JUST CLASSIC LTD v. EVERSHINE GROUP HOLDINGS LTD

CACV 75/2022

[2023] HKCA 143

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 75 OF 2022

(ON APPEAL FROM HCCW NO. 1 OF 2021)

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REASONS FOR JUDGMENT

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Hon Cheung JA (giving the Reasons for Judgment of the Court) :

I.  The appeal

1.  This is the appeal by the Petitioner Just Classic Limited against the judgment of Linda Chan J who dismissed its amended petition for the winding up of Evershine Group Holdings Ltd (‘the Company’).

2.  The Company’s solicitors asked for their attendance at the hearing of the appeal to be dispensed with on the ground that its position on the appeal was neutral. The Court dispensed with their attendance. Mr. Lo (together with Mr. Jiang) for the Petitioner informed us the Company which was listed on the GEM of the Stock Exchange of Hong Kong Limited was delisted on 17 October 2022.

3.  We allowed the appeal at the conclusion of the hearing. We set aside the orders below and ordered the Company to be wound up with costs of the appeal and below to be paid to the Petitioner from the assets of the Company. I now give reasons for our judgment.

II.  The original petition

4.  The original petition relies on section 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (‘CWUMPO’) that the Company is deemed unable to pay its debts by reason of its failure to comply with a statutory demand issued by the Petitioner. The background relating to the issue of the statutory demand is pleaded as follows :

‘ 5. Pursuant to an instrument dated 3 June 2016 (the ‘Instrument’), the Company issued convertible notes (‘the ‘Notes’) in the principal amount of HK$30,000,000 to the Petitioner as subscriber pursuant to a subscription agreement dated 16 May 2016.

6. By an amendment agreement dated 21 June 2018 and a deed of modification dated 28 June 2018 between the Company and the Petitioner, the maturity date of the Notes was extended to 3 December 2018.

7. By 3 December 2018 (i.e. the extended maturity date of the Notes), the full amount of the Notes remained outstanding and the said amount shall be redeemed at its then outstanding principal amount, i.e. HK$30,000,000 (the ‘Outstanding Principal Amount’) according to Clause 10.2 of the Instrument.

8. The Petitioner agreed, by a confirmation letter signed by the Petitioner and the Company dated 13 March 2019 (the ‘Confirmation Letter’), that the Outstanding Principal Amount shall be paid by installments before 30 November 2019 subject to the terms stated in the Confirmation Letter and an interest rate of 10.0% per annum shall be payable on the Outstanding Principal Amount from 4 December 2018.

9. On August 2020, solicitors for the Petitioner, Messrs. Anthony Siu & Co., for and on behalf of the Petitioner, served a statutory demand (the ‘Statutory Demand’) on the Company for payment ….., and demanding the Company to pay the Outstanding Principal Amount and the accrued interests within 21 days. …..

10. Over 21 days has now elapsed since the Petitioner served the Statutory Demand on the Company, but the Company has neglected to pay or satisfy the Outstanding Principal the Amount and the accrued interests or any part thereof or to make any offer to the Petitioner to secure or compound for the debt to the reasonable satisfaction of the Petitioner, and therefore, the Outstanding Principal Amount and the accrued interests are still due and owing to the Petitioner.’

III.  The amended petition

5.  The Company filed evidence in response to the petition. The Affirmation of Lau Man Kin dated 4 March 2021 stated that the parties had subsequently agreed in early to mid 2020 on a Repayment Schedule which replaced the arrangement in the Confirmation Letter. Mr. Lau further said :

‘ 12(2)	on or around 3 June 2020, a total of HK$17,095,890 (consisting of HK$15,000,000 as principal and HK$2,095,890 as interest) was paid by Champion Wise Investments Limited (“Champion Wise”) to the Petitioner in discharge of the Company’s obligations under the Repayment Schedule.
(3)	The existence of the Repayment Schedule is evidenced by a Receipt issued by the Petitioner acknowledging receipt of the sum of HK$17,095,890, and the confirmation (the “Auditor’s Confirmation”) dated 12 June 2020 endorsed by the Petitioner to the Company’s auditor as to the liability due from the Company to the Petitioner.’

6.  The Judge summarised the other matters raised by Mr. Lau as follows :

‘ 10. In the official receipt dated 3 June 2020 issued by P (“Receipt”) and addressed to Champion Wise Investments Ltd (“Champion”), it was stated that P [i.e. the Petitioner] received from Champion the sum of $17,095,890 “for the settlement of the outstanding principle [sic] and interest pursuant to the Redemption of Notes Agreement signed between [P], [Champion] and [the Company] on 28 May 2020”. The Receipt was signed by the authorised signatory of P together with its company chop.

