RE KING’S GLORY EDUCATIONAL CENTRE LTD

HCCW 456/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 456 OF 2016

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HCMP 3573/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3573 OF 2016

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HCMP 95/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 95 OF 2017

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J U D G M E N T

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1.  There are 3 actions before the court. They all arose out of a statutory demand (SD) served by Tsang Woon Ming (Tsang) on King’s Glory Education Centre Ltd (Company) dated 12 December 2016.

2.  The Company is the main operating entity of a group of companies which provide education services called King’s Glory Education (Group).  The protagonists in these matters are the 4 shareholders of the Group, namely, Tsang (37.5%), Lai Ka Lim (12.5%), Lin Wei Hsien (25%) and Ho Man Lung (25%).  The Shareholders hold their interest in the Group via a corporate vehicle, Nobility School Ltd (Nobility)[1].

3.  By the SD, Tsang sought to recover a director’s loan (Loan) of HK$3 million (M) from the Company, which was made up of 4 sums: HK$1.5M paid on 2 July 2015 (Sum A); HK$800,000 paid on 1 September 2015 (Sum B); HK$400,000 paid on 19 April 2016 (Sum C); and HK$300,000 paid on 4 May 2016 (Sum D). 

4.  The Company says that Sum A was in fact Tsang’s capital contribution which was put up by the 4 Shareholders after they bought the Group in March 2015.  In respect of Sum B, it was part of the injection of funds required from the Shareholders to the Group to maintain its operation. Half of that sum (HK$400,000) was Tsang’s money, and he was reimbursed by Ho Man Lung (Ho) in respect of the other half because it was part of the latter’s injection to the Group.

5.  There is no issue that Sums C and D, together with half of Sum B, were loans from Tsang.  However, the operation of the Group was unprofitable and instead of continuing to fund its operation, the Shareholders opted to sell their interests.  On 4 July 2016, they reached an agreement with Lin Wei Hsien (Lin) for him to purchase the interests of the other 3 Shareholders at HK$8M via a corporate vehicle, Doers Youth (Hong Kong) Group Ltd (Doers).  A sale and purchase agreement in Chinese (SPA) was signed by, inter alia, all the Shareholders.  The Company says that the loans given by the Shareholders to the Group prior to 4 July 2016 were all subsumed by or given up in exchange for their share of the purchase price. 

6.  By a Notice of Motion in HCMP 3573/2016 filed on 23 December 2016 (NM1), the Company sought an injunction against Tsang to restrain him from presenting a winding up petition based on the SD.  However, apparently Tsang then stole a march on the Company by petitioning its winding up in HCCW 456/2016 filed on 28 December 2016 (Petition).  The Petition does not rely on the deeming provision under s.178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (Ordinance) because less than 3 weeks had expired after the service of the SD on the Company.  Instead, it is alleged that the Company is insolvent and unable to pay its debt pursuant to s.177(1)(d) of the Ordinance.

7.  The Petition rendered NM1 academic when it came before the court for hearing on 30 December 2016.  There was an attempt by the Company to amend NM1, which was not resolved at the hearing due to concern whether the amendment was permissible.  However, the amendment was subsequently abandoned.  At the hearing, NM1 was adjourned for argument, and Tsang gave an undertaking not to prosecute the Petition until the adjourned hearing.

8.  The Company took out a Summons in HCCW 456/2016 filed on 13 January 2017 (Summons) to strike out the Petition on the unusual frivolous, vexatious and abuse of process grounds.  On the same day, the Company issued another Notice of Motion in HCMP 95/2017 (NM2), seeking a mandatory injunction against Tsang to withdraw the Petition on the ground of abuse of process.  Alternatively, an injunction to restrain Tsang from prosecuting the Petition.  I shall need to come back to such proliferation of proceedings when I come to the question of costs. 

Issue

9.  For this hearing, and quite sensibly, the arguments had proceeded on whether the Petition should be struck out as an abuse of process.  It is common ground that the issue in this case is whether there is a bona fide dispute based on substantial grounds over the Company’s liability to repay the Loan.  To resolve that issue, the court is required to examine the evidence in relation to Sum A, the reimbursement of half of Sum B and the SPA. 

Law

10.  The applicable legal principles are reasonably well-settled and not in dispute, see Re GW Electronics Co Ltd, HCCW 81/2016, 30 December 2016, §4(1) to (6). 

11.  It is common ground that it is not incumbent on the Company to prove its solvency at the strike out stage.  The reason is that if the Company has a bona fide dispute it would destroy Tsang’s locus standi to present the Petition as a creditor, see Re Hyundai Engineering & Construction Co Ltd (No 2) [2002] 2 HKLRD 354. 

