Synergy Lighting Ltd v. The Hongkong and Shanghai Banking Corporation Ltd

HCMP 1447/2020

[2020] HKCFI 2490

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1447 OF 2020

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D E C I S I O N

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1.This is an application by the plaintiff (“Company”) for an order to continue the ex parte injunction granted on 11 September 2020 to restrain the defendant (“Bank”) from presenting a winding‑up petition against the Company.

2.An injunction to prevent the presentation of a winding‑up petition is based on the court’s inherent jurisdiction to prevent the abuse of its own process, to which the American Cyanamid approach[1] to general interlocutory injunctions does not apply.  Great circumspection is to be exercised before granting such an injunction, for the right to petition for winding‑up in appropriate circumstances is a right conferred by statute, and a would‑be petitioner should not be restrained from exercising it except on clear and persuasive grounds: Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487, §§9‑10; Bryanston Finance Ltd v De Vries (No 2) [1976] Ch 63, 78.

3.If it is demonstrated that a petition would be bound to fail, it could be said that to present it would constitute an abuse. The usual ground on which it is said that a petition would be bound to fail, and should therefore be prevented by injunction, is that the debt is bona fide disputed on substantial grounds.  Where that is shown to be the case, the person claiming the debt is not established to be a creditor, and is not entitled to present a petition for winding‑up: Mann v Goldstein [1968] 1 WLR 1091.

4.Here, however, the Company admits that it was indebted to the Bank by way of banking facilities in the amount of approximately HK$48.4 million as specified in the statutory demand served on it on 19 August 2020. It is common ground that after some recent repayments, about HK$35.9 million remains owed to the Bank, which is therefore an undisputed creditor.  On what basis then does the Company say that a petition presented by the Bank would be an abuse?

5.The contention is that because the Company has already complied with the statutory demand by securing the debt, and the Bank is now “adequately and safely secured”, a winding‑up petition would be abusive. It seems to me, with respect, that this proposition is misconceived both in law and in fact.

6.It is not in dispute that on 22 September 2016, by way of security for repayment of the banking facilities, the Company had executed an assignment of certain accounts receivable in favour of the Bank.  I shall describe the nature of these receivables in a moment.

7.Reliance has been placed by the Company on section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), which provides:

“ (1) A company shall be deemed to be unable to pay its debts—

(a) if—

(i) a creditor, by assignment or otherwise, to whom the company is indebted in a sum then due that equals or exceeds the specified amount, has served on the company a written demand—

(A) in the prescribed form requiring the company to pay the sum so due; and

(B) by leaving it at the registered office of the company; and

(ii) the company has, for 3 weeks after the service of the demand, neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor.”

It is argued for the Company that since it has secured the debt (by reference to the assignment of receivables given long before the demand) and the Bank ought reasonably to be satisfied with the security, section 178(1)(a) has not been satisfied.  It is submitted, and I am prepared to assume for present purposes, that section 178(1)(a) covers security given before service of the statutory demand.

8.But even assuming for the moment that section 178(1)(a) is not satisfied, it does not follow that the Bank would not be entitled to present a winding‑up petition.  It is well established that a secured creditor may petition for the winding‑up of the debtor company: see Buckley on the Companies Acts (14^th ed), p 539; French on Applications to Wind Up Companies (3^rd ed), §7.398; Re Alexanders Securities Ltd (No 2) [1983] 2 Qd R 597 (per McPherson J); Re I J Langleb Ltd [1996] 4 HKC 68, 71‑72.  Section 178 merely affords a mechanism whereby a company may be deemed to be unable to pay its debts, which is a ground for winding‑up under section 177(1)(d).  A demand under section 178(1)(a) is not a sine qua non for winding‑up.[2]  Even without satisfying section 178(1)(a), a petitioner may prove in other ways that the company is unable to pay its debts and therefore should be wound up: Bozell Asia (Holding) Ltd v CAL International Ltd & another [1997] HKLRD 1, 7; Re Simpson Development Investment (HK) Co Ltd [1999] 1 HKLRD 202; Cheong Yip Finance (Hong Kong) Ltd v Moscow Narodny Bank Ltd [1979] HKLR 558.  Accordingly, the fact that section 178(1)(a) is not satisfied and the deeming provision has not come into play is not a ground for striking out a petition: Ricco (International) Co Ltd v Uni‑Harvest International Ltd [2020] HKCFI 201, §§32‑38 (a decision based on the equivalent section 327(4)(a) applicable to unregistered companies).  Nor, in my view, is it a ground for restraining the presentation of a petition.  The Company’s reliance on authorities[3] on the nature and extent of security that might reasonably satisfy a creditor in the context of a statutory demand is thus wholly misplaced.  Regrettably, none of the above principles or authorities was drawn to the attention to the ex parte judge.

9.Mr Kwong argues that the injunction obtained only restrains the Bank from presenting a winding‑up petition on the ground of deemed inability to pay debts under section 178(1)(a) and therefore does not go against any of the above principles.  However, this point was not made to the ex parte judge or in any of the written materials now before me, and seems to be an afterthought.  The injunction actually enjoins any winding‑up petition “based on the Statutory Demand dated 19 August 2020”, a phrase that may be meant to specify the debt in question.[4]  It is certainly not clear that the injunction only prevents reliance on the deeming provision in section 178(1)(a) and nothing more. The Company’s solicitors themselves warned the Bank that it would be in breach of the court’s order if it sought to present any winding‑up petition against the Company.

