LEUNG KWOK CHUN v. SEAVI ADVENT ASIA INVESTMENTS (IV) LTD

HCSD 16/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 16 OF 2016

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J U D G M E N T

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1.  This is an application to set aside a statutory demand. The statutory demand is based on a consent order (“Consent Order”) made in settlement of an action in which the respondent herein (“SEAVI”) was the plaintiff, and Liang Qiusheng (“Liang”), Leung Hon Fai (“HF Leung”) and the applicant herein were respectively the 1^st, 2^nd and 3^rd defendants. That action was in turn based on an earlier loan agreement and a deed of settlement entered into between these parties, among others.

2.  The three main issues raised are (i) whether a challenge against the Consent Order should be entertained at this stage (as opposed to the hearing of a subsequent bankruptcy petition); (ii) whether a consent order can only be impugned for fraud, collusion or miscarriage of justice and, if so, whether the present application fails on that count; and (iii) whether the debt is bona fide disputed on substantial grounds.

The applicant’s case

3.  It is necessary to set out the applicant’s allegations in some detail since he advances the fact-specific case that he signed the relevant documents under undue influence, duress and misrepresentation.

4.  The applicant says he first worked for Liang and HF Leung in 1999 when he became employed by their company.  A few years later he was transferred to another company of theirs which is now named Shenzhen Angel Food Co Ltd (“Shenzhen Angel”) and runs a catering business in the Mainland.  His position was Deputy General Manager and Liang’s personal assistant.  After 2004 he was no longer responsible for sales and marketing but remained Liang’s personal assistant until November 2010.

5.  The applicant says he was a loyal employee.  Liang and HF Leung became his mentors and close friends in whom he placed much trust and confidence.  He became accustomed to following their instructions.

6.  In May 2006, the corporate structure was reorganised.  Fine Ally Group Ltd (“Fine Ally”), a BVI company, was incorporated and became the holding company of Shenzhen Angel.  As a reward for his hard work, the applicant was allotted 3,500 shares in Fine Ally, representing 7% of its issued shares at that time.

7.  In early 2010, the applicant (then aged 56) made known to Liang his wish to retire.  Also in 2010, Liang formed the intention to bring in investment funds to invest in Fine Ally.  The applicant says that in around September 2010, Liang agreed to his proposal to retire, and the applicant effectively ceased to participate in the business operations in November 2010.  His employment with Shenzhen Angel was terminated.  His last salary, for the month of November 2010, was RMB 28,500.

8.  In November 2011, 3 investment funds invested in Fine Ally and became shareholders.  In early 2012, SEAVI, another investment fund, became interested in investing in and subscribing for shares in Fine Ally, with a view to seeing an eventual public listing of the shares.  The applicant says that the discussions and negotiations took place between Liang and SEAVI without his involvement.  The result of the negotiations was that SEAVI would invest by providing a loan of US$15 million, with a call option for SEAVI to convert the loan into shares of Fine Ally prior to the intended listing. 

9.  The applicant accepts that on 13 April 2012, he went to the offices of Messrs Iu Lai & Li, solicitors, and signed a loan agreement (“the Loan Agreement”).  SEAVI was the lender and Liang, HF Leung and the applicant were the borrowers.  Fine Ally was also a party to the agreement.  The applicant says that the Loan Agreement was explained by a solicitor to him “in broad terms” but not “fully or adequately”, that he raised strong objections to the agreement because there was no reason why he, as a minority shareholder holding a 3–4% interest, should be asked to bear responsibility for 100% of the loan. 

10.  He says, however, that his objections turned out to be futile because the others present all said that the arrangement had been agreed.  He was pressured into signing the Loan Agreement while SEAVI’s representatives told him that the Loan Agreement “was in accordance with standard practice”, the relevant provisions “were only inserted as a matter of formality”, and the Loan Agreement “would never be enforced against [him]”.  Meanwhile, Liang also told the applicant he need not worry as the Loan Agreement would not be enforced against him and that conversely, if SEAVI’s investment did not materialise, the group’s operations would be “greatly prejudiced”.

