RE PAN SUTONG

HCB 6548/2021

[2023] HKCFI 2620

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6548 OF 2021

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	IN THE MATTER OF Rule 99L of the Bankruptcy Rules (Cap. 6A)
	and
	IN THE MATTER OF PAN SUTONG (潘蘇通), a bankrupt

_______________

Before: Hon Linda Chan J in Chambers

Date of Hearing: 29 August 2023

Date of Decision: 10 October 2023

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D E C I S I O N

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1.  There is before the court an appeal against the decision of the Official Receiver (“OR”) in accepting the proofs of debt lodged by Bank of China Limited Shenzhen Branch (“BOC”) in the aggregate sum of HK$56,042,244,073.47 (“Debt”) for voting purpose at the first general meeting of the creditors of Mr Pan Sutong, a bankrupt (“Bankrupt”), held on 11 August 2022 (“FirstMeeting”).

2.  The appeal is made by Summons dated 7 October 2022 issued by a creditor, Seashore Global Group Ltd (“Seashore”), under rule 99L of the Bankruptcy Rules (“BR”).  In the Summons, Seashore applies for:

(1) A declaration that BOC was not entitled to vote at the First Meeting and is not entitled to do so at all future creditors’ meeting of the Bankrupt in respect of the Debt (§1);

(2) An order to set aside the resolution passed at the First Meeting whereby Mr Osman Mohammad Arab and Mr Wong Kwok Keung, both of RSM Corporate Advisory (Hong Kong) Ltd (“RSM Candidates”) were appointed as Joint and Several Trustees of the property of the Bankrupt, and be replaced by Mr Lai Kar Yan (“Mr Lai”), Mr Yeung Lui Ming (“Mr Yeung”) and Mr Kam Chung Hang, all of Deloitte Advisory (Hong Kong) Limited (“Deloitte”) (“Deloitte Candidates”)[1](§§2-3); and

(3) Alternatively, an order that a general meeting of creditors of the Bankrupt be re-convened on such time and date as the court considers appropriate (§4).

3.  The Summons is an attempt made by the Bankrupt, through Seashore, to re-litigate the issue as to whether the guarantees executed by the Bankrupt in favour of BOC are valid and enforceable, which has already been decided by this Court in Pan Sutong v Bank of China Limited in [2022] HKCFI 1450 on 18 May 2022 (“Judgment”).

4.  In this Decision, unless otherwise indicated, I adopt the abbreviations used in the Judgment.

A.      BACKGROUND

A1.    Events leading to Bankruptcy

5.  The Bankrupt was until his demise a prominent businessman who owned and controlled a conglomerate of companies including MD, GE, Goldin Tianjin, Tianjin Huading and Proman. 

6.  On 7 February 2020, DTT[2] (after more than 10 years of service) resigned as auditors of Proman and Goldin Properties.  Goldin Properties is at the apex of the property development arm of Goldin Group[3], which was one of the 2 groups founded, owned and controlled by the Bankrupt. 

7.  On 17 June 2021, BOC served a statutory demand on the Bankrupt requiring him to pay an outstanding amount of RMB 696 million plus interest (“RMB 696mDebt”).  The RMB 696m Debt arose in this way:

(1) By the second half of 2013, MD and GE had owed substantial amounts of debts to BOC.[4]

(2) In October 2015, the Bankrupt wrote the 1^st LOCPG Letter describing MD as one of his core businesses and requesting BOC to restructure the debts.[5]

(3) As a result of the 1^st LOCPG Letter (which was forwarded by LOCPG to BOC), a series of meetings were held between BOC and the Bankrupt from late-October 2015 to early February 2016, including the late-Jan 2016 Meetings held in Beijing on 30-31 January 2016.  During the same period, several documents were signed, including various personal guarantees given by the Bankrupt.[6]

(4) MD and GE’s debts were extended in March 2017, before being partly rolled over in August 2017.[7]

(5) On 17 July 2018, the Bankrupt wrote the 2^nd LOCPG Letter, expressing his gratitude for BOC’s efforts in restructuring his companies’ debts since October 2015, and asking for further indulgence.[8]

(6) As a result of the 2^nd LOCPG Letter (which was again forwarded to BOC), in December 2018, Goldin Tianjin became debtor of RMB 22 billions of MD’s debts (“1^st Transfer”).[9]

(7) In January 2020, Tianjin Huading agreed to assume RMB 5 billion of the debts owed by MD and GE (i.e. 2^nd Transfer).  To that end:[10]

(a) A credit line agreement (providing a one-off facility of RMB 5 billion) was executed between BOC and Tianjin Huading (i.e. 2020 Master Agreement).

(b) BOC and Tianjin Huading executed a loan agreement whereby BOC shall advance a 5-year term loan of RMB 656 million (i.e. Subject Loan) to Tianjin Huading for the specific purpose of repaying the debts owed by GE (i.e. 2020 Loan Agreement).

(c) As security for Tianjin Huading’s liability, the Bankrupt and Proman each executed a deed of guarantee (i.e. Pan Guarantee and Proman Guarantee (together “2020Guarantees”).

(8) Tianjin Huading failed to repay the Subject Loan.  As at 28 May 2021, the outstanding principal and interest under the 2020 Loan Agreement was RMB 696,424,582.60 (i.e. RMB 696m Debt).[11]

8.  On 5 July 2021, the Bankrupt applied to set aside the Statutory Demand in HCSD 28/2021 (“Setting AsideApplication”).  Meanwhile, BOC presented a winding-up petition against Proman in HCCW 215/2021 (“Winding-upPetition”).  Both applications were heard by this Court on 21 April 2022.  At the hearing, the Bankrupt and Proman did not dispute that the relevant loan agreements had been signed by the parties and the parties had in those agreements admitted the indebtedness owed to BOC.  Instead, the Bankrupt (and Proman) contended that there were bona fide disputes in respect of the RMB 696m Debt on the following grounds:

(1) Duress Ground: the Bankrupt signed various guarantees and other documents in 2016 because of duress (in the form of death threats and false imprisonment) administered by BOC at the late-Jan 2016 Meetings.  As the Bankrupt had already signed these documents, he and Proman later had no choice but to succumb to BOC’s demands in signing the 2020 Master Agreement, the 2020 Loan Agreement and the 2020 Guarantees.[12]

(2) Illegality Ground: The 2020 Master Agreement and/or 2020 Loan Agreement are void and unenforceable as a matter of Mainland law in that, among other things, they were executed to conceal the bad debts owed by MD and GE.[13]

(3) Abuse of Process Ground: It is an abuse of process for BOC to have intended to present a bankruptcy petition against the Bankrupt when another creditor (China CITIC Bank Corporation Limited (“CITIC”)) had already presented a bankruptcy petition against him.  The Winding-up Petition was also abusive since the Proman Guarantee contained an arbitration clause.[14]

9.  In the Judgment handed down on 18 May 2022, this Court  dismissed the Setting Aside Application with indemnity costs and authorised BOC to present a bankruptcy petition against the Bankrupt forthwith, and made a winding-up order against Proman.

10.  On 26 May 2022, BOC presented a bankruptcy petition in HCB 2799/2022 based on the RMB 696m Debt, which by then had increased to over RMB 740 million. 

11.  Before BOC’s petition was heard by the court, on 8 July 2022, this Court handed down a judgment in these proceedings [2022] HKCFI 2076, where CITIC (and 2 other petitioners) sought a bankruptcy order against the Bankrupt in reliance on his failure to pay a debt in the amount of HK$8 billion.  A bankruptcy order was made against the Bankrupt (§50).

12.  On 30 May 2022, two representatives from Deloitte[15] were involved in preparing a report advocating for a debt restructuring and a moratorium on the Bankrupt’s bankruptcy. 

13.  In June 2022, Mr Lai was approached by BOC’s solicitors as to whether he could be appointed as liquidator of Proman. Mr Lai stated that he was unable to take up the appointment due to conflict of interest. 

A2.    First Meeting

14.  On 11 August 2022, the First Meeting was held and was chaired by the OR in her capacity as provisional trustee of the Bankrupt.

15.  Prior to the First Meeting, BOC submitted 93 proofs of debt in the total amount of HK$56,042,244,073.47 (i.e. the Debt) (collectively “PODs”), comprising the following loans advanced by BOC, all of which were guaranteed by the Bankrupt:[16]

Borrower	Amount
MD	US$ 2,052,247,608 (equivalent to HK$ 16.1 billion)
GE	US$ 578,166,643.50 (equivalent to HK$ 4.5 billion)
Goldin Tianjin	RMB 26,252,052,275.49 (equivalent to HK$ 30.8 billion)
Tianjin Huading	RMB 4,779,050,255.38 (equivalent to HK$ 5.6 billion)

16.  Amongst the above debts, the HK$5.6 billion owed by Tianjin Huading was inclusive of the RMB 696m Debt and interest accrued up to the date of the PODs. 

17.  At the First Meeting, the creditors considered the resolutions for appointment of the candidates from RSM, Deloitte and Mr Alan Chung Wah Tang and Ms Hou Chung Man of Shinewing (HK) CPA Ltd (“Shinewing”).[17]

18.  Mr Patrick Mak of Messrs. Patrick Mak & Tse (“PMT”), solicitor for the Bankrupt, informed the OR that BOC’s PODs were subject to arbitration proceedings in the Mainland and decisions were pending.  Mr Simon Tang of Messrs. PC Woo & Co (“PCW”), solicitor and proxy for Seashore, raised the same point and proposed that no voting in relation to the appointment of liquidators should be conducted pending outcome of the arbitration.  As no detail or document in relation to the arbitration proceedings were provided by Mr Mak or Mr Tang, the OR considered that the creditors should vote on the proposed resolutions[18].   

19.  Although the statement made by Mr Tang on behalf of Seashore was not expressed as an objection to BOC’s votes, for the purpose of this appeal, I am prepared to assume that his statement constituted an objection to BOC’s votes for the purpose of rule 99L(2). 

20.  The majority of the creditors present and voting including BOC voted in favour of the RSM Candidates, and the voting result was as follows:[19]

Candidates from	Value (HK$)	%
RSM	76,508,406,557.95	69.07%
Deloitte	30,941,604,467.02	27.93%
Shinewing	3,316,761,746.87	2.99%

21.  Among those who voted for Deloitte was Seashore, whose debt, as admitted by the OR for voting purpose, was HK$ 19,283,314,208.77.[20]

A3.    Post-First Meeting

22.  After the First Meeting, on 12 August 2022, PCW sent a letter to OR, stating that the debts claimed in BOC’s PODs were “hotly disputed in the PRC to the extent that the enforceability and the legality of those guarantees in question are all subject to challenge by [the Bankrupt]”, and “the guarantees in question are currently subject to many legal proceedings in the PRC”.  By letter dated 12 August 2022 to the OR, PMT raised the same points as PCW.  No documentary proof in relation to the arbitration proceedings were provided to the OR[21]. 

23.  At that time, the only basis upon which Seashore objected to BOC’s PODs was that there had been arbitration proceedings between BOC and the Bankrupt in respect of certain (unidentified) debts.  There was no suggestion that the Debt did not exist. 

24.  It is clear that Seashore is not independent, but is seeking to dispute the Debt relying on the allegations which the Bankrupt wants, but is not able, to raise in his own right in these proceedings. 

