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Re Cheung Kwan

Judgment Cited authorities 8 Cited in Precedent Map Related
Vincent
Judgment Date12 March 2021
Neutral Citation[2021] HKCA 282
Judgement NumberCACV232/2020
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV232/2020 RE CHEUNG KWAN

CACV 232/2020

[2021] HKCA 282

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 232 OF 2020

(ON APPEAL FROM HCB NO 705 OF 2019)

________________________

Re: CHEUNG KWAN (張軍), Debtor
Ex Parte: CM INTERNATIONAL CAPITAL LIMITED, Petitioner

________________________

Before: Hon Kwan VP, Cheung JA and Au JA in Court

Date of Hearing: 23 February 2021

Date of Judgment: 23 February 2021

Date of Reasons for Judgment and Decision on Costs: 12 March 2021

________________________

REASONS FOR JUDGMENT
AND DECISION ON COSTS

________________________

Hon Kwan VP (giving the Reasons for Judgment and Decision on Costs of the Court):

1. This is an appeal of the debtor, Madam Cheung Kwan, against the bankruptcy order made against her by Linda Chan J on 3 June 2020. We dismissed her appeal at the conclusion of the hearing. These are the reasons for judgment of the court.

Background

2. The background matters have been set out in some detail in the judgment below. For present purpose, the relevant background may be summarised as follows.

3. The debtor is a sophisticated business woman with substantial commercial experience. From November 2011, she was the non‑executive chairman of a substantial company known as Kazakhstan Potash Co Ltd (“KPC”) which is engaged in the exploration and mining of potash mines in Kazakhstan, and the shares of which are listed on the Australian Stock Exchange. 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 a corporate entity. CAR became a creditor of KPC in June 2013 through the subscription of its convertible notes. Since May 2016, she has been a substantial shareholder of China Cloud Copper Co Ltd, the shares of which are listed on The Stock Exchange of Hong Kong Ltd (“SEHK”), and from September 2016 she has been its executive director and chairman. From 27 November 2015 to 7 June 2018, she was an executive director of Burwill Holdings Ltd (“Burwill”), another listed company in Hong Kong.

4. On 10 April 2015, CAR subscribed for 138 million shares in Burwill and by 2 June 2015, CAR became the second largest shareholder of Burwill.

5. By a subscription agreement dated 5 May 2015, Burwill subscribed for shares in KPC and on completion of its subscription on 5 January 2016 became the single largest shareholder of KPC.

6. The bankruptcy petition, presented by CM International Capital Ltd, was founded on a statutory demand for US$25 million odd. The debt arose out of two deeds of guarantee given by the debtor as the guarantor in favour of the petitioner dated 4 November 2015 (“1st Guarantee”) and 15 January 2016 (“2nd Guarantee”) to guarantee the respective indebtedness of two companies incorporated in the British Virgin Islands, Insight Go Ltd (“Insight Go”) and Star Way Enterprise Ltd (“Star Way”).

7. According to the documents adduced by the petitioner, 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 (“1st Loan”) to Insight Go for the purpose of acquiring 273,876,923 shares (equivalent to 4.99% of the issued shares) in Burwill at HK$0.26 per share. The conditions precedent stipulated in the 1st FA included execution of these agreements as security for the 1st Loan: (1) a security agreement dated 4 November 2015 by which 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 by which Insight Go agreed to create a fixed and floating charge over all its assets; and (3) the 1st Guarantee executed by the debtor.

8. The petitioner caused the proceeds of the 1st Loan to be paid into the bank account of Insight Go on 6 November 2015. Insight Go purchased 4.92% of the issued shares in Burwill with the proceeds and, as mentioned above, the debtor became an executive director of Burwill on 27 November 2015.

9. The 2nd Facility Agreement (“2nd FA”) was entered into on 15 January 2016 between the petitioner and Star Way, by which the petitioner agreed to advance a term loan of US$9 million (“2nd Loan”) to Star Way for the purpose of acquiring 266,545,275 shares (equivalent to 4.99% of the issued shares) in Burwill at HK$0.26 per share. The conditions precedent stipulated in the 2nd FA were similar to the 1st FA. They required execution of these agreements all dated 15 January 2016 as security for the 2nd Loan: (1) a security agreement by which Star Way agreed to create a first legal mortgage over all the shares to be acquired in Burwill; (2) a debenture by which Star Way agreed to create a fixed and floating charge over all its assets; and (3) the 2nd Guarantee executed by the debtor.

