RE THE PRECAST PILING AND ENGINEERING CO LTD (in liquidation)

HCCW 1156/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1156 OF 2002

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D E C I S I O N

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1.  In this application by Mau Shing Construction Company Limited (“Mau Shing”), a creditor of The Precast Piling and Engineering Company Limited (“the Company”), Mau Shing seeks the following orders:

(1)	under rule 84 of the Companies (Winding-up) Rules, leave to amend its proof of debt to state that it is a secured creditor to the extent of HK$700,000.00, being a sum paid by the Company into court as a condition for leave to defend in HCA No. 4083 of 2001 (“the High Court Action”); and
(2)	under section 186 of the Companies Ordinance, Cap. 32, leave to continue proceedings against the Company in the High Court Action in respect of two dishonoured cheques drawn by the Company in favour of Mau Shing for the respective sums of HK$300,000.00 and HK$400,000.00, for which the Company had paid into court HK$700,000.00 to satisfy the condition for leave to defend as aforesaid.

2.  The application has arisen in this way.

3.  On 13 September 2001, Mau Shing brought the High Court Action against the Company, claiming inter alia the proceeds of four dishonoured cheques.  Mau Shing sought summary judgment in respect of its claim on these dishonoured cheques.

4.  On 22 March 2002, a Master gave conditional leave to defend in respect of the two cheques issued in January 2001 upon payment into court of the full amount of these cheques of HK$700,000.00 with 21 days of the order.  Unconditional leave to defend was given in respect of the other two cheques.  The Company complied with this condition and made payment into court on 12 April 2002.

5.  On 21 October 2002, a creditor presented a petition to wind up the Company.  This was not known to Mau Shing when it attended a checklist hearing of the High Court Action on 30 October 2002.

6.  A winding-up order was made on the creditor’s petition on 29 January 2003.  The liquidators were appointed by an order made on 22 July 2003.

7.  Mau Shing was advised by its former solicitors that as the Company had been wound up, it would not be necessary to proceed with the High Court Action.

8.  On 11 October 2003, Mau Shing lodged its proof of debt prepared by its former solicitors, claiming HK$11 million odd.  In support of its claim, Mau Shing annexed the witness statements made by its directors in the High Court Action in October 2002 with a bundle of documents referred to in the witness statements.  Among the matters Mau Shing was required to state in the proof of debt were particulars of any security held, the value thereof, and the date when the security was given.  Mau Shing had stated “No” in the space for such information to be given.

9.  On 9 January 2004, Mau Shing’s former solicitors wrote to the liquidators enquiring if its proof of debt had been adjudicated.  It was not clear if any response was given to this.

10.  On 1 April 2004, the Company by the liquidators issued a summons in the High Court Action seeking an order that the sum paid into court by the Company to satisfy the condition for leave to defend be released to the liquidators.  No leave was sought by the liquidators under section 186 to proceed with this application in the High Court Action.  In the supporting affidavit, one of the liquidators stated that the High Court Action had been inactive since November 2002, that their solicitors had inquired with the former solicitors of Mau Shing if the latter would consent to release to the liquidators the sum paid into court and was told that Mau Shing’s former solicitors would apply to cease to act for Mau Shing.

11.  The liquidators’ application in the High Court Action was adjourned several times from 28 April 2004.  It was last adjourned sine die by consent on 12 October 2004, pending the determination of the present summons issued by Mau Shing on 23 September 2004.

12.  On 7 June 2004, the liquidators sent a notice of adjudication to Mau Shing, admitting its proof of debt to the extent of HK$3.48 million, as an unsecured debt.  This is the aggregate amount of the four dishonoured cheques claimed by Mau Shing in the High Court Action.  The balance of Mau Shing’s claim in the proof of debt was stood over for further investigation.  Mau Shing’s solicitors responded to this by asserting that Mau Shing considered the sum of HK$700,000.00 paid into court by the Company to be a secured debt.

13.  Notwithstanding the earlier position taken by the liquidators in correspondence of their solicitors on 5 July 2004, it is now accepted by Miss Linda Chan, who appeared for the liquidators, that Mau Shing is a secured creditor to the extent of the amount paid into court by the Company in the High Court Action for leave to defend.  This concession should have been made in view of an established line of authorities:

Ex parte Banner, In re Keyowrth (1874) LR 9 Ch App 379;

In Re Gordon, Ex parte Navalchand [1897] 2 QB 516;

In re Ford, Ex parte The Trustee [1900] 2 QB 211;

W A Sherratt Ltd v John Bromley Ltd [1985] 1 QB 1038; and

Flightline Ltd v Edwards & Anr. [2002] 1 WLR 2535

14.  Under rule 84 of the Company (Winding-up) Rules, it is provided as follows:

“If it is found at any time that the proof made by or on behalf of a secured creditor has omitted to state that he is a secured creditor, the secured creditor shall surrender his security to the Official Receiver or, where a liquidator has been appointed, to the liquidator, for the general benefit of the creditors unless the court on application is satisfied that the omission has arisen from inadvertence in which case the court may allow the proof to be amended upon such terms as to the repayment of any dividends or otherwise as the court may consider just.”

15.  The onus is on an applicant to establish that the omission to state the security was caused by inadvertence (In re Safety Explosives, Ltd [1904] 1 Ch 226 at 233; In re Maxson, Ex parte The Trustee [1919] 2 KB 330 at 335).

