RE GW ELECTRONICS CO LTD

HCCW 81/2016

[2021] HKCFI 1869

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 81 OF 2016

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D E C I S I O N[1]

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1.  By 2 summonses filed on 7 December 2020 (“1^st Summons”)  and on 27 April 2021 (“2^nd Summons”)  the Official Receiver (“OR”)  applies, qua provisional liquidator of the Company (“ORPL”)  and in her own name, for an order to allow her to pay the ad valorem fee (“AV Fee”)  said to be chargeable under Item I of Table B of Schedule 3 to the Companies (Fees and Percentages)  Order (Cap 32C)  (“CFPO”)  out of the cash fund held by her in the liquidation account of the Company (“Liquidation Account”).

2.  The 1^st Summons was issued under s 200(3)  of the Ordinance and rule 7(3)  of the Companies (Winding up)  Rules (“Rules”)  whereby the ORPL sought “directions and an order” in the following terms:

“1. The Liquidation Expenses as stated in paragraph 2(1)  of the [Conditional Order[2]] do include the [AV Fee] chargeable in these winding up proceedings as provided in Item I of Table B of Schedule 3 to the [CFPO];

  2.  The payment of the surplus, calculated on the basis of the Liquidation Expenses being inclusive of the [AV Fee], by the Official Receiver to the Petitioner shall be regarded as compliance with the requirement on the Official Receiver under paragraph 2(3)  of the [Conditional Order[3]]”

3.  The 2^nd Summons was issued under “inherent jurisdiction of the High Court” whereby the OR applies for “a declaration or order” in the following terms:

“1. Notwithstanding the terms of the [Conditional Order[4]] and the [Permanent Stay Order[5]], [AV Fee] imposed under Section 296 [of the Ordinance]; Sections 6 to 7 and Item I of Table B of Schedule 3 of [sic] the [CFPO] in the amount of HK$2,076,030 became due and payable on realisations of HK$124,102,769.90 made in 2017 in this liquidation, as set out in the attached schedule;

  2.  The abovementioned Orders are unaffected by the [AV Fee], which equate to and are to be met by the funds in the amount of HK$2,076,030 retained and presently held by the Official Receiver”

Factual background

4.  The factual background relevant to the Applicant’s summons dated 17 June 2020 for a permanent stay of all proceedings in the winding up of the Company (“Stay Summons”)  have been set out in §§2-9 and 13-18 of the Reasons and will not be repeated here. 

5.  The Summonses were issued in circumstances where:

(1)  the Stay Summons had already been argued by all parties, including the ORPL[6], at the hearing on 12 November 2020; 

(2)  at the conclusion of the hearing on 12 November 2020, this Court decided that it was appropriate to order a permanent stay upon accepting the undertaking given by the Applicant to pay to the Petitioner the sum of $2,881,887.73[7] within 5 working days of the order (“Undertaking”), and subject to the ORPL complying with the following conditions (collectively “Conditions”):

(a)  “The liquidation costs and the fees, costs and expenses of the Official Receiver of and arising out of the winding up of the Company (“Liquidation Expenses”)  be paid out of the cash fund in the [Liquidation Account] held by the [ORPL]” (“1^st Condition”);

(b)  “The ORPL shall as soon as reasonably practicable apply the balance of the cash in the Liquidation Account, after payment of the Liquidation Expenses, to discharge the Untaxed Costs in the sum of HK$7,586,956.80 and the Debt in the amount of US$15,263,129.39 owed by the Company to the Petitioner” (“2^nd Condition”); and

(c)  “The ORPL shall as soon as reasonably practicable pay the entire surplus (ie the cash after payment of the Liquidation Expenses, Untaxed Costs and the Debt)  in the Liquidation Account to the Petitioner” (“3^rd Condition”).

Upon compliance with the Conditions, the Applicant shall apply on paper for an order to stay the winding up proceedings permanently and to release the ORPL as provisional liquidator of the Company (“Conditional Order”);

(3)  the Conditional Order was sealed on 4 December 2020; and

(4)  by order dated 4 February 2021, the winding up proceedings of the Company were stayed permanently, and the ORPL released as provisional liquidator (“Permanent Stay Order”). 

6.  In determining the Stay Summons, one of the main issues which required determination was solvency of the Company, specifically whether the fund kept in the Liquidation Account was sufficient to discharge the Company’s liability to pay the Liquidation Expenses payable to the ORPL, as well as the Debt and the Untaxed Costs payable to the Petitioner.  For this purpose, the Applicant and the Petitioner relied on the information and evidence then adduced by the ORPL and put forward their respective arguments on the issues of solvency and the extent of the Company’s liability to pay statutory interest to the Petitioner. 

7.  The ORPL’s evidence and information on the Stay Summons consisted of:

(1)  the OPRL’s Report dated 29 December 2017 filed in CACV 24/2017 and 84/2017[8] (“ORPL’s Report”), where it was stated that she had “recovered” a total of HK$124,139,861.55 (§1), the total amount of the proofs of debts lodged was HK$122,652,221.65 (§3)  and, as such, “it appears that the Company was solvent” (§4).  On the question of fees and costs[9], the ORPL stated at §7:

“The estimated fees and costs of ORPL up to 18 January 2018 in the winding up of the Company are HK$33,443.50 with particulars set out below:

1.	Costs incurred before the winding up order was made (time-costs basis)	HK$5,180.00
2.	Fees for inserting of notices of winding up order and first meeting in the gazette (Item 7, Table A, Sch.3, [CFPO]	HK$660.00
3.	ORPL’s fees after the winding up order (time-costs basis)	HK$27,603.50
	Total	HK$33,443.50

(2)  the OR’s letter to the Court dated 23 June 2020 (“OR’s June 2020 Letter”)  which stated, inter alia, as follows:

“Since the [ORPL’s Report], there is no money received by the [ORPL] on the Company’s behalf (apart from the interests [sic] on the monies held by her). As at the date hereof, the total cash balance held by the OPRL is approximately HK$126,165,373.29 (based on the conversation [sic] rate of USD1 to HK$7.78).

According to the updated record of ORPL, apart from the Proof of Debt lodged by the Petitioner for the sum of USD15,263,129.39 (approximately HK$118,747,146.65 based on the conversation [sic] rate of USD1 to HK$7.78), the remaining 5 Proof of Debt (the particulars were set out in the [ORPL’s Report])  have been withdrawn.

…

The Official Receiver takes a neutral stance in the 1^st and 2^nd Applications and will leave it to the Applicant to substantiate their cases. With a view to saving costs, the Official Receiver does not propose to appear at the above hearing, unless the Court otherwise directs.

ORPL has provided an estimate on her fees and costs in the [ORPL’s Report]. In the event that the applications are allowed and assuming that she is not required to appear at the above hearing, ORPL would seek her fees and costs in a total of HK$64,443.50 (HK$33,443.50 + HK$23,000 being her claimed costs as per the summary of costs dated 28^th December 2017 + HK$8,000 being her claimed costs for the present applications)  or such amount as the Court may determine shall be borne by the party as the Court deems appropriate. A summary of costs is attached for assessment” (underlined added)

8.  After the Conditional Order had been made, the OR in her letter dated 17 November 2020 to the solicitors for the Petitioner (“FKC”)  and the solicitors for the Applicant (“ONC”), provided comments on the draft order and stated, inter alia, that “the Official Receiver’s costs and fees are HK$64,443.50 as at 23^rd June 2020”.

9.  Neither the ORPL’s Report nor the OR’s June 2020 Letter mentioned any AV Fee. 

10.  Having considered the parties’ evidence and arguments, this Court held that as at the date of the hearing (12 November 2020):

(1)  the liabilities of the Company comprised (a)  the ORPL’s fees and expenses (ie Liquidation Expenses)  in the amount of HK$64,443.50; (b)  the Enforcement Costs; (c)  the Debt; and (d) the Untaxed Costs (see §17 of Reasons).  As the Enforcement Costs would be set off against the recovery held by ARC, the undischarged liabilities of the Company consisted only of the Liquidation Expenses, the Debt and the Untaxed Costs (collectively “Liabilities”);

(2)  the Company’s assets exceeded the Liabilities and there was a surplus of HK$2,718,214.07 (§17 of Reasons); and

(3)  after discharging all the Liabilities, the surplus in the Liquidation Account should be paid to the Petitioner by way of statutory interest (§§20, 27, 29 of Reasons).

