HUA SHE ASSET MANAGEMENT (SHANGHAI) COMPANY LTD v. GAO YAN AND ANOTHER

HCMP 941/2023

[2023] HKCFI 2229

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 941 OF 2023

________________________

________________________

________________________

________________________

REASONS FOR DECISION

________________________

A. INTRODUCTION

1.  This is the substantive hearing of the following summonses taken out by the plaintiff (“Hua She”):

(1)  Hua She’s summons dated 21 June 2023 for an injunction restraining the 1^st defendant (“Gao”)  from presenting a bankruptcy petition against the 2^nd defendant (“Kei”)  (“the Injunction Summons”); and

(2)  Hua She’s summons dated 7 August 2023 for leave to amend its Originating Summons (“OS”)  in the form of the draft Amended Originating Summons annexed to the summons (“the draft Amended OS”)  and for other directions (“the Amendment Summons”).

2.  In the hearing before me, Hua She is represented by Mr Sonny Payne (together with Mr Lavesh Kirpalani), Gao is represented by Mr Charles Manzoni SC (leading Mr Jason Tang), and Kei is represented by Ms Lilian Ip.

3.  At the end of the hearing, I dismissed both the Injunction Summons and the Amendment Summons, with costs on an indemnity basis to Gao and Kei forthwith.  Those costs are to be summarily assessed.  I also granted leave to release Gao from the undertaking offered to the Court on 20 June 2023 (“the Undertaking”).  These are my reasons.

B.  BACKGROUND

B1. Judgment Debt owed by Kei to Gao under HCA 1223/2021

4.  On 16 August 2021, Gao commenced legal proceedings against Kei in this Court (ie HCA 1223/2021)  for an outstanding loan of RMB 328.05 million due under a written loan agreement (“the Loan Agreement”).  Gao’s case is as follows:

(1)  On 1 December 2015, Gao and Kei entered into the Loan Agreement, by which Gao agreed to provide loans to Kei at the interest of 8% per annum.  Kei agreed to pledge 100% of the shares of Sparkle Roll Holdings Limited (“SRH”)  to Gao (“the 1^st Share Charge”)  as securities of the indebtedness owed by him to Gao under the Loan Agreement.

(2)  From 31 December 2015 to 26 June 2018, Gao transferred eight tranches of money from his company to Kei’s designated bank accounts (“the Transfers”)  as loans under the Loan Agreement.  The total of the amounts lent to Kei is RMB 328.05 million.

(3)  In or around July 2020, Kei was in default in paying the interest.  As a result, Kei pledged 560,620,686 shares of Sparkle Roll Group Limited (“SRG”)  to Gao (“the 2^nd Share Charge”)  as further securities securing the indebtedness owed by him to Gao under the Loan Agreement.

(4)  In September 2020, Kei was in default by not paying the interest.  The SRG shares pledged under the 2^nd Share Charge were sold to repay the interest.

(5)  On 16 August 2021, Gao commenced HCA 1223/2021 against Kei to seek recovery of the outstanding loan (ie the RMB 328.05 million).

5.  According to the Affirmation of Ng Tsz Wai (“Ng”)  filed by Gao on 25 November 2021 in HCA 1223/2021, on 25 August 2021, Ng served, inter alia, the Writ of Summons and the Statement of Claim on Kei personally at the last known address of Kei, ie No.99, 6^th District, Sha Tin Tau New Village, Shatin, New Territories (“Kei’s Address”).

6.  Kei himself signed a Notice of Intention to Defend, and that notice was received by this Court on 1 September 2021.  On that notice, Kei put down Kei’s Address as his address for service of documents in the legal proceedings.

7.  However, Kei did not file and serve any defence within the time prescribed by the Rules of the High Court.

8.  Since no defence has been filed and served by Kei, on 7 February 2022, Gao obtained a default judgment against Kei (“the Judgment”)  for RMB328.05 million plus pre-judgment interest at the rate of 8% per annum from 16 August 2021 to the date of the Judgment, and thereafter at judgment rate, plus costs.

9.  Subsequently, Gao instructed Messrs. C&T Legal LLP (“C&T”)  to enforce the Judgment.  According to the Affirmation of Lee Kwok Wa (“Lee”, a senior consultant to C&T)  filed on 27 April 2023, on 3 March 2023, Lee served a Statutory Demand (“1^st SD”)  personally on Kei at Kei’s Address.

10.  By a letter dated 23 March 2023, Kei’s solicitors, Messrs. Huen & Partner (“H&P”), informed C&T that Kei would not be able to meet his indebtedness and would not contest any bankruptcy proceedings against him.

11.  Thereafter, Gao lodged a draft bankruptcy petition at this Court based upon the 1^st SD.  On 30 May 2023, Master Dick Ho commented on paper that there were some defects in the 1^st SD and that a fresh SD should be served.

12.  On 1 June 2023, a fresh SD (“the 2^nd SD”)  was served on H&P.  On the same date, H&P acknowledged that they had instructions to accept service of the 2^nd SD.

B2.  Debt owed by Kei to Hua She under an arbitration award (“the Award”)

13.  On 26 October 2020, Hua She obtained the Award against Kei.  The debt owed by Kei to Hua She under the Award is currently RMB 221 million.

14.  Hua She has taken various enforcement proceedings against Kei in the BVI, in Hong Kong (HCCT 16/2021), and in UK.  According to Hua She, Kei has sought to resist enforcement, and various courts have made adverse comments about his attempts to do so.

