RE SIT KWONG LAM

HCB 6051/2018

[2019] HKCFI 920

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6051 OF 2018

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J U D G M E N T

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Introduction

1.  There is before this court an amended bankruptcy petition (“Petition”) presented by Petrolimex Singapore Pte Ltd (“Petitioner”) against Mr Sit Kwong Lam (“Debtor”).  The Petition is based on the non‑compliance with a statutory demand dated 30 August 2018 (“statutory demand”) for the sum of over US$30 million (“Debt”).  There was no application by the Debtor to set aside the statutory demand.  There is no issue raised as to service.

Background

2.  According to the Petitioner, the Debt arose under the following circumstances.

3.  Brightoil Petroleum (Holdings) Limited (“Holdings”) is a company listed on the Hong Kong Stock Exchange.  The Debtor is the indirect controlling shareholder and chairman of Holdings.

4.  Brightoil Petroleum (Singapore) Pte Ltd (“Brightoil Singapore”) is a wholly‑owned subsidiary of Holdings. Brightoil Singapore bought goods from the Petitioner in the total sum of US$30,253,600 payable under 2 invoices dated 23 April 2018, but had difficulty paying.

5.  By a Deed of Personal Guarantee dated 23 April 2018 (“Personal Guarantee”) executed by the Debtor in favour of the Petitioner, the Debtor guaranteed the punctual performance by Brightoil Singapore of its obligation to pay the sum due under the 2 invoices on or before 10 July 2018.

6.  Brightoil Singapore failed to pay the sum due by 10 July 2018 and requested additional time to make the payment.

7.  The Petitioner and Brightoil Singapore then entered into a settlement agreement on 12 July 2018 (“Settlement Agreement”) to settle the Petitioner’s claims against Brightoil Singapore and to provide for payment by Brightoil Singapore of the sum due by 4 instalments between 10 August 2018 and 9 November 2018 (“Settlement Sum”).  Clause 1 of the Settlement Agreement provided that within 5 business days of the execution of the Settlement Agreement, Brightoil Singapore should procure:

(1)   Holdings to execute and deliver to the Petitioner a Parent Company Guarantee (“PCG”); and

(2)   the Debtor to execute and deliver to the Petitioner an addendum to the Personal Guarantee (“PG Addendum”).

8.  In accordance with Clause 1 of the Settlement Agreement, Holdings executed a PCG in favour of the Petitioner expressed to have been made on 16 July 2018.  The PCG was executed by inter alia the Debtor on behalf of Holdings.

9.  Further, the Debtor executed a PG Addendum in favour of the Petitioner also expressed to have been made on 16 July 2018.  The PG Addendum expressly provided as follows:

“  This Addendum is executed on this 16^th day of July 2018 as a Deed by the undersigned, Dr Sit Kwong Lam … (the “Guarantor”) in respect of the Personal Guarantee duly executed as a deed by the Guarantor on or about 23 April 2018...

Pursuant to this Addendum, I warrant and confirm that:

1.   I am fully aware of the terms and effect of the Settlement Agreement dated 12 July 2018 (the “Settlement Agreement”) entered between PLX and Brightoil in connection with the Guaranteed Obligations.

2.   The PG is hereby extended to cover the performance of Brightoil’s obligations under the Settlement Agreement.

3.   I agree to amend the meaning of Guaranteed Obligations in Clause 1.1 of the PG such that it will now read as follows:

“Guaranteed Obligations” means the Debtor’s payment obligation under invoice PS18050A&PS1805B dated 23 April 2018 and/or any and all of the Debtor’s obligations under any settlement agreement entered by the Seller and the Debtor in respect of the foregoing payment obligations of the Debtor, including but not limited to the Settlement Agreement dated 12 July 2018 between the Seller and the Debtor.

4.   All other terms and conditions of the PG, including the arbitration clause, shall remain unchanged and this Addendum shall constitute an integral part of the PG.”

10.  Other than the payment of US$100,000 to the Petitioner, Brightoil Singapore has failed to discharge its payment obligations under the Settlement Agreement.  Thus the Settlement Sum was deemed to have fallen due on 10 July 2018 by virtue of Clause 4 of the Settlement Agreement.

11.  By the statutory demand, the Petitioner demanded from the Debtor payment of the outstanding Settlement Sum pursuant to the Personal Guarantee and the PG Addendum.  The statutory demand was served on the Debtor on or about 12 September 2018 and was not complied with.

