PERAK PIONEER LTD v. CARRIAN HOLDINGS LTD

                 COMPANY LAW. NATURAL JUSTICE.  A Petition may not be presented by a person claiming to be a creditor if there is a substantial and bona fide dispute as to the existence of the debt alleged. A fortiori when such an issue is raised a winding-up order may not be made on the basis of that Petition until it has been argued and determined that no substantial or bona fide dispute exists.

                An alleged creditor company presented a Petition for the winding-up of an alleged debtor company. Evidence was filed on both sides including an affirmation made by a director of the alleged debtor company disputing the debt. The alleged debtor company issued a Notice of Motion to dismiss the Petition as an abuse of the process since there was a substantial dispute as to the existence of the debt relied upon.  The Motion was dismissed and a winding-up order made without affording counsel for the alleged debtor company an opportunity to address the Court on this issue. Held: The ruling of the Judge constituted a breach of the rules of natural justice. Order dismissing the Motion and Winding-Up order quashed. Order that Motion and Petition be reinstated for hearing before another judge.

IN THE COURT OF APPEAL

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JUDGMENT

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Kemisier, J.

1. On or about 4th May 1984 Carrian Holdings Ltd., then and now in liquidation, presented a Petition for the winding-up of Perak Pioneer Ltd. alleging very substantial indebtedness to them and, in consequence, that it was just and equitable that the order sought should be made. A partner in one of the films of chartered accountants which had been appointed joint liquidators of Carrian swore to the truth of some and to his belief in the truth of other averments in the Petition. On the 14th May a director of Perak made an affirmation on behalf of that company denying any indebtedness to Carrian and asking that the Petition should be dismissed. That was followed by a searching Request for Further and Better Particulars of the allegations made in the Petition. Carrian declined to give the particulars sought but instead, by leave, amended their Petition to show in detail the basis of their claim to be creditors of Perak. The supporting evidence is not be fore this Court but it is common ground that at least one further affidavit was filed on behalf of Carrian exhibiting the accounts of Perak for the years ending 31st July 1981 and 1982. On 5th July, when the attitude of Perak to the Petition appeared unclear, the hearing date was fixed for 9th of that month.

2. On 3rd July Perak filed a Notice of Motion, also to be heard on 9th July, for an Order removing the Petition from the file on the familiar grounds set out in 0. 18 r. 19 of the Rules of the Supreme Court.

3. When Motion and Petition came on for hearing before Jones, J. it was to be expected that counsel for Perak would open the proceedings since, if he succeeded on his Motion that would also be conclusive in relation to the Petition. Instead, counsel for Carrian was allowed to open on the footing that Perak's Motion was itself an abuse of the process. There was no counter Motion seeking relief in this context. The proceedings never seem to have recovered from this procedural hiccough.

4. Mr. Hamilton addressed the learned judge, as he has addressed us, on the broad basis that the accounts demonstrated Perak to be hopelessly insolvent, whether or not it owed money to Carrian; that Perak's directors accordingly owed all creditors a duty to support rather than to oppose any Petition to wind the company up; that they owed no conflicting duty to their shareholders and that any reliance on the wording of sections in the Companies Ordinance could only result in useless expenditure by way of costs and, in circumstances where there was no question of a scheme of arrangement or other rescue operation, would constitute a shameless abuse of the process of the Court. It is a robust and appealing approach and so attractive a fly having been cast before the judge at the outset of the hearing he rose with avidity to it. Not only did he find that Carrian had only to plead in its Petition that Perak owed it money and was insolvent in order to establish that it had a reasonable cause of action; that to oppose the Petition was an abuse of the process; that its directors were functus officio so that Perak had no locus standi before him; and that the Motion failed in consequence but, into the bargain, he made a windingup order on the basis that the question of Perak's indebtedness to Carrian, upon which the outcome of Motion and Petition alike ultimately depended, could be dealt with in the liquidation. As will appear he nonetheless answered that question himself.

5. In my view the learned judge was not entitled to ignore the statutory provisions pursuant to which alone he was entitled to make a winding-up order.

Section 177 of the Companies Ordinance provides that:

"A company may be wound up by the court if - (e) the company is unable to pay its debts."

So far so good. There was evidence before the judge which entitled him to find that Perak was insolvent to the tune of millions of dollars.

Section 179(1) provides that:

"An application to the court for the winding up of a company shall be by petition - presented. by any creditor or creditors."

It makes no provision for the presentation of a petition by any party not so interested; the company itself or a contributory apart. Further, it was not suggested that the judge could make a winding-up order of his own motion.

6. It was the basis of the submissions made by counsel for Perak that there was a substantial dispute on the evidence and, indeed, on the contents of the amended Petition itself, as to whether Perak was indebted to Carrian or not and, by reason of such substantial dispute, as to whether Carrian was "a creditor"; thereby rendering the presentation of its Petition an abuse of the process. This submission was supported by reference to the judgment of Ungoed-Thomas, J. in Mann v. Goldstein ^(l) at pages 1098 and 1099:

"But the Companies Court, in accordance with the practice which I have mentioned, does dismiss a petition founded on a substantially disputed debt whose validity it cannot conveniently decide even though the company be insolvent. -I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court. - So, in my view, when a petitioning creditor's debt is disputed on some such substantial ground, this court should restrain the prosecution of the petition as an abuse of the process of the court even though it should appear to the court that the company is insolvent."

