RE GOLDEN OASIS HEALTH LTD

CACV 100/2020

[2022] HKCA 237

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 100 OF 2020

(ON APPEAL FROM HCCW 236 OF 2018)

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REASONS FOR JUDGMENT

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Hon Kwan VP:

1.  I agree with the reasons for judgment of Barma JA.

Hon Barma JA:

Introduction

2.  On 24 August 2018, the petitioner, Gold Swing Enterprises Limited, issued a petition to wind up Golden Oasis Health Limited (“the Company”) pursuant to section 327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) on the basis that it was insolvent and unable to pay its debts.  The petition was opposed by New Health Elite International Limited (“New Health”), an opposing contributory.

3.  By a decision dated 4 March 2020 ([2020] HKCFI 364), Harris J (“the Judge”) dismissed the petition with costs to New Health and the Official Receiver.

4.  By a notice of appeal dated 7 May 2020, the petitioner appealed against the Judge’s decision.  New Health filed a respondent’s notice on 18 May 2020.

5.  We heard the appeal on 5 November 2021.  At the hearing, the petitioner was represented by Mr Jenkin Suen SC and Mr Justin Lam, while New Health was represented by Mr Jonathan Wong and Ms Ivy Ho.  At the conclusion of the hearing, we allowed the appeal, set aside the Judge’s order, ordered that the costs of the appeal and in the court below be paid by New Health to the petitioner (with certificate for two counsel), directed that the petition be restored for hearing before the Companies Judge on 15 November 2021, and further directed that a winding up order should be made against the Company if the debt (as defined below) had not been repaid in full by the time of the restored hearing.  These are my reasons for doing so.

6.  For completeness, it should be mentioned that in the event, the Company did not make repayment of the debt prior to the hearing of the restored petition, and a winding up order was made against it by Linda Chan J on 15 November 2021.

The factual background

7.  The following relevant factual background was largely undisputed.

8.  The Company was the owner of 55% of the shares in Mega Fitness (Shanghai) Investments Limited (“Mega Fitness”), which managed and operated a chain of sports and fitness clubs on the Mainland.  Mega Fitness was originally wholly owned by the petitioner, which sold a 55% interest in Mega Fitness to the Company pursuant to a sale and purchase agreement (“the Mega Fitness SPA”) dated 27 August 2014.  Subsequently, on 23 April 2015, the petitioner and the Company entered into a shareholders’ agreement relating to their ownership of Mega Fitness (“the Mega Fitness SHA”).  Clause 10.2(c) of the Mega Fitness SHA provided that shareholders loans made by the Company and the petitioner to Mega Fitness (of HK$11,000,000 and HK$9,000,000 respectively, as described in [10] below) were to be repayable at such times as agreed by the Company and the petitioner, and that repayment should only be made if simultaneous pro rata repayments were made in respect of both loans.  A similar term appeared in the Mega Fitness SPA, at Clause 10.1(c).

9.  The Company itself was initially owned by New Health and Smart Even Ventures Limited (“Smart Even”), which respectively held 80% and 20% of the Company’s shares.  New Health was owned as to 77.4% by China Wah Yan Healthcare Limited (“CWY Healthcare”), a Hong Kong listed company. Smart Even was a wholly owned subsidiary of CWY Healthcare.  In around March or April 2015, New Health transferred 20% of the shares in the Company owned by it to Giga Power Chapter Group Limited (“Giga Power”), which was also a wholly owned subsidiary of CWY Healthcare.  Following this transfer, the Company was owned as to 60% by New Health, 20% by Smart Even and 20% by Giga Power.