15.  Hua She’s is currently attempting to enforce its debt against some properties of Kei in the UK (“the UK Properties”)  by taking out an application for a charging order in about April 2022.  However, there is a dispute as to whether Kei is the beneficial owner of the UK Properties.  The dispute is to be resolved in a 4-day trial in the UK, which will start on 2 October 2023.

16.  If the UK Court rules that the UK Properties are beneficially owned by Kei, Hua She may probably be able to obtain a final charging order against the UK Properties.  Thereafter, Hua She would be able to enforce the Award pursuant to that charging order.

17.  If a final charging order is made in the UK proceedings, that would take Hua She out of the pool of unsecured creditors and provide Hua She with priority over other creditors of Kei.  Unsecured creditors will obtain only a pari passu distribution of the remainder of Kei’s assets after repayment to Hua She, whereas Hua She will be repaid in full from the sale proceeds of the UK Properties. It is that priority which Hua She is seeking to protect in these proceedings.

18.  Hua She is concerned to prevent any risk of a bankruptcy petition being presented against Kei pending the resolution of the UK proceedings.  Hua She believes that if a bankruptcy petition is made in Hong Kong before Hua She obtains a final charging order in the UK, Hua She will be unable to obtain the priority it wishes over other creditors in Kei’s bankruptcy.

B3. Recent development

19.  In May 2023, Gao learned about the UK proceedings commenced by Hua She. Gao tried to obtain more information of the UK proceedings through the enquiries made by his English solicitors to Hua She’s English solicitors.  Gao also expressed his intention to attend the relevant hearings by his legal team and to have his interest noted on the UK court file.  On 2 August 2023 Gao lodged a claim at the UK Court for enforcing the debt underlying his Judgment against Kei in HCA 1223/2021.  On 10 August 2023, Gao instructed his English solicitors to take out an application to join the UK proceedings as a party in order to oppose Hua She’s application for any final charging order against Kei.

20.  In Hong Kong, based upon an order to enforce the Award obtained by Hua She in HCCT 16/2021, Hua She tried to seek a garnishee order absolute in respect of the credit balance of a bank account held by Kei in Hong Kong.

21.  On 15 June 2023, Gao invited Hua She to consider withdrawing or staying the Garnishee proceedings, pending the substantive determination of a bankruptcy petition to be presented by Gao against Kei.  Hua She refused.

22.  On 16 June 2023, Hua She commenced these proceedings and filed the OS. In the OS, Hua She claims, inter alia, the following:

(1)  a declaration that no debt was due from Kei to Gao under the Loan Agreement as alleged in the 2^nd SD; and

(2)  an injunction restraining Gao from presenting a bankruptcy petition against Kei based on the 2^nd SD.

23.  On 19 June 2023,

(1)  Gao took out an application for leave to be joined in HCCT 16/2021 to oppose Hua She’s application for a garnishee order absolute on the basis that Kei was insolvent and the credit balance of the bank account should be distributed among Kei’s creditors pari passu;

(2)  Hua She made an ex parte on notice application in these proceedings for an interim injunction restraining Gao from presenting a bankruptcy petition against Kei.

24.  On 20 June 2023, upon Gao’s undertaking not to present any bankruptcy petition against Kei before the determination of Hua She’s application for an interim injunction (ie the Undertaking mentioned in [3] above), I gave directions for the disposal of the Hua She’s application for an injunction in these proceedings.  I also directed that the substantive hearing of the injunction application would take place on 24 August 2023 before me.

25.  On 7 August 2023, Hua She took out the Amendment Summons, seeking leave to amend the OS.  As per the draft Amended OS, Hua She intends to seek, inter alia, the following reliefs in these proceedings:

(1)  a declaration that the Judgment obtained by Gao in HCA 1223/2021 was procured by a deceit or fraud upon this Court;

(2)  a declaration that Gao has used the Judgment to procure a breach of Hua She’s rights under the garnishee proceedings in HCCT 16/2021;

(3)  a declaration that no debt is due from Kei to Kao under the Loan Agreement as alleged in the 2^nd SD; and

(4)  an order that Gao be restrained from presenting a bankruptcy petition against Kei based on the 2^nd SD or the Judgment.  

26.  There is no objection that the Amendment Summons be also heard and determined in the hearing on 24 August 2023.  Accordingly, I have proceeded to consider the merits of that application as well.

C.  INJUNCTION SUMMONS

C1. The principles

27.  The principles governing interim injunctions are trite.  The applicant seeking the injunction has to show a serious question to be tried, and that the balance of convenience is in favour of granting the injunction.

28.  A serious question to be tried is not a very steep hurdle.  So long as there is a serious question, it matters not whether the court thinks that the plaintiff’s chances of success at trial are 90% or 20%.  All that has to be seen is whether he has prospects of success which, in substance and reality, exist. Odds against success do not defeat him, unless those are so long that the plaintiff can have no expectation of success, but only a hope. If his prospects are so small that they lack substance and reality, then he fails, for he can point to no question to be tried which can be called “serious”, and no prospects of such success which can be called “real”.  If the opposing party seeks to show there is no serious question to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out.[1]

29.  However, while a company is seeking an interim injunction restraining the presentation of a winding up petition against the company, the American Cyanmid principles do not apply.  The company has to show that the presentation of a winding-up petition against it is an abuse of process.  Great circumspection must be exercised in respect of the grant of such injunction, for the right to present a winding up petition in appropriate circumstances is a right conferred by statute.  See Silverstarlight Ltd v China Citic[2], in which G Lam JA said:

“14. There is no dispute between the parties on the applicable principles for the grant of an injunction to prevent the presentation of a winding up petition. They do not align with the American Cyanmid principles governing the grant of an ordinary interlocutory injunction, but are based instead on the court’s inherent jurisdiction to prevent abuse of its process: see Re Sinom (Hong Kong)  Ltd [2009] 5 HKLRD 487. A company has to show that the presentation of a winding up petition against it would be an abuse of process, in order to obtain an injunction in advance to prevent it. Great circumspection must be exercised in respect of the grant of such injunction, for the right to petition for winding up in appropriate circumstances is a right conferred by statute, and a would be petitioner should not be restrained from exercising it except on clear and persuasive grounds: Sinom, §10. As Harris J observed in Hung Yip (HK)  Engineering Co Ltd v Kinli Civil Engineering Ltd [2021] 1 HKLRD 860 at §14, the ability to present a petition promptly in the case of a company believed to be insolvent is important to creditors since by virtue of section 184(2)  of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap 32)  it is relevant to the date of commencement of the liquidation.”

30.  In my view, as an unpaid creditor of Kei, Gao is entitled ex debito justitiae to commence bankruptcy proceedings against Kei.[3] In order to succeed in its application as per the Injunction Summons, Hua She has to show that the presentation of a bankruptcy petition by Gao against Kei would be an abuse of the process of this Court, which is significantly higher than the threshold in the American Cyanmid principles.

31.  Without prejudice to the above, I am of the view that Hua She has failed to show a serious question to be tried in the American Cyanmid sense, let alone the higher threshold as mentioned by G Lam JA in Silverstarlight. Further, the balance of convenience is not in favour of granting of the injunction sought by Hua She.  

C2.  What fraud?

32.  It is trite that an allegation of fraud would only be considered if it is pleaded distinctly and with the utmost particularity.[4]

33.  Apart from pleading the allegation of fraud distinctly with the utmost particularity, there must also be cogent evidence in support of the allegation of fraud to a standard commensurate with the degree of seriousness.  In Three Rivers DC v Bank of England (No 3)[5], Lord Millett said:

“184. It is well established that fraud or dishonesty (and the same must go for the present tort)  must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7^th ed (1952), p 644; Davy v Garrett (1878)  7 Ch D 473, 489; Bullivant v Attorney Genera for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

185. It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. ……

186. The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.” (Emphasis added)

34.  To say that a judgment has been obtained by fraud, the fraud has to be[6]:

(1)  fraud in the course of the proceedings in question; and

(2)  actual fraud.

35.  Mr Payne relies upon the following cases and submits that averments of fraud cannot be too precise.

(1)  In Dingway Investment Ltd v China City Construction & Development Co (Hong Kong)  Ltd & Others[7], Anthony Chan J said:

“102. On the other hand, it is abundantly clear that Dingway’s case is based on circumstantial evidence and inferences, eg, the receipt by D6 of a very substantial portion of the Sale Proceeds can speak volumes.

103. The following dicta was cited with approval in Ubiquiti Networks International Ltd v Chan Kim Chuen, unrep, HCA 1606/2016, 26 May 201, §81, per B Chu J: “… fraud and/or conspiracy by their very nature are clandestine and difficult to uncover, so quite often proof is not readily obtained. Hence, the averments of fraud and/or conspiracy cannot be too precise. In an application to strike out a fraud and/or conspiracy claim, the court will look upon such application with care to the above considerations, but at the same time will bear in mind that loose allegations that are not properly particularised will be oppressive as regards the defendants when the action goes to trial. The broad question for the court is whether from the facts as pleaded it can be argued that [the defendants] sufficiently know [the plaintiff]’s case on the conspiratorial combination(s)  or agreement(s)  that they have to meet.” (Mr Payne’s emphasis)

(2)  In Delco Participation BV v HWH Holdings Ltd[8], K Yeung J said:

“41(f)  Beyond the seriousness of the charge, there is in fact nothing magical in the word “fraud”. Every set of pleadings will have to be looked at on a case by case basis with the notions of fairness, justice and sufficiency in mind so as to decide whether [Further and Better Particulars] should be ordered, or whether the accuser has sufficiently pleaded a “general case of fraud” so as to be permitted to flesh out the details later on” (Mr Payne’s emphasis added)

36.  In my view, there is no conflict between the cases cited by Mr Payne and the principles set out in [32] to [34] above.  It is clear that an allegation of fraud must be pleaded with sufficient clarity and with sufficient particulars, so that the defendant would be able to know what case the plaintiff is putting forward, which the defendant has to meet in the proceedings.

37.  Hua She’s case in support of the Injunction Summons is that the Judgment was obtained by fraud.  However, as to what fraud is being alleged by Hua She, with respect, this is utterly unclear.  With respect, by reading the affirmations in support of the Injunction Summons filed by P, and by reading P’s written submissions, it is difficult to understand why P is saying the Judgment was obtained by fraud.

38.  At the beginning of the hearing, in response to the questions from the bench, Mr Payne submits that P’s case on fraud is as follows:

(1)  Hua She is not saying that the Loan Agreement, the Transfers, the 1^st Share Charge, and/or the 2^nd Share Charge, are not genuine.

(2)  Hua She’s primary case on fraud is that there is no evidence showing a linkage between the Loan Agreement and the Transfers.  In other words, P is saying that notwithstanding the Loan Agreement, Gao has never provided any loan to Kei under the Loan Agreement.

