KOLOT PROPERTY SERVICES LTD. v. RIGHTOP INVESTMENT LTD.

HCCW 146/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 146 OF 2002

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REASONS FOR JUDGMENT

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1. On 3 July 2001, the petitioner served a statutory demand on the respondent. On 4 February 2002, the petitioner presented a petition to wind-up the respondent on the ground of inability to pay its debts, relying on section 178(1)(a) of the Companies Ordinance, Cap. 32. The petition was amended on 10 October 2002. I heard the petition on 29 October 2002 and dismissed it without calling on the respondent. Having heard the parties on costs, I ordered the petitioner to pay the respondent costs on an indemnity basis. I told the parties that reasons for my judgment would be handed down on 12 November 2002. My reasons are as follows.

2. The law is clear and I quote from Palmer's Company Law:

"As to inability to pay debts, proof by a creditor that his particular debt has not been paid within a reasonable time is prima facie evidence that the company is insolvent, provided that the company has no bona fide basis on which to dispute the debt in question ... It is an abuse of process to present a winding up petition against a solvent company as a means of putting pressure on it to pay money which is bona fide disputed, instead of applying for summary judgment under RSC Order 14. In those circumstances the court will issue an injunction restraining presentation of the petition, and may penalise the petitioner in costs." (paragraph 15.211)

"... where there is a bona fide dispute as to the debt, the company cannot be said to have neglected to pay on a statutory demand. Coupled with this is a related general principle that a petition for winding up with a view to enforcing payment of a disputed debt is an abuse of the process of the court and should be dismissed with costs. Each case ultimately turns on its facts but the following points arise from the cases.

Where a debt is not disputed or the claim is substantial a creditor may present a petition with the object of forcing the company to pay. In such a case pursuit of the claim with personal hostility, even venom and ulterior motive, do not constitute an abuse of the process of the court. Similarly where the company is proved by other means to be insolvent or where the dispute is as to amount only an order will be made ...

To fall within the general principle the dispute must be bona fide in both a subjective and an objective sense. Thus the reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. 'Substantial' means having substance and not frivolous, which disputes the court should ignore. There must be so much doubt and question about the liability to pay the debt that the court sees that there is a question to be decided. The onus is on the company 'to bring forward a prima facie case which satisfies the court that there is something which ought to be tried either before the court itself or in an action, or by some other proceedings.' " (paragraph 15.214)

3. Shaukeiwan Plaza is a composite building with commercial and domestic units. The Deed of Mutual Covenant ("DMC") is dated 21 April 1992. The developer (the "Registered Owner" under the DMC), the first purchaser of a unit in Shaukeiwan Plaza (the "First Purchaser" under the DMC) and the petitioner (the "Management Company" under the DMC) were parties to the DMC. The petitioner is and has been the manager under the DMC. A sub-deed ("SDMC") was made by the developer (the "Registered Owner" under the SDMC), a purchaser of part of the commercial portion (the "Purchaser" under the SDMC), the petitioner (the "Estate Manager" under the SDMC) and the respondent (the "Manager" under the SDMC) to regulate the management of the commercial portion (the "Commercial Development" under the SDMC) of Shaukeiwan Plaza. The respondent was the former manager of the Commercial Development.

4. By the statutory demand, the petitioner demanded payment of:

"the sums of HK$234,452.70 being the outstanding management fee deficit of Commercial Development of Shaukeiwan Plaza from 1st May 1993 to 31st January 2001 and interest thereon at the rate of 2% per month from 24th April 2001 to the date of payment ... The sum of HK$234,452.70 referred to above pursuant to an Undertaking letter made by you in favour of [the petitioner] on 1st April 1995 and Sub-Deed of Mutual Covenant and Management Agreement dated 30th April 1993."

5. By the amended petition, the petitioner deleted the allegation of indebtedness in interest at the rate of 2% per month from 24 April 2001 and further deleted the reference to and reliance on the undertaking letter dated 1 April 1995. The debt as alleged in the amended petition was that:

"5. The [respondent] is indebted to [the petitioner] for HK$234,452.70 being the outstanding management fee deficit of Commercial Development of Shaukeiwan Plaza from 1st May 1993 to 31st January 2001.

6. The sum of HK$234,452.70 referred to above pursuant to Sub-Deed of Mutual Covenant and Management Agreement dated 30th April 1993."

