HCB 10174/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCYPROCEEDINGS NO. 10174 OF 2008

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J U D G M E N T

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1.  This was the hearing of a bankruptcy petition presented by Mr Lo Tong Hoi (“Mr Lo”) against Kwok Yuk Leung Paul (“Mr Kwok”). The petition was based on a debt of HK$1,143,785.21, which represented the outstanding balance of a loan of HK$1,498,537 advanced by Mr Lo to Mr Kwok on 1 September 1999, after adding interest that had accrued on the outstanding principal amount from time to time, and deducting periodic (and not always regular) repayments made by Mr Kwok between September 1999 and December 2007.

2.  A statutory demand was served in respect of the debt on 20 October 2008. It having gone unanswered, the petition was presented on 26 November 2008.

3.  On 16 January 2009, Mr Kwok gave notice that he intended to oppose the petition. In his notice, he identified three grounds on which he did so. In two affirmations filed by him in opposition to the petition, he elaborated on these grounds.

4.  However, Mr Kwok does not appear to deny that a loan in the amount stated by Mr Lo was made to him on 1 September 1999. Nor does he take any point as to the amount of the outstanding debt, as calculated by Mr Lo.

5.  The grounds relied upon by Mr Kwok to dispute the debt are as follows:-

(a)  The loan was advanced to him for the purpose of enabling him to purchase shares in two companies, Wide Tech Shipping Limited (“Wide Tech”) and Worldwide Maritime Limited (“Worldwide”).  Mr Kwok contends that under an agreement made between him as purchaser and Mr Lo and a Mr Yau as vendors, Mr Lo and Mr Yau agreed to sell shares in both companies to him, but that notwithstanding the agreement, no shares in Worldwide were ever transferred to him.

(b)  Under the terms of a Service and Joint Venture Agreement entered into between himself, Mr Lo and Mr Yau on 15 July 1998, he was to be employed by Worldwide, and was to be paid certain amounts by way of a net profit bonus and sales commission, which could be set off against the debt, but he never received the payments to which he was entitled.

(c)  By a Share Purchase Agreement made on 1 September 1999, Mr Lo promised him that Worldwide would distribute dividends in the amount of HK$1,498,537 (i.e. the amount of the loan) according to an agreed schedule between the years 2000 and 2002, in order to provide him with the means to repay the loan without having to utilise his own funds.  Notwithstanding this promise, however, Worldwide did not make the dividend payments promised, and only paid Mr Kwok dividends totalling HK$262,816 during 2000 and 2001.

6.  At the hearing, Mr Lui, who appeared for Mr Lo, contended that none of these grounds gave rise to a genuine basis for disputing the debt, and that a bankruptcy order should be granted. For Mr Kwok, Mr Chung contended that there were a number of factual disputes raised by Mr Kwok which could not be resolved on the basis of conflicting affidavit evidence, and that the petition should therefore be dismissed.

7.  The parties were agreed that the burden was on Mr Kwok, the debtor, to show that there existed a bona fide dispute on substantial grounds, and that it was necessary for him to do so by adducing sufficiently precise factual evidence to establish the existence of such a dispute.

8.  Mr Lui also submitted, and Mr Chung did not disagree, that:-

(a)  where the debtor relied on a cross claim to resist the making of a bankruptcy petition, it was incumbent on him to show the existence of a cross claim which exceeded the amount of the debt by evidence of the same standard; and

(b)  where a cross claim was relied upon, there had to be mutuality of parties – i.e., the cross claim must lie against the petitioner, and not some other party.

9.  Before dealing with Mr Kwok’s grounds for resisting the petition, it is necessary to set out some of the background. For present purposes, it suffices to refer to the background as described by Mr Lo. However, as will be seen, it is not straightforward.

10.  The background arises out of an intended sale of shares in two companies – Wide Tech Shipping Limited (“Wide Tech”) and Worldwide Maritime Limited (“Worldwide”). Wide Tech was a company that was engaged in the provision of a barge service for transporting cargo containers between Hong Kong and the Pearl River delta region. Worldwide acted as agent for Wide Tech in Macau and the PRC.

