XCHRX In re I.J. LANGLEB LIMITED

1996, No. CWU 377

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING-UP)

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J U D G M E N T

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1. This is the adjourned hearing of a winding-up petition which was presented on 8 July 1996. The petition was dismissed by Order of Master Woolley dated 4 September 1996. The only matter left is the question of costs as between the Petitioner and the Company.

2. Summary judgment was granted by an Order of Master Cannon ("the Judgment") on 15 May 1996 to the Petitioner against the Company for the price of goods sold and delivered. By letters dated 23 and 29 May 1996, the Petitioner demanded payment of the amount payable under the Judgment pursuant to s.178(1)(a) of the Companies Ordinance, Cap.32. This much appears from the petition and the supporting affidavit. However, no mention was made of any of the events involving both the Petitioner and the Company between the date the Judgment was obtained and the date the petition was presented, in particular, the fact that a charging order was obtained. A chronology of events is set out below.

Chronology

1996

For present purposes, it is unnecessary to go into events subsequent to the presentation of the petition. Suffice to say that the parties are still locked in litigation.

The Charging Order Absolute

3. As noted above, the hearing on 14 June to render the Charging Order Absolute was contested by the Company. Evidence was filed on its behalf. It is apparent from the land searches exhibited at the time that the Properties were purchased in August 1990 for an aggregate consideration of $11.16 million. It is also apparent that legal charges were registered against the Properties to secure general banking facilities in favour of the Bank of East Asia totalling $9.3 million. The Company's own estimate of the value of the Properties as at June 1996 was $22.3 million. Also in evidence was a repayment schedule issued by the bank on 14 February 1996 which showed that as at 14 March 1996, the outstanding balance secured on the Properties stood at $5.72 million.

4. The Petitioner submitted that there was no satisfactory evidence that the Properties afforded adequate security : the Company's own estimate was attacked on the basis that it was not an independent professional valuation and was self-serving and that the repayment schedule was stale. Whilst the repayment schedule from the bank was issued in February 1996, assuming against the Company that no further instalments had been made after the date of that statement, the total indebtedness as at the date of the petition would still have been well under $6.5 million. If one were to disregard the repayment schedule altogether, and relied solely on the figures contained in the land searches, the maximum amount secured by the bank's legal charge was capped at $9.3 million. So far as the value of the Properties was concerned, it is apparent from the land searches that the building was constructed in Tsimshatsui in 1989/1990 and so we are dealing with a relatively new commercial building. In the absence of evidence to the contrary, I am entitled to take judicial notice of the general trend of the value of new commercial properties in Hong Kong since 1990. By 1996, it is inconceivable that the Properties being in a six year old building in Tsimshatsui would have gone down in value given that the trend has been in the opposite direction. At the very least and giving the Petitioner the maximum benefit of doubt, the Properties could not have been worth less than their 1990 values. On that basis, there was clearly ample equity left in the Properties to satisfy the Judgment and the Petitioner's submission that there was no way in which he could have known or be satisfied that there was sufficient security is simply untenable.

5. We therefore have the situation of a fully secured creditor whose charges were registered against the Properties and who therefore must have known or be deemed to have known that there were sufficient assets to meet, in full, any sum due under the Judgment.

Who should bear the costs of the winding-up petition?

6. The question which arises is not whether the Petitioner had the relevant locus standi to present a petition, but whether he should be entitled to the costs of the petition. Whilst a secured creditor may present a petition

for winding-up, (see Moor v. Anglo-Italian Bank (1879) 10 Ch D 681) it does not follow that every secured creditor who presents a petition is automatically entitled to his costs. That must depend on the circumstances.

7. Counsel for the Petitioner submitted that the only constraint imposed on a secured creditor is that he must not exercise his power of sale pending the hearing of the petition. This proposition is based on Re Cambrian Mining Company (1881) WN 125 and a footnote in Gore-Browne on Companies at 32.6.4. Unfortunately not only is that report exceedingly brief, it is particularly short on the facts. The size of the debt, the value of the property subject to the mortgage etc. are unknown. All that can be said is that an interim injunction was granted in that case to restrain the exercise of a power of sale by a mortgagee who had presented a winding-up petition until the petition was heard. In these circumstances, it would not be right to seek to extract from that case any general principle of universal application.

