OLDHAM, LI & NIE v. HIGHFIT DEVELOPMENT CO LTD

HCCW 61/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 61 OF 2008

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D E C I S I O N

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1.  This is a creditor’s winding-up petition against Highfit Development Limited (“the Company”).  It was presented on 22 February 2008 by Messrs Oldham, Li & Nie, a firm of Hong Kong solicitors (“the Petitioner”).

2.  When presented, the debt on which the petition was based was said to be HK$1,457,557.  A statutory demand for this amount had been served on the Company on 17 January 2008, but had not been met.

3.  At the hearing, the Petitioner accepted that the petition debt should be reduced by HK$202,000 in respect of disbursements which had been billed to the Company but which had been settled directly by the Company.

4.  The debt that is said to be outstanding is therefore HK$1,255,557, made up of HK$993,361 in respect of profit costs, HK$52,060 in respect of disbursements, and HK$210,136 in respect of interest on those two sums.

5.  The debt is disputed by the Company, which says that it had been a client of the Petitioner since 2002 and that there was, at the outset, an agreement that all fees charged by the Petitioner to the Company would attract a discount of 15 per cent on the profit costs billed by the Petitioner.  Since 2002, the Petitioner has billed the Company for very substantial amounts, which have been paid in full with the exception of the amount that is the subject of the present petition.  The total of such bills that have been paid was HK$7,989,197.17, of which HK$6,881,752.67 represented profit costs.

6.  The Company says that contrary to what had been agreed, no discount was in fact made in respect of the profit costs charged on those bills.  Had the promised discount been made, the previous bills would, says the Company, have been reduced by some HK$1,032,262.90.  If a similar discount were made on the remaining bills in respect of which the petition has been presented, those bills would fall to be reduced by HK$149,004.15.

7.  The Company says that credit should be given for the discount which should have been, but was not, applied to the earlier bills.  If this were done and the discount is also applied to the remaining bill or bills, the total amount of the discounts which should have been given would exceed the proper amount of profit costs and disbursements under the remaining bills, and the Company would therefore in fact be in credit, albeit to a small extent, with the Petitioner, and in consequence, no interest could be chargeable, so that that element of the petition debt can be ignored.

8.  The Petitioner denies that there was any agreement to give a discount on its profit costs to the Company in respect of the work done by it for the Company, whether at the rate of 15 per cent or any other rate.

9.  The court’s approach to creditors’ winding-up petitions where a company claims that the debt on which the petition is based is disputed is well established.  The burden is on the company to establish that the debt is disputed bona fide and on substantial grounds.  See, for example, Re ICS Computer Distribution Services Limited [1996] 3 HKC 440.  This test has been consistently applied by the courts.  In applying the test, it is necessary to bear in mind that, in this context, “substantial” means that the dispute must have substance and is not frivolous; that the court should not accept the evidence of the company uncritically, but should look at it against so much of the background and evidence that is not disputed or not capable of being disputed in good faith, and be wary of unsubstantiated and unparticularised assertions.

10.  While the court will not try a dispute on the basis of affidavit evidence alone, it must necessarily take a view on the basis of the affidavit evidence that has been filed as to whether or not the dispute that the company seeks to raise is one with real substance or whether it is merely an attempt by the company to throw up dust and confuse the issue.

11.  Those observations are based on observations of Madam Justice Kwan in two unreported decisions, Re Hong Kong Construction (Works) Limited (unreported, HCCW 670/2002, Kwan J, 7 January 2003) and Re Grandfield Pacific Hotel Limited (unreported, HCCW 29/2001, Kwan J, 3 January 2002). 

12.  In this case, the evidence that the Company has put forward consists of two affidavits by a Miss Stella Sberro, a French lawyer who formerly had an association with the Petitioner and who was a friend of Miss Pearl Ling, who appears to be the principal shareholder of the Company, from whom, I was informed, instructions were taken.  There is also a further affirmation by Mr Chow Lok Kwan, the Company’s accountant.

13.  This evidence was responded to for the Petitioner by an affidavit from Mr Gordon Oldham, a partner in the Petitioner.

14.  It is Miss Sberro’s evidence that is of principal importance for present purposes, as Mr Chow’s evidence consists mainly of calculations, the accuracy of which does not appear to be disputed, to show the effect of applying the allegedly agreed discount to previous and current bills issued by the Petitioner.  He does not suggest that he has any personal knowledge of the alleged discount agreement.

