CHINA HEALTH GROUP LTD v. LI HONG HOLDINGS LTD

HCMP 2593/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2593 OF 2016

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REASONS FOR JUDGMENT

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INTRODUCTION

1.  By the originating summons herein dated 27 September 2016, the plaintiff seeks an injunction to restrain the defendant from presenting any petition for the winding up of the plaintiff based on a statutory demand dated 12 September 2016 (“the Statutory Demand”) for an alleged debt in the sum of US$4 million (“the Debt”), on the ground that the Debt is hotly disputed and any petition to wind up the plaintiff based on the Statutory Demand would be an abuse of the court’s process.

2.  The main issue arising for decision is whether there is a bona fide dispute of the Debt on substantial grounds.

3.  At the conclusion of the hearing on 8 February 2017, I informed the parties that I would grant an injunction in terms of paragraph 1 of the originating summons, with reasons to be given later.  This I now do.

BACKGROUND FACTS

4.  The evidence before the court consists of the following affirmations and the exhibits thereto:

(1) On behalf of the plaintiff –

(a) the 1^st and 2^nd affirmations of Mr Chung Ho (“Mr Chung”) dated 13 October 2016 and 17 January 2017 respectively;

(b) the affirmation of Tsui Siu Hung dated 19 January 2017; and

(c) the affirmation of Wong Kin Shing dated 19 January 2017.

(2) On behalf of the defendant –

(a) the affirmation of Mr Chen Li Bo (Mr Chen”) dated 25 October 2016; and

(b) the affirmation of Mr Ho Kin (“Mr Ho”) dated 14 November 2016.

5.  The underlying transactions giving rise to the Debt allegedly owed by the plaintiff to the defendant are of some complexity.  For the purpose of disposing of the present application, it is not necessary to set out the full details of the transactions here.  The following brief summary shall suffice.

6.  The plaintiff is a company incorporated in Bermuda.  Its shares are listed on the Main Board of the Stock Exchange of Hong Kong (stock code: 673).  Its principal business activities are business-to-customer consumer services and healthcare management systems in Mainland China.

7.  Dr Li Zhong Yuan (“Dr Li”) was formerly the Chairman and an executive director of the plaintiff.  He was replaced as Chairman of the plaintiff by Mr Jia Hong Sheng on 26 March 2013, but he remained as a director of the plaintiff until 18 June 2016 when the entire board of the plaintiff, save Mr Chung and Mr Wang Jingming, was replaced by the current board of the plaintiff.

8.  By a Subscription Agreement for Redeemable Convertible Cumulative Preference Shares dated 5 April 2006 (“the Subscription Agreement”), the plaintiff agreed to issue 15,000 preference shares (“the Preference Shares”) to four original subscribers at the price of US$1,000 per share, ie US$15 million in total.

9.  Under Bye-law 9A of the plaintiff:-

(1) Each Preference Share carried a fixed cumulative preferential cash dividend payable semi-annually at the rate of 5% per annum on the “Reference Amount” of US$1,000, subject to a reduction in the interest rate upon the occurrence of certain specified event(s) which are not material for the present purpose (clause 2).

(2) The Preference Shares were convertible at the option of the preference shareholder(s) at any time during the Conversion Period, defined to mean the period commencing on the Issue Date (28 July 2006) and ending on the Maturity Date (28 July 2011, being the fifth anniversary of the Issue Date) of the Preference Shares, and without the payment of any additional consideration therefor, into such number of fully-paid ordinary shares of the plaintiff in accordance with an effective “Conversion Rate” as further defined in the Bye-law (clause 6).

(3) The plaintiff was required to redeem each Preference Share outstanding on the Maturity Date at an amount as provided for in clause 8(a) thereof.

10.  According to Mr Chung, an executor director of the plaintiff appointed on 28 December 2012, Capital Foresight Limited (“CFL”) purchased the Preference Shares from the original subscribers in or about 2010 and became the holder of those shares.

