RE CHINA ZENITH CHEMICAL GROUP LTD (formerly known as XINYANG MAOJIAN GROUP LTD)

CACV 451 /2024, [2025] HKCA 253

On appeal from [2024] HKCFI 2769

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 451 OF 2024

(ON APPEAL FROM HCCW NO 243 OF 2023)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  This appeal is brought by China Zenith Chemical Group Limited (“Company”) against the judgment of Recorder Jenkin Suen, SC on 10 October 2024 (“Judgment”)^[1]. By the Judgment, the recorder ordered that the winding-up petition of the substituted petitioner Ms Lyu Yiling (“Lyu”) be listed for hearing on 28 October 2024 (later varied to 4 November 2024) for pronouncing a winding-up order against the Company.

2.  On 2 December 2024, Anthony Chan J adjourned the petition to the first Companies Court hearing after the disposal of this appeal.

Overview and background

3.  The Company was incorporated in the Cayman Islands on 7 December 2000 and has been registered as a non-Hong Kong company since 23 February 2001.  Its shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited.

4.  During 2013 to 2015, the Company issued unsecured and interest-bearing bonds to individual investors with a principal amount of $10 million each.  A large number of investors subscribed for these bonds for the purpose of presenting them to the Hong Kong Immigration Department to fulfil the investment requirement of the Capital Investment Entrant Scheme (“CIES”) of the government.  According to the 2024 annual report of the Company, as at 30 June 2024, the amount of bond payables already matured but still outstanding amounted to $318 million odd.  On the face of the 2024 annual report, the Company is balance sheet insolvent and cash flow insolvent, with net liabilities of over $1,000 million.  Its auditors issued a disclaimer of opinion on the consolidated financial statements of the group, noting the “existence of material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern”.

5.  Investors who were issued bonds have been demanding payment from the Company for quite some time.  Their claims are straightforward.  When the Company failed to pay, some brought claims in the High Court, obtained summary judgment, issued statutory demands, and on 8 June 2023 the original petitioner in these winding-up proceedings, Ms Wang Yuexian, presented a petition to wind up the Company.  As noted by Linda Chan J and the recorder, the Company deployed every conceivable tactic to delay payment due to the investors under the bonds, seeking to turn these proceedings into a game of musical chairs.  Creditors were paid off one at a time only when the Company had exhausted the means of opposition, whilst keeping at bay similar claims of other supporting creditors. 

6.  The petition of Ms Wang was stayed by consent pending determination of the Company’s appeal against the summary judgment.  Its appeal was dismissed on 13 December 2023.  A few days before the hearing of the petition on 4 March 2024 before L Chan J, the Company issued a summons for leave to adduce further evidence in opposition.  When the judge refused to grant leave for further evidence and indicated there was no basis to go behind the judgment obtained and affirmed after two fully contested hearings, the Company proposed to pay the judgment debt within two weeks.  The petition was adjourned to 25 March 2024 for making a winding-up order or dealing with any application for substitution by the supporting creditors.

7.  At the hearing on 25 March 2024, L Chan J dealt with the applications for substitution of five supporting creditors (all holders of bonds issued by the Company), as the Company had paid off the judgment debt of Ms Wang.  Each had a draft re-re-amended petition setting out the material facts of the claim with supporting affirmation and the counsel of each had lodged skeleton arguments in support of the application.  As the summons of Lyu was the first in time, she was ordered to be substituted as the petitioner.  The judge (rightly, in our view) did not accede to the Company’s request to deal with the claims of the supporting creditors one after the other. She adjourned the petition for the Company to file evidence in opposition to the claim of Lyu and to state brief grounds of opposition to the claims of the four supporting creditors.

8.  At the third hearing of the petition on 3 June 2024, L Chan J decided to adjourn the petition for argument in light of the Company’s allegation that Lyu’s claim was based on a forged document.  The substitution summonses of three supporting creditors (Chen Shaohua (“Chen”), Gu Yandong (“Gu”) and Qin Yu Huan (“Qin”)) were adjourned to be heard at the same hearing as the petition, as the Company’s grounds of opposition to their claims were similar.  As for the claim of the other supporting creditor Xu Wenjing (“Xu”), the judge indicated that the grounds in opposition did not constitute a bona fide dispute on substantial grounds and the Company should be wound up.  The Company then offered an undertaking to pay Xu’s debt within 42 days on condition that Xu was to surrender the original bond.  The judge accepted the Company’s undertaking and adjourned the petition to 19 September 2024 with directions to the parties to file further evidence.

