The BVI Commercial Court has provided a useful summary of the principles that guide its decision-making when faced with a contested application to appoint liquidators based on non-compliance with a statutory demand, in China Minsheng Banking Corp., Ltd., Hong Kong Branch v Tai Feng Investments Limited (BVIHCM2023/0271)
China Minsheng Bank Corp., Ltd. (the "Bank") sought to appoint liquidators over Tai Feng Investments Limited ("Tai Feng") on the basis of a failure, by Tai Feng, to comply with a statutory demand seeking repayment of sums that had been advanced under a loan agreement, handling fees and interest amounting to some US $34,490,855.65. The original loan had been amended on three occasions and the Bank had taken some security from Tai Feng, which the Bank valued at US$756,085.00.
At the hearing of the application, Tai Feng raised three main arguments in its defence. These were:
- the statutory demand was not served on Tai Feng in accordance with the Insolvency Rules;
- the underlying debt was disputed on substantial grounds; and
- alternatively, Tai Feng enjoyed security over property, which Tai Feng claimed to have been worth in excess of the debt and, therefore, Tai Feng was solvent, or had already complied with the requirement in s.155(2)(d) of the Insolvency Act, 2003 (as amended) to secure the debt.
Service of the statutory demand
The parties accepted that the demand was served on Tai Feng's registered agent and the agent was authorised to accept such service. Tai Feng's initial complaint was that, although the demand had been delivered to the registered agent on 10 October 2023, it did not come to the attention of the director of Tai Feng, Mr Sun, until early in December 2023. There seemed to be some equivocation on this point because Mr Sun had filed a second affidavit in which he said that "[H]e received and had knowledge of the statutory demand on 23 December 2023". This inconsistency in the evidence did not assist Tai Feng's defence.
Webster, J., held that "the delay in the registered agent forwarding the document to [Mr Sun] … does not in any way affect the validity of the service."
Failure to challenge the statutory demand
The BVI Commercial Court (the "Court") cited the well-known decision of the ECSC Court of Appeal in Trade and Commerce Bank v Island Properties SA and Jacob Ungar (BVIHCVAP 2009/12), which had been followed by the BVI Commercial Court in Everbright Sun Hung Kai Company Limited v Walton Enterprises Limited (BVIHC(COM) 2020/0022), in which it was held that "a company that does not challenge a statutory demand will not be precluded from challenging the issue of its insolvency at the hearing of the application to appoint liquidators – but it will have the burden of rebutting the statutory presumption of insolvency." The Court quoted the dicta of George-Greque J.A., (as she was then) in Trade and Commerce Bank. For the present purposes, it is worth emphasising the final sentence of paragraph 28, which was cited by the Court in the instant case:
"… Obviously, a company which has failed to challenge a statutory demand, in seeking to oppose the appointment of a liquidator will be saddled with the burden at that stage of establishing its solvency by way of countering its state of 'statutory insolvency' under s.8(1)(a) brought about by such failure."
Debt disputed on substantial grounds
Tai Feng disputed the debt that was the subject of the demand because it said that there had been an oral agreement made between the Bank, Mr Sun and a Mr Cheng in or around June 2018 by which the Bank had agreed to release Tai Feng from further liability to repay the debts claimed and that Mr Cheng would, instead, take over responsibility for these. This was denied by the Bank. However, Tai Feng had not produced any documentary evidence in support of this oral agreement but rather asserted that the Bank had not taken any steps following the alleged 2018 meeting. The Court found that the suggestion that there had been an oral agreement was inconsistent with the evidence and that the Bank had taken steps in relation to the sums owing since the date of the alleged meeting and before the service of the statutory demand.
