JOHN ROBERT LEES AND ANOTHER v. TAN LAM CHUAN

HCCW 373/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 373 OF 2002

____________

____________

____________

Before: Hon Kwan J in Chambers

HCCW 373/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 373 OF 2002

____________

____________

_________________________________

REASONS  FOR  DECISION

__________________________________

1.  On 2 February 2005, the liquidators of Promail International (HK) Limited (“the Company”) issued a summons under section 197 of the Companies Ordinance, Cap. 32.  In this summons, the liquidators sought an order that the property and assets of Shee Yip Shing, the respondent herein, including but not limited to the balances of the specified accounts with 7 banks, whether in the respondent’s own name or not, and whether solely or jointly held, be placed in the custody and control of the liquidators.

2.  Pending the hearing of that summons, the liquidators obtained an ex parte injunction before Reyes J on 2 February 2005 (“the ex parte injunction”) to restrain the respondent from disposing of the monies in the specified bank accounts.  On the same day, they took out an inter partes summons for continuation of that injunction pending the determination of the summons under section 197.

3.  At the return date of the inter partes summons on 4 February 2005, I made an order that the ex parte injunction be continued pending the determination of the section 197 summons.  I gave directions for evidence to be filed in the application and adjourned for argument the section 197 summons and the inter partes summons for continuation of the injunction.

4.  On 6 June 2005, on the application of the respondent, I varied the injunction to allow the respondent to draw a sum of $19,600.00 a month as his living expenses until after the determination of the section 197 summons and $80,000.00 towards his legal expenses in the liquidators’ summonses and his application for variation.

5.  The hearing on 3 August 2005 was the substantive hearing of the liquidators’ summons under section 197 and the inter partes summons for continuation of the injunction.

6.  At the conclusion of the hearing, I dismissed the section 197 summons with reasons to be handed down.  Before I go to the reasons, I would set out the background briefly. 

7.  The Company was incorporated in Hong Kong on 1 March 1999 with an issued capital of $2.00.  It was ordered to be wound up by the court on 10 July 2002.  On 21 March 2003, a regulating order was made under section 227A and the present liquidators were appointed.

8.  The police raided the offices of the Company in December 2000 and arrests were made.  In January 2002, the respondent, who was appointed a director in November 2000, and others were charged with conspiracy to defraud.  Among them was Tan Lam Chuan (“Mr Tan”), the major shareholder of the Company and also a director.  Consolidated charges were laid against the respondent, Mr Tan and 2 others in June 2002, that they had conspired to defraud such persons who might be induced to invest money with the Company by false and dishonest representations.  The case of the prosecution was that the Company operated 2 rebate schemes which it sold to participants with the promise of exceptionally high yield returns, on the representation that such high yield returns were due to the Company’s businesses in garment, food, department stores and supermarkets, when the Company did not in fact run any other business apart from the 2 rebate schemes.  On the investigation of the police, deposits of substantial sums were made into the accounts of the Company by the participants of the schemes.  Payments made out to participants for cash rebates would appear to be derived from the subscription fees of new participants. 

9.  It was clear that the Company could not possibly pay all the participants the profits promised to them.

10.  On 19 December 2000, a restraint order was made under the Organised and Serious Crimes Ordinance, Cap. 455 to restrain disposal of various assets of the Company and of various individuals, such assets included the balances held in the respondent’s bank accounts.

11.  The criminal trial of the respondent, Mr Tan and others took place in December 2004.  The respondent was acquitted and the others were convicted.  Due to the respondent’s acquittal, the restraint order against him must be discharged.  Hence, the liquidators applied for and obtained the ex parte injunction pending determination of their section 197 summons.

12.  The liquidators adduced evidence that between 19 April 2000 and 9 December 2000, payments totalling $5,378,316.33 were made from several bank accounts of the Company into the bank accounts of the respondent.

13.  Between March 2000 and the December 2000, a total of $34,688,607.00 was deposited into the respondent’s accounts with three banks.

14.  In the admitted facts in the criminal trial, these two matters were admitted by the respondent:

(1)	A total of $0.95 million in cash was withdrawn on 3 occasions from the Company’s bank accounts and the cash was paid over to the respondent at the bank.
(2)	On 24 October 2000, he opened an account with the Bank of East Asia Limited (“BEA”) and deposited $2 million.  He told the bank manager of BEA that he was the Company’s director and that the money belonged to the Company.  He later withdrew the sum of $2 million.

