RE CHU JIARU

HCB 8394/2020

[2023] HKCFI 721

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 8394 OF 2020

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D E C I S I O N

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Introduction

1.  By summons dated 13 September 2021, Chu Jiaru (“the Bankrupt”) applies for the annulment of a bankruptcy order dated 26 May 2021, as amended on 29 June 2021 (“the Order”).[1] The application is taken out under sections 33(1) and 98 of the Bankruptcy Ordinance (Cap 6) (“the BO”), though the real basis of the application is section 33(1) since it is that provision which governs the annulment of bankruptcy orders.  The Bankrupt contends that the Order ought not have been made, and alternatively, the provable debts and the expenses of the bankruptcy have all, since the making of the Order, been paid or secured.

2.  The application was listed for a 1-day hearing before me on 19 January 2022.  It was clear to me that this estimate was insufficient given the sheer amount of evidence placed before the court, and the comprehensiveness of the written submissions filed by both parties.  To avoid the inevitable adjournment of the application part-heard, I decided to re-fix the hearing for 2 days’ argument.

3.  Mr Manzoni SC made an oral application for a stay of the bankruptcy in light of the adjournment.  I declined it because, among other reasons, the trustees in bankruptcy were not before the court on that occasion.  I also allowed the Petitioner’s application of 10 January 2022 to adduce two affirmations,[2] with leave to the Bankrupt to file evidence in reply.  It seemed to me that this was the prudent course to take and any prejudice was limited in light of the adjournment.  The adjourned hearing took place on 21 & 22 June 2022.  The Petitioner was represented by Mr José-Antonio Maurellet SC leading Mr Cyrus Chua, and the Bankrupt instructed Mr Charlie Manzoni SC, leading Mr Danny Tang and Mr Keith Chan.  I am grateful to both sides for their assistance.

The Relevant Background

4.  These proceedings stem from the acquisition of Baccarat S.A. (“Baccarat”) by the PRC-based Fortune Fountain group of companies (“Fortune Fountain Group”) in 2017-2018. Baccarat is an internationally renowned crystalware manufacturer whose shares were listed for trading on Euronext Paris.  It has been described as a French luxury brand which is internationally recognised as “a leader in high-end and exclusive crystal products”.  It would not be unfair to say that what Baccarat is to crystal is similar to what Hermes is to luxury leather handbags.

5.  The Bankrupt and her family were the indirect beneficial owners of the Fortune Fountain Group, and she was the Chief Executive of Fortune Fountain Capital Limited (“FFCL”), a group holding company.  FFCL owned Gainfull Wealth Management Co., Limited (“Gainfull”). FFCL and Gainfull collectively held a majority (70%) interest in New Anchor Limited (“New Anchor”).  New Anchor owned Fortune Fountain Holding Group Co. Limited (“FFH”), which in turn owned Fortune Legend Limited (“FLL”).

6.  FLL is at the centre of this dispute, and it is a company incorporated in Luxembourg and was used by the Fortune Fountain Group as a special purpose corporate vehicle to acquire the shares in Baccarat.  It is said that the Baccarat acquisition was its first offshore investment.  FLL’s sole asset of note was its shareholding in Baccarat, which eventually exceeded 97% by June 2018.

7.  On 19 October 2017, FLL entered into an agreement to purchase an 88.8% stake in Baccarat for about €164 million.  By June 2018, FLL had acquired more than 97% of the shares in Baccarat.  Originally, the Group financed the acquisition through a facility of €71 million with FLL as borrower and China Minsheng Bank as lender.  According to the Bankrupt, the Group could no longer rely on onshore RMB loans due to foreign exchange issues, and had to refinance the acquisition with offshore funding instead.

8.  On 12 June 2018, Tor Asia Credit Master Fund LP (“Tor”), as lender, entered into a €22,500,000 facility agreement with Gainfull Wealth Management Co Limited, as borrower (“the 2018 Facility Agreement”) to provide a bridging loan for the purposes of the Baccarat acquisition.  This was secured by various forms of security, including a share charge over shares in Silver Ocean Limited (“Silver Ocean”), a company holding a resort property on land in St Kitts and Nevis.  The Bankrupt also gave a personal guarantee dated 27 June 2018 as further security in support of this facility (“the 2018 Guarantee”).

9.  On 14 October 2019, a syndicate of lenders (including Tor) (“the Lenders”), entered into a facility agreement with FLL as borrower (“the 2019 Facility Agreement”), and with the Petitioner as security agent.  The original principal amount of the facility was €75 million, which was later increased to €76 million on 29 October 2019.  The loan advanced under the 2019 Facility Agreement was secured by various forms of security, including the following:-

(1)  a pledge by FFH (“the FLL Pledge”) of its entire shareholding in FLL (“the FLL Shares”);

(2)  a pledge of receivables under certain inter-company loan agreements, including an approximately €103 million loan (“NAL Loan”) between NAL as lender and FLL as borrower (“the Receivables Pledge”);

(3)  a pledge of all of FLL’s shares in Baccarat;

(4)  a personal guarantee given by the Bankrupt (“the Guarantee”); and

(5)  a mortgage over the Bankrupt’s Hong Kong flat at the Argenta (“Argenta Property”) on Seymour Road (“the Argenta Mortgage”).

10.  Soon after the 2019 Facility Agreement was entered into, FLL defaulted and did not make the required repayments.  Following defaults on 31 January 2020 and 29 April 2020, the Petitioner issued an acceleration notice for the entire outstanding sum due under the 2019 Facility Agreement on 29 May 2020.  Although the Bankrupt describes these as “alleged defaults”, there does not appear to be any real dispute that FLL was in default under the 2019 Facility Agreement, or that the acceleration notice was validly issued.

11.  The Petitioner then took steps to enforce its security, including by way of appropriating the FLL Shares and the NAL loan and selling the Argenta Property.  To a large extent, the Bankrupt’s case focuses on the appropriations of the FLL Shares and the NAL loan, and the valuations attached to them, to support her contention that the debt under the 2019 Facility Agreement no longer existed, or was offset, by reason of the assets appropriated.

The Appropriation of the FLL Shares and NAL Loan

12.  On 23 December 2020, the Petitioner appropriated the NAL Loan and the FLL Shares under the Receivables Pledge and FLL Pledge, respectively.  Enforcement notices were sent on the same day. 

13.  Clause 6.1(a) of the FLL Pledge sets out the agreed valuation methodology with respect to realisation of the pledged assets, and the provision in the Receivables Pledge is materially identical.

14.  It states as follows:

“6.1 Realisation of the Pledged Assets

Upon the occurrence of an Enforcement Event, the Security Agent, without any demand, advertisement or notice of any kind, may realise the Pledged Assets or any part thereof, in accordance with applicable provisions of Luxembourg law, with the right for the Security Agent:

(a) to appropriate any of the Pledged Assets at a price to be determined by an independent external auditor (réviseur d’enterprises) designated by the Security Agent in accordance with the fair value of these Pledged Assets, using a standard market multi criteria approach (as per the reasonable discretion of the external auditor) combining market multiples, book value, discounted cash flow or other valuation methods generally accepted, if any, for companies in the same business sector as the Company and acting in a reasonable manner. For the avoidance of doubt, such valuation can be carried out before or after the date of appropriation in which case the fair value of the Pledged Assets will be valued as at the date of the appropriation. The Security Agent may elect, in its sole discretion to appoint or nominate another person to which the right to appropriate the Pledged Assets shall be transferred in lieu of the Security Agent, it being understood that such appointment or nomination shall not affect the Security Agent’s rights and obligations against the Pledgor …” (emphasis added).

15.  Grant Thornton was appointed as the independent external auditor to value the NAL Loan and FLL Shares.  Grant Thornton issued two valuation reports, comprising (i) a valuation report dated 21 December 2020 (“1^st GT Report”); and (ii) a report dated 29 October 2021 (“2^nd GT Report”). The two reports are nearly identical, except that the valuation dates adopted were different.  There is a dispute over the actual valuation date adopted by Grant Thornton in the 1^st GT Report.  The Petitioner says that it was 11 December 2020, while the Bankrupt says it was 26 October 2020.  I will address this later in this judgment.  Be that as it may, the purpose of the 2^nd GT Report was to confirm that the valuation contained in the 1^st GT Report was not materially different as at the date of enforcement by the Petitioner.

16.  After the appropriation of the FLL Shares, the Lenders held, through the Petitioner as security agent, 100% of the shareholding in FLL, and through FLL, 97.1% of the issued shares in Baccarat.  On 4 June 2021, the Lenders procured FLL to propose a public offer for all of the remaining publicly traded shares in Baccarat, followed by a squeeze-out procedure.  By August 2021, the remaining shares in Baccarat were acquired resulting in its privatization.  Baccarat was delisted from Euronext on 11 August 2021.

The GT Valuation Reports

17.  The purpose of the GT Reports was to provide an opinion on the market valuation of the FLL Shares and the NAL Loan, and it was acknowledged that the principal assets held by FLL consisted of its 97% shareholding in Baccarat and certain receivables.

18.  The GT Reports adopted the definition of “market value” stated by the International Valuation Standards Council as follows:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.

19.  There is considerable detail contained in the GT Reports, and at the hearing I have been greatly assisted by both leading counsel in reviewing them. In the section below, I will set out by way of broad overview the essential conclusions, but without rehearsing the granular detail and calculations used to support the various valuations.

