In Re Safe Rich Industries Ltd.

CACV000081/1994

H E A D N O T E

Company gave cheques and then countermanded them - payee issued statutory demand based on dishonoured cheques - such demand not met - creditor's winding-up petition presented by payee as a result - application by company to strike out petition - question whether debt genuinely disputed on substantial grounds - judge refused to strike out petition and instead ordered that company be wound up - company appealed - appeal dismissed.

1. The test at the summary stage is whether the defendant's assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.

(In the present case, the judge was right in finding that the company's story was unbelievable)

2. If a situation is so exceptional that a court giving summary judgment on a bill of exchange would nevertheless grant a stay of execution pending the determination of an unliquidated cross- claim, then the liability on the bill should not be treated as a debt for the purpose of making a winding-up order.

(The situation in the present was not exceptional)

IN THE COURT OF APPEAL

1994, No. 81
(Civil)

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Coram: Nazareth, V.-P., Litton and Bokhary, JJ.A.

Date of hearing: 3 November 1994

Date of judgment: 3 November 1994

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J U D G M E N T

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Bokhary, J.A.:

1. This interlocutory appeal concerns a winding-up petition presented on the basis of non-payment under a statutory demand.

2. Contending that the debt underlying that demand was genuinely disputed on substantial grounds, the company applied for the striking out of the petition.

3. By an Order made on April 29 this year, Jones J dismissed the application to strike out the petition, and instead ordered that the company be wound up. It was his view that the debt was not genuinely disputed on substantial grounds.

4. Appealing to us against that Order, the company attacks that view.

5. The debt, which is for $1,207,950.84, arises under the first six of ten cheques for $201,325.14 each which the company had drawn in favour of the petitioner and then countermanded.

6. There had been negotiations between the petitioner and the company over claims arising out of the supply of pharmaceutical products by the petitioner to the company. Those negotiations, or at least one phase of them, appear to have culminated in the delivery, under cover of a letter dated August 13, 1993, from the company to the petitioner, of the ten cheques: the first of which was post-dated to August 23,1993, and the last of which was post-dated to October 25 that year.

7. The statutory demand is dated October 9, 1993. By that time, the first six cheques had been returned to the petitioner marked "Refer to Drawer".

8. Shortly stated, the "defence" which the company sought to run is one along these lines. As a result of breaches by the petitioner of the relevant contracts of supply, the net position was that compensation was due to it, the company. But rather than pay compensation directly, the petitioner suggested indirect and indeed disguised compensation in the form of the supply by the petitioner to the company of further goods at unnaturally low prices. There were lengthy negotiations. And those led to the giving of the ten cheques as a goodwill gesture subject to the quantification of the compensation due to it, the company.

9. The expression "goodwill gesture" chosen by the company may not be wholly apt. Perhaps the expression "facade" would be more apt. Be that as it may, the defence was one of conditional delivery: the condition being, it seems, that the cheques would not be presented and were therefore worth about as much or possibly less than the paper on which they were written.

10. So the debt was disputed, and what I have said is an outline of how it was disputed. The question was whether it was genuinely disputed on substantial grounds. To put it at its simplest, was the company's story of conditional delivery believable?

11. In this connection, our attention has been drawn to the decision of this Court in Civil Appeal No. 182 of 1993, Ng Shou Chun v. Hung Chun San, January 26, 1994 (unreported) in which Godfrey JA, giving the first judgment at the invitation of the President, referred to the decision of this Court in Murjani v. Bank of India [1990] 1 HKLR 586, and then continued thus (at p.4):-

"But Murjani was decided before National Westminster Bank v. Daniel ..." - that was a decision of the Court of Appeal in England given on February 19, 1993, - "... and I would sound a note of caution about Murjani, which has come to be cited in almost every case under O.14 or O.86 to justify the plaintiff in asking the court to embark on a mini-trial of the action on affidavit evidence. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?' If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed; it is whether those assertions are believable."

12. For my own part, I must say that when I used to hear applications for summary judgment I was never so unfortunate as to come across any advocate bold enough to attempt to get me to embark upon a mini-trial on affidavit evidence. But I fully accept of course that it may have been attempted before other judges; and certainly no such attempt should ever be made.

13. The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.

14. Coming back to the facts of the present case, the judge looked at the evidence before him and decided in effect that the company's story was not believable. It is for us in this interlocutory appeal to say whether the judge was right or wrong. Either way, no lengthy recitation of our analysis of the evidence is necessary or even desirable. If there is no genuine dispute on substantial grounds, then there is neither necessity to say nor indeed logic in saying a lot about a negative like that. If, on the other hand, there is a genuine dispute on substantial grounds, then nothing should be said which might prejudice or prejudge how that dispute may be resolved at trial.

15. Putting it very briefly, it seems to me clear beyond argument that the position taken up by the petitioner was: that instalment payments should be made by the company to it in order to dispose of the bulk of what the negotiations had been about; and that anything left over should be disposed of by each side abandoning its claim. And it is equally clear that the position taken up by the company was: that it would make such instalment payments but that whatever was left would be discussed and if possible settled It is plain that the delivery of the cheques was unconditional. If what was left over can be settled, then the position can be adjusted if the parties wish and in any way they may wish. If what was left over has to be litigated or arbitrated, then that too can be done. Either way, what was left over is something quite apart from the cheques. All the documents, common sense and commercial sense point unerringly to that.

16. It should be mentioned that Mr Chain for the company drew attention to the decision of Harman J sitting in the Chancery Division of the English High Court in Re a Company [1991] BCLC 464. That decision is to the effect that if a situation is so exceptional that a court giving summary judgment on a bill of exchange would nevertheless grant a stay of execution pending the determination of an unliquidated cross-claim, then the liability on the bill should not be treated as a debt for the purpose of making a winding-up order.

17. One can readily see that a company which has obtained a stay of that sort should not be treated as indebted for the purpose of ordering it to be wound up. But the present case is not an exceptional case at all let alone one so wholly exceptional as to give rise to the situation with which Harman J was dealing.

18. There may be some claim or claims against the petitioner which the company in liquidation can still pursue. And Mr Reyes for the petitioner accepts that a decision against the company in this appeal could not give rise to any issue estoppel or the like in favour of the petitioner in the event of any such claim. But it is clear: that any such claim is wholly apart from the unconditional delivery of the cheques; and that no such claim can give rise to any exceptional situation.

19. In my judgment, this appeal, despite the skill with which it has been advanced, must be dismissed.

Nazareth, V.-P.:

20. I agree that for the reasons given by Bokhary JA the appeal must be dismissed. I would add only these few words. The judge below concluded that the company had not shown that there is bona fide dispute on substantial grounds. For myself, I am content to say that I am no less satisfied that the company has likewise failed to do better in this Court. Far from showing any credible grounds for regarding the delivery of the cheques as conditional, that being the company's case pursued before this Court, the evidence, that is the documentary evidence which was the evidence before us, points plainly to the contrary.

Litton, J.A.:

21. I too entirely agree and would dismiss this appeal.

[The petitioner was awarded the costs of the appeal such costs to be paid out of the assets of the company]

Representation:

Mr Benjamin Chain (instructed by Messrs Pang, Tang, Wan & Choi) for the company/appellant

Mr A.T. Reyes (instructed by Messrs Baker & Mckenzie) for the petitioner/respondent

Mr S.K. Lo (of the Official Receiver's Office) for the Official Receiver