Celebrity Special Situations Fund I, L.P. (Formerly Known As Donglin Special Situations Fund I, L.P.) v. China Linkage International Ltd

HCCW 120/2017

[2018] HKCFI 63

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 120 OF 2017

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DECISION

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1.This is the Petitioner’s application for an order to extend the time to register a charge dated 1 November 2015 (“the Charge”) made between China Linkage International Limited (“the Company”) as chargor and the Petitioner as chargee pursuant to s 346 of the Companies Ordinance, Cap 622 (“the CO”). The application is opposed by the Company’s contributory, China Asia Strategic Capital Limited (“China Asia”), who holds 90% of the shares of the Company.

The requirement of registration of charge under the Companies Ordinance

2.S 335 of the CO requires the company to register a charge in respect of its assets within 1 month of the making of the charge.[1] A person interested in the charge may also effect registration.[2]

3.S 337 makes it an offence against the company and its responsible officers for failing to comply with s 335.  It also renders the charge void against any liquidator and creditor of the company[3], but it does not prejudice any obligation for repayment of the money secured by the charge[4].

4.S 346(1) provides for the power of the court to extend the time for registration:

(1) The Court may, on application by the company or registered non-Hong Kong company or by a person interested in the charge, order that—

(a) the registration period specified in section 335(5), 336(6), 338(3), 339(4), 340(5), 341(4) or 342(6) be extended;

(b) … …

(2) The Court may make an order under subsection (1) on any terms and conditions that the Court thinks just and expedient.

(3) The Court must not make an order unless the Court is satisfied that—

(a) the failure specified in subsection (5)—

(i) was accidental;

(ii) was due to inadvertence or to some other sufficient cause; or

(iii) is not of a nature to prejudice the position of creditors or members of the company or registered non-Hong Kong company; or

(b) it is just and equitable to grant the relief on other grounds.

(4) …

(5) The failure is—

(a) in the case of subsection (1)(a), a failure to deliver a statement as required under Division 2, 3 or 4, or any accompanying instrument, within that registration period.

(b) … … …

Background

5.The Petitioner advanced in total $40 million to the Company pursuant to a loan agreement dated 1 November 2015 (“the Loan”) which was secured by the Charge.

6.The Company defaulted payment on the Loan.

7.On 16 November 2016, the Petitioner commenced HCA2993/2016 against the Company to recover the money owed under the Loan (“the HC Action”).

8.On 18 November 2016, the Petitioner obtained a Mareva injunction against the Company in the HC Action.  On 25 November 2016, Anthony Chan J continued the injunction with minor amendments.  The Company did not appear on the return day.

9.The Company did not file an Acknowledgment of Service and default judgment was entered on 3 March 2017.

10.The Petitioner commenced the present winding up petition against the Company (“the Petition”) on 18 April 2017 in respect of the debt due under the HC Action.

11.On 29 May 2017, the court appointed provisional liquidators in respect of the Company.

12.On 16 October 2017, Anthony Chan J dismissed China Asia’s application to terminate the appointment of the provisional liquidators.

13.The Petition has been adjourned pending China Asia’s application for setting aside the default judgment in the HC Action which will be heard on 31 January 2018.

The Petitioner’s case

14.The Petitioner makes it clear that the intention of this application is not to gain priority over other creditors as the proviso set out in the summons expressly addresses that concern.  The intention of this application is to overcome the technical argument now being raised by China Asia in opposing the Petition.

15.China Asia seeks to dispute the Loan on the ground that the Petitioner carried on the business as a money lender without a licence and consequentially the Loan was made contrary to the provisions in the Money Lenders Ordinance, Cap 163 (“MLO”).   The Petitioner’s case is that MLO is not applicable here as the Loan is an exempted loan because, inter alia, under paragraph 2 of Part 2 of Schedule 1 to MLO, the Loan is secured by a charge registered, or to be registered, under the CO.  If the court were to grant the extension order, it would virtually defeat the MLO defence raised by China Asia.

