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HCCW 83/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 83 OF 2014

___________________

IN THE MATTER OF The Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32

and

IN THE MATTER OF TAI SHING INTERNATIONAL (HOLDINGS) LIMITED (泰盛國際(控股)有限公司)

__________________

Before: Hon Anthony Chan J in Chambers

Date of Hearing: 3 March 2015

Date of Decision: 26 March 2015

________________

D E C I S I O N________________

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1. There is before this court a Summons dated 10 June 2014 issued by Tai

Shing International (Holdings) Ltd, the respondent company (“Company”),

to strike out a creditor’s Petition brought by Metal Winner Ltd (“MWL”)

on 4 April 2014 to wind-up the Company.

2. The Company is listed on the Hong Kong Stock Exchange with the

stock code 8103. MWL relies on 3 dishonoured cheques (“Cheques”)

totalling HK$5,700,000 (“Debt”) in support of the Petition.

3. In short, the Company argues that there is plausible evidence to

demonstrate that the Cheques are tainted with illegality and such that they

are not enforceable against it. The contended illegality is that the Debt

arose out of an illegal loan agreement by which the Company’s former

Chairman and director, Eric Wong (“Wong”), abused his position and

obtained a form of loan from MWL for his own purposes (most likely for

purposes of speculation on the shares of the Company). Secondly, the

Company has a cross-claim against MWL for dishonestly assisting in the

unlawful scheme perpetrated by Wong and/or knowingly receiving

property obtained as a result of Wong’s breach of his fiduciary duties owed

to the Company.

Law

4. The relevant legal principles to be applied on a strike out application

are not controversial. They were recently considered and summarised by

Harris J in In re Yueshou Environmental Holdings Ltd, HCCW 142/2013,

unrep, 16 July 2014, §8.

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5. In gist, the question is whether the Company has a bona fide defence on

substantial grounds which is to be demonstrated by putting before the court

not just a series of assertions of fact that if made out at trial would

constitute a defence, but credible evidence that demonstrates sound reasons

to think that the asserted facts may be proved at trial : In re Yueshou

Environmental Holdings Ltd, supra, § 9.

6. In addition, where the Company has a genuine and serious cross-claim

for a sum that exceeds the Debt, normally the court will not order a

winding-up : In re Yueshou Environmental Holdings Ltd, supra, §15.

7. Finally, it was held by the English Court of Appeal in Tallington Lakes

Ltd v Ancasta International Boat Sales Ltd [2014] B.C.C. 327, §41 :

“The practical issue is the extent to which the court must go in determining whether there is a genuine dispute on substantial grounds. The court must, as Oliver L.J. put it, take a view whether, on the evidence, there really is substance in the dispute…It is not, however, practical or appropriate to conduct a long and elaborate hearing, examining in minute detail the case made on each side. Such a course will involve both delay in getting the issue ready for hearing and a potentially lengthy hearing…Where, as here, the petitioner insists on proceeding, the court is fully justified in taking the course sensibly adopted by the Judge in this case of concentrating on those points which the petitioner said were his strongest.” [emphasis added]

Bona fide dispute on substantial grounds

8. Let me say at the outset that on the evidence adduced by the Company,

there is a fairly compelling case that there was an illegal scheme

perpetrated on the Company by Wong, and MWL was a party to that

scheme.

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9. MWL has put forward a “very simple and straight-forward” claim1and

grounded the Debt on the following:

(a) A written loan agreement entered into between MWL as

lender and the Company as borrower for a sum of

HK$10,000,000 dated 13 June 2011 (“Loan Agreement”);

(b) A written Repayment Agreement executed between MWL

and the Company on 21 December 2012 for the payment of an

outstanding sum of HK$5,700,000 as full and final settlement

of the Company’s liabilities under the Loan Agreement (“3rd

Repayment Agreement”); and

(c) The Cheques which were issued by the Company as payment

pursuant to the 3rd Repayment Agreement. They were dated 7

February 2013, 26 February 2013 and 31 March 2013.

10.The Loan Agreement embodied a very simple transaction, pursuant to

which the lender (MWL) agreed to provide the borrower (the Company) a

loan in the amount of HK$10,000,000 or less, with interest for the duration

of the loan (3 months) totalling HK$1,200,000 (4% per month).

11.It appears that the Company had considerable difficulty in marshalling

the evidence on what transpired in respect of the Loan Agreement due

primarily to the departure of Wong, who left the Company in January

2012. However, the evidence which has been put together by the

Company shows a very different picture to that painted by MWL. I shall

examine the critical documents in a chronological order.

