RE SUCCESS LANE DEVELOPMENT LTD

HCCW 3/2025

[2025] HKCFI 1121

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 3 OF 2025

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REASONS FOR JUDGMENT

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I.  INTRODUCTION

1.  Having considered counsel’s submissions, the main crux of which was on whether a cross-claim based on Success Lane Development Limited (the “Company”)’s ongoing legal proceedings claiming for damages against the Petitioner could be raised to resist the latter’s winding up petition presented herein on 3 January 2025 (the “Petition”) based on payable costs orders made in interlocutory applications in the Petitioner’s favour against the Company in the same ongoing proceedings, at the end of the hearing on 17 March 2025, I made a usual winding up order against the Company. I also ordered that the Company’s director Ms Yung Mei Chun Jessie (“Ms Yung”) be joined to these proceedings for the purpose of costs only. These are the reasons for my judgment.

II.  BACKGROUND

2.  The Petitioner operates a hotel named New World Millennium Hong Kong Hotel (the “Hotel”). The Petitioner and the Company entered into a “Long Stay Room Contract” (the “Long Stay Contract”) whereby the Company would rent a hotel room of the Petitioner for storage of various items (the “Stored Items”) 12 April 2022 to 11 July 2022. Based on the alleged breach of the contract as well as other causes of action, the Company (as plaintiff) commenced DCCJ 2191/2023 against the Petitioner (as defendant) claiming for damages, the value of which is said to be at least HK$3,000,000.

3.  I do not need to go into the details of the factual matrix here. Suffice to say that the Company made or opposed various applications in the District Court which resulted in various costs orders against it (the “Costs Orders”) all payable forthwith in the sum of HK$697,534.66 with judgment interest at judgment rates.

4.  The Costs Orders are either orders not appealed against, or orders against which leave to appeal has been refused by the Court of Appeal (in [2024] HKCA 839 and [2024] HKCA 926).

5.  On 24 October 2024, the Petitioner served the Statutory Demand in respect of the judgment debts under the Costs Order (the “Judgment Debts”) and the interest thereon (the “Judgment Interest”). As at the date of the Statutory Demand, the Judgment Debts together with the Judgment Interest amounted to HK$734,667.58 (collectively, the “Judgment Sum”). As none of the Judgment Debts has been paid, the Judgment Interest continued to accrue since 25 October 2024.

6.  One would have thought that after the Court of Appeal’s refusal to grant leave to appeal, the Company would have to accept that it had to comply with the Costs Orders, which are court orders. However, not only the Company still failed to comply with the court orders, but shortly after the expiry of the Statutory Demand, on 20 December 2024, the Company commenced DCCJ 7537/2024 seeking relief to set aside, among others, the Costs Orders. The basis for seeking such relief was that in those applications where the Costs Orders were awarded, the Petitioner failed or had failed to make full and frank disclosure to the Court that the Long Stay Contract was tainted by illegality and thus any of the Court’s rulings on the Petitioner’s Counterclaim for lien in favour of the Petitioner against the Company (based on the validity and enforceability of the Long Stay Contract), as well as any Costs Orders based on such rulings, was wrong.

7.  Equipped with DCCJ 7537/2024, the Company applied in DCCJ 2191/2023 for a stay of, inter alia, the Costs Orders (allegedly) urgently, so urgently that the Company issued the application in the afternoon of 31 December 2024 and insisted on having a hearing the next working day, that is, 2 January 2025. The ground of the alleged urgency was that without the stay, the Petitioner would, based on the Costs Orders, present a winding up petition.

8.  That stay application was dismissed on 2 January 2025 after the hearing: see [2025] HKDC 17. The Company filed a summons in DCCJ 2191/2023 on 16 January 2025 for leave to appeal against the dismissal. The parties shall file and serve written submissions in the coming weeks, and the Court has directed that the decision will be handed down on 10 April 2025. There is no further application for any order to stay the Costs Orders.

9.  There being no stay of the Costs Orders and the Statutory Demand having expired, the Petitioner presented the Petition herein pursuant to sections 177(1)(f) and 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).

