Addchance Ltd v. Herojoy Trading Ltd

HCMP 2/2018

[2019] HKCFI 1147

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2 OF 2018

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D E C I S I O N

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INTRODUCTION

1.On 2 January 2018, the plaintiff (“P”) took out an Originating Summons (the “OS”, subsequently amended in relation to the address of thedefendant, the “Amended OS”) against the defendant (“D”) for an injunction restraining D from presenting, taking out and advertising any winding-up petition against P based on the alleged debt of HK$20,950,000.00 (the “Alleged Debt”) as stated in the statutory demand dated 14 December 2017 (the “Statutory Demand”).

2.On 5 January 2018, upon P’s application on an ex parte basis, I granted an interlocutory injunction in terms of the OS pending hearing of the same (the “Interlocutory Injunction”).

3.On 15 May 2018, D took out a summons (the “Discharge Summons”) for an order that the Interlocutory Injunction be discharged.

4.On 10 September 2018, upon the joint application of the parties, I directed that the substantive hearings of the Amended OS and the Discharge Summons be heard at the same time.

5.Given the joint hearing of the two matters, the Discharge Summons has been rendered redundant (save possibly on costs).  If I am to dismiss the Amended OS, the Interlocutory Injunction will go too.  If I am to allow the same, the Interlocutory Injunction will be replaced by a permanent one.  I will therefore concentrate on the Amended OS.

6.The main issue before me is whether there is a bona fide dispute on substantial grounds as to whether the Alleged Debt was a genuine loan owed by P to D.

THE AFFIRMATIONS

7.On behalf of P, one of its director Mr Yeung Choi Yee (“Yeung”) has filed four affidavits.  They were filed on 2 January, 4 January, 23 July and 1 November 2018.  They will be referred to respectively as “Yeung 1^st”, “Yeung 2^nd”, “Yeung 3^rd” and “Yeung 4^th”.  Mr Yeung had been the assistant of Mr Sung Chung Kwun (“Sung”) between about 2004/2007 and 31 May 2016 when Sung left P. 

8.On behalf of D, the following affirmations have been filed:

(i) two affirmations of Ms Mok Pui Mei (“Mok”) filed on 16 April and 4 October 2018 (respectively “Mok 1^st” and “Mok 2^nd”).  Mok is a 40% shareholder and director of D;

(ii) two affirmations of Mr Wong Chiu Hong (“Wong”) filed on 16 April and 19 July 2018 (respectively “Wong 1^st” and “Wong 2^nd”).  Wong is a 50% shareholder and director of D; and

(iii) the affirmation of Sung filed on 4 October 2018 (“Sung Aff”). Sung was the founder of P and the Addchance Group (the “AHL Group”).

THE BACKGROUND FACTS

The plaintiff

9.P was incorporated in Hong Kong on 2 October 1981.  It has, through its subsidiaries in the Mainland and by providing financial resourcesto such subsidiaries, carried on the business of manufacturing dyed yarn and provision of yarn-dyeing services.

10.P was established by Sung and his wife (“Mrs Sung”) with each holding 50% of its shares.  Sung had been one of its directors from 17 October 1981 to 30 November 2015. 

11.During about 2004 and 2005, P underwent a corporate structural reform for the purpose of public listing.  Addchance Holdings Limited (“AHL”) was incorporated on 9 June 2004 in the Cayman Islands.  It becamelisted on the Stock Exchange of Hong Kong in 2005.  Since 29 August 2005, P has become an indirect wholly owned subsidiary of AHL.

12.According to Yeung[1], since the establishment of P, until 31 May 2016, the businesses of P had been operated in a traditional Chinese way, in the sense that the Sung family controlled the board of directors with Sung as the patriarch.  Although Mrs Sung and their children had also been directors of P, Sung had always been the ultimate decision maker.  If Sung gave any direction or instruction, all the other directors of P would almost invariably follow.  Even after Sung ceased to be a director of P on 30 November 2015, there had been no change in terms of management and decision making in P until 31 May 2016 when the last Sung family member on the Board of P left.  During that period, Sung still had the same office at the headquarters of the AHL Group, remained as one of the bank signatories of P (where only one signature was required for issuing cheques, transferring funds, etc and there was no limit to the amount) and remained as the ultimate mastermind.  Yeung described Sung as a shadow director of P during that period.

13.Yeung said [2] that until Sung left P on 31 May 2016, whether before or after the listing of AHL in 2005, Sung had treated the businesses of P as if they were his own personal businesses. 

The defendant

14.Around the same time when the said corporate structural reformof P took place, a discretionary trust (the “Employees’ Trust”) for the benefit of certain designated employees of the AHL Group was set up.  It was set up by Sung as the settlor.  He was however not one of the beneficiary staff.  The initial “trust fund” were 33,000,000 shares in AHL (“the 33m AHL Shares”).  They were contributed by Sung without consideration in return. 

15.For the purpose of that trust, D was incorporated in the BVI. It was the corporate vehicle through which the 33m AHL Shares were held. The whole of its shares, and in turn the 33m AHL Shares, were subject to that trust.  D’s sole business activity was to administer the Employees’ Trust. Its only connection with the AHL Group was through the holding of the 33m AHL Shares.

16.A professional trustee company in the BVI, called the GZ Trust Corporation, (“GZ” or the “Trustee”) was appointed the trustee to hold the 33m AHL Shares, while Wong, Mok and Ip Siu Lam (“Ip”) were appointed the protectors.  The dispositive and administrative powers were with the Trustee.

17.At the early stage after the incorporation of D, Sung and his daughter were its directors.  Between 15 August 2008 and 16 December 2016, Sung was the sole director of D.  On that latter date, Wong, Mok and Ip were appointed directors.  

