RE CHINA ZENITH CHEMICAL GROUP LTD (formerly known as XINYANG MAOJIAN GROUP LTD)

HCCW 243/2023

[2024] HKCFI 2097

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 243 OF 2023

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J U D G M E N T

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1.  The Company was incorporated in the Cayman Islands on 7 December 2000. It has since 23 February 2001 been registered as a non-Hong Kong company. The Company has issued share capital of HK$500 million divided into 500 million shares all of which have been paid up or credited as paid up. Its shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”) (stock code 362).

2.  The Company through its indirect subsidiaries engage in the business of manufacture and sale of chemical products, generation and supply of heat and power and construction services in the Mainland. Ms Chan Yuk Foebe (“Chan Yuk”) has since at least 2013 been the chairman, chief executive officer and executive director of the Company.

3.  The Company has raised funds by issuing bonds each with a principal amount of HK$10 million to individual investors. The “Petitioner” (as defined in §5 below) and the Supporting Creditors (as defined in §18 below) on their case, have subscribed for the bonds issued by the Company in 2013, 2014 or 2015, apparently for the purpose of fulfilling the investment requirement under the Capital Investment Entrant Scheme in Hong Kong.

4.  The proceedings have a chequered history with the Company trying to deploy every conceivable tactic so as to delay payment of the debts due to the Petitioner and the Supporting Creditors under the bonds issued by the Company.

Petitioner’s Judgment Debt

5.  On 13 April 2023, Ms Wang Yuexian, the original petitioner in these proceedings (“Petitioner”), obtained summary judgment in HCA 231/2022 on part of her claim from a Master in the amount of HK$5,500,000 (“Judgment”). In HCA 231/2022, the Petitioner claimed that:

(1)  HK$10 million was due and payable by the Company under a bond issued by the Company pursuant to a written agreement dated 4 December 2013 (“P’s Bond”).

(2)  The date of redemption of P’s Bond was 6 December 2021 whereupon the principal together with interest at 4% p.a. was payable to the Petitioner. In breach of P’s Bond and the agreement, no payment was made by the Company.

(3)  By letter dated 20 December 2021, the Company through its solicitors alleged that the Petitioner had executed an undated deed of waiver with effect that the amount due to the Petitioner shall be reduced to HK$5.5 million. The Petitioner said that she never executed the alleged deed of waiver.

(4)  The Company was liable to pay HK$13.2 million to her, being the principal and the interest due on P’s Bond[1]. A copy of P’s Bond was appended to the statement of claim.

6.  As at 2 May 2023, the amount due on the Judgment was HK$6,026,052.70 (“Judgment Debt”). By a statutory demand served upon the Company on the same day (“P’s SD”), the Company was required to pay the Judgment Debt. No payment was made.

(1)  On 8 June 2023, the petition was presented by the Petitioner, relying on the Company’s failure to satisfy P’s SD[2].

(2)  On 23 May 2023, the Company applied for interim stay of execution pending its appeal against the Judgment, which was withdrawn on 30 May 2023.

(3)  On 15 June 2023, DHCJ Herbert Au-Yeung gave directions on filing evidence and disposal of the appeal on paper. Shortly before the Company was due to lodge its submissions, it applied for leave to amend its Defence. The Judge then directed oral hearing for the appeal which was scheduled to be heard on 17 November 2023.

(4)  2 days before the hearing of the appeal, the Company applied for leave to file new evidence in support of the appeal, which was dismissed by the Judge.

(5)  On 13 December 2023, the Judge handed down his Decision dismissing the appeal and disallowed part of the amendment application. As noted by the Judge in §§4(1), 4(3), 6, 7(2) and 8 of the Decision, it was the Company’s admission in its Defence that HK$5.5 million was due and payable.

(6)  On 27 December 2023, the Company applied for leave to appeal out of time against the Judge’s decision, which was fixed for 2 February 2024.

(7)  On 10 January 2024, the Company further appealed against the Judge’s decision to the Court of Appeal in CACV 10/2024. No hearing date was fixed.

(8)  On 11 January 2024, the Company was ordered by the Judge to pay the costs of the appeal in the amount of HK$300,000. The amount was not paid. The application for leave to appeal was dismissed by the Judge on 2 February 2024.

7.  There was no dispute that the 3 core requirements for the court to exercise its discretionary jurisdiction to make a winding-up order against the Company were satisfied.

8.  Despite the Judgment, the Company sought to re-open the issues already determined by the court in HCA 231/2022 and argued that there was a bona fide dispute on substantial ground in respect of the Judgment Debt and raised the following grounds in opposition to the petition[3]:

(1)  The Petitioner and the Company possessed different copies of P’s Bond;

(2)  The Petitioner had not presented the original of P’s Bond to the Company for redemption pursuant to the terms and conditions. Therefore, the Company was not obliged to redeem P’s Bond; and

(3)  The Judgment was under appeal and the Company had “good prospect of success”.

9.  On 28 February 2024, the Company issued a summons for leave to adduce further evidence in support of its opposition to the petition[4].

Hearing on 4 March 2024

10.  At the hearing on 4 March 2024:

(1)  This Court refused to allow the Company to file further affirmation in opposition to the petition as there was no justification for the inordinate delay in filing the affirmation.

(2)  As submitted by Ms Tina Mok, counsel for the Petitioner, the Judgment Debt had not been paid, and the Petitioner was entitled ex debito justitiae to seek a winding up order against the Company. The Company should not be allowed to rely on the grounds set out in Ma 2^nd which constituted a collateral attack on the Judgment (Chu Kong v Lau Wing Yan [2023] HKCFI 2703 §§54-66; Power Securities Company Ltd v Sin Kwok Lam & ors [2019] HKCFI 2920 §§55-73).

