RE SILVER BASE (HOLDINGS) LTD

HCCW 20/2023

[2024] HKCFI 855

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 20 OF 2023

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DECISION

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1.  This is the application of Liang Guoxing (“the Applicant”) by summons dated 21 February 2024 (“the Summons”) for leave to appeal this Court’s refusal on 7 February 2024 (“the Decision”) to stay the Winding up Order made on 6 November 2023 (“the WU Order”) pending the Company’s appeal to the Court of Appeal.

2.  When this Court handed down its Reasons for the Decision dated 23 February 2024 (“the 2024 Reasons”), the Applicant had already issued the Summons. By summons dated 1 March 2024, the Applicant seeks leave to amend the Summons and the draft Notice of Appeal (“the NOA”) to address the 2024 Reasons. As such, leave is granted to make the amendments sought.

3.  For the relevant background and applicable legal principles, reference should be made to the Reasons for Judgment dated 10 November 2023 (“the Judgment”) as well as the 2024 Reasons.

Merits

4.  Mr Look-Chan Ho and Mr Joshua Yeung (counsel for the Applicant) advanced the same three grounds they had relied on, unsuccessfully, for a stay. The principal thrust of their submissions is that the Court adopted a wrong approach to winding-up in a case where the company only has one creditor. The Applicant considers it arguable that the winding up order should not have been made, citing new authorities.

A. Approach to winding-up with a company only has one secured creditor

5.  The Applicant submits that this Court adopted the wrong approach in holding (at §6 of the 2024 Reasons) that “the court will rarely grant a stay of winding-up order, and a stay will be an exception” because this is a case where there are no other creditors other than the Petitioner who is a secured creditor.

6.  The Applicant relied on this passage from the judgment of Nugee LJ in Khan v Singh-Sall [2023] EWCA Civ 1119 at 52:

“… secured creditors stand outside the bankruptcy process, the whole purpose of taking security being to enable the creditor to have recourse to specific assets for payment of his debt without having to share them with other creditors”.

7.  However, in that passage, the English Court of Appeal was referring to sections 267(2)(b) and 269(1) of the Insolvency Act 1986. Those provisions are equivalent to sections 6(2)(b) and 6B(1) of the Bankruptcy Ordinance (“the BO”) respectively but have no counterpart in the winding-up statutory regime in Hong Kong.

8.  The wording in section 178(1)(a)(ii) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“CWUMPO”) informs and provides that

“a company shall be deemed to be unable to pay its debts if … the company has, for 3 weeks after the service of the demand, neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor.” (Emphasis added)

9.  No such provision exists in the BO or the Bankruptcy Rules. The passage from the Khan case (based on English provisions that have no Hong Kong counterpart) does not and cannot assist the Applicant.

10.  In his reply submissions, the Applicant maintained that the Khan case stands for the proposition that the Petitioner, as a secured creditor, stands outside of the winding-process, citing the following passage from a new authority, namely, Re Progetto Jewellery Co Ltd [2022] HKCFI 364 at §40:

“It is well established that where a petitioner asserts that the company is insolvent, secured creditors stand apart from the collective process of liquidation and do not have any real interest in the company’s assets except those on which they have security. It is only the unsecured creditors who have any real interest in the company. This is because a secured creditor has the right to realize the security provided by the company for the purpose of repaying the debt owed to it …”

11.  The Applicant submits that the same legal principles apply to the winding-up statutory regime.

12.  Once again, the citation relied on is taken wholly out of context. First, the heading for §§37-45 (which appears immediately above §37) reads: “Whether the Petitioner was a creditor[1]”. That was the question before the court in Progetto. In that case the court concluded that the petitioner was not a creditor.

13.  In the present case the Petitioner is unquestionably a creditor of the Company when this Court rejected its defence based on the debt being a bona fide disputed.

14.  Second, the court in Progetto was not concerned with the position of secured creditors but “a creditor who owes a debt to the company which remains unpaid[2]”.

