RE LONGMAY INTERNATIONAL LTD

HCCW 268/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 268 OF 2012

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J U D G M E N T

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Introduction

1.  This is the substantive hearing of a creditor’s petition to wind up Longmay International Limited (“the Company”). The Petitioner is Mount Eastern Holdings (Hong Kong) Company Limited. There is also before me an application by the Company to strike out the petition. At the hearing, Mr Maurellet, for the Company, acknowledged that the striking out application was just “the flip side of the coin” and did not really add anything to the Company’s opposition to the petition. I shall therefore deal with the arguments on the petition and the striking out application globally.

2.  On 25 April 2012, the Petitioner’s solicitors served a statutory demand (“SD”) on the Company under section 178(1)(a) of the Companies Ordinance, Cap 32, (“the Ordinance”) claiming a debt of US$2,779,655.69. The debt was said to have arisen from two sale of goods contracts dated 21 November 2011 between the Petitioner as seller and the Company as buyer, the goods being iron ore. It was alleged in the SD that the Company had failed to procure the opening of Letters of Credit in favour of the Petitioner. As a result, the Petitioner decided to and did sell the iron ore to another buyer viz Arsen International (HK) Ltd (“Arsen”) by two contracts dated 6 December 2011 at a lower price. The Petitioner has suffered loss and damage in the sum of US$2,779,655.69. This was described in the SD as the difference between the contract price and the substitute sale price, together with the costs and expenses incurred by the Petitioner as a result of the Company’s breach of contract. 

3.  The SD has annexed to it a table purporting to set out the Petitioner’s calculation of its loss and damage. In the table, the Petitioner’s loss and damage was calculated by reference to the difference between the Petitioner’s net profit if the goods had been sold to the Company and the Petitioner’s net profit for having sold the goods to Arsen at a lower price. In arithmetic terms, the calculation was summarised as follows:

Total Loss: US$2,987,489.00 – US$207,833.31 = US$2,779,655.69

4.  This apparent anomaly between the table and the SD was finally clarified in the Petitioner’s skeleton submission in that the sum of US$2,779,655.69 consisted of

(1)   US$1,844,782.50, being the difference between the contract price and the substitute sale price to Arsen; and

(2)   US$934,873.19, being bank charges, commissions, demurrage and bonded warehouse fees for the iron ore. 

5.  This petition was presented on 1 August 2012. The petition, as accepted by Mr Kwok at the hearing, was based on and solely on the non‑compliance with the SD under section 178(1)(a) of the Ordinance – there being no evidence on the solvency or otherwise of the Company.

Discussion

6.  It is trite law that for there to be a valid statutory demand, the demand must be for a liquidated sum – a statutory demand for a claim for unliquidated damages is ineffective: French Applications to wind up Companies 2^nd edn para 6.4.4.1; Reinsurance Australia Corporation Ltd v Odyssey Re (Bermuda) Ltd 36 ACSR 348. Similarly, in order to support a creditor’s petition, the debt must exist in a liquidated form as at the date of presentation of the petition, albeit the debt may be either payable immediately or at a future date or even subject to a contingency. Consequently, a person claiming unliquidated damages in contract or in tort, but who has not yet obtained judgment, lacks standing to present a creditor’s petition: Fletcher The Law of Insolvency 4^th edn para 21‑007; Gore-Browne on Companies vol 2 para 55[20]; Boyle & Marshall Practice and Procedure of the Companies Court (1997) para 9.22.2.

7.  On the Petitioner’s own factual case, the Company has repudiated the two sale of goods contracts. The Petitioner has looked for alternative buyer and eventually sold the goods to Arsen by contracts dated 6 December 2011. In these circumstances, the proper analysis must be that the Petitioner is only entitled to damages for breach of contract: Bright Islands Corp v Chao [2002] 2 HKLRD 97 at 116-7 [86].

8.  The contracts are expressly governed by English law (although for the present purpose there is no difference between the English and Hong Kong position). Section 50 of the Sale of Goods Act 1979 (“The Act”) provides as follows:

(1)   Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-acceptance.

(2)   The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract.

(3)   Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept.

