RE MEGA GOLD HOLDINGS LTD

HCCW 273/2023 and HCB 3468/2023
(Heard Together)

[2024] HKCFI 2286

HCCW 273/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 273 OF 2023

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AND

HCB 3468/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3468 OF 2023

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________________________

(HEARD TOGETHER)

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J U D G M E N T

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1.  On 6 December 2023, pursuant to the orders made by Linda Chan J on 10 October 2023 and Anthony Chan J dated 21 August 2023, two petitions filed by the Petitioner, New Deal Trading Limited (“Petitioner”) were heard together, namely a winding-up petition (“the Winding-up Petition”) against Mega Gold Holdings Limited (“Company”) and a bankruptcy petition (“the Bankruptcy Petition”) against Man Chun Sing Matthew (“Debtor”). Both petitions were presented on the basis of debts allegedly owed by the Company and the Debtor to the Petitioner, which arose from various agreements made between the Petitioner and the Company under which the Debtor agreed to guarantee the performance of the Company’s obligations.

A.  FACTUAL BACKGROUND

A1.  The Company and the Petitioner

2.  The Company was incorporated in the British Virgin Islands on 6 January 2009. The Debtor is the founder and CEO of the Company. He holds 7,184 Ordinary Shares (i.e. 30.75% of the total issued shares in the Company).

3.  The Petitioner is also a shareholder of the Company, holding 3,389 Series A Preference Shares and 3,794 Ordinary Shares.

4.  Around late 2015, the Petitioner decided to further invest in the Company. While the Company is incorporated in the British Virgin Islands, its principal place of business is located in Hong Kong at the Science Park. The Company holds substantial assets in Hong Kong, including several operating subsidiaries which are incorporated in Hong Kong and provide services related to internet technologies.

A2.  Share Purchase Deed

5.  By a share purchase deed dated 23 December 2015 (“Share Purchase Deed”), the Petitioner agreed to purchase 3,794 Ordinary Shares in the Company (“Sale Shares”) from Mega Treasureland Limited, a holding company wholly owned by the Debtor, at a consideration of HK$40,066,000.

6.  Under Clause 9.1 of the Share Purchase Deed, the Company agreed to grant the Petitioner an option (“Put Option”) whereby the Company may, upon the Put Option being exercised by the Petitioner, be required to repurchase the Sale Shares at a price not lower than an internal rate of return (“IRR”) of 12%. The Petitioner may exercise the Put Option by delivering a written notice to the Company, and the Company would be required to pay the repurchase amount (“Put Option Consideration”) into the Petitioner’s bank account within 10 business days of the Completion Date.

7.  Clause 9.2 of the Share Purchase Deed provides that the Petitioner may exercise the Put Option when, among other things, the audited net profit of the Company for the year 2016 was less than HK$13,000,000. It is also stated in Clause 9.4 of the Share Purchase Deed that if the Put Option Consideration is not paid within 10 Business Days after the date of the Petitioner’s delivery of a written notice demanding payment of the same, interest shall accrue on the unpaid sum from the due date up to the date of actual payment at the rate of 0.3% per day. The relevant clauses are as follows:

“9.2 Exercise of Put Option

The Put Option may be exercised by the Purchaser at any time by delivering to the Company a notice in writing (the “Put Option Exercise Notice”) signed by or on behalf of the Purchaser upon the occurrence of any of the following events:

(a) the audited net profit of the Group for the year 2016 being less than HK.$13,000,000; or…

9.4 Put Option Completion

On the Put Option Completion Date the Company shall, and the Warrantors shall procure the Company to, pay or cause to be paid the Put Option Consideration into the bank account of the Purchaser set out in the Put Option Exercise Notice within 10 Business Days after the date of the Purchaser’s delivery of the Put Option Exercise Notice, failing which an interest shall accrue on the unpaid sum from the due date up to the date of actual payment at a rate of 0.3% per day. Any interest accruing under this Clause 9 .4 shall be immediately payable by the Company on demand by the Purchaser.” (emphasis added)

8.  Under Clause 9A of the Share Purchase Deed, the Debtor also guaranteed the Company’s performance of its obligations under the Put Option.

9.  Clause 17.2 of the Share Purchase Deed provides that any dispute, controversy or claim arising out of or relating to the Share Purchase Deed, or the interpretation, breach, termination, validity or invalidity thereof, shall be referred to arbitration by the Hong Kong International Arbitration Centre (“HKIAC”).

10.  For the year 2016, the Company recorded a net loss of HK$22,069,185. On 14 October 2022, the Petitioner delivered to the Company a Put Option Exercise Notice (“the Put Option Exercise Notice”), purporting to require the Company to purchase all of the Sale Shares at the applicable Put Option Consideration in cash.

11.  Neither the Company nor the Debtor paid the Put Option Consideration and interest to the Petitioner in accordance with the Share Purchase Deed. In response, the Company and the Debtor, through their solicitors on 28 October 2022 and 23 November 2022, wrote to the Petitioner questioning the validity of the Put Option Exercise Notice.

A3.  Investment Agreement

12.  On 23 December 2015 (i.e. the same date when the Share Purchase Deed was entered into), the Petitioner as the investor and the Company entered into an investment agreement (“Investment Agreement”), by which the Company allotted 2,538 Series A Preference Shares to the Petitioner at a subscription price of HK$40,000,000. On 17 October 2016, the Company further issued to the Petitioner 851 Series A Preference Shares in accordance with the valuation adjustment arrangement provided in the Investment Agreement.