15.  The respondent was employed by the Company from early 1998 to late 2000.  He has not been employed since.  According to him, his monthly salary from the Company at the time was only $15,000, plus bonus payment, commission or rebate in the region of $120,000.00 to $130,000.00, as a result of his recruitment of new members to purchase the rebate schemes of the Company.  The respondent asserted in one of his affirmations that he earned between $135,000.00 to $145,000.00 a month.

16.  The liquidators stated that although the respondent has not been convicted of conspiracy to defraud, it was established at the criminal trial that fraud was perpetrated by some of the principals of the Company, including Mr Tan.  The directors, including the respondent, were acting in breach of their fiduciary duties in operating an unlawful business.  Monies transferred out of the Company’s accounts not in operation of genuine business and paid into the respondent’s accounts were funds transferred in breach of trust.  The respondent, as the recipient, knew or must have known that he had no legal right to receive the payments.  Thus, the property transferred to him in breach of trust was held by him as constructive trustee.  The balance of $5.3 million odd in the respondent’s bank accounts is the property of the Company.

17.  Of the $5.3 million odd deposited into the respondent’s bank accounts, the aggregate balance remaining at present is only about $2.2 million odd.

18.  The respondent has made 3 affirmations in opposition.  In additional, he produced affirmations from Mr Tan, the account clerk of the Company Wong Yu Fai Angel, and three individuals who had invested in the rebate schemes of the Company.

19.  The respondent asserted that the $5.3 million odd deposited into his accounts is his own money.  Of the other substantial sums that had been paid into his accounts by the Company, he had already returned to the Company all these other sums that did not belong to him.  He explained that on some occasions, cheques were paid into his account merely out of convenience.  He would cash the cheque, hand over the funds to Angel Wong and she in turn would distribute the cash to the participants of the rebate schemes for payment to them of bonus, commission or cash rebates.

20.  The respondent claimed that the $2 million paid into his BEA account was not the money of the Company but had belonged to 2 other companies, Master Pro Holdings Sdn Bbh in Brunei and Pro-mail Worldwide Malaysia Sdn Bhd in Malaysia.  He denied that he had told the bank manager of BEA that the money belonged to the Company and claimed that he had not even spoken to the manager.

21.  Mr Tan asserted in his affirmation that of the amounts that made up the $5.3 million in the respondent’s bank accounts, he could identify 10 payments as payments of the respondent’s monthly salaries, commission, cash rebates or bonus and that these monies do not belong to the Company.  Mr Tan supported the respondent’s version that the $2 million paid to the respondent in October 2000 was for “extra bonus”.

22.  Mr Harris for the liquidators attacked the quality of the evidence filed by the respondent and laid emphasis on the absence of any documentary evidence on the respondent’s alleged entitlement to substantial bonus payments.  All that we have are just the assertions of the respondent, Mr Tan and Angel Wong.  Notwithstanding this, I do not think I can make a finding on the affidavits alone that the version of the respondent and those who gave affidavits on his behalf should all be rejected, or that the respondent must have the requisite knowledge to make him a constructive trustee.  I find that there is a dispute as to the Company’s entitlement to the funds in the respondent’s bank accounts.

23.  The liquidators’ application was made under section 197.  This provision reads as follows:

“197.  Custody of company’s property

Where a winding-up order has been made or where a provisional liquidator has been appointed, the liquidator, or the provisional liquidator, as the case may be, shall take into his custody, or under his control, all the property and things in action to which the company is or appears to be entitled.”

24.  The provisions equivalent to section 197 in the English legislation are found in the Companies Act 1929 section 189, the Companies Act 1948 section 243, and the Insolvency Act 1986 section 144(1).

25.  I do not think the liquidators’ application should be made under section 197, as this provision does not empower the court to act.  The appropriate provision is section 211 of Cap. 32 and this provides as follows:

“211.  Delivery of property to liquidator

The court may, at any time after making a winding-up order, require any contributory for the time being on the list of contributories, and any trustee, receiver, banker, agent or officer of the company to pay, deliver, convey, surrender, or transfer forthwith, or within such time as the court directs, to the liquidator any money, property, or books and papers in his hands to which the company is prima facie entitled.”

26.  The provisions equivalent to section 211 in the English legislation are found in the 1929 Act section 204, the 1948 Act section 258, and the 1986 Act section 234(2).

27.  It is clear from the opening words of section 211 (“the court may… require”) that it is this provision which gives the court the power to act.

28.  The effect of sections 197 and 211 are clearly set out in Gore-Browne on Companies, 45^th edition, vol. 2, para. 58[2A].  Section 144(1) of the 1986 Act (our section 197) is to impose a duty on the liquidator or provisional liquidator to take custody and control of “all the property and things in action to which the company is or appears to be entitled”.  Section 234 of the 1986 Act (our section 211) gives power to the court to enforce delivery to the liquidator or provisional liquidator of any of the property, books, and papers to which the company appears to be entitled.

