In a recent winding-up case, Discreet Ltd v. Wing Bo Building Construction Co., Ltd [2017] HCCW 49/2017, the Court confirmed that when there is clearly a cross-claim which exceeds the sum claimed by the petitioner, and it is clear that the cross-claim is genuine and based on substantial grounds, the petition can amount to an abuse of process.

Background

The Petitioner, Discreet Limited, a developer, entered into a contract with the Respondent, Wing Bo Building Construction Co. Limited, a building contractor (the Company), to build houses. The dispute arose when the Petitioner was not satisfied with the Company’s assessment of the amount payable for the work it had completed.

The Petitioner and Company agreed to appoint an independent quantity surveyor to assess the overall final account statement for the whole project. The quantity surveyor assessed that over HK$3.6 million was in fact due from the Petitioner to the Company, but the Petitioner refused to pay that sum and the Company commenced legal proceedings against the Petitioner to recover such. The Petitioner applied to stay those proceedings in favour of arbitration, and the Company was ordered to pay the Petitioner’s costs (HK$52,630) in respect of such application, which it had unsuccessfully opposed.

The Company failed to settle the said sum of HK$52,630. The Petitioner presented a petition for winding up against the Company based on the ground of insolvency, asserting by service of a statutory demand, that the sum of HK$52,630 was due to it.

Defending petition on basis of cross-claim

The Court referred to the applicable legal principles, namely that where a company contends that it has a bona fide defence on substantial grounds, because it has a cross-claim, if the company demonstrates that its cross-claim is genuine and serious and is greater or equal to the debt relied on by the creditor, a petition should not be presented and, if it is, it will be dismissed.

The Petitioner sought to rely on the unreported decision in Re Hong Kong Construction (Works) Limited [2003] HCCW 670/2002 in which the Court stated that “where a company does not or cannot dispute the petitioning debt, but puts forward a counterclaim which is disputed, on an application to strike out the petition….., it could not be said that the petition is an abuse of the process of the court, even though the existence of the cross-claim may be relevant to the exercise of the court’s discretion on the hearing of the petition.

However, the Court said that the unreported decision referred to a counterclaim that was disputed. The dispute, the Court said, has to be a bone fide one. If the Petitioner knows that it is a net debtor of the company, as in the present case, it is prima facie an abuse to present a petition. That is particularly true, the Court said, if the petitioner has no reason to think that the company is insolvent and therefore cannot be sensibly suggested that the petitioner is asserting a class right with a view to ensuring that the interests of creditors generally are protected by the company being put into liquidation.

Court’s decision

The Court held that there was clearly a cross-claim which exceeded the sum claimed by the Petitioner, and it was clear that the petition should not have been issued and the fact it was issued was an abuse of process.

Comments

The cross-claim in the above case is a liquidated claim which probably cannot be considered as closely connected to the Company’s claim due under the final account statement and therefore will not be subject to set-off. The Petitioner can commence enforcement proceedings against the Company to recover the sum of HK$52,630. If the Company does not have sufficient assets to satisfy the judgment sum, it may be a good ground to wind up the Company. However, in the above case, since the petition was only based on a statutory demand, the Company was entitled to raise any bona fide cross-claim to resist the petition for winding-up.