13.  Under Clause 9 of the Investment Agreement, the Debtor similarly guaranteed the Company’s performance of its obligations under a redemption right in the Second Amended and Restated Shareholders’ Agreement dated 17 November 2016 (“Shareholders’ Agreement”), details of which will be set out below. Pursuant to Clause 3A.1 of the Shareholders’ Agreement, the Petitioner is granted a right (“Redemption Right”) to require the Company to redeem its Series A Preference Shares at an IRR of 20% (“Series A Redemption Price”) upon the occurrence of any of the events specified therein. Clause 3A.1 provides that:

“3A. REDEMPTION RIGHT

3A.1 Notwithstanding anything to the contrary herein, at any time after the occurrence of any of the following events unless otherwise waived by the Series A Preference Shareholder, Series A Preference Shareholder (the “Series A Redemption Holder”) shall have the right, in its sole discretion, to require the Company to redeem all but not part of the Series A Preference Shares held by the Series A Redemption Holder, which are free of all Encumbrances, out of funds legally available therefor, at a redemption price (the “Series A Redemption Price”) equal to the sum to be calculated based on the Subscription Price adjusted for an Internal Rate of Return of 20% as at the date of Series A Redemption Notice (as defined below), plus all declared but unpaid dividends thereon up to the Series A Redemption Date or the Series A Redemption Completion Date (whichever is later), proportionally adjusted for share subdivisions, share dividends, reorganizations, reclassifications, consolidations, or mergers:

(a) the audited net profit of the Group for the year 2016 being less than HK.$13,000,000; …

(c) the Listing Vehicle fails to achieve the Qualified IPO by 31 December 2019; … (emphasis added)”

14.  Clause 17.2 also provides that any dispute, controversy or claim arising out of or relating to the Investment Agreement or the interpretation, breach, termination, validity or invalidity thereof, shall be referred to arbitration by the HKIAC.

A4.  Shareholders’ Agreement

15.  On 17 November 2016, the Petitioner as a Series A Investor and the Company entered into the Shareholders’ Agreement.

16.  As mentioned in §13 above, Clause 3A.2 of the Shareholders’ Agreement provides that the Petitioner may exercise the Redemption Right when the audited net profit of the Group for the year 2016 was less than HK$13,000,000; and the Listing Vehicle (as defined in the Shareholders’ Agreement) failed to achieve the Qualified IPO (as defined in the Shareholders’ Agreement) by 31 December 2019.

17.  Likewise, Clause 23.2 of the Shareholders’ Agreement provides that any dispute, controversy or claim arising out of or relating to the Shareholders’ Agreement or the interpretation, breach, termination, validity or invalidity thereof, shall be referred to arbitration by the HKIAC.

18.  On 17 November 2016, the Company adopted its Fourth Amended and Restated Memorandum and Articles of Association (“M&A”). Clause 13 of the M&A expressly incorporated the Redemption Right.

19.  It transpired that, for the year 2016, the Company recorded a net loss of HK$22,069,185, and no Qualified IPO was achieved by the Listing Vehicle by 31 December 2019 or at all.

20.  On 13 October 2022, the Petitioner delivered a Redemption Notice (“the Redemption Notice”) to the Company in accordance with Clause 16 of the Shareholders’ Agreement, demanding the Company to pay the Series A Redemption Price.

21.  Neither the Company nor the Debtor paid the Series A Redemption Price to the Petitioner in accordance with the Shareholders’ Agreement and/or the Investment Agreement. In response, the Company and the Debtor, through their solicitors on 28 October 2022 and 23 November 2022, wrote to the Petitioner questioning the validity of the Redemption Notice.

A5.  Statutory Demands

22.  On 21 February 2023, the then solicitors for the Petitioner, issued statutory demands on the Petitioner’s behalf in respect of the Put Option Amount and the Series A Redemption Price (“the Alleged Debt”) under section 327(4) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and section 6A(1)(a) of the Bankruptcy Ordinance (Cap. 6) respectively (“Statutory Demands”).

23.  On the same date, the Statutory Demands were served respectively on the Company and the Debtor, both as a director of the Company and in his personal capacity, at the Company’s principal place of business in Hong Kong. Neither did the Company nor the Debtor make any payment regarding the Alleged Debt to the Petitioner in accordance with the Statutory Demands.

24.  On 1 March 2023, solicitors for the Company and the Debtor issued a further letter to the Petitioner’s then solicitors, reiterating that the Put Option Exercise Notice and the Redemption Notice were invalid (collectively “the Notices”) and also stating that the disputes should be referred to arbitration.

25.  On 20 June 2023, the Petitioner presented both the Winding-Up Petition and the Bankruptcy Petition herein.

A6.  Arbitration

26.  On 1 August 2023, the Company and the Debtor filed a Notice of Arbitration with the HKIAC commencing an arbitration (“Arbitration”) regarding the validity of the Notices as well as the existence of the Alleged Debt.

B.  THE PARTIES’ CONTENTIONS

B1.  The Company’s and the Debtor’s Contentions

27.  The basis of the Alleged Debt has already been referred to above. However, as submitted by the Petitioner, for the purpose of the present Petitions, it is only necessary for the Court to focus on the Redemption Right. I will first turn to the positions taken by the Company and the Debtor.

28.  The Company and the Debtor submit that the validity of the Notices and the existence of the Alleged Debt are both matters within the arbitration clauses in the Share Purchase Deed, the Investment Agreement, and the Shareholders’ Agreement. They ask the Court to stay the Petitions in favour of the Arbitration with the following points highlighted:-

(1)  Both the Company and the Debtor dispute the Alleged Debt.

(2)  Each of the contracts under which the Alleged Debt allegedly arises, i.e. the Share Purchase Deed, the Investment Agreement and the Shareholders’ Agreement contains an arbitration clause covering the disputes on the Alleged Debt.

(3)  The Company and the Debtor have taken the requisite steps to commence the contractually mandated dispute resolution process, i.e. the Arbitration, and have filed affirmations demonstrating the same.

29.  The Company and the Debtor contend that there are no countervailing factors against the enforcement of the arbitration clauses:

(1)  There is no evidence suggesting that third party interests would be prejudiced if the Petitioner were required to undergo the Arbitration, as no other creditors have filed notices to appear as supporting creditors or indicated to substitute the Petitioner.

(2)  When the Petitioner intimated its intention to present the Petitions, the Company and the Debtor already drew the Petitioner’s attention to the arbitration clauses and pointed out that the Petitioner should refer the dispute to arbitration in their solicitors’ letter dated 1 March 2023.

(3)  The Company and the Debtor commenced arbitration proceedings, notwithstanding that they do not have any substantive claims against the Petitioner.

30.  The Company and the Debtor submit that (1) the precondition for the Petition to exercise the Put Option has not yet been satisfied; and (2) the Petitioner has waived and/or is estopped from exercising the Put Option and the Redemption Right.

