CAPITAL GLOBE LTD v. ABDUL AZIZ ESSA

HCMP 524 /2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 524 OF 2011

(ON AN INTENDED APPEAL FROM HCCW NO. 422 OF 2010)

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Hon Tang Acting CJHC:

1.  I have had the advantage of reading Fok JA’s judgment in draft. With respect, I agree with it and the orders he proposes to make.

Hon Fok JA:

The application

2.  This is an application for leave to appeal.  By summons dated 25 March 2011, the plaintiff (respondent below), Capital Globe Limited, seeks leave to appeal against the decision of To J made on 17 February 2011 whereby the learned Judge ordered the respondent to disclose to the petitioner its 2009 audited accounts.  The summons also seeks a stay of execution of that order until after the determination of the appeal.  An application for leave to appeal and for a stay of execution made to the Judge below was heard and dismissed on 15 March 2011.

3.  A draft notice of appeal was filed with the summons and the respondent has also submitted a skeleton argument in support of the application dated 23 March 2011.

4.  The defendant (petitioner below), Mr Abdul Aziz Essa, opposes the grant of leave to appeal and has submitted a statement in opposition to the application dated 8 April 2011.

5.  The application is determined on the basis of written submissions only, as the Court of Appeal is empowered to do under Order 59 rule 2A(5) of the Rules of the High Court.

The background facts

6.  The respondent is a private limited company incorporated in Hong Kong.  The petitioner is a Pakistani national who alleges that he had business dealings with the respondent in the period 2005 to 2009.  He claims that these included the investment of capital by him with the respondent under seven time charter contracts and an Australian property development agreement in return for an agreed revenue stream.

7.  As a result of default in payments, the petitioner served a statutory demand on the respondent on 9 September 2010 in respect of alleged debts of US$12 million under the time charter contracts and A$14 million under the Australian property development agreement.

8.  By way of pre-emptive strike, the respondent obtained an ex parte injunction from Harris J on 7 October 2010 restraining the petitioner from presenting a winding up petition.  In support of that application, the respondent filed the 1^st affirmation of Mr Brian Lee, a director and 50% shareholder of the respondent, in which it alleged that: it could not locate any documents relevant to the petitioner’s claim; it had instructed a firm of forensic accountants to scrutinise its books and records and to prepare a full report; it had “grave doubts on the genuineness and authenticity of [the petitioner’s] claims”; and, it was a “successful and solvent company with very substantial assets”.  In support of that latter statement, the affirmation exhibited a page from the respondent’s 2009 audited accounts.

9.  On 15 October 2010, having heard argument in respect of the continuation of the ex parte injunction, Harris J dismissed the injunction with indemnity costs to the plaintiff.  He found that at the time when Mr Lee made his affirmation, Mr Lee had been provided with sufficient information by the petitioner, and had had sufficient opportunity to carry out his own investigation of the respondent’s affairs, that he should have appreciated that the factual elements of the petitioner’s claim were likely to be true.  Harris J considered that there was insufficient evidence before the court to demonstrate a bona fide dispute on substantial grounds or even a strong possibility of such a dispute arising.

10.  On 18 October 2010, no longer constrained by the injunction, the petitioner presented a winding up petition against the respondent under section 177(1)(d) of the Companies Ordinance, Cap. 32, i.e. on the ground that the company was unable to pay its debts.

11.  On 20 December 2010, the respondent filed the 3^rd affirmation of Mr Lee in opposition to the petition.  This affirmation followed Mr Lee’s 1^st affirmation but omitted the earlier references to the respondent’s solvency and the engagement of a firm of forensic accountants to scrutinise its books and records and to prepare a full report.

12.  The petition came on for hearing on 3 January 2011 before To J.  At that hearing, the Judge ordered that the 1^st affirmation of Mr Lee stand as evidence in the trial of the petition.  Although the respondent had objected to such an order in respect of the evidence, no appeal against that order was made.  The substantive hearing of the petition was fixed to be heard on 17 March 2011.