11.  On 25 November 2020, the terms of the Conditional Order was approved. 

12.  The first time the OR asserted her entitlement to charge AV Fee was in her letter dated 25 November 2020 to the Court where she said, inter alia:

(1)  it had been discovered that the amount of AV Fee chargeable pursuant to Item I of Table B of Schedule to the CFPO “had all along been inadvertently omitted in the submissions by the Official Receiver mentioned above”;

(2)  as the total realization is HK$124,139,861.56, the AV Fee to be charged on the realization amounts to HK$2,076,400; and

(3)  the AV Fee is “part of the liquidation expenses given priority under rule 179 of [the Rules]”, and the Liquidation Expenses as defined in §32(1)  of the Reasons should include the AV Fee.

13.  By letter dated 26 November 2020, FKC stated that the matter of AV Fee was only raised by the OR after the Conditional Order had been made and requested an opportunity to be heard on the matter.

14.  In response, this Court observed that it was too late for the OR to raise the question of AV Fee, after the Court had determined the Stay Summons and made the Conditional Order.  No further changes to the Conditional Order would be entertained.

15.  By letter dated 1 December 2020 to the Court, the OR accepted that there was no excuse for her omission in raising the issue of AV Fee, but submitted that her omission “should not or could not be a ground for dispensing with the duty to charge and pay the [AV Fee] in this winding up”.  After setting out her submissions on the issue, the OR stated that she would appeal against the decision on Conditional Order if this Court did not re-consider her submissions:

“It is further submitted that in view of the statutory duties regarding the [AV Fee], the Official Receiver would have no alternative but would be duty bound to appeal against a decision of the Court that waives or dispenses with the charging of the [AV Fee] in the present circumstances. The Official Receiver sincerely invites the Court to re-consider our submissions on the [AV Fee] issue.”

16.  By another letter dated 1 December 2020 to the Court, the OR sought to provide further comments on the Conditional Order.

17.  Despite her knowledge that the claim for AV Fee (if allowed)  would be at the expense of the Petitioner (being the only party entitled to receive the surplus)  and the concerns raised by this Court, the OR seems to think that she could simply ask the Court to change the Conditional Order without issuing any summons or filing any evidence in support of her application.  Even after this Court had made clear that no further change to the Conditional Order would be entertained, the OR continued to seek to change the Conditional Order under the guise of providing comments on the draft Order.  This is wholly unacceptable.  The OR is no different from other litigants and is required to follow the rules and procedure if and when she wants to make an application. 

18.  By letter dated 3 December 2020, the parties were informed that:

“1. If the Official Receiver has any application to make, a proper application should be made. The Court would not deal with any ‘submissions’ on paper.

  2.   In the meantime, the order made on 12 November 2020 has already taken effect and should be complied with by all parties, notwithstanding the belated ‘submissions’ made by the Official Receiver in correspondence.  The order will be sealed so as not to delay the permanent stay ordered by the Court.”

19.  This was followed by the OR filing the 1^st Summons on 7 December 2020. 

Discussion

20.  In my judgment, the 1^st and 2^nd Summonses should be dismissed for the following reasons:

(1)  The ORPL is barred by the doctrine of res judicata and cannot seek to re-litigate the issue of fees which has already been determined by the Court as part of the decision on the Stay Summons (Res judicatapoint).

(2)  Even if (contrary to my view)  the issue of AV Fee has not been decided by the Court such that res judicata does not apply, it is an abuse of process for the ORPL to seek to raise in subsequent proceedings the issue of AV Fee, when such issue could and should have been raised in the Stay Summons (Abuse of process point).

(3)  Once the Conditional Order was sealed, this Court is functus and does not have jurisdiction to deal with the 1^st Summons or the 2^nd Summons (Functuspoint).

(4)  In any event, at the time the 2^nd Summons was issued, the winding up proceedings in respect of the Company had already come to an end and the ORPL released as provisional liquidator. The Court has no jurisdiction to make any order which concerns the winding up of the Company (No jurisdiction point).

21.  I deal with these points in turn.

Res judicata point

22.  A res judicata may be a cause of action estoppel or an issue estoppel (Spencer Bower and Handley: Res Judicata, 5^th ed, §1.05).  The relevant principle has been explained in Spencer Bower and Handley, §1.01, as follows:

“A res judicata is a decision pronounced by a judicial or other tribunal with jurisdiction over the cause of action and the parties, which disposes once and for all of the fundamental matters decided, so that, except on appeal, they cannot be re-litigated between persons bound by the judgment. A judgment in personam binds the parties and their privies, and because this is so basic it will generally be assumed in what follows. A judgment in rem is binding on the so-called world, party, privy or otherwise.”

23.  To set up res judicata as an estoppel, the following essential elements must be established:

(1)  the decision, whether domestic or foreign, was judicial in the relevant sense;

(2)  it was in fact pronounced;

(3)  the tribunal had jurisdiction over the parties and the subject matter;

(4)  the decision was: (a)  final; (b)  on the merits;

(5)  it determined a question raised in the later litigation; and

(6)  the parties are the same or their privies, or the earlier decision was in rem (Spencer Bower and Handley, §1.02).

24.  As regards issue estoppel, the principle was explained by Dixon J in Blair v Curran (1939)  62 CLR 464, 531-533:

“A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion … the distinction between res judicata and issue-estoppel is that in the first the very right or cause of action claimed or put in suit has in the former proceedings passed into judgment, so that it is merged and has no longer an independent existence, while in the second, for the purpose of some other claim or cause of action, a state of fact or law is alleged or denied the existence of which is … necessarily decided by the prior judgment, decree or order.”

25.  Similarly, in Spencer Bower and Handley, §8.01, the learned author explains issue estoppel in this way:

“A decision will create an issue estoppel if it determined an issue in a cause of action as an essential step in the reasoning. Issue estoppel applies to fundamental issues determined in an earlier proceedings which formed the basis of the judgment …”

26.  Mr Jeremy Bartlett SC, counsel for the OR, submits that res judicata or issue estoppel has no application to the 1^st and 2^nd Summonses for the following reasons:

(1)  The Petitioner has not issued any “proper summons for strike out with supporting evidence, as required” (1^st Reason). 

(2)  The Stay Summons was an interlocutory application made in the winding up proceedings in respect of the Company, and the Court has not “finally adjudicated on the matter” (2^nd Reason). 

(3)  There was no determination on the AV Fee because no one had raised the issue (3^rd Reason). 

(4)  The Stay Summons was not “former proceedings” and the 1^st and 2^nd Summonses are not subsequent proceedings.  As such, res judicata and issue estoppel have no application (4^th Reason). 

27.  The 1^st Reason is a non-point. 

(1)  There is no rule which permits or allows a party to issue a summons to strike out another party’s summons. 

(2)  It should have been clear from the letters to the OR that this Court was concerned about the propriety of the OR’s attempt to re-open issue which had already been determined by the Court as part of the Stay Summons. 

(3)  The fact that the OR decided not to address the concern in her evidence or the written submissions of counsel would not render the point to become inapplicable or irrelevant.  The Court has jurisdiction to regulate its own process and would not allow a party to re-open an issue in circumstances where such party is barred by issue estoppel or res judicata.   

28.  The 2^nd and 4^th Reasons are untenable.  Unlike other civil proceeding which needs to be commenced by way of a writ or an originating summons, an applicant who wishes to seek any relief which concerns the company in compulsory liquidation must apply by summons issued in the winding up proceedings.  Insofar as a summons is issued against a party which has not previously taken part in the winding up proceedings, such summons constitutes the “originating process” as against that party, and the determination of the Court on the issues raised by the parties will be “final” in the sense that unless reversed by the Court of Appeal, they are binding upon the parties concerned.  The procedure for making application in winding up proceedings is governed by the following rules in the Rules:

(1)  Rule 1 provides that “Subject to the limitation hereinafter mentioned these rules shall apply to the proceedings in every winding up under the Ordinance of a company …”.

(2)  Rule 7(1)  provides that every application in court other than a petition shall be made by motion. 

(3)  Rule 7(2)  provides that “Every application in chambers shall be made by summons, which, unless otherwise directed, shall be served on every person against whom an order is sought, and shall require the person or persons to whom the summons is addressed to attend at the time and place named in the summons”.

29.  It is wrong to assume or characterise a summons issued in the winding up proceedings as an interlocutory application without considering its nature and the relief sought by the parties.  In the case of the Stay Summons, the relief sought is final in that it determined once and for all whether the winding up proceedings in respect of the Company should come to an end.  Such determination binds all the parties[10] unless the order is overturned on appeal. 

