KEDA ELECTRON LTD v. ARCTIC COOLING (HK) LTD

HCMP 851/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 851 OF 2011

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BETWEEN

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RULING ON COSTS

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1.  This is a hearing to determine the costs of an application made by Keda for an interlocutory injunction to restrain Arctic from presenting a winding-up petition against Keda based on a statutory demand dated 7 April 2011. I will call it “the SD” hereinafter.

2.  Keda’s application for injunction arose in the following material circumstances. 

3.  Keda and Arctic entered into a master purchase order (“MPO”) dated 18 December 2009, whereby Keda agreed to purchase from Arctic a total of 50,000 pieces of VGA coolers.  It is common ground that under the MPO, Keda was to order these 50,000 coolers in batches.  Since late January 2010, Keda had placed various orders for the coolers.  Arctic would issue separate invoices for each batch of the coolers delivered for payment. 

4.  The evidence shows that, at the latest since March 2010, Arctic had complained about defects found in some of the coolers supplied to it, and Arctic had been discussing the problems with Keda.  At the same time, Arctic further issued eight invoices in May and June 2011 (collectively, the “May and June invoices”) in the total sum (“the Sum”) of US$62,877.80 (equivalent to HK$490,446.84), for various coolers thus supplied thereunder.

5.  Although Keda paid the invoices issued before the May and June invoices, Keda did not settle the May and June invoices.  Arctic had, by correspondence, demanded Keda to pay the Sum. Arctic indicated in a letter dated 28 July 2010 that it would start winding-up proceedings by serving a statutory demand if Keda did not pay the Sum by 6 August 2010.  Thereafter, between July 2010 and April 2011, the parties were engaged in correspondence (later through their solicitors) regarding Keda’s refusal to pay the Sum.

6.  In gist, Keda, by this correspondence, had stated that the coolers that had been supplied by Arctic were defective and Keda had thereby suffered a loss in an amount of not less than HK$1.6 million, and it was still in the process of verifying the full extent of the defective goods and its loss.

7.  Arctic’s solicitors, King & Wood, however asked for details and breakdowns of the alleged defects of the coolers and Keda’s loss and damage.  Later by a letter dated 7 April 2011 of King & Wood, it was said that Arctic had failed to provide any of the details and particulars asked for.  It therefore drew the inference that Arctic did not have a genuine and substantiated claim.  On the same day, King & Wood served on Arctic the SD demanding the payment of the Sum based on the May and June invoices. 

8.  By a letter dated 27 April 2011, Keda’s solicitors (“MC”) wrote to King & Wood, stating that Keda’s cross-claim was a serious and genuine one and Arctic should well know about the substance of the claim.  In support, it was further enclosed in the letter copies of the various product inspection reports and the previous correspondence between the parties relating to the defectiveness of the goods.  MC thereby demanded Keda to withdraw the SD immediately.

9.  By a letter dated 11 May 2011, King & Wood replied and maintained the position that the so-called evidence supplied by MC in the previous letters did not support a genuine cross-claim by Keda.  It further stated that unless they received substantive reply with supporting evidence from MC, they would present the winding-up petition against Keda without further notice, and it asked MC to treat that letter as Arctic’s 48 hours’ notice to Keda for issuing the winding-up petition. 

10.  That was the state of play as at 11 May 2011.

11.  Then, on 12 May 2011, ie, one day after that letter, Keda took out an ex parte originating summons under these proceedings, on notice, seeking an injunction to restrain Arctic from presenting a winding-up petition against Keda until further order of the court.

12.  The parties went before Recorder A Ho SC on the same day for the injunction application on an urgent basis.  However, at the hearing, Keda, through its counsel, offered an undertaking to the court to make a payment into court of the Sum, while Arctic, through its solicitors, was also willing to undertake not to present a winding-up petition against Keda based on the SD until the substantive determination of the originating summons (that is the injunction application) or further order of the court.

13.  Based on this cross-undertaking, by consent, the learned recorder ordered that the ex parte originating summons be turned into an inter partes originating summons (“OS”), and gave directions for the parties to file evidence therein for a substantive hearing.  Arctic made payment of the Sum into court on 13 May 2011 pursuant to their undertaking.  At the same time, the substantive hearing of the OS was fixed before this court on 21 November 2011.  The parties had since filed their respective evidence for that purpose.

14.  On 16 November 2011, Keda issued HCA1961/2011 (hereinafter HCA1961) against Arctic claiming, inter alia, damages in the sum of approximately $1.5 million for the defective coolers supplied to it by Arctic. 

