RE FAME DRAGON INTERNATIONAL INVESTMENT LTD

HCCW 373/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 373 OF 2016

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D E C I S I O N

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1.  This is a petition to wind up Fame Dragon International Investment Limited (“the Company”), a company incorporated in Hong Kong in January 2010, on the basis of a debt due under a loan agreement between the petitioner and the Company dated 13 November 2013, in the sum of US$50 million, together with interest.

2.  Two broad grounds have been raised by the Company in opposition to the petition.  First, it is contended that there is a bona fide dispute of the petition debt.  Secondly, it is submitted that the petition debt is fully secured by a pledge of shares which are said to be worth at a conservative estimate US$350 million.

3.  As to the first ground, the Company and the petitioner are related companies in that Zhuhai Zhenrong Company (“ZZC”), the 100% parent of the petitioner, holds 44.3% in Guangdong Zhenrong Energy Company Limited (“GZE”), which holds 100% of Guangdong Zhenrong (Hong Kong) Company Limited (“GZHK”), which in turn holds 100% of the Company.  It is said that the US$50 million loan which the petitioner indisputably advanced to the Company in November 2013 was in truth capital contribution by ZZC as a shareholder of GZE, not intended to be an enforceable loan. 

4.  In particular, it is said that there was a resolution on 8 November 2012 by the shareholders of GZE, including ZZC, that GZE would increase its capital by RMB700 million for the purpose of making an acquisition of assets, and it is said that ZZC’s pro rata share of contribution, being 44.3% of that amount, was approximately US$50 million, and was eventually structured as a loan from the petitioner in order to “bypass the lengthy and cumbersome approval process required by the State-owned Assets Supervision and Administration Commission in the PRC and to have a book entry to account for the transfer of the funds from the petitioner to the company”.

5.  This background does not positively show that the amount was a capital injection by ZZC into GZE, instead of a loan from the petitioner to the Company. It could also be an explanation of why the latter route was chosen whereas the former was not.  Nor could it explain at all why a pledge was created as security for the loan, the pledge being a pledge by Docile Bright Investment Limited, a fellow subsidiary of the Company, of the shares it held in Neptune Storage Limited as security for the loan in favour of the petitioner.

6.  In my view, the contemporaneous documents are clear beyond peradventure.  There was a letter dated 12 November 2013 from GZE to ZZC asking for a loan of US$200 million and, as part of that, a first loan of US$50 million to be borrowed on 15 November.  The letter suggests that the acquisition contemplated in 2012 had already been completed with the assistance of funds raised from banks in the sum of US$500 million.  The letter also referred to the purpose of the loan as being for working capital and explained that, because funds from banks were not available, US$50 million was needed in order to supplement the working capital.  Repeated references were made in that letter to the sum being a loan, without a single mention that it was to be regarded as a capital contribution by ZZC or the petitioner to GZE or the Company, or that the advance was in some way to be irrecoverable or unenforceable.

7.  Then there was the written loan agreement itself, dated 13 November 2013, which was headed “Loan Agreement (借款協議)”, and contained detailed terms of the loan, including repayment date, interest and security in the form of a pledge by Docile Bright of its shares in Neptune Storage.

8.  There was, apparently executed on the same date, a written pledge or charge by Docile Bright, a fellow subsidiary of GZHK, of its shares in Neptune Storage as security, expressly for the US$50 million loan.  The security was registered in the register of charges of Docile Bright in the BVI, albeit some nine months later in August 2014.  There is no evidence that this slight delay in the registration of the charge was due to the fact that this was not intended to be an enforceable pledge or to be security for an enforceable loan.  The fact remains that Docile Bright executed the share pledge and apparently accepted the registration of that pledge against it.

9.  Then when the petitioner issued the demand for repayment in May 2016, GZE responded in terms referring to the loan borrowed by the Company.  There is a suggestion that the letter from GZE dated 5 July 2016 might be directed towards a different loan of some RMB560 million, but that loan had been advanced to Docile Bright rather than to the Company.