30.  The 3^rd Reason is factually incorrect. 

31.  In determining the Stay Summons, one of the issues which this Court had to consider was solvency of the Company.  This, in turn, required the Court to consider whether the fund kept in the Liquidation Account was sufficient to discharge the Liabilities.  In this regard:

(1)  the Applicant and the Petitioner relied on the information and evidence adduced by the ORPL (described in §7 above)  and put forward their respective arguments on the issues of solvency, whether there would be any surplus after discharging the Liabilities and, if so, the extent of the Company’s liability to pay statutory interest to the Petitioner;

(2)  specifically, the meaning of “Liquidation Expenses” was expressly stated to cover what the OR then said and confirmed to be the “fees” payable to the ORPL; and

(3)  this Court took into account the precise amounts required to be paid by the Company in respect of the Liabilities, and concluded that the Company was solvent and had surplus after discharging all such Liabilities.

32.  It is clear that the precise amount of the Liquidation Expenses payable to the ORPL formed part of the factual foundation upon which this Court concluded that the Company was solvent.  If follows that the OR is barred by issue estoppel and cannot raise the same issue in the 1^st and 2^nd Summonses.

33.  Insofar as it is necessary, I consider that all the essential elements to set up res judicata estoppel against the OR are satisfied in that:

(1)  the Stay Decision and the Conditional Order were judicial determination and were pronounced;

(2)  this Court had jurisdiction over the parties and the subject matter;

(3)  the Stay Decision and the Conditional Order were final and on the merit;

(4)  the Stay Decision and the Conditional Order determined the issues of the amount of Liquidation Expenses payable to the ORPL, which included the amount of fees payable to the ORPL.  This is the same issue raised by the OR in the 1^st and 2^nd Summonses; and

(5)  the parties to the Stay Decision and the Conditional Order are the same as the parties to the 1^st and 2^nd Summonses.

Abuse of process point

34.  If, contrary to my view, the issue of AV Fee has not been decided by the Court such that res judicata or issue estoppel does not apply, I would still dismiss the 1^st and 2^nd Summonses on the ground that it is an abuse of process for the OR to seek to raise in the 1^st and 2^nd Summonses the issue of AV Fee when such issue could and should have been raised in the Stay Summons. 

35.  The principle governing the Henderson v Henderson abuse has been explained by Ma CJ in Ko Hon Yue v Chiu Pik Yuk (2012)  15 HKCFAR 72, §§82-83:

“82. The abuse that is known as the Henderson v Henderson abuse (or res judicata in the wider sense – the nomenclature is not important)  is derived from the case of that name. It has been developed and explained by the House of Lords in Johnson v Gore Wood & Co. (a firm)  [2002] 2 AC 1, by the Judicial Committee of the Privy Council in Yat Tung Investment Co. Ltd. v Dao Heng Bank Ltd and Brisbane City Council v Attorney General for Queensland [1979] AC 411, by the English Court of Appeal in Bradford and Bingley Building Society v Seddon [1999] 1 WLR 1482 and by our Court of Appeal in Ngai Few Fung v Cheung Kwai Heung [2008] 2 HKC 111 and Chiang Lily v Secretary for Justice [2009] 6 HKC 234. The essence of the doctrine is that a party ought generally not be permitted to raise in subsequent proceedings matters which that party could and should have raised in earlier proceedings.

83. … For present purposes, it is sufficient just to refer to the following facets of the doctrine:-

(1)  The starting point is to recognize that the doctrine is founded on an abuse of process. As Lord Wilberforce said in Brisbane City Council v Attorney General for Queensland, ‘it ought only to be applied when the facts are such as to amount to an abuse: otherwise, there is a danger of a party being shut out from bringing forward a genuine subject of litigation’: at 425.

(2)  This concern (that a party ought not lightly be deprived of the right to have serious matters litigated)  was echoed by Lord Millett in Johnson v Gore Wood : at 59D-G.

(3)  It must therefore be essential when striking out a claim on this basis (and thus preventing a litigation of that claim)  that an abuse is found to exist in seeking to raise in subsequent proceedings claims or issues which could and should have been raised in earlier proceedings. This abuse will usually take the form of the other party being ‘vexed’ (or in some cases, the terms ‘oppressed’, ‘unjustly harassed’ or ‘unjustly hounded’ are used)  by the subsequent set of proceedings: Johnson v Gore Wood at 31A-B.

(4)  The abuse can also take the form of the administration of justice being brought into disrepute: see Chiang Lily at 256D-G (para 58)  referring to Hunter v Chief Constable of the West Midlands Police [1982] AC 529. With the procedural reforms introduced by the Civil Justice Reform in 2009, the courts in Hong Kong must now, when exercising their procedural powers, increasingly bear in mind not just the parties before them in any particular litigation but also the position of other litigants in the court process. RSC O.1A r.1(f)  states as one of the underlying objectives of the court’s procedural powers under the Rules to be ‘to ensure that the resources of the court are distributed fairly’.

(5)  In examining aspects such as abuse, the court is concerned with balancing interests: not just those of the litigants before it, but also taking into account the other interests involved in the administration of justice. It is important therefore here to emphasise that when the court is dealing with the Henderson v Henderson type of abuse, it is not looking at an absolute bar to litigation such as issue estoppel or cause of action estoppel. On the contrary, in considering this type of abuse, the court is required to assess a number of factors and balance competing interests. See here, Bradford and Bingley Building Society at 1490F-H. It is also worth making the following observations at this juncture:-

(a)  There is conceptually an important distinction between absolute bars such as issue estoppel and the type of abuse with which we are concerned. In the former situation, the party who seeks to re-litigate an issue or cause of action has already had his day in court, whereas in the latter situation, that party has not: cf Johnson v Gore Wood at 59D (‘It is one thing to refuse to allow a party to re-litigate a question which already been decided; it is quite another to deny him the opportunity of litigating for the first time a question which is not previously being adjudicated upon’ per Lord Millett).

(b)  The assessment of different factors and balancing competing interests can be said to be an exercise of a discretion …” (underlined added)

36.  Mr Bartlett submits that Henderson v Henderson abuse does not arise because:

(1)  there is neither earlier concluded proceedings nor subsequent proceedings as the parties were still involved in the same proceedings (1^st Argument);

(2)  there was no determination on the AV Fee (2^nd Argument);

(3)  where a litigant failed to put all the amendments in the earlier application for amendments of his pleadings or failed to seek discovery of all documents from the other party, the Court still permits amendments to be made or hears the applications without any concern about abuse of process (3^rd Argument);

(4)  the OR is not asking the Court to permit or allow any AV Fee to be paid to the OR, but merely asking for recognition of what was imposed by the CFPO at the time when the ORPL realised assets in 2017 (4^th Argument);

(5)  the AV Fee sought by the ORPL would not affect the solvency of the Company and, hence, the outcome of the Stay Summons (5^th Argument); and

(6)  the OR stands in a different position from other litigants in that she is performing a statutory role, being the person designated by the CFPO to collect the AV Fee (6^th Argument). 

37.  The 1^st to 3^rd Arguments are the same arguments advanced under the 2^nd, 3^rd and 4^th Reasons, which I do not agree for the reasons stated in §§28 to 31 above. 

38.  I am unable to accept the 4^th Argument.  It is plain from the 1^st and 2^nd Summonses that the OR is seeking an order from the Court to allow her to pay the AV Fee she claims out of the fund in the Liquidation Account.  In any event, the argument ignores the fact that the OR, like any litigant, is required to comply with the order made by the Court. 

39.  More importantly, had the ORPL raised the issue of AV Fee before determination of the Stay Summons, it was possible that the Company, the Applicant or the Petitioner would challenge her entitlement to receive the amount claimed as grossly excessive, having regard to the fact that the Court had granted an interim stay of the winding up proceedings at the early stage, such that very little time was spent by the ORPL in dealing with the liquidation of the Company. 

40.  Mr Bartlett contends that neither the parties nor the Court can challenge or reduce the AV Fee as such Fee is prescribed by the CFPO, and only the OR can apply for a reduction of the AV Fee by making an application under paragraph 9 of the CFPO.  I do not agree.  The parties who have interest in the Company could challenge the decision of the OR[11] in not applying for a reduction of the AV Fee on the basis that the amount claimed is grossly excessive, having regard to the fact that the Court has already granted an interim stay of the winding up proceedings and very little time has been spent by the ORPL in dealing with the liquidation of the Company.  There is no proper basis to assume that the OR must be entitled to receive the AV Fee in the amount claimed.  For the same reason, it is wrong to assume that had the OR raised the issue of AV Fee much earlier, she would have been entitled to receive the same amount. 

41.  The 5^th Argument is irrelevant to the question of abuse.  Nothing further needs to be said. 

42.  The 6^th Argument is a surprising contention.  If and insofar as it is suggested that the OR stands in a special position and has the right to ask the Court to allow her to apply the fund under her control to pay the AV Fee (or any fees under the CFPO)  however late the application is made, it cannot be right.  No authority has been cited in support of such contention.   