18.Under the trust documents which governed the Employees’ Trust, Sung had no dispositive or administrative power.  This is not in dispute. Parties however disagree as to the degree of actual influence Sung had over D’s affairs.  Mr Dawes SC pointed to the fact that Sung had for a long periodbeen the sole director of D. My attention has also been drawn to page 98 of the 2015 Annual Report of AHL, which stated that “[Sung] has controlling interests in [D].”  I note that even D does not suggest that Sung had no influence at all over the affairs of D.  It only says that his say was not decisive: 

(i) Mok at §15 of Mok 1^st said that:

“ The major task of [D] before the termination of the [Employees’Trust] was to administer the annual or bi-annual distribution of dividend received from [the 33m AHL Shares]. As it related to what incentive to be given to which deserving staff, [Wong], myself and [Ip] always sought [Sung’s] opinion before deciding on the distribution. That is not to say that [Sung] dictated over the business of [D].”

(ii) Ms Chan at §16 of her Writing Submissions submitted that:

“ … even though Sung was initially one of the directors and at later stage the sole director of [D], his wishes or words were not decisive.”

The intended duration of the Employees’ Trust, and its termination

19.The Employees’ Trust was to last for 10 years from 2005 when AHL was listed. During that period, only income dividends from the 33m AHL Shares would be distributed (and some dividends had in fact been declared and distributed).  The shares themselves could only be distributed after the expiry of that 10-year period.

20.On 7 December 2009, the Employees’ Trust was terminated.  That was earlier than intended, and was due to the closure for business of GZ.  No replacement professional trustee had been engaged.  For the termination, GZ executed a Deed of Appointment dated 8 December 2009.  50% of the 33m AHL Shares were appointed thereby to Wong, 40% to Mok, and 10% to Ip.  The shares were appointed to them “absolutely freed and discharged from the trusts of the Trust”. 

21.The parties disagree as to the effect of that termination:

(i) as stated at §15.4 of Mr Dawes’ Written Submissions, P’s case is that the Deed of Appointment did not terminate the Employees’ Trust as a matter of law.  Wong, Mok and Ip in fact became the new trustees in place of GZ, and as such they were duty bound to exercise their discretion in the proper distribution of the 33m AHL Shares to the interested employees of AHL;

(ii) according to Mok[3], D’s position is that the Employees’ Trust had been terminated, that by the Deed of Appointment the 33m AHL Shares belonged to Wong, Mok and Ip absolutely, but that they “decided to honour as much as possible [Sung’s] intention to give monetary incentive to the designated beneficiary employees of the AHL Group.”

22.According to Mok[4], between 3 December 2010 and 5 December 2010, the 33m AHL Shares were sold to take advantage of a market price hike.  The net proceeds received were HK$41,794,559.31.  Out of those proceeds, sums in the total amount of HK$20,538,180 were distributed in January 2011 to 33 beneficiary employees in two lots.  The balance, as we shall see, and according to D’s case, was subsequently used by D to finance a loan to P, which alleged loan would become the subject-matter of this action.

23.As to Sung’s role at this stage, Mok said [5] that:

“ [Wong], myself and [Ip] continued to seek [Sung’s] opinion for distribution of the capital of [the 33m AHL Shares] even after the termination of the [Employees’ Trust] as we were mindful of the fact that these shares originated from [Sung], who out of his good intention, set aside certain assets for distribution among staffs of the AHL Group as reward for their years of hard work. We did so notwithstanding of our awareness of our legal ownership of [D’s] shares through which we had absolute control over [the 33m AHL Shares].”

The Alleged Loan

24.Those parts of Mok’s evidence [6] dealing with how she said an alleged loan (the “Alleged Loan”) was made by D to P are important.  It is the alleged failure on the part of P to fully repay this Alleged Loan which gave rise, according to D’s case, to the Alleged Debt.  Mok’s evidence in this regard is as follows:

“ 18. After the part distribution of the capital by [D] to beneficiary employees in January 2011, the next task of [D] wasto make final distribution of the remaining of HK$21,256,379.31of the net proceeds from the sale of [the 33m AHL Shares] in 2015 which was the 10^th anniversary of the listing of the AHL Group. The timing of the final distribution was in accordance with the original intention of the [Employees’ Trust]. During the interim,the remaining net proceeds of the sale of [the 33m AHL Shares] was left idle in the bank.

19. On 14 December 2010, [Wong], myself and [Ip] as shareholders of [D] approved an application by [P] for an advancement of Loan by [D] (‘the Loan Application’). This is now produced and shown to me ‘MPM-17’ a copy of a Minutes of a Shareholders’ Meeting on 14 December 2010 (‘the Shareholders’ Minutes”). As recorded in the Schedule attached to the Shareholders’ Minutes, the terms of the Loan was for a sum of HK$26,000,000 (‘the Loan’) repayable on demand without interest.

20. It should be noted that the Loan was not approved lightly by [D]. For the purpose of granting the Loan, [D] had carefully examined its corporate power and requirements of its Articles ofAssociation. The dual capacity of [Sung] as a director of [D] and[P] were noted at the time [D] approved the Loan. So far as I canrecall, Miss Agnes Fung, the Financial Controller and Company Secretary of [P] might have been consulted over the drafting of the Shareholders’ Minutes.

21. After the approval of the Loan, part of the Loan in the sum of HK$2,000,000 was advanced on 15 December 2010 by cheque No.209…The remaining HK$24,000,000 was advancedon 29 December 2010 by 4 cheques deposited into different bank accounts of [P] ….

22. The Loan was granted at the request of [Sung] on behalf of [P]. At the time, [P] was experiencing cash flow problems and needed the cash [D] had in spare to help ease its difficulties.

23. When receiving part of the Loan in the sum of HK$24,000,000 on 29 December 2010, [P’s] accounting staff requested it to be deposited into particular bank accounts of [P] so as to do away with any delay caused by internal bank transfers within the AHL Group. To the best of my memories, the four bank accounts that received the Loan were bank accounts of [P].

24. It is my belief that the moment the Loan was advanced to the 4 different bank accounts of [P], the money was utilized immediately for repaying bank loans or other credit facilities.”

25.The Shareholders’ Minutes contained the following relevant paragraphs:

“ 1. IT WAS NOTED THAT:-

[P] had applied to [D] to advance a loan upon the terms set out in the Schedule.

