Wong Ben Koon v. Cheer Hope Holdings Ltd

HCSD 27/2022

[2022] HKCFI 3823

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 27 OF 2022

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BETWEEN

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Coram: Deputy High Court Judge H. Au-Yeung in Chambers (Not Open to Public)

Date of Hearing: 20 December 2022

Date of Decision: 20 December 2022

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DECISION

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THE APPLICATION

1.This is the applicant’s application filed on 26 July 2022 (“the Application”) to set aside the statutory demand dated 28 March 2022 issued to him by the respondent (“the Statutory Demand”).

THE UNDISPUTED FACTS

2.From 1993 to 2020, the applicant was the Chairman and Executive Director of Prosperity International Holdings (HK) Limited (“Prosperity International”), which is a company listed on the Main Board of the Stock Exchange of Hong Kong.

3.The applicant has also been a director of Prosperity Minerals Group Limited (“Prosperity Minerals”) since 2005.

4.The respondent is a subsidiary of CCBI Investments Limited, which in turn is a subsidiary of China Construction Bank Corporation (“CCBC”).

5.On 16 March 2016, the respondent and Prosperity International entered into a Subscription Agreement (“Subscription Agreement”), under which the respondent agreed to subscribe for the US$20,000,000 interest bearing guaranteed notes (“the Note”) constituted by a note instrument which was executed on 15 April 2016 (“the Note Instrument”) and the US$20,000,000 5% guaranteed convertible bonds (“Convertible Bonds”) constituted by the Convertible Bond Instrument which was executed on 15 April 2016 (“the Convertible Bond Instrument”), both issued by Prosperity International.

6.The maturity date of the Note and of the Convertible Bond was 15 April 2019.

7.The applicant executed a guarantee in respect of the Subscription Agreement (“the Subscription Agreement Personal Guarantee”) dated 15 April 2016. Under Clause 2 thereof, the applicant agreed to guarantee Prosperity International’s performance under “the Transaction Documents” (which include the Subscription Agreement, the Note Instrument and the Convertible Bond Instrument, as amended from time to time).

8.Pursuant to a Put Option Deed dated 13 September 2016 (“the Put Option Deed”), Prosperity Minerals granted the respondent a put option in respect of certain shares in Prosperity International held by the respondent. The maturity date thereof (as extended) was 31 January 2019.

9.Under Clause 5 of the Put Option Deed, the applicant guaranteed the punctual performance by Prosperity Minerals and undertook that whenever Prosperity Minerals does not pay any amount due under or in connection with the Put Option Deed, he must immediately pay that amount on demand.

10.On 15 March 2022, the respondent issued a letter of demand to Prosperity Minerals in respect of the outstanding sum under the Put Option Deed.

11.On the same day, the respondent’s solicitors issued demand letters to the applicant in respect of the amounts due in relation to the Subscription Agreement and the Put Option Deed.

12.On 28/29 March 2022, the respondent served the Statutory Demand on the applicant.

13.Shortly thereafter, the applicant appointed Mr Johnson Chan (“Chan”) to approach CCBC for negotiation and requested the respondent to withhold bankruptcy proceedings.

TIMING OF THE APPLICATION

14.While the Statutory Demand was served on the applicant no later than 29 March 2022[1], the present application was only made on 26 July 2022.

15.Rule 47 of the Bankruptcy Rules (Cap.6A, Laws of Hong Kong) provides, inter alia, that:

“(1) The debtor may, within the period allowed by this rule, apply to the court for an order setting the statutory demand aside.

(2) The period referred to in subrule (1) is 18 days from the date of the service on him of the statutory demand or, where the demand is advertised in a newspaper pursuant to rule 46, from the date of the advertisement’s appearance or (as the case may be) its first appearance.

[…]”

16.Even if the service of the Statutory Demand was only effected on the applicant on 29 March 2022 as alleged, it is indisputable that the Application was made outside the 18 days’ period[2] prescribed under rule 47(2) of the Bankruptcy Rules as set out above, and there was a delay of over 3 months.

