BARLOW INVESTMENTS LTD (In liquidation) v. CLIFTONS LTD (in creditors’voluntary winding up) AND ANOTHER

HCMP 276/2020

[2021] HKCFI 1193

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 276 OF 2020

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J U D G M E N T

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1.  By originating summons (“OS”) dated 13 March 2020 the plaintiff (“P”) applies under s 255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) and r 128 of the Companies (Winding up) Rules (“Rules”) to reverse the decision of the 2^nd defendant (“D2”) qua Chairman of the creditors’ meeting of the 1^st defendant, Cliftons Limited (in creditors’ voluntary winding up) (“Company”), held on 13 December 2019 (“Meeting”) whereby D2 rejected P’s proof in respect of a claim of $9,214,727.53 for voting purposes (“Decision”).

2.  In the OS, P seeks the following relief:

(1)  A declaration that the Decision is “void and invalid”;

(2)  A declaration that P was entitled to vote at the Meeting and is entitled to do so at all future creditors’ meeting of the Company in respect of the full amount of its proof (i.e. $20,667,576.17);

(3)  An order that the resolution passed at the Meeting to appoint Mr Cosimo Borrelli (“Borrelli”) and D2 as joint and several liquidators of the Company (together “Liquidators”) be “set aside”; and

(4)  An order that a creditors’ meeting of the Company be reconvened on such time and date as the Court considers appropriate. 

A.  BACKGROUND

3.  The Company was incorporated in 2004 to operate the business of provision of meeting, conference and business event space under the Australian brand “Cliftons”.  The sole shareholder of the Company was Rose Window Holdings Ltd (“Rose”) which, in turn, was wholly owned by Mr Andrew Cameron (“Cameron”).  Rose and Cameron were the only directors of the Company before its liquidation.

4.  P was a wholly owned subsidiary of the Company, trading under the firm name of Cliftons.  P only had nominal paid-up capital of $1,000.  Until 26 April 2013 when it was replaced by Upper Rise Group Ltd (“Upper”), Rose was the only director of P.

5.  The only business of P was to lease the premises at 33/F of 9 Queen’s Road Central, Hong Kong (“Property”) from the landlord and sub-let the same, together with the furniture, fittings and equipment thereat, to the Company.  For this purpose, P entered into the following tenancy agreements with the landlord of the Property:

Date of Agreement	Period of Tenancy	Monthly Rent	Management and Air-conditioning charges
15/5/2006	8/4/2006 – 7/4/2009	$509,453	$47,000
27/7/2009	8/4/2009 – 7/4/2012	$757,295	$51,000
15/8/2011 (“2011 TA”)	1/9/2011 – 31/8/2013	$1,101,520	$54,500

6.  P, in turn, entered into the following home-made “Services Agreements” with the Company:

(1)  A Services Agreement dated 28 April 2006 (“1^st SA”) whereby P agreed to let the Property to the Company for 3 years (from 8 April 2006 to 7 April 2009), and the Company agreed to pay monthly service fee of $509,453, monthly management fee of $47,000 and quarterly rates at $63,300.

(2)  A Services Agreement dated 30 June 2008 (“2^nd SA”) whereby P agreed to rent to the Company “the said furniture, fittings and equipment held at [the Property]”, and the Company agreed to pay “Furniture, Fittings and Fit-out 2.777% per month (33.33% per year)” from 1 July 2008 to 30 June 2009.

(3)  A Services Agreement dated 1 July 2008 (“3^rd SA”) whereby the parties agreed to extend the 1^st and 2^nd SA for a period of 6 years from 1 July 2008 to 30 June 2014. 

7.  It is P’s case that its only source of income was the monthly rent, management fees, air-conditioning charges and rates (“Rent, Fees and Rates”) paid by the Company under the Service Agreements. As the Company had since January 2013 failed to pay the Rent, Fees and Rates, P was unable to pay the Rent, Fees and Rates payable to the landlord under the 2011 TA[1].

8.  On 31 May 2013, the landlord commenced HCA 969/2013 against P for arrears of Rent, Fees and Rates for the period from 1 June 2013 to 3 July 2013.  On 12 July 2013, the landlord obtained final judgment against P for $3,891,066.88[2] together with interest and costs.

9.  P failed to pay the judgment debt to the landlord.  Pursuant to a petition presented by the landlord on 28 August 2013, P was wound up by the Court on 30 October 2013.  Mr John Robert Lees (“Lees”) and Mr Mat Ng (“Ng”) were appointed as liquidators of P on 5 February 2014. 

10.  On 19 October 2018, P commenced HCA 2462/2018 against the Company claiming:

(1)  $7,373,697.74, being the outstanding Rent, Fees and Rates from  January 2013 to 3 July 2013 (“Outstanding Rent”) under the 3^rd SA; and

(2)  $9,214,728.53, being the outstanding monthly furniture rental under the 2^nd SA for the period from 1 July 2008 to 3 July 2013 (“Furniture Rental Claim”).

11.  In its Defence and Counterclaim dated 24 January 2019 (“D&CC”), the Company denied liability to pay the Furniture Rental Claim on the following grounds:

(1)  The 2^nd SA was to provide for payment of the fit-out cost of the Property incurred by P in mid-late 2006, and the Company was obliged to reimburse P of such fit-out costs over a period of 3 years (as reflected in the provision of “33.3% per year”).

(2)  The total fit-out cost was $5,521,480, and was identified in P’s accounts under “furniture & fittings” and “office equipment”.

(3)  The Company had already reimbursed P of the same in full by 2011.

(4)  The other furniture and equipment in the Property were provided by a third party, and were paid by the Company directly.

