RE WANG HUIMIN

HCB 6848/2019

[2021] HKCFI 3472

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6848 OF 2019

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JUDGMENT

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Introduction

1.  There is before this court an application of the debtor (“Madam Wang”) by Amended Summons dated 2 August 2021 (“Amended Summons”) for the annulment of the Bankruptcy Order made against her on 3 February 2021 in her absence (“Annulment Application”). The Annulment Application is made under section 33(1)(a) of the Bankruptcy Ordinance, Cap 6 (“BO”).

2.  The grounds in support of the Annulment Application are that the Bankruptcy Order ought not to have been made since:

(1) The only jurisdictional basis of the Petition, amended by Order dated 14 October 2020 (“Amended Petition”), was that Madam Wang had carried on business in Hong Kong during the period of 3 years ending with the date of the presentation of the Petition ie from 7 November 2016 to 6 November 2019 (“Relevant Period”)[1]. This is not borne out by the evidence.

(2) Service of the Amended Petition on Madam Wang, pursuant to an Order for Substituted Service dated 21 December 2020 by Master Hui, was invalid in that there had been serious material non-disclosure and misstatements in the Petitioner’s evidence in support of the application for it such that the Order should be set aside.

3.  The Annulment Application is opposed by the Petitioner and Milestone F&B I Limited (“Milestone”), a supporting creditor. The Annulment Application was initially opposed by the Trustees in Bankruptcy of Madam Wang (“Trustees”). At the hearing, Mr Ho, for the Trustees, withdrew their opposition and opted to remain neutral instead.

4.  Included in the Amended Summons is Madam Wang’s application for a general stay at paragraph 2, alternatively, a “limited” stay at paragraph 2A of execution of the Bankruptcy Order pending the determination of the Annulment Application. The stay applications were not pursued at the hearing.

Brief Factual Background

5.  The factual background is not seriously in dispute. The following is largely taken from Madam Wang’s 1st and 3rd Affirmations (“Wang 1” and “Wang 3” respectively).

6.  Madam Wang is a Chinese citizen and holds a PRC resident identity card. She has been residing in Shanghai since she was born in 1956. Madam Wang is not a permanent or non-permanent resident of Hong Kong. During the Relevant Period, she had only visited Hong Kong for a total of 79 days and stayed in hotels for overnight visits.

7.  The Petitioner is Madam Wang’s younger brother. Wang Huili is her younger sister. The Wang family originated from and have always been based in Shanghai.

8.  Madam Wang established a small restaurant, Shanghai City Huangpu Xiao Nan Guo Restaurant (上海市黃浦區小南國飯店), in Shanghai in 1987. The business prospered and expanded into a chain of restaurants operating under the name of “Xian Nan Guo” in the PRC and in Hong Kong. The Shanghai business was managed and operated by Shanghai Xiao Nan Guo Restaurant Co, Ltd (上海小南國餐飲有限公司) (“XNG Shanghai”) while the Hong Kong business was managed and operated by Xiao Nan Guo Holdings Limited (小南國控股有限公司) (“XNG HK”). The holding company TANSH Global Food Group Co Ltd (“TANSH Global”) was listed on The Stock Exchange of Hong Kong Limited (stock code: 3666) on 4 July 2012.

9.  Prior to TANSH Global’s IPO, by 2 trademark licensing agreements dated 17 May 2012, Madam Wang granted the company an exclusive and non-transferable licence to use the trademarks identified in TANSH Global’s IPO prospectus with a right to sublicense to, among others, any of the subsidiaries in the group at a nominal licence fee of RMB1.00 per annum for the first 50 years. The licence cannot be terminated or revoked by Madam Wang without TANSH Global’s prior written consent.

10.  From 2 February 2010[2] to 25 July 2019, Madam Wang was the Chairlady of the board of directors and an Executive Director of TANSH Global. She resigned from all positions in TANSH Global on 25 July 2019.

11.  In the early 2000s, Madam Wang transferred for nil consideration to each of the Petitioner and Wang Huili 25% of beneficial interests in the then Xiao Nan Guo Chinese restaurant business controlled by XNG Shanghai and XNG HK as well as the non-restaurant business comprising Shanghai Hongqiao Xiao Nan Guo Restaurants Management Co, Ltd (上海虹橋小南國餐飲管理有限公司) (“Shanghai Hongqiao”) and Xiao Nan Guo (Group) Co, Ltd (小南國（集團）有限公司) (“XNG Group”). Following his divorce in or around 2009, the Petitioner’s interests in Shanghai Honqiao and XNG Group were reduced to 12.5% - the other 12.5% went to his wife.

12.  Following an agreement entered into in December 2013 by Madam Wang, the Petitioner and Wang Huili, the Petitioner owned 7.386% of Xiao Nan Guo’s Shanghai hotel business constituted by XNG Group and one Shanghai WM Ming Hotel Co, Ltd (上海小南國花園酒店有限公司) (“WH Ming Hotel Co”).

13.  In or around late October or early November 2016, the Petitioner requested Madam Wang to buy back his shares in Shanghai Honqiao and the Shanghai hotel business. The Petitioner and Madam Wang then entered into a Share Transfer Agreement dated 7 December 2016 (“STA”) by which the Petitioner agreed to transfer his 12.5% interest in Shanghai Honqiao and 7.386% interest in WH Ming Hotel Co for a consideration of RMB 60,000,000. Nevertheless, the STA also stipulated that based on the sister-brother relationship and taking into account of the Petitioner’s circumstances (「基於姐弟關係並考慮呈請人的實際情況」), Madam Wang agreed to pay him a further RMB191,200,000.

14.  On 4 December 2018, a cheque dated 1 December 2018 in the sum of HK$213,920,000 issued by Madam Wang and payable to the Petitioner was dishonoured. On 7 December 2018, the Petitioner issued a statutory demand to Madam Wang for the sum of HK$213,920,000. Subsequently, Madam Wang applied to set aside the statutory demand in HCSD 51 of 2018 (“HCSD51”). The application was dismissed by DHCJ Le Pichon on 18 October 2019.

