TAI SHING INTERNATIONAL (HOLDINGS) LTD

HCCW 83/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 83 OF 2014

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D E C I S I O N
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1. There is before this court a Summons dated 10 June 2014 issued by Tai Shing International (Holdings) Ltd, the respondent company (“Company”), to strike out a creditor’s Petition brought by Metal Winner Ltd (“MWL”) on 4 April 2014 to wind-up the Company. 

2. The Company is listed on the Hong Kong Stock Exchange with the stock code 8103.  MWL relies on 3 dishonoured cheques (“Cheques”) totalling HK$5,700,000 (“Debt”) in support of the Petition.

3. In short, the Company argues that there is plausible evidence to demonstrate that the Cheques are tainted with illegality and such that they are not enforceable against it.  The contended illegality is that the Debt arose out of an illegal loan agreement by which the Company’s former Chairman and director, Eric Wong (“Wong”), abused his position and obtained a form of loan from MWL for his own purposes (most likely for purposes of speculation on the shares of the Company).  Secondly, the Company has a cross-claim against MWL for dishonestly assisting in the unlawful scheme perpetrated by Wong and/or knowingly receiving property obtained as a result of Wong’s breach of his fiduciary duties owed to the Company.

Law

4. The relevant legal principles to be applied on a strike out application are not controversial.  They were recently considered and summarised by Harris J in In re Yueshou Environmental Holdings Ltd, HCCW 142/2013, unrep, 16 July 2014, §8.

5. In gist, the question is whether the Company has a bona fide defence on substantial grounds which is to be demonstrated by putting before the court not just a series of assertions of fact that if made out at trial would constitute a defence, but credible evidence that demonstrates sound reasons to think that the asserted facts may be proved at trial : In re Yueshou Environmental Holdings Ltd, supra, § 9.

6. In addition, where the Company has a genuine and serious cross-claim for a sum that exceeds the Debt, normally the court will not order a winding-up : In re Yueshou Environmental Holdings Ltd, supra, §15.

7. Finally, it was held by the English Court of Appeal in Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2014] B.C.C. 327, §41 :

“The practical issue is the extent to which the court must go in determining whether there is a genuine dispute on substantial grounds. The court must, as Oliver L.J. put it, take a view whether, on the evidence, there really is substance in the dispute…It is not, however, practical or appropriate to conduct a long and elaborate hearing, examining in minute detail the case made on each side. Such a course will involve both delay in getting the issue ready for hearing and a potentially lengthy hearing…Where, as here, the petitioner insists on proceeding, the court is fully justified in taking the course sensibly adopted by the Judge in this case of concentrating on those points which the petitioner said were his strongest.” [emphasis added]

Bona fide dispute on substantial grounds

8. Let me say at the outset that on the evidence adduced by the Company, there is a fairly compelling case that there was an illegal scheme perpetrated on the Company by Wong, and MWL was a party to that scheme. 

9. MWL has put forward a “very simple and straight-forward” claim[1]and grounded the Debt on the following:

(a) A written loan agreement entered into between MWL as lender and the Company as borrower for a sum of HK$10,000,000 dated 13 June 2011 (“Loan Agreement”);

(b) A written Repayment Agreement executed between MWL and the Company on 21 December 2012 for the payment of an outstanding sum of HK$5,700,000 as full and final settlement of the Company’s liabilities under the Loan Agreement (“3^rd Repayment Agreement”); and

(c) The Cheques which were issued by the Company as payment pursuant to the 3^rd Repayment Agreement.  They were dated 7 February 2013, 26 February 2013 and 31 March 2013.

10. The Loan Agreement embodied a very simple transaction, pursuant to which the lender (MWL) agreed to provide the borrower (the Company) a loan in the amount of HK$10,000,000 or less, with interest for the duration of the loan (3 months) totalling HK$1,200,000 (4% per month).

11. It appears that the Company had considerable difficulty in marshalling the evidence on what transpired in respect of the Loan Agreement due primarily to the departure of Wong, who left the Company in January 2012.  However, the evidence which has been put together by the Company shows a very different picture to that painted by MWL.  I shall examine the critical documents in a chronological order. 

12. Firstly, there is a term sheet for a sale and purchase agreement dated 9 June 2011 (“Term Sheet”).  It was recovered from the belongings left behind by Wong in his office at the Company. 

