OZ v. CIL

HCSD 18/2023

[2023] HKCFI 3154

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPLICATION TO SET ASIDE A STATUTORY DEMAND

NO. 18 OF 2023

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REASONS FOR DECISION

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1.  This is an application by the applicant to set aside a statutory demand for US$12,857,198.35 dated 31 March 2023 served on him by the respondent (“SD”). After hearing counsel’s submissions, the Court dismissed the application with costs to be paid by the applicant to the respondent on an indemnity basis, and indicated that the reasons would be handed down in due course. These are the reasons for dismissing the applicant’s application.

A.  THE RELEVANT BACKGROUND

2.  On 20 September 2021, the following agreements were executed.

(1) The respondent as lender and RY as borrower (“the Borrower”) entered into a facility agreement (“Facility Agreement”) whereby the respondent agreed to make available to the Borrower a loan facility for an amount up to US$20 million.

(2) The applicant as guarantor executed a deed of personal guarantee (“the Guarantee”) in favour of the respondent whereby the applicant irrevocably and unconditionally undertaken, inter alia, to pay to the respondent any overdue amount owed by the Borrower under the Facility Agreement.

(3) The respondent as lender and the Borrower as chargor entered into a security agreement (“Security Agreement”) whereby the ordinary shares of ZP (a company listed on the Hong Kong Stock Exchange) (“Shares”) were charged by the borrower by way of first fixed charge in favour of the respondent.

3.  On 20 September 2021, the Borrower submitted an utilisation request to the respondent requesting a drawdown of US$19,800,000 (“the Loan”).  On the next day, a sum of US$19,701,000 was transferred to the Borrower’s account maintained with the Bank of China (Hong Kong) Limited, after a deduction of an arrangement fee of US$99,000.

4.  Clause 23 of the Facility Agreement sets out various events or circumstances which would constitute an event of default (“EOD”).  Pursuant to clause 23.12, it is an EOD if “[on] any Scheduled Trading Day on or after the first Utilisation Date, the Closing Price of the Shares is less than or equal to 50 per cent. of the Closing Price of the Shares on any of the 5 immediately preceding Scheduled Trading Days”.

5.  On 11 February 2022, the closing price of the Shares was less than approximately 66% of the Closing Price of the Shares on the immediately preceding trading day, which constituted an EOD under clause 23.12 of the Facility Agreement.

6.  On 13 and 21 February 2022, notices of acceleration and enforcement of event of default were served on the Borrower and the applicant, declaring the occurrence of an EOD and demanding repayment of all outstanding Loan together with accrued interest.

7.  On 8 July 2022, letters of demand were again issued to the Borrower and the applicant demanding payment of the outstanding Loan and accrued interest by 15 July 2022.

8.  On 31 March 2023, the respondent issued and served the SD on the applicant demanding repayment of the sum of US$12,857,198.35, calculated as follows:

(1) the Loan principal of US$19,800,000;

(2) plus interest in the sum of US$2,613,459.20 (accrued up to and including 28 February 2023);

(3) less the estimated value of the Shares in the sum of HK$74,677,400.36 (equivalent to approximately US$9,556,260.84 based on the exchange rate of US$/HK$ = 1/7.8145 as determined by the Hong Kong Monetary Authority as of 28 February 2023).

9.  On 17 April 2023, the applicant took out the application to set aside the SD.  In the Application, it was stated that “the grounds on which [the applicant] claim to be entitled to the order are set out in the Affirmation of [the applicant] made on the 14^th day of April 2023”.

10.  On 12 May 2023, another statutory demand (“the May 2023 SD”) was served on the applicant with a view to rectify the form number and the heading of the SD.  By an email dated 20 May 2023 to the applicant’s former solicitors, the respondent’s former solicitors, inter alia, confirmed that the respondent would not present a bankruptcy petition against the applicant based on the May 2023 SD.