(3)  Mr Look Chan Ho, counsel for the Company, argued that there was a bona fide dispute on substantial grounds in respect of the Judgment Debt relying on 2 new allegations not raised in Ma 2^nd. (a) First, “close to the hearing before the Deputy Judge, the Company discovered significant discrepancies between [P’s Bond] and the Company’s own record of a bond (“Company’s Bond”) issued to a person with the same name. These discrepancies strongly suggest that [P’s Bond] is counterfeit”. (b) The Judge excluded evidence on the Company’s Bond, citing procedural delay. Consequently, the court “may legitimately go behind” the Judgment on the basis that the Judgment was obtained by “fraud, mistake, collusion, or that there has been some miscarriage of justice” (Re Sun Fung Timber Co Ltd [2021] HKCA 1660 §32).

11.  In my view, the argument that the Companies Court should go behind the Judgment obtained by the Petitioner after a fully contested hearing merely because the Company alleges that the Judgment was obtained by fraud, mistake, collusion or that there has been miscarriage of justice is wholly without merit. As similar argument has often been raised in the Companies Court, it is useful to remind the practitioners of the applicable principles, which have been thoroughly stated in Re Tam Mei Kam, CACV 87/2012, 8 May 2013, §§22-27, (Yuen JA):

“22. Where a petition is presented based on a judgment debt, the court sitting in its bankruptcy jurisdiction is guided by the following principles.

22.1 The bankruptcy court will treat a judgment for a sum of money as prima facie evidence that the judgment debtor is indebted to the judgment creditor for that sum.

22.2 As prima facie evidence of indebtedness, it may be rebutted and that is what is meant by “going behind” the judgment. It is important to understand the rationale for this approach. First, bankruptcy affects an individual’s legal status. Secondly and importantly in this context, the bankruptcy court’s exercise of the power and/or duty to inquire into a judgment is necessary to protect a debtor’s real creditors from collusive judgments entered into by the debtor in order to initiate a bankruptcy and thereby reduce the funds available for his real creditors.

…

23. In other words, the reason why a bankruptcy court is not conclusively bound by a judgment debt is so that (in appropriate circumstances) it can inquire whether there was actually bona fide consideration for it. Of course apart from opposing creditors at the petition seeking to impugn the judgment debt, the judgment debtor himself can also seek to do so, especially if the judgment had been obtained by default. See Fletcher, The Law of Insolvency, 4^th ed. p.163 para.6-116…..

…

However that is not to say that in every case the bankruptcy court should exercise its powers of inquiry simply for a judgment debtor to get a second bite of the cherry and conduct parallel proceedings to review a judgment which he has lost or to avoid its execution.

24. The rationale discussed above should guide the approach to be taken by the bankruptcy court when a judgment debtor opposes a petition on the ground that he challenges the judgment debt.

25.1 If the judgment debtor has lodged either an application to set aside the judgment (in a case where the judgment did not require a decision on the merits) or an appeal, the bankruptcy court may stay the hearing of the petition to await the result of the application or appeal.

25.2 However, the bankruptcy court need not do so in every case. It may refuse to stay the petition and may proceed to make a bankruptcy order if the judgment debtor fails to satisfy the court that he has a reasonable prospect of succeeding in the application to set aside or the appeal (Watts v London Borough of Newham [2009] EWHC 377 at [53]). Put another way, an application to set aside or an appeal falling short of that standard would not be a viable or bona fide one, and the judgment debtor would have failed to rebut the prima facie evidence of indebtedness. As noted by the learned editor of the Law of Insolvency, at p.162 para.6-114:

‘It is important to note that the power to stay proceedings is once again a discretionary one, and that the mere fact that a debtor has lodged appeal against a judgment does not confer upon him the right to insist upon a stay of any bankruptcy proceedings founded upon that judgment. If the law were otherwise it would, as was observed by Lord Esher MR in Flatau, Re furnish an intolerable means whereby the debtor might delay the hearing of the petition, perhaps for months or even years, by embarking upon purely frivolous appeals. As it is, if the bankruptcy court forms the opinion that the appeal is without merit it may make a bankruptcy order without more ado’.

26.1 Where the judgment debtor has not lodged an application to set aside or an appeal by the time of the petition hearing but intends to do so (probably out of time), he must, in addition to satisfying the bankruptcy court of the reasonable prospects of success in his application or appeal, also provide a reasonable explanation why he has failed to act in time. If he can do so, the bankruptcy court may adjourn the hearing of the petition to enable him to commence an application to set aside or appeal, giving appropriate directions to ensure that it is conducted expeditiously, with liberty to apply so that either party may apply to restore or dismiss the petition as appropriate.

26.2 Where the judgment debtor is unlikely to be able to pursue an application to set aside or an appeal for procedural reasons eg where there has been gross and inexcusable delay, the bankruptcy court may consider his case to see if he can rebut the prima facie evidence of indebtedness. Before arriving at a decision, the bankruptcy court will consider the circumstances in which the judgment was obtained. At one end of the spectrum, the court may decide to dismiss the petition even if a regular judgment had been obtained in default, e.g. if service of a writ had been effected on the judgment debtor’s previous address and he can clearly establish a substantial defence. At the other side of the spectrum is a petition based on a judgment obtained after a full trial on the merits. In the latter situation, the general principle is that the bankruptcy court would inquire into such a judgment only if the judgment debtor can show fraud, collusion or miscarriage of justice, the latter term having been described as “something from which [the court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant” (Dawodu v American Express [2001] BPIR 983 quoted in Watts at [48]).

