RE JACKIN TOTAL FULFILMENT SERVICES LTD

HCCW 628/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 628 OF 2006

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J U D G M E N T

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Introduction

1.  The Petitioner, HBFP Limited, which is in members’ voluntary liquidation, issued a petition to wind-up the Company on the grounds of insolvency on 29 November 1996.  At the time of issuing the Petition the Petitioner relied on an alleged debt of HK$2,191,935.26 in respect of which it had served a statutory demand on 24 August 2006.  The alleged debt arose from non payment of professional fees of HK$1,906,220.70 and interest on those fees of HK$285,714.56.  The fees were incurred in connection with the provision of professional services for an arbitration between the Company and IBM Engineering Technology (Shanghai) Company Limited.

2.  The amount due to the Petitioner was reduced by a payment from the Company on 5 November 2006 of HK$1,217,968.03.  The principal allegedly outstanding is HK$688,525.67 according to the 4^th affidavit of Cosimo Borrelli sworn 24 January 2008, which I gave to leave to the Petitioners to file.

3.  The Petition is supported by Johnson, Stokes & Master (JSM), who alleged that they are a supporting creditors.  On 10 February 2007 JSM filed a notice of Intention to Appear and Support the Petition in respect of unpaid fees and disbursements in the amounts of HK$7,510,118.61 and £70,067.90.  On 9 January 2008 JSM filed a Supplemental Notice in respect of an alleged debt of HK$1,512,963.67.  It is explained in the affidavit of So Shiu Tsung Thomas, which I gave JSM leave to file, that this sum is made up of amounts that the Company has conceded are payable during taxations of costs awarded to JSM in various legal proceedings.

4.  It is not in dispute that a creditor who has a claim for a payment of a debt owed by a company to which there is no bona fide defence is entitled ex debito justitiae to a winding up order.  Conversely, if an alleged debt is bona fide disputed on substantial grounds by a company the creditor does not have locus to present a winding-up petition: Boyle & Marshall, Practice and Procedure of the Companies Court, 1997, §9.177; Re ICS Computer Distribution Ltd. [1996] 1 HKLR 181 AT 183F to J.

5.  At one stage of the proceedings Mr. Chua S.C., who appeared for the Company, seemed to be arguing that Petitioner had the burden of proving that it has a genuine demand for payment of a debt.  I do not agree.  Where a statutory demand is served under section 178(1)(a) and there is neglect to pay or to secure or to compound the debt to the creditor’s satisfaction within three weeks, the company is deemed insolvent and the creditor may petition for the company to be wound up.  If a company considers that the statutory demand has been improperly issued it can takes steps to stop the presentation of a petition.  If it does not and a petition is issued it is then for the company to demonstrate that it bona fide disputes the debt on substantial grounds: Homan CPA Limited HCCW 589/2006 (unrep.) Kwan J. 18 December 2007.  It is, therefore, for the Company to satisfy me that it bona fide disputes the Petitioner’s claim on substantial grounds.  The position in respect of JSM is more complex and I address their position in detail below.

Petitioner’s Claim

6.  As I made clear to Mr. Sherry who appeared for the Petitioner at the outset of the hearing having read the evidence and the submissions it seemed clear to me that the Petitioner’s claim was genuinely disputed on substantial grounds.  Mr. Sherry urged me to take into account the dilatory and unsatisfactory way in which the Company had dealt with the claim and in particular its delay in making any payment until November of last year, all of which he suggested demonstrated that the Company was not acting bona fide.  Whilst I can understand a degree of frustration on the Petitioner’s part over the Company’s conduct my conclusion after argument and re-reading the papers remains the same, namely, that this was a case in which the Petitioner should have commenced proceedings to recover the fees it says it is owed, not to have used the winding-up jurisdiction to pressure the Company into paying.  As so often happens when a party aggressively tries to take a short cut to obtain a remedy it ends up creating more delay.

