LEE ON WAI v. ATHORA LUX INVEST S.C.SP. - LOAN ORIGINATION AND ANOTHER

HCSD 7/2024

[2025] HKCFI 1036

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO 7 OF 2024

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BETWEEN

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D E C I S I O N

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1.   Introduction

1.1  By an application made on 22 January 2024 (“Application”), the Applicant (“Mr Lee”)[1] seeks to set aside 2 statutory demands issued on 3 January 2024 (“1^st SD” and “2^nd SD” and collectively “SDs”), respectively by the 1^st Respondent (“Athora Lux Invest”) and the 2^nd Respondent (“Apollo Credit Funds ICAV” and together with Athora Lux Invest “Original Lenders”).

1.2  These are my decision on the Application and my reasons for dismissing Mr Lee’s summons dated 11 November 2024 (“Summons”) to adduce his 4^th affirmation (“Lee 4^th”).

1.3  In these proceedings, Mr Lee is represented by Mr Timothy Lam and the Original Lenders by Mr Michael Lok (with Mr Billy Liu).

2.   Background

2.1  The SDs are based on a written facility agreement dated 28 March 2022 (“Facility Agreement”) which was executed by the following 10 parties:

(1) Double Winner Asia Limited (“Company”),

(2) Forever Concord Limited (“BidCo”),

(3) Revelry Gains Limited (“Revelry Gains”),

(4) Fameway Finance Limited (“Fameway Finance” and together with Revelry Gains “Sponsors”),

(5) Mr Lee,

(6) Mr Mok Tsan San (“Mr Mok” and together with Mr Lee “Individual Guarantors”),

(7) Athora Lux Invest,

(8) Apollo Credit Funds ICAV,

(9) Alter Domus Agency Services (UK) Ltd (“Agent”), and

(10) Alter Domus Trustees (UK) Limited (“Security Agent”).

2.2  It is common ground between the parties that the Facility Agreement was entered into for the purpose of financing the potential acquisition of a property known as House B together with Car Parking Spaces, 28 Middle Gap Road, Hong Kong (“Property”).

2.3  At all material times, the Property was owned by Joy Rich Development Limited (in liquidation) (“Joy Rich”) and mortgaged to the Sponsors, with Revelry Gains being the first-ranked mortgagee and Fameway Finance being the second-ranked mortgagee. Mr Lau and Mr Mok were respectively a director of Revelry Gains and Fameway Finance.

2.4  It was envisaged that a term loan of HK$250,000,000 (“Total Commitments”) would be made by the Original Lenders under the Facility Agreement to the Company to enable BidCo, its wholly-owned subsidiary, to acquire the Property in an intended mortgagee sale by Fameway Finance (“Mortgagee Sale”). Athora Lux Invest and Apollo Credit Funds ICAV were respectively committed to advance 78% and 22% of the Total Commitments.

2.5  Contemporaneous with or pursuant to the execution of the Facility Agreement, to secure repayment under the Facility Agreement, various securities were executed by the parties in favour of the Security Agent for the benefit of the Original Lenders, including (1) a Composite Share Charge over the entire portfolio of the issued shares in the Company and BidCo dated 28 March 2022, (2) a Composite Security Agreement executed also on 28 March 2022 which created, inter alia, fixed charge, floating charge and other charges specified therein over such assets of the Company and BidCo, (3) a Sub-Mortgage over the Property executed by Revelry Gains on 1 April 2022 and (4) another Sub-Mortgage over the Property executed by Fameway Finance on 1 April 2022.

2.6  Further, BidCo, Revelry Gains, Fameway Finance (collectively “Corporate Guarantors”) and the Individual Guarantors (together with the Corporate Guarantors, “Guarantors”) jointly and severally provided a guarantee and indemnity in the terms set out at section 16 of the Facility Agreement.

2.7  The documentary evidence shows the following chronology:

(1) On 29 March 2022, the Company, pursuant to the Facility Agreement, issued a Utilization Request to the Agent to borrow HK$100,000,000 for the purpose of paying the Acquisition Deposit, origination fees and legal fees (“First Loan”) and requested that the loan proceeds be transferred to Messrs Hau, Lau, Li and Yeung Solicitors (“HLLY”);

(2) On 1 April 2022, the First Loan was advanced to the Company;

(3) On 6 April 2022, an invitation to tender for the Property was published in the South China Morning Post;

(4) It was expressly stated in the Mortgagee Sale Tender Document that (a) Fameway Finance was the vendor, (b) the tender was to be submitted to Messrs Lau Kwong & Hung (“LKH”), the vendor’s solicitors and (c) the Mortgagee Sale would only proceed upon the liquidators of Joy Rich (“Joy Rich Liquidators”) giving consent for the acceptance of the tender offer;

(5) On 8 April 2022, by a letter from HLLY to LKH, BidCo submitted its offer in the sum of HK$320,000,000 with a tender deposit of HK$64,000,000 (“Acquisition Deposit”);

(6) By a letter dated 4 May 2022, LKH informed HLLY that BidCo’s offer was the highest bid submitted and that LKH would inform the Joy Rich Liquidators to convene a Committee of Inspection (“Joy Rich COI”) meeting on or before 18 May 2022 to seek their consent to proceed with the Mortgagee Sale;

(7) By a letter dated 9 March 2023, Fameway Finance informed BidCo that (a) despite their best endeavours, the Joyrich COI and the Joyrich Liquidators concluded that, taking into account the best interests of Joy Rich and its creditors, they could no longer proceed with the Mortgagee Sale and (b) the Mortgagee Sale was as a result terminated (“9/3/23 Letter”);

