HONGFAN INTERNATIONAL LTD v. HONG KONG YAHE CO., LTD

HCMP 1633/2017

[2018] HKCFI 2565

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1633 OF 2017

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DECISION

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INTRODUCTION

The summonses

1.  There are four summonses before the court:

(1)  the plaintiff’s (“Hongfan”) originating summons dated 20 July2017 seeking a permanent injunction prohibiting the defendant(“Yahe”) from presenting a winding up petition against Hongfan based on a statutory demand dated 28 June 2017 for a debt of RMB 18,242,292.17 (“Hongfan’s Originating Summons”);

(2)  Hongfan’s ex parte Summons dated 20 July 2017 applying for an interim injunction pending determination of Hongfan’s Originating Summons (“Hongfan’s Ex Parte Summons”);

(3)  Yahe’s summons filed on 28 July 2017 seeking, inter alia (a) dismissal of Hongfan’s Originating Summons and Hongfan’s Ex Parte summons based on material non-disclosure at the ex parte on notice hearing on 20 July 2017; (b) release from its undertaking given on 20 July 2017 in lieu of an interim injunction (“Yahe’s Undertaking”) on the same ground; and (c) fortification of Hongfan’s cross-undertaking in damages (“Yahe’s Discharge Summons”); and

(4)  Hongfan’s summons filed on 20 November 2017 seeking leave to be released from its undertaking given to the court on 12 September 2017 (“Hongfan’s Undertaking”) as contained in the terms of the unless order made on that day (the “Unless Order”) (“Hongfan’s Undertaking Summons”).

Procedural history

2.  Upon being served a statutory demand by Yahe for a debt of RMB 18,242,292.17 (the “petitioning debt”), Hongfan took pre-emptive measure of taking out Hongfan’s Originating Summons and the Hongfan’s Ex Parte Summons on 20 July 2017 seeking to restrain Yahe from presenting a petition against Hongfan.

3.  Hongfan’s Ex Parte Summons on notice was heard before the ex parte judge on 20 July 2017.  Sometime after the hearing had commenced, Yahe’s counsel, Mr Wong, appeared.  The application was adjourned to beheard by the summons judge on the return day, ie 28 July 2017, upon Yahe giving Yahe’s Undertaking not to present the winding-up petition against Hongfan pending determination of that Summons.  No injunction was ordered.  This summons was spent and was taken over by Hongfan’s Inter Partes Summons.  What was left of that summons was the question of costs.

4.  On 28 July 2017, the parties appeared before the summons judge.  There were three summonses before the summons judge.  In addition to Hongfan’s Originating Summons, Hongfan had taken out an inter partes summons on 26 July 2017 seeking an interim injunction to restrain Yahe from presenting a petition against Hongfan until determination of Hongfan’s Originating Summons (“Hongfan’s Inter Partes Summons”).  On the same day, Yahe filed Yahe’s Discharge Summons.  At that hearing, the summons judge only disposed of Hongfan’s Inter Partes Summons.  She made an order restraining Yahe from presenting a winding-up petition against Hongfan until determination of Hongfan’s Originating Summons.  That was an adjudication.  It was not an order made upon Yahe’s Undertaking.  Yahe’s Undertaking was spent and had no role after the hearing on 28 July 2017.  The summons judge then adjourned Yahe’s Discharge Summons and Hongfan’s Originating Summons to a date to be fixed and to be heard together.  She also gave directions for the hearing of the summonses.

5.  At the hearing on 12 September 2017, with the agreement of the parties and on Hongfan’s Undertaking, I made the Unless Order that unless Hongfan pays the petitioning debt by 4:00 pm on 30 November 2017, Yahe shall be at liberty to present a winding-up petition against Hongfan.  Hongfan’s Undertaking was an irrevocable undertaking that it will not resistthe presentation of a petition against it if it should fail to pay the petitioning debt in accordance with the terms of the Unless Order.  Anticipating that the petitioning debt will be paid, the hearing of Hongfan’s Originating Summons, Hongfan’s Ex Parte Summons and Yahe’s Discharge Summons were adjourned to 11 December 2017 for final disposal.

6.  Having determined not to pay the petitioning debt, Hongfan took out Hongfan’s Undertaking Summons on 20 November 2017, seekingleave to be released from Hongfan’s Undertaking.  On the same day, Hongfan’s solicitors wrote to Yahe’s solicitors to seek their consent to the application.  Yahe refused.  In its solicitors’ letter dated 21 November 2017, Yahe’s solicitors made it clear that Yahe would not give an undertaking not to present the winding up petition.  Relying on the automatic sanction under the Unless Order, Yahe presented a winding-up petition against Hongfan on 1 December 2017 based on Hongfan’s failure to pay the petitioning debt stated in the statutory demand served on Hongfan on 30 June 2017.  Subsequently, the four summonses were adjourned to be heard before me on 20 September 2018.

Dramatis personae

7.  The plaintiff herein, Hongfan, is a private company limited by shares and incorporated in Hong Kong.  It is a wholly owned subsidiary of a British Virgin Islands (“BVI”) company named Hongfan Group Holdings Limited.  Yan Tiejun (“Yan”) who is one of its two directors filed affirmations in support of Hongfan’s applications.

8.  Zhuhai Tiankai Metal Resources Company Limited (“TiankaiMetal”) is a private enterprise in the People’s Republic of China (the “PRC”).  It is a wholly owned subsidiary of Zhuhai Tiankai Investment Co Ltd (“Tiankai Investment”).  It trades in non-ferrous metals including aluminium ingots.  Tiankai Metal has a close business relationship with Hongfan.  Yahe’s case is that Yan is the person in de facto control of both Hongfan and Tiankai Metal.

9.  Wiseon Resources (Singapore) Pte Ltd (“Wiseon”) is a Singaporean company held 90% by Yan through a BVI company.  According to Yan, it is a nominee of Hongfan.

10.  The defendant herein, Hong Kong Yahe Co Limited (“Yahe”), is a private company limited by shares and incorporated in Hong Kong.  It is a wholly owned subsidiary of Guangdong Yuehe Investment Holdings Co Ltd (“Guangdong Yuehe”).