20.  In summary, the GT Reports concluded that:

(1)  the market value of the FLL shares as at the date of valuation was zero;

(2)  the market value of the Baccarat shares held by FLL (97%) was in the range of approximately €107.8 million to €128.2 million, with a midpoint value of around €118 million; and

(3)  the value of the inter-company loan from NAL to FLL was in the range of €27 million to €47 million, with a midpoint value of around €37 million.

21.  On the valuation of the FLL Shares, Grant Thornton concluded that:[3]

(1)  FLL had total assets of around €135.54 million.  These assets primarily consisted of its shareholding in Baccarat (around €118 million) and receivables from Baccarat (around €17.4 million).

(2)  FLL had total non-current liabilities of around €197 million.  These consisted of (i) €93.7 million as a “Senior Unitranche Loan”, being the outstanding amount owed to the Lenders; and (ii) €103 million as the “New Anchor Loan”.  FLL had other current liabilities of around €1.36m.

(3)  Based on the above figures, GT concluded that FLL had a negative asset value of around €62.8m.  Therefore, the equity value was nil.

22.  The Bankrupt disputes the FLL share valuation on the basis, among other things, that it was wrong to include the €93.7 million in the calculation of FLL’s liabilities.  This is because the purpose of the appropriation of the FLL Shares was to reduce or extinguish the amounts owed to the Lenders.  The Bankrupt argued that this was “double-counting”, and it was impermissible for the Lenders to acquire the FLL shares and thereby gaining control of the valuable Baccarat shares, while at the same time contending that the amounts under the 2019 Facility Agreement, which the Bankrupt guaranteed, were still due.

23.  On the valuation of the NAL Loan, Grant Thornton concluded that its value was around €37 million, despite its book value of €103 million.  Grant Thornton’s valuation of the NAL Loan was on the basis of the “residual amount remaining after repayment of the senior unitranche loan and costs of liquidation”.  In other words, the valuation was conducted on the basis that FLL would enter into liquidation.  The approach adopted was to take the total realisble assets of FLL, and then to deduct the payment of costs of liquidation and the repayment of €93.7 million to the Lenders.  The NAL Loan was then valued on the basis of what was left out of the total realisbale assets after those payments.

24.  The Bankrupt also disputes the NAL Loan valuation on the basis that Grant Thornton took an inconsistent approach. On the one hand, in the valuation of the FLL Shares, the NAL Loan was valued at book value, €103 million.  This had the effect of significantly reducing the value of the FLL shares that were appropriated.  On the other hand, when valuing the NAL Loan itself, this was calculated on a liquidation basis which was wholly unreal since Baccarat had not been liquidated and was in healthy operation.  The Bankrupt argues that the reason why this valuation approach was adopted was to drive down the value of the NAL Loan appropriated under the Receivables Pledge.

25.  On the valuation of Baccarat, Grant Thornton adopted a “market approach” using EV/Revenue and EV/EBITDA multiples from a selection of comparable companies in luxury items.  Their approach was to perform a valuation as at 1 January 2020, prior to the impact of COVID-19 on the global luxury market, and then adjusting the valuation for the impact of current market conditions. At the same time, it considered using the prevailing trading price of Baccarat shares on Euronext as the basis for valuation, but noted that (i) only 3% of its shares were in the public float and thus available for trading; and (ii) the volatility in the share price in recent months meant that it was not a reliable indicator of value.

Enforcement Against The Argenta Property

26.  Meanwhile, steps were taken to enforce the security which the Bankrupt gave with respect to the Argenta Property. On 14 February 2020, the Petitioner appointed receivers over the Argenta Property and demanded that the Bankrupt deliver vacant possession.  This request was not complied with by the Bankrupt.

27.  On 16 March 2020, the Petitioner commenced proceedings in HCMP 292/2020 (“the Order 88 Proceedings”) to obtain possession of the Argenta Property.  The Bankrupt contested the Order 88 Proceedings and was represented by her solicitors in Hong Kong, Messrs. Cham & Co.  On 1 December 2020, the court ordered the Bankrupt to deliver vacant possession of the Argenta Property.  A Notice of Appeal was filed by her solicitors, but the appeal was not pursued.

28.  Vacant possession was eventually obtained on 5 March 2021 with the assistance of the court bailiff.  The Argenta Property was eventually sold by the Petitioner, and the proceeds of sale were applied in partial satisfaction of the facility debt to the extent of around HK$29.99 million.

The Bankruptcy Proceedings

29.  By a statutory demand dated 29 May 2020, the Petitioner demanded that the Bankrupt made immediate repayment of €77,463,186.83 (“the Statutory Demand”).  The Statutory Demand stated that the debt demanded arose under the Guarantee, and that a default had arisen under the 2019 Facility Agreement in respect of which an acceleration notice was issued to FLL.  According to Annex 1 of the Statutory Demand, as at 18 May 2020 there was a total of €84,791,586.83 outstanding under the 2019 Facility Agreement.  The Statutory Demand gave credit for the value of the Argenta Property secured by the Argenta Mortgage at €7,328,400, based on a value of HK$62 million.  At the time of the Statutory Demand, the Argenta Property had yet to be sold.

30.  Between May and June 2020, the Petitioner took a number of steps to effect service of the Statutory Demand on the Bankrupt.  These comprised:

(1)  attempts at personal service at the Argenta Property and at 29/F Infinitus Plaza, 199 Des Voeux Road Central (“the Infinitus Address”) - the Bankrupt had identified these to be her addresses in the Argenta Mortgage and the Guarantee, respectively.

(2)  seeking to effect service through Messrs. Cham & Co (solicitors on record for the Bankrupt in the Order 88 Proceedings) but they stated that they had no instructions to accept service.

(3)  e-mailing the Statutory Demand to the Bankrupt’s e-mail address at jiaru_chu@fortunefountaincapital.com.

(4)  sending the Statutory Demand by courier to the Bankrupt’s address at 10 South Eaton Place, London (“London Property”).

(5)  advertisement in Hong Kong in the South China Morning Post.

31.  On 17 December 2020, the Petitioner presented a bankruptcy petition based on the Bankrupt’s failure to satisfy the Statutory Demand within 21 days of its service (“the Petition”). The Petitioner attempted to serve the Petition on the Bankrupt by way of the following methods:

(1)  personal service at the Argenta Property and Infinitus Address.

(2)  e-mailing the Petition to  jiaru_chu@fortunefountaincapital.com and to Mr Jack Sun’s e-mail address at jack_sun@ffegc.co.uk.[4]

(3)  sending the Petition by courier to the London Property – the envelope containing the Petitioner was marked as received by one “Matt C”.

32.  On 4 May 2021, the Petitioner obtained a substituted service order with respect to the Petition (“Substituted Service Order”) which directed that the Petition be served by post to Cham & Co’s offices, the Infinitus Address and the Argenta Property.  After service was duly effected under the Substituted Service Order, the court made the bankruptcy order on 26 May 2021.  This went unopposed given that the Bankrupt was absent from the court hearing.

33.  By a resolution passed on 8 July 2021 at a general meeting of creditors, Chow Wai Shing Daniel and Roderick John Sutton (both of FTI Consulting (Hong Kong) Limited) (“the Trustees”) were appointed as the joint and several trustees of the estate of the Bankrupt.  The Trustees have filed an Amended Report to Court dated 14 January 2022 (“Amended Report”) and a Second Report dated 14 June 2022 (“Second Report”) to inform the court of matters which have arisen in bankruptcy since their appointment.

34.  On 12 July 2021, the Trustees commenced recognition proceedings in the United Kingdom, seeking recognition of the Order.  The recognition application was granted by ICC Judge Prentis on 14 September 2021. Among other things, the Amended Report gives an account of the various attempts to secure the Bankrupt’s co-operation and obtain information from her in the United Kingdom.

Relevant Legal Principles on An Annulment Application

35.  Section 33 of the BO, which is identical to section 282 of the UK Insolvency Act 1986, provides as follows:

“(1) The Court may annul a bankruptcy order if it at any time appears to the court that –

(a) on any grounds existing at the time the order was made, the order ought not to have been made; or

(b) to the extent required by the rules, the provable debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured to the satisfaction of the court”.

36.  Section 98(1) of the BO provides:

“the court … may review, rescind or vary any order made by it … under its bankruptcy jurisdiction”.

37.  This is an application for the annulment of a bankruptcy order which is governed by section 33; an application for recission is separately governed by section 98.  There is an important difference between the two types of orders since, among other things, “an annulment will treat the bankruptcy as never having been made, while recission only terminates the bankruptcy”: Re Cheung Hing Chik (Debtor) [2021] 3 HKLRD 541 at [7.4] per Yuen JA, with whom Kwan VP and Au JA agreed.  Under section 33(1)(a), the focus is with respect to the position existing at the time when the bankruptcy order was made and whether it ought to have been at that time.  There is no similar limitation on an application for recission of a bankruptcy order.

