RE ANXIN-CHINA HOLDINGS LTD

HCCW 317/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 317 OF 2015

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REASONS FOR JUDGMENT

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Introduction

1.  This is a creditor’s petition (re‑re‑amended on 2 March 2016) presented by Bloom Zone Ltd (“the petitioner”) for the winding up of Anxin‑China Holdings Ltd (“the Company”).  At the conclusion of the hearing the petition was dismissed.  My reasons appear below.

2.  The petitioner’s claim is based on an alleged debt of HK$180 million (“the petitioning debt”) said to arise under a Supplemental Sale and Purchase Agreement dated 18 August 2014 (“the Supplemental Agreement”) made between the petitioner as vendor, the Company as purchaser and Tony Apatan Go as guarantor (“Go”).  The Supplemental Agreement varied an earlier Sale and Purchase Agreement dated 4 February 2014 (“the Agreement”) made between the same parties whereby the Company agreed to acquire the entire issued share capital of Glory Pavilion Limited (“Glory Pavilion”) from the petitioner for $1.3 billion.

3.  Glory Pavilion (through Mutual High Investment Limited (“Mutual High”)) was the 100% owner of Altus Technologies Limited (“Altus”).  Altus had developed certain information management technologies relating to the operation status of elevators and their surrounding environment relevant to the elevator security surveillance business.  The objective of the Agreement and the Supplemental Agreement was the acquisition of Altus (“the transaction”).

4.  In response to a statutory demand dated 17 September 2015 served on the Company by the petitioner’s solicitors, by letter dated 25 September 2015 Fan, Wong, & Tso, (“the FWT letter”) solicitors then acting for the Company, stated that the Company “does not dispute” the petitioning debt and requested further time to arrange for its payment.

5.  Infinity I‑China Fund (Cayman), LP (“the opposing contributory”) opposed the petition on the basis that there is a bona fide dispute on substantial grounds as to the genuineness of the petitioning debt.

Background facts

6.  The Company is an exempted company incorporated in the Cayman Islands in April 2003, registered under Part XI of the Companies Ordinance, Cap 32 as a non‑Hong Kong company with its principal place of business in Hong Kong and listed on the main board of the Hong Kong Stock Exchange (“HKEx”) in November of the same year.

7.  The Company acts as an investment holding company and carried on business through its PRC subsidiaries (collectively “the Group”).  It provides specialised intelligent monitoring systems for industrial and public safety surveillance.  It is an integrated solutions provider, services operator and equipment manufacturer of ISD and ISS systems, with 97% of its business in ISD systems.  

8.  The single largest shareholder of the Company at the time of the transaction was one Chen Hong (“Chen”) who was beneficially interested in 20.09% of its issued share capital.

9.  While Chen was not a member of the Company’s board, he was the CEO of its 2 main subsidiaries Shenzhen Anxin Digital Development Co Ltd (“Shenzhen Anxin”) and Jiangsu Hongxin Intelligence Technology Co Limited (“Jiangsu Hongxin”) that the Company had acquired in 2009/2010.  After those acquisitions, the Company (then known as Broad Intelligence Pharmaceutical Holdings Ltd) jettisoned its former pharmaceutical business, changed its name to its present form and replaced its directors and management.

10.  The Company had 4 executive directors, 2 non‑executive directors and 3 independent non‑executive directors (“INEDS”).  As appears from the table below, the executive directors became directors after the acquisition of the subsidiaries mentioned in §9 above:

Name	Position	Date of Appointment	Date of Resignation
LIU, Zhongkui (“Liu”)	CEO Chairman, CEO Chairman of Audit Committee	3/6/2011 9/1/2012	6/10/2015
WANG, Bo	Executive Director; Vice‑Chairman	15/6/2012	7/10/2015
YANG, Ma (“Yang”)	Executive Director	2/6/2010	7/10/2015
LIN, Supeng (“Lin”)	Executive Director	3/2/2010	17/2/2016

11.  Liu, Yang and Lin were all Chen’s subordinates in one or more of the principal subsidiaries chaired by Chen and all were appointed to the Company’s board after the acquisition of those subsidiaries.

12.  Chen is the Chairman, sole executive director, president and legal representative of Bonus Sky Investment Group Holdings Limited (“Bonus Sky”) (which together with Chen’s many other companies are collectively referred to as “the Bonus Sky Group”) and according to corporate filings, he increased his shareholding in Bonus Sky from 2% to 94% on 18 August 2014.

13.  The Company’s 2013 annual report showed that the Group had total cash assets in excess of $2 billion of which over $25 million was attributable to the Company.

14.  Trading of the Company’s shares has been suspended since 1 April 2015 and the Company (currently in the third and final stage of de‑listing) has until 10 June 2017 to submit a viable resumption proposal.

