RE LI XIAOMING

CACV 546/2019

[2021] HKCA 779

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 546 OF 2019

(ON APPEAL FROM HCB NO 6083 OF 2018)

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REASONS FOR JUDGMENT

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Hon Kwan VP (giving the Reasons for Judgment of the Court):

1.  On 15 November 2019, Deputy High Court Judge William Wong, SC made a bankruptcy order against Li Xiaoming (“the debtor”). This is his appeal and the reasons of the court for dismissing his appeal at the conclusion of the hearing.

Background

2.  The background giving rise to the petitioning debt in the region of US$5 million was set out in the judge’s decision (“the Decision”) at §§7 to 23.  The salient facts have been summarized in the judgment of the Court of Appeal (Kwan VP and Yuen JA) on 10 June 2020^[1] at §§4 to 11.2:

“4.  The Petitioner presented a bankruptcy petitionagainst the Debtor based on a statutory demand dated 26 July 2018.  The Debtor had not applied to set aside the statutory demand and did not dispute the amount of the debt.  The petition is based on a debt arising from a settlement agreement dated 13 February 2018 (“the Settlement Agreement”). 

5.1.  The background to the Settlement Agreement is as follows.  It is common ground that on 9 September 2009, a share sale and purchase agreement (“the 2009 SPA”) was executed whereby the Petitioner agreed to invest in the Debtor’s company Prosper Huge Limited (“Prosper Huge”) by acquiring shares therein.  The investment was for an anticipated mining project in Cambodia (“the project”). Apart from the Petitioner, there were other investors in the project.

5.2.  On the same day as the 2009 SPA, a document entitled “Irrevocable Guarantee” (“the Guarantee”) was also executed by the Petitioner and the Debtor.  In brief, it provided that the guarantor guaranteed, in favour of the Petitioner, Prosper Huge’s performance of the 2009 SPA.  The signature page contained three places for signature by: (1) the Debtor who was named as guarantor; (2) Prosper Huge as seller; and (3) the Petitioner as purchaser.  The Debtor signed in the place for Prosper Huge.

6.1.  Nevertheless, in a supplemental agreement made in 2014 (“the 2014 Supplemental Agreement”) which the Debtor signed on behalf of Prosper Huge, it was recited that he had provided each investor with an irrevocable guarantee^[2]. 

6.2.  Further, in another supplemental agreement dated 22 May 2015 (“the 2015 Supplemental Agreement”), which the Debtor again signed on behalf of Prosper Huge, it was agreed in clause 4 that once the investors received the funds stated therein, the debtor-creditor relationship between the Debtor and the investors in relation to the investment would be immediately terminated^[3]. Further, it was agreed in clause 5 that if the investors did not receive the funds stated therein by 31 December 2015, the investors would issue proceedings in the Hong Kong court against the Debtor^[4].   

7.  Further, on 9 February 2018, the Debtor signed a memorandum recording a timetable for repayment by the Debtor of the principal and interest for the project^[5]. 

8.  Also, at about this time, there was correspondence between the in-house legal advisers of the Debtor and the Petitioner^[6] respectively on the drafting of a settlement agreement. 

9.1.  On 13 February 2018, five representatives of the investors (including the Petitioner) went to the Debtor’s office where they had negotiations with him for the rest of the day. 

9.2.  That night, the Settlement Agreement (and [three]^[7] other agreements) were signed by (among others) the Debtor.  It recited (among other things) that the Debtor had provided an irrevocable guarantee for Prosper Huge^[8].  Under the Agreement, the Debtor agreed to repay certain funds to the Petitioner by 30 June 2018. 

10.  When the Debtor failed to do so, the Petitioner served a statutory demand on him on 26 July 2018, followed by the petition.  The notice of hearing, stating the identity of the Judge, was issued on 8 May 2019.  …

11.1.  The Debtor opposed the petition.  He did not dispute that he had signed the Settlement Agreement but argued that he had signed it under duress, both physical duress in that he alleged the five representatives did not allow him to leave his office until he signed it^[9], and economic duress in that he alleged that they threatened to make a report about him to the Hong Kong Stock Exchange to jeopardize a reverse takeover transaction on which he was working.  The Petitioner denied there was either form of duress.