(1) This is confirmed by the fact that Seashore has been able to obtain and produce the internal documents, and information obtained by the staff, of MD, GE, Goldin Tianjin and Tianjin Huading; the loan documentation entered into by these companies and the Bankrupt with BOC; and documents relating to the arbitration proceedings, all of which are confidential and could only have been provided by the Bankrupt to Seashore.   

(2) Mr Wong Yan Lung SC (leading Mr Avery Chan), counsel for Seashore, does not dispute that Seashore’s position is completely aligned with that of the Bankrupt or that Seashore obtained all the information and documents from the Bankrupt and his companies.

25.  At the callover hearing of the Summons on 1 December 2022, Seashore made a last-minute application to adduce further evidence, which was dismissed by this Court.  The Summons was adjourned for substantive arguments.

26.  In the meantime, the Bankrupt and his associates continued to take steps to disrupt and delay the insolvency process in that:

(1) On 21 June 2023, after a contested hearing, Master J Wong appointed the candidates from PricewaterhouseCoopers as liquidators of Proman and rejected Seashore’s proposal to appoint the candidates from Deloitte.

(2) On 9 August 2023, the Court of Appeal dismissed the Bankrupt and Proman’s applications for stay of proceedings pending this Court’s determination of the Summons.  See [2023] HKCA 964.

B.      DISCUSSION

B1.    Applicable principles

27.  Rule 99L of the BR provides that:

“(1) The chairman of a meeting shall have power to admit or reject a proof for the purpose of voting but his decision shall be subject to appeal to the court.

(2) If the chairman is in doubt whether the proof of a creditor should be admitted or rejected he shall make a note of it and shall allow the creditor to vote, subject to the vote being subsequently declared invalid in the event of the objection being sustained.” (underlined added)

28.  As submitted by Mr Wilson Lee, solicitor for the OR, the principle governing whether a proof should be admitted for voting purposes in winding-up applies equally to a proof in bankruptcy, in view of the almost identical wordings of rule 99L and rule 128 of the Companies (Winding-Up) Rules (Cap. 32H); and s.264 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUO”) provides that the same rules shall prevail and be observed with regard to (inter alia) debts provable in the winding up of an insolvent company as those under the law of bankruptcy.

29.  The principles governing an appeal against the decision of the office-holder in admitting or rejecting a proof of debt for voting purpose may be summarised as follows:

(1) The general scheme underlying the operation of the rule is that the chairman has power to admit or reject a proof, and his decision is subject to appeal.  If in doubt, the chairman shall mark the vote as objected to and allow the creditor to vote.  The chairman must look at the claim, if it is plain or obvious that it is good, he admits it, if it is plain or obvious that it is bad he rejects it, if there is a question or a doubt, he shall admit it but mark it as objected (Re Power Builders (Surrey) Ltd[2009] 1 BCLC250,§11, per Lewison J).

(2) The decision to admit or reject a proof for voting purposes at the first meeting of creditors is not a final determination of the creditor’s claim to prove in the liquidation (Re Days International Ltd [2014] 1 HKLRD 20, §9, per Harris J). 

(3) An appeal under rule 99L is the mechanism by which an objection to a proof may be tested.  What is at issue at this stage is the validity of the proof for the purposes of voting, not for the purposes of participating in a dividend.  A subsequent meeting (or the liquidator) may take a different view of the validity of the proof (Re Power Builders, §13).

(4) On an appeal, the chairman’s decision may be reversed or varied without impugning the correctness of the chairman’s decision at the time of the meeting.  In scrutinising the claim, the court is not confined to the material that was before the chairman.  The court examines the evidence placed before it and comes to a conclusion whether, on balance, the claim against the company is established.  In an appropriate case, resolution of the issue may depend upon oral evidence and cross-examination, but the issue remains the same (Re Power Builders, §§14-16).

(5) The court should undertake a broad, macroscopic assessment of the value at which the debt should be admitted.  It cannot be sensible at the earliest stage of liquidation, which may prove to have very little assets, to require the liquidator or the court to be drawn into an application which involves considerable work for the purposes of determining whether or not a proof should be admitted for voting purposes (Re Days, §10).

(6) If the creditor made out a clear prima facie case to support its contention that the amount claimed was due, it is for the party disputing the debt to put forward specific evidence or legal arguments as to why the whole or part of the amount claimed was not due (Revenue and Commissioners v Maxwell[2010] EWCA Civ 1379, §§65-67, per Lord Neuberger).

30.  Mr Wong accepts that the court should carry on a broad and macroscopic assessment when considering an appeal under rule 99L but contends that:

(1) The court should review all the evidence adduced by the parties after the First Meeting and makes a determination on whether BOC has discharged the legal burden of proof that the Debt existed on balance of probabilities.  If the court is left in doubt whether the relevant claims are established, the court should reject them and allow the appeal (Tradition (UK) Limited v Eaitisham Ahmed[2008] EWHC 2946 (Ch), §91). 

(2) The court conducts an independent assessmenton the basis of evidence and arguments before it, including all admissible evidence the parties adduce for the purposes of the application (Re Grande Holdings Ltd, HCCW 177/2011, 5 November 2014, §8, per Harris J). The assessment would “inevitably involve greater examinationofthefactualandlegalbasisfortheclaim”(Revenue and Commissioners v Maxwell, §63).

31.  If and insofar as Mr Wong contends that the court should resolve the factual dispute raised by Seashore or make any findings on the amounts actually advanced by BOC at any interim periods prior to the date of bankruptcy of the Bankrupt, I am unable to agree.

(1) The commencement date of bankruptcy is the date of bankruptcy order (s.30(a) of the Bankruptcy Ordinance (Cap. 6) (“BO”)).  Section 34(3) of the BO provides that all debts and liabilities[22] to which the bankrupt is subject at the date of the bankruptcy order, shall be provable in bankruptcy. 

(2) Admission to proof of debt is to be computed and determined as at the date of commencement of winding-up (Re Islington Metal and Plating Works Ltd [1983] 3 All ER 218, 221g-222i; Re Singapore Insurance Co Ltd [1985] 2 HKC 244, at 247E-249A).  Although both cases were decided in the context of winding-up, the same principles governing proof of debt apply to bankruptcy and winding-up (s.264 of Cap. 32).

(3) Rule 4(1) of the Proof of Debts Rules (Cap. 6E) prescribes the information which shall be stated in the proof of debt.  In particular, rule 4(1)(b) and (d) require the creditor to declare in the proof of debt “the total amount of his claim as at the date of bankruptcy order”, and “particulars of how and when the debt was incurred by the bankrupt”.  There is no requirement that the creditor has to prove how the loans were advanced, let alone at each interim periods, or that all the loans were advanced in accordance with the relevant loan agreements.  Indeed, how the loans were advanced at the interim periods is irrelevant as the relevant date for determining a proof of debt is the date of commencement of bankruptcy.   

(4) An appeal under rule 99L must be viewed against the principle governing proof of debt.  It is neither necessary nor appropriate for a creditor whose debt is being challenged to adduce detailed evidence to prove how the underlying loans at each interim periods had been advanced or whether they were done in accordance with the agreements.  The court looks at the evidence and decides whether as at the date of the meeting, the impugned debt existed (Re Power Builders, §13).  If the debt existed as at the date of the meeting, the creditor was entitled to vote and there is no proper basis to interfere with the decision of the OR.

(5) An appeal under rule 99L is a summary procedure and the approach of the court is to carry out a macroscopic review and assessment of the arguments and evidence adduced by the parties and decide whether the objection raised by the applicant is well-founded.  This does not require cross-examination of any deponents.  Nor does it require the court to embark on resolving the factual dispute raised by the applicant unless the court considers it appropriate to do so.  Where, as here, the bankruptcy is still at the very early stage, it would be undesirable and inappropriate for the parties to ask the court to resolve any such dispute.  It is the function of the trustee-in-bankruptcy to investigate the proofs of debt lodged by the creditors and adjudicate on their claims for the purposes of voting at subsequent meetings and entitlement to receive dividends. 

32.  However, Seashore is doing precisely the opposite.  In §1 of the Summons, it seeks a declaration that BOC is not entitled to vote at all future meetings in reliance on the Debt.  Mr Wong acknowledges that Seashore is interested in pursuing a restructuring of the debts owed by the Bankrupt and his companies, and the purpose of Seashore pursing this appeal is to seek a determination on the correct amount of debt owed to BOC which has a material impact on the restructuring.  An appeal under rule 99L is not and cannot be used for such purpose, particularly when the bankruptcy is still at a very early stage and on Seashore’s own case, there are still ongoing proceedings concerning the Debt.

33.  Indeed, until Mr Wong’s Skeleton are lodged, all parties proceeded on the basis that the court would approach the appeal in a summary manner:

(1) In the Summons, the estimated time for the Summons was 30 minutes. 

(2) At the hearing of the Summons on 1 December 2022, after having sight of the evidence and submissions of the parties, Mr Wong proposed the court to adjourn the Summons for arguments with 3 hours reserved. 

(3) There was no suggestion by Seashore (or any party) that there should be cross-examination of any deponents or that the court should embark on resolving any factual dispute and made any findings on the allegations raised by Seashore. 

34.  In any event, I do not agree that the burden is on BOC to satisfy the court that, on a balance of probabilities, the Debt existed.  As stated in §29(6) above, BOC only needs to adduce evidence to show that there is a prima facie case that the Debt existed. Once this is established, the burden is on Seashore to satisfy the court that its objection can be sustained.  This is mandated by the wordings of rule 99L(2), which state that the vote in question would only be declared invalid “in the event of the objection being sustained”. It is also the approach adopted by the English Court of Appeal in Revenue and Commissioners v Maxwell, §§65-67.

35.  Amongst the cases cited by Mr Wong, only in Tradition (UK) Limited did the court consider it appropriate to have a full trial and make final determination on the issues raised by the parties. It is a very different case. It concerned with the validity of a resolution passed by the majority creditors in approving a voluntary arrangement (IVA) of the Debtor which, if valid, would have the effect of putting an end to the bankruptcy:

(1) The applicant applied under s.262(1)(b) of the Insolvency Act 1986[23] and rule 5.22(3) of the Insolvency Rules[24] to set aside the decision of creditors’ meeting (“Meeting”) in approving the IVA on the grounds that (a) some of the debts allegedly owed to the Debtor’s associates (collectively “R3-R8”) and admitted by the chairman (Mr Andronikou) had been inflated; (b) the IVA and statement of affairs contained a number of errors and omissions which constituted a material irregularity for the purpose of s.262(1)(b); and (c) the conduct of Mr Andronikou in preparing his Nominee’s report and at the Meeting had fallen short of the standard required of a reasonably competent insolvency practitioner. The application was supported by witness statements filed by the parties, and all witnesses were cross-examined. 

(2) After a 16-day trial, the court (a) made findings on the correct amounts of the claims of R3-R8, which reduced the value of the votes in favour of the IVA from 77.94% to 73.52% (i.e. less than the requisite majority of 75%) (§§198-199); (b) held that there had been material irregularity at the Meeting and revoked the approval of the IVA, and refused to direct a further meeting to consider the IVA (§§203-204); (c)  rejected the applicant’s complaint based on errors and omissions in the IVA and the statement of affairs (§214); and (d) found that Mr Andronikou had failed to meet the standard of a reasonably competent insolvency practitioner in preparing his Nominee’s report and in conducting the proceedings, but rejected the allegation in relation to his conduct at the Meeting (§255).   

