YIP HAI TAK aka YIP HAI TAK, PETER v. SWISS COSMECEUTICS (ASIA) LTD

CACV 98/2019, [2024] HKCA 186

On Appeal From [2019] HKCFI 336

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 98 OF 2019

(ON APPEAL FROM HCCW NO 124 OF 2017)

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REASONS FOR JUDGMENT

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Hon Au JA:

A. INTRODUCTION

1.  By way of a petition dated 24 April 2017 (“the Petition”), the Petitioner (“Mr Yip”)  petitioned to wind up the Respondent (“the Company”)  on the ground of insolvency based on a statutory demand dated 6 March 2017 for the debt comprising CHF 105,527 and HK$280,000 (totalling HK$1.17m)  (“the Debt”).  It was Mr Yip’s case that the Debt represented the seven loans he had advanced to the Company over a period of time[1].  The Company opposed the Petition in disputing the Debt.

2.  By way of a written decision dated 1 February 2019 ([2019] HKCFI 334)  (“the Decision”), Harris J (“the Judge”)  held that the Company failed to establish a bona fide dispute of the Debt on substantial grounds.  However, given that the Company had made a payment of HK$1,200,000 (“the Security Sum”)  into court as security for the Debt pursuant to a court order dated 3 July 2017, the Judge decided not to make a winding up order at the time, and directed that he would hear the parties on the form of order that should be made in light of his decision (see [12] of the Decision).

3.  By way of a Notice of Appeal dated 27 February 2019[2], the Company appealed against the Decision.

4.  On 16 May 2019, upon the joint application by the parties on 14 May 2019, the Judge made an order by consent that, inter alia, a sum of HK$1,170,000 out of the Security Sum be paid to Mr Yip (paragraph 2), the Petition be dismissed with costs to Mr Yip (paragraph 3)  and that paragraphs 2 and 3 be stayed pending the determination of the Company’s appeal (paragraph 4).

5.  At the end of its hearing, this court dismissed the appeal with costs to Mr Yip, with reasons to be handed down later.

B.  BACKGROUND

6.  The key background facts are summarized in the Decision (see [4] - [8] of the Decision)  and the parties’ Agreed Common Chronology dated 5 May 2022.  For the present purposes, I will not repeat them and will only highlight those factual events that are most pertinent to the issues in this appeal.

7.  The Company was incorporated on 18 May 2011 by First May Holdings Limited (a company owned or controlled by Mr Yip)  as its sole shareholder.  A Ms Kan Pui Kwan (“Ms Kan”)  was appointed as the company secretary at the time.

8.  In November, the Company entered into a contract with Harvey Nichols (Hong Kong)  Limited to set up counters at Harvey Nichols (“the Harvey Nichols Counters”)  for the sale of cosmetics under the brand “Bellefontaine” by way of consignment.

9.  It was not and is not disputed before the Judge and in this appeal that, between 26 September 2011 and 21 March 2012, Mr Yip had advanced the following seven loans to the Company in the total sum of CHF 105,527 and HK$280,000 (totalling HK$1,170,000)[3]:

(1)  Loan 1 on 26 September 2011: CHF 59,150 (HK$500,000)  (“Loan 1”);

(2)  Loan 2 on 2 November 2011: CHF 12,793 (HK$110,000)  (“Loan 2”);

(3)  Loan 3 on 18 November 2011: CHF 21,564 (HK$180,000)  (“Loan 3”);

(4)  Loan 4 on 3 January 2012: HK$120,000 (“Loan 4”);

(5)  Loan 5 on 7 February 2012: HK$60,000 (“Loan 5”);

(6)  Loan 6 on 23 February 2012: HK$100,000 (“Loan 6”); and

(7)  Loan 7 on 21 March 2012: CHF 12,020 (HK$100,000)  (“Loan 7”).

10.  The advances went largely to pay for the Company’s administrative expenses (see [4] of the Decision).

11.  On 27 February 2012, Mr Yip (via First May Holdings Limited)  transferred 100% of the shareholding of the Company to Ms Kan at a nominal consideration of HK$1.

