RE CHENG KWUN SHING EDWARD

HCB 2472/2023

[2024] HKCFI 524

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 2472 OF 2023

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J U D G M E N T

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1.  This is the hearing of the petition presented by the petitioner on 4 May 2023 (“petition”) for a bankruptcy order against Cheng Kwun Shing Edward (the “debtor”).

Background

2.  Kary Kung (“Kary”), the sister of the petitioner, had been involved in a romantic relationship with the debtor from about 2013. In 2016, Kary started a money service operator/international remittance business with the debtor. On 28 June 2016, iCAN Fintech Group Limited (subsequently renamed into Vcan FinTech Limited (“Vcan”)) was incorporated. Although the debtor has been the sole director and ultimate sole shareholder of Vcan at all material times, it is not disputed that there was an agreement for Kary to be entitled to an equal share of the dividends of Vcan with the debtor.

3.  The petitioner’s case is that on 27 February 2018, she made available a loan of HK$500,000 (the “Debt”) to Vcan on condition that the debtor, as the sole director and shareholder of Vcan, sign a personal guarantee. A guarantee dated 27 February 2018 was entered into between the debtor and the petitioner (the “Guarantee”), whereby the debtor agreed to guarantee the repayment of the Debt by Vcan within 1 year.

4.  It is not disputed that HK$500,000 (minus administration fees) was transferred from the petitioner’s HSBC account into Vcan’s bank account on 27 February 2018.

5.  On 15 February 2022, the petitioner served a statutory demand requiring Vcan to repay the Debt. This statutory demand was subsequently withdrawn on 2 March 2022. At the same time, the petitioner’s then legal representatives threatened legal proceedings against Vcan and the debtor.

6.  On 17 August 2022, a second statutory demand was served on Vcan and a statutory demand was served on the debtor (the “SD”).

7.  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.

8.  On 4 May 2023, the Petition was presented.

Debtor’s Grounds of Opposition

9.  A Notice of Intention to Oppose the Petition was filed by the debtor on 27 June 2023. The following grounds of opposition were set out:

(1)  The HK$499,985 received by Vcan was not a loan from the petitioner;

(2)  The debtor did not sign the Guarantee;

(3)  There is a bona fide dispute on substantial grounds;

(4)  The presentation of the petition is an abuse of process.

Legal Principles

10.  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].

11.  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].

12.  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

Whether the Debt was a loan?

13.  The debtor’s case is that after his romantic relationship ended with Kary in 2017, he had continued to work together with Kary. However, the debtor did not want to be the only person contributing to Vcan whilst Kary would be entitled to 50% of the dividends. Therefore there was an oral agreement between Kary and the debtor that Kary would pay the defendant HK$500,000 to continue to develop Vcan’s business and to meet the operational costs and expenses as and when they arose.

14.  However, as Kary did not have sufficient funds, she procured the petitioner to deposit the HK$500,000 into Vcan. As such, it was submitted that the HK$500,000 was not a loan to Vcan but a non-refundable payment by Kary to the debtor.

15.  It is immediately apparent that the debtor’s case does not make sense:

(1)  The debtor says that by 2017, he had already contributed more than HK$2.7 million into Vcan, whilst Kary had only contributed about HK$600,000. It is difficult to see how HK$500,000 from Kary would equalize the previous capital contributions between them or would be sufficient to justify the further promise by the debtor to shoulder the future operational expenses.

(2)  If Kary had agreed to pay the debtor HK$500,000, it cannot be explained why she would procure the petitioner to make the deposit into Vcan’s account, instead of to the debtor directly.

(3)  The debtor knew about the transfer from the petitioner’s account into Vcan’s bank account instead of being paid to him. No objection was raised by the debtor on this transfer. The explanation given by the debtor was that as he was going to put the money into Vcan in any event, he did not raise any query. However, there is no evidence that this HK$500,000 was booked as any director’s loan in Vcan’s financial statements.

16.  In any event, I am of the view that whether the Debt was a loan and the circumstances under which the HK$500,000 was paid into Vcan’s account is irrelevant to whether the debtor is liable to the Debt, as the petitioner is relying on the Guarantee as the basis for the debtor’s liability for repayment. Ultimately, one needs to look at whether the debtor has raised any bona fide dispute as to his liability under the Guarantee.