15.  On 6 November 2019, the Petitioner presented the Petition against Madam Wang on the basis of non-compliance with the statutory demand. On 21 December 2020, the Petitioner obtained the Order for Substituted Service. On 3 February 2021, the Bankruptcy Order was made against Madam Wang in her absence.

Carrying on Business

The Law

16.  In Lee Yee Shing v Commissioner of Inland Revenue (2008) 11 HKCFAR 6 at [69] and [70], McHugh NPJ expressed the view that “common law courts have never doubted that the expression ‘carrying on’ implies a repetition of acts and that, in the expression ‘carrying on a business’, the series of acts must be such that they constitute a business”. Further, “[O]rdinarily, a series of acts will not constitute a business unless they are continuous and repetitive and done for the purpose of making a gain or profit”.

17.  While McHugh NPJ’s view was expressed in the context of a revenue statute, this court does not see why the same cannot be equally applicable in the present case. In any event, neither the Petitioner nor Milestone is able to draw a convincing distinction between the meaning of “carrying on a business” in a revenue context and the meaning of “carrying on a business” in a bankruptcy context.

18.  It is well-established that the condition under section 4(1)(c)(ii) BO is not satisfied by showing merely that a person is running his company’s business even though he is the sole beneficial shareholder and in complete control. A person is not regarded as carrying on business in Hong Kong simply because he is organising or managing or takes charge of the business of a company in this jurisdiction, whether as a director or otherwise. This follows from the fundamental doctrine of the separate legal personality of a company. Whether or not a person has carried on business in this jurisdiction is a factual question that must depend on the circumstances of each case. But there must be some evidence of activities on the part of the debtor over and above those attributable to the company to show that the debtor has carried on business of his own: Re Brauch (A Debtor) [1978] Ch 316, 328F-G; Re Chen Mei Huan, ex p Venetian Macau Ltd [2020] 1 HKLRD 409 at [4] - [5], [8].

19.  For instance, in Re Patrick Major Lee unrep, HCB 3448 of 2008, 29 July 2009 at [14], Barma J (as he then was) expressed the view that the provision of security for a company in which the debtor has an interest is not something that amounts to the carrying on of a business of his own. Rather, it would seem to involve no more than the supporting of the business of the company, in which he might be interested.

20.  On the other hand, the doctrine of the separate legal personality of a company does not preclude a finding, on the totality of the evidence, that such a person is also conducting a business of his own, separate and distinct from his company’s business: Re Kok Hiu Pan, ex p Wing Lung Bank Ltd [2002] 3 HKLRD 20 at [37]; Re Chen Mei Huan at [4].

21.  In the Petitioner’s skeleton submissions, Mr Chang SC relies on the following activities of Madam Wang as supporting the contention that she was carrying on business in Hong Kong during the Relevant Period:

(1) Owning trademarks and granting licences in Hong Kong.

(2) Buying out the Petitioner’s business interest through the STA.

(3) Investments through Extensive Power.

Owning trademarks and granting licences

22.  The evidence of Madam Wang’s ownership and licensing of trademarks comes from the 4th affirmation of Chan Ho Yin (“Chan 4”), one of the Trustees. According to Chan 4:

(1) as at 17 October 2021, 27 trademarks list Madam Wang as “Applicant/Owner”;

(2) around 14 to 15 out of 27 trademarks are variations of “Xiao Nan Guo” or “Shanghai Min” in English and Chinese, which is a brand known to be operated by TANSH Global in Hong Kong from 2016 to 2019;

(3) 2 out of 27 trademarks are variations of “The Dining Room”, which is a brand known to be operated by TANSH Global in Hong Kong from 2016 to 2019;

(4) 2 out of these 27 trademarks are variations of “Oreno”, which is a brand known to be operated by TANSH Global in Hong Kong from 2016 to around 2017;

(5) registration of 4 of these marks was renewed by Madam Wang during the Relevant Period;

(6) an exclusive licence to use 11 of these marks in Hong Kong was granted by Madam Wang to TANSH Global by a trademark licence agreement dated 17 May 2012 (“Licence Agreement”) in anticipation of TANSH Global’s IPO which took place in July 2012. The initial term was 10 years, renewed automatically for successive terms of 10 years. Madam Wang will be paid a licence fee of RMB1.00 per annum for the first 50 years of the licence and has a continuing obligation to keep all the marks properly registered.

23.  While acknowledging that the registration of all trademarks in Hong Kong pre-dated the Relevant Period, Mr Chang SC submits that what is important is that Madam Wang owned the trademarks during the Relevant Period for use in Hong Kong which should count as her, rather than TANSH Global’s, business. Mr Chang SC also submits that the grant of a licence to TANSH Global under one of the licensing agreements for use of some of her trademarks in Hong Kong also formed part of her business during the Relevant Period since the obligations and benefits of the agreement continued to operate with full effect during the Relevant Period.

24.  What is missing from Mr Chang SC’s submission is an explanation as to what business that Madam Wang was said to be carrying on personally by (i) owning those trademarks, (ii) renewing the registration of some of them, and (iii) continuing to abide by the terms of the licensing agreement entered into in 2012 during the Relevant Period. Is Mr Chang SC suggesting that Madam Wang was running a restaurant business in Hong Kong by virtue of (i), (ii) and (iii)? Or is he suggesting that Madam Wang was running a trademark licensing business in Hong Kong during the Relevant Period?

25.  The law is that although it is not necessary to be precise, one is still required to give some form of definition or description: Re Brauch supra at 329D. In that case, Goff LJ described, at 329A-B, the business of the debtor as “the business of promoting companies, or acquiring shell companies, to speculate in land, or alternatively that of finding suitable sites for development or investment, negotiating a price, including of course obtaining all necessary valuations, and financing the purchase”. That is obviously adequate for the purpose.