6. The first point I noted was that the alleged debt was the outstanding management fee deficit of the Commercial Development. The second point was that the period was from 1 May 1993 to 31 January 2001. The third was that the SDMC was the only basis for the alleged indebtedness.

7. No "arrangement" or "longstanding arrangement" was alleged. However, on the management fee deficit, what Mr Wong Lai Man, the estate manager of the petitioner, alleged in paragraph 7 of his 3rd affirmation was a "longstanding arrangement". He asserted that:

"7. The Commercial Development and the Residential Development share some of the common facilities but the use or occupation of such facilities by them were different. In order to ensure fairness between owners of the Commercial Development and the Residential Development and to facilitate management, there was a longstanding arrangement between the Petitioner and the Respondent that:

(a) The Respondent shall pay a fixed sum of management fee to the Petitioner every month. This monthly fee was initially $4,850. It was then adjusted to $6,850 and later on, $8,900.

(b) In respect of electricity charges, the Petitioner shall pay the electricity bills first and it shall then be reimbursed by the Respondent.

(c) In respect of other heads of expenses (e.g. water and lifts charges), the Petitioner would apply the Respondent's management fee towards settlement of these charges. If there was surplus or deficit in a particular month, it would be carried forward to the next month and so on until the surplus was exhausted or deficit made good by the Respondent, as the case might be."

8. Mr Vincent Chun, counsel for the petitioner on the instructions of Messrs S K Lam, Alfred Chan & Co., told me that clause 16(a)(xxvi) of the SDMC was the only basis of the petitioner's claim for re-imbursement and that he was not relying on any other contract.

9. Clause 16(a)(xxvi) of the SDMC provided that:

"Without in any way limiting the generality of the provisions of Clauses 8 and 14 and paragraph (b) of this Clause, the Manager shall have the following powers and duties, namely ... To be responsible to the Estate Manager for all sums of money whether of a capital nature or otherwise payable under the Deed of Mutual Covenant in respect of the Commercial Development. The Manager shall during the period of two years from 6th April 1992 and so long as the Estate Manager remains as the manager of the Estate under the Deed of Mutual Covenant pay to the Estate Manager a fixed contribution towards the management expenses of the Commercial Development of a non-capital nature under the Deed of Mutual Covenant an amount of HK$5,000.00 per month, which amount shall be subject to review having regard to the adjustment of the management expenses under the Deed of Mutual Covenant and the costs for providing the management services."

10. There was no suggestion that the sum of HK$234,452.70 or any part thereof was capital in nature.

11. In my judgment, it was clearly arguable that the amount of money of a non-capital nature payable by the owners of the Commercial Development under the DMC was quantified by the parties to the SDMC at $5,000 per month; that the respondent would pay the petitioner a fixed contribution of $5,000 per month; and that any "surplus" or "deficit" would be dealt with by a "review" of the amount of the fixed contribution. On this construction of clause 16(a)(xxvi), the petitioner's case of the respondent's liability to make good the "outstanding management fee deficit" must fail. Thus the petitioner had not even begun to make out a prima facie case of the alleged indebtedness and the petition must be dismissed.

12. Mr Vincent Chun sought to rely on the DMC. There was no mention of the DMC in the amended petition. In any event, the DMC did not take the petitioner's case any further.

(a) The responsibility of an owner under section D clause 1 of the DMC was to pay for "his due proportion of the Management Expenses and the Manager's Remuneration as shown in the annual budget(s) ..." There was no evidence of any budget. Even if (assuming without deciding that) it was the responsibility of the respondent to prepare the relevant budgets, failure to do so would result in a claim for damages, not in a debt in the amount of the "outstanding management fee deficit".

(b) The petitioner had the power under section D clause 4 to "fix the amounts to be contributed monthly". There was simply no allegation or evidence of the petitioner having fixed any monthly amount.

(c) The petitioner had the power under section D clause 6 to prepare revised budget(s). Again, there was no allegation or evidence of the petitioner having prepared any revised budget(s). Any breach of any alleged duty on the part of the respondent to prepare revised budget(s) would not result in a debt in the amount of the "outstanding management fee deficit".

(d) The petitioner had the power under section D clause 10(a) to adjust the management expenses or the monthly contribution payable by each owner by giving not less than one month's prior notice in writing. There was simply no allegation or evidence of any prior notice in writing.