1 Bundle A/ pg 58/ §3.

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12.Firstly, there is a term sheet for a sale and purchase agreement dated 9

June 2011 (“Term Sheet”). It was recovered from the belongings left

behind by Wong in his office at the Company.

13.According to the Term Sheet, whilst MWL was to provide a loan of

HK$10m, the borrower was in fact Wong. The substance of the

transaction was that MWL would purchase, on its own account, HK$10m

worth of shares in the Company (58.8 million shares at HK$0.17 per share)

and the loan would be secured by those shares. There was a moratorium

over the disposal of the shares for a period of 3 months. After the

expiration of 3 months, the shares would be sold according to the

instructions of Wong.

14.On the face of the Term Sheet, the loan might have been required to

generate certain demand for the Company’s shares. That demand could

have been used for purposes of speculation over such shares.

15.The interest to be paid for the loan would be 4% or HK$400,000 per

month. In addition to holding the shares as security, the Company was

required to provide MWL with a cheque in the sum of HK$1.2m for the

payment of interest and another cheque for HK$10m post-dated to

13 September 2011 as security. Further, Wong was required to provide a

personal guarantee. Finally, the Term Sheet referred to an agent who was

to be paid HK$300,000.

16.The Term Sheet was sent as a facsimile marked “CONFIDENTIAL”.

The header contained the following : 9 Jun 2011, 10:36 and “No. 6233”.

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17.It appears that less than 10 minutes after the Term Sheet was sent, a

second facsimile (“Fax”) marked “No. 6234” was sent at 10:45 by one

Tony Cheung to a firm of solicitors, Messrs Peter Cheung & Co (“Firm”).

The subject matter was stated to be “Loan Agreement (8103 and Metal

Winner Limited)”. 8103 was clearly a reference to the Company by its

stock code.

18.It appears from the Fax that a term sheet was attached to it (the

attachment is not contained in the evidence). If there was such an

attachment, the Term Sheet would in all probability be the attached

document. According to the Fax, Tony Cheung instructed the Firm to

“draft the loan agreement for both parties’ comments”. He also proposed

the insertion of an additional clause to restrict the lender from carrying out

any trading of the shares during the lock-up period (“Restriction Clause”).

19.According to the evidence of MWL, Tony Cheung acted as a middle-

man in the loan transaction. According to the terms of the Loan

Agreement and a Supplemental Loan Agreement (see below), the Firm

was acting as the solicitors for the Company in relation to the loan

transaction.

20.On 30 September 2014, in response to the enquiries of the Company’s

solicitors, the Firm provided a number of documents to them. Amongst

these documents, there was a Supplemental Loan Agreement between the

Company and MWL dated 14 June 2011 (“Supplemental Agreement”) and

a Personal Guarantee executed by Wong dated 13 June 2011

(“Guarantee”). The former provided, inter alia :

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(a) MWL agreed to purchase 58,800,000 shares in the Company

at or around the price of HK$0.17 per share from 2 persons to

be nominated by the Company;

(b) There was a lock-up period of 3 months during which MWL

was not allowed to dispose of the shares. The Restriction

Clause was largely adopted in the Supplemental Agreement;

(c) The Company guaranteed that the shares could be sold at no

less than HK$0.17 per share, otherwise it would be liable to

compensate for any shortfall;

(d) There was a confidentiality clause.

21.I should mention at this juncture that both the Loan Agreement and the

Supplemental Agreement were signed by Wong and Ms Lee Yuk Kwan

(“Lee”) who is a director of MWL. Their signatures were witnessed by the

principal of the Firm, which had prepared the agreements.

22.In the preamble of the Guarantee, it was stated that Wong provided the

guarantee (over the Company’s liabilities to MWL) because the loan was

given to the Company by MWL at his request. The Guarantee was also

prepared by the Firm and Wong’s signature thereon was witnessed by the

Firm’s principal.

23.On 18 April 2012, MWL’s previous solicitors sent a letter to the

Company for the attention of Wong pressing for the repayment of what

was outstanding under the Loan Agreement. A repayment schedule dated

31 March 2012 (“Schedule”) was enclosed with that letter.

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24.According to the Schedule, the loan of HK$10m made on 13 June 2011

came with a security of 6,110,000 shares2 in “#8xx3”. These must be

shares in the Company and they were subsequently sold between 21

November to 15 December 2011, and thereby recouping a sum of

HK$935,745.00.

25.It appears from the Schedule that the shares in another company

(“#01x5”) were also used to partially discharge the debt owed to MWL.

