial reputation, he appointed him to be the resident director of Pudu Sinar to supervise the day to day operation of the hotel. Although the petitioner had no experience in hotel management, it was hoped that he would soon acquire experience with the help and support of an experienced consultant and a General Manager employed by the hotel. In August 1989, the petitioner saw Mr Gaw in Hong Kong and at a meeting on the 12th August 1989, an option agreement was executed whereby the petitioner was granted an option to purchase at cost plus interest a 10% interest in Double Wealth. The option agreement reads as follows:- "THIS AGREEMENT is made the 12th day of August, One thousand nine hundred and eighty-nine BETWEEN Pioneer Industries (Holdings) Limited of 6/F, On Lok Yuen Building, 25 Des Voeux Road, C., Hong Kong (hereinafter called 'Pioneer') of the one part and Mr Dennis Tan Chin Yong or his nominees of 167 Jalan Kem, 42000 Port Klang Selangor, Malaysia (hereinafter called 'Mr Tan') of the other part. 1. Pioneer holds 80 shares representing 80 per cent of the total issued shares of Double Wealth Company Inc., Liberia, (hereinafter called 'Double Wealth') which is the sole shareholder of Pudu Sinar Sdn. Bhd., the 100 per cent owner of Park Avenue Hotel situate at 16 Jalan Imbi 55100 Kuala Lumpur, Malaysia. 2. Pioneer shall grant the option and Mr Tan shall accept the option ('the option') whereby Pioneer shall sell and Mr Tan shall buy 10 shares representing 10 per cent of the total issued shares of Double Wealth at cost to Pioneer plus interest. 3. The option shall expire on 11th day of August, 1992. Mr Tan shall give three month's notice to Pioneer of his intention to exercise the right of option. Both parties may negotiate at the time when the option expires to decide whether or not to extend the option for a further period. IN WITNESS WHEREOF the parties hereto have hereunto set their hands the day and year first above written." By a letter dated the 21st December 1989, the petitioner submitted his resignation from his position as managing director of Pudu Sinar. He explained the reasons for his resignation in another letter of the 1st January 1990 in which he made a reference to the option agreement which was as follows : "My father mentioned that the option you gave me for Park Avenue was under the understanding that I continue to work and not for work done up to now. On top of this he feels that if the hotel is sold in the near future and then I exercise the option you would object as it is not fair to you." Upon the petitioner submitting his resignation, the company appointed an additional resident director of Pudu Sinar to take over from the petitioner. In April 1990, the company and the two other independent owners agreed to sell the hotel. It is stated that the petitioner, who had postponed his decision to leave, together with other employees of the company and Pudu Sinar were involved in the drafting of the purchase and sale agreement, but that the petitioner was not primarily responsible for bringing about the sale. On the 25th April 1990, the petitioner entered into a waiver agreement with the company which reads as follows :- "THIS AGREEMENT made the 25th day of April One Thousand Nine Hundred And Ninety BETWEEN Pioneer Industries (Holdings) Limited ('Pioneer') as one part and Mr Tan Chin Yong, Dennis ('Mr Tan') as the other part. WHEREAS Pioneer has granted to Mr Tan an option to purchase 10 shares in Double Wealth Company, Inc. of Liberia ('Double Wealth') at cost to Pioneer plus interest ('the Option') as per an agreement between Pioneer and Mr Tan dated 12th August, 1989. For a consideration of M$1.00 paid by Pioneer, Mr Tan hereby waives all his rights whatsoever under the option, subject to the following terms and conditions: Pioneer undertakes with Mr Tan that upon completion of the sale of shares in Double Wealth, 10 per cent of the profits (after deducting therefrom cost to all shareholders plus interest) from the sale of the total issued shares in Double Wealth will be paid to Mr Tan as special bonus. From the proceeds of the sale of shares in Double Wealth, the shareholders will recover the total capital contribution to Double Wealth plus interest at Hong Kong Bank Prime rate plus 2% P.A. and payment of the special bonus will be made to Mr Tan: i) On completion and receipt of sale money, Mr Tan will be paid 80% of the special bonus less retention as described in (ii) & (iii) below. In consideration of Pioneer arranging to release to Mr Tan 80% of the special bonus, Mr Tan agrees and undertakes that he will at all times throughout the warranty period of 18 months indemnify pioneer from and against all claims made by the purchaser up to