B2.    Seashore’s arguments

36.  Mr Wong advances a number of arguments in support of his contention that the loans advanced by BOC to MD/GE pursuant to the loan agreements dated between September 2017 and September 2018 did not exist[25].

37.  First, which is the main plank of Seashore’s argument, no fund had actually been advanced by BOC to MD/GE pursuant to the loan agreements dated between September 2018 and September 2019[26].  His arguments run like this:

(1) The PODs are based on the Bankrupt’s personal guarantees for repayment of 45 loans allegedly advanced by BOC to MD (14 loans), GE (4 loans), Goldin Tianjin (22 loans) and Tianjin Huading (5 loans) between September 2018 and January 2020[27].

(2) In respect of the 14 loans to MD and the 4 loans to GE there is no evidence to show that BOC actually advanced any fund pursuant to the relevant loan agreements dated between September 2018 and September 2019.  As MD/GE are not liable, the Bankrupt as guarantor cannot be liable (Phillips and O’Donovan, Modern Contract of Guarantee, 4^th Ed., 1-025; 5-153)[28].

(3) As the loans allegedly advanced pursuanttoMD/GEloanagreementsdatedbetween2017[29] and 2019 did not exist, the 22 loans to Goldin Tianjin and the 4 loans to Tianjin Huading which sought to discharge the indebtedness of MD/GE, did not exist.  It follows that Goldin Tianjin, Tianjin Huading and the Bankrupt cannot be liable, according to the opinion of Shenzhen’s Zhong Lun Law Firm[30]. 

(4) The burden is on BOC to adduce evidence to prove that between 2017 and 2018, “loanmonieshaveactuallybeenpaidto (or drawn down by) the borrower in accordance with the terms ofthe governing loanagreement”[31].  This requires BOC to produce documents to prove that:

(a) “Recipient Accounts” in the names of MD/GE had been opened at BOC;

(b) MD/GE had applied for drawdown of the loans in the manner prescribed by the loan agreements;

(c) BOC paid the loan monies according to the drawdownapplicationsintothe “RecipientAccounts” beforeutilizingthemto discharge the original loans; and

(d) Records of applicable rates and computation of interest charged on the loan proceeds paid into the “Recipient Accounts” and the balance of the amounts due on the “Recipient Accounts”[32].

(5) Faced with Seashore’s case, BOC’s failure to produce the above documentary evidence or to proffer any proper explanation entitles the court to draw adverse inferenceagainstBOC(Tullett&TokyoInternationalSecuritiesLtdv. APC Securities Co Ltd [2001] 2 HKLRD 356, at 365)[33].

38.  As regards the alleged non-existence of the relevant “Recipient Accounts”, Mr Wong submits that:

(1) Upon inquiry with BOC’s hotline, the “Recipient Accounts” specified in the MD/GE loan agreements dated after August 2017 did not exist[34];

(2) BOC’s explanations that the “old lending accounts” were superseded by new ones, and “internal accounts” are not verifiable by hotline inquiry is incredible for the reasons set out in §27-30 of his Skeleton.  Although in Shenzhen CIETAC arbitration between BOC and GE/Bankrupt, the tribunal came to the view that the hotline could only be used to verify “public accounts” as opposed to “internal accounts”, such view was unsound and in any event does not bind Seashore which was not a party to the arbitration[35].

(3) The PRC foreign currency regulations require the opening and closing of “Recipient Accounts” be reported to SAFE[36], but no application form of MD/GE has been produced.  BOC’s assertion that the relevant regulations do not apply to refinancing accounts is “unconvincing and unsupported by authority” and the non-compliance with the relevant regulations would not render the contract void is “completely beside the point”[37].

(4) PRC law requires BOC to provide monthly statements of MD/GE’s Recipient Accounts but no such statements were produced.  BOC’s explanation that monthly statements would only be provided upon application is contrary to the relevant provisions and does not explain why BOC did not provide the requisite information recording the activities of the “Recipient Accounts”[38].

(5) By failing to follow the requirements prescribed by the loan agreements, “BOC had prevented new loans to MD/GE from coming into existence (as the independent auditors of MD and GE found).”[39]  

39.  Second, Mr Wong points to the following reports obtained by Seashore from MD/GE which show that BOC did not advance any loan to MD/GE after 2016 (collectively “4 Reports”):

(1) In MD’s auditors report dated 15 September 2022 (“MD Auditors Report”), the auditors stated that according to their review of MD’s accounting ledgers, MD had not received any new loan from BOC from 1 July 2016 to 31 December 2020.

(2) In MD’s liquidation report dated 6 July 2022, Appendix 4, Table 12-1, which set out the record between MD and BOC between 25 June 2009 to 29 February 2020, there was no record of any sum advanced by BOC to MD from 2016.

(3) In GE’s auditors report dated 15 September 2022 (“GE Auditors Report”), the auditors stated that according to their review of GE’s accounting ledgers, GE had not received any new loan from BOC from 1 August 2016 to 31 December 2020.

(4) In GE’s liquidation report dated 6 July 2022, the liquidators initially stated that the GE loans had been advanced and due, but they deleted the relevant paragraphs in their supplemental report, following review by the auditors appointed by the liquidators[40].

40.  Mr Wong says that the “findings” by “independent auditors” negate BOC’s assertions that loans had been advanced to MD/GE pursuant to the loan agreements dated between 2017 and 2019.  The auditors reports were not available at the time the courts or tribunals considered BOC’s claims against the Bankrupt.  BOC is unable to contradict the views stated in the 4 Reports.  BOC’s reliance on the 5 notices of adjudication issued by the liquidators of MD/GE is “plainly inadequate” as those were preliminary assessments prepared on the basis of the loan agreements[41]. 

41.  Third, BOC’s reliance on (1) the Bankrupt’s 2 letters to LOCPG acknowledging and thanking BOC’s support and efforts in restructuring his companies’ debts[42]; (2) the Overall Payment Agreement dated 17 December 2018 executed by MD, GE, Goldin Tianjin[43]; and (3) the Application for Debt Repayment executed by Tianjin Huading on 12 January 2020[44] is misplaced, as these are “not sufficient proof of actual advancement of loans after 2017”[45]. 

42.  Fourth, Mr Wong points to one out of 93 PODs and submits that it appears that there were 2 or even 3 sets of new loans being advanced to discharge one common set of antecedent indebtedness.  This example, couples with BOC’s inability to produce contemporaneous documents to prove how the funds from each of the new loan agreements went to discharge any specific antecedent loans, show that there is “a strong possibility that particular heads of MD/GE’s indebtedness had been doubled or even tripled”[46].

43.  Lastly, BOC cannot rely on the acknowledgements of debts by MD/GE and the lack of objections on the part of the Bankrupt because:

(1) a guarantor cannot be bound by any admission of principal debtor in the course of proceedings/arbitration without the authority of the guarantor under PRC law;

(2) MD/GE’s acknowledgments should not be taken at face value in view of BOC’s practice in requiring borrowers to pre-chop or pre-sign documents; and

(3) such acknowledgements cannot excuse BOC’s inability to produce documents evidencing advancement of actual funds to MD/GE between 2017 and 2019[47]. 

B3.     BOC’s arguments

44.  Mr Bernard Man SC (leading Mr Thomas Wong), counsel for BOC, submits that the Summons is yet another attempt deployed by the Bankrupt, through entities related to him, to disrupt or thwart the bankruptcy process.  The entire application is premised on the wild and unsubstantiated allegation that the BOC did not advance any loan to MD/GE such that the Bankrupt is not indebted to BOC.  The allegation is:

(1) inconsistent with the stance taken by the Bankrupt, who accepted (in the Setting Aside Application) that BOC had advanced considerable sums to MD/GE;

(2) nonsensical and cannot be squared with the contemporaneous documents, including the 1^st and 2^nd LOCPG Letters signed by the Bankrupt (in which he acknowledged the loans granted by BOC to his companies and asked for BOC’s indulgence) and the numerous loan documentation executed by the Bankrupt’s companies (which recited the substantial debts owed by MD/GE);

(3) at odds with the rulings reached by several other arbitral tribunals and the Mainland courts that BOC had indeed advanced substantial loans to MD/GE;

(4) contradicted by the latest reports issued by MD/GE’s liquidators in October 2022, which confirmed that BOC had indeed lent considerable sums to MD/GE; and

(5) debunked by the fact that MD/GE had, as recently as 2020, verified the existence and amount of their debts via BOC’s online system.

45.  Adopting a broad and macroscopic approach for admitting proofs for voting purposes, BOC is clearly entitled to rely on its PODs for voting purposes.

B4.    Analysis

46.  As Seashore has not obtained leave to adduce any expert evidence on PRC law, its evidence on the opinions on PRC law, whether stated in the affirmations of Sun Wei Yung Kevin filed in support of the appeal or in the documents exhibited thereto, is inadmissible[48] and in any event, would not be accorded with any weight.    

47.  In my view, the documents appended to the PODs and the findings in the Judgment are sufficient to prove that there is at least a prima facie case that the Debt existed as at the commencement date of the bankruptcy of the Bankrupt.

48.  Further, the evidence before the court, including the 4 Reports upon which Seashore relies heavily, confirm that the Debt existed as at the date of the commencement of the bankruptcy of the Bankrupt.

49.  First, in MD Auditors Report, the auditors produced MD’s accounting ledgers for the period from 31 March 2016 to 31 December 2020, which recorded that:

(1) MD had received loans in the aggregate amounts of RMB 11,814,199,762.46 and US$3,597,153,570 (equivalent to RMB 23,604,917,185.70) from BOC;

(2) MD had repaid to BOC the aggregate amount of RMB 12,507,149,445.23; and

(3) as at 31 December 2020, MD still owed BOC“short term loan” in the amount of RMB 12,927,342,635.49, which was the same as the amount stated in their report dated 24 May 2021.    

50.  The auditors’ reference to MD had not received any “new loans” during the period from 1 July 2016 and 31 December 2020 (which Seashore relies) must be read in conjunction with the next paragraph, where the auditors stated that the “short term loans” had been advanced by BOC in the period from March to June 2016.  I do not see how Seashore can assert that MD was not indebted to BOC when MD’s accounting ledgers recorded and confirmed that as at 31 December 2020, the outstanding balance owed to BOC was RMB 12,927,342,635.49.   

51.  Second, in their report, MD’s liquidators stated that as at 31 August 2021, the “short term loans” owed to BOC was RMB 11,822,462,232.22, after taking into account, inter alia, the amount stated in MD Auditors Report (i.e. RMB 12,927,342,635.49).

52.  Third, in GE Auditors Report, the auditors produced GE’s accounting ledgers for the period from 31 March 2016 to 31 December 2020, which recorded that:

(1) GE had received loans in the aggregate amounts of RMB 8,138,741,329.16 from BOC;

(2) GE had repaid to BOC the aggregate amount of RMB 4,941,635,438.49; and

(3) as at 31 December 2020, GE still owed BOC “short term loan” in the amount of RMB 3,360,568,133.76, which was the same as the amount stated in their report dated 25 May 2021.    

53.  The auditors’ reference to GE not having received any “new loans” during the period from 1 August 2016 and 31 December 2020 (which Seashore relies) has to be read in conjunction with the next paragraph, where the auditors stated that the “short term loans” had been advanced by BOC in the period from October 2015 to July 2016.  Again, I am unable to see how Seashore can assert that GE was not indebted to BOC when GE’s accounting ledgers recorded and confirmed that as at 31 December 2020, the outstanding balance owed to BOC was RMB 3,360,568,133.76.   

