Re Golden Oasis Health Ltd

HCCW 236/2018

[2020] HKCFI 364

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 236 OF 2018

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D E C I S I O N

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1.On 24 August 2018 the Petitioner, Gold Swing Enterprises Limited (“Gold Swing”) issued a petition to wind up Golden Oasis Health Limited (“Company”) on the grounds of insolvency pursuant to the s327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”). The Petition is opposed by New Health Elite International Limited (“New Health”) as opposing contributory. New Health holds 61% of the Company’s share capital. The Petitioner is also a shareholder holding 20% and a third shareholder, Smart Base Properties Limited (“Smart Base”) holds the remaining 19%. The Company’s only asset and business is its 55% interest in Mega Fitness (Shanghai) Investments Limited (“Mega Fitness”), which manages and operates a chain of sports and fitness clubs in the Mainland.

2.On 26 August 2019 Anthony Chan J heard an application to stay the Petition to arbitration pursuant to an arbitration clause contained in a shareholders agreement dated 30 March 2016 made between      Gold Swing and New Health (“Shareholders Agreement”).  Chan J dismissed the application in his decision of 6 September 2019 (“Decision”). Particularly as it is now argued by Mr Suen on behalf of Gold Swing that Chan J made certain findings that are res judicata in my view the Petition should have been listed before him and I would have expected one or other of the parties to have recognised this and informed the Clerk of the Lists.

3.The background to the Petition being issued is explained in [3]–[19] of the Decision.  As Chan J explains in [7] there is no dispute that the Company owes Gold Swing $5,899,844 (“Debt”). The defence (and the remainder of this paragraph is largely taken from [3] of Mr Yu’s opening submissions) is that the Debt was an advance in the nature of either a loan or working capital and that it was an implied term of the Shareholders Agreement that none of the shareholders were unilaterally entitled to call for or pursue repayment of such advances which would prevent the performance of the Shareholders Agreement. Although, the Company is not a party to the Shareholders Agreement the Company is entitled to rely on it by virtue of s4 of the Contracts (Rights of Third Parties) Ordinance, Cap 623. Further, the court has a discretion whether to wind up the Company, such discretion being wider in the case of a petition than by a contributory, and that it should in the circumstances of this case exercise the discretion to refuse to wind up the company.

4.The defence advanced by New Health in the evidence before Chan J is the same as before me: see [12] of the Decision.  Paragraph says this:

“12. It is a central feature of NHE’s case, which is disputed, that the Company has a bona fide dispute on the nature of the Debt because ‘it has been the common understanding and implied agreement among the shareholders that the Company is a holding company with its interest in Mega Fitness as the sole material asset, and that shareholders’ loan from the shareholders to the Company (including… the [Debt]) were to be injected into Mega Fitness as capital contribution which the shareholders are not entitled to call for repayment without consent of the other shareholders’ (1^st Affirmation of Mr Gaston Lam, §38).”

5.Chan J deals with the defence in [30]–[31], [34]–[35] of the Decision.  It seems to me that on a fair reading of the Decision Chan J has rejected the defence advanced by New Health.  I did not understand Mr Yu to argue otherwise.  Mr Yu argues that Chan J’s decision did not give rise to issue estoppel, because he did not have to decide whether or not New Health had demonstrated a bona fide defence on substantial grounds for the purposes of determining the summons before him.  Is this correct?

6.In Buildtech Ltd v Hung Wan Construction Co, Ltd [1] the Court of Appeal explain the circumstances in which issue estoppel arise in [13] of the judgment of the Court (which consisted of Yeung VP and Kwan JA):

“13. The defendant apparently seeks to rely on issue estoppel here. For issue estoppel to apply, there must be a distinct determination of the court on an issue in sufficiently clear and precise terms, and the decision on the issue must be a final decision. In respect of the exercise of discretion in an interlocutory matter, this does not give rise to res judicata. Further, the rules relating to res judicata in interlocutory matters are less stringent than those generally applicable. See Re Chime Corp Ltd (No. 2) [2]; Mullen v. Conoco Ltd [3]; and Chu Hung Ching v. Chan Kam Ming & Ors [4].”