10.The accounts receivable in question are future fees to be earned by the Company under energy management contracts with an Indonesian company called PT Intercipta Bangun Indoprima (“Intercipta”). The Company has entered into 100 such contracts with Intercipta to install energy saving lighting products or devices at business premises, malls and hypermarkets of the Lippo Group.  The Company charges fees based on a portion of the energy savings on a monthly basis over a contract period of 7 years.  It is said that Intercipta has in turn entered into back‑to‑back agreements with companies in the Lippo Group, and that Intercipta is a leading and reputable company in Indonesia. 

11.Most of the receivables are not present sums due and owing from Intercipta, but fees to be earned month by month over a remaining 4‑year period by the Company by performing the contracts to the standards required.  In terms of immediacy of recovery this is clearly not satisfactory for the Bank who has a debt due and repayable now.  It may be that the services provided by the Company were front‑loaded and based on equipment already installed, but there is a requirement for continuing services such as maintenance and technical solutions for the fees to be earned.

12.Moreover, there are inherent difficulties of enforcement of unsecured payment obligations against a foreign counterparty. The so‑called “back‑to‑back” arrangements that Intercipta is said to have with the Lippo Group have not been particularised or evidenced by documents.  The Company says that the receivables to be received would total approximately HK$120 million, but this is based on an assumption that the Company is entitled to about HK$2.5 million per month, which does not correspond to the actual receipts in 2019 and 2020, averaging HK$2.1 million and HK$1.1 million per month respectively, taking into account receipts by a related company called Synergy Energy Savings Co Ltd.  An aging analysis prepared by the Company itself shows that as at July 2020, HK$10.8 million of the receivables were more than 6 months past due.  From June to August 2020 Intercipta simply did not make any payment at all.

13.There is a suggestion by the Company that although the receivables represent a future income stream over 4 years, it has a net present value of about HK$98 million (using a discount rate of 5% p.a.), and that even after applying a 7% discount for credit risks, they still have a present value of HK$91 million.  However, as already explained, the receivables are not like an annuity or pension rights, and whilst the Company may eventually be able to find a buyer, there is in my view no basis to say that the Bank is acting unreasonably if it does not have confidence that the receivables would be readily marketable by it at a price near the range of values asserted. 

14.Mr Tang for the Bank submits that the test for “reasonable satisfaction” under section 178(1)(a) is the same as that for section 6D(3) of the Bankruptcy Ordinance (Cap 6), which permits a bankruptcy petition to be dismissed if the debtor has made an offer to secure or compound for the petition debt and the offer has been unreasonably refused: see McPherson & Keay, The Law of Company Liquidation (4^th ed), §3‑050.  In that context it has been held that the court has to be satisfied that no reasonable hypothetical creditor in the petitioner’s position would have refused the offer, before the petition is to be dismissed on that ground: Cheung Wah v The China State Bank Ltd [1999] 4 HKC 185; Re Ho Sik Tung Terry [2012] 5 HKLRD 777.  If this approach is adopted it is plain that the security here does not meet that standard.  Mr Kwong says the principles are different for section 178, and that “there has not been a failure to comply with the statutory demand if the creditor’s dissatisfaction with the security is unreasonable” and that the true test is whether the security would command the amount of the debt if put into the market: French, §§7.189‑7.190.  I am inclined to agree with Mr Tang’s approach but it seems to me that, even on the standard proposed by Mr Kwong, it cannot be said that the Bank is unreasonable in not being satisfied with the security.  The fact is that despite attempts to do so, the Company, who must be in the best position to market the receivables, has not been able to sell them so far.

15.For these reasons I take the view that there is no prima facie case either on the law or on the facts that a petition by the Bank would be an abuse of process.  Mr Kwong says that his summons should be adjourned to a date to be fixed for substantive argument, with an opportunity for the Company to file further evidence.  But in the absence of an interim injunction, which I am not prepared to grant, an adjournment would be pointless. The summons should therefore be dismissed and the ex parte injunction discharged.

16.I should not leave this case without commenting on the way in which the application had previously been conducted, which seems to me to leave a great deal to be desired.  First, the Company made no application within the 21‑day period specified in the Bank’s demand and did so only after its expiry, presenting it to the Duty Judge after office hours as a matter of extreme urgency.  Secondly, on the day of the ex parte application, 11 September 2020, although the Company’s solicitors told the Bank at 11:27 am about having firm instructions to make the application (without any indication of the basis of the application), no further notice was given to the Bank until 5:11 pm and then only with a copy of the affidavit (without the exhibits, skeleton argument or authorities), when the hearing was to take place at 5:30 pm.  The ex parte judge was not informed of the shortness of the notice or lack of materials given to the other side.[5]  Thirdly, after the ex parte order was obtained, the Company’s solicitors by contrast took a leisurely approach in giving information and materials to the other side: the Bank was not informed of the outcome until 14 September 2020 at 10:41 am or provided with a full set of the papers until 15 September 2020 at 12:30 pm.  Such conduct is unacceptable.

17.Costs will be to the Bank, to be taxed on an indemnity basis if not agreed.

Mr Alan Kwong, instructed by David Fenn & Co, for the Plaintiff

Mr Alexander Tang, instructed by Eversheds Sutherland, for the Defendant