RE EVERWIN ENTERPRISE (HONG KONG) LTD

HCCW 395/2021

[2022] HKCFI 1653

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 395 OF 2021

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J U D G M E N T[1]

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1.  There is before the court a winding up petition presented by the petitioner, Haitong International Products & Solutions Limited (“P”), on 27 October 2021 (“Petition”) against Everwin Enterprise (Hong Kong) Limited (“Company”) on the ground that the Company is unable to pay its debts. The debt arose out of the “2020 Notes” (as defined in §16 below) which fell due on 31 December 2020.

2.  On 19 October 2021, the Company applied ex parte (on notice) for an “interim interim” injunction to restrain P from presenting the Petition (“Injunction Summons”). On 22 October 2021, this Court after hearing arguments from leading counsel for both parties, dismissed the Injunction Summons as it did not appear from the evidence that there is a bona fide dispute on substantial grounds in respect of the debt. In particular, the Company admitted liability to pay the debt through Messrs. King & Wood Mallesons’ (“KWM”) letter dated 21 May 2021 (“Letter”):

“We are instructed that our client acknowledges and agrees that the amount of the outstanding sum owed by our client to your client under the Note Documents is USD195,378,000.” (underlined added)

3.  The Letter was exhibited to the Company’s affirmation filed in support of the Injunction Summons in discharge of its duty to make full and frank disclosure.[2] The Letter was not marked without prejudice and was considered by this Court at the hearing on 22 October 2021 without any objection from the Company. However, 1 week prior to the original hearing of the Petition[3], the Company belatedly issued a summons to seek an order to expunge the Letter and other correspondence identified therein (“Expunge Summons”) on the ground that they are covered by without prejudice privilege (“WPP”).

4.  At the hearing, Mr Paul Shieh SC (leading Ms Astina Au), counsel for the Company, opposes the Petition on the ground that there is a bona fide dispute on substantial grounds in that:

(1)   the 2020 Notes are “tainted with illegality” and, therefore, unenforceable (Illegality ground); and

(2)   there is an estoppel by convention against P by reason of the “Mutual Understanding” that P would not take any “drastic enforcement measures against the Company” until after expiry of the term of the appointment of its affiliate as financial adviser of the Company (Estoppel ground).

A.  Approach to Expert Evidence

5.  In recent times, there is a growing tendency on the part of the company opposing a winding up petition presented by a creditor (as well the debtor seeking to set aside a statutory demand or opposing a bankruptcy petition) to file voluminous affirmations and exhibits hoping to create an impression that there are many complex issues which cannot be determined by the court at the hearing of the petition. In particular, it is a matter of concern to see that substantial time and costs were incurred by the parties in filing “expert evidence” by affidavit[4] when such evidence is neither necessary nor relevant to the determination of the petition. This is because the approach of the Companies Court in dealing with a creditor’s petition is to ask whether the company has discharged the burden of showing a bona fide dispute on substantial grounds in respect of the debt. Once this threshold is met, the court will not go on to resolve the dispute, no matter how many affirmations or “expert evidence” have been filed by the parties.

6.  The present case is a paradigm example to illustrate the extent to which a company seeks to adduce “expert evidence” and voluminous exhibits in opposition to the Petition when such evidence is clearly unnecessary and irrelevant to the determination of the Petition:

(1)  The Company filed an affirmation of Huang Qisen (“Huang”) raising substantially the same factual matters already raised in the Injunction Summons. It also filed an “expert report” dated 6 January 2022 of Mr Stephen Weatherseed, senior director of Mazars CPA Limited (“SW Report”), which runs to 1,470 pages including many annexures.

(2)  This led to P filing a responsive “expert report” dated 21 February 2022 of Mr Chen Yung Ngai Kenneth, a partner of ZANHOL Forensic Accounting Services Limited (“Chen Report”) which runs to 61 pages.

(3)  The Company saw fit to include 3 bundles of Hong Kong Financial Reporting Standards and 3 more bundles of contracts relating to bonds which terms are irrelevant to the arguments on the Petition. As a result, there were 12 hearing bundles lodged with the court.

(4)  However, it was obvious from the skeletons lodged by counsel for the original hearing that no reference was made to many of the documents in the 12 bundles. It was only upon this Court’s direction requiring the legal advisers to remove all the documents which are irrelevant to the Petition that the Company removed all the irrelevant documents which took up more than 6 bundles.