11.  The sale of shares in the two companies appears to have had its origins in a document describing itself as a Service and Joint Venture Agreement, which was dated 22 June 1998 (this is not, however, the agreement relied upon by Mr Kwok in relation to the second ground on which he disputes his liability to Mr Lo – I shall come back to this later in this judgment). Mr Lo says in his evidence that this is the only written contract entered into by himself, Mr Yau and Mr Kwok.

12.  The agreement is a somewhat unusual one. It appears to have been intended to establish a framework under which Mr Kwok would provide services for Worldwide and Wide Tech, in accordance with broad terms agreed between himself on the one hand and Mr Lo and Mr Yau on the other. The agreement described Mr Lo and Mr Yau as vendors, and Mr Kwok as purchaser. It provided (by Clause B) for Mr Yau and Mr Lo (who were then the major shareholders of both Wide Tech and Worldwide) to nominate Mr Kwok to be the Assistant General Manager of the sales department of Worldwide for a two year period from 16 July 1998 to 15 July 2000, a post which also required him to perform services for Wide Tech by running its sales department. The agreement also provided (by Clause C) that Mr Kwok should be employed by Worldwide at a salary of HK$35,000 per month, plus a sales commission of 0.5% of net turnover of Wide Tech. There was also a provision (Clause H) for Mr Kwok to be paid a bonus calculated by reference to the net profits of (it seems) Worldwide (although confusingly, the agreement refers in this context to his “actual contributions to Wide Tech”). Clause I of the agreement provided that if the total net profit of Worldwide during the two years covered by the agreement reached HK$14 million, Mr Lo and Mr Yau would sell a 5% shareholding in Worldwide and Wide Tech to Mr Kwok at a price calculated by reference to the companies’ net book value as at the end of the two year period, with the sales commission and net profit bonus earned by Mr Kwok during that period being paid to Mr Lo and Mr Yau as a non-refundable deposit towards such purchase.

13.  So far as the sales commission and net profit bonus are concerned, Mr Lo says that it was later agreed that the sales commission should be replaced by a flat payment of HK$5,000 per month, and that the net profit bonus should be replaced by the payment of sums described as directors’ bonuses.

14.  As for the acquisition of an interest in the companies, according to Mr Lo, the idea was that Mr Kwok should be permitted to do so if he was successful in building up their sales, thereby contributing to their profitability.

15.  However, Mr Lo says that shortly after Mr Kwok started working for Worldwide, he indicated that he wished to obtain a 10% shareholding in the companies at an earlier stage. With this in mind, Mr Lo says that he came up with certain proposals on around 1 September 1999.

16.  First, he proposed that Mr Kwok should be allowed to acquire 10% of the shares in both companies immediately, of which half (5%) would be valued on the basis of the value of the fixed assets of the companies on 16 July 1998, when Mr Kwok started working for the companies, with the other half being valued on the basis of the fixed asset value of the companies as at 1 September 1999. Mr Lo says that this was recorded in a document he prepared and described as the Share Distribution document – this formed part of a bundle of documents which Mr Kwok had suggested formed a single agreement for his acquisition of his interest in the companies (a suggestion that was disputed by Mr Lo). This was the basis on which the purchase price of HK$1,498,537 (the same amount as the loan) was arrived at. Mr Lo also says (as appears to be reflected in the Share Distribution document) that he was to transfer a 2.5% interest in the companies to Mr Kwok (which would be treated as half of the first 5%, and valued as at July 1998), while Mr Yau was to transfer a 7.5% interest in them (the other half of the first 5% and the whole of the second 5% which was to be valued as at September 1999).

17.  Next, Mr Lo says that as Mr Kwok (and two other persons who acquired shares at the same time, a Mr Kwong and a Mr Chan) did not have the funds to pay for the shareholding, Mr Lo proposed that the companies should pay dividends to all the shareholders between July 2000 and July 2002 in amounts which would enable Mr Kwok (and the other two purchasers) to pay for their acquisitions. This was recorded in another document, called the Share Payment Scheme, which was signed by all the shareholders (Mr Lo, Mr Yau, Mr Kwok, Mr Kwong and Mr Chan). This document is material to the third ground relied upon to resist the petition, to which I shall come later.

18.  Mr Lo goes on to say, however, that this proposal was unacceptable to Mr Yau, who wanted to be paid a substantial amount up front, and was concerned that the companies might not generate sufficient profits to pay dividends in the amounts necessary to enable Mr Kwok and Mr Kwong to pay for their shareholdings. Mr Lo says that it was for this reason that he agreed to lend Mr Kwok (and, it seems, Mr Kwong and Mr Chan) the amounts needed to fund their acquisitions.

