上海船厂船舶有限公司 (also known as SHANGHAI SHIPYARD CO. LTD) v. REIGNWOOD INTERNATIONAL INVESTMENT (GROUP) CO LTD

HCCW 340/2021

[2021] HKCFI 3794

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 340 OF 2021

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DECISION ON COSTS

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1.  At the hearing on 6 December 2021, I dismissed the petition presented by the petitioner, Shanghai Shipyard Co. Ltd. (“Petitioner”), on the ground that the respondent, Reignwood International Investment (Group)  Company Limited (華彬國際投資(集團)有限公司)  (“Company”), had provided full security for the “Judgment Debt” (as defined in §9 below), the subject matter of the petition.

2.  There is no dispute that the petition should be dismissed.  The only issue between the parties is who should pay the costs of the petition.  This is surprising given that, as will become apparent in the latter part of this Decision, the position is clear. Nevertheless, rather than seeking to save costs, the parties saw fit to incur further costs by instructing counsel (and in the case of the Company, 2 very senior counsel)  to argue on costs. 

Background

3.  By a contract dated 21 September 2011 (“Contract”)  the Petitioner (as builder)  agreed to build and the Company (as buyer)  agreed to buy an offshore drillship (“Vessel”)  for USD200 million.  On 17 November 2011, the Company issued a guarantee (“Guarantee”)  in favour of the Petitioner for payment of the final instalment of the price (in the sum of USD170 million)  (“Final Instalment”).

4.  On 30 November 2012, the Contract was novated such that the Company’s rights and obligations as buyer were transferred to an indirect subsidiary of the Company (“OT1”). The Company remained a guarantor of payment of the Final Instalment. 

5.  On 11 January 2017, the Petitioner gave notice of completion of the Vessel to OT1 and demanded payment of the Final Instalment, but OT1 refused to pay on the ground that the Vessel was not deliverable.  On 23 May 2017, the Petitioner demanded the Company to pay pursuant to the Guarantee (“Demand”).  The Company contended that it should only be required to pay after the dispute between OT1 and the Petitioner was resolved and did not make any payment. 

6.  On 30 August 2018, the Petitioner commenced an action against the Company in the English Commercial Court to enforce the Guarantee.  Separately, on 3 June 2019, OT1 commenced an arbitration in London against the Petitioner for breach of the Contract (“Arbitration”).

7.  On 14 June 2019, the English Commercial Court ordered 2 preliminary issues to be tried namely, (1)  whether the Guarantee was a demand guarantee such that the Company’s liability thereunder crystallised by reason of the Demand (as the Petitioner alleged), or a “see to it” guarantee such that the Company’s liability thereunder arose only if OT1 was liable to pay the Final Instalment (as the Company alleged); and (2)  whether the Company was entitled to refuse payment pending conclusion of the Arbitration. 

8.  At the first instance, Knowles J ruled in favour of the Company on both issues and stayed the action pending resolution of the Arbitration. 

9.  On appeal, the English Court of Appeal (“CA”)  held that the Guarantee was a demand guarantee such that the Company became liable to pay when the Demand was made, and that the Company was not entitled to defer payment until conclusion of the Arbitration.  By an order dated 30 July 2021 (as amended on 13 August 2021), the CA gave judgment[1] (“CA Judgment”)  against the Company for USD171,416,666.67, being the amount stated in the Demand, together with interest and costs (“Judgment Debt”).   

10.  On 19 August 2021, the Company applied to the UK Supreme Court (“UKSC”)  for permission to appeal (“PTA”)  on inter alia the ground that the CA erred in characterising the Guarantee as a demand guarantee as opposed to a “see to it” guarantee, and seeks to set aside the CA Judgment.

11.  On 23 August 2021 the Petitioner served a statutory demand requiring the Company to pay the Judgment Debt within 21 days (“SD”). 

12.  On 9 September 2021, the Company issued an originating summons in HCMP 1328/2021 to seek an urgent injunction to restrain the Petitioner from presenting a winding up petition based on the SD until determination of its application for PTA and, if leave is granted, determination of the substantive appeal (“OS”).  This was followed by a summons filed on 10 September 2021 seeking an interim injunction against the Petitioner in similar terms as the OS. 