16.The reason why the Charge was not registered in time was explained by the former director of the Company, Mr. Zheng Qiang (“Mr Zheng”), who was then in charge of the Company and signed the Loan Agreement on its behalf.  Mr Zheng understood that it was the duty of the Company to register the Charge.  However, he was busy at the time and he forgot to register the Charge as required by the provisions in the CO.   According to him, the failure was unintentional.

17.In support of the application, the Petitioner has also invited the court to take into account the following matters:

(i)   There is a serious risk of dissipation of assets of the Company as shown in the Mareva Injunction application in the HC Action, in particular the Company had tried to dispose of its shares held in the stockbroker.

(ii)   Just one day before the issue of the writ in the HC Action, the Company on 15 November 2016 granted a charge (“the Gemini Charge”) in favour of a Mainland company known as Gemini Asset Management Ltd (“Gemini”), of which the sole director, Mr Yuan Yiqiang (“Mr Yuan”), indirectly held 90% of the shares in the Company.

(iii)   On 17 November 2016, the Company allotted 9 new shares to China Asia, which has since been a shareholder holding 90% of the shares in the Company. Mr Yuan was then the sole shareholder and director of China Asia.  Through his shareholding in China Asia, Mr Yuan indirectly held 90% of the shares in the Company.

18.The Gemini Charge made reference to the Supplemental Equity Subscription Agreement and Investment Agreement No. 4.  It is the Petitioner’s case that all these transactions were fictitious transactions designed to overcome the Mareva injunction and to defraud the creditors of the Company.

China’s Asia case

19.On the other hand, China Asia argues that:

(i)   The power to extend time for registration is discretionary.

(ii)   The court must not make an order for extension if it is not satisfied of the matters provided under s 364(3).

(iii)   Relying on the case of Re Ashpurton Estates Ltd[5], unless there are exceptional circumstances, an extension application should be refused once the company has gone into liquidation.

20.Ms Wu, counsel for China Asia, submits that the condition for the exercise of the power to make the extension order is not met in the present case.  Though Mr Zheng had failed to register the Charge due to inadvertence, the Petitioner could equally apply for registration itself.  The Petitioner ought to have known from the company search that the Charge was not registered by the Company.  The Petitioner admits having knowledge of the non-registration of the Charge on 17 November 2016, and yet it chose not to take any action until 19 July 2017 when it took out the present application for the extension order.

21.Further, Mr Chen Yijie (“Mr Chen”), the former sole shareholder of the Company, provides an explanation as to the transactions taken place from September to November 2016.  According to him, he signed the Subscription Agreement with Gemini, an investment company, on 9 September 2016.  The Company had not been able to honour the Subscription Agreement by obtaining funds from the securities account maintained with Orient Securities to pay Gemini.  Mr Chen’s share in the Company was therefore diluted, and Gemini was allotted 9 shares in the Company.  China Asia was Gemini’s nominee in receiving those 9 shares.  Mr Chen still holds the remaining 1 share. On 9 December 2016, he appointed one Mr Yun Shicheng, who purportedly was experienced in the capital investment market and business management, as a director of the Company, and he resigned as director on the same day.  Hence, these transactions were not made to defraud the creditors of the Company.

Merits of the application

22.Having considered the submissions of the parties, I decide to exercise my discretion in making the extension order.

23.First, I accept the explanation given by Mr Zheng that the failure to register the Charge was due to inadvertence on his part.  He was fully aware of the duty on the part of the Company to register the Charge. However, he forgot to do so as he was busy by that time.  There is simply nothing before the court to doubt the credibility of his explanation.

