X v. Y

HCSD 25/2019

[2019] HKCFI 2880

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 25 OF 2019

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JUDGMENT

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1.This is the adjourned hearing of the application taken out by X (“the Debtor”) dated 12 June 2019 to set aside the statutory demand issued by Y (“the Creditor”).

2.The Debtor also has an application for a time extension to set aside the statutory demand as the same was taken out a few days after the requisite 18 days.

3.The Creditor claims that the Debtor owes it in excess of HK$166.9 million(including principal in excess of HK$159 million) by reason of him havingentered into a personal guarantee dated 26 November 2017.

4.The matter first came before me on 7 August 2019 at 9:30 am for a callover (“the Callover”).  I gave further directions for the filing of evidence, in particular evidence of value of the controlling stake in a listed company which I will refer to below, and adjourned it for substantive argument before me today.

5.One key consideration advanced by the Debtor was the relevance of shares in a company listed on the Hong Kong Stock Exchange,W Company, owned by a company called N Company (“N”), which is wholly-owned by the Debtor and of whom he is said to be the sole director (“the Listco Shares”) which were said to effectively constitute adequate security for the Creditor.  Given the size of the stake in the listed company, it was suggested that the value of the Listco Shares exceeded the Debtor’s liability to the Creditor, the Debtor therefore wished toadduce evidence on the value of those shares, including that of the controlling premium which it has now done so.

6.I should mention that at the Callover, Mr Michael Lok, counsel for the Creditor, had persuasively sought to argue that even if the Listco Shares were worth more than the Debtor’s liability, this would be of no legal significance.

7.Rule 48(5)(c) of the Bankruptcy Rules (Cap 6A) provides that:

“ The court may grant the application if— … it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt;”

I will refer to this as the (5)(c) limb.

8.Hence, he argued, as the security was not provided by the Debtor but rather by N, that rule could not be relied upon by the Debtor. I should note that there is no charge over the defendant’s shareholding in N itself.  The position is succinctly and accurately summarised by Ng J in the case of Re Mann, Kevin Patrick HCB 8023/2013 (unreported, 24 March 2015) at paragraph 16:

“ The observations by the learned judge are not only supported by the authorities referred to in the judgment viz China and South Sea Bank Limited v Tan Soon Gin [1990] 1 AC 536 and Cheng Wai Kei v Commerzbank [2002] 2 HKC 340. They are also fully consistent with a long line of authorities which established that, for the purpose of proceedings under the Ordinance, a petitioner is not to be regarded as a ‘secured creditor’, and the petitioning debt is not to be regarded as a ‘secured debt’, where the petitioner holds securities, whatever their form, furnished by third parties rather than the Debtor himself: Re Kwok Chok Yee [2000] 2 HKC543; Lai Yuk Shau v Dao Heng Bank Ltd [2001] 4 HKC 299; Cheng Wai Kei v Commerzbank Aktiengesellschaft [2002] 2 HKC 340.”

9.A similar view was taken by Madam Justice Chu in the case referred to earlier, that is Cheng Wai Kei at paragraph 23 where her Ladyship in the context of the Bankruptcy Rules stated as follows:

“ It follows from the analysis in the preceding part of this judgment that the value of the security referred to in r 48(5)(c) means the value of the security over the property of the person against whom the statutory demand is made: see also Re Ip Lam On. Rule 48(5)(c) does not extend to properties provided by parties other than the applicant. The value of the other securities provided by Winful or Philco is therefore irrelevant. It is not open to the applicant to rely on r 48(5)(c) and argue that the value of the other securities exceeds the amount of the debt due by the applicant under the guarantee.”

10.It seemed to me that even if this were the case, I would query whethera debtor in the position of the Debtor would not be able to avail himself of rule 48(5)(d), which provided that the court may grant the application to set aside the statutory demand if:

“ the court is satisfied, on other grounds, that the demand ought to be set aside.”