13.  At the hearing on 14 September 2021:

(1)  the Company contended that it had applied to the UKSC for PTA which, if successful, would result in the CA Judgment being set aside and the Petitioner cease to be a judgment creditor;

(2)  the Petitioner sought a dismissal of the OS and the summons on the ground that it was a judgment creditor and had the right to enforce the Judgment Debt by presenting a winding up petition against the Company;

(3)  this Court refused to grant the injunction sought on the grounds that (a)  the Petitioner, being a judgment creditor, was entitled to present a winding up petition based on the SD if the Company failed to comply with the SD; and (b)  the Company had the means to avoid a winding up petition by providing security for the Judgment Debt pending determination of its application for PTA and the substantive appeal; and

(4)  the summons and the OS were dismissed with costs to be paid by the Company[2].

14.  Immediately after the hearing, on 14 September 2021, the Petitioner presented the petition based on the Judgment Debt and the Company’s failure to comply with the SD. 

15.  On 22 October 2021, the UKSC granted a stay of execution of the CA Judgment in the following terms (“1^st Stay Order”):

“on condition that the [Company] provides security by paying into court the sum of US$202,611,917.01 on or before 1 November 2021

1. There be a stay of execution of paragraphs 6 to 13 of the [CA Judgment], save that interest shall continue to accrue in accordance with paragraph 8 of the [CA Judgment], until the later of

a)  The refusal by the Supreme Court of permission to appeal; or

b)  The final determination of the appeal by the Supreme Court”

16.  On 11 November 2021, the UKSC granted PTA and varied the condition of stay as follows (“2^nd Stay Order”):

“there be a stay of execution of the order of the court below, until the determination of this appeal, on condition that the amount of the judgment debt is paid into court by 1^st December 2021”

17.  At the hearing of the Petition on 22 November 2021:

(1)  Mr Benjamin Yu SC (leading Ms Sara Tong), counsel for the Company, applied for an immediate dismissal of the petition on the ground that the grant of PTA was sufficient in itself to show that the Judgment Debt was bona fide disputed on substantial grounds;

(2)  Mr Look Chan Ho, counsel for the Petitioner, sought an adjournment of the petition to 6 December 2021 to see if the Company would comply with the condition under the 2^nd Stay Order;

(3)  This Court considered that it was appropriate to adjourn the petition to 6 December 2021 to see if the Company would comply with the condition.  It seems to me that if the Company pays the Judgment Debt into Court, the petition will be dismissed on the basis that the Judgment Debt has been fully secured or compounded for.  On the other hand, if the Company fails to comply with the condition, the Judgment Debt remains payable and the Petitioner is entitled to seek a winding up order against the Company.   

18.  Upon the Company’s application, on 23 November 2021, the UKSC further varied the condition of stay in this way (“3^rd Stay Order”):

“there be a stay of execution of the order of the court below, until the determination of this appeal, on condition that the sterling (GBP)  equivalent of USD 207,556,523.92 (calculated on the date of the payment in)  and GBP 276,256.38 is paid into court by 29 November 2021” (“Condition”)

19.  On 29 November 2021, the Company complied with the Condition.  By letter dated 30 November 2021, the Company through its solicitors informed the Court and the Petitioner that it had complied with the Condition.  In response, the Petitioner through its solicitors indicated that it would seek a dismissal of the petition and costs at the coming hearing. 

Discussion

20.  Mr Ho submits that the Petitioner is entitled to the costs of the petition on the following grounds:

(1)  the Petitioner’s conduct “was completely reasonable throughout” in that it was reasonable for the Petitioner to (a)  present the petition after dismissal of the Company’s application for injunction; (b)  seek an adjournment of the petition pending the Company’s compliance with the condition, particularly when the Company had not been able to pay the Judgment Debt into court in accordance with the 1^st Stay Order; and (c)  seek a dismissal of the petition following the Company’s compliance with the Condition;

(2)  the Company’s contention that the petition is bound to fail owing to the grant of the PTA is misconceived in that (a)  the mere existence of a PTA would not render a statutory demand premised on a judgment debt liable to be set aside (Dunhill v Hughmans (a firm) [2018] BPIR 59, §49; Royal Bank of Scotland v Fielding [2003] EWCA Civ 988); and (b)  even if there are very strong prospects of the appeal succeeding, the existence of an appeal would only justify an adjournment of the petition (Re Shiamas International Ltd,HCCW 80/2014, 3 September 2014, §4, per Harris J); and

(3)  although a winding up petition is not a means of enforcing a debt, a petitioner may present a petition for the purpose of recovering payment of his debt through the collective insolvency regime (Re Southwest Pacific Bauxite (HK)  Ltd [2018] HKCFI 426, at §25, per Harris J). 

