Re Cheung Kwan
Read the full judgment text of HCB 705/2019 on BabelCite. This HCB judgment was delivered on 3 June 2020.
1. By a bankruptcy petition presented on 31 January 2019 (as amended on 17 April 2019) (“ Petition ”), CM International Capital Limited (“ petitioner ”) seeks a bankruptcy order against Ms Cheung Kwan (“ debtor ”).
Cited by 8 cases · Cites 4 cases
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HCB 705/2019 [2020] HKCFI 1033 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE BANKRUPTCY PROCEEDINGS NO 705 OF 2019 _______________
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________________ J U D G M E N T ________________ 1.By a bankruptcy petition presented on 31 January 2019 (as amended on 17 April 2019) (“Petition”), CM International Capital Limited (“petitioner”) seeks a bankruptcy order against Ms Cheung Kwan (“debtor”). 2.As is common in petition of this nature, on 2 September 2019, the Court gave directions on filing of affirmations and directed that no further affirmation to be filed without leave of the Court. 3.The Petition was originally scheduled to be heard on 20 November 2019 but was adjourned due to the debtor’s belated application to file further evidence, being an affirmation of Shi Lei (“Shi 1st”). Leave was given to the debtor to file Shi 1st and to the petitioner to file affirmation in reply. The petitioner filed its reply on 24 December 2019, being the affirmations of Liao Feng (“Liao 1st”) and Song Shuren (“Song 1st”). 4.The hearing of the Petition was fixed for 11 March 2020, but was adjourned due to the General Adjourned Period of the Court. On 27 February 2020, the debtor issued a summons to strike out parts of Liao 1st and Song 1st on the ground that it is “an abuse of process for the petitioner to circumvent the legal effect of the provision of ‘no further evidence to be filed without leave’” by filing evidence which it “should and could have filed earlier” before the substantive hearing on 20 November 2019. The parts which the debtor seeks to strike out are matters relating to the transactions in question, specifically those matters of which the affirmants have personal knowledge. 5.In my view, the strike out summons is a classic “satellite” litigation and must be dismissed. It is a belated attempt on the part of the debtor to derail the hearing in March 2020. As submitted by Mr William Wong SC[1], counsel for the petitioner, the main theme of Shi 1st is that the petitioner devised a “sham” arrangement to avoid disclosing its interest in a listed company. Shi’s allegations concern Insight Go Limited (“Insight Go”) and what he had allegedly been told by the petitioner’s personnel to the effect that the loans were the petitioner’s investment. The petitioner is entitled to file evidence in reply to such allegations, including evidence on why the transactions were structured in a way which involved 2 entities (Insight Go and Star Way Enterprise Limited (“Star Way”)), and the arrangements in relation to such entities. The petitioner has not raised any new allegations in Liao 1st and Song 1st. Nor has the debtor proposed to file any further affirmation in response to Liao 1st and Song 1st. A. Background 6.The following fact and matters are not in dispute. 7.The debtor is a sophisticated business person with substantial commercial experience in that:
8.On 10 April 2015, CAR subscribed for 138,000,000 shares (equivalent to 13% of its enlarged issued shares) in Burwill at HK$0.31 per share. By 2 June 2015, CAR became the second largest shareholder of Burwill, holding 4,760,111,685 shares. 9.Pursuant to a subscription agreement dated 5 May 2015, Burwill (through a subsidiary) subscribed for 16.64% of the (then) issued shares (as enlarged) in KPC. The subscription was completed on 5 January 2016, and Burwill became the single largest shareholder of KPC, holding 28.13% of its issued shares. 10.Insight Go was incorporated in the British Virgin Islands (“BVI”) on 2 September 2015 and the petitioner was its sole shareholder. On 17 September 2015, Mr Shi Lei (石磊) (“Shi”) became the sole shareholder of Insight Go and Ms Song Shuren (宋樹人) (“Song”) was appointed as its first director. In mid-2016, Mr Liu Cheng (劉成) (“Liu”) was appointed as an additional director. 11.Star Way was incorporated in the BVI. From at least 15 July 2015, Zhou Wei (周偉) (“Zhou”) was its sole shareholder, and one of its directors. The other director was Song. 12.Shi and Zhou were both nominated by the debtor. According to the debtor, Shi was referred to her by a friend, while Zhou was “found” by her. Zhou described himself as a long time friend of the debtor. 