Perfect Direct Ltd and Another v. Dejin Resources Group Co Ltd
Read the full judgment text of HCCW 76/2014 on BabelCite. This High Court CFI judgment was delivered on 19 June 2015.
1. The petitioner has applied, by a petition dated 31 March 2014, to wind up Dejin Resources Group Company Limited (“the Company”) on the grounds of insolvency.
Cited by 1 case · Cites 4 cases
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HCCW 76/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING‑UP) NO 76 OF 2014 _______________
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________________________ JUDGMENT 1.The petitioner has applied, by a petition dated 31 March 2014, to wind up Dejin Resources Group Company Limited (“the Company”) on the grounds of insolvency. Background 2.The Company is a limited company incorporated in Bermuda with its registered office at Clarendon House, 2 Church Street, Hamilton, HM11, Bermuda. It has an authorised share capital of 250,000,000,000 shares of $0.01 per share, of which 429,594,983 were issued as at the date of the petition. 3.The Company, which was previously known as Bright International Group Ltd, was listed on the Main Board of the Stock Exchange of Hong Kong (“SEHK”) in November 1999 and at that time its principal activities consisted of the sale of lighting products. It is registered in the Hong Kong Companies Registry as a non‑Hong Kong company with a principal place of business at Unit D, 4/F Sing Ho Finance Building, 166‑168 Gloucester Road, Wanchai. 4.In May 2010 the Company completed two transactions to acquire nine goldmines in Mainland China. For the purposes of those transactions it issued two series of convertible notes (“the Notes”) in the principal amount of approximately $1 billion for one series and $6 billion for the other series. The Notes are governed by Hong Kong law, and both the Company and the Noteholders have submitted to the jurisdiction of the Hong Kong courts in respect of them. 5.Since July 2010, and as at the date of the petition, the petitioner has been the holder of Notes with a principal amount of $399 million. In addition, New Heaven Investment Limited (“New Heaven”), who is applying by summons dated 12 December 2014 to be added as the 2nd petitioner in these proceedings and whose position I shall address below, is the holder of $3 million of the Notes. There were 22 other Noteholders as the date of the petition to whom the Company owed $843 million, although since that date there has been some movement in the numbers of Notes held and identity of the Noteholders. In addition, there is evidence that the petitioner is in fact obliged to transfer the ownership of $189 million worth of Notes it holds to Yu Guolin, pursuant to an arbitration award dated 28 November 2013 issued by the Shanghai International Economic and Trade Arbitration Commission, and (insofar as enforcement of that award in Hong Kong is concerned) pursuant to an order of Madam Justice Mimmie Chan dated 10 June 2014. 6.There is no dispute that the Notes matured on 13 May 2013. There is also no dispute that the Company has not paid the petitioner the amount due upon maturity of the Notes. The dispute concerns whether or not the petitioner is in fact estopped from claiming the amount by virtue of representations and negotiations which will be analysed in more detail below. 7.It also does not appear to be seriously in dispute that absent some agreement as to an amendment of the terms of the Notes, the Company is insolvent. According to the consolidated financial statements for the period ending 31 December 2012 the Company had net current liabilities of $861,296,000 of which the vast majority consisted of the liabilities in relation to the Notes. However I should note that Mr Wilson Cheung, the Chairman of the Board of Directors of the Company (“the Board”), has stated at paragraph 36 and 37 of his 1st affirmation that:
8.The “Alteration of Terms” is a phrase which has been adopted in the various announcements of the Company, and in the financial statements of the Company, to mean the proposed alteration to the terms of the Notes which was being negotiated between the Company and the various Noteholders. I shall adopt it in this judgment as meaning that, although inevitably given that the proposed amendments to the Notes varied in terms of their detail from time to time, the phrase is inevitably somewhat loose in its precise definition. But the precise detail of the proposed amendments are not material to the matters that I have to decide. 9.To the extent that there is any dispute in relation to insolvency I find that the Company is insolvent, and was insolvent as at the date of the petition. 10.As a result of that finding it is not necessary for me to reach any conclusion about the validity of service of the Statutory Demand dated 6 September 2013 pursuant to section 327(4)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“the Ordinance”). Service of that Statutory Demand is disputed by the Company on the ground that it was apparently sent only via email rather than being properly served. The petitioner does not agree, but has not addressed this matter in any detail because of what it says is the obvious insolvency of the Company. Consequently I make no findings as whether the Statutory Demand has, or has not, been served so as to give rise to a “deemed insolvency” under the ordinance. 11.The Notes are such that the conversion price varies according to various complex provisions contained in clause 7. The detail of the variation in conversion price is not material to the issues before me and consequently I do not address it. Suffice it to say that the conversion price has varied from the initial conversion price of $0.6 per share to $24 per share at or around the time of maturity. 