11.2.  It should be noted that in his affirmations opposing the petition, the Debtor asserted that he had not personally guaranteed Prosper Huge’s obligations under the 2009 SPA and that repayments made were not done in his personal capacity.”

The Decision

3.  The judge analysed the evidence and found there was no substance in the defence of physical duress or economic duress^[10]. He held that the debtor failed to discharge his burden that there are bona fide disputes on the issue of duress.  In short, he found the debtor’s allegations incredible and not capable of being believed.

4.  Some of the reasons given for rejecting physical duress overlapped with economic duress.  The ones relevant to economic duress are as follows: just four days prior to signing the Settlement Agreement, the debtor willingly signed the Memorandum (in which he agreed to repay a total of US$77.9 million odd to investors of mining projects in Cambodia and Mongolia including Wang Le Tian (“LT Wang”; sole shareholder of the petitioner); there is no evidence the debtor protested after he signed the Settlement Agreement, he did not apply to set aside the statutory demand, he only raised the defence of duress when he filed evidence to oppose the petition on 2 January 2019; he had not even tried to avoid the Settlement Agreement at the first available opportunity, at least shortly after the Reverse Takeover deal fell through (“RTO Deal”); the debtor is a seasoned businessman and he voluntarily signed the 2014 Supplemental Agreement and the 2015 Supplemental Agreement which contained clear statements of fact inconsistent with his present stance that he did not provide a personal guarantee for Prosper Huge and had not incurred any personal liability; the email dated 28 September 2018 from Ms Zhang to YH Wang stating that LT Wang’s side was preparing an open letter and would disclose details of the dispute with the debtor to other investors and organisations such as the Stock Exchange of Hong Kong (“SEHK”)^[11] could not amount to sufficiently precise factual evidence showing how the five individuals who went to his office on 13 February 2018 had threatened to jeopardise the RTO Deal; the five individuals never submitted any report to the SEHK despite the debtor’s failure to abide by the terms of the Settlement Agreement; the debtor had the independent advice of YH Wang, a qualified solicitor in Hong Kong, not only on 13 February 2018 but also on the days leading up to and after 13 February 2018.

5.  The judge also analysed the allegations of duress against the contemporaneous documents^[12] and concluded that the objective facts in the documents do not sit well with the debtor’s case of duress.  These documents were: an email of 10 September 2019 from YH Wang to Ms Zhang enclosing a draft supplemental settlement agreement in which the Supplemental Agreement was referred to and relied upon in the recital; the payment of US$650,000 by a company of the debtor to Li Bing (the shareholder of one of the investors in the Settlement Agreement) in June 2018; the payment of RMB 400,000 to LT Wang’s corporate vehicle in February 2019 after the presentation of the petition; draft settlement agreements sent to YH Wang by Ms Zhang from 6 to 12 February 2018 indicating changes were made to the drafts, contrary to the debtor’s assertion that the five individuals refused to allow him to make any changes; WeChat message dated 7 January 2019 from one of the five individuals relaying a message from the debtor that he was trying his best to prepare some funds and that his opposition to the petition was only to buy time.

6.  For the above reasons, the judge found on the evidence there is no substance in the defence of duress and made a bankruptcy order against the debtor.

The grounds of appeal

7.  Three grounds of appeal^[13] were pursued by Mr Anson Wong, SC^[14] for the debtor:

(1)  The judge was wrong to find there was “sufficient contemporaneous documentary evidence which support the Petitioner’s case that the Debtor had personally guaranteed Prosper Huge’s liabilities under the 2009 SPA”^[15].  This was an error of law or a misapprehension of material facts.  Had he found that the debtor had not provided a personal guarantee for Prosper Huge by signing on the Guarantee in the manner as described, the judge would have assessed the evidence relating to duress differently and would be more inclined to regard as illegitimate the demand of the five individuals for the debtor to assume personal liability for the first time by signing the Settlement Agreement.

