Re Diyon Development Ltd

HCCW 178/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 178 OF 2006

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Before: Hon Kwan J in Court

Date of Hearing:  22 September 2006

Date of Judgment: 22 September 2006

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J U D G M E N T

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1.This is a creditor’s petition presented by Kong Yick Ming to wind up Diyon Development Limited (“the Company”).

2.A petition was presented against the Company by another creditor on 10 April 2006.  On 19 June 2006, I gave leave to the petitioner to withdraw and for Mr Kong to be substituted as petitioner.  Mr Kong filed his amended petition the same day.

3.In the amended petition, it is alleged that the Company is indebted to Mr Kong of HK$1,077,220.67 and RMB1,751,319, being the amounts Mr Kong paid and arising under his personal guarantees dated 8 February 1999 and 10 March 1999 to DBS Bank Limited (formerly Dao Heng Bank Limited) and the Bank of Tokyo-Mitsubishi UFJ, Limited (“UFJ”; formerly The Sanwa Bank Limited) in support of the Company’s indebtedness to these banks and in exercise of his rights of subrogation and indemnity.

4.On 19 May 2006, he served 2 demand letters on the Company for the debts aforesaid.  On the same day, he served a notice of intention to appear on the petition of the then petitioner as a supporting creditor.  As mentioned earlier, Mr Kong was substituted as petitioner when the previous petitioner withdrew.

5.In the amended petition, 3 creditors have given notice of intention to appear as supporting creditors.  Magician Investment (BVI) Limited gave notice of intention to appear as opposing contributory.

6.For the background of the Company and its ultimate parent company Magician Industries (Holdings) Limited (“Magician”), Mr Kong’s prior interest and involvement in the Magician group of companies, the restructuring of the group, the changes in the management of the group, I refer to the decision I gave on 21 June 2006, paragraphs 2 to 16.  This was a decision given on Mr Kong’s application for the appointment of provisional liquidators to the Company, which I dismissed.  I did rule on that occasion Mr Kong has made out a good prima facie case for a winding-up order on his amended petition, for the reasons given in paragraphs 26 to 32.

7.Further evidence has been filed by the Company and Mr Kong subsequent to that hearing.  There is one further affirmation on each side.  The Company continues to dispute liability to Mr Kong on the petitioning debt.

8.The principles are well established where a company seeks dismissal of a petition on the basis that there is a bona fide dispute of the petitioning debt on substantial grounds.  The court hearing the petition has to consider if the company has established a bona fide defence, not whether it has a fair probability of establishing a bona fide defence unlike the situation of a summary judgment, as in a winding up the petitioner’s debt and all the matters previously raised by the company to dispute the debt can still be considered by the liquidator on the adjudication of the petitioner’s proof of debt.  So the onus on the Company at this stage is to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds (Re ICS Computer Distribution Limited [1996] 1HKLR 181 at 183F to J).  It is not sufficient for the Company just to raise a cloud of circumstantial matters, if they fall short of contradicting documents that appear to be regular on the face.  It is incumbent on the Company to show that the objections raised do make out a cogent and substantial case of a bona fide dispute on substantial grounds.  I do not regard this as requiring the Company to prove a negative, as submitted by Mr Fung, SC for the Company.  The test is not satisfied by arguing hypotheses of fact on which it is said that a bona fide dispute could exist.

9.According to Mr Kong, the debt owed to him by the Company arose in this way.  When Mr Kong had a substantial interest in Magician and was serving as its chairman, he had executed personal guarantees to guarantee the liability of the Company to Dao Heng Bank in February 1999 and to Sanwa Bank in March 1999.  Magician and its subsidiaries were in great financial difficulty in 1999, they were indebted to 18 bank creditors.

10.In 2000, the Magician group negotiated a debt restructuring scheme with the 18 bank creditors.  A debt restructuring deed of the Magician group was executed on 10 November 2000.

11.The 18 banks were eventually paid off in accordance with the terms of the debt restructuring deed, with 16 banks agreeing to take a “haircut” of their original indebtedness.  The two exceptions were Dao Heng Bank and Sanwa Bank.  They held personal guarantees from Mr Kong and they preserved their rights to call on his personal guarantees as a pre-condition to their supporting the restructuring, so that any “haircut” these 2 banks took from the restructuring could be recouped from Mr Kong under his personal guarantees.

12.These matters are fully borne out by the following documents:

(1) 2 public announcements of Magician dated 30 September 2000 and 11 November 2000

In the 1^st announcement, under the paragraph “Security”, it was stated that:

“All existing guarantees previously granted to the Creditors by [Magician] in support of the Subsidiaries [this included the Company] or by the Chairman of the board of Directors, Mr Tony Kong, in support of the Group in respect of the Creditors Indebtedness will remain in full force and effect and, may be enforced in accordance with their terms.”