Legal principles on extension of time

17.While the Bankruptcy Ordinance (Cap.6, Laws of Hong Kong) has given the Court jurisdiction to extend the aforesaid 18 days’ period[3], rule 204 of the Bankruptcy Rules stipulates that:

“The court may, under special circumstances and for good cause shown, extend or abridge the time appointed by these rules or fixed by any order of the court for doing any act or taking any proceeding.” (emphasis added)

18.It can therefore be seen that the Court may only grant extension of time if the applicant can show “special circumstances” and “good cause”.

19.In Li Wo Hing v Raiffeisen Bank International AG, Beijing Branch (奧地利奧合國際銀行股份有限公司北京分行) (formerly known as Raiffeisen Zentralbank Oesterreich AG, Beijing Branch (奧地利中央合作銀行股份有限公司北京分行)) (HCSD 19/2014, unreported, 10 July 2014), To J held at [11] that:

“[…]‘special circumstances’ refer to surrounding circumstances which may afford an excuse for the delay in complying with the time limit; while ‘good cause’ relates to merits in respect of the proceedings for which extension of time for taking certain steps in the proceedings is sought. Once the time appointed by the rules has passed, an applicant has to show cause and an explanation for the delay. In other words, 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, for example, 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 will be more ready to grant indulgence for short delays […]”

The applicant’s explanation of delay

20.In his 1^st Affirmation, the applicant has given the following reasons for his delay:

(1) The person who served the Statutory Demand on him on 29 March 2022 did not explain the nature of the document to him. As the document was in English, and since he was busy preparing for a business trip for 31 March 2022, he did not pay sufficient heed to the document;

(2) Even when one of his associates explained the content of the Statutory Demand to him later on the same day, he did not fully register the significance of the same because of the anxiety caused by his forthcoming international travel;

(3) He was confused by the content of the Statutory Demand which mentioned about a personal guarantee which he had no recollection of signing;

(4) As he was concerned about the ramifications of the Statutory Demand, he authorised his associate (i.e. Chan) to handle the matter in his absence;

(5) During his absence in Hong Kong, he had instructed Chan to ask the respondent for indulgence so that he could deal with the matter personally upon his return to Hong Kong;

(6) Because of his limited educational background, he had erroneously assumed that the proceedings were still in nascent stages;

(7) As both sides appeared to be making genuine efforts in communicating with each other, it would be pre-mature for him to engage lawyer at that stage (even though he accepted, with the benefit of hindsight, that he should have asked Chan to instruct lawyers to act on his behalf immediately);

(8) He only realised the severity of the situation when he was informed by the Official Receiver by letter dated 27 June 2022 that a Bankruptcy Petition had been filed against him. He asked Chan to engage a firm of solicitors immediately, and attended the firm of solicitors to deal with the matter upon his completion of a 7-day quarantine on 8 July 2022.

Whether there were any special circumstances

21.I am of the view that the reasons provided by the applicant fall far short of “special circumstances”:

(1) While he initially blamed the server of the Statutory Demand for his failure to explain the nature of the document to him, the applicant admitted that one of his associates explained the content of the document to him subsequently on the same day. There is no reason why his associate would fail to remind him that he must apply to set aside the Statutory Demand within 18 days of his receipt thereof if he had such an application (and there is no evidence from the applicant that his associate failed to tell him about this);

(2) On the applicant’s own evidence, he was concerned about the ramifications of the Statutory Demand, and that was why he instructed Chan immediately to take care of the matter for him;

(3) While the applicant has tried to give the Court an impression that he did not appreciate the severity of the situation at the material time, he at the same time confessed that he had an “utmost concern about the gravity of the situation”[4].

22.In my view, the applicant only has himself to blame for not having taken prompt action in making the Application earlier.

23.I also take the view that the circumstances relied on by the applicant are so inadequate that they would not be enough to justify a much shorter delay, not to mention a delay of 3 months, which is substantial.

Conclusion on extension of time

24.I therefore hold that the Court should not exercise its discretion in extending the time for the applicant to make the Application, which should be dismissed on this ground alone.

MERITS OF THE SETTING ASIDE APPLICATION

25.For the sake of completeness, I would also consider the merits of the Application.

