RE LAM KA YUK, JAMES

HCB 5246/2016

[2018] HKCFI 1182

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO.5246 of 2016

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JUDGMENT

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Introduction

1.  This is a bankruptcy petition (“the Petition”) presented by Easy Mount Group Limited (“Easy Mount”), a BVI company, against Mr Lam on the ground that he is unable to pay his debt as demanded by a statutory demand (“the Statutory Demand”) personally served on him on 15 June 2016.

2.  The Statutory Demand is for the sum of RMB60,000,000 (“the Sum”) representing the alleged indebtedness of Mr Lam as guarantor under a Deed of Share Charge (“the Deed”) dated 22 January 2015 whereby Mr Lam guaranteed to pay Easy Mount any sum due by Well Spread Group Limited (“Well Spread”) under a share transfer and guarantee memorandum (“the Memo”) dated 7 January 2015. Lam is the sole owner and director of Well Spread at all material times.

3.  Mr Lam has made no application to set aside the Statutory Demand. Now he disputes his liability under the Deed.

4.  By the consent order granted by Ng J dated 3 April 2017, the deponents of the affirmations filed herein were ordered to attend the hearing to be cross-examined. Pursuant to this order, Ms Kwok and Mr Wang of Easy Mount and Mr Lam were cross-examined on their respective affirmations.

Background facts

5.  The alleged underlying liability arose from the Deed and the Memo.  These two documents aside, there are some related transactions generating other commercial documents. I do not venture to go into any detail concerning such transactions. I shall confine myself to those essential background facts leading to the issue of the Statutory Demand and such facts are supported by documentary evidence and not in dispute.

6.  By the Memo, Well Spread agreed to guarantee certain performances in relation to a proposed acquisition (“the Acquisition”) of the shares or assets of China LNG Corporation Limited (“China LNG”) by PetroAsian Energy Holdings Limited (“PEHL”) on or before 31 July 2015 (“the Deadline”).

7.  PEHL is a company incorporated in Cayman Islands and is listed in the Hong Kong Stock Exchange. China LNG is a private company incorporated in Hong Kong and Mr Lam is its sole director. As at the date of the Deed, Well Spread held 40% shares in China LNG and Easy Mount held 10% shares after acquiring the same from Well Spread by a share and purchase agreement dated 29 May 2014 (“the SP Agreement”) supplemented by another agreement dated 29 September 2014 in consideration of RMB 30 million (“the Supplemental Agreement”). Easy Mount acquired the shares from Well Spread with a view to the Acquisition.

8.  The Acquisition was to be done with the involvement of a BVI company, viz, Perfect Reward Limited (“Perfect Reward”). All the shareholders of China LNG including Easy Mount and Well Spread would transfer their respective shareholdings to Perfect Reward. PEHL would acquire Perfect Reward after it has acquired the entire shareholdings of China LNG.

9.  It is common ground that the Acquisition did not materialize. Easy Mount then claims against Mr Lam pursuant to the Deed in which he guaranteed certain matters to be performed by Well Spread under the Memo. It is necessary at this juncture to look at the relevant provisions in the Deed and the Memo.

10.  The Memo was written in simplified characters of the Chinese language. Easy Mount is Party A and both Well Spread and Mr Lam are Party B. Paragraphs 1 and 2 are as follows:

1.   若中潔能全體股權或資產未成功注入中業能源而終結，或截止2015年7月31日中潔能未能整體成功注入中業能源。乙方將收購甲方所持有中潔能公司10%股權，股權轉讓對價金額不低於¥60,000,000.00（大寫：人民幣陸仟萬元整）。乙方保證甲方轉讓中潔能10%股權之權利不受中潔能內部程式限制，包括但不限於：股東會決議批准、董事會決議批准及股東間的其他約定情形。

2.   如本諒解備忘錄第１條中約定條件成就，甲乙雙方應另行依照上述約定簽訂《股權轉讓協議》。乙方應在第1條所約定強制轉讓條件成就之日起3個工作之日內向甲方支付全部股權受讓對款項。

10.   The relevant part of paragraph 1 is that Party B agreed to purchase the 10% shareholding in China LNG held by Easy Mount (“the Shares”) at a consideration of not less than RMB60,000,000 (“the Consideration”) in the event that the Acquisition could not be completed.

