HOLMAN FENWICK WILLAN on behalf of Chen Jianhua v. GLORY SKY FINANCE LTD

HCCW 266/2018

[2019] HKCFI 2982

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 266 OF 2018

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DECISION

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Introduction

1.  This is the hearing of the debtor’s (“Debtor”) appeal against Master Hui’s order dated 5 September 2019, pursuant to which a garnishee order was made absolute after a five-month delay occasioned by the Debtor’s self–winding up petition in HCCW 113/2019 presented on 16 April 2019 (the “Self Winding-up Petition”).  Just two days before the hearing of the appeal, Harris J dismissed the Debtor’s Self Winding-Up Petition for abuse of process.  Accordingly, at this hearing, the Debtor abandons the appeal and agrees to pay costs on party and party basis.  What divides the Debtor and the judgment creditor (“Judgment Creditor”) is whether those costs should be assessed and taxed on indemnity basis.

The facts

2.  As gleaned from the court documents, the Judgment Creditor, its associates and the Debtor have a long business relationship and a history of litigation.  Under the action of HCMP 2482/2014, Registrar Lung ordered the 1^st and 2^nd defendants therein, namely Chen Jianhua (“Chen”) and Fan Hongwei (“Fan”), to pay the Debtor costs of $40,000.  On 29 November 2017, the Judgment Creditor paid those costs on behalf of Chen and Fan.  On 15 June 2018, Deputy High Court Judge Keith Yeung SC (as he then was) set aside Registrar Lung’s order.  The Debtor was therefore obliged to return the sum of $40,000 to the Judgment Creditor (the “underlying debt”).  Despite repeated demands and the issue of a statutory demand, the Debtor failed to pay.  The Judgment Creditor presented the present winding-up petition against the Debtor on 14 September 2018 (the “Petition”).

3.  After rounds of correspondence, the Debtor informed the Judgment Creditor by letter dated 19 September 2018 that they would settle the underlying debt, interest and costs before the first hearing of the Petition.  The Debtor’s solicitors, Messrs Ching & Co, wrote:

“Given your letter dated 17^th September 2018, at any rate that a Winding Up petition has already been issued, on last Friday, the 14^th day of September 2018, it seems that there is no real incentive on the part of our client to make early payment of the costs and accrued interest. That said, the costs and interest thereon will still be fully settled by our client, prior to the hearing of the Petition, now scheduled for 21^st November 2018 at 9:30 am.” (Emphasis highlighted by the Judgment Creditor)

4.  On 5 October 2018, through Ching & Co, the Debtor asserted its own solvency and claimed that it would not be wound up by reason of the small underlying debt.  Ching & Co wrote:

“... Please be rest assured that our client would never be wound up owing to such a small debt. You would remember that our client was able to provide loans in the sum of HK$17,000,000 out of its own funds! ... we note that your ‘threat’ now becomes really ‘soft’.”

(Emphasis highlighted by the Judgment Creditor)

5.  On 15 November 2018, the Debtor finally settled the underlying debt by cheque just before the first hearing of the Petition.  On 26 November 2018, Harris J dismissed the Petition as the underlying debt had been settled.  He ordered the Debtor to pay costs summarily assessed at $185,300 (the “judgment debt”).

6.  The judgment debt was not paid.  On 14 February 2019, the Judgment Creditor obtained a garnishee order nisi requiring the garnishee bank to show cause on return date on 17 April 2019.  On 1 April 2019, the garnishee bank informed the Judgment Creditor by letter that the Debtor has a credit balance of around $165,000 in its account with the bank.

7.  Then, on 16 April 2019, one day before the return date of the garnishee proceedings, the Debtor issued its Self Winding-Up Petition based on insolvency ground. The Self Winding-Up Petition only contains a bare assertion that the Debtor was unable to pay its debts.  The debts enumerated is an aggregate sum of over $1 million, including the judgment debt in issue, a sum of at least $175,540 being legal costs owed to the plaintiff under HCA 988/2017 and substantive legal fees owed to its solicitors.  Apart from the above assertion, there is not a shred of evidence in support of the alleged insolvency.

8.  On the return date for the hearing of the Self Winding-Up Petition, the Debtor issued a summons in this Petition seeking to have all enforcement actions against the Debtor stayed by reason of the Self Winding-Up Petition.  A stay was ordered up to the next hearing date of the Self Winding-Up Petition.

