RE TONG NAI KAN

HCB 4735/2023

[2023] HKCFI 3125

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 4735 OF 2023

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R E A S O N S  F O R  J U D G M E N T

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1.  At the hearing of the petition presented by Industrial Bank Co., Limited (“Petitioner”) on 16 August 2023 (“Petition”), I made a usual bankruptcy order against Mr Tong Nai Kan (唐乃勤) (“Debtor”). These are the reasons for my judgment.

2.  The Debtor is domiciled in Hong Kong. 

3.  By a facility agreement dated 18 November 2019 (as amended by side letters dated 13 May 2020 and 27 October 2020 and Amending Deed dated 28 April 2022) (“FA”) made between the Petitioner (as lender), Global Well Holdings Ltd (as borrower) (“GWH”), Uy Soon Ke and the Debtor (as guarantors), the Petitioner made available to GWH a HK$380 million term loan and HK$420 million revolving loan facility (together “Loans”).  Under the FA, the Loans were due and payable on 18 May 2022 “or any other date agreed in writing between the [Petitioner] and [GWH] from time to time”[1].

4.  The Debtor executed a guarantee dated 31 December 2019 in favour of the Petitioner (“Guarantee”) whereby he agreed to pay any amount outstanding and payable under the Loans[2].

5.  On 27 June 2022, the Petitioner demanded GWH to repay the outstanding principal and interest in the amount of HK$198,828,971.53. 

6.  No repayment was made by GWH.  The Debtor as guarantor was liable to pay the amount due and owing by GWH.

7.  As at 21 July 2022, the outstanding principal and interest owed to the Petitioner was HK$200,403,421.25 (“Debt”).  A statutory demand dated 22 July 2022 (“SD”) was served on the Debtor on 5 August 2022 requiring him to pay the Debt within 21 days. 

8.  On 27 July 2022 and 20 January 2023, GWH made partial payment in the total amount of HK$20,454,074.25 to the Petitioner.  As at 9 August 2023, HK$187,167,773.48 remained due and owing to the Petitioner of which HK$7,218,426.48 was interest (“Unpaid Debt”).   

9.  On 22 August 2022, the Debtor applied to set aside the SD in HCSD 36/2022 (“Application”) on the following grounds:

(1)  The Loans had been advanced to finance a public housing project in Kwai Chung under the Home Ownership Scheme (“Project”). The Petitioner knew that GWH would take at least 5 years to complete, and there was “no logical reason” as to why the Petitioner would ask for repayment before 17 November 2024[3].

(2)  As security for the Loans, a very valuable property located at 北京昌平區安四路69號院1號樓, 2號樓, 3號樓 in Beijing (“Beijing Property”) was mortgaged to the Petitioner.  The Petitioner accepted the valuation of the Beijing Property at RMB 280 million and signed a mortgage agreement dated 31 December 2019 with 北京華誠科工科技有限公司 (as mortgagor) and the Petitioner (as mortgagee) (“Mortgage Agreement”).  The Mortgage Agreement is governed by PRC law and subject to the jurisdiction of PRC court[4]. 

(3)  Even if the Debt existed, it is not yet due for payment under the Guarantee, “because the subject matter of the Guarantee is related only to the [Beijing Property] under the Mortgage Agreement in China, where the default (if any) is to be construed under the PRC law and subject to the jurisdiction of the People’s Court in China”.  Hong Kong court has no jurisdiction under the guarantee[5].

10.  The substantive hearing of the Application was scheduled to be heard on 8 August 2023.  By letter dated 31 July 2023, Messrs. Kelvin Cheung & Co (“KCC”) on behalf of the Debtor, informed the court that the Debtor had decided to withdraw the Application and would file a consent summons with the court. 

11.  On 7 August 2023, DHCJ Sara Tong SC made an order in terms of the consent summons filed, dismissing the Application with costs to be paid by the Debtor to the Petitioner. 

12.  Despite the dismissal of the Application, no further payment was made by the Debtor (or GWH).  The Petitioner presented the Petition on 16 August 2023. 

13.  In the “Notice to Oppose” filed by KCC in these proceedings on 17 October 2023, the Debtor stated that the Unpaid Debt is secured by the Beijing Property and its value is RMB260-280 million, more than sufficient to pay off the Unpaid Debt. 

14.  At the hearings before Master Lai on 17 October 2023 and Master J Wong on 7 November 2023, the Debtor through his solicitor at KCC, informed the court that he would pay the Unpaid Debt. 

15.  No payment was made by the Debtor.  Instead, by summons filed on 24 November 2023, Messrs. Yung & Au (“Y&A”), on behalf of the Debtor, applied for “retrospective leave” to file an affirmation made by the Debtor dated 24 November 2023 (“Debtor Aff”); leave a file a supplemental affirmation in opposition to the Petition; and adjournment of the Petition for arguments with 3 hours reserved.  I dismissed the summons, as the Debtor had not put forward any valid reason to justify his delay and inaction in filing his affirmation. 