43.  In my view, it is an abuse of process for the OR to pursue the 1^st and 2^nd Summonses after determination of the Stay Summons for the reasons set out below.

44.  First, the OR qua ORPL has been involved in, and taken substantive steps since the commencement of the winding up proceedings in March 2016.  There was ample opportunity for the ORPL to consider and decide what fees were payable to her.  As a matter of fact, the OR did in the ORPL’s Report and the OR’s June 2020 Letter state the amount of costs and fees payable to her (which included the fee under Item 7, Table A, Schedule 3 to the CFPO, see §7(1)  above). 

45.  Second, it would be unfair and oppressive to the other parties to the Stay Summons in particular the Petitioner, to be vexed again on the question of what amount the ORPL was entitled to receive from the fund in the Liquidation Account, having already filed evidence and advanced arguments on the Liabilities and obtained the Conditional Order which made clear that the Petitioner was entitled to receive the surplus after payment of the Liabilities.   

46.  Third, it is unfair to other court users to allow the OR to re-open the issue of AV Fee after determination of the Stay Summons, as it would mean that the OR can take up additional Court’s time which could have been deployed to applications made by other court users.  This is inconsistent with the underlying objectives of the Rules of the High Court as stated in Order 1A rule 1(a), (b)  and (f). 

47.  Lastly, allowing the OR to pursue the 1^st and 2^nd Summonses merely because she (and the solicitors acting on her behalf)  had overlooked the issue of AV Fee during a period of 4½ years would set an undesirable precedent for other cases.  Other litigants may seek to vex their opponents again on the ground that they had omitted to raise certain issue in the earlier proceedings.  This is precisely the type of abuse which the doctrine of Henderson v Henderson abuse is directed to avoid. 

Functus point

48.  Mr Samuel Chan, counsel for the Petitioner, submits that this Court is functus officio and it is not open to the OR to re-open the proceedings with a view to arguing a point which ought to have been raised at the time when, or even before, the Stay Summons was heard. 

49.  The relevant principle has been stated in Spencer Bower and Handley, §5.03:

“A judgment that has been formally entered can only be altered by the court which pronounced it within the narrow limits of the slip rule and the inherent jurisdiction. These powers are exercisable to ensure that the judgment gives effect to the court’s manifest intention and, in incidental matters such as costs and interest, to relieve against omissions (‘slips’)  by a party or his legal advisers. They do not enable the court to review its decisions on the merits, that is, its decision on issues presented to it for decision which it intended to decide …”

50.  Apart from repeating the 4^th and 6^th Arguments, the only new argument raised by Mr Bartlett is that by the time the 1^st Summons was issued, the Conditional Order might not have taken effect.  I disagree.  The Conditional Order took effect on the day it was pronounced.  In any event, once the Conditional Order was sealed on 4 December 2020, this Court is functus and does not have jurisdiction to deal with or review the issue of the amount of the Liquidation Expenses payable to the ORPL. 

No jurisdiction point

51.  This is only relevant to the 2^nd Summons, which was issued after the winding up proceedings in respect of the Company had already come to an end and the ORPL released as provisional liquidator.  There was no winding up proceedings within which the OR could seek any relief or determination concerning the winding up of the Company.  Nor does the Court have jurisdiction to entertain such application.

52.  In this regard, Mr Chan cites Re Conso Electronics (Far East)  Ltd [1996] 1 HKLR 1, where Godfrey JA said (6F-G)  this:

“The compulsory winding up having terminated with the making of the s.209A order, the effect of the previous order [appointing the former liquidators], which had provided for their remuneration, was clearly spent, although obviously the applicants did not realise this at the time … It follows that the order under appeal was made without jurisdiction and must be discharged …” (underlined added)

53.  Unsurprisingly, Mr Bartlett is unable to cite any case to contradict the ratio in Re Conso.  Nevertheless, he contends that the winding up proceedings are still “alive” and the “umbrella of proceedings still there”, given that the OR issued the 1^st Summons before the permanent stay took effect.  Further, the 2^nd Summons was issued under inherent jurisdiction, and the OR has the “right” to make the application pursuant to her “statutory role” in supervising liquidation and collecting the AV Fee. 

54.  No matter how Mr Bartlett puts it, the fact remains that by the time the 2^nd Summons was issued, the winding up proceedings had already come to an end, and the Court no longer has jurisdiction to supervise or make any order which concerns the liquidation of the Company. 

55.  For the above reasons, the 1^st and 2^nd Summonses fall to be dismissed. 

Amount of AV Fee

56.  If, contrary to my view, the OR is entitled to pursue the 1^st Summons, it seems to me that subject to the right of the parties to challenge the amount of AV Fee (as described in §40 above), the $2,076,400 claimed is the amount which the ORPL is entitled to receive out of the fund in the Liquidation Account. 

57.  The principles governing the payment of AV Fee have been fully set out in Re MF Global Hong Kong Ltd [2015] 2 HKLRD 325, §§5-9, per Barma JA and Re STX Pan Ocean (Hong Kong)  Co Ltd [2018] 4 HKLRD 826, §§6-11, per Godfrey Lam J.  In short, the AV Fee is chargeable on the “aggregate amounts of assets realized and brought to credit by a liquidator” at the rate prescribed in Item I of Table B of Schedule 3 to the CFPO. Although the ORPL was not and had never been appointed as liquidator, for the purpose of the CFPO, the meaning of “liquidator” includes provisional liquidator (Re MF Global, §11). 

Order

58.  For the above reasons, the 1^st and 2^nd Summonses are dismissed. 

59.  As for costs, I make a costs order nisi that the OR is to pay the costs of and occasioned by the 1^st and 2^nd Summonses to the Applicant[12] and the Petitioner, to be taxed if not agreed on an indemnity basis.  The OR has been warned that irrespective of the outcome of the 1^st and 2^nd Summonses, she should bear the costs occasioned by her applications on an indemnity basis. This reflects the fact that all the time and costs were incurred as a result of her (and her solicitors)  omission.  There is no reason why the other parties would have to bear any shortfall in costs.   

Mr Samul Chan, instructed by Fred Kan & Co, for the petitioner

Mr Jeremy Bartlett SC, instructed by the Official Receiver’s Office, for the Official Receiver

Attendance of the Applicant is excused

HCCW 81/2016

[2020] HKCFI 2936

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 81 OF 2016

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_______________

________________________________

R E A S O N S    F O R    D E C I S I O N

________________________________

1.  There is before the Court a summons dated 17 June 2020 issued by Leader First Limited (“Applicant”), a contributory of GW Electronics Limited (弘威電子有限公司) (“Company”), under section 209 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) for an order to stay all proceedings in the winding up of the Company. At the hearing, I ordered that the winding up proceedings of the Company be stayed permanently, with costs to be paid by the Applicant to the Petitioner. These are the reasons for my Decision.

A. Background

2.  On 15 March 2016, the Petitioner presented a winding up petition[1] against the Company based on a debt arising from the products sold and delivered to the Company in the amount of US$15,263,129.39 (“Debt”).  The Company’s application to strike out the petition was dismissed by Anthony Chan J on 30 December 2016.  On 9 January 2017, Harris J made a winding-up order against the Company. 

3.  On 27 March 2017, Anthony Chan J gave leave to the Company to appeal against the dismissal of the striking out application and ordered an interim stay of the winding-up order until determination of the appeal.  The Petitioner did not oppose the stay as a substantial part of the Debt had been secured by the funds kept by the Official Receiver (“OR”), who became the provisional liquidator of the Company by virtue of section 194(1)(a) of the Ordinance.

4.  The Company’s appeals against the dismissal of the striking out application and the winding-up order were heard by the Court of Appeal on 18-19 January 2018.  For the purpose of the appeals, the OR submitted her 3^rd report dated 29 December 2017, which stated that the Company had recovered cash in the aggregate amount of $124,139,861.55; the amount claimed in the proofs of debts lodged by 6 creditors were $122,652,221.65; and, as such, the Company appears to be solvent.

5.  On 10 October 2018, the Company obtained an order from DHCJ Dawes SC to confirm that for so long as the interim stay remains in operation, control of the Company reverts to the board of directors and the Company may do all things as may be necessary for the specific purpose of dealing with all issues arising from the debts owed by a company in Mainland, 深圳市勁升迪龍科技發展有限公司 (“DTT”).

6.  In its Judgment dated 2 April 2020, the Court of Appeal affirmed the orders below but gave an opportunity to the Company to consider whether an application would be made to discharge the winding-up order on the basis that according to the OR’s report, the Company was solvent and invited submissions as to the form of order that the Court should make.

