Re Xu Peixin

HCB 6058/2024

[2025] HKCFI 5846

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6058 OF 2024

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J U D G M E N T

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The Application and representation

1.On 30 August 2024 the Petitioner, Fruitful Worldwide Limited (“Petitioner”), presented a petition seeking a bankruptcy order against Xu Peixin (“Debtor”). The Petition was amended on 17 June 2025.  For convenience references to the Petition are to the Amended Petition unless otherwise indicated.  The Petitioner was represented by Queenie Lau SC and Clara Wong and the Debtor by Jenkin Suen SC and Kaiser Leung.

The Alleged Debt

2.The Petitioner alleges that the debtor owes it HK$28,875,000 (“Debt”) said to arise under a guarantee executed by the debtor on 6 June 2017 (“Guarantee”).  Under the Guarantee the Debtor as principal obligor guaranteed to the Petitioner the due and punctual observance and performance by Bliss Chance Global Limited (“Bliss Chance”) of its obligations under an investment agreement in relation to Bliss Chance Global Limited (喜昌環球有限公司) (“Investment Agreement”) entered into by the Petitioner, Bliss Chance and Bison Capital Financial Holdings Limited (“Bison Financial”) on 17 May 2017.  It is the Petitioner’s case that it did not receive the Class A Fixed Dividends on 22 June 2020 and 22 September 2020 payable under the Investment Agreement in the sum of HK$28,875,000.  A statutory demand was issued on 17 November 2020.  The Petition was issued over four years later.

3.The Grounds of Opposition are summarised as follows in [11] of Mr Suen’s skeleton submissions:

“(1)  The Amended Petition should be dismissed or stayed in light of the arbitration agreement under the Guarantee. By Notice of Arbitration dated 13 June 2025, the Debtor commenced arbitral proceedings to refer the disputes between the Debtor and the Petitioner arising out of the Guarantee to arbitration, and the Petitioner has participated in the arbitration by filing its Answer to Notice of Arbitration dated 20 August 2025. A sole arbitrator will be appointed by the Hong Kong International Arbitration Centre (“HKIAC”) soon; and

(2)  Without prejudice to §(1) above, the Debtor has raised bona  fide dispute on substantial grounds to the Alleged Debt, particularly the foreign illegality defence.”

Principles governing the determination of bankruptcy/winding up proceedings generally

4.The general principles are well established, but in order better to understand my reasoning in relation to the effect of the arbitration clause it is helpful to explain the relevant ones.  A debtor who contests a bankruptcy petition (or winding up petition in the case of a company) on the grounds that he does not owe the creditor the sum claimed is required to demonstrate that he has a bona fide defence on substantial grounds to the debt[1]; for brevity I will refer to this as a “substantial defence”.  The rationale is that a creditor must establish the existence of an undisputed debt to have standing (locus) to seek a bankruptcy order and a substantial dispute about whether the petitioner is a creditor of the debtor is not appropriate for adjudication in bankruptcy proceedings[2]. If the creditor has established that he has locus, he will have the necessary class right (a member of the class of unsecured creditors of the debtor), to seek a bankruptcy order on behalf of the class.  In the context of corporate insolvency, Ungoed Thomas J describes this in Mann v Goldstein[3]as a pre-condition; a prerequisite of presentation of a petition unlike the insolvency requirement, which is a pre-requisite of a winding-up order.  Thus, where the petition debt is disputed by a debtor, the issue before the court to resolve is whether there is a substantial dispute over locus, in other words whether the claimant is a creditor, and commonly this turns on the ability of a debtor to demonstrate a substantial defence.  As I will explain in the next section in Hong Kong the courts have determined that this issue is covered by a conventionally drafted arbitration clause[4].  It was not in dispute before me that the arbitration clause, which is set out below covers a dispute as to whether there is a substantial defence to the debt.

Effect of the arbitration clause

5.The guarantee is governed by the laws of Hong Kong (Clause 20.1.1) and was drafted by Sidley Austin, who acted for the Petitioner.  It formed part of a suite of agreements including the Investment Agreement which was also drafted by Sidley Austin.  It contains an arbitration clause (Clause 20.1.2) in the following conventionally wide terms:

“Any dispute, controversy, difference or claim (the ‘Dispute’) arising out of or relating to this Guarantee including, without limitation, a dispute regarding the existence, validity, interpretation, performance, breach or termination thereof or the consequences of its nullity, shall be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre (the ‘HKIAC’) under the HKIAC Administered Arbitration Rules (the ‘Rules’) in force when the notice of arbitration is submitted. The law of this arbitration clause shall be Hong Kong law. The seat of arbitration shall be Hong Kong. The Parties agree that at the sole option of the Preferred Shares Investor the expedited procedure contained in Article 41 of the Rules (or its equivalent in the Rules in force when the notice of arbitration is submitted) shall be available for all Disputes, regardless of the amount in dispute. The arbitral award shall be final and binding upon the Parties. The arbitration proceedings shall be conducted in English. The arbitration tribunal shall consist of one (1) arbitrator.”

