HUNG YIP (HK) ENGINEERING CO LTD v. KINLI CIVIL ENGINEERING LTD

HCMP 191/2020

[2021] HKCFI 153

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 191 OF 2020

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REASONS FOR DECISION

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Introduction

1.  On Monday 9 March 2020 Linda Chan J granted an ex parte interim injunction prohibiting the Defendant (“Creditor”), a creditor of the Plaintiff (“Company”), from presenting a petition to wind-up the Company relying a statutory demand served on 14 February 2020.  The time for compliance with the statutory demand had expired on Friday 6 March 2020 and there was, therefore, a risk that a petition could be presented at any time.  Notice of the application was given to the Creditor’s solicitors in the circumstances described in [13] below, which was too late for them to attend.  I note that this was during the general adjournment period caused by Covid-19.

2.  Linda Chan J granted an injunction until the return date of the originating summons on 13 March 2020.  The Creditor did not attempt to have the injunction discontinued on 13 March 2020 and directions were made largely by agreement for the originating summons for a final order to be set down for substantive determination and the interim injunction continued until the originating summons was determined.  That matter was listed before me for hearing on 13 January 2021.

3.  Having read both counsel’s skeleton argument in advance of the hearing it seemed to me that they had not properly understood the principles that guided the court in determining applications of this sort. Counsel had agreed that the relevant principles are described in a decision of Chow J, which I refer to later, which they appeared to understand as resulting in the issue for determination being simply whether or not the Company had demonstrated on the evidence filed for the hearing that it has a bona fide defence on substantial grounds, in other words the issue for determination was thought to be the same as if I was hearing a winding-up petition.  My clerk wrote to them bringing certain authorities to their attention and explaining that it was my preliminary view that the intended arguments did not properly address the material issues.  Counsel were asked to consider the implication of my views for the conduct of the application and provide new succinct skeletons.

4.  It became apparent fairly quickly during the hearing that the Company would have difficulty in satisfying the relevant principles and criteria and also that there had been quite serious material non-disclosure at the hearing before Linda Chan J.  As a consequence, the parties sought time to discuss settlement, which resulted in the application being dismissed by agreement.  However, in my view, it is desirable that I explain the relevant principles and how they are likely to operate in practice in order to avoid the misunderstanding that has arisen in the present case, which to some extent arises from relying on two recent authorities, which summarise the principles in a way, which may be, as in the present case, open to misinterpretation.

Legal Principles

5.  The test for determining whether or not a court will grant an application to restrain presentation of a petition is explained in the judgment of Slade L.J. in Coulon Sanderson & Ward Limited v Ward [1].

“Stephenson L.J. and Sir John Pennycuick specifically held [2] that the principles of the American Cyanamid case cannot be regarded as applicable to a motion seeking an injunction restraining presentation of a threatened winding-up petition on the ground that such presentation would be an abuse of the process of the court. This decision, therefore, is clear authority for the proposition that the court should not on an interlocutory motion restrain what would otherwise be the legitimate presentation of a winding-up petition by someone qualified to present it, unless the company establishes on the evidence a prima facie case for holding that the petition would constitute an abuse of process.”

6.  In Re A Company (No. 007923 of 1994) [3], another decision of the English Court of Appeal, Nourse L.J. explains how this principle operates in practice:

“The principle, as I apprehend it, is that a party which has presented a petition should not be restrained from proceeding with that petition, including the advertisement of the petition in accordance with the rules, unless there is prima facie evidence that the petition is more or less bound to fail, in which case the court may be prepared to conclude that the petition is an abuse of the process. It could not possibly be said in this case that the petition of the Secretary of State is more or less bound to fail, or that its presentation was an abuse of the process.”

