XCHRX WONG HO CHEUNG v. D.S. OFFSET PRINTING CO. LTD.

HCA12852/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12852 OF 1999

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J U D G M E N T

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Application to stay proceedings

1. This is an application by Mr Ho Siu Sing ("Mr Ho"), a contributory in the Defendant, to stay the two actions brought by the Plaintiffs against the Defendant, on the ground that he had presented a winding-up petition against the Defendant.

Background

2. The Defendant has four directors and in essence four shareholders who are the four directors themselves. Disagreement occurred among the four directors/shareholders which in effect divided the management into two camps. Mr Ho and his wife are on one side while Mr Diu and Mr Kan are on the other.

3. In High Court Action No.12852 of 1999, the Plaintiff had obtained judgment against the Defendant in the sum of $6.7 million in default of Notice of Intention to Defend. No execution had been levied on the judgment. In respect of the other High Court action, Mr Ho and his wife had lodged an Acknowledgment of Service on behalf of the Defendant to contest the action.

4. Mr Diu and Mr Kan said that they had examined the documents and found that the Defendant had no merits in defending the two actions. They further said that the Defendant had no other creditors and, after deducting the two claims by the Plaintiffs, the Defendant still has a net asset of about $2.7 million. Mr Ho, on the other hand, said that the Plaintiffs in the two actions are connected to Mr Diu and Mr Kan in terms of business dealings.

The principle

5. Under section 181 of the Companies Ordinance, after the presentation of a winding-up petition, the company, or any creditor, or contributory may apply to stay actions against the company. The Court may stay the action on such terms as it thinks fit. In Bowkett v. Fullers United Electric Works, Limited [1923] 1 KB 160, Bankes LJ. held at p.163 that :

"... The general policy of the Court in exercising this jurisdiction, when a petition has been presented which may result in a winding-up order or a scheme, is to secure that no creditor shall thenceforward gain priority over others of his class, and when an application is made to stay proceedings under s. 140 very exceptional circumstances must exist to justify the Court in refusing to accede to the application, because if the plaintiff's action is not stayed he will get payment in full while if his action is stayed he will take his place properly among other creditors of his class. ..."
(emphasis added)

See also Attlee Investment Limited v. Lee Chuen trading as Lee Chuen Furniture Company and Others [1983] HKLR 420.

6. Both the Plaintiffs and Defendant opposed the application. Mr Lau, Solicitor for the Defendant, argued that the principle in Bowkett only applies to insolvent companies. In this case, the Defendant is indeed an insolvent company. According to the balance sheet of the Defendant for the year ended 31st March 1999, the net liabilities of the company were $5,724,707.14. In the management account of the Defendant for the period April to August 1999, while a net asset of $2,716,891.77 was shown, it had not taken into account the loss of $3,716,113.12 being the loss of $4,116,113.12 less the share capital of $400,000. Mr Lau further referred to Herbert Berry Associates v. IRC [1978] 1 All ER 161 in which Lord Simon referred to previous cases including In re Roundwood Colliery Co. [1897] 1 Ch 373 at 381 where Stirling J. held that :

"... a creditor who has issued execution, or a landlord who has levied a distress, before the commencement of the winding-up will be allowed to proceed to sale unless there is established the existence of special reasons rendering it inequitable that he should be permitted to do so."

Mr Lau submitted that this case showed that the proceedings should be allowed to continue unless it is inequitable to do so. In my view, Herbert Berry had no application to the present case because first, the argument there was concerned with a creditor who had issued execution. In the present case no execution had been levied under the judgment. Second, it is clear from the judgment that Lord Simon did not go as far as the earlier cases, this is clear from p.169 of the judgment where he held that :

" Presumably the reason why the discretion has been exercised in such a way as to allow the distress to proceed to sale unless it is inequitable that it should not do so is that the Court of Chancery did not interfere by injunction with the exercise of a legal right unless that right was being exercised unconscionably. I would myself in these days prefer to regard the discretion as unfettered, the fact that the distrainor is exercising a legal right being regarded as an important factor for consideration in the exercise of the discretion." (emphasis added)

The real question

7. The real question in this case is this : if the rationale for staying a pending action against a company is to ensure that the creditors are treated equally, then should this principle apply in the present case to a contributory's petition for winding-up when he is not a creditor and there is no suggestion of any other creditor apart from the Plaintiffs. In relation to a contributory, it is only after the creditors have been paid in full that any surplus is distributed among the contributories : Halsbury's Law of England, 4th Ed. 1996 Reissue Vol.7(3) para.2563. Mr Ho is not a creditor of the company and the rationale that some creditors should not have advantage over the others of the same class in a distribution scheme would not apply to him.

Genuine claims

8. The issue then becomes whether the Plaintiffs in the two actions have a genuine claim against the Defendant so that if the claim is not genuine, they should not gain an unfair advantage. It is not disputed that in a meeting of the directors of the Defendant, a resolution was passed resolving that the Defendant would not contest the two actions. The resolution was passed with the casting vote of Mr Diu. Mr Ho and his wife had in fact agreed to appoint Mr Diu as the Chairman of the meeting although he claimed that he only agreed to this reluctantly. Whatever was the position, the Defendant had decided not to defend the actions.

The two actions

9. In High Court Action No.12852 of 1999, Mr Ho denied that the Plaintiff had delivered the goods to the Defendant. He referred to the fact that the invoices were signed by Mr Diu and Mr Kan and not by the warehouse keeper in the Defendant's factory in the Mainland under the normal circumstances. Also delivery notes were not attached to the invoices. He further denied that there was any agreement between the Plaintiff and the Defendant on the payment of interest and cash on delivery. Instead, the agreement was that payment was to be made on 90-day credit. As to the delivery of the machines, Mr Ho said that the machines were not delivered to the Defendant but to another entity.

10. I have to say what Mr Ho had raised were general denials which were contradicted by the documentary evidence. Debit note for the machines clearly showed that the machines were sold to the Defendant.

11. In relation to High Court Action No.13191 of 1999, Mr Ho said that the Plaintiff had indeed paid five cheques to the Defendant and the five cheques were presented for payment. However, he denied that the five cheques represented loans from the Plaintiff to the Defendant, instead it was part of an agreement relating to the investment in a company by the Plaintiff and the four shareholders of the Defendant.

12. Mr Ho had never explained why, if the five cheques were in the nature of an investment, the receipts issued by his wife should described them as loans.

Application refused

13. Mr Ho had not demonstrated that the claims lodged by the Plaintiffs are not bona fide claims. The Plaintiffs are clearly the only and major creditors of the Defendant. There is no indication of the Plaintiffs gaining an unfair advantage over other creditors. In the circumstances, I would decline to exercise my discretion in favour of Mr Ho. Accordingly, the application is dismissed.

Costs

14. As Mr Ho is unsuccessful in his application, the costs should follow the event and the Plaintiffs and the Defendant should be entitled to the costs of the application other than the costs of the hearing on 11th October 1999.

15. The hearing on 10th September 1999 was adjourned because Mr Ho had not served the application on the Defendant. Shortly prior to the resumed hearing of 11th October 1999, Mr Ho was served with the affirmations of the Defendant. His solicitors had written to the Plaintiffs' and the Defendant's solicitors informing them that he would require time to respond to the affirmations and suggested an adjournment of the hearing by consent. However, the two firms of solicitors insisted to continue with the hearing. In my view, Mr Ho's request was a reasonable one. No useful purpose would be gained by insisting on the hearing. The parties should, at that stage, agree on the directions to be given on the filing of further evidence. I would make no order as to costs for the hearing of 11th October 1999.