RE CHEUNG KWAN

HCB 705/2019

[2020] HKCFI 1033

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 705 OF 2019

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J U D G M E N T

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1.  By a bankruptcy petition presented on 31 January 2019 (as amended on 17 April 2019) (“Petition”), CM International Capital Limited (“petitioner”) seeks a bankruptcy order against Ms Cheung Kwan (“debtor”).

2.  As is common in petition of this nature, on 2 September 2019, the Court gave directions on filing of affirmations and directed that no further affirmation to be filed without leave of the Court. 

3.  The Petition was originally scheduled to be heard on 20 November 2019 but was adjourned due to the debtor’s belated application to file further evidence, being an affirmation of Shi Lei (“Shi 1^st”). Leave was given to the debtor to file Shi 1^st and to the petitioner to file affirmation in reply.  The petitioner filed its reply on 24 December 2019, being the affirmations of Liao Feng (“Liao 1^st”) and Song Shuren (“Song 1^st”).   

4.  The hearing of the Petition was fixed for 11 March 2020, but was adjourned due to the General Adjourned Period of the Court. On 27 February 2020, the debtor issued a summons to strike out parts of Liao 1^st and Song 1^st on the ground that it is “an abuse of process for the petitioner to circumvent the legal effect of the provision of ‘no further evidence to be filed without leave’” by filing evidence which it “should and could have filed earlier” before the substantive hearing on 20 November 2019.  The parts which the debtor seeks to strike out are matters relating to the transactions in question, specifically those matters of which the affirmants have personal knowledge.   

5.  In my view, the strike out summons is a classic “satellite” litigation and must be dismissed.  It is a belated attempt on the part of the debtor to derail the hearing in March 2020.  As submitted by Mr William Wong SC[1], counsel for the petitioner, the main theme of Shi 1^st is that the petitioner devised a “sham” arrangement to avoid disclosing its interest in a listed company.  Shi’s allegations concern Insight Go Limited (“Insight Go”) and what he had allegedly been told by the petitioner’s personnel to the effect that the loans were the petitioner’s investment.  The petitioner is entitled to file evidence in reply to such allegations, including evidence on why the transactions were structured in a way which involved 2 entities (Insight Go and Star Way Enterprise Limited (“Star Way”)), and the arrangements in relation to such entities.  The petitioner has not raised any new allegations in Liao 1^st and Song 1^st.  Nor has the debtor proposed to file any further affirmation in response to Liao 1^st and Song 1^st.

A.    Background

6.  The following fact and matters are not in dispute.   

7.  The debtor is a sophisticated business person with substantial commercial experience in that:

(1)  from November 2011, she was the non-executive Chairman of Kazakhstan Potash Co Ltd (“KPC”)[2], a substantial company listed on the Australian Stock Exchange, which engages in exploration and mining of potash mines in the Republic of Kazakhstan ;

(2)  since July 2013, she has been the beneficial owner of all the shares in China-Asia Resources Fund (“CAR”) and acted as its director through Vision Capital (Asia) Limited.  CAR became a creditor of KPC in June 2013 through subscription of its convertible notes;

(3)  since May 2016, she has been a substantial shareholder of China Cloud Copper Company Limited[3], a company whose shares are listed on The Stock Exchange of Hong Kong Limited (“SEHK”).  From September 2016, she has been its executive director and Chairman;

(4)  from 27 November 2015 to 7 June 2018, she was an executive director of Burwill Holdings Limited (“Burwill”), a company whose shares are listed on SEHK; and

(5)  on 28 September 2016, she (through a corporate vehicle) held 6.45% shares in Huiyin Holdings Limited[4], a company whose shares are listed on SEHK. 

8.  On 10 April 2015, CAR subscribed for 138,000,000 shares (equivalent to 13% of its enlarged issued shares) in Burwill at HK$0.31 per share.  By 2 June 2015, CAR became the second largest shareholder of Burwill, holding 4,760,111,685 shares.

