RE LI WING SANG

HCB 4740/2018

[2019] HKCFI 924

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4740 OF 2018

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REASONS FOR DECISION

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INTRODUCTION

1.  At the end of the hearing on 2 April 2019 of a bankruptcy petition presented on 15 August 2018 (“the Petition”) by Credit Suisse AG, Hong Kong Branch (“the Petitioner”) against Li Wing Sang (“the Debtor”), I granted a bankruptcy order.  I now give my reasons.

BACKGROUND FACTS

2.  The background is largely undisputed.  The following is largely extracted from the Debtor’s skeleton argument.

3.  The Debtor has had an account with the Petitioner since August 2012.  The Debtor has been an executive director and chairman of Tech Pro Technology Development Limited (Stock Code 3823) since December 2009 and March 2011 respectively.

4.  The Debtor made use of the Petitioner’s loan facilities.  Pursuant to, inter alia, a memorandum of charge dated 14 August 2012 (“MOCA”), the Debtor deposited shares listed on the Stock Exchange of Hong Kong (“SEHK”) in the Account as security.

5.  By an agreement dated 29 September 2016, the Petitioner and the Debtor agreed to a repayment plan in relation to the then outstanding liabilities in the amount of HK$79,852,110.90 (“the Repayment Agreement”). Pursuant to the Repayment Agreement, the Debtor procured further securities to be provided to the Petitioner.

6.  The Debtor fell behind with payments under the Repayment Agreement in about November 2016.

7.  From January 2017, the Petitioner pressed the Debtor for repayment. 

8.  In February 2017, the Petitioner beganto liquidate the Debtor’s security in order to reduce the secured indebtedness.

9.  By October 2017, the Petitioner held the following SEHK listed shares in the Account as security:

(1)   24,500,000 shares in Hanergy Thin Film Power Group Ltd (“Hanergy”) (“Hanergy Shares”);

(2)   400,000 shares in Chi Ho Development Holdings Ltd (“CHD”); and

(3)   1,607,500 shares in Li Bao Ge Group Ltd (“LBG”).

10.  On 9 October 2017, the Petitioner issued a statutory demand (“the SD”).  It specified that the full amount of the outstanding debt was HK$73,712,541.23 and estimated the value of the security it held at HK$11,046,175.  The Petitioner put a “HK$0” value upon the Hanergy Shares. 

11.  Shortly beforehand, the Debtor received a monthly investmentreport dated 30 September 2017 stating the value of the Hanergy Shares to beHK$3.91 per share (its last trading price), with a total value of US$12,263,502. 

12.  Between 10 April and 25 July 2018, the Hanergy Shares were sold to Mr Simon Tam (“Tam”) for a total amount of HK$12,250,000.  The proceeds of the such sales were applied by the Petitioner in partial settlement of the outstanding debt.

THESE PETITION PROCEEDINGS

13.  On 15 August 2018, the Petitioner presented the Petition against the Debtor.

14.  The Petition claims that:

(1)   The Debtor was indebted to the Petitioner in the sum of HK$67,229,322.15 as at 31 July 2018 due and owing under a facility letter dated 12 June 2015 and the Repayment Agreement (“the Petition Debt”).

(2)   The SD was served by the Petitioner on the Debtor on 16 October 2017 for the sum of HK$73,712,541.23, less the value of securities estimated to have a value of HK$11,046,175.

(3)   Since service of the SD, the Petitioner has applied proceeds of sales of charged securities in partial settlement of the debt demanded, so that the amount outstanding is the amount claimed in the Petition.

(4)   The Petitioner holds further securities for the payment of the Debt whose value was estimated as at 14 August 2018 as HK$1,132,512.50.

(5)   The Petition is not made in respect of the secured part of the Debt.

15.  The Debtor filed an affirmation dated 29 January 2019 (“Li”) to challenge the Petition.

16.  The Petitioner in reply filed the affirmation of Wai Tuen AngelaLeung dated 19 March 2019 (“Leung”) and the affirmation of Ng Kong Sang dated 19 March 2019 (“Ng”).

17.  Although further arguments were raised in evidence, by the time of the hearing, the Debtor disputed the Petition on the following grounds only:

(1)   The SD is defective by reason of its incorrect valuation of the security held by the Petitioner.

(2)   The Debtor has a cross-claim in excess of the Petition Debt.