2. IT WAS UNANIMOUSLY RESOLVED as follows:

(a) that it was in the interest of [D], to its benefit and in furtherance of its objects, that [D] accept and advance the Loan to [P] and that the same be and is hereby approved;and

(b) that [D] agrees with [P] to pay the Loan to [P] and, in this respect, make disclosure and do such other things asmay deem necessary and proper in connection therewith;and

(c) any action taken by [Sung], Director prior to the meeting in connection with the Loan be ratified and confirmed.

3. There being no other business the meeting was declared closed.”

26.Mok said that P had made a partial repayment in the total sum of HK$5,050,000.  The balance is what this Court is now concerned with.  She said [7] that:

“ The [Alleged Loan] was advanced in December 2010. In 26 January 2011, the [Alleged Loan] was partly repaid in HK$5,050,000 (the Herojoy Payments). The Herojoy Payments were in fact repayment of the [Alleged Loan] requested by [D]. The reason for the repayment was to enable [D] to retain about 50% of its capital i.e. the net proceeds of the sale of [the 33m AHL Shares] for final distribution of the capital. Upon receipt of the Herojoy Payments, the same was distributed to eligible employees on or about 31 January 2011.”

HCA 64/2017

27.On 11 January 2017, D took out a Writ against P in HCA 64/2017(“HCA 64/2017”).  A Statement of Claim (the “SOC”) was indorsed thereon:

(i) D pleaded at §3 that:

“ By agreements in or about 14^th December 2010 made by resolutions of the Board of Directors/Shareholders, [P] advanced to [D] by way of loan the sum of HK$26,000,000.00 which was repayable on demand but without interest by drawing 5 cheques in favour of [D] as follows …”

The numbers, dates and amounts of five cheques were then pleaded;

(ii) a written demand dated 12 September 2016 for repayment of the balance of HK$20,950,000 (ie the Alleged Debt) was pleaded (§4);

(iii) it was then pleaded (at §5) that despite further repeated requestsand demands, P had failed and refused to repay the Alleged Debt.

28.P’s Defence and Counterclaim was dated 22 May 2017 (“D&C”):

(i) Sung was joined as the 1^st defendant by Counterclaim.  The background of P, including the corporate structural reform leading to the incorporation of AHL, the Employees’ Trust and its termination, and Sung’s directorship in P were pleaded (§§2 – 4);

(ii) It was pleaded that in Sung’s capacities as P’s director (from 17 October 1981 to 30 November 2015) and P’s shadow director (from 30 November 2015 to 31 May 2016), Sung owed P fiduciary duties (§5);

(iii) In respect of the Alleged Loan:

(1) At §7.1, P pleaded that:

“ In breach of trust and/or fiduciary duties, [Sung] misappropriated from [P] or wrongfully allowed, caused and/or procured [P] to pay to himself an aggregate amount of HK$26,000,000 in 2010, the particulars of which are as follows.”

Particulars of seven payments alleged to have been made by P to Sung between 8 January 2010 and 20 July 2010 in the total amount of HK$26 million were then pleaded (the “Alleged Misappropriated Funds”);

(2) At §§7.2 and 7.3, P pleaded that:

“ 7.2. In December 2010, [Sung] caused HKS26,000,000 to bepaid by [D] (as [Sung’s] nominee/agent) to [P] (as particularised in paragraph 3 [of the SOC]) to settle his debt against [P] arising out of the Misappropriated Funds;

7.3 At the relevant time, both [P] and [D] were under the control of [Sung];”

(3) Hence, in gist, P’s pleaded defence in this regard was that the Alleged Loan was not loan but was repayment of funds which Sung had misappropriated from P.  P was therefore not under any contractual obligation to repay the Alleged Loan to D;

(4) At §§7.4 and 7.5 of the D&C, P pleaded the 2010 account ledger of Sung’s director current account with P (“Sung/P 2010 C/A”).  It was pleaded that the way the Alleged Misappropriated Funds and the Alleged Loan were recorded and posted showed that “they were contemporaneously treated as transactions purely between [P] and [Sung]”. It was further pleaded that “By 31 December 2010, [Sung’s] current account with [P] showed a zero balance”;

(iv) In respect of the Herojoy Payments of HK$5,050,000:

(1) P pleaded at §§8 and 9 that:

“ 8. On 26 January 2011, in breach of trust and/or fiduciary duties, [Sung] wrongfully allowed, caused and/or procured [P] topay to [D] an aggregate amount of HK$5,050,000, the particulars of which are as follows …

9. On 21 June 2011, [Sung], for and on behalf of [D], paid an aggregate amount of HK$5,050,000 (i.e. HK$2,550,000 and HK$2,500,000) to [P] to settle [D’s] debt against [P] arising out of the Herojoy Payments.  At the relevant time, both [P] and [D] were under the control of [Sung].”

(2) At §10, P pleaded the 2011 account ledger of Sung’s director current account with P (“Sung/P 2011 C/A”). Similar to the Alleged Loan, P pleaded that those payments “were contemporaneously treated as transactions purely between [P] and [Sung]”;

(3) In gist, P’s defence in respect of the Herojoy Payments was that they were not partial repayment of the Alleged Loan at all.

29.I will return to the Sung/P 2010 C/A and Sung/P 2011 C/A later.

30.On 5 July 2017, D filed its Reply and Defence to Counterclaim (“D’s Reply and Defence to Counterclaim”).  Issues were joined:

(i) In respect of §§7.1 – 7.5 of the D&C, D pleaded at §10 that:

“ Paragraphs 7.1, 7.2, 7.4 and 7.5 are not admitted. At the time of [sic] the Loan was approved on 14 December 2010, the shareholders of [D] had no knowledge that the Loan would be treated by [P] in the manner set out in paragraphs 7.1, 7.2, 7.4 and 7.5. Subsequent to the approval of the Loan, the shareholders had no knowledge of the Loan being treated in the manner set out in paragraphs 7.1, 7.2, 7.4 and 7.5. Matters set out in paragraphs 7.1, 7.2, 7.4 and 7.5 are matters of internal accounting treating of the Loan by [P] for which [D] could not control. Save that at the time of the advancement of the Loan, Sung was director or both AL and Herojoy, paragraph 7.3 is denied.”