9.  Pursuant to a subscription agreement dated 5 May 2015, Burwill (through a subsidiary) subscribed for 16.64% of the (then) issued shares (as enlarged) in KPC.  The subscription was completed on 5 January 2016, and Burwill became the single largest shareholder of KPC, holding 28.13% of its issued shares.

10.  Insight Go was incorporated in the British Virgin Islands (“BVI”) on 2 September 2015 and the petitioner was its sole shareholder.  On 17 September 2015, Mr Shi Lei (石磊) (“Shi”) became the sole shareholder of Insight Go and Ms Song Shuren (宋樹人) (“Song”) was appointed as its first director.  In mid-2016, Mr Liu Cheng (劉成) (“Liu”) was appointed as an additional director. 

11.  Star Way was incorporated in the BVI.  From at least 15 July 2015, Zhou Wei (周偉) (“Zhou”) was its sole shareholder, and one of its directors. The other director was Song. 

12.  Shi and Zhou were both nominated by the debtor. According to the debtor, Shi was referred to her by a friend, while Zhou was “found” by her.  Zhou described himself as a long time friend of the debtor.

13.  Song and Liu both worked for the petitioner.  Mr Liao Feng (廖峰) (“Liao”) was a director of the petitioner from 6 February 2015 to 27 December 2018.

14.  By a facility agreement dated 4 November 2015 (“1^st FA”), the petitioner agreed to advance a term loan in the amount of US$9.2 million loan (“1^st Loan”) to Insight Go for the purpose of acquiring 273,876,923 shares (equivalent to 4.99% of issued shares) in Burwill at HK$0.26 per share. 

15.  The conditions precedent stipulated in the 1^st FA included execution of the following agreements as security for the 1^st Loan: (1) a Security Agreement dated 4 November 2015 whereby Insight Go agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a Debenture dated 4 November 2015 whereby Insight Go agreed to create a fixed and floating charge over all its assets, and (3) a Deed of Guarantee and Indemnity dated 4 November 2015 executed by the debtor (“1^st Guarantee”).   

16.  The 1^st Loan was paid into Insight Go’s bank account on 6 November 2015. 

17.  By another facility agreement dated 15 January 2016 (“2^nd FA”), the  petitioner agreed to advance another term loan in the amount of US$9 million loan (“2^nd Loan”) to Star Way Enterprise Limited (“Star Way”) for the purpose of acquiring 266,545,275 shares (equivalent to 4.99% of issued shares) in Burwill at HK$0.26 per share. 

18.  Again, the conditions precedent stipulated in the 2^nd FA included execution of the following agreements all dated 15 January 2016 as security for the 2^nd Loan: (1) a Security Agreement whereby Star Way agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a Debenture whereby Star Way agreed to create a fixed and floating charge over all its assets; and (3) a Deed of Guarantee and Indemnity executed by the debtor (“2^nd Guarantee”).  For convenience, I will refer to the 1^st Guarantee and 2^nd Guarantee as “Guarantees”.

19.  The 2^nd Loan was paid into Star Way’s bank account on 21 January 2016.

20.  The 1^st and 2^nd Loans (together “Loans”) were applied by Insight Go and Star Way to acquire shares in Burwill equivalent to 9.98% of its issued shares (“Burwill Shares”). Pursuant to the Security Agreements dated 4 November 2015 and 15 January 2016, the Burwill Shares were deposited into a custodian account.   

21.  The parties entered into supplemental agreements dated 18 January 2016 to provide a security top-up mechanism, which requires Insight Go and Star Way to deposit top-up cash (being HK$0.26 less the closing price x number of Burwill Shares) into the settlement account if the price of the Burwill Shares falls below HK$0.26 per share. 

22.  It appears that Insight Go and Star Way are special purpose vehicles used for borrowing the Loans and holding the Burwill Shares. 

