BANK OF COMMUNICATIONS TRUSTEE LTD v. CHINA ENERGY RESERVE AND CHEMICALS GROUP OVERSEAS CO LTD AND ANOTHER

HCA 146/2020

[2021] HKCFI 486

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 146 OF 2020

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D E C I S I O N

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A. Introduction

1.  This is the Defendants’ renewed application for stay pending appeal and to file 2 affirmations in support.

2.  Master Rebecca Lee granted summary judgment against the Defendants on 29 October 2020 (“Judgment”) for repayment of sums under bonds due 2022 (“2022 Bonds”) in the sum of HK$2 billion, with interest plus costs and expenses in the sum of US$258,537.24.  Those bonds were issued by D1 and guaranteed by D2.

3.  The Defendants filed a notice of appeal and a summons for stay of execution pending appeal on the following day (“Stay Application”).  The hearing of the appeal is scheduled for 23-24 August 2021 (“Appeal”).

4.  On 21 December 2020, Master Rebecca Lee dismissed the Stay Application, but granted an interim stay of 21 days for the Defendants to renew their application for a stay of execution before a judge in chambers, which expired on 11 January 2021.

5.  Before me is a summons dated 30 December 2020 taken out by the Defendants, on 2 outstanding matters:

(1)     A renewed application for a stay of execution of the Judgment pending the final disposal of the Appeal (“Renewed Stay Application”);

(2)     An application for leave to adduce and rely on the 4^th and 5^th affirmations of Norman Lin dated 7 December 2020 (“Lin 4^th”) and 30 December 2020 (“Lin 5^th”), respectively.  They contain developments and updates to the restructuring negotiations since the Judgment, in support of the Renewed Stay Application (“New Evidence Application”).

6.  On 11 January 2021, I ordered that Lin 4^th and 5^th be admitted de bene esse without prejudice to the Plaintiff’s argument that they should not have been filed. 

7.  With regard the Renewed Stay Application, it is the Defendants’ case that:

(1)     There exist strong grounds for the Appeal, which is in itself a reason to grant a stay of execution.

(2)     Alternatively, the Appeal is at the very least arguable, and there are good reasons justifying a stay, namely, that execution of the Judgment would lead to serious and deleterious financial consequences to the Defendants which may lead to liquidation, thereby rendering the Appeal nugatory.

(3)     The Plaintiff would not suffer any significant prejudice from the stay because, on its own evidence, the Plaintiff would not gain any priority over other creditors of the Defendants but would merely be treated para passu upon winding up of the Defendants.

8.  The Plaintiff opposes both Applications.  In respect of the New Evidence Application, the Plaintiff says that the relevant evidence could have been obtained with reasonable diligence and filed with leave before the Master either prior to the Judgment or the dismissal of the Stay Application.  In fact, the Master had already made a case management decision to disallow any new affirmation evidence.

9.  In respect of the Renewed Stay Application, the Plaintiff says that the appeal does not meet the basic merits threshold for stay.  The alleged impact of the Judgment on the debt restructuring negotiations is an irrelevant consideration and is speculative in that there is no evidence of any imminent support for any restructuring proposal more than 2½ years after the event of default.  As to their financial position, the Defendants have long been insolvent prior to the Judgment.  Enforcing the Judgment would not have the effect of putting a viable and going business concern into financial jeopardy.

B.  Background

10.  The 2022 Bonds, together with seven other bonds (the “Other Bonds”), form part of a series of eight bonds totalling US$2 billion, which are guaranteed by D2 as the common guarantor (the “China Energy Bonds”) and issued by indirectly owned subsidiaries of D2. The Plaintiff is the common trustee across all the China Energy Bonds.

11.  In respect of the 2022 Bonds, D1 is the issuer and the Plaintiff is the trustee for the sole bondholder, ie China Life Trustee Limited (“China Life”).

12.  There is no dispute that an event of default occurred on 11 May 2018 under one of the Other Bonds due 2018 (“2018 Bonds”), such that cross-defaults were triggered across all of the China Energy Bonds. 

13.  On 25 October 2018, the Plaintiff issued a notice to, amongst others, the Defendants, confirming that cross-defaults had occurred in relation to, amongst others, the 2022 Bonds.  The notice required the issuers to make payments at specified bank accounts operated by appointed Agents.

14.  On 29 October 2018, a further event of default occurred as the Defendants did not pay the Plaintiff the accrued interest in respect of the 2022 Bonds.  

