RE EVERWIN ENTERPRISE (HONG KONG) LTD

HCCW 439/2024

[2024] HKCFI 3032

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 439 OF 2024

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J U D G M E N T

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1.  There is before the court a petition presented by Haitong International Products & Solutions Limited (“Petitioner”) seeking to wind up Everwin Enterprise (Hong Kong) Limited (永興達企業(香港)有限公司) (“Company”) on the ground that it is insolvent and unable to pay its debts. The Petitioner relies on the failure on the part of the Company in complying with a statutory demand served upon it on 3 June 2024 (“SD”) which required the Company to pay US$191,241,792 (“Debt”).

A.  BACKGROUND FACTS

2.  The Company was incorporated under the Companies Ordinance (Cap. 622) and is wholly owned by Tahoe Investment Group Co Ltd (“Tahoe Investment”) which, in turn, is owned by Mr Huang Qisen (“Huang”) as to 95%.  Tahoe Investment is a substantial shareholder of Tahoe Group Co Ltd, whose shares are listed on the Shenzhen Stock Exchange. 

3.  The Company was previously subject to a winding-up petition in HCCW 395/2021 presented by the Petitioner on 27 October 2021.  In that petition, the Petitioner relied on the Company’s failure to pay the “Funding Total Amount” (US$196,094,386) by 17 July 2020 and the default interest accrued thereon (US$45,779,060.88) both payable under the “2020 Notes”.  The Company opposed the petition and contended that there was a bona fide dispute on substantial grounds in respect of the debt given that (1) the 2020 Notes were tainted with illegality and therefore unenforceable; and (2) there was an estoppel by convention against the Petitioner by reason of the alleged “Mutual Understanding” that the Petitioner would not take any drastic enforcement measures against the Company until after expiry of the term of the appointment of its affiliate as financial adviser of the Company.  After hearing the parties’ arguments, on 2 June 2022, this Court held that there was no bona fide dispute on substantial grounds in respect of the debt and made a usual winding-up order against the Company (“Judgment”). 

4.  On the same day the Judgment was handed down, the Petitioner, the Company and Huang executed a settlement deed (“Settlement Deed”) to settle their disputes in HCCW 395/2021 and another action which had been commenced by the Petitioner against Huang. 

5.  The Settlement Deed provides inter alia as follows:

(1)  The Company and Huang agree to pay a settlement sum of US$218 million (“Settlement Sum”) to the Petitioner in the following manner:

(a)  10% (US$21.8 million) within 12 months (“1^st Instalment”);

(b)  20% (US$43.6 million) within 24 months (“2^nd Instalment”);

(c)  20% (US$43.6 million) within 36 months;

(d)  20% (US$43.6 million) within 48 months; and

(e)  The remainder US$65.4 million within 60 months (clause 2.2).

(2)  The Company and Huang shall within 14 days procure a payment of US$5 million to the Petitioner in partial satisfaction of the Settlement Sum (clause 2.3(a)).

(3)  A breach of clause 2.2 shall constitute an event of default, whereupon the outstanding Settlement Sum together with default interest at 8% p.a. shall become immediately due and payable (clause 2.10).

6.  Pursuant to the Settlement Deed, on 4 August 2022, the Company paid US$5 million to the Petitioner.

7.  On 8 August 2022, upon the joint application made by the Petitioner and the Company on 5 August 2022, this Court rescinded the winding-up order made on 2 June 2022.

8.  On 31 May 2023, the Company through a related company paid the 1^st Instalment.

9.  In breach of the Settlement Deed, the Company failed to pay the 2^nd Instalment which had fallen due on 2 June 2024.  This led to the remaining Settlement Sum in the amount of US$191.2 million to become due and payable. 

10.  On 3 June 2024, the SD was served on the Company requiring it to pay the Debt within 21 days.  

11.  The Company did not comply with the SD within the time limit and is deemed insolvent by virtue of s.178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”).    

