In re Esquire (Electronics) Ltd.

IN THE COURT OF APPEAL

1996, No. 31
(Civil)

----------------------

----------------------

J U D G M E N T

----------------------

Godfrey, J.A. :

Introduction

1. On 18 January 1996, Rogers, J. made an order for the compulsory winding up of Esquire (Electronics) Ltd ("the company") on a petition presented on 1 September 1995 by two former employees of the company. One supporting creditor appeared before the judge, BCCI Finance International Ltd. ("BCCI"). That company is in liquidation. Its claim is for some $115M. The Hongkong and Shanghai Banking Corporation ("HSBC") also appeared before the judge. It elected neither to support nor oppose the petition. Its claim is for some $210M. HSBC occupies a special position, in that the company and other companies associated with it have a substantial claim against HSBC which is the subject of litigation, which, because of the winding-up order, is presently stayed so far as the company is concerned. Six other creditors, all ex-employees of the company, opposed the petition.

The judgment

2. The judge in his judgment referred to the company's statement of affairs. He said it showed that the company was in a parlous state. The company's assets were shown in the sum of $23M representing fixed assets mortgaged to HSBC; a sum of $35M was shown in respect of trademarks and goodwill; and the claim against HSBC to which I have already referred was valued at $695M. But the company was insolvent with liabilities in excess of $300M; and it was not disputed that in that state of affairs the petitioning creditors were entitled to a winding-up order ex debito justitiae. However, as the judge recorded, the company sought to have the petition dismissed, or at least adjourned for an indefinite period. It said that the company's claim against HSBC could be better prosecuted by the company itself rather than by a liquidator. It claimed that finance might be available to enable the company to prosecute the company's claim against HSBC, but only if the company was not placed in winding-up. It referred to a somewhat nebulous offer made by a Mr. Lefkowitz to provide the company with this finance; and more importantly, it referred to an offer in that connection made by BCCI, which, said the judge, was prepared in principle, if the company was wound up, to consider financing the litigation. At the end of the day, the judge decided that he ought to make the winding-up order for which the petitioning creditors had asked. He said "..... in all the circumstances it would be better now to call a halt to matters".

The subsequent events

3. Since the judge made his order, any ardour which BCCI may have felt for funding the company's litigation against HSBC appears to have evaporated. BCCI has now stated that in its (provisional) view there is insufficient merit in the company's litigation against HSBC to justify BCCI's funding it.

The appeal

4. This is a simple case. There are no good grounds for appeal. As I have said, the petitioning creditors are entitled ex debito justitiae to a winding-up order; and, although there is a discretion in the court to refuse to make an immediate winding-up order, it is rare for the court to exercise its discretion in favour of a stay of the proceedings, or an adjournment for an indefinite period. An adjournment will not in practice be granted at the company's request against the opposition of a petitioning creditor, except when the company disputes the debt and seeks time to put in evidence to that effect, or, if the petition is founded on a judgment debt, to have the judgment set aside : see Buckley on the Companies Acts 14th ed Vol 1 p.545. An unpaid creditor is entitled ex debito justitiae to an order; it is of no avail to the company to say that, if only it is given time, it will be able to pay. Nor is it any answer to say that the company has no assets to meet the petitioners' claim. Even where a petitioning creditor consents to an adjournment or stay, the court is reluctant to grant anything but a short adjournment, usually to enable the petitioner to consider some proposal put forward by the company. Only in an exceptional case will a long adjournment be granted; and never one for an indefinite period. Long adjournments are inherently undesirable. A winding-up order, if made, dates back to the date of presentation of the petition. Adjournments make the process of liquidation more complex. Dispositions made between the presentation of the petition and the making of the winding-up order have to be examined to see if they are justifiable; and delay increases the number of these transactions and makes their examination more difficult. The winding-up procedure is not ordinary litigation. The special considerations which apply to creditor's winding-up petitions require that they should be heard promptly. In normal cases, where the debt is admitted, a period of four weeks from the date of the first hearing ought to suffice to enable the petitioning creditor, if still unpaid, to decide whether to press for a winding-up order or whether to rely on other arrangements put forward by the company. Usually this period should also suffice to enable the company to decide whether or not to promote some such other arrangement.

