RE MOK TSAN SAN

HCB 5428/2024

[2025] HKCFI 499

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 5428 OF 2024

_________________

_________________

__________________________

J U D G M E N T

__________________________

Introduction

1.  Athora Lux Invest S.C. SP - Loan Origination (“P1”) and Apollo Credit Funds ICAV (“P2”) jointly presented a bankruptcy petition filed on 6 August 2024 (“the Petition”) against Mr Mok Tsan San (“D”).

2.  By Notice of Intention to Oppose Petition dated 3 October 2024 (“the Notice”), D indicated his opposition to the Petition.

3.  This is the substantive hearing of the Petition. Mr Lok together with Mr Liu appear for P1 and P2 (collectively “Ps”) and Ms Leung appears for D.

4.  In the Notice, D advances three grounds to oppose the Petition. First, D contends that the Credit Facility dated 28 March 2022 (“the Facility Agreement”) may be invalid. Alternatively, D argues that no Acquisition Termination Event (“ATE”) under the Facility Agreement has occurred and lastly, D says that it is premature to enforce the Facility Agreement against him prior to the enforcement against the sub-mortgagors.

5.  There is no issue of service of the underlying statutory demands (“the SDs”) and the Petition.

Undisputed background facts

6.  The background facts narrated in the 2^nd Affirmation of Chan Wai Shing dated 13 January 2025 filed on behalf of Ps are not in disputed. A summary of those facts is as follows.

7.  The underlying debt giving rise to the Petition stems from the Facility Agreement executed among the Ps as the “Original Lenders” and D as one of the “Individual Guarantors”. The loan to be advanced to Double Winner Asia Limited (“Double Winner”) and Forever Concord Limited (the “Bidco”, which is a wholly owned subsidiary of Double Winner) as the borrowers under the Facility Agreement was for the purpose of a proposed acquisition of a distressed residential property at No.28 Middle Gap Road (“the Property”).

8.  At the time when the Facility Agreement was signed, the Property was solely owned by Joy Rich Development Limited (in liquidation) (“Joy Rich”), Revelry Gains Limited (“Revelry Gains”) and Fameway Finance Limited (“Fameway”) were its mortgagees under a first-ranking mortgage and second-ranking mortgage over the Property respectively.

9.  It was contemplated that Double Winner and/or Bidco would acquire the Property by bidding in the mortgagee sale initiated by Fameway (amongst others) (“the Mortgagee Sale”).

10.  The “Total Commitments” of Ps as the Original Lenders under the Facility Agreement was HK$250,000,000. Under Clause 2.1 of the Facility Agreement, Ps would make available a term loan facility in an aggregate amount equal to the Total Commitments. Pursuant thereto, on 1 April 2022, Ps advanced the principal amount of HK$100,000,000 to Double Winner being the first loan as defined under Clause 1.1 of the Facility Agreement.

11.  On 13 March 2023, Messrs. Hau, Lau, Li & Yeung (“HLLY”), acting for Double Winner and the Bidco, issued a notice of ATE (“the ATE Notice”) pursuant to Clause 7.2 of the Facility Agreement. The ATE specified in the ATE Notice was that Fameway terminated the Mortgagee Sale.

12.  The ATE triggered the payment obligation of Double Winner under Clause 7.2 of the Facility Agreement which provided that Double Winner shall prepay all loans in full, together with accrued interest, the break fee and all other amounts accrued or outstanding under the Facility documents.

13.  An extension of time to pay was agreed among Ps, Double Winner and the Individual Guarantors including D. The payment date was extended to 29 September 2023 (“the Extension Date”).

14.  No payment was made on the Extension Date. Ps’ former solicitors sent a demand letter dated 6 October 2023 to, among other people, D stating that an Event of Default under Clause 22.1 (non-payment) of the Facility Agreement had occurred and so they demanded for repayment.

