XCHRX Re UDL Contracting Ltd.

HCCW762/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO.762 OF 1999

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D E C I S I O N

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1. This is an application under section 181(b) of the Companies Ordinance for an order that all further proceedings in the arbitration between Apple Daily Printing Limited ("ADPL") and UDL Contracting Limited ("the Company") be restrained until the conclusion of the hearing of the petition presented on 24 August 1999 to wind up the Company or until further order. The application was made ex parte on notice to ADPL and first came before me on 10 December 1999. A temporary restraining order was granted pending the substantive hearing of the application on 17 December and directions were given for the filing of evidence by the parties. At the conclusion of the hearing on 17 December, judgment was reserved and the temporary restraining order was further extended until the handing down of this decision.

Jurisdiction

2. The substantive legal issue that falls for determination is whether the court has a jurisdiction under section 181(b) to restrain further proceedings in an arbitration. Section 181 provides :

"181. Power to stay or restrain proceedings against company

At any time after the presentation of a winding-up petition and before a winding-up order has been made, the company or any creditor or contributory may-

(a) .....

(b) where any action or proceeding against the company is pending in any court or tribunal other than the Court of First Instance or the Court of Appeal, apply to the Court of First Instance to restrain further proceedings in the action or proceeding,

and the court to which application is so made may, as the case may be, stay or restrain the proceedings accordingly on such terms as it thinks fit."

Although in his written submissions, counsel for ADPL suggested that it was unclear whether an arbitration falls within the definition of "action or proceeding" for the purposes of section 181(b), this was not further pursued in his oral submissions.

3. In Re Vassal Pty Ltd (1983) 8 ACLR 683, it was held that an arbitration is a proceeding. But there is a dicta in the House of Lords' decision in Herbert Berry Associates Ltd v. Inland Revenue Commissioners [1978] 1 All ER 161 to the effect that 'proceeding' involves the invocation of the jurisdiction of a court. See per Lord Simon at 170 a-b. Neither of those decisions is binding on this court.

4. It is to be noted that the Hong Kong provision is worded a little differently from the parallel English provision in that it has the additional words "in any court or tribunal". That would suggest that 'proceeding' is not to be confined to court proceedings. Further as pointed out by Kelly J in Re Vassal, 'proceeding' has been given a wider meaning in the cases referred to in his judgment and the view of Lord Simon appears to stand alone. 'Action or proceeding' is also used in section 186. As will become apparent, arbitrations are encompassed in the automatic stay imposed by that section. The same meaning must therefore be accorded to section 181(b). For all these reasons, the wider interpretation is to be preferred. In my judgment, an arbitration is a 'proceeding' for the purposes of section 181(b) of Cap.32.

5. Counsel for ADPL implicitly accepted that 'proceeding' includes arbitrations. His submissions turned solely on the effect of section 2AA of the Arbitration Ordinance, Cap.341 which provides as follows :

"2AA. Objective and principles of Ordinance

(1) The object of this Ordinance is to facilitate the fair and speedy resolution of disputes by arbitration without unnecessary expense.

(2) This Ordinance is based on the principles that-

(a) subject to the observance of such safeguards as are necessary in the public interest, the parties to a dispute should be free to agree how the dispute should be resolved; and

(b) the Court should interfere in the arbitration of a dispute only as expressly provided by this Ordinance."

It was submitted that this provision effectively displaces section 181 of Cap.32 if (i) an arbitration is on foot and (ii) the court is asked to interfere. If those two elements exist, then the court may interfere only within the confines of the provisions of Cap.341 itself.

6. The issue is whether section 181 is so displaced.

7. ADPL's submission involves according to section 2AA of Cap.341 a supremacy amongst the ordinances of Hong Kong. If its true effect is as suggested, it will be an 'overriding' provision. Is such an interpretation justified?

8. Section 2AA states the "objective and principles of ordinance". The object is clear : "to facilitate the fair and speedy resolution of disputes by arbitration". Subsection (2) sets out the principles applicable. The first is that whilst the parties to a dispute are to be accorded freedom to decide how the dispute is to be resolved, that freedom is nevertheless subject to public interest safeguards. The second of the principles which is set out in paragraph (b) of subsection (2) viz. that the court should interfere only as expressly provided by Cap.341, must be read as complementing the principle set out in paragraph (a) and it is in that context, i.e. how the dispute between the parties is to be resolved, that interference should be restricted. The decision of the Court of Appeal in SOL International Ltd v. Guangzhou Dong-Jun Real Estate Interest Co. Ltd [1998] 3 HKC 493 is entirely consistent with the approach set out above. It is to be noted that the question whether section 2AA displaces other ordinances such as section 181 of Cap.32 did not arise for determination. Accordingly the Court of Appeal's observations as to the effect of section 2AA must be read with that in mind.

