The Companies Court ordered company to be wound up despite value of security purportedly exceeds that of the petitioning debt
Company and Insolvency
On 6 November 2023 (with written Reasons for Judgment  HKCFI 2916 given on 10 November 2023), the Court of First Instance (presided by Deputy High Court Judge Le Pichon) allowed the Petition by the Petitioner in HCCW 20/2023 against the Company (Silver Base (Holdings) Limited, “the Company”) on the ground that the Company is unable to pay its debt of around HK$506 million. At the conclusion of the hearing, it was ordered that the Company be wound up. The Court clarified the true test of the sufficiency of security. Anson Wong Yu Yat acted for the successful Petitioner.
In this case, by a loan agreement dated 28 December 2016 made between the Petitioner, the Company and Liang Guoxing (“Mr Liang”), the Petitioner granted the Company a loan of HK$350 million at an interest rate of 8%, repayable on the maturity date being two years after the drawdown of the loan, with Mr Liang (a 50% shareholder and one of the directors of the Company) agreeing to execute a guarantee in favour of the Petitioner to guarantee the repayment of the loan and interests. After various extensions, the Company was obligated to settle all outstanding principal and accrued interest by 30 April 2022. The Petition is based on the debt arising from the loan together with relevant accruing interest (“the Debt”).
The Debt was secured by a first charge over the property known as House 8, No 33 Island Road, Hong Kong (“the Property”) owned by the Company. A statutory demand was served on the Company on 1 December 2022 which went unmet. The Company opposes the Petition on two grounds, namely: (1) the Debt has been fully repaid (“the Repayment Ground”); and (2) the value of the Property exceeds that of the Debt (“the Security Ground”).
The Court dismissed with indemnity costs the Company’s application to file further evidence taken out less than two weeks prior to the substantive hearing of the Petition, finding that the delay is not only inordinate but also inexcusable. In so doing, the Court held (at §§20-21) that the clear statement of the applicable principles for late interlocutory applications found in Converge Design and Construction Co Ltd v Mount Kelly International Limited  HKCFI 2433 at §2 are based on the underlying objectives of the CJR, which must also be applicable to winding up petitions where the company is unable to pay debts:
“…delay itself is a ground to refuse a late application, either for discovery or for the introduction of new pleadings and evidence, when trial is imminent. The onus is on the applicant to justify its delay and to show good reason for leave to be granted. … [The] just resolution of disputes requires due consideration of the time occasioned by last minute applications to introduce amendments to the pleadings and/or evidence on the eve of trial. Prejudice is inevitably caused, in the disruptions in the preparation for trial, the need to consider the new evidence and the need to respond thereto, coupled with the need to locate witnesses at the last minute to consider and if necessary to respond to the new evidence, and the last minute distraction from the proper focus and priority of the due preparation for trial. This is actual prejudice.”
At the hearing, the Company made no oral submissions on the Repayment Ground.
On the Security Ground, the Court held (at §54) that to satisfy section 178(1)(a)(ii) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (which provides that “A company shall be deemed to be unable to pay its debts if the company has, for 3 weeks after the service of the demand, neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor”), it is incumbent on the Company to secure the Debt “to the reasonable satisfaction of the creditor”.
The Court went on to find (at §§56-60) that:
(1) the Court will not entertain the Company’s proposition that if there is dispute as to the value of the Property and the Company has shown that it is reasonably arguable that the Company’s valuation would prevail, there should be a trial on valuation as it will have demonstrated that it has a bona fide defence to the Petition;
(2) the evidence shows that the Petitioner did invite the Company to sell the Property and also sought to arrange inspection of the Property for potential buyers with Mr Liang but he repeatedly refused, using the pandemic as an excuse;
(3) the Company made no effort to dispose of the Property. If the Property has the value the Company asserts, there was nothing to prevent the Company from selling the Property and repaying the Debt; and
(4) in those circumstances, it was not unreasonable for the Petitioner to take the view that it is not sufficiently secured.
The Court accepted (at §61) the Petitioner’s submission that as a matter of law, any difference in valuation does not preclude the Court from exercising its residual discretion to order a winding up. As the Court concluded (at §62), the Company is unable to demonstrate that the Property would command the amount of the Debt if “put into the market” which is the true test of the sufficiency of security. Accordingly, the Court held that the Company cannot succeed on the Security Ground.
The Judgment can be found here.
The Petitioner was represented by Anson Wong Yu Yat (led by Audrey Eu SC and with Xizhen Wang).
Anson Wong Yu Yat
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This article was first published on 14 November 2023.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photographs which appear in this article are included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related. The views and opinions expressed in this article/material are solely those of the members authoring it and do not necessarily reflect the official policy or position of Denis Chang’s Chambers, or of any other member or members of Denis Chang’s Chambers.