Re Datacom Wire & Cable Co. Ltd.

HCCW 717/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.717 OF 1999

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J U D G M E N T

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1. On 13 December 1999, a winding-up order was made on a petition presented by four creditors of Datacom Wire & Cable Company Limited ("the Company") who were substituted as petitioners for Stella International Limited ("Stella"), the original petitioner, also a creditor. The question of costs was reserved pending further submissions from the parties. These were made between 17 December 1999 and 4 January 2000 and pursuant to directions given on 13 December, the opposing contributory filed a further affirmation on 30 December 1999.

THE FACTS

2. The petition was adjourned from the master and first came before me on 25 October 1999. The Company did not appear but the petition was opposed by Sun Ming Wah Holdings Limited ("SMW") which held a controlling interest in the Company and Cheung Sing Kuen ("Mr Cheung"), a director and a contributory of the Company. Counsel for SMW and Mr Cheung sought and obtained leave to file and serve an affidavit in opposition as the opposing creditor and opposing contributory respectively. The petition was supported by Chi Shi Jer, a contributory ("Mr Chi" or "the supporting contributory") and three creditors who subsequently became petitioners.

3. The next adjourned hearing took place on 8 November 1999 when four creditors were substituted as petitioners. Stella's debt was to have been paid off by SMW. In fact this never took place and Stella became a supporting creditor after the substitution order. Mr Chi and Mr Cheung each owned 50% of the Company and were its sole directors. SMW is beneficially owned by Mr Chi, Mr Cheung and Mr Cheung's brother and Mr Chi's wife is one of the three directors of SMW. Other supporting creditors, including Luen Hung Fat Industrial Ltd, appeared at that hearing.

4. At the further adjourned hearing on 6 December 1999, counsel for SMW and Mr Cheung informed the court that the Company had $1.33 million in the bank and that it was able to make repayment to all the petitioners. When it emerged that the total value of the debts exceeded $1.33 million, the court was informed that another $150,000 of receivables was being collected and the adjournment would provide the opportunity for the shortfall to be made up and a section 182 application made. The petition was accordingly adjourned for seven days.

5. At the resumed hearing on 13 December 1999, it transpired that nothing had in fact been done : no section 182 application was ever made. The application for a further seven day adjournment was accordingly refused and the winding-up order made.

6. Whilst the same counsel appeared for both SMW and Mr Cheung and made submissions for them as opposing creditor and contributory respectively, no evidence had in fact been filed by or on behalf of SMW, the opposing creditor. As counsel for the supporting contributory pointed out, the affirmations in opposition were made and filed by Mr Cheung as "director" and "shareholder" of the Company. The affirmations of Mr Cheung filed on 1 November 1999 and 4 December 1999 were never expressed to have been filed on behalf of the opposing creditor. In his third affirmation filed on 30 December 1999, Mr Cheung claimed to have opposed the petition "for and on behalf of the Company". Given the directorships and shareholding structure of the Company, that would not have been possible without the consent of Mr Chi who in fact supported the petition. In short, Mr Cheung could only have opposed the petition on his own account, as contributory.

7. Although Mr Cheung never filed any notice of intention to appear as an opposing contributory, by participating in the proceedings in causing affirmations to be filed in opposition and instructing counsel to seek adjournments, Mr Cheung was plainly a "party" for the purposes of section 2 of the High Court Ordinance.

THE ORDINARY RULE WHERE A PETITION IS SUCCESSFUL

8. Although the question of costs is always in the discretion of the court, where the petition is successful, the practice as to costs is conveniently set out in French, Applications to Wind-up Companies at paras.4.5.1, 4.5.2.1, 4.5.4.1 and may be summarized as follows :

(1) one set of costs is generally given to the petitioner, another among all the creditors supporting him and a third among the contributories supporting him;

(2) where the petitioner has been substituted, the original petitioner's costs of presenting and advertising the petition will be ordered to be paid as an expense of the liquidation : see Re Bostels Ltd [1968] Ch 346;

(3) costs under (1) and (2) are normally ordered to be paid out of the assets of the company as an expense of the liquidation;

(4) creditors or contributories appearing to oppose a successful petition are not entitled to costs. See Re Bathampton Properties Ltd [1976] 1 WLR 168 at 171 H and French (supra) at para.4.5.5.1.