(2)  Based on the premise in (1), the judge was wrong to reject the defence of economic duress.  Further, the judge was in error in his analysis of the evidence and should have concluded that the debtor’s case raised a bona fide dispute on substantial grounds which can only be resolved at a trial.

(3)  The judge was wrong in refusing to recuse himself from the proceedings as the debtor had previously retained the judge (in his capacity as senior counsel) in a separate matter, in the course of which the judge had acquired information pertaining to the debtor’s financial affairs and this gave rise to apparent bias as well as the possibility of “reverse bias”.

8.  We will first deal with the recusal ground in (3).

The recusal ground

9.  As mentioned earlier, a notice of hearing of the petition was issued on 8 May 2019 giving the hearing date as 6 November 2019 with the judge as the presiding judge.

10.  It was not until Friday, 1 November 2019 (three working days before the hearing) that the debtor’s former solicitors wrote to the court as follows:

“The learned judge in his capacity as Senior Counsel has previously advised our client, Mr Li Xiaoming, who is the Respondent in these proceedings, in a separate matter. While we have no doubt that the Judge will be able to adjudicate these proceedings fairly, there is a possibility that a reasonable, fair‑minded and well-informed observer might conclude that there is a real possibility that the Judge would be biased.

In such circumstances, it might be more appropriate for the Petition to be heard by another Judge, and we do seek a direction that the Petition be heard by another Judge.”

11.  On 4 November 2019, the petitioner’s solicitors wrote to the court in response expressing regret that this was raised at the eleventh hour when it was known to the debtor in May 2019 that the judge would be hearing the case, and opining that this was a transparent attempt to delay the proceedings. Reference was made to §67 of the Guide to Judicial Conduct which provides: “Where a judge has, before appointment, acted as a lawyer for or against a person, one would expect that this, by itself, would usually not result in disqualification.  But everything depends on the particular circumstances.”  The petitioner’s solicitors stated that they have instructions to waive its right to object as long as the “separate matter” is wholly unrelated to the bankruptcy proceedings, and they opposed the direction sought by the debtor’s solicitors.

12.  The judge gave directions on the same day that he would hear the case.

13.  No further submissions were made by the debtor thereafter and no objection was made at the hearing on 6 November that the judge should recuse himself.  Nor did the debtor file any evidence showing that the judge had, in the course of advising the debtor on the “separate matter”, received extraneous information such that his knowledge might give reasonably rise to an apprehension of bias.

14.  The 1 November letter of the debtor’s solicitors is wholly inadequate for a proper recusal application.

15.  It is well-established that if a litigant “wishes to take any point on the qualification of the trial court it should be taken timeously as a plea in bar of trial.  If such a point is not taken, the omission to do so will be taken to show an intention to abandon or waive the point unless circumstances show that it was not intended to abandon or waive it or that the omission resulted from ignorance or misapprehension which provided a reasonable explanation of the failure to take it” (Millar v Dickson [2002] 1 WLR 1615 at 1629, §33(1)).

16.  No explanation for the omission to take the point earlier was sought to be provided until the debtor made his 2^nd affirmation in these appeal proceedings on 7 April 2021 (for which he sought leave to adduce as additional evidence on appeal).  He acknowledged that he was informed by his former solicitors in May 2019 that the petition was to be heard by the judge in November 2019.  He and his former solicitors took the view that the judge would have noticed that the judge had advised him as counsel only in March 2019 and would have taken his own initiative to refer the matter to another judge.  He was also advised by his former solicitors that according to the “e-hearing date enquiry service” in the Judiciary website, the presiding judge of the petition in November 2019 was not yet specified and it is “not uncommon” for a different judge to hear the matter even when there was a designated judge in the notice of hearing. For these reasons, they wrote to the court only on 1 November 2019.