38.  On an application to annul under section 33(1)(a), the court must first be satisfied that, at the time when the bankruptcy order was made, there are grounds to demonstrate it ought not to have been made.  If this is established, the court will then proceed to decide whether it should exercise its discretion to annul the bankruptcy order.  The leading case in Hong Kong on the governing legal principles on an application for an annulment of a bankruptcy order is Kam Hung Cheung v Bank of China (Hong Kong) Ltd. [2009] 3 HKLRD 597. At [11], the Court of Appeal adopted the following summary of law articulated by Chu J at first instance.[5]

“22. The relevant decided cases show that, in considering whether to exercise the power under s.33(1)(a), the court should first look at whether there were any grounds on which a bankruptcy order ought not to have been made at the material time when it was made. If the court does not think that such grounds existed, it cannot invoke s.33(1)(a) to annul the bankruptcy order. If the court thinks that such grounds existed, it still has to consider whether it should exercise its discretion to annul the bankruptcy order: see Society of Lloyds v Waters [2001] BPIR 698 at p.704G-H, and also Artman v Artman [1996] BPIR 511, at pp.513-514, and Askew v Peter Dominic Ltd [1997] BPIR 163, at p.164.

23. In exercising the discretion under s.33(1), the court has to carefully consider the interests of the creditor, the debtor and the public, bearing in mind that a bankruptcy order is to be annulled only under exceptional circumstances.

24. Furthermore, the person applying to annual a bankruptcy order bears the burden of proving that when the order was made there were grounds on which the order ought not to have been made: see OBE Insurance (Hong Kong) Ltd v Chan Wai Man William (unrep., HCB 187/2000).

25. And if a debtor disputes the debt on which a bankruptcy order is based, he must adduce cogent prima facie evidence to show that the dispute is supported by genuine and cogent reasons. Where the debt which forms the basis of a bankruptcy order is a judgment debt, the court will normally not reconsider any dispute on the debt: see paragraph 24 of the judgment in Re Kwong Ngai Ping (unrep., HCB 9447/2003).

26. In addition, where a bankruptcy order was made in the absence of the debtor, or where the underlying judgment in favour of the creditor was obtained by reason of the debtor's failure to give notice of intention to defend, then the debtor must provide reasonable and credible explanations for his absence or failure to give Notice of Intention to Defend: Re Luk Tsun Yin [2000] 1 HKC 774, at p.777, and Re Ng Chi Wo (unrep., HCB 2819/2003)”.

39.  The first question, therefore, is to determine whether there are grounds upon which the bankruptcy order “ought not to have been made”.  There is no statutory definition of these circumstances, but case law is useful to shed light to illustrate the types of situations which may qualify.  For example, it may transpire that the court had no jurisdiction to make the bankruptcy order in the first place.  An annulment may also be granted where the debt on which the petition is founded did not exist, or where the petition involved an abuse of process: JSC Bank of Moscow v Kekhman [2015] 1 WLR 3737 at [71].  Moreover, where it can be demonstrated by evidence subsequent to the bankruptcy order that the debts on which the petition was founded did not exist, then it would be right to say that there was a ground existing at the time the order was made on which it should not have been made: Royal Bank of Scotland v Farley [1996] BPIR 638 at 639H-640A per Hoffmann LJ.

40.  In the present case, it is not in dispute that one of the situations where an “order ought not to have been made” is where there is a bona fide dispute on substantial grounds in relation to the debt which forms the basis of the bankruptcy order.  As is well-established, the court will require that the debtor to adduce sufficiently precise factual evidence so as to satisfy the court that he has a bona fide dispute on substantial grounds: Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at [21] & [27] per Kwan JA, with whom Yuen JA and Au J agreed.  It was not suggested that the standard of a bona fide dispute on substantial grounds should be replaced by a higher one for the purposes of an annulment application.

41.  In other words, the standard should be the same on an application to set aside a statutory demand or on the hearing of a petition on the one hand, and on an application for annulment of a bankruptcy order on the other.  In my view, this is correct because if there was a bona fide dispute on substantial grounds of the underlying debt at the time when the bankruptcy order was made, the order should not have been made in the first place.  This is consistent with the approach adopted in England in a number of cases decided under section 282 of the UK Insolvency Act 1986: Guinan III v Caldwell Associates Ltd [2004] EWHC 3348 (Ch) at [16] per Neuberger J; Woolsey v Payne at [2015] EWHC 968 (Ch) at [14-25]; Dusoruth v Orca Finance UK Limited (in liq) [2022] EWHC 2346 (Ch) at [31] per ICC Judge Mullen.

42.  I have borne in mind that bankruptcy proceedings are summary in nature and are not intended to be used for the purpose of debt collection.  The jurisdiction to make a bankruptcy order will only be exercised in very clear cases, and if the court is satisfied that there is a bona fide dispute on the debt, the court will not usurp the function of a civil court and decide the disputes between the parties: Re Leung Chern Jiunn at [20].

43.  The use of the word “may” in section 33(1) makes it clear that the court’s power to annul is discretionary. Accordingly, I wish to stress that it is not the case that once a debtor demonstrates the existence of a bona fide dispute that she is automatically entitled to an annulment of the bankruptcy order.

44.  The debtor must still persuade the court to exercise its discretion in her favour under section 33(1)(a).  The court is not bound to set aside a bankruptcy petition or order especially where the creditor has acted reasonably, and the debtor has failed to raise defences which were open to him at an earlier stage: Owo-Samson v Barclays Bank Plc (No 1) & Anor [2003] BPIR 1373 at [35] per Carnwarth LJ.  Moreover, as stated in Kam Hung Cheung, in exercising the discretion under section 33(1)(a), the court must carefully consider the interests of the creditor, the debtor and the public, bearing in mind that a bankruptcy order is to be annulled only in exceptional circumstances.

45.  Kam Hung Cheung also states that where a bankruptcy order was made in the absence of the debtor, or where the underlying judgment in favour of the creditor was obtained by reason of the debtor's failure to give notice of intention to defend, then the debtor must provide reasonable and credible explanations for his absence or failure to give notice of intention to defend.  At the same time, however, where a bankruptcy order is made in the absence of the debtor, and it is demonstrated that the court did not have jurisdiction to make the bankruptcy order in the first place, there is no inflexible rule requiring the debtor to provide a reasonable or credible explanation for his absence at the hearing: see Re Wang Huimin [2021] HKCFI 3472 at [59-65] per Ng J; Michael Ma Wing v Fong Sze Ming [1988] 1 HKLR 354 at 364E-G per Cons VP.

The Bankrupt’s Case on the Debt

46.  On behalf of the Bankrupt, Mr Manzoni SC submits that there is a bona fide dispute on substantial grounds as to the existence of the debt as at the time of the Order such that the Order ought not to have been made within the meaning of section 33(1)(a). This is because the FLL Shares and the NAL Loan were substantially undervalued by the Petitioner for the purposes of their appropriation, and this was contrary to Luxembourg Law.  On a proper valuation, the value of the appropriated assets would have been more than sufficient to offset the entire indebtedness under the 2019 Facility Agreement.

47.  The Bankrupt submits that when enforcing the FLL Pledge, the Petitioner purported to appropriate the FLL Shares at a value of zero, notwithstanding that Baccarat was at all material times a profitable and immensely valuable company.  The nil valuation of the FLL Shares was “absurd and wrong” because it took into account FLL’s indebtedness under the 2019 Facility Agreement, when it was that very debt which was to be reduced or extinguished by the appropriation of the FLL Shares.  Moreover, the Bankrupt says that when enforcing the Receivables Pledge, the Petitioner purported to appropriate the NAL Loan at a value of €37,248,354, which was based on improper valuation methods.  The result is that the valuation is significantly depressed, and inconsistent with the full book value of €103.3 million given to the NAL Loan when valuing the FLL Shares.

48.  The FLL and Receivables Pledges were governed by Luxembourg law.  The Bankrupt submits that the crucial question is whether the valuation of the appropriated assets complied with the terms of the FLL and Receivables Pledges and general principles of Luxembourg law.  Had they been properly valued, the securities appropriated would have been more than adequate to repay the outstanding indebtedness of €93.7 million under the 2019 Facility Agreement. Accordingly, there was no debt owed at the time when the Order was made, and it should not have been made in the first place.

49.  The Bankrupt contends that there was a breach of Clause 6.1(a) because the valuations were conducted on the wrong date, and in valuing the assets of FLL, Grant Thornton only used one valuation method.  Questions were also raised as to the suitability of the comparables chosen in the valuation exercise.

50.  The Bankrupt also complained that the Petitioner had consistently refused to provide the Valuation Reports to the Bankrupt, and that it was only in November 2021 when the evidence was filed in opposition by the Petitioner.

51.  One of the major submissions of the Bankrupt is that the €93.7 million liability on FLL’s balance sheet should have been disregarded for the purposes of valuing the FLL shares.  This is because the valuation was performed for the appropriation of the FLL Shares to pay off the debt owed by FLL under a loan secured on those very shares, such that it was inappropriate for the same debt to be taken into account in the valuation of the FLL shares.  The Petitioner could not appropriate the FLL Shares other than for the purpose of applying it to reduce or discharge the debt owed by FLL to the Lenders under the 2019 Facility Agreement.

52.  On questions of Luxembourg law, the Petitioner relies on three expert reports prepared by Mr Frederic Lemoine and Mr Alex Schmitt of Bonn & Schmitt respectively dated 10 September 2021, 28 December 2021 and 28 March 2022.  The Petitioner also produced a Luxembourg valuation report prepared by Moore Audit SA dated 28 December 2021.

