RE FRIEDMAN HOWARD BARRY

HCB 1854/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1854 OF 2016

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J U D G M E N T

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Introduction

1.  There is before this court a bankruptcy petition dated 16 March 2016 (“Petition”) presented by Citibank NA (“Bank”) against Mr Friedman Howard Barry (“Debtor”).  The Petition is based on the non‑compliance with a statutory demand dated 19 February 2016 (“statutory demand”) served personally on the Debtor for the sum of over HK$3.9 million plus interest (“Debt”).  There was no application by the Debtor to set aside the statutory demand.[1]

2.  After the service of the statutory demand, the Bank, on 8 March 2016, uplifted a deposit maintained by Interpro Manufacturing Limited (“Interpro”) in the sum of slightly over HK$2 million and set it off against the Debt.  Hence, on the Bank’s case, the Debt has been reduced to around HK$1.923 million.

Background

3.  The Bank’s claim arose out of the indebtedness owed by Interpro of which the Debtor was a 70% shareholder[2] and director.  At all material times, the Bank had extended overdraft and trade finance facilities to Interpro (“Facilities”)pursuant to facilities letters and supplemental facilities letters dated between December 2006 and November 2014.

4.  In 2003, the Debtor’s wife (“Tse”) replaced him as director of Interpro.

5.  Notwithstanding the aforesaid change, on 24 November 2004, the Debtor and Mr Sun Kai Wah (“Sun”), another director and shareholder of Interpro, executed a guarantee and indemnity (“1^st Guarantee”) in favour of the Bank pursuant to which they became jointly and severally liable as the “sole principal obligor” for all moneys and liabilities owed by Interpro to the Bank.

6.  On 23 February 2010, Sun alone signed a Treasury Authorisation in respect of treasury transactions (“Treasury Authorisation”) purportedly on behalf of Interpro and produced it to the Bank.  The Treasury Authorisation on its face informed the Bank of the authority of:

(1)     Sun, by himself, to give written instructions to the Bank and execute agreements relating to any treasury, investment, hedging or similar products including inter alia spot transactions and derivatives transactions (“Treasury Transactions”) ;

(2)     Mr Chung Chi Man (“Chung”), Interpro’s financial controller, by himself, to give oral instructions relating to Treasury Transactions as afore‑defined.

7.  Pausing here, one of the Debtor’s complaints in the present case is that, while the Treasury Authorisation took the form of “extracts” of Interpro’s board resolutions, the company’s board of directors had never met or authorised any single director or employee to trade in Treasury Transactions and the Bank had made no effort to satisfy itself that the board had so authorised.

8.  On 17 September 2014, the Debtor alone executed another guarantee and indemnity (“2^nd Guarantee”) in favour of the Bank.  Under the 2^nd Guarantee, he became liable as the “sole principal obligor” for all moneys and liabilities owed by Interpro to the Bank, including all obligations under the 1^st Guarantee but excluding liabilities arising from the so‑called “Treasury Facility”.  The relevant terms are as follows:

“In consideration of Citibank releasing the Guarantor(s) from his obligations under the Guarantee & Indemnity dated November 24, 2004 (the “Original Guarantee”) as from the date of this Guarantee, the parties hereto agree that this Guarantee shall take effect retrospectively from the date of the Original Guarantee.  The parties further agree, for the avoidance of doubt, that the Guaranteed Obligations under this Guarantee include, without limitation, all the obligations of the Guarantors under the Original Guarantee.

Notwithstanding any other terms of this Guarantee (which may be amended from time to time, including but not limited to the description of the Facility or Facilities as referred to in the “Facility” section of the Annex), the Facility and Facilities shall exclude any portion/sub‑limit of each credit facility that has been or is or may be available for any of the spot transactions or derivative transactions or any other treasury or investment products (each portion/sub‑limit of each credit facility available for any of such transactions or products, collectively, the “Treasury Facility”).  For the avoidance of doubt, even if no Facility is identified or if “All” is specified or if any of the Treasury Facility is included in the Annex for Facility/Facilities, the Facility and Facilities shall be deemed to have excluded the Treasury Facility (if applicable).”

9.  Put it simply, if Interpro had incurred liabilities for any spot transactions, derivative transactions or any other treasury or investment products, in other words, Treasury Transactions, such liabilities would in principle not be covered by the 2^nd Guarantee.

