HCCW 422/2010
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMPANIES WINDING UP PROCEEDINGS NO. 422 OF 2010
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IN THE MATTER OF CAPITAL GLOBE LIMITED
and
IN THE MATTER OF SECTION 177(1) OF THE COMPANIES ORDINANCE, CAP. 32 OF THE LAWS OF HONG KONG
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BETWEEN
ABDUL AZIZ ESSA
Petitioner
and
CAPITAL GLOBE LIMITED
Respondent
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Before: Hon To J in Chambers (Open to Public)
Date of Hearing: 17 February 2011
Date of Decision: 17 February 2011
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D E C I S I O N
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Background
1. This is the Petitioner’s application for discovery. The Petitioner is a foreign national resident in Pakistan. The Respondent is an investment company incorporated in Hong Kong (“Company”).
2. On 9 September 2010, the Petitioner served on the Company a statutory demand for payment of USD12 million payable pursuant to the terms of a series of time charter agreements and AUD14 million payable pursuant to an Australian property related agreement. The time for compliance with the statutory demand was, at least as the Company understood, extended to until 7 October 2010.
3. On 7October 2010, the Company made an ex parte application under HCMP 1937 of 2010 before Harris J for an injunction order to restrain the Petitioner from presenting a winding-up petition. The application was supported by the 1st affidavit of Brian Lee, a director of the Company. Harris J granted the injunction. Pursuant to the Company’s undertaking an inter parte summons was issued for its continuation returnable on 15 October 2010.
4. On the late afternoon 14 October 2010, the Petitioner’s solicitor, Watkins, filed an affirmation in opposition to the Company’s application. At the hearing of the inter parte summons, Harris J was sceptical of Brian Lee’s 1st affidavit and thought there was insufficient evidence before the Court to demonstrate a bona fide dispute of the debt on substantial grounds or even a strong possibility of such a dispute existing. His Lordship set aside the ex parte injunction order on the ground of material non-disclosure on the part of the Company and ordered the Company to pay the Petitioner’s costs on an indemnity basis. I note the Company’s argument that the injunction order was discharged because it had no opportunity to respond to Watkins’ affirmation and its newly instructed counsel was unfamiliar with the matter.
5. Then the Petitioner filed the petition on 18 October 2010. On 19 November 2010, he filed an application for appointment of provisional liquidator. Pursuant to the directions of Harris J, Brian Lee filed his 2nd affidavit in opposition on 30 November 2010. That application was, however, dismissed on 8 December 2010 by consent with costs in the cause of the petition.
6. On 13 December 2010, the Petitioner filed his 3rd affirmation in response to Brian Lee’s 2nd affidavit. Then Brian Lee filed his 3rd and 4th affidavits in opposition to the petition on 20 and 31 December 2010 respectively.
7. On 31 December 2010, the Company applied for security for the Respondent’s costs. On 13 January 2011, the Petitioner applied for discovery of the Company’s audited accounts for the year ended 31 March 2009.
8. On 3 January 2011, the parties appeared before me for directions. The Petitioner sought leave to file an affirmation in reply to the 3rd affidavit of Brian Lee and for all evidence filed in the injunction application and the appointment of provisional liquidator application in HCMP 1937 of 2010 to stand as evidence in the winding-up petition. Mr Leong SC, counsel for the Company, had no objection to the Petitioner’s filing affirmation in reply to Brian Lee’s 3rd affidavit but asked for leave to file another affidavit in reply; and objected to have the evidence filed in the injunction application and in the provisional liquidator appointment application to be admitted as evidence in the winding-up petition.
9. As Brian Lee had filed his 3rd affidavit in opposition to the winding-up petition, I therefore took the view that the Petitioner was entitled to have the last word by way of reply. It was obviously inappropriate for Brian Lee to have the last word or to start yet another round of affidavits.
