RE ZHENG DUNQIAN

HCB 3929/2017

[2018] HKCFI 955

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 3929 OF 2017

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J U D G M E N T

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Introduction

1.  There is before this court a bankruptcy petition dated 28 June 2017 (amended on 12 September 2017) (“Petition”) presented by Haitong International Securities Company Limited (“Petitioner”) against Mr Zheng Dunqian (“Debtor”).  The Petition is based on the Debtor’s non-compliance with a statutory demand dated 15 May 2017 (“statutory demand”) served personally upon him for the sum of HK$116,269,588.98 (“Debt”). There was no application by the Debtor to set aside the statutory demand.

2.  The Debt arose out of a margin loan advanced by the Petitioner to Sun Wang Group Investment Limited (“Company”), a company incorporated by the Debtor on 6 October 2016.  The Debtor was the sole shareholder and director of the Company when it was incorporated.

3.  On 11 October 2016, the Company opened a margin securities trading account no. 02-0319379-33 (“Account”) with the Petitioner.  On the same day, the Debtor signed a personal guarantee in Chinese (“Personal Guarantee”) whereby he agreed to guarantee all the obligations of the Company to the Petitioner in respect of the Account.

4.  By a credit loan facility agreement dated 16 November 2016 signed by the Debtor on behalf of the Company (“Facility Agreement”), the Petitioner agreed to grant a margin credit loan facility, not exceeding HK$120 million, to the Company to enable it to acquire and hold listed securities in the Account.  Under the Facility Agreement, the Company was required to pledge the securities in the Account as collateral.

5.  The margin loan in question was advanced by the Petitioner to the Company pursuant to the Facility Agreement and guaranteed by the Debtor under the Personal Guarantee.

Further Background

6.  In order to fully understand the grounds of opposition raised by the Debtor, it is necessary to set out the factual background in some details.

7.  In around 2015, the Debtor’s brother Mr Zheng Dunmu and companies under his control, including Pure Sheen Limited (“Pure Sheen”), maintained margin securities trading accounts with the Petitioner for the purpose of trading in listed securities on margin.  At that time, Mr Zheng Dunmu and/or his companies held inter alia 250,744,000 shares in Changgang Dunxin Enterprise Co Ltd (“Shares”), a company listed on the main board of the Hong Kong Stock Exchange (“Changgang”).  At the time of Changgang’s listing in June 2014, Mr Zheng Dunmu was its Chairman and executive director, the Debtor was its CEO and executive director and the Debtor’s brother-in-law, Mr Chen Ruomao, was its CFO and executive director.

8.  By June 2015, Mr Zheng Dunmu and his companies had accumulated substantial margin deficits and failed to meet the margin calls made by the Petitioner. In January 2016, the Petitioner said it began to lose contact with Mr Zheng Dunmu.  On 20 January 2016, Changgang announced that trading of its shares was suspended at its own request.  In July 2016, the Petitioner decided to exercise its right to liquidate the listed securities held in the accounts of Mr Zheng Dunmu and his companies including the Shares.

9.  The Debtor was interested in purchasing the Shares.  In October 2016, the Debtor agreed in principle to purchase the Shares on an over-the-counter basis.  Shortly afterwards, he incorporated the Company, opened the Account, signed the Personal Guarantee and entered into the Facility Agreement on behalf of the Company with the Petitioner.  On 17-18 November 2016, the Company used the HK$120 million loan to acquire the Shares and deposited them in the Account.[1]

10.  To complete the picture regarding Changgang and the Company:

(1)    Since 25 January 2017, the Debtor’s duties as CEO and executive director of Changgang have been suspended by its Board pending a forensic review of inter alia his failure to provide any explanation for the suspicious dissipation of Changgang Group’s cash in 2016 and his failure to respond to Hong Kong Stock Exchange’s enquiries regarding Changgang Group’s affairs.

(2)    As at 15 May 2017, the Company owed the Petitioner HK$116,269,588.98 ie the Debt.  The Petitioner issued the statutory demand to the Company for the Debt.

(3)    On 17 May 2017, the Securities and Futures Commission issued a direction to suspend trading in the shares of Changgang with effect on 18 May 2017 as it appeared to the Commission that Changgang’s annual accounts for 2015 and other announcements contained “materially false, incomplete or misleading information”.

(4)    On 5 June 2017, Changgang announced that, upon the ex parte on notice application of a creditor, Harris J ordered the appointment of provisional liquidators of Changgang.

(5)    On 11 December 2017, upon the Petitioner’s application, Harris J ordered the appointment of provisional liquidators of the Company in HCCW 384/2017 on the basis that the Company is insolvent and unable to pay its debt, having failed to comply with a statutory demand dated 15 May 2017 for the Debt.

Discussion

11.  It is a well-established legal principle that in order to successfully oppose a Petition, a debtor has to show a bona fide dispute to the debt on substantial grounds, by sufficiently precise evidence which is believable, and must establish that he actually has a defence of substance, not just a fair probability of one: Re Tam Mei Kam unrep; HCB 3777 of 2011; 25 April 2012; Barma J (as he then was); Re Yuen Mun Wa (debtor) [2012] 5 HKLRD 108; Re Chan Hon Kwong unrep, HCB 6548/2016, 27 April 2017.

