THINKING GROUP LTD v. DIALECTIC PR LLC

HCMP 1054/2020

[2021] HKCFI 312

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1054 OF 2020

______________

______________

______________

________________________

REASONS FOR DECISION

________________________

Introduction

1.  The application before the court was the hearing of both a summons and an originating summons each dated 23 July 2020, by which the plaintiff sought, respectively, an interim injunction, in effect a continuation of an ex-parte injunction which was also granted on 23 July 2020 and seeks also a permanent injunction in the same terms.  The ex-parte Order restraining the defendant from presenting a winding up petition was made on an interim-interim basis, pending the issue of an inter-partes summons and the hearing of full argument.

2.  The orders which were sought are in relation to a Statutory Demand issued by the defendant on 2 July 2020. 

3.  At the conclusion of the hearing on 20th January 2021, I indicated to the parties that I was not prepared to either continue the injunction, or to re-grant the injunction order, and that reasons would be supplied in due course.  Those reasons are now set out.

Detail of the Statutory demand

4.  The Statutory Demand required payment by the plaintiff of the sum of US$1,062,000.00. Details of the alleged basis of the debt were set out, including that the parties had entered into “a sale and purchase agreement” in or around April 2020 “in relation to KN95 and 3 ply masks”.

5.  The Statutory Demand stated that there had been “five separate instalments” paid by the defendant intended to be “a rolling credit balance”. The plaintiff was said to have delivered 4,100,000 masks over seven shipments to a total value of US$3,343,000.00 whereas a total of US$4,405,000.00 was said to have been paid by the defendant “pursuant to the Agreement”.

Background

6.  The Statutory Demand summarises the basic elements of the dispute.  The parties were engaged in the sale and purchase of protective masks in the earlier part of 2020.  The defendant is an American company which has, as part of its business at least, the import and sale of various products into the USA.  The plaintiff is, primarily it appears, a retailer and supplier of audio equipment and products.  Neither party has any history of business in medical equipment or supplies.  However, when it became apparent that there was a substantial demand for protective face masks in the earlier part of 2020, the defendant sought the assistance of the plaintiff to find such masks for import into the USA, the plaintiff having been chosen and approached because of its contacts (specifically, Mr Shen Nong’s contacts) with manufacturers in China.  I will refer to the series of transactions, and potential transactions in regard to masks as “the Mask Business”.

7.  There is substantial common ground between the parties as to the background, including the fact that the agreements that all relevant communications between the representatives of the parties were via WhatsApp messages, and all agreements reached were via that messaging system.  It is common ground that there was no formal written agreement made between the parties governing the Mask Business.  There is however, notwithstanding the written WhatsApp exchanges, a dispute apparent in the affirmations filed by the parties as to whether the relationship between the parties was one of principal and agent, or rather, was one of buyer and seller.

8.  The plaintiff contends that this was an agency relationship.  The defendant made enquiries for masks on what is described as a casual basis, and the plaintiff would respond to such enquiries with quotations at a unit rate sourced from various manufacturers or suppliers in China.  If or when such quotations were acceptable to the defendant (the plaintiff says) the plaintiff would place orders with the manufacturers “on the defendant’s behalf”.  It was “understood”, says the plaintiff, that it was acting only as a middleman.  As such, it disputes any money being owed to the defendant.

9.  That was the state of the evidence and argument on this aspect as placed before the ex-parte judge when she made the Order dated 23 July 2020.

Injunctions in Restraint of Winding Up

10.  The principles are well established and were not in dispute between the parties, and are helpfully set out in the judgment of Chow J in Re Grande Holdings Ltd (HCMP 2369/2017, 22 December 2017) at paragraph 14.  It is clear that an injunction will be issued to restrain the presentation of a winding up petition if the court considers that the petition is itself an abuse of the process. The presentation of a petition to wind up a company is a statutory right, but presentation of a petition will be considered to be an abuse of the process if it is presented in respect of a claim in regard to which there is known to be a bona fide dispute on substantial grounds as to the debt.  Winding up petitions are not intended to be used as a means of debt collection.  To resist a petition the alleged debtor must show a bona fide defence. See: Addchance Ltd v Herojoy Trading Ltd [2019] HKCFI 1147.