7. The judgment of Ungoed-Thomas, J. was approved by Megarry, J. (as he then was) in re Lympne Investments ⁽²⁾ at page 527:

"Mann v. Goldstein ^(l), cited with approval in the New Zealand Court of Appeal in Bateman Television Ltd. v. Coleridge Finance Co. Ltd. ⁽³⁾ , provides authority for saying that when a petition is based on a debt which is disputed on substantial grounds, the petitioner is not a "creditor" within section 224(1) of the Act of 1948 (the Hong Kong equivalent is section 179(1) of the Companies Ordinance) who has the locus standi requisite for the presentation of the petition, even if the company is in fact insolvent."

8. It was further approved by the English Court of Appeal in Stonegate Securities v. Gregory ⁽⁴⁾. At pages 579 and 580 Buckley, L.J. said:

"If the creditor petitions in respect of a debt which he claims to be presently due, and that claim is undisputed, the petition proceeds to hearing and adjudication in the normal way; but if the company in good faith and on substantial grounds disputes any liability in respect of the alleged debt, the petition will be dismissed or, if the matter is brought before a court before the petition is issued, its presentation will in normal circumstances be restrained. That is because a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed."

And then, having cited the passage from Mann v. Goldstein⁽¹⁾ to which I have already referred:

"In my opinion a petition founded on a debt which is disputed in good faith and on substantial grounds is demurrable for the reason that the petitioner is not a creditor of the company within the meaning of section 224(1) at all, and the question whether he is or is not a creditor of the company is not appropriate for adjudication in winding up proceedings."

9. Counsel was not afforded the opportunity of arguing and the learned judge did not expressly rule on the question whether or not, on the evidence, the alleged debt was disputed in good faith and on substantial grounds - that is not on some frivolous or fanciful ground which the court should ignore. But, having said it was disputed and after referring to the authorities already cited the learned judge relied on the unreported English Court of Appeal case of Re Claybridge Shipping Company S.A. ⁽⁵⁾ in support of his apparent conclusion that he was nonetheless entitled so to rule and impliedly did so by holding that: "It is inconceivable that unconditional leave would be granted by a Master upon the hearing of a summons issue under Order 14."

10. As to bona fides and more generally would slightly alter the wording of another passage from the judgment of Ungoed-Thomas, J. in Mann v. Goldstein⁽¹⁾ at page 1095 so that it reads:

"It seems to me that to 'defend' a substantial claim in accordance with the procedure provided, and in the normal manner, even though with personal hostility or even venom, and from some ulterior motive, such as the hope of compromise or some indirect advantage, is not an abuse of the process of the court or acting male fide but acting bona fide in accordance with the process. And certainly no authority suggesting otherwise has been brought to my attention."

I invited Mr. Hamilton to bring some authority suggesting otherwise to our notice. He was unable to do so.

11. The position would be quite different if the supporting creditor represented below had also filed a Petition or had been substituted as petitioner.

12. As the matter stands I am of the opinion that the appeal should succeed if only because Perak was not given an opportunity to argue the substantial point underlying the Motion and constituting the basis of the opposition to the Petition. This involved no less than a breach of natural justice.

13. I would quash the orders made on 10th July; reinstate both the Motion and the Petition and order that both be set down for hearing before another judge.

14. Before parting from this case I would observe that reference was made in the judgment to the appointment of the Official Receiver as provisional liquidator of Perak, purportedly on 3rd May 1984, and, in the context of costs, to the absence of any application under section 182 of the Ordinance. As to the appointment of the Official Receiver, its validity must be highly questionable having regard to the wording of section 193(1). No Petition, as far as I am aware, had been presented by 3rd May 1984. This is also material to the court's purported appointment of 'special managers under section 216 of the Ordinance. As to section 182, I know of no winding-up order prior to that made on 11th July last.

15. Finally, both counsel have referred to a Report prepared by the Official Receiver, presumably pursuant to his questionable appointment, and submitted to the judge at the hearing and referred to in the judgment. Neither counsel was afforded the opportunity of seeing this documents.  Both should have been.

(1) (1968) 1 W.L.R. 1091

(2) (1972) 1 W.L.R. 523

(3) (1969) N.Z.L.R. 794

(4) (1980) 1 Ch. 576

(1) (1968) 1 W.L.R. 1091

(5) No. 001842 of 1980, 9/3/81

Li, J .A.:

16. I am in agreement with my brother Kempster to the effect that the appeal should be allowed and Motion and Petition reinstated to be heard by another judge.

17. In case we are criticised for prolonging any agony by not adopting a robust approach, my answer is that as the judicial system as we know no judge however robust may uproot the proverbial English oak.

Fuad, J.A.:

18. I agree that the appeal should be allowed, and with the order proposed by my Lords. I feel bound to say that the approach of the judge, with the utmost respect to him, both to the motion (which was in effect to strike out the petition in limine) and to the substantive opposition to the petition was Wholly misconceived for the reasons given by my brother Kempster, J.