26.  In the present case, there is no evidence that Madam Wang was running a restaurant business independent of that carried on by TANSH Global. It is also important to bear in mind that there is no evidence Madam Wang has licenced her trademarks to anyone other than TANSH Global. Nor is there evidence on the fees, if any, she had received during the Relevant Period other than the nominal one of RMB1.00 per annum which was obviously not for the purpose of making a profit.

27.  In section E.2(2) of Milestone’s submissions, Ms Law suggests that Madam Wang’s personal business was in “promoting the restaurant business of TANSH Global”. The suggestion rather ignores (i) the fact that the incorporation and the listing of TANSH Global had taken place well before the Relevant Period; and (ii) the meaning of a “promotor” in the context of company law and the role of a “promotor” only continues until the particular functions of promotion come to an end as they will when directors are appointed and then take over the management: Gower’s Principles of Modern Company Law (10th ed) at [5-4]; Twycross v Grant (1877) 2 CPD 469, 541. Even accepting that Madam Wang could be regarded as a promoter of TANSH Global’s restaurant business prior to its incorporation in 2010 or its listing in 2012, her role as a promotor had long ceased by the time of the Relevant Period.

28.  Further, in so far as Madam Wang, whether as director or beneficial shareholder of TANSH Global, assisted the company by (i) owning those trademarks, (ii) renewing the registration of some of them, and (iii) continuing to abide by the terms of the licensing agreement entered into in 2012, she was merely devoting her resources to support the business of TANSH Global in which she was financially interested. This is borne out by the evidence that Madam Wang allowed TANSH Global to use the various trademarks at a nominal consideration. In this court’s view, what Madam Wang did was no different in nature from what the debtor did in Re Patrick Major Lee ie the provision of security for a company in which the debtor had an interest. That cannot count as the carrying on of Madam Wang’s own personal business.

29.  Ms Law also suggests as an alternative that the licensing of post-IPO registered trademarks must per se have been a business which Madam Wang carried on in Hong Kong independent from her executive roles in TANSH Global. The short answer is that it is pure speculation - there is no evidence that Madam Wang had granted any licence before and during the Relevant Period to anyone other than TANSH Global. On the available evidence, it is wholly farfetched to suggest that Madam Wang was carrying on the business of licensing trademarks.

Buying out the Petitioner’s business interest through the STA

30.  By the STA entered into by Madam Wang and the Petitioner in Hong Kong on 7 December 2016, which was within the Relevant Period, it is provided inter alia that:

(1) The Petitioner shall transfer his 12.5% interest in Shanghai Hongqiao and his 7.386% interest in WM Ming Hotel Co to Madam Wang for a consideration of RMB251,000,000; as explained in Recital III, the consideration for the transfer is only RMB60,000,000, but based on the sister-brother relationship and taking into account the Petitioner’s actual circumstances, Madam Wang agrees to pay him a further RMB191,200,000.

(2) Madam Wang shall pay the consideration by 5 instalments, all due on dates within the Relevant Period.

(3) The Petitioner shall sign a separate document entrusting Madam Wang to sell his shareholding in TANSH Global to third parties before 1 May 2017, with a guarantee that the Petitioner will receive net sale proceeds of RMB40 million and any shortfall shall be made good by Madam Wang, but any amount in excess of RMB40 million shall belong to her.

(4) Madam Wang shall ensure that before she sells the Petitioner’s shareholding in TANSH Global and pays the first 3 instalments of the consideration to the Petitioner, the Petitioner remains as non-executive director of TANSH Global.

(5) When the Petitioner resigns as non-executive director of TANSH Global, Madam Wang shall procure that the Petitioner is appointed as vice-president of Shanghai Hongqiao.

31.  Mr Chang SC submits that the STA was reached through negotiation at arm’s length and each party had sought independent legal advice. Through the STA, Madam Wang had bought out the Petitioner’s interest in the “Xiao Nan Guo” business in Hong Kong and the Mainland. It was plainly a business transaction.

32.  In Milestone’s submissions at paragraphs 103-110, Ms Law submits that Madam Wang had entered into a transaction (i) to acquire shares in Hong Kong and (ii) to assume obligation to sell the Petitioner’s TANSH Global shares at a guaranteed price and she would be able to make a profit in the event she was successful in selling them at a premium. Such a transaction strongly militates in favour of the finding that she was carrying on her own business in Hong Kong at the time. Ms Law’s emphasis appears to be that Madam Wang had incurred significant personal liability with potential personal gain.

33.  Again, what is missing from Mr Chang SC’s submissions as well as Ms Law’s submissions is a description of what business Madam Wang was said to be carrying on by entering into the STA.

34.  Whether or not the STA counts as a business transaction, that was only a one-off transaction entered into by Madam Wang with a view to buying out the Petitioner’s entire interest in Shanghai Hongqiao and WM Ming Hotel Co as well as to underwriting the disposal of the Petitioner’s entire interest in TANSH Global. Mr Yu SC submits that this transaction was entered into primarily with a view to a clean break between Madam Wang and the Petitioner of the “Xiao Nan Guo” business in Hong Kong and the Mainland, rather than with a view to potential profit which was merely incidental. This court agrees.

35.  Anyway, this court is here concerned with the “carrying on” of a business by Madam Wang, which expression implies a repetition of acts and, ordinarily, done for the purpose of making a gain or profit: Lee Yee Shing v Commissioner of Inland Revenue supra. Obviously, once Madam Wang had bought out and procured the disposal of the Petitioner’s interest in the companies in question, there can be no repetition. The position might be different if, during the Relevant Period, Madam Wang had engaged in a series of such buy-outs. But there is no evidence to that effect.

