HKCFI 1033
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
BANKRUPTCY PROCEEDINGS NO 705 OF 2019
||CHEUNG KWAN (張軍)
||CM INTERNATIONAL CAPITAL LIMITED
||Hon Linda Chan J in Court
|Date of Hearing:
||7 May 2020
|Date of Judgment:
||3 June 2020
J U D G M E N T
1. By a bankruptcy petition presented on 31 January 2019 (as amended on 17 April 2019) (“Petition”), CM International Capital Limited (“petitioner”) seeks a bankruptcy order against Ms Cheung Kwan (“debtor”).
2. As is common in petition of this nature, on 2 September 2019, the Court gave directions on filing of affirmations and directed that no further affirmation to be filed without leave of the Court.
3. The Petition was originally scheduled to be heard on 20 November 2019 but was adjourned due to the debtor’s belated application to file further evidence, being an affirmation of Shi Lei (“Shi 1st”). Leave was given to the debtor to file Shi 1st and to the petitioner to file affirmation in reply. The petitioner filed its reply on 24 December 2019, being the affirmations of Liao Feng (“Liao 1st”) and Song Shuren (“Song 1st”).
4. The hearing of the Petition was fixed for 11 March 2020, but was adjourned due to the General Adjourned Period of the Court. On 27 February 2020, the debtor issued a summons to strike out parts of Liao 1st and Song 1st on the ground that it is “an abuse of process for the petitioner to circumvent the legal effect of the provision of ‘no further evidence to be filed without leave’” by filing evidence which it “should and could have filed earlier” before the substantive hearing on 20 November 2019. The parts which the debtor seeks to strike out are matters relating to the transactions in question, specifically those matters of which the affirmants have personal knowledge.
5. In my view, the strike out summons is a classic “satellite” litigation and must be dismissed. It is a belated attempt on the part of the debtor to derail the hearing in March 2020. As submitted by Mr William Wong SC, counsel for the petitioner, the main theme of Shi 1st is that the petitioner devised a “sham” arrangement to avoid disclosing its interest in a listed company. Shi’s allegations concern Insight Go Limited (“Insight Go”) and what he had allegedly been told by the petitioner’s personnel to the effect that the loans were the petitioner’s investment. The petitioner is entitled to file evidence in reply to such allegations, including evidence on why the transactions were structured in a way which involved 2 entities (Insight Go and Star Way Enterprise Limited (“Star Way”)), and the arrangements in relation to such entities. The petitioner has not raised any new allegations in Liao 1st and Song 1st. Nor has the debtor proposed to file any further affirmation in response to Liao 1st and Song 1st.
6. The following fact and matters are not in dispute.
7. The debtor is a sophisticated business person with substantial commercial experience in that:
(1) from November 2011, she was the non-executive Chairman of Kazakhstan Potash Co Ltd (“KPC”), a substantial company listed on the Australian Stock Exchange, which engages in exploration and mining of potash mines in the Republic of Kazakhstan ;
(2) since July 2013, she has been the beneficial owner of all the shares in China-Asia Resources Fund (“CAR”) and acted as its director through Vision Capital (Asia) Limited. CAR became a creditor of KPC in June 2013 through subscription of its convertible notes;
(3) since May 2016, she has been a substantial shareholder of China Cloud Copper Company Limited, a company whose shares are listed on The Stock Exchange of Hong Kong Limited (“SEHK”). From September 2016, she has been its executive director and Chairman;
(4) from 27 November 2015 to 7 June 2018, she was an executive director of Burwill Holdings Limited (“Burwill”), a company whose shares are listed on SEHK; and
(5) on 28 September 2016, she (through a corporate vehicle) held 6.45% shares in Huiyin Holdings Limited, a company whose shares are listed on SEHK.
8. On 10 April 2015, CAR subscribed for 138,000,000 shares (equivalent to 13% of its enlarged issued shares) in Burwill at HK$0.31 per share. By 2 June 2015, CAR became the second largest shareholder of Burwill, holding 4,760,111,685 shares.
9. Pursuant to a subscription agreement dated 5 May 2015, Burwill (through a subsidiary) subscribed for 16.64% of the (then) issued shares (as enlarged) in KPC. The subscription was completed on 5 January 2016, and Burwill became the single largest shareholder of KPC, holding 28.13% of its issued shares.
10. Insight Go was incorporated in the British Virgin Islands (“BVI”) on 2 September 2015 and the petitioner was its sole shareholder. On 17 September 2015, Mr Shi Lei (石磊) (“Shi”) became the sole shareholder of Insight Go and Ms Song Shuren (宋樹人) (“Song”) was appointed as its first director. In mid-2016, Mr Liu Cheng (劉成) (“Liu”) was appointed as an additional director.