27. Where the judgment debtor has already failed in his application to set aside the judgment or his appeal on substantive grounds at the time of the petition hearing, it would be most unlikely in that situation that the bankruptcy court would find that the judgment debtor could nevertheless rebut the prima facie evidence of indebtedness, unless he could satisfy the court that he could impugn the judgment of the court deciding the setting aside or appeal on the grounds discussed in the paragraph above.” (underlined added)

12.  As to what constitutes “miscarriage of justice” in this context, the Court of Appeal in Sun Fung Timber (§32) reiterated that this requires the debtor to demonstrate that there is “something from which [the court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant”, citing Re Tam Mei Kam, §26.2.

13.  In the present case, the Company’s belated allegation that P’s Bond was a “counterfeit” was raised 23 months after the Petitioner had commenced proceedings against the Company in reliance on P’s Bond, and 14 months after the Judgment had been entered against the Company. The allegation that the Company only recently “discovered” that P’s Bond was different to the Company’s Bond and there were “significant discrepancies” between P’s Bond and the Company’s Bond bore all the hallmarks of a recent fabrication, having regard to the following facts and matters:

(1)  It did not begin to explain why the Company, which had all along been opposing the Petitioner’s claim, was not able to discover the alleged counterfeit.

(2)  The allegation was inconsistent with the objective fact that (a) no other person in the same name as the Petitioner had ever come forth to claim the amount due on P’s Bond; (b) the Company had admitted in its Defence that HK$5.5 million was due to the Petitioner; and (c) the alleged discrepancies were based on the so-called Company’s Bond possessed by the Company, which was irrelevant to P’s Bond issued by the Company to the Petitioner.

14.  More importantly, the Company’s allegation, even if establish, did not go anywhere near to show that the hearings before the Master and the Judge were not “properly conducted judicial process”.

15.  Mr Ho contended that this Court should go behind the Judgment on the basis that it “was obtained under circumstances of fraud, mistake, or miscarriage of justice”, as the Judge had not considered the Company’s new defence that it had never issued P’s Bond, and the Judge disallowed the new evidence “solely due to the Company’s procedural delay in presenting the evidence”[5]. The contention only fell to be rejected:

(1)  Mr Ho was unable to articulate any reason as to why the Judge’s refusal to admit late evidence would have the effect of rendering the Judgment to become one having been obtained by “fraud, mistake, or miscarriage of justice” or why the hearing before the Judge was not “properly conducted judicial process” as alleged.

(2)  If the contention were right, it would mean that every debtor could adduce new evidence at a late stage and, when the court refused to grant leave and give judgment against it, the debtor would be able to argue that the judgment was obtained by fraud, mistake or miscarriage of justice. None of the authority cited by Mr Ho supports such a stark contention.

(3)  Indeed, Sun Fung Timber cited by Mr Ho did not support his contention. In that case, the arbitration award was obtained by consent whereby the company was ordered to pay RMB59 million to the petitioner within 30 days as penalty for breach of the supply agreement. The award was not the result of a full trial on the merits (§§9, 37). The court below and the Court of Appeal considered that the opposing contributory had discharged the burden of showing that there was a bona fide dispute on substantial grounds in respect of the debt as there were various dubious and unusual features which cast significant doubt over the genuineness of the supply agreement (§36).

(4)  By contrast, the Company had filed its Defence and evidence in opposition to the application for summary judgment, and argued against the merits of the application. The Judgment was given by the Master after a fully contested hearing and was upheld by the Judge after another fully contested hearing.

16.  For the reasons set out in §§5-15 above, I did not consider that there was a bona fide dispute on substantial grounds in respect of the Judgment Debt. As the Company had failed to comply with the P’s SD, it was deemed insolvent by virtue of s.178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”).

17.  To avoid the Court making a winding up order against the Company, Mr Ho on behalf of the Company indicated that the Company would pay the Judgment Debt within 2 weeks whereupon the petition was adjourned to 25 March 2024 for the purpose of making the winding-up order or dealing with any applications for substitution to be made by the Supporting Creditors.

Supporting creditors

18.  There are 9 supporting creditors who filed notices of intention to support the petition but only 5 of them have taken an active role in the proceedings. They are Xu Wenjing (“Xu”), Qin Yu Huan (“Qin”), Chen Shaohua (“Chen”), Gu Yandong (“Gu”), and Lyu Yiling (“Lyu”) (collectively “Supporting Creditors”).

19.  The Supporting Creditors are holders of the bonds issued by the Company, all of which are governed by Hong Kong law and contained non-exclusive jurisdiction clause in favour of Hong Kong courts.

20.  The claims of the Supporting Creditors may be summarised as follows:

Creditor	Date of Bond	Maturity Date	Outstanding Principal (HK$)	Unpaid Interest (HK$)	Service of Statutory Demand
Xu	22/11/2013 22/11/2021	22/11/2021 22/11/2023	10,000,000	600,000	19/1/2024 (“Xu’s SD”)
Lyu	14/9/2015	13/9/2023	10,000,000	--	27/10/2023 (“Lyu’s SD”)
Gu	26/3/2014	25/3/2022	10,000,000	3,746,230	--
Qin	20/12/2013	10/8/2023	9,000,000	127,761	26/10/2013
Chen	4/2/2014	4/2/2022	6,750,000	594,185	19/1/2024

21.  At the hearing on 4 March 2024, Mr Jeff Yau, counsel for Xu, described the HK$10.6 million debt owed by the Company (“Xu’s Debt”) in this way:

(1)  Under a bond instrument dated 22 November 2021 issued by the Company (“2021 Bond”), the principal amount owed to Xu was HK$10 million with maturity date of 22 November 2022 and interest at 3% p.a. from 22 November 2021.

