WONG YU MAN JAMES v. CHINA SUN GROUP HOLDING LTD (formerly known as GRAND PACIFIC ENTERPRISES LTD)

CACV 385/2023, [2024] HKCA 1008

On Appeal From [2023] HKCFI 2760

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 385 OF 2023

(ON APPEAL FROM HCB NO. 1649 OF 2023)

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REASONS FOR JUDGMENT

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Hon Chow JA (giving the Reasons for Judgment of the Court):

INTRODUCTION

1.  This is the Debtor’s appeal against a bankruptcy order (“the Order”) made against him by Deputy High Court Judge Phoebe Man on 27 October 2023. At the conclusion of the hearing on 27 September 2024, we allowed the appeal with reasons to be given later, which we now do.

BRIEF BACKGROUND FACTS

2.  The Debtor is a medical practitioner in Hong Kong for over 40 years. He has (or had) a friend called Jason Chong (“Chong”).

3.  Chong is the founder and chairman of CA Cultural Technology Group Limited (“CA Cultural”), a company listed on the Hong Kong Stock Exchange. He is also the controller of a company called Skalacrest (Hong Kong) Limited (“Skalacrest”).

4.  According to the Debtor, through the introduction of Chong, he came to know Wang Xiu Hua (“Wang”). Chong told him that Wang was a sophisticated investor, and her husband was the former chairman of a state-owned listed company in China. Chong also told him that Wang (and her husband) intended to invest in CA Cultural, and requested the Debtor to stand as guarantor in respect of the proposed investment (the details of which will be further explained below). The circumstances in which the Debtor agreed to act as guarantor are disputed by the parties, but do not require resolution for the purpose of determining the present appeal.

5.  What is not in dispute is that on 16 April 2021, the Petitioner (of which Wang was a director) and Skalacrest entered into a joint investment agreement (聯合投資協議, “the Agreement”).

6.  The Agreement provided, inter alia, that:

(1)  The Petitioner and Skalacrest would each contribute HK$50 million (資金, “Capital Contribution”) to invest in the shares of a listed company in Hong Kong agreed by the parties (Clause 1.1). There is no dispute that the company in question is CA Cultural.

(2)  The Petitioner would procure the combined fund of HK$100 million (聯合資金, “Joint Capital”) to be paid into the account of a company appointed by the Petitioner called Elegant Ease Investments Limited (“Elegant Ease”) held at Bank Julius Bäer & Co Ltd (“the Account”), and used to invest in the shares of CA Cultural (Clauses 1.1, 1.4 and 2.1).

(3)  Under “Investment Requirement” (投資要求) (Clause 1.1) –

(a)  the duration of the joint investment would be 2 years, renewable for 1 additional year with the agreement of both parties (投資期限, “Investment Period”);

(b)  the clearing date (年結日, “Clearing Date”) would fall on the 15^th day of April of each year (or the next working day if 15 April of any particular year fell on a Saturday, Sunday or public holiday);

(c)  Skalacrest guaranteed that the Petitioner would receive a guaranteed return (甲方保證利潤, “Guaranteed Return”) of 15% of its Capital Contribution per year, payable on each Clearing Date;

(d)  on each Clearing Date, after deduction of the Guaranteed Return, the Petitioner and Skalacrest were to share all profits on a 50:50 basis;

(e)  the Petitioner was entitled to deduct the Guaranteed Return from Skalacrest’s Capital Contribution or its profit from the joint investment;

(f)  if the remaining amount of Skalacrest’s Capital Contribution after deduction of the Petitioner’s Guaranteed Return fell below HK$50 million, Skalacrest should, within 5 working days after receipt of a written notice from the Petitioner, make up the shortfall, failing which the Petitioner would be entitled to terminate the Agreement; and

(g)  the Petitioner was also entitled to deduct from Skalacrest’s Capital Contribution any loss that it might suffer arising from the joint investment, and Skalacrest was required to make good such loss as might be suffered by the Petitioner if the same could not be recouped from Skalacrest’s Capital Contribution.

