MIAO ZHENGUO AND OTHERS v. CHUNG WINSTON

HCA 1283/2011
HCA 1290/2012
HCB 4005/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4005 OF 2012

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AND

HCA 1283/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1283 OF 2011

AND

HCA 1290/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1290 OF 2012

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 (Heard together)

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J U D G M E N T

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THE APPLICATIONS

1. There are the following applications before this court:

(1)  An amended bankruptcy petition (“the petition”) presented by 4 judgment creditors (“the petitioners”)against Mr Winston Chung (“the debtor”);

(2)  The petitioners’ summons for stay of HCA 1290/2012 pending determination of the petition in HCB 4005/2012;

(3)  The debtor’s notices of appeal against a garnishee order nisi and an order for examination granted by masters in HCA1283/2011;

(4)  The debtor’s application for stay of execution of Chung J’s judgment dated 24 April 2012 in HCA1283/2011concerning the subject judgment debts.

2. The petition is presented on the basis of the debtor’s failure to discharge 4 statutory demands presented by the petitioners, which were in turn based on judgment debts owed to the petitioners totalling $181m plus interest.  The debtor opposes the petition on the grounds that:

(1)  There is a bona fide dispute to the debt on substantial grounds.  There are extant proceedings in HCA 1290/2012 (“the Fresh Action”) seeking to set aside the judgment; alternatively, the judgment can only be enforced upon certain conditions being fulfilled; and

(2)  The petition was presented with improper motives and constituted an abuse of process.

3. The petitioners contend that the opposition is yet another tactical move by the debtor to evade liability. 

THE FACTS

4. The petitioners, the debtor and one Mr Xu were shareholders of Fadar International Limited (“Fadar”), which was the holding entity of MVP and another investment known as Krystal Koach Inc. (“Krystal”).  MVP was a group of companies in the USA which carried on the business of production of motorhomes and recreational vehicles.

5. Each of the shareholders was to grant a shareholder’s loan to Fadar to enable it to acquire the interests in MVP and Krystal.  Under a Cooperation Agreement signed on 25 June 2010, the petitioners advanced a total of HK$150m. The debtor was to advance HK$105m, HK$46m of which was paid by the 2^nd and 3^rd petitioners on his behalf. The debtor was to repay the HK$46m within a specified time, failing which he had to pay interest.  He failed to repay and Fadar had used its own funds to repay HK$15m on the debtor’s behalf to the 2^nd petitioner.

6. On about 3 January 2011, the shareholders entered into a Deed whereby all the parties (except the debtor) agreed to withdraw from the investment in respect of Fadar.  Fadar would repay the following amounts to the petitioners by 30 June 2011, guaranteed by the debtor, with interest.

Shareholder	Share capital (HK$)	Advance
Miao (P1)	$60,000,000
Guan Wei Guo	$30,000,000
Che Jaime (P3)	$30,000,000	$31,000,000
Shan Chang (P4)	$30,000,000
Xu Yue Yue
Total to be repaid	$181,000,000

7. The debtor was ousted from the board of Fadar in early to mid-June 2011.  He claimed that the petitioners had no intention of handing over control of Fadar and breached their side of the bargain and so he did not pay the HK$181m to them on 30 June.

8. The petitioners commenced HCA 1283/2011 on 29 July 2011 seeking repayment under the Deed.  Other proceedings relating to Fadar and involving the same parties were also filed in the USA.

9. An Order 14 application was taken out by the petitioners in HCA 1283/2011 and the substantive hearing was fixed for 29 February 2012 before Deputy Judge Lok.

10. Before the Order 14 application came on for hearing, in an attempt to settle HCA 1283/2011 and another action in the USA between the parties, the petitioners and the debtor entered into a Settlement Agreement on 14 October 2011 in the USA.

11. The Settlement Agreement provided that the debtor was  to  pay a sum of US$23.8m (about HK$185.64m, approximately the sum owed by the debtor under the Deed) in escrow on or before 29 November 2011 and this would be distributed to the petitioners on the following day.  Upon receipt of the funds, the petitioners would transfer all the outstanding equity of Fadar to the debtor.  The parties would execute a consent order (“the Consent Order”) in escrow, to be filed upon failure of the debtor to make repayment. 

12. The debtor failed to pay the settlement sum as promised. The Consent Order was released to the petitioners, without objection from the debtor, pursuant to clauses 3.01 and 3.02 of the Settlement Agreement.  Those clauses expressly provided that the debtor would not contest the prompt entry of the Consent Order, the judgment or the validity of such judgment. 

13. The petitioners filed the Consent Order on 5 December 2011.  Paragraph 2 to the schedule to the Consent Order provided that if the debtor failed to pay the US$23.8m on or before 30 November 2011, then judgment would be entered immediately in favour of the petitioners. 

14. MVP went into liquidation on 12 December 2011.

15. On 29 February 2012, the hearing before Deputy Judge Lok was adjourned on the debtor’s application until after determination of a question by the Californian court, namely, whether clause 3 of the Settlement Agreement which required the petitioners to transfer the equity of Fadar to the debtor, was penal in nature and hence contrary to the terms of the settlement.  The petitioners’ attorneys submitted that the debtor would receive good consideration in the form of the Fadar shares upon payment of US$23.8m.  The California court found in favour of the petitioners.

16. On 19 April 2012, MVP’s assets were sold through auction to the only bidder, Hackman Capital, a real estate investment firm that specialized in the acquisition and resale of distress assets, at the price of US$9.5m.