54.  Fourth, in their supplemental report, GE’s liquidators stated that as at 31 August 2021, the “short term loans” owed to BOC was RMB 3,360,568,133.76 and after adjustment for foreign exchange rates, the amount owed was RMB 3,331,210,996.71[49].

55.  Seashore’s reliance on the deletion of the narratives about the loans advanced by BOC to GE in the supplemental report[50] is misplaced.  As the liquidators explained in the same paragraph, the errors concerned with the dates on which the loans had been advanced and due, and they re-calculated the amounts in Appendix 11 thereto.  In Appendix 11, it was stated that as at 31 August 2021, the amount owed by GE to BOC was RMB 3,331,210,996.71 (being RMB 3,360,568,133.76 adjusted by exchange rate difference of –RMB 29,357,137.05).    

56.  I have not lost sight of the fact that the amounts claimed in the PODs are not the same as the amounts stated to be owed by MD/GE to BOC in the 4 Reports, apparently because of the adjustments made by MD/GE’s auditors and liquidators.  The precise quantification of BOC’s claims under the PODs is a matter which the trustee-in-bankruptcy would need to consider and adjudicate in future.    

57.  The 4 Reports all show that as at 31 August 2021, MD and GE owed very substantial amounts to BOC (as to RMB 12.9 billion and RMB 3.36 billion respectively), which are in line with the amounts claimed in the PODs.  Even if one were to adopt these lower figures as representing BOC’s claims against the Bankrupt, it would only reduce BOC’s claims by approximately HK$3.17 billion[51] (equivalent to 2.95% of the value of the total claims of the creditors present and voting at the First Meeting[52]).  The result of the voting at the First Meeting would have been the same.   

58.  Seashore’s allegation that the Debt did not exist is contradicted by the evidence it adduces and is plainly false.  As the objection raised by Seashore to the PODs is wholly without basis, the appeal must be dismissed.   

59.  For completeness, I agree with Mr Man that Seashore’s allegation that none of the loans advanced by BOC to MD/GE between 2018 and 2019 (“Relevant MD/GE Loans”) actually existed is absurd and demonstrably false for the further reasons discussed below.   

60.  First, Seashore’s assertion is wholly inconsistent with the Bankrupt’s own stance during the Setting Aside Application:

(1) BOC’s case was that the Subject Loan had been advanced for the purpose of partially repaying the debts owed by GE under the “Relevant MD/GE Loans”, if there was in fact no such debt owed by GE, the Subject Loan would not have been repayable and the Bankrupt would undoubtedly have raised this point in support of his Application.

(2) Yet, the Bankrupt did not do so, despite him being the owner and controller of MD/GE at all material times.[53]

(3) By relying on the Illegality Ground and alleging that the 1^st and 2^nd Transfers were intended to conceal the “bad debts” of MD/GE[54], the Bankrupt’s own case must be that BOC had lent money to MD/GE. 

(4) Not only does the Bankrupt’s stance in the Setting Aside Application show that Seashore’s assertion is factually incredible, the Bankrupt would be estopped (at least by virtue of the Henderson v Henderson principle) from making that assertion.  It is an abuse of process for a party to adopt diametrically inconsistent stances in different proceedings (Re Shun Tak Holdings [2009] 5 HKLRD 743 §§83-90; Vervaeke (formerly Messina) v Smith [1983] 1 AC 145 at 157B-C, per Lord Hailsham).

(5) Contrary to Seashore’s contention, the court cannot brush aside the Bankrupt’s stance on the basis that it was adopted “without the authority of the guarantor” or that the principal debtor has “failed to contest properly the proceedings”.  The contention flies against the fact that the Bankrupt has acknowledged the existence of the debts owed by MD/GE to BOC.

61.  Second, it is indisputable[55] that MD/GE owed BOC very substantial sums even before the advancement of the Relevant MD/GE Loans in 2018-2019.  If the Relevant MD/GE Loans had not actually been advanced for the purpose of settling MD/GE’s antecedent debts, it must follow that:

(1) those antecedent debts have been fully repaid by the Bankrupt or his companies in other way, which is totally unsubstantiated.  It is contrary to the LOCPG Letters, which clearly show that the Bankrupt’s companies including MD/GE had not been able to pay the debts owed to BOC; or

(2) those antecedent debts remain outstanding but BOC somehow chose not to seek repayment, which is equally absurd and non-sensical.

62.  Mr Wong submits that it is irrelevant that BOC had advanced these antecedent loans to MD/GE or how they were repaid as Seashore does not have information about these antecedent debts. I disagree.  Seashore has been able to obtain any document it wishes to adduce from the Bankrupt and his companies including MD/GE.  If there is any document to show that these antecedent debts had been repaid other than through the loans advanced by BOC, Seashore would have obtained such documents from the Bankrupt and his companies and produced the same in its evidence.  No such evidence has been adduced.   

63.  Third, the allegation that the Relevant MD/GE Loans did not exist flies in the face of all the contemporaneous documents:

(1) The relevant contractual documentation, signed by the Bankrupt’s companies, all recorded otherwise. 

(2) The Overall Repayment Agreement executed for the purpose of the 1^st Transfer recited that (a) MD owed over USD 3.5 billion and RMB 11.8 billion to BOC; and (b) GE owed over USD 708 million to BOC.[56]

(3) At clause 1.1 of the Overall Repayment Agreement, the parties agreed to a timetable to gradually reduce the indebtedness owed by MD/GE.[57]

(4) The Application for Debt Repayment dated 12 January 2020 executed for the purpose of the 2^nd Transfer referred to over (a) USD 708 million owed by GE and (b) USD 2.1 billion owed by MD.[58]

64.  Fourth, Seashore’s assertion makes no sense.  If the Relevant MD/GE Loans had not existed, there would have been no point for BOC to execute (and the Bankrupt’s companies would not have agreed to execute) the 1^st and 2^nd Transfers, which were carried out to enable Goldin Tianjin and Tianjin Huading to assume part of the indebtedness under the Relevant MD/GE Loans.

65.  Fifth, the vast majority of the Relevant MD/GE Loans have been acknowledged by:

(1) MD/GE directly via BOC’s online system (對賬管理系統); and

(2) MD’s and GE’s liquidators through their debt review notices issued in October 2022. 

65. The details of these acknowledgements (and how they correspond to the debts stated in BOC’s proof) are set out in the Schedule prepared by Mr Man and annexed to this Decision.  Mr Wong has not advanced any submission to contradict the facts stated in the Schedule.    

66.  Sixth, the points raised by Seashore in its affirmations are wholly unmeritorious.  They have been dealt with in Li Aff §§10-13 filed on behalf of BOC.  To summarise Seashore’s arguments and the responses thereto:

(1) BOC hotline revealed no record of “Recipient Accounts”:

(a) The “Recipient Accounts” set out in clause 7 of the MD and GE loan agreements were not used for receiving any loan monies under the relevant loan agreements (which were executed effectively to extend the repayment deadline of some pre-existing loans).  In any case, one cannot verify the existence of a loan account (貸款帳戶) by calling the BOC hotline, especially where (as here) the caller was not even the account-holder. 

(b) The same assertion has already been rejected by the tribunal in Shenzhen CIETAC arbitration which concerned with one of the loan agreements entered into by GE (no. 42 of 2019): see arbitral award dated 15 August 2022 (“598Award”) pp.63-64.  The Bankrupt was a party to the arbitration and is bound by such finding.   

(2) Absence ofapplicationforms for opening of “Recipient Accounts”: The relevant PRC law provisions are inapplicable to the present case since the Relevant MD/GE Loans were advanced for the purpose of repaying pre-existing debts, rather than for GE/MD’s own use.  Also, as held in the 598 Award pp.53-54, violation of these PRC law provisions would not render the loan agreements unenforceable.  This is reinforced by the fact that the relevant authorities, despite being fully aware of the loans in question, have never accused BOC of breaching any PRC law. 

(3) “Recipient Accounts” cannot be found in handover list or list of bank accounts provided by MD’s liquidator: These lists only show the settlement accounts or savings account (結算類存款賬戶), rather than any loan accounts such as the recipient accounts.

(4) Relevant MD/GE Loans not shown in MD/GE’s liquidators reports: The latest debt review notices issued by MD and GE’s liquidators in October 2022 confirm that BOC had indeed advanced considerable sums to ME and GE: see Schedule.

(5) MD/GE Auditors Reports confirm no “new loan” from BOC after July-August 2016: The Auditors Reports are only intended to verify the overall asset and liability positions of MD/GE as at 31 December 2020, rather than to record any specific advancement from BOC to the companies during any interim periods.  Further, the 598 Award has already ruled that BOC had advanced money to GE, while Shenzhen Intermediate People’s Court found that BOC had lent considerable sums to MD (USD 3.6 billion plus RMB 11.8 billion): judgment dated 10 June 2021 (“225Judgment”).

(6) BOC failed to provide monthly statements of “Recipient Accounts”: BOC has never received any request for the monthly statements, whether by MD, GE or their liquidators.  In any event, MD/GE themselves have from time to time confirmed their indebtedness via BOC’s online system (對賬管理系統): see Schedule.

67.  As regards Seashore’s allegation that MD/GE’s indebtedness might have been “doubled or even tripled” resulting in an “inflation” of the Bankrupt’s guarantee liability, it is a new allegation not mentioned in Seashore’s affirmations.  It is not open to Seashore to rely on an allegation which BOC has no opportunity to deal with in its evidence.

68.  In any event, Mr Man submits that Seashore’s speculation is premised on the erroneous assumption that each of the “antecedent loans” was completely rolled over or transferred every time a new loan agreement was signed.  However, if one takes loan agreement no. 83 of 2017 as an example[59]:

(1) By this agreement, US$ 649.5m was advanced by BOC to MD in December 2017.

(2) Subsequently in September 2018, by loan agreement no. 50 of 2018, BOC advanced US$ 55m to MD to partially roll over the aforementioned US$ 649.5m debt.

(3) Later in December 2018, BOC and Goldin Tianjin executed “22 Goldin Loans” to transfer part of the US$ 649.5m debt which had not been rolled over, as well as a number of other loans.

(4) Accordingly, there is no question of any “double-counting” or “triple-counting”.  BOC is entitled to rely on both loan agreement no. 50 of 2018 and “22 Goldin Loans” in its proof of debt because these agreements concerned different parts of the initial USD 649.5m debt.  The same logic applies to the other antecedent debts cited in §46 of Seashore’s Skeleton.

69.  For the above additional reasons, Seashore’s allegation that the Relevant MD/GE Loans did not exist is wholly unmeritorious.  There is no proper basis to challenge the OR’s decision in admitting BOC’s PODs for voting purpose at the First Meeting. 

B5.    Deloitte Candidates should not be appointed as trustees-in-bankruptcy

70.  Even if, contrary to my view, there is any proper basis to discount the entire value of the votes cast by BOC at the First Meeting, such that the majority was in favour of appointing Deloitte Candidates over RSM Candidates, I do not think that the court should give effect to such decision. 

71.  The principles governing the appointment of trustee-in- bankruptcy are not in dispute:

(1) The court has jurisdiction to consider and determine whether a person is fit to be appointed as trustee-in-bankruptcy. The decision of the creditors in general meeting may be reviewed and substituted by the court in the exercise of its supervisory jurisdiction over the conduct and office of trustees (Re Chan John Loong Fai (the Bankrupt) [2022] 1 HKLRD 63 §43).

