With the effects of the pandemic likely to be felt for some time, this decision will no doubt be useful to practitioners dealing with the increasing number of disputes between companies and their creditors. On the one hand, a creditor has a statutory right to present a winding-up petition in order to protect its interests where it believes a debtor company to be insolvent. On the other, irreparable damage could be caused to the debtor company's ongoing business and reputation notwithstanding it may have a bona fide defence for refusing to pay the alleged debt.
Are you justified?
On 9 March 2020 the plaintiff debtor sought an ex parte interim injunction to prohibit the defendant creditor from presenting a winding-up petition relying on a statutory demand served on 14 February 2020 in the amount of HK$4,773,651.63 (the debt). The 21-day period for compliance with the statutory demand had expired on 6 March 2020 and consequently the defendant was entitled to present a petition.
The Honorable Madam Justice Linda Chan granted the interim injunction until the return date of the originating summons on 13 March 2020. As the defendant did not attempt to have the injunction discontinued, directions were made for a final order to be set down for substantive determination and for the interim injunction to continue until that time. The matter was ultimately listed for hearing before the Honorable Mr. Justice Jonathan Harris.
During the hearing on 13 January 2021 – and having read counsels' skeleton arguments in advance – it quickly became apparent to Harris J. that the injunction would not have been granted had the court been properly informed of the position. In fact His Lordship commented that had the relevant principles in determining such an application been properly understood and argued by counsel, the plaintiff debtor would have been shown to have been unable to satisfy the requirements.
The applicant must demonstrate that presentation of a petition is an abuse of process. This situation is to be distinguished from the issue at stake in the hearing for a winding-up petition, which is whether the debtor company sought to be wound up has a bona fide defence on substantial grounds.
Six tests for abuse of process
Generally, in order to establish abuse of process, Harris J. noted that it is necessary for a debtor company to adduce evidence addressing the matters below:
- The underlying debt and how it is alleged by the creditor to arise.
- When and how the debt has been disputed prior to presentation of the statutory demand and any application to the court for an injunction.
- What is said to be the bona fide defence on substantial grounds.
- The solvency of the debtor company.
- The prejudice that will be caused by the presentation of the petition.
- Whether or not it is asserted that the creditor is consciously using the threat of presentation of a petition improperly and if so the facts and matters relied on as demonstrating this.
If these matters had been considered, in particular (i) and (iii), it would have been obvious that the defendant's view that the debtor company had no bona fide defence on substantial grounds was proper, and therefore it was not an abuse for it to present a petition. The plaintiff had failed to respond to the defendant's numerous claims for payments and chasing letters until 2 March 2020, three days prior to the expiration of the period for compliance with the statutory demand. In its response letter, the debtor did not critique the amounts claimed by the creditor and there was no quantification of the cross-claim.
Indeed it was the failure on the part of counsel to draw attention to the fact that the plaintiff had only disputed the debt on 2 March 2020 that led to the original grant of the injunction. In the words of Harris J., "[t]his was materially misleading" and had Her Ladyship "been properly appraised of the position…it was unlikely that the injunction would have been granted."
Know the principles
When considering whether or not to grant an injunction to restrain presentation of a winding-up petition, the court should not restrain the legitimate presentation of a petition unless the debtor company is able to establish that the petition would constitute an abuse of process.
The right to petition for winding-up is a statutory right, and so a would-be petitioner should not be restrained from exercising it except in cases of abuse. This may be, for example, where the petitioner knew that the underlying debt is disputed on substantial grounds and the petition is being used as a threat to assert pressure on the debtor company to pay rather than out of a genuine concern as to the debtor company's solvency.
In Hung Yip, as a result of the plaintiff debtor being shown unable to demonstrate an abuse of process during the hearing, the parties sought time to settle the dispute ultimately leading to the application being dismissed by agreement.
Companies and their advisers, when facing a winding-up petition, should keep in mind the principles and legal test laid down in Hung Yip to ensure that, in Harris J.'s words, "an application to restrain presentation of a petition is justified and those that proceed are properly formulated."
Authored by Jonathan Leitch and Nigel Sharman.
