RE DREAMEAST GROUP LTD (carrying on business in Hong Kong as DREAMEAST CULTURAL ENTERTAINMENT)

HCCW 487/2023

[2024] HKCFI 824

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 487 OF 2023

__________________

__________________

__________________________________

REASONS FOR JUDGMENT

__________________________________

1.  At the hearing of the petition presented on 1 November 2023 (as amended on 10 January 2024) (“Petition”) by the petitioner, Forever Union Holdings Limited (“Petitioner”), against Dreameast Group Limited (夢東方集團有限公司[1] (“Company”), I made a usual winding up order against the Company. These are the reasons for my judgment.

Background

2.  The Petitioner is a company incorporated in the BVI and is a registered non-Hong Kong company with a principal place of business in Hong Kong. It is the registered owner of a property known as Duplex A together with Balcony and Utility Platform thereof on 59^th and 60^th Floors of Tower 1 and Car Parking Spaces Nos. 26 & 27 on L1 Floor of Serenade, No. 11 Tai Hang Road, Hong Kong (“Property”).[2]

3.  The Company was incorporated in Bermuda and its shares have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”).

4.  Until 15 November 2021, the Company’s controlling shareholder was SkyOcean Investment Holdings Limited (“SkyOcean Investment”) which held 71.87% of the issued shares in the Company. SkyOcean Investment is a wholly owned subsidiary of Knowledge Silicon Valley Limited, a company incorporated in the BVI which is indirectly owned by Mr Zhou Zheng and Ms Zhou Jin as to 80% and 20% respectively[3].

5.  Chance Talent Management Limited (“Chance Talent”) is a company incorporated in the BVI with a principal place of business in Hong Kong. It is an indirect wholly owned subsidiary of CCB International (Holdings) Limited (“CCB International”)[4], and the mortgagee under the “Second Mortgage” (as defined in §7 below).

6.  According to the 2022 Annual Report of the Company, as at 31 December 2022, the Company had substantial debts due under the “CB” and the “CCBI Bonds”[5]:

(1) As regards the CB:

(a) On 24 November 2015, the Company issued a 5-year term RMB zero coupon convertible bonds due 2020 in an aggregate principal amount of RMB 1,500 million to SkyOcean Investment (“CB”).

(b) As at 31 December 2020, the outstanding principal under the CB was RMB 450 million.

(c) On 28 October 2020, the Company and SkyOcean Investment entered into deed of amendment pursuant to which the parties agreed that (i) the maturity date of the CB be extended from 23 December 2020 to 23 December 2025, (ii) the conversion price of HK$6.8 per share would be adjusted to HK$2 per share, and (iii) the CB would bear interest at 5% p.a., repayable semi-annually.

(2) As regards the CCBI Bonds, on 12 November 2015 and 28 June 2016, the Company entered into subscription agreements with Chance Talent (“SA”) pursuant to which CCB International subscribed for bonds in the aggregate principal amount of HK$740 million (“CCBI Bonds”) and convertible bonds in the principal amount of RMB 29.5 million[6].

Failure to pay amount due under CCBI Bonds

7.  In breach of the SA, the Company failed to pay the amount due under the CCBI Bonds. By a Second Mortgage dated 31 December 2020 entered into between the Petitioner (as mortgagor), the Company and Chance Talent (as mortgagee) (“Second Mortgage”), the parties agreed that:

(1) An event of default had occurred under the SA, and the Company is indebted to Chance Talent for obligations and liabilities under the SA (recital D);

(2) The Petitioner and the Company jointly and severally covenant with Chance Talent that they will on demand pay, make good and discharge to Chance Talent the Secured Indebtedness (as defined therein) together with interest and costs (clause 2.1);

(3) The Petitioner charges the Property to Chance Talent subject to the first mortgage over the Property (clause 3.1(a));

(4) If the Petitioner and/or the Company defaults in paying the Secured Indebtedness following demand duly made, it shall be lawful for Chance Talent to inter alia appoint receivers over the Property (clauses 5.1, 6.1 & 8.1); and

(5) As between the Company and the Petitioner, the Company shall be primarily liable for the repayment to Chance Talent of the Secured Indebtedness (surety provisions, clause 19.1).