9.  Instead of complying with its undertaking, the Company issued a summons on 17 June 2024 for leave to appeal against the order of L Chan J on 3 June 2024, for the discharge of its undertaking and for stay of all further proceedings in the winding up.  At the hearing of this summons on 4 July 2024, the application for stay of proceedings was abandoned.  The Company made new allegations to support its application for leave to appeal and discharge of undertaking.  The judge decided to release the Company from its undertaking and directed the petition and Xu’s summons for substitution be heard at an earlier date on 29 July 2024, with clear indication that further tactical manoeuvres from the Company would not be tolerated.

10.  L Chan J handed down her judgment on 12 August 2024^[2], finding that none of the allegations, whether old or new, constituted a bona fide dispute on substantial grounds in respect of Xu’s debt.  She ordered the petition be listed for hearing on 19 August 2024 for winding up of the Company.  The hearing date of 19 August 2024 was vacated when the Company paid off Xu’s debt.

11.  When Lyu’s petition and the applications for substitution of Gu, Chen and Qin came before the recorder on 19 September 2024, there were three additional applications for substitution by other supporting creditors – Xu Lingyan, Li Yizhou and Li Wenli.  The recorder decided to only deal with the claims of Lyu, Gu and Chen at the hearing and defer considering the claim of Qin (who did not file evidence in reply or skeleton submissions). As for the new applications for substitution, he gave directions for further evidence to be filed, which would take effect only if he should hold in favour of the Company there are bona fide disputes on substantial grounds for the claims of Lyu, Gu and Chen or if their claims were paid off by the Company.  There were other supporting creditors at the hearing but they did not apply for substitution.

12.  The recorder held in the Judgment on 10 October 2024 that the Company has not discharged the burden of showing bona fide disputes on substantial grounds in respect of the debts of Lyu, Gu and Chen totalling over $31 million.  The Company filed a notice of appeal against the Judgment on 28 October 2024 and sought an expedited hearing of its appeal before 21 November 2024, alleging that it had entered into a placing agreement and was due to receive a substantial sum on or around that date.  This was refused by Kwan VP on 29 October 2024.

13.  On 30 October 2024, the Company issued a summons to adduce new evidence on appeal.

14.  On 18 November 2024, the Company again sought an urgent hearing of its appeal, contending this time there was “real and substantial possibility” that it would not be able to obtain funds from share placing or shareholders’ loans to pay the debts of Lyu, Gu and Chen.  Barma JA directed on 21 November 2024 that the appeal be listed for hearing at an early date and the summons to adduce new evidence be heard at the substantive hearing of the appeal.  The hearing date of 20 February 2025 was later given.

15.  Gu, Lyu and Chen all applied for security for costs on appeal against the Company.  In opposing their applications, the Company filed evidence in December 2024 and made submissions in January 2025 that it had completed three rounds of “resoundingly successful” share placing in 2024 and the prospects of a new round of placing were “promising”, contrary to the “real and substantial possibility” expressed earlier that it would not be able to obtain funds from placing and shareholders’ loans to pay debts of over $31 million.

16.  The Court of Appeal (Kwan VP and Barma JA) ordered security for costs on appeal be provided by the Company in the total sum of $1,080,000.  The sums were paid into court on 10 February 2025.

The application to adduce new evidence

17.  The Company sought leave to adduce on appeal two affirmations made on 30 October 2024, that of its chief financial officer Ma Kin Ling (“Ma”) and one of its executive directors Shing Pan Yu James (“Shing”).

18.  By Ma’s affirmation, he adduced a report dated 29 October 2024 (“AUP Report”) prepared by the Company’s auditors, McMillan Woods (Hong Kong) CPA Limited (“MMW”), under an “Agreed Upon Procedures Engagement” prepared in compliance with the standards of the Hong Kong Institute of Certified Public Accountants.  The AUP Report confirmed the Company’s case that the bond held by Gu was not fully paid for in that only $4 million was received by the Company.