(2)  By a supplemental agreement dated 22 November 2022 (“SA”), the maturity date of the 2021 Bond was extended to 22 November 2023 with interest at 3% p.a..

(3)  Despite the letter of demand dated 5 December 2023 and Xu’s SD served on 19 January 2024, the Company failed to pay Xu’s Debt.

22.  By letter dated 18 March 2024, the Petitioner through her solicitors informed the Supporting Creditors that the Company had tendered payment for the Judgment Debt and if the cheque was cleared, it would not pursue the petition.

Hearing on 25 March 2024

23.  At the 2^nd hearing of the petition, the Petitioner confirmed that she would not pursue the petition. Each Supporting Creditors had filed a summons pursuant to rule 33 of the Companies (Winding up) Rules seeking leave to be substituted as petitioner, with draft re-re-amended petition setting out the material facts of the claim and an affirmation in support of the application.

24.  As the summons filed by Lyu was the first in time, this court ordered Lyu to be substituted as petitioner and to file the re-re-amended petition in respect of his debt.

25.  Other Supporting Creditors (i.e. Xu, Qin, Gu and Chen) appeared by counsel at the hearing and filed skeletons in support of their applications for substitution.

26.  Again, Mr Yau in his skeleton gave a detailed description of Xu’s Debt and the steps taken by Xu to seek payment from the Company. In summary:

(1)  Pursuant to a bond subscription agreement dated 20 November 2013 the Company agreed to issue, and Xu agreed to subscribe, for a bond at HK$10 million.

(2)  A bond instrument dated 22 November 2013 with maturity date of 22 November 2021 and interest at 3% p.a. (“2013 Bond”) was issued by the Company to Xu. Schedule 3 to the 2013 Bond was a “債券憑證證書” signed by 2 directors[6] on behalf of the Company and sealed with the company’s seal.

(3)  Upon maturity of the 2013 Bond, the Company and Xu entered into a supplemental agreement dated 22 November 2021 (“SA”) whereby the parties agreed that (a) the maturity date of the 2013 Bond be extended to 22 November 2023 at 3% p.a. interest and all other terms remained unchanged; (b) Xu could request the Company to issue another bond in place of the 2013 Bond.

(4)  On November 2021, the Company issued a bond, which was stated to have been executed as a deed poll (平邊契據), for the principal amount of HK$10 million, with maturity date of 12 months from the date of issue and interest at 3% p.a..

(5)  Schedule 3 to the 2021 Bond was a “債券憑證證書” signed by the same 2 directors[7] on behalf of the Company and was sealed with the company’s seal, which confirmed that the Company would pay Xu as holder of the 2021 Bond the HK$10 million principal and interest (“2021 Certificate”).

(6)  In a letter dated 11 February 2022, the Company referred to the 2021 Bond issued to Xu with maturity date of 22 November 2023 (“2022 Letter”), and stated as follows:

“the name of the Bondholder, Xu Wenjing is registered in the register of Bondholders. The present holder of the bond, Xu Wenjing is treated as its absolute beneficial owner for all purposes and abided by the law of Hong Kong.”

(7)  By letter dated 22 November 2023 addressed to the board of the Company, Xu through Chiu Liang & Co (“CLC”), exercised his right to redeem the 2021 Bond pursuant to clause 6.1 and enclosed a copy of the 2021 Bond.

(8)  By another letter dated 5 December 2023, Xu through CLC provided a redemption notice and requested the Company to pay HK$10 million to his bank account within 3 days failing which legal proceedings would be commenced against the Company.

(9)  In response to the demands, in its letter dated 15 December 2023, Wellington Legal (“WL”) on behalf of the Company, confirmed that the Company had issued the 2013 Bond, executed the SA and issued the 2021 Bond to Xu. However, it recently came to the Company’s attention that (a) the 2013 Bond might have been used for an improper purpose; and (b) Xu might have entered into financing arrangements to finance the acquisition of the 2013 Bond from an unknown source, which constituted “a serious matter that [the Company] would be obligated to investigate” (“1^st Allegations”). Relying on the 1^st Allegations, the Company requested Xu to provide documents showing the source of funds and documents filed with any entity relating to the 2013 Bond.

(10)  By letter dated 21 December 2023, CLC reiterated Xu’s demands for redemption of the 2021 Bond and stated that the 1^st Allegations were unfounded and were “simply pretexts for evading its liability for payment”; and there was no legitimate basis for requesting the documents.

(11)  On 19 January 2024, CLC served Xu’s SD on the Company requesting it to pay Xu’s Debt, of which HK$600,000 was interest accrued from 22 November 2021 to 22 November 2023.

(12)  The Company did not comply with Xu’s SD or state any further grounds in opposition to Xu’s Debt.

(13)  By a further letter dated 8 March 2024, CLC requested the Company to redeem the 2021 Bond by 20 March 2024 failing which Xu would apply for substitution as petitioner.

(14)  In its letter dated 19 March 2024, WL stated that the Company disputes Xu’s Debt and alleged that Xu “is fully aware that he is not entitled to redemption of the bond on its face value of HK$10,000,000” (“2^nd Allegation”) but failed to provide any particulars of the allegation .

27.  Mr Ho stated that the Company disputed all the Supporting Creditors’ claims but was not able to articulate the basis for disputing them. He submitted that the court should deal with the claims one after the other. This was despite the fact that the Supporting Creditors had already made demands and/or served statutory demands on the Company, and filed the substitution summonses.

