RE PHILIPP AND LION FAR EAST LTD

bjbj @gYn9e HCCW000130/1991 Companies Winding Up No.130 of 1991 ----------------- HEADNOTE ----------------- Application for discharge of appointment of provisional liquidator and special managers on the grounds that the company was not insolvent and an offer had been made for payment of the debt due to the petitioner. The offer of payment was not accepted as the petitioner contended that it might constitute a fraudulent preference under s.266 of the Companies Ordinance. The company also had substantial contingent liabilities. An argument advanced for the company that it should be permitted to trade out of its financial difficulties was rejected. There was strong prima facie evidence that the company was insolvent and it was therefore likely that a winding up order would be made at the hearing of the petition and as there was evidence that the assets of the company were in jeopardy, the application was dismissed. IN THE SUPREME COURT OF HONG KONG COMPANIES (WINDING UP) NO. 130 OF 1991 ------------------------- IN THE MATTER OF THE COMPANIES ORDINANCE, CHAPTER 32, LAWS OF HONG KONG AND IN THE MATTER OF PHILIPP AND LION FAR EAST LIMITED ------------------------- Coram : Hon. Jones J. in Chambers Date of hearing : 17th May 1991 Date of delivery of judgment : 17th May 1991 ------------------ JUDGMENT ------------------ A petition was presented on the 3rd May by the Royal Bank of Scotland (the petitioner) to wind up Philipp and Lion Far East Limited (the company) on the grounds that it is insolvent and unable to pay its debts. On the same date, upon an ex parte application by the petitioner, I appointed the Official Receiver to be the provisional liquidator of the company and upon a separate application by the official Receiver, made immediately after the appointment, I appointed Mr. S.P. Cheung and Mr. J.G.W. Blaauw, chartered accountants and partners of Coopers & Lybrand, to be special managers. By the present summons dated the 15th May, two directors of the company, Mr. M. Sheinbein and Mr Lion, seek an order to discharge the appointment of the Official Receiver, and through him the appointment of the special managers. The application for the appointment of the official Receiver as provisional liquidator was made upon the evidence of Mr A.P. Gray, the regional manager of the petitioner. He states that the Philipp and Lion Group whose antecedents go back to 1909, comprise a group of companies involved in international commodities trading primarily in non-ferrous metals. The group consists of nine companies, four in the United States, one in Jersey, one in the United Kingdom, two in Bermuda and the Hong Kong company. The principal trading companies of the group were Philipp and Lion Ltd. registered in England, Philipp and Lion Trading Inc. registered in Connecticut, United States and the Hong Kong company. The ultimate holding company is Philipp and Lion (U.S.A.) Inc. which is registered in Delaware. The group is owned on a 50/50 basis by Mr Michael Lion who is based in London and Mr Melvyn and Irwin Sheinbein in the United States. In September 1989 Mr Gray was approached by Mr Lion, the Chairman and Chief Executive of the English company with regard to establishing a subsidiary company in Hong Kong. After discussions, the petitioner agreed to provide banking facilities for the company to the extent of US$6,000,000, the terms and conditions of which are set out in a facility letter dated the 19th December 1989. The facility was stipulated to be subject to an annual review and to the petitioner s overriding right to require payment on demand at any time. The company commenced trading in Hong Kong in February 1990. There were five directors of the company, three being resident in Hong Kong and Mr M. Sheinbein and Mr Lion resident outside the jurisdiction. Although the petitioner was informed that the business of the company had got off to a good start and was performing to budget, the company in fact incurred losses which, at the 30th November 1990, amounted to over US$1,900,000. The true financial position of the company was not made known to the petitioner until January 1991. In April 1991, Mr Gray learnt that the English company was experiencing financial difficulties which resulted in the company going into creditor s voluntary liquidation with debts amounting to 12,886,000. At a meeting on the 22nd April 1991, two of the three resident directors of the company in Hong Kong Mr Neil Watts, the managing director and Mr Mark Beddis, the financial director informed Mr Gray and a colleague Mr warren Chow that they had decided that the company should cease trading on the 19th April 1991 due to the company s inability to make a particular payment that had fallen due. They went on to say that Banque Nationale de Paris, another of the company s bankers, had declined to extend further facilities. They mentioned that the English company had also ceased trading and was about to go into voluntary liquidation. Mr Gray was informed by Mr Beddis