19.  Mr Lo says that since the idea of using future dividends to pay for the shares had fallen through, he agreed with Mr Kwok that an amount which Worldwide was to pay Mr Kwok as a result of a retrospective pay increase should be paid to him, and that going forward, HK$8,000 should be deducted by Worldwide from Mr Kwok’s salary and paid to Mr Lo by way of repayment of interest and principal (although, somewhat paradoxically, this arrangement too should be backdated to 1 January 1999, so that a sum of HK$72,000 would be paid to Mr Lo at the outset).

20.  Thereafter, Mr Lo says, in early October 1999, it was decided that the companies should pay interest to their shareholders on the capital invested by them – a notion which I must confess strikes me as somewhat strange, since it would seem to involve the companies in paying interest on the capital provided to them by their shareholders. In fact, as appears from the document headed Share Interest Scheme prepared by Mr Lo, the intention seems to have been to cause the companies to pay a monthly amount to each shareholder based on the value of his shareholding as at 1 October 1999. Whatever the rationale for this arrangement may have been, Mr Lo says that Mr Kwok (and Mr Kwong and Mr Chan) agreed with him that all payments due to them under this proposal should be paid to him to repay his loans to them. Mr Lo says that this did happen until September 2001, when no further “interest” payments were made by the companies owing to their by then less favourable financial position.

21.  Mr Lo says that from this point, Mr Kwok made no further repayments to him, until he resumed making payments of HK$8,000 per month out of his salary in May 2004 (the amount was later increased to HK$10,000 per month in September 2006). These payments continued until the end of 2007, but ceased thereafter.

22.  The first ground relied upon by Mr Kwok for resisting the petition amounts to an assertion that he has a cross claim against Mr Lo arising out of the failure on Mr Lo’s part to perform his obligations to Mr Kwok in relation to the sale to him of shares in Wide Tech and Worldwide. The complaint is that whereas the agreement was that 10% of the shares in each company should be transferred to Mr Kwok, only shares in Wide Tech were transferred, no transfer ever having been made of shares in Worldwide.

23.  It is common ground that the agreement reached on 1 September 1999, whatever its other terms, involved Mr Kwok in acquiring 10% interests in each of the two companies. Mr Lo says, however, that at a meeting on 12 October 1999, some six weeks later, it was agreed between all the parties (including Mr Chan and Mr Kwong) that there was no point in transferring any shares in Worldwide, as these were essentially worthless, as it had no fixed assets.

24.  This suggestion is denied by Mr Kwok, who says that nothing of the sort was ever agreed. In this, he is supported by Mr Kwong, who filed evidence on his behalf, confirming that no such agreement as alleged by Mr Lo to have been made on 12 October 1999 was made.

25.  On the face of it, this gives rise to a conflict of evidence on the affidavits, which is not a matter which the court can realistically be expected to resolve on the basis of the affidavits alone. However, Mr Lui submits that there is documentary evidence to support Mr Lo’s position. He relies on notations made on cheques paid by Mr Lo to Mr Yau in settlement of the sums payable by Mr Kwok, Mr Kwong and Mr Chan to Mr Yau. Mr Lo says that he made the loans to them by (a) paying Mr Yau the sums payable to Mr Yau from them and (b) giving credit for the payments due to him personally. Mr Lo has exhibited three cheques paid by him to Mr Yau in this regard. The first two are annotated with a reference to the sale of shares in “WTL/Group”, which was, according to Mr Lo, a reference to Wide Tech and Worldwide, whereas the third (said to have been provided to Mr Yau on 12 October 1999) was annotated with a reference to sale of shares in Wide Tech alone. Mr Lui submitted that this was contemporaneous documentary evidence that supported Mr Lo’s version of events, which had not been (and could not be) explained by Mr Kwok.

26.  I do not think that this evidence is quite as conclusive as Mr Lui suggests. The notations were made by Mr Lo himself, and are, to that extent, somewhat self-serving. Further, there is no suggestion that Mr Kwok (or Mr Kwong or Mr Chan) was aware of the notation on the final cheque. In these circumstances, I do not think that it can be said that the conflict of evidence can be readily resolved in Mr Lo’s favour.