21.  On the other hand, Mr Yu contends that the Petitioner should pay costs of the petition on the following grounds:

(1)  costs should follow the event;

(2)  the Judgment Debt is bona fide disputed on substantial grounds in that (a)  where the judgment is under appeal, and permission to appeal has been obtained, it normally indicates that there are substantial grounds for disputing the judgment debt, as a court can give permission to appeal only where it considers the intended appeal has real prospects of success (Derek French, Applications to Wind Up Companies, 4^th edn, §7.638); (b) under English law, the UKSC would only grant PTA if it is satisfied that there is an “arguable point of law of general public importance”, and the appeal has reasonable prospects of success, relying on the opinion of Mr David Bailey QC dated 9 November 2021 (“Opinion”);

(3)  winding up proceedings are not enforcement proceedings (Re Lucky Resources (HK)  Ltd [2016] 4 HKLRD 301, §3, per Harris J).  It is wrong to transpose the higher threshold for a stay of execution, which requires a debtor to demonstrate “very strong prospects of the appeal succeeding” to an application for a stay/adjournment of a winding up petition pending determination of an appeal.  In this regard, the statements in Sky Talent Properties Ltd,HCCW 892/2003, 9 December 2003), §11, per Barma J (as he then was), as applied in Re Shiamas International Ltd,§§4-5, 8, where the Court seemingly treated a winding up petition as an enforcement mechanism, and consequently adopted the “very strong prospects of success” threshold in deciding whether to grant a stay pending appeal, is wrong and should not be followed;

(4)  although the Petitioner was entitled to present the petition against the Company, it was unreasonable for it to do so without waiting for determination of the PTA.  The Petitioner should bear the costs of the petition upon its dismissal, as it was a risk taken by the Petitioner when it decided to rush through the petition without waiting for determination of the PTA and the Company’s compliance with the Condition;

(5)  the condition granted by the UKSC is a condition subsequent.  The effect of the stay, said Mr Yu, is that the Petitioner was not entitled to enforce the CA Judgment once the UKSC granted a stay on 22 October 2021.  In this regard, the Court should not follow the practice of the English court, as described in Royal Bank of Scotland v Fielding [2003] EWCA Civ 988, at §9; and

(6)  The Company’s legal advisers needed time to clarify the terms of the condition under the 1^st Stay Order, and the Company was unable to comply with the original condition owing to foreign exchange control in the Mainland.  In any event, the UKSC varied the condition by allowing the Company to pay the Judgment Debt into court by 1 December 2021. 

22.  In my view, the Petitioner is entitled to the costs of the petition up to and including the hearing on 6 December 2021 for the following reasons.

23.  First, as a judgment creditor, the Petitioner was entitled to seek repayment of the Judgment Debt by serving the SD on the Company and, upon the Company’s failure to comply with the SD, by presenting the petition against the Company.  Mr Yu accepts that the Petitioner was entitled to present the petition, but contends that it was unreasonable for the Petitioner to do so.  I am unable to see how the Petitioner’s exercise of its right to present the petition can be characterised as unreasonable in light of the following matters:

(1)  it is well established that where the debt is undisputed or indisputable, the petitioner is entitled to present a winding up petition ex debito justitiae and thus cannot be said to be acting improperly (Re Shandong Chenming Paper Holdings Ltd [2020] HKCA 670, §33, per Barma JA);

(2)  the CA had refused to grant a stay of execution of the CA Judgment, and the Judgment Debt remained due and payable at the time the petition was presented;

(3)  the Company could have arranged for security to be provided in respect of the Judgment Debt or, at the very least, offered to provide security satisfactory to the Petitioner within the 21 days’ time limit for compliance with the SD.  The Company chose not to do so.  This was despite the reminder made by this Court at the hearing on 14 September 2021; and

(4)  the Petitioner had no obligation to await the outcome of the Company’s application for stay of the CA Judgment or of the PTA. 