B.  THE RELEVANT LEGAL PRINCIPLES

11.  Cheung JA in Ng Kin Siu v Gentle Soar Ltd [2023] HKCA 944 summarised the relevant principles in an application to set aside a statutory demand as follows:

(1)  “The application to set aside the statutory demand is made under section 47 of the Bankruptcy Rules (Cap 6A). The grounds upon which the statutory demand may be set aside are provided by section 48, amongst which the Court may set aside a statutory demand if the debt is disputed on grounds which appear to the Court to be substantial: rule 48(5)(b).” [§14]

(2)  “The relevant principle in respect of the two‑stage process of a statutory demand followed by a bankruptcy petition is that the service of the statutory demand is simply a means of establishing the debtor’s inability to pay.  The procedure for application to set aside the statutory demand is intended to be brief.  All that the Court is concerned with is whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand.  The creditor must establish a debt.  It is for the debtor to establish why he cannot do so, at any rate by the route of a statutory demand.” [§15]

(3)  “In determining whether a debt is bona fide disputed on substantial grounds, the onus is on the debtor to adduce sufficiently precise factual evidence which is believable to satisfy the Court that it has a defence of substance, not just a fair probability of one.  It is not sufficient for the debtor to simply make bald assertions or to merely raise a ‘cloud of objections’ on affidavits.” [§16]

C.  THE APPLICANT’S GROUNDS

12.  In his Affirmation dated 14 April 2023, the applicant stated at §6 that “based on my understanding gained during the negotiation and execution of the [Guarantee] and with regard to the debt asserted by the [respondent] against [the Borrower] under the Facility Agreement, I am only liable to assume [the Borrower’s] debt upon the [express] confirmation given by [the Borrower] or after the adjudication by the court and when [the Borrower] is still in default; otherwise [the respondent] has no right to directly demand me to assume such debt”.  A similar contention was made at §7 of his Affirmation.

13.  In his 2^nd Affirmation dated 14 September 2023, the applicant stated at §6 that the respondent “has not proven to me such event of default declared has in fact occurred”.

14.  At the hearing, Mr George Chu, counsel for the applicant, confirmed to the Court that he would only rely on the two grounds mentioned in his Skeleton Submissions to set aside the SD, namely (1) estoppel and (2) there was no specification of the type and nature of the securities in the SD and the estimation of value of the securities in the SD is incorrect.  In other words, the applicant no longer relied on the contentions raised in his affirmations to set aside the SD and it was unnecessary for the Court to have regard to them. 

15.  Mr Michael Lok, counsel for the respondent, rightly pointed out that the two points now sought to be relied upon on behalf of the applicant were new points and were not mentioned in his two affirmations. As provided in rule 47(4) of the Bankruptcy Rules (Cap 6A), the debtor’s application “shall be supported by an affidavit … (b) stating the grounds on which he claims that it should be set aside”.  No explanation was proffered on behalf of the applicant as to why the new points were not mentioned in his affirmations.  In these circumstances, I did not consider that the applicant should be allowed to rely on the two new points.  In any event, given the new points have no merits (see below), the Court would have dismissed the applicant’s application even if the applicant were allowed to rely on the two new points.

C1.  Estoppel

16.  At the hearing, Mr Chu submitted that the relevant representation made by the respondent was that made in the email dated 20 May 2023 to the applicant’s former solicitors.  In that email, the respondent’s former solicitors, inter alia, (1) referred to the letter dated 12 May 2023 from the respondent’s former solicitors, (2) stated that they were “instructed that [the respondent] confirms that it will not present a bankruptcy petition against [the applicant] based on the May 2023 SD” and (3) stated that “all of the respondent’s rights, including its rights, entitlement and remedies to pursue and present a bankruptcy petition against [the applicant] based on the [SD], are expressly reserved”. 

17.  For the purpose of the estoppel point, Mr Chu identified the relevant representation as having been made by the respondent’s former solicitors to state that the respondent confirmed that it would not present a bankruptcy petition against the applicant based on the May 2023 SD (“the Representation”). He submitted that the applicant had relied on the Representation and was led to believe that the SD would not be enforced or deployed, and the respondent was therefore estopped from relying on the SD.

