RE NERICO BROTHERS LTD

CACV 223/2022

[2023] HKCA 535

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 223 OF 2022

(ON APPEAL FROM HCCW NO 47 OF 2022)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

Introduction

1.  By a Summons filed on 15 July 2022 (“the Summons”), Target Insurance Company Limited (“the Petitioner”)  applied for an order that the Notice of Appeal filed on 30 May 2022 by Nerico Brothers Limited (“the Company”)  be struck out under the inherent jurisdiction of the court on the grounds that (a)  it discloses no reasonable ground of appeal; and/or (b)  it is frivolous or vexatious or otherwise constitutes an abuse of process of the court, “in that the Company is now impermissibly seeking to overturn the common premise between the parties at the Court below that the petitioning debt is not disputed by the Company”.

2.  Alternatively, the Petitioner seeks an order that the Company do procure Lee Cheuk Fung Jerff (“Mr Lee”)  or Wan Kai Leung Paul (“Mr Wan”)  or any of its directors or shareholders to give security for the costs of the appeal in the sum of HK$681,248 within 28 days.  The Summons has not been amended even though Mr Wan resigned as a director after the Summons was issued.

3.  The Company objects to the application to strike out the Notice of Appeal, but does not dispute that security for costs should be provided to the Petitioner.  However, it disputes the amount of the security sought and has indicated that it is prepared to pay the sum of HK$438,500 or such sum as directed by this Court.

4.  For the purposes of this application, the parties have filed affirmations and lodged written submissions.  Having considered them, the court does not think it is necessary to hold an oral hearing and we will deal with the application on paper.

Background

5.  The Petitioner[1] was an authorized insurer and its business was regulated by the Insurance Authority (“IA”)  under the Insurance Ordinance (Cap.41).  As of December 2021, the Company provided over 10,000 insurance policies for taxis in Hong Kong, representing about 60% of the taxi insurance market in Hong Kong.

6.  The Company is incorporated in Hong Kong and is a licensed corporation regulated by the Securities and Futures Commission.

7.  Since June 2020, the Petitioner maintained a managed account with the Company in respect of securities and spot forex (“the Account”), which was governed by the terms of the Institutional Services Client Agreement (“the Agreement”). Pursuant to section A, clause 3(b)  of the Agreement, the Company shall open, maintain and operate the Account in accordance with the Petitioner’s instructions.

8.  As at October 2021, an aggregate amount of HK$1.4 billion had been transferred to the Account.  Since the end of October 2021, at the request of the IA, the Petitioner has been demanding the Company to pay to it the amount standing in the credit of the Account.

9.  On 7 January 2022, IA appointed Mr Lai and Mr Kam as joint and several managers of the Petitioner (“the Managers”).  On 17 January 2022, the Managers formally lodged a withdrawal form with the Company requesting the return of the amount standing in the credit of the Account.

10.  According to an Investor Statement issued by the Company, as at 17 January 2022, the amount standing to the credit of the Petitioner’s Account was not less than USD154,177,206.74 (“the Sum”).  Other than remitting USD7,035.74 to the Petitioner on 25 January 2022, the Company has failed to pay the balance of USD154,170,171.74 (“the Outstanding Sum”)  to the Petitioner.

Service of Statutory Demand and appointment of Provisional Liquidators

11.  On 18 January 2022, the Petitioner’s Statutory Demand (“SD”)  was served on the Company.  The SD which was in the statutory Form 1A stated that the Outstanding Sum was “due as at the date of this demand”.  As the Company failed to pay the Sum within 3 weeks of the service of the SD, the Petitioner presented a petition on 10 February 2022 (“the Petition”)  and at the same time, applied for the appointment of provisional liquidators (“PLs”)  for the Company.

12.  The Company did not apply to set aside the SD.  It only objected to the application for appointment of PLs.  On 15 February 2022, the Company filed an affirmation of Mr Lee, one of its directors.

13.  Significantly, Mr Lee said “Insofar as the [SD] is concerned, as stated in [the Company’s then solicitors’] letter of 8 February 2021 [sic] … the Company does not deny that the Sum is owed to the Petitioner” (emphasis added).  However, it objected to the appointment of PLs, arguing that the Company was solvent, and that it had been attempting to recover the Outstanding Sum from a Cayman Islands company called Four Dimensions Global Strategy Fund (“Four Dimensions”), the Company having subscribed for units in this fund.