10.  On 30 October 2014, shortly after the Debtor had executed the 2^nd Guarantee, Sun on behalf of Interpro entered into what the Debtor described as the first of 4 “accumulator contracts” with the Bank.  The contracts were annexed to the Debtor’s notice of opposition under r 68 of the Bankruptcy Rules (“Notice”). The “Subject” of the contract dated 30 October 2014 was described as “FX TRANSACTION — DIGITAL FORWARD WITH EUROPEAN KNOCK‑IN”, whatever that might be intended to mean.  The “Subject” of the other contracts was described as “STRIP OF CNY BULLISH (DELIVERABLE)”, again whatever that might be intended to mean.

11.  According to its audited financial statements for the year ended 31 December 2014, Interpro had incurred liabilities from derivatives financial instruments to the tune of HK$29.17 million.

Deliberation

12.  It is well‑established that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Wong Lo Fung v AXA China Region Insurance Co Ltd unrep; HCB 1864/2013; 29 August 2014 at [25]–[26].

13.  It is equally well‑established that bankruptcy proceedings are summary in nature and are not intended to be used for the purpose of debt collection.  Where there is a bona fide dispute turning to a substantial extent on disputed questions of fact which require viva voce evidence, such disputes could not properly be decided on a Petition in which case the Petition should be dismissed: Re Yuen Mun Wah (debtor) [2015] 2 HKLRD 108.

14.  The jurisdiction to make a bankruptcy order is only exercised in very clear cases: Re Leung Cherng Jiunn (debtor) [2016] 1 HKLRD 850.  At [27(5)], Kwan JA set out her understanding of the law in this way:

“(5) This is not to say it should be easier for a creditor to succeed in a petition than in seeking summary judgment in a civil action, notwithstanding the higher threshold test for resisting a petition in the sense as explained above. It is well established that petitions are not meant to be used for the purpose of debt collection and the winding‑up or bankruptcy jurisdiction of the court would be exercised only in very clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the court will dismiss the petition. And if there is an abuse of process in invoking the jurisdiction of the court in an improper manner, the petitioning creditor may be ordered to pay indemnity costs.”

15.  In the present case, the Debtor opposes the Petition on the basis that there are bona fide disputes to the Debt on substantial grounds.  The grounds are set out in the Notice which has been verified on oath by the Debtor and further details have been provided in his 2^nd affidavit.  The Debtor seeks the dismissal of the Petition. 

16.  The Notice is a lengthy document.  This court does not intend to set out each and every conceivable point raised in the Notice.  Suffice it for the present purpose to say that the Debtor’s major complaints are as follows:

a.       In reality, Interpro’s indebtedness related to Sun’s unauthorised trading in “accumulator contracts”.  Such indebtedness did not arise from any trade finance facilities and was expressly excluded from the scope of the 2^nd Guarantee.

b.      The Bank negligently failed to make any or any proper enquiries which would have revealed that Interpro’s board of directors had not authorised any single director or employee to trade in “accumulator contracts” on its behalf.  In this regard, the Debtor’s case is backed up by Tse in her 1^st affidavit.

c.       The “accumulator contracts” executed by Sun were not binding on Interpro because (i) the Treasury Authorisation was ineffective owing to the absence of authorisation from the board, as explained above; (ii) an individual director of Interpro i e Sun, has no actual authority to bind the company merely by virtue of holding that office: Northside Developments Pty Ltd v R‑G (1990) 170 CLR 146 at 205; and (iii) a director cannot by his own conduct clothe himself with ostensible authority: Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 [70]–[71].

d.      The Bank applied Interpro’s funds realised from its trade receivables to “pay down” the losses under the “accumulator contracts”, leaving insufficient funds to cover Interpro’s liabilities under its trade finance facilities.

e.       The Bank presented the Petition against the Debtor in circumstances which were manifestly unjust because of its own misconduct or unconscionable conduct in its dealings with Interpro and the Debtor.