15.  The salient events that led to that state of affairs may be summarised as follows:

(a)  As at 31 December 2013, as shown in its annual report, the Company was solvent.

(b)  It entered into the Agreement with Glory Pavilion to acquire the latter’s issued capital on 4 February 2014.  A first payment of $200 million was to be made upon fulfilment of conditions precedent set out in clause 2.1 (A)‑(E).

(c)  There was no payment made but further negotiations ensued resulting in the Supplemental Agreement varying the Agreement.  The Supplemental Agreement required an initial payment of $20 million within 2 weeks of its signing and (as appears from §24 below) the balance of $180 million for the 1^st instalment would be due upon fulfilment of certain conditions and not on completion.

(d)  The initial payment was made on 10 September 2014, followed by completion on 30 September 2014.

(e)  The Company made no further payments.

(f)  Public announcements made since mid‑March 2015 disclosed serious problems within the Company concerning its management and internal controls:

•  On 18 March 2015, the Company announced a delay in the publication of its 2014 results due it requiring additional time to provide information to its auditors.

•  By 31 March 2015 discrepancies had emerged between banking records provided by certain accounting staff and management accounts of the Company and various subsidiaries.  As a result, the Company set up a special team to carry out a full investigation.

•  On the same day, trading was suspended.

(g)  On 8 May 2015 the Company announced that there was fraud committed by certain employees of the Company although, allegedly, it did not cause any loss to the Company.  Nevertheless, it showed that internal controls might have been inadequate.

(h)  The auditors took the view that the findings of the special team disclosed that fraud had been committed.  The auditors resigned on 11 May 2015 when the Company refused to appoint independent forensic accountants to conduct an independent investigation into the fraud.  The auditors considered in those circumstances it would be impossible for them to continue the 2014 audit.

(i)  On 3 June HKEx imposed conditions for the resumption of trading and essentially requiring that it be satisfied on the discrepancies issue and the adequacy of the Company’s internal controls.

(j)  As a result, on 11 June 2015, the Company appointed RSM Nelson Wheeler as independent forensic accountants.

(k)  The statutory demand was served on the Company on 17 September 2015.

(l)  On 24 September 2015, Cheung Chuen (“Mr Cheung”) an INED since September 2004 and a member of the Company’s audit, nomination, remuneration and corporate governance committees, resigned.  It resulted in the Company not having sufficient INEDs as required by the listing rules.

(m)  On 25 September 2015 several significant events took place:

•  Sue Yang (the Company’s financial controller), doubting the integrity of certain member(s) of senior management, gave notice of her resignation, effective from 30 September 2015.

•  The independent forensic accountants (appointed in June) resigned with immediate effect as they had serious concerns as to the information provided by the Group during the independent forensic review as well as the integrity of one or more member(s) of the Company.  

•  The FWT letter was sent in response to the statutory demand, although it was only 8 days after service of the demand on the Company.

(n)  The petition was issued only 12 days later, on 29 September 2015.

(o)  On 2 October 2015, on the petitioner’s application, Osman Mohammed Arab, Wong Kwok Keung and Lai Wing Lun (“Mr Lai”) (collectively the “PLs”) (who had been the independent forensic accountants) were appointed provisional liquidators of the Company.

The applicable legal principles

16.  Where a company against which a petition is presented defends it on the basis that the debt is disputed on substantial grounds, the test to be applied is not controversial: see Re Neo Telemedia Ltd (unreported, CACV 132/2015, 19 October 2015 at §3.1) where it is stated that:

“(1)  The onus is on the company to show that it disputes the debt on substantial grounds by adducing sufficiently precise factual evidence to satisfy the court that it has a bona fide dispute on substantial grounds;

(2)  The court has to be satisfied that the company’s assertions are believable in the context of so much of the background as is either undisputed or beyond reasonable dispute and in so doing, the evidence is not to be approached with a wholly uncritical eye;

(3)  Unsubstantiated and unparticularised assertions are to be treated with caution; and

(4)  The court has to take a view on the evidence (without trying the dispute on affidavit) but to determine whether a substantial dispute exists.”

17.  In the present case, the defence is not raised by the Company but by the opposing contributory.  As a matter of principle, there would not appear to be any reason why the same principles should not be applicable.

The opposing contributory’s case

18.  The opposing contributory's case is that there is a bona fide dispute on substantial grounds as to the genuineness of the petitioning debt.  It relied on the totality of the evidence to show that the stipulated condition was not satisfied as at the date of the statutory demand such that the petitioning debt could not have arisen and that serious questions are raised as to the bona fides of the transaction (upon which the petitioning debt is based) derived from evidence obtained from public records coupled with the following unusual unexplained features: (a) connections to Chen and Bonus Sky; (b) lack of evidence on valuation; (c) lack of evidence on due diligence; and (d) lack of explanation.  

