ALIS ACADEMIC LTD v. ARES ACADEMIC LTD

HCMP 1728/2024

[2024] HKCFI 2701

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1728 OF 2024

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BETWEEN

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JUDGMENT

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A. INTRODUCTION

1.  This is the hearing of the originating summons (“OS”) taken out by P against D on 9 September 2024. By the OS, P seeks to restrain D from presenting a winding-up petition based on a statutory demand dated 22 August 2024 (“SD”), under which D demanded P for immediate settlement of a sum of HK$347,372.05, with an Annexure A to the SD describing the debt as 50% of rental deposit, rents, management fees, utility bills and other fees in relation to the “Premises” (as defined therein) (“Alleged Debt”) pursuant to “an oral agreement between [P] and [D] to share the Premises in equal proportion” (“Alleged Oral Agreement”).

2.  On the same day when the OS was issued (i.e. 9 September 2024), P sought an ex parte (on notice) interim injunction against D. The Hon Linda Chan J declined to hear such application because there was no proper basis to make the application on an ex parte basis. She directed that all papers be served on D and indicated that it appears that the Alleged Debt is subject to a bona fide dispute on substantial ground and, therefore, cannot form the subject matter of a statutory demand. She further directed that the application be heard by her on 12 September 2024 unless D confirms by 12 noon on 11 September 2024 that it will withdraw the SD.

3.  The OS and the supporting Affirmation of Ko Suet Yim (“Ms Ko”) were served on D’s solicitors in the morning of 10 October 2024. On 11 September 2024, D’s solicitors informed P’s solicitors that D would withdraw the SD. The court was notified and the hearing was vacated. D further sought directions for filing of further evidence to address the issue of costs but the Hon Linda Chan J refused, stating that “It would be a waste of time and costs for the parties to file any affirmation to deal with costs”.

4.  Notwithstanding this, on 23 September 2024, D filed the Affirmation of Or Chak Lam whilst on 24 September 2024, P filed the Affirmation of Tam Pok Him.

5.  As the SD has now been withdrawn by D, the OS has been rendered academic and the only remaining issue is the question of costs. P asks for costs to be paid by D on an indemnity basis, whilst D asks for no order as to costs.

B. RELEVANT PRINCIPLES

6.  The relevant principles in determining the question of costs in a winding-up context may be summarised as follows:

(a) The winding-up procedure is intended only to be used in straightforward cases. It is not a means of asserting pressure on a company, which the creditor knows is probably solvent, for payment of a disputed debt. It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence: Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487, [11]; Re Alpha Building Construction Ltd (unreported, HCCW 283/2014, 20 May 2015), [6]-[7]; Re Sino Pacific Corporation Ltd (unreported, HCCW 257/2015, 20 January 2016), [14].

(b) Where a case is resolved without the need for substantive argument, the starting point was to ask which party had succeeded. Where it can fairly readily be said that a petitioner (or a plaintiff) has either been successful or unsuccessful in attempting to obtain what was sought by issue of a petition (or an originating summons), costs should be determined by reference to whether or not the petition (or the originating summons) has been successful. The court should not be required or need to spend time dealing with speculative arguments about what might or might not have happened if one or other of the parties had dealt with the matter differently. Only if it was unclear which side had succeeded was it necessary for the court to consider the substantive issues. In short, costs will follow the event: Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550, [8]-[12] (citing inter alia Chinese United Establishment Ltd v Nice Gain Enterprises Ltd (unreported, CACV 214/1995, 24 April 1996)).

(c) The position is more complex where a case has settled and where the terms of settlement do not involve the court granting any relief and the petitioner (or the plaintiff) only obtains something substantive under the terms of an agreement. The correct approach to determining costs in such cases is for the court first to consider the terms of settlement and assess whether the petitioner (or the plaintiff) has obtained substantially what he sought in his petition (or originating summons). If the answer is in the affirmative, it will not be necessary or appropriate for the court to consider evidence and arguments directed to the merits of the case, and the petitioner (or the plaintiff) will be treated as having been successful and entitled to his costs: Re Lucky Ford Industrial Ltd, supra, [13]-[14].

(d) Another similar situation is where the case has become academic and a claim is withdrawn because of subsequent events (like the withdrawal of the SD here). In such case, the discontinuing party is entitled to costs if it is the effective winner, and a broad brush approach can be taken by referring to all matters already laid before the Court: China Shanshui Cement Group Limited v Ng Sau Man Clifford [2020] HKCFI 2677, [20]-[29]. Nevertheless, even in such scenario, there seems to me no logical reason why the other principles stated herein should not similarly apply.