15.  On 21 November 2011, the parties came before this court for the hearing of the OS.  At the court’s suggestion, the parties agreed to continue with their respective undertakings until the determination of HCA1961.  However, the parties could not agree on the costs of the injunction application.  At the same time, again, at the court’s inquiry, the parties indicated that they were prepared to negotiate to settle their overall dispute in relation to Arctic’s claim and Keda’s claim under HCA1961.  The court thus adjourned the determination on costs to hopefully facilitate the parties to attempt settlement. 

16.  Since then, the matter on costs has been adjourned a few times, hoping that the parties would settle their overall disputes.  Their last attempt on mediation was in June 2012 but failed.  The question of costs of the injunction application under the OS is thus before this court today.

17.  The central question in determining costs for the present purpose is whether the court would have granted the substantive injunction application had it required to hear it. 

18.  Insofar as that is concerned, the relevant legal principles can be summarised as follows.  As laid down by Kwan J (as she then was) in Re Sinom (Hong Kong) Limited [2009], 5, HKLRD 487 at paragraphs 8 to 15:

          (1)     The court will grant an injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process.  Such relief is to be granted with great circumspection and a would-be petitioner would not be restrained from presenting a petition unless there are persuasive grounds. 

(2)     Secondly, it is an abuse of process to present a winding-up petition based on a claim where there is a bona fide dispute on substantial grounds, that is, where a company has a triable defence or a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt. 

(3)     Thirdly, the onus is on the company receiving the winding‑up petition to show that its cross-claim is genuine, serious and of substance. 

19.  In the present case, in support of the injunction application, Keda relies on its cross-claim against Arctic and the cross-claim arose, as I pointed out earlier, on the allegation that there were defective coolers supplied to Keda by Arctic in the course of dealings.  The amount of the cross-claim set out in the affirmation in support of the injunction is in the region of $1.6 million.  As I said, in the HCA1961, the amount of damages claimed arising from this cross‑claim has been reduced to $1.52 odd million.

20.  It is trite that, in determining whether there is a genuine claim, the court, for that purpose, needs not go into detail to analyse the eventual merits of the claim as to whether the claim will eventually succeed.  What it needs to do is to come to a view whether it is a serious and genuine claim on the basis of the evidence now before the court. 

21.  From the evidence that has already been supplied to the court under the affirmations filed in support of the injunction, I come to the view that there is at least a genuine cross-claim in the amount that would go beyond the $500,000 claim made by Arctic.  Given that this cross-claim is now under the action of HCA1961, for the present purpose, I will only give a very brief comment and observation as to why I say there is a genuine claim for that purpose of the injunction.

22.  As I said, the evidence shows that since the latest March 2010, Keda has been discussing with Arctic about some of the defectiveness of the air coolers supplied to it, and that this defective complaint is, on the face of the present evidence, supported by various reports in fact produced by Arctic itself, and also various correspondence between Keda’s personnel and Arctic’s personnel.  That, on the face of it, cannot be said to be wholly disingenuous, as I think Ms Yeung, for Arctic, seeks to argue.

23.  In opposition, and relying on the skeleton prepared by counsel (then appealing for Arctic) filed for the purpose of the November 2011 hearing, Ms Yeung raises basically three grounds to say why Keda’s claim cannot be genuine.  First, she relies on various so-called standard terms and conditions of Arctic to say that there could not be any set-off in relation to various goods supplied under different invoices, and that, in any event, the claim for defective goods can only be limited to 20 per cent of the price of the goods.

24.  Leaving aside the contents of these provisions, Keda’s point is that these clauses have not been incorporated into the contract evidenced by the MPO when they entered into it in December 2009.  Looking at the MPO itself, it did not contain those so-called standard terms and conditions.  There is therefore at least a factual dispute as to whether and how these standard terms and conditions have been incorporated into the contract between Keda and Arctic.  I therefore say there is at least a triable issue in relation to this. 

25.  Secondly, Arctic also argues that there cannot be any legal or equitable set-off under the claim now mounted by Keda against Arctic, the reason being that even if there is any evidence to suggest that there is any defectiveness of the goods, they were the goods provided not under the May and June invoices but related to earlier deliveries.  Even if that is the case, I am of the view that whether there could be legal or equitable set-off in relation to these claims for defectiveness of the goods provided in batches earlier than those of the May and June invoices, depends on whether these transactions could be regarded as closely connected under the decision of Townearn Industrial Ltd v Golden Globe Holdings Ltd [2003] 1 HKC 186 at page 192A. 