12.In early 2013, in anticipation of the maturity of the Notes, and no doubt having regard to the high conversion price, the Company commenced negotiations with the Noteholders in an attempt to vary the terms of the Notes. The petitioner was one of the largest holders at that stage and the Company approached the petitioner with a view to obtain its agreement to extend the maturity date of the Notes for three years, to 13 May 2016, and as a quid pro quo to reduce the conversion price from $24 to $0.40. There appears to be a degree of agreement between the parties that in or around January 2013 there was a meeting between various representatives of the parties in which the proposed amendments were agreed (although at that stage it appears that the new conversion price was to be $0.3). 13.On 1 March 2013 the petitioner signed an undertaking pursuant to which, in simple terms, it agreed that subject to all the necessary consents and approvals being obtained, it would sign an amendment to the Notes extending the maturity date and altering the conversion price in the manner set out above. It was the express intention of the Company to negotiate with all Noteholders and to obtain the agreement of them all for the purposes of the Alteration of Terms. However the undertaking signed by the petitioner contained a provision for the promotion of a scheme of arrangement in order to facilitate the amendments in the event that not all of the Noteholders reached agreement. I have referred to that undertaking only briefly because there is no dispute that it lapsed, and that a subsequent undertaking which was also in writing has become the operative document about which the dispute centres. 14.On 2 April 2013 the Company made an announcement that it had obtained the consent of a majority of the Noteholders to the Alteration of Terms. However the announcement made it clear that no formal agreement had been entered into with the Noteholders. The Company said that it would continue to use its best efforts to negotiate with the remaining Noteholders so as to obtain a unanimous consent for the proposals, but it did not preclude the possibility of putting forward the Alteration of Terms by way of a scheme of arrangement. It is clear that at the same time as the announcement the Company was also taking detailed legal advice about the possibilities for, and implications of, such a scheme of arrangement. 15.On 13 May 2013 a second undertaking (“the Undertaking”) was signed by the petitioner, consenting to extend the maturity date of the Notes for three years and to reduce the conversion price from $24.00 to $0.30. 16.The terms of the Undertaking are important and I set out the relevant terms below:
17.The thrust of the Company’s resistance to the petition, other than in relation to jurisdiction, is that as a result of the Undertaking it has altered its position and that the petitioner is not entitled now to resile from the Undertaking that was clearly given, and as a result the Company has a bona fide dispute to the petition debt in the form of a promissory estoppel, or equitable forbearance, defence. 18.Also on 13 May 2013 the Company made an announcement which was in similar terms to that made on 2 April 2013, but which recorded that, by that stage, the Company had obtained the in principle support of approximately 80% of the outstanding principal amount of the Notes. 19.By an announcement dated 14 May 2013 the Company announced that it had in principle support of 98% of the outstanding principal amount of the Notes. Once again it was made clear that the Company wished to negotiate towards unanimous consent, although it would consider putting forward a scheme of arrangement in the event that unanimous consent was not forthcoming. 20.During May 2013, according to the evidence of Mow Tai Loy, who is a former executive director of the Company, various Noteholders pressed the Company to commence proceedings for the purposes of a scheme of arrangement, and one continued to demand repayment. Notwithstanding this the Company did not take any obvious steps to resolve the matter. 21.However, in August 2013 the Company announced the placing of 69,160,000 new shares through a placing agent. The Company says that the purpose of the new placing was to raise funds in order to redeem the one remaining Noteholder, who continued to hold 2% in value, but who would not consent to the Alteration of Terms. Unfortunately there is no contemporaneous evidence from August 2013 which demonstrates the purpose of the fundraising. 22.However the petitioner says that the announcement which was made on 13 March 2014 adequately demonstrates that the fundraising was for the purpose of “general working capital”, and was indeed used for that purpose, and not for the purpose of buying out the remaining 2% Noteholder. In this respect the petitioner says that the announcement on 13 March 2014 shows that as at 11 March 2014 approximately 97% of the net proceeds had been used for general working capital of the Group, including amounts payable accrued in daily operation, staff costs and other working capital expenditure, and that the remaining amounts would be shortly utilised in the same way. The petitioner also notes that the same announcement states that the non‑consenting Noteholder finally gave his consent in early March 2014. The petitioner contends that it is clear that the fundraising exercise was for general working capital and not the purposes of buying out the remaining Noteholder. 23.The Company relies upon the letter from the Board contained within the announcement which states that “However, as the Company was not able to obtain the consent to the proposed alteration from all the Noteholders at that time, the Company had to secure necessary funds (ie by conducting the placing of new shares in late August 2013) to cater for the possible claim by the non consenting Noteholder before the Supplemental Deeds were executed and announced on 24 October 2013”. As to the proposition that 97% of the money had in fact been spent by 11 March 2014, only a few days after the non consenting Noteholder had in fact given his consent the Company says that if consent was given in early March the money may have been spent between that date and 11 March 2014. I am bound to say that I find this proposition very difficult to accept and it is clear to me that the money raised by the new share placement was indeed spent on general working capital and was not specifically allocated for payment to the non consenting Noteholder in the event that the Company was unable to obtain his consent. 