Injunction restraining the presentation of winding-up petition

Addchance Limited v Herojoy Trading Limited [2019] HKCFI 1147

It is well established that the court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of court’s process. Deputy High Court Judge Keith Yeung SC (“DHCJ Yeung”) revisited this principle in Addchance Limited v Herojoy Trading Limited where there were two sets of inconsistent accounting documents which respectively prove and disprove the existence of the debt.

Background
The Plaintiff (“P”), Addchance Limited, is a Hong Kong company established by Mr Sung Chung Kwun (“Mr Sung”) in 1981. Mr Sung had been one of the directors from 1981 to 2015. As a result of a corporate structural reform in 2004, P became an indirect wholly owned subsidiary of public listed company, Addchance Holdings Limited (“AHL”) (now known as GTI Holdings Limited).

Around the same time of the corporate structural reform, Mr Sung established a discretionary trust for the benefit of certain designated employees of AHL. The trust held 33,000,000 shares in AHL and was administered by the Defendant (“D”), Herojoy Trading Limited.

In December 2009, the trust was terminated and the shares were subsequently sold. The net proceeds of the sale were around HK$41 million. Out of these proceeds, sums in the total amount of around HK$20.5 million were distributed to the beneficiary employees.

According to D, the balance of the proceeds was subsequently used by D to finance a loan to P. The term of the loan was for a sum of HK$26 million repayable on demand without interest (the “Alleged Loan”). D asserted that P had made a partial repayment of the Alleged Loan in the total sum of HK$5.05 million (the “Alleged Repayment”), leaving a balance of HK$20.95 million still owing to D (the “Alleged Debt”). On 18 December 2017, D served a Statutory Demand upon P based on this Alleged Debt.

In its defence, P claimed that the Alleged Loan was not a loan but was repayment of funds which Mr Sung had previously misappropriated from P. P was therefore under no contractual obligation to repay the Alleged Loan to D.  P further asserted that the Alleged Repayment was not related to the Alleged Loan at all.  P took out an Originating Summons and successfully obtained an injunction restraining D from presenting any winding-up petition against P based on the Alleged Debt.  In reply, D took out a Summons to discharge the said interlocutory injunction.

Legal Principles 
The law as regards an application for an injunction to restrain the presentation of a winding up petition was well established and summarised by Chow J in Re Grande Holdings Ltd HCMP 2369/2017 (unreported, 22 December 2017) and Ng J in Re Hong Kong Investments Group Ltd [2018] HKCFI 984 as follows:

1. The court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of the court’s process.
2. It is an abuse of process to present a winding-up petition based on a claim of which there is a bona fide dispute on substantial grounds. 
3. Petitions are not meant for the purpose of debt collection and the winding-up jurisdiction of the court would be exercised only in clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition.
4. 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.
5. 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.
6. The court would caution itself against unsubstantiated and unparticularised assertions.  It is incumbent on the company to put forward ‘sufficiently precise factual evidence’ to substantiate its allegations.
7. 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.

Decision
In considering the evidence, DHCJ Yeung found that there were two sets of accounting documents each supporting a different conclusion:

• The first set of documents was contemporaneous to the Alleged Loan and contradicted the existence of the Alleged Loan. They comprise principally the 2010 and 2011 account ledgers of Mr Sung’s director current account with P and the 2010 and 2011 Audited Financial Statements of P. These documents do not record anything due to the D. 
• The second set of documents comprise principally the 2015 Annual Report and the several audit confirmations issued by the P in 2015 and 2016. These documents indicated the existence of the Alleged Loan.

In light of this unusual circumstance, DHCJ Yeung carefully examined the evidence and observed the following:

1. The set of documents which supports P’s case was prepared when Mr Sung was in control of P and was at that material time also the sole director of D.
2. The D did not produce any particulars as to how Mr Sung requested the Alleged Loan from D, when the request was made, or to whom it was made.
3. D did not dispute the authenticity of the account ledgers of Mr Sung’s director current account with P. 
4. Whilst D argued that the relevant accounts and financial statements relied on by P were the results of certain mistakes committed by P’s accounting staff, there was no evidence as to what prior year accounting treatment, adjustment or restatement had been or should have been effected by P to put right those alleged mistakes or how the D discovered those mistakes.
5. The audit confirmations relied on by D only bore the P’s chop without any authorised signatures. Further, there was no evidence as to who authored those letters.

In view of the overall evidence, DHCJ Yeung was satisfied that P has discharged its burden of showing a bona fide defence. Accordingly, the attempted use of the winding-up proceedings to resolve the dispute was held to be an abuse of process.

Comment
Generally, confirmation or acknowledgement of the loan by debtor company in the form of statement of accounts, acknowledgment by financial controller and correspondence exchanged between parties had been held to be solid evidence in support of the debt alleged. Under those circumstances, the company’s burden to show that there is a bona fide dispute on substantial grounds would be onerous. 

That said, in an unusual case where there are evidence pointing towards a different conclusion, this case demonstrates that the court would carefully examine all the evidence and would only exercise its jurisdiction to wind-up a company in clear cases. 

Whilst issuing a winding-up petition may put pressure on the debtor company to commence settlement negotiation with the petitioner, it is important to ensure that the debt is clear and there is no evidence to support a bona fide defence.  Otherwise, the petitioner might be injuncted to present, take out or advertise the winding-up petition with adverse costs consequences.