28.  It seems to this Court that the Company should be required to file evidence in opposition to the claim of Lyu (the substituted petitioner) and to state the brief grounds of opposition to the Supporting Creditors’ claims, having regard to the following facts and matters:

(1)  The conduct of the Company in seeking to dispute the Judgment Debt when there was no valid ground to do so;

(2)  The Company was fully aware of the claims made by the Supporting Creditors from their demand letters and statutory demands but chose not to state its grounds in opposition;

(3)  The straight-forward nature of the claims of the Supporting Creditors, all of which are based on the bonds issued by the Company; and

(4)  In the 2023 Annual Report of the Company (“2023 AR”), the auditor expressed disclaimer of opinion on the basis that as at 30 June 2023, the Group[8] had net current liabilities and net liabilities of HK$794,788,000 and HK$947,719,000 respectively[9]. There was a real concern that the Company was insolvent and unable to pay its debts.

29.  The petition (as re-re-amended) was adjourned to another Monday hearing, with directions on filing evidence. The Supporting Creditors were at liberty to restore their substitutions summonses.

Hearing on 3 June 2024

30.  At the 3^rd hearing of the petition, in respect of Lyu’s debt:

(1)  Mr Tommy Cheung, counsel for Lyu, relied on the bond dated 14 September 2015 issued by the Company, the certificate dated 14 September 2015 signed by the chairman and a director of the Company certifying the bond issued to Lyu and the confirmation letter dated 14 September 2015 issued by the Company. He contended that the various discrepancies identified by the Company did not support its allegations that Lyu had not paid the subscription price.

(2)  Mr Ho argued that there was a bona fide dispute on substantial ground in respect of Lyu’s debt as the Company never issued any bond to her, and her claim was based on a forged document. In support of his argument, Mr Ho pointed to various discrepancies in Lyu’s evidence and contended that although Lyu had paid HK$10 million to Zenith Investment Limited (“ZIL”)[10], the amount was refunded by the Company at ZIL’s request.

31.  While I did not think much of the allegations belatedly raised by the Company, in light of the serious nature of the allegations and the volume of the documents adduced by the parties, it would be appropriate to adjourn the petition for arguments. As the nature of the Supporting Creditors’ claims and the grounds in opposition raised by the Company were very similar, and to avoid any further delay in the determination of the petition, the substitution summonses issued by Chen, Gu and Qin were adjourned to be heard at the same hearing.

32.  As regards Xu’s Debt, having had the opportunity to consider Xu’s Debt and the detailed arguments advanced on behalf of Xu at the 1^st and 2^nd hearings of the petition (see §§21 and 26 above), the Company no longer maintained the 1^st Allegations and the 2^nd Allegation. Instead, in Ma 3^rd[11], the Company raised 2 new grounds in opposition to Xu’s Debt (“together “3^rd Allegations”):

(1)  It was a condition precedent for redemption that the original of the 2021 Bond had to be produced, but Xu never produced the original “despite repeated requests” from the Company. On 16 May 2024, the Company issued a writ in HCA 913/2024 against Xu and sought a declaration that unless and until Xu produces the original of the 2021 Bond to the Company, the Company is not under any obligation to make payment; and

(2)  The quantum of Xu’s Debt is disputed by the Company.

33.  I did not think that the 3^rd Allegations constituted a bona fide dispute on substantial ground in respect of Xu’s Debt:

(1)  The alleged condition precedent is inconsistent with clause 6.1, which provides that the 2021 Bond shall on the maturity date and upon the Company tendering payment of the principal be redeemed automatically[12]. This is reinforced by clause 6.3[13], which makes clear that it is only when the Company has fixed the time and place for redemption that Xu has to return the original of the 2021 Bond. As the Company never fixed the time and place for redemption, there was no obligation for Xu to return the original of the 2021 Bond.

(2)  Further, as the correspondence show, Xu had since 22 November 2023 given notice to the Company to redeem the 2021 Bond. Had the Company genuinely believed that redemption was subject to the alleged condition precedent, it would have requested Xu to deliver the original of the 2021 Bond but it never did. It lies ill in the Company’s mouth to complain that Xu failed to deliver the original of the 2021 Bond.

(3)  In any event, Mr Yau confirmed that Xu would deliver the original of the 2021 Bond as and when the Company provided the time and place for redemption.

(4)  The commencement of HCA 913/2024 was merely a tactical step belatedly taken by the Company. More importantly, it confirmed that the only substantive ground raised by the Company in not redeeming the 2021 Bond was the alleged condition precedent.

(5)  The Company has failed to state any basis for disputing the quantum of Xu’s Debt, which was based on the express terms of the 2021 Bond.

34.  Mr Ho urged the court not to consider Xu’s Debt at the hearing for 2 reasons:

(1)  The hearing was to deal with the petition (i.e. Lyu’s debt) but not the debts owed to the Supporting Creditors, and for this reason, he did not advance any arguments in respect of Xu’s Debt.

(2)  The Company was directed to file evidence to state the “brief grounds” in opposition to the Supporting Creditors’ debts. In compliance with the direction, the Company filed Ma 3^rd to state the brief grounds, and did not file all the evidence it wanted to adduce in opposition to Xu’s Debt.

35.  I disagreed. The Company had had the opportunity to consider Xu’s Debt for over 7 months and the only grounds raised in opposition (i.e. the 3^rd Allegations) did not constitute a bona fide dispute on substantial ground. There was no reason why the court should brush aside the fact that the Company had not complied with Xu’s SD such that it was deemed insolvent and should be wound up.

36.  Mr Ho asked this Court to stand down the petition twice for him to take instructions from the Company. After taking instructions, Mr Ho offered an undertaking to the Court that “on the condition that Xu surrenders the original bond, the Company will pay the full amount of the debt claimed by him within 42 days hereof, failing which the Company will not oppose the court making a usual winding up order against it” (“Undertaking”).

