RE CHINA STEM CELLS (SOUTH) COMPANY LTD

HCCW 49/2023

[2024] HKCFI 2089

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMI NISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 49 OF 2023

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HCCW 50/2023

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMI NISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 50 OF 2023

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(Heard Together)

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JUDGMENT

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1.  There are before the court two Petitions presented by Maxcess Finance Ltd (“Petitions” and “Maxcess”) on 3 February 2023 in respect of (i) China Stem Cells (South) Co Ltd (“CSCS”) in HCCW 49/2023 and (ii) China Stem Cells Holdings Ltd (“CSCH”) (collectively “Companies”) in HCCW 50/2023.

2.  Maxcess is a moneylender and presented the Petitions based on outstanding payments of US$1.74m and US$1.09m respectively under Loan Agreements with CSCS and CSCH. The Petitions were presented pursuant to s.327 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.

Issues

3.  CSCS and CSCH were respectively incorporated in the BVI and Cayman Islands. This court’s winding-up jurisdiction over them are not in dispute.

4.  The Companies are maintaining that they have a bona fide dispute over the debts based on substantial grounds[1], namely, breach of s.18(2)(j) of the Money Lenders Ordinance, Cap 163 (“Ordinance”).

Background

5.  The relevant background facts are quite simple. Maxcess entered into Loan Agreements of substantially the same terms with CSCS for US$1.6m and CSCH for US$1m (“Loans”) on 1 September 2022, repayable within 3 months of the drawdown date. CSCH and CSCS drew down the Loans in full and had them paid into an account held by their indirect parent company, Global Cord Blood Corporation (“GCBC”) on 16 September 2022 and 19 September 2022 respectively.

6.  On 11 January 2023, Maxcess issued Statutory Demands against CSCH for US$1,090,000 and CSCS for US$1,744,000 (“Debts”) representing the outstanding principal and interest. The Companies have failed and/or refused to repay them.

7.  Maxcess’ case is supported by the following uncontroversial facts :

(1) Written board and shareholders’ resolutions dated 1 September 2022 (“Resolutions”) authorising the Companies to enter into the Loan Agreements;

(2) The Loan Agreements and the Resolutions bear the signatures of the directors of the Companies, Mr Albert Chen (“Chen”) and Ms Tina Zheng (“Zheng”); and

(3) The Loan Agreements were performed in that the Loans were drawn down and paid to GCBC in accordance with the Companies’ instructions as contained in their respective drawdown notice. The moneys were used to pay for, inter alia, GCBC directors’ liability insurance, a purpose stated in the Loan Agreements. Chen and Zheng were directors of GCBC at the material times.

The Companies’ evidence

8.  The Companies are now under the control of Cayman-appointed Joint Provisional Liquidators (“Liquidators”). The basis for their appointment was serious risk of mismanagement and misconduct by GCBC’s directors, including Zheng and Chen; risk of dissipation and misuse of GCBC’s assets; and forgery of document by Chen.

9.  The evidence in opposition to the Petitions was adduced in the form of 3 affidavits by Ms Georgia Chow, one of the Liquidators. Her affidavits contain considerable amount of background details which, I regret to say, are not relevant to the resolution of the issue here. For instance, the allegations of wrongdoings on the part of Chen and Zheng which did not concern the Loan Agreements.

10.  There is also much insinuation in Ms Chow’s affidavits over the conduct of Maxcess, eg, the alleged delay by Maxcess in disclosing the Loan documents to the Liquidators. The allegation was answered by Maxcess, and there is no sufficient reason to doubt its evidence that the documents were supplied to the Liquidators soon after they had confirmed their authority to represent the Companies.

11.  Worse still, a very substantial part of Ms Chow’s affidavits was simply submissions and arguments, which are not evidence and should never have been set out in affidavits.

12.  Unfortunately, Maxcess then engaged with the allegations and submissions, and the “evidence” had disproportionately ballooned for what is a fairly simple case. In the analysis which follows, I shall focus on the relevant evidence.

