RE YEUNG MAN

HCB 5026/2021

[2022] HKCFI 1472

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 5026 OF 2021

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JUDGMENT

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1.  This is the hearing of an Amended Bankruptcy Petition[1] seeking a bankruptcy order against Madam Yeung Man (“Yeung”) based on a debt of HK$17,126,410.96 (“Debt”).

2.  At the material times, the Petitioner was a licensed money lender. It is now in voluntary liquidation after the passing of a Special Resolution on 15 November 2021. As stated in the Resolution, the Petitioner could not continue its business by reason of its liabilities. Mr Yuen Tsz Chun (“Yuen”) was appointed as the sole liquidator of the Petitioner.

3.  The Debt comprised of (i) the principal loan of HK$14,000,000 (“Loan”) advanced to Yeung by the Petitioner pursuant a Loan Agreement dated 26 April 2017, which was extended by a further agreement dated 26 April 2018 (“2018 Agreement”)[2] and (ii) interest accrued on the Loan at 11% p.a. from 25 April 2019 (due date for repayment under the 2018 Agreement) to 5 February 2021 in the sum of HK$3,126,410.96.

4.  On 18 March 2021, a Statutory Demand was personally served on Yeung. It had not been complied with or set aside.

Issue

5.  It is common ground that the sole issue before the court is whether Yeung has demonstrated a bona fide dispute to the Debt based on substantial ground(s).

Law

6.  The applicable principles are trite. The burden of establishing a bona fide dispute on substantial ground(s) is on the debtor. The debtor must adduce sufficiently precise factual evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one: see Re Hong Kong Investments Group Ltd [2018] HKCFI 984, per Ng J, §11.

7.  Where the bona fide dispute turns to a substantial extent on disputed questions of fact which require viva voce evidence, the bankruptcy court is not the forum for resolving whether the debt is due, and the petition would be dismissed: Re Hong Kong Investments Group Ltd, §12.

8.  The court must be satisfied that the debtor’s assertions are believable. It is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute. In other words, the evidence is not to be approached with a wholly uncritical eye: Re Yueshou Environmental Holdings Ltd, HCCW 142/2013, unrep, 16 July 2014, per Harris J, §8.

Yeung’s case

9.  Yeung’s case is that the Debt had already been repaid. Her evidence is that she is a housewife and the Loan was taken out at the instructions of her partner, Mr Chen Huawei (“Chen”), who is the father of her 4 children. The Loan was obtained from the Petitioner because Chen knew Mr Wen Jialong (“Wen”). Wen was a director of Lamtex Holdings Ltd (now in liquidation) (“Lamtex”), a Hong Kong listed company. The Petitioner was indirectly wholly owned by Lamtex.

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 (see para 39 below) 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 Huazun 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.

The Petitioner’s response

15.  The Petitioner’s evidence was adduced from Yuen. It is fair to say that he had no first-hand knowledge of these matters. However, the Petitioner relies upon documentary records and circumstantial evidence to challenge Yeung’s case.

16.  According to the Petitioner’s records, Yeung had repaid (i) a sum of HK$840,000 as Loan interest on about 25 June 2018 and (ii) another sum of HK$385,000 as interest on 25 January 2019. These payments were made after the Loan and interest were, according to Yeung, deemed repaid.

17.  On about 21 February 2019, Yeung signed an audit confirmation confirming that she owed the Petitioner a total sum of HK$14,151,890.41 as at 31 December 2018.

18.  When Yeung failed to repay the Loan and accrued interest by the maturity date on 25 April 2019, many demand letters were issued by the Petitioner or its agents to her from 20 April 2019 to 4 May 2021. The letters were ignored by Yeung.

19.  However, according to the Petitioner’s record, there was a reply by Yeung on 31 March 2020 that she would repay the Loan and the accrued interest before 31 October 2020.

20.  The Statutory Demand dated 18 March 2021 was also ignored by Yeung.

21.  After the Bankruptcy Petition was presented on 31 August 2021, on 20 September 2021 Yeung’s solicitors (“TPY”) claimed that pursuant to Clause 17.2 of a Loan Agreement dated 26 April 2019 (“2019 Loan Agreement”), the Petitioner should have commenced arbitration to recover the Debt. According to TPY’s letter dated 8 October 2021, the 2019 Loan Agreement was executed to extend and renew the 2018 Loan Agreement.