15.  On 25 January 2019, the Plaintiff issued a Demand and Acceleration Notice demanding immediate repayment under the 2022 Bonds. 

16.  Save for a partial payment for accrued interest on 20 December 2018, D1 and D2 have failed to pay the outstanding amount due pursuant to the 2022 Bonds, and legal expenses and remuneration which the Plaintiff was entitled to.

17.  Meanwhile, on 6 June 2018, the Defendants and issuers of the Other Bonds engaged FTI Consulting, Inc. (“FTI”) as their independent financial advisor for restructuring negotiations.  Restructuring proposals have been made and continued into January 2021.

18.  The defence and counterclaim raised by the Defendants, are twofold:

(1)     Estoppel by convention, ie the Plaintiff and China Life are estopped by convention from acting contrary to the “Common Understanding” between themselves, the Defendants and all bondholders, namely, that all bondholders of the China Energy Bonds should be treated equally.  No action should be taken by them and no payment would be made by the Defendants to any one of them, if it would prejudice the bondholders of the Other Bonds. China Life departed from that Common Understanding in demanding for payment and taking out this action, whilst taking part in restructuring negotiations to the prejudice of other bondholders.

(2)     Implied duty of good faith, ie China Life’s contractual rights to request the Plaintiff to institute legal proceedings to enforce repayment against the Defendants are subject to an implied duty of good faith not to exercise such rights arbitrarily, capriciously or unreasonably. China Life has breached such implied term, which is prejudicial to the interests of the bondholders of the Other Bonds and jeopardises the restructuring negotiations in which China Life itself continues to participate.

It is said that these are fact sensitive issues which should not be disposed of summarily.

19.  I will deal with the New Evidence Application before the Renewed Stay Application.

C.  New Evidence Application

20.  At the same hearing when the Judgment was given, the Defendants applied for and was granted an interim stay.

21.  The Stay Application was eventually disposed of on the papers by way of written submissions without exchange of affirmations. The Master did not give leave to file Lin 4^th, which the Defendants attempted to file with their second round of reply submission.

22.  The jurisdiction of this Court to entertain an application for a stay of execution is concurrent to that of the Court below: see HKCP 2021, §59/13/7; Tsang Wing Kwai v Tsang Wing Fai [2018] 5 HKLRD 350 (CA) at §24(b).

23.  There is a greater need for evidence to be filed in applications for stay of execution than for leave to appeal (§27).  Filing of evidence is permitted where there is good justification (§§26 and 24(f)).

24.  The present application for a stay is brought as a renewed application and not as an appeal against the Master’s case management decision of disallowing the filing of Lin 4^th.

25.  The evidence necessary to justify a stay is different from evidence relevant to resist an Order 14 application.

26.  Lin 4^th dealt with ownership of a sum of US$120 million and the Defendants’ expectation that further restructuring proposal be put before bondholders.  Lin 5^th repeats part of Lin 4^th and introduces evidence of facts after 13 November 2020, the final date laid down by Master Rebecca Lee for the parties to lodge submission on the Stay Application.  It is evidence about how the Appeal may bring deleterious effect on the Defendants and render the Appeal nugatory.

27.  The evidence is relevant, I allow the filing of Lin 4^th and 5^th. 

D.  Relevant legal principles on stay of execution

28.  The starting point is that an appeal does not operate as a stay of proceedings.  The successful party is not to be deprived of the fruits of his success.  To decide whether to grant a stay, the Court need only form a preliminary view as to the merits of the appeal. The burden is on the appellant to show (i) an arguable appeal (ie one with reasonable prospects of success), which is the minimum but not sufficient requirement; and (ii) good reasons or special circumstances justifying a stay. On the other hand, if the appellant can show that there exists a strong likelihood of success of the appeal, this would by itself enable a stay to be granted.  See Star Play Development Ltd v Bess Fashion Management Co. Ltd [2007] 5 HKC 84 at §9(5)-(7).

29.  The Court will generally exercise its discretion in favour of granting a stay of execution where the appeal would otherwise be rendered nugatory or the levying of execution would result in financial ruin or serious deleterious effect on the appellant: Star Play, at §9(8), (3)-(4).  The court will require good evidence to support the appellant’s contention, such as the production of accounts or other documents: Star Play, at §9(2), (3).

30.  The Court will of course also have regard to what prejudice (if any) is likely to be caused to the successful party if a stay of execution is granted. Ultimately, the Court must conduct a balancing exercise in the exercise of its discretion as to whether to grant a stay: see Star Play, at §10.