11.  The applicant explained in his 1^st affirmation at §25 that:

“In the circumstances, I reluctantly signed on the Loan Agreement (a) having been induced by SEAVI’s Representations and LQS’s 1^st Set of Representations, (b) by reason of the full trust and confidence I had placed upon LQS, and (c) as I was placed under such immense pressure from all the parties present that I genuinely believed I had no practical alternative. I simply had no choice.”

12.  The applicant said he was completely surprised to receive the writ of summons in HCA 38/2016 in January 2016.  This was an action brought by SEAVI against Liang, HF Leung and the applicant to recover the sum of HK$16,460,613 under a deed of settlement dated 11 June 2015 (which I shall refer to as “the Second Deed” as there was a prior deed of settlement to which I shall refer below) which compromised SEAVI’s claims against those 3 defendants for breaches of their obligations under the Loan Agreement.  The applicant says he had not even seen the Second Deed at that time.

13.  When he asked Liang what had happened, Liang told him there had been a problem with dividends and the listing plan was not fulfilled.  But Liang also told him that Fine Ally was able to pay the debt and two new investors were going to invest in Fine Ally, which would alleviate any financial concerns.

14.  Later Liang told the applicant that another creditor demanded that Liang must reach settlement with SEAVI, or that creditor would call in all of its outstanding loan.  Liang told the applicant they had no choice but to agree to SEAVI’s demands for repayment.  Nevertheless, when the applicant was presented with the draft consent order by Messrs Iu Lai & Li, he still raised objections.  To assuage his concerns, Liang told him that “there would be no problem whatsoever in making the repayments”, that “there would in any event be no adverse consequences to [him] personally”, and said the negotiations with the two new investors would be jeopardised if the applicant did not agree to the terms of the consent order immediately.  Liang questioned whether the applicant could bear the consequences if the new investment was hampered because of him.  Liang further threatened to take back the applicant’s shares in Fine Ally if he did not comply.

15.  The consequence was, according to the applicant in his 1^st affirmation at §37, as follows:

“As such, I reluctantly succumbed to LQS’s demand (a) on the basis of LQS’s 2^nd, 3^rd, and 4^th Sets of Representations, (b) by reason of the full trust and confidence I had placed upon LQS, and (c) as I was put under immense pressure (in particular in relation to Orix, Huajian, and Co-Stone as mentioned above) such that I genuinely believed I had no practical alternative. I believe I had no genuine choice in the matter, and even though I acceded to LQS’s demand, I cannot be said to have given any independent consent or endorsement of the terms contained in the Consent Order. For the avoidance of doubt, I did not receive any independent legal advice or explanation in relation to the Consent Order.”

16.  In these proceedings the applicant also filed an affirmation made by Liang in support of his factual allegations.  In particular, Liang said that in February 2016, he told Kevin Chan of SEAVI what he (Liang) had said to the applicant and the pressure he had imposed on the applicant.

17.  Messrs Iu Lai & Li signed the Consent Order on behalf of the 1^st, 2^nd and 3^rd defendants (i.e. Liang, HF Leung and the applicant) which was filed on 29 February 2016.  It took the form of a Tomlin order, providing for all further proceedings in the action to be stayed except for the purpose of carrying into effect the terms set out in the schedule thereto, and for that purpose liberty to apply was granted.  The schedule required the defendants to pay an aggregate sum of HK$16,460,613.00 by instalments in full and final settlement of (i) all claims arising out of the action; (ii) the Loan Agreement dated 13 April 2012; and (iii) the Second Deed.  The first instalment in the sum of HK$2.5 million was to be paid on or before 10 March 2016.  It was provided that upon full payment, a further consent order would be filed to discontinue the action with no order as to costs.

18.  Despite that the first instalment became due on 10 March 2016, the defendants had only paid a sum of HK$500,000 on 18 March 2016.  The applicant says that the sum was provided by Liang which the applicant simply transferred to SEAVI’s bank account.

