RE WING FAI CONSTRUCTION CO LTD

HCCW 735/2002

[2018] HKCFI 1369

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 735 OF 2002

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D E C I S I O N   O N   C O S T S

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1.  This is my decision on the costs of the proceedings in the misfeasance summons which was dismissed after trial as explained in my judgment dated 24 November 2017. The question for determination now is the incidence of costs as between the parties. It is common ground that if and insofar as any costs are ordered against the Applicant, he is personally liable for those costs to the Respondents to whom the costs are awarded (see Re Leco Watch Case Manufactory Ltd [2017] 2 HKLRD 388 at §14 and ReKam Toys & NoveltyManufacturing Limited (unrep, CACV 67/2017, 13 November 2017) at §45), without limitation by the amount of the assets in the liquidation estate, but also without prejudice to any right of recoupment the Applicant may have from the estate. The paragraph numbers put in parentheses below refer to the paragraphs of my judgment. The same abbreviations will be used.

2.  Although the Rules of the High Court (Cap 4A) do not directly apply here because the misfeasance claim was a proceeding in the winding‑up of Wing Fai (see RHC Order 1 rule 2), there is no dispute that the court should be guided by the same principles on costs as in an ordinary action.

3.  The Applicant has instituted and pursued the claim for misfeasance but failed to obtain any recovery at the end.  He lost and the Respondents won.  The starting point is therefore that costs should follow the event: the Applicant should pay the Respondents’ costs.  This is the order contended for by the 1^st and 2^nd Respondents.

4.  The 3^rd Respondent, however, is in a peculiar position.  He has not appeared on this hearing, as in the trial. He has effectively disappeared from the scene for many years.  In my view, his conduct in the litigation is such that no award of costs is called for.  I would make no order as to the 3^rd Respondent’s costs.

5.  To justify departure from the starting point in relation to the 1^st and 2^nd Respondents, Ms Theresa Chow, who appeared on behalf of the Applicant, raised a number of matters.  She relied on the judgment of Atkin LJ in Ritter v Godfrey [1920] 2 KB 47 at 60‑61 which stated that in the case of a wholly successful defendant, the court must give the defendant his costs unless the defendant (1) brought about the litigation or, in other words, “has so conducted himself as to lead the plaintiff reasonably to believe that he had a good cause of action against the defendant, and so induce him to bring the action”, or (2) has done something connected with the institution or the conduct of the litigation calculated to occasion unnecessary litigation and expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains. 

6.  This approach remains applicable in the post‑Civil Justice Reform era: Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679 at §§101‑104; Eminent Investments (Asia Pacific) Ltd v DIO Corporation [2017] 4 HKLRD 52.

7.  Ms Chow also relied on In re Elgindata Ltd (No 2) [1992] 1 WLR 1207 which, as summarised in Wang Din Shin v Nina Kung alias Nina T H Wang (unrep, CACV 460/2002 and CACV 67/2003, 19 April 2005) at §39 and Kinetic Medical and Health Group Co Ltd & Others v Dr Tse Ivan Cheong Yau (unrep, HCA 1115/2010, 7 April 2014) at §27, states that:

“ (i) Costs are in the discretion of the court [Order 62 r 2(4) RHC];

(ii) They should follow the event, except where it appears to the court that in the circumstances of the case some other order should be made [Order 62 rule 3(2) RHC];

(iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or part of his costs;

(iv) Where the successful party raises issues or makes allegations ‘improperly or unreasonably’ [in Hong Kong, ‘improperly or unnecessarily’], the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs [Order 62 rule 7(1) RHC].”

8.  I bear in mind that, in relation to principle (iii) in Elgindata, the Court of Final Appeal has said in Kam Leung Sui Kwan, Personal Representative of the Estate of Kam Kwan Sing, deceased v Kam Kwan Lai & Others (unrep, FACV 4/2015, 3 February 2016), at §8:

“As this Court has previously said, too inflexible an application of the rule that costs generally follow the event is to be avoided but the discretion to depart from the rule should be exercised with due circumspection since too ready a departure from the general rule encourages unnecessary argument. Nevertheless, the principles for depriving a successful party of part of his costs set out in Re Elgindata (No.2) are well-established and continue to apply in this jurisdiction notwithstanding the amendments to the rules of procedure under the Civil Justice Reform.”[1]

9.  The Applicant’s arguments may for present purposes be summarised into the following broad points:

(1) The Respondents’ conduct brought about the litigation: Principle (1) in Ritter v Godfrey.

(2) The Respondents had unreasonably raised issues.  Alternatively, the Respondents had raised issues on which they failed and which had led to unnecessary litigation and expense: Principle (2) in Ritter v Godfrey; Principles (iii) and (iv) in Elgindata.

(3) The Respondents had done wrongful acts in the course of the transactions of which the Applicant complained: Principle (3) in Ritter v Godfrey.

10.  As regards the first argument, as Mr Ng and Mr Barlow SC submitted for the 1^st and 2^nd Respondents respectively, s 276 is not a provision for punishing a director guilty of misfeasance but for compensating the company in respect of loss occasioned by his misfeasance (§273).  Proving loss is crucial for seeking relief under that provision.  The Respondents’ conduct might have brought suspicion upon themselves for having done something illegal, but it was also clear early on that the funds extracted were channelled to group companies and that eventually China Rich provided funds to discharge all bank indebtedness of Wing Fai without recourse to Wing Fai except for Benefit’s proof for $40 million which the Applicant did not admit, which was in essence the principal reason why the claim was eventually dismissed.  The 2^nd Respondent’s affirmation to which I referred (§292) was made in October 2003, well before commencement of these proceedings.  Coupled with the operation of the Set‑Off Agreement, there was simply no loss suffered by Wing Fai.  The Set‑Off Agreement was already well‑known to the liquidators of Wing Fai in 2004: see the decision of Kwan J (as she then was) dated 3 March 2004 in HCCW 253/2003 dismissing Zhukuan Wing Fai’s application to be substituted as petitioner for the winding‑up of Fitzroya.  Without focusing on ascertaining any unrecovered loss suffered by Wing Fai, the Applicant cannot be said to have been led reasonably to believe that he had a good cause of action in misfeasance.  I do not accept Ms Chow’s submission that the Applicant’s case has failed on a “technicality” (referring to the Applicant’s concession that insolvency was irrelevant).  The question of loss was not peripheral but central to a claim for misfeasance.

11.  Further, the Respondents’ conduct had to be viewed individually.  The Applicant was unable to plead anything that they did that could have reasonably led the Applicant to try to fix all of them with joint and several liability for all the payments‑out (§212).  For example, the 1^st Respondent only signed documents relating to 6 relevant payments‑out, which were all matched by corresponding payments‑in very close in time (§§341‑342).

12.  As regards the second point, Ms Chow pointed out that the Respondents had failed on some of the 8 issues dealt with at trial (§§81, 355).  However, I do not think that it can be said that the Respondents unreasonably, improperly or unnecessarily raised those issues or made allegations.  In many instances they simply did not admit the Applicant’s allegations.  I should not be taken as saying that a non‑admission could never amount to improper or unreasonable conduct for the purposes of costs, but I think, in general, the court should be slower to conclude that it does than in the case of a positive averment.  Failure on an issue, especially an issue raised by non‑admission, is not of itself sufficient to show unreasonable conduct.

13.  On the other hand, it is not necessary to establish that a successful party has acted unreasonably or improperly in raising an issue for it to be deprived of the whole or part of its costs.  It is sufficient to show that he has raised issues or made allegations on which he failed and which have caused a significant increase in the length or cost of the proceedings.  Of course, not every point that fails attracts deprivation of costs.  Whether or not it does depend on all the circumstances.

14.  One issue that in my view falls into this category is the de facto directorship issue (§§95‑149).  It was a substantial, discrete issue relating to all the payments-out during the period from 26 July 2001 to April 2002, involving both factual inquiries and legal arguments.  It did, in my view, lead to a significant increase in the complexity and costs of the case, not only at trial, but also in the course of its preparation.  I consider that the Respondents’ failure on this issue calls for some reduction of the costs which they may otherwise be awarded.

15.  Another issue that should also in my view lead to some reduction is whether or not the supposed trades with Famous Capital and King Capital were genuine.  This was part of the breach of duty issue, though by the time of trial and, in fact, ever since the 2^nd Respondent pleaded guilty in the criminal case and amended her defence in these proceedings on 14 February 2014 to admit the fictitious nature of the transactions, it had become a foregone conclusion (§224).  But this does not mean that it had no effect on the length and cost of the case generally.  It was certainly a real issue when the proceedings started — Kwan J described it the “pivotal issue” in her decision in 2009 on the application to strike out for want of prosecution.[2] It had occupied many paragraphs of the 11^th affidavit of Mr Kennedy which was made in support of the misfeasance summons in 2004. 

16.  I accept that after 14 February 2014, the 2^nd Respondent had effectively admitted the issue.  Her knowledge, though formally not fully admitted, could not seriously be disputed given the criminal conviction which was admissible against her.  It is true that the 1^st Respondent made no admission and denied knowledge, and in the judgment I found that he also knew that the sale and purchase transactions were fictitious when he signed on the documentation relating to the payments‑out in question (§§243‑260).  But the costs and time expended to deal with that issue were in my view limited, and overlapped to some extent with the de facto directorship issue.

17.  On the other hand, Mr Ng relied on the fact that on 26 August 2016, the 1^st Respondent made an offer of payment to settle the claim which was rejected by the Applicant.  The Applicant would be far better off if he had accepted that Calderbank offer.  Mr Ng did not go so far to say that this offer ousted the operation of the Elgindata principles as a matter of law, but urged the court to take the offer into account.

18.  It should also be recalled that, in the end, only 6 payments‑out were attributed to the 1^st Respondent, and they were all matched by corresponding payments‑in close enough in time to be inferred to be a round‑robin, which means that Wing Fai did not in fact suffer any loss as a result of those payments-out (§§341‑342) even leaving aside the discharge of bank debts by China Rich in April and May 2002.

19.  Overall, it seems to me that the outcome on this issue of breach of duty should also lead to some reduction of the costs to be awarded to the Respondents especially in the period before the 2^nd Respondent’s admission in February 2014.  Although the 1^st Respondent was more involved in disputing this issue, I consider the potential effect on costs was offset by his Calderbank offer.

20.  Related to the breach of duty issue is the fact that the letters of credit opened in favour of Famous Capital and King Capital were a fraud on the banks.  In fact, criminal proceedings were instituted and resulted in convictions of a number of persons including the 2^nd Respondent. The fact that the 1^st Respondent was not charged or convicted is not an answer because for the purpose of these proceedings I have found that he was also in the know as far as the letters of credit signed by him were concerned. In my view this brings into play the third principle in Ritter v Godfrey. I do not think, however, that this justifies depriving the Respondents of all costs.  The 1^st Respondent was responsible for only 6 of the relevant payments‑out but was sued for all of them.  The 2^nd Respondent had pleaded guilty and already served her sentence.  Even before 2014 they were only running a case of non‑admission on this point.

21.  As to the other issues at trial, the Respondents failed on part of the disputed payments‑out issue, as regards FC‑8, FC‑11, FC‑14, FC‑15, FC‑17 and FC‑22 (§§175‑182), but they are only some of the disputed payments‑out and the Respondents won on some others.  I do not think the 6 payments relied upon by Ms Chow constitute such a distinctly discrete issue as to detract from the general disposition in respect of costs.

22.  The Respondents also failed on the ratification issue (§§265‑272).  This was however a crisp issue that did not in my view add significantly to the length or costs of the proceedings.  Looked at in the round I do not think this issue should attract the application of Principle (iii) in Elgindata.

23.  I do not think the Respondents really failed on the attribution issue (§§188‑221), as Ms Chow submitted they did in part.  The Respondents accepted they were responsible for those payments‑out where they had signed the relevant documents.  It was the Applicant’s attempt to attach joint and several liability to the Respondents for all the payments that was roundly rejected.  The 2^nd Respondent’s alternative submission that the Applicant should be taken to have abandoned the specific attribution case (§216) hardly took up any time.

24.  The parties have in addition drawn attention to certain separate matters but I think they are not sufficiently relevant to affect the outcome on costs.  For example, Ms Chow submitted that the 2^nd Respondent brought contempt proceedings against Mr Kennedy for disclosing the transcripts of her private examination without leave of the court.  These are separate proceedings the costs of which have been separately dealt with.  They were simply part of the highly acrimonious battles between the parties. I do not see that the 2^nd Respondent’s ultimate failure (having won in the Court of Appeal) in the contempt proceedings should affect the costs position in the present proceedings.

25.  For the 2^nd Respondent’s part, Mr Barlow referred to certain evidence and alleged that the Applicant had tried to use the criminal proceedings against the 2^nd Respondent to force or induce her to settle the misfeasance claim.  As I stated in my reasons for ruling handed down on 27 October 2016, the Applicant had not had an opportunity of responding to or refuting this allegation.  No finding has been made against him in this respect.  It would not be right for present purposes to proceed on the basis that there was such wrongdoing on his part.

26.  It is not easy to put the above considerations individually into numerical terms and I do not think it is necessary to put a “value” on each factor.  In exercising its discretion the court has to take a broad brush rather than an accountant’s pen.  Having regard to all the circumstances, the order of costs I make is as follows:

(1) The Applicant do pay the 1^st and 2^nd Respondents respectively 40% of the costs of these proceedings up to 14 February 2014 and 70% of the costs thereafter, in each case with a certificate for two counsel.

(2) There be no order as to costs between the Applicant and 3^rd Respondent.

(3) The costs of and relating to this hearing on costs be treated as part of the costs of the trial.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 735 OF 2002

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J U D G M E N T

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TABLE OF CONTENTS

A.  INTRODUCTION

1.  This is the trial of the misfeasance summons issued pursuant to s 276 of the predecessor Companies Ordinance (Cap 32) between the liquidator of Wing Fai Construction Co Ltd (“Wing Fai”) as applicant and three of its former directors as respondents.  I shall refer to the joint and several liquidators or the sole liquidator of Wing Fai at any given time simply as the “Liquidators” or “Liquidator” as the case may be.[1]

2.  Wing Fai was wound up by order of the court on 9 December 2002 upon a petition presented on 6 July of the same year.  The Liquidator’s case is that between 6 May 1999 and 18 April 2002, the respondents, as directors or de facto directors, caused Wing Fai to enter into a series of transactions which involved (i) “payments‑out” by cheques or under letters of credit from the available funds of Wing Fai to two related companies, namely, Famous Capital Enterprises Ltd (“Famous Capital”) and King Capital Engineering Ltd (“King Capital”), purportedly for goods purchased when in fact no such goods were ever sold or delivered to Wing Fai; and (ii) “payments‑in” made by those two companies purportedly as repayments. 

3.  The letters of credit also led to criminal investigation and, eventually, criminal charges being brought against 5 persons[2] including the 2^nd respondent herein.  In 2013, the 2^nd respondent was convicted on her own plea of 11 charges of conspiracy to defraud the banks that had issued 11 letters of credit, which are among those included in the present civil claim.

4.  The Liquidator alleges that, in total, the payments‑in fell short of the payments-out by $36,151,301.87, and that this constituted a fraud on Wing Fai and the respondents were guilty of misfeasance, breach of duty and negligence.  The Liquidator claims from the respondents jointly and severally this amount of shortfall together with compound interest.

5.  Within this trial a number of issues arise for determination including, broadly, whether the 1^st and 2^nd respondents were de facto directors, whether certain payments were made from Wing Fai’s funds or credit, who procured the payments, whether the respondents acted in breach of duty and dishonestly, whether the payments were ratified, whether Wing Fai suffered any loss, the quantum of liability and what interest should be awarded.

B.  THE BACKGROUND

6.  The following facts are borne out by the evidence.

Wing Fai

7.  Wing Fai was incorporated in 1980 in Hong Kong.  At all material times until 22 April 2002, it was a wholly‑owned subsidiary of a company whose shares were (and still are) listed in the Stock Exchange of Hong Kong.  The listed company was initially called Wing Fai International Limited (“Wing Fai International”) (stock code 1191). The core business of the group headed by Wing Fai International was construction work. 

8.  Wing Fai was an approved “Group C” contractor for public works on roads and drainage.  This means it was eligible to tender for such public works contracts of any value exceeding $185 million. Wing Fai also engaged in the construction business through a subsidiary (owned 51% by Wing Fai), called Zhukuan Wing Fai Construction Co Ltd (“Zhukuan Wing Fai”).  At the material times Wing Fai was mainly involved in road and highway works, drainage and sewage works, watercourse desilting works, and construction and maintenance of drainage channels.  There was also a related company, called Wai Shun Construction Co Ltd (“Wai Shun”), which was engaged in the repair and maintenance of buildings but which by 2001 had become inactive.

Registered directors of Wing Fai

9.  The registered directors of Wing Fai were as follows:

Name	Date of appointment	Date of resignation
The 1st respondent	28 February 1997	26 July 2001
The 2nd respondent	28 February 1997	26 July 2001
The 3rd respondent	6 June 1998	22 April 2002
Vincent Lo	6 June 1998	4 May 2002
Eric Chim	22 April 2002	--
Poon Chin Yu	30 April 2002	20 June 2002

The takeover of the Group

10.  In around 1997, the 1^st respondent, who owned and controlled a private company called China Rich Properties Limited (“CRPL”), of which the 2^nd and 3^rd respondents were directors, staged a reverse takeover of the Group, which was in financial difficulty at the time.  As a consequence, the 1^st respondent became a major shareholder and Chairman of Wing Fai International, and CRPL became a subsidiary of it.  The listed company was renamed China Rich Holdings Limited (“China Rich”).

11.  A number of the former directors of Wing Fai International continued in office until late 1998.  They also continued to be directors of Wing Fai until late 1998.  Some senior officers from the old group, including Vincent Lo and Eric Chim, who joined in 1993 and 1994 respectively, continued to serve in the Group after the takeover and beyond 1998.  As stated above, Vincent Lo was made a director of Wing Fai in June 1998.

12.  Between about 1999 and 2002, the board of China Rich comprised the 1^st, 2^nd and 3^rd respondents and Vincent Lo[3] (as executive directors), and Wong King Keung Peter and Chung Shui Ming (as independent non‑executive directors).

13.  After the change of control, and during the times material to these proceedings, the structure of the group of companies headed by China Rich (“the Group”) was as shown in the following diagram.

14.  Wing Fai as well as Wai Shun became the wholly‑owned subsidiaries of the intermediate holding company, Benefit Holdings International Limited (“Benefit”).  Benefit’s two directors were the 1^st and 2^nd respondents.  Benefit had a number of other wholly‑owned subsidiaries, including Fitzroya Finance Co Ltd (“Fitzroya”), whose directors were also the 1^st and 2^nd respondents.

15.  Fitzroya had a money lender’s licence and its business included financial funding not only of other operations of the Group but also of suppliers and subcontractors of the Group.

The respondents

16.  The 1^st respondent was the Chairman, an Executive Director and a major shareholder of China Rich (holding, directly or indirectly, approximately 37.5% of the issued shares as at 31 July 2002).  He was registered as a director of Wing Fai from 28 February 1997 to 26 July 2001.  He was also one of the two directors of Benefit and Fitzroya.

17.  The 2^nd respondent was the Deputy Chairman, an Executive Director, the Chief Financial Officer and a shareholder of China Rich (holding a 3.17% stake as at 31 July 2002).  She was also registered as a director of Wing Fai from 28 February 1997 to 26 July 2001.  She was the other director of Benefit and Fitzroya.

18.  The 3^rd respondent was an Executive Director of China Rich and a director of Wing Fai between 6 June 1998 and 22 April 2002.  Prior to joining China Rich, he had, since 1981, worked in Hong Kong as a director of private companies owned by the Guangxi Provincial Government.

19.  It appears that the respondents left the Group in around 2005 to 2007.  China Rich has since been renamed Yueshou Environmental Holdings Ltd.

Office premises

20.  After the 1^st respondent had assumed control, the Group operated from its headquarters at 33^rd Floor, 118 Connaught Road.  This was where each of the respondents worked at the time.  The senior staff of Wing Fai was initially also stationed there.

21.  CR Airways Ltd (“CR Airways”) was a private company owned by the 1^st respondent engaged in the airline business.  As such, it was not part of the Group but, perhaps because of the common control, at some point its staff moved into the Connaught Road office.  As the office became crowded, in around mid‑2001 the staff responsible for the construction business gradually moved out of the Connaught Road office, to an office on 4^th Floor, Lee May Building in Nathan Road owned by a subsidiary of Benefit.  There was another unit on the 7^th floor of that building which was used by Wing Fai mainly for storage.

The payments‑out and payments‑in

22.  In the latest version of the Points of Claim,[4] the Liquidator has put forward (i) 66 payments relating to Famous Capital (labelled FC‑1 to FC‑66 respectively), consisting of 36 payments-out and 30 payments-in, and (ii) 21 payments relating to King Capital (labelled KC‑1 to KC‑21 respectively), consisting of 12 payments-out and 9 payments-in.  The majority of the payments-out were made via letters of credit (34 in the case Famous Capital and 7 in the case of King Capital); the rest were made by cheques. 

Modus operandi of the letters of credit

23.  At all material times up to 22 April 2002, Wing Fai had accounts at a number of banks including the following 4 banks:

(1)  DBS Kwong On Bank — operated by any 2 of the 3 respondents as the authorised signatories;

(2)  Kwangtung Provincial Bank (which later became part of Bank of China) — operated by joint signatures of an authorised signatory from each of Group A and Group B, with company chop. Group A consisted of the 1^st and 2^nd respondents; Group B consisted of the 3^rd respondent and two others[5];

(3)  Hong Kong Chinese Bank — operated by joint signatures of an authorised signatory from each of Group A and Group B, with company chop.  Group A consisted of the 1^st and 2^nd respondents; Group B consisted of the 3^rd respondent and two others[6]; and

(4)  Standard Chartered Bank — operated by joint signatures of an authorised signatory from each of Group A and Group B, with company chop.  The payroll service was operated by signature of the 2^nd respondent and one from Group C.  Group A consisted of the 1^st and 2^nd respondents; Group B consisted of the 3^rd respondent and Vincent Lo; Group C consisted of two other persons.

