YEUNG MAN v. NEW WINNING FINANCE COMPANY LTD, (IN LIQUIDATION), a Creditor

CACV 239/2022, [2024] HKCA 451

On Appeal From [2022] HKCFI 1472

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 239 OF 2022

(ON APPEAL FROM HCB NO 5026 OF 2021)

________________________

____________________

____________________

J U D G M E N T

____________________

Hon Chow JA (giving the Judgment of the Court):

INTRODUCTION

1.  This is the Debtor (“Yeung”)’s appeal against a bankruptcy order made by Anthony Chan J on 18 May 2022 (“the Bankruptcy Order”) upon the petition of the Petitioning Creditor (“Petitioner”).

BACKGROUND FACTS

2.  The Petitioner was a licensed money lender. It is now in voluntary liquidation.

3.  Pursuant to a loan agreement dated 26 April 2017, which was extended by a further agreement dated 26 April 2018 (“the 2018 Loan Agreement”), the Petitioner advanced a loan of HK$14,000,000 (“the Loan”) to Yeung.

4.  According to Yeung, she is a housewife, and the Loan was taken out at the instructions of her partner, Mr Chen Huawei (“Chen”). The Loan was obtained from the Petitioner because Chen knew Mr Wen Jialong (“Wen”). Wen was formerly an executive director and the chairman of the board of directors of Lamtex Holdings Ltd (in liquidation) (“Lamtex”), a Hong Kong listed company. The Petitioner was indirectly wholly owned by Lamtex.

5.  On 18 March 2021, the Petitioner served a statutory demand on Yeung, demanding repayment of the sum of HK$17,126,410.96 (“the Debt”), consisting of (1) the principal amount of the Loan in the amount of HK$14,000,000, and (2) interest accrued on the Loan at 11% pa from 25 April 2019 to 5 February 2021 in the amount of HK$3,126,410.96.

6.  Yeung failed to satisfy the statutory demand.

7.  On 2 September 2021, the Petitioner presented a bankruptcy petition (“the Petition”) against Yeung.

8.  Yeung filed two affirmations in opposition to the Petition. In her first affirmation dated 30 November 2021, she claimed that the Loan had already been discharged by a separate business arrangement negotiated between Chen and Wen in around mid-2018 (“the Repayment Arrangement”), and thus she was not liable to repay the Debt. The Repayment Arrangement was summarised by the Judge at §§10 to 14 of his written judgment dated 18 May 2022 (“the Judgment”), as follows:

“[10] The repayment of the Debt was made through a separate business arrangement negotiated between Chen and Wen in around mid-2018 (‘Repayment Arrangement’). It is not in dispute that at the time Wen was an executive director and board chairman of Lamtex. Wen resigned from such positions with effect from 1 June 2018.

[11] Under the Repayment Arrangement, if Chen’s company, Shenzhen Huaxun Weiye Real Estate Development Co Ltd (‘Huaxun’), made a loan of RMB 30 million to Wen’s company, Shenzhen Zhiweilong Shiye Co Ltd (‘Zhiweilong’), on or before 30 June 2018, then: (i) the Loan together with accrued interest would be ‘deducted’ from the RMB 30 million … and deemed fully repaid; and (ii) the Petitioner would seek repayment of the Loan from Zhiweilong instead.

[12] Yeung had produced 2 documents as evidence of the Repayment Arrangement, one ‘告知函’ (‘Notice’) and a ‘付清借款證明’ (‘Proof of Repayment’), both dated 30 May 2018 and addressed to Yeung. On their face, both documents bore the company chops of the Petitioner and Lamtex, as well as Wen’s signature. In addition, there are Mainland bank documents and loan receipts confirming the transfer of RMB 30 million by [Huaxun] to Zhiweilong on 19 June 2018.

[13] There is also a loan receipt dated 19 June 2018 (‘Receipt’) issued by Zhiweilong, which bore its company chop and Wen’s signature.

[14] By way of the Repayment Arrangement, the Loan and accrued interest were deemed fully repaid.”