7.  The following submissions were lodged with the Court of Appeal:

(1) The OR pointed out that the proofs of debts lodged had not been adjudicated and reserved her views as to whether there was any entitlement to statutory interest under section 264A of the Ordinance.

(2) The Petitioner disputed the Company’s solvency on the basis of its outstanding liabilities for the costs incurred by the Petitioner in the winding up proceedings and the appeals therefrom; and interest on taxed costs of the petition and the Debt.

(3) The Company invited the Court of Appeal to grant an interim stay with liberty to the Company to apply for a permanent stay within 28 days, failing which the winding-up order would be restored.

8.  By order dated 20 May 2020, the Court of Appeal acceded to the Company’s submissions and granted an interim stay with liberty to the Company to apply for a permanent stay of the winding-up order within 28 days, failing which the winding-up order would be restored. 

9.  Against the above background, the Summons was issued by the Applicant on 17 June 2020.

B. Applicable principles

10.  Section 209(1) of the Ordinance provides that:

“The court may at any time after an order for winding up, on the application either of the liquidator, or the Official Receiver, or any creditor or contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the court thinks fit.”

11.  The principles governing an application for a stay of winding up proceedings have been stated by Kwan J (as she then was) in Re Outboard Marine Corp Asia Ltd [2003] 1 HKLRD 585 at §§5-6 as follows:

(1) Once a permanent stay of the winding up proceedings is granted, the liquidation is for all practical purposes at an end. The liquidator may be discharged, control of the company reverts to the directors and the company may resume its business (Boyle and Marshall, The Practice and Procedure of the Companies Court, 1997 ed, at §9.175; Palmer’s Company Law, §15.164).  Any winding up order that has been made in relation to the company becomes inoperative without being revoked (Krextile Holdings Pty Ltd v Widdows [1974] VR 689 at 693).

(2) The power to grant a stay of winding up proceedings is discretionary.  The burden is on the applicant to make out a sufficient case for a stay that carries conviction (In re Calgary and Edmonton Land Co Ltd [1975] 1 WLR 355 at 358H to 359A).

(3) Before granting a stay, section 209(1) requires “proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed”.  Hence, it is not merely sufficient for the applicant to establish that a stay is reasonable in the circumstances.  He must satisfy the court that it ought to grant a stay (Krextile Holdings Pty Ltd v Widdows [1974] VR 689 at 694). 

(4) Where there are sufficient assets to pay all the creditors and the expenses of the liquidation, the interests of the members, in addition to those of the creditors and the liquidator, would be considered (In re Calgary and Edmonton Land, supra at 360C to G).   

(5) The Court would also consider whether the stay is “conducive or detrimental to commercial morality and to the interests of the public at large” (Re Telescriptor Syndicate Ltd [1903] 2 Ch 174 at 180; Krextile Holdings, supra at 694 to 695; Re Hua Hin (S) Co Ltd (unrep., HCMP 3965/1999, 6 December 1999, Yuen J).

12.  In considering the question of the solvency of the company, the Court may consider the undertakings given by the applicants are sufficient for the purposes of showing solvency.  The Court would take into account any arrangement which has been made to ensure that all the company’s debts are paid such that the company is for all practical purpose solvent.  A stay may also be deferred until the company’s debts were actually paid off (Re Luen Tat Watch Band Manufacturer Ltd, HCCW 497/2009, 27 November 2017, §2(5), per DHCJ To). 

C. Discussion

13.  The Applicant is one of the 2 contributories of the Company.  The other contributory, Harken Investments Ltd, also supports the application.  The ultimate beneficial owners of the contributories have agreed to pay the costs of the application.

14.  The OR confirms that she is not aware of any misconduct relating to the Company’s affairs or management and is neutral to the application.  There is thus no issue of commercial morality or public interests which militate against the Court granting a permanent stay of the winding up proceedings.   

15.  As regards the financial position of the Company, there is no dispute that the Petitioner is the only creditor remaining, the other creditors having withdrawn their proof of debts lodged with the OR. 

16.  Mr Jonathan Wong (appearing with Mr Bryan Lee) submits that the Company is solvent in that its assets are sufficient to pay the expenses of liquidation and the Debt in full. Any surplus after discharging all liabilities will be paid to the Petitioner by way of statutory interest pursuant to section 264A of the Ordinance.   

17.  Leaving aside the question of statutory interest, there is no dispute that as at the date of the hearing, the Company’s assets exceed its liabilities, leaving a surplus of $2,718,214.07:

	Assets	Liabilities
Cash held by OR	$126,165,373.29
Recovery from DTT, held by Array Electronics (China) Ltd (“ARC”)	$5,510,000.00[2]
Costs on account	$69,500.00
OR’s fees and expenses		$64,443.50
Costs incurred in enforcement action against DTT		$2,628,112.27[3]
Debt		$118,747,146.65
Untaxed costs of winding up proceedings (“Untaxed Costs”)		$7,586,956.80
Total	$131,744,873.29	$129,026,659.22

18.  In the evidence filed in opposition to the application, the Petitioner contends that the Company is insolvent. At the hearing, Mr Samuel Chan, counsel for the Petitioner, accepts (rightly) that the Company’s assets are sufficient to pay the expenses of liquidation and the Debt and in full.  He submits that pursuant to section 264A(2)(a)(ii) and section 264A(4)(b) of the Ordinance, the Petitioner is entitled to be paid the following sums:

(1) $33,164,415.64, being statutory interest on the Debt from the date of winding-up order to 29 June 2020 at judgment rate; and

(2) $2,427,826.18, being statutory interest on the Untaxed Costs from the date of winding-up order to the date of completion of taxation on 9 January 2021.

19.  Mr Chan contends that taking into account the liability to pay the aforesaid statutory interest, the Company’s liability “in the winding-up” is substantially more than its assets and, therefore, the Company is insolvent.  I disagree. 

20.  Where, as here, the assets realised by the Company are more than sufficient to discharge the expenses of liquidation[4] and the debts, the Company is solvent and the balance will become a surplus, which shall be applied to pay statutory interest in accordance with section 264A of the Ordinance.  Putting it in another way, it is only if the company is solvent that the obligation to pay statutory interest arises. 

21.  More importantly, Mr Chan’s contention that the Company is liable to pay the full amount of statutory interest, as opposed to the amount of surplus available to the Company, is erroneous, for the reasons explained below. 

22.  The starting point is section 264A of the Ordinance, which provides:

“(1) In the winding up of a company, not being an insolvent company, interest is payable in accordance with this section on the taxed costs of the petition and any debt proved in the winding up, including so much of any such debt as represents interest on the remainder.

(2) Any surplus remaining after the payment of debts proved in a winding up referred to in subsection (1) shall, before being applied for any other purpose, be applied in paying interest on the taxed costs of the petition and those debts in respect of the period during which the taxed costs of the petition and the debt have been outstanding, in the case of—

(a) a winding up by court—

(i) where the company has by special resolution resolved that the company be wound up, since the date of the resolution; and

(ii) in any other case, since the date of the winding-up order; and

(b) a voluntary winding up, since the commencement of the winding up (which must be construed having regard to section 228A(5)(a) or 230, as may be appropriate).

(3) All interest under this section ranks equally, whether or not the debts on which it is payable rank equally.

(4) The rate of interest payable under this section in respect of any debt is whichever is the greater of the following—

(a) the rate specified under section 49(1)(b) of the High Court Ordinance (Cap. 4); and

(b)  the rate applicable to that debt apart from the winding up.”

23.  In my view, it is clear from the opening words of section 264A(2) that statutory interest is only payable out of “any surplus remaining after the payment of debts proved in a winding up”.  The section creates an obligation, which is contingent upon a company being solvent and with a surplus after payment of proved debts, to apply such surplus to pay statutory interest.  The suggestion that the section can be invoked when the contingency exists (i.e. when a company is solvent with a surplus) but the very same section would remove that contingency (thereby making the section to become inapplicable) involves circuity of reasoning and would make the section to become unworkable. 

24.  Further, the contention that once section 264A is invoked, the creditors will have the right to require the company to pay statutory interest beyond the amount of surplus available does not accord with the statutory scheme of winding up.  This is because in the course of winding up, the liquidators can only apply the assets available to the company to pay the liquidation expenses, proved debts, statutory interest and distribution to the contributories in that order.  If the assets are not sufficient to meet all these payments, the liquidators will only be able to pay in accordance with the priority under the scheme, and if the amount is insufficient to pay all the persons entitled within the same class, then the persons will be paid in proportion to their claims.  There is nothing in the statutory scheme which has the effect of requiring the liquidators to find or apply assets beyond those available to the company so as to discharge the claims of any class of persons or persons within the same class in full. 

