RE LI XIAOMING

CACV 546/2019

[2020] HKCA 465

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 546 OF 2019

(ON APPEAL FROM HCB NO 6083 OF 2018)

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JUDGMENT

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

1.  This is the Petitioner’s application for security for costs of the Debtor’s appeal from a Decision of DHCJ William Wong SC (“the Judge”) given on 15 November 2019 (“the Decision”) making a bankruptcy order with costs against the Debtor.

2.  The parties have filed affirmations and lodged their respective submissions for this application.  Having considered them, the court does not think it is necessary to hold an oral hearing.  This interlocutory application has accordingly been determined on paper pursuant to Order 59 Rule 14A RHC.

Background

3.  The relevant background can be seen from the Decision.  However, for present purposes, it may be convenient to summarize the salient facts as follows. 

4.  The Petitioner presented a bankruptcy petition against the Debtor based on a statutory demand dated 26 July 2018.  The Debtor had not applied to set aside the statutory demand and did not dispute the amount of the debt.  The petition is based on a debt arising from a settlement agreement dated 13 February 2018 (“the Settlement Agreement”). 

5.1.  The background to the Settlement Agreement is as follows.  It is common ground that on 9 September 2009, a share sale and purchase agreement (“the 2009 SPA”) was executed whereby the Petitioner agreed to invest in the Debtor’s company Prosper Huge Limited (“Prosper Huge”) by acquiring shares therein.  The investment was for an anticipated mining project in Cambodia (“the project”).  Apart from the Petitioner, there were other investors in the project.

5.2.  On the same day as the 2009 SPA, a document entitled “Irrevocable Guarantee” (“the Guarantee”) was also executed by the Petitioner and the Debtor.  In brief, it provided that the guarantor guaranteed, in favour of the Petitioner, Prosper Huge’s performance of the 2009 SPA.  The signature page contained three places for signature by: (1) the Debtor who was named as guarantor; (2) Prosper Huge as seller; and (3) the Petitioner as purchaser.  The Debtor signed in the place for Prosper Huge.      

6.1.  Nevertheless, in a supplemental agreement made in 2014 (“the 2014 Supplemental Agreement”) which the Debtor signed on behalf of Prosper Huge, it was recited that he had provided each investor with an irrevocable guarantee. 

6.2.  Further, in another supplemental agreement dated 22 May 2015 (“the 2015 Supplemental Agreement”), which the Debtor again signed on behalf of Prosper Huge, it was agreed in clause 4 that once the investors received the funds stated therein, the debtor-creditor relationship between the Debtor and the investors in relation to the investment would be immediately terminated. Further, it was agreed in clause 5 that if the investors did not receive the funds stated therein by 31 December 2015, the investors would issue proceedings in the Hong Kong court against the Debtor.    

7.  Further, on 9 February 2018, the Debtor signed a memorandum recording a timetable for repayment by the Debtor of the principal and interest for the project. 

8.  Also, at about this time, there was correspondence between the in-house legal advisers of the Debtor and the Petitioner respectively on the drafting of a settlement agreement. 

9.1.  On 13 February 2018, five representatives of the investors (including the Petitioner) went to the Debtor’s office where they had negotiations with him for the rest of the day. 

9.2.  That night, the Settlement Agreement (and four other agreements) were signed by (among others) the Debtor.  It recited (among other things) that the Debtor had provided an irrevocable guarantee for Prosper Huge.  Under the Agreement, the Debtor agreed to repay certain funds to the Petitioner by 30 June 2018. 

10.  When the Debtor failed to do so, the Petitioner served a statutory demand on him on 26 July 2018, followed by the petition. The notice of hearing, stating the identity of the Judge, was issued on 8 May 2019. The relevance of this will be seen later in this Judgment.

11.1.  The Debtor opposed the petition.  He did not dispute that he had signed the Settlement Agreement but argued that he had signed it under duress, both physical duress in that he alleged the five representatives did not allow him to leave his office until he signed it, and economic duress in that he alleged that they threatened to make a report about him to the Hong Kong Stock Exchange to jeopardize a reverse takeover transaction on which he was working.  The Petitioner denied there was either form of duress.

11.2.  It should be noted that in his affirmations opposing the petition, the Debtor asserted that he had not personally guaranteed Prosper Huge’s obligations under the 2009 SPA and that repayments made were not done in his personal capacity.        

The Judge’s Decision

12.1.  In his Decision, the Judge set out in paras. 4 – 5 the applicable legal principles regarding the resisting of a bankruptcy petition, and in paras. 25 – 28, the legal principles regarding physical duress and economic duress.

12.2.  The Judge set out the material facts in paras. 7 – 23, recording the Debtor’s assertions that he had signed the Guarantee only as authorized representative of Prosper Huge and not in his personal capacity (paras. 9, 11 and 13).

12.3.  The Judge found there was no substance in the defence of duress (paras. 29 - 40 for physical duress, and paras. 41 – 46 for economic duress).  In paras. 47 – 54, the Judge emphasized that he had analyzed the allegation of both forms of duress against the contemporaneous documents. 

12.4.  Accordingly, the Judge held that the Debtor had failed to raise any real or substantial disputes, and a bankruptcy order was made against him.    

