MADISON LAB LTD v. PU YAN AND OTHERS

HCMP 757/2019

[2020] HKCFI 382

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 757 OF 2019

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D E C I S I O N

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A. INTRODUCTION

1.  BitOcean Co Ltd (“BitOcean”) is a Japan registered virtual currency platform operator.  The Plaintiff (“Madison”) agreed to buy BitOcean shares from the Defendants and other shareholders for JPY 1,680,000,000.  Madison now seeks to restrain the Defendants from presenting winding-up petitions for alleged debts connected with the sale (“the Alleged Debts”).

2.  Madison says that it has fully discharged its payment obligations as buyer.  The Defendants disagree, claiming that various payments purportedly made by Madison to a third party were unauthorised and invalid.

3.  The Defendants are subject to extant interim restraints against any winding-up petition based on statutory demands in relation to the Alleged Debts.

4.  In addition to Madison’s application for a final injunction (“the Injunction Application”), it has also applied to strike-out and/ or expunge (on without prejudice privilege grounds) two paragraphs from an affirmation of the 3^rd Defendant (“Kelman”) opposing the Injunction Application (“the Strike-Out Summons”).

5.  With the benefit of able submissions on these matters from Mr Michael Lok (with Ms Jasmine Cheung) for Madison and Mr Andrew Lynn for the Defendants, I consider that:

(1)  There is a substantial bona fide dispute as to the Alleged Debts, such that the Defendants should be restrained from initiating winding-up proceedings against Madison.

(2)  The Strike-Out Summons should be allowed to the extent agreed to by Mr Lynn at the hearing but not otherwise.

6.  My reasons follow.

B.  THE INJUNCTION APPLICATION

B1.  Background Facts

7.  The Alleged Debts relate to a share purchase agreement dated 9  December 2018 (“the SPA”) for Madison’s purchase of 67.2% of BitOcean’s shares from six sellers including the Defendants (together “the Sellers”) for JPY 1.68 billion (“Total Consideration”).

8.  The SPA is governed by Japanese law.  As further addressed in Section B4 below, the SPA provides for submission to the exclusive jurisdiction of the Tokyo District Court for any dispute in relation to the agreement.

9.  Of the Total Consideration of JPY 1.68 billion, it is undisputed that JPY 899,103,044 has been validly paid.

10.  As to the balance:

(1)  On 18 October 2018, Madison paid JPY 369.6 million to Y’s Service HK Limited (“Y’s Service”) pursuant to a deposit agreement between Madison and Y’s Service (“Y’s Service Deposit Agreement”).  Madison contends that the Y’s Service Deposit Agreement was entered into upon representations made by a Mr Takayuki Nakamura (“Nakamura”).

(2)  On 11 January 2019, Madison further paid HK$30,000,000 to Y’s Service, apparently pursuant to a written payment instruction issued by the 1^st Defendant dated 10 January 2019 (“the D1 Instruction”).

11.  Three of the Sellers (the Defendants) contend that they never received the payments made to Y’s Service, and never authorised Y’s Service to receive any part of the Total Consideration as deposit or otherwise.

12.  In summary, the relevant payments, including both the undisputed sums and the disputed payments to Y’s Services, are as follows:

Date	Payment	Payee	Status
18 October 2018	JPY 369.6 million	Y’s Service	Disputed
2 January 2019	JPY 135 million	Yu	Undisputed
2 January 2019	JPY 135 million	Kelman	Undisputed
10 January 2019	JPY 629,103,044	Zelo Law Office (“Zelo”) (legal representative of the Sellers)	Undisputed
11 January 2019	HKD30,000,000	Y’s Service	Disputed
Total:	Approx. JPY 1.689 billion

13.  The Defendants served statutory demands on Madison based on the Alleged Debts on 3 May 2019 and 24 June 2019.  Madison’s Amended Originating Summons dated 19 July 2019 seeks to restrain the

Defendants from presenting winding-up petitions based on these demands.

