RE CHINA CULTURAL CITY LTD

HCCW 313/2019

[2020] HKCFI 1598

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 313 OF 2019

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D E C I S I O N

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Application

1.  In October 2019 Shun Wo Yuen Limited (“Shun Wo Yuen”) issued a petition to wind up the Company on the grounds of insolvency relying on non-payment of a statutory demand for $113,208,628 (“Debt”) to establish insolvency.  It is Shun Wo Yuen’s case that the debt was assigned to it by its parent company Xin Wenhua (Hong Kong) Development Company Limited (“Xin Wenhua”) on 17 September 2019 in the circumstances described in the next section of this decision.  The Petition is opposed by one of the two shareholders of the Company, Chinluck Performance Limited (“Chinluck”)[1].

Background

2.  The Company was set up in 1993 by the Government of the People’s Republic of China (“Government”) through its then Liaison Office in Hong Kong, in collaboration with the owner of Chinluck, Cheng Zhen Shu, in order to promote Chinese culture.  Chinluck owned 50% of the Company.  It is not in dispute that the other 50% was held by nominees on behalf of the Government.  What is contentious is the arrangements, which were put in place on behalf of the Government to represent its interests.

3.  The two camps have fallen out and the Company is deadlocked.  Xin Wenhua has decided that the way to resolve the current impasse is for it to initiate a winding-up.

4.  It is Shun Wo Yuen’s case that Xin Wenhua represented the Government’s interest in the Company through a number of individuals who worked for it from time.  They were Pang Ching, Wang Kejing, Zeng Qinghuai and Huang Peibin who has produced Shun Wo Yuen’s principal affirmation.  It is also Shun Wo Yuen’s that advances to the Company, which were recorded as loans to the nominees representing Xin Wenhua’s interest were loans made on behalf of the Government. The Debt is said by Shun Wo Yuen to consist of those loans.

5.  It is fair to say that the contemporary documentation dealing with the matters, which I have summarised in the previous paragraph, are not as well or clearly documented as one would expect given that Xin Wenhua was representing the Government.  To some extent this can probably be explained by the fact that in 1993 (which was before the transfer of sovereignty) and until relatively recently Mainland commercial and financial interests were commonly informal and opaque.  That being said certain things seem to me to be fairly clear.

6.  Mr Pang, Mr Zeng and Mr Wang were directors of the Company.  They were also in turn shareholders.  The advances, which were clearly made to the Company did not come from their bank accounts.  They came initially from a company called Hong Kong United Arts Entertainment Co Ltd, which was associated with the New China News Agency as is apparent from correspondence at the time including a memorandum dated 14 April 1994.  HK United Arts subsequently came to be owned by Xi Wenhua.

7.  I do not understand Chinluck to suggest that the sums recorded as loans made by the three nominees either as directors or shareholders (the description of the capacity of the lender in the audited financial statements changes over time) were not advances on behalf of the Government.  There is some suggestion in the evidence filed by Mr Cheng on behalf of Chinluck that some of the advances were not loans and have been repaid, but nothing remotely like the full amount or sufficient to reduce the debt below the $10,000 threshold, which engages the court’s jurisdiction to wind up a company.

8.  There are three live issues.  The first issue, concerns the reliability of the accounts (which have been audited) and the amount payable.  The second issue is whether the Government has authorised the presentation of the Petition.  The third issue is whether Shun Wo Yuen has locus to present the petition.  This is a legal issue, which arises from the fact that the loans were transferred by equitable assignment from Pang to Zeng to Wang and then Wang executed a declaration of trust in respect of his interest to Xin Wenhua.  It was only the assignment by Xin Wenhua of its interest in the loan to Shun Wo Yuen that was by way of a legal assignment.  Mr Hui argues that consequently all that was transferred to Shun Wo Yuen was an equitable interest and that it was necessary for the holder of the legal interest to be joined as a party.

The burden on the Opposing Contributory

9.  In order to defeat the petition it is necessary for Chinluck to demonstrate that the Company has a bona fide dispute on substantial grounds.  The applicable legal principles in this regard are well-established, and succinctly summarized in this Court’s judgment in Re Yueshou Environmental Holdings Ltd [2].  In particular:

(a)  A winding-up petition can be successfully resisted if there is a bona fide dispute on substantial grounds on the Petition Debt.  The onus is on the Company (or in this case, Chinluck as the opposing contributory) to prove the same.

(b)  Chinluck must put forward sufficiently precise factual evidence to substantiate its allegations and cannot merely raise a cloud of objections on affidavits.

(c)  Chinluck’s assertions must be believable in the context of so much of the background as is either undisputed or beyond reasonable dispute. In other words, the evidence is to not to be approached with a wholly uncritical eye.