11. Star Way was incorporated in the BVI. From at least 15 July 2015, Zhou Wei (周偉) (“Zhou”) was its sole shareholder, and one of its directors. The other director was Song.
12. Shi and Zhou were both nominated by the debtor. According to the debtor, Shi was referred to her by a friend, while Zhou was “found” by her. Zhou described himself as a long time friend of the debtor.
13. Song and Liu both worked for the petitioner. Mr Liao Feng (廖峰) (“Liao”) was a director of the petitioner from 6 February 2015 to 27 December 2018.
14. By a facility agreement dated 4 November 2015 (“1st FA”), the petitioner agreed to advance a term loan in the amount of US$9.2 million loan (“1st Loan”) to Insight Go for the purpose of acquiring 273,876,923 shares (equivalent to 4.99% of issued shares) in Burwill at HK$0.26 per share.
15. The conditions precedent stipulated in the 1st FA included execution of the following agreements as security for the 1st Loan: (1) a Security Agreement dated 4 November 2015 whereby Insight Go agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a Debenture dated 4 November 2015 whereby Insight Go agreed to create a fixed and floating charge over all its assets, and (3) a Deed of Guarantee and Indemnity dated 4 November 2015 executed by the debtor (“1st Guarantee”).
16. The 1st Loan was paid into Insight Go’s bank account on 6 November 2015.
17. By another facility agreement dated 15 January 2016 (“2nd FA”), the petitioner agreed to advance another term loan in the amount of US$9 million loan (“2nd Loan”) to Star Way Enterprise Limited (“Star Way”) for the purpose of acquiring 266,545,275 shares (equivalent to 4.99% of issued shares) in Burwill at HK$0.26 per share.
18. Again, the conditions precedent stipulated in the 2nd FA included execution of the following agreements all dated 15 January 2016 as security for the 2nd Loan: (1) a Security Agreement whereby Star Way agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a Debenture whereby Star Way agreed to create a fixed and floating charge over all its assets; and (3) a Deed of Guarantee and Indemnity executed by the debtor (“2nd Guarantee”). For convenience, I will refer to the 1st Guarantee and 2nd Guarantee as “Guarantees”.
19. The 2nd Loan was paid into Star Way’s bank account on 21 January 2016.
20. The 1st and 2nd Loans (together “Loans”) were applied by Insight Go and Star Way to acquire shares in Burwill equivalent to 9.98% of its issued shares (“Burwill Shares”). Pursuant to the Security Agreements dated 4 November 2015 and 15 January 2016, the Burwill Shares were deposited into a custodian account.
21. The parties entered into supplemental agreements dated 18 January 2016 to provide a security top-up mechanism, which requires Insight Go and Star Way to deposit top-up cash (being HK$0.26 less the closing price x number of Burwill Shares) into the settlement account if the price of the Burwill Shares falls below HK$0.26 per share.
22. It appears that Insight Go and Star Way are special purpose vehicles used for borrowing the Loans and holding the Burwill Shares.
23. In May 2016, the debtor lent HK$2 million to Star Way for the purpose of allowing the latter to pay interest to the petitioner. In June 2016, the debtor arranged for HK$5,260,000 (or US$699,000) to be lent to Insight Go for the purpose of paying the 6 months’ interest payable to the petitioner.
24. The 1st Loan became due on 7 November 2017, while the 2nd Loan became due on 22 January 2018. On these maturity dates, the trading prices of the shares in Burwill closed at HK$0.32 and HK$0.31 respectively.
25. According to the summary of Burwill’s share prices adduced by the debtor, it was only until 31 August 2018 that the share prices fell below HK$0.26 per share.
26. The petitioner made 2 demands against the debtor:
(1) By email dated 9 February 2018, the petitioner stated that according to the trading price of 8 February 2018, the value of the Burwill Shares fell below the principal of the Loans and demanded for (a) repayment of US$22,051,000, being the principal, interest and profit sharing payable by Insight Go and Star Way, and (b) deposit of top-up “guarantee money” into the custodian account.
(2) By another email dated 31 August 2018, the petitioner referred to the principal and interest due under the Loans (which amounted to US$19,875,500) and the continued decline in the value of the “charged shares” (i.e. Burwill Shares), and demanded for deposit of top-up “guarantee money” into the custodian account to avoid enforcement of the charge.
27. Despite the...