17. Back in Hong Kong, the petitionershad restored their Order 14 application.  The hearing before Chung J took place on 24 April 2012.  Counsel for the debtor again asked for an adjournment on the ground that the petitioners would be doubly compensated (in receiving the auction proceeds and the settlement amount) when the proceeds of the auction should be set off against the debt due from him to the petitioners. 

18. To allay the debtor’s concern, the petitioners undertook not to remove any assets of Fadar, whether by appropriation or otherwise except in the ordinary and proper course of business of Fadar until (i) the expiry of 28 days; (ii) full payment by the debtor of the judgment and completion of the transfer of shares of Fadar from the petitioners to the debtor; and (iii) the debtor’s satisfaction upon his investigation into the books and records of Fadar that there has not been any misappropriation of Fadar’s assets by the petitioners (“the undertaking”).  This undertaking was embodied in the order made by Chung J (“24 April Order”), expressed to be by consent, for judgment to be entered against the debtor for the sum of HK$182.1m together with a stay of execution for 28 days conditional upon the debtor’s payment-in within 14 days.

19. Pursuant to the 24 April Order, judgment was entered.

20. On 7 May 2012, the debtor applied for extension of time to make payment into court.  His affirmation stated that he was confident of being able to pay by 29 May.  He had raised no issue of mistake as he now does, although it is fair to say that his application was made without prejudice to any subsequent application which he shall make including an application for setting aside or staying the 24 April Order. 

21. Chung J refused to grant the extension of time.  He took into account, amongst others, the following matters:

“19.  First, the plaintiffs’ contention that the defendant’s statements ought not be taken at face value by reason of his repeated unsuccessful attempts to resist judgment being entered, using different reasons at various times (see para 6 to 8 above).

20.  Secondly, assertions to the effect that:

(a)  the contractual document(s) was/were executed by him without knowledge of its/their full meaning and effect;

(b)  the auction was improperly conducted and was a conspiracy involving the auction agents and the plaintiffs;

(c)  the Apr 2012 consent order (especially the part relating to the time for making the payment‑in) was agreed to by the defendant’s former solicitors contrary to his express instructions.

In relation to sub‑para (a) above, the assertion has not been made prior to the inter partes hearing.

21.  In relation to para 20(b) above, the auction was known to the defendant prior to the April 2012 hearing (it was deposed to in his affirmation filed for that hearing) but the allegation was not made until the affirmation filed in support of the ex parte hearing. Further, the auction was dealt with on the defendant’s behalf by someone who declared that he was legally qualified in California and who have been:

‘providing business and financial advice to [the defendant] as concerns certain of his investments in the United States” (para 5 thereof).’

The declaration is vague as regards when the improprieties (allegedly wrongful rejection of other higher offers and the defendant’s “overbid”) came to the knowledge of the declaration maker. In a declaration made by another Californian attorney acting for the defendant in relation to the auction, it was stated that the declaration maker was informed of the rejection of the defendant’s “overbid” several days before the April 2012 hearing.”

22. The amount under the 24 April Order remains unpaid.  The petitioners served 4 statutory demands on 29 May 2012 and then issued the present petition on 20 June.  In addition, they have obtained a garnishee order and an order for examination of judgment debtor in HCA 1283/2011, which the debtor now appeals against. 

23. As a judgment or order made by consent cannot be appealed against[1], the debtor issued the Fresh Action on 24 July 2012 to set aside the 24 April Order.  The Fresh Action has been stayed pending disposal of the petition.

24. At the hearing before me on 20 December 2012, the debtor applied for an adjournment on the ground that he had taken out proceedings on the 18^th under section 20 of the Bankruptcy Ordinance (“the IVA application”), due to be heard on 15 March 2013.  I have refused the adjournment.  Among the reasons given was that the IVA application did not admit the judgment debt owed to the petitioners, so the court wondered how the disputed debt would be dealt with and how the petitioners could participate in the IVA proceedings.  In addition, there was a major unsecured creditor known as Tiny Tech who had issued a writ on 23 November 2012 and obtained default judgment against the debtor for the sum of HK$1.18 billion.  The speed at which that default judgment was obtained aroused suspicion, especially where the facts in support of Tiny Tech’s claim were unknown.

25. The above facts are not disputed or indisputable.  It can be seen from the history of the litigation that the debtor consistently entered into agreements, then subsequently disavowed them.  He tried every means to stall a hearing, defer payment or have a judgment set aside.

BONA FIDE DISPUTE ON SUBSTANTIAL GROUNDS

The legal principles

26. The burden is on the debtor to advance sufficiently precise factual evidence to satisfy the court that he has a bona fide dispute of the alleged debt on substantial grounds: Re ICS Computer Distribution Limited [1996] 3 HKC 440 at 443C-444A, Rogers J (as he then was).

27. A judgment is conclusive but the bankruptcy court can go behind a judgment to determine (i) if there was good consideration for the debt in question: Re Beauchamp, ex parte Beauchamp [1904] 1 KB 572; or (ii) if the judgment has been obtained by fraud or collusion, or that there has been some miscarriage of justice: Re Flatau, ex parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83.

28. These principles apply also to a consent order, which can be impeached upon any ground which invalidates an agreement (such as mistake or that the debt was fictitious): Re Lennox (1885) 16 QBD 315; Huddersfield Banking Co. Ltd. v Henry Lister & Son Ltd [1895] 2 Ch 273, 280, 283-4.

