RE F.O.B. INSTRUMENTS LTD

HCCW157/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 157 OF 2009

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DECISION ON COSTS

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1.  At the hearing on 29 June 2009, the petitioner was given leave to withdraw the petition as the debt in question had been fully paid.  The only outstanding matter relates to the costs of these proceedings.  The petitioner and the company seek costs against each other. In addition, the company asks for its costs to be paid on indemnity basis.  The core issues are whether the plaintiff should have brought the petition and whether the petition amounts to an abuse of process.

The relevant facts

2.  The facts that are relevant to the determination of the costs issue can be briefly stated as below.

3.  In District Court Civil Action No. 5974 of 2008, the petitioner is the plaintiff and the company is the defendant.  On 18 February 2009, the petitioner entered judgment in default of defence against the company for the sum of HK$260,951.15 together with interest and costs (“the Judgment”).

4.  On the same day, the petitioner served a statutory demand on the defendant for the payment of the Judgment.

5.  On 24 February 2009, the petitioner obtained a garnishee order nisi to enforce the Judgment against the company’s account (“BEA account”) with the Bank of East Asia (“BEA”).  By letter dated 2 March 2009, BEA informed the petitioner’s solicitors that the credit balance in the BEA account stood at medium seven figure.  BEA further indicated that it did not intend to attend the hearing for making the garnishee order absolute.

6.  The 21-day period under the statutory demand expired in 11 March 2009.  The company did not comply with it.

7.  On 18 March 2009, the company issued a summons to set aside the Judgment. The summons was made returnable on 3 April 2009.

8.  On 20 March 2009, the petitioner issued the petition herein. The petition had not been advertised.

9.  At the hearing on 3 April 2009, the company who was then acting in person was absent and the summons to set aside the Judgment was dismissed.   On the same day, the garnishee order was made absolute.  In the same afternoon, the company issued a second summons to set aside the Judgment and also sought to challenge the garnishee order absolute.  At the hearing of the summons on 4 June 2009, the company withdrew the application with costs to the petitioner.

10.  The Judgment was eventually fully satisfied by the garnishee order absolute.

11.  The petition came before the Master on 24 June 2009 when the petitioner indicated that it would seek leave to withdraw the petition.  The Master adjourned the petition to 29 June 2009 for disposal and argument on costs.

The company’s arguments

12.  The essence of the company’s argument is that with the garnishee order nisi, the petitioner became a secured creditor. In light of the indication in the BEA’s letter, it was clear that there was more than sufficient fund in the BEA account to meet the Judgment. The petition was therefore unnecessary.  Further, the petitioner should have known that the company was not insolvent as a matter of fact. The commencement of the winding-up proceedings is therefore an abuse of process, such that an indemnity costs order should be made against the petitioner.

The petitioner’s arguments

13.  The petitioner, on the other hand, argues that the company, having failed to comply with the statutory demand, was deemed to be unable to pay its debt under section 178(1)(a) of the Companies Ordinance.  Further, the company never has any genuine bona fide dispute to the judgment debt. Despite the garnishee order nisi and the BEA’s letter, the petitioner could not have been sure that the company was in a position to meet the Judgment because it was possible that the fund in the BEA account was not beneficially held by the company or that there was a claim to it by third party(ies).  The petitioner says that it is entitled to take whatever measure it was entitled to take to enforce its rights under the Judgment.

The petitioner’s entitlement to costs

14.   There can be no doubt that as the petitioner has the necessary legal and factual basis for bringing the petition herein. There was a valid and binding judgment debt and the company had failed to comply with the statutory demand, with which it was validly served.  The company was deemed to be unable to pay its debt. The fact that the company may be factually solvent does not necessarily invalidate a winding-up petition.

15.  When the petition was issued, the petitioner had obtained a garnishee order nisi.  As such, the petitioner had acquired an equitable charge over the funds in the BEA account: Galbraith v. Grimshaw [1910] 1 KB 339, 343 (affirmed [1910] AC 508), applied in Karaha Bodas Co LLC v. Perusuhaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) & Ors (No. 4) [2005] 1 HKC 182. 

16.  Mr Chain is correct to say that the garnishee order nisi did not preclude the petitioner from pursuing winding-up proceedings: see Hong Kong Civil Procedure 2009 vol.1 para.49/1/7 and the cases referred there.  However, in determining whether the petitioner should be awarded the costs of these proceedings upon the withdrawal of the petition, the core question is whether the petitioner acted reasonably in commencing these proceedings and in incurring the costs for the petition.  

17.  It cannot be seriously disputed that BEA’s letter was a clear indication that the BEA account had more than sufficient fund to meet the Judgment. Given the legal effect of the garnishee order nisi, the petitioner’s position was secured. It would not have been necessary to issue winding-up proceedings against the company.  To say the least, the petitioner should have waited until after the hearing to make the garnishee order absolute before contemplating other mode of enforcement.

18.  The petitioner’s stated fear that there was a possibility of the money in the BEA account not belonging beneficially to the company or subject to claims by third party(ies) must be assessed against the garnishee’s legal duty to inform the court of any claim or charge to or lien upon the debt sought to be attached, which is within its knowledge: The Leader (1868) L.R. 2 A. & E. 314; see also Hong Kong Civil Procedure 2009, vol. 1 paras.49/3/11 & 49/6/1.  There was no indication in BEA’s letter of any claim, charge or lien known to it.  In fact, BEA did not oppose making the garnishee order absolute.  The petitioner has given no basis for believing there was a possible risk that the garnishee order nisi would not be made absolute and/or the Judgment could not be satisfied by the fund in the BEA account.

19.  It is true that the company had taken out a summons to set aside the Judgment and if it was successful, the garnishee order nisi would fall away. However, if the company could meet the threshold for setting aside the Judgment, viz. the defence has a real prospect of success, the company would also succeed in contesting the petition.  Thus viewed, the setting aside application would not have justified or necessitated the issue of the petition.

20.  In short, the petition was not necessary and the petitioner’s costs in relation to these proceedings were not reasonably incurred.  It should not be entitled to costs against the company.

The company’s entitlement to costs

21.  The fact that the petitioner is not entitled to the costs does not lead to the conclusion that the company is entitled to costs of these proceedings.  The company has given no reason for not satisfying the Judgment and for not complying with the statutory demand.  It would appear from the chronology of events that the application to set aside the Judgment was to prevent the execution of the Judgment.  The subsequent withdrawal of the application justifies the inference that there was in fact no bona fide dispute of the liability to pay.  In my view, while it was not necessary for the petitioner to have incurred costs for the petition, the company also had not acted reasonably and that its conduct is such that it should not be allowed the costs of these proceedings.

Indemnity costs

22.  Given my conclusion in the preceding paragraph, the question of whether an indemnity costs order should be made against the petitioner does not arise.  I need only say that in any event I do not consider this is a case for making an indemnity costs order.  As discussed above, the petitioner could, as a matter of law, bring the petition concurrently with the garnishee order nisi.   Unless there are other circumstances demonstrating an abuse of process, the mere fact of bringing the petition after obtaining the garnishee order nisi does not amount to an abuse of process and/or warrant an indemnity costs order. 

Conclusion

23.  For the above reasons, I make no order as to costs as between the petitioner and the company.  The costs of the Official Receiver in the amount of $5,300 shall be deducted from the deposit held by him.