7.It is clear from the submissions and evidence filed for     the hearing before Chan J that as Mr Suen submits (and as the Decision suggests) Mr Frederick Chan on behalf of New Health argued that      New Health had demonstrated a bona fide defence on substantial grounds.  To borrow the language of the Court of Appeal it seems to me that there was a distinct determination in clear and precise terms.  As I have already observed I did not understand Mr Yu to argue that Chan J’s language in [30]–[31], [34]–[35] of his Decision did not constitute a clear and precise determination that New Health had failed to demonstrate that there was an understanding and/or implied term as alleged in [38] of Gaston Lam’s 1^st affirmation.  What Mr Yu argues is that the decision not only needs to be clear, but also in respect of a matter that had to be determined by the court in the earlier proceedings with which I agree [5].  I agree with Mr Yu that it was not necessary for Chan J to determine whether or not there was a bona fide defence on substantial grounds in order to decide the application before him.  What was in issue was whether the criteria for staying the dispute to arbitration explained in my decision in Re Southwest Pacific Bauxite (HK) Limited [6] were satisfied.  This does not require the court to determine whether or not there is a bona fide defence.

8.Chan J in his judgment makes no reference to the “bona fide defence on substantial grounds” test in his decision.  If he had thought   he was determining that question I would have expected him to have addressed the consequences for the continuation of the Petition, namely, that it only remained to consider whether there was any other ground for not winding up the Company.  Chan J did not.  In my view issue estoppel does not arise.  This leaves me in the somewhat invidious position of having to consider an issue on which as a matter of fact Chan J has expressed a clear view.

9.I have already referred to the defence that New Health argues the Company has to the Debt: see [4] above.  The loan giving rise to the Debt was made pursuant to clause 10 of the acquisition agreement by which the majority shareholder of New Health acquired a 55% interest in the Company.  Clause 10.1 provides:

“10.1 Subject to Completion, the Purchaser and the Vendor shall advance and/or contribute, in the form of sharesholders’ loans and/or in the form of paid up capital (as the case may be), of HK$11,000,000 and HK$9,000,000, respectively in accordance with their respective shareholdings in the Company on a pro rata basis immediately after Completion. If an advance is made to the Company in the form of shareholders’ loans, the terms and conditions of such shareholders’ loans shall be subject to further negotiation and agreements between the Purchaser and the Vendor provided that unless otherwise agreed, the shareholders loans shall be:

(a) unsecured;

(b) non interest bearing; and

(c) repayable at such times to be agreed by the Vendor and the Purchaser provided that no repayment shall be made unless a repayment of all shareholders’ loans is made simultaneously and in such amounts pro rata to the respective outstanding principal sums of all shareholders’ loans.”

Smart Even Ventures Ltd agreed to transfer its shares in the Company to Gold Swing along with an assignment of the Debt in February 2016.   The deed of assignment dated 30 March 2016 was executed and acknowledged by the Company and makes no reference to a qualification of the right to repayment (and the deed expressly states the Debt is currently due).  On 30 March 2016 the shareholders (Gold Swing having replaced Smart Even) executed a shareholders agreement (“Shareholders Agreement”).  Clauses 4.3 and 5.1 provide:

“4.3 The following matters are subject to the approval of all Shareholders and/or all Directors, as appropriate:

(a) the allotment or issue of new Shares of the Company;

(b) any amendment to the Memorandum or the Articles or any of the organizational or constitutional documents regarding the Company;

(c) any merger or other conglomerate change or arrangement or change of jurisdiction for the Company;

(d) any increase or decrease in the number of directions of the Company;

(e) the purchase, redemption or other acquisition by the Company of its own shares or its other securities;

(f) any reduction of the share capital or variation of the rights attaching to any class of shares of the Company;

(g) the entering into or the amendment of any agreements (including, without limitation, employment, licensing and management agreements) with any Shareholder or its Associates;

(h) the giving by the Company, directly or indirectly, by means of loan, guarantee, provision of security or otherwise, of any financial assistance to any Shareholder or its Associates;

(i) the appropriation, directly or indirectly, of any funds or property of the Company in any manner whatsoever to or for the benefit of any Shareholder or its Associates;

(j) any material change in the nature or type of the business of the Company or the carrying on by the Company of any business or operation other than the Business;

(k) the voluntary dissolution, liquidation or winding up of the Company;

(l) the creation of any Encumbrance over all or substantially all of the assets of the Company;

(m) disposing of substantially all of the assets of the Company.

THE BUSINESS

5.1 The Shareholders agree that the Company shall continue its holding of 55 shares in Mega Fitness which will carry on the business of managing and operating a chain of sports and healthcare clubhouses in the PRC.”

10.In about July 2016, $1,100,000 was repaid by the Company to Gold Swing.  This was not the result of a demand from Gold Swing.   It was the result of a suggestion by the owner of Gold Swing that its subsidiary, Mega Fitness (Shanghai) Investments Limited, repay its shareholder loans owed to the Company and Gold Swing in proportion to their interest in Mega Fitness (55% and 45% respectively). In April 2017 the remaining interest in the Company held by one of the initial shareholders, Giga Power, was transferred to New Health giving New Health its current 61% interest.