6.As I explained earlier it is not disputed that this clause covers the relevant dispute, namely, whether the Debtor has a substantial defence to the Debt. In Guy Lam[5], the Court of Final Appeal laid down the approach to be adopted in respect of an exclusive jurisdiction clause (“EJC”) in the context of bankruptcy petitions:

(1)  The determination of whether the petitioning debt is bona fide dispute on substantial grounds, while being an issue of the jurisdiction conferred on the court, is a “threshold question” and is part of the exercise of the court’s bankruptcy jurisdiction.  The threshold character of that question leaves room for the court to exercise discretion to decline exercising its bankruptcy jurisdiction to determine that question.  A circumstance where such discretion would be exercised is the fact that the parties have agreed to have all their disputes under the agreement giving rise to the debt to be determined exclusively in another forum (see [98] and [100]).

(2)  Two public policy considerations are involved: on the one hand, “the public policy interest in holding parties to their agreements”, and on the other, “the public policy underpinning the legislative scheme of the court’s bankruptcy jurisdiction” (see [101]).

(3)  The former comes into play when the parties have agreed to litigate their disputes under the agreement giving rise to the debt exclusively in another forum.  In respect of the public interest underlying the statutory scheme on bankruptcy jurisdiction, two relevant matters may bring such public policy into play.  First, “the more obviously insubstantial the ground for disputing the debt, the more it comes into prominence”. Secondly, such public policy is relevant where the creditor community is at risk, which may be evidenced by another creditor presenting a petition. Whether that discretion should be exercised is to be decided by a “multi-factorial” approach, depending on a “range of considerations” (see [101], [102] and [104]).

(4)  In the ordinary case of an EJC, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on frivolous or an abuse of process, the petitioner and the debtor ought to be held to their contract (see [105]).

7.In Re Simplicity & Vogue Retailing (HK) Co Ltd[6], the Court of Appeal held that the approach in Guy Lam is equally applicable to arbitration clauses.  In particular, it was held that:

(1)  In view of the statutory framework protective of arbitration, there is apparently “an even stronger case” (when compared to EJC) for upholding the parties’ contractual bargain that disputes falling within the scope of an arbitration clause should be resolved by arbitration (see [37]).

(2)  Following the approach in Guy Lam (CFA), the threshold character of a dispute about indebtedness leaves room for the exercise of a discretion by the court to decline to exercise the jurisdiction to determine that question, leaving the dispute to be resolved by arbitration as agreed and with regard to the public policy in holding the parties to their agreement.  The court is however alive to the fact that this public policy consideration is not the only consideration and it may exist in an “attenuated form”, as, for example, when a wholly frivolous defence is mounted that would constitute an abuse of process (see [38]).

(3)  The approach of the court in exercising its discretion is “multi-factorial”.  In general, the public policy of the legislative scheme for the court’s insolvency jurisdiction may be prominent where the grounds for disputing the debt are obviously insubstantial.  On the other hand, the significance of such public policy may be much diminished where there is no supporting creditor and no evidence of a creditor community at risk.  However, these are only examples of the factors that the court should take into account and it is important for the court to “retain flexibility” to deal with the case as the circumstances require (see [39]).

(4)  It is “not onerous” for the debtor to demonstrate that there is a genuine intention to arbitrate. To deter a debtor from merely raising an arbitration clause as a tactical move with no genuine intention to arbitrate, it is sensible for the court to require itself to be satisfied of the genuine intention so as to hold the parties to their agreed dispute resolution mechanism by taking into account the steps taken to commence the agreed dispute resolution process (which include preliminary stages such as mediation).  If those steps have yet to be embarked upon, the court could grant a short adjournment for the parties to commence those steps.  If there is no progress during the adjournment, the court could consider lifting the stay or exercising its jurisdiction over the petition debt (see [42]).

8.In regard to what would have to be shown in order for the court to be satisfied that a defence is wholly frivolous, it was observed by Recorder Richard Khaw SC in Re Mega Gold Holdings Ltd[7] at [69], in my view correctly, that:

(1)  The concepts regarding a claim or defence being “frivolous” or constituting an “abuse of process” are commonly found in the context of striking out applications.  It is a “rather high threshold” that one has to overcome in order to establish instances which are “frivolous” or amount to an “abuse of process” and the questions involved are always fact specific.

(2)  In the normal course of events, it is necessary to show that the claim or defence is bound to fail and hence does not warrant a chance to be further investigated at trial.  In order to determine if the threshold is met, the court should only conduct a preliminary assessment on whether it is a plain and obvious case that the dispute is “frivolous” or amounts to an “abuse of process” without attempting to undergo a mini-trial on affidavit evidence.

(3)  Unless a plain and obvious case is shown, the court should decline to exercise its insolvency jurisdiction to determine the dispute, leaving it to be resolved by the agreed arbitration mechanism and with regard to the public policy in holding the parties to their agreement.  Having said that, the court is not straitjacketed by any particular policies and interests and may take into account other relevant factors in making its decision in this regard.

