IN RE THE SHOP CLOTHING LTD. t/a THEME

HCCW 927/98

-----------------------

H E A D N O T E

-----------------------

Companies winding-up - creditor's petition - consent summons by Petitioning Creditors and Company for dismissal of the petition - whether the court has any discretion or is bound to dismiss the petition.

HCCW 927/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.CW 927 OF 1998

------------

------------

-------------------------

J U D G M E N T

-------------------------

1. This is the adjourned hearing of a creditors' petition and an application by consent by Charris Company Limited, Mullein Company Limited, Wettersley Company Limited, Brightsmart Limited and Excellent Base Limited ("the Petitioning Creditors") and The Shop Clothing Limited trading as "THEME" ("the Company") that, inter alia, the petition to wind up the Company be dismissed. The consent summons was submitted to the court on 6 March 1999, two days prior to the adjourned hearing of the winding-up petition. No order was made on the consent summons and it came on for hearing at the same time as the winding-up petition.

2. The petition is a creditors' petition based on a judgment debt dated 29 September 1998. A statutory demand was served on 17 November 1998 for the judgment sum of $575,185.30 together with interest. No payment was made within 21 days thereafter and on 28 December 1998, the Petitioning Creditors presented the petition to wind up the Company.

3. At the adjourned hearing on the winding-up petition, the Petitioning Creditors acknowledged that the judgment debt had not been paid. In fact, at the hearing of the petition before the Master on 3 March 1999, the Petitioning Creditors sought a winding-up order which was opposed by the Company on the ground that it wish to proceed by way of a voluntary winding-up, a meeting having been convened for 15 March 1999. Between 3 March and 6 March, the Petitioning Creditors apparently had a change of heart for reasons which are not readily apparent. Counsel for the Petitioning Creditors failed to proffer any reasons at the hearing.

4. An EGM has been convened for 15 March 1999 at 2 p.m. for the members of the Company. The stated purposes are :

"(1) To consider, and if thought fit, to pass the following resolutions:-

SPECIAL RESOLUTION

1. 'That the Company be wound up voluntarily.'

ORDINARY RESOLUTIONS

2. 'That Mr.T.W. LAW and Mr.Jasper MAN of Charles Chan, Ip & Fung CPA Limited (in association with Arthur Andersen) be appointed as Joint and Several Liquidators of the Company for the purpose of such winding up.'

3. 'That the statement of the Company's assets and liabilities and a list of creditors as at 31st December, 1998 be received.'

(2) Subject to the passing of the special and ordinary resolutions referred to above to consider, and if thought fit, to appoint members of the Committee of Inspection."

A creditors' meeting has also been convened for the same day at 2:30 p.m. The stated agenda is :

"1. To consider a special resolution for winding up passed by the Company on 15th March, 1999.

2. To consider and receive a statement as to the affairs of the Company together with a list of creditors of the Company and the estimated amount of their claims.

3. To nominate a person to be liquidator for the purpose of winding up the affairs and distributing the assets of the Company.

4. To appoint members of the Committee of Inspection, if appropriate.

5. To consider the appointment of members of the liquidation committee appointed by the Company."

Both notices were dated 1 March 1999.

5. The Company has filed an affidavit by one of its directors opposing the petition on the ground that "the directors believe it to be in the best interest of the general body of creditors and contributories that the Company be wound up by means of a creditors' voluntary winding-up as opposed to a compulsory winding-up as the latter will be more cumbersome procedurally and there will be a saving of costs and expenses". There is a reference to the fees payable under the Companies (Fee and Percentages) Order.

6. It is to be noted that the notice convening the EGM does not accord with the stated intention in that the resolution proposed to be passed at the EGM is to put the Company into a members' voluntary liquidation rather than a creditors' voluntary liquidation. Section 228(1) of the Companies Ordinance provides as follows :

"Circumstances in which company may be wound up voluntarily

(1) A company may be wound up voluntarily-

(a) .....

(b) if the company resolves by special resolution that the company be wound up voluntarily;

(c) if the company resolves by special resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up;

(d) ..."

For a creditors' voluntary winding-up, the appropriate resolution is in the terms of paragraph (c) rather than (b). See 6 Halsbury's Laws of Hong Kong at 93.1393, note 6.

7. At the adjourned hearing of the petition, the court posed the question as to why it should not make a compulsory winding-up order there and then.

8. Counsel for the Company submitted that where, as in the present case, the parties, i.e. the Petitioning Creditors and the Company agree, the court has no discretion in the matter and must make an order dismissing the petition. That appears to be the position in Australia where it has been held that the court must dismiss a petition if all parties to it ask for dismissal. There are two Australian authorities that are relevant. In Re Laverton Nickel NL (1979) 3 ACLR 945 was a case where a petition was presented by an inspector appointed under Part VIA of the Companies Act 1961 of New South Wales, i.e. a public interest petition. It was issued because of the identity of the directors of the company. After agreement had been reached with the company that one of the directors would resign and the others would offer themselves with re-election, the Attorney General considered it was no longer in the public interest that a winding-up order should be sought. The petitioner therefore sought an order by consent of the company that the petition be dismissed. Needham J concluded that prior to the 1961 Companies Act at least, the authorities made it clear that the petitioner was dominus litis and could have his petition dismissed whenever he felt it proper to do so. (Re Home Assurance Association Limited (1871) 12 Eq.59 appears to give some support to the former position but the short report is less than satisfactory.) There were interlocutory proceedings on foot by various parties that had entered into conditional contracts with the provisional liquidator pending as to whether such conditional agreements had to be approved by the court and whether provisional liquidator would be justified in entering into a firm contract with one of the parties. Three of the contracted parties sought to adjourn the dismissal until after the conclusion of the interlocutory matters. The judge in considering the question whether where two parties to the proceedings have agreed that the proceedings should be dismissed on certain terms, the court has any power to deny the parties the right to terminate that litigation, for example by delaying the dismissal, held :

