HBFP LTD (In Liquidation) v. JACKIN TOTAL FULFILMENT SERVICES LTD

HCCW628/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NO. 628 OF 2006

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D E C I S I O N

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1. This is an application for security for costs by Jackin Total Fulfilment Services Limited (“Jackin”), which is the subject of a winding-up petition presented by HBFP Limited (“HBFP”), which is itself a company in liquidation.  The Petition is based on a debt of some HK$2.19 million said to be due to HBFP from Jackin in respect of forensic accounting services provided by HBFP for the purposes of an arbitration between Jackin and a company called IBM Engineering Technology Shanghai Company Limited.  The arbitration has, it seems, now been concluded, apparently successfully from the point of view of Jackin. 

2. Jackin disputes its liability to HBFP in relation to the debt.  It has raised various issues in an affirmation filed on its behalf in opposition to the winding-up petition on the basis of which it suggests that it is not liable to HBFP for the sum claimed.

3. Mr Sherry, appearing today for HBFP, has submitted that the petition is very likely to succeed.  However, having considered the various affirmations filed in relation to the petition itself, I have come to the conclusion that it would not be appropriate for me to attempt an assessment of the likely outcome of the winding-up proceedings in the context of this application.  While it is possible that the petition will be successful, I do not think that the possibility of its failing can be entirely ruled out.  I turn, therefore, to consider whether or not security should be ordered in respect of the costs that Jackin is likely to incur in defending the petition. 

4. The basis on which security is sought is that HBFP is itself in liquidation and is therefore, prima facie, to be regarded as not being in a position to meet any costs order that may be made against it.  Mr Sherry accepted, in my view, rightly, that the onus was on HBFP to show that it could meet any order for costs that might be made against it at the end of the day.  He said, however, that there was little doubt that it was in a position to do so. 

5. Initially, the evidence relied upon for this purpose was an affidavit of Mr Nicholas Hill, one of the executive directors of HBFP and also one of its joint and several liquidators.  The other joint and several liquidator of HBFP is another of its executive directors, Mr Cosimo Borelli.  Mr Hill’s evidence explained that HBFP was formerly known as RSM Nelson Wheeler Corporate Advisory Services Limited (“RSM Nelson Wheeler”), a firm of insolvency and forensic accounting specialists.  As a result of a corporate reorganisation, it seems that the business of RSM Nelson Wheeler was sold to an international firm of insolvency practitioners, known as Alvarez and Marsal.  The company itself was then renamed HBFP, which represents the initials of the four principals behind the company, Messrs Hill, Borelli, Flynn and Poole, and it was then put into liquidation with a view to realising its assets, which consisted, for the most part, of outstanding professional fees.

6. HBFP went into member’s voluntary liquidation.  A declaration of solvency was filed along with a statement of assets and liabilities, which indicated that there were assets of some $124,762,139 and liabilities of $124,758,139 as at 31 March 2005.  There were thus net assets of only $4,000.  The largest category of assets was debtors and work in progress, which amounted to some HK$98 million-odd.  The largest liability was to the executive directors in an amount of just under HK$100 million.  The other liabilities, or external liabilities, consisted of bank debt of some $22 million, creditors and sundry liabilities of $1.5 million and a debt to RSM Nelson Wheeler CPA, certified public accountants, of HK$312,223.

7. Where a company in liquidation is a plaintiff or petitioner in proceedings, it is clear that any costs that may be ordered against it in the course of those proceedings rank at the highest level for payment to the creditor concerned or to the party entitled to them.  They are to be paid in priority to the expenses of realisation of assets, the expenses of the liquidation itself and the claims of the unsecured creditors.  That this is so is clear from the decision of the Court of Appeal in Extramoney Limited v Chan Lai Pang & Company, a firm [1990] 2 HKLR 268 and from the decision of Kwan J in re Grand Pacific Hotel Limited [2004] 1 HKLRD 1015.  In both of those cases, at the end of the day, no security was ordered as the court was satisfied that the company was in a position to pay any costs which might be ordered against it.  In addition, in each case, the position was fortified by undertakings that were given by the liquidators of the companies concerned to ensure that sufficient funds were kept available to meet any order for costs that might be made against the company at the end of the day.

8. The question for decision today, therefore, seems to me to be whether or not there are sufficient funds available in the liquidation of HBFP to meet any liability that might arise for costs on its part, which it may be ordered to pay Jackin in the event that Jackin succeeds in its resistance to the petition.  As to this, I have to say that until this morning the evidence filed by HBFP did not, in my view, go far enough to establish that it had actual funds on hand out of which such liabilities could be met.  There was no evidence as to the actual amount of cash available to the liquidators.  What was said was that, given the statement of assets and liabilities, it was necessary to look at the position in the light of an undertaking which was said to have been given by the executive directors to the liquidators of HBFP to the effect that they would not require repayment of the amounts due to them if to do so would render HBFP insolvent.  It was said that in the light of that undertaking there was no risk that the payment of any adverse costs order would not be made.

9. With respect, however, I do not think that this went far enough.  Absent some indication of the amount of cash actually available, it would not have been possible for the court to be satisfied that there were sufficient funds on hand to meet any costs order that might be made at the end of the day.  The undertaking referred to would not suffice for this purpose since, in my view, it could at best only mean that the debt owing to the executive directors would not be called in.  It would not, of itself, result in the generation of funds for HBFP. 

10. I note that in both the other cases to which I have referred there was an indication of the actual amount of funds available.  In re Grand Pacific Hotel Limited, the amount of cash on hand, in the hands of the liquidators, was actually stated and identified to the court.  In Extra Money the liquidators displayed a greater degree of sensitivity to disclosing the actual amount of cash on hand but they did provide sufficient evidence from which the Court of Appeal felt able to conclude that there was a minimum amount of funds available which was more than sufficient to meet any award of costs that might be made at the end of the day in that case.

