THE GRANDE HOLDINGS LTD v. JOINT AND SEVERAL SCHEME ADMINISTRATORS OF THE SCHEMES OF ARRANGEMENT BETWEEN THE SCHEME CREDITORS AND THE GRANDE HOLDINGS LTD (IN LIQUIDATION IN HONG KONG)

HCMP 2369/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2369 OF 2017

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J U D G M E N T

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INTRODUCTION

1.  By the plaintiff’s originating summons issued on 24 October 2017 (“the Originating Summons”), the plaintiff seeks an injunction to restrain the defendant from presenting any petition for the winding of the plaintiff based on a statutory demand dated 11 October 2017 (“the Statutory Demand”) for a sum of HK$5,342,497.13 (“the Alleged Debt”) said to represent the Scheme Administration Costs of the defendant arising from a scheme of arrangement (“the Scheme”) between the plaintiff and its creditors sanctioned by the court on 15 April 2016.

2.  The injunction is sought by the plaintiff on the following grounds:-

(1)  there is a bona fide dispute of the Alleged Debt on substantial grounds; and

(2)  the plaintiff has reasonably secured or compounded for the Alleged Debt.

BACKGROUND FACTS

3.  For the purpose of disposing of the present application, the following brief summary of the facts shall suffice.

4.  On 12 September 2013, the plaintiff was ordered to be wound up compulsorily upon the petition of a creditor, Sino Bright Enterprises Ltd (“Sino Bright”), presented to the High Court on 31 May 2011 in HCCW 177/2011. Messrs Fok Hei Yu and Roderick John Sutton (“the Former Provisional Liquidators”) were appointed as the plaintiff’s provisional liquidators in those proceedings.

5.  On 14 December 2015, the plaintiff, the Former Provisional Liquidators and others entered into an amended restructuring agreement, under which it was agreed, inter alia, that the restructuring costs would be capped at HK$45 million, and such costs were to be provided as to HK$20 million by Sino Bright and HK$25 by the plaintiff, both to be paid into court.  It is not in dispute that those sums were duly paid, or treated as having been duly paid, into court by Sino Bright and the plaintiff respectively (“the Monies in Court”).

6.  By an order dated 15 April 2016 made in HCMP 300/2016, Mr Justice Harris approved a scheme of arrangement upon the terms set out in the Schedule thereto (ie, the Scheme).

7.  The Scheme expressly named Messrs Yeung Lui Ming Edmund and Darach E Haughey as the “Scheme Administrators”.  There are also express provisions in the Scheme relating to payment of the “Scheme Administration Costs”.  It is not necessary for me to examine those provisions in detail because it is accepted by the defendant that, upon the true construction of the terms of the Scheme, the Scheme Administration Costs are to be paid out of the Monies in Court (see paragraphs 7 and 8 of Mr Chain’s skeleton submissions on behalf of the defendant dated 14 December 2017).

8.  By another order dated 9 May 2016 made by Mr Justice Harris in HCCW 177/2011, the winding up of the plaintiff was permanently stayed with effect as of and from the completion of the Scheme.

9.  Pursuant to the Scheme, an engagement letter dated 9 May 2016 (“the Engagement Letter”) was signed by one of the Former Provisional Liquidators (Mr Fok Hei Yu) on behalf of the plaintiff and one of the Scheme Administrators (Mr Edmund Yeung) on 11 May 2016.  Under the Engagement Letter, Deloitte Touche Tohmatsu (“Deloitte”), the firm of the Scheme Administrators, was engaged by the plaintiff to provide advisory services in respect of the Scheme.

10.  By a letter to the plaintiff dated 6 July 2016, the Scheme Administrators noted that the restructuring of the plaintiff had been completed, and sought payment of the total outstanding sum of HK$5,342,497.13 by way of Scheme Administration Costs.

11.  The Former Provisional Liquidators refused, however, to accede to the plaintiff’s requests that the said Scheme Administration Costs should be paid out of the Monies in Court.  On 29 May 2017, the plaintiff issued a summons (“the Payment Out Summons”) in HCCW 177/2011 seeking an order that a sum of HK$4.5 million be paid out of the Monies in Court to Deloitte in settlement of the plaintiff’s liability for the fees, costs and expenses incurred in accordance with the Engagement Letter.  At the hearing of the Payment Out Summons on 14 September 2017, the Former Provisional Liquidators objected to the relief sought by the plaintiff.  The Payment Out Summons has since been fixed to be heard on 30 January 2018.

12.  In the meantime, on 11 October 2017, the defendant issued the Statutory Demand on the plaintiff demanding for payment of the Alleged Debt within 21 days.

13.  On 24 October 2017, the plaintiff issued the present application seeking an injunction to restrain the defendant from presenting any petition for the winding of the plaintiff based on the Statutory Demand and/or the sum of HK$5,342,497.13 claimed therein.

