RE KE JUNXIANG

HCB 5542 of 2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 5542 OF 2013

________________

____________________________________

R E A S O N S   F O R   J U D G M E N T

____________________________________

1. On 31 July 2013 by Man Fung (Holding) Company Ltd (“the petitioner”) presented a petition for a bankruptcy order against Ke Junxiang (“the respondent”). The petition was based on an alleged debt of $8.68 million being the aggregate amount of five dishonoured cheques drawn by the respondent. At the conclusion of the hearing, the petition was dismissed for reasons to be given in writing which I now do.

2. It is not disputed that the respondent issued the five cheques that were dishonoured on presentation.  However, the petitioner and the respondent have given wholly different accounts of the circumstances in which and the reason for which those cheques were issued.

3. Particulars of the five cheques drawn on DBS Bank (Hong Kong) Ltd on the respondent’s account are as follows:

	Date of cheque	Amount	Date cheque presented
1st cheque	13.12.12	2 million	20.02.13
2nd cheque	22.01.13	1.67 million	14.03.13
3rd cheque	22.02.13	1.67 million	14.03.13
4th cheque	22.03.13	1.67 million	26.03.13
5th cheque	22.04.13	1.67 million	23.04.13

WHETHER DEBT DISPUTED ON SUBSTANTIAL GROUNDS

4. The issue is whether the alleged debt is disputed on substantial grounds.  That question can only be determined in the light of the explanation given by both parties. Their respective accounts are as follows.

The petitioner’s account

5. The petitioner’s account is to be found in the affirmation of Cheung Siu Chung Chevver (“CC”) dated 21 October 2013.  According to CC, in about October 2012, the respondent who is and was the chairman of CIL Holdings Ltd (“CIL”), a company listed on the Stock Exchange of Hong Kong, informed him at a social gathering that the respondent would like to raise capital of about HK$20 million for CIL.  CC set out the proposed terms in §5 of his affirmation:

(a)  CIL would allot and a new investor would subscribe for approximately 50 million new shares at the price of HK$0.40 each.

(b)  The respondent would guarantee that the investor would have HK$10 million in profit by his agreeing to buy back all the new shares at HK$0.60 each in 6 months’ time.

(c)  Should the share price fall below HK$0.40 during the six-month period, the respondent would be responsible for the price difference; should the share price go above HK$0.60, the investor would still have to sell to Mr Ke at the agreed price of HK$0.60 by the end of the six-month period;

(d)  The guaranteed profits in the sum of HK$10 million would be paid by the respondent to the investor by six monthly instalments by way of six post-dated cheques issued by the respondent personally upon the making of the agreement; and

(e)  To secure the performance of the buy-back agreement, the respondent would, upon the making of the agreement, provide to the investor another personal cheque in the sum of HK$20 million representing the consideration for the purchase of the newly allotted shares at the agreed price of HK$0.60 which would be post-dated to the end of the six-month period.

6. The proposal was relayed by CC to SY Cheung (“SYC”) an active investor in the stock market whom CC had known for a year and whom CC knew had the financial means for this capital raising exercise.

7. Initially, SYC who did not know the respondent or CIL had required the respondent to provide shares of equivalent value as security for the performance of the buyback arrangement.  When it transpired that the respondent’s shares had already been charged in favour of another party, SYC “trusted” that the personal cheques should be “good enough”. 

8. On 19 November 2012, CIL announced the placement of 50 million new shares at the price of HK$0.40 per share.

9. On 21 November 2012, SYC entered into an agreement with Business Securities Ltd, a stockbroker, to subscribe for and purchase in cash 49,880,000 placing shares of CIL at HK$0.40 per share.

10. On 29 November 2012, Business Securities Ltd on SYC’s instructions subscribed for 49,880,000 of the new shares.  The total cost incurred including the transaction levy, trading fees and brokerage fees was HK$20,003,476.16.

11. On or about 29 November 2012, the respondent issued six personal post-dated cheques each in the sum of HK$1.67 million, dated the 22nd day of each calendar month from December 2012 to May 2013 representing the six monthly instalments of guaranteed profits and one personal cheque for HK$20 million post dated to 22 May 2013 representing the consideration for the buy-back of the new shares.  The payee section was left blank and it was agreed that “[SYC] would be given the discretion to fill in the payee’s name for and on behalf of the Petitioner”.

