RE CIL HOLDINGS LTD

HCCW 702/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 702 OF 2005

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J U D G M E N T

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1.  This is a petition to wind up CIL Holdings Limited (“the Company”) on the ground it is unable to pay its debts.  The petitioner is CSI Investment Management Limited.  The petitioning debt is $1,541,995.42.

2.  A demand for this debt was served on the Company on 9 August 2005.  As no payment was made within 3 weeks, the Company was deemed unable to pay its debts under section 327(4)(a) of the Companies Ordinance, Cap. 32, the Company being an unregistered company.

3.  The debt may be a relatively small debt for the Company, the Company may or may not have the means of paying.  It has chosen not to pay, notwithstanding the service of the demand under section 327(4)(a).  If the court should find the debt is indubitably due, but the Company has refused to pay notwithstanding it may have the means of doing so, the petitioner is nevertheless entitled to an order to wind up the Company on the ground of insolvency.  The law is clear on this (Cornhill Insurance plc v Improvement Services Limited & Others [1986] BCLC 26).  The late evidence the Company has put in as to its alleged funds sitting in a bank in the PRC, or its alleged prospects of success of a claim it brought 5 years ago to recover $98 million, is wholly irrelevant.  If the Company wishes to play at high stakes in the face of a petition for its winding up, it must take the consequence if its grounds for opposition are rejected by the court.

4.  I will first give the background matters.

5.  The Company was incorporated in Bermuda in 1993.  Its shares are listed on the Hong Kong Stock Exchange.  As its name suggests, it is a holding company.  A petition was presented to wind up the Company by a bank in May 2001.  The petition was adjourned on several occasions over a two-year period to allow the Company to prepare a scheme of arrangement.  Eventually, an investor, Ke Jun Xiang (“Mr Ke”) was found and through his company he agreed to and did subscribe for new shares in the Company for $35 million.  A scheme was then put together and the requisite majority of creditors and shareholders voted in favour of it.  The scheme received the sanction of the court in April 2003 and the winding-up petition was dismissed on 14 April 2003.

7.  The petitioner is a licensed financial advisor approved by the Securities and Futures Commission.  In August 2001, Mr Ke was introduced to the petitioner by a director of the Company, Peter Ho Pui Tsun (“Mr Ho”).  It is not in dispute that the petitioner rented office premises in Hutchison House, Central and a lease was granted to the petitioner commencing from September 2001.  It is also not in dispute that during September 2001 to September 2003, for a period of 25 months, the petitioner allowed the Company to have use of the office premises, primarily to carry out its restructuring.  The petitioner claims it had orally agreed with the Company that the Company was to pay the petitioner $100,000.00 per month as licence fees for use of the business premises and use of the equipment, facilities and resources of the petitioner.  It is common ground that the petitioner agreed not to require the Company to pay licence fees before the completion of the restructuring scheme.  The Company denies it has agreed to pay licence fees at $100,000.00 a month.  I will come back to the Company’s defence raised in this petition later.

8.  From September 2001 to September 2003, the petitioner issued 25 invoices to the Company at the end of every month, each for $100,000.00.  The description on each of these invoices read: “Licensing fee for the use of office space and human resources facilities at Room 1804-5 Hutchison House, Central, Hong Kong for [the month in question] as agreed”.

9.  On 31 March 2002, the petitioner issued an invoice to the Company for $500,000.00.  The description on this invoice read: “Progress payment on advisory and consultancy fees pursuant to the Agreement dated 14 September 2002 [sic] for the purpose of a Restructure Proposal of CIL Holdings Limited as agreed”.

10.  All these invoices were received by the Company, as they all bore the chop of the Company.

11.  On 30 March 2003, Mr Ke issued a personal cheque to the petitioner for $1 million.  The petitioner claims that the cheque was in part payment of the outstanding licence fees.  Mr Ke alleges that the cheque was given due to threats of the petitioner and was intended merely as a security for payment of the licence fees.  After the scheme of arrangement received the sanction of the court, Mr Ke’s cheque was presented for payment sometime in May 2003, it was dishonoured.

12.  On 10 June 2003, the petitioner issued a writ against the Company in HCA No. 2114 of 2003, claiming licence fees of $2 million, from September 2001 to April 2003.  The Company was represented by solicitors, and through its solicitors obtained an extension of time to file a defence, although a defence was not filed due to subsequent events.