8.  On 15 November 2021, receivers[7] were appointed over SkyOcean Investment’s assets provided as security for the CCBI Bonds which included (1) 205,182,287 shares in the Company (equivalent to 71.87% shareholding) (“Pledged Shares”) and (2) the CB[8]. The Company was notified of the appointment on 26 November 2021[9].

9.  The Company failed to pay the debts due under the CCBI Bonds on the extended repayment date. On 10 January 2022, Chance Talent exercised its right to appoint the receivers[10] over the Property (“Receivers”).[11]

10.  The Property was sold by the Receivers for HK$65 million pursuant to a sale and purchase agreement dated 6 July 2022. After applying the proceeds to discharge the first mortgage and other disbursements, an amount of HK$36,795,192.46 was paid to Chance Talent[12].

11.  By Letter of Acknowledgement (對賬確認函) dated 30 June 2023 (“LOA”), the Company acknowledged and confirmed that as at 30 June 2023, it owed the Petitioner the amount of HK$36,795,192.46[13]. The amount represented the amount paid by the Petitioner to Chance Talent, which the Petitioner sought to be indemnified by the Company.

12.  Meanwhile, as at 31 December 2022, the outstanding principal on the CCBI Bonds was HK$465.4 million, which had since 30 June 2021 been due for repayment.

13.  Pursuant to a placing agreement dated 19 August 2023 made between SkyOcean Investment (acting by the Receivers), the Receivers and the placing agent, the Pledged Shares were sold and transferred to no less than 6 independent placees at the price of HK$0.1492 per share. There was therefore a change in control of the Company even though Ms Zhou remained the Chairlady and an executive director until 24 November 2023.[14]

14.  On 9 October 2023, the Petitioner served the Statutory Demand on the Company requiring it to pay HK$36,795,192.46[15] (“Debt”), being the amount due and payable to the Petitioner, as acknowledged in the LOA (“SD”).

15.  The Company did not comply with the SD within 21 days and is deemed insolvent by virtue of s.178(1)(a) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32).

Discussion

16.  There is no dispute that by reasons of the matters pleaded in §§10A to 11B of the Petition, the 3 core requirements for the court to exercise its discretionary jurisdiction to make a winding up order against the Company are satisfied.

17.  Mr Lok Ho, counsel for the Company, submits that there is a bona fide dispute on substantial grounds in respect of the Debt by reason of the following matters:

(1) Even if the Petitioner may have a right of indemnification as a result of the sale of the Property and the discharge of the Company’s debts, it does not follow that the Petitioner has sufficiently demonstrated that the Debt was due and payable.

(2) No due date of the Debt can be found on the LOA. Nor was a due date stated in the account voucher produced by the Petitioner[16].

(3) The Company’s chop on the LOA was not affixed in accordance with its articles of association, which requires signature by one director and the secretary or signature of 2 directors.

(4) There is no evidence that, prior to the SD, the Petitioner had sought to enforce its right, or had made any demand for any debt against the Company.

(5) It is the Petitioner’s case that there was an agreement between the Petitioner and the Company that it would withhold taking action against the Company[17]. There is however no evidence on how and when the Petitioner and the Company entered into this agreement and the precise term(s) of the same. There is nothing in the evidence that the Debt would remain be due and payable once there was a change of control of the Company.

18.  Mr Ho submits that the new management has been making inquiries about the Debt including how it arose, as it had been kept in the dark about the Debt and the purported execution of the LOA. Since the change in control, the Company has been seeking to improve its financial position.

19.  Further, Space Securities Limited (“SSL”), said to be the registered holder of Bond I and II with outstanding principal amount of HK$65,436,000 and HK$400 million respectively, has declared and undertaken not to enforce its rights and benefits under these Bonds (said to have carrying amount of HK$754,548,000) for 2 years[18]. I assume that Bond I and Bond II are the CB previously held by SkyOcean investment and acquired by SSL from the receivers in August 2023.

20.  Mr James Wong, counsel for SSL, opposes the Petition on the grounds that (1) the Debt is substantially less than the amount owed by the Company to SSL and it wishes to file evidence to prove the amount owed, and (2) the commercial value of the listing status of the Company would be lost if the Company is being wound up by the court.