III.  SET-ASIDE GROUND

10.  The first ground raised by the Company in its affirmation, namely, Affirmation of Ms Yung, in opposition to the Petition is that the Costs Orders are liable to be set aside for the reasons set out in DCCJ 7537/2024. These reasons were also essentially the very same reasons raised in the dismissed application to stay the Costs Orders at the hearing on 2 January 2025 in DCCJ 2191/2023 mentioned above.

11.  I note that Mr Alvin Cheung, counsel for the Company, rightly in my view, does not make any submissions on this ground, though the Company did not abandon this ground. In any event, I reject this ground for the following reasons:-

(1)  For the reasons explained in §§11-16 of [2025] HKDC 17, DCCJ 7537/2024 is unmeritorious, so unmeritorious that the Court refused to stay the Costs Orders.

(2)  Although the Company is applying for leave to appeal against that decision and the Court has yet to hand down its decision on the leave application, on the materials before me now, I see no real prospects of success of the intended appeal. First, the decision was a discretionary decision, and the threshold for a successful appeal against discretion is high; second, on the materials before me now (including the draft notice of appeal for the application for leave to appeal), I fail to see any error in relation to the discussion in the decision on the substantive merits of DCCJ 7537/2024.

(3)  In any event, as Mr Cedric Yeung, counsel for the Petitioner, submitted, even if the Company would succeed in DCCJ 7537/2024, only those Costs Orders relating to the Counterclaim would be set aside, because, as mentioned above, the full and frank disclosure, even on the Company’s case, went to the Counterclaim only. Therefore, as summarised in Annex to Mr Yeung’s Skeleton Submissions, at least HK$113,457.04 would remain extant. This is sufficient to wind up the Company: see Excellent Asia (BVI) Ltd v Mas Media Group Ltd [2021] HKCFI 3605 at §2.

IV.  CROSS-CLAIM GROUND

12.  The second ground in opposition raised by the Company, being the focus of the counsel’s submissions, is that its claim for damages in DCCJ 2192/2023 would amount to at least HK$3,000,000 and this constitutes a defence of set-off or cross-claim to resist the Petition based on the Costs Orders. For convenience, I shall refer to the claim in the ongoing proceedings as the main claim.

13.  At the outset, to put the matter in context, I should make it clear that the Costs Orders here are costs order for interlocutory applications. Such costs orders after Civil Justice Reform are almost invariably made payable forthwith or within 14 days upon summary assessment by virtue of Order 62 rule 9B. Further, the cross-claim or set-off raised by the Company is one based on the ongoing main claim, which the Company would have yet to prove at trial.

14.  Mr Yeung (for the Petitioner) relies on Bio-Chem Technology (HK) Ltd v Rich Leaf International (HK) Ltd [2019] 2 HKLRD 1087 at §§13-14 per ST Poon J and submits that a party is not permitted to set off costs orders payable forthwith against the subject claim even in the same action. At §14, his Lordship said:-

“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 is liable to pay costs forthwith would 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.  For my part, I would not go so far as to say that reliance on the main claim as a cross-claim against a claim or a winding up petition based on costs orders is always abusive. Whether there is an abuse depends on the facts of the particular case. That said, that it is not necessarily an abuse does not mean that a cross-claim would constitute a good ground to resist a winding up petition based on such costs orders.

16.  Mr Cheung (for the Company) goes so far as to submit that Bio-Chem “implicitly and wrongly assumes that there is no other recourse against the Company other than by a winding up petition” and that “ample methods of enforcement for non-compliance with costs orders” are available. However, Mr Chueng was unable to tell me what other means would be available in the present circumstances, for example, whether the Company has property of sufficient value for a charging order or cash in bank account sufficient for a garnishee order. He fairly accepted that there is no such evidence. In any event, the Petitioner is entitled to seek immediate payment of the Judgment Sum: see Re Wintac (Hong Kong) Ltd [2023] HKCFI 2323 at §15(3) per Linda Chan J, and is perfectly entitled to present the Petition: see Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd (2022) 25 HKCFAR 98 at §34 per Fok and Lam PJJ (delivering the unanimous judgment). It is unnecessary to exhaust other means before a winding up petition can be presented.

