NEW WINNING FINANCE CO LTD (IN LIQUIDATION) v. NEW SHINE GROUP LTD

HCCW 321/2021

[2022] HKCFI 2072

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 321 OF 2021

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J U D G M E N T

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1.  This is the hearing of a petition issued by New Winning Finance Company Limited (“the Petitioner”)  to wind up the Respondent New Shine Group Ltd (“the Company”).

2.  The Company was incorporated in Hong Kong on 21 March 2019 with its registered office at 8/F, Linkchart Centre, No 2 Tai Yip Street, Kwun Tong, Kowloon.  It has a share capital of HK$15,000,000, divided into 15,000,000 shares.  The amount of the capital paid up or credited as paid-up is HK$15,000,000.

3.  On 3 October 2090 the Company entered into a written loan agreement (“the Loan Agreement”)  pursuant to which the Company borrowed the sum of HK$5,000,000 from the Petitioner.  Under the terms of Loan Agreement interest was to accrue on the outstanding amount of the loan at 12% per annum on a quarterly basis.  The loan was repayable, together with all interest accrued, by 2 April 2020.

4.  The Company did not repay the loan on the due date and on 24 May 2021 the Petitioner served a statutory demand requiring the Company to pay the sum of HK$5,985,479.45, being the aggregate of the loan amount together with interest accrued from 3 October 2019 to 24 May 2021. The Company did not repay the loan and on 2 September 2021 the Petitioner issued the petition to wind up the Company.

5.  The Company contends that there is a bona fide dispute on substantial grounds which ought to be resolved pursuant to the arbitration agreement contained within the Loan Agreement.

6.  Its defence is that the Loan Agreement is not in fact a loan at all, but instead is part of a separate acquisition entered into between the Company and the parent company of the Petitioner.

7.  The parent company of the Petitioner, Lamtex Holding Limited, entered into an investment memorandum dated 17 September 2019 pursuant to which a Cayman Islands limited liability company known as Lamtex Opportunity Fund SPC recorded its intention to acquire a number of shares in a subsidiary of the Company known as Cool Cool Frozen Food Ltd.  As part of that intended investment, Lamtex Holdings Limited paid a refundable deposit of HK$15,000,000 to the Company.  The Investment Memorandum recorded that:

after the transaction is completed the Deposit was to be converted into subscription of the fund at the fund’s initial subscription price.

8.  It is said by the Company that during the negotiations, and due diligence, subsequent to the Investment Memorandum it became apparent that Cool Cool Frozen Food Limited required more working capital than had been anticipated.  It is said that Mr Pan, an executive director of Lamtex Holding Limited, agreed that an additional HK$5,000,000 would be made available for those working capital needs, but that it needed to be done by way of a “loan” extended to the Company from a subsidiary.  The Company says that this was ultimately recorded in the Loan Agreement.

9.  By a Supplemental Investment Memorandum dated 18 October 2019 it was recorded that the acquisition of Cool Cool Frozen Food Ltd would not proceed in the manner intended (but would likely proceed in a different manner)  and the HK$15 million refundable deposit would not in fact be refunded to Lamtex Opportunity Fund SPC.

10.  Due diligence in respect of the intended acquisition proceeded, although further time was required than had been originally anticipated and on 18 February 2020 the parties to the original Investment Memorandum entered into a Supplemental Agreement agreeing to extend the time for completion of the acquisition until 16 May 2020.  Oddly, and perhaps inconsistently with the Supplemental Investment Memorandum dated 18 October 2019, the Supplemental Agreement records an extension to the “return date of the earnest money of HK$15 million in the Investment Memorandum signed on 17 September 2019 to 16 May 2020”.

11.  By letter dated 2 June 2020 Lamtex informed the Company that it would not proceed with the acquisition and requested a return of the HK$15,000,000 deposit.  The Company has subsequently disposed of the shares of Cool Cool Frozen Foods Ltd, apparently for rather less than had been anticipated would be paid by Lamtex.

12.  Lamtex was wound up in Bermuda on 30 October 2020, and subsequently also in Hong Kong on 11 March 2021.  Around 3 November 2021 the Company filed a proof of debt in the Lamtex Winding up proceedings in Hong Kong in the sum of HK$49,800,000 said to be the agreed consideration for the 60% of the shareholding of Cool Cool Frozen Food Limited less the Deposit of HK$15 million and less also the ultimate disposal price of shares.  That proof of debt did not refer to the HK$5 million loan which is the subject of the petition.

