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Proper response to a statutory demand; timely reminders for practitioners: Re Madison Lab Limited [2020] HKCFI 1409

6 Jul 2020

In his judgment dated 12 March 2020 [2020] HKCFI 382, Deputy High Court Judge Abraham Chan, SC, granted a final injunction to restrain the creditors from presenting a winding-up petition based on the debts which were found, on the facts, to be bona fide disputed. Costs were ordered to be borne by the creditors on a nisi basis. The Company then applied to have their costs assessed on an indemnity basis.

By decision dated 3 July 2020 [2020] HKCFI 1409, the learned Deputy Judge ruled in favour of the Company, and ordered that costs should be borne by the creditors on an indemnity basis.

Several useful lessons can be derived from the latter decision:-

1) Do bear in mind that a winding-up procedure, per se, entails a “high-risk strategy“. In particular, winding-up petitions, by the very fact of their presentation, can cause considerable disruption and potentially irreparable damage to a company especially one with ongoing business.

2) It follows from the above that creditors – and those advising them – 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. See Re Alpha Building Construction Ltd (20 May 2015) per Harris J.

3) At the same time, a company faced with a statutory demand cannot merely sit on their hands and ignore it.  It should set out its grounds for disputing the subject indebtedness, so as to enable the creditors to form a proper view as to the merits of the defences. As an illustration, in Re Madison Lab [2020] HKCFI 382 the learned Deputy Judge took into account the various pre-action correspondence in which the Company set out its disputes to the indebtedness as well as specifically urging the creditors not to invoke the winding-up procedure and highlighting the possibility of indemnity costs.

4) If the creditors fail to provide any form of assurance, e.g. an effective undertaking not to present the winding-up petition based on the subject statutory demand, then it may be open to the company to take out an urgent injunction application.

5) However, whether urgent relief is reasonable and justified depends on the overall circumstances of the case, including the attitude of the parties. Hence, it is important that the company must, as was the case in Re Madison Lab, act “reasonably and conscientiously” so as to ensure that it would not become deprived of any part of its costs in pursuing injunctive relief.

Michael Lok and Jasmine Cheung acted for the Company and authored this Article.