The evidence

19.  The evidence adduced is voluminous.  I propose to deal with the material aspects that emerge under the headings below.

(a)  The petitioning debt

20.  The petitioning debt is said to arise under the Supplemental Agreement that varied the Agreement made some 6 months earlier by the same parties.  So far as material, the relevant provisions of the Agreement and the Supplemental Agreement are outlined below.

21.  Under the Agreement, the purchase price of $1.3 billion was payable in instalments.  The first instalment of $500 million itself was to be made in two stages: the first part required a payment of $200 million conditional on the satisfaction of the conditions precedent set out in the sub‑clauses (A)‑(E) of clause 2.1 (“the conditions precedent”).  The balance of $300 million was payable only after written confirmation that the relevant technologies were satisfactory.

22.  While the Agreement contained a waiver provision, the condition in sub‑clause 2.1(A) (relating to all authorisations, consents and approvals for completion of the transaction) could not be waived: see clause 2.4 (hereafter referred to as “the 2.1(A) condition”).  The second part of the first instalment (ie $300 million) was not payable until 7 business days after receipt of the Company’s written confirmation that the “relevant technologies” were satisfactory.

23.  As already noted, the Company did not make any payment under the Agreement.  Absent evidence to the contrary, the obvious and logical inference must be that the conditions precedent (including the 2.1(A) condition) had not been satisfied.  

24.  Clause 2.2 of the Supplemental Agreement amended the payment structure of the first instalment of $500 million.  Under sub‑clause (I), in relation to the first part of $200 million, $20 million was payable within two weeks after the signing of the Supplemental Agreement and:‑

“the balance of HK$180 million shall be payable upon completion of 80% of the trial production by the Vendor of 20,000 units of the safety monitoring and security systems for elevators (namely 16,000 units) and the Purchaser has confirmed in writing of its satisfaction of the Technology …”

While the opposing contributory used the term “condition precedent” to refer to this condition, for the avoidance of any confusion, this condition relating to the obligation to make payment of $180 million will hereafter be referred to as “the stipulated condition”.

25.  Digressing at this point, as earlier noted, the 2.1(A) condition could not be waived.  For that reason, the Company's obligation to make any payment in respect of the first instalment under the Supplemental Agreement was contingent on the prior satisfaction of the 2.1(A) condition.

26.  Satisfaction of the 2.1(A) condition is not mentioned in the Supplemental Agreement.  The only document in the bundles that mention their fulfilment is the Company’s announcement of 30 September 2014 relating to completion of the acquisition. But the question whether the 2.1(A) condition was satisfied prior to 10 September 2014, the date the $20 million was paid, remains open.

27.  The ostensible reason for the Supplemental Agreement as expressed in clause 1.2 is the following:

“As the Purchaser is in the course of testing the Technology, including a trial production of 20,000 units of equipment for testing this feasibility of mass production, therefore the Purchaser's satisfaction of the Technology has not yet been obtained in writing. The Parties have agreed to amend the Acquisition Agreement accordingly.”

28.  While from the point of view of syntax clause 1.2 was hardly satisfactory, it is clear that the parties considered that the product had to be “tested” before any view could be formed as to whether the technology was satisfactory.  Testing was therefore a pre‑requisite to any written confirmation and a necessary part of the process.  Further, it is to be noted that there is no mention in the Agreement of any “trial production” at all.

29.  Insofar as the stipulated condition is concerned, in order to trigger the obligation to pay $180 million, two events had to happen.  As regards the first of such events (“the 1^st event”), the petitioner's position was that it merely required the production of 16,000 units and not their installation.  (Pausing here, it should be mentioned that notwithstanding the fact that the stipulated condition required production “by the Vendor”, the petitioner sought to contend that the obligation to produce fell on the Company.  It only abandoned that position in reply when it finally accepted that the obligation fell on Altus/Glory Pavilion.)

30.  While that might be a literal reading, the wording of the provision seemed a very roundabout way of stating that what was required was the production of only 16,000 units.  Why mention 20,000 units at all? What was the point?