11.  It is noteworthy that in paragraph 2, it is provided that if the condition of the compulsory sale of the Shares is fulfilled, i.e., the non-completion of the Acquisition, both parties shall sign a sale transfer agreement and Party B shall pay all the Consideration within three days from the date of the occurrence of the said condition (“the Payment”).

12.  Clauses 23.1 and 23.2 provide as follows:

23.1   Mr Lam, as primary obligor, hereby unconditionally and irrevocably guarantees to Easy Mount, the due and punctual payment and discharge by Well Spread of all of the Indebtedness.

23.2   If Well Spread defaults in payment or satisfaction of any Indebtedness when due, or when a default has occurred, Mr Lam shall pay to Easy Mount on demand, without set off or other deduction, an amount equal to the amount so unpaid. A certificate by Easy Mount or any person duly authorized by Easy Amount of the amount so payable shall be conclusive unless manifestly incorrect. Easy Mount may make demand on Mr Lam without prior demand on Well Spread.  

13.  “Indebtedness” is defined in clause 1.1(g) as all present and future obligations and liabilities owed from Well Spread to Easy Mount whether actual or contingent, present or future, joint or several (including, but not limited to, any liabilities incurred as a guarantor or surety) and all interest thereon.

14.  There is no dispute that Well Spread did not make the Payment. Easy Mount contends that the Sum is the indebtedness of Well Spread and hence pursuant to clause 23.2 of the Deed, Mr Lam is liable to pay the Sum.

15.  Mr Cheung, for Mr Lam, advances three objections to the Petition. First, he argues that Easy Mount should be held responsible for the non-completion of the Acquisition and by the prevention principle, it cannot seek any relief against Well Spread and thus Mr Lam.

16.  Second, he argues that the alleged debt, not being for a liquidated sum, is not a debt within the meaning of the Bankruptcy Ordinance, Cap. 6 (“the BO”). Third, he contends that there is an arbitration clause in the Deed and the present dispute should be disposed of by way of arbitration.

17.  I should deal with the second ground first, which seems to me to be determinative of the Petition.

18.  Section 6(2)(b) of the BO provides that the debt underpinning a creditor’s petition should be for a liquidated sum payable to the petitioning creditor.  Thus, to succeed in the Petition, Easy Mount must prove the Sum represents a debt being for a liquidated sum.

19.  Mr Cheung submits that under the Memo, the parties are yet to enter into a share transfer agreement and Easy Mount remains to be the registered owner of the Shares. Easy Mount has not pressed for specific performance of the Memo. In the circumstances, there is no reason why the consideration of the transfer of the Shares has become a debt.

20.  Mr To, for Easy Mount, submits that Easy Mount primarily relies on the default in payment on the part of Well Spread in respect of the Consideration within 3 days after the Deadline. He argues that Well Spread did not pay the entire sum of the Consideration and indeed any part thereof and hence the Sum has become an amount equal to the amount so unpaid by Well Spread which Mr Lam guaranteed to pay Easy Mount under clause 23.3 of the Deed.

21.  Mr To continues to submit that the letters from Messrs Chiu, Szeto & Cheng issued to Mr Lam on behalf of Easy Mount dated 21 September 2015 and 14 March 2016 (collectively “the Letters”) are certificates under clause 23.2 of the Deed and they should be conclusive evidence of the amount so payable by Mr Lam.

22.  I cannot accept his submission. The factual basis of his submission is incorrect. In my judgment, on a true and proper construction of clause 2 of the Memo, I do not think that Well Spread was obliged to pay RMB 60 million to Easy Mount within 3 days from the Deadline. RMB 60 million is not the Consideration. It is merely the minimum amount of the Consideration to be agreed on by the parties. The parties could agree on any amount not less than RMB 60 million. There is no suggestion that the actual quantum of the Consideration is readily ascertainable. There is no evidence that the parties have come to any agreement as to how the ultimate amount was to be fixed as the Consideration. There is no evidence that as at the time of the issue of the Letters, the parties had come to any agreement as to the exact amount of the Consideration.

