RE VICTOR RIVER LTD

HCCW 331/2019

[2021] HKCFI 886

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 331 OF 2019

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JUDGMENT

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INTRODUCTION

1.  This is the substantive hearing of a winding up petition presented on 24 October 2019 and subsequently amended on 27 May 2020 (the “Petition”) by Haitong International Securities Company Limited (the “Petitioner”) against Victor River Limited (the “Company”) on grounds of insolvency.

2.  The Petition is based on the Company’s failure to pay a debt in the total amount of HK$103,004,813.49 (the “Debt”) following the service of a statutory demand on the Company on 27 August 2019 (the “Statutory Demand”).

3.  The Debt arises out of a facility letter dated 9 March 2018 (the “Facility Letter”), under which the Company obtained a margin loan facility of HK$400,000,000 from the Petitioner with a maturity date of 23 June 2018.

4.  This is not a particularly complicated case. I am of the view that it cannot be disputed that the Company did obtain margin facilities from the Petitioner.  The Company failed and is still unable to pay the outstanding balance.  The Company advances a number of grounds to resist the making of a winding up order.  This Court will deal with them in details below.

5.  I also granted leave to the Petitioner to file the 1^st Affirmation of Luk Wai Yin dated 11 December 2020 which mainly updates the Court of a recent event, namely, the delisting of Haitian Energy International Limited (“Haitian Energy”) by the Hong Kong Stock Exchange (the “HKSE”) on 7 December 2020.

THE DEBT

6.  The Company is a limited company incorporated in the British Virgin Islands (“BVI”). Its sole director and shareholder is Mr Lin Yang (“Mr Lin”).  The Company acts as Mr Lin’s personal investment holding vehicles and it traded in various listed shares in Hong Kong including a substantial shareholding in Haitian Energy, a Cayman company which was listed on the HKSE (stock code: 1659).  Haitian Energy was recently delisted by the HKSE on 7 December 2020.

7.  The Petitioner is a limited company incorporated in Hong Kong.  It is a stock brokerage firm with established business presence in Hong Kong.

8.  On 20 June 2014, the Company opened a margin securities trading account numbered 02-0186195-33 (the “Margin Account”) with the Petitioner.  The Margin Account and the margin loan facility provided thereunder (the “Margin Facility”) are governed by the Margin Account Terms and Conditions (the “Margin Account T&C”).

9.  Shortly after the Margin Account had been created, the Petitioner and the Company entered into a credit facility agreement by way of a facility letter dated 23 June 2014 (the “1^st Facility Letter”), whereby:

(1) The Petitioner agreed to provide, and the Company agreed to obtain, a Margin Facility with a credit amount not exceeding HK$200,000,000.

(2) The maturity date of the Margin Facility was stated to the first anniversary date from the date of the Company’s first drawdown.

10.  It is important that on 24 June 2014, the Company did issue a formal written request (i) to withdraw HK$195,959,295 from the Margin Account and (ii) to transfer the same to Mr Lin as ultimate beneficial shareholder of the Company.

11.  The request was approved by the Petitioner and HK$195,959,295 was debited to from the Margin Account.

12.  On 17 June 2015, the maximum credit amount under the Margin Facility was increased to HK$400,000,000 and the maturity date was extended to 23 June 2016.  These changes were reflected in the daily statement of the Margin Account dated 17 June 2015.

13.  On 24 June 2015, the Petitioner and the Company entered into another credit facility agreement by way of a 2^nd facility letter (the “2^nd Facility Letter”), whereby:

(1) The Petitioner agreed to provide, and the Company agreed to obtain, a further facility with a credit amount not exceeding HK$200,000,000 under the Margin Facility.

(2) The maturity date of the Margin Facility was stated to be upon the Petitioner’s demand.

14.  After the 2^nd Facility Letter had been signed, the daily statement of the Margin Account was updated, showing the increased credit limit of HK$600,000,000 with a maturity date of 23 June 2016.

15.  On 10 July 2015, the maximum credit amount under the Margin Facility was further increased to HK$800,000,000 with a maturity date of 23 June 2016.  These changes were reflected in the daily statement of the Margin Account dated 10 July 2015.