11.  Guangdong Yuehe is a state-owned enterprise in the PRC engaged in the business of, inter alia, trading in non-ferrous metals including aluminium ingots.  More than 60% of its share capital is owned by GY Asset Management Co Ltd, which is another state-owned enterprise wholly owned by Guangdong Province Supply and Sale Cooperative, a government agency. 

12.  Guangdong Yuehe Sky Triumph (“YST”) is a joint venture company incorporated in the PRC and jointly owned by Guangdong Yuehe, Tiankai Investment and Zhuhai Xinya Investment as to 40%, 30% and 30%respectively.  According to Hongfan, because of Zhuhai Xinya Investment’s failure to take up the shares in YST, YST is held by Yuehe and Hongfan in the ratio of 57:43.

THE BACKGROUND

High Court Action 391/2017

13.  The petitioning debt arose out of some guarantee agreements between Yahe and Hongfan relating to three agreements for sale and purchase of aluminium ingots, according to Yahe; or a revolving loan agreement dressed up as such sale and purchase agreements, according to Hongfan.  Those sale and purchase agreements were the subject matter of High Court Action No 391 of 2017 (“HCA 391/2017”) commenced by Yahe against Hongfan.  Yahe’s case is as follows.

14.  On 27 April 2015, Tiankai Metal as seller, Hongfan as guarantor of the seller, and Guangdong Yuehe and Yahe as buyer entered into an agreement for sale and purchase of 14,000 metric tonnes of aluminium ingots (“Contract 1”) and a supplemental agreement setting out other detailed terms of the sale and purchase (“Contract 2”).  On the same day, Hongfan and Yahe signed a share pledge agreement (“Contract 3”) under which Hongfan pledged or charged 100 million Chinalco shares to Yahe as security for Tiankai Metal’s performance of its obligations under Contract 1 and Contract 2.  Pursuant to Contract 1, Contract 2 and Contract 3, Guangdong Yuehe made three payments to Tiankai Metal on 11, 14 and 15 May 2015 in the total sum of RMB 56 million as purchase price for 14,000 tons of aluminium ingots.  Yahe’s case is that these were genuine prepayments for the purchase price.  Hongfan’s case is that these transactions were loan transactions dressed up as a sale and purchase of aluminium ingots.  In breach of Contract 1 Tiankai Meal failed to deliver the aluminium ingots by December 2015 and asked for extension of time to make the delivery.  On or about 13 July 2016, the four parties signed a supplemental agreement dated 23 June 2016 extending the deadline for delivery to 30 July 2016 (“Contract 4”).  Hongfan agreed to be jointly liable as guarantor together with Tiankai Metal in the event of Tiankai Metal’s breach of the extended deadline.  On or about 13 July 2016 Hongfan and Yahe signed a supplemental agreement dated 23 June 2016 acknowledging the payment of RMB 56 million and Tiankai Metal’s failure to honour its contractual obligation (“Contract 5”).  Eventually, Tiankai Metal again failed to meet the deadline on 30 July 2016.

15.  On 20 February 2017, Guangdong Yuehe and Yahe commencedHCA 391/2017 against Hongfan alleging breach of Contract 1, Contract 2 and Contract 3 and seeking refund of the purchase price of RMB 56 million.  On the same day, they obtained an ex parte injunction order restraining Hongfan from disposing of the 100 million Chinalco shares pledged or charged to Guangdong Yuehe upon their cross-undertaking in damages and an undertaking to pay $4 million as fortification into court within 3 days.

16.  Yahe had a bad start.  On 3 March 2017, Chow J discharged the above ex parte injunction for material non-disclosure of the details of Chinalco’s privatisation plan, not because of problems with Guangdon Yuehe and Yahe’s cause of action and claims.  Chow J also awarded costs against Guangdong Yuehe and Yahe. 

17.  Then the parties entered into negotiation.  Hongfan alleged that the parties reached a settlement agreement (the “Settlement Agreement”) postponing the due date for payment of the petitioning debt to 30 November 2017.  According to Yahe, the parties failed to reach any concluded settlement agreement.  On or around 17 March 2017, Guangdong Yuehe, Yahe and Hongfan jointly signed a consent summons to discontinue the action.  On 23 March 2017, HCA 391/2017 was formally discontinued by consent of the parties (the “Consent Order”) and upon Hongfan waiving its favourable costs order given by Chow J when discharging the ex parte injunction.  Guangdong Yuehe and Yahe was allowed to withdraw the sum of $4 million paid into court as fortification of their cross-undertaking.

18.  On 30 June 2017, Yahe served the statutory demand on Hongfan. That triggered Hongfan issuing Hongfan’s Originating Summons on 20 July 2017.

The alleged Settlement Agreement: when was the petitioning debt due

19.  The alleged Settlement Agreement is the lynchpin of Hongfan’s objection to the intended petition.  It is Hongfan’s case that as result of the alleged Settlement Agreement the due date for payment of the petitioning debt was deferred to 30 November 2017.  These two issues shall be considered together.

20.  Yahe’s case is that by reason of Contract 1 to Contract 5 and Tiankai’s failure to meet the extended deadline on 30 July 2016, Hongfan as guarantor was at the very least liable to refund to Yahe and Guangdong Yuehe the prepaid purchase price in the sum of RMB 56 million on 30 July 2016. Hongfan’s case is that in around 6 March 2017, the parties reached an oral agreement over the telephone to settle their dispute as evidenced by a covering email enclosing a draft un-signed settlement agreement.  Under the terms of the Settlement Agreement, HCA 391/2017 was discontinued upon Hongfan’s waiving the favourable costs order against Yahe and undertaking to pay the debt by five instalments with the last one being dueon 30 November 2017.  

21.  It is common ground that between 9 January and 6 March 2017 Hongfan made four payments or set-offs as follows:

(1) On 9 January 2017, Hongfan paid Guangdong Yuehe RMB 5 million.