9.In my earlier decision of Re Southwest Pacific Bauxite(HK) Ltd[8](“Lasmos”) I consider at [31] how a debtor might satisfy the court that he has a genuine wish to arbitrate a disputed debt, I say this:

“For these reasons I have concluded that I would depart from the approach in the earlier Hong Kong decisions that I have discussed earlier in this judgment and hold that:

(1) if a company disputes the debt relied on by the petitioner;

(2) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and

(3) the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process (which might include preliminary stages such as mediation) and files an affirmation in accordance with Rule 32 of the Companies (Winding Up) Rules, Cap 32H, Sub.Leg demonstrating this;

the petition should generally be dismissed.  I say generally, because for the reasons that I have discussed in the previous paragraph there may be exceptional cases in which it will be appropriate to stay the petition.  I would add this, that failure to comply with Rule 32 may have the same consequences even where there is an arbitration clause as would be the case where there is not.  The Companies Court may take the view in the exercise of its discretion that in the absence of any evidence being filed in time by the company it should be wound up immediately or a condition imposed for allowing the necessary evidence to be filed out of time such as a payment into court.[9]”

10.If a company wishes to rely on an arbitration clause it will generally be expected to take steps to instigate the contractual dispute resolution mechanism.  Paragraph [31(3)] explains the most obvious way in which a company can do this and that, if it does, generally the petition will be dismissed and the dispute over the debt will have to be resolved by arbitration.  This is consistent with [42] of Kwan VP’s judgment in Simplicity, in which the Court of Appeal state that demonstrating that there is a genuine intention to arbitrate is not onerous.  Paragraph 31 of Lasmos was not suggesting that taking the steps required under the arbitration clause within the time frame necessary to file an affirmation in accordance with Rule 32 of the Companies (Winding-up) Rules (Cap. 32H) was the minimum necessary to satisfy the court that the company wishes to rely on an arbitration clause, anymore than it was suggesting that if this was done a petition was always to be dismissed.  As all three judgments make plain, the court when dealing with a winding up petition presented in reliance on a debt arising under a contract containing an arbitration clause must balance party autonomy considerations and the public policy objectives inherent in the insolvency regime.  What engages the principle of party autonomy is not the commencement of an arbitration by the debtor, it is the parties’ agreement that any dispute should be determined by arbitration.  There may be cases in which there is concern that under the relevant arbitration rules an arbitration tribunal cannot make an award in the form of a negative declaration, i.e., the claimant does not owe money to the respondent, or that given the nature of the dispute the creditor is the more appropriate claimant[10]. Paragraph [31(3)] of Lasmos identifies the most straightforward way of satisfying the court that the agreed dispute mechanism is relied on, but as [42] of Simplicity confirms it is not the only way and there may be cases in which the court takes the view that even if an arbitration has not been commenced by the time the matter comes before the court a debtor should be allowed time to instigate one.  I will now consider the history of these proceedings and the steps taken by the Debtor to commence an arbitration.

Progress of the Arbitration

11.The Petitioner served a statutory demand on 17 November 2020. It issued the Petition almost four years later on 30 August 2024. The explanation for the delay is, and this is not controversial, due to unsuccessful discussions between the Plaintiff and the Debtor to resolve the claim.  On 23 October 2024, the Debtor filed his Notice of Intention to Oppose the Petition.  In the Notice the Debtor asserted two grounds of opposition.  First, that the statutory demand had been satisfied (an argument abandoned by the Debtor by the time the matter came on before me) and, secondly, that the Guarantee contained an arbitration clause and the dispute relating to the Petition should be resolved by arbitration.  In his 1^st affirmation made on 24 October 2024 the Debtor explains in [27] to [30] that he believes he has a foreign illegality defence and that a summons had been issued for leave to adduce expect evidence on Mainland law.  However, the Debtor did not take steps to commence an arbitration at this time.

12.On 25 April 2025 the Debtor’s solicitors (Howse Williams) wrote to the Petitioner requesting the Petitioner to agree to submit the dispute to an HKIAC administered arbitration and proposed candidates.  The Petitioner’s solicitors (DLA) replied on 7 May 2025 disputing that the dispute should be referred to arbitration but observing that the Debtor was at liberty to commence an arbitration if he wished.  Howse Williams replied on 27 May 2025 stating that the Petitioner was clearly the claimant in the disputes and it was the Petitioner’s obligation to commence arbitration proceedings to resolve the dispute.  DLA replied on the next day, 28 May 2025, disputing this. Howse Williams responded on 30 May 2025 contending that the Petitioner rather than the Debtor should commence the arbitration proceedings for several reasons including that otherwise the Debtor would likely bear the burden of proof and likely lose his right to seek security for costs.

13.On 13 June 2025 the Debtor served a notice of arbitration, which the Petitioner answered on 20 August 2025. 

14.Ms Lau submitted that the Debtor was plainly trying to delay matters and did not have a genuine interest in progressing an arbitration to determine whether the Debt is payable.  Consequently, there is no basis for the Court to stay the Petition nor any basis to subject the Debtor’s defences only to the frivolous threshold referred to in [38] of Simplicity.  This submission in my view is inconsistent with the principles that emerge from the line of authorities commencing with Lasmos to which I have referred in [7]–[9].

15.As I explained earlier the public policy consideration, which requires parties to an arbitration agreement to abide by that agreement if a dispute between them arises is not engaged by the commencement of an arbitration.  It is engaged by the inclusion of the arbitration clause in the commercial agreement of which it is a part.  The principles that emerge from the authorities to which I have referred are as follows:

(1)  If a debt relied on by a claimant is disputed, the agreement pursuant to which it arises contains an arbitration clause and the claimant issues a statutory demand or winding-up petition, two public policy considerations are engaged: party autonomy and the public interest underlying the statutory insolvency regime.

(2)  In an ordinary case absent countervailing factors relevant to insolvency, or the court being satisfied that the debtor’s defence is frivolous, the claimant and the putative debtor should be held to their agreement.