14.  In the affirmation, Mr Lee said the Company “cannot remit the said Sum given the fact that the [Outstanding] Sum is held at [sic] with a Cayman Islands agent … the withdrawal of which requires certain forms with Cayman Islands Monetary Authority (‘CIMA’)  and sought 21 days for remittance of the same” [23]. He said the Company was required to complete certain forms with CIMA, which also requested an independent audit report of the Petitioner and the Company, and that upon completion of the independent audit reports and reply from CIMA, remittance of the [Outstanding] Sum could be made [25], on his estimate, in “about 2 weeks” [70].

15.  At the hearing for the appointment of PLs before DHCJ Bernard Man SC on 17 February 2022, the Company’s then counsel Mr Stony Chan admitted that its liability to repay in cash “at the present moment now” was not disputed [Transcript, Application Bundle/141-2], the Company would “only be asking for an indulgence in terms of time for an extension” before the Companies Judge in the winding-up hearing [Transcript, AB/142], and the Outstanding Sum was “presently due and payable” to the Petitioner [Transcript, AB/167] (emphasis added).

16.  The deputy judge rejected the Company’s arguments and appointed PLs.  In the deputy judge’s oral reasons given the same day, he noted that the Company’s position as advanced by its counsel was that the units in the Four Dimensions fund were subscribed by the Company on its own behalf and not on behalf of the Petitioner [Transcript AB/167], which appeared to be inconsistent with some of the evidence [Transcript AB/169]. 

17.  More importantly, the deputy judge found that the evidence adduced by the Company was “highly unsatisfactory”, as the only document presented by the Company on the investment in the Four Dimensions fund was dated some months ago, Mr Lee did not even know the last name of the person he had been corresponding with, and there was a “remarkable dearth of information about the Four Dimensions fund” [Transcript, AB/169].  The deputy judge found that “the company’s inability to put forth evidence and to sensibly explain the whereabouts of the precise destination or use of the US$154 million-odd deposited by the Petitioner gives rise to great concern” [Transcript AB/169].

18.  There was no appeal from the deputy judge’s order.  Pausing here, we note that in the Company’s written submissions before this court [5(2)], it is said that its former counsel Mr Chan had “made unauthorized and unwarranted concessions” including that the debt should be payable immediately.  If it was indeed the case that the concession was unauthorized, the Company would have recourse in other proceedings, and we say no more than that.

19.  We note however that Mr Lee has alleged in his affirmation opposing the Summons that he was not aware of the concession until he read the transcript exhibited to Mr Lai’s affirmation in support of the Summons.  Suffice it to say that the Company was represented by solicitors (not its present firm)  before the deputy judge, and if counsel had made any concessions that were unauthorized, one would have expected the solicitors to have noted it and taken appropriate steps to notify the lay client and the court, if not immediately, then very soon afterwards. That was not done.

Winding-up Order

20.  About a week before the hearing of the Petition, on 26 April 2022, the Company filed an affirmation of another one of its directors Mr Wan opposing the petition.  Significantly, Mr Wan again confirmed that “it is the Company’s stance that it does not dispute the Outstanding Sum is owing and payable” [9].

21.  However, the Company opposed the petition on the ground that it was solvent and that there was a reasonable prospect that it could repay the Outstanding Sum within a reasonable time.  The affirmation contained the following allegations.

-   Due to anti-money laundering regulations of the Cayman Authorities, the Outstanding Sum can only be withdrawn from the Account upon compliance with the said regulations, which included submission of audited reports of the Petitioner [12]. 

-   It was the understanding of the Company that Four Dimensions’ inability to withdraw the Outstanding Sum “is partly, if not wholly, caused by the Petitioner’s inability and/or refusal to provide its audited reports” [32].

22.  The Company produced daily statements dated 28 February 2022 to 2 March 2022 showing that the cash holding of the Company with Four Dimensions was sufficient to repay the Outstanding Sum to the Petitioner [23].

23.  On 3 May 2022, the Petition came before the Companies Judge Linda Chan J (“the judge”). Counsel then instructed for the Company Ms Melinda Chiang applied for an adjournment.  This was rejected by the Companies Judge who made a winding-up order.

24.  Reasons for Judgment were given by the judge on 19 May 2022.  At [14(1)], the judge noted that the starting point is that the petitioner whose debt is not in dispute is entitled ex debito justitiae to an order for the compulsory winding up of the company.  This was the first of the points submitted on behalf of the Petitioner [16] and the judge noted [17] that Ms Chiang was unable to answer it [17].  She had only asked for an adjournment which the judge refused to grant.