9. Turning to section 181 of Cap.32, the first thing to observe is that an application under that section may be made by any creditor, contributory or the company. In other words, the application may be made by persons other than the parties to the arbitration. There is nothing in section 181 itself to suggest that the section does not apply to arbitrations. Certainly no amendment was made to this section when section 2AA of Cap.341 was added in 1996 to exclude arbitrations from its ambit. As stated in Re Oak Pitts Colliery Co. (1882) 21 Ch.D.322 at 327, the purpose of section 181 is "to maintain the status quo, to preserve the company's assets and put all unsecured creditors on an equal footing". This provision has to be read together with section 186 which provides for an automatic stay when a winding-up order has been made or a provisional liquidator appointed unless the court otherwise orders. Indeed, section 181 and section 186 complement each other. They share a common purpose save that the burden is different : prior to a winding-up order being made or provisional liquidator appointed, the burden is on the applicant to justify a stay.

10. There is little doubt but that section 186 extends to arbitrations. When a provisional liquidator assumes office, he takes over the control of the company and its assets. If proceedings by and against the company are to be continued, leave of the court must be obtained. In other words, no expenditure may be incurred without such leave. If ADPL's submission regarding the effect of section 2AA is correct, it would mean that arbitrations to which a company is party remain unaffected by the appointment of a provisional liquidator. That plainly is not the case since ongoing proceedings need to be funded and it is the provisional liquidator who is in control. Carried to its logical extreme, ADPL's submission would mean that the court must refrain from making winding-up orders since a compulsory winding-up order would 'interfere' with arbitration proceedings. Such a proposition does not withstand scrutiny.

11. For the reasons set out above, the jurisdictional point taken by ADPL is unquestionably without merit.

12. Having reached the conclusion that the court does have jurisdiction under section 181 to restrain further proceedings in the arbitration, the next question is whether the discretion ought to be exercised in favour of the applicant. By way of background, it is necessary to set out the salient events and I do so below.

Chronology of events

13. The arbitration commenced in September 1998. Pleadings closed on 23 August 1999. Meanwhile, each party made a payment as security for the arbitrator's costs. The Company was also required to pay $500,000 as security for the claimant's costs in the counterclaim made by the Company. The Company's counterclaim is for $190 million and it is accepted that it substantially exceeds the amount of ADPL's claim.

14. A winding-up petition was presented the day after pleadings closed based on non-compliance with a statutory demand founded on a judgment debt of approximately $900,000. It is relevant to mention at this stage that a winding-up petition was presented against the Company's holding company UDL Holdings Limited ("Holdings") on 24 October 1998. Since that date, various winding-up petitions have been presented against Holdings' subsidiaries. Those petitions have been adjourned pending a restructuring which affects not only Holdings but a number of its subsidiaries including the Company. On 24 September 1999, at a chambers hearing regarding the progress of the restructuring, the need for validation orders for monies to be expended on arbitrations involving subsidiaries that were subject to winding-up petitions was raised.

15. The petition in respect of the Company did not come before the master for a hearing until 10 November, 11 weeks after its presentation. During those 11 weeks, various events occurred in the arbitration.

16. Shortly prior to the presentation of the petition, the question of having preliminary issues determined in the arbitration was specifically raised by ADPL. There is a conflict of evidence as to whether this question had in fact been raised by the Company's representatives in December 1998. Be that as it may, the Company was agreeable to the determination of two or at most three matters as preliminary issues. ADPL's proposed list was substantially more extensive. On 18 October 1999, the arbitrator agreed with ADPL's position on preliminary issues. Notwithstanding the Company's objection to the scope and range of the preliminary issues, on 25 October 1999, the arbitrator directed that the preliminary issues as proposed by ADPL be tried. At the same time, he ordered discovery to be given by 22 November 1999. These are collectively referred to as "the Order for Directions No.8". It is the Company's position that the discovery ordered amounted to general discovery rather than specific discovery. That is disputed by ADPL. On 1 November 1999, the Company applied to the arbitrator for a stay of the arbitration.

17. On 10 November 1999, the arbitrator confirmed the position and required a deposit of $300,000 from each of the parties. For a period of about two weeks commencing on 16 November 1999, the Company's legal representative was indisposed with a serious eye infection. On 1 December 1999, the arbitrator advised that unless payment was received, he would not consider the Company's stay application. Three days later, on 4 December 1999, the arbitrator changed his mind and informed the Company that he would hear the stay application after all. Then on 7 December 1999, he issued a peremptory order to the effect that if his discovery orders were not complied with by 10 December, he proposed to make a default award against the Company in respect of its Defence and Counterclaim.