19.  In Shing’s affirmation, he referred to conversations in mid and late October 2024 that he and another had with Zhang Xiongfeng (“Zhang”), the majority shareholder of SBI China Capital Financial Services Limited (“SBI”), confirming that SBI issued three cheques of $10 million each in favour of the Company in July, August and September 2015.  It is contended that this inflow of funds supports the Company’s case of an outflow of moneys in that the money purportedly paid for the bond issued to Lyu was in fact refunded to Zenith Investment Limited (“ZIL”) at the latter’s request.

20.  At the outset of the hearing, we dismissed the application to adduce new evidence with costs to Lyu, Gu and Chen.  Our reasons are as follows.

21.  The Company has not satisfied one or more of the three conditions in Ladd v Marshall [1954] 1 WLR 1489 (which are cumulative requirements)^[3] for new evidence to be admitted on appeal.

22.  We have no quarrel with the proposition of Mr Abraham Chan, SC^[4] that the degree of “reasonable diligence” in condition 1 must be assessed against the overall circumstances of the case^[5].  We reject his contention that the reasonable diligence requirement should be considered in the context that the Company had an “onerous task of opposing numerous creditors at the same time and gathering its evidence in opposition within a short span of time”.  One bears in mind that this is a listed company, expected to keep reasonably comprehensive records of the bonds it had issued but not yet matured, with sufficient manpower to handle matters arising from the bonds and the resources to engage external assistance if required.  As Millett LJ said in another context on the meaning of “reasonable diligence”, the test is “how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency.”^[6]

23.  We have related the procedural history of these proceedings.  Investors who held bonds issued by the Company have been demanding payment long before 25 March 2024, when Lyu was ordered to be substituted as the petitioner.  We do not accept Mr Chan’s submission that the Company did not need to conduct a detailed review of Gu’s transactions until Gu filed his summons for substitution on 21 March 2024^[7].  Gu had travelled to Hong Kong to meet with Ma in late 2019 to inquire about the interest on his bond that he did not receive from the Company since October 2018.  After his bond matured in March 2021 and due to travel restrictions during the pandemic, he authorised his insurance agent in March 2022 to follow up with the Company seeking payment.  In May 2022, he instructed solicitors to demand payment from the Company and correspondence was exchanged with the Company’s solicitors for a year.  He then made a statement to the police in March 2023^[8]. To carry out a detailed review only at the point when a creditor sought to be substituted as the petitioner in winding-up proceedings could hardly be said to meet the standards of reasonable diligence.

24.  Ma deposed that the AUP Report could not have been obtained for use at the hearing before the recorder on 19 September 2024 for these reasons.  Sometime around the end of July 2024, Ma approached Michael Lo (“Lo”), a partner of MMW, to see if MMW could verify whether the bond issued to Gu was fully paid for.  Lo informed Ma that MMW were unable to take up this engagement because MMW were preoccupied with the audit of the Company’s accounts due to be issued on or before 30 September 2024 and the audit deadline could not be moved.  It was only after the audit was completed on 27 September 2024 that MMW was available to take up the engagement.  The hearing of the petition had taken place.  An engagement letter was issued to MMW on 15 October 2024 and the AUP Report was provided on 29 October 2024, after MMW reviewed the Company’s bank statements from 1 January 2014 to 31 December 2014 and matched each bond remittance receipt transaction to a bond certificate.

25.  The reasonable diligence requirement is clearly not met.  There is no good reason why another firm of certified public accountants could not have been engaged to undertake the exercise in the AUP Report when the Company learned at the end of July 2024 that MMW was unavailable.

26.  As for the evidence in Shing’s affirmation, Ma deposed that the Company’s solicitors had written to SBI on 21 June 2024 requesting SBI to confirm that it had issued cheques on behalf of ZIL to the Company, including a cheque dated 14 September 2015 of $10 million.  SBI provided no response.  Shing asked his friends and business acquaintances if they knew anyone in the management of SBI, and got negative replies.  It was only during a casual conversation Shing had with his neighbour on 14 October 2024 that the neighbour (who happened to be a good friend of Zhang) arranged for Shing to have dinner with Zhang, and this gave Shing the opportunity to request Zhang to clarify the Company’s questions about the cheques issued by SBI to the Company. On 23 October 2024, SBI wrote to the Company declining to provide any information unless required by law, but Zhang later provided some information to Shing and another person orally on 24 and 25 October 2024.

