RE EVERSHINE GROUP HOLDINGS LTD

HCCW 1/2021

[2022] HKCFI 246

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 1 OF 2021

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R E A S O N S  F O R  J U D G M E N T

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1.  There is before the Court a petition presented by the Petitioner, Just Classic Limited (“P”), on 4 January 2021 (as amended on 29 July 2021) (“Petition”) seeking a winding up order against Evershine Group Holdings Limited (永耀集團控股有限公司) (“Company”) on the ground that the Company is insolvent and unable to pay its debts. At the hearing, I dismissed the Petition. These are the reasons for my judgment.

2.  By a statutory demand (“SD”) served on the Company on 5 August 2020 P demanded the Company to pay $35,013,699 (“Debt”), which was described as (1) the outstanding principal of $30,000,000 due under an Instrument dated 3 June 2016 (“Instrument”); and (2) interest on the outstanding principal from 4 December 2018 to 4 August 2020 at 10% p.a. in the amount of $5,013,699. 

3.  It is P’s case that apart from a payment of $250,000 made on 11 April 2019, the Company has failed to pay, secure or compound for the Debt.  By virtue of s.178 of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“Ordinance”), the Company is deemed to be insolvent. 

4.  The Company filed 3 affirmations made by Mr Lau Man Kin, an executive director, and raised the following grounds in opposition to the Petition:

(1)  The terms of the Debt had been superseded by a repayment schedule agreed between P and the Company in around June 2020;

(2)  The Company had paid $17,095,890 prior to service of the SD; and

(3)  The parties had agreed orally to postpone repayment of the remaining amount of the Debt.

Background

4.                               The Company was incorporated under the former Companies Ordinance (Cap. 32) on 13 October 2000.  Its shares have since 13 August 2001 been listed on the GEM of The Stock Exchange of Hong Kong Limited (“SEHK”). According to the annual return filed by the Company on 5 August 2020, its issued capital is $1,098,339,892.01, all of which has been paid up or credited as paid up.

5.  By a subscription agreement dated 16 May 2016 made between P and the Company (“SA”), P agreed to subscribe and the Company agreed to issue convertible notes in the principal amount of $30,000,000 (“Principal”) constituted by the Instrument (“Notes”). 

6.  Under the Instrument executed by the Company by way of a deed poll, the Company issued the Notes to P in accordance with the terms of the SA.  Under clause 1 of the Instrument, the Company is required to redeem the Notes by 3 June 2018[1] if P does not exercise its right to convert the Notes into shares in the Company. 

7.  By an Amendment Agreement dated 21 June 2018 and a Deed of Modification to the Instrument Relating to the Notes dated 28 June 2018 (“Deed”), the parties agreed to extend the maturity date of the Notes was extended to 3 December 2018. 

8.  By a confirmation letter dated 13 March 2019 (“Confirmation Letter”) signed by P and the Company, the parties agreed to supplement and amend the terms of the Instrument and the Deed, such that the Company shall repay the outstanding principal by instalments, together with interest at 10% p.a. from 4 December 2018, before 30 November 2019.

9.  By a letter dated 3 April 2019 addressed to the Company (“Payment Direction”), P referred to the Notes and the Confirmation Letter and requested the Company to pay the outstanding principal and interest arising therefrom to a specified bank account at HSBC opened in the name of Beijing Gas Blue Sky Holdings Limited (“BGBS”). There is no dispute that BGBS is the parent company of P and that its shares are listed on SEHK.

10.  In the official receipt dated 3 June 2020 issued by P (“Receipt”) and addressed to Champion Wise Investments Ltd (“Champion”), it was stated that P received from Champion the sum of $17,095,890 “for the settlement of the outstanding principle [sic] and interest pursuant to the Redemption of Notes Agreement signed between [P], [Champion] and [the Company] on 28 May 2020”. The Receipt was signed by the authorised signatory of P together with its company chop. 

11.  Neither party has produced a copy of the “Redemption of Notes Agreement” said to have been signed on 28 May 2020 as described in the Receipt.