B2.  Principles

14.  Both parties accept the basic position stated by Kwan J (as she then was) in Re Sinom (Hong Kong) Limited [2009] 5 HKLRD 487 at §10:

“The court will grant a quia timet injunction to prevent the presentation of a winding-up petition which it considers would be an abuse of process. Great circumspection must be exercised in doing so, as the right to petition for winding up in appropriate circumstances is a right conferred by statute, and a would-be petitioner should not be restrained from exercising it except on clear and persuasive grounds”.

15.  Mr Lynn for the Defendants spotlights Kwan J’s reference to “great circumspection” in determining that a winding-up petition should be restrained on the basis that it is an abuse of process.

16.  Such circumspection is of course warranted, for the reasons clearly explained by Kwan J at §10 of her judgment.  Yet Kwan J was equally clear in stating (at §11) that “[i]t is an abuse of the process of the court to make a statutory demand or present a winding-up petition based on a claim to which there is a triable defence” (my emphasis).  See also Kwan JA (as she then was) in Re Hyundai Engineering & Construction Co Ltd [2002] HKLRD 71 at §7.

17.  In other words, for the purposes of the Court’s power to grant an injunction to prevent abuses of the winding-up procedure, the presentation of a petition where there is a triable defence is generally a clear case of abuse.

18.  Mr Lok further emphasises the following related propositions, which Mr Lynn does not dispute:

(1)  Petitions are not meant for debt collection purposes and the winding-up jurisdiction will be exercised only in clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition: Re Leung Cherng Jiunn (debtor) [2016] 1 HKLRD 850 (Kwan JA as she then was) at §27(5).

(2)  While the onus is on the company to adduce credible evidence, the Court is not required to make any findings at this stage. Rather, it has to be satisfied that the company has “a credible case that…should go to trial”: see Re China Shanshui Investment Co Ltd (unrep., HCCW 398/2015, 28 September 2016) (Harris J) at §7.

19.  In sum, the central question is whether Madison can show a “bona fide dispute on substantial grounds” for trial (Re Leung Cherng Jiunn (above) at §27(1)).

B3.  Whether Bona Fide Dispute on Substantial Grounds

20.  In my view, there is clearly a triable bona fide dispute as to the Alleged Debts.  In particular, there is a substantial dispute between the parties as to whether Madison’s payments to Y’s Service constituted good payment for the shares sold under the SPA.

21.  As the Court is not required to make any findings at this stage, and the dispute may go to a full trial, I will simply outline some key features of the dispute.

22.  As Mr Lynn for the Defendants points out, and I accept:

(1)  Madison does not suggest that Y’s Service had any actual authority to receive payments for the Sellers.  Instead, Madison’s case straddles the claims that: (a) “Mr Nakamura was at least ostensibly the Sellers’ agent for the purposes of instructing [Madison] to make payments to Y’s Service” (§12 of Madison’s Skeleton Submissions); and (b) Y’s Service may have ostensibly been the Defendants’ agent in receiving payments by virtue of the Y’s Service Deposit Agreement.

(2)  The basic requirements for establishing apparent authority are well-established and are set out by the Court of Final Appeal in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479, particularly §43 and §§70-71.

(3)  While the representation as to the agent’s authority need not be made by the principal himself, it has to be traceable back to the principal or a person with actual authority from the principal to make such a representation: Deyi Investment Ltd v Macjin Info-Com Tek Ltd (unrep., HCA 587/2014, 9  October 2015) at §25, affirmed on appeal in Deyi Investment Ltd v Macjin Info-Com Tek Ltd[2016] 5 HKLRD 137; Bowstead & Reynolds on Agency (21^st edn) at §8-019.  The representation may be made by way of words or conduct.

(4)  In a commercial context, a person should not be entitled to rely on what he is told where it is irrational for him to do so (which includes turning a blind eye or being reckless as to the true position): Akai Holdings Ltd (No 2) (above) at §§52, 61-62 (Lord Neuberger NPJ).

23.  With these points in view, Mr Lynn submitted that Madison has no serious case for trial on the apparent authority of Nakamura and/ or Y’s Service in relation to the disputed payments, and indeed that it would be “wholly irrational” for Madison to have proceeded on any such basis.

