HOLLMET A.G. AND ANOTHER v. MERIDIAN SUCCESS METAL SUPPLIES LTD

IN THE HIGH COURT OF HONG KONG

Companies (Winding-Up) No. CWU 14 of 1997

and

IN THE MATTER OF THE COMPANIES ORDINANCE
(Cap. 32, Laws of Hong Kong)

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J U D G M E N T

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1. This is a winding up petition, the hearing of which has taken 1 day and a little bit more but one has to say it has taken an unusual course. Briefly there are two Petitioners and one respondent-company. The petition is brought under S.177 of the Companies Ordinance on the basis that the company is unable to pay its debts.

2. As is common in these cases, the Petitioners rely upon what is called a statutory demand, and that is a document served on S.178(1)(a) which provides that:-

"A company shall be deemed to be unable to pay its debts.

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding $5,000.00 then due, has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor."

3. Briefly, the facts of this case are that the 1st Petitioner, Hollmet A.G., had a contract which I shall term the Ionis contract. This was for 12,000 tons of hot rolled steel. The price for the goods was originally US$290.00 per ton but was reduced to US$285.00 per ton. Payments were eventually arranged to be made on 3 successive days in June of this year, 10th, 20th and 30th. Two payments were duly made and the third payment remains outstanding.

4. It is unnecessary now to go through the full history of the matter. Suffice it to say that the early correspondence particularly that between the solicitors for the parties was vague and criticism can be levelled at that. Complaints were made in some of the early correspondence which do not seem to have been followed through. However, by the end of July, the allegation had been made that the goods failed to comply with the contract specification. There is only one slight twist in this aspect of the case and that is this. It was not until very recently that evidence was provided as to what that contract specification was. There was some dispute between the parties as to whether or not the physical properties of the steel and in particular the tensile strength, was part of the contract specification.

5. According to evidence which has recently been filed, it would appear that it was. The testing of the material has been criticised by the Petitioners on the basis that an insignificant sampling has been taken. That, of course, is not for me to decide although it does seem that of the samples taken about 50% exceeded the limits of the specification and has been described by the Russian metallurgist professor, who has provided a statement, as being too hard for general use.

6. There is an estimate of loss that was given back in July of last year and it was not until this morning that any real basis for that estimate was provided.

7. The other contract was a contract for the sale of 10,000 metric tons of cold rolled steel in sheets. That was made between the 2nd Petitioner with the Respondent. The contract price for that was US$405.00 per ton. Again there was correspondence and to cut matters short, the Company claimed that because of the defective nature of the steel, because it was, apart from anything else, rusty, the goods delivered were only worth US$250.00 per ton.

8. Matters appear to have remained slightly dormant from about August of last year through to January of this year, when the winding up petition was presented. The evidence which has been provided up until very recently was, in my view, of a sketchy nature. The Company did not see fit to particularise the basis of its claim and was content to rely primarily upon correspondence between the solicitors and the companies which were exhibited to the affidavits and also the bills of lading which indicated that some of the goods were defective.

9. I would summarise my views as to the state of the Company's case in this respect that they did have something of a claim against the Petitioners in respect of the quality of the goods. In respect of the Ionis contract there seems to me to be a potentially serious question there because, if particularly upon the Russian professor's evidence, it can be said that the steel was not fit for general purposes, this was clearly a serious matter. In respect of the other contract, partial shipments had been made in two batches, one on a vessel called the "Leo M", and the other on vessel called the "Linhai 18". The remainder of the contract goods was held over and the parties are in dispute as to whether it was rightly held over or wrongly held over. It seems particularly in respect of the Linhai 18 goods, that the Company's claim could be argued to have been considerably inflated.

10. However, there have been a number of things which have happened more recently. The first is that by Summons on 9th July, a week before this petition was due to be heard, the Company sought to put in, inter alia, the evidence from the Russian professor. Then yesterday morning, the Company was allowed to put in an affidavit which exhibited the documents showing that arbitration proceedings had been commenced. This morning, and this was predicated last night by Mr. Kerr who appeared on behalf of the Company, the Company has produced an affidavit exhibiting contract documents showing that indeed it sold on the goods at prices which would accord with the figures they have put as to the value of the goods in the condition in which they say they received them.

11. There seems to me to be no question, therefore, that now a bona fide dispute does arise between the parties. The Company has established that the alleged debts are disputed on substantial grounds. In the usual way, they are entitled to have Petition dismissed or at least to have the petition stayed pending resolution of that dispute.

12. The question, however, that was really argued in this case was this. By a summons which was dated the 6th of March, the Company sought to have the petitions stayed pursuant to Article 8 of the Uncitral Model Law under S.34(c) of the Arbitration Ordinance Cap.341, "the debtor and the 1st and 2nd Petitioners having by agreements in writing dated the 29th of April 1996 and 16th April 1996 respectively, agreed to refer to arbitration the matters in respect of which this action is brought."