26.There were altogether 3 Repayment Agreements. They were made

between MWL and the Company after Wong had left the Company on 30

May 2012, 8 August 2012 and 21 December 2012. They were all signed

on behalf of the Company by a director called Chan Yun Sang (“Chan”),

who left the Company in December 2012.

27.Notwithstanding the departure of Wong and Chan, and before the

disclosure by the Firm made on 30 September 2014 (see para 20 above),

the Company was able to say in its evidence that it has no information or

record about the Debt and no indication whatsoever of the Company

having received a loan from MWL3.

28.Surprisingly, there was no response from MWL as to how the loan of

HK$10m was paid to the Company. Further, Lee (in her 3rd affirmation

filed on 11 August 2014) denied having seen the Term Sheet prior to

seeing it as an exhibit in the Company’s evidence.

2 There was a share consolidation exercise of 10 to 1 carried out by the Company on 11 November 2011. 6.11m shares would have been consolidated from 61.1m shares. The discrepancy between 58.8m shares and 61.1m shares might be attributable to the fluctuation in share price : A/88/§30.

3 A/23/§22-23.

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29.In her 4th affirmation filed on 11 September 2014, Lee deposed to the

transfer of a total of HK$10m into the bank accounts of 2 individuals, Mr

Fan Stephen See Ching (“Fan”) and Ms Huang Qiaxian (“Huang”), as

designated by Wong on behalf of the Company.

30.In response, the Company maintains that it has had no link or dealing

whatsoever with Fan or Huang4.

31.There is no attempt by MWL to adduce evidence to explain why the

loan was paid to Fan and Huang. This is highly unsatisfactory because

Wong has given evidence on behalf of MWL to the effect that the Loan

Agreement reflected a genuine transaction and the money was needed by

the Company for “an investment project”. There is no detail given in

respect of the project.

32.The documents disclosed by the Firm on 30 September 2014 were duly

adduced in evidence by the Company via the 3rd affirmation of Tam Kwok

Leung filed on 21 October 2014. They have been met with silence from

MWL.

Analysis

33.In light of the state of the documentary evidence, there can be little

doubt that MWL has been economical with the truth. There is a great deal

more to the Loan Agreement. The Supplemental Agreement was designed

to be a hidden “side agreement”. That document exposes the falsity in

4 A/79/§9.

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MWL’s claim that it gave a loan to the Company to meet its legitimate

business requirement (an investment project).

34.Although the Supplemental Agreement was also signed between MWL

and the Company, it is difficult to see what the loan had to do with the

Company (save for the use of the loan to purchase its shares). Further, as a

matter of commercial logic, it is difficult to understand why it was

necessary for Wong to provide a personal guarantee for a loan granted to a

listed company. The Guarantee was provided on top of, inter alia, the

shares and the post-dated cheque of the Company as security for the loan.

35.The circumstances demonstrated by the evidence and the existence of

the Term Sheet suggest that the reality is, quite likely, reflected by the

Term Sheet, ie, the loan was provided not to the Company but for Wong’s

personal purposes (“True Transaction”). I should add that the Term Sheet

and the Supplemental Agreement clearly call for proper explanation by

Wong, who has given evidence in these matters on behalf of MWL. The

absence of such explanation speaks volume against MWL’s case.

36.Insofar as the purpose of the loan is concerned, Mr Maurellet, who

appeared for the Company with Mr Lok, suggested that Wong was using

the loan to speculate on the shares of the Company. I am inclined to think

that Mr Maurellet may well be right. However, if MWL was acquiring

some shares from 2 designated persons instead of the market, it is not clear

how that acquisition might be used to facilitate a speculation exercise on

the shares of the Company. On the other hand, the precise mechanics of

the speculation exercise are not something which can be elicited from the

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available documents. Indeed, it is unnecessary and unwise for this court to

try to determine the same on affidavits.

37.In any case, I am unable to see what benefit there was for the Company

under the loan transaction. It was simply used to answer to the repayment

obligation for the loan. Hence, it was necessary to, falsely, make it the

borrower.

38.This court’s understanding of the True Transaction is consistent with,

and supported by, the fact that the HK$10m was paid to 2 persons (Fan

and Huang)5 and resulted in some 6.1m shares held by MWL as shown in

the Schedule.

39.I should add that Lee’s denial of knowledge over the Term Sheet is not

credible in light of the similarity between its terms and those of the

Supplemental Agreement which she had signed. Further, Lee’s failure to

mention the Supplemental Agreement in her evidence must, in the

circumstances of this case, reflect a lack of candour on her part.