31.  As stated in §27 above, the Petitioner relies solely on the Redemption Right for the purpose of its Petitions. Hence, it would be unnecessary for me to address issue (1) as referred to in the preceding paragraph although the argument of waiver and estoppel as advanced by the Company and the Debtor (see below) also relates to the Put Option.

32.  As to waiver and estoppel, the Company and the Debtor allege that the Petitioner represented to them that it would not exercise the Put Option and the Redemption Right, provided that efforts had been made by the Company to either reach an IPO or find an investor to take up the Petitioner’s shares in the Company (“Representation”). The Company and the Debtor rely on the following facts to establish the Representation:-

(1)  At the Company’s board meeting on 21 April 2017, the Board requested the Petitioner to consider postponing the exercise of the Put Option. Mr William Chan (“Mr Chan”), a director of the Petitioner, said the Petitioner would discuss internally and revert.

(2)  Subsequently, Mr Chan orally represented to the Debtor on various occasions that the Petitioner would not exercise the Put Option and the Redemption Right, as there was no point in so doing if the Company did not have the necessary funds to meet its demands. Instead, the Petitioner would let the Company focus on its business development and exit only in an IPO or in a situation where a new investor could be found to take up the Petitioner’s shares.

(3)  The aforesaid representation was repeated in discussions with the Debtor in or around September or October 2018.

33.  The Company and the Debtor say that by this point in time, the parties had reached a shared assumption that the Petitioner would not exercise its strict legal rights under the Put Option and the Redemption Right, but that the Company would instead put in active efforts to reach an IPO or find an investor to take up its shares (“Shared Assumption”).

34.  According to their case, the Company and the Debtor then proceeded to search for an investor to replace the Petitioner and various potential investors had been introduced by the Petitioner to the Company. In 2021, the Company made a partial return of capital of HK$2,000,000 to the Petitioner upon its request for payment of “consultation fees”. It is said that the Petitioner acted in accordance with the Representation and the Shared Assumption until at least May 2022, as evidenced by the board minutes of 6 May 2022 which recorded that “Orchid Asia [the Petitioner’s parent company] is supportive of the Group and has agreed to continue [its] investment but is also keen to look for strategic partners for potential investment opportunities”.

35.  As such, counsel for the Company and the Debtor submits that the above amounted to a waiver because the Petitioner had unequivocally affirmed that it would not exercise the Put Option and the Redemption Right and would instead “continue [its] investment” in the full knowledge that the Company did not achieve a Qualified IPO in 2019.

36.  As to promissory estoppel, the Company and the Debtor argue that they have relied on the Representation in (1) expending time and effort in searching for a new investor and (2) agreeing to the Petitioner’s request for a reduction of capital. It would therefore be inequitable for the Petitioner to resile from the Representation.

37.  As to estoppel by convention, the Company and the Debtor rely on the Shared Assumption as referred to above and also adopt their arguments on promissory estoppel.

38.  The Petitioner has also emphasised that the allegations relating to the Representation and Shared Assumption constitute factual disputes which can only be resolved by live evidence and cross-examination at a substantive hearing: see Re Leung Cherng Jiunn HCB 244/2014 (unrep., 21 May 2015) at §37 (Recorder Linda Chan SC, as she then was), CPC Construction Hong Kong Ltd v Harvest Engineering (HK) Ltd HCA 2096/2013 (unrep, 2 July 2014) at §§76-82 (Recorder Coleman SC, as he then was).

39.  There is an issue as to whether the argument on waiver and estoppel would be excluded by Clause 21.1 of the Shareholders’ Agreement which reads:-

“21.1 Amendments and waivers

Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the prior written consent of the Series A Investor and the Founder. Notwithstanding the foregoing, this Agreement may be amended to add parties to this Agreement upon the sale and issuance or transfer of Shares, provided any newly added parties to this Agreement shall execute and deliver a deed of adherence in the form set out in Exhibit A agreeing to be bound by the terms and conditions of this Agreement. Any amendment or waiver effected in accordance with this Clause 21 shall be binding upon the Company and each Shareholder. (emphasis added)”

40.  The Company and the Debtor contend that the above provision should not affect their arguments on waiver and estoppel because (1) Clause 21.1 of the Shareholders’ Agreement only applies to a waiver of the Redemption Right, not the Put Option; nor does it exclude the operation of estoppel; (2) the enforcement of such a clause may also be questioned as the question of waiver always turns on conduct (which may not be reduced in writing) after the agreement has been entered into and further, the non-waiver clause may itself be waived: Estoppel by Conduct and Election (3^rd ed, 2023) at §4-008, Po On Auto Accessory Co Ltd v Grand Faith Holdings Ltd HCA 180/2010 (unrep., 20 Aug 2010) at §§69-76 (Master Marlene Ng, as she then was), Kwok Hon Shing v Happy Team (China) Ltd [2016] 2 HKC 482 at §§33-36); and (3) it is at least arguable that the board minutes dated 6 May 2022 constitute “written consent” for the purpose of Clause 21.1 of the Shareholders’ Agreement.

41.  Further, the Company and the Debtor also contend that even if the Petitioner was entitled to exercise and had validly exercised the Redemption Right, the Company is not presently liable to pay any part of the Alleged Redemption Price as it does not have adequate legally available funds therefor.

42.  The Company and the Debtor rely on Clause 3A.1 of the Shareholders Agreement (mirrored in Clause 13.1 of the M&A), which provides that:

“… Series A Preference Shareholder … shall have the right, in its sole discretion, to require the Company to redeem all but not part of the Series A Preference Shares held by the Series A Redemption Holder, which are free of all Encumbrances, out of funds legally available therefor, …”

43.  Clause 3A.5 of the Shareholders’ Agreement and Clause 13.5 of the M&A further provide that:

“If the Company fails to pay … the full Series A Redemption Price in respect of each redeeming Series A Preference Share … to be redeemed on such date because it has inadequate funds legally available therefor or for any other reason, the funds that are legally available shall nonetheless first be paid and applied on the Series A Redemption Date against each redeeming Series A Preference Share in a pro rata manner …, the shortfall shall be paid and applied from time to time out of legally available funds of the Company immediately as and when such funds become legally available in a pro-rata manner against each redeeming Series A Preference Share and the relative remaining amounts owed thereon …”

44.  Citing Re Grand State Investments Limited FSD11/2021 (RPJ) (which analysed similar provisions), the Company and the Debtor contend that the Company does not have legally available funds for distribution, as it has all along explained this to the Petitioner; and the Company’s management accounts also show that it only had bank and cash of HK$1,477.41 as of 31 May 2023.