17.  As regards whether an ongoing main claim could constitute a cross-claim against costs orders, Mr Cheung relies on Discreet Ltd v Wing Bo Building Construction Co Ltd, HCCW 49/2017, 14 November 2017 at §§2-3 ,6-9, 13 and 17 and Zebra Industries (Orogenesis Nova) Ltd v Wah Tong Paper Products Group Ltd, HCMP 436/2013, 27 October 2014 at §11 as examples where the Court did not question the validity of the respective company’s reliance on the main claim as a cross-claim to resist a winding up petition based on payable costs orders arising out of the main claim.

18.  I note, however, that in the two decisions relied upon by Mr Cheung, no issue was actually taken on whether a cross-claim based on the main claim could resist a winding up petition based on such costs orders. Therefore, I do not think those two decisions gave Mr Cheung any mileage.

19.  I have no qualm that a claim based on a costs order payable forthwith, or payable within 14 days by virtue of Order 62 rule 9B upon summary assessment, could constitute a cross-claim: see Popely v Popely [2004] EWCA Civ 463 at §§113-114, and similarly, a main claim could constitute a cross-claim in a petition based on such costs orders. However, Popely v Popely is not a case on how the Court should exercise its jurisdiction in relation to a cross-claim based main action in a winding up (or bankruptcy) petition based on such costs orders.

20.  In my view, the legal principles in relation to a winding up petition based on cheques and cross-claims based on separate matters, set out by Linda Chan J in §§32-41 of Re Silver Base International Co Ltd [2022] HKCFI 1793, are enlightening in respect of a winding up petition based on such payable interlocutory costs orders. In that case, having taken through various Hong Kong and English authorities, her Ladyship confirmed the following approach set out in §§32-33 of the judgment:-

“32… as a matter of principle, the Company’s cross-claim is no answer to its liability on the Cheque for the following reasons:-

(1) A cheque, being a bill of exchange, is a separate contract from the underlying transaction. An unliquidated cross-claim under the underlying agreement is no defence to an action on the bill, and it is to be treated as equivalent of cash generally…

(2) The Companies Court consistently held that the failure on the part of the company to pay the amount due under a cheque was a sufficient ground to wind up the company; and a cross-claim for unliquidated damages does not constitute a valid ground in opposition to a winding up petition;

(a) In Golden City Electronic Industries Company Ltd v PCR Electronics Manufacturing Ltd [1996] 2 HKLR 257, Rogers J (as he then was) held that in accordance with the standard O.14 rules, the petitioner is entitled to payment on that cheque and any counterclaim by the respondent should be dealt with separately. Where there is no legitimate dispute on the debt, ‘a winding up petition is a perfectly proper remedy for enforcing payment of a just debt’…

(b) In Re Kwong Yuen Construction Co Ltd, HCCW 336/2001, 22 June 2001, §30, Kwan J (as she then was) held that a cheque is a separate contract and oral evidence to qualify the nature or tenor of the cheque is inadmissible (§25). Even if the company is able to establish its cross-claim to some extent, ‘a free-standing cross-claim would not have constituted a reason why the petitioner should not be paid on the cheques. If there are valid cross-claims against the petitioner, they may still be pursued by the company in liquidation’. There are no exceptional circumstances for the court to grant a stay of execution of judgment on the cheques, pending determination of the cross-claim (§30).

(c) Recently this court in Re EUREKA Manufacturing Company Ltd [2020] HKCFI 2032 considered the principles governing a bill of exchange and held that the cheque constituted a contract separate from the underlying contract of sale and purchase of goods; and the burden is on the company to displace the presumption that there was unconditional delivery of the cheque and total failure of consideration for the cheque (§§33-39). As the amount represented by the cheque exceeded the statutory minimum, and the cheque was referred to in the statutory demand and the petition, the failure to pay the amount represented by the cheque was sufficient for the court to make a winding up order against the company (§§46-47).” (emphasis added)

21.  In relation to a cross-claim based on separate matters, her Ladyship had the following to say at §41 of her judgment:-

“41. In any event, I do not consider that the mere fact that the Company ash a cross-claim for unliquidated damages against P arising out of a separate contract is a valid ground for refusing to repay the Deposit.

(1) In many of the cases in which the court has to consider whether the company has a serious cross-claim, the claim arose out of the same contract which gave rise to the petition debt. One can see that it would be unjust or inequitable to allow the petitioner to seek a winding up order against the company when the company has a serious cross-claim against the petitioner under the same contract. However, it seems to me that the same consideration does not apply, at any rate with the same force, when the cross-claim arose out of separate contract and has nothing to do with the debt in question.