12.  P applied for summary judgment against the Company in respect of the Outstanding Rent.  In his Decision dated 4 November 2019, [2019] HKCFI 2768, DHCJ William Wong SC held that:

(1)  From January 2013 to 3 July 2013 (when the Company delivered vacant possession of the Property), the Company defaulted in paying the Outstanding Rent (§17);

(2)  Under the 3^rd SA, the level of Rent, Fees and Rates could be varied (§§20, 21);

(3)  At all material times, the Company made payments which matched P’s obligations under the various tenancy agreements entered into between P and the landlord (§19);

(4)  The Company had by conduct agreed to vary the level of Rent, Fees and Rates payable to P under the 3^rd SA to the same levels payable by P to the landlord under the 2011 TA (§§22-25, 28);

(5)  P did not rely on the 2^nd SA for the purpose of its application for summary judgment, and the Furniture Rental Claim had to go to trial (§32);

(6)  The judgment debt obtained by the landlord against P on 12 July 2013 was less than $4 million, after giving credit for the $3,580,260 deposit (“Deposit”) held by the landlord under the 2011 TA.  The Company could not claim credit for the Deposit as it had not pleaded a case of set off.  There was nothing to prevent the Company from filing a proof of debt for the Deposit if there are documentary evidence to prove that it had provided the sum to P (§§34-36);

(7)  Final judgment be entered against the Company for the Outstanding Rent together with interest at 1% above prime lending rate from 4 July 2013 until payment (“Judgment Debt”) (§41(1)-(2)); and

(8)  The Company’s counterclaim in respect of the overpayment of the monthly rent, management fees and air-conditioning charges from 2007 to 2012 was struck out (§41(3)). 

13.  Despite the demand letter dated 19 November 2019 from Messrs ONC Lawyers (“ONC”), solicitors for P, requiring the Company to pay $10,214,440.03 (being the Judgment debt and interest accrued thereon), no payment has been made by the Company. 

14.  By written resolutions passed by Rose as sole shareholder of the Company on 29 November 2019 (“Company’s Resolutions”), it was resolved that:

(1)  the Company could not by reason of its liabilities, continue its business and that the Company should be wound up voluntarily; and

(2)  Borrelli and D2, both of Borrelli Walsh Ltd (“BW”), be nominated as joint and several liquidators of the Company.

15.  This was followed by the Company’s letters dated 29 November 2019 to all its known creditors (including P) stating, inter alia, that:

(1)  pursuant to s 241 of the Ordinance, a meeting of creditors of the Company would be held on 13 December 2019;

(2)  the purpose of the meeting would be (a) to advise the current financial position of the Company; (b) to consider resolutions to wind up the Company voluntarily and to appoint  liquidators; and (c) to appoint a committee of inspection; and

(3)  the proof of debt (“POD”) and proxy forms must be returned to the Company before the meeting failing which the creditor might not be able to vote at the meeting. 

16.  On 11 December 2019, P lodged a POD for $20,667,576.17, which comprises:

(1)  Judgment Debt ($7,373,697.74);

(2)  Furniture Rental Claim ($9,214,728.53);

(3)  Interest on Judgment Debt ($2,878,923.90); and

(4)  Costs of HCA 2462/2018 ($1,200,226).

17.  The documents enclosed to P’s POD were the Decision, the 2^nd SA and an analysis of claim. 

18.  By letter dated 12 December 2019, Cameron (on behalf of the Company) informed P that:

(1)  the Furniture Rental Claim had been rejected for voting purposes at the Meeting, given that the action had not been progressed since close of pleadings on 31 May 2019, and it would be premature for the Company to predict the outcome of the ongoing litigation.  The Claim would be assigned a nominal value of $1 for voting purpose; and

(2)  the balance of the claim in P’s POD ($11,452,848.64) had been admitted for voting purposes at the Meeting. 

19.  Prior to the Meeting, in October 2019, Cameron was diagnosed with tongue cancer. On 18 November 2019 Cameron began to receive a course of radiation therapy in Australia (which lasted until 27 December 2019). As he was unable to travel to Hong Kong to attend the Meeting, he (on behalf of himself and Rose) executed a power of attorney dated 11 December 2019 (“POA”) to authorize D2 to chair the Meeting.  

20.  The Meeting was held on 13 December 2019 and attended by 7 creditors (collectively “Creditors”) which had lodged PODs claiming an aggregate amount of $39,286,360.94:

Creditor	Representative	Claim (HK$)
Centre Point Ltd	Martin Clapham	$1,560,385.00
Cliftons Operations Pty Ltd	Anthony Hill	$15,135,523.08
GPS McQuhae LLP	Martin Clapham	$74,040.00
Ilios C.P.A. Ltd	Martin Clapham	$19,500.00
Hong Kong Corporate Services Group	Martin Clapham	$12,189.00
Cameron	Martin Clapham	$1,817,147.69
P	Ng	$20,667,576.17
TOTAL		$39,286,360.94

21.  The minutes of the Meeting recorded, inter alia, the following facts and matters:

(1)  D2 acted as Chairman of the Meeting.  She informed the Creditors that she had been authorized by the directors to chair the Meeting.  Ng raised concerns about the validity of D2 in acting as Chairman and contended that pursuant to s 241(3) of the Ordinance, the Meeting should be conducted by the Directors;

(2)  D2 provided a brief introduction on the Company and distributed a statement of affairs prepared by a director  (“SOA”) and advised that as at 30 November 2019, the Company had net liabilities of $18,588,742 and assets of $70,543;

(3)  D2 informed the Creditors that the Company had by letter dated 12 December 2019 (a) admitted P’s claim to the extent of $11,452,848.64 for voting purposes; and (b) rejected the Furniture Rental Claim on the basis that the Claim was unliquidated or contingent and, therefore, only a nominal value of $1 was allowed for voting purposes at the Meeting;

(4)  The PODs submitted by the other 6 creditors in the total amount of $18,618,784.77 had been admitted in full for voting purposes;

(5)  Ng objected to the rejection of the Furniture Rental Claim;

(6)  D2 distributed a summary of the claims lodged by the Creditors and invited Ng to inspect the PODs after the Meeting, and Ng agreed;

(7)  D2 advised the Creditors that the PODs were admitted for voting purposes only and they would be formally adjudicated by the liquidators of the Company;

(8)  The sole shareholder had passed the Company’s Resolutions on 29 November 2019;

(9)  P nominated Mr Yuen Tsz Chun Frank and Ms Chan Hoi Yan (“Yuen/Chan”) as liquidators, who had submitted their consent to act and disclosure statement.  At Ng’s request, the consent to act and disclosure statement executed by Borrelli and D2 were provided to him;

(10)  Ng raised that BW had previous dealings with P in around 2013 which might constitute a conflict of interest.  D2 said she was not aware of such dealings but would revert to Ng after the Meeting;

(11)  D2 asked the Creditors to vote separately on the proposed appointment of Borrelli/D2 and Yuen/Chan as liquidators;

(12)  6 creditors (representing 61.9% of the admitted claims) voted in favour of Borrelli/D2, while P (representing 38.1% of the claims) voted in favour of Yuen/Chan; and

(13)  All Creditors voted against the appointment of a committee of inspection.