The Court rehearsed the well-known principles in Sparkasse Bregenz Bank AG v Associated Capital Corporation VG 2003 CA 3, namely that:
"The Court will order a winding-up for failure to pay a due and undisputed debt over the statutory limit, without other evidence of insolvency. If the debt is disputed, the reason given must be substantial and it is not enough for a thoroughly bad reason to be put forward honestly. But if the dispute is simply as to the amount of the debt and there is evidence of insolvency the Company could be wound up. To fall within this principle, the dispute must be genuine in both a subjective and objective sense. That means that the reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. Substantial means having substance and not frivolous. Which disputes the Court should ignore. There must be so much doubt and question about the liability to pay the debt that the Court sees that there is a question to be decided. The onus is on the Company to bring forward a prima facie case which satisfies the Court that there is something which ought to be tried either before the Court itself or in an action by some other proceeding."
The Court went on to note the importance of contemporaneous documentary evidence, citing the dicta of Males, L.J in the English Court of Appeal in Simetra Global Assets Ltd and another v Ikon Finance Ltd [2019] EWCA Civ 1413, [2019] 4 WLR 112 and Lord Goff in the English House of Lords in Armagas Ltd v Mundogas SA, (The Ocean Frost) [1985] 3 WLR 640. Importantly, Webster, J., held that:
"It is very easy for a debtor, when faced with an application to appoint liquidators, to say that the debt on which the application is based is disputed on substantial grounds because there is an oral agreement disputing the debt. Each case must be decided on its own facts, but where such an allegation is made, especially when there is written evidence to the contrary, the debtor faces an uphill task to satisfy the Court that there is a genuine or substantial dispute regarding the repayment of the debt."
The Court held that Tai Feng had failed to discharge this burden.
Tai Feng's solvency
Tai Feng suggested that it was not insolvent because it had two valuable assets; namely shares in two companies. The Court found that Tai Feng sought to ascribe a value to shares in the first of these companies based on an historical subscription and an extract from a financial report which suggested that, as at 2021, the group to which the company belonged had substantial value. Conversely, the Bank put forward evidence that suggested that in fact the value of the shares was nil. It was conceded that the number and value of the shares in the second company was significantly less than the debt in question. The Court also noted that Tai Feng had failed to adduce any evidence of its own liabilities, "which [made] the evidence of the value of the assets even less reliable in the context of proving [Tai Feng's] solvency."
In any event, the Court concluded that, "… assuming that Tai Feng was solvent on a balance sheet test, if it refuses to pay a debt that is not disputed on substantial grounds, it is still insolvent within in the meaning of s. 8(2)(c)(i) of the Act …"
As a consequence, the Court also found that Tai Feng had failed to discharge its burden of proving that it was solvent or that it had secured the debt in question.
Delay in enforcing the debt
Tai Feng submitted that the Bank had delayed in selling the shares described above, which had been secured against the loans in question and, in so doing, had failed to act in good faith and take reasonable steps to obtain the best price available. It was argued that had the Bank done so then it would have recovered more than the total amount due. In response, the Bank pointed to the terms of the security documents that gave the Bank "the power to sell or otherwise dispose of the shares on such terms and in such manner as the Bank may think in its absolute discretion". In addition, the Bank benefited from a clause absolving it from any liability in relation to the sale of the same. In any event, the Bank contended that an earlier sale would not have achieved the result contended for by Tai Feng.
Request for an adjournment
Finally, Tai Feng sought an adjournment on the basis that Mr Sun had not become aware of the statutory demand until approximately two months after it was served. The Court was urged to exercise its discretion under s.167 in this regard. However, the Court was unpersuaded. It pointed to Mr Sun's inconsistent evidence and also the "scheme of the Insolvency Act which requires applications to appoint liquidators to be dealt with expeditiously."
Comment
In coming to its judgment, the Court provided a useful summary of the principles that guide its decision- making when faced with a contested application to appoint liquidators on the basis of non-compliance with a statutory demand. In particular, it is important to note that while a failure to apply to set aside a demand will not necessarily be fatal to a successful defence, there is thereafter a shift in the burden to the respondent to demonstrate that the debt is disputed, that the company is nevertheless solvent or that it has adequately secured the value of the debt in question. The judgment underlines the importance of producing contemporary documentary evidence in support of those assertions. It is also a reminder that a submission that the debt in question is disputed must be substantial and based on reasonable grounds.
