RE SIMPLICITY & VOGUE RETAILING (HK) CO LTD

HCCW 457/2022

[2023] HKCFI 1443

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 457 OF 2022

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REASONS FOR JUDGMENT

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1.  At the hearing of the Petition presented by China Everbright Securities Value Fund SPC[1] (“Petitioner”) on 6 December 2022, I made the usual winding up order against Simplicity & Vogue Retailing (HK) Co., Limited (“Company”). These are the reasons for my Judgment.

Background

2.  The Company was incorporated in Hong Kong on 29 August 2017.

3.  By a corporate guarantee dated 27 November 2017 (“Guarantee”) the Company agreed to guarantee the obligations of Simplicity & Vogue Retailing Corporation (“Issuer”), the issuer of US$25,000,000 convertible bonds (“CBs”) under a bond instrument of the same date (“Instrument”).

4.  Under the Guarantee, the Company undertook to pay or discharge the Issuer’s obligations in connection with the Instrument on demand, and default interest at 10% p.a. for any due but unpaid sum.

5.  Under Condition 7(A) of the Instrument:

(1)  the Issuer was required to redeem the CBs on the earlier of (a) the date falling on the third anniversary of the “Issue Date” (i.e. 27 November 2017), and (b) the “Listing Date” (“Maturity Date”); and

(2)  the CBs shall be redeemed at aggregate principal amount of the CBs outstanding and any accrued but unpaid interest plus an amount that will result in a 15% “Internal Rate of Return” (“Redemption Amount”).

6.  Since no “Qualified IPO” (as defined in the Instrument) took place, the Maturity Date of the CBs was 27 November 2020 and US$29,601,572 (i.e. Redemption Amount) became due and payable by the Issuer.  No payment was made by the Issuer.

7.  On 17 December 2020, the Petitioner through its former solicitors demanded the Company to pay the Redemption Amount pursuant to the Guarantee.

8.  On 9 and 10 February 2021, US$240,000 and US$190,555.56 were paid by a subsidiary of the Company to the Petitioner as payments of interest.  On 30 April 2021, US$500,000 was paid by another subsidiary to the Petitioner as partial payment of the amount due under the CBs.

9.  By letter dated 9 August 2021, the Petitioner through Messrs.  Herbert Smith Freehills (“HSF”) demanded the Company to pay the Redemption Amount together with interest accrued after the Maturity Date and default interest by 12 August 2021.  No further payment was made by the Company or the Issuer.

10.  As at 12 August 2021, the amount due and payable under the Instrument was US$30,942,398 (“Debt”).

11.  By a statutory demand dated 13 August 2021 (“SD”) and served on the Company on the same day, HSF demanded the Company to pay the Debt.

12.  The Company failed to satisfy the SD within the time limit.  By virtue of s.178(1)(a) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32), the Company is deemed insolvent.

Failure to comply with Condition

13.  As the Petition was presented on 6 December 2022 and the verifying affidavit was filed on the next day, by virtue of rule 32(1) of the Companies (Winding-up) Rules, the Company was required to file its affidavit in opposition to the Petition within 7 days of filing of verifying affidavit. 

14.  On 21 April 2023, the Company purported to file the affirmation of Chu Yin Suet (“Chu 1^st”) in opposition to the Petition. 

15.  At the first hearing of the Petition before this Court on 24 April 2023:

(1)  Mr Danny Tang, counsel for the Petitioner, submitted that the court should make an immediate winding-up order against the Company as no affidavit in opposition, as required by rule 32, was filed by the Company.  If the court was minded to grant leave to the Company to file Chu 1^st out of time, it should be conditional upon the Company paying the Debt into court, following the usual practice of the Companies Court (Re Sun Sang Kong Yuen Shoes Factory Ltd [2015] 4 HKLRD 52 §§2-6, per Harris J).  The practice applied even if the Company had made known its ground of opposition before the first hearing, but failed to file any affirmation (Re Chinaplus Wines Ltd, HCCW 220/2016, 21 November 2016, per Harris J). 

(2)  Mr Clifford Smith SC (leading Mr Tommy Cheung), counsel for the Company, acknowledged that the practice of the Companies Court was to grant conditional leave to the Company to file Chu 1^st and asked for 28 days to pay the amount into court.   

(3)  Mr Tang submitted that the Company already had more than 4 months to consider the Petition and should be required to pay the Debt into court within 14 days.