12.  The Debtor does not dispute the amount of the Debt or his failure to comply with the statutory demand as such.  According to the written submissions of his Counsel, Mr Wong, he opposes the Petition on the following grounds:

(1)   Fraud - The Facility Agreement and the purchase of the Shares were a composite transaction which constitute a fraud against the Company and/or the Debtor.

(2)   Misrepresentation - The Company and/or the Debtor were induced to enter into the transaction based on the misrepresentations by the Petitioner as to the true value of the Shares at the time of entering into the Facility Agreement in November 2016 and the purchase of the Shares.

(3)   Non est factum - The Debtor did not understand the meaning of the Personal Guarantee in Chinese and the Facility Agreement in English that he had signed.

(4)   Set-Off - The Debtor has a valid set off to extinguish the Debt by reason of the fact that the Shares, as securities, are worth substantially the same now as they were on 16 November 2016.

(5)   Illegality - The transaction was tainted with illegality as the Debtor believes the Shares were transferred from Pure Sheen’s margin securities trading account with the Petitioner to the Account in breach of an injunction order dated 13 April 2016 (“Injunction”) obtained by Full Baba Finance Co Ltd (“Full Baba”) from G Lam J against inter alia Pure Sheen in Intended Action No. 41 of 2016 and continued by his Lordship on 22 April 2016 in HCA 956 of 2016.

Fraud/misrepresentation

13.  Ms Chan SC submits that the Debtor has failed to provide any particulars of the alleged fraud/misrepresentations, including, in particular, who made the misrepresentations, when they were made and the wording of the misrepresentations. Further, Ms Chan SC submits that it is inconceivable that the Debtor could have been misled as to the value of the Shares, given that, at all material times, he was the CEO and an executive director of Changgang.

14.  This court agrees.

15.  The Debtor was, at all material times, the CEO and an executive director of Changgang.  In Changgang’s 2015 annual report dated 3 June 2016 in which he signed off as executive director and gave a statement as its CEO, the net assets of Changgang were stated to be RMB1,057,480,000. In October/November 2016, the Debtor incorporated the Company, opened the Account, signed the Personal Guarantee, entered into the Facility Agreement on behalf of the Company, used the HK$120 million loan to acquire the Shares and pledged them with the Petitioner.  Lastly, the Company (Attn: the Debtor) was sent monthly statements in Chinese which set out the number of the Shares held in the Account and their last trading price in January 2016.  The one dated 30 November 2016 stated the value of the Shares, for the purpose of calculation of margin, was zero, owing to the suspension of trading of Changgang’s shares.

16.  It is utter nonsense to suggest that the Debtor, an "insider", could have been misled by an "outsider" ie the Petitioner as to the value of the Shares or somehow tricked by the fraud of the Petitioner in doing all that he did in October/November 2016.

Non est factum

17.  The plea of non est factum is hopeless.

18.  First, the statutory demand and the Petition were issued/presented on the basis of the Personal Guarantee signed by the Debtor in favour of the Petitioner.  The document is in Chinese and there is no suggestion that the Debtor cannot even read or understand Chinese.   At most, the Debtor can only claim not to be able to read the Facility Agreement which is in English, but that is neither here nor there, given that he cannot possibly suggest he did not know the Petitioner had in fact advanced the loan of HK$120 million to the Company.

19.  Second, a person of full age and ordinary understanding is normally bound by his signature to a document, whether he bothers to read or try to understand it or not: Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334.  A person who elects to sign a document without reading or trying to understand it cannot thereafter be heard to complain about the terms of the document and will be taken to have agreed to them: Wing Hang Credit Ltd v Hui Chun Kit Benjamin unrep, HCMP 732/2009, 3 November 2011, DHCJ G Lam SC (as he then was) at [93].

Set-Off

20.  Trading in the Shares has been suspended by Changgang itself in January 2016.  Suspension in the trading of the Shares has been ordered by the SFC with effect from 18 May 2017 and the suspension is still in place as of today.  There is simply no evidence that the Shares are worth anything, in the sense that there is a willing purchaser who will pay something for them, let alone worth HK$116,269,588.98 ie the Debt.

Illegality

21.  The short answer to this ground is that, by letter dated 15 April 2016, solicitors for Full Baba, the plaintiff in HCA 956 of 2016, viz Messrs Simon CW Yung & Co had served a copy of the Injunction on the Petitioner.  After some exchange of correspondence between Simon CW Yung & Co and the Petitioner’s then solicitors viz Mayer Brown JSM (“JSM”), Simon CW Yung & Co expressly indicated to JSM by letter dated 29 July 2016 that Full Baba did not object to the Petitioner’s intended disposal of the Shares in the margin securities account of Pure Sheen. There is thus no breach of the Injunction by the Petitioner by transferring the Shares from Pure Sheen’s account to the Account.  In any event, it is difficult to see how this transfer would render the Personal Guarantee or the Facility Agreement “illegal” and Mr Wong’s submissions in this regad are wholly unconvincing.

Disposition and Costs Order Nisi

22.  To conclude, none of the grounds put forward by the Debtor in opposing the Petition have any merits. 

23.  There shall be a usual bankruptcy order against Mr Zheng Dunqian and an order nisi that the costs of the Petition, including all costs previously reserved, if any, be to the Petitioner, to be taxed if not agreed, with certificate for Leading Counsel.