24.By letter dated 29 August 2013 Mr Mow Tai Loy wrote to the Board saying that, amongst various other complaints, since the announcement dated 13 May 2015 Noteholders representing no less than 25% of the Notes had expressed serious concerns about the lack of action and substantial delay by the Company in formalising the Alteration of Terms and, or alternatively, the necessary scheme of arrangement. He stated that the Noteholders were of the view that if the Company did not proceed with formalising the Alteration of Terms with due diligence their consent would no longer be valid. 25.On 30 August 2013 the petitioner wrote to the Company noting the forbearance it had given in the Undertaking in relation to its entitlement to interest accrued or to compensation pending the obtaining of necessary approvals and consents, and the formal documentation to give effect to the Alteration of Terms and noting that the Company had not proceeded with due diligence in relation to those matters. It gave notice that:
26.The Company says that there was a board meeting held on 30 August 2013 to discuss its interim results for 2013. Mr Cheung says that the petitioner’s letter of 30 August 2013 was expressly raised by Mr Mow Tai Loy, and that he (Mr Cheung) explained that there was a delay with the fundraising caused by the negotiations with the remaining 2% Noteholder. Mr Cheung said that it was anticipated that the application procedures could commence shortly, and according to Mr Cheung Mr Mow Tai Loy accepted that. 27.Of course Mr Mow Tai Loy was a director of the Company and consequently informing him as to the position of the Company does not address the concerns of the petitioner directly. However Mr Cheung relies upon the fact that Mr Mow Tai Loy’s brother, who is known as Milton Mow, is a director of the petitioner and therefore he says that it was assumed by those present at the Board meeting that Mr Mow Tai Loy would communicate the position to his brother. There is no relevant written resolution emanating from that Board meeting, there are no minutes of the Board meeting and there has not been any application or indeed indication that an application for a scheme of arrangement is to be made. In addition the letter from the petitioner has not been replied to. 28.On 6 September 2013 the petitioner emailed to all the directors of the Company copies of a statutory demand seeking repayment of the principal amount of the Notes then held by the petitioner. This statutory demand was therefore sent three days after deadline of 3 September 2013 for the passing of a board resolution to commence the scheme of arrangement procedure, which deadline was given by the petitioner by way of its letter dated 30 August 2013. Although there is a dispute between the parties as to whether or not the provision of the statutory demand by way of email constitutes good service of a statutory demand, there is no dispute that each of the directors of the Company did in fact receive the email and therefore did in fact receive an electronic copy of the statutory demand. In those circumstances, irrespective of the formalities of service, there is no doubt, and I so find, that as at 6 September 2013 the Company was well aware that the petitioner had withdrawn any forbearance which it had previously granted in relation to the Notes and was, certainly as from that point in time onwards, demanding full repayment in accordance with the terms of Notes in an un‑amended form. This timeline is relevant for the purposes of assessing the defence of promissory estoppel. 29.Thereafter the Company continued with its exercise of placing new shares, which were ultimately placed in October 2013, and the Company also applied to the SEHK for consent in relation to a circular announcing various matters, including the calling of a special general meeting to address the Alteration of Terms. It also continued to negotiate with the remaining 2% Noteholder who was withholding consent, and as identified above it finally obtained consent of that Noteholder in early March 2014. 30.There is some controversy between the parties as to whether the conduct of the Company following the statutory demand was appropriate or not. In particular the petitioner complains that when making the application to SEHK in relation to the circular, the Company failed to inform SEHK that the petitioner, as the largest Noteholder, had withdrawn its consent to the proposed amendments. As a result the petitioner wrote to SEHK and complained. Notwithstanding those complaints SEHK cleared the circular for publication and a special general meeting of the Company was held on 29 March 2014 in which the shareholders approved the Supplemental Deeds which amended the Notes, although they remain the subject of various conditions precedent which have not yet been satisfied. 31.The conditions precedent are set out an announcement dated 24 October 2013 and the outstanding ones include:
32.None of those conditions precedent can be waived and the Company undertook to use its best endeavours to procure the fulfilment of them as soon as practicable. They remain unsatisfied. 33.The petitioner also complains that it was not until 1 November 2013 that the Company made an announcement informing the shareholders that the petitioner had withdrawn consent in relation to the Alteration of Terms. That announcement indicates the view of the Board that the Undertaking was irrevocable, and that therefore it was not permissible for the petitioner to resile from it. 34.The Company on the other hand complains about the conduct of the petitioner, in the period following 6 September 2013, and alleges that the reasons for any delay in seeing the finalisation of the Alteration of Terms is due to unfounded complaints that the petitioner has made to SEHK following its allegedly wrongful withdrawal of the Undertaking. 35.On 31 March 2014 the petitioner presented the petition, and on 16 May 2014 the SEHK suspended trading of shares in the Company. They remain suspended. The substantive hearing of the petition came before Harris J on 4 December 2014 but was aborted as a result of an ex parte injunction obtained by a company called Sleek Thrive Ltd restraining the petitioner from seeking a winding up of the Company. Harris J has subsequently, on 7 May 2015, discharged that injunction and hence the hearing of the petition was restored. 36.I have dealt with period following the statutory demand briefly because in my view, whilst it provides background to the dispute and what has happened subsequently, it is not strictly relevant to the question which I am required to determine, which is whether the alleged promissory estoppel creates a bona fide dispute on substantial grounds to the debt. The petitioner accepts that it gave various representations by way of the Undertaking, but contends that it was entitled to, and did, withdraw its position at the latest by 6 September 2013 by sending to the directors of the Company the statutory demand. On that basis it is clear that what happened subsequent to 6 September 2013 does not affect what is said to be the withdrawal of the Undertaking. The grounds of opposition 37.The Company runs essentially two grounds of opposition to the petition:
Jurisdiction 38.It is now well established that in order to obtain a winding up order the petitioner needs to plead, and establish, that the court has jurisdiction to make that discretionary order. The principles upon which the court should exercise its discretion to wind up a foreign company have also been recently traversed by various cases. The conditions are “judge made”, in the sense that they are not written into the statute but have been established through a long line of cases. In Yung Kee, at paragraph 38 the court of appeal identified the core principles as follows:
39.The principles have also recently been set out in various judgments at first instance, but it is unnecessary for me to cite a full list. 40.The Company contends that neither the 2nd nor 3rd core requirements have been satisfied. 41.However, it goes further and suggests that the 2nd core requirement must necessarily be established and the court has no jurisdiction if it is not. In this respect the Company accepts, particularly in the light of the judgment of Harris J in Pioneer Iron and Steel Group Company Limited,HCCW 322/2010, that jurisdiction may exist despite the 3rd core requirement not being established, but it contends that there is no such flexibility over the 2nd core requirement. 42.At paragraph 28 of Pioneer Harris J said “The significance of each requirement will vary from case to case. An exceptional case may arise in which the connection with Hong Kong is so strong and the benefits of a winding up order for the creditors of a company so substantial that the court will be willing to exercise its jurisdiction despite the 3rd criteria not being satisfied, but that is not a matter of principle that I need to decide here”. 43.In Re China Medical Technologies Inc [2014] 2 HKLRD 997 Harris J held, in relation to an unregistered company, that the jurisdiction to wind up such a company was engaged if one of the matters specified in section 327(3) was present, and that the three core requirements went to the question of discretion rather than the question of jurisdiction. In that respect he agreed with the analysis of Lawrence Collins J (as he then was) in Re Drax Holdings Ltd [2004] 1 WLR 1049 at paragraph 26. 44.In the same case, whilst discussing the 3rd core requirement Harris J went on to say at paragraph 50 to paragraph 52:
45.Whilst it is correct that the comments of Harris J quoted above were made within the context of the 3rd core requirement (as was pointed out by Miss Sit, counsel for the Company) in my view they are of a more general application to the three core requirements as a whole. I do not accept the proposition that in order to establish jurisdiction to wind up a foreign company it is inevitably necessary to establish the 2nd of the core requirements. The core requirements do not go to jurisdiction. They go to the question of discretion, and that is a broad question which must be considered on the basis of the entirety of the company’s overall connection to Hong Kong. It cannot be determined one way or the other simply by reference to the single proposition embodied within the 2nd core requirement that the winding up must benefit the person applying for it. 46.As a result I reject the Company’s submission that the establishment of 2nd core requirement is a necessary precursor to the jurisdiction to wind up a company. 47.The Company is a company incorporated in Bermuda. It is clearly an investment company with its sole direct investment being a 100% interest in a BVI company called Bright Group (BVI) Ltd. It has various indirect subsidiary companies which perform the primary business of the group, which is split into three segments. First is mining, which occurs exclusively in the PRC, secondly forestry, which also occurs exclusively in the PRC and thirdly lighting products, the geographical distribution of which is not apparent from the financial statements for the period ending 31 December 2013. 48.The contribution which the holding company makes to the group’s activities is in its capital raising activities. In the chairman’s report contained within the 31 December 2013 financial statements the chairman stated that the worldwide economy had been weak since 2010, and he also stressed that the capital markets in Hong Kong had been sluggish. That he should make such a comment clearly reflects the activities of the holding company as reported within the financial statements, and as evidenced by the various matters have been referred to above. 49.Hence it is clear that the Company is a Bermudan company that:
50.The Company suggests that those factors simply satisfy the 1st core requirement, and consequently are not enough in themselves to justify the exercise of a discretion by this court to wind up the company. 51.The petitioner, on the other hand, says that those factors are sufficient in themselves to amount to a sufficient connection with Hong Kong to justify the exercise of the discretion. The petitioner points to paragraph 38 of the Pioneer decision in which it was held that the fact that the controlling mind of a commercially active company is based in Hong Kong and makes business decisions here about the company constitutes a substantial and relevant factor for the purposes of establishing a sufficient connection with Hong Kong for the purposes of the discretion to be exercised by the court. 52.In my view it would be a somewhat surprising conclusion to reach that a company which had all of the connections to Hong Kong which have been listed above was nonetheless one in which the court was almost inevitably bound to decide it should not exercise its discretion to wind up if it was otherwise an appropriate case for a winding up order to be made. I find that the above factors are sufficient to entitle me to exercise my discretion, if I consider it appropriate, to wind up the company even if they only go to the 1st core requirement. 53.However, in case I am wrong as to that, I go on to consider whether the 2nd and/or the 3rd core requirement are in fact established. 54.In relation to the 2nd core requirement the Company relies upon the fact that it only has one direct subsidiary, which is a BVI company which is therefore not an asset within the jurisdiction. In addition the other assets of the group are generally outside of Hong Kong and therefore it is said that there is nothing which a liquidator can do within the jurisdiction so as to benefit the petitioner. 55.The petitioner suggests that there are two ways in which the liquidators can conduct the liquidation so as to benefit petitioner. First the Company is listed on the SEHK and consequently has a major and valuable asset in Hong Kong, being its listed status. The Company says that this is not pleaded within the petition as a matter relied upon for the purposes of jurisdiction, and it is settled law that petitioner cannot rely upon matters which are not pleaded. I accept that in relation to jurisdiction it is clear that the matters relied upon need to be pleaded. However the petitioner does plead in the petition the listed status of the Company. In my view that is sufficient to entitle it subsequently to contend that the listed status constitutes something which will permit a benefit to be derived on a liquidation. 56.Secondly the petitioner says that whether or not the indirect subsidiaries are in fact situated in Hong Kong is not the relevant question. The relevant question is whether a winding up order in Hong Kong would enable some benefit to be gained by the petitioner, and whilst there may be difficulties in the path of a Hong Kong liquidator in realising assets in, for example, the PRC there can be little doubt that the liquidator would be able to exercise the control that any other shareholder would be able to exercise over the PRC assets. There is therefore a reasonable possibility that the liquidators would be able to derive some benefit to the Company, and thereby to its creditors. In this context the petitioner relies upon Re Beauty China Holdings Limited [2009] 6 HKC 351, per Kwan J (as she then was) at 358[42] to [51], which in my view supports that proposition. 57.I agree that there is a reasonable possibility that a winding up order would benefit those applying for it. Consequently I am satisfied that the 2nd core requirement has been satisfied in any event. 58.As to the 3rd core requirement, it is clear to me that there are indeed persons with a sufficient connection with the jurisdiction and a sufficient economic interest in the winding up of the Company so as to justify making an order which would engage the Hong Kong winding up regime. First it is clear that Notes constitute Hong Kong debts, in that they are all governed by Hong Kong law. In my view the court would inevitably be able to exercise a jurisdiction over the Noteholders in the event of a dispute on the Notes. In this context I discount the effects of the jurisdiction clause of the Notes on the ground that a jurisdiction clause goes to the discretionary question of forum non‑conveniens rather to the question of whether the court is able to exercise its jurisdiction over the Noteholders. The governing law clause of the Notes does entitle the courts to exercise such a jurisdiction, although whether it chooses to exercise that jurisdiction is a subsequent question which would have to be assessed by reference to all the circumstances relevant at the time. As a result I am satisfied that 3rd core requirement is made out. 59.Overall therefore I am satisfied that the court has jurisdiction to wind up the Company. Promissory estoppel 60.The basic requirements of promissory estoppel, which is also often known as Equitable Forbearance, were set out by the Court of Final Appeal in Luo Xing Juan v Estate of Hui Shui See [2009] HKCFAR 1 per Ribeiro J at paragraph 55 and following. A promissory estoppel arises where:
61.However as a general rule a promissory estoppel is suspensory only and does not permanently alter the legal relationship between the parties. The promisor can resile from his promise on giving reasonable notice and providing a reasonable opportunity to the promisee to resume his position. The promise will only become final and irrevocable if the promisee cannot resume his position: Ajayi v RT Briscoe (Nigeria) Ltd [1964] 1 WLR 1326, 1330. 62.That summary of the position is not intended to be a complete analysis of the law of equitable forbearance, but rather is a more general statement. There are a large number of cases which deal with this area of law, particularly in relation to the interrelationship between reliance, detriment and the inequity of removing the forbearance. It is not necessary for me to address those issues in detail for the purposes of deciding this case. For the sake of completeness however I note that the Company says in its submissions that detriment is unnecessary to show reliance. That may be correct insofar as it goes because reliance is essentially a factual question and it is logically not connected with detriment. But it does not necessarily mean that detriment is not a necessary element of an equitable forbearance. There is a divergence of view within various different authorities as to whether detriment is a necessary element, or whether all that is required is an inequity arising on removal of the forbearance and whilst those differing views may ultimately give rise to a semantic rather than a substantial difference, I simply state that I am not reaching any conclusions about those matters in this judgment. 63.The petitioner accepts that there is an existing legal relationship by virtue of the Notes, and that it has conveyed to the Company a clear and unequivocal promise that pending the obtaining of the necessary consents and approvals it will not seek to enforce what would otherwise be its right to a complete repayment of the debt under the Notes. It also accepts that it has promised that it will not seek any interest or compensation during the period between the Maturity Date of the Notes and the time required to effect the amendment. As a result it accepts that the first two requirements of an equitable forbearance are established. 64.However it contends that the forbearance is not a permanent forbearance, that it is dependent upon the Company acting with reasonable diligence for the purposes of obtaining the necessary consents and approvals, and that it is free to withdraw the forbearance provided that it would not be inequitable to do so. It says that by its letter dated 30 August 2013 it gave notice that the Company had four days (from 30 August 2013 to 3 September 2013) to pass a board resolution commencing the process towards a scheme of arrangement, and that if the Company did not do so within that period then it would seek the full extent of the monies which were otherwise due under the Notes. Consequently the petitioner says that it gave reasonable notice of its withdrawal of the forbearance, and indeed went further and provided the Company with an opportunity to maintain the forbearance thereafter simply by passing a board resolution. The Company failed to do so and in all the circumstances it is reasonable for it to have withdrawn its forbearance and it is therefore entitled to seek the winding up of the Company. 65.The Company, on the other hand, relies heavily upon the frequent use of the word “irrevocable” in the Undertaking to suggest that the petitioner was not entitled to withdraw the Undertaking because it was indeed an irrevocable one, and that it must be recognised that the petitioner knew and understood at all times that it would take a period of time in order to obtain the necessary consents and approvals. In addition it contends that it has changed its position in reliance upon the Undertaking and that as a result the petitioner is not entitled to resile from it. In terms of the legal analysis it therefore suggests that it would be inequitable or unconscionable for the court to allow the petitioner to resile. 66.I can immediately deal with the proposition that the use of the word “irrevocable” in the Undertaking prevents the petitioner from withdrawing it. I do not accept that it does. Both parties were at pains to stress that the Undertaking did not create a contract and that it could only rise to an equitable forebearance. Whist I am not sure that analysis is necessarily correct I shall assume that it is. If the Undertakings are not contractually enforceable then they can be withdrawn at any stage subject to the rules of equitable forebearance. That includes the statement that the promise is irrevocable. The petitioner would be entitled to resile from it, irrespective of its wording, provided that it is not estopped from doing so. The description of the Undertaking as irrevocable is just one of the factors that might weigh in the balance when the court is accessing the equity of withdrawal. 67.But even if the Undertaking is given contractual force I do not think that the word would necessarily preclude the petition. I would be inclined to accept the argument of the petitioner that its promise was premised upon the Company proceeding with reasonable diligence towards either a consensual Alteration of Terms or one promulgated under a scheme of arrangement. The question would then become whether, in all the circumstances, the Company did proceed with reasonable diligence so as to maintain the binding nature of the Undertaking or whether it did not, such that the petitioner was free to sue upon the Notes. Such an issue would have to be resolved at a trial. 68.It is correct to note that for the purposes of the current application the Company only needs to establish that there is a bona fide dispute on substantial grounds. It would be inappropriate for the court finally to resolve that dispute if there is one and the dispute should be determined in a more appropriate forum. This principle was reflected by Lawrence Collins J in ICS Incorporation Ltd v Michael Wilson and Partners Ltd [2005] EWHC 404 (Ch) at paragraph 87 where he said:
69.The petitioner relies upon a slightly different formulation of the test by Rogers J in Re ICS Computer Distribution Ltd [1996] 3 HKC 440 at 444:
70.The Company contends that it has relied upon the Undertaking and incurred considerable time, effort and expense to set the Alteration of Terms in motion. In particular it relies upon following:
71.The first of these aspects of reliance is difficult for the Company. The Company was under a clear obligation to all the Noteholders to repay the Notes on 13 May 2013. It had no choice other than to repay, which it clearly could not do, or alternatively to negotiate an amendment to the Notes with them (which amendment would inevitably have to be a unanimous amendment or implemented through a scheme of arrangement). Consequently I cannot see how it can realistically be said that the negotiation between the Company and the other Noteholders was a negotiation which was undertaken in reliance upon the Undertaking of the petitioner. The mere fact that the petitioner was the first of the Noteholders to whom the Company turned when it was obliged to enter into negotiations is an accident of fact which cannot then be used so as to create a facade of reliance when conducting the inevitable negotiations with the other Noteholders. Inevitably it did have to negotiate with each and every Noteholder, and in my view it did so as a result of the fact that had it not done so it would remain in breach of the terms of the Notes. I do not accept that it is even remotely arguable that such negotiations with the other Noteholders were conducted in reliance upon the Undertaking given by the petitioner. 72.The Company seeks to suggest that the fact that it negotiated with the other Noteholders on the basis of a conversion price of $0.4 which was the price set out in the Undertaking, and subsequently reduced that to $0.3 demonstrates reliance upon the Undertaking. That simply cannot be correct. All that it demonstrates is that the Company was prepared to move further, and give greater concessions, than it had originally been prepared to give to the petitioner. Consequently I reject the proposition that the negotiations were conducted in reliance upon the Undertaking. 73.As to the second aspect of alleged reliance, the evidence of Mr Wilson Cheung is that from around mid‑2013 the Company instructed its lawyers to prepare and draft various irrevocable undertakings, announcements in relation to the Alteration of Terms and other documents concerning the Alteration of Terms including Supplemental Deeds to alter the terms of the Notes, the circular which was a necessary aspect of that alteration, and the application to SEHK for their consent. 74.Clearly if any Alteration of Terms was to occur then it would be necessary for appropriate documentation to be drafted in any event. Therefore on one view the costs incurred in doing so are costs which would always be incurred and therefore may be said not to have been incurred in reliance. However it seems to me that there may be a difference in the type of documentation which would be needed to effect a consensual restructuring of the debt and that which would be needed to effect a scheme of arrangement for a nonconsensual restructuring. I do not have sufficient evidence to ascertain with any detail the extent to which the lawyers were drafting documentation which was dependent upon a consensual restructuring prior to 6 September 2013 when the petitioner purported to withdraw the Undertaking. But it does seem to me that there is a realistic possibility that certain documents were prepared which may not have been prepared if the Company had not obtained the consent of the petitioner to the Restructuring and did not have the benefit of the Undertaking. 75.Consequently, although I think that the evidence is lacking as to exactly what was done so as to demonstrate reliance, I am unable to say that there is no argument that reliance was indeed placed upon the Undertaking given by the petitioner by instructing lawyers, and incurring costs involved in proceeding on the reasonable assumption that the restructuring would be consensual, based upon the Undertaking. 76.Inevitably it is correct that not all of the Noteholders had by that stage consented, but I can foresee that it may be argued that having obtained the consent of the petitioner, and shortly thereafter obtained the consent of 98% of the Noteholders it was a reasonable assumption by the Company that it would be able to overcome any hurdles created by the then non‑consent of the remaining 2% Noteholder. In those circumstances it seems to me that there is likely to have been some reliance on the Undertaking prior to 6 September 2013, although the extent of it cannot be ascertained on the somewhat vague evidence before me. 77.In relation to the third aspect of reliance which is emphasised by the Company, namely the work done towards the placement of shares, it seems to me that the most that can be said on the current state of the evidence is that the Company entered into a Placing Agreement dated 28 August 2013, which is before the Undertaking was withdrawn. Anything which happened after 6 September 2013 is, in my view, irrelevant save to the extent that it can subsequently be shown that it was inevitably going to happen as a result of actions which took place prior to withdrawal of, and in reliance upon, the Undertaking. The placement of shares itself did not occur until significantly after the withdrawal of the Undertaking, but again the evidence is lacking as to the precise nature of all the steps that were undertaken before 6 September 2013 (save for the signing of the Placing Agreement). 78.Notwithstanding the somewhat compelling proposition made by the petitioner that the current evidence, which all post dates 6 September 2013, indicates that the placement of the shares was in fact nothing to do with the Notes, without a far more detailed analysis what happened before 6 September 2013, in particular the reasoning and rationale for entering into the Placing Agreement on 28 August 2013 I cannot discount the possibility that the Company was indeed taking this course in reliance upon the Undertaking which had been given by the petitioner. 79.As a result I am satisfied that there is a need to investigate whether there has been reliance, and if so the nature and extent of that reliance. But that in itself is not enough to establish a bona fide dispute on substantial grounds based upon equitable forbearance. 80.The next aspect of the argument concerns the question as to whether it would be inequitable to allow petitioner to withdraw the Undertaking in all the circumstances. 81.The majority of the argument of the Company focuses on the lack of prejudice for the petitioner in the event that it is prevented from resiling from its undertaking. I do not accept that argument. If the petitioner is of the view that it is no longer in its interest to accept the Alteration of Terms then holding it to the Undertaking would indeed constitute prejudice. 