(ii) Similarly, in respect of the Sung/P 2011 C/A, D pleaded (at §12) that it related to matters of internal account treatment of the Alleged Loan by P which D had no knowledge of.

31.Sung filed his Defence to Counterclaim on 4 December 2017 (“Sung’s Defence”):

(i) He denied that he had breached any fiduciary duties he owed to P;

(ii) He pleaded that there had been mutual or cross advances of funds between him and P, and that “All those transactions have been properly accounted for in [Sung’s] current account in [P’s] books” (§9(2));

(iii) As at 31 December 2009, P was indebted to Sung in the sum of approximately HK$27.16 million (§9(3));

(iv) In 2010, there were similarly such mutual advances.  Sung admitted that amongst the advances from P to him that year (in the total sum of about HK$63 million), there were those seven sums (in the total of HK$26 million) pleaded by P as the AllegedMisappropriated Funds. He pleaded that they were repayments by P.  He pleaded further that in 2010, he had also advanced to P about HK$59.43 million, so that at year end, P remained indebted to him in the sum of about HK$23.59 million (§§9(4) – 9(6));

(v) In respect of the Alleged Loan, he pleaded that at §§9(7) – 9(9) that:

“ (7) In December 2010, [D] made a payment in the sum of HK$26,000,000 to [P].

(8) Probably due to the background of the [Employees’ Trust],such payment by [D] to [P] was mistakenly recorded in [Sung’s] current account as credit balance in [P’s] books.

(9)   Notwithstanding the background of the [Employees’ Trust],given that [D] and [Sung] are separate legal entitles, the payment from [D] should not have been recorded as credit balance of [Sung’s] current account in [P’s] books.”

(vi) In respect of the Herojoy Payments, Sung similarly averred (at §§10 and 11) that they were in fact part repayment of the Alleged Loan, and that:

“ Probably due to Trust Arrangement as set out above, such repayment by [P] to [D] was mistakenly recorded in [Sung’s] current account as debt balance in [P’s] books.”

(vii) Sung then pleaded that the accounts of P were in 2015 corrected(which he referred to as the “Correction”, which term I adopt),and how he started HCCW 47/2017 (“HCCW 47/2017”) against P after the Correction.  His relevant averments are as follows:

“ 12. …

(1) In or about 2015, it came to [Sung’s] knowledge that the transaction as between [D] and [P] were recorded through his current account with [P];

(2) As mentioned, given that [D] and [Sung] are separate legal entities, the payment from and to [D] should not have been recorded as transactions between [D] and [Sung];

(3) Against such backdrop, [Sung] caused the current accounts of himself and [D] to be updated, with the transactions relating to [D] be taken out and dealt with separately (‘the Correction’).

…

16. …

(2) Before the Correction was carried out in 2015, the transactions as between [P] and [D] were mistakenly recorded in [Sung’s] current account. Since 2015, the transaction between [P] and [D] has already been separately accounted for.

(3) On 15 December 2016, [Sung] presented a statutory demand to [P] in support of the outstanding owing by [P] to [Sung] in the sum of HK$29,050,000.

(4) On 27 January 2017, [Sung] presented a Winding-up Petition as against [P] under action no. HCCW 47/2017.

(5)   Pursuant to the Order of the Deputy High Court Judge Le Pichon dated 19 October 2017 in HCCW 47/2017, [P]made a payment to [Sung] in the sum of HK$29,050,000 being the petitioning debt.”

32.As at today, HCA 64/2017 remains pending, and has not been completed.

The Statutory Demand

33.According to Yeung[8], D served the Statutory Demand upon P on 18 December 2017.  According to the Statutory Demand, the Alleged Debt was said to have been incurred on 15 and 29 December 2010, that it was interest free, and that the amount due was HK$20,950,000.

34.There is no dispute between the parties that the Alleged Debt is the same as the subject matter in HCA 64/2017.

P’s application for the Interlocutory Injunction, and its case

35.On 5 January 2018, P came before me on an ex parte basis for the Interlocutory.  It was supported by Yeung 1^st. As I have said in paragraph 2 above, having heard leading counsel for P, I granted the Interlocutory Injunction.

36.P’s case for the Interlocutory Injunction (and now for the permanent injunction), as stated in Yeung 1^st, was primarily the same as its case pleaded in the D&C in HCA 64/2017.

37.In terms of documents, and on top of the Sung/P 2010 C/A and Sung/P 2011 C/A, Yeung in Yeung 1^st pointed to certain entries in the 2010 and 2011 Audited Financial Statements of P (“AFS/2010” and “AFS/2011” respectively) which were inconsistent with the existence of the Alleged Loan.  He stated that:

“ By 31 December 2010, [Sung’s] current account with [P] showeda zero balance. According to the [AFS/2010], nothing due to [D] was recorded …” [§24(5)]

“ As shown in the Directors’ Report in the [AFS/2010], the then directors of [P], including [Sung] and [Wong], did declare and confirm that ‘no contracts of significance, to which [P], its holding companies, fellow subsidiaries or subsidiaries was a party and in which a director of [P] had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.’” [§24(6)]

“ As shown in the Independent Auditor’s Report in the [AFS/2010],it was stated that ‘the directors of [P] are responsible for the preparation of the financial statements that give a true and fair view…and for such internal control as the directors determine isnecessary to enable the preparation [of the] financial statements that are free from material misstatement, whether due to fraud or error.’ It was also the independent auditor’s opinion that the [AFS/2010] gave a true and fair view of the state of affairs of [P].” [§24(7)]

Yeung similarly (at §§27 – 29) pointed to the AFS/2011 and said that for theyear ended 31 December 2011, nothing was shown to be due by P to D, that no connected transaction was disclosed, and that the independent auditor confirmed that AFS/2011 gave a true and fair view of the state of affairs of P.

