RE GW ELECTRONICS CO LTD

HCCW 81/2016

[2020] HKCFI 2936

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 81 OF 2016

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R E A S O N S    F O R    D E C I S I O N

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1.  There is before the Court a summons dated 17 June 2020 issued by Leader First Limited (“Applicant”), a contributory of GW Electronics Limited (弘威電子有限公司) (“Company”), under section 209 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) for an order to stay all proceedings in the winding up of the Company. At the hearing, I ordered that the winding up proceedings of the Company be stayed permanently, with costs to be paid by the Applicant to the Petitioner. These are the reasons for my Decision.

A. Background

2.  On 15 March 2016, the Petitioner presented a winding up petition[1] against the Company based on a debt arising from the products sold and delivered to the Company in the amount of US$15,263,129.39 (“Debt”).  The Company’s application to strike out the petition was dismissed by Anthony Chan J on 30 December 2016.  On 9 January 2017, Harris J made a winding-up order against the Company. 

3.  On 27 March 2017, Anthony Chan J gave leave to the Company to appeal against the dismissal of the striking out application and ordered an interim stay of the winding-up order until determination of the appeal.  The Petitioner did not oppose the stay as a substantial part of the Debt had been secured by the funds kept by the Official Receiver (“OR”), who became the provisional liquidator of the Company by virtue of section 194(1)(a) of the Ordinance.

4.  The Company’s appeals against the dismissal of the striking out application and the winding-up order were heard by the Court of Appeal on 18-19 January 2018.  For the purpose of the appeals, the OR submitted her 3^rd report dated 29 December 2017, which stated that the Company had recovered cash in the aggregate amount of $124,139,861.55; the amount claimed in the proofs of debts lodged by 6 creditors were $122,652,221.65; and, as such, the Company appears to be solvent.

5.  On 10 October 2018, the Company obtained an order from DHCJ Dawes SC to confirm that for so long as the interim stay remains in operation, control of the Company reverts to the board of directors and the Company may do all things as may be necessary for the specific purpose of dealing with all issues arising from the debts owed by a company in Mainland, 深圳市勁升迪龍科技發展有限公司 (“DTT”).

6.  In its Judgment dated 2 April 2020, the Court of Appeal affirmed the orders below but gave an opportunity to the Company to consider whether an application would be made to discharge the winding-up order on the basis that according to the OR’s report, the Company was solvent and invited submissions as to the form of order that the Court should make.

7.  The following submissions were lodged with the Court of Appeal:

(1) The OR pointed out that the proofs of debts lodged had not been adjudicated and reserved her views as to whether there was any entitlement to statutory interest under section 264A of the Ordinance.

(2) The Petitioner disputed the Company’s solvency on the basis of its outstanding liabilities for the costs incurred by the Petitioner in the winding up proceedings and the appeals therefrom; and interest on taxed costs of the petition and the Debt.

(3) The Company invited the Court of Appeal to grant an interim stay with liberty to the Company to apply for a permanent stay within 28 days, failing which the winding-up order would be restored.

8.  By order dated 20 May 2020, the Court of Appeal acceded to the Company’s submissions and granted an interim stay with liberty to the Company to apply for a permanent stay of the winding-up order within 28 days, failing which the winding-up order would be restored. 

9.  Against the above background, the Summons was issued by the Applicant on 17 June 2020.

B. Applicable principles

10.  Section 209(1) of the Ordinance provides that:

“The court may at any time after an order for winding up, on the application either of the liquidator, or the Official Receiver, or any creditor or contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the court thinks fit.”

11.  The principles governing an application for a stay of winding up proceedings have been stated by Kwan J (as she then was) in Re Outboard Marine Corp Asia Ltd [2003] 1 HKLRD 585 at §§5-6 as follows:

(1) Once a permanent stay of the winding up proceedings is granted, the liquidation is for all practical purposes at an end. The liquidator may be discharged, control of the company reverts to the directors and the company may resume its business (Boyle and Marshall, The Practice and Procedure of the Companies Court, 1997 ed, at §9.175; Palmer’s Company Law, §15.164).  Any winding up order that has been made in relation to the company becomes inoperative without being revoked (Krextile Holdings Pty Ltd v Widdows [1974] VR 689 at 693).