15.  Third, the background to that case shows that prior to issuing the statutory demand, the petitioner had in effect obtained full payment or the benefit of a full security in respect of the debt by withholding payment of the judgment debt to the company[3]. Given that context, the reference to “secured creditors” must mean those creditors whose debts have been fully secured.

16.  That is reinforced by the authorities cited by Linda Chan J for the observations made in Progetto §40.

17.  Mr Anson Wong Yu Yat, counsel for the Petitioner, invited attention to the fact that the phrase “stand apart from the collective process of liquidation” (in §40 of Progetto) is apparently taken from Fletcher, The Law of Insolvency, (5^th edn), §24-018. However, in Fletcher, the relevant passage reads:

“In effect, to the extent of the realisable value of the property comprised in the security, such a creditor enjoys the advantage of being able to stand apart from collective process of the liquidation and to proceed to realise the charge in order to recoup the amount outstanding from the company[4].”

18.  Company Law in Hong Kong: Insolvency 2021, §7.035 (which concerns the order of payment to creditors laid down in the CWUMPO) is the other authority cited. The relevant passage read “secured creditors can look to their security for the realisation of their claims to the extent of such security[5].”

19.  Thus, only fully secured creditors stand apart from the collective process of liquidation.

20.  For the reasons stated, I do not consider that the observations made in the Khan and Progetto cases take the Applicant’s case any further. They do not support the proposition the Applicant advances.

B. Sufficiency of security

21.  Where the petitioner is a secured creditor, the applicable legal principles are those set out in §34 of the Judgment. The relevant test of sufficiency of security is stated in §13 of the 2024 Reasons which is not challenged.

22.  The repeated assertions of the Applicant/Company of sufficiency of security are self-serving and rendered meaningless by the conduct described in §§58-59 of the Judgment. Repetition of a submission rejected by this Court cannot remedy its lack of substance.

C. Bona fide dispute on valuation

23.  In §16.1 of the Applicant’s written submissions, the Applicant cited French on Applications to Wind Up Companies (4^th edn) at §§7.188-7.190[6] for the proposition that “the existence of sufficient security means that the Company has secured the Debt to the reasonable satisfaction of the Petitioner, and renders section 178 (1)(a)(ii) CWUMPO inapplicable”.

24.  I note that the proposition stated is not reflected in the authority cited. Be that as it may, as formulated, the security has to be “to the reasonable satisfaction of the Petitioner”. The Applicant has not adduced any evidence to that effect. To the contrary, the security is not “to the reasonable satisfaction of the Petitioner”.

25.  As a fallback position, the Applicant resorts to submitting that the proper approach to determining how a bona fide dispute on valuation affects the grant of a winding-up order is a difficult and important question of law and principle that ought to be determined on appeal.

26.  I do not agree. The dispute on valuation is a distraction. The plain fact is that the debt the Company owes the Petitioner is and remains unpaid.

Conclusion and order

27.  None of the grounds advanced in support of the leave application has any merit. It follows that leave to appeal the stay application must be refused and costs would follow the event.

28.  The Petitioner seeks costs on an indemnity basis because of this unmeritorious application as well as the Applicant’s repeated attempts to submit new authorities causing wastage of time and costs.

29.  While I deprecate the piecemeal fashion in which the Applicant’s counsel has chosen to present his submissions and the Applicant has sailed pretty close to the line, I do not consider its conduct sufficiently egregious to attract an award of indemnity costs.

30.  Accordingly, the Summons as amended is dismissed. Costs of the Summons (as amended) with certificate for counsel be to the Petitioner, such costs to be summarily assessed and payable forthwith.

31.  The Petitioner do lodge its statement of costs within 14 days hereof, the Applicant do lodge its objections (limited to 2 pages) within 14 days thereafter and the Petitioner do lodge its reply (if any, limited to 2 pages) within 7 days thereafter.