(e) The petitioner had the power under section D clause 10(b) to demand an additional amount, but there was no allegation or evidence of any prior not less than one month's notice in writing.

(f) Section D clause 11 imposed the obligation on the petitioner to prepare the budgets for maintenance and management costs for each accounting year and required the appellant to "take into consideration of any surplus or deficit in respect of any of the said expenses (or the said general expenditure) after payment of all the costs charges and expenses and carried forward from the accounts in the preceding Accounting Year". If the owners of the Commercial Development were otherwise obliged under the DMC to have the deficit made good, there should have been no deficit to be carried forward from the preceding accounting year to be taken into consideration in preparing the budget for the coming accounting year.

13. The "longstanding arrangement" could not and did not save the appellant from having its amended petition dismissed. To start with, any material "arrangement" relied on in creating the debt must be alleged in the petition and there was no allegation in the amended petition of any "arrangement", "longstanding" or otherwise. Secondly, Mr Vincent Chun expressly disavowed reliance on any other alleged contract. In any event, the alleged "arrangement" was self-contradictory. A deficit in a month was either to be carried forward or made good by the respondent. If the respondent was bound to make good the deficit, there should be no deficit to be carried forward. Moreover, by alleging that a deficit was to be "carried forward to the next month and so on until the ... deficit [was] made good" by the respondent, the petitioner seemed to have left it open to the respondent to choose to keep having the deficit carried forward, i.e. to have the deficit carried forward to the next month "and so on".

14. By alleging an "outstanding" management fee deficit, the petitioner conveyed the impression that the respondent had paid part of the management fee deficit. Mr Wong Lai Man alleged in paragraph 9 of his 4th affirmation that:

"As shown by the account (Exhibit 'WLM-2'), the Respondent has made continual part payments towards partial settlement of the management fee deficit until January 2001 ..."

This was positively misleading. Such of the accounts as the petitioner had chosen to produce showed that from December 1992 to January 2001 the respondent had not paid any sum apart from the fixed monthly amounts and the electricity charges (which had nothing to do with the debt alleged in the amended petition).

15. The uncontested evidence of the respondent was that on 29 September 2000 the owners' committee terminated the respondent's appointment. There was nothing in the amended petition or the affidavit evidence to justify the claim under the SDMC until the end of January 2001.

16. Thus, the petitioner had not begun to make out any prima facie case of the indebtedness as alleged in the amended petition. If the petitioner had for one moment thought that it had a good claim against the respondent, it had a choice of possible actions to take: it could bring an action in the District Court with an application for summary judgment if it thought its claim was unanswerable; and it could, as it had done here, serve a statutory demand following by a petition to wind up the respondent. There was no evidence that it thought that the respondent was insolvent, or otherwise unable to pay. I echo what Deputy Judge Woolley said in Far East Structural Steel Work Engineering Limited v Yet Kai Construction Company Limited, HCCW 853/1999, unreported, 17 February 2000:

"Having what they believed was a good claim against the respondent, they had a choice of possible actions to take: they could bring an action in the Court of First Instance, with an application under Order 14 for judgment if they thought their claim was unanswerable; they could, and under the provisions of the sub-contract, should, have referred their dispute to arbitration; or they could, as they have done here, serve a statutory demand followed by a petition to wind up the respondent. There is no evidence that they thought that the respondent was insolvent, or otherwise unable to pay, and the first two options, should their claim prove good, would have accordingly resulted in payment being made. The option chosen, however, if allowed to proceed to its logical conclusion, would probably result in the destruction of the respondent as a viable entity. The presentation of the petition alone can do, and no doubt has done here, considerable damage to the respondent's business and the goodwill of its customers. It is for this reason that the courts regard the use of such a procedure as a debt collecting operation, to put pressure on a company to pay, or to settle on terms which it might not otherwise have to, as something which should be discouraged in the strongest terms. There has been no explanation given to me why the petitioner chose this course, with its potentially devastating effect on the respondent, rather than another course which would have recovered a debt, if properly owed, without affecting the respondent's other business."

17. I had no hesitation in finding that there was an abuse of process here and that was why I ordered the dismissal of the amended petition without calling on the respondent. Coupled with the fact that the petitioner had not begun to make out a prima facie case of the alleged indebtedness, I ordered the respondent to pay costs on indemnity basis.