CITITREND ASIA LTD v. GENSTAR INVESTMENT HOLDING LTD

HCCW 416/2021

[2022] HKCFI 3482

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 416 OF 2021

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D E C I S I O N

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1.  Cititrend Asia Limited seeks by its Amended Petition (“Petition”) an order that Genstar Investment Holding Limited (“Company”) be wound up on the grounds of insolvency. The debt upon which the Petitioner relies is explained in [6] of the Petition:

“According to a Promissory Note dated 13 September 2013 (the ‘Promissory Note’), the sum of USD378,567.00 is loaned to the Company by the Petitioner and the Company agrees to pay back the Creditor the sum of USD378,567.00 with 1% interest rate per annum from the date of the Promissory Note. The Company therefore has been indebted to the Creditor in the sum of USD378,567.00 for the principal amount under the Promissory Note since 13 September 2013.”

2.  To prove insolvency the Petitioner relies on a statutory demand served on 18 October 2021 (“Statutory Demand”). The Statutory Demand describes the debt (“Debt”) as follows:

“According to a Promissory Note dated 13 September 2013 (the ‘Promissory Note’), the sum of USD378,567.00 is loaned to the Company by the Creditor and the Company agrees to pay back the Creditor the sum of USD378,567 with 1% interest rate per annum from the date of the Promissory Note.”

3.  The material part of the Promissory Note reads as follows:

“Genstar Investment Holding, Ltd. referred to herein as ‘Promisor’, and CitiTrend Asia Ltd., referred to herein as ‘Promisee’, enter into an agreement that the sum of $378,567.00 USD is loaned to Genstar Investment Holding, Ltd .. and that the promiser agrees to pay back the promisee the sum of $378,567.00, (Three Hundred Seventy Eight Thousand, Five Hundred Sixty Seven and 00/100 Dollars), with 1% interest rate amortized annually from the above date. The payback schedule is to be over 5 years starting in 2016 or sooner. Details to be determined according to cashflow on Jan 2016.This Note is Guaranteed by the assets of Genstar Investment Holding, Ltd.”

4.  Although the details of the payback schedule is ambiguous, from the language of the Promissory Note what is clear is that the principal and interest were to be repaid by the end of 2021 at the latest; it being clear from the Promissory Note that the latest date the Payback Schedule was to commence was the end of 2016. No practical problem arises in regard to assessing when or how much had to be repaid, because it is not in dispute that the advance was made and there has been no repayment of the principal or the interest.

5.  The Petition is contested by one of the 2 contributories to the Company, Hiperk Limited (“Hiperk”) , which holds 54% of the Company. The remaining 46% is held by the Petitioner. In order to successfully oppose the Petition, Hiperk must demonstrate that the Company has a bona fide defence on substantial grounds to the Debt. What this test requires is uncontroversial. The Parties agree that it has recently been summarised accurately in a decision of DHCJ Sit SC in Asia View Enterprises Limited[1].

“28. The applicable legal principles are not in dispute:-

(1) A petitioner who is owed an undisputed or indisputable debt is entitled to a winding up order ex debito justitiae.

(2) In order to successfully oppose a petition on the basis of a bona fide dispute to the debt on substantial grounds, the debtor has to adduce sufficiently precise evidence which is believable, and must establish that it has a defence of substance, not just a fair probability of one.

(3) Winding-up proceedings are summary in nature and are not meant to be used for the purpose of debt collection. If the court is satisfied that there is a bona fide dispute on the debt, it will not usurp the function of a civil court and decide the disputes between the parties.

(4) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, ‘substantial’ means having substance and not frivolous.

(5) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(6) The court should caution itself against unsubstantiated and unparticularized assertions. It is incumbent on the company to put forward sufficiently precise factual evidence to substantiate his allegations.

(7) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely ‘raising a cloud of objections on affidavits’ or whether there really is substance in the dispute raised by the company.

See Re Hong Kong Investments Group Limited [2018] HKCFI 984, HCCW 63/2017 (unrep., 21 May 2018), §§11-14.””