(4)  Skalacrest should pay its Capital Contribution into the Petitioner’s designated account within 5 working days after the signing of the Agreement. The Petitioner was required to pay its Capital Contribution together with Skalacrest’s Capital Contribution into the Account within 3 working days after payment by Skalacrest (Clauses 1.2 and 1.4).

7.  Also on 16 April 2021, the Debtor signed a personal guarantee (擔保契約書, “the Guarantee”) of Skalacrest’s obligations under the Agreement in favour of the Petitioner.

8.  The Guarantee provided, inter alia, that:

(1)  the Debtor, as primary obligor, unconditionally and absolutely agreed to pay all losses, claims, damages, costs and expenses etc which might be caused to or suffered by the Petitioner arising from the Agreement; and

(2)  the Debtor’s obligations under the Guarantee would not be discharged, reduced or changed by any variation of or addition to the terms of the Agreement (“Clause 7(4)”).

9.  On 6 October 2021, the share price of CA Cultural plummeted by 75% on a single day, and has never recovered since.

10.  Skalacrest did not pay the Petitioner the Guaranteed Return of HK$7.5 million on the first Clearing Date (ie 15 April 2022).

11.  On 21 June 2022, the Petitioner demanded the Debtor to pay the first-year Guaranteed Return of HK$7.5 million pursuant to the Guarantee, on the ground that Skalacrest had defaulted in meeting its obligation to do so under the Agreement.

12.  By a letter in response dated 28 June 2022, the Debtor, without admitting the Petitioner’s demand, asked the Petitioner to provide “the detailed record of the investments made by [the Petitioner] from 16^th April 2021 to 15^th April 2022”.

13.  The Petitioner did not produce any record as sought by the Debtor.

14.  On 28 February 2023, the Petitioner served a statutory demand on the Debtor requiring him to pay the sum of HK$7.5 million.

15.  The Debtor did not satisfy the statutory demand.

16.  On 23 March 2023, the Petitioner issued a bankruptcy petition (“the Petition”) against the Debtor based on the unsatisfied statutory demand. The Petition was resisted by the Debtor. In the affidavit of the Debtor filed on 21 June 2023 (“the Debtor’s Affidavit”), he stated that he had been told by Chong, amongst other things, that the “investment plan” had not been performed according to the Agreement, in that: (i) the Petitioner and Skalacrest had not injected the total sum of HK$100 million into the Account, and (ii) the Petitioner had not caused Elegant Ease to buy shares of CA Cultural pursuant to the Agreement. He was further told by Chong that there were many other substantial and material variations to the Agreement when carrying out the investment plan under the Agreement. The Debtor said that he had no knowledge of such non-performance or variations, and his prior consent or approval to the same had not been sought or obtained. The Debtor was also given to understand by Chong that Wang and/or entities under her control had purchased some shares of CA Cultural in the open market, and Chong and Wang had been controlling and/or manipulating the price and trading volume of the shares of CA Cultural. For the above reasons, the Debtor contended that the Guarantee was invalid, void and/or unenforceable against him.

17.  In answer to the Debtor’s allegation that the Petitioner had not performed its obligations under the Agreement, the Petitioner revealed for the first time a “Confirmation Letter” (確認函) dated 19 August 2022, which was apparently signed by a representative on behalf of Skalacrest. A copy of the Confirmation Letter was produced as an exhibit to the affirmation of Wang filed on 7 July 2023 (“Wang’s Affirmation”). In the Confirmation Letter, it was stated, inter alia, that:

(1)  In accordance with the Agreement, the Petitioner had acquired 35.4 million shares of CA Cultural for the total sum of HK$103,584,114.72 during the period from 23 April 2021 to 18 May 2021.

(2)  Skalacrest agreed that the Petitioner was not required to comply with Clauses 1.1 and 1.4 of the Agreement, and could purchase shares of CA Cultural otherwise than in the name of Elegant Ease or through the Account.

(3)  The Petitioner had duly performed all its obligations under the Agreement.

(4)  As at the first Clearing Date (ie 15 April 2022), Skalacrest’s Capital Contribution pursuant to the Agreement or its profits derived therefrom were insufficient to pay the Guaranteed Return (of HK$7.5 million) to the Petitioner, and neither Skalacrest nor any of the individual guarantors (including the Debtor) had paid any part of the Guaranteed Return to the Petitioner.

