Re Leader, John Roger also known as Roger Leader

HCB 1015/2021

[2022] HKCFI 11

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1015 OF 2021

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Before: Hon Ng J in Court

Date of Hearing: 16 December 2021

Date of Judgment: 3 January 2022

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JUDGMENT

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Introduction

1.There is before this court a bankruptcy petition (“Petition”) dated 9 February 2021 presented by the Petitioner against Mr Roger Leader. The Petition is based on the non-compliance with a statutory demand dated 20 July 2020 (“statutory demand”) for the sum of HK$1,020,000 (“Debt”). There is no dispute as to service.

2.The Debt is said to be due and owing pursuant to a put option (“Put Option”) granted by Mr Roger Leader to the Petitioner under a Shareholders’ Agreement dated 24 June 2019 (“SHA”) entered into by the Petitioner, Mr Roger Leader and a Mr Li Quanwei[1] (“Li”) relating to Quantum Human Capital Limited (“Company”). Under Clause 10 of the SHA which contains the Put Option, the Petitioner could require Mr Roger Leader to purchase all the Petitioner’s Option Shares in the Company at the consideration of HK$1,020,000. The Petitioner exercised the Put Option by issuing a notice to Mr Roger Leader dated 26 June 2020 (“Notice”) requiring completion to take place on 7 July 2020. Mr Roger Leader failed to respond to the Notice, attend to the completion or pay the HK$1,020,000 to the Petitioner.

Background

3.The Company was incorporated in Hong Kong on 17 May 2019. Its issued share capital was HK$1,500 divided into 1,500 ordinary shares. Its registered and beneficial shareholders were at all material times:

(1) The Petitioner: 600 shares.

(2) Mr Roger Leader: 450 shares.

(3) Li: 450 shares.

4.According to Mr Roger Leader’s 1st affidavit in opposition dated 10 June 2021 (“Leader 1”), the brief background to the formation of the Company and the execution of the SHA is this.

(1) In early 2019, the Petitioner, Mr Roger Leader and Li discussed about a new partnership business based on the introduction of Mainland Chinese to internships in Hong Kong and executive searches in Hong Kong. This led to the formation of the Company. The Petitioner instructed his solicitors viz Dundons to prepare a written agreement and on 24 June 2019, the 3 of them executed the SHA at the office of Dundons.

(2) The SHA was drafted by Dundons acting on the instructions of the Petitioner alone and neither Li nor Mr Roger Leader paid much attention to the details of it.[2]

(3) Basically, Li was to contribute his contact in the Mainland and his existing business in Shenzhen, which would provide IT, website design and back office support. Mr Roger Leader was to contribute the “Roger Materials” and run the Hong Kong side of the business and the Petitioner was to contribute a shareholder loan to the Company.

5.The shareholder loan was provided for in Clause 2.3 of the SHA which required the Petitioner to advance a loan to the Company in the sum of HK$1,028,500 (“Shareholder Loan”). There is no dispute that the Petitioner had advanced the Shareholder Loan to the Company. Indeed, the Petitioner and the Company had entered into a detailed Loan Agreement on 24 June 2019.

6.It would appear to be common ground that the events in Hong Kong in the second half of 2019 and then the arrival of Covid-19 in 2020 rendered it very difficult to bring interns into Hong Kong from the Mainland. This had an adverse impact on a big part of the 3 shareholders’ business plan. In the Petitioner’s 5th affidavit dated 30 July 2021 (“Liang 5”), he stated that it was because the business environment in Hong Kong had become more difficult since the second half of 2019 that he decided to exit the Company in accordance with the terms of the SHA.

7.The exit mechanism is set out in Clause 10. For ease of reference, that clause is set out in full below.

“10. CHRIS PUT OPTION

10.1 In consideration of the payment of HK$1.00 by Chris [the Petitioner] to Roger [Mr Roger Leader] (receipt of which is hereby acknowledged by Roger), Roger grants to Chris an option to require Roger to purchase all of the Option Shares on the terms set out in this agreement.

10.2 The Option Shares shall be sold with full title guarantee free from all liens, charges and encumbrances and with all rights attached to them at the date of Completion.

10.3 The Option may only be exercised:

(a) for a period of 10 Business Days immediately after the expiry of 12 months from the Commencement Date; or

(b) (if not exercised under Clause 10.1(a)) for a period of 10 Business Days after the expiry of 24 months from the Commencement Date

For the purposes of this Clause 1.10.3, the date of exercise of the Option is the date on which Chris serves the Exercise Notice on Roger.

10.4 The Option shall be exercised only by Chris giving Roger an Exercise Notice in accordance with Clause 18 which shall include:

(a) the date on which the Exercise Notice is given;

(b) a statement to the effect that Chris is exercising the Option;

(c) a date, which is no less than five and no more than 15 Business Days after the date of the Exercise Notice, on which Completion is to take place; and

(d) a signature by or on behalf of Chris.