6.  As I explain in [10] of Re China Culture City Ltd[2]:

“…bare oral allegations, uncorroborated by documentary evidence or contrary to common or commercial sense, are insufficient to raise bona fide dispute on substantial grounds.”

7.  Hiperk contends that the Company has 2 defences. The first is that the Promissory Note is unenforceable because the agreement is unenforceable on the grounds that the repayment provisions are uncertain. I disagree. As I have already observed even assuming it was unclear what the interim repayment schedule was to be, it is clear that by 31 December 2021 the Debt was repayable in full. The authorities are clear that the commercial courts strive to find an ascertainable meaning in a commercial contract not strike them down because of infelicitous language and a weakness for pedantry[3]. As I have explained it is clear what the Promissory Note states the position to be in the circumstance that have arisen: the Debt is payable. The fact that this arguably is not so if the dispute had concerned an alleged right to repayment earlier than 2022 is not in my view a reason to find the agreement unenforceable on the grounds of uncertainty.

8.  The second ground is that the Promissory Note does not accurately reflect the prior agreement at the time the Petitioner made the advance that constitutes the Debt. Keith Chan, who appeared for Hiperk, argued that Hiperk, which made a similar payment at the time, agreed with the Petitioner that the advances were in the nature of capital contributions and not to be treated as loans. However, the evidence filed by Hiperk’s owner Luo Mingyue does not say this let alone demonstrate with sufficient clarity that if it is arguable. On 3 November 2021 Hiperk’s solicitors wrote in response to the Statutory Demand as follows:

“1. We act for Mr. Luo Mingyue in the capacity of director of GenStar Investment Holding Limited (the ‘Company’) in relation to the captioned matter.

2. We are instructed that the captioned statutory demands were served on the Company at its registered office on or about 18^th October 2021. By the statutory demands, your client alleges that the Company is in indebted to your client under a Promissory Note dated 13^th September 2013 (the ‘Promissory Note’) for a loan in the principal amount of USD378,567.00 and interest of USD3l,366.8l (up to 13^th September 2021) (the ‘Loan’).

3. Whilst our client in principal does not dispute that the Loan was lent by your client to the Company, our client is of the view that the Loan is not immediately due and repayable to your client. Below we set out our client's case:-

(a) All material times, Hiperk Limited (of which our client is the sole shareholder and Cititrend Asia Limited (of which Mr. Sean Duby is the sole owner) are the only two shareholders of the Company;

(b) At all material times, the Company's major asset is a wholly-owned WOFE company in China, namely Taizhou HiPerk Machinery Company Limited (‘WOFE’);

(c) In or about year 2013, in view of WOFE's need of additional capital for the funding of the factory building and facilities located in Zhejiang, China, which arc owned by the WOFE, our client (through Hiperk Limited) lent USD285,000 and Mr. Sean Duby (through your client) lent USD378,567.00 (i.e. the principal of the Loan) to the Company. Over the same period, our client also lent money (in Chinese currency RMB) to the WOFE directly;

(d) Given the Loan was made in the context of funding a long term investment of the WOFE, it was the parties’ intention that the Loan shall not be due and repayable on demand, instead it shall only fall due and become repayable upon further deliberation by and consensus to be reached between your client and the Company and the repayable schedule is subject to further agreement between the parties;

(e) In particular, no discussion at all in regards to repayment of the Loan had ever taken place up to now;

(f) In respect of the execution of the Promissory Note, we are instructed that Mr. Sean Duby prepared and presented the draft Promissory Note to our client at his home address in the United States for execution by our client for and on behalf of the Company. Upon execution, neither our client nor the Company was provided with the original or copy of the Promissory Note.