(8) By an email dated 13 March 2023, HLLY served notice pursuant to clause 7.2(a) of the Facility Agreement that an Acquisition Termination Event had occurred, attaching the 9/3/23 Letter (“13/3/23 Notice”). Under clause 1.1 of the Facility Agreement, an Acquisition Termination Event would occur if the offer of BidCo for the Mortgagee Sale was rejected, or BidCo was excluded or rejected from the Mortgagee Sale by a Sponsor, Joy Rich COI or Joy Rich Liquidators, or a Sponsor terminated the Mortgagee Sale, in each case for any reason whatsoever;

(9) Upon the occurrence of an Acquisition Termination Event, under clause 7.2(d) of the Facility Agreement, the Company was obliged to repay the First Loan together with accrued interest and the Break Fee (defined at clause 7.9 as being 2.5% of the outstanding loan) on or prior to the earlier of (a) the date falling 180 days after the occurrence of the Acquisition Termination Event; and (b) the date when the Acquisition Deposit was returned to BidCo;

(10) In September 2023, the Original Lenders agreed to extend the repayment date from 9 September 2023 (180 days from the 13/3/23 Notice) to 29 September 2023;

(11) As there was no repayment by the Company, by a letter dated 6 October 2023 (“Demand Letter”) from the Original Lenders’ former solicitors (“A&O”) to the Company, BidCo, Revelry Gains, Fameway Finance, Mr Lee, Mr Mok and Ms Yeung Yet He (“Ms Yeung”), A&O demanded payment from the Company and each Guarantor of the First Loan, accrued interest and the Break Fee quantified at HK$127,912,120 (“Demand Letter Amounts”) as at 6 October 2023. Ms Yeung was a director of the Company until 18 January 2024 when she was replaced by the receivers and managers of the Company appointed by the Security Agent.

2.8  On 3 January 2024, the SDs were issued based on the Demand Letter Amounts and default interest accrued from the date of the Demand Letter to the date of the SDs in the total sum of HK$135,466,319.51 (“Total Outstanding Amount”). The 1^st SD, issued by Athora Lux Invest, is premised on 78% of the Total Outstanding Amount in the sum of HK$105,663,729.22 and the 2^nd SD, issued by Apollo Credit Funds ICAV, is premised on 22% of the Total Outstanding Amount in the sum of HK$29.802,590.29.

2.9  There is no dispute that the SDs were validly served on Mr Lee.

3.   The setting-aside grounds

3.1  As observed by Mr Lok, Mr Lee’s case has morphed and progressively expanded, in that Mr Lam has, inter alia, (1) refrained from pursuing substantive grounds advanced in Mr Lee’s evidence but instead mounted technical objections and (2) sought to capitalize upon a number of developments which took place after the issuance of the Application on 22 January 2024.

3.2  As a matter of record, the Property and Joy Rich have generated a significant number of legal proceedings. In my decision dated 28 August 2024 (“28/8/24 Decision”) in HCA 510/2012 and HCA 1497/2022 ([2024] HKCFI 2204), I gave a brief summary at section 2 thereof which I will not repeat here. In addition, on 7 May 2024, BidCo commenced HCA 845/2024 against LKH, Ms Yeung and Fameway Finance (“HCA 845”). HCA 845 is pursued by the receivers and managers of BidCo (“BidCo Receivers”). I will set out the significance of the 28/8/24 Decision and HCA 845 as I track how the setting-aside grounds have expanded over time.

3.3  The grounds pursued by Mr Lam at the hearing on 2 July 2024 were as follows:

(1) The SDs are defective for failing to state or identify the consideration for Mr Lee’s liability as a guarantor under the Facility Agreement (“Defective SD Ground”);

(2) There is a bona fide dispute on substantial grounds as to whether the Acquisition Termination Event has occurred (“No ATE Ground”);

(3) Even if an Acquisition Termination Event had occurred, no proper demand was made to Mr Lee before the issuance of the SDs (“No Proper Demand Ground”);

(4) The court should exercise its residual discretion in view of the fact that the Original Lenders were already enforcing various other securities to recoup the Total Outstanding Amount (“Residual Discretion Ground”).

3.4  In relation to the No ATE Ground, its substance only surfaced in Mr Lee’s 2^nd Affirmation which was filed on 11 June 2024, premised on a number of allegations advanced in HCA 845. In relation to the No Proper Demand Ground, the substance only surfaced in Mr Lam’s written submissions. The hearing was therefore adjourned to allow the Original Lenders to adduce further evidence to deal with the new developments and for Mr Lee to file reply evidence.

3.5  Prior to the adjourned hearing on 21 October 2024, by a letter dated 18 October 2024, Mr Lee’s solicitors informed the court that Mr Lee wished to rely on the 28/8/24 Decision, by which I acceded to an application to set aside the default judgment obtained by Fameway Finance against Joy Rich premised on the mortgage over the Property. It was suggested that by reason of the 28/8/24 Decision, there was also a substantive dispute as to whether the Facility Letter should be vitiated or rescinded by reason of common mistake (“Common Mistake Ground”). The hearing was therefore further adjourned to 14 November 2024 for parties to lodge further submissions on (1) whether Mr Lee should be permitted to rely on the 28/8/24 Decision and (2) if so, how the 28/8/24 Decision would impact upon the Application.

3.6  Unfortunately, the hearing on 14 November 2024 could not proceed substantively due to inclement weather in the morning, given the resulting time limitation. However, at that hearing, as noted above, I dismissed the Summons for leave to adduce Lee 4^th.