E.  Defence of estoppel by convention

31.  The essential elements of an estoppel by convention are:

(1)     The parties share a common assumption of fact or law.

(2)     The contents of the common assumption must be sufficiently certain and unequivocal to enable the court to give effect to it.

(3)     The assumption is communicated between the parties and is acted upon by the parties.  There must be some mutually manifest conduct by the parties.

(4)     One party attempts to depart from the assumption, which departure would be unjust because of the part taken by him in occasioning the adoption of the assumption by the other party.

(5)     The other party would suffer detriment if the opposite party were allowed to set up rights against him inconsistent with the assumption.

See Unruh v Seeberger (2007) 10 HKCFAR 31 at §§133-150 per Ribeiro PJ.

32.  An understanding or assumption is a state of mind, the existence of which is to be inferred from the person’s actions: see Barnes: The Law of Estoppel, §5.41.  Accordingly, the approach of the Court should be to consider the totality of the evidence, looking not only for express words but also considering the relevant factual matrix and the conduct of all parties.

33.  Additionally,

(1)     The fact that negotiations are on foot makes it unlikely that there will be a common assumption sufficient to found an estoppel by convention.  The court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as equitable estoppel: Dawn Jade Ltd v Himanshu Girdhar Dua (unrep, CACV 4/2014, 13 January 2015), §40.

(2)     Even an agreement to an “informal standstill” would not amount to creditors having waived or suspended their rights in a legally binding manner so as to prevent them from thereafter resuming enforcement of their rights: Sanwa Finance Hong Kong Ltd v Honey Technology Ltd (unrep, CACV 271/1999, 3 February 2000), p 11.

34.  Turning to the Defendants’ case, the Common Understanding is said to derive support from the fundamental nature of the China Energy Bonds, which are guaranteed by D2, share a common trustee (ie the Plaintiff) and have very similar terms.  It is demonstrated by the words and consistent course of conduct of bondholders, the Plaintiff and the Defendants as evidenced in the correspondence from the ad hoc committee of bondholders, and the appointment of an agent in relation to payments to be made, and the parties’ dealings in restructuring negotiations.

35.  The course of conduct includes:

(1)     On the part of China Life, its solicitors, DLA Piper Hong Kong (“DLA Piper”) stated that “[China Life] expects that no payments should be made by [D2] in preference to particular bondholders, including the holders of the 2018 Bonds”, and repeatedly requested that no preferential payments be negotiated.

(2)     On China Life’s own evidence, it admitted that the Common Understanding was “obvious”, in that when the parties were in discussions regarding a potential restructuring, “it [was] important to ensure that all bondholders were being treated equally during the restructuring process” and that it was only upon the failure of the restructuring negotiations that bondholders could freely enforce their respective rights: Chow 1^st, §8.3(c).

(3)     On the part of the Defendants, they have acted consistently so as to ensure equal treatment between bondholders, including equal dissemination of information by announcements and equal repayment of interest to all. 

(4)     On the part of the bondholders, they have continually participated in the restructuring negotiations even till January 2021.  The other bondholders have not invoked the contractual terms to demand repayment or commence actions until 21 September 2020, when the Plaintiff as trustee commenced HCA 1607/2020 for another bondholder.

(5)     On the part of the Plaintiff (as trustee), it has refrained from exercising its right under the Trust Deed to accelerate the bonds due 2019.

36.  Against the above case of the Defendants, one should consider the indisputable contemporaneous evidence.

37.  The China Energy Bonds and the Trust form the subject matter of heavy documentation.  The Common Understanding was inconsistent with the express terms of the Trust Deed, which obliged the Trustee, upon an event of default, and upon meeting the pre-requisites, to give notice that the 2022 Bonds were immediately due, and to commence proceedings.

38.  The Common Understanding was inconsistent with the express terms of the Demand and Acceleration Notice dated 25 January 2019, which demanded immediate payment of all sums due under the 2022 Bonds.

39.  The Defendants have never referred to the Common Understanding in response to the demands for repayment or any of the letters from DLA Piper that have allegedly given rise to the Common Understanding.  The first mention of the Common Understanding was only in Lin 2^nd. 

40.  Very shortly after the announcement of the cross default on 25 May 2018, China Life had already expressly reserved its right to enforce the Bonds on 1 and 4 June 2018.  All of the relevant correspondence by DLA Piper contained an express reservation of China Life’s right to instruct the Trustee to enforce its rights under the Bonds against any member of the China Energy Group (including D1 and D2). 