27.  We do not regard the action taken by the Company to obtain information or confirmation from SBI to have met the standards of reasonable diligence.  The Company’s solicitors sent a letter to SBI dated 21 June 2024 requesting for information within seven days.  There was no follow up by the solicitors when they had no response.

28.  As condition 1 is plainly not met for Ma’s affirmation adducing the AUP Report and Shing’s affirmation, it is not necessary to deal with conditions 2 and 3.  For completeness, we would mention succinctly why condition 2 is not satisfied as well.

29.  The AUP Report, which identified that Gu made one single remittance to the Company of $4 million during 2014, was adduced to counter the finding that the defence of the Company that Gu’s bond was not fully paid for was fabricated and not believable.  As submitted by Mr Jeff Yau for Gu, the probative value of the AUP Report is limited.  An “agreed-upon procedures engagement” is not an audit, review or other assurance engagement and does not involve obtaining evidence for the purpose of the practitioner expressing an opinion or an assurance conclusion in any form^[9]. As stated in the report, it was prepared on the basis that MMW was only asked to review the evidence and records provided by the Company.  The evidence and accounting records reviewed have not been disclosed.  Further, the engagement letter requested MMW to produce a report of factual findings substantially in the form contained in the appendix to the letter, which turned out to be the same as the AUP Report.

30.  As for Shing’s affirmation, he deposed to the oral information provided by Zhang which confirmed that SBI had issued three cheques to the Company on behalf of ZIL in July, August and September 2015 of $10 million each.  We are inclined to think that evidence of this inflow of funds is of little probative value.  SBI has not provided corroboration to the alleged refund regarding the subscription for the Lyu Bond.  To the contrary, SBI had issued statements which recorded the deposit of the $10 million for the Lyu Bond on 17 September 2015 and another dated 30 April 2024 recording the Lyu Bond.  The new evidence would not have important influence on the outcome of the appeal in respect of Lyu’s claim.

This appeal

31.  By the Judgment, the recorder held that the Company has not discharged the burden of showing there are bona fide disputes on substantial grounds in respect of the claims of Gu, Lyu and Chen.

32.  The Company sought to challenge on appeal the evaluation of evidence and findings of fact in the Judgment.  Even though the evaluation and findings were made on the basis of evidence in writing and not on oral evidence, the appeal court “should be reluctant to interfere with the judge’s evaluation of the evidence, unless it is demonstrated that the judge had fallen into palpable errors in the findings of fact”.  As has been emphasised before: “The appellate process is not designed to give a litigant a platform to repeat submissions made in the court below on the evidence and factual aspects in the hope of persuading the appeal court to come to a different view from the primary judge.”^[10]

33.  We turn to consider the appeal in relation to the claims of Gu, Lyu and Chen.

Gu’s claim

34.  Gu claimed that he entered into an agreement with ZIL (“Gu SPA”) to purchase a bond issued by the Company and had transferred $10 million to Kingston Securities Limited for onward transfer to ZIL as payment.  He was issued a bond certificate and bond instrument both dated 26 March 2014 by the Company, the authenticity of which is not disputed.  He had received interest on the bond from ZIL or Alpha Investment Group Limited (“Alpha”; apparently related to ZIL) until October 2018.

35.  The Company raised various defences to Gu’s claim at different times.  In 2022, the Company by its solicitors alleged that Gu had executed a supplemental agreement with the Company (“Alleged Gu SA”), to extend the term of his bond from 25 March 2022 for three years in exchange for payment of $750,000 made to Alpha (“Alleged Extension”).  In March and May 2024, the Company by its solicitors alleged (repeated in Ma’s affirmation filed in May) that the Company had no record of Gu having made payment for his bond (“Alleged Non-Payment”). In August 2024, the Company alleged in Chan Yuk 3^rd that it had received only $4 million from ZIL (by a cheque drawn by Yau Wai (“Sam Yau”), the principal of ZIL), and had agreed with ZIL that the Gu Bond would be cancelled in default of payment of the balance of $6 million and later cancelled the bond (“Alleged Cancellation”), as evidenced by a letter of undertaking dated 26 March 2014 from ZIL to the Company (“Alleged Undertaking”) and a demand letter dated 10 April 2014 from the Company to ZIL (“Alleged Demand Letter”).