Deliberation

12.  According to his skeleton submissions, the Debtor opposes the Petition on 3 grounds:

(1)   the Court should exercise its discretion to stay or dismiss the Petition due to the existence of an arbitration clause; (“Ground 1”)

(2)   there is a bona fide dispute of the Debt on substantial grounds; (“Ground 2”)

(3)   there is a reasonable prospect of the underlying debt being paid by Brightoil Singapore within a reasonable time. (“Ground 3”)

Ground 1

13.  Ground 1 is entirely without merits.

14.  To start with, there is no arbitration clause in either the Personal Guarantee or the PG Addendum. The only arbitration clause that Mr Chan can find is Clause 7 of the Settlement Agreement which was between the Petitioner and Brightoil Singapore.  The relevant part of Clause 7 provided:

“  7.    Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in Singapore in accordance with the Arbitration Rules of the International Arbitration Centre (“SIAC Rules”) in force as on the date of this Settlement Agreement, which rules are deemed to be incorporated by reference in this clause.  The Tribunal shall consist of a sole arbitrator…”

15.  What Mr Chan seems to be relying on is Clause 4 of the PG Addendum which does refer to a non‑existent arbitration clause in the Personal Guarantee.  His argument is that since the Petitioner relies upon the Personal Guarantee, the Settlement Agreement and the PG Addendum to hold the Debtor liable as guarantor for Brightoil Singapore’s liability under the Settlement Agreement, the PG Addendum should be construed as containing an arbitration clause in the same term as Clause 7 of the Settlement Agreement or it should be rectified to that effect.

16.  A term can of course be incorporated into a contract by reference: Astel‑Peiniger Joint Venture v Argos Engineering and Heavy Industries Co Ltd[1994] 3 HKC 328, a decision relied upon by Mr Chan.  At 339F, Kaplan J said:

“ The task before the Court in determining whether or not there has been incorporation by reference is one of construction; namely, to ascertain the parties’ intentions when they entered into the contract by reference to the words that they used.” (emphasis added)

17.  Earlier in Kaplan J’s judgment at 338C‑D, his Lordship made reference to the English Court of Appeal decision of Giffen (Electrical Contractors) Ltd v Drake & Scull Engineering Ltd (1993) 33 Con LR 84 where in the context of a construction contract, it was argued that on the true construction of the sub‑sub‑contract, the main contract arbitration clause was incorporated.  His Lordship then continued:

“ The court held that it was not incorporated and stated that the ‘fundamental question was whether the language of the clauses relied on pointed plainly to the intention of the parties to incorporate the main contract arbitration clause…’ ” (emphasis added)

18.  If one looks at the actual language used in Clause 4 of the PG Addendum, one will not be able to find (i) any reference to the arbitration clause in the Settlement Agreement at all, or (ii) any purported attempt to incorporate the arbitration clause in the Settlement Agreement into the PG Addendum.  As this court pointed out earlier, all one can find in Clause 4 is a reference to a non‑existent arbitration clause in the Personal Guarantee, period.  In these circumstances, it is difficult to see how Mr Chan can demonstrate the language of Clause 4 “pointed plainly to the intention of the parties to incorporate the arbitration clause in the Settlement Agreement” into the PG Addendum.

19.  While it is true that in construing a contract, all parts of it must be given effect where possible and no part of it should be treated as inoperative or surplus: Lewison The Interpretation of Contracts 6^th ed para 7.03, in this court’s view, the reference to “arbitration clause” in Clause 4 of the PG Addendum was indeed a clerical mistake, as submitted by Mr Ho for the Petitioner, which can and should be ignored as a matter of construction.

20.  To take the matter one step further, even assuming, as stated in paragraph 10.8 of Mr Chan’s skeleton submissions, the PG Addendum is governed by an arbitration clause in the same term as Clause 7 of  the Settlement Agreement,[1] it is difficult how that can be a valid ground for opposing the Petition.

21.  First, Clause 7 does not in terms preclude the parties to the Settlement Agreement, or for that matter, parties to the PG Addendum, from invoking the insolvency or bankruptcy jurisdiction of the Court prior to the commencement and/or completion of the arbitration process in Singapore.

