RE H12 (HK) LTD

HCCW 92/2020

[2021] HKCFI 1836

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 92 OF 2020

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J U D G M E N T

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1.  There is before the Court a petition presented by Mr Walter Junger (“P”) on 11 May 2020 to wind up H12 (HK) Limited (“Company”) on the ground that it had failed to comply with a statutory demand served on it on 20 March 2020 (“SD”) and that it is unable to pay its debts (“Petition”).

2.  In the SD, the Company was required to pay $7,181,310.34 (“Debt”) which was made up of 3 claims:

(1)  the outstanding salary from July 2018 to February 2020 in the amount of HK$5,514,255, as particularised in Schedule 1 (“Salary Claim”);

(2)  the outstanding expenses from March 2018 to January 2020 in the amount of HK$453,531.89, as particularised in Schedule 2 (“Reimbursement Claim”); and

(3)  the outstanding loans and interest in the amount of HK$1,213,523.45, of which HK$16,523.45 was interest accrued from 1 January 2019 to 18 March 2020, as particularised in Schedule 3 (“Loans Claim”). 

3.  The Company contends that there is a bona fide dispute on substantial ground in respect of the Debt such that P does not have the locus to present the Petition. 

A.  Factual background

4.  The Company was incorporated in Hong Kong on 21 November 2014 as the vehicle to hold and operate a chain of high end art hotels under the brand “H12” around the world. A Shareholders’ Agreement was entered into by the shareholders to regulate their relationship and the conduct of the affairs of the Company.  At around the same time, the Company acquired 95% of the issued shares in Hotel 12 Management GmbH (“Target Company”), which holds a Hotel 12 in Austria.

5.  The Company has 3 shareholders and their shareholdings are:

(1)  Plateno Investment Ltd (“Plateno”), holding 61.75%, which is an operator of hotels in the Mainland;

(2)  WJ&F (HK) Limited, holding 28.75% (“WJ&F”); and

(3)  Fortune News International Limited, holding 9.5%. 

6.  P has expertise in management of luxury hotels in Asia and Europe.  P (through WJ&F) holds 28.75% shareholding in the Company and was one of its directors from 3 March 2015 to 11 May 2020[1]. He was the CEO of the Company from 31 August 2015 to 11 May 2020.

7.  The other 2 directors were nominated by Plateno.  Amongst the directors, P was responsible for running the day-to-day affairs of the Company in Hong Kong, while the 2 Plateno-appointed directors were not based in Hong Kong.

8.  The Company’s business has been operating at a significant loss in that:

(1)  According to draft audited accounts for the year ended 31 December 2018 (“2018 Accounts”), as at 31 December 2018, the Company had net current liabilities and net liabilities of US$184,845 and US$5,049,837 respectively.

(2)  The auditors qualified the 2018 Accounts on the basis that there was a material uncertainty that “cast significant doubt on the Company’s ability to continue as a going concern”. 

9.  Throughout 2018, P repeatedly informed the Plateno-appointed directors that the Company had been in a dire financial position.  These included:

(1)  In May 2018, P stated that the Company had a “serious cash flow issue” and was unable to pay the salaries of staff.

(2)  In April 2018, P stated that the Company’s funds in bank account could only support the business for 4 to 6 weeks.  Thus, the “top management” had suspended payment of all or part of their salary and some of the expense payments.  He would have to “stop the operation” of the Company by the end of August 2018 and “declare bankruptcy”.

(3)  In August 2018, P stated that the Company faced a “critical cash flow problem”. 

(4)  In September 2018, P described the financial situation of the Company as “desperate”, which led to the termination of 3 positions in the Company.

10.  In early to mid-2019, P continued to tell the Plateno-appointed directors that the Company had been suffering losses and required capital injection without which it should be wound up.  In particular, between May and July 2019, P stated that:

(1)  The Company had since mid 2018 been suffering from financial hardship and had not been able to pay salaries to some of the employees;

(2)  As of 30 June 2019, the Company owed him salaries ($2,772,000), loan ($1,370,190), salary tax ($543,255) and travel expenses ($418,662.72 from March 2018 to June 2019 and $297,269 from June to August 2019) (collectively “Outstanding Sums”);

(3)  Plateno should provide further funds to support the operation of the Company or agree to sell the assets of the Company so as to repay the debts and avoid a state of insolvency;

(4)  P had negotiated with over 50 companies on a potential sale of the Company’s shares in the Target Company; and

(5)  The Company should cease operation and proceed to liquidation.

11.  This was followed by demands made by P on 16 August 2019 and 12 September 2019 requring the Company to pay the Outstanding Sums.  However, other than expressing their surprise and disappointment over the financial results of the Company and requesting P to provide full information on all the contracts signed by the Company, the Plateno-appointed directors did not take any of the steps suggested by P.   