16.  On 6 January 2017, the Petitioner and the Company entered into another credit facility agreement by way of a 3^rd facility letter (the “3^rd Facility Letter”), whereby:

(1) The Petitioner agreed to provide, and the Company agreed to obtain, a facility with a credit amount not exceeding HK$400,000,000 under the Margin Facility.

(2) The maturity date of the Margin Facility was stated to be (i) 12 months after the First Renewal Date (as defined therein) or (ii) upon the Petitioner’s demand.

17.  The facility created under the 3^rd Facility Letter was reflected in the monthly statement of the Margin Account dated 31 January 2017, which shows the Petitioner had a credit limit of HK$400,000,000 with the maturity date marked “N/A”.

18.  On 9 March 2018, the Petitioner and the Company entered into another credit facility agreement by way of the Facility Letter at issue, whereby:  

(1) The Petitioner agreed to provide, and the Company agreed to obtain, the same facility with a credit amount not exceeding HK$400,000,000 (the “HK$400,000,000 Margin Limit”) under the Margin Facility (with a new maturity date).

(2) The new maturity date of the Margin Facility was stated to be (i) 23 June 2018 or (ii) upon the Petitioner’s demand.

19.  The terms of the Facility Letter were reflected in the monthly statement of the Margin Account dated 31 March 2018, which shows the Petitioner had a credit limit of HK$400,000,000 with the new maturity date of 23 June 2018.

20.  On 23 June 2018, the HK$400,000,000 Margin Limit expired pursuant to the Facility Letter, whereupon the Company’s credit limit under the Margin Facility became zero.

21.  Between 10 September 2018 and 27 August 2019 (i.e. the date of the Statutory Demand), the Petitioner issued 102 margin call letters and emails to the Company to demand the Company to make good the margin deficit.

22.  As the margin call letters and emails went unheeded, the Petitioner (i) exercised its right to liquidate some of the securities in the Margin Account on various instances between 18 January 2019 and 1 March 2019 and (ii) applied the sale proceeds to reduce the debt under the Margin Facility, pursuant to the Margin Account T&C.

23.  In particular, on 28 February 2019 and 1 March 2019, the Petitioner liquidated 3,008,080,000 shares and 450,000,000 shares in Haitian Energy that were held in the Margin Account and applied the sale proceeds to reduce the debt position from HK$431,889,948.33 (as of 27 February 2019) to HK$86,548,789.33 (as of 1 March 2019).  There are still 1,654,664,000 shares in Haitian Energy in the Margin Account.

24.  As of 26 August 2019 (i.e. the day before the Statutory Demand was issued), the Company owed a sum of HK$101,979,202.85 to the Petitioner under the Margin Facility. This is evidenced by an account position report of the Margin Account dated 4 November 2020, which shows a negative balance of HK$101,979,202.85 under the Margin Account as at 26 August 2019.

25.  On 27 August 2019, the Petitioner, through its solicitors, Messrs. DLA Piper, served the Statutory Demand on the Company, demanding payment of the Debt of HK$103,004,813.49 (which included the aforementioned outstanding sum of HK$101,979,202.85 and default interest accrued thereon).

26.  From then onwards until 12 February 2020, the Petitioner issued another 18 margin call emails to the Company and demanded that the Company make good the margin deficit.  However, the Company still failed to pay and satisfy the Debt or any part thereof.  The Debt remains wholly unpaid.  

27.  It is well established that a debtor may oppose a petition on the ground that there is bona fide dispute on substantial grounds as to the existence of the petitioning debt.  A bona fide dispute is not a trivial or insubstantial dispute, but one based on solid grounds disputable both in law and on the facts of the case.  (See Re Malcolm Westley Casselle (a debtor) HCB 1698/2010, unrep., 8 March 2011 at §24 per To J.)

28.  The burden is on the debtor to adduce sufficiently precise factual evidence which is believable to satisfy the Court that it has a bona fide dispute on substantial grounds.  (See Re Chan Hon Kwong HCB 6548/2016, unrep., 27 April 2017 at §9 per Ng J.)

29.  The defence must be one of substance, not just a fair probability.  (See Re ICS Computer Distribution Ltd [1996] 1 HKLR 181 at 183I-J per Rogers J (as he then was).