Applicable legal principles

26.Rule 48(5) of the Bankruptcy Rules (Cap.6A, Laws of Hong Kong) provides that the Court may grant the application to set aside statutory demand if:

“(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c) 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; or

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

27.The principles applicable to such a rule have been summarised by Linda Chan J in DCKD & Another v JPWL [2022] HKCFI 1059 as follows:

“22. The burden is on the Applicants to satisfy the Court that there are valid grounds to set aside the [statutory demands].

23. When considering an application to set aside, the Court is only undertaking a limited exercise and will only be concerned with whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand (Budge v AF Budge (Contractors) Ltd [1997] BPIR 366, 372A-D, per Peter Gibson LJ). As Kwan J (as she then was) explained in Re Choy Wai Bor, HCB 8565/2001, 28 May 2002, §22:

‘[T]he mechanism to set aside a statutory demand is intended to be a filtering process to protect the debtor against a petition being presented based on a statutory demand that is demonstrably unjustified.’

24. For the purpose of demonstrating that the debt is disputed on substantial grounds within rule 48(5)(b), the Applicants must establish by sufficiently precise factual evidence which is believable that they have a defence of substance, not just a fair probability of one (Chan Ping Lam Waymond v Noble Art Ltd, CACV 270/2012, 30 September 2013, §8, per Fok JA (as he then was)). The Court will consider the case being put forward with a reasonably critical eye, testing the case against the other background facts and circumstances (Lai Kar Yee v The Prudential Assurance Company Limited, CACV 233/2014, 9 June 2017, §12, per Barma JA).

25. Where a debtor relies ‘on other grounds’ within rule 48(5)(d), the question for the Court remains the same – whether the creditor is entitled to rely on the non-compliance with the statutory demand to found a petition. This was stated by Nicholls LJ in In re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at 276B-E:

‘… Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1)^[5], in the absence of an unsatisfied return to execution or other process, a debtor’s inability to pay the debt in question is established if, but only if, the appropriate statutory demand has been served and not complied with.

When therefore the rules provide, as does rule 6.5(4)(d)^[6], for the court to have a residual discretion to set aside the statutory demand, the circumstances which normally will be required before a court can be satisfied that the demand ‘ought’ to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.’ (underlined added)

26. It is not necessary that evidence as to prejudice is filed or that the possibility of prejudice has been raised by a debtor. The question remains whether it would be just to allow the statutory demand to be relied on for a bankruptcy petition to be brought (Re Leung Cherng Jiunn, §16).”

The Applicant’s grounds for setting aside

28.Mr Chung for the applicant submitted that the debt is disputed on substantial grounds in that the applicant had no knowledge of the alleged Personal Guarantee(s) attached to the Subscription Agreement and in the Put Option Deed. It was also said that he only signed the Subscription Agreement and the Put Option Deed under the cursory explanation and assurances given by Mr Yam of the respondent on 16 March 2016 and 13 September 2016 respectively (“the No Knowledge of Guarantees Ground”).

29.It was further submitted that the Statutory Demand is invalid and/or unenforceable because:

(1) the debts attached to the Subscription Agreement and the Put Option Deed have not been properly ascertained and/or agreed by either Prosperity International or Prosperity Minerals; nor have those debts been adjudicated by any competent court of law in any jurisdiction (“the No Adjudication Ground”);

(2) during the applicant’s tenure as the chairman or director of Prosperity International and Prosperity Minerals (as the case may be), he had never been informed about the default on their part under the Subscription Agreement and the Put Option Deed (“the No Knowledge of Default Ground”);

(3) “Prosperity International proposed a financial restructuring by means of a winding up petition and appointment of joint and several provisional liquidators (“JPLs”) on a light touch approach on 28 November 2019. The applicant had never been informed by either Prosperity International, Prosperity Minerals or the JPLs that the respondent had contacted any of them regarding the Subscription Agreement and the Put Option Deed”[7] (“the No Contact of Primary Debtor Ground”)

30.Mr Chung further submitted that the issuance and subsequent service of the Statutory Demand was procedurally improper and irregular (“the Procedural Impropriety Ground”).

31.I will consider these grounds in turn below.