(3)  However, the debtor must demonstrate a genuine intention to arbitrate the dispute.

(4)  If the debt has not been disputed or is disputed on frivolous grounds or there are countervailing considerations of the type referred to in [28]–[30] of Lasmos, the claimant may be justified in issuing a statutory demand and, if it is not satisfied, issuing a petition.

16.It is relevant that an arbitration clause imposes a contractual obligation on a claimant to resolve any dispute that his claim gives rise to, and in respect of which he wishes a remedy, to seek the remedy through the arbitration process.  As explained in [25] of Lasmos a claimant, who issues a winding-up petition does so because he believes that it is the most efficacious means of obtaining payment of the debt (or must be assumed to) albeit through the collective insolvency regime that is engaged when a winding-up order is made.  In this sense a claimant, who decides to try and recover a disputed debt by winding-up the company is seeking a remedy to enforce payment of a claim that is disputed.  It may be objected that the winding-up order does not result in a right to payment because, it is necessary for a creditor to first prove his debt in accordance with the procedure contained in Rules 79–83 of the Companies (Winding-up) Rules, Cap. 32H.  This is correct, but proving a debt is part of the process commenced by the presentation of a petition, which leads to the claimant recovering that proportion of his debt as can be paid by an insolvent company once its assets have been collected and are available for distribution by a liquidator.  The bankruptcy regime is substantially the same.

17.Paragraph 31(3) of Lasmos describes an obvious way for a company to demonstrate that a debt is disputed and that the claimant should be held to his agreement to arbitrate, but it is not the only way.  As the Court of Appeal explain in [42] of Simplicity demonstrating that the debtor disputes a debt and wishes it arbitrated is not onerous.  In the penultimate sentence of [42] the Court of Appeal says this:

“It is not onerous to demonstrate that there is a genuine intention to arbitrate. To deter a debtor from merely raising an arbitration clause as a tactical move with no genuine intention to arbitrate, it is sensible for the court to require itself to be satisfied of the genuine intention so as to hold the parties to their agreed dispute resolution mechanism. The courts have emphasized that the steps required under the arbitration clause to commence the process may include preliminary stages such as mediation^[11]. And even if no steps at all were taken, the court could still exercise its discretion in an appropriate case to grant a short adjournment for the debtor to commence arbitration and require an undertaking from him to proceed with the arbitration with all due dispatch^[12]. If no progress is made during the adjournment, the court could consider lifting the stay and proceed to exercise its jurisdiction on the petition debt^[13].”

18.This is justified by virtue of the obligation, which an arbitration clause imposes on a claimant to arbitrate any dispute.  The consequence is that, although the most straightforward way for a putative debtor to demonstrate that there is a dispute and it should be determined in accordance with the arbitration clause is to serve a notice of arbitration, the same can be done by writing to the claimant informing him that the debt is disputed and that the dispute should be referred to arbitration.  In most cases the claimant will be the appropriate party to commence arbitration proceedings and if this is the case and the claimant is invited to commence an arbitration this will generally suffice to demonstrate a genuine intention to hold the claimant to the agreed dispute resolution mechanism.

19.In the present case it seems to me clear that the Petitioner is the natural claimant.  If before the Petition had been issued the Debtor had sent a letter along the lines of that written by Howse Williams on 25 April 2025 in my view that would have sufficed to demonstrate the necessary intention to hold the Petitioner to his bargain and for the dispute over the debt to be arbitrated.  However, the letter was sent some eight months after the Petition was issued and the Petitioner objects that such a delay does not demonstrate a genuine intention to arbitrate and smacks of a delaying tactic.

20.As I have explained what engages the public policy considerations, which supports and promotes party autonomy in dispute resolution is the agreement to arbitrate.  Once a claimant is aware that a debt is disputed and he wishes to instigate proceedings to recover the debt, he should consider commencing an arbitration.  If the claimant believes that either any defence is frivolous (a view that may be reached because the claimant has not been told what the defence is) or there are insolvency considerations, which justify commencing winding-up proceedings, he may be justified in issuing a statutory demand, and, if it is not satisfied, a petition.

21.A debtor faced with a claim for a debt he disputes arising under a contract containing an arbitration clause and a threat to commence insolvency proceedings if it is not paid (perhaps made along with service of a statutory demand) cannot if he wishes to have the dispute resolved by arbitration prudently sit back and do nothing, because by invoking the insolvency regime the claimant brings insolvency considerations into play.  The sooner that the debtor makes plain his desire to arbitrate the more straightforward the matter becomes and absent the claimant demonstrating either that the grounds for disputing the debt are frivolous or an insolvency consideration that justifies presentation of a petition, the court will dismiss the petition.

22.The fact that a debtor does not express an intention to arbitrate until after a petition is presented does not mean that the arbitration clause ceases to be relevant.  However, as the Court of Appeal explains in Simplicity the court needs to be satisfied that the debtor’s intention is genuine and the later the debtor seeks to rely on the arbitration clause there will be more room for argument about this.  As is made clear by the Court of Appeal in [42] even if no steps have been taken before proceedings are commenced, this is not fatal.  The Court of Appeal envisages a debtor being given a short adjournment to commence an arbitration.  In my view service of a notice in opposition, which states that the debt is disputed and that the dispute should be arbitrated will commonly be sufficient to show a genuine intention to arbitrate if coupled with a clear and reasoned proposal that the claimant commence the arbitration process.

