RE YUAN TONG GLOBAL FINANCIAL GROUP LTD (formerly known as NOBLESEED FINANCIAL GROUP LTD)

HCCW 258/2020 [2021] HKCFI 1534 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING UP) PROCEEDINGS NO. 258 OF 2020 ______________________________ IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and IN THE MATTER of Yuan Tong Global Financial Group Limited圓通環球金融集團有限公司(formerly known as Nobleseed Financial Group Limited協同博勤金融集團有限公司) ______________________________ Before: Deputy High Court Judge Alexander Stock, SC in Chambers Date of Hearing: 17 May 2021 Date of Decision: 4 June 2021 _____________________ DECISION _____________________ By a petition dated 14 August 2020, the Petitioner (Directir Limited) seeks to wind up the Company (Yuan Tong Global Financial Group Limited) on the ground of insolvency, under sections 177(1)(d) and 178(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32). The Petitioner relies on a statutory demand issued on 24 June 2020, for an alleged debt of HK$1,300,000, said to have arisen under a Service Agreement for Animation Production Services dated 9 March 2020 (the “Agreement”). The Company opposes the Petition on the ground that there is a bona fide dispute on substantial grounds as to the existence of the alleged debt. The sole issue is whether the Company has discharged its burden of establishing such a bona fide dispute. At the hearing of the petition before me, the Petitioner was represented by Mr Carter Chim and the Company was represented by Mr Mike Yeung. Principles There is no dispute as to the applicable principles, which were summarised recently by Deputy High Court Judge Sit SC in Re Asia View Enterprises Ltd [2020] HKCFI 2812, as follows: A petitioner who is owed an undisputed or indisputable debt is entitled to a winding up order ex debito justitiae. In order to successfully oppose a petition on the basis of a bona fide dispute on substantial grounds, the debtor has to adduce sufficiently precise evidence which is believable, and must establish that it has a defence of substance, not just a fair probability of one. Winding up proceedings are summary in nature and are not meant to be used for the purpose of debt collection. If the court is satisfied that there is a bona fide dispute on the debt, it will not usurp the function of a civil court and decide the disputes between the parties. The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, “substantial” means having substance and not frivolous. 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 should caution itself against unsubstantiated and unparticularised assertions. It is incumbent on the company to put forward sufficiently precise factual evidence to substantiate its allegations. The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised. Facts and alleged debt The facts appear from the parties’ respective affidavit evidence, given by: (i) Ko Cheun Kam (“Ko”), a manager of the Petitioner; and (ii) Kwok Wai Tak (“Kwok”), a director and sole shareholder of the Company. The Petitioner is a financial public relations company, whose sole shareholder is and was Ronald Kung Yiu Fai (“Kung”). The Company is the parent company of Yuan Tong Global Securities Limited (formerly known as Nobleseed Securities Limited) (“YTG Securities”), a financial service provider licensed to conduct certain regulated activities under the Securities and Futures Ordinance (Cap. 571). In or around March 2020, YTG Securities acted as one of the Joint Bookrunners and Joint Lead Managers for an intended initial public offering (“IPO”) in Hong Kong of shares in MBV International Limited (“MBV”). In connection with MBV’s intended IPO (the “IPO”), the Petitioner and the Company entered into the Agreement dated 9 March 2020 with the following relevant provisions: “…[the Company] now engages [the Petitioner] to produce a 1-minute short animation for the Company’s client and agrees to accept the engagement and enter into an agreement with both parties. The agreement is as follows: I. Services Provided by [the Petitioner]: - Conceptualize the concept and content of the film. - Design and production of 1-minute video. - Sound editing and background music (without narration). - Approximately 10-15 working days of production and editing time. - Utilize [the Petitioner’s] social media platforms (to promote) at the relevant promoting period. … IV. Term of service and fee The term of provision of the public relations services shall be from the signing of the Agreement to 26 March 2020. The total amount of the investor relations and public relations consultancy fees paid by the Company to [the Petitioner] for this agreement is HK$1,354,000, which is based on [the Petitioner’s] estimation of work required to complete the production of a one-minute animation film, if the Company requires other services not referred to in this Agreement, [the Petitioner] shall provide separate quotations accordingly … VI. Commencement and termination Effective Date of this Agreement: Effective upon the signing of this Agreement until 26 March, 2020. VII. Payment After signing this agreement, the Company should pay a sum of HK$54,000 of the service fee by cheque or bank transfer to [the Petitioner] within 2 days and the remaining service fee (HK$1,300,000) by 26 March, 2020. Once the agreement is signed, it cannot be cancelled or altered. The above fees are non-refundable project operating expenses and other sales expenses are payable by invoice…”. On 10 March 2020, the Company sent to the Petitioner a cheque for HK$54,000, in payment of the first amount under clause VII of the Agreement. On 20 March 2020, Ms Sarah Li of the Petitioner sent by WhatsApp message a copy of a draft animation clip to, inter alia, Ms Yan of the Company, and asked Ms Yan to provide comments on the same by 23 March 2020. The Petitioner also issued to the Company an invoice seeking payment of the balance said to be due under the Agreement (i.e. HK$1,300,000). On 23 March 2020, MBV issued an announcement that it had decided not to proceed with the IPO. Further WhatsApp messages were exchanged between Ms Li