Safe Castle Ltd v. China Silver Asset Management (Hong Kong) Ltd

HCCW 69/2019 & HCB 1301/2019
(HEARD TOGETHER)
[2020] HKCFI 406

HCCW 69/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 69 OF 2019

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1301 OF 2019

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(HEARD TOGETHER)

Before:  Hon Harris J in Court

Dates of Hearing:  27 September 2019

Date of Decision: 11 March 2020

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D E C I S I O N

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1.I have before me a petition to wind up the Company on the grounds of insolvency and bankrupt Frank Dominick. Subject to an issue concerning service of the statutory demand on Mr Dominick, the outcome of the former determines the latter.

2.The claim arises out of an investment by the Petitioner,   Safe Castle Limited (“Safe Castle”) in Altair Asia Investments Limited (“Altair”).  By way of a subscription letter dated 1 October 2017 Safe Castle subscribed for $200,000,000 worth of participating shares.  By way of a side letter, Altair agreed to redeem the participating shares at cost together with a 15% guaranteed return on the occurrence of certain events, which included the average closing price of a particular listed share falling below a specified price for an extend period, in which event redemption should take place with 21 business days (“Closing Price Trigger Event”) and the expiry of one year after the date of Safe Castle’s investment in Altair ie 10 October 2018.

3.To secure Altair’s obligations a security package was put together, which included:

(1)  a guarantee from the Company, which is Altair’s investment advisor;

(2)  a charge over the shares of China Silver Asset Management Limited, the Cayman Island incorporated parent of the Company to secure Altair’s obligations (“Share Charge”);

(3)  a charge over the Company’s bank account with Standard Chartered Bank; and

(4)  a personal guarantee provided by Mr Dominick.

4.In November 2017 a dispute arose as a result of, so      argues Safe Castle, a failure by Altair and the Company to have the Share Charge registered and notification to Standard Chartered of the charge over the bank account.  On 4 December 2017 Mr Dominick wrote to Safe Castle stating that registration of the Share Charge was being processed by Cayman lawyers and Standard Chartered were in the process of advising them about registration.  Safe Castle sent a series of emails during December and January pressing for confirmation that these matters were being dealt with.

5.On 3 January 2018 a Closing Price Trigger Event occurred and Safe Castle served a redemption notice on 5 January 2018.  Altair could not redeem and a waiver letter was signed on 23 January 2018.  In return for Altair’s agreeing six conditions precedent Safe Castle agreed by a waiver letter dated 23 January 2018 to waive the Closing Price Triggering Event and not insist on immediate redemption.  Amongst the conditions precedent were the following:

(1)  Redemption of HK$60,000,000 of the HK$200,000,000 by a particular date;

(2)  payment of a guaranteed return of HK$7,500,000 by a particular date; and

(3)  perfection of the Charges within a particular date.

6.The conditions were not satisfied.  In particular $60 million was not paid on time; although it was paid.

7.In order for a company to successful defend a petition for its winding up on the grounds of insolvency it is necessary for it to establish that it has a bona fide defence on substantial grounds.  This is explained in [8] of my decision in Re Yueshou Environmental Holdings Ltd [1],           I explain the principles which govern how this is assessed:

“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.’”

8.In Re Leung Cherng Jiunn [2] the Court of Appeal confirmed that there is no meaningful difference between a bankruptcy petition and a winding up petition so far as this test is concerned.

9.I will consider whether or not the Company has demonstrated that it has a bona fide defence on substantial grounds before dealing with the question of service of the statutory demand on Mr Dominick.

10.Mr Barlow advanced two defences.  First that Safe Castle accepted partial payment from Altair after the deadlines under the Waiver Letter had passed.  By accepting the late payments from Altair and thus enjoying the benefit of the Waiver Letter Safe Castle made an unequal representation that it would continue with the Waiver Letter and forgo its right arising from delay of the payments: Chitty on Contracts (33^rd ed), §§22-040 & 24-003.  I disagree.  It seems to me that in accepting partial payments that Altair had agreed to make under both the subscription agreement and subsequently in varied form under the Waiver Letter Safe Castle, was not representing anything.  It is artificial to read into the act of acceptance in the circumstances Safe Castle found itself in any representation to Altair, the Company or Mr Dominick about anything in particular and equally artificial to suggest that Mr Dominick thought otherwise, which is why, I think it reasonable to assume, he does not      say in his affidavit that when Safe Castle accepted the payments he assumed that it was affirming the Waiver Letter.  A waiver requires an unequivocal representation[3] that rights will be foregone which necessitates establishing “that the party alleged to have waived his objection has taken some step which is only necessary or only useful if entertained at all”[4].  This has not been demonstrated.

