SAFE CASTLE LTD v. CHINA SILVER ASSET MANAGEMENT (HONG KONG) LTD

HCCW 69/2019

[2020] HKCFI 1028

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 69 OF 2019

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D E C I S I O N

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Introduction

1.  On 11 March 2020, I handed down my decision in these proceedings which concerns a petition to wind-up China Silver Asset Management Limited (“Company”) and a petition to bankrupt Mr Frank Dominick. I made an order that the Company be wound up.  The order has not yet been pronounced.  I also ordered that the bankruptcy petition be adjourned in order that the issue of service, which I had concluded could not be determined on affidavit evidence, could be considered further.

2.  The sole shareholder of the Company, China Silver Asset Management Ltd (“opposing contributory”) has applied for a stay of the winding-up order pending determination of the Company’s appeal of my decision[1].

3.  I divide this decision into the following sections:

(1)     The circumstances in which the Companies Court will stay a winding-up order pending an appeal;

(2)     The appeal’s prospect of success

Stay of a winding-up order pending appeal

4.  Although the court has the jurisdiction to stay a winding-up order pending an appeal on the application of a contributory[2], it is my understanding that it is not the practice to do so.  I have not granted a stay pending appeal in the 10 years that I have been the Companies Judge.  This in my view is consistent with the authorities.  The position in England is explained by Plowman J in Re A&BC Chewing Gum Ltd[3] in which he says this:

“… and as a matter of practice a stay is never granted. The only exception that I think is known to the department is where I myself once went wrong in In re Westbourne Galleries Ltd.[4], and not having been alerted to the position, and not knowing it before, I granted a stay, with precisely what consequences nobody has ever told me. But there are very good reasons for the practice of never ordering a stay, and they are these: as soon as a winding up order has been made the Official Receiver has to ascertain first of all the assets at the date of the order; secondly, the assets at the date of the presentation of the petition, having regard to the possible repercussions of section 227 of the Act of 1948; and thirdly, the liabilities of the company at the date of the order, so that he can find out who the preferential creditors are, and also the unsecured creditors.

     Supposing there is an appeal and the winding up order is ultimately affirmed by the Court of Appeal, and there has been a stay, his ability to discover all these things is very seriously hampered: it makes it very difficult for him, possibly a year later, to ascertain what the position was at different times a year previously.  But assuming a stay is not granted, if the business is being carried on at a profit, as I understand this business now is, no additional harm is done by refusing a stay.  As I understand it, if the Official Receiver is given an indemnity, say by the Coakley brothers, who are running this business, he will allow it to be carried on, and the Coakley brothers, in this case, could be appointed special managers and carry on the business as they have been doing.  If the business is being carried on at a profit, creditors of the business, after the date of the winding up order, would be paid in priority to the unsecured creditors at the date of the order as part of the expenses of the winding up.  Then, if the appeal is allowed, the business is handed back as a going concern, it has not suffered any loss.  Of course, if the business can only be carried on at a loss—it should not be carried on at all.”

5.  There are two Hong Kong Court of Appeal authorities that are in my view entirely consistent with this approach.  In Bank Negara Indonesia v Interasian Traders Finance Ltd[5] Cons JA says this, with which the others members of the Court of Appeal agreed:

“… In general litigation the likelihood of success and the danger that success may in the interim have been rendered nugatory are matters of considerable concern. But the jurisdiction we are concerned with at the moment is different. It is to some extent a supervisory jurisdiction and must take into account the interest of others apart from the two immediately involved. The machinery of winding-ups gives ample reason for the English practice, which is never to grant a stay pending appeal: In re A & B.C. Chewing Gum Ltd.[6]. A company is not without some protection. I understand that advertisement of the order may be restricted. And a company may bring an appeal within a very short space of time. There is a practice direction in England that such appeals, although they are from a final order, shall be entered in the list of interlocutory appeals: Re Reliance Properties Ltd.[7]. I think we should adopt the same practice here once separate lists are in fact established. In the meantime urgent matters can be dealt with urgently and I can for the moment think of no reason why we could not have been asked to deal with the substantive appeal as well this morning. That would have disposed one way or other of the Company’s problem.

Where an appeal against a winding-up order is subsequently allowed, but the liquidation has proceeded so far that the Company cannot be put back into its original position, then some injustice may result from the refusal of a stay.  This must be set against the difficulties that a stay would cause to the liquidator in all other cases and also be viewed in the context of the many and varied advantages that limited liability otherwise confers.”