7.  My reasons for finding that the debt is bona fide disputed on substantial grounds are as follows.  The Company has never suggested that it owes nothing to the Petitioner.  Up to 19 April 2005 it paid the Petitioner HK$846,790.  Its says that it gave a budget of between HK$500-600,000 JSM when discussing with them retaining the Petitioner as a forensic accounting expert to assist in the Arbitration.  This budget was exceeded without the Company’s approval and the Company simply does not accept that the level of fees charged is justified.  Subsequently, the Company says, it agreed with the Petitioner that the Petitioner would be paid whatever was recovered in the taxation of the Company’s costs and disbursements of the Arbitration in which it was successful.  The statutory notice was served before the taxation process was completed.  When the taxation was completed the difference between the amount recovered on taxation of HK$2,064,758.03 and the amount already paid of HK$846,790 was paid to the Petitioner on 5 November 2007.  This amount was HK$1,217,968.03.

8.  The Petitioner disputes ever having agreed a budget or subsequently agreeing that it would be paid what was recovered on taxation.  It says its fees are reasonable, the Company was successful in the Arbitration recovering HK$154,000,000 and its reasons for delaying and refusing payment are wrong and unconscionable.

9.  If nothing had been paid by the Company to the Petitioner in respect of its fees presentation of a petition might have been legitimate, although problematic.  Where liability is not in dispute, but it is not known with certainty how much is owed a creditor still has locus to present a petition: Re Tweeds Garages Ltd. [1962] Ch.406; Re Claybridge Shipping Co SA [1997] 1 BCLC 572 per Lord Denning MR at 575b; Re R.A. Foulds Ltd. (1986) 2 BCC 99, 269 per Hoffmann J at 99, 274.  However, if the size of the debt is not known with certainty, then a statutory demand cannot be served and the petitioner must be able to prove a company’s inability to pay its debts otherwise than by neglect to comply with a statutory demand: Re a Company (No 003729 of 1982) [1984] 1WLR 1090.  Accordingly if there had been no payment in circumstances in which it was obvious that something was payable, the Petitioner could not have served a statutory demand, but could have petitioned on the grounds insolvency and then attempted to prove the Company was insolvent.

10.  That is not the position here.  A significant sum was paid before the Petition was issued.  Although, something more was obviously payable there is a dispute, which I cannot resolve on affidavit evidence, about how the balance was to be assessed and when it was payable.  The Company says that it has paid in accordance with that agreement.  I accept that there are reasons to question the Company’s story, but not to such an extent as justifies me concluding that the Company has failed to establish a bona fide dispute on substantial grounds.

11.  If matters ended there I would dismiss the Petition, but it is supported by JSM who are willing to be substituted for the Petitioner.  I turn to consider their position and claim.

Supporting Creditor

12.  JSM are owed currently untaxed costs awarded to them in various proceedings in which they have sought to recover legal fees owed to them by the Company.  There does not appear to be any dispute that JSM is owed something.  I accept that it is probably at least the amount it claims in its Supplemental Notice.

13.  Mr. Chua S.C. argued that notwithstanding that payment would be due to JSM on the completion of the taxation this did not provide any basis for winding-up the Company.  He said that this was for the following reasons.

14.  First, Mr. Chua S.C. argued that JSM’s application to be substituted as petitioner under Rule 33 of the Companies (Winding-up) Rules was flawed.  The Petitioner has not:

(1) failed to advertise the Petition with the time limits prescribed.

(2) consented to withdraw its petition or allowed it to be dismissed, or the hearing to be adjourned or failed to appear in support of its Petition.

(3) acted in such a way as to fail to apply for an order in terms of the prayer in the Petition.

15.  Ms. Linda Chan’s response to this submission on behalf of JSM was that it was not necessary for JSM to apply to be substituted unless the Court is of the view that the Petition would otherwise fail.  It seems to me that that is essentially what the first part of Rule 33 means.  I, therefore, do not accept Mr. Chua S.C.’s first submission.  Mr. Chua S.C. went onto submit that if I am against him, as I am, on this first point, I should not exercise my discretion to substitute JSM for the Petitioner because:

(1) JSM is not a “creditor” within the meaning of section 178 of the Companies Ordinance;

(2) even if JSM is a contingent creditor, it fails to establish a prima facie case for a winding-up;

(3) JSM appears to have broken its undertaking to the Court not to proceed to execute judgment until the winding-up proceedings have been disposed of.

