RE WONG YU MAN JAMES

HCB 1649/2023

[2023] HKCFI 2760

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 1649 OF 2023

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JUDGMENT

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1.  This is the hearing of the petition presented by China Sun Group Holding Limited 中森集團控股有限公司(formerly known as GRAND PACIFIC ENTERPRISES LIMITED (東華企業有限公司)) (the “Petitioner”) on 23 March 2023 (“Petition”) for a bankruptcy order against Wong Yu Man James (王裕民) (the “Debtor”).

Background

2.  The Petitioner and Skalacrest (Hong Kong) Limited (“Skalacrest”) entered into a joint investment agreement dated 16 April 2021 (the “Agreement”).

3.  Under Clause 1.1 of the Agreement, the mechanism of the joint investment was set out to be:

(1)  Skalacrest and the Petitioner would each contribute HK$50 million. The joint investment would thus be HK$100 million (the “Joint Investment”).

(2)  The investment would then be put into an account of Elegant Ease Investments Limited (“Elegant Ease”) with Bank Julius Baer & Co. Ltd. Elegant Ease was an agent appointed by the Petitioner.

(3)  The Joint Investment was for investing in a listed company in Hong Kong.

(together, the “Mode of Operation”)

4.  Although the identity of the listed company was not set out in the Agreement, there is no dispute that parties knew the Hong Kong listed company referred to would be CA Cultural Technology Group Ltd. (CA Cultural).

5.  The Debtor was a shareholder of CA Cultural. The founder of CA Cultural was Jason Chong, who was a friend of the Debtor.

6.  Under Clause 1.1(2) of the Agreement, Skalacrest guaranteed the Petitioner a return of 15% of the Petitioner’s HK$50 million capital contribution i.e. HK$7.5 million (the “Guaranteed Return”).

7.  Clause 4.2(4) of the Agreement set out that to protect the Petitioner’s interest, Skalacrest would procure personal guarantees from three people on the Guaranteed Return: Jason Chong, Fiona Lee and the Debtor.

8.  A guarantee dated 16 April 2021 was entered into between the Debtor and the Petitioner (the “Guarantee”), whereby the Debtor agreed to guarantee the obligations of Skalacrest under the Agreement.

9.  Skalacrest defaulted in paying the Petitioner the Guaranteed Return by the year end on 15 April 2022. The Petitioner’s solicitors issued a letter of demand dated 21 June 2022 to the Debtor, demanding payment of HK$7.5 million pursuant to the Guarantee. No payment was received from the Debtor.

10.  On 28 February 2023, the Petitioner served a statutory demand requiring the Debtor to pay the Debt (“SD”) .

11.  The Debtor did not comply with the SD and is deemed insolvent by virtue of s.6A(1)(a) of the Bankruptcy Ordinance (Cap 6). The Petitioner had discharged the onus of showing that the Debtor was unable to pay his debt, as required by s.6(2)(c) of the same Ordinance.

12.  On 23 March 2023, the Petition was presented.

Debtor’s Grounds of Opposition

13.  A Notice of Intention to Oppose the Petition was filed by the Debtor on 23 May 2023. The following grounds of opposition were set out:

(1)  There is no outstanding debt due and payable since the Agreement was invalid/void/unenforceable;

(2)  The Guarantee was invalid/void/unenforceable;

14.  Further grounds were set out by the Debtor in his affirmation in opposition filed on 21 June 2023:

(1)  He was assured that the Guarantee was a “mere formality” and that Jason Chong would be solely responsible for all liability in relation to the Joint Investment Agreement.

(2)  He was pressured into signing the Guarantee at a dinner held on 16 April 2021.

(3)  No one advised him to seek independent legal advice.

(4)  He was informed at a dinner on 18 April 2021 that the Agreement was in fact a share price controlling exercise, and hence the Agreement should be voided for illegality.

(5)  There was no performance of the Agreement by the Petitioner or Skalacrest because:

(i)  the Petitioner and Skalacrest had not injected the sum of HK$100,000,000 into the account of Elegant Ease.

(ii)  The Petitioner had not caused the Elegant Ease to buy the shares of CA Cultural.

As such, it is said that there was a repudiatory breach of the Agreement and there was nothing to guarantee.