6.  Penlington JA in Re S Zhong Shan International Investments Co Ltd[8] also cites Re A&BC Chewing Gum Ltd[9] with approval and applies it in declining an application for leave to appeal a winding-up order made by Mayo J (as he then was) on the grounds of insolvency.  These decisions have been followed by Kwan J (as she then was) in Re King Pacific International Holdings Ltd[10]and Re China International Business Development (Hong Kong) Limited[11].  Kwan J refers to a short decision of the Court of Appeal in Re Cirtex Co Ltd[12] in which the Court of Appeal refers to A&BC Chewing Gum[13], with apparent approval.  It would, therefore, appear that the established Hong Kong practice approved by the Court of Appeal is quite clear, namely, that a winding-up order will not be stayed pending appeal; certainly not stayed simply on the basis that the criteria by reference to which such applications in general litigation are assessed, principally that any appeal will be rendered nugatory unless a stay is granted, are satisfied.

7.  However, Mr Manzoni referred me to a decision of Yuen J (as she then was) in Re Max Share Ltd[14] in which her Ladyship took a different approach.  It should be said at the outset that the judgment makes no reference to either of the Court of Appeal decisions to which I have referred, which suggests that Yuen J may not have been referred to them.  Yuen J refers to a decision of Supreme Court of Victoria, Brinds Ltd & Ors v Offshore Oil NL & Ors (No 2)[15], which considers the way in which the court’s discretion to grant a stay, which I do not understand it to be disputed that the court has, should be exercised. The facts of Brinds are relevant and unusual.  A winding up was ordered on 5 May 1983 on the grounds of insolvency.  The winding-up order was stayed on the same day for 14 days and the stay extended until determination of the appeal, which was dismissed on 16 December 1983. On 2 February 1984 the Full Court gave the applicant leave to appeal to the Privy Council.  Counsel was asked if the applicant wished to apply for a stay and was told they did not wish to do so.  On 14 March 1984, the applicants having changed their minds, an application was made for a stay pending appeal to the Privy Council, which was adjourned and having subsequently been restored was heard on 2 October 1985.  By that time liquidators had been in office for over two years and, it would appear, had undertaken a substantial amount of work[16]. The principal judgment is that of Fullagar J with whom the other two members of the court agree.  Fullagar J draws a distinction at p245 (2^nd paragraph) between an application to stay a winding-up order before it has become effective (which is the present case) and one made long after liquidators have been appointed.  He goes on to refer with apparent approval to the decision of Plowman J in Re A&BC Chewing Gum Ltd[17], although the application had been made sometime after liquidators had been appointed.  I note in passing that at p246 (3^rd paragraph) Fullagar J notes that “[It] has long been accepted in the law that it is not desirable that insolvent companies should remain free to operate.  It is, as a matter of public interest, not desirable”.  This is, of course, correct and a subject that I return to at [10].  Fullagar J then goes on to summarise the reasons for granting a stay advanced by counsel on behalf of the applicants at p245:

“1. Irreparable harm would be caused to Brinds if the winding up proceeded until Brinds was successful on the appeal; or, at all events, there was a very severe risk of such harm.

2. There is little or no countervailing harm likely to be suffered by the petitioner if the liquidator was restrained until the appeal was determined against Brinds, that is to say, restrained in the way Mr Hooper ended by seeking.

3. The length of stay sought was comparatively short.

4. There were good prospects of success in the appeal.

5.     Such delay as had occurred in the prosecution of the appeal was not inordinate, and had largely resulted from lengthy, albeit unsuccessful, negotiations for settlement of this and a number of other proceedings between the companies associated with or controlled by the present parties, and the delay had not substantially prejudiced the respondents or anyone else.”

8.  I note that Fullagar J does not suggest that in all cases the court should approach an application for a stay by turning the submissions advanced before him into questions used to assess the application. What he did was to deal with each submission and, on my reading of the Judge’s decision, reject each of them and accordingly dismiss the application.

9.  In Re Max Share Yuen J after referring to Brinds says this:

“ In Brinds, the Full Court set out 5 considerations which would be pertinent to a court exercising its discretion whether or not to grant a stay of a winding up order pending appeal. The first is to consider what prejudice would be caused to the company if the winding up proceeded; secondly, what prejudice or harm would likely be suffered by the petitioner if a stay is granted; thirdly, the length of the stay sought; fourthly, whether there were good prospects of success in the appeal; and fifthly, the time taken in the prosecution of the appeal and in the making of an application for stay of the winding up order. I shall deal with each of these 5 considerations in turn.