12.  On 1 March 2012, the following three agreements were entered into by the following parties:

(1)  A Sales Agency Agreement whereby the Company (defined as “Principal”)  appointed Do-Well Capital Investment & Management Ltd (“Do-Well”)  (defined as “Sales Agent”)  as the Company’s exclusive sales agent for all the skin care products under the name of “Bellefontaine” in the People’s Republic of China (“PRC Sales Agency Agreement”).  This was signed by the Company (through Ms Kan)  and Do-Well;

(2)  A Sales Agency Agreement whereby the Company (defined again as the “Principal”)  appointed Do-Well (defined again as the “Sales Agent”)  as the Company’s exclusive sales agent for all the skin care products under the name of “Bellefontaine” in Hong Kong and Macau (“HK Sales Agency Agreement”).  This was also signed by the Company (through Ms Kan)  and Do-Well;

(3)  A supplemental agreement signed by Mr Yip (through Ms  Kan)  and Do-Well (“the Supplemental Agreement”).  In the Supplemental Agreement, it defined Mr Yip also as “Principal” and Do-Well as “Sales Agent”. It referred to a “Sales Agency Agreement dated 1 March 2012” where the “Sales Agent” was appointed by the “Principal” as its agent pursuant to the terms therein. The substance of the Supplemental Agreement provided that Do-Well shall reimburse the “Principal” for the amount of HK$2m “for the already initiated counter deposits and construction, existing stock products, events, promotion and advertising” and that the payment shall be made by two tranches of HK$1m each respectively before 15 February and 15 March 2012.

13.  At the same time, it is common ground that (a)  on 18 February 2012 and 15 March 2012, two sums of HK$1m each were deposited to Mr Yip’s account, totalling HK$2m (“the HK$2m Payment”)[4], and (b)  the HK$2m Payment represented the payments agreed to be made under the Supplemental Agreement.

14.  On 19 March 2012, the Company appointed Ms Kan as the sole director.  There is no dispute that at the material times, Ms Kan was not in charge of the Company’s banking records or accounts, which were retained and overseen by Mr Yip’s business partner.

15.  At the same time[5]:

(1)  On 20 February 2012, Mr Yip transferred a sum of HK$300,000 to Ms Kan; and

(2)  It is Ms Kan’s evidence that Mr Yip advanced a sum of HK$300,000 to HK$400,000 to her sometime around April 2012.

16.  Further, thereafter on 6 June 2012, 27 December 2012, and 17 July 2013, Mr Yip respectively transferred to Ms Kan HK$100,000, HK$91,200 and HK$43,600 (totalling HK$234,800).

C.  THE DECISION

17.  As mentioned above, the Company did not dispute that Mr Yip had advanced the seven loans (see: [2] of the Decision).

18.  However, the Company through the three affirmations filed by Ms Kan raised two defences to dispute the liability to repay the Debt before the Judge:

(1)  First, it was alleged that before Ms Kan acquired all the Company’s shares in February 2012 for HK$1, on 31  December 2011 Mr Yip orally represented to her (“the Oral Warranty”)  that, by the time of such transfer of shares, the Company would be clear of any liabilities which she did not know about and specifically agree to (“the Warranty Defence”).

(2)  Second, in any event, the Debt had all been repaid or set-off by the HK$2m Payment with the balance subsequently transferred by Mr Yip back to Ms Kan (“the Repayment Defence”).

19.  It is the Company’s contentions that the Warranty Defence and the Repayment Defence raised bona fide dispute of the Debt on substantial grounds.

20.  Applying the well-established principles[6] relevant to whether a bona fide defence has been established, the Judge held that, although it seemed odd that the Mr Yip had waited for five years to pursue the Debt and the circumstances in which Ms Kan acquired the Company’s share capital were unclear, given the inconsistencies identified in the Company’s own case, the Company had failed to establish a bona fide dispute of the Debt on substantial grounds.  See [3], [11] and [12] of the Decision.

D.  THIS APPEAL

D1.  Grounds of appeal

21.  The relevant principles on whether there exists a bona fide dispute of a petition debt on substantial grounds have been summarized by Kwan J (as she then was)  in Re Hong Kong Construction (Works)  Limited (HCCW 670/2002, 7 January 2003)  at [6(1)] - [6(4)] as follows:

“(1)  The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, ‘substantial’ means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2)  The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3)  The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward ‘sufficiently precise factual evidence’ to substantiate its allegations.

(4)    The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely ‘raising a cloud of objections on affidavits’ or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.”

22.  It is not suggested in this appeal that the Judge had applied the wrong principle in finding that the Company had failed to establish a bona fide defence on substantial grounds[7].