15.  D’s liability to settle the indebtedness of Double Winner under the Facility Agreement was governed by Clause 16.1. It provides that D, as one of the personal guarantors, irrevocably and unconditionally jointly and severally with other guarantors to, among other matters, undertakes that whenever Double Winner does not pay any amount when due under or in connection with the Financial Agreement that he will immediately on demand pay that amount as if it was the principal obligor. Further D agrees with Ps that if any obligation guaranteed by him is or becomes unenforceable, invalid or illegal, D will, as an independent and primary obligation, indemnify Ps immediately on demand against any cost, loss or liability it incurs as a result of, among other persons, Double Winner not paying any amount which would, but for such unenforceability, invalidity or illegality, have been payable by Double Winner under the Financial Agreement on the date when it would have been due.

16.  Ps issued their respective SDs on D on 18 January 2024 and the aggregate amount claimed was HK$135,466,319.51 comprising principal sum of HK$100,000,000.00, a break fee of HK$2,500,000.00 and accrued interest of HK$32,966.319.51(“the Demanded Sum”). It was alleged to be due on 3 January 2024.

17.  On the other hand, Fameway obtained default judgment against Joy Rich on 29 October 2012 (“the Default Judgment”) for the sum of HK$81 million plus interest in HCA 510/2012. As a result, Fameway was entitled to enforce a fourth charge dated 9 September 2010 over the Property (“the Fourth Charge”) by way of a mortgagee sale on account of the occurrence of an event of default thereunder.

18.  By a decision dated 28 August 2024 in Fameway Finance Limited v Joy Rich Development Limited [2024] HKCFI 2204 (“the Setting Aside Decision”), DHCJ Jonathan Wong set aside the Default Judgment.

Relevant legal principles

19.  The general principles relating to the grant of a bankruptcy petition are well-settled. Linda Chan J said this in Re Li Man Hoo [2020] HKCFI 1354 at §15(1),

“Bankruptcy proceedings are summary in nature and are not meant to be used for the purpose of debt collection. The jurisdiction to make a bankruptcy order will only be exercised in very clear cases. If the Court is satisfied that there is a bona fide dispute on the debt, it will not usurp the function of a civil court and decide the disputes between the parties. The usual practice of the Court is to dismiss the petition, leaving the petitioner to establish himself as a creditor by judgment to be obtained in the civil court.”

20.  The burden is on the debtor to show a bona fide dispute to the debt on substantial grounds by sufficient precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Re Wong Lo Fung (unreported, HCB1864/2013, 29.8.2014) per Ng J at §25.

21.  With these principles in mind, I now turn to the purported substantial grounds put forth by D.

Common mistake ground

22.  Ms Leung submits that the Facility Agreement may be vitiated by common mistake.

23.  The legal principles relating to the plea of common mistake are not in dispute. The five essential elements of this plea were set out by Cheung JA in Bank of China (Hong Kong) Ltd v Keen Lloyd Energy Ltd & Ors (unreported, CACV132/2011, 23.3.2012) at §27 citing with approval Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 at 703 and they are as follows:

(1)  There must be a common assumption as to the existence of a state of affairs;

(2)  There must be no warranty by either party that the state of affairs exists;

(3)  The non-existence of the state of affairs must not be attributable to the fault of either party;

(4)  The non-existence of the state of affairs must render performance of the contract impossible; and

(5)  The state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.

24.  D relies on the Setting Aside Decision. He contends that an important understanding and factual basis for the Financial Agreement was that Fameway was able to sell the Property as the mortgagee on the strength of the Default Judgment. The Setting Aside Decision could not be a known fact to the parties when the Financial Agreement was executed.

25.  He goes on to say that the beneficial ownership of the Property and the validity of the mortgages and the Financial Agreement are still very much a live issue and his liability under the Financial Agreement might not exist.

26.  On this evidence, Ms Leung submits that the fundamental assumption of all the parties to the Financial Agreement is that Fameway was the mortgagee of Joy Rich and had authority to enter into the Mortgagee Sale. This assumption has been rendered invalid by the Setting Aside Decision and this is capable of rendering the Financial Agreement void. She further submits that it could not make commercial sense for D to have entered into the Financial Agreement as a guarantor if he had known that there was a possibility that Fameway was not a valid mortgagee.

27.  Mr Lok makes a preliminary point that neither Ps nor D is a party to HCA 510/2012 and the Setting Aside Decision is not binding on them. This is correct but the significance of the Setting Aside Decision is that the state of affairs has changed. The status quo is that the legality of the Mortgagee Sale of the Property is a live issue.