41.  It is also noteworthy that holders of the Other Bonds have not come forward to assert the Common Understanding.  This was despite:

(1)     The Plaintiff keeping them informed about its actions;

(2)     The Defendants’ HKEx announcement on 2 September 2020 about this case and the Plaintiff’s summary judgment application; and

(3)     The Plaintiff’s institution of HCA 1607/2020 on 21 September 2020 as Trustee under another Bond against CERCG Overseas Capital (as issuer) and D2 (as guarantor).

42.  The Common Understanding is inconsistent with FTI’s internal memorandum dated 2 April 2020 (“FTI Memorandum”), which stated that any bondholders who did not accept the Defendants’ offer to issue a new zero-coupon may still commence legal action.

43.  On top of these objective circumstances, one would note the change of stance of the Defendants from that before the Master:

(1)     The parties to the Common Understanding have been expanded to include not only China Life and the Defendants, but also all holders of the Other Bonds.

(2)     Industry practice said to give rise to the Common Understanding is no longer relied on at this hearing.

44.  Considering the defence of estoppel by convention against such undisputed, objective circumstances, the Defendants are far from showing strong grounds for the Appeal.

F.  Defence of implied duty of good faith

45.  This an evolving area of law and is fact sensitive. The implied duty is of general application and is not restricted to the employment context: Sunny Tadjudin v Bank of America, National Association (unrep, CACV 12/2015, 20 May 2016), §51.

46.  A duty of good faith is implied on the grounds of upholding business efficacy and/or giving effect to parties’ intentions as gleaned from the entire factual context, whereas estoppel by convention can only be established if the each of the requisite elements set out in Unruh, §§129-150 is met.

47.  However, there are established authorities holding that in exercising the contractual right to demand payment of a loan, there is no duty not to act irrationally or arbitrarily.  The calling of a loan is an absolute contractual right which does not attract a good faith requirement.  It is materially distinguishable from a right given to a contracting party to make a discretionary assessment on behalf of both parties: Morley v Royal Bank of Scotland plc [2020] EWHC 88 (Ch), §§149, 160; UBS AG v Rose Capital Ventures Ltd [2019] 2 BCLC 47, §56; Habib Bank Zurich (Hong Kong) Ltd v Creation Castle Ltd [2020] HKCFI 1062, §§66-68.

48.  Ms Tong, counsel for the Defendants, acknowledges that the Defendants’ factual case is similar to that relied upon for estoppel by convention, but the hurdle for the implied term to succeed is lower.

49.  The Plaintiff had a positive duty, upon an event of default, upon meeting the pre-requisites in Clause 8.1 and Condition 8 (in Schedule 3) of the Trust Deed, and upon instructions by China Life, to give written notice to D1 declaring the Bonds to be immediately due and payable.  Failure to do so would be breach of trust.  The Defendants have to overcome the hurdle of showing that demanding for repayment and commencing proceedings against the Defendants were outside a reasonable range of options of the Plaintiff or that the Plaintiff’s exercise of powers was arbitrary or capricious.

50.  Considering paragraphs 44-49 above, the Appeal can only be said to be arguable in respect of existence of the implied duty and its exercise.

G.  Appeal would be rendered nugatory without a stay of execution

51.  Since the Appeal is considered by this Court only to be arguable, good reasons have to be shown for a stay of execution. The Defendants submit that the Appeal would be rendered nugatory absent a stay as they would suffer irreparable, deleterious financial consequences.

52.  There is a sum of US$120 million in D1’s account which the Defendants intend to use for restructuring.  If the Plaintiff were to levy execution on such sum, it would severely disrupt and irreparably prejudice the ongoing restructuring negotiations.  It would also trigger other legal actions from other bondholders.  In fact, none of the bondholders proceeded to legal action for almost 28 months from the event of default until 22 September 2020, just 2 weeks before the substantive hearing of the Order 14 application in this case, plainly prompted by the Plaintiff’s Order 14 summons.

53.  Should these happen, it would cause the Defendants to lose a valuable window to restructure their debts.  Even if, after losing the Appeal, the Plaintiff is able to repay any sum obtained through execution, the Defendants would have lost a valuable window to restructure their debts.  This would give rise to serious and deleterious financial consequences to the Defendants, who may already have been driven into liquidation.  The Appeal would be futile.

54.  Ms Tong invites the Court to apply Caine Tai Investment Co. Ltd v Ayala International Finance Ltd & Republic National Bank of New York [1983] 1 HKC 163 at 166D-F, with similar circumstances.  The Court of Appeal granted a stay where the defendants might be forced to dispose of their major assets at great loss, and if the appeal were successful, they would have lost the opportunity of participating in the various property developments.  Ms Tong submits that liquidation is more serious than losing an investment opportunity.