31.  In actual fact, the petitioner’s reading is contradicted by the Company’s announcement dated 18 August 2014 referring to the production of 20,000 units:

“It is also a condition to the payment of the 1^st Instalment Consideration that the Company has confirmed in writing of its satisfaction of the Technology. The Company is in the course of testing the Technology, including a trial production by the Vendor of 20,000 units of the safety monitoring and security systems for elevators for testing the feasibility of mass production …

In order to maintain the subsistence of the proposed Acquisition to enable the Company to continue testing and ensuring that the technology is satisfactory to the Company … the Directors consider it to be in the interest of the Company to enter into the Supplemental Agreement with the Vendor and the Guarantor.” (emphasis added)

32.  The opposing contributory considered that the 1^st event required the production of 20,000 and not only 16,000 units of “safety monitoring and security systems for elevators” and the nature of the product also required their installation before any testing could be carried out.  The Company's satisfaction of the technology depended on 80% of the units, namely 16,000, being found satisfactory.

33.  The opposing contributory’s case is that the evidence filed by Mr Lai on behalf of the PLs showed that (i) prior to the acquisition (namely, 4 February 2014) Altus might have installed less than 1000 elevator monitoring systems: see the 1^st affirmation of Mr Lai dated 4 August 2016 at §107; and (ii) by 4 August 2016 (the date of Mr Lai’s 1^st affirmation) only 17,000 units had been installed: see the 2^nd affirmation of Mr Lai dated 12 December 2016 at §15.  At best, all that the PLs’ evidence shows is that 17,000 had been installed by 4 August 2016, almost 11 months after the relevant date.  In any event, even on the petitioner’s reading, there is no evidence that by the date of the statutory demand (17 September 2015), 16,000 units had been produced.  

34.  If (as is my view) the opposing contributory’s construction of the stipulated condition were to prevail, then, as at the date of the statutory demand (17 September 2015), the obligation to pay the petitioning debt could not have been triggered.  In that scenario, there would be every reason to dispute the petitioning debt and none to acknowledge it.  In those circumstances, it is wholly inexplicable why the Company did not dispute the petitioning debt.

35.  While the true construction of the stipulated condition is not a matter for determination in these proceedings, there is little doubt which reading is likely to prevail.  Even if the petitioner’s reading were to prevail, the second of the two events (“the 2^nd event”) would also be dispositive on the issue of liability.

36.  The 2^nd event required the purchaser’s written confirmation of its satisfaction of the technology.  The notion of “satisfaction” of the technology also appeared in the Agreement and was inextricably linked to the notion of testing.  In response to the court’s query as to whether the test was subjective or objective, Mr Lok (counsel for the petitioner) stated that it was purely subjective and entirely a matter for the purchaser.  That must also reflect the petitioner's approach to the construction of the 2^nd event.

37.  No written confirmation is before the court.  If the requisite confirmation was in fact issued (so satisfying the 2^nd event), it is inconceivable that it would have been omitted from the evidence, that being a critical and indispensable component of the stipulated condition.  As fulfilment of the 2^nd event is a pre-requisite to establishing the petitioning debt, its absence must mean that the 2^nd event was never satisfied.

38.  On that basis it fell to the petitioner to provide a credible explanation for the “omission”.

(b)  The Company’s written confirmation

39.  The only “evidence” relating to its existence is a passing reference to it in the evidence of the PLs.  However, it is not suggested that the PLs have had sight of such a written confirmation.  Paragraph 114 of Mr Lai's 1^st affirmation stated that:

“[a]ccording to the former local management of [Altus] and the former local management of the Group in Shenzhen, the Company confirmed in writing of its satisfaction that 80% of the trial production of 20,000 units of the first safety monitoring and security systems for elevators (namely 16,000 units) was completed.”

40.  The PLs did not state if the confirmation was dated and if so its date nor did they explain what steps (if any) were taken to verify it.  Further, the source(s) of the information was/were unnamed, the persons having the conversation were not identified and the person signing the confirmation has also not been named.  When this is put in proper context, against the backdrop of fraud having occurred within the Company that the PLs (in their former role as independent forensic accountants) had themselves found to exist and their “concerns as to the integrity of one or more member(s) of the management of the Company”, the weight (if any) to be attached to this evidence has to be minimal.

41.  It is in this context that the absence of evidence of due diligence having been performed assumes relevance.  There is no mention by the PLs of there being any record(s) pertaining to tests undertaken by the Company to verify if the technology was satisfactory.  Such a process had to be undertaken before the Company could form any view on the matter.  Had such tests been conducted, records would surely exist.

42.  In those circumstances, the evidence necessary to establish the Company’s liability to pay the petitioning debt is simply not there.

(c)  The petition and its verification

43.  The starting point is r.29 of the Companies (Winding‑Up) Rules which provides as follows:

“r 26 Companies (Winding-Up) Rules — Every petition for the winding up of the company shall be verified by an affidavit referring thereto. Such affidavit shall be made by the petitioner … or, in case the petition is presented by a corporation, by some director, secretary, or other principal officer thereof, and shall be sworn after and filed with a 4 days after the petition is presented, and such affidavit shall be sufficient prima facie evidence of the statements in the petition.”