S.18(2)(j) of the Ordinance

13.  Section 18(1) of the Ordinance provides that the agreement for the repayment of money lent by a money lender shall be unenforceable unless a note or memorandum in writing of the agreement is made in accordance with s.18(2). Section 18(2)(j) further requires the note or memorandum to contain “a declaration as to the place of negotiation and completion of the agreement for the loan”. Section 18(3) contains an exception to s.18(1) so that if the court is satisfied that in all the circumstances it would be inequitable not to enforce the agreement, the court may exercise its discretion to enforce it with suitable variations, modifications and exceptions to such extent as it considers equitable.

14.  First of all, I agree with Ms Sit SC, who appeared with Mr Ng for the Companies, that if this court comes to the view that there was a breach of s.18(2)(j), then a winding-up order should not be made because it is not the function of the companies court in winding-up proceedings to adjudicate on whether the Loan Agreements should nevertheless be enforced and with what, if any, variation(s) to their terms pursuant to the discretion under s.18(3).

15.  Mr Dawes SC, who appeared with Mr Lee for Maxcess, submitted that even if this court comes to the view that the place of negotiation and/or completion had been misstated, no court would conceivably refuse to enforce the Loan Agreements because of such minor technical breach. Both sides were experienced commercial party; the Loan Agreements were negotiated, signed and acted upon. No conceivable prejudice had been caused (and none has been suggested by the Companies). There is nothing which needs to be investigated further at trial.

16.  Attractive as it may be, I am unable to agree with Mr Dawes because the exercise of discretion is a holistic consideration of all the relevant circumstances. The Companies had complained, eg, about the high interest rate charged under the Loan Agreements (36% p.a.). No doubt it will be one of the issues which may be argued under s.18(3). It is simply inappropriate to have such issues resolved in this hearing.

17.  The Companies’ case on violation of s.18(2)(j) is as follows :

(1) The memoranda of the Loan Agreements declared that the place of negotiation and completion of the Agreements was the Hong Kong registered office address of Maxcess (“Winning House”).

(2) The “completion” of a written agreement necessarily involves the signing of the same by the counterparty (a proposition not in dispute). The signatory on behalf of the Companies was Zheng.

(3) However, there is an assertion from the Liquidators that Zheng had not come to Hong Kong in the 3 years prior to 2023.

18.  The hearing of the Petitions was adjourned on 15 April 2024 for further evidence on the basis of the Liquidators’ assertion. The further evidence may be summarised as follows. The Loan Agreements were negotiated at Winning House between Chen and Mr Howard Ng (“Ng”), Maxcess’ director, on 4 August 2022. Zheng was not in Hong Kong at the material times. On 1 September 2022, Chen brought the Loan Agreements with Zheng’s signatures to Winning House where Ng counter-signed the documents.

19.  Maxcess maintains that the evidence showed that the Loans Agreements were indeed negotiated and completed at Winning House as stated. The court was referred by Mr Dawes to E-Way (HK) Property Credit Ltd v Fung Wing Tim [2019] 5 HKC 14, [84] (DDCJ Phoebe Man) for the proposition that having regard to the “modern way of business transactions”, provided that part of the negotiations could be said to have taken place at the stated location, s.18(2)(j) of the Ordinance could not be said to have been breached.

20.  With respect, the proposition is consonant with sound commercial common sense and I agree with it. Further, the Loan Agreements were completed with Ng’s signatures. In the premises, I am unable to see why s.18(2)(j) was breached.

21.  In her written submissions, Ms Sit maintained that there is an absence of independent contemporaneous evidence to show that the Loan Agreements were entered into with the Companies on 1 September 2022. Firstly, the Loan Agreements were supported by the related documents, namely, the Resolutions and, importantly, the payment of, inter alia, insurance premium in accordance with the stated purpose of the Loans. Secondly, Ng’s latest evidence is corroborated by that of Chen.