10. As for the evidence filed in the injunction application and provisional liquidator appointment application, Mr Leong SC argued that such evidence was irrelevant in the winding-up petition which would only be concerned with the issue whether the debt is disputed on substantial grounds. He confirmed that the Company would not be relying on anything other than Brian Lee’s 3rd affidavit in resisting the winding-up petition. On the other hand, as submitted by Mr Kwok, counsel for the Petitioner, the issue for determination in the injunction application was also whether the debt is disputed on substantial grounds. He argued that it would save a lot of duplication if the evidence filed in the injunction application and appointment of provisional liquidator application were to stand as evidence in the winding-up petition, so that what was left was for the Petitioner to file a reply to Brian Lee’s 3rd affidavit. That was clearly sensible. After hearing argument, I gave directions in the terms sought by the Petitioner.
The discovery application
11. The present discovery application was related to one document produced by Brian Lee in his 1st affidavit in the injunction application. In paragraphs 65 and 66 of that affidavit, Brian Lee averred that the Company was a successful and solvent company with very substantial assets. He said that the Company had always been able to honour its financial obligations and repay all its bank loans. He said at paragraph 65:
“According to the latest audited accounts of [the Company] for the year ended March 31 2009, the share capital and retained earnings of [the Company] are respectively HK$130,985,774 and HK$127,432,503. The net current asset of [the Company], which reflects its solvency, and without taking into account the alleged claims of [the Petitioner] and the claims of a Mr Gul Mohammed (details of which are provided below), is HK$259,466,536. Now shown before me and marked BL-22 is a copy of the Balance Sheet of [the Company] from its latest audited account.”
The Petitioner sought discovery of the full set of the audited account from which the one page balance sheet exhibited by Brian Lee was extracted.
12. The basis of the application is Order 24 rule 10 of the Rules of the High Court (“RHC”), which applies to winding-up petitions by virtue of rule 210 of the Companies Winding Up Rules, Cap. 32H. Order 24 rule 10 entitles a party to require production by the other party for inspection documents referred to in that other party’s pleadings, affidavits or witness statements or expert reports.
13. Mr Leong SC argued that the Petitioner’s application was entirely misconceived and opposed the application on the basis that: (1) the usual discovery principles under Order 24 of the RHC are inapplicable to creditor’s petition for winding-up the way they do to other proceedings; (2) solvency of the company does not become relevant until the petitioner has proven himself as a creditor; (3) the 2009 audited accounts were only referred to at the pre-petition stage and the Company has confirmed not to refer to them in the winding-up petition proceedings; and (4) the discovery is not going to assist in the fair disposal of the winding-up proceedings or for saving costs.
Phoenix Telecommunication Limited and Dragon Investment Company II LLC, HCMP 514/2002
14. The thrust of Mr Leong SC’s argument is that special rules of discovery apply to a creditor’s winding-up petition which render the general rules under Order 24 inapplicable. He relied on the judgment of Yuen JA, sitting as an additional judge of the Court of First Instance, in Phoenix Telecommunication Limited and Dragon Investment Company II LLC , HCMP 514/2002 (“Phoenix case”) in support of his proposition.
15. In the Phoenix case, the defendant (“Dragon”) issued a statutory demand against Phoenix in the sum of $1.6 million. When the demand was not met, it threatened action against Phoenix. Phoenix then sought an injunction to restrain Dragon from presenting a winding-up petition as did the Company in the present case. In the end, Yuen JA was satisfied that Phoenix had put forward a sufficient case to raise a bona fide dispute about the debt on substantial grounds and granted the injunction. Immediately, it can be appreciated that the present case is the reverse of what happened in the Phoenix case as Harris J held at the inter partes hearing that there was insufficient evidence to demonstrate a bona fide dispute on substantial grounds or even a strong possibility of such a dispute existing and discharged the injunction order granted earlier at an ex parte hearing.
16. The part of the judgment in the Phoenix case relied on by Mr Leong SC is the statement of the legal principle quoted by Yuen JA at paragraphs 36 to 40, in particular paragraph 40:
“36. It is well-established law that a petition to wind-up a company is a summary procedure, and if the company can show that there are substantial grounds which support its bona fide dispute of the alleged debt, the Court would not (unless the dispute is capable of being determined simply) undertake a trial at the hearing of the petition, but would strike out the petition.