(2) The power to grant a stay of winding up proceedings is discretionary.  The burden is on the applicant to make out a sufficient case for a stay that carries conviction (In re Calgary and Edmonton Land Co Ltd [1975] 1 WLR 355 at 358H to 359A).

(3) Before granting a stay, section 209(1) requires “proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed”.  Hence, it is not merely sufficient for the applicant to establish that a stay is reasonable in the circumstances.  He must satisfy the court that it ought to grant a stay (Krextile Holdings Pty Ltd v Widdows [1974] VR 689 at 694). 

(4) Where there are sufficient assets to pay all the creditors and the expenses of the liquidation, the interests of the members, in addition to those of the creditors and the liquidator, would be considered (In re Calgary and Edmonton Land, supra at 360C to G).   

(5) The Court would also consider whether the stay is “conducive or detrimental to commercial morality and to the interests of the public at large” (Re Telescriptor Syndicate Ltd [1903] 2 Ch 174 at 180; Krextile Holdings, supra at 694 to 695; Re Hua Hin (S) Co Ltd (unrep., HCMP 3965/1999, 6 December 1999, Yuen J).

12.  In considering the question of the solvency of the company, the Court may consider the undertakings given by the applicants are sufficient for the purposes of showing solvency.  The Court would take into account any arrangement which has been made to ensure that all the company’s debts are paid such that the company is for all practical purpose solvent.  A stay may also be deferred until the company’s debts were actually paid off (Re Luen Tat Watch Band Manufacturer Ltd, HCCW 497/2009, 27 November 2017, §2(5), per DHCJ To). 

C. Discussion

13.  The Applicant is one of the 2 contributories of the Company.  The other contributory, Harken Investments Ltd, also supports the application.  The ultimate beneficial owners of the contributories have agreed to pay the costs of the application.

14.  The OR confirms that she is not aware of any misconduct relating to the Company’s affairs or management and is neutral to the application.  There is thus no issue of commercial morality or public interests which militate against the Court granting a permanent stay of the winding up proceedings.   

15.  As regards the financial position of the Company, there is no dispute that the Petitioner is the only creditor remaining, the other creditors having withdrawn their proof of debts lodged with the OR. 

16.  Mr Jonathan Wong (appearing with Mr Bryan Lee) submits that the Company is solvent in that its assets are sufficient to pay the expenses of liquidation and the Debt in full. Any surplus after discharging all liabilities will be paid to the Petitioner by way of statutory interest pursuant to section 264A of the Ordinance.   

17.  Leaving aside the question of statutory interest, there is no dispute that as at the date of the hearing, the Company’s assets exceed its liabilities, leaving a surplus of $2,718,214.07:

	Assets	Liabilities
Cash held by OR	$126,165,373.29
Recovery from DTT, held by Array Electronics (China) Ltd (“ARC”)	$5,510,000.00[2]
Costs on account	$69,500.00
OR’s fees and expenses		$64,443.50
Costs incurred in enforcement action against DTT		$2,628,112.27[3]
Debt		$118,747,146.65
Untaxed costs of winding up proceedings (“Untaxed Costs”)		$7,586,956.80
Total	$131,744,873.29	$129,026,659.22

18.  In the evidence filed in opposition to the application, the Petitioner contends that the Company is insolvent. At the hearing, Mr Samuel Chan, counsel for the Petitioner, accepts (rightly) that the Company’s assets are sufficient to pay the expenses of liquidation and the Debt and in full.  He submits that pursuant to section 264A(2)(a)(ii) and section 264A(4)(b) of the Ordinance, the Petitioner is entitled to be paid the following sums:

(1) $33,164,415.64, being statutory interest on the Debt from the date of winding-up order to 29 June 2020 at judgment rate; and

(2) $2,427,826.18, being statutory interest on the Untaxed Costs from the date of winding-up order to the date of completion of taxation on 9 January 2021.

19.  Mr Chan contends that taking into account the liability to pay the aforesaid statutory interest, the Company’s liability “in the winding-up” is substantially more than its assets and, therefore, the Company is insolvent.  I disagree. 

20.  Where, as here, the assets realised by the Company are more than sufficient to discharge the expenses of liquidation[4] and the debts, the Company is solvent and the balance will become a surplus, which shall be applied to pay statutory interest in accordance with section 264A of the Ordinance.  Putting it in another way, it is only if the company is solvent that the obligation to pay statutory interest arises. 