36.  Mr Chang SC refers this court to a number of English authorities which suggest that, in principle, a single transaction can constitute the carrying on of business if in a particular context and on the totality of the evidence that appears to be the position: Masters v Barclays Bank plc [2013] BPIR 1058 at [19] - [20]; Charlton v Funding Circle Trustee Ltd [2020] BPIR 125 at [22]. As stated earlier, the context of the present case is that the STA was entered into primarily with a view to a clean break between Madam Wang and the Petitioner in respect of the “Xiao Nan Guo” business in Hong Kong and the Mainland. In these circumstances, and looking at the totality of the evidence concerning the STA, this court is not satisfied that Madam Wang was carrying on a business by entering into the STA.

Investment through Extensive Power

37.  It is Madam Wang’s evidence that Extensive Power was incorporated on 8 November 2010 for the purpose of holding and managing Madam Wang’s interests in the TANSH Global shares. Seizing upon this sentence, Mr Chang SC submits that Extensive Power did not, and was never intended to, carry on a business in its own right. During the Relevant Period, Extensive Power purchased and disposed of a substantial number of TANSH Global shares. These transactions were carried out by Extensive Power as Madam Wang’s agent and constituted the carrying on of a business by Madam Wang in Hong Kong.

38.  This court does not agree.

39.  First, the submission that Extensive Power did not and was never intended to carry on a business in its own right ignores the principle of the separate legal personality of a company: a one-shareholder company’s business is still the business of the company, not the shareholder. It also conveniently ignores the following important pieces of evidence:

(1) Madam Wang’s evidence at paragraph 21 of Wang 3 that part of the purpose of incorporating Extensive Power was that it would be used to facilitate the setting up of a family trust.

(2) Extensive Power’s Directors’ reports for the years 2016 to 2018 which consistently stated the principal activities of the company were to act as the trustee of the Wang Trust.

40.  Since Madam Wang was the sole director and shareholder of Extensive Power from 3 August 2011 until she was adjudged bankrupt, whenever Extensive Power traded in the TANSH Global shares during the Relevant Period, it could only have done so via Madam Wang as its sole director. The law in this regard is clear: a person is not regarded as carrying on business in Hong Kong simply because he is managing the business of a company in this jurisdiction.

41.  Further, the suggestion that those share trading transactions were carried out by Extensive Power as Madam Wang’s agent (and hence the reliance on section 4(2)(b) BO) is but a bare assertion. In principle, it is of course possible for a company to act as its shareholder’s agent. But that rather depends on whether there is evidence in support of the alleged agency - there is none before this court. On the contrary, the available evidence suggests Extensive Power’s business activities were carried out as trustee of the Wang Trust, rather than as agent of Madam Wang.

42.  In Milestone’s submissions at paras 140-144, Ms Law contends that during the Relevant Period, Madam Wang disposed of some of her substantial shareholdings through Extensive Power as her alter ego. Further, Madam Wang, through Extensive Power, acquired and held shares in a company called Mercurity Fintech Holdings Inc (“MFH”).

43.  Ms Law’s submissions in this regard suffer from the same problems as Mr Chang SC’s in that the assertion that Extensive Power was Madam Wang’s alter ego is just a bare assertion. The submissions also ignore the principle that a person is not regarded as carrying on business in Hong Kong simply because he is managing the business of a company in this jurisdiction.

44.  Further, as Mr Yu SC puts it in his Reply Submissions, just because Extensive Power was engaged in share transactions and was wholly owned by Madam Wang does not mean that Extensive Power itself was operating a share investment business, let alone that Madam Wang herself was operating a share investment business independent of that of Extensive Power.

45.  In Lee Yee Shing v Commissioner of Inland Revenue supra at [75] - [96], McHugh NPJ’s observations starkly illustrate (i) the difficulty of the question whether a person who buys and sells shares is carrying on a business of share trading and (ii) the 25 factors which the Court has to take into account before it can come to the conclusion that such a person is or is not carrying on a share trading business. At [96], the learned NPJ concluded that “[T]he more of these factors that are present the greater the probability that the trader is applying commercial principles in the conduct of a business of share trading. The presence of a considerable number of these factors may indicate that the activities of the trader are so considerable, organised and systematic that they go beyond what is found in the share trading activities of ordinary share buyers – even those who buy and sell many shares frequently or in large sums – and thus amount to a business”. In the present case, there is simply no attempt by Mr Chang SC or Ms Law to analyse the evidence in light of those factors and explain why the activities of Extensive Power or Madam Wang amounted to the carrying on of a business of share trading.

Other activities of Madam Wang

46.  In addition to the above, in Milestone’s skeleton submissions, Ms Law further relies on the following activities of Madam Wang as supporting the contention that she was carrying on business in Hong Kong during the Relevant Period. They can be disposed of quickly as the contention is clearly untenable.

47.  First, on 18 August 2016, Madam Wang granted the Irrevocable Offer / Put Option to Milestone in relation to its 113,820,000 shares in TANSH Global. Under the Irrevocable Offer / Put Option, Madam Wang, as executive director of TANSH Global, irrevocably offered to procure a third party to purchase Milestone’s shares on inter alia the following terms:

(1) Milestone could elect to sell all or some of the shares to the third party at the price of HK$1.50 per share any time between 1 January and 30 April 2019.

(2) In the event that Madam Wang was unable to procure a third party to purchase the shares, she should first pay the purchase price in cash to Milestone by 2 instalments.

48.  Second, on 28 March 2018, Madam Wang entered into a Deed of Sale with Sunshine over its intended exit from TANSH Global, the nature of which is quite similar to the Irrevocable Offer / Put Option. Under the Deed of Sale:

(1) Sunshine is entitled to issue a written notice to Madam Wang within 30 days after TANSH Global has published its annual report for the year 2017 notifying her of its intention to sell its shares in TANSH Global. Upon receipt of the said notice, Madam Wang shall immediately look for a qualified purchaser. The price for the sale of the entirety of Sunshine’s shares is HK$208,662,421.

(2) Should Madam Wang fail to find such a qualified purchaser on or before 30 September 2018, Madam Wang would be obliged to pay the specified price to Sunshine on or before 31 December 2018.

