SHAGANG SHIPPING COMPANY LTD v. HNA GROUP CO.,LTD

HCCW 218/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 218 OF 2013

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J U D G M E N T

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1.  On 24 February 2014 I made an order dismissing the amended Petition. The question of costs was adjourned for argument. The relevant background and facts are as follows.

2.  The Petition seeks an order winding up the Company on the ground of insolvency.  The underlying debt of US$58,375,709.52 allegedly arises pursuant to a guarantee given by the Company.

3.  In the middle of 2013 the Petitioner commenced a High Court Action in England against the Company seeking to enforce the guarantee.  The guarantee had an exclusive jurisdiction clause in it.  The writ was served towards the end of July 2013, but before 26 July 2013.  The guarantee was in respect of the liabilities of Grand China Shipping (HKG) Co Ltd and the High Court Action was to enforce against the Company by way of guarantee an arbitration award made in the Petitioner’s favour on 1 November 2012.

4.  On 14 May 2013 the Petitioner served a statutory demand on the Company’s registered office in the mainland where it is incorporated.  On 5 June 2013, the Company wrote to the Petitioner’s solicitors stating that it disputed the service of the statutory demand, denied any liability under the guarantee and disputed that the High Court of Hong Kong had jurisdiction in the Action.

5.  The Petitioner’s solicitors replied on 11 June 2013.  The  Petitioner’s solicitors suggested that the Hong Kong Court had jurisdiction to wind up the Company.  The letter did not explain in any detail the basis upon which this was asserted.

6.  The Company wrote a further letter on 26 July 2013.  It stated that the Company’s defence to the claim would be set out in the defence to be filed in the High Court Action in England and that it was premature to present a winding-up petition. 

7.  On 1 August 2013 the Petition was presented. On 2 August 2013 the Petitioner issued a summons for leave to serve the Petition out of the jurisdiction.  On 9 August 2013 Master Hui adjourned that application to me.  The reason for this was that the Master was aware that the practice that has developed of granting leave pursuant to RHC Order 11 rule 1 to serve petitions out of the jurisdiction on companies incorporated elsewhere was probably misconceived and that the Companies Court Judge should have the opportunity to consider whether leave should be granted or was necessary.

8.  On 5 September 2013 I granted the Petitioner leave to amend the Petition and adjourned the summons for leave to serve out for further consideration at a hearing at which I invited the Official Receiver to attend and make submissions.  On 24 February 2014 the Petition first came on before me.  An amended Petition was filed on 10 October 2013.

9.  The Petitioner did not fix the date for the hearing of its summons.  On 23 December 2013 the Company filed a summons for declarations that the Petition has not been served and that the court should not exercise jurisdiction.  On 10 January 2014 the parties filed a consent summons.  That consent summons provided that the two summonses should be heard together with one day reserved.  On 12 February 2014 the Petitioner filed a summons for dismissal of its amended Petition. 

10.  On 24 February 2014 the position of the parties on costs were significantly different.  The Petitioner sought no order as to costs.  The Company sought an order that the Petitioner should pay its costs on an indemnity basis.

11.  It will be noted from the above chronology of events that an unusual feature of this case is that the Petition has not been served, or purportedly served, on the Company.  The Company was aware that the Petition had been issued and advertised and its solicitors initially attended hearings on the basis that they had a watching brief.  The Company did not formally involve itself in the proceedings until it issued its summons in December 2013 because, it says, it became concerned that the Petitioner was not proceeding with its summons and it wanted the matter resolved.  I asked counsel for both parties whether they were aware of any authorities addressing how costs should be dealt with in proceedings which had not been served.  They were not aware of any.  They were prepared to proceed on the assumption that the court’s broad discretion as to costs allow it to order, if it is just and fair, that the costs of a defendant or respondent, who has not been served with proceedings, should be paid by a plaintiff or petitioner.  It may be that on a taxation a limited amount would be recoverable, but that is not an issue which I am concerned with.

12.  The Petitioner argued that there were two reasons for making no order to costs:

(1) That the Company had never set out what its defence was to the claim for the debt.

(2) It had not been served with a proceedings.

13.  The second objection largely fell away when it was accepted that the court could make an order that the Petitioner pay the Company’s costs incurred in dealing with the Petition if the court concluded that it was just to do so.  In my view where a company has been notified that a winding‑up petition has been issued against it, it should be able to recover any costs it incurs in considering the petition and how it should respond to it, on the basis that sooner or later it will be served with it, even if as matters transpire the proceedings are terminated before service.  Precisely how much should be recovered in such circumstances is a matter for a taxing master to consider applying normal, relevant principles.

14.  Miss Lee argued that where prior to the presentation of a petition a company had not made clear the basis for disputing the debt relied on by the petitioner in any meaningful way, the petitioner should not be penalised with a costs order in relation to the issuance and presentation of the petition.  She referred me to the judgment of Mr Recorder Ambrose  Ho  SC in Re SNE Engineering Company Limited HCCW 308/2012 unreported 6 August 2013.  In that case the Recorder ordered no orders as to costs up to the date when the Company explained the basis of its defence.