22.  The minutes recorded the following resolution to have been passed by a majority of the Creditors voted at the Meeting:

“That it has been demonstrated to the satisfaction of this meeting that the Company cannot, by reason of its liabilities, continue its business and that it is advisable to wind-up the same, and accordingly that the Company be wound up voluntarily and that [Borrelli] and [D2] of [BW] … be appointed as Joint and Several Liquidators of the Company” (“Appointment Resolution”).

23.  By letter dated 19 December 2019, BW provided the minutes to P and confirmed that it had advised the directors of P in relation to a proposed creditors’ voluntary liquidation of P in March 2013, which did not proceed.  No further work or discussion had been  undertaken by BW in respect of P since 11 June 2013.

24.  In response, in ONC’s letter dated 6 January 2020, they “put on record” the various “irregularities” in relation to the Meeting which included:

(1)  the Meeting was not chaired by a director of the Company, contrary to the requirement of s 241 of the Ordinance (§§3-5) (“s 241 point”);

(2)  the nomination of Borrelli/D2 were not made by any creditor but by the Company, which was “against the intention of the legislation” under s 242 of the Ordinance (§§6-8) (“s 242 point”);

(3)  ss 262C and 262D of the Ordinance provide that a disclosure statement must be tabled at the meeting before the appointment or nomination, but neither the consent to act nor the disclosure statement of Borrelli/D2 were tabled at the Meeting (§§9-11) (“s 262C point”);

(4)  the list of creditors as required by s 241(3A)(b) of the Ordinance was not tabled at the Meeting, and the claims of related parties had been admitted in the absence of concrete supporting evidence (§§12-15) (“List of creditors point”); and

(5)  Rule 128 of the Rules provides that if the chairman is in doubt whether a proof should be admitted or rejected, he should “mark it as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained”.  It is only if it is plain and obvious that the claim is bad that the chairman must reject it.  D2’s rejection of the claim has “significantly prejudiced” P’s rights (§§17-19) (“Rejection of POD point”). 

25.  In her letter dated 3 February 2020, D2 (on behalf of the Liquidators) responded to the complaints raised by ONC as follows:

(1)  s241 point: D2 had been authorized by the POA to chair and conduct the Meeting.  Cameron (being the only non-corporate director) was and remains unwell (§4);

(2)  s242 point: D2 was not involved in any voting / decision making in respect of any proposed resolutions at the Meeting.  All Creditors were invited to vote for the resolutions on the proposed appointment of liquidators (§§5, 7);

(3)  s262C point: the consents to act and disclosure statement in respect of Borrelli/D2 were available for inspection at the Meeting, and the Liquidators were not disqualified from being nominated or appointed as liquidators pursuant to s 262B(3) of the Ordinance (§§10-11);

(4)  List of creditors point: the SOA was available for inspection at the Meeting.  The 6 creditors’ claims and details of the invoices stated in the PODs were consistent with the books and records of the Company.  A suitable time could be arranged for P to review the PODs at the Liquidators’ office.  No adjudication of the PODs was required for the purpose of voting at the Meeting, and the claims were admitted or rejected by the Chairman for voting purpose pursuant to r 128 (§§12-15); and

(5)  Rejection of POD point: pursuant to r 125, the Furniture Rental Claim is a contingent claim.  D2 was not a party to HCA 2462/2018 and she was not in a position to form a view on the merits of the claim prior to the Meeting (§§18-19). 

26.  No further correspondence was exchanged.  On 13 March 2020, the OS was issued. 

27.  At the Creditors’ meeting held on 26 March 2021, which was attended by 3 creditors (including P), D2 reported, inter alia, the following matters:

(1)  the Liquidators had realized assets in the amount of $143,240, and paid $28,350 to HSBC for production of documents and $5,248 for advertising fees, leaving a cash balance of $109,642; and

(2)  The Liquidators’ fees and expenses as at 31 December 2020 amounted to $1,796,440, most of which were incurred in reviewing and analysing the banking transactions of the Company and dealing with the OS.  No payment has been made to the Liquidators.

B.  ANALYSIS

B1.  New applications

28.  In his skeleton submissions, Mr Benjamin Yu SC (leading Ms Bianca Yu), counsel for P, states (for the first time) that P also seeks, under “such further or other relief”, an order that (1) Yuen/Chan be “substituted” as liquidators of the Company, and (2) the Liquidators “would not be entitled to payment of their fees and expenses incurred as liquidators”.  I shall refer to these as “new applications”.

29.  Ms Eva Sit SC (leading Ms Esther Mak), counsel for the Company and D2, objects to P’s attempt to make the new applications on the grounds that (1) they have never been mentioned in the OS or the affirmations filed by P; (2) they purport to seek removal of the Liquidators under s 252 of the Ordinance without any proper application made or foreshadowed in the evidence filed; and (3) P relies on event took place in March 2021 (i.e. after the Meeting) without any application to adduce the evidence in question. 

30.  At the beginning of the hearing, I indicate to Mr Yu that the Court will not entertain the new applications.  Apart from the grounds raised by Ms Sit, which I agree, the new applications also fall foul of the requirements of Order 7 rule 3(1) of the Rules of the High Court, which provides as follows:

“Every originating summons must include a statement of the questions on which the plaintiff seeks the determination or direction of the Court of First Instance or, as the case may be, a concise statement of the relief or remedy claimed in the proceedings begun by the originating summons with sufficient particulars to identify the cause or causes of action in respect of which the plaintiff claims that relief or remedy”.

31.  Mr Yu accepts that it is not properly open to P to make the new applications and does not pursue the matters further.   

B2.  Question raised in OS

32.  Unlike a company in compulsory liquidation, a company in voluntary winding up is not subject to the supervision of the Court, and its affairs are being dealt with by the liquidators under the supervision of the creditors.  Section 255 of the Ordinance gives a means of access to the Court and is in these terms:

“(1)  The liquidator, or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls, or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court.

(2)  The court, if satisfied that the determination of the question or the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just.