19.  On 26 April 2016, the applicant instituted an action against SEAVI (HCA 1101/2016) for the purpose of setting aside the Consent Order, the Loan Agreement and the Second Deed on the grounds of misrepresentation, duress and undue influence exerted by SEAVI, Liang, HF Leung or Fine Ally.

The respondent’s case

20.  For its part, the respondent denies that the applicant was misled or pressurised into executing any of the agreements and contends that the applicant’s assertions are incredible and contradicted by documentary evidence.

Issue 1 – Whether the Consent Order may be challenged at this stage

21.  Mr Johnny Ma who appeared for SEAVI submitted that the application should be dismissed in limine because the established practice of the court is not to go behind a judgment or order at the stage of hearing an application to set aside a statutory demand, as opposed to the hearing of a subsequent bankruptcy petition.

22.  There is a practice note in England to that effect; see Practice Note (Bankruptcy : Statutory Demand : Setting Aside) (No.1 of 87) [1987] 1 WLR 119, which states at §3:

“Where the statutory demand is based on a judgment or order, the court will not at this stage go behind the judgment or order and inquire into the validity of the debt nor, as a general rule, will it adjourn the application to await the result of an application to set aside the judgment or order.”

23.  This has been adopted as the practice in Hong Kong: see Re Maydwell, ex p WFM Motors Pty Ltd, a creditor [1999] 3 HKLRD 325, 334G-335A (Le Pichon J).  In Re Choy Wai Bor (unrep., HCB 8565/2001; 28 May 2002), Kwan J endorsed this as “good practice with a sound basis in law”, and articulated three reasons (at §§21-23) for the practice, which are based broadly on: (a) the court’s wide discretion under rule 48(4) on the hearing of an application to set aside a statutory demand, including a discretion to dismiss an application on incomplete evidence, without adjourning it for full evidence; (b) the intention for the mechanism to set aside a statutory demand to be a filtering process against statutory demands that are demonstrably unjustified; and (c) the need for speed in disposing of an application to set aside a statutory demand.

24.  The practice has been followed in many cases at first instance since, such as in Sin Wai Ping v International Bank of Asia Limited (unrep., HCSD 27/2002, 6 Feb 2004), §10 (Chu J); Wong Shui Kee Roger trading as Roger S K Wong & Co v Victor Chu & Co (unrep., HCSD 4/2004; 30 March 2004), §§5-6 (Deputy Judge To); Fung Tak Chi v Billion Eagle Ltd [2010] 4 HKLRD 563, §21 (Chu J); and Wong Yu Cho Rolly v Ling Dai Hong (unrep., HCSD 23/2012 & HCB 7588/2012; 14 March 2013), §§25-28 (Deputy Judge Le Pichon). 

25.  In Cheung Sun Lam v Lai Kam Man & others (unrep, CACV 148/2011, 18 March 2013), the Court of Appeal approved of the practice in the following terms:

“36. As regards the second ground, the Judge [Barma J] said at para 14 of his judgment,

‘14. However, the present position is that the costs orders, and the Allocaturs arising from them, remain in place, as no steps have been taken by the Debtor to seek to have them reopened or otherwise set aside. In these circumstances, it does not seem to me that the court can, or should, in the context of a hearing in relation to a statutory demand based on what are (on the face of them) regular orders of the court, go behind those orders. That this is the appropriate approach is clear from Re Maydwell [1999] 3 HKLRD 325 and Sin Wai Ping v International Bank of Asia (unreported, HCSD 27/2002, Chu J, 6 February 2004). In Re Maydwell, Le Pichon J (as she then was) endorsed the English practice under which the court would not, in an application to set aside a statutory demand, go behind a judgment on which the debt was based or inquire into the validity of the debt. In Sin Wai Ping, Chu J (as she then was) explained this on the basis that the court was not, in such circumstances, exercising any appellate or review role which would enable it to consider the merits of the judgement or order relied upon for the purpose of the statutory demand.’

37.    In our view, the Judge was correct in law in so saying. The legal position was clearly set out in the authorities cited by him. In effect, a debtor cannot rely on a dispute regarding a judgment debt to challenge a statutory demand by reference to rule 48(5)(b). However, he could still challenge the demand by reference to other grounds in that rule.”