(e) It is not an answer for an alleged creditor to say that it was not until it received the alleged debtor’s affirmation that it understood the reasons why payment of the alleged debt was disputed. It is for the alleged creditor and its advisors to assess, in the first instance, whether or not it is an appropriate case in which to issue a winding-up petition (or similarly a statutory demand). If their assessment proves to be incorrect, and they recognise that in the light of matters of which they become aware after the petition (or the statutory demand) is issued, the petition should be dismissed (or should not be presented to begin with). They should also accept consistent with such reasoning that they will have to pay the costs: Re Sino Pacific Corporation Ltd, supra, [7].

(f) If an alleged creditor knew or should have appreciated that there was a bona fide dispute in respect of the debt before the petition (or statutory demand) was issued, it is appropriate for the court to make an indemnity costs order as it amounted to an abuse of process: Re Alpha Building Construction Ltd, supra, [14]; Re Sino Pacific Corporation Ltd, supra, [8], [13]; Hung Yip (HK) Engineering Co Ltd v Kinli Civil Engineering Ltd [2021] 1 HKLRD 860, [15].

C. ANALYSIS

7.  In the present case, D’s withdrawal of the SD necessarily means that D could no longer present a winding-up petition as the underlying basis (the SD) is gone. It is thereby no longer necessary for P to continue with the OS and the application for injunction. In other words, the OS has been rendered academic because of the step subsequently taken by D to withdraw the underlying SD, such that it is no longer necessary for P to continue with the OS to seek to restrain D from presenting a winding-up petition. It appears that in such circumstances the proper course for P to do is to discontinue the OS and I would grant leave for P to do so. Notwithstanding that, it can be fairly readily be said that P has been successful in attempting to obtain what was sought by issue of the OS. As emphasised by Mr So in oral submissions, P is the effective winner; and Mr Tang does not suggest otherwise.

8.  Applying the principles above particularly those in the winding-up context, P should be entitled to costs without the need for the court to look at the further evidence filed after the withdrawal of the SD. In this regard, I agree with Mr So’s primary stance that it is not appropriate for the court to allow parties to file affirmation evidence to contest the costs of the OS.

9.  Consistent with the foregoing and as mentioned above, the Hon Linda Chan J had in fact refused, despite D’s specific request, to grant directions for the filing of further evidence to address the issue of costs. On behalf of D, Mr Tang submits that notwithstanding such refusal, the court has not prohibited the parties from filing further evidence. He further submits that D has filed evidence in accordance with O28 r1A(4) of the Rules of High Court. With respect, given the fact that the OS has become academic, there is no reason for the parties to file any further evidence save to address the issue of costs, for which leave was specifically sought but refused by the court. It seems arbitrary to suggest that D could nevertheless invoke O28 r1A(4) of the Rules of High Court to file evidence on the issue of costs which effectively circumvents the directions made (and the views expressed) by the Hon Linda Chan J. In my view, Her Ladyship’s view is consistent with the authorities and if any party nonetheless disagrees, the proper course is for such party to formally apply for leave to file further evidence. Alternatively, even if no formal leave is required, I am of the view that, in line with the principles summarised above, it is in any case not necessary or appropriate for the court to go into the further evidence.

10.  I also agree that it is not an answer for D to say that it only realised after the receipt of P’s affirmation evidence that P has a bona fide defence to D’s claim. It follows that P should be entitled to costs against D without the need to look into substantive merits or further evidence.

11.  Moreover, even without looking into the substantive merits or further evidence, D should have appreciated, from the fact that it is relying on an alleged oral agreement (which is by nature susceptible to dispute) without much (if any) particulars thereof stated in the SD, that there was a bona fide dispute in respect of the Alleged Debt. It is therefore appropriate for costs to be ordered against D on an indemnity basis.

12.  Without prejudice to the foregoing, even if the parties were allowed to rely on the further evidence adduced before the court, it does not appear to me that they would substantially assist D. Indeed, as Mr So put in in his oral submissions, even if practically the court is to take those evidence into account, it would only weaken D’s position (particularly having regard to the letter from P’s solicitors dated 2 September 2024, which is addressed further below).

13.  First of all, P and D are companies engaged in the business of education consultancy. On behalf of P, Ms Ko outlined the factual background of business collaboration between P and D in her Affirmation. It is significant that Ms Ko was a shareholder and a director of both P and D and yet there is no incontrovertible evidence that Ms Ko was made aware of the Alleged Oral Agreement. On her evidence, the Alleged Oral Agreement was first referred to in the purported board minutes of the meeting of D on 10 July 2024 for which she did not receive any notice. This is to some extent echoed by the minutes which refer to Ms Ko as being absent, and the document does not bear her signature.