8. Another approach is to consider whether, had the petition proceeded to a full hearing, an order for winding-up would have been made so that the Petitioner should have the costs. As to that, the application would have been problematic for the reasons set out below.

9. First, the basis of a winding-up order is that the company is insolvent : see Cornhill Insurance Plc. v. Improvement Services Ltd. [1986] WLR 114 at 116H. In that case, an insurance company widely believed to be solvent persisted in the non-payment of an undisputed debt. Harman J. had to consider whether the defendants could properly swear to their belief in the plaintiff company's insolvency and present a petition for its winding-up. He approved and adopted the approach in Mann v. Goldstein [1968] 1 WLR 1091 where Ungoed-Thomas J. (at p.1096) stated as follows :

"When the creditor's debt is clearly established it seems to me to follow that this court would not, in general at any rate, interfere even though the company would appear to be solvent, for the creditor would as such be entitled to present a petition and the debtor would have his own remedy in paying the undisputed debt which he should pay. So, to persist in non-payment of the debt in such circumstances would itself either suggest inability to pay or that the application was an application that the court should give the debtor relief which it itself could provide, but would not provide, by paying the debt."

Counsel for the Petitioner sought to rely on that passage. But the present case differs from the Cornhill and Mann cases in one important respect and it is the fact that the Petitioner is fully secured. He has the ability through executing the Charging Order Absolute to pay himself in full out of the Company's assets, a feature that was absent in both Cornhill and Mann. It is perfectly understandable why the Company did not pay the debt : it had applied for a stay of execution of the Judgment and an application for leave to appeal out of time against that Judgment was then pending; further, the creditor was fully protected in the sense that it had a charge over assets that unquestionably exceeded the amount he was entitled to recover under the Judgment. In these circumstances, I have difficulty with the averment that the Company was insolvent.

10. Second, even in cases where section 178(1)(a) applies, the court retains a residual discretion whether or not to make a winding-up order. Considerations that would affect the exercise of that discretion include whether the Petitioner would be deprived of his legitimate expectation of being paid, whether security has been furnished for the full amount etc. See Re Amalgamated Properties of Rhodesia Limited [1917] 2 Ch.115 and Re Douglas Griggs Engineering Ltd. [1963] 1 Ch.19. On the facts, these considerations would operate against the exercise of the discretion in the Petitioner's favour.

11. It should be mentioned that the presentation of the petition gave rise to certain consequences such as the freezing of the Company's bank accounts which undoubtedly disrupted the day-to-day business of the Company and evidence has been filed to the effect that it has lost customers as a result. However, the facts are not sufficiently compelling to warrant any finding or inference as to the existence of "some collateral and sinister object" in the presentation of the petition.

12. Having regard to the circumstances of this case, I would exercise my discretion in favour of the Company and order that the costs of the winding-up petition be borne and paid by the Petitioner. I make an order nisi that such costs be on a party and party basis.

Notice to show cause

13. The Company served a notice returnable at the adjourned hearing requiring that cause be shown why an order should not be made under O.62, rr.7 and 8 in respect of costs incurred by the Company. It would appear, although it is not clear from the face of the notice, that it was directed at the solicitors for the Petitioner rather than the Petitioner himself. The basis for that application appears to be two-fold : first that the petition ought never to have been presented, and second that full disclosure should have been made regarding the Charging Order Absolute. Counsel for the Company referred to Peter Oswald Scales & Anor. v. William H.H. Wong (1983) HKLR 110 and Re Fuliham Investment Ltd. (1985) 2 HKC 202 for the proposition that the court would set aside an order where there has been material non-disclosure. The latter case concerned the setting aside of an order for the appointment of a provisional liquidator in a winding-up application on the ground of material non-disclosure. But in the present case, the question is not one of setting aside any order that had already been obtained but whether the petition should have been presented at all.

14. Costs orders against solicitors personally are rare and are only made in clear cases where the conduct in question amounts to a serious dereliction of duty : see Ho Lee Man v. Wong Wai Kai (No.2) [1993] 1 HKC 193. Aggressive tactics do not automatically translate into a dereliction of duty. In my judgment, the facts do not warrant such an order being made. Accordingly, the notice to show cause is dismissed. I make an order nisi that the Petitioner's solicitors be entitled to the costs of and occasioned by the notice to show cause.