KIU HUNG INTERNATIONAL HOLDINGS LTD v. CHEUNG HOI YAN

HCMP 61/2020

[2021] HKCFI 314

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 61 OF 2020

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JUDGMENT

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1.  There is before the court an Originating Summons issued by the Plaintiff (“Kiu Hung”) on 14 January 2020 for a quia timet Injunction restraining the Defendant (“Cheung”) from present a winding up petition against it based on a debt which it disputes.

2.  The issue here is whether there is a bona fide dispute over the debt in question based on substantial grounds, and it turns upon the quality of the evidence before the court.

Background

3.  Cheung is the holder of a Promissory Note dated 17 January 2019 (“PN 2019”) issued, on its face, by Kiu Hung, a company listed on the main board of HKSE.   Based on PN 2019, Cheung claims the principal sum of HK$1.17 million together with interest thereon as provided (24% p.a.) (“Debt”).  PN 2019 expired and became payable on 17 October 2019.

4.  On 27 December 2019, Cheung served a Statutory Demand on Kiu Hung in respect of the outstanding principal and interest (HK$264,644.38) based on PN 2019.  Kiu Hung says that this was the first demand ever received by it and the demand came out of the blue.

5.  Kiu Hung denies the debt.  On 14 January 2020, by way of her solicitors’ letter Cheung declined to withdraw the Statutory Demand as requested by Kiu Hung.  Hence these proceedings. 

6.  On 16 January 2020, Kiu Hung obtained an ex parte Interlocutory Injunction restraining Cheung from presenting any winding-up petition against it.  On 23 January 2020, upon the parties’ consent, the Interlocutory Injunction was continued until conclusion of these proceedings or further order.

7.  The PN 2019 is intricately related to another Promissory Note dated 1 April 2018 (“PN 2018”) issued to Mr Shu Zhongwen (“Shu”).  The validity of PN 2018 is not in issue.  It is accepted by Kiu Hung that Shu was its creditor and PN 2018 was issued in answer to the debt owed to Shu.

8.  PN 2018 was in the principal sum of HK$2,119,120.  The document contained 2 important terms: (1) it carried interest at the rate of 24% p.a. from date of issuance on 1 April 2018 to maturity, 30 September 2018 (clause 3); and (2) it provided that Shu was free to transfer or sell PN 2018 prior to the maturity date (clause 4).  PN 2018 came with a template transfer form and one for confirmation of independence of purchaser. 

9.  The terms of PN 2019 suggested that Shu had transferred part of the debt represented by PN 2018 to Cheung (clause 6). 

Kiu Hung’s case

10.  Subsequent to the issuance of PN 2018, Shu was appointed as an executive director of Kiu Hung on 24 October 2018.  At the time, the latter had not repaid the debt under PN 2018 despite its expiration. Kiu Hung was in negotiation with Shu on a change of payment method – allotment of newly issued shares in Kiu Hung in lieu of payment.  

11.  Kiu Hung alleged that during such negotiation it found out that Shu had misappropriated RMB 2 million of its money (“Sum”) in January 2019.  The Sum represented, apparently, a trade debt owed by Mr Liu Fa Lin, a Mainland merchant, to Kiu Hung.  It was alleged that as a director of Kiu Hung, Shu instructed Liu to pay him directly for the company’s purpose.  In fact, the money was paid without the knowledge or consent of the company.  Instead of repaying the money, Shu came to a settlement with Kiu Hung to treat the misappropriated funds as full and final settlement for PN 2018.

12.  However, Shu failed to execute a discharge for PN 2018 or a receipt of the debt which explained the lack of written record to show that PN 2018 had been fully paid off.  The unreasonable attitude of Shu caused a breakdown of relationship.  On 28 June 2019, Shu ceased to be a director of Kiu Hung.

13.  Kiu Hung says that it had no reason to issue PN 2019 to Cheung or anyone, as the debt under PN 2018 was fully discharged.  PN 2019 is forged and/or not authentic.  Indeed, it had no knowledge about PN 2019 until the receipt of the Statutory Demand.

Cheung’s case

14.  Cheung’s evidence is that through the introduction of Mr Pun Yat Kan (“Pun”), who was an executive director of Kiu Hung at the material time, she got to know of Shu’s desire to sell part of the debt under PN 2018.  She agreed to purchase the debt to the value of RMB 1 million, which was equivalent to the principal sum stated on PN 2019.  On 17 January 2019, Cheung signed the Transfer Form and Confirmation based on the templates attached to PN 2018. 

15.  Cheung’s acquisition of interest in PN 2018 was evidenced by a newly issued PN 2019 which was signed by two directors of Kiu Hung, namely, Shu and Mr Dennis Yu (“Yu”), the CEO and an executive director of Kiu Hung.  The document was passed to her by Pun.  The consideration of RMB1,000,000 was paid by Cheung to Shu by way of two fund transfers.  The payments are not in dispute.

16.  Cheung’s case is largely supported by the evidence of Pun.  In particular, Pun had produced two Balance Sheets of Kiu Hung dated respectively 30 June 2019 and 31 December 2019.  According to Pun, the Balance Sheets were produced to him when he was representing an investor, who was interest to acquire shares in Kiu Hung, for due diligence purpose.  In those documents, PN 2019 was recorded against Cheung’s name under “Other Loans”.  Under that category, inter alia, another PN for the principal of HK$949,120 was recorded against Shu’s name.  The two principal sums added up to the principal under PN 2018. 

17.  Further, the accrued interest under PN 2019 had increased from HK$126,936.99 in the June 2019 Balance Sheet to HK$192,328.85 in the later document. 