Discussion

The No Knowledge of Guarantees Ground

32.The applicant alleged that he had no knowledge of the alleged Personal Guarantee(s) attached to the Subscription Agreement and of the Put Option Deed and that he had signed the said documents (which were in English) only upon the cursory explanation and assurances given by Mr Yam of the respondent (who presented those documents to the applicant for his signatures) that those documents would not cause any alarm or concern. The applicant further alleged that if he had known that he was providing a personal guarantee, he would not have signed the documents.

33.I have no hesitation in coming to the conclusion that these allegations are totally incredible.

34.Firstly, it is evident that the applicant had instructed a solicitors’ firm (Stephenson Harwood) (“SH”) to represent him in the preparation and execution of the Subscription Agreement. It is incredible that SH has not explained to him the legal effect of the Subscription Agreement (including the Subscription Agreement Personal Guarantee which was included as one of the schedules thereof).

35.Secondly, it is evident that the applicant was arranged by SH to sign the Subscription Agreement as “Personal Guarantor”, and that the signature page of the document (bearing the applicant’s signature in his personal capacity as “Personal Guarantor”) was sent by SH to the respondent’s solicitors on 16 March 2016. This shows that the applicant’s evidence that the Subscription Agreement was presented by Mr Yam to him for signature is unbelievable.

36.As far as the Put Option Deed is concerned, it is evident that it was Mr Tommy Wan of Prosperity International who arranged for the return of the signature pages thereof to the respondent.

37.Hence, the applicant’s allegation that he was asked by Mr Yam of the respondent face-to-face to sign the Put Option Deed is contradicted by contemporaneous documents.

38.Thirdly, there are a lot of other documents which show that the applicant knew and accepted his obligation as a guarantor at the material time, to name a few:

(1) In the minutes of the Board of Directors (“Prosperity International’s Board”)’ meeting of Prosperity International held on 15 March 2016 (at which the applicant attended as Chairman of the meeting), it was recorded that Prosperity International’s Board approved the Subscription Agreement and it was specifically noted therein that the closing of the Subscription Agreement was conditional upon the applicant’s giving his personal guarantee in relation thereto. The applicant had signed the minutes;

(2) By virtue of the Notice to Personal Guarantor dated 15 April 2016 (which was written in both Chinese and English) which the applicant signed, the applicant confirmed that he had read and fully understood the Subscription Agreement Personal Guarantee;

(3) In Prosperity International’s Public Announcement dated 16 March 2016 (which the applicant signed as Chairman of the company), it was stated that the applicant agreed to irrevocably and unconditionally guarantee the punctual performance by Prosperity International of all of its obligation under, inter alia, the Subscription Agreement;

(4) The written resolution of directors of Prosperity Minerals dated 13 September 2016 approved the Put Option Deed. In the said resolution, the applicant was referred to as a guarantor. The applicant had signed this written resolution;

(5) By virtue of an Acknowledgement attached to the “Form of Notice to Guarantor” (which the applicant signed), the applicant indicated his full understanding of the transactions contemplated by the Put Option Deed and of his obligations and liabilities as a guarantor under the said Deed.

39.Fourthly, in any event, it is trite that persons of full age and understanding are bound by documents they signed unless they can establish a recognised basis to disown such documents: Ming Shiu Chung & Others v Ming Shiu Sum & Others (2006) 9 HKCFAR 334 at [84] – [87]. The applicant’s counsel has not contended that any such basis existed in the present case.

The No Adjudication Ground

40.It was submitted that the debts attached to the Subscription Agreement and the Put Option Deed have not been properly ascertained and/or agreed by either Prosperity International or Prosperity Minerals; nor have those debts been adjudicated by any competent court of law in any jurisdiction.

41.The calculations of the outstanding amounts have been set out in the relevant documents.

42.The applicant’s counsel has not drawn to the Court’s attention any requirement that the applicant’s liability would only be crystalised upon the agreement of Prosperity International or Prosperity Minerals (as the case may be).

43.Neither was it a stipulated requirement that the respondent could only go after the applicant pursuant to the personal guarantees upon a competent court of law’s adjudication on the liability on the part of Prosperity International or Prosperity Minerals.

44.This submission is therefore totally without merit.

The No Knowledge of Default Ground

45.The applicant alleged that he had not been informed about the default on the part of Prosperity International or Prosperity Minerals while he was still the chairman or director thereof (as the case may be).