7.  As will be seen from the latter part of this Judgment, the so-called “expert evidence” is wholly unnecessary and irrelevant to the determination of the Petition. When viewed against the underlying objectives of the CJR, one can only say that such “expert evidence” is a complete waste of time and costs.

8.  Consistent with the court’s duty to further the underlying objectives by actively managing cases[5], in future, if a party wishes to adduce any expert evidence in winding up or bankruptcy proceedings (including application to set aside a statutory demand) commenced by a creditor, it should at the callover hearing, identify the relevant expert issues and the proposed expert and seek the court’s direction as to whether the issues are relevant to the petition. It is only if the court gives such directions that the parties may embark upon preparing and filing any expert evidence in the proceedings. If a party files any expert evidence without first satisfying the court that it is appropriate to do so, it may expect the court to order all the costs occasioned by such evidence to be borne by that party even if it is successful in the proceedings. In the case where the company is ordered to be wound up by the court, such that the petitioner is ordinarily entitled to be paid the costs of the petition out of the company’s estate, the court may order the directors responsible for causing the company to file the expert evidence to pay the costs occasioned by such evidence, as it would be unjust to apply the company’s estate to pay such costs.

B.  Background facts

9.  Haitong International Securities Group Ltd is a listed company in Hong Kong (“Haitong”) and engages in provision of financial services through its subsidiaries (collectively “Haitong Group”). The Company, Haitong International Securities Company Limited (“Haitong Securities”) and Haitong International Capital (HK) Limited (“Haitong Capital”) are wholly owned subsidiaries of Haitong.

10.  Huang owns 95% of Tahoe Investment Group Co Ltd (“Tahoe Investment”). Tahoe Investment is the parent company of the Company and a substantial shareholder of Tahoe Group Co. Ltd (“Tahoe Group”), a company listed on the Shenzhen Stock Exchange. Tahoe Group holds all the issued shares in Tahoe Group Global (Co.,) Ltd (“Tahoe Global”).

B1.  Tahoe Bonds and 2019 Notes

11.  Pursuant to a Purchase Agreement dated 28 June 2019, Tahoe Global issued and sold to Haitong Securities US$400,000,000 aggregate principal amount of 15% Senior Notes due 2022 (“Tahoe Bonds”). Payment under the Tahoe Bonds was guaranteed by Tahoe Group. The Tahoe Bonds have since 11 July 2019 been listed on the Singapore Stock Exchange.

12.  Pursuant to a Note Purchase Agreement dated 28 June 2019, the Company purchased from P a leverage participation note 2020 (“2019 Notes”) linked to the Tahoe Bonds.

13.  Under the Pricing Supplement dated 10 July 2019 (as amended and restated on 18 December 2019) issued by P (as issuer of 2019 Notes), the “Aggregate Nominal Amount” and “Aggregate Proceeds Amount” of the 2019 Notes were US$195,378,000 and the maturity date was 17 July 2020.

14.  In May and June 2020, P sought to terminate the 2019 Notes on the basis that the market price of the Tahoe Bonds had dropped significantly but was not able to do so given that “termination mechanism” existed in the 2019 Notes[6].

B2.  2020 Notes

15.  The Company entered into a series of transactions with the result that the 2019 Notes were swapped with a set of notes issued by Auspicious Forward Investment Solutions Limited (“SPV”), a special purpose vehicle controlled by P, on 29 June 2020 (“SPV Notes”).

16.  Pursuant to the Sale and Purchase Agreement dated 7 July 2020 made between the Company (as purchaser), Haitong Securities (as dealer) and P (as issuer), the Company exchanged the SPV Notes for a new set of leveraged participation notes issued by P on 7 July 2020 (“2020 Notes”).

17.  Under the Side Letter Deed executed on or around 7 July 2020 (“Side Letter”), the Company agreed to pay default interest at 20% per annum (to be compounded daily) from the date the “Funding Total Amount” (as defined in §18 below) is due in full to the date of payment[7].

