Re Yueshou Environmental Holdings Ltd

HCCW 142/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 142 OF 2013

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D E C I S I O N

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Introduction

1.I have before me an application to strike out the Petition issued on 28 May 2013 seeking an order to wind up the Company on the grounds of insolvency [1]. The Company is incorporated in Bermuda and is listed on the Main Board of The Stock Exchange of Hong Kong Limited.  It was called Wing Fai International Limited before changing its name to China Rich Holdings Limited in July 1998 and subsequently to its present name.  No issue arises about the Court’s jurisdiction to wind up the Company.  The Petitioner relies to establish insolvency on a statutory demand dated 20 November 2012 in respect of a debt of $2,805,586.97 (“Debt”).  The alleged debt arises, says the Petitioner, as follows.

2.The Debt represents the unpaid balance of monies owed to the Petitioner in respect of salary, expenses and legal costs which the Company had agreed to reimburse her, and cash advances during the period in which she was a director of the Company and a number of subsidiaries, which ended on 7 January 2005, and a subsequent period during which she was an authorised representative of the Company which ended on 20 July 2007.

3.The Debt has been acknowledged in writing by the Company on a number of occasions.  The Petitioner says that she received from the Company an undated document entitled “Statement of Claims” in about July 2010, which sets out the amounts payable by it to her for the years ending July 2010.  At that time the debt totaled $6,501,239.92 and that part of the Debt that had been incurred at that time formed part of it.  A significant proportion of the liability for $6,501,239.92 appears to have been included in earlier audited financial statements which post date the Petitioner ceasing to be a director of the Company.  This is demonstrated by the fact that the Company’s auditors sent a Confirmation For Audit Purposes dated 13 October 2010 to the Petitioner recording that as at 31 July 2010 the books and records of the Company showed $6,501,239.92 as being payable to her.

4.The sum that the Company had acknowledged was payable to her was not paid and a demand for settlement of it was made by the Petitioner’s solicitors in November 2010. This resulted in a reply from the Company’s solicitors, Lily Fenn and Partners (“LFP”), dated 29 November 2010 agreeing to repay $6,501,239.92 by installments and acknowledging that the Company should pay the Petitioner’s costs in respect of two legal proceedings: HCA 833/2004 and a related appeal CACV 249/2010.  The Petitioner’s solicitors accepted this proposal.

5.Subsequently, the Company became aware that the Petitioner was subject to investigation for fraud in relation to the affairs of the Company and in respect of which she was charged in 2010 [2]. In a six page letter dated 14 April 2011 from LFP to the Company, LFP advised the Company on whether as a result of the criminal proceedings that had been commenced, the Company could refrain from paying her the sum previously acknowledged as due.  LFP considered the deed of indemnity which provided for the basis for payment of much of the $6,501,239.92 and concluded that it did not and the sum was payable.

6.In a letter dated 4 August 2011 LFP acknowledged that $4,805,586.97 was payable.  This was $6,501,239.92 less installments that had been paid presumably in reliance on LFP’s advice of 14 April 2011, of which the Debt formed part.  The Company proposed to pay the outstanding amount by installments.  In a further document between the Company and the Petitioner dated 16 May 2012 and described as “Indebtedness Repayment Extension Agreement” (“2012 agreement”), the Company again acknowledged the Debt (which was the amount due on 4 August 2011 less a number of further installments) and agreed to repay it within 6 months.  The Petitioner argues that the 2012 agreement is the contractual basis for the Petitioner’s recovery of the Debt, although, as I understand the argument advanced by Mr. Strachan, if that is wrong he says it is still recoverable as the Debt is repayable pursuant to the original Service Agreement and Indemnity entered into in 1999 and 2000 between the Company and the Petitioner and which I describe in more detail later in this decision.  What is quite clear is that between July 2010 and May 2012, which was long after the Petitioner had ceased to have a role in the Company, the Company was explicitly stating with the benefit of legal advice that the Debt was payable and subsequently paid by installments of this sum reducing the amount to the Debt claimed in the statutory demand.  However, it became clear during the exchange of evidence that the calculation of the debt had failed to take into account a payment of $1,000,000 made in June 2012 to the Petitioner pursuant to costs orders in her favour made on 7 November 2011 and 22 December 2011 in CACV 249 of 2011.  The Petitioner explains in her 3^rd affidavit that she had not appreciated that this sum was connected to the sum of $1,304,347.05 referred to in LFP’s letter of 4 August 2011 in respect of costs she had incurred in the appeal and that the $1,000,000 should be set‑off against the balance owed to her.  She suggests that part of the reason for this oversight is that in addition to the amount of legal costs that the Company has admitted and agreed to pay there is a considerable sum that she is still owed which is not covered by the agreement.  She says this is approximately $20,000,000 and she had claimed it by way of counterclaim in the High Court Action which I refer to later in this decision.  I accept the Petitioner’s explanation.  It follows that the amount she says is indisputably due is reduced to $1,805,586.92.

