RE UIL HONG KONG LTD (also known as UIL Hong Kong Ltd)

HCCW 205/2019

[2019] HKCFI 2311

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 205 OF 2019

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D E C I S I O N

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1.  The Petitioner is the Allahabad Bank, which petitions to wind up UIL Hong Kong Limited (“Company”) on the grounds of insolvency. To prove insolvency it relies on a statutory demand dated 22 March 2019 for payment of US$6,919,104.32 plus interest, which continues to accrue.

2.  The Company has filed evidence setting out the grounds on which it says it has a bona fide defence to the debt. Before addressing the alleged defence it will be helpful to summarise the onus, which at this stage it is necessary for the Company to satisfy in order to have the Petition dismissed.  What has to be demonstrated in order to satisfy the bona fide defence on substantial ground threshold has been discussed in many cases and is not controversial.  These are summarised in my decision in Re Yueshou Environmental Holdings Ltd [1].

“8. It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment. If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed. Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated. I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

‘Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.’

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B.

(2) I have to be satisfied that the Company's assertions are believable. The test

‘... is indeed as simple as whether the defendant's assertions are believable. But it must be recognised─because failure to recognise it would create a debt-dodgers' charter─that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

Re Safe Rich Industries Ltd (unreported) CA 81/94, 3 November 1994, Bokhary JA, §13.

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship's judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

‘(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, “substantial” means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.’”

3.  In other words, a company must adduce evidence that demonstrates an honest belief in facts and matters that constitute a substantial defence.  If the court approaching the evidence with regard to the principles describe in the previous paragraph concludes that defence is concocted the threshold has not been satisfied.  To quote Lord Hoffmann (then sitting at first instance) in Re Record Tennis Centres Ltd [2], in which the company, as in the present case, relied on a  cross-claim, if the court concludes on the affirmation evidence that the defence “has been conjured up to stave off liquidation” a winding-up order should be made. In my view that is clearly the position in the present case.

4.  The debt arises under a Facility Agreement dated 1 August 2013 pursuant to which the petitioning bank made advances to the Company.  The finance was principally trade finance and the Facility Agreement was supplemented by letters amending its terms. The relevant amendments related to the amount of the facility.  There is no dispute that the Company defaulted in its repayment obligations. Its defence is that it has cross-claims.  The cross-claims are explained in paragraphs 16 to 36 of the 2^nd affirmation of Swapnil Hiraman Mokashi.

5.  There are two cross-claims.  The first is that the Petitioner wrongly reduced the amount of the Facility.  The second is that clause 11.5 of the Facility Agreement required the Company to keep deposited with the Petitioner an amount equal to 20% of the total credit facility.  As the facility was reduced the amount of the deposit should have been reduced by US$1 million.

6.  The Company argues that the Petitioner was not entitled to unilaterally reduce the facility, because of some implied restrictions, which qualify the written terms.  The implication arises after the Facility Agreement was executed and is a consequence of the discussions between the parties during which at one point the Petitioner’s staff indicated that the Petitioner would increase the level of the Facility.  It seems to be suggested that assuming, which the Petitioner denies, something along these lines was said it prevented the Petitioner subsequently reducing the Facility. It my view this is a non-sense argument, which has obviously been concocted. Similarly, fatuous is the claim that the failure to recover the US$1 million that the Petitioner continued to hold when the Facility was reduced, which it appears the Company did not request repayment of, resulted in a failure to complete a contract for purchase of copper cathodes, which unsurprisingly, the Company conjures into a cross-claim for massively in excess of the US$1 million said to have been withheld: US$9 million.

7.  Ms Lam argued that I should take into account in assessing the evidence the fact that it had been filed for a recent validation order application and the Company wishes leave to file further evidence.  It is not, however, suggested that any further evidence will materially alter the substance and character of cross-claims and I can see no purpose to be served by not disposing of the Petition at the first hearing in the view of the entirely unconvincing evidence that has so far been filed.

8.  A number of creditors, said to hold a substantial amount of the Company’s debt, apparently support an adjournment to allow attempts to restructure the debt to be advanced.  It is well established that in order to obtain an adjournment on this ground some credible evidence of a restructuring proposal needs to have been produced.  In this case there is none and given the view that I have formed about the unreliability of the Company’s evidence it does not seem to me appropriate to adjourn for this reason.  I will, therefore, make the normal winding-up order.