B2.  The Petitioner’s Contentions

45.  As mentioned above, since the Company and the Debtor did not make any payment to the Petitioner upon having been served the Statutory Demands, the Petitioner’s case is that both the Company and the Debtor are unable to pay their debts, and thus should be wound up and adjudged bankrupt respectively.

46.  Recognising that the Alleged Debt is subject to arbitration clauses in the Share Purchase Deed, the Investment Agreement and the Shareholders’ Agreement, the Petitioner contends that the Company and the Debtor (1) lacked a genuine intention to bring the matter for arbitration; and (2) raised grounds of opposition that were frivolous such that the Petitioner should still be entitled to exercise its statutory right to seek winding-up and bankruptcy orders.

47.  In relation to the argument that the Company and the Debtor lacked a genuine intention to arbitrate, the Petitioner relies on the fact that the Company and the Debtor had been made aware of the Petitioner’s claims under the Notices as early as in October 2022, but they sat on these claims and did not file the Notice of Arbitration until 1 August 2023. In particular, after the Petitioner issued the Notices on 13 and 14 October 2022, the Company and the Debtor responded by issuing letters objecting to the Petitioner’s claims through their solicitors. Moreover, after the Petitioner issued the Statutory Demands on 21 February 2023, the Company and the Debtor still failed to take any immediate steps to commence arbitral proceedings.

48.  Counsel for the Petitioner therefore submitted that the last-minute commencement of HKIAC arbitration was an abuse of process and reflected a lack of genuine intention to arbitrate. The Company and the Debtor filed the Notice of Arbitration (1) over 9 months after it had become aware of the Petitioner’s claims, (2) over 5 months after they had been served with the Statutory Demands, (3) over 1 month after the Petitions had been filed and served; and (4) on the day before the Company was due to file evidence in opposition to these proceedings. Given that the Company and the Debtor were both legally represented, such a delay is apparently inconsistent with the existence of any genuine dispute. This was particularly so when, as pointed out by the Petitioner, nothing relating to the defence of waiver/estoppel was raised at the Company’s board meeting on 19 October 2022 (i.e. a few days after the Notices were issued).

49.  Further, the Petitioner contends that the Company and the Debtor’s ground of opposition founded upon waiver and/or estoppel borders on the frivolous or abuse of process.

50.  First, it is the Petitioner’s case that the waiver/estoppel argument is precluded by Clause 21.1 of the Shareholders’ Agreement (cited above) which provides that no term of the agreement or no observance of the same shall be varied or waived without “the prior written consent of the Series A Investor and the Founder”. 

51.  Citing MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119, the Petitioner argues that an estoppel could only arise if (1) there would have to be some words or conduct unequivocally representing that the variation was valid despite its informality; and (2) something more would be required for this purpose than an informal promise (at §16).

52.  It has also been submitted on behalf of the Petitioner that the Representation was made when the Petitioner had not yet decided to exercise its Put Option and Redemption Right. The Representation also made no reference to the Shareholders’ Agreement, and hence cannot be construed or understood as an unequivocal representation or a waiver.

53.  Moreover, the Petitioner contends that the Representation is not supported by documentary evidence. Instead, the parties’ communications seem to suggest the contrary:

(1)  Mr Chan unequivocally confirmed that it would not extend the IPO deadline for the purpose of triggering the Redemption Right in a WhatsApp message to Mr Henry Ho (“Mr Ho”) dated 4 June 2019, the then CFO of the Company.

(2)  Mr Chan’s WhatsApp message to the Debtor dated 18 September 2018 shows that the Petitioner had always maintained the position that redemption of its interest by the Company formed part of the potential exit options being considered by the Petitioner.

54.  In relation to the defence of lack of legally available funds, the Petitioner emphasises that according to the Company’s own affirmation evidence, the Company has net assets of over HK$42 million available.

C.  RELEVANT AUTHORITIES ON THE EFFECT OF AN ARBITRATION CLAUSE ON WINDING-UP/BANKRUPTCY PROCEEDINGS

55.  As discussed above, one of the parties’ arguments in the present proceedings lies in the effect of the arbitration agreement on the winding-up and bankruptcy proceedings, which has recently received extensive judicial consideration.

56.  For quite a substantial period of time, the courts in Hong Kong have taken the view that the party seeking to stay the winding-up or bankruptcy petition should bear the burden of showing a bona fide dispute on substantial grounds, despite the presence of an arbitration clause: Hollmet AG and Another v Meridian Success Metal Supplies Ltd [1997] 4 HKC 343 at 347; Re Sky Datamann (Hong Kong) Ltd (unrep., HCCW 487/2001) (29 January 2022) at §§13-31; Re Jade Union Investment Ltd (unrep., HCCW 400/2003) (5 March 2004) at §§18-19, 21-23. This judicial thinking has persisted for over a decade: see e.g. Re Southern Materials Holding (HK) Co Ltd (unrep., HCCW 281/2007) (13 February 2008) and Re Quiksilver Glorious Sun JV Ltd [2014] 4 HKLRD 759.

57.  However, in Re Southwest Pacific Bauxite (HK) Ltd [2018] 2 HKLRD 449 (“Lasmos”), Harris J departed from the earlier approach and decided to adopt an approach that appeared to attach greater weight to the parties’ contractually agreed mode of dispute resolution. Under this approach, a winding-up petition should generally be dismissed upon satisfaction of three conditions (§31):

(1)  a company disputes the debt relied on by the petitioner;

(2)  the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and

(3)  the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process.

58.  Notwithstanding the above, Harris J recognised in Lasmos that there might be exceptional circumstances in which the petition should be stayed (not dismissed) (§31).

59.  The decision of Lasmos was then considered in subsequent decisions in which doubts were cast on its reasoning (see, for example, But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85, in which Kwan VP noted that the Lasmos approach would entail a “one way” discretion and could result in substantial curtailment of a creditor’s statutory right to present a petition, and also Re Asia Master Logistics Ltd [2020] 2 HKLRD 423).

