Consequences of Rashly Issuing a Statutory Demand: A lot of Money (Indemnity)
“Survey and test prospective action before undertaking it. Before you proceed, step back and look at the big picture, lest you act rashly on raw impulse” - Epictetus
“Your hindsight on this case, was far more accurate than his foresight” - David Carpenter
In Madison Lab Ltd v Pu Yan & Ors  HKCFI 382, the Court granted a final injunction to restrain the creditor-Defendants from presenting a winding-up petition against Madison Lab Ltd (“Company”) based on the debts which were found, on the facts, to be bona fide disputed. Costs were ordered to be borne by the Defendants on a nisi basis. Consequently, on 3 July 2020  HKCFI 1409 the Court further ruled in favour of the Company and ordered that costs of the injunction summons be borne by the Defendants on an indemnity basis.
The Company is a subsidiary of a listed company and had to purchase shares in BitOcean Co Ltd (“BitOcean”) from the Defendants and other shareholders for a total consideration of JPY 1.68 billion. It was the Company’s case that it has fully discharged its payment obligations under the relevant Sale and Purchase Agreement (“SPA”) as buyer.
Among the total consideration of JPY 1.68 billion, the Company contends that it has paid the following payments to a third party known as Y’s Service HK Limited (“Y’s Service”) (“Payments to Y’s Services”) in partial discharge of its obligations under the SPA:
On 18 October 2018, the Company paid JPY 369.6 million to Y’s Service pursuant to a deposit agreement between the Company and Y’s Service.
The Company contends that the deposit agreement was entered into upon representations made by a Mr Takayuki Nakamura (“Nakamura”).
On 11 January 2019, the Company further paid HK$30,000,000 to Y’s Service, apparently pursuant to a written payment instruction issued by the 1st Defendant dated 10 January 2019 (“the D1 Instruction”).
The Defendants (being three of the sellers of the SPA) disagreed with the Company’s position and claimed that the Payments to Y’s Services were unauthorised and invalid.
The Defendant’s position is that they never received the Payments to Y’s Service, and never authorised Y’s Service to receive any part of the total consideration.
On the basis of the above, the Defendants served statutory demands on the Company. In response, the Company issued an Amended Originating Summons seeking to restrain the Defendants from presenting winding-up petitions based on these demands.
The court considered the following legal principles:
The court will grant an injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process.
For the purposes of the court’s power to grant an injunction to prevent abuses of the winding-up procedure, the presentation of a petition where there is a triable defence is generally a clear case of abuse.
Petitions are not meant for debt collection purposes and the winding-up jurisdiction will be exercised only in clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition.
The central question is whether the Company can show a “bona fide dispute on substantial grounds” for trial.
The Court held that in this particular case, there is clearly a triable bona fide dispute as to the alleged debts, and considered that the Company does have bona fide and substantial grounds for maintaining its case on the valid payment of the total consideration to the sellers of SPA via Y’s Service at trial. The Court came to its conclusion on the following facts:
There is no dispute that at least part of the monies received by Y’s Service did reach at least some of the sellers of the SPA.
The Company’s acquisition of BitOcean shares involved a range of intermediaries, including a Mr Li Jian and Nakamura. According to affirmation evidence, it was Nakamura who first introduced BitOcean to Mr Li, and it was Mr Li in turn who introduced Nakamura to the Company to act as a liaison on behalf of the sellers.
Nakamura had access to BitOcean’s share register, which was undisputedly the private property of BitOcean. While that fact of itself may not be dispositive as to Nakamura’s role, it is one relevant factor for consideration within the wider factual matrix.
Likewise, there is some prima facie support for the Company’s case in the form of an email sent by the 3rd Defendant to the Company on 29 December 2018 stating that Nakamura and another individual “are not now authorized to speak on our behalf”, which at least arguably implies that Nakamura was acting as the seller’s authorised agent before that point.
The Defendants’ serious allegation that the D1’s Instruction (relating to the payment of HK$30,000,000 on 11 January 2019) was forged gives rise to an obviously triable issue.
Since the D1’s Instruction cannot at this stage be brushed aside as a false document, it lends credence to the Company’s overall case on ostensible authority.
In all, the materials to hand do not supply a sufficiently clear and complete picture to enable sound findings on the related questions of agency, authority and (mis)representation that arise in this case; certainly none that are sufficient to defeat the Company’s case without trial.
The Court therefore ruled in favour of the Company’s injunction summons to restrain the Defendants from presenting winding-up petitions against it.
DECISION ON COSTS
The Company applied to vary the nisi order such that the costs of the injunction summons be assessed on an indemnity basis.
The learned Deputy Judge agreed with the Company that it is appropriate in the circumstances of this case to allow its costs of the injunction summons on an indemnity basis. The following matters are considered:
The presentation of a petition where there is a triable defence is generally a clear case of abuse.
The Company cited Re Cosmigo Limited (unrep., HCMP 905/2017, 8 November 2017) at §9 which provided:
the costs of the proceedings to enjoin presentation of the petition should as a matter of general principle be awarded on an indemnity basis.”
The onus of care falls upon the petitioner and his advisers to determine whether they can fairly say that “on the information available to them any asserted defence is fairly obviously insubstantial and unmeritorious”. If there is doubt about this, then the prudent course is to proceed to obtain judgment to recover the sums believed to be payable.
The expectation that putative petitioners must decide whether to issue petitions with all due care is partly grounded in the reality that a petition presented against a company which has an ongoing business causes considerable disruption. In particular it normally results in banks freezing the company’s accounts.
The matters cited by the Defendants do not support the view that, on the information available to them, they could properly conclude that any asserted defence on the Company’s part would be “fairly obviously insubstantial and unmeritorious”. It should instead have been fairly clear from early on –and in any event by mid-May 2019 – that there was a substantial bona fide dispute between the parties in relation to the alleged debt.
The Company has made repeated attempts from as early as 1 April 2019 to impress upon the Defendants that they were taking an inappropriate “high risk strategy” in pursuing winding-up. The Company had also, through correspondence dated 19 May 2019, specifically urged the Defendants not to invoke the winding-up procedure, referring inter alia to Re Cosmigo and the possibility of indemnity costs.
Therefore, Practitioners should always remember the following points when advising clients:
Seeking to wind up a company is a “high-risk strategy”. The presentation of a petition where there is a triable defence is generally a clear case of abuse. If there is doubt, the prudent course is to obtain judgment.
Creditors and their advisors have an onus of care to determine whether they can fairly say that on the information available to them any asserted defence is fairly obviously insubstantial and unmeritorious. If the answer is ‘no’, then they should not invoke the winding-up procedure.
A company faced with a statutory demand should not merely sit on their hands and ignore it. In the present case, the Court took into account the various pre-action correspondence in which the Company specifically urge the Defendants not to invoke the winding-up procedure and highlight the possibility of indemnity costs.
This article was co-authored by Joshua Chu from ONC Lawyers