(3)  Hua She’s alternative case is that the loan under the Loan Agreement has already been fully repaid by Gao.

Mr Payne has confirmed that he would not travel beyond the case as set out in the above.

39.  I have to mention that in Mr Payne’s affirmations filed in support of the Injunction Summons and in his written submissions, Mr Payne has in fact challenged the veracity of the evidence given by Lee in his affirmation. During the hearing before me, in response to the enquiries made by me, Mr Payne has withdrawn those allegations, and Mr Payne has confirmed that he is not making any allegation against any solicitor or any law firm in these proceedings.

40.  I would focus on Hua She’s primary case and alternative case on fraud as submitted by Mr Payne.

C2.1  Hua She’s primary case

41.  Hua She is not disputing the genuineness of the Loan Agreement and the Transfers.  Hua She is only saying that there is no evidence showing the instructions given by Gao and Kei to their respective companies in respect of the Transfers.  In my view, it is plain and obvious that Hua She cannot put forward an arguable case on fraud by this argument.

42.  While the Loan Agreement, the Transfers, the 1^st Share Charge and the 2^nd Share Charge are all genuine, it is more probable than not that the Transfers are the steps taken by Gao to perform the Loan Agreement.  Further, the Statement of Claim in HCA 1223/2021 is verified by a Statement of Truth signed by Gao.  In Gao’s Affirmation dated 24 July 2023 filed in these proceedings in opposition to the Injunction Summons, Gao also said that he did advance sums to Kei pursuant to the Loan Agreement.  There is no evidence showing that Gao’ evidence on the linkage between the Loan Agreement and the Transfers may not be true.

43.  With respect, Hua She’s primary case on fraud is a non-starter.

C2.2  Hua She’s alternative case on fraud

44.  Mr Payne submits that:

(1)  The disclosure of interest notices filed by SRH with HKEx show that between 30 July 2020 and 10 September 2020, SRH disposed of a total of 1,446,648,000 SRG shares for a total sale price of HK$357,728,794 (“the 1.4B SRG Share Disposal”).

(2)  The sale proceeds obtained in the 1.4B SRG Share Disposal equates approximately to the amount of the loan purportedly advanced under the Loan Agreement.

(3)  In the BVI proceedings[9], Kei has made an affirmation in November 2020 (“the BVI Affirmation”), in which Kei said at [6] that “[the] recent sale of my shares has been effected in order to repay the loan to Mr Gao.”

(4)  As a result of the 1.4B SRG Share Disposal, “the principal of the loan was repaid”[10].

45.  With respect, I am unable to accept Mr Payne’s submissions.

46.  It is clear that in the 1.4B SRG Share Disposal, the shares being disposed of are the SRG shares, not the SRH shares.  The disposal would have no connection with the 1^st Share Charge at all.

47.  In the 1.4B SRG Share Disposal, some of the shares are the SRG shares pledged to Gao under the 2^nd Share Charge.  I agree with Mr Manzoni SC that the point in fact has been made clear by what Mr Payne has said in his 1^st affirmation dated 20 June 2023 in support of the Injunction Summons.  In that affirmation, Mr Payne said:

“7. The observation of the Court in the UK Judgment[11] … are as follows:

‘76. ……

(vii)  Scepticism as to the extent to which Mr Kei’s mental state has genuinely hampered him in providing instructions and evidence for these proceedings when it does not appear to have prevented him from:

a)  Entering into a share pledge of Sparkle Group shares in July 2020, upon which he relies as justification for the subsequently disposal of those shares ……’

…………

25. I note that none of the above matters have been disclosed or explained by Mr Gao in the Statutory Demand. Mr Gao might well argue in respect of the 2^nd Share Charge that it is only in respect of interest on the loans, not the principal which is the claimed debt under the Statutory Demand, however, that would not explain the security provided under the 1^st Share Charge, which is still in place over Sparkle Holdings. ……” (Emphasis added)

48.  What Kei said in [6] of the BVI Affirmation, in context, is the sale of the SRG shares covered by the 2^nd Share Charge or part of those shares.  The sale of these SRG shares cannot mean the whole indebtedness owed by Kei to Gao under the Loan Agreement has been fully discharged.  The number of the SRG shares pleaded to Gao under the 2^nd Share Charge is only 560,620,686, which is only about 39% of the SRG shares (ie 1,446,648,000)  disposed of as mentioned in the disclosure notices.  Since the shares pleaded to Gao under the 2^nd Share Charge are about 39% of the shares disposed of as mentioned in the disclosure notices, even if all the SRG shares covered by the 2^nd Share Charge are included in the 1.4B SRG Share Disposal, only about 39% of the sale proceeds would be used to repay the indebtedness owed by Kei to Gao under the Loan Agreement.  In fact, Gao’s case is that the proceeds obtained after realizing the 2^nd Share Charge have been used to repay the interest owed under the Loan Agreement only.  There is no evidence showing that all the proceeds obtained in the 1.4B SRG Share Disposal has been used to repay the entire indebtedness owed by Kei to Gao under the Loan Agreement.

49.  In fact, in Mr Payne’s own words as set out in [25] of his 1^st affirmation, “the security provided under the 1^st Share Charge … is still in place over Sparkle Holdings”.  If all the indebtedness under the Loan Agreement has been repaid after the 1.4B SRG Share Disposal, there is no reason why the 1^st Share Charge would still be in place.