30.  The Court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.  The Court would caution itself against unsubstantiated and unparticularised assertions.  (See Re Hong Kong Investments Group Ltd [2018] HKCFI 984 at §13 per Ng J.)

31.  Applying the above legal principles to the facts of the present case, I have no difficult at all in coming to the view that the Debt is not bona fide disputed on substantial grounds.  First, it is clear that the Company did draw down its available margin facility and has so far not repaid the same.

32.  Secondly, I have no hesitation to come to the view that the Petitioner is contractually entitled, under the Margin Account T&C, to make margin calls against the Company and demand the Company to make payment or provide additional security when the “Margin Value” of the Margin Facility became zero on 23 June 2018.

33.  The Company’s failure to meet the margin calls constituted an event of default under the Margin Account T&C.  This provides another basis for the Petitioner to demand repayment of all outstanding sums from the Company.

34.  At the hearing, the only arguments advanced by Mr Wong for the Company were that:

(1) The Petitioner remains unable to produce any primary documentation of the alleged loan drawdown which is said to give rise to the Debt.

(2) There is no primary documentation evidencing the figure of the Debt.  The only available “evidence” showing the figure of the principal debt which the Petitioner could point to is the monthly statement for August 2019.  There are no particulars or an account of how the amount of the Debt came about.

35.  I have no hesitation in dismissing such submissions.  First, the contemporaneous documents clearly show that the Company has made use of the credit facility under the Facility Letter and was indebted to the Petitioner.

36.  Such fact was expressly and unequivocally admitted by the Company in writing. In an undated letter issued by the Company entitled “Margin 贷款续期申请,” the Company acknowledged that (1) the HK$400,000,000 Margin Limit would expire on 23 June 2018 (“Margin Loan 贷款4亿元将于2018年6月23日到期) and (2) it was obliged to repay the outstanding amounts to the Petitioner (“我司如融资成功，筹集到资金，也会计划将逐步还清该笔贷款”).  I agree that it is plainly incredible for the Company to disavow such a letter now and to dispute the existence of the Debt.

37.  Secondly, I agree with Mr Ho for the Petitioner the lack of any written drawdown notice does not assist the Company at all.  The credit facility agreed under the Facility Letter was one which does not require any written notice of drawdown from the borrower.

38.  This is evident from the monthly statement dated 31 March 2018, which shows that the Petitioner had granted the Company a credit facility of HK$400,000,000 with a maturity date of 23 June 2018 under the Margin Facility.  There is no suggestion that the provision of such a credit facility was preceded by any prior written drawdown notice from the Company.

39.  I do not think this argument gets the Company anywhere.

40.  At the end of the hearing, I directed the parties to file evidence and submissions to explain to this Court how the shares of a delisted company (“Delisted Shares”) can be traded in Hong Kong and to address the Court how the delisting of Haitian Energy may impact on the Court’s consideration of the 3 “core requirements” as a result of the Company’s jurisdictional challenge.

41.  Mr Wong for the Company then filed a Supplemental Submissions on 16 February 2021 which effectively sought to re-argue the Company’s entire case in opposition to the Petition including additional arguments like the Petitioner is fully secured, the Statutory Demand is defective and has not been effectively served.  Mr Ho for the Petitioner has a legitimate complaint that this is inappropriate and unsatisfactory as the hearing for the Petition has already taken place, at which parties have made full submissions. I never intended that the parties could have a second round of submissions on all relevant points.  My directions are focused and concern with two discrete issues.

42.  Nonetheless, Mr Ho for the Petitioner has professionally and admirably dealt with the additional points raised by Mr Wong for the Company.  First, I agree with Mr Ho for the Petitioner that there is no evidence and indeed allegation that the Petitioner is fully secured by reason of the pledge over the Haitian Shares.  There is no suggestion that the current value of Haitian Shares would be sufficient to cover the full amount of the Debt.  As such, it is clear that the Petitioner is not and cannot at present be a fully secured creditor.

43.  Secondly, I agree that it is fallacious and unrealistic for the Company to assume that the value of the Haitian Shares remained the same from February to August 2019.  Between February and August 2019, Haitian Energy had published no less than nine announcements suggest that the financial condition of Haitian Energy was in a state of flux, and that the value of the Haitian Shares was susceptible to fluctuation.