(4)  Leave was granted to the Company to file Chu 1^st conditional upon the Debt being paid into Court within 21 days (i.e. by 15 May 2023) (“Condition”).

16.  The Company failed to comply with the Condition.  Instead, it issued a summons on 19 May 2023 seeking (1) leave to file Chu 1^st out of time, (2) an extension of time to comply with the Condition for 3 months, and (3) an adjournment of the Petition.  The justification for seeking an extension of time for 3 months was stated in §§12-13 of Chu 2^nd filed on 19 May 2023:

“12. … since [the Company] is only a company holding shares of the operating company in Shanghai, and the senior management and decision makers are all based in Shanghai, [the Company] has to rely on the Simplicity group to raise the funds or expand the business of the operating company in Shanghai to increase the cash flow. I am informed and verily believe that the Simplicity group has immediately structured a pro-active business plan so as to increase its sales in the coming months. Arrangements for the introduction of a white knight are also ongoing.

13. Whilst exhibits on the above are not yet available due to the need for preserving confidentiality of the stakeholders involved, I do confirm that [the Company] has been working hard with the senior management and decision makers in Shanghai to enable the Condition to be satisfied.  However, given huge figure of petitioning debt in the sum of US$30,942,398 and limitation of time, the above steps have not yet been fruitful and hence [the Company] was unable to comply with the Order on 15 May 2023.”  

17.  Mr Tang submits that as the Petition is uncontested, a winding-up order should be made against the Company on this ground alone.  As regards the Company’s application for extension of time and adjournment:

(1)  The burden is on the Company to adduce evidence to satisfy the court that there are good reasons to grant the extension and adjournment and for this purpose, the Company has to show that there is a reasonable prospect of being able to comply with the Condition within the extended time limit. 

(2)  However, all that the Company did was to make some general assertions, in §§12-13 in Chu 2^nd, to the effect that (a) the “group” had devised a plan to increase its sales, and (b) there were “arrangements” for introduction of an unidentified “white knight”, neither of which is supported by any document. There is no credible evidence to show that if given time, the Company will be able to comply with the Condition. 

(3)  The inability to comply with the Condition is reinforced by the fact that having considered the Petition for over 5 months, the Company has not been able to come up with anything to show that if the court grants a further adjournment, it will be able to come up with anything, restructuring proposal or otherwise, in respect of the Debt. 

18.  Mr Smith does not take issue with Mr Tang’s submissions, other than pointing out that the Company did not have 5 months to deal with the “restructuring”, as the Condition was only imposed on 24 April 2023. 

19.  In my view, the points made by Mr Tang are well founded.  There is no credible evidence to show that if given time, the Company will be able to comply with the Condition. 

(1)  To the contrary, the assertions in §§12-13 of Chu 2^nd confirm that (a) neither the Company nor the “group” has financial means to comply with the Condition or pay the Debt, and (b) despite having received the Petition for over 5 months, the Company has not been able to come up with any restructuring proposal, let alone a concrete proposal, to deal with the Debt or to restore its solvency (cf. Re Jiayuan International Group Limited [2023] HKCFI 1254, §12). 

(2)  Although Mr Smith suggests that if given time, the Company may be able to raise the requisite funds to comply with the Condition, when asked by this Court as to whether the Company will give an undertaking to the court that it will comply with the Condition within the next 3 months, Mr Smith is unable to proffer such undertaking. 

20.  As the Company fails to demonstrate any good reasons to justify the extension of time or the adjournment sought, there is no proper basis for the court to extend the time for the Company to comply with the Condition or to adjourn the Petition.  It follows that there is no evidence in opposition to the Petition, and the Petitioner is entitled ex debito justitiae to a winding-up order. 

Grounds in opposition raised in Chu 1^st

21.  For completeness, I will deal with the other arguments advanced by counsel, assuming that there is a proper basis for the court to consider the grounds raised by the Company in Chu 1^st.

22.  In Chu 1^st, the Company raised 2 grounds in opposition to the Petition:

(1)  There is a bona fide dispute as to whether the Guarantee has been discharged by reason of a variation of the principal contract between the Petitioner and the Issuer, specifically an agreement to give time to the Issuer, to which the Company did not agree[2] (Discharge ground).

(2)  There are arbitration clauses in both the Instrument[3] and the Guarantee,[4] and hence the dispute over the Debt should be referred to arbitration[5].  The argument is based on Re Southwest Pacific Bauxite (HK) Limited[2018] 2 HKLRD 449, §31 (Lasmos) (Arbitration ground).