11.Secondly, that there had been no breach of the conditions precedent.  Safe Castle says that Altair failed to pay in accordance with clauses 2(1) and 2(2) of the Waiver Letter, which require:

“2. WAIVERS

Subject to the satisfaction of the following conditions precedent, Safe Castle hereby irrevocably waives its rights to request for early redemption of the relevant number of Participating Shares up to the principal amount of HK$140 million on the ground of the Triggering Event:

(1) the Company has completed the redemption of the relevant number of Participating Shares representing the principal amount of HK$60 million to the full satisfaction of Safe Castle and Safe Castle has received the proceeds thereof on or before [21 February 2018];

(2) Safe Castle has received the guaranteed return in respect of the Participating Shares in the principal sum of HK$200 million accrued up to 18 January 2018 on or before [15 February 2018] and for the avoidance of doubt, Safe Castle shall only be entitled to the guaranteed return in respect of the Participating Shares in the principal sum of HK$140 million subsequent to 18 January 2018.”

12.Mr Barlow submitted that it was necessarily an implied term that Safe Castle had to take such steps as were necessary in order for Altair to make this payments and Safe Castle did not provide the necessary information before the due dates for payment.  I accept that on the basis of the documentary evidence this is arguable.

13.Clauses 2(3) and 2(5) required Altair to provide on before 26 January 2018 documentary evidence to Safe Castle’s reasonable satisfaction that:

(1)  the Share Charge had been registered; and

(2)  for Altair to arrange service of the charge over the Standard Chartered Bank account to the bank

14.The Company says that these conditions were complied with and that even if Safe Castle was not informed in writing of compliance certainly in the case of the Share Charge, Safe Castle were told at a meeting on 11 January 2018 that the Share Charge had been registered.  Also, Mr Barlow argued that to the extent that Safe Castle questions the authenticity of the documents evidencing the registration of the Share Charge this is clearly not an issue that can be resolved on affirmation evidence filed for the purpose of a winding up petition on   the grounds of insolvency.  It seems to me that it is arguable that the Company has a bona fide defence on substantial grounds to the claim for breach of clauses 2(3) and 2(5).

15.Clause 2(4) required Altair to arrange for the appointment of a person nominated by Safe Castle as the authorised signatory subject to regulatory approval and bank approval of the bank accounts referred to in the charge over the bank account “on a date to be provided at the sole discretion of the regulator.”  The regulator is the Securities and Futures Commission and they have provided no date.  It would seem that this provision had not been properly thought through.  Not only is there an argument that technically it has not been breached even if the spirit       has not been complied with, but it is peripheral to the main purpose of the Waiver Letter and it does not seem to me that even if it has been breached, the breach by itself would justify treating Safe Castle as entitled to treat the agreement embodied in it at end and the Subscription Agreement revived.

16.Clause 2(6) provides that Safe Castle waives its rights to request early redemption if “Altair has settled, or has arranged the settlement of, reasonable costs and expenses incurred by Safe Castle (including legal documentation costs) in the amount of approximately amount of HK$150,000 or before [15 February 2018].” Mr Dominick says that the failure to pay arose from Safe Castle’s own failure to provide invoices showing that Safe Castle had incurred legal costs in relation to the Waiver Agreement.  He says it was made clear during discussions in the first quarter of 2018 that Altair could not get Intertrust, the administrator of the fund to pay the costs.