The Petitioner’s Case on the Debt

53.  The Petitioner contends that the Bankrupt’s case does not withstand scrutiny because FLL was cashflow and balance sheet insolvent, with net liabilities exceeding €62.8 million.  In no market would a purchaser agree to pay a non-nominal price for the FLL shares. The security which was appropriated were the FLL Shares, and not the Baccarat Shares, and it is wrong to conflate the two for the purposes of valuation.  The 2019 Facility Agreement was a €76 million loan to FLL that has not been repaid, and therefore, when valuing the FLL shares that debt must be accounted for in considering the fair value of those shares.

54.  In relation to the valuation of the NAL Loan, the Petitioner says that there is nothing wrong with Grant Thornton’s valuation because it is standard practice to value an insolvent company based on the realisable value of its assets and liabilities in a liquidation scenario.

55.  The Petitioner also submits that the Bankrupt’s reliance on Luxembourg law is “difficult to understand” because the Guarantee is governed by Hong Kong law, and whether the FLL Shares were undervalued is to be determined by Hong Kong law.  Under Hong Kong law, a creditor owes an obligation to the surety to realise securities held at market value: The China and South Sea Bank v Tan Soon-Gin [1990] 1 HKLR 546, 549I per Lord Templeman.  This duty is of an equitable nature arising from the creditor-surety relationship, and may be modified by the contract between the creditor and the surety.

56.  The Petitioner submits that the Bankrupt’s case is not sustainable because the Guarantee is silent on the duty of the Petitioner to value the FLL Shares and the NAL Loan.  On the other hand, the FLL and Receivables Pledge – which contain Clause 6.1(a) and are governed by Luxembourg Law does not apply to the Bankrupt since she is not a party to those agreements.  The duties owed by the Petitioner under those instruments under Clause 6.1(a) are, at most, owed to FFH and New Anchor, and the Bankrupt has no entitlement to complain as a non-party.

57.  The Petitioner also points out that the burden is on the Bankrupt to adduce evidence to demonstrate what ought to be the market value of the FLL Shares and the NAL Loan, and that she has failed to discharge this burden: Re Chiu Chi Hong [2021] 2 HKC 50 at [29] per DHCJ William Wong SC; China Merchants Bank v Huang Jincan (HCA 2268/2002, 23 June 2003) at [17-21].  This should be considered together with the general burden on a debtor to adduce sufficiently precise factual evidence where he seeks to demonstrate a bona fide dispute of the underlying debt in a bankruptcy context.  The Petitioner points to the lack of expert evidence from the Bankrupt as to how the security should be valued.

58.  On questions of Luxembourg law, in answer to the reports prepared by Bonn & Schmitt, the Petitioner relies on the affirmations prepared by Ms Armel Waisse of Molitor dated 2 November 2021 and 10 January 2022.

Whether Bona Fide Dispute on Substantial Grounds

59.  Having set out the applicable legal principles, and the respective cases of the parties in broad outline, I now turn to consider the question of whether the Bankrupt has established a bona fide dispute on substantial grounds of the existence of the debt at the time when the Order was made such as to bring the case with the scope of section 33(1)(a).

60.  If I do not accept that a bona fide dispute has been established, it is unnecessary to consider the question of discretion.  However, if I am satisfied that a bona fide dispute has been established, it would be inappropriate for me to usurp the role of a civil court (either in Hong Kong or in a foreign jurisdiction) and to decide the dispute between the parties.  It will then become necessary for me to consider whether I should exercise my discretion under section 33 to grant the order sought.

61.  I need to decide whether there is a sufficiently arguable case that the appropriations of the FLL Shares and the NAL by the Petitioner were at an undervalue to support a reasonable argument that they ought to have been sufficient to offset the amount owing by FLL under the 2019 Facility Agreement in respect of which the Bankrupt has given a guarantee and which forms the underlying the basis of the Petition upon which the Order was granted.  If so, I also need to consider what (if any) recourse the Bankrupt would have given that she is a non-party to the FLL and Receivables Pledge which are governed by Luxembourg law.

62.  Before turning to the main points made by Mr Manzoni SC, it is helpful to dispose of a number of points which in my view do not amount to sufficient grounds to dispute the underlying debt.  These are:

(1)  the Bankrupt’s argument that the 1^st GT Report used the incorrect valuation date of 26 October 2020;

(2)  the comparables used by Grant Thornton were unsuitable; and

(3)  Grant Thornton acted in breach of Clause 6.1(a) with respect to its valuation of Baccarat because it only used a market approach, without using other valuation methods.

63.  The Bankrupt contended that Grant Thornton valued the FLL Shares and the NAL Loan at the wrong date, in contravention of Clause 6.1(a) which requires a valuation of the pledged assets “as at the date of appropriation”.  The argument runs as follows.  In the 1^st GT Report at page 6, it is stated that the valuation was conducted “as at 26 October 2020 (the Valuation Date)”.  The 2^nd GT Report at page 6 states that the scope of this opinion was to confirm that the value of the assets as at the enforcement dates was “not materially different to the Original Valuation as at 11 December 2020 as set out in the [1^st GT Report]”.  However, the Bankrupt contends that the 1^st GT Report never performed a valuation as at 11 December 2020 given that the valuation was stated to be conducted “as at 26 October 2020”.

64.  The Petitioner submits that, when properly read in context, it is clear that the reference to 26 October 2020 is a typographical error.  I agree.  The Glossary of Terms in the 1^st GT Report at page 38 defines the “Valuation Date” to be 11 December 2020.  In addition, there are references to “market cap” numbers as at 11 December 2020 in the 1^st GT Report which are only explicable if that were the valuation date used.  The 2^nd GT Report also says that the previous valuation was conducted as at 11 December 2020.  Overall, while it is unfortunate that such an error was made in the 1^st GT Report, I am unable to accept the submission that valuation conducted in the 1^st GT Report was, as a matter of fact, done as at 26 October 2020, as alleged by the Bankrupt.

65.  Next, the Bankrupt also contended that the comparables used by Grant Thornton were completely unsuitable.  Out of the 16 comparable companies, there was only 1 company with a ‘high’ comparability, Lalique.  Since Lalique had a significantly higher EV/EBITDA ratio (36.2x) than the ratio adopted by Grant Thornton for Baccarat (12.8%), the result was that Baccarat’s valuation was significantly depressed.  In my view, in addition to the difficulties inherent in engaging on such an exercise in an application such as the present, it is unnecessary to delve into the question of whether the comparables used by Grant Thornton were appropriate because there was no competing valuation evidence adduced by the Bankrupt to show how the valuations would be different if ‘appropriate’ comparables were used.  Indeed, in the Moore opinion produced by the Bankrupt, it was fairly accepted that without valuation work carried out by them, they could not say whether the value for Baccarat would have been greater or less. This is significant because the burden rests on the Bankrupt to demonstrate, with credible supporting evidence, the extent of the under-valuation, if any.

66.  The Bankrupt complains that Grant Thornton had acted contrary to the express requirement under Clause 6.1(a) by failing to apply a “standard multi-criteria approach … combining market multiples, book value, discounted cash flow or other valuation methods generally accepted”.  This is because Grant Thornton only used a market approach based on comparables in valuing the Baccarat shares, without using other valuation methods.  However, the problem with this submission is that there is no expert evidence adduced by the Bankrupt to suggest what would be the appropriate valuation of the Baccarat shares would be if an additional valuation method was used.

67.  In any event, I agree with the Petitioner that Clause 6.1(a) expressly envisages that the external auditor will exercise “reasonable discretion” and act in a “reasonable manner” in the choice of valuation method of the pledged assets.  In my view, it would be illogical and unrealistic to compel the external auditor to adopt multiple valuation methods where, as here, the auditor formed the view that a particular valuation method was the appropriate one – provided, of course, that the view was reasonably held.  I do not consider that this is what Clause 6.1(a) requires by using the phrase “standard multi criteria approach”.  In my judgment, what this “approach” requires the external auditor to do is to evaluate and assess, amongst various valuation methods available, and form a view as to which method or methods should be applied in the auditor’s reasonable discretion.

68.  I now turn to what I consider to be the crux of the Bankrupt’s case regarding the valuation of the FLL Shares and the NAL Loan.

69.  The Bankrupt’s case is that the €93.7 million figure on FLL’s balance sheet ought to have been disregarded for the purposes of valuing FLL shares.  Mr Manzoni SC submitted that the failure to do so was an example of “financial engineering”, and that it was unfair that the Lenders were able to seize control of Baccarat while at the same time seeking to recover the outstanding amount under the 2019 Facility Agreement against the Bankrupt.

70.  I appreciate Mr Maurellet SC’s argument that it is important not to conflate the valuation of the FLL Shares with the value of the Baccarat shares.  It was the FLL Shares that were the subject of appropriation, and it was clearly balance sheet insolvent, taking into account the €93.7 million figure in FLL’s net liabilities.  I understand the argument that no market participant would purchase the FLL Shares knowing that it had such a significant negative asset position.  As a general proposition, I have no problem with those contentions in the abstract. However, in my mind, the context of the valuation is important.  It may be open to the Bankrupt to fairly call into question whether it was appropriate for Grant Thornton to have taken into account the €93.7 million figure in their valuation of the FLL Shares in the context of an appropriation of security which was for the purpose of reducing or extinguishing the amount owing under the 2019 Facility Agreement.  Taking a step back, and viewing the matter with commercial sense and reality, one should not lose sight of the fact that, in reality, the Lenders did obtain control of the 97% interest in Baccarat by virtue of taking over FLL.  On any metric, that shareholding was extremely valuable at the time of appropriation.