Waite L.J. expresses the principle a little differently, but again makes it clear that what has to be demonstrated is that issue of a winding-up petition would amount to an abuse of process:

“Where it is sought to restrain presentation of the petition, there must be prima facie evidence that the company would succeed in establishing that the proceedings sought to be restrained would constitute an abuse of process — Coulon Sanderson & Ward Ltd v Ward (1986) 2 BCC 99,207 applying Bryanston Finance Ltd v De Vries (No. 2) [1976] Ch 63.”

7.  The same principles govern such applications in Hong Kong.  The authority most commonly cited to demonstrate this is the judgment of my predecessor Kwan J (now Kwan JA) in Re Sinom (Hong Kong) Ltd [4] in which the Judge summaries her understanding of the principles in the following terms in [8] to [11].

“8. The applicable legal principles are largely non-controversial. I will endeavour to state them succinctly.

9. The principles governing applications for interim injunctions in American Cyanamid Co v Ethicon Ltd [1975] AC 396 do not apply to this situation, as the granting of an injunction to restrain the presentation of a winding-up petition would finally dispose of the issue in dispute in the present proceedings (Bryanston Finance Ltd. v De Vries (No. 2) [1976] 1 Ch 63 at pp.80E-81E).

10. The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding-up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds (Bryanston Finance, supra, at pp.78D-E, 79A-D).

11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (‘a disputed debt petition’), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (‘a cross-claim petition’), such a petition may be restrained from proceeding (Re Pan Interiors Ltd [2005] EWHC 3241 (Ch), paras. 34–39). It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence (In re A Company (No. 0012209 of 1991 [1992] 1 WRL 351).  A   cross-claim petition is regarded in the same way (Southern Cross Group plc v Deka Immobilien Investment GmbH     [2005] BPIR 1010, paras. 29-30; Re Pan Interiors Ltd, supra, para. 35).”

8.  A company, which wishes to restrain presentation of a petition, is required to demonstrate that it is clear that presentation would be an abuse of process.  I would emphasise that in my view this is not the same (although on occasions there may be little material difference) as demonstrating that if a petition were to be issued the company would at the trial prima facie be able to establish that it has a bona fide defence on substantial grounds.  I explain the distinction and its significance in [14] to [18].

9.  In the present case, counsel for the Company submitted in his first skeleton argument that the principles determining the originating summons are as explained in Chow J’s judgment in Re Grande Holdings Ltd [5] with which counsel for the Creditor agreed.  The relevant paragraph of the judgment is [14].

“14. The principles governing an application for an injunction to restrain the presentation of a winding-up petition are well settled. In China Health Group Limited v Li Hong Holdings Limited, HCMP 2593/2016 (with Reasons for Judgment handed down on 29 March 2017), at paragraphs 26 to 31, I summarized the relevant principles as follows:

(1) The court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of the court’s process.

(2) It is an abuse of process to present a winding-up petition based on a claim of which there is a bona fide dispute on substantial grounds.

(3) The threshold for resisting a petition (requiring proof of a bona fide defence) is higher than that for resisting an application for summary judgment (requiring proof of a fair probability of establishing a bona fide defence), but the difference between the two tests is, in most cases, likely to be more a matter of semantics than substance.

(4) Petitions are not meant for the purpose of debt collection and the winding-up jurisdiction of the court would be exercised only in clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition.

(5) The onus is on the company to put forward credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at the trial.”

10.  Counsel for both parties seem to have read [14(3) to (5)] of the judgment as indicating that the issue on the hearing of the originating summons was the same as if a petition had been issued and come on for trial, namely, had the Company demonstrated that the Company had a bona fide defence on substantial grounds.  Whilst on occasions that may in practice be the case, as I have explained it is not what a company has to demonstrate.  What has to be demonstrated is that presentation of a petition is an abuse of process.  The facts of the present case allow the distinction and its importance to be illustrated and explained with some precision.