13.  On 17 July 2003, Mr Ke and Mr Ho, two directors of the Company, each executed a deed of guarantee.  The guarantee was sent to Mr Ke under cover of a letter of the petitioner’s solicitors in Chinese and in English, requesting him to sign if he understood its meaning.  It was further stated that to protect his rights, Mr Ke should seek independent legal advice before he considered signing the deed of guarantee.  The recitals in the guarantee stated that as at 30 April 2003, the Company was indebted to the petitioner in the sum of $2 million; that prior to the execution of the deed of guarantee, the petitioner had brought HCA No. 2114 of 2003 against the Company for recovery of the debt; and that Mr Ke covenanted to repay the petitioner the debt aforesaid by issuing 4 post-dated cheques in satisfaction thereof, and copies of the cheques were attached to the deed of guarantee.

14.  On 17 July 2003, upon the execution of the deeds of guarantee, the petitioner filed a notice of discontinuance of proceedings in HCA No. 2114 of 2003.

15.  Pursuant to his guarantee, Mr Ke issued four personal cheques to the petitioner dated 30 July 2003, 30 September 2003, 30 November 2003 and 31 January 2004 for the total sum of $1.6 million.  Mr Ke has also claimed that these cheques were given due to threats of the petitioner.  He further claims that the cheques were not meant to be “realised and enforced for payment” but were given as “interim security” in place of his earlier personal cheque of $1 million.  Needless to say, these four personal cheques were all dishonoured when presented for payment.

16.  On 23 October 2003, the petitioner through its solicitors sent a demand letter to Mr Ke for $3 million.

17.  On 1 December 2003, the Company acting by Mr Ho, issued 15 promissory notes in favour of the petitioner, each for $200,000.00, all payable on 30 June 2004, with interest at 6% per annum from the date of issue to payment.  Mr Ke has claimed in the winding-up proceedings that the promissory notes were all issued under the threat of the petitioner.

18.  When the due date for payment on the promissory notes arrived, no payment was made.  On 5 July 2004, the petitioner’s solicitors wrote to the Company demanding payment on the promissory notes in the total sum of $3 million with interest.  On 14 July 2004, the petitioner issued a writ against Mr Ke in HCA No. 1674 of 2004, on the four dishonoured cheques for the sum of $1.6 million.  On 2 August 2005, the petitioner obtained summary judgment against Mr Ke for the sum claimed from a Master.  On 21 December 2005, Deputy Judge Muttrie dismissed Mr Ke’s appeal against the Master’s decision.  Mr. Ke has lodged an appeal against the judgment of Deputy Judge Muttrie.  I understand he has paid security for costs of his appeal to the Court of Appeal.  This appeal has yet to be heard.

19.  As the petitioner has obtained judgment against Mr Ke in respect of part of the sums due on the promissory notes, the petitioner in its demand against the Company on 9 August 2005 only sought payment for the balance of the sums due for the seven remaining promissory notes in the aggregate sum of $1.4 million.  They form the subject matter of the petitioning debt.

20.  I should also mention that on 25 October 2004, the Company via its auditors CCIF CPA Limited sought confirmation that the Company owed the petitioner $3 million as at 30 June 2004 and on 29 October 2004, the petitioner sent a written reply to confirm.

21.  In resisting the application for summary judgment, Mr Ke has filed three affirmations, he also filed a defence and counterclaim which was amended on 23 September 2005.  In resisting the present petition, Mr Ke has filed one affirmation, Mr Ho two affirmations and the Company even issued a writ against the petitioner on 27 February 2006, in HCA No. 432 of 2006, alleging that the oral agreement to licence office premises to the Company should be rescinded for false representation and the promissory notes should be declared invalid and claiming other reliefs.

22.  It would appear that when Mr Ke or the Company has new legal representation in various stages of proceedings, a different spin was put on the case that Mr Ke or the Company sought to make out.

23.  Mr Maurellet for the Company has advanced two main grounds to oppose the petition.

24.  He contended there is a bona fide dispute of the petitioning debt on substantial grounds on the basis of economic duress.  This is the main ground.  His second ground is that there is a genuine cross claim of the Company against the petitioner, claiming a declaration to set aside the promissory notes and other reliefs for misrepresentation.  This is the action in HCA No. 432 of 2006.