13.  On 13 January 2011, the petitioner issued a summons for discovery under Order 24 rules  10, 11 and 13 seeking the rest of the respondent’s 2009 audited accounts, on the basis that one page of this document had already been exhibited to Mr Lee’s first affirmation.  To J heard this application on 17 February 2011 and ordered the respondent to disclose the accounts within three days.

14.  After the petitioner sought to require the respondent to comply with To J’s discovery order, the respondent issued a summons for leave to appeal pursuant to Order 59 rule 5B and for a stay of execution.  On 15 March 2011, To J heard and dismissed that application for leave to appeal and for a stay of execution.

15.  On 17 and 28 March 2011, the substantive hearing of the petition took place before Deputy High Court Judge Pow SC.  This was despite the petitioner not yet having been provided with the respondent’s 2009 audited accounts pursuant to To J’s discovery order.  Judgment on the petition is still pending as at the date of this decision.

16.  On 18 March 2011, the Master assessed the indemnity costs, ordered by Harris J to be paid by the respondent to the petitioner in respect of the injunction proceedings, at $225,356.

17.  On 25 March 2011, the respondent issued the present summons seeking leave from the Court of Appeal to appeal against To J’s discovery order.

The application for leave to appeal

18.  The respondent did not dispute that the test to be applied in respect of its application for leave to appeal is whether the appeal has a reasonable prospect of success.  See Hong Kong Civil Procedure 2011 (Vol. 1) at Note 59/2A/4.

19.  The draft notice of appeal seeks to raise, in summary, the following grounds of appeal against To J’s discovery order:

(1) First, that the Judge failed to apply the principles laid down in Order 24 rule 13, namely that the order for discovery must be necessary either for disposing failure of the cause or matter awful saving costs (Ground 1).

(2) Secondly, that, since the petitioner is seeking to wind up the respondent on the ground that it is unable to pay its debts and is relying on the deeming provision under section 178(1)(a) of Cap. 32 to establish such inability, the only relevant issue for the court’s determination is whether the petitioner can prove that the debts which were the subject of the statutory demand were due and owing at the time such demand was issued (Grounds 2(a) and 2(b)).

(3) Thirdly, that the discovery order offends against the rule, supported by paragraphs 4 and 6 of Practice Direction 3.4, that extensive discovery will not be ordered in a creditor’s petition (Grounds 2(b) and 2(c)).  Further, that the respondent had confirmed it would not refer to its 2009 audited accounts at the trial of the petition (Ground 2(f)).

(4) Fourthly, that the respondent’s solvency was not relevant until the petitioner had proved his status as a creditor (Grounds 2(d), 2(e) and 3).

20.  These grounds summarised above may be addressed under four headings: failure to apply Order 24 rule 13; relevance of solvency; discovery in winding up proceedings; and, locus.

Failure to apply Order 24 rule 13

21.  There is no substance in this proposed ground of appeal.

22.  It is clear that To J had the provisions of Order 24 rule 13 in mind when he was considering the petitioner’s application for discovery.  This is clear from paragraph 13 of his Judgment, where at point (4) he summarised the argument of counsel for the respondent as being that “the discovery is not going to assist in the fair disposal of the winding-up proceedings or for saving costs”.

23.  Moreover, it is clear from paragraph 24 of the Judgment that the Judge considered that discovery of the 2009 audited accounts was necessary for the disposal of the issue regarding the solvency of the respondent.

Relevance of solvency

24.  I do not consider there is any merit in the contention that the solvency of the respondent is irrelevant at the trial of the petition since the only issue for the court is whether the petitioner can prove that the debts claimed under his statutory demand were due at the time of the making of that demand.