22.  One may say that there is still no “independent evidence” to verify Maxcess’ case. On the other hand, the burden is on the Companies to demonstrate with “sufficiently precise factual evidence” that there is a bona fide dispute of the petitioning debt on substantial grounds and cannot merely raise a cloud of objections on affidavits. Peripheral and/or disputes of fact which do not go to the foundation of the petitioning debt are normally distractions and are irrelevant: Re Genetic Enterprises Ltd.

23.  In the supplemental skeleton arguments of the Companies, a number of forensic points were raised to cast doubt on Maxcess’ case, eg, (a) lack of documents evidencing due diligence and internal approvals which Maxcess ought to have carried out; and (b) lack of immigration records or other documents to substantiate Chen’s visit of Zheng in the Mainland when the COVID-19 quarantine restrictions were in place.

24.  With respect, I am unable to come to the view that these forensic points would detract from the strength of Maxcess’ case or serve to make out a bona fide dispute of the Debts on substantial grounds. It is important to bear in mind that the Companies do not suggest that Maxcess was in cahoots with Chen or Zheng. Nor can such suggestion be borne out by the forensic points.

25.  In her viva voce submissions, Ms Sit contended that the signature page of the Loan Agreements[2] were incorrect in light of the latest evidence. The information on the page suggested that both parties to the Agreements had signed the document on 1 September 2022 when in fact the Companies had signed it before that day.

26.  I can see some force in the submission. However, in my view the compliance of s.18(2)(j) is a matter of substance. Based on the latest evidence, the Loan Agreements were negotiated and completed at Winning House. The ambiguity identified by Ms Sit would not render the memoranda of the Loan Agreements incorrect.

27.  Ms Sit also made 3 points to cast doubt on the veracity of Maxcess’ latest evidence. First, it was submitted that such evidence came very late and there is no explanation why it was not provided earlier. In my view, Maxcess was entitled under an adversarial system to take the view that the lack of substance in the Companies’ evidence (see para 18 above) did not call for an elaboration. This is not to say that such a stance is consistent with the underlying objectives of the RHC.

28.  Second, it was argued that Maxcess’ latest evidence is inconsistent with its previous evidence in the form of Ng’s 2^nd affirmation, [15(1)] and [21(1)(5)]. With respect, I see no substance in the point. In those paragraphs, Ng was addressing the criticisms made by Ms Chow in her affidavit. Properly understood, there is no material inconsistency.

29.  Finally, it was said that Maxcess’ latest evidence is unsupported by any document, eg, on the negotiation on 4 August 2022. Again, I see no substance in the point. Maxcess is not required to approach these cases as if it bears a criminal burden. Its case is simple and based on documents. It has addressed the s.18(2)(j) argument with its own as well as the evidence of Chen.

30.  For these reasons, I am unable to agree that the Companies have made out a bona fide dispute of the Debts. The parties have agreed that this court should not proceed immediately to make winding-up orders against the Companies but to adjourn the Petitions to the following Monday (12 August 2024) to allow the Companies an opportunity to pay the Debts. I so order.

State of the evidence

31.  As observed in paras 9 to 12 above, the “evidence” filed in this case was made up of much irrelevant materials, submissions and arguments. Undoubtedly, such materials had resulted in unnecessary costs inflation. It is high time that parties, in particular their legal advisors, must exercise proper restraint. They have a duty under O.1A, r.3 to assist the court to further the underlying objectives of the RHC. The drafting of evidence is driven by lawyers. They must be alive to the possible exposure to wasted costs if proper restraint is not exercised in advancing irrelevant materials which result in unnecessary costs.

32.  Maxcess should not have engaged with the irrelevant materials and contributed to the costs wastage. Instead, it should have either dealt with only the relevant materials and object to the irrelevant materials at the hearing (preferably with a forewarning letter to the other side) or invite the other side to withdraw the irrelevant materials and file replacement affidavit, failing which it should apply to strike out the irrelevant materials. Regrettable as it may be that the court will be saddled with another interlocutory application in the event of an intransigent offender but (a) unless the offending materials are removed more wasted costs will likely follow and (b) unless the offender and its lawyers are penalised on costs, litigation discipline will not be maintained.

33.  Lastly, I am grateful to counsel for their assistance.