3.7  In the following sections, I will deal with (1) Defective SD Ground, (2) No Proper Demand Ground, (3) Residual Discretion Ground, (4) No ATE Ground and (5) Common Mistake Ground in that order.

4.   The applicable principles

4.1  The Application relies on Rules 48(5)(b) and(d) of the Bankruptcy Rules Cap 6A (“BR”), namely (1) the debt is disputed on grounds which appear to the court to be substantial and (2) Mr Lee is able to satisfy the court that there are other grounds that the SDs ought to be set aside. Specifically in relation to the No Consideration Ground, reliance is placed on an alleged contravention of Rule 44(3) of the BR.

4.2  For the purpose of demonstrating that a debt is disputed on substantial grounds within Rule 48(5)(b), the onus is on the debtor to adduce sufficiently precise factual evidence which is believable to satisfy the Court that it has a defence of substance, not just a fair probability of one. It is not sufficient for the debtor to simply make bald assertions or to merely raise a “cloud of objections” on affidavits: Ng Kin Siu v Gentle Soar Limited [2023] HKCA 944 §16.

4.3  As regards Rule 48(5)(d), In re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at 276 B-E provides the following guidance:

“Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1), in the absence of an unsatisfied return to execution or other process, a debtor's inability to pay the debt in question is established if but only if, the appropriate statutory demand has been served and not complied with.

When therefore the rules provide, as does rule 6.5(4)(d), for the court to have a residual discretion to set aside the statutory demand, the circumstances which normally will be required before a court can be satisfied that the demand 'ought' to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court's intervention is called for to prevent that injustice.”

4.4  In relation to Rule 44(3), the Court of Appeal observed in Re Leung Cherng Jiunn [2016] 1 HKLRD 850 as follows:

“[13] The requirement regarding the information to be provided of the debt in the statutory demand is not onerous. The creditor is not required to “completely” set out the bases of the debt in the statutory demand... The statutory demand is merely to inform the debtor of the way in which the debt arises so that he would know what course he should take in the light of the information given. This is because the statutory demand is an important document. It is “the straight and narrow gateway” through which a creditor must pass in order to establish the debtor’s apparent inability to pay the debt demanded in order for a bankruptcy petition to be presented (TSB Bank plc v Platts (No 2) [1998] BPIR 284 at 288H).

[15] … Nicholls LJ had also pointed out at 280D to E that whilst the statutory code affords the court a desirable degree of flexibility in dealing with an application to set aside a statutory demand for defects, this is not to be taken as a charter for slipshod preparation of statutory demands. He also emphasised that as the making of a bankruptcy order remains a serious step for the debtor, and the prescribed preliminaries in the statutory code are intended to afford protection to him, if a statutory demand) is defective, the court will be alert to see whether those mistakes have caused or will cause any prejudice to the debtor.”

5.   The Defective SD Ground

5.1  The Defective SD Ground may be disposed of shortly.

5.2  I accept Mr Lok’s characterization that the Defective SD Ground represents a fundamental shift from Mr Lee’s original case.

5.3  In Mr Lee’s 1^st Affirmation (“Lee 1^st”), the original case pursued was as follows:

“[8] I am, and was at all times, a director of [Revelry Gains]… Neither Revelry Gains nor me had ever been any shareholder or director of [the Company] or [BidCo], or had ever had any commercial or other relationship whatsoever with [the Company] or [BidCo]. As such, I did not, and do not, know why Revelry Gains or me would become obligors for [the Company] or [BidCo] in the Loan Transactions, Nevertheless, I executed the Facility Agreement as well as other agreements, instruments and documents in my capacity and on behalf of Revelry Gains as requested.

[17] I have never executed any deed of personal guarantee to or in favour of the [Original Lenders] or the Security Agent, and as such, I do not understand why the [Original Lenders] allege in the respective Statutory Demands that I am an individual guarantor, and as I am not any guarantor, I shall not be liable to the [Original Lenders] for any amount alleged to be due and owing by [the Company] and/or [BidCo] to the [Original Lenders]. I therefore strenuously deny liability.

[18] As deposed above, I have never had any interest in the Principal Amount at all, and further, I have never enjoyed any benefit of the Principal Amount or any part thereof. Even if I had ever executed any guarantee to or in favour of the [Original Lenders], which is strenuously denied, such guarantee shall not be enforceable against me for want of consideration on my part.” (emphasis added)

5.4  In my view, Mr Lee’s original case is unbelievable and Mr Lam is astute in not pursuing the above factual case, for the following reasons:

(1) Mr Lee’s assertion that he did not sign or did not know why he had to sign any personal guarantee is unbelievable given the express terms of the Facility Agreement, in particular where LKH had confirmed in writing to HLLY on 24 March 2022 (prior to the execution of the Facility Agreement which contains Mr Lee’s guarantee) that advice was given to Revelry Gains, Fameway Finance, Mr Lee and Mr Mok on, inter alia, the Facility Agreement and a warning notice which set out the liabilities of the Guarantors under the Facility Agreement (“Warning Notice”);

(2) Mr Lee acknowledged that he had received and fully understood the content of the Warning Notice on 28 March 2022;

(3) On the allegation of want of consideration, as pointed out by Mr Lok, it is well-established that in most cases, consideration for a guarantee would usually consist entirely of some advantage to or conferred on the principal such as loaning money to the principal. In the present case, the evidence of the Original Lenders[2] is that the Facility Agreement related to the acquisition of the Property as a distressed residential property from Joy Rich which was in liquidation at the material time. As the first-ranking mortgagee of the Property, Revelry Gains (and Mr Lee as director) obviously had an interest in seeing the completion of the acquisition. The foregoing evidence is not challenged by Mr Lee and not dealt with by Mr Lam in submissions.