12.  On 20 March 2020, P through his solicitors served the SD on the Company.  This was followed by service of the Petition on 11 May 2020. 

13.  The Petition came to the attention of the Plateno-appointed directors on 13 May 2020.  They received the corporate documents of the Company from P on 12 June 2020, but were of the view that such documents were incomplete. 

14.  On 29 May 2020, P provided the following documents in support of the Debt:

(1)  The Employment Agreement dated 30 March 2018 between P and the Company (“Employment Agreement”);

(2)  The “Lifestyle Lab Travel and Business Expense Reimbursement Policy” and the email from P to Plateno-appointed directors reporting his expenses; and

(3)  The 9 loan agreements entered into between P and the Company from October 2018 to July 2019 (collectively “Loan Agreements”).

15.  Until the draft affirmation of Jiang Wei was filed on 23 July 2020 in opposition to the Petition, the Company has not been disputed the liability to pay the Debt or challenged the validity of the SD. 

B.  Applicable principles

16.  It is well established that an unpaid creditor is entitled to seek a winding up order against a company ex debito justitiae.  The burden is on the company to demonstrate by sufficiently precise factual evidence that there is a bona fide dispute on substantial ground in respect of the debt. 

17.  If the petitioner has already served a statutory demand in respect of the debt and the company fails to show that there is a substantial dispute on the debt, he can rely on the deeming provision under s 178 of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUO”) to prove that the company is insolvent.  To avoid the statutory presumption of insolvency, the company should comply with the demand as to the amount which is not bona fide disputed, and then contest the remainder (Re SEC (Hong Kong) Co Ltd, HCCW 215/2013, 21 March 2014, §27, per Ng J). 

18.  Mr Lai Chun Ho, counsel for the Company, submits that “the issue of the Company’s solvency simply does not arise due to the existence of bona fide disputes between P and the Company”.  Reliance is placed on the following authorities:

(1)  Re Hyundai Engineering & Construction Co Ltd [2002] 2 HKLRD 354 where Kwan J (as she then was) considered the relevant authorities (at §§27-29) and said (at §29):

“the issue of the solvency of the Company would not become relevant unless and until … the Company has failed to establish a bona fide dispute of the debt on substantial grounds and that FWT [petitioner] should be allowed to proceed with the petition.”

(2)  Mann v Goldstein [1968] 1 WLR 1091 where Ungoed-Thomas J said (at 1099):

“when a petitioning creditor’s debt is disputed on some such substantial ground this court should restrain the prosecution of the petition as an abuse of the process of the court even though it should appear to the court that the company is insolvent”

19.  Mann v Goldstein, Re Hyundai Engineering and Re Shenhua Sheng Yu Coal and Energy Corp Ltd [2001] 2 HKLRD 452 (considered in Re Hyundai Engineering) were concerned with applications to restrain presentation of, or to strike out, winding up petitions on the ground that there were substantial disputes on the debts such that the petitioners were not “creditors” within the meaning of the relevant statues[2]. In these cases, the Courts held that the petitioners had no locus to pursue the winding up petitions as there were disputes on substantial grounds on the debts in question, and the Companies Court is not the appropriate forum to resolve such disputes.  It was in this context that Ungoed-Thomas J explained the principle in Mann v Goldstein (as applied in Re Hyundai Engineering) thus:

“To enable the Companies Court to make the winding-up order itself, not only must the petitioner have been shown to be entitled to present the petition, but one of the grounds specified in section 222 of the Companies Act must be established: and the only such ground relied on in the petition and before me was that the company is unable to pay its debts. This requirement is additional to the pre-condition of presenting the petition, that the petitioner must be a creditor, and is not alternative to it. But the insolvency requirement, unlike the creditor requirement, is only a prerequisite of the order and not a prerequisite of the presentation of the petition. So if a person is entitled to present a petition, then the company’s inability to pay its debts is the very matter which it is appropriate for the Companies Court to enquire into and decide in the exercise of its jurisdiction to make a winding-up order” (1095E-F).

“The winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court” (1099A-B). (underline added)

20.  As is clear from the above passages, once the petitioner is able to show that he is a creditor of the company, he has the locus to pursue the petition.  The Court will then have to consider whether the company is insolvent.  However, this does not mean that the petitioner or the Court can only take into account the company’s failure to satisfy the statutory demand in respect of the debt which is not bona fide disputed.  Where there is admission of insolvency on the part of the company or other cogent evidence which shows that the company is insolvent, the Court will have to consider whether the company should be allowed to continue to operate as a going concern in light of its insolvency.

