RE SINO PACIFIC CORPORATION LTD

HCCW 257/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 257 OF 2015

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D E C I S I O N

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1. On 7 August 2015 the Petitioner issued a petition to wind up the Company, Sino Pacific Corporation Limited, on the grounds of insolvency. The Petitioner relied on a statutory demand in respect of a debt alleged to be arising pursuant to an agreement entered into on 15 August 2014 that had been assigned to the Petitioner on 15 July 2015. On 23 November 2015 I made an order dismissing the Petition and ordering that costs be determined at a subsequent hearing, that hearing has taken place before me this morning.

2. The Petition came to be dismissed at the instigation of the Petitioner after it received evidence filed on behalf of the Company in opposition. Having read the affirmation it would appear the Petitioner’s solicitors took the view, it seems to me correctly, that it was not appropriate to proceed further with the Petition as the Company appeared to have demonstrated that it is arguably, at least, that it has a bona fide dispute on substantial grounds.

3. The Petitioner’s solicitors filed on 13 January 2016 their submissions in support of their client’s application that it has its costs incurred in the proceedings.  It would appear that it was not until after they received the submissions of Mr Kerby Lau on behalf of the Company that they became aware of my decision in Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550.  In that decision I explain in detail the principles which, in my view, apply in the light of the underlying objectives of the Rules of the High Court stated in Order 1A rule 1 to the determination of costs in circumstances such as that that was before me in Re Lucky Ford, and it seems to me is before me in the present case.

4. In Re Lucky Ford a winding‑up order was made, and the consideration of the relevant approach to the assessment of costs was made in that context.  I shall not repeat the majority of my earlier decision but I would quote para 12 and 14:

“12. If judgment is entered for relief sought by a petitioner pursuant to a consent order, as was the case in Re Chinese United Establishments Ltd, or the respondent has withdrawn his objection to the relief sought by a petitioner resulting in judgment in his favour, costs will follow the event.

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14.  In my view having regard to O.1A r.1 the correct approach to determining costs in cases which do not involve the court granting substantive relief is for the court first to consider the terms of settlement and assess whether the petitioner has obtained substantially what he sought in his petition. If he did it will not be necessary or appropriate for the court to consider evidence and arguments directed to the merits of the case and whether or not the petitioner would have bene successful if the petition had gone to trial. The petitioner will be treated as having been successful and entitled to his costs.”

5. In short, in my view, where it can fairly readily be said that a petitioner has either been successful or unsuccessful in attempting to obtain what was sought by issue of a petition, costs should be determined by reference to whether or not the petitioner has been successful.  The court should not be required or need to spend time dealing with speculative arguments about what might or might not have happened if one or other of the parties had dealt with the matter differently. 

6. In the present case, it seems to me quite clear that having voluntarily offered to withdraw (as the petition has been advertised it needed to be dismissed) the petition, it followed if regard was had to the principles explained in Lucky Ford, thatthe Petitioner should pay the costs of the proceedings.

7. Today Ms Chan, on behalf of the Petitioner, advanced an argument, originally formulated without reference to Lucky Ford, that the Petitioner was entitled to its costs because the Company had not responded to its statutory demand, and it was not until the Petitioner received the Company’s affirmation in opposition that it understood the reasons why payment of the alleged debt was disputed.  It seems to me that this is wrong.  Although it may be prudent indeed, it seems to me that invariably it would be, for any company faced with a statutory demand, to inform a petitioner of its grounds for disputing the underlying debt with a view to preventing a petition being issued and its bank account frozen, it does not follow that if, for any reason it fails to do so, that a petitioner becomes automatically entitled to its costs if it presents a petition which once it receives an affirmation in opposition, and concludes it is sensible to agree to have the Petition dismissed.  It is for the petitioner and its advisors to assess, in the first instance, whether or not it is an appropriate case in which to issue a winding‑up petition.  If their assessment proves to be incorrect, and they recognise that in the light of matters of which they become aware after the petition is presented, the petition should be dismissed.  They should accept consistent with the reasoning in Lucky Ford,that they will have to pay the costs.  It follows that, in my view in the present case, the Company should have its costs of the proceedings. 