The 2^nd announcement contained this sentence under the heading “Security”:

“Until repayment in full of the Secured Indebtedness and all amounts owing under the Term Loan and the Secured Convertible Bonds, all existing guarantees previously granted to the Residual Creditors and the Secured Creditor by [Magician] in support of the Subsidiaries or by the Chairman of the Board, Mr Tony Kong, in support of the Group in respect of the Bank Indebtedness will remain in full force and effect, and may be enforced in accordance with their terms.”

(2) the debt restructuring deed

Under “Security”, in clause 7.1(c) it was provided that “nothing herein affects any guarantees or security granted to any Creditors by any third party”.  “Creditors” included the 2 banks in question.

Further, by the provision in clause 2, it was expressly provided that the debt restructuring was conditional upon compliance with a number of conditions precedent including clause 2.1(n) (this provided creditors holding guarantees must obtain written agreement from the guarantor that his guarantee remains in full force notwithstanding the terms of the debt restructuring deed) and clause 2.1(o) (this provided that such guarantor must also provide the agent [ABN-AMRO Bank] with a written agreement not to exercise the right of subrogation or indemnity during the restructure period).

(3) a letter provided by Mr Kong to ABN-AMRO Bank dated 14 December 2000 pursuant to clause 2.1(o) of the debt restructuring deed

By this letter Mr Kong undertook that in the event that he discharged his obligations under the guarantees given to the Sanwa Bank and the Dao Heng Bank, he shall not during the restructure period seek to exercise any right of subrogation, contribution or indemnity or demand any payment from the Magician group.

(4) 2 deeds of undertaking both dated 15 December 2000 provided by Mr Kong to Dao Heng Bank and Sanwa Bank pursuant to clause 2.1(n) of the debt restructuring deed

The undertaking recited that it was given in consideration of the 2 banks agreeing to participate in the debt restructuring of the group.  It was expressly stated that the guarantees provided by Mr Kong should remain in full force and effect.  In respect of the undertaking to the Sanwa Bank, the principal amount for which Mr Kong was liable under the guarantee was given.  It was stated that the guarantees and his liability thereunder should not be affected by the banks participating in the debt restructuring of the group.  Lastly, he undertook to pay the banks forthwith upon their demand in accordance with the guarantees all the losses they may suffer in connection with or as a result of their participating in the debt restructuring.

13.Nothing raised by Mr Fung on behalf of the Company has cast doubt on the way that liability was assumed by Mr Kong on behalf of the Company.  Mr Kong’s assertion is well borne out by the documents referred to above.  I note that the current management of the group took over in March 2006, and they only have the records of the group to go by, whereas Mr Kong was in control of the group at the time and was closely involved in the restructuring.

14.The Company has criticized the wording in the 2 public announcements, saying that it did not contain sufficient information as no mention was made of any right of indemnity that Mr Kong might have against the group if his personal guarantee should be invoked by the banks, and there was no disclosure of the amount of the guaranteed liabilities and thus the potential liability of the group to indemnify Mr Kong.  It was alleged by the Company that these announcements were not in compliance with the Listing Rules, Magician being a listed company.  I do not think anything turns on this criticism.  The announcements could certainly have been worded in a far more comprehensive way, nevertheless they were prepared on the advice and with the assistance of the professional advisers of the group, including solicitors.

15.Next, I turn to the assertion of payment of the liability assumed and the evidence adduced in support by Mr Kong.

16.According to him, Dao Heng Bank called on his personal guarantee and between 5 March 2002 and 29 April 2005, he paid a total of HK$460,933.67 to it.  Sanwa Bank called on his personal guarantee and between 5 March 2002 and 29 April 2005 he paid a total of HK$616,287.00 to it.  The total he paid to the 2 banks to discharge the liability of the Company guaranteed by him was HK$1,077,220.67.

17.On 3 April 2006, UFJ assigned all its rights under Mr Kong’s guarantee to Sze Shun Kin.  On 17 May 2006, Mr Kong paid to Mr Sze, as the assignee of the right of the balance of his liability under his personal guarantee to the Sanwa Bank, the sum of RMB1,751,319.