18. It was in these circumstances that the Company's application came before me on 10 December.

Discretion

19. The hearing of the preliminary issues is due to commence on 10 January. Ten days have been set aside which are now thought to be insufficient and if so the matter will be part-heard. It is the Company's position that it is insolvent and can no longer fund the arbitration. It cannot afford legal representation for the January hearing. Further, unless the arbitration is stayed, the Company will be in breach of the peremptory order and the likelihood is that it will not be allowed to pursue its counterclaim. So not only will the Company not be in a position to pursue its counterclaim, it will not even be in a position to properly defend the claim. The prejudice that would be caused to the creditors is evident : a litigant who is unrepresented is plainly at a disadvantage. It may result in an award against the Company which would not otherwise arise had it been in a position to properly defend itself and to assert the counterclaim. An 'unmeritorious' debt would augment the Company's liabilities and result in creditors receiving less than they otherwise would, whether under the scheme of arrangement or upon the Company's liquidation. It is also the Company's position that but for the lack of funds, it would institute removal proceedings against the arbitrator for alleged misconduct in requiring security for costs of the Company's counterclaim and in issuing the Order for Directions No.8. For present purposes, it is unnecessary to consider the allegations made against the arbitrator.

20. ADPL submitted that the discretion ought not to be exercised in favour of the Company for a number of reasons. It complained that the Company has never condescended to particulars as to its alleged impecuniosity or inability to finance the arbitration. On 17 August 1999, the Company's legal representatives wrote to ADPL's solicitors in the following terms :

"The financial position of UDL Contracting Ltd has continued to strengthen. The company's operational activities were wound down in late 1998 and as a result its operational expenses have been reduced to a negligible level. Virtually the only significant expense which the company currently bears is legal fees incurred in pursuit of its debts and outstanding monies. Whilst cutting operational expenses to a negligible level the company has continued to collect payments due and to pursue outstanding debts and monies and hence a positive cashflow has been maintained and is likely to continue for the foreseeable future ... The Respondent has never itself been in liquidation or under threat of such proceedings..."

A letter in similar terms was sent on 23 August 1999 to the arbitrator. The winding-up petition was presented the following day.

21. In the light of ADPL's criticisms, the Company sought and obtained leave to exhibit its management accounts. The 4th affirmation of Li Kam Wa, a director of the Company, which exhibited the management accounts of the Company prepared for the month ending 30 November 1999 as well as a cash flow statement also of that date was filed during the afternoon of the hearing. In fact what was exhibited appears to be a precis of the management accounts. They show that the Company's liabilities exceed its assets by $284 million after the making of provisions. So far as the Company's cash flow is concerned, it has but a nominal amount of cash in its bank account. Plainly the Company has no funds with which to finance the arbitration.

22. Whilst it is difficult to understand how the letters of 17 and 23 August came to be written given the financial condition disclosed in these accounts, I do not exclude the possibility that there may be an explanation for this. In any event, there is no denying that the Company's finances is presently in a parlous state. There is also the fact that the Group is undergoing a restructuring and is not in a position to lend assistance to the Company. Nor is it possible given the petition for the Company to raise finance from third parties. I am therefore satisfied that the Company is indeed impecunious.

23. ADPL also submitted that the fact that the Company cannot afford to be legally represented at the arbitration does not mean that it will not get a fair hearing. Further, having applied for the same relief from the arbitrator, the Company ought not be permitted to 'forum shop' by seeking the same relief from the court simply because it does not like the approach of the arbitrator.

24. In the exercise of the court's discretion under section 181(b) the test is whether substantial injustice will result if the arbitration is not stayed. It is inarguably in the interest of the Company's creditors and contributories that ADPL's claim be properly defended and the counterclaim asserted. Against that I have to balance any potential prejudice to ADPL.

25. A stay will not have the effect of eliminating ADPL's claim : that will be adjudicated sooner or later since the stay that is being sought is not permanent but is of limited duration. It is presently anticipated that the restructuring process would be completed by March or April. In practical terms, this means an adjournment of no more than two to three months since it is accepted that the hearing scheduled for January is likely to go part-heard. If the scheme is sanctioned by the court, the stay would cease. The arbitration can then resume. In this connection, it ought to be mentioned in that under the draft scheme of arrangement, a sum of $2 million out of interim financing obtained of $5 million has been set aside for arbitration expenses involving the subsidiaries. The court was informed that the bulk of the $2 million has already been expended. However, if the draft scheme were sanctioned, there is provision under clause 22(d) for the Scheme Administrator to employ part of the Scheme Funds to fund arbitrations if he determines that to be in the best interest of the Scheme Creditors as a whole. If the Scheme either does not proceed as anticipated or is not sanctioned, then a winding-up order would seem inevitable. In that eventuality, if the liquidator were to consider that the Company does have a sound counterclaim, he may seek funding from the creditors to resolve the dispute.

26. In all the circumstances, it would be appropriate for the court to exercise its discretion in favour of the Company.

27. The order made on 10 December 1999 and extended on 17 December is to be further extended until the conclusion of the hearing of the petition to wind up the Company. Costs are to follow the event and I make an order nisi to that effect.