IN RE CHINA WIN HOLDINGS LTD.

HCCW266/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.266 OF 1998

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J U D G M E N T

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1. This is a creditor's petition to wind-up China Win Holdings Ltd. ("China Win"). The alleged indebtedness arises under a guarantee dated 9 March 1995 given by China Win to Topstart Ltd. (the Petitioner) in respect of principal and interest due to the Petitioner from China Win's subsidiary Wishful Chance Development Ltd. ("Wishful Chance") under a loan agreement dated 8 March 1995 made between the Petitioner and Wishful Chance ("the 1995 Agreement").

2. The Petition is opposed on the ground that there is a bona fide dispute as to the debt. China Win contends that the guarantee was not supported by any consideration.

3. The Petition came on for hearing on 5 October. Counsel for the Respondent submitted that the Petition ought to be dismissed because the debt is disputed. Whilst it was accepted that the court has a discretion, in such cases, the modern practice is to dismiss, rather than to adjourn, the Petition. The Petitioner must first establish the debt in a separate action.

4. From the affirmations filed by both sides, it is apparent that the disputed issue of fact is an extremely narrow one : whether there was a consensus between the parties prior to concluding the 1995 Agreement that the debt would be guaranteed by China Win, or, as is China Win's case, the request for a guarantee was only made after the 1995 Agreement had been concluded.

5. The negotiations were conducted by Meng Hai Di, the then managing director of Oriental Aluminium Co. Ltd. ("Aluminium"), the parent company of the Petitioner and Tsang Fai, the majority shareholder and director of both China Win and Wishful Chance who holds the shares as nominee for the ultimate parent Nanhai Municipal Development Group Company ("Nanhai"). Neither party had served any notice of cross-examination and no witnesses were therefore in attendance at the hearing on 5 October.

6. The opposition to the Petition stands or falls on that narrow issue of disputed fact referred to above. Plainly, that issue ought to be tried. It may be tried before the court itself or in an action, or by some other proceedings : see per Jessell MR in Re Great Britain Mutual Life Assurance Society [1880] 16 Ch D 246, 253 and Palmer's Company Law, Vol.3, para.15.214 at 15068/1. There is no inflexible rule that a disputed debt must be tried in separate proceedings. Given the narrow issue which arises in the present case, the most expedient way must be the determination of the issue by the court itself. Accordingly, directions were given at the hearing on 5 October that the deponents do attend for cross-examination, failing which their evidence would be excluded. The hearing was therefore adjourned to 3 November.

The facts

7. It is common ground that on 30 March 1993, Wishful Chance requested a loan of US$2 million from the Petitioner. On the same day, Nanhai which owns and/or controls Wishful Chance provided a guarantee to the Petitioner in respect of both principal and interest due under the loan. Although expressed to be made between the Petitioner and Wishful Chance, the loan agreement ("the 1993 Agreement") was executed by Aluminium for the Petitioner. The evidence of Mr Meng is that Topstart was and remains a wholly-owned subsidiary of Aluminium.

8. It is also common ground that repayments were made in April and July 1994 aggregating US$580,500. No further repayments have been made since that date.

9. Mr Meng was the deputy managing director of Aluminium between July 1993 and November 1994. He became managing director from November 1994 until May of 1998 when he returned to Beijing. Aluminium is owned by Orientmet Holdings Ltd. ("Holdings") which in turn is owned and/or controlled by China National Non-ferrous Metals Industry Trading Group Corporation.

10. Sometime prior to 8 March 1995, negotiations were conducted between Mr Meng and Mr Tsang regarding the outstanding loan. As noted above, the only repayments that had been made by then was only US$580,500. It is not disputed that negotiations took place prior to 8 March 1995 and that the Petitioner was pressing very hard for repayment. In fact, it was accepted by Mr Tsang that sometime after July 1994, the Petitioner wrote seeking repayment because Holdings was to be listed. Hence there was an element of urgency.

Mr Meng's evidence

11. Mr Meng's evidence was that he knew that Mr Tsang was a director of both Wishful Chance and China Win. A Mr Yu who had signed the 1993 Agreement on behalf of Wishful Chance had left the company and repayment had not been made in accordance with the terms of the 1993 Agreement. The Petitioner was therefore anxious to deal with someone in a position of power and/or authority in its discussions for repayment of the outstanding amount with a view to that amount being actually repaid. It became clear in these negotiations that Wishful Chance was not, financially, in a position to make any repayment and sought an extension. In those circumstances, the idea of a new loan agreement arose. This was to replace the 1993 Agreement. Mr Meng accepted that the idea may have originated from him. In any event, the idea was accepted inasmuch as negotiations continued on that basis. According to Mr Meng the question of a guarantee was raised and discussed during the discussions regarding extension for repayment. Mr Meng said that since there was a guarantee for the 1993 Agreement, he was certain that the Petitioner could not possibly have signed the 1995 Agreement without also requiring a guarantee. His evidence was that the parties reached a consensus regarding the guarantee before the 1995 Agreement was signed. It was put to Mr Meng whether it was possible that not having been given a guarantee on 8 March when the 1995 Agreement was signed, he called Mr Tsang on 9 March and asked for a guarantee. Mr Meng did not regard it as a real possibility because he did not consider that a guarantee could have been provided within the space of one day had the issue not been discussed and agreed earlier.