(3)  ….” (underlined added)

33.  Given the nature of s 255 of the Ordinance and the requirements of Order 7 rule 3, it is incumbent upon P to identify the specific questions or powers which it asks the Court to determine or exercise in the OS. 

34.  In the present case, the only application made by P in the OS is an appeal against the Decision under r 128 of the Rules:

(1)  In §1 of the OS, the only question which P seeks the determination of the Court is the validity of the Decision (i.e. the Rejection of POD point). 

(2)  The relief sought in §§2-5 of the OS are consequential relief, and only fall to be considered if P succeeds in its appeal against the Decision.

(3)  The title of the OS only referred to s 255 of the Ordinance and r 128 of the Rules. 

(4)  The decision not to refer to ss 241, 242 and 262C must be seen against the fact that P had in ONC’s letter of 6 January 2020 alleged non-compliance with these provisions, but chose not to rely on the same in the OS.

35.  It follows that the only issue raised in the OS is the Rejection of POD point. 

36.  I consider that it is just and beneficial to determine the issue, as it would put an end to the disputes between the parties over (1) the validity of the Decision which, in turn, is determinative of the validity of the appointment of the Liquidators; and (2) whether the Company was liable to pay the Furniture Rental Claim on the basis of the evidence adduced by the parties, some of which were not available at the time the Decision was made. 

B3.  Rejection of POD point

37.  The starting point is r 128 of the Rules which provides as follows:

“The chairman shall have power to admit or reject a proof for the purpose of voting, but his decision shall be subject to appeal to the court. If he is in doubt whether a proof should be admitted or rejected he shall mark it as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained.”

38.  However, r 128 must be read subject to r 125, which stipulates the types of debt in respect of which a creditor shall not vote in this way:

“A creditor shall not vote in respect of any unliquidated or contingent debt, or any debt the value of which is not ascertained, nor shall a creditor vote in respect of any debt on or secured by a current bill of exchange or promissory note held by him unless he is willing to treat the liability to him thereon of every person who is liable thereon antecedently to the company, and against whom a bankruptcy order has not been made, as a security in his hands, and to estimate the value thereof, and for the purposes of voting, but not for the purposes of dividend, to deduct it from his proof.” (underlined added)

39.  Ms Sit submits that the test to be applied by the Court in determining an appeal under r 128 has been sufficiently stated by Harris J in Re Days International Ltd [2014] 1 HKLRD 20, §§9-10:

“9. The decision to admit or reject a proof for voting purposes under Rule 128 of the Companies (Winding-Up) Rules at the first meeting of creditors is not a final determination of the creditor’s claim to prove in the liquidation. It is a preliminary assessment and it is not uncommon for a liquidator who has doubts about a debt to value it HKD1 for voting purposes. The test which a liquidator should apply when assessing a proof for voting purposes is whether, on balance, the claim against the company is established and, if so, in what amount[3]. I agree with Mr Chain that this involves a relatively broad, macroscopic assessment.

10. I also agree with Mr Chain that the court when called upon to determine a challenge to a liquidator’s decision to admit or reject a proof for voting purposes is not deciding whether the liquidator made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court[4]. However, I do not accept that this requires the court to undertake a different exercise to the one undertaken by a liquidator. The court should also undertake a broad, macroscopic assessment. It cannot be sensible at the earliest stages of a liquidation of a company, which may prove to have very little assets, to require the liquidator or the court to be drawn into an application which involves considerable work for the purposes of determining whether or not a proof should be admitted for voting purposes[5]. ...” (underlined added)

40.  Ms Sit also refers the Court to In re Grande Holdings Ltd, HCCW 177/2011, 5 November 2014, where Harris J held, at §§7-8, that in considering the appeal, the Court is entitled to consider whatever admissible evidence on the issue that the parties place before the Court, and asks whether it seems probable that the debt is payable such that the proof should be admitted for voting purposes in the value of the debt claimed or, if the evidence justifies it, some other amount.

41.  On the other hand, Mr Yu submits that the Court should follow the principles and the approach expounded by DHCJ To in GMI Technology Inc v East China Digital Technology Ltd and anor, HCMP 2036/2016, 11 August 2017, at §§6-14:

“6. … A ‘contingent debt’ refers to a case where there is doubt as to whether or not there is any debt at all … In McPherson’s Law of Company Liquidation, the learned authors wrote:

‘A contingent creditor has been described as one towards whom, under an existing obligation, the company would or might become subject to a present liability on the happening of some future event or at some future date …’

…

10. The general approach that the chairman of a creditors’ meeting should adopt when assessing a proof for voting purpose under rule 125 is to ask himself whether, on balance, the claim against the insolvent company is established. This involves a relatively broad and macroscopic assessment: Re Days International Ltd.

11. In such assessment, the benefit of doubt should be resolved in favour of the creditor submitting the proof…If it is plain or obvious that a claim is good, the chairman must admit it. If it is plain or obvious that it is bad, he must reject it. If there is a question, a doubt, he shall admit it but mark it as objected to: Emery v UCB Corporate Services Ltd, quoting Re A Debtor (No 222 of 1990).

12. … In hearing an appeal from the chairman’s assessment, the court is not determining whether the chairman’s decision was reasonable, but is carrying out its own independent assessment of the value at which the debt should be admitted upon the same broad and macroscopic approach… The correct approach is to keep the factual inquiry to a minimum and decide no more than necessary as there is an interest of timeous and efficient resolution: Aldon Limited v Eileen Sale (as Liquidator of Kingstons Investment Limited) & Derek Taylor. The same benefit of doubt principle should also apply. In other words, unless the court is sure that the claim is unliquidated or unascertained, the claim should be admitted for voting purpose …

14. Prima facie, where it is found the chairman had wrongly refused to allow a creditor to vote for his full entitlement either because the chairman had rejected the proof or because he had only admitted it in part, the court would usually order a new meeting on the basis of the principle of creditor democracy: Re Power Builders (Surrey) Ltd, with a direction as to whether the appellant creditor’s claim should be admitted at a certain value (or it is higher than a value which is big enough to defeat other votes), see: HM Revenue & Customs v Maxwell. The court also has discretion to directly substitute the liquidator proposed by the appellant creditor, subject to the proposed liquidator’s filing of a new consent to act: Aldon Limited v Eileen Sale (as Liquidator of Kingstons Investment Limited) & Derek Taylor.” (underlined added)

42.  Mr Yu submits that the Court should “intervene” in the Decision for the following reasons:

(1)  The fact that the Furniture Rental Claim has not been determined by the Court would not make it a “contingent” claim.  Reliance is placed on the meaning of contingent debt as explained in GMI §7. 