49.  The circumstances under which Madam Wang entered into the 2 transactions with Milestone and Sunshine were explained in Wang 3.

50.  Essentially what happened was that, in around 2016, in view of the unsatisfactory performance of the share price of TANSH Global, Zhu Xiaoxia (“Zhu”), the then executive director of TANSH Global, proposed that the company should acquire shares in MFH, a company listed on NASDAQ. It was considered that the acquisition would create synergy to further enhance TANSH Global’s development by taking advantage of the strong supply chain capacity of MFH. In order to finance the acquisition, Zhu proposed a rights issue by TANSH Global (“Rights Issue”). Both Zhu and Madam Wang were then substantial shareholders of MFH and were obliged to abstain from voting at the Board meeting and the EGM on the resolutions to approve the acquisition. Madam Wang therefore entered into the 2 transactions with Milestone and Sunshine in exchange for their support for the acquisition as well as the Rights Issue.

51.  The Irrevocable Offer / Put Option was offered to Milestone before the Relevant Period. As far as the date of the Deed of Sale is concerned, this court accepts Madam Wang’s uncontradicted evidence in Wang 3 at para 30 that it should have been entered into before the EGM held on 24 August 2016 because it was offered to secure Sunshine’s support of the acquisition and the Rights issue at that meeting.

52.  Mr Yu SC’s point is that these 2 dealings with Sunshine and Milestone were discrete one-off transactions entered into prior to the Relevant Period. They were for the purpose of enhancing TANSH Global’s development which would only incidentally benefit Madam Wang as a shareholder. Providing assistance in support of TANSH Global cannot, without more, amount to demonstrating that Madam Wang was carrying on her own personal business: see, for instance, Re Patrick Major Lee supra and Re Chen Mei Huan supra. There is force in that submission.

53.  In any event, the weakness of Ms Law’s submission lies in her inability to characterise what personal business Madam Wang was supposed to be carrying on by entering into the 2 transactions: see Re Brauch supra at 329D. At para 118(5) of Milestone’s submissions, Ms Law simply asserts that “Madam Wang entered into a continuum of transactions[3] before and during the Relevant Period which strongly support the finding that she carried on her own business in Hong Kong.”

54.  Third, Madam Wang was said to be the promoter of businesses injected or to be injected into other corporate vehicles in which she had an equity interest. These include:

(1) In June and July 2016, Madam Wang had pledged “her shares” in TANSH Global to Guotai Junan Securities (Hong Kong) Limited (“Guotai”) for several loans to the tune of RMB 210m obtained by “her corporate vehicles”.

(2) On 4 June 2015, Madam Wang and Zhu incorporated JM (HK) Investment Hong Kong Limited (“JM HK”) in which Madam Wang was a director until 24 October 2019. On 30 June 2015, JM HK acquired all the shares in Chung So Si Fong Dessert Limited (“Chung So”) which operated a dessert restaurant business in Hong Kong. On 1 March 2018, Madam Wang and Zhu signed a Deed of Guarantee in favour of Bank of Communications (Hong Kong) Limited after it made available a HK$5 million banking facility to Chung So.

(3) In March 2016, Madam Wang and Zhu incorporated Bomin Investment Limited (“Bomin”) with equal shareholding and had been its directors since incorporation. Since 21 December 2016, Bomin owned 20% shareholding interests in Golden Hall Dessert Company Limited (“Golden Hall”) which operated 3 dessert stores in Hong Kong.

55.  As far as the pledge of shares to Guotai is concerned, the transaction was explained in Wang 3 which explanation was uncontradicted. At paras 24 and 29(g), Madam Wang clarified that those shares were held by Value Boost Limited (“Value Boost”) and it was Value Boost which pledged its shares to Guotai for facilities granted by Guotai to enable it to participate in the Rights Issue. Ms Law’s submission is thus put on a false premise. Ms Law then seizes upon 1 sentence of Madam Wang’s 2nd affirmation in HCSD51 in which she described the shares as “her” shares and the loans to be for “her corporate vehicles”. In this court’s view, what a layman subjectively perceives and describes carries little weight: if the shares were legally held by Value Boost, how Madam Wang described the shares would not affect the legal position: Re Chen Mei Huan supra at [11] - [12].

56.  As far as the incorporation of JM HK and the acquisition of Chung So are concerned, Madam Wang cannot be regarded as the promotor of a dessert business since the Chung So dessert business was already there when JM HK acquired Chung So in June 2015. In any event, the incorporation and the acquisition took place and were completed well before the Relevant Period. There is no evidence that after the acquisition, Madam Wang had any part in the running of the Chung So dessert business. Regarding the Chung So Guarantee, this court is of the view that what Madam Wang did was merely providing financial assistance to Chung So in which she was indirectly interested, instead of carrying on her own personal dessert business. To hold otherwise would be to ignore the fundamental doctrine of the separate legal personality of a company.

57.  Lastly, regarding the incorporation of Bomin, it took place before the Relevant Period. As for the acquisition of 20% of Golden Hall by Bomin, while it took place within the Relevant Period, even if Madam Wang was involved in it[4], her involvement in the acquisition was only in her capacity as one of the directors of Bomin. There is no evidence that after the acquisition, Madam Wang had any part in the running of the Golden Hall dessert business. In these circumstances, Madam Wang cannot be regarded as the promotor of Golden Hall’s dessert business.

58.  To conclude, while the evidence in this regard must be viewed in its totality rather than in a truncated manner: Re Brauch (A Debtor) supra at 330F; Re Chen Mei Huan supra at [12], on the totality of the evidence, this court is not satisfied that Madam Wang had carried on business in Hong Kong during the Relevant Period. There was therefore no jurisdiction to grant the Bankruptcy Order against her: Re Wong Lei Kwan Joanne, ex parte Bank of China (Hong Kong) Ltd [2009] 3 HKLRD 173 at [29].