(6)  There were material variations of the investment plan without seeking the Debtor’s consent or approval. As a result, his obligation under the Guarantee was discharged.

(7)  It is alleged that at a meeting on 26 June 2022, Madam Wong on behalf of the Petitioner agreed not to enforce the Guarantee against him if the Debtor agreed to vote for and chip in HK$3 million as funding for a plan to takeover CA Cultural. The Petitioner is thus estopped from enforcing the Guarantee against the Debtor.

Legal Principles

15.  The applicable principles are trite. In opposing a bankruptcy petition, the debtor has to show a bona fide dispute on substantial grounds in respect of the debt by adducing sufficiently precise evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one[1]. In this regard, it is not sufficient for a debtor to merely raise “a cloud of objections on affidavits”[2].

16.  The court must be satisfied that the debtor's assertions are believable. It is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute. In other words, the evidence is not to be approached with a wholly uncritical eye[3].

17.  On the other hand, the Court ought not embark on the exercise of determining the dispute on a balance of probabilities raised by a debtor on the basis of affidavit evidence. All that a debtor faced with a bankruptcy petition is required to do is to establish the existence of a substantial dispute in good faith of the debt on which the petition is based. Once that is done, the petition should be dismissed, leaving it to the creditor to proceed to establish his entitlement to the debt by proceedings in the ordinary way[4].

Discussion

Non-Performance on the part of the Petitioner?

18.  There is no dispute that the Petitioner and Skalacrest did not adhere to the Mode of Operation in that the mechanism of first paying the capital investment into Elegant Ease was not carried out.

19.  Mr Chang SC for the Debtor argued that as the Guarantee was meant to guarantee the obligations of Skalacrest in the Agreement, this presupposed performance of the Agreement. It was argued that as the Petitioner had not performed in accordance with the Mode of Operation as set out in Clause 1.1 of the Agreement, there was no performance at all to speak of, and as such there was nothing for the Debtor to guarantee.

20.  The Petitioner answered by producing a written confirmation from Skalacrest to the Petitioner dated 19 August 2022 (“Skalacrest’s Confirmation”) confirming:

(1)  In accordance with the Agreement, the Petitioner had purchased 35,400,000 shares in CA Cultural in the sum of HK$103,584,114.72, the details of which was shown in a table attached to Skalacrest’s Confirmation.

(2)  The requirement to purchase the CA Cultural shares through Elegant Ease had been waived.

(3)  The Petitioner had performed all its obligations under the Agreement, including the capital investment and reporting obligations.

(4)  The Petitioner had not received the Guaranteed Return from Skalacrest.

21.  Mr Chang SC submitted that the table compiled by the Petitioner showing the details of CA Cultural shares purchased was insufficient proof that such shares were purchased pursuant to the Agreement (emphasis added). He submitted that those shares could have been purchases of CA Cultural shares carried out by the Petitioner for other purposes and there was no basis to attribute those shares to be those purchased under the Agreement.

22.  This submission clearly went against the content of Skalacrest’s Confirmation. Mr Chang SC went on to submit that no weight should be given to Skalacrest’s Confirmation for the following reasons:

(1)  Skalacrest’s Confirmation was clearly an afterthought to bridge the evidential gap raised by the Debtor, as it was only issued almost 16 months after the Petitioner had allegedly performed its obligations.

(2)  The Debtor was never told of the varied Mode of Operation.

(3)  There was no explanation of how the waiver of making the investment through Elegant Ease came about.

(4)  Skalacrest’s Confirmation was silent as to whether Skalacrest had made any capital contribution under the Agreement.

(5)  The Petitioner had not produced any underlying documents evidencing that the transactions did take place.

(6)  There seems to be a discrepancy on whether the Joint Investment Agreement was signed on 16 April 2021 or 19 April 2021.

23.  I am of the view that the above criticisms are desperate attempts to discredit or invalidate Skalacrest’s Confirmation and have no merit:

(1)  There was no requirement in the Agreement for either Skalacrest or the Petitioner to furnish the Debtor with a confirmation of due performance at the time of fulfilment. There is thus nothing untoward for Skalacrest to give such confirmation only upon a challenge from the Debtor.

(2)  There was also no requirement in the Agreement for either Skalacrest or the Petitioner to inform or seek consent from the Debtor of any change in the Mode of Operation.