21.  More importantly, Mr Chan’s contention that the Company is liable to pay the full amount of statutory interest, as opposed to the amount of surplus available to the Company, is erroneous, for the reasons explained below. 

22.  The starting point is section 264A of the Ordinance, which provides:

“(1) In the winding up of a company, not being an insolvent company, interest is payable in accordance with this section on the taxed costs of the petition and any debt proved in the winding up, including so much of any such debt as represents interest on the remainder.

(2) Any surplus remaining after the payment of debts proved in a winding up referred to in subsection (1) shall, before being applied for any other purpose, be applied in paying interest on the taxed costs of the petition and those debts in respect of the period during which the taxed costs of the petition and the debt have been outstanding, in the case of—

(a) a winding up by court—

(i) where the company has by special resolution resolved that the company be wound up, since the date of the resolution; and

(ii) in any other case, since the date of the winding-up order; and

(b) a voluntary winding up, since the commencement of the winding up (which must be construed having regard to section 228A(5)(a) or 230, as may be appropriate).

(3) All interest under this section ranks equally, whether or not the debts on which it is payable rank equally.

(4) The rate of interest payable under this section in respect of any debt is whichever is the greater of the following—

(a) the rate specified under section 49(1)(b) of the High Court Ordinance (Cap. 4); and

(b)  the rate applicable to that debt apart from the winding up.”

23.  In my view, it is clear from the opening words of section 264A(2) that statutory interest is only payable out of “any surplus remaining after the payment of debts proved in a winding up”.  The section creates an obligation, which is contingent upon a company being solvent and with a surplus after payment of proved debts, to apply such surplus to pay statutory interest.  The suggestion that the section can be invoked when the contingency exists (i.e. when a company is solvent with a surplus) but the very same section would remove that contingency (thereby making the section to become inapplicable) involves circuity of reasoning and would make the section to become unworkable. 

24.  Further, the contention that once section 264A is invoked, the creditors will have the right to require the company to pay statutory interest beyond the amount of surplus available does not accord with the statutory scheme of winding up.  This is because in the course of winding up, the liquidators can only apply the assets available to the company to pay the liquidation expenses, proved debts, statutory interest and distribution to the contributories in that order.  If the assets are not sufficient to meet all these payments, the liquidators will only be able to pay in accordance with the priority under the scheme, and if the amount is insufficient to pay all the persons entitled within the same class, then the persons will be paid in proportion to their claims.  There is nothing in the statutory scheme which has the effect of requiring the liquidators to find or apply assets beyond those available to the company so as to discharge the claims of any class of persons or persons within the same class in full. 

25.  Mr Wong relies on the judgment of the English Court of Appeal in In re Lehman Bros International (Europe) (in administration) (No 4) [2016] Ch 50 in support of his submission that statutory interest is payable only out of the surplus.  The case is concerned with a company in administration, where statutory interest is governed by rule 2.88(7) of the Insolvency Rule 1986[5], but the rule is virtually identical to section 189(2) of the Insolvency Act 1986[6] which applies to company in liquidation.  Section 189(2) of the Insolvency Act 1986 in turn is equivalent to our section 264A(2).  At §108 of Lehman Bros (No 4), Lewison LJ said:

“I agree also with the judge that rule 2.88(7) applies only to a surplus which arises, or which can be retrospectively shown to have arisen, in the course of the administration. But the factual premise on which we are working is that all creditors who have proved in the administration have been paid their debts (barring post-administration interest) in full. So I do not see why this is a real objection. I agree also that rule 2.88(7) can only entitle those who have proved in the administration to statutory interest….” (underlined added)

26.  In In re Lehman Bros International (Europe) (in administration) (No 4) [2018] AC 465, a case concerning the extent of members’ liability under section 74(1) of the Insolvency Act 1986[7] to contribute to the assets of a company in liquidation, where the English court had to determine whether  contributions can sought in respect of liability for statutory interest under rule 2.88(7), Lord Neuberger explained (at §139) the nature of statutory interest in this way:

“The position with regard to statutory interest is in my view very different. Statutory interest is due under rule 2.88(7), and that provision states that the liability to pay such interest is only out of any ‘surplus remaining after payment of the debts proved’. The contrary view was taken in the courts below, and I accept that their conclusion is more consonant with what one would expect. None the less, it seems to me that there is no answer to the simple proposition advanced by the LBHI2 administrators that, as section 74 only requires payment from contributories of an ‘amount sufficient for payment of [a company’s]…liabilities’, the section cannot be invoked to create a ‘surplus’ from which statutory interest can then be paid. If there is a deficit, there is no liability for statutory interest, and, if there is a surplus, there is only a liability for statutory interest to the extent of the surplus. Accordingly, in the absence of a sufficient surplus to pay all the statutory interest, there is no obligation to pay all the statutory interest, and therefore there can be no ‘liabilit[y]’ which a contributory could be called on to meet under section 74(1). In effect, the LBIE administrators’ argument to the contrary involves them pulling themselves up by their own bootstraps.” (underlined added)

27.  The above passages in Lehman (No 4) confirm that statutory interest is only payable when there is a surplus after payment of proved debts and up to the extent of the surplus available. It follows that the Petitioner’s entitlement to receive statutory interest is only limited to the amount of surplus available to the Company. 

28.  In considering whether the interests of the creditors will be prejudiced by a permanent stay of the winding up proceedings, the Court will consider whether the creditors will be worse off in financial terms.  This involves a comparison of the return to the creditors if the company remains in liquidation as against a stay of the winding up.  In this regard, this Court asks Mr Wong if the Applicant wants to maintain the argument, made in his skeleton, that the Petitioner’s right to be paid statutory interest does not arise as its proof of debt have not been adjudicated by the OR, which is said to be a pre-requisite for section 264A(1) to apply.  It seems to me that where there is no dispute that the Debt is due to the Petitioner, it is just a matter of formality for the OR to adjudicate and admit the Debt so as to convert it into a proved debt.  If the Applicant insists that there must be a formal adjudication of the Debt before the Petitioner is entitled to be paid the Debt and statutory interest, it would mean that the liquidation will have to continue so that the Petitioner will not be prejudiced by a stay.  Mr Wong confirms that the Applicant accepts that for the purpose of the application, the Debt should be treated as if it is a proved debt, such that the Petitioner is entitled to receive the Debt as well as the surplus available to the Company by way of statutory interest.   

29.  That being the position, the interests of the Petitioner will not be prejudiced if the Court directs, as a condition of a stay, that the entire surplus be paid to the Petitioner. 

30.  As the application has the support of all the contributories and the OR is neutral to the application, I am satisfied that this is a case which warrants the Court exercising its discretion to order a permanent stay of the winding up proceedings.   

31.  As for costs, I order the Applicant to pay the costs of the Petitioner in respect of the application, to be taxed if not agreed.  This accords with the fact that the Applicant bears the burden of satisfying the Court that it is an appropriate case to order a stay, and the Petitioner, being the only creditor of the Company, is entitled to be heard on such application.  Although the Court does not accept some of the contentions advanced by the Petitioner, this in part is the result of the Applicant seeking to argue at previous hearing and in skeleton that (1) the Petitioner is not entitled to receive statutory interest as the Debt has not been adjudicated, and (2) the obligation to pay statutory interest is not a liability of the Company.  Both arguments are abandoned only at the hearing. 

32.  As to the form of order, I order that the winding up proceedings of the Company be stayed permanently, upon the undertaking given by the Applicant to pay $2,628,112.27 (being the net amount stated in ARC’s Letter) to the Petitioner within 5 working days hereof and the following conditions:

(1) the OR is entitled to be paid out of the cash fund in the liquidation account of the Company, her remuneration, expenses, fees and costs of and arising out of the winding up of the Company (collectively “Liquidation Expenses”);

(2) the OR shall as soon as reasonably practicable apply the balance of the cash fund, after payment of the Liquidation Expenses, to discharge the Untaxed Costs and the Debt owed by the Company to the Petitioner; and

(3) the OR shall as soon as reasonably practicable pay the entire surplus (i.e. the cash fund after payment of the Liquidation Expenses, Untaxed Costs and the Debt) in the liquidation account of the Company to the Petitioner.

33.  I also order that the OR be released as liquidator of the Company upon the compliance with all the conditions and the stay taking effect, and the usual order requiring the Applicant to deliver a sealed copy of the order to the Registrar of Companies for registration.