Are JSM a creditor?

16.  Mr. Chua S.C. submits that JSM are not a creditor, because there is no debt due to them and will not be until an allocatur is issued at the end of the taxation process.  Ms. Chan acknowledges that there is a line of authorities that a solicitor’s untaxed bill of costs cannot be the basis for a winding-up petition.  In Re Laceward Ltd. [1981] 1 WLR 133, Slade J. held that an untaxed bill of costs is a disputed debt.  However, the position was changed in England as a result of Tottenham Hotspur plc v Edennote plc [1994] BCC 681 in which it was held at page 684 that the word “creditor” for the purpose of section 124 of the Insolvency Act 1986, which is similar to section 179 of the Companies Ordinance, means a person to whom a debt is owed by the relevant company and the relevant debt can be a future debt and unascertained. It was further held that an order for costs made against the company in earlier proceedings or on an earlier application is a debt on which a winding-up petition can be based, notwithstanding that the costs have not yet been taxed or agreed and the precise liability has, therefore, not been ascertained: see also Boyle & Marshall, Practice and Procedure of the Companies Court, ibid at §9.179.

17.  In Re Golden Always Ltd. [1996] 3 HKC 252, Le Pichon J. (as she then was) refused (at least this is how, in my view mistakenly, Ms. Chan puts it) to follow Tottenham Hotspur plc v Edennote plc and applied the principles to be found in Re Lacewood Ltd. and Re a Company (No. 001573 of 1983) [1983] 1 BCC 98,937 and held at page 255A-D that until either taxation or agreement, a liability for untaxed, unagreed costs could not be a debt capable of founding a winding-up petition.

18.  Ms. Chan invites me not to follow Re Golden Always Ltd.  Ms. Chan submits that I should not do so for 2 reasons:

(1) Le Pichon J. did not sufficiently consider the principles in Tottenham Hotspur plc v Edennote plc, which are of general application and not confined to the facts of the case as Le Pichon J. seems to have thought (page 256); and

(2) the Learned Judge did not have the benefit of the authorities, which laid down the principle that a creditor whose amount of claim cannot be ascertained with certainty does have the necessary standing to petition.

19.  In short, Ms. Chan argues that the liability to pay costs is a contingent debt and a contingent debt clearly gives locus to present a petition: see section 179(1).  Rattee J. explained why this is the correct analysis in the context of the Insolvency Act 1986 at page 684A to F of his judgment in Tottenham Hotspur plc v Edennote plc:

“In my judgment I should beware of placing too much reliance on either of those cases [Re Laceward Ltd. and Re a Company (No. 001573 of 1983)], given that both were decided on the effect of earlier legislation replaced by a completely new code in the form of the 1986 Insolvency Act and the rules made thereunder.

What I must consider is whether the petitioners are creditors within the meaning of s. 124 of the 1986 Act. Section 124 provides that a petitioner can be a contingent or prospective creditor.  The word ‘creditor’ is not otherwise defined for the purposes of s. 124, but I was rightly referred by counsel to the provisions of r. 13.12 of the Insolvency Rules 1986.  Rule 13.12(1) is in these terms:

‘“Debt”, in relations to the winding up of a company, means (subject to the next paragraph) any of the following –

(a) any debt or liability to which the company is subject at the date on which it goes into liquidation;

(b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date; and

(c) any interest provable, as mentioned in Rule 4.93(1).’

Subrule (2) contains a provision not relevant for present purposes.  Subrule (3) is in these terms:

‘For the purposes of references in any provision of the Act or the Rules about winding up to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in any such provision to owing a debt are to be read according.’

Subrule (4), again, is not material for present purposes.

‘The petitioners before me submitted that a creditor for the purposes of s. 124 of the 1986 Act is a person to whom a debt within the meaning of the Act is owed.  Rule 13.12(3) shows, submit the petitioners, that the relevant debt can be future and unascertained.  To the extent that the judge in either Re a Company or Re Laceward Ltd – the cases to which I have referred – decided that a liability for untaxed, unagreed costs could not be a debt capable of found a winding-up petition, because the amount of the indebtedness was unascertained and unascertainable at the date of the petition, the petitioners submitted that that decision is no longer valid in the context of the 1986 legislation.  I accept this argument.’”

