Re Neo Telemedia Ltd

HCCW 288/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 288 OF 2014

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D E C I S I O N

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1.This was an application by Neo Telemedia Ltd (“the company”) to strike out a winding up petition presented on 14 October 2014 by Beyond Net Service Ltd (“the petitioner”).

2.The petition was issued after a statutory demand served on the company on 4 September 2014 went unsatisfied.  The statutory demand was made in respect of the debt of HK$3,067,500 due under a cheque issued by the company that was dishonoured upon presentation.  The statutory demand remains unsatisfied.

3.The basis of the present application to strike out the petition is that the debt is disputed and that the company has on a bona fide defence on substantial grounds.  The company’s case is that there has been a total failure of consideration.

CHRONOLOGY AND BACKGROUND FACTS

4.The company is a listed company in Hong Kong.  It holds a number of subsidiaries engaging in the sale of telecommunication products and services and transmedia advertising services mainly in the PRC.  The company acquired Cloud Computing Investment Ltd (“Cloud Computing”) on 24 April 2013.

5.On 1 August 2012, prior to its acquisition by the company, Cloud Computing had entered into a consultancy agreement with the petitioner for the period of one year.  The consultancy fee was RMB4.5 million payable by Cloud Computing or its authorized third party within 30 days. No payment was effected within that period.

6.Shortly after acquiring the new subsidiary, on 9 May 2013, the company made a payment of HK$1.6 million on behalf of Cloud Computing to the nominated agent of the petitioner and a further payment of HK$1 million to the petitioner on 16 September 2013 in respect of the consultancy agreement.

7.Then on 15 December 2013 the company drew a cheque for HK$3,067,500 in favour of the petitioner for the balance of the consultancy fee.

8.On 25 February 2014 Cloud Computing’s auditors issued three confirmations of audit to the petitioner pertaining to the periods ended 31 December 2012, 24 April 2013 and 31 December 2013 respectively.

9.The petitioner presented the cheque for payment on 4 June 2014.  It was dishonoured.

10.On 4 September 2014 the petitioner issued the statutory demand.

11.The company’s solicitors replied on 19 September 2014 alleging for the first time that there had been a total failure of consideration.  It also demanded that the HK$2.6 million be refunded to the company. 

12.The petitioner presented the petition on 14 October 2014.

13.On 5 December 2014 Cloud Computing issued a writ under HCA 2480/2014 seeking the return of the HK$2.6 million on the basis of total failure of consideration.  However, the writ has yet to be served.

THE APPLICABLE PRINCIPLES

14.The applicable principles are not in dispute.  The parties agree that the relevant principles are those set out in the decision of Harris J in Re Yueshou Environmental Holdings Ltd, HCCW 142/2013 (unreported, 16 July 2014) at §8 where relevant extracts from the authorities on the subject are cited.

15.In summary:

(1)  the onus is on the company to show that it disputes the debt on substantial grounds by adducing sufficiently precise factual evidence to satisfy the court that it has a bona fide dispute on substantial grounds;

(2)  the court has to be satisfied that the company’s assertions are believable in the context of so much of the background as is either undisputed or beyond reasonable dispute and in so doing, the evidence is not to be approached with a wholly uncritical eye;

(3)  unsubstantiated and unparticularised assertions are to be treated with caution; and

(4)  the court has to take a view on the evidence (without trying the dispute on affidavit) but to determine whether a substantial dispute exists.

THE COMPANY’S CASE

16.The evidence filed by Cheung Sing Tai, the chairman and CEO of the company, is to the effect that the consultancy agreement was varied on some unspecified date by agreement of the parties in two respects: (1) the fee would be paid by instalments and (2) the petitioner would commence the provision of services upon receiving the first instalment and the period of engagement be extended accordingly.

17.It was after that variation that the two instalments totalling HK$2.6 million were paid by the company on behalf of Cloud Computing as stated in §6 above. According to Mr Cheung, even after part payment of HK$2.6 million was made, the petitioner still rendered no consultancy services to Cloud Computing.

