VERIZON UK LTD v. CARDTEL EUROPE LTD

HCCW 430/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 430 OF 2010

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BETWEEN

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REASONS FOR DECISION

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Introduction

1.  On 22 October 2010 the Petitioner, Verizon UK Limited, issued a winding-up petition, which was amended on 11 January 2011, seeking a winding up of Cardtel Europe Limited (“Company”). On 17 November 2011 I made a winding-up order.  These are my reasons for doing so.

2.  The Amended Petition relies on a debt of £11,841,916.80 plus interest of approximately HK$142,148,305.08 as at September 2010 (“Debt”).  The debt arises under a guarantee and indemnity agreement dated 28 May 2010 (“Guarantee”) given in respect of the liabilities of Nowtel Europe Limited (“Nowtel”) under 2 agreements, namely, a wholesale master services agreement dated 25 June 2001 between Nowtel and the Petitioner (“Master Agreement”) and a further agreement dated 28 May 2010 to entered between Nowtel and the Petitioner to provide for payment of outstanding sums owed under the Master Agreement and for a variation in payments terms for the provision of future services (“Variation Agreement”).

3.  Nowtel is incorporated in Ireland.  It and the Company are members of the Nowtel group of companies. Nowtel was wound up voluntarily in Ireland on the grounds of insolvency on 27 October 2010.

4.  The Petitioner does not rely on a statutory demand to demonstrate insolvency.  However, it is not in dispute that:

(1) the Company executed the Guarantee;

(2) the Debt has been incurred by Nowtel;

(3) the Company is unable to pay the Debt if it is due under the Guarantee; and

(4) that if the court is not satisfied that the Company has a bona fide defence on substantial grounds to the Debt it is liable to be wound up.

5.  The Company disputes the Debt on the grounds that it entered into the Guarantee in reliance on a misrepresentation about the sums owed to the Petitioner during the negotiation of the Variation Agreement and that it is entitled to have the Guarantee rescinded.  Before dealing with the defence I shall consider the legal principles applicable when determining whether or not a respondent to a petition to wind up a company on the grounds of insolvency has demonstrated that the company has a defence to the debt which founds the petition.

Legal Principles

6.  It is well established that where a company seeks to dispute a petition debt:

(1) The burden is on the company to establish a genuine dispute on substantial grounds.

(2) The court should assess the company’s evidence against so much of the background and evidence as is not in dispute or capable of being disputed. In other words the court must consider whether, when assessed in context, the company’s evidence is capable of belief.

(3) It is incumbent on the company to put forward sufficiently precise factual evidence to substantiate its allegations.

(4) The court in determining where there is a substantial dispute must necessarily take a view on the affidavit evidence to see if the company is merely raising a cloud of objections or whether there is substance in the dispute raised.

See: Re ICS Computer Distribution Ltd [1996] 3 HKC 440 at 443D-444E; Re Hong Kong Construction (Works) Ltd HCCW 670/2002, 7 January 2003 Kwan J (unrep) at para 6(1)-(4); Re Safe Rich Industries Ltd CA 1/1994, 3 November 1994, Bokhary JA at para 13.

The Defence

7.  The Company argues that it agreed to sign the Guarantee on the basis of, and in reliance upon, the Petitioner’s representations that:

(1) Nowtel’s outstanding indebtedness to the Petitioner at the time was US$17,083,331: see recital B to the Variation Agreement.

(2) The alleged outstanding amount was US$4,083,331 in excess of the agreed credit limit of US$13,000,000: see recital D to the Variation Agreement.

8.  It is the Company’s case that the representations were untrue because either there was no or little excess over the agreed credit limit owed by Nowtel to the Petitioner at the time the Variation Agreement was negotiated and the Guarantee signed.  Had the Company been aware that the representations were untrue, i.e., Nowtel’s outstanding indebtedness was in fact substantially less than US$4,083,331 in excess of the agreed credit limit, the Company would not have agreed to enter into the Guarantee.

9.  The Company submits that a misrepresentation of fact by a creditor, which induces the guarantor to enter into a guarantee, will entitle the guarantor, in accordance with normal principles, to rescind the guarantee.  The misrepresentation may relate to the financial position or state of accounts of the principal, the creditor’s policy and intentions as to the terms of the principal contract, or the need and purpose of the guarantee.  I do not understand the Petitioner to dispute these basic principles.

10.  The Company also submits that the courts are more inclined to treat a minor misrepresentation as justifying rescission in the case of guarantees than might be the case if dealing with other kinds of contracts.  Mr. Douglas Lam, who appeared for the Company, referred me to the decision of Fry J in Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469 in which he says:

“there is no consideration in this case, as in many cases of suretyship, for the contract so entered into; and therefore I think …it is a contract in respect of which very little is sufficient. Very little said which ought not to have been said, and very little not said which ought to have been said, would be sufficient to prevent the contract being valid”

11.  In so far as this suggests that a misrepresentation of little materiality to the guarantor’s decision to sign a guarantee may justify rescission or the award of damages because of the particular nature of a guarantee, I disagree.  It may be that in practice a decision to guarantee a debtor’s liabilities is a sensitive one and that in particular cases little would have been required to cause the guarantor to refuse to act as a surety, but that seems to me to be a different matter and goes to the commercial, rather than the legal, character of a guarantee. Having said this in my view nothing turns on this issue in the present case. The determinative issues are whether or not I am satisfied that there was a misrepresentation and, if I am, whether I am further satisfied that if it had not been made the Company would not have signed the Guarantee.