same extent which Pioneer warrants and undertakes with the purchaser for Mr Tan's portion. ii) 10 per cent of balance retention sum, after adjustment of current assets and current liabilities of accounts as of completion date, will be paid to Mr Tan on complete payment of net Retention Money by the purchaser. Pioneer will keep a retention of 20% of the special bonus due to Mr Tan which will be released as follows: a) M$170,000 for a period of 12 years or discharge of Pioneer's tax liability on the sale, whichever is sooner & b) Balance of the money will be retained for the warranty period of 18 months or upon discharge from purchaser whichever is earlier. Pioneer will deposit with the bank the money so retained and interest earned will be for the account of Mr Tan. (signed)....." The petitioner's claim is restricted to the special bonus referred to in clause (i), no claim being made under either clause (ii) or (iii). According to Mr and Mrs Gaw, the peitioner agreed to carry out certain follow up work after the sale of the hotel for which upon its satisfactory completion Mr Gaw intended to pay him a bonus. The majority of the directors of the company however objected to paying the petitioner a 10% bonus under the waiver document upon the profit of approximately $80,000,000 made on the sale and considered that if any bonus was to be paid, it should be 5% of the total capital gain subject to the petitioner's satisfactory performance of the after sale matters. On the 12th June 1990, the company made a payment of $2,000,000 to the petitioner as part payment of the bonus in anticipation that the petitioner would carry out the after sale matters. However, the petitioner failed to do so, but instead made several requests to the company for payment of the bonus. Accordingly the company is not prepared to pay the 5% bonus that it had intended. The company contends that no consideration was given by the petitioner for either the option or the waiver. In a fax dated the 11th June 1990, Mr Gaw informed the petitioner that the intention for the option was to encourage the petitioner to devote himself to the management of the hotel project and to improve the product so that in three to five years the hotel might be in a favourable position to go public. When the petitioner worked for the hotel, he was paid a salary of M$15,000 per month as chief executive officer in addition to free lodging and board. The proceedings against the petitioner were issued by the company on the 27th May 1991 for damages for fraudulent misrepresentation and/or in negligence. Damages in the sum of $10,000,000 are claimed for the investment in Socoil and damages for loss of profit. A claim is also made for repayment of the sum of $2,000,000 as part payment of the special bonus as money had and received in respect of a total failure of consideration. The company also pleads that the option and waiver documents are unenforceable on the grounds that there was no consideration. There was a further claim for the sum of $538,614.97 relating to the purchase of some carpets intended to be used for the renovation of the hotel but this claim has now been withdrawn. The petitioner denies that Socoil went into receivership as a result of heavy financial losses caused by his speculation in palm oil in the commodity market and states that the receivership was lifted in June 1985 when all the debts owed by Socoil were settled by the existing directors. However, this statement conflicts with the petitioner's letter of the 21st December 1989 to the company when he expressed his appreciation to Mr Gaw for coming to the help and rescue of Socoil. He also contends that the loan of M$150,000 was not made to him personally but to his father's family and was eventually repaid by his father. The petitioner claims that he was the sole representative of Mr Gaw with regard to the negotiations for the purchase of the hotel and that he personally handled the purchase from the negotiation stage until the takeover, including the arrangement of all stock taking and government approvals. He said that the option agreement was first discussed with Mrs Gaw in May 1989 when it was mutually decided that it provided a good method for his remuneration for his work in assisting the company at the company's request in the negotiation and subsequent purchase of the hotel, the management of the hotel up to the date of the option agreement, and in consideration for his agreement not to resign as a director of Pudu Sinar at the material time in August 1989. He commented that the original offer for the option by Mrs Gaw was for 15% interest, but that he offered to accept 10% interest as being fair and reasonable. The petitioner denies that the