12. The share price had dropped to $0.355 on 29 November 2012 and continued to drop.  There was a meeting on 3 December 2012 attended inter alia by SYC, the respondent and CC when, according to CC, the respondent explained that the fall was “due to an isolated incident in which a careless shareholder got his account closed and shares sold by creditor.”

13. Another meeting attended by the same parties took place on 6 December 2012 when SYC asked the respondent “to honour his part of the agreement by paying the price difference.” CC’s account of that meeting is set out in § 16 of his affirmation:

“… At that time, the price was around HK$0.355 and the price difference for the newly allotted shares was HK$2,250,000. The [respondent] acknowledged that he had to pay for the difference but that he would need more time to do so. The respondent then said he would give [SYC] a sum of $2,000,000 to show his sincerity ... … Since he did not have the money available immediately, the cheque in the sum of HK$2,000,000, again his personal cheque, post-dated to 13 December 2012 was given to [SYC] in our presence. [SYC] agreed to give the respondent time to get the money ready.”

14. Between 6 December 2012 and early February, the respondent asked SYC not to deposit the cheques for the monthly instalment payment of profits, namely, the 22 December 2012 and 22 January 2013 cheques.

15. In early February, the respondent met CC and gave him a draft document consisting of four pages in Chinese (“the draft share transfer”).  According to CC, the respondent said that it recorded the arrangement as agreed by the parties.  The draft included the respondent’ s promise to pay the extra sum of $2 million to SYC.  The respondent also wrote out a fifth page in CC’s presence and added it to the draft.

The respondent’s account

16. In November 2012, the respondent found himself in dire financial straits.  Earlier that year, a default judgment had been obtained against him which the Court of Appeal was only prepared to set aside conditional upon his making a payment of $25 million into court and on 19 October 2012 refused his application for leave to appeal to the Court of Final Appeal. While his application to that Court for leave to appeal was pending, the judgment creditor had initiated bankruptcy proceedings against him and the second hearing of the petition was scheduled for 14 November 2012.

17. In those circumstances, the respondent contacted CC and asked him to arrange a personal loan.  After some discussion, CC indicated that he would be able to do so but only to the extent of $20 million and on the terms set out in § 8 of the respondent’s first affirmation as follows:

(a)  The total loan of HK$20 million would be deposited into the respondent’s DBS bank account;

(b)  Interest on the loan would be HK$10,200,000 to be paid by six monthly instalments of HK$1.67 million each month starting from 22nd of December 2012;

(c)  The loan advancement was to be repaid on 22 May 2013;

(d)  To secure due performance of the repayment obligation, the respondent was asked to issue seven post-dated checks with the payee section left blank which he handed to CC for handling.

Date	Amount (HK$)	Corresponding to the Cheques pleaded in Petition
22.12.12	1,670,000 (Interest)
22.01.13	1,670,000 (Interest)	2nd Cheque
22.02.13	1,670,000 (Interest)	3rd Cheque
22.03.13	1,670,000 (Interest)	4th Cheque
22.04.13	1,670,000 (Interest)	5th Cheque
22.05.13	1,670,000 (Interest)
22.05.13	20,000,000
	(Loan Repayment)

18. Seven cheques were delivered in consideration of the loan to be advanced.  The cheques included the 2^nd, 3^rd, 4^th, and 5^th cheques of the petition.

19. On 3 December 2012, the respondent met CC who introduced him to SYC.  On that occasion, SYC told the respondent that he had purchased some of the shares of CIL through placing and enquired about the business of CIL.  The respondent replied that the placing agent was in charge of the allotment and other than knowing that the allotment was made to Business Securities Ltd neither he nor the board knew the identity of the beneficial owners.  As regards CIL’s business, it would not be appropriate for him to say anything as it might involve inside information.

20. CC and SYC then told the respondent that the loan would be ready in about 10 days but that there would be an arrangement fee of $2 million.  The respondent had little option but to agree that he would issue another cheque for that amount post-dated to 13 December 2012 which he proceeded to do.

21. During that discussion, SYC needed to know the respondent’s address in Hong Kong and learned that he had been renting accommodation at the Island Shangri-La on a long-term basis.  The respondent was given to understand that it would adversely affect the confidence of the lender if the respondent did not have a residential address appearing on the loan agreement.  The respondent was also told that SYC had a house in Sheung Shui available for leasing.  Not wishing to jeopardise the approval of the loan, the respondent took a lease of the house at a rent of $100,000 per month commencing 10 December 2012 through a subsidiary of CIL although the respondent never moved in.