18.  The terms of the 2020 Notes are set out in the Pricing Supplement dated 17 July 2020 (“2020 Pricing Supplement”) [8] which provides, inter alia, that on the Maturity Date (31 December 2020), the Company shall pay the “Funding Total Amount” to P, which comprises the following 2 amounts:

(1)  “Funding Notional Amount”, being the amount lent by P to the Company for acquisition of the Tahoe Bonds, to be calculated by the agreed formula of (A - B) where:[9]

"A" is “Bond Instrument Amount”, being US$247,878,680;

and

"B" is “Bond Initial Investment Amount”, being US$51,682,704.78.[10]

(2)  “Funding Cost”, being the cost of financing, to be calculated by the agreed formula of (X × Y × Z) where:[11]

"X" is “Funding Notional Amount”, defined as “A - B";

"Y" is “Funding Rate” defined as 12%; and

"Z" is “Day Count Fraction” defined as the total number of days from the Issue Date to Maturity Date, divided by 360.[12]

19.  Applying the above formulas, P calculated the amount payable by the Company at US$207,117,551.17, being Funding Notional Amount (US$196,195,975.22) plus Funding Cost (US$10,921,575.95).

B4.  Early Redemption of 2020 Notes

20.  The transactions described in §§15-16 above did not involve any actual cash flow but resulted in the parties swapping the 2019 Notes with the 2020 Notes (“Swap Transactions”). The Company contends that the Swap Transactions serve no real purpose other than to dress up the financials of Haitong Group.[13]

21.  On 14 July 2020 (i.e. 3 days before the date of the 2020 Notes[14]), Haitong Securities (on behalf of P) referred to (1) the 2020 Notes, the 2020 Pricing Supplement, the Side Letter, (2) Tahoe Group’s failure to repay its RMB 1.5 billion 7.5% medium term notes due 5 July 2020 as a “Bond Default Event” under the 2020 Pricing Supplement, and (3) the market price of Tahoe Bonds dropped to 39.756% as a “Trigger Event” under the 2020 Pricing Supplement, and requested for early redemption of the 2020 Notes by paying the Total Funding Amount of US$196,094,386 no later than 17 July 2020 (“Redemption Notice”).

22.  The Company did not comply with the Redemption Notice. Nor did P take any further step to enforce the Redemption Notice. Instead, the parties agreed that Haitong Capital should be appointed as arranger and financial advisor to assist the Company (and its subsidiary) in dealing with the liquidity problem by raising new facility or restructuring its debts.

B5.  Appointments of Haitong Capital as Arranger / Financial Advisor

23.  By a mandate letter dated 19 December 2020, the Company agreed to appoint Haitong Capital and its affiliates (which include P) as exclusive arranger in respect of a primary syndication of a US$250-400 million senior secured facility to be borrowed by the Company and/or its affiliates for an initial period of 12 months from 19 December 2020 (“1^st Appointment”).

24.  By another mandate letter dated 31 March 2021, Tahoe Life Insurance Company Limited (“Tahoe Life”), a subsidiary of the Company, agreed to appoint Haitong Capital and its affiliates (which include P) as financial advisor to arrange and manage the provision of any financing, or other forms of financial accommodation, disposals or sales of any shares or assets of any part of Tahoe Life and its subsidiaries (“Insurance Group”) or any restructuring of the Insurance Group and to provide financial advisory services in relations to such transactions for an initial period of 12 months from 31 March 2021 (“2^nd Appointment”).

25.  In respect of the 1^st and 2^nd Appointments, Haitong Capital is entitled to a success fee equivalent to 2% of the funded amount in respect of a financing transaction or the total consideration of a M&A financial advisory transaction[15].

26.  Despite the 1^st and 2^nd Appointments, Haitong Capital was not able to arrange any financing for the Company or the Insurance Group.

B6.  1^st SD and 2^nd SD

27.  On 10 September 2021, P served a statutory demand on the Company requiring it to pay the US$241,975,036.10, being Funding Total Amount (US$196,195,975.22) and default interest accrued thereon (US$45,779,060.88) from 17 July 2020 (“1^st SD”).[16]

28.  The Company through KWM’s letter dated 21 September 2021 objected to the 1^st SD.[17]

29.  By letter dated 5 October 2021, Messrs. DLA Piper (“DLAP”), solicitors for P, stated that without prejudice to P’s position that the 1^st SD was valid, to avoid any further argument, it served another statutory demand dated 5 October 2021, requiring the Company to pay US$241,697,772.39 (“Debt”), being Funding Total Amount (US$207,117,577.17) and default interest accrued thereon at 20% p.a. from 1 January 2021 to 5 October 2021 (US$34,580,221.22) (“2^nd SD”).