4. We are instructed to deny your client's allegations in the said statutory demands and to dispute the same on the ground that any alleged debt/loan owned by the Company to your client is not immediately due and repayable. In view of our client's bona fide dispute over the alleged debts under the said statutory demands, our client is prepared to object to any winding up petition against the Company filed on the basis of the said statutory demands”

9.  This clearly does not suggest that the Debt was a capital contribution. Subsequently in his affirmation in opposition dated 16 December 2021 (at which time he says he did not have a copy of the Promissory Note) Mr Luo says this in [8]:

“Taizhou Hiperk spent large amounts of money in 2010 for purchasing a piece of land (the ‘Land’) located at No. 11, Huaqian Avenue, Pingqiao Town, Tiantai County, Zhejiang Province, China. In the period from around 2011 to 2013, Taizhou Hiperk needed extra capital to build factory facilities on the Land and purchase equipments. In view of the situation, Sean Ransom Duby and I agreed orally to make loans to the Company through Hiperk and the Petitioner. According to oral consensus of Sean Ransom Duby and I, although the respective capital injections would be deemed loans from Hiperk and the Petitioner to the Company, the loans would not be repaid immediately upon the request of the creditors (viz. Hiperk and the Petitioner) as the purpose of the loans was to provide Taizhou Hiperk with long-term operation capital. Instead of repayment at any time on demand, Sean Ransom Duby and I agreed then that the loan repayment should be subject to negotiation and consensus to be reached by Sean Ransom Duby and I in the future, and the loan repayment would not essentially commence until Taizhou Hiperk makes profit. Back then; Sean Ransom Duby and I did not discuss interest calculation method, Sean Ransom Duby, Hiperk, the Petitioner and I did not sign any written agreement to record our intention back then. In accordance with the oral agreement between Sean Ransom Duby and I, since neither Sean Ransom Duby nor I (respectively representing the Petitioner and Hiperk) had the ability to set aside a large amount of money for the capital injection back then, Sean Ransom Duby and I made a number of remittances into the Company's bank account through the bank accounts of the Petitioner and Hiperk respectively, with a different amount in each remittance. The two parties confirm that the total amount of remittance made by the Petitioner is USD378,567.00 (viz. the Principal).”

10.  Clearly this evidence falls far short of demonstrating that it is arguable that the advances were capital contributions. The highest one can put it is that it was not agreed at the time of the advances what the repayment terms would be. However, that is not a ground for concluding that it is arguable that the Promissory Note is not to be given effect. It seems to me clear that Hiperk has not demonstrated that there is a bona fide defence on substantial ground.

11.  Mr Chan argued that if I were to conclude that the Promissory Note was clear in giving a right to repayment by 31 December 2021, but not any early date, this presented the Petitioner with the technical difficulty that the Statutory Demand had been issued in October 2021 and could not be relied on to prove insolvency and that the Petition refers to section 178(1)(a) of the Companies (Winding Up and Miscellaneous) Ordinance, Cap. 32 only. Further Hiperk has offered to pay US$420,000 to the Company to make it solvent. Ms Wong accepted that she could not rely on the Statutory Demand if I take that view, as I do, that it is only clear that the Debt was repayable by 31 December 2021. However, the financial statements produced by Hiperk clearly show the Company has liabilities exceeding US$1 million and, therefore, even if Hiperk were to inject additional capital of US$420,000 the Company would remain insolvent, although Mr Luo in his 1^st affirmation states that only Hiperk and the Petitioner are creditors.

12.  It seems to me that the totality of the evidence demonstrates that the Company is insolvent. I waive the irregularity in the Petition not referring to section 178(1)(c). I will hear counsel on whether Hiperk wants time to pay the Debt and avoid a winding up order and costs.

13.  Having heard counsel I will make the following order.

14.  Petition be adjourned until Monday 5 December 2022 at 9:30am before the Companies Judge. If by 5pm on 1 December 2022 Hiperk has caused the Debt to be settled the Petition be dismissed and counsel’s attendance be dispensed with. If the Debt is not settled the normal winding up order be made and counsel’s attendance be dispensed with.

15.  The Petitioner’s costs up to and including 15 December 2021 be paid out of the assets of the Company; the Petitioner’s costs thereafter be paid by Hiperk.