10.  Each of New Health, Smart Even and Giga Power made shareholder’s loans (totalling HK$35,000,000) to the Company, which used HK$24 million to pay the petitioner the consideration for the acquisition of 55% of Mega Fitness, and injected the remaining HK$11,000,000 into Mega Fitness by way of a shareholder’s loan from the Company to Mega Fitness, to be used by Mega Fitness as working capital.  The shareholder’s loans by New Health, Smart Even and Giga Power to the Company were made in proportion to their respective shareholdings in the Company.  Thus, New Health advanced HK$21,000,000 to the Company (“the New Health Loan”), while Smart Even and Giga Power advanced HK$7,000,000 each (“the Smart Even Loan” and the “Giga Power Loan” respectively).  Apart from the Company injecting HK$11 million into Mega Fitness (“the Mega Fitness Loan”), the petitioner (which still held 45% of the shares in Mega Fitness) also made a shareholder’s loan to Mega Fitness of HK$9,000,000.

11.  On 16 February 2016, Smart Even entered into a sale and purchase agreement (“the Smart Even SPA”) with the petitioner, by which Smart Even agreed to sell its 20% interest in the Company, together with the Smart Even Loan, to the petitioner for the sum of HK$7 million, of which HK$156 was attributed to the 20% shareholding in the Company, while HK$6,999,844 was attributed to the then outstanding amount of the Smart Even Loan.

12.  The Smart Even SPA defined (by Clause 1.1) the Smart Even Loan as all sums due to Smart Even as at the completion date, which would not be less that HK$6,999,844.  It provided (by Clause 2.2) that the 20% shareholding being sold, and the Smart Even Loan, would be sold free from all encumbrances and with all rights attaching thereto.  Paragraph 1.7 of Schedule 1 identified the sole director of the Company as New Health, and paragraph 1.10 of Schedule 1 stated the business of the Company to be “investment”.  The Smart Even SPA also provided for the execution of a deed of assignment (“the Smart Even Deed”) by Smart Even and the Company in favour of the petitioner, and a shareholders’ agreement between all the shareholders of the Company (“the Company SHA”) (see clauses 5.2(c) and (h)).  Clause 14 provided that the Smart Even SPA should not be amended, supplemented or modified, except by instruments in writing signed by the parties to it.  Schedule 2 set out the form of the Smart Even Deed, containing certain express terms which will be further described below.  Finally, Schedule 4, dealing with vendor’s warranties, stated at paragraph 2.7 that the Smart Even Loan was valid, enforceable and not subject to any encumbrances, and at paragraph 2.8 that neither the Company nor Smart Even had taken or withdrawn any action which would adversely affect the enforceability of the Smart Even Loan.

13.  On 30 March 2016, the sale of the 20% shareholding in Smart Even and the Smart Even Loan under the Smart Even SPA was completed.  On that date, the Smart Even Deed (in the form of the deed of assignment set out at Schedule 2 of the Smart Even SPA) was executed by Smart Even, the petitioner, and the Company (which executed the Smart Even Deed through a Mr Gaston Lam, who was a director of New Health, the sole director of the Company as at the date of the Smart Even Deed).  As will become apparent, the execution of the Smart Even Deed by the Company as a party is of significance to these proceedings.

14.  The Smart Even Deed contained the following material provisions:

(1)     Clause 2, which provided that “[Smart Even] hereby represents and warrants to [the petitioner] that … (b) the [Smart Even Loan] is due and payable and is valid and subsisting and repayable by [the Company] to [Smart Even] in full on demand and free from all or any encumbrance, charge, lien, rights of set-off or counterclaim, compromise, release, waiver, option and dealing or any agreement for any of the same; (c) no event has occurred directly or indirectly whereby any part of the [Smart Even Loan] has or may become unenforceable or any title, rights, interests and benefits of [Smart Even] in the [Smart Even Loan] or any of its rights or remedies have been or may become adversely affected …”

(2)     Clause 4, by which “[The Company] hereby confirms and acknowledges to and confirms the foregoing, and further undertakes to [the petitioner] that it will make all payments of the [Smart Even Loan] and discharge all its obligations in respect thereof to [the petitioner] directly instead of to [Smart Even]”.