(2) As an office holder, a trustee-in-bankruptcy, must not only be independent of the parties, but must be seen to be so.  Any conflict of interest or over-familiarisation should be discouraged.  Where the conduct of a liquidator has been such as to give rise to a perception, on reasonable grounds, that he was biased, or where his conduct has been such as to give rise to a real and reasonable loss of confidence in him by the creditor, the court may accede to an application to remove him (Re Legend International Resorts Ltd, HCCW 1139/2004, 7 March 2011, §§30-31).

(3) A liquidator should not be a person nor the choice of a person who has a duty or purpose which conflicts with the duties of the liquidator (Re Value Food Supply Ltd[2021] HKCFI 2975, §11).

72.  There is no suggestion that the RSM Candidates have any conflict or that they are not capable of performing their duty as trustee-in-bankruptcy of the Bankrupt.

73.  By contrast, the following matters give rise to an appearance of lack of independence or conflict of interest on the part of the Deloitte Candidates:

(1) The previous involvement of DTT as auditors of Proman/Goldin Properties for over 10 years;

(2) The trustee-in-bankruptcy has to investigate the affairs of the Bankrupt and his assets which include the companies owned and controlled by the Bankrupt of which DTT were auditors;

(3) The Deloitte Candidates were involved in preparing a report of, and advocating for debt restructuring and a moratorium on the bankruptcy proceedings, which was relied on by the Bankrupt in seeking a stay of execution of the Judgment;[60] and

(4) Mr Lai himself declined the invitation of BOC’s solicitors to be nominated as liquidator of the Bankrupt’s company (Proman) on the ground of conflict.

74.  I agree with the view of Master Wong, as stated in his Decision in refusing to appoint the Deloitte Candidates as liquidators of Proman, that Deloitte’s “fingerprints are everywhere” and they can “never be seen to be independent and impartial”. 

C.      DISPOSITION & COSTS

75.  For the above reasons, the Summons is dismissed. 

76.  As for costs, I make a costs order nisi that Seashore is to pay the costs of and occasioned by the Summons to BOC and the OR on an indemnity basis, with certificate for 2 counsel for BOC. The costs are to be assessed by way of gross sum assessment if not agreed.

77.  It seems to me that it is appropriate to order Seashore to pay indemnity costs for the following reasons:

(1) The appeal is based on an allegation that the Relevant MD/GE Loans and hence the Debt did not exist, which I find to be false and wholly without basis. 

(2) It is an abuse of process for Seashore to seek to re-litigate the issue as to the validity of the guarantees executed by the Bankrupt in favour of BOC, knowing full well that the issue has already been determined by the court in the Judgment.

(3) It is a misuse of the appeal procedure under rule 99L to seek a final determination on the correct amount of BOC’s claims under the PODs with a view to use such determination for the collateral purpose of pursuing a restructuring of the debts owed by the Bankrupt and his companies.

(4) It is a waste of costs and time for Seashore to pursue the appeal in circumstances where there was no proper basis for the court to replace the RSM Candidates as trustees-in-bankruptcy of the Bankrupt.   

78.  BOC and the OR are to submit their respective statements of costs for gross sum assessment within 7 days of this Decision, and Seashore is to submit its comments on the statements, if any, within 7 days thereafter.  Costs will be assessed on paper. 

(Linda Chan) Judge of the Court of First Instance High Court

 

Mr Wong Yan Lung SC leading Mr Avery Chan, instructed by P.C. Woo & Co., for the Applicant

Mr Bernard Man SC leading Mr Thomas Wong, instructed by King & Wood Mallesons, for Bank of China Limited Shenzhen Branch

DLA Piper Hong Kong, for the Trustees, is excused

Mr Wilson Lee, of Official Receiver’s Office, for the Official Receiver

SCHEDULE – ACKNOWLEDGEMENT OF DEBTS

Part 1 – Debts owed by MD

	Loan Agreement	Amount of principal as stated in proof (USD)	Amount of interest (normal + default) as stated in proof (USD)	MD’s liquidators’ confirmation (USD)	MD’s own confirmation (USD)
1.	50 of 2018	53,029,747.06	2,880,983.07 + 5,600,659.98	Principal of USD 1,343,045,781.51 + Interest of USD 132,181,924.36 * Liquidator has withheld confirming loan agreements 50 of2018, 53 of 2018 and 46 of 2019 since they are the subject of ongoing arbitration:   *But note that MD themselves have confirmed at least the principals of these 3 loan agreements.	53,029,747.06
2.	52 of 2018	273,045,781.51	17,539,196.73 + 31,849,989.96		333,767,765.90
3.	53 of 2018	247,850,860.30	13,024,340.40 + 26,132,252.24		247,850,860.30
4.	46 of 2019	123,218,822	5,425,295.50 + 14,315,823.21		123,218,822.00
5.	47 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
6.	48 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
7.	49 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000

  

Part 2 – Debts owed by GE

8.	50 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
9.	51 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
10.	52 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
11.	53 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
12.	54 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
13.	55 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
14.	56 of 2019	107,000,000	5,825,712.96 + 11,007,672.61		107,000,000
TOTAL in USD		2,052,247,608		1,475,227,705.87	1,827,867,195.26
TOTAL in HKD[61]		16,107,065,351.39		11,578,324,649.52	14,346,015,682.00
	Loan Agreement	Amount of principal as stated in proof (USD)	Amount of interes (normal + default) as stated in proof (USD)	GE’s liquidators’ confirmation (USD)	GE’s own confirmation (USD)
1.	41 of 2019	128,037,492.34	5,616,502.26 + 10,095,231.44	Principal of USD 515,037,492.34 + Interest of USD 37,216,465.58	128,037,492.34
2.	42 of 2019	129,000,000	5,636,372.81 + 10,169,433		129,000,000
3.	43 of 2019	129,000,000	5,636,372.81 + 10,169,433		129,000,000
4.	44 of 2019	129,000,000	5,636,372.81 + 10,169,433		129,000,000
TOTAL in USD		578,166,643.50		552,253,957.92	515,037,492.34
TOTAL in HKD[62]		4,537,740,901.51		4,334,365,188.73	4,042,271,758.63

  

HCCW 295/2021
HCB 6548/2021
[2022] HKCFI 2076

HCCW 295/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 295 OF 2021

_______________

	IN THE MATTER OF SILVER STARLIGHT LIMITED
	and
	IN THE MATTER OF Section 327(3)(b) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)

_______________

BETWEEN

	CHINA CITIC BANK CORPORATION LIMITED TIANJIN BRANCH (中信銀行股份有限公司天津分行)	1st Petitioner
	CITIC BANK INTERNATIONAL (CHINA) LIMITED, BEIJING BRANCH (中信銀行國際 (中國) 有限公司北京分行)	2nd Petitioner
	CHINA CITIC BANK INTERNATIONAL LIMITED (中信銀行 (國際) 有限公司)	3rd Petitioner
and
	SILVER STARLIGHT LIMITED	Respondent

_______________

HCB 6548/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO 6548 OF 2021

_______________

Re:
	PAN SUTONG (潘蘇通)	Debtor
Ex-parte:
	CHINA CITIC BANK CORPORATION LIMITED, TIANJIN BRANCH (中信銀行股份有限公司天津分行)	1st Petitioning Creditor
	CITIC BANK INTERNATIONAL (CHINA) LIMITED, BEIJING BRANCH (中信銀行國際 (中國) 有限公司北京分行)	2nd Petitioning Creditor
	CHINA CITIC BANK INTERNATIONAL LIMITED (中信銀行 (國際) 有限公司)	3rd Petitioning Creditor

_______________

(Heard together)

Before: Hon Linda Chan J in Court

Date of Hearing: 7 June 2022

Date of Judgment: 8 July 2022

_______________

J U D G M E N T

_______________

1.  There are before the court 2 petitions presented by the 1^st to 3^rd Petitioners against (1) Silver Starlight Limited (“Company”) in HCCW 295/2021 (“HCCW”); and (2) Mr Pan Sutong (潘蘇通) (“Pan”) in HCB 6548/2021 (“HCB”), on the ground that they failed to comply with the statutory demands requiring them to pay HK$8 billion (“Debt”) which had fallen due on 10 December 2019.

2.  The Debt is the unpaid principal advanced by the 1^st and 2^nd Petitioners to the Company under a facility agreement dated 15 May 2017 (“Facility Agreement”). Pan executed a personal guarantee dated 15 May 2017 in favour of the 3^rd Petitioner (as agent on behalf of the “Finance Party” [1]) agreeing to pay any amount owed by the Company under the Facility Agreement (“Guarantee”).

3.  Prior to presentation of the petitions, both the Company and Pan had taken steps to challenge the locus of the Petitioners in presenting a petition against them on the ground that there is a bona fide dispute on substantial grounds in respect of the Debt and, in the case of the Company, it also disputed the jurisdiction of the court to make a winding up order against it. All the issues have been determined by the court against the Company and Pan, as further described in §§12 – 20 below.

A. BACKGROUND

4.  The background and the disputes raised by the Company/Pan are set out in §§6-14 of the Judgment of DHCJ MK Liu in HCMP 222/2021 dated 3 June 2021 (“HCMP Judgment”) and §§3-13 of the Judgment of the Court of Appeal in CACV 301/2021 dated 25 August 2021 (“CACV Judgment”), being the Company’s appeal against the HCMP Judgment.

5.  Pan is a Hong Kong resident. He is the sole legal and beneficial owner of the Company, which is incorporated in the BVI.

6.  Goldin Properties Holdings Limited (“Goldin Holdings”):

(1) is a company incorporated in Hong Kong. It is an investment holding company and owns various subsidiaries which, in turn, hold many investments and assets including a property development project in Tianjin (“Tianjin Project”)[2];

(2) was a listed company in Hong Kong until completion of its privatization on 17 August 2017; and

(3) is wholly owned by Pan, with 4.811% held in his name, 35.59% held in the name of the Company and the remaining shares held in the name of 2 other BVI companies wholly owned by him[3].

7.  The Debt arose out of a HK$8 billion loan advanced by the 1^st and 2^nd Petitioners (with the 3^rd Petitioner as agent) to the Company to facilitate the privatization of Goldin Holdings. There was another loan of HK$4 billion advanced by the 3^rd Petitioner to the Company to fund the privatization although this is not relied on by the Petitioners in the petitions.

8.  The HK$8 billion loan was secured by, inter alia, (1) the Guarantee, (2) a share charge dated 15 May 2017 executed by the Company in respect of its shares in Goldin Holdings, and (3) a mortgage dated 30 November 2017 executed by Goldin Properties (Tianjin) Co. Ltd (“Goldin Tianjin”), an indirect wholly owned subsidiary of Goldin Holdings established in the Mainland, over 2 pieces of land (nos. 116051200046 and 116051200025) used in the Tianjin Project (“Mortgaged Lands”).

9.  The Company failed to pay the interest due on the HK$8 billion loan. By notice dated 10 December 2019, the 3^rd Petitioner as agent declared that the principal and the accrued interest became due and payable immediately and the Company was required to pay all the amount due. Apart from paying part of the overdue interest on 8 January 2020 and 29 May 2020, no further payment was made by the Company. Irrespective of the acceleration notice, the HK$8 billion loan was due for repayment on 15 May 2020.