18.  Attached to the Confirmation Letter is a table (“the Table”) setting out the details of the 35.4 million shares of CA Cultural allegedly acquired by the Petitioner pursuant to the Agreement. According to the information contained in the Table:

(1)  The 35.4 million shares of CA Cultural were purchased during the period from 23 April 2021 to 18 May 2021 at prices ranging from HK$2.81 to HK$3.03 per share (for the total consideration of HK$103,584,114.72).

(2)  Of those 35.4 million shares, 28.8 million shares were not purchased in the name of Elegant Ease through the Account, but were purchased in the sole name of Wang through her personal account with 金英证券 (香港) 有限公司.

(3)  The remaining 6.6 million shares of CA Cultural, which were purchased in the name of Elegant Ease through the Account, had been transferred to an account with 长复证券有限公司 on unspecified date(s).

19.  Paradoxically, Wang also said, in her affirmation, that Chong and she had never discussed or agreed upon any variation to the terms of the Agreement[1].

THE JUDGMENT

20.  The Petition was heard by the Judge on 27 September 2023. A number of grounds were raised by the Debtor to challenge the Petitioner’s claim on the Guarantee, including:

(1)  non-performance of the Agreement by the Petitioner;

(2)  material variation of the Agreement; and

(3)  no commercial reason for the Agreement/illegality.

21.  On 27 October 2023, the Judge give a judgment (“the Judgment”) in favour of Petitioner and made a bankruptcy order against the Debtor.

22.  In respect of the material variation ground, Mr Jonathan Chang, SC (who appeared for the Debtor below) argued that by virtue of the rule in Holme v Brunskill (1878) LR 3 QBD 495, the waiver of the “Mode of Operation” under the Agreement was a material variation to the Agreement such that the Debtor’s liability under the Guarantee had been discharged. The Judge summarized Mr Chang’s arguments at §26 of the Judgment as follows:

“(1) Skalacrest was originally required to pay its capital contribution into Elegant Ease’s account first. Pursuant to Clause 1.1(2) of the Agreement, the Petitioner was entitled to draw the Guaranteed Profit from the amount of Skalacrest’s capital contribution. If Skalacrest were not required to put its capital contribution into Elegant Ease’s account, the Debtor would be deprived of the ‘cushion’ of this amount in Elegant Ease’s account. The Debtor’s exposure is said to be increased in this scenario.

(2) The importance of using Elegant Ease as an agent for carrying out the purchase of CA Cultural shares was to identify that those transactions carried out by Elegant Ease were done pursuant to the Agreement. If the Petitioner was allowed to do away with using Elegant Ease as an agent, it would be impossible to identify which of the transactions carried out by the Petitioner were those carried out under the Agreement. It is suggested that the Petitioner would then be able to retrospectively ‘cherry-pick’ the ‘loss-making transactions’ to be those attributable to the Agreement, and to keep the ‘profit-making transactions’ out of the ambit of the Agreement. By doing this, the Petitioner could carve-out all ‘profit-making transactions’ from which the Petitioner could draw the Guaranteed Return. The Debtor’s exposure is said to be increased in this scenario.”

23.  Pausing here, it may be noted that the expression “Mode of Operation” was defined at §3 of the Judgment to mean the mechanism of the joint investment under Clause 1.1 of the Agreement, namely:

“(1) Skalacrest and the Petitioner would each contribute HK$50 million. The joint investment would thus be HK$100 million …

(2) The investment would then be put into an account of Elegant Ease Investments Limited … with Bank Julius Baer & Co. Ltd. Elegant Ease was an agent appointed by the Petitioner.

(3) The Joint Investment was for investing in a listed company in Hong Kong.”

24.  The Judge rejected Mr Chang’s arguments, holding that they were “red-herrings and there was no material variation to the risk exposure that the Guarantor had signed up for”. The Judge’s reasons for this view were set out at §27 of the Judgment:

“(1) The Guaranteed Return was not pegged with the performance of the shares purchase but with the amount of capital contribution of the Petitioner, which was set at HK$50 million. If one looks at the original obligation that the Debtor had signed up for, which is a maximum exposure of 15% of the capital contribution by the Petitioner (set to be HK$50 million), it is apparent that the variation or waiver of the Mode of Operation did not change this maximum exposure, which remained at HK$7.5 million.

