RE LIN QINGXIONG

HCB 6306/2019

[2020] HKCFI 884

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6306 OF 2019

_________________

_________________

________________

J U D G M E N T

________________

Introduction

1.  There is before this court a bankruptcy petition dated 16 October 2019 (“Petition”) presented by Guotai Junan Securities (Hong Kong) Limited (“Petitioner”) against Mr Lin Qing Xiong (“Debtor”).  The Petition is based on the Debtor’s non‑compliance with a statutory demand dated 15 August 2018 (“statutory demand”) for the sum of HK$223,488,571.93 (“Debt”)[1]. 

2.  The Debt arose out of 2 Deeds of Guarantee dated 7 April 2014 (“1^st Guarantee”) and 12 May 2015 (“2^nd Guarantee”)signed by the Debtor (collectively “Guarantees”) as guarantor in favour of the Petitioner in respect of the indebtedness of 2 securities account holders of the Petitioner viz Merit Lead Investments Limited (“Merit Lead”), a BVI company wholly owned by the Debtor and Mr Qiu Zhiqiang (“Qiu”), a business partner of the Debtor.

3.  The execution of the Guarantees by the Debtor and the failure of Merit Lead and Qiu to fully repay their indebtedness to the Petitioner is not in dispute.  At the hearing, Mr Tse confirmed to this court there was no dispute as to the amount of the Debt as such. 

4.  The sole issue for this court is whether the Debtor had raised a bona fide dispute to the Debt on substantial grounds.

Background 

5.  The Petitioner is a Chinese securities company listed on the main board of the Hong Kong Stock Exchange and provides diversified financial services including inter alia securities brokerage services.

6.  The Debtor was one of the founders of Wang Tai Holdings Limited (“Wang Tai”), a company listed in Hong Kong in 2014.  He was also Wang Tai’s chairman[2] and majority shareholder[3] at all material times. 

7.  On or about 7 April 2014, Merit Lead opened a securities margin account with the Petitioner (“Merit Lead Margin Account”) and entered into various agreements with the Petitioner including inter alia a Client Agreement for Securities Trading (《證券交易客戶協議書》) and an Agreement for Securities Margin Trading (《保證金賬戶客戶協議書》) pursuant to which the Petitioner provided margin facilities to Merit Lead for investing in securities.

8.  At the same time, the Debtor executed the 1^st Guarantee in respect of Merit Lead’s indebtedness to the Petitioner.  The 1^st Guarantee provides, inter alia, that:

(1)  The Guarantor will pay GTJAS on demand and hereby guarantees the repayment to GTJAS on demand of all sums of money which now are or shall hereafter become due to GTJAS from the Principal in respect of any transaction in the account of the client at GTJAS with all interest, costs, commission and other charges and expenses which GTJAS may charge against the Principal and all costs, charges and expenses which GTJAS may incur in enforcing or obtaining payment of the sums of money due to GTJAS from the Principal.  It shall not be necessary for GTJAS to make any demand on or take any action against the Principal before making any demand on or recovering payment from me/us (Clause 2).

(2)  This guarantee shall continue in force and be a continuing guarantee and shall be applicable to the whole outstanding balance that may become due to GTJAS from the Principal (Clause 3).

(3)  So long as there are any monies outstanding under the Principal’s Account with GTJAS, this guarantee shall be irrevocable and binding as a continuing security on me/us, my/our assigns, executors and administrators (Clause 10).

(4)  It is understood and agreed that none of the terms or provisions of this guarantee may be waived, altered, modified or amended except in writing duly signed for and on GTJAS’s behalf (Clause 24).

9.  Subsequently, on or around 7 May 2015, the Petitioner as lender issued a facility letter (保證金貸款確認書) (“Merit Lead Facility Letter”) for the advancement of HK$145,000,000 to Merit Lead which was countersigned by Merit Lead as borrower and by the Debtor, Qiu and another as guarantors on 12 May 2015.  Under the terms of the Merit Lead Facility Letter, Merit Lead should pledge not less than 272,000,000 Wang Tai shares into the Merit Lead Margin Account as security.  In about mid-2015, the Wang Tai shares were pledged with the Petitioner[4].