18.  There was no substance in these submissions. 

(1)  First, the applicant was completely silent in his affirmations regarding the Representation made by the respondent’s solicitors in the email dated 20 May 2023.  There was no evidential basis for the assertion that the applicant had relied on the Representation. 

(2)  Second, the Representation only referred to the respondent’s intention not to present a bankruptcy petition based on the May 2023 SD.  Nothing was mentioned in the Representation regarding the SD.  Accordingly, the Representation could not have led anyone to believe that the respondent would not seek to enforce the SD.

(3)  Third, it was clearly stated in the email dated 20 May 2023 that the respondent would reserve its rights to, inter alia, proceed with the SD.   The applicant could not have been induced to believe that the respondent would not proceed with the SD.

19.  For these reasons, the applicant’s estoppel ground must be rejected.

C2.  Type, Nature and Value of Securities in the SD

20.  Under this ground, Mr Chu submitted, inter alia, that (1) the SD only spelt out the estimated value of the secured securities without specifying the type and nature of the securities, (2) the respondent’s affirmation did not deal with such securities, (3) if the respondent had not disposed of such securities, the debt was an unliquidated sum, and (4) there was “strong likelihood that the estimation of value is incorrect”.

21.  All of these submissions must be rejected.

(1)  Rule 48(5)(c) of the Bankruptcy Rules provides that the court may set aside a statutory demand if “it appears that the creditor holds some security in respect of the debt claimed by the demand, and either Rule 44(5) is not complied with in respect of it, or the court is specified that the value of the security equals or exceeds the full amount of the debt”.

(2)  There are authorities to the effect that (a) Rule 44(5) only applies to a secured creditor who holds security over property of the person against whom the statutory demand is made and (b) the statutory demand does not need to specify the nature and value of the securities held by the creditor over the assets of third parties: e.g. Cheng Wai Kei v Commerzbank Aktiengesellschaft [2002] 2 HKC 340 at §§15-17 (Chu J). 

(3)  It cannot be disputed that the securities held by the respondent were the Shares, which belonged to the Borrower and not the applicant.  In the light of the propositions set out in the previous sub-paragraph (which Mr Chu did not challenge), the respondent did not need to specify the nature and value of the Shares in the SD. In any event, Mr Chu did not cite any specific provision in the Bankruptcy Rules that the respondent was supposed to have violated in not specifying the type and nature of the securities in the SD.

(4)  Further, given that the applicant failed to complain about the lack of details of the securities in his affirmations, it was unsurprising that the respondent has not mentioned about the securities in its affirmation.

(5)  Moreover, there was no merit in the applicant’s contention that the securities held by the respondent had not yet been sold and the debt was for an unliquidated sum.  As pointed out by Mr Lok, a similar argument was advanced but rejected in Re Kwok Chok Yee [2000] 2 HKC 543 at 546D-547E.  At p 547B-C, Le Pichon J said “the emergence of any such disagreement cannot by itself, and without more, provide a basis for a challenge to the validity of the statutory demand.  It cannot result in the sum claimed in the demand ceasing to be a demand for a liquidated sum and become one for an unliquidated sum”.  No submission was advanced by Mr Chu to address these observations.  

(6)  Accordingly, there was no basis for the applicant to suggest that the estimated value of the securities in the SD was incorrect.

D.  DISPOSITION

22.  For the above reasons, I dismissed the applicant’s application to set aside the SD.  I also made an order to authorise the respondent to present a bankruptcy petition against the applicant forthwith.

23.  As to costs, I considered that the application was wholly groundless and unmeritorious, and that it was an appropriate case for the court to order costs in favour of the respondent to be taxed on an indemnity basis.  I did not consider it necessary to resort to clause 8 of the Guarantee as the basis to order indemnity costs against the applicant.

24.  After hearing submissions from the parties, the Court summarily taxed the respondent’s costs to be HK$240,000.