11.  The debt relied on in the statutory demand totals HK$4,773,651.63 (“Debt”).  It consists of interim payments numbers 24 to 27 claimed pursuant to a sub-contract carried out by the Creditor and forming part of the Company’s main contract with the Government for construction work in Kwai Chung.  The details of the work do not matter.  It is the Creditor’s position that the payments were calculated in accordance with an agreed formula, which in substance amounted to the Creditor being entitled to an agreed percentage of the amount received by the Company from the Government, which was to be paid within seven days of receipt of payment by the Company.  IP 24 was dated 24 October 2019 and the subsequent three interim payment applications were for the following three months.  IP 27 was dated 7 February 2019.  The Creditor sent 10 letters to the Company seeking payment of the various interim payments culminating in a letter dated 20 January 2020.  The Company accepts that it did not reply to any of these letters neither did it contact the Creditor by other means to explain why it was not paying any of the amounts that the Creditor says that it is entitled to be paid.

12.  The Creditor’s solicitors issued a statutory demand on 14 February 2020 for the Debt.  It was not until the Company’s solicitor’s letter of 2 March 2020 (three days before the 21-day period for satisfying the statutory demand expired) that the Company made any effort to dispute the debt.  This four page letter fell far short of recording with sufficient specificity matters capable of constituting a bona fide dispute on substantial grounds.  It reads like an attempt to construct excuses for non-payment.  It is sufficiently short that I shall quote the relevant paragraphs from the letter.

“8. By various letters from your client to our client, your client made purported demands for the following alleged sums pursuant to the Sub-Contract:

Alleged IP No.	Alleged Cut-off Period	Alleged Outstanding Amounts Due
IP 24	19 September 2019	HK$1,681,842.83
IP 25	19 October 2019	HK$992,140.12
IP 26	19 November 2019	HK$1,566,576.60
IP 27	19 December 2019	HK$533,092.08
Total Alleged Outstanding Amounts Due:		HK$4,773,651.63

9.  It appears that the alleged outstanding amounts due correspond to the Alleged Debt as set out in the Statutory Demand.

10.  We write to put on record that your client has failed to provide the declaration and documentary proof as required under Clause 5.3(c) of the Terms, and our client cannot to date be satisfied or confirm that no wages and/or remuneration are in arrears on your client’s part.  To the contrary, our client has been informed by workers and/or sub-contractors of your client that they have not been duly paid by your client on the works that have been done for Kwai Chung Project.

11.  In the circumstances, pursuant to Clause 5.3(d) of the Terms, our client is fully entitled to withhold all payments to your client, including any payments demanded under the alleged ‘IP 24’, ‘IP 25’, ‘IP26’ or ‘IP 27’.

12.  Entirely without prejudice to the foregoing, we hereby request that your client do provide:

(a)  a list of all staff, workers, employees and/or sub-contractors which are or have been engaged by and/or through your client for the Kwai Chung Project (the ‘Employees and Sub-contractors’);

(b)  a written declaration confirming that all payments outstanding and/or due to the Employees and Sub-contractors have been paid by your client in full, and no wages and/or remuneration to the Employees and Sub-contractors are in arrears as of today;

(c)  all documents and/or records relating to payment of wages and/or remuneration to the Employees and Sub-contractors, including but not limited to   copies of bank statements, payment instructions, remittance slips and/or cheques, and/or acknowledgements and/or receipts from the Employee and Sub-contractors; and

(d)  if any outstanding payments are due to the Employees and Sub-contractors, a list setting out all details of such outstanding payments, including the Employees and Sub-contractors to be paid, the amounts due, and the due date of each payment, etc.

13.  In the premises, your client is clearly not entitled to the Alleged Debt as alleged or otherwise, and the Statutory Demand should not have been issued to our client.

14.  Since October 2019, our client have received repeated complaints from the Resident Engineer of the Kwai Chung Project that construction works at the project site had been suspended and the site was left idle.  This has caused significant delays to the work progress of the Kwai Chung Project, and has seriously and adversely impacted on our client’s performance review by the Employer.