29. The court has to say, looking at that compromise and all the facts which led up to it, whether in its opinion it is a just and proper compromise.  If the court finds that the compromise was made when one party knew all the circumstances, and the other did not, then, even if there was no fraud, the compromise cannot be a fair one.  See re Hawkins ex parte Troup  [1895] 1 QB 404, 409 Lord Esher MR.

30. A consent order must be interpreted in the light of its factual matrix and construed as a commercial instrument.  In ICS Ltd v West Bromwich Building Society [1998] 1 WLR896, 912-3:

“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

‘…if detailed semantic and syntactic analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’”

31. In Sirius International Insurance Co v FAI General Insurance Ltd [2004] 1 WLR 3251,para 18-19, Lord Steyn says:

“The settlement contained in the Tomlin order must be construed as a commercial instrument. The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene.

There has been a shift from literal methods of interpretation towards a more commercial approach. … The tendency should therefore generally speaking be against literalism…”

A preliminary point

32. Before analyzing “the substantial grounds” put forth by the debtor, it will be useful to dispose of an issue raised by Ms Tam, SC.  Ms Tam, SC submits that implicit in the absence of an application to strike out the statement of claim in the Fresh Action was the petitioners’ admission that there are triable issues. 

33. This is refuted by Mr Smith SC.  He draws to the court’s attention that the Fresh Action was commenced after the petition was issued.  A decision to strike out might lead to an appeal, delay and costs.  The bankruptcy court has power to impose a condition under section 9(5) of the Ordinance for payment of the judgment debt into court but the court cannot ask the debtor to pay, under the Fresh Action, the judgment sum into court as a condition of being allowed to prosecute that action.  The petitioners have thus taken the expedient course of staying the Fresh Action pending resolution of the petition.  The lack of a striking out application should not bar the petitioners from proceeding, otherwise a debt dodger can always start a fresh action to challenge a judgment without fear of being made bankrupt. 

34. I accept the submission of Mr Smith, SC.  I do not think the petitioners admit that there are triable issues.  I am, however, vigilant to the fact that there should not be a mini trial on affidavit of the Fresh Action.  The court’s role in this hearing is to see if there is a bona fide dispute to the judgment debt on substantial grounds, based, among others, on the pleaded case in the Fresh Action.

The “substantial grounds”

35. The debtor claims that at every stage from the Deed up to the 24 April Order, the underlying and obvious intention of the parties was that the debtor would buy out the petitioners’ investment with a substantial payment and obtain control over Fadar and its underlying assets. It was on this fundamental premise that the 24 April Order was made and judgment entered.  If this fundamental premise was wrong or rendered inoperable by reason of the petitioners’ actions, then the 24 April Order should be set aside, or the petitioners should be required to perform their side of the bargain prior to receiving payment.  In broad terms, the “substantial grounds” put forth by him can be categorized as follows:

A.  That the debtor never gave instructions for his then legal representatives to consent to the 24 April Order (“the lack of instructions ground”)[2].

B.  It was an implied term of the Settlement Agreement and the 24 April Order that Fadar was worth approximately US$23.8m.  The petitioners had breached the implied term in liquidating Fadar (“the implied terms ground”)[3].

C.  That at the time of the making of the 24 April Order, the parties were not aware of the fact that the overbid process was not available (“the mistake ground”)[4].

D.  The petitioners are estopped from denying their obligation to deliver to the debtor the shares of Fadar upon payment of US$23.8m (“the estoppel ground”)[5].

A.  The lack of instructions ground

The factual bases

36. The debtor did not speak or read English and had to rely on Steve Chen for all communications with US attorneys.  He was allegedly not provided with any translation of the Settlement Agreement.  Steve Chen only told him the gist and faxed to him the execution page to sign.  The debtor’s understanding of the transactions and events which took place in California turned out to be wrong on important matters. 

37. The debtor claims that he only found out that the 24 April Order was said to have been made with his consent after his current legal team went before Chung J on 7 May 2012 to seek extension of time for payment. He had never given instructions to his former solicitors (“Chu & Lau”) to consent, in particular, to payment into court within 14 days. He had suggested 35 days. He was told that the petitioners were prepared to undertake not to dispose of the assets of Fadar.  Neither the draft 24 April Order provided by the petitioners’ solicitors nor Chu & Lau’s email to the debtor stated the terms to have been made by consent.

The legal principles

38. Where an action has been ended by compromise, the bankruptcy court will not go behind the compromise if it has been made by independent counsel, and it is not impeached as fraudulent: Re Gregory (No 1) [1935] 1 Ch 65 at 72, per Lord Hanworth MR; Corney v Brien [1951] 84 CLR 343 at 357.

39. Nor will mistaken reliance on one’s legal advisers, without more, entitle one to set aside a consent order: Hui Shek To v Open Worth Investments Ltd, HCA2268 of 1997, 15.8.1997, page 8, Recorder Tang SC (as he then was).

Application of the legal principles

40. In the present case, the 24 April Order was made with representation on both sides, after some negotiation as to the time for the debtor to make payment and the provision of the petitioners’ undertaking.The petitioners might have been insistent but there was no suggestion of fraud.  It was not alleged that despite the implied authority of the lawyers to compromise the action, there was a limitation of such implied authority which had been brought to the attention of the petitioners: Ng Shui Hing v. Lai Hang [1983] 1 HKC 158, 162D.  Nor was it alleged that the petitioners had contributed to the matters in paragraph 36 above.