9.  The Petition came before the Judge for hearing on 8 May 2022. On the same date, the Judge gave the Judgment, in which he held that Yeung’s case was “unbelievable”, and made the Bankruptcy Order against Yeung.

10.  The Judge held that there was no bona fide dispute of the Debt on substantial grounds because, inter alia:

(1)  The conduct of Yeung was inconsistent with settlement of the Debt. Specifically, after the Debt had allegedly been settled by the Repayment Arrangement, Yeung still paid two instalments of interest to the Petitioner in the sum of HK$840,000 on 25 June 2018 and HK$385,000 on 25 January 2019 respectively. Further, Yeung signed an audit confirmation on or about 21 February 2019, confirming that she still owed the Petitioner the total sum of HK$14,151,890.41 as of 31 December 2018[1].

(2)  The existence of the Debt was further acknowledged by Yeung when she signed the “2019 Loan Agreement” dated 26 April 2019[2]. Any suggestion that Yeung signed the 2019 Loan Agreement without finding out if the Debt was deemed repaid was not believable[3]. Pausing here, it may be noted that after the presentation of the Petition, on 20 September 2021, Yeung’s former solicitors (Tam, Pun & Yipp, “TPY”) claimed that pursuant to Clause 17.2 of the 2019 Loan Agreement, the Petitioner should have commenced arbitration to recover the Debt. According to TPY’s letter of 8 October 2021, the 2019 Loan Agreement was executed to further extend and renew the 2018 Loan Agreement[4].

(3)  Yeung did not respond at all to the many demand letters or the statutory demand from the Petitioner, until after the Petition was filed in early September 2021[5].

(4)  There was no credible explanation for the considerable delay on Yeung’s part in asserting that the Debt had been repaid. Even if Yeung had required time to gather evidence in opposition to the Petition, one would have expected Yeung to instruct her solicitors to remind the Petitioner about the Repayment Arrangement on the first available opportunity. Yeung did not do so. Instead, her solicitors only asked for the matter to be referred to arbitration by relying on the 2019 Loan Agreement which contradicted the Repayment Arrangement. Further, it was not until Yeung filed her first affirmation dated 30 November 2021 that the allegation of the Repayment Arrangement was made for the first time[6].

(5)  Finally, the accounting records of the Petitioner showed that the Loan remained in its books with Yeung’s name as the borrower[7].

11.  As for the Notice, the Proof of Repayment and the Receipt, the Judge was of the view that they did not outweigh the evidence and inference that the Debt remained due and owing to the Petitioner[8]. The Judge was also of the view that those documents were not reliable evidence of the existence of the Repayment Arrangement because, inter alia:

(1)  Wen, who negotiated the Repayment Arrangement with Chen, was not a director of the Petitioner at the time the Repayment Arrangement was reached. He was merely a director of the ultimate holding company of the Petitioner, ie Lamtex[9].

(2)  The Repayment Arrangement was commercially unusual in that it was an arrangement whereby “a director of a parent company was apparently using an asset of its subsidiary (the Loan) for the purpose of his own company”[10].

(3)  There was no explanation why the Proof of Repayment was issued before the loan of RMB30 million was released from Huaxun to Zhiweilong[11].

(4)  Properly analysed, the transaction evidenced by the Notice and the Proof of Repayment was one of novation – the discharge of the Loan and accrued interest owed by Yeung to the Petitioner and the creation of new obligation to repay the same by Zhiweilong to the Petitioner. However, there is no evidence of consent to the novation by Yeung or Zhiweilong. In particular, Yeung’s evidence suggested that she played no part in the Repayment Arrangement. Consent by Yeung, Zhiweilong and the Petitioner was an essential legal requirement for the novation[12].

(5)  There was an inherent conflict between (a) the Notice and the Proof of Repayment, which suggested that the repayment obligation to the Petitioner would be assumed by Zhiweilong, and (b) the Receipt, which did not mention any repayment obligation to the Petitioner[13].

(6)  There was no evidence from Chen or Wen to explain what had taken place. In particular, the evidence of Chen could have explained if the loan from Huaxun had been repaid in any part by Zhiweilong[14].