5.5  Mr Lam was thus driven to mount a technical attack premised on an alleged contravention of Rule 44(3) of the BR which provides:

“The statutory demand must state the amount of the debt, and the consideration for it (or, if there is no consideration, the way in which it arises)…”

5.6  Mr Lam argues that nowhere in the SDs is the consideration identified and relies on Huen Wai Kei v Choy Kwong Wa Christopher (No 2) [2014] 4 HKLRD 782 §§60-62 to draw an analogy with the pleading requirement that consideration must be pleaded in a Statement of Claim. In the alternative, Mr Lam contends that even were the court not minded to set aside the SDs, the SDs should be amended and re-served on Mr Lee, relying on Re Blackman (a Debtor) [1999] BCC 446 at 447D-F.

5.7  I agree with Mr Lok that Mr Lam’s analogy with the pleading requirement does not assist the Application. As has been pointed out at Re Leung Cherng Jiunn §13 (cited at §4.4 above), a creditor is not required to “completely” set out the bases of the debt in the statutory demand. In any event, in the present case, the SDs are anything but a product of “slipshod preparation”. Each of the SDs contains an Annex 1 (titled “Particulars of Debt”) which makes reference to the terms of the Facility Letter (in particular clause 16.1 which governs the obligations of the Guarantors), the occurrence of the Acquisition Termination Event, Demand Letter, the calculation of the Demand Letter Amounts, and the Total Outstanding Amount. In my view, it is plain that the information contained therein was sufficient to enable Mr Lee to know what course he should take.

5.8  Further and in particular, at Huen Wai Kei §§63-67, the Court of Appeal found, on the evidence, that the relevant agreement was not supported by consideration in fact. Mr Lok has very fairly accepted that the word “consideration” is not specifically mentioned in the SDs. However, it seems to me that what the SDs did was to faithfully refer to the terms of the Facility Agreement which itself do not deploy expressly the word “consideration”. As is trite, it is not necessary for the consideration to appear on the face of the instrument of the guarantee and the existence of consideration may be proved by extrinsic evidence. Where, as here, Mr Lam has refrained from pursuing Mr Lee’s factual case that the Facility Agreement is not supported by consideration, it seems to me that the Defective SD Ground is a sterile technical complaint, in that no prejudice has been shown to have been caused to Mr Lee.

6.   No Proper Demand Ground

6.1  The No Proper Demand Ground is yet another instance where Mr Lam was driven to not pursue Mr Lee’s substantive case and changed tack to mount a technical argument.

6.2  At Lee 1^st §31, Mr Lee contended that he had never received the Demand Letter. In response, the Demand Letter was then duly adduced into evidence in the Original Lender’s evidence in opposition. It is unsurprising that Mr Lam has decided not to pursue Mr Lee’s factual case. It is plain that the Demand Letter was delivered by courier, fax and email to Mr Lee at the contractual address, fax number and email (all belonging to Fameway Finance) stated at clause 31.2 of the Facility Agreement. As provided at clause 31.3, such delivery would be effective.

6.3  Mr Lok then argues that the delivery of the Demand Letter has fallen foul of clause 31.3(c) of the Facility Letter which provides:

“All communications or documents to be made or delivered from or to an Obligor shall be sent through the Agent.” (emphasis added)

6.4  As the Demand Letter was sent by A&O directly, Mr Lam reasons that the delivery of the Demand Letter to Mr Lee is therefore contractually ineffective.

6.5  I am unable to accept Mr Lam’s submissions. As is clear from the provisions of the Facility Agreement, the duties of the Agent are entirely mechanical and administrative on nature (clause 25.5(a)). Clause 25.5(b) provides:

“Subject to paragraph (d) below, each of the Agent and the Security Agent shall promptly forward to a Party the original or a copy of any document which is delivered to the Agent or Security Agent (as applicable) for that Party by any other Party.”

6.6  In the present case, A&O had specifically copied the Demand Letter to the Agent. Clause 25.8 of the Facility Agreement provides that the Agent may “rely on any representation, communication, notice or document believed by it to be genuine, correct and appropriately authorized.”

6.7  Clause 31.3(c) does not mandate that any communications or documents to be made or delivered to Mr Lee must be sent by the Agent. I agree with Mr Lok that, on the proper construction of clause 31.3(c), the present circumstances have satisfied the requirement of “sending through” the Agent.

6.8  The No Proper Demand Ground is therefore another sterile technical complaint, in that what is being suggested is that the Agent should have forwarded the Demand Letter to Mr Lee again, when the Agent and all the addressees already knew from the face of the Demand Letter that it had already been delivered to the addressees including Mr Lee.

6.9  For completeness, I should point out that it is part of Mr Lam’s submission that, pursuant to clause 16.1(b) of the Facility Agreement, a demand was necessary to trigger Mr Lee’s liability as a Guarantor. It provides:

“Each Guarantor irrevocably and unconditionally jointly and severally:

(b) undertakes with each Finance Party that whenever any other Transaction Obligor does not pay any amount when due under or in connection with any Finance Document, that Guarantor shall immediately on demand pay that amount as if it was the principal obliger…” (emphasis added)

6.10  Conversely, Mr Lok argues that since Mr Lam’s liability was that of a primary obligor, no demand was necessary, relying on MS Fashions Ltd v Bank of Credit and Commercial International SA (in liquidation) [1993] Ch 425 at 436F-F and 435H-436GF and FWD Life Insurance Co (Bermuda) Ltd v Cheng Wing Yiu Dumas, HCMP 2365/2014, 8 July 2016 §55.