24.  Despite Mr Lynn’s skilled delivery, I do not accept this submission.  On the present evidence, I consider that Madison does have bona fide and substantial grounds for maintaining its case on the valid payment of the Total Consideration via Y’s Service at trial.

25.  Counsel for both sides made fairly extensive submissions on the terms of the SPA, the affidavit evidence of several key persons (including Madison’s sole director Raymond Ting (“Ting”) and Kelman) and a wide range of transactional documents and communications.  There was also a foray into detailed calculations going to matters of alleged overpayment and the distribution of sums as between the Defendants.

26.  All this reflects the basic reality that the authority issue – and ultimately the existence and extent of the Alleged Debts – requires a close grasp of the details and circumstances of the parties’ dealings.  In all, I do not think that the materials to hand supply a sufficiently clear and complete picture to enable sound findings on the related questions of agency, authority and (mis)representation that arise in this case; certainly none that are sufficient to defeat Madison’s case without trial.

27.  Mr Lok emphasised several further matters in this regard:

(1)  An agent may act for more than one party in a transaction and may assume different roles at different stages of the negotiating and transactional process: Yili Concepts (HKG) Ltd v Lee Wai Chuen HCA 12911/1997, unrep., 29 September 2000 at p.21 (DHJC Kwan as she then was). Ascertaining the true position requires a proper understanding of the prevailing circumstances at each stage of the process.

(2)  Madison’s acquisition of BitOcean shares involved a range of intermediaries, including a Mr Li Jian (“Li”), and Nakamura.  According to Ting’s affirmation evidence, it was Nakamura who first introduced BitOcean to Li, and it was Li in turn who introduced Nakamura to Madison to act as a liaison on behalf of the Sellers.

(3)  Nakamura had access to BitOcean’s share register, which was undisputedly the private property of BitOcean.  While that fact of itself may not be dispositive as to Nakamura’s role, it is one relevant factor for consideration within the wider factual matrix.

(4)  Likewise, there is some prima facie support for Madison’s case in the form of an email sent by Kelman to Madison on 29  December 2018 stating that Nakamura and another individual “are not now authorized to speak on our behalf” (my emphasis), which at least arguably implies that Nakamura was acting as the Seller’s authorised agent before that point.

28.  It is also notable that:

(1)  The Defendants have not denied that Madison did actually pay the sums set out in the table at §12 above to Y’s Services.

(2)  There is no dispute that at least part of the monies received by Y’s Service did reach at least some of the Sellers.  At the same time, there is also evidence (from Kelman) referring to internal arrangements between the Sellers for further distribution between them of sums received in payment for the relevant BitOcean shares.

(3)  By its payments on 2 and 10 January 2019 (§12 above), Madison had undisputedly paid a substantial part of the Total Consideration in partial discharge of its obligations under the SPA.  The two disputed payments bookend these undisputed payments.

(4)  While Mr Lynn pointed out that the disputed payments to Y’s Service were inconsistent with Clause 3.5 of the SPA, which required Madison to arrange a wire transfer to “a single account designated by [the] Sellers at least ten bank opening days before the Closing Date” (“the Zelo Account”), the same might also be said about the undisputed payments, which were made to three different payees.

(5)  Inasmuch as the Defendants seek to differentiate between the amount of payment they each actually received via the Zelo Account to advance an alternative case of “overpayment” to the 1^st Defendant and underpayment to the 2^nd Defendant, they have supplied no evidence to substantiate the position.

29.  There is also an obviously triable issue around the Defendants’ serious allegation that the D1 Instruction (relating to the payment of HK$30,000,000 on 11 January 2019) was forged.

30.  Viewed narrowly, this would of itself only suffice to justify an injunction against the 1^st Defendant in relation to the HK$30,000,000 sum.  But that is too narrow a view.  In my view, the D1 Instruction supports Madison’s wider case on Y’s Service role as agent, including as to the 18 October 2018 payment.  Since the D1 Instruction cannot at this stage be brushed aside as a false document, it lends credence to Madison’s overall case on ostensible authority.