5. There are exceptional cases. One such is In re L.H.F. Wools [1970] 1 Ch 27, in which there were no supporting or opposing creditors and the petitioning creditor was itself the subject of a substantial claim made against it by the company. It was held that where a company had a genuine and serious cross-claim against the petitioning creditor (I emphasise those words) which it had not reasonably been able to litigate, the petition should usually be dismissed or stayed. It was accepted that the company's directors would be better able than a liquidator to prosecute the company's claim in that case. There was no prejudice in that case to the petitioning creditor. Accordingly, the Court of Appeal thought it right in that case to stay the winding-up.

6. The leading judgment, given by Harman, L.J. makes it plain that this case is very different from ours. Harman, L.J. says (at p.38) :

"It is quite true that it is the last ditch always in company cases that the company attacked has a claim which, if the liquidation be withheld, would be better managed by the directors than by any liquidator."

7. Harman, L.J. who had vast experience in company matters, was of course quite right about this. It is rare that this consideration will be given any weight. But as Harman, L.J. went on to point out :

"But the objection has very little force, in my opinion, in a case where the person on whom the attack is intended is the very person who is bringing the petition." (emphasis added)

8. That is of course not this case. For my part, I find In re L.H.F Wools Ltd, a very special case, of no assistance in the resolution of this case, which is in the general run-of-the-mill. Yet we are now asked to rescind the winding-up order, or to stay all further proceedings on the petition, for a period of 3 months. There can be no justification for us doing so unless we are satisfied that the judge was wrong to exercise his discretion in favour of making the winding-up order, and to refuse the application made to him for an adjournment for an indefinite period of the petitioner's application to wind up the company.

The result

9. For my part, I find it quite impossible to say that the judge was wrong. I think it may be correct, as Mr. Mok, for the directors of the company ably urged, that the judge placed too much weight on the fact that BCCI had made an offer to fund the company's litigation against HSBC if the company was wound up. But there are no good grounds, so far as I can see, for thinking that the judge would have made any different order had the offer by BCCI not been before him at all. For this reason, it seems to me, the directors of the company fall at the first hurdle. And even now, they have been unable to produce to us any concrete proposal for the funding of the company's litigation against HSBC acceptable to the petitioning creditors or the Official Receiver. Had it been the case that a definite offer by the directors (using either their own money, or money borrowed by them for the purpose) to fund this litigation had been made to the Official Receiver, and the Official Receiver had unreasonably refused to consider it, I might have been able to agree that the proceedings ought to be stayed for a few weeks in order to see whether the money was in fact forthcoming to enable the present stay of the claim made by the company against HSBC to be lifted so that that litigation could proceed; but nothing of the kind has been forthcoming. I would not be prepared to attach any weight to the desire of HSBC of which we were informed to oppose the order sought by the directors of the company; for HSBC is in a similar position to the bank in the case of L.H.F. Wools. But on the material before us it would be quite wrong for us to rescind the winding-up order and equally wrong for us indefinitely, or for a long period, to stay further proceedings on the petition, as the directors of the company have asked us to do.

The directors of the company

10. I have referred in this judgement to the directors of the company. It is of course they who are prosecuting this appeal, not the company. Yet I notice from the papers that an order for security for the petitioners' costs of this appeal has been made against the company itself. I suspect that it was not drawn to the notice of Ching, J.A. who made the order for security of costs, that that order should not have been made against the company. However, be that as it may, in the end, I see no reason at all for interfering with the judge's judgment and I would dismiss this appeal.

Ching, J.A. :

11. For the reasons stated by my Lord, Godfrey, J.A. I too would dismiss this appeal.

Keith, J. :

12. I agree that this appeal should be dismissed for the reasons given by Godfrey, J.A.