6.11  In view of my conclusion that the delivery of the Demand Letter was compliant with clause 31.3(c) of the Facility Agreement, it is strictly unnecessary for me to deal with the disagreement between counsel. However, I should indicate that I agree with Mr Lok. As has been pointed out at FWD §55:

“Although it is not completely clear, the fact of a guarantor being a principal debtor, or primary obligor, is generally considered to overrule an express provision in a guarantee to the effect that payment must be made “on demand”: see The Law of Guarantees, supra, §7–006. Consequently, if the guarantor is also a principal debtor, no prior demand would be required for liability to arise under the guarantee.”

7.   The Residual Discretion Ground

7.1  The Residual Discretion Ground may also be dealt with shortly.

7.2  Mr Lam relies on the following passages in X v Y [2019] HKCFI 2880:

“[46] It however seems to me that in an extreme case where the security, albeit one provided by a third party, would be of such an amount and of such liquidity (say cash or cash equivalent) that it could be said that no reasonable creditor would have proceeded to bankrupt the Debtor rather than realise the security, then perhaps the residual discretion could be relied upon.

[47] This, in my view, should not be considered as an intrusion in the rule in China and South Sea Bank v Tan which provides that the lender clearly has the legal right to sue the guarantor or the borrower as he sees fit. But rather this would be recognising that as the bankruptcy regime engages class remedies, as well as the more draconian consequences which flow from the bankruptcy, the court is entitled to consider the practical realities in any given case. Given the latest developments in the present case it would not be appropriate to say more about the rule.”

7.3  Mr Lam says that the residual discretion should be exercised to set aside the SDs, on the basis that the Original Lenders have “at their disposal numerous third-party securities to enable them to recover” the Total Outstanding Amount (namely the securities set out at §2.5 above).

7.4  I do not agree with Mr Lam.

7.5  As has been pointed out by Mr Lok:

(1) Under clause 16.6 of the Facility Agreement, the Applicant expressly “waives any right it may have of first requiring any Finance Party (or any trustee or agent on its behalf) to proceed against or enforce any other rights or security or claim payment from any person before claiming from that Guarantor under this Clause 16. This waiver applies irrespective of any law or provision of a Finance Document to the contrary”;

(2) Under clause 16.9 of the Facility Agreement, it is expressly provided that “[t]his guarantee is in addition to and is not in any way prejudiced by any other guarantee or security now or subsequently held by any Finance Party”;

(3) In any event, in X v Y [2020] HKCFI 3178, Linda Chan J observed at §30(2) that, at the setting-aside stage, “[t]he Court is not concerned with other matters, such as whether the Debt has been sufficiently secured or compounded for or whether the Respondent acted reasonably in refusing to accept any offer made by the Debtors. These are matters which fall to be considered at the petition stage.”

8.   The No ATE Ground

8.1  The No ATE Ground was originally pursued at Lee 1^st §28 on the basis that the occurrence of the Acquisition Termination Event was “casually determined” by HLLY in the 13/3/23 Notice without any prior consultation or agreement with Mr Lee and the other Guarantors named in the Facility Agreement.

8.2  The foregoing case was again not pursued by Mr Lam. As has been pointed out above, the 13/3/23 Notice was issued by HLLY following the 9/3/23 Letter in which Fameway Finance informed BidCo that the Mortgagee Sale was terminated. Further, as pointed out by Mr Lok, no provision is made in the Facility Agreement that consultation or agreement was required from any of the Guarantors for the purpose of declaring the occurrence of an Acquisition Termination Event.

8.3  Mr Lam then relies on a number of factual allegations pleaded in the Statement of Claim in HCA 845 (“HCA 845 SOC”) to contend that there is a dispute as to whether Fameway Finance had in fact terminated the Mortgagee Sale, and as such, there is a dispute as to whether an Acquisition Termination Event had occurred.

8.4  HCA 845 was commenced by the BidCo Receivers against LKH, Ms Yeung and Fameway Finance in respect of the Acquisition Deposit and 2 further payments paid by BidCo to LKH, respectively on 13 February 2023 in the sum of HK$14,000,000 (“1^st Further Payment”) and 16 January 2024 in the sum of HK$9,850,000 (“2^nd Further Payment”). It is pleaded at HCA 845 SOC §50 that LKH had informed the BidCo Receivers on 16 April 2024 that (1) the Acquisition Deposit was released to Fameway Finance on 7 May 2022, (2) the 1^st Further Payment was paid by BidCo to LKH pursuant to a Head of Terms signed on 1 February 2023 (“Head of Terms”) and was released by LKH to Fameway Finance on 13 February 2023, and (3) the 2^nd Further Payment was paid by BidCo to LKH on 16 January 2024 pursuant to an preliminary framework agreement dated 5 January 2024 (“PFA”) and released by LKH to Fameway Finance on 16 January 2024.

8.5  Mr Lam argues that Fameway Finance did not in reality terminate the Mortgagee Sale but had continued with it. He places emphasis on the fact that the 2^nd Further Payment was released to Fameway Finance on 16 January 2024, well after the 9/3/23 Letter. Therefore, Mr Lam reasons that there is a substantial dispute as to whether the whole “edifice” of the SDs had “evaporated”.

