BIO-CHEM TECHNOLOGY (HK) LTD v. BIO-CHEM TECHNOLOGY (HK) LTD

HCMP 375/2019

[2019] HKCFI 1156

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 375 OF 2019

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Reasons for Decision

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Introduction

1.  This is the Plaintiff’s application for an interlocutory injunction to restrain the Defendant from presenting a petition for winding-up against the Plaintiff based on 2 statutory demands in respect of a costs order payable by the Plaintiff to the Defendant in the proceedings HCA 476/2017.

2.  At the end of the hearing I granted the injunction on condition that the Plaintiff do pay into court a sum of money equal to the amount of the outstanding costs and interest by 4 pm on Monday, 25 March 2019 and that the Plaintiff’s costs be in the cause of the Originating Summons.

3.  I have indicated that I will hand down the written reasons for my decisions, which I now do.

Costs Order in HCA 476/2017

4.  In HCA 476/2017, the Plaintiff claimed against the Defendant for a sum of USD3,870,125 being allegedly outstanding purchase price in respect of 4 supply contracts of certain feed additive. 

5.  An application was taken out by the Defendant to stay the proceedings on the ground that the dispute has to go for arbitration pursuant to an arbitration clause provided in the contracts between the parties.

6.  The stay application was heard before Deputy High Court Judge Sherrington and the learned judge ordered^[1] that the proceedings be stayed pending the parties’ arbitration and that costs of the stay application be borne by the Plaintiff to be taxed if not agreed.

7.  The Plaintiff commenced arbitration proceedings on 17 January 2018.  The Defendant denies liability and counterclaims against the Plaintiff for alleged breaches of contract by the Plaintiff.

8.  On 14 January 2019, the costs of the Defendant in HCA 476/2017 were taxed before Master Kot and on 20 February 2019 the Defendant obtained an interim certificate for a total amount of HK$381,826. 

9.  On 1 March 2019, the Defendant’s solicitors issued 2 statutory demands and served on the Plaintiff. 

10.  On 13 March 2019, the Plaintiff’s solicitors sent a letter to the Defendant’s solicitors purportedly giving notice that the sums under the statutory demands had been set off by the Plaintiff from the Plaintiff’s claim against the Defendant.

11.  On 14 March 2019, the Defendant’s solicitors wrote that they have standing instructions from the Defendant to file and serve a winding-up petition against the Plaintiff if the Plaintiff failed to comply with the statutory demands on or before 22 March 2019.

Applicable Legal Principles

12.  In Re Sinom (Hong Kong) Ltd^[2], Kwan J (as Kwan VP then was) set out the relevant principles in relation to an application for an injunction restraining a creditor from presenting a winding-up petition based on a cross-claim raised by the company, which are as follows^[3]:

“9. The principles governing applications for interim injunctions in American Cyanamid Co v Ethicon Ltd [1975] 396 do not apply to this situation, as the granting of an injunction to restrain the presentation of a winding-up petition would finally dispose of the issue in dispute in the present proceedings (Bryanston Finance Ltd v De Vries [1976] 1 Ch. 63 at pp. 80E-81E).

10. The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding-up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds (Bryanston Finance Ltd v De Vries [1976] 1 Ch. 63 at pp. 78D-E, 79A-D).

11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (“a disputed debt petition”), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (“a cross-claim petition”), such a petition may be restrained from proceeding (Re Pan Interiors Ltd. [2005] EWHC 3241 (Ch), paras. [34] to [39]). 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 (In re A Company (No. 0012209 of 1991) [1992] 1 WLR 351). A cross-claim petition is regarded in the same way (Southern Cross Group plc v. Deka Immobilien Investment GmbH [2005] All ER (D) 374, paras. [29] & [30]; Re Pan Interiors, supra., para. [35]).

12. To successfully resist a cross-claim petition, the company has the onus of establishing that its cross-claim is genuine, serious and of substance. There must be supporting relevant details to demonstrate that the cross-claim is based on substantial ground. The test is very much the same as the test for a disputed debt petition for deciding whether a debt is disputed in good faith and on substantial grounds (Applications to Wind Up Companies, by Derek French, 2^nd edition, paras 6.10.7.2 and 6.10.7.3 and the cases there cited).

13. In Re Bayoil SA [1999] 1 WLR 147 at 154B, Nourse LJ said it was also necessary for the company in a cross-claim petition to show that it has been unable to litigate its cross-claim. In the subsequent decision of Popely v. Popely [2004] EWCA Civ 463 at para. [124], Jonathan Parker LJ (with whom the other members of the English Court of Appeal agreed) said he did not understand Nourse LJ to be intending to lay down an absolute requirement to that effect. Rather, he understood Nourse LJ to be doing no more than indicating that where there has been a delay in the prosecution of the cross-claim, the delay must not be such as to throw real doubt on the genuineness of the cross-claim. Popely was applied in Re Pan Interiors, supra. and Marchands Associates LLP v. Thompson Partnership LLP [2004] EWCA Civ 878, para. [46].