(2) Clause 5 of the Guarantee expressly provided that there was no requirement for the Petitioner to first look to Skalacrest’s capital contribution in satisfaction of the Guaranteed Return. Again, the maximum risk that the Debtor was exposed to under the Guarantee had always remained at 15% of the Petitioner’s capital contribution.

(3) There was no prejudice suffered by the Debtor by reason of the waiver/variation of the Mode of Operation – he was told of the worst case scenario in the Guarantee: that he was treated as the primary obligor, no variation would discharge the Guarantee, the Petitioner was not required to look first to other guarantors or securities before enforcing the Guarantee etc. It was under those circumstances that the Debtor had signed up and agreed to provide such guarantee.”

25.  The Judge concluded at §28 of the Judgment that the variation of the Mode of Operation did not increase the risk exposure of the Debtor, and the variation did not go outside the purview of the Guarantee. As such, the variation was caught by Clause 7(4) and the Debtor’s obligation under the Guarantee had not been discharged.

THE NOTICE OF APPEAL

26.  Dissatisfied with the Judgment, the Debtor filed and served a Notice of Appeal on 23 November 2023. A total of 9 grounds are raised in the Notice of Appeal. They have been crystallized by Mr Wong Yan Lung, SC (for the Debtor) into 3 main points, namely, that the Debtor’s liability under the Guarantee has been discharged because of (1) fundamental breach and/or non-performance of the Agreement (“the Breach/Non-performance Ground”); (2) material alteration or variation of the Agreement (“the Variation Ground”); and/or (3) illegality impacting the Agreement and the Guarantee (“the Illegality Ground”).

DISCUSSION

27.  As mentioned at the hearing of the appeal, we shall focus on the Variation Ground for the purpose of disposing of the present appeal.

28.  In support of the Variation Ground, Mr Wong’s argument, in summary, is as follows:

(1)  Where there is a material variation of the terms of the principal contract, ie (i) where the alteration is not “obviously unsubstantial”, with no possible prejudice to the guarantor resulting, or (ii) where the alteration is not inevitably for the benefit of the guarantor, the guarantor will be discharged: O’Donovan and Phillips, The Modern Contract of Guarantee, 4^th ed, at §§7-002 to 7-003. The threshold for finding an immaterial variation is high: AVC Property Development Co Ltd v Joyful Grace Trading Ltd [2018] 3 HKC 47, at §37.

(2)  Pursuant to the Agreement, the risk assumed by the Debtor under the Guarantee was on the basis that (i) the Joint Capital of HK$100 million would be injected into CA Cultural and maintained for a period of at least 2 years, (ii) half of the Joint Capital would be contributed by Skalacrest, and (iii) the Petitioner’s Capital Contribution would only be used to purchase CA Cultural shares if and only if Skalacrest had first deposited its HK$50 million Capital Contribution into the Account.

(3)  The objective of the Agreement was to make a joint investment of HK$100 million in CA Cultural and to maintain this joint investment for at least 2 years. The maintenance of this substantial investment for at least 2 years would reduce the risk of a drop in the share price of CA Cultural and the Petitioner having to recover the Guaranteed Return from the Debtor’s Guarantee.

(4)  With the Confirmation Letter, the risk assumed by the Debtor under the Guarantee became pegged to Wang’s random sole personal purchases of CA Cultural shares from the open market, without the benefit of the HK$100 million Joint Capital investment in CA Cultural for at least 2 years, without the buffer of Skalacrest’s HK$50 million Capital Contribution, and without Chong’s personal involvement in the investment decisions. Plainly, the Confirmation Letter has exposed the Debtor to a far greater risk of being called upon to honour the Guarantee.

