RE ALPHA BUILDING CONSTRUCTION LTD

HCCW 283/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 283 OF 2014

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DECISION

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Introduction

1.  The Petitioner, Best Partner Ltd, is a developer.  It engaged the Company to carry out construction work for it.  Disputes arose between them that led to lengthy arbitration proceeding.  On 30 March 2012 the arbitrator delivered an interim award on liability and quantum in the Company’s favour for $6,581,003.04, which was paid.  However, the Petitioner applied to the High Court for an order for remission in respect of the interim award dismissing its counterclaim.  That application was successful.  As a result the arbitrator delivered a supplemental interim arbitration award and a consent final award dated respectively 31 July 2014 and 10 September 2014 awarding the Petitioner $2,219,282.27 in respect of its counterclaim.  Following receipt of the consent final award the Petitioner served on Monday 15 September 2014 a statutory demand in respect of the amount of the final award of $2,219,282.27.  The Company’s solicitors replied stating that as the Company still had not had its costs of the arbitration assessed, and that this would be well in excess of the amount of the award, it would be inappropriate for the Petitioner to present a petition as the Petitioner owed the Company money rather than vice versa.  On 13 October 2014 the Petitioner issued a petition to wind up the Company on the grounds of insolvency.  On 21 October 2014 the Company issued a summons to strike out the Petition and it is that application that I have before me today for determination.  On  24  November  2014 the Company, which has adduced evidence demonstrating solvency, paid $2,219,282.27 into court.

2.  In order better to understand how the Company is able to argue that despite a final award in the Petitioner’s favour it is probably the net creditor it is helpful to give a chronology of the relevant events, which I take from the affidavits and affirmations filed by the solicitors for both parties:

(1)  24 January 2006 – Company served its notice of arbitration;

(2)  17 June 2008 – after the Petitioner’s solicitors noticed that there were unpleaded matters in the Company’s witness statements, the Petitioner invited the Company to amend its statement of claim to reflect the contents of its witness statements;

(3)  18 September 2008 – Company’s solicitors reverted stating that it had no plans to amend its statement of claim;

(4)  23 June 2009 – the Petitioner applied to the arbitrator to expunge irrelevant evidence in the witness statements and expert reports;

(5)  28 August 2009 – The Petitioner’s application to expunge evidence was allowed and the costs of the application was awarded to the Petitioner;

(6)  2 September 2009 – The Company’s solicitors applied to amend the statement of claim despite having refused to do so when first invited by the Petitioner.  The Petitioner opposed the amendments and the parties made submissions to the arbitrator;

(7)  2 December 2009 – arbitrator allowed the amendment of the statement of claim but awarded the costs of the application to the Petitioner.  The arbitrator further gave the following costs order: “All costs in connection with and arising out of this Order for Directions No. 24 are awarded in favour of the Respondent in any event.”;

(8)  22 December 2009 – The costs order awarded to the Petitioner on 2 December 2009 was amended by the arbitrator to the following: “All costs incurred and thrown away by the amendment and the costs of any consequent amendment be to the Respondent in any event.”;

(9)  September 2011 – main hearing, over 9 days;

(10)  30 March 2012 – interim award on liability and quantum, awarding principal sums totalling $6,581,003.04 to the Company on its claim and, save for $127,632.25, dismissing the Petitioner’s counterclaim;

(11)  30 April 2012 – the Petitioner sought leave to appeal against the interim liability award.  Specifically, it challenged the arbitrator’s dismissal of its counterclaim;

(12)  27 July 2012 – arbitrator’s final award, awarding the costs of the arbitration (including the counterclaim) to the Company;

(13)  11 December 2012 – Au J gave the Petitioner leave to appeal;

(14)  11 March 2013 – the hearing of the appeal;

(15)  30 January 2014 – Au J allowed the appeal and remitted the award to the arbitrator for reconsideration;

(16)  3 April 2014 – remission hearing before the arbitrator;

(17)  31 July 2014 – arbitrator’s supplemental interim award on liability and quantum, reversing his dismissal of the counterclaim and awarding liquidated damages of $1,320,000 to the Petitioner;

(18)  10 September 2014 – arbitrator’s revised final award.  By consent, the arbitrator gave the Petitioner the costs of the arbitration, post-remission but left untouched the costs of the award pre-remission;

(19)  On 9 March 2015 Mimmie Chan J granted the Company an extension of time to commence taxation of its costs in the arbitration.