(d)  An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

10.  It has been repeatedly held that bare oral allegations, uncorroborated by documentary evidence or contrary to common and commercial sense, are insufficient to raise a bona fide dispute on substantial grounds: see e.g. (1) Re GW Electronics Co Ltd [3]; and (2) Re Kinston Entertainment (HK) Ltd [4].

11.  In Dayang (HK) Marine Shipping Co, Limited v Asia Master Logistics Limited [5], DHCJ William Wong SC stated:

“… The Companies Court neither resolves nor determines disputes when ruling on a creditor-petitioner’s locus to wind-up a debtor-company. Instead, disputes over the debt are only finally resolved upon determination by the liquidator (subject to the possibility of appeal) ….

72.       To elaborate, the Companies Court does not, when hearing a petition for winding-up, make any determination on the dispute.  Its role is simply to consider the prospective merits and ascertain whether the debtor-company had proven a triable case on the defence.  It does not even have to decide whether one side or the other is more probably right: see Tallington Lakes Limited v Ancasta International Boat Sales Ltd [2012] EWCA Civ 1712 (20 December 2012) §5 per David Richards J (as he then was) and Re Leung Cherng Jiunn (debtor) [2016] 1 HKLRD 850 (‘Re Leung Cherng Jiunn’) at p.863; §27(5) per Kwan JA (as she then was)…”

12.  I would qualify the Deputy Judge’s comments.  It is necessary for a company or an opposing contributory to demonstrate that a company has a bona fide defence on substantial grounds to a claim that the petitioner is owed at least $10,000.  In some cases a company will be able to fairly say that it does not know how much it owes, but that it concedes a certain amount at least is due and is willing to pay it.  In an extreme case it may be able to demonstrate that it cannot work out with any confidence at all what the minimum amount is and in those circumstances it is reasonable for it not to make any payment; although that will, I anticipate, be rare.  What it cannot simply do is to point to shortcomings in accounts or financial records and blithely say that it does not know how much is payable and decline to pay anything.  Not only is that not a defence on a substantial grounds, but it also falls short of satisfying the bona fide component of the test.  I would expect bona fide opposition where what is in issue is the amount of the debt to involve some credible attempt to show what the minimum owed is thought to be.

The Defence

13.  I shall address the argument that the financial records are too unreliable to allow calculation of what is payable.  In my view there can be no sensible dispute that a significant amount has been lent interest free and for no agreed term and is, therefore, repayable on demand.  It is not sufficient to respond to a claim for repayment that there is genuine uncertainty about the sum due and not proffer any attempt at an assessment of what the sum payable is likely to be.  Mr Cheng attempts to circumvent this type of complaint by distancing himself and Chinluck from any involvement in the preparation of the accounts, although audited financial statements were signed by Chinluck’s nominee director, and they record year after year amounts due to a shareholder and Mr Cheng does not suggest that it refers to Chinluck.  For example, as early as 16 December 1996 the audited financial statement for the year ending 31 March 1996, clearly shows $22,417,053 as due to a shareholder. That figure increases over the following years.

14.  It seems to me clear on the evidence that the Company owes considerably in excess of $10,000 to the Government’s nominees and that it is unable to repay what is due and owing.

15.  The second defence, namely, that the Government has not authorised the presentation of the Petition has an air of unreality about it.  It is apparent from correspondence exhibited to Mr Huang’s affirmations that the Liaison Office was actively involved at various times in the affairs of the Company and that the various people and entities that I have referred to in [4] were closely associated with the Liaison Office and, I think it a compelling inference, doing its bidding.  For example, Shun Wo Yuen has exhibited a memorandum dated 28 June 1994 and a letter dated 10 November 1998 from the Liaison Office that make it clear that it was collaborating with Chinluck to form the Company and, in the case of the latter, that Mr Zeng was appointed as a shareholder of the Company by the Government.  Clearly, Xin Wenhua and its nominees were representing the entity and individuals appointed to represent the Government’s interests.  The idea that the Liaison Office does not know about the present Petition and there is reason to doubt the authority of those who have authorised its presentation to do so is illusory and I reject it.

16.  The final defence is rather more substantial and was the focus of Mr Hui’s submissions before me.  It is not in dispute that the assignments of whatever sums were due to initially Mr Pang and then to Mr Zeng and Mr Wang were equitable assignments.  The assignment by Xin Wenhua to Shun Wo Yuen was a legal assignment.  Mr Hui argued that necessarily all that could have been assigned to Shun Wo Yuen was the interest that Xin Wenhua itself held, which was an equitable interest in the debt that Mr Wang held on trust for it.  That being the case, so Mr Hui reasoned, Mr Pang was a necessary party to the Petition.

