What Happens When a Creditor Petitions to Wind Up a Company Already Subject to an Unfair Prejudice Petition?

Introduction

The question arose in the recent case of Li Fu Hua (also known as Denise Li) v Chen Ching Chih and another HCMP 1374/2018, [2018] HKCFI 2786.

Chronology

1. On 31 August 2018, Li Fu Hua (the “Petitioner”) presented an unfair prejudice petition (the “Petition”) against Chen Ching Chih (the “1st Respondent”). Prosperous Global China Holding Limited (the “Company”) was joined as a nominal party. The Petitioner argued that she was wrongly excluded from the management of the Company by the 1st Respondent. The Petitioner relied on such unfairly prejudicial conducts to seek equitable relief from the court.

2. On 6 September 2018, Yi Chun Navigation Inc. (the “Creditor”) who was controlled by the 1st Respondent served a statutory demand for repayment of debt on the Company.

3. On 24 September 2018, the Petitioner issued an amendment summons to amend the Petition and presented a contributory’s winding up petition against the 1st 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 amendment summons.

6. On 10 December 2018, winding up order was made against the Company on the Creditor’s Winding Up Petition.

7. On 17 December 2018, the judge decided that the Petition should be struck out or dismissed and the Petitioner then applied to withdraw the Petition.

Rationale of the judge’s decision

Striking Out the Petition

The judge decided that there was no reason for the Petition to hang over the 1st Respondent when in reality there was 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. Moreover, 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 and the Petition should be struck out or dismissed.

Petitioner to Pay costs

Generally, 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 by, eg, showing a change of circumstances to which the applicant did not contribute 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 a sufficient ground for displacing the presumption but if it is plain that the claim would have failed, that is an additional factor favouring the presumption. The motivation of withdrawal due to practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of the case is not sufficient too.

The judge decided that the winding up order made is not a change of circumstances caused by some form of unreasonable conduct on the 1st Respondent. There is nothing to suggest that the presentation of the Creditor’s Winding Up Petition is improper. The Petitioner would or might well have succeeded at trial is not itself a sufficient reason to depart from the general rule. The Petition was presented well before the statutory demand served by the Creditor is an irrelevant consideration because the Petitioner had 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 1st 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 1st Respondent’s costs.

Is That a Fair Result?

It is questionable whether the costs order made is a fair one. The Petitioner may have genuine grievance against the 1st Respondent. 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 Petition and obtain reliefs 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 1stRespondent, if any, should be investigated by the liquidators. 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.

Jurisdictions: 

 Senior Partner, ONC Lawyers