SANFORD YUNG-TAO YUNG v. KINSTON ENTERTAINMENT (HK) LTD

HCCW351/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 351 OF 2007

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J U D G M E N T

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1.  This is the trial of a winding-up petition against Kinston Entertainment (HK) Limited (“the Company”).  The petition was presented by Mr Sanford Yung-tao Yung on 7 August 2007.  The petition was based on a debt of HK$3.56 million due pursuant to a loan agreement relating to a loan of HK$3 million which Mr Yung says was made by him to the Company in March 2006.  A statutory demand was served on 3 October 2006, but after service of the statutory demand, only limited part repayments of the loan were made and the amount on which the petition is based represents the debt that is said to be due as at the date of presentation of the petition.

2.  The loan was the subject of a loan agreement dated 13 March 2006 which, on its face, appeared to be made between the Company and another company called Moline Limited.  The loan agreement indicated that there was to be a loan of HK$3 million and indicated that HK$2 million had been advanced on the date of the loan agreement, 13 March 2006, with a further $1 million to be advanced at a later date, but in any case on or before 31 March 2006.  It is common ground that the further sum of HK$1 million was in fact advanced on 28 March 2006.  The agreement provided that the loan should be repaid within four to six months.  The latest date for repayment was, therefore, 28 September 2006.

3.  The Company resists the petition on three principal grounds.  First, it says that it is not in fact indebted to Mr Yung because the loan agreement was not made with him but with Moline Limited.  The Company refers to the loan agreement itself, which is in the form of a document addressed by the Company to Moline and is signed by Mr Yung for and on behalf of Moline Limited. 

4.  It has to be said that this was not a point that was taken in the Company’s evidence that it filed initially in opposition to the petition in October and November 2007.  It was raised for the first time in an affirmation by its director, Mr Fan Chi-wing, just over a week ago.  I gave leave for that affirmation to be put in evidence at this hearing, notwithstanding its lateness, as it appeared that the Petitioner was ready to deal with it, having already prepared evidence in response to the matters which it wished to address and would suffer no prejudice if I were to allow it in.

5.  Secondly, the Company says that, by an oral agreement made on about 13 July 2006, it was expressly agreed between the Company and Mr Yung that the loan should only be repayable out of profits to be earned by the Company from sales of compact discs, video compact discs and DVDs of a concert or of certain musical productions which were called the “Everlasting Golden Hits Concert”.  It is, I think, common ground that the purpose of the loan in the first place was to enable the Company to package and market such CDs, VCDs and DVDs.

6.  Finally, it says that the Petitioner cannot rely on the statutory demand to show that it is insolvent because it has not in fact neglected it.  It says that there were in fact negotiations concerning repayment and agreed repayment terms that were entered into after the presentation of the statutory demand.  It is also asserted in the latest affirmation of Mr Fan that Mr Yung agreed that he would not pursue a winding-up petition against the Company.

7.  There is no real dispute as to the law that has to be applied.  The test is to be found in Re ICS Computer Distribution Limited [1996] 1 HKLR 181, and has been summarised by Kwan J in Re GrandfieldPacific Hotel Limited (unreported, CFI, HCCW 29/2001, 20 November 2001).  I do not think it necessary to set out in any detail what was said in those two cases as the test is well-known.  It is for the Company to show, by sufficiently precise evidence, that it has a bona fide dispute of substance in relation to the debt on which the petition is based.

8.  I turn therefore to the first point.  As to this, it is correct that the agreement was, on its face, between Moline and the Company.  However, Mr Yung has affirmed that, in fact, he and not Moline was the lender.  He says that he used Moline as a party to the loan agreement in order not to disclose his involvement in the loan, but that the loan was in fact advanced by him personally and not the company, and that the parties’ subsequent conduct shows quite clearly that the loan was always regarded, on all sides, as a loan from him and not from the company, Moline.

9.  In support of this, Mr Yung relies, first, on the fact that he advanced the loans.  The fact that the advances were made by him was in fact admitted by Mr Fan in his second affirmation.  Miss Wong, who appears for the Company, has suggested that the only admission that Mr Fan made was that the moneys, or the proceeds of the loan, were advanced by Mr Yung, and not that Mr Yung was the lender.

10.  For my part, I have some difficulty in reading what is stated in Mr Fan’s second affirmation in this way.  In that affirmation, what is said is that it was accepted, or admitted, that advances were made by Mr Yung.  In the ordinary way, I would read this as meaning that the advances by way of loans were made by him.  It is, in any event, I think, significant that there was no mention of this particular point concerning the identity of the lender in the affirmation.  In my view, the very late introduction of this point into the proceedings would appear to be something of an afterthought. 