THE APPEAL

12.  On 4 June 2022, Yeung, acting in person, filed a Notice of Appeal against the Bankruptcy Order, contending that the Judge had failed to give sufficient weight to her grounds of opposition to the Petition, or appreciate that her opposition was supported by contemporaneous evidence such as the Notice and the Proof of Repayment, and he ought to have concluded there was a bona fide dispute of the Debt.

13.  On 4 October 2023, Yeung, then legally represented, filed a Supplementary Notice of Appeal raising the following substantive grounds of appeal:

(1)  The Judge erred in effectively conducting a mini-trial on affirmations, which should not have been done in determining whether there was a bona fide dispute of the Debt on substantial grounds (“Ground 1”).

(2)  Even though the court may find that a debtor’s case to be that only conditional leave to defend would have been given had it been an Order 14 application (that is, the defence is shadowy, suspicious, a sham, or such a defence that the court is prepared very nearly to give judgment), the petition should still be dismissed (“Ground 2”).

(3)  In the present case, in light of the documentary evidence adduced by Yeung, namely, (i) the Notice, (ii) the Proof of Repayment, and (iii) the Receipt, the authenticity of which was not challenged, the Judge should not have effectively conducted a mini-trial on affirmations by “carefully [scrutinising]” such documentary evidence without any oral evidence and should not have summarily dismissed such documentary evidence as unreliable (“Ground 3”).

(4)  In agreeing with the Judge’s suggestion that the said documents might be analysed as novation, Yeung’s counsel should not have been taken to agree that this was the only way to analyse the matter (“Ground 4”).

(5)  Further and in any event, given that the novation point was raised only during the hearing, absence of evidence of consent to novation by Yeung or Zhiweilong should not have been taken summarily as evidence of no consent. Instead, such absence of evidence should mean that the court ought to find, even on the theory of novation, that there was a bona fide dispute of substance (“Ground 5”).

(6)  Against the aforesaid documentary evidence –

(a)  The Judge failed to accord any or any sufficient weight to the fact that the Petitioner (in liquidation) had no first-hand knowledge of the matters in dispute.

(b)  The Judge failed to accord any or any sufficient weight to the fact that the Petitioner had to rely on circumstantial evidence.

(c)  The Judge failed to accord any or any sufficient weight to the fact that there was a serious conflict between the documentary records relied upon by the Petitioner and the documentary evidence relied upon by Yeung, namely, (i) the Notice, (ii) the Proof of Repayment, and (iii) the Receipt.

(d)  In short, the Judge failed to accord any or any sufficient weight to the documentary evidence relied upon by Yeung and erred in according excessive weight to the other evidence or absence of evidence as if he had to arrive at a conclusive finding of what happened and what not, rather than properly discharging his duty simply to determine whether there was a bona fide dispute of substance (“Ground 6”).

DISCUSSION

(i)  Grounds 4 and 5

14.  We shall first deal with Grounds 4 and 5, which concern the proper characterisation of the Repayment Arrangement relied upon by Yeung to contend that there is a bona fide dispute of the Debt on substantial grounds.

15.  As earlier mentioned, the Judge took the view that the Repayment Arrangement ought properly to be characterised as a “novation” of the 2018 Loan Agreement involving “the discharge of the Loan and accrued interest owed by Yeung to the Petitioner and the creation of new obligation to replay the same by Zhiweilong to the Petitioner”[15]. However, as pointed out by the Judge, consent was an essential legal requirement for a novation, but there was no evidence of consent to the novation by Yeung or Zhiweilong. This constituted one of the reasons given by the Judge for rejecting Yeung’s defence to the Petition based on the Repayment Arrangement.

16.  In relation to Grounds 4 and 5, Mr Lam (on behalf of Yeung) complains that notwithstanding the fact that (i) the legal characterisation of the Repayment Arrangement as a novation was only raised by the Judge at the hearing of the Petition, and (ii) the Judge did not ask counsel to address the issue of whether there was evidence of the parties’ consent to the novation, he proceeded to hold or find, in the Judgment, that “there is no evidence of consent to the novation by Yeung or Zhiweilong. In particular, Yeung’s evidence suggested that she played no part in the Repayment Arrangement. Consent by Yeung, Zhiweilong and the Petitioner was an essential legal requirement for the novation”[16]. Mr Lam submits that –

(1)  none of the parties confirmed that a novation was the only proper way to characterise the Repayment Arrangement, and the Judge did not analyse the possibility that the Repayment Arrangement might instead be viewed as a “contract”; and

(2)  had the issue of consent been raised, the Judge might have been addressed as in §§17-19 below at least to show that there were substantial disputes on the issue of consent[17].