82.However, in my view this is only part of the overall analysis. The 1st stage of the analysis should in fact look at whether, at the time of the withdrawal, the promisee (ie the Company) would suffer some prejudice or detriment as a result of the withdrawal. This issue goes back to the question as to the relationship between detriment and inequity which, as I have said has been the subject of considerable judicial thinking. Without seeking in any sense to set out the law in detail in my view it is a fair proposition to say that for the purpose of assessing whether the promisor should be entitled to withdraw its promise it is necessary to assess whether the promisee’s change of position in reliance upon the promise will leave it in a worse position than it would be in had the promise never been made. That is a detailed analysis which requires some evidence to make any sensible assessment. 83.Consideration must also be given to what might be the appropriate relief in a dispute over this issue. That touches upon the question of whether the Undertaking should be suspensory only or whether it might give rise to a permanent state of affairs. Once again there is considerable debate amongst the various authorities as to the nature of relief that can, or should, be given in a case where the detriment relied upon involves the expenditure of money. On one hand that money cannot be returned and hence there is a permanent position of detriment, however that in itself does not necessarily make it inequitable to allow withdrawal of the promise. 84.The flexibility of the courts’ remedial discretion in this context has been emphasised on various occasions, not least by Lord Browne‑Wilkinson in Roebuck v Mongovin [1994] 1 All ER 568. It was alleged in that case that the defendant was prevented from applying to strike out the claim for want prosecution on the grounds that it had represented that it not did not intend to do so. As a consequence, the plaintiffs [known as claimants] had incurred some additional legal costs in connection with the claim. Lord Browne‑Wilkinson, referring to the doctrine at issue as equitable estoppel, held, at 575d‑f:
85.These various issues are highly factually sensitive questions which will have to have regard to the very detail of the reliance and change of position which the Company may ultimately be able to establish between the date of the Undertaking and the date when it was removed on 6 September 2013. Even if the Company was able to establish at a trial that an equitable forbearance did arise that does not make it inevitable that the petitioner would necessarily be prevented from withdrawing its promise and subsequently enforcing its debt. That is a question that a court would have to decide having regard the circumstances which were found to exist surrounding the Undertaking, the reliance upon it and the withdrawal. 86.I recognise that there is some debate as to the strength of the evidence which is required to justify the demonstration of a bona fide dispute within the context of an application to wind up a company. My view in this case, based upon the evidence which I have seen, is that this is, at best for the Company, a borderline case as to the establishment of a dispute. However given the points that have been raised it does, in my view, go beyond the scope of the Companies Court on a winding up application to seek to determine:
87.Consequently, to use the language of the cases, I am satisfied that there is a bona fide dispute which makes it inappropriate to grant an order winding up the Company. 88.The application of the petitioner is accordingly dismissed. New heaven 89.There is an application by New Heaven to be joined as a 2nd petitioner. New Heaven signed an undertaking to the Company in very similar terms to that of the petitioner. It did not seek to withdraw its undertakings until service of a statutory demand on the Company on 16 July 2014. The issues that arise in relation to New Heaven are therefore very similar to the issues which arise in relation to the petitioner, save that the period in which the Company may have relied upon the undertakings extends until 16 July 2014. On the basis that I am satisfied that there is a bona fide dispute which makes it inappropriate to grant an order winding up the Company on the petitioner’s case, it must follow that I would take a similar view in relation to New Heaven, even if only on the ground that any detriment suffered between 13 May 2013 and 6 September 2013 is likely to be similar as between both the petitioner and New Heaven. 90.I recognise that there may be a further argument available to New Heaven concerning reliance, in that New Heaven held only a small percentage of the overall value of the Notes. In fact it held notes with a principle amount of $3 million, and so reliance on the undertaking given by New Heaven may have been significantly less than that placed on the Undertaking given by the petitioner. However that additional argument will have to be addressed in the context of the resolution of the overall dispute as to whether or not it is inequitable to allow withdrawal of the promise. 91.As a result I decline to allow New Heaven to be joined as a 2nd petitioner. There is no benefit in allowing it. Costs 92.I make an order nisi that the petitioner should pay the costs of the Company of the petition to be taxed if not agreed. New Heaven should pay to the Company the costs of the Joinder Summons to be taxed if not agreed. This order will become absolute unless written submissions are made within 14 days.
Mr Laurence Li, instructed by DLA Piper Hong Kong, for the 1st petitioner Mr Devin CI Sio, instructed by Cheung & Yeung, for the (Putative) 2nd petitioner Ms Eva Sit and Mr James Man, instructed by Michael Li & Co, for the respondent Attendance of the Official Receiver was excused |
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