13. According to the Term Sheet, whilst MWL was to provide a loan of HK$10m, the borrower was in fact Wong.  The substance of the transaction was that MWL would purchase, on its own account, HK$10m worth of shares in the Company (58.8 million shares at HK$0.17 per share) and the loan would be secured by those shares.  There was a moratorium over the disposal of the shares for a period of 3 months.  After the expiration of 3 months, the shares would be sold according to the instructions of Wong. 

14. On the face of the Term Sheet, the loan might have been required to generate certain demand for the Company’s shares.  That demand could have been used for purposes of speculation over such shares. 

15. The interest to be paid for the loan would be 4% or HK$400,000 per month.  In addition to holding the shares as security, the Company was required to provide MWL with a cheque in the sum of HK$1.2m for the payment of interest and another cheque for HK$10m post-dated to 13 September 2011 as security.  Further, Wong was required to provide a personal guarantee. Finally, the Term Sheet referred to an agent who was to be paid HK$300,000.

16. The Term Sheet was sent as a facsimile marked “CONFIDENTIAL”.  The header contained the following : 9 Jun 2011, 10:36 and “No. 6233”. 

17. It appears that less than 10 minutes after the Term Sheet was sent, a second facsimile (“Fax”) marked “No. 6234” was sent at 10:45 by one Tony Cheung to a firm of solicitors, Messrs Peter Cheung & Co (“Firm”).  The subject matter was stated to be “Loan Agreement (8103 and Metal Winner Limited)”.  8103 was clearly a reference to the Company by its stock code. 

18. It appears from the Fax that a term sheet was attached to it (the attachment is not contained in the evidence).  If there was such an attachment, the Term Sheet would in all probability be the attached document.  According to the Fax, Tony Cheung instructed the Firm to “draft the loan agreement for both parties’ comments”.  He also proposed the insertion of an additional clause to restrict the lender from carrying out any trading of the shares during the lock-up period (“Restriction Clause”).

19. According to the evidence of MWL, Tony Cheung acted as a middle-man in the loan transaction.  According to the terms of the Loan Agreement and a Supplemental Loan Agreement (see below), the Firm was acting as the solicitors for the Company in relation to the loan transaction. 

20. On 30 September 2014, in response to the enquiries of the Company’s solicitors, the Firm provided a number of documents to them.  Amongst these documents, there was a Supplemental Loan Agreement between the Company and MWL dated 14 June 2011 (“Supplemental Agreement”) and a Personal Guarantee executed by Wong dated 13 June 2011 (“Guarantee”).  The former provided, inter alia:

(a) MWL agreed to purchase 58,800,000 shares in the Company at or around the price of HK$0.17 per share from 2 persons to be nominated by the Company;

(b) There was a lock-up period of 3 months during which MWL was not allowed to dispose of the shares.  The Restriction Clause was largely adopted in the Supplemental Agreement;

(c) The Company guaranteed that the shares could be sold at no less than HK$0.17 per share, otherwise it would be liable to compensate for any shortfall;

(d) There was a confidentiality clause.

21. I should mention at this juncture that both the Loan Agreement and the Supplemental Agreement were signed by Wong and Ms Lee Yuk Kwan (“Lee”) who is a director of MWL.  Their signatures were witnessed by the principal of the Firm, which had prepared the agreements. 

22. In the preamble of the Guarantee, it was stated that Wong provided the guarantee (over the Company’s liabilities to MWL) because the loan was given to the Company by MWL at his request.  The Guarantee was also prepared by the Firm and Wong’s signature thereon was witnessed by the Firm’s principal. 

23. On 18 April 2012, MWL’s previous solicitors sent a letter to the Company for the attention of Wong pressing for the repayment of what was outstanding under the Loan Agreement.  A repayment schedule dated 31 March 2012 (“Schedule”) was enclosed with that letter. 

24. According to the Schedule, the loan of HK$10m made on 13 June 2011 came with a security of 6,110,000 shares[2] in “#8xx3”.  These must be shares in the Company and they were subsequently sold between 21 November to 15 December 2011, and thereby recouping a sum of HK$935,745.00.

25. It appears from the Schedule that the shares in another company (“#01x5”) were also used to partially discharge the debt owed to MWL. 