36.  The recorder formed the view that the defence of Alleged Cancellation is not believable.  He gave nine reasons for his view^[11]:

(1) The Company’s case has changed substantially from Alleged Extension, to Alleged Non-Payment, and eventually to Alleged Cancellation.  The defence of Alleged Cancellation is diametrically opposed to the initial defence of Alleged Extension.  There was similar evolution and change of defence by the Company in Xu’s case, which L Chan J found against the Company in her judgment.

(2) In support of the defence of Alleged Extension, the Company produced the Alleged Gu SA and a cheque of $750,000 dated 29 March 2022 in favour of Alpha, and both documents bore the signature of Chan Yuk.  In Chan Yuk 3^rd, she gave no explanation why she signed the Alleged Gu SA and issued the cheque, if the Gu Bond had been cancelled in April 2014 according to the Alleged Demand Letter that she signed.

(3) The defence of Alleged Extension was maintained seriously by the Company for at least a year, before it made a stark U-turn.

(4) Despite the fact that Gu has been pursuing the Company for interest in late 2019 and for payment since March 2022, it was only in August 2024 that the defence of Alleged Cancellation was raised and the Alleged Undertaking and the Alleged Demand Letter were produced.

(5) By the Alleged Undertaking, ZIL asked the Company to issue and then cancel the Gu ZIL Bond, complete the transfer procedure and issue the Gu Bond all on 26 March 2014, even though the balance of $6 million would only be paid by 2 April 2014.  There is no explanation why the Company would agree to issue the bond before full payment and no apparent reason why the issuance of the bond could not be deferred to 2 April 2014 when payment was to be made.  When payment of $6 million was not made, the Alleged Demand Letter requested ZIL to return the Gu Bond before 21 April 2014.  However, the Company did nothing to follow up for ten years.

(6) ZIL was the Company’s bond agent according to a public announcement issued by Chan Yuk on behalf of the Company on 17 June 2014.  The Company still had business transactions with ZIL until at least the end of 2018 (no particulars were given by the Company of these transactions).  The Company claimed it could not reach ZIL, but managed to produce documents belatedly which bear the footprint of ZIL.

(7) After the alleged cancellation of the Gu Bond in April 2014, there is no evidence on what had become of the $4 million admittedly received by the Company.

(8) Gu has produced a letter issued by the Company on 20 April 2015 which certified that Gu invested $10 million in the bond via ZIL as the appointed bond agent, and that Gu’s name is registered in the register of the bondholders.  The Company has not produced any credible evidence to rebut this letter, nor has it produced the register of the bondholders, despite leave given to file evidence in response.

(9) Gu has produced sufficient documentary evidence proving his payment of $10 million to ZIL.

37.  The recorder regarded the Company’s arguments concerning the interest payments under the Gu Bond (they were paid by Sam Yau, Alpha and ZIL not by the Company, the rate of interest paid was 6% not 7.5%) at best a neutral factor.  It may equally be said that if the Gu Bond was cancelled, there is no reason for Sam Yau to pay interest to Gu at all.  And the fact that ZIL assisted the Company in the payment of interest would be consistent with collaboration between the Company and Sam Yau/ZIL, which enabled the Company to come up belatedly with the Alleged Undertaking and the Alleged Demand Letter^[12].

38.  The recorder did not think the Company’s criticism of Gu’s evidence (that Gu included the Alleged Gu SA as one of the documents submitted for his CIES application in 2023, whilst disputing the authenticity of this document in the present proceedings and maintaining that he did not sign the Alleged Gu SA) would add much to its case.  The real issue is the credibility of the Alleged Cancellation defence based on the Company’s own evidence and the circumstantial evidence.  This defence hinges on the alleged agreement and representations between the Company and ZIL, to which Gu was not privy^[13].

39.  In support of the Company’s case there is a bona fide dispute on the Gu Bond, Mr Chan raised these arguments on appeal:

(1) The recorder’s finding that the Alleged Cancellation defence was a recent fabrication and not believable is plainly wrong.  The defence is supported by contemporaneous documentary evidence being the Alleged Undertaking and the Alleged Demand Letter.  The recorder reached his findings on fabrication (in effect finding the supporting documents were forged and the Company had conspired with ZIL) without inviting submissions on these serious allegations, and this was a serious procedural irregularity.  He drew inferences of serious misconduct by conjecture or on mere balance of probabilities, not from proved facts.