20.  Le Pichon J’s analysis is at pages 254G to 255E of her Ladyship’s decision in Re Golden Always Ltd.:

“An issue which arises in both petitions is whether the statutory demand made in each case was valid.  A sealed copy of the allocatur dated 31 October 1995 was produced at the hearing.  The companies’ assertion that they were never served with a copy of the allocatur prior to 2 February 1996 was not challenged.  The question which arises for determination is whether at the date the statutory demand was made, there was a debt ‘then due’.  ‘Due’ has been construed as meaning ‘absolutely due’ and ‘presently payable’: see Re European Life Assurance Society (1869) LR 9 Eq 122, 127; The New Travellers’ Chambers Ltd. v Cheese and Green (1894) 70 LT 271 and Re Bryant Investment Co. Ltd. [1974] 1 WLR 826, 828H.

Once taxation has been finalised and completed, an allocatur or certificate is issued to the party entitled to the order for costs: see O 62 r 22 of the Rules of the Supreme Court.  Until either taxation or agreement, a liability for untaxed, unagreed costs could not be a debt capable of found a winding up petition.  As was stated in Re Laceward Ltd. [1981] 1 WLR 133 at 137A-B:

‘Before such taxation takes place [that is to say, taxation of the bill of costs concerned] there is no certainty whatever as to whether all or any specific part of the debt alleged by the petition will be found truly due to the petitioners.’

See also Re a Company (No 001573 of 1983) 1 BCC 98, 937.  Whilst the issuance of an allocatur to the party entitled to costs crystallises the amount of debt and renders it certain, until the party liable to pay the costs is presented with a copy of the allocatur, there is no obligation to pay.  Hence after obtaining an office copy of the allocatur from the taxing officer, the practice is for the party entitled to costs to present the allocatur to the party directed to pay the costs for payment: see Halsbury’s Laws of England (4^th Ed) Vol. 37 para. 743.

The Petitioner submitted that the statutory demand which contained information regarding the allocatur was or constituted sufficient notice.  I would agree had it been accompanied by a copy of the allocatur.  But it was not.  In my view, the obligation of the party directed to pay the costs does not arise until such time as he is presented with a copy of the allocatur.  It follows that the statutory demands served on the companies were invalid because at the time such demands were served, there was not in existence a debt ‘then due’.”

21.  Le Pichon J. refers to Tottenham Hotspur plc v Edennote plc later in her judgment.  There is no explanation as to why her Ladyship considered it inapplicable in the light of the provisions of section 179(1).  Le Pichon J.’s decision was overturned on appeal, but on a ground not relevant to the issue I am considering on which the Court of Appeal did not comment. 

22.  In my view the position is this.  It is clear that a person to whom a company has a liability to pay a debt contingent on the occurrence of a future event has locus to issue a winding-up petition: section 179(1).  This is because although he is not entitled to immediate payment he will still be affected if the company is insolvent.  He cannot, however, serve a statutory demand.  If he chooses to present a petition he does so under sections 177(1)(d) and 178(1)(c).  In Re Golden Always Ltd. the Petitioner had served a statutory demand and was purporting to bring its petition within 178(1)(a).  In my respectful view Le Pichon J. decided Re Golden Always Ltd. correctly, but the decision is inapplicable to this case.  JSM are not relying a statutory demand or section 178(1)(a).  In Re Lacewood Slade J. was not satisfied that until taxation was completed it could not be said that any sum was payable.  Whilst this might be a surprising view to have taken, if correct it necessarily follows that a prospective or contingent debt could not be said to exist.  That is not the current position.  It is clear that something in excess of HK$10,000 is payable.  The live questions are how much and when will they become payable.  There is in my view a prospective or contingent debt sufficient to give JSM locus to present a petition.

Is the Company insolvent?

