Z v. Y

HCSD 21/2020 [2020] HKCFI 3178 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE APPLICATION TO SET ASIDE A STATUTORY DEMAND NO 21 OF 2020 _______________ BETWEEN X Applicant and Y Respondent _______________ AND HCSD 22/2020 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE APPLICATION TO SET ASIDE A STATUTORY DEMAND NO 22 OF 2020 _______________ BETWEEN Z Applicant and Y Respondent _______________ (Heard together) Before: Hon Linda Chan J in Chambers (Not open to public) Date of Hearing: 18 December 2020 Date of Decision: 18 December 2020 Date of Reasons for Decision: 31 December 2020 _________________________________ R E A S O N S F O R D E C I S I O N _________________________________ By 2 applications dated 25 May 2020, X (“X”) and Z (“Z”) (together “Debtors”) seek to set aside the 2 statutory demands dated 7 May 2020 (“SDs”) served by Y (“Respondent”) requiring each of them to pay $209,088,000 (“Debt”). At the hearing, I dismissed the applications and ordered the Debtors to pay the costs of and occasioned by the applications to the Respondent, to be taxed if not agreed, with certificate for 2 counsel. These are the reasons for my decision. A. Background facts The Debt arose in this way. The Respondent’s sole shareholder is Lin (“Lin”). Lin together with Chan (“Chan”) are the directors of the Respondent. Chan is the wife of BL (also known as LY and YY) (“BL”). The Debtors allege that Lin and Chan were BL’s nominees and they acted in accordance with his instructions. FCM (“FCM”) is controlled by KK, the younger brother of X, and is said to be Z’s corporate vehicle. Through FCM, Z held approximately 30% shares in CTS (“CTS”) which, in turn, holds 99.83% shares in M (“M”). By a new set of agreements including a framework agreement entitled “五方協議” dated 28 September 2019 (“Five Parties Agreement”) entered into between X, the Respondent, Lin, Z and FCM, Z and X agreed to pay $308,000,000 owed to the Respondent under a series of agreements previously made between the same parties in September and October 2018 in the following manner: Z agreed to purchase 110 million shares in TWR for $143,000,000 (“Price”), to be paid by 27 March 2020 failing which the Respondent can enforce against the security. Z agreed to pay $165,000,000 to the Respondent by 27 March 2020 (“$165M Debt”) with interest. Z’s obligations were secured by (i) a 股份抵押协议dated 30 September 2019 over no less than 684,885,911 shares held by FCM in CTS (“Share Charge”). For this purpose, 688,232,319 shares in CTS (“Shares”) were transferred to and held by the Respondent’s solicitors, Stevenson, Wong & Co (“SWC”), in escrow; and (ii) a Deed of Guarantee dated 28 September 2019 executed by X (“Guarantee”) up to $308,000,000. Z failed to pay the Price, the $165M Debt and the accrued interest by 27 March 2020. Following Z’s default: The Respondent exercised its rights under cl.7.1-7.3 of the Share Charge to procure the transfer of the Shares to itself, which was approved at CTS’s board meeting held on 3 April 2020. At the meeting, KK observed that “professional due diligence and valuation of CTS should start after the share transfers had been completed, consistent with the agreements in the report to directors.” On 3 April 2020, the Respondent engaged Roma Surveyors & Property Consultants Limited (“Roma”), a subsidiary of Roma Group Limited (listed on GEM of the Stock Exchange) and recommended by SWC, to conduct an auction to sell the Shares (“Auction”). By letters dated 8 April 2020, SWC demanded Z to pay the Price and the $165M Debt by 13 April 2020, and informed X that the Respondent had not received the sums due from Z and would enforce the Guarantee. No payment was made by Z. By letter dated 15 April 2020, SWC demanded X to pay $308,000,000 by 29 April 2020. In the meantime, in SWC’s letter dated 17 April 2020, FCM was informed about the Respondent’s intention to sell the Shares through the Auction, tentatively to take place in Hong Kong in early May 2020. The Respondent suggested FCM and its representatives to invite interested persons in the industry to attend the Auction. On 21-22 April 2020, KK reported to SH, the Chairman of CTS, that: CTS had engaged Grant Thornton (“GT”) to carry out a valuation of M as at 31 March 2020, which valuation would