MAGNATE PRECIOUS METALS LTD v. BIYONGXIN TRADING CO., LTD AND OTHERS

HCMP 280/2021

[2021] HKCFI 3698

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 280 OF 2021

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REASONS FOR DECISION

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INTRODUCTION

1.  In the present case, by a summons dated 4 March 2021, the Plaintiff seeks an order that the ex parte injunction order granted by Deputy High Court Judge MK Liu on 3 March 2021 be continued until the substantive determination of the Originating Summons in the present proceedings or further order.

2.  This Court was informed that at a call over hearing, the said injunctive order was discharged on the basis that all the Defendants did give an undertaking in terms of the injunction order.

3.  It is not disputed that the undertakings given by the 2^nd Defendant to the 6^th Defendant should continue until the substantive determination of the Originating Summons in the present proceedings or further order. The only issue is whether the 1^st Defendant should continue to give such an undertaking in view of the fact that, on the 1^st Defendant’s case, its debts cannot be disputed on bona fide and substantial grounds.

4.  On 1 December 2021, after reading the parties’ helpful written submissions and hearing the parties’ oral arguments, I made an order that the 1^st Defendant is entitled to present a winding up petition against the Plaintiff as its debt cannot be said to be disputed on bona fide and substantial grounds.

5.  But I also directed that the said petition be presented only after the expiry of 7 days from 1 December 2021. The sole purpose of which is to allow the Plaintiff the time to pay off its debts due to the 1^st Defendant so as to avoid a winding up petition.

6.  Now I give my reasons.

MATERIAL FACTS

7.  The Plaintiff is a Hong Kong company engaged in the business of trading precious metals and investments. It is part of the global group of entities (“Magnate Group”)  owned by Mr Chiang Chien Heng (“George Chiang”)  across various jurisdictions which also carries on other investment activities.

8.  Since September 2018, Mr Liu Po Chang (“Johnson Liu”)  and his family members have through their corporate vehicles subscribed the investment products of Magnate Group. As shown by the subscription confirmations dated 7 September 2018, the 2^nd Defendant (whose sole shareholder is Li Shua Lien, Johnson Liu’s step mother), the 3^rd Defendant (whose sole shareholder is Lee Chu Yun, Johnson Liu’s sister-in-law), the 4^th Defendant (whose shareholder is Johnson Liu)  and the 5^th Defendant (whose shareholder is Liu Yu Chang, Johnson Liu’s brother)  subscribed the investment fund known as “Magnate Treasure Bowl Premier” (“Magnate Fund”). George Chiang was the principal of both the Investment Manager (i.e., a company called Magnate Management)  and Investment Advisor of the Magnate Fund, and he was also the Money Laundering Reporting Officer of the Investment Manager.

9.  The 1^st Defendant is owned by five Liu family members in equal shares. Fortune Star Company Limited (“Fortune Star”)  is controlled by an investor independent of Johnson Liu and his family.

10.  The 1^st to the 5^th Defendants and Fortune Star each entered into a subscription agreement dated 5 October 2020 (“the Subscription Agreement”)  with the Plaintiff to subscribe for the Notes. The principal amount subscribed by them was US$5 million, US$2 million, US$2.5 million, US$2.5 million, US$3 million and US$1 million respectively. Schedule 3 of the Subscription Agreement contains the deed constituting the Notes.

11.  Under Clause 4.1 of the Terms and Conditions of the Notes, the Plaintiff shall pay interest to the noteholders at the rate of 8% per annum on the outstanding principal amount until the maturity date (i.e. 3 years from the issuance of the Notes), and quarterly interest shall be payable on 25 January, 25 April, 25 July and 25 October in each year. Failure to make any interest payment for 10 days would trigger the event of default under Clause 6.1(a)  of the Terms and Conditions of the Notes, and the noteholder would be entitled to declare and demand that the outstanding principal amount and accrued interest shall become due and repayable.

12.  With respect to the subscription of the Notes by the Defendants, the subscription monies of US$5 million were transferred from the 2^nd to the 5^th Defendants (with each of them transferring US$1.25 million)  on 29 September 2020 for and on behalf of the 1^st Defendant.

13.  Upon receipt of the US$5 million, a Note Certificate dated 5 October 2020 (“Note Certificate”)  was signed and issued by the Plaintiff. The Note Certificate certifies that the 1^st Defendant is the holder of the Notes in the principal amount of US$5 million, and that “for value received”, the Plaintiff promises to pay the 1^st Defendant such amount or amounts as shall become due in respect of the Notes.