28.  Mr Lok submits that there is no finding in the Setting Aside Decision as to the state of minds of Ps and D at the time when the Facility Agreement was signed. He further points out that D has failed to identify any evidence to show that the parties had ever considered the validity of the Default Judgment when entering into the Facility Agreement.

29.  Mr Lok’s submission must be right but I am convinced on the evidence that there was a common assumption that Fameway was able to carry out the Mortgagee Sale and it was within the contemplation of the parties that Double Winner and/or the Bidco would purchase the Property with the loan advanced under the Facility Agreement.

30.  Mr Lok submits that the second element is absent as the parties have clearly allocated the risk of any such unenforceability arising out of the alleged assumption to D under the terms of the Facility Agreement. In this regard, Mr Lok relies on Clauses 16.1 and 16.4 of the Facility Agreement.

31.  Mr Lok further relies on the warning notice dated 28 March 2022 (“the Warning Notice”) issued to D sent to HLLY under the cover letter of Messrs. Lau Kwong & Hung (“LKH”), solicitors for Fameway, dated 24 March 2022. In Clause 7 of the Warning Notice provides that D will be called upon to honour [his] obligations if any obligation of [Double Winner] or any other Transaction Obligor under any Financial Document is or become unenforceable, invalid or illegal.

32.  I am not convinced that any of these provisions indicates the alleged allocation of risks. These provisions do not involve Fameway in whatsoever manner and has nothing to do with its inability or lack of authority to complete the Mortgagee Sale of the Property. It is not suggested that Fameway is a Transaction Obligor within the meaning of the Financial Agreement.

33.  Thus, I am of the view that in the Facility Agreement, neither Ps nor D gives any warranty that Fameway was able to carry out the Mortgagee Sale.

34.  As regards the third element, Mr Lok relies on the fact that D was at all material times the sole director of Fameway. He submits that any defect in the Fourth Charge not being raised ought to be attributable to the fault of D.

35.  I am unable to accept this submission. The Setting Aside Decision does not suggest that the underlying loan agreement between Joy Rich and Fameway might be vitiated by reason of any fault of D. Rather, the allegation is that one Mr Ben Lau who was the shadow director of Joy Rich and had control of Fameway made use of the underlying loan agreement to siphon off the loans proceeds for his own purpose and benefit: §3.1(2) of the Setting Aside Decision. D was not even mentioned in the Setting Aside Decision at all.

36.  In my view, D’s real problem with the plea of common mistake is the absence of the last two elements.

37.  There is no doubt that the Facility Agreement was intended to provide finance to the BidCo for its proposed acquisition of the Property pursuant to the Mortgagee Sale. However, I accept Mr Lok’s submission that the contractual adventure of the Facility Agreement is not rendered essentially and radically different by the non-completion of the Mortgagee Sale. The parties are in full agreement on the terms and subject of their contract and there is no evidence to the contrary.

38.  The ATE in the Facility Agreement is defined to include different scenarios in which the proposed acquisition of the Property could not be materialized due to different reasons. The parties to the Facility Agreement have agreed on the consequences flowing from the occurrence of an ATE: Clause 7.2.

39.  It is plain that the non-completion of the Mortgagee Sale of the Property would not render the Facility Agreement void.

40.  I agree with Mr Lok that after all the Facility Agreement is a simple loan agreement. Ps have made the advancement to Double Winner pursuant to the Facility Agreement and there is no reason why Ps could not look to D for repayment.

41.  I conclude that there is no merit in the common mistake ground.

Non-occurrence of ATE ground

42.  In D’s affirmation, D contends that the BidCo commenced an action under HCA 845/2024 to recover a sum of HK$87,850,000 which was alleged to have been misappropriated. The misappropriated sum was said to be paid as deposit for the purpose of the Property upon a Preliminary Framework Agreement on 5 January 2024.

43.  Ms Leung submits that it was a clear step taken to continue the Mortgagee Sale by way of the Preliminary Framework Agreement.

44.  The ATE Notice is solid evidence of the ATE. It was unequivocally indicated that Fameway had terminated the Mortgagee Sale and that an ATE had occurred.