11.  On the other hand, according to Mr Chen, a director and beneficial shareholder of CFL, the Preference Shares were issued by the plaintiff to CFL on 28 July 2006 pursuant to the Subscription Agreement.  The question of whether the Preference Shares were in fact issued by the plaintiff to CFL directly in 2006 or sold by the original subscribers to CFL in 2010 does not have to be resolved in the present application.

12.  By an agreement entered into between the plaintiff and CFL dated 23 November 2012 (“the November 2012 Agreement”), CFL agreed that it would not require the plaintiff to redeem the Preference Shares or convert them into ordinary shares on or before the completion of a fund raising exercise.  It was also agreed that the plaintiff would redeem the Preference Shares in full and final settlement of all rights in respect of the Preference Shares at the aggregate price of not more than US$19 million, to be satisfied by a cash payment of US$15 million to CFL or its designee(s), and the issue of a promissory note for not more than US$4 million to be delivered to CFL or its designee(s).

13.  In around October and November 2014, the plaintiff paid off the amount of US$15 million, after substantial pressure from CFL.

14.  By a letter dated 31 July 2015 (“the July 2015 Letter”) to the plaintiff, CFL purported to nominate the defendant as the designee of the promissory note in accordance with the November 2012 Agreement.  The letter states as follows:

“For settling the dividends of the Preference Shares cumulative up to and include 30 November 2012, in accordance with the Agreement on 23 November 2012 between [the plaintiff] and [CFL], [the plaintiff] agrees to issue and [CFL] or its designee agrees to accept a promissory note in the principal amount of four million US dollars ($4,000,000) (the ‘Promissory Note’).

[CFL] hereby asks that [the plaintiff] issue the Promissory Note in favour of [the defendant], as the designee of [CFL], at the soonest convenience.”

15.  By a Loan Note dated 1 August 2015 (“the Loan Note”) issued, or purportedly issued, by the plaintiff (affixed with the seal of the plaintiff and signed by Dr Li), the plaintiff promised to pay the sum of US$4,000,000 to the defendant.  The Loan Note states as follows:

“[The plaintiff] (the ‘Debtor’) for value received hereby promises to pay to, or to the order of [the defendant] (the ‘Creditor’) the sum of UNITED STATES DOLLARS FOUR MILLION (US$4,000,000) without interest on [31 January 2016].”

16.  According to Mr Ho (the sole director and shareholder of the defendant) and Mr Chen:-

(1) The two of them were old friends.

(2) In or around March to April 2015, Mr Chen approached Mr Ho and asked him whether he would be interested to purchase a US$4 million debt (represented by a promissory note) due to CFL from the plaintiff at a discount.

(3) After many meetings to discuss the matter, on 11 April 2015, Mr Ho entered into an agreement with CFL to purchase the promissory note for US$1.67 million (“the Debt Purchase Agreement”).

(4) On 23 April 2015, Mr Ho issue a cheque for HK$12,962,800 to CFL (“the Cheque”) as payment for the price of the promissory note.

(5) Later, Mr Ho informed Mr Chen that he had decided to purchase the promissory note in the name of the defendant.

(6) By a letter dated 31 July 2015 (ie, the July 2015 Letter), CFL informed the plaintiff that it would nominate the defendant as the designee of the promissory note.

(7) On 1 August 2015, the plaintiff issued the Loan Note to the defendant.

17.  On the other hand, it is the plaintiff’s case that the Loan Note was issued by the plaintiff to the defendant pursuant to what is referred to as a “Backdoor Arrangement” made or arranged by Dr Li for his own benefit.  According to Mr Chung:-

(1) The November 2012 Agreement was arranged and negotiated by Dr Li.

(2) On or about 24 June 2014, Mr Chen told him in Hong Kong that the US$4 million payable to CFL under the November 2012 Agreement was not for the benefit of CFL, but in fact would be paid to Dr Li.