24.  In the course of its business, in order to purchase and pay for materials required for the performance of its contracts such as asphalt, concrete mix and steel bars, Wing Fai procured letters of credit to be issued by its banks in favour of the suppliers.  What transpired after its liquidation, and is no longer seriously in dispute, is that apart from the genuine sale and purchase of materials, between 1999 and 2002, the above 4 banks were also asked to and did issue letters of credit for the purpose of transactions which turned out to be fictitious.  Those letters of credit were all issued to Famous Capital and King Capital respectively.

25.  It would appear that in relation to the applications signed by the 2^nd respondent, they were prepared based on details provided by her to an accounts officer, Julia Ip.  The applications for letters of credit were signed mostly jointly by the 2^nd and 3^rd respondents, and occasionally jointly by the 1^st and 2^nd respondents or by the 1^st and 3^rd respondents.  The applications would specify the supplier of the goods (Famous Capital or King Capital, as the case may be), the amount of credit required, and describe the goods to be purchased.

26.  After the letters of credit were issued, in due course the banks received the documentation from the supposed supplier of goods required for negotiation such as invoices and cargo receipts.  The invoices were signed by Mandy Ip and Masada Tsui, the relevant officer of Famous Capital and King Capital respectively.  After checking the documentation, the banks paid the beneficiaries the relevant amounts.  In some instances, the respondents signed trust receipts on behalf of Wing Fai, pledging to the banks the documents of title in respect of the goods the subject of the letters of credit.

27.  Upon maturity of the letters of credit the banks debited Wing Fai’s accounts (with overdraft facilities) for the amounts of the letters of credit together with bank charges.

Famous Capital

28.  Famous Capital was a company incorporated in Hong Kong in about 1998.  Its registered office was the address of the TrustNet group which appeared to be a company secretarial office.  It had 10 issued shares which were held by a BVI company.  At all material times its secretary was Mandy Ip and the directors were Mandy Ip and Carmen Cheng. They were also the authorised signatories of Famous Capital’s bank accounts, which could be operated by either of them with a company chop. 

29.  Mandy Ip was an employee of Wing Fai between 1997 and April 2002.  After Wing Fai was sold in April 2002, she became employed by CR Airways instead.  She had worked in the Connaught Road office throughout.

30.  Carmen Cheng is the daughter of the 2^nd respondent. It appears that since December 1998 she had worked in the Group as the personal assistant of the 1^st respondent.

31.  Famous Capital was deregistered on 31 January 2004.  As is admitted by the 2^nd respondent and certified by Mandy Ip on the application for its deregistration, it had never carried on any trade or business operation.

King Capital

32.  King Capital was also a company incorporated in Hong Kong in September 2000.  Its registered office was the address of an accountant’s firm.  Masada Tsui was its secretary and one of its two directors.  The other director was Tony Lo.  They were also the shareholders of King Capital and the authorised signatories of its bank account.

33.  Masada Tsui was an employee of GreaterChina Technology Group Ltd (“GreaterChina”) and worked in Wing Fai’s accounts department.  GreaterChina was a company engaged in health and lifestyle internet business (listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong in April 2000) in which China Rich and the 2^nd respondent had an approximately 38.1% and 6.49% shareholding respectively.  The 2^nd and 3^rd respondents were both directors of GreaterChina from 2000 onwards.  The 2^nd respondent was its Chairman and Chief Executive Officer.

34.  Tony Lo was a senior employee in the Group, occupying the position of project manager responsible for the Group’s Mainland projects.

35.  Like Famous Capital, King Capital had also never carried on any trade or business.

Financial relations between Wing Fai and the Group

36.  As is common for many groups of companies, there were considerable intra‑group financial dealings between Wing Fai and other members of the Group.  Further, there were indirectly‑related dealings in that Fitzroya lent money to Wing Fai’s sub‑contractors who needed financing to meet cash flow needs.

37.  The audited financial statements of Wing Fai for the years 1998/99 to 2000/01 showed the following amounts due between Wing Fai on the one hand and Benefit and Wing Fai’s fellow subsidiaries on the other:

Date of financial year end	Amount due to Benefit (in $ million)	Amount due from Benefit (in $ million)	Amounts due from fellow subsidiaries (in $ million)	Amounts due to fellow subsidiaries (in $ million)
31/7/1998	108.6	-	117.6	19.4
31/7/1999	115.3	7.6	143	7.7
31/7/2000	110.3	7.2	162.3	15.1
31/7/2001	110.3	-	178.1	-

38.  At all material times up to around April and May 2002, Wing Fai’s finances were supported by China Rich.  As the Group’s listed holding company, it gave assurance to the outside world of its continued financial support for Wing Fai.  For example, China Rich issued a comfort letter to Wing Fai dated 23 November 2001 in connection with Wing Fai’s audit confirming that China Rich “will provide adequate funds to enable Wing Fai … to meet in full its financial obligations as they fall due for the foreseeable future”.  Further, China Rich had guaranteed Wing Fai’s bank debts and granted charges over bank deposits and securities to the banks to secure Wing Fai’s borrowings.

Set-off Agreement

39.  Shortly before the announcement of the results of the Group for the financial year ended 31 July 2001, there was a Board meeting of China Rich on 23 November 2001, preceded by a meeting of its Audit Committee.[7]

40.  At the meeting, the Board of China Rich resolved, inter alia, that an agreement dated 23 November 2001 for the mutual set‑off of certain indebtedness among companies in the Group (“Set‑off Agreement”) be approved and that the Chairman be authorised to sign it.  The agreement was made among China Rich and 23 of its subsidiaries including Benefit, Wing Fai, Wai Shun and CRPL.  It set out the inter‑company current accounts balances as of 31 July 2001, showing, inter alia, that Wing Fai owed Benefit $110.3 million and Fitzroya owed Wing Fai $175.4 million.

41.  Pursuant to the Set‑Off Agreement, the set‑off was implemented by the Group’s accounts department making journal entries in the books and accounts of Group companies on 28 March 2002.

Sale of Wing Fai to Sino Glister

42.  In around March 2002 or shortly before, the 1^st respondent approached Vincent Lo offering to sell Wing Fai to him but he declined.  (The precise date was unclear but Vincent Lo recalled it was about a month before he fell seriously ill on 19 April 2002.)  The 1^st respondent then approached Eric Chim with the same proposal.

43.  Eric Chim had worked for Wing Fai in the construction business since 1994, first as Operations Manager, and later as Assistant General Manager, reporting to Vincent Lo.  In late 2001 or early 2002, the 1^st respondent separated the responsibilities for Wing Fai’s then four main construction projects between Vincent Lo and Eric Chim.  Vincent Lo was in charge of two projects in Ma On Shan and Kowloon whereas Eric Chim became responsible for a maintenance project in the New Territories and a construction project in Kam Tin.  Eric Chim was regarded as part of the senior management of the Group.

44.  Eric Chim had apparently obtained indication from Mainland sponsors who agreed to back him and inject $40 million as working capital into Wing Fai.  Eventually the 1^st respondent agreed to sell Wing Fai to Eric Chim. 

45.  On 22 April 2002, Wing Fai was sold by Benefit to a company held by Eric Chim named Sino Glister International Investments Ltd (“Sino Glister”).  Benefit, Wing Fai, Wai Shun, Sino Glister and Eric Chim entered into a written agreement for the sale and purchase of the shares in Wing Fai (“Sale and Purchase Agreement”).  The principal terms of this agreement included:

(1)  Benefit would transfer all the shares it owned in Wing Fai to Sino Glister for the price of $5 million.

(2)  Benefit would deliver all the books and records of Wing Fai to Sino Glister.

(3)  Sino Glister, Wing Fai, Chim and Wai Shun acknowledged that as at 22 April 2002, Wing Fai owed Benefit a debt of $40 million, which Sino Glister and Wing Fai would repay Benefit in this way:

(a) When Wing Fai and Wai Shun received any payments pursuant to their Government contracts, the money would be deposited into one of a list of their specified bank accounts (“the Old Accounts”).  Wing Fai and Wai Shun had to pay 60% of such receipts to Benefit.

(b) The debts owed to Benefit should be repaid within 6 months.  Otherwise Wing Fai had to pay interest to Benefit at 12% pa.  In any event the debts and accrued interest must be repaid within 12 months.

(4)  Sino Glister acknowledged it had full and sufficient knowledge and understanding of Wing Fai’s financial and other conditions.

(5)  Before the debts owed to Benefit had been repaid:

(a) Benefit reserved the right to appoint a director on Wing Fai’s board.

(b) The existing authorised signatories of the Old Accounts would not be changed, and would have the power and authority to withdraw any sum from the Old Accounts to repay Benefit.

(c) Wing Fai and Wai Shun pledged all the rights in relation to the Old Accounts to Benefit.

(6)  Eric Chim and Wai Shun guaranteed Wing Fai’s and Sino Glister’s performance of the agreement.

46.  On the same date of 22 April 2002, Eric Chim was appointed a director of Wing Fai while the 3^rd respondent ceased to be a director.  Shortly afterwards, on 4 May 2002, Vincent Lo also resigned as director.  Benefit did not exercise the right to nominate a director.

47.  Pursuant to the sale, some of the accounts staff, presumably those who worked exclusively or primarily in relation to Wing Fai, had to move from the Connaught Road office of the Group to the Lee May Building office of Wing Fai.

48.  After the sale, the Group retained control over the Old Accounts of Wing Fai pursuant to the terms of the Sale and Purchase Agreement, but otherwise Eric Chim had control over Wing Fai.  He opened a new account with HSBC in the name of Wing Fai (“the HSBC Account”).  This account remained under his control until the liquidation.

Discharge of liabilities to banks in respect of the letters of credit

49.  Consistent with the understanding that Eric Chim would acquire Wing Fai clear of bank debts, Wing Fai’s overdrafts with the banks were fully settled between April and May 2002 with money provided by the Group, as described in greater detail in §§297–300 below.  It is common ground that the banks did not suffer any loss as a result of the letters of credit in question.  None of the banks put in a proof of debt.

The liquidation of Wing Fai

50.  Previously, Wing Fai had disputes with a sub‑contractor, Enfield Construction Co Ltd (“Enfield”).  Enfield had itself been put into liquidation in 1998.  The disputes were compromised by a settlement agreement in December 2000, which required Wing Fai to pay to Enfield 90% of further sums received under a specific contract with the Housing Authority. In June 2002, a further sum of about $1.63 million was indeed received on that contract into the HSBC Account, as a result of which Wing Fai was obliged to pay Enfield approximately $1.46 million.  When the amount was not paid[8], on 6 July 2002, Enfield presented a petition for the winding up of Wing Fai.  Provisional liquidators were appointed by the court on the same date on the basis of allegations that Eric Chim was misappropriating or dissipating assets.

51.  The petition was opposed by Wing Fai (under the control of Eric Chim) until 2 December 2002.  On 9 December 2002 a winding up order was made uncontested.  By an order of the court dated 28 February 2003, the provisional liquidators were appointed liquidators of Wing Fai.

The course of these proceedings

52.  The misfeasance summons that is the subject of this trial was issued on 30 August 2004, accompanied by the 11^th affidavit of David Kennedy filed in support.  Points of Claim were filed by the Liquidators on 10 September 2004, and Points of Defence of all 3 respondents on 23 December 2004.  Further and better particulars of the Points of Claim were filed by the Liquidators on 19 April 2006. 

53.  From that date there was a period of inaction until 22 May 2008 when the Liquidators issued a summons for directions.[9]  On 19 August 2008 the respondents took out a summons to strike out the proceedings for want of prosecution.  The application was rejected by Kwan J on 7 October 2009, and later by the Court of Appeal[10] and the Court of Final Appeal.[11] 

54.  Meanwhile, the respondents had also applied by summons dated 1 December 2009 to strike out the Points of Claim on the basis that they disclosed no reasonable cause of action, were embarrassing and an abuse of process.  The application was dismissed by Chu J on 28 March 2011.  I shall refer to this interlocutory battle in §§199–202 below as it is significant for the purpose of ascertaining the nature and scope of the Liquidator’s case on the respective respondents’ liability.  On 10 May 2013, Mimmie Chan J gave leave for the Liquidator to amend the Points of Claim principally to add an allegation of negligence and to revise the schedule containing particulars of the payments-in and -out.

55.  By early 2014, the 2^nd respondent had become separately represented and, having pleaded guilty to the criminal charges, filed Amended Points of Defence which, inter alia, admitted that no goods were delivered in consideration of the payments to Famous Capital and King Capital and averred that the letters of credit were a method of obtaining financing on favourable terms for the Group.

56.  Since then, the Points of Claim had been re-amended in May 2015 and re-re-amended in September 2016, whereby the particulars of the payments-out and payments-in as well as their total amounts had undergone considerable changes, and re-re-re-amended during the trial in October 2016 to cure the omission of pleading the conviction of the 2^nd respondent in compliance with O 18 r 7A.  The total amount claimed was initially $32.69 million, reduced to $29.49 million by amendment, increased to $56.53 million by re-amendment, and reduced to $36.15 million by re-re-amendment.

Criminal proceedings

57.  In early 2004, David Kennedy, one of the then liquidators of Wing Fai, made a report of the case to the police, enclosing the transcript of the private examination of the 1^st and 2^nd respondents under s 221 of the then Companies Ordinance (Cap 32).  An application by those two respondents to commit Mr Kennedy for contempt of court, on the basis that he had done so without leave of the court, eventually failed in the Court of Final Appeal in October 2009.[12] 

58.  The Liquidators’ report led to investigation resulting in 5 persons being eventually charged in 2010 with 13 offences, namely, the 2^nd respondent herein, Carmen Cheng, Mandy Ip, Masada Tsui and Tony Lo — in other words, the 2^nd respondent and all the directors of Famous Capital and King Capital.  The 2^nd respondent, Carmen Cheng and Mandy Ip were charged with 10 counts of conspiracy to defraud the issuing banks of 10 letters of credit in favour of Famous Capital.  The 2^nd respondent, Masada Tsui and Tony Lo were charged with one count of conspiracy in relation to a letter of credit in favour of King Capital.  Carmen Cheng and Mandy Ip were also charged with money laundering in connection with the proceeds of the letters of credit issued to Famous Capital.  Masada Tsui and Tony Lo faced a similar money laundering charge relating to the letter of credit in favour of King Capital. 

59.  In October 2013, the 2^nd respondent pleaded guilty to all 11 charges against her.  The prosecution offered no evidence against Carmen Cheng, as a result of which all charges against her were dismissed.  Masada Tsui pleaded guilty to the conspiracy charge and the prosecution offered no evidence against her on the money laundering charge.  On 25 November 2013, Mandy Ip and Tony Lo were convicted after trial by the District Court.  The former was found guilty on both the conspiracy and money laundering charges in relation to Famous Capital; the latter was found guilty on the money laundering charge but not the conspiracy charge in relation to King Capital.[13] 

60.  By virtue of s 62 of the Evidence Ordinance (Cap 8), the conviction of the 2^nd respondent is admissible in this trial as evidence to prove, where relevant, that she committed the offences of which she was convicted.  The 11 letters of credit that were the subject of the criminal proceedings are among the transactions impugned in the present proceedings.[14]

Other proceedings

61.  Since 2003, the Liquidators had also been engaged in various sets of civil proceedings against China Rich and related entities and persons “based on [the Liquidators’] refusal to recognise the effect of set‑off of inter-company accounts pursuant to [the] Set Off Agreement”.[15]  A global settlement was reached in September 2016 pursuant to which there was a mutual release, discharge or waiver from all claims and actions between any of China Rich and its subsidiaries, Benefit and Fitzroya on the one hand and Wing Fai, Wai Shun and Zhukuan Wing Fai on the other, although further details were not disclosed.

C.  THE PARTIES’ CONTENTIONS

(1)  The Liquidator’s case

62.  The Liquidator’s case is that the respondents were at all material times directors or de facto directors or officers of Wing Fai.  Famous Capital and King Capital were associated with Wing Fai and under the control of the 1^st and 2^nd respondents. 

63.  The Liquidator alleges that the respondents procured or authorised to be made, from the available funds or credit of Wing Fai under their control, various payments to Famous Capital and King Capital. These payments were mostly purportedly for goods purchased when in fact no such goods were sold or delivered to Wing Fai, and the rest were for no known consideration.

64.  As for the particulars of the payments-out and -in, the Liquidator alleges:

(1)  Between 6 May 1999 and 1 February 2002, 36 payments-out were made to Famous Capital totalling $75,230,248.87, and 30 payments‑in were received by Wing Fai totalling $47,700,000.00, with a shortfall of $27,530,248.87.

(2)  Between 14 November 2001 and 18 April 2002, 12 payments-out were made to King Capital totalling $29,421,053.40, and 9 payments‑in were received by Wing Fai totalling $20,800,000.00, with a shortfall of $8,621,053.40.

65.  The Liquidator alleges that the respondents knew or ought to have known that no relevant goods had been or were to be sold or delivered to Wing Fai.  The payments were therefore not made for any legitimate commercial or other purpose of Wing Fai.

66.  The Liquidator alleges that in authorising the payments‑out, the respondents were dishonest, guilty of misfeasance, in breach of duty and/or negligent.  As a result, Wing Fai has suffered loss in the total sum of $36,151,301.87. The Liquidator claims a declaration that the respondents were guilty of misfeasance, breach of duty and breach of trust, and an order that each of them pay to the Liquidator any sum they are liable to repay or restore to Wing Fai.

67.  The Liquidator claims compound interest pursuant to s 48 of the High Court Ordinance or the equitable jurisdiction of the court at the rate of 8% pa or other appropriate rate.

(2)  The 1^st respondent’s case

68.  The 1^st respondent pleads that Wing Fai was on a day‑to‑day basis managed by two senior staff members, namely, Vincent Lo and Eric Chim.  Vincent Lo would report important decisions to him but the 1^st respondent never disagreed with Vincent Lo given his experience in Wing Fai.  Further, the 1^st respondent contends he did not have time to “micro‑manage” every single matter of Wing Fai.  He could not read English and relied on the oral reports of his co‑directors or the staff.

69.  The 1^st respondent denies he was a de facto director of Wing Fai after 26 July 2001, contending that what he did concerning Wing Fai was incidental to his position as Chairman of China Rich.

70.  As for the payments-out and payments‑in to and from Famous Capital and King Capital, the 1^st respondent says he does not have any direct knowledge, except that he was told that the payments were made in the ordinary course of Wing Fai’s business for its benefit.  On the disputed payments-out, the 1^st respondent essentially took the same position as the 2^nd respondent with the exception of FC-38.[16]

(3)  The 2^nd respondent’s case

71.  The 2^nd respondent avers that she ceased to be a director of Wing Fai on 26 July 2001 and denies that she was a de facto director thereafter.  She admits Famous Capital and King Capital were related to Wing Fai and neither carried on any business.

72.  She admits the fact, admits that she ought to have known, but denies that she knew, that no goods were delivered to Wing Fai in consideration of the payments-out.  She admits that the respondents signed documents acknowledging deliveries of asphalt, concrete mix and steel bars which had never been delivered.

73.  She avers that the letters of credit were a “method of obtaining financing on favourable terms for the China Rich Group, which included [Wing Fai] up until 22 April 2002”, and that she had always intended that Wing Fai should be indemnified by the China Rich Group in respect of debts incurred to relevant issuing banks to the extent that funds were utilised by other members of the Group.  She avers that this group financing was a proper purpose of Wing Fai.

74.  She avers that the nature and purpose of the letter of credit transactions was known to China Rich, Benefit and Wing Fai through their directors and officers and executed with their informed consent. Her conduct was therefore ratified by Wing Fai’s directors and/or its sole shareholder Benefit and/or the ultimate parent China Rich.  She also avers that there was ratification by Benefit and/or China Rich as a result of the Set‑off Agreement, the discharge of Wing Fai’s bank indebtedness and the Sale and Purchase Agreement. 

75.  She avers that the bank indebtedness arising from the impugned transactions were all secured by cash deposits or guarantees given by China Rich, and Wing Fai’s indebtedness to the banks was discharged by China Rich, Fitzroya or Benefit by no later than May 2002, as a result of which any residual loss to Wing Fai was extinguished.

76.  As to the details of the payments-out and payments‑in, she denies that the schedule to the Re-Re‑Re‑Amended Points of Claim constitutes a complete listing.  Further:

   Famous Capital

(1)  She admits that between 15 January 2001 and 1 February 2002, payments-out were made to Famous Capital by cheques or letters of credit totalling $53,880,995.79 from available credit or funds of Wing Fai.

(2)  She denies that 14 specific payments-out[17] were made from available credit or funds of Wing Fai between 6 May 1999 and 20 February 2001 totalling $23,252,273.00.

(3)  She avers that between 15 January 2001 and 28 January 2002, at least 30 payments-in were made to Wing Fai, directly or indirectly by Famous Capital totalling $47,700,000.00.

King Capital

(4)  She admits that between 14 November 2001 and 18 April 2002, 12 payments-out were made to King Capital by cheques or letters of credit totalling $29,421,053.40 from available credit or funds of Wing Fai.

(5)  She avers that between 26 November 2001 and 18 April 2002, at least 9 payments-in were made to Wing Fai, directly or indirectly by King Capital totalling $20,800,000.00.

(4)  Liquidator’s reply to the 2^nd respondent’s case

77.  As against the 2^nd respondent’s case, the Liquidator contends, inter alia, that the use of the letters of credit for the alleged purpose of obtaining finance for the Group was “invalid and not binding” on Wing Fai in that it lacked authority, was a fraud on Wing Fai, was not a proper purpose nor in the interests of Wing Fai.

