RE PACIFIC CULTURAL HOSPITALITY DEVELOPMENT (HK) LTD

HCCW 176/2020

[2022] HKCFI 905

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 176 OF 2020

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J U D G M E N T

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1.  There is before the Court a petition presented by the petitioner, Qian Dao Hu Yulang Park Holdings Limited (千島湖玉星園控股有限公司) (“P”), on 18 June 2020 (“Petition”) seeking a winding up order against Pacific Cultural Hospitality Development (HK) Limited (太平洋文旅發展 (香港) 有限公司) (“Company”) on the ground that the Company failed to pay a debt of RMB27 million (“Debt”), the particulars of which are described as follows[1]:

“A sum of RMB24,000,000.00 (with annual interest at the rate of 24% according to an oral agreement) being the balance of the consideration of RMB45,000,000.00 which shall be paid by the company to the creditor within 10 workings [sic] days under an Equity Partnership Agreement written in Chinese for investment dated 28^th January 2018.”

2.  Prior to presentation of the Petition, on 9 April 2020, P served a statutory demand (“SD”) requiring the Company to pay the Debt said to have been incurred on 31 March 2020. P says that as the Company has failed to comply with the SD, the Company is deemed insolvent by virtue of s. 178 of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32).

3.  The Company filed 2 affirmations made by Mr. Teow Chee Chow (“Teow”)[2] in opposition to the Petition. At the hearing, Mr. Sunny Chan, counsel for the Company, submits that the Petition should be dismissed on the following grounds:

(1) It is an abuse of process for P to present the Petition when it was aware that the Debt is bona fide disputed on substantial grounds;

(2) The Debt is not for a liquidated sum and hence cannot form the basis of the SD and the Petition; and

(3) The Company has a serious cross claim against P for breach of the “2^nd Agreement” (as defined in §8 below), the very agreement which gave rise to the Debt.

4.  P filed the 3^rd and 4^th affirmations made by Mr. Huang Yulang (“Huang”) in reply to Teow’s 1^st and 2^nd. Huang is a director of P.

Background

5.  P, Mr. Teow Wooi Huat (“Teow Sr.”), who is Teow’s father, and 羅御軒 (“Law”) entered into an “equity partnership agreement” (股權合作協議書) in Chinese dated 28 January 2018 (“1^st Agreement”). Under the 1^st Agreement, Teow Sr. and Law agreed to cooperate with P in the investment on a theme park development project in Hangzhou in the Mainland (“Project”) in the following manner:

(1) P, Teow Sr./Law and other investors would invest RMB 147 million into and become shareholders of玉郎巨星文化創意園 (香港)有限公司 (a Hong Kong company) (“YPL”) (cl.5).

(2) YPL would invest the entire RMB 147 million in a wholly-owned subsidiary in Hong Kong, 千島湖玉郎巨星文化創意園(香港)有限公司 (“QYPL”) (recital 3, cl.6-7).

(3) QYPL has entered into a joint venture with 淳安千島湖旅遊集團有限公司, a Mainland company (“JV Partner”), through 淳安千島湖玉郎巨星文化創意有限公司 (“JVC”), another company established in Mainland. The JVC would raise and invest RMB 210 million into the Project. QYPL would invest RMB 147 million into JVC and hold 70% of its equity (recital 4, cl.6-7).

(4) Teow Sr. would pay a lump sum of RMB45 million (“Investment Sum”) within 10 working days of the 1^st Agreement to acquire 20% of YPL’s shareholding, of which 18% would be allotted to Teow Sr. and 2% to Law. The wordings in Chinese are:

“乙方同意於簽訂本股東合作協議日起10個工作天内，以一次性支付方式，出資人民幣肆仟伍佰萬元整(RMB45,000,000)，以取得YPL 的 20%股權，其中18%及2%的股權將分別分配予乙方及丙方,即乙方將取得18%股權及丙方則將取得2%股權”) (cl.8).

