RE SILVER BASE (HOLDINGS) LTD

HCCW 20/2023

[2023] HKCFI 2916

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 20 OF 2023

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REASONS FOR JUDGMENT

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1.  This is the substantive hearing of the petition (as amended) by Guangdong Finance Ltd (“the petitioner”) against Silver Base (Holdings) Ltd (“the Company”) pursuant to section 177 (1) (d) and section 178 (1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. Cap 32 (“CWUMPO”) on the ground that the Company is unable to pay its debts. At the conclusion of the hearing, it was ordered that the Company be wound up, with costs with certificate for 2 counsel to the Petitioner, such costs to be taxed if not agreed.

Background facts

2.  By a loan agreement dated 28 December 2016 (“the Loan Agreement”) made between the Petitioner, the Company and Liang Guoxing (“Mr Liang”), the Petitioner granted the Company a loan of $350 million (“the Loan”) at an interest rate of 8%, repayable on the maturity date being two years after the drawdown of the loan, with Mr Liang (a 50% shareholder and one of the directors of the Company) agreeing to execute a guarantee in favour of the Petitioner to guarantee the repayment of the loan and interests.

3.  After various extensions, the Company was obligated to settle all outstanding principal and accrued interest by 30 April 2022.

4.  The petition is based on the debt arising from the Loan together with relevant accruing interest (“the Debt”).

5.  The Debt was secured by a first charge over the property known as House 8, No 33 Island Road, Hong Kong (“the Property”) owned by the Company.

6.  A statutory demand was served on the Company on 1 December 2022 which went unmet.

7.  The Company opposes the petition on two grounds, namely, (a) the Debt has been fully repaid (“the repayment ground”), and (b) the value of the Property exceeds that of the Debt (“the security ground”).

8.  In support of the security ground, the Company exhibited a report dated 3 May 2023 prepared by Midland Surveyors (“the Midland report”). Under the heading “4. VALUATION METHODOLOGY”, it read:

“We have adopted the direct comparison method to assess the market value of the Subject Property. Selection of comparable sale transactions is confined within the same locality, which is considered to be the most relevant and indicative of the market value of the Subject Property. Accordingly, comparable sale transactions have been selected and adopted for comparison and analysis …”

9.  Surprisingly, the Midland report did not contain a list of comparables.

The Company’s application to file further evidence

10.  The Court first dealt with the Company’s application by summons dated 24 October 2023 filed less than 2 weeks prior to this hearing. It sought leave to file and serve Mr Liang’s 4^th affirmation (“Liang 4^th”) to reply to the allegations raised in the 4^th affirmation of Lee Chun Hing, the manager of the Petitioner (“Mr Lee”), dated 26 June 2023 (“Lee 4^th”), filed 4 months earlier.

11.  The Company’s application was dismissed with indemnity costs for the reasons set out below.

12.  The only explanation for the inordinate delay was that Mr Liang was hospitalised in July and August and had to undergo an operation. However, no documentary evidence was provided to substantiate Mr Liang’s inability to deal with the matter during those 2 months, such as proof of the operation and hospitalisation with relevant dates.

13.  Even assuming Mr Liang was hospitalised for the entire 2 months, there was at least a week in June to start the process. It then took him another month and 3 weeks from the end of August before the summons was taken out. There is no explanation given for the delay. Moreover, the Company had another director (Mr Liang’s brother who is the shareholder of the other 50% of the Company) who could and should have taken over or progressed the matter in the interim.

14.  Although Liang 4^th was said to reply to allegations raised in Lee 4^th, that is not the case. Lee 4^th did not make new allegations. Rather, it was filed to reply to the allegations made in Mr Liang’s 3^rd affirmation dated 29 May 2023 (“Liang 3^rd”) to supplement the Company’s opposition to the petition based on 2 grounds set out in §7 above.

15.  In particular, Liang 3^rd exhibited a revised set of repayment records[1] (“the 07 record”) compiled by the Company’s accountant Choi Do Chiu (“the accountant”) and a set of documents[2] said to support the 07 records (“the 08 vouchers”).

16.  According to Liang 3^rd, the 07 record was compiled by the accountant based on internal records of “related accounts”. No information was given as to the nature of such accounts and their connection/relevance to the Loan Agreement. There is no affirmation from the accountant to explain the methodology adopted in compiling the 07 record and how they are to be read.

17.  When the repayment information set out in the 07 record was analysed, the amounts of many of these items reflected payments due to the Petitioner under 3 personal loans made to Mr Laing in 2014 and 2015 and a loan made to Keen Pearl Limited (“Keen Pearl”), a company owned and controlled by Mr Liang, in 2018 (collectively, “the Other Loans”). They are summarised in the table in §37 below. That information was set out in Lee 4^th which described the analysis conducted.