option was granted on the basis that he would continue to work for the hotel and that Mr Gaw would object to exercising the option under the option agreement if the hotel was sold in the near future. He states that he continued to work in the hotel until about the 16th June 1990 at the request of Mrs Gaw and remained a director of Pudu Sinar until the 5th June 1990 when he resigned with all the other directors after the sale was completed. The petitioner claims that he was the only person authorised by Mr Gaw to act in the sale and that he was specifically asked to postpone his resignation by Mrs Gaw until the 1st July 1990 in order to deal with the sale. During the final stages of the negotiations for the sale of the hotel, the petitioner states that he had obtained an agreement in principle with CS First Boston to finance the purchase of the shares which were the subject of the option agreement, to which Mr Gaw and the purchaser agreed. However, Mr Gaw subsequently changed his mind and said he did not want the petitioner to appear as the seller in the agreement and therefore asked the petitioner to waive all rights under the option agreement in exchange for a profit sharing agreement. This resulted in the waiver agreement being entered into on the 25th April 1990. The petitioner denied that he had agreed with either Mr or Mrs Gaw to deal with the follow-up work after the sale of the company's interest in the hotel. The petitioner referred to a fax of the 8th June 1990 when Mr Gaw stated that the company intended to pay US$517,687 on the 11th June 1990 which represented 5% of the profits as opposed to the agreed 10% set out in the waiver agreement. Accordingly, he replied by requesting confirmation that he was entitled to the 10% but was informed by Mr Gaw that the amount remitted only amounted to part payment of his share and he would be informed when a further payment would be made. On the 12th June 1990, the petitioner was informed by Mr Gaw that US$256,410 had been paid into his account and that the accounts department was still verifying the figures relating to the statement of net profits Subsequently, by the 14th July 1990, the petitioner was informed by Mrs Gaw that although she and Mr Gaw fully supported his position, the board of directors of the company had changed their position and were no longer prepared to pay the petitioner's 10% share of the profits. The petitioner therefore wrote to Mrs Gaw on the 15th July 1990, setting out his position. As he received no satisfaction to his correspondence, the petitioner informed Mrs Gaw by his letter of the 2nd August 1990, that he was unable to represent the company or the former shareholders of Double Wealth any further until the profit sharing agreement had been resolved. By the fax from Mr Gaw dated the 11th June 1990, that was received by the petitioner on the 3rd August 1990 to which I have referred, the petitioner was informed that the board of the company had agreed to grant a special bonus of 5% of the profits as a special bonus with the intention that the petitioner was to be encouraged to devote himself to the management of the hotel. It is trite law that where a debt is disputed by the company on a substantial ground and not one that is frivolous or without substance, the winding up procedure is an abuse of the process of the court and the petitioner has no locus standi, see Mann v. Goldstein [1968] 1 WLR 1091, Re Welsh Brick Industries Limited [1946] 2 All ER 197. In respect of the option agreement, the petitioner claims that the payment is for his work in the negotiations in the purchase of the hotel and for managing the hotel up to the date of the agreement and for his agreement not to resign as a director at the material time in August 1989. The company denies the petitioner's allegations and asserts that there was no consideration for the option agreement. With regard to the waiver agreement, Mr Mills-Owens, counsel for the petitioner submitted that the consideration arises from the M$1 paid to the petitioner by the company, with an undertaking to pay the petitioner 10% of the profits in consideration of the petitioner waiving all his rights under the option agreement, together with an undertaking that he would at all times throughout the warranty period of 18 months indemnify the company against all claims. Mr Mills-Owens accordingly argued that as the petitioner is an unpaid creditor whose debt is not bona fide disputed or subject to a substantial dispute, he is entitled ex debito justitiae to present a winding up petition as a legitimate means of obtaining payment of his debt. Further, as the company was under an undisputed obligation to pay the sum due and had failed to do so, it could be inferred that it was unable to do so, so that it was proper for the petitioner to swear to his belief as to the company's insolvency, see Cornhill insurance plc. v. Improvement Services Limited & Others [1986] 1 WLR 114. Mr Mills-Owens went on to submit that there was at least an undisputed debt of $2,156,696 due to the petitioner for Mrs Gaw had stated in her evidence that the net profit from the sale amounted to $51,958,697.15. 