Ignore Rule 32 at your peril: some lessons from the fall of Hong Kong Easy Charge Ltd

Introduction

Few matters could be more important and pressing for a company to attend to than dealing with a petition seeking its winding-up. Seven days from the petitioner';s filing of an affidavit verifying the petition¹ is the default deadline prescribed under Rule 32 of the Companies (Winding-up) Rule (Cap. 32H) (Rule 32) for the company to file its evidence in opposition.

The Hong Kong court expects strict compliance with Rule 32.²Non-compliance with the rule will result in the court imposing payment conditions for the company to defend the petition. It is now an established practice of the court that, if no evidence in opposition has been filed by a company by the time the petition is placed before the Companies Judge, then, to obtain leave to file evidence, the company will have to pay into court the amount of the debt relied on in the petition, or at least a substantial proportion of it. If the company does not do so, the court will proceed to determine the petition on the basis that no evidence has been filed opposing it and this basically means the company will be wound up.³

Because the company's impecuniosity is commonly the reason why a winding-up petition is brought against it in the first place, the payment condition, once imposed, could cripple the company's ongoing ability to resist the petition. This apparently was what happened in the recent case of Re Hong Kong Easy Charge Ltd.⁴

What happened in Re Hong Kong Easy Charge Ltd?

In Re Hong Kong Easy Charge Ltd, the company faced a petition based on its failure to comply with a statutory demand requiring it to pay HK$16,294,500. The debt arose out of a contract for sale and purchase of a smart wireless charging system for electric vehicles at a price of HK$18,105,000 which was to be paid in three instalments. The company paid the first instalment but failed to pay the rest. Meanwhile, a subsidiary of the company signed on its behalf a receipt for the goods delivered by the petitioner, indicating that the goods were duly accepted. By a letter dated 22 March 2022, the company referred to the adverse impact of the COVID-19 pandemic on its business and requested the petitioner to extend the payment deadlines for the remaining instalments. However, the company never made any further payment.

Having repeatedly chased payment in vain, the petitioner served a statutory demand on 5 February 2024 and later presented a winding-up petition against the company on 25 March 2024. The affirmation verifying the petition was filed on 26 March 2024. Under Rule 32, the company was obliged to file its affirmation in opposition by 9 April 2024.⁵ However, it was only until 6 June 2024 (being six days before the first hearing of the petition before a Master) that the company issued a summons to seek leave to file its affirmation in opposition. The Master adjourned the summons and the petition to the next Monday hearing on 24 June 2024.

In the meantime, the company took various steps to seek to challenge the underlying debt. Those steps included issuance of a generally indorsed writ in HCA 1093/2024 on 5 June 2024, by which the company claimed the first instalment and unliquidated damages for breach of the contract. Further, on 17 June 2024, relying on the same grounds as those already raised in the affirmation in opposition to the petition, the company issued a summons to strike out the petition on the basis that there is a bona fide dispute on substantial grounds in respect of the petitioning debt.

The court's reaction

At the first Monday hearing of the petition on 24 June 2024, the petitioner referred to the court's existing practice and invited the court to direct the company's payment of the petitioning debt into court as a condition for granting leave to the company to file its affirmation in opposition. On the other hand, the company argued that it was "extremely unreasonable" for the petitioner to demand such payment just for the company to have a chance to properly defend the petition, which was said to be "problematic and inconsistent in itself, premising on a doubtful and potentially forged document, of a Debt clearly subject to a bona fide dispute and substantive dispute". Notwithstanding the company's serious allegations, the court did not depart from its existing practice - it directed the company to pay half of the petitioning debt into court as a condition for granting leave to the company to file the affirmation out of time.

Without sufficient means to put up the required payment, the company ignored the condition. Instead, in what appears to be a tactical manoeuvre to divert attention, the company discontinued HCA 1093/2024 and issued another writ in HCA 1279/2024 with a general endorsement, claiming amongst other things as against the petitioner, the first instalment, unliquidated damages for breach of contract and unliquidated damages "for falsely and maliciously and without reasonable or probable cause presenting a petition by the [petitioner] to wind up [the company] in relation to the Goods that were never delivered".