Illegality

40.There is little doubt about the illegality of the True Transaction,

especially when the court is only concerned whether a bona fide dispute on

substantial grounds has been made out. Indeed, Mr Wong, who appeared

for MWL, did not seek to dispute that the True Transaction is illegal. I

shall deal with Mr Wong’s submissions below. For the present purpose, I

shall identify the grounds for taking the view that, assuming that the facts

asserted by the Company are proven at trial, the True Transaction is illegal. 5

See para 20(a) above.

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41.To begin with, Wong had acted in breach of his fiduciary duties to the

Company. The evidence suggests that MWL was a party to Wong’s

unlawful scheme to use the Company’s resources for his personal gain.

Further, I agree with Mr Maurellet that the Company may have a claim

against both Wong and MWL for an unlawful means conspiracy (see Clerk

& Lindsell on Torts, 21stedn, §§24-98 to 24-106).

42.I have also been taken by Mr Maurellet to 2 statutory provisions which,

prima facie, have been breached :

(a) S 341(1)(a) of the Securities and Futures Ordinance, Cap 453

(“Ordinance”) – disclosure of interest by director of a listed

corporation of his interest in the shares of that corporation.

According to s 351 of the Ordinance, infringement of this

provision may attract criminal sanctions;

(b) S 47A of the old Companies Ordinance, which was applicable

to this case at the material times – financial assistance by the

Company for acquisition of its own shares.

43.In addition, a number of market misconduct offences under the

Ordinance might have been committed – ss 295 (false trading), 296 (price

rigging) and 299 (market manipulation).

44.In light of the view taken by this court on the illegality of the True

Transaction, it is unnecessary to deal with the Company’s cross-claims

based on dishonest assistance and knowing receipt.

MWL’s arguments

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45.There are 2 primary arguments advanced by Mr Wong. Firstly, it is

contended that MWL’s claim is premised upon the 3rd Repayment

Agreement and the Cheques. They are not tainted by any illegality. I am

unable to agree with Mr Wong. The 3rd Repayment Agreement, and the

Cheques which were provided pursuant to its terms, were in purported

discharge of the outstanding liabilities under an illegal Loan Agreement.

They are clearly the “fruits of a poisoned tree”. I cannot see how, as a

matter of law, they can be divorced from the illegal True Transaction and

be enforced. No authority has been cited to the court in support of MWL’s

argument.

46.Secondly, it was argued that MWL had no knowledge of any illegality

which might have been practised by Wong on the Company. With respect,

I see no merit in that contention. Both the Loan Agreement and the

Supplemental Agreement were signed by Lee, she must have known about

an under table arrangement as reflected in the latter. Indeed, as stated in

para 39 above, the evidence suggests that Lee knew about the Term Sheet

and therefore the True Transaction. Further, MWL’s attempt to hide the

truth from the court is not helping its cause.

Governance of the Company

47.It is the duty of this court to mention its misgivings over the governance

of the Company as revealed by the evidence. Firstly, the 3 rd Repayment

Agreements were signed by Chan, who is said to have no knowledge at all

about the Debt, allegedly on the instructions of Wong at a time when the

latter had already left the Company. If true, this is quite extraordinary and

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it is highly disturbing that a listed company is under the charge of such a

person.

48.Secondly, the circumstances under which the Cheques were signed by

the Chairman of the Company, Liu Bo (“Liu”), are equally disturbing. The

Cheques were signed by Liu and Chan. There is a witness statement from

Liu explaining why he had signed the Cheques. It was said that because he

was not stationed in Hong Kong, he therefore pre-signed a number of

blank cheques of the Company so that they could be used by Chan. By

doing so, Liu had destroyed the whole purpose of having 2 signatures for

the Company’s cheques, and it is difficult to see how such behaviour sits

properly with his responsibilities to the Company and its shareholders.

Conclusions

49.For these reasons, I have no hesitation in striking out the Petition.

50.There is no question in my mind that the Petition constitutes an abuse

of the process of the court. MWL has put forward a false case and with

which it has tried to pressurise the Company into paying for Wong’s debts.

I therefore must award costs against MWL in favour of the Company on

indemnity basis, to be taxed if not agreed, subject to 2 points. Firstly, Mr

Maurellet has indicated that the Company does not ask for a certificate for

2 counsel. Secondly, the costs of Bundle B of the Hearing Bundles should

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be borne by the Company’s solicitors by reason of the breach of Practice

Direction 5.4, §4(4).

51.Last but not least, I am grateful to counsel for their assistance in these

matters.

(Anthony Chan)

Judge of the Court of First Instance

High Court

Mr Simon Wong, instructed by Oldham Li & Nie, for the petitioner

Mr Jose-Antonio Maurellet and Mr Michael Lok, instructed by Ching & Solicitors for the Company