14.  By emails dated 5 November 2020 and 25 November 2020 from the Plaintiff’s solicitors to the 1^st Defendant, the 1^st Defendants and its related companies, namely, the 2^nd to the 5^th Defendants were asked to sign the Deed of Authorization and Agreement, for compliance purposes. There was dispute as to the appropriate wording of the said deed.

15.  By email dated 23 January 2021 at 1:52 am from the Plaintiff’s solicitors to the 1^st Defendant, the 1^st to the 5^th Defendants were asked to sign the Deed of Authorization and Agreement as amended. The email also stated that the Plaintiff was ready to pay the interest of the Notes to the 1^st Defendant, but it would not do so unless the Deed of Authorisation and Agreement was emailed and posted back to the Plaintiff’s solicitors by noon of 25 January 2021.

16.  On 24 January 2021 at around 11:23 am and 11:24 am, the 1^st Defendant received 10 pages of fax from the Plaintiff’s solicitors (“the Fax”). Upon receipt of the Fax, the representatives of the 1^st to the 5^th Defendants signed on pages 7 to 8 of the Fax being the execution pages of the Deed of Authorization and Agreement.

17.  On 25 January 2021 at 11:52 am, the 1^st Defendant’s representative emailed the signed execution pages of the Deed of Authorization and Agreement to the Plaintiff’s solicitors. The same were also faxed to the Plaintiff’s solicitors later on the same day.

18.  The Plaintiff failed to make payment of quarterly interest of the Notes on 25 January 2021.

19.  On 5 February 2021, the 1^st Defendant through its solicitors served a written notice pursuant to Clause 6.1 of the Terms and Conditions of the Notes declaring and demanding that the outstanding principal amount of the Notes shall become due and repayable plus accrued interest.

20.  On 10 February 2021, the statutory demand was issued and subsequently served on the Plaintiff.

ANALYSIS

21.  On proper analysis, this case is rather simple and straightforward. It is not in dispute that the Plaintiff did receive a sum of US$5 million for the subscription of the Notes issued by the Plaintiff (“the Notes”). It is also undisputed that the Plaintiff failed to make interest payment to the 1^st Defendant which resulted in an event of default.

22.  The Plaintiff’s defence is as follows:

(1)  There was an implied term in the Subscription Agreement and/or the Notes that (i)  if consideration of the Notes was paid by a third party, the subscriber and the relevant third party have to comply with its know your client (“KYC”)  requirements; and (ii)  in default of compliance, the Plaintiff will not be obligated to accept any payment or consideration for the Notes as valid, and the subscriber will not be entitled to demand payment from the Plaintiff under the Subscription Agreement or the Notes (the “Implied Term”)

(2)  As the Plaintiff received the US$5 million from the 2^nd to the 5^th Defendant instead of from the 1^st Defendant, the 1^st to the 5^th Defendant had to confirm that the 1^st Defendant did authorise the 2^nd to the 5^th Defendant to make the US$5 million payment on its behalf.

(3)  However, in breach of the Plaintiff’s KYC requirements and the Implied Term, the 1^st to the 5^th Defendant only returned the signed execution pages on the “deed of authorization and agreement” (“Deed of Authorization and Agreement”)  by email or fax, and did not deliver the signed original of the entire deed back to the Plaintiff.

(4)  As a result, the Plaintiff was not obligated to accept the US$5 million as valid consideration for the Notes, and the 1^st Defendant was not entitled to demand payment from the Plaintiff.

23.  First, whilst I am inclined to the view that there is an implied term that the 1^st Defendant has to comply with certain KYC requirements, the key issue, though, is what happened if the 1^st Defendant failed to comply with the said KYC requirements.  I am of the view that the Plaintiff has a choice, either it can reject the subscription or it can accept the subscription and then apply for an injunction to compel the 1^st Defendant to comply with its KYC requirements.

24.  In the present case, as Mr Wong for the Plaintiff fairly accepted, the Plaintiff chose to affirm the Subscription Agreement. Instead of returning the US$5 million, the Plaintiff chose to accept the same and issue the Note Certificate to the 1^st Defendant, under which the Plaintiff promised to pay the amount which shall become due “for money received”.

25.  In my view, that should be the end of analysis. There is no legal basis for the Plaintiff to keep the US$5 million and yet refuse to pay interest under the Notes which it chose to issue. Put another way, if for whatever reasons, the 1^st Defendant or indeed the 2^nd to the 5^th Defendant were not able to comply with the Plaintiff’s KYC requirements at all, then does it means that the Plaintiff could forever hold on to the subscription money and needs not pay any interest under it? The answer must be in the negative. The Plaintiff is not entitled to a windfall simply because the 1^st Defendants were not able to comply with its KYC requirements.

