RE LAW KWOK WAI

HCB 6537/2018

[2020] HKCFI 836

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6537 OF 2018

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REASONS FOR JUDGMENT

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1.  This was the hearing of the Petition dated 14 November 2018 presented by Walvic Engineering & Consultant Co Ltd (“the petitioner”) for a bankruptcy order against Law Kwok Wai (“the debtor”). At the conclusion of the hearing, a bankruptcy order was made. My reasons appear below.

BACKGROUND FACTS

2.  The debtor is the sole director and shareholder of Honwin Engineering Limited (“Honwin”), a construction material supplier.

3.  The petitioner is a Hong Kong company.  Its directors were Leung Yat Tung (“Leung”) and Cho Yu Fun (“Cho”).

4.  Cho, Leung and the debtor have known each other for a long time and, according to Cho, for about 30 years.

5.  Relevant to the debtor’s defence are other related companies:

(a)  Crown Asia Engineering Limited (“CAE”); and

(b)  HK Marine Equipment Limited (“HK Marine”) whose directors were Leung and Leung’s daughter Gillian.

6.  On 27 July 2017, Honwin entered into a purchase order (project number AA3206) with CAE in connection with “main contract 3206” for the reclamation works of the 3^rd airport runway project for the supply of 600 m³ of granular fill material to CAE to be delivered between 1 August 2017 and 1 November 2017 to CAE (“the purchase order”).

7.  On 28 July 2017, the debtor on behalf of Honwin entered into a loan agreement with the petitioner (“the loan agreement”) under which the petitioner agreed to advance to Honwin HK$3 million (“the loan”) subject to conditions precedents set out in §5 of the loan agreement as security, namely:

“(a) an agreement to be entered into between CAE and [Honwin] as per schedule 1, pursuant to which CAE would deduct amount due to [Honwin] under the [purchase order] and repay on behalf of [Honwin] to [the petitioner] on behalf of [Honwin]; and

(b) Personal Guarantee in favour of [the petitioner] to be given by director of [Honwin] ...”

8.  The set-off agreement between Honwin and CAE set out in schedule 1 of the loan agreement (“the CAE set-off agreement”) and the debtor’s personal guarantee (“the guarantee”) in respect of Honwin’s obligations under the loan agreement were duly executed. 

9.  On 28 July 2017, Honwin gave notice to the petitioner for the loan to be advanced on 31 July 2017. 

10.  §6 of the loan agreement provided for repayment of the principal amount within 61 days from the date of the drawdown or 30 September 2017 whichever is the earlier (“the termination date”), with any balance remaining unpaid at the termination date to be immediately repayable.

11.  The CAE set-off agreement authorised CAE to deduct the loan owed by Honwin to the petitioner from payments due from CAE under the purchase order upon the written request of the petitioner.

12.  A sum of HK$273,145.95 for delivery for the period ending 31 August 2017 was set off by CAE on 29 September 2017 and paid to the petitioner.  There were no other set-offs as no further fill material was supplied pursuant to the purchase order. 

13.  Despite requests made on 21 June 2018 for payment under the loan agreement and the guarantee, no repayment was made.  Accordingly, a statutory demand was served on the debtor, the guarantor, for the balance of HK$2,726,854 remaining outstanding on the loan as at 29 August 2018 (“the debt”).

14.  The statutory demands prompted a response dated 18 September 2018 from solicitors for Honwin and the debtor denying that any debt was owing and, instead, counterclaiming damages of approximately HK$231,000 for loss suffered by the debtor. 

15.  The petition is based on the debtor’s failure to satisfy the statutory demand for the debt.

DISPUTED DEBT

(A) Legal principles applicable

16.  The relevant test is not controversial.  The debtor cited the test set out in Re Yuen Mun Wa [2012] 5 HKLRD 108 (at §§4(a) and 11) that “the court will not make a bankruptcy order against an alleged debtor if he or she can show, with sufficient precise evidence that there is a bona fide dispute in relation to the debt on which the petition is based”, recognising that a debtor has a higher burden than a defendant in a summary judgment application. 

