THE HONG KONG AND SHANGHAI BANKING CORPORATION v. SMI HOLDINGS GROUP LTD (FORMERLY KNOWN AS SMI CORPORATION LTD)

HCCW 108/2019

[2019] HKCFI 1948

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 108 OF 2019

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J U D G M E N T

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Introduction

1.  This is a petition filed on 11 April 2019, by the Hong Kong and Shanghai Banking Corporation Limited (“the Bank”) to wind up SMI Holdings Group Limited (“the Company”).  The petition was subsequently amended on 19 June 2019.

2.  The Company was incorporated in Bermuda and is listed on the Main Board of the Stock Exchange.  The Bank relies on Section 327(3b) of the Companies (Winding Up and Miscellaneous Provisions) (Cap.32) Ordinance and in that regard, it has to show a sufficient connection to the jurisdiction.

3.  No point was taken by the Company that the Bank was unable to demonstrate such a connection. Having regard to both the amended petition and the evidence before me, I conclude that a sufficient connection has been shown such that the court can exercise its jurisdiction.

4.  On 4 July 2018, the Bank served a statutory demand in the sum of approximately HK$12.7 million on the Company.  The Company neither complied with the demand nor did it seek an injunction to restrain the issuance and/or presentation of a winding-up petition.

5.  I should point out that at the hearing today Mr Vincent Law, solicitor advocate, appeared for a supporting creditor.  His position, essentially, was that should I find that there was an issue with the Bank’s locus to present the petition, it would seek to substitute itself as the petitioner.  The Company made written representations on this point.  For reasons which I will explain below and which are self-explanatory, the point does not arise and therefore I do not deal with it.

Basis of debt

6.  As at April 2019, it is said that the Company owed some HK$14 million to the Bank. At the material times, the Company held a current account with the Bank (“the Account”).  Another of its subsidiaries also held an account with the Bank. This is something which I will explain later but has no direct relevance.

7.  In June 2018, the Company issued a cheque in the sum of HK$14.8 million-odd to one Mega-Vision Project Workshop (“Mega-Vision”) whereupon the said cheque was cleared on or about 14 June 2018.  There is some possible dispute about the exact date but I will proceed as the Bank has suggested, namely, using 14 June 2018 (being the date the most advantageous for the company) for the purpose of the present argument.

8.  As there was only about HK$2.2 million in the Account prior to the cheque being cleared, this resulted in an overdraft of some HK$12.6 million.  This overdraft was provided pursuant to the Bank’s general conditions and terms which applied by reason of the agreement as between the Bank and the Company when the Company opened the Account.

9.  In August 2018, the Bank commenced High Court Action 1817/2018.  The cause of action was essentially for recovery on the same matters which it now relies on in the petition.  The Bank says that in the light of the financial information and conditions of the Company, it sought to commence the present petition rather than to pursue the High Court action instead.

Applicable test for winding-up petition

10.  The court’s approach in assessing whether a bona fide dispute on substantial grounds has been made out is well established.  As summarised by Kwan J, (as Kwan VP then was) in Re Hong Kong Construction (Works) Limited (Unreported, 7 January 2003, HCCW 670/2002), at paragraph 6:

“(i)  The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds.  In this context, “substantial” means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(ii)  The court should look at the company’s evidence against so much of the background and evidence that is not disputed and not capable of being disputed in good faith;  in other words, the evidence is not to be approached with a wholly uncritical eye.

(iii)  The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information had been sought by the other side.  It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(iv)  The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists.  In doing so, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company.  Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds”.

The company’s defence and request for an adjournment as summarised

11.  Mr Tom Ng, appearing with Ms Jasmine Cheung, in a skilful and persuasive submission submitted that:

(1)  there was a bona fide dispute on substantial grounds arising from whether or not the cheque was, as a matter of fact, countermanded before it was cleared on 14 June;

(2)  that there was either a defence or a bona fide cross-claim arising out of the bank’s breach of Quincecare duty given the suspicious circumstances in which the cheque was issued and cleared;

(3)  that in any event, even if the Bank had established locus, an adjournment should be granted on the basis that there could be a restructuring and that it would otherwise be to the advantage of the unsecured creditors that there be an adjournment.

12.  Before I deal with those arguments, it is of note that the Company’s evidence consists of two short affirmations from one Mr Kenneth Jack Shang, who is now an executive director of the Company.  As he makes clear in his 2nd affirmation, he joined the company since around January 2019, which is after the material events.

