RE X10 LTD

1988, No. CWU206

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H E A D N O T E

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CREDITORS PETITION FOR A COMPULSORY BINDING UP ORDER OF X10 LIMITED IN RECEIVERSHIP NOTICE OF OPPOSITION TO APPEAR BY ANOTHER CREDITOR BEING A SUBSIDIARY OF THE COMPANY PRINCIPLES TO BE APPLIED ON AN APPLICATION FOR AN ADJOURNMENT MADE BY THE OPPOSING CREDITOR AND THE COMPANY SUPPORTED BY THE PETITIONER WHERE A SCHEME OF ARRANGEMENT FOR THE SALE OF THE ASSETS OF THE COMPANY WAS IN THE COURSE OF NEGOTIATION - APPLICATION BY NAY OF CONSENT SUMMONS AND APPROACH BY THE PARTIES TO THE OFFICIAL RECEIVER FOR CONSENT WAS FIELD TO BE IMPROPER - SEE PRACTICE NOTE (COMPANIES WINDING-UP) OF 18TH JULY 1977 (1977)1 W. L. R. 1066.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES WINDING-UP NO. CWU206 OF 1988

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J U D G M E N T

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1. On the 6th December 1988, the Hong Tong & Shanghai Bank (the petitioner) presented a winding-up petition against X10 Limited (the company) on the grounds of its insolvency. The debt claimed in the petition is over HK$ 10, 000, 000. Receivers had been appointed over the assets of the company under a debenture created in favour of the Bank of Scotland shortly before the winding-up petition had been presented. The first heating of the petition before the master one the 11th January was adjourned until the 1st February as the master's certificate had not been obtained.

2. On the 31st January, a notice to appear at the hearing and to oppose the petition was filed by another creditor Pico Electronics Limited (Pico) who claim to be owed a sum of over £729,000. Accordingly, on the 1st February when the petition came before the master, it was adjourned to my list for hearing on the 13th February.

3. Pico is a subsidiary of the company and both companies are members of the X10 group of companies. Another company in the group System X10 Limited is also in receiver ship at the instigation of the Bank of Scotland with the same receivers as those appointed for the company.

4. Evidence was placed before me at the hearing on the 13th February that the receivers had been making efforts to sell the assets of the X10 Group as a whole, which it was contended would realise a better price than if the winding-up proceedings were to continue.

5. The validity of the appointment of the receivers by the Bank of Scotland and the debenture under which the appointment was made, have been challenged by the petitioner while a further argument has been raised with regard to the quality of Pico's debt for, as I have said, it is a subsidiary of the company.

6. At the hearing on the 13th February, I gave directions for the filing of evidence and fixed the hearing for the issues raised by the petitioner to be heard on the 18th and 19th April. On the 14th April, a consent summons signed by the solicitors for the petitioner and Picowas filed for the hearing dates to be vacated and for a fresh date to be fixed. This summons was supported by an affidavit of Mr Day, Pico's solicitor, in which he referred to the negotiations for the sale of the assets and that a purchase of the Xl0 Group could be expected within about for weeks. The Official Receiver was requested to sign the consent summons, but naturally refused to do so as he is of course not a party to the Proceedings. May I say that it was wholly improper for the application for the adjournment to be made in this way which must be made in open court.

7. When the petition was called on for hearing yesterday, Mr Cheung, counsel for Pico, sought an adjournment to a date to be fixed but for a period of at least four weeks hence in view of the negotiations that were taking place for the sale of the group which was supported by Mr Faulkner, counsel for the petitioner. Mrs Goodman who appeared for the Official Receiver emphasised that the petition should be dealt with expeditiously and that only a short adjournment should be granted.

8. I took the view that the petitioner should either proceed or have the petition dismissed having regard to the delay since the date of the presentation of the petition and the paucity of the information before me with regard to the progress of the negotiations for the sale of the group. In fact I had wrongly been under the impression that the petitioner did not intend to proceed so I indicated that I would dismiss the petition. But Mr Faulkner then addressed me to the effect that as I was not prepared to grant the adjournment he wished to proceed.

9. However, Mr Cheung was now placed in an embarrassing position for he informed me that his instructions had been limited to the application for the adjournment. This was a surprising statement to say the least. After granting a short adjournment, Mr Cheung returned to inform me that the agreement for the sale would be signed later that day As a result I stood the petition down until today. On the resumption I was informed by Mr Cheung that the agreement had not in fact been signed but that the agreement to which he intended to refer related to an agreement by the prospective purchaser to put back the actual signing of the agreement for the sale. Be that as it may, at the eleventh hour Mr Allman-Brown appeared on behalf of the company and also said that he had instructions to represent the Bank of Scotland, who would however require special leave to appear under Rule 30 of the Companies, (Winding-up) Rules. At the present time, I propose to defer the application by the Sank of Scotland for special leave to appear.