14.  Whilst Mr Tang points to another unsigned board minutes dated 22 May 2024, they do not set out the Alleged Oral Agreement. I accept that there is some force in Mr Tang’s reliance on the part which says that “[P] shares 50% of rent of the location now”, which may point to P’s acceptance of an obligation to pay 50% of rent as at that point in time. However, this is not by reference to a specific oral agreement. One must also not forget that this is preceded by a rather equivocal statement that D is expected to take up the whole rental agreement if P is inactive, which seems to suggest that the arrangement is a fluid and flexible one depending on the need or usage of the premises, which begs the question if there were already a clear and binding oral agreement in existence in the first place. In any event, Mr So emphasises that P does not accept the validity and genuineness of the unsigned board minutes.

15.  Further, Mr Tang relies on the reminders and invoices to D in July and August 2024, but to some extent these could be said to be self-serving particularly when the claim and the existence of the Alleged Oral Agreement were categorically denied in the letter dated 2 September 2024 from P’s solicitors.

16.  In addition, it may be noted that neither the SD nor correspondence prior to its issuance purported to set out the particulars of the Alleged Oral Agreement, including for instance the date, the place and the personnel among whom it was entered into. These particulars were only subsequently put forward in D’s Affirmation.

17.  All these cast doubts on the existence of the Alleged Oral Agreement which cannot be summarily resolved.

18.  Second and importantly, the letter dated 2 September 2024 from P’s solicitors made clear that there is a dispute on the Alleged Oral Agreement. As submitted by Mr So, if the SD is withdrawn on that juncture, the costs incurred in the present proceedings would have been saved.

19.  On behalf of D, Mr Tang argues that the letter of 2 September 2024 contains bare denial, and no explanation is given as to why P was using D’s premises for free. He also emphasizes that P in fact has a positive case as to why no rent is payable but that was only mentioned in Ms Ko’s Affirmation in support of the OS, namely that she had asked her mother to make available premises in the PRC for use by D. As Mr Tang puts it, the letter of 2 September 2024 is manifestly inadequate, and it is conduct which the court should take into account.

20.  Whilst I can see the logic of Mr Tang’s argument, this ignores the fundamental principle that the winding-up process is only intended for straightforward cases. If a matter cannot be summarily resolved because of the inherent nature of a claim or the fact that such claim is hotly contested, then it would not be right for a creditor to resort to the winding-up process. The creditor cannot simply shift the burden to the debtor for failing to come up with sufficient particulars of a defence. As Harris J put it in Re Sino Pacific Corporation Limited, supra, [7]:

“Although it may be prudent indeed, it seems to me that invariably it would be, for any company faced with a statutory demand, to inform a petitioner of its grounds for disputing the underlying debt with a view to preventing a petition being issued and its bank account frozen, it does not follow that if, for any reason it fails to do so, that a petitioner becomes automatically entitled to its costs if it presents a petition which once it receives an affirmation in opposition, and concludes it is sensible to agree to have the Petition dismissed. It is for the petitioner and its advisors to assess, in the first instance, whether or not it is an appropriate case in which to issue a winding-up petition. If their assessment proves to be incorrect, and they recognise that in the light of matters of which they become aware after the petition, the petition should be dismissed. They should also accept consistent with the reasoning in Lucky Ford, that they will have to pay the costs.”

21.  Further, whilst it may be said that the letter of 2 September 2024 could contain more particulars, I consider that the letter should have sufficiently brought to D’s notice that P strenuously denies the existence of the Alleged Oral Agreement which, by nature of such agreement being an oral one, is unlikely to be capable of being summarily resolved. In particular, it is significant that the letter of 2 September 2024 put on record that (i) D never communicated the Alleged Oral Agreement to P, (ii) P never agreed and/or accepted the Alleged Oral Agreement, (iii) P had no knowledge of the Alleged Oral Agreement until the issuance of the SD, (iv) no board meeting and/or board resolution of D has been called and/or passed in relation to the Alleged Oral Agreement, and (v) no board meeting was called and/or board resolution of D had been passed in relation to the issuance of the SD. Given the numerous factual issues in dispute, it seems plain that the matter could not be resolved summarily, regardless of the fact that the two sides might have their own account of the events.

22.  In the circumstances, D should have appreciated, at the latest by the receipt of the letter of 2 September 2024, that it should not have issued the SD or otherwise seek to present a winding-up petition.