12.  Mr Cheung, appeared for Tsang, emphasised that the Petition should only be struck out on a plain and obvious case, see Re Neo Telemedia Ltd, CACV 132/2015, 19 October 2015, §3.1 and 3.2.  I agree with Mr Wong SC, appeared with Mr Lo for the Company, that the test is whether a plain and obvious case has been made out on the Company’s bona fide dispute. 

Quality of the evidence

13.  Before I turn to consider the constituents of the Loan in turn, I should say that the evidence marshalled by the Company in dispute of the Loan is convincing and supported by contemporaneous evidence. On the other hand, Tsang has provided little or no evidence in answer to those of the Company.  Instead, he relies heavily on the evidence of a financial consultant (Cheung) who provided part-time service to the Company (and other entities in the Group) in the preparation of its financial documents and accounts in 2016 (until July).  As pointed out by Mr Wong, there is no evidence to suggest that Cheung was privy to or had knowledge over some of the important dealings between the Shareholders.  Her evidence is therefore of limited assistance. 

Sum A

14.  There is a helpful table attached to the Company’s Skeleton Arguments as Annex I which set out all the payments by the Shareholders to the Group.  It is attached to this Decision as Annex I (Annex I). 

15.  The issue here is whether Sum A was a capital contribution or a director’s loan.  It is uncontroversial that when they acquired the Group the Shareholders were required to put up an initial capital of HK$20M, HK$5M each to reflect the original intention of 25% shareholding for each of them.  From February to May 2015, by way of 7 payments, Tsang had paid a total of HK$4.95M as his initial capital.  These payments are agreed. Therefore, apart from the wrinkle that the contribution was short by HK$50,000, Tsang had fulfilled his obligation by May 2015.

16.  However, Lai Ka Lim (Lai) had difficulty raising the capital, and it was agreed between him and Tsang at the end of June 2015 that Tsang would take up half of the shares to be subscribed by Lai. Consequently, Tsang became a 37.5% shareholder and had to contribute an additional HK$2.5M to the initial capital. 

17.  The Company says that Sum A was part of that HK$2.5M, which was paid in 2 tranches: HK$1.5M (Sum A) on 2 July 2015 and HK$1M on 13 July 2015. 

18.  On the other hand, Cheung’s evidence is that, after having paid the HK$4.95M by May 2015, Tsang gave a loan to Company on 2 July 2015 (Sum A) and then made another 3 payments in the total sum of HK$2.6M as initial capital: HK$1M on 13 July 2015 (no dispute that this was part of Tsang’s initial capital, see Annex I); HK$600,000 on 27 July 2015; and HK$1M on 31 July 2015.  Putting these payments in context, it appears to be Tsang’s case is that the HK$2.6M was for taking up the additional 12.5% shares. 

19.  As supporting document for the alleged HK$1.5M loan received on 2 July 2015 from Tsang, Cheung produced a Loan Receipt signed by her as Financial Consultant which was dated 4 July 2015. 

20.  In addition, there are two 1-page Balance Sheet of the Company as at 31 March and 30 June 2016 exhibited by Tsang.  In each of the Balance Sheets, there is a reference to “Amount due to directors” at respectively HK$2,988,288 and HK$3,958,288.  There is no explanation as to how the figures came about. 

21.  It must be borne in mind that the court is not required to try the factual issue on affidavits.  The purpose of the present exercise is to determine if a plain and obvious case has been made out that there is a bona fide dispute on substantial grounds over the Loan. 

22.  There are a number of problems with Tsang’s case.  Firstly, the share allotment to the Shareholders took place on 14 July 2015.  On the next day, Lai transferred half of his shares to Tsang.  There is no explanation why Tsang should be given half of Lai’s shares before he made his additional contribution.  From Annex I, it can be seen that the contribution of all the other Shareholders were in place well before the allotment.  In the circumstances, the Company’s contention on the nature of Sum A is more consistent with common sense and the general picture. 

23.  Secondly, I see no reason why Tsang would have paid HK$50,000 or HK$100,000 more for the additional shares (depending on whether he intended to make good the shortfall of HK$50,000 for his original 25% shares, see paras 15 and 18 above). 

24.  Thirdly, and most importantly, there is clear evidence from Ho, supported by documents, that the payment of HK$600,000 made on 27 July 2015 was his loan to the Group.  The contrary evidence from Cheung was demonstrated to be wrong by Mr Wong with an examination of the documents [B6/1175 and B8/1676].  Further, there is a WeChat record and an email both from Tsang [B2/257 and 272] which evidence his acknowledgement that the HK$600,000 came from Ho. 

25.  In light of the above, the veracity of the Loan Receipt is questionable.  As regards the Balance Sheets, apart from the lack of explanation over the sums said to be “Amount due to directors”, the increase in the amount (assuming to be Tsang’s loan) from March to June 2016 is not consistent with Annex I. 