29.  Thus, the liquidator’s application should have been made under section 211.

30.  Mr Harris cited Re London Iron & Steel Co Ltd [1990] BCLC 372 as authority for the proposition that the court may order property to be handed over to receivers even though there is a dispute as to ownership.  This case was decided under section 234 of the 1986 Act.  Warner J held that the decisions decided under the previous legislation (Re Vimbos Ltd [1900] 1 Ch 470; Re Palace Restaurants Ltd [1914] 1 Ch 492) and the views of the leading textbooks (Buckley on the Companies Act, 14^th edition, page 623; Halsbury’s Laws, 4^th edition, vol. 7, para. 1183; Gore-Browne on Companies, 44^th edition, vol. 2, para. 34.5.2; and Atkins’ Encyclopaedia of Court Forms, 2^nd edition, vol. 10, page 186) on the procedure in section 258 in the 1948 Act, which was replaced by section 234 in 1986, are no longer applicable, due to the change of wording in section 234.  Moreover, even though a dispute of fact may arise as to the true ownership of the property in question, a respondent to the application would be adequately protected in the section 234 procedure by Part 7 of the Insolvency Rules, as those rules provide that all the procedures necessary for resolving a dispute as to fact would be available as in an action commenced by writ.

31.  Re LondonIron & Steel was considered by our Court of Appeal in Re Crownhall Investments Ltd [1992] 1 HKC 137.  There, the application made under section 211 was objected to by the respondent on jurisdictional grounds, one being that the procedure was not applicable where the company’s entitlement to the property was in dispute.  The Court of Appeal held that the procedure established by Re Palace Restaurants since 1914 have been accepted too long for our courts to depart from what the authorities have so clearly established and Re London Iron & Steel, which was decided on new legislation and therefore distinguishable, has not changed the position.

32.  The proper use of our section 211 was set out in the 44^th ed of Gore-Browne in the extract referred to earlier as follows:

“But the power [under section 258 of the 1948 Act] must not be stretched beyond its natural and intended limitations, so as, for example, to attack ordinary debtors of the company or third parties who have indirectly obtained company’s moneys; nor may the court or liquidator enforce payment or delivery where the obligation, and therefore the liquidator’s right, is in dispute.  Although such disputes are often determined, with the third party’s consent, on a summons in the winding up, there is no power to compel submission to this procedure.  The liquidator’s proper course is to take action in the ordinary way, and for this purpose, he exercises his power to bring an action or other proceedings in the company’s name and on its behalf.  This he may do without sanction in a voluntary winding up, but only with the sanction of the court or the liquidation committee in a winding up by the court.”

33.  I am bound by the decision of the Court of Appeal.  I hold that the summary procedure under section 211 is not available in this instance where there is a dispute as to the ownership of the property.

34.  Mr Victor Cheung, who appeared for the respondent, informed the court that the respondent would not submit to this procedure.  I have therefore dismissed the liquidators’ summons under section 197, which should have been made under section 211.

35.  Upon my dismissal of the summons, Mr Harris applied for an order that the ex parte injunction be continued upon the liquidators’ undertaking to issue a writ action for recovery of the money against the respondent and to issue an inter partes summons in the intended High Court action for an injunction in substantially the same form as the ex parte injunction.

36.  I have given leave to the liquidators to commence the High Court action and accepted an undertaking of the liquidators in these terms:

“The liquidators do undertake to issue legal proceedings against the respondent for payment by him to the Company for monies in the bank accounts listed in paragraph 1 of the ex parte injunction by 12 September 2005 and to issue within 7 days thereafter an inter partes summons for an injunction in substantially the same form as the ex parte injunction.”

37.  I am satisfied on the evidence before me that the liquidators have an arguable case against the respondent for recovery of the sums in his bank accounts and that it is appropriate to grant injunctive relief to restrain disposal of the assets pending the determination of the inter partes summons to be issued as the liquidators have undertaken to do.  I have therefore ordered that the ex parte injunction be continued, upon the liquidators’ undertaking aforesaid, pending the determination of the inter partes summons to be issued in the proposed High Court action, subject to the variation that the respondent is to be at liberty to withdraw from his bank accounts a periodical sum of $19,600.00 a month as his daily living expenses until after the determination of the inter partes summons. 