26.  Given the authorities, that the above is the approach to statutory demands based on ordinary judgments is now beyond question. 

27.  Is this practice applicable to consent judgments?  There are undoubtedly differences between a judgment obtained after a determination on the merits and a consent judgment.  In particular, whereas a judgment entered after a determination on the merits can only be set aside on very limited grounds such as that it has been obtained by fraud, a judgment by consent can be set aside on any of the grounds upon which a contract can be set aside: Ng Shui Hing v Lai Hang [1983] 1 HKC 158 (CA) at 162 per Fuad JA.

28.  Notwithstanding this difference, it seems to me that the reasons identified in Re Choy Wai Bor apply equally in the case of consent orders and judgments.  After all, entering a judgment of the court is a serious step, even if done by consent.  A debtor, by consenting to judgment, is prima facie prepared to be subjected to the various means by which an unsatisfied judgment can be enforced.  To allow the judgment to be challenged at the stage of an application to set aside a statutory demand would mean that no petition could be presented on the basis of that judgment in the meantime, which could prejudice the operation of s 42 of the Bankruptcy Ordinance as regards the restriction on disposition of property.

29.  Further, I note that in Lee Chun Wah Ben v Kwan Shiu Fai Felix (unrep., HCSD 5/2004; 30 July 2004), Deputy Judge K Y Chan (as L Chan J then was), after considering the English Practice Note and Re Maydwell, struck out the application to set aside the statutory demand in that case which was based on a default judgment.  This shows that the prevailing practice does not apply only to a judgment on the merits after contest.

30.  I conclude therefore that the general rule applies equally to the Consent Order in this case.  I recognise that this is a rule of practice, and does not mean that the court has no jurisdiction to hear argument and set aside a statutory demand based on a judgment.  Nothing has been advanced by the applicant, however, to show any special reasons for departing from the general rule.  For this reason alone the application should be dismissed. 

31.  Since the other matters have been argued before me, and in case I am wrong on the point above, I proceed to deal with the further issues.

Issue 2 – Whether the Consent Order can only be re-opened on ground of fraud, collusion or miscarriage of justice

32.  The second issue is whether the Consent Order can only be impugned by the bankruptcy court on the ground of fraud, collusion or miscarriage of justice.  Mr Ma for SEAVI, relying on In re Lennox, ex parte Lennox (1885) 16 QBD 315, In re Flatau, ex parte Scotch Whisky Distillers Limited (1888) 22 QBD 83, In re Hawkins, ex parte Troup [1895] 1 QB 404, McCourt and Siequien v Baron Meats Ltd [1997] BPIR 114, Dawodu v American Express Bank [2001] BPIR 983 and Re Chung Kau (unrep., HCB 581/2003; 15 May 2003), submitted that on a bankruptcy petition, and a fortiori on an application to set aside a statutory demand, the court will not go behind a judgment unless there was “fraud, collusion or miscarriage of justice”.

33.  He submitted that what Lord Esher MR said in In re Hawkins, ex parte Troup, supra, at 409, which suggested that the bankruptcy court could refuse to act on a judgment by consent if it was an unfair or improper compromise, was aberrant and not supported by the other authorities.  Mr Ma said the passage was expressed far too widely.

34.  It is in my view unnecessary to decide whether this is so or to go through the authorities at length.  The applicant is not seeking to set aside the consent order simply on the ground that the compromise was unfair or ill-advised.  He says it is liable to be set aside for undue influence, duress and misrepresentation.  As the Court of Appeal held in Ng Shui Hing v Lai Hang, supra, a judgment by consent can be set aside by an ordinary court on any of the grounds upon which a contract can be set aside.  I cannot conceive of any reason why the bankruptcy court’s power should be narrower.  Indeed, Warner J pointed out in McCourt and Siequien v Baron Meats Ltd, supra, at 120H, that “the grounds upon which a bankruptcy court may go behind a judgment are more extensive than the grounds upon which an ordinary court of law or equity may set it aside”.  Further and in any event, as Mr Khaw SC pointed out, actual undue influence is a species of fraud: CIBC Mortgages plc v Pitt [1994] 1 AC 200, 209B. 

