RE TANG YAU SING

HCB 7144/2019

[2020] HKCFI 877

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 7144 OF 2019

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R E A S O N S   F O R   J U D G M E N T

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1.  At the substantive hearing of the petition presented by GF Securities (Hong Kong) Brokerage Limited (“petitioner”) on 19 November 2019, I made a bankruptcy order against Mr Tang Yau Sing (“debtor”). I said I will give detailed reasons in a judgment which I now do.

A.    BACKGROUND

2.  The following fact and matters are not in dispute.   

3.  The petition is based on the debtor’s failure to satisfy a statutory demand served on him on 21 May 2019 (“SD”).  In the SD, the petitioner demanded the debtor to pay HK$166,966,063.55 (“Debt”), which represented the outstanding principal of a loan and interest accrued up to 17 May 2019 less the value of the security estimated at HK$7,200,000.

4.  The Debt arose out of a personal guarantee dated 16 November 2017 (as amended by a supplemental deed dated 26 November 2017) (together “Guarantees”) executed by the debtor in favour of the petitioner.  The Guarantees formed part of a series of agreements whereby the petitioner agreed to advance a credit facility of HK$225,000,000 (“Loan”) to Noble Gate International Limited (“Noble”) to finance its acquisition of shares in Winto Group (Holdings) Limited (“Winto”), a company whose shares are listed on the GEM Board of the Stock Exchange of Hong Kong Limited.

5.  Under the Guarantees, the debtor agreed to pay or discharge any liabilities of Noble as if he were the primary obligor. 

6.  Apart from the Guarantees, the Loan was also secured by, inter alia, a Share Charge over all the shares in Maxace Holdings Limited (“Maxace”), a Security Deed over all the shares in Winto held by Maxace and a Security Deed over all the shares in Winto held by Noble. 

7.  By a series of supplemental agreements dated 26 November 2017, the parties agreed to increase the Loan to HK$300,000,000 and the terms of the agreements creating the security in favour of the petitioner were amended accordingly. 

8.  The debtor has been the sole shareholder and director of Noble.  Until the appointment of Receivers (as defined in §9 below), Maxace was owned and controlled by the debtor. 

9.  Noble defaulted in repayment of the Loan.  On 3 June 2019, the petitioner appointed Mr Alexander Lawson and Mr Christopher Kennedy of Alvarez & Marsal Cayman Islands Limited as receivers over, inter alia, all the shares in Maxace, as well as the shares in Winto held by Maxace and Noble (together “Receivers”).  At that time, Maxace and Noble together held 341,103,500 shares in Winto, which represented  78.96% of its issued shares as at 11 June 2019 (“Winto Shares”). 

10.  On 12 June 2019, the debtor applied to set aside the SD and for an extension of time of 18 days to make the application. 

11.  Between 6 and 28 August 2019, the Receivers sold about 21 million shares held by Maxace in Winto (equivalent to 4.96% of its issued shares).  On 2 September 2019, the Receivers entered into a sale and purchase agreement for sale of the 319 million-odd shares held by Noble in Winto.  The sale was completed on 5 September 2019.

12.  After deducting the costs and expenses incurred by the sale, the net sale proceeds of HK$46,196,638.22 were paid to the petitioner on 8 and 29 October 2019.   

13.  The application to set aside the SD was heard by DHCJ Maurellet SC on 31 October 2019 and was dismissed on the same day.  The debtor was represented by senior and junior counsel.  In his judgment [2019] HKCFI 2880 (“Judgment”), the learned judge held that:

(1)  The Receivers are agents of Noble and, accordingly, the petitioner (as mortgagee of the Winto Shares) is not liable for the acts of the Receivers (§27).

(2)  The debtor is liable to the petitioner as primary obligor by reason of clause 2.1(c) of the Guarantees (§§34 – 36).