23.Demonstrating that the Debtor has a genuine intention to arbitrate has been complicated by the fact that it was not until six months after the Notice of Opposition had been served that Howse Williams wrote requesting that the Petitioner commence an arbitration.  This has left room for the Petitioner to argue that there has never been a genuine intention to arbitrate and the Debtor has simply been trying to delay matters.  It seems to me that although not without some force these points do not of themselves support a conclusion that the Debtor’s reliance on the arbitration clause is purely tactical and the Debtor has failed to demonstrate sufficient indicia of sincerity to justify the court finding a genuine intention to arbitrate.  In my view a genuine intention to arbitrate has been demonstrated.

The Defence

24.In his affirmation made on 24 October 2024 the Debtor states that the Petition is opposed on two grounds.  First, that the Debt has been satisfied (a defence not advanced before me) and, secondly, that the Guarantee contains an arbitration clause and the foreign illegality defence should be arbitrated.  He does not suggest that he had told the Petitioner this prior to the service of his affirmation and his Notice of Intention to Oppose the Petition dated 23 October 2024.  This point is made in [5] and [70] of the 2^nd affirmation of Han Ye filed by the Petitioner. The Debtor does not dispute this in any of the affirmations he filed after 2^nd affirmation of Han Ye and he does not explain why not.  It is, therefore, plain that the Debt was not disputed on the ground of foreign illegality at the time the statutory demand or the Petition was served.  In these circumstances, the Petitioner was entitled to proceed on the basis that the Debt was not disputed, and it could quite properly issue a statutory demand and a petition.  It does not necessarily follow that the court should proceed to require that the Debtor demonstrates a substantial defence, now that a dispute has been raised, however, the failure to alert the Petitioner to the existence of a dispute is relevant to the exercise of the court’s balancing of the discretionary factors in determining whether to require the Petitioner to have the dispute determined by arbitration or first require the Debtor to demonstrate a substantial defence. This is a fact sensitive assessment.

The Debtor’s factual case

25.The Petitioner is an indirectly owned subsidiary of China Huarong Asset Management Co Ltd, which is incorporated in the Mainland (“China Huarong”) and listed in Hong Kong.  I shall refer to the group of companies of which it is the apex as the “Huarong Group”).  It is the Debtor’s case that through another subsidiary, “Huarong”, the Huarong Group conducted what the Debtor calls “off-balance sheet business” and “channel business”. Mr Suen describes what the Debtor means by channel business as a passive management trust, in which the manager only undertakes transactional business and does not assume management responsibilities.  This is usually to avoid regulatory requirements and attain the benefit of off-balance sheet activities, such as keeping a corporation’s profit level high or debt-to-equity and leverage ratios low.

26.The Debtor says he met China Huarong’s former general manager, Bai Tianhui (“Bai”) in 2016.  Bai explained to him that Huarong’s channel business had been under stricter scrutiny by the Mainland authorities and Huarong wanted to explore with the Debtor using Target Capital Management Limited’s (“Target Capital”) asset management as a “new channel”.  The Debtor was the indirect owner of Target Capital, which held various securities licences.  Bai suggested, says the Debtor, that a company listed on the Main Board of the Hong Kong Stock Exchange’s (“HKEX”) be acquired and Target Capital injected into it.  The new company would be used for channel business.

27.It is the Debtor’s case that in January 2017 Bai proposed the following arrangement:

(1)  Target Capital become Huarong’s vehicle to assist in arranging for its off-balance sheet activities (Huarong would arrange funds to set up a fund structure through the assistance of Target Capital to operate as a channel for Huarong’s off-balance sheet business (“Target Capital Fund Channel” or “Fund Channel”)).  The proposed size of the Fund Channel business was in the region of HK$20 billion, with 0.5% channel fees.

(2)  Huarong would cooperate with Bison Capital Financial Holdings Limited (“Bison Financial”) to gain control over a Main Board listed company in Hong Kong by way of equity acquisition, for which Bison Financial would settle 20% of the capital required and the remaining capital would be settled by Huarong through its nominee, but Huarong would only make such investment by way of preferred shares.

(3)  Upon acquisition of a listed company, Target Capital would be integrated as part of the listed company’s assets.

28.Bai explained, says the Debtor, that this was a “win-win” situation for all those involved:

(1)  For Huarong:

(a)  It could utilise the Target Capital Fund Channel to achieve off-balance sheet operations for on-balance sheet asset management business.

(b)  By participating in the acquisition of the listed company and integrating Target Capital into the listed company, it could achieve effective control over the off-balance sheet business activities.

(c)  It would pay Target Capital the channel fees.  However, the fees to be collected following the integration of Target Capital into the listed company may be recovered by Huarong using the preferred shares mechanism through the shareholders’ equity distribution arrangement of the listed company with a view to reducing the costs of the off-balance sheet arrangement.

(2)  For Bison Financial, it could expect to (1) gain profits in the capital market by integrating the asset management business into the listed company; (2) to gain profit by investing in, expanding and strengthening the listed company; and (3) to pave the way for further cooperation with Huarong in the future.

29.Huarong actively assisted in launching the Fund Channel business by setting up the relevant funds under Target Capital Fund Channel:

(1)  On 24 April 2017, Huarong initiated the establishment of three funds.  It directly engaged Ogier, an offshore law firm, to assist.  It communicated with Ogier on the establishment documents of the three funds and the subscription agreements and conveyed the opinions of Huarong’s internal investment committee and other bodies.