30.  The Company did not comply with the 2^nd SD within the time limited to do so. Shortly after the Company’s failed attempt to obtain an “interim interim” injunction against P, the Petition was presented.

31.  In the Petition, P refers to and relies on (1) the 2020 Notes, the Side Letter, the 2020 Pricing Supplement, (2) the Company’s failure to pay (1) the Funding Total Amount (US$207,117,551.17) due on 31 December 2020, (3) the Letter wherein the Company acknowledged a substantial part of the Debt, (4) the Company’s failure to comply with the 2^nd SD, and (5) the dismissal of the Injunction Summons as the bases for contending that the Company is unable to pay its debts.

C.  Discussion

C1.  Expunge Summons

32.  The principles on WPP are not in dispute. As submitted by Mr Shieh:

(1)  Where negotiations are being carried out on a “without prejudice” basis, the burden will be on a party seeking to show the basis of communication has changed to an “open” one (Cheddar Valley Engineering Ltd v Chaddlewood Homes Ltd [1992] 1 WLR 820, at 825H-826B).

(2)  The use or absence of the “without prejudice” stamp is not conclusive. Even if such express words are not used, the WPP still applies if the circumstances judged objectively were such that it can be assumed to have been intended the communication in question, being made with a view to settlement, be not admitted in evidence (Yu Man Fung Alice v Chiau Sing Chi Stephen [2019] HKCFI 1549 at §27).

(3)  For a communication to constitute a negotiating document, it is not necessary for it to “contain a concession or offer of compromise”. It is sufficient that the communication evinces a genuine desire to negotiate a settlement of an actual or potential dispute (Williams v Hull [2009] EWHC 2844 at §38).

33.  Mr Shieh contends that the following documents are covered by WPP and, as such, all references made to such documents in the Petition[18] and P’s affirmations[19] should be expunged:

(1)  the letter from DLAP to KWM dated 26 February 2021;

(2)  the letter from DLAP to KWM dated 14 May 2021; and

(3)  the Letter.

34.  Mr Shieh submits that the first 2 letters are indisputably protected by WPP as P confirms[20] that it only relies on the Letter. The Letter was part of a series of negotiations between DLAP and KWM conducted on a WPP basis in that:[21]

(1)  On 26 February 2021, DLAP sent an open letter to KWM to explain how it calculated the debt at US$196,195,975.22;

(2)  On 26 February 2021, DLAP also sent a “without prejudice” letter requesting the Company to (a) execute a settlement agreement, (b) acknowledge its debt in writing by way of a draft open letter enclosed thereto (“draft Open Letter”) and (c) arrange for a corporate guarantee to be signed;

(3)  On 3 March 2021, KWM sent an open letter requesting P to contact the Company to explain the precise calculation on the Company’s liability;

(4)  On 14 May 2021, DLAP sent a “without prejudice” letter referring to the previous discussions between P and the Company on the calculation of the Company’s liability, and requested the Company to acknowledge its debt by issuing the draft Open Letter;

(5)  It was against the above context that KWM issued the Letter. Although the Letter was not marked “without prejudice”, the fact that the draft Open Letter was not used is significant, bearing in mind the material differences between the 2 letters:

(a)  While the draft Open Letter makes no reference to any without prejudice communications, the Letter expressly refers to DLAP’s letter dated 14 May 2021. The burden of showing that the basis of the Letter has changed to an “open” one falls on P.

(b)  The draft Open Letter requires the Company to acknowledge that it owed US$196,094,386 to P but the Letter refers to a lesser sum of US$195,378,000. This shows that the Company was still hoping to engage in further negotiations.

(c)  The Letter refers to “other requests as set out in paragraph 5 of [the letter dated 14 May 2021]” which relates to, inter alia, due execution “Settlement Agreement” (which is clearly protected by WPP), this indicates the Company did not abandon the protection of WPP.

35.  In my view, there is no proper basis for the court to expunge the Letter. As stated in §3 above, the Letter was exhibited to an affirmation filed by the Company in support of the Injunction Summons.