(5) The Investment Sum would be transferred to a specified bank account of YPL (cl.9).

(6) The 1^st Agreement constituted the entire agreement between the parties and superseded any prior agreement or any warranties, written or oral, and any amendment to the agreement would only take effect if in writing signed by all 3 parties (cl.18).

6.  By a supplemental agreement (“1^st SA”) back-dated to 28 January 2018 made between P, Teow Sr. and Law, the parties agreed that P shall transfer 20% of the shares it held in YPL to Teow Sr./Law, and Teow Sr. shall pay the Investment Sum to the bank account of a 廖瑞賢, instead of YPL’s bank account as stated in the 1^st Agreement.

7.  The Company was incorporated on 23 May 2018 and was acquired by Teow as an off the shelf company. Since 12 November 2018, Teow has been the sole shareholder and director of the Company.

8.  In November 2018, the parties to the 1^st Agreement agreed that the Company would replace Teow Sr. whereupon another “equity partnership agreement” back-dated to 28 January 2018 with identical terms as the 1^st Agreement was signed by P, the Company and Law (“2^nd Agreement”). The parties also signed a supplemental agreement to the 2^nd Agreement back-dated to 28 January 2018 with identical terms as the 1^st SA save that the Company replaced Teow Sr. as a party (“2^nd SA”).

9.  Pursuant to the 1^st and 2^nd Agreements, Teow Sr./the Company paid an aggregate sum of RMB 27 million to P in that:

(1) RMB 21 million was paid by Teow Sr. between 11 February 2018 and 9 April 2018; and

(2) RMB 6 million was paid by the Company on 19 November 2018.

10.  Although the Petition referred to an “oral agreement” concerning interest, no particulars have been pleaded. However, in Huang 3^rd P alleges that there was an oral agreement reached in March 2019 between Huang (on behalf of P) and Teow Sr. (on behalf of the Company) when they met in Malaysia during which it was agreed that in return for allowing more time for the Company to pay the balance of the Investment Sum, the Company would pay 2% monthly interest (i.e. 24% per annum) on the outstanding balance of the Investment Sum from May 2018 (“Oral Agreement”). The Company denies the existence of the Oral Agreement and points out that it is not supported by any documents.

11.  On 2 September 2019, P transferred 12,348,018 shares in YPL (equivalent to 8.40% of YPL’s issued shares) (“1^st Batch”) to the Company and another 1,372,002 shares in YPL (equivalent to 0.93% of YPL’s issued shares) (“2^nd Batch”) to Law. According to the instrument of transfer and bought and sold notes provided by P to the Company, the consideration for the 1^st Batch was RMB18.9 million.

12.  In Huang 3^rd, P explains that only the 1^st and 2^nd Batches (equivalent to 9.3% of YPL’s issued shares) were transferred to the Company/Law as only RMB 21 million had been treated as partial payment of the Investment Sum, and RMB 6 million was treated as payment of interest pursuant to the Oral Agreement.

13.  In the letter dated 27 March 2020 (“Pre-SD Letter”) to the Company, Messrs. Paul W. Tse, solicitors for P (“PWT”), stated that:

(1) the Company had paid only RMB 21 million, and the balance of the Investment Sum (RMB 24 million) was in arrears pursuant to clause 8 of the 2^nd Agreement;

(2) subsequently, P and the Company “orally agreed that an interest rate of 24% to be imposed on the balance of the [Investment Sum] with immediate effect”;

(3) P demanded that the Company pays RMB 26.64 million by 31 March 2020, failing which P would institute legal proceedings against the Company without further notice; and

(4) a schedule showing the calculation of interest from 1 May 2018 to 29 February 2020 against the amounts paid by Teow Sr./the Company (“Schedule”) was appended.