11.  Neither party has produced a copy of the “Redemption of Notes Agreement” said to have been signed on 28 May 2020 as described in the Receipt.

12.  In a “confirmation for audit purposes” (“Audit Confirmation”) dated 12 June 2020 issued by Messrs. Elite Partners CPA Ltd, the auditors of the Company, which was signed by the authorised signatory of P together with its company chop, P confirmed the following information:

(1)  as at 31 May 2020, the outstanding principal due by the Company to P was $15,000,000;

(2)  the “Maturity Date” was “per attached repayment schedule” (“Schedule”). In the Schedule, reference was made to the Notes and stated that “Based on the confirmation letter signed by [the Company] and [P] (a wholly-owned subsidiary of BGBS [i.e. the parent company]), the repayment schedule is further proposed as below”;

(3)  immediately underneath the aforesaid statement were (inter alia) details of the repayments. The first 4 rows show as follows:

Payment Date	Interest Period	Outstanding Principal	Repayment of Principal	Interest Amount	Total Repayment
11/4/2019	4/12/2018-3/1/2019	30,000,000		250,000	250,000
28/5/2020	4/1/2019-28/5/2020	30,000,000	15,000,000	4,191,781	17,095,890 (a)
30/6/2020	29/5/2020-30/6/2020	15,000,000	38,356	135,616	100,000 (b)
31/7/2020	1/7/2020-31/7/2020	14,961,644	36,464	127,071	100,000 (b)

(4)  in (a), it was stated that “(i) Total repayment amount of HK$17,095,890 to be paid by Champion Wise; (ii) 50% of the interest amount of this period shall be repaid by the Company at the end of the term”. In (b), it was stated that “Outstanding amount to be repaid at the end of the term”; and

(5)  the last payment date stated in the table is 28 February 2022.’

7.  In the 3^rd Affirmation of Mr. Lau dated 21 May 2021, he stated that subsequent to the Repayment Schedule, the Petitioner orally agreed with the Company to postpone the repayment of the instalments due subsequent to the payment by Champion Wise.

8.  The Petitioner then amended the petition pursuant to the Court order on 28 July 2021 by the following :

‘ 8A. Apart from a payment in the sum of HK$250,000 made to the Petitioner by way of cheque on or about 11 April 2019, the Company has not repaid to the Petitioner any part of the said Outstanding Principal Amount together with the said interest thereon, whether by the date of 30 November 2019 or at all.’

9.  It also pleaded, by reference to what Mr. Lau said about the Repayment Schedule, an alternative case that the Company was unable to repay its debt under section 178(1)(c) of CWUMPO. :

‘ 11B. The Petitioner does not admit that the Repayment Schedule is binding on the Petitioner. However, even on the Company’s own case that the alleged Repayment Schedule is binding on the parties:-
11B.1.	A total sum of HK$17,545,890 (i.e. the total amount of lines 1 to 4 of Appendix 2 [the Repayment Schedule]) had fallen due prior to the date of the Statutory Demand (i.e. 4 August 2020). Out of this sum, only one interest payment of HK$250,000 was paid on 11 April 2019. The balance of HK$17,295,890 remained due and payable at the time of the Statutory Demand and had not been paid by the Company or secured or compounded to the reasonable satisfaction of the Petitioner. Pursuant to section 178(1)(a) of the CWUMPO, the Company is deemed unable to pay its debts.
11B.2.	Further or alternatively, since the date of the Statutory Demand and as of the date of the application for leave to file and serve the Amended Petition herein, a further total sum of HK$7,999,229 (i.e. the total amount of lines 5‑15 of Appendix 2) has fallen due. To date, the Respondent has not paid any part of this sum to the Petitioner. On the basis inter alia that the Company has not paid the aforesaid substantial debts that have fallen due (and further sums that continue to fall due based on the alleged Repayment Schedule), without any valid explanation or justification, the Petitioner avers that the Company is unable to pay its debts pursuant to section 178(1)(c) of the CWUMPO.’

10.  Section 178(1)(c) of the CWUMPO provides that a company shall be deemed to be unable to pay its debts :

‘ (c) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.’

