GW ELECTRONICS CO LTD v. TOSHIBA ELECTRONICS ASIA LTD AND ANOTHER

HCMP 1449/2018

[2018] HKCFI 2443

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1449 OF 2018

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JUDGMENT

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1.  The following declaration is sought by the plaintiff by originating summons dated 12 September 2018:

“that control over the affairs of GW Electronics Company Limited (“Company”) reverts to the board of directors of the Company upon a stay of the winding up order dated 9 January 2017 made against the Company pending appeal in CACV 24/2017 (or further order) and for so long as the stay remains in operation, such that the Company may do all things as may be necessary for the specific purpose of managing, preserving and/or dealing with all issues arising from or in connection with all or any debt(s), charge(s), guarantee(s) and/or any other security(ies) against a PRC company known as 深圳市勁升迪龍科技發展有限公司 (“DTT”) and/or associated persons.”

Background

2.  The plaintiff was the respondent to a petition presented by the 1^st defendant in HCCW 81/2016.  The plaintiff (i.e. the Company) attempted to strike out the petition on the ground that there was a bona fide dispute over the debt on which the petition was based.  The application was dismissed on 30 December 2016, and a winding-up order was made on 9 January 2017.  The winding-up order was premised upon the decision because once the strike-out was declined, a winding-up order normally followed.  The winding-up order was, however, stayed pursuant to an order of Anthony Chan J dated 27 March 2017 pending the Company’s appeal to the Court of Appeal (“Stay Order”).  The court also granted leave to appeal against the decision on that occasion.  The appeal was heard by the Court of Appeal on 19 January 2018, and judgment is pending.

3.  The Company commenced these proceedings, arguing that the declaration is necessary to enable it to take steps in the mainland to preserveits debt and/or what is known as the movable assets charge (“MAC”) againstDTT.  The Company and DTT were parties to a repayment agreement dated2 November 2015.  Pursuant to the said agreement, DTT had the obligation to repay debt owed to the Company and agreed to charge all its existing and future movable assets to the Company.  The terms of the MAC were recorded in Annexure 1 to the repayment agreement.

4.  The MAC was filed and registered in the Market and Quality Supervision Commission of Shenzhen Municipality (“MQSC”) on 16 November 2015.  In January 2017, DTT failed to comply with certain payment obligations under the repayment agreement.  Thereafter, the Company conducted regular searches on the register managed by MQSC in respect of the MAC.

5.  On 11 July 2018, the Company discovered that the MAC was discharged on 15 May 2018 without its consent.  It was later discovered that the discharge was apparently procured by a Miss Liu Xiaoyan claiming to be an attorney acting for DTT and the Company.  The Company had no idea who she was.  Although the Company informed its then solicitor in July 2018 about the discharge, they were advised that despite the stay, the control over the affairs of the Company continued to rest with the Official Receiver (“OR”) acting as provisional liquidators, and actions could only be taken by them.  The parties began to correspond with the OR instead.  

6.  As a result of consultation with its current solicitors, the Company was advised in August 2018 that during the subsistence of the Stay Order, control over the affairs of the Company reverted back to its directors and the liquidation was in effect suspended. 

7.  The parties were at one stage informed that the Court of Appeal expected to hand down its judgment in August 2018 but was subsequently told that it would only be available by the end of October.  The Company therefore commenced a procedure known as administrative review in the mainland on 10 September 2018 to protect its interest.  However, the Company was then advised that the continuation of the administrative review required the Company to submit a number of documents, all of which must be notarised by a China-appointed attesting officer (“CAAO”).  It was said that given the Company is currently subject to a winding-up order, the Company will encounter substantial difficulties in getting the required documents notarised by a CAAO.  Further, even if a CAAO is minded to notarise the documents, there are considerable doubts as to whether the China Legal Service (Hong Kong) Limited (“CLS”), the official institution responsible for approving the notarised documents, would approve of the same.

