Re Hong Kong Automobile Ltd

HCCW 288/2019

[2020] HKCFI 1134

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 288 OF 2019

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JUDGMENT

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1.This is the hearing of a petition presented on 23 September 2019 by Pininfarina S.p.A. (“the Petitioner”), an Italian-listed company to wind up Hong Kong Automobile Limited (“the Company”) on grounds of insolvency. At the conclusion of the hearing, judgment was reserved which I now give.

BACKGROUND

2.This petition is based on an unpaid statutory demand served on the Company on 23 May 2019 in respect of a debt of €3 million (“the debt”).  The debt arises out of a Memorandum of Understanding dated 11 June 2018 and 2 subsequent amendments made on 1 August 2018 and 24 October 2018 respectively (“the 1^st Amendment” and “the 2^nd Amendment” and collectively “the Amendments”).

3.The Company was incorporated in Hong Kong in March 2016 and is a fully owned subsidiary of Hybrid Kinetic Group Ltd (“HK Group”) a Hong Kong listed company whose Chairman is hereinafter referred to as “Chairman Yeung”.

4.The Company is in the business of design, development, manufacture, sales and service of new energy vehicles and related core components and systems.

5.The Petitioner is an Italian car design firm, carrying on the business of design, engineering, prototyping and niche manufacturing of motor vehicles.

6.The Petitioner and the Company began their collaboration in 2017 and entered into one contract in February and two contracts in May 2017 for the development of electric cars.  There were subsequent amendments made in 2018 to the May contracts.

THE MEMORANDUM OF UNDERSTANDING (“THE MOU”)

7.On 11 June 2018, the parties entered into the MOU.  Its substantive provisions were prefaced by the following:

“[i]n consideration of the successful performance of the activities and the fruitful ongoing cooperation and in order to permit [the Petitioner] to properly organize its own resources and keep them booked for [the Company]’s programs guaranteeing a smooth activities start-up in July, 2018”.

8.For present purposes, the pertinent substantive provisions are articles 1, 2 and 4:

“ 1) The Parties wish to enter into a long term development agreement providing a partnership according to which [the Company] shall engage [the Petitioner], for the programs to be developed in the next years, including the overall development for series, consisting of: complete styling, engineering, prototyping and SOP follow-up for [4 specified models]

2) At time’s benefit, [the Company] authorizes [the Petitioner] to start working on the above vehicle(s) development after this MOU signature. This MOU foresees a down-payment invoice of 3.000.000€ net (three million Euro) to be paid within 31^st July 2018, relevant to the initial styling and feasibility stage for the first SUV model, where [the Petitioner] has to be promptly engaged. This amount will become part of the overall Contract Price, once it will be signed.

4) The Parties have agreed to sign this MOU that will remain in full force and effect until the first of:

a) the signature of the contracts listed in point 1), of which at least one of the SUV model shall be signed within 30^th June 2018, to start up in the first week of July, 2018

b) 31^st of July, 2018”

9.The 1^st Amendment dated 1 August 2018 postponed the term provided in art. 4 b) in the MOU from 31 July 2018 to 15 September 2018.

10.The 2^nd Amendment dated 24 October 2018 revised article 1 of the MOU by adding other models/items to the list.  It then went on to provide as follows:

“ The Parties agree to implement art. 2 as follows:

2) The 3M€ downpayment did commit [the Petitioner] to start the activities relevant to the initial development for the compact-SUV (K350) and compact-Sedan (H300).

The Parties agree that the 3M€ invoiced on June 15th 2018 will be paid by [the Company] within Sep 30th 2018 ...

The parties agree to change art. 4 as follows:

4) The Parties have agreed to sign this MOU that will remain in full force and effect until the first of:

a) The signature of the contracts listed in point 1), of which at least a total of n.2 models shall be signed within Dec 31st 2018 – and n. 1 of them within Oct 30th 2018.

b) March 15th 2019

In case in which this [MOU] will terminate without the signature of the relevant contract, [the Petitioner] will be entitled in any case to retain the downpayment received as per art. 2 and to be compensated for the works performed, the work already in progress together with the cost incurred and for the costs [the Petitioner] has committed to incur for the ongoing activity.