(2) The recorder’s finding that Gu’s private arrangements with Sam Yau for receiving interest payments of 6% on the Gu Bond were a neutral factor and not lending credibility to the Company’s case is plainly wrong.  The payment of interest at 6% by Sam Yau was contrary to the Gu Bond which provided for 7.5% p.a. and that payments were to be made by the Company to Gu’s bank account directly.

(3) The recorder is plainly wrong in ignoring glaring inconsistencies in Gu’s own case in that Gu submitted the Alleged Gu SA to the Immigration Department in 2023 with a certifying letter of the Company dated 26 March 2022.  It was acknowledged there is no evidence to explain this inconsistency^[14].  Gu was effectively conceding he had engaged in a criminal offence by making false statements to an immigration officer in his CIES application.  The existence of potential immigration fraud amounts to a disturbing feature of Gu’s case and is plainly relevant to the overall assessment.

40.  We are not persuaded that the recorder is plainly wrong in the aspects as contended by Mr Chan, or that any palpable errors in his analysis and evaluation of the evidence have been demonstrated.  The real issue for the recorder was whether the Alleged Cancellation defence is believable and a bona fide dispute on substantial grounds is raised.  He was not required to make any findings or come to a firm conclusion on forgery or conspiracy and did not do so.  In assessing the credibility of the defence, he was entitled to take into account the apparent inconsistencies in the lines of defence pursued at different times and the documentary evidence adduced, and the doubts generated by logical reasoning.  There is no procedural irregularity or unfairness to the Company.  Nor did the recorder draw any inferences by conjecture.

41.  The other arguments of Mr Chan are essentially a repetition of the submissions by the former counsel of the Company before the recorder, in the hope of persuading this court to take a different view.  It is futile to repeat submissions rejected by the recorder without demonstrating in what way the recorder went wrong.

42.  There is no valid basis to interfere with the evaluation and findings of the recorder regarding Gu’s claim.

Lyu’s claim

43.  Lyu claimed that she entered into an agreement with ZIL (“Lyu SPA”) dated 1 September 2015 for the purchase of a $10 million bond issued by the Company.  She was issued a bond instrument and certificate by the Company both dated 14 September 2015.  The bond matured on 14 September 2023.  When the Company failed to pay the principal amount, she served a statutory demand on the Company on 27 October 2023.

44.  The Company raised these defences:

(1) There is no proper explanation how the Lyu Bond was obtained.  Lyu only produced the Lyu SPA but not a transfer form signed by her and Lyu.

(2) No payment was made to the Company.  The Company received $10 million by cheque from ZIL to subscribe for a bond on 14 September 2015.  Shortly afterwards, ZIL informed the Company that it would not proceed with the subscription and requested a refund.  The Company agreed with ZIL it would only refund $8.8 million as this was the third time in six weeks that ZIL sought to subscribe and then requested a refund at the last minute.  The refund arrangement was recorded in a note executed by ZIL (“Alleged Note”) stating that $6 million was to be paid to Omega Technology Development Ltd and $2.8 million to Willing Peace Limited.

(3) There was no claim for interest by Lyu and the amount of interest is substantial.

45.  The recorder regarded the argument that Lyu did not provide proper explanation how she obtained the Lyu Bond a technical argument.  This should not detract from the real issue whether the Company can demonstrate a bona fide dispute on substantial grounds if the documents adduced by Lyu (the Lyu Bond, the bond instrument and certificate) were genuine and authentic^[15].

46.  He took the view that the defence of no payment made to the Company is not believable for these reasons^[16]:

(1) The Company sought to challenge the authenticity of the documents adduced by Lyu, having raised “suspected forgery” in Ma’s 3^rd affirmation filed on 17 May 2024, and yet did not ask Chan Yuk or the other director Law Tze Ping (the signatures of both appeared on those documents)^[17] to deny in their affirmations that they had signed the documents in question.

(2) The Company chose not to produce the register of bondholders, notwithstanding Lyu had produced a letter issued by the Company dated 14 September 2015 (“Company Confirmation Letter”) stating that Lyu “is registered in the register of the Bondholders”, and despite the confirmation of its former counsel at the hearing before L Chan J on 3 June 2024 that the register could be produced.