10. Mr Allman-Brown who has made an application for the hearing to be adjourned, has very helpfully taken me through the history of this matter and he has explained in greater detail particulars of the negotiations that have been taking place for the sale of the group to Chungco Trading Private Limited (Chungco), a company incorporated in Singapore. Heads of Agreement were in fact signed on the 23rd March with or completion fixed for the 15th April. This date was clearly geared to the hearing of the petition yesterday but was undoubtedly on the facts, unrealistic with the result that it is anticipated that if the sale is to proceed, a further time of about four weeks will be required. A deposit of US$ 500, 000 has been paid under the agreement by Chungco to the Bank of Scotland. The Bank of Scotland have in turn, paid US$ 500,000 to the petitioner in reduction of the company's indebtedness to the petitioner pending an assignment of the debt to Chungco which it is anticipated will he executed on the same date as the completion under the Heads of Agreement. I have also been told that the scheme has the support of 80% of the creditors of the company.

11. Whilst there is no evidence before me at present, I accept Mr Allman Brown's statement from the ban table that he has been informed by Mr Robinson, one of the receivers, that if the scheme is not implemented, it is almost certain that the unsecured creditors will receive no dividend and the Bank of Scotland is unlikely to obtain a full recovery of its debts.

12. The position in this case is far from satisfactory. In the first place, the procedure adopted by the solicitors to obtain the adjournment by way of a consent summons and their approach to the Official Receiver to obtain his consent was, as I have said, wholly improper. Some practitioners appear to be under the impression that a creditor's compulsory winding-up petition and bankruptcy petitions can be dealt with in the same way as an ordinary action. They are not or actions for they have wider implications in the public interest. The court is not merely concerned with the interests of the petitioner and any opposing creditor but with the general body of creditors. It is to be noted that Mr Robertson, the Deputy Manager of Credit Control of the petitioner wrote to the Rank of Scotland on the 13th February which letter reads in part as follows:-

" Re: X-l0 Limited

We refer to our telecon Robertson/ Robertson of 11th February. The hearing date for our winding up petition was today set at April 18th 1989. As per our discussions we confirm:

a) we will take no further, action between nom and the hearing date,

b) should you so request we will adjourn the hearing for a further 2 week period,"

13. I understand that the bank's legal advisers were not aware of his letter until today. Suffice it to say that Mr Robertson should not have made reference to the action that he intended to take which I regard as an impertinence. Any adjournment to be granted is a matter for the discretion of the court not for the convenience of the petitioner and the Bank of Scotland. I trust the solicitors who advise the petitioner all bring my comments to the notice of their client so that their correspondence is not couched in this manner in the future.

14. Apart from the improper approach by the parties to obtain the Official Receiver's consent to an adjournment, the Official Receiver does not appear to have been consulted upon the steps that have been taken with regard to the scheme, nor has a statement of affairs been submitted. I would merely remind the Official Receiver that if in the future there is any lack of cooperation from those persons who have a duty to assist in the investigation of the affairs of a company, an application should be made immediately to the court for directions to be given.

15. Mr Allman-Brown's application for an adjournment has been supported by both the petitioner and Pico, whilst Mrs Goodman for the Official Receiver does not oppose the application. Nevertheless, I entirely agree with her when she said that winding-up proceedings cannot he used as leverage for all the parties.

16. As is well known the court will when a debt is not disputed usually grant an adjournment for a short period for a scheme or proposal to be considered and only in exceptional circumstances will a long period of adjournment be granted. This procedure does not, of course, apply to contributories petitions. The reasons are encapsulated in the Practice Note of the 18th July 1977 when Brightman J. made a statement representing the views of all the judges of the Companies Court with the concurrence of the Vice-Chancellor where in paragraphs 2,3 and 4 he said:-

"2.    There have recently been a number of cases in which repeated and lengthy unopposed adjournments have been sought after the presentation of a creditor's petition for the compulsory winding up of a company. Such adjournments of petitions are often undesirable because the winding up order, if made, dates back to the presentation of the petition, and the adjournments may make the process of liquidation more complex. The books of the company tend to get out of date, and sometimes they are lost, quite apart from any dishonesty officers and employees who could provide valuable information sometimes leave and cannot be traced. Further, dispositions made between the presentation of the petition and the making of the winding up order have to be examined to see if they are justifiable, and delay both increases the number of these transactions and makes their examination more difficult.

3.    Whatever may be the rights of the parties to agree on deferring the hearing of ordinary litigation, the special considerations which apply to creditors' winding up petitions require as a general rule that they should he heard promptly. No rigid timetable can or should be laid down, but in normal cases where the debt is admitted, a period of four weeks from the date of the first hearing ought to suffice to enable the petitioning creditor, if still unpaid, to decide whether to press for a winding up order, or whether to rely on other arrangements. Usually this period should also suffice to enable the company to decide whether or not to promote a moratorium or other scheme of arrangement.

4.    It is recognised that in some cases there will be special factors which will justify longer agreed adjournments, or more adjournments than one; an example is where a receiver has been appointed and is realising the assets. But those practising in the Companies Court should realise that in future the court is likely to be reluctant, to grant long or repeated adjournments even with the consent of all, concerned, unless there are shown to be cogent grounds for the application."

17. Practitioners are therefore reminded of this practice and that in future if the court is not supplied with full reasons for an application for an adjournment, it is unlikely that it will be granted.

18. Having heard further argument today, I shall, in the exceptional circumstances of this case grant the application for a further adjournment until Monday, the 8th May at 9:15 a.m. On that date if the scheme has not been finalised, I shall fix a date for the petition to be argued reserving two days for this purpose. No further adjournment of the date fixed for argument will be entertained in which case the petitioner must elect either to proceed or to have the petition dismissed.

19. Costs will be reserved.