27.  Further, it is, to say the least curious that, just a matter of weeks after an agreement had been reached on the basis that the purchase price for the share acquisitions should be by reference to the fixed asset value of both companies (itself a somewhat odd basis for valuation), an assessment carried out and calculated by Mr Lo himself, Mr Lo should be saying (and the purchasers agreeing) that one of the companies in fact had no value. If this were the case, one would have expected that this would have been known to Mr Lo from the outset, and that the agreement would from the beginning have been that only shares in Wide Tech should be acquired.

28.  Mr Lui also made the point that if this were a serious cross-claim, it is surprising that there should be no record of Mr Kwok ever having complained about the failure to transfer the shareholding in Worldwide to him. There is, I think, some force in this point, although I would not be inclined to regard it as entirely conclusive.

29.  However, it is not sufficient for Mr Kwok to establish that there is a cross-claim which has some substance to it – it is necessary for him to go further and to establish that it is of a value which exceeds the amount of the debt on which the petition is based. Mr Kwok has failed to do this. He has put forward no evidence (beyond a statement that Worldwide was at one time a creditor of Wide Tech for some HK$40 million – an amount which Mr Lo says related to unpaid agency fees), to enable any attempt to be made to place a value on the Worldwide shares which he says should have been transferred to him.

30.  In these circumstances, I do not think that this ground provides a basis on which Mr Kwok can resist the petition.

31.  The second ground on which Mr Kwok resists the petition is based on alleged non-payment of the sales commission and net profit bonus to which Mr Kwok claims to be entitled. In this respect, Mr Kwok initially relied on a different version of the Service and Joint Venture Agreement which was said to have been dated 15 July 1998. However, when it was pointed out by Mr Lo that this version of the agreement had never been signed, and had never, according to Mr Lo, been agreed, Mr Kwok accepted that this might well have been the case, admitting that his memory might now be failing him.

32.  However, payments of the same sort were also required to be made under the signed version of the agreement dated 22 June 1998.

33.  Mr Lo accepts that these payments do not seem to have been made after a certain point. However, he says that some such payments were made, as he and Mr Yau were paid amounts representing the commission payable to Mr Kwok as a deposit for the intended share transfer pursuant to the Service and Joint Venture Agreement. He says that the reason for the payments ceasing is because they were superseded by the arrangements agreed on 1 September 1999, when the sales commission was replaced by an increase in monthly salary of HK$5,000 and the net profit bonus by directors’ bonuses that were to be paid in future.

34.  In support of his case, Mr Lo has produced documentation prepared by the accounts department of Worldwide which suggests that these amounts were paid to Mr Kwok (although they were in fact, it seems, paid to Mr Lo and/or Mr Yau as deposits or part payment for the transfer of shares).

35.  However, it seems to me that there is a more fundamental difficulty in Mr Kwok’s way in relation to these payments. It is this – Mr Kwok was employed by Worldwide, and the obligation (if it existed at all) was one which was owed to him by that company, rather than by Mr Lo.

36.  Mr Chung submitted that as Mr Lo was a party to the Service and Joint Venture Agreement, he was personally liable to pay such amounts to Mr Kwok. I do not think that this at all likely to have been the case. The agreement, as I have indicated above, was in essence an agreement setting out a framework for the cooperation of Mr Kwok with Mr Lo and Mr Yau, intended to lead up to an acquisition by Mr Kwok of an interest in the two companies. As part of the arrangement, Mr Lo and Mr Yau were to propose Mr Kwok’s employment with Worldwide – a matter which, given their ownership of the best part of that company, one might expect to go through. But that would not, I think make Mr Lo (or Mr Yau) Mr Kwok’s employer, or render him liable to pay Mr Kwok’s salary or other remuneration should his employer, Worldwide, fail to do so.

37.  In these circumstances, it seems to me that any claim in respect of these payments is one that Mr Kwok must assert against Worldwide, and not Mr Lo. It is therefore not a matter which assists him in relation to this petition. Even if it conceivably could be, there is no evidence as to the value of such a claim, and it is not possible to be satisfied that it is likely to overtop the amount of the debt on which the petition is based.