(5)  In holding that the Confirmation Letter did not cause any material variation to the risk exposure that the Debtor had signed up for, and in dismissing, without explanation, the Debtor’s contentions as “red herrings”, the Judge erred by being fixated on the issue of whether the monetary limit which the Debtor guaranteed (ie HK$7.5 million) had been increased. The Judge’s approach is fundamentally flawed. A material variation occurs if a guarantor is exposed to a greater risk of being called upon to honour a guarantee; it is no answer that the monetary limit under the guarantee would remain the same if the risk materializes: Triodosbank NV v Dobbs [2005] 2 Lloyd’s Rep 558, at §35; The Modern Contract of Guarantee, at §§7-012 to 7-014, 7-017. Variations to the principal contract, though not impacting the monetary limit guaranteed, could still be prejudicial to the guarantor: HSBC v Norman John Martel (CACV 54/2003, 3.6.2005), at §§13, 28-32.

(6)  The Judge also erred by holding that the “variation of the Mode of Operation” (per the Confirmation Letter) was caught by Clause 7(4) because the said variation (1) “did not increase the risk exposure of the Debtor”, and (2) “did not go outside the purview of the Guarantee”. As explained in CIMC Raffles Offshore (Singapore) Ltd v Schahin Holding SA [2013] 2 All ER (Comm) 760, at §§42 and 51, the effect of the “purview doctrine” is that certain “variations” can be so substantial that it is beyond the scope of any anti-avoidance provision.

(7)  In the present case, the purported “variations” under the Confirmation Letter were so fundamental that they could not properly be treated as variations merely because the Petitioner and Skalacrest said so after the event.

(8)  Further, there had been significant changes in the economic situation before the purported “variations” per the Confirmation Letter. First, the share price of the CA Cultural shares plummeted in October 2021 and never recovered. Both the Petitioner and Skalacrest already knew that the Petitioner had made a “bad investment decision”. Second, by the time when the Confirmation Letter was issued, it was certain – rather than merely possible – that the planned investment was a disaster, and the Guaranteed Return could not be deducted from either Skalacrest’s Capital Contribution or the profit that Skalacrest could make from investing in CA Cultural. It became certain that the Petitioner would seek recourse against the Debtor.

29.  In response, Mr Laurence Li, SC (on behalf of the Petitioner), while accepting that the “purview” doctrine would not, prima facie, be excluded by an anti-avoidance provision such as Clause 7(4), argues that the deviations from the Mode of Operation in the present case are not “substantially different” from the original obligations in the Agreement (as guaranteed by the Debtor). Mr Li says that the obligation to pay the Guaranteed Return (even post-Confirmation Letter) remained within the general purview of the Guarantee for the following reasons:

(1)  The Agreement contemplated only the pooling of funds by the Petitioner and Skalacrest, and the procuring by the Petitioner of such funds to be invested in CA Cultural. The Agreement made no provision about such investment taking any particular form.

(2)  The Debtor’s belated claim that the joint investment should involve “Chong’s personal involvement in the investment decisions” (and that the deviations rid the Debtor of such protection) has no merits. Putting aside the fact such point was never raised in evidence (or in the hearing below), this over-states the terms of the Agreement. Clauses 2.1 and 4.1(2)-(3), (6) thereof make it abundantly clear that the Petitioner (instead of Skalacrest or Chong) was responsible for effecting the purchases of shares of CA Cultural. All that Clause 2.3 relevantly provided was that if the actual circumstances turned out to be different from the investment requirement as agreed, the Petitioner was required to confer with Skalacrest. Nothing in that clause (or elsewhere in the Agreement) suggests that Chong was to have any input on a day-to-day basis.

(3)  The changes to the Mode of Operation to do away with solely investing via Elegant Ease are inconsequential tweaks which do not alter any party’s risk exposure. Further, there is no basis for the Debtor to claim that he somehow lost any “buffer”; or to suggest there was any fundamental change to the nature of the Guarantee.

(4)  To the contrary, the Debtor signed up to a deal to secure Skalacrest’s obligations to pay up to HK$7.5 million each year to the Petitioner as the latter’s Guaranteed Return. That liability existed at the outset – as the Debtor well appreciated. That was the same liability which he was exposed to throughout the process. The Debtor was not at any point exposed to any “greater risk” of being called upon to honour the Guarantee especially nothing suggests Skalacrest did not put forward its HK$50 million Capital Contribution. In addition, Clause 5 of the Guarantee expressly provided that the Petitioner need not first look to Skalacrest (via its Capital Contribution or otherwise) – meaning that the Debtor had always stood in the same position vis-à-vis the Petitioner.