11.I therefore invited Mr Lok and Mr Robert Pang SC (leading Mr Raymond Chu), who represented the Debtor’s case with skill and eloquence on the scope of this rule, (ie the “Rule (5)(d) Limb”) at the adjourned hearing.

New developments

12.Since the last hearing, all the Listco Shares have been realised by the receivers, Mr AL and Mr CK, as joint and several receivers (they having been appointed on 3 June 2019) and therefore the proceeds are not able to satisfy the Debtor’s liability.

13.The Debtor argues that the Listco Shares were sold at an undervalue and therefore seeks to argue that he has (through N) a pending or at least prospective serious cross-claim against the receivers.

14.I must say that not much is known about the sale process engaged by the receivers save that it would appear that in the summer periodvarious potential purchasers had been approached.  Between 6 and 28 August,the receivers had sold about 20 million W shares, and on 2 September, the receivers entered into a sale and purchase agreement for 319 million-odd shares.  The sale was completed on 5 September.

15.The Creditor says that after these disposals, the Debtor still owes it in excess of HK$120 million.

The cross-claim point

16.On 4 September 2019, the Debtor provided a valuation report prepared by A Company (“A”), which suggested a value in the range of HK$0.52 to HK$0.58.  The very next day, the receivers apparently entered into the agreement to sell the 319 million W shares for HK$35.25 million to one SCI Company, ieabout one-fifth of the value as assessed by A.  The Debtor was apparently unaware of the sale at that price and suggests that if he had been aware, he would have sought injunctive relief to protect the value of the shares.

17.On 17 September 2019, an announcement was made by the listed company referring to the completion of the sale and purchase of the shares in the listed company as well as a mandatory unconditional cash offer.  The announcement stated as follows:

“ The Company was informed by the Offeror that on 2 September 2019, the Vendors, the Offeror (being the Purchaser), MrLui and the Receivers entered into a Sale and Purchase Agreement pursuant to which, among other things, the Offeror agreed to acquire and the Vendors agreed to sell the Sale Shares, being an aggregate of 319,680,000 shares (representing 74 per cent of the entire issued share capital of the Company as at the date of the joint announcement) at the aggregate consideration of HK$35.25 million or approximately HK$0.1103 per Sale Share which was determined by a private tender conducted by the Receivers … Immediately following Completion, the Offeror and parties acting in concert with it became interested in 319,680,000 Shares, representing 74 per cent of the entire issued share capital of the Company. Pursuant to Rule 26.1 of the Takeovers Code, the Offeror is required to make the Offers for all the issued Shares (other than those already owned and agreed to be acquired by the Offeror and parties acting in concert with it) and to cancel all the outstanding Options.”

18.At page 9 of the said announcement under the heading “Comparison of value”, it is stated that:

“ The Share Offer Price of HK$0.1103 per Offer Share represents:

(a) a discount of approximately 51 per cent to the closing price of HK$0.225 per Share, as quoted on the Stock Exchange on the Last Trading Day;

(b) a discount of approximately 52.2 per cent to the average closing price of HK$0.231 per Share, being the average closing price of the Shares as quoted on the Stock Exchange for the five trading days …

(c) a discount of approximately 55 per cent to the average closing price of HK$0.245 per share, being the average closing price of the Shares … for the 10 trading days …

(d) a discount of approximately 67.7 per cent to the average closing price of approximately HK$0.342 … being the average closing price of the Shares as quoted on the Stock Exchange for the 30 trading days …

(e)   a premium of approximately 73.4 per cent over the audited consolidated total equity attributable to the owners of the Company per Share of … HK$0.0636 as at 31 December 2018, calculated based on [the] Shares in issue as at the date …”

19.I note that the announcement also refers to the financial situation of the company.  It is stated that:

“ As disclosed in the annual report of the Company for the year ended 31 December 2018, the Group recorded an audited loss attributable to owners of the Company of approximately HK$15.1 million and HK$37.5 million for the years ended 31 December 2017 and 2018 respectively. The audited total equity attributable to the owners of the Company as at 31 December 2018 was approximately HK$27.5 million.”