(2)  The Furniture Rental Claim is ascertained and liquidated. As such, it can only be rejected if it is plain or obvious that it is bad.  Even if the Chairman has doubt about the Claim, she must admit it for voting purpose but mark it as objected.

(3)  The Decision was “evidently taken on the direction of Cameron” given that the extent in which the Claim was admitted and the reason given therefor were the same as those stated in the Company’s letter dated 12 December 2019.

(4)  There was “a marked disparity in approach between D2’s approach to P’s proof and her approach to all other proofs” lodged for the purpose of the Meeting.  This was despite the fact that a number of such creditors were related parties of the Company.

43.  Further, the Furniture Rental Claim should be admitted for voting purposes as it had been established by P. In any event, it cannot be said that it is plain or obvious that the Claim is bad for 2 reasons:

(1)  Upon proper construction of the terms of the 2^nd SA and the 3^rd SA, the Company was liable to pay $153,374.44 per month to P for 6 years (from 1 July 2008 to 30 June 2014).  The contention raised by Cameron to the effect that the payments were for reimbursements of the actual fit-out costs incurred by P over a period of 3 years (from 2008 to 2011) is wholly inconsistent with the 2^nd SA and the 3^rd SA agreements and should not be accepted. 

(2)  Cameron’s evidence is “inadmissible” for the purpose of construing the meaning of the 2^nd SA and 3^rd SA as it represents the subjective intention of Cameron or the subsequent conduct of the parties.

44.  On the other hand, Ms Sit submits that the Decision at the Meeting was justified, given that:

(1)  A “contingent debt” could refer to a situation where there is doubt if there will be any debt.  Reliance is placed on  the passage in McPherson as quoted in GMI §6.   

(2)  The Company pleaded, in its D&CC, that the Furniture Rental Claim had been fully discharged.  As P’s liquidators must have possession of the books and accounts of P, they could easily have challenged the plea if it was not borne out by or consistent with P’s books and accounts. 

45.  Ms Sit further submits that there is demonstrably no Furniture Rental Claim and no debt for the following reasons:

(1)  The fact that the 2^nd SA was to cover fit-out costs incurred by P which the Company was to reimburse over 3 years is supported out by (a) the express words “fittings”, “fit out” and the “2.777% per month (33.3% per year)” in the 2^nd SA; and (b) the express words in cl 4 of the 3^rd SA that the “facilities” owned by P at the Property, which could only be a reference to the fit-out paid by P;

(2)  the 2^nd SA was for one year only.  Although the 3^rd SA extended the term to 6 years, cl 6 expressly provided that “the costs for the provision of the Facilities will vary from time to time as agreed between both parties”;

(3)  the Company’s ledgers show that for 3 years from July 2007 to May 2009, $153,374.44 was paid by the Company to P each month for “fit out lease rental charge” against the loan account between P and the Company; and

(4)  Cameron’s evidence (not disputed by P) is evidence on factual matrix and context and is admissible in construing the terms of the 2^nd and 3^rd SA. 

46.  I do not think any of the arguments advanced by Mr Yu (as summarized in §42 above) constitute a valid ground to impugn the Decision. 

47.  First, as regards the meaning of “contingent debt”, I am inclined to agree with Ms Sit that it can refer to a situation where there is doubt if there will be any debt, which was what D2 referred to. 

48.  In any event, the validity of the Decision does not turn on whether D2 used the term “contingent debt” correctly. As the minutes of the Meeting show, D2 referred to the fact that the Furniture Rental Claim had been the subject matter of litigation and there was no determination by the Court.  Apart from objecting to the Decision, Ng did not articulate any ground (let alone the grounds now articulated by Mr Yu) for suggesting that the Claim must be admitted in full.

49.  Second, the approach of the Court.  It seems to me that there is a significant difference in the approach expounded in Re Days and Re Grande and that in GMI:

(1)  In Re Days and Re Grande, the test is to ask whether on balance the claim is established, and a liquidator who has doubt about a debt is entitled to value it at $1 for voting purposes.   

(2)  By contrast, in GMI, the test is unless the liquidator is certain that the claim is unliquidated or unascertained, he must admit it for voting purpose even if he has doubt about the claim.

50.  I prefer the approach in Re Days and Re Grande, which reflects the requirement of r 125 and is consistent with what I understand to be the usual practice of liquidators (including where the Official Receiver acts as liquidator) to admit a debt at $1 for voting purpose when the liquidator considers that there is doubt about the debt or that the value of the debt has not been ascertained at the time of the creditors’ meeting. 

51.  It follows that unless P is able to demonstrate that on balance the Furniture Rental Claim is established, there is no proper basis to impugn D2’s doubt about the Claim or the validity of the Decision.   

52.  Third, the contention that the Decision was “evidently taken on the direction of Cameron” is neither here nor there.  As Chairman of the Meeting, D2 was entitled to take into account all relevant evidence available to her, including the evidence provided by P as well as those provided by the directors of the Company. 

53.  Fourth, as regards the alleged “disparity” in admitting the PODs submitted by the other creditors and that submitted by P, I do not think it is well founded.  In response to P’s complaint, D2 has in her letter dated 3 February 2020 already explained that the 6 creditors’ claims and details of the invoices stated in the PODs were consistent with the books and records of the Company, and P was invited to review the PODs at the Liquidators’ office (see §25(4) above).  P has not adduced evidence to show that D2’s explanation is in any way incorrect.  Nor has P explained why it did not take the obvious step to inspect the PODs, if it had genuine concern about whether the claims had been wrongly admitted.

54.  Fifth, I do not agree that upon proper construction of the terms of the 2^nd and 3^rd SA, the Company was liable to pay $153,374.44 per month to P for 6 years. 

(1)  Neither the 2^nd SA nor the 3^rd SA contains any express term which supports the construction contended by Mr Yu.  There was simply no reference to the amount payable per month, let alone over a period of 6 years. 