22. Despite assurances, the respondent never received the promised loan.  Then on about 4 January 2014 SYC told him the loan would be ready shortly but that the respondent had to pay the arrangement fee upfront.  Again short of options, the respondent agreed he paid SYC $300,000 in cash the same day and a further $530,000 in cash on 15 January 2013.  As to the balance of $1.17 million, the respondent issued a cheque with the name of the payee left blank on 15 January 2013 with a request that it not be deposited earlier than 17 January 2013.  SYC presented this cheque twice, on 17 January 2013 and 23 January 2013.

23. A few days after 4 January 2013 CC met the respondent and mentioned that since the price of CIL shares had continued to drop, SYC was minded to sell them in the open market.  The respondent offered to see if any of his friends would like to purchase the shares, pointing out that if all the shares were sold in a short time in the open market, it could lead to a further price drop and chaos which would be detrimental to everyone concerned.

24. During that discussion, CC asked if the respondent had any suggestions.  The respondent proceeded to sketch out his thoughts on paper, namely, the proposed share transfer.

25. A few weeks later, in early February 2013, CC and the respondent had another meeting in which CC complained that the $1.17 million still had not been paid nor had the respondent had found a purchaser for SYC’s shares.  The respondent made the point that $830,000 had been paid and complained about the increasing number of requirements for the loan over time.  In order to resolve the dispute, the respondent wrote down further thoughts on paper for resolving the problem.  That became the fifth page of the draft share transfer document.

The competing accounts

26. As a preliminary matter, it is to be noted that there is no direct evidence from SYC who had played a critical role in the transaction.  The only substantive affirmation filed on behalf of the petitioner is CC’s affirmation.

27. I find the petitioner’s account troubling for a number of reasons.

(1)  The placing of 50 million new shares would not have resolved the respondent’s financial predicament.

(a)  CIL is a listed company.  Any decision to place new shares to raise further capital must be a board decision.  It is not a decision that could be taken by the Chairman alone.  Funds raised go to the company as working capital. They could not be applied for the personal benefit of the Chairman.  Further, any such decision would have to be properly documented.  In any event, such a placing of new shares could not have taken place as a private arrangement between the Chairman and the investor subscribing for such shares.

(b)  CIL’s announcement of 19 November shows that formal arrangements had been put in place with a Placing Agent including a requirement that there be no less than six placees and all funds raised would be working capital for CIL.

(c)  On the evidence it is absolutely clear that in November 2012 the respondent was in grave personal financial difficulties and needed funds urgently.  The placing of new shares by CIL would not have solved the respondent’s personal financial problems. 

(d)  Given his precarious financial state, it defies common sense for the respondent to have taken on additional financial obligations (and an onerous one at that) to buy back the new shares at a 50% mark up.  Not only would the guaranteed profits have to come out of his pocket, so would the cost of purchasing the shares.

(2)  SYC committed himself to taking up the new shares without delivery of any cheque from the respondent and at a time when he was not acting with the petitioner’s authority.

(a)  The placing of new shares was announced on 19 November 2012 (after trading hours).  Prior to 5pm on 21 November 2012, SYC had entered into a binding agreement to purchase 49,880,000 placing shares at $0.40 per share.  The petitioner’s case is that seven cheques with the payee’s name blank were delivered to CC on 29 November 2012.  That SYC should have committed himself to acquiring those shares before the cheques were delivered and without security takes some believing.

(b)  There is also no explanation as to SYC’s sudden change of stance from requiring security for the investment in the new shares to simply accepting the personal cheques, let alone any evidence from SYC himself: see §7 above.

(c)  Further, on 21 November when SYC took on the obligation, the petitioner had not yet authorised the transaction.  Whilst, on 10 January 2013, the petitioner “confirmed and ratified” SYC’s actions retrospectively, that did not alter the fact that as at 21 November, the petitioner was not involved.  (Further, I note the absence of any evidence regarding the relationship between SYC and the petitioner.  It would not appear that SYC is even a director of the petitioner.)

(3)  The “agreement” that gave rise to the $2 million cheque issued on 13 December 2012 is not consistent with the terms set out in §5 of CC’s affirmation.