71.  The issue of whether the valuation was properly conducted by Grant Thornton in conformity of Clause 6.1(a) is one that arises under the FLL Pledge which is governed by Luxembourg law.  There was evidence from Bonn & Schmitt to suggest that under Luxembourg law the valuation method should depend on the purpose for which the valuation of the collateral is performed.  The following is stated [4.4.4] of their Report dated 10 September 2021:

“Regarding more particularly the question as to whether the valuer will need to take into account the fact that the valuation is made in connection with an appropriation process of the collateral as the result of which the outstanding debt will get discharged or reduced by the value of the collateral and that for such reason such debt should not be counted when making the valuation, we take the view this should be the case on the basis of the principle of the ancillary nature of the pledge”.

72.  Bonn & Schmitt explain that the “ancillary nature of the pledge” is a concept known in Luxembourg law that the pledge is a security interest ancillary to the secured debt as a consequence of which the pledge is meant to secure the payment of the debt due to the creditor, but only the amount due.  In other words, the pledge is not meant to be used as a means for the creditor to receive more than what is actually to do him: [4.2] of the Report.

73.  At [4.4.4] of the Report, the following is stated:

“ … However, in the current case, the valuation was made for the purpose of appropriating the FLL shares as security for a debt on the books of FLL owed to the persons who were proceeding with the appropriation. Therefore, the debt would ex hypohesi reduced or discharged by the appropriation of the security and the outstanding amount of such debt should not have been taken into account.”

74.  I understand that there is no direct case law from Luxembourg which has addressed this issue, and that Bonn & Schmitt’s opinion is seriously disputed by the Petitioner’s expert, Ms Waisse.  One of her major points was that Clause 6.1(a) of the FLL Pledge does not require or allow Grant Thornton to take into account the intention of the appropriating party.  She also says that there is no express provision in the FLL Pledge requiring the exclusion of the value of the secured debt from the value of the pledged assets.   In addition, her opinion is that the principle according to which a pledge is a security interest ancillary to the financial obligations that it secures was not violated in this case.

75.  Moreover, at [38] of Ms Waisse’s 1^st Affirmation, she states:

“The assets pledged under the Share Pledge Agreement being mainly composed of shares in a company, their “fair value” is generally determined in consideration of this separate legal entity taken as a whole, including all its assets and liabilities. In practice, as Clause 6.1(a) of the Share Pledge Agreement does not provide otherwise, the Secured Liabilities have to be taken into account, which is customary in valuations performed in relation to the enforcement of pledges in Luxembourg”.

76.  In my evaluation, on the basis of the evidence before me, I find that there is a reasonable argument open to the Bankrupt that the FLL Shares were undervalued by reason of the inclusion of the €93.7 figure in FLL’s net liabilities.  Once again, I put it no higher than this because I appreciate that this is in ‘uncharted waters’ insofar as Luxembourg law is concerned and there is the competing opinion from Ms Waisse. Whether the valuation so performed by Grant Thornton was in conformity of Clause 6.1(a) does, in my mind, turn on disputed issues of Luxembourg law which are inappropriate for summary determination in Hong Kong.

77.  I next turn to the valuation of the NAL Loan.  Mr Manzoni SC’s main point was the inconsistency in Grant Thornton’s approach.  On the one hand, in the valuation of the FLL Shares, the NAL Loan was valued at its full book value of €103.3 million.[6] This had the effect of significantly driving down the value of the FLL Shares appropriated by using the full book value of the NAL Loan.  On the other hand, when it came to the valuation of the NAL Loan for the purpose of its own appropriation, Grant Thornton gave only a value of €37.2 million.  Instead of adopting its book value, Grant Thornton conducted its valuation on the basis of the residual amount recoverable after full repayment of the €93.7 million and the costs of liquidation.  In other words, this was calculated on a liquidation basis.

78.  This submission was supported by the view of Bonn & Schmitt who stated at [25(iii)] of their report dated 28 December 2021:

“The IC Loan was valued on the assumption that Fortune Legend would be liquidated and that the IC Loan was immediately repayable. No consideration was given to the effective term of the IC Loan and the financial situation of Baccarat as a solvent and profit-making company with a going concern business. Indeed the repayment of the IC Loan is dependent on the solvency status of Baccarat, the continuation of its activities and its possibility to distribute dividends in the future. Despite the difficult year of 2020, the Baccarat group remained profitable and there was as such no reason to assume that the IC Loan was not to be reimbursed in its entirety over its stated term”.

79.  Grant Thornton has explained that it decided to reject the book value method of valuation since FLL was cash-flow and balance-sheet insolvent.  It reasoned that no hypothetical purchaser would purchase the NAL Loan at the full face value of €103.3 million, and in its 3^rd Report, it stated that it is standard practice to value an insolvent company based on the realisbale value of its assets and liabilities in a liquidation scenario.

80.  In response, the Petitioner argues that the “inconsistency” argument misses the point because the NAL was simultaneously a debt owed by FLL to NAL, and also an asset owned by NAL. Understood as a debt, the NAL Loan does not cease to be repayable merely because FLL is insolvent.  Given that FLL remains obliged to repay the entire IC Loan upon insolvency, the book value method may be used to value the NAL Loan.  In contrast, understood as an asset, the NAL Loan could not be given its book value because no creditor can expect to recover the full value of their loan to an insolvent company.  Accordingly, given FLL’s insolvency, the liquidation method was an appropriate valuation method.

81.  I do not find it necessary, and indeed it is not my function, to conclusively resolve these disputes. For my part, I consider that the Bankrupt has demonstrated a reasonable argument, supported by expert evidence to call into question the valuation of the NAL Loan as well.  Having read the respective submissions of the parties on this issue, and considered both sides’ expert evidence, I do not consider that this is a matter which is capable of summary determination or that I can dismiss the Bankrupt’s argument outright at this stage.  It seems to me that this is a matter which is far from straightforward.

82.  The Bankrupt submits that the appropriation of the FLL Shares, on a proper valuation, was sufficient to extinguish the outstanding indebtedness of €93.7 completely.  This was so even if one disregards the argument that the Baccarat shares should have been worth more, and simply adopts the value of FLL’s realisable assets of €135.5 million used by Grant Thornton.  The Bankrupt argues that the precise valuation would depend on the relative priorities of the debts of FLL.  Depending on the precise priority of the debts, the Lenders would collect anywhere between €93.7 million to €131.47 million, all of which would be sufficient to offset the outstanding indebtedness.  All of the scenarios put forward – in the Moore Report and in the 2^nd Bonn & Schmitt Report - involve situations where there is no “double-counting”.  On these issues, which are matters of some complexity, I do not consider that I can summarily determine them against the Bankrupt in this application.

83.  I am conscious that the Bankrupt is not a party to either the FLL or Receivables Pledge, which are governed by Luxembourg law.  There is also a dispute as to whether the Bankrupt would have standing to commence proceedings in Luxembourg.  Ms. Waisse is of the opinion that the Bankrupt would have no remedy under Luxembourg law, and in any event, she could not seize the Luxembourg court.  She says that, in her experience, claims aiming at overturning the enforcement of a pledge are exclusively brought by pledgors or insolvency receivers.  Her opinion is that only the pledgor, to the exclusion of any third party, would be allowed to bring a claim for nullity of the enforcement.

84.  Bonn & Schmitt were of the view that under Luxembourg procedural rules, any party who has a legitimate interest protected by law can bring legal proceedings in the Luxembourg courts.  With respect to the FLL Pledge, it would not only be the pledgor, but also the guarantor, who had a legitimate interest to challenge the appropriation of collateral on the basis of an erroneous valuation.  In addition, it would be wrong to say that the Bankrupt could not claim annulment of the appropriation of the FLL shares simply because she is not a contracting party – she could have standing based on fraud or abuse of rights.  The doctrine of abuse of rights is wide in scope.  In addition, there is a possibility of a claim for damages against Grant Thornton and/or the Lenders for tortious liability.  To substantiate her claim, the Bankrupt can choose to produce a new valuation report, or ask the Luxembourg court to appoint an independent valuer.

85.  I am unable to summarily determine the question of whether the Bankrupt would be able to commence proceedings in the Luxembourg courts with respect to the appropriation of the FLL Shares and the NAL Loan.  This issue is a matter on which there is genuinely conflicting expert evidence, and it does not appear to me that the answer is straightforward or suitable for summary determination.  In my view, it does appear to be reasonably arguable – and I do not put it higher than this - that the Bankrupt may be able to seek the appropriate legal redress in the Luxembourg courts with respect to the allegedly wrongful appropriations.

86.  For the above reasons, I conclude that the Bankrupt has demonstrated that there is a bona fide dispute on substantial grounds of the debt claimed under the Petition.  At the same time, however, I am mindful that my function is not to usurp the function of a civil court – and even more so, in the present case where the civil court is in a foreign jurisdiction – to actually determine the dispute between the parties.

The Discretionary Factors to be Taken Into Account

87.  I now turn to consider whether I should exercise my discretion in favour of the annulment of the Order.  As I have indicated above, the mere fact that the Bankrupt has demonstrated that there is bona fide dispute of the debt on substantial grounds at the time when the Order was made does not automatically entitle the Bankrupt to an annulment.