44.  As the petition was twice amended, the relevant affirmations are (i) the affirmation of Liu Chunli (“CL Liu”) dated 28 September 2015 (“Liu 1:); (ii) her 4^th affirmation dated 30 December 2015 (“Liu 4”); and (iii) the affirmation of Chai Mao (“Chai”) dated 3 March 2016 (“Chai 1”).  As CL Liu and Chai are not directors or officers of the petitioner, plainly, the petitioner has failed to comply with r.26.

45.  The winding‑up rules are expressed in mandatory terms.  While Ms Eu SC (counsel for the opposing contributory) submitted that the court should dismiss the petition in limine as a result, I do not consider that dismissal is automatic following non‑compliance. The court retains a discretion as regards the appropriate order to be made having regard to all relevant circumstances.

46.  I turn to consider the relevant evidence.  Without a doubt, the affirmations filed for the purpose of verifying the petition (ie Liu 1 and 4 and Chai 1) are seriously defective.  First, as already mentioned, CL Liu and Chai do not hold any office in the Company.  Second, the affirmations do not show personal knowledge on the part of the deponent at all: neither CL Liu nor Chai has stated his/her source of knowledge of the matters deposed to.  While each of CL Liu and Chai has exhibited a written resolution of authorisation, it cannot dispense with or replace the usual requirements.  

47.  Third, there is an undated draft affirmation of Go (“the Go draft affirmation”) exhibited to the 2^nd affirmation dated 12 December 2016 of Lam Kai Pun, solicitor for the petitioner.  In his affirmation (at §4) Mr Lam represented that the Go draft affirmation “would be affirmed and filed in due course”.  The master was so informed at a hearing on 14 November 2016.  Yet that has not happened despite a time lapse of more than 2 months.  

48.  The Go draft affirmation stated that Go was stationed in the Philippines, rendering it “very inconvenient” for him to attend Hong Kong to make the supporting affirmations.  That was proffered as the ostensible reason for authorising CL Liu to make the supporting affirmations.  But the deponents (CL Liu and Chai) purporting to verify the petition on the petitioner's behalf do not themselves reside in Hong Kong but Shenzhen.  Further, their visits to Hong Kong, certainly in the case of CL Liu, required the renewal of a re‑entry permit.  (There is no indication of Chai’s travel status.)

49.  With regard to CL Liu, two observations are pertinent: (i) she shares a home address in Shenzhen with Yang (one of the executive directors of the Company at the material time) but no information was given as to their relationship nor would it appear that the PLs have made inquiries in that regard; and (ii) 2 letters exhibited to her affirmations are copies of faxes received by the Company from Go.  Since the documents she exhibited are copies of documents received by the Company, they could only have come from someone with access to that source.  In those circumstances, only Yang (who as an executive director of the Company would have access to such documents) fits the bill. 

50.  According to the Go draft affirmation, allegedly, Go came to know CL Liu (who was working in a hospital in Shenzhen) some years earlier and it was said that CL Liu introduced “Ms Cai” to him.  In fact, “Ms Cai” turns out to be [Mr] Chai.  That error is telling: it raises serious doubts as to whether Go has even met the deponent, [Ms] Cai/[Mr] Chai.  While the ostensible reason advanced for the introduction to “Ms Cai” was because CL Liu did not reside in Hong Kong, as earlier noted, neither is Chai so resident:  he gave as his address an address in Shenzhen.

51.  Further, in relation to Chai, there is evidence derived from publicly available information show that he was working for Chen at the time when Chai 1 was affirmed: Chai was appointed executive director, general manager, legal representative and supervisor of a company within the Bonus Sky Group in August 2015 and general manager of another Chen/Bonus Sky entity in May 2016. He continues to work for Chen.

52.  It is beyond argument but that the petition has not been properly verified.  There is no conceivable reason why it could not have been.  After all if Go (as he claims) is the sole owner of the petitioner and hence the only person standing to benefit from the transaction, why did he not file his own affirmation? What prevented him from doing so?  Instead, he chose to rely on affirmations made by two individuals (CL Liu and Chai) who have no apparent connection with the petitioner.  It simply defies belief and cries out for an explanation.  

53.  What has occurred cannot be excused or overlooked as accidental or clerical errors.  Winding up proceedings have serious consequences.  Court rules and procedure are there for good reason.  I find the wholesale disregard of the rules and procedure highlighted above highly disturbing.  The petitioner's seeming inability to have the matters relied on in support of the petition properly verified is a very serious matter that without a doubt undermines the genuineness of the petitioning debt if not also the transaction.