9.  In the present case, it is not seriously in dispute that there was an available market for the iron ore at the material time. At the hearing, the parties were able to refer this court to Platts’ Steel Markets Daily which showed the price of iron ore on a daily basis. The price information of iron ore in Platts was said by the Company to be based on actually daily trading prices. The Petitioner differed to the extent that the price information in Platts was only a benchmark and did not necessarily reflect the actual market price of iron ore. The difference in my view is only a matter of degree. There being an available market for the iron ore, the price at which the Petitioner has resold the goods to a third party is generally irrelevant and should not be taken in preference to the market price, however the latter may be ascertained: McGregor on Damages 18^th ed para 20-116.

10.  It would not have made any difference even if the Petitioner had made a claim in the SD, which it has not, for its loss arising from the Company’s failure to open the Letters of Credit in question: the Petitioner’s claim would still be a claim for unliquidated damages: McGregor on Damages 18^th ed paras. 20-127-128.

11.  The difference between a liquidated sum and unliquidated damages is well‑known. A liquidated sum is one where the amount is either already ascertained or capable of being ascertained as a matter of arithmetic. If the ascertainment of the sum requires investigation beyond mere calculation, then it constitutes damages: Hong Kong Civil Procedure 2013 para 6/2/4.

12.  In the present case, the fact that the Petitioner has chosen to claim the difference between the contract price payable by the Company and the resale price to Arsen would not make the claim a liquidated one, even though the Petitioner seems to be quite certain about its calculation. The ascertainment of the quantum of damages arising from the Company’s breach of contract requires an investigation of the market price at the time when the iron ore ought to have been accepted or at the time of the refusal to accept: section 50(3) of the Act. This is more than mere arithmetic. Equally, the ascertainment of the costs and expenses alleged to have been incurred by the Petitioner as a result of the Company’s breach of contract ie bank charges, commissions, demurrage etc, is also more than mere arithmetic.

13.  In my judgment, the SD is defective since it is a demand for unliquidated damages dressed up as a liquidated sum. For the same reason, the Petitioner has no locus to present the Petition.

14.  Furthermore, the quantum of the Petitioner’s claim is seriously in dispute.

15.  As far as the claim for US$1,844,782.50 is concerned, I have already mentioned that the Company is only entitled to damages for non‑acceptance under section 50 of the Act (or for failure to open the Letters of Credit). The Company further submitted that in the present case the Petitioner was in substance pursuing a loss of profit claim which was expressly precluded by the contracts.

16.  Clause 21.2 of both contracts provides that:

“The Parties hereby agree that either Party shall not have the right to claim from the other Party any indirect or consequential loss, loss of profit, loss of revenue or similar losses under this Contract except the loss set forth in Clause 7.2 herein.”

17.  Clause 7.2 deals with the situation where the Petitioner has issued a letter of indemnity in favour of a carrier and suffered a loss, due to the Company’s fault, arising from that indemnity, which is irrelevant for the present purposes.

18.  In my view, there is substance in this submission. Whether one takes the Petitioner’s calculation from the table annexed to the SD or from its skeleton submissions, the Petitioner is in effect saying it would have made a larger profit but for the Company’s breach of contract and is claiming the difference as its loss. Clause 21.2 of the contracts may on first impression appear unusual but its provision is clear: a claim for loss of profit is expressly precluded by it.

19.  As Deputy High Court Judge Harris SC (as he then was) rightly pointed out in Re Jackin Total Fulfilment Services Ltd [2008] 3 HKLRD 475 at 480 [9], if the size of the debt is not known with certainty, then a statutory demand cannot be served - the petitioner must set out to prove the company’s inability to pay its debts otherwise than by neglect to comply with a statutory demand. As explained in Re a Company (No. 003729 of 1982) [1984] 1 WLR 1090, this is because the company cannot be said to have “neglected to pay” the sum in the statutory demand within the term of section 178(1)(a) of the Ordinance if it in good faith and on substantial ground disputes the amount of the debt. 

20.  That is the position here. The Company does not seriously dispute that it has failed to open the Letters of Credit or to accept the goods in question. However, the Company does, in my view in good faith and on substantial grounds, challenge the quantum of the claim. In these circumstances, the Petitioner cannot rely on the Company’s neglect to pay the amount of the SD in support of the petition.

21.  Lastly, I should mention that it is not the function of the Companies Court to carry out an assessment of damages for breach of contract in a creditor’s winding up petition. This is a case in which the Petitioner should commence proceedings (legal or arbitral proceedings in accordance with clause 12.1 or 13.2 of the contracts) to recover its losses.

Disposition

22.  For the above reasons, I would dismiss the Petition. I would also make an order nisi that the Petitioner is to pay the Company’s costs, with certificate for counsel.