(1)  By choosing to exhibit the Letter to an affirmation and drawing the court’s attention to its contents, the Company must be taken as having waived any WPP which might have been attached to the Letter. I do not agree with Mr Shieh’s submission that the Company was not “relying on the contents” of the Letter at the ex parte hearing or that the Company’s act in exhibiting the Letter was insufficiently “unequivocal” to constitute waiver (cf. Daimler AG v Leiduck Herbert Heinz Horst, HCA 4089/1994, 28 July 2011, §38[22]). The Company considered it necessary to disclose the contents of the Letter at the ex parte hearing was precisely because it was relevant to the court’s consideration as to whether there is a bona fide dispute on substantial grounds in respect of the Debt. This is the same question which the court has to consider at the hearing of the Petition.

(2)  Nor do I think it is right for the Company to characterize its act in exhibiting the Letter for the purpose of making full and frank disclosure as a “partial” waiver (cf. Citic Pacific Ltd v Secretary for Justice [2012] 2 HKLRD 701, §§26-38). The passages in Citic do not assists the Company as the Court of Appeal affirms (§28) the principle that “if the holder of privilege in a document voluntarily discloses that document to a specific party then, in respect of that specific party at least, privilege in the document must be lost”.

36.  In any event, it is clear from the chain of correspondence described in §34 above that the parties were conscious of, and did distinguish, the letters which were covered by WPP and those which were not. The fact that the contents of the Letter are not exactly the same as the wordings of the draft Open Letter is irrelevant as KWM did on behalf of the Company acknowledged its liability to pay the amount due under the 2020 Notes, which was precisely what P requested the Company to do. This is reinforced by the fact that KWM never suggests that the Letter was intended to be covered by WPP but that it had omitted to so mark the Letter.

B2.  Applicable principles

37.  The principles are well established. A winding-up petition should only be presented if the creditor is owed a liquidated sum and the company does not have any valid ground for refusing payment. Where the company disputes the debt in question, it bears the burden to show that there is a bona fide dispute on substantial grounds and, for this purpose, must adduce sufficiently precise factual evidence to substantiate its allegations and cannot merely raise a cloud of objections on affidavits. Bare oral allegations, uncorroborated by documentary evidence or contrary to common and commercial sense, are not sufficient to raise a bona fide dispute on substantial grounds. The Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds, but the Court does not try the dispute on affidavits (Re China Cultural City Ltd [2020] 4 HKLRD 1, §§9-12; Re Leung Cherng Jiunn [2016] 1 HKLRD 850 (CA), §27).

B3.  Admission of liability

38.  Mr Maurellet SC (leading Mr Jason Yu) submits that the Company has in the Letter admitted liability to pay the Debt for the following reasons:

(1)  The ISIN[23] number quoted in the letter (ISIN no. XS2201672750) is the unique ISIN number of the 2020 Notes. Thus, the reference in the Letter to the “outstanding sum owed by our client to your client” which the Company “acknowledges and agrees” to be owed must be the debt payable under the 2020 Notes.

(2)  Although the Company suggests that the Letter only acknowledged the correctness of the calculation of the debt[24], that cannot be right as the wordings used by KWM are that the Company acknowledged and agreed that the outstanding sum was “owed by our client to your client”.

(3)  The admission was clear and unequivocal. It was also unqualified as the Company did not reserve any right to challenge the amount owed to P.

39.  I agree with Mr Maurellet’s submissions. Although the amount admitted by the Company in the Letter (US$195,378,000) is less than the Debt (US$241,697,772.39) stated in the 2^nd SD, the difference is mainly attributed to the contractual interest accrued during the period between the issue of the Letter and the 2^nd SD. More importantly, even if there is any basis to suggest that the 2^nd SD is defective (none has been suggested), to avoid the presumption of insolvency, it is incumbent upon the Company to comply with the 2^nd SD and pay the amount which is not bona fide disputed (Re Eureka Manufacturing Co [2020] HKCFI 2032, §22).

40.  As the Company has failed to comply with the 2^nd SD, it is deemed unable to pay its debts by virtue of s.178(1) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32).

41.  In light of my conclusion that the Company has admitted liability to pay US$195,378,000 under the 2020 Notes, it is not open to the Company to contend that by reason of the Illegality ground or the Estoppel ground, there is a bona fide dispute on substantial grounds in respect of the Debt. Nevertheless, I will set out the reasons as to why I consider that there is no merit in either ground.