(2)  The contention that the parties had already agreed to a fixed amount of rental at the time the 2^nd and 3^rd SA were entered into is contradicted by cl 6 of the 3^rd SA, which provides that “the costs for the provision of the Facilities will vary from time to time as agreed between both parties”. 

(3)  As submitted by Ms Sit, the express words used in the 2^nd SA and cl 4 of the 3^rd SA support the Company’s contention that the parties had agreed that the Company was to reimburse the fit-out costs incurred by P over a period of 3 years (see §45(1)-(2) above). 

55.  More importantly, it is clear from the following books and records of P and of the Company that what the parties had agreed was for the Company to reimburse the actual fit-out costs incurred by P over a period of 3 years, and that the Company has fully reimbursed such fit-out costs before 2011.

56.  First, the Company’s ledgers recorded that for 3 years from July 2007 to May 2009, an amount of $153,374.44 was paid by the Company to P every month for “fit out lease rental charge”, and the  amounts were debited against the loan account between P and the Company.

57.  As Ms Sit submits, it was open to P to adduce its books and accounts to contradict what was shown in the Company’s ledgers but it chose not to do so.  It is open to the Court to infer that P’s books and accounts, if produced, would not support the allegations now put forward by P.   

58.  Second, P’s audited accounts for the year ended 30 June 2009 dated 19 April 2010 (“2009 A/C”) and the year ended 30 June 2011 dated 31 August 2012 (“2011 A/C”) (which contain the results for the year ended 30 June 2010 (“2010 A/C”)) show that P’s revenue for those 3 years was almost the same as its “costs of sale”:

	2009 A/C	2010 A/C	2011 A/C
Revenue	$9,520,211	$10,256,638	$10,202,705
Costs of sale	$9,503,660	$10,256,638	$10,162,705

59.  As Mr Yu acknowledges, on P’s case, the Furniture Rental Claim, if payable for 6 years (from July 2008 to June 2014), would have resulted in a profit to P from the 4^th year onwards (i.e. from the year ended 30 June 2010 onwards).  This is because the total amount payable to P for 6 years would be $11,042,959.70 (72 months x $153,374.44/month) whereas the total costs of the “furniture & fittings” and office equipment was $5,521,480.  However, the 2010 A/C and 2011 A/C show that P did not make any such profit in those 2 years.

60.  Third, the 2009 A/C, 2010 A/C and 2011 A/C do not support P’s allegation that the Company had since 2008 failed to pay the Furniture Rental Claim. 

(1)  Had the Company failed to pay the Furniture Rental Claim since 2008[6], the 2009 A/C would have recorded the Company owed $1,840,493.28 to P as at 30 June 2009[7], while the 2010 A/C and 2011 A/C would have recorded the Company owed $3,680,986.56[8] and $5,521,479.84[9] as at 30 June 2010 and 30 June 2011 respectively. 

(2)  However, neither the 2009 A/C, 2010 A/C nor the 2011 A/C recorded the Company owed such amounts (or indeed any amount) to P. 

61.  When the absence of any profit made by P and the absence of any amounts owed by the Company to P are put by this Court to Mr Yu, he argues that (1) the accounts are irrelevant to and cannot be admitted for the purpose of construction of the 2^nd and 3^rd SA, given that they only came into existence after the conclusion of the 2^nd and 3^rd SA; and (2) the accounts were prepared by the then management of P (who were the same persons in control of the Company) and hence may not be reliable or accurate. In any event, they are not binding upon the creditors (i.e. the landlord who has been funding this application).  I am unable to accept the arguments. 

(1)  For the reasons stated in §54 above, I do not think the basis of the Furniture Rental Claim is borne out by the terms of the 2^nd and 3^rd SA.  Indeed, Mr Yu himself has to rely on Note 12 to 2009 A/C (cost of furniture & fittings, office equipment) as well as §8 of the D&CC as evidence on what he said to be the monthly amount payable by the Company.

(2)  Even if, contrary to my view, the obligation of the Company to pay the Furniture Rental Claim can be seen upon proper construction of the 2^nd and 3^rd SA, I do not think the 2009 A/C, 2010 A/C and 2011 A/C are irrelevant or inadmissible for the purpose of construing the terms of the 2^nd and 3^rd SA as they go to the factual matrix and context of the 2^nd and 3^rd SA. 

(3)  The 2009 A/C, 2010 A/C and 2011 A/C were prepared at the time when P was a going concern and before it defaulted in paying rent to the landlord.  There was no basis to doubt the  accuracy of the amounts recorded in these accounts, and none has been identified in P’s evidence filed in support of the OS. 

62.  For the above reasons, taking into account all the evidence before the Court, I do not think that on balance, P has established that the Furniture Rental Claim was owed by the Company.  It follows that there is no basis for P to ask the Court to reverse the Decision and the OS should be dismissed. 

63.  For completeness, I will deal with the other points raised by Mr Yu, in case this matter goes further. 

B4.  “Irregularities” vs defect in procedure

64.  Mr Yu cites Re YK Engineering & Piling Ltd, HCCW 674/2004, 20 September 2004 in support of his contention that where there were “major irregularities” in the creditors’ meeting, the Court may invalidate the meeting. In Re YK Engineering, Kwan J (as she then was) held that the voluntary liquidation purportedly commenced by the company was invalid as the statutory notice period for convening a creditors’ meeting had not been complied with. 

65.  As Ms Sit points out, the submission conflates “defect in procedure” and “irregularity”.  The former renders the voluntary liquidation invalid (as in YK Engineering).  The latter is governed by r 209(1) of the Rules which provides that “[n]o proceedings under the Ordinance or the rules shall be invalidated by any formal defect or by any irregularity, unless the court is of the opinion that substantial injustice has been caused by the defect or irregularity, and that the injustice cannot be remedied by any order of the court”. 

66.  The distinction is significant in the present case.  All the other 4 points complained of by P are admittedly “irregularities”.  Therefore, unless P satisfies the Court that “substantial injustice” has been caused by the irregularities and that the injustice cannot be remedied by any Court order, the Meeting shall not be invalidated.

B5.  s241 point

67.  The gravamen of the complaint is that the Meeting was not chaired by a director of the Company but by D2 who had been authorised by the directors to do so. 