7.Before turning to consider why the Company contends that notwithstanding these facts the Debt is not payable I shall consider the relevant legal principles.

Legal Principles

8.It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment.  If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed.  Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated.  I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

“Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.”

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

(2) I have to be satisfied that the Company’s assertions are believable.  The test

“... 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.”

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, §13

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

“(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds.  In this context, “substantial” means having substance and not frivolous.  An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side.  It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists.  In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company.  Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.”

9.These judgments demonstrate that it is necessary for a company contending that it has a bona fide defence on substantial grounds to put before the court not just a series of assertions of fact that if made out at trial would constitute a defence, but credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at trial. 

10.Mr. Strachan and Mr. Wong cited further cases which deal with the impact on the resolution of this issue of various types of matter, which occur where there are disputes over debts, for example an acknowledge of a debt[3] or a request for time for payment[4].  These cases illustrate the rather obvious point that it is harder for a company to satisfy the court that it has a bona fide defence on substantial grounds if it has conducted itself in a way which suggests that the debt is payable.  The authorities referred to in footnotes 3 and 4 illustrate that as a matter of practicality once a debt is acknowledged the evidence and argument relied on to establish a substantial defence will have to be compelling.  As will become apparent later in this judgment I consider that this is such a case.

11.A secondary legal issue arises from the way in which the Company puts its case.  Statements can be found in various authorities to the effect that a winding-up petition is not a means of enforcing a debt but the engagement of the corporate insolvency regime for the benefit of all creditors[5]. This is uncontroversial.  Mr. Wong also referred to observations that appear in a number of cases that winding-up petitions should not be used as a means of debt collection [6]. He argued that the court would not normally wind up a company that is solvent and took me to Bozell Asia (Holdings) Ltd. v CAL International Ltd [7] to illustrate this.  Mr. Wong submitted on the basis of these disparate authorities that it is an abuse of process to use a winding-up petition to recover a debt from a company which the creditor knows to be solvent; necessarily this means a debt to which there is no defence.  I disagree.

12.The position in my view is quite simple.  A creditor is entitled to serve a statutory demand in respect of a debt to which he believes there is no defence.  If the debt is not satisfied he has locus to present a petition to wind up the company.  If the company is found to have no defence the creditor will normally be entitled to a winding‑up order ex debito jusitiae, although the court has a discretion not to so order if good reason is shown for taking some other course such as adjourning the petition in order to allow a restructuring of the company’s debt to be instigated because the court is satisfied that this appears to be in the best interests of the general body of creditors.  There is no foundation in the authorities for the suggestion made by Mr. Wong that a creditor who has an unanswerable debt cannot properly petition to wind up a company known to be solvent as a means to recover his debt.  It is well established in my view that this is acceptable [8]. What is not acceptable is issuing a winding-up petition in respect of a debt which a creditor knows is the subject of genuine dispute to pressure a company into paying.  It is this situation to which observations to the effect that a winding-up petition should not be used as a means of debt collection are directed.  As is apparent from the facts recited in the introduction to this judgment the present proceedings are a long way from being such a case.  A company cannot dispose of a petition as Mr. Wong contended simply by paying the amount of the debt into court and adducing evidence that it is solvent.  A solvent company, which refuses to pay a debt cannot insist, as the Petitioner’s argument necessarily implies, that before issuing a petition a creditor must first obtain a judgment and then exhaust other means of enforcement.  There is nothing in the various authorities that have been cited to support this view. Mr. Wong’s argument involves taking statements and decisions reached in very different contexts and elevating them to a single principle, namely that a creditor cannot petition to wind up a solvent company that secures a debt, which in my view the authorities clearly do not justify.  I will take just one of the authorities relied on by Mr. Wong to illustrate the fallacy of this argument.

