Artech Development Ltd v. Posismo Ltd

HCCW 43/2017

[2018] HKCFI 344

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 43 OF 2017

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J U D G M E N T

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Introduction

1.This is the substantive hearing of the winding‑up Petition presented by the Petitioner against Posismo Limited (“Company”) pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“CO”).

2.The basis of the Petition is that the Company failed to repay a loan of JPY 240 million (“Loan”) plus interest accrued thereon, its subsequent failure to meet a Statutory Demand served on it on 28 December 2016 and is therefore deemed to be unable to pay its debts under s 178(1)(a) CO.

3.The Loan is evidenced by a written loan agreement dated 24 April 2015 between the Petitioner and the Company (“Loan Agreement”).  The Loan Agreement provided that the period of the Loan began on 24 April 2015 and ended on 23 April 2016 and the Company should pay interest on the principal sum at the rate of 15% per annum.

4.There is no dispute that the Loan Agreement was signed by the parties and that the Company received JPY 240 million from the Petitioner on 4 May 2015.  There is also no dispute that the Company did not repay the Loan or comply with the Statutory Demand.

5.The Company opposes the Petition on the ground that the Loan Agreement is a sham and there was in fact no “loan” from the Petitioner to the Company.  As a slight variant to this ground, the Company also contends that the Petitioner is estopped from enforcing the Loan Agreement.  In gist, the Company claims there is a bona fide dispute of substance over the Petition debt and the court should dismiss the Petition.

The Parties’ cases

6.The Petitioner is a company incorporated in the British Virgin Islands.  Its only shareholder is e‑Compact Limited (“e‑Compact”). e‑Compact is solely owned by Anglo Japan Enterprises Limited which is in turn solely owned by Mr Michele Matsuda (“Mr Matsuda”) who resides in Hong Kong.  Mr Matsuda says the Petitioner is in the finance / money lending business principally to Japanese entities.  The Petitioner has lent money to numerous borrowers referred to it by Mr Kyota Yamada (“Mr Yamada”), an acquaintance of Mr Matsuda since 2001 and with whom Mr Matsuda is said to have a close relationship.

7.The Company is incorporated in Hong Kong.  At the material time, its principal activities were the provision of consulting services on design, process and application of information and technology in relation to internet and web‑based environment[1]. As stated in its annual returns for 2014 and 2015, its directors were Ryoji Miyauchi (“Mr Miyauchi”) and Osanari Nakamura, both resident in Japan.

8.In a nutshell, the Company’s case is as summarized in paragraph 5 above.  Its detailed case has been set out in Mr Chain’s written submissions as follows.

(1) In reality, the Loan Agreement was not a loan agreement but part of a series of transactions designed by Mr Yamada. 

(2) The Petitioner is in truth controlled by Mr Yamada. Mr Yamada controls a major shareholding in a Tokyo listed company GeoNext Corp (“GeoNext”), through another company he controls, Resort and Medical Co Limited (“R&M”).

(3) In around 2015, an investment company viz Evolution Capital Management LLC (“Evolution”) held JPY 240 million worth of Warrants of GeoNext.  Evolution intended to sell the Warrants.

(4) Mr Yamada did not want the Warrants to be sold in the open market, as that would likely adversely affect the share price of GeoNext.

(5) After considering multiple options, Mr Yamada arranged to purchase the Warrants from Evolution himself.  However, he did not want to do so in his own name, as it would be difficult for him (as a person who controlled a major shareholding of GeoNext) to sell the Warrants at a later date without giving the market the impression that he had lost confidence in GeoNext (thereby adversely affecting its share price).

(6) Instead, Mr Yamada would channel the necessary funds through the Company to a Singaporean investment company, S & Brothers Pte Limited (“S & Brothers”).  S & Brothers would then purchase the Warrants in their name.  Discussions between Mr Yamada, the Company and S & Brothers also involved Kawakami acting as a middleman.

(7) It was Mr Yamada’s plan to then drive up the share price of GeoNext, by having R&M subsequently injecting a Japanese cartoon characters business (with potential for huge imminent growth in the PRC) and/or solar energy business into GeoNext.

(8) Once GeoNext’s share price rose, the Warrants would increase in value and could be sold at a profit.  75% of the sales proceeds would go to Mr Yamada while the Company and S & Brothers should equally share the balance of 25% ie 12.5% each.

(9) The Company and S & Brothers agreed to participate in the aforesaid series of transactions proposed by Mr Yamada.