B4.  Illegality ground

42.  At the ex parte hearing, the Company argued that the 2020 Notes were entered into as part of a swap transaction to replace the 2019 Notes so as to dress up the Haitong Group’s financial reports which, it said, amounts to deception in contravention of ss.108 and 277 of the Securities and Futures Ordinance (Cap. 571) (“SFO”).[25] This Court did not accept that this constituted a bona fide dispute on substantial ground in respect of the Debt sufficient for the court to grant the injunction sought.

43.  At the hearing on the Petition, the Company repeats the same arguments. To bolster its arguments on the Illegality ground, the Company filed the SW Report in January 2022. Despite the volume of the SW Report, the arguments remain the same:

(1)  By asking the Company to swap the 2019 Notes with the SPV Notes a few days before 30 June 2020[26] (the date to which the interim accounts of Haitong Group was made up) (“Interim Accounts”), and then to exchange the SPV Notes for the 2020 Notes a few days later, there was “conscious action on the part of the Haitong Group intended to mislead the users of their Interim Accounts”[27].

(2)  The 2020 Notes had no intrinsic value and/or commercially justifiable rationale. The timing of the Swap Transactions fit with the Company’s case that they were requested by P (through one Ms Tian) to “accommodate” the Haitong Group, which was then in the process of preparing the Interim Accounts.[28]

(3)  Mr Weatherseed essentially makes the same point as the Company - the Swap Transactions appear suspicious and carry the “hallmark of window dressing” given that (a) it was agreed at the outset that the SPV Notes would be temporary such that their terms did not matter, (b) the Swap Transactions coincided with the date to which the Interim Accounts were made up, and (c) P could have simply amended the 2019 Notes and there was no need to use the SPV Notes as a “conduit”.[29]

44.  Mr Weatherseed goes on to say that the significance of the Swap Transactions becomes apparent as the fair value of the Tahoe Bonds (an asset to P) is different from the fair value of the 2019 Notes (a liability to P) as a matter of accounting treatment in that:

(1)  On 30 June 2020, the quoted price of the Tahoe Bonds dropped from US$390.8 million to US$248 million. This drop in value (US$142.8 million) should have been reported as a “loss” in Haitong Group’s Interim Accounts.[30]

(2)  As the 2019 Notes represent a liability to P, its fair value would remain at US$195,378,000.[31] This liability can only be “derecognised” when the 2019 Notes becomes due (i.e. 17 July 2020).[32]

(3)  By entering into the Swap Transactions the Haitong Group artificially engineered a “cancellation” of the 2019 Notes on 29 June 2020, with the result that the liability under the 2019 Notes (US$195,378,000) was replaced it with the liability under the SPV Notes (assumed to be US$52 million[33]).

(4)  The difference between the original liability under the 2019 Notes and the new liability under the SPV Notes (US$143 million) represent a “gain” to Haitong Group, which would cancel out the “loss” under the Tahoe Bonds (described in sub-§(1) above).

(5)  The Swap Transactions therefore amounted to a material distortion of the financials of the Haitong Group as at 30 June 2020 and gave rise to potential liabilities under, inter alia, s.384 of the SFO.

45.  Mr Shieh contends that where the raison d’etre of a transaction is to deceive third parties, such deceptive intention was present in the mind of the party seeking to enforce the contract, and where the documents were drawn up from the outset in such a way as to facilitate that deception, the contract would be unenforceable for illegality (Alexander v Rayson [1936] 1 KB 169 at 187-189, citing Lindley LJ in Scott v Brown, Doering, McNab & Co [1892] 2 QB 724). Further, applying the more recent English authority of Patel v Mirza [2017] AC 467, §120, per Lord Toulson, it is plainly an affront to the public interest to allow P to enforce instruments which were created and employed to deceive the public. Given the importance of investor protection, public policy demands that P be debarred from benefiting from its own illegal acts. I am unable to agree.