38.  That leaves Mr Kwok’s final ground of opposition. In essence, Mr Kwok says that the arrangement was that he should not have to pay for his shareholding in Wide Tech and Worldwide from his own funds. He suggests that the Share Payment Scheme document of 1 September 1999 evidences an intention that his cost of acquiring his shareholding should be funded through dividends to be declared by the companies in future, and that this in turn is evidence of the arrangement that he alleges.

39.  As I have noted above, Mr Lo has taken issue with Mr Kwok’s bundling together of various documents dated 1 September and 1 October 1999 together with the unsigned Share Purchase Agreement (also dated 1September 1999). I would accept that the documents were not part of a single agreement – the Share Purchase Agreement was not signed, and the Share Interest Scheme documents were not prepared until a month after the share purchase was agreed on 1 September 1999.

40.  However, on the face of it, the Share Payment Scheme document does suggest that it was intended that payment for the shares being acquired by Mr Kwok, Mr Kwong and Mr Chan should be largely effected from payments of dividend to be made by the companies in the future. That said, however, such an intention does not necessarily imply that payment for the shares should only be made if such dividends were paid – there would seem to be no basis on which it could be guaranteed that such dividends would be paid, since this would depend on the performance of the companies in the years ahead.

41.  Mr Lo also suggested that Mr Kwok’s own behaviour was inconsistent with the case that he now puts forward, in that even if dividends in the amounts envisaged in the Share Payment Scheme document were not paid, Mr Kwok admits that dividends totalling HK$262,816 were paid to him in 2000 and 2001. Mr Lo says that if Mr Kwok’s case were true, such payments should have been paid over to him pursuant to the arrangement alleged by Mr Kwok, but they were not.

42.  But this does not appear to be correct. On the contrary, the documentation exhibited by Mr Lo at exhibit LTH-20 to his first affirmation appears to show that such dividends were applied so as to reduce the balance outstanding from Mr Kwok. On the first page of the documents making up that exhibit, there are items of HK$137,401, HK$75,415 and HK$50,000 recorded as being “Dividends or Cash Repayments” for May and September 2000 and August 2001 – these amounts total HK$262,816, the precise amount of the dividends alleged by Mr Kwok to have been paid to him. It is apparent from the running balance in the last column of this document that these amounts were, in fact, applied in reduction of the balance owing to Mr Lo. The evidence in relation to the dividends that were paid would therefore seem to be consistent with Mr Kwok’s case.

43.  But the question remains, does this go far enough? I do not think that it does. The dividends to be declared according to the Share Payment Scheme document would just be sufficient to pay the principal amount advanced by Mr Lo to Mr Kwok. They would not cover the interest that Mr Kwok appears to accept would accrue on the loan. Those amounts would therefore necessarily have to be paid by Mr Kwok from his own funds (whether his existing funds or his salary from his position with Worldwide and Wide Tech).

44.  Further, when one has regard to the record of the payments made (LTH-20), it is clear that regular payments were made between October 1999 and September 2001 from the Shares Interest Scheme payments made to Mr Kwok, and again from 2004 onwards from his salary. Although Mr Kwok alleged that the later deductions were unauthorised and without his consent, this contention is not borne out by the terms of e-mail correspondence between Mr Kwok and Mr Lo’s secretary in March and April 2008, in which Mr Kwok refers to the deductions without any suggestion that they were unauthorised or otherwise improper.

45.  Further, had it been the case that Mr Kwok was not to be liable to repay Mr Lo in the absence of dividend payments of amounts sufficient to cover the principal amount of the loan, it is surprising that he should not have complained about the failure to make such payments in the time that has elapsed since they should, on his case, have been made. It is also surprising that he should not have complained about it when deductions were made from his salary from 2004 onwards. His failure to complain, and his acceptance of the deductions from his salary are, I think, cogent evidence of a recognition on his part that the loan from Mr Lo was one that had to be repaid, regardless of whether or not the companies paid sufficient dividends to enable him to do so.

46.  I therefore do not think that Mr Kwok has put forward sufficiently precise evidence to show that he has a bona fide basis for disputing his debt to Mr Lo on this ground – on the contrary, there is in my view substantial evidence the other way.

47.  As Mr Kwok has failed to establish that any of the three grounds he relies on give rise to a bona fide dispute of substance in relation to the petition debt, I propose to make the usual bankruptcy order, with costs, against him.