38.  On the question of costs of the section 197 summons, although this summons is dismissed, I think it is justified for the summons to be issued initially.  The point regarding the inappropriateness of this procedure was not taken by the respondent at all, and it was raised only by the court at the hearing on 3 August 2005.  Furthermore, as submitted by Mr Harris, the liquidators did have some justification to proceed with the summary procedure on the evidence filed by the respondent in May 2005.  It was only in late June 2005 that the respondent put in further supporting evidence from Mr Tan, Angel Wong, and others.  In these circumstances, I only awarded the costs of the hearing of 3 August 2005 to the respondent, to be paid out of the assets of the Company.  I further ordered that the liquidators’ costs of the section 197 application are to be paid out of the assets of the Company.

39.  In respect of the inter partes summons for continuation of the injunction, I ordered that the costs of that application, including all costs reserved, are to be costs in the cause of the writ action to be commenced by the liquidators pursuant to their undertaking.

Mr Jonathan Harris, instructed by Messrs Minter Ellison, for the Joint and Several liquidators

Mr Victor Cheung, instructed by Messrs Ng & Partners, for the Respondent

HCCW 373/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 373 OF 2002

____________

____________

Before: Hon Kwan J in Chambers

______________

D E C I S I O N

______________

1.  This is an application made by Shee Yip Shing (“the respondent”) on 12 May 2005, seeking an order to vary an ex parte injunction granted by Reyes J on 2 February 2005 prohibiting the disposal of assets in Hong Kong.

2.  The property and assets covered by the ex parte injunction related to the balances in the specified bank accounts with seven banks in Hong Kong.  The ex parte injunction was to remain in force up to and including the return date on 4 February 2005.

3.  At the return date on 4 February 2005, I ordered that the ex parte injunction is to be continued pending the determination of two summonses issued by the liquidators of the company in question , Promail International (HK) Limited (“the Company”), on 2 February 2005.

4.  The liquidators have applied under section 197 of the Companies Ordinance, Cap.32 to take into their custody or control the property and things in action to which the Company is or appears to be entitled, and for an order for continuation of the ex parte injunction.  The two summonses were set down to be heard together with one day reserved, and the hearing is to take place on 3 August 2005.

5.  I gave directions at that hearing on the filing of evidence in opposition by the respondent and evidence to be filed in reply by the liquidators.  To date, the respondent has not filed any evidence in opposition.  The purpose of the respondent’s present application to vary the ex parte injunction is to allow him to withdraw funds from the bank accounts covered by the injunction to pay for living expenses and his legal costs in resisting the liquidators’ summonses.  His application is opposed by the liquidators.

6.  The Company was ordered to be wound up on 10 July 2002 and on the same day the Official Receiver appointed the liquidators as provisional liquidators.  On 21 March 2003, I granted a regulating order under section 227A and the liquidators were appointed.

7.  From 22 November 2000, the respondent was appointed a director of the Company, he had not been a shareholder.

8.  On 12 January 2001, the respondent and two others were charged in the magistrates’ court with conspiracy to defraud.  In the consolidated charge, it was alleged that the respondent and three others had conspired together and with others unknown to defraud such persons who might be induced to invest with the Company by false representations.

9.  On 19 December 2000, Deputy Judge Toh granted a restraint order under the Organised and Serious Crimes Ordinance, Cap.455.  As a result, HK$48.5 million was restrained in the accounts of various banks.

10.  The trial of the respondent and the other three accused took place late last year.  The respondent was acquitted and the others were convicted.  As a result of his acquittal, the respondent made a request to the Department of Justice for the discharge of the restraint order regarding his assets.  As the Department of Justice saw no further ground of maintaining the restraint order in respect of the respondent’s assets, a consent summons was signed.  This gave rise to the ex parte injunction sought and obtained by the liquidators on 2 February 2005.

11.  In the admitted facts dated 7 December 2004 under section 65C of the Criminal Procedure Ordinance, Cap.221, the respondent admitted two things:

(1)	a total of HK$0.95 million in cash was withdrawn on three occasions from the Company’s bank accounts and cash was paid over to him at the bank; and
(2)	he had opened an account with the Bank of East Asia Limited on 24 October 2000 and put in HK$2 million, having told the bank manager that the money belonged to the Company.  He later withdrew HK$2 million.

12.  To date, the liquidators have been able to identify payments of HK$5,378,316.00 as payments made from the Company’s bank accounts to the respondent’s bank accounts from 19 April 2000 to 9 December 2000.  Of these sums of money, HK$1.95 million was paid to the respondent by way of cash cheque.  Of the 15 payments so identified by the liquidators,

(1)	one payment was made in April 2000, one in May 2000, two in October 2000, four in November 2000 and seven were made in December 2000;
(2)	nine payments were in the sum of HK$150,000.00 or above, and the total amount of these nine payments came up to just over HK$ 5 million.