50.  In his oral reply submissions, Mr Payne for the first time refers to a Supplemental Agreement among SRH, Gao and Kei dated 6 July 2020.  Recital (A)  of that agreement reads as follows:

“On 6^th July 2020, [SRH] and [Gao] entered into a Second Share Pledge Agreement …, in which SRH agreed to pledge all its shares to [Gao] as a security for the RMB330 Million loan in accordance with [the Loan Agreement] between [Kei] and [Gao].”

Mr Payne submits that in the light of this recital, apart from the 1^st Share Charge and the 2^nd Share Charge, there is another share charge (“the 3^rd Share Charge”).  The details of the 3^rd Share Charge are those set out in Recital (A)  of the said Supplemental Agreement.  The 1.4B SRG Share Disposal is the disposal pursuant to the 3^rd Share Charge.

51.  I refuse to accept this point.

(1)  This is an entirely new point, raised for the first time in Mr Payne’s oral reply submissions.  No prior notice has been given to Gao and Kei that Hua She would take this point in this hearing.  Gao and Kei have not been given an opportunity to adduce evidence to meet this point in the hearing before me.  I would not allow Hua She to rely upon this point to support the Injunction Summons.  If Hua She is allowed to do so, this would be grossly unfair to Gao and Kei.

(2)  Without prejudice to the above, Recital (A)  of the said Supplemental Agreement may not be accurate or correct.  All the SRH shares have already been pledged to Gao in the 1^st Share Charge in December 2015.  That being the case, it would not be necessary to pledge those shares to Gao again by a new share charge.  Further, it should be the owner of the SRH shares pledging those shares to Gao, and that owner should be Kei.  It would not be correct to say that SRH is pleading SRH shares to someone else, for SRH itself would not be the owner of those shares. 

(3)  In any event, the subject matter of the 1.4B SRG Share Disposal is the SRG shares, not the SRH shares.  There cannot be any connection between the matter mentioned in that Recital (A)  and the 1.4B SRG Share Disposal.

52.  In my judgment, Hua She’s proposition that the indebtedness under the Loan Agreement has been fully repaid is a mere speculation not supported by any prima facie evidence, let alone cogent evidence.

C2.3  No arguable case on fraud

53.  In my judgment, Hua She has failed to demonstrate that its case on fraud as formulated by Mr Payne in this hearing is arguable.

C3. Abuse of process

54.  Mr Manzoni SC submits that if Hua She has any concern of the genuineness of the debt due from Kei to Gao under the Loan Agreement, Hua She in fact should not take any step to prevent Gao from presenting a bankruptcy petition against Kei, but should let the bankruptcy proceedings take the natural course, and raise its objection to the debt in the bankruptcy proceedings.  However, as stated in [17] and [18] above, Hua She wants to eliminate the risk of having bankruptcy proceedings against Kei in Hong Kong, so that Hua She can acquire the status of a secured creditor by getting a final charging order against the UK Properties in the UK proceedings.  Seeking an injunction in these circumstances is an abuse of the process of this Court.  I am in respectful agreement with Mr Manzoni SC.

55.  As submitted by Mr Manzoni SC, once Kei is placed in bankruptcy, an independent trustee would be appointed.  Each and every creditor would be required to submit a proof of debt to the trustee.  The trustee would then consider and determine the claim made by each creditor.  Hua She may lodge its objection to the debt under the Judgment.  After considering Hua She’s objection, the trustee may or may not admit that debt.  If the trustee admits the debt, Hua She would be entitled to challenge that decision by lodging an appeal to the Court pursuant to s.34(5)  of the Bankruptcy Ordinance.

56.  Alternatively, Hua She may oppose the bankruptcy petition in the Bankruptcy Court, putting forward its case that the Judgment was obtained by fraud as a ground in support of its objection.  Such a route is certainly open to Hua She.  See Re Tam Mei Kam[12], in which Yuen JA said:

“22. Where a petition is presented based on a judgment debt, the court sitting in its bankruptcy jurisdiction is guided by the following principles.

22.1 The bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum.

22.2 As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment. It is important to understand the rationale for this approach. First, bankruptcy affects an individual’s legal status. Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.

……

23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances)  it can inquire whether there was actually bona fide consideration for it. Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the judgment debtor himself can also seek to do so, especially if the judgment had been obtained by default. ……” (Emphasis added)

57.  Hua She is not interested to raise its objection in the bankruptcy proceedings at all, but is trying to obtain an injunction to prevent the commencement of the bankruptcy proceedings.  Hua She indeed is using the Injunction Summons to try to frustrate the pari passu distribution among the unsecured creditors (Hua She is one of them)  in the bankruptcy proceedings.  This is an abuse of the process of this Court.

C4. Locus

58.  Another problem of Hua She’s case is that in fact, it does not have the necessary locus to challenge the Judgment by the present proceedings.

59.  The Loan Agreement is an agreement between Gao and Kei.  Hua She does not have any cause of action under the Loan Agreement, and has no interest in the Loan Agreement.  It is not affected by that Loan Agreement other than that its commercial interest may be affected by any debt due under it because Gao is a competing creditor in Kei’s insolvency.  That commercial interest cannot be a sufficient basis upon which Hua She may put forward a case against Gao and Kei for the reliefs in the OS or in the draft Amended OS.

60.  While Hua She does not have the locus to pursue for any relief as stated in the OS or in the draft Amended OS, Hua She would not have the locus to apply for the interim injunction sought in the Injunction Summons.