17.Clause 2(6) does not make it clear precisely what costs were intended to be paid by Altair, but it would appear that Mr Dominick accepts that a series of revised bills issued by Raymond Siu & Lawyers, and sent to him by email from Yvonne Wu on 4 October 2018, covered work for which Altair was liable under clause 2(6) to reimburse Safe Castle totalling $223,072.  However, Mr Dominick says that they were not paid because the bills were all to China Shandong Hi-Speed Financial Group Limited (“Hi-Speed”) not Safe Castle.  Hi-Speed is Safe Castle’s ultimate holding company. Hi-Speed changed its name from China Innovation Finance Group Limited to Hi-Speed in early 2018 and informed Intertrust of this by email on 2 February 2018.  There is nothing unusual about legal fees incurred by an investment vehicle being payable by its holding company and Mr Dominick must have known this, given that as he explains in his affirmation he had worked for some years in a number of sophisticated financial services companies.  Mr Dominick has not exhibited any emails with Intertrust dealing with this issue and has not provided any evidence that after 4 October 2018 he informed Ms Wu that the bills would be paid by Intertrust (which is not what clause 2(6) provides) and that it would do so if the bills were reissued in the name of Safe Castle.  It seems to me clear that Altair were in breach of clause 2(6) and that this justified Safe Castle treating the condition precedents as not being met and it becoming entitled to enforce its rights under the Subscription Agreement.

18.Mr Barlow argued that Safe Castle has no basis for presentation of the Petitions because it is fully secured as it still holds 5,292,982.11 shares in Altair.  The fact of security does not deprive a creditor of locus to present a petition.  In any event such evidence as I have on the value of the security, namely Altair’s balance sheet as at 31 March 2019, shows it to be $3,198,157.46 which provides nothing like full security for the debt.  Therefore, even if, which seems unclear as Altair confirmed the redemption by its contract note of 26 February 2019, Safe Castle still holds security it obviously fails to provide anything like full security and is irrelevant not to only to the issue of locus, but how the Court should exercise its discretion to determine the Petition.

19.In conclusion it seems to me that the Company has failed to show a bona fide defence on substantial grounds and should be wound up.

20.So far as the bankruptcy petition is concerned there is an additional issue to resolve namely the question of service. Rule 46(2) of the Bankruptcy Rules provides that “the creditor shall do all that is reasonable for the purpose of bringing the statutory demand to the debtor’s attention and, if practicable in the particular circumstances, to cause personal service of the demand to be effected.”

21.Proper service of a statutory demand is required before a bankruptcy petition is issued and the court requires strict compliance with Rule 46(2).  Kwan J (as she then was) explains the principles in [15]–[17] of her decision in Lam Chik Sing ex p Hong Kong Chinese Textile Mills Association [5]:

“15. Proper service of the statutory demand is a pre-requisite for the commencement of bankruptcy proceedings under section 6A of Cap. 6. The requirements as to service of the statutory demand must be strictly adhered to (Re Lam Lai Wah Susanna [6] and on appeal in Lam Lai Wah Susanna v Pacific Century Insurance Co Ltd [7]).

16. Ms Anna Saing, appearing for the petitioner, relied on the authorities which stated that the court is not bound as a matter of course to annul the bankruptcy order even if it is satisfied the order ought not to have been made, but has a discretion to exercise in the light of all the circumstances whether the order should be annulled (Delph Sing v Wood [8]; Re Lawson [9]; Re Ditfort, ex p Deputy Commissioner of Taxation (NSW) [10];and Re Chan Chi Ho, ex p Strong Well International Ltd [11]).

17. Failure to serve the statutory demand properly is an extremely serious matter.  That the petitioning debt is apparently not in dispute is wholly immaterial. Failure to serve the demand is not just a formal defect or irregularity, it renders defective the petition founded on the demand.  It does not appear to me it would be at all appropriate to exercise the discretion not to annul the bankruptcy order where service of the statutory demand was defective.”

22.As a matter of law to effect personal service:

(1)  The server should first satisfy himself that he has found the correct person.  He should then hand to or leave with the person to be served the document.  If the person will not take the copy, he should tell him what it contains and leave it as nearly in his possession or control as he can: Hong Kong Civil Procedure 2019, [65/2/3].