23.  In May 2016, the debtor lent HK$2 million to Star Way for the purpose of allowing the latter to pay interest to the petitioner.  In June 2016, the debtor arranged for HK$5,260,000 (or US$699,000) to be lent to Insight Go for the purpose of paying the 6 months’ interest payable to the petitioner. 

24.  The 1^st Loan became due on 7 November 2017, while the 2^nd Loan became due on 22 January 2018.  On these maturity dates, the trading prices of the shares in Burwill closed at HK$0.32 and HK$0.31 respectively.

25.  According to the summary of Burwill’s share prices adduced by the debtor, it was only until 31 August 2018 that the share prices fell below HK$0.26 per share.

26.  The petitioner made 2 demands against the debtor:

(1)  By email dated 9 February 2018, the petitioner stated that according to the trading price of 8 February 2018, the value of the Burwill Shares fell below the principal of the Loans and demanded for (a) repayment of US$22,051,000, being the principal, interest and profit sharing payable by Insight Go and Star Way, and (b) deposit of top-up “guarantee money” into the custodian account.     

(2)  By another email dated 31 August 2018, the petitioner referred to the principal and interest due under the Loans (which amounted to US$19,875,500) and the continued decline in the value of the “charged shares” (i.e. Burwill Shares), and demanded for deposit of top-up “guarantee money” into the custodian account to avoid enforcement of the charge.   

27.  Despite the aforesaid demands, Insight Go and Star Way did not make any repayment or deposit any top-up cash into the custodian account. 

28.  By a statutory demand served on the debtor on 21 December 2018 (“SD”), the petitioner demanded the debtor to pay US$25,278,087.66, being the amount due and payable as at 31 August 2018 under the Deeds. 

29.  Following the debtor’s failure to comply with the SD, on 31 January 2019, the Petition was presented.  As at the date of the Petition, the petitioning debt was US$26,866,937.44 (“Debt”), being the amount due by Insight Go under the 1^st FA (US$13,477,915.67) and the amount due by Star Way under the 2^nd FA (US$13,389,021.77).   

B.    Discussion

30.  As the debtor has failed to comply with the SD and has not repaid the Debt, by virtue of section 6A(1)(a) of the Ordinance, the petitioner has discharged the onus of showing that the debtor is unable to pay his debt, as required by section 6(2)(c) of the Bankruptcy Ordinance (Cap 6).

31.  It is well established that in opposing a bankruptcy petition, the debtor has to show a bona fide dispute on substantial grounds by sufficiently precise evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §27, per Kwan JA (as she then was); Re Soetrisno Farida [2019] HKCFI 2756, at §11, per Ng J).  In this regard, it is not sufficient for the debtor to merely raise “a cloud of objections on affidavits” (Artech Development Ltd v Posismo Ltd [2018] HKCFI 344, at §10(4), per Ng J).

32.  In the Notice of Intention to Show Cause filed on 21 March 2019 (“Notice”), the debtor stated that she intends to show cause against the Petition on the following grounds:

(1)  there was no valid or proper service of the SD;

(2)  the Loans were not due on the dates specified in the Petition;

(3)  the Loans are secured;

(4)  had the petitioner liquidated the Burwill Shares on the maturity dates of the Loans, the Debt would have been fully settled;

(5)  the Debt is not for a liquidated sum; and

(6)  the petitioner is unable to prove that the debtor is unable to pay or has no reasonable prospect of being able to pay the Debt. 