IV.  Reasons for the dismissal of the amended petition

11.  The Judge held that the Petitioner is not entitled to seek a winding up order against the Company on the basis of the grounds stated in the amended petition. The Judge held that the debt stated in the statutory demand was incorrect and defective. Likewise, the petition was defective as it continues to rely on the statutory demand and no attempt has been made by the Petitioner to address the defects or to set out the correct bases of the debt upon which it relies. The Judge explained :

‘ 28. On P’s own case, any variation to the terms of the Instrument, to be effective, can only be made by the parties executing a deed poll. If this is right, it must also apply to the Confirmation Letter as it was not executed by a deed poll. The effect would be that the Notes remain non‑interest bearing (as provided in clause 4.1 of the Instrument), and P would not be entitled to charge any interest on the Principal. It follows that the particulars of the Debt, as stated in the SD, would be materially incorrect as it referred to the Confirmation Letter and stated that interest was payable on the Principal from 4 December 2018.

29．As stated above, the contents of the Receipt suggest that the parties have signed the Redemption of Notes Agreement. While the Company said that there had been a change in management since the arrest of the person who was responsible for dealing with P, the same has not been said by P. Yet, no explanation has been offered by P to explain whether the parties had in fact signed the Redemption of Notes Agreement, whether it has a copy of such agreement, what are the terms of such Agreement and whether it is contended that the Agreement is invalid and, if so, on what grounds.

30．In any event, it is clear that the amount of debt stated in the SD was incorrect as it had failed to take into account the fact that the Company had on 28 May 2020 repaid $17,095,890 to P in accordance with the Payment Direction. It is impossible to see how P could ignore this payment, having itself signed the Receipt and the Audit Confirmation (to which the Schedule was appended).

31．For the reasons stated in [28] and [30] alone, the SD was defective. The Petition is likewise defective as it continues to rely on the SD and no attempt has been made by P to address the defects or to set out the correct bases of the debt upon which it relies. Instead, in the face of the contemporaneous documents signed by P (as described in [9-12] above), P continues to maintain that the Schedule is not binding upon the parties and only a sum of $250,000 has been paid.’

12.  The Judge further held that it is not open to the Petitioner to contend that according to the Repayment Schedule, a sum of $7,999,229 has fallen due as at 29 July 2021 and failure to pay such sum shows that the Company is unable to pay its debts. This is because ‘the Petitioner was not entitled to make an allegation of fact which is inconsistent with another allegation of fact in the pleading’. The Judge held that it is also incorrect for the Petitioner to plead that a further sum of $7,999,229 has fallen due :

‘ 32(2) ...... This is because there is no dispute that on 26 March 2021, the Company has paid $3,900,000 into Court in compliance with the condition imposed in the order made by Harris J on 8 March 2021. On P’s own case, as a result of the validation order made in the same order, P has become a secured creditor over the $3.9 million paid into Court and is entitled to obtain payment out of the same. This flies against P’s contention that the amount of $7,999,229 remains unsecured or not compounded for.’

V.  Grounds of appeal

13.  The Petitioner relied on three grounds of appeal :

1)  The Judge erred in dismissing the amended petition on the basis that the statutory demand and the amended petition over‑stated the amount of the debt;

2)  The Judge erred in citing cases from the bankruptcy context for the proposition that a statutory demand is the ‘straight and narrow gateway’ through which a creditor must pass to establish the debtor’s insolvency, which do not apply to winding ups; and

3)  The Judge erred in disregarding the fact that the Company was indisputably insolvent even on its own case.

VI.  Our view

1)  Misstatement of the statutory demand

14.  The starting point is that a misstatement in the statutory demand on the amount of the debt will not necessarily by itself render the statutory demand fundamentally defective. The Court in bankruptcy procedures retains a discretion not to set it aside having regard to all the circumstances of the case. Hence, Nicholls LJ in Re a Debtor (No 1 of 1987) [1989] 1 WLR 271 held at page 279B that :

‘ Nevertheless, applying the approach which I have indicated above as the correct approach to these statutory provisions, in my view it by no means follows from the existence of those defects that this statutory demand ought to be set aside. The court will exercise its discretion on whether or not to set aside a statutory demand, having regard to all the circumstances. That must require the court to have regard to all the circumstances as they are at the time of the hearing before the court. There may be cases where the terms of the statutory demand are so confusing or misleading that, having regard to all the circumstances, justice requires that the demand should not be allowed to stand. There will be other cases where, despite such defects in the contents of the statutory demand, those defects have not prejudiced and will not prejudice the debtor in any way, and to set aside the demand in such a case would serve no useful purpose. For example, a debtor may be wholly unable to pay a debt which is immediately payable, either out of his own resources, or with financial assistance from others. In such a case the only practical consequence of setting aside a statutory demand would be that the creditor would promptly serve a revised statutory demand, which also and inevitably would not be complied with. In such a case the need for a further statutory demand would serve only to increase costs. Such a course would not be in the interests of anyone.’