60.  While Lasmos is a decision on arbitration clauses, similar issues have been considered in the context where there is an exclusive jurisdiction clause (“EJC”) and the relevant decisions can be found in Re Lam Kwok Hung Guy, ex p Tor Asia Credit Master Fund LP: [2022] 4 HKLRD 793 (“Guy Lam (CA)”) and (2023) 26 HKCFAR 119 (“Guy Lam (CFA)”).

61.  The majority judgment in Guy Lam (CA) was given by G Lam JA. Having conducted an extensive survey and analysis of the authorities, G Lam JA concluded that there were “cogent reasons” for extending the approach applicable to ordinary actions (where the actions would be stayed unless “strong cause” can be shown) to winding-up or bankruptcy petitions where an EJC is involved:

(1)  There is a strong public policy of the law requiring parties to abide by their contracts (at §83).

(2)  An anomaly would arise from the fact that a party bound by an EJC is not allowed to proceed with an ordinary action in a forum other than the one prescribed in the EJC, but can somehow resort to the more draconian measure of presenting a winding-up or bankruptcy petition on the basis of an alleged indebtedness (at §84).

(3)  Merely stating an EJC to be a factor is likely to give rise to uncertainty and conflicting approaches. The EJC would not be given any relevance if the court simply determines whether the petition debt is bona fide disputed on substantial grounds, since it is an inquiry which the court would undertake even without an EJC (at §85).

(4)  There is no public policy objection to a creditor circumscribing by contract his statutory right to present an insolvency petition (at §85).

62.  The applicable approach was summarized by G Lam JA in the following terms (at §86):

“where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an exclusive jurisdiction clause in favour of another forum precluding the determination of that dispute by the Hong Kong court, the petition should not be allowed to proceed, in the absence of strong reasons, pending the determination of the dispute in the agreed forum.”

63.  In Guy Lam (CFA), the Court of Final Appeal laid down once and for all the approach to be adopted in respect of EJC in the context of bankruptcy petitions. French NPJ, delivering the judgment with which other members of the Court agreed, clarified the conceptual basis on which a bankruptcy petition may be stayed in light of an EJC:

(1)  The determination of whether the petition debt is bona fide disputed on substantial grounds, while being an issue of the jurisdiction conferred on the court, is a “threshold question” (at §98), and is part of the exercise of the court’s bankruptcy jurisdiction. The threshold character of that question leaves room for the court to exercise discretion to decline exercising its bankruptcy jurisdiction to determine that question. A circumstance where such discretion would be exercised is the fact that the parties have agreed to have all their disputes under the agreement giving rise to the debt be determined exclusively in another forum (at §100).

(2)  Two public policy considerations are involved: on the one hand, “the public policy interest in holding parties to their agreements”, and on the other, “the public policy underpinning the legislative scheme of the court’s bankruptcy jurisdiction” (at §101).

(3)  The former comes into play when the parties have agreed to litigate their disputes under the agreement giving rise to the debt exclusively in another forum. In respect of the public interest underlying the statutory scheme on bankruptcy jurisdiction, two relevant matters may bring such public policy into play. First, “the more obviously insubstantial the grounds for disputing the debt, the more it comes into prominence” (at §101). Secondly, such public policy is relevant where the creditor community is at risk, which may be evidenced by another creditor presenting a petition (at §102). Whether that discretion should be exercised is to be decided by a “multi-factorial” approach, depending on a “range of considerations” (at §104).

(4)  Upholding the majority approach in Guy Lam (CA), French NPJ summarised the position thus at §105:

“[I]n the ordinary case of an EJC, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract.”

64.  Following Guy Lam (CFA), there seems to be some divergence of first instance decisions as to whether the approach expounded therein applies to arbitration clauses. In Re Simplicity & Vogue Retailing (HK) Co Ltd [2023] HKCFI 1443, Linda Chan J held that the ratio in Guy Lam (CFA) only applied to EJC (§35). A contrary view was taken in Re Shandong Chenming Paper Holdings Ltd [2023] HKCFI 2065, in which Harris J agreed with the parties’ common ground that the reasoning in Guy Lam (CFA) should be applied by analogy to arbitration clauses. The dispute between the parties there was whether Guy Lam (CFA) should be applied to stay or dismiss a petition where the debtor-company has raised a cross-claim against the petitioner which falls within the scope of an arbitration clause. Harris J answered the question in the affirmative.

65.  The appeals from the above decisions of both Linda Chan J and Harris J were heard and determined by the same panel of the Court of Appeal comprising Kwan VP, Barma and G Lam JJA in Re Simplicity & Vogue Retailing (HK) Co Ltd [2024] HKCA 299 (“Re Simplicity (CA)”) and Re Shandong Chenming Paper Holdings Ltd [2024] HKCA 352 (“Re Shandong Chenming (CA)”). The two judgments were handed down by the Court of Appeal on the same day.

66.  In Re Simplicity (CA), Kwan VP held that the approach in Guy Lam (CFA) is equally applicable to arbitration clauses. Her Ladyship, giving the judgment of the Court of Appeal, highlighted the following points:-

(1)  In view of the statutory framework protective of arbitration, there is apparently “an even stronger case” (when compared to EJC) for upholding the parties’ contractual bargain that disputes falling within the scope of an arbitration clause should be resolved by arbitration (§37).

(2)  As mentioned above, following the approach in Guy Lam (CFA), the threshold character of a dispute about indebtedness leaves room for the exercise of a discretion by the court to decline to exercise the jurisdiction to determine that question, leaving the dispute to be resolved by arbitration as agreed and with regard to the public policy in holding the parties to their agreement.  The court is however alive that such public policy consideration is not the only consideration and it may exist in an “attenuated form”, as, for example, when a wholly frivolous defence is mounted that would constitute an abuse of process (§38).

(3)  The approach of the court in exercising its discretion is “multi-factorial”. In general, the public policy of the legislative scheme for the court’s insolvency jurisdiction may be prominent where the grounds for disputing the debt are obviously insubstantial. On the other hand, the significance of such public policy may be much diminished where there is no supporting creditor and no evidence of a creditor community at risk. However, these are only examples of the factors that the court should take into account and it is important for the court to “retain flexibility” to deal with the case as the circumstances require (§39).

