RE CENTRE RISE TRADING LTD

HCCW 142/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 142 OF 2007

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J U D G M E N T

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The Petition

1.  This is a creditor’s petition to wind up Centre Rise Trading Limited (“the Company”) presented by China Merchants Bank Company Limited (“the Bank”) on the ground that the Company is unable to pay its debts as they fall due.  The petition was presented on 24 March 2007 and amended on 29 October 2007.  It was founded on a judgment debt obtained by the Bank against the Company in High Court Action No. 16494 of 1999 (“the Hong Kong judgment”) on 12 July 2000, in respect of outstanding principal and interest owed by the Company to the Bank for facilities granted to the Company.

2.  By the Hong Kong judgment, it was adjudged that the Company was to pay the Bank US$34,038,045.20 together with further interest on the sum of US$32,366,000.00 at the rate of 4.75 % per annum over the best lending rate for US dollars from time to time quoted by the Bank, from 22 September 1999 until repayment in full.

3.  A demand was served on the Company under section 178(1)(a) of the Companies Ordinance, Cap. 32 on 2 March 2007 for US$5,601,329.00, made up of the principal sum of US$3,593,357.00 and interest of US$2,007,971.00.  This was the amount of the petitioning debt before the amendment of the petition.  This amount was arrived at on the assumed basis that on 16 January 2001, parts of the mortgaged properties with a gross floor area of 14,535 sq m at an agreed value of US$21,628,080.00 (“the Set-off Properties”) were used to set off and repay part of the outstanding principal.  The Bank later c1aimed this supposition was incorrect, as it did not in fact obtain legal title to the Set-off Properties until 15 January 2008.  The interest element in the sum of US$5.6 million odd was arrived at using the prevailing rate of interest on judgment debts in Hong Kong.  This was also incorrect, as under the Hong Kong judgment, the Bank was entitled to charge interest at 4.75% per annum over its best lending rate for US dollars from time to time.

4.  In the amended petition, the amount of the petitioning debt was revised to US$41,230,700.40, made up of the principal sum of US$25,222,580.79 and interest of US$16,008,119.61.  The calculation was arrived at on the basis there was no setting off of the value of the Set-off Properties as at 31 January 2007, and that interest on the principal of US$25,222,580.79 was charged at 4.75% per annum over the Bank’s best lending rate for US dollars from time to time.  Subsequent to the amendment of the petition and on 15 January 2008, the Bank obtained legal title to 13,612.28 sq m of the Set-off Properties, the total value of which, at the agreed price per sq m, was US$20,255,072.64.  Giving credit for this sum, the Bank claimed the Company still owed US$24,085,536.94 as at 15 January 2008.  These figures are conveniently set out in a summary in table form in the skeleton submissions of the Bank.

5.  The Company opposed the amended petition on three broad grounds:

(1) It disputed the existence of the indebtedness.  According to the Company, not only has it fully discharged its indebtedness, it has overpaid the Bank.

(2) It disputed the Bank’s entitlement to rely on the Hong Kong judgment in presenting this petition, by reason of estoppel.

(3)    It has a genuine cross claim against the Bank.

The background

6.  I will first set out the relevant background facts which are largely undisputed.

7.  On 18 October 1997, the Company entered into a loan agreement with the Bank, pursuant to which the total sum of US$32,366,000.00 was advanced.  The Company’s liabilities under the loan agreement were secured by a mortgage executed in November 1997 by Beijing Yuetan Building Real Estate Development Company Limited (“Yuetan”), in respect of 27,113 sq m of properties and land use rights in the North Block of Yuetan Building in Beijing.  80% of the shares in Yuetan was held by the Company.

8.  The Company defaulted under the loan agreement in November 1999.  The High Court Action was brought against the Company in October 1999 and the Hong Kong judgment was entered in July 2000.

9.  In June 2000, the Bank brought an action against the Company and Yuetan in the Guangdong Higher People’s Court, seeking repayment of debt for monies advanced to the Company and the enforcement of the security provided by Yuetan so as to apply the proceeds from enforcement to repay the debt.