14. In Hong Kong, it was said by the Court of Appeal in Re SY Engineering, CACV No. 1896 of 2001, [2002] HKEC 241 at paras. 15 to 16 that inability to litigate the cross-claim must be shown by the company for the court to reject a cross-claim petition. I have considered the two lines of English cases in Re Landune International Ltd. [2005] 4 HKLRD 46 at paras. 26 to 30 and expressed the view that SY Engineering does not bind me on this issue, as the relevant dicta were obiter and founded on dicta in Re Bayoil which were not part of the ratio decidendi. As in Landune International, I propose to adopt the approach in the subsequent English decisions that inability to litigate is not an absolute requirement.

15. Where a cross-claim is raised by the company, it is open to the petitioning creditor to bring in a reverse cross-claim to extinguish the company’s cross-claim. If the reverse cross-claim, together with the petition debt, exceeds the company’s cross-claim, the petition may be allowed to proceed, but not if the reverse cross-claim is disputed on substantial grounds (Montgomery v. Wanda Modes Ltd. [2002] 1 BCLC 289, paras. [38] to [40]; Re City Top Engineering Ltd. [2006] 2 HKLRD 562, paras. [20] to [27]). In this situation, the approach is to consider the overall relationship between the parties to see whether there is, at the end of the day, an undisputed or undisputable debt that is or will be due to the petitioning creditor (Re Jade Union Investment Ltd., HCCW No. 400 of 2003, [2004] HKEC 306, Barma J, 5 March 2004, para. 12). It is not necessary for the reverse cross-claim to be quantified, so long as it is certain to come into existence and its combined effect with the petition debt is of sufficient size to offset the cross-claim (Re To Kin Wah, HCB No. 9856 of 2007, Barma J, 16 October 2008, paras. 7 to 9).

16. The existence of an arbitration clause, or of the commencement of arbitration, does not prevent the court from considering whether or not the company has established the existence of a bona fide dispute of substance in relation to the debt on which the petition is based (Re Jade Union Investment Ltd., supra., paras. 13 to 27).”

Discussion

13.  The Plaintiff in the present case has a cross-claim against the Defendant.  The Plaintiff seeks to set off the sums owed to the Defendant being taxed costs against them in HCA 476/2017.  In other words, the Plaintiff is seeking to set off a costs order arising from the same proceedings by its claim which is the subject matter of the proceedings.

14.  In my view, it would be an abuse of process to allow the Plaintiff to do this as otherwise a party who failed in an interlocutory application and isliable to pay costs forthwith would not be required to pay the actual amount by merely pleading that the costs be set off from part of his claim or counterclaim.  This cannot be right.

15.  However, the argument of the Plaintiff is not only that he is entitled to set off the sums by its claim.  The Plaintiff’s position is that it is willing to pay the full amount of the debt of the 2 statutory demands into court as security.  Mr Oh, counsel for the Plaintiff, has submitted that in so doing any petition for winding-up to be presented against the Plaintiff out of the statutory demands will be bound to fail, as it would then be difficult for the Defendant to rely on section 178(1)(a) of the Companies Ordinance to prove that the Plaintiff is insolvent^[4].

16.  With respect, I agree with Mr Oh.

17.  Although, as submitted by Mr Hui, counsel for the Defendant, the facts of the present case are peculiar in that the debts under the statutory demands are costs order out of the same proceedings, what I consider to be critical is whether the petition for winding-up will amount to an abuse of process.  Whether the company’s cross claim can constitute a valid defence is but one factor to be considered.

18.  In this case, should the Defendant be allowed to present a winding-up petition against the Plaintiff and the Defendant does present a petition, the petition will inevitably be unsuccessful as the Defendant will be unable to prove that the Plaintiff is insolvent.  But by presenting the petition and advertising it, serious damage which might be irreparable will be caused to the Plaintiff.

19.  The Plaintiff is a subsidiary of a company (a company in the GBT Group) listed on the Hong Kong Stock Exchange and is responsible for settling listing fees, payments to auditors, suppliers, employees and creditors of the Plaintiff and GBT Group.  If a winding-up petition is presented against the Plaintiff, over HK$100 million in liabilities to other subsidiaries in the GBT Group will become immediately repayable and the Plaintiff’s bank account will be frozen. A public announcement will have to be made by the GBT Group which may result in a serious damage to the Group’s reputation.

20.  As submitted by Mr Hui, the Plaintiff can simply pay the Defendant the sums owed to avoid all the above mentioned to happen.  To a large extent, any dire consequence that might happen to the Plaintiff is caused by the Plaintiff’s reluctance to pay the Defendant, which is unjustifiable in the circumstances.

21.  As I have indicated at the hearing, I share Mr Hui’s sentiment. However, apart from presenting a winding-up petition, there are other means for execution of the costs order against the Plaintiff for payment.  Moreover, a winding-up petition should not be used as an oppressive means for enforcement of a debt. 

22.  As explained above, with the Plaintiff’s indication that it will pay into court the full sum as security, any winding-up petition against the Plaintiff relying on the statutory demands is bound to fail.  It is an abuse of process for the Defendant to insist on presenting a winding-up petition against the Plaintiff knowing full well that the Plaintiff has the ability to pay.

23.  For the above reasons, the injunction is granted with the condition that the Plaintiff do pay in the amount of the outstanding costs and interest by 4 pm on Monday, 25 March 2019.

24.  After hearing parties’ submissions on costs, I see no reason not to make the usual costs order that the Plaintiff’s costs be in the costs of the proceedings, following the Plaintiff’s success in applying for an interim injunction.