13.Song and Liu both worked for the petitioner. Mr Liao Feng (廖峰) (“Liao”) was a director of the petitioner from 6 February 2015 to 27 December 2018. 14.By a facility agreement dated 4 November 2015 (“1st FA”), the petitioner agreed to advance a term loan in the amount of US$9.2 million loan (“1st Loan”) to Insight Go for the purpose of acquiring 273,876,923 shares (equivalent to 4.99% of issued shares) in Burwill at HK$0.26 per share. 15.The conditions precedent stipulated in the 1st FA included execution of the following agreements as security for the 1st Loan: (1) a Security Agreement dated 4 November 2015 whereby Insight Go agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a Debenture dated 4 November 2015 whereby Insight Go agreed to create a fixed and floating charge over all its assets, and (3) a Deed of Guarantee and Indemnity dated 4 November 2015 executed by the debtor (“1st Guarantee”). 16.The 1st Loan was paid into Insight Go’s bank account on 6 November 2015. 17.By another facility agreement dated 15 January 2016 (“2nd FA”), the petitioner agreed to advance another term loan in the amount of US$9 million loan (“2nd Loan”) to Star Way Enterprise Limited (“Star Way”) for the purpose of acquiring 266,545,275 shares (equivalent to 4.99% of issued shares) in Burwill at HK$0.26 per share. 18.Again, the conditions precedent stipulated in the 2nd FA included execution of the following agreements all dated 15 January 2016 as security for the 2nd Loan: (1) a Security Agreement whereby Star Way agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a Debenture whereby Star Way agreed to create a fixed and floating charge over all its assets; and (3) a Deed of Guarantee and Indemnity executed by the debtor (“2nd Guarantee”). For convenience, I will refer to the 1st Guarantee and 2nd Guarantee as “Guarantees”. 19.The 2nd Loan was paid into Star Way’s bank account on 21 January 2016. 20.The 1st and 2nd Loans (together “Loans”) were applied by Insight Go and Star Way to acquire shares in Burwill equivalent to 9.98% of its issued shares (“Burwill Shares”). Pursuant to the Security Agreements dated 4 November 2015 and 15 January 2016, the Burwill Shares were deposited into a custodian account. 21.The parties entered into supplemental agreements dated 18 January 2016 to provide a security top-up mechanism, which requires Insight Go and Star Way to deposit top-up cash (being HK$0.26 less the closing price x number of Burwill Shares) into the settlement account if the price of the Burwill Shares falls below HK$0.26 per share. 22.It appears that Insight Go and Star Way are special purpose vehicles used for borrowing the Loans and holding the Burwill Shares. 23.In May 2016, the debtor lent HK$2 million to Star Way for the purpose of allowing the latter to pay interest to the petitioner. In June 2016, the debtor arranged for HK$5,260,000 (or US$699,000) to be lent to Insight Go for the purpose of paying the 6 months’ interest payable to the petitioner. 24.The 1st Loan became due on 7 November 2017, while the 2nd Loan became due on 22 January 2018. On these maturity dates, the trading prices of the shares in Burwill closed at HK$0.32 and HK$0.31 respectively. 25.According to the summary of Burwill’s share prices adduced by the debtor, it was only until 31 August 2018 that the share prices fell below HK$0.26 per share. 26.The petitioner made 2 demands against the debtor:
27.Despite the aforesaid demands, Insight Go and Star Way did not make any repayment or deposit any top-up cash into the custodian account. 28.By a statutory demand served on the debtor on 21 December 2018 (“SD”), the petitioner demanded the debtor to pay US$25,278,087.66, being the amount due and payable as at 31 August 2018 under the Deeds. 29.Following the debtor’s failure to comply with the SD, on 31 January 2019, the Petition was presented. As at the date of the Petition, the petitioning debt was US$26,866,937.44 (“Debt”), being the amount due by Insight Go under the 1st FA (US$13,477,915.67) and the amount due by Star Way under the 2nd FA (US$13,389,021.77). B. Discussion 30.As the debtor has failed to comply with the SD and has not repaid the Debt, by virtue of section 6A(1)(a) of the Ordinance, the petitioner has discharged the onus of showing that the debtor is unable to pay his debt, as required by section 6(2)(c) of the Bankruptcy Ordinance (Cap 6). 31.It is well established that in opposing a bankruptcy petition, the debtor has to show a bona fide dispute on substantial grounds by sufficiently precise evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §27, per Kwan JA (as she then was); Re Soetrisno Farida [2019] HKCFI 2756, at §11, per Ng J). In this regard, it is not sufficient for the debtor to merely raise “a cloud of objections on affidavits” (Artech Development Ltd v Posismo Ltd [2018] HKCFI 344, at §10(4), per Ng J). 32.In the Notice of Intention to Show Cause filed on 21 March 2019 (“Notice”), the debtor stated that she intends to show cause against the Petition on the following grounds:
33.In her second affirmation filed on 9 September 2019 (“Cheung 2nd”), however, the debtor alleged, for the first time[5], that:
34.At the hearing, Mr Anson Wong SC[7], counsel for the debtor, (rightly) does not pursue any of the grounds stated in the Notice. Instead, he contends that on the basis of Cheung 2nd, Shi 1st and the affirmation of Zhou (“Zhou 1st”), the debtor has shown a bona fide defence on the Debt on the grounds of (1) “sham”; (2) “illegality” and (3) “estoppel by convention”. Much reliance is placed on Zhou 1st and Shi 1st, where they said that they had been told by Liao and Song respectively that the acquisition of Burwill Shares was an investment of the petitioner, but dressed up as Loans to Insight Go and Star Way so as to avoid having to disclose the petitioner’s interest to SEHK. 35.In my view, the debtor’s assertions that all the agreements signed between the parties, including the Guarantees, are “sham” or that such agreements are “illegal” are unbelievable. 36.First, the assertions bear the hallmarks of a recent invention. Neither the debtor, Shi nor Zhou have been able to produce any documents (whether contemporaneous or after the event) in support of their assertions. Even after the debtor had been served with the SD, and with the benefit of legal advice, the debtor did not in the Notice assert that any of the agreements signed between the parties are “sham”, “illegal” or that the petitioner is estopped from relying on any of the agreements signed. 37.Second, the debtor’s assertions are flatly contradicted by contemporaneous documents, which show that prior to signing each of the 1st and 2nd Guarantees:
38.The above documents confirm that far from being “sham”, the nature of the Guarantees (and the 1st FA, the 2nd FA) was explained by DLA to the debtor, and the debtor confirmed that she understood and agreed to be bound by their terms. 39.Although in Cheung 2nd the debtor tries to get around the terms of the Guarantees by alleging that Liao made the Alleged Promise, she does not say that the Alleged Promise was made before she signed the Guarantees or that she had relied on the Alleged Promise in entering into the Guarantees. This is not surprising, as such allegation, even if made, would be inconsistent with the Confirmation and Clauses 3.2, 3.16(d) and Clause 3.17 of the Guarantees, which provide:
40.Third, the debtor’s assertion that the Loans were in fact the petitioner’s investment in Burwill Shares and that she has no interest in or control over Insight Go and Star Way is wholly inconsistent with the following (undisputed) fact and matters:
41.Fourth, the suggestion that the debtor was asked to sign the Guarantees “as a mere formality” makes no sense. Given her extensive involvement in substantial and listed companies (see §7 above), the debtor must be familiar with commercial transactions including the use of corporate vehicles to hold shares in listed companies, and the execution of a personal guarantee by the real owner of the borrower. She has not proffered any explanation as to why the petitioner required the alleged “formality”, particularly when Insight Go and Star Way would provide security for the Loans (in the form of the Security Agreements and Debentures). 42.Fifth, the debtor’s reliance on the control exercised by the petitioner over Insight Go and Star Way is misplaced. As part of the transactions, the parties agreed that the petitioner was entitled to appoint a director of Insight Go and Star Way and an authorised signatory of their bank accounts, to ensure that the assets held by these companies could not be disposed of without the consent of the petitioner. 