RE SHIU KWONG MAN JIMMY

HCB 4242/2017

[2018] HKCFI 2504

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4242 OF 2017

_______________

_______________

HCB 4243/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4243 OF 2017

_______________

_______________

_________________

J U D G M E N T

_________________

Introduction

1.  There are before this court 2 bankruptcy Petitions dated 11 July 2017 (“Petitions”) presented by the Petitioner against (1) Mr Shiu Kwong Man Jimmy (“Shiu”) and (2) Mr Siu Kong Fai (“Siu”) (“Debtors”).

2.  The Petitions are based on non‑compliance with 2 statutory demands for judgment debts against the Debtors totalling HK$108,451,363.07 plus further interest.  The judgment debts in turn arose from claims by the Petitioner against them as guarantors of loans extended to companies associated with them. 

3.  The Debtors’ appeal against the judgments have been dismissed.  There was no application to set aside the statutory demands.

4.  Subsequent to the presentation of the Petitions, the Petitioner has recovered HK$107,732,650.97 from the sale of security provided by third parties, leaving a sum of over HK$700,000 still outstanding.[1]

Background

5.  The Debtors, together with Siu Kong Wai Tony (“Tony”), are brothers and were at all material times directors and shareholders of:

(1) Kingsway Int’l (HK) Corporation Ltd (in liquidation) (“Kingsway”).

(2) Kwong Wing & Co (China) Ltd (in liquidation) (“Kwong Wing”).

(3) A3 Hotel Ltd (in liquidation) (“A3 Hotel”).

(4) Jest International Ltd (“Jest”).

6.  Between 2010 and 2014, the Petitioner extended loans to Kingsway and Kwong Wing which were guaranteed by inter alia the Debtors.  In late 2015, Kingsway and Kwong Wing defaulted on their loans.  As a result, the Petitioner commenced proceedings against the guarantors in HCA 758 of 2016 for Kwong Wing’s loans and HCA 759 of 2016 for Kingsway’s loans.  As the Debtors had guaranteed both companies’ loans, they were defendants in both actions.

7.  On 12 January 2017, summary judgment was granted in favour of the Petitioner in both actions against all the guarantors defendants including the Debtors.[2]

8.  On 24 January 2017, the Petitioner issued the statutory demands against the Debtors.  On 11 July 2017, the Petitioner presented the Petitions against the Debtors.

9.  The loans granted by the Petitioner were partly secured by way of charges over two properties viz 129 & 131 Temple Street, Kowloon (“129 Temple Street”) and a flat in Hing Fat Building, Temple Street, Kowloon (“Hing Fat Building”).

10.  Kingsway was the owner of 129 Temple Street and executed in favour of the Petitioner: (1) a 1^st legal charge to secure its own borrowings by a Debenture dated 19 July 2010 (“Debenture”); and (2) a 2^nd Mortgage dated 3 January 2012 (“2^nd Mortgage”) to secure Kwong Wing’s borrowings.

11.  On 24 February 2016, pursuant to the Debenture and 2^nd Mortgage, the Petitioner appointed Mr Edmund Yeung Lui Ming and Mr Derek Lai Kar Yan of Deloitte Touche Tohmatsu as receivers and managers (“Receivers”) over 129 Temple Street.  

12.  On 12 July 2016, the Receivers advertised 129 Temple Street for sale by tender.  The Receivers received 2 bids of HK$60 million and HK$100 million respectively and proceeded to negotiate with the higher bidder Tuen Long Centre I Ltd (“Tuen Long”).

13.  On 22 August 2016, the Receivers entered into a sale and purchase agreement (“S&P”) with Tuen Long at the price of HK$108 million, on condition that vacant possession was recovered on or before 16 December 2016, failing which the purchase price would be reduced to HK$105 million.  It is important to note that the Receivers entered into the S&P as agent of Kingsway, and not the Petitioner.  The status of the Receivers as the agent of Kingsway was expressly provided for in Clause 18.02(xi) of the Debenture and Clause 11.10 of the 2^nd Mortgage.

14.  129 Temple Street was originally occupied by A3 Hotel which held a hotel licence and operated a hotel there.  A3 Hotel had also borrowed from the Petitioner and defaulted.  On 27 July 2016, the Petitioner presented a petition for A3 Hotel’s winding up.  On 3 October 2016, A3 Hotel was wound up by the Court.  Upon its liquidation, its hotel licence was also revoked.

15.  The Receivers were unable to obtain vacant possession of 129 Temple Street, despite the fact that A3 Hotel had been wound up.  Eventually, the Petitioner issued proceedings against Kingsway in HCMP 1287 of 2016 and, on 31 May 2017, obtained an order for vacant possession.  The order for vacant possession was executed by the court bailiffs on 10 August 2017.  The Receivers then managed to re‑negotiate the purchase price with Tuen Long to HK$108 million. On 1 September 2017, completion of the sale took place. The net proceeds received by the Petitioner from the sale was HK$105,698,973.61.