2019 Loan Agreement

22.  A few words should be said about the 2019 Loan Agreement, which is disputed by the Petitioner. It has no record of that Agreement. As mentioned in the preceding paragraph, the document was relied upon by TPY in September 2021. It was apparently signed by Yeung and Mr Wu Xiaolin, who was a director of the Petitioner. Wu’s signature was accompanied with a stamp of the Petitioner. This Agreement contained the same clause 16.1 as in the 2018 Loan Agreement such that all previous agreements were superseded and replaced by it. Under the later Agreement, the repayment of the Loan was extended to 25 April 2020.

23.  In Yeung’s 1^st Affirmation (“Yeung 1^st”), she explained that in around early April 2019 Wen asked her to sign the 2019 Loan Agreement to extend the Loan. Although she was aware of the Repayment Arrangement at the time, she did not know if the RMB 30 million loan had been released to Zhiweilong. Chen was very busy and often absent from Hong Kong. She agreed to sign the 2019 Loan Agreement.

24.  Yeung further explained that she entered into the 2019 Loan Agreement under the mistaken belief that the Loan remained outstanding. When the Statutory Demand was received, Yeung contacted Wen and was assured by him that he would deal with the matter with Chen. Believing that it would be sorted out by Chen, who was staying in the Mainland due to the outbreak of COVID-19, Yeung did not follow up on the matter.

25.  Yeung “finally realised the severity of the proceedings” after the presentation of the Petition. Chen was informed and solicitors were instructed by her. After taking some time to check the record, Chen confirmed with her that the Loan had been repaid through the Repayment Arrangement. Subsequently, supporting documents were provided to her by Chen.

26.  It is not in dispute that the allegation of the Repayment Arrangement was first made in Yeung 1^st.

Analysis

27.  The only issue to be determined is whether Yeung has raised a bona dispute over the Debt based on substantial grounds. Ms Lee, who appeared for the Petitioner, submitted that assessed against the undisputed or indisputable evidence, as well as Yeung’s own admission or conduct, the answer must be in the negative. On the other hand, Mr D’Souza, who appeared with Ms Tang for Yeung, submitted that Yeung’s case is supported by sufficiently precise factual evidence, and the present dispute is not suitable for summary disposal in bankruptcy proceedings.

28.  I am of the view that, assessed against the undisputed or indisputable evidence, Yeung’s case is not one which sits well with common sense, and I find it unbelievable.

29.  First and foremost, the repayment of the Debt by way of the Repayment Arrangement is plainly inconsistent with the subsequent interest repayments (see para 16 above). These were large payments and not the kind which were carelessly made. The same goes for the audit confirmation (para 17 above). It was signed by Yeung well after the Debt was supposedly deemed repaid. If Yeung was unaware of the release of the RMB 30 million loan as she alleged in Yeung 1^st, she could easily have found out from Chen by way of a phone call. Any suggestion that Chen was a busy businessman and often away from Hong Kong for that purpose cannot be taken seriously.

30.  Mr D’Sousa submitted that Yeung had not been able to check her bank records in relation to the interest payments. I am not persuaded by the submission. The cheque for the HK$840,000 payment was produced by the Petitioner. It bore the signature of Yeung. There is no reason to believe that she cannot tell if the cheque was drawn on her account or whether the signature was indeed hers. The payment of HK$385,000 was collected on the Petitioner’s behalf by its solicitors. It is unlikely for such an event to have been forgotten by Yeung.

31.  I am equally unconvinced by the submission that whether the signature on the audit confirmation was in fact made under Yeung’s hand is in dispute. Yuen’s 2^nd affirmation by which, inter alia, the audit confirmation was produced was filed on 28 January 2022. If there is genuine dispute on the authenticity of the audit confirmation, one would have expected Yeung to apply for leave to file further evidence in that regard. No such application has been made.

32.  Secondly, notwithstanding Yeung’s abandonment of any reliance on the 2019 Loan Agreement, that document was signed by her in April 2019 and it flatly contradicted the proposition that the Debt was deemed repaid in June 2018.