(2) In February 2017, Yan informed Lu of Yahe that Hongfan could not pay Yahe and Guangdong Yuehe by cash and offered to pay by way of setting off the purchase price of 5 tons of rare earth to be sold by Tiankai Metal to Guangdong Yuehe.  The arrangement was for Tiankai Metal to sell the rare earth to Guangdong Yuehe at the price of RMB 4,015,000 and then for Guangdong Yuehe to sub-sell the rare earth to a sub-buyer for RMB 4,065,000 and to be paid direct by the sub-buyer.  Despite no agreement for such arrangement had been reached, Hongfan caused J&D Technology (the sub-buyer) to deposit the sum of RMB 4,065,000 into the bank account of Guangdong Yuehe on 16 February 2017.  After receipt of the sum and in the course of verifying the payment, agreement for the set-off was reached with Hongfan.  Hence, Yahe and Guangdong Yuehe gave credit to the sum of RMB 4,015,000 received from J&D Technology.

(3) On 3 March 2017, Guangdong Yuehe received RMB 4,050,000 from J&D Technology under a similar arrangement.  In the course of verifying the payment, agreement was reached with Hongfan for setting off RMB 4,040,000 as the purchase price for 5 tons of rare earth sold to Guangdong Yuehe.  Hence, Yahe and Guangdong Yuehe gave credit to this sum.

(4) On 6 March 2017, Hongfan transferred 20.5 million shares inChinalco to Yahe from which Yahe realized RMB 24,702,707.83 under the privatization arrangement of Chinalco.

After giving credit to these four sums, the net amount outstanding was RMB 18,242,292.17, which was the petitioning debt relied on by Yahe.

22.  Hongfan relied on some e-mail correspondence dated 6 March 2017 between the parties and an un-signed draft settlement agreement, the four payments and set-offs, and the Consent Order discontinuing HCA 391/2017 as evidence of the Settlement Agreement.  Mr Lung argues that had there been no Settlement Agreement, Hongfan would not have waived the favourable costs order against Yahe under the Consent Order and paid or set-off the four sums.

23.  While admitting receipt of the email of 6 March 2017 and thedraft settlement agreement, Yahe denied having reached a binding settlement agreement. Specifically, Yahe alleged that the draft agreement contained terms which were unacceptable to Yahe such as waiving all of its other rights under Contract 1 and Contract 2 upon return of the prepayment alone.  Those rights are substantial.  Those terms were not included in the Consent Order.  There was no admission by Hongfan that these terms were abandoned and did not form part of the Settlement Agreement.

24.  Most telling of all is that three of the four payments or set-offs were made before 6 March 2017, suggesting that they had no nexus with the alleged Settlement Agreement.  MrTsang submits that these payments only evidenced Hongfan performing its obligation under Contract 1 to Contract 5 and was not evidence of the alleged Settlement.  The fourth payment was made on 6 March 2017.  On that day, Hongfan just presented a draft settlement agreement to Yahe for consideration.  How could it be said that those four payments were made pursuant to a concluded Settlement Agreement?  In my view, Hongfan was just juggling the payments around to make up a case of the alleged Settlement but the timing did not match.  I agree with Mr Tsang’s submission.  On the objective facts, it is inherently improbable that the parties had reached a concluded Settlement Agreement. 

25.  Since Hongfan failed to prove the Settlement Agreement, it must necessarily follow that Yahe’s case is more inherently credible.  On my finding that the parties had not reached any concluded Settlement agreement, there is no issue that the debt was not due until 30 November 2017.  Accordingly, I accept Yahe’s case that on 28 June 2017, after giving credit to four prior partial payments or set-offs in the total amount of RMB 37,757,707.83 as particularised in paragraph 21, Yahe issued a statutory demand against Hongfan demanding payment of the petitioning debt.  I also accept Yahe’s argument that the petitioning debt was due on 30 July 2016 and reject Hongfan’s argument based on the alleged Settlement Agreement that the debt was not due until 30 November 2016 and has not fallen due at time of issue of the statutory demand.

The Wiseon transactions

26.  One of the grounds of Hongfan’s intended opposition to the intended winding-up petition is that it has a set-off or cross-claim exceeding the petitioning debt by reason of a claim by its associated company, Wiseon, against Yahe’s parent company, Guangdong Yuehe.  That claim allegedly arose under the following circumstances.

27.  There was an arrangement between YST and Wiseon under which Wiseon would purchase aluminium ingots from upstream suppliers and resell to YST under back-to-back sale and purchase arrangements.  Around December 2014, Wiseon agreed to purchase 60,000 metric tons ofaluminium ingots from Vitol SA which it would sell to YST under the above back-to-back arrangements.  Under clause 12 of the agreement between Wiseon and YST, YST shall issue a letter of credit to Wiseon.  However, Guangdong Yuehe as the majority shareholder of YST failed to procure YST to issue the letter of credit.  As a result, Wiseon could not issue a letter of credit to Vitol SA to meet its payment obligation to Vitol SA for the purchase of aluminium.  On 20 January 2016, Vitol SA commenced arbitration proceedings and obtained a default award against Wiseon in the sum of US$4,668,129.44 and RMB 2,400,590.50 plus interest and arbitration costs.

28.  On 31 May 2017, Wiseon issued a letter demanding YST and Guangdong Yuehe to indemnify it against the arbitral award.  According to Hongfan, Kang and Huang of Guangdong Yuehe orally admitted responsibility to Hongfan and on behalf of Guangdong Yuehe accepted liability and undertook to compensate Wiseon 57% of the arbitral award.  That liability amounted to RMB 19,462,006.30, exclusive of interest and costs.  Despite repeated demand, Guangdong Yuehe failed to pay.

The Unless Order and Hongfan’s Undertaking

29.  On 12 September 2017, the parties appeared before me in relation to two summonses: Hongfan’s Originating Summons and Yahe’s Discharge Summons.