C.  Whether P is a creditor

21.  Both counsel have made extensive submissions in their skeletons on whether P is entitled to the 3 claims notwithstanding that:

(1)  P has adduced contemporaneous documents (including those described in §14 above) in support of his claims, and the Company had not previously disputed liability to pay the same. 

(2)  It is not the function of the Companies Court to resolve their arguments or determine whether P is entitled to the amounts claimed. 

(3)  The only question is whether the Company has discharged the onus of showing a bona fide dispute on substantial grounds in respect of all claims, such that P cannot claim to be a creditor of the Company. 

22.  Mr Lai submits that there is a bona fide dispute on substantial grounds in respect of the Debt for the following reasons:

(1)  Salary Claim: The salary was incurred in breach of the Articles of Association of the Company (“Articles”), and P cannot rely on the Duomatic principle to “ratify” such breach due to the “probable insolvency” of the Company at the time the Employment Agreement was entered into. 

(2)  Reimbursement Claim: The expenses were “not contractually owed by the Company”.  Any unjust enrichment claim by P is debarred by the rule against contractual “leapfrogging”.

(3)  Loans Claim: The Loan Agreements were not enforceable because they involved a breach of the no-conflict rule on the part of P in his capacity as a director of the Company.  The Company may further rely on its change of position as a defence to P’s potential claim in unjust enrichment. 

23.  As regards the Salary Claim, Mr Lai contends that in breach of the Articles, the Employment Agreement has not been approved by the shareholders.  Reliance is placed on Tam Po Kei v Tam Bo Kin [2011] 1 HKLRD 537 where Harris J held (§§18-20, 100) that the director’s duty to act in good faith includes a duty to act in accordance with the company’s constitution. The right for directors to obtain remuneration under the articles is exceptional and limited in nature, due to the stringent fiduciary duties of a director not to make a profit out of his trust or place himself in a position of conflict.  In the present case, article 26(1) of the Articles states that directors’ remuneration must be determined by the company at general meeting. 

24.  The argument is wholly without merit.  The Employment Agreement concerned the employment of P as the CEO of the Company.  It has nothing to do with director’s remuneration.  Article 26(1) of the Articles is not engaged.

25.  In my view, the Company has not demonstrated that there is bona fide dispute on substantial ground in respect of the Salary Claim for the following reasons:

(1)  The Employment Agreement was approved by the board at the meeting held on 30 March 2018 at which all 3 directors were present.  The Employment Agreement was signed by a Plateno-appointed director (Mr Alex Zheng Nanyan) on behalf of the Company. 

(2)  The suggestion that the Employment Agreement required the approval of the shareholders is wrong in law. It is well established that where there is an effective board, the shareholders cannot in general meeting usurp the powers of the board (Breckland Group Holdings Ltd v London and Suffolk Properties and others [1989] BCLC 100; Miracle Chance Ltd v Ho Yuk Wah [1999] 3 HKC 811 (CA) at 815C-F).   

(3)  The Employment Agreement provides, inter alia, that P is entitled to receive net salary of $190,000 per month and housing allowance of $80,000 per month, and the Company is liable to pay all taxes which become due and payable under the Agreement. 

(4)  The Company duly paid the salary and housing allowance to P during the period from May 2015 to March 2018 out of the funds deposited in the bank account which had been controlled by Plateno’s finance team. 

(5)  There is no dispute that from July 2018 to May 2020, the Company did not pay any salary or housing allowance to P.  Nor is there any dispute that P’s salaries tax for 2017/18 and the provisional tax for 2018/19 in the total amount of HK$543,255 was paid by P on 23 April 2019, but the Company has not repaid the same to P. 

26.  As there is no bona fide dispute in respect of the Salary Claim, which is of a substantial amount, P is a creditor of the Company and has the locus to pursue the Petition.  It is unnecessary to determine the validity of the arguments advanced by counsel in respect of the other 2 claims.

D.  Insolvency

27.  The matters stated in §§8 - 11 above, which are not in dispute, all go to show that the Company has since at least mid-2018 been insolvent and unable to pay its debts.  Indeed, in his skeleton, Mr Lai make his submissions on the basis that the Company has since March 2018 been insolvent.  This constitutes an admission on the part of the Company that it is insolvent and unable to pay its debts.

E.  Conclusion

28.  The Company has not advanced any point as to why, despite its insolvency, the Court should allow it to continue to operate as a going concern.  It is in the circumstances appropriate for the Court to make a winding up order against the Company. 

29.  As for costs, I make a cost order nisi that the costs of and occasioned by the Petition, including the costs of the Official Receiver, be taxed and paid out of the assets of the Company.