14.  In response, the Company in its letter dated 30 April 2020 stated that COVID-19 related restrictions had prevented the Company’s director, who was in Malaysia, from seeking Hong Kong legal advice. It drew to P’s attention that:

(1) there was no prior demand for payment;

(2) in P’s memo dated 14 October 2019, there was no mention of any interest payable by the Company;

(3) cl.7 of the 2^nd Agreement required the entire RMB 147 million be invested into QYPL;

(4) only minimal information in relation to the entire investment scheme had been provided by P to the Company, contrary to its obligation under the 2^nd Agreement; and

(5) the 2^nd Batch was transferred to the Company for a consideration of RMB 18.9 million but the Company had paid RMB 27 million.

15.  In their letter dated 12 May 2020, PWT reiterated that the Company was obliged to pay the Investment Sum within 10 days of the 2^nd Agreement, which was not a conditional term. The Company’s failure to fulfil clause 8 amounts to a breach of the 2^nd Agreement and has caused loss and damage to P.

Discussion

16.  It can be seen from the above narratives that while P and the Company both alleged that the other party had acted in breach of the 2^nd Agreement, neither party has accepted the breach of the other or sought to terminate the 2^nd Agreement. When asked by this Court as to whether the 2^nd Agreement remains alive and, if so, whether P has communicated to the Company that it is ready, willing and able to transfer the remaining 10.7% shares in YPL to the Company and why P resorted to winding up proceedings instead of seeking specific performance of the 2^nd Agreement by commencing an action, Mr Fong confirms that the 2^nd Agreement remains alive, P has never informed the Company that it will transfer the remaining shares to the Company upon receipt of the balance of the Investment Sum, and P considers that if the Company is wound up, the liquidators can “take up” the 2^nd Agreement.

17.  In my view, this is a case where P has misused winding up proceedings for the purpose of forcing the Company to pay the balance of the Investment Sum in circumstances where it knew that:

(1) the Debt was not due and payable on the date it claims;

(2) P’s claim is not for a liquidated sum. At the highest, P’s claim is for unliquidated damages;

(3) there is substantial dispute which supports the Company’s contention that P acted in breach of the 2^nd Agreement such that the Company has a serious cross claim against P for breach of the 2^nd Agreement; and

(4) the proper course would be for P to commence an action to resolve the dispute with the Company and to seek specific performance or damages for breach of the 2^nd Agreement against the Company.

18.  I deal with these points in turn.

Debt not due and payable on 7 February 2018

19.  Mr Chan submits that the following evidence including contemporaneous documents show that P has agreed to vary or waive the date and amount in which the Investment Sum should be paid:

(1) The deadline for payment stipulated in clause 8 of the 2^nd Agreement was 7 February 2018, about 3 months before the incorporation of the Company and 9 months before Teow acquired the Company;

(2) P accepted 3 tranches of payments from Teow Sr. and the Company up to November 2018 without any protest;

(3) In the Wechat messages exchanged between Huang and Teow Sr. from 2 January 2019 to 10 March 2019, Huang asked Teow Sr. to make further payment and did not suggest that the Company had acted in breach of the 2^nd Agreement; and

(4) In September 2019, P only transferred the 1^st and 2^nd Batches to the Company/Law which, on its case, corresponded to the amount of Investment Sum received.

20.  On the other hand, Mr Fong submits that there was no effective variation or waiver of the date for payment for the following reasons:

(1) In Teow 1^st and 2^nd, the Company fails to make clear its case as to whether the date of payment has been varied or waived which he says is mutually exclusive;

(2) No consideration has been provided by the Company in support of any variation. It is illogical to suggest that the Company’s delay in making payment supports a waiver;

(3) The alleged waiver is inconsistent with Teow 1^st where he said (at §24) that the Company had not injected the remaining balance of the Investment Sum because “the Project appeared to be moving at a very slow pace” and Huang “appeared to be very reluctant to issue any shares to the [Company]”; and

(4) even if there were variation, no specific date for payment was agreed by the parties. Although the 2^nd Agreement did not provide that time is of the essence, an innocent party is entitled to give notice fixing a reasonable time for performance thus making time of the essence (Long Art Investment Limited v Kam Chiu Fei, HCA 1024/2001, 9 October 2003, §§80(1), per DHCJ YL Wong SC). In the Pre-SD Letter, P demanded the Company to pay the Debt by 31 March 2020, thereby making time of the essence.