78.  The Liquidator avers the Set-Off Agreement was “invalid and not binding” on Wing Fai for the reasons that it lacked authority, that it was entered into in breach of the directors’ duties as it benefitted the Group at the expense of Wing Fai, that the respondents caused China Rich to act in breach of the letter of comfort by refusing to provide financial support, and that China Rich remained liable to provide support pursuant to the letter of comfort.  Further, it is averred that the Set‑Off Agreement constituted disposition with intent to defraud creditors under s 60 of the Conveyancing and Property Ordinance (Cap 219) and was therefore void.

(5)  The 3^rd respondent’s case

79.  There was some suggestion at the interlocutory stage that the 3^rd respondent was suffering from certain degenerative disease of the mind.  Apart from the original Points of Defence filed on behalf of all three respondents on 23 December 2004, the 3^rd respondent has not filed any further pleading or witness statement.  For some years he has not taken any part in and has effectively disappeared from these proceedings. There was no valid address for service on him.  His current whereabouts is unknown.  He was 71 in 2002 and therefore by now about 86 years of age.  On 16 June 2015, an order was made dispensing with service on him of any further documents in these proceedings.  Despite advertisements published on newspapers, he did not appear in the trial and no submissions were made on his behalf.

D.  THE ISSUES

80.  For a long time in this case, the focus had been put on what might have been the key question, namely, whether the letters of credit were issued for genuine, commercial transactions involving the actual sale and purchase of goods.  With the plea of guilty by the 2^nd respondent in the criminal court, this is no longer a serious issue (albeit formally in issue between the Liquidator on the one hand and the 1^st and 3^rd respondents on the other).

81.  On the basis of the parties’ pleaded cases and submissions, the principal issues that arise for determination may be broadly described as follows:

(1)  whether the 1^st and 2^nd respondents were, from 26 July 2001 to 18 April 2002, de facto directors or officers of Wing Fai;[18]

(2)  whether the 14 payments-out denied by both the 1^st and 2^nd respondents and the 1 additional payment‑out denied by the 1^st respondent were in fact payments made out of Wing Fai’s available credit or funds;

(3)  whether each of the respondents procured or authorised the payments-out to Famous Capital and King Capital and whether they are jointly and severally liable for all the payments;

(4)  whether in procuring or authorising the payments‑out, the respondents acted dishonestly, in breach of duty or negligently;

(5)  whether the impugned transactions had been ratified by Benefit and China Rich;

(6)  whether Wing Fai sustained any loss;

(7)  the quantum of liability of each of the respondents; and

(8)  whether compound interest should be awarded and for what period.

E.  SUBMISSION OF NO CASE

82.  At the end of the Liquidator’s case, Mr Barlow SC for the 2^nd respondent elected to call no evidence and submitted there was no case for his client to answer.

83.  In the case of a no case submission coupled with an election not to call evidence, all the evidence will be before the court. The question raised by the 2^nd respondent’s submission simply becomes, as in the case of the 1^st and 3^rd respondents who have not made that submission, whether or not the Liquidator has made out his case against the respondent in question by the admissible evidence to the required standard: Michael John Miller v Margaret Cawley [2002] EWCA Civ 1100.

F.  THE WITNESSES AND DOCUMENTS

84.  The witnesses called by the Liquidator to testify include:

(1)  Vincent Lo, who was at all material times a director of Wing Fai up to 4 May 2002 and a director of China Rich up to 3 August 2002.  He was careful and forthcoming in his evidence and did, in my view, genuinely attempt to tap into his memory.  He appears to have had a low opinion of Eric Chim (certainly by the time of trial), and was somewhat defensive in his evidence at times but, on the whole, I accept him as an honest witness.  He is largely independent, except that he claims to be a creditor of Wing Fai for about $2.9 million (whose proof of debt remains to be adjudicated).

(2)  Mandy Ip was educated in the Mainland.  She was a relatively low‑level accounts clerk.  She was subpoenaed to give evidence but was unhelpful and repeatedly said she could not remember anything.  She was clearly reluctant to have anything further to do with this whole saga (which had resulted in a 24-month prison sentence for her), and was under considerable stress over being compelled to come to court to give evidence.  I have a distinct impression that she consciously or subconsciously did not want to recall the events over the relevant period.

(3)  Anne Kong was an accounts manager in Wing Fai at the time.  She left Wing Fai and the Group about a month after Wing Fai was sold to Sino Glister in April 2002.  She gave her evidence in a straightforward manner.  On the whole I accept her evidence, though one must nevertheless be cautious in acting simply on witnesses’ recollection after such a long lapse of time.

(4)  The Liquidator also called Mr David Kennedy (who was one of the two provisional liquidators and, later, liquidators of Wing Fai, until October 2005) and Mr Nicholas Hill himself (who was between December 2004 and June 2009 one of the joint and several liquidators of Wing Fai and thereafter its sole liquidator).  Neither of them of course was privy to the contemporaneous events prior to the liquidation.  Their evidence centred principally round the course of the liquidation, their investigation and legal proceedings.  Parts of their witness statements were, on objection raised by Mr Barlow, been ruled inadmissible as being opinion or conjecture.

85.  The 1^st respondent did not exchange any witness statement by the deadline imposed by an unless order made in June 2014, as a result of which he was debarred from calling any witness at trial.

86.  The 2^nd respondent filed witness statements but elected to make a submission of no case and not to give evidence.  She did cause subpoenas to be issued to 2 solicitors Mr Camille Jojo and Mr Thomas Fyfe shortly before the trial but, for reasons I had already handed down,[19] I did not allow that evidence to be adduced.

87.  Having regard to the fact that the main events took place more than 14 years ago by the time of trial, I have sought primarily to refer to the documents in seeking to resolve questions of fact, bearing in mind the objective circumstances and overall probabilities: see The Ocean Frost [1985] 1 Lloyd’s Rep 1, 57.  I would hesitate to base any crucial finding solely on any oral evidence given out of recollection.

88.  A large number of documents (over 29,000 pages in total) have been placed into the trial bundles.  They contain, inter alia, statements of 2 persons, namely, Eric Chim and Julia Ip that the Liquidator relies on as hearsay statements.  The 2^nd respondent has filed a notice of objection.  Pursuant to s 47 of the Evidence Ordinance (Cap 8), I have declined to exclude such evidence as against the 2^nd respondent.[20] I have however reminded myself at all times of the need for caution before placing any weight on untested statements.

89.  In particular, Eric Chim made two (hitherto unfiled) affirmations.  The Liquidator served a hearsay notice but when the 2^nd respondent objected, the Liquidator took out a summons, shortly before trial, for leave under O 38 r 2 to adduce the affirmations into evidence without cross‑examination. The application was opposed and when by Day 4 of the trial (18 October 2016) the Liquidator had still been unable to call Eric Chim to testify, it was withdrawn.  His affirmations do not therefore form part of the evidence in the trial.  There remain however statements made by Eric Chim to the police between 2004 and 2007 as well as to the Liquidators at an interview in 2002.

90.  It would in my view be unsafe to rely on those statements of Eric Chim.  Although reliance is now sought to be placed on his evidence, the Liquidators have previously had very serious concerns over the integrity and veracity of Eric Chim.  The application for the appointment of provisional liquidators for Wing Fai was made because Enfield, the petitioner, then in the control of liquidators from RSM Nelson Wheeler, considered that Chim had a propensity to dissipate Wing Fai’s funds.  In August 2002, Kennedy wrote to Chim’s solicitors saying he had lied on oath.  In October 2002,[21] Kennedy said Eric Chim had told many lies about what happened and he did not believe him.[22]  In oral evidence, Kennedy accepted he found he had to treat statements of Eric Chim with caution and “healthy scepticism”. 

91.  In the provisional liquidators’ report dated 28 January 2003, it was stated that Wing Fai, through Eric Chim, had resisted the appointment of the provisional liquidators “at every possible opportunity” until 2 December 2002.  It was also said that Eric Chim had made “false allegations” to the court and the Official Receiver, and “misled” and spread “false rumours” amongst sub‑contractors, leading to difficulties in obtaining access to the construction sites.  A long list of the hostile steps he took were set out in the report.  Despite being a registered director of Wing Fai by July 2002, he had also failed, despite numerous demands, to provide the provisional liquidators with a statement of affairs.

92.  Further, it seems to me that Eric Chim had a clear motive for giving statements which might have the effect of shifting to the previous management the responsibility for any deficiency of assets or lack of books and records, in order to minimise his own responsibility as the person in charge of Wing Fai during the months immediately prior to its provisional liquidation.  In these circumstances, I consider that no weight can safely be placed on Eric Chim’s statements.

93.  There was an ongoing debate that lasted well into the trial as to whether the respondents had given proper discovery of documents.  The evidence does not all speak with one voice but I think the following may be said:

(1)  Part of the staff of Wing Fai and part of the documents of Wing Fai, especially those on the construction projects, had moved back to Lee May Building in 2001 when the Connaught Road office became over‑crowded.

(2)  Documents relating to the several ongoing construction projects of Wing Fai were all handed over to Eric Chim or his staff on or around 22 April 2002.

(3)  After 22 April 2002, the Group retained the documents relating to the Old Accounts of Wing Fai (including cheque books) pursuant to the terms of the Sale and Purchase Agreement that gave them control of those accounts.

(4)  The Group was likely to have within its computerised accounting system information concerning Wing Fai up to 22 April 2002.  The Group may also have retained hard copies but this is not inconsistent with Eric Chim also being given copies.

(5)  There is some evidence in the form of a documents receipt signed by a staff member of Wing Fai that, after the Sale and Purchase Agreement, copies of certain documents were given to the 3 construction companies, though it is far from conclusive.  The employee who signed the receipt also witnessed Eric Chim’s signature on the Sale and Purchase Agreement.  Although the receipt suggests a “full set of accounting system which includes all computer files and data” was supplied, Anne Kong’s evidence, which I accept, was that Wing Fai’s staff (presumably without the proprietary software) could no longer use the old computer system and had to do their accounting on Excel files instead.  Anne Kong, however, left in June 2002 and did not know what happen afterwards.

(6)  The accounts staff of Wing Fai did move some further documents and computers to the Lee May Building office following the sale in April 2002.  Eric Chim himself admitted to the provisional liquidators in November 2002 that the books and records of Wing Fai (but not the documents of the Old Accounts) were principally kept in Lee May Building.

(7)  To the extent that the computers found at the Lee May Building office had been tampered with, they were likely to have been tampered with by Eric Chim, as indeed Kennedy suspected.  In the provisional liquidators’ report dated January 2003, Eric Chim was accused of removal and possible destruction of Wing Fai’s books and records.

(8)  When the provisional liquidators went to the Lee May Building office of Wing Fai in July 2002, they were directed by Eric Chim only to the 4/F office, and were never told that Wing Fai had premises on the 7/F of the same building used for filing and storage.  It does not appear that the Liquidators ever set foot on the 7/F premises.

(9)  The documents within the accounting system of the Group, such as the general ledgers, were not documents within the possession, custody or power of the respondents, who were but shareholders or directors of China Rich and other Group companies: see Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627, 635–636 which analysed power in terms of a presently enforceable legal right; a fortiori after the respondents eventually left the Group.  The Liquidator has apparently never sought third party discovery from China Rich or its subsidiaries or applied for production of documents by them pursuant to s 221 of the predecessor Companies Ordinance.

94.  In these circumstances I do not think much can safely be inferred from certain documents not being available within the trial documents.

G.  ISSUE 1 — DE FACTO DIRECTORSHIP

(1)  Scope of s 276

95.  S 276 provides:

“If in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present officer or liquidator or receiver of the company, has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of duty in relation to the company which is actionable at the suit of the company, the court may, on the application of the Official Receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct of the promoter, officer, liquidator or receiver, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, or breach of trust[23] as the court thinks just.”

96.  It is common ground that s 276 merely provides a summary procedure whereby existing rights of a company in liquidation may be enforced against past or present officers of that company. The section does not create any new duty on the part of or any independent cause of action against officers of a company: see eg In re B Johnson & Co (Builders) Ltd [1955] Ch 634, 647–648; Revenue and Customs Commissioners v Holland [2010] 1 WLR 2793, §55.  There is no dispute that breach of duty covers negligence: Cohen v Selby [2001] 1 BCLC 176, §20.

97.  The remedy afforded by this provision may be sought only against the limited class of persons to whom the section applies: Holland, supra, §38.  The category of persons relevant in this case is “officer”.  That term as defined in s 2 “includes a director, manager or company secretary of the body corporate”.  A director, as defined in s 2, “includes any person occupying the position of director by whatever name called”.  This definition includes what is commonly known as a “de facto director” but does not cover a “shadow director”[24]: Holland, §22.[25] 

(2)  Relevant capacity

98.  It follows that I should reject the Liquidator’s initial submission that irrespective of whether the respondents were de facto directors, they must be officers because of their trusteeship of corporate funds under their control.[26]  Directors are not trustees in the full or strict sense[27], although no doubt they owe analogous duties in respect of corporate assets that come under their control.  But insofar as the respondents were not directors, any duty on them arising from such other capacity or from the control they had over relevant assets can only be pursued elsewhere, not in these proceedings which are confined by the scope of s 276.

99.  The Liquidator does not contend that any of the respondents was a manager or company secretary.  The only material capacity is “director”.  The 3^rd respondent was a registered director at all material times and so clearly falls within the scope of s 276.  The 1^st and 2^nd respondents, however, resigned as directors of Wing Fai on 26 July 2001.  The question that arises is — in relation to the payments‑out and payments‑in made after that date[28] — whether or not, between 26 July 2001 and 18 April 2002,[29] the 1^st and 2^nd respondents were de facto directors of Wing Fai.

(3)  Principles on de facto directorship

100.  For the law on de facto directorship, the following passage in the decision of Millett J in In re Hydrodam (Corby) Ltd [1994] BCLC 180, 183 has been influential:

“A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.”

The passage has been applied in Hong Kong: see eg Re HKSC Foods Ltd (unrep, HCCW 456/2008; 15 July 2009) at §46 per Kwan J; Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd (unrep, HCMP 2625/1988 and HCA 1670/1989, 25 March 1997), sections 7.1 and 7.2, per Barnett J; Aktieselskabet Dansk Skibsfinansiering v Wheelock Marden & Co Ltd (unrep, CACV 24, 25, 36, 37 & 104/1994, 17 November 1994), pp 10–11.  Whilst influential, it has been recognised for some time that the passage is not an exhaustive statement of the law: In re Richborough Furniture Ltd [1996] 1 BCLC 507, 522h.

101.  The law in the UK has since developed and the leading case is now the decision of the Supreme Court in Revenue and Customs Commissioners v Holland, supra.  The English Court of Appeal has regarded the judgment of Lord Collins there as containing the ratio decidendi of the decision: Smithton Ltd v Naggar [2015] 1 WLR 189 §§26, 75.  While the above passage in In re Hydrodam (Corby) Ltd was broadly approved by the Supreme Court, it was also pointed out that whether a person is “held out as a director” and “claims and purports to be a director” are relevant but not necessary factors: Holland, §90.

102.  In Holland itself, Lord Collins, whilst adopting the position that there was no one single definitive test for a de facto director (see §91), said (at §93) that the correct formulation in a case of the kind before the court was that in order to make a person liable for misfeasance as a de facto director,

“the person must be part of the corporate governing structure, and the claimants had to prove that he assumed a role in the company sufficient to impose on him a fiduciary duty to the company and to make him responsible for the misuse of its assets”.

103.  In Smithton Ltd v Naggar [2015] 1 WLR 189, Arden LJ (with whom Elias and Tomlinson LJJ agreed) stated a number of points of general practical importance as follows:

“34. The concepts of shadow director and de facto [director] are different but there is some overlap.

35. A person may be de facto director even if there was no invalid appointment. The question is whether he has assumed responsibility to act as a director.

36. To answer that question, the court may have to determine in what capacity the director was acting (as in Holland).

37. The court will in general also have to determine the corporate governance structure of the company so as to decide in relation to the company’s business whether the defendant’s acts were directorial in nature.

38. The court is required to look at what the director actually did and not any job title actually given to him.

39. A defendant does not avoid liability if he shows that he in good faith thought he was not acting as a director. The question whether or not he acted as a director is to be determined objectively and irrespective of the defendant's motivation or belief.

40. The court must look at the cumulative effect of the activities relied on. The court should look at all the circumstances ‘in the round’ (per Jonathan Parker J in Secretary of State v Jones [1999] BCC 336).

41. It is also important to look at the acts in their context. A single act might lead to liability in an exceptional case.

42. Relevant factors include: (i) whether the company considered him to be a director and held him out as such; (ii) whether third parties considered that he was a director.

43. The fact that a person is consulted about directorial decisions or his approval does not in general make him a director because he is not making the decision.

44. Acts outside the period when he is said to have been a de facto director may throw light on whether he was a de facto director in the relevant period.

45. In my judgment, the question whether a director is a de facto or shadow director is a question of fact and degree. …”

104.  I would respectfully adopt as applicable in Hong Kong the approach set out in Lord Collins’ judgment in Holland and in Arden LJ’s judgment in Smithton.

105.  One of the submissions made on behalf of the 2^nd respondent is that insofar as she did certain acts in relation to or on behalf of Wing Fai, she acted in a capacity other than as a director of Wing Fai.  This is a question of fact to be resolved on the evidence.  While there has to be a reason for attributing an act to a person as a de facto director if there are other capacities in which a person could have acted, the correct test is based on actuality, not possibility.  There is no rule that if there were other capacities in which a person could have acted without assuming to act as a director, then the acts should be attributed to such other capacities: see Smithton at §§63–70 & 75. 

106.  Mr Barlow relied on the statement of Arden LJ in Smithton at §26 that “the volume of decisions which a person is said to have made as a de facto director will not have significance if those decisions were made in some other capacity”.  As stated above, however, the critical word in this sentence is “were”; it does not mean “could have been”.  This imports a question of fact, not of possibilities.

107.  It was further submitted that wherever there is a lack of clarity as to the capacity in which certain actions were taken, the 2^nd respondent “must be entitled to the benefit of the doubt”: per Deputy Judge Timothy Lloyd QC in In re Richborough Furniture Ltd [1996] 1 BCLC 507, 524; quoted by Lord Hope, without disapproval, in Holland at §30.  I accept that the burden of proof lies on the person alleging de facto directorship, ie the Liquidator in this case.  There is no suggestion in the authorities, however, that there has to be proof beyond reasonable doubt.  The Liquidator simply has to establish his allegation on the balance of probabilities.

108.  In addition, it should be borne in mind that the role of a de facto director need not extend over the whole range of a company’s activities: In re Mea Corporation Ltd [2007] 1 BCLC 618; Smithton, §32.

(4)  Pleadings

109.  As against the 2^nd respondent, the Points of Claim give the following particulars for the plea of de facto directorship:

“(i) Carried out the functions of a director of the Company;

(ii) By remaining as authorised signatory of all the Company’s bank accounts until 6 July 2002 save for an account operated by the Company following its sale at HSBC;

(iii) Authorising orders placed by the Company with suppliers and other transactions that exceeded certain financial limits;

(iv) Ultimately responsible for the employees of the Company;

(v) Executing at least one bond on behalf of the Company under the Company’s Common Seal in favour of the Hong Kong Housing Authority;

(vi) Exercising an overall supervisory role over the Company’s affairs, including financial and operational matters, and playing significant roles in monthly management meetings;

(vii) Retaining control of the Company’s records;

(viii) The person to whom another of the Company’s directors, Vincent Lo Sek Chiu, and senior staff, such as Eric Chim Kam Fai, reported and regularly deferred and took instructions; and

(ix) Executing a substantial number of financial documents on behalf of the Company using a “Wing Fai Director” chop, thereby holding herself out to third parties as a director of Wing Fai.”

110.  As against the 1^st respondent, the same particulars except (iv) and (v) are pleaded.

111.  It was submitted that certain acts and matters now relied upon by the Liquidator were not pleaded, such as the allegation that the 1^st and 2^nd respondents continued to control the affairs of Wing Fai and were responsible for and made all decisions relating to Wing Fai’s finances including the approval of payments.[30]  It seems to me, however, that particulars (i) and (vi) cover these matters.  In particular, item (i) is very wide and no attempt to narrow it down was made by the respondents by requesting particulars.  Moreover, in Kennedy’s 11^th affidavit, filed with the misfeasance summons, it was expressly alleged that the 1^st and 2^nd respondents, notwithstanding their resignations, controlled the affairs, particularly the financial affairs, of Wing Fai.[31]

(5)  Relevant facts and analysis

112.  Under the articles of association of Wing Fai, the business of the company shall be managed by the directors, who may exercise all those powers of the company not required to be exercised by the company in general meeting, subject to such regulations as may be prescribed by the company in general meeting (art 85).  The directors may appoint (and remove) managers or agents for the company and delegate to them any of the powers vested in the directors, with power to sub‑delegate (art 86).  All cheques, bills of exchange and other negotiable or transferable instruments, and all receipts for moneys paid to the company, shall be signed, drawn, accepted or otherwise executed in such matter as the directors shall from time to time by resolution determine (art 89).  The directors may exercise all the powers of the company to borrow money and to mortgage or charge all or any part of the undertaking, property and assets of the company (art 90).  The seal of the company shall not be affixed to any instrument except by the authority of a resolution of the directors, and every such instrument shall be signed by one director or some other person nominated by the directors for the purpose (art 113).  The company’s powers of having official seals conferred by the Companies Ordinance were vested in the directors (art 114). The directors were required to cause proper and true books of account to be kept (art 130).

113.  In the period in question (26 July 2001 to 18 April 2002), the registered or de jure directors of Wing Fai were Vincent Lo and the 3^rd respondent.

114.  The 3^rd respondent was an executive director of China Rich as well.  He was invited by the 1^st and 2^nd respondents to join the Group.  He had been a director of Wing Fai since June 1998.  He was the director in charge of administration — daily administration and daily operation of Wing Fai.

115.  It was Vincent Lo and Eric Chim who were responsible for the day‑to‑day management of the construction business of Wing Fai.  Both of them had ample experience in the construction industry and were the senior “construction men” in Wing Fai after the takeover by China Rich.