and Ms Yan. On 25 March 2020, a WhatsApp message from Ms Li provided a link to the final version of the animation clip, and Ms Li indicated that the IPO had been adjourned. Subsequently, there was correspondence whereby the Petitioner claimed that the second payment of HK$1,300,000 under the Agreement was due and owing, which the Company disputed. A DVD containing the animation clip prepared by the Petitioner for the IPO, was included as an exhibit to Ko’s evidence. Alleged defence/bona fide dispute The evidential basis for the alleged defence/bona fide dispute is set out in Kwok’s affirmation evidence, the relevant portions of which can be summarised as follows: Kung (of the Petitioner) was a long-time acquaintance of Tsang Wing King (“Tsang”), the CEO and a director of the Company. There were various past dealings in connection with capital markets transactions between entities controlled by Kung, and the Company’s associates (including YTG Securities). As a result, the Petitioner was aware of the manner in which YTG Securities was paid for such services, i.e. that payment of a majority of YTG Securities’ entitlement would be dependent on the success of the relevant IPO. At the time of the Agreement, in principle approval had been obtained from The Hong Kong Stock Exchange in respect of the IPO, and the parties anticipated that the IPO would complete on 27 March 2020. The Petitioner knew that the financial entitlements of YTG Securities for the IPO would depend on the successful listing of MBV’s shares. Prior to the Agreement, discussions took place between Tsang and Kung; and Kwok’s account was based on what he was told by Tsang. During those discussions, Kung mentioned that he had incurred investment losses in previous capital markets projects with YTG Securities and suggested that he was an influential figure. In effect, Kung sought an inflated price of HK$1,354,000 for the services provided under the Agreement, to cover or compensate for such past investment losses. Since YTG Securities did not wish to jeopardise its reputation, Kwok procured Tsang to indicate that the Company was willing to consider the requested fees if YTG Securities became entitled to its full fees arising from MBV’s IPO. YTG Securities would only be able to charge MBV for the animation production at market rate, such that a substantial part of the HK$1,354,000 fee would have to be borne by YTG Securities or its group companies. It was therefore crystal clear to Kung that the fee of HK$1,354,000 was only agreeable if the portion of the fees in excess of the market rate would only become payable when YTG Securities’ entitlement to all its fees for MBV’s IPO became reasonably secure (i.e. upon the successful completion of the IPO on the expected date of 27 March 2020). Kung accepted this arrangement and parties executed the Agreement. Accordingly, it was agreed that the fees of HK$1,354,000 for the provision of the animation service would be in two stages: the first being HK$54,000 payable within two days, and the second being HK$1,300,000 payable on or before 26 March 2020 if and only if there was by 26 March 2020 continued contemplation by all professional parties of an expected MBV listing on 27 March 2020. In other words, if at any time after the Agreement until 26 March 2020, MBV would not be listed on 27 March 2020, the Agreement would immediately be terminated, all rights and obligations would cease, and the Petitioner would only be entitled to the first amount. Further, but for the said background and explanation, a one-minute animation for an IPO road show could never justify a fee over HK$1,000,000. On the basis of this evidence Mr Yeung, for the Company, put the point in terms that payment of the disputed sum (HK$1,300,000) was subject to a condition, namely, the IPO participants’ continuing expectation as at 26 March 2020, of the IPO’s completion on 27 March 2020. In written argument, the condition was said to arise in one of three ways: (i) on true construction of the Agreement; (ii) as an implied term (by necessary implication or in order to give business efficacy); and/or (iii) as a collateral agreement qualifying the Agreement. In its reply evidence, the Petitioner denied the Company’s factual account of pre-contractual conversations between Tsang and Kung, and denied that there was any condition to payment as alleged by the Company. Analysis Having considered the parties’ respective evidence and arguments, I conclude that the Company has failed to raise a bona fide dispute on substantial grounds. My key reasons are as follows. First, there is simply no textual support in the Agreement, for the alleged condition; and further, the alleged condition is in my view inconsistent with the express terms. The payment terms in the Agreement are clear: the first payment (HK$54,000) is to be made within two days, and the second payment (HK$1,300,000) is to be by 26 March 2020. There is no reference whatsoever to a condition of the nature contended for by the Company, nor to anything which might suggest an intention to impose such a condition. In other words, the insertion of the alleged condition requires one to re-write the terms of a clearly worded written contract. Despite Mr Yeung’s various contrary arguments, I do not see that there is any relevant ambiguity in the contractual provisions on payment, nor any other matter in the Agreement which would support the construction contended for by the Company. Second, the condition contended for does not appear to be commercially workable or sensible, even on the Company’s own version of the parties’ intentions and the contractual context. As pointed out by Mr Chim, if the parties’ intention had been to tie payment of the second installment to the receipt by YPG Securities of its fees for the IPO, then the alleged condition is ineffective, and an entirely blunt tool, for the purpose of achieving such an objective. That is because, on the Company’s own case, the IPO was only expected to complete on 27 March 2020, yet the Agreement provides for payment of the second installment by 26 March 2020. Had