ALCO HOLDINGS LTD v. WORLD CROWN INVESTMENTS LTD

HCMP 795/2022

[2022] HKCFI 3669

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 795 OF 2022

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REASONS FOR DECISION

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1.  On 23 June 2022 the Plaintiff (“Company”) issued an originating summons seeking an injunction restraining the Defendant from presenting a winding up petition based on a statutory demand issued against the Company dated 9 June 2022. On 24 June 2022 an inter partes summons was issued (“Inter Partes Summons”) for an interim injunction and heard before Yeung J on 30 June 2022. The Defendant gave an undertaking not to present a winding up petition pending the determination of the originating summons which I heard on 22 November 2022.

2.  The Company is listed in Hong Kong and carries on business developing and manufacturing electronic and computer goods. Although the evidence about its financial state is limited, it is clear from the circumstances in which the application arises that the Company faces serious financial issues and is probably insolvent.  In March 2022 with the assistance of Deloitte it began to explore the possibility of finding potential investors to help it solve its financial difficulties.  One of these was Mr Benny Wong. The Defendant is a special purpose vehicle which Mr Wong appears to have established with a view to it being the corporate vehicle through which any investment he made would be implemented. Negotiations took place between Mr Wong and representatives of the Company.  In the course of the discussions Mr Wong made two transfers to subsidiaries of the Company:

“(1) On 19 and 20 May 2020, Mr Wong personally transferred the sum of RMB 3,700,000 in the Mainland to Plaintiff’s subsidiary company in the Mainland known as “愛高電業（東莞）有限公司” (“Alco Dongguan”).

(2) On 24 May 2022, Mr Wong gave a personal cheque in the sum of HK$652,174 to one Nexstgo Link Co. Ltd (“Nexstgo”), being another subsidiary of Plaintiff.”

3.  Shortly thereafter the negotiations ended and Mr Wong sought repayment of the advances that he had made in May 2022.  The sums were not repaid.  This led to issue of the statutory demand.

4.  It is apparent from the skeleton argument filed by the Company for the application before me and for the application before Yeung J that the plaintiff did not properly understand the principles which guide the Court in determining applications of this sort; in fact it is apparent from the Company approaching the Listing Clerk for a hearing before the Summons Judge rather than as should have been the case before the Companies Judge, that the Company’s legal advisers were not familiar with applications of this sort.  The Company approached the matter before Yeung J and before me on the basis that what was required in order to obtain relief was it to be demonstrated that the Plaintiff had a bona fide defence on substantial grounds to the debt sought by the statutory demand.  It is not.  A debtor is required to show that presentation of a winding up petition would be an abuse of process.  What is necessary is to demonstrate that the creditor knows or should know that there is a genuine defence to the claim at the time the application is issued.  It is not sufficient to demonstrate that if a petition were to be issued, the debtor would be able to adduce evidence that at trial it is arguable would demonstrate a bona fide defence on substantial grounds.  This is explained in my judgment in Hung Yip (HK) Engineering Co Ltd v Kinli Civil Engineering Ltd[1]: 

“10.  Counsel for both parties seem to have read [14(3) to (5)] of the judgment as indicating that the issue on the hearing of the originating summons was the same as if a petition had been issued and come on for trial, namely, had the Company demonstrated that the Company had a bona fide defence on substantial grounds.  Whilst on occasions that may in practice be the case, as I have explained it is not what a company has to demonstrate.  What has to be demonstrated is that presentation of a petition is an abuse of process.  The facts of the present case allow the distinction and its importance to be illustrated and explained with some precision.

14.  It seems to me that if a petition had been issued on 6 March 2020 there would have been very little room for argument that it was an abuse of process.  In my view, it is implicit in the test applied by the court that for presentation of a petition to be an abuse a creditor must either have been told enough to understand that the debt is disputed on substantial grounds or must be assumed to have known this from facts of which he was aware.  As the authorities make clear a putative petitioner should not lightly be prevented from exercising his statutory right to present a petition.  I would have thought it self-evident that the procedure that permits a company to apply to court to restrain presentation of a petition is not intended to provide a mechanism by which a dispute that would normally be determined on the hearing of a petition is determined at the instigation of a company by a preliminary summary process.  The scope of the insolvency regime is defined by the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (‘Ordinance’), and its subsidiary legislation, which does not provide any mechanism for challenging a statutory demand unlike the regime for personal bankruptcy, which so provides in Rule 48 of the Bankruptcy Rules, Cap 6A.  The ability to present a petition promptly in the case of a company believed to be insolvent is important to creditors as by virtue of s184(2) of the Ordinance, it is relevant to the date any winding-up is deemed to commence.  This effects the period within which claims may arise for transfers at an undervalue and unfair preferences pursuant to ss 265D and 266 of the Ordinance.

