Hong Kong: No Use Lashing Out Over Unpaid Debts – Cosmetics Distribution Company Avoids Winding Up Order Despite Failing To Establish Bona Fide Defence

In Swiss Cosmeceutics (Asia) Ltd [2019] HKCFI 336, Mr Justice Harris of the Hong Kong Court of First Instance declined to wind up a company despite it failing to establish a bona fide defence on substantial grounds. Mr Justice Harris commented on the difficulties presented by sporadic record keeping, and reiterated the principle that the burden of proof lies with the company to demonstrate a bona fide defence on substantial grounds, despite the existence of anomalies in the petitioner’s claim.

Facts

In May 2011, Swiss Cosmeceutics (Asia) Ltd (“Company“) was established by Mr Yip Hai Tak to manufacture cosmetics in Switzerland for distribution and sale in Hong Kong. Between 26 September 2011 and 21 March 2012 Mr Yip loaned the Company money on seven separate occasions, totalling HK$1,213,600.

The Company leased two premises and operated sales outlets in Hong Kong. On 27 February 2012, Mr Yip transferred his shares to one Ms Kan, who became the owner of the Company. On 1 March 2012, the Company and Mr Yip entered into agreements with Do-Well to sell some of the Company’s sales outlets in Hong Kong for HK$2,000,000. The Company’s case is that part of this money was used to repay the money loaned from Mr Yip.

Mr Yip brought a petition to wind up the Company on the grounds of insolvency relying on an unpaid statutory demand. The Company's defence was that Mr Yip had failed to disclose the debts during the transfer of the shares in the Company to Ms Kan.

The burden of proof

The Court drew upon the general principles of company law asserted in Re Yueshou Environmental Holdings Ltd Unrep HCCW 142/2013, [2014] HKEC 1178:

  • a winding-up petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any bona fide defence on substantial grounds to the debt, otherwise the petition should be dismissed;
  • the onus is on the company to satisfy the Court that its assertions are believable, but in deciding whether the evidence is believable, the evidence is not to be approached with a wholly uncritical eye but is to be looked at against the undisputed background and evidence (or those that cannot be disputed in good faith);
  • the grounds that the company relies on have to be substantial, and not frivolous;
  • the Court should caution itself against unsubstantiated and unparticularised assertions – it is incumbent on the company to put forward sufficiently precise factual evidence to substantiate its allegations.

Outcome

The Court acknowledged that there were some oddities in Mr Yip’s claim. However, the burden was on the Company to demonstrate a bona fide defence on substantial grounds, and it had failed to do so in this case. To establish a defence on substantial grounds requires “some precision“, and this becomes a difficult exercise when accurate records have not been kept. However, despite finding that the Company had failed to establish a defence, Mr Justice Harris declined to make a winding-up order, as the Company had placed HK$1.2 million into Court as security.

Key takeaways

This case reinforces the principle that a company defending a winding-up petition against it has the burden of proof to establish a bona fide defence on substantial grounds. This burden is not reduced or limited by irregularities in the petitioner’s case. If the company has paid money into the Court as security for the debt, there is a chance that a winding-up order can be avoided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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