Creditor’s interest – the key consideration in an application to stay a winding-up order pending appeal

image_pdfimage_print

Introduction

Section 209(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) empowers the Hong Kong court to make an order staying the winding-up proceedings after the winding-up order is made upon the application of, among others, a contributory. However, in the case of Safe Castle Limited v China Silver Asset Management (Hong Kong) Limited [2020] HKCFI 1028, Harris J made it clear that the court will be reluctant to exercise its discretion to stay a winding-up order pending appeal.


The court’s established practice to refuse a stay pending appeal

The position in England

In the English case of Re A&BC Chewing Gum Ltd [1975] 1 WLR 579, 592-593, Plowman J explained the practical reasons for refusing a stay of the winding-up order pending appeal. Under insolvency law, as soon as a winding-up order is made, the Official Receiver has to ascertain the assets and the liabilities of the company at the date of the Order so as to find out the preferential creditors and the unsecured creditors. This follows that in the event that a stay of the winding-up order pending appeal is granted and the winding-up order is ultimately affirmed, the Official Receiver’s ability to conduct the said investigation into the liability and assets at the date of winding-up order will be seriously hampered given the time lapse. Furthermore, even if a stay is not granted, the company may continue running its business and will not suffer any additional harm, irrespective of whether it is making any profit or not.


The position in Hong Kong

There are cases in Hong Kong that referred to or applied Re A&BC Chewing Gum Ltd. In Bank Negara Indonesia v Interasian Traders Finance Ltd [1980] HKLR 622, 624, the Court of Appeal held that whilst in the general litigation where the likelihood of success and the danger that success may in the interim have been rendered nugatory are matters of considerable concern, winding-up proceeding is to some extent a supervisory jurisdiction. As such, the Court should take into account the interest of others, in particular, the creditors of the winding-up company. This is read by the Court of Appeal as the reason underlying the position in England discussed above.

Harris J, in the present case was referred to Re Max Share Ltd (unreported, HCCW 321/1996, 25 August 2000), in which Madam Justice Yuen took a different approach. In that case, her Ladyship referred to the decision in Brinds Ltd & Ors v Offshore Oil NL & Ors (No 2) (1985) 10 ACLR 242, which summarised 5 considerations therefrom in considering whether to grant a stay of the winding-up order, including (1) the prejudice caused to the company; (2) the prejudice suffered by the petitioner; (3) the length of the stay; (4) prospects of success in the appeal; and (5) the time taken in the prosecution of the appeal and in the making of an application for a stay of the winding-up order. However, Harris J in the present case considered that such interpretation is not correct, and that the relevant paragraphs in the decision of Brinds Ltd & Ors v Offshore Oil NL & Ors (No 2) only implied that the applicant must at least demonstrate cogent reasons why a stay should be granted.

His Lordship further held that the core question at issue is whether or not creditors’ interests will be harmed by a stay of winding-up order. In order for a stay to be exceptionally granted, in additional to the considerations in general litigations, such as the prospect of success of the appeal, the applicant for a stay must adduce evidence which shows that it is able to pay its debts as they fall due.


Application

In the present case, at the petition of Safe Castle Limited (the “Petitioner”), a winding-up order was made against China Silver Asset Management (Hong Kong) Limited (the “Company”) on 11 March 2020. The sole shareholder of the Company applied for a stay of the winding-up order as a contributory (the “Contributory”). The Contributory resolved to provide financial support to the Company to pay its debts when they fall due and also adduced the Company’s audited financial statement for the year ending 31 December 2018, which shows that the Company is solvent. However, the said audited financial statement does not cover the Company’s liability owed to the Petitioner, and the Contributory failed to show the Company’s ability to pay the debt claimed by the Petitioner, though the same was disputed by the Company.

Applying the principles discussed above, the Court found that the creditors’ interest would be harmed if a stay is granted. Further, the Company failed to show a bona fide defence to the debt claimed by the Petitioner. Consequently, the Court dismissed the application for a stay of the winding-up order with costs to the Petitioner.


Implications

Following this decision, it is now clear that creditor’ interest is the key consideration in an application for stay of a winding-up order. Furthermore, as discussed in our previous newsletter article titled “Costs Consequence Following an Unsuccessful Appeal of a Winding Up Order” issued in September 2017, a third party funder to the appeal should be aware that it may be liable for the appeal costs taxed on indemnity basis should the appeal is unsuccessful.

 

For enquiries, please feel free to contact us at:
E: insolvency@onc.hk                                                        T: (852) 2810 1212
W: www.onc.hk                                                                    F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2020