12.  In a “confirmation for audit purposes” (“Audit Confirmation”) dated 12 June 2020 issued by Messrs. Elite Partners CPA Ltd, the auditors of the Company, which was signed by the authorised signatory of P together with its company chop, P confirmed the following information:

(1)  as at 31 May 2020, the outstanding principal due by the Company to P was $15,000,000;

(2)  the “Maturity Date” was “per attached repayment schedule” (“Schedule”).  In the Schedule, reference was made to the Notes and stated that “Based on the confirmation letter signed by [the Company] and [P] (a wholly-owned subsidiary of BGBS), the repayment schedule is further proposed as below”;

(3)  immediately underneath the aforesaid statement were (inter alia) details of the repayments.  The first 4 rows show as follows:

Payment Date	Interest Period	Outstanding Principal	Repayment of Principal	Interest Amount	Total Repayment
11/4/2019	4/12/2018-3/1/2019	30,000,000		250,000	250,000
28/5/2020	4/1/2019-28/5/2020	30,000,000	15,000,000	4,191,781	17,095,890 (a)
30/6/2020	29/5/2020-30/6/2020	15,000,000	38,356	135,616	100,000 (b)
31/7/2020	1/7/2020-31/7/2020	14,961,644	36,464	127,071	100,000 (b)

(4)  in (a), it was stated that “(i) Total repayment amount of HK$17,095,890 to be paid by Champion Wise; (ii) 50% of the interest amount of this period shall be repaid by the Company at the end of the term”.  In (b), it was stated that “Outstanding amount to be repaid at the end of the term”; and 

(5)  the last payment date stated in the table is 28 February 2022. 

Discussion

13.  At the first hearing of the Petition on 8 March 2021, the Company applied for leave to file the affirmation in opposition to the Petition (“Lau 1^st”)[2] out of time.  Harris J gave leave to the Company to file Lau 1^st subject to the condition that the Company shall pay $3.9 million into Court by 26 March 2021.  The Company complied with the condition by paying the full amount into Court on 26 March 2021.

14.  Pursuant to the consent summons filed by the parties, on 28 July 2021, leave was given to P to amend the petition by introducing the following averments:

(1)  apart from a payment of $250,000 made to P on 11 April 2019, the Company has not repaid to P any part of the “Outstanding Principal Amount” (being $30,000,000 as defined in §7 of the Petition) together with the said interest thereon (§8A);

(2)  further or alternatively, P does not admit that the Schedule (as referred to in §§12-13 of Lau 1^st) is binding on P.  However, on the Company’s own case that the Schedule is binding, a sum of $17,545,890 (being the total amount stated in the first 4 rows of the table) had fallen due prior to the date of the SD but only one interest payment of $250,000 was paid on 11 April 2019, and the balance of $17,295,890 remained due and payable at the time of the SD, and the Company had not secured or compounded to the reasonable satisfaction of P (§§11A, 11B.1); and

(3)  further or alternatively, since the date of the SD and as of the date of the amendments to the Petition (28 July 2021), a further total sum of $7,999,229 (being the total amount of the 5^th to 15^th rows in the Schedule) has fallen due.  On the basis that the Company has not paid any part of this sum to P, the Company is unable to pay its debts pursuant to s.178(1)(c) of the Ordinance (§11B.2).

15.  Despite the Confirmation Letter, the Payment Direction, the Receipt and the Audit Confirmation, at the adjourned hearing of the Petition on 4 November 2021, Mr Benny Lo, counsel for P, submits that apart from a payment in the sum of $250,000 on or about 11 April 2019, the Company has failed to pay, secure or compound for the balance of the Debt, and is deemed to be unable to pay its debts under s.178(1)(a) of the Ordinance.  In any event, the Company is insolvent by reason of its inability to pay the amounts in accordance with the dates set out in the Schedule.  His arguments run like this.   

16.  First, the law “should and does give effect to” contractual provisions such as clause 14.1 in prescribing formalities for modifications (MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24, [2019] AC 119 per Lord Sumption JSC at §10).  Clause 14.1 of the Instrument provides as follows:

“Any modification to this Instrument may be effected only by deed poll, executed by the Company and expressed to be supplemental hereto, and (save for minor amendments by the Company which shall not adversely affect the rights of the Noteholder under this Instrument) only if it shall first have been approved in writing by the Noteholder(s) holding more than 50% of the then outstanding principal amount of the Notes.”

17.  As the Company has not produced any deed poll to give effect to the Schedule, prima facie, the Schedule (and presumably, the Redemption of Notes Agreement) has not met the prescribed formality requirements.

18.  Second, any agreement to adopt the Schedule would be unenforceable for lack of consideration, because a promise to pay a sum which the debtor is already bound by law to pay to the promisee does not count as consideration (Bank of China (Hong Kong) Ltd v Cosan Ltd & Ors (unrep., CACV 331/2006, 11 May 2007) per Yuen JA at §26).

19.  Third, even assuming the Schedule is binding on P, it would not mean that the basis of the Petition is “no longer extant”.  To the contrary, the Schedule explicitly states that it is a schedule for “[r]epayment of zero coupon convertible notes in the principal amount of HK$30,000,000 (the ‘Notes’) issued by Evershine Group Holdings Limited (#8022)” and that it is “[b]ased on the confirmation letter signed by Evershine Group Holdings Limited and Just Classic Limited”.  The Schedule is self-evidently an arrangement for implementing repayment of the existing debt under the Notes and the Confirmation Letter.