10.  On 11 January 2021, the Petitioners served a statutory demand on the Company demanding payment of the Debt.

11.  On 16 February 2021, the Petitioners served another statutory demand on Pan requiring him to pay the Debt.

A1. HCMP Judgment

12.  By originating summons dated 22 February 2021 in HCMP 222/2021 (“HCMP”), the Company sought a final injunction to restrain the Petitioners from presenting a winding-up petition against it on the grounds[4] that: (1) the court has no jurisdiction to wind up the Company (“Jurisdiction Point”); and (2) the Debt is subject to a bona fide dispute (“Bona Fide Dispute Point”) relying on 2 main allegations: (a) there was an overall agreement made orally in or around April or May 2017 between Mr Sun Deshun, former chairman of the 1^st Petitioner (“Sun”), on behalf of the Petitioners and Pan (on behalf of the Company) (“Overall Agreement”) under which the Petitioners agreed that they would procure buyers to buy the properties on the Mortgaged Lands, and use the proceeds of sale to repay the loans; and (b) the Petitioners made a representation to the Company that the Petitioners would enforce their right to the security over the Mortgaged Lands first, and would only demand the Company/Pan for any outstanding amount under the Facility Agreement after enforcement of such security (“Representation”). The Petitioners acted in a way contrary to the Overall Agreement and the Representation by unreasonably obstructed the sale of properties in the Tianjin Project (“Unreasonable Obstruction”) and failed to realise the Mortgaged Lands to repay the Debt and, therefore, should not be entitled to enforce the Facility Agreement against the Company[5].

13.  With the parties’ agreement, DHCJ MK Liu heard the substantive arguments on 31 May 2021 for the purpose of making a final determination on the matters set out in the originating summons[6]. In the HCMP Judgment, the Judge held against the Company on the Jurisdiction Point and the Bona Fide Dispute Point, and made the following determinations or findings on the issues raised by Pan on behalf of the Company:

(1) The court has sufficient basis to exercise its discretionary jurisdiction to wind up the Company as the first and second core requirements are satisfied; and the Company does not take issue with the third core requirement which is satisfied in any event (§§10-33).

(2) The existence of the Overall Agreement is incapable of being believed given that:

(a) it is not supported by any contemporaneous document;

(b) its gist is contradictory to the terms of the Facility Agreement and the Guarantee;

(c) it is inconsistent with the public announcement made by Goldin Holdings on 19 April 2017, which described the disposal of the properties on the Mortgaged Lands as an inseparable part of the privatization;

(d) it is inconsistent with the Company/Pan’s conduct in continuing to discuss with the Petitioners during the period from 7 August 2019 to 7 April 2020 for the purpose of restructuring the loan under the Facility Agreement and using Pan’s other personal assets to repay the same, all of which were done without any reference to the Overall Agreement;

(e) it is only in Pan 1^st that the Overall Agreement is mentioned for the first time, and Pan’s explanation for not mentioning it at an earlier time is not believable;

(f) it is Pan’s case that he would not have proceeded with the privatization but for the Overall Agreement made in April/May 2017, but according to the public announcements, the Company on 20 February 2017 had already applied to the 3^rd Petitioner for a loan for the purpose of the privatization. This was followed by a formal offer made by the Company on 29 March 2017 to purchase the shares held by the other shareholders of Goldin Holdings; and

(g) the Overall Agreement makes no commercial sense particularly when the contemporaneous documents show that the 1^st Petitioner took a dim view on the prospect of the Tianjin Project, and the 1^st and 2^nd Petitioners agreed to advance the loan on the strength of Pan’s other personal assets (§§41-52).

(3) The Unreasonable Obstruction falls away as it is based on the Overall Agreement which is unbelievable (§53).

(4) The Representation is unbelievable for the same reasons stated in §§41-48 in HCMP Judgment (§54).

(5) There is no merit in the point that the Petitioners should realise the Mortgaged Lands first. The Petitioners owe no such duty to the Company. Under clause 2.2 of the Facility Agreement, the Petitioners are entitled to seek recovery of the Debt without resorting to any of the securities held including the Mortgaged Lands (§55).

(6) In his unsworn statement, Sun denies that he made any representation or any agreement as alleged by the Company/Pan. There is no merit in the Company’s argument that Sun’s statement is insufficient for the purpose of rebutting the Company's case (§57).

(7) Neither clause 6.1 (which stipulates that the loan is for 3 years) nor clause 38.4 (entire agreement clause) can lend support to the existence of the Overall Agreement and the Representation (§§58-59).

A2. CACV Judgment

14.  On 9 June 2021, the Company appealed against the HCMP Judgment in CACV 301/2021 (“CACV”). On 10 June 2021, the Company applied for a stay of execution of the HCMP Judgment pending determination of its appeal. The application was dismissed by DHCJ MK Liu on 16 June 2021 on the ground that the Company failed to show that it has an arguable appeal, but the Judge continued the stay for 28 days for the Company to seek a stay from the Court of Appeal.

15.  The hearing of the appeal was expedited and scheduled to be heard on 10 August 2021. By summons dated 26 July 2021, the Company applied for leave to adduce Pan 4^th (which exhibited an affirmation made by Peng Jianyin (彭建寅) (“Peng”) dated 3 July 2021 (“Peng 1^st”). Peng was the General Manager of the 3^rd Petitioner but left its employ after June 2019) as evidence at the hearing of the appeal.

16.  At the hearing of the appeal:

(1) counsel for the Company[7] urged the Court of Appeal to determine the Jurisdiction point once and for all given that the parties had filed evidence and the issue had been fully thrashed out (§19);

(2) the Company's application for leave to adduce Pan 4^th / Peng 1^st was dismissed for failing to satisfy the second and third conditions in Ladd v Marshall [1954] 1 WLR 1489 in that (a) there had been unexplained delay in making the application, and (b) Peng 1^st was not evidence as was presumably to be believed (§§40-47);

(3) the Company’s appeal was dismissed; and

(4) the Company’s application for an interim stay pending its application for leave to appeal to the Court of Final Appeal was also dismissed (§§53-54).

17.  In the CACV Judgment, the Court of Appeal made the following determinations or findings on the issues raised by Pan on behalf of the Company:

(1) the Company failed to show any reviewable error in the Judge’s evaluation of the facts leading to the conclusion that the first core requirement is satisfied (§§20-29);

(2) the Company failed to show that the Judge erred in his conclusion that the second core requirement is satisfied, since the 35.59% shareholding in Goldin Holdings can be realized and distributed in liquidation, irrespective of where the underlying assets indirectly held by Goldin Holdings are located (§§30-35); and

(3) there is nothing wrong in the Judge’s conclusion that the Overall Agreement and the Representation is not credible and raises no bona fide dispute on the Debt on substantial grounds (§§36-39, 48-52).

A3. HCSD Judgment

18.  In the meantime, on 5 March 2021, Pan applied to set aside the statutory demand served upon him in HCSD 3/2021 (“HCSD”), raising the Bona Fide Dispute Point based on the same allegations contained in his affirmations filed in HCMP[8].

19.  Shortly before the substantive hearing in HCSD, on 7 September 2021, the Petitioners applied for leave to adduce evidence in reply to Peng 1^st essentially adopting the same response it filed in CACV on 4 August 2021 (“CACV Response”). On 4 October 2021, Pan applied for leave to file a 3^rd affirmation (“Pan 3^rd”) which exhibited a draft 2^nd affirmation of Peng (“Peng 2^nd”) and the transcript of a telephone recording between Peng and Pan on 27 September 2021 (“1^st Transcript”)[9].

20.  HCSD and the summonses for leave to file further evidence were heard before DHCJ Le Pichon on 15 October 2021. In her judgment dated 19 November 2021 (“HCSD Judgment”), the Judge dismissed Pan’s application to set aside the statutory demand and made the following determinations or findings on the issues raised by the parties:

(1) Henderson v Henderson issue estoppel is founded on abuse of process and the essence of the doctrine is that a party ought generally not be permitted to raise in subsequent proceedings matters which that party could and should have raised in earlier proceedings. Whether or not there is Henderson abuse is to be determined by applying the broad merits-based approach as explained in Yifung Properties Ltd v James Nicholas Barrie Smith [2019] 1 HKLRD 36 (CA). A difference in parties is no bar to the application of the Henderson principle in appropriate circumstances (§§47-59).

(2) Even if there is “no privity of interest” and the Henderson abuse is not applicable, the court can still disallow a party to re-litigate an issue on the ground of abuse of process or a collateral attack on a judgment. The existence of special circumstances such as “additional evidence” that was not before the court in the earlier proceedings can constitute an exception (Capital Wealth Finance Co Ltd v Lai Yueh-Hsing &ors, HCA 686/2012, 31 July 2015, §§63-64) (§§60-62).

(3) In the HCMP Judgment, the court already decided that Pan’s allegations on the Overall Agreement and the Representation are not credible and do not constitute bona fide dispute on substantial grounds in respect of the Debt. The Court of Appeal affirmed the Judge’s conclusion. The Unreasonable Obstruction point falls away and in any event has not been challenged on appeal (§§63-64).

(4) Peng 1^st qualifies as “additional evidence”, while §§4-6 of Peng 2^nd deals with items (i) and (ii) of the Petitioners’ CACV Response and will be considered by the court. The rest of Peng 2^nd and the 1^st Transcript are elaborations of the matters contained in Peng 1^st and were known to him at the time Peng 1^st was made. No exceptional circumstances are put forward by Pan to justify why he should be allowed to adduce them as evidence (§§65-70).

(5) Except §§6-9 and §10(a)-(c) which respond to the issue of the authenticity of Peng 1^st, the rest of Pan 3^rd and the rest of the 1^st Transcript deal with matters which could and should have been addressed in Pan 2^nd. There are no genuine extenuating circumstances to justify the court taking them into account (§§71-72).

(6) There are serious doubts on the credibility and reliance of Peng’s evidence given that:

(a) the Court of Appeal highlighted the questions over the authenticity of Peng 1^st, but nothing in Peng 2^nd or the 1^st Transcript resolves that issue;

(b) although Peng 1^st was made one month after the HCMP Judgment, he does not address the inconsistencies between the Overall Agreement and the contemporaneous documents nor any of the reasons given by the Judge for concluding that the Overall Agreement is unbelievable;

(c) Peng’s assertions regarding a meeting on 3 January 2017 he attended with Sun and the arrangements to discuss with Sun Hongbin of Sunac on the cooperation of the Tianjin Project in February and March 2018 are contradicted by Goldin Tianjin’s declaration issued on 5 March 2018 confirming that there was no equity cooperation or intention of merger and acquisition in any form between Goldin and Sunac; and

(d) in Peng 1^st, he claims that the absence of a written agreement was due to the presence of a standard format for the Petitioners’ financing document. However, he offers an entirely different reason in Peng 2^nd, namely, that it would be inappropriate for Sun’s promise to be written in black and white (§§74-88).

(7) The additional evidence is “the very antithesis of credible evidence” and is insufficiently material to have any impact on the outcome of the Company/Pan’s case on the Overall Agreement (§§89-91).

(8) There is no reason for the court to reach a different conclusion on the issues decided in the earlier proceedings. Ms Eu’s belated “spin” on what is meant by the Overall Agreement namely, the nature of the Overall Agreement is being misunderstood and the negotiations and discussions during the period from 7 August 2019 to 7 April 2020 related to extension of time for payment of interest (referred to in §§47-48 of HCMP Judgment), is not remotely credible (§§92-98).