41. Even if the debtor had not consented to the 24 April Order, the contents of his 5^th affirmation in HCA 1283/2011[6] showed that he knew the question of judgment would arise on 24 April 2012 and he would need to raise HK$182m.  He scolded his own lawyers when he was told that the petitioners insisted on payment within 14 days.  Taken at its highest, the debtor was ordered by Chung J to pay within 14 days. 

42. There was no fraud or vitiating factor involved.  The lack of instructions ground is unsustainable. 

B.  The implied terms ground

The legal principles

43. Terms will only be implied if necessary to give business efficacy to an agreement.  Reasonableness is not a ground for doing so: Twinkle Step Investment Ltd v Smart International Industrial Ltd (1999) 2 HKCFAR 255 at 261J to 262A, Ching PJ. The question is whether the term contended for is one which the court must imply in order to establish what the contract is, the parties themselves not having fully stated the terms of their contract: Twinkle Step, at page 263, Bokhary PJ.

44. In Chitty on Contracts, 31 ed, Vol 1, para 13-005,

“More recently, however, a much broader approach to the implication of terms was adopted by the Judicial Committee of the Privy Council in Att-Gen of Belize v Belize Telecom Ltd. Lord Hoffmann stated that:

‘… in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such provision would spell out in express words what the instrument read against the relevant background, would reasonably be understood to mean’

and that the list of requirements set out in previous cases for the implication of a term:

‘… is best regarded not as a series of independent tests which must each be surmounted, but rather a collection of different ways in which judge have tried to express the central idea that the proposed implied term must spell out what the contract actually meant, or in which they have explained why they did not think that it did so.’”

45. The court is to answer a single question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?  Chitty on Contracts,para 13-005.

The terms to be implied

46. Ms Tam, SC submits that the common intention was for the debtor to buy out Fadar as a going concern.  The terms that the debtor seeks to imply are:

(i)  In respect of the Deed: that there would be no material change in the value of the Fadar shares between the date of the Deed and the date of completion thereunder; otherwise the petitioners shall have to make good any shortfall.

(ii)  In respect of the Settlement Order and the 24 April Order: that the value of Fadar is worth approximately US$23.8m^[7] when Fadar was to be transferred to him and that the petitioners have a duty to ensure that the company was worth that amount.

47. With regard to the Settlement Agreement, Ms Tam, SC relies heavily on a balance sheet of MVP for the first 9 months of the calendar year 2011 (“the Balance Sheet”) which shows that: 

(i)  The total assets for those 9 month ranged from US$28m to US$34m;

(ii)  The total current liabilities ranged from US$1.38m in early 2011 to about US$6.17m (highest in August). 

(iii)  The long term liabilities (being note payable and shareholder payable) started at US$23.9m, rising to US$29.2m. 

(iv)  The total liabilities started from US$25.28m, rising to US$34.55m.

(v)  The total net equity started from US$5.9m, dropping to US$2.45m.

(vi)  There had been an advance of US$5m from the debtor in the course of this year.

Ms Tam, SC submits that, disregarding the long term liabilities in the form of shareholders’ loans, the net equity of MVP was relatively stable, above US$23.8m throughout the first 9 months of 2011.  So long as Fadar remained as a going concern and the debtor had gained control, the debtor would not have called in the long term liabilities.  There would have been substantial assets and cash to keep Fadar going.

48. Ms Tam, SC submits that it was theBalance Sheet which was relevant to assessing the value of Fadar before entry into the Settlement Agreement, not the valuation report prepared by Alvarez & Marsal (made 3 weeks before the parties signed the Settlement Agreement).  Alvarez & Marsal valued Fadar at between US$12.2m and US$16.6m as at 21 September 2011 in a liquidation scenario.  She submits that Fadar should have been valued instead as a going concern, which should have been the position had the shares of Fadar been handed over to the debtor upon the latter’s full payment. Moreover, the Alvarez report did not take into account the cash position.  There were talks about liquidation but the debtor could not do anything because he was not in the management.

49. The petitioners suggested that the debtor had knowledge about the value and corresponding changes of Fadar’s assets before the signing of the Settlement Agreement and the 24 April Order and that he was aware that Fadar was in financial trouble and hence there would be no implied term as to asset value.  Ms Tam, SC submits that taking this suggestion to its logical conclusion, the petitioners could demand for payment of US$23.8m from the debtor and yet in return hand him an empty shell devoid of assets including the auction proceeds.  This fundamental flaw was, she submits, what any reasonable businessman would not have agreed to.

50. For the following reasons reflected in the terms of the documents and the factual matrix, I reject the implied terms ground. 

51. Firstly, one should start from the Deed and not the Settlement Agreement.  The sums agreed to be paid by the debtor under the Deed, upon which Settlement Agreement and the 24 April Order were based, were liquid sums representing the amount advanced by each of the petitioners that had nothing to do with the value of Fadar or MVP.  (Note that repayment of HK$15m to the 2^nd petitioner was apparently with the same theme.)

52. Secondly, the Settlement Agreement expressly recited, among others: that the debtor did not make his expected investment into Fadar as set out in the Cooperation Agreement; that the Deed provided that Fadar (as guaranteed by the debtor) would repay the loans made by the petitioners, the petitioners would withdraw from Fadar and the Cooperation Agreement would be terminated, leaving the debtor the sole investor in Fadar; that the Deed was not performed; that the principal and interest accrued on each of the petitioner’s loans totalled HK$182.1m; and that the petitioners had commenced HCA 1283/2011 seeking specific performance of the debtor’s obligations under the Deed.  These recitals operated as estoppel by convention, they being assumptions shared by the parties before entry into the Settlement Agreement: Unruh v. Seeberger (2007) 10 HKCFAR 31, 79H. The debtor could not be better off having terms implied by being in default of compliance of the Settlement Agreement than if he had complied with the Deed.

