RE NEO TELEMEDIA LTD

CACV 132/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 132 OF 2015

(ON APPEAL FROM HCCW NO. 288 OF 2014)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

I. Striking out of petition

1.1  At the conclusion of the appeal by Neo Telemedia Limited (‘the company’), we dismissed its appeal against the judgment of Deputy High Court Judge le Pichon who dismissed the company’s application to strike out the winding up petition presented by Beyond Net Service Limited (‘the petitioner’) against the company.

1.2  The petition was presented pursuant to a statutory demand served on the company by the petitioner for the sum of HK$3,067,500 due under a cheque issued by the company.  The cheque was dishonoured upon presentation.  The company failed to meet the statutory demand.  The company applied to strike out the petition on the basis that the debt is disputed and the company has a bona fide defence on substantial grounds, namely, that there has been a total failure of consideration for the sum of HK$3,067,500. 

II. Background

2.1  The background of this case is succinctly summarised by the Judge which I will respectfully adopt.

2.2  The company is a listed company in Hong Kong.  It holds a number of subsidiaries engaging in the sale of telecommunication products and services and transmedia advertising services mainly in the PRC.  The company acquired Cloud Computing Investment Ltd (‘Cloud Computing’) on 24 April 2013.

2.3  On 1 August 2012, prior to its acquisition by the company, Cloud Computing had entered into a consultancy agreement with the petitioner for the period of one year.  The consultancy fee was RMB4.5 million payable by Cloud Computing or its authorized third party within 30 days.  No payment was effected within that period.

2.4  Shortly after acquiring the new subsidiary, on 9 May 2013, the company made a payment of HK$1.6 million on behalf of Cloud Computing to the nominated agent of the petitioner and a further payment of HK$1 million to the petitioner on 16 September 2013 in respect of the consultancy agreement.

2.5  Then on 15 December 2013 the company drew a cheque for HK$3,067,500 in favour of the petitioner for the balance of the consultancy fee.

2.6  On 25 February 2014 Cloud Computing’s auditors issued three confirmations of audit to the petitioner pertaining to the periods ended 31 December 2012, 24 April 2013 and 31 December 2013 respectively.

2.7  The petitioner presented the cheque for payment on 4 June 2014.  It was dishonoured.

2.8  On 4 September 2014 the petitioner issued the statutory demand.

2.9  The company’s solicitors replied on 19 September 2014 alleging for the first time that there had been a total failure of consideration.  It also demanded that the HK$2.6 million be refunded to the company.

2.10  The petitioner presented the petition on 14 October 2014.

2.11  On 5 December 2014 Cloud Computing issued a writ under HCA 2480/2014 seeking the return of the HK$2.6 million on the basis of total failure of consideration.  However, the writ has yet to be served.

III.  Principles

3.1  There is no dispute that the following principles are applicable where there is a dispute of the debt on substantial grounds :

1) The onus is on the company to show that it disputes the debt on substantial grounds by adducing sufficiently precise factual evidence to satisfy the Court that it has a bona fide dispute on substantial grounds;

2) The Court has to be satisfied that the company’s assertions are believable in the context of so much of the background as is either undisputed or beyond reasonable dispute and in so doing, the evidence is not to be approached with a wholly uncritical eye;

3) Unsubstantiated and unparticularised assertions are to be treated with caution; and

4) The Court has to take a view on the evidence (without trying the dispute on affidavit) but to determine whether a substantial dispute exists.    

See Re Yueshou Environmental Holdings Ltd, HCCW 142/2013, Harris J (unreported, 16 July 2014) at paragraph 8.

3.2  As the application before the Judge was not simply an opposition by the company to the petition but an application by the company to strike out the petition, therefore, apart from the principles mentioned above, the company has to demonstrate that it is plain and obvious that the petition was not sustainable.  

IV.  Variation of agreement

1) The company’s case

4.1  The company’s case is that there was a variation of the consultancy agreement and there was a total failure of consideration of the sum of HK$3,067,500.  The consultancy agreement was said to be varied by the parties in two respects :

(1) the fee would be paid by instalments; and

(2) the petitioner would commence the provision of services under the consultancy agreement upon receiving the first instalment and the period of engagement would be extended accordingly.

4.2  The company said it was after the agreement to vary that the two instalments totalling HK$2.6 million were paid by the company on behalf of Cloud Computing.  However, the petitioner had not rendered any consultancy services to Cloud Computing even after this part payment despite repeated oral demands by the company to the petitioner.  This remained to be the position even after the company issued the cheque of HK$3,067,500.  Hence the total failure of consideration defence.

