XCHRX In re First GNP Hong Kong Ltd.

1995, CWU NOS.136 and 137

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H E A D N O T E

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PETITION TO WIND-UP UNDER S.177(1)(d) OF THE COMPANIES ORDINANCE - DISPUTED DEBT - PETITION STRUCK OUT

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING UP) NOS.136 and 137 OF 1995

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J U D G M E N T

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1. This is an application to strike out petitions that have been presented to wind-up First GNP (Hong Kong) Limited and First GNP (Holdings) Limited and I will refer to them respectively as "Hongkong" and "Holdings". Both petitions were presented on 1st April 1995. The Company say they never received sealed copies and learnt about the petitions in the circumstances described below. What is clear is that they were not served with the petitions on 1st April nor was any attempt made to apprise them of the presentation of the petitions on that day. Yet both the Official Receiver and the Company's banker, the Nanyang Commercial Bank, received sealed copies that morning. According to the affidavits of service filed, service was effected at about 12:45 pm on Monday, 3rd April. I note in passing that the petitioner's solicitors did not observe the usual courtesy of providing the company's solicitors with copies. Hongkong's complaint, and in my view it is a legitimate one, is that it should have been served at least at the same time as a copy was provided to its bankers. The delay in serving Hongkong was quite deliberate. It is conduct that should neither be condoned nor encouraged.

2. Be that as it may, Hongkong learnt about the petition filed against it from its bankers who faxed Hongkong a copy on 1st April. It lost no time in issuing a summons to strike out the petition which came before me in the afternoon of 3rd April. At that hearing, Counsel for the petitioner opposed the abridgement of time for service of the summons to strike out. Having been served with the affidavit shortly before the hearing, he sought an adjournment for the filing of evidence. The summons was therefore adjourned for hearing on 11th April to give the petitioner the opportunity to file evidence in opposition to the summons.

3. To complete the picture, Holdings apparently was not aware of the petition against it until it received a letter dated 6th April 1995 from the petitioner's solicitors, notwithstanding the affidavit of service. In any event, a summons to strike out that petition against Holdings was issued on 8th April, returnable at the adjourned hearing of the application to strike out the petition against Hongkong.

4. By way of background, certain winding-up proceedings against Hongkong and Holdings were commenced in the latter part of 1994. These proceedings were compromised and resulted in a Deed of Settlement. Clause 8 is material and provides as follows :

"Hongkong and Holdings jointly and severally agree to :-

(a) pay to Guang Xin a further sum of US$1,000,000.00 by 31st March 1995;

(b) alternatively to sub-clause (a) of this Clause, Hongkong and Holdings may elect to transfer the legal and beneficial title to and interest of and make delivery of a total of 414 metric tonnes grade A aluminium ingots ("the Goods") to Guang Xin on or before 31st March 1995 which shall be of merchantable quality, and free from encumbrances or liens or other adverse interest, defects, charges, expenses (including storage charges), duties, levies, fees, fines and/or taxes, costs and disbursements or other payments (hereinafter collectively referred to as 'the Charges'). Such delivery should be effected in (i) Hong Kong (ii) Guangzhou or (iii) Shenzhen (to be elected by Hongkong and/or Holdings) by Hongkong and/or Holdings handing to Guang Xin all necessary Bills of Lading; cargo warrants; go-down warrants or other documents of title which will enable Guang Xin to take delivery of and title to the Goods with all the Charges fully paid by Hongkong and Holdings, by 31st March 1995;

(c) If Hongkong and/or Holdings neither pay to Guang Xin the sum of US$1,000,000.00 nor make delivery of 414 metric tons of aluminium ingots by 31st March 1995, Hongkong and Holdings shall be deemed not to have elected to fulfil their obligations by delivering the aluminium ingots and Guang Xin shall be entitled to pursue its claim for the said US$1,000,000.00."

5. As will be apparent from the events that occurred in March described below, there is a dispute as to whether or not Hongkong had discharged its obligations under Clause 8(b).

