Introduction
In the recent decision in Re Pan Sutong et al [2024] HKCA 580 (“Decision”), the Court of Appeal considered whether the doctrine of issue estoppel will apply to debar a debtor or a debtor company from raising arguments to resist a bankruptcy or winding up petition, where such argument could have been raised at an earlier stage when the debtor attempted to set aside the statutory demand issue against him or the debtor company applied for an injunction to restrain the presentation of a winding up petition.
Background
These proceedings concern Pan Sutong (“Pan”) and his wholly-owned BVI corporate vehicle, Silver Starlight Limited (“Silver Starlight”).
In 2020, three banks (collectively, “Banks”) presented statutory demands against Silver Starlight and Pan regarding the liabilities of Silver Starlight, for which Pan was said to have offered a guarantee.
At an earlier stage, Silver Starlight applied for an injunction to restrain the Banks from presenting a winding-up petition (“Injunction Application”), and Pan applied to set aside the statutory demands presented against him (“Setting Aside Application”). In particular:
- In the Injunction Application, Silver Starlight contended that the Hong Kong court did not have the jurisdiction to order Silver Starlight’s winding-up, since Silver Starlight was a foreign company (“Jurisdictional Argument”).
- In both the Injunction and the Setting Aside Applications, Pan and Silver Starlight contended that there was an overall agreement between the Banks and Silver Starlight that (among other things) the liability to repay the Banks (if any) has not arisen yet (“Overall Agreement Argument”).
These Arguments were rejected when disposing of the Injunction and Setting Aside Applications.
The Banks presented a bankruptcy petition and a winding up petition against Pan and Silver Starlight respectively. At the hearing of the petitions, Linda Chan J held that she was bound by the findings in the Injunction and Setting Aside Applications by reason of the doctrine of issue estoppel.
On such basis, the bankruptcy order and winding-up order were made against Pan and Silver Starlight respectively. Pan and Silver Starlight appealed.
The CA’s Decision on Issue Estoppel / Re-Litigation
While the CA dismissed Pan and Silver Starlight’s appeal, it provided valuable insight into whether the doctrine of issue estoppel applied as the first instance judge contended.
As to the Jurisdictional Argument, the CA held that the Court hearing the winding-up petition should not be bound by the findings in relation to the Injunction Application (§§96-100). This was because in the Injunction Application, all that the Court needed to decide was that there was a reasonably arguable case that the threshold requirements for winding up a foreign company were met. There was no determination that the threshold requirements were actually met. Silver Starlight was therefore free to re-open the matter when the winding-up petition came before the Court.
As to the Overall Agreement Argument, the CA noted the principle that, where a company fails to show that there is a bona fide dispute to a debt for the purposes of an application for an injunction to restrain the presentation of a winding-up petition, the company cannot attempt to reargue the same points when the winding-up petition is presented.
Similarly, where a debtor had raised certain arguments in seeking to set aside a statutory demand against him but failed, the same points cannot be rerun at the hearing of the bankruptcy petition (collectively, “Preclusion Principle”).
Importantly, having surveyed the relevant Hong Kong, English and Australian authorities, the CA held that it would be unhelpful to refer to the Preclusion Principle as being based on res judicata or issue estoppel. Rather, the question to be decided is whether there is such a change of circumstances which would justify permitting the respondent to re-open a point decided against it, when the winding-up or bankruptcy petitions are heard (§121).
In clarifying the juridical basis of the Preclusion Principle, the CA emphasized that the “strictures” attendant on the doctrines of res judicata and issue estoppel do not apply to determining whether the same points can be re-run in the subsequent bankruptcy or winding-up proceedings, if they had been dismissed in the earlier “precursor” application to set aside the statutory demand or that to restrain the presentation of a winding-up petition (§119).
However, it remains to be seen whether the above clarification of the juridical basis of the Preclusion Principle will make any difference in practice. As observed in the Decision, a better way of putting the same point and more evidence to support the same point do not constitute a relevant change of circumstances; specific new facts which “really would make a difference” which were unknown to the parties at the previous hearing would, however, suffice to satisfy this requirement (§§124-125).
Key Takeaways
The Decision provides much welcome clarification as to the extent to which matters can be re-opened at the bankruptcy or winding-up petition stage, when the same had been raised and dismissed in applications to set aside a statutory demand or for an injunction to restrain the presentation of a winding-up petition.
As to the Preclusion Principle, it is also now clear that the “strictures” attendant on the doctrines of res judicata and issue estoppel do not apply to the determination of whether the same points can be run in the subsequent bankruptcy or winding-up proceedings, if they had been dismissed in the earlier “precursor” application to set aside the statutory demand or that to restrain the presentation of a winding-up petition. The parties’ focus can be directed to the sole question of whether there is such change in circumstances such as to justify the re-opening of the matter.
William Wong SC, Patrick Chong, Lai Chun Ho and Alex Yeung acted for Pan and Silver Starlight.
Anson Wong SC, Alex Fan and Joanne Szeto acted for the Banks.
The full Decision can be accessed at https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=161000&QS=%2B&TP=JU
