CHINA LATIN (INTERNATIONAL) ENGINEERING CO LTD v. KEYES GLOBAL HOLDINGS LTD

HCMP 2/2020

[2020] HKCFI 977

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2 OF 2020

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BETWEEN

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D E C I S I O N

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Background

1.  This is an application by the plaintiff, China Latin (International) Engineering Company Limited (“China Latin”), a private company incorporated in Hong Kong, for an order to restrain the defendant, Keyes Global Holdings Limited (“Keyes Global”), from presenting a winding-up petition against China Latin, on the ground that the debts in question are disputed by China Latin.

2.  The principles that govern an application of this nature are not in dispute.  The jurisdiction to restrain the presentation of a petition for winding-up stems from the power of the court to prevent abuse of its process.  It would be an abuse for a person to present a winding-up petition based on alleged indebtedness that is bona fide disputed by the company on substantial grounds: Re Sinom (Hong Kong) Ltd [2009] 5 HKLRD 487.  The issue on this application, therefore, boils down to whether the evidence establishes a bona fide dispute of the debt on substantial grounds.

3.  In Re Hong Kong Investments Group Ltd [2018] HKCFI 984 at §13, Ng J summarised the court’s approach on that question as follows:

“ (1) 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.

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

(3) The court would caution itself against unsubstantiated and unparticularized assertions.  It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists.  In so doing, 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.”

China Latin’s case

4.  The debts based on which Keyes Global issued a statutory demand dated 19 December 2019 on China Latin have arisen under a written Loan Agreement and a written Supplemental Loan Agreement (defined below) between the parties.  According to the first affirmation of Mr Lok Ho Ting (“Mr Lok”), its sole director, China Latin does not dispute the indebtedness under those agreements but says that the repayment date of the sums owed has been postponed by an oral agreement until the conclusion of the negotiations relating to the acquisition by a third party of the groups comprising China Latin and Keyes Global respectively.  The background according to Mr Lok was as follows. 

5.  Since around 2015, SeaHarrier Forest Resources Corporation Ltd (“SeaHarrier”) (of which Mr Lok was also the sole director) had engaged in forestry business with Greenheart Wood Trading Co Ltd (“Greenheart”), including the purchase of logs from Greenheart for SeaHarrier’s own use or for on-sale to third parties. 

6.  On 24 August 2017, (1) SeaHarrier, (2) a subsidiary of SeaHarrier named Huaneng Resources (Suriname) NV, and (3) a subsidiary of Greenheart called Greenheart Forest Suriname Suma Ltd, entered into a Forestry Management and Sales Services Agreement (“FMSSA”) and a Charges over Shares in Suriname SeaHarrier Investment Ltd (“Share Charge”).

7.  In November 2018, Greenheart served a statutory demand on SeaHarrier based on 15 invoices for a total sum of over USD26.9m allegedly outstanding as of August 2018 (“Invoice Debts”), and a statutory demand for the same sum on Mr Lok Ho Ting based on a personal guarantee.

8.  On 3 December 2018, SeaHarrier managed to obtain an interim injunction from the High Court (in HCMP 2126/2018) to restrain Greenheart from presenting a winding-up petition against SeaHarrier based on that demand, on the ground that the Invoice Debts had merged into the FMSSA and the Share Charge which contained an arbitration clause.

9.  On 7 December 2018, after negotiations between the representatives of SeaHarrier, Greenheart and VMS Investment Group (“VMS”), including Mr Lok and the CEO of VMS, Mr Benny Chong (“Mr Chong”), it was agreed that SeaHarrier would withdraw its injunction application and Greenheart would not pursue its claim for the Invoice Debts, on the condition that VMS/Greenheart would procure a loan to SeaHarrier or its related company.  It was orally agreed that VMS/Greenheart would first lend USD9m to SeaHarrier or its related company to enable it to settle the sums owed to Greenheart.