(3) On or about 25 July 2014, Dr Li told Mr Jia Hong Sheng and him in Beijing that the US$4 million was compensation that CFL had agreed to pay to him (Dr Li) for procuring the “Fu Shou Yuan Project” (which ultimately fell through during the course of 2011 and 2012).

18.  On 12 September 2016, the defendant (through its solicitors) issued the Statutory Demand to the plaintiff pursuant to Section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, requiring the plaintiff to pay the sum of US$4 million within 21 days of the service of the demand on it.

19.  On 27 September 2016, the plaintiff issued the originating summons herein seeking to restrain the defendant from presenting any petition for the winding up of the plaintiff based on the Statutory Demand.

The New Emails

20.  In his 2^nd affirmation dated on 17 January 2017 and filed on 20 January 2017, Mr Chung alleges that while he was in Beijing on 2 and 3 January 2017, he was sought out by an anonymous man.  He met the anonymous man, who was wearing a facemask, at his hotel on 3 January 2018, and was given an USB drive which was wrapped in a plastic film.  The anonymous man told Mr Chung that the USB drive contained some important information, gave him a password to open the USB drive and then left.  Mr Chung opened the USB drive on the same day and found that it contained various emails (“the New Emails”) which Mr Man submits are objective proof that the evidence of Mr Chen and Mr Ho relating to the Debt Purchase Agreement is fabricated and support the plaintiff’s case of the Backdoor Arrangement.  I shall come back to the contents of some of the New Emails later in these reasons for judgment.

21.  The plaintiff’s solicitors (K&L Gates) first disclosed the existence, and provided copies, of the New Emails to the defendant’s solicitors (Howse Williams Bowers) by a letter dated 17 January 2017.

22.  In Mr Chong’s skeleton submissions dated 6 February 2017, it was said that given the time pressure and the highly unusual circumstances in which Mr Chung allegedly came to be given the New Emails, the defendant was unable to take steps to ascertain the authenticity or integrity of the New Emails, and the defendant was never given the opportunity to respond to them.  It was further submitted that the New Emails should not be admitted as evidence and, in any event, should be given little weight.

23.  However, at the hearing on 8 February 2017, Mr Chong confirmed to the court that the defendant would not pursue its objection to the admissibility of the New Emails as evidence, but would maintain that the court should give them very little weight.

24.  Mr Chung’s account as to how he came to be given the USB drive is, to say the least, highly suspicious.  However, as mentioned above, Mr Chong on behalf of the defendant accepted the admissibility of the New Emails as evidence.  There was no application by Mr Chong for leave to file evidence in reply or cross-examine Mr Chung on his affirmation.  The court cannot conduct a mini-trial based on evidence given by affidavit.  In all circumstances, the New Emails must be considered as part of the evidence before the court for the purpose of deciding whether the plaintiff has succeeded in showing that there is a bona fide dispute of the Debt on substantial grounds.

DISCUSSION

25.  The following principles are relevant for the purpose of the present application.

26.  First, the court will grant an injunction to restrain the presentation of a winding-up petition which it considers would be an abuse of the court’s process (Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487, at paragraph 10 per Kwan J (as she then was)).

27.  Second, it is an abuse of process to present a winding-up petition based on a claim of which there is a bona fide dispute on substantial grounds (Re Sinom, at paragraph 11).

28.  Third, it has been said that the threshold for resisting a petition (requiring proof of a bona fide defence) is higher than that for resisting an application for summary judgment (requiring proof of a fair probability of establishing a bona fide defence): see Re Grandfield Pacific Hotel Ltd, HCCW 29/2001, at paragraph 11 per Kwan J (as she then was).  The difference between the two tests is, in most cases, likely to be more a matter of semantics than substance.  As recently explained by her Ladyship when sitting in the Court of Appeal in Re Leung Cherng Jiunn (debtor) [2016] 1 HKLRD 850, at paragraph 27(4), the two test are broadly similar, and where a defendant has obtained leave to defend, unconditionally or with conditions, it would be most unlikely that a petition would be granted.  In my view, if it can be shown that the company would likely obtain leave to defend assuming that an application for summary judgment is being made by the creditor, equally it would be most unlikely that a petition by the creditor would be granted.