3.  Subsequent to the presentation of the Petition the Company has produced its bill of costs for its costs from 24 January 2006 to 30 January 2014.  These costs total $6,679,655.53. It will be readily appreciated why the Company argues that it has a substantial cross‑claim.

Legal Principles

4.  The Petitioner relies on a statutory demand to establish deemed insolvency pursuant to section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32.  If a company neglects to pay a debt within 21 days of receipt of a statutory demand a creditor can properly present a petition to wind up the company unless he is aware of matters that constitute a bona fide defence on substantial grounds to the debt.  If he is aware of such matters he should not present a petition.  To do so is an abuse of process and it is improper for a petition to be used to exert pressure on a company to pay a disputed debt: Yueshou Environmental Holdings Ltd[1]. A petitioner should understand that a petition presented against a company which has an ongoing business causes considerable disruption.  In particular it normally results in banks freezing the company’s accounts.  The decision whether or not to issue a petition where a debt is disputed has to be taken with appropriate care.  Commonly if a petition is presented at a time when the petitioner is aware of the matters, which a court subsequently finds constitute a bona fide defence on substantial grounds, the petition will be dismissed and the petitioner ordered to pay the costs on an indemnity basis[2].

5.  Various authorities have considered what constitutes a bona fide defence on substantial grounds.  I summarised the principles that emerge from them in Yueshou ibid at paragraphs 8 and 9:

“8. It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment. If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed. Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated. I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

‘Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.’

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

(2) I have to be satisfied that the Company’s assertions are believable. The test

‘… is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised – because failure to recognise it would create a debt‑dodgers’ charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, §13

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

‘(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, “substantial” means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.’

9.These judgments demonstrate that it is necessary for a company contending that it has a bona fide defence on substantial grounds to put before the court not just a series of assertions of fact that if made out at trial would constitute a defence, but credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at trial.”

6.  A putative petitioner should, when assessing whether or not to issue a petition in the face of an asserted defence, bear in mind that the winding up procedure is a summary process and a realistic view has to be taken of whether or not given the nature of the procedure the court is likely to take the view that there is sufficient substance in a company’s contention to constitute a bona fide defence on substantial grounds.  As David Richards J recently explained in his judgment in the English Court of Appeal in Tallington Lakes Ltd. v Ancasta International Boat Sales Ltd [3]:

“41. The practical issue is the extent to which the court must go in determining whether there is a genuine dispute on substantial grounds. The court must, as Oliver LJ[4] put it, take a view whether, on the evidence, there really is substance in the dispute. It appears from Chadwick J’s judgment that the facts before him were straightforward. It is not, however, practical or appropriate to conduct a long and elaborate hearing, examining in minute detail the case made on each side. Such a course would involve both delay in getting the issue ready for hearing and a potentially lengthy hearing. In this case, the evidence went through several rounds over a period of some six months. This time would have been better spent in getting a CPR Pt 7 claim underway. A lengthy hearing is likely to result in a wasteful duplication of court time. Petitioning creditors must take a realistic view of whether the company is likely to establish a genuine and substantial dispute. Where, as here, the petitioner insists on proceeding, the court is fully justified in taking the course sensibly adopted by the judge in this case of concentrating on those points which the petitioner said were his strongest.”

7.  The Companies Court should not allow itself to be drawn into resolving reasonably disputable factual issues and matters.  The winding up jurisdiction, and the procedure for prosecuting winding-up petitions, exist to ensure that insolvent companies are put into liquidation and that this is done promptly in order to protect the interests of creditors.  It is not a means of asserting pressure on a company, which the creditor knows is probably solvent, for payment of a disputed debt. The procedure should be reserved for use when at the time of presentation of a petition a petitioner, and his advisers, can fairly say that on the information available to them any asserted defence is fairly obviously insubstantial and unmeritorious.

8.  There are cases, such as the present one, where a company contends that it has a bona fide defence on substantial grounds because it has a cross‑claim.  If the company demonstrates that its cross-claim is genuine and serious and it is greater or equal to the debt relied on by the creditor a petition should not be presented and if one is it will be dismissed[5].  Delay in prosecuting a cross-claim may be relevant in the assessment of its credibility, but it is not generally a bar to reliance on it[6].  A claim, other than the debt relied on in the petition, that a petitioner asserts he has and which constitutes a bona fide defence on substantial grounds to the company’s cross claim, may also be relevant in assessing whether overall a company has shown a defence to a claim for payment of the petition debt[7].