23.  JSM’s concern is that the Company is dormant and has transferred all the sums that it received in the Arbitration to an associated company.  It relies on the observations of Deputy Judge Muttrie at paragraph 51 of his judgment in JSM’s successful application for summary judgment for its fees:

“In the second place, there appears to have been dissipation of assets.  Though it is an inactive company, Jackin obtained over $119 million on the basis of the Final Award.  What, if anything, it recovered in costs is not known.  According to the 4^th affirmation of HH, Jackin has assets of about $8 million though examination of the exhibited balance sheet shows that these assets are composed almost entirely of sums dues from a subsidiary and other debtors.  What has happened to the costs is not known, and the inference must be that they have been siphoned off.”

24.  Ms. Chan submitted that in the circumstances of this case even if I am satisfied that there is a bona dispute about the amount of the debt it would still be proper to wind up the Company because of the real risk of JSM being left with no remedy if I do not.  Ms Chan referred me to the judgment of Oliver L.J at page 579b of Re Claybridge Shipping Co. S.A. [1977] 1 BCLC 572.  She also submitted that the evidence relied on by the Company as demonstrating it is solvent is stale and of doubtful reliability.  Finally, Ms. Chan urged me to take into account the shabby way in which the professionals who helped the Company in the successful Arbitration have been treated.

25.  Into a consideration of these factors intrudes the offer from the Company’s parent, Jackin International Holdings Limited to pay the sums owed to the Petitioner and JSM when they have been determined by the Court.  They have offered the following undertaking to the Court in a letter addressed to Ms. S. M. Kwan dated 30 January 2008:

“Dear Sir,

Re:  Companies (Winding-Up) Action No. CW 628 of 2006

I am the Chairman & Managing Director of Jackin International Holdings Limited, I have the authorization from Jackin International Holdings Limited to provide the following undertaking to the Court for and on behalf of Jackin International Holdings Limited:-

“Jackin International Holdings Limited undertake to pay professional fees, interest, taxing deposit and the costs of taxation arising thereof of Johnson Stokes & Master and HBFP Limited (In Liquidation), formerly known as RSM Nelson Wheeler Corporate Advisory Services Limited owed by Jackin Total Fulfillment Services Limited within 7 days when properly assessed.”

Yours sincerely

Helena Ho

Managing Director

Jackin International Holdings Limited”

26.  Insolvency is the inability to pay debts as they fall due.  In this case the solvency of the Company has to be judged by reference to the likely debts due to JSM.  The information about the Company’s financial state is limited, but it does not have to demonstrate solvency if the debt relied on is contingent and there is good reason why it has not yet been paid.  It is fairly common for a parent company to guarantee the liabilities of a subsidiary in order that it can be audited on a going concern basis.  It seems to me that in the circumstances of this case the undertaking that has been offered should be treated in this way.  If the parent company is prepared to underwrite the debts due not only to JSM but also to the Petitioner the Company’s debts will be settled as they fall due.  I am not satisfied that insolvency has been demonstrated or that in order to protect JSM’s position a winding-up order is required.

27.  So far as Mr. Chau S.C.’s point that JSM undertook to Deputy Judge Muttrie not to execute any judgment against the Company is concerned, petitioning to wind-up the Company is not execution of a judgment.  It is also clear from paragraph 53 of the judgment that the undertaking was directed to ensuring that JSM did not try and gain priority over other creditors, which their action has not.

28.  I have received letters from the solicitors for the Petitioner and JSM both asserting that the language of the undertaking is unsatisfactory.  It seems to me that their concerns are exaggerated, but to avoid any doubt I would state that my reading and understanding of the undertaking is that Jackin International Holdings Limited will pay JSM all sums assessed by the Court as payable to it by the Company within 7 days of any order, allocatur, judgment or certificate in respect of such sums being perfected.  Similarly, the Petitioner will be paid in full all and any sums adjudged due to it within 7 days of any judgment, order, allocatur or certificate in its favour against the Company being perfected.  If the Company thinks that I have misunderstood the undertaking it should ensure that the parties and the Court are informed of this within 7 days of the date of the handing down of this judgment.

Costs

29.  I will make an order nisi that the Petitioner pays the Company’s costs of the Petition.  There be no order as to costs between JSM and the Company.  The order will become absolute unless an application is made to vary the order nisi within 14 days of the date of handing down of this judgment.