PANG OI WAH JUDY v. DRAGON CHEER INVESTMENT LTD

HCCW 276/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 276 OF 2006

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J U D G M E N T

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1.  This was an application by Dragon Cheer Investment Company Limited (“the Company”) to strike out the petition brought against it on 8 June  2006 by Madam Pang Oi Wah Judy (“the Petitioner”).  The petition is based on an alleged debt of HK$2.1 million plus interest, in respect of which a statutory demand was served on the Company on 11  May 2006.  The Company seeks to strike out the petition on the basis that the debt underlying the petition is disputed, and that the petition is therefore bound to fail.

2.  It was common ground between Mr Maurellet, appearing for the Company, and Mr Lam, appearing for the Petitioner, that in order for it to succeed in its application, the Company had to demonstrate, by precise and believable evidence, a bona fide dispute of substance as to the existence of the debt (see  Re  ICS Computer Distribution Limited [1996] 1 HKLR 181).

3.  The Petitioner’s case is that she advanced the sum of HK$2.1  million to the Company on about 29 March 2005, pursuant to an oral agreement made about a week earlier between herself and Mr  Wei  Zhongqing (“Mr Wei”) (whom it is common ground is the ultimate beneficial owner of the issued shares in the Company), and that it was also orally agreed that the loan would bear interest at a rate of 1.5% per month.  She says that the Company needed the loan because it had entered into agreements to purchase two properties, but had found, about a week before the completion date, that it would not be able to obtain the full amount of bank financing that it had been anticipating, and would be left with a shortfall of about that amount, when the expenses of the transaction were taken into account.  The Petitioner relies on a receipt signed by the Company, which records the receipt by the Company of HK$2.1 million from the Petitioner on 29 March 2005.  The receipt (the original of which is in Chinese) states that the amount represented a loan, and was paid directly by the Petitioner to the solicitors representing the Company in the property transaction.

4.  The Company’s case is that the sum of HK$2.1 million was not a loan, but an “investment” by the Petitioner in the Company, and that the Petitioner is not entitled to repayment of it.  It (through Mr Wei) says that the Petitioner had expressed interest in investing in the Company because she felt that the properties which it had agreed to purchase would prove to be good investments, and as she and Mr Wei enjoyed a good relationship at the time, he agreed to allow her to take a stake in the property investment by investing in the Company.

5.  The Company’s case is supported by a number of affirmations made by Mr Wei, and also by affirmations made by a Ms Yang Shaoping (“Ms Yang”), who is Mr Wei’s sister in law, and a Ms Cheng See Wing (“Ms Cheng”), who was formerly employed by the Company as an accounts clerk.  The main evidence for the Company is to be found in Mr  Wei’s affirmations.

6.  In his second affirmation, in which he first set out the Company’s case, Mr Wei dealt with the background to his relationship with the Petitioner, saying that she was introduced to him in early 2004 through a mutual friend, a Ms  Fiona  Cheng.  At that time, the Petitioner said that she ran her own financial consultancy business, dealing in insurance, securities trading and property.  Shortly after they met, she approached Mr Wei and asked if she could share the Company’s office premises in order to save costs, apparently because she anticipated having to spend substantial amounts on legal costs in litigation with what Mr Wei describes as an “established insurance company”.

7.  Mr Wei says that he agreed to this arrangement, and that the Petitioner then moved into the Company’s offices, and as she was not charged any rent, she helped the Company out by assisting with its business.

8.  Mr Wei goes on to say that at the end of 2004, he came across two properties in Kowloon, which he thought had good investment potential.  He says that while he had in mind to purchase them with a view to profiting from a quick resale, he was persuaded by the Petitioner to refit them and rent them out, with a view to selling later, as this could prove more profitable.  He goes on to say that the Petitioner asked if she could share in the investment, and that he agreed.  He says that she invested HK$2.1 million and that it was orally agreed that she would be allotted shares to reflect her investment in the Company, and that he in fact offered her a shareholding of some 6-7% in the Company in December 2004, which reflected the proportion her contribution then bore to the Company’s assets, but she said she would prefer not to hold shares in her own name because of the litigation in which she and her own company were embroiled.