For a form of order, see Palmer's Company Precedents, Part II, 17th Ed. at 91-92.

9. The question which arises is whether I ought to depart from the normal rule in this case and order that the costs to be awarded to the petitioners, the supporting creditors and supporting contributory be paid and borne by the opposing contributory on the ground that he had acted unreasonably in opposing the winding-up petition.

WHETHER DEPARTURE FROM THE ORDINARY RULE JUSTIFIED

10. Position of the opposing creditor

11. SMW never filed any evidence to oppose the petition. As no costs order is sought against SMW, the question of ordering costs against SMW does not arise. So far as SMW's own costs are concerned, the ordinary rule would apply. As opposing creditor in a successful petition, SMW would not be entitled to costs. See French (supra) at para.4.5.5.1. Parenthetically, it is to be noted that SMW was itself wound up by the court on 8 February 2000.

12. Position of the opposing contributory

13. Costs orders have sometimes been made against opposing contributories. See Boyle and Marshall on Practice and Procedure of the Companies Court at para.9.120 and Buckley on the Companies Acts, 14th Ed. at 551. Such an order was made in In re A & BC Chewing Gum Limited [1975] 1 WLR 579 where a contributory petitioned to wind-up the company on the just and equitable ground. Admittedly that was a shareholder dispute case where costs would not normally be borne by the company since its role as party is purely nominal. Nevertheless, the underlying rationale remains that a party who unreasonably opposes a successful winding-up petition should be ordered to bear the costs.

14. Another example is In re Ice Crown Limited (1976) 11 May (unreported) cited in Buckley at p.551, fn 3. The footnote states that the costs of the petitioner and supporting creditor, after the day of the first hearing, were ordered by Templeman J to be paid by two opposing creditors, one of whom was a director and shareholder of the company and the other was an associated company with a largely common directorate. Presumably the costs incurred up to and including the day of the first hearing was a liquidation expense and paid out of the assets of the company since there would not appear to be any reason to deprive the successful parties of those costs and it would not have been fair to have made the opposing creditors pay costs which would have had to be incurred in any event, i.e. irrespective of any opposition.

15. It should also be mentioned that in In re Amery China Building Co. Ltd [1982] HKLR 236 a costs order was made against the opposing creditor and contributory. It is to be noted that the order extended to and included the company. The reasons are however not apparent from the judgment.

16. Was Mr Cheung's opposition unreasonable?

17. I have no hesitation in concluding that it was. The sole issue in the petition was the Company's solvency. Adjournments were obtained by Mr Cheung on the basis that the Company was solvent and able to pay the petitioning debts. As Mr Cheung well knew, that was blatantly untrue : in fact, it was unable to pay off the petitioning debts. Mr Cheung made many allegations in his various affirmations but

(a) neither the allegations as to the alleged relationship between Stella and the supporting contributory nor the proceedings commenced by SMW against the Company have any relevance to the solvency issue;

(b) the allegations as to the supporting creditor's motive in supporting the petition is again wholly irrelevant; and

(c) the allegations that the Company had a cause of action against the supporting contributory and his wife for breach of fiduciary duty are also not germane to the issue of the Company's solvency.

In short, Mr Cheung's opposition was wholly unwarranted. He had no reasonable or bona fide basis for maintaining that the Company was in a position to pay off the petitioning debts.

ORDER

18. The form of order appearing in Palmer's Company Precedents (supra) has to be adapted to cater for the particular facts of this case (for example, the Company did not appear) and to take into account the decisions in Re Bostels Ltd and Re Ice Crown Ltd considered above. The appropriate costs order is as follows :

(1) the original petitioner's costs of presenting and advertising the petition be paid out of the assets of the Company as a liquidation expense;

(2) the costs of the creditors and contributories supporting the petition down to and including the hearing on 20 October 1999 be paid out of the assets of the Company as a liquidation expense;

(3) the costs of the petitioners and of the creditors and contributory supporting the petition after 20 October 1999 be paid by the opposing contributory; and

(4) the costs in (2) and (3) above be taxed if not agreed but that only one set of costs is to be allowed to the creditors supporting the petition and one set of costs to the contributory supporting the petition.