17.  As this court understands it, the Debtor’s two principal cases are that (1) the Debt was in reality in respect of Interpro’s liabilities under “Treasury Facility” which was excluded from the 2^nd Guarantee and could not support the present Petition and (2) the 2^nd Guarantee is in any event liable to be rescinded and/or set aside in equity by reason of the Bank’s “misconduct” or “unconscionable” conduct including inter alia its failure to disclose to the Debtor its intention to sell and it did sell highly‑sophisticated and high‑risk “accumulator contracts” to Interpro, as well as its apparent intention and ability to “circumvent” the Trade Facility Exclusion in the 2^nd Guarantee. 

18.  As expected, the Bank disputes the Debtor’s case. In the relatively short affirmation of Ng Hong Wai, the Bank made a number of specific replies to, and denials of, the contents of the Debtor’s 2^nd affidavit and Tse’s 1^st affidavit.

19.  First, the Bank said the Debt represents Interpro’s outstanding liabilities under overdraft and trade facilities as follows:

20.  The outstanding trade facilities are said by the Bank to consist of 3 Import Loans with reference numbers 6475719110, 6474719366 and 6478719625 as follows:

21.  Second, the Bank denied having applied receipts from Interpro’s invoice financing to settle Interpro’s liabilities under Treasury Facility or that Interpro’s default on the overdraft and trade facilities was a direct result of the Bank using such receipts to “pay down” losses on the “accumulator contracts”. 

22.  Third, the Bank said Interpro’s outstanding indebtedness in relation to Treasury Facility was in the sum of US$344,094 (roughly HK$2.7 million), being the Bank’s “unwinding costs”.  It is apparent that the Bank relied on this as further proof that the Debt was unrelated to Interpro’s liabilities under Treasury Facility since the amounts of the two were different.

23.  Fourth, the Bank said it did not unwind any “accumulator contracts” in September 2015, as alleged by the Debtor or at all.  Instead, the Bank only unwound 3 “option contracts” in February 2016.  There is however no explanation from the Bank what those “option contracts” were.  Nor is there any explanation by the Bank as to what happened to the four “accumulator contracts” entered into by Sun on behalf of Interpro.

24.  Lastly, the Bank denied it was obliged to notify the Debtor of Interpro’s “accumulator contracts” with the Bank or its huge losses, on the ground that the Debtor was not a shareholder or director of Interpro at the material time.  Instead, the Bank said it would always contact and did contact Sun and Chung, relying on the Treasury Authorisation and the fact that Interpro’s Treasury Transactions were supported by written confirmations signed by Sun.  The Bank did not suggest it also contacted Tse, another director of Interpro, or informed her of the “accumulator contracts” or Interpro’s any other Treasury Transactions.

25.  Having considered the totality of the evidence, it seems to this court there are serious questions to be answered before it can be satisfied this is a clear case to make a bankruptcy order against the Debtor.  These questions are:

(a) whether the “accumulator contracts” entered into by Sun were duly authorised by Interpro’s board of directors or were otherwise binding on Interpro;

(b) if not, whether the Bank had applied Interpro’s money, whether from trade financing or otherwise, to pay for the losses arising from the “accumulator contracts”;

(c) in any event, whether the Bank had applied Interpro’s ordinary trade receivables to “reduce” the latter’s liabilities under the so‑called “Treasury Facility” with the consequential “increase” of Interpro’s overdraft and trade liabilities;

(d) whether the Bank harboured any intention to sell highly‑sophisticated and high‑risk “accumulator contracts” or other treasury products to Interpro at the time it requested the 2^nd Guarantee from the Debtor; if so whether the Bank owed any obligations of disclosure to the Debtor and the extent of such obligations;

(e) whether the 2^nd Guarantee is liable to be rescinded and/or set aside in equity.

26.  In my judgment, the above questions cannot be satisfactorily answered on the materials presently available or dealt with in a summary manner.  The factual questions are complex, and their resolution would require viva voce evidence to be tested by cross‑examination and with proper discovery given by both parties.  Obviously, the summary procedure of a bankruptcy petition is not suited to resolve these questions.

Disposition and Costs Order Nisi

27.  To conclude, this court is not satisfied a bankruptcy order should be made.  In these circumstances, the Petition against the Debtor should be dismissed and this court shall so order.

28.  There shall be an order nisi that the costs of the Petition, including all costs previously reserved, if any, be to the Debtor, to be taxed if not agreed, with certificate for counsel.