6. I will now turn to describe some of the more material events that occurred in March and early April. On 27th March, Hongkong caused the goods to be shipped from Tianjin to Hong Kong. On 30th March, Hongkong sent to the petitioner's solicitors a Bill of Lading in which the petitioner was named as the consignee, a Certificate of Quality and a Certificate of Weight. It also advised the petitioner's solicitors that the vessel was due to arrive in Hong Kong any time the next day, i.e. 31st March. On 31st March, the petitioner's solicitors wrote and asked for additional documents. On the same day, there was another letter from the petitioner's solicitors to the effect that it had been in contact with the shippers and realised that the ship had not yet left Tianjin. The petitioner's position was that physical delivery was required under Clause 8(b) and as Hongkong could not comply with that, it required payment on or before 31st March. But it is clear from the correspondence that the Companies took a different view.

7. As noted above, the petitions were presented on 1st April which was a Saturday. The time stamp on the petitions showed that court fees were paid at 10:53 am. The presentation of the petitions would normally follow payment. Although there is no evidence of the time they were presented, a sealed copy with a covering letter was received by Hongkong's bankers, apparently at 11:29 am. There is a date and time stamp recording receipt to this effect on the covering letter. This is of some importance as the documents of title relating to the goods, as Hongkong alleges, were not returned to Hongkong until 12:35 pm that day. Hongkong was only notified of the petitioner's intention to return the documents by fax at 11:58 am. So at the time the petitions were presented, the documents of title were still in the petitioner's possession. The ship's departure from Tianjin was delayed until 1st April due to inclement weather. It arrived in Hong Kong on 5th April. On 6th April, the petitioner's solicitors purported to make a demand for payment pursuant to Clause 8(c) of the Deed which was expressed to be as follows :

"Without prejudice to our two letters of demand dated 31st March ..... and to any of our client's rights in relation to the above two Petitions ..."

Mr Leong, Counsel for the Companies, characterised this as a half-hearted attempt to salvage the petitions. Whatever its effect, this letter has no bearing on the applications before me.

8. I now turn to the petitions.

9. They are mirror images of each other except that the Company in the one case is Hongkong and in the other is Holdings. Put simply, each alleged that the Company, be it Holdings or Hongkong, had neither paid US$1,000,000.00 nor made delivery of the goods by 31st March as was its obligation under Clause 8 of the Deed. Accordingly, the petition alleged that the Company was indebted to the petitioner in the sum of US$1,000,000.00 being a sum due and owing under the Deed. It referred to the service of a demand for payment made by fax on 31st March from the petitioner's solicitors' to the company and non-payment thereof by the Company. There followed an allegation the Company was insolvent and unable to pay its debts. Thus, s.177(1)(d) of the Companies Ordinance appears to be the basis of each of the petitions.

10. As to the application to strike out, put simply the companies dispute the debt. Their position is that Hongkong had performed all obligations required by Clause 8(b), therefore neither Hongkong nor Holdings owed the petitioner any sum of money. Counsel for Hongkong and Holdings relied on In re Par Excellence Co. Ltd. [1990]2 HKLR 277 for the proposition that before winding-up proceedings are commenced, the debt must be clearly established. Until that is done, the petitioner has no locus standi. So when a debt is substantially disputed, the winding-up procedure is an abuse of the process of the court.

11. In New Travellers' Chambers Limited v. Cheese & Green 70 LT at 272 which was cited In re Par Excellence, Kekewich, J. held that a debt is substantially disputed if there is any reasonable ground for disputing the existence of the debt. I think there is no dispute as to the law. Both sides agree with the principles stated In re Par Excellence. The question as formulated by Bokhary, JA in the recent Court of Appeal decision in Re Safe Rich Industries Ltd. (unreported), Civil Appeal No.81 of 1994 is whether "the debt was genuinely disputed on substantial grounds". Where the parties differ is to the application of this principle to the facts.