(2)  In May 2017, the funds under Target Capital Fund Channel, namely RongTai Capital Management SPC—RongTai Stable Strategy One SP (“RongTai One”), RongTai Capital Management SPC—RongTai Stable Strategy Two SP (“RongTai Two”), and RongTai Capital Management SPC—RongTai Stable Strategy Three SP (“RongTai Three”) (collectively known as “RongTai Funds”), simultaneously completed the signing of the following funds subscription agreements:

(a)  Donghai Investment Holdings (“Donghai”), a wholly-owned subsidiary of Huarong International, acting as a preferred  investor, respectively subscribed for HK$300 million, HK$350 million and HK$350 million of RongTai Funds;

(b)  Generous Star Ventures Limited (“Generous Star”), Crystal Fount Investments Limited (“Crystal Fount”) and United Brilliant International Holdings Limited (“United Brilliant”) as subordinated investors, respectively subscribed for HK$150 million, HK$175 million and HK$175 million of the funds.

(c)  The shares held by United Brilliant in RongTai Three were transferred to Wasson Capital Limited (“Wasson”) on 31 January 2018.

(3)  On 24 May 2017, RongTai Funds made the following investments:

(a)  In Anstone Investment Limited (“Anstone”) in the form of three facility arrangements respectively in the amounts of HK$112,500,000, HK$131,250,000 and HK$131,250,000.

(b)  In Regal Link Development Limited (“Regal Link”) in the form of three equity placements in the amounts of HK$112,500,000, HK$131,250,000 and HK$131,250,000.

(c)  In MEK Special Situation SP (“MEK SP”) managed by MEK Asia Capital SPC (“MEK SPC”) in the form of three subscription agreements all in the amount of HK$131,250,000.

(4)  Further, on 6 September 2017, RongTai Funds respectively contributed HK$88,494,965.35, HK$125,052,431.79 and HK$125,052,431.79 to obtain stocks in Landing International Development Limited (HKEX stock code: 0582) (“Landing”). Gaming was Landing’s important business, whose chairman and actual controller were Yang Zhihui (“Yang”).

30.On 17 May 2017, the Petitioner (a wholly owned subsidiary of Huarong International and acting as a preferred stock investor), Bison Financial (as a common stock investor) and Bliss Chance (as the target company) entered into the Investment Agreement.  The key material terms of the Investment Agreement are as follows:

(1)  Bliss Chance shall allot and issue, and

(a)  The Petitioner shall subscribe for (i) 550,000,000 Class A Preferred Shares at the consideration of HK$550,000,000 and (ii) 100,000,000 Class B Preferred Shares at the consideration of HK$100,000,000;

(b)  Bison Financial shall subscribe for 159,999,999 Ordinary Shares at the consideration of HK$159,999,999 (together with the one Ordinary Share that Bison Financial already held prior to the Agreement would bring its total holding to 160,000,000 Ordinary Shares) (Clauses 2, 3.1, 5.2.2 and 5.2.3; Schedules 1 and 2; Preamble (A));

(2)  Class A Preferred Shares are redeemable preferred shares with no par value in the share capital of Bliss Chance, having the rights, preferences and privileges as set out in the Articles and the Terms of the Class A Preferred Shares (see Schedule 3).

(a)  Class A Preferred Shareholders shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend on Class B Preferred Shares, the Ordinary Shares and any other Shares, of an amount which would give the Class A Preferred Shareholder an annual rate of return of 10.5% per annum on the Class A Preferred Shares Subscription Price for each outstanding Class A Preferred Share payable quarterly on 15 March, 15 June, 15 September and 15 December in each year.  If Bliss Chance fails to pay any sum in respect of the Class A Preferred Shares when the same becomes due and payable under the Articles, interest shall accrue on the overdue sum at the rate of 18% per annum ((i) of Schedule 3).

(b)  Any or all of the Class A Preferred Shares may, subject to the applicable legal restrictions on Bliss Chance’s redemption of its Shares, be redeemed in cash at the option of the holder at any time (i) six months after the Class A Issue Date or (ii) after the occurrence of an Event of Redemption, upon a Class A Redemption Notice from any Class A Preferred Shareholder to Bliss Chance.  The redemption price for each Class A Preferred Share to be redeemed shall be equal to the aggregate amount of (i) 100% of the Class A Preferred Shares Subscription Price and (ii) a premium which would give the Class A Preferred Shareholders an annual rate of return of 10.5% or where such redemption is due to the occurrence of an Event of Redemption, 18% per annum from the Class A Issue Date up to and including the date of payment in full of the Class A Redemption Price less the aggregate amount of all dividends and distributions paid in respect of such Class A Preferred Share being redeemed to such Class A Preferred Shareholder prior to the date of payment in full of the Class A Redemption Price ((iii) of Schedule 3).

(c)  An Event of Redemption is defined to include the failure of Bliss Chan to pay any Class A Preferred Fixed Dividend in respect of the Class A Preferred Shares within 7 days of the Class A Dividend Payment Date (Schedule 3).

(3)  Class B Preferred Shares are redeemable convertible preferred shares with no par value in the share capital of Bliss Chance, having the rights, preferences and privileges as set out in the Articles and the Terms of the Class B Preferred Shares (Schedule 4).