10.  On 3 January 2001, pursuant to mediation by the Guangdong Higher People’s Court, the Bank, the Company and Yuetan reached an agreement embodied in a Civil Mediation Decision, which contained these salient terms:

(1) The Company acknowledged that it owed to the Bank a sum of US$32,366,000.00, interest of US$6,408,596.90, default interest of US$778,520.44 and compound interest of US$618,789.03.  The Company and Yuetan undertook to pay the legal costs and asset preservation costs incurred by the Bank.

(2) The Bank agreed that Yuetan could sell 10,435.02 sq m out of the 27,113 sq m of the mortgaged properties to China Great Wall Asset Management Corporation (“China Great Wall”) at a price of RMB 14,000.00 per sq m for RMB 146,090,280.00.  The whole of the purchase price should be deposited into the Bank’s account, of which RMB 120 million would be used for the repayment of the Company’s debts.  The balance would be used to repay the legal costs and preservation costs incurred by the Bank.  Thereafter, upon examination and subject to approval by the Bank, a sum of RMB 25 million would be used to pay the relevant transaction costs of Yuetan.

(3) A gross floor area of 14,535 sq m of the mortgaged properties (i.e. the Set-off Properties mentioned earlier) valued at US$1,488.00 per sq m in the total sum of US$21,628,080.00 was to be set-off against the liabilities owed by the Company to the Bank.  The rent from the Set-off Properties would belong to the Bank and Yuetan agreed to assist the Bank to collect the rent.

(4) The exact gross floor area of the Set-off Properties, the exact figure of the indebtedness and the deduction of the default interest and compound interest would be confirmed in the indebtedness set-off agreement to be entered into between the Bank, the Company and Yuetan.

(5) Yuetan undertook that within six months from the date on which the mediation agreement became operative, it would assign the Set-off Properties to the Bank, and would complete the formalities for obtaining the relevant housing ownership certificates, and would simultaneously deliver the housing ownership certificates of the remaining secured properties to the Bank for its safe custody.

(6) Any outstanding principal and interest was to be repaid by the Company within two years of the date of the mediation agreement.  Yuetan undertook to continue to secure such outstanding sums by the remaining mortgaged properties with a gross floor area of 2,237.29 sq m.

(7) The Bank agreed to appoint Yuetan to sell the remaining mortgaged properties during the two years from the effective date of the mediation agreement.  The price of the properties which Yuetan was entrusted to sell should not be lower than the price of the Set-off Properties.  If there should be funds or properties remaining after Yuetan had used the proceeds to pay off all the indebtedness, such funds or properties would be regarded as remuneration for Yuetan.

(8) If the Company and Yuetan could comply with the above conditions, the Bank agreed to waive the default interest and the compound interest.

(9) Both the fee of acceptance of the action of US$190,240.61 and the asset preservation fees of US$193,800.00 should be borne by the Company and Yuetan.

11.  On 19 January 2001, Yuetan deposited to the Bank’s account RMB 138,785,766.00 (as opposed to RMB 146,090,280.00 stipulated in clause (2) of the Civil Mediation Decision), being 95% of the purchase price received from China Great Wall.  Of this sum, RMB 120 million was applied by the Bank to settle in part the Company’s indebtedness.  After deducting the court fees and preservation fees under clause (9), the balance held by the Bank pursuant to clause (2) was RMB 15,602,382.66, for payment of the relevant transaction costs of Yuetan, subject to the examination and approval by the Bank.

12.  In June and July 2001, Yuetan made various requests to the Bank for payment of the aforesaid balance of the proceeds from China Great Wall, for payment of stamp duty, legal fees and so on.  The Bank requested Yuetan to provide documentary proof for the purpose of approving payment.  By a letter dated 3 August 2001, the Bank informed Yuetan that given the repeated failure to provide documentary proof, the Bank decided to refer the matter to court and in the meantime it would not deal with any further application from Yuetan for payment of transaction costs.

