RE TAO WENGUANG

HCB 3813/2019

[2020] HKCFI 2348

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3813 OF 2019

_______________

_______________

________________

J U D G M E N T

________________

1.  There is before the Court a petition presented by the petitioner, IMC Development & Management Limited (“petitioner”), on 26 June 2019 seeking a bankruptcy order against Mr Tao Wenguang (“debtor”).

2.  The petition is based on the debtor’s failure to satisfy a statutory demand dated 20 May 2019 (“SD”) whereby the petitioner required the debtor to pay HK$3,421,841.72 (“Debt”), being the unpaid principal due under a HK$3,500,000 loan advanced by Mr Frank Wen King Tsao (“Mr Tsao”) to the debtor on 18 July 2014 (“Loan”), less repayment of HK$78,158.28 together with interest accrued.  The SD was served on the debtor on the same day.

3.  Although a number of affirmations were filed on behalf of the petitioner, other than an affidavit to verify the statements in the petition (which was made by a director of the petitioner), all the affirmations were made by the petitioner’s solicitor, who does not have any personal knowledge of the fact relating to the Loan or the cross-claim raised by the debtor. 

Background

4.  The following fact is taken from the documents exhibited to the debtor’s affirmations or from the fact stated in the debtor’s affirmations which the petitioner has not disputed. 

5.  Mr Tsao was the founder and owner of the “IMC Group”, which comprises various companies and entities carrying on business in the Mainland, Singapore, Japan, Malaysia and Myanmar.  The ultimate holding company of the Group is Tsao Holdings Ltd.  Until his demise in August 2019, Mr Tsao managed and controlled the business of the Group and was the final decision maker on all matters.   

6.  For present purpose, only the following companies in the Group are relevant:

(1) the petitioner, a Hong Kong company engages in provision of management services;

(2) Genius Investment Corporation (“Genius”), a Panamanian company which holds, inter alia, all the shares in Suntec Investment Pte Ltd (“SIPL”) and Suntec Property Ventures Pte Ltd (“SPV”) and;  

(3) SIPL, a Singapore company which holds a number of subsidiaries in Hong Kong; and

(4) SPV, a Singapore company which holds various property development projects in Singapore.

7.  The debtor was employed by the Group on 25 October 2010 and worked as the personal assistant to Mr Tsao, responsible for dealing with any investments or affairs of the Group assigned to him by Mr Tsao. 

8.  In 2012, Mr Tsao decided to invest in Singapore and acquired SIPL for that purpose.  The debtor was appointed as an executive director of SIPL, responsible for business development and was assigned to work in Singapore. 

9.  In mid-2013, Mr Tsao set up SPV whose management team included 4 directors namely, the debtor, Ms Chan Yeow Toh (“YT Chan”), Mr Tan Chin Nam and Mr Tan Kian Hoon (collectively “4 Directors”) and a general manager, Mr Arthur Wang. 

10.  In a memo entitled “Incentive Scheme and Participation by Management in Property Development Projects” dated 29 May 2013 signed by Mr Tsao (“2013 Memo”), it was stated as follows:

“1. The purpose of this paper is to document the rationale and mechanics for management to participate in property development projects undertaken by IMC / Suntec Group, which [sic] to control and manage the risk as well as to incentivise management when undertaking property development projects.

2. It noted that the IMC / Suntec Group intend to make foray into the property development market in Singapore by forming joint-ventures with suitable local partners. This will also bring more business opportunities to our real estate consultancy arm.

3. One such opportunity arose when we were introduced to the CNQC Group in Singapore. In a recent Executive Condominium land tender exercise, CNQC was the successful tenderer of a piece of land in Woodlands Avenue 5 for the development of an Executive Condominium (‘EC’) project. We approached CNQC to take a small stake in this EC project and we have successfully negotiated to take up a 15% stake in the project.

4. IMC / Suntec Group will be incorporating a new company in Singapore to be known as Suntec Property Ventures Pte Ltd (‘SPV’) as the vehicle to invest in this EC project as well as other property development projects in the future. SPV will be a wholly-owned subsidiary of Genius Investment Corporation.

5. During our various discussions with CNQC, we understand that CNQC requires its management team to co-invest in a portion of each of their property development project. It believes that by doing so, it can effectively align the interest of the management with that of the company. In this way, the management will be more mindful of their responsibility in the projects (management will share in the losses should a project fail).