30.  In response to the Debtor’s reliance on the changes in the economic situation, Mr Li argues that:

(1)  The deviations from the Mode of Operation pre-dated the Confirmation Letter, with the first purchase by Wang taking place on 23 April 2021 (shortly after the Agreement was signed and well before CA Cultural’s share price plummeted in October 2021). Though Skalacrest only subsequently expressed its agreement to release the Petitioner from adherence with the Mode of Operation, that does not change the date the “variations” took place.

(2)  As guarantor, the Debtor had always taken up the risk that he would have to pay the Guaranteed Return if called upon to do so by the Petitioner. The Petitioner had a right to proceed against him either way even if there were sufficient funds from Skalacrest. It is neither here nor there that CA Cultural’s share price plummeted in October 2021.

31.  In short, Mr Li says that the deviations from the Mode of Operation did not take the Debtor’s obligation outside the purview of the Guarantee, and there was no discharge of his obligations under the Guarantee.

32.  We are not persuaded by Mr Li’s arguments.

33.  There is no dispute about what is referred to at §25 of the Judgment as the rule in Holme v Brunskill (1878) 3 QBD 495, namely, that if the principal and creditor without the guarantor’s consent agree between themselves to alter the nature of the principal obligation the guarantor is discharged because the obligation in its altered form is not that which was guaranteed[2]. In AVC Property Development Co Ltd v Joyful Grace Trading Ltd [2018] 3 HKC 47, at §35, Lam VP (as he then was) said that the law can be taken from the judgment of Cotton LJ in Holme v Brunskill, at 505-6:

“The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is insubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.”

34.  There is also no dispute that the rule in Holme v Brunskill may be displaced by an anti-discharge (or anti-avoidance) provision such as Clause 7(4). Nevertheless, Mr Li accepts that the application of an anti-discharge provision is subject to the “purview” doctrine, which was recognised by Lord Atkin in his judgment in Trade Indemnity Co Ltd v Workington Harbour and Dock Board [1937] AC 1, at 21:

“The words ‘any arrangement . . . . for any alteration in or to the said works or the contract’ are very wide. Probably they would have to be cut down so as not to include such changes as have been suggested as substituting a cathedral for a dock, or the construction of a dock elsewhere, or possibly such an enlargement of the works as would double the financial liability. An author of great authority, happily still with us, suggests that such words only relate to alterations ‘within the general purview of the original guarantee’.”

35.  The “author of great authority” mentioned by Lord Atkin above was a reference to Mr Sidney Rowlatt (as Rowlatt J then was), who stated the following in his book on Principal and Surety (1898):

“… it is appreciated that assent, whether previous or subsequent to a variation, only renders the surety liable for the contract as varied, where it remains a contract within the general purview of the original guarantee … If a new contract is to be secured there must be a new guarantee.”[3]

36.  The correct jurisprudential basis of the purview doctrine (ie whether it is a doctrine of pure construction, or a doctrine of law), and the doctrine’s true scope or nature (ie whether the guarantee, in its true construction, covers the new arrangement, or whether the anti-discharge provision operates to exclude the rule in Holme v Brunskill), have not been authoritatively settled: see CIMC, at §51. For the purpose of determining the present appeal, it is not necessary to resolve these controversies, save to note that certain variations of the principal contract may be so fundamental or substantial that the rule in Holme v Brunskill might continue to apply notwithstanding the existence of an anti-discharge provision in the guarantee.

37.  In the present case, taking the Confirmation Letter at its face value, it is clear that there have been very substantial variations of the Agreement.

38.  First, the Agreement provided for a “joint” investment in the shares of CA Cultural by the Petitioner and Skalacrest. However, it would appear from the Confirmation Letter and the information contained in the Table that there was no joint investment in the shares of CA Cultural at all. The only party who made any investment in the shares of CA Cultural was the Petitioner (through Wang). Skalacrest did not purchase or acquire any shares of CA Cultural, whether in its own name or otherwise.