53. Thirdly, a term as to the precise value of the underlying equity of the companies would have to be made expressly.  There  were express warranties in the Settlement Agreement as to the accuracy of the financial information of Fadar and business records provided to counsel for the debtor and that there was no material undisclosed or contingent liabilities other than those in clauses 2.01 and 2.02.  It was also expressly stated that there were no balance sheets, statement of operations or similar documents describing the financial affairs of Fadar, and no tax returns.[8] but none as to value, let alone the basis for valuation.  In any event, the implied terms would be precluded by the “entire agreement clause” in clause 10.13. 

54. Ms Tam, SC contends that an entire agreement clause should be construed in its entire factual matrix.  According to Universal Solutions Ltd v. Christopher Gordon Young, CACV 201/2011, 17 May 2012, an entire agreement clause may not exclude or supersede misrepresentation as to matters that were not the subject of the terms of the agreement because it was not sufficiently clear for that purpose.  The agreement might have included, but did not include, an express specific exclusion of such implied term.  However, it did not exclude collateral warranties.  (paras 19, 22, 23 of the decision)  Of course, one must not forget that such cases are only authorities for the clause with particular wording.  The effect of such provision is a matter of construction (para 24 of the decision.)  The Court of Appeal held that it was difficult to decide on an Order 14 application what constituted the factual matrix against which the relevant clause should be construed.

55. However, the following fourth and fifth points will answer this aspect of her submission.

56. Fourthly, before the Settlement Agreement in October 2011 the debtor should have known that Fadar/MVP were in financial difficulties.  He was in possession of the board minutes of MVP for at least June to July 2011[9] showing that the company was in dire financial difficulties.  The board even had a motion dated 20 August 2011 to solicit a written offer from him for sale of Fadar as a going concern[10].  He could not have harboured a view that the assets were worth US$23.8m without express discussion with the outgoing shareholders who did not share his positive view of Fadar.  The debtor clearly knew about the intended assignments for the benefit of creditors even before he entered into the Settlement Agreement^[11].

57. Fifthly, before the 24 April Order, the debtor should have known that there had been changes to the value of Fadar’s assets:

(i)  The debtor was of the view that MVP has suffered substantial operating losses since its formation and he made 3 unsecured loans totalling US$5m to MVP between October 2010 and January 2011. This was reflected in the Balance Sheet. 

(ii)  As early as 10 October 2011 when he filed his first affirmation in HCA1283/2011, the debtor has already alleged that MVP’s profitability was being adversely affected due to mismanagement following his ouster from the board.

 (iii)  The debtor knew that liquidation of MVP had commenced after he had defaulted in payment under the Settlement Agreement.  It was 4 months before the 24 April Order.

(iv)  As the debtor refused to honour the Settlement Agreement, assignment of MVP’s assets for the benefit of creditors resumed and the liquidator^[12] decided upon an auction.

(v)  When the debtor tried to set aside the Settlement Agreement in California, and argued that the 24 April Order was penal, his US attorneys made various representations to the California court on oath and orally.  It was said that starting from about December 2011, the petitioners began a campaign to strip any value that Fadar has and to transfer that value to themselves, thereby leaving Fadar without value, that the consideration the petitioners promised to convey to the debtor would have been materially reduced[13].  It was also said that Fadar was a very different company with very different assets since it entered into receivership and was not worth much.

(vi)  According to the legal opinion dated 31 January 2012 given by Mr Richard Buxbaum on the validity of clause 3 of the Settlement Agreement and relied upon by the debtor in HCA 1283/2011, it was stated that under the Settlement Agreement, the value of assets that the debtor would obtain would be around US$10m to US$14m.

(vii)  Mr Donald Dye[14], filed a declaration in HCA 1283/2011 after the auction that the debtor expected to be entitled to an offset of at least US$13m calculated by considering the proceeds of sale from auction plus earlier sales. 

(viii)  A letter from the debtor’s attorney dated 22 April 2012 to the petitioners’ US attorney objected to the decision to liquidate MVP, stating that Fadar’s only asset had been destroyed and had eliminated the value of the Fadar shares to be transferred to the debtor. 

(ix)  In the debtor’s 3^rd affirmation filed in HCA 1283/2011, one day before the 24 April Order was made, the debtor stated that on 19 April 2012 the MVP’s liquidators sold off the assets at US$9.5 m and would pay the proceeds to Fadar and complained that if judgment were issued in Hong Kong, he would acquire MVP and Fadar but without assets. 

58. All of these factors, viewed individually or collectively, point to the conclusion that the debtor could not have bona fide believed, before the Settlement Agreement or the 24 April Order (as the case may be) that the value of the underlying assets was close to US$23.8m. The parties held different views on the value and prospects of MVP. Whether one reads the Settlement Agreement or the 24 April Order literally or with commercial sense, the implied terms are not ones that the court must of necessity imply to establish what the agreement was.  The implied terms ground fails.