20.  Fourth, as regards the alleged repayment of $17,095,890 “on or around 3 June 2020” alluded to in Lau 1^st:

(1)  On the Company’s own case, any repayment under the Notes shall be made to the account of BGBS at HSBC;

(2)  P has checked its bank statements for the relevant period, including those for the said HSBC account, which do not show the alleged repayment of $17,095,890 by the Company;

(3)  By letters dated 14 July 2021 and 20 July 2021, P’s solicitors requested the Company’s solicitors to provide details and evidence of the alleged payment of $17,095,890, but received no reply.  If such payment had been made to P, it is incredible that the Company would not be able to supply evidence of payment.  Accordingly, despite evidence showing the purported receipt of the sum by P, the irresistible inference from the Company’s inability to supply evidence of payment is that it has, in fact, not paid the sum to P.

21.  Fifth, even on the Company’s own case that (i) the Schedule is binding; and (ii) $17,095,890 had already been repaid, the Company should still be wound up.  This is because:

(1)  According to the Schedule (the dates and figures are reproduced in Appendix 2 to the Petition), putting aside the $250,000 and $17,095,890, there is still the sum of $200,000 (the total amount in lines 3-4 of Appendix 2) that fell due prior to the date of the SD;

(2)  Therefore, P can still rely on the deemed insolvency provision under s.178(1)(a) of the Ordinance.  If there is a debt above the statutory minimum which is indisputable, a petition can be validly presented even if the debt as claimed in the petition is for a larger sum, part of which is bona fide disputed.

22.  Finally, there is no dispute that, even according to the Schedule, further substantial sums have fallen due after the date of the SD which have not been repaid.  As of the date of the hearing on 4 November 2021, those sums amounted to $13,499,624 (the total amount in rows 5-19 of the Schedule).  From the Company’s persistent non-payment of debts that are not substantially disputed, an inference can be drawn that it is unable to pay its debts (Re AuraSound Speakers Ltd [2004] 3 HKLRD 502 per Tang J (as he then was) at §51).  

23.  Reliance is placed on Re Richbell Strategic Holdings Ltd [1997] 2 BCLC 429 where Neuberger J (as he then was), in allowing a winding-up petition, held that the company’s failure to pay a debt which fell due after the presentation of the petition indicated that it was unable to pay its debts (at 452e, 456d, 458h-459a).  In Re Hin-Pro International Logistics Ltd [2016] 5 HKLRD 282, the Court of Appeal applied Re Richbell Strategic Holdings Ltd in allowing the amendment of a petition to include post-petition debts (§§12-16, 41-42).

24.  In Lau 3^rd, the Company alleges for the first time that, on an unspecified date, Mr Chiu Ngai Hung on behalf of the Company and Mr Cheng Ming Kit on behalf of P “agreed verbally that subsequent to the [alleged] payment of HK$17,095,890 […] the repayment of the rest of the instalments may also be postponed until the Company raises funds by issuing new shares”.

25.  Mr Lo submits that there is nothing in this ground, given that:

(1)  Mr Lau’s statements that “Mr. Chiu informed me and I believe that” and “I also enquired with Mr Hung, who informed me and I believe that” put it beyond doubt that the Company is relying on hearsay evidence to establish the alleged existence of this verbal agreement.  This is not permissible because hearsay evidence is only allowed in affidavit evidence “sworn for the purpose of being used in interlocutory proceedings” (O.41 r.5).  The Petition is not interlocutory in nature;

(2)  The Company’s evidence in support of the alleged oral variation is flimsy, imprecise and unbelievable.  Not only is it based on pure hearsay, it is vague and unsupported by any documentary evidence.  This falls far short of discharging the burden of adducing “sufficiently precise factual evidence” that there is a bona fide dispute on substantial grounds; and

(3)  Any such purported oral variation, even if it existed, would not be binding on P because (i) it would not have complied with the requisite formalities, and (ii) it would not be supported by consideration.

26.  The principles governing statutory demand and petition are well established:

(1)  A statutory demand is an important document.  It informs the debtor of the way in which the debt arose so that he would know what course he should take in the light of the information given.  It is “the straight and narrow gateway” through which a creditor must pass in order to establish the debtor’s apparent inability to pay the debt demanded in order for a bankruptcy petition to be presented (TSB Bank plc v Platts (No 2) [1998] BPIR 284 at 288H-290A, as applied in Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at §13, per Kwan JA (as she then was)). 