46.  As Mr Maurellet submits, a distinction must be drawn between a contract to do a thing that cannot be performed without violating the law, and a contract that can be performed legally. In order to avoid a contract that can be legally performed (as is the case here), the mens rea of a “wicked intention” to break the law must be shown (Waugh v. Morris (1873) LR 8 QB 202 at 208 per Blackburn J). There is no evidence to suggest that P entered into the 2020 Notes “with the objective of issuing the interim accounts that P knew or recklessly knew was misleading”, still less evidence to prove P’s intention to violate the law by knowingly deceiving the users of the Interim Accounts. There is simply no evidence to suggest that P had the necessary ill motive or intention. To the contrary:

(1)  The Company relies on Huang’s hearsay assertion that Ms Tian of the Haitong Group represented to Mr Brian Liu that the SPV Notes and 2020 Notes were issued so as to “accommodate” the preparation of the Haitong Group’s accounts.[34] Such vague assertion is a far cry from saying that P knowingly issued the 2020 Notes to deceive the users of the Interim Accounts.

(2)  The Company’s allegations are made in extremely general terms and not directed against any specific officers of Haitong Group. There is no basis to attribute the knowledge or motive of the unidentified officers of Haitong Group (or Haitong for that matter) to P.

(3)  The preparation of Haitong Group’s accounts including whether to make provision for any impairment loss in respect of the Tahoe Bonds or how to report the fair value of the liability under the 2019 Notes was the responsibility of the directors of Haitong. There is no basis for Mr Weatherseed to assume that those directors ought to have applied the accounting treatment he says to the 2019 Notes.

47.  There are 2 other reasons why the Illegality ground must be rejected:

(1)  On the Company’s case, the SPV Notes are integral to the alleged illegality. However, Mr Weatherseed confirms that, without the SPV Notes, a direct swap of the 2019 Notes with the 2020 Notes would not have enabled the Haitong Group to offset the fair value “loss” he says ought to arise from the fall in the market price of the Tahoe Bonds.[35] In other words, it is the accounting treatment that Haitong Group may apply upon the issuance of the SPV Notes that might be tainted by illegality. As P is not suing or relying on the SPV Notes, let alone the accounting treatment of the Interim Accounts, the alleged wicked intention is too remote to render the 2020 Notes to become unenforceable (cf. 21^st Century Logistic v. Madysen [2004] 2 Lloyd's Rep 92, §§18-19, per Field J).

(2)  Even if, contrary to my view, there is any proper basis to suggest that Haitong Group adopted a wrong accounting treatment on the 2019 Notes and/or the SPV Notes, this cannot be taken as evidence of a motive or intention on the part of Haitong Group to break the law. It is even more remote to attribute such motive or intention to P which was not required to prepare any financial statements.

48.  For the above reasons, I do not think that the Illegality ground constitutes a bona fide dispute on substantial ground in respect of the Debt.

49.  I do not consider the SW Report or the Chen Report to be necessary for the determination of the Petition or the Illegality point. For completeness, Mr Maurellet puts forward the following reasons in support of his contention that the SW Report is “speculative and suspect” and does not have any evidential value:

(1)  There is no basis for an accounting expert to opine on the subjective motive or intention of the (unidentified) officers, including whether they knowingly caused misleading accounts to be issued.[36]

(2)  Mr Weatherseed accepts he does not know how the 2019 Notes were in fact recognised in the Interim Accounts. His conclusions are based on “inferences” he draws from the reference to “fair value” in the Interim Accounts.[37]

(3)  However, his conjecture is wrong in that:

(a)  Mr Luk deposes that the accounting treatment which Haitong Group applied towards the 2019 Notes was not the one (wrongly) assumed in the SW Report. When the price of the Tahoe Bonds fell, the fair value of the liability of the 2019 Notes was in fact reduced in Haitong Group’s accounts. There was thus no net accounting “loss” to avoid by entering into the swap transactions.[38]

(b)  This is corroborated by Haitong Group’s audited financial statements for the year ended 31 December 2019, which stated that the 2019 Notes were “linked” to its underlying investments (i.e. Tahoe Bonds) and the economic value was “hedged”.

(c)  P’s expert (Mr Chen) disagrees with the SW Report’s accounting treatment of the 2019 Notes. He also reviewed Haitong Group’s interim and audited accounts for 2019 and conclude that those accounts in fact adjusted the fair value of the 2019 Notes in line with Tahoe Bonds’ market value.