C4.1  The 1^st SD and the 2^nd SD

61.  The Bankruptcy Rules “provide a complete code governing how a statutory demand is to be issued, served, and challenged”.[13] Accordingly, only the debtor is entitled to apply to set aside a statutory demand.  Kei is the only person who has the locus to apply to set aside the 1^st SD and the 2^nd SD.  Hua She has no standing to do so.

62.  Unless the 1^st SD and/or the 2^nd SD are set aside, Hua She cannot contend that no money is due from Kei to Gao.

C4.2 The Judgment

63.  The Judgment is a default judgment.  A default judgment can be set aside by this Court on such terms as the Court thinks fit.[14]

64.  However, a third party cannot seek to set aside a default judgment unless he can show that he has a direct interest in the subject matter of the action.  Further, he can only apply either in the name of the defendant with his leave, or he must make both the plaintiff and the defendant parties to the application and ask for leave to intervene.[15] In other words, setting aside a default judgment can only be done in the action in which the judgment was granted.

65.  For the aforesaid reason, Hua She cannot seek an order with the effect of setting aside the Judgment in HCA 1223/2021 in the present proceedings.

66.  Further, as submitted by Mr Manzoni SC, Hua She would not be able to join HCA1223/2021 for the purpose of making an application to set aside the Judgment. The joinder application would not succeed.

(1)  Order 15 rule 6 provides:

“(2)  Subject to the provision of this rule, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on application-

……

(b)  order any of the following persons to be added as a party, namely-

(i)  any person who ought to have been joined as a party or whose presence before the Court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, or

(ii)  any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.

……

(3)  An application by any person for an order under paragraph (2)  adding him as a party must, except with the leave of the Court, be supported by an affidavit showing his interest in the matters in dispute in the cause or matter or, as the case may be, the question or issue to be determined as between him and any party to the cause or matter.”

(2)  As recently explained in Re Leung Yat Tung[16]:

(a)  A party might be added under Order 15 rule 6(2)(b)(i)  (“Necessity Limb”)  if his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action.

(b)  A wider jurisdiction has been conferred on the Court by Order 15 rule 6(2)(b)(ii)  (“Just and Convenient Limb”).  However, it requires the would-be-intervener to possess some interest directly related to the subject matter of the action.  A mere commercial interest in its outcome, divorced from the subject matter of the action, is not enough.

(3)  In Shanghai Land Holdings Ltd (in receivership)  v Chau Ching Ngai & Another[17], the plaintiff company (in receivership)  obtained a default judgment against a director, Chau.  Subsequently, the same receivers were appointed as receivers of Chau’s assets.  A third party also obtained a default judgment against Chau.  The third party applied to be joined to the proceedings between the Company and Chau, for the purpose of contending that the receivers had a conflict of interest.  The third party contended that its interest in Chau’s assets as a judgment creditor would have provided a sufficient basis justifying the joinder application.  Sakhrani J refused to accept this submission and dismissed the joinder application.  His lordship held that the third party’s interest was merely a commercial one, in that if the plaintiff company enforced its judgment against Chau then there would be less assets of Chau available to satisfy the third party’s debt.

(4)  The situation in the present case is same as the situation in Shanghai Land Holdings.  Hua She is saying that if Gao is allowed to present a bankruptcy petition against Kei, Hua She’s application for a charging order over the UK Properties owned by Kei would be in jeopardy.  The interest alleged by Hua She is merely a commercial interest, which is completely divorced from the subject matter of HCA 1223/2021, ie the loan owed by Kei to Gao under the Loan Agreement. 

67.  Mr Payne submits that Hua She has the locus to seek an order to set aside the Judgment in the present proceedings.  He relies upon Roshan v Singh and Others, in which DHCJ Simon Monty QC said:

“31. I can see no basis for concluding that as a matter of principle a judgment obtained by fraud can only be set aside by a party to that earlier action. It might well be that where a judgment is sought to be impeached it would be a rare case where a non-party can say to the court that because a judgment in a case to which he was not a party was obtained by fraud it should be set aside; it might be said that the non-party had no personal (as opposed to a more general public-spirited or general)  interest in that happening. However, it seems to me that the present case is different.” (Mr Payne’s emphasis)

68.  However, in the same paragraph cited by Mr Payne, the learned judge in fact mentioned that as to whether the non-party can seek an order to set aside a judgment allegedly obtained by fraud, a relevant factor is whether that non-party has sufficient interest in the matter.

69.  Mr Payne has referred me to the judgment of Lord Sumption at [60] in Takhar v Graefield Ltd[18]. However, what Lord Sumption said there in fact is against Hua She’s stance that it can make an application for an order setting aside the Judgment in the present proceedings.  In that paragraph, Lord Sumption said:

“60. …… A party to the earlier litigation was entitled to bring an original bill in equity to set aside the Judgment given in that litigation on the ground that it was obtained by fraud.” (Emphasis added)

70.  Mr Payne has further referred me to Vitaly Ivanovich Smagin v Ashot Yegiazaryan and Another[19]. The matter in that case is leave to serve the proceedings out of jurisdiction. Suffice to say that as to whether a non-party may commence a new set of proceedings to seek an order to set aside a judgment in another set of proceedings, in the circumstances of that case, the court is of the view that the issue is arguable.  That case cannot be said as an authority in support of the proposition putting forward by Mr Payne.

71.  With respect to Mr Payne, for the reasons set out in the above, as a matter of Hong Kong law, I do not see how Hua She can seek an order to set aside the Judgment in HCA 1223/2021 in the present proceedings.  Further, I am of the view that Hua She does not have sufficient interest to join HCA 1223/2021 to make an application for an order to set aside the Judgment therein.