18.  Lee 4^th also exhibited 2 written valuations of the Property, namely, a valuation report prepared by B.I. Appraisals Limited (“BIA”) dated 18 May 2023 and a valuation report prepared by Jones Lang LaSalle Limited dated 30 May 2023 (“the JLL report”). Lee 4^th noted (at §45) the absence of any market comparable in the Midland report which it considered “weird”.

19.  So far as the new Midland report is concerned, it bears the same date as the Midland report[3] with an identical reference number and an identical valuation of $710 million. The only real difference is the addition of a list of 10 comparables. While under the heading Valuation Methodology, there are 2 additional paragraphs absent from the Midland report, the critical and operative paragraph is that common to both reports: see §8 above.

20.  A clear statement of the applicable principles for late interlocutory applications is to be found in Converge Design and Construction Co Ltd v Mount Kelly International Limited [2020] HKCFI 2433 where (at §2) Mimmie Chan J observed that:

“…delay itself is a ground to refuse a late application, either for discovery or for the introduction of new pleadings and evidence, when trial is imminent. The onus is on the applicant to justify its delay and to show good reason for leave to be granted. … [The] just resolution of disputes requires due consideration of the time occasioned by last minute applications to introduce amendments to the pleadings and/or evidence on the eve of trial. Prejudice is inevitably caused, in the disruptions in the preparation for trial, the need to consider the new evidence and the need to respond thereto, coupled with the need to locate witnesses at the last minute to consider and if necessary to respond to the new evidence, and the last minute distraction from the proper focus and priority of the due preparation for trial. This is actual prejudice.”

21.  Since those principles are based on the underlying objectives of the CJR, they must also be applicable to winding up petitions where the company is unable to pay debts.

22.  The delay in the present case is not only inordinate but also inexcusable. That is sufficient reason to dismiss the Company’s summons for leave to put in Liang 4^th.

23.  So far as the new Midland report is concerned, the Company did not disclose the date it was received. That is an important piece of information given that the only differences are those described in §19 above. The timing of the new Midland report is relevant.

24.  If the omission of the list of comparables had been a genuine oversight, it could easily have been remedied upon receipt of Lee 4^th (26 June 2023) which noted its absence. It was not.

25.  Ms Audrey Eu SC, Mr Anson Wong Yu Yat and Mr Xizhen Wang, counsel for the Petitioner, submitted that the valuation given in the Midland report was clearly based on the same list of comparables as that in the new Midland report. Otherwise, it would not be explicable how the same valuer could have arrived at an identical valuation when the same methodology was used for both reports. In other words, the list of comparables was the basis upon which both reports were prepared.

26.  The Petitioner invited attention to the fact of the list of 10 comparables, only 2 (transactions concerning Houses 5 and 7 in the same development) were directly comparable. These other properties are situated in very different areas which command a much higher unit rate. These could only have been included to yield a much higher unit rate for the Property. It was thus submitted that the list had been deliberately withheld until Liang 4^th.

27.  Given the fact that the report was prepared by an experienced valuer, an unintentional omission is hardly credible absent immediate action to rectify that omission after receiving Lee 4^th. There is therefore some merit to the Petitioner’s submission.

28.  Mr Jonathan Chang SC and Mr Peter Dong, counsel for the Company, submitted that if the intention was to conceal the list of comparables, there would be no reason to disclose it now.

29.  The Company acknowledged that the Midland report without a list of comparables has no probative value. It was therefore necessary for the Company to seek leave to file the new Midland report to show the value of the security. In seeking leave to admit Liang 4^th, the Company must have entertained the possibility (however remote) that its application would be successful.

30.  The possibility that the new Midland report had been deliberately withheld or that it was provided to the Company much earlier who only chose to make it available on the eve of this hearing is an inference that is justified by the lack of evidence as to when the Company received the new Midland report and the total absence of any explanation to account for the delay.

31.  The Company’s conduct in taking out the summons in circumstances when it had no good reason to seek the Court’s leave to allow Liang 4^th to be filed cannot be condoned. Had the application been successful, that evidence could have derailed the hearing.

32.  The whole exercise is wasteful of judicial time and resources, not to mention causing prejudice to the Petitioner by diverting its attention on the eve of the substantive hearing and the need to spend time to consider respond to the new evidence. Indemnity costs are thus warranted.

Applicable principles

33.  The applicable principles where the debt is disputed on substantial grounds are well-established. A convenient summary may be found in Re Hong Kong Investments Group Ltd [2018] HKCFI 984 at § 13:

(a)  The burden is on the Company to establish that there is a genuine dispute of the debt on grounds that have substance and are not frivolous.

(b)  The evidence is not to be approached with an uncritical eye.

(c)  The company must put forward sufficiently precise factual evidence to substantiate its allegations.