37.  It was upon accepting the Undertaking that this Court adjourned the petition and the substitution summonses issued by Qin, Gu and Chen to a date to be fixed for substantive arguments with directions for the parties to file further evidence. The adjourned hearing was fixed on 19 September 2024.

Hearing on 4 July 2024: Stay Summons

38.  The matter then took a complete turn. Instead of complying with the Undertaking, the Company issued a summons dated 17 June 2024 for (1) leave to appeal against the order of 3 June 2024; (2) a discharge of the Undertaking; and (3) stay of all further proceedings (“Stay Summons”).

39.  As submitted by Mr Vincent Chen (appearing with Mr Jeff Yau), counsel for Xu, the grant of a stay of winding up proceedings is against the general practice of the Companies Court (Practice and Procedure of the Companies Court (1997), §9.164; Re Cirtex Co. Ltd [1987] 3 HKC 21 (CA); Safe Castle Ltd v China Silver Asset Management (Hong Kong) Ltd [2020] HKCFI 1028, §11; Re Silver Base (Holdings) Limited [2024] HKCFI 586, §6). In any event, there was no evidence to justify a stay of the proceedings. This was particularly so when the Company was not only deemed insolvent but also balance sheet insolvent according to the 2023 AR.

40.  Mr John Scott SC (leading Mr Han Sheng Lim), counsel for the Company, did not have any answer to the above point, and (rightly) abandoned the application for stay of proceedings.

41.  In support of the application for leave to appeal and a discharge from the Undertaking, the Company filed Ma 4^th in which he alleged that:

(1)  He had been advised that “serious and substantial prejudice will be caused to [the Company] if the Undertaking is not discharged pending the conclusion of the appeal process”, as “under Hong Kong law, money paid to another party is not recoverable on the grounds of mistake if the payer believed that it was more likely than not that he was not actually legally liable to pay.”[14]

(2)  The Company denied liability to pay a large proportion of Xu’s Debt. Its position is that the 2021 Bond should be redeemed for HK$5 million in light of an alleged “Deed of Waiver”. He then set out the “full facts” underlying the 2021 Bond including (a) 2 sets of payment instructions dated 3 December 213 signed by Xu in the sum of HK$1.4 million and HK$5 million; (b) a cashier order issued to Imaginedustries Ltd dated 3 December 2013; (c) the SA; (d) a bond redemption payment instructions; and (e) a letter from TC Wong & Co enclosing the bond payment instructions and the SA without enclosures dated (collectively “4^th Allegations”). The Company would explain the relevance of these documents and its detailed grounds in opposition in a further affirmation if leave would be granted[15].

(3)  He had been advised and verily believed that “the aforesaid matters were brought to the attention of the Court during the [hearing on 3 June 2024], but the learned Judge declined to admit additional document into evidence or grant leave to [the Company] to file a further affirmation explaining the matter in full”.

(4)  Even if the Company would be able to recover the amount paid to Xu, there would be substantial uncertainty as to whether it could in fact recover the same from Xu, given that Xu was not present in Hong Kong and has no substantial assets in Hong Kong. He was advised that this might cause “serious difficulties in enforcing any judgment obtained against [him].”[16]

42.  The assertion that the 4^th Allegations had been brought to the attention of this Court at the hearing on 3 June 2024 was plainly false:

(1)  As stated in §32 above, the only grounds advanced by the Company in opposition to Xu’s Debt were the 3^rd Allegations.

(2)  No where in any of the affirmation or correspondence did the Company ever mention or refer to the 4^th Allegations.

43.  In his Skeleton, Mr Scott[17] alleged that this Court “refused to admit into evidence further documents that counsel for the Company had on hand to show a bona fide substantial dispute in relation to Xu’s claim” [18]. Relying on this allegation, Mr Scott submitted that this Court’s decision in refusing leave to the Company to file evidence in opposition to Xu’s Debt “amounted to substantial procedural unfairness and was plainly wrong”[19]. The allegation and the argument were wholly without merit.

(1)  The so-called “further documents” (whatever they were) were not referred to in Ma 3^rd. Nor did the Company prepare any affirmation or summons to adduce such “further documents” at the hearing.

(2)  It was difficult to see how counsel could fairly criticise the court for not admitting into evidence the “further documents” on counsel’s hand when no affirmation or summons had ever been prepared or filed by the Company for such purpose.

(3)  This was particularly so when the Company had been told in clear terms of the details of Xu’s Debt and only advanced the 1^st, 2^nd and 3^rd Allegations in opposition. If the Company chose to withhold the 4^th Allegations for tactical reason, it only had itself to blame. The so-called “procedural unfairness” complained of by the Company was its own making. The reliance on the New Sparkle Roll International Group Ltd v Sze Ching Lau [2024] HKCA 336 was misplaced.

44.  Worse still, Mr Scott alleged that “the Company was effectively forced not only to concede Xu’s [Debt], but also to substantively oppose the claims of three other supporting creditors at the same time in addition to that of Lyu”[20]. The allegation that the Company was “forced” to concede Xu’s Debt were not supported by any evidence and was contradicted by the fact that the Undertaking had been offered by the Company after obtaining legal advice from Mr Ho.

45.  As submitted by Mr Chen, the burden was on the Company to satisfy the court that he should be released from the Undertaking on valid grounds, such as (1) where there was a material change of circumstances since the undertaking had been given; (2) where the subject matter to which the undertaking had been given no longer existed; (3) the party to whom the undertaking was given agreed to release the undertaking; and (4) when the undertaking had been obtained through fraud, misrepresentation or mistake (Wang Linping v Huang Keqin [2020] HKCFI 256, §101). The allegation and argument advanced by Mr Scott did not go anywhere near to showing that there was any valid ground for discharging the Undertaking.