B.  DISCUSSION

12.  The principles are not in dispute.  As stated in §37 of the Judgment, a winding-up petition should only be presented if the creditor is owed a liquidated sum and the company does not have any valid ground for refusing payment.  Where the company disputes the debt in question, it bears the burden of showing that there is a bona fide dispute on substantial grounds and, for this purpose, must adduce sufficiently precise factual evidence to substantiate its allegations and cannot merely raise a cloud of objections on affidavits.  Bare allegations, uncorroborated by documentary evidence or contrary to common and commercial sense, are not sufficient to raise a bona fide dispute on substantial grounds.  The Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds, but the court does not try the dispute on affidavits (Re China Cultural City Ltd [2020] 4 HKLRD 1 §§9-12; Re Leung Cherng Jiunn [2016] 1 HKLRD 850 (CA), §27).

13.  Until the draft affirmation of Huang was filed on 19 September 2024 (“Huang 1^st”), the Company did not raise any ground to dispute the Debt, whether in correspondence or in any other form.  In Huang 1^st, the Company disputes liability to pay the Debt on 2 grounds:

(1)  Estoppel Ground: There was a “shared assumption” that the Petitioner would exercise a call option (“Option”) to purchase 14,223,570 shares in Akumin Inc (“Akumin Shares”) held by Thaihot Investment Co Ltd[1] (a related company of the Company) (“Thaihot”), and apply at least a sum of US$35 million to repay the relevant instalment then outstanding (“Shared Assumption”).  The Petitioner is estopped from claiming any amount over and above US$8.6 million (being the 2^nd Instalment less US$35 million)[2].

(2)  Further Agreement Ground: By various emails exchanged between the parties’ solicitors on 4 August 2022, the parties reached a “Further Agreement” (as defined in §34(3) below) which imposed an obligation on the Petitioner to use its best endeavours to negotiate in good faith and to enter into a tri-partite agreement in respect of Haitong International Securities Company Limited’s (“Haitong Securities”) role to hold the Akumin Shares as custodian (“Best Endeavour Obligation”).  The Petitioner is not entitled to demand payment of the Settlement Sum until after it has fulfilled such Obligation[3].

B1.  Estoppel Ground

14.  Mr Thomas Wong, counsel for the Petitioner, submits that the Estoppel Ground is “hopeless” for the following reasons.

15.  First, the Settlement Deed contains a “no oral modification” clause[4].

(1)  The rationale of a contractual provision requiring specified formalities to be observed for variation is to prevent attempts to undermine written agreements by informal means.  To support an estoppel defence, at the very least, (a) there would have to be some words or conduct unequivocally representing that the variation was valid despite its informality; and (b) something more would be required for this purpose than the informal promise itself (Re Guy Kwok Hung Lam[2021] HKCFI 2135 §77).

(2)  In other words, where a contract contains a “no oral modification” clause, a higher threshold is imposed on the party alleging estoppel, as the parties must have acknowledged in some way the formality requirement but nonetheless chose to go ahead to vary the contract in an informal manner (Chinachem Financial Services Ltd v Century Venture Holdings Ltd [2023] HKCFI 457 §§461-467).

(3)  Even taking the Company’s case to its highest, there is no evidence that the parties acknowledged the formality requirement in clause 14 when allegedly forming the Shared Assumption.

16.  Second, the Shared Assumption plainly did not exist:

(1)  There is no document, contemporaneous or otherwise, which records or refers to the Shared Assumption.

(2)  The Shared Assumption is completely inconsistent with clause 2.3(c) of the Settlement Deed, which states that the Option gives the Petitioner an option – not obligation – to acquire the Akumin Shares.

(3)  The Shared Assumption also flies against the Option itself, which states that the Petitioner has the right – not obligation – to purchase the Akumin Shares (see e.g. clause 1.1).