(4)  Each of the Petitioner and Bison Financial shall have the right to appoint one director to the board of Bliss Chance, which shall consist of two (Clauses 7.1.1, 7.3.1 and 7.4.1).

31.On 6 June 2017, the parties further executed, inter alia, the following documents:

(1)  The Guarantee, executed by inter alia the Debtor whereby the Debtor as principal obligor guarantees to the Petitioner the due and punctual observance and performance by and all of Bliss Chance of its obligations under the Investment Agreement (Clause 3 of the Guarantee).

(2)  A “Share Charge relating to certain issued share capital of Roadshow Holdings Limited” (“Bliss Chance Share Charge”) executed by Bison Financial and the Petitioner, whereby Bison Financial, as legal and beneficial owner of its 100% shareholding in Bliss Chance and as continuing security for the payment or discharge of all obligations under the Investment Agreement, charges in favour of the Petitioner by way of a first fixed charge all of its rights, title and interest present and future in and to the shares and the dividends (Clause 2.1 of the Bliss Chance Share Charge).

32.From July to October 2017, Huarong and Bison Financial had been in active discussion with Transport International Holdings Limited (“Transport International”) as the counterparty in respect of the acquisition of a company listed on the HKEX with stock code 888 (“Listco”), the target company.  Huarong was actively and heavily involved in the negotiation and due diligence process.

33.On 27 October 2017, Bliss Chance as chargor and the Petitioner as chargee executed a “Share Charge relating to certain issued share capital of Roadshow Holdings Limited” (“Listco Share Charge”), pursuant to which Bliss Chance charged in favour of the Petitioner all of its rights, title and interest in and to all those 728,127,410 ordinary shares in the capital and issued by the Listco as security for the continued performance of the Investment Agreement.

34.As a last step, Target Capital was integrated into the Listco.  On 23 January 2018, the Listco disclosed a connected transaction: the Listco’s wholly owned subsidiary (i.e. Bison Financial (Hong Kong) Limited) and various vendors (including Bison Financial) entered into an agreement, pursuant to which the Listco’s wholly owned subsidiary shall pay a consideration of HK$270,000,000 to purchase all the issued shares in Target Capital.  The acquisition was officially completed on 14 December 2018.

35.It was against this backdrop says the Debtor that Huarong operated its channel business. Huarong was involved with the Listco through preferred shares arrangement and it used the Target Capital Fund Channel for conducting off-balance sheet business activities.  Since then, Target Capital’s income, including management fees collected from off-balance sheet business activities conducted through Target Capital Fund Channel by Huarong, was formally incorporated into the Listco’s financial statements.

36.Insofar as the Target Capital Fund Channel is concerned, from 2018 to 2020, fund liquidity was maintained and the annual fund management fee income was consolidated into the Listco’s financial statements.  The Debtor says that due to regulatory issues encountered by Huarong in 2018 and Bai’s arrest, the planned off-balance sheet business activities could no longer continue.  From April 2018 onwards, there was no increase in the investment in the off-balance sheet funds, and the total size of the funds failed to meet the expectations.  The Listco had never been able to achieve net profits, and no distributable dividends had been generated from the management fees.

37.Bison Financial made payments to Huarong in the form of preferred share dividends on a quarterly basis according to the stipulations of the Investment Agreement.  From 2020 onwards, fund liquidity severely deteriorated and Bison Financial ceased to pay preferred share dividends.

The foreign illegality defence

38.It is the Debtor’s case that these transactions in Hong Kong by its subsidiaries required China Huarong to obtain regulatory approval in the Mainland.  The Huarong Group’s failure to do so was a contravention of Mainland law and thus arrangements that included the Guarantee were in violation of Mainland law.  However, the Debtor accepts that both the Investment Agreement and the Guarantee are (A) governed by Hong Kong law; (B) their terms are lawful under Hong Kong law; (C) the performance of both was to take place exclusively in Hong Kong and (D) their performance in Hong Kong is lawful.  The Debtor argues that as the Investment Agreement was an attempt to circumvent Mainland law and in violation of it, the Investment Agreement is not enforceable in Hong Kong on public policy grounds and consequently the Guarantee is not enforceable.

39.Generally, under the common law the validity of a contract will be determined by the law, which governs it, in this case the laws of Hong Kong. However, there are cases in which although under the law, which governs the contract it is lawful, the contract’s performance has been found to be unlawful under the law of another jurisdiction and for this reason held to be unenforceable.  These cases can be divided into two categories: (1) those, which were found to involve an infringement of public policy and (2) those involving an illegality rule or lex loci solutionis[14]. In the case of the former category English cases have held that if the true purpose and intent of the parties are to perform an act in violation of foreign law of a friendly jurisdiction the contact is invalidated[15]. In Ryder Industries Ltd v Chan Shui Woo[16] the Court of Final Appeal whilst holding that the illegality defence under the common law of Hong Kong did not fall for decision set out in the judgment of Lord Collins NPJ the principles that represent Hong Kong law[17] and this includes the principle to which I have referred in the previous sentence, which is taken from the English Court of Appeal’s decision in Foster v Driscoll[18].  Lord Collins explains the decision in Foster v Driscoll in [44]–[47].  Lord Collins refers to the judgment of Sankey LJ in which he says that “the mere fact that a vendor of goods knows that the purchaser proposes to run them into a country where they are prohibited by some revenue law is not sufficient to render the contract of sale illegal, but if beyond mere knowledge the vendor actively engages in an adventure to get the goods into such country, the Court will not assist the parties…”.  Lord Collins approves the proposition that “an English contract would be held invalid on account of illegality if the real object and intention of the parties [at the time of concluding the contract] necessitate them joining in an endeavour to perform in a foreign country some act which is illegal by the law of such country ….”.