21.  In my judgment, the evidence relied upon by Mr Chan supports the Company’s contention that the parties have agreed to vary the date for payment of the Investment Sum under clause 8 of the 2^nd Agreement. Indeed, it is absurd to suggest otherwise as the Company did not exist on the contractual date for payment (7 February 2018). The alleged lack of consideration is only raised by Mr Fong in his reply submissions and is a matter to be determined at trial as much depends on the dealings between the parties at the relevant times including whether they have assumed any mutual obligations in support of the variation.

22.  I am unable to accept Mr Fong’s contention that 31 March 2020 was a reasonable deadline set by P. In Long Art, a letter dated 13 November 2000 setting a deadline at 5 p.m. on 14 November 2020 for delivery of goods was considered reasonable in view of the numerous demands made in the previous weeks (since 29 September 2000) (at §81(2)-(9)). In the present case, the first demand made by P against the Company was the Pre-SD Letter dated 27 March 2020 (Friday) which laid down a deadline on 31 March 2020 (Tuesday).

23.  Moreover, on P’s case, under the Oral Agreement, the parties agreed to allow more time for the Company to pay the remaining balance of the Investment Sum. No particular date was alluded to under the Oral Agreement. It has not been explained by P as to why in light of the Oral Agreement, P was entitled to unilaterally impose the deadline for payment in the manner suggested in the Pre-SD Letter.

24.  Further, it is not P’s pleaded case that the deadline for payment of the Debt was 31 March 2020. Although the SD described the Debt as having been incurred on 31 March 2020, in the Petition, the only basis pleaded is that the Debt was due and payable on 7 February 2018. For the reasons described in §§19 -21 above, I do not see how P can claim that the Investment Sum was due and payable on 7 February 2018.

P’s claim is not for a liquidated sum

25.  The principles governing statutory demand and petition are well established:

(1) A statutory demand is an important document. It serves to inform the debtor of the way in which the debt arose so that he would know what course he should take in the light of the information given. It is “the straight and narrow gateway” through which a creditor must pass in order to establish the debtor’s apparent inability to pay the debt demanded in order for a bankruptcy petition to be presented (TSB Bank plc v Platts (No 2) [1998] BPIR 284 at 288H-290A, applied in Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §13).

(2) Whilst the statutory code affords the Court a degree of flexibility in dealing with an application to set aside a statutory demand for defects, this is not to be taken as a charter for slipshod in preparation of statutory demands. If a statutory demand is defective, the Court will be alert to see whether those mistakes have caused or will cause any prejudice to the debtor. Where the debt in issue was not a large sum, it could not be said the defect would have made no difference in that the debtor would not have paid anyway and no prejudice would have been suffered (Re Leung Cherng Jiunn, §§15-16, citing In re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at 280D-E, per Nicholls LJ). The same principle applies to a statutory demand issued by a petitioner to a company.

(3) A statutory demand for a claim for unliquidated damages is ineffective (French, Applications to Wind Up Companies, 4^th ed., §7.160; Butterworths, Company Law (Winding Up and Miscellaneous Provisions) Handbook, 4^th ed., §178.05). The debt must exist in liquidated form as at the date of presentation of the petition. Consequently, a person claiming unliquidated damages in contract or in tort, but who has not yet obtained judgment, lacks standing to present a winding up petition (Fletcher, The Law of Insolvency 5^th ed., §21-007; Re Longmay International Ltd, HCCW 268/2012, 29 May 2013, §6, per Ng J).