15.  Whilst In re A Debtor (No 1 of 1987) was dealing with an application to set aside a statutory demand, the same reasoning will apply when the Court hears the petition itself : Chan WS v CC Bank [2022] 3 HKLRD 520 at [27].

16.  Further, Kwan J (as she then was) in Re Hong Kong Construction (Works) Ltd (HCCW 670/2002 Decision dated 7 January 2003) held that :

‘ 6(5) If there is a debt which in part above the statutory minimum is indisputable, a petition can validly be presented even if the debt as claimed in the petition is for a larger sum, part of which is bona fide disputed. The court would not as a general rule strike out a petition or restrain its advertisement even though the petition also refers to sums claimed by the petitioner in relation to which there is a dispute (Re Tweeds Garages Ltd [1962] Ch. 406 at 411 to 414; Re Taylor’s Industrial Flooring Ltd [1990] BCC 44 at 48H; Re Pendigo Ltd [1996] BCC 608 at 610B to D).’

17.  In this case, in view of the Repayment Schedule and the Petitioner’s acknowledgement to its auditor which the Petitioner had not denied, the Judge was entitled to take the view that the amount of the debt in the statutory demand was incorrectly stated. The real issue, however, is whether the Judge had properly considered her discretionary power notwithstanding the misstatement in the statutory demand. The Judge was aware of the principles on discretion as she had expressly referred to In re A Debtor (No 1 of 1987).　　On the face of the judgment that I have quoted, the Judge did not seem to have considered the issue of discretion at all. Even if she had, the decision is plainly wrong when she held that the Petitioner was not entitled to relief on the basis of the grounds stated in the amended petition. Either way this Court is entitled to exercise the discretion afresh. According to the Repayment Schedule relied upon by the Company, it had not paid the balance of the money due to the Petitioner in the sum of $12,654,110 ($30,000,000 less $250,000 less $17,095,890) by the date of the hearing on 17 January 2022. Mr. Lo accepted that this sum should be further reduced by another sum of $3,900,000 which the Company had paid into court and which the Judge on 13 December 2021 ordered by consent to be paid out to the Petitioner’s solicitors. Mr. Lo confirmed that the money had since been released to the Petitioner by its solicitors. After deducting $3,900,000 the outstanding debt due to the Petitioner is $8,754,110. We note that there is a difference in opinion between the Judge and the Petitioner whether the Petitioner became a secured creditor by an order for payment into court of this sum. It is not necessary for us to determine this issue. The point is simply that even deducting the $3,900,000, there is still a substantial debt owing by the Company.

18.  The defence raised by the Company to the outstanding amount due under the Repayment Schedule is that there was an oral agreement by the Petitioner that the payment would be postponed. Mr. Lo’s objection is that this contention is based on hearsay evidence which is not admissible in a winding up petition. It is not necessary for us to determine the question of admissibility of the evidence, it is sufficient for us to say that this defence is not a credible defence in substance. This defence was not raised when the statutory demand was served. It was also not raised at the first opportunity when Mr. Lau filed his first affirmation. The defence was only raised on 21 May 2021, which was about eight and a half months after the statutory demand was served and about four and a half months after the presentation of the petition. The two officers of the Company who were said to have reached the oral agreement with the Petitioner did not provide any affirmation in support of their claim. Instead, Mr. Lau simply relayed the hearsay evidence of these persons in his second affirmation. The defence was couched in vague terms. There was no detail of the discussion relating to the oral agreement. The casual way in which an oral agreement is said to have been reached by the parties in a commercial setting where substantial sums are involved, is to be contrasted with details contained in the Repayment Schedule. When the defence was raised at such a late stage of the proceedings and in such an unsatisfactory manner, the Court is clearly entitled to hold that, even if there are misstatements in the amended petition, the Company has failed to show that in respect of the sum of $8,754,110 due there is a bona fide dispute on substantial grounds supported by sufficiently precise evidence which is believable and not just a fair probability of one : see Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at [27(1)‑(4)]. In view of this, the deficiency in the statutory demand would not render it unjust for the statutory demand to stand.

19.  Further, Mr. Lo pointed out that the evidence indicated that the Company was both balance sheet and cash flow insolvent :

(1)  On the Company’s own case, it owed substantial amounts to other creditors which it was apparently unable to repay, so much so that those creditors had no choice but to agree to a ‘hair‑cut’. He referred to letters from the Company’s creditors who were owed HK$35,456,000, HK$14,605,144.15 and HK$900,000 respectively;

(2)  The consolidated unaudited financial statements of the Company and its subsidiaries stated that the Group had ‘net current liabilities of approximately HK$59,254,000 and net liabilities of HK$21,062,000’, indicating ‘significant doubt about the Group’s ability to continue as a going concern and therefore the Group may be unable to realise its assets and discharge its liabilities in the normal course of business’; and

(3)  At the hearings of the petition on 4 November 2021, 13 December 2021 and 17 January 2022, the Company’s counsel never advanced any submissions disputing the fact that it was insolvent or unable to pay its debts. They merely asked for adjournments to continue negotiations and (at the 17 January 2022 hearing) to put together a scheme of arrangement.