40.In [48]–[49] Lord Collins explains the later English House of Lord’s decision of Regazzoni v KC Sethia[19] in which Foster v Driscoll was applied.  What is relevant is that the House of Lord’s decision proceeded from the finding that it was the common intention of the parties to the relevant contract to violate the laws of India.  Lord Collins refers to Lord Reid’s statement that the crucial fact was that both parties knew that the contract could not be performed without the suppliers procuring a breach of the law of India.  It would be surprising if the doctrine is engaged if only one party to a contract is aware of the foreign illegality and possessed the necessary object and intent.  It seems to me clear that to succeed in a defence of foreign illegality it is not sufficient for the Debtor to prove that the making and/or performance of the Investment Agreement was illegal under Mainland law.  The Debtor has also to prove that both he and the Petitioner knew that performance of the Investment Agreement would, or at least there was a strong possibility it would, infringe Mainland law, but proceeded to make the agreement and implement it notwithstanding.

41.For present purposes I accept that the expert evidence filed by the Debtor demonstrates that it is arguable (I put it no higher than that) that the Investment Agreement violated Mainland laws that governed the Huarong Group’s business activities in whatever jurisdiction they were carried out including Hong Kong.  I also accept for present purposes that it is arguable that Bai knew this (but again I put it no higher) and that his knowledge is sufficient for the purposes of establishing the Petitioner’s intention to implement a business activity that was illegal under Mainland law.  However, as I have explained it is necessary for the Debtor to prove that he knew sufficient to support a finding that both he and the Petitioner had a common object and intention to implement an agreement, they knew was unlawful under Mainland law. It is not sufficient for the Debtor to show that he understood that in entering the Investment Agreement the Huarong Group intended to develop a new business in Hong Kong, because a similar business in the Mainland was facing increasing restrictions unless he also understood the new business in Hong Kong would result in the infringement of Mainland law.  I now turn to the Debtor’s evidence.

42.The Debtor first raises the illegality defence in his first affirmation in which he says in [34] that he had been told by Bai that “Huarong’s then channel business had been under strict scrutiny by PRC authorities.  Yet, Bai did not explain that in much detail to me …… Therefore, he considered the need for ‘new channels’ for Huarong’s off-balance sheet business activities ….”. This evidence falls far short of demonstrating that the Debtor thought at the time the Investment Agreement was made that the business contemplated by the Investment Agreement would infringe Mainland law.  Nothing in the subsequent 40 paragraphs in which he talks about the Investment Agreement and the infringement of Mainland law makes reference to the Debtor understanding at the time the Investment Agreement was made that it involved the Huarong Group infringing Mainland law.  The Debtor’s evidence goes into detail about each stage of the implementation of the Investment Agreement and explains, for example, that a major international law firm, Sidley Austin, drafted much of the documentation.  The Debtor does not suggest that any stage he believed that what was proposed infringed, or even might infringe, Mainland law.

43.The Debtor filed six further affirmations, which deal with various matters including at some length in his 3^rd affirmation the Debtor’s views on the illegality issue (largely inadmissible evidence, but clearly indicating his mind was focused on the issue).  These additional affirmations also contain no evidence that suggest the Debtor thought at the time the Investment Agreement was made that either its terms or its performance was illegal under Mainland law.  It, therefore, seems to me that the foreign illegality defence is frivolous and has no prospect of success.  The Debtor has tried to distract attention from the obvious flaw in his defence, namely, that he did not think at the time the Investment Agreement was signed or implemented that it infringed Mainland law and he had no reason to so think.  This is a defence concocted after the event.  The Court and the Petitioner have been presented with extensive evidence, both factual and opinion evidence on Mainland law, that has endeavored to make the matter seem as complicated as possible.  The evidence, however, fails to address adequately a central component of a foreign illegality defence.

44.Although it was not central to the argument before me the Debtor did advance another defence.  The Debtor says in [42] to [43] of his first affirmation that he asked Bai why it was necessary to require the Debtor and Jiang to guarantee performance of the Investment Agreement by Bliss Chance.  He says that Bai reassured him that the Guarantee was a formality and China Huarong would never enforce it, because China Huarong would not give up its control over the business and accordingly would not redeem the preferred shares or enforce the Guarantee.  Mr Suen submitted that this was evidence of an estoppel by representation and prevented the Petitioner from enforcing the Guarantee[20]. The Petitioner was not able to file any evidence, which addresses what Bai did or did not say.  Such evidence as it has filed directed to the issue is submission rather than evidence from a witness, who was present at the time recalling what took place.  It does not seem to me that what the Debtor is suggesting was said to him by Bai, who was China Huarong’s general manager, is so inherently unlikely in my experience that his evidence on affirmation can be dismissed as frivolous.

Disposition

45.I will, therefore, make an order that the Petition is dismissed.  I will make a costs order nisi that the Petitioner pays the Debtor’s costs with a certificate for two counsel.