KIU HUNG INTERNATIONAL HOLDINGS LTD v. 綿陽合力醫療健康管理有限公司

HCMP 356/2019

[2019] HKCFI 1060

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 356 OF 2019

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D E C I S I O N

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1.  I have before me a summons dated 20 March 2019 taken out by the plaintiff for certain reliefs in relation to a winding‑up petition in the High Court in HCCW 81/2019. It is sufficient to deal with the background facts briefly.

2.  There were two loan agreements entered into in relation to certain intended investment projects between the parties.  When demands were made by the defendant herein for repayment of the loans, the plaintiff herein disputed the validity of the loan agreements and effectively said that they were shams. That resulted in the defendant commencing winding‑up proceedings against the plaintiff last year in HCCW 344/2018 on the basis of those loan agreements.  That set of winding‑up proceedings was in due course settled by a settlement agreement dated 13 December 2018 in the preamble of which it was admitted that the plaintiff had, in breach of contract, failed to repay the loans in question.

3.  The settlement agreement provided for the plaintiff to pay certain sums to the defendant, in particular a sum of approximately HK$12.4 million, another sum of approximately HK$1.2 million, and a third sum of HK$200,000.  Apparently those sums were not paid and as a consequence the parties entered into a supplemental agreement on around 29 January 2019, by which they agreed the date for payment of the sum of HK$12.4 million would be postponed, but in addition the plaintiff had to pay a further sum of HK$1.3 million to the defendant representing compensation for interest, split into HK$1 million payable on 30 January 2019 and around HK$300,000 payable on 30 June 2019.  The sum of approximately HK$1.2 million payable under the settlement agreement was also postponed to 30 January 2019. 

4.  The sums payable in accordance with the supplemental agreement on 30 January 2019 were still not paid.  As a result, on 21 February 2019, the defendant’s solicitor sent to the plaintiff a demand letter and a statutory demand for payment of all the sums due under the supplemental agreement.  On 15 March 2019, the plaintiff herein issued the originating summons in these proceedings seeking an injunction to restrain the defendant from presenting any petition for the winding‑up of the plaintiff in respect of the sums claimed in the statutory demand.

5.  The plaintiff’s solicitor, also on the same date, wrote to the defendant asking for an undertaking not to present a winding‑up petition.  The defendant, nevertheless, on 18 March 2019, presented a petition for the winding‑up of the plaintiff on the basis of the debts claimed in the statutory demand.  On 20 March 2019, the plaintiff took out a summons seeking an order to restrain the defendant from advertising the petition, an order restraining the defendant from further prosecuting or carrying on the petition and an order staying the winding‑up proceedings pending the final determination of these proceedings in the originating summons.

6.  Insofar as the present application is taken out in and based on the originating summons, it is obviously misconceived because the originating summons, which seeks an injunction to prevent the presentation of the petition, no longer makes sense.  The horse has already bolted.  The originating summons is pointless.  The interlocutory summons in that sense has no basis in any viable, underlying substantive right being pursued in these proceedings. 

7.  In any event, as far as the summons seeks to restrain the prosecuting or carrying on of the petition and an order to stay the winding‑up proceedings, that seems to me also to be misconceived because these are matters for the court seised of the winding‑up proceedings and should not have been sought in the originating summons proceedings in the first place.  This is not a mere question of form because winding‑up is a class remedy.  Upon an attempt by the company to stay or restrain further prosecution of the petition presented by a creditor, other creditors may apply to be substituted since the date of the petition has important consequences in the liquidation of companies generally. In this connection, the company has now taken out a summons in the winding‑up proceedings to strike out the petition which is returnable on 8 May 2019.

8.  There is, however, a problem created by the defendant itself and that is that the petition, which seeks to wind up an unregistered company, has not set out the matters that the authorities have laid down to be core requirements for the Hong Kong court to have jurisdiction and to be able properly to exercise that jurisdiction to wind up unregistered companies pursuant to section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). 

9.  On behalf of the plaintiff, Mr Wong SC, has referred me to cases such as Re Chun Yip Holdings Ltd, HCCW 463/2012 (26 March 2015) where at paragraphs 29 and 30, Harris J said that it is necessary for a petition to state that the three criteria are satisfied and to set out with sufficient particularity the matters relied on in support, namely:

“ (1) There is a substantial connection between the company and Hong Kong;

(2) There is a reasonable possibility of a winding‑up order benefiting those applying for it;

(3) There is a person within the jurisdiction with sufficient economic interest in the liquidation of the company to justify a winding‑up in Hong Kong.”

10.  In my judgment, since this is a matter that goes to the settled practice of the court in exercising the jurisdiction of winding‑up unregistered companies, and since without such matters being set out a petition to wind up an unregistered company is prima facie defective and demurrable, the defendant as the petitioner ought to be required to rectify the position before the petition should be advertised. 