18.The documents adduced by Mr Kong in support of his assertion that payment of HK$1,077,220.67 was made comprise the following:

(1) a covering letter of UFJ to Mr Kong dated 3 May 2006 enclosing a schedule giving a breakdown of his outstanding liabilities as at 31 October 2003

The schedule enclosed stated the outstanding principal as at 30 April 2000 and this was the same amount mentioned in the deed of undertaking given by Mr Kong to the Sanwa Bank dated 15 December 2000 referred to earlier.  The outstanding liability of Mr Kong under the continuing guarantee dated 10 March 1999 according to the schedule was US$349,756.75 as at 31 October 2003, and this was in respect of the liabilities of the Company for an import bills facility in US dollars.  The schedule also showed 2 repayments received by UFJ from Mr Kong towards discharge of this liability under the “Deed of Repayment” on 5 March 2002 for HK$184,864.00 and on 31 October 2002 for HK$188,160.00.

(2) a covering letter of UFJ to Mr Kong dated 20 April 2006 enclosing a schedule giving the breakdown of his outstanding liabilities as at 3 April 2006

The schedule enclosed stated that the outstanding principal and accrued interest under his guarantee aforesaid as at 3 April 2006 was US$218,914.87, and this was in respect of the liabilities of the Company for an import bills facility in US dollars.  The schedule showed among other items 5 payments received by UFJ from Mr Kong after 31 October 2003 towards discharge of this liability under the “Deed of Repayment” and the “Second Deed of Repayment”.  These payments were as follows:

on 31 December 2003, HK$56,249.65;

on 18 August 2004, HK$82,105.34;

on 29 October 2004, HK$33,179.71;

on 1 February 2005, HK$53,688.85;

on 29 April 2005, HK$18,039.45.

(3) an e-mail from DBS Bank to Mr Kong on 8 May 2006 enclosing a repayment record in respect of the Magician group

In the record, the indebtedness of the Company and another subsidiary called Jinda was set out in separate columns.  The record gave the repayments made after the closing of the debt restructuring on 18 December 2000.  The entries showed 7 payments made by Mr Kong for the discharge of the Company’s liabilities and they were as follows:

on 5 March 2002, HK$163,872.00;

on 1 November 2002, HK$166,805.10;

on 31 December 2003, HK$49,863.92;

on 17 August 2004, HK$35,293.32;

on 29 October 2004, HK$14,262.43;

on 31 January 2005, HK$23,082.57;

on 29 April 2005, HK$7,754.33.

The amounts stated as distribution from the HSBC in the repayment record were explained in a letter of Mr Kong to the HSBC dated 24 April 2006 which he produced.

19.These documents emanating from the two banks showed clearly the payments made by Mr Kong pursuant to his personal guarantees in discharge of the liabilities of the Company.

20.The documents produced by Mr Kong in support of his assertion payment of RMB1,751,319 was made comprise the following:

(1)     an assignment agreement made on 3 April 2006 between UFJ and Mr Sze

The recitals of this agreement referred to the guarantee executed by Mr Kong in favour of the Sanwa Bank in March 1999.  They recited the undertaking letters dated 24 August 2000 and 15 December 2000 by which Mr Kong confirmed to UFJ that his liability under the guarantee should not be affected by the participation of UFJ in the debt restructuring of the group and he undertook to pay UFJ all losses it may suffer in connection with the debt restructuring.  They also recited that the debt restructuring was terminated in November 2003 when UFJ ceased to have any claims against the principal borrowers and their group companies and that under the personal guarantee Mr Kong had made “numerous repayments” to UFJ to compensate in part its loss from the debt restructuring.  The amount assigned under this agreement by UFJ to Mr Sze was US$218,914.87, being the outstanding principal and interest under Mr Kong’s guarantee as at 3 April 2006.  The consideration for the assignment was HK$20,000.00.  Under clause 6.6 of the agreement, Mr Sze confirmed, represented and warranted to UFJ that he is a party independent to Mr Kong and the principal borrowers’ group and is not connected with the principal borrowers in any way, that he has adequate information concerning Mr Kong’s business and financial condition to make an informed decision regarding the entering into of the assignment, and that he has independently and without reliance on any party made his own analysis and decision to enter into the agreement.  Clause 7.4 provided that the assignment constituted the entire understanding between the parties with respect to the subject matter.

(2)     a letter dated 3 April 2006 from UFJ to Mr Sze acknowledging receipt of the cash payment of HK$20,000.00 being the consideration under the assignment agreement

(3)     a notice of assignment dated 4 April 2006 from UFJ to Mr Kong giving notice of the assignment agreement

(4)     a repayment proposal made on 4 April 2006 between Mr Kong and Mr Sze

By this proposal, Mr Kong was to make a 1^st repayment not later than 15 April 2006 of not less than RMB100,000 and that he was to repay an amount not less than RMB10,000 each month until the full settlement of the assigned amount.  It was provided that in the event Mr Kong should fail to comply with the repayment schedule, the whole balance of the assigned amount should become immediately due and payable.