18.There were thereafter “repeated oral demands” by the company’s vice president and executive director Mr Fred Zhang Xinyu (“Mr Zhang”) to Mr Yiu Hoi Ying (“Mr Yiu”) of the petitioner, apparently all to no avail.

19.Mr Wong, counsel for the company, submitted that the company has done all it could to prove a negative.  He further submitted that the court should draw an adverse inference from the petitioner’s failure to file any evidence to show that it did provide services to Cloud Computing.

IS THERE A BONA FIDE DISPUTE ON SUBSTANTIAL GROUNDS?

(a)  Variation

20.A number of matters were relied on to establish that the terms of the consultancy agreement had been varied.  First, exhibited to Mr Cheung’s 2^nd affirmation is a copy of payment instructions issued on 8 May 2013 by the petitioner to Cloud Computing and the company to pay the consultancy fee in Hong Kong dollars of a sum that is the equivalent of RMB4.5 million to two different payees.  The first payee was a company called Century Investment (Holding) Ltd to whom an amount being the equivalent of HK$1.6 million in RMB was to be paid and the balance was to be paid to the petitioner in Hong Kong dollars.

21.It should be noted that the instructions were somewhat contradictory as regards the currency to be remitted.  The opening paragraph appeared to require the remittance to be in Hong Kong dollars but the actual instructions for remittance to the first payee were for an amount in RMB.  Be that as it may, nothing turns on that and it is common ground that HK$1.6 million was paid to Century Investment. 

22.However the instructions plainly did not provide for payment by instalments.  The balance was to be paid to the petitioner at the same time but the company/Cloud Computing did not comply with that part of the payment instructions.  Plainly acceptance of the first payment could not assist to company’s case on variation.  

23.Second, the company sought to attach significance to the second payment of HK$1 million that was made on 16 September 2013, over four months later.  While the company contended that the part payments support their case that the original agreement was varied, but as already noted the payment instructions (which were issued shortly after the company’s acquisition of Cloud Computing when payment had been overdue for more than eight months under the consultancy agreement) did no such thing.  They required payment of the full amount.

24.As regards the September payment itself, it is equally consistent with the petitioner accepting late payment of the balance of an amount that was long overdue.

25.Third, all that the company has said about the variation was that it took place prior to the first payment.  It did not even bother to clarify whether the variation took place before or after it had acquired Cloud Computing.  That is pertinent to the company's source of knowledge of the alleged oral variation.  

26.But the fact that the alleged variation was made orally would not mean that the company did not have to condescend to particulars.  In such a case it is incumbent on the party alleging a variation to give particulars such as the terms of the variation, the date the oral agreement was reached, the identities of the persons who made that oral agreement, the number of instalments and the amount of each instalment.

27.If the alleged variation took place post‑acquisition, plainly the matters referred to in the preceding paragraph would be within the company’s knowledge.  If it took place pre-acquisition, due diligence should have revealed those matters.  There is simply no excuse for the absence of particulars.

28.Fourth, the company relied on the audit confirmations as supporting its case on variation.  The first audit confirmation appears to show that as at 31 December 2012 an amount of RMB1.875 million was payable on demand as a consultancy fee to the petitioner but the nature and amount of transactions were shown as being for the period between 11 May 2012 to 31 December 2012 when the consultancy agreement was only signed on 1 August 2012.  As such it is unclear whether the amount shown as owing was attributable to fees accrued prior to 1 August 2012.

29.The second audit confirmation states Cloud Computing’s indebtedness to the petitioner as at 24 April 2013 but the nature and amount of transactions during the period from 1 January 2013 to 24 April 2013 (ie pre‑acquisition) are described as ‘consultancy fee payable’ to petitioner of RMB1.5 million.

30.The third audit confirmation states that as at 31 December 2013 Cloud Computing was indebted to the petitioner in the sum of RMB2,435,683 which amount corresponds to the petitioning debt that is in Hong Kong dollars.