(2)  Whilst the statutory code affords the Court a degree of flexibility in dealing with an application to set aside a statutory demand for defects, this is not to be taken as a charter for slipshod in preparation of statutory demands.  The making of a bankruptcy order remains a serious step for the debtor, and the prescribed preliminaries in the statutory code are intended to afford protection to him.  If a statutory demand is defective, the Court will be alert to see whether those mistakes have caused or will cause any prejudice to the debtor.  Where the debt in issue was not a large sum, it could not be said the defect would have made no difference in that the debtor would not have paid anyway and no prejudice would have been suffered (§§15-16 CA, citing In re A Debtor (No 1 of 1987) [1989] 1 WLR 271 at 280D-E, per Nicholls LJ).  The same principle applies to a statutory demand issued by a petitioner to a company. 

(3)  In opposing a petition, the debtor has to show a bona fide dispute on substantial grounds by adducing 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, §27(1)-(4); Re Soetrisno Farida [2019] HKCFI 2756, at §11, per Ng J).

27.  In my judgment, P is not entitled to seek a winding up order against the Company on the basis of the grounds stated in the Petition.

28.  On P’s own case, any variation to the terms of the Instrument, to be effective, can only be made by the parties executing a deed poll.  If this is right, it must also apply to the Confirmation Letter as it was not executed by a deed poll.  The effect would be that the Notes remain non-interest bearing (as provided in clause 4.1 of the Instrument), and P would not be entitled to charge any interest on the Principal.  It follows that the particulars of the Debt, as stated in the SD, would be materially incorrect as it referred to the Confirmation Letter and stated that interest was payable on the Principal from 4 December 2018. 

29.  As stated above, the contents of the Receipt suggest that the parties have signed the Redemption of Notes Agreement. While the Company said that there had been a change in management since the arrest of the person who was responsible for dealing with P, the same has not been said by P. Yet, no explanation has been offered by P to explain whether the parties had in fact signed the Redemption of Notes Agreement, whether it has a copy of such agreement, what are the terms of such Agreement and whether it is contended that the Agreement is invalid and, if so, on what grounds.

30.  In any event, it is clear that the amount of debt stated in the SD was incorrect as it had failed to take into account the fact that the Company had on 28 May 2020 repaid $17,095,890 to P in accordance with the Payment Direction.  It is impossible to see how P could ignore this payment, having itself signed the Receipt and the Audit Confirmation (to which the Schedule was appended). 

31.  For the  reasons stated in §§28 and 30 alone, the SD was defective.  The Petition is likewise defective as it continues to rely on the SD and no attempt has been made by P to address the defects or to set out the correct bases of the debt upon which it relies.  Instead, in the face of the contemporaneous documents signed by P (as described in §§9-12 above), P continues to maintain that the Schedule is not binding upon the parties and only a sum of $250,000 has been paid. 

32.  Having adopted such a stance, it is not open to P to contend that according to the Schedule, a sum of $7,999,229 has fallen due as at 29 July 2021 and failure to pay such sum shows that the Company is unable to pay its debts.  I say this for 2 additional reasons:

(1)  First, even in a writ action, if a party wants to make an allegation of fact which is inconsistent with another allegation of fact in the same pleading, it can only be done if the party has reasonable grounds for so doing and the allegations are made in the alternative.  The objective is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives (Hong Kong Civil Procedure 2022, §18/12A/1).  Here, it is plainly within P’s knowledge what documents it has signed and whether on its case, such documents are binding between the parties, and the basis for contending that they are not binding. The requirement for a petitioner to state its case clearly is particularly important given the summary nature of winding up proceedings and the lack of pleadings filed by the parties.  It would be unfair to allow a petitioner to advance a point in law which it contends affects the validity of the documents signed by the parties but at the same time says that the same point only applies to some but not all the documents signed by the same parties.   

(2)  It is in any event incorrect to say that as at the date of P’s application to amend the Petition, a further sum of $7,999,229 has fallen due.  This is because there is no dispute that on 26 March 2021, the Company has paid $3,900,000 into Court in compliance with the condition imposed in the order made by Harris J on 8 March 2021.  On P’s own case, as a result of the validation order made in the same order, P has become a secured creditor over the $3.9 million paid into Court and is entitled to obtain payment out of the same.  This flies against P’s contention that the amount of $7,999,229 remains unsecured or not compounded for.  In light of the dismissal of the Petition, I express no view as to the correctness of P’s argument on the effect of the validation order.   

33.  As for costs, it seems to me that costs should follow the event.  I make a costs order nisi that P shall pay to the Company and the Official Receiver the costs of and occasioned by the Petition, together with all costs reserved, to be taxed if not agreed.