(4)  It is “not onerous” for the debtor to demonstrate that there is a genuine intention to arbitrate. To deter a debtor from merely raising an arbitration clause as a tactical move with no genuine intention to arbitrate, it is sensible for the court to require itself to be satisfied of the genuine intention so as to hold the parties to their agreed dispute resolution mechanism by taking into account the steps taken to commence the agreed dispute resolution process (which include preliminary stages such as mediation). If those steps have yet to be embarked upon, the court could grant a short adjournment for the parties to commence those steps. If there is no progress during the adjournment, the court could consider lifting the stay or exercising its jurisdiction over the petition debt (§42).

67.  In Re Shandong Chenming (CA), G Lam JA (giving the judgment of the Court of Appeal) provides a detailed analysis of the question regarding the applicability of the Guy Lam (CFA) approach where the debtor raised the cross-claim (rather than a dispute directly opposing the petition debt) which was within the ambit of the arbitration clause. His Lordship took the view that the approach in Guy Lam (CFA) should apply in such circumstances.

68.  Since the decisions of Re Simplicity (CA) and Re Shandong Chenming (CA) were handed down after the substantive hearing of the Petitions, the parties were directed to provide supplemental submissions (if so advised) so that they could have an opportunity to comment on the new authorities and their effects. In their supplemental submissions, there is no dispute between the parties on the relevant principles. The core issue relates to the application of those principles, namely, whether the disputes raised by the Company and the Debtor “border on the frivolous or abuse of process”.

69.  Pausing here, I wish to point out that the concepts regarding a claim or defence being “frivolous” or constituting an “abuse of process” are commonly found in the context of striking out applications. It is a rather high threshold that one has to overcome in order to establish instances which are “frivolous” or amount to an “abuse of process” and the questions involved are always fact-specific. In the normal course of events, it is necessary to show that the claim or defence is bound to fail and hence does not warrant a chance to be further investigated at trial. In the present case, in order to determine if the threshold is met, the court should only conduct a preliminary assessment on whether it is a plain and obvious case that the dispute is “frivolous” or amounts to an “abuse of process” without attempting to undergo a mini-trial on affidavit evidence. Unless a plain and obvious case is shown, the court should be more ready to decline to exercise its insolvency jurisdiction to determine the dispute, leaving it to be resolved by the agreed arbitration mechanism and with regard to the public policy in holding the parties to their agreement. Of course, as mentioned above, the court is not straitjacketed by any particular policies and interests and may take into account other relevant factors in making its decision in this regard.

70.  After the decisions of Re Simplicity (CA) and Re Shandong Chenming (CA) were handed down by the Court of Appeal, the Privy Council in the UK delivered a judgment on 19 June 2024 on the same subject matter in Sian Participation Corp (in Liquidation) v Halimeda International Ltd [2024] UKPC 16. It should be noted that the Privy Council has taken a view different from that of Guy Lam (CFA). In essence, it was held that as a matter of BVI law and English law (§125), the correct test for the court to apply to the exercise of its discretion whether to make an order for the liquidation of a company where the debt on which the application is based is subject to an arbitration agreement or an EJC and is said to be disputed is whether the debt is disputed on genuine and substantial grounds (§99). In essence, the Privy Council took the view that a winding-up or liquidation order based on a debt not disputed on substantial grounds does not offend the general objectives of the arbitration legislation because it does not seek to resolve anything about the underlying debt, or interfere with the resolution of any dispute about the debt (§92).  It does not, according to the Privy Council’s view, offend the parties’ arbitration agreement because it is not a “matter” subject to that agreement; seeking a liquidation is simply not something the creditor has promised not to do (§92). In view of such reasoning, the decision of Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2015] Ch 589 (in which a discretionary stay of creditors’ petitions was granted where an insubstantial dispute about the creditor’s debt was raised between parties to an arbitration agreement) was considered to be wrong (§100).

71.  After the Privy Council’s judgment in Sian was handed down, the parties were asked to provide further submissions (if any) relating to that decision. As the parties have recognised in their further submissions, there is a stark difference between the approach taken by the Privy Council and that adopted by the Hong Kong courts (including the Court of Final Appeal). As pointed out by the Company and the Debtor, the Privy Council’s approach was apparently not accepted in Guy Lam (CA) (§§82-87), Guy Lam (CFA) (§105) and Re Simplicity (CA) (§37).  In relation to the approach which should be taken here, as a matter of stare decisis and given the analysis provided in the authorities discussed above, I agree with the Company and the Debtor that this Court should follow the reasoning in Guy Lam (CFA) and also in Re Simplicity (CA).

72.  Finally, in relation to the Privy Council’s reasoning in Sian, I would only venture to add that there is no hard and fast rule on whether a winding-up or bankruptcy order would or would not necessarily “offend” the parties’ arbitration agreement.  This essentially turns on the basis of the underlying debt for the purpose of the petition and whether the debt and the alleged dispute fall within the scope of the arbitration agreement. For example, if the debt arises from a sum payable under the agreement containing an arbitration clause and the debtor raises a dispute over creditor’s performance of the terms of the agreement, there is no reason why the debt and also the dispute, in light of their nature and substance, would not constitute a “matter” which should be subject to the arbitration agreement.

D.  ANALYSIS

73.  With the above principles in mind, as the parties have stated in their submissions, the key issues before the Court are whether the lines of defence put forward by the Company and the Debtor “border on the frivolous or abuse of process”.

D1.  Waiver / Estoppel defence

74.  It has been emphasised on behalf of the Petitioner that there is no documentary evidence which directly supports the existence of the Representation or the Shared Assumption as alleged by the Company and Debtor. In an ordinary case of winding up or bankruptcy petition where the issue is whether there is a bona fide dispute as to the existence of such alleged representation or understanding, the complete absence of written records or documentary evidence may seriously jeopardise the credibility of the allegation(s) raised: Re Everwin Enterprises (Hong Kong) Ltd [2022] HKCFI 1653 at §37.