Given the company's failure to meet the payment condition, the petitioner wrote to the court to request restoration of the hearing of the petition to a Monday hearing on the basis that there was no evidence in opposition to the petition. The court so directed. The company's solicitors then sent a series of letters to the court to object the relisting of the hearing, claiming among other things that the company was "a victim of fraud and the use of a false document" and asserted that it was "entitled as of right to apply to strike out a Petition, to file evidence it relies on, and to be heard on the merits".

Unimpressed with the company's submissions, the court ordered that the hearing still stood. The court specifically rejected the company's contention that it was "entitled as of right" to strike out the petition. The court pointed out that, unlike other proceedings, a company which opposes a winding-up petition presented by a creditor should set out its grounds in opposition to the petition in the affirmation to be filed in accordance with Rule 32. The court also made clear that the company's application to strike out the petition, which was in any event considered to be redundant, could not get around the time limit prescribed by Rule 32.

In a desperate attempt to avoid its death sentence, on 1 August 2024, the company issued a summons for, amongst other things, relief from sanction as regards the payment condition. However, the court considered it to be misconceived, reasoning that no "sanction" was imposed. Instead, what the court ordered was that leave be granted to the company to file affirmation in opposition subject to compliance with the payment condition. Due to the company's failure to meet the condition, the affirmation was not admitted as evidence and the petition remained uncontested. The court ultimately granted a usual winding-up order as against the company.

Commentaries

It perhaps cannot be emphasised enough that, where a company wishes to resist a winding-up petition,⁶ it must act promptly.⁷ If the seven-day window prescribed under Rule 32 is insufficient for the company to put together a proper defence, an application for the extension of time for filing its affirmation in opposition should be issued as soon as possible.

As illustrated in the case of Re Hong Kong Easy Charge Ltd, the court adopts a strict approach towards failure to follow Rule 32 and it will not hesitate to direct a non-complying company to pay into court the whole or a substantial proportion of the petitioning debt as a condition to defend the petition. In that event, the company may only choose between upfront payment and immediate winding-up.⁸

1. This is an affidavit that deposes to the truth of the contents of a petition, which shall be sworn after and filed within four days after the petition is presented: see Rule 26 of the Companies (Winding-up) Rule (Cap. 32H).
2. See, for example, Traxys Europe S.A. v. Khingan Resources Ltd [2020] HKCFI 2717 at §8.
3. See Re Sun Sang Kong Yuen Shoes Factory Co Ltd [2015] 4 HKLRD 52 at §§5-6.
4. [2024] HKCFI 2134.
5. Commutation of the seven-day deadline excludes Saturdays, Sundays and general holidays, including 29 March 2024, 1 April 2024 and 4 April 2024.
6. A company seeking to oppose a petition seeking its winding-up on insolvency grounds will have to demonstrate at least one of the following circumstances: (1) there is a bona fide dispute of the petition debt on substantial grounds, (2) there is a claim that exceeds and constitutes a transaction set-off against the petition debt, or (3) there is a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner's debt: see Arjowiggins Hkk 2 Ltd v. Shandong Chenming Paper Holdings Ltd [2024] 2 HKLRD 1040, [2024] HKCA 352 at §§26-29.
7. Where the company wishes to nip the threat of winding-up in the bud, one option is to apply for a quia timet injunction to restrain presentation of the petition itself. The Hong Kong court will grant the injunction if the presentation of the petition would constitute an abuse of process. This requirement can be satisfied where there is evidence showing that the creditor must either have been told enough to understand that the debt is disputed on substantial grounds or must be assumed to have known this from facts of which he was aware: see Hung Yip (HK) Engineering Co Ltd v. Kinli Civil Engineering Ltd [2021] 1 HKLRD 860, [2021] HKCFI 153 at §14.
8. The court's imposition of the payment condition can possibly be challenged by way of an appeal. However, as of the date of this article, there is no reported case of any successful appeal.

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