88.  Mr Manzoni SC submitted that the strength of the Bankrupt’s case on the merits was a matter of significant weight in the exercise of discretion.  While I do not exclude the possibility of a case where it can be conclusively, or with near certainty, shown that a debt did not exist at the time of the bankruptcy order, on the facts of the present case I am unable to go so far.  Many of the points raised by the Bankrupt, including her standing in the Luxembourg courts and the application of Luxembourg law, are not straightforward issues and the subject of serious dispute by the Petitioner.

89.  At the hearing, the major issues relevant to the issue of the exercise of discretion canvassed were as follows:

(1)  whether the Bankrupt had a reasonable and credible explanation for her absence when the Order was made;

(2)  the conduct of the Bankrupt after the Order was made, and in particular, whether she has failed to comply with her requirement to submit a sworn statement of affairs under section 18 of the BO; and

(3)  whether, having regard to the information as to the Bankrupt’s assets and liabilities available to the court, it was unavoidable that there would be a ‘re-bankruptcy’ even if the Order was annulled.

The Bankrupt’s Absence from the Hearing

90.  The Court of Appeal has affirmed that where a debtor seeks to annul a bankruptcy order made in her absence, the debtor must provide a reasonable and credible explanation for her absence: Kam Hung Cheung at [11].

91.  Mr Manzoni SC relied on Ng J’s decision in Re Wang Huimin [2021] HKCFI 3472 at [65] to suggest that there is no rigid or inflexible rule requiring an explanation for absence in every case.  It is important, however, to understand the context in which that proposition was stated.  Unlike Kam Hung Cheung, Re Wang Huimin was a case where there was no jurisdiction to make the bankruptcy order in the first place.  This was a central part of Ng J’s reasoning as to why Kam Hung Cheung was not read as an inflexible rule to cover ‘no jurisdiction’ cases: Re Wang Huimin at [64].

92.  In a ‘no jurisdiction’ case, it is understandable why the court might be less concerned about the reasons for a debtor’s absence  But here there is no suggestion that the court lacked jurisdiction to make the Order.    Accordingly, I do not agree that Re Wang Huimin dispenses with the need in the present case to consider whether the Bankrupt has provided an acceptable explanation for her absence at the court hearing.

93.  The need for a satisfactory explanation for the debtor’s absence must be viewed in the context of the built-in safeguards to ensure that the debtor is provided with adequate notice of bankruptcy proceedings, and also the opportunities afforded to raise objections before a bankruptcy order is made.  In my view, if a debtor were permitted to seek an annulment of a bankruptcy order made in her absence without a credible explanation as to why she was absent in the first place, this would mean that debtors could readily seek to reverse bankruptcy orders without taking reasonable steps to set aside a statutory demand or raising grounds in opposition to the bankruptcy petition itself.  That would be obviously undesirable.

94.  Section 9(2) of the BO provides that, at the hearing of the petition, the court shall require proof of the debt of the petitioning creditor and of service of the petition.  If satisfied with the proof, the court may make a bankruptcy order in pursuance of the petition. In the present case, the Petition was served in accordance with the methods prescribed in the Substituted Service Order.

95.  There was a suggestion in the Bankrupt’s written submissions that the Substituted Service Order was “arguably” liable to be set aside, in which case the Petition was not properly served.[7] The basis of this contention, which is made with notable constraint, is that the Petitioner ought to have disclosed the fact that it had been informed in December 2020 that the Fortune Group’s e-mail had been hacked since July 2020 in connection with its application for substituted service.[8]  This is said to support the Bankrupt’s claim that the Fortune Group’s e-mail system were unusable since July 2020.

96.  In my view, either the Substituted Service Order was liable to be set aside, or it was not.  It does not assist to suggest that that the order “arguably” ought to be set aside.  By way of contrast, in Re Wang Huimin at [94], Ng J held that the substituted service order obtained in that case was wrongly obtained and should be set aside in view of material non-disclosure.  That was one of the essential reasons why the bankruptcy order was annulled in that case.  Turning back to the present case, I do not find it helpful to decide whether the Substituted Service was “arguably” liable to be set aside or not.  For completeness, and were it necessary to do so, I would have accepted the Petitioner’s submissions and concluded that the non-disclosure of the 26 December 2020 e-mail would not have constituted sufficient grounds to set aside the Substituted Service Order.

97.  I now turn to the explanation offered by the Bankrupt as to why she was absent from the court hearing.  The Bankrupt’s case is that she did not have notice of the Statutory Demand and the Petition until around 3 August 2021.  This was when Zircon, another lender, informed her that a bankruptcy order was made against her in Hong Kong.  She says that she “does not recall” receiving the Statutory Demand or the Petition.  She emigrated from Hong Kong to the UK in early 2019, has not returned to Hong Kong since late 2019, and has not left the UK since January 2020.  In addition, the documents sent to FFCL’s address in Hong Kong were not forwarded to her since it was understaffed.  Moreover, she also did not receive the documents sent to her London address since she moved to another part of England (Upton-upon-Severn) due to the COVID-19 pandemic.  She claims not to have read her e-mails regularly, and due to the hacking of the Fortune Group’s e-mail system in July 2020, she was unable to receive documents through e-mail either.  The Bankrupt also apologised for the “oversight” in not having taken enough care to ensure that documents would reach her.

98.  To start with, I conclude that the steps taken by the Petitioner to serve the Statutory Demand and the Petition on the Bankrupt were reasonable in all the circumstances.  In my view, the Petitioner genuinely sought to provide the Bankrupt with adequate notice of the Statutory Demand and Petition through the various methods of attempted service which eventually were unsuccessful.  Not only did this involve various attempts at personal service in Hong Kong, but also included sending the documents through e-mail and by courier to the London Address.  The Petitioner also took the reasonable approach of asking Messrs. Cham & Co whether they had instructions to accept service of the Statutory Demand.  Following all of these steps, the Petition was validly served in accordance with a properly obtained Substituted Service Order.

99.  In his oral submissions, Mr Manzoni SC submitted that the Petitioner obtained the Order soon after service was effected under the Substituted Service Order.  The Order was obtained on 26 May 2021, and service under the Substituted Service Order was effected on 11 May 2021.  He submitted that the Petitioner was in a rush to obtain the Order; the inference being there was an intention to deprive the Bankrupt of a meaningful opportunity to be heard.  I do not accept this submission.  I am unable to see that the Petitioner did anything improper or unusual in obtaining the Order, and it had followed established procedures in obtaining a Substituted Service Order and valid service under it.  Moreover, given that the Statutory Demand was issued in May 2020, it was understandable that the Petitioner would have wished to secure a court hearing as soon as possible. Further, as I will discuss below, the Bankrupt took an evasive attitude towards service which caused delay.  In any event, in my view, the point loses forensic force because even on the Bankrupt’s own case that she did not learn of the Petition until August 2021.

100.  As indicated above, I also conclude that the Bankrupt took an evasive approach towards service.  When it suited her interests, she appointed solicitors to defend the Order 88 Proceedings seeking to prevent an order for possession being made against the Argenta Property.  Messrs Cham & Co were solicitors on record for the Bankrupt in those proceedings.  However, the Bankrupt declined to give them instructions to accept service of the Statutory Demand on her behalf.  In addition, the Petition was served on the solicitors under the Substituted Service Order.  In light of the above, I find it difficult to accept that the Bankrupt would have no idea about the steps taken in Hong Kong to commence bankruptcy proceedings against her.  If anything, she only has herself to blame for not taking a more proactive and responsible approach towards service.

101.  Moreover, I am unable to accept her explanation that she had emigrated to the United Kingdom in early 2019, and did not return to Hong Kong since late 2019 at face value.  There was insufficient evidence before the court regarding her entry and exits into Hong Kong.  For example, there was no statement of travel records from the Immigration Department to corroborate her alleged absence from Hong Kong. Further, although the Bankrupt produced a St Kitts passport purporting to show that she had not departed from the United Kingdom during the relevant period, the Bankrupt is the holder of several other passports, including a PRC and HK passport.  Those were not produced in evidence.  Without these, I am unable to proceed on the basis that there is satisfactory documentary evidence to corroborate her claim that she had not departed from the UK or that she did not return to Hong Kong since late 2019.  In making these observations, I bear in mind that the burden must be on the Bankrupt to establish a credible and reasonable explanation for her absence.

102.  As pointed out by the Petitioner, Clause 7.1(a) of the Guarantee contained a representation by the Bankrupt that she was resident and domiciled in Hong Kong as of October 2019.  There is no evidence that the Bankrupt informed the Petitioner this representation was no longer true by reason of her purported emigration to the United Kingdom, and if what she now says is correct, this would mean that she made a false representation in the Guarantee.

103.  Further, on 14 September 2020, the Bankrupt issued a writ in HCA 1552/2020 against the Petitioner seeking a declaration that the Guarantee was null and void.  The Bankrupt’s address in the Writ was stated to be the Argenta Property.  This does not sit well with her contention that she had already emigrated to the United Kingdom.  The issuance of the Writ shows the Bankrupt’s ability to authorise matters to be done in Hong Kong on her behalf when she believed that it was in her interests.  Notably, the Writ was issued by the Bankrupt after the Statutory Demand was taken out in May 2020, and it sought to invalidate the very instrument which gave rise to the debt claimed under the Statutory Demand.