23.  It should be noted that under clause 2 of the Memo, what Well Spread was required to pay is the Consideration and not the minimum amount of the Consideration. If there is not any definite amount of the Consideration having been fixed by agreement, the minimum amount of RMB 60 million cannot be deemed to be the agreed amount.

24.  I can accept that it is not necessary for the parties had to first enter into a share transfer agreement before the obligation of the Payment could arise. There is no temporal requirement as to when they have to sign a share transfer agreement. So long as the condition of the compulsory sale occurs, within three business days thereafter, Well Spread has to pay the Consideration with or without a written agreement. Still, before Well Spread can do so in such an event, there must be a consensus about the quantum of the Consideration.

25.  I have not lost sight of the fact that thus far Well Spread has not raised any objection to the alleged transfer price of RMB 60 million and that RMB 60 million should be the minimum amount that Well Spread has to pay for the Shares anyway. However, I cannot rewrite the contractual provision so as to impose an obligation on Well Spread to pay the minimum amount of the Consideration within 3 days from the occurrence of the condition for the compulsory sale in the absence of any agreement of the exact amount of the Consideration.  

26.  To conclude, the Sum is not the amount unpaid by Well Spread and it follows that Mr Lam is not liable to pay the Sum to Easy Mount either.

27.  The Letters seemingly provides Easy Mount a shortcut. I can accept that there is no specific requirement as to how a certificate under clause 23.2 should be issued.  Nor is the format of the certificate to be issued thereunder stipulated. Arguably, Easy Mount can issue such a certificate by way of letters.

28.  Nevertheless, I am unable to accept that the Letters could be conclusive evidence that the Sum is payable by Mr Lam. In the first place, in both of the Letters, it was alleged that Well Spread failed to pay RMB 60 million on 31 July 2015 pursuant to the Memo. Thus, it was alleged that Mr Lam is liable to pay the Sum in accordance with the Deed.

29.  It can be seen that the same factual mistake was made in the Letters. The Consideration not having been fixed by agreement, Well Spread was not liable to pay Easy Mount for the transfer of the Shares at all. In any event, the obligation to pay on the part of Well Spread did not arise on 31 July 2015 under the Memo. The time now contended by Mr To that Well Spread had to pay is 3 days from the Deadline and not 31 July 2015.

30.  I can then come to the conclusion that the information contained in the Letters including the alleged amount payable by Mr Lam is manifestly incorrect. They cannot be conclusive and is open to challenge.

31.  Having concluded that the Sum, not representing a liquidated sum, is not a debt within the meaning of the BO, the Petition falls to be dismissed.

32.  For completeness, I proceed to consider the two other objections mounted by Mr Cheung.

The prevention principle objection

33.  In making this objection, Mr Lam relies on a document written in the Chinese language entitled “Letter of Promise”. The document bore his signature and was dated 22 January 2015. It was addressed to Easy Mount and by this document, Mr Lam gave an undertaking to Easy Mount to complete four matters in three days’ time. In simple terms, the four matters related to the four transfers by the four shareholders of China LNG including Well Spread and Easy Mount all of their respective shares to Perfect Reward. It was further provided that in the event that any loss has been caused by breach of any of his undertaking given, Mr Lam should fully compensate Easy Mount. On the other hand, if Easy Mount causes any delay to the Acquisition, Easy Mount should bear all the resultant loss.

34.  The crux of this objection is that Easy Mount had been late in its payment for the Shares and this delay badly affected the progress of the Acquisition and eventually led to its failure/non-completion.

35.  Mr Lam also blames Ms Kwok, chairman of Easy Mount, for causing the failure.

36.  Mr Cheung submits that, due to the prevention principle, Easy Mount should not be allowed to hold Well Spread or Mr Lam liable for the obligations under the Memo or the Deed by reason of its own contribution to the failure of the Acquisition.

37.  I can see no merit in this ground. Ms Kwok was cross-examined and I do not think that there is anything in her oral evidence of assistance to the case of Mr Lam.

