In the unusual case of Albert Edward Rodrigues v Associacao Portuguesa de Socorrous Mutuos (in liquidation) (HCMP 1391/2014), the Hong Kong Court of First Instance ordered a permanent stay of a company’s creditors’ voluntary winding up which has technically been going for 25 years, and in so doing reminded us of the applicable principles and the fact sensitive nature of such applications.

Background

The Associacao Portuguesa de Socorrous Mutuos (the “Association“) is a Hong Kong company limited by guarantee, incorporated in 1915 to promote the welfare of the Portuguese community in Hong Kong.

In October 1989, the members of the Association passed a special resolution resolving that it be voluntarily wound up.  At that time, the Association was solvent and the intention was to transfer its assets to another entity with much the same purpose.  However, rather than a members voluntary winding up then proceeding as it should have done in the ordinary course, several very unusual irregularities instead occurred:

  1. The necessary notice of appointment of liquidators had not been filed with the Companies Registry upon a change in liquidators;
  2. The date on the special resolution submitted to the Companies Registry was inaccurate, and had not been corrected;
  3. The Company had not presented a declaration of solvency, as required by s 233 of the former Companies Ordinance (Cap 32), the effect of which was that technically the winding up would proceed as a creditors’ voluntary winding up;
  4. Although advised by the Companies Registry in August 1990 to apply to the Court for an order staying the (creditor) winding up proceedings so that a members’ voluntary winding up could start afresh, no steps were taken to do so; and
  5. Nothing further was done to liquidate the Association.  On the contrary, the Association continued to carry on its affairs and prepared audited financial statements every year.  The intended liquidators even stayed on the board for some years.

The application

To finally remedy these irregularities, earlier this year the Association applied for orders that:

  1. The Association’s current creditors’ voluntary winding up be permanently stayed under s.209(1) Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32); and
  2. All transactions of the Association be validated since it was placed into liquidation under s.184 Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).

Principles for staying winding up proceedings

In his judgment dated 29 August 2014, the Honourable Mr Justice Harris stated that, in a voluntary winding up, the Court may make an order staying the proceedings if it is “just and beneficial” to do so.  His Lordship then recounted the principles by reference to which the Court determines applications to stay winding up proceedings:

  1. The power to grant a stay of winding up proceedings is discretionary;
  2. The burden is on the applicant to make out a sufficient case that carries conviction. Before granting a stay, proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed is required;
  3. Whether there are sufficient assets to pay all the creditors of the company and the expenses of the liquidation. The Court will also have regard to the interests of shareholders; and
  4. The Court will also consider whether a stay is conducive or detrimental to commercial morality and to the interests of the public at large.

Analysis and findings

This case turned on its unique facts.  In applying these principles, Harris J found that this was a proper case for staying the technical creditors’ winding up of the Association and to grant the validating order when considering:

  1. There was nothing before the Court to suggest that the failure of the board to ensure that the Association’s affairs were properly conducted was sinister or resulted from bad faith. Rather it seemed that the board simply didn’t give those affairs sufficient attention, and that an investigation into the conduct of the affairs of the Association or the propriety of the board’s behaviour and inactivity would only be of historical interest; and
  2. The Association’s creditors and the liquidation expenses can comfortably be paid out of the assets.
  3. When faced with a choice between requiring the Association to liquidate its assets and proceed as it appears to have been intended in 1989 or allowing the Association to continue to do lawfully what in practice it has been doing for the last 25 years, Harris J found the latter to the more appropriate course to adopt; and
  4. Accordingly, found little danger of anything being validated with such an all-encompassing order that should instead by properly impugned.

Commentary

This most unusual case is both a timely reminder of the applicable principles and is illustrative of the highly fact-sensitive nature of the Court’s exercise of its discretion in deciding stay applications.  Although the Court had few difficulties in granting the orders sought in this case, one cannot assume that the Court will take the same attitude in other cases.

Also, it must not be assumed that the Court will normally look upon the inaction of liquidators so kindly. The character of the Association was more akin to a charity than to a commercial venture, and the amount of time that has elapsed means any investigation now would have little relevance.