17.  Looking at the explanation on a de bene esse basis, the reasons given for the delay are wholly unacceptable.  As made clear in the Guide to Judicial Conduct, the mere fact that a judge had previously acted as a lawyer for or against a person would not usually, by itself, result in disqualification.  See also Locabail (U.K.) Ltd v Bayfield Properties Ltd [2000] QB 451 at §25.  It is plainly wrong for the debtor and his former legal advisers to cast the burden on the judge to decide whether to recuse himself notwithstanding recusal had not been sought by any party.  As observed in Re JRL, ex parte CJL (1986) 161 CLR 342 at 352: “Although it is important that justice must be seen to be done, it is equally important that judicial officers discharge their duty to sit and do not, by acceding too readily to suggestions of appearance of bias, encourage parties to believe that by seeking the disqualification of a judge, they will have their case tried by someone thought to be more likely to decide the case in their favour.”  As for the absence of mention of the presiding judge in the “e‑hearing date enquiry service” and the possibility of change of the designated judge nearer to the hearing date, these are but lame excuses. The absence of reasonable explanation for the failure to object to the judge’s qualification was not due to ignorance or misapprehension.

18.  The lateness of the debtor’s attempt to seek recusal, and the fact that he did not raise his objection at the hearing by putting forward evidence before the judge to support his contention that it would not be appropriate for the judge to hear the matter are strong indications that the attempt at seeking recusal is but a tactical move made without conviction as to its propriety.  As stated in Komal Patel v Chris Au [2018] 1 HKLR 328 at §155: “… the failure to raise an objection as soon as the party became aware of the matter suggesting the possibility of bias and the lateness of an objection (and the absence of any explanation for the delay) is a matter that a fair-minded and informed observer would take into account, together with all the circumstances when determining whether the reasonable apprehension of bias test has been satisfied.”

19.  Furthermore, the 1 November 2019 letter merely put forward a bare claim of apparent bias and such a vague and general contention (that the judge had previously advised the debtor as counsel in a separate matter) is wholly inadequate.  The allegation of bias must be assessed objectively by the fair-minded and informed observer by having regard to all the relevant circumstances pertaining to the recusal application.  It is therefore incumbent on the complaining party to specify how the judicial officer would be biased towards a particular party or on a particular issue, or what that bias would be.  There must be articulation of a logical connection between the conduct giving rise to the apprehension of bias and the possibility of departure from impartial decision-making.  The party seeking recusal is required to “articulate the relevant reasoning by which the fair-minded observer would attribute a level of prejudgment justifying recusal”. (ZN v Secretary for Justice [2016] 1 HKLRD 174 at §§38 to 40; Falcon Private Bank Ltd v Borry Bernard Edouard Charles Ltd [2014] 3 HKLRD 375 at §55; Falcon Private Bank Ltd v Borry Bernard Edouard Charles Ltd (2014) 17 HKCFAR 281 at §30; Lai Yiu Mun Susanna v Tsang Kai Choy Paul [2019] 2 HKLRD 359 at §§21 to 23) 

20.  For the above reasons, this unsubstantiated recusal application could not get off ground.  We are inclined to agree with Mr Douglas Lam, SC^[16] for the petitioner that this is an abuse of process.  This ground of appeal must fail.

21.  In an attempt to salvage this ground of appeal, the debtor filed an affirmation on 7 January 2020 in these appeal proceedings in opposition to the application for security for costs deposing to the separate matter on which the judge advised him as counsel and exhibiting an affirmation he made in the separate proceedings dated 4 April 2019.  As stated in §24.2 of the judgment of the Court of Appeal on security for costs on 10 June 2020, such evidence is unlikely to be permitted on appeal as the conditions of Ladd v Marshall [1954] 1 WLR 1489 do not appear to have been satisfied.