the parties truly intended to tie payment of that installment to YTG Securities’ fees for the IPO, they would surely have deferred such payment until at least 27 March 2020. Accordingly, the choice of 26 March 2020 as the date for the second payment, seems inconsistent with the Company’s case as to the parties’ contractual intentions and what was discussed or agreed orally. Despite best efforts, Mr Yeung was unable to provide an adequate answer to this point. Further, there is another, simple explanation for the choice of 26 March as the date for payment of the second installment of fees, namely, that that is the date upon which the provision of services under the Agreement was to be completed. That explanation is consistent with the Petitioner’s construction of the Agreement, which is in turn reflects the actual wording used. Indeed, it is doubtful whether the condition framed by the Company - which ties a substantial payment obligation to the “continuing expectation” of the “IPO participants” - is even sufficiently certain for contractual purposes. Third, and again related, there is at least some inconsistency between different versions of the alleged condition contended for by the Company, and what is said to have been agreed between Kung and Tsang: compare paragraphs 18(4) and (5) above. Notably, it was at times said that the second payment obligation was tied to the “successful completion” of the IPO, and at other times that it was tied to a continuing expectation of this, as at 26 March 2020. In addition, Kwok’s affirmation evidence of pre-contractual conversations and agreement between Kung and Tsang, was hearsay. No evidence was filed by Tsang on point, nor was any explanation proffered for its absence. In these circumstances, and in light of the other points set out above, I do not find Kwok’s evidence of such pre-contractual conversations and agreement to be reliable for present purposes. Given the above points, whether one analyses the Company’s position in terms of contractual construction, implication of contractual terms, or collateral agreement, I do not see that there is a reasonable or plausible argument for imposing the condition contended for. Mr Yeung, for the Company, relied heavily on the total amount of fees payable under the Agreement, arguing that it is self-evident that these were grossly excessive for the production of a simple 1-minute animation clip. This was said to support the Company’s position, that the second installment under the Agreement was in truth intended to provide compensation for a past grievance, rather than reflecting the market value of the services provided. However, I do not think that this point assists the Company. There was no evidence before me on appropriate markets rates for services of the type provided, which in fact included more than simply preparation of the 1-minute clip: see above. Further, the Agreement expressly provided that the fee charged was based on the Petitioner’s estimation of the work required. More importantly, even assuming it were correct that the amount of consideration under the Agreement is excessive by reference to market rates, and further assuming that the intention was to compensate Kung for a past grievance, these features would not support the condition contended for. That is because the alleged objective of compensating Kung would or could still be achieved on the Petitioner’s construction of the agreement (i.e. as per its actual wording); and does not entail or suggest the further consequence that payment of the second installment be conditional on YTG Securities receiving its fees for the IPO (or a reasonable expectation of the same). Next, Mr Yeung relied on Kwok’s evidence of past dealings between Kung, and the Company/YTG Securities. There were exhibited to Kwok’s evidence two consulting services agreements said to be between the Company/YTG Securities, and another of Kung’s entities. Mr Yeung argued that the fees for services rendered were on these occasions paid in one tranche, which raises the question why a split payment mechanism was used in the Agreement. However, the agreements in question were with a different entity, and for the provision of a different type of service (certain assistance in studying the Taiwan stock market). I do not see how the payment mechanism in these agreements takes the matter significantly further one way or another, for present purposes. Nor do I think that the split payment mechanism in the Agreement calls for any further explanation, given that the second installment fell due on a date when the works and services in question were due to be completed, and on the day before the IPO was expected to take place. Finally, in written argument Mr Yeung attempted to demonstrate, by reference to the Company’s consolidated financial statements, that the Company was solvent such that it could pay the alleged debt if it saw fit. This was relied upon as an indicator that the dispute as to the debt was genuine. However, this also does not assist. There is no dispute that the statutory demand was validly served and not paid. In a case of this nature, the Court must decide on the basis of the evidence and legal principles, whether the alleged debt is bona fide disputed on substantial grounds. If not, the petitioner is entitled to a winding up order as of right: see principles set out above. Indeed in oral argument, this line of argument was not pressed. Conclusion and disposition For the above reasons, I conclude that the Company has failed to demonstrate a bona fide dispute on substantial grounds as to the petition debt. I will accordingly make a winding up order against the Company, in the usual terms. As to costs, I will make an order nisi that Petitioner’s costs and the Official Receiver’s costs be paid out of the assets of the Company, on a party and party basis, to be taxed if not agreed. ( Alexander Stock, SC ) Deputy High Court Judge Mr Carter Chim instructed by Messrs. Robertsons for the Petitioner Mr. Mike Yeung instructed by Messrs. K. B. Chau & Co for the Respondent Official Receiver being absent