8.6  I am not persuaded by Mr Lam, for the following reasons.

8.7  First, the Head of Terms is a non-binding document under which it was contemplated that the Company would acquire 99.99% of the authorized share capital of Joy Rich and as such a completely different transaction from that contemplated under the Mortgagee Sale. The execution of the Head of Terms preceded the 9/3/23 Letter and does not have the effect of negating the content of the 9/3/23 Letter, namely that the Mortgagee Sale was terminated by Fameway Finance. The foregoing is made even clearer in the PFA itself. The PFA is an agreement between Fameway Finance (as vendor), Revelry Gains (as confirmor) and BidCo (as purchaser). Recital 7 thereof provides:

“The Vendor have put the Property on the market for sale by inviting tender. A conditional offer was received from the Purchaser to acquire the Property on or about May 2022. The Purchaser's tender to purchase the Property at the price of HK$320 million (the "Purchase Price") is not accepted. A Heads of Terms was entered subsequently to restructure the Company and HK$14 million further deposits were paid. As property market deteriorate in 2023, Parties agreed to reduce the purchase price of the Property to HK$240 million subject to additional further deposits of HK$9,850,000.00 to be paid within 14 days from signing of this PFA and the aggregate initial deposit in total HK$87,850,000.00 to be released to Vendor as deposit for this PFA notwithstanding any previous stakeholder undertaking between the Parties.”

8.8  Secondly, as has been pointed out by Mr Lok, it is a quantum leap of reasoning to assert that the PFA has the effect of showing that the Mortgagee Sale was still in progress. Under the Facility Agreement, the Mortgagee Sale was a specifically defined transaction. In particular, clause 20.23(f)(iv) of the Facility Agreement provides that, except with the prior consent of the Agent, none of the Company and BidCo may “extend the “Acceptance Period” (as defined in the Mortgage Sale Tender Document).” Under the Mortgage Sale Tender Document, the term “Acceptance Period” is defined as follows:

“… the period between (i) the Mortgagee sale tender Commencement Date and Time and (ii) the date which is the earlier of (A) the fourteenth (14th) working day after the COI shall have convened a meeting to consider the Mortgagee sale tender; and (B) the 56^th working day after the Mortgagee sale tender Commencement Date and Time (both dates inclusive), unless extended in accordance with clause 2.11…”

8.9  It is plain that the PFA was executed beyond the “Acceptance Period” and there is uncontroverted evidence that no prior consent had been obtained from the Agent to extend the “Acceptance Period”.

8.10  Thirdly and relatedly, clause 20.23(f)(ii) also provides that except with the prior consent of the Agent, none of the Company and BidCo may amend the term or condition of the Mortgagee Sale in any respect. Under the Facility Agreement, the Acquisition Deposit is defined as the amount paid or payable by BidCo pursuant to clause 2.8 of the Mortgage Sale Tender Document (ie 20% of the tender price in the sum of HK$64,000,000). Clause 3 of the PFA provides as follows:

“It is acknowledged that the Purchaser has submitted a cashier order for the amount of HK$64 million to the Vendor's solicitors together with the tender. Upon signing of this PFA, such deposit of cashier order will be treated as an initial deposit (the "Initial Deposit") and shall be applied in part payment of the Purchase Price under the Formal Agreement. Further deposit of HK$14 million paid upon signing of Heads of Terms will also aggregate as initial deposit and additional further deposits of HK$9,850,000.00 to be paid within 14 days from signing of this PFA and the aggregate Initial Deposit in total HK$87,850,000.00 to be released to Vendor as deposit for this PFA notwithstanding any previous stakeholder undertaking between the Parties.”

8.11  As pointed out by Mr Lok, clause 4.1(a) of the Facility Agreement provides as follows:

“The Lenders will only be obliged to comply with Clause 5.4 (Lenders' Participation) in respect of a Loan if the Agent has received (or waived receipt of) all of the documents and other evidence listed in Part 1 (Conditions precedent to initial Utilisation) of Schedule 2 (Conditions precedent) in form and substance satisfactory to the Agent prior to the proposed Utilisation Date of that Loan. The Agent shall notify the Company and the Lenders promptly upon being so satisfied.”

8.12  Pursuant to Part 1 (Conditions precedent to initial Utilisation) of Schedule 2 (Conditions precedent), such documents include an agreed form the “Preliminary Framework SPA”. The terms of the PFA are different from those of the agreed form. There is again no evidence to show that any prior consent had been obtained from the Agent before the execution of the PFA.

8.13  I agree with Mr Lok that there is no bona fide dispute over whether the Mortgagee Sale had been terminated. Where it is Mr Lee’s case that Fameway Finance had not terminated the Mortgagee Sale, no evidence has been adduced from Mr Mok or any other personnel from Fameway Finance, in the particular circumstances where Mr Mok was a fellow Individual Guarantor and both Fameway Finance and Revelry Gains are Sponsors under the Facility Agreement. On the evidence, and as noted in the 28/8/24 Decision, Fameway Finance and Revelry Gains were at the material time closely related, as further evidenced by the fact that, as noted above, the contractual address, fax number and email of Mr Lee under the Facility Letter are those of Fameway Finance.

9.   The Common Mistake Ground

9.1  Mr Lam next seeks to capitalize on the 28/8/24 Decision to argue that there was a common mistake, in that the Original Lenders must have acted on the shared assumption that Fameway Finance had the proper standing and legal authority as the mortgagee of Joy Rich to sell the Property by way of the Mortgagee Sale. By the 28/8/24 Decision, the default judgment obtained by Fameway Finance against Joy Rich was set aside. Mr Lam therefore argues that if Joy Rich succeeds in setting aside the mortgage transaction at trial, the foregoing shared assumption would become incorrect.