25.  A petition under section 177(1)(d) of Cap. 32 is made on the basis of the company’s inability to pay its debts, i.e. on the basis of its insolvency.  As Harman J observed in Cornhill Insurance v Improvement Services [1986] 1 WLR 114 at 116H, “the fundamental allegation of insolvency … is the basis upon which a winding up order is made”.  Reliance on the statutory demand mechanism is simply a convenient method by which a petitioner can demonstrate a company’s inability to pay its debts.  Therefore, even if a statutory demand has not been properly served, the court may nevertheless be satisfied from other evidence that the respondent is unable to pay its debts and grant a winding up order accordingly: see e.g. Re AuraSound Speakers Ltd [2004] 3 HKLRD 502 per Tang J (as he then was) at §50.

26.  It follows that the respondent’s solvency was a relevant issue at the trial of the petition and that it was open to To J to conclude that discovery of its 2009 audited accounts were necessary for the fair disposal of that issue.

Discovery in winding up proceedings

27.  It is clear from paragraph 17 of the Judgment below that To J took into account the respondent’s reliance on paragraphs 4 and 6 of Practice Direction 3.4. Paragraph 4 of that Practice Direction concerns cross-examination of witnesses and does not therefore have any direct bearing on the proposed appeal, since no cross-examination was ordered.

28.  As for paragraph 6 of the Practice Direction, that concerns general discovery and not discovery under Order 24 rule 10.  By its terms, paragraph 6 does not suggest that the rule that no discovery of documents will be ordered applies to all winding up petitions and it expressly provides for a departure from the practice of not ordering discovery.  This is reinforced by reference to paragraph 7 of the Practice Direction, which indicates that where documents have been exhibited to affidavits, there may be a necessity to give discovery of other documents.

29.  Order 24 rule 10 applies in winding up proceedings by virtue of rule 210 of the Companies (Winding-up) Rules and there is no basis for contending that its application in the present case is contrary to principle.

30.  So far as the respondent contends that it had confirmed that it would not refer to its 2009 audited accounts at the trial of the petition, it is clear that this was a point duly noted by To J.  But as the Judge rightly observed, he had already ordered that the 1^st affirmation of Mr Lee, including the exhibit of part of the 2009 audited accounts, should stand as evidence at the trial of the petition: see paragraphs 8 and 10 of the Judgment.  As noted above, there was no appeal against that order and consequently, the Judge was right to conclude that the extract from the 2009 audited accounts was “in evidence for all intents and purposes”: see paragraph 22 of the Judgment.

31.  There is no substance in the proposed grounds of appeal under this head.

Locus

32.  The respondent’s proposed grounds of appeal under this head seek to contend that its solvency does not become relevant until the petitioner proves his status as a creditor. Reliance is placed on the decision of Yuen JA (sitting as an additional Judge of the Court of First Instance) in Phoenix Telecommunication Limited v Dragon Investment Company II LLC, HCMP 514/2002, unrep., 2.9.02.

33.  However, the ratio of the Phoenix case (at §40) is that:

“… if the company can show a bona fide substantial dispute, then … the Court should restrain the presentation of the petition without taking into account the question of the company’s solvency. If a petitioner’s debt is bona fide disputed on substantial grounds, he has no locus standi to present a petition anyway. …”.

34.  Thus, Phoenix is concerned with the pre-trial stage where the court may be asked to restrain the presentation of the petition or to strike it out.  Once the court concludes that the petition should be allowed to proceed, the issue of solvency is clearly relevant: see per Kwan J (as she then was) in Re Hyundai Engineering & Construction Co Ltd (No. 2) [2002] 2 HKLRD 354 at §§28-29.

35.  Here, the petitioner has been allowed to proceed to trial on the petition.  As To J rightly held at paragraph 15 of the Judgment below, the present case is the reverse of the situation in Phoenix.  In that case, Yuen JA held that the company had put forward a sufficient case to raise a bona fide dispute about the debt on substantial grounds and granted an injunction to restrain the presentation of a petition.  In this case, on the other hand, Harris J held at an inter partes hearing that there was insufficient evidence to demonstrate a bona fide dispute on substantial grounds or even a strong possibility of such a dispute existing and hence discharged the injunction order restraining the presentation of the petition.