46.This is a totally irrelevant matter.

47.Furthermore, even if this matter is relevant, the undisputed evidence that the applicant has made partial repayments of sums owed under the Put Option Deed between August 2018 and April 2019 shows that the applicant’s denial of knowledge of default on the part of Prosperity Minerals is totally incredible.

The No Contact of Primary Debtor Ground

48.The applicant stated that he had never been informed by Prosperity International, Prosperity Minerals or the JPLs that the respondent had contacted any of them regarding the Subscription Agreement and the Put Option Deed.

49.Pursuant to the Subscription Agreement Personal Guarantee, the applicant has undertaken with the respondent that:

“whenever [Prosperity International] does not pay any amount when due under or in connection with any Transaction Document, the [Applicant] shall immediately on demand pay that amount as if he was [Prosperity International].”[8]

50.A similar provision is also included in Clause 5.1.2 of the Put Option Deed.

51.Hence, the matter raised by the applicant under the No Contact of Primary Debtor Ground is totally irrelevant.

The Procedural Impropriety Ground

52.Lastly, Mr Chung, relying on paragraphs 22 – 26 of the applicant’s 1^st Affirmation, contended that the issuance and subsequent service of the Statutory Demand was procedurally improper and irregular. I set out those paragraphs in full as follows:

“22. Quite apart from the validity of the personal guarantees, I have also been advised that there was procedural impropriety in the issuance and subsequent service of the Statutory Demand.

23. As I have alluded to above and will do so in greater detail below, I was not aware that I had signed a personal guarantee until the contents of the Statutory Demand were explained to me. Therefore, I never admitted the debt and no judgment was obtained in relation to this debt before the issuance of the Statutory Demand.

24. Further, on 8 July 2022, I found out from my family members that a package containing 2 copies of documents, namely, 2 copies of Form of Default Redemption Notice to Prosperity International Holdings (H.K.) Limited both purportedly dated 15 March 2022 (the ‘2 purported Default Redemption Notices’) had been delivered to my residential address on 8 July 2022 i.e. almost 4 months after the same were purportedly issued. The 2 purported Default Redemption Notices were copied to Wong Ben Koon, the Application (sic) herein and I reiterate that I only received them on 8 July 2022 […]

25. I then inspected the 2 purported Default Redemption Notices and concluded that they were improper and irregular. The particulars of my observations are set out as follows:

(a) Since the restructuring of board of directors and management in or around late 2021, there has been no subsequent reappointment of directors to replace the then existing directors […];

(b) There has been no authorization of admission to the amount of debt stated in the 2 purported Default Redemption Notices because there was no director appointed by the Board of Directors of Prosperity International at the material times.

26. In the circumstances, I have been advised and verify believe that the 2 purported Default Redemption Notices were improper and irregular and hence they are voidable or invalid. I, as a purported personal guarantor, a secondary debtor, shall not be liable to a debt which has not been ascertained. I would leave it to my lawyer to give submissions to the court on the irregularities and impropriety of the issuance of the Statutory Demand as well as the inordinate delay of service of the 2 purported Default Redemption Notices on me by the Respondent in due course.”

53.While the applicant stated that his lawyer would make submission on the irregularities and impropriety of the issuance of the Statutory Demand, his counsel did not attempt to do so apart from referring to the content of the applicant’s 1^st Affirmation as quoted above. It is understandable, because the purported “irregularities and impropriety of the issuance of the Statutory Demand” are totally groundless.

Conclusion on the merits of the applicant’s grounds of setting aside

54.I therefore hold that the applicant’s Application must fail even if time has been extended for him to take out the Application beyond the 18-day time limit.

DISPOSITION

55.The Application is hereby dismissed.

COSTS

56.Costs should follow the event.

57.I therefore order that the applicant shall bear the costs of the respondent, to be taxed on indemnity basis[9] if not agreed.

UPLOADING OF THIS DECISION

58.By consent, I direct that this Decision may be uploaded to the Judiciary website pursuant to paragraph 2 of Practice Direction 25.2.

Mr Hylas Chung, instructed by K. Y. Woo & Co., for the applicant

Mr Keith Chan, instructed by Herbert Smith Freehills, for the respondent (attending remotely by VCF)