Mok 1^st

38.Mok made Mok 1^st on behalf of D in opposition.  Mok 1^st is a 30-page long affirmation.  The most relevant parts of her evidence may be summarized as follows:

(i) She gave quite some details on the background of D, its business, its operation and the termination of the Employees’Trust (§§5 – 17);

(ii) She stated how the Alleged Loan was advanced (§§18 – 24).  I have set out her relevant evidence in this regard above;

(iii) She claimed that at the time of the Alleged Loan, P was short of cash, and was in need of financial subsidies.  She pointed to some entries in the AFS/2010 in an attempt to illustrate that point (§§25 – 30);

(iv) She referred to Sung’s Defence which she sought to confirm. She referred to HCCW 47/2017 and the settlement by P of that claimed amount and made various observations and comments thereon (§§31 – 37);

(v) In respect of the Sung/P 2010 C/A and Sung/P 2011 C/A she said that:

“ I have no idea how the Loan came to be recorded in the manner shown in these company ledgers. [Sung] in [Sung’s Defence] explained that it was due to mistake …” [§38]

“ … The mistake mentioned by [Sung] is understandable. The [33m AHL Shares] held by [D] were originated from [Sung]. Any layman could easily labour under the misconception that because the trust fund came from [Sung] the fund reverted back to [Sung] upon termination of the [Employees’ Trust].” [§40]

(vi) She said that the sums totaling HK$5,050,000 were repayment of the Alleged Loan (§§41 – 42).  I have set out her relevant evidence in this regard above;

(vii) In respect of the Sung/P 2011 C/A, she repeated Sung’s assertion in Sung’s Defence that it was a mistake.  She asserted (at §43) that:

“ The mistake, in my view is understandable as the responsible account might have mistaken the money from [D] as [Sung’s] money without having fully comprehend the legal effect of a trust and its termination.”

(viii) She then referred to the Correction and said that P had in 2016 made admissions about the Alleged Loan:

“ 44. … The remaining of the sale proceeds in the sum of HK$21,256,379.31 should be finally distributed among the designated beneficiary employees in about 2015. Our concern about the final distribution of the remaining proceeds todesignated beneficiary employees was communicated to [Sung]. It was about time to sort out the repayment of the balance of Loan so that the final distribution could be carried out.

45. It must be out of our concern over the repayment of the balance of the Loan so as to enable the final distribution to the beneficiary employees that the management accounts were looked at and wrong entries about the Loan were discovered and put right. In any event by a letter dated 9 February 2016 and another letter dated 6 September 2016, [P] admitted the balance of Loan and sought confirmation from [D] of exact amount outstanding as at 31 December 2015 and 31 July 2016. There are now produced and shown to me ‘MPM-21’ copies of the said two letters. These two letters had the company chop of [P] and so were likely to have been issued by Sandra Lam Yuen Man ([P] Accounts Manager) or Dorothy Cheng Yee ([P’s] Accountant) on the instruction of Agnes Fung ([P’s] Financial Controller) for the purpose of clarifying the outstanding Loan at HK$20,950,000 to Deloitte Touche Tohmatsu, the auditor appointed by AHL …

46. The balance of the Loan was further admitted in the 2015 Annual Report of AHL (‘the 2015 Annual Report’) which was published on 31 March under Note 27 …”

Yeung 3^rd

39.Yeung made Yeung 3^rd in reply.  The most relevant parts of Yeung 3^rd may be summarized as follows:

(i) He disputed Mok’s evidence that the financial position of P was such that it required the Alleged Loan.  He produced the full version of AHL’s 2010 Annual Report.  He made reference to the overall financial position of the AHL Group.  He also highlighted the proposed declaration of dividends in that financial year.  He stated that “Once one takes the correct approach in assessing [P’s] financial strength and liquidity, one can easily see that there is absolutely no need for [P] to borrow money, let alone borrowing money from [D].” [9];

(ii) In respect of the settlement of HCCW 47/2017, which he confirmed, he said that the settlement sum “has nothing to do with any transfers in 2010 and 2011” [10];

(iii) In respect of the Correction and admissions which P was alleged to have made, he said:

“ 52. In the 2015 Annual Report, it can be seen that no prior year adjustment and/or restatement in respect of the purported Loan of HK$26 million has been made. Rather, it simply recorded that HK$20,950,000 was owed to [D] and it clearly indicated that this amount was nil in 2014 …

53. As such, I verily believe that the adjustment made in 2015 is not really made as a result of the spotting of errors; otherwise a prior period correction or restatement would have been made. It is, rather, just a baseless and arbitrary reclassification. Back then, I, while a director of [P], did not notice this reclassification,and indeed my attention has not been drawn to it.

54. In this connection, it must be noted that in 2015, the new management and board of directors significantly relied on the former management, in particular [Wong] and Ms Agnes Fung.

55. I verily believe that the two letters exhibited in ‘MPM‑21’ were prepared by Ms. Agnes Fung or Ms. Dorothy Cheng without the involvement of the new management. Indeed, those letters only bear the Company’s chop without any authorized signatures.  At the material time, the chop was kept by Ms. Dorothy Cheng.”

Sung Aff

40.The most relevant parts of Sung Aff may be summarized as follows:

(i) He confirmed that he had been a director of P up to 31 November 2015 and the Executor Director of AHL up to 31 May 2013.  After he stepped down, he continued to act as consultant to the AHL Group until May 2016 [11];

(ii) He essentially sought to confirm what he had pleaded in Sung’s Defence;

(iii) Specifically in respect of the Alleged Loan, he said at §8 that:

“ In about December 2010, [P] was experiencing cash flow problemand requested [D] for an interest free loan of HK$26,000,000 to berepayable by [P] on demand (‘the Loan’). The Loan was approved by the shareholders of [D] on 14 December 2010 and advanced in the manner that would meet the immediate need of [P]”;

(iv) Specifically in respect of the alleged mutual or cross advances between him and P, he said that:

“ 10. As the founder of [P] and the AHL Group and their Director or Executive Director, I did from time to time advance money to [P] as unsecured interest-free loan for its operation needs. At the same time, [P] also advanced money to me or make payments on my behalf. All these transactions were properly accounted for in [P’s] books.