17.  These contradictions are particularly startling given that:

(1)  The Settlement Deed contains an “entire agreement clause” which “supersedes all prior agreements, representations or communications concerning such subject matter under this Deed, whether written or verbal” (clause 12).

(2)  The Shared Assumption was said to have been formed in April 2022[5], more than one month before the Settlement Deed was signed by the parties.

(3)  Both sides were assisted by solicitors in the negotiations of the Settlement Deed, with DLA Piper Hong Kong (“DLA”) acting for the Petitioner and King & Wood Mallesons (“KWM”) for the Company.  During the negotiations, many drafts of the Settlement Deed were prepared and exchanged.  Had the Shared Assumption existed, it would have found its way into the Settlement Deed or otherwise reduced into writing. 

(4)  This is particularly so when the Company had already tried but failed to raise an estoppel defence when resisting the petition in HCCW 395/2021 due to lack of written proof.

(5)  The Company’s assertion that the Shared Assumption was not properly reflected in the Settlement Deed due to “time constraints”[6] rings very hollow and cannot be accepted.

18.  Furthermore:

(1)  On the Company’s case, in light of the Shared Assumption, the Petitioner should have exercised the Option within a reasonable time, at least before the privatization of Akumin in February 2024[7].

(2)  Yet, there is no evidence that the Company has demanded the Petitioner to exercise the Option before February 2024.  Nor is there any document to show that the Company has ever complained about the Petitioner’s failure to exercise the Option after February 2024.

19.  Third, the Shared Assumption lacks particularity:

(1)  To constitute an estoppel by convention, the contents of the alleged common assumption must be sufficiently certain to enable the court to give effect to it (First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 §79).

(2)  According to the Company, the Shared Assumption requires the Option to be exercised “within a reasonable time”.  This is too vague and uncertain; it is unclear when the Petitioner must exercise the Option.  The Petitioner would not have agreed to such an ambiguous and unwritten obligation.

20.  Fourth, the Shared Assumption, even if existed, must be communicated to the parties.  Yet, on the Company’s case, the Shared Assumption was something “implicit in the agreed arrangement”[8]. In other words, it was not something which had been communicated to the parties.

21.  Fifth, even on the Company’s case, the sum of US$8.6 million (i.e. the 2^nd Instalment less US$35 million) remained due and payable by 2 June 2024.  To avoid the presumption of insolvency, it was incumbent upon the Company to comply with the SD and pay the amount which is not bona fide disputed[9], but it did not do so.

22.  Lastly, at Huang 1^st §17.2, the Company claims that the Option, if operated as an option rather than an obligation, would be meaningless.  This point has no merit.  Like any call option, the Option gives the Petitioner certainty that should it choose to exercise the Option, Thaihot must sell the Akumin Shares to it.  It would save the Petitioner the time and trouble of locating a willing seller.

23.  On the other hand, Mr Paul Shieh SC (leading Ms Astina Au) submits that the Company’s case on the Shared Assumption must be accepted as being at least arguable for the following reasons.

24.  First, the failure to reflect the Shared Assumption in the Settlement Deed was attributed to the fact that (1) the negotiations took place under a tight timeline and a real threat of winding-up; (2) there were 2 parallel levels of negotiations (which by its nature is likely to give rise to miscommunication); and (3) there was in fact internal inconsistency amongst the executed agreements: clause 2.3(c)(i) of Settlement Deed refers to the Option being exercisable after 24 months whereas clause 1.1 of the Option refers to a shorter period of 12 months.

25.  Second, as a matter of law, neither a “no oral modification clause” nor an “entire agreement clause” necessarily precludes a defence based on estoppel (Re Mega Gold Holdings Ltd[2024] HKCFI 2286 §82; Dubai Islamic Bank PJSC v PSI Energy Holding Co & Ors[2011] EWHC 2718 §83).  Further:

(1)  The “no oral modification clause” does not apply as the Company is not relying on anything subsequent to the Settlement Deed which would amount to a subsequent modification of anything agreed therein.  The Company’s case is that the parties had acted on the Shared Assumption at the time of negotiating the Settlement Deed (which failed to reflect it[10]).