15.  Your client is reminded that it is your client’s responsibility to allocate sufficient labour resources to carry out the construction work required.  Your client shall ensure that work is completed to the satisfaction of our client and the Employer in accordance with the agreed schedule and by the completion date.

16.  Our client reserves all rights to recover against your client any loss and damage (included liquidated damages) caused by the delay in and suspension of work progress on your client’s part.”

13.  The Creditor’s solicitors replied on 4 March 2020 taking issue with the contractual provisions relied on by the Company as the parties had not in fact signed any agreement.  The Company’s solicitors replied at 11am on Saturday 7 March 2020 asking for confirmation by 10am on Sunday 8 March that a petition would not be issued and warning that absent such a confirmation an urgent application would be made for an injunction.  Unsurprisingly given the time when the letter was sent, the Creditor’s solicitors did not reply.  On Sunday 8 March 2020 the Company’s solicitors approached Linda Chan J, who directed that there be a hearing at 9:30am on Monday 9 March 2020.  As I have explained the Creditor’s solicitors received notice of this too late to attend.

When is presentation of a petition an abuse?

14.  It seems to me that if a petition had been issued on 6 March 2020 there would have been very little room for argument that it was an abuse of process.  In my view, it is implicit in the test applied by the court that for presentation of a petition to be an abuse a creditor must either have been told enough to understand that the debt is disputed on substantial grounds or must be assumed to have known this from facts of which he was aware.  As the authorities make clear a putative petitioner should not lightly be prevented from exercising his statutory right to present a petition.  I would have thought it self-evident that the procedure that permits a company to apply to court to restrain presentation of a petition is not intended to provide a mechanism by which a dispute that would normally be determined on the hearing of a petition is determined at the instigation of a company by a preliminary summary process.  The scope of the insolvency regime is defined by the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”), and its subsidiary legislation, which does not provide any mechanism for challenging a statutory demand unlike the regime for personal bankruptcy, which so provides in Rule 48 of the Bankruptcy Rules, Cap 6A.  The ability to present a petition promptly in the case of a company believed to be insolvent is important to creditors as by virtue of s184(2) of the Ordinance, it is relevant to the date any winding-up is deemed to commence.  This effects the period within which claims may arise for transfers at an undervalue and unfair preferences pursuant to ss 265D and 266 of the Ordinance.

15.  As I have emphasised in [8], what needs to be demonstrated is an abuse of process.  Although, in the present context this has a largely technical meaning it does involve some element of impropriety in the sense of misuse of the procedure in s179 of the Ordinance for presentation of a petition to wind-up a company, particularly if the creditor knows that the debt is disputed on substantial grounds and issue of a petition is threatened with a view to asserting pressure to pay rather than out of a genuine concern as to a company’s solvency.  It is, however, well settled that there is nothing objectionable in principle to a creditor owed a debt that he believes cannot be disputed issuing a petition to wind-up a company he suspects is insolvent[6]. This suggests that presentation of a petition relying on a debt genuinely believed to be payable is not an abuse even if a subsequent inquiry demonstrates that for a reason unknown to the creditor at the time the petition was issued there existed a bona fide defence on substantial grounds.

16.  What constitutes an abuse of process in this context has been considered by me in cases in which a petition has been dismissed and a company suggests that the petitioner knew at the time the petition was presented, or should have appreciated, that the Company had a bona fide defence on substantial grounds and that in such circumstances presentation of a petition was an abuse of process and justified ordering costs on an indemnity basis.  One example, Cosmigo Ltd v Monin Asia Kl Sdn Bhd [7], will suffice to illustrate how I understand “abuse of process” in that context.

“9. The Company, which was represented by Ms Frances Lok, argues that by parity of reasoning where a statutory demand is issued and a request to undertake not to issue a petition is refused, in circumstances where it should have been appreciated by the Petitioner that there was a bona fide defence on substantial grounds, similarly, the costs of proceedings to enjoin presentation of the petition should be awarded on an indemnity basis. It would seem to me that, as a matter of general principle, that is correct.