All the other terms of the MOU shall remain valid and unchanged.” (emphasis supplied)

11.Attached to the 2^nd Amendment was a chart headed “Budgettary Estimation for New Vehicles Development based on assumptions as of Sep 17th 2018” which set out cost estimates for 8 “existing platforms” including those for K350 and H300 which are models within the MOU.

12.The 2^nd Amendment is significant in that it removed any ambiguity that might be said to have existed in the original MOU.  Clear wording was used not only in relation to the Petitioner’s obligations to start its work relevant to the initial development of the K350 and H300 models but also to the Company’s payment obligation in relation to the €3 million.

13.The penultimate paragraph providing as it did for the retention of the down payment as per art. 2 whether or not the MOU (as amended) terminates without the signature of the relevant contract made the obligation to pay clear beyond doubt.

CHRONOLOGY

14.The relevant events (including summaries of relevant emails where appropriate) leading up to the statutory demand are set out below:

(a) On 18 June 2018 the Petitioner sent an email to the Company enclosing (i) an invoice dated 15 June for 3M€ as down payment for the project (K350); and (ii) an “Invoice Plan” as well as a “Payment Plan”, with the latter showing when each payment was due.

(b) By 17 July 2018[1], initial drawings, sketches, vehicle dimensions et cetera for K350 and H300 models had been prepared and sent to the Company.

(c) On 1 August 2018, the parties entered into the 1^st Amendment extending the backstop date to 15 September 2018.

(d) On 24 October 2018, representatives of the Petitioner and HK Group had a meeting at which various topics were discussed.  Minutes of that meeting (“the October minutes”) are set out in an email of even date from the Petitioner to the participants (viz. representatives of HK Group and the Company).

(i) One of the topics was the “MOU”.  Its signing was recorded in the minutes.

(ii) Under the topic “Payments”, the minutes recorded that “Chairman Yeung will force the payment process in order to release all payments due to [the Petitioner] (around 8 M€) within end of October.”

(e) WhatsApp messages from Mark Moussa of the Company to the Petitioner of (i) 2 November 2018 reported an update from its CFO that “the wire transfer will complete by end of next week” and (ii) 9 November 2018 stated that the Chairman is personally working to help expedite the payment … now planned for next week”.

(f) In his email of 26 November 2018 to Chairman Yeung, the Petitioner referred to the final agreement reached at the October meeting that all overdue amounts would be paid by the end of October. However, they remained pending and unpaid as at the date of the email.

(g) Chairman Yeung’s reply (sent the same day) regarding the payment issue was that HK Group’s remittance request was being reviewed by the State Administration of Foreign Exchange of China (“SAFEC”)[2] and HK Group undertook to pay interest accrued caused by the delay.

(h) On 13 December 2018, the Petitioner sent a letter to HK Group seeking payment within 2 weeks (by 27 December 2018) of outstanding invoices totaling €8,267,000[3] that included the debt.

(i) On 21 January 2019, the Petitioner sent its demand letter seeking settlement of outstanding receivables[4] from the Company of, inter alia, €4,827,000 that included the debt.  Attached to the letter was a statement of accounts as of that date.

(j) In his reply by email dated 24 January 2019, Chairman Yeung explained that a potential acquisition had been delayed but upon its completion, “all payment obligations” would be fulfilled.

(k) There were email exchanges between the parties on 13-14 February 2019 with Chairman Yeung requesting further time (another 2 weeks[5]) for payment. While amenable to request, the Petitioner required “a firm commitment from HK Group to sign the [Letter of Warranty]” by 1 March 2019.

(l) The Petitioner’s email of 7 March 2019 to Chairman Yeung referred to “the absence of any substantial and acceptable proposal from [HK Group]” despite the Petitioner having offered “all reasonable and possible solutions to [HK Group]” and that it had been his sincere hope that HK Group would at least agree with signing a Letter of Warranty and propose an arrangement to pay its debts.  As it had not done so, the Petitioner had no choice but to resort to legal proceedings.