39.  Second, the Agreement provided that the investment in the shares of CA Cultural was to be effected through the Account in the name of Elegant Ease. However, it would appear from the Table that, of the 35.4 million shares allegedly acquired pursuant to the Agreement, 28.8 million shares were acquired in the sole name of Wang through her personal account with 金英证券 (香港) 有限公司. Although the remaining 6.6 million shares were acquired in the name of Elegant Ease through the Account, those shares have since been transferred away from the Account to an unspecified account with 长复证券有限公司 on unspecified date(s).

40.  Third, the Agreement clearly contemplated that the investment (ie shares of CA Cultural) would be kept or maintained by Elegant Ease in the Account up to the end of the Investment Period. However, as earlier mentioned, the 35.4 million shares allegedly acquired by the Petitioner pursuant to the Agreement were either never kept in the Account (as to 28.8 million shares) or have been transferred away (as to 6.6 million shares).

41.  Fourth, the Agreement provided that Skalacrest would make a capital contribution of HK$50 million for the investment in the shares of CA Cultural. There is, however, no evidence that Skalacrest made any payment towards the acquisition of the 35.4 million shares referred to in the Table. The reference in the Confirmation Letter that Skalacrest’s capital contribution pursuant to the Agreement or its profits derived therefrom were insufficient to pay the Guaranteed Return of HK$7.5 million to the Petitioner (“本公司[4]的資金或本公司可於標的專案投資的盈利不足以扣除貴公司[5]的保證利潤”) is hardly sufficient evidence that Skalacrest had contributed HK$50 million, or any or any specific amount, towards the purchase of the 35.4 million shares. Whether Skalacrest had indeed made any payment(s) was a matter peculiarly within the knowledge of the Petitioner, who should be in a position to give full particulars and produce evidence of the payment(s). No such particulars or evidence have been given or produced by the Petitioner.

42.  There is also force in Mr Wong’s submission that the above variations of, or deviations from, the provisions of the Agreement have materially increased or affected the risk exposure of the Debtor under the Guarantee:

(1)  Mr Wong argues that Skalacrest’s Capital Contribution of HK$50 million, if it was made and kept in the Account (whether in the form of cash or shares of CA Cultural), was something to which the Debtor could seek recourse in the event of him being called upon by the Petitioner to honour the Guarantee by exercising the right to subrogation. Mr Li has not been able to provide any effective answer to this argument.

(2)  The Judge seems to have taken the view that the maximum exposure of the Debtor under the Guarantee was limited to 15% of the Petitioner’s capital contribution of HK$50 million (per year). This is incorrect. Under the Agreement, in addition to the obligation to pay the Guaranteed Return to the Petitioner, Skalacrest was under an obligation to make good any loss of capital suffered by the Petitioner in the proposed investment. This further obligation of Skalacrest also formed part of the Debtor’s obligations under the Guarantee (see the recital of the Guarantee: “天溢隆成[6]保證貴公司可以獲得就其所付出的資金每年15%為保證利潤及可以在每年投資獲利後，享有一半利潤及保證一切虧損概由天溢隆成承擔，而貴公司無需承擔任何損失 (此等貴公司的利益及保障以下簡稱「保證回報」”)). In order to quantify the full extent of Debtor’s obligations under the Guarantee, it will be necessary to ascertain the actual loss(es) suffered by the Petitioner arising from the Agreement. For this purpose, it is essential to identify the shares that were purchased pursuant to the Agreement and the purchase price(s) of those shares. However, the 35.4 million shares of CA Cultural allegedly acquired by the Petitioner pursuant to the Agreement were purchased at different prices on different dates. The total consideration paid by the Petitioner for those shares was over HK$100 million. Under the Agreement, the Petitioner was required to make a capital contribution of HK$50 million only. Prima facie, only a portion of the 35.4 million shares of CA Cultural acquired by the Petitioner could be treated as investment made pursuant to the Agreement. The Petitioner has not identified which shares were acquired pursuant to the Agreement. In the absence of such identification, it will not be possible to work out the full extent of Debtor’s obligations under the Guarantee.