29.  Fourth, petitions are not meant for the purpose of debt collection and the winding-up jurisdiction of the court would be exercised only in clear cases.  Where oral evidence is required to decide a real and substantial dispute of fact, the court will generally dismiss the petition (Re Leung Cherng Jiunn (debtor), at paragraph 27(5)).

30.  Fifth, the onus is on the company to put forward credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at the trial (Re Alpha Building Construction Ltd, HCCW 283/2014, 20 May 2015, at paragraph 5 per Harris J).

31.  In the present case, the defendant claims to be a bona fide purchaser for value from CFL of the debt of US$4 million owed by the plaintiff pursuant to the Debt Purchase Agreement which was allegedly made in April 2015 after discussion or negotiation between Mr Chen and Mr Ho in March and April 2015.

32.  Mr Man submits, however, that the New Emails clearly show that the evidence of Mr Chen and Mr Ho relating to the Debt Purchase Agreement is fabricated.  Amongst the New Emails, the following are of particular note:-

(1) In an email dated 19 November 2012, Rupert Li (a partner of King & Wood Mallesons in Beijing) provided to Dr Li “Ho Kin’s personal information”, including his Hong Kong identity card number and address in Hong Kong.

(2) Attached to an email dated 19 November 2012 from Zhong Yuan Li (ie Dr Li) to Rupert Li under the subject “Re: Nomination” was a draft letter from CFL to the plaintiff instructing the plaintiff to issue the promissory note pursuant to “the Agreement dated 19 November 2012” to “Mr Kin HO (HKID K4612321(3)) or an entity controlled by Mr Kin HO upon [the plaintiff’s] payment [or] delivery of US$15 million to [CFL]”.

(3) In his reply email to Zhong Yuan Li dated 19 November 2012, Rupert Li stated as follows: “Noted and will review.  If all in order, I will ask Capital Foresight to sign and return.”

(4) A person called Ida then sent, under cover of an email dated 20 November 2012, to Rupert Li and Dr Li the following “signed documents”: (i) an undated agreement signed, apparently, by Mr Chen on behalf of CFL which, it would seem, eventually became the November 2012 Agreement, and (ii) an undated letter signed apparently by Mr Chen on behalf of CFL to the plaintiff instructing the latter to issue a promissory note pursuant to “the Agreement dated [   ] November 2012” to “Mr. Kin HO” or an entity wholly owned by “Mr. Kin HO”.

33.  On the face of these emails, it would appear that back in November 2012, there was already an arrangement, of which Dr Li was a party, for the issue by the plaintiff of a promissory note for US$4 million to Mr Ho or an entity owned or controlled by him.  If so, the defendant’s case on how it became the holder of the Loan Note cannot be true or correct.  The New Emails also lend credence to the plaintiff’s case that the Loan Note was in fact issued by the plaintiff pursuant to the “Backdoor Arrangement” made or participated in by Dr Li for his benefit, though not necessarily for his sole or exclusive benefit, and that the defendant was Dr Li’s nominee for the purpose of receiving the Loan Note.  It follows that it must at least be open to serious argument that the Loan Note is not enforceable by the defendant against the plaintiff, because the issue of the Loan Note by the plaintiff to the Dr Li’s nominee (the defendant) would involve a breach of fiduciary duty on Dr Li’s part of which the defendant had knowledge.

34.  In coming to these views, I have taken into account various points raised by Mr Chong, in particular the following:-

(1) Mr Chong stresses that the transaction between the plaintiff and CFL was a genuine commercial transaction which was well documented.  For the present purpose, the court is not directly concerned with the wider transaction under which CFL became the holder of the Preference Shares or entitled to receive the dividends payable by the plaintiff on those shares.  The focus of the present application concerns the particular aspect of the transaction between the plaintiff and CFL relating to the Loan Note, and the question is whether it was issued by the plaintiff to the defendant pursuant to the Backdoor Arrangement as alleged by the plaintiff.  The fact that some elements of the transaction between the plaintiff and CFL were genuine or commercial cannot provide an answer to that question.