11. As a result of the cross loans between myself and [P], as of 31 December 2009, [P] was indebted to me in the sum of approximately HK$27,160,000.

12. In the year of 2010, I advanced a total of approximately HK$59,430,000 to [P] and [P] advanced to me approximately HK$63,000,000.  Taking into account the HK$27,160,000 [P] owed me by end of 2009, [P] was still indebted to me by HK$23,590,000 by end of 2010.  There are now produced and shown to me marked exhibit ‘SCK-1’ copies of the records of my advancements to [P] in 2010 and a table setting out the relevant transactions between [P] and me since 2009 prepared by the account staff back then.”

(v) I note that apart from the table (the “Breakdown List”), the “records” produced by Sung comprised just copies of a number of cheques issued by him to P as the payee;

(vi) Similar to Mok, he pointed to two audit confirmation letters of 9 February 2016 and 19 October 2016 in which P was said to have admitted the total amount of debts it owed to him[12];

(vii) He referred to HCCW 47/2017 and stated that the proceedings were on 19 October 2017 settled by P agreeing to pay him in full the claimed sum of HK$29.050,000;

(viii) In respect of Sung/P 2010 C/A and Sung/P 2011 C/A, he said at §22 that:

“ I do not know why the receipt of the Loan (HK$26,000,000) in December 2010 and the payment to [D] in January 2011 (HK$5,050,000) were entered in [P’s] current account between me and [P]. It might be a mistake due to the background of the [Employees’ Trust] and money coming from [D] was misunderstood to be money coming from me. Correction were duly made and the AHL Annual Report for the financial year ending 31 December 2015 reflected the correct indebtedness of [P] to me and [D] respectively in the sums of HK$29,050,000 and HK$20,950.000.”

Yeung 4^th

41.In Yeung 4^th, Yeung pointed out [13] that the two confirmation letters relied upon by Sung only bore P’s company chop without any authorized signature.  In respect of the settlement of HCCW 47/2017, he said at §18 that:

“ As to HCCW 47/2017 …, this action has been settled and [P] has fully paid the HK$29,050,000 to [Sung]. I have been advised and verily believe that this does not have any impact on [P’s] merits in the present action.”

THE APPLICABLE LEGAL PRINCIPLES

42.The law as regards an application for an injunction to restrain the presentation of a winding up petition was summarized by Chow J in Re Grande Holdings Ltd HCMP 2369/2017 (unreported, 22 December 2017) at paragraph 14, that:

“ (1) The court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of the court’s process.

(2) It is an abuse of process to present a winding-up petition based on a claim of which there is a bona fide dispute on substantial grounds.

(3) The threshold for resisting a petition (requiring proof of a bona fide defence) is higher than that for resisting an application for summary judgment (requiring proof of a fair probability of establishing a bona fide defence), but the difference between the two tests is, in most cases, likely to be more a matter of semantics than substance.

(4) Petitions are not meant for the purpose of debt collection and the winding-up jurisdiction of the court would be exercised only in clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition.

(5)   The onus is on the company to put forward credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at the trial.”

43.On the court’s approach where a debt is said to be bone fide disputed on substantial grounds, Peter Ng J explained in Re Hong Kong Investments Group Ltd [2018] HKCFI 984 (at paragraph 13) as follows:

“ In the context of a winding-up petition, the court’s approach where a debt is said to be bona fide disputed on substantial grounds can be summarized as follows:

(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 andunparticularized 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.”

44.I will apply the above principles to the facts of this case.

THE PARTIES’ SUBMISSIONS

45.On behalf of P, Mr Dawes submitted that there is clearly a bona fide dispute on substantial grounds as to whether the Alleged Loan was a genuine loan owed by P to D.  P’s case, as summarized by him, is that the Alleged Loan arose out of sums misappropriated by Sung from P, that the sum was subsequently transferred back to P (from D) at Sung’s direction, and that there is therefore no basis for D’s claim.  He submitted that the use of statutory demand (and winding-up proceedings) to resolve the dispute is therefore an abuse of process.

46.When advancing P’s case, Mr Dawes relied principally on the Sung/P 2010 C/A, Sung/P 2011 C/A, AFS/2010 and AFS/2011 which are inconsistent with the existence of the Alleged Loan.  He pointed to the pleadings in HCA 64/2017 and submitted that the nature of the claim was such that the use of winding-up proceedings amounted to an abuse.  In respect of the evidence of Mok and Sung that those accounts and financial statements were the results of mistakes committed by P’s accounting staff, Mr Dawes submitted that Sung had never given any credible explanation as to how the mistakes came about and got to be discovered.  In respect of the “admission” made in the 2015 Annual Report, Mr Dawes submitted that that was the first time when the Alleged Loan was publicly disclosed, but that no explanation had been proffered as to why and under what circumstances P made the alleged admissions five years after the event.

47.Ms Chan relied on the 2015 Annual Report and the various audit confirmations in 2015 and 2016 which supported the existence of the Alleged Debt.  She relied heavily on the audit confirmation dated 6 September 2016 which was issued at a time when Sung had left P.  She also relied heavily on the Breakdown List and the settlement of HCCW 47/2017.  She submitted that in the light of the evidence, which she had gone into in detail, P had failed to adduce sufficiently precise factual evidence to discharge the “very onerous” [14] burden of showing that there is a bona fide dispute on substantial grounds as to whether the Alleged Loan was a genuine loan owed by P to D.

CONSIDERATION OF THE EVIDENCE

48.I remind myself at the outset that this Court does not, and ought not attempt to, try the dispute on affidavit. The task before the Court is to decide whether a substantial dispute exists, and more specifically whether there is a bona fide dispute on substantial grounds as to whether the Alleged Loan was a genuine loan owed by P to D.