26.  The SD, on its face, is defective in that:

(1) it stated incorrectly that the date for payment of the Investment Sum was 7 February 2018;

(2) it failed to describe any particulars of the Oral Agreement which P claimed entitled it to apply RMB 6 million received from the Company as payment of interest; and

(3) it failed to explain how the Debt came about having regard to the RMB 27 million received by P.

27.  Mr Fong contends that the SD is not defective. Although the SD did not make any reference to the Pre-SD Letter, the Company must have known this since the Pre-SD Letter was issued shortly before the SD. I do not agree. The evidence suggests that the Company might not have received the Pre-SD Letter by the time it wrote the letter dated 30 April 2020 to PWT as it still stated that it was “unaware of any payment demand prior to [the letter dated 9 April 2020 from [PWT] to the Company enclosing the SD]”. There is no answer to the defects identified in §26(1)-(2) above.

28.  Mr Chan makes 2 points in support of his contention that P’s claim is not for a liquidated sum:

(1) Clause 8 of the 2^nd Agreement, properly construed, does not impose an obligation on the Company to pay the Investment Sum first. As P has not transferred 20% of issued shares in YPL to the Company, there is no obligation for the Company to pay the balance of the Investment Sum, being RMB 18 million; and

(2) Even if (which is not accepted) the Company were in breach of the 2^nd Agreement, P’s claim would only be damages for breach of contract, not the Debt. This is because P has not transferred 20% issued shares in YPL to the Company/Law, it cannot be said that the Company has received the corresponding benefit for the Investment Sum in full.

29.  Mr Fong submits that the transfer is not a condition precedent to the Company’s obligation to pay. Although clause 8 does not set out the order of performance, the words “in order to obtain” (“以取得”) 20% of YPL’s shareholding suggests that the Company’s payment is a condition precedent to P’s obligation to transfer shares. In any event, if the Company is wound up, the liquidator will be in a position to deal with the matter by requiring P to transfer the outstanding balance of YPL shares to the Company.

30.  I am inclined to agree with Mr Chan’s submissions for the following reasons:

(1) P has not rendered full performance of its obligation to transfer 20% issued shares in YPL to the Company/Mr. Law. Prima facie, in order to claim the entire Investment Sum, P ought to have performed its side of the bargain, unless it can demonstrate that payment of the Investment Sum in full is a condition precedent to P’s obligation to transfer shares, in which case an action for an agreed sum may be available to P to claim any outstanding balance as a debt without P having to first perform (Chitty on Contracts, 34^th ed., §30-003). Otherwise, provision must be made for any part of P’s obligation which remains unperformed (i.e. ~10.7% of YPL’s issued shares yet to be transferred to the Company/Law).

(2) The 2^nd SA states that pursuant the 2^nd Agreement, P shall transfer the shares to the Company and Law, who shall make payment to P in the amount of RMB45 million.[3] It appears that these obligations are “concurrent conditions”, as characterised in Chitty, §24-024, whereby each party’s obligation is to depend on the readiness and willingness of the other to perform at that time. The position is similar to that of a contract of sale of goods, where the “delivery of the goods and payment of the price are in the absence of a contrary intention concurrent conditions” (Chitty, §24-024).

(3) In the absence of any letter from P stating that it is ready and willing to transfer the remaining YPL shares upon payment by the Company, it is doubtful if P is entitled to claim the outstanding balance of the Investment Sum as a liquidated sum (even assuming the Debt is the outstanding balance).

31.  In any event, I am unable to see how P can claim that the Debt represents the loss and damage it suffered as a result of the Company’s breach. It is indisputable that the shares in YPL are valuable property and P still retains them. There is no suggestion that the remaining 12% issued shares in YPL cannot be sold to other party at the same or any other price. There is thus no basis for P to claim that the Debt represents the loss it has suffered as a result of the Company’s breach of the 2^nd Agreement.