(10) The Loan Agreement was entered into in April 2015 as a façade for Mr Yamada to channel funds into the Company.  The face amount of the loan thereunder is JPY 240 million, exactly the purchase price of the Warrants, with an arbitrary loan period of 12 months and interest rate at 15%.

(11) The Petitioner transferred JPY 240 million to the Company on 4 May 2015.  The Company immediately transferred the JPY 240 million to S & Brothers on 5 May 2015.  S & Brothers did purchase the Warrants from Evolution around that time.

(12) Another part of the same series of transactions was Mr Yamada causing R&M to acquire a 49% stake in the Japanese cartoon characters business on 3 March 2015, for the purpose of eventually injecting into GeoNext.

(13) 25% of that stake was sold by R&M to S & Brothers on 5 June 2015, which it was anticipated would provide further profit and windfall to S & Brothers (on top of its 12.5% share of future sales proceeds for the Warrants) upon eventual injection into GeoNext, in exchange for S & Brothers’ assistance in managing and growing the Japanese cartoon characters business.

9.The Petitioner’s case is straightforward.  At the material time, it was in the business of money lending.  In about mid‑April 2015, Mr Matsuda received a call from Mr Yamada informing him that he had a prospective borrower to be referred to him, which turned out to be the Company. Pursuant to the referral, the Petitioner, via Mr Matsuda, and the Company, via Mr Miyauchi, proceeded with the loan arrangement and executed the Loan Agreement on 24 April 2015.

Deliberation

10.The court’s approach where a debt is said to be bona fide disputed on substantial grounds is well‑settled and, judging from the parties’ written submissions, not controversial.

(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds.  In this context, “substantial” means having substance and not frivolous.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularized assertions.  It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists.  In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company.

Re Hong Kong Construction (Works) Ltd unrep, HCCW 670/2002,7 January 2003, Kwan J (as she then was) at [6].

11.In Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at [27(5)], Kwan JA further observed:

“…It is well established that petitions are not meant to be used for the purpose of debt collection and the winding‑up or bankruptcy jurisdiction of the court would be exercised only in very clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will dismiss the petition.”

12.For the defence of sham agreement, the relevant principles have been succinctly summarized in Hui Cheung Fai v Daiwa Development Ltd unrep, HCA 1734/2009, 8 April 2014, DHCJ Eugene Fung SC, at [71]:

“…A sham exists where (1) the parties intended that the documents or acts they have done would not create the legal rights or obligations they appear to create; and (2) it was intended that the documents or acts would mislead a third party into believing the parties had created those rights and obligations.”

13.At [72], the learned Deputy Judge further observed:

“In Hitch v Stone [2001] STC 214, Arden LJ at 230a‑e gave the following guidance as to whether an act or document is a sham:

‘First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties’ explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties.

Second… the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties.

Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship.

Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied...

Fifth, the intention must be a common intention…’”

14.Thus, in order to establish the Loan Agreement is a sham, the Company must adduce evidence to show that both the Petitioner and the Company (1) intended that the Loan Agreement would not create the legal rights or obligations it appeared to create; and (2) intended that the Loan Agreement would mislead a third party into believing the parties had created those rights and obligations.  Failure to establish the Petitioner had such an intention is fatal to the Company’s defence.

15.As for the defence of promissory estoppel, it is only necessary to refer to the following passage in Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 at [55] per Ribeiro PJ:

“A promissory estoppel may be said to arise where (i) the parties are in a relationship involving enforceable or exercisable rights, duties or powers; (ii) one party (the promisor), by words or conduct, conveys or is reasonably understood to convey a clear and unequivocal promise or assurance to the other (the promisee) that the promisor will not enforce or exercise some of those rights, duties or powers; and (iii) the promisee reasonably relies upon that promise and is induced to alter his or her position on the faith of it, so that it would be inequitable or unconscionable for the promisor to act inconsistently with the promise.”

16.In order to establish the defence of promissory estoppel, the Company must adduce evidence to show the Petitioner, by words or conduct, has conveyed or is reasonably understood to have conveyed a clear and unequivocal promise or assurance to the Company that it will not exercise its rights under the Loan Agreement and seek repayment of the Loan.

17.Mr Chain, at paragraphs 18 to 22 of his written submissions as well as during his oral submissions, has raised a number of queries on the Petitioner’s evidence and conduct with a view to challenging the genuineness of the Loan.  These queries include:

(1) The Loan of such a significant amount was made in circumstances with literally zero due diligence by the Petitioner as lender.

(2) The use of self‑contradictory phrases in the Petitioner’s letter dated 7 March 2016 to the Company.