15.  In my view this is not the appropriate way to deal with costs of a petition on the grounds of insolvency. It is correct that where a statutory demand is relied upon the onus is upon the company to demonstrate a bona fide defence on substantial grounds. I accept that a company that receives a statutory demand would be well advised to explain as soon as possible the basis upon which it disputes payment of the alleged debt with a view to avoiding a petition being issued if possible. However, it is not under an obligation to do so.  If it transpires that it does have a bona fide defence on substantial grounds and the Petition is dismissed, it does not seem to me that the fact that the grounds of the defence were not set out until the company filed its evidence is a reason to depart from the normal rule.  It also seems to me that approaching the question on the basis advanced by Miss Lee simply invites speculative argument about what would or would not have happened if the company had responded to a statutory demand contesting payment of the debt claimed.  Questions concerning the amount of the detail that had to be provided would arise and there would, I anticipate, commonly be arguments about whether it would have been likely to have made any difference to whether or not the petition was issued.  It is a common experience of litigation lawyers that plaintiffs and petitioners are rarely deflected from issuing legal proceedings by letters received from the solicitors of putative defendants confidently asserting that the claim is misconceived.

16.  In my view, having decided to proceed no further with the Petition it is appropriate that the Petitioner pays the Company’s costs of the proceedings.  In my view this should include the costs of the Company’s summons.  It seems to me reasonable that by December 2013 the Company should have become concerned that the Petitioner was not progressing with its summons for leave to serve the Petition and took the initiative to try to force the pace.

17.  Mr Anson Wong SC submitted that the costs should be paid on an indemnity basis.  Mr Wong referred me to the judgment of Kwan J (as she then was) in Re Hyundai Engineering & Construction Co Ltd [1] at paragraph 8.  Kwan J explains, and I agree, that a petition to wind up a company is not ordinary litigation.  The implication of a petition for a company is considerable.  It is well established, of course, that a winding‑up petition should not be used casually as a means of debt collection.  If a petitioner presents a petition aware of matters which render it inappropriate, the petitioner is properly characterised as having been improperly issued and in those circumstances in my view it may be appropriate to order that the petitioner pays the costs on an indemnity basis.  This being the case the issue in the present case is whether or not the Petition was improperly issued.

18.  Mr Wong accepted that the Company had not provided any detail of the basis upon which it disputed the right of the Petitioner to enforce the guarantee.  In these circumstances he accepted that he could not fairly suggest that it was improper to issue a petition because the Petitioner knew that the Company had a bona fide defence on substantial grounds.  Instead Mr Wong contended that the Petitioner, or in practice his legal adviser, either did, or should have known that jurisdiction was problematic.  The original version of the Petition did not adequately set out facts and matters necessary in order to demonstrate that this would be a proper case for the Hong Kong Companies Court to exercise the exorbitant jurisdiction that winding up a foreign incorporated company involves.  This is why it was necessary for them substantially to amend the Petition and even then the matters introduced by the amendments did not self-evidently satisfy the relevant criteria.  Mr Wong went on to argue that the chronology of the proceedings indicated that the reason why the Petitioner had decided to abandon the Petition was because it came to recognise that it faced considerable hurdles in dealing with the jurisdiction issue.  This was a matter that should have been appreciated before the Petition was issued and meant that its issuance was improper.

19.  I accept that it appears likely that the Petitioner did not fully appreciate either the restricted circumstances in which the court would exercise jurisdiction to wind up the Company or, perhaps, did not understand how in practice these criteria have to be satisfied.  I am not, however, satisfied that the Petition can fairly be said to have been improperly issued.  It is not every case in which the court finds the criteria for exercising the winding-up jurisdiction over a foreign incorporated company have not been met that justifies making an indemnity costs order.  It does not seem to me that the facts of this case take it materially out of the ordinary and justify a special order.

20.  In conclusion, I will therefore make an order that the Petitioner pays the Company’s costs of the proceedings including the two summonses.

21.  That leaves the question of the costs of the present application.  Frankly, it seems to me that the parties should have agreed the obvious order, namely, that the Petitioner pays the Company’s costs on a party and party basis.  In my decision in Re Lucky Food Industrial Limited HCCW 145/2012 unreported 3 July 2013, I addressed the way in which the court should deal with the costs of proceedings which terminate without the court determining whether the substantive relief sought by the Petitioner should be granted.  Although the facts and nature of that case are different from the present one, that was a petition issued under section 168A and 177(1)(f) of the Companies Ordinance, Cap 32, the broad approach explained in paragraphs 12 to 14 of that judgment in my view applies.  Generally, if a petitioner is successful in recovering the debt which is the foundation for the petition the court will not be interested in an investigation into the underlying merits of the claim or the way in which the proceedings have been conducted.  The petitioner will have his costs of the proceedings.  If the petition is dismissed without the petitioner managing to obtain payment from the company, then the petitioner has been unsuccessful and he should pay the costs.  Arguments which involve the court being asked to consider how proceedings might have developed if the parties and their legal advisers had behaved differently tend to involve speculation and are not susceptible to reliable resolution.  Much the same can be said of attempts to recover costs on a higher than normal basis other than in very straight forward cases.  In the circumstances I think it is appropriate for there to be no order as to the costs of the present application and I so order.