15.  On 16 February 2016, the same date as the Smart Even SPA was executed, Giga Power entered into a sale and purchase agreement (“the Giga Power SPA”) by which Giga Power agreed to transfer a 19% shareholding (out of its 20% interest) in the Company, and assign the Giga Power Loan, to Smart Base Properties Limited (“Smart Base”).  Completion of the Giga Power SPA took place on 30 March 2016 (the same day as the completion of the Smart Even SPA), when a deed of assignment (“the Giga Power Deed”) was executed by Giga Power, Smart Base and the Company to effect the transfer to Smart Base of the 19% shareholding in the Company and the assignment of the Giga Power Loan to Smart Base.  The Giga Power Deed was, like the Smart Even Deed, executed by Mr Gaston Lam on behalf of the Company, and the Giga Power SPA and the Giga Power Deed were in materially identical terms.

16.  On completion of the Smart Even SPA and the Giga Power SPA by the execution of the Smart Even Deed and the Giga Power Deed, the position in relation to the Company in terms of shareholdings and shareholder’s loans was as follows:

(1)    New Health held a 60% shareholding and the New Health Loan;

(2)    the petitioner held a 20% shareholding and the Smart Even Loan (now standing at HK$6,999,844);

(3)    Smart Base held a 19% shareholding and the Giga Power Loan; and

(4)    Giga Power continued to hold a 1% shareholding.

17.  Also on 30 March 2016, the same date as the Smart Even Deed and the Giga Power Deed were executed, New Health, the petitioner, Smart Base and Giga Power entered into the Company SHA, as provided for in the Smart Even SPA. It should be noted that the Company was not itself a party to the Company SHA, which was executed by Mr Gaston Lam on behalf of New Health and Giga Power.

18.  The Company SHA provided:

(1)     By Clause 4.3(j), that the approval of all shareholders was required for any material change in the nature of the Company’s business.

(2)     By Clause 4.3(k), that the voluntary dissolution, liquidation or winding up of the Company was a matter that was subject to the approval of all shareholders.

(3)     By Clause 5.1, that it was agreed between the shareholders that the Company should continue its holding of 55% of Mega Fitness, which would carry on its existing business of managing and operating sports and health clubs in the Mainland.

(4)     By Clause 8.1.5(c), that each of the parties to the Company SHA represented and warranted to the others that neither execution nor performance of the Company SHA would contravene any provision of any obligation (contractual or otherwise) which was binding on it, or on any of its assets.

19.  In about July 2016, the Company repaid HK$1,100,000 to the petitioner, thus reducing the outstanding balance of the Smart Even Loan to HK$5,899,844 (“the Debt”).

20.  On 28 April 2017, Giga Power transferred its remaining 1% shareholding in the Company to New Health, so that it ceased to be a shareholder, and New Health became a 61% shareholder in the Company, with the petitioner and Smart Base continuing to hold 20% and 19% of the Company respectively.

These proceedings

21.  On 18 April 2018, the petitioner demanded repayment of the Debt by serving a statutory demand on the Company.  The demand was not complied with, and in consequence, the petitioner presented the petition on 24 August 2018, seeking the winding up of the Company.

22.  On 20 February 2019, New Health applied by summons for a stay of proceedings under the petition pending an intended arbitration.  This application came before Anthony Chan J on 26 August 2019.  Anthony Chan J rightly considered that the only issue for his determination was whether or not the petition should be stayed on the basis of an arbitration clause contained in the Company SHA (at Clause 17), and that questions regarding the substantive merits of the petition were not for him to determine, but should be left to the court dealing with the petition, if it were not stayed to arbitration.  Anthony Chan J dismissed the application for a stay, holding that the Debt upon which the petition was based arose under the Smart Even Deed, which contained no arbitration clause, and that the arbitration clause in the Company SHA, which was a separate agreement to which the Company was not a party, provided no basis for staying the petition (which was brought against the Company) to arbitration (see his judgment at [28] and [34]).  Although it was not strictly necessary for him to do so, having regard to the limited nature of the issues before him, Anthony Chan J went on to express the view that there was no evidence to support New Health’s suggestion that there was an implied understanding between the shareholders of the Company that their shareholder’s loans to the Company could only be called in with the consent of all other shareholders, and that in any event the petitioner (which was not a shareholder at the time when the Smart Even Loan was made) could not have been party to such an understanding even if one might have existed at the time of the loan.