APPLICABLE PRINCIPLES

14.  The principles governing an application for an injunction to restrain the presentation of a winding-up petition are well settled.  In China Health Group Limited v Li Hong Holdings Limited, HCMP 2593/2016 (with Reasons for Judgment handed down on 29 March 2017), at paragraphs 26 to 31, I summarized the relevant principles as follows:-

(1) The court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of the court’s process.

(2) It is an abuse of process to present a winding-up petition based on a claim of which there is a bona fide dispute on substantial grounds.

(3) The threshold for resisting a petition (requiring proof of a bona fide defence) is higher than that for resisting an application for summary judgment (requiring proof of a fair probability of establishing a bona fide defence), but the difference between the two tests is, in most cases, likely to be more a matter of semantics than substance.

(4) Petitions are not meant for the purpose of debt collection and the winding-up jurisdiction of the court would be exercised only in clear cases.  Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition.

(5) The onus is on the company to put forward credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at the trial.

THERE IS A BONA FIDE DISPUTE OF THE ALLEGED DEBT ON SUBSTANTIAL GROUNDS

15.  On behalf of the plaintiff, Mr Bernard Man, SC submits that there is a bona fide dispute of the Alleged Debt on substantial grounds, namely:-

(1)  upon the true construction of the relevant terms of the Engagement Letter, the plaintiff is not liable to pay the Alleged Debt other than by way of the Monies in Court; and

(2)  further or alternatively, the plaintiff is not liable to pay the Alleged Debt because one of the contractual requirements stipulated in the Engagement Letter for the plaintiff’s liability to arise has not been satisfied.

16.  I shall first deal with the second ground relied upon by the plaintiff to contend that it is not liable to pay the Alleged Debt.  In the Engagement Letter, it is expressly stipulated as follows:-

“For the avoidance of doubt, the fees charged by [Deloitte] shall be subject to the approval by the Scheme Creditors’ Committee (as defined under the Schemes)” (“the Approval Condition”).

17.  The following provisions in Part 2 of the Scheme relating to the Scheme Creditors’ Committee are relevant for the present purpose:-

“11. A Scheme Creditors’ Committee shall be formed in respect of … the Hong Kong Scheme as soon as practicable after the Effective Date. The Scheme Creditors’ Committees shall each comprise of three members …

12. The quorum for each meeting of the Scheme Creditors’ Committee shall be two members present in person or by proxy. The Scheme Creditors’ Committee shall act in the best interests of the general body of Scheme Creditors. Any decision shall be by a majority of those present and in the case of an equality of votes, the member with the Admitted Claim of the highest value shall hold a casting vote.

13. The Scheme Creditors’ Committees shall be responsible for reviewing and approving any Scheme Administration Costs…”

18.  The defendant accepts that satisfaction of the Approval Condition is a contractual requirement for the plaintiff’s liability to pay the Scheme Administration Costs to arise (see paragraph 34 of Mr Chain’s skeleton submissions).

19.  It is the defendant’s evidence that: (i) one member of the Scheme Creditors’ Committee (namely, ASM Fund) signed a resolution of the Scheme Creditors’ Committee approving the Scheme Administrators’ Outstanding Fees of HK$5,342,497.13 in full, and (ii) another member of the Scheme Creditors’ Committee (namely, Sino Bright) signed a similar resolution of Scheme Creditors’ Committee approving the Scheme Administrators’ Outstanding Fees in the discounted amount of HK$4,500,000 (see paragraph 18 of Mr Glen Ho’s affirmation filed on 17 November 2017).  It would appear, however, that the third member of the Scheme Creditors’ Committee (namely, McVitie) did not sign any resolution approving any part of the Scheme Administrators’ Outstanding Fees.

20.  In such circumstances, it seems to me to be clear that neither the full amount of HK$5,342,497.13, nor the discounted amount of HK$4,500,000, by way of Scheme Administration Costs has been approved by the Scheme Creditors’ Committee.

21.  Mr Chain argues that (i) the Engagement Letter does not specify or require that the form of approval from the Scheme Creditors’ Committee must be given through a resolution passed at a meeting, (ii) Clause 13 of Part 2 of the Scheme does not preclude such approval being given by a majority in writing, and (iii) Clause 13 can be read distinctly from Clause 12 which provides for the quorum and procedures in a meeting, but does not provide that approvals can only be given by the Scheme Creditors’ Committee via a meeting.

22.  I do not accept these submissions.  The provision in the Engagement Letter stating that “the fees charged by [Deloitte] shall be subject to the approval by the Scheme Creditors’ Committees (as defined under the Schemes)” is plainly intended to be read together with the terms of the Scheme, including in particular Clauses 11 to 13 of Part 2 thereof, which make express provisions regulating how decisions are to be made by the Scheme Creditors’ Committee.  I accept that an unanimous written resolution of the three members of Scheme Creditors’ Committee would probably suffice even without a meeting, but there is no such unanimous written resolution in the present case.  I consider, therefore, that the Approval Condition has not been satisfied.