46.  Nevertheless, to avoid the need for the parties and the court from having to deal with yet another set of proceedings in relation to a straight-forward matter:

(1)  This Court decided to release the Company from the Undertaking.

(2)  As the adjournment of the petition had been granted on the basis that the Company would abide by the Undertaking, which proved to be incorrect, the hearing of the petition and Xu’s summons for substitution were directed to be heard at an earlier hearing.

(3)  Leave was given to the Company to file a further affirmation in opposition to Xu’s Debt so that there would be no further excuse for the Company to engineer another adjournment on the basis that it has not filed all the evidence it wished to file.

47.  Although Mr Chen urged this Court to require the Company to pay the undisputed amount (HK$4 million) to Xu and the disputed amount (HK$5.6 million[21]) into court, having regard to the conduct of the Company in repeatedly making false allegations, both for the purposes of opposing Xu’s Debt and delaying these proceedings, I did not consider that it was appropriate to do so. It was up to the Company to decide whether to pay Xu’s Debt before the next hearing. If it decided to continue to dispute Xu’s Debt but failed in its opposition, the court would make a winding up order against the Company. This was made clear to the Company so that there could be no more tactical manoeuvrers.

48.  The costs of the Stay Summons were reserved. It seems to me that there were valid grounds to think that it should be the directors, instead of the Company, who should bear the costs of the Stay Summons, as it was the directors[22] who came up with the false allegations in support of the application.

Hearing on 29 July 2024

49.  In Ma 6^th [23], he said that he joined the Company in 2016 as Finance Manager, and was responsible for handling “bondholder matter” including maintenance of the Company’s register of bondholders and safe-keeping of “bond-related documents such as bond subscription agreements, copy bond certificates, bank statements and other relevant documentation.”[24] There was a bona fide dispute on substantial ground as to whether the Company was liable to pay HK$5.6 million of the 2021 Bond[25] in reliance on the 3^rd Allegations[26] and the following 3 grounds belatedly raised in Ma 6^th:

(1)  “Alleged Waiver Agreement”: On or before November 2013, Xu and Chan Yuk (on behalf of the Company) allegedly entered into a “Waiver Agreement”, the effect of which was that[27]:

(a)  the Company would issue the 2013 Bond to Xu;

(b)  Xu would sign a “Deed of Waiver” waiving payment of HK$5 million principal;

(c)  upon receiving HK$10 million, the Company would transfer HK$6.4 million to a recipient designated by Xu;

(e)  of the HK$6.4 million transferred away, HK$5 million constituted the principal that had been waived by Xu under the Deed of Waiver, and HK$1.4 million constituted immediate payment of interest on the remaining HK$5 million principal; and

(f)  the Company would keep HK$3.6 million for its own use and repay the HK$5 million principal after 8 years.

(2)  “Alleged Unlawful Purposes”: The Company believes that the whole purpose of the arrangements behind the Alleged Waiver Agreement was for Xu to obtain a bond with a face value of HK$10 million which he could present to Hong Kong Immigration Department (“Immigration”) in compliance with the requirements of Capital Investment Entrant Scheme (“Scheme”) while only having to pay HK$5 million (or HK$3.6 million) in reality. Xu “likely transacted with [the Company] and obtained the 2021 Bond in furtherance of unlawful purposes, i.e. violating immigration law and/or regulations”[28].

(3)  “Alleged Extension Agreement”: In February 2022, Xu (acting by Mr Ricky Chan Yuk Hang, a solicitor from TC Wong & Co) and the Company[29] allegedly entered into an “Extension Agreement” the effect of which was that[30]:

(a)  the parties agreed to extend the term of the 2013 Bond by 2 years;

(b)  the Company would issue the 2021 Bond to Xu upon surrendering the 2013 Bond. The 2021 Bond would be subject to the Waiver Agreement;

(c)  the Company would redeem the 2021 Bond for HK$5 million payable in 3 tranches in 2022, 2023 and 2024; and

(d)  in exchange for the Company making an advance payment of HK$1.75 million (“Advance Payment”), the Company would be able to redeem the 2021 Bond by paying HK$1.75 million and HK$1.5 million in 2023 and 2024 respectively. However, the Advance Payment was not paid allegedly due to problems with Xu’s bank account and inability to confirm Xu’s identity or authorisation.

50.  In my judgment, none of the allegations raised in Ma 6^th constitutes a bona fide dispute on substantial grounds in respect of Xu’s Debt.

51.  As regards the Alleged Waiver Agreement bears all the hallmarks of a recent fabrication and is incredible:

(1)  The Alleged Waiver Agreement is inconsistent with and contradicted by the express terms of all the contemporaneous documents signed and/or issued by the Company itself, namely (a) the bond subscription agreement dated 20 November 2013, (b) the 2013 Bond; and (c) the certificate signed by Chan Yuk (and another director) which bears the Company’s seal.

(2)  The Alleged Waiver Agreement is also contradictory to the Voluntary Announcement made by the Company on 17 June 2014 (issued by order of the board with Chan Yuk as chairman and chief executive officer) (“Announcement”) where it stated as follows:

“…during the period from November 2013 to March 2014, the Company entered into separate subscription agreement with thirteen (13) independent private investors (the “Subscribers”) pursuant to which the Subscribers have agreed to subscribe and the Company has agreed to issue the Corporate Bonds in the aggregate principal amount of HK$130,000,000 at par value with no discount, being coupon rates of not more than 6% per annum and maturity dates of eight (8) years from the date of issue (the “Subscriptions”).” (underlined added)

(3)  In the Announcement, Xu was listed as a Subscriber, with date of issue on 22 November 2013, coupon rate at 3% and principal amount of the Corporate Bond at HK$10 million. This was a clear confirmation that the Company had issued the 2013 Bond at the principal amount of HK$10 million to Xu.