116.  At the material time, up to August 2002, the 3 respondents and Vincent Lo were the 4 executive directors of China Rich.  The annual reports of the Group for the year ended 31 July 2001 and 2002 stated that the 1^st respondent was actively involved in both the strategic planning and overall management control of the entire Group, the 2^nd respondent was actively involved in the corporate planning, financial management as well as the daily operations of the Group.  The 3^rd respondent was stated to be an executive director, without any particular portfolio being mentioned as his responsibility.  The 2001 annual report stated that Vincent Lo was in charge of all construction projects of the Group.

117.  I shall discuss specific aspects of the evidence below although it has to be borne in mind that at the end, the relevant matters have to be assessed cumulatively and looked at “in the round”.

Role in Wing Fai’s affairs, including financial and operational matters

118.  As the only director of Wing Fai who testified at trial, Vincent Lo’s evidence is significant.  I accept his evidence in this context, which was not seriously challenged.  Vincent Lo joined Wing Fai in December 1993, after working in the Government.  He was appointed a director of Wing Fai in 1998 and a director of China Rich in late 1999.  He was responsible for the construction‑related operations of Wing Fai.  He had to attend to the various contract works and the actual operation on various sites, handling the nuts and bolts of a construction business including the numerous claims generated.  It seems that he had authority to take cost‑cutting measures such as reducing staff salaries and other labour costs.  He said however that he had to discuss operational issues with the 1^st respondent and obtain his permission on tasks such as payment to sub‑contractors, changes of sub‑contractors and changes of key management staff.

119.  Even on the construction business, Vincent Lo would consult the 1^st respondent on important matters since he was “the boss”.  Vincent Lo could only place orders with suppliers that had been previously agreed with the 1^st respondent.  The 1^st respondent had the final say on the price to be put in a tender.  He also decided which sub‑contractors and suppliers should be paid in priority.

120.  One instance that evidenced the 1^st respondent’s control was when he decided that despite Eric Chim used to report to Vincent Lo, the responsibility for Wing Fai’s existing construction projects would henceforth be divided between Vincent Lo and Eric Chim, so that Lo would be responsible for contracts ST75/97 and DC97/07 and Chim for contracts DC98/11 and DC98/04 respectively.  However, Vincent Lo was not clear about the timing of this incident and since it could have happened before July 2001, I place no weight on it.

121.  In his defence, the 1^st respondent stated that Vincent Lo and Eric Chim (as Assistant General Manager) “literally made all decisions (save for financial matters which were overseen by the Second Respondent) for the Company”.  I accept that the two men were put in charge of the day‑to‑day operations of the ongoing construction projects but, having regard to the evidence, I do not think that the 1^st respondent’s proposition was made out on a more general level.  Nor do I accept that Vincent Lo was the “soul and centre of all directors” as alleged by the 1^st respondent in his defence. 

122.  Vincent Lo said that he had very limited involvement in the financial aspects of Wing Fai’s affairs, which were the responsibilities of the 1^st and 2^nd respondents.  He said that anything relating to financial issues required either the 1^st or 2^nd respondent’s ultimate consent or approval before Wing Fai “could spend any money”.  They made all decisions relating to Wing Fai’s finances, including the approval of payments and the preparation of accounts, with the 1^st respondent having the final say.  Financial reports were prepared by the accounts department under their supervision.   Vincent Lo signed the audited accounts for the year ended 31 July 2001 in November 2001 in the knowledge of and reliance on the fact that the 1^st and 2^nd respondents had approved them.

123.  As an example of their control over finance, Vincent Lo said Wing Fai’s cheque books were kept in the Connaught Road office.  Whenever he signed a cheque, there would almost always be a Group A signature (ie that of the 1^st or 2^nd respondent — see below) on the cheque already, enabling him to be satisfied that at least one of them had authorised the payment.

124.  From Vincent Lo’s point of view, notwithstanding their resignations, the 1^st and 2^nd respondents had continued to control the affairs of Wing Fai during the relevant period, up to the time when Vincent Lo was out of action because of a major illness starting 19 April 2002.  The 2^nd respondent continued to be responsible for Wing Fai’s finances and the 1^st respondent made the final decisions.

125.  Anne Kong testified that the accounts department was headed by Johnny Chuang, who was also the Financial Controller of China Rich and reported to the 1^st and 2^nd respondents.  She stated that she was not aware of the resignation of the 1^st and 2^nd respondents as directors of Wing Fai.  They continued to attend Wing Fai’s meetings as its “bosses”.

126.  Specifically, in relation to the letter of credit transactions that have given rise to the claim in this action, at least those that the 1^st or 2^nd respondent was expressly involved in, it seems clear that they were responsible for making the decision to engage in the transaction.  There is no suggestion that Vincent Lo took part in them.  Indeed, the 2^nd respondent pleaded in her defence that the letters of credit were a method of obtaining finance on favourable terms for the Group and she intended that Wing Fai be indemnified by the Group in respect of debts incurred to the issuing banks to the extent that the funds were utilised by other companies in the Group.

127.  Engaging in the letter of credit transactions was an act of borrowing money in the name of Wing Fai, a matter entrusted to the directors under the Articles (art 90).  I do not think that the board resolutions appointing the 1^st and 2^nd respondents (among others) as authorised signatories for bank accounts were tantamount to authorisations for the same people to exercise the power of borrowing on behalf of the company.

128.  Julia Ip’s evidence in this regard, which I accept in relation to the applications signed by the 2^nd respondent, was that within Wing Fai, it was usually the 2^nd respondent who gave instructions for opening a letter of credit and approved the application form.  For letters of credit in favour of Famous Capital and King Capital, the 2^nd respondent provided the information (such as the beneficiary, the amount and the goods concerned).  In contrast, for other letters of credit, the information would be filled in based on the relevant documents such as invoices supplied by the accounts department.

Authorised signatories of bank accounts

129.  There is no dispute that at the material time the 1^st and 2^nd respondents (and the 3^rd respondent) were authorised signatories of all the bank accounts of Wing Fai opened at 8 banks, including the 4 banks from which the impugned payments were made.  The bank mandates on signatories were given mostly in 1998 or 1999 and, despite that the 1^st and 2^nd respondents ceased to be registered directors in July 2001, the mandates were not amended to remove them. 

130.  Specifically, the 3 respondents were the only authorised signatories of the accounts at DBS Kwong On Bank, which required any two of their signatures to operate the accounts.  For the accounts at Standard Chartered Bank, Kwangtung Provincial Bank and Hong Kong Chinese Bank, the 1^st and 2^nd respondents were “Group A” signatories, and one person from each of Group A and Group B had to sign jointly to operate the accounts (in the case of SCB and KPB the company chop was required as well).  The persons named in Group B varied, but for all three banks the 3^rd respondent was included.  In the case of HKCB and SCB, Vincent Lo was also a Group B signatory.

131.  It was submitted that the position was that, by not amending the mandates to remove the 1^st and 2^nd respondents, they had remained authorised signatories by authority of the board and were as such the board’s authorised agents.  In my view, the fact that as between Wing Fai and the banks, the 1^st and 2^nd respondents had certain authority to operate the accounts jointly with signatories is by itself not indicative of de facto directorship.  Of more importance are the decision‑making activities as to the deployment of Wing Fai’s financial resources.  But their status as authorised signatories is part of the set‑up that enabled them to make such decisions.

Cheques

132.  Exhibited to the 11^th affidavit of Kennedy[32] were, inter alia, 96 cheques signed by the 1^st or 2^nd respondent and the 3^rd respondent between October 2001 and July 2002, with the majority dated before 22 April 2002.  Those cheques were stamped with the following company chop:

“For and on behalf of

WING FAI CONSTRUCTION CO., LTD.

 

……………………………………………

   Director ”

133.  Mr Ng and Mr Barlow both pointed out that these were all KPB cheques and that the mandate to KPB specified this particular chop had to be used.  It was submitted that the signatures of the 1^st and 2^nd respondents there were inserted as a requirement of a Group A signature, and did not mean that they were directors of Wing Fai.  From an objective point of view, however, it seems to me that the signatures together with the chop did amount to a representation, or holding out, both to the payees and to KPB, that the signatures were those of the directors of Wing Fai.

Letters of credit documents

134.  Also exhibited to Kennedy’s 11^th affidavit[33] were 82 documents (including applications for letter of credit, trust receipts and cargo receipts) which the 1^st respondent or the 2^nd respondent signed together with the 3^rd respondent using the above company chop.  Again the bank in question was KPB but the documents included not only those relating to Famous Capital and King Capital but also documents relating to genuine letters of credit transactions.  Thus there were, for instance, cargo receipts issued by Wing Fai to genuine suppliers bearing that chop and the respondents’ signatures.  It seems to me there was a holding out of the 1^st and 2^nd respondents (as the case may be) as directors of Wing Fai to those third parties as well.

Letters to banks

135.  Further, on 16 April 2002, the 2^nd and 3^rd respondents issued letters to Bank of East Asia and ICBC giving instructions for the repayment of overdraft using existing fixed deposits.  They signed the letters on behalf of Wing Fai using the company chop set out in §132 above which likewise held them out as directors.

Monthly progress meetings

136.  After their resignation, the 1^st and 2^nd respondents had continued to participate in monthly “Internal Progress Meetings” of Wing Fai where issues concerning Wing Fai’s construction projects were discussed and managed.  The impression one gets from the minutes is that they were not too familiar with the details of the projects but were concerned about the financial aspects.  The 1^st respondent was the “boss” receiving reports and occasionally giving directions, while the 2^nd respondent was mainly concerned with financial matters.  This corroborates Vincent Lo’s evidence that when it came to finance or contentious matters, the 1^st respondent would make the final decision and that the 2^nd respondent was mainly responsible for financial matters.

137.  Thus, for example, in the meeting on 25 August 2001, in relation to a project in Kam Tin, the 1^st respondent asked Vincent Ip to prepare a forecast of work done and payments to sub‑contractors and suppliers every week “for finance control and distribution of payments”. On another project where there were issues concerning works orders, the 2^nd respondent “instructed” Eric Chim to execute the contract in a way that would achieve more benefit to Wing Fai.  In the 22 September 2001 meeting, on the Kam Tin project, the 1^st respondent asked Kenny Kee to report to the 2^nd respondent regularly if there were any problems with respect to sub‑contractor payments. The 2^nd respondent stated that all quantity surveyors would be reporting to Moses Yuen for all financial matters.

Bond in favour of Hong Kong Housing Authority

138.  For the purposes of certain decoration works in Cheung Wang Estate, a performance bond dated 10 September 2001 in the sum of $1 million was executed by Wing Fai by affixing its common seal.  The 2^nd respondent and Vincent Lo signed above the seal.

139.  By art 113 of Wing Fai’s articles, any instrument to which the seal was affixed had to be “signed by one Director or some other person nominated by the Directors for the purpose”.  Since Vincent Lo was a registered director, the 2^nd respondent need not have signed it as a director.  Further, on 1 August 2000, Wing Fai’s board had resolved that any two of the 1^st respondent, the 2^nd respondent and Vincent Lo were authorised to execute government contracts and HKHA contracts on behalf of Wing Fai.  It appears that this arrangement had not been revoked after July 2001.  The 2^nd respondent could well have signed on the bond pursuant to the board’s authorisation.  Her signature of this bond does not, in my view, suggest that she was a de facto director of Wing Fai at the time.

Control of the Old Accounts post‑April 2002

140.  The Liquidator’s reliance on the operation of the Old Accounts by the 1^st and 2^nd respondents (including the Group’s possession of the cheque books of those accounts) after 22 April 2002 is, in my view, misplaced.  It is evident from the terms of the Sale and Purchase Agreement that the Old Accounts were carved out from the sale of Wing Fai on 22 April 2002 and specifically reserved for the control of Benefit as vendor for the purpose of repaying, out of future receivables, the $40 million owed to Benefit. Such post‑sale control is not in any way referable to the respondents’ directorial powers of Wing Fai, but to the contractual right of Benefit.  Indeed, on the basis of the Sale and Purchase Agreement, even the de jure directors of Wing Fai would have no power over the Old Accounts.

(6)  Overall discussion

141.  Mr Ng submitted that “as a matter of practical reality”, the 1^st respondent, as Chairman of China Rich which was the ultimate holding company of Wing Fai, “should maintain control over the important affairs of Wing Fai” and “maintain control of Wing Fai’s finance for risk management”.[34] There is nothing wrong in this, but the very doctrine of de facto directorship is there to deal with the practical reality where it is not reflected by the register.  The question is the part played by the person; the commercial motives behind his actions are not conclusive.

142.  Mr Ng argued that the 1^st respondent “called the shot” because he was “the boss” and regarded by others as such and as having the highest authority.  This might be broadly true, but this does not prevent the 1^st respondent from being a de facto director.  The control exercised by a holding company as such is shareholder’s control, normally manifested in the powers of the company in general meeting, such as the power to appoint and remove directors.  Where a shareholder actually enters the arena and acts in the management of the business, there is no reason why he cannot or should not be held to be a de facto director merely because everyone defers to him as the boss.  What is significant in my view is the quality of his acts, not the reasons for the staff’s obeisance.

143.  It was further submitted, based on In re Richborough Furniture Ltd, supra, at p 524g, a de facto director must have acted “on an equal footing with the other true directors in directing the affairs of the company”.  It was said that since Vincent Lo — a true director — had played a subservient role to the 1^st respondent, the latter was not a de facto director.

144.  The reference in In re Richborough Furniture Ltd to “equal footing” seems to hark back to the distinction between shadow directors and de facto directors.  Mr Ng’s submission seems to suggest that if anything, the 1^st respondent was a shadow director, not a de facto director, because Vincent Lo was accustomed to seeking and deferring to the 1^st respondent’s views and acting in accordance with his directions.  While it was said in In re Hydrodam (Corby) Ltd at p 182 that the two terms “do not overlap” and “are alternatives, and in most and perhaps all cases are mutually exclusive”, it seems to me this strict separation is in truth no longer tenable.  As Lord Collins stated in Holland at §91, the distinction between de facto directors and shadow directors has been “eroded” and become

“impossible to maintain with the extension of the concept of de facto directorship and the consideration of such matters as the taking of major decisions by the individual, which might be through instructions to the de jure directors, and the evaluation of his real influence in the affairs of the company”.

145.  In my view, whether or not the 1^st respondent acted on an “equal footing” with any of the de jure directors is a factor to take into consideration in determining the question of fact whether the 1^st respondent acted de facto as a director, but not a test in law which must be satisfied if de facto directorship is to be established: Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333, 343–344; Re Kaytech International plc [1999] 2 BCLC 351, 423i.  In the present case, it is to be noted that while Vincent Lo was a de jure director and had day‑to‑day management of the construction business, he played little role in the financial affairs of Wing Fai and no part at all in the transactions involving Famous Capital and King Capital.

146.  Mr Barlow submitted that all the actions of the 2^nd respondent relied upon by the Liquidator were undertaken with the authority of the resolutions of Wing Fai’s board, or were functions which any agent of the board appointed under art 86 of the Articles could perform, or were undertaken by the 2^nd respondent in her capacity as Group CFO or as director of Benefit.  I do not agree. As can be seen above, the 2^nd respondent was effectively the finance director of Wing Fai.  She was the person to go to on Wing Fai’s financial affairs.  The role she played in such affairs was direct and directorial.  Her authority extended, in particular, to the transactions with Famous Capital and King Capital, not merely as a signatory of bank documents but as a decision‑maker.  In contrast, neither Benefit, as the shareholder, nor China Rich as the ultimate parent, had authority under the Articles to run Wing Fai’s financial affairs.  The management of its finances was a matter for the directors of Wing Fai, and they never delegated it to any agent or manager. I do not think that being Group CFO empowered the 2^nd respondent to take charge of Wing Fai’s financial affairs without at the same time discharging functions of a directorial nature vis‑à‑vis Wing Fai.

147.  A special feature in this case is that we are not concerned with a person who had never been a de jure director.  The 1^st and 2^nd respondents had been registered directors of Wing Fai since the end of February 1997.  Although they resigned on 26 July 2001 (the reasons for which are not in evidence), what is notably absent is any change in the governance of Wing Fai after their resignation.  Vincent Lo specifically said that they continued to control the affairs of Wing Fai and the 2^nd respondent continued to be responsible for Wing Fai’s finances.  There is no evidence suggesting that the nature and scope of the 1^st and 2^nd respondents’ acts and powers in relation to Wing Fai had in any way changed after 26 July 2001.  On the contrary, the whole tenor of the evidence indicates continuity in the mode and structure of governance of Wing Fai notwithstanding their resignation as de jure directors.

148.  There was also the representation or holding out of the 2^nd respondent as a director of Wing Fai to third parties (see §§132–135 above).  There might not have been any subjective intention to make that representation, but the omission to change the mandate to KPB requiring the chop in question was entirely consistent with there being no real change in practice after the resignations in July 2001.

149.  Viewed as a whole, the picture that emerges from the evidence is that the 1^st and 2^nd respondents were, at all material times, at the apex of the corporate governing structure of Wing Fai, especially in relation to its financial affairs including borrowing money from the banks and making significant payments to third parties such as suppliers and sub‑contractors or other companies in the Group.  Their resignations in July 2001 had no perceivable impact on their functions or the management structure of Wing Fai.  They continued to manage the affairs of Wing Fai and, in particular, to make decisions in respect of its finances that fell clearly within the province of directors.  In so acting they assumed roles that were sufficiently directorial to bring them within the concept of “director”. In conclusion, I find that, generally in relation to the financial affairs of Wing Fai, the 1^st and 2^nd respondents were its de facto directors from 26 July 2001 to 18 April 2002 and hence within the definition of “officer” in s 276.

H.  ISSUE 2 — DISPUTED PAYMENTS-OUT

150.  Both the pleaded individual payments‑out and –in and the total amounts claimed have undergone substantial changes in the course of this litigation.  Pursuant to pre-trial directions, the Liquidator and the 2^nd respondent have prepared schedules setting out their position on the various pleaded payments-out and payments-in,[35] on which the 1^st respondent has also commented, although the respondents maintain their position that the picture put forward by the Liquidator is incomplete.

151.  Both the 1^st and 2^nd respondents admit the alleged payments‑in and payments‑out in relation to King Capital. They do not dispute that, arithmetically, as a matter of netting them off, there was a net outflow of funds from Wing Fai in the amount of $8,621,053.40 to King Capital.  Based on the documents available, I find that this is proved also as against the 3^rd respondent.

152.  In the case of Famous Capital, there are 15 alleged payments-out to Famous Capital that are disputed by the 1^st respondent and 14 disputed by the 2^nd respondent.  For the following discussion, they may be divided into 4 groups:

(1)  FC–1, FC–2, FC–3, FC–4, FC–5 and FC–6

(2)  FC–7 and FC–21

(3)  FC–8, FC–11, FC–14, FC–15, FC–17 and FC–22

(4)  FC–38

(1)  FC–1, FC–2, FC–3, FC–4, FC–5 and FC–6

153.  In the case of each of these payments, the available documents show a pattern:

(1)  a letter of credit was issued by KPB upon the application of CRPL in favour of Famous Capital;

(2)  documents such as commercial invoice, cargo receipt and inspection certificate were issued and signed on behalf of CRPL to Famous Capital, which enabled the latter to present the documents, via Chekiang First Bank as presenting bank, to KPB for negotiation;

(3)  KPB paid Famous Capital upon negotiating the letter of credit, and issued an inward bill advice to CRPL, advising that the trust receipt loan would fall due on a date typically about 4 months away;

(4)  upon negotiating the letter of credit, KPB charged CRPL the presenting bank’s charges, CHATS fee, and its own commission;

(5)  accounting entries would be made in CRPL’s books based on a payment voucher bearing the date of negotiation of the letter of credit, debiting account no 40200 (Retention Payable — Wing Fai) and crediting account no 40700 (Trust Receipt Loan) and account no 31100 (banks).  The amount debited to account no 40200 was the amount of the letter of credit plus bank charges and commission;

(6)  about 4 months later, presumably when the trust receipt loan was retired (ie repaid by CRPL), accounting entries would again be made in CRPL’s books based on another payment voucher bearing the date of repayment, debiting account no 40700 (trust receipt loan) and account no 81100 (interest) and crediting account no 31100 (bank).

154.  In other words, for each letter of credit paid, CRPL made a debit entry in its books in respect of its inter‑company account with Wing Fai (ie account no 40200).  This means CRPL regarded the amount as charged to Wing Fai, which thereby became a receivable from Wing Fai.  Where the account was originally in credit (ie showing CRPL owed money to Wing Fai), such a debit entry would reduce the balance, ie reduce the amount shown as owing to Wing Fai, as evidenced in the available trial balances and payment vouchers of CRPL.  There would in all probabilities be a corresponding credit entry in Wing Fai’s books in the account with CRPL.

155.  The Liquidator submitted that the fact that these letters of credit were not applied for by Wing Fai does not matter, because the documentary evidence suggests that the amounts were charged by CRPL to Wing Fai.

156.  For the following reasons, I am unable to accept that these letters of credit represented payments-out made from Wing Fai’s funds or on Wing Fai’s credit that could properly fall within the scope of these proceedings.

157.  First, there is no proper pleaded case to cover this.  The Liquidator’s pleaded case was that the payments were made from Wing Fai’s available funds or credit.  The thrust of his case had always been that letters of credit were applied for, and issued by banks, in connection with fictitious transactions involving Wing Fai.  Thus it was said that most of the payments were “purportedly in consideration for goods allegedly delivered to the Company [ie Wing Fai] by Famous Capital and King Capital”[36] and that the respondents “authorised the payments to Famous Capital and King Capital”[37].  There was no case pleaded that the payments were improperly made by CRPL for fictitious transactions and then by Wing Fai to CRPL, or that Wing Fai’s inter‑company account with CRPL was improperly debited, in relation to letters of credit issued purportedly for goods delivered to CRPL.