(d)  The FWT letter

54.  The Agreement appears to have drafted by TC & Co.  It would appear that FWT replaced them as the Company’s solicitors sometime after the date of the Agreement since FWT were responsible for preparing the Supplemental Agreement.  There is some suggestion by the PLs that DS Cheung & Co might also have acted for the Company at some stage in the acquisition.  In any event, FWT were acting as the Company's solicitors at the date of the FWT letter, 25 September 2015. 

55.  The petitioner relied heavily on the FWT letter as a clear admission by the Company of the petitioning debt.  The issue is whether that fact alone is sufficient to remedy and overcome the seemingly insuperable difficulties faced by the petitioner under the headings (a) to (c) above.

56.  While in a run‑of‑the‑mill creditor/debtor situation, a clear admission by the debtor would normally constitute an almost insuperable obstacle to any attempt to raise a bona fide dispute on substantial grounds for the petitioning debt, plainly the present case is not what one might describe as a common garden variety of creditor petition.

57.  Insofar as FWT’s letter is concerned, the opposing contributory highlighted the following matters:

(a)  FWT’s letter does not amount to a written confirmation of satisfactory testing of the technology being acquired;

(b)  the Company had no reason to acknowledge liability if the stipulated condition had not been satisfied;  

(c)  FWT has not identified the person who gave instructions for the FWT letter; and

(d)  the FWT letter was sent at a time when the Company was in a state of disarray and upheaval.

58.  Mr Lok submitted that the opposing contributory was seeking to reverse the burden of proof when the onus was upon the opposing contributory to adduce sufficient evidence to substantiate its case.  It was further submitted that an opposing contributory could not be in a better position than the Company had the Company itself opposed the petition.

59.  It is not apparent in what way it is said that the opposing contributory is thus able to derive some advantage that is not available to the Company had it opposed the petition.  While the burden of proof and the quality of the evidence do not change whether it is the company or the opposing contributory that opposes the petition (see §17 above), it does not follow that how the burden is discharged and the nature of the evidence adduced must necessarily be the same.  Rather, such matters are fact‑sensitive and fact‑specific.

60.  The FWT letter cannot be viewed in isolation.  It has to be put in context and evaluated against the backdrop of the matters outlined in §§6‑15 above and the specific challenge concerning the satisfaction or otherwise of the stipulated condition.

61.  The relevant backdrop shows that at about the time the statutory demand was served on the Company, significant events had already been unfolding within the Company and one might say, engulfing it: see §15 above.  Critically, by that time the Company was well aware of the inadequacy of its internal controls and the existence of “fraud” that had caused it to appoint independent forensic accountants.  Indeed, the integrity of “senior management” itself (which must mean those having control of and/or actively running the Company) was in issue.

62.  But who would have been in a position to give instructions for and authorise the FWT letter other “senior management” whose very integrity was in question?  In that regard, I also take note of the fact that the FWT letter appeared to have been dispatched in unseemly haste — the “admission” is particularly remarkable in that it occurred only 8 days after receipt of the statutory demand when the Company had 21 days within which to respond, and at a time when major events were convulsing the Company: see in particular the events described in §15(l)‑(m) above.

63.  The petitioner sought to derive comfort from a passage from the judgment of Rogers J (as he then was) in Re Grace Garments Ltd, unreported, HCCW 231/1995, dated 14 February 1996.  That was a case where the petitioning bank had issued a letter of credit and presented a petition against the company.  The solicitors for the company gave a written acknowledgment of the debt on its behalf for good consideration.  The company later sought to resile from that letter written.  It was in those circumstances that Rogers J rejected the contention that there was a substantial dispute as to liability and found the letter to constitute:

“a serious and considered admission. It was made by solicitors properly instructed on behalf of the company … in the circumstances of this case the Court should only disregard this admission if it is satisfied that there is a properly arguable case based on proper evidence.”

64.  The facts of the present case could not be more different.  The Company was hardly operating under normal conditions. The preceding 6‑month period (from March to August 2015) was marked by increasingly serious and worrying developments within the Company itself.  Then came a series of events in the second half of September 2015 — service of the statutory demand of $180 million on the Company on 17 September 2015, the resignation of Cheung on 24 September 2015, followed hot‑foot by the respective resignations of Company’s financial controller and the independent forensic accountants the following day — events that could be described as being of almost seismic proportions.  In fact, a mass exodus of directors (the chairman and 2 executive directors) did take place during the first week of October 2015.

65.  Of particular significance are the reasons given by the financial controller and the independent forensic accountants (the PLs in their former guise) for resigning.  (Pausing here, I note the absence of any written findings/report (whether provisional or in draft form) from the independent forensic accountants.)  On the very day of the FWT letter (25 September 2015), the Company issued an announcement to the effect that the reasons given for the resignations included there being “a possible loss of Company assets”, discrepancies in the Company's records and “serious concerns as to information provided by the Group”.  It was hardly “business as usual”: the conditions then prevailing within the Company in which important decisions had to be made was anything but “normal”.