49.One highly unusual feature of the present case is the existence of two sets of accounting documents each supporting a different conclusion.

50.The first set of accounting documents is contemporaneous to the Alleged Loan.  They comprise principally the Sung/P 2010 C/A, AFS/2010, Sung/P 2011 C/A and AFS/2011.  They support P’s case.  As summarized by Mr Dawes[15], in Sung/P 2010 C/A the Alleged Misappropriated Funds and the subsequent repayment from D were contemporaneously treated as transactions purely between P and Sung, such that the account at year end showed a zero balance.  Further, contrary to what has been claimed by Sung at §11 of Sung Aff (that P owed him the sum of approximately HK$27,160,000 as of 31 December 2009), no amount was brought forward from 2009 to 2010.  The Alleged Loan was further not shown on the AFS/2010.  The Sung/P 2011 C/A and AFS/2011 are similarly inconsistent with D’s case based on the Herojoy payments of HK$5.05 million.

51.One can immediately see that the basis of P’s case is not any “unsubstantiated and unparticularized assertions.”  P’s case is supported by a set of contemporaneous accounting documents prepared by P when P was controlled by Sung, and when Sung was the sole director of D.

52.Mok has referred to the Shareholders’ Minutes.  She said that the shareholders “approved an application by [P] for an advancement” [16] and that “The Loan was granted at the request of [Sung] on behalf of [P]” [17]. However, apart from those assertions, no particulars have been given as to how Sung requested the Alleged Loan, when the request was made, or to whom it was made.  No documentary record (except the Shareholders’ Minutes) has been produced.  Sung has similarly provided sparse details as to how the Alleged Loan was allegedly requested by him and advanced to P [18].  

53.Importantly D has not sought to dispute the authenticity of the Sung/P 2010 C/A or Sung/P 2011 C/A.  Rather, D’s case is that they “might be” the results of mistakes.  I use the words “might be” and put them in quotation marks deliberately, because even D cannot say for sure:

(i) In D’s Reply and Defence to Counterclaim, D pleaded that “Subsequent to the approval of the Loan, the shareholders [of D] had no knowledge of the [Alleged] Loan being treated” in the way as the Sung/P 2010 C/A or Sung/P 2011 C/A had;

(ii) In Sung’s Defence, the word “probably” was used [19];

(iii) In Mok 1^st, she said “I have no idea how the Loan came to be recorded in the manner shown” [20] though she claimed at §40 that “the mistake mentioned by [Sung] is understandable.”;

(iv) Equally, in Sung Aff at §22, Sung said that “I do not know…It might be a mistake due to the background of the [Employees’Trust]…”

54.The state of the books apparently remained as what they had been until 2015.  In Yeung 3^rd, he produced [21] the available confirmation forms signed by Sung, Mok, Wong and Ip to the auditor for the financial years of 2010 to 2015.  In none of them was the Alleged Loan disclosed. 

55.Then, according to D’s case, the Correction was effected.  And then followed the second set of accounting documents.  It comprises principally the 2015 Annual Report and the several audit confirmations issued by P.    

56.I note however that the evidence from D as to how the alleged mistakes in the books were discovered is vague at best:

(i) Mok said that it “must be out of our concern over the repayment of the balance of the Loan so as to enable the final distribution to the beneficiary employees that the management accounts were looked at and wrong entries about the Loan were discovered and put right.” [22] (emphasis added)

(ii) For Sung:

(1) he pleaded in Sung’s Defence that “In or about 2015, it came to [Sung’s] knowledge that the transaction as between [D] and [P] were recorded through his current account with [P]”.  No facts have been pleaded as to how the matter allegedly came to his knowledge;

(2) in Sung Aff, all he has said was that “… Correction were duly made and the AHL Annual Report for the financial year ending 31 December 2015 reflected the correct indebtedness …” [23];

(iii) There is further no evidence as to what prior year accounting treatment, adjustment or restatement had been or should have been effected by P to put right those alleged mistakes that had for five years been in the books of a listed group.  On the evidence, the Alleged Loan simply got disclosed publicly for the first time in 2015.  I note in this regard that while the Alleged Loan was disclosed in the 2015 Annual Report (against the item of “Amount due to a related company” and in Note 27), the comparative figures of that same item in that same report for the previous year of 2014 indicated that the corresponding balance was nil.  In my view, there is some weight in Yeung’s belief, as set out at §53 of Yeung 3^rd, that “the adjustment made in 2015 is not really made as a result of the spotting of errors; otherwise a prior period correction or restatement would have been made.  It is, rather, just a baseless and arbitrary reclassification.”  

(iv) I agree with Mr Dawes that this is an area that the Court may need the assistance of an expert.

57.In respect of the audit adjustments, I note, as has been pointed out by Mr Dawes, that whilst they bore the chop of P, none of them bore any authorized signature.  I note further that there is no evidence as to who authored those letters.  I also cannot ignore Yeung’s evidence at §§54 – 55 of Yeung 3^rd that in 2015, the new management and board of directors significantly relied on the former management, and his belief that MPM‑21 were prepared by Agnes Fung or Dorothy Cheng without the involvement of the new management.

58.Relying on a number of authorities [24], Ms Chan submitted that “Confirmation/acknowledgement of loan by debtor company in the form of statement of accounts, acknowledgement by financial controller and correspondence exchanged between parties had been held to be solid evidence in support of the debt alleged” [25]. I do not doubt that that can be the case.  But as I have observed above, one highly unusual feature of this case is the presence of two inconsistent sets of accounts each pointing towards a different conclusion.  In none of those cases cited by Ms Chan did this highly unusual feature exist.