17.  That test was approved by the Court of Appeal in Re Leung Cherng Jiunn (debtor) [2016] 1 HKLRD 850 at §27 where the difference between the 2 tests were considered, with the Court of Appeal concluding that while the threshold test for resisting a petition would require a higher standard, it considered that the threshold tests in both situations to be broadly similar.

18.  The authorities cited by the petitioner are to similar effect and propound the same test using slightly different terminology such as that the evidence has to be “believable” and the defence “having substance and not frivolous”: see, for example, Re Cheung Chi Mang HCB 1361/2018, 21 May 2018.

(B) The debtor’s case

19.  The only defence pursued at the hearing was that based on a bona fide dispute relating to the debt.  The debtor maintained that he had a set‑off or cross-claim against the petitioner acting as agent for HK Marine which exceeds the debt. 

20.  In so far as the debtor may have a claim against HK Marine, such a claim could not assist the debtor in resisting the petition for want of mutuality: see Wong Wai Lin v Heung Wah Wing CACV 1066/2000, 24 May 2001 at §15 and Re Cheung Chi Mang HCB 1361/2017, 21 May 2018.  Accordingly, Mr Paul Lee, counsel for the debtor, acknowledged that his defence stands or falls on the agency issue.

21.  It should be mentioned that a second defence in the debtor’s written submissions based on a representation made by Leung was not pursued at the hearing.  Matters relating to that representation have accordingly been omitted from the narrative of events in §§ 22 and 24 below.

22.  The debtor’s cross-claim relied on a number of events in addition to those set out in the background section which should be mentioned.  To set the scene for his cross-claim, the following passages from his affirmation filed in opposition to the petition are relevant:

“5. I have known [Leung] for a long time. In around mid-2017, Leung approached me and represented himself as the director of the petitioner and HK Marine which were under his control and management …

…

7. In around June 2017, Leung suggested to me that he would like to make use of my developed relationship and reputation in Zhuhai PRC to rent quarries in Zhuhai for extraction of quarry materials. The said quarry materials were to be used in the construction of the 3^rd runway of the Hong Kong International Airport (the “3^rd Runway Project”) ... He also told me that he would provide the required funding to facilitate the rental of the quarries in Zhuhai.

8. By ... an authorization letter dated 12 June 2017 … HK Marine authorized me to incorporate a company in Zhuhai, PRC, which was later named [Crown Pacific Construction (Zhuhai) Limited (“Crown Pacific”)], and to deal with all the matters on its behalf, including but not limited to the rental of quarries and sourcing of quarry materials in Zhuhai, PRC (“Instruction”) …

…

11. In order to meet the expenses to be incurred for the execution of the Instruction:

(a) I suggested to Leung that the sum of HK$3,000,000.00 was initially required to meet the upfront expenses, to which Leung agreed to be necessary;

(b) Leung told me as [Crown Pacific] had yet to be incorporated, the said sum had to be paid via the [petitioner] account.  Leung further told me that for accounting purposes and also security reason, Honwin and I were required to enter into a loan agreement and guarantee respectively for the said amount of HK$3,000,000.00 …”

23.  It is to be noted that no dates were specified in relation to the matters stated in §11 (a) and (b) of the debtor’s affirmation.  Although, given the context, they would have taken place before the date of the loan agreement, it is far from clear whether those events occurred before or after 18 July 2017 which, as will become apparent, is of significance.

24.  Subject to that caveat, the events in the succeeding paragraphs are set out chronologically, commencing with 18 July 2017:

(1)  on 18 July 2017, HK Marine

(a) appointed Leung as Crown Pacific’s supervisor, Li Kam Wah as managing director and Lee San Ho as company secretary; and

(b) authorised Leung to sign all relevant documents for Crown Pacific.

(2)  also on 18 July 2017,

(a) Leung engaged the debtor as general manager of Crown Pacific; and

(b) Zhuhai Municipal Bureau of Commerce acknowledged HK Marine’s application for the establishment of Crown Pacific as a foreign enterprise (“the acknowledgement”).  The acknowledgement named HK Marine as the investor, the subscribed contribution amount being US$3 million[1].