23.  The Company however has advanced in the Amended Notice of Appeal the following two grounds of appeal:

(1)  Ground 1 – The Judge erred at [11(4)] of the Decision in overlooking that the HK$2m Payment would give rise to a defence of set-off, and erred in not giving proper weight to Mr  Yip’s note on a payment advice or the Supplemental Agreement.[8]

(2)  Ground 2 – The Judge erred at [2] and [10] of the Decision in failing to address the Company’s defence based on the Oral Warranty, and erred in failing to attach due weight to Mr Yip’s delay in recovering the Debt and/or the lack of explanation as to why Ms Kan would have agreed to be liable for the Debt.[9]

24.  Mr Yip has also filed a Respondent’s Notice dated 20 March 2019 seeking to affirm the Decision on three additional grounds.  However, it is unnecessary for me to deal with these grounds since, as explained below, I do not find the grounds of appeal to be of merits.

25.  But before I deal with the merits of these grounds of appeal, there are two observations that I should mention.

26.  First, as raised by this court at the hearing, for the reasons and observations set out by G Lam JA at [55] - [57] below, there is a serious doubt as to whether the present appeal as formulated in the Amended Notice of Appeal is properly constituted.

27.  However, it is not necessary for me to dispose of the appeal on this basis as I have in any event found the grounds of appeal to be without merits for the reasons I will explain below.

28.  Second, Ms Lam SC[10] for Mr Yip submitted that for the Company to succeed in this appeal, it needs to show that the Judge’s findings are plainly wrong as the appeal is against findings of fact.  In support, counsel relied on Uni-creation Investments Ltd v Secretary for Justice [2018] 2 HKC 531 at [30].

29.  On the other hand, Ms Cheung[11] for the Company contended that Uni-creation is distinguishable as the case is not concerned with a winding up petition.  Ms Cheung instead submitted that as the Judge had only considered the affidavit evidence in rejecting the Company’s defences, the Court of Appeal is in as good a position as the Judge to consider the evidence on its own in deciding whether the Company had established a bona fide dispute on substantial grounds in relation to its defences.  Ms Cheung further submitted that the Court of Appeal (differently constituted)  had previously adopted this approach in Neo Telemedia (CACV 132/2015, 19 October 2015, Cheung, Kwan, Barma JJA)  in deciding whether the company could succeed in its appeal in seeking to strike out the winding up petition on the basis that it had a bona fide dispute on substantial grounds of the petition debt in that case.

30.  With no disrespect to Ms Lam and Ms Cheung, I also do not find it necessary to resolve this issue, since for the reasons that I will turn to below, I would dismiss the grounds of appeal on either approach.

D2.  Ground 1

31.  This ground relates to the Repayment Defence.

32.  The Judge had correctly summarized the Company’s factual allegations in support of the Repayment Defence at [7] - [10] of the Decision as follows:

“7.  I have already alluded to Ms Kan’s second line of defence.  Ms Kan says that in November 2011 she agreed with Mr Yip that ownership of the Company would be transferred back to her for the reasons I have already explained.  She says that in anticipation of this she began to look for new business opportunities. She met a Mr Simon Hon at the launch of a counter in Harvey Nicholls in Pacific Place in about November 2011.  They discussed his company, Do-Well, becoming the distributor for a cosmetics brand, Bellefontaine, produced by Mr Yip and at that time, I assume, it is not entirely clear, distributed in Hong Kong and the Mainland by Ms Kan.  The agreement that they reached involved Do-Well taking over the Harvey Nicholls counters for which Do-Well was to pay HK$2,000,000.  Ms Kan says that on learning this, Mr Yip suggested that the HK$2,000,000 be paid to him and he would use it to settle the loans owed to him and pay the balance to the Company.

8.  The Company and Mr Yip entered into agreements dated 1 March 2012 with Do-Well and HK$2,000,000 was paid to Mr Yip.  Some subsequent payments were made by Mr Yip to Ms Kan, totalling Ms Kan says in her 2^nd affirmation between HK$600,000 or HK$700,000, and consisting of two payments.  The first was made on 20 February 2012 and was for HK$300,000, which is supported by a transaction advice exhibited by Ms Kan. The second was a payment of between HK$300,000 to HK$400,000 made sometime around April 2012 according to Ms Kan, although at the time of making her 2^nd affirmation she was unable to produce any document to support the transfer.