12. Mr Meng had no specific recollection of events that occurred on either 8 or 9 March 1995 given the lapse of time.

Mr Tsang's evidence

13. Mr Tsang's evidence was that the Petitioner and/or Aluminium wanted the monies due under the 1993 Agreement repaid. In the negotiations, Mr Tsang made it clear that Wishful Chance was in financial difficulties and was not in any position to make repayment. Mr Meng pressed hard for repayment and it became apparent to Mr Tsang that there was concern about the 1993 Agreement in that Mr Yu who had signed it on behalf of Wishful Chance had left the company. It was in those circumstances that a new agreement to confirm the loan was suggested. On 8 March 1995, Mr Tsang said that he was invited over to Mr Meng's office where again Mr Meng pressed for repayment. He begged Mr Meng for an extension whereupon Mr Meng placed the 1995 Agreement (which was not yet signed) before Mr Tsang and suggested that it should be signed by Mr Chan Kwai Sang who was also a shareholder and director of both Wishful Chance and China Win. Mr Tsang agreed and took it away for Mr Chan to sign. In the interim, he was invited to lunch by Mr Meng in a restaurant in the same building as Mr Meng's office.

14. Mr Tsang said that he reported to Mr Chan who agreed to sign the 1995 Agreement. This was sent back to Aluminium immediately. Mr Tsang was adamant that during the negotiations the question of a guarantee by China Win was never mentioned. Mr Tsang said that Mr Meng called him the following day (i.e. 9 March) asking for a guarantee to be provided by China Win. According to Mr Tsang, Mr Meng 'begged' him to do so because without it it would be difficult for Mr Meng to account to his superiors. Mr Tsang said that he did not want to put Mr Meng in a difficult position so he signed the guarantee. It is also his evidence that Mr Meng realized on 9 March, at the time he made the telephone call to Mr Tsang, that the Nanhai guarantee ceased to have effect when the 1995 Agreement was signed. China Win provided the guarantee simply because of a desire to assist Mr Meng. Mr Tsang apparently signed the guarantee on his own initiative and only talked to Mr Chan about it after the event. The provision of the guarantee was not relayed to Nanhai until the present proceedings were threatened. Implicit in all this is that Mr Meng had 'slipped up' when negotiating and entering into the 1995 Agreement.

Whose version of events is to be believed?

15. I have little hesitation in accepting Mr Meng's version. Mr Tsang gave the impression of having a crystal clear and detailed recollection of the circumstances relating to the signing of the 1995 Agreement. Yet, he made no mention of the change in interest rate from 8% per annum provided for in the 1993 Agreement to 9% per annum in the 1995 Agreement. It is apparent from the original of the 1995 Agreement that the figure '9' was typed or printed over some other figure that had been tipp-exed out. It is quite noticeable that the figure '9' is of a smaller size in comparison with the size of the figures appearing in the 1995 Agreement. Yet no mention was made of the circumstances relating to this alteration and who effected it although, as altered, it was initialled by Mr Chan.

16. In his 2nd Affirmation (para.5), he asserted that both he and Mr Chan were involved in the loan negotiations on the Respondent's side. That was contradicted by Mr Chan who, in cross-examination, admitted that he was not involved in the negotiations. Mr Tsang's credibility is also affected by his reluctance to accept that the loan extension was a benefit to Wishful Chance. Further, he would have the court believe that Wishful Chance was actually doing the Petitioner a favour by executing the 1995 Agreement. It is also noteworthy that the remarks contained at the end of the guarantee are wholly consistent with the Petitioner's case but not with that of China Win since its position is that the earlier guarantee ceased to have effect on 8 March when the 1995 Agreement was signed.

17. I find it difficult to accept that Mr Tsang was so ready and willing to oblige when Mr Meng made his request on 9 March. Mr Tsang's evidence was that he provided the guarantee only to assist Mr Meng and not because it was pursuant to any prior agreement between the parties. It must follow that Mr Tsang did not believe or intend the guarantee to be either effective or enforceable. As neither Mr Meng nor Mr Tsang is legally qualified, absent legal advice, in all probability neither would have been alert to the 'consideration' issue and its effect. Even if, as Mr Tsang alleges, he was told by Mr Meng that the earlier guarantee ceased to have effect when the 1993 Agreement was superseded by the 1995 Agreement, Mr Tsang never bothered to seek legal advice at the time if only to confirm that Mr Meng's understanding of the legal effect of the documents was correct. It is simply not credible that a guarantee for such a substantial amount could have been given for the purpose of assisting Mr Meng only, at least without first ascertaining the legal effect of providing such a guarantee given the potentially serious consequences for the guarantor.

18. As Mr Tsang was wearing two hats at all material times, namely, as majority shareholder and director of each of China Win and Wishful Chance, there is nothing in the point that the negotiations did not involve China Win. In 1993, the guarantee in fact preceded the 1993 Agreement. In 1995, it was the reverse. Whilst one would have expected the two documents to have come into existence contemporaneously, and there is no explanation from the Petitioner as to how they came to be dated differently, it has to be remembered that these documents were drawn up without the assistance of lawyers. Although it was Mr Tsang's evidence that the 1995 Agreement was prepared by the Petitioner and presented to him at the meeting on 8 March, this was never put to Mr Meng. Mr Meng's evidence had the ring of truth about it : these events happened a long time ago and frankly, he now has no specific recollection of the events of 8 and 9 March 1995 except that the parties did reach a consensus in the negotiations that the 1995 Agreement would be guaranteed by China Win to replace and supersede the 1993 Agreement that had been guaranteed by Nanhai.

Conclusion

19. For the reasons set out above, I accept the evidence of Mr Meng and it follows that the defence fails. Accordingly, I make an order that China Win be wound up and I also make an order nisi for costs in favour of the Petitioner.