(d)  The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists.

34.  Where the petitioner is a secured creditor, the following principles are relevant:

(a)  A secured creditor may petition for the winding up of the debtor company: see Synergy Lighting Ltd v The Hongkong and Shanghai Banking Corporation Limited [2020] HKCFI 2490 at §8.

(b)  In relation to a winding up, a secured creditor does not have to elect between resting on the security and taking part in the liquidation until after the winding-up order is made: see French, Applications to Wind Up Companies (4^th edition, 2021) at [7.382].

(c)  The true test of the sufficiency of security ought to be whether it would command the amount of the debt if “put into the market”: Commercial Bank of Scotland v Lanark Oil Company Limited (1886) 14 R 147, 149; French, at [7.188].

(d)  A security holder owes no duty to the debtor to exercise its power of sale over the secured assets at any particular time and could decide in its own interest whether and when to sell: Re Victor River Ltd [2021] HKCFI 886 at §44.

(e)  Whether security has been furnished for the full amount is one of the considerations that would affect the exercise of the court’s residual discretion whether or not to wind up the company: see Re IJ Langleb Ltd [1996] 4 HKC 68 at 73B-C.

Repayment

35.  As noted in §15 above, the 07 record was exhibited to Liang 3^rd. It is in the form of a chart with numerous columns headed, inter alia, “Serial no”, “GDF Form” “Payment date”, “Instalment”, “Interest”, “[Principal]”, “Total amount” “Payment amount (with supporting documents) and “Supporting document no (Red number)” being the last column. The chart comprised 66 rows of entries under the various columns.

36.  To recap, the key documents said to support the 07 record prepared by the accountant were also exhibited[4] (ie the 08 vouchers). There is no affirmation from the accountant himself to identify what ‘related accounts’ (in addition to the Company's own records relating to the loan) he consulted when compiling the 07 record. Nor is there any explanation of the methodology used for the compilation or of various markings/endorsements appearing on the 08 vouchers.

37.  Upon perusing the 07 record and the 08 vouchers, it became apparent to the Petitioner that many of the payments relied on were payments in respect of the Other Loans described §17 above and summarised in the table below:

Loan No.	Agreement Date	Loan Amount / Principal	Borrower
EV6-01-20140911- 001	11/9/2014	$300,000,000	Mr Liang
EV0-01-20150706- 001	6/7/2015	$50,000,000	Mr Liang
EV0-01-20150731- 001	6/7/2015	$234,900,000	Mr Liang
EV6-01-20181220- 001	20/12/2018	$148,000,000	Keen Pearl

38.  The Petitioner submitted that the 07 record and the 08 vouchers are not credible or reliable and full of absurdities and inherent inconsistencies. To demonstrate this, the Petitioner referred to Annexes 1 and 2 attached to its written submissions.

39.  Annex 2 is a detailed calculation of overpaid principal and interest. The amounts of principal repayment and interest payment were all extracted from the 07 record. Since interest was only payable on the outstanding principal from time to time, the Petitioner caused interest calculations to be prepared on the basis.

40.  Annex 2 shows

(a)  total accrued interest of just under $21 million whereas on the Company’s case, the total interest paid came to $77 million, resulting in an overpayment of over $56 million; and

(b)  an overpayment of principal in excess of $1.5 million.

41.  Annex 1 which identifies some of the more glaring absurdities and inconsistencies is very detailed. Those absurdities are summarised in §14 of the Petitioner’s submissions and it suffices to mention but a few to illustrate the point:

(a)  at least 8 of the repayments were made between 31 January 2016 and 11 October 2016 well before the actual drawdown of the Loan which took place on 3 January 2017;

(b)  one of the 08 vouchers stated on its face that it was an interest payment for one of the Other Loans;

(c)  the amounts and payment dates of many of the repayments relied on match the amounts of interest and scheduled dates due under the Other Loans; and

(d)  one of the 08 vouchers[5] showing a payment of RMB 30 million[6] bears 23 numbered stamps in red [7]. That voucher is said to support all 23 repayments when the recorded repayments span a period ranging from 31 January 2016 to 23 July 2019.

42.  At the hearing, Mr Chang made no oral submissions on this part of the Petitioner’s case. Obviously, the Company was unable to challenge the matters set out in Annexes 1 and 2.

The security ground

43.  The Debt is currently around $506 million. The Company accepted that the Midland report can be disregarded as it lacks comparables.

44.  Mr Chang referred to the JLL report which referred to major recent transactions within the development where the Property is situated as the most relevant comparables. House 5 was sold on 9 September 2021 for $505 million representing a unit rate of $104,946 per square foot and House 7 on 13 November 2017 for $480 million representing a unit rate of $95,257 per square foot.