104.  The Petitioner took the additional steps of e-mailing the Statutory Demand to the Bankrupt’s e-mail address, and the Petition to the Bankrupt and her husband’s e-mail addresses.  Although there is a suggestion that the Group’s e-mails were “hacked” since July 2020, apart from an e-mail dated 26 December 2020 which made this suggestion, there is little else in terms of corroborative evidence.  In addition, as the Petitioner points out, Mr Sun’s e-mail account (jack_sun@ffegc.co.uk) was in use in March 2021 which further casts doubt on the claim that the e-mail account was inoperative when the Petition was sent to that e-mail account on 6 January 2021.  Overall, I have reservations as to whether the Bankrupt’s case as to whether her and her husband’s e-mail account were inaccessible at the time when the Statutory Demand and Petition were sent is true.

105.  The Petition was also sent by courier to the Bankrupt’s London Address, and it was marked as received by a “Matt C”.  Even if she was not residing at that address at that time, it would have been reasonable for her to have made arrangements to ensure that correspondence sent to the London Address to be forwarded to her where she was residing elsewhere in the United Kingdom.

106.  Lastly, I have not lost sight of the carefully worded manner in which the Bankrupt has expressed herself in her evidence and the submissions made on her behalf.[9] She says that she “does not recall” having received the Statutory Demand or Petition.  This is different from a positive statement that she did not receive those documents, and as Mr Maurellet SC submitted the language used is very guarded.

107.  In all the circumstances, I consider that the Bankrupt has failed to provide a reasonable and credible explanation for her absence at the hearing of the Petition at which the Order was made.  I find that it is likely that the Bankrupt knew that steps were being taken in Hong Kong by the Petitioner to enforce their claim by way of Statutory Demand and Petition, and that the Bankrupt deliberately took an evasive approach towards service.  She did nothing to inform the Petitioner where she might be served and declined to give instructions to her Hong Kong solicitors to accept service.

Conduct of the Bankrupt

108.  Section 18(1) of the BO states that where a bankruptcy order has been made otherwise than on a debtor’s petition, the bankrupt shall submit a statement of his affairs, which shall be verified by affidavit, to the trustee not more than 21 days after the day the order was made.  The statement of affairs must contain such particulars of the bankrupt’s creditors, debts, liabilities and assets as may be prescribed (section 18(2)(a)).  It is a contempt of court for a bankrupt who, without reasonable excuse, fails to comply with the obligation imposed under section 18 and is liable to be punished accordingly (section 18(4)).

109.  No Statement of Affairs (“SOA”) has been submitted by the Bankrupt in Hong Kong despite numerous requests by the Trustees.[10] As at 14 January 2022, their request for the submission of the SOA in Hong Kong remain unanswered.[11]  As confirmed by Mr Manzoni SC at the hearing, this continued to be the case in June 2022 when the adjourned hearing before me took place.  This was so despite the fact that this point was raised by the Trustees on 14 January 2022.  Accordingly, there was a continuing breach of section 18 by the Bankrupt while this application was extant.

110.  I am conscious that the Bankrupt did submit an SOA in the United Kingdom on 7 November 2021 (“UK SOA”). This was following an order made by an English court on 29 October 2021 compelling her to do so.  The Trustees have set out a summary of the UK SOA and the estimated realizable value of the Bankrupt’s assets in their Amended Report.[12] According to the Trustees, and based on the matters set out in the UK SOA and pending investigation, the Bankrupt’s estate had a net deficiency of approximately HK$784 million.

111.  The starting point is that the Order which the Bankrupt seeks to annul is an order by the Hong Kong court made under the terms of the BO.  The duties imposed under the bankruptcy legislation in Hong Kong which require co-operation by the bankrupt with the trustees are of central importance to the bankruptcy regime.  In general, a bankrupt cannot, without reasonable excuse or explanation, fairly expect to receive favourable treatment by a Hong Kong court on an annulment application while at the same time ignoring her legal obligations in this jurisdiction arising upon bankruptcy.

112.  Mr Maurellet SC submitted that the Bankrupt’s failure to file an SOA in Hong Kong is a matter which ought to be taken into account in the court’s exercise of discretion whether to annul the Order.  I agree.  There was a clear failure by the Bankrupt to comply with her obligations under section 18 of the BO despite reminders made by the Trustees, and in my judgment, this is a matter that I am entitled to take into account in the exercise of my discretion. At the discretion stage of an annulment application, the court must be given full and accurate details regarding the Bankrupt’s assets and liabilities in order to make an informed assessment of whether a bankruptcy order should be annulled.  The information contained in a sworn SOA is directly relevant to the court’s exercise of discretion.

113.  The Petitioner has complained about the Bankrupt’s failure to co-operate with the Trustees and her refusal to disclose assets in the United Kingdom.[13] In response, the Bankrupt’s own case is that many of the Petitioner’s allegations relate to the UK recognition proceedings, and therefore are not directly relevant to the present application.[14]  In my judgment, the Bankrupt cannot have her cake and eat it too.  If she is saying that her conduct in the UK recognition proceedings is irrelevant to the present application, the focus is squarely placed on her unsatisfactory conduct in the Hong Kong bankruptcy proceedings.  On her own logic, she is not entitled to fairly rely on the UK SOA as a satisfactory answer for her failure to comply with section 18.

114.  The Order is valid unless it is annulled or set aside by the court.  The fact that the Bankrupt has taken out an application to annul the Order does not relieve her from her obligation to comply with section 18.  Nor does the fact that the Bankrupt did submit the UK SOA excuse her from her obligations under the BO to submit a sworn statement of affairs within 21 days of the bankruptcy order.

115.  In his oral reply submissions, Mr Manzoni SC submitted that if the court came to the view that the Bankrupt did not treat the Hong Kong bankruptcy proceedings seriously, this was a matter which could be reflected in costs irrespective of the outcome.  I do not agree that this would be an appropriate course to take because, in my view, this would not be sufficient to reflect the seriousness of the non-compliance with section 18.

116.  I have not lost sight of the other complaints made by the Petitioner regarding the Bankrupt’s conduct and its complaint regarding concealment of assets.  These include a failure to co-operate with the Trustees, a refusal to disclose assets in the United Kingdom, and a number of suspicious transactions after the Order was made.[15] I have reviewed the matters relied upon by the Petitioner, and to some extent, there is merit in their complaints.  I would not dismiss these points as “white noise”, as Mr Manzoni SC vividly described them.  However, in terms of the exercise of my discretion, I acknowledge that the most influential point is the Bankrupt’s failure to comply with section 18 of the BO.

RE-BANKRUPTCY & THE BANKRUPT’s ASSETS

117.  In the exercise of its discretion in deciding whether to grant an annulment of a bankruptcy order, it is relevant for the court to consider whether there is evidence to indicate that it is unavoidable that the debtor will be declared bankrupt again.  If there is such evidence, the court may exercise its discretion to refuse to annul the bankruptcy order: Kam Hung Cheung at §37.

118.  The Petitioner submits that even discounting the debt under the 2019 Facility Agreement, the Bankrupt still remains liable for €36,320,504.48 to a number of creditors.  Given that the Bankrupt’s estate has less than €5 million of realisable assets, it is impossible for the Bankrupt to satisfy her bankruptcy debts even if the Order is annulled.  Therefore, there is no point to annul the bankruptcy order, and only have the creditors to re-petition for bankruptcy afterwards.

119.  The Petitioner relies on the following debts[16] to support its figure of €36,320,504.48: [17]  -

(1)  €35,718,706.88 – the debt under the 2018 Guarantee in respect of amounts outstanding under the 2018 Facility Agreement.

(2)  €372,736.24 – a debt owing to Allen & Overy under a guarantee of FFCL’s outstanding legal fees.

(3)  €97,155.85 – a debt owing to the Commissioner of Inland Revenue for outstanding salaries taxes between 2019 and 2021.

(4)  €131,905.51 – a debt owing to HSBC for unpaid credit card bills as of 25 October 2021.

120.  Out of these 4 debts, the most significant of these is under the 2018 Guarantee.  In this regard, Tor submitted a proof of debt for €35,718,706.88 which was outstanding in respect of the 2018 Facility Agreement and guaranteed by the Bankrupt in her personal capacity under the 2018 Guarantee.[18]

121.  According to the analysis of the UK SOA by the Trustees, the estimated realizable value of the Bankrupt’s assets was only HK$41,582,664.  In their Amended Report, the Trustees have provided supporting explanations to the court regarding their estimates with respect to the various items of assets listed by the Bankrupt.[19] Accordingly, on the basis of the information available, it appears that there is a significant shortfall between the realizable value of the Bankrupt’s assets and the claims of the other creditors of the Bankrupt identified by the Petitioner.

122.  The Bankrupt sought to undermine the Petitioner’s reliance on the  €35,718,706.88 debt under the 2018 Guarantee by pointing out that Tor had previously presented a bankruptcy petition in HCB 8396/2020 with respect to that debt, but the petition had since been withdrawn.[20] However, the Petitioner has explained that the withdrawal of that petition was because a bankruptcy order had already been obtained in these proceedings.  The withdrawal of a bankruptcy petition based on a debt does not mean that the underlying debt ceases to exist or is extinguished.