33.  Further, the circumstances under which that document came to be signed as described by Yeung are difficult to understand. Wen had already resigned from his positions in Lamex in June 2018. He was never a director of the Petitioner and there is no evidence of any other connection between Wen and the Petitioner. It is baffling why he was concerned about extending the Loan and asked Yeung to sign the 2019 Loan Agreement. Bluntly, the suggestion that Yeung signed the document without finding out if the Debt was in fact deemed repaid is not believable.

34.  Thirdly, even if the court is to ignore the lack of response by Yeung to the many demand letters, her response to the Statutory Demand was extraordinary. She was being chased for a substantial debt with interest running at 11% p.a. The suggestion that she simply believed Wen and left it to him and Chen to deal with the matter (and did not herself follow up with Chen) is not a credible one.

35.  Fourthly, there is no credible explanation for the considerable delay in asserting that the Debt had been repaid. According to Yeung, she informed Chen about the situation after the presentation of the Petition. A RMB 30 million loan was not something which easily escaped the mind of a reasonable businessman. Even if time was required to check the records, one would have expected Yeung to instruct her solicitors to remind the Petitioner about the Repayment Arrangement (which she was aware of) and ask for time to check the records about the release of the RMB loan. Instead, Yeung’s solicitors asked for the matter to be referred to arbitration by relying on a document which contradicted the Repayment Arrangement.

36.  Finally, in respect of the Notice, Proof of Repayment and Receipt, which constitute the high watermark of Yeung’s case, they do not outweigh the evidence and inference discussed above. Moreover, I do not find these documents to be reliable evidence such that the court may conclude that a bona fide or believable dispute has been made out for the following reasons.

37.  The Notice and the Proof of Repayment were, on their face, issued 1 day before Wen resigned from Lamtex. He was not a director of the Petitioner. Mr D’Souza submitted that, depending on the facts of the case, the court may conclude that a director or employee of a parent company has authority, actual or apparent, to bind or otherwise act on behalf of a subsidiary, citing Bowstead and Reynolds on Agency, 22^nd edn, [1-030]. However, this was a case where a director of a parent company was apparently using an asset of its subsidiary (the Loan) for the purpose of his own company. Viewed in conjunction with the fact that the alleged transaction took place 1 day before Wen’s resignation, it is not one which can be accepted without careful scrutiny.

38.  There is no explanation why the Proof of Repayment was issued before the RMB loan was released.

39.  Properly analysed (both Ms Lee and Mr D’Souza agreed with the court’s analysis), the transaction evidenced by the Notice and the Proof of Repayment was one of novation[3] – the discharge of the Loan and accrued interest owed by Yeung to the Peitioner and the creation of new obligation to repay the same by Zhiweilong to the Petitioner (see Chitty on Contracts, Vol 1, [22-089]). However, there is no evidence of consent to the novation by Yeung or Zhiweilong[4]. 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 (see Chitty, [22-091]).

40.  There was inherent conflict between, on one hand, the Notice and the Proof of Payment which suggested that the repayment obligations to the Petitioner for the Loan and accrued interest would be assumed by Zhiweilong once the RMB loan was released. On the other hand, the Receipt, which was made after the Repayment Arrangement had come into effect according to Yeung’s case, stated that the RMB 30 million loan had to be repaid in 30 day together with monthly interest at 3%. There was no indication of any payment obligation to the Petitioner.

41.  There is no affidavit from Chen or Wen to explain what actually took place. I see no reason why a draft affidavit from Chen cannot be produced even if he is unable to come to Hong Kong. The absence of evidence from Chen is telling because he could have explained if the RMB loan had been repaid in any part by Zhiweilong to Huaxun, and if not, why so. Such evidence would shed considerable light on the veracity of the Repayment Arrangement.

42.  The unsatisfactory state of Yeung’s evidence has to be assessed in light of the records of the Petitioner which contradicted any suggestion that the Loan had been repaid. The records showed that the Loan remained in the books of the Petitioner under Yeung’s name as borrower, and efforts were periodically made to chase for repayment. I disagree with the submission made on behalf of Yeung that these records are at best self-serving. They were the type of business records normally kept by money lenders, and no adequate reason has been shown to put them in doubt.

Disposition

43.  For these reasons, I make the usual bankruptcy order with costs against Yeung.

44.  Last but not least, I am grateful to counsel for their assistance.