13.  The source of his knowledge on a number of matters which are germane to the present proceedings is not entirely clear; to the extent that he does not identify a source or that his belief is based on contemporaneous documents.  This would obviously have a bearing on the weight that the court is to give to his evidence.  This is a matter which of course goes to issue (1) and issue (2), rather than issue (3).

Issue (1) – the alleged countermand

14.  Mr Shang says that shortly after 12 June 2018, he made verbal and written requests by email to the Company’s then relationship manager with the Bank, one Ms Winnie Chan, to stop payment of the cheque on and after 13 June 2018, but that there was no response at all from the Bank on such request.  The reason for seeking this countermand was that on or about 12 June 2018, it is said that the accounting staff members of the Company, including herself and its executive director, one Mr Ethan Pan, had been misled by one Dr Allan Yap, who was the former director and chairman of the company, into thinking that the Company owed monies to Mega-Vision.  It is in those circumstances that the Company drew the cheque in favour of Mega-Vision.

15.  It is said that shortly afterwards, on or about 12 June 2018, Mr Ethan Pan of the Company, upon verification and confirmation with the senior management of the Company (although it is not specifically stated who these gentlemen or ladies might be) realised that there was in fact no such debt owed to Mega-Vision; and that despite repeated requests and demands by the Company and/or Miss Yuki Yung and/or Mr Ethan Pan on behalf of the Company, Dr Allan Yap failed or refused to return the cheque to the Company.

16.  It is of significance that there is no evidence emanating from Miss Yuki Yung and no explanation has been provided by the Company as to why this is the case save that she has left the employment of the Company.  The Company seeks to suggest that this is a matter which should be revisited at trial and it may then have the benefit of cross-examining the Bank’s witnesses as well as seeking a subpoena of non-co-operating witnesses, presumably Miss Yuki Yung as well as perhaps other former officers.

17.  It seems to me that in circumstances where the Company has not adequately explained why it was not possible to seek evidence by way of affirmation from Miss Yuki Yung or whether she was willing to otherwise give evidence at trial, this would not be a factor militating in favour of a dismissal of the petition.  Notwithstanding that the burden  on the Company to establish a bona fide dispute on substantial grounds is not high, nevertheless the burden squarely falls upon it.

18.  I have carefully considered the email chain which has been exhibited as between the Bank and the Company immediately following the 12 June 2018 issuance of the cheque and note that:

(1)  there is nothing on the point prior to 15 June 2018, which was of course after the cheque had already been cleared; and

(2)  perhaps more importantly, there was no contemporaneous complaint that a timely request for countermand, (ie 12 or 13 June 2018) had been made but ignored.  If such a request had been made and ignored, common sense would suggest that this would have been raised at the time and far more would have been said by way of complaints or criticisms which do not appear in the correspondence.

19.  All in all, I am not satisfied that on issue (1) the Company has demonstrated a bona fide dispute on substantial grounds.

Issue (2) - alleged breach of Quincecare[1] duty

20.  The Company relies on this to either demonstrate that the Bank, by being in breach of its Quincecare duties, has shown a bona fide dispute on substantial grounds, or perhaps, more accurately, that it has demonstrated a bona fide cross-claim for damages, which, if made out, would extinguish the bank’s claim[2].

21.  Both parties were content for me to rely on the recent decision of Anthony Chan J in PT Tugu Pratama Indonesia v Citibank NA [2018] 5 HKLRD 277; in particular under the heading “Duty of care owed by banks to its customers” and, in particular, paragraphs 47 to 55, as a convenient summary of the general applicable principles:-

Duty of care owed by a bank to its customers

47.  The guiding authorities are not in dispute.  However, the parties differ materially on how the authorities are to be understood.  I start with the proposition that the relationship between the customer payer and the paying bank to which the payer delivers a money transfer order is that of principal and agent – the paying bank making payment on behalf of its principal, the payer.  In carrying out the transfer the bank owes the customer the usual banker-customer duty to exercise reasonable care and skill, which co-exists under both contract and in tort: see Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363 at 375-376 per Steyn J (as he then was); Brindle & Cox’s Law of Bank Payments, 5th edn, at [3-102].