Discharge ground

23.  Mr Tang submits that the Discharge ground has no merit because the Guarantee expressly provides that there shall be no discharge by reason of variation of the principal contract in cl.8(a) and (e) of the Guarantee, which state as follows:

“The obligations of any Guarantor under this Guarantee will not be affected by an act, omission, matter or thing which, but for this Clause 8, would reduce, release or prejudice any of that Guarantor's obligations under this Guarantee (without limitation and whether or not known to that Guarantor or the Beneficiary) including:

(a) any time, waiver or consent granted to, or composition with, the Issuer, any other Guarantor, any other Obligor or any other person;

...

(e) any amendment, novation, supplement, extension, restatement (however fundamental and whether or not more onerous) or replacement of any Bond Document or any other document or security including without limitation any change in any extension of maturity date or any increase in any redemption amount of any convertible bond or the issuance of additional convertible bonds under any Bond Document or other document or security …” (underlined added)

24.  The Company’s argument is based on the rule in Holme v Brunskill: if the principal and creditor without the guarantor’s consent agree between themselves to alter the nature of the principal obligation, the guarantor is discharged (O’Donovan and Phillips, The Modern Contract of Guarantee, 4^th edn, 2020, §§7-001-7-004).

25.  An agreement by the creditor to give time to the debtor is one instance of variation, although this is based on “highly technical reasoning”, and may operate harshly against the creditor in that the guarantee is discharged even if the giving of time is manifestly for the benefit of the guarantor (Chitty on Contracts, 34^th edn, 2021, §47-111; O’Donovan and Phillips, §§7-075-7-079). 

26.  However, the parties can agree that the guarantee will not be discharged by any variation which would otherwise have the effect of discharging it; in other words, they can contract out of the Holme v Brunskill rule (O’Donovan and Phillips, §§7-096-7-100).  This was what the Petitioner and the Company did under cl.8(a) and (e) of the Guarantee.

27.  It seems to me that the submissions are incontrovertible.  Mr Smith (rightly) does not take issue with the points made by Mr Tang.  The Discharge ground is wholly without merit and must be rejected.  It follows that there is no proper basis to require the parties to refer their “dispute” to arbitration, even if the approach discussed in Guy Lam applies to the present case.

28.  Nevertheless, in view of the importance of the point which arises in many cases coming to the Companies Court, I will consider the parties’ arguments and state my view on the Arbitration ground.

Arbitration ground

29.  Mr Tang submits that Lasmos does not assist the Company:

(1)  Chu 1^st only referred to the arbitration clauses[6]. This falls foul of the requirement stated in Lasmos §31, which requires an affirmation demonstrating that the Company “[has taken] steps required under the arbitration clause to commence the contractually mandated dispute resolution process”.     

(2)  In But Ka Chon v Interactive Brokers LLC[2019] 4 HKLRD 85 (CA) §§50-56, a case on bankruptcy, the Lasmos point failed on this very ground.

(3)  To-date, the Company has taken no steps to commence arbitration.

30.  Mr Smith does not advance any submissions to contradict the points made by Mr Tang.  To the contrary, in his oral submissions, Mr Smith contends that the court should not follow the Lasmos approach, but should follow the approach in Guy Lam to which I now turn.

31.  At the first hearing, the Company contended that the then pending CFA judgment in Re Guy Kwok Hung Lam would have an impact on the Petition, notwithstanding that the case was concerned with exclusive jurisdiction clause (“EJC”).  The judgment was handed down on 4 May 2023 [2023] HKCFA 9 §105 (Guy Lam) in which the CFA held that:

(1)  in an ordinary case where the underlying dispute of the petitioning debt was subject to an EJC, the “Established Approach”[7] was not applicable, and the court should dismiss the petition (§§61, 105); and

(2)  it was not necessary to decide on the position where the dispute over the petitioning debt was subject to an arbitration clause (§91).

32.  Mr Tang submits that in view of the above ratio, Guy Lam does not alter the analysis in §29 above.  Furthermore:

(1)  There is nothing in Guy Lam which suggests that the 3 requirements in Lasmos §31 would not apply, even in cases involving EJC. Indeed, the CFA referred to the CA’s summary of the 3 requirements in Lasmos (§48) and expressed no disapproval.  This means the argument in §29 above remains correct even if Guy Lam has any application to the present case.