30.  Hongfan did not dispute that the petitioning debt was owedto Yahe.  The underlying premises of its opposition to the intended petition were, first, that the advance of RMB 56 million which allegedly gave rise to the petitioning debt was a loan dressed up as agreements for sale and purchase of aluminium ingots, ie Contract 1 to Contract 5; and second, that after the discontinuation of the proceedings in HCA 391/2017 the parties reached the Settlement Agreement such that the petitioning debt would not be due until 30 November 2017.  Thus, at the time of the issue of the statutory demand, the petitioning debt had not yet fallen due.  In addition, Hongfan claimed to have a set-off or cross-claim exceeding the petitioning debt.

31.  Not only did Hongfan not dispute the petitioning debt, through its counsel it assured the court that the debt would be paid on or before 30 November 2017.  The thrust of Mr Lung’s argument in support of the injunction was that the mere presentation of a petition and advertisement of a petition would cause Hongfan and its holding company irreparable damage and it would be unjust to allow a petition to be presented in the light of the Settlement Agreement.  Through counsel, Hongfan assured the court that it will be able to pay and will pay the petitioning debt by 30 November 2017, which was only two and half months’ away.  As the matter then stood, on a balance of convenience, it made good sense to giveHongfan a last chance and to have the summonses adjourned to a date after 30 November 2017.  The petitioning debt was admitted.  If Hongfan would be unable to pay on 30 November 2017, it is clear evidence that it is unable to pay its debt when due and it has no defence to a petition.   

32.  Yahe was reluctant to have the summonses adjourned and insisted to proceed.  To give comfort to Yahe and as an assurance of Hongfan’s ability and commitment to pay, the idea of an unless order was floated to the parties.  After further discussion, counsel on both sides were optimistic that the dispute will be resolved by 30 November 2017 upon Hongfan paying the sum demanded.  Hongfan was so confident that it wouldmeet the payment obligation that it consented to an unless order to be made against Hongfan for payment of the petitioning debt before 4:00 pm on 30 November 2017 and offered an irrevocable undertaking not to resist the presentation of the winding up petition if the payment is not made.  The effect of the Unless Order was discussed during the exchange between Mr Lung, counsel for Hongfan, and the court.  It may not be appropriate for this court to make it a term of the Unless Order that Hongfan shall be wound-up on default of its payment obligation on 30 November 2017.  That should be a matter left to the companies court.  Hence the Unless Order was made in the following terms upon the irrevocable Hongfan’s Undertaking: 

“ AND UPON theirrevocable undertaking given by the Plaintiff through its Solicitors to the Court and to the Defendant (a) not to conduct any business other than its usual business, and (b) not to resist the presentation of winding-up petition to be instituted by the Defendant against the Plaintiff if paragraph (1) of the Order is not complied with

IT IS ORDERED that:-

1. unless the Plaintiff shall pay to the Defendant, before 4:00 pm, 30 November, 2017, the sum of RMB 18,242,292.17, the Defendant shall, notwithstanding paragraph 1 of the Order dated 28 July 2017 by the Honorable Madam Justice Mimmie Chan,have thelibertyto present the winding-up petition against the plaintiff based on the statutory demand dated 28th June 2017.

2. …” (My emphasis)

33.  These terms of the Unless Order were reached after about two hours’ discussion in the morning session and another hour’s discussion in the afternoon session among counsel with exchanges from the bench.  There were adjournments for counsel to seek and obtain instructions from their respective clients.  There was absolutely no argument on the merits or on the law.  The terms of the Unless Order were not proposed by one party or the court to which the other party did not object.  They were negotiated and agreed between the parties and not the result of an adjudication. The terms reached were the result of a compromise and an agreement.  Though not expressly stated as a consent order, it was in every respect an order made by consent of the parties.  It has the same effect as an agreement.  The Unless Order evidences that agreement and its terms.  The court has no power to set it aside or vary its terms, except on the samegrounds as it would set aside a contract because of a vitiating factor, namely fraud, illegality, duress, mistake or misrepresentation.  

34.  As mentioned above, the Unless Order evidences the compromise agreement and its terms.  There were both express and implied terms.  There were three express terms.  First, Hongfan will pay the petitioning debt on 30 November 2017.  Second, if it fails to pay, it will not resist the presentation of a winding-up petition based on the statutory demand dated 28 June 2017.  Third, if it fails to pay, it will not rely on the set-off or cross-claim defence to resist the petition. 

35.  These terms include an express admission of the petitioning debt owing by Hongfan and two implied admissions that the debt was due on 30 July 2016 as stated in the statutory demand and that the underlying transactions giving rise to the debt were not an illegal loan agreement.  Therewas no express admission to that effect.  But by implication, by undertakingnot to resist a winding-up petition against the plaintiff based on the statutory demand dated 28 June 2017, Hongfan must be taken to have admitted that the petitioning debt, the legality of the underlying transactions giving rise to the debt and the validity of the statutory demand were not disputed so that it would be proper for Yahe to present the petition and for Hongfan not to resist.  Another reasonable inference to be drawn is that the debt was due on 30 July 2016 as stated in the statutory demand specifically referred to in the Unless Order.  Thus, the date of payment of 30 November 2017 was one of the compromises in the compromise agreement.  It was not the original due date for payment but the date of the extended time to pay for the purpose of the compromise agreement.  These three admissions were the underlying basis of the Unless Order.  Without these admissions, there was no basis for Yahe to present a winding- up petition or for Hongfan to undertake not to resist the presentation of the petition. 

36.  These admissions were made orally as evidenced in the transcript and reflected in the Unless Order.  The following exchanges between counsel and the court at page 3 of the transcript relating to the terms of the Unless Order to be made are relevant:

“ COURT: But you have to be very sure that your client will pay on that day.

MR LUNG: Well, it -- may I just have a moment to take instructions? My gut reaction is that if my client is not paying, then they suffer the consequence, which is that we have basically admitted that a debt will be due on a future date. I think that that is what we have admitted. That time has not come, and so whatever petition there might be,it can’t be on a debt that is not due.

COURT: So if -- but of course, come 30 November, you can still say, ‘I have this bona fide counterclaim.’