15.On 23 May 2019, the statutory demand was served on the Company in respect of the debt.

16.The petition was presented on 23 September 2019.

THE COMPANY’S DEFENCE

17.The Company contends that it can show a bona fide dispute on substantial grounds with sufficiently precise evidence.

18.Mr Chu, counsel for the Company, described the petition as a gamble on the part of the Petitioner to exert maximum pressure on the Company, misusing the winding up procedure for debt collection. It was submitted that the Petitioner, for example, could have obtained summary judgment before issuing the statutory demand.

19.He submitted that the debt is disputed on substantial grounds inasmuch as the Company has a good claim for rectification of the 2^nd Amendment because it contained common mistakes: specifically, that the words “did commit” in the first sentence of art. 2) be replaced by “authorize” and the words “will be paid” in the second sentence of art. 2 be replaced by the words “foresaw payment”.

20.Mr Chu also stated that the Company is entitled to use post 2^nd Amendment actions as evidence to rebut the Petitioner’s case of an alleged debt.

The Company’s case on rectification

21.The Company relied on the following matters in support of what he submitted was a continuing common intention on the part of the parties that they never intended the MOU (as amended) or the 2^nd Amendment to be binding in regards to payment of the €3 million:

(a) The parties’ modus operandi

22.Prior to the MOU, the parties had entered into 3 contracts, each of which required the Company to make payment of part of the total contract price (described as an “advance payment”) upon the signing of the relevant contract.  Similar provisions are found in 2 further contracts subsequent to the MOU and made between the parties on 31 July 2018.  That was said to be “their usual mode of dealing”.

23.It was said that those contracts show that advance payments or down payments are only payable upon a contract being signed and the reason why the MOU (and its Amendments) was used was because the parties never intended it to be binding.  It was meant to be a stepping stone to the contracts the parties were intending to make.

24.In response to the question whether the MOU created binding obligations on the parties, the answer given was that “some aspects are binding” such as the confidentiality clause.  It was submitted that the €3M down payment was nothing more than an agreement to agree, being one of the terms of the contemplated contract(s).

(b) The words used were “vague”

25.The words used in the original MOU[6] namely, “authorizes” and “foresees”, were said to be “vague”. The rectification sought   restores the vague language used in the original MOU.

(c) The Company would have been in immediate breach if the 2^nd Amendment was intended to be binding 

26.The 2^nd Amendment was signed on 24 October 2018 but the date for making the down payment was 30 September 2018, some 3 weeks earlier.  It was submitted that the parties could not have intended such an outcome and therefore could not have intended and did not intend actual payment to be made on that date.  It was said that it would make more sense to say that the parties foresaw payment in the event of their entering into the contemplated contracts.

27.Reference was then made to the penultimate paragraph of the  2^nd Amendment envisaging a ‘no contract’ situation but providing for compensation to the Petitioner for work done etc. It was submitted that the effect made the situation more ‘equitable’ as the Petitioner would not have to assume all the risk if no contract was signed rather than getting nothing for work done pursuant to the MOU.

28.For good measure, the Company stated that apart from 2 power points[7] received on 17 July 2018, there is no evidence of any IP that was generated or what work the Petitioner had performed in the ensuing months[8].

(d) Intellectual property rights (“IPR”) do not feature in the MOU and its Amendments

29.In summary, all 5 contracts the parties entered into between February 2017 and 31 July 2018 have extensive provisions governing ownership of IPR as well as third-party rights and indemnity: the rights are clearly defined and delineated; they are of value; they carry inherent risks which require further indemnification; and the nature and amount of damages are contractually limited.

30.In short, it was submitted that without clearly defined IPR ownership, “commencement of activities” by the Petitioner, its continuation of concept development and feasibility of works would be “pointless”[9] or worthless from the Company’s point of view. What would be of real value would be IP rights but that IPR ownership “was still being negotiated and disputed[10]”.

