Re Wo Ming Engineering Ltd

HCCW 273/2020

[2020] HKCFI 3028

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 273 OF 2020

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JUDGMENT

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APPLICATIONS

1.On 31 August 2020, the Petitioner, Messrs Frances Ip & Co, a firm of solicitors, presented a winding up petition (“the Petition”) against Wo Ming Engineering Limited (“the Company”).

2.The Petition is unusual in the sense that it does not seek a winding up of the Company.  Instead, it seeks:

“(1) The sum of HK$149,682.00 to the Petitioner;

(2)  Interest on the HK$149,682.00 at such a rate for such period as this Honourable Court thinks fit.”

3.It is quite clear to this Court that the Petitioner has used the winding-up proceeding as a debt collection device to achieve its real purpose of forcing the Company to pay its demanded debt.  Courts have time and again stressed to professionals that winding-up proceedings are not to be used for debt collection.  This is a particularly good example because there is in no way the Court can possibly grant can make an order in terms of paragraphs 1 and 2 of the prayer of the Petition.

4.In fact, as no winding-up relief is even prayed for, it is not clear as to what orders courts of this jurisdiction can possibly grant under the Petition.  This is all the more surprising as the Petitioner is a firm of solicitors in Hong Kong.  Mr Pang for the Company is right that this is a clear abuse of the process of the Court.

5.I should at the forefront say that whether the petitioning debt is or is not disputed in the present circumstances is beside the point.  The critical point is the Court cannot possibly make an order to direct a payment of the petitioning debt together with an interest to the Petitioner with or without making a winding-up order.  This shows that the Petitioner, despite being a firm of solicitors, has no idea about what a winding-up proceedings is and for what purposes.

6.On 2 September 2020, the Company instructed Messrs Lui & Law and wrote to the Petitioner in the following terms:

“We are instructed that while our client disagrees with your alleged debt, in order to resolve the matter quickly, our client paid you HK$149,682 today which is the amount claimed in your statutory demand dated 3 August 2020. The bank transaction advice is enclosed for your reference.

As your purported claim has been fully satisfied, our client demands that you take immediate steps to withdraw the winding-up petition and unfreeze our client’s accounts.”

7.Although Ms Liao for the Petitioner submitted that the above payment shows that the Company admitted the petitioning debt, it is quite clear to the Court that the payment was made without prejudice to the Company’s right to dispute the validity of the petitioning debt.

8.On 2 September 2020, the Petitioner wrote back to state, inter alia, that:

“Please be informed that we will let you know the outstanding costs incurred due to the nonpayment from your client regarding the captioned matter in due course.

Meanwhile, we are happy to receive your proposal/agreement as to the settlement of this matter.”

9.The Petitioner has no intention to withdraw the Petition upon being fully paid.

10.On 10 September 2020, Messrs Lui & Law on behalf of the Company wrote to the Petitioner and stated, inter alia, that:

“The sole basis of your Petition is gone. The only remaining issue is costs of the Petition. Our client also agrees to pay your costs of the Petition to be taxed if not agreed, if the Petition is withdrawn by consent. Such costs would include the net amount of deposit paid to the Official Receiver.

That being the case, there are no outstanding issues in the Petition. The Petition should be withdrawn immediately….

Should you refuse to withdraw the Petition despite the petitioning debt having been paid and despite having a costs order in your favour, or should you unreasonably delay the process, our client will regard it as evidence of bad faith and take such further actions as it thinks fit.

We reserve our client’s position on costs of the Petition if it is not withdrawn by consent.  We also reserve our client’s position on future costs if any unnecessary steps are taken.”

11.Despite the above clear open offer, the Petitioner still refused to withdraw the Petition and allowed it to hang over the head of the Company, to have its bank accounts frozen and to cause it prejudice.

12.Having received no response from the Petitioner, the Company, through Messrs Lui & Law, wrote to the Petitioner again to request it to sign on a consent summons to withdraw the Petition.  The Official Receiver also agreed to the terms of the draft consent summons.

13.On 18 September 2020, the Company, through Messrs Lui & Law, wrote to the Petitioner again and stated, inter alia, that:

“21. The petitioning debt was fully paid on 2 September 2020. We informed you on the same day and requested you to take immediate step to withdraw the Petition. However, instead of acting reasonably to withdraw the Petition, you now threaten to advertise the Petition. On the other hand, you keep dragging on the matter by requesting a global settlement.

22. It is clear that you intend to use the Petition and the advertisement of the Petition to put pressure on our client to reach a global settlement with you on other cases, which is not an issue in and could not have founded the Petition. This is clearly an abuse of process.