16.  Nevertheless, I have considered the Debtor Aff de bene esse and I do not think that the grounds raised therein constitute a bona fide dispute on substantial grounds in respect of the Unpaid Debt. 

17.  In Debtor Aff, the Debtor repeats all the contentions raised in Debtor 1^st and alleges that he did not instruct KCC to withdraw the Application.  His allegations made by summarised as follows:

(1)  He only engaged Y&A as his solicitors on 22 November 2023.  KCC never informed him about the progress of these proceedings[6];

(2)  He never instructed KCC to inform the court that he would pay the Unpaid Debt[7];

(3)  He never instructed KCC to withdraw the Application[8];

(4)  Although the Loans were stated to be repayable on 18 May 2022, there was a consensus (“共識”) that the Loans would only be repaid by 17 November 2024 or before[9];

(5)  He disputes the jurisdiction of the Hong Kong court as mentioned in Debtor 1^st.  In the Amending Deed, the clause where the parties submit to the jurisdiction of Hong Kong court was deleted and replaced by an arbitration clause requiring the parties to submit their dispute to Shenzhen court of International Arbitration[10];

(6)  Although cl.14(c) of the Guarantee provides that the Petitioner may commence proceedings in other jurisdiction, this has to be read with cl.15 which provides that the Guarantee is governed by the PRC law.  As the Petitioner relies on the FA and the Guarantee as the bases for requiring the Debtor to pay the Unpaid Debt, the matter must be referred to arbitration for determination[11]; and

(7)  The Beijing Property is worth RMB 280 million and the Project (held by other companies) have already been mortgaged to the Petitioner, the value of these properties exceeds the Unpaid Debt.  He is willing to assist the Petitioner to realise the properties and apply the proceeds to repay the Unpaid Debt or to come up with a repayment proposal acceptable to the Petitioner[12].

18.  The Debtor did not comply with the SD and is deemed insolvent by virtue of s.6A(1)(a) of the Bankruptcy Ordinance (Cap. 6).  The Petitioner has discharged the onus of showing that the debtor is unable to pay his debt, as required by s.6(2)(c) of the same Ordinance.    

19.  In opposing a bankruptcy petition, a debtor has to show a bona fide dispute on substantial grounds in respect of the Debt by adducing sufficiently precise evidence which is believable, and must establish that he has a defence of substance, not just a fair probability of one (Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §27, per Kwan JA (as she then was); Re Soetrisno Farida [2019] HKCFI 2756, at §11, per Ng J).  In this regard, it is not sufficient for the debtor to merely raise “a cloud of objections on affidavits” (Artech Development Ltd v Posismo Ltd [2018] HKCFI 344, at §10(4), per Ng J). 

20.  In bankruptcy proceedings, the principles on res judicata and issue estoppel apply.  In addition, the Turner principle requires a debtor who brought an application to set aside a statutory demand to raise all the arguments against the petition debt, and the court requires exceptional circumstances before it would allow a debtor to raise the same or new arguments at the petition stage. The relevant principles are discussed in Re Yip Kim Bor [2022] HKCFI 1912, §§20-21:   

“20. The principles on res judicata and issue estoppel apply to bankruptcy proceedings. In Chan Yuk Lun v Chan Ying Chit[2015] 1 HKLRD 501, §§9-13, Godfrey Lam J (as he then was) held that a determination on an application to set aside a statutory demand is a “final” determination on the issues between the parties and the principle of res judicata applies to bar the parties from raising the same issue at the hearing of the petition:

‘9. However, it has been held by Susan Kwan J (as she then was) in the (strangely unreported) case of Re Choy Wai Bor (unrep., HCB 8565/2001, [2002] HKEC 650) (28 May 2002) at [30] that the court’s decision of refusing to set aside a statutory demand gives rise to a determination that, by virtue of the principle of res judicata, precludes the debtor from raising the same issue on the hearing of the bankruptcy petition, at any rate where there has been no change of circumstances.

….

13. Looking at the substance of the matter, such an order refusing to set aside a statutory demand, coupled with the operation of the principle of res judicata, has the effect of a final determination of specific issues as between the parties …’ (underlined added)

21.  There is a further principle in bankruptcy law which has been described as the ‘Turner principle’ or the public policy principle.   The principle may be summarised as follows:

(1)  Where a debtor brought an application to set aside a statutory demand, that application being part of the bankruptcy process, is the proper forum for the parties to raise all their arguments against the petition debt (Turner v Royal Bank of Scotland [2000] BPIR 683, §§47, 49, per Chadwick LJ; Atherton v Ogunlende [2003] BPIR 21, at 27, per Neuberger LJ).   

(2)  It would be an abuse of the bankruptcy court’s practice if the debtor is allowed to run an argument which could and should have been run at the application to set aside a statutory demand (Harvey v Dunbar Assets plc [2017] EWCA Civ 60, §§51, 58, per Henderson LJ).   It would also be a waste of court’s time and the parties’ money and would defeat the obvious purpose of the statutory scheme if a debtor can at the hearing of the petition ask the court to go into the question which has already been determined in the application to set aside the statutory demand (Turner, §49).