33.  In her second affirmation filed on 9 September 2019 (“Cheung 2^nd”), however, the debtor alleged, for the first time[5], that:

(1)  Insight Go and Star Way were at all times controlled and owned by the petitioner, and Shi and Zhou held the shares in Insight Go and Star Way as nominees of the petitioner;

(2)  The Loans were in fact the petitioner’s investment in Burwill.  The petitioner designed and used Insight Go and Star Way as “phantom platform corporate vehicles” to acquire not more than 5% of Burwill’s issued shares.  This was said to “facilitate free trade without disclosure and simplify internal procedures”, and to avoid the obligation to disclose the petitioner’s interests in Burwill to SEHK;

(3)  The debtor, being an “influential independent person”, was asked to provide the “guarantees in form”.  She agreed to sign the Guarantees because the petitioner is an overseas investment company under the China Minsheng Investment Group, and she “hoped to have the chance to work with such a large company in the future”.  More importantly, the debtor hoped that the China Minsheng Bank (“CMB”) would advance a loan to CAR which, in turn, would be applied to finance KPC’s acquisition of potash mine.  That hope was materialised when CMB agreed under an agreement dated 13 November 2015 to advance a US$75 million to CAR.

(4)  At that time[6], Liao “promised” that the Guarantees “were guarantees in form only to comply with the formalities in the plan designed by [the petitioner] rather than real legal guarantees and that no legal liability would be pursued at any time” (“Alleged Promise”). 

34.  At the hearing, Mr Anson Wong SC[7], counsel for the debtor, (rightly) does not pursue any of the grounds stated in the Notice.  Instead, he contends that on the basis of Cheung 2^nd, Shi 1^st and the affirmation of Zhou (“Zhou 1^st”), the debtor has shown a bona fide defence on the Debt on the grounds of (1) “sham”; (2) “illegality” and (3) “estoppel by convention”.  Much reliance is placed on Zhou 1^st and Shi 1^st, where they said that they had been told by Liao and Song respectively that the acquisition of Burwill Shares was an investment of the petitioner, but dressed up as Loans to Insight Go and Star Way so as to avoid having to disclose the petitioner’s interest to SEHK.

35.  In my view, the debtor’s assertions that all the agreements signed between the parties, including the Guarantees, are “sham” or that such agreements are “illegal” are unbelievable. 

36.  First, the assertions bear the hallmarks of a recent invention.  Neither the debtor, Shi nor Zhou have been able to produce any documents (whether contemporaneous or after the event) in support of their assertions.  Even after the debtor had been served with the SD, and with the benefit of legal advice, the debtor did not in the Notice assert that any of the agreements signed between the parties are “sham”, “illegal” or that the petitioner is estopped from relying on any of the agreements signed. 

37.  Second, the debtor’s assertions are flatly contradicted by contemporaneous documents, which show that prior to signing each of the 1^st and 2^nd Guarantees:

(1)  The petitioner’s representative, Liu Chao (劉超), issued a 忠告(“Advice”) to the debtor, which described the nature of the Loans and the Guarantees to be provided by the debtor as security for the Loans, and advised the debtor to review the financial position of Insight Go and Star Way, seek independent legal advice and financial advice before deciding whether to sign the Guarantees. 

(2)  The debtor signed her name before a solicitor of Messrs David Lo & Partners (“DLP”) to confirm that she received and understood the Advice.

(3)  The debtor also signed a 擔保人確認函(“Confirmation”) addressed to DLP, to confirm that she understood the nature of the 1^st FA, the 2^nd FA and the Guarantees, and that she had confirmed to DLP at a meeting (in the absence of the petitioner’s representative), the following matters: 

“(1) 貸款人要求律師樓向本人提供下文所載的法律意見，使本人不能在簽署擔保書後，聲稱本人在法律上不受擔保書約束。

...

(5) 會面時，羅律師展示了擔保書，並要求本人細心閱讀擔保書及提出問題。羅律師解釋說以下是擔保書的主要條文及含意的概要，但並非包攬無遺:-

(a) …

(b) …

(c) 擔保書將會就上文5(a) 段所述的款項向貸款人提供擔保。此外，在擔保書中，本人將會承諾在借款人不償還上文5(a) 段所指的任何款項時償還該款項。這表示本人將根據擔保書的條文成為借款人對貸款人在貸款協議項下的還款責任擔保人；本人須對該等款項承擔個人法律責任；貸款人可以為該等款項而起訴本人。如果借款人不準時償還貸款，貸款人有權透過採取法律程序強制執行擔保書權益，以獲得還款。” (underlined added)

38.  The above documents confirm that far from being “sham”, the nature of the Guarantees (and the 1^st FA, the 2^nd FA) was explained by DLA to the debtor, and the debtor confirmed that she understood and agreed to be bound by their terms. 