16.  Jest was the owner of Hing Fat Building and granted the Petitioner a legal charge dated 13 May 2011 as security for the loans to Kwong Wing.  Again, the Petitioner issued proceedings against Jest in HCMP 478 of 2016 and, on 9 February 2017, obtained an order for vacant possession of Hing Fat Building from Jest.  The Petitioner subsequently sold Hing Fat Building and, upon completion on 17 November 2017, received HK$2,033,677.36 as net sale proceeds.

17.  Apart from the above, the Petitioner has not recovered other sums to settle the outstanding debts owed by the Debtors.  As stated in paragraph 4 above, after deducting the partial recoveries, a sum of over HK$700,000 remains still outstanding.

Ground of opposition

18.  In the Debtors’ skeleton submissions, Mr Kwan confirms the Debtors raise no dispute to the outstanding debts in the sum of HK$718,712.10 stated in the Petitioner’s skeleton submissions.  The sole ground of opposition to the Petitions is that the Debtors have a bona fide cross‑claim against the Petitioner as it had sold 129 Temple Street at a substantially under‑valued price.

Deliberation

19.  The Court’s approach in dealing with an alleged cross‑claim, in a corporate insolvency context, is neatly summarised by Barma J (as he then was), in Re Jade Union Investment Limited unrep, HCCW 400 of 2003, 5 March 2004 at [11]: 

“ In the context of set‑offs or cross‑claims, the court will look at the evidence adduced by the company and reach a conclusion as to whether the set‑offs or cross‑claims relied upon by the company have substance. If it is satisfied that such set‑offs or cross‑claims have substance, and exceed the amount of the debt on which the petition is based, the court will ordinarily dismiss or stay the petition. It is arguable that there may be a further requirement in relation to cross‑claims that the company should have been unable previously to litigate them, but even if that is a requirement, it was not suggested that it arises for consideration in this case.” (emphasis added)

20.  The same approach can and should be adopted in bankruptcy proceedings: Re Shang Lili unrep, HCB 5329 of 2014, 25 January 2016, Ng J at [25].

21.  In the present case, the sale of 129 Temple Street was effected by the Receivers, who are well‑known professionals.  The following is a detailed sequence of events of the sale.

22.  As stated earlier, on 12 July 2016, the Receivers advertised 129 Temple Street for sale by tender.

23.  On 27 July 2016, the Receivers received a bid from Tuen Long, the higher bidder, whose bid was HK$100 million.

24.  On 10 August 2016, the Receivers’ solicitors wrote to Kong & Tang, former solicitors for the Debtors and Kingsway, notifying them the Receivers’ intention to sell for not less than HK$105 million, unless a better offer was received by 15 August 2016.  No better offer was received.

25.  On 12 August 2016, Kong & Tang wrote back and objected to the sale.  They produced a 2‑page extract of a valuation report by Prudential Surveyors (Hong Kong) Limited (“Prudential”) dated 14 May 2015, which assessed the market value of the property, as at 13 February 2015, was HK$170 million while the value for sale under repossession was HK$140 million.

26.  On 15 August 2016, Kong & Tang wrote to the Receivers’ solicitors informing them that they had a potential buyer of the property who was willing to offer HK$130 million and to enter a preliminary sale and purchase agreement as soon as possible with an intended completion date within 9 months from the signing of the preliminary sale and purchase agreement.  Attached to that letter was a letter of intent by the so‑called potential buyer dated 11 August 2016 with the identity of the buyer redacted.  Kong & Tang objected to the Receivers selling the property at below HK$130 million and formally sought the Receivers’ consent to sign the preliminary sale and purchase agreement within 14 days. They also threatened to take out a summons to obtain the court’s consent if the Receivers’ consent was not forthcoming within 7 days.  As it turned out, Kong & Tang never issued the summons they threatened to take out.

27.  On 22 August 2016, the Receivers entered into the S&P with Tuen Long at the price of HK$108 million, on condition that vacant possession was recovered on or before 16 December 2016, failing which at the price of HK$105 million.

28.  In support of the said sale price, the Receivers had commissioned and obtained 2 valuation reports:

(1) From Knight Frank dated 22 August 2016 which valued 129 Temple Street at:

i. HK$100 million on a market value basis;

ii. HK$70 million on a repossession basis.

(2) From Savills dated 30 August 2016 which valued 129 Temple Street at:

i. HK$104 million on a market value basis;

ii. HK$83.2 million on a forced sale basis.

(3) Both valuations were as at 9 August 2016, assuming vacant possession but without any valid hotel licence for the immediate operation of the property.

29.  Prior to completion on 1 September 2017, the Receivers obtained an updated valuation from Knight Frank which valued the property as at 31 August 2017 (assuming vacant possession and no valid hotel licence for the immediate operation of the property) at:

(1) HK$105 million on a market value basis;

(2) HK$73.5 million on a repossession basis.

30.  The assumption of no valid hotel licence was entirely proper as A3 Hotel was wound up by the Court on 3 October 2016 and its hotel licence was cancelled on 9 December 2016.  Further, as stated in paragraph 15 above, the Petitioner had to issue proceedings in HCMP 1287 of 2016 in order to obtain an order for vacant possession of the property.