(3)  If the debtor wishes to run new arguments at the hearing of the petition which were not run at the application to set aside the statutory demand, the court would inquire why those arguments were not run at the time when they could, and should, have been raised (Coulter v Chief Constable of Dorset Police (No 2) [2006] BPIR 10, §§20-22, per Chadwick LJ; Harvey §48).

(4)  The court requires exceptional circumstances before it would allow the debtor to raise the same arguments at the petition stage (Atherton v Ogunlende, at 27).”

21.  I do not accept the Debtor’s allegations that he was not aware of the progress of the proceedings or that he did not instruct KCC to withdraw the Application. 

(1)  No document or credible evidence has been adduced by the Debtor in support of his allegations.

(2)  The allegations make no sense.  There was no reason for KCC to withdraw the Application unless they had been instructed by the Debtor to do so.   

(3)  Prior to their letter dated 31 July 2023 informing the court of the withdrawal of the Application, KCC wrote a letter dated 25 July 2023 to the Petitioner’s solicitors proposing (a) the Debtor to withdraw the Application; (b) the Petitioner giving not less than 3 months for the Debtor to come up with a settlement proposal with a view to full and final settlement of the Unpaid Debt; (c) vacating the hearing on 7 August 2023 and paying the costs of the Application. 

22.  The Debtor made the Application to set aside the SD but decided to withdraw it shortly before the substantive hearing.  Having decided to withdraw the Application thereby abandoning the opportunity to dispute the Unpaid Debt and the SD, it is not open to the Debtor to advance the same grounds raised in the Application at the petition stage.  The principle of res judicata and Turner principle apply equally to any new grounds which were not, but could have been, raised in the Application.  No reason, let alone exceptional circumstances, has been shown by the Debtor as to why he should be allowed to revive the grounds raised in the Application or to raise any new grounds in opposition to the Unpaid Debt.  For this reason alone, I hold that the Debtor has failed to discharge the burden of showing that there is any bona fide dispute on substantial grounds in respect of the Unpaid Debt.   

23.  For completeness, in case this matter goes further, I set out the reasons why I do not consider the grounds raised in Debtor 1^st and Debtor Aff are capable of constituting a bona fide dispute on substantial grounds in respect of the Unpaid Debt.

24.  First, the alleged “consensus” the Loans will only become due and payable on 17 November 2024 (§9(1) & §17(4) above) is not supported by any document and is incredible.  Even if established, it does not have the effect of varying the express term of the FA, which provides that the Loans were due and payable on 18 May 2022 (see §3 above). 

25.  Second, the mortgage over the Beijing Property (§9(1)-(2) & §17(7)) is provided by the mortgagor, while the Project is held by other companies.  Neither the Beijing Property nor the Project is a security within the meaning of rule 48(5)(c) of the Bankruptcy Rules (Cap. 6A) and, therefore, does not constitute a valid ground for setting aside the SD (Chan WS and Chan CNP and CC Bank[2021] HKCFI 143, §37).  Nor does it constitute a valid ground in opposition to the Petition (Re Kwok Chok Yee[2000] 2 HKC 543, 546B-C).  In any event, there is no evidence in support of the Debtor’s allegation that the Beijing Property is worth RMB 260 million or 280 million, still less that it can be realised for such amount.  Nor is there any evidence on the value of the Project or the financial position of the relevant companies which hold the Project. 

26.  Third, there is no merit in the arguments on jurisdiction (§9(3) & §17(5)-(6) above):

(1)  The starting point is that there is no dispute on the Unpaid Debt or the fact that the Debtor has provided the Guarantee as security for such Debt, both of which have been admitted in the Debtor’s “Notice to Oppose”.  The Debtor has not identified what dispute requires the determination by other forum, be it the PRC court or arbitration. 

(2)  The Guarantee upon which the Petitioner relies does not contain any exclusive jurisdiction clause in favour of the PRC court.  To the contrary, under cl.14 of the Guarantee, the Debtor agrees that the jurisdiction clause in favour of the PRC court is for the benefit of the Petitioner.  Cl.14(c) provides that the Debtor will not prevent the Petitioner from commencing legal proceedings in any other jurisdiction. Contractual estoppel principle operates to estop the Debtor from disputing the Petitioner’s right to commence legal proceedings in other jurisdiction including Hong Kong. 

(3)  The governing law of the Mortgage Agreement is irrelevant as the Petitioner does not rely on the Mortgage Agreement.   In any event, there is no evidence or suggestion that under the PRC law, the Debtor is not liable under the Guarantee or that the Unpaid Debt is not due and payable.   

(4)  The arbitration clause in the FA is also irrelevant.  The Petitioner relies on the Guarantee, not the FA, in seeking repayment of the Unpaid Debt.