11.There seems to have followed a period of approximately a year in which a dialogue proceeded about the financial affairs and accounts of the Company.  This became increasingly contentious culminating in the presentation of a statutory demand by Gold Swing.

12.The principles by reference to which the court assess whether or not a bona fide defence on substantial grounds has been demonstrated is well established.  In Re Yueshou Environmental Holdings Ltd [7] I explain them 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.’”

13.In other words a company must adduce evidence that demonstrates an honest belief in facts and matters that constitute a substantial defence.  If the court concludes having read the affirmation evidence that the defence is an artifice concocted to avoid liquidation a winding-up order should be made.

14.Mr Yu submitted that where a winding up is sought by a contributory the position “is very different from that of a petitioning creditor whose debt is unpaid”.  This submission is based on an erroneous reading of §4-047 of the 4^th edition of The Law of Company Liquidation by McPherson & Keay in which the authors are dealing with petitions presented pursuant to s122 of the Insolvency Act 1986.  Whilst it is no doubt correct that the considerations are different where the petitioner is petitioning qua shareholder, particularly if the petition is not presented on the grounds of insolvency, if the petitioner is petitioning qua creditor seeking a winding up order under s177(1)(d) of the Ordinance the fact that the petitioner also happens to be a shareholder will generally be irrelevant.  Mr Yu also made the further, uncontroversial submission that the court has a discretion to wind up a company even if a bona fide defence is not demonstrated.

15.Mr Yu argued that the Company has the following defence.  It is an implied term of the Shareholders Agreement binding on      New Health, Gold Swing and Smart Base that the parties do not do any act such as demand repayment of the shareholder loans in the nature of working capital, which would put an end to the state or circumstances which enables the continuation of the Company holding its business, namely, Mega Fitness.  Mr Yu referred me to Chitty on Contracts (33^rd ed), §§14-013, 14-024 and Stirling v Maitland [8] to support his submission that there is an implied term that if any party enters into an arrangement, which can only take effect by the continuance of a certain existing state of circumstances, that the party shall do nothing of his own motion to put an end to the state or circumstances under which alone the arrangement can be operative.  I agree with Mr Suen that the significance of this principle is diluted in cases in which the parties have chosen to enter into a sophisticated and comprehensive written agreement to govern their rights and obligations.  If such an agreement does not qualify a right to repayment of a loan otherwise repayable on demand the room for implying the term advanced by Mr Yu is greatly reduced.  However, in the present case there are clauses, which do apply potentially to recovery of shareholder loans.

16.Clause 4.3(k) of the Shareholders Agreement (quoted in [9] above) prohibits issue by a shareholder of a winding-up petition without the agreement of the other shareholders.  Clause 5.1 provides that      “The Shareholders agree that the Company shall continue its holding of 55 shares in Mega Fitness which will carry on the business of managing and operating a chain of sports and healthcare clubhouses in the PRC.” Clause 4.3(j) provides that any change in the nature or type of the business of the Company must be approved by all shareholders.  It seems to me that in the light of these provisions, and in particular clause 4.3(k), it is bona fide arguable on substantial grounds that it is an implied term of the Shareholders Agreement that Gold Swing was not entitled to unilaterally require repayment of its loan and, in particular, not entitled to petition to wind up the Company.

17.I also agree with Mr Yu that the Company can bona fide argue that any such implied term is for its benefit and that it is entitled to enforce it pursuant to s4(1) of the Contracts (Rights of Third Parties) Ordinance, Cap 623.

18.It follows that I find that New Health has demonstrated that the Company has a bona fide defence on substantial grounds.  It is not necessary for me to deal in detail with Mr Yu’s alternative arguments based on estoppel by convention and discretionary considerations.  Suffice it to say that if I had not accepted his principal case I would have rejected his alternative arguments for dismissing the Petition rather than winding up the Company.

19.I order that the Petition be dismissed.  The Petitioner shall  pay New Health’s costs with a certificate for two counsel and the Official Receiver’s costs, such costs to be taxed if not agreed.

Mr Jenkin Suen SC and Mr Justin Lam, instructed by Tsang & Lee,     for the petitioner

Mr Benjamin Yu SC and Ms Bianca Yu, instructed by Baker & McKenzie,  for the opposing contributory

The attendance of the Official Receiver was excused