THE DEFECTIVE SD ARGUMENT

Relevant legal principles

18.  Section 6(2) of the Bankruptcy Ordinance (Cap 6) (“BO”) provides:

“ (2) Subject to sections 6A to 6C, a creditor’s petition may be presented to the court in respect of a debt or debts if, but only if, at the time the petition is presented—

(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds $10,000 or a prescribed amount;

(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured;

(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay; and

(d) there is no outstanding application to set aside a statutory demand served under section 6A in respect of the debt or any of the debts.”     [emphasis added]

19.  Section 6A(1)(a) of the BO provides:

“ (1) For the purposes of section 6(2)(c), the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either—

(a) the petitioning creditor to whom the debt is owed has served on the debtor a demand (known as ‘the statutory demand’) in the prescribed form requiring him to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least 3 weeks have elapsed since the demand was served and the demand has been neither complied with nor set aside in accordance with the rules; or

….”

20.  Rule 44(5) of the Bankruptcy Rules (Cap 6A) (“the Rules”) provides:

“ Form and content of statutory demand

…

(5) If the creditor holds any security in respect of the debt, the full amount of the debt shall be specified, but—

(a) there shall in the statutory demand be specified the nature of the security, and the value which the creditor puts upon it as at the date of the demand; and

(b) the amount of which payment is claimed by the demand shall be the full amount of the debt, less the amount specified as the value of the security.”

21.  Section 6B(1) of the BO provides:

“ Creditor with security

(1) A debt which is the debt, or one of the debts, in respect of which a creditor’s petition is presented need not be unsecured if either—

(a) the petition contains a statement by the person having the right to enforce the security that he is willing, in theevent of a bankruptcy order being made, to give up his security for the benefit of all the bankrupt’s creditors; or

(b) the petition is expressed not to be made in respect of the secured part of the debt and contains a statement by that person of the estimated value at the date of thepetition of the security for the secured part of the debt.”

22.  Rule 48 of the Rules addresses a hearing of an application to set aside a statutory demand.  Rule 48(5) provides:

“ (5) The court may grant the application if—

(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;

(b) the debt is disputed on grounds which appear to the court to be substantial;

(c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or

(d) the court is satisfied, on other grounds, that the demand ought to be set aside.”     [emphasis added]

23.  A debtor may also challenge a bankruptcy petition on the basis that there are substantial grounds for thinking that the petitioner might be fully secured: Platts v Western Trust & Savings Ltd [1996] BPIR 339, cited in Re Choi Chi Kwun, ex p Overseas Union Bank Limited HCB 517/2000 (unreported, 12 May 2000), DHCJ Kwan (as she then was).

24.  It is clear that:

(a)   A creditor can only petition in respect of an unsecured debt;

(b)   If a creditor holds security:

(i)   he must value that security in the statutory demand; and

(ii)   he must state in the petition either:

(1)   that he is willing to give up his security if a bankruptcy order is made; or

(2)   that the petition is not made in respect of the secured part of the debt, along with a statement of the value of the security for the secured part of the debt as at the date of the petition.

25.  The parties by their counsel agreed:

(1)   A debtor may challenge the valuation of the security in the SD or the petition.

(2)   A debtor could, at the petition hearing, dispute the security valuation given in the SD.

(3)   If it was found at the petition stage that the security valuation in the SD was wrong, but that the true security value did not equal or exceed the petition debt, then the validity of the statutory demand would depend on whether the defect had caused prejudice to the debtor (eg Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at §§15 – 16).

26.  However, the parties’ counsel were not agreed as to what happens if at the petition stage, it was found that the security valuation in the statutory demand was wrong and the security value in fact equaled or exceeded the debt as at the date of the statutory demand.  I was surprised by the submissions of the Petitioner’s counsel to the effect that the statutory demand could still be valid in such circumstances.  As Mr Yu for the Debtor submitted, had the security been properly valued, there could surely be no statutory demand claiming payment of an unsecured debt.  As it happens on the facts of this case, I do not think this scenario arises.

The Debtor’s arguments

27.  The Debtor challenges the Petitioner’s valuation of the HanergyShares in the SD as having a nil value, and asserts they had a value in excess of the debt claimed in the SD.  He relies on:

(1)   The Petitioner’s monthly investment reports between September2017 and March 2018 attributing a value of HK$3.91 per share to the Hanergy Shares, which was the last trading price before trading of Hanergy shares halted on 20 May 2015. 

