Case Update: - Can Untaxed Solicitors' Fees Be The Basis of A Winding-Up Petition?

Determining such an answer can be complex, particularly compared to a sum like a loan, and it often hinges on whether the creditor follows the correct procedure.

The governing law for the winding up of companies is Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap.32 (“the Ordinance”). According to s177 of the Ordinance, a company may be wound up by the court under certain circumstances, with one of the most common one being the company's inability to pay its debts. This inability is defined in s178 of the Ordinance:-

(1) A statutory demand in the form prescribed by s178(1)(a) has been served on the company, and 3 weeks after the service of the demand, the company still neglects to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor (s178(1)(a);

(2) If execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part (s178(1)(b); or

(3) If it is proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company (s178(1)(c).

The subsequent question is how a creditor, likely a law firm, can demonstrate the company's inability to pay its debts based on untaxed fees. While the Ordinance provides three methods to show this inability, the most common method is by serving a statutory demand on the company, so we will first explore this approach.

It is trite that the debt stated in the statutory demand must be a liquidated sum, the definition of liquidated sum is a specific sum of money due and payable and that must either be already ascertained or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not liquidated: Hong Kong Civil Procedure 2025 §6/2/4. As explained by the Court of Appeal in Bright Island Corp v Chao [2002] 2 HKLRD 97, "the decisive hallmark of a liquidated claim is that the process of quantification is already complete, and there is an absence of any element of 'penalty' to be imposed over and above the actual loss sustained". The next question would be, whether untaxed solicitors' fee is a liquidated sum.

Generally, the answer is no, for one simple reason, that the fee is subject to challenge by the client regarding its reasonableness through the process of taxation which involves more than just an arithmetical calculation: Re: The Grande Holdings Ltd (No.4) 2015 2 HKC 58. However, if the fee amount is not disputed by the client, then the sum can be liquidated. Nevertheless, at the risk of stating the obvious, this is rare as such a sum is always in dispute.

It follows that, if the statutory demand served is based on such unliquidated sum, then such demand would be deemed as defective, leading to the dismissal of the winding up petition: Re Jackin Total Fulfilment Services Ltd [2008] 3 HKC 566.

This does not mean; however, that a company can never be wound up based on untaxed solicitors’ fees.

 As noted earlier, serving a statutory demand is just one of the three methods to show the company’s inability to pay its debts. Notwithstanding the sum being an unliquidated sum, creditors can still wind up a company if it can prove to the satisfaction of the court that the company is unable to pay its debts: s178(1)(c), which also includes debts that are contingent or prospective: s179, Re: Jackin Total Fulfilment Services Ltd [2008] 3 HKC 566. One must bear in mind though, that proving the company's inability to pay its debts under s178(1)(c) is relatively less straightforward and more difficult in contrast to proving it under s178(1)(a) i.e. by way of statutory demand.

In conclusion, untaxed solicitors’ fees can be the basis for winding up a company provided the correct procedure is followed. Although in limited circumstances such a sum can be a liquidated sum (eg. if undisputed by the company), solicitors are generally advised to proceed under s178(1)(c) rather than the more common s178(1)(a); or, to simply have the sum taxed first before initiating the winding-up process.

Capital Chambers consist of members specialising in company matters, who can be found here.