59.I have also considered the Breakdown List which Ms Chan relied on heavily.  Sung said at §10 of Sung Aff that all the cross advances between P and him had been “properly accounted for in [P’s] books”.  But no such proper accounts have been produced.  Exhibit “SCK-1” which he produced at §12 of Sung Aff comprised, as I have noted above, only copies of cheques and the Breakdown List.  The Breakdown List however does not take the form of any formal accounting ledger.  Its authorship is unknown.  It is not suggested to be a contemporaneous record.  It contains handwritten marks which state of affairs, as I commented in the course of the hearing, is unsatisfactory.

60.Related to the Breakdown List is the settlement of HCCW 47/2017.  Ms Chan submitted that the settlement of that action and the payment by P to Sung of the overall balance shown on the Breakdown List suggested that even P accepted the accuracy of the same, which contents were inconsistent with P’s case and the Sung/P 2010 C/A or Sung/P 2011 C/A.  In this regard, Mr Dawes submitted that in general parties settle cases for different reasons.  Whether P has in fact accepted the contents of the Breakdown List is a matter for trial.  He submitted further that the settlement of HCCW 47/2017 may in any event only open up a question of issue estoppel against P.

61.In the way as argued by Ms Chan, the Breakdown List is one piece of evidence which supports D’s case.  But I do not agree with Ms Chan’s submission [26] that it “would destroy” P’s case.  The evidence will have to be considered in the totality.  The crux of the matter remains this, that the Court at this stage is confronted with two sets of accounting documents each pointing towards a different direction.  Importantly, the set which supports P’s case was prepared when Sung was in control of P which businesses were, as described by Yeung, treated by Sung as if they were his personal businesses.  He was at that material time also the sole director of D.  There had apparently been mutual advances between P and Sung.  But the details of those mutual advances have not been the subject matter of any proper accounting ledger.  There is then D’s suggestion that the accounting documents which P seeks to rely on were the results of certain mistakes committed by the accounting staff.  But given the unsatisfactory evidence which I have highlighted above, I cannot, and ought not, rule on that issue on affidavit.

62.There is further the issue raised by D as to whether P was in any cash flow problem at the material time, thereby necessitating its requests for the Alleged Loan.  This is an ancillary issue, but nonetheless one that I cannot rule upon in the light of the evidence.

63.Given the evidence which I have highlighted, I am satisfied that there is a bona fide dispute on substantial grounds as to whether the Alleged Loan was a genuine loan owed by P to D.  I am also of the view that in the light of the evidence and the nature of the dispute, the attempted use of the winding-up proceedings to resolve the dispute constitutes an abuse of process.

64.For the avoidance of doubt, I state that whilst I have been looking at the evidence adduced by D, I have not lost sight of the principle that the overall onus to establish a bona fide defence is on P.  I have been examining the evidence adduced by D as part of the overall evidence to decide whether P has discharged that burden.  In the end, I am satisfied that P has.

NECESSITY OF THE INJUNCTION

65.In this regard, I accept Mr Dawes’ submission that given the substantial goodwill that P has built up worldwide in the yarn-dyeing field, the business of P would suffer serious and irreparable damage if a winding-up petition is presented against it.  I am also satisfied that the granting of the injunction sought will not leave D with no redress.  The parties would still be able to resolve their differences in HCA 64/2017 initiated by D, which is still pending.

UNDERTAKING AS TO DAMAGES

66.At §46 of his Written Submissions, Mr Dawes submitted that P continues to be willing to give the usual undertaking as to damages.  That undertaking (the “Undertaking as to Damages”) was offered by Yeung at §46 of Yeung 1^st, in the following terms:

“ If the Court finds that the injunction sought by [P] has caused loss to [D] or any other party and decides that [D] or that other party should be compensated for that loss, I have been authorized by [P] to confirm that [P] shall undertake to comply with any order that the Court may make.”

ALLEGED MATERIAL NON-DISCLOSURE

67.Ms Chan at the very last paragraph of her Written Submission made the following point, that:

“ The Breakdown List was not disclosed in the ex parte injunction hearing on 5 January 2018. This constitutes material non-disclosure that would have affected the Court’s decision when making the interlocutory injunction order. The matter should be reflected in costs order regarding the 5 January 2018 hearing.”

68.On this point, Mr Dawes pointed out for my attention that the alleged non-disclosure of the Breakdown List was never suggested in the affidavit evidence but was raised for the first time in Ms Chan’s Written Submissions.  He submitted that P must be given adequate notice with sufficient particulars so that it could understand D’s case to be advanced.  He cited in support Gee on Commercial Injunctions (6^thed) at §9-032, that:

“ A party seeking to have without notice relief discharged for non- disclosure must give adequate notice that this ground is relied upon together with sufficient particulars enabling the other party to understand the case to be advanced. An allegation of non- disclosure is potentially serious both for the other party and his legal advisers and the party complaining of non-disclosure must give sufficient notice of his complaint so that there can be a fair hearing, and should be made without unnecessary delay.”

69.I accept Mr Dawes’ submissions in this regard.  I can see that there can be cases where, due to urgency or other special circumstances, the party raising material non-disclosure may not have the opportunity to give a lot of notice about the intended challenge.  But this is not one of those cases.  D had had plenty of time to raise it.  In my view, and on the facts of this case, it is unfair to allow D to raise the point in the manner which I have described.  I refuse to entertain the point.

DISPOSITION

70.In the circumstances, for the reasons I have set out above, and upon P’s Undertaking as to Damages in the terms as recited above, I grant the injunction sought in the Amended OS.  I dismiss the Discharge Summons.

71.On the question of costs, I make an order nisi that (1) P shall have the costs of the Amended OS, including the costs of the ex parte hearingon 5 January 2018, with certificate for two counsel; (2) P shall also have the costs of the Discharge Summons; (3) all costs are to be taxed if not agreed.  Any party who seeks any variation should file its submissions within 14 daysfrom the date of this Decision, then submissions in opposition within 14 days thereafter, and submissions in reply within 7 days thereafter. 

Mr Victor Dawes SC, leading Mr Dicky Cheung and Mr Victor Lui, instructed by Wong Heung Sum & Lawyers, for the plaintiff

Ms Winnie W M Chan, instructed by Joseph P K Pang & Co, for the defendant