17.  Mr Hui argued that a beneficiary under a trust cannot sue in relation to trust property. Generally, it is the trustee who must sue [6]. There is an exception known as the Vandepitte procedure named after the Privy Council decision in Vandepitte v Preferred Accident Insurance Corporation of New York [7]. The effect of the Vandepitte procedure is explained by Lord Templeman in Hayim v Citibank NA [8]:

“… when a trustee commits a breach of trust or is involved in a conflict of interest and duty or in other exceptional circumstances a beneficiary may be allowed to sue a third party in the place of the trustee. But a beneficiary allowed to take proceedings cannot be in a better position than a trustee carrying out his duties in a proper manner …

… a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owned by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.”

18.  Even if the Vandepitte procedure is invoked, the trustee must be joined as a defendant or before the court [9]. As Viscount Cave LC stated in Performing Right Society Ltd v London Theatre of Varieties Ltd [10] at 14:

“… it was always the rule of the Court of Chancery, and is, I think, the rule of the Supreme Court, that, in general, when a plaintiff has only an equitable right in the thing demanded, the person having the legal right to demand it must in due course be made a party to the action… If this were not so, a defendant after defeating a claim of an equitable claimant might have to resist like proceedings by the legal owner, or by persons claiming under him as assignees for value without notice of prior equity, and proceedings might be indefinitely and oppressively multiplied.”

19.  Likewise, the authors of Lewin on Trusts [11] explain:

“Where a beneficiary brings a derivative action in his own name, then the trustees must be joined as defendants. The need for joinder of the trustees is not merely a procedural matter, nor merely to ensure that the trustees are bound by the judgment or to avoid multiplicity of actions. The need for joinder has a substantive basis since the beneficiary has no personal right to sue and is suing on behalf of the estate, or more accurately the trustee.”

20.  I accept for present purposes that in the case of Mr Wang, as he executed a declaration of trust in favour of Xin Wenhua, Shun Wo Yuen was the assignee of the benefit under a trust, which was the only interest that Xin Wenhua held and was able to assign.  I also accept that the Vandepitte has no application on the facts of this case.  The issue is whether it is necessary for a beneficiary under a trust to join the trustee as a party to a petition to wind up a company?  Mr Hui argued that it is largely on the basis of the judgment of Au JA in Re Chung Kong Materials (JV) Limited[12].  Au JA explains the decision of Anthony Chan J, which gave rise to the appeal in [4] of his reasons for judgment:

“The Judge dismissed the petition on the primary basis that, on the evidence, it was triable as to whether the petitioner was the equitable assignee of the Debt. He also concluded that, in any event, even if the petitioner was an equitable assignee of the Debt, it should have joined Mr Lau in these proceedings as it was unclear as to whether Mr Lau (even if he was the rightful creditor) had retained any interest in the Debt.”

21.  Au JA goes on to explain the Judge’s reasoning, namely, that the assignment was equitable and that in the circumstances of the case it was necessary to join the assignor. Chan J had said this in [32]–[33] of his judgment:

“19. He further explained why it was procedurally necessary for the petitioner to join Mr Lau at paragraphs 28–33 as follows:

‘…

32. In the present case, given the unsatisfactory nature of the evidence as analysed above despite Ling’s challenge; the lack of clear evidence whether Lau (assuming that he was the rightful creditor) has retained any interest in the Debt; and the absence of evidence that the assignment had been perfected with consideration provided by the Petitioner and notice of the assignment having been given to the Company (see William Brandt’s in para 26 above), the Petitioner was invited by this court to join Lau in these proceedings.

33. Regrettably, the invitation was declined.  In the circumstances of this case, I do not believe that the court should grant a remedy of last resort to wind‑up the Company when it is in doubt over the Petitioner entitlement to the Debt.  I should add that the failure to join Lau in these circumstances tends to lend weight to Ling’s contention that the evidence adduced by the Petitioner does not set out an accurate picture.’”

22.  The appeal in respect of the above finding was described by Au JA as follows: [26] “Under this ground, Ms Ng contends that the evidence supports clearly that Mr Lau has assigned the Debt to the petitioner, which is also expressly acknowledged by the Company by way of the Confirmation Letter.  The Judge is thus plainly wrong in concluding that the question of equitable assignment is triable.”

23.  Au JA dismissed the Appeal on this ground and then goes on to say this:

“34. Given our conclusion in Ground 2 above, it is strictly speaking unnecessary to deal with Ground 3. We will however dispose of it briefly as follows.

35. Ms Ng has fairly not disputed that the authorities have established that, save in an exceptional case, it is a procedural requirement for an equitable assignee to join the assignor to sue the debtor. See: T v A [2018] 3 HKLRD 730 at paragraph 55 per Chow J and the authorities referred to therein.

36. Counsel’s contentions are that in a winding up case as in the present, even if Mr Lau has retained any interest in the Debt despite the assignment, he could still proceed to assert that interest in the proof of debt process after the winding up of the Company. This constitutes an exceptional circumstance falling within the exception to the procedural requirement of joining the assignor.