32.  Either of the above 2 points is sufficient to dismiss the Petition. As there is a bona fide dispute on substantial ground in respect of the Debt, P does not have locus to present the Petition. It is not necessary for the Company to prove that it is solvent or that it is able to pay its debts.

Company has a bona fide cross claim against P

33.  Mr Chan submits that the Company has a genuine, serious cross-claim of substance against P for breach of the 2^nd Agreement based on the following:

(1) P failed to transfer 12% issued shares in YPL to the Company which corresponds to the RMB27 million received from Teow Sr./the Company;

(2) P failed to apply all the monies invested by the investors (including the RMB27 million paid by Teow Sr./the Company) for the sole purpose of investing in YPL and ultimately QYPL in that:

(a) HK$57.5 million was paid by YPL to companies owned by Huang as licence fees;

(b) monthly salary in the amount of HK$180,000 was paid by YPL to Huang from January 2018 to March 2019 and HK$90,000 from April 2019 onwards;

(c) a monthly consultation fee of HK$129,000 was paid by YPL to another company wholly owned by Huang; and

(d) RMB 84.5 million appears to have been missing from the books of accounts of QYPL.

34.  P denies the allegations and responds as follows:

(1) There was a clear understanding between P and Teow Sr./the Company that since the Project sought to capitalise on popular comic characters created by Huang, part of the investment in the Project would cover the costs of acquiring intellectual property rights in Huang’s creations. The “license fees” of RMB57,456,570 corresponded to the sums under contracts in which the relevant intellectual property rights were assigned to QYPL or JVC;

(2) The allegations were only advanced after the Petition had been presented. The Company has not brought any claims against P including a possible derivative action qua shareholder on behalf of YPL, which shows the allegations lack credibility (Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487, §§13-14, per Kwan J (as she then was));

(3) In any event, the alleged misappropriations only afford YPL, not the Company, a claim against Huang;

(4) The Company has not filed any evidence to demonstrate that it is solvent or that, taking into account the cross claims, it could pay its debts as they fell due. Nor has the Company stated that any cross-claim would exceed the Debt;

(5) Any such claim could be pursued by the liquidator after the Company is wound up; and

(6) post-winding up (Re ICS Computer Distribution Ltd [1996] 1 HKLR 181, §9).

35.  In my view, the evidence as it now stands, shows that the Company has a serious cross claim against P for breach of the 2^nd Agreement. The 2^nd Agreement expressly provides that the entire sum invested by the investors, including the Investment Sum to be invested by Teow Sr./the Company, shall be injected into QYPL through YPL. None of the point made by Mr Fong goes to explain why P was entitled to ignore the terms of the 2^nd Agreement and caused YPL to make the various payments to Huang or his companies. As the obligation to inject all the monies invested by the investors including Teow Sr./the Company was imposed on P, it is open to the Company as a party to the 2^nd Agreement to enforce such obligation against P. If, as the Company contends, P acted in breach of the 2^nd Agreement, it casts doubt on P’s entitlement to claim the remaining balance of the Investment Sum.

Disposition and costs

36.  For the above reasons, the Petition is dismissed.

37.  As for costs, I make a costs order nisi that P shall pay the costs of and occasioned by the Petition to the Company on an indemnity basis, to be assessed by way of gross sum assessment. The Company is directed to lodge its statement of costs within 7 days of this Judgment, and P shall provide its comments, if any, within 7 days thereafter.

38.  It is appropriate to order costs on a higher scale to reflect this Court’s finding that it is an abuse of process for P to have presented the Petition when it was aware that (1) there is a bona fide dispute on substantial grounds in respect of the Debt, (2) P’s claim is not for a liquidated sum, and (3) the Company has a serious cross claim against P for breach of the 2^nd Agreement which, if successful, may affect P’s right to claim the remaining balance of the Investment Sum.

39.  As for the costs of the Official Receiver, it shall be deducted from the deposit paid by P.