Court of Appeal confirms that Court does have jurisdiction to grant leave to amend a creditor’s winding-up petition to include debts accrued after its presentation

In Re Hin-Pro International Logistics Ltd, CACV 54/2016, the Court of Appeal upheld the Court of First Instance (CFI) decision that the court does have jurisdiction to grant leave to amend a creditor’s winding-up petition, to include debts accrued after its presentation. The company had been granted leave to appeal the CFI decision to enable the Court of Appeal to consider whether the rule in Eshelby v Federated European Bank Ltd [1932] 1 KB 254 (the Eshelby Rule), still applied. The CFI, in coming to its decision had rejected the Eshelby Rule and instead applied the less stringent test in Re Richbell Strategic Holdings Ltd. Those tests are explained below.  

Background

The Petitioner had presented a creditor’s winding up petition including only one debt (Original Debt). The Petitioner subsequently applied for leave to amend the Petition to add a number of other debts which arose after presentation of the Petition (Subsequent Debts).  

CFI’s Decision

The CFI had to decide whether it had jurisdiction to grant leave to amend a creditor's winding up petition to include debts accruing after its presentation and if so, whether the Court should exercise its discretion to grant such leave.

The Company’s argument was that the Eshelby Rule applied. That rule provides that the court does not have jurisdiction to amend a writ to include a cause of action not in existence when the writ was issued. The CFI disagreed and held that the Eshelby Rule (whether or not it survives completely, partially or at all in a writ action in the modern era, especially after the civil justice reforms in Hong Kong) did not apply to a creditor’s winding up petition. Instead, the CFI followed Re Richbell Strategic Holdings Ltd [1997] BCLC 429, from which it distilled three principles:-

(1)     The Court has jurisdiction under the Rules of the High Court to allow an application to amend by introducing post-petition debts in a creditor’s winding up petition.

(2)     The test which has 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.

(3)     So long as the original debt in a 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 CFI referred to the following four differences between a creditor’s winding up petition and a writ action to justify not applying the Eshelby rule in a creditor’s winding up petition:-

• Unlike a plaintiff in a writ action, a petitioner in a creditor's winding up petition is asserting a class remedy on behalf of all the company’s creditors. Public interest, normally absent in a writ action, is engaged, namely that the company should not be allowed to continue to trade and instead there should be an orderly distribution of its assets.

• The need to take into account the public interest is reflected in the much lower threshold for other creditors of a company to participate in a creditor's winding up petition. Any creditor of the company can give notice of intention to appear as a supporting or opposing creditor, whether relying on pre-petition or post-petition debts. By contrast, in a normal writ action, a non-party will only be able to intervene, if he has an interest in the matters in dispute or there exists a question or issue which in the court’s opinion it would be just and convenient to determine between him and a party to the action.

• If a petitioner fails to advertise his petition, consents to withdraw his petition, allows it to be dismissed or fails to appear in support of it, the Court can substitute, as petitioner, any creditor who has a right to present the petition, whether or not the creditor is relying on a pre-petition or post-petition debt.

• A petitioner can rely on a future debt in presenting a winding up petition as a prospective creditor under s.179(1)(c) Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). Conversely, a plaintiff in a normal writ action cannot sue for recovery of a debt which has not yet accrued.

Having concluded that the Court did have jurisdiction to allow the amendment in question, the CFI went on to decide that it should exercise its discretion to allow the amendment in this case because:-

• In view of the underlying objectives of the Rules of High Court (to increase cost-effectiveness, promote procedural economy and distribute court resources fairly), the practical implication of rigid insistence on requiring a fresh petition to be filed each time a subsequent debt arose, would result in multiplicity of proceedings and an unnecessary waste of costs and of the Court’s resources.

• Allowing the amendment would not cause the company any substantive prejudice. If it had a genuine defence to the Subsequent Debts on substantial grounds, it could always apply to strike out the Amended Petition or oppose it when it came to be heard.    

Court of Appeal Decision

The Court of Appeal upheld the CFI’s decision and had no doubt that the Court does have jurisdiction to allow amendments to include post-petition debts and that the Eshelby Rule does not apply to a creditor’s winding up petition.

In addition to agreeing with the principles in Re Richbell, the Court of Appeal said that RHC Order 20, rule 5(1), 7 and 8 also give the court a wide general discretion to allow amendment at any stage of proceedings for the purpose of determining the real question in controversy and that there is nothing in Order 20, rule 5 that bars the Court’s power to allow a creditor’s winding up petition to be amended to include post-petition debts. 

Comment

The ruling will be welcomed by creditors since it is now clear that the Court can grant leave for their winding up petitions to be amended to include post-petition debts, rather than them having to issue fresh petitions. However, the Court of Appeal did not make any ruling on the question whether the Eshleby Rule should continue to apply to writ actions or to other types of winding up petitions (such as those under section 168A or on the just and equitable ground) and hence we will have to wait until the Court of Appeal addresses this in future.