1. In Hung Yip (HK) Engineering Company Ltd v Kinli Civil Engineering Ltd [2021] HKCFI 153, Harris J reminded practitioners of the true principles applicable to an injunction restraining the presentation of a winding-up petition. Prior to this judgement, it would be fair to say that a number of practitioners had proceeded on the assumption that the hurdle for an applicant to cross was effectively the same as that to defeat a creditor’s petition.
Introduction
2. The jurisdiction of the Court to grant an injunction restraining a prospective petitioner to present a petition against a company is well recognised: see Goodway Ltd v Pirelli Cables Ltd [1997] HKLRD 1039.
3. In Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487, Kwan J (as her Ladyship then was) held at §9-11:
“9. The principles governing applications for interim injunctions in American Cyanamid Co v Ethicon Ltd [1975] AC 396 do not apply to this situation, as the granting of an injunction to restrain the presentation of a winding-up petition would finally dispose of the issue in dispute in the present proceedings (Bryanston Finance Ltd v De Vries [1976] 1 Ch 63 at pp.80E-81E).
10. The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding-up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds (Bryanston Finance Ltd v De Vries at pp.78D-E, 79A-D).
11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (a disputed debt petition), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (a cross-claim petition), such a petition may be restrained from proceeding (Re Pan Interiors Ltd [2005] EWHC 3241, paras.34-39). It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence. (Re Company [1992] 1 WLR 351). A cross-claim petition is regarded in the same way (Southern Cross Group Plc v Deka Immobilien Investment GmbH [2005] BPIR 1010, paras.29-30; Re Pan Interiors Ltd, para.35).” (emphasis added)
4. The onus is on the company to put forward credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at the trial: China Health Group Limited v Li Hong Holdings Limited (HCMP 2593/2016, 29 March 2017), at §§26-31.
The need to show abuse
5. In Hung Yip (HK) Engineering Company Ltd v Kinli Civil Engineering Ltd [2021] HKCFI 153, Harris J emphasized the need to show abuse on the part of the prospective petitioner:-
10. Counsel for both parties seem to have read [14(3) to (5)] of the judgment as indicating that the issue on the hearing of the originating summons was the same as if a petition had been issued and come on for trial, namely, had the Company demonstrated that the Company had a bona fide defence on substantial grounds. Whilst on occasion, that may in practice be the case, as I have explained, it is not what a company has to demonstrate. What has to be demonstrated is that presentation of a petition is an abuse of process. The facts of the present case allow the distinction and its importance to be illustrated and explained with some precision.
What is abusive
6. Harris J went on to explain what his Lordship meant by abuse:-
14. It seems to me that if a petition had been issued on 6 March 2020 there would have been very little room for argument that it was an abuse of process. In my view, it is implicit in the test applied by the court that for presentation of a petition to be an abuse, a creditor must either have been told enough to understand that the debt is disputed on substantial grounds or must be assumed to have known this from facts of which he was aware. As the authorities make clear a putative petitioner should not lightly be prevented from exercising his statutory right to present a petition. I would have thought it self-evident that the procedure that permits a company to apply to court to restrain the presentation of a petition is not intended to provide a mechanism by which a dispute that would normally be determined on the hearing of a petition is determined at the instigation of a company by a preliminary summary process. The scope of the insolvency regime is defined by the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”), and its subsidiary legislation, which does not provide any mechanism for challenging a statutory demand unlike the regime for personal bankruptcy, which so provides in Rule 48 of the Bankruptcy Rules, Cap 6A. The ability to present a petition promptly in the case of a company believed to be insolvent is important to creditors as by virtue of s184(2) of the Ordinance, it is relevant to the date any winding-up is deemed to commence. This affects the period within which claims may arise for transfers at an undervalue and unfair preferences pursuant to ss 265D and 266 of the Ordinance.
15. As I have emphasised in [8], what needs to be demonstrated is an abuse of process. Although, in the present context this has a largely technical meaning it does involve some element of impropriety in the sense of misuse of the procedure in s179 of the Ordinance for presentation of a petition to wind-up a company, particularly if the creditor knows that the debt is disputed on substantial grounds and issue of a petition is threatened with a view to asserting pressure to pay rather than out of a genuine concern as to a company’s solvency. It is, however, well settled that there is nothing objectionable in principle to a creditor owed a debt that he believes cannot be disputed issuing a petition to wind-up a company he suspects is insolvent[6]. This suggests that presentation of a petition relying on a debt genuinely believed to be payable is not an abuse even if a subsequent inquiry demonstrates that for a reason unknown to the creditor at the time the petition was issued there existed a bona fide defence on substantial grounds.
16. What constitutes an abuse of process in this context has been considered by me in cases in which a petition has been dismissed and a company suggests that the petitioner knew at the time the petition was presented, or should have appreciated, that the Company had a bona fide defence on substantial grounds and that in such circumstances, presentation of a petition was an abuse of process and justified ordering costs on an indemnity basis.
Evidence required
7. Finally, his Lordship helpfully identified the evidential issues to be addressed by the Company at paragraph 18:-
“Generally, in order to establish that presentation of a petition would be an abuse it is necessary for a company to adduce evidence that addresses the following matters, which are likely to be relevant to some degree to the question in most cases:
(1) The debt and how it is alleged by the creditor to arise. It might be thought that this is fairly obviously the first thing that has to be addressed, but one need only look at the evidence and skeletons filed for the present case to find illustrated that this is not always the case.
(2) When and how the debt has been disputed prior to presentation of the statutory demand and any application to the court for an injunction. As I explain in [20] this was not done properly in the present case.
(3) What is said to be the bona fide defence on substantial grounds.
(4) The solvency of the company.
(5) Prejudice that will be caused by the presentation of the petition.
(6) Whether or not it is asserted that the creditor is consciously using the threat of presentation of a petition improperly and is so the facts and matters relied on as demonstrating this.”
8. Companies should bear these guidelines in mind when considering applying for an injunction to restrain a winding up petition.