4.3  The company relied on a number of matters in support of its case on variation of the consultancy agreement :

(1) the payment instructions issued by the petitioner to Cloud Computing and the company to pay the consultancy fee in Hong Kong dollars of a sum that is the equivalent of RMB 4.5 million to two different payees;

(2) the company made a second payment of HK$ 1 million on 16 September 2013; and

4.4  Three audit confirmations by Cloud Computing were issued stating consultancy fees were payable to the petitioner :

(1) as at 31 December 2012, RMB 1.875 million;

(2) as at 24 April 2013, RMB 1.5 million; and

(3) as at 31 December 2013, RMB 2,435,683 (this amount corresponds to the debt under the statutory demand and the petition in Hong Kong dollars).

2) The Judge’s view

4.5  The Judge rejected the company’s case on variation.  She held that the payment instruction does not support the company’s case on variation in that the petitioner merely gave instruction on the mode of payment and not payment by instalments.  The second payment of HK$1 million on 16 September 2013 was consistent with the petitioner accepting late payment of the balance of an amount that was long overdue. 

4.6  The audit confirmations also did not support the company’s case on variation.  In respect of the first confirmation it was in respect of transactions for a period before the signing of the consultancy agreement on 1 August 2012.  It was not clear whether the amount shown as owing was attributable to fees accrued prior to 1 August 2012.  The second confirmation was also in respect of transactions before the company acquired Cloud Computing on 24 April 2013.  The Judge held that it was impossible to make much sense out of the first and second audit confirmations or attach significance to them.  In stark contrast, the sum of the third audit confirmation is the equivalent to the petitioning debt as being payable on demand. 

4.7  More importantly, the Judge held that the company simply failed to give particulars of the oral variation such as the terms, dates, the identity of the persons who made the agreement, the number of instalments and the amount of each instalment.

3) My view on variation

4.8  In my view the company has failed to put forward a credible case on the oral variation.  The points raised by the Judge, which I agree, were not answered by the company.

V. Total failure of consideration

1) The company’s case

5.1  As to the total failure of consideration the company’s case is that the petitioner failed to provide any services at all both before and after the acquisition by the company of Cloud Computing.

2) My view

5.2  The Judge rejected the company’s case on total failure of consideration.  In my view the Judge is also correct on this point. The Judge considered various matters including the fact that the company did not state how it came to know that no service was provided by the petitioner prior to the acquisition and the company did not give any particulars to their oral demands for the petitioner to provide the service. 

5.3  However what is more important is that the company had not properly explained why, despite the failure by the petitioner to provide services, the company still chose to make payment to it on 16 September 2013 by the sum of HK$1 million (having first paid HK1.6 million on 9 May 2013) and then four months later, issued the cheque in question to the petitioner?

5.4  As the Judge rightly observed, no explanation was given as to what prompted these payments.  These payments were said to be made by the company pursuant to a variation agreement.  But the case on variation was plainly not sustainable by reason of the matters discussed above.  Further, if despite receipt of the first two payments in May and September 2013 and the petitioner still had failed to provide services, then it made no sense whatsoever for the company to pay an even larger sum of HK$3,067,500 when there was no guarantee that the petitioner would even honour the bargain.

5.5  The allegation by the company that Cloud Computing caused the company to issue the cheque was unhelpful and opaque.   The payment appeared to have been entirely voluntary since there was no evidence of the petitioner requesting, much less pressurizing the company/Cloud Computing for payment.  Again, the company had not produced any record of written complaint by the company or Cloud Computing, nor were there any contemporaneous records of request for services. 

5.6  In my view, this singular lack of explanation is fatal to the company’s claim.  As I have said earlier, the Judge had also considered other matters when she rejected the company’s claim on lack of consideration. I do not need to repeat them here. 

5.7  The company complained that the petitioner itself did not answer the company’s case on affidavit but only by way of an affirmation of its solicitor.  I agree that in relation to contentious matters between lay clients the response should come directly from the lay client and not indirectly through its solicitor.  However, in this case, the overall view is that the company itself had failed to discharge the burden of showing in the first place that it has a bona fide dispute to the debt and the affirmation of the petitioner’s solicitor does not advance the company’s case further.

5.8  The petitioner had suggested in its written submission that antecedent debt was the consideration for the cheque.  It was not necessary for this Court to consider this point (which was in fact not addressed by the petitioner at the hearing) because the Judge was entitled to reject the argument on lack of consideration based on the facts of this case.

VI. Conclusion

6.  Accordingly, the appeal was dismissed.

Decision on costs

7.  The petitioner seeks costs of the appeal on an indemnity basis.  This is not an appropriate case to impose an indemnity costs order.  The petitioner is to have the costs of the appeal on a party to party basis with certificate for two counsel.

Hon Kwan JA :

8.  I agree with the reasons for judgment and decision on costs of Cheung JA.

Hon Barma JA :

9.  I agree.