20.On 30September 2019, the Debtor’s solicitors wrote to complain about the sale of the shares which they considered to be at significant undervalue, which was sent both to the Creditor and to the receivers.  On 8 October 2019, the solicitors for the receivers replied as follows:

“ You allege in your letter that the receivers disposed of 319,680,000 shares of the company to a purchaser at a ‘gross undervalue‌—‌discount’. This allegation is hereby expressly denied. We know that you do not act for any of the chargors and your client has no interest in the shares at all. In any event, as your client should be aware, the receivers ran a robust and competitive marketing process for the sale of the shares. Having considered the offers made by the prospective investors and the conditions of the company, the receivers were of the view the shares were sold at the best price reasonably obtainable in the market at that time.”

21.As of today, no claim has been issued by N against the receivers, although Mr Pang had indicated to me that this was something which was under active consideration, a matter complicated by a decision as to which would be the proper forum to launch the proceedings.

22.In terms of the general principles applicable to these type of proceedings, Mr Pang SC reminded me of the warning given by Hoffmann J (as he then was) in In re a company (No 0012209 of 1991) [1992] 1 WLR 351:

“ It does seem to me that a tendency has developed, possibly since the decision in Cornhill Insurance Plc. v. Improvement Services Ltd. [1986] 1 W.L.R. 114, to present petitions against solvent companies as a way of putting pressure upon them to make payments of money which is bona fide disputed rather than to invoke the procedures which the rules provide for summary judgment. … But if, as in this case, it appears that the defence hasa prospect of success and the company is solvent, then I think that the court should give the company the benefit of the doubt and not do anything which would encourage the use of the Companies Court as an alternative to the R.S.C., Ord. 14 procedure.”

23.He further reminded me of the importance of this application and its knock-on effect on a bankruptcy petition should this application to set aside be dismissed because, in practice, as he puts it, the refusal to set aside a statutory demand might very often in substance determine in a summary way the substantive right of the applicant; in particular, by virtue of the principle of res judicata which would then preclude the applicant from relying on the same ground of opposing the bankruptcy petition unless therewas a material change of circumstances: see the decision of Godfrey LamJ in Chan Yuk Lun v Chan Ying Chit [2015] 1 HKLRD 501 at paragraphs 9 – 11.

24.I am very conscious of the ramifications in either accepting or refusing to set aside the statutory demand and therefore I will make clear in the reasons below what I have and have not taken into account.

25.Here, I consider for reasons explained below thatI am primarilyconcerned about the Creditor’s standing or locus standi in presenting a bankruptcy petition rather than how that bankruptcy petition ought to be case managed.

26.The Debtor cited the decision of the English Court of Appeal in John Henry Popely v Ronald Albert Popely [2004] EWCA Civ 463 (30 April2004) and highlighted paragraph 113 of the judgment where it was held that:

“ With all respect to Mr Briggs, on this issue he was in my judgmentattempting to argue the unarguable. Either the Underlying Claimis a ‘crossdemand’ within the meaning of the rule, or it is not; andwhether it is or not cannot in my judgment depend on the nature of the debt which is the subject of the statutory demand. In contrast to the words ‘counterclaim’ and ‘set-off’, the word ‘cross’ in the expression ‘cross demand’ does not imply any kind of procedural or juridical relationship to the debt which is the subject of the statutory demand: all it means, in my judgment, is that the ‘demand’ is one which goes the other way, i.e. that it is a ‘demand’ by the debtor on the creditor.”

27.The Debtor accepts that a receiver owes equitable duties to the mortgagor (as being the person or persons who is or are interested in the equity of redemption): see Silven Properties v Royal Bank of Scotland [2004]1 WLR 997 at paragraph 27 (per Lightman J).  It is a matter of trite law that “a receiver is appointed to act as agent for the mortgagor, the exercise of the power of appointment does not of itself render the appointor liable for the receiver’s act or omissions.  Accordingly, the mortgagee is not liable if such a receiver sells at an undervalue”:  see Lightman & Moss on the Law ofAdministrators and Receivers of Companies (6^thed), at paragraph 13-073.