13.  The liquidators believe that the funds in the respondent’s bank accounts are the property of the Company.  They are making a proprietary claim to these funds on behalf of the Company.

14.  The respondent has filed evidence in support of his application setting out his family circumstances.  He is living with his mother who is a housewife and two children aged 8 and 2.  He has filed a petition for divorce from his wife.  He is 33 years old and has been unemployed since early 2001.  He suffers from an illness and attends hospital for follow-up treatment.  He claims he is not able to work because of his illness.

15.  He was employed by the Company since early 1998 to late 2000.  He earned HK$135,000.00 to HK$145,000.00 a month, of which HK$15,000.00 was salary and the rest was bonus, commission or rebate.  During the period of his employment, he said he had accumulated regular and substantial savings.

16.  He set out the minimum living expenses for himself and his dependants at HK$19,600.00 a month and a breakdown of these was given.  He claims he has to borrow from relatives and friends in order to support his family.

17.  He applied for Legal Aid on 8 February 2005.  His application was refused on 14 April 2005.  Without drawing on his bank accounts, he said he would have no means to engage lawyers to resist the liquidators’ applications against him.

18.  He asserts that all the proceeds in his bank accounts belong to him beneficially, to the exclusion of the Company and all others.

19.  In his supplemental affirmation, the respondent listed his bank accounts.  There are seven of them and the balances in May 2005 are as follows: in respect of his one account in Shanghai Commercial Bank Limited, the credit balance stood at about HK$1.3 million odd; for his three bank accounts in the Hang Seng Bank Limited, there is a nil balance for all of them; of his two bank accounts in HSBC, he has an aggregate balance of about HK$779,000.00 odd; he has opened two new accounts at DBS Bank (Hong Kong) Limited, and the total balance is less than HK$2,000.00.  The aggregate bank balances in the accounts as disclosed by the respondent come up to about HK$2 million.

20.  There is no mention in his affirmations of his accounts in the following banks covered by the ex parte injunction, namely, the Standard Chartered Bank, the Bank of East Asia, the Bank of China and the Yien Yieh Commercial Bank.  I note however that in the respondent’s summons for variation, he has not sought withdrawal from these other bank accounts.

21.  According to the evidence adduced by the liquidators, very substantial deposits and withdrawals were made in the respondent’s bank accounts in the latter half of 2000.  The total balances in the accounts with the Standard Chartered Bank in October 2001 amounted to HK$460,000.00 odd, and, as I have mentioned, the respondent did not account for this in his supporting affirmations.

22.  The liquidators say that notwithstanding the remuneration received by the respondent from the Company as an employee, the majority of the funds in his bank accounts would appear to originate from the funds of the Company paid by investors in the investment scheme run by the Company and do not belong to the respondent beneficially.

23.  If the variation were allowed, the respondent would be permitted to withdraw living expenses of about HK$60,000.00 (for three months) in all up to the date of adjourned hearing.  Having considered the amount of the fees he has claimed that would be spent on legal expenses, the nature of the applications for which legal advisers are to be engaged, the work done by the legal advisers and to be done by them, I am inclined to think that the amount of legal expenses claimed by the respondent is on the high side.  In my view, HK$80,000.00 should be sufficient to cover reasonable legal expenses in this application and legal expenses to be incurred in resisting the liquidators’ applications.  That being the position, if I were to allow a variation, a total sum of HK$140,000.00 would be released from the ex parte injunction.  This is a modest sum and would represent about a month’s remuneration received by the respondent from the Company.

24.  Further, on my above analysis, of the amounts identified as payments from the Company, about HK$5 million out of the HK$5.3 million odd would appear unlikely to have been received due to remuneration for services rendered.  That would leave about HK$300,000.00, which might be attributable to the respondent’s remuneration for the services he provided to the Company.

25.  I think it appropriate in these circumstances to exercise my discretion to vary the ex parte injunction.

26.  I make the following orders:-

The ex parte injunction granted on 2 February 2005 and continued on 4 February 2005 is to be varied as follows:
(a)	the respondent be at liberty to withdraw from his bank accounts as specified in his summons, the periodical sum of HK$19,600.00 a month, until after the determination of the liquidators’ summonses filed on 2 February 2005 and scheduled to be heard on 3 August 2005; the first payment of which is to commence within seven days of this order and thereafter on the 1st day of each month; and
(b)	the respondent be at liberty to withdraw from his bank accounts as specified in his summons, the total sum of HK$80,000.00 towards payment of his legal expenses in respect of the liquidators’ said summonses and of the present application.

27.  Save that the liquidators’ costs of this application are to be paid out of the assets of the Company, I make no order as to costs.