MR LUNG: Yes.” (My emphasis added)

It is clear from these exchanges that the petitioning debt was admitted.  Upon my caution, counsel took instructions. After a short adjournment for taking instructions, Mr Lung confirmed the admission that the petitioning debt would become due on 30 November 2017 and the agreement to an unless order to be made with the sanction of a winding-up petition.  The following exchange between Mr Lung and the bench at page 6 of the transcript is relevant:

“ MR LUNG: We have offered that we will pay at the latest by that date, and that the injunction be continued until that date. We have also agreed to give the other side some …

COURT: Now, what about an unless order? Unless you pay, then bankruptcy, or then...

MR LUNG: Then the winding-up” (My emphasis added)

By a slip of the tongue, I mentioned “bankruptcy” as the sanction.  This was promptly corrected by Mr Lung.  Not only did this confirm Mr Lung’s, and therefore also Hongfan’s, understanding of the nature and type of sanction but also the underlying basis of the sanction.  Hence, this is an implied admission that if Hongfan does not pay on 30 November 2017, it is unable to pay the petitioning debt when due. 

37.  There is another aspect in the Unless Order. Immediately after the above exchanges, I drew Mr Lung’s attention to Hongfan’s other defence of set-off and cross-claim:

“ MR LUNG: Then the winding-up.

COURT: Yes, yes, yes, I mean …

MR LUNG: I think we have to accept that consequence. Well, subject to instructions, I am happy to …

COURT: No, you have the other point, you have the bona fide …

MR LUNG: The frustrate point.

COURT: Yes.

MR LUNG: Which is why I said, subject to instructions, I believe I can abandon that point, if we fail to pay back by…

COURT: So in that case, what we can do is reach that agreement, and then leave the question of non-disclosure and costs and so on.

MR LUNG: Yes.” (My emphasis added)

Then, after taking instructions, Mr Lung confirmed at page 7 of the transcriptthat Hongfan would abandon that set-off or cross-claim argument if it would be allowed up to 30 November 2017 to pay the petitioning debt:

“ MR LUNG: I just confirmthat I -- we will accept that if we do not pay by the end of November, we will not take a cross-claim point, so the unless order would work in that sense.” (My emphasis added)

The terms of the Unless Order were then finalised during the discussion in the afternoon.

38.  By the irrevocable Hongfan’s Undertaking, Hongfan has abandoned all its defences to a petition, if it should fail to pay the petitioning debt on 30 November 2017.  Hongfan’s Undertaking is evidenced in the Unless Order made by consent.  Its understanding of the effect of this undertaking is evidenced in the transcript.  Yahe agreed to the adjournmentand not to proceed forthwith to discharge the inter partes injunction order thereby gave Hongfan more time to pay and saved Hongfan from the risk of any damage which an advertisement of a petition could cause to Hongfan and its parent company.  As a quid pro quo, Hongfan agreed not to pursue any of its defences.  The parties saved the risk of uncertainty in litigation.  They achieved a mutually satisfied result.  Yahe would receive payment of the outstanding debt on 30 November 2017 or the right to an uncontested petition with Hongfan’s Undertaking.  Hongfan has more time to pay what it was willing to pay and thought it was able to pay.  This is truly an agreement containing a compromise on both sides.  The court has no power to set aside this agreement or interfere with its terms even if the effect of the compromise was not what a party anticipated or that party now thinks it has entered into a bad bargain after having obtained fuller information, legal advice or a second thought.

39.  It should also be noted that apart from these express or implied admissions, there is also an actual finding by this court that the alleged Settlement Agreement did not exist, that the due date for payment of the petitioning debt was 30 July 2016[1] and that there could be no set-off or cross-claim[2].

40.  With the making of the Unless Order, it was anticipated that there would be no need to adjudicate on the two summonses then before me, except for the issue of costs. The hearing was adjourned to 11 December 2017 for the purpose of tidying the loose ends and determining the question of costs of the two summonses and the costs of Hongfan’s Ex Parte Summons which were reserved.

HONGFAN’S UNDERTAKING SUMMONS

Introduction

41.  Having regard to the procedural history, I think it appropriate to begin by considering Hongfan’s Undertaking Summons first.

42.  Hongfan’s position is that it has a good defence to the petition for the following reasons:

(1) it has a bona fide dispute on the petitioning debt on substantial grounds, namely the nature of the underlying transaction giving rise to the petitioning debt;

(2) it has a bona fide dispute on the petitioning debt on substantial grounds because the petitioning debt had not yet fallen due at the time of the issue of the statutory demand; and

(3) it has a set-off or cross-claim exceeding the petitioning debt.

It is against the above background that Hongfan seeks to be released of its undertaking because of change of circumstances. 

43.  Yahe’s position is very straight forward.  It relies on:

(1) the Unless Order as an agreement evidencing an admission which may not be withdrawn save with leave of the court;

(2) the Unless Order as evidence of a compromise agreement which may not be set aside, except by reason of fraud, duress, illegality, misrepresentation and mistake; and

(3) the automatic sanction under the Unless Order which has not been set aside and against which no relief from sanction has been sought or granted.

44.  I do not find it necessary to refer to Mr Tsang’s very lengthy submissions about these grounds.  Suffice it is to say that these grounds are supported by well-established legal principles.  Mr Lung has no disputeabout those legal principles.  There is no dispute that Hongfan has not applied for leave to withdraw the admissions or for relief from sanction under the Unless Order.  There is also no argument that the Unless Order should be set aside as having been obtained as result of any of the vitiating factors.  What remains is for Hongfan to justify the release from its undertaking.  Thus, prima facie, the Unless Order bites for any of the grounds as advanced by Yahe, unless Hongfan can show that the alleged change in circumstances is material to its defence and that the defence is arguable.

Change in circumstances

45.  The change in circumstances relied on by Hongfan was a sudden change of stance of Guangdong Yuehe in denying its liability to indemnify Wiseon in the Wiseon transactions.  Hongfan argues that this event is highly material to the mutuality argument in Hongfan’s cross-claim against Yahe and it triggered Wiseon into assigning its cause of action against Guangdong Yuehe to Hongfan and Hongfan commencing arbitral and court proceedings in Singapore against Guangdong Yuehe.  It thereforeargues that for this reason, it should be relieved of its undertaking so that itmay pursue its defence, in particular, the cross-claim argument.  Hongfan’s argument is solely directed at the mutuality argument. 