25.  Mr Wong relies on the judgment of the English Court of Appeal in In re Lehman Bros International (Europe) (in administration) (No 4) [2016] Ch 50 in support of his submission that statutory interest is payable only out of the surplus.  The case is concerned with a company in administration, where statutory interest is governed by rule 2.88(7) of the Insolvency Rule 1986[5], but the rule is virtually identical to section 189(2) of the Insolvency Act 1986[6] which applies to company in liquidation.  Section 189(2) of the Insolvency Act 1986 in turn is equivalent to our section 264A(2).  At §108 of Lehman Bros (No 4), Lewison LJ said:

“I agree also with the judge that rule 2.88(7) applies only to a surplus which arises, or which can be retrospectively shown to have arisen, in the course of the administration. But the factual premise on which we are working is that all creditors who have proved in the administration have been paid their debts (barring post-administration interest) in full. So I do not see why this is a real objection. I agree also that rule 2.88(7) can only entitle those who have proved in the administration to statutory interest….” (underlined added)

26.  In In re Lehman Bros International (Europe) (in administration) (No 4) [2018] AC 465, a case concerning the extent of members’ liability under section 74(1) of the Insolvency Act 1986[7] to contribute to the assets of a company in liquidation, where the English court had to determine whether  contributions can sought in respect of liability for statutory interest under rule 2.88(7), Lord Neuberger explained (at §139) the nature of statutory interest in this way:

“The position with regard to statutory interest is in my view very different. Statutory interest is due under rule 2.88(7), and that provision states that the liability to pay such interest is only out of any ‘surplus remaining after payment of the debts proved’. The contrary view was taken in the courts below, and I accept that their conclusion is more consonant with what one would expect. None the less, it seems to me that there is no answer to the simple proposition advanced by the LBHI2 administrators that, as section 74 only requires payment from contributories of an ‘amount sufficient for payment of [a company’s]…liabilities’, the section cannot be invoked to create a ‘surplus’ from which statutory interest can then be paid. If there is a deficit, there is no liability for statutory interest, and, if there is a surplus, there is only a liability for statutory interest to the extent of the surplus. Accordingly, in the absence of a sufficient surplus to pay all the statutory interest, there is no obligation to pay all the statutory interest, and therefore there can be no ‘liabilit[y]’ which a contributory could be called on to meet under section 74(1). In effect, the LBIE administrators’ argument to the contrary involves them pulling themselves up by their own bootstraps.” (underlined added)

27.  The above passages in Lehman (No 4) confirm that statutory interest is only payable when there is a surplus after payment of proved debts and up to the extent of the surplus available. It follows that the Petitioner’s entitlement to receive statutory interest is only limited to the amount of surplus available to the Company. 

28.  In considering whether the interests of the creditors will be prejudiced by a permanent stay of the winding up proceedings, the Court will consider whether the creditors will be worse off in financial terms.  This involves a comparison of the return to the creditors if the company remains in liquidation as against a stay of the winding up.  In this regard, this Court asks Mr Wong if the Applicant wants to maintain the argument, made in his skeleton, that the Petitioner’s right to be paid statutory interest does not arise as its proof of debt have not been adjudicated by the OR, which is said to be a pre-requisite for section 264A(1) to apply.  It seems to me that where there is no dispute that the Debt is due to the Petitioner, it is just a matter of formality for the OR to adjudicate and admit the Debt so as to convert it into a proved debt.  If the Applicant insists that there must be a formal adjudication of the Debt before the Petitioner is entitled to be paid the Debt and statutory interest, it would mean that the liquidation will have to continue so that the Petitioner will not be prejudiced by a stay.  Mr Wong confirms that the Applicant accepts that for the purpose of the application, the Debt should be treated as if it is a proved debt, such that the Petitioner is entitled to receive the Debt as well as the surplus available to the Company by way of statutory interest.   

29.  That being the position, the interests of the Petitioner will not be prejudiced if the Court directs, as a condition of a stay, that the entire surplus be paid to the Petitioner. 

30.  As the application has the support of all the contributories and the OR is neutral to the application, I am satisfied that this is a case which warrants the Court exercising its discretion to order a permanent stay of the winding up proceedings.   

31.  As for costs, I order the Applicant to pay the costs of the Petitioner in respect of the application, to be taxed if not agreed.  This accords with the fact that the Applicant bears the burden of satisfying the Court that it is an appropriate case to order a stay, and the Petitioner, being the only creditor of the Company, is entitled to be heard on such application.  Although the Court does not accept some of the contentions advanced by the Petitioner, this in part is the result of the Applicant seeking to argue at previous hearing and in skeleton that (1) the Petitioner is not entitled to receive statutory interest as the Debt has not been adjudicated, and (2) the obligation to pay statutory interest is not a liability of the Company.  Both arguments are abandoned only at the hearing. 

32.  As to the form of order, I order that the winding up proceedings of the Company be stayed permanently, upon the undertaking given by the Applicant to pay $2,628,112.27 (being the net amount stated in ARC’s Letter) to the Petitioner within 5 working days hereof and the following conditions:

(1) the OR is entitled to be paid out of the cash fund in the liquidation account of the Company, her remuneration, expenses, fees and costs of and arising out of the winding up of the Company (collectively “Liquidation Expenses”);

(2) the OR shall as soon as reasonably practicable apply the balance of the cash fund, after payment of the Liquidation Expenses, to discharge the Untaxed Costs and the Debt owed by the Company to the Petitioner; and

(3) the OR shall as soon as reasonably practicable pay the entire surplus (i.e. the cash fund after payment of the Liquidation Expenses, Untaxed Costs and the Debt) in the liquidation account of the Company to the Petitioner.

33.  I also order that the OR be released as liquidator of the Company upon the compliance with all the conditions and the stay taking effect, and the usual order requiring the Applicant to deliver a sealed copy of the order to the Registrar of Companies for registration.   

Mr Jonathan Wong and Mr Bryan Lee, instructed by ONC Lawyers, for the applicant

Mr Samul Chan, instructed by Fred Kan & Co, for the petitioner

Official Receiver was not represented and absent

HCCW 81/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 81 OF 2016

___________________

__________________

________________

D E C I S I O N

________________

Leave to appeal

1.  This leave application concerns the dismissal of the Company’s application to strike out the Petition on the ground that there was a bona fide dispute on substantial grounds over the debt (Debt) on which the Petition was based: see Decision dated 30 December 2016 (Decision).  With respect, I am unable to find any merit in the grounds contained in the draft revised notice of appeal.  Apart from taking a fresh point (ground 1(3)) which was not ventilated at the hearing on 9 December 2016, the vast majority of the arguments advanced by the Company in support of the grounds are repetitions of those made at the said hearing. 

2.  However, there is force in the Company’s submission that there is “some other reason” in the interest of justice why the appeal in question should be heard: see s.14AA(4)(b) of the High Court Ordinance, Cap 4.

3.  To briefly explain, an order to wind up the Company was made on 9 January 2017 (Order).  It can be seen from the decision of Mr Justice Harris that the Order was premised upon the Decision because once the strike out was declined, a winding up order normally follows.  On 2 February 2017, the Company filed an appeal against the Order. 

4.  An appeal against the Order is one as of right. I agree with the Company that an appeal against the Order will necessarily consider the merits of the underlying Decision, although it should be said that the existing Notice of Appeal has not properly set out the challenge to the merits of the Decision.  I am told that an amendment will be made in that regard.

5.  On behalf of the Petitioner, Mr Bleach SC (appearing with Mr Chan) submitted that this “some other reason” argument is one for the Court of Appeal, and it is ultimately an issue of case management over the 2 appeals in question.

6.  Whilst I can see some merits in Mr Bleach’s submission, it appears inevitable that the Court of Appeal will have to examination the merits of the challenge to the Decision.  Further, this court is seized of the argument and it cannot simply defer the matter to the Court of Appeal.

7.  I am satisfied that leave to appeal against the Decision should be granted pursuant to s14AA (4)(b), and I do so. 

Stay of execution

8.  One of the Company’s creditors has taken out an application to stay the winding up of the Company until the determination of the Company’s appeal against the Order. 

9.  Given the decision of this court to accede to the leave application, the Petitioner is not opposing the stay because a substantial part of its debt has been secured in the custody of the Official Receiver acting as the Provisional Liquidator (PL) of the Company.  

10.  There is before the court a draft rider (Rider) to be added to any stay order to provide for the receipt of further sums of money, which are anticipated, by the PL.  Given the Rider, the PL no longer maintains any opposition to the stay application.