(a)  If the terms of the transaction are those outlined in §5 of CC’s affirmation, there is simply no rational explanation as to why the respondent would have agreed to pay SYC an additional $2 million in early December 2012. SYC’s profit from the transaction was pre-set at HK$10 million.  Fluctuations in CIL’s share price in the course of that period are wholly irrelevant. 

(b)  On the day the cheques were allegedly handed over to CC for transmission to SYC, ie 29 November, the price of CIL shares had already dropped to $0.355 per share. That is shown in SYC’s monthly statement for his margin account with Business Securities Ltd. According to CC (§13), “the price continued to drop in the next few days”. If that was the case the loss would have been much greater than $2.25 million, rendering the $2 million figure even more inexplicable.

(c)  The explanation allegedly given by the respondent for the drop in price (see §12 above) is nonsensical. No experienced investor would have accepted such an explanation.

(4)  Discrepancies between the terms stated in §5 of CC’s affirmation and the facts. 

(a)  The nub of the proposal was that for an investment of $20 million for a six-month period, a 50% return (ie $10 million in profit) would be guaranteed.  It was envisaged that each share would be acquired at a cost of $0.40 and resold under the buyback arrangement at the end of six months for $0.60 each.  As a matter of simple arithmetic, that translates into 50 million shares.  There was nothing “approximate” whether in number or amount. 

(b)  There were discrepancies in both the number of shares involved and the amount of guaranteed profits.  Instead of subscribing for 50 million shares, SYC only subscribed for 49,880,000 shares and instead of deriving guaranteed profits in the sum of $10 million, he stood to receive 6 equal instalments of $1.67 million each would produce a total profit of $10.2 million. 

(c)  In my view, those discrepancies cannot be dismissed as being de minimis. An additional profit of $200,000 is hardly “loose change”. 

(d)  I should also mention that the terms as set out in § 5 of CC’s affirmation do not reflect what the petitioner maintains they were intended to mean. As a matter of construction, under the terms of subparagraphs (c) and (d), the investorwould have been entitled to both the monthly instalments as well as the 50% markup per share at the end of the six-month period.

(5)  The petitioner’s evidence failed to address significant matters arising from the respondent’s evidence.

(a)  The petitioner failed to explain why the tenancy agreement was entered into with the respondent.

(b)  It failed to explain the purpose of the payments of $300,000 and $530,000 made by the respondent in January 2013 and the purpose of the cheque issued on 15 January 2013.

(c)  It failed to explain the reason for presenting the cheque for $1.17 million twice (on 17 and 23 January 2013) at a time (supposedly between 6 December 2012 and early February 2013) when the petitioner had decided that the respondent should be granted an ‘indulgence’ by the petitioner refraining from presenting the respondent’s cheques due and payable during that period (ie the 13 December 2012 cheque for $2 million and the cheques for the December 2012 and January 2013 monthly instalments of the guaranteed profits).

Conclusion

28. One does not encounter such difficulties with the respondent’s account which is entirely consistent with the documentary evidence.

29. The petitioner’s criticisms of the respondent’s account can be dealt with briefly.

30. First, it was said that the loan of $20 million does not make commercial sense because the parties did not know each other and there was no security.  But on the respondent’s case, SYC had just subscribed for shares in CIL and he knew that the respondent was the chairman of CIL.  The contemplated loan was nothing less than a “high risk high return” transaction.  There was nothing extraordinary about it.

31. Second, the petitioner questioned why the respondent was willing to provide the guarantee under the draft share transfer.  Given that the respondent was chairman of CIL and he and his wife together held some 17% of the issued shares, clearly he had every reason to take all possible steps to prevent the share price from falling further which a sell-off by SYC would precipitate.  Under the draft proposal, a third-party would have primary liability and the respondent’s liability would be secondary.  If no such third party could be found, the proposal was no more than a mere proposal.  The financial exposure (if any) would be entirely within the respondent’s control.

32. Third, the petitioner also queried why the key figures were the same. At that point in time (being January 2013) the respondent was anxious to obtain the long promised $20 million loan and SYC was looking to find a purchaser for his shares. The respondent’s explanation is that SYC was more likely to be receptive to a proposed transaction that was comparable.

33. In any event, the similarity of the key figures alone is hardly determinative having regard to the difficulties arising from the petitioner’s account.  Put differently, the petitioner’s criticisms do little to dent the fact that the respondent has shown that the debt is disputed on substantial grounds.