12.  The Petitioner does not accept that there had been overcharging and points to acknowledgments of the sums in Nowtel’s statement of affairs and the absence of any challenge to the Petitioner’s claim for this sum in Nowtel’s liquidation despite the fact that the Company’s deponent was also a director of Nowtel.  It says that even if, which it does not admit, there had been overcharging in the order of the amount that the Company has been able to particularise, namely, £2,149,079 (see paragraph 26 of Mr. Bell’s 3^rd affirmation) it still leaves over £9,000,000 of the Debt unexplained.

13.  The Company argues that this is not the point.  What it has demonstrated is that rather than the Company owing in excess of US$4,083,331 over the credit limit as recorded in the Variation Agreement, at the most Nowtel owed US$1,934,252 and probably less than this as it is likely that there was further overcharging, which the Company has not yet been able to identify.  If it had been known that the excess was not as significant as represented by the Petitioner the Company would not have signed the Guarantee.  I accept that the Company has demonstrated that there is a serious dispute as to whether or not Nowtel had been overcharged by US$2,149,079.  I do not accept that the Company has demonstrated that it has bona fide defence on substantial grounds that a material misrepresentation was made by the Company on which it relied in deciding to sign the Guarantee for the following reasons.

14.  There is no evidence that any representations were made to the Company about the amount of the excess over the credit limit at all or that the Company had any discussions with the Petitioner about the Guarantee.  What appears to have happened is that Nowtel was told by the Petitioner the terms on which it was prepared to continue to provide its services and that Nowtel was left to obtain a guarantee from the Company.  There is no evidence that the Company’s board ever saw the Variation Agreement in which the alleged misrepresentations are contained or any evidence concerning its deliberations prior to authorising the execution of the Guarantee.  The relevant part of Mr. Bell’s evidence is to be found in paragraphs 17 to 19 of his 1^st affidavit, which reads as follows:

“17. As the Company is a member of the Nowtel group, I considered that it was in the interests of the Company to provide a guarantee with respect to certain liabilities of Nowtel Europe to Verizon. The decision for the Company to provide a guarantee to Verizon was premised upon Verizon’s representation that Nowtel Europe had exceeded the credit limit agreed between the parties under the Wholesale Master Services Agreement by around US$4 million. As explained below, the Company discovered subsequently that Verizon had substantially overcharged Nowtel Europe for its services.

18. If Verizon had not made its representation concerning the alleged substantial excess, then I would not have agreed to execute the Guarantee and Indemnity on behalf of the Company. This is because:

(a) If there had not been any excess of the credit limit, then there would not have been any reason for Nowtel Europe to execute the Payment Plan or to request that the Company and other Nowtel group companies execute the Guarantee and Indemnity; and

(b) If there had been only a relatively minor excess of the credit limit, then I would have expected Nowtel Europe to make its own arrangements to pay the excess sum or provide Verizon with other forms of security. I would not consider that it would be necessary or in the interests of the Company to provide a guarantee.

19. Accordingly, the Company only executed the Guarantee and Indemnity because of Verizon’s representation that Nowtel Europe had substantially exceeded the credit limit by approximately US$4 million. If not for Verizon’s representation, the Company would not have been prepared to execute the Guarantee and Indemnity. More specifically, if the Company had been aware that substantial sums claimed by Verizon were erroneous and unfounded, then in no circumstances would the Company have agreed to the Guarantee and Indemnity.”

15.  This evidence assumes a number of different things:

(1) There was either no excess over the credit limit or, if there was, the amount was minimal.

(2) If there had only been about US$1,900,000 in excess of the credit limit either the Petitioner would not have insisted that the Guarantee be provided or, even if it had, the Company would have refused to give it even if it meant that the Petitioner ceased to provide services to Nowtel.

16.  All that the Company has demonstrated is that Nowtel had been overcharged in the order of US$2,200,000.  This still leaves an excess of over US$1,500,000.  This is not a minimal figure even in the context of the sizable credit limit made available by the Petitioner.  It is quite clear from the emails that the Petitioner was insistent that its terms for continuing to provide services to Nowtel, which included the Guarantee, be met or it would terminate the services.  This is very clear from the Petitioner’s email of 25 May 2010 in response to Nowtel’s attempts to negotiate the Petitioner’s terms for continuing to provide its services.  The Petitioner makes it clear that it is no longer prepared to act, as it saw it, as a financier to Nowtel on an unsecured basis.  The email culminates in the following terms:

“From a Verizon perspective, the Nowtel options are therefore as follows:

1. Return the ‘complete package’ of signed documents to Verizon – these are the original documents we have issued and includes the payment plan document, the cross-company guarantees and the charge over fixed assets. The previously stated deadline of noon Wednesday 26^th May2010 still applies; or

2. Nowtel return to managing the account within the original agreed 45 day payment terms and make immediate payment of all amounts overdue, payment to be received no later than 5 pm, 26^th May 2010. The exact figure can be provided on request.

Failure to do either of these by the specified date, will result in us issuing a 5 business day suspension letter for all services provided. If Nowtel fails to then cure the breach of payment terms stated above pursuant to the Suspension Notice, it is Verizon’s intention to suspend services and terminate the service agreement(s) in place. Verizon reserves its right to issue legal proceedings to recover the outstanding amounts plus interest and costs at any time.

I trust this clarifies our position.”

17.  Following the email the package of documents including the Guarantee were signed.  There is simply no evidence to suggest that the Company was giving any independent consideration to whether or not it would sign the Guarantee.  On the face of the matter it was simply doing what it was asked by Nowtel.  The Company has not come close to demonstrating that if it had been told, whether by the Petitioner or Nowtel, that the excess over the originally agreed credit limit was, say, US$1,000,000 rather than over US$4,000,000 it would have made any difference to whether or not it signed the Guarantee.  I do not find Mr. Bell’s believable. His evidence is this regard I find to be disingenuous. 

18.  In conclusion, I have not been satisfied that the Company has demonstrated that it has a bona fide defence on substantial grounds to the Debt.