23.  On behalf of the defendant, Mr Chain further argues that the plaintiff has unequivocally waived the Approval Condition by seeking extensions of time to pay, instead of disputing its liability to pay.  For this purpose, Mr Chain relies on the exchange of emails between Mr Binney (a director and CFO of the plaintiff) and the defendant between 31 May 2017 and 13 June 2017, as well as the plaintiff’s response to the Statutory Demand.  However, for a waiver of right by election to arise, it is a prerequisite that “the party making the election must first be aware of the facts which have given rise to the existence of his right” (see Large Land Investments Ltd v Cheung Siu Kwai [2003] 1 HKLRD 313, at paragraph 15(2) per Yuen JA, with whom the other members of the Court of Appeal agreed).  In the present case, the issue of waiver was first raised by the defendant in Mr Chain’s skeleton submissions dated 14 December 2017.  There is therefore an absence of evidence on the plaintiff’s state of knowledge of the relevant facts, namely, that only two of the three members of the Scheme Creditors’ Committee signed resolutions approving the Scheme Administrators Costs (for different amounts), at the relevant time.  In this regard, it is relevant to note that, in the Statutory Demand, the defendant asserted, incorrectly in my view, that “the requirement that the Scheme Creditors’ Committee approve the Scheme Administrators’ fees, costs and expenses has been fulfilled and therefore the same has been due and payable in full by the [plaintiff]”.  The fact that only a majority the Scheme Creditors’ Committee approved of a part of the Scheme Administrators’ Outstanding Fees first came to light, it would appear, in Mr Glen Ho’s affirmation filed on 17 November 2017.

24.  In an earlier decision given by me on 18 December 2017 refusing the defendant’s application for an abridgment of time so that its originating summons (“the Supplementary Originating Summons”) taken out on 14 December 2017 (seeking, inter alia, a substantive determination of the plaintiff’s liability to pay the amount of HK$4,500,000 by way of Scheme Administration Costs) could be heard together with the Originating Summons on 18 December 2017, I stated that:-

“It is not necessary for me to decide whether paragraph 2 of the Supplementary Originating Summons relating to the liability issue should be heard today, because one of the matters to be considered in respect of that issue is whether the plaintiff has waived certain contractual requirement to be met for the defendant to be paid their fees, and Mr Chain accepts that the question of waiver entails a consideration of the plaintiff’s state of knowledge which requires evidence to be adduced but no evidence has yet been filed by the parties for the purpose of the Supplementary Originating Summons.”

25.  In the aforesaid circumstances of this case, I do not consider that it is open to the defendant to rely on the issue of waiver for the purpose of resisting the plaintiff’s application for injunction.  I am also not minded to permit further evidence and submissions to be filed on the issue of waiver as proposed by Mr Chain towards the end of the hearing on 18 December 2018, for two reasons:-

(1)  admitting further evidence on the plaintiff’s state of knowledge of the relevant facts at the relevant time may simply lead to a dispute of fact which would not assist the defendant, because (a) the threshold for resisting a winding up petition based on a statutory demand is simply proof of a bona fide defence, (b) a petition would generally be dismissed where oral evidence is required to decide a real and substantial dispute of fact, (c) it is an abuse of process to present a petition based on a statutory demand where there is a bona fide defence to that demand or where the validity of that demand can only be determined after hearing oral evidence on a real and substantial dispute of fact, and (d) an injunction may be granted to restrain the presentation of such petition; and

(2)  the issue of waiver can be fully ventilated when the court hears the defendant’s Supplementary Originating Summons.

26.  In all, I am of the view that the Approval Condition has not been satisfied such that there is clearly a bona fide dispute of the Alleged Debt on substantial grounds.  Having reached this conclusion, it is not necessary for me to consider the others grounds raised by Mr Man on behalf of the plaintiff in support of the present application.  It would also not be appropriate for me to express any view on the construction issue mentioned in paragraph 15(1) above, in view of the fact that it is an issue which will, in due course, have to be determined by the court under the defendant’s Supplementary Originating Summons.

DISPOSITION

27.  For the foregoing reasons, I allow the plaintiff’s application and make an order in terms of paragraph 1 of the Originating Summons, with costs to the plaintiff to be taxed on a party and party basis if not agreed.  I make a like order in respect of the costs of and occasioned by the defendant’s inter partes summons dated 14 December 2017.  I do not consider that there is sufficient ground to make an order that costs should be assessed on an indemnity basis.  In view of the fact that the issues raised in this case are not complicated, I also decline to grant a certificate for two counsel.