23. We are instructed to request you to give a written undertaking, by 11:00 a.m. on Saturday 19 September 2020, that you will not take steps to advertise the Petition before 1 November 2020. In the absence of your written undertaking by the said time, we have standing instructions to apply for an injunction to restrain you from advertising the Petition.

We hope you will act reasonably and take immediate step to withdraw the Petition without further ado.

We take the view that our recent correspondence would have been unnecessary if you had acted reasonably and expeditiously to withdraw the Petition.  We expressly reserve our client’s position when the court decides on the issues of costs of the Petition or whether items of costs are reasonably and necessarily incurred.” 

14.On 19 September 2020, the Petitioner wrote back and stated, inter alia, that:

“…Should your client be mindful to settle this matter amicably in lieu of trial, your client is urged to take into account the actual situations we really suffered and is invited to provide us with a draft settlement agreement for global settlement of the matter by 30 September 2020, Wednesday without further delay.

In fact, it is very clear that we have set out our position and stance under numerous letters to you since 2^nd September 2020 in relation to the global settlement (not partial settlement) by way of settlement agreement in order to save time and costs of the parties, Regrettably you still turn a blind eye on the matter and totally ignored our sincere suggestions. We are reminding you that there will be costs to be incurred should you delay the drafting/provision of the Settlement Agreement.” (Emphasis added.)

15.On 21 September 2020, the Petitioner insisted that there was no consensus in favour of the approval or endorsement of a consent summon at all.

16.As such, on 22 September 2020, the Company took out an inter parte summons to apply for an injunction to restraint the Petitioner from taking any steps to cause or allow the Petition to be advertised and/or to be gazetted (the “Injunction Summons”).

17.On 23 September 2020, the Company also took out an inter parte summons to strike out the Petition on the ground that it is an abuse of the process of the Court or alternatively, paragraphs 1 and 2 of the prayer of the Petition be struck out on the ground that the same are an abuse of the process of the Court (“the Striking Out Summons”).

18.Both summonses came before this Court on 25 September 2020.  As there was not enough time to deal with both summonses, this Court gave directions for filing of evidence on the Petitioner’s undertaking not to advertise or gazette the Petition.

19.On 16 October 2020, the Petitioner put on record by way of affirmation that the Petitioner would withdraw the Petition, and filed and served a summons for discontinuance on 3 November 2020, 3 days before the present hearing.  Ms Liao for the Petitioner submitted that that being the case, the only outstanding issue should be costs of the Petition, the Striking Out Summons and the Injunction Summons.

20.On 28 September 2020, prior to filing evidence in opposition to the Striking Out Summons and the Injunction Summons, the Plaintiff proposed to the Company on a without prejudice save as to costs basis that:

(1)  The Petition, the Striking Out Summons and the Injunction Summons be withdrawn, and the upcoming hearings be vacated;

(2)  Costs of and occasioned by the Petition up to and inclusive of 5 September 2020 be borne by the Company; and

(3)  No order as to the costs of the Striking Out Summons and the Injunction Summons.

21.The Petitioner’s proposal was rejected by the Company, in my view, rightly.  Hence, the only live issues before this Court are the costs of the Petition, the Striking Out Summons and the Injunction Summons.

COSTS – ANALYSIS

22.The Petitioner submits that costs of the Petition, the Striking Out Summons and the Injunction Summons should be paid by the Company to the Petitioner because:

(1)  The Petitioner is clearly entitled to the costs of the Petition as there is no bona fide dispute of the petitioning debt;

(2)  There being no bona fide dispute of the petitioning debt, there can be no abuse of process on the part of the Petitioner;

(3)  On the contrary, the Company’s wrongful reliance on without prejudice correspondence in the Striking Out Summons and the Injunction Summons is an abuse of the process of the Court;

(4)  The Injunction Summons is defective in, inter alia, that there was no evidence of substantial and imminent harm, and material non-disclosure of steps taken by other (would-be) creditors of the Company’s failure to pay their debts and the Company’s reliance of correspondence which are at least arguably without prejudice in nature.

COSTS OF THE PETITION AND THE STRIKING OUT SUMMONS

23.In Lionstar Manufacturing Ltd v Zoo International Pte Ltd, HCCW 263/2018, unreported, 28 June 2019, Coleman J at §§29-30 said:

“29. For myself, I am not convinced that there is any significant difference between the “successful party approach” and the “discontinuance principle”, or at least they seem to me significantly to overlap. I see the latter as simply an example of the former; if one party discontinues the claim it has brought, it might ordinarily be thought that the other party has succeeded. Essentially, both approaches (even if they differ) identify that the starting point for the consideration of costs will entail looking at the form of the order which comprises the settlement of termination of the proceedings, considering what costs order might ordinarily follow that event, and considering whether there is any reason in the particular circumstances of the case for departing from that costs order.

