RE TITANIUM TECHNOLOGY LTD

HCCW 292/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 292 OF 2010

____________

____________

_________________________________

REASONS FOR DECISION

_________________________________

1.  I have before me an application by ELM Computer Technologies Limited for substitution as the Petitioner in the present proceedings to wind up the Company on the grounds of insolvency. The Petitioner indicated at the first hearing of the Petition before Master Lai on 8 December 2010 that it no longer intended to pursue the Petition. The Applicant told the Master that it wished to apply to be substituted. Master Lai made directions for the filing of evidence and for the matter to come back before a master on 23 February 2011. The application came back before Master Hui on 23 February 2011. He ordered that it be heard before the Companies Judge. I heard the application on 8 April 2011.

2.  The Applicant relies on a statutory demand dated 12 January 2011 for a total of $2,592,666, although Ms. Rachel Lam, who appeared for the Applicant, told me at the outset of the hearing that for the purposes of this application she needed only to rely on that part of the total sum claimed in the statutory demand in respect of which there was least room for argument.  The Company contests the application on the grounds that it has a bona fide defence on substantial grounds (which for the sake of brevity I shall refer to simply as a “defence”) to the Applicant’s claims.  Mr. Eugene Yim, who appeared for the Company, drew my attention to 2 authorities, which he submitted demonstrate that if a company had filed evidence, which it contends proves that it has a defence the court should proceed to determine whether or not this is the case rather than allow substitution first and consider whether or not a defence has been established at the hearing of a petition.  Those authorities are the judgment of Yuen J in Re Hon Seng Engineering Ltd [2001] 2 HKLRD 295 and Kwan J in Fitzroya Finance Company Limited (unreported) HCCW 253 of 2003 judgment 3 March 2004. Rather than paraphrase the relevant parts of the judgments it is easier to quote them.  I start with Re Hon Seng Engineering Ltd, in which Yuen J said this at page 296J to 298C:

“Approach on application for substitution

The first issue that has arisen for consideration is whether the court should consider the evidence on the issue of indebtedness at this stage at all.  Counsel for Wenden has submitted that a creditor who presents a petition initially (such as Jason) is taken to have established a prima facie case just by making the usual short verifying affirmation.  A creditor who seeks to be a substituted petitioner should not have to shoulder a higher burden of proof.

Counsel for Wenden referred me to Boyle and Marshall’s Practice and Procedure of the Companies Court p.293 para.9.68:

“… in the vast majority of cases, a supporting creditor … will make his application for an order for substitution orally in open court on the hearing or adjourned hearing of the petition when it becomes clear that the present petitioner … is not pursuing his petition … No formal application need be issued … Where there is only one supporting creditor and the petitioner does not pursue the petition, the court will not refuse substitution merely because the company contends that the alleged debt of the applicant for substitution is disputed: in such cases, the court will usually order substitution and give directions for the filing of evidence.” (Emphasis added.)

The approach to be adopted does not appear to have been decided in any case in England or in Hong Kong.  I have been referred by those appearing for the Company to the decision of the Court of Appeal in Re S Zhong Shan International [1990] 1 HKC 90.  However the Court of Appeal was not laying down any general principles but was dealing with a procedural position particular to that case.  The Judge at first instance had ordered the company to be wound-up on the original petitioner’s case, but the Court of Appeal held that the company’s appeal against that order should be allowed.  The application for substitution had not been adjudicated upon by the Judge at first instance, but since the winding-up order had already been made, the Court of Appeal entertained the renewed application in the respondent’s notice and determined the issues raised pursuant to s.13(4) of the High Court Ordinance (Cap. 4) and O.59 r.10(3) of the Rules of the High Court (Cap.4, Sub.Leg.).

In my view the approach that should be taken in an application for substitution is as follows.  If all that the company does at the application for substitution is to contend, but without having adduced evidence, that it disputes the debt of the applicant for substitution, then the court may order substitution and give directions for the filing of evidence, so that the company may subsequently, if it wishes to, apply to strike out the petition on the ground that there was a bona fide disputed debt on substantive grounds.