15.  Miss Sberro’s evidence in her first affidavit is to the following effect.  She says that she formed an association with the Petitioner at some time prior to 2002, as she had connections in France and was in a position to introduce French clients to the Petitioner.  She said that it was agreed between her and Mr Oldham that she would be paid a commission of between 15 and 20 per cent of the profit costs charged by the Petitioner to such clients introduced by her.  She says that she was also for a period a registered foreign lawyer with the Petitioner.  She says that she introduced Miss Ling to Mr Oldham in 2002, but that as Miss Ling was a personal friend, she did not wish to take any commission in respect of bills rendered to her.

16.  At this time, it seems that Miss Sberro and her father, or companies controlled by him or them, were in arrears in respect of bills for legal services which had been rendered by the Petitioner to them, in particular to a company controlled by her father called Pacific Commerce Limited.  The amount of these bills was not insubstantial, being in excess of HK$400,000.

17.  Miss Sberro says that she agreed with Mr Oldham that in consideration for her not taking any commission in respect of the referral of Miss Ling and the Company, outstanding fees owed by Pacific Commerce Limited would be waived by the Petitioner.  She goes on to say that Mr Oldham also agreed with Miss Ling that his firm, the Petitioner, would give the Company a discount on all fees that it was to bill the Company.  She says that she recalls this having been mentioned at the first couple of meetings between Mr Oldham and Miss Ling and also being reiterated or confirmed on a number of subsequent occasions.

18.  Miss Sberro’s second affirmation does not take matters much further so far as the alleged discount is concerned.  It deals mainly with the existence of the commission agreement between herself and the Petitioner, the existence of which had been denied by Mr Oldham, and also with the circumstances in which her association with the Petitioner came to an end, a matter which was deposed to by Mr Oldham in his affidavit in reply.

19.  However, Miss Sberro does not anywhere in her affidavit state what the allegedly agreed discount was in terms of its size.  It appears to be left largely to assumption or inference that the discount was to match the amount of commission allegedly foregone by her.

20.  As I have noted, Mr Chow did not profess to have any personal knowledge of the alleged discount agreement.  His evidence therefore does not take matters any further in this respect.

21.  Mr Oldham denies the existence of any agreement to give any discount to the Company.  In his affidavit filed in reply to the Company’s evidence, he also denied that there was an agreement to pay commission at a rate of 15 or 20 per cent to Miss Sberro.  His position was that while Miss Sberro was expected to be paid something, the amount that she was to be paid was not by way of a fixed commission on all billings to clients introduced by her, but would vary from case to case on an ad hoc basis.

22.  For the Company, Mr Suen, who appeared today, submitted that first, on the basis of Miss Sberro’s evidence, there was clearly a dispute as to whether or not there had been any agreement as to the giving of a discount of 15 per cent by the Petitioner to the Company.  This being a matter on which Miss Sberro and Mr Oldham had given diametrically opposed affidavit evidence, it must (said Mr Suen) necessarily be a dispute of substance which should not be determined in the context of winding-up proceedings but should be left to be determined after trial in an action to be brought by the Petitioner against the Company.

23.  Second, Mr Oldham’s evidence should be viewed with reserve, as he was a partner of the Petitioner and, as such, had an interest in the matter.  By contrast, said Mr Suen, Miss Sberro was an independent witness.

24.  Third, Mr Oldham’s evidence in relation to the commission agreements or arrangements with Miss Sberro was inconsistent with contemporaneous correspondence which tended to suggest that such an arrangement did exist and his evidence should be viewed with considerable reserve for this reason also.

25.  Apart from Miss Sberro’s evidence, and this is the fourth point, it was also suggested that the arrangement that was suggested made commercial sense for two reasons.  First, that it was normal, or at least not uncommon, for a discount to be offered to a client for whom substantial work which would generate large billings was likely to be undertaken; and second, the arrangement involved, in effect, the passing on of Miss Sberro’s waived commissions to the Company, the client in this case.

26.  With respect, I am unable to accept that these submissions provide an answer to the petition.  While it is true that there appears on the face of the evidence to be a dispute as to the existence of the discount agreement alleged by the Company, it remains necessary, as the authorities to which I have already referred indicate, for the court to consider with a not wholly uncritical eye the evidence which has been put forward in support of the alleged dispute.

27.  When this is done, it will be soon apparent that the evidence of Miss Sberro is not entirely satisfactory.  Nowhere in her evidence does she actually state what the amount of the alleged discount was agreed to be.  Indeed, her evidence suggests at best that Mr Oldham may have indicated that some discount would or might be offered, but not that any particular rate of discount would be applied. 