6. On learning that this scheme being practised by CNQC, Tan Sri Dr Frank Tsao (‘Chairman’) was also keen to implement this same practice in SPV to control the risk. Chairman has decided that for all future projects, whenever practicable, management of SPV should participate in an additional 1% of the project.

7. However, Chairman understands that certain team members may face funding problem to participate in this scheme. Therefore he has approved that each member of the management team may borrow S$50,000 for participation in this scheme as long as the member also contributes at least S$50,000 of his own funds. The interest-free loan will be repaid when the relevant project development is completed and capital returned to the shareholders (i.e. including SPV’s management) of the property development company.

8. This scheme will be separate from the normal management incentive scheme for the management staff of SPV. For the management incentive scheme, Chairman will implement a scheme where up to 20-30% of net profit of each project will be awarded to the management team of SPV.” (underlined added)

11.  As can be seen from the 2013 Memo, Mr Tsao mentioned 2 different schemes. 

(1) The first scheme concerned the management team’s contribution of 1% to the capital required for the projects undertaken by SPV. For this purpose, Mr Tsao would advance an interest free loan of S$50,000 to each member of the team for each project if that member contributed S$50,000 of his own funds to such project (see §§1, 6-7) (“Participation Scheme”).

(2) The second scheme concerned the implementation of a scheme to incentivise the management team who would undertake the property development projects by awarding up to 20-30% of net profit of each project to the management team (see §§1, 8) (“Incentive Scheme”).    

12.  Shortly afterwards, SPV was incorporated and became the joint venture partner of Qingjian Realty (South Pacific) Group Pte Ltd (“Qingjian”) in developing 2 Executive Condominium projects in Woodlands and Anchorvale, Singapore.  The names of the JV companies are Qingjian Realty (Woodlands) Pte Ltd (“QRW”) and Qingjian Realty (Anchorvale) Pte Ltd (“QRA”). 

13.  Pursuant to the directions of Mr Tsao on the Participation Scheme, 2 loans in the amount of S$50,000 each were advanced by Genius to the debtor.  In the Loan Agreement dated 25 June 2013 and duly signed by both parties (“Loan Agreement”), it was stated in the preamble that the debtor is a member of the management of SPV, which held 15% interest in QRW and QRA. 

14.  In an undated and unsigned memo also entitled “Incentive Scheme and Participation by Management in Property Development Projects” (“Unsigned Memo”), it was stated as follows:

“1. Following the approval of the memorandum on the Incentive Scheme and Participation by Management in Property Development Projects by [Mr Tsao] on 29 May 2013, this paper is to review the incentive scheme where up to 20-30% of the net profit will be awarded to the management team of Suntec Property Ventures Pte Ltd (‘SPV’). The final proposed percentages will be around 25% of net profit which is the mid-point of the range.

2. The management team eligible for the incentive scheme will include the 4 board members of SPV, namely [the debtor], Mr Tan Chin Nam, Mr Tan Kian Hoon and Ms Chan Yeow Toh, as well as Mr Arthur Wang Yu.

3. The initial proposal for the distribution of the incentive pool is as follows, based on the expected duties and responsibilities:-

[debtor]	32%
Mr Tan Chin Nam	25%
Mr Arthur Wang Yu	20%
Mr Tan Kian Hoon	13%
Ms Chan Yeow Toh	10%
	100%

4. The final distribution percentages will be subject to further adjustments based on the actual contributions to the projects and to the company.” (underlined added)

15.  In July 2014, the debtor was in need of fund and asked Mr Tsao to advance a HK$3.5 million loan to him which he did.  The Loan is evidenced by a handwritten memo dated 16 July 2014 from Mr Tsao to YT Chan (“Loan Memo”), which stated as follows:

“I intend to give a loan to [the debtor] amounting to HK dollars three and a half million (HK$3.5 million) for 30 years with 1% interest per annum repayable in 30 years. There is a condition that [the debtor] should not leave IMC Group. The loan will immediately due to payment once he leaves IMC Group. You can debit my personal a/c now stands at about 17 million US dollars”.

16.  The debtor counter-signed on the Loan Memo (which had been typed-up) to acknowledge receipt of the Loan on 18 July 2014. 