(2)  All that the Petitioner is saying is that there must be evidence that the parties have chosen to go ahead to vary the contract informally despite the formality requirement[11].  This calls for an examination of the precise words used by Wang Zihao (“Wang”), a director of the Petitioner and Feng Heping, a representative of the Company and Huang during their informal negotiations and considered in context. This is a factual dispute that can only be resolved by live evidence and cross-examination (cf. Re Leung Cherng Jiunn HCB 244/2014, 21 May 2015, §37; CPC Construction Hong Kong Ltd v Harvest Engineering (HK) Ltd, HCA 2096/2013, 2 July 2014, §§76-82).

26.  According to the Shared Assumption:

(1)  The Petitioner ought to have exercised the Option within a reasonable time, at least before it became impossible to do so (due to the privatization of Akumin) in February 2024,[12] and applied a sum of no less than US$35 million towards reducing the Company’s and Huang’s liability under the 2^nd Instalment.[13]

(2)  Had the Petitioner properly accounted for the US$35 million, the Company would have fully discharged its liability under the 2^nd Instalment by paying US$8.6 million.[14]  Yet, when Huang met with Wang in May 2024 to discuss the 2^nd Instalment, Wang refused to accept this as the correct amount due thereunder.[15] 

(3)  By insisting on payment of US$43.6 million, the Petitioner was departing from the Shared Assumption, which is unconscionable and prejudicial to the Company.  The Petitioner is estopped from claiming any amount over US$8.6 million, and relying on its non-payment as an “event of default” under the Settlement Deed (cf. Unruh v Seeberger (2007) 10 HKCFAR 31 at §§133-151).

27.  Third, the authorities suggest that the common assumption can be expressly stated or by conduct, and there is no requirement that it must be communicated to the parties.

28.  Fourth, non-payment of US$8.6 million does not give rise to any presumption of insolvency:

(1)  On the Company’s case, it is only liable for US$8.6 million under the 2^nd Instalment and this amount, if paid, would fully discharge its liability due to the Petitioner up to 2 June 2024. On that analysis, there would clearly be no “event of default” and so the balance of the Settlement Sum would not be payable.   

(2)  The SD sought payment of over US$191 million (i.e. over 20 times more) on the basis that an “event of default” had occurred. If the Petitioner now accepts that only US$8.6 million was due under the 2^nd Instalment, it should issue a fresh demand in the correct sum and on the correct basis.  Unless the Company fails to comply with a statutory demand in that lesser amount, the Petitioner should not be permitted to rely on the deemed insolvency provision in s.178(1)(a) of CWUMPO (Re China Oceanwide Group Ltd[2023] HKCFI 455 §31; Re Pacific Cultural Hospitality Development (HK) Ltd [2022] HKCFI 905 §25(2)).

29.  In my view, the Shared Assumption bears all the hallmarks of a recent fabrication created by the Company for the purpose of opposing the Petition and must be rejected.  I agree with the submissions of Mr Wong that the facts and matters summarised in §§16-18 above show that the Shared Assumption did not exist at the time the parties negotiated and executed the Settlement Deed.  The Company has not put forward any plausible answers in response to these facts and matters.  This is significant as the Company was fully aware of the fact that in HCCW 395/2021, it had tried to raise estoppel as a ground in opposition to the petition, which was met with the Petitioner’s argument that the estoppel was incredible for lack of any evidence in support.  It is incredulous to suggest that the Company would have been contented with not insisting on the Shared Assumption to be inserted into the Settlement Deed had it existed at the time. 

30.  Mr Shieh seeks to explain the absence of the Shared Assumption in the Settlement Deed by referring to the parallel negotiations between the lay clients and their respective solicitors at the time, and the fact that the Company was under pressure to come to an agreement to avoid a winding-up order.  I am unable to accept the explanation:

(1)  The explanation is not supported by any credible evidence.  In Huang 1^st, all that he says is that “because of the time constraints mentioned above, the Shared Assumption was not properly reflected in the Settlement Deed”[16].   