37. The petition would be struck out on the basis that a petitioner with a debt which is disputed on substantial grounds has no locus standi to present the petition, and the presentation of a petition in those circumstances would be an abuse of the process of the Court. The same approach should be taken on a company's application to restrain the presentation of a petition (Mann v Goldstein
38. Thus, if a company can show, before a petition is presented by a particular alleged creditor, that the presentation of a petition by that creditor would be such an abuse of process, then the company would be entitled "as of right" to restrain the presentation (Stonegate Securities Ltd v Gregory
39. Of course, in considering the company's evidence disputing the debt, the Court does not simply accept the company's allegations in isolation, but would see whether they are believable in the context of documents or evidence which are beyond any reasonable dispute (Re Safe Rich Industries Ltd
40. But if the company can show a bona fide substantial dispute, then in my view the Court should restrain the presentation of the petition without taking into account the question of the company's solvency. If a petitioner's debt is bona fide disputed on substantial grounds, he has no locus standi to present a petition anyway. To suggest (as in the discussion in McPherson's Law of Company Liquidation other creditors who have chosen not to present a petition themselves or to apply to be substituted as petitioners, would be to enable officious persons, by manipulating the Court's process, to inquire into a company's financial position and to disrupt its business activities. That would obviously not be right.”
Mr Carolan, counsel for the Petitioner, had no dispute about these legal principles. He emphasised that the present caseis factually distinguishable from the Phoenix case.
17. Mr Leong SC emphasised the importance that this is a creditors’ petition. He referred to paragraph 6 of Practice Direction 3.4 which expressly directs that for creditors’ petition no discovery of documents will be ordered unless good grounds for departure are shown and that paragraph 4 of the Practice Direction precludes cross-examination on affidavit unless for valid reason. He submitted that the rationale behind paragraph 40 of the judgment in the Phoenix case was to prevent an officious person, by manipulating the court’s process, to inquire into a company’s financial position and to disrupt its business activities. He further argued that not until the Petitioner has established his status as a creditor would solvency of the Company become relevant. He said that the alleged debt in the present case is far from being undisputed. Hence, Mr Leong SC submitted that following the principle in the Phoenix case and the spirit in Practice Direction 3.4, this Court should refuse the discovery and stop the Petitioner from manipulating the Court’s process to inquire into the Company’s financial position.
18. The Phoenix case was not about discovery. The basic principle is that a petition on insolvency ground would be struck out if the company could show a bona fide dispute of the petitioning debt on substantial grounds. It would be an abuse of the process of the Court for a petitioner who had no locus standi as a creditor to present a petition. Hence, the court would restrain a petitioner who does not have the locus standi of a creditor from presenting a petition or from seeking discovery of the Company’s accounts. But that case is not authority for the proposition that a petitioner has to satisfy the court that the debt is not disputable before it could invoke any discovery procedures relating to solvency of the company.
19. In the present case, the Company had it chance. It obtained an ex parte injunction on the basis that it had a bona fide dispute of the petitioning debt on the strength of Brian Lee’s 1st affidavit, but the injunction was discharged at the inter parte stage when Harris J was satisfied of the contrary. The present case has gone past the stage which the Phoenix case was in. While the issue whether the debt is disputed on substantial grounds remains to be determined, it is not a case, like the Phoenix case, in which the court was satisfied that the debt was clearly disputable, such that the petitioner clearly did not have the locus standi of a creditor to file a petition. The question whether the petitioning debt is bona fide disputed on substantial grounds or whether the Petitioner has the locus standi of a creditor remains to be determined at the forthcoming hearing. If that issue is resolved in favour of the Petitioner, the issue of insolvency would be very relevant as to how the discretion of the Court in determining the petition would be exercised.
Discussion
20. Having so considered the Phoenix case, all of Mr Leong SC’s grounds of opposition may be disposed of together and briefly.
