Re Centre Rise Trading Ltd

CACV 250/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 250 OF 2008

(ON APPEAL FROM HCCW NO. 142 OF 2007)

-----------------------

----------------------

Before: Hon Rogers VP, Le Pichon JA and Lam J in Court

Date of Hearing: 22 January 2009

Date of Handing Down Judgment: 10 February 2009

----------------------

J U D G M E N T

----------------------

Hon Rogers VP:

1.This was an appeal from a judgment of Madam Justice Kwan given on 22 July 2008.  The matter before the judge was a petition to wind up the respondent on the ground that the company was insolvent and unable to pay its debts.  The judge found that there were was no substantial dispute on bona fide grounds that the company did not owe a substantial debt to the petitioner and that it had not discharged the onus of establishing to the satisfaction of the court that it had cross-claims which were genuine cross-claims.  The judge concluded that the company had raised a “cloud of objections” and that none of the grounds of opposition were of substance.  In those circumstances the judge made a winding up order.

2.At the conclusion of the hearing of this appeal judgment was reserved which we now give.

The background

3.In October 1997 the petitioner advanced US$32,366,000.00 to the respondent (“the company”) in accordance with a loan agreement.  The loan agreement was secured by a mortgage executed in November 1997 by Beijing Yuetan Building Real Estate Development Company Limited (“Yuetan”), in respect of 27,113 sq m of property and land use rights in the North Block of Yuetan Building in Beijing.  80% of the shares in Yuetan were held by the company.

4.The company defaulted under the loan agreement and proceedings were brought in Hong Kong against the company in October 1999.  Those resulted, in July 2000, in a judgment (“the 2000 judgment”) in favour of the petitioner for US$34,038,045.20 together with further interest on the sum of US$32,366,000.00 at the rate of 4.75 % per annum above the best lending rate for US dollars from time to time quoted by the Bank, from 22 September 1999 until repayment in full.

5.In June 2000, the petitioner commenced an action against the company and Yuetan in the Guangdong Higher People’s Court, seeking repayment of debt namely the sums advanced to the company.

6.There was then a mediation settlement in the Guangdong Higher People’s Court.  That was dated 3 January 2001.  The judge summarised the terms thus:

“ (1)  The Company acknowledged that it owed to the Bank a sum of US$32,366,000.00, interest of US$6,408,596.90, default interest of US$778,520.44 and compound interest of US$618,789.03.  The Company and Yuetan undertook to pay the legal costs and asset preservation costs incurred by the Bank.

(2)  The Bank agreed that Yuetan could sell 10,435.02 sq m out of the 27,113 sq m of the mortgaged properties to China Great Wall Asset Management Corporation (“China Great Wall”) at a price of RMB 14,000.00 per sq m for RMB 146,090,280.00.  The whole of the purchase price should be deposited into the Bank’s account, of which RMB 120 million would be used for the repayment of the Company’s debts.  The balance would be used to repay the legal costs and preservation costs incurred by the Bank.  Thereafter, upon examination and subject to approval by the Bank, a sum of RMB 25 million would be used to pay the relevant transaction costs of Yuetan.

(3)  A gross floor area of 14,535 sq m of the mortgaged properties (i.e. the Set-off Properties mentioned earlier) valued at US$1,488.00 per sq m in the total sum of US$21,628,080.00 was to be set-off against the liabilities owed by the Company to the Bank.  The rent from the Set-off Properties would belong to the Bank and Yuetan agreed to assist the Bank to collect the rent.

(4)  The exact gross floor area of the Set-off Properties, the exact figure of the indebtedness and the deduction of the default interest and compound interest would be confirmed in the indebtedness set-off agreement to be entered into between the Bank, the Company and Yuetan.

(5)  Yuetan undertook that within six months from the date on which the mediation agreement became operative, it would assign the Set-off Properties to the Bank, and would complete the formalities for obtaining the relevant housing ownership certificates, and would simultaneously deliver the housing ownership certificates of the remaining secured properties to the Bank for its safe custody.

(6)  Any outstanding principal and interest was to be repaid by the Company within two years of the date of the mediation agreement.  Yuetan undertook to continue to secure such outstanding sums by the remaining mortgaged properties with a gross floor area of 2,237.29 sq m.

(7)  The Bank agreed to appoint Yuetan to sell the remaining mortgaged properties during the two years from the effective date of the mediation agreement.  The price of the properties which Yuetan was entrusted to sell should not be lower than the price of the Set-off Properties.  If there should be funds or properties remaining after Yuetan had used the proceeds to pay off all the indebtedness, such funds or properties would be regarded as remuneration for Yuetan.