(2)  Even in the context of EJC, the CFA held that the petitioner needs not be held to the contractual bargain if there are countervailing factors e.g. where the debtor mounted a frivolous defence which is an abuse of process designed to put off the evil day (§§99, 105).

(3)  Here, the Company has not commenced any arbitration to seek a discharge of the Guarantee.  There is no reason why it would not have done so if it had the courage of its conviction, and if there existed a genuine dispute in respect of the Debt.   This, coupled with the lack of merit of the Discharge ground, shows that the Company’s opposition is simply a delaying tactic to frustrate the court’s progress and constitutes an abuse of process.

33.  As stated above, Mr Smith submits that the court should follow the approach in Guy Lam and give effect to the contractual bargain reached between the parties, relying on the ratio contained in §105:

“... [I]n the ordinary case of an EJC, absent countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract. On that basis this appeal should be dismissed.”

34.  Mr Smith submits that by analogy, in a pro-arbitration jurisdiction like Hong Kong, a fortiori a contracting party should similarly be bound by the arbitration clause unless the ground of opposition “borders on the frivolous or abuse of process”, and/or where there are other creditors supporting the winding-up petition (see for eg., Emperor UA Cinemas Ltd v Lark China Cinema Investments Ltd[2022] HKCFI 2316, §22).  In the present case:

(1)  The arbitration clauses are contained in the evidence adduced by the Petitioner and are thus already before the Court [8].  As such, there will be an issue as to whether the Petition should be allowed to proceed further in view of the CFA judgment as applied analogously to the facts of this case.

(2)  The Company accepts that it has to satisfy the Condition before it can file its detailed evidence on its grounds of opposition.

(3)  The Condition has not yet been satisfied and the Company has explained in Chu 2^nd why, despite its efforts, the Company still needs another 3 months before being in a better position to meet the Condition.  

(4)  The Company understands that, when seeking an adjournment, it “has to demonstrate to the court that a concrete restructuring proposal or a scheme of arrangement has been prepared and put forward to the creditors for their consideration, and such proposal or scheme has the support of the requisite majorities of creditors”(Jiayuan, §12(3)).  

(5)  Nevertheless, it would be fair and just to adjourn the Petition so that the Company is able to continue with its effort to meet the Condition, because unlike Jiayuan, there are no supporting creditors appearing in the Petition and the Petitioner agreed to bind itself to the arbitration clauses. 

(6)  Unlike cases such as Re China Technology Corporation Limited [2020] HKCFI 2537 where the petitioning debt was a judgment debt, the Company disputes the Debt (which is not a judgment debt) and wishes to set out its evidence in full to persuade the court that the winding-up mechanism is inapt.

(7)  The time sought by the Company, i.e. 3 months, is not excessively long in light of the substantial amount of the Debt. 

35.  It seems to me that the ratio in Guy Lam only applies to EJC, not arbitration clause.  As far as arbitration clause is concerned, the approach of the Companies Court is guided by the principles stated in the CA’s judgments in But Ka Chon and Sit Kwong Lam v Petrolimex Singapore Pte Ltd [2019] 5 HKLRD 646, §§33-39, and in deciding whether to exercise its discretion to dismiss or stay a petition where the parties have agreed to an arbitration clause, the court will also consider whether the requirements in Lasmos are satisfied. 

36.  The only other point made by Mr Smith is the absence of any supporting creditor which, he submits, is one of the 2 requirements for a petitioner to come within the exception discussed in Guy Lam.  I do not read the CFA judgment as laying down any general rule that if the agreement which gave rise to the petitioning debt contains an arbitration clause and there are no supporting creditors to the petition, the court must dismiss or stay the winding-up petition.  

37.  It does not seem to me to be right that once there is an arbitration clause in the agreement which gave rise to the petitioning debt, the Companies Court should invariably refuse to consider the merit of the “defence” raised by the company and require the parties to litigate their dispute in arbitration.  There is no reason why the Companies Court should adopt such a mechanistic approach or fetter the exercise of its discretion in this way.  In my view, where, as here, the company raises a substantive “defence” to the petitioning debt, the court should consider whether the “defence” is one which can readily be shown to be wholly without merit.  If the court is able to come to that view without considering any detailed arguments or disputed evidence, it would have no difficulty in concluding that the “defence” is one which “borders on the frivolous or abuse of process” even if Guy Lam approach applies.  There is no proper basis to require the parties to refer their “dispute” to arbitration in the absence of any genuine “dispute” in respect of the debt.