9.  Mr Wei says that while the Petitioner did not wish to be a registered shareholder of the Company, she did ask for some documentation to be prepared to record her investment, and that he agreed to this.  He says that this is how the receipt came to be prepared.  Although he professed not to have a very clear memory of the circumstances in which it was signed, he says (in this affirmation) that he thinks it might have been signed around 29 March 2005, and that it was signed on the same occasion by himself, Ms Yang and a Mr Lee Yu Ming (the former husband of the Petitioner) (“Mr Lee”), all of whom were, along with the Petitioner and a Mr Huang Hongzhang, then directors of the Company and that the Petitioner was also present.  In addition to their signatures, the receipt also bears the Company’s chop.  He says that, for his part, he read through it quickly and, being under the impression that it simply recorded the receipt by the Company of HK$2.1 million from the Petitioner, signed it.  He did not, in this affirmation, deal with the fact that the sum received was described in the receipt as a loan.

10.  Mr Wei says that the HK$2.1 million was never meant to be a loan, but represented an investment by the Petitioner in the Company, and that neither he nor the Company had need of any loan from the Petitioner at the time.  He says that the Company remains ready and willing to issue shares to the Petitioner to reflect her investment in it.

11.  Mr Wei says that some months later, in October 2005, to his surprise and annoyance, the Petitioner told him that she had lost interest in the Company and would like her money back, with interest at 1.5% per  month, in exchange for which she would sell her shares in the Company back to him.  Thereafter, on Mr  Wei’s case, nothing further happened until the statutory demand was served on the company on 11 May 2006.

12.  As will become apparent, there are significant respects in which Mr  Wei was to diverge from this version of events in his fourth affirmation, filed in response to the Petitioner’s evidence in reply.  I shall deal with these differences below.

13.  Ms Yang’s evidence dealt with the circumstances in which the receipt was signed.  Her version is very different from that initially put forward by Mr Wei.  She says that the document was brought to her in China by Mr Wei, who said that it was in order for her to sign it, as he had seen a draft of it previously, and had agreed with the Petitioner that a receipt should be prepared.  She says that she signed it without reading it on this basis, and because Mr Wei had already signed it.  She also agrees with Mr Wei that no loan was ever intended, and that the Petitioner was an “investor” in the Company, saying that the Petitioner took a close interest in the Company’s affairs, which she thought more consistent with her being an investor rather than a mere creditor, and that for her own part, she regarded the Petitioner as an investor in the Company.

14.  Ms Cheng’s evidence is, so far as the Petitioner’s involvement in the Company’s business is concerned, along much the same lines.  She says that she was told by Mr Wei that the Petitioner had invested in the Company, and that from her observations, the Petitioner behaved as though she had a stake in the Company.

15.  The Petitioner’s case is supported by an affirmation made by her in reply to Mr Wei’s second affirmation, in which she disputes the version of events put forward by him in that affirmation.  It is also supported by an affirmation of Mr  Lee, which confirms her version of the circumstances in which the receipt was signed, which is much the same as that set out in Mr Wei’s second affirmation.

16.  At the hearing, Mr Maurellet, while accepting that there were unsatisfactory aspects of his client’s evidence, suggested that the same could be said of the Petitioner’s evidence, and that overall, the affirmation evidence disclosed a dispute of fact which could not be resolved without a trial, at which each parties’ evidence could be assessed with the benefit of cross-examination, so that the appropriate course to take would be to strike out the petition and leave the Petitioner to establish her claim by proceedings in the ordinary way.

17.  It seems to me however, that the Company’s evidence falls well short of being the precise and believable evidence that is needed to establish that there is a bona fide dispute of substance as to the debt.  There are many gaps and inconsistencies in the Company’s evidence, which were not satisfactorily dealt with.