46.  The change in circumstances relied on by Hongfan is Guangdong Yuehe’s change of stance in the Wiseon transactions.  While itis Hongfan’s allegation that Guangdong Yuehe undertook to indemnify 57% of Wiseon’s loss, this has not been admitted by Yahe.  Even assuming Guangdong Yuehe had given such an undertaking and there was a change of stance, Guangdong Yuehe and Wiseon are not parties to these proceedings.  Guangdong Yuehe’s stance or undertaking to indemnify Wiseon was not part of the terms of the Unless Order.  It did not feature at all in the negotiation before the making of the Unless Order.  Maintenance of Guangdong Yuehe’s stance or its indemnity to Hongfan was not a pre-condition of the Unless Order.  How could it be argued that Guangdong Yuehe’s alleged change of stance could be one of the material circumstances in Hongfan’s agreeing to the Unless Order being made against it?  The alleged change in circumstances is very artificial.

47.  Besides, Hongfan suffered no detriment.  Before the making of the Unless Order, it alleged that Wiseon has a claim against Guangdong Yuehe.  Wiseon can still make that claim against Guangdong Yuehe.  Indeed, by causing Wiseon to assign the cause of action to Hongfan and forHongfan to commence proceedings against Guangdong Yuehe in Singapore, Hongfan is proceeding in that direction.

48.  More importantly, the purpose of the release, according to Hongfan, is to enable Hongfan to pursue its argument that it has a set-off or cross-claim exceeding the petitioning debt.  On Hongfan’s case, that argument is unsustainable as a matter of law.  The set-off or cross-claim alleged by Hongfan was Wiseon’s claim against YST for its failure to issue a letter of credit to enable Wiseon to complete its sale and purchase agreement of aluminium ingots with Vitol SA.  As result, Vitol SA obtained an arbitration award against Wiseon.  Wiseon is held as to 90% by Yan through a BVI company and as to the remaining 10% by Liang.  YST is a joint venture between Guandong Yuehe and Hongfan in which Guangdong Yuehe holds 57% interest. Hongfan alleged that Kang and Huang of Guangdong Yuehe had orally admitted liability as to 57% of Wiseon’s loss.  As Guangdong Yuehe is the holding or parent company of Yahe, Hongfan equated Wiseon’s claim against YST as Hongfan’s claim against Yahe. 

49.  A fundamental requirement for set-off or cross-claim is that there must be mutuality between the parties: Wong Wai Lin Lana v Heung Wah Wing[3].  In considering mutuality, the court looks at the beneficial title rather than purely at the legal title: Middleton v Pollock ex parte Nugee[4].  Given the above background in which the set-off or cross-claim arose, it is difficult to see how Hongfan can have a beneficial interest in a claim of Wiseon, a company beneficially owned by one of the directors of Hongfan and Liang, not to mention that Wiseon has been shielded off by a BVI company.  Hongfan attempted to bridge that gap by alleging without evidence that Wiseon is Hongfan’s nominee.  But, in Uttamchandani v Central Bank of India[5], Lord Lloyd said:

“ As I understand the old cases on this topic [equitable set-off], set-off in equity under this head was never allowed, save where a Court of Equity could see that the person claiming to rely on set-off was the beneficial owner of the debt in question, either on the face of it, or by distinct admission, or otherwise without the need for any further enquiry. … Thus it was not sufficient for a person seeking to rely on set-off in equity to establish an arguable case of beneficial ownership. The rule was never extended that far.”

In the absence of evidence or an admission from Yahe, Hongfan attempted to make itself the beneficial owner of the debt by causing Wiseon to assign the cause of action to itself.

50.  However, the mutuality principle also requires that the third party debt in which the respondent is beneficially interested and which is to be applied to set-off the petitioning debt must be one which is owed by the petitioner.  The respondent may not set-off the petitioning debt by any debt owed to him by a third party and force the petitioner to enforce the petitioning debt against that third party.  Thus even if a debt was owed by YST or Guangdong Yuehe to Wiseon or Hongfan (by reason of Wiseon’s assignment of the cause of action), that debt may not be used to set-off the petitioning debt owed by Hongfan to Yahe.  There was no mutuality between Yahe and Guandong Yuehe, though the former is a subsidiary of the latter.  They are separate legal entities.

51.  All these companies involved above are companies either incorporated in Hong Kong or in the People’s Republic of China.  They are separate legal persons.  Assuming that Wiseon’s cause of action against YST or Guangdong Yuehe has been validly assigned to Hongfan, Hongfan’s set-off or cross-claim involves at least two quantum leaps.  First, if Wiseon has any claim, it is against YST.  It is difficult to see how it can make a claim, albeit apportioned, against one of YST’s shareholders, namely Guangdong Yuehebecause of the concept of separate corporate personality.  Second, it is also difficult to see how Guangdong Yuehe’s liability owed to Wiseon could be used to discharge Hongfan’s liability owed to Guangdong Yuehe’s subsidiary Yahe.  The parties to the two debts are totally different.  With or without Wiseon’s assignment of its cause of action, this set-off or cross-claim argument cannot even get off the ground.  It was only an excuse and Hongfan’s commencement of arbitral proceedings was also a self-engineered event which has no bearing to the set-off or cross-claim.  Guangdong Yuehe’s change of stance could not be a material change in circumstances which could justify Hongfan to be released of its irrevocable undertaking. 

Conclusion

52.  For the above reasons, I do not consider Guangdong Yuehe’s change of stance a material change in circumstances which could justify Hongfan to be released from its irrevocable Hongfan’s Undertaking.  Hongfan’s Undertaking Summons is therefore dismissed.