C.  The mistake ground

The law on mistake

59. In Bank of China (Hong Kong) Ltd v. Keen Lloyd Energy Ltd,CACV 132/2012, 23.3.2012, the Court of Appeal summarized the 5 elements for common mistake as follows:

(1)  There must be a common assumption as to the existence of a state of affairs;

(2)  There must be no warranty by either party that that state of affairs exists;

(3)  The non-existence of the state of affairs must not be attributable to the fault of either party;

(4)  The non-existence of the state of affairs must render performance of the contract impossible;

(5)  The state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.

60. The Court of Appeal also referred to the distinction between the subject matter and the quality of the subject matter as described by Lord Phillips of Worth Matravers MR in Green Peace Shipping Ltd v. Tsavliris Salvage (Intl) Ltd [2003] QB 679as follows:

“55. Where that which is expressly identified as the subject of a contract does not exist, the contract will necessarily be one which cannot be performed. Such a situation can readily be identified. The position is very different where there is ‘a mistake as to the existence of some quality of the subject matter which makes the thing without the quality essentially different from the thing as it was believed to be.’ In such a situation it may be possible to perform the letter of the contract.”

and as described by Lord Phillips as follows:

“74. In considering whether performance of the contract is impossible, it is necessary to identify what it is that the parties agreed would be performed. This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances. In some cases it will be possible to identify details of the ‘contractual adventure’ which go beyond the terms that are expressly spelt out, in others it will not.”

61. Unilateral mistake, without more, is not sufficient to set aside a consent order: Hui Shek To v. Open worth Investments Ltd, HCA 2268/1997, 15.8.1997, page 5, Recorder Tang SC (as he then was).

62. However, if a mistake by one of the parties as to the meaning of the words used was induced by the other party, the agreement may be impeached: Wilding v. Sanderson [1897] 2 Ch 534, 550.

“Where one party to a compromise is labouring under some misapprehension about its terms that is known to, or has in some way been encouraged by, the other party, it is arguable that there is no genuine agreement between them even though, viewed objectively, it would appear that an agreement has been concluded. That could render the whole agreement void ab initio, or alternatively, result in an agreement upon the basis of the understanding of the mistaken party for whom the remedy of rectification may be available in relation to any written agreement made pursuant to the negotiations.” Foskett on the Law of and Practice of Compromise, 7 ed, para 4-22.

The alleged mistake

63. The debtor alleged that the 24 April Order was void for mistake because the petitioners were aware of:

(i)  the fact that the debtor was labouring under a mistaken notion that an overbid process was available when it was not;

(ii)  the implied terms of the Settlement Agreement and the Consent Order.

The facts in support of the alleged right to overbid

64. As early as mid-February 2012, there had been discussion between Mr Dye and Mr Klaus of the liquidator on overbidding.  Mr Dye made 2 proposals for buyers with close affiliation to the debtor to purchase the assets of Fadar and requested Mr Klaus for an opportunity to overbid if the latter were to receive a more favourable proposal.

“In fact I believe that in order for CMA to meet its fiduciary duty to creditors, of which [the debtor] is one, it must provide the opportunity for further bids on the property. I do not think I am saying anything that in any way varies from our prior discussions, but I wanted to make our position clear so that Fadar or any other interested party does not believe that CMA can close a deal without providing further opportunities to bid on the property, without our objection.”

65. Mr Klaus’ reply was, “If the decision is made to move forward with one of the offers received, acceptance will (be) subject to an overbid process.”

66. Three days before the auction, Mr Klaus asked if the debtor and/or his financial partners were going to participate in the auction, to which the answer was that there was no such plans.  Mr Klaus expressed disappointment and so did Mr Dye[15]. Mr Dye stated in his email,

“I am also disappointed that we will not be able to participate. I believe that we assembled and made ‘good faith’ offers that under most circumstances would have permitted us to close a deal. However, several of our potential associates were not interested in participating in the auction process and preferred to do a private deal. Also, had there not been so much past history between Winston and Fadar, I think we could have forged a deal. I hope the auction goes well for all concerned.”

67. In the morning of the auction, Raymond Lee (representing a group assisting the debtor) made a last ditch telephone offer to bid at around US$23‑24 m which would include a settlement of all claims with Fadar.  The liquidator insisted that the potential buyer deposit US$500,000 with the liquidator before the auction would be continued even though there was then only one registered bidder.  Eventually Mr Lee did not attend the auction. 

68. On 22 April 2012, the debtor’s US attorney, Claremont Law Group Inc, asserted that the sale by auction was subject to an overbid process, and asked for the sale proceeds to either remain in Fadar’s possession or be offset against any consent judgment that may be entered in the Hong Kong court.  They also demanded for full and complete accounting of Fadar since the petitioners had taken over control.

69. On 23 April 2012, at 10:55 am, Dobler Law Group Inc (the debtor’s US attorney) wrote to Penelope Parmes (the liquidators’ attorney), stating that the former was in discussion with 2 entities to submit overbids.  Dobler asked for the liquidator’s procedure for submission of overbids and a copy of the Hackman offer accepted by the liquidator so that the debtor could submit offers.

70. Parmes wrote back to Dobler at around 3:39 pm Pacific time, ie 7:39 am Hong Kong time on 24 April, setting out the history of events and denied that there was an overbidding process.

71. Steve Chen was informed of this letter by email from Dobler on 23 April at 3:44 pm Pacific time (ie 7:44 am Hong Kong time on 24 April).  This was not communicated to the debtor’s then lawyers (Chu & Lau) before or at the hearing at 10:00 am on 24 April before Chung J. The debtor claims that at the time the 24 April Order was made, the parties were not aware of the non-availability of the overbid process.