17.  According to the corporate charts of the Group, as at 19 May 2014, SPV held 15% interest in a “Woodlands EC Project” and a “Anchorvale EC Project”, which are the same projects mentioned in the Loan Agreement. 

18.  By 2015, SPV had invested in 4 projects alongside with Qingjian.  Apart from its 15% equity in QRW and QRA, SPV also had 15% and 25% interest in 2 other projects referred to as “Visionaire” and “Inz Residence” (collectively “4 Projects”).

19.  In October 2015, Mr Tsao (then at the age of 91) stated his intention to gradually pass the helm to his daughter, Dr Mary Ann Tsao (“Dr Tsao”).  In a memo dated 4 October 2015 (“2015 Memo”), Mr Tsao said that (1) he would hand over the family business to Dr Tsao to oversee it, and (2) going forward and as part of the succession of management, the process and policies outlined therein would take immediate effect.  In essence, while Mr Tsao remained the final decision maker, all instructions to be issued by him and all papers submitted to him for approval must first be endorsed by Dr Tsao and YT Chan.  All reports submitted to Mr Tsao must be copied to Dr Tsao and YT Chan.

20.  Prior to the termination of his employment with effect from 4 May 2016, Arthur Wang had requested the Group to pay his share of the bonus under the Incentive Scheme, but no such payment was made to him.  Arthur Wang brought a claim at the Labour Tribunal for payment of the amount due to him, which was subsequently withdrawn. 

21.  In an email dated 4 May 2016 from Dr Tsao to the 4 Directors entitled “SPV directors’ incentive scheme” (“2016 Email”), Dr Tsao said as follows:

“As you know, there is an investment scheme my Father devised for SPV directors in the Qing Jian investments, where directors can receive a matching S$50K interest free loan to invest in these projects, and in which the directors participated in varying degrees. The scheme is ongoing, and the good news is that the first Qing Jian project is due to deliver 70% return on investment as previously projected.

In the 2013 memo reflecting the above, there was also a clause mentioning the possible implementation of a profit sharing scheme for Qing Jian projects under SPV. This came to my attention recently, and after careful consideration and discussion with my family, we concluded that my father’s initial intent for a merit based incentive doesn’t apply in the current situation – given that we are a minority shareholder in a relatively low risk project where our team has limited space to improve upon the bottom line in any significant way, nor requiring effort that is above and beyond what is expected of our team. In any event, my Father did not indicate to me any intention of implementing this scheme at the present, nor did he leave any detailed instructions for this scheme.

In this regard, I would like to inform you that the clause pertaining to the above in the 2013 memo has been cancelled. I trust you don’t have issues with this. Please feel free to discuss with me if you have further questions or would like a copy of the relevant documents.” (underlined added)

22.  In February 2018, the Group requested the debtor to sign a new agreement in respect of the Loan but no agreement was reached between the parties.  This was followed by the Group deducting a sum of HK$13,026.38 per month from the debtor’s salary as repayment of the Loan until his employment was terminated with effect from 28 July 2018.

23.  By a Deed of Assignment dated 13 May 2019 signed by Dr Tsao and another person as joint attorneys of Mr Tsao, all the rights, benefit, interest and title to, in and under the Loan (less the 6 monthly repayments of HK$13,026.38 from February 2018 to July 2018) were assigned to the petitioner absolutely.

24.  A notice of assignment dated 20 May 2019 was given to the debtor, directing him to make all future payments to the petitioner.

25.  Mr Tsao passed away in August 2019.

Discussion

26.  The relevant principles are well established. 

27.  Where, as here, the debtor has failed to comply with the SD in respect of the Loan which he does not dispute, by virtue of section 6A(1)(a) of the Bankruptcy Ordinance (Cap 6) (“Ordinance”), the petitioner has discharged the onus of showing that the debtor is unable to pay his debt, as required by section 6(2)(c) of the Ordinance.   

28.  The burden is on the debtor to show a bona fide dispute on substantial grounds by adducing sufficiently precise factual evidence which is believable.  Where the debtor seeks to rely on a cross claim, he has to show that the cross claim has substance and that the claim exceeds the amount of the petitioning debt (Re Shang Lili, unrep., HCB 5329/2014, 25 January 2016, §§10 and 24, per Ng J). 