13.In Re IJ Langleb Ltd [9] the petitioner had obtained summary judgment against a company.  A charging order was registered over four offices owned by the company.  Meanwhile the company applied for leave to appeal.  The company presented a petition in July 1994 that was dismissed in September 1996.  In determining costs Le Pichon J considered whether the petition should have been issued and concluded it should not.  Mr. Wong in his submissions put reliance on the following passage at 72 to 73c of the judgment:

“Counsel for the petitioner sought to rely on that passage. But the present case differs from the Cornhill and Mann cases in one important respect and it is the fact that the petitioner is fully secured. He has the ability through executing the charging order absolute to pay himself in full out of the company’s assets, a feature that was absent in both Cornhill and Mann. It is perfectly understandable why the company did not pay the debt: it had applied for a stay of execution of the judgment and an application for leave to appeal out of time against that judgment was then pending; further, the creditor was fully protected in the sense that it had a charge over assets that unquestionably exceeded the amount he was entitled to recover under the judgment. In these circumstances, I have difficulty with the averment that the company was insolvent.

Second, even in cases where s 178(1)(a) applies, the court retains a residual discretion whether or not to make a winding-up order. Considerations that would affect the exercise of that discretion include whether the petitioner would be deprived of his legitimate expectation of being paid, whether security has been furnished for the full amount etc: see Re Amalgamated Properties of Rhodesia Ltd [1917] 2 Ch 115 and Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19. On the facts, these considerations would operate against the exercise of the discretion in the petitioner’s favour.

It should be mentioned that the presentation of the petition gave rise to certain consequences such as the freezing of the company’s bank accounts which undoubtedly disrupted the day‑to‑day business of the company and evidence has been filed to the effect that it has lost customers as a result. However, the facts are not sufficiently compelling to warrant any finding or inference as to the existence of ‘some collateral and sinister object’ in the presentation of the petition.

Having regard to the circumstances of this case, I would exercise my discretion in favour of the company and order that the costs of the winding-up petition be borne and paid by the petitioner. I make an order nisi that such costs be on a party and party basis.”

14.There are important differences between the facts of Langleb and the present case.  First, the Debt was not secured at the time the Petition was issued. Secondly, the Company has admitted the Debt in a letter written by its own solicitors.  It seems to me that in these circumstances a petitioner is entitled to issue a petition if he concludes a company’s subsequent change of position is without merit.  Nothing in Le Pichon J’s judgment suggests otherwise in my view.  Le Pichon J clearly recognised that she was deciding the case on the basis that the facts before her took the case outside the type of situation considered in Cornhill Insurance plc v Improvement Services Limited [10]and Mann v Goldstein [11] in which experienced English Chancery judges took the conventional view that there is nothing objectionable in principle to a creditor owed a debt he believes cannot be disputed issuing a petition to wind up a company he knows is probably solvent.  There is nothing in Le Pichon J’s judgment to suggest she disagreed with the English decisions.

15.The position is different if a debt is undisputed but the company has a genuine and serious cross claim for a sum that exceeds the debt.  In this situation normally the court will not order a winding up [12] and if a creditor knows that the company asserts a genuine and serious cross claim a petition should not normally be issued against a company known to be solvent.  However, I do not accept Mr. Wong’s submission that because the Company commenced in December 2012 an action against the Petitioner (“Action”), in which the Petitioner has counterclaimed, which gives rise to some of the issues that arise for consideration in these proceedings it follows that the Petition should be dismissed.  This is only the case if I am satisfied that either there is a bona fide defence on substantial grounds or that, if not, there is a genuine and serious cross‑claim.