45.  D actually signed off a letter on behalf of Fameway to BidCo dated 9 March 2023 to inform BidCo that it could no longer proceed with the Mortgagee Sale and this letter was attached to the ATE Notice.

46.  As pointed out by Mr Lok, in the Statement of Claim filed in HCA845/2024, it is expressly pleaded that an ATE had occurred. I fail to see how the action could be relied on to negate the occurrence of the ATE.

47.  Furthermore, any sale pursuant to the Preliminary Framework Agreement cannot be equated with the Mortgagee Sale under the Facility Agreement with clear specifications. It cannot possibly undermine the effect of the ATE Notice.

48.  In the premises, I find no substance in this non-occurrence ATE ground.

Premature enforcement against D

49.  Ms Leung submits that the pleadings in HCA 845/2024 show that there are positive allegations as to the whereabouts of the monies provided by Ps under the Financial Agreement. It is submitted that the myriad of uncertainties presented by the underlying litigations suggest that D has a bona fide substantial dispute as to the debt.

50.  This is a deviation from the last ground in the Notice, which is thoroughly bad. I agree with Mr Lok that the remedies available to a creditor could be exercised at any time or times simultaneously or contemporaneously or successively or not at all: China and South Sea Bank v Tan Soon Gin [1990] 1 AC 536 (PC).

51.  I cannot accept the submission of Ms Leung. The unproven allegations in other litigations could not possibly assist D to discharge his onus to show his bona fide dispute to oppose the Petition.

52.  I find no merit in the third ground as a result.

Conclusion and orders

53.  For the reasons given, I conclude that D has failed to show a bona fide dispute to the Demanded Sum on substantial grounds or a defence of substance.

54.  Accordingly, I make the usual bankruptcy order against D.

55.  Costs should follow the event. On the costs issue, Mr Lok makes two points. First, R79(4) of the Bankruptcy Rules provides that where a bankruptcy order is made on a creditor’s petition, the costs of the petitioning creditor shall be taxed and paid out of the estate.

56.  Mr Lok further draws my attention to Clause 14.3 of the Facility Agreement which provides that D shall pay all costs and expenses (including legal fees) incurred by Ps in connection with the enforcement of the Facility Agreement and any proceedings instituted by or against Ps as a consequence of their entry into the Facility Agreement.

57.  The phase “all costs” suggests that the parties have agreed on taxation on an indemnity basis: Tele-Art v Bank of China [2012] 1 HKLRD 484 at §53.

58.  I am satisfied that the wording of Clause 14(3) clearly points to indemnity costs: X v Y [2019] HKCFI 2880 at §54.

59.  Mr Lok then submits that Ps should be granted indemnity costs to be paid out of the estate as so ordered by DHCJ Sara Tong SC in Re Yu Pun Hoi [2024] 4 HKC 270.

60.  Mr Lok fairly highlights to this court that Linda Chan J in Re Leung Ka Chun [2024] HKCFI 3042 departed from Re Yu Pun Hoi and the learned judge was of the view that if costs were ordered on an indemnity basis, it would mean that the creditors, rather than the debtor, would have to bear the higher costs and there is no justification for allowing the petitioner to recover its costs at the expense of the other creditors.

61.  Ms Leung makes no submission on the costs issue.

62.  I am aware that these are bankruptcy proceedings and is essentially a class action. Ps are not really suing on the Facility Agreement by the Petition. However, I do not think that giving effect to the contractual terms of the Facility Agreement by way of an indemnity costs order would be unfair to other creditors of D, if any. After all, the underlying liability of D has to be determined with reference to all the contractual terms of the Facility Agreement including Clause 14.3. I fail to see why D could avoid his liability to indemnity Ps against all costs incurred by Ps in these proceedings instituted by them in accordance with Clause 14.3. Ps would suffer injustice if I deny them their right of a full recovery of their legal costs under the Facility Agreement.

63.  Accordingly, I accept Mr Lok’s submission. I exercise my discretion to allow Ps indemnity costs. I make a costs order nisi that D do pay Ps costs of the Petition, to be taxed on an indemnity basis if not agreed, and paid out of the estate.

64.  Lastly, I thank Ms Leung, Mr Lok and Mr Liu for their helpful assistance.