15.  As I have emphasised in [8], what needs to be demonstrated is an abuse of process.  Although, in the present context this has a largely technical meaning it does involve some element of impropriety in the sense of misuse of the procedure in s179 of the Ordinance for presentation of a petition to wind-up a company, particularly if the creditor knows that the debt is disputed on substantial grounds and issue of a petition is threatened with a view to asserting pressure to pay rather than out of a genuine concern as to a company’s solvency.  It is, however, well settled that there is nothing objectionable in principle to a creditor owed a debt that he believes cannot be disputed issuing a petition to wind-up a company he suspects is insolvent[2]. This suggests that presentation of a petition relying on a debt genuinely believed to be payable is not an abuse even if a subsequent inquiry demonstrates that for a reason unknown to the creditor at the time the petition was issued there existed a bona fide defence on substantial grounds.”

5.  This case was not cited to Yeung J and neither did counsel for the Company cite it before me.  Also relevant, but not cited, was the Court of Appeal’s decision in Ma Ka Hing v Pang Ming Chung[3], which holds that where a debtor admits receiving money, in the absence of circumstances giving rise to a presumption of advancement, it is for the defendant to prove that the money was a loan which is not repayable at the date[4] of issue of legal proceedings to recover it.  If there is nothing to suggest the money was paid to settle an existing debt or given in return for cash, the money is prima facie repayable on demand.

6.  In the present case the Company signed payment authorizations in respect of both advances to the relevant subsidiaries and also receipts.  They record the Company, Mr Wong and the Defendant agreeing that the transfers were loans by the Defendant to the Company.

7.  The Company’s solicitors wrote on 17 June 2022 in response to the statutory demand setting out the Company’s defence:

“With due respect, the SD is prima facie defective, invalid and irregular. It must be rioted that:

(a) There is no loan agreement mentioned entered into between our client and your company in any form at all;

(b) There have been no payments made directly by your company to our client at all;

(c) There is no particular due date of the purported debt mentioned in the SD nor the letter from Messrs. Darin Leung & Partners (‘DLP’), solicitors for your company, to our client dated 31 May 2022;

(d) There is no basis mentioned in the 31 May letter why the purported debt is ‘repayable upon demand’ at all;

(e) There is no debt or loan due and payable by our client to your company; and

(f) The Alleged Loan Confirmation Receipts are not supported by any payment proofs or records directly made by your company to our client at all.’”

“In case the Urgent Funding was a loan made by your company (without constituting any admission by our client), it shall only be returned by our client to your company in accordance with the Proposed Restoration. Since your company has not yet revert the Assigned Debts to Leungs, our client is therefore not required to repay the Urgent Funding to your company at this juncture. In any event, it has never been agreed that our client is required to repay the Urgent Funding to your company upon demand and/or by the Purported Due Date and/or by any other predetermined dates at all.”

8.  It appears clear from the letter that the Company could not demonstrate that it had been agreed that the loans were repayable on any particular terms.  The loans appear to have been made in the expectation or hope that Mr Wong would invest in the Company and the loans would be swopped for equity.  But this was never agreed and thus the loans were repayable on demand – which it would appear the Company’s solicitors did not appreciate.  The issue was whether the Defendant could properly claim repayment from the Company.  It is clear that the Defendant proceeded on the basis that as this was what the contemporaneous documents signed by the Company agree, the Company was the debtor.  I would make 2 points.  First, that as at 30 June 2022 it seems to me it was not an abuse of process for a petition to be issued, because the Defendant could quite legitimately take the view that the contents of the solicitor’s letter were disingenuous and did not demonstrate a defence.  It is not for this court now to assess the matter as if a petition had come on for trial.  Secondly, in any event it does not seem to me that the Company has demonstrated a defence.  It asked for a loan and Mr Wong agreed to procure one on the terms recorded in the payment authorisations and receipts.  I can see no reason why the Defendant was not entitled if the investment did not proceed to ask for the loan to be repaid immediately.

9.  The Company has also argued that in some way it is relevant that at the time the loans were made the Company’s major shareholder assigned their loans to the Company to Mr Wong.  In my view it is not.  There is no dispute about the assignments, which are probably of little value.  There is no evidence to suggest that it was agreed that the loans were only repayable if the assignments were cancelled.

10.  I release the Defendant from its undertaking and dismiss the originating summons and the Inter Partes Summons.  I will make a costs order nisi that the Plaintiff shall pay the Defendant’s costs of the Action including any reserved costs.