18.  The first area of concern in relation to the Company’s evidence is that, while it is accepted that the sum of HK$2.1 million was provided by the Petitioner, it is unclear as to when the Company says it was provided.  The tenor of Mr Wei’s second affirmation, in particular the section in which he deals with the Petitioner’s alleged request to invest in the Company, suggests (at least implicitly) that the money was advanced as early as December 2004, since it was as early as that that Mr Wei claims to have offered a shareholding in the Company to the Petitioner.  However, nowhere is this clearly stated, and the Company does not expressly suggest that the monies were provided otherwise than as suggested by the Petitioner, in or around the end of March 2005.

19.  The second area of concern is that the terms of the alleged investment by the Petitioner were never satisfactorily explained in the Company’s evidence.  The suggestion in Mr Wei’s second affirmation was that he offered a shareholding of 6-7% in the Company to the Petitioner, as this represented the proportion which the HK$2.1 million bore to the Company’s assets.  However, he put forward no evidence as to what the Company’s assets were at the time that the monies were provided, so that this was at best an assertion on his part.  Moreover, as the Petitioner pointed out, an offer of such a shareholding did not make sense, because (looking at the investment in the properties that were purchased) while her HK$2.1  million did represent about 6-7% of the overall value of the properties, some HK$19.6 million of the acquisition cost was financed by a bank loan from DBS Bank Limited, with the Company (or Mr Wei) putting up only some HK$10  million odd.  The proportion of money provided by her therefore represented some 16% of the total put up by her and Mr Wei, so that a 6% interest in the Company did not reflect the value of what she had provided.

20.  Mr Wei’s response, in his fourth affirmation, was to say that he had subsequently put in further funds to meet ongoing expenses and mortgage repayments, and that the Company had in fact some HK$17  million odd in “shareholders’ loans”, a state of affairs which was reflected by draft accounts which he produced for the purpose of an application for a validation order.

21.  These accounts were, however, a rather self serving document for this purpose, having been prepared only after the statutory demand and petition were served, at a time when the Petitioner had long ceased to be a director of the Company.  Even if they are to be accepted as accurate, it is not clear whether the Petitioner’s HK$2.1 million was included in the amount for shareholders’ loans.  Given that the Petitioner was not actually a shareholder of the Company, it is open to question whether it would have been included in that figure.  Whether or not it was, the figures do not take the Company very much further.  If the Petitioner’s funds were included as part of the shareholders’ loans, her contribution represented some 12% of the shareholders’ loans.  If they were not, her contribution would represent some 10% of the total of the shareholders’ loans plus her contribution.  In either case, this would be more than the 6-7% shareholding which it is claimed was offered to her in December 2004.

22.  Further, the suggestion that the shareholding that the Petitioner was to acquire was to vary depending on how much Mr Wei put in subsequently is a surprising one.  It would leave the Petitioner in a state of uncertainty as to what her stake in the Company would eventually be, and does not seem to be an arrangement that makes much commercial sense.  More fundamentally, the implicit suggestion that Mr Wei somehow knew, in December 2004, how much further money he would have to put in to the Company in the months ahead, and was able to work out the eventual position in relation to his and the Petitioner’s relative contributions so far in advance, is one which I have great difficulty in accepting.

23.  A third area of concern relates to the different versions put forward by Mr Wei as to the circumstances of the signing of the receipt.  As I have noted, his initial evidence as to this was that it was signed at about the time of the advance, in March 2005, on an occasion when the Petitioner and all the directors who signed the note were present.  However, he fails satisfactorily to explain why he signed it when it suggested that the advance by the Petitioner was by way of loan, if that was not his and the Company’s understanding of the position.  The document was in the Chinese language, which he well understood.  It was not a long document, and it did, in my view, make it clear that it recorded the receipt by the Company from the Petitioner of a sum of money by way of loan.  If this were not a correct statement of the position, one would not have expected Mr Wei to have signed it without amendment.