21. Order 24 rule 10 of the RHC is phrased in absolute terms. If a party chose to exhibit or refer to part of a document in his pleadings, affidavits or witness statements served under Order 38 rule 2A or experts’ reports, the other party shall be entitled to serve a notice on him requiring him to provide a copy or to produce the entire document for inspection. The party served with the notice must provide copy or make the inspection available. A party’s right to discovery under that rule is an absolute right. Practice Direction 3.4 does not deal with discovery. It could not have the effect of overriding Order 24 rule 10 of the RHC as to render it inapplicable to creditors’ petitions.
22. The Company produced Brian Lee’s 1st affidavit exhibiting the balance sheet. It relied on it at the injunction application and had the benefit of the use of the document. The balance sheet was produced for the purpose of restraining the Petitioner from filing the petition. The central issue in that injunction application is the same as that in the winding-up petition, i.e. whether the debt is bona fide disputed on substantial grounds. It lies ill in the Company’s mouth to say now that it will not be relying on the balance sheet as if it had never been produced. The clock could not be turned back and history could not be re-written. What had been produced had been produced. It is in evidence for all intents and purposes, including to be made use of by the Petitioner as the basis for requesting for the full set of 2009 audited accounts. The only bar to the request is relevance.
23. The petition was presented on the basis of the Company’s failure to pay despite service on it of the statutory demand. If the Petitioner could make out a prima facie case of a debt, it would be up to the Company to show it had a bona fide dispute about the petitioning debt on substantial grounds. Until that is done, the Company is deemed under section 178 of the Companies Ordinance to be unable to pay its debts. The solvency of the Company would clearly be a relevant issue. In addition, the Petitioner is entitled to adduce whatever evidence available to prove that the Company is insolvent. I am not aware of any practice that a creditors’ petition is to be heard in two stages, by first determining if the debt is bona fide disputed on substantial grounds and, if not, whether the company is insolvent. The petitioner is free to present evidence on both issues. On the other hand, the petitioner may adduce evidence about the debt only and then rely on the presumption under section 178. But what is important is that the proceeding shall be kept summary.
24. The balance sheet of the Company would be relevant in determining the solvency issue and so would the complete set of 2009 audited accounts from which the balance sheet was taken and of which the balance sheet represented a summary. It needs no imagination to think that the 2009 audited accounts would be relevant. In particular, as submitted by Mr Carolan, in this case the most substantial assets listed may comprise wholly or in part various shareholdings in some Australian related companies in the Capital Globe group. Seven of such companies are now known to have recently been placed in receivership by a secured creditor, National Australia Bank. The 2009 audited accounts would certainly be necessary for the disposal of the issue before the Court at the hearing of the petition.
25. There is nothing to suggest the spirit behind Practice Direction 3.4 is applicable to discovery under Order 24 rule 10 of the RHC. Even if it does, Practice Direction 3.4 does not purport to lay down any invariable rule. It is subject to exceptions. The exceptions being the existence of good grounds and valid reasons, which have to be determined depending on the circumstances of the petition. In the end, it is a matter of discretion of the court, which is to be exercised judiciously and in accordance with common sense. Therefore, even if the spirit of Practice Direction 3.4 were applicable, there is nothing to suggest the disclosure would be unduly burdensome, oppressive or unnecessary for the disposal of the issue before the Court in a creditors’ winding-up petition. The 2009 audited account had been prepared and is in the possession of the Company. The discovery could neither be burdensome nor oppressive. The application for discovery must be allowed.
Conclusion
26. In conclusion, I do not consider the Phoenix case relevant. It is factually distinguishable from the present case. The Company had referred to the balance sheet taken from the 2009 audited accounts of the Company in Brian Lee’s 1st affidavit. The Petitioner is therefore entitled to demand a copy or inspection of the 2009 audited accounts from which the balance sheet was extracted. Accordingly, I order discovery with costs to the Petitioner.
( Anthony To )
Judge of the Court of First Instance
Mr Paul Carolan and Mr Eugne Kwok, instructed by Messrs Stevenson, Wong & Co., for the Petitioner
Mr Alan Leong, SC and Mr Bruce Lau, instructed by Messrs Liau, Ho & Chan, for the Respondent
Please refer to HCMP524/2011 for the relevant appeal(s) to the Court of Appeal.