     First of all, I have to consider whether there would be irreparable prejudice done to the Company in this case if the winding up order is not stayed. …”

10.  With great respect I do not read Brinds as setting out five considerations which the Full Court thought are the criteria by reference to which applications for stays should be assessed.  Fullagar J simply summarises counsel’s submission having introduced them with the statement that an applicant must at least demonstrate cogent reasons why a stay should be granted.  Matters of the sort advanced by counsel for the applicants in Brinds may commonly be relevant, but they are no more than that.  In my view the correct position is as follows.  The court will rarely grant a stay of a winding-up order.  A stay will be an exception.  As Cons JA states in Bank Negara Indonesia[18] it is not sufficient, as is in general litigation, to demonstrate that the appeal will be rendered nugatory, regard has to be given to the special character of the remedy, which the petitioner invokes when presenting a petition.  The classic statement of the nature of winding up as a class remedy is to be found in the judgment of Buckley J in Re Crigglestone Coal Co Ltd[19]:

“But then comes another consideration, viz, that the order which the petitioner seeks not an order for his benefit, but an order for the benefit of a class of which he is a member. The right ex debito justitiae is not his individual right, but his representative right. If a majority of the class are opposed to his view, and consider that they have a better chance of getting payment by abstaining from seizing the assets, then, upon general grounds and upon s.91 of the Companies Act, 1862, the Court gives effect to such right as the majority of the class desire to exercise. This is no exception. It is a recognition of the right, but affirms that it is the right not of the individual, but of the class; that it is for the majority to seek or to decline the order as best serves the interest of their class. It is a matter upon which the majority of the unsecured creditors are entitled to prevail, but on which the debtor has no voice.”

Once the court has found that a company should be wound up on the grounds of insolvency the interests of creditors generally are engaged.  In my view it follows that the court should have regard to their interests, which include terminating a company’s operations if it is insolvent.  The question of solvency is directly engaged.  The engagement is all the more concrete if, as in the present case, another creditor has issued a    winding-up petition; which I consider in more detail in [15].

11.  The consequence of this is that in order for a company to satisfy the court that its case is exceptional and a stay should be granted pending appeal, it will be necessary to demonstrate, in addition to the normal criteria which guide the court, that the interests of creditors will not be harmed by a stay.  Commonly this will necessitate a company adducing evidence that shows that it is able to pay its debts as they fall due even if the petitioner is entitled to payment of the disputed debt.  If it cannot then prima facie the interests of creditors for whose benefit (as a class) the winding-up order has been made will be prejudiced and a stay should not be granted.

12.  In the present case an affidavit has been filed by Patrick Maloney on behalf of the opposing contributory.  Mr Maloney explains that the Company carries on business regulated by the Securities and Futures Commission (“SFC”) and if the winding-up order is not stayed the Company will lose its licence, which was granted on 2 December 2009, to carry on regulated business and will not be able to provide the advisory services it is currently contracted to provide to a Cayman Islands entity, Ardon Maroon Fund Management Ltd, which will damage its business.  The SFC has agreed to a temporary suspension of the licence (type 9) pending determination of the stay application.  However, as I understand the evidence, the SFC would cancel the licence if the winding-up order is not stayed.  Although, the Company could apply for a new licence if the appeal is successful Mr Maloney asserts that a licence which has been in place for an extended period has greater value as a new licence suggests the holder is inexperienced and it would also take sometime to obtain a new licence.  During the period it did not have a licence the Company could not carry on its normal advisory business and would likely loose clients.  The immediate impact has been the Company’s inability to execute trades during the period of suspension, which has taken place during a period of market turbulence.

13.  This maybe correct, but it is not the relevant issue. As I have explained that relevant issue is whether or not creditors’ interests will be harmed.  Mr Maloney explains that the opposing contributory has been paying the Company’s creditors since the Company’s bank accounts were frozen. On 3 April 2020 the opposing contributory passed a board resolution to provide financial support to the Company in order that it can pay its debts as they fall due and can continue as a going concern.  Mr Maloney has exhibited the Company’s audited financial statement for the year ending 31 December 2018, which shows the Company is solvent.  However, they do not show the liability under the guarantee, which gave rise to the Petition.  What seems clear is that if Altair Asia Investments Limited[20] (a related company to the Company (“Altair”)) is liable to the Petitioner as it alleges under the agreement, which has been guaranteed by the Company, the Company could not pay the Petitioner.  This presumably explains why despite being put on notice by a letter from the Court dated 8 April 2020 that in order to obtain a stay security for the debt might be necessary, no offer of security has been forthcoming.  In short, the opposing contributory has not shown that it is able to pay the debt claimed by the Petitioner and remains solvent.