23.  Thereafter, on 18 September 2019, New Health issued proceedings (HCA 1720/2019) against the petitioner and Smart Base (which had also petitioned to wind up the Company), seeking a declaration that there was an implied term in the Company SHA to the effect that the sums injected into the Company by way of the shareholder’s loans were not repayable on demand without New Health’s consent, and also seeking an injunction against the petitioner and Smart Base to prevent them from petitioning for the Company’s winding up.  On 8 October 2019, New Health applied for an interim injunction to this effect, but the application was dismissed by G Lam J (as he then was), who awarded the petitioner and Smart Base indemnity costs in respect of that application.

The judgment below

24.  Attempts to prevent the petition being heard having failed, it came on for hearing before the Judge on 15 October 2019, leading to the judgment now under appeal.

25.  The Judge first rejected an argument by Mr Suen, who appeared for the petitioner below, that the views expressed by Anthony Chan J to the effect that there was insufficient evidence to establish the existence of an understanding between the shareholders of the Company that the shareholders’ loans could only be called in with the consent of all shareholders, gave rise to res judicata or issue estoppel so as to prevent those arguments being ventilated before him.  The Judge was of the view that Anthony Chan J was dealing only with the question of whether the petition should be stayed to arbitration, and was not concerned (and did not purport) to determine the question whether the Company had established the existence of a bona fide dispute of substance in relation to debt arising under the Smart Even Loan, which was the Debt on which the petition was based.

26.  The Judge then went on to consider whether the Debt on which the petition was based (i.e. the outstanding balance of the Smart Even Loan), which had been assigned to the petitioner under the Smart Even Deed, was bona fide disputed on substantial grounds.  Having considered the submissions of New Health, to the effect that it was the common understanding and implied agreement amongst the shareholders of the Company that the Company was a holding company whose sole material asset was its holding in Mega Fitness, and that the shareholders’ loans made by New Health, Smart Even and Giga Power were intended as capital contributions to the Company, in respect of which repayment could not be demanded without the consent of all other shareholders, the Judge accepted the submission of counsel for New Health (Mr Benjamin Yu SC and Ms Bianca Yu) that it was arguable that it was an implied term of the Company SHA, upon which the Company was entitled to rely pursuant to s 4(1)(b) of the Contracts (Rights of Third Parties) Ordinance (Cap 623), that the Company’s shareholders were not entitled to unilaterally demand or take proceedings for repayment of shareholders’ loans to the Company that were advanced as working capital, including the Smart Even Loan, and that in consequence, there was a bona fide dispute of substance as to the Debt relied on by the petitioner in its petition.

27.  In support of his view, the Judge also drew support from Clauses 4.3(j), 4.3(k) and 5.1 of the Company SHA (referred to at [18(1)] to [18(3)] above).

28.  Having come to this view, the Judge dismissed the petition on the basis that the Debt on which it was based was bona fide disputed on substantial grounds, and did not consider it necessary to deal with alternative arguments by Mr Yu based on estoppel by convention and discretionary considerations.

This appeal

29.  Dissatisfied with the judgment below, the petitioner has appealed.  In broad terms, the arguments put forward by the petitioner are as follows:

(1)     The implied term that is suggested to exist in the Company SHA (preventing the petitioner from seeking to recover the Smart Even Loan absent the agreement of the other shareholders in the Company) is not reasonably arguable and does not give rise to a bona fide dispute of substance.  In particular, it contradicts the express terms of the Smart Even Deed, which is the relevant agreement for present purposes, and so cannot properly be implied, and in any event does not satisfy the other requirements governing the implication of terms into contracts, particularly because it was neither necessary for it to be implied, nor obvious that it should be.