The Company’s case

8.  Mr Wong argued that the control over the affairs of a company reverts to its board upon a stay of the winding-up order so long as the stay remains in operation.  He drew my attention to passages in texts such as Boyle & Marshall referring to situation where a winding-up order is stayed for a limited period, and in such case, the liquidation is in effect suspended and control reverts to the directors for that period only.  

9.  He also relied on Re Kim Maxwell Ltd [1992] 1 NZLR 69 where Tipping J held that the effect of the winding-up order is suspended during the currency of the stay.  The judge went on to say:

“ Where a winding up is stayed, on whatever basis and for whatever reason, it seems to me that it must follow that the directors resume control. A stay cannot have the consequence that neither the liquidator not the directors have control because that would leave no one in control which is a quite untenable proposition.”

10.  Mr Wong also referred me to paragraph 1 of the stay order which provides that the stay shall not prevent the Official Receiver from receiving on behalf of the Company a certain sum of money or from directing an account for the receipt of that money on behalf of the Company or from giving good receipt of that money.  He submitted that the terms of this order reflect the legal position he advanced as it prescribes that the power of the OR during the subsistence of the stay order shall be suspended save those expressly reserved.

The 1^st defendant’s case

11.  Although the OR took a neutral stance in these proceedings, it is opposed by the 1^st defendant.  Mr Chan (for the 1^stdefendant) took the following points.  Firstly, Mr Chan took a point on the purpose of the stay.  He argued the fact that the powers of the directors had been suspended upon the making of the winding-up order and the stay order does not ipso facto have the effect of reverting complete or genuine control over the affairs of the Company to the board.  This is because the predominant underlying reason or purpose for granting the stay was for the purpose of saving or deferring liquidators’ expenses pending the appeal.

12.  Further, even if the directors did have some residuary powers to act for the Company during the stay for certain purpose, there is still no or no sufficient evidence before the court to show that immediate actions are not only necessary but would also be effective to recover or preserve assets for the benefit of the creditors, contributories or the OR (as provisional liquidators).  He said the outcome is at best doubtful.

13.  Finally, there is a risk that the 1^st defendant or other unsecured creditors would be prejudiced by funding the contributories’ claim to seek reimbursement of legal and other professional costs incurred or to be incurred in the intended recovery actions from the Company or to claim priority over this new debt over those of the 1^stdefendant and other unsecured creditors.

14.  Although the OR was neutral, Mr Lee for the OR helpfully drew my attention to the following matters.  One, the OR agrees with the general proposition advanced by the Company, ie once the winding-up order was made, the control of the Company reverts back to its board.  The board is therefore at liberty to take the intended action if they so wish.  At one point, the possibility of lifting the stay to enable the OR to take action on behalf of the Company was considered and floated in correspondence.  However, given the OR’s view on the general proposition, the idea was not put into effect.

15.  As to the purpose of the stay order, on top of the points made by Mr Chan, he referred me to the evidence adduced by one of the directors and creditors of the Company (ie Mr Lo Chi-tak Lewis) in support of the application for stay where he mentioned that if a stay is granted, the directors of the Company would be able to continue to monitor and ensure that DTT would make the schedule payment to the Company.  DTT was the only debtor of the Company, and on this basis, his understanding was therefore that the directors of the Company had the responsibility of dealing with the DTT debt during the stay.

Discussion

16.  It is unusual for the court to stay winding-up proceedings pending appeal, and the practice of the English court is not to grant a stay.  See Re King Pacific International Holdings Ltd [2002] 3 HKLRD 474 at paragraph 13 per Kwan J (as she then was), referring to the well-known decision of Plowman J in Re A&BC Chewing Gum [1975] 1 WLR 579.

17.  There were, however, special circumstances in the present case.  The stay order was made by consent. The court was also informed on that occasion that the disputed debt owed to the 1^stdefendant was already secured by the OR by then.  Although there was a total of five creditors, the 1^stdefendant was the major creditor and the four others confirmed that they did not intend to pursue the debts against the Company.  There was in effect only one creditor.

18.  As mentioned above, there was also a rider to the stay order, namely, that the OR was not prevented from receiving on behalf of the Company the sum of RMB 6,539,714.92 and US$1,435,930.05 (or the Hong Kong dollar equivalent).