66.  Further, it is not at all apparent that the admission was given for good consideration since there was no conceivable reason why any admission should have been made when, on the evidence, there were legitimate and unanswerable defences to the petitioning debt.  The admission appeared to be devoid of any rational justification.

67.  Given the upheaval that was taking place within the Company, why would instructions have been given for the FWT letter and in such a tearing hurry?  In those circumstances, given the very legitimate questions the opposing contributory has raised, it was incumbent on the petitioning creditor (being the party seeking a winding up order) to provide a credible answer.  That it has not done.

68.  Taking up the thread from §54, the PLs stated in August 2016 (Lai 1^st at §95) that they were obtaining further information from the 3 firms of solicitors that might have been engaged by the Company in relation to the acquisition of Altus and “their respective work done during their engagement with the Company”.  That must necessarily have covered the period during which instructions would have been given for the FWT letter.  However, there has been no update at all on those matters that would have shed light on the instructions that had been given.

69.  In those circumstances, the petitioner cannot hide behind the FWT letter as exonerating it from providing credible explanations to the legitimate challenges made by the opposing contributory or from complying with the winding up rules and court procedure.

(e)  The transaction

70.  The opposing contributory contended that there was no commercial justification for the transaction based on the fact that the consideration involved was HK$1.3 billion when the net asset value of Glory Pavilion, Mutual High and Altus was just over RMB5 million.  The petitioner for its part pointed to the fact that they were significant profit guarantees for 2014 and 2015, the consideration was spread over four instalments and there were long‑term prospects for the Company in making the acquisition.

71.  It is not the role of the court to pronounce on the commerciality of a particular transaction that is a management decision.  In my view, the factors the opposing contributory relied on as mentioned in §70 without more are insufficient.

72.  The opposing contributory then highlighted the fact that the Company entered into the transaction without any proper valuation. The Company had nothing beyond a “Calculation Report Considering the equity value of Altus Technologies as at 27 January 2014” dated 4 February 2014 (“the calculation report”) prepared by Jones Lang Lasalle (“JLL”).

73.  There are several features of the calculation report that call for comment: (a) the calculation report bears the same date as Agreement; (b) the Company alone was responsible for providing all the information, data and assumptions used for the scenario analyses carried out by JLL; and (c) the calculation report was not an independent formal opinion of value of what was being acquired.

74.  When acquiring Anxin Mate Holding Ltd from the opposing contributory several years earlier the Company had apparently acted on a report taking a similar approach.  That may be so but it cannot validate an approach if it is not one that could be said to be appropriate or in the Company’s best interest. What is an issue here is not the bona fides of the Anxin Mate transaction but of the subject transaction.  

75.  Further, the fact that the consideration was less than the lowest of the three values given in the calculation report cannot and does not of itself establish good faith.  It does not render the point made by the opposing contributory any the less valid.  

(f)  The connections

76.  It is also the opposing contributory’s case that the petitioner is related to Chen, that the transaction was not an unrelated transaction and/or that it was a sham.  The 3^rd affidavit of Ariel Poppel set out information obtained from publicly available information showing connections between the petitioner and the Company through the Company’s then controlling shareholder and persons employed or associated with him.  The connections are depicted in the 6 appendices attached to the opposing contributory’s submissions.

77.  For present purposes, it is unnecessary to go into that evidence in any detail because at this stage it is not for the court to make factual findings but to reach a conclusion based on the evidence presented as to whether there are substantial grounds for disputing the petitioning debt.  The salient matters arising are highlighted below.

 (i)   Chen and the Bonus Sky Group

78.  Publicly available information shows that Chen has been and remains a 94% registered shareholder, Chairman, sole executive director and legal representative of the Bonus Sky Group since at least 18 August 2014.  Prior to that date, he is recorded as the holder of only 2% of its issued shares. The petitioner stressed that Bonus Sky was not under his control until 18 August 2014 when Chen became the 94% shareholder. I note that was the date the Supplemental Agreement was signed.

79.  It is the opposing contributory’s case that that record is inconsistent with a press release published 3 months earlier (on 9 May 2014) of an Inauguration Ceremony held at the Hong Kong headquarters of the Bonus Sky Group said to be the holding company of 3 companies listed on HKEx, namely the Company, China.com (then known as Sino Splendid Holdings Ltd) and also Sinoref Holdings Ltd.  The picture showed Chen its Chairman unveiling the name plaques of those companies.  In other words, Chen (being the Chairman of the Bonus Sky Group) was holding himself out as the person in command.