9.2  Counsel agreed that the legal elements of a common mistake which has the effect of making a contract void ab initio are summarized at Chitty on Contracts, 35^th Ed §5-017 as follows:

“Where the mistake is common, that is shared by both parties, there is consensus ad idem, but the law may nullify this consent if the parties are mistaken as to some fact or point of law which lies at the basis of the contract. In summary, if: (i) the parties have entered a contract under a shared and self-induced mistake as to the facts or law affecting the contract; (ii) under the express or implied terms of the contract neither party is treated as taking the risk of the situation being as it really is; (iii) neither party was responsible for or should have known of the true state of affairs; and (iv) the mistake is so fundamental that it makes the “contractual adventure” impossible, or makes performance essentially different to what the parties anticipated, the contract will be void.”

9.3  In my view, the Common Mistake Ground fails on at least the first, second and/or fourth elements identified in the above passage.

9.4  In relation to the first element, there is no dispute between counsel that Mr Lee has to show that he and the Original Lenders had a positive state of mind/belief as to Fameway Finance’s authority to sell the Property by way of the Mortgagee Sale: Bank of China (Hong Kong) Ltd v Keen Lloyd Energy Ltd & Ors, CACV 132/2011, 23 March 2012 §30.

9.5  However, as expressly provided for at clause 22.11(c) of the Facility Agreement, it is an event of default if any Transaction Document is not or ceases to be in full force and effect. Transaction Document is defined as including an Acquisition Document, which in turns includes the Mortgage Sale Tender Document (ie the mortgage sale tender document in respect of the Mortgagee Sale issued by the Sponsors as vendor or confirmor as invitation for purchase of the Property by way of mortgagee sale tender.). It is therefore clear that the express terms of the Facility Agreement are against Mr Lam’s argument that the Original Lenders had a positive belief that Fameway Finance had the proper and legal authority as the mortgagee of Joy Rich to sell the Property by way of the Mortgagee Sale.

9.6  In relation to the second element, I refer to the following passages in The Great Peace Shipping [2003] QB 679:

“[80] Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake.

[84] … it is next necessary to determine whether, on true construction of the contract, one or other party has undertaken responsibility for the subsistence of the assumed state of affairs. This is another way of asking whether one or other party has undertaken the risk that it may not prove possible to perform the contract, and the answer to this question may well be the same as the answer to the question of whether the impossibility of performance is attributable to the fault of one or other of the parties.

[85] … Supervening events which defeat the contractual adventure will frequently not be the responsibility of either party. Where, however, the parties agree that something shall be done which is impossible at the time of making the agreement, it is much more likely that, on true construction of the agreement, one or other will have undertaken responsibility for the mistaken state of affairs. This may well explain why cases where contracts have been found to be void in consequence of common mistake are few and far between.”

9.7  In my view, on a proper construction of the Facility Agreement, it is plain that the risks have been allocated to the Guarantors. I repeat my observations set out above in relation to the first element. Further, clause 16.4 of the Facility Agreement (Waiver of defences) provides:

“The obligations of each Guarantor under this Clause 16 will not be affected by an act, omission, matter or thing which, but for this Clause 16, would reduce, release or prejudice any of its obligations under this Clause 16 including (and whether or not known to it or any Finance Party):

(d) any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of a Transaction Obligor or any other person;

(f) any unenforceability, illegality, invalidity or non-provability of any obligation of any person under any Finance Document or any other document or security…”

9.8  “Transaction Obligor” is defined to include an Obligor which in turns includes a Guarantor which in turns include a Sponsor (ie Revelry Gain and Fameway Finance).

9.9  For completeness, Mr Lam argues that insofar as the Original Lenders seek to argue that Mr Lee has accepted the contractual risk of Fameway Finance not having the legal authority/standing to sell the Property, this is a question of construction which will be “coloured by a fuller understanding of the background” to the Facility Letter and which cannot be summarily resolved “in the absence of full factual matrix evidence”: Golden Ocean Group Ltd v Humpuss Intermoda Transportasi Tbk Ltd [2013] 1 CLC 929. However, Mr Lam has not articulated or identified the relevant factual matrix which might be said to be supportive of Mr Lee’s case that, on its proper construction, the Facility Agreement has not allocated the risks to the Guarantors.

9.10  In relation to the fourth element, Mr Lam relies on, inter alia, Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255 and Apvodedo NV v Terry Collin [2008] EWHC 775.

9.11  In Associated Japanese Bank at 268E-F, Steyn J observed:

“… Fourthly, and this is the point established by Bell v. Lever Brothers Ltd. [1932] A.C. 161, the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist…”

9.12  In Apvodedo, Henderson J observed:

“[43] Taking the elements of common mistake identified in paragraph 76 of Great Peace, element (i) would clearly be satisfied because there would have been a common assumption as to the existence of a state of affairs. Element (ii) would raise the question whether the parties intended the allocation of the risk of non−production of the documents in clause 10.2 to be unqualified, or whether it was predicated upon the truth of the common assumption. As to element (iii), nobody suggests that the non−existence of the state of affairs was attributable to the fault of any party to the Exclusivity Agreement. Element (iv), if read literally, would still not be satisfied, because it would still be possible for Mr Collins to pay the £1 million. However, Associated Japanese (see below) shows that there are cases where a defence of common mistake can succeed even though performance of the relevant contractual obligation is possible (in that case payment by a bank under a guarantee). This suggests that the true test may rather be whether the non-existence of the state of affairs renders performance of the contract in accordance with the common assumption impossible. Finally, the state of affairs (namely the existence of a genuine vendor and of the Documentation) would arguably be circumstances which had to subsist if performance of the contractual adventure was to be possible. Again, much would depend on precisely how the "contractual adventure" was identified, and here too Associated Japanese might help Mr Collins to surmount this hurdle.

