Injunction to restrain the presentation of a winding-up petition

Introduction

Rather unfortunately, there are no statutory provisions available to a company to set aside a statutory demand. If a company is served with a statutory demand and disputes the alleged debt, save for agreeing with the alleged creditor not to present a winding-up petition, it has no alternative but to seek relief from the court and obtain an injunction restraining the presentation of a winding-up petition.

The judgment of Hung Yip (HK) Engineering Company Limited v Kunli Civil Engineering Limited [2021] HKCFI 153 (“Hung Yip v Kunli”) (handed down by the Honourable Mr. Justice Harris) helpfully reminds parties (including legal practitioners) of the distinct thresholds between (i) obtaining an injunction preventing the presentation of a winding-up petition, and (ii) determining the merits of a winding-up petition.

Background

In Hung Yip v Kunli, the Defendant (the “Creditor”) sent 10 letters to the Plaintiff (the “Company”) (the last of which was dated 20 January 2020) demanding repayment of the sum of HK$4,773,651.63. The Company ignored all the letters which led to the Creditor serving a statutory demand on the Company on 21 February 2020.

Three days prior to the 21-day period for satisfying the statutory demand expiring, the Company replied to the Creditor’s previous letters and raised certain grounds to dispute the debt. His Lordship stated that this letter “fell far short of recording with sufficient specificity matters capable of constituting a bona fide dispute on substantial grounds” and “It reads like an attempt to construct excuses for non-payment”.  The Creditor replied on 4 March taking issue with the alleged grounds raised by the Company to dispute the debt.

At 11 a.m. on Saturday, 7 March, the Company sent a letter asking for confirmation by 10 a.m. on Sunday, 8 March that a winding-up petition would not be issued and warning that absent such confirmation an urgent application would be made for an injunction. Unsurprisingly, given the time the letter was sent, the Creditor’s solicitors did not reply and on Sunday, 8 March, the Company’s solicitors approached the Honourable Madam Justice Linda Chan who directed that a hearing be held at 9:30am on Monday, 9 March. Given the late notice, the Creditor’s solicitors did not attend and Her Ladyship granted an interim injunction restraining the presentation of a winding-up petition against the Company. A date for a substantive hearing was set, although the application was eventually dismissed by agreement.

Legal principles clarified

In handing down his Reasons for Decision, His Lordship emphasised that a company that wishes to restrain presentation of a winding-up petition is required to demonstrate that it is clear that presentation would be an abuse of process (rather than the lower threshold required to dispute a winding-up petition, namely the existence of a bona fide dispute of the debt on substantial grounds). His Lordship stated “it does involve some element of impropriety in the sense of misuse of the procedure in s179 of the Ordinance for presentation of a petition to wind-up a company, particularly if the creditor knows that the debt is disputed on substantial grounds and issue of a petition is threatened with a view to asserting pressure to pay rather than out of a genuine concern as to a company’s solvency.  It is, however, well settled that there is nothing objectionable in principle to a creditor owed a debt that he believes cannot be disputed issuing a petition to wind-up a company he suspects is insolvent. This suggests that presentation of a petition relying on a debt genuinely believed to be payable is not an abuse even if a subsequent inquiry demonstrates that for a reason unknown to the creditor at the time the petition was issued there existed a bona fide defence on substantial grounds.”

To assist parties in future matters, His Lordship helpfully stated that in order to establish that presentation of a petition would be an abuse it is necessary for a company to adduce evidence that addresses the following matters:

1. The debt and how it is alleged by the creditor to arise;
2. When and how the debt has been disputed prior to presentation of the statutory demand and any application to the court for an injunction;
3. What is said to be the bona fide defence on substantial grounds;
4. The solvency of the company;
5. Prejudice that will be caused by the presentation of the winding-up petition; and
6. Whether or not it is asserted that the creditor is consciously using the threat of presentation of a winding-up petition improperly.

His Lordship noted that the same facts can often apply to both situations and on the facts of this matter concluded that an injunction should not have been granted because the Company had not shown a bona fide dispute on substantial grounds.  

Conclusion

There is little statutory protection against the presentation of a winding-up petition after a statutory demand has been served. There is also a high bar needed to show abuse of process to obtain an injunction restraining the presentation of a petition. Given the pressure that commencement of winding-up proceedings places on a company, it would be wise to discuss ways to restructure an outstanding debt and avoid a situation where statutory demand becomes necessary.

With respect to a creditor, it is important to understand your right to serve a statutory demand and/or winding-up petition. It is also important to evaluate all available information before proceeding to demonstrate that presenting a winding-up petition was not an abuse of process.  If unable to do so, you may be subject to an adverse costs order s for proceeding with the winding-up petition.

Sunny Hathiramani

If you would like to discuss any of the matters raised in this article, please contact:

Ian De Witt
Partner | E-mail

Robin Darton
Partner | E-mail

Sunny Hathiramani
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.