Cardomon International Ltd v. Longview Corporation Ltd

HCCW 85/2018

[2019] HKCFI 239

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 85 OF 2018

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D E C I S I O N

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1.On 29 March 2018, the petitioner Cardomon International Limited issued a petition for the winding up of the Company on the grounds of insolvency. The alleged debts relied on by the petitioner are two loans for HK$895,000 and HK$250,000 respectively which were advanced to the Company on 12 September 2007 and 31 January 2013. There is no dispute that these loans were made to the Company and they are recorded in audit confirmations dated 14 April 2014 and are recorded in various of the Company’s audited financial statements, most recently in that for the year ending 30 June 2016.

2.A statutory demand was served and dated 7 March 2018.  The Company itself does not oppose the petition.  It is opposed by one of the two shareholders of the Company, Mr Ong Han San.  He owns 50% of the issued shares and is one of its directors.  Mr Ong has filed two affirmations setting out the grounds on which he contends that there is a defence to the petitioner’s claims for recovery of its loans. 

3.Before turning to consider Mr Ong’s evidence and the arguments advanced on his behalf by Mr Tom Ng, it is helpful to set out briefly the relevant legal principles by reference to which the Companies Court determines disputes of this sort.

4.It is well known that it is necessary in order to defeat a winding-up petition for a party opposing it to demonstrate that the company has a bona fide dispute on substantial grounds in respect of the alleged debt.  In Re Yueshou Environmental Holdings Ltd [1] I summarised the relevant principles in [8] in which I state as follows:

“8. It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment. If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed. Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated. I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

‘Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.’

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

(2) I have to be satisfied that the Company’s assertions are believable. The test

‘... is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised – because failure to recognise it would create a debt‑dodgers’ charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, §13

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

‘(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. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(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 unparticularised assertions, especially where particulars and information have been sought by the other side. 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. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.’ ”

5.Mr Ng contended that there are two arguably bona fide and substantial defences to the claims.  The first is that both the petitioner and himself had agreed that the Company did not have to repay the loans that both of them had made as shareholders until the financial position of the Company permitted.  The second is that even if the court does not accept that there is a bona fide defence on substantial grounds in respect of that defence, for reasons which I will explain in more detail later the petitioner is estopped from claiming repayment.  I shall deal with the first suggested defence.

6.It is convenient to set out Mr Ong’s evidence in full rather than summarise it because it is succinct.  In [10(1)]–[10(2)] of his 1^st affirmation, he says as follows:

“(1) The Company and its shareholders (i.e. the Petitioner and myself) agreed that the Company does not have to repay any sum due to the Petitioner or me, until the financial position of the company permits, to the effect that no directors’/shareholders’ loan will be repaid unless and until the Company has sufficient funds to pay off outstanding loans owed to other creditors as well to the directors and shareholders. The Company accepted the loans on this basis.

(2) This is supported by the audited accounts, recording that ‘the shareholders consent to provide adequate financial support to the company and will not call for any repayment of the loan amount until the financial position of the company permits’. There is now produced and shown to me marked ‘OHS-8’ copy of the audited accounts of the Company for 2009, 2010, 2011, 2013 and 2014, recording this arrangement. To the best of my knowledge, these accounts were also signed and approved by the Petitioner. Notwithstanding that the audited accounts of the Company for 2015 and 2016 have not recorded such arrangement, I have never agreed to and/or accepted any variation to such arrangement.”

In his reply affirmation in response to evidence filed by the Company and given by Mr Wesley George Fraser, he says this in [3] and [4]:

“3. The Company and its shareholders (i.e. the Petitioner and myself) agreed that the Company does not become obliged to repay any sum due to me or to the Petitioner, until the financial position of the company permits, to the effect that no directors’/shareholders’ loan or debt will be repaid unless and until the Company has sufficient funds to pay off outstanding loans or debt owed to other creditors as well to the directors and shareholders. The Company accepted the loans on this basis.

4. The parties’ (i.e. the Company, the Petitioner and myself) understanding is that the ‘debt’ would not come into existence unless the contingency is satisfied. Further, the condition is a continuing one: in other words, the ‘debt’ does not exist, and/or does not have to be repaid, if the condition/contingency is not satisfied at the time when repayment is demanded. The fact (which is denied, as explained below) that the condition/contingency was once satisfied previously does not matter.”

7.As can be seen from the paragraphs that I have quoted, Mr Ong has not been able to tell the court details of the circumstances in which the alleged agreement came to be made.  It is not suggested, for example, that it is recorded in an exchange of correspondence or emails, or that it is resulted from an oral agreement made at a particular meeting, the dates and circumstances of which he is able to recall.  On its face, therefore, his affirmation evidence does not appear to satisfy the tests summarised in the passages quoted by me from Re Yueshou earlier in this decision. 

8.In Mr Fraser’s 1^st affidavit in support of the petition, he also makes reference to the notes in the audited financial statements (which I will quote later) and explains his recollection of the circumstances in which they came to be included, at least initially it would appear, in the audited financial statements for the 2008 and 2009 financial years.  His recollection in his affidavit, which was dated 8 June 2018, was that they were included at the request of the Company’s auditors.  He does go on in [7] to suggest that the reason the notes subsequently came to be changed was that after a period of sustained profit, all the parties concerned, in about 2015, came to an agreement that the statement is no longer necessary and that the notes that were included in the accounts could be changed.

