Hong Kong Legal Update: What happens when a creditor petitions to wind up a company already subject to an unfair prejudice petition?

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Introduction

In a recent Court of First Instance case Li Fu Hua (also known as Denise Li) v Chen Ching Chih (陳清治) and another HCMP 1374/2018, [2018] HKCFI 2786, the court has to deal with the situation where a creditor filed a winding up petition (on ground of insolvency) against a company in respect of which a minority shareholder has already filed an unfair prejudice petition against the majority shareholder and the company.

Chronology

1. On 31 August 2018, the former petitioner (the “Petitioner”) presented an unfair prejudice petition (the “Petition”) against Chen Ching Chih (the “1^stRespondent”) and Prosperous Global China Holding Limited (the “Company”) was joined as a nominal party. In the Petition, the Petitioner argued that she was wrongly excluded from the management of the Company by the 1^st Respondent and there were various breaches of the articles of association committed by the 1^st Respondent. The Petitioner relied on such unfairly prejudicial conducts committed by the 1^st Respondent to seek equitable relief from the court.
2. On 6 September 2018, Yi Chun Navigation Inc. (the “Creditor”) who was controlled by the 1^st Respondent served a statutory demand for repayment of a debt on the Company.
3. On 24 September 2018, the Petitioner issued the 1^st Amendment Summons to amend the Petition (the “1^st Amendment Summons”) and presented a contributory’s winding up petition against the 1^st Respondent and the Company (the “Contributory Winding Up Petition”).
4. On 28 September 2018, the Creditor presented a creditor’s winding up petition against the Company (the “Creditor’s Winding Up Petition”).
5. On 3 October 2018, the Petition was listed for hearing. In view of the pending Creditor’s Winding Up Petition which the court was told would be uncontested, the court ordered a temporary stay of the Petition including the 1^st Amendment Summons.
6. On 27 November 2018, the Petitioner nevertheless issued the 2^nd Amendment Summons seeking substantive amendments to the Petition (the “2^ndAmendment Summons”).
7. On 10 December 2018, winding up order was made against the Company on the Creditor’s Winding Up Petition.
8. On 17 December 2018, Deputy High Court Judge William Wong SC (the “Judge”) decided that the Petition should be struck out or dismissed and the Petitioner then applied to withdraw the Petition. Since the withdrawal was not opposed by the 1^st Respondent, the Judge made an order that the Petition be withdrawn by consent.

Rationale of the Judge’s decision

Rationale for striking out the Petition

Firstly, the Judge decided that there is no reason for the Petition to hang over the 1^stRespondent when in reality there is no prospect that the Petition would be heard. The relief as prayed by the Petitioner could never be granted in view of the winding up of the Company.

Secondly, with the winding up of the Company, the liquidators should be the one to investigate any wrongdoings against the Company. Therefore, there is no utility in maintaining the Petition.

Therefore, the Judge is of the view that Petition should be struck out or dismissed if the Petitioner did not apply for a withdrawal.

Rationale for the Petitioner to pay costs

The general rule regarding costs is that the party who applies to withdraw an action or any proceedings would bear the costs, unless the applicant shows a good reason for departing from that position. To displace the presumption, the applicant will usually need to show a change of circumstances to which he has not himself contributed and is brought by some form of unreasonable conduct on the other party. The fact that the applicant would or might well have succeeded at trial is not itself a sufficient ground for departing from the general rule but if it is plain that the claim would have failed, that is an additional factor favouring the presumption. Meanwhile, the motivation of withdrawal due to practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of the case will not suffice to displace the presumption.

Firstly, the Judge decided that the winding up order made on 10 December is not a change of circumstances caused by some form of unreasonable conduct on the 1^stRespondent. The Judge has considered that the Creditor was controlled by the 1^stRespondent at the material time but he decided that there is nothing to suggest that the presentation of the Creditor’s Winding Up Petition is improper.

Secondly, the Judge decided that it is not necessary to determine the merits of the Petitioner’s grounds of petition at such stage. It is also not a sufficient reason to depart from the general rule even if the Petitioner would or might well have succeeded at trial.

Thirdly, the Judge decided that it is an irrelevant consideration to depart from the general rule even the Petition was presented well before the statutory demand served by the Creditor because the Petitioner has then applied for withdrawal.

Lastly, the Petitioner confirming that the Company being insolvent in her Contributory Winding Up Petition has rendered such petition an inappropriate one. The 1^st Respondent is entitled to argue that the Petitioner has no interest to present and continue the Petition.

Therefore, the Judge ordered the Petitioner to pay the 1^st Respondent’s costs.

Is that a fair result?

It is questionable whether the costs order made by the Judge is a fair one. The Petitioner may have genuine grievance against the 1st Respondent but before it could be heard, a creditor related to the 1st Respondent filed a winding up petition against the Company. Whilst the Petitioner did not dispute that the Company was insolvent and should be wound up, it does not necessarily mean that the Petitioner could not proceed with the unfair prejudice petition and obtain reliefs under such petition (such as a buy-out order based on a valuation at a date when the Company was still solvent). Apparently the Judge’s decision is very much based on the fact that the Petitioner chose to withdraw the Petition. But he was also of the view that the Petition should be withdrawn as he mentioned that any wrong-doing of the 1^st Respondent, if any, should be investigated by the liquidators instead. With respect, this was not a very practical suggestion. Liquidators could be very expensive and the Company seems to have little assets to finance such investigation. More importantly, if the Petitioner’s complaint is unjustifiable exclusion from management, this is not something that a liquidator should be concerned as it was not a wrong done to the Company. Hence, it is submitted that whether the general presumption that those withdrawing the petition should pay the respondent costs should be displaced in situation like the present case is a question that remains debatable.

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This article is written by ONC Lawyers and was first published on ONC’s website.

This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.