28.MrPang noted a number of oddities arising from the timing andsale of the Listco Shares by the receivers after they received the expert report.  He complained that the receivers first ‘dumped’ 21 million shares and then sold the remainder at a major discount (even to market price without reference to the controlling premium) without any proper explanation.  Significantly, he said, the Creditor chose not to deploy expert evidence notwithstanding that it had been given leave to file the same, and therefore he submitted the undisputed evidence before the court was that the shares were worth in excess of HK$0.50, which is considerably in excess to the price which were ultimately sold.

29.Moreover, he highlighted the fact that the evidence as to the receivers’ conduct was “piecemeal and crafted”, and therefore, did not properly inform the court as to whether or not in fact the best possible price had been achieved.

30.The receivers are not a party before the court and the court will therefore be cautious in making any observation in their absence.  While I am unable to decide (and this is not the occasion to decide) whether the receivers have or have not failed to obtain the market price for the Listco Shares, I think there is substance in Mr Pang’s point that the price obtained seems, at least at first blush, somewhat on the low side having regard to the price it was recently trading at.

31.In coming to this very tentative observation, I do not need to relyon A’s report, which has been quite heavily qualified and therefore of limited evidential weight, even assuming it is admissible: see my decision in Chow Steel Industries Public Co Ltd v Ko Sung [2018] HKCFI 1622 (unreported, HCMP 2711/2017, 18 May 2018).

32.Mr Lok relied upon the decision of Ludsin Overseas Ltdv Maggs [2014] EWHC 3566 at paragraph 23:

“ … the best indication of the value of an asset at any particular time is what someone will pay for it after reasonable attempts had been made to sell it.”

This is true insofar as it goes, however this does not inform on the particularcircumstances of the sale process in a particular case.

33.The question arising out of the possible claim by N against the receivers cannot, in my view, defeat the Creditor’s locus to present a bankruptcy petition as that claim is not by the Debtor against the Creditor.

34.Notwithstanding the able submissions of Mr Pang, I am unableto accept that in a case like the present a claim by a company, notwithstanding one which is wholly-owned by the Debtor, would engage the ‘co-extensiveness principle’.  It seems to me the correct legal position, as identified by Mr Lok, is that the Debtor here is in the position of a primary obligor.

35.I note that at clause 2.1(c) of the guarantee, the following is provided:

“ … agrees with the lender that if any obligation guaranteed by it is or becomes unenforceable, invalid or illegal, it will, as an independent and primary obligation, indemnify the lender immediately on demand against any cost, loss or liability it incurs as a result of the borrower not paying any amount which would, but for such unenforceability, invalidity or illegality, have been payable by it under any finance document on the date when it would have been due. The amount payable by the personal guarantor under this indemnity will not exceed the amount it would have hadto pay under this clause2 if the amount claim had been recoverable on the basis of a guarantee.”

36.The present case is therefore different from the two cases cited by the Debtor, namely that of the English Court of Appeal in Octagon Assets Ltd v Remblance [2010] Bus LR 119 and the decision of Zacaroli J in Promontoria (Chestnut) Ltd v Bell [2019] EWHC 1581 (Ch), where the debtor’s obligation were merely secondary to the primary debtor’s obligation.

37.It seems to me, therefore, that in the present situation, the statutory demand cannot be set aside on this ground no more than it could if the Debtor had a claim against unrelated third parties.  Having said this,I do not consider such a claim, if brought and if considered to be meritorious after it is articulated in a statement of claim to be irrelevant as to how the Bankruptcy Judge would deal with the petition. Bankruptcy proceedings, like corporate insolvency proceedings, involve class remedies.