11.  In the premises, I grant the application subject to the Rider and upon the undertaking by Company to prosecute both its appeals with due diligence.

12.  I shall hear the parties on costs.

HCCW 81/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 81 OF 2016

__________________

__________________

__________________

D E C I S I O N

__________________

1.  On 9 December 2016 Anthony Chan J heard the Company’s application to strike-out the Re-amended Petition presented by Toshiba Electronics Asia Limited, the Judge handed down his decision dismissing the application on 30 December 2016. Today I heard the Petition.

2.  The strike-out application required consideration of the issue which determines the success or failure of petitions of this sort presented to the court, namely, a petition for a winding-up order on the grounds of insolvency.  That test which is well established and explained more fully in Anthony Chan J’s judgment is whether or not the Company has demonstrated a bona fide defence on substantial grounds.

3.  Before me today Mr Yip on behalf of the Company sought two things: (1) that the petition should be adjourned in order for the Company to have adequate time to consider whether or not to appeal Anthony Chan J’s decision; alternatively (2) adjournment of the petition and leave to file further evidence in order to contest it.

4.  The practice of the Companies Court in circumstances of this sort is quite clear.  A strike-out application effectively determines the substantive issue in the petition.  If the strike-out issue is unsuccessful, a company will normally automatically be wound up, unless the parties agree or the Court is persuaded that the petition should be adjourned in order to allow the company the opportunity to settle the petitioner’s, and possibly other creditors’, claim.  If the petition is not going to be adjourned for reasons of this sort, the company is wound up, and it is not the practice of the Companies Court to grant a stay pending an appeal of either a decision to dismiss a strike-out application, or if the matter is determined at the trial of the petition, to challenge the Companies Court’s judgment.

5.  What, in effect, the Company is seeking is the opportunity to file further evidence which would demonstrate that Anthony Chan J’s decision was wrong.  This I am not prepared to do and would clearly be wrong in principle. 

6.  As a final fall-back position, Mr Yip sought an adjournment of one week in order to give his clients the opportunity to consider whether they should pay so much of the debt as is possible.  The Petitioner is not prepared to agree to an adjournment in order to allow the Company the opportunity to try and settle a claim which has been outstanding for some considerable period of time, I will therefore make the normal winding-up order.

HCCW 81/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 81 OF 2016

___________________

__________________

________________

D E C I S I O N

________________

1.  By a Re-Amended Petition dated 15 March 2016, Toshiba Electronics Asia, Ltd (Petitioner) applies to wind-up GW Electronics Co Ltd (Company) on the ground that it is insolvent and unable to pay its debt in the sum of US$15,263,129.39 (Debt). The Debt represents the outstanding payment for goods sold and delivered by the Petitioner to the Company under a Distributorship Agreement in respect of electronic memory products dated 1 January 2013 (Agreement).

2.  This is the hearing of the Company’s Summons dated 12 May 2016 to strike out the Petition on the grounds that: (a) it is an abuse of process because there is a bona fide dispute on substantial grounds over the Debt; and (b) in the alternative, the proceedings should be stayed in favour of arbitration pursuant to an arbitration clause in the Agreement.  The alternative ground is not pursued[1].  

Issue

3.  There is essentially 1 issue in this application, namely, whether the asserted defence of the Company is believable.  It is a factual issue which has to be evaluated bearing in mind the applicable legal principles.

Law

4.  The following legal principles are applicable to this application and not in dispute :

(1) Winding-up petitions should not be used as a means of debt collection: Asahi Iwasawa & Associates Management Consultants Ltd v SEC(Hong Kong) Co Ltd, HCCW 215/2013, unrep, 21 March 2014, §24;

(2) Where a creditor issues a winding-up petition in respect of a debt which is the subject of a genuine dispute aimed to pressure a company into paying, it would constitute an abuse of process: Re Yueshou Environmental Holdings Ltd, HCCW 142/2013, unrep, 16 July 2014, §12;

(3) The main reason for dismissing a petition where there is a bona fide dispute on substantial grounds is the danger of abuse of the winding-up procedure. A party to a dispute should not be allowed to use the threat of a winding-up petition as a means of forcing the company to pay a bona fide disputed debt: Parmalat Capital Finance Ltd v Food Holdings Ltd [2009] 1 BCLC 274, [9];

(4) The onus is on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds: Re ICS Computer Distribution Ltd [1996] 3 HKC 440, 444C;

(5) In discharging the onus, the court must be satisfied that the company’s assertions, considered in the context of the background which is undisputed or indisputable, are believable: Re Safe Rich Industries Ltd, CA 81/1994, unrep, 3 November 1994, pp 4-5;

(6) The court does not try the dispute on affidavit but is to determine whether a substantive dispute exists.  In so doing, the court has to take a view on the evidence to see if the company is merely raising a cloud of objections on affidavits or whether there really is substance in the dispute: Re Hong Kong Construction (Works) Ltd, HCCW 670/2002, unrep, 7 January 2003, §6(4);

(7) Where the defence rests on a collateral oral agreement, the effect of which is to vary the terms of the principal contract, it must be proved strictly, including the existence of an animus contrahendi on the part of all the parties to it: Bank of India v Surtani Murlidhar Parmanand [1994] 1 HKC 7, 11I-12C.

Background

5.  The Agreement contained the following termination clause :

(1) The Petitioner was entitled to terminate the Agreement in the event, inter alia, of the Company’s insolvency, bankruptcy, liquidation or dissolution (Article 17.1(ii));

(2) If the Agreement was terminated, at the Petitioner’s option, the Company should resell to the Petitioner its inventory of products, at the lower of either the actual price paid or the then prevailing prices of the Petitioner (Article 17.2).

6.  The Petitioner and the Company had a very good relationship and, save for an unfortunate error on the part of its bank, the latter had never failed to meet its payment obligation under the Agreement.

7.  However, since about the end of 2014, one of the Company’s major customers, DTT, which was a strategic promotion customer of Toshiba for its “SLC wafers”, was in difficulty in paying the Company.  As a result of DTT’s non-payment, a substantial inventory was accumulated in the Company’s warehouse, and provisions would have to be made in the Company’s accounts in respect of the same.  Such provisions would adversely impact upon the credit facilities from its banks.  According to the Company, although it was not in financial trouble, it took steps to negotiate with the Petitioner to resolve the problem.

8.  It is common ground that there was a series of meetings between the management of the Company and the Petitioner during the end of August and September 2015.  It is the Company’s case that on 11 September 2015, Mr Mizuma, the Managing Director of the Petitioner, proposed the following terms to the Company :

(1) The Agreement be terminated by mutual consent (1^st Condition);

(2) All sums payable to the Petitioner by the Company under the Agreement, which were due by the end of September and October (Account Payable), were to be settled by delivery of all stored products purchased from the Petitioner (some of which had been fully paid) at prices to be determined by the parties (2^nd Condition); and

(3) The Company would provide its customer lists and other information, which were trade secrets and confidential information, to the Petitioner (3^rd Condition).

9.  The Petitioner’s proposal was, according to the Company, orally accepted by it via 2 of its Directors, Mr Lo and Mr Kwok.  The Company contends that the parties had thus reached a new agreement on the Account Payable (Oral Agreement).

10.  In respect of the Account Payable, it is uncontroversial that a payment in the sum of US$14,781,085.18 was due on 25 September 2015, and another sum of US$16,590,174.95 was due on 25 October 2015 (around HK$244M (million) in total). 

11.  The Company says that the Oral Agreement was performed as follows :

(1) Pursuant to the 1^st Condition, the parties agreed to terminate the Agreement.  A termination letter dated 14 September 2015 was sent by the Petitioner to the Company.  According to that letter, the Agreement was terminated “in accordance with Article 17.1”.  The Company’s evidence is that Mr Kwok and Mr Lo were uncomfortable with the wording of the letter, but they accepted it because of Mr Mizuma’s insistence and to maintain harmony in the relationship;

(2) Pursuant to the 2^nd Condition, the Company sent to the Petitioner on 15 September 2015 its inventories of all products kept at its warehouses and their purchase prices.  Later that day, in the course of discussing the prices, Mr Mizuma proposed that the return of products, subject to agreed variations of types and quantities, would fully and finally settle the Account Payable at HK$244M.  It is important to note that the prices of the repurchase were based on the prices at which the products were acquired from the Petitioner.  The proposal was accepted by the Company. Mr Mizuma also requested the Company to deliver additionally 2 million pieces of “SLC 4G” to the Petitioner at no cost.  It was said that the discussions were evidenced by a printout of what was written on a whiteboard;

(3) By an email dated 16 September 2015, Mr Lo confirmed to Mr Mizuma that the Company would return 1 million pieces of “SLC 4G” to the Petitioner at no cost;

(4) On 17 and 18 September 2015, the Company delivered to the Petitioner products worth at least HK$244M to settle the Account Payable;

(5) Pursuant to the 3^rd Condition, the Company had provided its customer lists and confidential information to the Petitioner.  Such information included resale price, payment terms, key contact person and contact method.