13.  In 2002 and 2003, the Bank obtained orders from the Guangdong Higher People’s Court to enforce the Civil Mediation Decision.  The Guangdong Higher People’s Court entered a civil adjudication decision against the Company and Yuetan, ordering Yuetan to transfer to the Bank the Set-off Properties so as to settle and repay to the Bank US$21,628,080.00, in accordance with clause (3) of the Civil Mediation Decision.  It appointed the Guangzhou Railway Transportation Intermediate Court (“the Guangzhou Railway Court”) to execute the Civil Mediation Decision.  A notice was issued by the Guangdong Higher People’s Court to the Beijing National Land Resources and Housing Management Bureau (“Beijing National Land Bureau”) on 29 May 2002 regarding the said execution, directing the latter to assign the properties to the Bank.

14.  Notwithstanding the enforcement action of the court, as Yuetan had not paid the land premium for the land on which the building was built, the Beijing National Land Bureau could not assist the Bank to process the assignment of the Set-off Properties.

15.  The matter dragged on from 2004 to 2007 despite subsequent decisions and orders of the Guangzhou Railway Court imposing a penalty on the management company of the Yuetan Building (which was controlled by the Company) in failing to give assistance, freezing the shares of the Company in the management company, and ordering the mortgaged properties to be sold by auction.

16.  On 16 January 2007, Yuetan brought an action against the Bank in the Beijing Higher People’s Court (“the Beijing Action”) claiming RMB 161,914,592.00, alleging that it had suffered economic losses as a result of the Bank’s breaches of the Civil Mediation Decision.  The Company was the third party in that action.

17.  This winding-up petition was presented on 24 March 2007.  

18.  On 21 June 2007, Yuetan assigned to the Company all its rights and benefits which it may have in the Beijing Action.

19.  In May 2007, the Bank paid to the authorities various sums being the land premium, fund usage charges and late fee, in the total sum of RMB 4.6 million odd, which should have been paid by Yuetan, to clear the obstacle to obtaining legal title to the Set-off Properties.  A verification letter of payment of the land premium was issued by the Land Usage Centre of Beijing to Yuetan in August 2007.  Eventually, on 15 January 2008, a premises ownership certificate was issued by the Beijing Municipal Construction Committee, showing that the Bank has become the legal owner of the Set-off Properties.

Disputed indebtedness

20.  The Bank has produced four tables in the affirmations which were marked A to D.  In view of the amendment to the amount of the petitioning debt, Tables A and B have been superseded and it relies only on Tables C and D.  Table D is just a continuation of Table C, setting out the calculation of the debt and interest up to 15 January 2008.

21.  I leave aside for the time being the argument of Mr Ng, SC for the Company that the Bank is not entitled to charge interest at the rate stipulated in the Hong Kong judgment by reason of estoppel.

22.  Mr Ng attacked the composition of the petitioning debt on various grounds.

23.  Firstly, he contended that the Bank has failed to give credit for RMB 15,602,382.66, being the balance of the proceeds from China Great Wall withheld by the Bank.  This sum is not for the discharge of the Company’s indebtedness but to settle the relevant transaction costs of Yuetan, pursuant to clause (2) of the Civil Mediation Decision.  I have considered the correspondence exchanged in June and July 2007.  I am not persuaded that it was wrong for the Bank to withhold payment in such circumstances.  Besides, even if the RMB 15 million were to be taken into account, RMB 4.6 million should be deducted, being the land premium and other charges which Yuetan should have paid, leaving only about RMB 10.9 million, equivalent to US$1.3 million, to discharge the Company’s liabilities.  The Company would still owe a very substantial sum to the Bank. 

24.  Mr Ng further argued that the Bank has split the sum of US$15,335,625.33 (being the US dollar equivalent of the sums from the China Great Wall proceeds applied to settle the Company’s liabilities under clause (2)) towards payment of principal and interest arbitrarily, in that US$7 million odd went to pay part of the principal and US$8 million odd was applied towards interest.  No explanation has been provided by the Bank why the sum was split in that way.