80.  As earlier noted, at all material times Liu, Yang and Lin were his subordinates in Shenzhen Anxin and Jiangsu Hongxin.  The opposing contributory has exhibited public records that show them as still working for Chen and/ or the Bonus Sky Group.

81.  Chen’s business card described him as Chairman of the Board for the Bonus Sky Group comprising the Company and China.com.  However, Sinoref was not mentioned.  Those matters point to the card being circulated at a time prior to the Bonus Sky Group becoming the holding company of Sinoref.  Since by the date of the press release mentioned in §79 above Sinoref had become part of the Bonus Sky Group, the card must have related to a period earlier than 9 May 2014.  In other words, Chen was announcing the fact that he was Chairman of the Bonus Sky Group months earlier than 18 August 2014.

82.  Whether Chen had become Chairman at the date of the Agreement, he was certainly such well before the date of the Supplemental Agreement.

 (ii)  Go and JinLiJia

83.  By letter dated 1 September 2014, the petitioner directed the Company to pay the initial sum of $20 million due under the Supplemental Agreement to its wholly owned subsidiary JinLiJia (Hong Kong) Trade Company Ltd (“JinLiJia”) stating that JinLiJia was wholly owned by Go.  The letter was signed by Go on the petitioner's behalf.

84.  The Company duly made payment into the account of JinLiJia as instructed on 10 September 2014.

85.  But from its incorporation in 2011, JinLiJia’s sole shareholder and director was one Zhang Liya.  Go does not feature at all in any of JinLiJia’s annual returns in any capacity notwithstanding the assertions made in the petitioner’s letter.  There is no evidence that shows Go to be the sole beneficial owner of JinLiJia.  Plainly an explanation was required but the petitioner chose not to provide one, whether in the Go draft or otherwise.

86.  The day following the initial payment, on 11 September 2014, Zhang transferred all her shareholding to a BVI company but she remained as director of JinLiJia till April 2015 and is also the supervisor of a company in which Chen has a beneficial interest.

87.  CL Liu and Chai who filed the so‑called “verifying” affirmations on the petitioner’s behalf as well as Zhang have all been shown to have some link to or connection with Chen/ the Bonus Sky Group.

 (iii)  Altus

88.  Was Chen was the real vendor of Altus?  Altus was acquired by Mutual High some three weeks prior to the Agreement.  The petitioner criticised the connections sought to be established on the basis, inter alia, that Chen only had a 2% interest in Bonus Sky at the relevant time.  However, as shown in §§79 and 81 above, he held himself out as the Chairman of Bonus Sky months earlier. 

89.  The evidence also shows that several months after the date of the Agreement the Company made new appointments to the board of Altus not as additional directors but to replace serving directors.  It is to be noted that (a) all this occurred at a time when no part of the consideration for the transaction had fallen due or had been paid under the Agreement; (b) the new appointments were all employees/subordinates of Chen.  Although those appointments took place after the date of the Agreement they were made months before completion.  That they should have occurred prior to completion would be inexplicable but for the Chen connection.

90.  Mr Lok criticised the “connections” as not probative, largely built upon “hypotheses of fact based on inference after inference”.  Viewed in isolation, each of the links may not be sufficient.  However, undeniably, a link can be traced from every person involved in the transaction to Chen/the Bonus Sky Group as shown in the appendices.  That state of affairs cannot be sheer happenstance.

Other matters

91.  Where relevant, I have already made references to the PLs’ evidence in considering the material aspects of the evidence.  The PLs have realised assetsand have set out the financial condition of the Company.  The cash assets come to about $1.4 million.  Other than the petitioning debt, the Company’s debts still outstanding are of the order of HK$2.5 million.  The bulk of current liabilities are undisputed debts due to professionals who have rendered services to the Company and listing fees.  None of the other creditors has joined to support the petition.  The listing status of the Company is an asset yet to be realised but its delisting is an event that is looming on the horizon.

92.  As the PLs take a neutral stance in the present proceedings, it is unnecessary to go further into their evidence save to say that they consider the Company to be balance sheet insolvent.

93.  It should be mentioned that the relief sought for a winding up order was framed in the alternative on the just and equitable ground pursuant to section 327(3)(c).  However, there would be no reason for the court to make a winding up order under this head of relief since no grounds for it have been set out in the petition.  

Conclusion on bona fide disputed debt

94.  In my view, the correct approach in the present case required an evaluation of the petitioning debt based on the totality of the evidence.  Adopting that approach, for the reasons set out at length above, I am satisfied that the opposing contribution has demonstrated by credible evidence that the petitioning debt is bona fide disputed.