10. The petitioner caused the proceeds of the 2nd Loan to be paid into the bank account of Star Way on 21 January 2016. Star Way purchased 4.85% of the issued shares in Burwill with the proceeds.

11. Pursuant to the security agreements dated 4 November 2015 and 15 January 2016, the shares in Burwill acquired by Insight Go and Star Way (“Burwill Shares”) were deposited into a custodian account.

12. The petitioner entered into a supplemental agreement with each of Insight Go and Star Way dated 18 January 2016 for these borrowers to provide top-up security if the price of the shares in Burwill should fall below HK$0.26 per share. By these supplemental agreements, Insight Go and Star Way agreed to deposit top-up cash in that event, being HK$0.26 less the closing price multiplied by the number of Burwill Shares.

13. In May 2016, the debtor lent HK$2 million to Star Way for the latter to pay interest to the petitioner in respect of the 2nd Loan. In June 2016, through the arrangement of the debtor, four sums totalling HK$5.26 million were remitted by a company known as Wealthy Capital Enterprise Inc to the bank account of the petitioner to pay interest due in respect of the 1st Loan.

14. The 1st Loan became due on 7 November 2017. The 2nd Loan became due on 22 January 2018. On those maturity dates, the trading prices of the shares in Burwill closed at HK$0.32 and HK$0.31 respectively. It was not until 31 August 2018 that the share price fell below HK$0.26.

15. The petitioner made two demands against the debtor. By an email dated 9 February 2018, the petitioner stated that the value of Burwill Shares fell below the principal of the 1st and 2nd Loans and demanded repayment of US$22,051,000 (being the principal, interest and profit sharing payable by the borrowers, not including overdue penalty interest) and deposit of top-up “guarantee money”[1] into the custodian account. By another email dated 31 August 2018, the petitioner referred to the principal and interest due under the 1st and 2nd Loans and the continuing decline in the value of the charged shares and demanded for deposit of top‑up “guarantee money” into the custodian account to avoid enforcement of the charge.

16. Despite the demands, Insight Go and Star Way did not make any repayment or deposit top-up cash into the custodian account.

17. The petitioner served a statutory demand on the debtor on 21 December 2018 of US$25 million odd, being the amount due and payable as at 31 August 2018 under the 1st and 2nd Guarantees. The bankruptcy petition was presented on 31 January 2019. The petitioning debt was US$26,866,937.44 (“the Debt”).

18. In the Notice of Intention to show cause filed on behalf of the debtor on 21 March 2019, she stated that she intended to show cause against the petition on six grounds: (1) there was no valid or proper service of the statutory demand; (2) the Loans were not due on the dates specified in the petition; (3) the Loans are secured; (4) had the petitioner liquidated the Burwill Shares on the maturity dates of the Loans, the Debt would have been fully settled; (5) the Debt is not for a liquidated sum; and (6) the petitioner is unable to prove that the debtor is unable to pay or has no reasonable prospect of being able to pay the Debt. With the possible exception of ground (4), the other grounds were not pursued before the judge.

19. On 19 August 2019, trading in the shares of Burwill was suspended. A winding-up petition has since been presented against Burwill.

20. The substantial grounds for disputing the Debt were raised for the first time in the 2nd affirmation of the debtor filed on 9 September 2019. In gist, her case is that the transactions entered into by the petitioner on 4 November 2015 and 15 January 2016 were a sham. They were created for the purpose of enabling the petitioner to invest in approximately 10% of the shareholding in Burwill without making disclosure to the SEHK in accordance with the law. The purported borrowers of the Loans, Insight Go and Star Way, were at all material times the corporate vehicles of the petitioner and under its control. The dressed up Loans were in fact the petitioner’s investment in Burwill, and Insight Go and Star Way were “phantom platform corporate vehicles”[2] used by the petitioner to each acquire not more than 5% of Burwill’s issued shares. Being an “influential independent person”, the debtor was asked by the petitioner to provide the Guarantees for the sham transactions. The debtor agreed to do so because the petitioner is an overseas investment company under the China Minsheng Investment group and she hoped that the China Minsheng Bank (“CMB”) would advance a loan to CAR which would be used to finance KPC’s acquisition of potash mine. An agreement dated 13 November 2015 was indeed entered into by CMB to advance US$75 million to CAR[3]. At that time[4], the then director of the petitioner, Liao Feng (“Liao”), made a verbal promise to her that the Guarantees were merely to comply with formalities and...

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