10.  On or about 16 April 2014, Qiu opened a securities margin account with the Petitioner (“Qiu Margin Account”) and entered into various agreements with the Petitioner including inter alia a Client Agreement for Securities Trading (《證券交易客戶協議書》) and an Agreement for Securities Margin Trading (《保證金賬戶客戶協議書》) pursuant to which the Petitioner provided margin facilities to Qiu for investing in securities.

11.  Subsequently, on or around 7 May 2015, the Petitioner as lender issued a facility letter (保證金貸款確認書) (“Qiu Facility Letter”) for the advancement of HK$63,000,000 to Qiu which was countersigned by Qiu as borrower and by the Debtor, Merit Lead and another as guarantors on 12 May 2015.  Under the terms of the Qiu Facility Letter, Qiu should also pledge his Wang Tai shares into the Qiu Margin Account as security.

12.  At the same time, the Debtor executed the 2^nd Guarantee as guarantor of Qiu’s indebtedness to the Petitioner.  The 2^nd Guarantee contained the same terms as stated in paragraph 8 above.

13.  By a letter dated 9 March 2018, the Petitioner demanded the Debtor, as guarantor, for payment of HK$149,968,546.64, being Merit Lead’s indebtedness under the Merit Lead Margin Account as at that day. 

14.  On 15 August 2018, the Petitioner issued the statutory demand to the Debtor demanding payment of HK$223,488,571.93, being the total indebtedness of Merit Lead and Qiu.

15.  By a letter dated 27 August 2018, the Petitioner demanded the Debtor, as guarantor, for payment of HK$60,819,879.38, being Qiu’s indebtedness under the Qiu Margin Account as at that day.

16.  On 16 October 2019, the Petitioner presented the Petition against the Debtor. 

Deliberation

17.  It is a well‑established legal principle that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Re Tam Mei Kam unrep, HCB 3777 of 2011, 25 April 2012, Barma J (as he then was); Re Yuen Mun Wa (debtor) [2012] 5 HKLRD 108; Re Chan Hon Kwong unrep, HCB 6548 of 2016, 27 April 2017. 

18.  As stated earlier, the sole issue which falls for determination is whether the Debtor has raised a bona fide dispute to the Debt on substantial grounds.

19.  According to Mr Tse’s skeleton submissions at para 6, the dispute is “whether the Petitioner is estopped[5] from enforcing its rights against the Debtor in view of what happened in 2018”.  In fact, as explained below, on the basis of the Debtor’s evidence, the real dispute is whether there was actual release by the Petitioner of the Debtor’s liabilities under the Guarantees upon Mr Li Dongfan (“Mr Li”) agreeing to take up all of his liabilities to the Petitioner and becoming in effect the guarantor of Merit Lead and Qiu in around April 2018 (“Dispute”). 

20.  In summary, according to the Debtor, what happened was that in early 2018, Mr Li offered to buy all his shares in Wang Tai which were then pledged with the Petitioner.  On or around 18 March 2018, Mr Li and the Debtor orally agreed that, subject to the Petitioner’s approval, and in consideration of Mr Li taking up all the Debtor’s financial responsibilities and debts with the Petitioner, he would transfer all his Wang Tai shares to Mr Li (“Proposed Transaction”).

21.  What happened afterwards is crucial to the resolution of the Dispute.  Instead of summarising it, this court shall quote from the Debtor’s affirmation, the relevant part of which consists of only a few paragraphs as follows.

“19. As the agreement was subject to the approval by the Petitioner, I informed the Petitioner about the Transaction and set up meetings with a Ms. Chung (鍾思華) (‘Chung’)[6] and a Mr. Chu (‘Chu’)[7], both of whom are staff of the Petitioner …

20. On or around 22 March 2018, a meeting was held between myself, Mr. Li, Chung and Chu at the offices of the Petitioner in Hong Kong. The Transaction was explained to the Petitioner through Chung and Chu. At the meeting, Chung and Chu expressed that they do not have the necessary authority to approve the Transaction. However, they would relay the message to their superiors and would give us a reply thereafter.