be extended to include the value of CTS; FCM had engaged PwC to do a separate valuation on CTS for its own reference (“PwC Valuation”). In the meantime, on 22 and 23 April 2020, Roma advertised in 4 local newspapers that the Auction would be held on 6 May 2020. In respect of the Auction: The Debtors and FCM through Messrs Sit, Fung, Kwong & Shum’s (“SFKS”) letters dated 23 April 2020, 29 April 2020 and 4 May 2020 stated that (1) the Respondent should try to sell the Shares by private treaty or private tender before pursuing an auction; and (2) the Auction was in violation of cl.4 of the Five Parties Agreement and should be cancelled. By letter dated 29 April 2020 to Roma, SFKS alleged that Roma had set up “deliberate obstructions” to deter interested parties from participating in the Auction and threatened legal action against Roma if the Auction proceeded. In view of the threats made by the Debtors, the Auction was adjourned without any date for resuming the process. In their letter dated 6 May 2020, SWC refuted all the allegations and required SFKS to (i) provide a list of parties who would be interested in a private sale process; (ii) inform Roma of their suggested arrangements on an auction or other means of sale; (iii) state, with reasons, if their clients had any alternative proposed auctioneer; and (iv) provide any further views on the procedure for sale. On 5 May 2020, the Respondent formalized GT’s engagement to carry out a valuation of the Shares for the purpose of cl.4 of the Five Parties Agreement, after SH had stated that it was unnecessary for both CTS and the Respondent to engage GT. On 7 May 2020, the Respondent served the SDs on the Debtors, which comprised the $165M Debt and $44,088,000, being interest accrued from 28 September 2019 to 7 May 2020. In GT’s valuation report dated 13 May 2020 (“GT Valuation”), the value of CTS’ shareholdings (based on the net assets of CTS, as required by cl.4 of the Five Parties Agreement) were as follows: Shareholding Low ($) Mid ($) High ($) 10% 33,090,000 34,764,000 36,438,000 16% 52,944,000 55,622,000 58,300,000 26% 86,034,000 90,387,000 94,738,000 Despite the extensive correspondence exchanged between the parties on the sale of the Shares in which SWC repeatedly requested SFKS to agree on a protocol for sale of the Shares or to provide proposal on carrying out a public auction in the event that a sale by private treaty was unsuccessful, by 14 August 2020, no constructive proposal was made by the Debtors. B. Applicable principles The applications are made under rules 47 and 48 of the Bankruptcy Rules. Rule 48(5) provides that the Court may grant the application if: “(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt or debts specified in the statutory demand; (b) the debt is disputed on grounds which appear to the court to be substantial; (c) it appears that the creditor holds some security in respect of the debt claimed by the demand, and either rule 44(5) is not complied with in respect of it, or the court is satisfied that the value of the security equals or exceeds the full amount of the debt; or (d) the court is satisfied, on other grounds, that the demand ought to be set aside”. The burden is on the Debtors to satisfy the Court that there are valid grounds to set aside the SDs. Mr Benjamin Yu SC (leading Mr Julian Lam) has helpfully referred the Court to the following cases which discussed the summary nature of an application to set aside a statutory demand and the Court’s approach in considering such application. A statutory demand followed by a bankruptcy petition is a two-stage process. This was explained by Carnwath LJ in Owo-Samson v Barclays Bank Plc & Boyden (No 1) [2003] BPIR 1373, at §16 in this way: “The ordinary procedure, involving the ‘two-stage process’ of a statutory demand followed by a bankruptcy petition, is well known (see the description in Re a Debtor (No 415-SD-1993) [1994] 1 WLR 917, per Jacob J). The service of a ‘statutory demand’ in the prescribed form is simply one means of establishing ‘inability to pay’: see s268(1)(a) of the 1986 Act. Jacob J said of this stage (at 920): ‘The procedure prescribed is intended to be brief. In my view it is aimed at establishing an inability to pay and no more. It is not a general coarse sieve where the court considers generally whether the petition will succeed or fail.’ (at 920G)” (underlined added) In considering an application to set aside a statutory demand, the Court is only concerned with whether the creditor is able to establish a debt founded on the demand. This was a limited exercise, as described by Peter Gibson LJ in Budge v AF Budge (Contractors) Ltd [1997] BPIR 366 at 372A-D: “Miss Heilbron has submitted that the whole matter should be looked at, in her words, ‘in the round’. I think that this may be a misunderstanding of the limited exercise that is involved when one is considering an application to set aside a statutory demand. All that the court is concerned with is whether the creditor is able to pursue bankruptcy proceedings founded on the statutory demand. The creditor must establish a debt. It is for the debtor to establish why he cannot do so, at any rate by the route of a statutory demand …” (underlined added) Where a debtor relies “on other grounds” within rule 48(5)(d), the question for the Court remains the same - whether the creditor is entitled to rely on the non-compliance with the statutory demand to found a petition. This was stated by Nicholls LJ in In re A Debtor (No. 1 of 1987) [1989] 1 WLR 271 at 276B-E: “… Under the Act, a statutory demand which is not complied with founds the consequence that the debtor is regarded as being unable to pay the debt in question or, if the debt is not immediately payable, as having no reasonable prospect of being able to pay the debt when it becomes due. That consequence, in turn, founds the ability of the creditor to present a bankruptcy petition because, under section 268(1), in the absence of an unsatisfied return to execution or other process, a debtor’s inability to pay the debt in question is established if, but only if, the appropriate statutory demand has been served and not complied with. When therefore the rules provide, as does rule 6.5(4)(d), for the court to have a residual discretion to set aside the statutory demand, the circumstances which normally will be required before a court can be satisfied that the demand ‘ought’ to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.” (underlined added) C. Merit of Debtors’ grounds In their affirmations, the Debtors raised 2 main grounds in support of their applications to set aside the SDs. First, the Debtors allege that they have a counterclaim against the Respondent on the basis that it had “wrongfully pressed for an auction in actual or anticipatory breach of” cl.4 of the Five Parties Agreement and cl.7.3 of the Share Charge by initiating the auction process “using the [GT Valuation] notwithstanding that (i) [GT] is not a truly independent valuer and (ii) the [GT Valuation] is objectionable and at undervalue”. It is not in dispute that as a result of the Debtors’ default, the Respondent was entitled to enforce the Share Charge including exercising the power to sell the Shares. It is difficult to see how the Respondent’s proposal to sell the Shares through a public auction could give rise to a claim against the Respondent. This is particularly so when the Auction had been cancelled and, despite repeated requests made by the Respondent, the Debtors failed to provide any constructive proposal on how to go about selling the Shares. Mr John Hui (appearing with Mr Tommy Cheung) (rightly) does not pursue the point. Second, the Debtors allege that the Respondent and BL “acted in bad faith and/or abused the bankruptcy procedure. It would not be fair and just to allow the bankruptcy petition to proceed when [the Respondent] is already in the process of realising the [Shares] (which [the Respondent] is obliged to pursuant to the Five Parties Agreement and the [Share Charge]), which in all probability would generate enough funds to extinguish and eliminate the Debt”. Mr Hui acknowledges that the Debtors cannot rely on the ground under rule 48(5)(c), given that the Share Charge was provided by a third party. Nevertheless, he argues that the Court should exercise its discretion under rule 48(5)(d) to set aside the SDs on the basis that it is “unjust” for the Respondent to rely on the SDs to invoke the bankruptcy regime in circumstances where: the value of the Shares (as secured by the Share Charge) “would