11.  The plaintiff, however, does not stop there.  It is submitted on behalf of the plaintiff that the debts relied on by the defendant in the petition are disputed and that as a matter of discretion this court should restrain the advertisement of the petition in any event on that ground.  As to the proper test in that regard, Mr Wong SC has referred me to In re a Company (No 007923/1994) [1995] 1 WLR 953, where it is said that the test set out in authorities such as Bryanston Finance Ltd v de Vries (No 2) [1976] Ch 63 applicable to the question whether an injunction should be granted to restrain a presentation of the petition, is not to be equated to the test applicable to the question whether the advertisement of a petition already presented should be prevented. 

12.  However, it should be noted that the question faced by the court in that case is an exercise of what appears to be an unfettered discretion under rule 4.11(1) of the Insolvency Rules 1986 of the UK which provided: 

“ Unless the court otherwise directs, the petition shall be advertised once in the Gazette.”

13.  There is no such provision in our winding‑up rules.  Rule 24 of the Companies (Winding Up) Rules, Cap 32H, provides:

“ Every petition shall be advertised seven clear days or such longer time as a court may direct before the hearing as follows...”

14.  Further, in Re Kwong Yuen Construction Co Ltd (HCCW 336/2001, 22 June 2001), Kwan J who was faced with a similar application for an injunction to restrain a petitioner from further proceeding with its petition to wind up the company, whether by advertising the petition or otherwise, and an order that the petition be removed from the file of proceedings, her Ladyship said the test for determining whether an injunction of this kind should be granted is the same as that for determining whether a petition should be struck out on the ground that there is a bona fide dispute on substantial grounds as to the company’s liability to pay the debt, citing, inter alia, Bryanston Finance.  In the end, at paragraph 31, her Ladyship came to the view and stated that the company had failed to establish that if and when the petition should come on for substantive hearing, it would be bound to be dismissed because the debt was disputed on bona fide and substantial grounds, and she therefore dismissed the company’s application. 

15.  But even if I were to apply the approach in In re a Company, it seems to me the position does not favour the plaintiff in the present case. First of all, the petition in that case was a public interest petition; there was no question of insolvency.  In the present case, the petition was based on inability to pay debts and the creditors of the company plainly would have a keen interest in any winding‑up petition. 

16.  Further, while a lot has been said in the affirmations of the plaintiff alleging that the loan agreements were not intended to have effect and therefore shams and unenforceable, there was very little said to explain why the debts under the settlement agreement and the supplemental agreement are not payable.  It is to be recalled that those agreements contained acknowledgment that the plaintiff had received legal advice and had read and understood the terms and had signed the agreement voluntarily.  It appears also that the settlement agreement was drafted by the plaintiff’s Hong Kong solicitors and attested to by a solicitor of that firm.

17.  It would also appear that cheques were made by the plaintiff referable to the payments required under those agreements after the agreements were entered into, although some of them had been dishonoured upon presentation. 

18.  On the basis of the present materials, I am not satisfied that the petition would be bound to be dismissed on the basis that the debts were disputed as and when the petition comes on for hearing. 

19.  There is also the question of the financial position of the company. Although Mr Wong SC has drawn attention to the positive net assets in the interim report of the company which shows its financial position as at 30 June 2018, Mr Lam SC, on behalf of the defendant, has pointed out that the position is much less comfortable, and indeed, raises concerns, if one looks at the position of current liabilities and current assets, so much so that the financial statements in the section “Basis of preparation” stated that the excess of current liabilities over current assets indicated “the existence of a material uncertainty which may cast significant doubt on the group’s ability to continue as a going concern”.

20.  It is also a matter of concern that some banks already know about the petition, but some apparently do not.  Banks and other parties who may have financial dealings with the plaintiff are of course among the persons that the requirement of advertisement of a petition is aimed at protecting.  As Nourse LJ stated in In re a Company at p 958F:

“ It is helpful to start with a consideration of the purposes of advertisement. The primary purpose must be to give notice of the petition to those who are entitled to be heard on it, namely the creditors, whether actual, contingent or prospective, and contributories of the company... The secondary but no less important purpose of the advertisement must be to give notice to those who might trade with the company during the period between the presentation of the petition and its final determination and who might thus be adversely affected by the provisions of section 127 of the Act of 1986 [the equivalent of our section 182 of Cap 32].”

21.  The mere fact that the company has disputed the debt and the fact that it has indicated an intention to apply for validation orders under section 182 are, in my opinion, not justification for keeping other creditors, banks and other traders of the company in the dark. 

22.  For all these reasons, I consider that the petitioner, ie the defendant, should not advertise the petition before rectifying the defects by making proper amendments, but otherwise I refuse to restrain the advertisement of the petition.  The rest of the plaintiff’s summons which Mr Wong SC has very sensibly said he would not pursue, therefore falls to be dismissed. 

(Submissions on costs)

23.  No order as to the costs of the hearing but the plaintiff is to pay the defendant the costs of the application including the summons and the affidavits.