31.Although Mr Wong, counsel for the company, submitted that the audit confirmations supported his client’s case on variation, for my part, given that the amounts stated in the first and second audit confirmation do not correspond to any of the amounts that have been paid and with the added difficulty mentioned in §27 above, it is impossible to make much sense out of the first and second audit confirmations or attach significance to them.  They appear to relate to a period prior to the company’s acquisition of Cloud Computing and nothing is known about the records of Cloud Computing based upon which its auditors issued the first and second audit confirmations.

32.In stark contrast, the third audit confirmation shows an amount in RMB approximately equal to the petitioning debt as being payable on demand.

33.To conclude on the variation submission, in my view, the company has failed to put forward a credible case as regards the alleged oral variation.  In any event I consider the variation argument to be a red herring: whether or not the consultancy agreement was varied as alleged does not establish any bona fide dispute on substantial grounds.

(b)  Total failure of consideration

34.As regards the lack of services, at §9 of Cheung 3, Mr Cheung explained that as the company had only acquired Cloud Computing in late April 2013 and the outstanding services under the consultancy agreement were not urgently needed, the matter was not prioritised by the company or Cloud Computing.

35.What remains unclear is the basis of Mr Cheung’s belief that no services had been provided prior to the company’s acquisition of Cloud Computing.  Was it based on information from Cloud Computing or as a result of due diligence conducted prior to the acquisition that took place in late April 2013?

36.Be that as it may, Mr Cheung went on to state (at §9 of Cheung 3) that:

“… given the total lack of services from the Petitioner and the sums recorded as being due to the Petitioner pursuant to the Consultancy Agreement, the management of the Company and Cloud Computing began to become concerned and started to make informal oral requests and queries as stated in § 11 of [Cheung 2]. No formal written demands were issued at that time in order to maintain a cordial business relationship between the parties. As it was not apparent at the time that the Petitioner intended to present the cheque without honouring its obligation to provide services, the Company was not alerted to any urgent need to take immediate legal action.”

37.That passage is unsatisfactory in a number of respects.  First, at §11 of Cheung 2, it was stated that the informal complaints were made but §9 of Cheung 3 was not specific as to when Mr Zhang began making oral demands and requests.  According to Mr Cheung the matter was not prioritized.  That must mean that the demands were made later.  But when? After the HK$2.6 million had been paid?

38.Pausing there, it is to be noted that the company made two payments to the petitioner with an interval of more than four months elapsing between the first and second payments.  No explanation has been given as to what prompted the second payment if, according to the company, no services had been rendered under the consultancy agreement.  The evidence does not go beyond asserting that Cloud Computing “caused” the company to make the payments.

39.On 15 December 2013, three months later and approximately seven months after the first payment, the company nevertheless gave the petitioner a cheque for the balance.  While the evidence again is that Cloud Computing “caused” the company to issue the cheque, the assertion is unhelpful and opaque.  The payment appears to have been entirely voluntary since there is no evidence of the petitioner requesting, much less pressurizing the company/Cloud Computing for payment.  On the company’s case, no services had been rendered to Cloud Computing in the interim notwithstanding the two payments.  Yet, the company saw fit to pay the balance.  It is an odd state of affairs.

40.Second, if, on the company’s own case, it and Cloud Computing became concerned (at any rate by mid September 2013) over the non‑provision of services to Cloud Computing, not only did the company/Cloud Computing not make a single written complaint, there are no contemporaneous records of any communication requesting services. 

41.The company is not the contracting party to the consultancy agreement.  As earlier noted (see §33 above), the basis of the assertion that no services had been provided at all pre‑acquisition is obscure.  What is remarkable is the total absence of evidence from anyone who would have been in a position to speak to what had not been done by the petitioner pre-acquisition such as the person who had been running Cloud Computing.  One is simply left in the dark as to Mr Cheung’s source of knowledge.