that the proceeds of sale relating to four trust receipt advances amounting to US$901,464.38 had been received by the company but had been appropriated for other purposes. The trust receipts provide for payment to be made immediately by the company upon receipt of the proceeds of sale of any goods whilst the company was to act as trustee for the petitioner with regard to the custody and realisation of any goods. Mr Gray was further advised by Mr Watts that the sum of US$1,000,000 out of the US$3,000,000 capital reserve had not been injected into the company. The US$1,000,000 represented part of the reserve capital of US$1,800,000 which is shown in the company s audited accounts as an amount due from its parent Company as a capital reserve. The sum in question had been placed by the company s parent company on deposit with Banque Nationale de Paris in Jersey. Reservations at the meeting had been expressed by Mr Watts that the money might not be remitted to the company. At the hearing I was informed that Banque Nationale de Paris have made a claim in respect of this deposit against the parent company. Mr watts assured Mr Gray that his primary concern was that the company should meet its obligations in an orderly and professional manner and that he wished to see the petitioner s interests safeguarded as far as possible. Accordingly, Mr Gray suggested that there appeared to be no alternative other than for the company to proceed to a members voluntary liquidation in order that the assets of the company and the interests of its creditors could be safeguarded. Mr Watts and Mr Beddis resigned as directors of the company on the 26th April because they said they had not been able to obtain a meaningful response to the proposed voluntary liquidation from the other directors who were outside the jurisdiction. The only other director in Hong Kong had resigned a few days earlier, on the 22nd April. As a result of the resignations, the company was left with no accountable management in Hong Kong for responsible decisions could now only be made by Mr M. Sheinbein in the United States and Mr Lion in the England. By a letter dated the 23rd April, the petitioner made a written demand to the company for immediate payment of the sum due under the facility which amounted to US$2,072,155.89 plus interest. No reply was received from the company to this letter with the result that a further demand was made by the petitioner s solicitors on the 29th April. As no reply was received to this letter, the winding up petition was presented on the 3 rd May, based upon the monies advanced by the petitioner under the facility letter. In seeking to discharge the appointment of the provisional liquidator and through him the special managers, Mr Bleach, counsel on behalf of the two directors, Mr M. Sheinbein and Mr Lion, admitted the indebtedness of the company to the petitioner and gave an irrevocable undertaking that all monies due will be paid into an account that is satisfactory to the petitioner. However, the offer has not been accepted by the petitioner on the grounds that any payment would amount to a fraudulent preference under s.266 of the Companies Ordinance. Section 266 provides :- 266. (1) Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within 6 months before the commencement of its winding up which, had it been made or done by or against an individual within 6 months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being wound up be deemed a fraudulent preference of its creditors and be invalid accordingly: Although Mr Bleach contended that a payment by the company of its indebtedness to the petitioner would not amount to a fraudulent preference on the grounds that it is a voluntary payment, I do not accept this submission for if another petition is presented within six months, the payment will be deemed to be a fraudulent preference. The application to discharge is supported by an affidavit of Mr Morgan, the solicitor acting for the two directors. He says that Mr M. Sheinbein and Mr Lion had originally agreed to the company being placed in liquidation, but that they changed their minds later when Mr M. Sheinbein became aware that there was substantial liquidity in the company s London Metal Exchange positions which could enable the company to continue trading with a view to concluding outstanding contracts. Since that time Mr M. Sheinbein has arranged for some of the company s positions to be closed in order to discharge its indebtedness to the petitioner. The company has a number of outstanding contracts for completion by the end of July and forward contracts amounting to one a month until the middle of 1992. Mr M. Sheinbein has endeavoured to complete some of the company s contracts, but has been informed by some purchasers that they have lost confidence in the company because of the liquidation and are not prepared to renegotiate their contracts. However, he believes that it would be possible to complete some of these contracts if the company was not in liquidation and has the