11.  Quite apart from this, there is, in any event, a considerable amount of further evidence to suggest that the lender was in fact Mr Yung, and that this was well-understood by both sides.  In this connection, reference may be made to: firstly, post-dated cheques which were given by the Company to Mr Yung personally on 13 July 2006; secondly, Mr Yung’s letter of 8 September 2006, addressed to the Company, in which he stated himself to be the lender; thirdly, Mr Fan’s response of 25 September 2006, in which no issue was taken with the fact that Mr Yung had stated himself to be the lender; fourthly, the fact that it was Mr Yung who issued the statutory demand in his personal capacity; and fifthly, the fact of a guarantee by Mr Fan given in about November 2006, in which there was an express acknowledgement of indebtedness on the part of the Company to Mr Yung (see paragraph 3 and also the last page of that document).

12.  Miss Wong suggested that the latter at least, that is to say, the references to Mr Yung being the lender in the guarantee, must have been a mistake.  I do not see why that is so.  The document appears to have been drafted by lawyers.  It states clearly, in two separate places, that there has been a loan from Mr Yung to the Company.  More pertinently, nowhere in any evidence filed on behalf of the Company is it even suggested that there was any mistake in relation to what was stated in the guarantee.

13.  Miss Wong also suggests that there may have been some loose use of language by Mr Fan in the correspondence and in the documents that have been referred to.  I would accept that laymen sometimes do fail to distinguish clearly between individuals and companies that are owned or controlled by them.  However, that does not seem to be the case here.  Quite apart from the fact that, as I have noted, the guarantee was drafted by lawyers, it seems to me that in the letter of 25 September from Mr Fan to Mr Yung, Mr Fan had in fact been careful to distinguish between himself and the Company, because there are several occasions on which he refers to things that were to be done by himself, or stated by himself, being careful to qualify them with the words “on behalf of the Company, Kinston Entertainment (HK) Limited”.  I therefore would not be prepared to accept that Mr Fan was guilty merely of loose language as Miss Wong suggested might have been the case.

14.  Finally, Miss Wong suggested that I should not refer to the later documents and that no reliance could properly be placed on them because they were not contemporaneous with the loan.  With respect, I do not think that this is a good point.  The documents, to my mind, clearly demonstrate what the position was so far as the parties were concerned and I see no reason why they should not be referred to.

15.  I am therefore satisfied that Mr Yung has established that he was, in fact, the lender and that the Company has failed to raise any bona fide dispute of substance in respect of this particular contention. 

16.  As to the second point, the agreement that the Company alleges was made on 13 July 2006 was that Mr Yung agreed that repayments should not be required until there had been sufficient receipts generated from the proceeds of sales of CDs, VCDs and DVDs from the concert project.

17.  As to this, I have to say that the allegation appears to be a bare allegation of an oral agreement unsupported by any documentation, without any detailed account being given of the circumstances in which it came to be made.  This is, to my mind, somewhat surprising where the original agreement was in written form.

18.  As Miss Tsui, who appears for the Petitioner, has pointed out, the letter of 25 September 2006, on which heavy reliance was placed by the Company, does not in fact refer to the oral agreement in the terms in which it is alleged.  There is no reference to any agreement to postpone payment until sufficient receipts had been generated from the project.  The only matter that is referred to is an alleged agreement to postpone presentation of post-dated cheques, which had been given on 13 July 2006, if Mr Fan, on behalf of the Company, requested Mr Yung to withhold presentation of them. 

19.  Moreover, the letter refers extensively to the Company making attempts to realise its assets and to make sales of the products in question in order to generate income and asks repeatedly for time to be allowed to enable it to repay the debt.  There would seem to have been no need to make such requests for time, or to seek such time, if there had in fact been an agreement that there was no obligation to repay until the sales proceeds had proved sufficient.

20.  A further matter that casts doubt on the Company’s case is the provision by it of the post-dated cheques on 13 July 2006.  This seems to me to be somewhat inconsistent with the agreement that is alleged.  Miss Wong suggested that they were only given as evidence of good faith or sincerity on the part of the Company, but it seems to me that to provide post-dated cheques on the basis of an alleged understanding that they would not be presented if such a request were made by the provider of the cheques renders the provision of the cheques quite meaningless.  There seems to me to be no point in giving a party post-dated cheques, or in that party accepting them, if it was intended that they should not be presented and if there were, in fact, no obligation to pay.