25.  As pointed out by Mr Jat, SC for the Bank, the figures of appropriation were set out in Table C which was provided by the Bank in the affirmation filed in August 2007.  The Company has never raised any complaint or challenge to the appropriation of principal and interest until the service of its skeleton submission in this hearing.  

26.  I accept Mr Jat’s submission that the complaint is misconceived as a matter of law.  As the Company did not exercise its right to appropriate when the repayment was made, the right to appropriate had devolved upon the Bank as the creditor.  The Bank may exercise such right up to the very last moment or until something happened which made it inequitable for the Bank to exercise the right.  Where there is no appropriation by either the debtor or creditor in the case of a debt bearing interest, the law will, unless a contrary intention appears, apply the payment to discharge any interest due before applying it to the earliest items of principal (Chitty on Contracts, 29^th ed, vol 1, paras 21-059 to 21-061, and 21-067).  Further, it was provided in clause 11.3 of the loan agreement that if any amount received by the Bank from the Company or any other person for payment of any sum due by the Bank is less than the full amount due, the Bank shall apply that amount in or towards such part of the obligations of the Company as the Bank may in its absolute discretion determine.

27.  As for the calculation put forward by the Company in support of its contention that it has fully settled and even overpaid the Bank to the extent of US$89,404.00, I agree with Mr Jat this is flawed in a number of respects, assuming for the time being it is right to use the figures as provided in the Civil Mediation Decision.

28.  Firstly, it is wrong for the Company to calculate interest only at US$6,408,596.00.  This figure excludes the default interest and compound interest.  Contrary to the Company’s allegation it had fulfilled its obligations under the Civil Mediation Decision so the Bank should waive the default interest and compound interest pursuant to clause (8), it does not appear on the documents placed before me that Yuetan had fulfilled its obligations.  Clause (5) required Yuetan to assign the Set-off Properties to the Bank and complete the formalities for obtaining the housing ownership certificates within half a year after the mediation agreement became operative.  That was not done.

29.  Secondly, the Company deducted US$16,377,525.33 as part payment being the proceeds from China Great Wall.  This figure is incorrect, as it includes RMB 15,602,382.66, which should be withheld by the Bank under clause (2) to settle the transaction costs of Yuetan.

30.  Thirdly, the Company deducted US$21,628,080.00 being the value of the Set-off Properties, but the legal title to these properties was not acquired by the Bank within 6 months of the Civil Mediation Decision as contemplated, this took place only in January 2008.  Further, not all of the 14,535 sq m were transferred to the Bank, only 13,612.28 sq m were transferred.

31.  Last but not least, the Company’s calculation has not taken into account any interest element since January 2001.  What the Company has done is just to take the position of the indebtedness in January 2001 and deduct various sums from it.

32.  Mr Ng submitted that the state of indebtedness on the Bank’s case was unclear.  He said the Company still does not know what is the specified sum alleged to be owed to the Bank, that makes the statutory demand and the petition incurably bad.  I do not agree with him that the Bank was not in a position to make a demand for a specified sum that cannot seriously be questioned as to existence or quantum.  The figures of the Company’s indebtedness are clear, they have been set out in Tables C and D and summarised in the table to Mr Jat’s submissions.

33.  I find there is no substantial dispute on bona fide grounds that the Company does owe a substantial debt to the Bank.

Estoppel

34.  Mr Ng submitted that the Civil Mediation Decision came after the Hong Kong judgment, and both were in relation to the same subject matter.  Clause (1) of the Civil Mediation Decision provided that the parties had agreed that the principal indebtedness owed by the Company to the Bank as at 31 December 2000 was US$32,366,000.00 and interest at that date was US$6,408,596.90.  As the Civil Mediation Decision was intended to regulate the subsequent dealings between the Bank, the Company and Yuetan, it was at least arguable that, by implication, the Bank would not be allowed to fall back on the Hong Kong judgment in enforcing its rights against the Company.  The effect of clause (1) is a clear representation made by the Bank to the Company that the Bank would not enforce its strict legal rights under the Hong Kong judgment in relation to interest, as interest in the Civil Mediation Decision was stated at US$6.4 million odd, much lower than the interest if calculated at the rate provided in the Hong Kong judgment.  Mr Ng said it would be inequitable to allow the Bank to resile from this and re-assert its claim under the Hong Kong judgment.