16.  There is no dispute as to the test to be applied, which was stated by Williams J in Ex parte Clarke, Re Burr 67 LT 232 at 233 in these terms:

“In my opinion the meaning of the rule is, that the creditor who has voted and has omitted to value his security ought always to be allowed to withdraw his proof and to be relieved from being deemed to have surrendered his security unless he has elected really to abandon his security; that is, unless he has omitted to do that which he did omit, deliberately and on purpose.  If it has been done accidentally he ought, on such terms as the court may think fit to impose, to be relieved from the loss of his security. …

If I arrive at the conclusion that [the creditor], having this choice before him, balanced the advantages and deliberately elected to prove, it is plain that he is not entitled to the benefit of being allowed to withdraw his proof on the ground of its being made by inadvertence.  On the other hand, if I think that [the creditor] really left the matter in his solicitor’s hands and proved for the debt, making the mistake of not mentioning the security, and without consideration of the respective advantages of proving and not proving, he would come within the clause.  It is a question of fact …”

17.  According to the evidence of Lam Sau Kuk, a director of Mau Shing, when he attended the office of Mau Shing’s former solicitors in October 2003 for the purpose of signing a proof of debt on behalf of Mau Shing, he was shown the proof of debt which had been completed by the solicitor.  Mr Lam was explained the contents of this document and was told by the solicitor that Mau Shing did not hold any security for the debt claimed against the Company.  Being a layman, he naturally deferred to the legal advice given and he signed the proof of debt completed for Mau Shing.  It was not until Mau Shing had changed its solicitors that correct legal advice was given in respect of the security held by it in respect of the amount paid into court by the Company.

18.  There is no reason to doubt what Mr Lam has stated on oath, notwithstanding there is no evidence from the former solicitors of Mau Shing.  The statement made in the proof of debt that there was no security was due to the legal advice given in mistake by Mau Shing’s former solicitors.  Mr Lam had simply not considered the respective advantages of proving for the secured debt and not proving for the secured debt.  In the circumstances, there was no election to abandon the security in respect of the amount paid into court.  Indeed, I would be very surprised if Mau Shing had decided to abandon its security, as it is clear from the witness statement made by Mr Lam in October 2002 he knew that the Company was in great financial difficulty, as he was told by a director of the Company that the Company had no money to settle the substantial amounts owed to Mau Shing even if legal proceedings were brought.  As in In re Maxson, supra. at 335, I cannot see what reason there could be for not declaring the security held and its value, except that at the time when the proof of debt was made by Mau Shing’s director, he was given to understand there was no security.

19.  I hold that the statement made in the proof of debt that no security was held by Mau Shing arose as a result of inadvertence.

20.  It was further submitted by Miss Chan that leave ought not to be given as the liquidators had for more than one year acted on the proof of debt lodged by Mau Shing and had altered their position by making an application in the High Court Action for the sum paid into court to be released to them and had made an adjudication on the proof of debt admitting Mau Shing’s claim on the four dishonoured cheques as unsecured debt.  Reliance was placed on In re Safety Explosives Ltd, supra. that the granting of leave under the provision equivalent to rule 84 is not a matter of right but is subject to control of the court, and that leave should not be granted where the position of all parties, and of the liquidator in particular, has been altered since the proof was made. 

21.  The present situation is very different from the facts in In re Safety Explosives.  Besides, as held in Re Chung Shun Koo, ex parte Sum Che Chuen (1906-7) 2 HKLR 1 (Bankruptcy), the court may still exercise its discretion to allow amendment of a proof even if the debtor’s position has been altered in the meantime, if it is possible to restore the status quo ante or if “things can be put straight”.

22.  In the present situation, it seems to me that justice would be done if Mau Shing should indemnify the liquidators in respect of all their costs incurred and occasioned by Mau Shing’s omission to state its security in the proof of debt.

23.  I grant the application made under rule 84, subject to the term that Mau Shing is to indemnify the liquidators in respect of their costs incurred in the application for release of the amount paid into court in the High Court Action.  I would deal with the costs of the present application subsequently. 

24.  As for the summons for leave to proceed in the High Court Action, it seems to me necessary for Mau Shing to seek such leave under section 186, to enable it to apply for the money paid into court to be released to it, on the premise that its claim for the two dishonoured cheques has been admitted by the liquidators in the adjudication made on the proof.  This is similar to the situation in Flightline Ltd v Edwards, supra.  I would grant the application on slightly different terms sought in the summons. 

25.  As stated in In re Ford, supra. at 213, where money is ordered to be paid into court for leave to defend to abide the event and where the plaintiff has without default on his part failed to get judgment before the bankruptcy, the event is the decision of his right in the bankruptcy.  The money must remain in court until the event is decided by the trial of the action, if that is to be tried, or by adjudication upon a proof by the plaintiff in the bankruptcy.  Here, as there has been an adjudication on the proof of debt in respect of part of Mau Shing’s claim, all Mau Shing would be required to do is to seek release of the money paid into court on the basis of the adjudication on its proof.  I make an order giving leave to Mau Shing to proceed with the High Court Action for the purpose of making the application that I have indicated.

26.  As for the costs of the present application, Miss Catrina Lam for Mau Shing has not opposed an order that Mau Shing should pay the liquidator’s costs of the present application but submitted that the costs should be taxed on a party and party basis.  Miss Chan has sought costs on an indemnity basis, on the ground that the unsecured creditors should not suffer by the mistake made by Mau Shing in its proof. 

27.  I bear in mind that Mau Shing has filed its evidence in support of its application in September 2004.  There was one hearing before a Master in October 2004 when because of the liquidators’ opposition, the summons was adjourned for argument.  It seems to me that the liquidators should not have continued with their opposition having had the opportunity to consider the evidence in support.  I decline to award costs of this application to the liquidators on an indemnity basis.  I order Mau Shing to pay the liquidators’ costs of this application on the standard basis.