The argument

9.  At the time the Petition was issued the Petitioner argued that the Company was out of time to have its costs of the arbitration taxed and, for that reason, could not establish a substantial defence.  The Company obtained, in my view unsurprisingly given the background, an extension of time to commence the taxation.  As a result, and also because it does not seem to me that the fact that the Company has made a payment into court impacts on the question of whether or not a substantial defence has been demonstrated, it is not seeming to me that there can be any question concerning bona fides, the live issue becomes fairly narrow: does the evidence demonstrate that the Company has on the balance of probabilities a cross‑claim for the same or more than the amount it owes the Petitioner?

10.  The Petitioner’s approach in respect of this issue is as follows.  It questions the Company’s bill of costs, which claims, as I have said, $6,679,654, although it does this in general terms.  It cannot pick out particular items and demonstrate that this figure is more likely than not going to be reduced to below $2,219,282.27.  What it does do is to argue that it has its own claim for $4,056,320 in respect of its own costs of the arbitration plus $688,576.50 in respect of the costs of the successful remission application.  In short what is being said is that the Company will not recover anything like $6,679,654 and in any event the Petitioner has its own claim for costs totalling $4,744,896.50 in respect of various interim orders made in its favour during the arbitration which exceeds the difference between $6,679,654 and $2,219,282.27.  The Company takes a number of technical points.  It points out that the Petitioner has not itself obtained leave to commence a taxation out of time.  I shall, however, assume as I think is safe, that at the hearing on 15 November 2015 leave will be given.  The Company also suggests that given the undue delay in claiming the interlocutory costs there is likely to be a global deduction in such costs as the Petitioner obtains on taxation, which could be in the order of 20-30%[8].

11.  It seems that the evidence establishes that on the balance of probabilities the Company’s costs of the arbitration up to the date of remission will equal or exceed $2,219,282.27.  What is unclear is which party will owe the other money after the taxation of each party’s costs is completed.  It seems to me that in these circumstances the Company has demonstrated a bona fide defence on substantial grounds.  Put slightly differently it seems to me that the totality of the evidence establishes a genuine dispute between the parties about who owes who money.  This is a dispute that cannot be resolved until after taxation is completed.  It is certainly not the function of the Companies Court to try and determine the matter.  Neither in my view is it sensible to proceed as Mr. Hew, who  appeared for the Petitioner argued, on the basis that for present purposes the matter can be determined by simply adding up the total amounts claimed by each party and setting them off against one another, which produces a figure of $693,763 to the Petitioner, and conclude that this is the minimum that the Company owes the Petitioner and, therefore, the Petition should not be struck out.  There is an air of unreality about this submission. It is quite clear that both parties’ bills will be reduced to some degree on taxation and on the basis of what is before me I cannot safely say that at the end of the process it will be the Petitioner that is owed money. 

12.  The Petitioner has argued that in the event that this is the court’s decision the Petition should be stayed not struck out pending the determination of its application for an extension of time to commence taxation on 15 November 2015.  I can see no good reason at all for doing this.  As I have already said, I have assumed that the application will be successful, but in my view it makes no difference to my assessment of how the Petition should be dealt with.  In my view it should have been appreciated before the Petition was issued that this was not an appropriate case in which to issue a petition to wind up a company.  It was speculative at best and as I have already observed petitions should not be presented in such situations.  The fact that immediately following receipt of the final award the Petitioner served a statutory demand suggests that the winding‑up procedure was used to put pressure on the Company rather than because of any genuine concern, which is not suggested in the evidence, about its solvency.  I will, therefore, strike out the Petition and hear the parties on costs.

13.  The court heard oral submissions of counsel on costs.

14.  I will order that the Petitioner pays the costs of the strike out application on an indemnity basis.  It seems to me that the Petitioner’s solicitors should have appreciated before issuing the Petition that the Company had a substantial claim for costs and that until those costs, and the Petitioner’s own costs, had been assessed there was sufficient doubt about what sum if any was payable to the Petitioner that presenting a petition to wind up the Company was an inappropriate means by which to try and secure immediate payment of the final award.  The speed with which a statutory demand was served suggests that a conscious decision was made to pressure the Company by using the winding up procedure in circumstances which made it inappropriate.  This is the type of case in which the Companies Court should award indemnity costs and signal its displeasure at the misuse of the winding up procedure.