31.  Mr Kwok submits and this court agrees that the appropriate basis for valuing 129 Temple Street was on the repossession basis / forced sale basis because that was what actually happened.  On such a basis, 129 Temple Street was valued by 2 reputable surveyors at between HK$70 million and HK$83.2 million. Even on a market value basis, the property’s value was in the range of HK$100 million to HK$105 million.  Either way, the sale by the Receivers could not be said to be at an undervalue.

32.  In support of their contention that the sale by the Receivers was at an undervalue, the Debtors rely on the following 5 pieces of evidence.  

33.  First, the report dated 14 May 2015 from Prudential which assessed the market value of the property at HK$170 million and the value for sale under repossession at HK$140 million, as at 13 February 2015 (“Prudential’s Valuation”).  This was referred to in paragraph 25 above.

34.  Second, the letter dated 15 August 2016 from Kong & Tang to the Receivers’ solicitors which suggested that there was a potential buyer who was willing to offer HK$130 million for the property. 

35.  Third, in a report dated 15 February 2017, Citiland Surveyors Limited assessed the market value of the property, as at 15 February 2017, at HK$155 million (“Citiland’s Valuation”).

36.  Fourth, by a letter of intent dated 30 June 2017, CK Charles Ho & Co, solicitors on behalf of Asia Business Hotel Investment Holding Limited (“Asia Business Hotel”) informed the Receivers’ solicitors of its intention to purchase the property at HK$115 million.

37.  Fifth, an undated advertisement for tender curiously marked “confidential” said to have been put on the internet by one Rising Sun Bright Development Limited.  The advertisement claimed the property was for sale with an asking price of HK$210 million.

38.  Having scrutinized the 5 pieces of evidence, this court is not satisfied that the Debtors’ alleged cross‑claim has any substance.

39.  First, the Prudential’s Valuation valued the property as at 13 February 2015 and therefore wholly out of date.  Further, what assumptions were used by Prudential to arrive at their valuation were unknown to the Receivers.

40.  Second, Kong & Tang did not reveal any details, not even the identity, of the potential buyer in their 15 August 2016 letter on the pretext that the preliminary sale and purchase agreement had not yet been signed.  This is a curious excuse since the Receivers had to know the identity of the intended buyer and might have to negotiate the terms of the preliminary sale and purchase agreement eg completion date, before deciding whether or not to enter into it.  Eventually, the intended buyer never came forward to contact the Receivers.  This rather suggests the offer of HK$130 million from this intended buyer was not serious, to say the least.

41.  Third, Citiland valued the property as at 15 February 2017, well after the Receivers had entered into the S&P with Tuen Long at the price of HK$108 million, alternatively, HK$105 million.  Importantly, the valuation was based on the assumption that “the property has a valid hotel licence granted by the Home Affairs Department” and depended heavily on the valuer’s own assessment of “Hong Kong Tourist Market Outlook”.  The assumption that the property had a valid hotel licence was simply wrong since A3 Hotel’s licence to operate a hotel at 129 Temple Street had already been cancelled on 9 December 2016, as evidenced by a letter from the Home Affairs Department dated 13 December 2016.  In any event, the valuer’s assessment of the outlook of Hong Kong’s tourist market was irrelevant.  It is the potential buyers’ assessment and the price that they were willing to pay for the property to be used as a hotel which was relevant.

42.  Fourth, the letter of intent from Asia Business Hotel is no evidence of the value of the property at all.  This is amply demonstrated by clause 1 of the letter entitled “Purchase Price” which reads:

“ Subject to the valuation report to be prepared by independent and qualified surveyor confirming that the value of the Subject Property is no less than HK$115,000,000 on or before signing of the Formal Agreement for Sale and Purchase in respect of the Subject Property, the Purchase Price of the Subject Property shall be HK$115,000,000.”

43.  It is unclear why Asia Business Hotel did not value the property first before issuing the letter of intent naming HK$115 million as the intended purchase price.  This again raises serious doubt as to the genuineness of its intent.  In the end, no such valuation report was ever produced by Asia Business Hotel.

44.  Fifth, the undated advertisement for tender is nothing more than an advertisement.  No evidence has been produced to show whether any potential buyers had responded to it by making a bid for the property, or if so, what their bids were.  The advertisement clearly cannot prove that the property’s market value even came close to HK$210 million in August 2016.

45.  For completeness, it was the Receivers who sold the property to Tuen Long for HK$108 million as agent for Kingsway.  The Petitioner cannot be held liable for the acts or omissions of the Receivers because it was simply not their principal.  Hence, even if the Receivers had sold the property at an undervalue, which they had not, the Debtors still cannot mount a claim against the Petitioner.

Disposition and costs order nisi

46.  For the above reasons, the Debtors’ opposition to the Petitions fail.

47.  There shall be a usual bankruptcy order against Mr Shiu Kwong Man Jimmy and Mr Siu Kong Fai, and an order nisi that costs be to the Petitioner, to be taxed if not agreed, and paid forthwith, with certificate for counsel.