12. Mr Ismail, for the petitioner, says that it is beyond argument that Hongkong had not performed its obligations under Clause 8(b). He submits that on its true and proper construction, Clause 8(b) required that physical possession of the goods be given to the petitioner on or before 31st March. The reasons are set out in paras.5.13 and 5.14 of his very detailed submissions. If, however, contrary to his submissions, Clause 8(b) did not require physical delivery of the goods on or before 31st March, he submitted that the company had still not performed all its obligations under Clause 8(b). The three documents delivered, namely, the Bill of Lading, the Certificate of Weight and the Certificate of Quality were insufficient. Clause 8(b) also required other documents and as an example, he suggested that it required a surveyor's report to the effect that the goods were of merchantable quality. The "missing" documents are listed in a letter from the petitioner's solicitors to the Companies' solicitors of 30th March.

13. Mr Leong for the Companies disagrees. He says that Clause 8(b) did not require physical delivery but only delivery of documents of title. Put shortly, the Company's position is that it has done all that Clause 8(b) required it to do.

14. Mr Lo for the Official Receiver submitted that the petitions were premature because the debt had not been clearly established.

15. It is apparent that the construction of Clause 8(b) is not free from difficulty. Whilst I accept that the construction put forward by Mr Ismail is a possible one, I cannot say, on reading Clause 8(b), that that clause can admit of no other construction. It would, of course, have been a different matter had the Company not delivered any document of title to the petitioner. For in those circumstances, Hongkong could not possibly contend that it had discharged its obligations under Clause 8(b).

16. On the facts stated above, I find that the debt alleged in the petitions is genuinely disputed on substantial grounds. The question whether the Company is indebted to the petitioner depends on whether the Company has discharged its obligations under Clause 8(b). That is a question which cannot be decided in a companies court.

17. Mr Ismail invited my attention to Re San Imperial Corp. Ltd. [1980] HKLR 649 at 650 where it is stated that :

"The power to strike out in limine should be exercised with great circumspection."

I do not doubt that as was stated by Rogers, J. in Re Mediavision Ltd. [1993]2 HKC 629 at 633H :

"It is a strong remedy to strike out a petition because the court drives a party from the court without giving it a hearing on the merits."

But as was stated in Mann v. Goldstein [1968]1 WLR 1091, when a debt is substantially disputed, the winding-up procedure is an abuse of the process of the court. I do not consider that in such circumstances there is any alternative but to strike out the petitions. On that ground alone, the petitions should be struck out.

18. There is, however, another factor that reinforces that conclusion. Documents of title to goods which the Company say are worth US$1,000,000.00 were retained by the petitioner's solicitors and remained in their possession at the time the petitions were presented. On those facts, I am inclined to agree with Mr Leong that even assuming the petitioner's contentions to be correct that physical delivery was required, the Companies could not be expected to make payment at the time when, for all they knew, the documents of title might not be returned. For this reason, the presentation of the petitions was premature.

19. Mr Leong had advanced a further argument to ground his application to strike out the petitions in the event of my finding against the Companies on the dispute to that point. The further argument is to the effect that s.177(1)(d) of the Companies Ordinance cannot be invoked where there is no actual evidence of the Companies inability to pay debts. In view of my conclusion on the disputed debt point, I do not propose to go into this issue.

20. For the reasons stated, I grant the application to strike out the petitions against Holdings and Hongkong. It remains only to thank Counsel for their considerable assistance.

[Submissions on Costs]

21. Having heard both parties on the question of costs, I have been given submissions by Mr Leong and I have also been referred to the Overseas Trust Bank's case. Having considered the arguments submitted by both sides, I will order, dealing first with the s.182 costs, costs on the usual party and party basis to be taxed if not agreed. Dealing with the costs of the application to strike out, I will grant costs on a common fund basis to be taxed if not agreed and the Official Receiver is to get his costs from the petitioner.