8. A further issue which arises for consideration is the level of costs which should be paid.  Mr Lau, on behalf of the Company, sought an indemnity costs order.  He did so on the basis that the Petitioner should have appreciated that there was a bona fide dispute in respect of the debt before the Petition was issued, and in accordance with the approach to be found in cases like my decision in Re Alpha Building Construction Ltd HCCW 283/2014 unreported decision of 20 May 2015, a company and its advisors should give realistic assessment to whether or not there is likely to be a bona fide dispute to a claim, and if it can be shown that there were matters of which they were aware before the petition was issued, it is appropriate for the court to make an indemnity costs order as the presentation of the petition was an abuse of process.[1]

9. The particular point that Mr Lau has drawn to my attention as demonstrating, he argues, that the Petitioner should have appreciated that this was not an appropriate case in which to present the petition, is the inclusion in the agreement of 15 August 2014 to which I have already referred, of Clause 11 which contains a prohibition against assignment.  Clause 11 reads as follows:

“This agreement shall be binding upon each party’s successors but shall not be assignable.”

10. The agreement was drafted by the Petitioner’s solicitors.  It follows, says Mr Lau, that when drafting the Petition which expressly refers in para 19 to an assignment of the relevant debt, said to be arising under the agreement, they must have been aware, or certainly should have been aware, that there was room for argument that the assignment was ineffective, and therefore the Petitioner was not owed the alleged debt by the Company.  It seems to me that that is correct.  The material question is whether in those circumstances it would be proper for the court to proceed on the basis that the Petition should not have been issued, and can be characterised as an inappropriate attempt to put pressure upon a company to pay a debt about which there was room for dispute.

11. Ms Chan argued that Clause 11 did not extend so far as to prohibit the assignment of a debt arising under the agreement, and therefore it was not unreasonable, particularly as the Petitioner had served a notice of assignment upon the Company and not received any objection to it, for the Petition to be issued.  It does not seem to me necessary to resolve the question of the precise effect of Clause 11, what is quite clear is that the clause at the very least arguably prohibited the assignment of the very assignment of debt that the Petitioner relies on, and that if the assignment was invalidated it necessarily followed, the Petitioner was not entitled to receive the Petition.

12. As the Petitioner’s solicitors must have been aware that there was a question over the effectiveness of the assignment, it seems to me that the decision to proceed to issue of the Petition was at the very least a gamble and the gamble which as subsequent events have shown did not pay off.

13. On balance it seems to me that it was a misuse of the winding‑up procedure to issue a petition, knowing that at the very least there was a ground upon which the Company could credibly argue that it had a bona fide defence on substantial grounds.  It seems to me that in those circumstances a more generous costs order than would normally be ordered is appropriate.  I will therefore order that the costs are paid on an indemnity basis with certificate for counsel.

14. I would end by repeating what I have said in a number of earlier decisions including Re Alpha which I have referred to earlier, namely, that the winding‑up procedure is intended only to be used in straight forward cases, in which a petitioner can genuinely say at the time a petition is presented that as far as it is aware, there is no credible basis for a company to refuse to pay the debt claimed.  If a petitioner or its advisors are aware of matters which they appreciate if raised by a company, would be likely to constitute a bona fide defence on substantial grounds, a petition should not be issued.  This would not leave the creditor without recourse.  The correct course would be to issue a writ for recovery of the debt and if a judgment is obtained and unpaid, at that stage a winding‑up petition could be issued.  The winding‑up procedure does not exist as an alternative to a writ action.  It exists as a statutory procedure which enables a creditor to put into liquidation a company which there is reason to believe is insolvent, and its insolvency is the reason why it has failed to pay a particular creditor a particular debt.