The Hong Kong court recently provided guidance on a creditor’s entitlement to vote at a creditors’ meeting for a company in liquidation where the company has a cross-claim against the creditor: Re Hsin Chong Construction Co Ltd [2021] HKCFI 3451 (24 November 2021).
The Honourable Mr Justice Harris held that where a creditor lodges a proof for voting purposes and the company has a genuine cross-claim against the creditor:
- Where the company’s cross-claim is for a liquidated or ascertained amount - meaning that the chairperson can assess the dollar value of the cross-claim - this cross-claim must be netted off against the creditor’s claim so that the creditor is entitled only to vote the net liquidated amount due, if any. This ruling departs from an earlier Hong Kong court decision that the company’s cross-claim did not need to be netted off.1
- Where the company’s cross-claim is not for a liquidated or ascertained amount, it follows that the creditor’s net claim is also not a liquidated or ascertained claim. Under Hong Kong insolvency rules, this means the creditors’ net claim is not one that can be properly admitted for voting purposes. Harris J accepted that this result was unsatisfactory - it potentially deprives creditors with genuine claims of their voting entitlement. But his Lordship considered that this result followed from the drafting of the current rules, which the Hong Kong government had permitted to remain in their present form despite a reform recommendation by the Law Reform Commission.
- The chairperson must determine whether on the balance of probabilities a claim or cross-claim for a liquidated or ascertained amount is established. If not, the proof should not be admitted for voting purposes or should be valued at HK$1. This ruling also departs from an earlier Hong Kong court decision that a creditor should be entitled to vote unless the chairman was certain that the claim is unliquidated and unascertained.2
This decision is relevant to cases where a company is put into liquidation due to suspected wrongdoing by the company’s management, and the suspected wrongdoers and their associates then assert an entitlement to vote at the creditors’ meetings by reason of purported claims against the company. For example, they might assert claims in the form of loans or rights to payment under supply contracts. The effect of this decision is that these suspected wrongdoers and their associates may be prevented from voting by reason of the company’s cross-claim against them relating to the suspected wrongdoing. Since these cross-claims will typically be for an unliquidated and unascertained amount, the chairperson would be entitled to reject the proof for voting purposes or to value the claim at HK$1.