72.  Mr Payne submits that, in fact, Hua She is not seeking an order to set aside the Judgment, but is only seeking a declaratory relief, declaring that the Judgment was procured by a deceit or fraud upon this Court.[20] That being the case, Hua She would not be subject to the restrictions as set out in the above.  With respect, I disagree. We are not in a game of words. There is no difference in substance between the effect of the declaration being sought by Hua She and the effect of an order setting aside the Judgment.

73.  Mr Payne also submits that even if Hua She does not have a cause of action against Gao and Kei, Hua She would still able to seek declaratory reliefs regarding the genuineness of the debt under the Judgment.  However, as submitted by Mr Manzoni SC, in order to demonstrate that Hua She would have the necessary locus by this argument, Hua She has to show “real interest” in the matter.

74.  As explained by Coleman J in Convoy Global Holdings Ltd v Kwok Hiu Kwan[21], the questions of a real interest and a real issue are linked.  In order to understand whether there is a real interest, one must look to what the real issue is.  In Convoy, the real issue was whether s.131 of the Securities and Futures Ordinance had been breached[22], and the only person that had a real interest in that question was the SFC.  The company itself was unable to seek declarations about a breach of s.131 despite the fact that a breach of s.131 would affect the proper corporate governance of the Company.  That commercial interest in knowing whether s.131 had been breached was insufficient to amount to a “real interest”[23]

75.  Here, the “real issue” is whether the Judgment was obtained by fraud as alleged by Hua She.  However, as explained in the above, the commercial interest of Hua She, based upon seeking to minimise the number of creditors of Kei and facilitating Hua She’s priority in the repayment process, is not a sufficient interest justifying the granting of the declaratory reliefs sought by Hua She in these proceedings.

C5. No serious question to be tried

76.  For the reasons above, even assuming the American Cyanmid principles are applicable, Hua She has failed to show a serious question to be tried.  If the higher threshold as mentioned in Silverstarlight is adopted, Hua She is miles away from that threshold.

77.  On this ground alone, the Injunction Summons must be dismissed.

D.  BALANCE OF CONVENIENCE

78.  Without prejudice to the aforesaid, insofar as may be necessary, I would also dismiss the Injunction Summons on the ground that the balance of convenience is in favour of refusing the application.

D1. Hua She may address its concern in the bankruptcy proceedings

79.  If Hua She’s real concern is to preserve its rights as an unsecured creditor of Kei by challenging the genuineness of the debt due from Kei to Gao under the Loan Agreement and the Judgment, as explained in the above, Hua She would certainly have an opportunity to do so in the bankruptcy proceedings. Hua She’s rights as an unsecured creditor of Kei would not be prejudiced by the presentation of a bankruptcy petition by Gao against Kei at all. 

80.  As said in Section C3 above, this Court would not allow Hua She to use the Injunction Summons to try to frustrate the pari passu distribution of Kei’s assets among the unsecured creditors, and to try to obtain a priority over and above the other unsecured creditors.

D2.  Hong Kong bankruptcy proceedings would not automatically lead to a stay in the UK proceedings.

81.  As submitted by Mr Manzoni SC, if Gao presents a bankruptcy petition against Kei in Hong Kong, the Hong Kong bankruptcy proceedings would not have the effect of automatically staying the UK proceedings.  At most, a Hong Kong trustee in bankruptcy might seek recognition in the UK Court, and thereafter apply for a discretionary stay of those UK proceedings.[24] It has to be borne in mind that:

(1)  The one who would make an application for recognition in the UK Court would be the Hong Kong trustee in bankruptcy, not Gao or Kei.

(2)  Whether the Hong Kong bankruptcy proceedings would affect the UK proceedings in any way is a matter to be determined by the UK Court. 

82.  I agree with Mr Manzoni SC that the Hong Kong Court should not defer the legitimate commencement of bankruptcy proceedings in Hong Kong, simply because of its possible effect on UK proceedings commenced by one creditor potentially to the detriment of other creditors.  To do so would significantly undermine the effect of, and public policy behind, the bankruptcy legislation in Hong Kong.

D3.  If Hong Kong bankruptcy proceedings would have the effect of delaying the UK proceedings

83.  Even if the Hong Kong bankruptcy proceedings would have the effect of delaying the UK proceedings, this in fact would not be a reason in support of the Injunction Summons.

84.  In Re Aggarwal, Navin Kumar[25], Creditor A (a judgment creditor)  opposed the bankruptcy petition lodged by Creditor B, saying that (a)  the alleged debt due to Creditor B was subject to a proprietary claim by Creditor A, and that (b)  the petition was an abuse of process presented not to enforce the debt due to Creditor B but to interfere with Creditor A’s attempt to enforce its judgment against the debtor.  Barma J (as he then was)  dismissed Creditor A’s objection and said:

“22. Further, it seems to me that there is nothing wrong in principle with a creditor seeking to prevent another creditor from retaining the benefit of execution levied against an insolvent debtor. Where a debtor is insolvent, it is entirely in accordance with the policy of the law that his assets should be realised for the benefit of all his creditors, and for them to recover their debts on a pari passu basis. This is what is provided for in the Bankruptcy Ordinance and in the provisions relating to winding up in the Companies Ordinance (Cap 32). That being so, I cannot see that there is any abuse in Melco seeking to achieve this.”

85.  Even if Gao is seeking to delay or to prevent Hua She from ring fencing the UK Properties for its own debt by bankruptcy proceedings in Hong Kong, this is entirely legitimate.