9.  Thus says Ms Kan nothing is now owed to Mr Yip.

10.  There is nothing surprising, in fact it is what one would expect, for the acquirer of a company to ask about its existing liabilities and to seek warranties in respect of them.  To that extent the suggestion that the loans were discussed is plausible.  I note that Mr Yip has not explained why Ms Kan would have agreed to be liable to repay him or whether it was discussed.  Neither has he explained why he did not demand repayment until March 2017.”

33.  The Judge then found at [12] of the Decision that the Company had failed to establish a bona fide dispute under the Repayment Defence in accepting Ms Lam’s submissions, which were summarized at [11] of the Decision as follows:

“11.  Ms Lam submitted that to focus on the oddities in Mr  Yip’s claim was to adopt the wrong approach to determining the Petition.  She argued that the burden was on the Company to demonstrate a bona fide defence on substantial grounds and that Ms Kan’s story, that has developed during the course of her three affirmations, contains inconsistencies and falls short of satisfying the burden which the Company is under.  In particular she pointed to the following:

(1)  Ms Kan in her 1^st affirmation did not admit that the advances had been made.  She only conceded they had been when documentary evidence was adduced contradicting her evidence.

(2)  Ms Kan’s initial defence was that she had agreed with Mr Yip that any liabilities should be waived.  It was not until her 2^nd affirmation that she mentioned the payment from Do-Well to Mr Yip and argued it has been made to settle the sums due to him from the Company.

(3)  There is no corroboration of Ms Kan’s story.  There are no contemporaneous documents to support her version of events.  On the contrary the documents show two of the advances being made on 21 March 2012 and 17 July 2013 for CHF12,026 and CHF5,394 respectively, which was after the share transfer.  Also the supplemental agreement dated 1 March 2012 pursuant to which HK$2,000,000 was paid by Do-Well to Mr Yip was made between him and Do-Well and was signed by Ms Kan on Mr Yip’s behalf.  There is no reference to the Company in the supplemental agreement.

(4)(i)  Ms Lam sought to demonstrate that the payments alleged to have been payments by Mr Yip to Ms Kan in respect of the difference between the sums owed to him and HK$2,000,000 were not a settlement of sums owed by him to the Company.  Mr Yip says that the first transfer was to help Ms Kan finance a down payment on a flat and he has exhibited a memorial showing a purchase by Ms Kan in March of 2012.  It was also Mr Yip’s recollection in his 2^nd affirmation that the second payment made to Ms Kan was a payment to her, which was intended to be a loan to her Brother Matthew.  This seemed to be supported by an email that he exhibited.

(ii)  In her 3^rd affirmation Ms Kan exhibited bank transfer documents showing that Mr Yip had made transfers totalling HK$200,000 to Ms Kan, which according to the notes on the documents were not repayment of a sum due to the Company, but a loan to her Brother Matthew in June 2012. There was a further payment of HK$100,000 in December 2012 and the note on the advice says ‘settlement of divers outstandings up to the end of 2012’.  What Ms Kan does not explain is when and how the shortfall between the amount of the loan and the HK$2,000,000 was repaid.  Clearly what she says in her 3^rd affirmation is inconsistent with her 2^nd affirmation.

(iii)  Thus, submitted Ms Lam, the suggestion that the HK$2,000,000 was paid as a means to settle the debt owed to Mr Yip under an arrangement that he repay the difference is not supported by the payments to Ms Kan in 2012.  This being the case it is inherently unlikely that the HK$2,000,000 payment was made to settle the loans.”

34.  Ms Cheung submitted that the Judge had erred in this finding as the following matters clearly supported the Company’s case on the Repayment Defence.

35.  First, Ms Cheung drew our attention to the PRC and Hong Kong Agency Agreements (collectively “the Sales Agency Agreements”), the Supplemental Agreement and their previous drafts.  In relation to these documents, Ms Kan has explained at paragraph 8 of her 3^rd Affirmation as to how they had evolved into the final versions that were signed:

“8. Yip’s explanation is further contradicted by the earlier drafts of the Do-Well Agreements. There are now produced and shown to me marked ‘KPK-29’ true copies of the emails from Do-Well’s representative, Grace Xie (‘Grace’), attaching the said earlier drafts.