(2) In Re Hongkong Bai Yuan International Business Co., Ltd [2002] HKCFI 960, §40, I held that even if the company has a serious cross-claim against the petitioner for breach of other contracts.. it does not provide a valid basis for the company not to pay the petitioning debt admittedly owed to the petitioner pursuant to the subject contracts… until after determination of the company’s cross-claim. There are 2 reasons for this: (a) it would be tantamount to conferring a right on the company to retain the petitioner’s money as a security for the company’s cross-claim; and (b) the cross-claim arose out of different contracts and had nothing to do with the contract which gave rise to the debt.” (emphasis added)

22.  Thus, the ultimate question is one posed by her Ladyship in Re Silver Base International Co Ltd at §41(1), namely, whether it would be “unjust or inequitable to allow the petitioner to seek a winding up order against the company”.

23.  In my view, to answer this question, the approach adopted towards petitions based on cheques and cross-claims on separate matters, as applied in Re Silver Base International Co Ltd, should be adopted towards petitions based on such costs orders, for the following reasons.

24.  The underlying policy of costs payable upon summary assessment has been set out by Lord Phillips in a Law Society Civil Litigation Conference held in England on 24 January 2002, adopted in §27(b) of Section 2 of the Civil Justice Reform – Final Report:-

“There was a fear that the new rules would lead to a proliferation of interlocutory in-fighting. This fear has not been realised. I believe that this is largely attributable to what has been described as a ‘pay as you go’ system of awarding costs. Under CPR 44 the court is required to make a summary assessment of costs on giving judgment on an interlocutory application and those costs had to be paid within 14 days. In the old days interlocutory costs orders would not normally have to be paid until conclusion of the litigation. The fear of having to call upon one’s client to write a cheque for costs incurred in an interlocutory skirmish must be a powerful disincentive to interlocutory proceedings unless success seems certain. The reduction of interlocutory in-fighting and, in particular, of interlocutory appeals is one of the major success stories of the Woolf reforms.” (emphasis added)

25.  In order to ensure that this purpose of discouraging unmeritorious interlocutory skirmishes would be achieved, the Court has strictly to keep the distinction between “costs in any event” and “costs payable forthwith” or “costs payable upon 14 days” for interlocutory applications. To keep such distinction, how the Court would allow such costs orders to be enforced is key. For this, it is important, in my view, that as a general rule, like cheques and separate claims, the Court should regard such costs orders as free-standing, and though such costs orders are not equivalent of cash, it should be as readily enforceable almost as readily cash-able as cheques. Further, to achieve this purpose, such costs orders, though made in the same proceedings, should be regarded as separate matters from the main claim in the same proceedings.

26.  There would be no injustice done to the company, because if the company would have a valid claim, the company in liquidation could still pursue it. This also addresses Mr Cheung (for the Company)’s submissions that if the Company would be wound up, then another objective under the Civil Justice Reform to resolve disputes in accordance with the parties’ substantive rights would be defeated. If the claim is valuable and worth pursuing, the liquidators would continue the claim in the interest of the Company. In any event, in my view, I do not see how requesting or demanding a paying party to pay costs under costs orders would compromise the paying party’s rights – it could just pay and proceed to trial.

27.  On the contrary, it would be unjust if the company could rely on the main claim as a cross-claim based on the main claim to resist a winding up order based on such costs orders, because:-

(1)  It would in effect confer a right on the company to retain the petitioner’s money as a security for its main claim;

(2)  It would be contrary to the purpose of such costs orders under Civil Justice Reform; and

(3)  Such costs orders, being free-standing and supposed to be readily enforceable, would have nothing to do with the main claim, in the sense that even if the company wins the main claim at the end, the company will still have to pay the costs orders.

28.  Therefore, while I would not go so far as to say that a cross-claim or set-off based on main claim would necessarily be abusive (depending on the circumstances of the particular case), the Court’s general approach toward a cross-claim based the main claim should be that such a cross-claim is not sufficient to resist a winding up petition on such costs orders, payable forthwith or within 14 days upon summary assessment for interlocutory applications.

29.  In the present case, I see no reason to depart from this general approach. Therefore, I do not need to examine the merits of the main claim, and reject this second ground in opposition to the Petition.