14.  As I mentioned in [10] another petition was issued against the Company by Mr Li Xianyang on 10 January 2020.  Mr Li asserts in the Petition that he is owed US$1,500,000 under a guarantee of the opposing creditors liability to pay him an advisory fee under an advisory agreement dated 4 May 2018.  Mr Maloney suggests in his affidavit that the claim is baseless and sets out reasons why he says this is so.  However, I cannot assess whether or not the Company has a bona fide defence to this new petition.  What is relevant for present purposes is that there is another creditor, who is sufficiently concerned that a debt, which he believes is payable is outstanding that he has issued a winding-up petition.  This engages the considerations that I have discussed in [10].  On the face of the accounts that I have been given it would appear that the Company cannot pay Mr Li’s debt.  As I have already noted the Company is being pursued under a guarantee of an alleged debt of the opposing contributory.  I have no evidence of the opposing contributory’s ability to pay either the debt claimed by the Petitioner or Mr Li.  In these circumstances, it seems to me that there is no reason to depart from the established practice and refuse a stay.  Although given this decision it is not necessary for me to do so, I will deal with the grounds advanced by Mr Manzoni as demonstrating a strong prospect of success in the appeal.

Prospects of the appeal succeeding

15.  The Company argued that it has a bona fide defence on substantial grounds on the basis that the Petitioner’s right to payment was dependent on it showing that the Company had failed to satisfy one of the conditions precedent to payment specified in the Waiver Letter[21].  The Waiver Letter constituted a variation to the obligations of Altair, which it was unable to honour in January 2018.  The obligations have been guaranteed by the Company.  The Company’s defences were technical, but I accepted that in all but the case of clause 2(6), the Company had managed to show a bona fide defence on substantial grounds[22].

16.  Clause 2(6) provides: “[Altair] has settled, or has arranged the settlement of, reasonable costs and expenses incurred by Safe Castle (including legal documentation costs) in the amount of approximately HK$150,000 on or before 15 February 2018”.  The question of whether or not clause 2(6) has been satisfied emerges as follows.  The substantive evidence in opposition was filed in the Bankruptcy Proceedings issued against Mr Frank Dominick.  In [58]–[64] of his affidavit Mr Dominick says, and I summarise, that the Company had not been presented with bills addressed to Altair in respect of the relevant costs and expenses and this is why no payment has been made.  This was responded to by Mr Liu Yao on behalf of the Company.  He answers Mr Dominick’s critique in [34] of his 3^rd affirmation.  Clearly on the basis of the evidence the Petitioner contended that clause 2(6) had not been complied with.  However, the Petitioner did not address this point in its skeleton argument, although the Company did.  The Company now takes two points in respect of my finding that the Company had not complied with clause 2(6).  The first is that it was not argued at the hearing by counsel on behalf of the Petitioner and, therefore, it was wrong to decide this point without having given the Company the opportunity to deal with it[23].  The hearing lasted two hours and my notes do not record either counsel making oral submissions on this issue.  However the issue was not conceded by counsel for the Petitioner and counsel for the Company obviously understood it to be taken against the Company despite it not being expressly dealt with in the Petitioner’s skeleton to which the Company responded.  Not only did the Company have the opportunity to address the issue, but its counsel did deal with it. It does not seem to me that the fact that I did not ask any questions about the issue can sensibly be said to have deprived the Company of the opportunity to deal with the point.  If counsel for the Company had any doubt whether the point was abandoned, he could have asked.  He did not.

17.  I also do not think that the Company had demonstrated that it has good prospects of demonstrating that I was wrong in my finding on this clause.  The Company had to demonstrate a substantial defence that it is bona fide. Clearly, the obligation was to pay a sum of approximately HK$150,000 in respect of legal fees, which it appears from Mr Dominick’s evidence he accepts it had been demonstrated Altair was to liable to pay[24].  Altair has not paid it or made any effort to pay it.  In my view there is certainly not a strong argument that it has a “bona fide” defence on substantial grounds. The substance of the condition was that Altair would pay the costs in return for the waiver.  It has not done so.

Conclusion

18.  I, therefore, will dismiss the application for a stay pending appeal with costs to the Petitioner with a certificate for two counsel, such costs to be taxed if not agreed.