48.  Generally, a bank is bound by the customer’s instruction to make payments.  In the first instance judgment in Lipkin Gorman v Karpnale Ltd [1987] 1 WLR 987 (a case where a solicitor misused his authority over the client’s accounts to obtain funds to satisfy his gambling habit), Alliott J held at 1006C-E :

“(1) the bank is entitled to treat the customer’s mandate at its face value, save in extreme cases; (2) the bank is not obliged to question any transaction which is in accordance with the mandate, unless a reasonable banker would have grounds for believing that the authorised signatories are misusing their authority for the purpose of defrauding their principals or otherwise defeating his true intention; (3) it follows that, if a bank does not have reasonable grounds for believing that there is fraud, it must pay; (4) mere suspicion or unease do not constitute reasonable grounds and are not enough to justify a bank in failing to act in accordance with a mandate; and (5) a bank is not required to act as an amateur detective.”

49.  In Quincecare, supra, at 376e to h, Steyn J held :

“In judging where the line is to be drawn there are countervailing policy considerations. The law should not impose too burdensome an obligation on bankers, which hampers the effective transacting of banking business unnecessarily. On the other hand, the law should guard against the facilitation of fraud, and exact a reasonable standard of care in order to combat fraud and to protect bank customers and innocent third parties. To hold that a bank is only liable when it has displayed a lack of probity would be much too restrictive an approach. On the other hand, to impose liability whenever speculation might suggest dishonesty would impose wholly impractical standards on bankers. In my judgment the sensible compromise, which strikes a fair balance between competing considerations, is simply to say that a banker must refrain from executing an order if and for as long as the banker is ‘put on inquiry’ in the sense that he has reasonable grounds (although not necessarily proof) for believing that the order is an attempt to misappropriate the funds of the company. … And, the external standard of the likely perception of an ordinary prudent banker is the governing one.” [emphasis added]

50.  In Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, CA, at 1356E-G, May LJ referred with approval to Steyn J’s analysis in Quincecare :

“For my part I would hesitate to try to lay down any detailed rules in this context. In the simple case of a current account in credit the basic obligation on the banker is to pay his customer's cheques in accordance with his mandate. Having in mind the vast numbers of cheques which are presented for payment every day in this country, whether over a bank counter or through the clearing bank, it is, in my opinion, only when the circumstances are such that any reasonable cashier would hesitate to pay a cheque at once and refer it to his or her superior, and when any reasonable superior would hesitate to authorise payment without inquiry, that a cheque should not be paid immediately on presentation and such inquiry made. Further, it would, I think, be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customers’ cheques to him before they are paid. In this analysis I have respectfully derived substantial assistance from the material parts of the judgment of Steyn J in [Quincecare] …” [emphasis added]

51.  In the same case, Parker LJ held at 1378B-D :

“The question must be whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded, or, in this case, that there was a serious or real possibility that Cass was drawing on the client account and using the funds so obtained for his own and not the solicitors’ or beneficiaries’ purposes. That, at least, the customer must establish. If it is established, then in my view a reasonable banker would be in breach of duty if he continued to pay cheques without inquiry. He could not simply sit back and ignore the situation. In order so to establish the customer cannot, of course, rely on matters which a meticulous ex post facto examination would have brought to light. Such an examination may well show that it was indeed obvious what Cass was doing, but in the present case the inquiry is simply whether Mr Fox [the branch manager of the bank], and therefore the bank, had, on the basis of the facts and banking practices established at the time, reason to believe that there was a serious possibility that Cass was misusing his authority to sign under the mandate in order to obtain and misapply the cash handed to Chapman [a clerk employed by the solicitors] in fraud of the solicitors.” [emphasis added]

52.  In assessing whether the bank was put on inquiry, factors such as (i) the standing of the corporate customer; (ii) the bank’s knowledge of the signatory; (iii) the amount involved; (iv) the need for a prompt transfer; (v) the presence of unusual features; and (vi) the scope and means available to the bank for making reasonable inquiries are relevant: Quincecare at 377a-c and DEX Asia Ltd v DBS Bank (HK) Ltd [2009] 5 HKLRD 160 at §56 where Deputy Judge Chua SC emphasised the need to consider the particular facts before the court

53.  The authorities show that the threshold which triggers the banker’s duty to make inquiry is high.  In Quincecare, Steyn J held at 377a-c and 377e-f :

“Everything will no doubt depend on the particular facts of each case. ... But there is one particular factor which will often be decisive. That is the consideration that, in the absence of telling indications to the contrary, a banker will usually approach a suggestion that a director of a corporate customer is trying to defraud the company with an initial reaction of instinctive disbelief.

…

… trust, not distrust, is also the basis of a bank’s dealings with its customers.  And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.”