(3)  The claim intended to be brought by Noble against the Receivers for alleged breach of duties in selling the Winto Shares at an undervalue (“Noble Claim”) cannot defeat the petitioner’s locus to present a bankruptcy petition against the debtor by reason of lack of mutuality (§§33, 37). 

(4)  The Debt is not an unliquidated claim (§41).

14.  Following the dismissal of the application to set aside the SD, on 19 November 2019, the petitioner presented a bankruptcy petition against the debtor relying on his failure to comply with the SD.  After giving credit to the net sale proceeds of the Winto Shares received by the petitioner, the petitioning debt was reduced to HK$147,639,936.83 as at 29 October 2019 (“Petitioning Debt”).

B.    DISCUSSION

15.  As the debtor has failed to comply with the SD and has not repaid the Petitioning Debt, by virtue of section 6A(1)(a) of the 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 Bankruptcy Ordinance (Cap 6) (“Ordinance”). 

16.  That the debtor is unable to pay his debts is fortified by the fact that, in addition to the Petitioning Debt, he is also liable to pay HK$105,662,465.75 owed by Noble to Shareholder Value Fund (“SVF”), which is guaranteed by him. 

17.  In his 2 affirmations, the debtor advances 3 grounds in opposition to the petition:

(1)  The Noble Claim, supported by the same valuation report adduced in his application to set aside the SD.  Although no claim has been brought against the petitioner, the debtor reserves his right to sue the petitioner if it is “part of engineering and benefitting from a situation of under-value selling the Winto shares”.  As he is the sole shareholder of Noble, and Noble does not have any other liability, “every dollar recovered by Noble, is an extra dollar to creditors”.

(2)  A long time acquaintance, Mr Doni Kusno Handoyo (“Mr Handoyo”), agreed to advance a loan of US$25 million which is available for drawdown within 90 days from 31 December 2019.  This shows that the debtor has available funds and that he is “commercially sound” and can repay his debts. 

(3)  An unsecured creditor of the debtor, to whom HK$1.63 million is owed, is of the view that the petition should not be proceeded without the debtor first obtaining the loan from Mr Handoyo and/or dealing with the Noble Claim.  The creditor will provide a signed copy of a confirmation letter to confirm his view. 

(4)  The debtor holds “a CPA licence to carry out accounting, financial advisory and other regulated activities and acts as CFO and company secretary of listed companies”.  A bankruptcy order would be “unduly harsh” on him, and would end his career. 

18.  At the callover hearing on 13 January 2020, the debtor, through his counsel, asked for a short adjournment of the petition on the basis that he would soon draw down the US$25 million loan to repay his debts.  The petitioner did not oppose the proposed adjournment, and the petition was adjourned to a date not before 6 April 2020.   

19.  At this hearing, the debtor asks for a further adjournment of the petition on the ground that due to COVID-19, he has not been able to travel out of Hong Kong to meet with certain (unidentified) “white knight” with a view to obtain new financing, or to meet with his creditors to discuss how to restructure his debts.

20.  I deal with these grounds in turn. 

B1.  Noble Claim

21.  As stated in §13(3) above, the issue whether the Noble Claim is a cross claim against the petitioner has already been determined by DHCJ Maurellet SC.   

22.  Although the learned judge said (at §40 of Judgment) that the existence and viability of the Noble Claim is “something which the Debtor can, if he thinks appropriate, bring to the attention of the Bankruptcy Judge and make such point as he considers appropriate”, I do not think it is open to the debtor to re-litigate the same issue as a ground in opposition to the petition.  There are 2 reasons for this.

23.  First, the principle of res judicata precludes a debtor from relying on the same ground already raised and determined by the Court in an application to set aside a statutory demand at the hearing of the bankruptcy petition unless there was a material change of circumstances (Chan Yuk Lun v Chan Ying Chit [2015] 1 HKLRD 501 §§9 – 11, per Godfrey Lam J).  The principle was accepted by senior counsel for the debtor at the hearing of the application to set aside the SD (see §23 of Judgment).