11.  The burden lies on the alleged debtor to establish that there is a genuine dispute over the debt based on substantial grounds.  Evidence cannot to be mere assertion but must be substantiated. See:  Re Hong Kong Investments Group Ltd [2018] HKCFI 984.  

12.  However, an injunction seeking to restrain winding up proceedings is not to be considered along ‘American Cyanamid’ lines, since the right to petition for winding up is granted by statute and is not therefore to be restrained other than on clear and persuasive grounds. See: Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487.  Kwan J (as she then was) stated in that case (at paragraph 10) that:

“The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding-up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds (Bryanston Finance Ltd v De Vries at pp 78D-E, 79A-D).”

13.  I note that this principal was not drawn to the attention of the ex-parte judge.

14.  Lastly of course, it is to be remembered that this is an application for an injunction, and not the hearing of the petition itself.  It is not the occasion on which to determine the issues between the parties based on the affirmation evidence available to this point, but a view is to be taken, in effect, as to whether or not a substantial dispute over the debt can be said to exist.  The court does not try the dispute on affidavits, but looks to see whether the dispute is one which has substance, and is not merely what has been described as “a cloud of objections”.

The Alleged Debt

15.  The course of dealings between the parties in regard to the Mask Business involved, as the plaintiff says, a series of relatively ad hoc arrangements over a relatively short period of time.  There is no dispute that the plaintiff issued a series of invoices to the defendant on its own letterhead, setting out sums said to be due to the plaintiff in respect of orders for specific masks, nor any dispute that these contained sales terms including a “warranty”.  There is also no dispute that the defendant made a series of payments to the plaintiff which do not appear to have been directly responsive to these Sales Invoices or even referable to specific transactions. 

16.  I accept that the evidence indicates, as the defendant contends, a form of running account having been operated by the parties.  In general, the defendant seems to have made payments in advance, such that the plaintiff was in funds when placing purchase orders with the various manufacturers in China. 

17.  There were, it appears, 5 batches of orders placed by the defendant which were fulfilled and completed, with the masks delivered.  One batch was cancelled, and one batch, the last in the Mask Business, was not completed because, I understand, the chosen mask manufacturer or supplier in China failed to complete its part of the work and may have become insolvent.  This is described by the plaintiff as a “scam” perpetrated by the supplier in China.  In any event no masks were manufactured or delivered in relation to that order.

18.  The last Sales Invoice which was issued to the defendant was issued by an associated company of the plaintiff (Odoyo International Limited “Odoyo”).  That was said to be in relation to the “scam” transaction just referred to.

19.  After some delay, the defendant ended the Mask Business, and by about early July 2020 was seeking repayment of the balance monies which it says were held by the plaintiff.  Taking the view that the amount owed to it was indisputable, the defendant issued the statutory demand.

Considerations

20.  The nature of the contractual relationship lies at the heart of the plaintiff’s submissions as to whether there is a substantial dispute between the parties as to the alleged debt, and whether therefore the Statutory Demand is an abuse of the process, being used merely as a means of debt collection where there is known to be a substantial dispute as to the debt.

21.  The plaintiff contends that there was no single “sale and purchase” agreement between the parties and therefore each order should be treated as a separate contract. Those several contracts are not necessarily subject to the same terms and conditions. The defendant’s case is that the relationship was a simple vendor and purchaser one, with the plaintiff sourcing and supplying masks to the defendant as purchaser.  There was, therefore, no contractual ‘nexus’ between the defendant and any other party.

22.  The defendant further says that the “agency relationship” is a novel allegation which has appeared only in the context of the court proceedings.  The defendant points to a series of Sales Invoices in particular which were proffered by the plaintiff to the defendant.  These contained various terms, including a warranty as to quality. They were issued (with one exception) in the name of the plaintiff, without any qualification as to capacity, such as “as agent”.

23.  Those Sales Invoices were in the bundles before the judge at the ex-parte stage, but her attention was not specifically drawn to them, and the plaintiff made its application without any reference to the question as to whether it was acting as agent or as principal.  The defendant submits that this was one of several notable, and inexcusable, omissions of in respect of the obligation of full and frank disclosure.  This is considered further below.

24.  Whatever the true nature of the relationship between the parties, it is common ground that all communications and agreements that were made were made “in writing”, largely if not exclusively through exchanges of WhatsApp messages.  Whatever contract arrangement or arrangements existed between the parties is to be found in those messages and exchanges.