D4.  Fairness to all creditors would be achieved by the bankrupt proceedings

86.  As aptly said by Barma J (as he then was)  in Re Aggarwal:

“23. …… Indeed, it would seem to me that there are advantages to the making of a bankruptcy order sooner rather than later, as this would enable the debtor’s affairs to be investigated much sooner, which may well be of benefit to his creditors. …… Finally, the making of a bankruptcy order now would seem to be better calculated to advance the principle of pari passu distribution, whereas the refusal to make one by dismissing the petitions would be likely to give a potentially significant advantage to the Firm, which is actively seeking to enforce its judgment against the Debtor by process of execution, which, if successful, would be likely to benefit it to the exclusion of the Debtor’s other creditors.”

87.  For the same reasons as set out in the aforesaid dictum, there is no reason for me to grant an injunction to prevent the commencement of bankruptcy proceedings against Kei.

D5.  Refusing the injunction application

88.  For all the reasons set out in sub-sections D1 to D4 in the above, insofar as may be necessary, I would exercise my discretion against Hua She and dismiss the Injunction Summons.

D6. Other matters

89.  Ms Ip refers me to a summons taken out by Hua She on 21 August 2023 in HCA 1223/2021, by which Hua She seeks leave to intervene in that action and an order to set aside the Judgment.  Hua She also seeks an order that the summons be heard together with the substantive hearing of the OS in these proceedings.  Ms Ip submits that by that summons, Hua She has conceded that in fact, it could not make an application for a relief with the effect of setting aside the Judgment in these proceedings, but can only do so in HCA 1223/2021.

90.  With respect, I am unable to agree that such a concession has been made by Hua She by filing the summons in HCA 1223/2021.  In that summons, Hua She specifically asks that the summons be heard together with the substantive hearing of the OS in the present proceedings.  Hence, Hua She’s stance is that an application for a relief with the effect of setting aside the Judgment can be made either in these proceedings or in HCA 1223/2021.  Hua She has not conceded that such an application can only be made in HCA 1223/2021.

91.  Notwithstanding the non-acceptance of Ms Ip’s point as set out in the above, that would not change the outcome that Injunction Summons must be dismissed.  For the sake of completeness, I would also add that the time spent on this point in the hearing is minimal.

92.  I note that the summons in HCA 1223/2021 will be heard by a master on 30 August 2023.  Hua She, Gao and Kei should draw the master’s attention to my decision made on the Injunction Summons and the Amendment Summons and these Reasons for Decision.  My decision here may have an impact on that summons.

E.  AMENDMENT SUMMONS

93.  In considering whether Hua She has demonstrated that its case on fraud as formulated by Mr Payne in this hearing is arguable, I have taken the proposed amendments as set out in the draft Amended OS into account.  My conclusion is that even with these proposed amendments in mind, Hua She has failed to show an arguable case.  In the circumstances, there is no point to allow the Amendment Summons.

F.  COSTS

94.  The general rule is costs following the event.  Mr Payne submits that notwithstanding the general rule, as to the costs up to the date of Gao’s Affirmation, ie 24 July 2023, there should be no order as to costs.  The general rule should only apply to the costs incurred after 24 July 2023.  The reason given in support of this position is that 1^st Share Charge and the 2^nd Share Charge have not been mentioned in the 1^st SD and the 2^nd SD.

95.  I am unable to accept these submissions.  Plainly, Hua She is not saying that had the 1^st Share Charge and the 2^nd Share Charge been mentioned in the 1^st SD and the 2^nd SD, the injunction application would have had never been made.  In my judgment, the general rule should apply to all the costs incurred as a result of the Injunction Summons and the Amendment Summons.

96.  There is sufficient complexity justifying a certificate for two counsel.

97.  I am of the view that indemnity costs are also justified in this case. Reasons are as follows:

(1)  An allegation of fraud should not be lightly made.  Yet, Hua She has put forward an allegation of fraud, which is unarguable at all. 

(2)  As said in [39] in the above, Hua She in fact had put forward an allegation challenging the honesty of Lee (a solicitor in the firm representing Gao in these proceedings)  by affirmations and by written submissions.  Although Mr Payne withdrew the allegation in the hearing, that allegation had already been made and put forward in the documents lodged with the Court.  Putting forward an allegation of this kind against a practicing solicitor without any cogent basis is extremely improper and inappropriate.  A clear message must be sent out that conduct of this kind would not be tolerated by this Court.  An order of indemnity costs should be made in these circumstances.[26]

(3)  I have made a finding that the injunction application made by Hua She is an abuse of the process of this Court.

G.  DISPOSITION

98.  For the reasons above, I made the order as set out in [3] above at the end of the hearing.  Subsequent to the hearing, after considering the bills of costs lodged by Gao and Kei respectively and the written replies given by Hua She to the said bills, I summarily assess the costs payable by Hua She to Gao at HK$860,000, and the costs payable by Hua She to Kei at HK$360,898.  In accordance with the costs order made by me, those costs have to be paid forthwith.

99.  For the sake of completeness, I have directed that in HCCT 16/2020, there be a hearing for directions before me on a date to be fixed in consultation with counsel’s diaries.  Hua She, Gao and Kei may consider what steps they should take in HCCT 16/2020 as a result of this decision.  In the hearing before me on 24 August 2023, the time spent on HCCT 16/2020 is minimal.

100.  Lastly, it remains for me to thank all counsel (including solicitor advocate)  for the assistance rendered to the Court.