10.  Pursuant to this arrangements, on 14 December 2018, Keyes Global (the lender company procured by VMS/Greenheart) entered into a loan agreement (“Loan Agreement”) to extend to China Latin (a related company of SeaHarrier) a credit facility of HKD210,870,000 (approximately USD26.9m, equivalent to the Invoice Debts).  On the same day an amount of HKD73,218,750 (equivalent to USD9m) was drawn down on the facility by China Latin and paid to Greenheart on behalf of SeaHarrier.  According to the Loan Agreement, the “Maturity Date” of the loan was “six (6) months from the first Utilisation Date or such other later date as the Parties may agree in writing”.  The Utilisation Date meant the date on which the facility or any part thereof was utilised.  There is no dispute that the original Maturity Date of the loans drawn down was therefore 13 June 2019.

11.  In early March 2019, Greenheart asked SeaHarrier to settle the remaining balance of the Invoice Debts.  At that time, Mr Lok was in touch with China Forestry Group Corporation (“China Forestry”), a Chinese state-owned enterprise, which had proposed to acquire certain assets of SeaHarrier and was also interested in acquiring Greenheart’s group.  Since it was understood that if the acquisition went ahead, the debts in question would become intra-group receivables and could be settled by way of intra-group set-offs, it was agreed between Mr Lok and Mr Chong that the sums owed by SeaHarrier to Greenheart and the loan under the Loan Agreement need not be repaid before the conclusion of the negotiations for the potential acquisitions.

12.  It was further agreed that the debts between the two sides should be consolidated into one transaction by increasing the loan facility for China Latin to “absorb” two loans made by two related companies of Greenheart, called “Ever Bless” and “Taine”, in the amounts of approximately USD3.95m and USD3.23m respectively, to Hua Hui Industrial and Commercial Development Ltd (“Hua Hui”), a company of which Mr Lok was also a director.

13.  On this basis, on 22 March 2019, China Latin entered into a supplemental loan agreement (“Supplemental Loan Agreement”) with Keyes Global, increasing the amount of the credit facility to HKD234,800,000.  The Maturity Date was also extended by 17 days to “30 June 2019 or such other later date as the Parties may agree in writing”.  On the same date of the agreement, a drawdown was made by China Latin for HKD102,050,000 to be paid to Greenheart on behalf of SeaHarrier.  On 1 April 2019, a further drawdown was made by China Latin for HKD32.22m and HKD21.37m to be paid to Ever Bless and Taine respectively.

14.  Notwithstanding that the Maturity Date of the loan was stated in the Supplemental Loan Agreement to be 30 June 2019, in May 2019, Mr Lok and Mr Chong orally agreed that, in consideration of Mr Lok’s continued efforts and assistance in making the potential acquisitions happen, the sums owed by his companies to VMS/Greenheart need not be repaid before the conclusion of the negotiations for the potential acquisitions.

15.  The negotiations for the potential acquisitions were delayed and only formally commenced in June 2019.  Since then, there had been no attempt whatsoever on the part of Keyes Global to seek repayment from China Latin under the Loan Agreement and the Supplemental Loan Agreement, until 19 December 2019 when Keyes Global, without any prior notice, served a statutory demand on China Latin and on Mr Lok based on his personal guarantee.

16.  In Mr Lok’s second affirmation, it is said that the oral agreement in May 2019 was reaffirmed by Mr Chong at a meeting on 18 July 2019.

17.  On the basis of these allegations, counsel for China Latin submit that (1) there was an oral agreement in May 2019 (reaffirmed in July 2019), amounting to an oral variation of the written agreements, that the sums owed under the Loan Agreement and the Supplemental Loan Agreement would not be repayable until after the conclusion of the negotiations with China Forestry; and (2) in any event, Keyes Global is estopped from claiming repayment before the conclusion of the negotiations. 

18.  An argument raised by China Latin at an earlier stage that the disputes between SeaHarrier and Greenheart arising from the FMSSA and the Share Charge continued to affect the indebtedness under the Loan Agreement and the Supplemental Loan Agreement, including in particular the argument that the arbitration clause in the FMSSA and the Share Charge is binding on Keyes Global by “subrogation”, is no longer relied upon.

Discussion

19.  On the evidence, it is clear that the Loan Agreement (as amended by the Supplemental Loan Agreement) amounted to a refinancing exercise, enabling companies on Mr Lok’s side to restructure and consolidate their indebtedness into one loan owed by China Latin to Keyes Global.  It seems to me that any previous disputes relating to the Invoice Debts are merely of historical interest and have little relevance to the present application.