59.  In Milestone’s Submissions, Ms Law argues that the Court should not exercise its discretion to annul the Bankruptcy Order. The primary reason put forward is that Madam Wang has failed to provide any reasonable and credible explanation for her absence at the hearing at which the Bankruptcy Order was made, relying on the Court of Appeal decision in Kam Hung Cheung v Bank of China (Hong Kong) Limited [2009] 3 HKLRD 597. At [11], the Court adopted the following principles laid down by Chu J (as she then was) pertaining to an application for annulment:

(1) In considering whether to exercise the power under section 33(1)(a), the court should first look at whether there were any grounds on which a bankruptcy order ought not to have been made at the material time when it was made.

(2) If the court does not think that such grounds existed, it cannot invoke section 33(1)(a) to annul the bankruptcy order. If the court thinks that such grounds existed, it still has to consider whether it should exercise its discretion to annul the bankruptcy order.

(3) In exercising the discretion under section 33(1), the court has to carefully consider the interests of the creditor, the debtor and the public, bearing in mind that a bankruptcy order is to be annulled only under exceptional circumstances.

(4) The person applying to annul a bankruptcy order bears the burden of proving that when the order was made there were grounds on which the order ought not to have been made.

(5) Where a bankruptcy order was made in the absence of the debtor, then the debtor must provide reasonable and credible explanations for his absence.

60.  In Kam Hung Cheung, the bankruptcy petition was presented pursuant to a default judgment dated 20 June 2003 in HCA 1497 of 2003. The most important ground put forward by the debtor in support of his application for annulment of the bankruptcy order against him was that he was out of town when the creditor served the writ of summons. On the facts, the Court held that the debtor had failed to show there were any grounds (including the alleged defective service of the writ) such that the bankruptcy order ought not to have been made. On that basis, Chu J’s decision to dismiss the annulment application was upheld by the Court of Appeal.

61.  Importantly for the present purpose, the Court of Appeal held at [30] - [32] that service of the bankruptcy petition pursuant to an order for substituted service was proper service in accordance with the law. There was no suggestion by the debtor in that case that the order for substituted service ought to be set aside or that the jurisdictional requirements under section 4(1) BO were not met. This is an important distinction between Kam Hung Cheung and the present case.

62.  In Michael Ma Wing v Fong Sze Ming [1988] 1 HKLR 354, the petitioner had served a bankruptcy petition by ordinary post to the debtor’s address in Hong Kong despite knowing that the debtor had left Hong Kong. The Court of Appeal unanimously allowed an appeal against the First Instance Judge’s refusal to set aside a receiving order and an adjudication of bankruptcy against the debtor on the ground that the wording of the BO made it plain that the Court could make a receiving order only if inter alia it was satisfied with proof of service of the petition.

63.  At 364E-G, Cons VP concluded:

“… whether one calls it a question of jurisdiction or not I am, in the end, not persuaded that a court can ignore the plain words of the statute. These stipulate that the court may make a receiving order if—and I read that as, only if—it is satisfied with the proof inter alia of the service of the petition. The court, of course, is entitled to regulate its own procedure. It has an inherent jurisdiction to see that its procedure is not abused. It may act on rules made generally under a statutory provision, such as the Rules of the Supreme Court. But I do not think it can use such powers to override clear legislative intention. In the present instance, had the judge who heard the petition directed his mind to the question of proof of service, he could not have been satisfied with it. It follows then that he had no power to make the order that he did. …” (emphasis added)

64.  Since Kam Hung Cheung was not a case where the jurisdiction to grant the bankruptcy order was absent, the Court of Appeal did not have to resolve the tension between the requirement that the debtor must provide a reasonable and credible explanation for his absence when the bankruptcy order was granted and what was decided in Michael Ma Wing. In fact, Michael Ma Wing was not even cited in the Court of Appeal’s judgment.

65.  For the above reasons, this court does not read Kam Hung Cheung as laying down an inflexible rule that, where a bankruptcy order is made in the absence of the debtor, the debtor must provide a reasonable and credible explanation for his absence, even when there is no jurisdiction to make the bankruptcy order in the first place.

66.  This court has also considered the other reasons put forward by Ms Law as to why it should not exercise its discretion to annul the Bankruptcy Order. In the end, this court is not persuaded that those reasons outweigh the overwhelming factor in this application ie the absence of jurisdiction to make the Bankruptcy Order. If so, the court’s discretion under section 33(1)(a) BO would be exercised in allowing the Annulment Application.

67.  That is sufficient to dispose of the present application. For completeness, this court will go on to consider the parties’ submissions on the validity of the service of the Petition on Madam Wang.

Service of the Petition

68.  Section 9(2) BO provides that “[A]t the hearing the court shall require proof of the debt of the petitioning creditor and of the service of the petition, and, if satisfied with the proof, may make a bankruptcy order in pursuance of the petition.”

69.  On 21 December 2020, the Petitioner obtained the Order for Substituted Service of the Amended Petition. That Order directed that service of the Amended Petition be effected by prepaid ordinary post to Madam Wang at two commercial addresses in Hong Kong, known as the Shui On Centre address and the Ka Yip Street address (“2 HK Addresses”) which were said to be the last known addresses of Madam Wang[5].

70.  The application was first made by the Petitioner by an affidavit of Fong Yick Man (“Fong”) dated 11 December 2019 (“Fong 1”), a clerk of the Petitioner’s solicitors (“JCC”). In Fong 1, it was said the Petitioner had confirmed that he had no knowledge of any address of Madam Wang other than the 2 HK Addresses.

71.  Between Fong 1 and the Order for Substituted Service, Fong had filed 2 further affidavits on 18 May 2020 and 9 November 2020 (“Fong 2” and “Fong 4” respectively) while a partner of JCC, Wong Huk Kam (“Wong”) had filed an affirmation (“Wong 1”) on 18 May 2020, all in response to the comments made by Master Hui on 6 January and 3 August 2020 (“Master’s Comments”). It was on the basis of the statements made in those affidavits / affirmation that the Petitioner obtained the Order for Substituted Service.