(3)  On 20 July 2017, the debtor and Lee San Ho as “Party A” entered into a rental agreement for the rental of one quarry in Zhuhai with Zhuhai Zhongguigang Marine Engineering Co Ltd      (“Party B”) at HK$2.64 million per annum (“the 1^st contract”)[2].  That was signed by the debtor as Party A in his own name.  50% of the annual rental was payable within 2 days of the 1^st contract and the balance on the inception and commencement of the lease contract of the SAR Government.

(4)  The loan agreement, the guarantee and the CAE set‑off agreement were then executed on 27/28 July 2017.

(5)  On 1 August 2017, the parties to the 1^st contract entered into a second rental agreement (“the 2^nd contract”) for the rental of the second quarry on terms similar to those in the 1^st contract. It was again signed by the debtor as Party A in his own name.

(6)  On 12 August 2017 Crown Pacific obtained its Business Licence.

(7)  On 28 August 2017, the debtor paid 50% of the rental due under each of the 1^st and 2^nd contracts, totaling HK$2.64 million.

25.  According to the debtor, as HK Marine (the owner of Crown Pacific) never came up with the required capital contribution of US$3 million as Crown Pacific’s paid-up capital, Crown Pacific was not able to commence operations.  As a result, Party B to the 1^st and 2^nd contracts could not obtain any approval from the Zhuhai local authority for the rental of the relevant quarries resulting in the deposits paid being forfeited.

PETITIONER AS AGENT

26.  The debtor’s case is that the petitioner acted as agent for HK Marine under the instructions of Leung who is a director of the relevant entities.  It was submitted that Leung had authority to bind the petitioner, HK Marine and CAE which were closely related companies through either having common directors, officers or shareholders and all were involved in the 3rd runway project.  The PRC company to be incorporated, Crown Pacific, was owned and controlled by HK Marine.

27.  The debtor submitted that the court should infer from the circumstances surrounding the loan agreement that the petitioner was acting as agent for HK Marine and had apparent authority to enter into the loan agreement because Leung was a director of both those entities coupled with the following 3 matters which were said to provide strong support for that inference.  Those matters are considered under the headings below.

(1) The purpose of the loan agreement

28.  It was submitted that the purpose of the loan agreement was to provide funding for the debtor to carry out the Instruction of HK Marine.  The debtor relied on §5, 7-8 and 11 (a)[3] of his affirmation.

29.  Although it is unclear when the suggestion of HK$3 million as upfront fees mentioned in §11 (a) was made, Mr Lee submitted that it would have occurred after the date of the 1^st contract because by then the cost of renting the quarries was known.

30.  Whether or not that was indeed the case can only be a matter of speculation.  Be that as it may, what is remarkable is that the debtor should enter into a contract in his own name and incur personal liability of HK$1.32 million without any certainty of funding since the loan agreement was not entered into until 28 July 2017.

31.  Turning to the loan agreement, there is no evidence that Leung was involved at all.  Cho confirmed in his 2^nd affirmation that Leung had never requested that a loan be made to Honwin.  Although Leung is a director of the petitioner, the petitioner’s annual return for the relevant year shows Cho to be the registered holder of 99.999% of the issued shares.

32.  The loan was made to Honwin.  Under §4.2 (a), the purposes for which the loan could only be applied was expressly stated: advances could only be used to make “payment for the working capital of Honwin”. In other words, it could not be used for other purposes.

33.  Cho explained that because the petitioner earned management fees from CAE in the reclamation works, quarry materials had to be made available to CAE.  The purpose of the loan agreement was “to enable Honwin to secure sand source in China as common industry practice and to be deducted through supply”.

34.  He went on to explain that he had known the debtor (whom he considered a reliable businessman) for 30 years and Honwin had a good reputation as a construction material supplier in the industry, having been involved in mega sized projects supplying sand.  In those circumstances, he was content with having the conditions precedent as security[4].