20.  The Loan Agreement and the Supplemental Loan Agreement are detailed legal documents, apparently professionally prepared, setting out the terms of the facility agreed between the parties, including not only the maturity date of the loan but also the due dates for payment of interest. As Mr Chong pointed out in his affirmation, China Latin had failed to pay various interest instalments on the three drawdowns under the facility due on various dates between February and June 2019.  By the end of June 2019, total unpaid interest amounted to over HKD13.12m.

21.  In the light of this, it would be highly surprising that a serious agreement intended to have significant legal effect in relation to a very large sum of money would have been arrived at orally between the parties without any written record at all.  Yet the first affirmation of Mr Lok simply asserted that the oral agreement was reached in May 2019 between him and Mr Chong, without any detailed account as to the process of negotiation, offer and acceptance and generally the circumstances of the alleged oral agreement.  There was also a suggestion by Mr Lok that as soon as in early March 2019 it was already agreed between him and Mr Chong that the sums owed under the Loan Agreement need not be repaid before the conclusion of the negotiation for the potential acquisitions (see paragraph 12 of his first affirmation), but this is difficult to square with the express provision of the Maturity Date in the Supplemental Loan Agreement.

22.  It is very difficult to accept, as between commercial parties, that after entering into detailed written loan agreements, including the Supplemental Loan Agreement dated 22 March 2019 which inter alia extended the Maturity Date by 17 days to 30 June 2019, they would have orally come to an agreement indefinitely postponing the repayment date of a very substantial loan by reference to certain vague notion of “conclusion of the negotiations” for certain acquisitions, without any written record or even a text message, email or internal note or memorandum.  As provided in both written agreements, whilst the parties had contemplated the possibility of a further agreement to choose a later Maturity Date, they had envisaged that it would be a date the parties might agree “in writing”.  The absence of any writing in my view casts considerable doubt on the account put forward by China Latin: see Re Kinston Entertainment (HK) Ltd (urnep, HCCW 351/2007, 12 March 2008), §§16-23; Re GW Electronics Co Ltd [2020] HKCA 180, §37.1.

23.  Furthermore, on 17 June 2019, Keyes Global through its former solicitors issued a letter to China Latin as well as to the guarantors of the loan including Mr Lok, stating that China Latin had failed to pay the interest instalments due under the Loan Agreement as amended by the Supplemental Loan Agreement and that such failure constituted an Event of Default under the agreements (“EoD Demand Letter”).  Accordingly, Keyes Global declared all of the amounts outstanding under the agreements had become immediately due and payable and demanded payment of over HKD247m, and warned that unless payment was made within the next 7 days, legal proceedings (including but not limited to winding-up proceedings) would be commenced without further notice.  The EoD Demand Letter was passed by China Latin to its solicitors and, on 24 June and 8 July 2019, Messrs Johnny K K Leung & Co wrote on behalf of China Latin to Keyes Global’s solicitors saying they were taking instructions from their client and asked Keyes Global to withhold taking further action. 

24.  The EoD Demand Letter is clearly a contemporaneous document that is inconsistent with the alleged oral agreement. Yet in the face of that demand, China Latin did not immediately raise the objection, as one would have expected, that the demand was in breach of the oral agreement reached in March and May 2019.

25.  It is regrettable that, not only was the EoD Demand Letter not disclosed in the first affirmation of Mr Lok used for the ex parte (on notice) application for the injunction on 2 January 2020, but he actually stated in that affirmation at paragraphs 20 and 21:

“ 20. When the said negotiation was ongoing since June 2019 and is now in an advanced stage, SeaHarrier was not requested to make further repayments to Greenheart and there was no attempt whatsoever on the part of Keyes Global to seek repayment from China Latin under the Loan Agreement and the Supplemental Loan Agreement. …

21.       Surprisingly, on 19^th December 2019, without any prior notice, the solicitors for Keyes Global served the SD on China Latin. …”

26.  In the context of the ex parte application, when one of the principal matters relied upon by China Latin in support of its version of the facts was that no demand for repayment had been made at all by Keyes Global until the statutory demand which came out of the blue, it was most misleading for Mr Lok to have said what he did in those two paragraphs without disclosing the EoD Demand Letter.