(4)  Chan Yuk, the person allegedly made the Agreement with Xu, has not made any affirmation and no explanation has been provided as to why she has not done so. This is despite the fact that she was and still is the chairman, chief executive officer and executive director of the Company. This is significant. Had the Alleged Waiver Agreement been made on or before November 2013, the board, in particular Chan Yuk, would have made the Announcement on 17 June 2014 knowing its contents to be false.

(5)  The Alleged Waiver Agreement is also inconsistent with WL’s letter of 15 December 2023 (see §26(9) above) whereby the Company confirmed that it had issued the 2013 Bond, executed the SA and issued the 2021 Bond to Xu, without any qualification or suggestion that the parties had entered into any alleged collateral agreements to either the 2013 Bond or 2021 Bond.

(6)  Had the Alleged Waiver Agreement existed, it would have raised by the Company much earlier in correspondence or at the very least in Ma’s affirmations. Again, no explanation has been proffered by Ma (the person claims to be responsible for handling “bondholder matter”) as to why he did not mention the existence of such Agreement, whether in response to Xu’s demands or in his affirmations.

(7)  There is simply no evidence to show that Xu has ever received the alleged payment of HK$6.4 million. All that the Company has adduced is payment instructions addressed to “SBI E2-Capital Financial Services Ltd” (not the Company) to pay Imagindustries Ltd, a company which has no relationship whatsoever with Xu[31].

(8)  The alleged “Deed of Waiver” produced by the Company was on its face dated “2021” and had not been signed the Company. It could not have taken effect as alleged. More importantly, had the parties entered into the Deed of Waiver and intended it to remain binding, the Company would have insisted on referring to such Deed of Waiver or the Alleged Waiver Agreement when they entered into the SA and executed the 2021 Bond (the latter as a deed poll). No reference was made in either the SA or the 2021 Bond and no explanation has been provided by the Company as to why there was no such reference.

52.  The Alleged Extension Agreement is equally incredulous and does not give rise to a bona fide dispute for the following reasons:

(1)  It is premised on the existence of the Alleged Waiver Agreement, which I find to be a recent fabrication.

(2)  The Alleged Extension Agreement is not contained in or supported by any contemporaneous document. It is inconsistent with and contradicted by the express terms of all the contemporaneous documents signed and/or issued by the Company itself, namely (a) the SA; (b) the 2021 Bond which was executed as a deed poll; (c) the 2021 Certificate; and (d) the 2022 Letter.

(3)  The person who allegedly acted on behalf of the Company in making the Alleged Extension Agreement has never been identified. Nor is there any explanation as to why the person who alleged made the Alleged Extension Agreement has not come forth to make any affirmation.

(4)  The Advance Payment alleged to be in exchange for the extension, has never been paid to Xu. Nor has the Company ever attempted to tender payment of HK$1.75 million and HK$1.5 million in 2023 and 2024.

53.  As regards the Alleged Unlawful Purpose, in light of the finding that the Alleged Waiver Agreement and Alleged Extension Agreement are pure fabrications, the issue does not arise.

54.  Mr Adrian Lai (appearing with Mr Han Sheng Lim), counsel for the Company, submits that Hong Kong now follows the illegality test set out in Patel v Mirza[32] (Re Monat Investment Ltd [2023] 2 HKLRD 1311, §52). This entails the “range of factors” approach which requires the Court to consider (1) the underlying purpose of the prohibition which has been transgressed, (2) any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and (3) the possibility of overkill unless the law is applied with a due sense of proportionality.[33] All the 3 limbs are highly fact sensitive, in particular the 3^rd which requires consideration of a range of factors[34]. I do not see how the Company can rely on the alleged illegality as a ground in opposition to Xu’s Debt as the allegation involves the court finding that the Company and Chan Yuk knowingly prepared and provided false documents in particular, the 2013 Bond, the SA, the 2021 Bond and the 2022 Letter, to Xu for the purpose of misleading the Immigration, and yet the Company would be able to benefit from its own wrong by being released from any liability to redeem the 2021 Bond.

55.  For the above reasons, I hold that the Company has not discharged the burden of showing that there is a bona fide dispute on substantial grounds in respect of Xu’s Debt.

56.  After the hearing, by letters dated 1 and 6 August, WL stated that the Company would be willing to redeem 2021 Bond in the sum of HK$10.6 million within 14 days should the court find that there is no bona fide dispute on substantial grounds in respect of Xu’s Debt. This confirms that Xu’s Debt remains unpaid.

57.  I order that the petition be listed for hearing on 19 August 2024 for pronouncing a winding up order against the Company. If the Company does have the means to pay Xu’s Debt as it claims and provide evidence of payment by 15 August 2024, the hearing will be vacated.

58.  As for costs, I consider that the costs of and occasioned by (1) the Stay Summons and (2) the opposition to Xu’s Debt from 17 June 2024 including the costs of the hearing on 29 July 2024, should be paid by the directors to Lyu, Xu and the Official Receiver, on an indemnity basis, to be assessed by way of gross sum assessment and be paid forthwith. As the directors are not parties to the proceedings, I make the following directions:

(1)  the directors are joined as parties for costs purpose only;

(2)  leave to the directors to file and serve affirmation to show cause as to why they should not bear the costs of the Stay Summons within 14 days of this Judgment;

(3)  leave to Lyu and Xu to file and serve any affirmation in reply, if any, within 7 days thereafter; and

(4)  time to run during summer vacation.

59.  The costs of the petition, including the costs of the remaining substitution summonses be reserved and be dealt with at the adjourned hearing of the petition on 19 August 2024 or 19 September 2024.