21.  It seems to me, therefore, that the presentation of post-dated cheques, post-dated to the last possible repayment date of the loan, suggests that there had been no agreement to vary the loan as is suggested by the Company, but that, rather, the loan, even at that stage, remained in its original form. 

22.  Similar points can be made in relation to a letter of 18 October from the Company to Mr Yung in which requests are made for time.  Such requests would have been quite unnecessary had there in fact been an agreement of the nature stated, and it is surprising that if there was such an agreement, there is no reference to it in any of the correspondence between the Company and Mr Yung.  Similarly, the deed of guarantee acknowledges the existence of the loan without any suggestion that there had been any agreement to repay.

23.  In these circumstances, I am quite satisfied that there is no substance to this alleged dispute.  The evidence which the Company has put forward does not, to my mind, even begin to approach the precision that is required to raise a bona fide dispute of substance. 

24.  That leaves the final point and as to this, it seems to me that the Company has clearly neglected to pay the statutory demand.  It may, however, be arguable that it may have compounded to the reasonable satisfaction of the creditor by entering into the settlement agreement that was in fact reached.  It is, however, legitimate to look at the terms of the settlement to see what was in fact agreed, and it is clear from the terms of the correspondence between Baker & McKenzie and the Company, some of which was countersigned by Mr Fan on behalf of the Company, to show that what was agreed is not what is suggested in paragraph 10 of Mr Fan’s third affirmation, but that the position was that if any instalment were missed, Mr Yung would be immediately entitled to present a winding-up petition against the Company.

25.  It is true that the correspondence in question was marked “without prejudice”, however, the purpose of looking at the documentation at this stage is not with a view to establishing the existence of a debt which is denied, or for the purpose of establishing an admission in relation to the debt on the part of the Company in the course of negotiations that were without prejudice, but to establish the actual terms of the settlement agreement that was reached.

26.  It seems to me that where one party puts forward one version of a settlement agreement and the other party disputes that that is the nature of the agreement, it is perfectly legitimate for the other party to refer to the without-prejudice documentation recording the settlement to demonstrate its terms.  I do not think that it would have been wise for the Petitioner to have relied simply on Mr Yung’s statement or say-so that the terms of the agreement were not as alleged by Mr Fan in his third affirmation.  Quite clearly, to do so would have invited a submission - that was in fact made - that there was in fact a dispute as to the terms of the settlement and that the matter should therefore go to trial.  To my mind, it was quite legitimate for the Petitioner to refer to the without-prejudice correspondence in question for the limited purpose of establishing the terms of the agreement.

27.  As for the suggestion in paragraph 10, which Miss Wong suggested was a separate allegation, that there was an oral agreement on the part of Mr Yung outside of the correspondence between his solicitors and the Company, agreed between himself and Mr Fan, that he would not take steps to wind up the Company, it seems to me that this is simply not believable where it is quite clear that solicitors were instructed, were involved in negotiating or setting the terms of the settlement agreement, and where, most significantly, the Company had in fact acknowledged the terms of settlement by signing on the letters in question.

28.  I am therefore satisfied that there is no dispute of substance in relation to this such as to require the matter to go to trial.

29.  So far as reliance on the statutory demand and the question of the Company’s insolvency is concerned, or its inability to pay its debts, it seems to me that even if - which I am prepared to accept would be arguable - the statutory demand cannot be relied on in itself as the basis for deeming the Company to be unable to pay its debts, having regard to the fact that the Company did, it seems, enter into a settlement agreement with Mr Yung thereafter, it is quite clear, nonetheless, that the Company has in fact failed to pay the debt in full.  There had been no explanation for this.  It has not provided any evidence as to its financial position or ability to make payment of its debts in future. 

30.  In those circumstances, it seems to me that, as in Re Aurasound Speakers Limited [2004] 3 HKLRD 502, to which I was referred by Miss Tsui, I am perfectly entitled to infer from the fact that the Company has neglected and failed to pay the debt, which I have found to be indisputably due, for a considerable period of time that it is unable to pay its debts and make a winding-up order accordingly.

31.  For all of these reasons, I am satisfied that the Petitioner is in fact a creditor of the Company and that the Company has no bona fide dispute of substance as to the debt on which the petition is based, and that the Company is unable to pay its debts.  I shall therefore make the usual winding-up order with costs against the Company.