25.  On the first ground, Mr Maurellet relied on the decision of Waung J in Esquire (Electronics) Ltd & Another v HSBC [2005] 3 HKLRD 358 at paras 109 to 135.  He pointed out that Waung J had said it is the “most notorious difficult problem” in economic duress to ascertain what is “illegitimate pressure amounting to compulsion”, being the first of the three basic requirements identified by the Judge as necessary to establish economic duress.  From that he argued that in the absence of cross-examination and discovery, the Company’s evidence on the alleged threats of the petitioner cannot be rejected summarily.  Hence, there is an arguable defence on economic duress, raising a substantial dispute on the petitioning debt.

26.  As appeared from Mr Ke’s affirmation in the winding-up proceedings, the alleged threat was that in October or November 2003, the petitioner had threatened to commence legal proceedings against Mr Ke on the dishonoured cheques and against the Company for unpaid licence fees, if the Company should refuse to issue the promissory notes for settlement of the licence fees.  Mr Ke said that he submitted to the pressure because the Company was then applying to the Stock Exchange for re-listing of its shares, and wished to avoid giving a bad impression to the Stock Exchange and adverse consequences for the re-listing application. 

27.  Mr Maurellet submitted that the threat to sue was made at a critical moment for the Company, so the petitioner was not just driving a hard bargain, but had crossed the line so the pressure it applied on Mr Ke and the Company to demand payment amounted to illegitimate pressure sufficient to make out a case of economic duress.

28.  The onus is on the Company to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.  This onus is not satisfied by raising vague and flimsy allegations and then saying there is a dispute of fact which should go to cross-examination.  An allegation of threats is easily made.  It must be examined against the totality of the evidence adduced, in particular against evidence not in dispute or not capable of being disputed.  It is necessary to ask if there are other factors which may make the pressure allegedly applied illegitimate and unconscionable, such as the wrongfulness or illegitimacy of the threat, the courses open to the Company, the Company’s access to independent advice, the presence or absence of protest by the Company (see the academic work cited by Waung J at para 126 of his judgment).  This is not embarking on a trial but the court has necessarily to take a view on the issue to see whether the Company has satisfied the threshold onus of raising a bona fide dispute on substantial grounds.

29.  Here, it is without dispute that the Company has been in occupation of business premises for two years and taken the benefit of the facilities of the petitioner for which it was recognised that some payment was due.  Not a cent was paid so far, despite demands since May 2003.  Invoices were issued by the petitioner to the Company every month for two years, for which receipt was acknowledged.  There was no protest of any kind from the Company it should not be charged $100,000.00 a month, or that it should only be liable for a lesser sum.

30.  If the petitioner had, in October or November 2003, indeed threatened to sue the Company if the Company should fail to issue promissory notes to settle licence fees, the petitioner was merely threatening to carry out something within its rights.  That does not make the pressure applied illegitimate.

31.  All along, the Company had access to independent legal advice.  One must bear in mind that the Company is a listed company.  It was represented by solicitors from the start when the petitioner first brought action against the Company in June 2003 in HCA No. 2114 of 2003.  When the deeds of guarantee were sent to Mr Ke and Mr Ho in July 2003, they were sent under cover of a letter of the petitioner’s solicitors to Mr Ke in Chinese and English, requesting Mr Ke to sign if he understood the meaning and stating that to protect his rights, he should seek independent legal advice before signing.  The four personal cheques issued by Mr Ke were issued pursuant to the terms of the deed of guarantee which he signed.

32.  In the three affirmations filed by Mr Ke in the action against him, HCA No. 1647 of 2004, no mention was made of any threat by the petitioner in October or November 2003, which he now alleges constituted illegitimate pressure to the Company in agreeing to issue the promissory notes in December 2003.  The main defence in that action was that his liability on the personal cheques was discharged because the petitioner accepted the promissory notes in a compromise and settlement, see paragraph 2(f) of his amended defence and counterclaim.  Although he has made allegations in his affirmations there were threats by the petitioner, these were the threats made earlier, which led him to issue his personal cheque in March 2003 and the four personal cheques in July 2003.