(5)     a letter dated 17 May 2006 from Mr Sze to Mr Kong to confirm that Mr Sze had received the total amount of RMB1,751,319 repaid by Mr Kong between 27 April 2006 and 5 May 2006 being the full and final settlement of the assigned amount.

21.Mr Fung has raised a number of objections in a very comprehensive submission.  I do not find it necessary to deal with each and every one of them.  Much was made of the lateness of Mr Kong in making his claim.  His claim was raised at a board meeting on 13 April 2006, followed by a demand letter on 19 May 2006.  There was no mention of any amount owed to Mr Kong in the ledgers or audited accounts of the Company, during the period when he was involved in the management of the group.  These are merely circumstantial matters.  In any event, it would appear that the matter of his claim was raised with the Company before April 2006, as in 2004 Mr Kong’s solicitors had obtained a legal opinion from counsel on whether he had a right of indemnity against the Company and this was provided to Magician on 27 September 2004.  Counsel in his opinion also referred to the letters of undertaking provided by Mr Kong to the 2 banks and the letter to ABN-AMRO Bank in December 2000 referred to earlier.

22.It was submitted that Mr Kong might have discharged his liability to the 2 banks not under the personal guarantees, but under the Deed of Repayment and 2^nd Deed of Repayment referred to in the payment schedules and the repayment records furnished by the banks.  I think it is sufficiently clear from the schedules and the repayment record that the payments were made to discharge Mr Kong’s liabilities under the personal guarantees to guarantee the liability of the Company.  That in addition to his personal guarantees he had also executed the Deed of Repayment and the 2^nd Deed of Repayment in favour of the banks, probably to provide better protection to these creditors, is in my view immaterial.  It can also be seen from the statutory demand served by UFJ against Mr Kong on 24 November 2005 that the demand was made in respect of moneys owing under the guarantee in March 1999, the letters of August 2000, December 2000, June 2000 and the 2 Deeds of Repayment.  Not all of the documents referred to in the statutory demand have been produced, but I do note from those documents produced that they all made reference to Mr Kong’s liabilities under the guarantee in March 1999, and that the guarantee has remained in full force and effect.

23.It was also submitted by Mr Fung that any payments made by Mr Kong to the banks after full performance of the restructuring agreement were made to discharge the liability of Magician, not of the Company, as Magician had assumed responsibility for repayment of all debts due from the subsidiaries under the debt restructuring deed by virtue of clause 3.  I do not think this is a valid point, as stated earlier the liabilities of Mr Kong to the 2 banks under the personal guarantees were not affected by the debt restructuring deed.  The letters of December 2000 and the provisions in the debt restructuring deed have shown this very clearly.

24.The point was made that it was not clear if the payments were made by Mr Kong to discharge the liabilities of the Company or of any other subsidiaries in the group.  This is also a bad point.  I have mentioned the items of repayments made in the schedules and the repayment record of the 2 banks in some detail.  There can be no doubt that these payments were made in respect of the liabilities of the Company and not of any other entity.

25.I see nothing irregular on the face of the documents produced by Mr Kong showing the assignment of the balance of the liabilities under the guarantee from UFJ to Mr Sze.  That UFJ and Mr Sze have not given affirmations in these proceedings did not matter.

26.As to the payment of RMB 1.7 million odd, Mr Kong has explained that his paying off the entire amount in May 2006 (notwithstanding Mr Sze had agreed to accept payment by instalments which may stretch over 13 years) was motivated by his desire to exercise his right of subrogation against the Company, and it would seem, to seek to be substituted as the petitioner in the winding-up petition if there should be failure to pay.  The motives of Mr Kong in seeking to wind up the Company are not relevant.

27.That more documents could have been adduced, apart from the letter of Mr Sze in May 2006, to show that he had received full payment, is also not in my view material.

28.I hold that the Company has failed to establish a bona fide dispute of the petitioning debt on substantial grounds.

29.As there is in my view a debt which cannot be substantially disputed and it has remained unpaid notwithstanding that a demand was made, I am entitled to infer that the Company is unable to pay its debts as they fall due, whether it has the actual ability to do so is not relevant (Cornhill Insurance Plc v Improvement Services Limited [1986] 1 WLR 114; An Feng International Trading Limited v Honour Link International Development Limited [1999]3 HKC 116 at 123E).

30.For the above reasons, I make an order to wind up the Company.  The petitioner’s costs are to be paid out of the assets of the Company.  I would grant a certificate for 2 counsel.

Mr Clifford Smith, SC & Mr Jose Maurellet, instructed by Messrs Oldham, Li & Nie, for the Petitioner

Mr Patrick Fung, SC & Mr William Wong, instructed by Messrs Michael Li & Co., for the Company

The Official Receiver, attendance excused