(d)  In any event, it is difficult to see how the assumption in the SW Report (that the fair value of the 2019 Notes does not depend on the price of the Tahoe Bonds) can be correct when the SW Report itself suggests that the 2019 Notes required P to deliver the Tahoe Bonds to the Company in exchange for payment of money to P.[39] Clearly, P’s net exposure under the 2019 Notes depended on the Tahoe Bonds’ market price.

50.  Mr Shieh is not really able to answer the above criticisms on the SW Report except to say that Mr Weatherseed had not been provided with access to the books and accounts of Haitong and, therefore, was not able to verify the assertions made by Mr Chen, and the court should allow the matter to proceed to trial as long as it is satisfied that the suspicious circumstances, read together with the SW Report, give rise to a bona fide dispute on illegality ground. I do not think that either reason is sufficient to refute the criticisms made by Mr Maurellet which seems to me to be well founded.

B5.  Estoppel ground

51.  The Company claims that there was a “Mutual Understanding” that, upon the 1^st and 2^nd Appointments, P would refrain from seeking drastic enforcement measures against the Company until expiry of such Appointments.[40] The “Mutual Understanding” gives rise to an estoppel by convention. The same argument was raised by the Company at the ex parte hearing on 22 October 2021.

52.  At the hearing, Mr Shieh submits that it would be unconscionable and prejudicial to the Company if P were allowed to now depart from the “Mutual Understanding” because the Company (and its subsidiaries) had specifically agreed to onerous “lock-in” provisions when they agreed to the Appointments (cf. Unruh v Seeberger (2007) 10 HKCFAR 31, §§133-151, per Ribeiro PJ). As estoppel is based on the parties’ conduct and common assumption, which is inherently less likely to be reduced into writing, the absence of document recording the “Mutual Understanding” is not surprising. The only proper way to test the Company’s case on the existence of the “Mutual Understanding” would be to allow the matter to proceed to trial.

53.  I remain of the view that the Estoppel ground is wholly devoid of merit and does not constitute a bona fide dispute on substantial ground in respect of the Debt for the following reasons:

(1)  The Company is unable to adduce any document, contemporaneous or otherwise, which records or refers to the “Mutual Understanding”.

(2)  The Company and the companies within Haitong Group had been dealing with each other as commercial parties and all the agreements were reduced into writing. In particular, the parties entered into written fee and mandate letters on the 1^st and 2^nd Appointments[41] to record their agreements without any reference to the “Mutual Understanding”.

(3)  The allegation that P would forego the right to seek repayment of the Debt indefinitely in exchange for the 1^st and 2^nd Appointments which might not result in payment of any fees to Haitong Capital makes no commercial sense and only falls to be rejected.

(4)  More importantly, P has since July 2020 been demanding the Company to pay the debt due under the 2020 Notes. At no point did the Company suggest that P was not entitled to make the demand by reason of the “Mutual Understanding”. In KWM’s letter dated 21 September 2021 where it set out the grounds for disputing the debt under the 1^st SD, the only basis for suggesting that P was “estopped” from seeking early redemption of the 2020 Notes was an alleged “promise and/or oral agreement to extend the maturity date of the relevant notes to 31 December 2020 (‘Promise’)” said to have been made by P. This letter shows that the “Mutual Understanding” is nothing more than an allegation created by the Company sometime after September 2021.

54.  For completeness, the Company has in the affirmations raised the point that it had a reasonable excuse to not satisfy the 2^nd SD on the ground that the Company was forbidden from paying the Debt as a result of the Mareva injunction granted by Marlene Ng J in HCMP 2301/2020. The argument is a bad one as the injunction order expressly states that the order “does not prohibit” the Company from “dealing with or disposing of any of its assets in the ordinary and proper course of business”. It does not have the effect of preventing the Company from paying the Debt as part of its ordinary and proper course of business. In any event, insofar as it is necessary, the Company may seek a variation of the injunction which it never does.

C.  Disposition and costs

55.  For the reasons set out above, I hold that the Company has failed to show that there is a bona fide dispute on substantial grounds in respect of the Debt. As the Company is deemed unable to pay its debts, it is appropriate for the court to make a usual winding up order against the Company and I so order.

56.  As for costs, I make a costs order nisi that P is entitled to be paid the costs of and occasioned by the Petition, to be taxed if not agreed with certificate for 2 counsel. Other than this, the costs will be dealt with in accordance with the usual winding up order.