72.  Mr Yu SC submits that the Order for Substituted Service is liable to be set aside by reason of the Petitioner’s serious material non-disclosure and misstatements.

73.  The law in this regard is not in dispute.

74.  First, a party who seeks an order for substituted service makes the application on an ex parte basis. In such circumstances, the applicant must give full and frank disclosure of all material facts in the application: CFF v ZWJ unrep, CACV 171 of 2012, 27 May 2013, Kwan and Lam JJA (as they then were) at [27].

75.  In Kan Hung Cheung v The Director of Immigration [2008] 2 HKC 323 at [15] - [19] A Cheung J (as the Chief Justice then was) set out some of the principles on material non-disclosure which are particularly pertinent to the present case as follows:

(1) Materiality is not determined by asking if the judge had had before him the additional facts later disclosed would he have come to the same conclusion. The right test is that the court must be fully informed of all facts that are relevant to the weighing question which the court has to make in deciding whether or not to make the order. Or put it another way, material facts are those which are material for the judge to know in dealing with the application before it.

(2) Material facts include not only facts known to the applicant but also any additional facts which should be known if proper enquiries were made.

(3) An applicant has a duty to inform the Court as soon as he becomes aware that the Court has been misinformed or given incomplete information at the time of the ex parte application. There is also a duty to disclose any material change of circumstances while the proceedings remain on an ex parte basis.

(4) In the event of material non-disclosure or material misstatements of facts, the court’s approach is as follows:

(a) the same principles are to be applied whether there has been material non-disclosure or material misstatements of facts and to all ex parte applications;

(b) even if there has been material non-disclosure or misstatements of fact, the court nevertheless has a discretion whether or not to set aside an ex parte order: this discretion will very rarely be exercised in favour of a person seeking to uphold the ex parte order in cases of deliberate non-disclosure or misstatements of material facts and with great caution even in cases where such non-disclosure or misstatement was not deliberate; and

(c) normally a court will not assist a party to retain an advantage to which he was not entitled.

(5) The jurisdiction to set aside an ex parte order for material non-disclosure is a disciplinary, indeed penal, jurisdiction, quite irrespective of the merits of the application.

76.  Further, the test as to materiality is an objective one. It is not for the applicant or his legal advisers to decide the question. Hence it is no excuse for the applicant subsequently to say that he was genuinely unaware, or did not believe, that the facts were relevant or important: China Medical Technologies, Inc v Bank of China (Hong Kong) Limited unrep, HCA 2448 of 2014, 20 June 2018, Au-Yeung J at [66] and [67].

77.  On the evidence, it is not in dispute that there was no disclosure of Madam Wang’s residential addresses in Shanghai viz “中国上海市长宁区龙溪路189号801幢” (“Longxi Road Address”) or her address at No 40, 2000 Long, Jianhe Road, Changning District, Shanghai (“Jianhe Address”) (collectively “Shanghai Addresses”). This is so notwithstanding the fact that prior to the grant of the Order for Substituted Service, the Petitioner either knew or could easily have found out the Shanghai Addresses if proper enquiries had been made.

78.  In his affirmation dated 9 September 2021 (“P1”) at paragraphs 17 to 24, the Petitioner affirmed that he became aware of the Longxi Road Address by 23 July 2020 when his PRC lawyers provided him with the result of their search which revealed that address. That revelation pre-dated Fong 4 and the Order for Substituted Service. As a result of that revelation, on 17 August 2020, the Petitioner applied for leave to serve a Concurrent Writ of Summons in HCA 1198 of 2020 (“HCA1198”) [6] on Madam Wang at the Longxi Road Address. Leave was granted by Master Kot on 1 September 2020. Eventually, on 17 November 2020, the Petitioner and JCC were informed by the Registrar of the High Court that the documents in HCA1198 requested to be served had been successfully served on Madam Wang at the Longxi Road Address through the Shanghai City Changning District People’s Court (上海市長寧區人民法院).

79.  Yet, the above information was never disclosed to Master Hui and the statement in Fong 1 that the Petitioner had had no knowledge of any address of Madam Wang other than the 2 HK Addresses was never corrected.

80.  At paragraph 29(3) of P1, the Petitioner affirmed that “[A]s to the reason why the Longxi Road Address was not stated on the draft Amended Petition and the 4th Affidavit of Fong Yick Man, Mr Wong explains to me and I verily believe that he was following the directions of the Court and it did not occur to him that the Longxi Road Address was relevant when he was preparing the draft amendment to the Petition and approving the content of the said 4th Affidavit of Fong Yick Man.”

81.  However, in the 2nd affirmation of Wong dated 8 September 2021 (“Wong 2”), Wong never confirmed on oath that it really did not occur to him at the time that the Longxi Road Address was relevant - he merely referred to paragraph 29(3) of P1 and confirmed that was what he explained to the Petitioner. Mr Yu SC submits that it is rather unbelievable that a solicitor who had successfully served Madam Wang outside jurisdiction at the Longxi Road Address would have failed to realise that the Longxi Road Address was relevant to the application for substituted service. There is force in that submission.

82.  As for the Jianhe Address, it has been consistently stated as Madam Wang’s residential address in Shanghai in publicly accessible documents filed by TANSH Global and Extensive Power with the Company Registry since around 2011 up to May 2019 and November 2020 respectively.

83.  At paragraph 20(d) of Master Hui’s Comments dated 3 August 2020, the learned Master inquired whether any updated company search had been conducted to ascertain the whereabouts of Madam Wang. In response, the answer given in Fong 4, which was dated 9 November 2020, was that an updated company search had been conducted but nothing shed light on the whereabouts of Madam Wang.

