XCHRX RE A STATUTORY DEMAND SERVED BY WILLIAM E. SIMON & SONS (ASIA) LTD.

HCSD 26/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

STATUTORY DEMAND LIST NO. 26 OF 1999

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D E C I S I O N

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1. I have before me an application under Rule 47 of the Bankruptcy Rules, to set aside a statutory demand served on Mr Lam Yin Sang under the provisions of section 6A of the Bankruptcy Ordinance, Cap. 6.

2. The debt is claimed by the creditor, William E. Simon & Sons (Asia) Ltd (Simon) pursuant to a guarantee given by Mr Lam under an agreement dated 13 July 1993 (the master agreement). Mr Lam was then the chairman and chief executive of Swank International Manufacturing Company Ltd (Swank) and, under the provisions of a loan agreement pursuant to the master agreement, a loan was to be made to a third company to be incorporated in the British Virgin Islands, later Hatton Enterprises Corp. (Hatton), the purpose of which was to inject capital provided by Simon into Swank. The amount of the loan was US$15,000,000 which was duly paid by Simon. Further terms of that agreement were that a large proportion of Swank's shares and warrants were transferred to Hatton, Simon was entitled to nominate a director of Hatton, and became entitled to options on Hatton shares.

3. It appears that Swank did not prosper as the parties had hoped, and by 1997 it became apparent to Simon that, unless a further injection of capital was made, they would be entitled to terminate the loan under the terms of the loan agreement, thereby rendering it immediately due and payable. However, as an alternative to this course, and with a prospect of securing further financing, on 24 March 1997, a new agreement was entered into (the 1997 agreement) which envisaged a new loan agreement being made, also guaranteed by Mr Lam.

4. The 1997 agreement, after reciting inter alia that Simon claimed to be entitled to terminate the original loan and require payment from Mr Lam, which at the time was not admitted by Mr Lam, but has not been denied during these proceedings, also stated that Simon agreed not to exercise their rights subject to and conditional upon the entering into of the agreement referred to in clause 2 of the agreement. Clause 2 reads as follows:

"FURTHER AGREEMENT

Although it has not been possible in the time available to draft a detailed contract relating to the matters herein, this agreement is intended to be contractually binding. On the date which is 21 days after the date hereof, the parties shall execute an agreement or agreements to replace this agreement and to replace all the Existing Agreements as amended by, and to give effect to, the provisions of Clause 3 to the last Clause of this agreement and of Schedule 2 to this agreement incorporating substantially the provisions of the Existing Agreements (to the extent relevant and not inconsistent herewith) or (where the relevant matter is not covered by an Existing Agreement) incorporating provisions which are common in relation to matters of that type. Pending execution thereof (but without prejudice to these rights) Simon agrees not to exercise the rights referred to in Recital (D)."

5. The agreement or agreements intended to replace this agreement were not executed 21 days thereafter or, indeed, at all. The date for execution of the further agreements was extended no less than seven times at the request of Simon, and with the agreement of Mr Lam, because of ongoing correspondence between Simon and the Securities & Futures Commission regarding the effect of the 1997 agreement and whether Simons's rights under it would trigger a general offer in respect of Swank, something which they wished to avoid. The final extension of time was to 30 June 1998. Simon's solicitors wrote to Mr Lam shortly before that date requesting a further extension to 31 December 1998, but only received a reply from his solicitors saying that due to heavy business commitments he would require more time to consider the request, and would hopefully revert in about two weeks. On 2 July 1998 Simon's solicitors replied that the agreement and their offer to extend had lapsed on 30 June 1998.

6. On 1 September 1998, Mr Lam wrote to Simon, setting out his personal liabilities, including the US$15million owed to Simon, and making proposals for various repayment options. These were rejected by Simon who on 19 October 1998 wrote to Hatton to demand payment of the loan, and to Mr Lam on 6 November 1998 in similar vein. A winding up order was made against Hatton in March 1999, and the statutory demand, the subject of these proceedings served on Mr Lam on 29 April 1999.

7. Under Rule 48(5)(b) and (d), the court may grant an application to set aside a statutory demand if the debt is disputed on grounds which appear to the court to be substantial, or if the court is satisfied, on other grounds, that it ought to be set aside. This requires the court to conduct an enquiry similar to that in an application for summary judgment under Order 14, namely to see whether there is a genuine triable issue which would afford an arguable defence to the debtor in an action on the debt, or whether, for any other reason, it would be inequitable to allow the statutory demand to stand.

8. The grounds upon which Mr Lam seeks such an order may be summarised as follows:-

(1) that the 1997 agreement is binding and operates to release Mr Lam from his guarantee under the master agreement;

(2) that the conduct of Simon relating to the 1997 agreement amounts to a waiver by Simon of the insolvency of Swank as an event of default under the loan agreement and they are accordingly estopped from relying on it;

(3) that there has been a material alteration of the master agreement without his consent by a waiver by Simon of its rights under clauses 3A and B of the 1997 agreement and its election not to proceed with it; and

(4) the statutory demand itself is defective as it does not state details of the interest claimed nor the security which, it is claimed by the applicant, Simon holds.

The 1997 Agreement

9. There can be no doubt from the wording of the 1997 agreement that, for what it was worth, it was binding on those who were parties to it. The applicant claims that, as a binding agreement, it released him from his guarantee in the 1993 agreement, and the fact that Simon decided not to proceed with it cannot resurrect the earlier agreement and the guarantee.