29.  To constitute a bona fide cross claim for the purpose of resisting a bankruptcy petition, the claim must be one which is or may be brought by the debtor against the petitioner.  The requirement of mutuality of a cross claim, in the context of an application to set aside a statutory demand, has been explained by Le Pichon JA in Wong Wai Lin Lana v Heung Wah Wing & Ors [2001] 3 HKC 649 (at 654C-F) in this way:

“As a matter of construction, para (a) of r 48(5) must contemplate that the counterclaim, set-off or cross demand in question be against the petitioning creditor since the fact that the debtor appears to have a counterclaim, set-off or cross demand against someone else would be entirely irrelevant. This is reinforced by the phrase ‘equals or exceeds the amount of the debt’. The significance of this is that if the amount of the counterclaim, set-off or cross demand equals or exceeds the amount of the debt, then in the event of the counterclaim etc, succeeding, the debt supporting the petition would be extinguished. Indeed, the injustice of not setting aside the statutory demand where the debt is capable of being extinguished by the counterclaim, set-off or cross claim is apparent and, undoubtedly, is the rationale underlying the provision. Certainly, extinguishment of the debt requires that there be mutuality. Whilst a characteristic of the legal right of set-off, it is not the preserve of the right of set-off. In my judgment, mutuality is an essential ingredient of paragraph (a) and it makes no difference that what the debtor appears to have is a counterclaim, or cross demand rather than a set-off.”

30.  Ms Kareena Teh, solicitor for the petitioner, submits that a bankruptcy order should be made against the debtor.  Her submissions boil down to 3 main points. 

31.  First, there is no bona fide dispute to the Debt, given that the debtor admits the Loan and the fact that upon his departure from the Group, the “condition” stipulated in the Loan Memo ceased to exist.  The petitioner (as assignee of the Debt) was entitled to serve the SD on the debtor, and the debtor’s failure to comply with the SD demonstrate his inability to pay the Debt. 

32.  Second, the documents produced by the debtor do not support his contention that the Incentive Scheme existed in that:  

(1) The 2013 Memo concerns “a totally different scheme”.

(2) The provenance of the Unsigned Memo is “unknown and doubtful” and, in any event, its wordings are uncertain on the material aspects such as the portion of net profit to be distributed and the shares of the recipients. 

(3) It is clear from the evidence that the Incentive Scheme mentioned in the 2013 Memo had never been implemented and was terminated by Dr Tsao in May 2016.

33.  Third, under the Incentive Scheme, the bonus would be payable by SPV to the debtor.  There is no evidence that the petitioner has received any profits generated by the 4 Projects or that it has any liability to pay such bonus to the debtor.  There is no mutuality between the debtor’s claim for the bonus and his liability to repay the Loan to give rise to a bona fide cross-claim for the purpose of resisting the petition.

34.  The debtor does not dispute that he received the Loan and that the same has not been repaid.  Nor does he dispute that the “condition” stipulated in the Loan Memo has since his departure from the Group in July 2018 ceased to exist.  His case is that:

(1) At the time the Loan was granted by Mr Tsao to him, he promised to repay the Loan upon receiving the bonus from the Incentive Scheme.  He made that promise because at that time, the 2 projects for which he had been responsible (i.e. “Woodlands EC Project” and “Anchorvale EC Project”) had already been completed and he estimated that he would receive around HK$6.8 million by way of bonus under the Incentive Scheme.  Mr Tsao agreed to his request and the explanation given.

(2) By 2015, the profit after tax of the 4 Projects was S$39,550,851 and, taking a median of the 20-30% range of bonus mentioned in the 2013 Memo (i.e. 25%), the total bonus payable to the management team would be S$9.8 million and his share would be $3.2 million (being 32% of the total bonus), equivalent to around HK$18 million.

(3) Mr Tsao had operated the Group as a whole and treated all the companies as his own, and he used different companies to carry out his commercial purposes and the employees (including the debtor) followed his instructions without any question.  It is wrong for the Group to seek to use different legal entities within the Group and argue that the liability to pay the bonus is separate from the Loan.   

(4) After setting off the bonus payable to him, the Group should pay him around HK$13.9 million.   

(5) Dr Tsao had no right to cancel the Incentive Scheme unilaterally in May 2016, given that the debtor (and the management team) had already performed their work on the 4 Projects and was entitled to be paid the bonus in accordance with the Incentive Scheme.  Moreover, Dr Tsao’s decision has never been endorsed by the management team of the SPV (i.e. the 4 Directors).