54.  Similarly, in Lipkin Gorman (CA), May LJ held at 1356F-G that :

“it would … be only in rare circumstances, and only when any reasonable bank manager would do the same, that a manager should instruct his staff to refer all or some of his customers’ cheques to him before they are paid.”

55.  Recently, in Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2018] 1 WLR 2777, CA, putting the Quincecare duty in context, Sir Geoffrey Vos C held at 2810G to 2811C that :

“First, we were told by Mr Miles that this is the first case where the court has found against a bank in respect of the Quincecare duty. That is because it will be a rare situation for a bank to be put on inquiry; there is a high threshold. … the banker’s duty only arises where, abnormally, the banker is put on inquiry by the particular circumstances. As Steyn J said in Quincecare: trust, not distrust, is the basis of a bank’s dealings with its customers; and full weight must be given to this consideration before one can conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme to defraud the company.” [emphasis supplied]

22.  Both Mr Ng and Mr Wilson Leung, who argued the case for the Bank with skill and eloquence, cited other cases.  I hope I shall be forgiven if I do not cite them all in my judgment.  Ultimately, and to paraphrase the words of Steyn J (as Lord Steyn then was) in Quincecare itself, “everything will no doubt depend on the particular facts”.  While the general principles are well settled, it is the application of those principles which, on occasion, give rise to complicated issues.

23.  I note that in some cases, it has been suggested that the banker’s duty to make inquiries was described as “high” or in other cases that there was a reference to a “high threshold”.  For my part I consider that whatever epithet one chooses to use to describe their duty, this does not for practical purposes assist the court in assessing whether a particular bank has been put on inquiry in a particular case.  I will have regard to the general principles and apply them to the facts on the evidence before me.

24.  Amongst others, Mr Ng has relied on the following red-flags which he submitted ought to have put the Bank on inquiry on the facts of the present case. 

25.  First, he points to the significant amount of the overdraft, in the sense that the bank balance shifted dramatically from a positive HK$2 million to minus HK$12 million.  This amounted to what he called a “material departure” from the way in which the account was operated.  In that regard, he sought to highlight the various duties on the Bank, either by reference to sections in the Anti-Money Laundering and Counter Terrorist Financing Ordinance (Cap 615) or other provisions imposed by the Hong Kong Monetary Authority, as informing the common law duty of the Bank, including Quincecare duty.  Insofar as it goes, I agree with that general proposition.

26.  Second, he further points out that it would be odd for the Company to have risked the Bank not honouring the cheque by reason of the discretionary nature of the overdraft.  The Company did not adduce any evidence of the existence of such a fear and therefore this is pure surmise.  In any event, given that the Company had a turnover (on a consolidated basis taking into account its subsidiaries) of over HK$3 billion, profits of approximately HK$300 million and liquidity in excess of HK$ 200 million, that would seem unlikely.  The relatively attractive interest rate which applied by reason of the overdraft compared with the appreciation of the then credit risk would lead one to, on balance, infer that such refusal was unlikely or, at the very least, the Bank would have called to inform the Company before dishonouring the cheque.

27.  Third, he highlighted the amount of the overdraft, not necessarily in absolute terms but in relative terms comparing to what it was previously, and suggested that the overdraft figures previously had never reached such a high number.  If the Account was the only account of the Company, I would see great force in that submission, but it seems to me that the court should not look at that piece of evidence in isolation.  One should bear in mind that the Bank was not the principal banker to the Company and the Bank would have known about the overall financial resources available to the Company and those are relevant when assessing whether or not the amount of overdraft to the tune of HK$12 million is something which should have raised suspicion.

28.  I have also considered and perused previous bank statements of the Account and it is noteworthy, as Mr Leung pointed out, that in the month preceding the payment, amounts in the sum exceeding hundreds of millions went out of the Company’s Account.

29.  Fourthly, the Company points to the suspicious nature of the payment coupled with the lack of a call on the part of the Bank to seek confirmation.  In his 2nd affirmation, Mr Shang says this, “To the best of my knowledge, the previous practice of the petitioner was that the petitioner would seek the company’s verbal confirmation before clearing a cheque, especially a cheque of such significant amount”.  This is reflected by the email from Miss Yuki Yung to Mr Schumann Wong, dated 15 June 2018, stating, ‘Why this client has no verbal test for the 40 million cheque’?”

30.  The evidence of Mr Schumann Wong, who was an associate relationship support manager of the Bank, was that, “Although I may have on some occasions called the company to request that they confirm that they will cover an overdraft, the decision of whether to grant an overdraft is entirely at the petitioner’s discretion, as provided in the petitioner’s general conditions”.