12.  The Petitioner vigorously denies the Company’s case.  The Petitioner’s case is that it terminated the Agreement upon realising that the Company was insolvent, and it had exercised the option under Article 17.2 to repurchase the majority of the Company’s inventory.

13.  In respect of the repurchase of finished products, the original sale price to the Company was adopted.  For the DTT related wafers, they were repurchased at prevailing price.  There were also some rejected items.  Consequently, the amount owed to the Petitioner was reduced to US$15,263,129.39.

Analysis

14.  To resolve the factual issue in question, I shall consider (a) whether the Oral Agreement is consistent with any business sense; (b) whether the Company’s case stands up to scrutiny; and (c) whether it is supported by any contemporaneous documents.

15.  The first point I should consider is whether the Company was insolvent at the material times.  It is an important backdrop against which the Company’s case should be evaluated.  In this regard, there is incontrovertible evidence in the form of written presentation made by the Company to the Petitioner on 27 August 2015.  According to such material, the Company was in a very difficult financial situation :

(1) There were doubtful debts or estimated provision of more than HK$145M and slowing-moving stock of about HK$55M.  Together, they tied up entirely the HK$200M capital contribution from the 2 shareholders of the Company;

(2) The provision of HK$145M would turn a profit for the financial year 2015 into a loss;

(3) The Company would require banking finance for at least 2 months for its normal business operations from August to December 2015.

16.  In 2 emails from respectively Mr Kwok and Mr Lo to Mr Mizuma dated 4and 5 September 2015, it was stated as follows :

(1) The Company had suffered a loss of HK$58.8M during the 1^st half of 2015 and was projecting another big loss of HK$141.7M for the 2^nd half.  Such loss did not include the DTT inventory of US$18.65M kept by the Company.  The loss was mainly on the account receivables from DTT in the sum of HK$140M;

(2) The Company’s shareholders could not provide further help;

(3) The Company was “definitely in very desperate situation” and “all the supporting banks will shut down [the Company]” if it could not solve the inventory and account receivables problems immediately.

17.  According to Mr Mizuma, whose evidence is supported by an exhibit, the Company had outstanding loans owed to the banks in the total sum of US$24.2M (or HK$189M) which would fall due between 11 September 2015 and 25 November 2015.  This evidence will have to be considered in light of the Account Payable.

18.  Mr Bleach SC, appearing with Mr Chan for the Petitioner, submitted that the evidence clearly shows that since late August or early September 2015, the Company was unable to continue its business and still pay its way, and was thus “unable to pay its debts” within the meaning of s.177(1)(d) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  I was referred to Re Aloha Coffee Co Ltd (in liq) [2013] 1 HKLRD 356, §§22-23, where the court considered a similar statutory provision under s.51(3) of the Bankruptcy Ordinance, Cap 6.

19.  I agree that the Company was quite clearly insolvent at the material times.  I also agree with Mr Bleach that the denial by Company that it was so reflects poorly on the quality of its evidence, and is a matter to be considered by the court for the present purposes.

20.  The insolvency of the Company would entitle the Petitioner to invoke Article 17 to terminate the Agreement, as well as to repurchase the Company’s inventory at prices acceptable to it.  Why would the Petitioner agree to the terms of the Oral Agreement when the situation would be governed by Article 17?

21.  Mr Coleman SC, appearing for the Company with Mr Yip, accepted that the only advantage to the Petitioner under the Oral Agreement was the alleged confidential information of the Company. 

22.  It should firstly be pointed out that, according to Mr Mizuma’s evidence, the Company was required to provide a list of the end-customers including information on all backlog orders to the Petitioner. The information was required for end-customer management, and to protect Toshiba’s brand name in light of the imminent termination of the Agreement.  Mr Mizuma also said that the Petitioner might be able to assist the Company to press for payments from the end-customers so that it would in turn get paid. 

23.  Mr Mizuma’s evidence accords with common sense. The need for end-customer management was implicitly accepted in Mr Lo’s 3^rd affirmation, para 17(c).  Further, if the distributorship was coming to an end, the value of the list of Toshiba product customers is questionable insofar as the Company was concerned. 

24.  Furthermore, I am unable to find in the contemporaneous documents any suggestion that the Company was parting with its confidential information upon the termination of the Agreement.  This was an important issue because it was the only chip with which to bargain with the Petitioner.  Not only would one expect some record of the bargain, there ought to be some record of discussion of the kind of confidential information to be provided.  There is none.

25.  In the premises, the Company’s case that the Petitioner entered into the Oral Agreement by reason of the alleged confidential information is flimsy. 

26.  In respect of the allegation that the Company had reached an agreement with the Petitioner on the prices of the repurchase on 15 September 2015, the unchallenged evidence is that the repurchase exercise involved a very substantial quantity of products.  A substantial part of those products (“X6” components) were sold by the Petitioner more than 12 months ago and not covered by any product warranty.  An inspection of the products had to be carried out.  They were only delivered to the Petitioner on 17 and 18 September 2015, and the inspection was only completed on 29 September 2015. 

27.  In addition, there was the question of price fluctuation of the products, which is again uncontroversial.  It is therefore difficult to believe that Petitioner had agreed to repurchase the Company’s inventory at acquisition prices on 15 September 2015.  

28.  As regards the question whether the Oral Agreement was evidenced by any contemporaneous document, I do not find the printout of the whiteboard (see para 11(2) above) helpful in this regard. There was certainly no mention of the 3 Conditions.  A fair reading of the printout suggests that the parties were negotiating on the exit from the Agreement.  Indeed, the Company’s evidence that Mr Mizuma asked for the return of some “SLC 4G” products at no cost and its subsequent response confirm that state of affairs.  Moreover, one has to bear in mind that the warehoused products had yet to be counted and inspected.  I therefore do not see the printout as evidence of the Oral Agreement. 

29.  It is convenient to note here that, ultimately, there was no return of products to the Petitioner without cost.  The repurchase has been summarised in para 13 above. 

30.  I have not been able to find any contemporaneous document which may be in support of the Oral Agreement.  It must be remembered that the alleged Oral Agreement involved a very substantial sum of money.  It would be surprisingly not to have a paper trail for such a transaction. 

31.  On the other hand, even if the Petitioner’s internal records in the form of reports to Tokyo head office and meeting notes are to be ignored, there are documents which contradict the Company’s case :

(1) By an email dated 17 September 2015 (10:08 hrs) from Mr Mizuma to Mr Lo and Mr Kwok, the Company was informed about Tokyo head office’s request for payment of HK$20-30M in cash “until the end of this month”, and that some of the inventory would be returned later;

(2) By another email of the same day (15:31 hrs) from Mr Ishibashi to Mr Lo and Mr Kwok, it was stated that the counting of the goods would require a few days, and the result and value of those goods would be discussed after completion of the exercise.

32.  In his submission, Mr Coleman relied upon certain parts of the transcripts of recorded meetings between the parties which took place on 14, 15, 21 and 23 September 2015. Those transcripts were introduced at the hearing with the leave of the court notwithstanding the opposition of the Company.  However, I do not agree that those parts of the transcripts identified by Mr Coleman add much to the Company’s case.

33.  To begin with, as submitted by Mr Coleman, the proper understanding of what was said in the meetings cannot depend merely on textual analysis and/or inference.  Cross-examination of the attendees will be required.  However, it would not be right to determine this application on the hope that something may be uncovered in cross-examination.  To discharge its burden, the Company must adduce “credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at trial”: Re Yueshou Environment Holdings Ltd, supra, §9.  I am unable to see such evidence in the transcripts. 

34.  Finally, I should mention that it is common ground that the negotiations over the termination of the Agreement also covered a sister company of the Company which was the Shanghai distributor of Toshiba products.  However, I do not see anything of significance arising from the negotiations over the Shanghai distributorship because the termination of the Agreement was not linked to the termination of that distributorship. 

35.  For these reasons, I am not satisfied that the Company has a bona fide dispute of the Debt on substantial grounds.  This application is accordingly dismissed with a costs order nisi in favour of the Petitioner with a certificate for 2 counsel, to be taxed if not agreed.

36.  Last but not least, I am grateful to counsel for their assistance.