158.  These 6 payments were added to the Points of Claim at a very late stage by amending the numbers in the pleading and the particulars in the schedule, without recognising that they bear a very different pattern in fact from the payments hitherto complained of, and that any claim to be made on the basis of those 6 payments has to be analysed in quite different terms.

159.  Secondly, the crucial act against Wing Fai in relation to these 6 letters of credit was not the making of the application to the banks or the production of commercial papers for obtaining payment under the letters of credit, but the making of the entry against Wing Fai in some inter‑company account, ie the act of “invoicing” or “on-charging” Wing Fai.  On the case now advanced, it does not matter whether the commercial transactions were genuine or fictitious.  The complaint is that they were booked to Wing Fai despite not being Wing Fai’s transactions.  The fatal flaw in this is that there is no plea or proof this was done or procured by any of the respondents.

160.  Thirdly, as a direct result of the absence of any pleaded case, there is no evidence as to how the inter‑company balances were dealt with after February 2000 (the date of the last of these 6 payments-out). It is not known whether any inter‑company balances between Wing Fai and CRPL remained after February 2000, and whether they were extinguished by set‑off or otherwise prior to the Set‑off Agreement and the Sale and Purchase Agreement.  Likewise there is no investigation for payments or entries in the other direction which represented matching “payments‑in”.

161.  Fourthly, in relation to FC–3, FC–4, FC–5 and FC–6, there are no available documents such as the applications for the letter of credit, cargo receipts, trust receipts and inspection certificates to show that any specific respondent signed the relevant documents in order to obtain payment under the letters of credit.  Ms Chan’s submission that they must have been signed by the 1^st respondent (or Mandy Ip) and the 2^nd respondent and must have been procured by them[38] is without pleaded basis.

162.  Fifthly, there is no suggestion or evidence that Wing Fai used any actual funds in its bank accounts to pay off CRPL.  The Liquidator has not identified any payment in the bank statements of Wing Fai that corresponded to these 6 transactions.

163.  Sixthly, taken at its highest, the Liquidator’s case is that there is a wrongful debit against Wing Fai in its inter‑company account.  This is, however, only an accounting entry.  There is no evidence that this has translated into any actual loss of funds on the part of Wing Fai.  Assuming Wing Fai undeservedly ended up with an inter‑company debt owed, for example, to CRPL, there is nothing to show that CRPL either (i) enforced that debt prior to Wing Fai’s liquidation and obtained satisfaction, or (ii) put in a proof of debt in Wing Fai’s liquidation, or (iii) received payment from Wing Fai out of actual funds.  Alternatively, assuming Wing Fai’s inter‑company net receivable from CRPL was wrongfully reduced, there is nothing to show that this represented a real loss.  In these circumstances, the contention that Wing Fai “suffered a loss equivalent to the amounts charged by CRPL”[39] is speculative and not supported by evidence.

164.  Accordingly, these 6 payments-out totalling $12,136,361.60 should be excluded from the claim.

(2)  FC–7 and FC–21

165.  FC–7 and FC–21 represent 2 alleged payments-out in the respective sums of $4,500.96 and $600,000, with the former being bank charges.

166.  The Liquidator accepts that both sums are based on letters of credit issued on the application of CRPL.[40]  Accordingly, the problems identified above in relation to FC–1 to FC–6 also apply to these 2 sums.  Further, FC–21 was deleted when the Points of Claim were first amended in May 2013, but reinstated on re‑amendment in June 2015 for reasons that were not apparent.

167.  The Liquidator relies on a schedule with the caption “Temporary Payment — 31211” as at 31 July 2001 found among Deloittes’ working papers for the 2001 audit.  The trial balance of Wing Fai as at 31 July 2001 showed a balance in “Temporary Payment 31211” of $10,603,368.87, which matched the total balance shown on the temporary payment schedule.

168.  The relevant entries in the temporary payment schedule that correspond to FC–7 and FC–21 are described as:

“Famous Capital – CRPL LC#C-01-S-24246”

“Famous Capital CRPL – LC#C-01-T-20450”

169.  FC–21 together with 5 other sums referred to in the schedule (which corresponded to FC–24, FC–28, FC–30, FC–31 and FC–34) amount to a total sum of $10,020,099.92. 

170.  There are auditors’ manuscript notes on the document stating:

“The L/C has been opened to Famous Capital and the material is not rec’d by the … Hence, confirmation would be sent to confirm the O/S balance as per <5353H>”

171.  There was, indeed, a request for audit confirmation issued to Famous Capital dated 30 October 2001 (signed by Anne Kong) requesting it to confirm that the amount due from it to Wing Fai as of 31 July 2001 was $10,020,099.92.  This amount matched the sum of 6 entries referred to above.  The auditors’ manuscript notes on the request for audit confirmation recorded:

“Alternative Procedure

1. Test checked to the Purchase Order, L/C pay’t and the debit note issued by the counterparty, result satisfactory.”

172.  It seems to me, however, that while these matters show that Wing Fai regarded Famous Capital as owing the amount for FC–21 ($600,000) to itself, they do not show that the money advanced by the bank under the letter of credit was repaid by Wing Fai.  Prima facie, the money would have been repaid by the applicant for the letter of credit, namely CRPL, which might have debited Wing Fai in the inter‑company account as in the case of FC–1 to FC–6, possibly prompting Wing Fai in turn to debit Famous Capital.  No bank statement or other document showing any actual outflow of funds from Wing Fai in relation to FC–7 and FC–21 has been adduced.

173.  The Liquidator submitted that the same schedule also referred to 5 other sums which were admitted by the 1^st and 2^nd respondents to be payments-out from Wing Fai.[41] But those 5 entries related to letters of credit applied for by Wing Fai itself.  Further, the outflow of funds relating to those 5 other entries are independently supported by other contemporaneous documents.  This point does not therefore assist the Liquidator.

174.  I conclude that the Liquidator has failed to prove that these 2 items, totalling $604,500, represent a recoverable loss on the part of Wing Fai.

(3)  FC–8, FC–11, FC–14, FC–15, FC–17 and FC–22

175.  These 6 payments-out were also added to the claim in September 2016 in reliance on a schedule[42] seized by the police at the residence of Mandy Ip on 14 May 2008 (“the Mandy Ip Schedule”).[43] It was disclosed by the 2^nd respondent in August 2016 as part of the “unused materials” in the criminal proceedings.

176.  The schedule set out in columns under the heading of “LC/Cash‑out by WF” and “Cash‑in at FCEL” respectively certain information which may be presented as follows (the “FC” numbering is added):

FC No.	Date	“LC/Cash‑out by WF”	“Cash‑in at FCEL”
8	15.1.2001	1,804,501.16
9, 10	15.1.2001		1,800,000.00
11	16.1.2001	2,101,696.42
12, 13	16.1.2001		2,100,000.00
14	30.1.2001	2,002,517.78
15	31.1.2001	1,802,004.26
16	31.1.2001		1,800,000.00
17	09.2.2001	1,502,170.51
18	10.2.2001		1,500,000.00
19, 20	14.2.2001		2,500,000.00
22	20.2.2001	1,903,020.47
23	20.2.2001		1,900,000.00

177.  For the following reasons, I find it sufficiently probable that these 6 payments were payments-out of the funds or credit of Wing Fai.

178.  First, the objective circumstances indicate that the schedule found at Mandy Ip’s home was some kind of reconciliation record. Other figures in schedule are generally found to be supported by other evidence.

179.  Secondly, as can be seen from the table above, 5 of the 6 payments-out in question were almost immediately followed by payments made by Famous Capital to Wing Fai that were round sums very close in amount. 

180.  Apart from these 6 payments-out, the above 9 payments-in[44] were also “discovered” from the Mandy Ip Schedule.  In correspondence shortly before re‑re‑amending the Points of Claim in September 2016, the Liquidator stated that the 6 payments-out should be added to the claim if the 9 payments-in were to be included.  The 6 payments‑out total $11,115,910.60 whereas the aggregate sum of the 9 payments-in is $11,600,000.00.  Although the condition was not agreed to by the respondents and the Liquidator nevertheless admitted the payments‑in, it seems to me no injustice can be complained of if the schedule is given weight in relation to the 6 payments‑out.

181.  Further, of the 6 payments-out in question, relevant pages of Wing Fai’s bank statements had since been identified during the trial for 5 of them (with the exception of FC–8), strongly indicating that the relevant entries in the Mandy Ip Schedule did record actual payment out based on Wing Fai’s funds.

182.  The Liquidator has, therefore, in my view, shown that these items probably represented payments-out of Wing Fai’s funds. However, no letter of credit or related document has been found in relation to them.  As a result, the Liquidator has not attributed these items to any of the respondents.  The consequence of this is dealt with under Issue 3 below.

(4)  FC–38

183.  FC–38 is admitted by the 2^nd respondent but disputed by the 1^st respondent.

184.  The bank statement and bank voucher of Famous Capital show that on 1 September 2001, Famous Capital received $2,003,598.52 as the proceeds of a letter of credit.  The bank statement of Wing Fai shows that, about 4 months later, on 31 December 2001 Wing Fai was debited $2,007,296.94.  The particular given was “BLS C01T2341101”.

185.  No copies of the letter of credit, the application, cargo receipt or trust receipt have been adduced.  However, the Mandy Ip Schedule (referred to in §175 above) recorded the sum of $2,003,598.52 under “LC/Cash‑out by WF” on 1 September 2001 and also suggested the sum was paid out by KPB, which is consistent with the fact that the amount was eventually debited to Wing Fai’s account with KPB.  Taking account of all the evidence, I consider it proved on balance that FC–38 was a payment out on the basis of funds of Wing Fai.

186.  However, the Liquidator has again not attributed this item to any of the respondents.  The consequence of this is dealt with under Issue 3 below.

(5)  Overall

187.  Overall, therefore, I find that:

(1)  FC–1 to FC–7 and FC–21 are to be excluded. 28 payments‑out were made to Famous Capital totalling $63,093,887.27.[45]  It is accepted that $47,700,000.00 was received by way of payments-in.  The shortfall claimed is reduced to $15,393,887.27.

(2)  The shortfall claimed in relation to King Capital remains $8,621,053.40.[46]

(3)  The total claim is therefore reduced to $24,014,940.67.

I.  ISSUE 3 — MAKING OR PROCURING TO BE MADE

188.  The respondents are said to have breached their duty by making or procuring to be made a number of payments from the available funds or credit of Wing Fai to Famous Capital and King Capital.  It is necessary to see on the pleading who allegedly made or procured to be made which particular payments and to see on the evidence whether the allegations are made out.

(1)  Individual responsibility of directors

189.  The starting point is that duties of a director are owed by him personally and individually to the company.  The board of directors has no separate legal identity.  While many of the powers of directors can only be exercised by the board collectively through resolutions of the board as an organ of the company, each director is liable only for his own misfeasance and breach of duty.  This accords with the position of directors viewed as trustees of the company’s assets under their control, since trustees are likewise not liable for the acts or defaults of their co‑trustees: Lewin on Trusts (19^th ed), §39–94.  This principle was given statutory force in s 32(1) of the Trustees Ordinance (Cap 29) (repealed and replaced in 2013), which provided: “A trustee … shall be answerable and accountable only for his own acts, receipts, neglects, or defaults, and not for those of any other trustee …”.[47]

190.  S 276 is a provision directed against individual persons.  It invites focus on the “officer” in question and provides a procedure to examine into “the conduct of the … officer”.  It does not in itself make all or some members of the board of directors jointly liable for the misfeasance of a director.  There is one legal proceeding in this case, but conceptually it comprises three applications against the three respondents respectively.[48]

191.  Counsel for the Liquidator relied on the judgment of Ralph Gibson LJ in Bishopsgate Investment Management Ltd v Maxwell [1993] BCC 120 at 143F–H where it was said the liability of directors participating in breaches of trust is joint and several.  This may be taken as common ground but its application in this case begs the question of who participated in the alleged breaches.  Without taking part in it, a director is not answerable for the acts or defaults of their co‑directors. This distinction is neatly illustrated by Bishopsgate itself.  It was an application for summary judgment based on two allegations against the defendant, Ian Maxwell, in that case: first, that he failed to discover the misappropriations by a co‑director, his father Robert Maxwell; and, secondly, that he signed certain transfers of shares which amounted to misappropriations of the company’s assets.  Chadwick J dismissed the application on the first but entered summary judgment on the second.  The appeal to the Court of Appeal was brought by the defendant against summary judgment on the second claim.  It was in that context that the Court of Appeal found the defendant had acted in breach of duty by signing the relevant transfers (see pp 140C–D & 143G).

192.  A director is not, as such, an agent of his co‑directors: Gore‑Browne on Companies, at §15[13].  Nor is a director, without more, vicariously liable for his co‑directors’ acts generally.  This is plain from general principles but was also expressly provided in art 146 of Wing Fai’s articles:

“… No Director, manager or other officer of the Company shall be liable for the acts, receipts, neglects or defaults of any other Director, manager or other officer of the Company. …”

193.  It is also stated in Gore‑Browne on Companies that a director who agreed to a course of practice that results in loss was not responsible where he had taken no part in the specific misapplication of the money.  This is illustrated by Cullerne v The London and Suburban General Permanent Building Society (1880) 25 QBD 485, where the directors of a building society had passed a resolution authorising advances to be made to members on the security of their shares.  An advance was subsequently made to a member on the security of his shares, and the society thereby incurred a loss.  Although one of the directors concurred in the resolution, he took no part in making this advance.  In holding him not liable for the loss, Lindley LJ (with whom Lord Esher MR and Lopes LJ agreed) stated, at pp 488–489:

“It does not, however, also follow that because the resolutions of December, 1876, and of February, 1883, are contrary to law, and are invalid, the plaintiff is responsible for what other people did on the faith of them. It probably is true that if no such resolutions had been passed no such advances as they authorized would have been made; but the real cause of the loss sustained by the society is the improper advance; the resolution was not the causa causans of the loss, but only a causasine quâ non. … The plaintiff ought not to have passed the resolutions, and his co‑directors ought not to have acted on them. I am not aware of any authority which goes the length of deciding that under these circumstances the plaintiff is liable for what they have done. They were not his servants or agents; their authority was as great as his; their knowledge the same as his; and, even assuming that he misled them upon a point of law, this does not make him liable to the society for the loss of money which they advanced and not he.”

194.  A director can, of course, be found liable for failing in his duty to acquaint himself with the affairs of the company and to prevent the wrongdoing of his co‑directors, as was alleged in the first claim in Bishopsgate Investment Management Ltd v Maxwell, supra, at pp 128H–129C.  But that is a separate charge that needs to be distinctly pleaded and proved, which, as explained below, has not been advanced in the present case.

195.  It is accordingly necessary to examine precisely how and for which particular acts each respondent is said on the pleading to be liable.  It is also necessary to examine the conduct of each respondent separately — a requirement that, I think, has sometimes been lost sight of by the Liquidator in the conduct of this litigation.  In the early stages of the case, the respondents were jointly represented and filed a joint defence.  But their defences had become separate since 2014 as had their legal representation.

(2)  Relevant principles of pleading

196.  Allegations of breach of duty, dishonesty and fraudulent conduct must be clearly pleaded.  Fraud, especially, has to be distinctly pleaded with the utmost particularity: Haifa International Finance Co Ltd v Concord Strategic Investments Ltd [2009] 4 HKLRD 29.  Mr Barlow also referred to the English Court of Appeal’s decision in Lipkin Gorman v Karpnale Ltd [1987] 1 WLR 1340.  The principle is so trite that it is unnecessary to quote the general passages at length.

(3)  Relevant procedural steps

197.  For the reasons that appear below, it is necessary to examine certain procedural steps taken in relation to the pleadings.  The misfeasance summons issued on 30 August 2004 seeks a declaration that the respondents

“were guilty of misfeasance and/or breach of duty and/or breach of trust in relation to the Company in misapplying the money of the Company:

(i) by authorising payments by cheque and the purchase of letters of credit in the sum of HK$18,525,681.32 from the Company’s funds for the benefit of Famous Capital Enterprises Limited (“Famous Capital”) without consideration whereby the same became wholly lost to the Company;

(ii) by authorising payments by cheque and the purchase of letters of credit in the sum of HK$14,167,065.80 from the Company’s funds for the benefit of King Capital Engineering Limited (“King Capital”) without consideration whereby the same became wholly lost to the Company.”

198.  The Points of Claim were filed voluntarily by the Liquidators, which were followed by directions for the filing of subsequent pleadings.  Pursuant to a request, certain particulars of the Points of Claim were given in a letter dated 8 December 2004.  Answers to a further request for particulars of the Points of Claim were given by the Liquidators on 19 April 2006.

199.  By summons filed on 1 December 2009, the respondents applied to strike out the Points of Claim pursuant to O 18 r 19. A principal basis of the application was that the Points of Claim, in framing the crucial allegations against the 1^st respondent “and/or” the 2^nd respondent “and/or” the 3^rd respondent, were unparticularised and embarrassing. 

200.  As Chu J (as she then was) noted in her decision of 28 March 2011 on that summons, one of the grounds relied upon by the respondents was that the Points of Claim were embarrassing because they did not plead a case of fraudulent breach of fiduciary duty against each of the respondents and did not specify which acts of dishonesty were alleged against each respondent.  As a result, each of the respondents did not know exactly what the individual case against him or her was.  In response to this complaint, it appears that counsel for the Liquidator (Mr Jeremy Bartlett), inter alia, submitted that each of the 3 respondents signed application forms for letters of credit, trust receipts and cargo receipts and thereby authorised and procured payment out of Wing Fai’s assets.  Counsel also relied on a proposed amended schedule to the Points of Claim, specifying which respondent signed the relevant documents.

201.  Chu J dealt with this aspect of the argument at §§42–43 of her decision:

“42.  … In paragraphs 18 to 21 of the Points of Claim, it is pleaded that the 1^st respondent “and/or” 2^nd respondent “and/or” 3^rd respondent had acted in breach of fiduciary duty and/or breach of trust and were dishonest in the manner as particularised in those paragraphs.  The respondents take exception to the words “and/or”.  From reading the whole of the Points of Claim, it can be readily seen that the liquidators’ case is that each of the respondent was in breach of fiduciary duty and acted dishonestly and the breach and dishonesty alleged against each of them arose in similar ways, namely, they had signed the applications for letters of credit, trust receipt documents, cargo receipts and also cheques, thereby caused the Company to pay by cheques or letters of credit for goods that were never delivered, a fact known to them.

43.   As the exhibits to Mr Kennedy’s 11^th affidavit show, the applications for letters of credit, trust receipts, cargo receipts and cheques involved in the transactions in question were invariably signed by either two of the respondents.  Mr Bartlett had attached to his submissions a schedule that helpfully summarizes the details of the transactions, including which of the respondents signed the bank and other documents for the transactions.  I accept that the Points of Claim by themselves may not have fully identified the role and involvement of each of the respondents in the transactions complained of.  However, this is far from saying that the Points of Claim ought to be struck out as being embarrassingly vague or unclear.  In any event, the proposed amendments to the Schedule as per the Amended Points of Claim (which was served as long ago as July 2005) have identified which of the respondents was involved in executing the bank documents for the transactions in question.  Although the respondents do not consent to the amendments, the court is entitled to have regard to them when deciding whether the Points of Claim call for a striking out.” (emphasis added)

202.  In the result, Chu J refused to strike out the pleading.  The Points of Claim were eventually amended in May 2013 pursuant to leave given by Mimmie Chan J on 10 May 2013.  The notable amendment for present purposes is the addition of a column in the schedule to the Points of Claim specifying the respondents who executed the relevant documents for the transactions in question on behalf of Wing Fai.

203.  Mr Barlow for the 2^nd respondent contended that it is not open to the Liquidator to make any claim against the 2^nd respondent other than based on those payments-out where the 2^nd respondent signed the relevant documents.  He argued that, just as the respondents were estopped from renewing their complaints that the current Points of Claim were demurrable for embarrassment, so also must the Liquidator be held to the analysis upon which Chu J had allowed the Points of Claim to avoid being struck out.

204.  There is force in this submission.  It seems to me that it would have been an embarrassing plea simply to allege that the 1^st and/or 2^nd and/or 3^rd respondent breached his or her own duty by making or procuring a large number of payments.  This expression, using the shorthand “and/or” — a symbol all too often used without appreciation of the uncertainty it produces — contains 7 possible meanings,[49] which, together with the 48 payments-out, produce a great number of possible combinations.  In a case of misfeasance, let alone dishonest misfeasance, each director is entitled to know for which misapplication of funds he or she is alleged to be liable and the alleged basis for such liability. 

205.  An ambiguous plea can no doubt be clarified by particulars.  As Parker LJ said in Lipkin Gorman, supra, at p 1375B, an equivocal pleading need not be bad if followed by proper and sufficient particulars.  Once particularised, however:

“its actual ambit is, like any other paragraph which requires to be particularised, defined, restricted or limited by the particulars in fact given.” (p 1375D)

206.  Plainly, the case put forward before Chu J with the particulars proposed was that each respondent was liable for the misapplication of funds that he or she directly authorised or procured by signing the relevant documents relating to the cheques or letters of credit.  That was how her Ladyship read the pleading (see §42 of the decision quoted above), a reading which I share.  This, as I read Chu J’s decision, was what saved the Points of Claim from the attack in question.  The fact that the amendments were not formally made until 2 years later, in May 2013, cannot negate the context of the development of the claims.

(4)  The pleaded case

207.  With this history in mind, I go on to examine the Re‑Re‑Re‑Amended Points of Claim.  In §9 of the pleading, it was pleaded that Famous Capital and King Capital were related to Wing Fai and “under the de facto control of” the 1^st and 2^nd respondents. §11 pleaded that Wing Fai was operated by the respondents for the benefit of the Group as a whole, without regard for the interests of Wing Fai itself, but this plea was wholly unparticularised and could be no more than a general precursor to the more specific allegations of breach of duty that appear later in the pleading.