25.  As for the Company’s application for adjournment, the judge noted that no meaningful progress for retrieval of the Outstanding Sum had been made since Mr Lee’s affirmation in February 2022, and he had not given the court an update despite the Company’s assertion that he would be able to do so upon his return from Singapore on 29 April 2022 (a week before the hearing of the Petition). Accordingly, the judge made a winding-up order.

Grounds of Appeal against the Winding Order

26.  On 30 May 2022, the Company lodged a Notice of Appeal. 

27.  The Company submitted 6 grounds of appeal.  They may be summarized as follows:

(1)  The Judge failed to consider that there was no express provision in the Agreement that time is of the essence upon the Petitioner’s request to withdraw the Sum, and reasonable time should be given to the Company to comply with the request.  The same applies to the formal withdrawal notice from the Petitioner to the Company, the redemption notice from the Company to Four Dimensions, and the statutory demand[2]. (grounds 1, 3 and 4)

(2)  In making the Winding up Order, the Judge erred in failing to consider that the IA’s appointment of Managers for the Petitioner on 7 January 2022 triggered a “red flag” within the system of Four Dimensions, and therefore the withdrawal of the Sum deposited with Four Dimensions must be approved by CIMA and the Caribbean Financial Action Task Force (“the Cayman Authorities”).  It was the failure on the part of the Petitioner to provide an independent audited report and fulfill the compliance requirements of the Cayman Authorities that stalled the remittance of the Outstanding Sum and thus, as the Petitioner was in repudiatory breach of the Agreement, and/or under the common law prevention principle, the Petitioner is not entitled to immediate repayment of it. (grounds 2, 5 and 6)

The Petitioner’s application to strike out the Notice of Appeal, alternatively for security for costs from the Company

28.  On 15 July 2022, the Petitioner issued the Summons to strike out the Notice of Appeal on the grounds that:

(a)  it discloses no reasonable ground of appeal; and/or

(b)  it is frivolous or vexatious or otherwise constitutes an abuse of process of the court, in that the Company is now “impermissibly seeking to overturn the common premises between the parties at the Court below that the petitioning debt is not disputed by the Company”.  There was an alternative application for security for costs in the sum of HK$681,248 to be paid by Mr Lee and/or Mr Wan.

Discussion

29.  The legal principles concerning the jurisdiction of this Court to strike out a notice of appeal are well established and have been summarized in Leung Chung Lan Lorraine v Hang Seng Bank Ltd [2019] HKCA 1408 at [34] - [35]:

“34.  The Court of Appeal has inherent jurisdiction to strike out a notice of appeal where an appeal is plainly not competent (Aviagents Ltd v Balstravest Investments Ltd [1966] 1 WLR 150 at 154B to E, 155D to G; Ng Shek Po & Anr v Director of Lands [1996] 4 HKC 616 at 619D to E), or where the appeal is frivolous, vexatious or an abuse of the process of the court (Burgess v Stafford Hotel Ltd [1990] 1 WLR 1215 at 1220A to G, 1221B to D; Fok Siu Wing v Hong Kong Housing Authority [2016] 1 HKLRD 238 at [6], [11] to [13]). In the case of the latter, the inherent jurisdiction would be exercised on precisely the same basis as if Order 18 rule 19 strictly applied to notices of appeal (Burgess v Stafford Hotel Ltd at 1221D).

35.  The jurisdiction to strike out a notice of appeal should be confined to clear and obvious cases. It should not be utilised, and an order to strike out should not be made, where any extensive inquiry into the facts is likely to be necessary (Burgess v Stafford Hotel Ltd at 1222C to D).”

30.  We note that the Petition had been presented on the basis in the SD that the Company was unable to pay its debts, relying on s.178(1)(a)  of Companies (Winding-Up and Miscellaneous Provisions)  Ordinance Cap. 32, i.e. the debt was “then due”, which according to case law means “absolutely due” and “presently payable” (Re Golden Always Ltd [1996] 3 HKC 252, 254H; Re Huge Best International Limited, HCCW 389/2010 unreported, 22 June 2011, [44] – [46]).  If, as the Company now argues [ground 4(4)] the SD was “wrongfully issued”, the Company should have applied to set aside the SD, which as noted above, contained the assertion that the debt claimed was “due as at the date of this demand”.