31.  I accept that the failure to double check by way of making a call beforehand as a matter of general principle may be one of many factors that the court would consider before deciding whether a Bank was in breach of its Quincecare duties.  On the present facts and on the evidence before me, I do not consider, having regard to the other factors, that this in itself should tip the balance.  In any event, it would appear that the said practice only relate to the amount of the cheque rather than whether or not there would be an overdraft.

32.  I have also considered for present purposes that the rate of interest charged by the Bank, by reason of this being an overdraft, not to be a red-flag especially if one considers the financing rate of the Company which is disclosed in the audited accounts.  That rate is only 2 or 3 percentage points higher than the rate charged by the Bank.

33.  I accept Mr Ng’s submission that the mere fact that the Company was listed and therefore has certain risk controls in place, or that the fact that the Company’s accounts are audited, by themselves, does not negate a duty on the part of the Bank.  However, I consider that these are at least relevant to the overall factual matrix.

34.  Finally, the Company points to incidents which happened in 2016, by reference to monies which were paid out not from the Account, but rather, another account held by one of its subsidiaries with the Bank.  It is said that this, combined with the June 2018 cheque should have alerted the Bank.  In my view, this is either neutral or might even be said to be a factor militating against the Company’s case.

35.  If there was a problem with those payments (and on the state of the evidence it is not entirely clear what it is), the fact that there was no reaction on the part of the Company, its directors (whether executive or otherwise), or its auditors would be something which a reasonable bank would take into account.  Again, I accept that this is not a conclusive answer or a pointer to the fact that a bank cannot owe a duty but it is certainly something which is relevant.

36.  Finally, I should point out that the fons et origo of the suggestion that the Bank was in breach of Quincecare duty is of course predicated upon the assumption that some sort of fraud had been exercised as against the Company. The account of such a fraud in the evidence is rather sparse.  There is no explanation, for example, as to why it was originally believed that the company owed such monies to Mega-Vision.  There is also no explanation as to why no proceedings have been brought against Dr Allan Yap directly, since he is a person who appears to be responsible for this “mistake” nor, indeed, Mega-Vision, the recipient of such funds which, on the Company’s case, would have been paid under a mistake of fact.

37.  Be that as it may, for the purpose of the present proceedings, I have assumed that the Company has demonstrated a triable issue that it was indeed the victim of a fraud and therefore, and on the basis of that premise, concentrated on whether the Bank ought to have been alerted.

38.  My conclusion is that having regard to the evidence before me, it could not be said that the Bank should have considered there to be “a serious or real possibility albeit it not amounting to a probability” that the Company might be defrauded. 

39.  For the avoidance of doubt, had I not otherwise been persuaded by Mr Leung that the Bank was able to establish its locus, I would not have considered that the “admission” in the form of the corporate announcements would have demonstrated that the Bank had proved its locus.  I therefore find issue (2) against the company.

Issue (3) – should there be an adjournment?

40.  IBy reference to a number of cases, including Re APP (Hong Kong) Limited [2005] 1 HKLRD 272 and Re RNA Holdings Ltd (Unreported, HCCW 388/2004, 23 August 2004), the court is empowered even when the petitioner has demonstrated a locus to seek an immediate winding-up order, to adjourn the petition for a short, or, on some occasions, not so short period.  This is because winding-up proceedings are class remedy proceedings and therefore one has regard to the interests of the unsecured creditors.

41.  For this purpose I have considered:

(1)  the evidence submitted by the Company, and

(2)  I had sought an indication from the Bank as to whether other creditors had filed a notice of intention to appear in the proceedings and it would appear that the only two would be the Bank itself as well as Mr Law’s client who both sought a winding-up order today.  I had considered whether it would be more appropriate to simply deal with the question of locus today and, in the event that I reach the conclusion which I have now reached, to simply adjourn this to the following Monday morning call-over list before the companies’ judge.

42.  Having regard to the state of evidence before me and the position taken by the supporting creditors, it seems to me that that would not be necessary and would simply incur further costs.

43.  None of the grounds advanced by the Company succeed. I would have granted a winding up order save that the parties then indicated to me they wished some time to discuss. I will make a winding up order at 5 p.m today unless I am informed of there being an agreement for a short adjournment of the petition in which case I will restore it for further conduct of the proceedings.

44.  It remains for me to express my gratitude for Mr Wilson Leung for the Bank, and Mr Tom Ng and Ms Jasmine Cheung, for the Company, for their able assistance.