28.  That does not, in my view, suggest that there was any concluded agreement in this respect.  Further, as Mr Poll, appearing for the Petitioner, pointed out, apart from Miss Sberro’s assertion, there is no other evidence supporting the alleged discount agreement.  In particular, it is surprising that Miss Ling, with whom the agreement must have been made if it had been made, has not filed or seen fit to file any evidence to depose to it. 

29.  But more pertinently, to my mind, the contemporaneous documentation and correspondence between the parties does not support, and appears to be inconsistent with, such an agreement.  As to this, there is no reference whatever in any correspondence between the Company and the Petitioner to such a discount having been agreed.  This is against a background in which from 2002 onwards, the Petitioner provided what appear clearly to have been very substantial legal services to the Company, for which it billed the Company somewhere in the region of HK$9 million in total.

30.  Of these bills, bills representing slightly under HK$8 million were paid in full.  They were not, however, always paid on a timely basis.  Mr Oldham has exhibited correspondence which indicates that the Petitioner did, from time to time, press for payment in respect of some of these bills, with the Company promising that it would pay if given time to do so.

31.  Miss Ling, and indeed Miss Sberro, were parties to much of this correspondence.  However, nowhere in this correspondence is there any reference by the Company to the alleged discount, nor is any question raised as to whether or not the alleged discount had in fact been given or taken account of in the bills that had been rendered.  This, it seems to me, is quite inconsistent with the existence of the alleged discount agreement.

32.  I do not think that Mr Suen’s submission that the Company reposed trust and confidence in the Petitioner is any answer to this.  This submission was, I think, designed to explain why the Company did not query the bills that had been rendered.  However, it seems to me that it must have been plain from the bills and statements of account rendered from time to time that no discount was being given, and that being so, the failure of the Company to challenge the bills, or at least to query whether or not the supposedly agreed discount had been taken into account, is inexplicable and quite inconsistent with the existence of the agreement alleged.

33.  Further, there is no reference to any such discount in either the retainer agreement entered into between the Company and the Petitioner in 2002 at the outset of their relationship or in a subsequent retainer agreement entered into in 2004, which would, in any event, appear to supersede any previous agreement that had been made.

34.  As to the suggestion that Mr Oldham’s evidence should be viewed with reserve, this is based on what is said to be his unsatisfactory or weak evidence in relation to the commission agreement.  It should, however, be borne in mind that Mr Oldham does not deny that Miss Sberro was to be paid something for work she did or clients she introduced to the firm.  He was disputing the existence only of a fixed commission agreement.

35.  While the correspondence exhibited by Miss Sberro does, I think, give some reason to doubt whether Mr Oldham’s version of events is entirely correct, as some of it does appear to contain references to such a commission agreement and there are other documents which are consistent with the existence of such an agreement, the true position in relation to the commission agreement does not, at the end of the day, seem to me to be a particularly relevant factor in the context of the Petitioner’s claim against the Company.

36.  It was also suggested that Mr Oldham’s evidence should be viewed with reserve on the basis of his position as a partner of the Petitioner.

37.  However, I do not think that either of these points detracts in any way from the views which I have expressed, having regard to the state of the documentary evidence that is before me.  Nor do I think that it is entirely correct to say that Miss Sberro is an entirely independent party, since it appears from the correspondence which I have been shown and which have been exhibited in the proceedings that she clearly had a fairly close relationship with Miss Ling and in many ways acted almost as Miss Ling’s agent for the purpose of dealing with the Petitioner in relation to the matters on which Miss Ling instructed the Petitioner, and in particular in relation to the question of outstanding fees.

38.  In saying this, I do not overlook the fact that one of the commercial justifications relied upon in support of the discount agreement is Miss Sberro’s alleged agreement to waive commission in respect of billings by the Petitioner to the Company.  To my mind, however, that agreement, if in fact it was made, does not lead to the conclusion contended for, namely that it was much more likely that there was therefore a corresponding discount agreement between the Petitioner and the Company.

39.  I say this for two principal reasons.  First, Miss Sberro’s case is that there was an agreement not just as to the discount, but also that legal fees payable by Pacific Commerce Limited would be waived in consideration of her waiving her commissions in relation to work done for Miss Ling and the Company.  As a result, it appears that over HK$420,000 worth of fees incurred by Pacific Commerce Limited was waived by the Petitioner.

40.  Assuming that there was an entitlement on Miss Sberro’s part to receive commission at the rate of 15 per cent, this would have required billings of some HK$2.8 million to be made as against the Company in order for the Petitioner to achieve savings of the commission payable to Miss Sberro to offset the fees foregone from Pacific Commerce Limited.