13.  It is said that, arising out of those facts, there is a bona fide dispute on substantial grounds as to the obligation to repay the loan.  I understand the defence to be that the HK$5,000,000 should not be treated as a loan, but instead should be treated as a non-refundable deposit in relation to the intended acquisition of Cool Cool Frozen Foods Limited.  As explained by Tang To Wong at paragraph 14 of his first affirmation:

“it was envisioned that the sum would either be deducted from the consideration to be paid by Lamtex upon completion of the Acquisition Plan, all be treated as acquiring shares of CC Frozen Food.”

14.  There are several difficulties with that defence:

(1)  The Loan Agreement is between different parties to all of the agreements entered into concerning the potential acquisition of Cool Cool Frozen Food Limited.  The Petitioner does not appear on any of those agreements.  The mere fact that the Petitioner is a subsidiary of Lamtex Holdings Limtied, that Mr Pan signed all the agreements on behalf of each of the relevant parties, and that the loan was advanced by Lamtex Holdings Limited (i.e. it was the applicant on the payment request)  is neither here nor there. The concept of separate legal personality is enshrined into Hong Kong law, and nothing that the Company has raised suggests any basis on which the Petitioner might be bound by the terms of the Investment Memorandum or the other investment agreements.

(2)  The Investment Memorandum does not, nor do any other of the investment agreements, actually record an agreement to purchase Cool Cool Frozen Funds Limited.  At the highest they record an obligation to proceed with due diligence in the anticipation that it might lead to an acquisition.  The terms which the Company suggests apply to the HK$5,000,000 do not address what would happen to the HK$5,000,000 in the event that the agreement to purchase did not materialise (as indeed has been the case).  It seems to me inevitable that in such circumstances the HK$5,000,000 would be repaid.  There is nothing to suggest, and I do not understand the Company to be suggesting, that the HK$5,000,000 was an irredeemable investment in the Company.

(3)  Thus even if the HK$5,000,000 was to be considered as similar to the HK$15,000,000 it appears to me that it is, in any event, refundable.  The Supplemental Agreement records that the HK$15,000,000 was paid as Earnest Money, and is refundable, with the refund due on 16 May 2020.  I recognise the potential conflict between that and the Supplemental Investment Memorandum dated 18 October 2019, but I have no reason to think that the later agreement would not prevail, and it seems that the Company also agrees that the HK$15,000,000 is refundable given that in its proof of debt against Lamtex Holding Limited, it gives credit for the HK$15,000,000.

(4)  On 18 February 2020 the Company returned a signed audit confirmation to the auditors of the Petitioner, acknowledging the debt of HK$5,000,000 plus interest as due and payable by the Company to the Petitioner as at 31 December 2019.  The Company says this is not relevant because it was not a demand for payment.  It is correct that it was not a demand for payment, but it was a clear acknowledgment of the debt owed as at that date.

(5)  The Company has also acknowledged the debt, and sought extensions for payment.  Letters dated 24 April 2020, 5 June 2020 and 15 June 2020 are clear acknowledgments of the debt due under the loan, and they are entirely inconsistent with the proposition now put forward that the loan amounts advanced were somehow non refundable.

(6)  There is an entire agreement clause and a “no amendment other than in writing” clause in the Loan Agreement which renders the arguments of the Company extremely difficult, if not impossible to maintain, given that its defence would effectively require the recognition of an agreement other than that contained in the written Loan Agreement.

15.  In all the circumstances, I am satisfied that, in line with the normal and uncontroversial principles that apply to winding up proceedings in the cases that have been cited to me by the parties, including Re Yueshou Environmental Holdings Limited HCCW 142/2013; Re Yeung Man [2022] HKCFI 1472; Re Everwin Enterprise (Hong Kon) [2022] HKCFI 1653; Re Guy Kwok-Hung Lam [2021] HKCFI 2135, there is no bona fide dispute on substantial grounds, and the Company should be wound up.  The arbitration agreement contained within the Loan Agreement does not alter that conclusion.

16.  As a post script, there is some debate between the parties about some of the we chat messages that have been relied upon by the Petitioner.  The Company complains that they are without prejudice and should not have been disclosed.  Ms Lee for the Petitioner withdrew any reliance on these messages, and instead relied only upon the other evidence.  I confirm that I have not relied upon what is said in those messages for the purposes of this decision, and consequently I do not find it necessary to resolve that dispute.