35.  Accordingly I reject Mr Ma’s submission that the application should be dismissed on this ground.

Issue 3 – Whether there is a bona fide dispute of the debt on substantial grounds

36.  The third issue is whether the applicant has put forward a sufficient factual case to show that “the debt is disputed on grounds which appear to the court to be substantial” within the meaning of r 48(5)(b) of the Bankruptcy Rules.  For the following two principal reasons, I have come to the view that the applicant has failed to show that the debt is bona fide disputed on substantial grounds.

37.  First, the applicant’s case on the Loan Agreement is in my view contradicted by the very agreement itself.  Although the Loan Agreement was for a loan of US$15 million loan facility, as Mr Khaw SC pointed out, there was a provision in clause 15A.4 of the agreement that:

“the maximum liability of KC Leung [ie the applicant] under this Agreement shall be (1) the percentage of his shareholding interest in [Fine Ally] over the aggregate shareholding interest of the Borrowers [ie Liang, HK Leung and the applicant himself] in [Fine Ally] as at the First Drawdown Date; multiplied by (2) the aggregate amount of all liabilities of the Borrowers under this Agreement.”

38.  As Mr Khaw SC said, the applicant’s percentage shareholding in Fine Ally at the material time (16 April 2012) was about 3.75%.  This means, as submitted on behalf of the applicant, that under the Loan Agreement itself the applicant was not liable for more than a portion of around 3.75% of the total liability.

39.  The odd thing is that this was not mentioned by the applicant in his affirmations at all.  In my view, given this provision which was clearly tailor-made for the applicant’s benefit, it is incredible for him to say, as he did in his 1^st affirmation, that at the execution meeting, he objected to the Loan Agreement because he considered that there was no reason he should have to shoulder “all of the responsibility” and “100% of the liabilities” for the loan, that his objection was futile and that the others told him the agreement was a mere formality never to be enforced against him.  In fact, under the Loan Agreement the applicant was not required to bear 100% liability for the loan; his responsibility was capped in proportion to his relatively small shareholding in Fine Ally.  Accordingly I find the applicant’s allegations about the Loan Agreement not credible.

40.  The second matter is that when there was default in the borrowers’ performance of the Loan Agreement, the parties including the applicant actually first entered into a deed of settlement on 13 February 2015 (“the First Deed”) in substantially the same terms as the subsequent Second Deed, before the latter was entered into on 11 June 2015.

41.  The applicant made no mention of the First Deed in his 1^st affirmation.  Instead, the applicant attacked the Second Deed and said he had never seen it before.  He was certain that he was given only the execution page of the Second Deed by Liang and had not agreed to any of its terms, nor was he aware of any of its contents.

42.  In contrast, the affirmation filed by SEAVI in opposition to the application stated:

(1)    As a result of the breaches of the Loan Agreement, negotiation and discussion between all parties concerned began in 2014 in relation to the further agreements needed to cater for the changing circumstances to facilitate the intended listing of Fine Ally.

(2)    A draft deed of settlement was sent to the applicant and the CFO of a subsidiary of Fine Ally in August 2014.

(3)    After rounds of comment, that deed and other documents were finalised.  A signing meeting was held on 13 February 2015 at Messrs Iu Lai & Li’s office.  The applicant, Liang and HF Leung, SEAVI’s representatives and both sides’ solicitors were present.  A total of 11 documents were signed by the applicant including the First Deed.  The documents had been explained and no objection or protest was raised by the applicant at any time about any of the documents.  This signing meaning was tape-recorded by SEAVI.

(4)    The Second Deed was entered into primarily for the purpose of extending the payment date for 3 months to 30 September 2015 as the timetable of the intended listing of Fine Ally was postponed.  The principal terms of the First Deed remained unchanged and were reproduced in the Second Deed.