53.  Hongfan did not pay on 30 November 2017.  The excuse it gave for not paying was Guangdong Yuehe’s change of stance.  Hongfan’s choice not to seek leave to set aside the compromise agreement or to withdraw from its admission reflects that it knew it has no chance of successin such applications.  The only other course open to Hongfan was to apply for relief from sanction of the Unless Order.  But the best relief it could obtain would be an extension of time to pay, which is not what it wanted.  Then it conjured this ground of change of material circumstances, which on my finding is neither material nor genuine.  The only inference that could be drawn from the non-payment, this groundless application and all the circumstances is that Hongfan was never able to pay, now or at the time of its issue of the Hongfan’s Originating Summons or on 30 November 2017.  The application for injunction was a delaying tactic.  When Hongfan’s application to be released from Hongfan’s Undertaking is viewed against the above background, it is clear that the application was an abuse of legal process.  The so called change in circumstances was a lame excuse.  Wiseon’s assignment of the cause of action was a self-engineered event which has no bearing on Hongfan’s claim of set-off or cross-claim.  The application is an abuse of process attempted under aggravating circumstances in that Hongfan was trying to circumvent an unless order.  Accordingly, I make an order nisi that it shall pay Yahe’s costs of the application on indemnity basis, including all costs reserved.

HONGFAN’S ORIGINATING SUMMONS

54.  As I indicated, once Hongfan’s Undertaking Summons is determined, the other summonses could be disposed of summarily.  Pursuant to Order 2, rule 4 of the Rules of the High Court, the Unless Order shall take effect.  Yahe shall be at liberty to present a winding-up petition against Hongfan and Hongfan shall not resist the presentation of such petition.  Upon Hongfan’s failure to pay the petitioning debt on 30 November 2017, a petition has been presented.  This summons is now academic.  As the matter now stands, this summons has to be dismissed.  The outstanding question is costs.

55.  Mr Lung reiterates Hongfans defence that the sales and purchase agreements were sham; the loan was unenforceable for illegality; and that in any event as result of the alleged Settlement Agreement the petitioning debt had not fallen due at the time of issue of the statutory demand.  He repeats that Hongfan has a set-off and cross-claim exceeding the petitioning debt. He submits that if the court finds any of these grounds arguable, Hongfan is entitled to an injunction order.  These issues had not been explored during the hearing on 12 September 2017 because of the compromise agreement and the making of the Unless Order.  They have been considered as result of Hongfan’s Undertaking Summons.  Hongfan’s arguments have all been dismissed with my finding that the alleged Settlement Agreement did not exist, that the due date for payment of the petitioning debt was 30 July 2016 and that there was no set-off or cross-claim for want of mutuality.  What was left was just a vague allegation of illegality and whether Hongfan was unable to pay its debt when due.

56.  A quick answer to Mr Lung’s submissions is that the Unless Order, as I have found, contains an express admission that the petitioning debt was due and owing; and that if Hongfan should be unable to pay on 30 November 2017 it is because Hongfan is unable to pay its debt.  In addition to my finding that the petitioning debt was due on 30 July 2016, there was also an implied admission that the petitioning debt was originally due on 30 July 2016 and that the extended due date of 30 November 2017 was only for the purpose of the Unless Order.  The admissions were made on the basis that the petitioning debt was the balance of the outstanding purchase price under Contract 1 and Contract 2 afterdeducting the various repayments and not on the basis of an illegal loan agreement.  By the parties’ agreement, Hongfan was given extension of time to pay until 30 November2017 for the purpose of the Unless Order.  These admissions have not been withdrawn.  Hongfan must be taken to have abandoned its case based bona fide dispute on the petitioning debt, illegality and the alleged Settlement Agreement.  How the debt arose is no longer relevant.  Without the leave of this court for Hongfan to withdraw the admission and with the court’s positive finding in respect of some of these issues, there could no longer be any bona fide dispute of the petitioning debt on these grounds.  

57.  Even if Hongfan had a valid set-off or cross-claim, Hongfan has abandoned it as part of the compromise agreement in the course of the negotiation for the Unless Order.  This court has no power to set aside a compromise agreement except by reason of some vitiating elements.  There is no allegation of any vitiating element.  As the transcript shows, Mr Lung fully understood he was abandoning thisground, whether it be a valid ground or not.  Hongfan made no applicationto set aside the Unless Order because it knew such an application is doomed to fail.  This precisely demonstrates the lack of merits in Hongfan’s application to be released of Hongfan’s Undertaking.  Furthermore, I have also made a finding of factthat even assuming Wiseon had a claim against Guangdong Yuehe, Hongfancould not have a valid set-off or cross-claim against Yahe due to lack of mutuality. 

58.  Because of these admissions which Hongfan has not taken steps to have them withdrawn and the court’s finding of fact, it is not open to Hongfan to argue that it has a bona fide dispute on the petitioning debt on substantial grounds.  For reasons as given, Hongfan does not have any valid set-off or cross-claim against Yahe due to lack of mutuality.  Hongfan has no grounds to restrain Yahe from presenting a petition against it.  Hongfan’s Originating Summons has to be dismissed.  There is no reason to depart from the general rule that costs should follow the event.  Accordingly, the summons is dismissed and I make a costs order nisi that Hongfan shall pay Yahe’s costs of this summons on party and party basis, including all costs reserved. 

HONGFAN’S EX PARTE SUMMONS

59.  This summons is an ex parte summons on notice. Yahe’s counsel appeared sometime after the hearing had commenced.  It was adjourned to be heard with Hongfan’s Originating Summons upon Yahe’s Undertaking not to present a petition.  Costs were reserved.  It is now totally academic. The only outstanding issue is costs.  As Hongfan’s Originating Summons is dismissed with costs on party and party basis, costs of this summons should also be awarded on the same basis.  Accordingly, I make no order under this summons other than a costs order nisi that Hongfan shall pay Yahe’s costs on party and party basis, including all costs reserved.