10.5 The Option may only be exercised for all of the Option Shares.

10.6 Once given, an Exercise Notice may not be revoked without the written consent of Roger.

10.7 All dividends and other distributions resolved or declared to be paid or made by the Company in respect of the Option Shares by reference to a record date which falls on or before Completion shall belong to, and be payable to, Chris.

10.8 The Consideration payable on exercise of the Option shall be satisfied in cash at Completion.

10.9 The Consideration shall be an aggregate amount of HK$1,020,000,00 [sic] (the ‘Consideration’).

10.10 Completion shall take place at Messrs. Dundons Solicitors at Rooms 1802-1803, 18/F, Lucky Building, 39-41 Wellington Street, Central, Hong Kong on the date specified in the Exercise Notice.

10.11 At Completion, Roger shall pay the Consideration to Chris by cashier order.

10.12 Chris shall deliver to Roger at Completion:

(a) instrument of transfer and sold noted [sic] for the Option Shares duly completed in favour of Roger; and

(b) share certificates for the Option Shares.”

Deliberation

8.It is well-established that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Re Wong Lo Fung unrep, HCB 1864/2013, 29 August 2014 at [25] - [26].

9.In the present case, Mr Roger Leader opposes the Petition on the ground that there are bona fide disputes to the Debt. At paragraph 31 of Mr Cheung’s skeleton submissions, he summarizes the ground as follows:

(1) There is sufficient evidence demonstrating that Clause 10 should not be allowed to remain in the SHA because of (i) the unilateral mistake of Mr Roger Leader which was known to the Petitioner or (ii) the common mistake of Mr Roger Leader and the Petitioner. (“Ground 1”)

(2) In light of the bona fide disputes over Clause 10 and hence the Debt, the Petitioner should establish Mr Roger Leader’s liability in a civil trial, during which Mr Roger Leader will seek to rectify Clause 10 on the basis of unilateral mistake and/or common mistake. The Bankruptcy Court is not the proper forum to resolve those disputes. (“Ground 2”)

(3) There is in any event no crystallised debt which can form the basis of the statutory demand and the present Petition. (“Ground 3”)

10.Ground 1 and Ground 2 can be dealt with together. This is because at the hearing, Mr Cheung informs this court that the so-called bona fide disputes over Clause 10 are references to the unilateral mistake and common mistake under Ground 1. There are no other disputes being put forward by his client.

11.The starting point is that reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed: Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at [84]. A person is bound by his signature to a document whether or not he reads it or understands it unless there is shown to be a recognized legal basis for concluding that his apparent consent has been in some way vitiated: Re Wong Lo Fung at [32].

12.In Bank of China (Hong Kong) Ltd v Fung Chin Kan & Another (2002) 5 HKCFAR 515 at [51], Litton NPJ affirmed:

“... the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood. …” (emphasis added)

13.It is Mr Cheung’s submission that Clause 10 did not reflect the true agreement between the Petitioner and Mr Roger Leader and is against commercial sense. Put simply, the clause in its current form would:

(1) Entitle the Petitioner to force Mr Roger Leader to purchase his “Option Shares” for HK$1,020,000; in other words, allowing the Petitioner to exit the Company but at the same time still retain his entitlement to recover the Shareholder Loan from the Company.

(2) Effectively compel Mr Roger Leader to solely guarantee that the Petitioner would get his money back, even if the Company’s business venture was unsuccessful, which was never the common intention of the Petitioner and Mr Roger Leader[3].

14.Mr Cheung further submits in view of the fact that Clause 10 deviates from the true agreement between the Petitioner and Mr Roger Leader, Mr Roger Leader is minded to apply for rectification of the same on the basis of unilateral mistake and/or common mistake.

15.At the hearing, Mr Cheung explains to this court the true agreement is an oral agreement between the Petitioner and Mr Roger Leader and consists of 2 terms which can be found in Leader 2 at paragraph 39(ii)[4]:

“(ii) [Clause 10] does not reflect the agreement between us in a number of respects. For example, the Petitioner and I had agreed that I would provide the Petitioner with an exit in relation to his investment in QHC (including his Shareholder Loan of HK$1,028,500, see clause 2.3 of the Agreement) by agreeing to acquire the Petitioner’s investment for the aggregate amount of HK$1,020,000, the agreement being that this would only apply if the business plan was realised. This agreement was made in order to provide the Petitioner with an exit as he said he intended to become a private banker within 12 - 18 months. It was certainly not our intention that the whole financial risk of the partnership would in effect be borne by me. It was also agreed that the Shareholder Loan would only be repaid out of the profits of the Company. This is also not reflected in the Agreement.” (emphasis added)

16.In other words, the true agreement is that (i) the Put Option in Clause 10 would only apply if the Company’s business plan was realised ie if the business was successful and (ii) the Shareholder Loan would only be repaid out of the profits of the Company.