(3)  Nothing turns on whether the Agreement was signed on 16 April 2021 or 19 April 2021.

(4)  The burden is on the Debtor to show that the Petitioner has not performed its obligations. The Petitioner’s performance under the Agreement is prima facie confirmed by Skalacrest’s Confirmation. The Debtor had not provided any evidential basis to challenge Skalacrest’s Confirmation. To suggest that the Petitioner needed to first produce the underlying transaction documents before any weight can be given to Skalacrest’s Confirmation is to reverse the burden of proof.

(5)  The Debtor’s obligation is to guarantee Skalacrest’s obligation to pay the Petitioner the Guaranteed Return under the Agreement. Whether Skalacrest had made its capital contribution does not affect the Debtor’s obligation under the Guarantee.

24.  Based on the above, the non-performance argument does not assist the Debtor in raising a bona fide dispute on substantial grounds to the debt in question.

Material Variation?

25.  Mr Chang SC then submitted that even if there was due performance of the Agreement, by virtue of the rule in Holme v Brunskill[5], the waiver of the Mode of Operation was a material variation to the Agreement such that the Debtor’s liability under the guarantee ought to have been discharged.

26.  It was submitted that the Mode of Operation was crucial in two ways:

(1)  Skalacrest was originally required to pay its capital contribution into Elegant Ease’s account first. Pursuant to Clause 1.1(2) of the Agreement, the Petitioner was entitled to draw the Guaranteed Profit from the amount of Skalacrest’s capital contribution. If Skalacrest were not required to put its capital contribution into Elegant Ease’s account, the Debtor would be deprived of the “cushion” of this amount in Elegant Ease’s account. The Debtor’s exposure is said to be increased in this scenario.

(2)  The importance of using Elegant Ease as an agent for carrying out the purchase of CA Cultural shares was to identify that those transactions carried out by Elegant Ease were done pursuant to the Agreement. If the Petitioner was allowed to do away with using Elegant Ease as an agent, it would be impossible to identify which of the transactions carried out by the Petitioner were those carried out under the Agreement. It is suggested that the Petitioner would then be able to retrospectively “cherry-pick” the “loss-making transactions” to be those attributable to the Agreement, and to keep the “profit-making transactions” out of the ambit of the Agreement. By doing this, the Petitioner could carve-out all “profit-making transactions” from which the Petitioner could draw the Guaranteed Return. The Debtor’s exposure is said to be increased in this scenario.

27.  Despite the attractive and persuasive presentation by Mr Chang SC, I agree with Ms So for the Petitioner that these arguments are red-herrings and there was no material variation to the risk exposure that the Guarantor had signed up for:

(1)  The Guaranteed Return was not pegged with the performance of the shares purchase but with the amount of capital contribution of the Petitioner, which was set at HK$50 million. If one looks at the original obligation that the Debtor had signed up for, which is a maximum exposure of 15% of the capital contribution by the Petitioner (set to be HK$50 million), it is apparent that the variation or waiver of the Mode of Operation did not change this maximum exposure, which remained at HK$7.5 million.

(2)  Clause 5 of the Guarantee expressly provided that there was no requirement for the Petitioner to first look to Skalacrest’s capital contribution in satisfaction of the Guaranteed Return. Again, the maximum risk that the Debtor was exposed to under the Guarantee had always remained at 15% of the Petitioner’s capital contribution.

(3)  There was no prejudice suffered by the Debtor by reason of the waiver/variation of the Mode of Operation – he was told of the worst case scenario in the Guarantee: that he was treated as the primary obligor[6], no variation would discharge the Guarantee[7], the Petitioner was not required to look first to other guarantors or securities before enforcing the Guarantee[8] etc. It was under those circumstances that the Debtor had signed up and agreed to provide such guarantee.

28.  I am thus of the view that the variation of the Mode of Operation did not increase the risk exposure of the Debtor, and the variation did not go outside the purview of the Guarantee. As such the variation is caught by Clause 7(4) of the Guarantee and the Debtor’s obligation is not discharged.

29.  The Debtor’s complaint of non-disclosure of material variation and change of exposure would fall away in view of my decision that there was no material variation to speak of.