B4.  Exclusive Jurisdiction Clause

31.  Given my conclusion that there is a bona fide dispute for trial, I need not express any conclusion on the merits of Madison’s alternative argument based on Clause 10.5 of the SPA and the judgment of Harris J in Re Southwest Pacific Bauxite (HK) Limited [2018] 2 HKLRD 449 (“the Lasmos case”).

32.  Clause 10.5 of the SPA materially provides that:

“The parties to this Agreement agree that if any dispute arises in relation to this Agreement, such dispute shall be subject to the exclusive jurisdiction of the Tokyo District Court as the court for the first instance.”

33.  In Lasmos §31, Harris J held that a winding-up petition should be generally dismissed where:

(1)  the company disputes the debt relied on by the petitioner;

(2)  the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt; and

(3)  the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process.

34.  In so holding, Harris J departed from the approach taken in several earlier Hong Kong decisions at first instance: see Lasmos §§24-31.

35.  Mr Lok submitted that the Lasmos approach should by analogy be followed in situations featuring an exclusive jurisdiction (rather than arbitration) clause, with the upshot that the presentation of a winding-up petition in such circumstances “amounts to an abuse of process” (citing Colman J in A v B [2007] 2 C.L.C. 203 at §15).

36.  In But Ka Chon v Interactive Brokers LLC [2019] 4 HKLRD 85, Kwan VP expressed reservations about the Lasmos approach (§§57-73), particularly as to whether the court’s discretion should be exercised in a way that involves (as her Ladyship saw it) “a substantial curtailment” of the statutory right of a creditor to present a petition (§63).  Kwan VP did however acknowledge that “considerable weight should be given to the factor of arbitration” in the court’s exercise of discretion (§70).

37.  While expressly obiter (§57, §70, §73), Kwan VP’s remarks will obviously warrant close attention in a case where the outcome depends critically on whether the Lasmos approach should be followed, which is not this case.

C.  THE STRIKE-OUT SUMMONS

38.  Turning to the Strike-Out Summons, the targeted paragraphs are §§124-125 of the Affirmation of Kelman (the 3^rd Defendant) dated 18 July 2019, which was filed in opposition to the Injunction Application. Those paragraphs state:

“124. In late May 2019, D1 and Raymond [P’s sole director] met in person in Tokyo to discuss the statutory demands served on [sic] Plaintiff. Raymond represented that my strategy was ‘evil’ and that it prevented the Plaintiff from raising the funds needed to pay the Sellers, which was in progress. Raymond further admitting [sic] to still owing the demanded sums and stated he would pay, but that he could not raise the issue specifically with Madison Group’s board, which the statutory demands threatened to do since upon a petition being filed the GEM Board’s rules would require a public announcement of it to shareholders.

125. On or about 27 June 2019 Raymond sent Zelo a draft settlement agreement. His draft settlement agreement required us to settle with Y’s Service. Raymond was negotiating settlement on the basis that he could have Y’s Service pay us such settlement amount as he agreed to pay.”

39.  As stated in Mr Lynn’s skeleton submissions and confirmed at the start of the hearing, without conceding that §124 was covered by privilege, the Defendants were content to redact that paragraph on the basis that they would not be relying upon it.

40.  As it turns out, neither §124 nor §125 featured in any of the substantive arguments on the Injunction Application, even though the parties were permitted to refer to those paragraphs on a de bene esse basis.

41.  As such – and given my decision to allow the Plaintiff’s application for a final injunction – the status of §125 is essentially a moot question and I do not propose to further deal with it.

D.  CONCLUSION AND COSTS

42.  On the substantive relief sought in the Injunction Application, I will grant an order in the terms set out at §§1-3 of the Plaintiff’s Amended Originating Summons.

43.  Having considered the brief written points on costs in the parties’ original skeleton submissions, I will make an order nisi that the Plaintiff should have its costs of the Amended Originating Summons, including the costs of the initial ex parte on notice application for interim relief, with certificate for one counsel.

44.  I will allow the Strike-Out Summons as it applies to §124 but not otherwise.

45.  I will make an order nisi that the parties bear their own costs of the Strike-Out Summons in view of the matters noted in Section C above.