(e) The Petitioner’s invoice dated 15 June 2018

31.The Company acknowledged receipt of the invoice but maintained that it did not detract from the common intention at the time of the execution of the 2^nd Amendment that the Company did not need to pay the €3 million.

32.It also referred to the October minutes which recorded that Chairman Yeung would “force the payment process[11]” of around €8 million which made no mention of the €3 million to be paid.

(f) Default of payment was not the reason for the MOU Amendments

33.The recitals to each of the Amendments made no reference to the Company’s default in payment. Rather, the reason for the 2^nd Amendment was “due to an overall strategy revision of the agreed contents, some items agreed in the MOU have to be revised”.

(g) Post 2^nd Amendment events

34.Considerable reliance was placed on what was said to be a separate commercial arrangement between the Petitioner and Chairman Yeung to force payment of the €8 million to the Petitioner, first mentioned in the October minutes[12].  This allegation is made in the affirmation of Yip Man Tong filed in support of the Company’s opposition to the petition.

35.Much was made of the fact that the emails exchanged were with Chairman Yeung who is not a director or shareholder of the Company although it was accepted that Chairman Yeung is the head of  HK Group.

36.In essence, the Company maintained that in none of the post 2^nd Amendment emails was there any direct reference to the MOU as amended or the 2^nd Amendment or to the debt.

DISCUSSION

37.I propose to comment only on the more salient of the matters the Company relies on for rectification.  The remaining matters are either subsumed in the matters considered or are irrelevant.

38.It is unclear what effect the parties’ modus operandi is said to have on the MOU (as amended).  All that can be shown is that prior to and post MOU, the parties had chosen to enter into binding contracts with detailed provisions relating, inter alia, to IPR. But it does not address the question why the MOU and its Amendments cannot be and are not binding.

39.Tellingly, in response to the Court’s question whether the MOU created binding obligations on the parties, the answer was that “some aspects are binding” such as the confidentiality clause.

40.In my view, either the MOU created binding obligations or it did not.  There can be no halfway house of it being ‘partially’ binding in the sense that only certain aspects are binding. It will not have escaped notice that, conveniently, what is said to be not binding is the payment obligation.

41.If it was not intended to be binding, then what was the point of having an MOU at all?  Why bother?  Being a stepping stone is neither here nor there.

42.I do not accept that there was anything “vague” about the MOU at least after the 2^nd Amendment was in place.  The stark difference in the wording used in the 2^nd Amendment is not suggestive of some careless or typographical error; rather, it points to their having been intentionallly chosen[13].

43.The mere incantation of a common intention is insufficient without an evidential basis. The rectification sought involves deleting precise wording and reinstating the language used in the original MOU. No evidence has been adduced to explain how the “mistake” came to be made.

44.Even assuming (contrary to my view) there to be a case for re-instating the wording of the original MOU, it cannot override clear meaning of the penultimate paragraph of the 2^nd Amendment.

45.In so far as it was suggested that if it created a binding obligation to make the down payment, the Company would be spending money for nothing (in the sense of not getting any quid pro quo), that is not correct. The ‘preface’ to the substantive articles in the original MOU shows that the intention was to permit the Petitioner to organise its resources within a short period of time and making them available for the Company’s programs to ensure a smooth start-up in July 2018.

46.In a commercial setting, it is payment for the other party’s immediate commencement of the design process for the models agreed, work flow planning and the marshalling of resources in readiness for deployment to enable a quick start once the anticipated contract was in place. It is evident from a perusal of the nature of the attachments[14] to the 17 July 2018 email that the Petitioner had invested time and effort into the projects since the MOU. The attachment to the 2^nd Amendment also shows that further work (in the form of detailed cost estimation for the different models) was done based on assumptions as of 17 September 2018.

47.The Company also posed the question, rhetorically, why the parties would enter an agreement that would render one of them immediately in breach.  The Petitioner attributes the error to an oversight[15] in not amending the 30 September date when the parties were finalizing the 2^nd Amendment in August and September.