55.  Further, D1 does not have significant assets of its own.  The US$120 million does not belong beneficially to it (although the Plaintiff disputes this).

56.  D2 has no income and has a loss of approximately RMB106 million.  According to its balance sheet:

(1)     D2’s bank accounts in Mainland China and a substantial part of its long term equity investment are subject to an asset preservation order.  

(2)     While D2 has net assets of RMB967 million, its other assets are receivables and equity interest; 99% are not realisable without triggering the liquidation of its subsidiaries and the collapse of the Group.

(3)     Any available cash is far from enough to satisfy the judgment debt or to pay the outstanding amount under the Other Bonds.

57.  The Plaintiff challenges the causation for the Defendants’ financial ruin.  As pointed out by Mr Jin Pao, SC, counsel for the Plaintiff, the Defendants have long been unable to meet their debts prior to the Judgment.  This was evidenced by their public announcements on 25 May 2018 which gave the cause for financial difficulties as the “tightening in credit conditions in the PRC” which “resulted in a liquidity crunch on the Group”.  Further, in D2’s 2018 Audit Report, their own auditors were of the opinion that they could not comment on whether D2 could continue as a going concern.

58.  So this is not a case of companies with an ongoing and solvent line of business being irreparably harmed by a judgment subject to appeal. 

59.  Further, the Defendants’ assertion that levying execution would severely disrupt ongoing restructuring negotiations is irrelevant, particularly when there is no winding-up petition in relation to the Defendants.  In Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104, Ma CJHC (as he then was) held that:

(1)     The possibility or even reasonable prospect of a restructuring of the judgment debtor’s debts does not provide any reason for a stay of execution (§7);

(2)     The court may only take into account broader interests where the judgment debtor was being wound up or where liquidation or some scheme of arrangement was imminent, to prevent a judgment creditor from gaining an unfair advantage and ensure statutory pari passu distribution (§8(4)); and

(3)     The court has no inherent jurisdiction to create a moratorium or standstill without legislation.  The Companies Court is the right forum to take into account the interests of creditors as a whole when a winding-up petition is presented (§§9-11, 52‑53).

60.  Still further, one should not miss the fact that it is now about 2½ years after restructuring negotiations first commenced in August 2018. Despite proposal after proposal from FTI, no restructuring agreement has been reached.  There is no standstill agreement or even an interim moratorium on claims on any of the China Energy Bonds.

61.  According to the FTI Memorandum, whether other bondholders would accept the Defendants’ repayment proposal depended predominantly on China Life’s attitude.  Given China Life has not accepted any restructuring proposal, it is questionable if a realistic restructuring proposal would emerge before the Appeal.  This is to be distinguished from Credit Lyonnais, where the proposals had the support of 98% of creditors, and were still not considered to be a relevant consideration for stay.

62.  In summary, I am not satisfied that it is the enforcement of the Judgment that would cause serious financial and deleterious consequences to the Defendants.  In any case, it would be a wrong exercise of discretion to order a stay to enable restructuring proposals to be made which is nowhere near agreement.

H.  The stay will not cause any significant prejudice to the Plaintiff

63.  The Plaintiff and China Life have emphasized that the enforcement of the Judgment in this case would not give them any priority over other bondholders, and that the effect of such enforcement would merely put them in the position of an “unsecured creditor”, such that they would be treated pari passu in any winding-up proceedings against the Defendants. 

64.  On the premise of such position taken by the Plaintiff and China Life, Ms Tong submits that it is difficult to see what prejudice they will suffer in having to withhold enforcement for merely a few months.

65.  I am unable to accept this contention.  The starting point is, always, that a successful litigant should not be deprived of the fruits of its success.  The Plaintiff has been deprived of repayment since the event of default and that is prejudice in itself.

I.  Conclusion

66.  I grant leave to file Lin 4^th and 5^th under the New Evidence Application.

67.  The Appeal is merely arguable in respect of both defences.  The Defendants’ serious financial difficulties are not caused by the enforcement of the Judgment.  The continuation of restructuring negotiations that have lasted for 2½ years without anything near agreement is not a relevant or valid reason for a stay.  I therefore dismiss the Renewed Stay Application.

68.  On a nisi basis, costs shall be paid by the Defendants to the Plaintiff, to be taxed if not agreed, with certificate for 2 counsel.

69.  I thank counsel for their assistance.