However, if at the hearing of the application for substitution, the company has already adduced evidence seeking to show that it bona fide disputes the applicant’s debt on substantial grounds, then that issue should be determined by the court before making an order for substitution, because material has been placed before the court for it to arrive at an “opinion” whether the applicant “would have a right to present a petition” under r.33.

Procedurally, it would only be telescoping the steps that would be taken at subsequent stages if at the hearing of the application, the company had not yet adduced evidence disputing the debt.  A saving in time and costs would also be effected.

There may be a concern that where a previous petitioner had withdrawn and an application for substitution was still pending, the company would be left in an uncertain position.  I think however that that concern can be met by the court ordering that the order for substitution, if it is made, should take effect from the date of the application.”

3.  Kwan J summarised the correct approach as follows in paragraph 4 of her judgement in Fitzroya Finance Company Limited:

“As the liquidators of ZWF had written to BLG on 21 October 2003 giving notice of inter alia their intention to apply for substitution as the petitioner, on the same day that the summons for substitution was issued, Fitzroya filed a substantial affirmation by one of its directors Kelly Cheng Kit Yin (“Kelly Cheng”) disputing the debt of ZWF, even before Fitzroya had received that summons and the supporting evidence.  At the adjourned hearing of the petition on 3 November 2003, Wai Shun applied for dismissal of the petition and ZWF applied to be substituted as the petitioner. I gave directions for the filing of evidence in ZWF’s application for substitution and adjourned the application for argument.  The petition was likewise adjourned, until after the determination of ZWF’s application.  This is the procedure endorsed by Yuen J (as she then was) in Re Hon Seng Engineering Limited [2001] 2 HKLRD 295 and Re Precast Piling and Engineering Co. Ltd. [2002] 327 HKCU 1, where the company has adduced evidence disputing the debt of the applicant for substitution when the application is made.  As there is already evidence placed before the court whether the company has a bona dispute of the applicant’s debt, that issue should be resolved first before a decision is made on the application for substitution, instead of allowing the applicant to be substituted and deferring the dispute of his debt to be resolved at a later stage.”

4.  In Re Hon Seng Engineering Ltd Yuen J rejected the respondent’s argument that it had a defence and ordered substitution.  In Fitzroya Finance Company Limited Kwan J found that a defence had been demonstrated and substitution was refused.  Neither case appears to have involved a statutory demand.  Neither case makes it entirely clear what is the consequence of the further conduct of the proceedings if a company fails to demonstrate a defence.

5.  In my view the relevance of the applicant relying on a statutory demand is this.  If there is no defence insolvency to be presumed.  If there is no statutory demand insolvency had to be proved. Consequently, if a statutory demand is not relied on it may be procedurally economical to consider the question of a defence at a substitution application and leave the question of insolvency, if it is to be the subject of any dispute, to be considered at the hearing of the petition if substitution is granted.  If a statutory demand is relied on in practice, at least from the perspective of the applicant, there is unlikely to be any advantage at all in delaying consideration of the company’s actual solvency.

6.  Although it is not clear from Yuen J’s judgment how her Ladyship anticipated that the proceedings would develop it seems likely from her observations about the procedure adopted telescoping the steps to be taken with attendant saving in time and costs, that her Ladyship envisaged the hearing being determinative of the substantive issues in the proceedings.

7.  It seems to me that if the court is to hear argument on an application for substitution, which goes to a company’s substantive opposition to a petition the outcome of the application must generally be determinative of all the substantive issues to which the proceedings give rise.  In other words if a company fails to establish a defence it follows that it will be wound up.  Consistent with this, in my view, it will normally be desirable that any issue of solvency is addressed at the same time. A company cannot expect, if substitution is granted, to have another opportunity to persuade the court that a winding-up order should not be made and in future respondent companies should proceed on this basis if they wish to contest a substitution application.

8.  In this case when I asked Mr. Yim whether or not he was able to proceed on the basis that if he failed to persuade me that the Company had a defence it followed that, when the Petition was restored, the Company would be wound up, he said not as he took the view that his client might need to serve additional evidence dealing primarily with solvency.  He agreed that in these circumstances substitution should be allowed.  In these circumstances I order substitution and make directions for the filing of evidence for the further conduct of the proceedings.