8.1. In the earlier drafts, the provisions relating to Do-Well’s payment of the HK$2M Sum were included as part of the Hong Kong Agency Agreement. In other words, it was the Respondent who would receive the HK$2M Sum.

8.2. It was only in Grace’s email of 28 February 2012 that a draft Supplemental Agency Agreement appeared for the first time. Crucially, in that draft, the ‘principal’ (i.e. the recipient of the HK$2M Sum)  was still the Respondent and not Yip. There is thus no question that the Respondent was the original intended recipient of the HK$2M Sum.

8.3. Instead, it is only after Yip and I reached an agreement over the Arrangement for the Sum as described in paragraph 33 of my 2^nd Aff that I nominated Yip to be the recipient of the HK$2M Sum in the final, version of the Supplemental Agency Agreement (exhibited as ‘KPK-17’ to my 2^nd Aft).”

36.  With this evidence in mind, Ms Cheung submitted that when these documents (together with their drafts)  were read together in the proper context, they supported the Company’s case that Do-Well had all along agreed to pay the Company (as the Principal)  the HK$2m in relation to the Harvey Nichols Counters.  In the premises, there was no reason why the HK$2m was eventually paid to Mr Yip instead of the Company (as now provided in the Supplemental Agreement)  other than that it was agreed between Mr Yip and Ms Kan that he would receive those payments as repayment of all the debts then owed by the Company to him, with any surplus to be repaid by him later[12].

37.  Ms Cheung therefore submitted that the Sales Agency Agreements and the Supplemental Agreement together with their drafts supported the Repayment Defence.

38.  Second, Mr Yip did in fact thereafter make various repayments of about HK$600,000 to HK$700,000 to Ms Kan (who was then the sole beneficial owner of the Company)  between February and April 2012, representing approximately the difference between the HK$2m and those parts of the loans already advanced by Mr Yip to the Company.

39.  Third, it was stated in the “Payment Details” of the remittance note of Mr Yip’s transfer of HK$91,200 to Ms Kan on 27 December 2012 (“the Remittance Note”)  that the transfer was for “SETTLEMENT OF DIVERS OUTSTANDING UPTO END OF 2012”.  This, said Ms Cheung, further lent support to the Company’s case that the various transfers made by Mr Yip to the Company after his receipt of the HK$2m were to pay back the Company the surplus after setting off the Debt.

40.  Ms Cheung emphasized that the Judge in dismissing the Repayment Defence had failed to take into account the above matters that were in support of the defence.  Had he done so, Ms Cheung further submitted, the Judge ought to have concluded that the Company had established a bona fide dispute of the Debt under the Repayment Defence.

41.  With respect to Ms Cheung, I am unable to agree.  In my view, for the following reasons, it is clear that even on the Company’s own case, the Repayment Defence is not believable.

42.  First, as pointed out by this court at the hearing, the Company’s case that the HK$2m Payment was for the repayment of the Debt is plainly inconsistent with the following objective facts:

(1)  Loan 6 was made by Mr Yip to the Company on 23 February 2012 which was after Mr Yip received HK$1m as the first tranche of the HK$2m on 18 February 2012.

(2)  In this aspect, it is beyond belief that after the receipt of this HK$1m, Mr Yip would then (on the Company’s case)  transfer HK$300,000 to Ms Kan as surplus after setting off the then existing debts on 20 February 2012, but then almost immediately advanced Loan 6 to the Company again on 23 February 2012.

(3)  Similarly, Loan 7 was made by Mr Yip to the Company on 21  March 2012, again after he received HK$1m as the second tranche of the HK$2m on 15 March 2012.

(4)  All these show that the HK$2m could not have been intended to be for the repayment of the Debt owed by the Company to Mr Yip as contended by the Company.

43.  Second, the Company’s case that the HK$2m was only agreed to be paid by Do-Well to the Company in relation to the Harvey Nichols Counters after the transfer of all the shares in the Company to Ms Kan on 27 February 2012 as supported by the fact that the various agreements were signed on 1 March 2012 is also inconsistent with the fact that the first HK$1m was already paid to Mr Yip on 18 February 2012.  Quite to the contrary, the fact that the first HK$1m was paid to Mr Yip before the transfer of the Company’s shares to Ms Kan is consistent with Mr Yip’s case that it was all along agreed that Do-Well would pay him the HK$2m for the Harvey Nichols Counters to reflect and compensate his investment in the counters and the relevant stocks made before the transfer of the shares to Ms Kan.  This is further supported by the documentary evidence that the initial outlay of funds for the Harvey Nichols Counters were all made by Mr Yip.[13]

44.  In this respect, Ms Cheung’s reliance on the Sales Agency Agreements and Supplemental Agreement as well as the Remittance Note does not assist her.