24.  Second, I do not think that once the Company has obtained the PTA, it can be taken as having discharged the burden of showing that the Judgment Debt is bona fide disputed on substantial grounds.  At its highest, the PTA only goes to show that the Company’s appeal raises “arguable point of law of general public importance” and the appeal has reasonable prospects of success.  This is not the same as showing a bona fide dispute on substantial grounds in respect of the Judgment Debt.  Indeed, the existence of a binding judgment coupled with the refusal of the court giving that judgment to grant a stay is normally sufficient to negate any suggestion by the company that there is a bona fide dispute on substantial grounds in respect of the judgment debt. 

25.  Third, I do not agree that the stay took effect as soon as the UKSC granted the 1^st Stay Order.  As is clear from the 1^st Stay Order, the stay would only take effect “on condition that the [Company] provides” the security within the stated time limit.  The condition is a condition precedent and the stay does not take effect unless and until the Company complies with the condition.  There is nothing in the evidence before this Court to show that the UKSC intended to change the condition from a condition precedent to a condition subsequent when it made the 2^nd Stay Order or the 3^rd Stay Order. 

26.  Fourth, I am unable to agree with Mr Yu’s contention that the practice of the Hong Kong court in dealing with winding up petitions is different from the practice of the English Court, which was described in Royal Bank of Scotland v Fielding [2003] EWCA Civ 988, at §9:

“The notes to the White Book make clear, and I accept, that there is a practice in the Bankruptcy Court that normally a bankruptcy order will not be made while a stay is in force, but the court will normally adjourn the petition, if necessary, from time to time so long as the stay exists. If, however, a general stay of execution, for example pending appeal, is in existence at the date of the presentation of the petition, this will be regarded as an obstacle to the acceptance of the petition or as grounds for immediate dismissal of the petition because there will not in those circumstances be any debt payable in existence at the date of the petition.”

27.  Mr Yu submits that the Court should follow the approach in Re Sun Fung Timber Co Ltd[2021] HKCA 1660, where Barma JA stated (at §23)  that the “bona fide dispute on substantial grounds” test applied to bankruptcy and winding up proceedings, and that “petitions are not meant to be used for the purpose of debt collection and the winding-up or bankruptcy jurisdiction of the court will be exercised only in very clear cases”.  These principles are well established, but they do not support Mr Yu’s submissions.  As far as this Court is aware, the power and practice of the Companies and Bankruptcy Court in Hong Kong when dealing with petitions presented on insolvency ground are very similar, if not the same, as in the UK in that:

(1)  The general power of the Court in dealing with the petition under s.266(3)  of the Insolvency Act 1986 is materially the same as s.180(1)  of the Companies (Winding up and Miscellaneous Provisions)  Ordinance (Cap. 32); and

(2)  In the absence of a stay, an unpaid judgment creditor is entitled to present a petition in reliance on a judgment debt.  It is a matter within the discretion of the Court to decide whether to adjourn or stay the petition pending determination of an appeal against that judgment.   

28.  Fifth, although the petition was dismissed, this was the result of the Company having provided full security for the Judgment Debt shortly before the hearing.  Had the Company not provided security for the Judgment Debt, the Petitioner would not have sought dismissal of the Petition, and this Court would not have made an order to dismiss the Petition.  At most, the petition would be adjourned pending determination of the appeal by the UKSC.

29.  Lastly, the Company has never indicated its agreement to pay the costs of the petition.  Instead, it chooses to seek costs against the Petitioner and fails in its arguments. 

Conclusion

30.  For the above reasons, I order that:

(1)  the Company do pay the costs of and occasioned by the petition including the costs of the hearing on 6 December 2021 to the Petitioner;

(2)  The costs are to be assessed by way of gross sum assessment.  For this purpose, the Petitioner is to lodge a statement of costs for gross sum assessment within 3 days of this Decision, and the Company to lodge a statement of objection, if any, within 3 days thereafter; and

(3)  The Official Receiver’s costs in the amount of $6,500 be paid by the Company.