The defence

16.Mr Strachan argued that the Petitioner’s right to payment of the debt arose under the 2012 agreement.  This document is drafted as a formal agreement.  Its two operative provisions read as follows:

“1. MATURITY DATE

The Creditor agrees to extend the date of repayment of the Indebtedness to a date falling six months from the date of this Agreement with the same terms and conditions, and the Debtor promises to repay the Indebtedness to the Creditor when it falls due as provided in the foregoing.

2. PRIORITY OF USE OF CERTAIN FUNDS FOR INDEBTEDNESS REPAYMENT

To protect the Creditor’s interest, the Debtor agrees to pay the Indebtedness to the Creditor, on a first priority basis, out of any refund of deposits previously made by the Debtor with Lily Fenn & Partners of approximately HK$3 million and with Clifford Chance of approximately HK$9.4 million (after deducting the necessary legal expenses in respect of the court cases, namely HCA 2570 of 2003 and HCA 2051 of 2004, as may be required by the respective lawyers).”

17.It is apparent from these terms that the Company acknowledged that the Petitioner was due immediate payment of $2,805,586.97 and had sought time to pay.  The Petitioner agreed to this in return for the protection referred to in clause 2.  It seems to me that the language and form of the document indicates an intention on the part of the parties that it be legally binding and I have no doubt that if the Petitioner had sought payment in full shortly after it was signed this is what the Company would have contended.  I see no merit in Mr. Wong’s submission that there is significant dispute whether the agreement was entered into with authority by the Company.

18.It seems to me that clause 2 provides for sufficient consideration on the part of the Company to make it enforceable.  The material question is whether the 2012 agreement created a new, independent right to payment that replaced that arising under the Service Agreement and the Indemnity or only affected the timing of the right to payment under those agreements.  In my view by expressly stating that a certain sum of money, “the indebtedness” referred to in clause 1 and defined in the recital, was payable in accordance with the revised timetable as opposed to stating that such sums as might be due under the Service Agreement or the Indemnity would paid in accordance with the revised timetable, the 2012 agreement did create a right to payment of the Debt independent of the Service Agreement or the Indemnity.  This being the case I agree with Mr. Strachan that the attacks on the validity and effect of the Service Agreement and the Indemnity are irrelevant.

19.Mr. Wong argued that if the 2012 agreement did create a right to payment of the Debt then it was entered into by mistake and it is liable to be set aside.  I disagree.  Any mistake would be a unilateral mistake made by the Company.  It was not induced by the Petitioner.  The common law provides no remedy for a unilateral mistake made by one party, which was not induced by the other and the Court does not have an equitable jurisdiction to set aside a contract on the grounds of mistake [13]. I, therefore, reject the argument that even if the 2012 agreement gives a right to payment of the Debt there is still a substantial defence on this ground.  However, in case I am wrong about this I turn to consider what is the position if the Service Agreement and the Indemnity are the source of the right to payment.

20.I would start with this introductory comment.  All the evidence adduced by the Company comes from Ms. Tang Lo Nar, whose first involvement with the Company was when she was appointed its company secretary on 12 March 2012.  This was shortly before a change in the management of the Company, which seems to have been the catalyst for the change of attitude to the Petitioner’s claim.  Ms. Tang had no firsthand knowledge of the relevant events.  Despite this and the fact that the Company had for sometime accepted liability to reimburse the Petitioner for her legal expenses, its approach to demonstrating a bona fide defence has been to take issue with everything its lawyers have been able to think of regardless of merit.  For example, the Company is not prepared to accept that the Service Agreement which is dated 1 March 1999 (“service agreement”) and the Deed of Indemnity dated 1 March 2000 (“indemnity”) which gave rise to its liability to pay the Petitioner the sums she claims are genuine.  The basis for disputing this is twofold.  First, that in response to a request from Deacons whose name appears on the documents asking for the originals or copies Deacons says that they cannot find them.  Secondly, that the Petitioner cannot produce an original version either.  However, since the documents were drafted 13 years ago I find it entirely unremarkable that Deacons has not retained a copy or that given the admissions of liability the Petitioner does not have an original version.  As it is for the Company to demonstrate that it has a bona fide defence on substantial ground I find choosing to dispute the authenticity of the Service Agreement and the Indemnity on such weak grounds unhelpful.