Sum B

26.  The Company’s case that half of Sum B was repaid to Tsang by Ho as the latter’s loan to the Company is well supported by the documentary evidence [B6/1176A and 1177].  There is no answer from Tsang to such evidence, and it appears that these were not matters within the knowledge of Cheung.

The SPA

27.  In respect of half of Sum B and Sums C and D, the Company relies on the SPA pursuant to which the Shareholders’ loans are to be subsumed by their receipt of a share in the purchase price.  It should be pointed out that it was anticipated in the SPA that a formal agreement would be signed by the parties.  That was not carried out due to the disagreement of Tsang over the terms of the formal agreement.  However, there is evidence that the SPA has at least been partially performed by Doer. 

28.  There is a wealth of evidence provided by the Company, and analysed before the court by Mr Wong, on why the total amount of shareholder’s loan provided by Tsang was HK$2.58M and not HK$3.58M as he contends, ie, the sums of HK$600,000 and half of Sum B (HK$400,000) belonged to Ho (see above).  This sum of HK$2.58M was stated by Tsang himself as his shareholder’s loan in a WeChat message generated in the course of the sale of the Group [B2/301]. 

29.  It is abundantly clear from the evidence that the purchase price of HK$8M, after deducting a sum of HK$3.02M payable to a third party, would be shared by the Shareholders pro rata to the amount of their shareholder’s loan.  This is clear from Tsang’s said WeChat message, which set out the amount payable to each of the Shareholders.  Those amounts were later stated in the SPA. 

30.  In the premises, the case of the Company is a strong one.  The only real argument advanced by Mr Cheung is that the SPA is not enforceable by the Company but only by Doer as the purchaser.     

31.  I am inclined to agree with Mr Wong that the point can be met by the principle that part payment of a debt by a third party (Doer), if accepted by the creditor (Tsang) in full settlement of the debtors’ (Group) liability, is a good defence to a claim by the creditor for the balance, see Chitty on Contracts, 32 edn, Vol 1, 4-128.  Further, the consideration for the accord and satisfaction may be executory, see British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616, at 643-644.

32.  It is unnecessary to deal with the other arguments made by Mr Wong to answer that of Mr Cheung, namely, estoppel by convention and equitable assignment of Tsang’s shareholder’s loan to Doer.  I do not believe that those arguments, which were only advanced in the reply submission of Mr Wong, were fully developed.  Nor is there any supporting authority provided to the court. 

Conclusions

33.  For the above reasons, the Petition is struck out.  NM1 is academic and it is dismissed.  I see no valid reason why it was necessary to bring NM2 in addition to the Summons, and it is also dismissed. 

Costs

34.  The Company asks for the costs of the Summons on indemnity basis by reason of the abuse of process, see Re Hyundai Engineering & Construction Co Ltd [2002] 2 HKLRD 71, at §§6-8. Although I agree with Mr Wong that Tsang is well aware of the Company’s bona fide dispute over the Loan, I believe that the court has to have regard to the overall picture of these 3 proceedings. 

35.  In my view, the Company should have put the proceedings under NM1 on hold once it knew about the Petition, which was served on it on 28 December 2016.  Instead of doing so, the Company continued to incurred costs in those proceedings, eg, 5 affirmations had been filed by the parties from 29 December 2016 to 14 July 2017.  This is wastage of resources, which the Civil Justice Reform (CJR) was intended to curb.  In order to give effect to the CJR, the court is duty bound to look at any such wastage with a critical eye, and to penalise the same with costs. 

36.  Much the same may be said about NM2.  Altogether 4 affirmations had been filed in those proceedings.  It must be added that the multiplicity of proceedings had resulted in ballooning of the hearing bundles (consisting of 9 box files).  The fact that the affirmations in the different proceedings cross-referred to one another had rendered it very difficult for the court to prepare this hearing.  Again, this means that resources are simply wasted.

37.  It is fortunate for the Company that Tsang did not ask for a costs order in his favour in respect of the wastages.

38.  In the premises, looking the matters in the round, in particular, the fact that Tsang had been put to unnecessary legal expenses by reason of the conduct of the Company, I make an order that the Company is to have the costs of the Summons with a certificate for 2 counsel, to be taxed on party and party basis if not agreed.  I also make an order for costs in favour of the Official Receiver in the sum of HK$4,100 to be deducted from Tsang’s deposit. 

39.  The Company is to have the costs of NM1 incurred up to and including the 28 December 2016.  I make no order as to the costs of the hearing on 30 December 2016.  That hearing could have been avoided given the fact that NM1 was rendered academic.  I also make no order as to the costs of NM2.

40.  Last but not least, I am grateful to counsel for their assistance.