26. There were altogether 3 Repayment Agreements. They were made between MWL and the Company after Wong had left the Company on 30 May 2012, 8 August 2012 and 21 December 2012.  They were all signed on behalf of the Company by a director called Chan Yun Sang (“Chan”), who left the Company in December 2012.

27. Notwithstanding the departure of Wong and Chan, and before the disclosure by the Firm made on 30 September 2014 (see para 20 above), the Company was able to say in its evidence that it has no information or record about the Debt and no indication whatsoever of the Company having received a loan from MWL[3]. 

28. Surprisingly, there was no response from MWL as to how the loan of HK$10m was paid to the Company.  Further, Lee (in her 3^rd affirmation filed on 11 August 2014) denied having seen the Term Sheet prior to seeing it as an exhibit in the Company’s evidence. 

29. In her 4^th affirmation filed on 11 September 2014, Lee deposed to the transfer of a total of HK$10m into the bank accounts of 2 individuals, Mr Fan Stephen See Ching (“Fan”) and Ms Huang Qiaxian (“Huang”), as designated by Wong on behalf of the Company. 

30. In response, the Company maintains that it has had no link or dealing whatsoever with Fan or Huang[4].

31. There is no attempt by MWL to adduce evidence to explain why the loan was paid to Fan and Huang.  This is highly unsatisfactory because Wong has given evidence on behalf of MWL to the effect that the Loan Agreement reflected a genuine transaction and the money was needed by the Company for “an investment project”.  There is no detail given in respect of the project. 

32. The documents disclosed by the Firm on 30 September 2014 were duly adduced in evidence by the Company via the 3^rd affirmation of Tam Kwok Leung filed on 21 October 2014.  They have been met with silence from MWL. 

Analysis

33. In light of the state of the documentary evidence, there can be little doubt that MWL has been economical with the truth.  There is a great deal more to the Loan Agreement.  The Supplemental Agreement was designed to be a hidden “side agreement”.  That document exposes the falsity in MWL’s claim that it gave a loan to the Company to meet its legitimate business requirement (an investment project). 

34. Although the Supplemental Agreement was also signed between MWL and the Company, it is difficult to see what the loan had to do with the Company (save for the use of the loan to purchase its shares). Further, as a matter of commercial logic, it is difficult to understand why it was necessary for Wong to provide a personal guarantee for a loan granted to a listed company.  The Guarantee was provided on top of, inter alia, the shares and the post-dated cheque of the Company as security for the loan.

35. The circumstances demonstrated by the evidence and the existence of the Term Sheet suggest that the reality is, quite likely, reflected by the Term Sheet, ie, the loan was provided not to the Company but for Wong’s personal purposes (“True Transaction”).  I should add that the Term Sheet and the Supplemental Agreement clearly call for proper explanation by Wong, who has given evidence in these matters on behalf of MWL.  The absence of such explanation speaks volume against MWL’s case. 

36. Insofar as the purpose of the loan is concerned, Mr Maurellet, who appeared for the Company with Mr Lok, suggested that Wong was using the loan to speculate on the shares of the Company.  I am inclined to think that Mr Maurellet may well be right.  However, if MWL was acquiring some shares from 2 designated persons instead of the market, it is not clear how that acquisition might be used to facilitate a speculation exercise on the shares of the Company.  On the other hand, the precise mechanics of the speculation exercise are not something which can be elicited from the available documents.  Indeed, it is unnecessary and unwise for this court to try to determine the same on affidavits. 

37. In any case, I am unable to see what benefit there was for the Company under the loan transaction.  It was simply used to answer to the repayment obligation for the loan.  Hence, it was necessary to, falsely, make it the borrower. 

38. This court’s understanding of the True Transaction is consistent with, and supported by, the fact that the HK$10m was paid to 2 persons (Fan and Huang)[5] and resulted in some 6.1m shares held by MWL as shown in the Schedule. 

39. I should add that Lee’s denial of knowledge over the Term Sheet is not credible in light of the similarity between its terms and those of the Supplemental Agreement which she had signed.  Further, Lee’s failure to mention the Supplemental Agreement in her evidence must, in the circumstances of this case, reflect a lack of candour on her part.