68.  Mr Yu submits that s 241(3)(b) imposes a duty to do what is prescribed, and not a discretion to do it or not (Grunwick Ltd v Acas [1978] AC 655 at 690F).  The “unmistakable meaning” that the directors must appoint one of their number (and not just any person for the purpose) is reinforced by s 241(4) which provides that it is “the duty of the director appointed to preside at the meeting of creditors”to attend the meeting and preside thereat.  The duty under s 241(3)(b) and (4) is to be contrasted with r 118 of the Rules, which provides that where a meeting is summoned by the Official Receiver or the liquidator, he or someone nominated by him shall be the chairman of the meeting. 

69.  In any event, it could not have been the intention of the legislature nor could it have been proper that the liquidator nominated by the company should be allowed to preside over the creditors’ meeting which is to consider the appointment of liquidator, given that:

(1)  there was a “plain conflict of interest” when one of the items was to approve the appointment of liquidator, and the proposed appointee could exercise the power qua chairman to reject P’s Furniture Rental Claim;

(2)  the amendments introduced to s 241[10] which restricts the powers of the liquidator nominated at the meeting of the company, and s 250A which restricts the powers of the directors before the appointment of a liquidator of the company to those with the sanction of the court or so far as may be necessary to secure compliance with s 241, were to avoid the abuse known as “Centrebinding”[11]; and

(3)  If s 241(3)-(4) is interpreted to allow a company-nominated  liquidator to preside over the creditors’ meeting at which the appointment of liquidators is considered, it would render the creditors “vulnerable to procedural abuse” in favour of the company.

70.  I am unable to agree with Mr Yu’s submissions.

71.  While it is correct that s 241(3)(b) and s 241(4) impose a duty on the directors to appoint one of their number to preside at the first creditors’ meeting, such duty is imposed by the legislature to address the problem (and potential abuse) whereby the company passed resolutions to put the company into voluntary liquidation and appoint liquidators of their choice and delay the holding of the first creditors’ meeting, thereby preventing the creditors to vote for appointment of alternative liquidators even if they wish to do so. 

72.  I am unable to discern anything, under s 241(3)-(4) or any other provisions under the Ordinance, which mandates the section to be construed as imposing a duty on a director to personally chair the meeting, or that he cannot discharge such duty by appointing a representative to act on his behalf.  This is because the representative appointed by the director will be under a duty to chair the meeting in accordance with the requirements of the Ordinance and the general law.  The director is liable for any breach of duty on the part of his representative under the general law of agency.  Mr Yu’s response is that the representative does not owe the same duties as the directors, specifically the representative does not owe fiduciary duties to the company.  I disagree.  Where a representative is appointed to chair a creditors’ meeting, his duties are no different from the duties owed by a director who is appointed by the board to chair such meeting.  Their duties are both governed by the Ordinance and the general law applicable to company’s meeting.  Indeed, this is precisely what P is trying to do in the present proceedings by alleging a whole array of breaches of statutory provisions and duties against D2 qua Chairman of the Meeting.   

73.  Further, I agree with Ms Sit that on a purposive construction of ss 241(3)(b)and 241(4), it should be possible for the directors to appoint another person to act on their behalf in chairing the first creditors’ meeting, given that:

(1)  S 241 must be read together with ss 453 and 456 of the Companies Ordinance (Cap 622) (“CO”), which permit private companies to have only one director that is a body corporate. 

(2)  Where the company only has one corporate director, necessarily it would not be able to “preside” at the meeting.  Instead, the director would have to appoint a representative to attend the meeting.

(3)  S 241 must be construed in light of the above context.  It is inconceivable that the legislature would have permitted a company with a sole corporate director to appoint a representative to preside at the meeting, but not where a company has a natural person as its sole director.   

74.  Even if, contrary to my view, s 241(3)(b) and s 241(4) do impose a duty on one of the directors to preside at the Meeting personally and the Meeting was held in breach of that duty, it does not render the proceedings at the Meeting invalid.  For this purpose, Ms Sit relies on Re Salcombe Hotel Development Co Ltd[1991] BCLC 44, 46d-e where in the absence of the director, the solicitor acting for the company took the chair of the creditors’ meeting.  This constituted a breach of the duty imposed by the equivalent provision of s 241(3)(b) and s 241(4) of the Ordinance[12]. Scott J (as he then was) held that the absence of the chairman (the director) would not invalidate the proceedings at the creditors’ meeting in this way:

“Section 99(1) is concerned to prescribe the duties of directors. The creditors’ meeting in the present case was properly summoned by proper notice. The only creditor was present at the meeting. Under the general law relating to meetings, if the person who ought to preside thereover is absent, it is open to those entitled to attend and who are present to appoint their own nominee to preside over the meeting. The absence of the chairman need not invalidate the proceedings at the meeting.”

75.  Mr Yu submits that Re Salcombe is not on all four with the present case, as the general law provides an answer where the chairman did not turn up at the meeting, which is not the case here.  In any event, the case only assists the defendants in relation to a breach of s 241(4) but not a breach of s 241(3)(b). I do not agree.  As Ms Sit submits, s 241(3)(b) and (4) both prescribe the duties of the directors, the breach of either duty constitutes an offence under s 241(6), but does not have the effect of invalidating the proceedings at the meeting. 

76.  As to Mr Yu’s argument that when one of the agenda items of the Meeting was to approve the appointment of the liquidator, the exercise by D2 of the power qua Chairman in rejecting P’s Furniture Rental Claim “plainly involved a serious conflict of interest”, it has no merit. 

77.  As Ms Sit submits, the interest of a chairman in the outcome of the resolution does not per seimpugn the exercise of his powers in the conduct or process of the meeting.  The principle is stated in Briggs, The Modern Law of Meetings, 3^rd ed, §7.30 (in the context of general meetings) that:

“The fact that the chairman has an interest in the outcome of a decision does not, in itself, impugn the integrity of the process at a meeting. No company contemplates that the chairman will be totally disinterested in every matter, and he is presumed to act in good faith unless it is proven otherwise”

78.  In the present case, the exercise of the power to reject P’s Furniture Rental Claim is a matter separate and distinct from the exercise of power by the Creditors to appoint liquidators. The former was a decision made by D2 based on the POD (and the supporting documents) then submitted by P, while the latter were the decisions made by the Creditors, who had been asked by the Chairman to consider and vote on 2 sets of proposed liquidators separately.  In any event, I am unable to see how the fact that the majority of the Creditors happened to vote for Borrelli/D2 would render D2 to be in a position of conflict. 