(6) Throughout his employment, the debtor had utmost respect and trust for Mr Tsao, and he believed that the Group would pay the bonus to the management team in accordance with Mr Tsao’s instructions as stated in the 2013 Memo. 

(7) In 2018, the debtor had repeatedly requested the new management to pay the bonus to the management team in accordance with the Incentive Scheme and to apply his share of the bonus to repay the Loan, but they used various excuses to delay his requests.  Prior to his departure from the Group, in all the discussions he had with the Group, the debtor made it clear that the repayment of the Loan must be dealt with at the same time as the payment of bonus. 

35.  In my view, the debtor has demonstrated that there is a bona fide dispute on substantial ground that the Loan was advanced to the debtor on the basis that it would be repaid out of the bonus payable to him and, as the bonus has not been paid to him, the petitioner (as assignee of the Debt) is not entitled to demand repayment of the Debt.  His case is supported by the documents produced and the fact and matters stated in his affirmations.  I do not think it is open to Ms Teh to cast doubt on the veracity of the documents relied upon by the debtor or the fact stated in his affirmations, when the petitioner has not asked the persons who have personal knowledge of the matters to make affidavits to raise such dispute.  It seems to me that for this reason alone, the petition must fail as the factual issues raised by the debtor have not been disputed by the relevant persons.     

36.  Nevertheless, in case this matter goes further, I set out below the further reasons why I consider the debtor’s case constitutes a bona fide cross-claim which exceeds the amount of the Debt.

37.  First, there is at least a triable issue that the Incentive Scheme was approved by Mr Tsao whose decision was binding upon the Group.

(1) Contrary to the petitioner’s contention, the wordings used in the title and §1 of the 2013 Memo both suggest that Mr Tsao had approved 2 separate schemes, which concerned the management team’s participation in the projects to be undertaken by SPV (i.e. the Participation Scheme) and the payment of bonus to the management team in undertaking such projects (i.e. the Incentive Scheme).

(2) The wordings used in §8 of the 2013 Memo were sufficiently certain, as it stated that “[Mr Tsao] will implement a scheme where up to 20-30% of net profit of each project will be awarded to the management team of SPV”. 

(3) There is no dispute that Mr Tsao owned and controlled the Group and was its ultimate decision maker on all matters. 

38.  Second, it is at least arguable that the decision made by the “family” in early 2016 (as mentioned in the 2016 Email) could not retrospectively revoke the Incentive Scheme, given that:

(1) It has not been explained why Dr Tsao or the “family” could have the requisite authority to revoke Mr Tsao’s decision or to make any decision on behalf of SPV (absent any evidence to suggest that Dr Tsao or the “family” were directors of SPV).

(2) By May 2016, the management team already completed all the projects on the understanding that the Incentive Scheme had been approved by Mr Tsao.  As such, there may be argument by the debtor that even if Dr Tsao and the “family” had the authority to revoke Mr Tsao’s decision or to make such decision on behalf of SPV, they were estopped from doing so. 

(3) Many of the reasons given in the 2016 Email were matters already known to Mr Tsao at the time he signed the 2013 Memo and, therefore, may not be proper grounds for revoking Mr Tsao’s decision.

39.  Third, it is also arguable that the wordings used in §8 of the 2013 Memo suggest that the liability to pay the bonus under the Incentive Scheme was a liability of Mr Tsao and SPV was his vehicle for that purpose.  This is reinforced by the fact that at the time of the 2013 Memo, SPV had not even been incorporated.  It is thus arguable that there is mutuality between the liability of the debtor to repay the Loan (which was until the assignment owed to Mr Tsao) and the liability of Mr Tsao to pay the bonus (which was subsequently assumed by  SPV after its incorporation).  As the liability already existed at the time  the Debt was assigned to the petitioner, the petitioner must take the benefit of the Debt subject to its existing liability.

40.  For the above reasons, I dismiss the petition.  I make a costs order nisi that the petitioner do pay the costs of the debtor and of the Official Receiver, to be assessed by way of gross sum assessment. As the debtor acts in person, his costs will be assessed in accordance with Order 62 rule 28A of the Rules of High Court (Cap 4).  I direct the debtor and the Official Receiver to lodge their respective statements of costs within 7 days of this Judgment.  The petitioner do provide its comments, if any, within 3 days thereafter.