(3) There is little merit in the criticism of Lyu’s failure to provide satisfactory proof of payment of $10 million.  Lyu already produced the pay-in slip issued by her bank evidencing payment to SBI on 8 September 2015, the official receipt and statements issued by SBI on 9 September 2015, a letter from SBI dated 8 October 2015 confirming utilisation of her funds for acquiring the Lyu Bond by ZIL on her behalf.  She has also produced further statements issued by SBI on 17 September 2015 and 30 April 2024 recording the Lyu Bond of $10 million.  The evidence of payment of $10 million by Lyu is “overwhelming”.

(4) As for the alleged refund by the Company, this is contrary to the Lyu bond instrument and certificate.  The Alleged Note (which made no reference to Lyu) was disclosed for the first time in May 2024, and was not produced to refute the Lyu claim when she served a statutory demand in October 2023.  The refund of $8.8 million did not tally with the principal of the bond, there is no plausible reason for the Company to enjoy a substantial difference of $1.2 million when the refund was requested forthwith, even taking into account the alleged refund on two previous occasions.

(5) There are doubts that the Company has private dealings with ZIL and hence the Company managed to come up with documents bearing ZIL’s input to contradict what are otherwise straightforward claims in reliance of the bond certificates. It is “extraordinary” that the Company has not procured ZIL to corroborate its account and merely alleged in “generic terms” it could not get in touch with ZIL without giving much particulars.

47.  The recorder considered the explanation put forward by Lyu’s counsel, Mr Tommy Cheung, why she has not claimed interest and came to the view that she has not decided to forego the claim for interest and it was understandable to confine her claim to the outstanding principal to minimise dispute in order to seek a winding-up order^[18].

48.  Mr Chan advanced substantially the same arguments made by the former counsel before the recorder.  In summary, his contentions are as follows:

(1) The recorder is plainly wrong in finding that the contemporaneous documents adduced by the Company and its arguments were “tangential points which are either immaterial or without merits”.  The pay-in slip of the bank produced by Lyu showed a sum of $10,000,850 (after deducting service charge of $150) was transferred to SBI, but SBI’s receipt and statement stated that $10,000,985 was deposited.  The recorder’s rejection of this discrepancy as immaterial^[19] is baseless.

(2) The recorder is wrong to downplay the discrepancy in the interest rate (6% as stated in the Company’s Confirmation Letter, and 7.5% as stated in the Lyu Bond).  The inaccurate interest rate stated in the Company’s Confirmation Letter strengthens the Company’s case that the documents produced by Lyu were forgeries.

(3) The refund arrangements are supported by contemporaneous documents including the Alleged Note, the Company’s cheques to Omega Technology Development Ltd and Willing Peace Limited, and the Company’s bank statements.

(4) The recorder surmised there are doubts that the Company has private dealings with ZIL and raised an unwarranted conspiracy theory between them.

(5) Lyu never requested for payment of interest over eight years.  This inertia goes entirely against common and commercial sense, and strongly supports the Company’s case that she is not a bondholder of the Company.  It is irrelevant that she may choose to file a proof of debt for interest after the Company is wound up.

49.  The unsuccessful arguments repeated on appeal do not demonstrate any palpable error of the recorder in his evaluation of the evidence.  He was entitled to come to the view that the evidence of payment by Lyu was overwhelming and the defence is incredible.  We see no basis to interfere with the finding that the Company has not discharged the burden of showing a bona fide dispute on substantial grounds for Lyu’s claim.

Chen’s claim

50.  The Company does not challenge Chen’s status as a bondholder.  He served a statutory demand on the Company on 19 January 2024 for his debt, of which $6.75 million was the principal.

51.  The Company advanced two major defences, both of which were held by the recorder to be without merit.  The Company no longer disputes Chen’s eligibility to redeem his bond.  The only defence pursued on appeal is that the Company had repaid more money to Chen than he claimed.  It is alleged that the total amount repaid was $5.75 million rather than $3.25 million, taking into account: (1) Chen was paid $2 million (rather than $1 million) as of 15 November 2022, as admitted in his 1^st affirmation^[20] and repeated in his draft re-re-amended petition; and (2) on 1 August 2023, the Company through its Mainland subsidiary paid RMB 1.35 million (equivalent to $1.5 million at the time) to a PRC Company (“PRC Company”) on Chen’s instructions.