37. There is no merit in this contention.  Given the above questionable evidence relating to the purported assignment, this is plainly a case where the purported assignor should be joined to perfect the title to claim the Debt by way of the summary winding up procedure.  The proof of debt argument is missing the point, as the petitioner must first satisfy the court that it has the necessary locus to wind up the Company before it could rely on the proof of debt procedure as a fall back to say this is an exceptional case not to join the assignor.  The Judge is fully justified to observe at paragraph 33 of the Judgment that, given the doubtful evidential circumstances of this case, the court simply should not permit the petitioner to resort to a summary procedure to wind up the Company.”

24.  It would appear that the Court of Appeal were not referred to English decisions dealing specifically with the necessity of a beneficiary joining a trustee when presenting a winding up petition, which I explain in the next paragraphs.  I think it is also clear that in expressing the view, which is obiter, in [37] Au JA was influenced by the decision that had already been reached, namely, that the assignee’s title was questionable.

25.  In re Steel Wing Company Limited[13] P O Lawrence J explains:

“The main reason why an assignee of part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is in my opinion because the Court cannot adjudicate completely and finally without having such parties before it. The absence of such parties may result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning the same debt. In my opinion, however, this reasoning does not apply to a winding up petition. After a winding up order has been made the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner’s debt as well as the debts of other creditors. In the case of an assignee of part of a debt the Court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all.

For the reasons I have stated I have stated I have come to the conclusion, first, that an assignee of a definite part of a debt is none the less a creditor in equity in respect of that part because, according to the accepted rules of procedure, the Court requires him to join the persons interested in the remainder of the debt as parties to any action he may bring to recover his part of the debt, and, secondly, that such an assignee is entitled to present a winding up petition under s.137 without joining  the persons interested in the remainder of the debt as            co-petitioners or as respondents.”

26.  In re Steel Wing Company Limited [14] has been cited with approval by the Privy Council in Parmalat Capital Finance Ltd v Food Holdings Ltd [15].

“6. There is no dispute that, at the commencement of the winding up, the money due under the put agreements had become payable and PCFL was insolvent. Section 96 of the Companies Law provides that a petition may be presented by a ‘creditor’ and the first question is whether Food and Dairy were creditors. The board considers that they were. Food and Dairy were the contracting parties to the put agreements and had the right, as against PCFL, to demand payment. They retained both the legal title and the equity of redemption. In the opinion of the board, the fact that they had assigned the debts by way of security to Norwest did not deprive them of the status of creditors.

7. Mr Moss QC, who appeared for the appellants, submitted that even if Food and Dairy were entitled to sue, the proceedings were not properly constituted because Norwest, as equitable assignee, should have been joined in the proceedings. He relied upon the analogy of an action to recover a debt, in which it is clear that an assignor seeking to recover an assigned debt must join the assignee: see Walters & Sullivan Ltd v J Murphy & Sons Ltd [16]. But the analogy is false. As P O Lawrence J explained in Re Steel Wing Co Ltd [17]:

‘The main reason why an assignee of a part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is in my opinion because the court cannot adjudicate completely and finally without having such parties before it. The absence of such parties might result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning such debt. In my opinion, however, this reasoning does not apply to a winding-up petition. After a winding-up order has been made the court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner’s debt as well as the debts of the other creditors. In the case of an assignee of part of a debt the court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all.’

8. In other words, a winding-up order does not affect the legal rights of the creditors or the company.  It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors.  In the course of that process, the rights of creditors may have to be determined.  But such a determination is not necessary at the stage when the order is made.  An equitable assignor therefore has a sufficient interest without joining the assignee.”

27.  The authors of Guest on The Law of Assignment [18] also explain that an equitable assignee has sufficient title to inter alia present a winding-up petition.

“Title to sue. An equitable assignee has sufficient title to present a bankruptcy petition [19] or a winding-up petition [20] against the debtor, to vote at a creditors’ meeting [21], to prove in the bankruptcy or liquidation[22], to obtain a grant of administration of a deceased debtor’s estate [23] and to avail himself of the rights of a judgment creditor against a judgment debtor [24]. He can also commence or continue an arbitration under an arbitration clause in a contract which has been assigned to him [25].

28.  It seems to me that if the Court of Appeal had been referred to these decisions and there had been no dispute, as in the present case, about the effect of the assignment to Shun Wo Yuen they may have reached what in my view is the correct conclusion, namely, that it is not necessary to join the trustee and thus the third defence fails.

29.  I will, therefore, make a winding-up order and a costs order nisi that Chinluck pays the costs of the Petition such costs to be taxed if not agreed, and the Petitioner’s costs of presenting and advertising the Petition be paid out of the assets of the Company.