9.  Between 12 June 2019 and 2 December 2019, the Self Winding-Up Petition was adjourned four times.  On the first occasion, it was adjourned for about ten days to accommodate the Debtor’s solicitor’s diary.  On the second occasion, it was adjourned to enable the Debtor to raise funds for advertising the Self Winding-Up Petition.  On the third and fourth occasions, it was adjourned to enable the Debtor to amend the Self Winding-Up Petition and to file affidavit in reply to the Judgment Creditor’s affirmation in opposition.  The Debtor did neither of these.  Eventually, on 2 December 2019, Harris J dismissed the Self Winding-Up Petition with costs for abuse of process.  The Judgment Creditor asked for costs to be awarded on indemnity basis.  However, Harris J made a costs order nisi that the costs be assessed on party and party basis and invited the Judgment Creditor to take out a summons seeking indemnity costs if it so wished.

10.  In the meantime, by reason of the Self Winding-Up Petition, the return date for the hearing of the garnishee proceeding was adjourned three times from 17 April 2019 to 20 June 2019, then to 11 July 2019, and eventually to 5 September 2019.  At the last hearing, Master Hui made the garnishee order absolute.  On 13 September 2019, the Debtor filed the notice of appeal.  The appeal was adjourned to be heard before me on 4 December 2019.  As mentioned above, two days prior to that, Harris J dismissed the Self Winding-Up Petition.  That removed any possible ground for appeal.  However, Mr Ching, solicitor for the Debtor, indicated that the Debtor may appeal the order of Harris J.

The legal principles

11.  As Mr Ching has conceded that the appeal be dismissed, the only issue is whether costs should be awarded on indemnity basis.  The principles applicable to indemnity costs are well settled by the Court of Appeal decision in Choy Yee Chun v Bond Star Development Ltd [1].  In that case, Stock J (as he then was) adopted the following principles as set out by Godfrey J (as he then was) in Overseas Trust Bank Ltd v Coopers & Lybrand (a firm) & Others v Peat, Marwick, Mitchell & Co (a firm) & Another (third parties) [2] :

“... In my opinion, in order to justify a taxation on the indemnity basis, the successful party has to show, either that the case is one of a type already recognised in the practice of the court as warranting a taxation on that basis (such as, for example, the contempt cases to which I have already referred) or that there is some feature in the case even more special or unusual than one which would justify a taxation on the common fund basis. A case in which the successful party has demonstrated that the proceedings were initiated or prosecuted by the unsuccessful party in a manner which constitutes that party’s proceedings an abuse of the process of the court might well be a candidate for an award of taxation of costs on an indemnity basis. A taxation of the successful party’s costs on an indemnity basis could properly be ordered, in my opinion, where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner. Any proceedings instituted or prosecuted in such circumstances as to constitute an affront to the court could properly be the subject of a direction for the taxation of the successful party’s costs on the indemnity basis.”

His Lordship then went on to hold that the same principles apply equally to costs against an unsuccessful defendant.  He said [3] :

“There has been a suggestion by counsel for the appellant that somehow the principles apply to a party who has instituted proceedings, but not to a party in response. In my judgment, the principles apply equally to those who not only institute proceedings but who defend them. If a plaintiff has been forced to institute proceedings by a defendant whose conduct has been not only hostile in the normal litigious sense, but oppressive and with base ulterior motive, and if the pursuit of a defence constitutes conduct which is part of an oppressive game plan, then invocation of the power to award costs on an indemnity basis may well be justified. Of course there will in most litigation be evidence which a court rejects, and it is far from rare that a court will find that evidence has been deliberately untruthful. Such a finding will not necessarily in itself warrant an order for costs upon either of the bases alternative to party and party taxation. But there will be cases—and it is true that they will be the exception and not the rule—where the conduct of a party in a case is of a more venal kind, where the conduct of the litigation has in some sense been wicked, and in such a situation the exceptional power can quite properly be applied.”

12.  Thus, the threshold which a party seeking indemnity costs has to prove against his opponent is a very high one.  He has to show some special or unusual feature in the case, such as that the action involves an abuse of process of the court, the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously or for an ulterior motive, or in an oppressive manner.  The common theme in these examples is that the proceedings are instituted or prosecuted in such circumstances and in such manner as to constitute an affront to the court.  Such conduct includes conduct which may be indicative of bad faith, ulterior motive, abuse of the process of the court, or oppression.  Such conduct must not be viewed in isolation.