25.  For present purposes, the disagreement between the parties as to the capacity in which the plaintiff was acting does not require resolution at this stage.  On the evidence available however it appears that the evidence and arguments presented before me favour the position of the defendant, namely that the defendant was in the position of a purchaser from the plaintiff.

26.  In an injunction application seeking to restrain a winding up petition, it is the plaintiff’s burden to show a genuine dispute regarding the debt on substantial grounds. This imposes an evidential burden on the plaintiff to provide sufficiently precise factual evidence so as to substantiate its allegations.  The issues that appear from the evidence are not to be decided on the affirmations, but a decision must be made as to whether these are matters of substance.  See re Hong Kong Investments Group Ltd [2018] HKCFI 984 at [13].

Parallel Proceedings

27.  The defendant has commenced what the plaintiff describes as “parallel proceedings” in HCCL 8/2020 by which the defendant seeks to recover damages in respect of defects in the quality of the masks which were supplied by the plaintiff in regard to the Masks Business.  The Statement of Claim was dated 30 October 2020.  No Defence has yet been filed.  I perceive no overlap of issues between the two sets of proceedings.

A Genuine Dispute, on Substantial Grounds?

28.  The plaintiff contends that the “alleged debt” which is the subject of the Statutory Demand is disputed.  In part this is advanced by way of semantic quibbles taken with the terminology used in the Statutory Demand (such as whether the demand was properly to be based on “an agreement”, or “a series of agreements”, or whether the correct type of masks were referred to in the Statutory Demand).  Because of the issue as to the true nature of the contract between the parties, it is said that the court will be required to consider oral evidence to ascertain the intention of the parties in making the relevant agreements, notwithstanding the fact that the agreements were made, as is common ground, by exchanges of text message. There is no explanation as to why such evidence should be admissible (or required) in the context of what appears to be a written contract. It is further submitted that evidence may be required to determine whether the contract arrangements were governed by Hong Kong law, or some other system of law.  But there is no explanation as to what difference this might make. 

29.  The plaintiff also submits that some consideration may need to be given to the governing law relevant to these transactions, without advancing an explanation as to the significance of this investigation, and submits that an investigation is needed into whether there was an agreement between the parties as to repayment of the sums paid by the defendant to the plaintiff in excess of any liability for masks in fact delivered.

30.  For the purposes of a consideration as to whether the injunction should be continued, and made permanent, the question is whether these contentions demonstrate a substantial bona fide defence, such that the presentation of the petition is an abuse of process.

31.  For the purposes of considering the injunction, and bearing in mind that the hearing of the petition, if or when presented will provide the appropriate forum for a consideration of these issues, I am entirely unpersuaded that a substantial dispute has been demonstrated, or that there is any reason to prevent the presentation of a petition in this case.  The matters raised by the plaintiff in submissions appear to me to match perfectly the description of a cloud of objections.

32.  In those circumstances, I do not propose to consider the arguments or evidence in any further detail, save to say that from the contemporaneous documents, a clear balance of account in favour of the defendant exists. 

33.  On this basis, the continuation of the injunction would be more than problematic.  However, there are, unfortunately, even more serious issues which arise.

Non Disclosure

34.  The defendant expresses considerable concern as to this given that the hearing at which the injunction was granted was conducted on an ex-parte basis, and the injunction issued after hearing evidence only from the plaintiff. I note that a solicitor was present on behalf of the defendant, pursuant to the very short notice that had been given, but no submissions as to merits were made, and no evidence from the defendant was presented.

35.  The relevant principles as to the duty of full and frank disclosure are well established, and are helpfully summarised in the judgment of Coleman, J in X and Y v Z [2020] HKCFI 826 as follows:

“48. It is well settled that, in making an ex parte application, the applicant has the duty to make full and frank disclosure of all facts and matters material to the application. Materiality is to be decided by the court, and not by the assessment of the applicant or his legal advisers.

49. The duty extends to making proper enquiries before the application, as the duty of disclosure applies not only to material facts known to the applicant but also to additional facts he would have known if he had made such enquiries. The duty also extends to bringing to the court’s attention any points that could be made by the respondent, even if not yet made, at the time of the ex parte application, unless the point is not one which (a) the respondent would reasonably be expected to raise in due course or (b) which can be dismissed as without substance or importance.