18.  In addition, Pun had provided explanations on the manuscripts which appeared on the copy of PN 2019 produced by Kiu Hung :

(1) A voucher number, which followed the system used by Kiu Hung, was written on the top right hand corner[1];

(2) Three lines could be found at the bottom of the first page of PN 2019.  Firstly, “Dr P/N” against Shu in the sum of HK$1,170,000;

(3) Secondly, “Cr P/N” in Cheung’s name of HK$1,170,000;

(4) Underneath them, “Transfer of P/N from [Shu] to [Cheung]”.

19.  Based on such evidence, Pun said that Kiu Hung had full knowledge of PN 2019 and had properly approved it. 

Law

20.  There is no argument by the parties over the test which has to be met by Kiu Hung.  It must demonstrate a bona fide dispute of the Debt based on substantial grounds.  It is trite that to satisfy the test, sufficient precise evidence is required from Kiu Hung.

Analysis

21.  I regret to say that Kiu Hung’s evidence before the court is little more than bare assertions.  There is no supporting evidence for such assertions when it can fairly be expected that if Kiu Hung’s case is true, there must be supporting evidence available to it. 

22.  Most glaringly, Kiu Hung’s stance in respect of the documentary evidence adduced by Cheung is little more than unsubstantiated allegations that they are not genuine. 

23.  In respect of PN 2019, there is no evidence from Yu on the authenticity of his signature on PN 2019, nor any explanation on the absence of such evidence.  Instead, Kiu Hung’s evidence is that Yu was questioned on his signature on the document.  Whilst Yu was said to be adamant that he did not sign the document, he acknowledged that the signature resembled his to a high degree.  There was no attempt to produce any handwriting evidence before the court. 

24.  The Balance Sheets are important evidence which not only support Cheung’s case but also contradict Kiu Hung’s case that it knew nothing about PN 2019.  In the face of such documents, Kiu Hung made 3 points[2]: (1) Pun’s evidence on the investor was doubted; (2) it did not provide any accounts or records to individual shareholders for due diligence purpose; and (3) the accuracy and authenticity of the Balance Sheets were not accepted.  

25.  However, the information contained in the Balance Sheets were corroborated by both the Interim Report 2019 and Annual Report 2019 of Kiu Hung.  In the former, the total amount of the promissory notes issued by the Group[3] matched the figure stated on the June 2019 Balance Sheet.  In the latter, it can be seen[4] that Shu’s promissory note was recorded under “Related Party Transactions” and the principal was reduced from HK$2,119,000[5] to HK$949,000, which matched the Balance Sheets as well as fortifying Cheung’s case that part of the HK$2,119,000 was acquired by her. 

26.  In an attempt to answer the Annual Report, Kiu Hung alleged that there was a request to the auditor to extinguish the debt to Shu under PN 2018 because it was no longer indebted to Shu.  However, the auditor disagreed.  Again, no documentary support was put forward by Kiu Hung. Normally, there would be correspondence exchanged with the auditor on such issue.

27.  Pun’s evidence on the manuscripts on PN 2019 is also important evidence in support of Cheung’s case and contradicts that of Kiu Hung.  The manuscripts most likely belonged to someone in Kiu Hung’s accounts department.  In this regard, Kiu Hung’s evidence was that the handwritings belonged to a person called Wilfred who worked directly under Shu.  It was alleged that “Shu or his nominee would write anything on [PN 2019] without [Kiu Hung’s] knowledge”[6].

28.  Kiu Hung’s response holds on water when the manuscripts were perfectly consistent with its Annual Report 2019 which recorded the reduction of the value of the promissory note held by Shu. 

29.  Another example of the inadequacy of Kiu Hung’s evidence is that there is no documentary support in respect of the alleged trade debt of RMB2 million owed by Mr Liu or in support of the allegation that the debt was paid to Shu.  Indeed, the proposition that PN 2018 had been fully settled was contradicted by both the Interim Report and Annual Report.

30.  Finally, Mr Wong, who appeared for Kiu Hung, submitted that Cheung knew or ought to have known that PN 2019 was voidable by reason of Shu alleged breach of fiduciary duties in its issuance. 

31.  The allegation of breach of fiduciary duties rested on 2 key limbs: (1) Shu procured the payment of interest under PN 2019 when no further interest was payable under PN 2018 after the stated due date (30 September 2018); and (2) PN 2018 was not negotiable after the said date.

32.  In respect of (1), whilst clause 3 of PN 2018 stipulated that the interest was to be paid on the due date, there was nothing in the terms of the document which suggested that where the debt under PN 2018 was not paid on 30 September 2018, no further interest should be payable.  The submission of Kiu Hung runs contrary to common sense, ie, it would be beneficial for it not to repay or delay the repayment of the debt.  No authority had been cited in support of this point. 

33.  Kiu Hung is, arguably, on firmer ground in respect of the second alleged breach of fiduciary duty in that clause 4 referred to Shu being free to transfer or sell PN 2018 before 30 September 2018.  However, I am unable to see the basis of the allegation that Cheung either knew or ought to have known of the breach (assuming that there was a breach by Shu).  The evidence is that PN 2019 was signed by two of Kiu Hung’s directors and it was handed over to Cheung by another director, Pun.  To Cheung, Kiu Hung had plainly agreed to PN 2019.  If there was a prohibition against sale after 30 September 2018, Kiu Hung had approved it as far as Cheung was concerned.   

34.  For these reasons, I see no substance in the allegation that Shu was in breach of fiduciary duties or that Cheung knew or ought to have known of such breach.  Further, I am of the view that Kiu Hung has not demonstrated a bona fide dispute on substantial grounds in respect of the Debt. 

35.  The Originating Summons is accordingly dismissed.  I make an order nisi that the costs of and occasioned by this application be paid by Kiu Hung.