36.  Similarly, To J was right to hold (1) that Phoenix was not authority for the proposition that a petitioner has to satisfy the court that the debt is not disputable before it can invoke any discovery procedures relating to solvency of the company (paragraph 18 of the Judgment) and (2) that the respondent had already sought to challenge the locus standi of the petitioner to present the winding up petition in this case and was therefore beyond the stage which Yuen JA was considering in Phoenix (paragraph 19 of the Judgment).

37.  The other cases cited by the respondent in its skeleton argument in support of this application are, with one exception, like Phoenix concerned with the pre-trial stage, i.e. the stage of an injunction to restrain the presentation of a petition or an application to strike out a petition.  They simply do not advance the respondent’s case in this matter at all.

38.  The exception is the decision of Kwan J (as she then was) in eSchool Limited v ePlaza Limited, HCCW 1122/2002, unrep., 23.7.02.  But far from assisting the respondent here, that case is a further example of a court proceeding to consider whether, although it could not rely on its statutory demand, a petitioner was nevertheless able to show that the company was insolvent under s. 178(1)(c) of Cap. 32.

39.  In my opinion, there is no substance in the proposed grounds of appeal on the basis that the petitioner did not have locus to present the petition.

40.  In the circumstances, it is unnecessary to consider the further argument advanced in the skeleton argument of the petitioner that Harris J’s indemnity costs order of 15 October 2010, which costs were untaxed as at the date of the presentation of the petition on 18 October 2010, was a prospective or contingent debt sufficient to confer locus to present the petition.

Conclusion and orders

41.  For the reasons set out above, there are no good grounds to interfere with the Judge’s exercise of discretion to order discovery.  I therefore refuse leave to appeal against the decision of To J dated 17 February 2011 and I dismiss the respondent’s summons dated 25 March 2011.

42.  In its skeleton argument, the respondent asks for an oral hearing of the application for leave to appeal.  For his part, the petitioner does not suggest that an oral hearing is necessary.  I consider that the application for leave to appeal is totally without merit and, accordingly, I would make a further order under Order 59 rule 2A(8) that no party may request the determination to be reconsidered at an oral hearing inter partes.

Costs

43.  The costs of this application should follow the event and I would therefore make an order nisi that the respondent pay the petitioner’s costs of this application.

44.  The petitioner contends that the costs should be on an indemnity basis due to the dilatory pursuit of the application for leave to appeal and the flagrant breach of To J’s discovery order, which has still not been complied with despite the absence of a stay of execution.  Although the application has not been proceeded with particularly speedily, I take into account that the petitioner was content to proceed with the substantive hearing of the petition in the absence of the 2009 audited accounts ordered to be disclosed.  On the other hand, I do consider that the respondent’s conduct in refusing to comply with the order by disclosing the accounts as ordered, in the light of the lack of merit of the proposed appeal against that order, justifies the award of costs on an indemnity basis and I would so order.

45.  It would be appropriate to assess the petitioner’s costs on a gross sum basis.  For that purpose, I direct the petitioner’s solicitors to submit a bill of costs within seven days hereof and leave is given to the respondent to submit its response within seven days thereafter.

46.  The petitioner seeks an order that Mr Lee be ordered to bear the petitioner’s costs of resisting this application for leave to appeal personally.  The basis for this contention is Mr Lee’s confirmation that he is funding the respondent’s litigation and the fact that the respondent appears to be insolvent.  Such an order lies within the jurisdiction of the court under s. 52A(2) of the High Court Ordinance, Cap. 4.  However, Mr Lee should be given the opportunity to make submissions in this regard.  I therefore also direct that any such submissions on behalf of Mr Lee be made within seven days hereof and that the petitioner make any submissions in response within seven days thereafter.