24.The existing owner of the Petitioner, the Celebrity Group, acquired the Petitioner from its previous owner, Ms Jiang Xinrong (“Ms Jiang”), in April 2016.  At the time of the acquisition, the new owner was not aware that the Charge was required to be registered.  After the making of the present application, Mr Kiow Wei Hao (“Mr Kiow”), the representative of the new owner, asked for assistance from Ms Jiang.  Ms Jiang told him that it was the understanding of both Mr Zheng (the then director of the Company) and her that it was the Company’s legal duty to register the Charge, and she therefore left it to the Company to do the registration.  Mr Kiow later managed to ask Mr Zheng to make an affirmation to support the application.

25.In Re Wilson Tyres Pty Ltd[6], it was held that despite awareness of the need to register, failure by the chargee to lodge a charge within the registration period is accidental if it is unintentional. Accidental is synonymous with unintentional.  In Re Resinoid and Mica Products Ltd[7], the respective solicitors for the chargor and chargee each left it to the others to effect registration.  It was held that the failure was due to inadvertence.  Applying the same principles here, I accept that the failure to register the Charge was due to accident and inadvertence on the part of the Company and the Petitioner.

26.In any event, I take the view that there is some other sufficient cause and it would be just and equitable to grant the extension order.

27.It has been made clear from the outset that the Petitioner is not intending to gain priority over other creditors and the proviso set out in the summons addresses that particular concern.

28.As I see it, the object of the application is to improve the Petitioner’s position vis-à-vis the Company.  If the extension order is granted, it may not be possible for the Company and China Asia to run the MLO defence.

29.As between the Petitioner and the Company, I consider it just and equitable to extend the time for the registration of the Charge.  Under the CO, the Company bore the primary responsibility to register the Charge.  S 337 of the CO makes it an offence against the Company and its responsible officers for failing to register the Charge.  China Asia is not a creditor of the Company.  Its locus to intervene is based on the fact that it is the shareholder of the Company.  As against the Petitioner who is a creditor of the Company, China Asia does not enjoy right superior than that of the Company.  As between the Petitioner and the Company, it would simply lie ill in the mouth of the Company to oppose the application for extension order since it was the duty of the Company to register the Charge in the first place.  As China Asia does not stand in any better position, it would not be just and equitable to allow it to oppose the extension application.

30.I am therefore satisfied that there is some other sufficient cause and it would be just and equitable to grant the extension order as sought by the Petitioner.  For the same reasons, the discretion should be exercised in favour of the Petitioner.

31.Reliance is made on the case of Re Ashpurton Estates Ltd[8] to support the proposition that, unless there are exceptional circumstances, an application to extend the time for registration should always be refused once the company has gone into liquidation.

32.However, this is not a rule of law.  Lord Bingham had given the following explanation regarding the rationale for such practice:[9]

“ … … Ever since that case it has been the practice to insert in an order extending the time for registration some such words as: "but that this order be without prejudice to the rights of parties acquired prior to the time when the debentures shall be actually registered." The reason for the proviso is as valid today as it was then. Such an application would be made either ex parte by the chargor company, which had the statutory duty to register, or by the chargee in which case the company would be joined as the only respondent, if there were any respondent at all. It was not the practice to advertise for creditors and to make one of them a respondent. Consequently, it was necessary to protect persons whose rights would otherwise be overridden in their absence: see also In re Mendip Press Ltd. (1901) 18 T.L.R. 38 decided by the same judge a few days after the Joplin case.

It soon became established that, so long as the company was a going concern at the date of registration, the proviso did not protect, and was not intended to protect, an unsecured creditor who had lent money at a time when the charge should have been but was not registered: see In re Ehrmann Brothers Ltd. [1906] 2 Ch. 697 and In re Cardiff Workmen's Cottage Co. Ltd. [1906] 2 Ch. 627. The reason for this was that such unsecured creditor could not have intervened to prevent payment being made to the lender whose charge was not registered (whom I will call "the unregistered chargee"). Nor could such unsecured creditor have prevented the creation of a new charge, duly registered, to take the place of the unregistered charge. The proviso was intended to protect only rights acquired against, or affecting, the property comprised in the unregistered charge, in the intervening period between the date of the creation of the unregistered charge and the registration of such charge. Such persons would include a subsequent chargee of the relevant property; a creditor who has levied execution against the relevant property; and an unsecured creditor if, but only if, the company has gone into liquidation before registration is effected. Once the company has gone into liquidation, the existing unsecured creditors are interested in all the assets of the company, since the liquidator is bound by statute to distribute the net proceeds pari passu among the unsecured creditors, subject to preferential debts. The assets of the company are at that stage vested in the company for the benefit of its creditors. The unsecured creditors are in the nature of cestuis que trust with beneficial interests extending to all the company's property.