45.  In relation to the fact that the Company was originally named as the “Principal” to receive the HK$2m from Do-Well in the draft Agency Agreements and Mr Yip was only later named as the Principal to receive the sum in the Supplemental Agreement, this was explained by Mr Yip at paragraph 8 of his 3^rd Affirmation as follows:

“8. I would note that the exhibits in Ms Kan’s 3^rd Affirmation (in particular, the earlier drafts at KPK-29 of the Do-Well Agreements)  support my case completely:

(1)  In fact, at the material time of the initiation of negotiations with Do-Well, the shares in the Respondent [the Company] had not yet been transferred to Ms Kan and I was still the sole shareholder thereof. It thus follows that the earlier drafts provided for the Respondent to receive the HK$2M Sum.

(2)  As a result of the anticipated transfer in shareholding of the Respondent, it became necessary to reach an arrangement whereby my interest and investment· into the Harvey Nichols counters and stocks available remained compensated. Before the effective transfer of the entire shareholding of the Respondent, it is the same whether I or the Respondent received the consideration of HK$2 million from Do-Well. With the change in shareholding of the Respondent on 27 February 2012, it is necessary to correct agreements with Do-Well to reflect my investment in Harvey Nichols counters. This explains why the draft Supplemental Agency Agreement with the Respondent as party to contract with Do-Well came into being and why in the final signed version of the Supplemental Agreement dated 1 March 2012 thereof I was the counterparty and not the Respondent. This thus demonstrates that the HK$2M Sum was separate and distinct from my loans to the Respondent.”

46.  This explanation is credible as it is consistent with the payment pattern and the advancement of Loans 6 and 7 as identified above.  Hence, the fact that the Company was named as the “Principal” in the draft agreements to receive the HK$2m is at best neutral to the Company’s case and does not assist its contentions under the Repayment Defence.

47.  Insofar as the Remittance Note is concerned, as submitted by Ms Lam SC, the sum of HK$91,200 paid to the Company and the reference in the note to settlement of “divers outstanding upto end of 2012” plainly related to Mr Yip’s repayment of various outlays and expenses which had been paid by Ms Kan or the Company for business trips to Hong Kong, Mainland China and South East Asia, as the exact figure was supported by contemporaneous underlying documentation exhibited to Mr Yip’s 3^rd Affirmation as exhibit “YHT-23”.  This therefore does not support Ms Cheung’s submission that this transfer is related to Mr Yip’s repayment of the surplus after deducting the HK$2m from the Debt.

48.  In light of the above reasons, and also for the reasons the Judge had given in the Decision, the Judge was plainly correct to conclude that the Company had failed to establish a bona fide dispute under substantial ground in relation to the Repayment Defence.

49.  This ground of appeal failed.

D3.  Ground 2

50.  This ground relates to the Judge’s rejection of the Warranty Defence.  Under this ground, the Company now complains that the Judge had failed to appreciate the true nature of the defence, which was independent of the Repayment Defence.  In particular, it is contended that in concluding that the Company had failed to establish a bona fide dispute on substantial grounds, the Judge had not made any factual finding that the Oral Warranty was not made.  The Company further submitted that the Warranty Defence is a waiver defence in nature, in that what Mr Yip had represented to Ms Kan was in effect that he would waive all the debts owed by the Company to him by the time when the shares were transferred to her.

51.  There is no merit in this ground as the Warranty Defence is unarguable for the following reasons:

(1)  Whether it is a waiver of all existing debts (as now submitted)  or a warranty that the Company had no existing liabilities that Ms Kan did not know about and specifically agree to by the time the shares were transferred to her (as was the Company’s original case[14]), the underlying plank is that Mr Yip made the Alleged Warranty on 31  December 2011.  However, the Debt in fact consisted of four more loans advanced by Mr Yip to the Company after this date respectively on 3  January 2012 (Loan 4), 7 February 2012 (Loan 5), 23  February 2012 (Loan 6)  and 21 March 2012 (Loan 7).  It is in particular noted that Loan 7 was even made after the shares were transferred to Ms Kan on 27 February 2012.  The Warranty Defence is plainly inconsistent with these objective facts.