43.  Importantly, under the First Deed, Liang, HF Leung and the applicant had to pay, in the proportion of 46.5%, 46.5% and 7% respectively, the total sum of HK$16,460,613 to SEAVI by 30 June 2015.  Each of them, however, stood as a guarantor for the other two.  This effectively means that each of them was liable to SEAVI for the full amount of HK$16,460,613, although as between themselves they would bear separate responsibility in the specified proportion. 

44.  Remarkably, the applicant still said nothing whatsoever about the First Deed in his 2^nd affirmation made in reply to SEAVI’s affirmation.  Likewise, he did not mention or challenge the First Deed in the new action he brought against SEAVI.

45.  One must therefore proceed on the basis that the First Deed was a valid agreement knowingly and freely entered into with binding legal effect on the applicant.  Not only does it mean that the applicant’s allegation of not having agreed to any of the terms of the Second Deed highly misleading, on this basis the applicant had an indefeasible legal obligation to pay SEAVI the sum of HK$16,460,613 under the First Deed.  This is significant in the following respects.

46.  First, the applicant’s allegation that he knew nothing about the Second Deed was, at best, misleading.  There is unchallenged evidence that he had already agreed to the same substantive terms by way of the First Deed.  The applicant must know that he had not paid anything to SEAVI under that deed.  This in my view makes it incredible for the applicant to assert, as he did, that he was “completely astounded” when he received the writ in HCA 38/2016 and that he demanded to know from Liang why he was being sued by SEAVI.

47.  Secondly, the Second Deed was intended to supersede the First Deed.  If, as the applicant now claims, the Second Deed should be avoided, it would simply mean that the First Deed would be extant, on which the applicant was equally liable to SEAVI for the same sum of HK$16,460,613.

48.  Thirdly, it follows that far from being manifestly to his disadvantage as the applicant sought to portray, the Consent Order was actually in the applicant’s interests given that applicant was liable for HK$16,460,613 under the unchallenged First Deed, because it provided for payment of the same sum by instalments, with no order as to costs.  On that basis it is difficult to see how it could be characterised as an unconscionable abuse of trust and confidence for Liang to persuade the applicant to consent to the order (assuming he did persuade him).

49.  I should mention that Mr Khaw SC argued that the Consent Order was disadvantageous to the applicant compared to the Second Deed because the Consent Order made him jointly and severally for the whole sum of HK$16,460,613 whereas the applicant was liable as a primary debtor only for 7% of the sum under the Second Deed.  I do not agree with this submission.  Taking into account the guarantee, which existed in both the First and Second Deeds, as I have stated above the applicant was effectively liable to SEAVI for the whole sum under both Deeds.  Further, it seems to me at least arguable that insofar as the applicant pays to SEAVI under the Consent Order more than 7% of the sum due, he should have the same subrogation rights he would enjoy as a guarantor.

50.  Fourthly, all this makes the applicant’s allegations of undue influence, pressure and misrepresentation in February 2016 quite lacking in substance and credibility.  The applicant’s allegations were premised on the factual background that he had never agreed to be responsible for any sum and that he had been assured the documents he entered into were mere formality.  If in fact, as at February 2016, the applicant knew he was liable for HK$16,460,613 at least under the unchallenged First Deed, if not the Second Deed, all those allegations that he somehow agreed to the Consent Order not out of his own free will seem to me wholly to lack credence.

51.  Apart from the above two main reasons, I think Mr Ma was right in pointing out that the applicant had failed to show there was any falsity in the alleged representations as to existing fact made by Liang to the applicant in February 2016 which, on the applicant’s case, led to his agreement to the Consent Order.  There is nothing to show that neither Liang nor Fine Ally was able to pay the required amount at the time, or that Liang did not believe in the prospects of being able to make payment.

Disposition

52.  For the above reasons, the application is dismissed.  Pursuant to r 48(7) of the Bankruptcy Rules (Cap 6A) I authorise the respondent to present a bankruptcy petition forthwith.  There will be an order nisi that the applicant do pay the respondent the costs of the application to be taxed if not agreed.