43.Lastly, counsel for the debtor contends that if the petitioner were a genuine lender, it would have taken step to realise the Burwill Shares after the maturity dates of the Loans. It is submitted that had the Burwill Shares been sold in November 2017 and January 2018, the petitioner would have realised more than enough money to repay the amounts due, and the fact that the petitioner did not take such step is only consistent with or explicable by the fact that the petitioner was the real owner of the Burwill Shares. I am unable to accept the contention. There is nothing unusual for the petitioner not to enforce the security provided by Insight Go and Star Way upon maturity of the Loans. This is particularly so when the value of the Burwill Shares exceeded the amount owed to the petitioner. Indeed, the evidence shows that the petitioner had been monitoring the share prices of Burwill, and when the prices fell below the amount owed, demands were made against the debtor (and the borrowers) for repayment and deposit of top-up “guarantee money”. 44.In light of my holding that the debtor’s assertions are incredulous, it is unnecessary to deal with the debtor’s legal arguments on sham, illegality or estoppel by convention. Nevertheless, I will deal with the points briefly. 45.So far as “sham” is concerned, Mr Wong relies on Artech where Ng J said (in the context of a winding up petition), at §14:
46.Applying the test in Artech to the present case, it is clear that the first requirement cannot be met, given that the contemporaneous documents discussed in §§37 and 39 above all show that both the petitioner and the debtor intended the Guarantees to be binding upon the debtor. As there is no suggestion that the Guarantees would mislead (or have misled) any third party, the second requirement is also not established. 47.As for “illegality”, counsel for the debtor argues that as the Loans were in fact the petitioner’s investment in Burwill Shares, the failure on the part of the petitioner to disclose its interest in Burwill Shares constituted a breach of sections 324, 325 and 328 of the Securities and Futures Ordinance (Cap 571). I do not think it has been demonstrated that a breach of the provisions under the Securities and Futures Ordinance, if established, would have the effect of rendering the Loans to become irrecoverable or the Guarantees to become unenforceable. In any event, the argument is based on the same evidence relied on by the debtor in support of the alleged “sham”, which I consider to be incredible. It follows that I do not think that there is any credible evidence basis in support of the alleged illegality. 48.In relation to “estoppel by convention”, counsel for the debtor relies on First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 at §79 and submits that where the parties entered into some transactions on the basis of a common assumption and it would be unjust to allow a party to depart from such common assumption, the Court would give effect to such common assumption. He relies on the debtor’s evidence and submits that there was a common assumption that the Guarantees “were not meant to be enforced and would not be enforced”. In seeking to enforce the Guarantees, the petitioner is attempting to depart from the parties’ common assumption and it is unjust for the petitioner to do so. This is said to be a sufficient detriment for the operation of estoppel by convention, relying on Mitsui Babcock Energy Ltd v John Brown Engineering Ltd (1997) 51 Con LR 129 at 185-6. 49.The evidence discussed in §§37 and 39 above are sufficient to refute the debtor’s assertion that there was a common assumption that the Guarantees would not be enforced. Nothing further needs to be said. 50.As the debtor fails to discharge the burden of showing that there is a bona fide dispute on the Debt, whether on the grounds of sham, illegality or estoppel by convention, there is no valid ground in opposition to the Petition. 51.I make a usual bankruptcy order against the debtor. I make a costs order nisi that the costs of the Petition and of the strike out summons be to the petitioner and be paid out of the assets of the debtor’s estate, with certificate for 2 counsel. The costs of the Official Receiver to be paid out of the deposit.
Mr William Wong SC leading Ms Ellen Pang instructed by King & Wood Mallesons for the petitioner Mr Anson Wong SC leading Ms Amanda Li and Mr Dicky Cheung instructed by Cheung Fung & Hui for the debtor Attendance of the Official Receiver was excused [1] Leading Ms Ellen Pang [2] Formerly known as “Fortis Mining Limited” [3] Formerly known as “Harmonic Strait Financial Holdings Limited” and “Asia Investment Finance Group Limited” [4] Formerly known as “Vitop Group Limited” and “Share Economy Group Limited” [5] In Cheung 2nd §§35, 43 [6] The debtor had not specified the time she was referring to [7] Leading Ms Amanda Li and Mr Dicky Cheung |
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