be of such an amount and of such liquidity that it could be said that no reasonable creditor would have proceeded to bankrupt” the Debtors, rather than to realise the security; and the Respondent’s “unjustified enforcement actions and/or tactics” have caused considerable unfairness and/or injustice to the Debtors, and the Court should not condone the same. I do not think that these allegations, even if established (which they have not) are valid grounds to set aside the SDs. As discussed in Section B above, in considering the applications, the Court is only concerned with whether the Respondent should be allowed to rely on the SDs to prove the Debtors’ inability to pay the Debt. The fact that the Respondent’s only means of getting paid would be to exercise its rights to sell the Shares, far from being a ground to set aside the SDs, confirms the Debtors’ inability to pay the Debt. The Court is not concerned with other matters, such as whether the Debt has been sufficiently secured or compounded for or whether the Respondent acted reasonably in refusing to accept any offer made by the Debtors. These are matters which fall to be considered at the petition stage. (See: s 6D(1), (3) of the Bankruptcy Ordinance (Cap 6) (“BO”); Owo, §17, citing Jacob J’s observation in Re a Debtor (No 415-SD-1993)). Mr Hui cites X v Y [2019] HKCFI 2880 where DHCJ Maurellet SC observed (at §§45-47) that “in an extreme case where the security, albeit one provided by a third party, would be of such an amount and of such liquidity (say cash or cash equivalent) that it could be said that no reasonable creditor would have proceeded to bankrupt the Debtor rather than realise the security, then perhaps the residual discretion could be relied upon”. I do not think this passage assists the Debtors. As can be seen from the Judgment, the learned Judge’s attention was not drawn to s 6D of the BO or the authorities discussed in Section B above. In any event, I do not think that the Debtors have adduced sufficiently precise factual evidence which is believable in support of their allegations (cf. Re Leung Cherng Jiunn [2016] 1 HKLRD 850, at §27, per Kwan JA). The value of the Shares is dictated by the market. So long as the Respondent has taken steps to put the Shares for sale in the open market and with sufficient marketing effort, the prices offered by the interested buyers represent what the buyers are willing to pay for the Shares. The highest price offered by the interested buyers would be the market price or the best price reasonably obtainable for the Shares. It would be in the interests of the Respondent (consistent with its equitable duty of care qua chargee) to sell the Shares at the highest price offered by the interested buyers. Indeed, this was precisely what the Respondent was trying to achieve by engaging a professional auctioneer (Roma) to carry out the Auction. Unfortunately, the Respondent’s effort to sell the Shares in the open market came to a halt owing to the stance taken by the Debtors. It lies ill in the Debtors’ mouth to allege that the Respondent acted in bad faith or that its enforcement actions were “unjustified” or “unfair”. It is pointless for the Debtors to argue that the GT Valuation or the PwC Valuation better reflected the value of the Shares. At the end of the day, it is the highest price which may be fetched for the Shares in an open sale which matters. For completeness, it seems to me that there is no merit in the Debtors’ allegation that GT is not independent or that there is anything untoward or improper about the GT Valuation. As can be seen from the facts stated in Section A above, it was CTS which identified GT as the independent valuer to assess the value of CTS and its shareholdings, and KK (the person through whom Z controlled FCM) had no issue with the independence or qualification of GT. The GT Valuation was prepared on the net assets value basis, which had been agreed between the parties under cl.4 of the Five Parties Agreement. (Linda Chan) Judge of the Court of First Instance High Court Mr John Hui and Mr Tommy Cheung, instructed by Sit, Fung, Kwong & Shum, for the Applicants in both proceedings Mr Benjamin Yu SC leading Mr Julian Lam, instructed by Stevenson, Wong & Co, for the Respondent in both proceedings