24.  The difficulty is compounded when Mr Wei’s fourth affirmation is considered.  In it, he suggests that the document was not signed in March 2005 at all, but some months later.  Moreover, the circumstances in which it was said to have been signed are, to say the least, odd.  He suggests that he was shown an earlier draft of the document which did not make reference to the money provided by the Petitioner as being a loan, and was presented with the version which he signed just as he was about to board a train to depart for the Mainland, and that he therefore signed it hurriedly, without looking at it closely.  However, he then goes on to say that he kept the document with him, taking it to the Mainland, where he gave it to his sister in law, Ms Yang, to sign.  There was therefore a time lapse between his signing it, and his giving it to Ms Yang to sign.  It beggars belief that he did not take the opportunity to look at it more closely in the interval, or when he gave it to Ms Yang to sign, or even before it found its way into the Company’s records, particularly if, as he said, he signed it in a hurry in the first place.

25.  The utter incompatibility of the different versions of events makes it impossible for me to be satisfied that the evidence which the Company has put forward as to the circumstances in which the document was signed is either precise or believable.

26.  A further point to note is that Mr Wei’s evidence as to his and the Petitioner’s approach to the investment in the properties is also inconsistent.  In his second affirmation, he says that his initial intention was to buy the properties with a view to a quick resale at a profit, and that he was later persuaded by the Petitioner that it would be better to refit the properties and rent them out, and sell them only when the market was moving upwards with greater momentum.  In his fourth affirmation, however, he puts the position the other way around, saying that it was the Petitioner who was keen on a quick sale, while he was of the view that it would be better to refit the properties, and rent them out pending a resale at a more opportune moment.  While this aspect of the matter is perhaps of relatively little significance in relation to the parties’ intentions as to the nature of the funds provided by the Petitioner, the complete change in the Company’s case does little to inspire confidence in the precision or believability of the evidence put forward by it.

27.  I would add also that one might expect light to be thrown on the nature of the advance by the Company’s records - however, the Company did not see fit to provide any of its accounting records, from which some information might be gleaned as to how it regarded the advance at the time.

28.  Moreover, Mr Wei’s suggestion that the Petitioner approached him in October 2005 indicating that she wished to sell her shares in the Company back to him is a surprising one, given that the Petitioner was never a shareholder in the Company and thus had no shares to sell back to him.  This is not something that Mr Wei can have been unaware of, given that on his own evidence, he tried unsuccessfully to get her to accept shares in December 2004, so that he must have known that she was not, in fact, a shareholder in the Company.

29.  There are also other respects in which the Company’s evidence lacks detail and precision.  Thus, for example, Mr Wei’s assertions that he could obtain funds interest free from friends are no more than bare assertions, with nothing concrete to back them up.

30.  In these circumstances, I am unable to regard the Company’s evidence as coming anywhere near the precise and believable evidence that is required to make out a bona fide dispute of substance in relation to the debt.

31.  Mr Maurellet suggested, however, that there were a number of matters which lent substance to his client’s case, or at least raised questions about the Petitioner’s case, these being:-

(1)	The fact that the loan agreement was allegedly made orally, without a written loan agreement, a matter which he suggested was incredible given the Petitioner’s background as an experienced businesswoman.
(2)	The only documentary evidence of the loan was the receipt, the terms of which were odd, in that the reference to the monies received being a loan appeared only in the second part of the document, and that there was no reference to either the repayment date or interest rate in the document, when these were two of the most important terms of any loan.
(3)	That the monies were paid, not to the Company but to its solicitors, in circumstances which were not entirely clear.
(4)	That there was no demand until the statutory demand, which was served over a year after the loan was made, when interest (which on the Petitioner’s case was payable monthly) was piling up at the rate of some HK$31,500 per month.
(5)	The fact that the Petitioner and her ex husband were directors of the Company, and the Petitioner’s active involvement with the Company’s business, suggested that she was an investor and not a mere lender.
(6)	The high rate of interest was also unusual, particularly in the light of Mr Wei’s evidence (in his fourth affirmation) that he could have borrowed from friends in China interest free.