39.  Although in Cheung 2^nd the debtor tries to get around the terms of the Guarantees by alleging that Liao made the Alleged Promise, she does not say that the Alleged Promise was made before she signed the Guarantees or that she had relied on the Alleged Promise in entering into the Guarantees.  This is not surprising, as such allegation, even if made, would be inconsistent with the Confirmation and Clauses 3.2, 3.16(d) and  Clause 3.17 of the Guarantees, which provide:

“3.2 Binding Obligations

  The obligations expressed to be assumed by [the debtor] in this Guarantee are her legal, valid, binding obligations, and enforceable in accordance with its terms.”

“3.16 Prior to execution of this Guarantee, the Guarantor has been:

…

(d)    advised by the Lender that by signing this Guarantee, she will be liable for punctual payment of all outstanding indebtedness owing and/or payable by the Borrower under the Finance Documents and if the Borrower does not pay any amount in respect of such indebtedness when due, she will be called upon to honour her obligations under this Guarantee.”

“3.17 … [the debtor] further declares that in deciding to sign this Guarantee, she has not placed any reliance upon any advice, opinion or representation of (a) any person having any interest in the Borrower whether by reason of directorship, shareholding or employment; or (b) save as set out in Clause 3.16 above, the [petitioner] or any of its representatives or agents.” (underlined added)

40.  Third, the debtor’s assertion that the Loans were in fact the petitioner’s investment in Burwill Shares and that she has no interest in or control over Insight Go and Star Way is wholly inconsistent with the following (undisputed) fact and matters:

(1)  the debtor’s own conduct  in arranging for payment of interest due and payable by Insight Go and Star Way in 2016 (see §23 above);

(2)  the demands made by the petitioner against the debtor to repay the Loans and deposit top-up “guarantee money” (see §26 above), which the debtor has never challenged;

(3)  the fact that for over 2 ½ years (from 27 November 2015 to 7 June 2018), the debtor was involved in the management of Burwill as its executive director (see §7(4) above), while the petitioner did not have any role in the management of Burwill.  The fact that the appointment only happened after the  acquisition of 4.99% shares in Burwill by Insight Go is consistent with the debtor being the beneficial owner of Insight Go, as it was through this acquisition that the debtor was able to entrench her control over Burwill.  Had the petitioner been the real owner of Insight Go, it would have procured its nominee to be appointed as a director of Burwill, rather than leaving such an important position to the debtor; and

(4)  until the petitioner took step to replace the shareholder of Insight Go in end 2016, the sole shareholders of Insight Go and Star Way (i.e. Shi and Zhou) were both nominated by the debtor, and were unknown to the petitioner. 

41.  Fourth, the suggestion that the debtor was asked to sign the Guarantees “as a mere formality” makes no sense.  Given her extensive involvement in substantial and listed companies (see §7 above), the debtor must be familiar with commercial transactions including the use of corporate vehicles to hold shares in listed companies, and the execution of a personal guarantee by the real owner of the borrower.  She has not proffered any explanation as to why the petitioner required the alleged “formality”, particularly when Insight Go and Star Way would provide security for the Loans (in the form of the Security Agreements and Debentures).

42.  Fifth, the debtor’s reliance on the control exercised by the petitioner over Insight Go and Star Way is misplaced.  As part of the transactions, the parties agreed that the petitioner was entitled to appoint a director of Insight Go and Star Way and an authorised signatory of their bank accounts, to ensure that the assets held by these companies could not be disposed of without the consent of the petitioner.