75.  However, as explained above, one should not equate the tests for determining (1) whether a dispute is bona fide disputed on substantial grounds in an ordinary winding up or bankruptcy petition with (2) whether a dispute “borders on the frivolous or an abuse of process”.  The threshold for the latter is high. Otherwise, the EJC or arbitration clause would be rendered nugatory or irrelevant to the court’s exercise of its insolvency or bankruptcy jurisdiction: Guy Lam (CA) at §85.

76.  Bearing the above in mind, I am not persuaded that the Petitioner has shown that the waiver/estoppel defence borders on the frivolous or amounts to an abuse of process.

77.  In particular, the Company and the Debtor have adduced contemporaneous documents which would at least lend some support to the allegations regarding the Representation and the Shared Assumption. For instance:

(1)  A new Chief Investment Officer had been recruited to search for an investor to replace the Debtor. The Company’s board minutes between 2020 and 2022 also documented the Debtor’s discussions with potential investors.

(2)  There were various email exchanges showing that potential investors had in fact been introduced to the Company by the Petitioner.

(3)  In 2021, the Company made a partial return of capital of HK$2,000,000 to the Petitioner, which, as alleged by the Company and the Debtor, was made upon the Petitioner’s request because it had agreed not to exercise the Put Option and the Redemption Right.

(4)  At the Company’s board meeting on 6 May 2022, it was resolved that the Petitioner’s parent company is “supportive of the Group and has agreed to continue [its] investment but is also keen to look for strategic partners for potential investment opportunities”.

78.  Apart from the above, Mr Tao, director of Youth Dimension Limited (another shareholder of the Company), was also at least able to articulate, with some degree of particularity, the occasions on which Mr Chan was said to have denied any intention to exit its investment (i.e. during their rides back from Science Park to Central after attending board meetings).

79.  That said, I have not lost sight of the evidence which might suggest otherwise. For instance:

(1)  In the WhatsApp message from Mr Chan to the Debtor on 18 September 2018, Mr Chan stated that “[A]s 2019 is approaching please work on either having someone to buy our shares, or the Company redeeming our shares, or engaging an FA to sell the whole Company to a strategic. For the last option we can introduce a few very capable FAs for you to choose from. Please let us know. Thank you.”. Whilst the Petitioner underscored the reference to “the Company redeeming our shares”, it is noted that in the same message, Mr Chan also offered the Debtor alternative options, such as having someone else take up the shares.

(2)  In the WhatsApp message from Mr Chan to Mr Ho on 4 June 2019, Mr Chan indicated that they “won’t extend [the IPO deadline]”, although Mr Chan also asked Mr Ho to “find new investors to buy us out”. Since then, the Petitioner has introduced a number of potential investors to the Company and has requested the Company to make a partial return of capital of HK$2,000,000. The reasons why the Petitioner subsequently made such an introduction or request relate to factual disputes which warrant further inquiry.

80.  Further, I do not consider it frivolous to say that the Representation and/or the Shared Assumption had been detrimentally relied upon by the Company and the Debtor. §34 above suggests that the Company and the Debtor had expended time and effort in locating a new investor in place of the Debtor; and that they had agreed to the Petitioner’s request for a reduction of capital.

81.  After all, as discussed above, it is not for this Court to conduct a mini-trial on affidavit evidence. Suffice it to say that this is not a case where there is a complete absence of corroborating written records (or other evidence).  There are factual disputes which necessitate a careful examination of all relevant oral and documentary evidence. At least, this is not a plain and obvious case that the factual account provided by the Company and the Debtor is hopelessly unbelievable and/or bound to fail. I am therefore not satisfied that the dispute on waiver/estoppel raised by the Company and the Debtor borders on the frivolous and/or amounts to an abuse of process.

82.  As regards the no oral modification clause in Clause 21.1 of the Shareholders’ Agreement, I am not satisfied that it completely precludes the waiver/estoppel defence for the following reasons.

(1)  It is well-established that a no oral modification clause does not exclude an estoppel defence. It involves a factual determination of whether there were words or conduct which “unequivocally representing that the variation was valid notwithstanding its informality”, which is something more than the informal promise itself: Rock Advertising at §16. The additional authorities cited by the Petitioner in its supplemental submissions appear to be in support of this proposition: Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA NV [2019] 2 CLC 349 at §64; CP Global Inc v Guy Kwok Hung Lam [2021] HKCFI 2135 at §77 (Linda Chan J); Chow Tai Fook Nominee Lid v Diamond City Ltd [2021] HKCFI 3019 at §48 (Wilson Chan J).

(2)  Moreover, the authorities cited by the Company and the Debtor (see §40 above) suggest that a no-waiver clause does not exclude the operation of the doctrine of waiver, as the no-waiver clause may itself be waived. In the ultimate analysis, whether the parties’ post-contractual conduct is sufficient to evince an intention to override the no-waiver clause is a matter of fact and degree to be decided on a case-by-case basis.

(3)  Further, there is at least a plausible argument that the 6 May 2022 board minutes, which recorded the Petitioner’s agreement to continue its investment in the Company – notwithstanding the failure to achieve a Qualified IPO – may constitute “written consent” as required under Clause 21.1.

83.  The Petitioner also highlights the lack of documentary waivers signed by the Petitioner and the Company/Debtor. The Petitioner submits that the absence of documentary waivers is telling when considered against the usual practice for any variation or waiver of any term or right under the Shareholders’ Agreement to be recorded in writing and signed. In this respect, the Petitioner points to the following:

(1)  The waiver letters signed by each shareholder of the Company (including the Debtor and the Petitioner) to waive their pre-emptive rights to purchase Offered Securities under the Shareholders’ Agreement.

(2)  The waiver letters signed by each director of the Company to waive the right to the requisite amount of notice for a board meeting provided in Article 17.1 of the M&A.