38.I do not know at this stage:  (i) what other creditors there may be of the Debtor and what their views are; (ii) N’s financial position, in particular, whether it has any debt so that it is not at the moment entirely clear whether every dollar recovered by N would result in an extra dollar to the Debtor’s estate; (iii) the merits of N’s claim and the time and costs to be incurred in order to pursue such a claim to its conclusion, and how, if the Debtor were bankrupted, how the appointment of a trustee-in-bankruptcy would affect the viability and efficiency of such a claim.

39.This is not the time to consider these matters and the evidence before is insufficient to conduct such an exercise.  This is an exercise to be conducted by the Bankruptcy Judge after the evidence is filed on such matters. He will then consider whether or not in the exercise of his discretion to adjourn the petition and if so for how long to allow the claim by N to be pursued.

40.As I have mentioned earlier, I am aware of the line of cases,in particular Chan Yuk Lun and others as to the possibility of the impact of res judicata.  I therefore wish to make it clear for the avoidance of doubt that the existence and viability of the claim by N against the receivers (if so pursued) is not something which I consider to be relevant for the present exercise and therefore this is something which the Debtor can, if he thinks appropriate, bring to the attention of the Bankruptcy Judge and make such points as he considers appropriate.

The liquidated damages point

41.It seems to me in the present case that the amount of the principal and interest can be calculated and it is therefore not an unliquidated claim:  see Court of Appeal’s decision in Re Grande Holdings Ltd [2016] 1 HKLRD 435.  This is of course different from simply estimating costs or other contingent possibilities, which was the situation in the English Court ofAppeal case in Timi Owo-Samsonv Barclays Bank Plc [2003] EWCA Civ 714. In fairness, although the point was raised in the Debtor’s skeleton submission,it was not further pursued orally at the hearing.

Extension of time

42.Mr Pang prays in aid the decision of To J in Li Wo Hing v Raiffeisen Bank International AG, Beijing Branch HCSD 19/2014 (unreported, 10 July 2014).

43.He further submitted that an applicant for an extension of time toset aside statutory demands fulfil two requirements: (a)special circumstances justifying delay, and (b) good cause (which relates to merits of the case).  He cited in particular paragraph 11 of the judgment which stated that:

“ … if an applicant has no merit in his defence, a good excuse for the delay in complying with the time limit alone would not avail him. On the other hand, even if an applicant can show merits, ie good cause, he still has to show special circumstances to explain his delay.If he is guilty … of contumelious delay, he cannot expect the court will exercise the discretion in his favour. Of course, the shorter the delay, the easier it would be for him to show special circumstances. Subject to showing good cause, the court would be more ready to grant indulgence for short delays.”

44.Notwithstanding contrary submissions by Mr Lok, I consider that if I had accepted that there were merits in the application, I would have extended time.  But for the reasons set out above, it is not necessary for me to deal with this, save to say that had I considered there were merits, I would have allowed the extension of time given the short period of delay involved.

Rule 5(d) Limb

45.Insofar as the Rule 5(d) Limb is concerned, as a result of the sale of the Listco Shares, I consider this issue has become largely academic.  On that basis, I do not consider it would be the right opportunity to delve into it.  I recognise of course that when construing that rule, the court should be careful in not effectively permitting an intrusion on other rules; for example, rule 5(c), whereby a Debtor would be able to rely on third party security as if he had provided himself or herself.  That of course would be incorrect. 

46.It however seems to me that in an extreme case where the security, albeit one provided by a third party, would be of such an amount and of such liquidity (say cash or cash equivalent) that it could be said that no reasonable creditor would have proceeded to bankrupt the Debtor rather thanrealise the security, then perhaps the residual discretion could be relied upon.

47.This, in my view, should not be considered as an intrusion in the rule in China and South Sea Bank v Tan which provides that the lender clearly has the legal right to sue the guarantor or the borrower as he sees fit. But rather this would be recognising that as the bankruptcy regime engages class remedies,as well as the more draconian consequences which flow from the bankruptcy,the court is entitled to consider the practical realities in any given case. Given the latest developments in the present case it would not be appropriate to say more about the rule.