No commercial reason for the Joint Investment Agreement/Illegality

30.  Mr Chang SC has suggested various theories and speculations on how the Agreement might be part of an illegal price-rigging scheme, or that parties had engaged in the manipulation of the share price of a listed company, such that the Agreement ought to be voided.

31.  These are mere speculations (and probably theories formulated by the legal team rather than by the Debtor himself) and are not supported by evidence, except for the piecemeal hearsay evidence of the Debtor.

32.  Mr Chang SC submitted that the Court should draw on the circumstantial evidence such as the fact that the identity of the listed company was not set out in the Agreement, and the fact that the Petitioner seemed to be the party enjoying all the benefit under the Agreement. The mere fact that the Agreement seemed to favour one party does not immediately point to a possibility of illegality. There could be many commercial reasons why a particular deal had been agreed, or why certain information was left out of an agreement. There is no dispute that the Agreement by itself was not illegal. Short of specific and precise evidence, it would be inappropriate to make an inference that there is illegality based on theories and speculations.

33.  As to the hearsay evidence of the Debtor, I attach very little weight to it. First of all, there was no suggestion of illegality when the Debtor’s solicitors first responded (by letter dated 28 June 2022) to the letter of demand from the Petitioner’s solicitors. One would have thought that if there was any truth to the allegation, it would have been raised at the first opportunity. Likewise, no illegality was mentioned in the Debtor’s Notice of Intention to Oppose Petition.

34.  The Debtor had described himself as a “risk-adverse” investor. Yet after he had allegedly heard about the “price-controlling operation” from Mr Liu only 2 days after the signing of the Guarantee, he had not asked to be released from the Guarantee. This is contradictory to his representation that he did not want to be involved with any illegal operation.

35.  Further, the Debtor did not explain how the “price manipulation” was supposed to work and how the Agreement fit into such plan.

36.  The illegality defence has no merit and does not assist the Debtor in raising a bona fide dispute on substantial grounds.

Factual Disputes warranting a trial?

37.  The Debtor’s allegation that he genuinely believed he would not be held liable despite having signed the Guarantee is against common sense and unbelievable:

(1)  The Debtor alleged that Madam Wang had threatened that if the Guarantee was not executed, the investment would not materialise. If that were the case, it cannot be explained why the Debtor would still see the Guarantee as a mere formality, or that he would not be liable.

(2)  Skalacrest’s obligations under the Agreement clearly included procuring personal guarantees from 3 different people. This is contradictory to any allegation that Madam Wong promised to only hold Jason Chong liable.

(3)  The Debtor’s alleged belief is also contradicted by the fact that he had inserted a Clause 22 to the Guarantee, limiting the validity of the Guarantee to 2 years only. If the Debtor did not believe that the Guarantee was meant to take effect, there would have been no need to make such an insertion.

(4)  the Debtor had signed a written confirmation dated 16 April 2021, acknowledging that the he had been advised to obtain independent legal advice and that he had already sought such advice. There is no allegation that this document was forged.

(5)  In the first letter of response from the Debtor via his solicitors dated 28 June 2022, it was never suggested that the Debtor thought the Guarantee was a mere formality.

38.  The allegation that Madam Wang promised to release the Debtor of his obligations under the Guarantee if he agreed to put in HK$3 million in support of a takeover plan is inherently incredible and is rejected: there is no reason why Madam Wang would forgo a HK$7.5 million guarantee in exchange for a HK$3 million investment. Further, if the Defendant had genuinely thought he was not liable under the Guarantee, there is no reason why he would agree to pay HK$3 million for the non-enforcement of the Guarantee.

39.  In any event, the Guarantee is admittedly signed by the Debtor. It is well established that persons of full age and understanding are bound by the documents they signed unless they can establish a recognised legal basis to disown such documents. For this purpose, the facts constituting the particular vitiating factor relied on must be pleaded and established by the evidence[9]. No such vitiating factors have been established by the Debtor.

Disposition

40.  In light of my conclusions above, the Debtor has failed to show a bona fide dispute on substantial grounds in respect of the debt by adducing sufficiently precise evidence which is believable, nor has he established that he has a defence of substance.

41.  I will therefore make the usual bankruptcy order against the Debtor.

42.  I thank Mr Chang SC and Ms So for their able assistance.