IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO. 73 OF 2009
||IN THE MATTER of SINOM (HONG KONG) LIMITED
||IN THE MATTER of Part V of the Companies Ordinance, Cap. 32
||IN THE MATTER of Order 29 Rule 1 of the Rules of the High Court, Cap. 4A
Before: Hon Kwan J in Chambers (Not open to public)
Date of Hearing: 21 July 2009
Date of Handing Down of Decision: 5 August 2009
D E C I S I O N
1. This is a notice of originating motion issued by Sinom (Hong Kong) Limited (“the Company”), seeking an injunction that Mount Gibson Mining Limited (“MGM”) be restrained from presenting any petition to this court for the winding up of the Company based on the sum of US$8,669,838.67 claimed in the statutory demand dated 24 October 2008 and served on the Company the same day.
2. MGM is a subsidiary of Mount Gibson Iron Limited, which is a mining company incorporated in Western Australia and listed on the Australian Securities Exchange. The amount claimed in the demand was for the balance of price due to MGM as per the final adjusted invoices for three shipments of iron ore sold and delivered by MGM to the Company during May to June 2008, pursuant to an agreement dated 25 May 2005 (“the Agreement”) for long term supply of hematite lump ore and fine ore produced by MGM from 1 January 2005 until the completion of mining at the mines in Tallering Peak and Extension Hill in approximately December 2010.
3. On 5 November 2008, MGM issued a notice to the Company to terminate the Agreement alleging breach of the Company in failing to cause a letter of credit to be provided, to nominate or send a vessel to collect the shipment of ore scheduled for 22 September to 1 October 2008 and for the shipment scheduled for 16 to 25 October 2008.
4. On 12 November 2008, the Company by its solicitors issued a reply to the statutory demand disputing liability to pay on the basis there is a genuine and serious cross-claim which exceeded the amount of MGM’s claim in the demand. MGM’s solicitors were put on notice that the Company required written confirmation from MGM it would not lodge a winding-up petition, failing which the Company would seek an injunction. Subsequent correspondence was exchanged between solicitors.
5. On 12 January 2009, MGM’s solicitors informed the Company’s solicitors that they did not have instructions to present a winding-up petition for the time being and in the event MGM should ultimately decide to do so, MGM was willing to provide the Company with at least five clear business days’ notice in advance. The Company took the view that did not remove the threat or allay its concern and insisted on withdrawal of the statutory demand. MGM declined to do so, contending that its claim for damages arising out of its termination of the Agreement by reason of the Company’s breach was well in excess of the Company’s cross-claims. The present application was issued on 14 January 2009.
6. Directions were given on 12 February 2009 for the filing of evidence in opposition and in reply and the adjournment of the application for substantive argument.
7. Both MGM and the Company have referred various disputes under the Agreement to arbitration in Australia, in late 2008 and early 2009 and arbitration has commenced. Pleadings filed in the arbitration proceedings have been placed before this court. All the cross-claims and reverse cross-claim raised in this hearing are covered in the arbitration proceedings.
The legal principles
8. The applicable legal principles are largely non-controversial. I will endeavour to state them succinctly.
9. The principles governing applications for interim injunctions in American Cyanamid Co. v. Ethicon Ltd.  AC 396 do not apply to this situation, as the granting of an injunction to restrain the presentation of a winding-up petition would finally dispose of the issue in dispute in the present proceedings (Bryanston Finance Ltd. v De Vries (No. 2)  1 Ch 63 at 80E to 81E).
10. The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds (Bryanston Finance, supra., at 78D to E, 79A to D).
11. As with a petition where there is a bona fide dispute of the debt on substantial grounds (“a disputed debt petition”), where the company has a genuine and serious cross-claim against the petitioner greater than or equal to the petitioner’s debt (“a cross-claim petition”), such a petition may be restrained from proceeding (Re Pan Interiors Ltd.  EWHC 3241 (Ch), paras.  to ). It is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence (In re A Company (No. 0012209 of 1991)  1 WLR 351). A cross-claim petition is regarded in the same way (Southern Cross Group plc v. Deka Immobilien Investment GmbH  All ER (D) 374, paras.  & ; Re Pan Interiors, supra., para. ).