17.  Mr Lam submits that the Repayment Arrangement, instead of being characterised as a novation, may properly be regarded as a “contract” between Yeung and the Petitioner, under which:

(1)  Yeung agreed that her partner (Chen)’s company (Huaxun) would advance a sum of RMB30 million to Wen’s company (Zhiweilong); and

(2)  in consideration for Yeung’s aforesaid agreement, the Petitioner should deduct from the RMB30 million the amount of the Loan and interest thereon, and thus the Loan would be deemed to have been fully repaid[18].

18.  Mr Lam further submits that the advancement of the sum of RMB30 million by Huaxun to Zhiweilong would be evidence of Yeung’s consent to the contract because otherwise, her partner (Chen) would not have caused Huaxun to advance RMB30 million Zhiweilong. Alternatively, says Mr Lam, if the Repayment Arrangement should be treated as being a novation among Yeung, the Petitioner, Lamtex and Huaxun, (i) the said advancement would be evidence of Yeung’s consent and Huaxun’s consent to the novation, and (ii) insofar as consent by Zhiweilong was necessary for the novation, given that Zhiweilong was Wen’s company, there should be no question that Wen, who signed the Notice and the Proof of Repayment, did consent to the novation on behalf of Zhiweilong[19].

19.  Mr Lam also submits that Wen had actual or apparent authority to act on behalf of the Petitioner to enter into the said contract or novation:

(1)  As regards actual authority, Mr Lam relies on the fact that –

(a)  Wen was at the time the chairman and had been an executive director of Lamtex, the 100% holding company of the Petitioner; and

(b)  Wen’s wife was a shareholder of Lamtex, and Wu Xiaolin (who entered into the 2018 Loan Agreement on behalf of the Petitioner) was Wen’s nephew.

(2)  As regards apparent authority, Mr Lam relies on the fact that –

(a)  both the Notice and the Proof of Repayment bore the company chop of the Petitioner;

(b)  Wen was at the time the chairman and had been an executive director of Lamtex, the 100% holding company of the Petitioner; and

(c)  Wen’s wife was a shareholder of Lamtex, and Wu Xiaolin (who entered into the 2018 Loan Agreement on behalf of the Petitioner) was Wen’s nephew[20].

20.  We do not accept the above submissions of Mr Lam, for the following reasons:

(1)  Mr Lam’s complaint that the issue concerning the proper legal characterisation of the Repayment Arrangement was raised by the Judge only at the hearing of the Petition without any forewarning has no merit. Yeung was represented by solicitors and counsel in the proceedings below. She put forward the Repayment Arrangement as the basis to contend that there was a bona fide dispute of the Debt on substantial grounds. It ought to have been obvious to her lawyers that the proper legal characterisation of the Repayment Arrangement was a matter relevant to the validity of her defence to the Petition, and something which ought to be addressed even without any prompting by the Judge.

(2)  At the hearing, Yeung’s counsel agreed with the Judge’s view that the Repayment Arrangement should be regarded as a novation of the 2018 Loan Agreement[21]. He did not suggest that the Repayment Arrangement ought instead to be regarded as a contract between Yeung and the Petitioner. It lies ill in her mouth now to complain that the Judge failed to consider that possibility.

(3)  In any event, regardless of whether the Repayment Arrangement ought properly to be regarded as a novation or a contract, the same issue concerning Yeung and Zhiweilong’s consent to it would arise. Bearing in mind Yeung’s evidence that she played no part in the Repayment Arrangement, Yeung, as advised by her lawyers, ought to have adduced evidence on the issue of consent in order to lay the necessary foundation for her defence to the Petition.