123.  The Bankrupt next submitted that there were serious questions relating to the circumstances in which she signed the 2018 Facility Agreement, as well as the 2019 Facility Agreement.  This was due to her poor command of English, her reliance on her colleagues to explain the terms to her and the lack of explanation from the Petitioner’s legal representatives.  These points were not pressed at any great length by Mr Manzoni SC in oral submissions, and rightly so.  I have no hesitation in rejecting them. The Bankrupt was a person of sophistication and the Chief Executive of a substantial corporate group with resources at her fingertips.  I accept the Petitioner’s submissions that this is not a case where a complaint of non est factum can be made out.

124.  The Bankrupt made the point that there is no evidence as to what amount, if any, is still owing under the 2018 Facility Agreement especially after the enforcement steps taken by Tor.  However, as pointed out by the Trustees in their Amended Report, the value of the formal proof of debt under the 2018 Facility Agreement was €35,718,706.88.  The relevant enforcement steps taken by Tor included the appointment of receivers over the issued share capital of Silver Ocean under the St Kitts Share Charge under a deed of appointment dated 14 February 2020.

125.  In the UK SOA, the Bankrupt gave a value of £6 million to the “St Kitts Hotel”.  The Trustees have explained that this should be a reference to the 100% equity holding in Silver Ocean Limited. In turn, Silver Ocean is the holder of the land parcel on St Kitts.  The land holding was previously operated as a resort under the name Ottley Plantation Inn, but it has not been in operation for several years.  After drawing attention to the fact that receivers were appointed over the Silver Ocean shares on 14 February 2020, the Trustees stated that:

“The Trustees understand from the Share Receivers that a sale and marketing process of the St Kitt’s hotel remain ongoing. The Share Receivers expect that after discharge of the secured and unsecured debts of Silver Ocean and of the pledged shares in Silver Ocean, there will be no prospect of a turn to the shareholder”.[21]

126.  Accordingly, on the basis of the information available, it appears that there will be no prospect of a return to the Bankrupt with respect to her shares in Silver Ocean.  In any event, it would appear that even if one were to give maximum credit of £6 million according to the value claimed by the Bankrupt in the UK SOA, there would be still be a substantial shortfall in the Bankrupt’s estate.

127.  The other major asset mentioned in the UK SOA worthy of mention is with respect to “China Zhong An Xin Fund Stock Right”.  The Bankrupt gave a value of £240 million with respect to this. However, as pointed by the Trustees, there was no information provided with respect to this asset as of 14 January 2022.  In addition, the Trustees have written to a “China Zhong An Xin” to confirm whether there is a holding by the Bankrupt, but there has been no reply.

128.  The Bankrupt sought to address the issue of re-bankruptcy through providing a solicitor’s affidavit dated 22 April 2020.  She explained the affirmation was provided by her solicitor due to medical complications arising from her pregnancy at the time.  Information was given regarding (i) her sole ownership of the Class A interest in a trust structure (“Hwabao Trust”) operated by Hwabao Trust Co Ltd as trusteea 28.33% shareholding in the Shenzhen listed Sichuan Shengda Forestry Co Ltd. (SZ:2259) (“Shengda”) held through a trust structure and (ii) a proof of shareholding issued by Zhong An Xin Technology Co Ltd (“ZAX”) dated 30 June 2019 confirming that the Bankrupt, though an investment fund, held 30% of the shares in ZAX and RMB 1 billion in debt vis-à-vis ZAX.

129.  Her overarching point is that, having regard to the value of these assets, it is clear that she has sufficient assets to cover the entire net deficiency set out by the Trustees in their Amended Report.

130.  In relation to the Hwabao Trust, it was said that her 28.33% interest in Shengda held through the Trust was worth RMB 967,500,000 as of 8 October 2021, of which the Class A interest is worth approximately RMB 640,000,000.  There was produced a report issued by Hwabao Trust and a proof of shareholding registration by Hwabao in Shengda dated 8 October 2021. Regarding ZAX, a proof of shareholding dated 30 June 2019 was produced.  It was said that the valuation of her 30% shareholding alone would be worth RMB 3.6 billion, and that regard should also be had to the RMB 1 billion debt.

131.  In relation to ZAX, the Second Report of the Trustees points out that the value now claimed by the Bankrupt is inconsistent with the information provided in the UK SOA.  They also point out that the Bankrupt owns the shares in ZAX via Qianyuan Shitong Equity Investment Management Co. Ltd. (“Qianyuan Shitong”), and that they have been unable to confirm this relationship through searches in the public domain.  They also say that Qianyuan Shitong’s shareholding in ZAX has been pledged, and that ZAX is the subject of PRC legal proceedings commenced by the Agricultural Bank of China in respect of which two substantial enforcement orders have been made by the PRC courts in August 2021 and April 2021.  As at the date of the Second Report, the Trustees confirmed that despite their inquiries, they have not been “able to determine the Bankrupt’s shareholding or any realisale value from the shares in ZAX”.[22]

132.  In relation to the Hwabao Trust, the Trustees state that according to their calculations, the Bankrupt’s alleged interest is worth approximately RMB 444 million if the Class A shares are indeed held by the Bankrupt.  According to the Second Report, the Trustees have written to Hwabao Trust to obtain confirmation of the Bankrupt’s current interest in the Class A shares and other relevant information, but no reply was received.  In addition, the Bankrupt has “refused to provide the Trustees with any information to confirm her holding in the Class A shares or to co-operate with the Trustees in securing this asset for the benefit of creditors in the Bankrupt Estate”.[23]

133.  I must confess that I have difficulty in accepting the Bankrupt’s evidence at face value.  The information provided is fairly limited, and there is also no updated contemporaneous evidence with regard to the positions she held as at the date of the annulment hearing.  For example, the proof of shareholding for ZAX is only dated 30 June 2019.  Even giving due allowance for health conditions, there is not even a short affirmation from the Bankrupt personally to confirm that she does, in fact, hold those assets and that they are of the value that is claimed.  And importantly, the Bankrupt has chosen not to submit a sworn SOA in Hong Kong in contravention of section 18 to verify her holding of these assets as required by Hong Kong law, and it appears that the Hwabao Trust was even not mentioned in the UK SOA.  This is, unfortunately, a further example of selective disclosure of information by the Bankrupt.

134.  By reason of the limited information provided by the Bankrupt at a late stage, the court is left in a difficult position in evaluating whether it is unavoidable whether she would be declared bankrupt again.  Much will depend on whether the Bankrupt does in fact continue to hold interests in the Hwabao Trust and in ZAX, and to what extent those assets can be realised.  I do not consider that I can safely accept the Bankrupt’s evidence at face value, especially in the light of the information provided by the Trustees in the Second Report.  I am mindful that the Bankrupt bears the burden of persuading the court to exercise the court in her favour, and it is incumbent upon her to fully and promptly disclose her assets.  This is not what merely what this court expects, but it is what our law requires.

135.  Her latest disclosure highlights the importance of her failure to file a sworn SOA in accordance with BO section 18.  Moreover, it also shows that the Bankrupt has been selective with her disclosure of assets because it was only in April 2022 that she disclosed her alleged interest in the Hwabao Trust.

136.  In all the circumstances, I do not think the Bankrupt is entitled to be given the benefit of the doubt.  Where there is a significant doubt as to the extent of the bankrupt’s estate and a background of non-cooperation with his trustees, the court may take the view it would not be right to hamper further investigation by the trustees of the estate with a view to making distributions for the benefit of the creditors: Re Phillip John Lambert [2019] BPIR 1220 at [51] per ICC Judge Mullen. On an annulment application, the court has to carefully consider the interests of the creditor, the debtor and the public, and given that bankruptcy is a class remedy, in my judgment it would be plainly be more desirable for the Trustees to investigate and make inquiries with respect to her alleged interests in the Hwabao Trust and in ZAX, rather than to grant an annulment outright.

Discretion

137.  In my judgment, although the Bankrupt has been able to show that there is a bona fide dispute of the underlying debt on substantial grounds, I am not satisfied that I should exercise my discretion in favour of the annulment.

138.  It seems to me that all of the relevant discretionary considerations identified are against the Bankrupt. This is not a case where the Bankrupt had any reasonable explanation for her absence at the court hearing.  I have decided that her approach towards service was evasive, and I reject her explanations for her absence as incredible.  Her conduct in the bankruptcy has been unsatisfactory, and there has been a clear failure to comply with section 18 by not filing a sworn SOA. Her approach towards disclosure of assets and information has been selective at best, and I am unable to give her the benefit of the doubt with respect to her latest disclosure of assets.  In exercising my discretion in this manner, I have not lost sight of my conclusion that the Bankrupt may have reasonable grounds to challenge the underlying debt.  That, in itself, is not sufficient to get the Bankrupt home on this application, especially where the Bankrupt’s arguments are the subject of serious dispute by the Petitioner.

Conclusion

139.  For all the above reasons, I am not satisfied that I should exercise my discretion in favour of granting the annulment order sought by the Bankrupt. Were it necessary to do so, I would have also declined to make an order of recission under section 98 as well.  I dismiss the Bankrupt’s summons dated 13 September 2021.

140.  On costs, I direct that written submissions be filed on the appropriate costs order to be made in light of my decision.  The Petitioner is to file written submissions on costs within 14 days, and the Bankrupt is to file reply submissions within 14 days thereafter. Unless otherwise directed, I will determine the issue of costs by way of paper disposal.