10. Mr Carolan, on behalf of Simon, says that it is apparent from the 1997 agreement, and the subsequent correspondence, that it was only the first step in a series of agreements which would, when executed, replace the existing agreements, including the master agreement. It, was, he says, in effect an agreement to agree, and as these other agreements were never executed in spite of a number of extensions of time, this agreement therefore lapsed. It is unfortunate that the 1997 agreement did not envisage, and state specifically the effect of, a failure to execute the agreements referred to in clause 2 thereof, once the 21 days, or any extension of time had expired, but as it did not, it is necessary to look at the agreement as a whole to see what its effect, by itself, is.

11. It clearly is a preliminary agreement. It refers to agreements to replace it, and without which it is largely meaningless. In effect it provides a foundation for a new loan structure and new options, and suspends Simon's right to call in Mr Lam's guarantee subject to and conditional upon the entering into of the new agreements. Once the time has expired for the new agreements to be executed, it is clear that the 1997 agreement has no further effect. There is nothing in it which can be enforced by either party, and, indeed, no attempt has been made by any party to do so. This being the case, once the fundamental terms of the agreement had not been carried out, it must be taken to have lapsed and the original master agreement stands unchanged and unamended.

12. In any event, the obligations of Simon under the agreement were subject to the approval of its board of directors. That approval was never given, and without it, the agreement could not take effect.

13. I find therefore that the 1997 agreement itself does not operate to release Mr Lam from his guarantee under the master agreement.

Estoppel

14. Mr Poon for the applicant says that the behaviour of Simon over the 1997 agreement now estops them from relying on the earlier agreement which would have been replaced by it, if it had been proceeded with. He points to their conduct in failing to wait for a reply to their request for a further extension after 1 July 1998 and unilaterally failing to proceed with it.

15. This cannot amount to estoppel. As I have noted above, once the provisions of the 1997 agreement were not carried out, the whole agreement lapsed as being of no further effect. An extension of time for Simon to try to arrange matters to carry out those provisions depended on the agreement of Mr Lam. That agreement was not forthcoming. It would have been a matter of a moment for him to give his approval to a further extension, and when he did not, and the time expired, there can be no criticism of Simon for ceasing their efforts to give effect to the agreement, and to call in the original debt.

16. Further, their waiver of their rights to rely on the event of default under the loan agreement was only subject to and conditional on the agreements envisaged by the 1997 agreement being executed. Once it was apparent that this was not going to happen , and the 1997 agreement lapsed, their rights under the original agreement were restored, and the failure to assert those rights while trying to carry out the 1997 agreement cannot estop them from enforcing them now.

Material alteration by waiver

17. The only matter relied on by Mr Lam to support his allegation of a material alteration is the waiver by Simon of their rights under clause 3A and 3B of the 1997 agreement. The waiver was made necessary by the advice given to Simon that the retention of these rights might trigger a general offer for Swank, which, as I have noted above, they wished to avoid. The rights under these clauses gave power to Simon to procure changes in Hatton's bank mandates, to require the resignation of directors and the appointment of their nominees as directors and negotiators with creditors. The effect would be to give Simon a degree of control over Hatton and Swank. I cannot agree with the applicant that, by waiving that control, they have changed anything to the prejudice of the applicant. This cannot therefore amount to a material alteration to the 1993 agreement affecting the rights of Simon under it.

Form of Statutory Demand

18. There are two matters which Mr Lam claims make the statutory demand defective; the first is the failure to state details of interest, and the second is the failure to state the nature of any security held by the creditor.

19. Mr Carolan concedes that there has been a failure to give details of the interest in the demand, but says that this is not fatal to their claim. He says first that for a defect in the demand to merit its setting aside, the defect must be such as to mislead the debtor, or so lacking in clarity as to confuse him. Here the debtor was under no illusions as to the amount of the principal debt, and had referred to it himself many times. Equally, he was well aware of the amount of interest on the debt which is set out in the financial statements of Hatton, supplied by Mr Lam himself, and it was set out in the Proof of Debt filed by Simon in the Hatton winding up proceedings and discussed at a meeting of creditors on 22 April 1999 at which Mr Lam was present. This has not been denied by Mr Lam. I accordingly accept that there is no way that Mr Lam could have been confused or misled by the way the debt is expressed.

20. In any event, I am not satisfied that any substantial injustice has been caused by this defect and the respondent is also entitled to rely on the provisions of section 124(1) of the Bankruptcy Ordinance.

21. In respect of the matter of security, the applicant relies on clause 4(b)(i)(bb) of the loan agreement made under the master agreement which gives Simon the right to a second charge on Swank shares and warrants in the event of them or any of them, or any other assets of Hatton, being charged to secure indebtedness or other obligations of Hatton.

22. The short answer to that is that there is no evidence that such a charge was ever created, either from Mr Lam or elsewhere, and there is accordingly no security which needs to be mentioned in the demand.

23. As I can find no other grounds which, under the provisions of Rule 48(5) I may set aside the statutory demand, this application must be dismissed.

24. The creditor is authorized to present a bankruptcy petition against Mr Lam forthwith, and I further order that the creditor's costs of this application be taxed and paid forthwith by the debtor, Mr Lam.