45.  He submitted that House 5 was the more relevant comparable being a more recent transaction. Adopting that unit rate, the value of the Property would be in excess of $528 million which comfortably exceeds the current value of the Debt.

46.  On that basis, it was submitted that the Petitioner is fully secured and cannot avail itself of section 178 (1) (a) as the Debt is fully secured. While the Petitioner could still prove that the Company is unable to pay the Debt without relying on the deeming provision (i.e. section 178 (1) (a) (ii)), that is when the court’s discretion would be triggered, citing the Langleb case at 71H-I, 72A D-E and 73A.

47.  The decision in that case related to whether a petitioner whose petition was dismissed was entitled to the costs of the petition. On the facts of that case, the court held that the petitioner was a fully secured creditor who must have known or deemed to have known there were sufficient assets to meet any sum due under the judgment. In those circumstances the court had difficulty with the averment that the company was unable to pay its debts and awarded costs of the petition to the company.

48.  Mr Chang proceeded to persuade the Court that the value of the Property was of the order of $528 million. He submitted that

(1)  the court should adopt JLL’s conclusion that the unit rate for House 5 was $104,946;

(2)  as House 8 is in the upper row of houses commanding a better sea view and being further away from traffic along Island Road, those factors support the view that House 8 is not ‘worse off’ than House 5 in terms of unit rate;

(3)  JLL cannot justify a 20% discount by valuing the Property at $440 million; and

(4)  the Court was invited to adopt the JLL report but not its valuation.

49.  In response to the Court’s query as to the saleable area of the Property, the JLL report adopted the saleable area stated in the sales brochure of 5039 ft.² while Midland and BIA in their respective reports adopted the information obtained from the Rating and Valuation Department (“RVD”) of approximately 4720 ft.²

50.  If the RVD figure is adopted, the value of the Property would be around $495 million, far short of what is due to the Petitioner. The RVD figure would appear to me to be more reliable than information given in sales brochures.

51.  Mr Chang then sought to persuade the Court that JLL should not have assessed the Property at such a low value since it considered Houses 5 and 7 to be “the most direct evidence due to their high similarities in terms of building design and specification, layout, and aspect, provision of ancillary areas including garden and car parking spaces.[8]” It was submitted that JLL’s valuation, effectively discounting the value by approximately 20%, cannot possibly be justified.

52.  In short, the Court was invited to cherry pick from the JLL report. That appears to be a novel approach which must be rejected. The Court is in no position to carry out an assessment of the value of a property which is the province of experts in the field. It is a matter of expert evidence.

53.  Section 178 provides:

“178. Definition of inability to pay debts

(1) A company shall be deemed to be unable to pay its debts—

(a) if —

(i) …

(ii) the company has, for 3 weeks after the service of the demand, neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; ”

54.  To satisfy section 178 (1) (a) (ii), it is incumbent on the Company to secure the Debt “to the reasonable satisfaction of the creditor”. In the Langleb case, the creditor was fully protected in the sense that it had a charge over assets that “unquestionably”[9] exceeded the amount required to satisfy the debt.

55.  But that is not the present case. Other than the Midland report (being common ground that it is to be disregarded), none of the valuations before the Court shows an assessed value inarguably in excess of the Debt.

56.  The Company then sought to persuade that if there is dispute as to the value of the Property and the Company has shown that it is reasonably arguable that the Company’s valuation would prevail, there should be a trial on valuation as it will have demonstrated that it has a bona fide defence to the petition.

57.  That is not a proposition that the Court will entertain. The Debt became due on 30 April 2022. A statutory demand was served on 1 December 2022 and the petition presented on 6 January 2023. There is no denial that the Debt is not paid.

58.  The evidence shows that the Petitioner did invite the Company to sell the Property and also sought to arrange inspection of the Property for potential buyers with Mr Liang but he repeatedly refused, using the pandemic as an excuse. In late October 2022, a potential buyer offered $430 million for the Property, with an alternative offer of $480 million to acquire the entire issued shares in the Company. Mr Laing refused the offer on 8 November 2022[10].

59.  The Company made no effort to dispose of the Property. If the Property has the value the Company asserts, there was nothing to prevent it from selling it and repaying the Debt.

60.  In those circumstances, it was not unreasonable for the Petitioner to take the view that it is not sufficiently secured.

61.  As Ms Eu submitted, as a matter of law, any difference in valuation does not preclude the Court from exercising its residual discretion to order a winding up, citing the Langleb case at 73B-C and Synergy Lighting Limited v Hong Kong and Shanghai Banking Corporation Limited [2020] HKCFI 2490 at §§5, 8 and 14.

62.  The Company is unable to demonstrate that the Property would command the amount of the Debt if “put into the market” which is the true test of the sufficiency of security[11]. Accordingly, it cannot succeed on the security ground.