(2)     Further, the Judge misapprehended critical facts in coming to the conclusion that it was reasonably arguable that the supposed term should be implied, e.g. by stating wrongly that the loan giving rise to the Debt was made pursuant to the Mega Fitness SPA.

(3)     The apparent restriction on the ability to wind up contained in clause 4.3(k) on which the Judge relied to support his conclusion was only applicable to voluntary winding up, and could not, as a matter of legal policy, apply to compulsory winding up on the basis of insolvency.

(4)     The Judge failed to provide adequate reasons for finding that the term should be implied, and in rejecting the petitioner’s case to the contrary.  In particular, the Judge is said to have failed to consider the petitioner’s submissions as to the irrelevance of clause 4.3(k) of the Company SHA, the lack of necessity for an implied term and its inconsistency with the express terms of the Company SHA.

(5)     Finally, the Judge was wrong to hold that the judgment of Anthony Chan J dated 6 September 2019 did not give rise to an issue estoppel against New Health in respect of the existence of the implied term.

30.  By a respondent’s notice, New Health contended that:

(1)     The Judge ought to have found that the petitioner was estopped (by an estoppel by convention) from contending that it was entitled to unilaterally seek repayment of the Debt.

(2)     The petition ought to be dismissed as a matter of discretion.

The supposed implied term

31.  With respect to the Judge, and to Mr Wong, to look at the Company SHA in an attempt to divine in it an implied term that has the effect of restricting the petitioner’s ability to call in the Smart Even Loan is to start in the wrong place.  In order to ascertain the terms of the Smart Even Loan, the starting point must be, in my view, to consider the terms of the loan itself.  In the present case, that requires regard to be had to the Smart Even Deed.  It is plain from the terms of the Smart Even Deed that the Smart Even Loan was agreed by Smart Even and the Company to be repayable by the Company on demand (to Smart Even prior to the execution of the Smart Even Deed, and to the petitioner thereafter).  This term is clear and unequivocal, being expressly stated in Clause 2 of the Smart Even Deed, which was expressly confirmed by the Company by Clause 4 of that document, and means that once the petitioner became the owner of the Smart Even Loan, it was entitled to call in the loan by making a demand, at a time of its choosing.  Were it otherwise, so that there was some restriction on the ability of Smart Even or the petitioner (as the case may be) from calling in the loan, the Smart Even Loan would not have been one that was repayable on demand, but (even if a demand were formally required) one that would have been repayable only on some other contingency or condition (such as the agreement of the other shareholders).

32.  It plainly could not be reasonably argued that the Smart Even Deed contained an implied term to the effect that the petitioner could only call in the Smart Even Loan with the consent of the other shareholders.  Such an implied term would contradict the express agreement between the Company and the petitioner in the Smart Even Deed that the Smart Even Loan was repayable on demand, and would thus fall foul of the well‑established rule that a term will not be implied where it would contradict the express terms of the contract (see e.g. Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd [2019] HKCA 261 at [30]-[32] where the principles governing the implication of terms are summarised).  It does not seem to me to be possible to contend that where a term could not be implied into the contract governing the relationship between the parties to that contract, that the same result could nevertheless be achieved by permitting such a term to be implied into some other agreement (to which the person seeking to rely on it is not a party) so as to enable that person to rely on it by means of the Contracts (Rights of Third Parties) Ordinance.  To permit this would wholly cut across the basic principles governing the implication of terms into contracts.

33.  In any event, I do not consider that the supposed implied term can be implied into the Company SHA.  Mr Wong submitted that having regard to the small authorised capital of the Company, and the fact that its only asset was its 55% interest in Mega Fitness, to which it had extended a shareholder’s loan which was not likely to be readily recoverable (whether due to its terms or the poor performance of Mega Fitness), it must at least be arguable that the Company must have been known to its shareholders to be unlikely to be able to repay the loans extended by such shareholders to it. As such, the shareholder’s loans to the Company should be regarded as working capital and not repayable on demand.