The Guarantee

17.  The Guarantee provides that:

“I, [the debtor], … for and in consideration of [the petitioner] lending HK$500,000 to [Vcan] … I, [the debtor], hereby personally guarantee to you the payment of any obligation of [Vcan] and I hereby agree to bind myself to pay you on demand any sum which may become due to you by [Vcan] whenever [Vcan] shall fail to pay the same within One Year …”

18.  The debtor’s case is that he had never seen the Guarantee before 23 February 2022 and that he had never signed it. The debtor however, does not say that the signature on the Guarantee is not his signature, but mentioned that he had previously pre-signed on a blank piece of paper and gave to Kary for the limited purpose of filling out instructions to banks. The suggestion is that someone had used his pre-signed signature and superimposed it onto the Guarantee without his knowledge or consent.

19.  The petitioner’s case is that the Guarantee was signed by the debtor, as supported by Kary’s affidavit evidence, where it is set out that she personally witnessed the debtor’s signature on the Guarantee on 27 February 2018.

20.  I am of the view that the debtor’s case is incredible and raises no bona fide dispute:

(1)  An email dated 28 February 2018 from Kary to the petitioner and the petitioner’s husband, copying the debtor, reads:

“Hi Eva and Garry,

The total of HKD $500,000- you have made on 27^th Feb, 2018 was well received. Attached herewith the [Guarantee] for your reference. Should you have any further questions, please do not hesitate to contact us. Thanks!”

A signed copy of the Guarantee was attached to this email. This is a contemporaneous document showing clearly the debtor was copied on an email where a signed copy of the Guarantee was attached. This email defeats any contention of the debtor that he had only first heard about the Guarantee in an email from Kary in December 2021. The debtor has not denied that the email address belonged to him, nor did he provide any explanation when this email was exhibited in support of the petitioner’s contention. This is despite the fact that he had sought leave to put in a further round of evidence.

(2)  This email also defeats allegations of fraud or superimposition. The 28 February 2018 email shows that Kary had appended a signed copy of the Guarantee the day after it was executed (back in 2018), and not, as alleged by the debtor, as having been forged or superimposed with his signature, to pressure the debtor in negotiations after relations broke down in 2021.

(3)  There is a record of a WhatsApp message between the petitioner and Kary whereby Kary forwarded a copy of the Guarantee to the petitioner for her to arrange for transfer. Although the WhatsApp message is itself undated, the petitioner’s and Kary’s affidavit evidence is that the WhatsApp message was on 27 February 2018.

(4)  When negotiations between Kary and the debtor broke down on the transfer of Vcan’s shares, Kary sent an email on 10 December 2021 to the debtor and demanded repayment of the Debt referring specifically to the Guarantee. No denial was made by the debtor against the existence of the Guarantee. The debtor’s explanation for not having responded was that “he did not know what she was talking about” and he “was suspicious of Kary Kung’s motives for writing about these non-existent agreements in emails to me”. However, this explanation is against any common sense: a demand was made against the debtor for repayment of a sum of money; if there was no basis for making such demand, one would expect there to have been immediate denial, especially when relations have broken down and there was already suspicion on Kary’s motives. Instead, the debtor had only denied the existence of the Guarantee by way of a solicitor’s letter on 24 February 2022.

(5)  Allegations of fraud require cogent evidence in support. Other than bare assertions, the debtor has failed to point to anything in support of his allegation that the Guarantee was forged.

21.  Accordingly, the debtor has failed to raise any bona fide dispute on substantial grounds to his liability under Guarantee, and hence, the Debt.

Abuse of Process?

22.  The debtor alleges that the true motive of the petition is to apply pressure on the debtor to transfer Vcan’s business to Kary. First of all, I fail to see how the threat of bankruptcy would affect the debtor’s decision in transferring the business to Kary: although the debtor would arguably be prevented from continuing to act as the director of Vcan if he was bankrupted, his status as shareholder would not be affected. It has also not been demonstrated as to how the clientele would move from Vcan to Kary’s competing business, if the debtor was bankrupted. I therefore do not agree that the issue of the petition constitutes an abuse of process.

Disposition

23.  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. The so-called factual disputes have no substance that warrant a trial.

24.  I will therefore make the usual bankruptcy order against the debtor.

25.  I thank counsel for their able assistance.