9.Subsequent to that affidavit having been made, the petitioner obtained a letter from the auditors, Cheung & Cheung, dated 21 August 2018, which explains their recollection of the circumstances in which the notes came to be included in the audited finance statement.  The letter is comprehensive.  In [3], Cheung & Cheung explain their recollection of the circumstances as follows:

“The financial support from its directors/shareholders came in the form of loans to the company to enable it to acquire capital assets for the manufacture of plastic parts for sale to its customer to generate cash flows to cover the operating costs and expenses. The thin capital arrangement requires both of its directors/shareholders to agree their continued financial support to the company. Financial support is considered not necessary when Longview has accumulated sufficient reserves which would enable it to continue in business as a going concern. At the end of each reporting period, we have made an assessment of whether to include the Statement/Note based on the net current assets and accumulated profit or loss on Longview and facts known to us at the time right up to the date that the audited financial statements were signed off. The directors/shareholders would then confirm their agreement to our assessment by signing the audited financial statements containing the Statement/Note. There were no correspondence with the directors/shareholders regarding (i) the inclusion of the Statement/Note in the 2009, 2010, 2011, 2012, 2013 and 2014 audited financial statements and (ii) the removal of the Statement/Note from the 2015 and 2016 audited financial statements as the inclusion/removal was based on our assessment of the company’s financial position.”

Later in the letter, they deal with the financial years ending 30 June 2015 and 2016 respectively in which the notes were changed simply to refer to the fact that the loans were interest‑free and not for any specified tenor:

“Based on the above facts, Longview was in a strong financial position with both net current assets and accumulated profit being almost three times the amount of loans advanced from its directors/shareholders. Although it was noted that cash balances decrease and cash alone would not be sufficient enough to repay loans from its directors/shareholders, Longview had significant trade receivables and that there were no indications that receivables would became irrecoverable up to the date of the reports were signed off. Cash balances and trade receivables together were sufficiently large enough to cover all current financial obligations and loans from directors/shareholders. Therefore financial support would not be required based on the above facts. Longview could continue its existence and business as a going concern without any financial support from its directors/shareholders even after repaying the loans from its directors/shareholders.”

10.It seems to me that Cheung & Cheung’s explanation is consistent with [6] of Mr Frasier’s 1^st affidavit, and inconsistent with the apparent suggestion of Mr Ong that the notes reflected some agreement entered into between him and the petitioner, which was consciously intended to restrict the circumstances in which repayment could be requested.  The notes were of course included in audited financial statements prepared after that relevant accounting period had expired, and therefore served the primary purpose of allowing the auditors to audit the financial statements on a going-concern basis, at a time when their review of the accounts suggested that the solvency of the Company might be questionable absent the kind of undertaking that is recorded in the notes.  It seems to me that in these circumstances the suggestion of Mr Ong, that he entered into an agreement with the petitioner which restricted their ability to require repayment until such time as the financial position of the Company improved from that, which presumably existed round about the time the agreement must have been made which given the date of the first loan would appear to be around about 2007, is wholly unconvincing.  I am not satisfied that a bona fide defence on substantial grounds has been established in respect of that argument. 

11.The second suggested defence is estoppel.  This is said to arise from the inclusion of a note in the 2009 financial statements. The note is Note 11, and the relevant part of that note is [3] which reads:

“The entity is owned by the directors with share capital of HK$10,000.00 only. Instead of increasing its share capital, the company’s operation is mainly sourced from the directors’/shareholders’ loan of HK$1,790,000.00 which is interest free and has no fixed repayment term. In addition, the shareholders consent to provide adequate financial support to the company and will not call for repayment of the loan account until the financial position of the company permits.”

The particular part of that paragraph which is said to give rise to the relevant representation is the final sentence.

12.Mr Ng argued that it is at least arguable that that sentence contains a representation with no time limit that the shareholders would not call for repayment during a period in which the Company required financial support.  As a consequence, even if in 2015 and 2016 the financial position of the Company had changed, and the restriction recorded in the note which I have quoted was no longer necessary, if, as he argued, the evidence indicates the financial position changed by the time statutory demand was served, the representation was engaged and the petitioner was estopped from seeking repayment. 

13.Mr Ng in his written submissions referred me to the decision of the Court of Final Appeal in Luo Xing Juan v Estate of Hui Shui See [2009] HKCFAR 1.  In that decision, the Court of Final Appeal set out the principles relating to promissory estoppel.  Mr Ng has summarised these in the following terms which I quote, as I understand them not to be contentious:

“(a) A promissory estoppel may 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.

(b) While it is necessary for the purposes of exposition to identify the separate elements of the doctrine, it should be borne in mind that when applying them to the facts, each element does not exist in its own watertight compartment to be kept separate from the others.

(c) Thus, the meaning of the words or conduct constituting the promise or assurance has to be understood in the light of the parties’ particular relationship and especially in the light of the legal rights or powers exercisable, and known to be exercisable, by the promisor.”

14.Given the fact that (i) for the purposes of assessing this suggested defence one has to assume the representation is there not because of an express agreement between Mr Ong and the representative of the petitioner, but because of a request of the auditors made for the reasons explained in their letter, I do not think it is credible to suggest that the inclusion of the statement alone constituted a clear and unequivocal promise not years later to request repayment of the loan that the petitioner had made. Precisely what was intended may be unclear, but what does seem to me to be certain is that the sentence in the note, to which I have referred, included simply to facilitate the auditors in auditing the financial statement on a going‑concern basis, is too vague and uncertain to satisfy the criteria identified and explained by the Court of Final Appeal. 

15.I am not, therefore, persuaded that Mr Ong has demonstrated that there is a bona fide defence on substantial grounds to the petition and I will, therefore, make the normal winding-up order unless the parties wish me to make some different order, and I will now hear them.

(Submissions by counsel)

16.I will make a normal winding-up order but order that the petitioner’s costs are paid on a party-and-party basis by Mr Ong, such costs to be taxed if not agreed.

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

Mr Tom Ng, instructed by Robertsons, for the opposing contributory