(2)  There is no dispute that the parties had since April 2022 been negotiating on the terms of the Settlement Deed and it was only until 2 June 2022 that the Settlement Deed was executed.  It is inconceivable that during the entire period of negotiations (which lasted over a month) with the parties having reviewed and provided their comments on the many drafts of the Settlement Deed that neither Huang, the Company nor KWM would have been alerted to the absence of the Shared Assumption in the Settlement Deed, had it existed at the time. 

(3)  The Company has not been able to produce any contemporaneous document, whether in the form of letter, email or message, which suggests that the parties had at any point of time mentioned or discussed the Shared Assumption.  This again is very telling given that on the Company’s case, the Shared Assumption involved 2 other companies (i.e. Thaihot and Akumin Inc) and was important for the Company.  Again, there is no explanation whatsoever as to the complete absence of document which shows the existence of the Shared Assumption. 

(4)  Had the Shared Assumption existed, the Company and Huang would have taken steps to remind, if not request, the Petitioner to exercise the Option and applied the sum of US$35 million towards payment of the 2^nd Instalment.  This was never done and no explanation has been provided by the Company. 

(5)  Most tellingly, even after the SD had been served on the Company, which referred to the Company’s failure to pay the 2^nd Instalment fallen due on 2 June 2024 and the entire outstanding Settlement Sum became due and payable, the Company still did not raise the Shared Assumption as a ground to dispute the liability to pay the 2^nd Instalment or the Debt. 

(6)  The fact that the Company never attempted to pay US$8.6 million to the Petitioner also goes to show that the Shared Assumption did not exist.  Had the Shared Assumption existed, I would expect the Company to raise it and pay the sum of US$8.6 million to the Petitioner in response to the SD. 

31.  As the Shared Assumption did not exist (as I so find), there is no basis for the Company to contend that the Petitioner is estopped from relying on the Company’s failure to pay the 2^nd Instalment or to demand for payment of the Debt. 

32.  If and insofar as it is necessary to consider the other arguments raised by counsel, I am inclined to agree with Mr Wong’s arguments set out in §§19-20 above.  Even if, contrary to my view, there is any credible evidence in support of the existence of the Shared Assumption, the same does not constitute a bona fide dispute on substantial ground given that the Shared Assumption is too uncertain and was not communicated to the Petitioner. 

33.  For the above reasons, I reject the Estoppel Ground. 

B2.  Further Agreement Ground

34.  Mr Shieh submits that by reason of the “Further Agreement” (as defined in §(3) below) reached on 4 August 2022, the Petitioner is not entitled to demand repayment of any Settlement Sum due until after it has fulfilled the Best Endeavour Obligation:

(1)  By email dated 4 August 2022 from KWM to DLA (at 1:45pm) (“KWM’s 1^st Email”), KWM set out the additional terms (16 paragraphs) which related to the new arrangement.[17]  Relevantly, §13(b) recorded the Best Endeavour Obligation as follows:

“The parties shall use their best endeavours to take the following actions by 9 September 2022, or as soon as reasonably practicable thereafter …

(b)    [Thaihot], [the Petitioner] and Haitong Securities shall negotiate in good faith to enter into a tri-partite agreement for Haitong Securities to hold the Akumin Shares as custodian.”

(2)  By reply email on the same day from to KWM (at 5:27pm), DLA indicated that the Petitioner was agreeable to the proposed arrangements save and except a minor comment with regard to §11 (which is irrelevant for present purposes).[18]

(3)  KWM on the same day (at 6:20pm) confirmed that the revised terms (as set out in DLA’s email at 5:27pm) were acceptable to the Company.[19] There was thus clearly a further agreement to supplement and/or vary the Settlement Deed (“Further Agreement”)[20].