72. Dobler had by letter dated 24 April sent at 3:03 pm Pacific time refuted allegations in Parmes’ letter.  Dobler said that Parmes did not address the fact that there were 2 potential buyers willing to pay more for the assets outside the auction.  The liquidator had less than arms length relationship with Hackman Capital.  Dobler asserted that the liquidator failed to obtain the best value for the assets of MVP in breach of its fiduciary duty to the creditors of MVP; and had acted in concert with Fadar to the detriment of the debtor.  Dobler informed Parmes of the 24 April Order. 

“If Hong Kong court’s Order is fully complied with, Mr Chung will be the owner of Fadar on or before May 22, 2012. To the extent that CMA (the liquidator) has engaged in any conduct that has caused a loss of value to Fadar, Mr Chung will seek to hold CMA fully accountable for those losses.”

In this letter, there was no suggestion that the sale through auction was void because of mistake.  Dobler even said that the debtor would become owner of Fadar if he were to pay.

73. Raymond Lee had approached Hackman to see if it would be interested in reselling the assets of MVP at US$10.5m[16]. He was told that the offer was too low.  Hackman had already received an offer for US$14.5 to 15 m and if properly marketed, he might be able to get as much as US$18m. 

74. The debtor claims that by the auction and by preventing him from overbidding, the substance of Fadar’s investment and hence the subject matter of the parties’ bargain were stripped away.  If he had known about it, he would not have entered into the 24 April Order. 

Application of the legal principles

75. The petitioners say that they had never heard of an overbid until the debtor’s US attorney first raised it on 22 April 2012.  This must be rejected as the emails between Dye and Klaus between 16 and 18 April 2012 showed that the notion of overbidding was not a recent invention of the debtor. 

76. The debtor clearly had no intention to bid despite having notice of the auction.  He did not pay any deposit, sign the bid procedures or sign the asset purchase agreement, as required for bidding.  Pre-auction proposals were not accepted for failure to prove financial ability to close.

77. Ms Tam SC emphasized that though the debtor did not bid, he had wanted to overbid.  In my view, if there had been an overbid process, Raymond Lee would not have made an oral offer on the morning before the auction.

78. The debtor might have a case if the correspondence had stopped in February 2012 but contemporaneous documents would have excluded overbidding.  The debtor did not deny that the Notice of Bidding Procedures was sent to Mr Dye by email on 2 April 2012.  Clause 7 of the Notice stated that all sales were “final, absolute …” “Seller intends to sell the Assets to the Qualified Bidder(s) who have presented the highest and/or best Qualified Bid(s).” Clause 11 provided that upon closing of the Sale, possession of the Assets subject to such bidder’s Definitive Agreements would immediately be granted to that Successful Bidder.  Neither the auction nor the terms of Notice of Bidding Procedures were objected to by the debtor. 

79. Had there been an overbid process, the procedure would have been agreed between the debtor and the liquidator before the auction and not afterwards, when the assets would have gone out of the hands of the liquidator. Whatever “overbid” would be a private deal between the debtor with the successful bidder, not involving the liquidator.  In fact, the debtor approached Hackman Capital after the auction was over.

80. The letter dated 22 April 2012 from the debtor’s US attorney demanded that the proceeds of sale from the auction be offset against any consent judgment[17].  This clearly showed that the debtor could not have intended to overbid even if he believed he had the right to do so. 

81. Moreover, the liquidators’ insistence on compliance with bidding qualification meant that they had not shared, encouraged or induced the debtor’s notion of overbid.

82. Ms Tam, SC submits that Chung J might have made a mistake as to time.  In paragraph 21 of his judgment[18], he referred to a declaration dated 4 May 2012 in which Dobler said that he was informed of the rejection of the defendant’s “overbid” several days before the April 2012 hearing.  In fact, what was rejected, on 19 April 2012 prior to the auction, was an offer to purchase all assets of MVP for US$10.5m and a request for postponement of the auction to enable the potential bidder to submit a bid materially in excess of the offer.  That mistake, in my view, was simply irrelevant in view of the present fuller state of evidence.

83. Ms Tam, SC submits that much of the documentation relating to the auction process involves legal documents governed by US law.  Interpretation of such documents is to be addressed by US legal experts.  With respect, there is nothing to show that such interpretation involves legal principles different to those in Hong Kong.

84. Mr Smith, SC rightly points out that the implied terms ground and the overbidding ground are contradictory.  If the petitioners had unilaterally removed the very subject matter, how would an overbid process assist him in getting back a company worth US$23.8m?  An overbid would only mean that he would pay more for a company worth less.  To this, Ms Tam, SC can only say that the debtor was ousted from the management and could not stop the fire sale.  All that he contemplated was to get back the assets and recover from the petitioners.  This contemplation was, in my view, akin to buying litigation.  In any case, since the debtor denies having consented to the 24 April Order, how could the mistake on overbidding have assisted him?

85. I find that the debtor was not labouring under a mistaken notion of there being an overbid process at the time the 24 April Order was made. The petitioners/ liquidator neither had that notion nor encourage or induce the debtor’s.  There was nothing to sustain a case on common mistake or unilateral mistake based on the notion of overbid.

86. As for the debtor’s misunderstanding of the meaning and effect of the Settlement Agreement and the 24 April Order, and failure to realize the existence of the implied term, for the reasons given in Sections A and B above, there could not have been such misunderstanding, nor had the petitioners caused or induced it.