13.  Mr Ching referred me to a well-established legal principle laid down by the Court of Appeal in Attlee Investments Ltd v Lee Chuen t/a Lee Chuen Furniture Co & Another [4] that “where a petition has been presented which might result in a winding up or scheme of arrangement, no creditor should thereafter gain priority over others of his class and that even if the execution has already been commenced, a stay should be granted unless there are very exceptional circumstances”.  Hence, to resist an adjournment of the garnishee proceedings or to resist an appeal against a garnishee order made while a winding-up petition is extant, the creditor has to prove exceptional circumstances.  Mr Ng, counsel for the Judgment Creditor, argues that this principle is not engaged if the presentation of the winding-up petition is an abuse of process.

14.  In my view, the winding-up petition and the garnishee proceedings have to be viewed separately, that the winding-up petition is an abuse of process does not necessarily render the resistance to the garnishee proceedings an abuse of process.  A winding-up petition may be held to be an abuse of process for many reasons, some of which may not be related to the resistance to the garnishee proceedings.  Abuse of process in taking out the winding-up proceedings may be one of the factual circumstances to be considered in deciding whether the resistance to the garnishee proceedings is also an abuse of proceedings or is raised for ulterior motive which is inconsistent with the principle in Attlee Investments Ltd.  Exceptional circumstances would be proved if resistance to the garnishee proceedings including an appeal against a garnishee order are abuse of legal process.  Such abuse of process would also be sufficient to support a claim for indemnity costs.

15.  The material factual circumstances in this appeal are: the presentation of the Self Winding-Up Petition one day before the return date for the hearing of the garnishee proceedings; that the Self Winding-Up Petition was the factual basis for adjourning the hearing of the garnishee proceedings; and that the Self Winding-Up Petition was eventually dismissed as being an abuse of legal process.  While the Debtor’s conduct in relation to the adjournment of the garnishee proceedings and its appeal against the garnishee order absolute must be viewed against these factual circumstances, I must guard myself against too readily jumping to the conclusion that as the Self Winding-Up Petition was an abuse of legal process, so must be the adjournments of the garnishee proceedings and the appeal against the garnishee order absolute. 

Discussion

16.  The Judgment Creditor’s case is that the Debtor is not insolvent and its resistance to the garnishee proceedings and appeal were made with the ulterior motive of delaying or even frustrating his recovery of the judgment debt. That amounted to abuse of legal process which meets the requirement of exceptional circumstances under the principle in Attlee Investments Ltd and justifies a claim for indemnity costs.  The thrust of Mr Ching’s argument is that the Debtor presented the Self Winding-Up Petition because it is genuinely insolvent.  To protect the interest of all its creditors, it is duty bound to resist or delay the garnishee proceedings under the principle in Attlee Investments Ltd so that all its creditors may share in the assets of the Debtor under the pari-passu principle.

17.  In the face of Harris J’s dismissal of the Self Winding-Up Petition, I have to accept that the Debtor is not insolvent.  Mr Ching argues that what Harris J decided was that there was no evidence that the Debtor was insolvent and not that it was indeed insolvent.  That is semantic.  The Debtor pleaded insolvency.  It had eight months to present its case and file affidavit evidence.  It did not do so.  The inference is that it did not have evidence to support its case of insolvency.  It was therefore solvent.  Presumably that was what caused its petition to be dismissed as an abuse of process.  It is not open to the Debtor to turn around and launch an attack on Harris J’s decision arguing that the Self Winding-Up Petition was dismissed on technical or procedural grounds and that it was insolvent.

18.  Apart from the decision of Harris J, there are indeed plenty of evidence on which solvency may be inferred.  The Debtor had come to the view that it was insolvent.  It pleaded an indebtedness of over $1 million, including the judgment debt and another debt of $175,540 under a costs order in another action.  The other debts are owed to its solicitors.  There are only three creditors.  Though it is a $10,000 company, it has been carrying on business as a finance company lending huge sums of money to borrowers.  As asserted by Ching & Co’s letter dated 5 October 2018, it had funds of $17 million to lend to the Judgment Creditor.  It is naïve to believe that it can operate as a finance company on its authorised capital.  It must have access to resources or assets outside its share capital.  But there is no evidence of its assets, its account receivables, money owed by its borrowers. 