(9) The “prevention defence” is based on the same matters which underpin the Unreasonable Obstruction point. It is an abuse of process for Pan to seek to resuscitate the issue by a side wind (§§99-107).

(10) Even if it is open to Pan to re-argue the “prevention defence”, the Petitioners owed no duty to the surety to exercise their power of sale over the mortgaged securities and could decide in their own interest whether to sell and when to do so. The suggestion that the Petitioners were acting improperly by ganging up or colluding with other creditors to frustrate and obstruct the segregation and partition of the Mortgaged Lands for sale has no credible basis. In any event. It has not been shown that there is any causal link between the drop in value of the Mortgaged Lands and the Petitioners’ act or lack of action (§§108-122).

(11) Pan’s application to set aside the statutory demand is based on the same factual matrix as in HCMP. Applying the Yifung broad merit-based approach, the application is an attempt to make a collateral attack on the HCMP Judgment. It is an abuse of process for Pan to re-litigate settled issues. It would be manifestly unfair to the Petitioners and bring the administration of justice into disrepute (§§123-124).

(12) In any event, Pan failed to demonstrate that he has a defence of substance and the evidence adduced is far from “sufficiently precise factual evidence which is believable” (§125).

B. DISCUSSION

21.  The determinations and findings in the HCMP Judgment, CACV Judgment and HCSD Judgment are binding upon the Company and Pan. Nevertheless, the Company/Pan saw fit to file voluminous evidence in opposition to the petitions which include:

(1) Pan’s affirmation dated 20 December 2021 made on behalf of the Company in HCCW (“Pan 1”) in which he seeks to dispute the Debt based on the same allegations raised in HCMP and HCSD and some new allegations which he claims could not have been made earlier[10].

(2) Peng 1^st, the 1^st Transcript and another transcript of the recording between Peng and Pan on 19 December 2021 (“2^nd Transcript”).

(3) Pan 1 as evidence in HCB (leave was given with the consent of the Petitioners, without prejudice to any legal issues that may be raised including the issue of admissibility of such evidence).

22.  Mr Anson Wong SC[11], counsel for the Petitioners, submits that the principle of res judicata applies and the Company/Pan are precluded from arguing that the Debt is bona fide disputed on substantial grounds or that the 3 core requirements for the court to exercise its discretionary jurisdiction under s.327(3)(b) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) are not satisfied. In any event, Pan 1 is inadmissible in HCB.

23.  On the other than, Mr Rimsky Yuen SC[12] submits that the res judicata principle does not apply to the Company/Pan given that (1) the test or threshold applied in HCMP and CACV are not the same as the test applicable to the hearing of the petitions, and (2) the court did not have the benefit of the evidence of Peng in full.

24.  Accordingly, the issue which this court has to decide is whether the principle of res judicata, whether in the narrow sense (cause of action estoppel or issue estoppel) or in the wider sense (Henderson abuse), applies to the Company/Pan. If the principle applies, the Company/Pan are bound by the determinations and findings made by the court in the HCMP Judgment, CACV Judgment and the HCSD Judgment and cannot be heard to argue that there is a bona fide dispute on the Debt or that the 3 core requirements are not satisfied.

B1. Principles on res judicata

25.  The principles are not in dispute and may be summarized as follows:

(1) A res judicata in the narrow sense may be a cause of action estoppel or an issue estoppel. The decision pronounced by the tribunal disposes once and for all the fundamental matters decided, and cannot be re-litigated between the parties and their privies (Spencer Bower and Handley: Res Judicata, 5^th ed, §§1.01, 1.05; Re GW Electronics Company Ltd[2021] HKCFI 1869, §22).

(2) To set up res judicata as an estoppel, it must be established that (a) the decision, whether domestic or foreign, was judicial in the relevant sense; (b) it was in fact pronounced; (c) the tribunal had jurisdiction over the parties and the subject matter; (d) the decision was final and on the merits; (e) it determined a question raised in the later litigation; and (f) the parties are the same or their privies, or the earlier decision was in rem (Spencer Bower and Handley §1.02; GW Electronics §23; Capital Wealth §21).

(3) Issue estoppel applies to fundamental issue determined in earlier proceedings which formed the basis of the judgment or as an essential step in the reasoning or the immediate foundation of the decision (Spencer Bower and Handle §8.01; GW Electronics §25, Capital Wealth §§23-24).

(4) For a party to be estopped by privity, he must have some kind of interest, legal or beneficial, in the previous litigation or its subject matter (Capital Wealth §§28-29).

(5) As for Henderson abuse, the essence of the doctrine is that a party ought generally not to be permitted to raise in subsequent proceedings matters which that party could and should have raised in the earlier proceedings. The abuse can take the form of the other party being “vexed”, “oppressed”, “unjustly harassed” or “unjustly hounded” by the subsequent set of proceedings, or bring the administration of justice into disrepute (Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72, §§82-83; Yifung §§16-17)

26.  Mr Yuen submits that there are well established “exceptions” to the principles on issue estoppel. One such exception is “where there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, being material which could not by reasonable diligence have been adduced in those earlier proceedings”, relying on Capital Wealth §25 which, in turn, referred to Spencer Bower §8.31. I shall refer to it as the “Arnold exception”.

27.  It is important not to understand the nature of the Arnold exception and its limits. As explained in Spencer Bower §8.31-8.34:

(1) An exception for “special circumstances” was established in Arnold v National Westminster Bank plc [1992] 2 AC 93. In that case, the parties entered into a 32-year lease which provided for periodic rent reviews. On the first review, the arbitrator assumed that the rent could be reviewed at the next review date. Walton J reversed the decision, holding that the hypothetical lease for the balance of the term contained no provision for any further review. The judge refused leave to appeal against his decision, and the court of appeal had no power to grant leave to appeal. The tenant challenged the interpretation at the next review but was met with an issue estoppel. The estoppel failed in all courts because of the special circumstances, which included the bizarre construction adopted by Walton J was rejected in later cases, and the absence of any right of appeal. The refusal of leave to appeal had been wrong, if not perverse, having regard to the amounts involved, the continuing importance of the question in that and other cases, and the debatable nature of the decision. It was in these circumstances that Lord Keith held that the bar created by cause of action estoppel was absolute, but not for issue estoppel (at 109) in this way:

“… there may be an exception to issue estoppel in the special circumstances that there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, whether or not that point was specifically raised and decided, being material which could not by reasonable diligence have been adduced in those proceedings. One of the purposes of estoppel being to work justice between the parties, it is open to courts to recognise that in special circumstances inflexible application of it may have the opposite result.” (underlined added)

(2) Issue estoppel continues to apply if no newly discovered fact, if the party had only just realised its importance, where it was discoverable with reasonable diligence or the new fact was not sufficiently material. Discovery of new evidence is not sufficient. The exception should be kept within narrow limits to avoid undermining the general rule and provoking increased litigation and uncertainty. The absence of an effective right of appeal is critical (Spencer Bower §8.32).

(3) There have been very few cases where special circumstances have been established (Spencer Bower §8.33).

28.  The authorities make clear that the Arnold exception is confined to “special circumstances” where it would be unjust to enforce issue estoppel. It was a point emphasised by Lord Keith in Arnold. Recently, in Test Claimants in the Franked Investment Income Group Litigation and others v. Commissioners for Her Majesty’s Revenue and Customs [2021] 1 All ER 1001, the UK Supreme Court reviewed the earlier authorities on issue estoppel and the Arnold exception, and explains how the exception works (§68, per Lord Reed and Lord Hodge):

“Lord Sumption in Virgin Atlantic Airways (above), para [21], explained Lord Keith’s judgment in Arnold (above) in relation to issue estoppel. In the case of that estoppel it was in principle possible to challenge a previous decision on an issue not only by taking a new point which could not reasonably have been taken in the earlier proceedings but also (in contrast to cause of action estoppel) ‘to reargue in materially altered circumstances an old point which had previously been rejected’. In para [22] he stated that Arnold was authority for the following proposition:

‘(3) Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which (i) were not raised in the earlier proceedings or (ii) were raised but unsuccessfully. If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised.’” (underlined add)

29.  In Test Claimants, the Supreme Court reiterates the point that issue estoppel overlaps with the rules or concepts of res judicata and abuse of process, all of which serve the common purpose of supporting good administration of justice:

“Res judicata, estoppel and abuse of process support the same legal policies, namely ‘that there should be finality in litigation and that a party should not be twice vexed in the same matter’: Johnson v. Gore Wood & Co [2002] 2 AC 1, p 31, per Lord Bingham of Cornhill. Lord Bingham went on to state: ‘This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole.’” (§59).

“Res judicata is a rule of substantive law, while abuse of process is a concept which informs the exercise of the court’s procedural powers … [T]hey are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation.” (§74).

B2. HCCW

30.  Mr Wong submits that the Company should be debarred from re-litigating the Bona Fide Dispute Point and the Jurisdiction Point which have already been determined by the courts in HCMP and CACV. All the essential elements to set up res judicata are satisfied in that the HCMP Judgment (as affirmed by the CACV Judgment):

(1) is a judicial decision and was in fact pronounced;

(2) is given by the court which has jurisdiction over the Petitioners, the Company and the Debt;

(3) is final and on the merits. Although the Company in HCMP sought an injunction to restrain the Petitioners from presenting a winding up petition, it invited the court to make a “final” determination on both the Bona Fide Dispute Point and the Jurisdiction Point, and the Judge made such determinations based on the evidence filed and the substantive arguments advanced by the parties;

(4) the Company seeks to re-argue the Bona Fide Dispute Point and the Jurisdiction Point at the hearing of the petition; and

(5) the parties to the petition are the same as the parties to HCMP.

31.  Mr Yuen argues that there is no question of res judicata, issue estoppel or Henderson abuse for the following reasons:

(1) the test or threshold applied in the HCMP Judgment and the CACV Judgment is not the same as the test to be applied at the hearing of the petition;

(2) Peng 1^st was rejected by the Court of Appeal based on Ladd v Marshall grounds, but this court has the benefit of Peng’s evidence “in full” without Ladd v Marshall concerns. As Peng’s evidence could not by reasonable diligence have been adduced in HCMP and CACV, the exception to issue estoppel applies; and

(3) The onus is on the Petitioners to establish that the subsequent litigation is an abuse, and the court has to assess a number of factors and to balance the interest of litigants and other interests involved in the administration of justice.

32.  In my view, none of the reason advanced by Mr Yuen has any merit and, in any event, does not constitute a sufficient reason for the Arnold exception to apply.

33.  First, it is clear from the HCMP Judgment that the Judge dismissed the originating summons not merely on the ground that the Company failed to satisfy the test or threshold governing the grant of an injunction to restrain presentation of petition. Rather, the Judge acceded to the Company’s invitation to make a final determination on the Bona Fide Dispute Point and the Jurisdiction Point on the basis of the evidence filed by the parties and the full arguments advanced by counsel. I do not see any basis for the Company to ask the court to ignore the determinations and findings set out in the HCMP Judgment (as summarized in §13 above). This is particularly so when the Company had the opportunity to appeal against such determinations and findings but failed to reverse any of them.

34.  At the hearing, Mr Yuen seeks to rely on §54 of the CACV Judgment, where the Court of Appeal said that “the jurisdiction question may still arise in the context of the petition if one is presented. If it is then resolved in the plaintiff’s favour, the petition will be dismissed”. Mr Yuen submits that this supports the Company’s contention that the Jurisdiction Point remains a live issue which may be challenged by the Company at the hearing of the petition. I disagree.