(2) Mr Chong submits that there was no reason why CFL would want to give Dr Li US$4 million, and that if the US$4 million was intended to go to Dr Li, CFL would obtain zero return from its investment in the Preference Shares.  This submission assumes that the full or complete picture of the various transactions between the plaintiff, the defendant and CFL is before the court. The contents of the New Emails, including but not limited to those specifically mentioned above, suggest that there is a lot more in those transactions which have not been disclosed in the evidence currently before the court.  I do not consider that it is safe to draw any conclusion at this stage on what, if any, return CFL obtained from its investment in the Preference Shares.

(3) Mr Chong further submits that Mr Chung, as a director of the plaintiff, was under a duty to “whistle-blow” the misconduct of Dr Li, but he took no action to pursue Dr Li or raise the matter with the board of the plaintiff in the past 2 years or so after he had allegedly been told by Mr Chen and Dr Li in June and July 2014 about the Backdoor Arrangement.  I accept that on Mr Chung’s own evidence, he might well have been in breach of fiduciary duty owed to the plaintiff and he might not be a fit and proper person to act as a director of a listed company in Hong Kong, but that does not mean he has given false evidence on oath.  Mr Chung’s part in the Backdoor Arrangement can only be fully explored in a trial.

(4) Lastly, Mr Chong submits that Mr Chung’s evidence in respect of the alleged “admission” by Dr Li and the circumstances in which he came to be given the USB drive is not capable of belief.  I accept that there are obvious question marks relating to Mr Chung’s evidence.  However, as earlier mentioned, the court cannot conduct a mini-trial based on evidence given by affidavit.  I do not consider Mr Chung’s evidence to be so incredible that it can simply be brushed aside or ignored in the present application.

35.  I also bear into mind that there is evidence that Mr Ho paid the sum of HK$12,962,800 to CFL in April 2015 allegedly as purchase price for the debt of US$4 million. Mr Man submits, however, that the payment was in fact made pursuant to a round-robin arrangement to pay off the 2^nd to 4^th tranches of dividends on the Preference Shares.  The evidence before the court is not conclusive one way or another on this matter.  I do not consider that the court can make a finding of fact on a disputed issue of this nature based on the existing evidence.

36.  Overall, I have come to the conclusion that the plaintiff has shown that there is a bona fide dispute of the Debt on substantial grounds.

OTHER MATTERS

37.  There are two other matters that I should mention.  First, in view of the conclusion reached above, it is not necessary for me to deal with the additional point raised by Mr Man that the Loan Note was executed without the authority of the plaintiff and therefore unenforceable by the defendant.

38.  Second, in the Statutory Demand dated 12 September 2016, it was stated that the Debt was also evidenced in and/or by (a) the July 2015 Letter, and (b) the November 2012 Agreement.  It is, however, apparent from Mr Chong’s submissions that the defendant’s claim against the plaintiff is based on the Loan Note.  The defendant is not a party to either the November 2012 Agreement or the July 2015 Letter.  Neither document gives rise to any contract or claim enforceable by the defendant against the plaintiff.  In my view, it is clear that the defendant does not have any valid cause of action against the plaintiff based on the July 2015 Letter and/or the November 2012 Agreement.

DISPOSITION

39.  For the foregoing reasons, I grant an injunction in terms of paragraph 1 of the originating summons.

40.  I further order that the amount of US$4 million paid into court by the plaintiff on 19 October 2016 pursuant to its undertaking given to the court on 30 September 2016 be released to the plaintiff.

41.  Lastly, I make an order that the defendant shall pay the plaintiff the costs of this action, to be taxed on a party and party basis if not agreed, with certificate for two counsel.