(2)   On that valuation basis, the investment report dated 30 September 2017 (two weeks before the SD) valued the Hanergy Shares at the US dollar equivalent of HK$95,655,316.

(3)   An assertion that, by the time of the SD, it was basic knowledge within the industry that there was a secondary off-exchange market of the shares in Hanergy;

(4)   Hanergy continued to trade and announced substantial profits for the year ended 31 December 2016 and the six months ended 30 June 2017.

(5)   An assertion that the prospects of resumption of trading for Hanergy’s shares had improved by the time of the SD as one of the two pre-conditions for resumption required by the SFC had been satisfied.

28.  The Petitioner (by Ng) has explained the monthly investment reports as being reports automatically generated by the Petitioner’s computer using the last available trading price.  It seems to me to be a non-starter to suggest that either the Petitioner or the Debtor believed, at any time after the halt of trading in Hanergy shares, that the shares could be sold at the last trading price.

29.  I note that the monthly investment reports changed the value of the Hanergy Shares as of March 2018 to HK$0.50 per share.  Ng states that was to reflect the price of Hanergy shares sold through a private placement in December 2017.  This seems to me to be consistent with the investment reports showing the value to be whatever was the last known sale price achieved.

30.  Ng states he does not know what the Debtor means by referringto a secondary off-exchange market in Hanergy shares at the time of the SD. For myself, I would require expert evidence as to the existence of any material off-exchange market in shares in Hanergy at the time of the SD.  The Debtor has had an opportunity to file evidence and has done so, and he has neither pointed to any private sales between May 2015 and October 2017, nor has he filed any relevant expert evidence.

31.  I am also not persuaded (without relevant expert evidence) by Mr Yu’s submission that value should have been attributed to the Hanergy Shares in the SD because, at the time of the SD, Hanergy was taking steps towards meeting SFC’s requirements for resumption of trading in its shares.  If there had been an announcement of actual resumption of trading, that might be different.

32.  The Debtor also relies on events subsequent to the SD as evidence of the Hanergy Shares having a substantial value:

(i)   On 13 June 2018, a director of Hanergy bought approximately 422,000 Hanergy shares at HK$3.5 per share.

(ii)   On 1 November 2018, Hanergy announced that it had received a proposal for privatization of the shares from its controlling shareholder at a price of not less than HK$5 per share.

33.  Mr Yu submits that the Court can look to subsequent market value in order to infer market value at the relevant date.  He refers to Stanley v TMK Finance Ltd [2011] Bus LR Digest D93 at §16.  Mr Lok points out that David Richards J stated that a later sale may be used to establish by inference the market value at an earlier date if two factors were established:(1) no significant change in market conditions between the two dates (other than a quantifiable general rise in market values); and (2) the circumstances of the sale can truly be regarded as establishing market value at the date of the sale and hence be used as a reliable basis for inferring market value at the earlier date: Stanley v TMK at §§17 – 18.

34.  I do not consider that the later sale relied on by the Debtor satisfies these two requirements in order to allow an inference that the later sale price reflects market value at the date of the SD.  I would not feel it safeto attach any weight to the evidence that a director of Hanergy, under scrutinyby the SFC, would purchase a batch of shares much smaller than the Hanergy Shares at a significant price despite the suspension in trading.

35.  I do not consider the proposed privatization to amount to evidence of the market value of the Hanergy Shares in any event.  It seems on the evidence (at least as at 19 March 2019) highly unlikely that the proposed privatization, if completed, will lead to any cash realization for shareholders of Hanergy.

36.  In oral submissions, Mr Yu raised an argument for the first time that the sales by the Petitioner of the Hanergy Shares in March to July 2018 at HK$0.50 could be used as evidence that the market value as at the date of the SD (in October 2017) was HK$0.50 at least.  I am simply unable to accept that submission: (1) I have no evidence of the market for Hanergy shares between October 2017 and March 2018, and (2) the sales of Hanergy Shares were agreed between the Debtor and his friend Mr Tam, so I am unable to be satisfied that they represent true market value.

37.  I am not satisfied on the evidence that there is a real issue as to whether the nil valuation for the Hanergy Shares in the SD was wrong.  Accordingly, I do not find the SD defective in that respect.