84.  This statement in Fong 4 is clearly problematic. Assuming that company searches had indeed been conducted on TANSH Global and Extensive Power, it is inherently improbable that he or Wong could have overlooked the Jianhe Address if either of them had paid attention to what was obtained from the Companies Registry. As a matter of inherent probabilities, the more plausible explanation is that company searches had been conducted but no one paid attention to what was revealed in those search results - Wong nevertheless approved that statement in Fong 4. Deliberate or not, that is a clear misstatement.

85.  In Wong 1 at paragraph 3, Wong affirmed that he had confirmed with the Petitioner that he had no information or knowledge as to the whereabouts of Madam Wang. The truthfulness of that statement is highly dubious - on the uncontradicted evidence of Madam Wang in Wang 3, she had been living in the Jianhe Address with her mother from 2009 to mid-2019 and the Petitioner had regularly visited the mother in Madam Wang’s presence, especially on almost all important Chinese festivals. Even giving the Petitioner the benefit of the doubt that he did not know the exact whereabouts of Madam Wang in Shanghai at the date of Wong 1 ie 18 May 2020, there was no justification for the Petitioner not to disclose that Madam Wang was last known to be residing at the Jianhe Address.

86.  The statement in Wong 1 should be contrasted with the Petition or the Amended Petition in which the Petitioner did not rely on the other jurisdictional grounds under section 4(1)(c)(i) BO viz that Madam Wang has been ordinarily resident, or has had a place of residence in Hong Kong within the Relevant Period. It stands to reason that the Petitioner must have known full well that Madam Wang only had a residence outside Hong Kong and that residence was more probable than not in Shanghai.

87.  In any event, that statement in Wong 1 was never corrected after the Petitioner and JCC had acquired actual knowledge of the Longxi Road Address and the successful service of the HCA1198 documents on Madam Wang at that address.

88.  The question of service of the Amended Petition is a matter between the Petitioner and Madam Wang. Mr Chang SC, with his usual pragmatism, does not dispute the Shanghai Addresses, which the Petitioner failed to disclose, were something he knew about or could easily have found out if proper enquiries had been made. Nor does he dispute that misstatements have been made to Master Hui which were never corrected.

89.  Mr Chang SC made 3 points in his succinct skeleton argument but the only one by which he seriously attempts to address the complaint of material non-disclosure / mis-statements is that the Longxi Road Address was not material information that ought to be disclosed. This is because, reading the Arrangement for Mutual Service of Judicial Documents in Civil and Commercial Proceedings between the Mainland and Hong Kong Courts, March 1999 (“1999 Arrangement”) together with the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region, 18 January 2019 (“2019 Arrangement”), there is no mechanism for service of a bankruptcy petition in the Mainland. He also submits that there is no mechanism under the BO or the Bankruptcy Rules for substituted service of a bankruptcy petition in the Mainland.

90.  This court does not agree that point is an answer to the complaint of material non-disclosure / misstatements at all.

91.  To start with, the 1999 Arrangement is not concerned with substituted service at all - it is about proper service of Hong Kong judicial documents in the Mainland in accordance with PRC law. The 2019 Arrangement also has nothing to do with service - it is about Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and Hong Kong. Further, the point as to whether Hong Kong bankruptcy petitions can be validly served in the Mainland is not as clear cut as Mr Chang SC appears to suggest since there is nothing in the 1999 Arrangement which expressly excludes bankruptcy petitions from the definition of “Judicial documents” at Article 9.

92.  Be that as it may, even assuming for the sake of argument that there is no legal mechanism for service of a Hong Kong bankruptcy petition in the Mainland, that does not mean objectively the existence of the Shanghai Addresses is not something Master Hui needed to know in dealing with the application before him. In an application for substituted service, the Court’s primary concern must be the whereabouts of, in this case, Madam Wang and how the bankruptcy proceedings could be brought to her attention and by what means. This is self-evident from the Master’s Comments. If Master Hui had been informed of the Shanghai Addresses, he might well have included in the Order for Substituted Service a direction that the Amended Petition be sent by post to the Shanghai Addresses or by advertisement in a Chinese newspaper in Shanghai so as to bring the bankruptcy proceedings to the notice of Madam Wang.

93.  It seems to this court that the problem with Mr Chang SC’s argument is that the application before Master Hui was not an application for service on Madam Wang outside jurisdiction. If, for instance, Madam Wang was known or suspected to be residing in 2 jurisdictions outside Hong Kong, 1 in the Mainland and the other in somewhere else, and there was no mechanism for the proper service of a Hong Kong bankruptcy petition in the Mainland, then obviously the Shanghai Addresses would be irrelevant and immaterial to the Master dealing with the application - there was just no way to effect service on Madam Wang in Shanghai or anywhere else in the Mainland. Here, Master Hui was concerned with substituted service in accordance with Hong Kong law. The fact that sending the Amended Petition by post to the Shanghai Addresses or by advertisement in a Chinese newspaper in Shanghai may not be proper service under the 1999 Arrangement in accordance with PRC law does not mean it cannot amount to valid substituted service in Hong Kong.

94.  For the above reasons, this court agrees that the Order for Substituted Service was wrongly obtained and should be set aside. Given the serious nature of the non-disclosure and misstatements, in the exercise of its discretion, this court is not minded to re-grant it. Indeed, it is pointless to do so in view of this court’s conclusion on the carrying on business point.

95.  Since this court cannot be satisfied with proof of the service of the Amended Petition under section 9(2) BO, there was no jurisdiction to grant the Bankruptcy Order against Madam Wang. The Bankruptcy Order must also be annulled on this ground.

Disposition and costs

96.  The Annulment Application is hereby allowed. There shall be an Order in terms of paragraph 1 and no order on paragraphs 2 and 2A of the Amended Summons.

97.  Liberty to Madam Wang to apply for consequential orders.

98.  In the absence of agreement on costs within 14 days, the parties are directed to obtain a hearing date before this court for argument on costs, 1 hour reserved.