35.  The recital to the CAE set-off agreement stated the following:

“[CAE] undertook the third runway project, project number: main contract 3206; based on good cooperation in the past, [Honwin] was arranged to be responsible for the supply of granular fill material, project number: [the purchase order]; on the other hand [CAE] arranged [the petitioner] as a construction contractor. Based on mutual benefits, [the petitioner] was willing to provide a loan to [Honwin]; as security for such loans, [Honwin] agrees with the following irrevocable arrangements for deduction of [purchase order] payment to protect the interests of [the petitioner].”

36.  The CAE set‑off agreement enabled the petitioner to set‑off the HK$3 million advanced against Honwin’s future payment receivable under the purchase order.

37.  HK Marine did not feature at all in the loan agreement.

 (2) The relationship between (i) the debtor and (ii) the petitioner, HK Marine and CAE

38.  It was submitted that Leung, as a director of both HK Marine and to the petitioner, could confer apparent authority on the petitioner to act as agent of HK Marine.

39.  The relevant context consisted of HK Marine having asked the debtor to carry out the Instruction and represented to the debtor that HK Marine would provide funding.  It was submitted that the 2^nd sentence in §11 (b) which specifically mentioned the amount of HK$3 million that had been suggested by the debtor in §11 (a), should be read as if it had included the words shown in italics below:

“Leung further told me that for accounting purpose and also security reason, Honwin and I were required to enter into a loan agreement and guarantee respectively with the petitioner acting as agent for HK Marine for the said amount of HK$3,000,000.00.”

40.  The relevance of the relationship is dependent on the court accepting what the debtor submitted was the purpose of the loan and is not free-standing.  Of itself, the existence of the relationship is a neutral factor.

 Conclusion on (1) and (2)

41.  This is a case where the debtor, based simply on the fact that he trusted Leung, entered into the 1^st contract on 20 July 2017 that required payment of HK$1.32 million within 2 days at a time when HK Marine had not provided him with any funds and when on 18 July 2017 it became known that for Crown Pacific to commence operations it had to have a paid‑up capital of US$3 million.

42.  Plainly, the ability of HK Marine to come up funding for Crown Pacific was pivotal to the whole arrangement.  The debtor’s evidence is singularly silent on this aspect.

43.  Apart from the 1^st contract, the debtor committed himself to the 2^nd contract on 1 August 2017.  Then, having obtained the loan from the petitioner, instead of first ascertaining whether Crown Pacific had met the necessary paid‑up capital requirement to commence operations, a month later, on 28 August 2017, the debtor expended HK$2.64 million as deposit payments for the 1^st and 2^nd contracts.

44.  It is to be noted that Honwin was able to supply a quantity of fill material pursuant to the purchase order during August 2017 at a time when Crown Pacific was unable to commence operations and before payment of the rental deposits.  Honwin was in a position to supply fill material from other sources.

45.  In my view, those matters serve to undermine the debtor’s case as to the purpose of the loan agreement.  His account stretches one’s credulity.

46.  In light of the petitioner’s explanation for the loan agreement and its terms which are entirely consistent the explanation given, there is little scope for the court to draw any inference that the purpose is other than that given by the petitioner.

(3) HK Marine’s control over the petitioner

47.  Mr Lee referred to the certificate of demand in respect of the loan agreement issued by the petitioner to the debtor in respect of the outstanding principal, default interest, facility fee totalling HK$3,213,186.  It was signed by Luk Ka Kit David, “Beneficiary’s Officer”.

48.  The court was informed that David Luk was an alternate director of HK Marine.  On that basis, it was suggested that the court should infer that HK Marine controlled the petitioner.

49.  That submission is sustainable for the following reasons:

(a)  on its face, the certificate relied on makes no mention of HK Marine;

(b)  §2.1 of the guarantee provided that “[a] certificate by the Beneficiary’s officer of the amount so payable shall be conclusive…”;

(c)  as earlier noted, Cho is the owner of the petitioner; and

(d)  HK Marine is not a shareholder of the petitioner.

50.  The fact that David Luk wore 2 hats, one as an officer of the petitioner and the other as an alternate director of HK Marine is again a neutral factor.  It does not support the suggested inference.

51.  Without the shadow of a doubt, the 3^rd point relied on as supporting the inference the court is invited to draw, is a non‑starter.

CONCLUSION

52.  For those reasons, the court made the bankruptcy order.