22.  The debtor did not apply for leave to adduce further evidence on appeal until 8 April 2021, being the his 2^nd affirmation which essentially repeated his 1^st affirmation of 7 January 2020.  There was no explanation why this summons was issued a year and a half after the notice of appeal was filed on 28 November 2019. Due to the lateness of his summons, the automatic directions for disposal of interlocutory applications in PD 4.1 §36 could not be complied with in time for the hearing of the appeal on 25 May 2021.  His 2^nd affirmation, for which leave to adduce on appeal was sought, did not comply with PD 4.1 §37 in that it did not explain how the criteria for admission of new evidence was satisfied.  As a result, he was directed to file a supplemental affirmation to address the omission.  His supplemental affirmation asserted that each of the criteria in Ladd v Marshall was satisfied.  We do not agree with the debtor’s assertions, in particular that the new evidence he sought to adduce could not have been obtained at the trial with reasonable diligence because on 4 November 2019 the judge had already rejected the recusal application and this issue did not feature at the hearing on 6 November.  No proper application for recusal was made for the reasons given earlier.

23.  On appeal, Mr Wong did not appear to rely on the assertions that the criteria in Ladd v Marshall were satisfied.  Instead, he contended that this is a rare case and the Court of Appeal may exercise its wide discretion to admit new evidence in the interests of the administration of justice notwithstanding the criteria were not met, citing Saluja v Gill [2002] EWHC 1435 (Ch) at §31.  He contended that the condition in Ladd v Marshall (that the evidence could not have been obtained with reasonable diligence for use at the hearing below) need not be complied with, as the petitioner was not privy to and had no knowledge of the dealings between the judge and the debtor in the “separate matter” and would not be in any position to file any rebuttal evidence.  Further, as the judge did not ask the debtor to file evidence when he refused to entertain the objection, the judge must have taken into consideration his involvement in the “separate matter” and it is appropriate that the Court of Appeal should receive evidence of those matters that the judge must have taken into account.

24.  These submissions are entirely without merit.  It cannot be right that a litigant should be relieved from the obligation to adduce evidence with reasonable diligence for use in the court below merely because the other party would not be able to adduce evidence in rebuttal. As has often been stated, the court is rightly loath to order a new trial on the ground of fresh evidence as it is in the public interest there should be finality in litigation.  Whether the other party is able to adduce rebuttal evidence is not a relevant consideration.  The contention that the judge must have taken into consideration the matters that the debtor sought to adduce in his 2^nd affirmation is entirely speculative.  The judge was entitled to reject the application for recusal in the letter of November 2019 as no proper basis for recusal was put forward.

25.  Under Order 59 rule 10(2), it is necessary to show “special reason” for admitting new evidence on appeal.  There is no basis to relax the application of the criteria in Ladd v Marshall in this instance. (Sky Joy Investment Ltd v Zheng Dunmu & Ors [2018] HKCA 259 at §§9 to 12) The summons to adduce new evidence was hopelessly late and we dismissed it on that ground alone.

No personal guarantee ground

26.  We turn to consider ground (1) being that no personal guarantee was provided by the debtor because of the way he signed the Guarantee.

27.  Mr Wong submitted that on the face of the Guarantee as executed by the debtor, the debtor did not provide any personal guarantee to the petitioner.  The judge was in error in holding otherwise.  Further, the judge was wrong to place reliance on the subsequent documents signed by the debtor (the 2014 Supplemental Agreement, the 2015 Supplemental Agreement), as they were not signed by the debtor in his personal capacity even though they contained an acknowledgment of the debtor’s personal liability.  The judge was also wrong to rely on the Memorandum as this document, signed by the debtor and the five individuals, must pertain to the corporate vehicles of the persons who signed and not the personal capacity of the signatories. 

28.  If no personal guarantee was intended to be given by the debtor (who owned the entire shareholding in Prosper Huge), there is no reason why the Guarantee was worded in the way it did by naming the debtor as the guarantor.  If Mr Wong’s contention is correct and the legal effect of the Guarantee as executed by the debtor is that a guarantee was purportedly given by Prosper Huge as guarantor to guarantee the performance of Prosper Huge under the 2009 SPA as the primary obligor, this would be a construction that flouts business common sense.  Quite clearly, this was not how the parties had understood the effect of the Guarantee, nor did they conduct the dealings between them on that basis, as evidenced by the documents subsequently signed by the debtor – the 2014 Supplemental Agreement, the 2015 Supplemental Agreement, the Memorandum on 9 February 2018 – in all of which the debtor unequivocally and repeatedly acknowledged his personal liability to the petitioner under the 2009 SPA.