52.  The recorder took the view that the alleged repayment of $2 million cannot withstand close scrutiny for these reasons^[21]:

(1) Chen explained in his 2^nd affirmation^[22] that he was mistaken.  The Company only paid him $1 million as of 15 November 2022.  His mistake arose from the assumption that Company had repaid the sums due under the 1^st supplemental agreement entered into on 19 May 2022 (“Chen 1^st SA”) in accordance with the payment schedule, which was not the case.  He set out in his 2^nd affirmation the particulars of the total amount of $1 million received, comprising four payments of $250,000 each with the dates, and with documentary evidence in support except for the first payment, which is nevertheless supported by his 1^st affirmation.

(2) The Company has not adduced evidence to rebut Chen’s 2^nd affirmation and to support its contention that $2 million was paid. It merely relied on the earlier statement in Chen’s 1^st affirmation.

(3) Chen’s case that only $1 million was paid as of 15 November 2022 was supported by the 2^nd supplemental agreement the parties entered into on 2 December 2022 (“Chen 2^nd SA”) to amend the repayment schedule of Chen 1^st SA.  The obvious implication is that the three payments supposed to be paid from 15 September 2022 onwards (totalling $1 million) were not yet paid and hence there was a need to amend.  This is convincing proof that the Company had only paid $1 million up to the time of Chen 2^nd SA.

(4) Chen 2^nd SA clause 2 also provided that the Company should pay $1.9 million not yet repaid for the period from 15 September 2022 to 15 January 2023.  The scheduled payments during such period in Chen 1^st SA added up to $2 million, of which only $100,000 was paid by the Company on 5 December 2022.

53.  As for the amount of RMB 1.35 million allegedly paid by the Company to the PRC Company, the recorder found no merit in this allegation for the following reasons^[23]:

(1) The Company is unable to produce any evidence in writing to show that Chen authorised or instructed the alleged payment.  All that it could produce was a payment instruction by the Company to a redacted entity (purportedly its subsidiary) to pay RMB 1.35 million to the PRC Company as partial repayment to Chen.  It is a self-serving document.

(2) Chen denied that he has any business relationship with the PRC Company, its shareholders or directors.  The Company is unable to adduce evidence showing any connections between Chen and the PRC Company.

(3) According to a company search by Chen’s solicitors, the PRC Company was established on 12 July 2023 and dissolved on 9 November 2023.  This casts further doubt on the credibility of the Company’s allegation.

54.  Mr Chan contended that the recorder should have approached with caution Chen’s withdrawal of admission that he was paid $2 million^[24]. This abandonment of previous admission was made only on 22 August 2024, 28 days before the substantive hearing of the petition.  The Company did not have sufficient time to locate evidence to rebut Chen’s allegations.  The recorder failed to consider the prejudice to the Company by the belated withdrawal of admission.  The explanation for the alleged mistake and confusion is “hardly convincing” and was based on assertion, and the inconsistencies in Chen’s two affirmations would warrant fuller investigation in a trial.

55.  We could detect no error of law or principle in the recorder’s assessment of the evidence.  There is no merit in Mr Chan’s submissions.  The explanation for the alleged mistake was not based on assertion.  As analysed by the recorder, there is convincing proof.  We do not think 28 days is insufficient for the Company to review its records for payments made under Chen 1^st SA and Chen 2^nd SA.  This exercise should have been undertaken before the Company put forward the defence of over-payment.  Instead it chose to rely solely on Chen’s statement in his 1^st affirmation.  It has not sought to adduce new evidence on appeal having had further opportunity to review its records since August 2024.  The allegation of prejudice in not being able to locate rebutting evidence plainly has no substance.

56.  As for the alleged payment to the PRC Company, this has nothing to do with any admission and the recorder is entitled to take the view that the deficiency in the Company’s evidence casts doubt on the credibility of its defence.

57.  The recorder is correct to hold that the Company has not discharged its burden of showing a bona fide dispute on substantial grounds in respect of Chen’s claim.  There is no basis to interfere with his finding.

Order and costs

58.  We dismiss the Company’s appeal.

59.  There is no dispute that costs should follow the event.  We order the Company to pay Lyu, Gu and Chen their costs of this appeal.