31.  Instead, faced with the SD and then the Petition, the Company, not once but twice, unconditionally admitted in the affirmations of Mr Lee and Mr Wan that the Outstanding Sum was owed and payable.  There was no allegation that its liability to the Petitioner was only contingent or prospective (cf written submissions of the Company opposing the Summons [6(3)]).

32.  More importantly, at the hearing before the judge, the Company only sought an adjournment of the hearing of the petition.  The Company said in its written submissions: “It is the Company’s stance that it does not dispute the Outstanding Sum is owing and payable” [5].  It did not argue that there was a condition precedent to the recoverability of the Outstanding Sum, or that it was not presently payable due to any fault of the Petitioner, and that the Petition should therefore be dismissed.  The Company was merely asking the court to exercise its discretion to adjourn the hearing of the Petition “for a reasonable time”, it did not deny that there was a ground for winding-up at all.

33.  That being the Company’s position before the judge, it should not be the judge’s task to trawl through the evidence to see if it disclosed a defence of condition precedent or fault on the part of the Petitioner.  All that the judge was asked for was a “reasonable time” to repay, an indulgence which the judge declined to give in the exercise of her discretion, a decision which this court as an appellate court would not overturn in the absence of error of law, or misapprehension of material facts, or a failure to take a relevant matter into account, or having taken an irrelevant matter into account, or a decision that is “plainly wrong”.

34.  As the judge was never asked to determine the issue whether the ground for winding-up was established, it is an abuse of process for the Company now to not only argue a point which it should have raised below, but which seeks to contradict common ground before the judge.  We note that in a letter to the Company’s then solicitors dated 30 March 2022, the Petitioner’s solicitors specifically asked if the Company would continue, at the winding-up hearing on 13 April 2022, to take the position the Company took before the deputy judge.  The reply from the Company’s then solicitors dated 6 April 2022 was to “confirm that Our Client does not dispute the debt claimed by the Petitioner.  We are instructed that Our Client is a solvent company but is only unable to repay the debt at the current stage… Our Client … seeks for time extension for repayment …”.  This supports the Petitioner’s evidence [Lai 1^st, 15.07.2022, para 8] that in light of the Company’s position, it (the Petitioner)  had not filed any evidence in reply in the Petition, and it would thus be prejudiced if the Company were now allowed to assert that it was not liable to repay the Outstanding Sum because the Petitioner had been “stalling” the remittance of that sum due to its purported failure to supply its audited report.  This is particularly important to the repudiatory breach and/or prevention principle issues that the Company is now seeking to raise in the grounds of appeal.

35.  In any event, out of an abundance of caution, we have considered the exhibits to Mr Wan’s affirmation (which were not included in the Application Bundle)  and we note that there is no evidence from the Cayman Authorities (whether directly or by way of attachment)  that expressly required the Petitioner to provide its audited report for the Company’s redemption of units in the fund.  The only evidence purporting to be from CIMA (“WKLP-6”)  is an email of 13 April 2022 from one Sharon from the Financial Reporting Authority to Four Dimensions which is said to attach an SAR (Suspicious Activity Report)  Reporting form, asking it to complete the form “with as much information as possible”.  Interestingly, this was in reply to an email of 8 April 2022 from Four Dimensions saying that “we would like to reject its [the client’s] investment or deposit and return the asset to them …” (emphasis added), which is inconsistent with a redemption of units by the Company.

36.  In all the circumstances, the grounds of appeal are unarguable and the present case falls within the category of “very clear and obvious cases” where the court would exercise its power to strike out the Notice of Appeal.

Security for costs

37.  As a matter of completeness, if we had not struck out the Notice of Appeal, we would have made an order for security for costs of the appeal in the sum of HK$450,000 to be paid into court by Mr Lee (Mr Wan having resigned as a director on 10 August 2022)  in the manner proposed.

Order

38.  We order that the Notice of Appeal filed on 30 May 2022 be struck out on the grounds that (a)  it discloses no reasonable ground of appeal and /or (b)  it constitutes an abuse of the process of the court.  We note that the Summons asked for the costs of the strike-out application to be paid by the Company (which we note is now in liquidation)  on an indemnity basis, but the parties have not made submissions on this application.  We give leave to the Petitioner to file a written submission on this matter (limited to 5 pages)  within 14 days of the date of this Judgment, and the Company to file a written submission in reply (limited to 5 pages)  within 14 days thereafter.  We will give a written decision on costs thereafter.