27.  When this was pointed out in Keyes Global’s evidence, in his reply affirmation, Mr Lok said that the failure to exhibit the EoD Demand Letter was “plainly due to oversight”, saying that the preparation work for the affirmation had to take place urgently between Christmas and New Year’s Eve towards the end of 2019.  There was no evidence from the solicitors as to why those letters could have been overlooked assuming that was the case.

28.  Mr Lok also said in his reply affirmation, for the first time, that there was another meeting, held on 18 July 2019, at which Mr Chong “reaffirmed” that the sums owed by China Latin were not repayable until after the conclusion of the negotiations with respect to the potential acquisitions. Not only was there no mention of this meeting at all in his first affirmation, Mr Lok was unable to produce any minutes, notes, text messages or other mobile phone records to support what he alleged to have been said at that meeting, which is most surprising given that the meeting was allegedly held in the office of Greenheart Group and attended by various parties and various confirmations were given during the meeting.  Nor has Mr Lok credibly explained why this “re-affirmation” by Mr Chong at the July 2019 meeting was not mentioned in his first affirmation.

29.  In the circumstances it seems to me that the bare allegation of the oral agreement made in March and May 2019 and reaffirmed in July 2019 does not give rise to a bona fide dispute of the debt on substantial grounds.  This is sufficient to dispose of China Latin’s application, but Mr Chain has raised two additional points on behalf of Keyes Global that I should mention.

30.  First, it is submitted that even if the alleged oral variation of the Maturity Date was in fact agreed in May 2019, and was effective despite being made orally,[1] it was only an extension of the Maturity Date and did not affect Keyes Global’s right to demand immediate repayment, as it did by letter on 17 June 2019, upon an event of default, namely, the non-payment of interest on the sums drawn down.  Mr Mak argues on behalf of China Latin that the oral variation extended to “sums owed” by China Latin and covered interest payments.  In my view this makes the oral agreement even more incredible because it would mean that the lender had not only agreed to an indefinite postponement of the principal, but had in addition agreed to suspend all obligations for China Latin to make periodic payments of interest while repayment of the loan was indefinitely deferred.  Further, this argument seems to me to be inconsistent with the case put forward in China Latin’s solicitors’ letter dated 30 December 2019 to Keyes Global’s solicitors which referred to the oral agreement as being one for the extension of the “Maturity Date” for the loan, as well as in China Latin’s skeleton argument for the ex parte application which referred to a “consensual variation of the Maturity Dates”.

31.  Secondly, it is submitted for Keyes Global that the non-disclosure of the EoD Demand Letter was such that the ex parte injunction granted in January 2020 should not be continued and a fresh injunction should not be re-granted.  I also accept this submission.  The evidence put before the court on the ex parte application was not very strong.  A point emphasised on behalf of China Latin at that time was that there was no demand at all by Keyes Global for repayment of the loan until the statutory demand which was issued without any prior notice of possible legal action.  This has turned out to be false (though I make no criticism of counsel who, I assume, were simply relying on instructions).  In my judgment the ex parte injunction should be discharged on this ground alone and not be re-granted.  In addition to the reasons already given above, I take into account the high materiality of the non-disclosure in that without that point, the ex parte injunction would probably not have been granted.  One would normally expect affidavit evidence to be filed by the party responsible to account for the non-disclosure (see Fantastic State Ltd v Tien’s Organic Farm [2019] 3 HKLRD 438, §40).  Despite having made a false assertion and failed to disclose an important fact, China Latin has given only the most cursory of explanation, which does not deal with why Keyes Global’s letters to China Latin and the guarantors and the two holding letters of China Latin’s solicitors in response, which should be in the file, could have been overlooked.  Even if the omission was not deliberate, to make an assertion that Keyes Global had made “no attempt whatsoever” to seek repayment, without taking the simple step of checking the file, was in my view reckless.

32.  For these reasons, China Latin’s application is dismissed with costs to be taxed if not agreed, with a certificate for two counsel.  Given the conduct of China Latin as set out above, I consider that costs should be taxed on an indemnity basis.