20.  In our view, an inference can be drawn from the circumstances that the Company is unable to pay its debt. The Judge should not have held that the statutory demand and the petition were defective. Had she proceeded in the way as we have indicated, inevitably she would find that the Company was unable to pay its debt both under sections 178(1)(a) and (c).

2)  Nature of a statutory demand in bankruptcy and in company winding up

21.  The Judge’s decision may be influenced by her view on the nature of the statutory demand. She held that the statutory demand ‘is “the straight and narrow gateway” through which a creditor must pass in order to establish the debtor’s apparent inability to pay the debt demanded in order for a bankruptcy petition to be presented (TSB Bank plc v Platts (No 2) [1998] BPIR 284 at 288H-290A, as applied in Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at [13]) per Kwan JA (as she then was)’.

22.  The two cases relied upon by the Judge were concerned with petitions for bankruptcy and not winding up of a company. The nature of a statutory demand in bankruptcy and company winding up is different. Peter Gibson LJ in TSB Bank expressly limited the ‘straight and narrow gateway’ condition to bankruptcy :

‘ By s 264(1)(a) of the Insolvency Act 1986 a creditor may present a bankruptcy petition against an individual. By s 267(1) such petition must be in respect of one or more debts owed by the debtor and the petitioning creditor must be a person to whom the debt or at least one of the debts is owed. Section 267(2) provides that such a petition may be presented only if at the time the petition is presented certain conditions are satisfied. Those conditions are:

‘ (a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds [£750],

(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor ... either immediately or at some certain, future time, and is unsecured,

(c) the debt, or each of the debts, is a debt which the debtor appears ... to be unable to pay ...,

(d) there is no outstanding application to set aside a statutory demand served ... in respect of the debt or any of the debts.

......

For the purpose of s 267(2)(c), the debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either a statutory demand has been served and the demand has not been complied with or set aside or there has been an unsatisfied execution (s 268(1)).

The statutory demand can therefore be seen to be of crucial importance if a creditor, who does not have a judgment debt, is to obtain a bankruptcy order. As Sir John Vinelott put it in ‘Individual Insolvency – The Insolvency Acts 1985 and 1986’, (1987) Current Legal Problems at p 14, the statutory demand is ‘the straight and narrow gateway’ through which such a creditor must pass. It is accordingly quite different from a statutory demand in the field of company law which merely provides one means of establishing a company’s inability to pay its debts, the usual ground on which a company is wound up compulsorily. In contrast in bankruptcy it is not the debtor’s general inability to pay his debts that is crucial but the apparent inability to pay the debt in the statutory demand, and at the hearing of the bankruptcy petition the failure to pay or secure or compound for that debt.’ ’

23.  Section 6(2) and section 6A of our Bankruptcy Ordinance (Cap. 6) are in similar terms to the sections referred to in TSB Bank. The same reasoning by Peter Gibson LJ applies to the present case.

VII.  Reliance on inconsistent case

24.  In our view, the Judge was wrong not to allow the Petitioner to rely on an alternative case based on what the Company had put forward in Mr. Lau’s affirmation. There is nothing unfair for the Petitioner to rely on the alternative case as pleaded in the amended petition. As Bokhary PJ held in Poon Hau Kei v Hsin Chong Construction Co Ltd (2004) 7 HKCFAR 148 :

‘ 19. Provided that it does so in a fair manner, a court is entitled to decide in favour of a party on the basis of a scenario that he has not pleaded but his opponent has pleaded. This is a proposition at which I arrive on principle. It is also a proposition supported by highly persuasive authority. In John G. Stein & Co. Ltd v. O’Hanlon [1965] AC 890 at p.910A, Lord Guest said: “I fail to see how [the defenders] can have been in any way prejudiced when the facts upon which liability was established are those averred in the defences and spoken to by their witnesses in evidence”. Lord Reid (at p.906C‑D), Lord Evershed (at p.907E‑G) and Lord Wilberforce (at p.913E) agreed in terms with Lord Guest’s rejection of the defenders’ pleading point. And Lord Hodson did so in effect when (at p.907G) he concurred in Lord Reid’s opinion.’

VIII.  Conclusion

25.  Accordingly, the appeal was allowed as indicated above.