50. The duty of full and frank disclosure is an onerous duty. It arises from the rule that an application which is made, and relief which is granted, in the absence of one party (the party against whom the relief is granted) must be in rare or exceptional circumstances. But the rule cannot be allowed itself to become an instrument of injustice. This means that courts will be astute to respondents merely invoking the mantra of material non-disclosure, where there are slender grounds for the argument, and it may simply be an attempt to deflect from the substantial merits or balances in the case. It also leaves open to the court a discretion to continue the injunction, or to grant a fresh injunction in its place, notwithstanding that there may have been non-disclosure on the original ex parte application.

51. The principles relevant to the exercise of that discretion were considered by the Court of Appeal in Excel Courage Holding Ltd v Wong Siu Lai (unreported, CACV 28/2014, 30 May 2014), and where it adopted the following guide:

(1) If the court finds that there have been breaches of the duty of full and frank disclosure on the ex parte application, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial.

(2) Notwithstanding that general rule, the court has discretion to continue or re-grant the order.

(3) That jurisdiction should be exercised sparingly and should take account of the need to protect the administration of justice and uphold the public interest in requiring full and fair disclosure.

(4) The court should assess the degree and extent of the culpability regarding non-disclosure. It is relevant that the breach was innocent, but there is no general rule that an innocent breach will not attract the sanction of discharge of the order. Equally, there is no general rule that a deliberate breach will attract that sanction.

(5) The court should assess the importance and significance to the outcome of the application for an injunction of the matters which were not disclosed to the court. In making this assessment, the fact that the judge might have made the order anyway is of little if any importance.

(6) The court can weigh the merits of the plaintiff’s claim, but should not conduct a simple balancing exercise in which the strength of the plaintiff’s case is allowed to undermine the policy objective of the principle.

(7) The application of the principle should not be carried to extreme lengths or be allowed to become the instrument of injustice.

(8) The jurisdiction is penal in nature, and the court should therefore have regard to the proportionality between the punishment and the fence.

(9) There are no hard and fast rules as to whether the discretion to continue or re-grant the order should be exercised, and the court should take into account all relevant circumstances.

52. It is also correct that when a party has been found responsible for material non-disclosure, that party will generally be ordered to bear costs, which may be ordered on an indemnity basis if the non-disclosure was deliberate.”

36.  The defendant is highly critical of the extent of the disclosure made by the plaintiff before the ex-parte judge, and Mr Alder lists these complaints in his skeleton submissions.  Several such complaints are made (justifiably in my view), and I merely highlight in particular, that the ex-parte judge was not notified that there were documents such as the Sales Invoices which strongly militated against any “agency” issue arising.

37.  Nor was the judge informed of the fact that the WhatsApp communications between the parties included several statements which appeared to constitute admissions of liability sent on behalf of the plaintiff.

38.  Nor, it appears, was the judge reminded of the relevant considerations in the grant, or refusal, of an injunction in restraint of winding up proceedings.  As referred to above, such proceedings should not be restrained except where there exist clear and persuasive grounds that the winding up is itself an abuse of the process. 

39.  Mr Chan, on behalf of the plaintiff sought to brush aside the significance of these matters, or submitted that the relevant documents were in the evidence, but his submissions fell far short of being able to persuade me that there had been a fair presentation of both sides of the argument to the ex-parte judge.  To echo the words of Coleman, J, when the court finds that there have been breaches of the duty of full and frank disclosure on the ex-parte application, the general rule is that it should discharge the order obtained in breach and refuse to renew the order until trial.  That is precisely the course which I consider to be appropriate in this case.

Regrant?

40.  I have considered, but reject, a re-grant of the injunction order on the basis, as set out above, that no substantial defence appears to me to have been shown, meaning that there is insufficient evidence of a substantial dispute as to the debt.

Costs

41.  It is well understood that a party found responsible for material non-disclosure will generally be ordered to bear costs, which may be on an indemnity basis if the non-disclosure was deliberate.  There is nothing before me to suggest any inadvertence in the non-disclosures in the present case, and no such submissions was advanced in respect of the more serious examples of non-disclosure. 

42.  This is, in my view, an appropriate case on which to order costs against the plaintiff on an indemnity basis.