(8)  If the Company and Yuetan could comply with the above conditions, the Bank agreed to waive the default interest and the compound interest.

(9)  Both the fee of acceptance of the action of US$190,240.61 and the asset preservation fees of US$193,800.00 should be borne by the Company and Yuetan.”

7.It will be noted that that mediation settlement was made in the light of the fact that there had been some payments made prior to the date of the settlement.  The judge summarised the remainder of the events in paragraphs 11-16 of her judgment and, since there has been no effective challenge to her findings, I set out them here:

“11.  On 19 January 2001, Yuetan deposited to the Bank’s account RMB 138,785,766.00 (as opposed to RMB 146,090,280.00 stipulated in clause (2) of the Civil Mediation Decision), being 95% of the purchase price received from China Great Wall.  Of this sum, RMB 120 million was applied by the Bank to settle in part the Company’s indebtedness.  After deducting the court fees and preservation fees under clause (9), the balance held by the Bank pursuant to clause (2) was RMB 15,602,382.66, for payment of the relevant transaction costs of Yuetan, subject to the examination and approval by the Bank.

12.   In June and July 2001, Yuetan made various requests to the Bank for payment of the aforesaid balance of the proceeds from China Great Wall, for payment of stamp duty, legal fees and so on.  The Bank requested Yuetan to provide documentary proof for the purpose of approving payment.  By a letter dated 3 August 2001, the Bank informed Yuetan that given the repeated failure to provide documentary proof, the Bank decided to refer the matter to court and in the meantime it would not deal with any further application from Yuetan for payment of transaction costs.

13.   In 2002 and 2003, the Bank obtained orders from the Guangdong Higher People’s Court to enforce the Civil Mediation Decision.  The Guangdong Higher People’s Court entered a civil adjudication decision against the Company and Yuetan, ordering Yuetan to transfer to the Bank the Set-off Properties so as to settle and repay to the Bank US$21,628,080.00, in accordance with clause (3) of the Civil Mediation Decision.  It appointed the Guangzhou Railway Transportation Intermediate Court (“the Guangzhou Railway Court”) to execute the Civil Mediation Decision.  A notice was issued by the Guangdong Higher People’s Court to the Beijing National Land Resources and Housing Management Bureau (“Beijing National Land Bureau”) on 29 May 2002 regarding the said execution, directing the latter to assign the properties to the Bank.

14.   Notwithstanding the enforcement action of the court, as Yuetan had not paid the land premium for the land on which the building was built, the Beijing National Land Bureau could not assist the Bank to process the assignment of the Set-off Properties.

15.   The matter dragged on from 2004 to 2007 despite subsequent decisions and orders of the Guangzhou Railway Court imposing a penalty on the management company of the Yuetan Building (which was controlled by the Company) in failing to give assistance, freezing the shares of the Company in the management company, and ordering the mortgaged properties to be sold by auction.

16.   On 16 January 2007, Yuetan brought an action against the Bank in the Beijing Higher People’s Court (“the Beijing Action”) claiming RMB 161,914,592.00, alleging that it had suffered economic losses as a result of the Bank’s breaches of the Civil Mediation Decision.  The Company was the third party in that action.”

8.In March 2007, the petitioner served a statutory demand on the company for a total sum of US$5,601,329.41.  That was made up of the sum of US$3,593,357.66, outstanding capital, and US$2,007,971.77, accrued interest.  The way the amount was calculated was shown in what has been referred to as Table A, with the associated Table B, which was exhibited “WSS-12” to the second affirmation of Wan Songshan.  It was on the basis of non-compliance with that statutory demand that the petition was presented against the company.

9.The calculation in Table A was relatively simple.  It was based on the premise that as of 31 December 2000 the principal owing was US$32,366,000 and the interest owing was US$7,805,906.30.  That reflected the first clause of the mediation settlement.  The calculation then shows that as of 16 January 2001 the interest had risen by a further US$385,156.69.  On that day the table shows that the principal sum was reduced by the sum of US$21,628,080 (i.e. in accordance with clause (3) of the mediation settlement).  It also emerges from a reading of Table A and Table B that after 16 January 2001 interest was only claimed on the sum of US$3,594,500.79.  That is despite the fact that the RMB120 million referred to in clause (2) of the mediation settlement, together with some RMB7 million which had been repaid, was converted to US dollars as of 27 December 2001.  That sum was credited as paying off all the outstanding interest up to 16 January 2001 and a portion of the capital that was still owing, namely US$7,143,419.21.  It thus reduced the capital amount owing to US$3,594,500.79.