19.  The Debtor took steps to present its own Self Winding-Up Petition.  It had eight months to adduce evidence of its insolvency.  It sought four adjournments.  On one occasion, it sought adjournment for the purpose of amending the petition.  No amendment was filed. Specifically, on another occasion, it sought adjournment and asked for 35 days to prepare an affidavit in support of its own insolvency.  For two months, it absolutely did nothing.  All these suggest it had no evidence to support its case of insolvency.

20.  Mr Ching argues that the Debtor was genuinely insolvent.  It did not even had money to advertise the Self Winding-Up Petition, which made an adjournment necessary and the court granted the adjournment.  Again that assertion is evidence from the bar table.  That the court granted an adjournment is neither here nor there.  As the petition had not been advertised, the court was forced to grant the adjournment.  As asserted by Mr Ng, the Debtor was represented by two counsel on at least two occasions.  Mr Ching explains that he charged a very small fee only in view of his long business relations with the Debtor.  While he could speak for himself, he could not explain why the Debtor in its alleged insolvent condition could afford the luxury of two counsel on two of the hearing.  The Debtor must have undisclosed assets or access to outside resources.  It lies ill in the Debtor’s mouth to assert that it could not pay for the advertisement.  

21.  As for the inability in filing affidavit to explain its insolvency, Mr Ching explains that when a company is falling apart, it is difficult to collect evidence and prepare an affidavit.  Documents, financial reports etc may not be readily available.  This is only evidence from the bar table.  It is not supported by affidavit evidence from an officer of the Debtor company.  Be that as it may, the Debtor company did not appear to be a large and sophisticated one.  It is a $10,000 finance company operating a money lending business.  Its directors could have easily produced some evidence of its insolvency.  Eight months was a long time.  Its total failure to file an affidavit discredits its assertion of insolvency.  All in all, the only reasonable inference to be drawn from the Debtor’s inability to file evidence to advance its case of insolvency after eight months is that it has no evidence of insolvency and that it is solvent. 

22.  I now turn to the question of delay.  The Debtor presented its Self Winding-Up Petition on 16 April 2019.  It made no progress for eight months.  The petition was adjourned for four times between 12 June 2019 and 2 December 2019.  The first adjournment was to accommodate Mr Ching’s diary.  It was only a call over hearing, the personal attendance of Mr Ching was not called for.  It was only a short adjournment of about ten days.  I draw no adverse inference on that adjournment.

23.  The second adjournment was, as I have mentioned above, to enable the Debtor to raise funds to advertise the petition.  The Debtor was all along represented.  It must know it had to make funds available for advertising when he presented the petition months ago.  The advertising costs were not substantial.  Even if the Debtor company had no funds, it could have access to resources from its directors or shareholders.  Besides, the fact that it was able to instruct two counsel on two occasions cast real serious doubt on its alleged lack of funds.  The inescapable inference is that adjournment was self-engineered to cause delay in the proceedings. 

24.  The third adjournment was to enable the Debtor to amend its petition.  No amendment was made.  For the same reasons as above, the Debtor could not argue that it was prevented from making the amendment due to lack of funds.

25.  The fourth adjournment was to enable the Debtor to file affidavit in respond to the Judgment Creditor’s affirmation in opposition to the Self Winding-Up Petition.  I accept that this adjournment was not occasioned by the Debtor.  However, no affidavit was filed by the Debtor.  Likewise, that failure is more likely due to lack of supporting evidence than lack of means.   All in all, two adjournments were self-engineered and occasioned substantial delay. 

26.  When such conduct is viewed against the backdrop that the Self Winding-Up Petition was presented as an abuse of process in that the Debtor was actually not insolvent; that the Debtor did not prosecute the Self Winding-Up Petition regularly and with diligence; that the Debtor engineered delays in the winding-up proceedings; and that the Self Winding-Up Petition was presented just one day before the garnishee proceedings, the overwhelming inference is that the Self Winding-Up Petition was presented to delay the garnishee proceedings and to prevent the Judgment Creditor from recovering the judgment debt.  The further inference is that Debtor’s resistance to the garnishee proceedings, the adjournments and the appeal against the garnishee order absolute are abuse of process calculated to frustrate the Judgment Creditor’s effort in recovering the judgment debt.  Not only does such conduct amount to exceptional circumstances such that the principle in Attlee Investments Ltd does not apply, it also constitutes an affront to the court which justifies an order for indemnity costs.  And I so order.

Conclusion

27.  For all these reasons, the appeal is dismissed with costs to the Judgment Creditor to be taxed on indemnity basis.