34.  However, given that the Company expressly agreed in the Smart Even Deed that the Smart Even Loan was repayable on demand, even leaving aside the inconsistency with this provision, I do not think that this could be said to be a matter that is so obvious as to go without saying, or something that is required to give business efficacy to the arrangements between the shareholders and the Company.  As Mr Suen pointed out, even if at some particular point in time the Company might have difficulty in repaying the shareholder’s loans, it does not follow that this would always be the case, or that it might not be possible to raise funds commercially if the performance of the Company or Mega Fitness were to improve.

35.  Similarly, with respect, I do not think that the other provisions in the Company SHA considered by the Judge (mentioned in [27] above) take the matter further.  Clause 4.3(j), relates to changes in the business, but the presentation of a petition does not lead to a change in the Company’s business. Clause 4.3(k) on its terms applies only to voluntary winding up of the Company, and not to compulsory winding up due to inability to pay its debts.  Finally, Clause 5.1 cannot, in my view, prevent the presentation of a petition to wind up the Company where it is justified to do so.

36.  Mr Wong also submitted that the petitioner’s reliance on other documents such as the Smart Even Deed in construing the Company SHA was misplaced, as the focus should be on the relevant contract being construed.  The difficulty with this argument however, is that it ignores the fact that the debt which is the subject of the petition arises under the Smart Even Deed, and not the Company SHA, so that it is there that one should look for the terms governing the Smart Even Loan.

37.  Finally, Mr Wong submitted that even having regard to the terms of the Smart Even Deed, none of its express terms prevented the circumscribing of the conditions under which a demand for payment could be made by the petitioner.  This submission cannot be accepted, for the reasons explained at [31] above.  A loan the repayment of which was so circumscribed could not be said to be repayable on demand.

38.  For the foregoing reasons, the supposed implied term is not one which is reasonably arguably capable of being implied into either the Smart Even Deed or the Company SHA, and it follows that the Company has failed to demonstrate the existence of a bona fide dispute of substance in relation to the petition debt.

39.  That being the case, it would be superfluous to consider Mr Suen’s other arguments against implication mentioned at [29(2)] and [29(3)] above, and I do not propose to dwell on them.

40.  Nor is it strictly necessary to deal with the arguments relating to lack of reasons and res judicata, other than to say that I do not find either of these arguments to be particularly convincing.  As to the alleged failure to give reasons, it is well established that it is not incumbent on a judge to deal explicitly with every single argument raised by a party.  As to the res judicata argument, it seems to me to be clear that Anthony Chan J’s decision was concerned only with whether or not the petition should be stayed to arbitration, and not with the underlying merits of the dispute, so that any views which he expressed as to the latter would not be binding on a later judge considering those merits.

41.  So far as the grounds raised in the respondent’s notice are concerned, these can also be dealt with briefly.

42.  The argument based on estoppel by convention cannot succeed having regard to the terms of the Smart Even Deed, and the absence of any evidence that the parties thereafter proceeded on the basis of any common assumption inconsistent with those terms.

43.  As to the argument that the petition should be dismissed as a matter of discretion, this was primarily based on an argument that this was a contributory’s petition.  However, it is clear that the petitioner has presented the petition not in its capacity as a contributory but as a creditor.  It was also suggested that to permit a winding up petition in respect of what was really a shareholder’s loan (and thus in reality a capital injection) would permit the petitioner to bypass the need to obtain the consent of other shareholders before recouping its capital injection.  This point has already been fully answered above, in the context of the implied term argument.

44.  For the foregoing reasons, it could not be said that there is any bona fide dispute of substance as to the recoverability by the petitioner of the Smart Even Loan.  It followed that the appeal should be allowed, with costs to the petitioner both here and below.

Hon Au JA:

45.  I respectfully agree with the reasons for judgment of Barma JA.