44.  Thirdly, I also agree that it is erroneous for the Company to submit that the Petitioner had an obligation to liquidate and realise the Haitian Shares before 27 August 2019.  As a matter of law, a security holder (1) owes no duty to the debtor to exercise its power of sale over the secured assets at any particular time and (2) could decide in its own interest whether and when to sell (See The China and South Sea Bank Ltd v Tan Soon Gin George [1990] 1 HKLR 546 at 550B-E per Lord Templeman.)

45.  It is also well established that a secured creditor may petition for the winding up of a debtor company. (See Synergy Lighting Ltd v Hong Kong and Shanghai Banking Corp Ltd [2020] HKCFI 2490 at §8 per G Lam J.)

46.  In any event, I am of the view that it is not very fair for the Company to raise this point after the close of evidence because the Petitioner did not have any opportunity to put forward any evidence on whether the Petitioner could still dispose of the remaining Haitian Shares at the time of the presentation of the Petition and if so whether it would be easy or difficult to do so.  There is also a factual issue as to at what price the remaining Haitian Shares could be sold.  The parties have not adduced evidence on all these aspects because the Company has not raised this argument before.  Hence, I do not think it is fair for the Company to raise it at this stage.  In any event, I will dismiss this submission as being unmeritorious.

47.  As to the alleged defects in relation to the service of the Statutory Demand, first, I totally agree with Mr Ho for the Petitioner that it is most surprising that the Company has only seen fit to challenge the service of the Statutory Demand after both parties have filed (1) their affidavit evidence and (2) multiple rounds of written submissions; and (3) had a full oral hearing of the Petition.

48.  Secondly, even if the service of the Statutory Demand is somehow defective such that the deeming provision under section 327(4) of the Companies (Winding Up and Miscellaneous Provisions) (Cap.32), (the “Ordinance”) cannot apply, this does not assist the Company.  A statutory demand is merely a means of proof of insolvency.  It is not a sine qua non for the success of a petition on the ground of insolvency (see Bozell Asia (Holding) Ltd v CAL International Ltd [1997] 1 HKLRD 1 at 7B-C per Rogers J (as he then was) and Ricco (International) Company Limited v Uni Harvest International Limited [2020] HKCFI 201 at §§32-34 per Deputy High Court Judge Abraham Chan SC).

49.  I am of the view that, in the present case, it is plain and obvious that the Company should, even in the absence of any statutory demand, be wound up under section 327(3)(b) of the Ordinance on the basis that it is unable to pay its debts which are presently due and owing. The Debt is presently due and owed by the Company to the Petitioner. The Company fails to pay the same.

50.  The Company’s only known assets were the Haitian Shares. Following the delisting of Haitian Energy on 7 December 2020, there is no evidence adduced by the Company as to how much those Haitian Shares worth now. The Company has not suggested (let alone adduced any evidence) that the present value of the Haitian Shares is sufficient to cover the Debt.

51.  In the circumstances, the Company is obviously insolvent and this Court has no hesitation to find that the Company is unable to pay its debts within the meaning of section 327(3)(b) of the Ordinance.

JURISDICTION TO WIND UP FOREIGN COMPANIES

52.  Mr Wong for the Company submitted that the Petitioner fails to satisfy the three core requirements so that the Court can exercise its discretionary jurisdiction to wind up the Company, a foreign company.

53.  I have to confess that I have difficulties in understanding such submissions.  The Company was specifically incorporated, though in BVI, for the purpose of investing and trading in listed securities in Hong Kong. Its accounts show that it had had active trading activities of listed securities in Hong Kong including the Haitian Shares.  Its accounts were with the Petitioner in Hong Kong.  The only remaining assets of the Company are the Haitian Shares which though delisted are situated in Hong Kong and can be traded in Hong Kong albeit not through the HKSE. In fact, it is the Company’s case that the Petitioner should have realised the Haitian Shares to partially set off the Debt.