84.  The Petitioner submits that the above is clear evidence that the Company, the Debtor and Mr Tao were aware of the contractual requirement for any waiver or amendment of rights under the Shareholders’ Agreement to be reduced into writing and signed. The Company and the Debtor do not seem to have proffered an answer to this submission. While I acknowledge the force of this submission, I am not persuaded that it would render the Company and Debtor’s waiver defence hopeless to the extent of being regarded as frivolous. I would confine myself to two observations:

(1)  As regards the waiver letters signed by shareholders to waive their rights of first options, it should be borne in mind that the consent was sought from all shareholders of the Company for the purpose of allowing the Company to issue certain convertible bonds. In those circumstances, it was readily accepted by all parties that consent would need to be recorded in written form. However, it does not follow from this example that the waiver as now contended by the Company and the Debtor would therefore need to be reduced into writing as this remains a fact-sensitive issue.

(2)  As regards the signed waiver by the directors of the right to the requisite amount of notice for a board meeting, the relevant right is found in the M&A, not the Shareholders’ Agreement. I do not think it directly assists the Petitioner’s case insofar as one is concerned with waiver of a right under the Shareholders’ Agreement.

D2.  No “adequate legally available funds” defence

85.  Insofar as the “no adequate legally available funds” defence is concerned, the Petitioner submits that on the evidence of the Debtor, the Company had net assets of HK$42,027,772.15 as of 31 May 2023. The Company and Debtor submit that the Company only had bank and cash of HK$1,477.41 as of 31 May 2023.

86.  According to the balance sheet of the Company’s accounts dated 31 May 2023, the Company had an interest of HK$42,026,294.74 in its subsidiaries and bank and cash of HK$1477.41, which together constitute the total current assets in the amount of HK$42,027,772.15. Hence, the parties’ disagreement boils down to a question of construction: whether then “funds legally available” in Clause 3A. 5 of the Shareholders’ Agreement means (1) the total current assets of the Company (which include its interests in its subsidiaries) or (2) the Company’s cash maintained in its bank account.

87.  The Company and the Debtor rely on the decision of the Grand Court of the Cayman Islands in Re Grand State Investments Ltd FSD11/2021 (RPJ). In that case, the debtor company argued that the petition debt was subject to a bona fide dispute because under the terms of the shareholders’ agreement, phrased similarly to Clause 3A.5 of the Shareholders’ Agreement, the company did not have to pay a redemption price (which was the subject of the petition debt) if it did not have legally available funds.

88.  The Grand Court noted that section 12.3(e) of the shareholders’ agreement required the company, in so far as it was able to do so, to cause any other group company to distribute to the company any funds which may properly and lawfully be distributed to the company.[1] It held that the effect of this term was that it is only if (1) the company has a legal right to compel the transfer of assets from a group company to it; and (2) there are sufficient “available” funds held by that group company, that the company can require a group company to provide it with assets for the purpose of making the redemption payment.

89.  Clause 3A.7 of the Shareholders’ Agreement is similarly worded, which provides that “the Company shall in good faith use all reasonable efforts as expeditiously as possible to increase the amount of legally available redemption funds including without limitation, causing any other Group Company to distribute any and all available funds to the Company [for the purpose of paying the redemption price]”.

90.  Without resolving the issue of construction conclusively, Re Grand State appears to suggest, contrary to the construction implicit in the Company and the Debtor’s submission, that “funds legally available” are not confined to the amount of cash in the debtor’s bank account.

91.  That, however, does not necessarily mean that the no adequate legally available funds defence is frivolous or borders on an abuse of process. Even if, as a matter of construction of the Shareholders’ Agreement, “funds legally available” include the Company’s interest in its subsidiaries and/or funds properly and lawfully distributable to the Company, there are still outstanding questions as to whether (1) the Company had the legal right to require transfer of assets from the subsidiaries to itself and (2) whether the subsidiaries held sufficiently available funds. The resolution of (1) requires an examination of the contractual relationships between the Company and its subsidiaries, or the existence or otherwise of shareholder control of the Company in its subsidiaries. They should be resolved by the parties’ contractually agreed dispute resolution mechanism after considering all relevant evidence in this regard.

D3.  Genuine intention to arbitrate

92.  As discussed above, the threshold for showing a genuine intention to arbitrate is not a high one. Even if the company or debtor has not taken steps under the arbitration clause, the court may nevertheless grant a short adjournment to allow the company or debtor to take such steps: Re Simplicity (CA) §42.

93.  Although the Petitioner has emphasised the fact that the Company and the Debtor were already aware of the Petitioner’s claims as early as October 2022, I do not consider any delay to be so serious as to negate a genuine intention to arbitrate. After all, the parties were essentially communicating by way of correspondence in the intervening period (see e.g. the letters from Woo Kwan Lee & Lo, solicitors for the Company and the Debtor to the Petitioner dated 28 October 2022, 23 November 2022, and 1 March 2023 questioning the validity of the Put Option Exercise Notice and the Redemption Notice). It is noteworthy that in the letter from Woo Kwan Lee & Lo dated 1 March 2023, the arbitration agreements were specifically referred to and the Petitioner was asked to refer disputes in relation to the validity of the Notices to arbitration.

94.  In any event, there is no dispute that a Notice of Arbitration was filed by the Company and the Debtor with the HKIAC on 1 August 2023, about a month and a half after the presentation of the Winding-up Petition on 20 June 2023. 　In my view, there is no sufficient basis to come to the view that the Company and the Debtor lacked any genuine intention to commence arbitration.

E.  CONCLUSION

95.  For all the above reasons, I am satisfied that the disputes raised by the Company and the Debtor in opposition to the Petitions are not frivolous or amount to any abuse of process. I also take the view that there is no sufficient basis to conclude that the Company and the Debtor have failed to demonstrate a genuine intention to arbitrate. Moreover, there is no evidence of the creditor community being at risk. There being no countervailing factors which militate against the public policy of holding the parties to the arbitration clauses, I exercise my discretion to decline to exercise the winding-up and bankruptcy jurisdiction and I order that both the Winding-up Petition and the Bankruptcy Petition be stayed, pending the resolution of disputes by the Arbitration.

96.  I make an order nisi that the Petitioner pay the costs of the Petitions to the Company and the Debtor, to be taxed if not agreed, with certificate for two counsel, in light of the nature and complexity of the matters (including the uncertainty on the applicability of Guy Lam (CFA)’s approach in the present petitions pending the decisions of Re Simplicity (CA) and Re Shandong Chenming (CA) as at the time of the substantive hearing). The costs order nisi shall become absolute unless an application is made to vary the same within the next 14 days.