26.  Mr Wong for the Plaintiff submitted that there is a distinction between KYC requirements which cannot be complied and KYC requirements which can be easily complied with and yet the 1^st Defendant chose not to comply with the same. I disagree. As I said above, the Plaintiff has an option to return the subscription money to the respective defendants in the present action. Once it chose to affirm the Subscription Agreement and issued the Note Certificate, the Plaintiff has a contractual obligation to perform it.

27.  In my view, it is both unnecessary and against common and commercial sense that pending compliance with the Plaintiff’s KYC requirements, a contractual term should be implied such that the Plaintiff is entitled to retain the subscription money and at the same time be relieved of the payment obligations under the contract.

28.  I also agree with Mr Man for the 1^st Defendant that the contract with respect to the Magnate Fund provides that in the event of the subscriber’s refusal to produce information for the purpose of verifying the identity and/or source of funds of the subscriber, the subscription monies will be returned without interest to the account from which the monies were originally debited. This, I agree, shows that there is no necessity for the Implied Term. 

29.  Secondly, I note that on 25 January 2021, the 1^st to the 5^th Defendant did sign the execution pages of the Deed of Authorization and Agreement and send the same back to the Plaintiff by email or fax. The only dispute is that the original of the said deed was not returned to the Plaintiff. That is the gist of the complaint.

30.  Mr Man for the Defendants submitted that first, no such complaint was raised by the Plaintiff until it applied for the ex parte injunction order. Secondly, the signed execution pages contained a fax header “24/01/2021 11:24”, which indicated beyond doubt that they belonged to the Deed of Authorization and Agreement faxed from the Plaintiff to the 1^st Defendant on 24 January 2021 at 11:24 am for signature. Thirdly, the 1^st Defendant had previously executed the subscription documents for the Notes by sending the execution pages only to the Plaintiff, and no issue was taken by the Plaintiff.

31.  Mr Wong for the Plaintiff has referred this Court to the email correspondence which shows that the Plaintiff attached great significance to the return of the originals and a bank account with the Bank of Communication was closed due to the failure to return the original of the said Deed to the Plaintiff. However, this is different from the allegation of an implied term as now alleged by the Plaintiff. Mr Man is right that the Plaintiff has never in its pre-action correspondence articulated that there is an implied term to the effect that unless the original of the said deed is returned, the 1^st Defendant is not entitled to receive interest payment under the Note Certificate. 

32.  In any event, critically, the 1^st Defendant is  willing to deliver the original of the said deed to the Plaintiff within 14 days from 1 December 2021. Upon receiving the same, there is no more basis for the Plaintiff to refuse to perform its obligations under the Subscription Agreement and the Note Certificate.

33.  Accordingly, I reject the Plaintiff’s submission on the Implied Term. Whatever damages that the Plaintiff says it has suffered, it could claim for the same against the Defendants. That is entirely separate and distinct from the Plaintiff’s obligations under the Subscription Agreement and the Note Certificate.

34.  Mr Wong for the Plaintiff referred this Court to the case of Tallington Lakes Limited v South Keverten District Council [2012] EWCA Civ 443 at §22 where Etherton LJ held that:

“…in this context that it is well established that the threshold for establishing that a debt is disputed on substantial grounds in the context of a Winding-up Petition is not a high one for restraining the presentation of the Winding-up Petition and may be reached even if, on an application for summary judgment, the defence could be regarded as ‘shadowy’.”

35.  Applying the above legal test, in view of the reasons as set out above, I have no hesitation to come to the conclusion that the 1^st Defendant is definitely entitled to obtain summary judgment on its claims.

36.  Finally, as I do not find it correct to accept the Plaintiff’s submissions on the Implied Term, it is not necessary for this Court to further deal with the 1^st Defendant’s arguments on estoppel and material non-disclosure.

DISPOSITION

37.  For all the reasons stated above, I made the orders as set out in paragraphs 4 and 5 above.

38.  As Mr Wong for the Plaintiff asked for time to make the payments as demanded under the statutory demand within 14 days, I am of the view that the overall justice lies in the 1^st Defendant getting paid as soon as possible. Given that the Plaintiff has gained substantial time by reason of this injunctive application since March this year, on balance, I was only minded to grant 7 days to the Plaintiff.

39.  I also summarily assess the costs to be paid forthwith by the Plaintiff to the 1^st Defendant at HK$300,000.

40.  Finally, it remains for this Court to thank Mr Wong for the Plaintiff and Mr Man for the Defendants for their very helpful submissions.