Pevonia International Llc v Pevonia Asia Ltd

Judgment Date23 April 2014
Subject MatterCompanies Winding-up Proceedings
Judgement NumberHCCW417/2012
CourtHigh Court (Hong Kong)
HCCW417/2012 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

____________

IN THE MATTER OF THE COMPANIES ORDINANCE, Chapter 32 of the Laws of Hong Kong

and

IN THE MATTER OFPEVONIA ASIA LIMITED (Company No 1087808)

____________

BETWEEN

PEVONIA INTERNATIONAL LLC Petitioner

and

PEVONIA ASIA LIMITED Respondent
____________
Before: Hon To J in Court
Date of Hearing: 4 December 2013
Date of Judgment: 23 April 2014

______________

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...

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