21.  The point about SSL can be disposed of quickly:

(1) No evidence has been placed before the court as to what, if any, step has been taken by the Company to improve its financial position or to restructure its debts which had fallen due. This includes the HK$465.4 million due and payable under the CCBI Bonds, as stated in the 2022 Annual Report (see §12 above).

(2) It has not been explained why SSL gave the undertaking not to take enforcement action for 2 years, particularly when no restructuring proposal has been put forward by the Company in respect of its indebtedness.

(3) In the absence of any restructuring proposal, there is simply no prospect of the Company being able to restore its solvency and preserve its listing status. There is no reason why the court should allow a company which is grossly insolvent to continue to trade.

(4) In any event, the undertaking does not bind the Petitioner.

22.  Ms Natalie So, counsel for the Petitioner, submits that there is no bona fide dispute on substantial grounds in respect of the Debt having regard to the following matters:

(1) The contemporaneous documents show that the Petitioner had charged the Property in favour of Chance Talent as security for the debts owed under the CCBI Bonds, after the Company had defaulted in paying the amount due under the CCBI Bonds.

(2) The Property had been sold and the proceeds applied to pay the Company’s debts.

(3) The Petitioner, as mortgagor having mortgaged its Property to secure the debt of another (the Company), is presumed in the absence of other evidence to be only a surety, and is entitled to be exonerated by the principal debtor (On Sky Enterprise (HK) Ltd v Lanco International Holdings Ltd, HCA 529/2010 & HCMP 921/2010, 8 December 2016, §§112-113 (per Ng J)). In any event, it is clear from clause 19.1 of the Second Mortgage that the Petitioner is a surety in respect of the debts owed by the Company.

(4) The Company has acknowledged and confirmed the Debt in the LOA, after the Property had been sold and its proceeds applied to repay the Company’s debts. The validity of the LOA is not affected by the change in control on the part of the Company or its management.

(5) The Second Mortgage was duly considered and approved by the board of directors of the Company, evidenced by the resolutions in writing of all the directors dated 31 December 2020[19].

(6) In the management accounts made up to 30 June 2023 produced by the Company, the Debt was recorded as a current liability of the Company in the amount of HK$36,795,000[20].

(7) The Company is insolvent in that according to the management accounts, as at 30 June 2023, it had net current liabilities of HK$24,433,000 and net liabilities of HK$486,317,000.

23.  The points made by Ms So are based on the contemporaneous documents and are well founded. Mr Ho is unable to point to anything as to why the Petitioner is not entitled to seek indemnity of the amount paid to Chance Talent pursuant to the Second Mortgage.

24.  The fact that the LOA is not signed by the directors in accordance with the requirement of the articles of association does not assist the Company as the requirement only applies to contract, not a LOA which confirmed the existence of the Debt. In any event, the Company’s liability to pay the Debt is subsequently confirmed by the Company in the management accounts made up to 30 June 2023.

25.  I am unable to see how the change in control in the controlling shareholder or the board would have any impact as to whether the Company is liable to pay the Debt owed to the Company. Other than his contention, no reason has been identified by Mr Ho.

26.  I do not think that there is any substance in Mr Ho’s argument that there was an agreement that the Petitioner would withhold taking action against the Company, relying on §13 of Zhou 2^nd:

(1) In §13, Zhou said that “at the request of the Company, the Petitioner agreed to withhold any demand for indemnity for the time being. The Petitioner believed that it was in its interests to withhold taking action for the time being if the Company was unable to repay yet anyway, as long as the Company acknowledged the debt.” It is not a statement that the Petitioner agreed not to demand for payment in the future if no repayment was made by the Company.

(2) The burden is on the Company to adduce sufficiently precise factual evidence to show that there was an agreement binding upon the Petitioner which has the effect of precluding the Petitioner’s right to seek payment of the Debt. No such evidence has been adduced by the Company.

27.  Lastly, the Company is not only deemed insolvent but is plainly insolvent as can be seen from its management accounts. There is no evidence to suggest that the Company has taken any step to address the insolvency of the Company or to restructure the debts which have fallen due. In the circumstances, I do not see any useful purpose for the court to adjourn the Petition.