19.  I have considered the context in which the stay order was made and the positions of the three parties before me.  Despite their helpful and persuasive submissions, I am unable to accept the submissions advanced byMr Chan for the 1^st defendant.  Insofar as the purpose of the stay is concerned, I accept as a matter of general proposition that the control of the Company would be handed back to the board in the event of a stay.  This is also the OR’s position in the context of this matter.

20.  In the present case, the stay order was made by consent even if one is to assume that the purpose of the stay is to save or defer liquidation expenses (which is not surprising).  I cannot see how this has anything to do with the effect of the stay insofar as the role of the board is concerned.  One would have thought that it is consistent for the power to revert back to the board if the purpose is for saving liquidation expenses.

21.  Mr Chan also submitted that the proposition advanced by the Company would create a legal oxymoron because the stay was not worded on specific limited terms and the Company would be wrong in contending that only specific and limited powers revert to a fully reinstated board, but whether Mr Wong is contending is that the declaration is a limited one and his submission is that the board resumes control over the affairs of the Company in its entirety upon a stay.

22.  Mr Chan also suggests that a new application for stay under section 209 ought to be made to enable the court to consider the relevant evidence and report of the OR to form a view on whether a new stay for a limited purpose should be granted “on such terms and conditions as the court thinks fit”.

23.  In this regard, I cannot see why a new application for stay has to be made.  Given my views on the general proposition, the idea that a new stay application has to be made must be rejected.

24.  As to the point about doubtful outcome, I accept that it is by no means certain that the actions to be taken by the Company would definitely result in substantial recovery.  On the face of the evidence before me, which is not disputed by the 1^st defendant, we are dealing with a PRC company seeking to evade liability to pay some RMB 74 million to the Company. Whilst there is no certainty, the steps proposed to be taken are reasonable ones and ought to be done by the directors to safeguard the interests of the Company.

25.  Despite Mr Chan’s attack on the quality of the evidence before me, I am satisfied that the proposed actions are necessary. Costs and expenses will no doubt be incurred, and I appreciate the point on potential depletion of assets advanced by Mr Chan.  However, we are dealing with a very significant amount owed by DTT to the Company.  The need to take action was only discovered months after the stay order.  There is therefore no inconsistency between the need to take action now and the Company’s concern on incurring liquidation costs when the application for stay was made.

26.  Further, the decision of the Court of Appeal should be availablesoon, and the period of time where costs will be incurred should therefore be limited.  Whether the parent company who will be funding the associated legal costs in this period is able to recover the same from the Company is not a matter to be decided today.  On the basis of the evidence available, I am not satisfied the Company is throwing good money after bad by going after DTT and those associated with it.  

27.  I have also considered whether the declaration is necessary and not academic.  I am satisfied that there is a practical need for the same and the Company has a genuine legitimate interest of a material character to be enforced or protected.  Whilst Mr Chan pointed to the seemingly wide scope of the declaration, I believe it is necessary given the fluidity of the situation that the Company is facing, and there is in any event no suggestion that it ought to be turned down or tainted with.

28.  In the circumstances, I will allow the Company’s application and I shall hear the parties on costs.

(Discussion re costs)

29.  This is my decision on costs.  The general position is that costs should follow the event.  Mr Chan opposed the application for costs against the 1^stdefendant on the following bases:

(1)   Their submissions were helpful and reasonable in the circumstances.  It was, for example, the 1^st defendant who drew the court’s attention to the evidence before A Chan J when the stay order was made.

(2)   They were entitled to protect their own interests as major creditor of the Company.

(3)   The parties had to come to court in any event as they are seeking declaratory relief and the hearing could not therefore be avoided. 

30.  On balance, I form the view that costs should follow the event in this matter.  The assistance provided by Mr Chan was most helpful, and some of the concern raised by him on the evidence before the court is legitimate. However, the hearing was contested and given my finding in favour of the Company, I do not believe it is appropriate to depart from the general rule.