23.  Third, despite being a director of D, Ms Ko was never made aware of any board meetings of D for the discussion and/or resolution of the issuance of the SD on 22 August 2024. Indeed, it was not until 4 September 2024 that a notice of board meeting was issued, stating that agenda “will include discussions on the ratification of the issuance of statutory demand against [P]”. This seems to suggest that the SD was never properly authorised and issued in the first place. This casts doubt on the validity of the SD.

24.  Fourth, on 9 September 2024 at 1100 hours, a board meeting was held by D. In a home-made minutes of D, it was noted by the directors present at the meeting that “… the issuance of the statutory demand is intended as a means to apply pressure on [P] in order to assist [D] in recovering its debt as negotiations have reached a roadblock” and “a winding-up petition against [P] remains an option…” (“Board Minutes”). Such document reflects the intention of D in issuing the SD to put pressure on P. Given my view that D should have appreciated that there is a bona fide dispute on its claim, this would amount to an abuse of process.

25.  In this regard, whilst Mr Tang argues on behalf of D that there is nothing improper for D to apply commercial pressure on P to seek payment of an undisputed debt, it only begs the question whether D should have appreciated at the very least that there were grounds upon which P could credibly argue that it had a bona fide dispute on substantial grounds. For the reasons canvassed herein, it seems to me that the answer is in the affirmative and costs should be paid on an indemnity basis.

26.  Fifth, I am not persuaded by D’s argument that D may not resort to a winding-up petition eventually, and there is no imminent need for P to take out the present proceedings. It must be borne in mind that the 21-day time limit of the SD will lapse after 12 September 2024, and D has refused to withdraw the SD by 4 September 2024 notwithstanding the request in letter dated 2 September 2024 from P. It seems unreal to suggest that P should do nothing in the interim but wait for the board meeting on 9 September 2024.

27.  Further, whilst the Board Minutes recorded that the Board does not intend to petition for winding-up “at this stage” and that the Board will only consider this route after a future board meeting, they did say that a winding-up petition remains an option. There is no reason why P could not issue proceedings to clear such threats which may materialise in future.

28.  In any case, as confirmed by Mr So on behalf of P, they are only seeking the costs of the OS but not the costs of the application for interim injunction. As such and if one is merely focusing on the OS itself, there is even less reason to criticize P for taking legal action on the ground of lack of urgency.

29.  On balance, given that D had issued the SD and in the absence of withdrawal of the same (which only took place on 11 September 2024), it seems to me that P is at least entitled to err on the safe side and take out the OS on the basis that a winding-up petition may be presented in future.

30.  As submitted by Mr So, a rationale for awarding costs on an indemnity basis is to recognise that the Companies Court is a busy one and the winding-up process is only meant for disposal of straightforward cases in a speedy and summary manner. In order to avoid litigants abusing the winding-up process, indemnity costs orders would be made in appropriate cases, i.e. where the creditor knew or should have appreciated that there was a bona fide dispute in respect of the debt before a statutory demand or a winding-up petition was issued. For the avoidance of doubt, this does not necessarily mean that the creditor does not have a good (or even strong) case; rather it simply reflects the fundamental principle that the winding-up process is intended for straightforward cases only.

31.  For all these reasons, even if I am to consider the further evidence, I remain of the view that D should pay P’s costs on an indemnity basis in line with the principles summarised above.

32.  That said, I should mention that there is no real justification for P to seek the injunction on an ex parte basis (albeit on notice). The SD was issued on 22 August 2024 and a winding-up petition could only be presented after the lapse of 21 days. It is open to P to issue the OS and seek interim relief on an inter partes basis in the interim, and it seems to me that the costs incurred in the intended ex parte application should not be borne by D. Indeed, it was also the view of the Hon Linda Chan J that “There is no proper basis to make the application on an ex-parte basis as the imminent expiry of the period for compliance with the SD was the result of the delay and inaction on the part of the Plaintiff”. In this regard, as mentioned above, Mr So has fairly confirmed that P is only seeking the costs of the OS but not the costs of the application for interim injunction. He has also confirmed that he is seeking certificate for one counsel only insofar as today’s hearing is concerned.

33.  In the premises, save that there should be no order as to costs for the Plaintiff’s application for interim injunction, I order that the costs of the OS, including the costs of the hearing on 30 September 2024, be paid by D to P on an indemnity basis, with certificate for one counsel, to be taxed if not agreed.

34.  It remains for this Court to thank Mr So and Mr Hui for P and Mr Tang for D for their helpful submissions and assistance rendered to the Court.