10.  The letter of 5 July 2016 referred to the loans of both the Company and Docile Bright.  There is no suggestion in that letter that the US$50 million advanced to the Company was in any way a capital injection which did not need to be repaid, nor was there any other response to the demand letter from the petitioner or ZZC in May 2016, other than the letter of 5 July 2016.

11.  When a further demand letter was issued by the petitioner’s solicitors in August 2016, there was simply no response.

12.  There is no real evidence to say that all the contemporaneous documents were prepared and signed as a sham or not intended to have any effect.  There is not even any evidence of any oral agreement between any individuals that in any way detracts from the documents.

13.  It seems to me that there is simply an assertion that the money advanced was a capital contribution made by ZZC pursuant to the shareholders’ resolution of November 2012, which assertion is not borne out, and is in fact contradicted, by the subsequent documents entered into over a year later in November 2013.

14.  Nor has the Company produced any of its books of accounts or other records to show that the relevant sum had been treated as anything other than an amount due to the petitioner as a loan.

15.  Equally, there is no evidence from the Company to suggest that the other shareholders of GZE did make capital contribution in respect of the remainder of the RMB700 million, pursuant to the November 2012 resolution.

16.  The same dispute here has given rise to HCA 2110/2016, brought by the petitioner against the Company for recovery of the loan.  The application by the petitioner for summary judgment there was heard before Master S Kwang, who gave summary judgment in favour of the petitioner.  There is a notice of appeal to a judge in chambers filed by the Company on 14 March 2017, but, as is well established, that in itself is not a ground for resisting enforcement of the judgment or a winding-up petition based either on the judgment or on the underlying debt.  There is in addition a summons for stay of execution of the master’s judgment, pending the appeal to a judge, filed on 17 March 2017, that is, last Friday. 

17.  Miss Eva Sit, who appears for the company, submits that I should adjourn the petition until after the hearing of the stay application before the master.  She referred me to authorities that suggest that a stay, if granted, would be a relevant consideration to the consideration by the Companies Court of a winding-up petition such as the present.

18.  It seems to me that no dogmatic rule of law or practice can be laid down in terms of what the court should do, having regard to the developments in concurrent proceedings in the form of a High Court Action and a winding-up petition.  It depends on the circumstances of each case.

19.  In the present case, given that all the relevant evidence in the High Court Action, which is not very voluminous, has been placed before me, and that I have heard the arguments and am conversant with the relevant issues, it really serves no purpose to defer the matter to the master who, incidentally, is a different master from Master S Kwang, on a separate occasion for consideration whether there should be a stay of execution, and then for the parties to return to this court to argue again the winding-up petition.

20.  Accordingly, I reject the first ground of opposition.

21.  The second ground raised by the company is that the petitioner is in possession of full security for the debt.  It is important to note, however, that the security is not security on the assets of the company.  Miss Sit, very properly, drew my attention to the decision of Le Pichon J in Re K & R Wong Construction Company Limited [1998] 2 HKC 364, which established that a creditor holding security provided by a third party is not regarded as a secured creditor in the usual sense in winding-up proceedings.

22.  As far as I am aware, the presence of security provided by a third party is not a defence to an action against the debtor or a winding-up petition, nor does Miss Sit submit otherwise.  All she is saying, as I understand it, is that, in exercising the residual discretion of the court in deciding whether to make a winding-up order, the fact that the petitioner is secured by virtue of a charge or pledge over third party’s assets is something that I can and should take into account.

23.  But this consideration, in my opinion, in the circumstances of this case, is not an independent ground for opposition to the petition.

24.  Given that I have concluded that the petitioner has a petition debt which cannot be disputed on substantial grounds, it seems to me that this is a case where the petitioner is entitled ex debito justitiae as against the Company to a winding-up order.