(3)  The requirement of keeping or maintaining a substantial block of shares of CA Cultural in the Account would, as submitted by Mr Wong, tend to support (or even increase) its trading price and reduce the risk of a drop in CA Cultural’s share price and thus the risk of the Debtor being called upon to make payment under the Guarantee.

43.  In all the circumstances, we are of the view that the Debtor has shown a bona fide dispute of the Petitioner’s claim on the Guarantee on the ground that the variations to the Agreement in the present case are of such a fundamental or substantial nature that his liability under the Guarantee has been discharged notwithstanding the presence of Clause 7(4).

44.  In passing, we should mention that it is also a matter of concern, as accepted by Mr Li for the Petitioner, that Skalacrest only subsequently (ie after the share price of CA Cultural had plummeted in October 2021) expressed agreement to release the Petitioner from adherence with the Mode of Operation[7]. As pointed out by Mr Wong, at that time (ie when Skalacrest signed the Confirmation Letter on 19 August 2022), both the Petitioner and Skalacrest well knew that the planned investment was a disaster and the Guaranteed Return could not be recouped from either Skalacrest’s Capital Contribution or the profit that Skalacrest could make from investing in CA Cultural, and thus it became certain that the Petitioner would seek recourse against the Debtor. The following comment, quoted by Sir Bernard Rix (with whom Arden and McCombe LLJ agreed) in CIMC, at §57, from a case comment on Marubeni Hong Kong and South China Ltd v Government of Mongolia [2004] EWHC 472 (Comm), [2005] EWCA Civ 395 in (2005) JIBLR 488 (at 493), seems to us to be apt:

“Equity prevents two parties to a triangular relationship altering their arrangements behind the back of the third … If anything the justification for the rule in Holme v Brunskill is heightened in the case of a primary liability instrument, given the more onerous nature of such an instrument on the part of the guarantor ...”

45.  In conclusion, we are satisfied that the Debtor has raised a bona fide defence on substantial ground to the Petitioner’s claim on the Guarantee. It follows that the Petition should be dismissed, leaving the Petitioner to pursue an ordinary civil action against the Debtor if it wishes to enforce the Debtor’s obligations under the Guarantee.

46.  Having reached the above conclusion, it is not necessary for us to consider the Breach/Non-performance Ground or the Illegality Ground, which will have to be fully ventilated in any new action which the Petitioner may bring against the Debtor.

DISPOSITION

47.  The Debtor’s appeal is allowed, the Order is set aside, and the Petition is dismissed.

48.  On the issue of costs, Mr Li argues that there should be no order as to the costs of the appeal and below, or alternatively that there should be no order as to the costs below, essentially on the ground that the allegation that Skalacrest had not made any payment pursuant to the Guarantee is a new point which was not raised in the proceedings below. We do not accept this argument. At §39(a) of the Debtor’s Affidavit, he stated that he had been told by Chong that the “investment plan” had not been performed according to the Agreement in that, amongst other things, the Petitioner and Skalacrest had not injected the total capital sum of HK$100 million into the Account. It was in answer to this allegation that Wang produced the Confirmation Letter to contend that the Petitioner had performed its obligations. Further, it is clear from the transcript of the hearing on 27 September 2023 that the Judge understood the Defendant to have raised the issue of whether Skalacrest had put in any money, and that issue was addressed by Ms Natalie So (who appeared for the Petitioner below)[8]. The relevant evidence on the issue of whether Skalacrest had made any payment was very limited, and it was, in our view, sufficiently raised before the Judge. Overall, we see no good or sufficient reason why the Debtor should not have the costs here and below. Accordingly, we make an order that the Petitioner shall pay the Debtor’s costs of the appeal and below, to be taxed if not agreed, with certificate for 2 counsel only in the proceedings below.

49.  We further make an order that the fees and expenses of the Official Receiver/trustee of the Debtor’s estate shall, in the first instance, be paid out of the Debtor’s estate, without prejudice to the Debtor’s right to seek reimbursement of the same from the Petitioner (see Re Lam Kwok Hung Guy [2023] 5 HKLRD 463).