(3) The Petitioner’s unexplained lack of effort and failure to enforce the Loan Agreement and to demand for repayment of the Loan.

(4) Mr Matsuda’s self‑contradictory description of his relationship with the Petitioner.

18.Some of these queries have been satisfactorily answered by the Petitioner while others have not.  With respect to Mr Chain, this court does not place too much emphasis on these queries or the Petitioner’s answers to them.  The simple reason is that the onus is on the Company to establish a bona fide dispute of substance over the Petition debt.  The onus is not on the Petitioner to establish the genuineness of the Loan, it being common ground that the parties have indeed executed the Loan Agreement and the Company has indeed received JPY 240 million from the Petitioner.

19.Having considered the evidence adduced by the parties, in the view of this court, there are fundamental flaws in the Company’s case.

20.First, the lack of evidence to support the Company’s allegation that Mr Yamada was in control of the Petitioner, other than the one‑sentence bare assertion in the first affirmation of Mr Miyauchi at paragraph 5 and repeated at paragraph 12.  Mr Yamada’s control of the Petitioner is critical to the Company’s defence that the Loan Agreement is a sham.  If Mr Yamada was not in control of the Petitioner, it is inherently improbable that he could have procured the Petitioner to enter into a sham loan agreement with the Company (or to participate in any other way in his grand scheme to boost the share price of GeoNext).  There is no suggestion in the evidence that Mr Yamada has provided any incentive, financial or otherwise, to the Petitioner in order to induce it to grant a sham “loan” to the Company.  The Company’s case is simply that Mr Yamada was in control of the Petitioner, period.

21.Second, the fact that Mr Yamada did not occupy any position (as director or otherwise) in the Petitioner and the lack of any legal basis to establish that whatever he intended, said or did could be attributed to the Petitioner or was authorized by the Petitioner.

(1) If Mr Yamada had no authority to represent the Petitioner, whatever he might have promised or assured the Company, eg that the Loan was not a loan and need not be repaid, could not bind the Petitioner.

(2) If Mr Yamada’s intention (that the Loan Agreement was only a sham and the Loan need not be repaid) could not be attributed to the Petitioner, the Company would fail to establish a critical element of the defence of sham agreement ie a common intention that the Loan Agreement would not create the legal rights or obligations it appeared to create.  Mr Yamada himself could very well have intended the Loan Agreement to be a sham, but that was not the Petitioner’s intention.

22.Third, the lack of an explanation as to why Mr Yamada thought it was necessary to use the Company as a conduit and paid it a fee for so doing.  On the Company’s case, it was to receive 12.5% of the proceeds when the Warrants were eventually sold by S & Brothers.  Based on the value of the Warrants stated in the Warrant Sale Agreement dated 30 April 2015 at JPY 240 million, 12.5% would be JPY 30 million or about HK$2.1 million.  There is no suggestion that the Petitioner had difficulty transferring the funds to S & Brothers directly.  Nor is it easy to think of any such difficulty.  If so, why should Mr Yamada let the Company earn the easy money of JPY 30 million for receiving the funds from the Petitioner on 4 May and transferring them to S & Brothers the next day?

23.Fourth, the lack of an explanation as to why Mr Yamada considered it necessary or expedient for the Petitioner and the Company to sign a loan agreement at all, if the role of the Company was a mere conduit of funds. The Company could have acted as a mere conduit of funds without signing anything.  After all, the Company and S & Brothers did not sign any written agreement between themselves to confirm or conceal the true nature of the transfer of JPY 240 million from the Company to S & Brothers. If the Loan Agreement was a façade for Mr Yamada to channel funds into the Company, as submitted by Mr Chain, who was he trying to fool or, paraphrasing the words of DHCJ Eugene Fung SC quoted in paragraph 12 above, who was the third party that the Loan Agreement was intended to mislead?  There is no answer in the Company’s evidence.

24.All in all, this is a case where the Company has raised a cloud of factual issues on affidavits but, upon closer analysis, this court is not satisfied that the defence of sham agreement or promissory estoppel is bona fide or has any substance.  It is just a cloud.

Disposition and costs

25.There shall be a winding up order against Posismo Limited and an order nisi that costs be to the Petitioner, to be taxed if not agreed, with certificate for counsel.

26.Lastly, this court wishes to thank counsel on both sides for their helpful assistance.

Mr Jose D’Almada Remedios, instructed by Yung, Yu, Yuen & Co., for the Petitioner

Mr Christopher Chain and Mr Tom Ng, instructed by Li & Partners, for the Respondent

The Official Receiver is excused from attendance