10. As I have explained in the present case, the demands for payment were not made in respect of a failure to settle sums allegedly due pursuant to an agreement signed between the Company and the Petitioner. The circumstances in which the Company had come to make various payments to settle sums which, on the face of the matter, were payable pursuant to an agreement made between Shanghai Walton and the Petitioner, are not straightforward.

11. As the Companies Court has endeavoured to make clear on various occasions, petitions to wind up companies, particularly companies which there is no reason to think are insolvent, should only be made in straightforward cases where it is clear to the petitioner’s lawyers that there is little ground for the debtor company to dispute liability. If there is doubt about this, then the prudent course is to proceed to obtain judgment to recover the sums believed to be payable.

12. So far as I can see from the papers which I have before me, this is a case, which in my view, it should have been appreciated was not suitable for the winding-up procedure.  It may be that that was not immediately apparent at the time the statutory demand was issued, but it seems to me that if an objective view had been taken of the information that I would imagine would clearly have become available during the course of April 2017, that should have been the conclusion that was reached, and it should have been agreed that the statutory demand be withdrawn.”

17.  Determining at a preliminary stage of a dispute whether or not a company’s grounds for refusing to pay an alleged debt are sufficiently credible to constitute a bona fide defence on substantial grounds can be difficult.  A winding-up petition is not the appropriate process to determine difficult disputes and I have encouraged parties to take a realistic approach when assessing whether or not it is appropriate to issue a petition relying on a debt, which is disputed.  As I explain in Re Alpha Building Construction Limited [8]:

“6. A putative petitioner should, when assessing whether or not to issue a petition in the face of an asserted defence, bear in mind that the winding up procedure is a summary process and a realistic view has to be taken of whether or not given the nature of the procedure the court is likely to take the view that there is sufficient substance in a company’s contention to constitute a bona fide defence on substantial grounds. As David Richards J recently explained in his judgment in the English Court of Appeal in Tallington Lakes Ltd. v Ancasta International Boat Sales Ltd [2014] BCC 327 3:

‘41. The practical issue is the extent to which the court must go in determining whether there is a genuine dispute on substantial grounds. The court must, as Oliver LJ[9] put it, take a view whether, on the evidence, there really is substance in the dispute. It appears from Chadwick J’s judgment that the facts before him were straightforward. It is not, however, practical or appropriate to conduct a long and elaborate hearing, examining in minute detail the case made on each side. Such a course would involve both delay in getting the issue ready for hearing and a potentially lengthy hearing. In this case, the evidence went through several rounds over a period of some six months. This time would have been better spent in getting a CPR Pt 7 claim underway. A lengthy hearing is likely to result in a wasteful duplication of court time. Petitioning creditors must take a realistic view of whether the company is likely to establish a genuine and substantial dispute. Where, as here, the petitioner insists on proceeding, the court is fully justified in taking the course sensibly adopted by the judge in this case of concentrating on those points which the petitioner said were his strongest.’

7. The Companies Court should not allow itself to be drawn into resolving reasonably disputable factual issues and matters.  The winding up jurisdiction, and the procedure for prosecuting winding-up petitions, exist to ensure that insolvent companies are put into liquidation and that this is done promptly in order to protect the interests of creditors.  It is not a means of asserting pressure on a company, which the creditor knows is probably solvent, for payment of a disputed debt.  The procedure should be reserved for use when at the time of presentation of a petition a petitioner, and his advisers, can fairly say that on the information available to them any asserted defence is fairly obviously insubstantial and unmeritorious.”

18.  That having been said it does not follow that because at a trial of a petition the court finds that there is a bona fide defence on substantial grounds that at the time the petition was issued the petitioner should have appreciated that this was the case.  This takes me back to the distinction that I identify in [8] namely, between demonstrating at the time an injunction is sought that issue of a petition is an abuse of process and demonstrating that there is bona fide defence on substantial grounds.  Generally, in order to establish that presentation of a petition would be an abuse it is necessary for a company to adduce evidence that addresses the following matters, which are likely to be relevant to some degree to the question in most cases:

(1)  The debt and how it is alleged by the creditor to arise.          It might be thought that this is fairly obviously the first thing that has to be addressed, but one need only look at the evidence and skeletons filed for the present case to find illustrated that this is not always the case.