[44] Further support for the argument might also be found in the well−known speeches of Lord Atkin and Lord Thankerton in Bell v Lever Bros Ltd [1932] AC 161: see for example the reference by Lord Atkin at 226 to a new state of facts which "makes the contract something different in kind from the contract in the original state of facts", and the example he then gives of one of the cases arising out of the postponed coronation of King Edward VII, Krell v Henry [1903] 2 KB 740, where the Court of Appeal found that the subject of the contract was "rooms to view the procession", with the consequence that the postponement made the rooms not rooms to view the procession, and the defence of an implied term succeeded. Obviously the rooms themselves remained exactly the same throughout, and equally obviously there was no impossibility about letting them for the original period of two days.

[45] In Associated Japanese the defendant bank agreed to guarantee the obligations of the ostensible owner of four industrial machines to the claimant bank under a sale and lease back transaction. The guarantee was in terms unconditional, and applied if the lessee should for any reason make any default in payment of any sum due to the claimant: see 261A−C. In fact, the machines did not exist and both banks were the victims of a fraud. There was accordingly some similarity to the facts of the present case. Steyn J dismissed the claimant's action against the defendant under the guarantee on two separate grounds. First, he held that on the true construction of the guarantee agreement it was subject to an express condition precedent that the lease related to existing machines, or alternatively that such a condition precedent was to be implied into the agreement. Secondly, he held that the contract of guarantee was in any event void ab initio for common mistake. He found that both parties (the creditors and the guarantor) acted on the assumption that the lease related to existing machines; that the subject matter of the guarantee was essentially different from what it was reasonably believed to be by both parties; and that for both parties the guarantee of obligations under a lease with non-existent machines was essentially different from a guarantee of a lease with four machines which both parties at the time of the contract believed to exist: see 269B−F. The non−existence of the subject matter of the principal contract was therefore of fundamental importance to the accessory contract of guarantee, which was accordingly void.

[46] I do not suggest for a moment that a similar analysis can automatically be applied to the present case. Every case turns on its own facts, and there are some obvious differences between the position of the guarantor in Associated Japanese and the position of Mr Collins under clause 10.2 of the Exclusivity Agreement. However, the similarities are in my judgment close enough to suggest that he may well have a sustainable defence of common mistake. Associated Japanese is also of importance because it demonstrates that a defence of common mistake can succeed even if it is on the face of the contract perfectly possible for the defendant to do precisely what he has contracted to do. The contract of guarantee was framed in the widest terms, and there could be no doubt that the lessee had defaulted. Equally there was nothing impossible about the defendant bank paying the sums which had apparently fallen due. Nevertheless, the defence of common mistake succeeded” (emphasis added)

9.13  Mr Lam relies on clause 3.1 of the Facility Agreement, which provides that the Company shall apply all amounts borrowed by it towards financing, directly or indirectly, essentially the acquisition of the Property through the Mortgagee Sale.

9.14  I agree with Mr Lok that the “contractual adventure” in the present case precisely encapsulates the possible non-occurrence of the Mortgagee Sale. The reasons for Steyn J’s conclusion in Associated Japanese Bank set out at Apvodedo §45 cannot apply in the present case, given the express terms of the Facility Agreement. The invalidity of the Mortgagee Sale is considered an event of default and the terms of the Facility Agreement militate against any suggestion that the Original Lenders had acted on the assumption that the validity of the Mortgagee Sale was immune from legal challenge.

9.15  I therefore do not regard the Common Mistake ground to be valid.

10.   Reasons for dismissal of the Summons

10.1  It cannot be disputed that the application to adduce Lee 4^th is an extremely late application and was only pursued in response to Mr Lok’s submissions that there was no evidence on the positive beliefs of Mr Lee and the Original Lenders. I should also point out that the application to adduce Lee 4^th represents a volte face on Mr Lam’s part, as it was originally the position that no evidence was required for Mr Lee to rely on the Common Mistake Ground.

10.2  In my view, Lee 4^th does not have an important effect on the outcome of the Application. It consists primarily of bare allegations. For example, at Lee 4^th §6, it is stated as follows:

“I was in fact labouring under the said assumption/supposition at the time when the Facility Letter was entered into. I believe that the Respondents herein also had the same assumption/supposition.”

10.3  It is for the above reasons that I dismissed the Summons.

10.4  For completeness, I agree with Mr Lam that where, as here, the Original Lenders were able to provide a full response, it seems to me that I should exercise my discretion to allow Mr Lee to rely on the Common Mistake Ground despite it having been raised late: Lau Wang Chi Barry v CGS-CIMB Securities (Singapore) Pte Ltd [2024] 2 HKLRD 81.

11.   Conclusion

11.1  For the above reasons, I dismiss the Application and make an order under Rule 48(7) of BR, authorizing the Original Lenders to respectively present bankruptcy petition against the Applicant forthwith.

11.2  I also make a costs order nisi that Mr Lee is to pay to the Original Lenders the costs of the Application (including any costs reserved) and the Summons, to be taxed if not agreed.