Statutory but not mandatory – a reminder of the first principles

Statutory demand is a common and important tool in the winding up process. But recently, the Hong Kong Court of First Instance has reminded us that it is by no means a must. In Synergy Lighting Ltd v Hongkong and Shanghai Banking Corp Ltd [2020] HKCFI 2490, the Court emphasised that even though the requirement for statutory demand under section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”) was not satisfied, a creditor might still be entitled to present a winding-up petition.

Background

The Company plaintiff assigned certain accounts receivable in favour of the defendant Bank to secure some banking facilities.

Several years later, the Bank served a statutory demand against the Company. The Company argued that it had already complied with the statutory demand by securing the debt to the “reasonable satisfaction” of the Bank (as section 178(1)(a) of the CWUMPO requires), and, as such, for the Bank to issue a winding-up petition would be abusive.

Decision

The Court flatly rejected the Company’s contention, and held that it was misconceived both in law and in fact.

On the law, a would-be petitioner should not be restrained from exercising its statutory rights except on clear and persuasive grounds. Section 177 of the CWUMPO provides that a company may be wound up if it is “unable to pay its debts”.  Section 178(1)(a) of the CWUMPO merely affords a mechanism whereby a company may be deemed to be unable to pay its debts ie, by non-compliance with a statutory demand. However, a statutory demand under section 178(1)(a) was not an indispensable condition for winding‑up. Even without satisfying section 178(1)(a), a petitioner may prove in other ways that the company is unable to pay its debts and therefore should be wound up.

Further, on the facts of the present case, the receivables were not satisfactory for the Bank, which had a debt presently due and repayable, because (1) the immediacy of recovery was not satisfactory; and (2) there were inherent difficulties of enforcement of unsecured payment obligations against the foreign counterparty of the account receivables.

Regarding the test for “reasonable satisfaction” under section 178(1)(a), the Bank submitted that the test was the same as that for section 6D(3) of the Bankruptcy Ordinance (Cap 6), where the court had to be satisfied that no reasonable hypothetical creditor in the petitioner's position would have refused the offer. The Court held that if this approach was to be adopted, the security could not meet this standard. The Company, on the other hand, submitted that the true test was whether the security would command the amount of the debt if put into the market. The Court was inclined to agree with the Bank's approach. But, even on the standard proposed by the Company, it cannot be said that the Bank was unreasonable in not being satisfied with the security. Given the Court’s conclusion on the law, however, this was not a point the Court needed to decide.

For the foregoing reasons, the Court found no prima facie case that the Bank’s petition would be an abuse of process.

Comments

A statutory demand is merely an evidentiary device to prove insolvency. While this decision simply explains the first principles, it is still a useful reminder of them. Further, despite no clear conclusion being reached, the decision sheds some light on the test for “reasonable satisfaction” under section 178(1)(a) of the CWUMPO.