Hong Kong: Court of First Instance clarifies test for adding debts accrued after presentation of a creditors' winding up petition

In Re Hin-Pro International Logistics Limited[1], the Hong Kong Court of First Instance held that it has jurisdiction to grant leave to amend a creditor's winding up petition to include debts accrued only after its presentation. The Court adopted the relevant legal test set out in Re Richbell Strategic Holdings Limited[2] and rejected the more stringent Eshelby Rule test (see below), which still applies to amendments of a writ. This is welcome news for creditors faced with additional debts, which often add up to a substantially higher sum than the original debt and, which often accrue only after the presentation of a winding up petition.

Facts

On 18 August 2014, Compania Sud Americana De Vapores S.A. (the "Petitioner") presented a creditor's winding up petition against Hin-Pro International Logistics Limited (the "Company"). The petition included only one debt in the sum of HKD 433,430.00 due pursuant to a costs order of the Hong Kong Court (the "Original Debt" and "Costs Order" respectively). The petition was subsequently amended in October 2014 (the "Amended Petition"). In October 2014, the Costs Order was discharged with the effect that, in practice, the Original Debt no longer subsisted.

The Petitioner then applied to Court for leave to amend the Amended Petition to include additional debts arising from judgments and orders made by the Courts in Hong Kong and England after 18 August 2014 (i.e. after the date on which the original petition was presented to Court) (the "Additional Debts").  

The Company opposed the amendments on a number of grounds; namely that the proposed amendments constituted an abuse of the Court's process and were immaterial, useless and bound to fail.

Questions for the Court

The key questions for the Court were:

1. Whether it had jurisdiction to grant leave to amend a creditor's winding up petition to include debts which had accrued only after its presentation; and
2. If yes, whether the Court should exercise its discretion to grant such leave.

The Court held that it had jurisdiction and, in exercising this jurisdiction, granted the Petitioner leave to amend the Amended Petition to include debts accrued after its presentation. The Court's reasoning on jurisdiction is explained below.

Jurisdiction

The Court of First Instance, referring to and relying on the judgment of Neuberger J in Re Richbell Strategic Holdings Limited ("Re Richbell"), established three principles:

1. The Court has jurisdiction, under the Rules of the High Court ("RHC"), to allow an application and grant leave to amend a petition by introducing post-petition debts in a creditor's winding up petition.
2. The test which is to be satisfied by a petitioner in such an application is less stringent than the test for a plaintiff seeking leave to amend a writ to add or substitute a post-writ cause of action (the Eshelby Rule, see below).  
3. So long as the original debt in the creditor's petition existed at the date of the petition, the petitioner does not have to establish that the original petition will certainly succeed.

The test to be applied for a plaintiff seeking leave to amend a writ to add or substitute a post-writ cause of action is known as the Eshelby Rule. This rule was established in Eshelby v Federated European Bank Ltd [1932] 1 KB 254, in which it was held that the Court has no jurisdiction (and therefore cannot give leave to a plaintiff) to amend a writ or pleading to include a cause of action which was not in existence when the proceedings were initiated and the writ was issued.

The Court set out the following differences between creditor's winding up petitions and writs, which were the key factors on which it relied to determine that the lower threshold in Re Richbell, rather than the Eshelby Rule, applies to creditors' winding up petitions:

1. Unlike a plaintiff in a cause of action, a petitioner in a creditor's winding up petition is asserting a class remedy on behalf of creditors. Therefore, there is a public interest (not engaged in a writ of action) to prevent the company from continuing to trade and to distribute assets amongst creditors when insolvent.
2. The need to take into account the public interest is reflected in the low threshold required for other creditors to participate in a creditor's winding up petition. For example, any creditor can give notice of their intention to appear as an opposing creditor, whether they rely on pre or post-petition debts. In contrast, in a writ action a non-party will only be able to intervene where, for example, he has an interest in the matters in dispute.
3. If the petitioner fails to advertise his petition or decides to withdraw his petition, the Court can substitute for the petitioner any creditor who has a right to present the petition, regardless of whether it is relying on a pre or post-petition debt.
4. A petitioner can rely on a future debt in presenting a winding up petition (pursuant to s179(1)(c) Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). In contrast, a plaintiff cannot sue for recovery of a debt which is not yet due. 

The Court noted (obiter) that recent authorities indicate that, at least in England, the Eshelby Rule has fallen out of favour with the Courts, which are taking a more modern and flexible approach to applications for leave to amend a writ to add or substitute a post-writ cause of action. In terms of the legal position in Hong Kong, the Court stopped short of making a comment as to whether the Eshelby Rule remains good law in respect of writs: "no matter whether the Eshelby Rule survives completely, partially or at all in a writ action in the modern era, especially after the CJR in Hong Kong, it has no application to a creditor's winding up petition".

Implications

The Court's jurisdiction to grant leave to amend by introducing post-petition debts in a creditor's winding up petition is potentially a useful tool for creditors.   Allowing a petitioner to amend the petition in this way promotes procedural economy and fairness in the conduct of proceedings, provided that it does not cause a concerned party any substantive prejudice.  In most cases, companies can apply to strike out or oppose the re-amended petition so the issue of substantive prejudice would not arise.  On the contrary, a rigid requirement for a fresh petition is likely to result in a multiplicity of actions and an unnecessary waste of costs, time and court resources.