26.  These again are factual matters that need to be tried.  I cannot at this stage come to the view that Keda’s claim for equitable set‑off must fail.  In particular, I accept Mr Li’s submissions for Keda that, on the face of it, all these deliveries came from one MPO which suggests that they might be regarded as closely connected transactions.  But as I said, I will not comment any further because this is now the subject matter of HCA1961.

27.  In any event, I also accept Mr Li’s submissions that even if these transactions were so separate to prohibit an equitable set-off, for the purpose of resisting a winding-up petition, a cross‑statement is just as effective as an equitable set-off (see Re Sinom (Hong Kong) Limited at paragraph 11).  Therefore, it is no longer necessary for me to deal with also Arctic’s submissions that there is nothing to suggest that there are defectiveness of the goods supplied under the May and June invoices.  As I say, even if Arctic was correct on this, which I am not going to comment on any further, it does not mean that Keda’s cross‑claim for the other defective goods supplied cannot be regarded as a proper cross-claim for the purpose of resisting a winding-up petition presented against it.

28.  Insofar as the amount of the cross-claim is concerned, Keda has now pitched it at the level of $1.5 million.  Again, with the evidence before me, I cannot say that it is clear to me that this $1.5 million claim is disingenuous, nor can I say that there is clear evidence before me to show that the cross-claim can only be less than the $500,000 now claimed by Keda.

29.  For all these reasons, I am of the view that Keda has demonstrated that it has a genuine dispute of a cross‑claim which will be exceeding the $500,000-odd claimed by Arctic under the May and June invoices.  Therefore, I would have granted the injunction if I had to determine it substantively.

30.  I would say one more thing. 

31.  The fact is, a petition for winding up presented based on a SD is premised on the basis that the non-compliance of a SD would be regarded as prima facie evidence to show that the company is insolvent and unable to pay its debts.  That is why it is the usual ground relied on by a would-be petitioner for the purpose of winding up a company.  So a statutory demand is but one factor, one usually powerful factor, to show that the subject company is insolvent.  But in the present case, Keda has put into court the very Sum demanded under the SD.  For that purpose, I am of the view that there is no way that a winding-up petition could be presented against the company on the basis of that debt.  If I were to rule just purely on that, I would have granted the injunction as well on the basis that the company has demonstrated that it was able to pay the debt and it is not insolvent for that purpose.

32.  Ms Yeung, for Arctic, submits that even if that is the case, the court should consider the conduct of the parties and whether Keda has taken out the injunction application in bad faith for the purpose of determining whether costs should be awarded to Keda. 

33.  As far as I can see, most of Ms Yeung’s submissions on the questionable conduct of Keda and that the injunction application was taken out in bad faith were premised upon her submissions that Keda does not have a genuine claim and it has not provided enough information to Arctic and King & Wood before the service of the SD.

34.  For the reasons that I have just given, I do not agree with Ms Yeung, with respect.  In my view, the evidence of reports and email communication and correspondence do provide sufficient prima facie materials that there is a genuine cross-claim for the purpose of taking out the injunction application.  I cannot therefore say that the injunction, in particular in light of King & Wood’s letter dated 11 May 2011 threatening that they would take out a winding‑up petition within 48 hours, was taken out in bad faith.

35.  Ms Yeung has another point.  She said that after the November hearing for the purpose of facilitating negotiation, the parties arranged an inspection of the so-called defective goods.  Ms Yeung says Keda has not been fully co-operative, and also has been obstructive in providing information requested by Arctic in relation to those defective goods.  She therefore said that Keda has not been conducting itself in a way which is in compliance with Order 1A of the High Court Rules, in that it was not conducting itself in a way to facilitate the efficient resolution of the dispute and to facilitate settlement and negotiation.

36.  I again do not agree with Ms Yeung.  The court will not look into the details of these matters of inspection when, at that time, there was of course still the pending HCA1961, and it cannot be said to be wholly unreasonable on the part of Keda to be wary that, under the cover of settlement negotiation, Arctic was, at the same time, using the occasion to obtain or fish for information and evidence in support of its defence.

37.  I would, however, of course say that the parties should try their best to conduct themselves in the negotiation for settlement.  This matter has been adjourned for a number of times.  The parties had attempted mediation and this has failed.  On the face of the materials before me, I cannot come to a clear view one way or the other to say that any of the parties had been unreasonable or had been in bad faith in the conduct of the negotiations for settlement.  I therefore do not think there are any conducts at the moment, on either party, to affect my exercise of discretion on costs in relation to the injunction application. 

38.  For the above reasons, I will order that costs of the injunction be to Keda, to be taxed if not agreed.

39.  As requested by counsel for Keda, to avoid any doubt, I also give certificate for counsel.