208.  The breaches of duty are pleaded in §§18–20:

“Breach of fiduciary duty/breach of trust

18. Between 6 May 1999 and 1 February 2002, in breach of fiduciary duty and/or in breach of trust, the First Respondent and/or the Second Respondent and/or the Third Respondent made and/or procured to be made at least 36 payments by way of transfers, cheques and letters of credit, totaling at least HK$75,230,248.47 from available credit or funds of the Company under their control to an account in the name of Famous Capital … Most of these payments were purportedly in consideration for goods allegedly delivered to the Company by Famous Capital, whilst the consideration for the rest of the payments were unknown. Despite various documents being signed by the Respondents as directors of the Company to the contrary, no such goods were delivered. Between 14 March 2001 and 28 January 2002, payments totaling HK$47,700,000.00 were paid to the Company by 30 cheques and/or transferred from Famous Capital (including payments alleged by the Second Respondent to be indirectly paid by third parties on behalf of Famous Capital), leaving a shortfall of HK$27,530,248.47 owing to the Company from Famous Capital.

19. Between 14 November 2001 and 6 April 2002, in breach of fiduciary duty and/or in breach of trust, the First Respondent and/or Second Respondent and/or Third Respondent made and/or procured to be made 12 payments totaling at least HK$29,421,053.40 from available credit or funds of the Company under their control to an account in the name of King Capital. Most of these payments were purportedly in consideration for goods allegedly delivered to the Company by King Capital whilst the consideration for the rest of the payments were unknown. Despite various documents being signed by the Respondents as directors of the Company to the contrary, no such goods were delivered. Between 26 November 2001 and 18 April 2002, 9 payments totaling HK$20,800,000 were paid to the Company by 9 cheques from King Capital to the Company (including payments alleged by the Second Respondent to be indirectly paid by third parties on behalf of King Capital), leaving a shortfall of HK$8,621,053.40 owing to the Company from King Capital.

20. A Re‑Re‑Amended Schedule giving full particulars of all the payments and repayments mentioned in paragraphs 18 and 19 above is attached to these Re‑Re‑Amended Points of Claim.

Particulars of breach

(a) The First Respondent and/or Second Respondent and/or Third Respondent drew cheques on the Company’s bank account(s) and otherwise procured payments from the Company’s available credit funds by arranging documentary letters of credit in favour of and to an account in the name of Famous Capital amounting to HK$75,230,248.47 and to an account in the name of King Capital amounting to HK$29,421,053.40. Most of these payments were purportedly in consideration for goods allegedly delivered to the Company by Famous Capital and King Capital; however, no such goods were delivered. Given the relationship between at least the First and Second Respondent and the directors of Famous Capital and King Capital, the Respondents knew or ought to have known that no goods were delivered. The payments were therefore not made for any legitimate commercial or other purpose of the Company’s business or interests.

(b) The First Respondent and/or Second Respondent and/or Third Respondent authorised the payments to Famous Capital and King Capital (directly or indirectly through other accounts including Greater China Herbs, Asia.com Tech Ltd, Swife or Swift Finance Ltd and Strategic Finance which appear to be associated with Famous Capital and/or King Capital and/or the First and Second Respondents) referred to in paragraphs 18 and 19 above for unexplained consideration or in settlement of purported invoices issued by Famous capital and King Capital addressed to the Company that were stated to be for the sale and delivery of goods; namely, asphalt, concrete mix and steel bars. Although, as the First Respondent and/or Second Respondent and/or Third Respondent knew or ought to have reasonably known, no asphalt, concrete mix or steel bars or any other goods had been, or were to be, sold or delivered to the Company in consideration for the said payments to Famous Capital and King Capital.

(c) The First Respondent, Second Respondent and Third Respondent acknowledged on behalf of the Company delivery of asphalt, concrete mix and steel bars from Famous Capital and King Capital to the Company in the knowledge that Famous Capital and King Capital had never delivered any asphalt, concrete mix or steel bars to the Company.” (emphasis added)

209.  §21 pleaded that:

“The First Respondent and/or Second Respondent and/or Third Respondent were dishonest, guilty of misfeasance, in breach of duty and/or negligent in authorising the payments to Famous Capital and King Capital referred to in paragraphs 18 and 19 and particularised in the Re‑Re‑Amended Schedule hereto. The First Respondent and/or Second Respondent and/or Third Respondent’s dishonesty is apparent or, alternatively, can be inferred from the following facts and matters: …”

210.  Particulars given in April 2006 simply unhelpfully asserted that the payments were “jointly or separately” made, procured or authorised by the respondents.  Then, at the end of the pleading, there is the schedule I have already referred to.

211.  The allegation, on my reading of the pleading, is that each of the respondents made, procured or authorised the wrongful payments in question, in that they “signed” relevant documents, “drew cheques”, “arrang[ed] documentary letters of credit” and “acknowledged” receipt of goods.  This is consistent with the way the case was put forward in the schedule to the Re‑Re‑Re‑Amended Points of Claim, which specified the respondents who signed the banking documents for Wing Fai.  Even taking into account Kennedy’s 11^th affidavit which was filed with the misfeasance summons, I can see no other specific allegation (or, for that matter, evidence) of making, procuring or authorising the payments. 

212.  At trial, however, the Liquidator contended that each of the three respondents is jointly and severally liable with the other two in respect of all the payments‑out.  With respect, I can see no pleaded basis for this contention.  It is true that the Re‑Re‑Re‑Amended Points of Claim contain a prayer that the respondents “do jointly and severally repay or restore” to the Liquidator the sums claimed, which are stated as one total sum for Famous Capital and one for King Capital, but it continues to say “or such other sums as the Court thinks fit”.  There is no averment, in the body of the pleading, of any basis for joint liability.  There is no plea of conspiracy, no plea of common design, no plea that any one respondent acted as the agent of the other two or was induced, incited, persuaded or instructed by the other two to act, no plea that each respondent participated — however slightly — in the payment made or procured by the other two, and no plea that any respondent breached his or her own duty by failing to prevent what the other two did.  The case against each of them was pleaded squarely on the basis that he or she made or procured the impugned payments to be made.  Each was charged with responsibility for his or her own acts.  Those acts are attributed in the schedule.  There is no plea that on some other basis, any respondent should be inferentially held to have procured a particular payment even though no relevant documents have been found that were signed by him or her in relation to that payment.

213.  In the Liquidator’s opening, there was an assertion that the impugned transactions were “approved by R2 together with either R1 or R3” and that “Rs are therefore jointly and severally liable to repay or restore the amount of HK$36,151,301.87”.[50]  The latter statement clearly did not follow from the former, as regards the 1^st and 3^rd respondent.  Nor is there any pleaded basis for the former statement other than in relation to the transactions for which the 2^nd respondent had signed documents as particularised.  Objection was raised to this purported expansion of the claim.

214.  In closing, the Liquidator submitted that the respondents’ liability is founded on their positions as directors and trustees of Wing Fai’s funds and facilities under their control, and their breach of fiduciary duties as such directors and trustees.  With respect, it does not follow from the directors’ quasi‑trusteeship of the company’s assets that they are strictly liable for any misapplication of funds by anyone.  As stated above, as a matter of general principle, directors, like trustees, are liable for their own acts and omissions, not those of their colleagues.  The Liquidator submitted that there was a “scheme” but nowhere was this pleaded.[51] In any event, as shown by Cullerne v The London and Suburban General Permanent Building Society, supra, a director who agreed to a course of practice that resulted in loss is not necessarily liable where he had taken no part in the specific instance of misapplication of money.

215.  Insofar as Ms Chan prayed in aid the observation of the Court of Final Appeal in the appeal on dismissal for want of prosecution that while the Points of Claim “could be better particularized, it was not so lacking in content that a sensible, proper defence could not be pleaded”, it should be noted that, first, the Court decided the appeal after Chu J had rejected the respondents’ application to strike out for the reasons set out in her judgment.[52] The Court was therefore presumably aware of the basis on which the case was put before Chu J including the proposed schedule of attribution.  Secondly, there the respondents criticised the Points of Claim in order to deflect “any criticism that could be made against [them] for not having even now revealed the true nature of their defence or in apparently not even taking any steps to gather evidence”.[53]  It was in this context that the Chief Justice made the observation quoted above.  It was not an encomium suggesting the Points of Claim were free of defect insofar as a claim of joint and several liability is concerned.

216.  Mr Barlow went further and submitted that in advancing an all‑embracing claim of joint and several liability on the part of all 3 respondents for all the payments, the Liquidator had abandoned the case of specific attribution.  I do not agree.  The Liquidator has, in my judgment, tried unsuccessfully to expand the ambit of his case, but this does not mean that the case of attribution in the schedule was abandoned.  It is true that a difficulty has arisen in the assessment of any loss caused (see §340 below) because the Liquidator has offered no assistance on how the quantum of liability should be assessed if his case of joint and several liability for all payments was rejected, but that is a separate matter and not a question of abandonment.

217.  I should mention that there is also a claim for negligence.  But there was no separate case run that any respondent was negligent in relation to certain payments which he or she did not procure, because, for example, he or she had omitted to do something to stop the others from causing those payments to be made.  If this was alleged, it would have been necessary to plead it with some particularity: Cohen v Selby, supra, at §§30-32.  As it is, no separate negligent act or omission was pleaded, and no separate case of negligence was run at trial.

(5)  Conclusion

218.  For the reasons give above, I consider that the claim against each respondent is limited to those payments that he or she, as pleaded in the schedule, procured to be made by signing the banking documents. 

219.  Clearly, by signing an application for letter of credit, or the supporting documents such as trust receipts, inspection certificates and cargo receipts, the director in question effectively procured Wing Fai to borrow money from the bank to be paid to Famous Capital or King Capital.  It appears that the eventual debit to Wing Fai’s bank account upon maturity of the letter of credit 3 or 4 months later was done by the bank automatically, as an inexorable consequence of the earlier acts.  Where the documents for a payment were co‑signed by two respondents, they are of course jointly and severally responsible for that payment.

220.  The respondents are not liable for those sums that are not attributed at all to any of them, including all of the disputed payments-out discussed under Issue 2 above and some others.

221.  There is no dispute in relation to which payments each respondent had signed bank documents (although the impact on the amount of the claims has not been calculated):[54]

(1)  the 1^st respondent had signed on such documents in relation to 7 payments, namely, FC–2, FC–24, FC–28, FC–30, KC–7, KC–13 and KC–21;

(2)  the 2^nd respondent had signed on such documents in relation to 29 payments, namely, FC‑1, FC‑2, FC‑24, FC‑34, FC‑36, FC‑39, FC‑44, FC‑47, FC‑48, FC‑51, FC‑52, FC‑54, FC‑56, FC‑57, FC‑59, FC‑61, FC‑63, FC‑64, FC‑66, KC‑1, KC‑4, KC‑5, KC‑6, KC‑7, KC‑9, KC‑10, KC‑11, KC‑16, KC‑17; and

(3)  the 3^rd respondent had signed on such documents in relation to 30 payments, namely, FC‑24, FC‑28, FC‑30, FC‑34, FC‑36, FC‑39, FC‑44, FC‑47, FC‑48, FC‑51, FC‑52, FC‑54, FC‑56, FC‑57, FC‑59, FC‑61, FC‑63, FC‑64, FC‑66, KC‑1, KC‑4, KC‑5, KC‑6, KC‑9, KC‑10, KC‑11, KC‑13, KC‑16, KC‑17, KC‑21.

J.  ISSUE 4 — BREACH OF DUTY AND DISHONEST MISFEASANCE

(1)  The underlying commercial transactions were fictitious

222.  The next issue is: where it is shown that a respondent did procure money to be paid to Famous Capital or King Capital out of Wing Fai’s funds or credit, was that act a breach of duty?

223.  The Liquidator essentially contends that because the payments‑out were purported payments for goods, and to the respondents’ knowledge neither Famous Capital nor King Capital sold or supplied any goods to Wing Fai, the payments were “not made for any legitimate commercial or other purpose of the Company’s business or interests”.[55]  It follows, it was submitted, that the payments were made in breach of duty, and the respondents were guilty of dishonest misfeasance.

224.  It is now quite clear on the evidence, and hardly controversial, that the supposed sale and purchase transactions between Famous Capital and King Capital on the one hand as seller and Wing Fai on the other hand as purchaser were fictitious.  There was no real agreement for the sale and purchase of building materials.  There were never any goods delivered.  The inspection certificates and cargo receipts were forged. Neither Famous Capital nor King Capital was an independent party selling anything to Wing Fai.  They were instead vehicles used to obtain credit from the banks under the letters of credit.  The transactions constituted a fraud on the banks, as admitted by the 2^nd respondent in the criminal proceedings relating to 11 letters of credit in question there.

(2)  The 2^nd respondent’s case of Group Financing Regime

225.  Neither the 1^st nor the 3^rd respondent has put forward any positive case on the propriety of the transactions.  The 2^nd respondent has advanced a defence that the transactions were part of the operation of a financing regime, using “a method of obtaining financing on favourable terms”.  On this basis, Mr Barlow contended that while there was a fraud on the banks, it does not follow that there was a fraud on, or breach of duty to, Wing Fai. The argument ran as follows: (1) The funds raised from the impugned transactions were used to fund the business operations of the Group, including Wing Fai and Wing Fai’s sub‑contractors (“Group Financing Regime”). (2) The impugned transactions were intra vires as a matter of the constitution of Wing Fai.  (3) It was not shown that the 2^nd respondent took part in them with the dishonest intention of misappropriating funds from Wing Fai and permanently depriving Wing Fai of those funds.  (4) The 2^nd respondent believed the transactions to be in the best interests of Wing Fai.  (5) The transactions were not undertaken to defraud Wing Fai’s creditors.  (6) The banks were protected because the letters of credit were each secured by cash deposits or China Rich’s guarantee, and in the end Wing Fai’s indebtedness to the banks was discharged by the Group by no later than May 2002.

226.  Mr Barlow also submitted that the pleading was defective so that there was no triable cause of dishonest misfeasance, and as such the claims fails altogether.  However, I do not think the Liquidator’s claim is confined to fraud.  It is alleged that the respondents were dishonest, but it is also alleged that they were guilty simply of misfeasance, breach of duty and negligence.[56]

227.  I shall first discuss whether there was a breach of duty, and then turn to the question of fraud and dishonesty.  The impugned transactions involved the use of the power to borrow money via letters of credit, or via overdraft in the case of cheques drawn on bank accounts already in debit balance, and to apply the funds thus borrowed or the credit balance where cheques were drawn on accounts in credit.  There is no dispute that in the exercise of these powers, the respondents owed fiduciary duties to Wing Fai, including the duty to act honestly and in good faith in the best interests of the company, and not to use the powers for improper purposes.  In relation to assets of the company which have come into their hands, or which are under their control, they effectively owe the duties of a trustee: In re Lands Allotment Co [1894] 1 Ch 616, 631, 638; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1575–1576.

228.  Opening letters of credit in favour of and writing cheques to Famous Capital and King Capital purportedly in payment for goods purchased from them, when there was in fact no sale and purchase transaction whatsoever, was in my view prima facie a use of the powers of directors for improper purposes.  It was for the respondents to justify the transactions and demonstrate why they were not a misuse of Wing Fai’s assets and credit: Bishopsgate Investment Management Ltd v Maxwell, p 140C–G; Waddington Ltd v Chan Chun Hoo Thomas (unrep, CACV 10/2014, 20 May 2016), §38.  The justification put forward by the 2^nd respondent is the Group Financing Regime.

229.  In closing arguments, three preliminary objections to the Group Financing Regime argument were taken on behalf of the Liquidator. First, it is said that it had not been pleaded by the 2^nd respondent. I do not think this objection is entirely well‑founded.  The 2^nd respondent had pleaded that the letters of credit were “a method of obtaining financing on favourable terms for the China Rich Group, which included [Wing Fai] up until 22 April 2002”; that the 2^nd respondent “always intended that [Wing Fai] be indemnified by the China Rich Group in respect of debts incurred … to the relevant issuing banks to the extent that the funds were utilized by members of the group other than [Wing Fai]”; and that “group financing was a proper purpose of [Wing Fai] and that the nature and purpose of the impugned letter of credit transactions was known to China Rich, Benefit and [Wing Fai]”.[57]

230.  Moreover, this must be seen in the context of the case put forward by the Liquidator.  Kennedy’s 11^th affidavit, which was filed with the misfeasance summons and prayed in aid by the Liquidators as a document to be read together with their Points of Claim[58], stated that Famous Capital and King Capital were set up for the purpose of obtaining funds from Wing Fai through letters of credit “to channel monies to other entities in the China Rich Group”.  The money obtained under the letters of credit “would be distributed to Group companies”.  While some of the monies obtained was repaid to Wing Fai, a shortfall had not been repaid.[59] It was said that:

“Wing Fai (along with the rest of the subsidiaries of China Rich) was operated by the Respondents like a family company. This operation had total disregard for the concept of separate legal entities or for the separate creditors of those entities. Everything appears to have been done for the common good of ‘the Group’ regardless of the effects felt by each of the individual subsidiaries. It was one group of ‘mother, father, brothers and sisters’ that had to ‘help each other’. This is squarely the position of at least the Second Respondent …”.[60]

The affidavit concluded that Wing Fai was “operated by the Respondents for the common good of the China Rich Group and with total disregard to Wing Fai itself or its creditors”.[61]  This, Kennedy said in his oral evidence, was certainly an explanation as to why things turned out the way they did.  In their evidence, both Hill and Kennedy confirmed the relevant parts of Kennedy’s 11^th affidavit.

231.  The Points of Claim itself complained that Wing Fai, as part of the Group, was operated by the respondents “for the benefit of the China Rich group as a whole, without regard for the interests of the Company itself or its creditors”.[62]

232.  It may be taken as common ground, therefore, that the funds paid to Famous Capital and King Capital through letters of credit or cheques were channelled to other Group companies, while some of the money subsequently found its way back to Wing Fai.

233.  The second objection is that the Group Financing Regime was not put to Vincent Lo or Anne Kong.  I accept that for that reason it would not be open to the 2^nd respondent to contend that it was known to or approved by them.  But it does not follow the argument can be completely shut out, merely because they were not asked for what would have been their opinion.

234.  The third objection is that, because the 2^nd respondent did not testify, there was no evidence at all to support the Group Financing Regime argument.  Again, I do not think the argument can simply be ignored on this basis, because as explained above it was part of the Liquidator’s own case that the impugned transactions were carried out for the good and benefit of the Group.  It is therefore necessary to deal with the argument substantively.

235.  As a matter of principle, it is not a sufficient justification for the directors involved in such payments to say that they looked to the benefit of the group as a whole.  Each company, albeit within a group, is a separate legal person with separate interests and separate and probably different creditors.  It is the duty of the directors of a company “to consult its interests and its interests alone” in deciding how to exercise their powers as directors of that company; they are not entitled to sacrifice the interests of that company in order to promote the interests of other group companies, even if they are also directors of them: Walker v Wimborne (1976) 137 CLR 1 at 6–7; Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] 1 Ch 62, 74D–E; Linter Group Ltd v Goldberg (1992) 7 ACSR 580, 620.

236.  The burden of proving the defence lies on the 2^nd respondent: Phipson on Evidence (18^th ed), §6–06; Tam Po Kei v Tam Bo Kin (No 1) [2011] 1 HKLRD 537, §25 per Harris J. None of the respondents has given evidence at trial to substantiate it.  It is true that Vincent Lo accepted that Fitzroya, the moneylender within the Group, did lend money from time to time to Wing Fai’s sub‑contractors who needed loan financing, and that such loans were of benefit to Wing Fai because they enabled the sub-contractors to carry on and complete works that were of value to Wing Fai, but there is no evidence of the true extent of such loans.  It is also true that the Group had provided security by way of pledged deposits with the banks to secure Wing Fai’s bank facilities.[63] But there is no evidence that any of the respondents, as directors of Wing Fai, gave separate consideration to its position as a separate entity when procuring a particular relevant payment to be made.  There is no evidence that the 2^nd respondent had considered the interests of Wing Fai specifically and “always intended” that Wing Fai be fully indemnified by the Group as she asserted.  There is no suggestion that Vincent Lo, a director, was informed about the impugned transactions or their alleged purpose.  Wing Fai was thus deprived of the benefit of his independent consideration of those transactions.

237.  From an objective point of view, it is difficult to see how the transactions could, overall, be in the interests of Wing Fai. 

(1)  The scheme involved deception of the banks and the use of forged documents issued by Wing Fai, and therefore potential civil and criminal liability on its part for fraud.  There is some suggestion that the interest rate on funds obtained via letters of credit was substantially lower than that on funds borrowed on Wing Fai’s overdraft facilities.  That advantage, if it did exist, was obtained by deception.  This, if and when discovered, would obviously jeopardise Wing Fai’s relationships with its bankers, and as a matter of common sense could have possible implications on its ability to undertake further Government contracts.  It was not a scheme to which an ordinary, honest director would have subscribed. 

(2)  Further, Wing Fai incurred large indebtedness to the banks, while the money went first to Famous Capital or King Capital and then in part to other companies in the Group.  Even if corresponding entries were entered in the accounts, Wing Fai only obtained an unsecured inter‑company receivable from either Famous Capital or King Capital (both straw companies) or from a Group company such as Fitzroya. 

(3)  Thirdly, all the interest, fees and expenses associated with the transactions fell on Wing Fai. 

(4)  Fourthly, there is nothing to show that those sub‑contractors of Wing Fai that obtained loans from Fitzroya could not be financially assisted whether by Fitzroya or otherwise without the scheme.  Nor is there anything to show that Fitzroya’s loans to those sub‑contractors were on anything other than normal commercial terms.  There is no evidence that they were lent as a favour to Wing Fai.

238.  For these reasons, I consider it plain that there was a misuse of fiduciary powers and hence a breach of duty on the part of each of the respondents insofar as he or she procured the relevant payments to be made to Famous Capital or King Capital, regardless of whether in so acting he or she acted without a fraudulent intent as against Wing Fai.

(3)  Dishonesty in the sense of deception of the banks

239.  In the light of the conclusion above, whether the breach was dishonest and fraudulent is therefore academic, except perhaps in relation to any relief that may depend on proof of fraud so I shall nevertheless deal with it.