54.  Under section 327 of the Ordinance, the Court has a discretionary jurisdiction to wind up a foreign company. To determine whether to exercise its discretionary jurisdiction, the Courts will normally have regard to three core requirements, namely, that:

(1) The foreign company had a sufficient connection with Hong Kong;

(2) There must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(3) The Court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets. (See Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§19-21 per Ma CJ and Lord Millet NPJ.)

55.  As to the first core requirement:

(1) The required connection need not consist in the presence of assets within the jurisdiction. A sufficient connection can be shown if the foreign company incurred the petition debt under an agreement negotiated, executed and performed within the jurisdiction and carried on business within the jurisdiction. (See International Westminster Bank Plc v Okeanos Maritime Corp [1987] 3 All ER 137 at 148H-149H per Gibson J.)

(2) It is also relevant for the Court to consider whether there is any other jurisdiction which is more appropriate for the winding up of the company. (See Winbless Inc v Silver Shadow Company Limited HCCW 369, 370, 375/2011, unrep. 24 February 2014 at §62 per Mimmie Chan J.)

56.  As to the second core requirement, it is not necessary for a petitioner to identify with great precision what the benefit will be or quantify with exactness the value of the benefit, as long as the benefit can be said to be a real possibility rather than a merely theoretical one. (See Re China Huiyuan Juice Group Ltd [2020] HKCFI 2940 at §§26-29 per Harris J.)

57.  As to the third core requirement, this requirement will generally be satisfied by the presence of a creditor holding a material portion of the debt of the company. (See China Medical Technologies Inc [2014] 2 HKLRD 997 at §48 per Harris J.)

58.  Applying the above legal principles to the facts of the present case, I am satisfied that the Company had a close connection with Hong Kong both in terms of its overall business and operations.  First, the sole commercial purpose of the Company is to act as Mr Lin’s personal investment holding vehicle in respect of investments and trading in listed securities in Hong Kong including shares of Haitian Energy.  It can hardly be disputed that the Company’s investment activities were at all material times closely tied to Hong Kong.

59.  Secondly, the Facility Letter at issue was negotiated, executed and performed in Hong Kong. Specifically, the Facility Letter contains (1) a correspondence address of the Company in Hong Kong; (2) the appointment of a service process agent for the Company in Hong Kong; (3) a Hong Kong governing law clause and (4) a non-exclusive jurisdiction clause in favour of Hong Kong.

60.  Thirdly, the Company’s sole director and shareholder (i.e. Mr Lin) is an individual who had (1) provided a Hong Kong correspondence address in the Facility Letter, and (2) reported a Hong Kong residential address in the latest annual return of Haitian Energy.

61.  Fourthly, the Haitian Shares are capable of being transferred, traded and dealt with in Hong Kong.  The fact that Haitian Energy was incorporated in the Cayman Islands is of no practical significance in relation to any future distribution or liquidation.

62.  Fifthly, I agree that there is no other jurisdiction which is more appropriate than Hong Kong for the winding up of the Company.  The Company’s connection with Hong Kong is much closer than that with the BVI (i.e. its place of incorporation).  There is no suggestion that the Company has carried out any business activities in the BVI after its incorporation.  By contrast, the Company has carried out business dealings in Hong Kong by entering into various facility agreements with the Petitioner since June 2014.

63.  As for the second core requirement, I am of the view that a winding up order in Hong Kong has a real possibility in bringing benefit to the Petitioner.  Mr Lin has not provided the Petitioner with any information regarding the asset and liabilities of the Company.  As of now, the Haitian Shares are the only known assets of the Company.  It is unclear whether the Company has any other assets, and if so, their value.

64.  I agree that it cannot be said that there will have no practical benefit to the Petitioner to have a liquidator appointed to investigate the financial position of the Company and ascertain whether the Company hold other assets which could be realized for the benefit of the Petitioner and/or other creditors.

65.  Further, I also agree that whilst the Haitian Shares are likely to be of limited value following Haitian Energy’s delisting on 7 December 2020, a liquidator will be able to exercise the Company’s rights (as shareholder of Haitian Energy) to protect or maximise the value of the Haitian Shares.

66.  For instance, a liquidator exercising the Company’s rights as shareholder can (1) enquire into the restructuring or liquidation of Haitian Energy; (2) obtain Haitian Energy’s books and accounts and (3) request the directors of Haitian Energy to provide a financial status update.  A liquidator will also be much better placed than the Petitioner to identify any potential buyers who are interested in the Haitian Shares.