79.  Even if, contrary to my view, the Meeting was held in breach of s 241 of the Ordinance, it only constituted an irregularity.  I do not think such irregularity would invalidate the Appointment Resolution, given that prior to voting on such matter, the Creditors had been provided with (1) the financial information of the Company, (2) the List of creditors, (3) the disclosure statements and consent to act made by both sets of proposed liquidators for their consideration, and the Creditors were given the opportunity to vote on both sets of the proposed liquidators.  There was no injustice, let alone “substantial injustice” caused by the irregularity.  Indeed,  P has not in its evidence suggested any injustice, still less one which cannot be remedied by any Court order.

B6.  s 242 point

80.  Section 242 of the Ordinance provides as follows:

“The creditors and the company at their respective meetings mentioned in section 241 may nominate a person to be liquidator for the purpose of winding up the affairs and distributing the assets of the company, and if the creditors and the company nominate different persons, the person nominated by the creditors shall be liquidator, and if no person is nominated by the creditors the person, if any, nominated by the company shall be liquidator:

  Provided that in the case of different persons being nominated any director, member, or creditor of the company may, within 7 days after the date on which the nomination was made by the creditors, apply to the court for an order either directing that the person nominated as liquidator by the company shall be liquidator instead of or jointly with the person nominated by the creditors, or appointing some other person to be liquidator instead of the person appointed by the creditors.”

81.  Mr Yu’s argument runs like this:

(1)  Apart from P’s nomination, no other nominations of liquidators were put forward by other creditors present at the Meeting.

(2)  It is clear from s 242 that where the nomination of the company is different from the nomination of the creditors, the person nominated by the creditors shall be the liquidator.

(3)  The reference to “creditors” in s 242 includes the singular (s 7(2) of the Interpretation and General Clauses Ordinance).  It follows that where there is only one nomination from the creditors, the person nominated by the creditor would be the liquidator.

(4)  It is therefore irregular for D2 to put the appointment of Borrelli/D2 to a vote.  She does not have the power to determine the mechanism by which the liquidator is chosen where the company and a creditor appointed different liquidators; that is prescribed by s 242 of the Ordinance.

82.  The argument is misconceived. 

(1)  The reference in s 242 to the persons nominated by the “creditors” is a reference to the decision made by the creditors at the s 241 meeting. There is no provision under the Ordinance to allow a “creditor” to make such decision on its own or outside the creditors’ meeting.

(2)  Section 242 is not engaged, as the majority of the Creditors decided to appoint Borrelli/D2 as liquidators of the Company, who are the same persons nominated by the Company.

83.  Ms Sit submits that there is no specified formality on how the nomination is to be put forward, and refers to Max Regent Garments Co Ltd v Direct Fashion Sourcing Ltd (in liq), HCMP 568/2012, 21 August 2012 in which Lees/Ng were involved as an example to show that there was no formal nomination of proposed liquidators.  While the case does not really answer the point made by Mr Yu, it does demonstrate that as an experienced liquidator, Ng should have been aware that the technical points such as the alleged irregularities complained of by P would not be sufficient to invalidate the proceedings at the Meeting.

84.  In any event, for the same reasons stated in §79 above, I do not consider that there was any “substantial injustice” caused by the alleged irregularity or that such injustice is one which cannot be remedied by any Court order.

B7.  s 262C point

85.  As to P’s complaint about the failure to table the disclosure statement and the consents to act in respect of Borrelli/D2 as required by ss 262C(2)(a), 262D, 262E(3)-(4) of the Ordinance, it is wholly devoid of merit.   

86.  Section 262C(2)(b) requires these documents to be tabled “before the appointment or nomination (as the case requires)”[13]. As recorded in the minutes, those documents were made available at the Meeting and inspected by Ng before the Creditors were asked to vote on the proposed appointment of liquidators. 

87.  On the other hand, it is not apparent that P had made available the disclosure statement and consents to act in respect of Yuen/Chan. 

88.  In any event, no “substantial injustice” caused by the alleged irregularity has been alleged or articulated.

B8.  List of creditors point

89.  P complains that the list of creditors was not tabled at the Meeting and was only provided to P at Ng’s request.  Mr Yu contends that this contravenes s 241(3)(a) of the Ordinance, which requires the directors to cause a full statement of the position of the company’s affairs to be laid before the creditors’ meeting.  Pursuant to s 241(3A)(b) of the Ordinance, the full statement of the position of the company’s affairs must show the names of the creditors and the estimated amount of each of their claim.  Failure to comply with s 241(3)(b) without reasonable excuse constitutes an offence under s 241(6)(b) of the Ordinance.  Although the list of creditors was inspected by Ng at the Meeting, this does not mean P did not suffer prejudice.  The lateness in providing the list of creditors meant that P was only fully cognisant of its position vis-à-vis the other creditors at the Meeting. 

90.  The complaint must be rejected. 

91.  Section 241(3)(a) of the Ordinance only requires the full statement of the position of the company’s affairs to be laid before the creditors’ meeting.  It does not require the statement to be provided to the creditors before the meeting as Mr Yu suggests.  Had the legislature intended to require the statement to be provided to the creditors before the creditors’ meeting, it would have been so stated in s 241(1)-(2) (which governs how creditors’ meeting is to be convened). 

92.  As the minutes of the Meeting show, the Creditors were provided with information about the financial position of the Company and the SOA.  In addition, the list of creditors was laid at the Meeting and was inspected by Ng. D2 also invited Ng to inspect the PODs lodged by the other creditors after the Meeting, and Ng agreed. 

93.  It is surprising to see that Ng still considers it appropriate to incur time and costs in pursuing such complaint in his affirmation.

C.  DISPOSITION AND COSTS

94.  For the above reasons, the OS is dismissed. 

95.  As for costs, I make a costs order nisi that P do pay the costs of and occasioned by the OS, to be assessed by way of gross sum assessment.  As the parties have already lodged their statement of costs, I direct P to provide its comments on the defendants’ statement of costs within 3 days from the date of this Judgment.