D.  The estoppel ground

87. Where one person (‘the representor’) has made a representation of fact to another person (‘the representee’) in words or by conduct, with the intention and the result of inducing the representee to act on the faith of such representation and alter his position to his detriment, the representor, in any litigation which may afterwards take place between him and the representee, is estopped, as against the representee, from making, or attempting to establish by evidence, any averment substantially at variance with his former representation.  Spencer Bower on Estoppel by Representation, 4^th ed, para I.2.2.

“There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not. For example, it may be desirable to settle a disagreement to an existing state of affairs in order to establish a clear basis for the contract itself and its subsequent performance. Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerns those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel.” Peekay Intermark v ANZ Banking Group [2006] 1 CLC 582, para 56.

88. The alleged representation was that upon payment by the debtor, the petitioners would transfer the equity in Fadar to him; and the undertaking not to “remove any assets of Fadar”.

89. Alternatively, estoppel by convention may operate. This prevents an unjust departure by one person from an assumption adopted by another as the basis of some act which, unless the assumption is adhered to, would operate to that other’s detriment.  Thus, “the parties must enter into some legal relationship on the basis of an assumption that is shared by or common to them both.  The commonality of the assumption is what marks out estoppel by convention as a distinct form of estoppel.” Unruh v Seeberger (2007) 10 HKCFAR 31, 79H.

90. The debtor claims that there has been an assumption between the parties that the petitioners were obliged to deliver up to the debtor the share of and in Fadar worth US$23.8m by reference to the value of the underlying assets.  The petitioners are thus estopped from denying such an obligation.

91. Having regard to the analyses under the implied terms ground, the petitioners did not share such common assumption, or make representation as to value.  By the time the 24 April Order was made, the Fadar assets had been sold.  Whatever assets the petitioners undertook to preserve would be the proceeds of auction instead of the Fadar assets themselves.  It could not be the assumption of the petitioners that what was preserved was worth anything near US$23.8m.  The case on estoppel is unsustainable.

PETITION PRESENTED WITH IMPROPER MOTIVE AND THUS CONSTITUTED ABUSE OF PROCESS

92. The court frowns upon an attempt to use bankruptcy proceedings as a means to wrongfully extort payment from a respondent or to otherwise obtain a collateral advantage from him: Re a Debtor (no 883 of 1927) [1927] All ER 267, 274B-D.

93. The debtor suggests that due to the fact that there are a number of ongoing proceedings between related parties[19], he believes that the present bankruptcy proceedings have been brought with the improper motive of forcing him into being unable to properly pursue his rights. 

94. Each set of proceedings has its own cause of action to establish.  The present amended petition will be decided on its merits.  The fact that granting a bankruptcy order will have a knock-on effect of bringing other claims of the debtor against related parties to a standstill is not, without more, evidence of any improper motive on the part of the petitioners.  There is no evidence of improper motive shown.

FINDINGS

95. I find that there is no bona fide dispute to the judgment debt on substantial grounds.  Nor was the petition issued for the purpose of extortion of the debtor or otherwise an abuse of process.  The opposition by the debtor is but another desperate attempt to wriggle out of his liability over the judgment debt. 

WHAT ORDER SHOULD BE MADE?

96. A successful petitioning creditor is entitled to a bankruptcy order.  However, Ms Tam, SC asks for an adjournment pending the resolution of the Fresh Action or the IVA application.

97. Ms Tam, SC submits that the Fresh Action is effectively a cross-claim against the judgment debt.  The factual circumstances there are highly interwoven with those relied on in this petition.  The proper approach should be to stay or dismiss the petition pending set-off.  See re Finbo Engineering Co Ltd [1998] 2 HKLRD 695, Le Pichon J (as she then was).

98. Looking at the statement of claim in the Fresh Action, there is no question of set-off.  There is simply no plea of any breach of contract or other actionable wrong sounding in damages.  The only plea of breach relates to the undertaking given to the court, breach of which would only result in committal for contempt but not private remedies.  In any case, the undertaking has expired automatically 28 days after the 24 April Order. There was no allegation that the assets were removed in the 28 day period.  The alleged stripping of assets was before the 24 April Order was even made and formed part of the implied term ground.  The temporary stay of execution of the 24 April Order has lapsed after 28 days.  Accordingly, there were no damages to set off the judgment debt.

99. Ms Tam, SC submits that there is no authority which supports the petitioners’ application to stay the Fresh Action.  I am satisfied that the stay sought is really a temporary one pending resolution of this petition.  If the petition is dismissed, the Fresh Action can proceed.  If a bankruptcy order is granted, prosecution of the Fresh Action will be in the discretion of the Official Receiver.

100. Ms Tam, SC also suggests that a bankruptcy order should not be granted pending hearing of the IVA application in less than 3 weeks’ time.  After hearing the arguments on the petition, there is nothing to persuade me to change my mind that the present proceedings should not wait for resolution of the dubious IVA application.

101. I therefore order as follows:

(1)  That a bankruptcy order is to issue against the debtor;

(2)  By virtue of the bankruptcy order, the proceedings under HCA 1290/2012 shall be stayed;

(3)  Both notices of appeal in HCA 1283/2011 are dismissed for not being prosecuted; 

(4)  The application for stay of execution of the 24 April Order is also dismissed.

102. I make an order nisi that costs (including those reserved) should follow the event and be to the petitioners on all applications, to be taxed if not agreed.  There shall be certificate for 2 counsel.

103. I am most grateful to counsel for their thorough preparation and assistance to the court.