12. To successfully resist a cross-claim petition, the company has the onus of establishing that its cross-claim is genuine, serious and of substance. There must be supporting relevant details to demonstrate that the cross-claim is based on substantial ground. The test is very much the same as the test for a disputed debt petition for deciding whether a debt is disputed in good faith and on substantial grounds (Applications to Wind Up Companies, by Derek French, 2nd edition, paras 126.96.36.199 and 188.8.131.52 and the cases there cited).
13. In Re Bayoil SA  1 WLR 147 at 154B, Nourse LJ said it was also necessary for the company in a cross-claim petition to show that it has been unable to litigate its cross-claim. In the subsequent decision of Popely v. Popely  EWCA Civ 463 at para. , Jonathan Parker LJ (with whom the other members of the English Court of Appeal agreed) said he did not understand Nourse LJ to be intending to lay down an absolute requirement to that effect. Rather, he understood Nourse LJ to be doing no more than indicating that where there has been delay in the prosecution of the cross-claim, the delay must not be such as to throw real doubt on the genuineness of the cross-claim. Popely was applied in Re Pan Interiors, supra. and Marchands Associates LLP v. Thompson Partnership LLP  EWCA Civ 878, para. .
14. In Hong Kong, it was said by the Court of Appeal in Re SY Engineering, CACV No. 1896 of 2001,  HKEC 241 at paras. 15 to 16 that inability to litigate the cross-claim must be shown by the company for the court to reject a cross-claim petition. I had considered the two lines of English cases in Re Landune International Ltd.  4 HKLRD 46 at paras. 26 to 30 and expressed the view that SY Engineering does not bind me on this issue, as the relevant dicta were obiter and founded on dicta in Re Bayoil which were not part of the ratio decidendi. As in Landune International, I propose to adopt the approach in the subsequent English decisions that inability to litigate is not an absolute requirement.
15. Where a cross-claim is raised by the company, it is open to the petitioning creditor to bring in a reverse cross-claim to extinguish the company’s cross-claim. If the reverse cross-claim, together with the petition debt, exceed the company’s cross-claim, the petition may be allowed to proceed, but not if the reverse cross-claim is disputed on substantial grounds (Montgomery v. Wanda Modes Ltd.  1 BCLC 289, paras.  to ; Re City Top Engineering Ltd.  2 HKLRD 562, paras.  to ). In this situation, the approach is to consider the overall relationship between the parties to see whether there is, at the end of the day, an undisputed or undisputable debt that is or will be due to the petitioning creditor (Re Jade Union Investment Ltd., HCCW No. 400 of 2003,  HKEC 306, Barma J, 5 March 2004, para. 12). It is not necessary for the reverse cross-claim to be quantified, so long as it is certain to come into existence and its combined effect with the petition debt is of sufficient size to offset the cross-claim (Re To Kin Wah, HCB No. 9856 of 2007, Barma J, 16 October 2008, paras. 7 to 9).
16. The existence of an arbitration clause, or of the commencement of arbitration, does not prevent the court from considering whether or not the company has established the existence of a bona fide dispute of substance in relation to the debt on which the petition is based (Re Jade Union Investment Ltd., supra., paras. 13 to 27).
The petitioning debt
17. Pursuant to the Agreement, the Company was obliged to purchase ore from MGM at the price determined in accordance with clause 4.1 and directly referable to the iron content of the shipment multiplied by the Hamersley Benchmark Price applicable at the date of purchase. The Hamersley Benchmark Price is set as a result of negotiations between Rio Tinto Limited and its major Japanese customers and applies for the period of 12 consecutive months commencing 1 April each year. In 2008, the Hamersley Benchmark Price was not set until 24 June 2008. MGM invoiced the Company in the meantime for shipments taken after 1 April 2008 based on the old Benchmark Price, pending the setting of the new Benchmark Price for the year of 2008 to 2009, on the basis that adjustments would be made for these shipments after the new Benchmark Price was...