21.The Company also argues that if the documents are genuine they are both defective.  In paragraphs 42 and 43 the Company’s written submissions its case is put as follows, and I quote from paragraphs 42 and 43 of its first written submissions:

“42. As stated in the 1^st Affirmation filed on behalf of the Company, the Alleged Deed of Indemnity is fundamentally defective in that

42.1. there is no common seal of the Company;

42.2. the signatories are not identified;

42.3. there is no identity of witness, save and except a name purported to be “Allen Tang” who is unknown to the Company;

42.2. no board resolution approving the Alleged Deed of Indemnity was found;

42.5. the page on which the signature was affixed is a standalone page which can be attached to and later stapled with any other unrelated documents;

42.6. no announcement made with respect of this Alleged Deed of Indemnity;

42.7. no announcement or disclosure of the Alleged Deed of Indemnity was made in any annual report of the Company

43. As to the Alleged Service Agreement, it was defective in that

43.1. No board resolution approving the entering into the Alleged Service Agreement was found;

43.2. No public announcement as to the signing of the Alleged Service Agreement, which the Company would have been obliged to do had it been a genuine transaction;

43.3. No disclosure of this Alleged Service Agreement was made in any annual report of the Company;

22.It seems to me quite clear that regardless of whether or not these documents were executed as a deed the Service Agreement is clearly enforceable as an agreement.  I can see no reason why any of the matters mentioned by the Company would lead to a different conclusion if the documents are genuine.

23.It is also suggested that the Petitioner may not be able to rely on the Deed of Indemnity because clause 2.3 contains provisions providing that the appointment of lawyers had to be approved by the Company and the Company had to be notified of the claims. The Company says there is no evidence that the Petitioner complied with these provisions.  However, having admitted the debt it seems to me that it is for the Company to demonstrate that it was not informed and that this, despite the admission of the debt, is a bar to recovery.  The Company obviously knew of the claims and if it did not require the information or object to the choice of lawyers it cannot now avoid liability on this ground.

24.The Company also suggests that the recognition of the Debt by the auditors, HLB Hodgson Impey Cheng Limited, and LFP’s advice should be viewed with skepticism because the Company believes that the Petitioner was instrumental in them being retained by the Company in 2004 and 2007 respectively.  This is pure speculation.

25.Despite the breadth of the Company’s attack on the Petition the determinative issues are relatively narrow.  The Service Agreement and the Indemnity both contain provisions allowing the Petitioner to recover legal and other expenses from the Company in specified circumstances.  Clause 15.1 of the Service Agreement and clauses 2.1 to 2.3 of the indemnity provides:

“15.1 The Company agrees to indemnify and hold harmless the Executive on demand from and against any and all losses, claims, damages, liabilities, and expenses, including without limitation, any proceedings brought against the Executive, arising from the performance of her duties in connection with her appointment under this Agreement, so far as permitted by law and the Company’s Bye‑laws, except in any case where the matter in respect of which indemnification is sought under this Clause was caused by the wilful default or wilful neglect of the Executive or any other matter referred to in Clause 13.1 (irrespective of whether the Company terminates this Agreement thereunder).

….

2.1 Subject to clauses 2.2, 2.5 and 4.3 of this Deed, the Company shall, to the fullest extent permitted by law and without prejudice to any other indemnity to which the Indemnified Person may otherwise be entitled, indemnify and hold the Indemnified Person harmless in respect of all Claims and Losses arising out of, or in connection with, the actual or purported exercise of, or failure to exercise, any of the Indemnified Person’s powers, duties or responsibilities as a director or officer of the Company or of any of its subsidiaries.