22.  Second, importantly, even if Clause 7 purports to have that effect, it will not be enforced in our Court as being contrary to public policy: Re Greater Beijing Region Expressways Ltd [1999] 4 HKC 807[2] (“GBRE”).

23.  Re Greater Beijing Region Expressways Ltd was concerned with the applicability and enforceability of a provision in a joint venture agreement between Mr Ho and Mr Gao in relation to their joint venture company (“Miracle”) which was the majority shareholder of GBRE.  Article 18(d) of the joint venture agreement in effect provided that for the winding up of GBRE, approval of both Mr Ho and Mr Gao was required.

24.  At 816A and G‑H of the judgment, Rogers JA observed thus:

“ …That right to present a petition under section 177[3] is given by section 179(1) to the company, creditors and contributories.

…

It is clear that the reason why the articles of association of a company cannot preclude the statutory rights of the contributories to present a petition for winding‑up is that it is contrary to public policy that the contributory’s right be fettered…”

25.  At 817A‑C and E of the judgment, Rogers JA continued:

“ …In those circumstances, if Mr Gao’s and Mr Ho’s approval was required for the presentation by Miracle i.e. by the controlling shareholder, of a petition to wind up GBRE, this would be to fetter the statutory right of Miracle as the controlling contributory of GBRE. This, as it seems to me, would be just as much contrary to public policy when it is contained in the joint venture agreement as it would if there were contained in the articles of GBRE a provision that the controlling shareholders might not present a winding‑up petition without the consent of Mr Gao and Mr Ho or whoever bought their shares in Miracle…

   …The point is the same: if a matter is contrary to public policy, the courts will not give effect to an agreement whether the agreement is constituted by the articles or whether it is constituted by some outside agreement.”

26.  Although Re Greater Beijing Region Expressways Ltd was concerned with a contributory’s statutory right to wind up a company which the Court of Appeal held could not be fettered by contract, whether the contract is constituted by the articles or whether it is constituted by some outside agreement, in this court’s view, the same principle applies by analogy to an arbitration clause in a contract, if and in so far as the clause purports to restrict or fetter a creditor’s statutory right to petition for the bankruptcy of a debtor — the objection based on public policy is the same in both cases.  Re Greater Beijing Region Expressways Ltd is binding on this court and must be followed.

27.  To conclude, if the terms of Clause 7 are construed as not precluding the Petitioner from invoking the bankruptcy jurisdiction of the Court against the Debtor prior to the commencement and/or completion of the arbitration process, then it cannot constitute a ground for opposing the Petition. Conversely, if the terms of Clause 7 are construed as so precluding the Petitioner, then Clause 7 will fall foul of Re Greater Beijing Region Expressways Ltd and will not be enforced by the Court. Either way, even if the PG Addendum did contain a term identical to Clause 7, it would not assist the Debtor.

28.  For these reasons, Ground 1 must be rejected.

Ground 2

29.  Ground 2 is based on the Petitioner having granted an extension of time to Brightoil Singapore to pay by virtue of the Settlement Agreement and this is said to have the effect of releasing the Debtor’s liability under the Personal Guarantee.  This Ground is also premised on the PG Addendum post-dating the Settlement Agreement.

30.  In order to understand the fallacy of this Ground, instead of summarising Mr Chan’s submissions, this court shall set out verbatim the relevant paragraphs in his skeleton submissions below:

“ 17. It is well established that if a creditor agrees with the principal Respondent to materially vary the guaranteed obligation or to grant an extension of time for payment, the guarantor is discharged unless, for example, the terms of the guarantee expressly preserves the guarantor’s obligations or if the guarantor gives his consent: The Modern Contract of Guarantee (3^rd ed) at [7‑074].

18. There is doubt as to whether a guarantor’s agreement to preserve his liability under the varied contract which post‑dates the variation is effective to prevent the guarantor’s release: The Modern Contract of Guarantee (3^rd ed) at [7‑102].

19. Here, there is no dispute that the terms of the [Personal Guarantee] do not expressly preserve the guarantor’s liability in the event of a variation or extension of time. The Petitioner relies upon the PG Addendum as extending the Respondent’s liability under the [Personal Guarantee] to the debt owed under the Settlement Agreement. The question then is whether the PG Addendum post‑dates the Settlement Agreement.