80% of this figure will amount to $4,156,696.00, which, after deducting the payment of $2,000,000 on account received in June 1990, leaves a sum of $2,156,696 due to the petitioner. With regard to the High Court Action instituted by the company, Mr Mills-Owens submitted that the claim that has been made with regard to Socoil is for unliquidated damages which has nothing to do with the petitioner's claim under the agreement of the 25th April 1990. Further, he went on to argue that it was not the company that invested in Socoil, but the associate companies Bonaview and Bonalink, so that any claim should be brought by those companies and not the company. However, I do not agree, for, as submitted by Miss Eu, counsel for the company, the representations are alleged to have been made by the petitioner to the company and not to the two associate companies. As the claims made by the company arise out of separate and distinct transactions and are unliquidated, he submitted that they do not constitute any defence to the petitioner's claim under the agreement so that no defence has been raised that will justify a stay of execution, see AB Contractors Limited v. Flaherty [1986] 16 BLR 8. Miss Eu submitted that there was neither consideration for the option nor for the waiver. She said that the petitioner made no contribution towards the purchase of the hotel except with regard to stock taking and that he later took charge as the managing director of the hotel. In respect of the option, she argued that there is no reference to consideration so that extrinsic evidence is admissible, but that evidence is in dispute. She drew my attention to a number of matters where there is a conflict of evidence between the parties which appears from the evidence that I have summarised. Miss Eu went on to submit that the waiver of the option which amounts to an invalid right does not amount to consideration moving from the petitioner. Miss Eu also contended that the debt claimed was not an entitlement, but was referred to in the documentary evidence as a special bonus. As the petitioner failed to carry out the follow up matters after the sale, the company refused to pay the petitioner the bonus. Upon the evidence, there is no dispute that the option and waiver agreements were executed by the petitioner and the company and figures were calculated to show an amount that is due to the petitioner either on the higher sum of over $80,000.00 calculated by the petitioner or the sum of almost $52,000.00 referred to by Mrs Gaw. Nevertheless, there is an obvious dispute as to whether there was any consideration moving from the petitioner. The evidence indicates that a payment was not to be made for the petitioner's services at the hotel prior to its sale, but that the payment was to be a bonus for services carried out after the sale which were not performed by the petitioner. In view of the evidence that is in dispute which I am unable to say, can be described as either frivolous or insubstantial, the companies court is not the appropriate forum to determine that dispute. I shall now deal with the cross-claims. The claim that has been made in the High Court action, although partly for unliquidated damages, also claims a liquidated sum of $10,000,000 in respect of the investment in Socoil and the return of the $2,000,000 already paid to the petitioner under the waiver agreement. It cannot, therefore, be said, as was asserted by Mr Mills-Owens, that the company has merely put forward a bare allegation that a dispute exists with regard to the High Court proceedings. In my judgment, the company has shown substantial grounds that it has a set off or counterclaim to the claim made by the petitioner. There is a close connection between the petitioner's claim and the High Court action so I would, in any event, have, in the exercise of my discretion, refused to make a winding up order. As a result there will be an order to strike out the petition as an abuse of the process of the court. There will also be an order nisi for costs in favour of the company and the Official Receiver. (B.L. Jones) Judge of the High Court Representation: Mr R. Mills-Owens, Q.C. and Miss J. Wee (Ince & Co.) for Petitioner Miss A. Eu (Cheng Yeung & Co.) for Company Miss Fiona Lee for Official Receiver