38.  On the facts, the Petitioner no longer holds the Hanergy Shares as security as they have been sold.  Accordingly, there is no argument that the Petitioner now holds security of a value equal to or in excess of the Petition Debt.

THE ALLEGED CROSS-CLAIM

Relevant legal principles

39.  For a court to reject a petition because of the existence of an unlitigated cross-claim, it has to be shown that the cross-claim is genuine andone of substance, and that it must be an amount exceeding the amount of thepetitioner’s debt.  Re SY Engineering Co Ltd CACV 1896/2001 (unreported, 27 February 2002), cited in Bank of Communications v Au Wai Ming HCB 4016/2004 (unreported, 8 February 2005) at §14; cf Re Jade Union Investment Ltd HCCW 400/2003 (unreported, 5 March 2004) cited in Re Shang Lili HCB 5329/2014 (unreported, 25 January 2016) at §§24 – 25. 

40.  In assessing the substance of a cross-claim:

(1)   There must be sufficiently precise evidence which is believable to establish that a debtor actually has a defence or cross-claim of substance, not just a fair probability of one: Re She Ka Kui [2018] HKCFI 601 at §§9, 37.

(2)   Bankruptcy proceedings are summary in nature and are not intended to be used for the purpose of debt collection.  The jurisdiction to make a bankruptcy order is only exercised in very clear cases. Where oral evidence is required to decide a real and substantial dispute of fact, the Court will dismiss the petition: Re She Ka Kui at §§10 – 11.

(3)   There is no absolute requirement that the debtor must show that he was unable to litigate his cross-claim.  The recent trend is simply to recognise that a failure to litigate a cross-claim may be something that throws doubt on the genuineness of the cross-claim: Re She Ka Kui at §§35 – 36.

41.  It is well established that a mortgagee has the duty to take reasonable precautions to obtain the best price reasonably obtainable for the mortgaged property at the time: Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355B–C.

42.  Where, by agreement with the mortgagor, a mortgagee sold the property via a transaction initiated and devised by the mortgagor, and on terms all of which had been agreed by the mortgagor, the mortgagor could not complain that the mortgagee had breached its duty to obtain the best price reasonably obtainable: Fisher and Lightwood’s Law of Mortgage(14^thed) at §30.24, p 692, citing Newport Farm Ltd v Damesh Holdings Ltd [2003] UKPC 54.  To similar effect is Mercantile Credit Company Ltd v Clarke & Clarke (unreported, EWCA, 7 November 1995) 1995 WL 1082212.

The Debtor’s arguments

43.  The Debtor argues that the sale of the Hanergy Shares between10 April and 25 July 2018 to Mr Tam at HK$0.50 per share for a total amount of HK$12.25 million was at an undervalue, on the basis that the true value per share was around HK$3.5 per share.

44.  It is not clear on the evidence whether the sales of the Hanergy Shares were mortgagee sales with the Debtor’s consent, or mortgagor’s sales with the Petitioner’s consent.  On the facts, it is not necessary for me to decide that.

45.  Although it is accepted by the Debtor in his evidence that he introduced Mr Tam’s offer to the Petitioner, he claimed in his evidence that he told the Petitioner that it was too low[1], but that the Petitioner coerced him into agreeing to the sales of the Hanergy Shares.  Mr Yu confirms he does not pursue the allegation of coercion, stating he does not need to go that far.  Rather Mr Yu focuses on asserting that the Petitioner failed in its duty as mortgagee by failing to properly expose the Hanergy Shares to the market orobtain expert advice, in particular in light of the June 2018 Hanergy director’spurchase of Hanergy shares at HK$3.5 per share.

46.  Mr Yu submits that the Petitioner did not take reasonable precautions to obtain the best price reasonably obtainable and failed to obtain the best price reasonably obtainable by seeking advice as to the proper value and mode of sale.

47.  However, in my view of the contemporaneous evidence, what happened was that the Debtor himself brought the sale offer to the mortgagee and requested a realization of security at that price.

48.  The Petitioner’s evidence includes:

(1)   Internal emails dated 26 March 2018 whereby Angela Leung informed her colleagues that the Debtor wanted to know if he could sell 5 million Hanergy shares to his friend Mr Tam for HK$0.50 per share and use the proceeds to repay the Petitioner,to which her senior colleagues replied they had no objection.