20. The Respondent submits that there is plainly a substantial dispute as to when the Settlement Agreement and PG Addendum were respectively executed (or the date on which such documents should be treated as having been executed).

…

22.3. The Settlement Agreement expressly and unambiguously provides that it was entered on 12 July 2018…

22.4. Similarly, the PG Addendum clearly states in the opening paragraph that ‘This Addendum is executed on this 16^th day of July 2018 as a Deed by the undersigned…’

…

22.7. Clearly, all parties have agreed to treat the dates of 12 July 2018 and 16 July 2018 respectively as the execution dates of the Settlement Agreement and PG Addendum. Applying the aforesaid principles, the Petitioner is contractually estopped from contending that either agreement was in fact executed on any other dates even if both parties knew full well that such agreed date of execution was untrue.

22.8. The Court should treat the Settlement Agreement and PG Addendum as having been executed on 12 and 16 July 2018, irrespective of the actual dates of the parties appending their physical signatures.” (emphasis added)

31.  Although there is some suggestion[4] by the Petitioner that the Settlement Agreement and the PG Addendum were executed by the parties separately on some other dates and that the PG Addendum pre-dated the execution of the Settlement Agreement by the Petitioner, it is not in dispute that, on their face, the Settlement Agreement was entered into on 12 July 2018 while the PG Addendum was entered into on 16 July 2018.

32.  Taking 12 July 2018 and 16 July 2018 as the execution dates of the Settlement Agreement and the PG Addendum, in this court’s view, Ground 2 is still utterly unmeritorious.

33.  The relevant legal principles are very well‑established although some of them have been omitted from Mr Chan’s list of authorities.

34.  First, the starting point is that a binding agreement by the creditor to extend the time for the performance by the principal of the principal’s obligations under the main contract releases the guarantor from liability: O’Donovan & Philips The Modern Contract of Guarantee 3^rd ed para 7‑074.  This is the general rule.

35.  Second, this general rule is subject to a number of exceptions, the most important of which for the present purpose is consent by the guarantor to the extension of time.  In O’Donovan & Philips The Modern Contract of Guarantee 3^rd ed at para 7‑102, the learned editors said this:

“ (vii) Consent by the guarantor to the giving of time

Even if there is no term in the guarantee by which the guarantor agrees to, or authorises, an extension of time, the guarantor will not be released if it consents to the giving of time to the principal before the extension is given. The same principle applies as in the case of variation generally. As we have seen, if consent is given after the creditor has extended time, there is some doubt as to whether this is effective to prevent the guarantor’s release.” (emphasis added)

36.  Third, contrary to the last sentence at para 7‑102, there is little doubt as to the effect of a guarantor giving his consent after the creditor has extended time.  This is supported by an earlier passage in O’Donovan & Philips The Modern Contract of Guarantee 3^rd ed at para 7‑064 where the editors observed:

“ The creditor may negotiate the variation with the principal and only afterwards seek to obtain the consent of the guarantor to the variation. There is clear authority which suggests that an acceptance of liability by the guarantor at this time is binding on it, notwithstanding the absence of consideration and even though the guarantor simply assents to the variation (rather than specifically agreeing to be bound by the guarantee).” (emphasis added)

37.  The said observation is supported by the following passage in Credit Suisse v Borough Council of Allerdale [1995] 1 Lloyd’s Rep 315, 364 (Coleman J), the first case cited in the footnote to para 7‑064:

“ It has long been the law that an assertion of acceptance of liability by a surety made after the occurrence of events, which would entitle him to be discharged and of which he has knowledge, such as the disposal of security by the creditor, or the giving of time to the debtor, will be binding on the surety notwithstanding the absence of further consideration for his guarantee. This was held by Lord Eldon LC in Mayhew and Gent v Crickett, (1818) 2 Swans 185. The explanation for this is no doubt that the surety is taken to have waived his rights to treat himself as discharged from the guarantee or to have elected to be bound by it. Moreover, the consent in question does not have to be expressed in terms of express agreement to being bound by the guarantee: it is sufficient if the surety assents to the variation of the principal debt: see Halsbury Laws (4^th ed) vol 37, par 258.” (emphasis added)

38.  Fourth, consent need not be express — it may be implied eg where the guarantor requests or instigates the extension of time and/or where the guarantor is a director of the principal debtor company and negotiates with the creditor for the extension: Pacific Harbour Advisors Pte Ltd v Winson Federal Ltd unrep, HCA 1257 of 2013; DHCJ Ismail SC; 19 November 2015 at [29] and [32].