38.  Mr To argues that the document is not binding on Easy Mount. The undertaking was given by Mr Lam to Easy Mount and not the other way round. This is so despite the assertion contained in the document that Easy Mount should bear all the loss if it causes any delay in the Acquisition.

39.  I agree with Mr To. The undertaking was given by Mr Lam only without any conditions even if its content was drafted by the representative of Easy Mount. However, with or without the undertaking of Easy Mount in this document, if the non-completion of the Acquisition was indeed caused by the delay in payment by Easy Mount, I fail to see why Easy Mount should not be held liable for any loss suffered by Well Spread under the SP Agreement and/or the Supplemental Agreement.

40.  More fundamentally, I can see no causal link between the alleged delay in payments and the non-completion of the Acquisition at all. Even on his own evidence, Easy Mount fully paid for the Shares in late April 2015.  The agreement relating to the Acquisition (“the Acquisition Agreement”) was entered into on 24 April 2015.  The Acquisition was expected to take place on 30 September 2015. Well Spread and Mr Lam did not find it necessary to amend the Memo and the Deed so as to extend the Deadline. I accept Mr To’s submission that any delay in payment should be water under the bridge and cannot possibly be the cause of the non-completion of the Acquisition on the Deadline.

41.  Furthermore, as pointed out by Mr To, Mr Lam actually sent an email dated 1 March 2016 to Ms Kwok and said that the Acquisition was cancelled because an IPO would be in the best interest of the shareholders of China LNG. Mr Lam made no complaint about the alleged delay and no accusation that East Mount caused the non-completion of the Acquisition on the Deadline.

42.  In his affirmation, Mr Lam explained the circumstances under which parties agreed to terminate the Acquisition Agreement at the end of 2015 and early 2016. He said that the prevailing economic conditions have changed drastically and it would be advisable to terminate the Acquisition Agreement.

43.  In the premises, on the evidence, I am not satisfied that it is arguable that the non-completion of the Acquisition on the Deadline was due to the lateness of payment of East Mount for the Shares. I reject the prevention principle objection without hesitation.

The arbitration clause

44.  Mr Cheung relies on clause 10 of the Memo which is an arbitration clause stipulating that all disputes relating to or caused by the Memo should be resolved by arbitration. Mr Cheung argues that without any determination of their dispute by arbitration, no indebtedness within the meaning of the Deed can be established.

45.  I invite the parties to a recent judgment of Harris J in Lasmos Limited v. Southwest Pacific Bauxite (HK) Limited, HCCW 277/2017 [2018] HKCFI 426 and ask for their assistance by way of written submissions. There, the Companies Judge reviewed a number of authorities, both local and oversea, concerning the impact of an arbitration clause in an agreement giving rise to a debt relied on a petitioning creditor in his petition has on the exercise of the court’s discretion to make a winding-up order.

46.  In the end, at §31, the Companies Judge concluded that he should depart from the approach in the earlier Hong Kong decisions and held that if a company disputes that the debt relied on by the petitioner and the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt, and the company takes the steps required under the arbitration clause to commence the contractually mandated dispute resolution process and files and affirmation in accordance with Rule 32 of the Companies (Winding up) Rules, Cap. 32H demonstrating this, the petition should generally be dismissed and there may be exceptional cases in which a stay is more appropriate.

45.   The Companies Judge’s conclusion is supported by cogent reasons and perspicacious analysis. However, given my conclusion on the existence of a debt, I do not find it necessary to make my own conclusion on the effect of the arbitration clause here. 

46.   In any event, Well Spread has never disputed liability to pay the Sum let alone having taken any steps to commence arbitration, I do not think Mr Lam can rely on the arbitration clause for a dismissal or a stay of the Petition.

Conclusion and order

47.  For the reasons given, I am not satisfied that Easy Mount has established the debt underpinning the Petition. Accordingly, the Petition must be dismissed.

48.  There is no reason why costs should not follow the event. I make an order nisi that East Mount should pay Mr Lam his costs of the Petition including any costs previously reserved, to be taxed if not agreed.

49.  Lastly, I thank both Mr To and Mr Cheung for their assistance in this matter.