(2)  When and how the debt has been disputed prior to presentation of the statutory demand and any application to the court for an injunction.  As I explain in [20] this was not done properly in the present case.

(3)  What is said to be the bona fide defence on substantial grounds.

(4)  The solvency of the company.

(5)  Prejudice that will be caused by the presentation of the petition.

(6)  Whether or not it is asserted that the creditor is consciously using the threat of presentation of a petition improperly and is so the facts and matters relied on as demonstrating this.

19.  It seems to me that as at 9 March 2020 when Linda Chan J heard the application it would not have been an abuse for the Creditor to present a petition, because the Creditor could quite properly take the view that it had not been demonstrated that there was a bona fide and substantial defence to all of the Debt.  There is no critique of the amounts claimed in the four interim payments which go to make up the Debt and no quantification of the cross-claim, in the Company’s solicitor’s letter of 2 March 2020, which was the only response that the Company had received at that time to the four interim payment applications and 10 chasing letters.  It does not seem to me that it can sensibly be suggested that in these circumstances it was an abuse of process to issue a petition, because (which the Company was forced to argue before me) given enough time the Company would be able to compile evidence to demonstrate that it does have a bona fide defence on substantial grounds, although it had manifestly failed adequately to inform the Creditor in any detail of what those grounds might be.  This being the case it would seem to have been wrong, if I had been required to decide the application, to grant an injunction unless I had been persuaded that there were some additional factors to be taken into account such as security for the Debt, actual solvency and possibly irreparable damage to the Company’s ongoing business, which militated very strongly against presentation of a petition.

Material non-disclosure

20.  Having found that in my view the injunction should not have been granted on 9 March 2020, it seems to me appropriate to explain why Linda Chan J probably reached a decision with which I, with the benefit of time and further documentation, disagree. The short point is that the Company’s evidence and Counsel’s skeleton failed to draw attention to the fact that the Company had not until 2 March 2020 disputed the Debt. Only the 9^th and 10^th chasing letters dated 19 December 2019 and 20 January 2020 respectively, were exhibited to the supporting affirmation of Ip Cheung Wai Walton and they were referred to only as demonstrating that the Creditor was aware of the terms of the agreement between it and the Company.  There is nothing to alert the Court to their real significance.  The letters and the Company’s total failure to respond to the Creditor’s claims for payments and chasing letters are not referred to at all in counsel’s skeleton (I should perhaps add that Mr Cheung did not appear for the Company at the hearing before Linda Chan J).  The affirmation and the skeleton gave the misleading impression that the Company had been complaining about the matters referred to in the Company’s solicitor’s letter of 2 March 2020 for some considerable time and by implication had told the Creditor why it was not being paid.  This was materially misleading.  I think it reasonable to assume that if the Judge had been properly appraised of the position, namely, that the claims had not been disputed until 2 March 2020 and the obviously vague and incomplete nature of the attack on the Debt brought fairly to the Judge’s attention, it is unlikely that the injunction would have been granted.  It maybe that the rushed way in which the matter came on resulted in counsel also not fully understanding the factual position and as a consequence failing fairly to describe the relevant events, but whatever the cause the application was framed unsatisfactorily.  If the issues I have identified in [18] had been addressed this might have been avoided.

Future applications to restrain presentation of petitions

21.  As a consequence of the impact of Covid-19 on the economy the court is likely to face increasing numbers of disputes between companies and their creditors and it is with a view to helping ensure that companies are properly advised of the circumstances in which an application to restrain presentation of a petitions is justified and those that proceed are properly formulated, that I have produced this Reasons for Decision.