TRAXYS EUROPE S.A. v. KHINGAN RESOURCES LTD

HCCW 186/2020

[2020] HKCFI 2717

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 186 OF 2020

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D E C I S I O N

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1.  On the 26 June 2020 the Petitioner presented a petition for the winding up of the Company on the grounds of insolvency. It served its verifying affidavit on 3 July 2020. Pursuant to Rule 32 of the Companies (Winding-up) Rules (Cap 32H) it was necessary for the Company to file any evidence in opposition that it wished to file within seven days. When the matter came on before me on Monday, 5 October 2020 there was no evidence before me from the Company opposing the petition, although an affirmation had apparently been filed on 29 September 2020.

2.  As I have sought to make clear to practitioners through a number of decisions [1] and as a consequence of circulars helpfully issued at my suggestion to solicitors by the Law Society, it is important that companies which are subject to a winding up petition comply with Rule 32.  If, for some reason, there is a difficulty in serving evidence within seven days or a company only becomes aware of Rule 32 after the specified time has expired, the company should apply for an extension of time.  As, by now, should be well known to practitioners in the insolvency field, it is my practice if evidence has not been filed before the first Monday hearing before me either to make a winding up order on the grounds that the Petition is not opposed or, if an application for an extension of time is made at the hearing of the petition, to require security for the debt to be provided.  I have emphasised to practitioners that a petitioner is entitled to have the first hearing in open court before a companies judge treated as a trial at which if possible the petition is disposed of.  It is my practice, where practical, to try and determine petitions at the first hearing before me.  This is desirable from the point of view of both companies and creditors.  This is one of the reasons why I have taken the view that it is important that practitioners comply with Rule 32.

3.  Another unsatisfactory feature of late filing of evidence is that it is commonly accompanied by the rather crass assumption on the part of many solicitors that if they file evidence at the Registry on Friday it will have made its way to me before 9:30am on Monday morning.  They do not bother to send a copy directly to my clerk.  Elementary common sense should suggest that it is unrealistic to expect a clerk in the Registry to appreciate that it is necessary for an affirmation filed at the end of the week to be rushed to a judge for a hearing early on Monday morning and do so.

4.  I adjourned the petition on 5 October 2020 and directed that the Company should issue a summons to make a formal application for leave to file evidence out of time a week later as my diary was able to accommodate a swift hearing and I thought it necessary that any application should be supported by evidence explaining the matters that Mr Yu advanced as explaining the reasons why there was no evidence in opposition before me.

5.  Evidence has been filed on behalf of the Company explaining the late production of evidence in opposition by the Company’s solicitor Chan Yuen Lam, who is a partner in Gall. Ms Chan says, rather unhelpfully given the purpose of her affirmation that: “due to the unprecedented outbreak of COVID-19 and consequential restrictions, the Respondent was unable to seek Hong Kong law advice on the Statutory Demand in good time.  I note that all of the Respondent’s directors have resided outside Hong Kong.  Accordingly, Hong Kong legal advice was only available to the Respondent in around August 2020 when Gall was formally engaged”.  I would have expected Ms Chan to know, and to tell the court, precisely when Gall were engaged.  As it transpired this information would have been useful because it identifies a problem with the time period specified in Rule 32.  Apparently, Gall were first approached by the Company and asked to act for it on 22 July 2020.  Gall could not immediately accept the instructions because it needed to complete its “know your client” process which commonly takes a few weeks.  What this means is that it will normally be difficult for a company to instruct a firm of solicitors unless it is an existing client and for evidence in opposition to be filed in compliance with Rule 32.  For this reason I will copy this decision to the Official Receiver as it would appear that Rule 32, which provides for a very short time period anyway, requires amendment.  Rule 32 was drafted at a time before “know your client” procedures were implemented.

6.  The Company’s directors are based in Russia.  It would appear that there are already disputes between the parties on foot, which have resulted in arbitration proceedings in Russia.  Clearly on being instructed Gall should have advised the Company of Rule 32 and made an application for an extension of time for filing evidence.  On the basis of what I have been told of the background to this matter it would seem to me reasonable to assume that the Company would have been able to obtain a substantial extension of time quite possibly until the later part of September.

7.  Ms Chan explains the reasons such advice was not given in [27] of her affirmation.  

“The Respondent and its legal team (myself included) also accept that an application for leave to file the Affirmation in Opposition out of time should have been taken out in good time prior to the adjourned hearing on 5 October 2020. However, the Respondent did not do so for the reasons I have briefly alluded to in paragraphs 20 and 21 above. To elaborate on this and without waiving legal professional privilege:

(1) The legal team overlooked the need to apply for an extension of time under Rule 32. Although the legal team was aware of the Court’s decision in Re Grand China Shipping (Hong Kong) Co Ltd [2013] 4 HKLRD 1, the legal team was labouring under the misapprehension that (a) the Grand China decision did not require a company to apply for an extension of time to comply with Rule 32; and (b) the Companies Court would normally allow a company to proceed beyond the Monday hearing, without imposing any condition for security to be paid, if the company files an affirmation in opposition raising a bona fide dispute a few days before the Monday hearing. In hindsight, this is a misapprehension of the position as the language of Rule 32 requires the leave of the Honourable Court to file late affirmations in opposition to a petition.

(2) The Respondent and its legal team were also (in hindsight, unwisely) under the misapprehension that TESA would appreciate the strength of the Respondent’s case and consent to the dismissal of the Petition, given the parties’ correspondence in connection with the Russian Proceedings, the Russian Ruling and the stance taken by TESA in the Russian Proceedings as set out in Section A above.”

8.  There is no point in me speculating as to how Ms Chan managed to read the authorities and the Law Society circular as justifying her assumption that Rule 32 did not need to be complied with; an assumption that seems all the odder as Gall, who purport to specialise in insolvency, acted for the Petitioner in Grand China.  It seems to me the position is fairly clear.  Rule 32 must be complied with.  If evidence is not filed in opposition within the specified time, or an extension of time is not obtained before the matter comes on before a master or a companies judge, a summons should be issued seeking an extension of time at the next hearing.  The later such an application is made the more likely it is that either it will not be granted, for example, if it is made to a companies judge on the first hearing of the petition in open court, or conditions, normally the payment into court of the whole or a substantial proportion of the debt, will be imposed.  It is extraordinarily naive to assume as Ms Chan did, that although the court has made it clear it will adopt a strict approach if evidence is produced when a petition first comes on before a judge in open court it will, conversely, adopt a lenient approach if evidence is filed without leave in the week before the hearing.

9.  Most of the cases in which this problem has arisen, result from a company instructing solicitors very late.  This is not such a case.  It seems to me that the correct approach is to ask whether if the appropriate application had been made when the solicitors were first instructed it would have been granted and the extent, if any, to which the failure to make such an application has delayed the resolution of the petition to an extent which justifies the court imposing a condition on granting an extension of time. In other words the focus is on the prejudice to the petitioner and, although this is not such a case, possibly other creditors.

10.  As I have explained earlier, it seems to me fairly clear that the delay in making the application has not delayed the progress of the proceedings.  It seems to me that it would, therefore, be unreasonably harsh to require a payment into court to be made as a condition of granting leave to file evidence out of time.  However, costs have been wasted as a result of inexcusable mistakes and I order that the costs of the hearing on 5 October 2020 and the costs of the present application be paid by the Company to the Petitioners forthwith on an indemnity basis.   I will leave the Company and its solicitors to determine who should actually pay those costs—on the face of the matter it would seem to me that it should be Gall.