21. In or around late-March or early-April, a second meeting was held between myself, Mr. Li, Chung and Chu at the offices of the Petitioner in Hong Kong. At this meeting, I was told by Chung and Chu that the Petitioner would give approval to the Transaction.

22. With the approval given by the Petitioner, I was given to understand that Mr. Li would step in my shoes and be responsible for all my debts and liabilities towards the Petitioner. I would also be released of all the guarantees that I have executed in favour of the Petitioner. That was the whole purpose of the Proposed Transaction.

23. In reliance of the approval given by the Petitioner:-

a. I have acted in accordance with the instructions given by Mr. Li on 25 March 2018 for the purposes of reforming the Board of Directors of Wang Tai …

b. I have caused my shares to be transferred to Mr. Li; and

c. I resigned from the Chairmanship of Wang Tai;

24. Mr. Li became the Chairman of Wang Tai and his appointment was officially announced on or around 17 April 2018 …

25. Thereafter, I consider myself to be released from performing any of the guarantees executed in favour of the Petitioner.

26. Subsequent to the Transaction, I understand that Mr. Li has executed certain documents with the Petitioner for the purposes of the Transaction. There is now produced and shown to me marked ‘LQ-12’ a true copy of the relevant ‘wechat’ conversations between myself and Mr. Li.” (emphasis added)[8]

22.  On such evidence, it seems to this court reasonably clear that the Debtor’s case is one of actual release by the Petitioner of his liabilities under the Guarantees upon Mr Li agreeing to take up all the Debtor’s liabilities to the Petitioner.  Upon enquiry from the bench, Mr Tse confirms that his “definitive” case is that there was an actual release of the Debtor by the Petitioner, instead of a mere promise to do so.

23.  If this court considers the evidence is sufficiently precise and believable in support of the Debtor’s case, then of course the Petition fails.  But in this court’s view, the evidence is neither sufficiently precise nor believable.  The reasons are as follows.

24.  First, the Debtor’s case is based on nothing but his own self-serving bare assertion.  There is no corroborative evidence from Mr Li. If Mr Li had happily agreed to take up all the Debtor’s financial responsibilities and debts with the Petitioner, he should be willing to make an affirmation in support of the Debtor’s case.

25.  Second, as accepted by Mr Tse in court, there is also no direct documentary evidence to support his assertion that the Petitioner has released the Debtor’s liabilities under the Guarantees or Mr Li had become the guarantor of Merit Lead and Qiu.  Common sense would dictate that for indebtedness to the tune of over HK$200 million, the Debtor would insist that there should be a proper written release executed by the Petitioner while the Petitioner would insist that Mr Li would execute fresh Deeds of Guarantee to replace the Guarantees signed by the Debtor. But none was adduced in evidence by the Debtor.  Again, if Mr Li had happily agreed to take up all the Debtor’s financial responsibilities and debts with the Petitioner, he should at least be willing to provide the so-called “certain documents with the Petitioner for the purposes of the Transaction” he allegedly executed, as alluded to in paragraph 26 of the Debtor’s affirmation.  The exhibit “LQ-12” referred to in paragraph 26 in fact had no relevance to the Proposed Transaction as alleged.

26.  Mr Tse told this court he relied on certain WeChat messages which can prove something had been agreed between the Petitioner and the Debtor in April 2018.  This court has read those messages and find them not even remotely supportive of the Debtor’s case of release by the Petitioner.