32.  As to these points:-

(1)	While one might in other circumstances expect more in the way of formalities to be observed in relation to documentation concerning a loan, I think that the relationship between the Petitioner and Ms Wei has to be borne in mind.  It is common ground that they were on good terms, that the Petitioner was permitted to occupy the Company’s offices at no charge, and that she assisted in various ways with the conduct of the Company’s business.  In these circumstances, the existence of an oral agreement, or one attended with little in the way of formality, is not in my view a matter that casts so much doubt on the Petitioner’s case as to lead to the conclusion that there is a bona fide dispute of substance in relation to it.
(2)	As to the form of the receipt, it seems to me that it is clear enough.  The absence of any reference to a loan repayment date or interest rate does not, in my view, detract from the fact that the document purports, in terms, to record the advance of a sum of HK$2.1 million by way of loan.  Where no fixed date for repayment is stipulated, the loan will in general be repayable on demand.  So far as the interest rate is concerned, the most that can be said about the absence of any written record of it is that this might give rise to a basis for the Company’s disputing its liability to pay interest, whether at the rate claimed or at all.  This would not, however, establish that there is a bona fide dispute as to the whole of the debt on which the petition is based so as to call for the petition to be struck out.
(3)	I do not see that the fact that the monies from the Petitioner were paid to the solicitors acting in the conveyancing transaction takes the matter very far, one way or another.  Given that the funds were used as part of the completion monies for the purchase of the properties, there seems to be little surprising in this.
(4)	As for the alleged lack of demands by the Petitioner prior to the service of the statutory demand, it is the Petitioner’s case that she made several demands for the interest, and for repayment, orally.  There is also evidence to suggest that the Company was taking steps to raise funds or to refinance the properties, a matter which lends some substance to the Petitioner’s evidence that she was prepared to wait for a while, to see if the Company could raise funds with which to repay her, before taking further steps against it.
(5)	The Petitioner has said that she and her ex husband served as directors of the Company on Mr Wei’s request.  I do not think it possible to resolve this particular dispute on the basis of the affirmation evidence, but it does not seem to me in any event that this factor is of such significance as to overcome the many deficiencies in the Company’s evidence to which I have already referred.  So far as the Petitioner’s involvement in the Company’s business is concerned, it is Mr Wei’s own case that she assisted him with this in exchange for being provided with rent free office accommodation.  So far as Ms Yang’s and Ms Cheng’s evidence as to their understanding of the nature of the Petitioner’s involvement in the business of the Company is concerned, this is largely based on what they were told or led to understand by Mr Wei, which does not take the matter further, or on her having assisted in relation to the Company’s affairs, which is not in my view, so conclusive as to lead me to conclude that there is a bona fide dispute of substance in relation to the debt alleged by the Petitioner.
(6)	As to the point concerning the rate of interest, as I have indicated in sub-paragraph (2) above, the most that can be said is that there might be some basis for the Company to assert the existence of a dispute as to the interest element.  In any event, the assertions of readily available funds from other sources are, as I have pointed out in paragraph 28 above, no more than bare assertions, which do not take the Company very far.

33.  Thus, I am unable to find that the Company has demonstrated, by precise and believable evidence, the existence of any dispute of substance as to the nature of the advance made by the Petitioner.  At best, it may be able to raise a dispute as to the rate of interest claimed.  Mr  Maurellet suggested that in those circumstances, there would have to be a trial on the question of interest, and that it would be just as easy to deal with the whole question of liability at the same time, so that the petition should be dismissed and the Petitioner left to establish all aspects of her claim in the normal way.  I do not think that this would be the right approach to take.  Given that the Company has been unable to demonstrate any dispute of substance as to the nature of the advance, and has made no attempt to meet the statutory demand served against it, it seems to me that the right course would be simply to dismiss this application, and leave it to the Company to deal with the petition as it thinks best.

34.  I shall therefore dismiss the Company’s application, and make a costs order nisi that the Company should pay the Petitioner’s costs of this application, to be taxed on the party and party basis if not agreed.