10.The company challenged the petitioner’s calculation of the amount owing.  That caused the petitioner to reconsider the way in which the amount of the debt claimed was calculated.  The major consideration which then came to the fore were the problems, referred to in paragraphs 13-15 of the judgment below, which the petitioner had encountered in obtaining ownership of the Set-off Properties referred to in the mediation settlement.  Without going into details it suffices to say that the transfer of the ownership of the 14,535 sq m referred to in the mediation settlement did not take place as was required.  The petitioner was forced to bring other proceedings in the Mainland in order to obtain the property and it also had to pay some RMB4,689,995 in land premium, fund usage charges and late fees that should have been paid by the company.  On that basis the petitioner put forward its case on the basis that it was entitled to charge interest in the sum US$16,008,119.61 up until 31 January 2007.  The company then argued that if it were to be charged interest over that time it should be entitled to rents which had been received by the petitioner up until that date.  It emerged in the course of the hearing of this appeal that the company had received some of the rents from the relevant property and that the petitioner had also received some of the rents.  Quite how much each party had received was unknown.

11.The judge accepted that the company’s indebtedness was clear on the basis of Tables C and D.  In this court it was apparent that without going into the various arguments and counter arguments on the basis of Tables C and D, the basic claim which was the foundation of the statutory demand was, in essence, sound.

12.In answer to the question as to what grounds the company had to challenge the calculations in Tables A and B, Mr Ng SC, who appeared on behalf of the company, raised two points.  The first point was that it was said that the petitioner had not taken into account the sum of RMB15,602,382.66 at the latest by 5 September 2002.  That was the sum which was left in respect of the sum referred to in clause (2) of the mediation settlement as RMB25 million.  It was said that Yuetan had requested the petitioner to set off the company’s indebtedness using that money.  However, when the letter of 5 September 2002 was read and understood, it was clear that Yuetan had requested the payment of any balance to itself.  That was a very different thing from saying it should be used to discharge the indebtedness of the company.  Furthermore, that sum was earmarked under clause (2) of the mediation settlement to be used to pay the relevant transaction costs.  Some of those costs, namely RMB4,689,995, as already noted above, were ultimately discharged by the petitioner.  For those reasons, therefore, I do not consider that the challenge to the principal amount owing mainly US$3,593, 357.66 is sustainable.

13.The other point taken in respect of the calculations in Tables A and B was that the interest should have been calculated at 7.5%.  That argument was based on the approximate calculation of what the interest in clause (1) of the mediation settlement might be worked out as.  But it must be remembered that the mediation settlement was just that, a settlement.  It was not necessarily a calculation of everything to which the petitioner might be entitled.  As it was, the interest calculations in Table B were at fluctuating rates which were at all times significantly lower than the best lending rate for US dollars + 4.75% referred to in the 2000 judgment.  Quite apart from the fact that I see no basis for the interest rate being calculated by extrapolating something from the mediation settlement that, in my view, was neither express nor implied, I consider that the interest rates taken, which would appear to be no higher than under the original loan agreement, were reasonable.

14.Whereas there may be minor discrepancies in the calculations, it is quite clear that, even on the basis of Tables A and B, there was a substantial amount owing which must have been very close to the amount of the statutory demand.  There has been no attempt by the company to discharge that sum.  To the contrary, even up to now the indebtedness is challenged.  Neither has it been shown that the company has liquid assets to enable it to pay that sum.

15.For completeness it may be mentioned that the Beijing Action, referred in paragraph 16 of the judgment below, failed.  Although an appeal is apparently pending there is no reason to suppose that it has any chance of success.

16.In approaching the matter in this way I should not be taken as disagreeing with the approach of the judge.  In the liquidation, the petitioner may well be able to establish it is entitled to the sum shown in Tables C and D.

17.I would therefore dismiss this appeal with an order nisi of costs in favour of the petitioner.

Hon Le Pichon JA:

18.I agree.

Hon Lam J:

19.I agree for the reasons given by the Vice-President, the appeal should be dismissed on the basis of the calculations in Tables A and B.

Mr Jat Sew Tong SC & Mr Law Man Chung, instructed by Messrs Paul Hastings Janofsky & Walker, for the Petitioner/Respondent

Mr Peter Ng SC & Ms Elsie Yiu, instructed by Messrs Li & Partners, for the Respondent/Appellant