240.  Mr Barlow submitted that the Liquidator’s pleading contained various equivocal averments, such as the respondents “knew or ought to have known that no goods were delivered”,[64] which could not support a claim for fraud: Armitage v Nurse [1998] Ch 241, 256; Lipkin Gorman v Karpnale Ltd, supra, at 1352A–B.  I agree such averments are unsatisfactory, but those sentences are not the only relevant averments.  There are others which, if established, are plainly sufficient to show dishonesty in the way alleged.  The attack on the pleading on this basis was dealt with by Chu J, refusing to strike out the Points of Claim: see §45 of her Ladyship’s decision dated 28 March 2011.  I do not think it is open to the 2^nd respondent effectively to seek again to strike out the pleading on this ground.

241.  In determining whether it has been proved that the respondents dishonestly deceived the banks, the proper approach has been set out in several decisions of the Court of Final Appeal from which I extracted the following principles in Securities and Futures Commission v Wang Jian Hua and Others (unrep, HCMP 745/2013, 29 October 2015), at §§50–52:

“50.  First, although the civil standard of proof applies, “such standard is to be applied flexibly, factoring in the inherently greater improbability of serious misconduct as compared with lesser forms of misconduct, and therefore requiring the person bearing the burden of proving the allegation to prove it with evidence of a commensurate cogency” (Nina Kung at §182).  See also Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117 at §§72–75.

51.   Secondly, where the court is invited to reach a conclusion of wrongdoing as an inference to be drawn on the basis of circumstantial evidence, “any such inference must be properly grounded in the primary facts found.  The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question” (Nina Kung at §185).

52.   Thirdly, where the court is asked to find by inference fraud or serious misconduct, such inferences are to be drawn only where they are compelling, sufficient to overcome the inherent improbability that such conduct had occurred.  The conclusion has to be “plainly established as a matter of inference from proved facts” (Nina Kung at §§186–187; HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336 at §72).  The principle is clearly set out in paragraph 72 of Sir Anthony Mason NPJ’s judgment in Lee Ming Tee …”

242.  Insofar as the 2^nd respondent is concerned, her conviction and ample other evidence demonstrated that she was dishonest in the sense that she knew the letters of credit transactions were a deception practised on the banks, and I so find. 

243.  The 1^st respondent, however, was not a defendant in the criminal proceedings.  There is a live issue whether he knew the sale and purchase transactions were fictitious when he signed on documentation relating to those 7 payments‑out referred to in §221(1) above.  The matters from which the 1^st respondent’s dishonesty (“and/or” the 2^nd respondent’s “and/or” the 3^rd respondent’s) is said to be inferred are pleaded in the 8 particulars in the Re‑Re‑Re‑Amended Points of Claim at §21.

244.  Particular (1) is that the directors of Famous Capital and King Capital were related to the 1^st and 2^nd respondents and had been acting under their instructions, and that the respondents knew that these two companies were not independent third parties.  The directors of Famous Capital were Mandy Ip and Carmen Cheng; the directors of King Capital were Masada Tsui and Tony Lo. 

245.  Mandy Ip appears to have been a China Rich employee since 1993 although in the material years she had to deal with accounting matters of Wing Fai.  She was on Wing Fai’s payroll between 1997 and April 2002.  There is conflicting evidence whether she had her own room.  I prefer the evidence of Vincent Lo that she sat together with others in the central area of the Connaught Road office.  She continued to work in CR Airways (a company of the 1^st respondent) after the sale of Wing Fai in April 2002.

246.  The Liquidator relied on a statement of Julia Ip given to the police in May 2005 which stated that Mandy Ip primarily followed the 1^st respondent’s instructions and acted like his secretary, but Mandy Ip herself testified that while she had contact with the 1^st respondent, she did not have a senior position and anyone in the Group could give her work. Julia Ip’s statement is admissible[65] but, as she was not called to give evidence, I think it would be unsafe to rely on her untested statement effectively to find dishonesty on the part of the 1^st respondent.  Moreover, Julia Ip also said that the instructions on the applications for letters of credit in favour of Famous Capital were generally provided by the 2^nd (not the 1^st) respondent.  In the same statement, she told the police that the 1^st respondent had never instructed her to open a letter of credit in favour of Famous Capital. 

247.  Mandy Ip was convicted for conspiracy to defraud the banks.  The conviction, however, is not admissible evidence in these proceedings.  In any event, the accusation there was that she conspired with the 2^nd respondent.  The 1^st respondent was not prosecuted at all.

248.  According to a proposed share options list in January 2000, Carmen Cheng had been employed as the personal assistant to the 1^st respondent since December 1998.[66]  She was subpoenaed at the instance of the Liquidator but eventually not called by any party to testify.

249.  As for Masada Tsui, she was employed by GreaterChina, of which the 2^nd and 3^rd respondents were directors and the 2^nd respondent was in addition the Chairman and CEO.  The 1^st respondent was not a director of GreaterChina.  There is no suggestion that this company was managed by the 1^st respondent at the material times.  Masada Tsui pleaded guilty to one charge of conspiracy in relation to a letter of credit in favour of King Capital.  The conviction is not pleaded (as required by O 18 r 7A) and in any event relates only to a conspiracy with the 2^nd respondent.

250.  Regarded as part of the Group’s senior management, Tony Lo was a manager handling projects on the Mainland and, because of that, should have had opportunity of working directly with the 1^st respondent as the 1^st respondent’s focus at the time was on the Mainland business of the Group. 

251.  Particular (2) is that Mandy Ip signed a declaration when applying to de‑register Famous Capital stating it had never commenced any business or operation. 

252.  Particular (3) is that Wing Fai never traded with Famous Capital or King Capital.  It was not industry practice or custom for one company to supply both concrete mix and asphalt.  The quantities involved were enormous and far exceeded Wing Fai’s requirements. There was no address for delivery or transport documents of the 38,370 tonnes of asphalt said to have been delivered by Famous Capital to Wing Fai.  Steel bars and concrete continued to be supplied by the usual suppliers.

253.  Particular (4) is that Famous Capital did not have a place of business.  The only address given by Famous Capital was an address belonging to the “TrustNet Group”.

254.  Particular (5) is that King Capital did not have a place of business.  Its address was an accountant’s office by the name of S H Yeung & Co.

255.  These 4 particulars (ie (2) to (5)) go to the fact that Famous Capital and King Capital were not genuine suppliers of materials to Wing Fai.  They do not as such go to show that the 1^st respondent must have had the requisite knowledge.

256.  Particular (6) is that the directors of Famous Capital and King Capital had declined to attend interviews with the Liquidators to explain the transactions.  I do not think it is relevant to the point at hand.

257.  Particular (7) is that the person named as the “contact person” on the letter of credit documentation was Julia Ip and that she was instructed by the 1^st and 2^nd respondents to prepare the paperwork in connection with the letters of credit issued in favour of Famous Capital and King Capital.  As explained in §246 above, however, Julia Ip’s evidence in her police statement was that she was instructed by the 2^nd respondent, not the 1^st respondent.

258.  Particular (8) is that various amounts were “repaid” by Famous Capital and King Capital to Wing Fai.

259.  In the absence of direct evidence of the 1^st respondent’s knowledge, the matter is one for inference.  The fact that the 2^nd respondent was involved in the letters of credit, with Mandy Ip, Carmen Cheng, Masada Tsui and Tony Lo being involved as directors for Famous Capital and King Capital, tends in my view to suggest that the 1^st respondent had knowledge.  After all, the 2^nd respondent was merely the Group CFO, with a very small (3.17%) shareholding in China Rich.  The notion that she took it upon herself to set up Famous Capital and King Capital, and procure these staff members, including her daughter, to be directors, and that subsequently invoices and other documents for fictitious transactions were produced, and in several cases signed by the 1^st respondent, all without the 1^st respondent’s requisite knowledge, is in my view less probable than the scenario that the 1^st respondent did have knowledge of Famous Capital and King Capital and that they were companies directed by his staff.  Further, even if he did not follow the minute details, it would be unlikely, given his position, that he was entirely unaware of any payment‑in received from Famous Capital or King Capital.

260.  I accept that I need to look for inferences that are compelling.  In my view, the circumstances here give rise to an inference of sufficient force and likelihood as to justify a finding, on the balance of probabilities, that the 1^st respondent knew the sale and purchase transactions were fictitious when he signed on the documentation relating to the 7 payments–out in question.  This is fortified by the fact that the 1^st respondent, who is of course peculiarly well placed to explain first‑hand his then state of mind, did not give evidence.  There was some suggestion that he was physically unfit but this was not properly substantiated (with a previously undisclosed medical note dated September 2011 being simply handed up, which did not state that the 1^st respondent was unfit to give evidence).  The inference is, in my view, therefore strengthened as against the 1^st respondent on this issue: see Prest v Petrodel Resources Ltd [2013] 2 AC 415 at §44; Wisniewski v Central Manchester Health Authority [1998] PIQR 324, 340; Tjang Siu Thu v Profield Construction Engineering Ltd (unrep, CACV 156/2013, 27 May 2015), §§27-33.

261.  As for the 3^rd respondent, it seems to me that the evidence marshalled under the particulars mentioned above to prove his dishonesty is tenuous.  The evidence is equally consistent with his simply being told what to do without knowing the details and does not, in my view, sufficiently support a finding that he knew the transactions with Famous Capital and King Capital were fictitious.

(4)  Dishonesty vis‑à‑vis Wing Fai

262.  As against Wing Fai, however, the Liquidator’s pleaded case is not that money was taken away and pocketed by the respondents themselves personally, but that the money was channelled to the Group companies for the benefit of the Group as a whole without regard to the interests of Wing Fai itself, and that the outflow and inflow of funds resulted in a net shortfall for Wing Fai as at 22 April 2002.  There is no allegation pleaded, or even mentioned in opening[67], that any of the respondents took the funds personally or set out to deprive Wing Fai of assets.  In fact, the Liquidator had, prior to the trial, opposed any expert opinion being adduced for the purpose of tracing the money, on the ground that it was irrelevant.[68] The 2^nd respondent’s application to adduce expert evidence was not proceeded with on the common understanding that the Liquidator would not run the case that any of the respondents directly personally benefitted from the transactions.[69]

263.  In closing submissions, the Liquidator’s counsel referred to certain documents suggesting that some of the money obtained under the letters of credit went from Famous Capital to a number of other persons or entities outside the Group.[70] Because of the position taken by the Liquidator as mentioned above, there had been no investigation before or at trial as to precisely how those funds paid out were ultimately employed or whether the funds were repaid or passed on.  It would in my view be wholly unfair to allow such unpleaded allegations to be raised and for such forensic reports to be referred to, for the first time in closing submissions, when the respondents had not had an opportunity to explain or respond and in particular when the 2^nd respondent had elected to make a submission and call no evidence.

264.  I conclude that it is not established that the respondents or any of them, insofar as they procured the payments‑out, intended to deprive Wing Fai of the funds permanently.

K.  ISSUE 5 — RATIFICATION

265.  The issue of ratification was raised by the 2^nd respondent on the pleading in two ways.  First, the 2^nd respondent pleaded that her conduct was expressly or impliedly ratified because the nature and purpose of the impugned transactions was known to China Rich, Benefit and Wing Fai through their officers and the transactions were executed with their fully informed consent.[71] Secondly, it was pleaded that the transactions were expressly or impliedly ratified by Benefit and/or China Rich as a result of the Set‑Off Agreement, the Sale and Purchase Agreement and the discharge by the Group of Wing Fai’s indebtedness to the issuing banks.[72] 

(1)  Implied ratification by reason of 1^st and 2^nd respondents’ directorship of Benefit

266.  In his submissions at the end, Mr Barlow only relied on implied ratification by Benefit.[73]  It was contended that since Wing Fai was, prior to 22 April 2002 and at the time of each of the impugned transactions, wholly owned by Benefit, and the 1^st and 2^nd respondents were the only two directors of Benefit, the acts complained of, which were done with the consent of the 1^st and 2^nd respondents, were impliedly ratified by Benefit.  He relied on the following well‑known passage in In re Duomatic Ltd [1969] 2 Ch 365, 373:

“where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

The argument is that, as the acts of Wing Fai’s directors had been approved and adopted by Benefit, the sole shareholder, Wing Fai cannot bring a claim against the directors for breach of duty because the acts of the shareholders were the acts of the company.

267.  There are in my view at least two problems with this argument.  First, on the 2^nd respondent’s own case, where a respondent had not signed the documents in question, there was nothing to fix him or her with knowledge of and responsibility for the particular payment. 

268.  On the facts, not all the payments‑out were procured by the 1^st and 2^nd respondents together.  In fact, based on my conclusion on Issue 3 above, only 3 impugned payments[74] were procured by them together, and one of them was not shown to have been made out of Wing Fai’s funds.[75]  The vast majority of the payments‑out cannot be said to have been made jointly with the assent of the 1^st and 2^nd respondents.

269.  Secondly, I accept Ms Chan’s submission that as a matter of law, there is a relevant exception to the Duomatic principle where the transaction is not bona fide or honest.  In Bowthorpe Holdings Ltd v Hills [2003] 1 BCLC 226 at §50, Morritt VC, referring to the principle that a company is bound in a matter intra vires by the unanimous agreement of its members, said:

“But subsequent decisions show that there are exceptions to such a principle. First, the transaction must be bona fide or honest. This, in my view, is demonstrated by the qualification of Viscount Haldane in A‑G for Canada v Standard Trust [1911] AC 498, 505 that ‘the case was not ... a cloak under which a conspiracy to defraud was concealed’, by Younger LJ in Re Express Engineering Works [1920] 1 Ch 466, 471 that ‘no fraud is alleged in respect of this transaction’, and by Lawton LJ in Multinational Gas v Multinational Services [1983] Ch 258, 268 that the members must act in good faith. Thus, in Re Duomatic [1969] 2 Ch 365, 372 Buckley J cited with approval the view of Astbury J in Parker and Cooper Ltd v Reading [1926] Ch 975, 984 that the transaction must be both intra vires and honest.”

270.  In Madoff Securities International Ltd v Raven [2011] EWHC 3102 (Comm) at §123, Flaux J also recognised an exception to the Duomatic principle to the effect that a transaction can be impugned by the company if it is not honest, bona fide and in the best interests of the company and suggested, as a possible rationale for the exception, that public policy demands that a transaction which is not honest, bona fide and in the best interests of the company is not binding on the company.

271.  It is true that both Bowthorpe Holdings and Madoff Securities are only decisions holding there was a serious issue to be tried on the application of the Duomatic principle,[76] and I have some reservation whether the exception applies whenever the transaction may be said to be not in the best interests of the company, but the principle seems to me to be a sound one at least in respect of a dishonest and criminal transaction.  It is also stated in Gore‑Browne on Companies at §§8[1] & 8[20][77] that a company cannot ratify an illegal transaction.  Here, the letters of credit transactions were plainly illegal and, indeed, criminal, in the sense that they were a fraud on the issuing banks.  Whatever the precise scope of the exception may be, there is no doubt in my mind that it applies on the facts of this case, where any informal approval by the sole shareholder, if given, would “have been a cloak under which a conspiracy to defraud was concealed”: A‑G for Canada v Standard Trust [1911] AC 498, 505.

(2)  Ratification by Set‑Off Agreement and Sale and Purchase Agreement

272.  Neither the Set‑Off Agreement nor the Sale and Purchase Agreement referred to the impugned transactions involving Famous Capital and King Capital.  It is difficult to see how they gave rise to an implied, let alone, express ratification of those transactions.  As Mr Barlow did not elaborate on this ground in his submissions in the end, it is unnecessary to deal with it any further.

L.  ISSUE 6 — LOSS AND DAMAGE

(1)  The approach

273.  S 276 is not a section for punishing a man guilty of misfeasance but for compensating the company in respect of the loss occasioned by his misfeasance: Re Canadian Land Reclaiming and Colonizing Co (1880) 14 Ch D 660, 673–674.  Since the misfeasance here is the direct misapplication of the company’s funds or funds obtained on the company’s credit, each of the directors who are liable is required to restore to the company what he has caused it to lose as a result of his breach of fiduciary duty: Target Holdings Ltd v Redferns [1996] AC 421, 434; Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, §78. 

274.  The misfeasance involved the first kind of breach of fiduciary duty as categorised by Tipping J in BNZ v NZ Guardian Trust Co Ltd [1999] 1 NZLR 664 at 687; Libertarian Investments Ltd v Hall, supra, §79.  In such a case, which involves the wrongful paying away of trust assets, the applicable approach was explained by Lord Browne‑Wilkinson in Target Holdings Ltd (at p 434) as follows:

“In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. … If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed … Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred … Thus the common law rules of remoteness of damage and causation do not apply.”

275.  Taking a somewhat different approach, in Libertarian Investments Ltd v Hall at §168, Lord Millett NPJ described the principle in terms of the process following an account:

“If the account discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for the disbursement to be disallowed. This will produce a deficit which the defendant must make good, either in specie or in money. Where the defendant is ordered to make good the deficit by the payment of money, the award is sometimes described as the payment of equitable compensation; but it is not compensation for loss but restitutionary or restorative. The amount of the award is measured by the objective value of the property lost determined at the date when the account is taken and with the full benefit of hindsight.”

Similarly, in that case, Litton NPJ also analysed the remedy in terms of an “equitable debt” (see §154), citing Ex p Adamson; In re Collie (1878) 8 Ch D 807, 819.

276.  While there may be a tension between the two approaches,[78] it is in my view unnecessary to distinguish between them for present purposes.  The law requires that the loss or deficit resulting from the misfeasance be made good.

277.  The arguments raised by the respondents may be grouped into two main points:

(1)  The Liquidator has failed to present the full picture concerning the transfers into and out of Wing Fai, and the claim now put forward does not meet the burden of proof.

(2)  Any financial loss to Wing Fai had been made good by later transfer of funds or credit supplied for Wing Fai.  This argument refers in particular to the discharge of Wing Fai’s bank indebtedness by the Group following the implementation of the Set‑Off Agreement and the sale of Wing Fai to Sino Glister on 22 April 2002.

(2)  Uncertainties in relation to the payments

278.  The first argument is that by reason of the unavailability of Wing Fai’s 2001–2002 accounting records, one does not know the full picture concerning transfers out of and into Wing Fai.  Complaint was made of the “constantly changing nature” of the pleaded case, culminating in the submission that the Liquidator’s case “has all been mere guesswork”.

279.  It is true that the figures pleaded in the Points of Claim, both representing the total amounts of payments-in and -out and the individual entries, have undergone numerous changes in the course of these proceedings.  Mr Barlow said that in this respect, very little black ink remains in what is now the fifth iteration of the pleading.

280.  But this is a mere forensic point.  The ultimate question is whether the Liquidator has proved misfeasance that resulted in loss.  In a case of misapplication of funds such as the present, the breach of fiduciary duty was complete when the money was paid out wrongfully, and the loss was incurred.  The directors responsible have to replace the property wrongfully transferred away or make good the loss: Bishopsgate Investment Management Ltd v Maxwell, supra, at p 143G.

281.  In the case of payments-out made by cheques to Famous Capital and King Capital, the loss is obvious.  The funds paid out were Wing Fai’s to dispose of, even if its bank accounts were in overdraft (as seem to have been the case).  The proceeds of the cheques represented borrowed money from the banks which fell within the control of the directors.  There is no material difference from a company’s credit balance in its bank account as analysed in Selangor United Rubber Estates Ltd v Cradock (No 3), supra, at pp 1575–1577.

282.  In the case of payments made via letters of credit, the loss is in substance the same.  The proceeds of the letters of credit were effectively borrowed by Wing Fai from the issuing banks, with the only difference that they did not immediately become due but typically only three months later.

283.  In both situations Wing Fai was wrongfully caused to borrow money from the banks and the money was misapplied by being paid to Famous Capital and King Capital for the purposes of the Group as a whole.  The loss was suffered as soon as money was paid to those two companies.

284.  It is possible for it to be shown that the deficit was made good, and the company did not suffer a loss after all, because, for example, the money was later brought back to or for the credit of the company in the way of repayment, but unless and until such credit is shown, it is plain that as a direct consequence of the payments-out the company has suffered a loss of the funds of which the directors were stewards.

285.  While the Points of Claim alleges that the payments‑out and payments‑in left a “shortfall”, it is, in my view, confusing to think in terms of the Liquidator having to prove loss in the nature of a shortfall.  The shortfall is not a single event but the final difference between the sum total of payments‑out and payments‑in.  While it is no doubt for the Liquidator to prove the payments-out, each of which constituted a breach of fiduciary duty on the part of the responsible directors, it is in my opinion for the directors to show that credit should be given for payments in the other direction: see In re Anglo‑French Co‑operative Society, ex p Pelly (1882) 21 Ch D 492, 501 per Jessel MR.  By misapplying funds in breach of duty, they came under an immediate obligation to make good the damage to the company, and unless they show that they have already done so, for example, by bringing back the money, they will be held liable to do so.

286.  In my judgment, therefore, it is not enough for the 2^nd respondent to submit, as Mr Barlow did on her behalf, that “nowhere … is there evidence which clearly shows that conduct of [the 2^nd respondent] caused financial loss to Wing Fai that was not made good by later transfers of funds …”.[79]  The 2^nd respondent has to show by evidence that the loss to Wing Fai was indeed made good by later transfers of funds or credit.

(3)  The Set‑Off Agreement, Sale and Purchase Agreement and discharge of bank indebtedness

287.  The 2^nd respondent advanced the case that to the extent any loss to Wing Fai arising from the impugned transactions had not been paid back by 22 April 2002, it was extinguished as a combined result of the Set‑Off Agreement, the Sale and Purchase Agreement and the discharge by the Group of the outstanding indebtedness of Wing Fai to the issuing banks by May 2002.

