IN RE SILK PLAN LTD.

HCCW 890/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.890 OF 1998

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J U D G M E N T

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1. This is a petition by Gapo Limited ("the Petitioner") to wind up Silk Plan Limited ("the Company") based on an unpaid judgment debt.

The judgment debt

2. The judgment debt arose in the following way. By writ issued on 31 December 1997, the Petitioner commenced proceedings against the Company in respect of alleged breaches of a tenancy agreement and licence agreement and sought, inter alia, declarations that the deposits of $41,700 under the tenancy agreement and of $10,000 under the licence agreement had been forfeited and for various sums due in respect of rent, rates, management and licence fees in respect of the period specified in the prayer for relief as well as interest and damages. In its defence filed on 22 January 1998, the Company admitted that sums totalling $54,598 in respect of rent, management fee, rates and licence fee were outstanding and denied all the other allegations. No set-off was specially pleaded. On 21 February 1998, the Petitioner took out an Order 14 summons for summary judgment in the sum of $53,432.50 in respect of overdue rent, management fee, rates and licence fee.

3. At the hearing of the Order 14 summons on 24 June 1998, the Petitioner obtained judgment for that sum. Although the Company had filed a defence, it did not appear at the hearing.

4. Based on this judgment debt, the Petitioner filed the present petition.

Ground for opposing the petition

5. The Company opposed the petition on the ground that it has a right to a set-off in that the Petitioner has in its possession the sum of $51,700 paid by the Company as deposit and the Petitioner has not yet obtained a declaration that it is entitled to forfeit the same.

6. But whether or not the Company is entitled to a set-off would depend on the resolution of the question whether the deposits had been properly forfeited. As noted above, the Company failed to specially plead a set-off in its defence as it is required to do under Order 18, rule 17 of the Rules of the High Court. It did not oppose the Order 14 application. In my judgment, there is little doubt that the Order 14 proceedings could have been resisted, in any event as to the amount of $51,700, on the basis that there was a bona fide dispute as to the Petitioner's right to forfeit that sum. As to the difference between the amount claimed under Order 14 and the amount of the deposits i.e. $1,732.50, there was plainly no defence. Having allowed the judgment to have been obtained in the sum not of $1,732.50 but $53,432.50, is it now open to the Company to rely on the yet unresolved question of whether or not it is entitled to a set-off as an answer to the petition?

7. The Company's stance is that it is a matter for the Petitioner to establish its right to forfeit the sums in question and that unless and until the appropriate declarations had been obtained, the monies which form the subject matter of the deposits belong to the Company. It is to be observed that if that contention were correct, the Order 14 proceedings and more particularly, the judgment obtained was an altogether pointless exercise. It would render the judgment nugatory.

The applicable principles

8. Counsel for the Petitioner relied on In re Douglas Griggs Engineering Ltd. [1963] 1 Ch 19. In that case, the petition was based on a judgment debt obtained in November 1961. In that same year, in a separate action against the company by a different party, the company brought the petitioning creditor into that action by way of third party proceedings. Whilst the plaintiff in that action recovered judgment against the company, the third party proceedings as between the company and the petitioning creditor was still pending and was due to be heard some five weeks after the winding-up petition which was presented in January 1962. The company's claim against the petitioning creditor in the third party proceedings was for a sum in excess of the amount of the judgment debt upon which the petition was based. On these facts, Pennycuick J held (at page 23) that :-

"...It would have been open to the company to apply in the action brought by the petitioning creditor for leave to defend by raising a set off, but the company did not elect to do so. In the event the petitioning creditor has obtained judgment and possesses all the remedies of a judgment creditor, in particular, the petitioning creditor is entitled to present a petition for winding up the company based on that judgment, and prima facie is entitled to a winding-up order against the company based on that judgment. It seems to me that this prima facie right of the petitioning creditor to a winding-up order is not displaced merely by showing that the company has a disputed claim against the petitioning creditor which is the subject of litigation in other proceedings."

9. The only difference between In re Douglas Griggs Engineering Ltd. and the present case is that in the former, the disputed claim against the petitioning creditor arose out of other proceedings rather than the same proceedings. In my judgment, the difference is not one of substance : in In re Douglas Griggs Engineering Ltd., the company could have obtained leave to defend by raising a set-off and in the present case, it could have resisted the Order 14 application in respect of $51,700 by raising a set-off.

10. In re Douglas Griggs Engineering Ltd. was applied in Re United Strength Ltd. [1992] 1 HKC 386, a case similar on the facts to the present save that in that case the company did advance a counterclaim and in Order 14 proceedings, summary judgment was stayed pending resolution of the company's counterclaim. Nevertheless, the petitioning creditor which had based its petition on the taxed costs of the Order 14 proceedings which were not stayed was entitled to a winding-up order.

11. The other relevant authority is Re L.H.F. Wools Ltd. [1970] 1 Ch 27 which, inter alia, held that the modern practice is that where a company had a genuine and serious cross-claim against the petitioning creditor which it had not reasonably been able to litigate, the petition should usually be dismissed or stayed. This ruling was recently considered and applied by the Court of Appeal in In re Bayoil S.A. [1999] 1 WLR 147 at 154C.

12. Whilst no cross-claim has been advanced in this case, even if one had been advanced, it is difficult to see how the Company could show that it had not reasonably been able to litigate the cross-claim : it had every opportunity, but failed, to do so.

13. In my judgment, the Company has not been able to distinguish In re Douglas Griggs Engineering Ltd. or Re United Strength Ltd. and show why the principle enunciated and applied in those cases should not apply in the present case. The judgment obtained is unimpeachable and no application for a stay of execution has been made. In the circumstances, I see no reason not to make the winding-up order sought by the Petitioner. The Petitioner is also entitled to costs and I make an order nisi to that effect.

14. Pending this judgment, the Official Receiver saw fit to send the court a copy of his letter to the Petitioner, effectively making supplemental submissions under the guise of inter partes correspondence. This is highly irregular. Supplemental submissions should not be made without the leave of the court. Suffice to say that where a winding-up order is made based on a judgment debt, I fail to see any basis for a liquidator to reject a proof of debt in the liquidation founded on that judgment debt. If the liquidator considers that the deposits forfeited belong to the Company, then he must take proceedings on behalf of the Company in liquidation to recover those deposits for the benefit of the Company's creditors.