35.  I do not accept this submission either, as a matter of law or as a matter of construction of the Civil Mediation Decision.

36.  I agree with Mr Jat that the Hong Kong judgment and the Civil Mediation Decision were cumulative, not mutually exclusive, remedies available to the Bank.  The Bank was entitled to sue the Company as the principal debtor for the Company’s indebtedness.  The Bank was also entitled to enforce its security under Yuetan’s mortgage, as long as the Bank did not obtain payment of more than 100% of the total indebtedness from the principal debtor and the mortgagee.  This is the established position at law of remedies available to a secured creditor.

37.  As a matter of construction, there is nothing in the Civil Mediation Decision, whether in clause (1) or in any other provision, to suggest that the liabilities of the Company would be frozen as at 31 December 2000, and that the Company would not be liable for any further interest after that date.  I am quite unable to discern any representation of the kind as submitted by Mr Ng.

Cross claim

38.  This is the subject of Yuetan’s claim in the Beijing Action, which has been assigned to the Company after the presentation of this petition.

39.  Yuetan’s claim of RMB 161 million odd is made up in this way.  

40.  Firstly, the Bank was in breach of clause (7) of the Civil Mediation Decision.  Yuetan had requested the Bank to confirm the sale agency agreement and to perform the sale of whole floors previously reached with two purchasers.  The Bank had failed to confirm the sale agency agreement and had set a lot of obstacles.  This resulted in losses to Yuetan arising from a discharge of the contracts between Yuetan and its customers and Yuetan had missed the best time to sell the properties.  Yuetan claims a loss of RMB 68.2 million odd under this head.

41.  Secondly, the Bank was in breach of clause (2) of the Civil Mediation Decision.  Yuetan had remitted RMB 138 million odd being the proceeds received from China Great Wall.  The Bank had failed to perform its obligation and to return RMB 15.6 million odd of the proceeds to Yuetan.  This caused a disruption to Yuetan’s cashflow and it was unable to pay taxes and fees.  Yuetan claims loss of RMB 16.5 million odd under this head.

42.  Thirdly, the Bank was in breach of clause (3) of the Civil Mediation Decision.  Yuetan helped the Bank to let properties which could not be sold as yet and to collect rent, but the Bank came to the premises to make trouble and the tenants refused to pay rent.  This caused losses to Yuetan of RMB 77 million odd.

43.  In support of its contention that the Bank was in breach of clauses (2), (3) and (7) of the Civil Mediation Decision, the Company has adduced a legal opinion from a lawyer in China.  The legal opinion does not, in my view, advance the Company’s  or Yuetan’s case, as it is short on legal analysis and reasoning and the sources of law have not been identified in some instances.

44.  In respect of the alleged breach of clause (2), I do not propose to repeat what I have said in the earlier part of this judgment.  I do not regard this claim to be of any substance, in view of the contemporaneous letters in 2001.

45.  The allegation that the Bank was in breach of clause (7) is nothing but a bare assertion.  It is not clear in what way the Bank had failed to discharge its ob1igation under c1ause (7), and how the alleged breach gave rise to loss and damage of RMB 68 million.

46.  The claim in respect of the alleged breach of clause (3) is misconceived.  On the face of this provision, no ob1igation was imposed on the Bank.  The Company and Yuetan have failed to demonstrate how the alleged loss of RMB 77 million arose from any breach of the Bank.

47.  The Company has not discharged the onus of establishing to the satisfaction of the court that the cross claims are genuine cross claims.

Conclusion

48.  The Company has raised a cloud of objections on affidavit but none of the grounds of opposition are of substance.  I make an order to wind up the Company.  The costs of the petitioner are to be paid out of the Company’s assets.