(2)  Further, the Warranty Defence is also factually and totally inconsistent with the Repayment Defence.  It is simply incredible that if there was indeed the Oral Warranty, the Company (through Ms Kan)  would have subsequently agreed to repay the Debt with the HK$2m Payment.  As such, the Warranty Defence is factually not believable on the Company’s own case.

52.  For these reasons, the Judge was also clearly correct to conclude that the Company had failed to establish a bona fide dispute of the Debt on substantial grounds under the Warranty Defence and was entitled to treat this defence briefly in the Decision.

E.  DISPOSITION

53.  For all the above reasons, this court dismissed the appeal with costs to be taxed if not agreed, on party and party basis.

54.  In making the above costs order:

(1)  This court rejected Ms Lam’s submissions that Ms Kan instead of the Company should bear the costs.  It is not disputed that the Company is neither insolvent, nor has it been ordered to be wound up.  There is therefore no issue that the creditors of the Company would be prejudiced by the costs order, different from the situation where a company has been wound up for insolvency[15].

(2)  This court also rejected Ms Lam’s submissions that costs should be taxed on an indemnity basis as we did not find the appeal to be so hopeless that it amounted to an abuse of process.

Hon G Lam JA:

55.  I agree with the reasons for judgment given by Au JA above, and propose to add a few words only in relation to the form of this appeal.  As mentioned by Au JA above, having regard to the fact that the Company had made a payment into court, Harris J did not make a winding up order upon handing down his Decision on 1 February 2019.  The order that was eventually made by the judge, on 16 May 2019, by consent, was as follows:

“2. Out of the sum of HK$1,200,000 paid into Court by the Company … as security for the Petition debt, a sum of HK$1,170,000 be paid to the Petitioner within 7 days hereof;

3. The Petition be dismissed with costs of the Petition to be paid by the Company to the Petitioner;

4. Paragraphs 2 and 3 above be stayed pending the final determination of the Company’s appeal to the Court of Appeal …

5.  The Petition be adjourned to the 2^nd Monday after the Court of Appeal has determined the Appeal”

56.  In its Amended Notice of Appeal the Company sought an order that: (1)  the “finding” that the Company had failed to establish a bona fide defence on substantial grounds to the petition debts be set aside; (2)  the petition be dismissed; and (3)  the petitioner do pay the Company the costs of the appeal and below.  In the light of what was actually ordered, these prayers for relief seem to me to be defective.

(1)  Item (1)  seems to me to be misconceived since an appeal lies from a “judgment or order”, not against the reasons or findings of the court as such: see section 14(1)  of the High Court Ordinance (Cap 4); Lo Kai Bun v Pong Man Yi & others (CACV 127/2006; 13 December 2006), at [17] - [19] per  Stock JA; Lake v Lake [1955] P 336.

(2)  Item (2)  is redundant since the judge actually made an order dismissing the petition.  Although that order was stayed pending the appeal, it was plainly not envisaged that the petition would be revived one way or the other.  If the Court of Appeal agreed with the judge that there was no genuine dispute of the debt, the money in court would be paid out in discharge of the petition debt, and the petition would as a consequence be dismissed.  If the Court of Appeal held that there was a genuine dispute, a fortiori the petition should be dismissed.  This prayer is also inconsistent with §5 of the Consent Order which required the petition to be called on in the Court of First Instance shortly after the appeal was determined.

(3)  Item (3), in so far as it challenged the costs order below, would, left on its own, require leave, which had not been obtained: see section 14(3)(e)  of the High Court Ordinance.

(4)  Furthermore, the entire order of 16 May 2019 was made by consent.  No leave had been obtained for appealing against an order made by consent as required by section 14(3)(e)  of the High Court Ordinance; nor has any special ground been advanced as would generally be necessary for setting aside a consent order.

57.  Accordingly I have grave doubts whether the appeal was properly constituted.  These problems might have been obviated if the Company had paid attention to them at the stage of resolving the matter at first instance.  Alternative forms of order could have been proposed to and made by the Judge with similar effect leading to the same outcome in substance. However, as the Company failed in any event for the reasons given by Au JA, I agree that the appeal should be dismissed on that basis.

Hon Chow JA:

58.  I agree with Au JA and G Lam JA’s reasons for judgments.