43.  Lastly, counsel for the debtor contends that if the petitioner were a genuine lender, it would have taken step to realise the Burwill Shares after the maturity dates of the Loans.  It is submitted that had the Burwill Shares been sold in November 2017 and January 2018, the petitioner would have realised more than enough money to repay the amounts due, and the fact that the petitioner did not take such step is only consistent with or explicable by the fact that the petitioner was the real owner of the Burwill Shares.  I am unable to accept the contention.  There is nothing unusual for the petitioner not to enforce the security provided by Insight Go and Star Way upon maturity of the Loans.  This is particularly so when the value of the Burwill Shares exceeded the amount owed to the petitioner.  Indeed, the evidence shows that the petitioner had been monitoring the share prices of Burwill, and when the prices fell below the amount owed, demands were made against the debtor (and the borrowers) for repayment and deposit of top-up “guarantee money”.

44.  In light of my holding that the debtor’s assertions are incredulous, it is unnecessary to deal with the debtor’s legal arguments on sham, illegality or estoppel by convention.  Nevertheless, I will deal with the points briefly.   

45.  So far as “sham” is concerned, Mr Wong relies on Artech where Ng J said (in the context of a winding up petition), at §14:

“Thus, in order to establish the Loan Agreement is a sham, the Company must adduce evidence to show that both the petitioner and the Company (1) intended that the Loan Agreement would not create the legal rights or obligations it appeared to create; and (2) intended that the Loan Agreement would mislead a third party into believing the parties had created those rights and obligations. Failure to establish the Petitioner had such an intention is fatal to the Company’s defence.”

46.  Applying the test in Artech to the present case, it is clear that the first requirement cannot be met, given that the contemporaneous documents discussed in §§37 and 39 above all show that both the petitioner and the debtor intended the Guarantees to be binding upon the debtor.  As there is no suggestion that the Guarantees would mislead (or have misled) any third party, the second requirement is also not established. 

47.  As for “illegality”, counsel for the debtor argues that as the Loans were in fact the petitioner’s investment in Burwill Shares, the failure on the part of the petitioner to disclose its interest in Burwill Shares constituted a breach of sections 324, 325 and 328 of the Securities and Futures Ordinance (Cap 571).  I do not think it has been demonstrated that a breach of the provisions under the Securities and Futures Ordinance, if established, would have the effect of rendering the Loans to become irrecoverable or the Guarantees to become unenforceable. In any event, the argument is based on the same evidence relied on by the debtor in support of the alleged “sham”, which I consider to be incredible.  It follows that I do not think that there is any credible evidence basis in support of the alleged illegality. 

48.  In relation to “estoppel by convention”, counsel for the debtor relies on First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 at §79 and submits that where the parties entered into some transactions on the basis of a common assumption and it would be unjust to allow a party to depart from such common assumption, the Court would give effect to such common assumption.  He relies on the debtor’s evidence and submits that there was a common assumption that the Guarantees “were not meant to be enforced and would not be enforced”.  In seeking to enforce the Guarantees, the petitioner is attempting to depart from the parties’ common assumption and it is unjust for the petitioner to do so.  This is said to be a sufficient detriment for the operation of estoppel by convention, relying on Mitsui Babcock Energy Ltd v John Brown Engineering Ltd (1997) 51 Con LR 129 at 185-6.

49.  The evidence discussed in §§37 and 39 above are sufficient to refute the debtor’s assertion that there was a common assumption that the Guarantees would not be enforced.  Nothing further needs to be said. 

50.  As the debtor fails to discharge the burden of showing that there is a bona fide dispute on the Debt, whether on the grounds of sham, illegality or estoppel by convention, there is no valid ground in opposition to the Petition.   

51.  I make a usual bankruptcy order against the debtor.  I make a costs order nisi that the costs of the Petition and of the strike out summons be to the petitioner and be paid out of the assets of the debtor’s estate, with certificate for 2 counsel.  The costs of the Official Receiver to be paid out of the deposit.