30. It seems to me that this can entail a holistic approach, where the Court is entirely unfettered as to the particular aspects which it takes into account, and the weight which it gives to them.  As the Famous Marvel case shows, those aspects may include the conduct of the parties, and the perceived strength or weaknesses in the cases.  But I am firmly of the view that the Court will, naturally, shy away from forming firm conclusions as to what might have happened if the action had been pursued all the way to a trial, unless that appears almost certain.”

24.I am of the view that the Petition herein should have been dismissed from the inception.  First, the Petition, as it stands, is fatally defective.  Mr Pang for the Company is correct that there is no averment that the Company is insolvent or unable to pay its debts and the Petition does not even seek the winding-up of the Company but instead seeks for a payment of the debt as if the Petition is a normal district court action.

25.This is the rare sort of cases which I am quite certain that the Court will have no hesitation to strike out or dismiss the Petition.

26.I accept that by seeking a relief for repayment of the petitioning debt, the Petitioner demonstrates a lack of understanding of this Court’s winding-up jurisdiction.  It is trite that a creditor will not per se be entitled to payment of a particular amount even if it is successful on its petition.  In Re Jade Union Investment, HCCW 400/2003, unreported, 5 March 2004, Barma J (as he then was) at §18 said:

“…A petition for the winding up of a company is quite different from an action between parties, in which the parties seek the court’s determination as to their respective rights and liabilities. By a winding up petition, a creditor invokes the court’s jurisdiction under the Companies Ordinance to wind up a company on one or more of the grounds set out in section 177(1) of that Ordinance. In doing so, it exercises a class right available to all of the company’s creditors. If a winding up order is made, the creditor will not necessarily have established any right to be paid, or to be admitted to proof in respect of, any particular amount. This is because it will not necessarily have obtained any adjudication from the court of its right to recover any particular amount from the company. It will still be obliged to submit a proof of debt, along with other creditors of the company, and following the adjudication of its proof by the liquidator, it will rank pari passu with all other creditors of the same class for a dividend to be paid out of the assets of the company.” (Emphasis added.)

27.Mr Pang for the Company submitted that by seeking payment in the Petition, the Petitioner is effectively asking the Court to adjudicate the Petitioner’s entitlement to the Company’s assets upon winding up, which is clearly inappropriate and not within the ambit of the Court’s jurisdiction that the Plaintiff sought to invoke by presenting the Petition.  I agree.

28.I am also of the view that there is no proper explanation for presenting a winding-up petition and conspicuously failed to seek a winding-up relief.  One wonders what is the purpose of presenting a winding-up petition if one does not even seek a winding up order.  On this ground alone, the Petition should be dismissed and taken out of the Court’s files.

29.Secondly, it is really inexcusable that upon being paid in full with costs in favour of the Petitioner to be taxed if not agreed, the Petitioner still chose to keep the Petition alive.  This is a clear abuse of the winding up jurisdiction of this Court.   

30.Thirdly, in relation to whether there is bona fide dispute as to the petitioning, I am of the view that on proper analysis, it is irrelevant.  Even if the debt is not disputable on substantial grounds, as I said earlier, the Petition, as it stands, should be dismissed.  Ms Liao for the Petitioner submitted that the Petition could be easily amended.  It may or may not be the case.  However, as the matter stands, there were no amendments or attempts to make amendments to the Petition before this Court. In fact, once the petitioning debt is fully paid, it is not clear as to how the Petitioner could have amended the Petition to keep it alive.

31.It is quite clear that upon full payment of the petitioning debt on 2 September 2020 and an agreement to pay costs to the Petitioner, there is no legitimate basis for the Petitioner to maintain the Petition.  It is simply unsustainable.  The continuous prosecution of the Petition is a clear abuse of the process of the Court.

32.Moreover, whilst I do not propose to conduct a detailed analysis on whether the petitioning debt is disputed on substantial grounds or not, it is clear to this Court that first, there are respectable arguments as to whether the Petitioner can recover the petitioning debt by way of the Petition given that section 60 of the Legal Practitioners Ordinance, Cap159 provides that “no action shall be brought upon any such agreement as is referred to in section 58.”  Ms Liao’s submission is that a winding up petition is not an “action”.  However, Mr Pang is right that the Petitioner in fact deployed the Petition as if it is an “action” to recover debts.

33.Finally, as the Petitioner has withdrawn the Petition, the starting point is that the Petitioner should pay for the costs of the Petition unless there are exceptional circumstances.  In the present case, I am of the view that the Petitioner cannot be said to the winner as the Petition itself is defective and the Company only paid under pressure without admitting liabilities.