Illegality

40. There is little doubt about the illegality of the True Transaction, especially when the court is only concerned whether a bona fide dispute on substantial grounds has been made out.  Indeed, Mr Wong, who appeared for MWL, did not seek to dispute that the True Transaction is illegal.  I shall deal with Mr Wong’s submissions below.  For the present purpose, I shall identify the grounds for taking the view that, assuming that the facts asserted by the Company are proven at trial, the True Transaction is illegal. 

41. To begin with, Wong had acted in breach of his fiduciary duties to the Company.  The evidence suggests that MWL was a party to Wong’s unlawful scheme to use the Company’s resources for his personal gain. Further, I agree with Mr Maurellet that the Company may have a claim against both Wong and MWL for an unlawful means conspiracy (see Clerk &Lindsell on Torts, 21^stedn, §§24-98 to 24-106).

42. I have also been taken by Mr Maurellet to 2 statutory provisions which, prima facie, have been breached :

(a) S 341(1)(a) of the Securities and Futures Ordinance, Cap 453 (“Ordinance”) – disclosure of interest by director of a listed corporation of his interest in the shares of that corporation.  According to s 351 of the Ordinance, infringement of this provision may attract criminal sanctions;

(b) S 47A of the old Companies Ordinance, which was applicable to this case at the material times – financial assistance by the Company for acquisition of its own shares.

43. In addition, a number of market misconduct offences under the Ordinance might have been committed – ss 295 (false trading), 296 (price rigging) and 299 (market manipulation).

44. In light of the view taken by this court on the illegality of the True Transaction, it is unnecessary to deal with the Company’s cross-claims based on dishonest assistance and knowing receipt.

MWL’s arguments

45. There are 2 primary arguments advanced by Mr Wong.  Firstly, it is contended that MWL’s claim is premised upon the 3^rdRepayment Agreement and the Cheques. They are not tainted by any illegality.  I am unable to agree with Mr Wong. The 3^rdRepayment Agreement, and the Cheques which were provided pursuant to its terms, were in purported discharge of the outstanding liabilities under an illegal Loan Agreement.  They are clearly the “fruits of a poisoned tree”.  I cannot see how, as a matter of law, they can be divorced from the illegal True Transaction and be enforced.  No authority has been cited to the court in support of MWL’s argument.

46. Secondly, it was argued that MWL had no knowledge of any illegality which might have been practised by Wong on the Company.  With respect, I see no merit in that contention.  Both the Loan Agreement and the Supplemental Agreement were signed by Lee, she must have known about an under table arrangement as reflected in the latter.  Indeed, as stated in para 39 above, the evidence suggests that Lee knew about the Term Sheet and therefore the True Transaction.  Further, MWL’s attempt to hide the truth from the court is not helping its cause. 

Governance of the Company

47. It is the duty of this court to mention its misgivings over the governance of the Company as revealed by the evidence. Firstly, the 3^rd Repayment Agreements were signed by Chan, who is said to have no knowledge at all about the Debt, allegedly on the instructions of Wong at a time when the latter had already left the Company.  If true, this is quite extraordinary and it is highly disturbing that a listed company is under the charge of such a person. 

48. Secondly, the circumstances under which the Cheques were signed by the Chairman of the Company, Liu Bo (“Liu”), are equally disturbing.  The Cheques were signed by Liu and Chan.  There is a witness statement from Liu explaining why he had signed the Cheques.  It was said that because he was not stationed in Hong Kong, he therefore pre-signed a number of blank cheques of the Company so that they could be used by Chan.  By doing so, Liu had destroyed the whole purpose of having 2 signatures for the Company’s cheques, and it is difficult to see how such behaviour sits properly with his responsibilities to the Company and its shareholders.

Conclusions

49. For these reasons, I have no hesitation in striking out the Petition. 

50. There is no question in my mind that the Petition constitutes an abuse of the process of the court.  MWL has put forward a false case and with which it has tried to pressurise the Company into paying for Wong’s debts.  I therefore must award costs against MWL in favour of the Company on indemnity basis, to be taxed if not agreed, subject to 2 points. Firstly, Mr Maurellet has indicated that the Company does not ask for a certificate for 2 counsel.  Secondly, the costs of Bundle B of the Hearing Bundles should be borne by the Company’s solicitors by reason of the breach of Practice Direction 5.4, §4(4). 

51. Last but not least, I am grateful to counsel for their assistance in these matters.