2.2 The indemnity in clause 2.1 of this Deed shall be deemed not to provide for, or entitle the Indemnified Person to, any indemnification that would cause this Deed, or any part of it, to be treated as void under the Companies ordinance and, in particular, except as provided in clause 2.3 of this Deed, shall not provide directly or indirectly (to any extent) any indemnity against:

(a) any liability incurred by the Indemnified Person to the Company or any Associated Company;

(b) any liability incurred by the Indemnified Person to pay a fine imposed in Criminal proceedings or a sum payable to a regulatory authority by way of penalty in respect of non-compliance with any requirement of a regulatory nature (however arising); or

(c) any liability incurred by the Indemnified Person:

(i) in defending any criminal proceedings in which he is convicted; or

(ii) in defending any civil proceedings brought by the Company, or an Associated Company, in which judgment is given against him;

where, in any such case, any such conviction, judgment or refusal of relief has become final.

2.3 Without prejudice to the generality of the indemnity set out in clause 2.1 of this Deed, the Company shall, to the fullest extent permitted by law, indemnify and hold the Indemnified Person harmless on an incurred basis against all legal and other costs, charges and expenses reasonably incurred subject to such appointment of legal and other professionals shall first be approved by the Company in defending Claims including, without limitation, Claims brought by, or at the request of, the Company or any Associated Company and any investigation into the affairs of the Company or any Associated Company by any judicial, governmental, regulatory or other body

PROVIDED THAT, the Indemnified Person agrees that any such legal and other costs, charges and expenses paid by the Company shall fall to be repaid, or any liability of the Company under any transaction connected thereto shall fall to be discharged, not later than:

(i) in the event of the Indemnified Person being convicted in the proceedings, the date when the conviction becomes final; or

(ii) in the event of judgment being given against the Indemnified Person in the proceedings, the date when the judgment becomes final;”

26.Mr. Wong argued that the ability to the Company to enter into these indemnity agreements was restricted by the Company’s bye laws.  Bye law 166(1) provides:

“166. (1) The Directors, Secretary and other officers and every Auditor for the time being of the Company and the liquidator or trustees (if any) for the time being acting in relation to any of the affairs of the Company and everyone of them, and everyone of their heirs, executors and administrators, shall be indemnified and secured harmless out of the assets and profits of the Company from and against all actions, costs, charges, losses, damages and expenses which they or any of them, their or any of their heirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty, in their respective offices or trusts; and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto; PROVIDED THAT this indemnity shall not extend to any matter in respect of any willful negligence, wilful default, fraud or dishonesty which may attach to any of said persons.”

27.I accept for the purposes of the present application that an agreement that went beyond the terms of bye law 166(1) would be ultra vires the Company and could not be enforced.  However, it does not seem to me that the indemnities in the Service Agreement and the Indemnity do so.  Bye law 166 itself provides a very wide indemnity, but  expressly excludes in its proviso matters involving willful neglect,  willful default, fraud or dishonesty.  Clause 15.1 of the Service  Agreement expressly excludes willful default or willful neglect.  Clauses 2.2 and 2.3 of the Indemnity use different language, but in practice are probably narrower than clause 15.1 and the bye law because they exclude recovery in any case in which the Petitioner is unsuccessful and, therefore, could exclude recovery in respect of a relatively benign case which fell short of willful default or negligence.  I, therefore, reject the argument that there is a defence in relation to the validity of these clauses. 

28.The Company has admitted liability for the Debt and done so after receiving legal advice.  I do not accept, as the Company suggests in paragraph 32 of its written reply submissions that: “In adjudicating on whether the Alleged Sum exists, this court would have to ask itself this very basic and fundamental question -- how did the debt arise? Or did the underlying debt exist? To this, other than the sum of HK$ 1.3 million odd, the petitioner provides no answer”.  The Court does not have to ask this question.  Neither is it for the Petitioner, at least in the first instance, to show how the debt is made up.  It is for the Company to demonstrate with precision that it has, since it admitted the Debt, discovered matters that give rise to a substantial defence.  The approach suggested by the Company is to reverse the burden that the authorities referred to early establish is upon a company defending a petition issued in reliance on a statutory demand.  In most cases it may be that a petitioner demonstrates how the debt has been incurred and how it is calculated, but in a case such as the present one where the debt has been so clearly admitted in my view it is not required to do so.  It transpired during the hearing that there was a further problem with this argument. 