48.That process would normally involve some interaction and/or communication between the parties over the changes to be made.  The Company has not adduced any evidence that would support there having been “the common mistakes” it now wishes to rectify.

49.While much was made of the value of IP rights, there is no evidence that there were “negotiations and disputes” between the parties over the IPR ownership issue other than Mr Yip’s bare assertion. Nor is there evidence to suggest that agreement as to ownership of such rights was a precondition to payment of the debt.

50.Turning to the post 2^nd Amendment events, an analysis of the relevant emails and statements mentioned in §14 (i) and (j) shows that the debt featured in the statements mentioned.  It was a component of what was shown to be owing to the Petitioner in the table that appears in the body of the letter of 13 December 2018. Similarly, it was also a component of outstanding items shown in the statement of accounts attached to the letter of 21 January 2019.

51.A review of the evidence shows that by the time of the 24 October meeting, the Company was in arrears in respect of payments due not only to the Petitioner but also to PF Engineering which was responsible for the H700 model. That the Petitioner should have concerns over the outstanding payments which were continuing to accrue is only to be expected.

52.In the circumstances, that email correspondence[16] as well as face-to-face meetings had been conducted throughout the period since at least the October meeting at the highest level between Mr Angori, a director of the Petitioner and Chairman Yeung is unremarkable.

53.There is no evidential basis that I can see to support the allegation of the existence of a separate commercial arrangement between the Petitioner and Chairman Yeung regarding the €8 million. That is but sheer speculation.

54.The table set out in the letter of 13 December shows that by that date, the Company’s outstandings to the Petitioner and PF Engineering were over €8.2 million. That amount included 3 payments due in November and early December. There is nothing unusual for the Petitioner to reach an understanding with Chairman Yeung in late October concerning the overall indebtedness.

55.While as of 24 October, the overall indebtedness was less than €8 million, several payments were shortly to fall due. The €8 million figure factored in those payments. A key component of the overall amount is the €3 million as is plain from the 13 December 2018 table and the 21 January 2019 statement of accounts as explained in §50 above.

56.There is no evidence that points to any other business dealings between the Petitioner, PF Engineering, the Company and HK Group. The notion that there was a separate commercial arrangement between Chairman Yeung and the Petitioner is fanciful and not borne out by the evidence.

57.No objection was ever raised to the invoices presented on 18 June 2018 in respect of the debt. Rather, the consistent theme of email exchanges[17] following the October meeting show acknowledgments (implicit or otherwise) of indebtedness, excuses being offered for not meeting assurances of payment, and repeated requests for further time.

58.By mid-February 2019, in response to a further request for an additional 2 weeks for payment (because HK Group was said to be at an important stage of negotiation with investors), the Petitioner was only willing to do so upon commitment by HK Group in the form of a Letter of Warranty: see §14 (k) and (l) above.

59.At the hearing, a copy of the draft Letter of Warranty received overnight by the Petitioner’s solicitors from its client was produced which showed that the MOU as amended was one of the agreements listed in the recitals. The point of the Letter of Warranty was to secure an undertaking from HK Group as sole shareholder of the Company to pay the Company’s debts in full by 15 May 2019.

60.In response to the statutory demand, the Company’s solicitors sent a reply dated 10 June 2019.  Under the heading “Impossibility of payment due to SAFEC”, the letter stated that they had been informed by their client that “the remittance of €3 million appears to be in the process of being reviewed by SAFEC”. In my view, that was another acknowledgment of the debt.

CONCLUSION

61.For the reasons stated, I do not accept that the Company has shown that it has a bone fide defence on substantial grounds based on a rectification claim.

62.Accordingly, I make an order in terms of paragraph 1 of the petition. There is also to be an order that the costs of and occasioned by the petitioner be paid out of the assets of the Company.

Mr Justin Ho, instructed by Tanner De Witt, for the Petitioner

Mr Raymond Chu, instructed by David Lo & Partners, for the Company

Attendance of the Official Receiver was excused