In Re Intco International (HK) Co Ltd HCCW 240/2014, the Winding Up Petition was presented in respect of debts under unpaid invoices for goods sold and delivered.  The Court of First Instance (“the Court”) dismissed the Winding Up Petition, for the reason that there was a genuine dispute in substance on the underlying debts.  This case illustrates how the Court approaches the question of disputed debts in winding up proceedings.

Background

Intco International (HK) Co Ltd (“the Company”) was a company incorporated in Hong Kong, which carried on a recycling business in the Mainland with a specialism in expanded polystyrene (“EPS”). The Company in the ordinary course of its business purchased and reused compressed EPS scrap to make frame products. The Petitioner was a supplier of EPS incorporated in England.

In September 2013, the parties signed two documents, namely a purchase order prepared by the Company and a sales contract prepared by the Petitioner. Both documents contained the details of the quantities of EPS to be purchased, shipment and payment, and their terms were consistent. However, they did not provide for any means for determining whether or not the EPS supplied was of an acceptable quality or how, in the event of dispute, the parties would determine whether or not the quality was satisfactory.

The sales contract prepared by the Petitioner contained an exclusion clause (the “Exclusion Clause”): “we will not entertain claims for any quality reasons regarding the above containers loaded at our site. For your satisfaction you have the option to send a representative at the time of loading. Material is as per photos/as per previous supply.”

Subsequently, two consignments of EPS were found to contain excessive amount of foreign materials like wood and paper by the investigation of the Company’s technical department.

As a result, the Company refused to pay the invoices and the Petitioner presented a petition to wind up the Company on the grounds of insolvency on 28 August 2014.

Issue before the Court of First Instance

The issue arising before the Court was whether there was a bona fide dispute over petitioned debt on substantial grounds.

Findings of the Court of First Instance

The Court ruled in favour of the Company and dismissed the Petition. It is well established that if there is a bona fide dispute on substantial grounds, the Petition should be dismissed (Yueshou Environmental Holdings Ltd HCCW 142/2013). The onus to adduce sufficiently precise factual evidence to satisfy the court that there is a bona fide dispute lies in the company, as illustrated in Re ICS Computer Distribution Ltd [1996] 3 HKC 440 and Re Hong Kong Construction (Works) Limited HCCW 670/2002. Further, the Court has to be satisfied that the company’s evidence is believable. The Court will look at the evidence against so much of the background and consider whether it is not disputed or not capable of being disputed in good faith (Re Safe Rich Industries Ltd CA 81/94 and Re Hong Kong Construction (Works) Limited HCCW 670/2002). An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order (Re Hong Kong Construction (Works) Limited HCCW 670/2002). The winding up procedure should only be used where any asserted defence is fairly obviously insubstantial and unmeritorious (Alpha Building Construction Limited HCCW 283/2014).

Concerning the present case, the Company had raised its concerns promptly and documented them and the Petitioner raised various counter-arguments in respect of the Company’s complaints. The contemporaneous documents presented before the Court demonstrated that there was a bona fide dispute between the parties.

In addition, the Court found that there was not enough evidence to determine whether the parties’ agreement contained the Exclusion Clause. The Court took the view that it was necessary to consider the history of dealings between the parties in order to see whether the sales contract superseded the purchase order, and if it did not, whether the lack of certainty as to the agreed terms resulted in the Exclusion Clause ineffective.

Therefore, the Court held that the dispute of debts was bona fide on a substantial ground and dismissed the Petition.

Conclusion

The present case is a typical example illustrating how the Court approaches the question of disputed debts in winding up proceedings.  The Court will look at all available evidence to determine whether there is a genuine dispute in substance. If the Court is satisfied that there is a genuine dispute, the Petition will be dismissed.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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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 © 2015