35.  The Petitioner breached the Best Endeavour Obligation by (1) delaying its response to KWM’s draft Custodian Agreement (circulated on 3 August 2022) until 6 September 2022, which was only 3 days before the agreed deadline of 9 September 2022, and (2) completely ignoring and failing to negotiate with the Company after KWM reverted with a further revised draft of the Custodian Agreement on 9 September 2022.[21]  The Petitioner has not explained its lack of response to KWM’s further revised draft, and does not deny that it was in breach.[22]

36.  Mr Shieh contends that it is at least arguable that there exists an implied term in the Further Agreement that the Petitioner shall not be entitled to demand repayment of any outstanding sum under the Settlement Deed until after it has fulfilled the Best Endeavour Obligation (“Implied Term”).  Such a term is necessary to give the Further Agreement business efficacy,[23] for without it the Best Endeavour Obligation would be meaningless.  It is not an answer (cf. the Petitioner’s Skeleton §35) to say that the Company could sue for breach of contract, for that would only embroil the parties in uncertain litigation and the Petitioner has not suggested what loss there would be.

37.  In my judgment, there is no credible evidence in support of the Company’s allegation that the parties have reached a valid agreement to vary or supplement the Settlement Deed on 4 August 2022.   

(1)  Under the Settlement Deed, the parties agreed that “no variation of [the Settlement] Deed or any other documents in the agreed form shall be valid unless in writing and signed by or on behalf of each of the Parties”.  There is no evidence to show that the Company or the Petitioner have ever signed the Further Agreement which is necessary for any valid variation of the Settlement Deed.

(2)  Mr Shieh’s argument that the emails exchanged between DLA and KWM constituted signing on behalf of their respective clients cannot be right.  The emails only contained negotiations on the terms proposed by DLA and KWM and did not contain any signature of either party.  Nor was there any indication in those emails that the parties had agreed to waive the requirement of signature under the Settlement Deed.   

38.  Even if, contrary to my view, the Further Agreement existed, it is clear that the essential conditions for a term to be implied into the Further Agreement[24] cannot be satisfied given that:

(1)  The Implied Term is inconsistent with clause 2.10 of the Settlement Deed, which entitles the Petitioner to recover all the outstanding Settlement Sum upon the Company’s failure to pay the relevant instalment due.  I do not agree with Mr Shieh’s argument that clause 2.10 is irrelevant as the Implied Term only arose afterwards.  On the Company’s case, the Implied Term has the effect of varying the Petitioner’s right to demand repayment under the Settlement Deed.  Such variation can only be made in writing and the same must be signed by the parties.  The Company cannot circumvent the requirement of clause 2.10 by contending that it is an implied term. 

(2)  The Implied Term is not neither obvious nor necessary to give business efficacy to the Settlement Deed or the Further Agreement.  On the Company’s case, the so-called Best Endeavour Obligation only required the Petitioner to negotiate in good faith in respect of a tripartite agreement regarding custodian arrangement of the Akumin Shares. It is impossible to see how the custodian arrangement (or the lack thereof) can be said to be necessary to give business efficacy to the payment obligation under the Settlement Deed. 

(3)  The Implied Term is neither reasonable nor equitable in that according to §13 of KWM’s email of 4 August 2022, the Company’s failure to observe the Best Endeavour Obligation shall not constitute an event of default under the Settlement Deed, whereas according to the Implied Term, the Petitioner’s failure to observe the same Obligation would result in it being deprived of the right to demand for repayment of the Settlement Sum.   

39.  For the reasons set out above, I hold that the Further Agreement did not exist and, even if the Further Agreement existed, there is no basis for implying the Implied Term into such Agreement. 

C.  DISPOSITION & COSTS

40.  As the Company fails to discharge the burden of showing that there is a bona fide dispute on substantial grounds in respect of the Debt and is deemed insolvent, it is appropriate for the court to make a usual winding-up order against the Company.