33.  Mr Ke and the Company have taken a volte-face.  From contending that a valid compromise was reached when the petitioner accepted the promissory notes in discharge of Mr Ke’s personal liability, they have now attacked the compromise in accepting the promissory notes, saying that the notes should be set aside for economic duress.

34.  Further, a new allegation was raised for the first time in the statement of claim in HCA No. 243 of 2006 that the promissory notes signed by Mr Ho for and on behalf of the Company were issued without authority.

35.  The allegation of illegitimate pressure does not hold water.  By no stretch of imagination could this be termed an arguable defence.

36.  I turn to the other ground of opposition, that there is a genuine cross claim based on misrepresentation.  The misrepresentation was said to arise in this way.  When Mr Ke and the petitioner’s chief executive officer entered into an oral agreement for a licence of the premises in August 2001, Mr Ke on behalf of the Company orally agreed to the licence on the following terms and conditions:

(1) the monthly rent and other office overhead expenses but excluding expenses of staff payable by the petitioner were to be split and borne by the Company and the petitioner in equal shares;

(2) the Company was not required to pay immediately its share of the expenses until after the Company had completed its restructuring sanctioned by the court; and

(3) the amount of the licence fee payable by the Company to the petitioner should be verified by proper accounts and documentation.

37.  It is alleged that sometime later in 2001, Mr Lok of the petitioner represented to Mr Ho that the total overhead expenses were $200,000.00 per month and the petitioner would charge the Company $100,000.00 per month.  In reliance on that representation, the Company through Mr Ho agreed to pay the licence fee of $100,000.00 to the petitioner.  The petitioner however failed to supply any accounts or documentation to verify its overhead expenses, in breach of the oral agreement with Mr Ke.  It is alleged that the petitioner’s representation was false in that the total overhead expenses were grossly exaggerated and made to induce or procure the Company to agree to pay monthly licence fee of $100,000.00 and to issue the promissory notes subsequently.  Until the accounts were properly verified, it was contended that the Company should not be liable to pay.  Further, by reason of the misrepresentation, the Company was entitled to rescind the oral licence agreement and to rescind the promissory notes.  Lastly, the promissory notes signed by Mr Ho were without proper authority and therefore not binding on the Company.

38.  In HCA No. 432 of 2006, the Company claims against the petitioner proper accounts and enquires of its correct share of the licence fees and consultancy fees that the Company should be liable to pay; a set-off against any judgment sum obtained by the petitioner against Mr Ke in HCA No. 1647 of 2004; a declaration that the licence fee at $100,000.00 a month, the consultancy fee and the issuance of the promissory notes were procured by false representation of the petitioner; a declaration that the promissory notes were issued and signed without proper authority of the Company; and a declaration that the promissory notes were invalid and should be set aside.

39.  This cross claim is also a non-starter.

40.  As stated earlier, invoices were issued by the petitioner to the Company every month for two years for a licence fee of $100,000.00 for which receipt was acknowledged, with no protest of any kind from the Company it should not be charged $100,000.00.  On 25 October 2004, the Company via its auditors sought confirmation from the petitioner that the Company owed the petitioner $3 million as at 30 June 2004 and the petitioner on 29 October 2004 sent a written reply to confirm.  Last but not least, the alleged oral agreement and subsequent representation were contrary to the amended defence and counterclaim in HCA No. 1647 of 2004.  In paragraph 2(b) of this pleading, it was averred as follows:

“in about September 2001, the Plaintiff [i.e. the petitioner] orally agreed with CIL [i.e. the Company] that the Plaintiff agreed to licence a portion of the Plaintiff’s office for CIL use and CIL orally agreed to Licence fee at the rate of HK$100,000.00 per month to the Plaintiff for the said use and service”.

41.  The allegation of false representation is plainly incredible.  There is no genuine cross claim in HCA No. 432 of 2006.  There is no good reason why the promissory notes should not be honoured.

42.  I reject the grounds of opposition raised by the Company.  The Company has refused to pay the petitioning debt which I find to be indubitably due.  The petitioner is entitled to wind up the Company on the ground it is unable to pay its debts and I so order.  The petitioner’s costs are to be paid out of the assets of the Company.