benefit of an expert trader to conduct the negotiations. Mr Blaauw has made enquiries from the company s London Metal Exchange brokers which reveal that with one exception, all the brokers had, prior to the 3rd May, closed the company s positions after a 100% margin call had been made and not met. From a draft balance sheet, it is estimated that the value of the company s realisable assets amounted to over US$3,000,000 inclusive of funds held by the brokers which would result in a net surplus of US$563,000. However, contingent liabilities in respect of forward contracts amount to at least US$3.,439,000. Mr Blaauw has disputed the contention put forward on behalf of the company that the difficulties experienced in relation to its customers was created by the appointment of a provisional liquidator, but had arisen prior to that date following the decision of the English company to cease trading which led to the margin calls by brokers and cancellation of contracts. Although Mr Morgan considered that the funds held by the brokers on behalf of the company can be made available to pay existing creditors, Mr Blaauw is of the opinion that the proposal would not safeguard the position of the suppliers under the forward contracts as the estimated losses as at the 26th April amounted to approximately US$3,000,000 which had increased at the 9th May to about US$4,000,000. Whilst Mr Morgan said that the existing business of the company is capable of showing a profit or a loss, it is more likely to show a profit if the business is pursued by Mr M. Sheinbein and Mr Lion, whereas Mr Blaauw said that the financial statements of the company, since it began trading in February 1990, do not support such an optimistic forecast regarding the company s profitability. He referred to the statements, including the audited and management accounts for the first three months of trading from February to the 31st May 1990, which resulted in a loss of US$822,000 and a further loss of US$1,762,000 from the 31st May 1990 to 28th February 1991. Accordingly, he concluded that in these circumstances, the company may have difficulty in raising banking facilities to continue its operations, given the financial difficulties of the group as a whole. The petitioner alleges that the company is insolvent and unable to pay its debts under s.178(1)(c) of the Companies Ordinance which provides : 178.(1) A company shall be deemed to be unable to pay its debts - (a) . if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company. In order to determine whether a provisional liquidator should be appointed, it is necessary for the petitioner to establish that there is a good prima facie case for a winding up order to be made at the hearing of the petition and that it is right that a provisional liquidator be appointed in all the circumstances, see Re Union Accident Insurance Co. Ltd. [1972] 1 All ER 1105. Mr Bleach submitted that it had not been established that the company is insolvent and unable to pay its debts for there are assets available over and above the liabilities while the company has given an irrevocable undertaking to pay its indebtedness to the petitioner. He also argued that there is no danger or jeopardy to the assets for the company is not a fly by night operation but a member of a long established group of companies. He went on to say that the provisional liquidator, and through him, the special managers, have had and will continue to have a detrimental effect on the business of the company, particularly with regard to the futures contracts that require the expertise of persons who specialise in this form of trading. Mr Huggins, counsel for the petitioner, submitted that the company is unable to pay its debts as they fall due which is why the company ceased trading on the 19th April when the directors recognised the need for a voluntary liquidation. Further the failure of the company to respond to the subsequent demands made by the petitioner for payment on the 23rd April and 29th April amounts to prima facie evidence of insolvency. Mr Huggins drew my attention to the definition of inability to pay debts when the court is required to take into account contingent and prospective liabilities on p.859 of the 5th Edition of Pennington s Company Law which reads :- It seems that a company is unable to pay its debts if it cannot pay them as they fall due out of cash or readily realisable assets in its hands, and it is immaterial in applying this test that it could pay them over a lengthy period by a steady realisation of all its assets. .... Additionally, a company is unable to pay its debts if it has no reasonable prospect of paying all of them, both accrued and prospective, by a steady realisation of all its assets, and in applying this test it will be immaterial that the company can pay its accrued debts out of its liquid resources. ...... No regard must be paid to the profits which the company might earn or to any further liabilities which it might incur under fresh contracts if it continued to