11. However, at the start of the hearing this morning, Mr Sherry applied for and was given leave to adduce in evidence an affirmation by his instructing solicitor, Mr Gall, in which Mr Gall provided further information as to the current position in HBFP’s liquidation on the basis of information supplied to him by Mr Hill.  This information was to the effect that realisations to date had comfortably exceeded the amounts of outside debt, which was put at some $26 million and that the extent of the excess had been sufficiently large that it had been possible to make payments to the executive directors in respect of the debts that were owed to them.  The evidence went on to indicate that the current level of outside debt, the bulk of which had by now been repaid, was not more than some $350,000 consisting of the amount owing to RSM Nelson Wheeler CPA, which, as I have indicated, was slightly in excess of $312,000, and a small amount due to various sundry creditors, which was estimated at being not likely to be much more than about $10,000 or thereabouts.

12. In addition, Mr Gall went on to indicate, on the basis of information provided by Mr Hill, that some HK$1.5 million by way of outstanding fees, had in fact been collected within the last fortnight and that there was at least a further HK$15 million in the pipelines which would be collected over the course of the coming weeks and months.  However, as some of that is waiting upon taxation of the bills submitted by HBFP or its predecessor, it may be that it will take a little time for all of that money to be collected.

13. In my view, on the basis of this evidence, it seems likely that HBFP will have sufficient funds to meet the likely amount of any costs order that may be made against it.  Although I take on board Mr Fong’s point that there is at present no concrete evidence in the form of documentation that would indicate the actual amount of cash available - and this is a point to which I will return - it does seem to me that, having regard to the identity of the affirmants, there is in my view no real reason to doubt the accuracy or veracity of what has been stated to be the position.

14. In coming to my view that HBFP is likely to have sufficient funds to meet any costs order that may be made against it, I have taken into account also the amount of costs which I think are likely to be incurred in Jackin’s resistance of this petition.  The amount of security sought was HK$900,000.  In my view, this amount was excessive.  It would appear from the skeleton bill that was produced for the purpose of this application that an amount of slightly over HK$425,000 is claimed in respect of work done from the commencement of the proceedings up to the filing of the company’s affirmation in opposition to the petition.  This, in my view, is far too high. 

15. The affirmation filed runs to some 22 paragraphs extending over 11 pages.  It has no more than four relatively short exhibits.  I cannot see that the amount of $425,000 or anything approaching that amount, is likely to be recovered on taxation at the end of the day in these proceedings, assuming that Jackin is successful in resisting the petition that has been presented against it.  Moreover, there are other aspects of the bill, which are, in my view, also somewhat unsatisfactory.  It seems unlikely to me that there will need to be as many as three further hearings before the petition is brought on for substantive hearing.  It seems to me likely that there will only be one or, at most, two, further hearings before that will be done. 

16. As I understand the position, on the disposal of this application the matter will be restored for further directions before the companies judge at the usual Monday morning hearing.  It seems to me likely that it should be possible on that occasion for the matter to go forward with directions being given that will be sufficient to get the matter to a substantive hearing of the petition.  At most, there may conceivably be a need for one further directions hearing.

17. Finally, I cannot see that the petition can possibly take four days to be tried.  The estimate of four days appears to have been based on the expectation that there would be cross-examination of deponents on their affirmations.  This is a course that is very rarely taken in creditors’ petitions where, as here, the only issue is whether or not there is a bona fide dispute of substance in relation to the debt on which the petition is based.  In cases of this sort the court deals with the matter on the basis of the affidavits alone and comes to a view as to whether or not such a dispute is demonstrated by sufficiently credible and precise evidence on the basis of the evidence that is placed before it.  It does not embark on a mini-trial, or a trial in any form, of the underlying merits of the claim.  That being so, it seems to me that it is very unlikely that this petition will take more than a day to be dealt with substantively.

18. Doing the best that I can, it seems to me to be very unlikely that the recoverable costs in this case are likely to exceed the amount of HK$300,000.  Bearing that amount in mind, it seems to me that although the evidence still lacks a precise figure as to the amount of cash available, bearing in mind the fact that some HK$1.5 million has been recovered in the last two weeks and that the existing external debt is some $350,000, it seems to me almost certainly to be the case that HBFP will have sufficient funds available on hand to meet the amount of costs that I consider that it is likely that Jackin will recover in the event that it is successful in opposing the petition.

19. An undertaking was offered by the joint and several liquidators of HBFP that they would ensure that funds would be kept on hand and not paid out so as to reduce the amount of funds on hand.  In the light of the views which I have expressed as to the likely amount of recoverable costs, an undertaking to keep $300,000 on hand will suffice and I accept that undertaking.  Mr Fong has, as I indicated, expressed concern that there was no concrete evidence of the amount of cash on hand.  While, as will appear from what I have said, I do not think there is likely to be a problem in this regard, it seems to me, taking into account the interests of Jackin, that the appropriate course for me to take would be to accept the undertaking offered by the joint and several liquidators, that they will ensure that HBFP has on hand at all times, from this point forward, cash of not less than HK$300,000 to be kept available to meet any order for costs that may be made against it in the event that its petition fails.  I shall also direct the liquidators to file an affirmation, which I understand should not cause any great problems, within seven days from today to provide evidence that they have on hand not less than that sum of money.

20. It seems to me that with this undertaking and the affirmation to be filed, Jackin will be adequately protected in the event that it succeeds in obtaining an order for costs in its favour.  On that basis, I will not make an order for security for costs in the form requested by Jackin; that is, I will not require an amount of cash to be brought into court to secure it in respect of its costs.

(Submissions and decision on costs)