67.  In the regards, Mr Ho for the Petitioner submitted that the Petitioner has indicated that it is prepared to provide funding to the liquidators to exercise the Company’s rights as an 18% shareholder of Haitian Energy in order to take steps to investigate into the causes of failure of that Company so as to maximize the value of the Haitian Shares.  I agree that there is therefore a real rather than theoretical possibility that a winding-up order will benefit the Petitioner.

68.  Additionally, the other shareholders of Haitian Energy, namely, (i) Haitong International Investment Fund SPC – Fund I SP, (ii) Great Loyalty International Investment Ltd, (iii) Oceanwide Holdings International Limited and (iv) Grand Profit International Investment Limited (who together hold approximately 44.1% of the shares in Haitian Energy) have indicated to the Petitioner that:

(1) They would support the involvement of the Company’s liquidators in the restructuring or liquidation of Haitian Energy; and

(2) They would request a general meeting of Haitian Energy to be called and pass any necessary resolutions to protect or maximize the value of the Haitian Shares.

69.  Since these other shareholders and the Company together hold more than 50% of the shares in Haitian Energy, it is clear that there will be a simple majority of more than 50% shareholding in approving any ordinary resolution at a general meeting of Haitian Energy.

70.  Mr Wong for the Company submitted that the second core requirement has not been satisfied because:

(1) The liquidators appointed by Hong Kong Courts will not be recognised by the Cayman Court.

(2) There is no real and discernable benefit in winding up the Company since the listing status of Haitian Energy has already been cancelled.

71.  I disagree. In the present case, the benefits to be derived from a winding-up in Hong Kong are not dependent upon the Hong Kong liquidators being recognised by the BVI courts or the Cayman courts.

72.  As observed by Ma CJ and Lord Millet NPJ in §39 of Kam Leung Sui Kwan v Kam Kwan Lai (supra), every court has an implied jurisdiction to make whatever orders that are necessary to give effect to its own judgments. Where (1) a company has representatives and officers who reside in Hong Kong and (2) such representatives and officers are subject to the in personam jurisdiction of the Hong Kong Courts, a Hong Kong liquidator will be able to apply for court orders to facilitate the exercise of its powers.

73.  In the present case, the annual return of Haitian Energy dated 20 October 2019 shows that:

(1) Haitian Energy has established a place of business in Hong Kong.

(2) Haitian Energy has an “authorized representative” by the name of Lin Tian Hai in Hong Kong; and

(3) Three of the five directors of Haitian Energy were resident in Hong Kong.

74.  A Hong Kong liquidator will be able to enforce the Company’s right qua shareholder of Haitain Energy within Hong Kong.  A Hong Kong liquidator will not need the recognition of the BVI courts or the Cayman courts to sell or realise the value of the Haitian Shares, since the Haitian Shares, despite the delisting, are capable of being transferred and traded in Hong Kong.  I accept the Petitioner’s evidence that in fact, part of the transfer or trading or dealing process must take place in Hong Kong.  This makes Hong Kong the more appropriate forum to make a winding up order.

75.  The delisting of Haitian Energy may or may not have affected the value to be realized by way of restructuring. At the present stage, it cannot be said that the prospect of realizing the value of the Haitian Shares through the appointment of a Hong Kong liquidator is a theoretical one. This Court will do what it can to facilitate such a process for the general benefit of all stakeholders including the Petitioner.

76.  As to the third core requirement, this requirement is clearly satisfied since the Petitioner is a creditor of the Company incorporated with an established presence in Hong Kong.

DISPOSITION

77.  For all the reasons stated above, I make the usual winding up order against the Company.

78.  As far as costs is concerned, I make a cost order nisi that the Company is to pay the costs of and occasioned by the Petition to the Petitioner, to be taxed on a party to party basis if not agreed. This cost order nisi will be made absolute within 14 days hereof unless the parties take out an application to vary the same within the 14 days period.

79.  Finally, it remains for me to thank Mr Ho for the Petitioner and Mr Wong for the Company for their helpful assistance.