13. There is no need for me to recite the arbitration clauses which appear in both contracts. It is sufficient if I simply say that there were arbitration clauses which provided that all disputes in connection with the contracts should be, first of all, settled by amicable negotiations and friendly discussions and that they should otherwise go to arbitration before the International Chamber of Commerce. What is said is that because of Article 8(1), the Court should have immediately stayed the winding up proceedings. The Company's case was put as high as this and to quote Mr. Kerr in his submission this morning: "As long as one party holds up his hand and says here is a dispute, the Court's jurisdiction is effectively outsted."

14. That it seems to me puts the matter far too high. I say so for these reasons. Article 8(1) provides that:-

"A court before which an action is brought in a matter which is the subject to an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed."

I should also have regard to the report of the United Nations Commission on International Trade Law on the Work of its 18th session the 3rd to 21st of June 1985 which is United Nations document A/40/17.

15. Paragraph 1 of that says, that:

"Article 8(1) deals with an important negative of fact of an arbitration agreement. The agreement to submit a certain matter to arbitration means that this matter shall not be heard and decided upon by any court, irrespective of whether this exclusion is expressed in the agreement. If, nevertheless, a party starts litigation, the court shall refer the parties to arbitration unless it finds the agreement to be null and void, inoperative or incapable of being performed."

16. Very simply, it seems to me that the point taken by the Company sets off on the wrong foot. Although in many instances, people may regard winding up petitions as a means of enforcing a contract, that is not what it is. The procedure of winding up is to wind up an insolvent company. What the court is concerned to see is whether or not the company is insolvent. The basis upon which that may be presented, may be under S.178 or it may be on a different basis but at the end of the day, the court must consider whether the company is insolvent.

17. One then turns back to Article 8(1), one sees that a winding up proceeding is not a matter which is the subject of an arbitration agreement, it is the underlying contract which is the subject of an arbitration agreement. It is common ground between the parties that in all other types of winding-up cases when the court is faced with the question of whether a debt is owing, the test it applies is whether there is a bona fide dispute on substantial grounds.

18. If there is an agreement which provides that disputes should go to arbitration, until the court is satisfied that there is a dispute, it seems to me that it can still be said that money is due and owing under the contract. It is only once the dispute has arisen that the arbitration comes into being. So whether one looks upon the test, under S.177 as considering whether the company is a debtor or whether one applies the other approach and considers whether there is a bona fide dispute on substantial grounds, it seems to me that until it is properly established that there is a dispute, the debt would exist.

19. It is not sufficient in the Companies Court for a person merely to hold up his hand and say there is a dispute. He must establish that there is a bona fide dispute on substantial grounds. Of course, once arbitration proceedings have been commenced, the matter is different because then it may be said that there is not a debt owing. Hence the significance of the commencement of the arbitration proceedings which took place earlier this week.

20. What approach the court should take when a summons is taken out as it was in this case for a stay of proceedings must, it seems to me, to be this. If a company wishes to obtain a stay of winding up proceedings on the basis that the underlying debt upon which the Statutory Notice is founded is disputed, it must establish in the normal way that there is a bona fide dispute on substantial grounds. If it has not satisfied the Court as to the bona fides and substantial nature of its claim it can only expect a short adjournment to enable it to commence the arbitration and then, if sufficient evidence to establish a genuine dispute is still absent it can expect to have to give an undertaking to proceed with the arbitration with all due dispatch. It cannot simply put up its hands and say: "You, the Court, have no jurisdiction because of my contract". That is not what the contract says, and the Companies Court is entitled to be satisfied that there is a proper dispute.

21. In the light of the evidence which has been filed today, in my view the company has now established that it does have a bona fide dispute on substantial grounds. I will, as requested by Counsel for the Company dismiss the petition, rather than simply stay the Petition as had been sought on the summons. Had I been prepared only to stay the Petition, I think it would have been right to do so on terms that the Company undertakes to use its best endeavours to proceed with the arbitration with all due expedition.

Further Argument

22. That now leaves the question of costs. Costs is never an easy thing and it is often one of the most important things in the case. The approach which I take is this that the debtor has today succeeded in having the petition dismissed. If the order had been the order sought on the summons and the petition was stayed, the matter might be different. But it has put in evidence and had the advantage now not simply of having the petition stayed but of having it dismissed. The question arises as to what should the order be. It seems to me that the petition having been dismissed, the debtor is entitled to its costs from the presentation of the petition up until the time when it should have put in the evidence which has resulted in the dismissal of the petition and did not. From that time up until the time when the debtor did put in his evidence, then the petitioners should get their costs because those costs were thrown away by reason of the failure to file the evidence which has resulted in the order which the debtor has got.

23. So, effectively it seems to me that the debtor should get the costs of the petition up until 7th April which is when, according to the Order made when I gave directions on the Petition, the debtor should have filed the evidence which was presented this morning. Costs thereafter up until this morning should be to the petitioners.