29.  For the approach to the construction of a signature on a document, Mr Lam referred this court to the statements of Bankes LJ in Ariadne Steamship Co v James McKelvie & Co [1922] 1 KB 518 at 525:

“… it is a sound rule of construction … that where the signature is unqualified the presumption is that the agent is personally liable, but that where sufficient words of qualification are annexed to the signature to indicate that the person signing signs as agent the presumption is the other way. No doubt the presumption in either case may be rebutted, and it must always be a question of construction merely whether, taking the document as a whole, the presumption is or is not rebutted.”

30.  In this instance, the debtor did not sign in the signature space for the guarantor but signed in the space for the seller being Prosper Huge.  As his signature was qualified in this manner, this gave rise to a rebuttable presumption that he signed as agent for and on behalf of Prosper Huge.  The presumption may be rebutted.

31.  We do not agree with Mr Wong the mere fact that the debtor signed in the signature space for Prosper Huge and not in the space for the guarantor leaves no doubt that the debtor was not personally liable, whether as the guarantor or as agent of Prosper Huge.

32.  Having regard to the document as a whole including the clear commercial purpose of it, we are of the view it must be clear to a reasonable person that by signing on the document, the debtor was indicating his consent to providing a personal guarantee as stated in the document. There is no cogent reason to adopt a construction that the document signed by the parties would be wholly ineffective and defy commercial sense.

33.  We also reject Mr Wong’s submission that the judge was in error in relying on the acknowledgment of the debtor of his personal liability in the subsequent documents signed by him.  The judge rightly held that the capacity in which the debtor signed the subsequent documents is immaterial^[17].

Economic duress ground

34.  The legal principles relating to duress in general and economic duress are not in contention.  They have been set out comprehensively in the Decision at §§25 to 28.

35.  The arguments on appeal relate to the judge’s assessment of the evidence applying the legal principles that are not in dispute.  As mentioned earlier, he found the debtor’s allegations incredible.

36.  An appeal against a bankruptcy order is an appeal against an exercise of discretion.  The function of the Court of Appeal in such an appeal is one of review.  It would not lightly interfere with the decision of the primary judge unless it can be shown that he had erred in principles of law, or had misapprehended material facts, or had failed to take relevant matters into account, or had taken irrelevant matters into account, or the exercise of his discretion was “plainly wrong”.  This is so even though the findings were based on affidavit evidence and contemporaneous documents rather than oral evidence.  The appellate process is not designed to give a litigant a platform to repeat submissions made below on the evidence and factual aspects in the hope of persuading the appeal court to come to a different view. (Re Au Wai Ming, CACV 167/2015, 18 November 2016, §12; Re Cheung Kwan [2021] HKCA 282 at §§31 to 33)

37.  Mr Wong sought to persuade this court the judge had fallen into palpable errors in his assessment of the evidence.  He argued there is a bona fide dispute that the five individuals had applied illegitimate pressure on the debtor on 13 February 2018.  We have rejected his starting premise that the debtor had assumed no personal liability prior to the execution of the Settlement Agreement.  The other points he took are merely a rehash of the matters urged before the judge.  Applying the principles on which the appeal court should act, we find no basis to interfere with the judge’s evaluation. 

38.  None of the grounds of appeal are of merit.  We have therefore dismissed the appeal.

Costs

39.  We have heard arguments on costs.  There is no dispute that the debtor should pay the petitioner’s costs of this appeal and the application to adduce new evidence on appeal.

40.  The ground relating to recusal and the application to adduce new evidence on appeal are an abuse of process.  We consider one-third of the costs of the appeal should be attributable to the recusal ground.  We order the debtor to pay one-third of the costs of the appeal and the application to adduce new evidence on an indemnity basis.

41.  We order there be a payment out to the petitioner’s solicitors of the amount paid into court as security for costs of this appeal.