17.Assuming that there exists the so-called true agreement, it is true that (i) is not reflected in Clause 10. However, as Mr Lai points out at the hearing, (ii) is reflected in Clause 15.1 of the SHA which provides that any profits of the Company available for distribution shall first be applied for the repayment of all Shareholder Loans. Hence, as far as (ii) is concerned, the SHA effectively reflects the agreement of the parties - if the Company did not make a profit, it is difficult to see how the Shareholder Loan could be repaid by it. But in any event, whether or not (ii) is reflected in the SHA would not affect the Put Option in Clause 10 which has nothing to do with the Shareholder Loan. As stated earlier, the Shareholder Loan was provided for in Clause 2.3 of the SHA and was governed by a detailed Loan Agreement dated 24 June 2019.

18.But this court is not satisfied that the so-called true agreement exists. As far as (i) is concerned ie there was an oral agreement between the Petitioner and Mr Roger Leader that the Put Option would only apply if the Company’s business plan was realised, the reasons are these. First, Mr Roger Leader has provided no particulars as to the circumstances under which the alleged agreement was reached - he simply asserted that there was such an oral agreement. Second, the alleged oral agreement is not corroborated by any contemporaneous documents. This much is accepted by Mr Cheung at the hearing. Third, the Put Option is meant to be an exit mechanism for the Petitioner. This much is also accepted by Mr Roger Leader in paragraph 39(ii) quoted above. One cannot help asking why the Petitioner, who was the largest shareholder of the Company, would agree to exit the Company only if it was successful, but not if it was unsuccessful? Common sense would dictate the opposite: normally, a shareholder would only want to exit a company if it is unsuccessful or if its prospects of success are dim.

19.In other words, this court does not find Mr Roger Leader’s evidence on the so-called true agreement sufficiently precise or believable.

20.For completeness, this court would go on to ask the next question: what exactly is the mistake relied upon to vitiate the Put Option?

21.At paragraph 22 of Mr Cheung’s skeleton submissions, the mistake was simply that Mr Roger Leader thought Clause 10 reflected the true agreement. If so, this is the same sort of mistake that anyone who does not bother to read through a document intended to have legal effect would commit. Allowing this sort of mistake to vitiate Clause 10 would go against the very fundamental principle espoused in Ming Shiu Chung & Ors v Ming Shiu Sum & Ors supra. Importantly, this court does not find Mr Roger Leader’s evidence that he had made such a mistake believable. It seems to this court that Clause 10 is reasonably well drafted and fairly easy to understand. As it imposed a financial obligation on Mr Roger Leader, one would have expected him to pay attention to this clause, even if he did not bother to read through the entire SHA.

22.Lastly, unilateral mistake can only be a ground for rectifying a contract if there is evidence to show inter alia that the counterparty knew of the mistake: Chitty on Contract (34th ed) at para 5-071. There is none in this case, only a bare assertion by Mr Roger Leader.

23.As for common mistake, Mr Cheung submits at paragraph 25 of his skeleton submissions that there is at least a bona fide dispute over whether at the time of execution of the SHA, the Petitioner and Mr Roger Leader had made a common mistake as to Clause 10 ie they both mistakenly thought that it reflected the true agreement. As far as Mr Roger Leader is concerned, this court has already explained above it does not find it believable he had made such a mistake. In this court’s view, the suggestion that the Petitioner was mistaken as to the effect of Clause 10 is but a bare assertion unsupported by evidence. Indeed, the suggestion is fanciful given that, on Mr Roger Leader’s own case, it was the Petitioner alone who gave instructions to Dundons to draft the SHA.

24.For the above reasons, this court has no hesitation in rejecting Ground 1 and Ground 2.

25.Ground 3 can be dealt with briefly.

26.First, Clause 10 clearly provides for the payment by Mr Roger Leader of a liquidated sum ie HK$1,020,000: Clause 10.9.

27.Second, the liquidated sum was payable upon the exercise of the Put Option by cash[5] at Completion: Clause 10.8.

28.Completion should take place on the date specified in the Exercise Notice: Clause 10.10 - on the evidence, that would be 7 July 2020.

29.If so, Mr Roger Leader’s liability to pay the HK$1,020,000 had been fixed on 7 July 2020.

30.The fact that Mr Roger Leader chose not to attend to Completion on 7 July 2020 or to pay the liquidated sum on that day cannot change the crystallization of the Debt. To hold otherwise would mean a debtor can unilaterally postpone his liability to pay a debt by breaching his contractual obligation and put the innocent party to the expense of going to Court to seek a decree of specific performance of Clause 10, as suggested at paragraph 2(g) of Mr Cheung’s skeleton submissions. Unless compelled by binding authority, and none has been cited by Mr Cheung, this court is not prepared to accept his submission.

31.For these reasons, Ground 3 is also rejected.

Disposition and costs

32.To conclude, this court is satisfied that the Petitioner is entitled to a bankruptcy order against Mr Roger Leader and hereby grants the usual bankruptcy order against him and an order nisi that costs of the Petition, including all costs previously reserved, if any, be to the Petitioner.

Mr Tommy Cheung, instructed by MinterEllison LLP, for the Debtor

Mr Richie Lai, instructed by M K Lam & Co, for the Petitioner

Attendance of the Official Receiver was excused