How to dispute an “indisputable” debt? Implied term can defeat a winding-up petition

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Introduction

In the September 2019 issue of our newsletter, we discussed the ruling of the Court of First Instance in Re Golden Oasis Health Limited [2019] HKCFI 2173, where Mr Justice Anthony Chan refused to stay a winding-up petition to arbitration pursuant to an arbitration clause in the relevant shareholders’ agreement. In the subsequent decision of the Court of First Instance in [2020] HKCFI 364, Mr Justice Harris (“Harris J”) proceeded to hear the petition, and decided to dismiss the petition notwithstanding that it was undisputed that the debtor company did owe the debt in issue.


Background

Gold Swing Enterprises Limited (“GSE”) and New Health Elite International Limited (“NHE”) are shareholders of the debtor company Golden Oasis Health Limited (the “Company”). They respectively hold 20% and 61% of the Company’s shares. The Company’s sole asset and business is its majority shareholding in Mega Fitness (Shanghai) Investments Limited (“Mega Fitness”), which operates a chain of sports and fitness clubs in Mainland China.

In August 2018, GSE brought a petition to wind up the Company on the ground of insolvency relying on a debt arising from a shareholder’s loan due from the Company to GSE. There was no dispute that the Company owed a sum of HK$5,899,844 to GSE (the “Debt”). The Debt was currently due, which had been expressly acknowledged by the Company in writing.

Nonetheless, the petition was opposed by NHE. Relying on the shareholders’ agreement between inter alia GSE and NHE dated 30 March 2016 (the “Shareholders’ Agreement”), NHE argued that it was the common understanding among the shareholders of the Company that the Debt, being a shareholder’s loan to the Company, shall be injected into Mega Fitness as capital contribution which GSE was not entitled to pursue repayment in the absence of approval of all other shareholders of the Company.


Legal principles

It is trite that a winding-up petition should only be issued if the debtor company does not have any valid ground to refuse repayment. In order to defeat a winding-up petition, the company is required to satisfy the court that it has a bona fide defence on substantial grounds to the debt in issue. The onus is on the company to adduce evidence that shows an honest belief in facts and matters that establish a genuine dispute of the debt on substantial grounds.


Decision

Notwithstanding the written acknowledgement from the Company that the Debt was due and that it was uncontested that the Company did owe the Debt to GSE, Harris J accepted the defence of implied term advanced by NHE. It was NHE’s case that the Shareholders’ Agreement contained an implied term that none of the shareholders shall perform any act, such as requiring repayment of shareholder loans in the nature of working capital, which would bring an end to the circumstances or state that allow the Company to continue to hold Mega Fitness. Importantly, NHE relied upon the following clauses of the Shareholders’ Agreement:

(1)   Clause 4.3(k) prohibits issue of a winding-up petition by a shareholder without the consent of all shareholders.

 

(2)   Clause 5.1 provides that “[t]he Shareholders agree that the Company shall continue its holding of 55 shares in Mega Fitness which will carry on the business of managing and operating a chain of sports and healthcare clubhouses in the PRC.

 

(3)   Clause 4.3(j) prohibits any change in the nature or type of the business of the Company without the consent of all shareholders.

 

GSE’s demand for repayment of the Debt (which, according to the NHE, was to be injected into Mega Fitness as capital contribution) would effectively prevent the Company from continuing to hold Mega Fitness and hence the shareholders from performing the Shareholders’ Agreement. In light of the above (particularly clause 4.3(k)), Harris J accepted that NHE had a bona fide defence on substantial grounds that it was an implied term of the Shareholders’ Agreement that GSE was not entitled to unilaterally call for repayment of the Debt, and in particular was not entitled to issue a winding-up petition against the Company.

Harris J further held that even though the Company was not a party to the Shareholders’ Agreement, it was bona fide arguable that the aforementioned implied term was for the Company’s benefit and therefore it was entitled to enforce the term by virtue of section 4(1) of the Contracts (Rights of Third Parties) Ordinance (Cap. 623), which inter alia provides that a third party may enforce a term of a contract if the term purports to confer a benefit on it.

The petition was accordingly dismissed. GSE was ordered to pay NHE’s costs with a certificate for two counsel.


Conclusion

Harris J’s decision demonstrates that even where it is seemingly indisputable that debts are owed by and due from a debtor company, seeking remedies against the debtor company may not be as straightforward as it may seem. The court will look at all the available evidence, including the possible existence of implied terms in a contract, to determine whether there is a bona fide defence, even if the debtor company is not a party thereto.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2020