30.  It remains for me to emphasise that my view above is reached in the present context, namely, that the petition is based on costs orders payable forthwith or payable within 14 days upon summary assessment in interlocutory applications and a cross-claim is raised based on a claim for damages in an ongoing legal proceedings. It seems that there may be different considerations where the legal proceedings are not ongoing but finally concluded (and the receiving party may be to blame for not enforcing any immediately payable costs orders earlier), or where the situation is reversed, that is, the petition is based on the main claim and a cross-claim is based on such costs order. However, this is not an appropriate occasion to for me to express any view here on such scenarios.

31.  For the sake of completeness, the above is based on the assumption that the Company’s main claim has substance. In gist, the Company’s claim is based on the Petitioner’s damage of the Stored Items. However, although the Company started its action in DCCJ 2191/2023 back in mid-2023, the Company still has not provided any particulars of the Stored Items, despite the Court Order therein made on 27 March 2024 that the Company had, in essence, to provide such particulars by way of discovery, and there is, of course, not yet any evidence on the value of such Stored Items. On 13 March 2025, an Unless Order was made therein for the Company to make such discovery next week or so, but it is incumbent on the Company to present sufficient evidence before the Companies Court to resist the winding up petition, rather than asking this Court to wait until the Company’s compliance with the Unless Order in the other case. On the materials presented before me, I was not satisfied that the Company has raised any cross-claim of substance. Therefore, even assuming that a cross-claim based on the main claim, as a matter of law, could constitute a good ground for resisting the petition, the Company’s cross-claim could not.

V.  ABUSE OF PROCESS

32.  The last ground raised by the Company is abuse of process. With the Company’s other grounds rejected above, I see no abuse here. I reiterate that the Petitioner is entitled to seek immediate payment of the Judgment Sums: see Re Wintac (Hong Kong) Ltd, supra at §15(3), and is perfectly entitled to present the Petition: see Shandong Chenming Paper Holdings Ltd v Arjowiggins HKK 2 Ltd, supra at §34.

33.  I reject this ground as well.

VI.  LATE UNDERTAKINGS

34.  It remains for me to say that during the hearing, for the first time, the Company offered a solicitors’ undertaking to pay the Judgment Sums within a short period of time. After taking instructions, Mr Yeung (for the Petitioner) rejected the proposal during the hearing. Immediately after rejection, Mr Cheung then said that it was his instructions that the period for payment for the undertaking could be shortened to the end of the same day. Mr Yeung, of course, rejected it.

35.  I would think that the Court would be very cautious against accepting undertakings made in manner. I would not accept such undertakings in the present case.

VII.  COSTS AGAINST MS YUNG

36.  For the above reasons, the Company’s opposition was totally unmeritorious. I found it appropriate to wind up the Company.

37.  Also, I found it appropriate to join Ms Yung to the proceedings for the purpose of costs only for the following reasons:-

(1)  The Company’s opposition was totally unmeritorious.

(2)  Ms Yung has been the Company’s director responsible for or handling the litigation in DCCJ 2191/2023. She must have known that there is no merit in setting aside the Costs Orders.

(3)  Ms Yung still makes the affirmation in opposition in the present proceedings, spending a very substantial part regurgitating the Company’s unmeritorious grounds for setting aside the Costs Orders.

(4)  It would be unfair for the Company and its creditors to bear the costs of such unmeritorious opposition apparently orchestrated by Ms Yung: see Re Tianji Holding Ltd [2025] HKCFI 765 at §§1 and 36; Re Carnival Group International Holdings Ltd [2022] HKCFI 2668 at §§30-31.

(5)  The Court of Appeal has reminded the plaintiff twice (in [2024] HKCA 839 at §64 and [2024] HKCA 926 at §34) of the Court’s power to order costs against the Company’s directors, after characterising the Company’s applications there as “wholly unmeritorious”, “pointless”, “baseless” and “indiscriminate”: see [2024] HKCA 839 at §64.

VIII.  CONCLUSION

38.  In the circumstances, I saw fit to make a usual winding up order at the end of the hearing. I also saw fit to order that Ms Yung be joined to the present proceedings, with directions for filing affirmations and submissions for disposal on paper.

39.  I thank Mr Yeung and Mr Cheung for their assistance.