29.The original amount that the Company admitted was payable was $6,501,239.92.  This figure was calculated in a schedule headed “Statement of Claims” produced sometime after July 2010.  The schedule was produced by the Company, which must, therefore, have known at that time, not only the calculation but the items of expense referred to in the schedule.

30.The Company suggests that in so far as the Debt relates to HCA 833 of 2004 and CACV 249 of 2010 (which is a figure of $304,347.05 having given credit for $1,000,000 received in June 2012) this is not recoverable because it relates to claims in respect of a subsidiary of the Company, Wing Fai, and the indemnities do not extend to a claim brought against the Petitioner in her capacity as a director of a subsidiary of the Company.  I disagree.

31.Clause 3.1 of the Service Agreement sets out the Petitioner’s duties.  These extend to all duties required of her by the Board.  It seems reasonable to assume, and the Company has not suggested otherwise, that the Petitioner became a director of the Company’s subsidiaries at the Board’s request.  Clause 15.1 applies to any claim arising in the performance of the Petitioner’s duties and, therefore, applies to claims brought against her in her capacity as a director of a subsidiary.

32.So far as the balance of the Debt is concerned Mr. Wong went through the schedule to which I have just referred in an effort to try and demonstrate that it was unclear that the balance was properly payable.  The schedule shows that the original debt was made up of a combination of items and was not limited to reimbursement of legal expenses.  These items include salary, cash advances and legal costs.  Mr. Wong submitted that some part of the balance due as at 19 May 2007 when the last repayment was made must include legal expenses (which I accept given the dates it appears in the schedule they were incurred) and that those costs probably included costs in respect of a defamation action (HCA 4460 of 2003) and a misfeasance action (HCCW 735 of 2002) that were not recoverable in accordance with the terms of the service agreement and the indemnity.  He also argued that some must relate to expenses that there is no evidence the Company properly authorised.  It seems to me that this is too speculative to constitute a bona fide defence on substantial grounds.

33.In conclusion I am not satisfied that the Company has demonstrated a bona fide defence on substantial grounds to the balance of the Debt after deducting $1,000,000 which the Petitioner accepts that she received in June 2012.

34.The Company argued that even if I reached this conclusion the Petition should either be dismissed or stayed because of the claim that it advances for recovery in the Action.  I see two difficulties with this argument.  The first is that I accept, as Mr. Strachan argued, that the Company’s claims are time barred.  Mr. Wong argued that the claims are in restitution for money had and received and such claims are not subject to the Limitation Ordinance. Mr. Wong referred me to Limitation Periods, McGee, 6^th edition, §4.006 to 4.007, in which the author expresses the view that claims for money had and received are not subject to the Limitation Act; although I note that at the end of this passage he doubted in the light of Kleinwort Benson Ltd. v S. Tyneside MBC [14] if a court would reach this conclusion.  With the latter observation I agree although not the former conclusion.  I prefer the analysis of the authors of Goff & Jones [15].

35.I dismiss the summons to strike out the Petition and direct that the Petition be relisted for the first Monday after the decision is handed down.  The Petitioner is to have the costs of the application to be paid forthwith with a certificate for two counsel.  It seems to me that materially more time and work was required in dealing with this case than was necessary as a result of the Company taking a plethora of unmeritorious points and I order that one third of the Petitioner’s costs be paid on an indemnity basis.

36.The remaining matter I have to deal with is the costs of the adjournment, which was caused by the Company’s failure to prepare the bundles in accordance with my directions. There seems to have been some misunderstanding on the part of the Petitioner’s solicitors on what costs order I had in mind at the time I ordered the adjournment which resulted in a bill being submitted for a gross sum assessment, which in my view bore no reality to what I had in mind.  However, as I had not made a costs order the matter is easily resolved by me now doing so in the following terms: The additional costs reasonably incurred by the Petitioner as a result of the adjournment of the hearing on 9 January 2014 be paid by the Company forthwith.

Mr Mark Strachan SC and Mr Mike Lui, instructed by King & Wood Mallesons, for the petitioner

Mr William Wong SC and Mr Kerby Lau, instructed by Bough & Co, for the respondent

Attendance of the Official Receiver was excused