GOLONG CO., LTD v. SESDERMA, S.L.

HCMP 1646/2020

[2021] HKCFI 2659

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1646 OF 2020

________________

________________

_________________

D E C I S I O N

________________

1.  On 12 March 2021 I delivered my decision (“March Decision”) in an application made by the Plaintiff for an order enjoining the Defendant from presenting a petition to wind up the Plaintiff on the grounds of insolvency. As can be seen from [14] of the decision, I granted the Plaintiff’s application and made a costs order nisi that the Defendant pay the Plaintiff’s costs with a certificate for two counsel.

2.  On 15 March 2021 the Defendant’s solicitors wrote to the court seeking a variation to that costs order nisi in the following terms:

“the Defendant pays the Plaintiff’s costs with a certificate for two counsel, save that the Plaintiff shall not be entitled to its costs prior to 1 December 2020, or to its costs of or occasioned by its expert opinion evidence.”

3.  Two days later on 17 March 2021 the Plaintiff’s solicitors wrote seeking a variation to the costs order.  The variation sought by the Plaintiff is that the costs be assessed on an indemnity basis.  I will deal with the application in relation to the costs of the expert opinion evidence first.  This is a reference to evidence that was initially introduced by the Plaintiff on Mainland law.  I took the view at the hearing that the evidence was inadmissible and unhelpful and I did not refer to it.

4.  As is unfortunately, commonly the case in interlocutory applications involving Mainland affairs, Mainland law opinion evidence was introduced without proper consideration, in my view, being given either to the procedure to be adopted, namely directions, or what was capable of constituting admissible opinion evidence on foreign law.  I, therefore, agree with the Defendant that the Plaintiff’s costs of its opinion evidence on Mainland law should be excluded from the costs order.

5.  So far as the issue concerning both the suggested adjustment by the Defendant to exclude costs before 1 December 2020 and the Plaintiff’s own application for costs to be assessed on an indemnity basis, in my view, the following is the position.  There are two authorities which are relevant.  The first is my decision in [6], [8] and [9] of Re Cosmigo Limited [1].

“6. The issue before me today is costs. The Company seeks its costs of the proceedings and invites the court to order that they be assessed on an indemnity basis. The Petitioner has opposed both.

…

8. So far as the suggestion that costs should be assessed on an indemnity basis is concerned, this is advanced on the grounds that it is now well-established that if a petition is issued and the petitioner is aware of matters which constitute a bona fide defence on substantial grounds to the debt, the proceedings are an abuse and it is appropriate for the court to order the costs on a higher basis.

9. The Company, which was represented by Ms Frances Lok, argues that by parity of reasoning where a statutory demand is issued and a request to undertake not to issue a petition is refused, in circumstances where it should have been appreciated by the Petitioner that there was a bona fide defence on substantial grounds, similarly, the costs of proceedings to enjoin presentation of the petition should be awarded on an indemnity basis. It would seem to me that, as a matter of general principle, that is correct.”

6.  The relevant principle is that if a party issues, or threatens to issue a winding up petition when in possession of sufficient information for the court to conclude that it should had been appreciated by the creditor that it was inappropriate to issue a petition, because it was likely that the company will be able to demonstrate a bona fide defence on substantial grounds, then in dismissing a petition or in granting an application to enjoin presentation of the petition, the normal positon will be that the creditor is ordered to pay the costs on an indemnity basis.

7.  The other decision is dealing with a different matter. It is Madam Justice Kwan’s (as she then was) decision in Re Sinom (Hong Kong) Limited [2]. The relevant parts of that decision are set out in [7] of my March Decision and what in practice that meant I was required to consider in the application then before me is explained in [8].  As Madam Justice Kwan explained generally it will be required of a company, claiming a cross-claim constitutes a bona fide dispute to a debt to set out in sufficient detail and quantification the cross-claim in order for it reasonably to be said that the creditor should appreciate that there is a bona fide defence on substantial grounds.

8.  Of course precisely what that will mean in any particular case will depend on the facts.  It may be that because of the complexity of a cross-claim, it is not possible to quantify it precisely shortly after a threat to issue a petition is made perhaps by service of the statutory demand, but it is sufficiently clear from the surrounding circumstances that the cross-claim is both arguable and likely to exceed the debt that in the circumstances the court will reasonably expect the creditor to recognise it was not an appropriate case in which to issue a petition.

9.  To a large extent the position in the present case concerns whether or not that is broadly speaking the position in which the Defendant should have appreciated it was in during the period between roughly September and December 2020.  I deal with the cross-claim, in [10] and [11] of the March Decision.  As is clear I concluded that certainly by the time I was hearing the substantive application, the information that was available demonstrated that there was a bona fide cross-claim and my reasoning includes in [11], observations which suggested as a matter of common sense, that this should have been apparent sometime earlier.

10.  Of course if a creditor is owed an undisputed clearly quantified debt and the suggested reason for it not being paid is a cross-claim, it is not the creditor’s responsibility to try and work out for itself, precisely what that cross-claim is likely to look like in its fleshed out from. However, a certain amount of informed common sense needs to be applied by a creditor and his lawyers in assessing whether or not it is a proper case in which to present a petition, but clearly they need to have material with which to work.

11.  As is apparent from my March Decision, this case was relatively complicated and somewhat messy.  It seems to me that although by the time the matter came on before me, the evidence that had been filed demonstrated that there was a bona fide defence on substantial grounds, if one looks back at the correspondence that was exchanged in September and October 2020, the Plaintiff had not provided sufficient information, in my view, for it to be fairly said that the Defendant should have appreciated that this was not a proper case to issue a petition.

12.  In large part my reasoning relates to the fact that Mr Payne has submitted that it was not until early December 2020 that the Plaintiff made it clear that it was no longer seeking specific performance of the distributorship agreement that it subsequently alleged had been breached giving rise to the loss of profit claim.  It follows that it cannot, in my view, fairly be said that until the Plaintiff had made that position clear, it was unreasonable for the Defendant to continue to press for payment of the clearly quantifiable debt.  It might be said that the Defendant might have guessed that at some point in time the position of the Plaintiff would change, but it does not seem to me that that in itself is sufficient to justify criticising the Defendant for proceeding on the basis that it appeared to be the Plaintiff’s position that the distributorship agreement remained in place and it wanted it implemented rather than treating it as ending as a result of a repudiatory breach by the Defendant, which gave rise to a cross-claim which justified withholding payment of the outstanding quantified debt.  I, therefore, will not vary the costs order as sought by the Plaintiff.

13.  So far as the Defendant’s application is concerned, namely, that the costs before 1 December 2020 should be disallowed in my opinion the position is as follows.  Having concluded for the reasons that I have explained that it seems to me that the Defendant was entitled to take the position that it did all the time, it appeared that the Plaintiff was contending that the distributorship agreement remained in place and should be enforced, it follows that it had justification for proceeding as it did and in those circumstances I agree with the Defendant that the order that I have made should be adjusted to reflect that position.

14.  I will, therefore, vary the costs order in the terms sought by the Defendant in its letter dated 15 March 2021.  In the circumstances I think it follows that the costs of the applications to vary the costs order should be paid by the Plaintiff to the Defendant, to be taxed if not agreed.