YAHE’S DISCHARGE SUMMONS

Introduction

60.  This summons was taken out by Yahe on 28 July 2017 and was first heard on the return date of Hongfan’s Originating Summons.  On the return date, it was adjourned to be heard with Hongfan’s Originating Summons and Hongfan’s Ex Parte Summons.  It seeks, inter alia, (1) dismissal of Hongfan’s Originating Summons and Hongfan’s Ex Parte Summons for material non-disclosure; (2) release of Yahe from Yahe’s Undertaking in lieu of an interim injunction given on 20 July 2017 pending determination of the above summonses on the same grounds; and (3) fortification of Hongfan’s cross-undertaking in damages.  Yahe relies on eight instances of material non-disclosure and other material non-disclosure relating to Hongfan’s financial ability in honouring its cross-undertaking.

Relief (1)

61.  The first relief sought by this summons creates enormous amount of confusion.  Firstly, at the adjourned hearing of Hongfan’s Originating Summons, Yahe can ventilate any grounds of opposition including material non-disclosure without specifically taking out this summons applying to have Hongfan’s application by those two summonsesdismissed specifically on the ground of material non-disclosure.  Secondly, material non-disclosure is usually a relevant ground for discharging an injunction improperly obtained for that reason.  I find it difficult to see how it could be a relevant consideration in an application to dismiss an application for injunction yet to be granted.  Yahe may, of course, use the non-disclosed information as grounds for opposing Hongfan’s application for injunction.  The application was wholly unnecessary and was a complete waste of time.  The application for this relief must be dismissed. 

Relief (2)

62.  Material non-disclosure is usually relevant for discharging an order made by the court in an ex parte hearing.  Its relevance in an application for relieving a party from its own undertaking is seldom heard of.  In the factual situation of this case, how an argument based on material non-disclosure could be deployed to relieve a party from its undertaking is logically confusing.  Yahe’s Undertaking was given at the hearing of Hongfan’s Ex Parte Summons on 20 July 2017.  On 26 July 2017, Hongfan filed Hongfan’s Inter Partes Summons in accordance with the usual procedure.  Yahe’s Discharge Summons was filed and heard on 28 July 2017. At the hearing on 28 July 2017, the summons judge allowed Hongfan’s Inter Partes Summons and granted an interim injunction restraining Yahe from presenting a winding-up petition against Hongfan.  She then adjourned all the three summons to a date to be fixed for argumenttogether.  Thus as at that moment, Yahe’s Undertaking was spent or lapsed.  An injunction order was made as result of adjudication.  Yahe’s Undertaking lapsed on the very day the summons was filed.  There is no purpose to be served by releasing Yahe from its undertaking which has lapsed.  This application has become academic.  However, Yahe insisted a determination of the merit of the application and whether there was material non-disclosure for the purpose of determining its entitlement to costs.

63.  Yahe argue that there were at least eight instances of material non-disclosure relating to the merits of Hongfan’s case for injunction and other material non-disclosure relating to Hongfan’s means to honour its cross-undertaking in damages.  Though Hongfan’s application for interim injunction was made by ex parte application on notice, what its solicitors did was to serve a bundle of documents on Yahe’s solicitors without informing them of the time of hearing.  Yahe had to make enquiries with the court to find out the time of hearing and urgently instruct counsel.  When Yahe’s counsel arrived in court, the hearing had already begun.  Then, the ex parte judge enquired if the parties were amenable to the idea of disposing of the application by way of an undertaking until return date.  That was agreed and Yahe undertook not to present a petition pending further determination of the summons.  The agreement was made without the opportunity of studying and understanding Hongfan’s case.  The hearing was adjourned to 28 July 2017 to be heard together with Hongfan’s Originating Summons.  Then during the intervening period, Yahe discovered the material non-disclosures and filed the Yahe’s Undertaking Summons on 28 July 2017.

64.  Hongfan’s argument is that Yahe voluntarily gave an undertaking at the suggestion of the ex parte judge knowing it was in effect an interim injunction until the return date.  There is therefore no basis for Yahe to allege that the ex parte judge’s attention had not been drawn to any particular issue for the simple reason that Hongfan was never in a position to complete its oral submission.

65.  As I have already indicated, the usual challenges based on material non-disclosure were directed at non-disclosure to the ex parte judge who did not have the benefit of hearing from the absentee party and which resulted in an adverse order being made against the absentee party.  Here, the ex parte judge floated the idea of an undertaking for just eight days to keep the status quo so that the parties can properly consider their respective position.  That was a perfectly sensible way any judge would have handled the application.  

66.  Yahe is seeking to be released from its undertaking because some material information had not been disclosed to the ex parte judge and Yahe.  Firstly, even if there had been material non-disclosure, the ex parte judge was notcalled upon to act on what was represented to her and then to make a decision.  The ex parte judge made no adjudication and no interim injunction was ordered.  Indeed, Yahe is not seeking to set aside any orders made by the ex parte judge. 

67.  Secondly, as for material non-disclosure to a party which led to Yahe giving an undertaking, Yahe’s position is very different from that of the ex parte judge.  Hongfan owes the court the duty of full and frank disclosure, but owes no such duty to Yahe.  Yahe has to look after its own interest.  It has knowledge of the material facts.  It should know its case.  Yahe was given, by consent, eight days to consider its position, take legal advice and do whatever it thought fit. If in those eight days Yahe discovered any fact which had not been disclosed to the ex parte judge and which it thought relevant and would provide a ground for opposing the injunction sought, it is for Yahe to employ the information to challenge Hongfan’s application at the subsequent hearing.  That was how Yahe could have used the information.  It was not permissible for Yahe to raise material non-disclosure as a ground for seeking to be released from its undertaking.  For this reason, I do not find it necessary to determine whether the non-disclosure was material from point of view of the ex partejudge.  The application for this relief has no merit and has to be dismissed.

Relief (3)

68.  As for Yahe’s application for fortification, it is relevant if the interim injunction is to continue.  As Hongfan’s application for injunctionis now dismissed, this application is academic and must also be dismissed.

Conclusion

69.  There is absolutely no merit in Yahe’s Discharge Summons.  Yahe was being over-litigious.  It unnecessarily raised issues which complicated and delayed the whole matter.  The reliefs sought are misconceived and refused.  Accordingly, the summons is dismissed with a costs order nisi that Yahe shall pay Hongfan’s costs, including all costs reserved.