(2)   An internal email dated 8 April 2018 between the Petitioner’s employees responsible for the Debtor’s account recording a discussion with the Debtor that morning including the Debtor’s statement that there was a buyer behind Mr Tam for the Hanergy shares acquired at HK$0.50 per share, and that the Debtor had complained again that he had been required to pay stamp duty despite the fact that he did not receive cash from the share disposals.

(3)   An internal email dated 8 April 2018 between the Petitioner’s employees responsible for the Debtor’s account stating that the Debtor was arranging 5 million Hanergy shares to be sold at HK$0.50 per share, which was expected to complete in the next day or so.

(4)   Letters dated between 3 April 2018 and 23 July 2018 from the Petitioner to the Debtor whereby the Petitioner referred to the Debtor’s request for the Petitioner’s consent to sell a specified number of Hanergy shares at HK$0.50 per share to a buyer identified by the Debtor, and stating that the Petitioner consented to the sale on the condition that the sale proceeds were paid directly from the buyer to the Debtor’s account withthe Petitioner and were applied to reduce the secured liabilities under the MOCA.

(5)   From 3 April 2018, the Petitioner sent DVP forms to the Debtor“as per [his] request” for the purposes of the Debtor’s signature and return in order to authorize the Petitioner to process the sales of Hanergy Shares to Mr Tam.  And the Debtor did sign and provide the Petitioner with such signed instructions.

49.  I was provided at the hearing with an agreed translation of the transcript of various audio recordings included in the Petitioner’s evidence.  The audio-recordings were of certain telephone calls between the Debtor andthe Petitioner between November 2017 and July 2018 related to instructions by the Debtor to sell shares, or the Petitioner seeking confirmation of instructions to sell shares.  I do not place any great reliance on these calls, asI am informed by the Debtor that they do not present a complete picture andmight require explanation.  However, I note they contain nothing to indicate that the sales of the Hanergy Shares were not requested by the Debtor.

50.  All the contemporaneous documentation I have seen indicates that the Debtor initiated the sales to Mr Tam at HK$0.50 and fully participated in such sales between April and July 2018.  I do not accept there is any believable evidence of these sales of Hanergy Shares being anything other than pursuant to the Debtor’s request.  In the circumstances, it is entirely unconscionable in my view for the Debtor to now turn around and say that the sales by the Petitioner as mortgagee were not conducted reasonably.

51.  As stated above, Mr Yu abandoned the argument raised in Li that the Debtor’s participation in the sales of the Hanergy Shares was under duress.  Rather, he sought to distinguish the Newport Farm and Mercantile Credit Companyline of cases.  He sought to argue that those cases, whilst not expressly stated to be decided on the basis of estoppel, were indeed so decided.  Mr Yu argued that, in those cases in contrast to this case, one could see assurances being made by the mortgagor to the mortgagee not to dispute the terms of the sales,and a benefit to the mortgagor in giving such assurances.

52.  It seems to me that the authorities relied on by Mr Lok were expressly stated to be decided on the basis that, on their facts, it was unconscionable for the mortgagor to complain about the terms of the sales. I am satisfied that where the Debtor has initiated the sales of the Hanergy Shares at HK$0.50 per share and has approved the key terms of sales (ie price,amount, date), the proposition that the Petitioner failed to satisfy its duty as a mortgagee is, to use Lord Scott’s words “a staggering one which offends both equity and common sense”.

53.  In any event, I note the complete absence of any expert valuation evidence to support the Debtor’s claim of an undervalue.

54.  I am not satisfied that the Debtor has advanced believable evidence to substantiate his alleged cross-claim.

CONCLUSION

55.  Accordingly, I am satisfied that the SD, for a liquidated unsecured sum in excess of HK$10,000 which was immediately payable, has not been satisfied within three weeks; and the statutory presumption is that the Debtor is unable to pay his debts as they fall due.  Accordingly, I made a bankruptcy order.

56.  Having regard to Clauses 9 and 13.3 of MOCA, and Clauses 17.1 and 12.1 of the Account opening terms and conditions, agreeing that the Petitioner’s relevant expenses be paid on an indemnity basis, it was not disputed by Mr Yu that costs to the Petitioner in respect of the Petition be on an indemnity basis.