Conclusion

48.It follows from the above that I dismiss the application to set aside the statutory demand and it therefore follows that the court authorises the Creditor to present a bankruptcy petition after the expiry of 14 days to today’s date:  see the decision of Madam Justice Chu in Cheng Wai Kei v Commerzbank, paragraph 25.

(Discussion re rule 48(7), the time for presenting the petition; and costs)

Costs and ancillary matters

49.On the issue of costs, Mr Lok for the Creditor asked for costs to follow the event and be taxed on a gross sum basis, as well as on an indemnity basis.  He points to (i) clause 8.1 of the guarantee which provides that:

“ The parties agree that all of their own costs and expenses, including legal fees, which they incur in connection with this deed and any other documents referred to in this deed and any other finance documents shall be paid by the borrower in accordance with the facility agreement.”

as well as clause 8.3, which provides that:

“ Indemnity of the personal guarantor will promptly indemnify the lender and any other officer, director, employee, agent or representative of the lender in respect of all reasonable costs and expenses, losses or liabilities of any kind, which such person incurs or suffers in connection with.”

50.He also points to the letter sent by his solicitors to the Debtor’ssolicitors following the sale of the Listco Shares and he submits that for the Debtor to pursue his application to set aside the statutory demand after the sale is so unreasonable so as to be deserving of being visited on by a costs order on an indemnity basis.

51.Mr Pang SC primarily invited me to reserve the question of costs to the Bankruptcy Judge so he could take into account the existence of the claim by N against the receivers.  He opposed any order on a higher basis by reason of the fact there were no unusual features in this litigation which justified such a higher basis.  However, should I be minded to make a costs order, he agreed that it would be appropriate for me to do so on a gross sum basis.

52.Notwithstanding the attraction of reserving the question of costs to the Bankruptcy Judge, I think that, on balance, this is a proper case where costs should follow the event and I therefore order that the costs of the application be borne by the Debtor to be paid to the Creditor.

53.I do not consider it would be appropriate to order costs on a higher basis.  I have considered the decision of Deputy High Court Judge Hunsworth in Citibank NA v KCL Chemical Ltd & Others HCA 1635/2016 (unreported, 9 February 2017) where it would appear that the learned judge there considered that the existence of a clause providing for payment on demand of “all legal and other costs and expenses”, suggested that costs on an indemnity basis would be appropriate.

54.First of all, it seems to me that whether or not a particular clause mandated or pointed to indemnity costs would depend on the wording of the particular clause. Secondly, it seems to me that these are bankruptcy proceedings. In the present case, I do not think it clear that by agreeing to clause 8.1 the parties would have necessarily agreed that costs of bankruptcy proceedings would be recoverable on an indemnity basis and clearer language (which sometimes appears in other documents which the Court has seen) would be required.

55.I also do not think that the fact that the Listco Shares have been sold meant that it was so unreasonable for the Debtor to proceed with this application that his conduct could be described as an abuse of process, or otherwise so unreasonable.

56.I will therefore give the costs of these proceedings to the Creditor to be taxed on a gross sum basis which will be determined on paper.

57.There are two final matters.

58.First of all, I would like to thank both parties’ counsel for their able assistance, both in writing and orally and this is why I was able to deal with it as quickly as I was.

59.The other matter is the matter which Mr Lok referred to, which is this: I understand that normally if an application to set aside a statutory demand is unsuccessful as is the case here, then the judgment would normallybe not open to the public and not published.  Therefore, unless the parties agree to the contrary, that is how I propose to deal with it.

(Discussion re publishing judgment)

60.The uploading and publication of this Decision will therefore be embargoed until further order, which may be lifted if an application is made following the conclusion of the bankruptcy petition against the Debtor (if indeed a petition is filed).

Mr Robert Pang SC and Mr Raymond Chu, instructed by David Lo & Partners, for the applicant

Mr Michael Lok, instructed by Allen & Overy, for the respondent