(2)  It must be brought to the attention of the person to be served that he was being served with a legal document which required his attention: Dynasty Line Ltd v Sukamto Sia [12]

23.It is Mr Dominick’s case that this did not happen.  The first point that he makes in his affidavit is that in the solicitor’s certificate        of service dated 7 March 2019 it says he was served at 2:15pm on 16 January 2019 at Units 1405-10, 14^th Floor, China Resources Building, 26 Harbour Road, Wan Chai.  Mr Dominick accepts that he attended a meeting at that office in the afternoon 16 January, but he did not arrive until about 3:19pm, which seems to be borne out by an exchange of Wechat messages between him and Ms Wu and indeed is accepted by Ms Wu in her affirmation.  He then goes on to give the following evidence:

“15. In this connection, I also refer to paragraph 4 of Ku’s 1^st Affirmation, in which he said as follows:

‘4. That at the time of the said service of the Statutory Demand, the said Debtor was identified and pointed out by the Petitioner’s staff in the conference room of the Petitioner Company and the said Debtor also admitted to me that he was the Debtor named therein and the proper party to be served.’

16. This is again untrue, in that there is absolutely no question of me ‘admitting to [Ku] as the Debtor named in the Statutory Demand and the proper party to be served’. I never spoke to Ku, let alone making any admission to him as alleged. Ku never addressed me at the Meeting in any way and never presented me with any document stating what the document was and why it was being served upon me. It is doubtful if Ku can even speak sufficient English to address me as to deliver the Statutory Demand in the proper manner and I do not speak nor understand Chinese at all as I am American and my only language is English.

17. Instead, during the Meeting (which was a without prejudice meeting between the parties), I noted that a Chinese man was invited to come into the conference room.

(1) The man did not identify himself or say anything about his role. After he had entered into the conference room, he sat nearest to the door of the conference room.

(2) Shortly after that man had come into the room, he spoke with the other representatives of the Petitioner in Chinese, which I did not understand.

(3) Later, about 2 to 3 minutes after he had come into the room, that man came forward and dropped on a coffee table in front of Patrick Maloney and me a document. He never told me what the document was. He simply said to both Patrick and me in English ‘you sign this’. Instead of addressing either Patrick or me he just kept on saying ‘you sign this’ in English.

(4) I did not pick up the document. I never read it. I did not know what the document was, as the document was face down with the back of the document a blank page facing upwards. I had no dialogue with that man and there is absolutely no question of me admitting to that Chinese man that I was the debtor nor as I mentioned earlier did he ever address Patrick or me individually by name—when I even did not know what the document was about. He then spoke to the other representatives of the Petitioner in Chinese for a brief moment and he then left the Meeting never to be seen again. Patrick said that the meeting was ‘Without Prejudice’ and we are not signing anything. Patrick asked for the man’s business card but he failed to produce any.

18. I only became aware of the bankruptcy petition against me on 8 March 2019 when I received a call from one Horace Yiu of Citibank informing me that my credit card was cancelled.  I was very surprised and asked him why as I have made all the payments.  He said that  I was bankrupt and they have the right to cancel it     and demanded payment in full for the entire amount owed as per the credit card agreement that I signed. Mr Horace Yiu then proceeded to tell me that a company called ‘Safe Castle’ filed a bankruptcy petition against me and it was in a paper that the bank checks.”

24.Ms Wu and the solicitors clerk who attempted to effect service (Ku Sze To) dispute this version of events.  It certainly looks like either Mr Dominick or Ms Wu and Mr Ku are lying.  I agree with Mr Barlow that this is not a conflict I can resolve on affirmation evidence.  Cross-examination is necessary if Safe Castle wishes to proceed with the bankruptcy petition.

25.I will make the normal winding up order in respect of the Company.  I direct that there be a case management hearing on the Bankruptcy Petition in order to determine how it should proceed.  I will reserve the costs of the Bankruptcy Petition.

Mr Alexander Tang, instructed by Stephenson Harwood, for the petitioner (in both cases)

Mr Barrie Barlow SC, Mr Law Man Chung and Mr Thomas Wong, instructed by Chiu & Partners, for the respondent (in HCCW 69/2019) and the debtor (in HCB 1301/2019)