RE GOLDEN GATE INTERNATIONAL KINDERGARTEN AND NURSERY LTD

HCCW 210/2017

[2018] HKCFI 641

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 210 OF 2017

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D E C I S I O N

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1.  I have before me a petition issued by Wong Shui Fun to wind up the Company on the grounds of insolvency. Mr Tom Ng, who appeared for Mr Wong, argued that Mr Wong is a contingent creditor[1] for HK$1,612,605.90 being the total of a series of non interest-bearing loans made to the Company of which Mr Wong is a shareholder and the sole director between 5 May 2014 and 2 January 2015 (“Debt”). The petition is opposed by the estate of the other shareholder, Mr Wayne Ko (“Opposing Contributory”).

2.  The contingency is the profitability of the Company. The contingency arises in this way.  In a minute of the sole director of the Company, Mr Wong, dated 8 September 2014, he states that the shareholders’ loans (and Mr Ko made a loan of approximately HK$1.8 million) would not be repaid until the Company became profitable in anticipation of a new investor contributing finance to the Company’s business which was operating a kindergarten.  Indeed, the Company has defended a claim in HCA 285/2017 by Mr Ko’s estate to recover the loan made by him on this ground.  The Company pleads in its Defence as follows in paras 16.3.3 and 16.3.4:

“16.3.3. Wong and Young would be responsible for seeking new investors to support the operations of the DLA Holdings and Companies.

16.3.4.    To facilitate the negotiation with the potential investor, no repayment of loans and/or reimbursement of funds to directors of DLA Holdings and the Sister Companies would be made until:- (i) the Defendant makes a profit; and (ii) such a repayment or reimbursement has been approved by the board of directors.”

3.  Mr Ng conceded for the purposes of the hearing before me that Mr Wong was bound by the agreement between Mr Wong and Mr Ko, which I have quoted.  Mr Ng argued that on this assumption, Mr Wong is a contingent creditor for the Debt and is, therefore, able to petition.  Mr Wong does not rely on a statutory demand to prove insolvency.  He relies on his own evidence, based on his position and knowledge as the sole director of the Company that the Company is clearly insolvent and has ceased business. 

4.  Although Mr Chan, who appeared for the Opposing Contributory, questioned the veracity of Mr Wong’s evidence, the Opposing Contributory has adduced no evidence to suggest that Mr Wong’s evidence, which includes an albeit unaudited balance sheet, is not largely correct and if it is that the Company is clearly insolvent and has ceased business, which I find as a fact.

5.  It seems to me that the difficulty with Mr Wong’s case is this.  The principal contingency is the Company making a profit. However, it follows ex hypothesi from Mr Wong’s own case that the Company is currently insolvent and should be wound up, that the contingency would never arise.  Section 263 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap 32, provides:

“Debts of all descriptions to be proved

In every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this Ordinance of the law of bankruptcy) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value.”

6.  A debt which is subject to a contingency which cannot arise if the company is insolvent in my view cannot be admitted to proof.  The reasons for this are apparent from paras 68 to 71 of Lord Neuberger’s decision in Re Lehman Brothers International (Europe) (No 4) [2017] UKSC 38; [2017] 2 WLR 1497, the facts of which are to the extent relevant apparent from these paragraphs: 

“68. The LBIE administrators contend that it would not be open to LBHI2 to lodge a proof in LBIE’s administration for the subordinated debt until all ‘Senior Liabilities’ have been paid in full. David Richards J accepted that contention, on the ground that clause 7(d) and/or (e) had the effect of precluding the lodging of a proof. The Court of Appeal disagreed, and considered that LBHI2 could prove for the subordinated debt at any time. However, they said that, until the Senior Liabilities had been paid in full, the subordinated debt would be a contingent debt, and because of the terms of the Loan, the correct value to ascribe to such a proof before the Senior Liabilities have all been paid would be nil, as nothing could be paid on the proof. If and when the Senior Liabilities were met in full, the Court of Appeal said [2016] Ch 50, para 41 that the proof in respect of the subordinated debt would be revalued pursuant to rule 2.79.

69. In my judgment, David Richards J’s view on this point is to be preferred. The Court of Appeal’s view appears to me to raise a logical problem. If, at the time such a proof was lodged, there was a chance that the Senior Liabilities would be paid in full, then, as with any other debt which rests on a contingency that may occur, a valuation of that proof would not be nil: it would have to be a figure which discounted the sum due, in order to allow for the contingency not occurring. However, if the proof is ascribed a valuation greater than nil, it would have to be paid out on any distribution made prior to the satisfaction in full of other proved claims (unless there was one payment of 100%). As David Richards J said, that would appear to fall foul of clause 7. Further, any dividend would be paid out before any statutory interest or any non-provable liabilities had been paid off, which would be inconsistent with the conclusions I have just expressed.

70. It therefore follows that, in my view, it would not be open to LBHI2 to lodge a proof in respect of the subordinated debt until the non-provable liabilities have been paid in full, or at least until it is clear that, after meeting that proof in full and paying any statutory interest due on it, the non-provable liabilities could be met in full. As soon as that has happened, there would, subject to what I say in the next paragraph, be nothing to stop LBHI2 lodging a late proof.

71. On the face of it at any rate, it seems a little strange that a proof can be, or has to be, lodged for a debt which ranks after statutory interest (which can only be paid out of a ‘surplus’) and non-provable liabilities. It may be that the proper analysis is that the subordinated debt is a non-provable debt which ranks after all other non-provable liabilities. It is unnecessary to decide that point, and, as it was not argued, I say no more about it.”

7.  If the contingency cannot arise in the event of the winding up and, therefore, cannot be admitted to proof, it is artificial to characterise the creditor as a contingent creditor.  The correct analysis in my view is that for the purposes of section 179(1) he is not a creditor at all.  A creditor must be somebody whose debts can properly be admitted to proof even if the debt is valued at a nominal amount pending a final determination of its value, which may depend on the occurrence of a contingency.  If the claim cannot properly be admitted to proof at all, the claim cannot sensibly be characterised as a contingent debt.  In order for the debt to be contingent, there must be some possibility of the contingency occurring.  If necessarily it cannot if a winding-up order is made, there is no longer a contingency and, therefore, no longer a contingent debt. 

8.  For this reason, I conclude that the petitioner is not a contingent creditor or a creditor at all and, therefore, did not have locus to present the petition, which I will therefore dismiss and make a costs order nisi that the petitioner pays the Opposing Contributory’s costs of the petition, and that the Official Receiver’s costs are paid out of the petitioner’s deposit, the balance of which shall be returned to the petitioner.