27.  Third, according to the account statements of the Merit Lead Margin Account and Qiu Margin Account, as at 18 March 2018, the outstanding indebtedness of Merit Lead and Qiu were HK$151,416,543.29[9] and HK$58,266,436.22[10] respectively, making a total of HK$209,682,979.51.  The market price of the Wang Tai shares as at 18 March 2018, however, was merely HK$0.084.  According to the Annual Reports of Wang Tai for the years ended 31 December 2017 and 31 December 2018, the Debtor’s direct and indirect shareholding was 290,440,000 such that the total market value of the Debtor’s Wang Tai shares was only HK$24,396,960.  As such, it is quite improbable that Mr Li would be willing to take up all of the Debtor’s liabilities in return for shares which were worth only around HK$24 million.

28.  Fourth, the narrative at paragraphs 20 to 21 of the Debtor’s affirmation about the first and second meetings with Choong and Zhu is simply too imprecise to give any meaningful support to the Defendant’s case.  For instance, there was no description of Mr Li’s financial background, no brief introduction of Mr Li’s net worth to Choong and Zhu and no explanation as to Mr Li’s capability of taking up the Debtor’s indebtedness etc such that the Petitioner could even begin to consider whether to release the Debtor and to accept Mr Li as a replacement guarantor.  Bearing in mind the Debtor’s liabilities of over HK$209 million, it is rather improbable that Choong and Zhu would not seek more information about Mr Li at the first meeting before taking the matter to their superiors as alleged.  It is even more improbable that, without sufficient information about this Mr Li, the Petitioner would approve the Proposed Transaction within weeks from the first meeting.

29.  Fifth, the available documentary evidence before this court tends to undermine, rather than support, the Debtor’s case.

(1)  According to para 3B of the Minutes of the 5^th Meeting of the Petitioner’s Credit Committee dated 7 May 2018 (“Minutes”), the Petitioner had only approved an intended sale of Wang Tai shares to Mr Li for HK$60 million (“Intended Sale”).  As at 2 May 2018, the total number of Wang Tai Shares pledged to the Petitioner by Merit Lead and Qiu was 406,840,000[11].  It did not refer to Mr Li taking up the Debtor’s liabilities or substituting the Debtor as the new guarantor.

(2)  According to an undated Letter of Intent signed by Mr Li and addressed to the Petitioner, Merit Lead and Qiu agreed to sell to Mr Li a total of 400,000,000 Wang Tai shares pledged to the Petitioner at the price of HK$0.138 to HK$0.50 in order to partially repay the indebtedness of the Merit Lead and Qiu Margin Accounts.  The Letter of Intent also recorded that the first part of the sale, comprising a sale of 36,000,000 Wang Tai shares from Merit Lead to Mr Li for approximately HK$5 million had been completed by 16 November 2018[12].  Although the Letter of Intent was undated, by reason of its reference to the date of 16 November 2018, one can reasonably deduce that it must be dated after 16 November 2018.  Importantly, there is nothing in the Letter of Intent which suggested that Mr Li has already become the guarantor of Merit Lead and Qiu.  In the Letter, Mr Li only described himself as an independent third party.

30.  Sixth, the Debtor had failed to reply to the statutory demand dated 15 August 2018 to him as guarantor of both Merit Lead and Qiu or to the Petitioner’s demand letter dated 27 August 2018 to him concerning Qiu’s indebtedness.  If the Debtor truly believed that by mid-April 2018, he had already been released from all his liabilities under the Guarantees, the first thing that he would do upon receiving the statutory demand and the demand letter must be to point that out to the Petitioner in reply.  His failure to do so immediately is an indication that his so-called defence is a late fabrication.

31.  Lastly, in addition to the Debtor’s evidence being insufficiently precise and unbelievable, Clause 24 of the Guarantees also requires any waiver of their terms to be in writing duly signed for and on behalf of the Petitioner.  None has been produced by the Debtor. 

Disposition and costs order nisi

32.  To conclude, this court is of the firm view that the so-called bona fide dispute to the Debt on substantial grounds put forward by the Debtor has no merits whatsoever.

33.  There shall be a usual bankruptcy order against Mr Lin Qing Xiong and an order nisi that the costs of the Petition, including all costs previously reserved, if any, be to the Petitioner, to be taxed if not agreed, with certificate for Counsel.