42.Under the consultancy agreement, the petitioner undertook to be Cloud Computing’s dedicated consultant, effectively on call at any time to render advice, not only to the Cloud Computing but also to all companies under its control.  One would expect Cloud Computing to be in possession of some records/documents reflecting communications between the Cloud Computing and the petitioner.  None is before the court.

43.Despite this, the company saw fit to pay the remaining balance amounting to approximately 54% of the total fees on behalf of Cloud Computing, apparently unprompted and without any strings attached.  That is a very strange approach to a commercial agreement when the company being a listed company is answerable to its public shareholders. 

44.Third, digressing for a moment it is to be noted that somewhat belatedly, in Cheung 3 (that being the last round of evidence) it was suggested that payment of the cheque was conditional on the provision of services and could only be cashed after the petitioner had completed its services.  But the point did not even feature in the company’s submissions. 

45.In any event, the point does not appear to be a sound one given the parole evidence rule in as much as the communication of the condition was alleged to have been made orally between Mr Zhang (who is the company’s vice president and executive director) and Mr Yiu.  Moreover, not being a contracting party but a designated payor, it is unclear how it could have demanded performance.

46.Fourth, there is no explanation of what precipitated the issuance of the cheque to the petitioner seven months after the first payment.  Something must have prompted the company to do so if, as we are led to believe, from an unspecified date in the course of 2013 the company began to make informal demands and queries.  But no explanation has been given and it has not been suggested that the variation terms required such payments to be made since no particulars of the terms have been provided.  

47.Fifth, the reason put forward for the absence of any written complaint for the lack of services — in order to maintain “a cordial business relationship” — rings hollow.  On the company’s case, Cloud Computing was a newly acquired subsidiary in April 2013.  There is no evidence of any prior dealings/transactions between the company and the petitioner.  It is wholly unclear what business relationship existed between the company and the petitioner that the company wished to preserve.  If what was meant was the business relationship between the petitioner and Cloud Computing, it was within the latter’s contractual rights to seek the provision of the agreed services.

48.Sixth, the cheque was dishonoured in early June 2014 but the company took no action until prompted by the issuance of a statutory demand by the petitioner on 4 September 2014.  It was only in response to the statutory demand that it was alleged for the first time on 19 September 2014 that there had been a total failure of consideration.  By then, even on the company’s case of a variation extending the consultancy period to the first anniversary of the first payment (ie 8 May 2014), the time for the petitioner to perform its services had long expired.  The absence of any complaint even upon and after the expiration of the agreement (as allegedly varied) is telling and makes the company’s case that much harder to take seriously.

49.Mr Wong submitted that the company has done all that it could in establishing a negative, namely, that no services had been provided.  In those circumstances, he sought to establish his case by asking the court to draw an adverse inference from the fact that the petitioner has not produced evidence of its performance of the consultancy agreement.

50.The company relied on clause 3 of the consultancy agreement.  That stated that the petitioner would provide dedicated business resources consolidation services to Cloud Computing including, inter alia, analyzing its existing business, resources, and capabilities, selecting and assessing potential new business projects according to Cloud Computing’s strategy etc.  The company submitted that it was incumbent on the petitioner to put forward some evidence of performance to answer the company’s allegation and it has failed to do so.

51.But the company’s first hurdle is to show that it has done all that it could in establishing a negative.  For the reasons set out at length above I am unable to accept that the company has done so.  It has not even produced evidence that was within its power to do.  All the company has done is to put before the court unsubstantiated assertions of fact.

52.In my view it has failed to produce sufficiently precise factual evidence to satisfy the court that there is substance in the dispute raised by the company.  It follows that its application to strike out the petition must fail.

ORDER

53.The company’s summons is dismissed.  I make an order nisi that the costs of the summons be to the petitioner.

Mr Tony Chow, instructed by C L Chow & Macksion Chan, for the petitioner

Mr Jonathan Wong and Mr Derek J Y Chan, instructed by Fan Wong & Tso, for the company

The Official Receiver did not appear