carry on its business during the period of realisation. The contention advanced by Mr Bleach that the company would be more likely to trade out its difficulties if the provisional liquidator and special managers are discharged and an expert is engaged in their place to renegotiate contracts or incur liabilities under fresh contracts is untenable. Not only is this argument based on pure speculation, but having regard to the passage that I have just quoted from Pennington, it is also wrong in law. Accordingly, the court is not entitled to take into account the possibility that the company, in the course of its business, might earn profits in the future to discharge its liabilities. Although the company may have sufficient assets to pay its indebtedness to the petitioner and its other creditors, the company still has contingent liabilities of almost US$3,500,000. Coupled with the circumstances that led to the presentation of the petition to which I have adverted, there is strong prima facie evidence that the company is insolvent and unable to pay its debts with the result that it is probable that a winding up order will be made at the hearing of the petition. Two matters raised by Mr Bleach were entirely without merit. The first related to Mr Gray s suggestion that the company should go into a members voluntary liquidation when it was clear that he meant a creditors voluntary liquidation. The second concerned the contention that prejudice might be caused by the liquidation to the American companies that are not experiencing any financial difficulties which is irrelevant. Whilst Mr Bleach has asserted that the assets are not in danger of being dissipated or in jeopardy, there is abundant evidence to justify the petitioner s fears that there is a real risk. First, the payment by the company under the four trust receipts was described by Mr Bleach as a payment to the petitioner, but that it had merely been paid into the wrong account. However, such payment was a clear breach of trust for it was money that was available to the company as working capital to which it was not entitled. No explanation has been put forward on behalf of the company as to why the money was not placed in the right account, although neither Mr M. Sheinbein nor Mr Lion claim that they were aware of the position. Second, no explanation has been put forward for the diversion of the US$1,000,000 by the company to its parent company which is now the subject of a claim by Banque Nationale de Paris with whom the money is placed on deposit. Mr Bleach submitted that the money did not form part of the share capital but was a loan. However, this observation does not detract from the fact that the petitioner had been misled. Third, the petitioner s concern has been reinforced by a letter from Mr M. Sheinbein to Mr Watts of the 23rd April when he said that as the company was unable to fulfil its obligations in respect of two contracts, he was arranging for Philipp and Lion Trading Inc. to resell the material in question so that the contracts would be regarded as cancelled. A fourth cause of concern appears in a fax from Mr Watts to Mr Lion dated the 29th April in which reference is made to a discussion between Mr M. Sheinbein and Mr Sobol, a trader who was formerly employed by the company, about the possibility of transferring some of the profitable positions from the Far East account to another group company account which could amount to fraudulent trading in contravention of s.266 of the Companies Ordinance. Apart from the evidence of jeopardy or dissipation to the assets, there was a lack of candour by officers of the company who failed to keep the petitioner informed as to the true financial position of the company until January 1991 when the full extent of the losses became known. A further factor that I have taken into account is the lack of any accountable directors in Hong Kong, both Mr M. Sheinbein and Mr Lion being abroad. As I have said, the petitioner has established a strong prima facie case that the company is insolvent so that it is likely that a winding up order will be made at the hearing of the petition. Further, there is a substantial risk to the assets of the company with the result that in all the circumstances of this case, I am quite satisfied in the exercise of my discretion, that the appointment of the provisional liquidator and the special managers should be maintained. The summons is therefore dismissed. (B.L. Jones) Judge of the High Court Representation: Mr John Bleach (Simmons & Simmons) for the Company (Applicant) Mr Adrian Huggins, Q.C. and Mr Cheung Kam (Alsop Wilkinson) for the Petitioner Mrs Karen Ho for Official Receiver PAGE PAGE - - &`#$ ZC(* CAAB000130/1991 Normal.dot Judiciary Hong Kong SAR Microsoft Word 9.0 >=l9e Judiciary Hong Kong SAR coleadsun CAAB000130/1991 Title Nen9e Nen9e Microsoft Word Document MSWordDoc Word.Document.8 CAAB000130/1991 Normal.dot Judiciary Hong Kong SAR Microsoft Word 9.0 >=l9e Judiciary Hong Kong SAR CAAB000130/1991 Title Judiciary Hong Kong