41.  Although it eventually transpired that more than this amount was in fact billed to the Company over a period of years, this does not seem to me to be something that would necessarily have been known to the parties at the time.  Put another way, by agreeing both to waive fees owed by Pacific Commerce Limited and to give a 15 per cent discount to the Company, the Petitioner would necessarily have been giving away more than it would have saved from the non-payment of commissions to Miss Sberro.  This does not strike me as making a great deal of commercial sense or as being something which was commercially inherently likely.

42.  The second reason for my coming to this conclusion is this.  The correspondence that is relied upon by Miss Sberro in relation to the existence of the commission agreement does not, to my mind, support the existence of the discount agreement; rather the reverse.  In some respects it positively suggests that there was no discount agreement as is now alleged.

43.  In this context, I would refer briefly to three pieces of correspondence that seem of particular relevance in this respect.  The first is an email from Miss Sberro to Mr Oldham that was exhibited as part of Exhibit 4 to her second affidavit.  That email is dated 25 August 2004, and in it Miss Sberro says this:

“Just one remark.  The invoice for PCL [i.e. Pacific Commerce Limited] regarding Fortis Bank and Tak Shing, we have been agreed to void it as I do not take any commissions on Pearl, or maybe do you prefer that I take the commission on Pearl and we do not void PCL invoices?”

44.  Quite apart from the fact that this extract makes no reference to a discount agreement having been agreed with the Company, which may, as Mr Suen suggested, have been because Miss Sberro in this correspondence, as with the other correspondence to which I shall refer, was concentrating more on her personal position or that of Pacific Commerce Limited vis-à-vis the Petitioner, the fact is that the suggestion that the position was either that Pacific Commerce’s fees should be waived or alternatively that Miss Sberro should take a commission is inconsistent with the suggestion that Miss Sberro had unconditionally agreed to waive her commissions which are the underpinning or foundation for the suggestion that there was to be a corresponding discount in the fees offered to the client, the Company.

45.  There are two other passages in the correspondence between Miss Sberro and Mr Oldham to similar effect.  The first is in a handwritten letter from Miss Sberro to Mr Oldham dated 14 June 2005, in which she says:

“We were agreed, you and I, to take out of statement all PCL bills due to you in exchange of Pearl’s file for which I did not take commission.  So we have discounted at this time HK$100,000 for payment of all those bills and Clara, who did not pay.”

46.  This again does not suggest that there was any agreement to pass on any discount in relation to the saved commissions on Miss Ling’s work.  Rather, it suggests that the saved commissions were intended to compensate for writing off the bills that had previously been rendered to Pacific Commerce Limited, which remained outstanding at that time.

47.  Finally, there is another letter, or perhaps it is an email, of 1 May 2006 at the time when the relationship between Miss Sberro and the Petitioner appeared to have taken a turn for the worse and in which there was some consideration of a termination of their association, which in fact took place in due course.  In that message, Miss Sberro said this:

“At this stage of our collaboration, it would appear that there is a desire on your part to terminate our association.  If we choose to do such, all past fees which are overdue, as well as the Pearl Ling case, which added more than US$1 million, according to your record of December 2005, to your practice, would have to be settled.  Quite naturally, the fees I owe your office should be deducted from this larger sum owed me.”

48.  This letter too is, to my mind, completely inconsistent with there having been a settled agreement to waive the fees in question, and even if it were not and this were merely a negotiation tactic on the part of Miss Sberro, it clearly suggests that Miss Sberro was taking the view at this stage that she should be paid commissions in respect of fees generated from Miss Ling and the Company as a client of the Petitioner, in which case there would be no basis on which the Petitioner would have agreed to pass on any discount to Miss Ling.

49.  Finally, the suggestion that it makes commercial sense to offer a discount to a large client does not, in my view, really take the matter any further.  While it may not be uncommon for this to be done, whether or not this was done in any particular case is a question of fact which will have to be determined by reference to the evidence, as it does not seem to me that a practice such as that alleged can be said to in any way be a universal practice.

50.  However, on the evidence in this case, it does not seem to me that any case of substance has been made out for the existence of the discount agreement alleged.

51.  In those circumstances, I am quite satisfied that the Company has failed to discharge its burden of establishing the existence of a bona fide dispute that is of substance, and having come to that view, it seems to me that the appropriate disposition of this matter would be to make the usual winding-up order with costs against the Company.