39.  Applying these principles to the present case, this court has no doubt that the Debtor has consented to the extension of time both before and after the extension was given by the Petitioner in the Settlement Agreement.  Further, by executing the PG Addendum, the Debtor had clearly accepted his liability under the Personal Guarantee would not be released by the extension of time.

40.  To start with, the Debtor’s consent to the extension of time can be inferred from his signature to the Settlement Agreement, albeit as director on behalf of Brightoil Singapore. If the Debtor did not consent to the extension of time, he did not have to sign on it, even though he was Brightoil Singapore’s chairman and director.  Indeed, in the circumstances of this case, one can reasonably infer that the Debtor had either directly or indirectly (through his staff) instigated the extension and/or negotiated with the Petitioner for the extension, as a result of which a settlement agreement was prepared for him to sign.  There is no evidence to suggest that the Debtor was unaware of alternatively totally opposed to the extension given in the Settlement Agreement.

41.  Further, by executing the PG Addendum which expressly extended the ambit of the Personal Guarantee to cover Brightoil Singapore’s liability under the Settlement Agreement, the Debtor has also clearly consented to the extension of time and accepted he would continue to be liable as a guarantor under the Personal Guarantee.  This is self‑evident from the express terms of the PG Addendum set out earlier in this judgment.

42.  For these reasons, Ground 2 must be rejected.

Ground 3

43.  The validity of Ground 3 depends on the cogency of the evidence adduced by the Debtor.  In this regard, Mr Chan relies on the following:

(1)   Paragraphs 20 and 21 of the Debtor’s affirmation filed on 4 February 2019.

(2)   An affirmation of Chiu Man Yee (“Chiu affirmation”) affirmed in the middle of the hearing, shortly before Mr Chan was about to complete his oral submissions.

44.  As far as the Debtor’s affirmation is concerned, it is little more than an expression of hope that sometime in the future, the Brightoil Group would be able to arrange re‑financing which if successful would enable Brightoil Singapore to repay the Debt.

45.  As far as the Chiu affirmation is concerned, all it does are:

(1)   exhibiting (i) a re‑financing term sheet entered into between a wholly‑owned special purpose vehicle of China Huarong International Holdings Limited (中國華融國際控股有限公司) and Holdings (“Huarong Term Sheet”) dated March 2019; and (ii) a Sale and Leaseback Term Sheet entered into between OHA (UK) LLP, Holdings, Brightoil Shipping Group Limited and the Debtor dated 25 February 2019 (“OHA Term Sheet”);

(2)   setting out her instructions from the Debtor that the Brightoil Group is expected to receive sufficient re‑financing to pay the debt owed by Brightoil Singapore to the Petitioner in full with interest, and such re‑financing (in particular as per the Huarong Term Sheet) is expected to become available to the Brightoil Group by the end of May 2019.

46.  Neither term sheet supports Ground 3.

47.  In particular, the opening paragraph of the Huarong Term Sheet shows that the terms set out therein are for the purpose of discussion only.  The English translation provided by the Debtor’s solicitors reads:

“ The terms and conditions contained in this agreement are not legally binding, they are set out therein solely for the purpose of reference and/or discussion, and are subject to the change of market conditions and internal approval of China Huarong International Holdings Limited (“Huarong” or “lender”), including but not limited to credit, legal and compliance approval. This list of indicative terms shall not be construed as a promise from Huarong to arrange transactions nor provide any financing or loans...”

48.  The OHA Term Sheet is similarly non‑binding and contains only indicative terms and conditions.

49.  In this court’s view, the effect of the Chiu affirmation is similar to the Debtor’s affirmation — it is just an expression of hope, on instructions, that sometime in the future, the Brightoil Group would be able to arrange its re‑financing which if successful would enable Brightoil Singapore to repay the Debt.

50.  On such evidence, this court is not satisfied there is a reasonable prospect of the Debt being paid, either by Brightoil Singapore or the Debtor, within a reasonable time. Ground 3 therefore fails.

Disposition and Costs order nisi

51.  There shall be a usual bankruptcy order against the Debtor Mr Sit Kwong Lam and an order nisi that costs of the Petition, including all costs reserved, if any, be to the Petitioner.