PENTA-OCEAN CONSTRUCTION CO LTD v. TREASURE PROPERTIES LTD

HCA 3717/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3717 OF 2003

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J U D G M E N T

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1. This is an application by the provisional liquidators of the Defendant company (the Company) for an order that there be a permanent stay of all proceedings in the action pursuant to s. 255 Companies Ordinance, Cap. 32 (the Ordinance).

2. The Plaintiff's claim is for monies due under certain settlement agreements reached between the parties in settlement of disputes between them, arising from the construction of residential houses by the Company for the Plaintiff. The Company counterclaims in the proceedings alleging that the Plaintiff was in breach of both of the Settlement Agreements sued upon because it failed to carry out its obligations under the Settlement Agreements, in particular in making good repairs and the prevention of future water damage. It is sufficient to say that there are significant issues between the parties as to whether or not the Company is entitled to the sum claimed in the counterclaim, or must pay a sum to the Plaintiff.

3. The writ was issued in October 2003 and the defence was filed in December 2003. By an order dated 21 April 2004, the Master ordered that unless the Company filed and exchanged a list of documents by 4 p.m. on 12 May 2004, the Plaintiff would be entitled to enter judgment against the Company.

4. On 11 May 2004, the Company passed a resolution of its directors, pursuant to s. 22A of the Ordinance, that it should be wound up. Professional accountants from Messrs Ferrier Hodgson have been appointed the provisional liquidators. On their appointment, the provisional liquidators have made the present application for a stay of the action.

5. The law is clear that upon the voluntary winding up of a Company the court has a discretion to stay or restrain the continuation of proceedings against the Company. The general principle is that proceedings against the Company should be stayed to avoid the judgement creditors getting priority over other creditors, see Yuen J. in Re Flour City Architectural Metals (Asia) Ltd unreported 28 November 2001, HCCW 104 of 2001.

6. The provisional liquidators intend to dispute the claim, although they acknowledge that they have no funds in the Company to do so. The usual rule where the claim is in dispute is to allow the litigation to proceed and the court to resolve dispute, see Re Thurso New Gas Company [1998] 42 Ch D 486 at 491. It is the provisional liquidators' position that the company has insufficient funds to properly undertake the discovery of documents, and for that reason the Company failed to exchange its list of documents by 4 p.m. on 12 May 2004. The Plaintiff is accordingly in a position to enter judgment pursuant to the "unless" order of the Master.

7. Mr Lam for the liquidators says that that rule should not apply in the present case because the Company has a counterclaim and, having failed to complete discovery, it is exposed to judgment being entered intermediately, not on the merits, but by reason of the unless order. That, he said, will disadvantage other creditors because the Company will have had no opportunity to argue its counterclaim. He said that it will be sufficient if the Plaintiff proves its debt in the winding up and, if the debt is not accepted completely by the liquidators, the Plaintiff has a right of appeal against their decision. He was obliged to acknowledge however, that that right of appeal involved litigation, but, he said, without any justification being explained, that would be a less expensive procedure.

8. It is right that a judgment will now be entered, were there are not to be a stay, and that judgment would not be on the merits thereby applying the Company of pursuing its counterclaim. But, while that may be to the disadvantage of the other creditors it seems to me that where the provisional liquidators insist on disputing the debt, the usual rule should apply. If the litigation proceeds and the Company elects not to, or is simply, as here, unable to make discovery and judgement is entered as a consequence of an unless order, then so be it. That is simply part of the litigation process. It seems to me that impecuniosity on the part of the defendant Company should not be a reason for depriving the Plaintiff of its right to enforce an unless order.

9. Counsel for the Plaintiff accepted that it would not be appropriate for the Plaintiff to proceed to execution and acknowledged that a stay of execution ought to be ordered. I am satisfied that there should be no stay on the Plaintiff proceeding to judgment but that there should be a stay of all proceedings in the action following the entry of judgment.

10. There will be an order that the Plaintiff shall have its costs on the application to stay.