"...There is, as is well known, a provision in the rules for the substitution of a petitioner where one petitioner wishes to withdraw or have dismissed his petition. Such a substitution may well involve some delay in the dismissal of the petition, but I think that is a particular case which does not represent a general principle that a court may, of its own motion, decline to enter an order or judgment when the only parties before it which have a right to be engaged in that litigation consent to that order being made.

Accordingly, I think that I must, as the parties have agreed, dismiss this petition."

In Re Alexanders Securities Ltd. (1983) 2 Qd R 629 is the other relevant Australian decision. Where the debt with respect to which a winding-up petition had been presented had been paid and the creditor was agreeable to his petition being dismissed and no person seeking to be substituted as petitioner, it was held that the petition should be dismissed notwithstanding that the company was not shown to be solvent.

9. Counsel for the Company relied heavily on the passage cited from Laverton Nickel. For my part, I doubt the correctness of the proposition that the court has no residual discretion as a statement of general principle, much less that it reflects the position under Hong Kong law. The reasons underpinning the proposition of Needham J are unclear. The only reason that can be discerned is the New South Wales rule providing for substitution of creditor or contributory for a withdrawing petitioner. Whether or not that rule is identical to the Hong Kong rule, having considered the Hong Kong rule, I can find nothing in it that would curtail the wide discretion vested in the court by Cap.32. Moreover, the facts in Laverton Nickel were somewhat special : it was a public interest petition and the pending interlocutory matters did not appear to impinge on the matters arising in the petition. Re Alexander Securities Ltd. is also distinguishable. Although it also concerned a creditor's petition, the petitioning creditor had been paid off which is not the case here.

10. Once the jurisdiction of the Companies Court is engaged by the presentation of a creditor's petition, different considerations appear to me to apply. It is in nature different from an ordinary action which would concern only the parties to it in that the public interest is affected if an insolvent company continues to trade. I can see no good reason why a winding-up order should not be made. The undisputed judgment debt remains unpaid. The Company acknowledges that it is insolvent. Moreover, no creditors appeared at the hearing of the petition to oppose the petition. The only opposition came from the Company.

11. The Company asserts that the intention is to put the Company into a creditors' voluntary liquidation, that being the purpose of the meeting convened for 15 March. However, as noted above, the resolution proposed is one pertaining to section 228(1)(b) (a members' voluntary winding up) rather than section 228(1)(c) (a creditors' voluntary winding up); second, the notice for the meetings is inadequate since for a special resolution 21 days' notice is required. As (which is acknowledged) the Company is not in a position to file a declaration of solvency pursuant to section 233, the proposed liquidation cannot be a members' voluntary winding-up. See 6 Halsbury's Laws of Hong Kong at 95.1388, 95.1389 and 95.1393. It would therefore appear that the Company's tackle is sadly out of order and that the proposed resolution which, in any event, is not the appropriate resolution, is unlikely to achieve what the Company intends to achieve. Moreover, to the extent that the Company invites the court to assume that the resolution would be passed, in my judgment, the court should not second-guess what may or may not transpire at the meetings convened for 15 March, assuming for present purposes that the meetings are properly convened.

12. To summarize the Company's position, it agrees that the Company ought to be wound up save that it believes that it should be wound up voluntarily and not under the supervision of the court. There is no evidence as to the wishes of the creditors (as opposed to the wishes of the directors), much less that the creditors or a majority of them independant of the Company oppose any winding-up by the court. Normally the decisive factor is the view of the majority in value of the creditors unrelated to the company : 'It is after all their money' : see Re William Thorpe and Son Ltd. (1988) 5 BCC 156 at 158. If the court were to make a winding-up order on the present petition and at the meeting of creditors to be convened pursuant to the provisions of Cap.32 it were to transpire that the creditors wish the winding-up to proceed as a creditors' voluntary winding-up, they may avail themselves of the provisions in section 209A of Cap.32 and apply to convert the compulsory liquidation into a creditors' voluntary liquidation. This provision is unique to Hong Kong : see Re Peregrine Fixed Income Ltd. (In Liquidation) [1998] 4 HKC 151, 153I.

13. In my judgment, where, as in the present case, the Petitioning Creditors' debt has not been satisfied and the Company is insolvent, the court is not compelled to give effect to the wishes of the Petitioning Creditors and the Company to dismiss the petition. The court retains a discretion and, on the facts, the proper exercise of the discretion is to make an order to wind up the Company under Cap.32 and I so order.

14. There is to be an order nisi for costs in favour of the Petitioning Creditors.