(4)  Even if, for the sake of argument, the Repayment Arrangement ought to be regarded as a contract between Yeung and the Petitioner as argued by Mr Lam, there was no evidence that Wen had any authority to enter into the Repayment Arrangement on behalf of the Petitioner.

(a)  The fact that (i) Wen was the chairman and an executive director of the ultimate holding company of the Petitioner, and/or (ii) Wen’s wife was a shareholder of the Petitioner and his nephew entered into the 2018 Loan Agreement on behalf of the Petitioner, plainly cannot constitute any evidence that Wen had actual authority of the Petitioner to enter into the alleged contract.

(b)  In so far as apparent authority is concerned, it has to be shown that Wen was held out or represented by the Petitioner as having authority to enter into the Repayment Arrangement on its behalf. The matters relied upon by Mr Lam, namely, (i) Wen was the chairman and an executive director of the ultimate holding company of the Petitioner, (ii) Wen’s wife was a shareholder of the Petitioner and his nephew entered into the 2018 Loan Agreement, and (iii) the Notice and Proof of Repayment bore the company chop of the Petitioner, are plainly not sufficient to clothe Wen with the apparent authority of the Petitioner to enter into the Repayment Arrangement. There was no evidence as to the identity of the person who applied the Petitioner’s company chop on the Notice and Proof of Repayment, or the circumstances in which that person came into possession of the company chop, or that person’s authority to use the Petitioner’s company chop.

(c)  Mr Lam refers the Court to the judgment of Louis Chan J in TS Office System Ltd v Wing Kee Produce Ltd [2015] 1 HKLRD 479, at §32, in support of the proposition that “[c]ompany chops may constitute representation of authority of the principal”. What Louis Chan J said at §32 of his judgment was this: “The defendant’s permission for Ms Wong to use the defendant’s rubber chop was a representation to 3^rd parties that she had authority to act for the defendant in situations where the use of the defendant’s rubber chop would suffice”. That statement must, however, be read together with the immediately preceding §31, where the learned judge said: “There are however situations where the representation is by conduct or by permitting the agent to assume a particular position. The representation thus may not be clear as to the kind of contracts that it covers. In such case, the facts and circumstances of the case have to be considered to determine the kind of contracts that are covered by the apparent authority.” It is clear that much more is required to establish apparent authority than the mere fact that a company’s rubber chop has been applied on a document. TS Office System Ltd cannot be read as establishing any general proposition that a person who applies a company’s rubber chop on a written agreement has apparent authority to bind the company to the terms of that agreement.

(5)  In our view, in the absence of any evidence that Wen had the Petitioner’s authority (actual or apparent) to enter into the Repayment Arrangement on its behalf, the Repayment Arrangement, whether viewed as a novation or a contract, plainly cannot give rise to a bona fide dispute of the Debt on substantial grounds. This is so quite apart from the Judge’s view that Yeung’s case, on the facts, was “unbelievable”.

21.  In short, Grounds 4 and 5 are rejected.

(ii)  Grounds 6

22.  Ground 6 can be disposed of briefly. Under these grounds, Yeung effectively seeks to rehearse her arguments on the evidence which were rejected by the Judge. As noted above, Yeung contends that the Judge failed to accord any or any sufficient weight to the fact that:

(1)  the Petitioner had no first-hand knowledge of the matters in dispute;

(2)  the Petitioner had to rely on circumstantial evidence; and

(3)  there was a serious conflict between the documentary records relied upon by the Petitioner and the documentary evidence relied upon by her.

23.  In his written submissions, Mr Lam tries to explain away the contradictions or inconsistencies between (i) the documentary evidence and/or Yeung’s conduct, and (ii) Yeung’s case on the Repayment Arrangement[22], which it is not necessary to set out in this judgment[23].

24.  In the present case, the Judge examined the evidence and materials before him with care, and clearly explained why he accepted the evidence proffered by the Petitioner and rejected Yeung’s defence to the Petition based on the Repayment Arrangement. We have summarised the Judge’s reasoning in §§10 and 11 above, and do not propose to repeat the same here. The Judge’s conclusion that Yeung’s case was “unbelievable” and thus she had failed to raise a bona fide dispute of the Debt on substantial grounds was an evaluative judgment based on the evidence and findings of fact made by the Judge, even though the findings were based on affirmation evidence and contemporaneous documents rather than oral evidence.