(1) The Court of Appeal’s observation was made in the context of the Company’s application for interim stay pending its application for leave to appeal to the Court of Final Appeal. It has nothing to do with the substantive issues decided in the appeal, which concerned whether the Judge’s determinations on the Bona Fide Dispute Point and the Jurisdiction Point in the HCMP Judgment should be reversed.

(2) As is clear from the CACV Judgment, on the substantive issues, the Court of Appeal held that there was no reviewable error on the Judge’s determinations on both the Bona Fide Dispute Point and the Jurisdiction Point. It follows that such determinations remain binding upon the parties.

35.  Second, I do not think that the Arnold exception applies to the Company merely because Peng 1^st, the 1^st Transcript and the 2^nd Transcript were not adduced as evidence in HCMP or CACV. As explained in §§27-28 above, to come within the exception, it is incumbent upon the Company to show that there are special circumstances such as materially altered circumstances or no right of appeal such that it would be unjust to enforce issue estoppel against it. The fact that Peng was unwilling to give evidence against the Petitioners in HCMP[13] is not a reason, much less special circumstances, for the exception to apply. The Company has not proffered any explanation as to why it would be unjust for the court to enforce issue estoppel against it. Nor has counsel cited any authority in support of the contention that the unwillingness of a potential witness to give evidence on behalf of a party may constitute special circumstances for the exception to apply. For this reason alone, the suggestion that the Arnold exception applies to the Company must be rejected.

36.  In any event, there is no basis to suggest that Peng 1^st, the 1^st and 2^nd Transcripts are evidence which could not by reasonable diligence have been adduced in HCMP. This is because the same assertions contained in Peng 1^st, albeit in much greater details, were in fact set out in Pan 1^st and Pan 2^nd filed by the Company in HCMP. As for the telephone conversations recorded in the 1^st and 2^nd Transcripts, it is clear that they are “evidence” (assuming they are) which could have been obtained by the Company with reasonable diligence but they chose not to do so. I am unable to see how the Company can rely on its own failure to adduce Peng 1^st or the conversations recorded in the 1^st and 2^nd Transcripts as a reason or justification for seeking to avoid the court’s determinations and findings set out in the HCMP Judgment.

37.  Nor is there any basis to contend that Peng’s evidence is “sufficiently material” to have any impact on the determination of the Bona Fide Dispute Point. The Court of Appeal rejected Peng 1^st not just on the ground of unexplained delay but also on the ground that it is not evidence which was presumably to be believed (see §16(2) above). Indeed, the same contention has already been considered by DHJC Le Pichon in HCSD and rejected for the reasons stated in §§74-91 of the HCSD Judgment.

38.  Third, the suggestion that the onus is on the Petitioners to establish that the “subsequent litigation” is an abuse is misconceived. The burden is on the Company to satisfy the court that it comes within the Arnold exception such that it is not bound by the determinations and findings made by DHCJ MK Liu on the Bona Fide Dispute Point and the Jurisdiction Point. As the Company fails to show that the Arnold exception applies, it is barred by issue estoppel and should not be allowed to re-litigate the same issues at the hearing of the petition.

39.  It is not necessary for the Petitioners to demonstrate that it is an abuse of process for the Company to re-litigate the same issues for the purpose of establishing Henderson abuse or collateral attack on a judgment. In any event, in seeking to re-litigate the Bona Fide Dispute Point and the Jurisdiction Point in circumstances where the court has already determined the issues, the Company is effectively asking the court to vex the Petitioners again on the same issues already decided by the court. Such conduct constitutes a Henderson abuse as it would undermine the determinations and findings made by the court and bring the administration of justice into disrepute (Ko Hon Yue §§82-83).

B3. HCB

40.  Mr Yuen does not dispute that the principle of res judicata applies to bankruptcy proceedings. Nor does he dispute that where, as here, a debtor made an application to set aside a statutory demand and failed in the application, he is precluded from raising the same issue at the hearing of the petition, unless there has been a material change of circumstances (Re Tang Yau Sing[2020] HKCFI 877 §23, citing Chan Yuk Lun v. Chan Ying Chit [2015] 1 HKLRD 501 where G Lam J (as he then was) stated the principle (§§9-13) in this way:

“9. However, it has been held by Susan Kwan J (as she then was) in the (strangely unreported) case of Re Choy Wai Bor (unrep., HCB 8565/2001, [2002] HKEC 650) (28 May 2002) at [30] that the court’s decision of refusing to set aside a statutory demand gives rise to a determination that, by virtue of the principle of res judicata, precludes the debtor from raising the same issue on the hearing of the bankruptcy petition, at any rate where there has been no material change of circumstances.

…

13. Looking at the substance of the matter, such an order refusing to set aside a statutory demand, coupled with the operation of the principle of res judicata, has the effect of a final determination of specific issues as between the parties …” (underlined added)

41.  Pan made an application to set aside the statutory demand and failed in the application. As is clear from the HCSD Judgment, DHCJ Le Pichon considered all the issues raised by Pan and rejected them for the reasons stated. It is not suggested that there has been any material change of circumstances between the determination of HCSD and the hearing of the petition. It follows that the determinations and findings set out in the HCSD Judgment are binding upon Pan. It is not open to him re-litigate the same issues already decided by the court against him.

42.  It is not clear whether Pan relies on the 3 reasons outlined in §31 above as the bases for contending that there is no question of res judicata, issue estoppel or Henderson abuse. It seems to me that none of the reasons has any merit:

(1) The issues raised by Pan in HCSD are the same issues he raises in seeking to oppose the petition.

(2) Peng 1^st and the 1^st Transcript were considered by the Judge for the purposes of considering whether Pan is precluded by the principle of res judicata, Henderson abuse and issue estoppel from re-litigating the same points already decided in the HCMP Judgment and the CACV Judgment, and the effect of such evidence.

(3) In any event, for the same reason stated in §36 above, I do not consider that the 2^nd Transcript is evidence which could not by reasonable diligence have been adduced in HCSD.

(4) Nor do I think that the Petitioners have to establish that the petition is an abuse. The fact that Pan seeks to re-litigate the issues already decided by the court by itself constitutes an abuse of process.

43.  For the reasons set out in §§40-42 above, it is not open to Pan to re-litigate any of the issues decided by the court in HCSD.

44.  For completeness, Mr Wong submits that as the determination in HCSD gives rise to res judicata in the petition, Pan 1 would not be admissible as evidence in the petition unless it satisfies the first and second limbs of Ladd v. Marshall (Re Lai Kar Yee[2018] HKCFI 186, §11, per Au Yeung J, citing Re Wiemer, ex p Hang Seng Bank Ltd [2013] 2 HKLRD 1214,§16, per To J).

(1) The first and second limbs of Ladd v. Marshall are (a) the evidence could not have been obtained with reasonable diligence for use earlier, and (b) the evidence must be such that, if given, would probably have an important influence on the result of the case, though it need not be decisive.

(2) The first limb cannot be satisfied since all the evidence concerning the disputes in relation to the Debt could and should have been included in Pan’s previous affirmations. As far as Peng is concerned, Pan managed to obtain Peng 1^st on 3 July 2021. Nothing in Peng 1^st can be said to be new materials which could not have been obtained with reasonable diligence.

(3) In any event, the second limb cannot be satisfied since none of the evidence in Pan 1 would probably have an important influence on the result of the case.

45.  Mr Yuen has not advanced any separate argument to answer the point.

B4. 3^rd Petitioner

46.  At the hearing (but not in his skeleton), Mr Yuen makes a further point that the 3^rd Petitioner is not a creditor of the Company or Pan and, therefore, does not have the locus to present the petitions. It lies ill in the Company/Pan’s mouth to submit that the 3^rd Petitioner is not a proper party to the petitions, having decided to join the 3^rd Petitioner as a defendant in HCMP and a respondent in HCSD. In any event, the point has no bearing on the outcome, as there is no dispute that the 1^st and 2^nd Petitioners are creditors of the Company and Pan and have locus to present the petitions.

C. DISPOSITION AND COSTS

47.  For the reasons set out above, the Company and Pan are bound by the determinations and findings made by the court in the HCMP Judgment, the CACV Judgment and the HCSD Judgment. They should be precluded from re-litigating the same issues already decided by the court against them, which are the only grounds advanced by them in opposition to the petitions.

48.  As the Company has failed to comply with the statutory demand served by the Petitioners upon it and the Debt remains unpaid, the Company is deemed insolvent.

49.  As for Pan, he has failed to comply with the statutory demand served by the Petitioners upon him and the Debt remains unpaid, he is deemed unable to pay his debts. In addition, this Court has in HCSD 28/2021 [2022] HKCFI 1450 held that there is no bona fide dispute on substantial grounds in respect of a debt of RMB 740,780,581.02 owed by Pan to Bank of China Limited (trading as Bank of China Limited Shenzhen Branch) (“BOC”). BOC has presented a bankruptcy petition against Pan on 26 May 2022 which will be heard before a Master on 2 August 2022. Mr Harrison Miao, counsel for BOC, supports the petition presented by the Petitioners. It is indisputable that Pan is liable to pay the debt owed to BOC but fails to do so. This reinforces the fact that Pan is unable to pay his debts.

50.  It is in the circumstances appropriate for the court to make the usual winding up order against the Company, and the usual bankruptcy order against Pan. Costs will be dealt with in the usual way, save that the Petitioners are entitled to a certificate for 2 counsel, and BOC is entitled to be paid the costs of attending the hearing. The costs order is made on a nisi basis.

51.  Mr Wong asks for costs to be assessed on indemnity basis to reflect the abusive litigation conduct on the part of the Company and Pan. While I agree that the conduct of the Company/Pan is abusive, it seems to me that it is not appropriate to order costs on a higher scale as such costs would have to be paid out of the estates of the Company and Pan which, in turn, would reduce the pool of assets available to the creditors. There is no reason why the creditors, who are the only parties having any real interest in the estates, should be penalized with costs on a higher scale.

D. DUTY TO PREPARE BUNDLES

52.  Lastly, this court wishes to remind the practitioners once again that it is unacceptable for them to include voluminous documents in the hearing bundles even if this what their clients want or insist. It is regrettable to see that despite the size of the legal teams on both sides, no attempt has been made by the parties to assist the court[14] by including only those documents which are relevant and will be referred to at the hearing of the petitions. The hearing bundles contain 4213 pages (excluding English translation and the new evidence which the Company/Pan sought to put in one working day before the hearing without leave of the court), most of which have not been referred to in counsel’s submissions. The court expects the legal representatives to take into account the summary nature of winding up and bankruptcy proceedings and include only the documents relevant to the petitions and which the parties will need to refer in the course of their respective submissions[15]. In future, if a party or its legal representative insists on including documents which are irrelevant and will not be referred to at the hearing, the party and the legal representatives may expect the court to penalize them with costs irrespective of the outcome of the proceedings.

	(Linda Chan)
	Judge of the Court of First Instance
	High Court

Mr Anson Wong SC leading Mr Alex Fan and Ms Joanne Szeto, instructed by Sit, Fung, Kwong & Shum, for the 1^st – 3^rd Petitioners

Mr Rimsky Yuen SC and Mr William Wong SC leading Mr Adrian Wong and Mr Lai Chun Ho, instructed by Zhong Lun Law Firm LLP, for the Respondent

Mr Harrison Mao, instructed by King & Wood Mallesons, for BOC