34.For all the reasons stated above, I am of the view that the Company is entitled to the costs of the Petition and the Striking Out Summons.  I will also award the said costs on an indemnity basis for I consider that the conduct of the Petitioner is deplorable and a clear abuse of the process of the Court.

COSTS OF THE INJUNCTION SUMMONS

35.I am also of the view that the Company is also entitled to have the costs of the Injunction Summons on an indemnity basis.  First, it is quite clear to this Court that upon making full payment and agreeing to pay the costs of the Petitioner prior to 22 September 2020, there is no legitimate basis for the Petitioner to insist on prosecuting the Petition and to have the same advertised or gazetted.

36.It is trite that hanging a petition over the head of a company and having its bank accounts frozen, ipso facto, will cause prejudice to the company.  I note that paragraphs 36 to 44 of the 2^nd Affirmation of Mo Yuen Chau set out the prejudice suffered by the Company as a result of the wrongful presentation of the Petition at least from 2 September 2020 onwards.  Under such circumstances, it is only natural that the Company took out an application to restrain the advertisement of the Petition.  I am of the view that the Company should not have been driven to incur such unnecessary costs. It should not be penalised by the unreasonable conduct of the Petitioner.

37.Ms Liao for the Petitioner submitted that there was no evidence of substantial and imminent harm.  I disagree.  Further, the fact that there are other (would be creditors) of the Company who have or might have demanded payment publicly does not make the hanging of the Petition over the head of the Company justifiable.  

38.Secondly, Ms Liao for the Petitioner took the point that the Company wrongly deployed some without prejudice correspondence in support of its application for an injunction.  First, I am of the view that this submission does not assist the Petitioner as this Court is dealing with the issue of costs and Ms Liao has referred to the without prejudice save as to costs correspondence the content of which does not help the Petitioner at all.  In a without prejudice save as to costs letter dated 7 September 2020, the Petitioner demanded, inter alia, that:

“2. Your client’s written undertaking to us to globally and concurrently settle all other outstanding legal costs, expenses and disbursements incurred and in connection with the cases handled by us previously. A list of the said cases and the amount of each case can be provided by us to you for your reference and further handling upon request.”

39.It is quite clear that the Petitioner is using the Petition, wrongfully, to force the Company to pay for legal costs in relation to cases which are not the subject matter of the Petition.  This cannot be right.  It is not the sort of conduct that one expects from an officer of the Court.

40.Thirdly, Mr Pang for the Company submitted that it seems that the matters that need to be “globally settled” are matters involving other legal work done by the Petitioner on behalf of the Company.  However, no demands for such legal costs in arrears have been made by the Petitioner.  Therefore, it must mean that the relevant bill has not yet been rendered to the Company so as to start the 1-month period required under section 66 of the Legal Practitioners Ordinance, Cap 159.  Mr Pang thus submitted that such unbilled costs are not due and payable and therefore no dispute arises.

41.Fourthly, Mr Pang for the Company submitted that the without prejudice correspondence are in fact clear examples of the Petitioner utilizing the Petition to pressurize the Company in accepting unfavourable terms in respect to claims outside the ambit of the Petition.  As such, it is submitted, that the same clearly constitutes abuse of process and clear unambiguous impropriety which is one of the exceptions that without prejudice correspondence is not admissible.  (Chu Chung Ming & Anor v Lam Wai Dan & Anor [2012] 4 HKLRD 897 at §§30-31 per Au-Yeung J)

42.I am of the view that I do not need to resolve the above issues.  This Court proceeds on the basis that the content of the without prejudice correspondence have no bearing and will not affect the Court’s exercise of discretion on the issue of costs.

43.Nonetheless, the key consideration is that the petitioning debt has been fully paid and as discussed above, there is no basis to continue to prosecute the Petition.  On this basis alone, the Court would have granted the injunction.  Indeed, the Petitioner saw fit to give an undertaking not to advertise and/or gazette the Petition.

44.The without prejudice save as to costs correspondence dated 7 September 2020 which this Court is entitle to read clearly shows that the conduct of the Petitioner is unreasonable.

45.In the circumstances, I am of the view that the proper costs order is for the Petitioner to pay the costs of the Company on an indemnity basis.

DISPOSITION

46.For all the reasons stated above, I make an order that the Petitioner is to pay the costs of and occasioned by the Petition, the Striking Out Summons and the Injunction Summons to the Company, on an indemnity basis, to be taxed if not agreed.

47.Finally, it remains for me to thank Ms Liao for the Petitioner and Mr Pang or the Company for their helpful assistance.

Ms Tara Liao, instructed by Frances Ip & Co, for the Petitioner  

Mr Ronald Pang, instructed by Lui & Law Solicitors, for the Respondent