25.  The Court of Appeal will not lightly interfere with such conclusion of the Judge unless he erred in law, or was under a misapprehension of material facts, or failed to take relevant matters into account, or took irrelevant matters into account, or his decision was plainly wrong. We are satisfied that the Judge did not make any error of principle or approach, or any palpable error in his decision. The Judge’s conclusion that Yeung had failed to raise a bona fide dispute of the Debt on substantial grounds was one which was fairly open to him. We see no basis to interfere in the Judge’s decision in the present case.

(iii)  Grounds 1, 2 and 3

26.  Under these grounds, Yeung complains that the Judge erred in his approach to the determination of the Petition, in that, instead of deciding whether there was a bona fide dispute of the Debt on substantial grounds, he conducted a mini-trial on affirmations as if he had to arrive at a conclusive finding of whether she was indebted to the Petitioner for the amount of the Loan and interest thereon.

27.  These grounds of appeal have no merit. The Judge set out the applicable principles at §§6 to 8 of the Judgment. Mr Lam has not raised any complaints about the principles stated by the Judge. While it is true that the Judge examined the evidence before him in some detail at §§27 to 42 of the Judgment, we are satisfied that the Judge did so in order to decide whether Yeung had succeeded in raising a bona fide dispute of the Debt on substantial grounds, and not to make any conclusive factual findings. The Judge came to the conclusion that Yeung’s case was “unbelievable” when viewed against the undisputed or indisputable evidence, and thus he was not satisfied that there was a bona fide dispute of the Debt on substantial grounds. As earlier mentioned, we are of the view that on the evidence and materials before him, it was open to the Judge to come to such conclusion.

28.  The general complaints raised in Yeung’s original Notice of Appeal add nothing of substance to the grounds raised in the Supplemental Notice of Appeal, and do not require separate consideration.

29.  In all, none of the grounds of appeal raised by Yeung is valid or has merit.

DISPOSITION

30.  Yeung’s appeal is dismissed with costs to the Petitioner, to be summarily assessed on a party and party basis. Yeung shall have leave to file and serve a statement of objections (limited to 2 pages) to the Petitioner’s Statement of Costs dated 2 April 2024 within 14 days from the date of this judgment.

31.  We do not accede to Ms Lee’s application for an order of indemnity costs against Yeung, for the following reasons:

(1)  Although we have dismissed Yeung’s appeal, we do not consider that the merits of her appeal are so lacking that an order for indemnity costs is justified.

(2)  The case of Re SY Engineering Co Ltd (CACV 1896/2001, unreported, 27 February 2002) relied upon by Ms Lee does not assist her argument. That case concerned an appeal brought by a company against a winding up order made against it. The appeal was dismissed, and the Court of Appeal considered that the appeal was entirely devoid of merit and it was appropriate to order costs in the petitioner’s favour on an indemnity basis. The Court of Appeal also said that indemnity costs are appropriate where a company unsuccessfully appealed from a winding-up order. As pointed out by Le Pichon JA at §20 of her judgment in that case, as a matter of practice, where the company is the only appellant, security for costs must be given from an outside source. The reason is that it is not just that any costs occasioned by an unsuccessful appeal from a winding-up order should be thrown upon the assets of the company to the prejudice of its creditors. Where the security paid in is not sufficient to cover the costs of the petitioner on an indemnity basis, the shortfall should be borne by the outside source (a contributory in that case). We do not read the judgment of the Court of Appeal in SY Engineering Co Ltd as laying down any general proposition that an order for indemnity costs should always be made in favour of a petitioner/creditor where a company unsuccessfully appealed from a winding-up order. In any event, the present case does not concern a winding-up order against a company. The fact that the Petitioner may not recover all its costs incurred in resisting the present appeal from Yeung’s estate would not prejudice her creditors, while the fact that the Petitioner itself is in liquidation cannot be a good reason for making an indemnity costs order in its favour.