It follows from this approach that the court must invariably refuse to extend the time for registration once the company has gone into liquidation. If an order extending time were made and the proviso included, registration would be of no assistance whatever to the unregistered chargee because the unsecured creditors at that stage would be protected by the proviso. Such an order after liquidation would be futile and will be refused: see In re Spiral Globe Ltd. [1902] 1 Ch. 396, where the order was made, though presumably useless to the unregistered chargee; In re S. Abrahams & Sons Ltd. [1902] 1 Ch. 695, where the order was refused because it would be useless; In re Anglo-Oriental Carpet Manufacturing Co. Ltd. [1903] 1 Ch. 914, which was concerned with the construction of the proviso but which illustrates the principle; and the Ehrmann case [1906] 2 Ch. 697 where this court approved Anglo-Oriental.

The position accordingly became firmly established that the court (i) invariably adds to an order extending time the proviso which I have mentioned and (ii) will not make an order once liquidation has supervened, because the effect of the proviso would be to render the order futile. This is a matter of discretion and not of law. It is possible to imagine a case, for example where fraud is involved, in which the court might extend the time for registration after the commencement of liquidation and omit the proviso which would render the order futile; we do not know of such a case in practice, and certainly the instant case does not fall into the category of fraud.”

33.According to such dicta, it is always the practice of the court to insert the proviso to protect the interests of other creditors in an extension application.  But once the company has gone into liquidation, registration would be futile to the unregistered chargee because the unsecured creditors at that stage would be protected by the proviso.  That is the reason why the court would always refuse an extension order after the commencement of winding up proceedings.  It would simply be useless.

34.Different considerations apply in the present case.  The court here is not concerned with priority between different creditors, rather the result of this application would affect the rights vis-à-vis the Petitioner and the Company (including its contributory).

35.China Asia seems to accept that once the extension order is made, the MLO defence is no longer available to the Company and China Asia.  But there is unfairness to them.  Had the Company registered the Charge which was its primary responsibility, such defence would not have been available to the Company in any event.  Though the Petitioner was free to register the Charge itself, the Company should not be allowed to benefit from its own failure to effect registration.  Hence as between the Petitioner and the Company (including its contributory), it would be just and fair for the court to grant the extension order.

36.There is some dispute between the parties as to whether the Petitioner carried on the business of a money lender within the meaning of MLO.  However, had the Company discharged its duty in registering the Charge, whether the Petitioner was a money lender is very much a non-issue.

37.There is also some weight in the Petitioner’s argument that the shares subscription agreement, the shares allotment and the Gemini Charger were not genuine transactions.  In my judgment, it is not necessary for me to resolve such issue for the purpose of the present application.  The reasons given by me earlier are already more than sufficient for the court to exercise the discretion in granting the extension order.

38.I therefore make an order in terms of paragraph 1 of the Petitioner’s summons dated 19 July 2017.  I also make an order nisi that the costs of the said summons be paid by the opposing Contributory to the Petitioner which shall be made absolute 14 days after the date of the handing down of this Decision.

Mr Patrick Chong, instructed by Howse Williams Bowers, for the Petitioner

Joint and Several Liquidators of the Respondent, absent

Ms Teresa Wu, instructed by Hon & Co, for China Asia Strategic Capital Limited, a contributory of the Respondent