Grounds of Appeal from the Judge’s order

13.  On 28 November 2019, the Debtor filed a Notice of Appeal. 

14.  The grounds of appeal may be summarized as follows:

- The Judge was wrong to take into account his finding of fact that the Debtor had personally guaranteed Prosper Huge’s liabilities under the 2009 SPA, and this was critical in the Judge’s assessment of the Debtor’s case on economic duress (Ground 1).

- If the Judge had not found that the Debtor had personally guaranteed Prosper Huge’s liabilities, but the parties believed that he had, then they would have entered into the Settlement Agreement under a common mistake (Ground 2). 

- In any event, the Judge should have recused himself from the proceedings as the Debtor had previously retained the Judge (in his capacity as senior counsel) in a separate matter, in the course of which the Judge had acquired information pertaining to the Debtor’s financial affairs and this gave rise to apparent bias as well as the possibility of “reverse bias” (Ground 3).

The Petitioner’s application for security for costs of the appeal

15.  On 3 December 2019, the Petitioner by letter requested security for costs of the appeal in the sum of HK$500,000. The Debtor did not comply with the request.  

16.  On 18 December 2019, the Petitioner took out the present summons for security for costs of the Debtor’s appeal in the sum of HK$507,550.  Affirmations in support of, and in opposition to, the application were filed. 

Discussion

17.  The principles governing the court’s exercise of discretion in an application for security for costs of an appeal are well-known.  They have been set out extensively in Chung Kau v Hong Kong Housing Authority & Others [2004] 2 HKLRD 650 and will not be repeated here.

18.  It is clear in the present case that there exist “special circumstances” within the meaning of O.59 r.10(5) RHC in that the Debtor appears to be impecunious.  He is now bankrupt.  It has been held by this court in Re Au Wai Ming CACV167/2015, paras. 24 – 25 that the fact that the Debtor is a bankrupt is in itself not a bar to an order for security for costs of an appeal from the bankruptcy order.    

19.  The question then is whether the Debtor has shown countervailing factors militating against an order for security, such as the merits of the appeal.  The following is a preliminary view of the merits.     

20.  As for Ground 1, the Judge was clearly aware of the Debtor’s allegation that he had not signed the Guarantee in his personal capacity because he had signed in the space for Prosper Huge and not in the space for guarantor.  However, the Judge noted that there was sufficient contemporaneous documentary evidence which supported the Petitioner’s case that the Debtor had personally guaranteed Prosper Huge’s liabilities (para. 54).  These documents have been set out in paras. 6.1, 6.2, 7 and 8 above.  On a preliminary view of the merits of the appeal, we consider that the Judge was entitled to make that finding. The Debtor had not explained why (in whatever capacity) he executed those documents which referred to himself having provided a guarantee if that was not true.  Nor had he explained what was the point of his only signing the Guarantee as representative of the primary obligor.  On our preliminary view of the merits of the appeal, the Judge was entitled to find on the documents that the Debtor had indeed intended to guarantee Prosper Huge’s liabilities and the parties had throughout conducted themselves accordingly.          

21.  As for Ground 2, it is clear from the affirmations, submissions before the Judge and the Decision that common mistake had not been argued below.  The Flywin v Strong & Associates (2002) 5 HKCFAR 356 objection applies.  Mistake is matter of mixed law and fact, and it is not open to a litigant to raise this argument only on appeal.   

22.  As for Ground 3, as noted above, the court had informed the Debtor’s solicitors of the date of hearing and the identity of the judge hearing the petition by a notice in May 2019, nearly 6 months before the hearing. 

23.  It was not until Friday, 1 November 2019 (3 working days before the hearing) that the Debtor’s solicitors wrote to the court requesting that arrangements be made for another judge to hear the petition on the ground of apparent bias.  The Judge replied on Monday, 4 November 2019 that he would proceed to hear the petition.  No further submissions were made by the Debtor and no evidence was filed alleging that the Judge had any confidential information. 

24.1.  It is well-established that “if a [litigant] … wishes to take any point on the qualification of the trial court it should be taken timeously as a plea in bar of trial.  If such a point is not taken, the omission to do so will be taken to show an intention to abandon or waive the point unless circumstances show that it was not intended to abandon or waive it or that the omission resulted from ignorance or misapprehension which provided a reasonable explanation of the failure to take it” (Millar v Dickson (PC) [2002] 1 WLR 1615 at 1629, para.33(1)).  There was no evidence from the Debtor explaining the delay for some 6 months before the Judge was asked to recuse himself only 3 working days before the hearing.

24.2.  Further, Ground 3 refers to the Judge having acquired information pertaining to the Debtor’s financial affairs.  This had not been asserted by the Debtor’s solicitors, and was not supported by any evidence, before the hearing.  As for the contents of his affirmation filed on 7 January 2020 in opposition to the application for security for costs, it is unlikely that they would be permitted on appeal, as the conditions of Ladd v Marshall [1954] 1 WLR 1489 do not appear to have been satisfied.

25.  At this stage therefore, we are not satisfied that the merits of the Debtor’s appeal are such that we should exercise the court’s discretion to refuse an application for security for costs.  We have considered the draft bill and take the view that, reducing the figure claimed for solicitors’ time charges, a sum of $400,000 would be adequate.

Order

26.  There will be an order in terms of the summons filed on behalf of the Petitioner on 18 December 2019 save that para. (1) should read as follows: “The Debtor do within 28 days from the date of this Order give security to the satisfaction of the court in the sum of HK$400,000 for the costs of the Petitioner herein in these proceedings”.