24.  Second, as submitted by Mr Michael Lok, counsel for the petitioner, in opposing a bankruptcy petition, 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).   

25.  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 §15) 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.”

26.  The same principle must apply when considering whether the debtor can rely on a cross claim as a ground in opposition to the petition.  This is because unless the cross claim is one which is (or can be) made by the debtor against the petitioner, there would be no basis for the debtor to contend that such claim, if established, would extinguish the petitioning debt relied on by the petitioner.  This is consistent with the statutory scheme of bankruptcy, which envisages a debtor relying on a counterclaim or cross demand which exceeds the amount of the debt specified in the statutory demand (rule 48(5)(a)) as a ground to set aside the statutory demand.  If that application fails, the petitioner is entitled to present a petition against the debtor (see section 6(2)(d) of the  Ordinance).  There is nothing under the Ordinance to suggest that while a debtor cannot rely on a cross claim which lacks mutuality as a ground to set aside a statutory demand, he can rely on the same cross claim as a ground in opposition to the petition. 

27.  In any event, it is now clear that contrary to the debtor’s assertion in his affirmation that Noble has “no outstanding debt/liabilities”, in fact, Noble is indebted to SVF in the amount of HK$105,662,465.75.  At the hearing, the debtor confirms the existence of this liability and accepts that the assertion in his affirmation is incorrect.  In light of the substantial liabilities owed by Noble, the debtor’s assertion that if the Noble Claim is successful, there will be recovery to his creditors cannot be accepted, even assuming Noble has the requisite fund to pursue the claim (which has not been shown).

B2.  US$25 million loan

28.  Despite the adjournment, the debtor has not been able to draw down the US$25 million to repay the Petitioning Debt.  The debtor has not proffered any explanation on this, other than a general assertion made during the hearing that owing to COVID-19 and the global economic downturn, he has not been able to obtain any loan from any lender.   

B3.  View of unsecured creditor

29.  Contrary to the debtor’s assertion in his affirmation, the unsecured creditor has not provided any written confirmation, let alone a signed one, to say that no bankruptcy order should be made.  This is not surprising, as the debtor has not even been able to draw down the US$25 million said to have been secured for the purpose of repaying the Petitioning Debt.   

30.  In any event, I do not think the view of the debtor’s unsecured creditor is relevant to the petition, at least one based on failure to comply with statutory demand.  This is because unlike winding up proceedings, which is a class remedy with procedure designed for creditors of the debtor company to participate in the proceedings, viz., (1) rule 30[1] allows every persons who intends to appear on the hearing of the petition to file a notice of intention to appear on petition; (2) rule 31 requires the petitioner to prepare and make available a list of the persons who have given notice of their intention to appear on the hearing of the petition; and (3) rule 33 allows any creditor or contributory to apply for substitution as the petitioner, the Bankruptcy Rules (Cap 6A) do not have such procedure. 

B4.  Personal consideration  

31.  The debtor has not explained why a bankruptcy order would put an end to his career.  Even assuming it would have such an effect, I do not think it is a relevant consideration.  In deciding whether a bankruptcy order is to be made, the Court is concerned with whether the petitioner has made out the statutory requirements prescribed in sections 6 to 6D of the Ordinance.  Once those requirements are met, the petitioner is entitled to seek a bankruptcy order against the bankrupt, which would bring into the operation of a statutory scheme for dealing with assets and liabilities of the debtor, to ensure that there is a fair and rateable distribution of assets amongst the creditors. 

B5.  Further adjournment   

32.  Other than the bare assertions made by the debtor at the hearing, there is no evidence, still less documentary evidence, to show that the debtor has during the period of adjournment taken steps to obtain new financing and to obtain the agreement of his creditors to compromise or restructure the debts owed.  The debtor has had almost a year from the date the SD was served on him to arrange his financial affairs, but he has not been able to secure any agreement from his creditors or new financier.  I do not think there is any basis for the Court to grant a further adjournment of the petition.