(a)  Set‑Off Agreement

288.  On around 23 November 2001, China Rich and Benefit and many of their wholly‑owned subsidiaries (including Fitzroya, Wing Fai, Wai Shun and Zhukuan Wing Fai) entered into an agreement to set off the outstanding balances within their mutual current accounts.  A board meeting of China Rich was held[80], at which it was resolved, inter alia, that the Set‑off Agreement be approved and that the Chairman be authorised to sign it.  The appendix which formed part of the minutes stated:

“SET‑OFF OF INTER‑COMPANY CURRENT ACCOUNT BALANCES

It was proposed before the Board meeting that the inter‑company current accounts balances of the Company and its subsidiaries (herein collectively called “the Group Companies”) must be set off against the amounts due to/from all the other Group Companies for the purpose of simplifying the administrative and accounting procedures.

It was also proposed that any of the Group Companies must not call for repayment in cash or in kind of the inter‑company current accounts balances before setting off against the amounts due to/from all the other Group Companies. All set‑off should be reviewed by the Chief Financial Officer. It was proposed that the Audit Committee should give approval to this accounting treatment.

It was proposed that the aforesaid set‑off should be adopted in the coming financial year or at any time at the discretion of the Chief Financial Officer or the Accounting Manger as he/she thinks fit and also at the recommendation of our Auditors.

It was noted that the members of the Audit Committee have been informed and have agreed on the accounting treatment regarding the set‑off of the inter‑company current accounts balances among the Group Companies.

It was resolved that the inter‑company current accounts balances of the Company and its subsidiaries (herein collectively called the “Group Companies”) must be set off against the amounts due to/from all the other Group Companies and must not call for repayment in cash or in kind of the inter‑company current accounts balances before setting off against the amounts due to/from all the other Group Companies. All set‑off should be reviewed by the Chief Financial Officer. It was resolved that all members of the Audit Committee have given approval to this accounting treatment.

It was also resolved that the aforesaid set‑off should be adopted in the coming financial year or at any time at the discretion of the Chief Financial Officer or the Accounting Manager as he/she thinks fit and also at the recommendation of our Auditors.”

289.  The Set‑Off Agreement, which was signed by, among others, the 1^st respondent on behalf of China Rich, Benefit and Fitzroya, and by the 3^rd respondent on behalf of Wing Fai, provided:

“1) The Group Companies assign the right to the inter‑company current accounts balances to Fitzroya Finance Company Limited.

2) Fitzroya Finance Company Limited has the right to set‑off the inter‑company current accounts balances among the Group Companies.

3) Any of the Group Companies must not call for repayment in cash or in kind of the inter‑company current accounts balances before setting off against the amounts due to/from all the other Group Companies. All set‑off should be reviewed by the Chief Financial Officer.

4) As approval to the accounting treatment regarding the set‑off the inter‑company current accounts balances was obtained from all the members of the Board and Audit Committee in a board meeting held on 23^rd November, 2001, the Chief Financial Officer or the Accounting Managers of the Group Companies should adjust the books and records of the Group Companies in accordance with the aforesaid set‑off of inter‑company current accounts balances in the coming financial year or at any time at the discretion of the Chief Financial Officer or the Accounting Manger as he/she thinks fit and also at the recommendation of the Auditors.

5)  This Agreement is effective from the date of this Agreement.”

290.  The Set‑Off Agreement set out the inter‑company accounts balances as at 31 July 2001.  In particular, it was stated that the amount due from Wing Fai to Benefit was $110,295,746 whereas the amount due from Fitzroya to Wing Fai was $175,385,697.96.

291.  During his cross‑examination, Hill blithely suggested that the Set‑Off Agreement was not genuine but a backdated document subsequently created.  In my view any such allegation should be rejected.

(1)  The allegation is not open to the Liquidator because it was not pleaded, nor has any notice been given to dispute the authenticity of the documents pursuant to RHC O 27 r 4.

(2)  Such allegation would be contrary to Hill’s own evidence‑in‑chief which adopted the contents of his 4^th affidavit the relevant parts of which are set out in §292 below.

(3)  The Board minutes of 23 November 2001 referred to the Set‑Off Agreement which was approved by the Board.  The Board minutes were signed not only by all the respondents but also by Vincent Lo and an independent non‑executive director Dr Wong King Keung Peter.  The minutes attached and referred to an appendix which stated that the audit committee had been informed of and agreed on the accounting treatment regarding the set-off of inter‑company current account balances.[81] 

(4)  Vincent Lo, the Liquidator’s own witness, testified that he went through the contents of the documents for the 23 November 2001 meeting before signing them.  He considered the set‑off arrangement reasonable and agreed with it.  While understandably he could not recall the meeting having regard to the lapse of time, he had no reason to think it did not actually take place.  He understood the nature and effect of the schedule to the Set‑Off Agreement that set out the inter‑company balances.

(5)  As Kwan J (as she then was) said in Re Fitzroya Finance Co Ltd (unrep, HCCW 253/2003, 3 March 2004)[82], at §24:

“The way in which all parties had conducted themselves afterwards would appear to lend support to Fitzroya’s case that there was in existence an agreement on the extinguishment of the inter‑group debts.”

(6)  Had the allegation been properly raised, there might well have been independent evidence, such as evidence from Dr Peter Wong, that could be adduced against it.[83]

292.  I proceed therefore on the basis that there was a genuine set‑off arrangement embodied in the Set‑Off Agreement executed at around its date of 23 November 2001.  The accounting steps and the numbers involved are not in dispute.  When the 2^nd respondent sought directions for expert evidence to be adduced on, inter alia, the following issues:

“6.   What was the total amount of the Company’s and the Construction Group’s bank debt that was discharged by China Rich, Fitzroya and/or Benefit in 2002 (“the bank debt”)? 

7.  What amounts became due and owing on inter‑company account between the Company, the Construction Group, Fitzroya, China Rich and Benefit after repayment of the bank debt and implementation of the Set Off Agreement? 

8.  What was the debt due from the Company and the Construction Group to Benefit immediately before the execution of the Sale and Purchase Agreement?”,

Hill’s response in his affidavit was:[84]

“36. I do not see the relevance of the issues set out in points 6, 7 and 8. These are all amounts that have been given in evidence by the 2^nd Respondent and are not in dispute.

37. The 2^nd Respondent has stated on oath, in her Affirmation dated 3 October 2003, filed in HCA 2570/2003[85] (“Cheng Affirmation”) (“NTCH–6”):

(i) that the amount of the Company’s bank debt that was discharged by China Rich Group companies was HK$116,364,951 (paragraph 32 of the Cheng Affirmation, at page 11 of “NTCH–6”);

(ii) how the figures in the Set‑off Agreement dated 23 November 2001 were obtained and its consequences (that the only debt between the Company and any China Rich Group company after the set‑off was the HK$40,000,000 that the Company owed Benefit) (at paragraphs 14 to 32 of the Cheng Affirmation, at pages 5–12 of “NTCH–6”); and

(iii) that the amount of the debt due by Company to Benefit is HK$40,000,000, as set out in the Proof of Debt in the Liquidation that she signed on behalf of Benefit (paragraph 33 of the Cheng Affirmation, at page 12 of “NTCH–6”).

I find it extraordinary that the 2^nd Respondent is now seeking an expert accountant to investigate matters that she has affirmed and that are not to my knowledge in dispute.” (emphasis added)

293.  The set‑off was actually implemented on 28 March 2002 by the Group’s accounts department making journal entries.  This seems to me to have been a unilateral exercise carried out pursuant to the Set‑Off Agreement, not requiring any further act on behalf of Wing Fai by its directors or otherwise.  The agreement entrusted the mechanics to the Group CFO, ie the 2^nd respondent.  In essence, on that date, Fitzroya simply collected payment by exercise of right of set-off pursuant to the course agreed in November 2001.

294.  As a result, the sums due from Fitzroya to Wing Fai were set off against the sums due from Wing Fai to Benefit (but assigned by Benefit to Fitzroya), leaving a net balance owed by Fitzroya to Wing Fai.  In particular, as explained the 2^nd respondent’s affirmation in HCMP 2570/2003, immediately before the set‑off on 28 March 2002, the position was that Wing Fai owed Fitzroya a debt (assigned from Benefit) of $110,295,746, while Fitzroya owed Wing Fai $151,508,908.78, giving rise to a net debt owed by Fitzroya to Wing Fai of $41,213,162.[86] This accorded with the figures in the journal vouchers for the set‑off exercise.

295.  After the set‑off, on 22 April 2002, Benefit entered into the Sale and Purchase Agreement to sell Wing Fai to Sino Glister.  There is no suggestion that this is not a genuine sale or that Eric Chim was in any way acting as a front for or in collusion with the respondents or the Group.  The Sale and Purchase Agreement was apparently drafted by a firm of solicitors and was signed in front of a solicitor.  The parties acknowledged that Wing Fai owed Benefit a net sum of $40 million, which gave rise to the lien on future receivables and the Group’s retention of control over the Old Accounts.

(b)  Discharge of Wing Fai’s bank debts by the Group

296.  Further, as explained in the parts of the 2^nd respondent’s affirmation in HCMP 2570/2003 that are not in dispute, as a condition for the sale and purchase[87], Sino Glister required the three construction companies (Wing Fai, Wai Shun and Zhukuan Wing Fai) to be clear of all outstanding bank indebtedness as at 22 April 2002 which was agreed at $104,763,078.

297.  Accordingly, after 22 April 2002, the Group made net repayments totalling $105,766,126 to Wing Fai’s bankers, discharging all indebtedness under its overdraft and facilities.

(1)  As at 22 April 2002, Wing Fai’s bank accounts were in substantial overdraft.

(2)  To achieve a clean break with the construction companies, the Group agreed to discharge their liabilities to the banks in full.

(3)  The amount paid by the Group after 22 April 2002 to Wing Fai’s banks for this purpose was $116,364,951.  After adjusting for overpayments and repayments, the net total payment by the Group to settle Wing Fai’s bank indebtedness was $105,766,126.

(4)  As a result of these payments for Wing Fai, Fitzroya’s net indebtedness to the construction companies (which totalled $44,700,571.56) were extinguished; instead Wing Fai became indebted to the Group to the tune of $59,924,342.58.

(5)  The Group waived the amount in excess of $40 million (ie $19,924,342.58) so that, as was agreed with Sino Glister, Wing Fai owed $40 million to Benefit.

(6)  The Group companies did not lodge any proof of debt in Wing Fai other than Benefit’s proof for $40 million.  The proof had been disputed by the Liquidator and is no longer maintained.

(7)  All of Wing Fai’s banks were repaid.

298.  The calculations are shown in the 2^nd respondent’s affirmation as well as in a document said to be a schedule to the Sale and Purchase Agreement.  Although it was disputed whether the schedule in fact formed part of the Sale and Purchase Agreement, its contents seem to me to be in line with the 2^nd respondent’s affirmation and a credible explanation of how the agreed amount of $40 million was arrived at.  In any event, as explained above, those steps are not disputed by the Liquidator.

299.  In fact, the amounts of bank repayments as stated by the 2^nd respondent were close to those summarised in a schedule prepared by the Liquidators[88], which recorded payments to 4 banks as follows.  There are minor differences but they are not material for present purposes.

Bank	Opening balance as at 22 April 2002	Interest accrued up to date of payment	Payment by the Group
Standard Chartered	(90,076,859.53)	(417,345.37)	90,494,204.90
DBS Kwong On	(12,744,411.70)	(36,522.34)	12,780,934.03
ICBC	(951,887.60)	(36,028.60)	915,859.00
Hong Kong Chinese Bank	(11,656,909.15)	(109,171.26)	11,766,080.41
Total	(115,430,067.98)	(514,664.97)	115,957,078.34

300.  It will be noted that the vast majority of the repayments were made to 3 of the 4 banks involved in the transactions impugned in these proceedings.  The result is that, Mr Barlow submitted, Wing Fai has suffered no unrecovered loss from those transactions.  In my view there is force in this submission. 

(c)  Wing Fai suffered no loss as a result

301.  In Re Derek Randall Enterprises Ltd [1990] BCC 749, a director of the company, who was also a shareholder, took £78,000 in commissions and paid them into his own personal account without accounting for them to the company.  Later he gave the company’s bankers a guarantee of its indebtedness up to £90,000.  In support of his guarantee, he paid £88,500 including the misappropriated £78,000 into a special account at the bank charged with payment of his liability under the guarantee.  Subsequently the bank called on his guarantee and transferred the money out of the guarantee account to reduce the company’s overdraft.  In the company’s liquidation, it was held (by Millett J at first instance and by the Court of Appeal) that the director was guilty of misfeasance, but that since the company’s money was used to discharge its debt, it had had the full benefit of the money and could not claim the sum over again.

302.  The position in the present case can be analysed as follows:

(1)  The direct result of the impugned payments-out was that Wing Fai’s bank accounts were depleted, leading to a larger indebtedness to the banks than would otherwise have been the case.  There were no more such payments‑out after the sale on 22 April 2002.

(2)  The funds obtained under the impugned transactions were channelled to entities in the Group: see §§229–232 above. The Group therefore comprised the recipients of the misapplied funds.

(3)  The Group’s repayments, post‑sale, of Wing Fai’s bank debts were, to the extent of such funds, a direct result of the impugned transactions coupled with China Rich’s guarantee to the banks and the agreement with Eric Chim to clear off all bank debts.

(4)  The repayments were plainly made with the intention of severing all ties between the Group and Wing Fai, thus settling all accounts whether hidden or manifest except the resultant $40 million debt to Benefit.  It is inconceivable for it to have been intended that Wing Fai would thereafter still have a claim, such as for knowing receipt, against Group entities, arising out of the impugned transactions and the way the Group had made use of the banking facilities of Wing Fai.

(5)  These repayments were tantamount to the return of money by Group entities into Wing Fai’s bank accounts, discharging Wing Fai’s liabilities to the banks which were carried over from the pre-sale period.

(6)  This return of money was not saddled with liability because (i) the Group there and then waived any right to recover from Wing Fai the sum of $19,924,342.58; (ii) as to $40 million, Benefit initially lodged a proof of debt, but this was never accepted on behalf of Wing Fai, and is no longer maintained by Benefit; and (iii) China Rich, despite having guaranteed Wing Fai’s bank debts, did not claim to be, and was not, subrogated to any rights of the banks against Wing Fai.

(7)  Accordingly, on the face of things, Wing Fai received, but did not give, value for the discharge of its bank debts to the tune of $59,924,342.58.

(8)  This sum far exceeds what has been called in these proceedings the “shortfall” between the payments‑out and the payments‑in up to 22 April 2002.  In fact, based on my conclusions on Issues 2 and 3 above (§§187 and 220–221), the waived sum of $19,924,342.58 alone exceeded the maximum shortfall attributable to any of the respondents.

303.  In these circumstances, for Wing Fai to recover any further money, whether from the respondents (as claimed in these proceedings) or from the Group as their co‑obligors (against whom the Liquidator has not claimed), on account of the alleged “shortfall” as at 22 April 2002, would in my view be for it to have the benefit of the money twice over.

304.  Indeed, Kennedy fairly accepted during his evidence, if Wing Fai had been reimbursed for the costs it incurred in the impugned transactions and such reimbursement came from an external source without any recourse to Wing Fai, then overall there was no effect on Wing Fai financially.

305.  It does not matter that China Rich was a guarantor of Wing Fai’s bank debts so that the banks could call upon the guarantee if Wing Fai failed to repay.  As between China Rich and Wing Fai, it was the latter who owed the primary liability to the banks: Re Derek Randall, supra, p 752D–E.  Further, as a matter of fact, China Rich did not claim to be subrogated to the banks’ rights as against Wing Fai at all.  Even if it did, to the extent of any shortfall between the payments‑out and payments‑in, it might well have been met with the riposte that it was not entitled to be so subrogated because it was merely paying off its own liability as co‑obligors with the respondents who were charged with misfeasance for having channelled Wing Fai’s funds to the Group.

306.  Nor does it matter, in my view, for present purposes, that the funds used to pay off the banks were not, or could not by rules of tracing be readily traced back to, the very funds channelled to the Group pursuant to the impugned transactions.  It appeared to be a fact in Re Derek Randall that the money used to pay the bank was the money misappropriated from the company.  But this does not seem to me to be essential to the present analysis. The critical question is whether the depletion of the funds had been made good by the parties responsible for the misappropriated funds with money not saddled with any liability.  If it had been, it does not matter whether or not it had been made good with the very money originally removed as a result of the misfeasance.

307.  It would be a wholly different case, where it might very well be said the respondents could not claim any credit, if it was an independent white knight who paid off Wing Fai’s bank debts, even if such payment was for free.  But here Wing Fai’s bank debts were repaid by the Group, the very entities to whom, it is said, money obtained on Wing Fai’s credit, from the very same banks, had been channelled for their benefit, and those bank debts were (to the tune of $59,924,342.58) repaid without the Group obtaining anything in return.

308.  Further, in Re Derek Randall, the commissions wrongfully retained by the director had no direct relation to the company’s liabilities to the banks which he eventually repaid.  In contrast, we have in this case a link not found there, which is that the misfeasance directly resulted pro tanto in the very bank indebtedness that was eventually paid off.  Wing Fai’s bank accounts were akin to funds which were wrongfully depleted, but they were later replenished, at least in part without recourse and liability to Wing Fai, by the very Group to which money was said to have been channelled. 

309.  In these circumstances it seems to me the discharge of the bank debts of Wing Fai should be given credit for.

310.  It was argued on behalf of the Liquidator that Wing Fai’s loss of the receivable from Fitzroya exceeded any payment of bank debts by the Group.[89] The receivable from Fitzroya was not “lost”, but set off in part against the debt owed by Wing Fai to Benefit and assigned to Fitzroya.  There is no claim for misfeasance against the respondent on account of the set‑off, nor is there any proceeding on foot to set aside the set‑off or the Set‑Off Agreement.  This is further dealt with in §§314‑338 below.

311.  The Liquidator submitted that because payments‑out were represented by an amount recorded in a certain temporary payments account in Wing Fai’s ledgers as an asset (a debit entry), it would not be affected by the repayment of the bank debts by the Group in May 2002.[90]  It seems to me the argument is misconceived.  There is nothing to show how the discharge of the bank indebtedness would have affected Wing Fai’s internal ledgers if it had remained in the same book‑keeping system of the Group after the sale.  But more importantly, the book‑keeping methodology does not affect the real effect of the repayment by the Group.

312.  In a similar argument, the Liquidator submitted that as the amounts of payments‑out were recorded as “Deposits and prepayments and temporary payments” in Wing Fai’s ledgers and not as a receivable from Fitzroya or a payable to Benefit, they would not be affected by the set‑off.[91]

313.  In my view Ms Chan was correct in submitting that the implementation of the Set‑Off Agreement itself did not directly affect any loss suffered by Wing Fai as a result of the impugned transactions.  Its effect was to cancel out the entire debt owed by Wing Fai to Fitzroya (as Benefit’s assignee) with part of the debt owed by Fitzroya to Wing Fai.  The discharge of Wing Fai’s bank debts by the Group was a separate subsequent act that effectively returned value to Wing Fai in part for no consideration.

(4)  Liquidator’s attack on the Set‑Off Agreement

314.  Finally, I turn to certain separate arguments raised by the Liquidator against the Set‑Off Agreement.  The Liquidator argued that it was “invalid and not binding” on Wing Fai on essentially 3 grounds, and that since the Group’s payment of Wing Fai’s bank debts was done pursuant to the Set-Off Agreement, it was therefore also “invalid and not binding” on Wing Fai.[92] This is difficult to understand, there being no suggestion that the banks should pay back $105,766,126 to the Group and prove in Wing Fai’s liquidation instead.  As was submitted on behalf of the Liquidator (see §313 above), the Set-off Agreement itself did not directly affect the assets position of Wing Fai. 

315.  Further, proceedings in which the Liquidators sought specifically to impugn the Set-Off Agreement[93] had not succeeded and had all come to an end.  The Set-Off Agreement, which is not said to be illegal or void (except under s 60 of Cap 219 as discussed below), had been performed and acted upon.  The Liquidator has given up all claims against the Group based on his refusal to recognise the effect of set-off pursuant to the Set-Off Agreement.  The inter-company accounts were left intact.  There is no plea, within these proceedings, to set aside the Set‑Off Agreement or the set-off exercise; nor are the necessary parties to such a claim before the court here.  It is difficult to see where the Liquidator’s plea that it is “not binding” leads to.  In my view, the Liquidator’s criticisms of the Set-Off Agreement in these proceedings are academic.

316.  Be that as it may, and in case it is relevant, I deal with the 3 grounds raised below.

(a)  Breach of directors’ fiduciary duties

317.  It was argued that the Set-off Agreement was made to benefit the Group at the expense of Wing Fai and its creditors and accordingly in breach of the directors’ fiduciary duties.  Relying on cases such as Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 10 ACLR 395, it was submitted that the directors of Wing Fai owed a duty to its creditors.  As Street CJ said in that case in a passage (at p 401) quoted with approval in Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417 at §129:

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorize or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets.”

318.  There are, in my view, a number of problems with this argument.  First, Vincent Lo signed the board minutes of China Rich that approved the Set-Off Agreement, probably having attended an actual meeting.  He, who was also a director of Wing Fai, thought it “reasonable”, did not see any problem with it and did not have any doubt or suspicion about it.  He approved the audited accounts of Wing Fai (for the year ended 31 July 2001) on a going concern basis without even relying on China Rich’s letter of comfort.  Although it was not he who signed the Set‑Off Agreement on behalf of Wing Fai, he was aware of it and there was no suggestion that he breached any duties to Wing Fai, nor any plea that he was misled by the respondents as regards Wing Fai’s financial condition when he approved the set-off.

319.  In addition, the Set-off Agreement received the approval of the board of China Rich and its audit committee, which included independent persons: see §§288 & 291 above.  They would have been aware of the financial position of the Group’s major subsidiaries.  It would be a grave allegation to say they were party to a Group decision that involved breaches of duty by Wing Fai’s management. 

320.  Secondly, the authorities relied upon by the Liquidator for suggesting that a duty had arisen on the part of Wing Fai’s directors to take account of creditors’ interests suggest that such duty would arise only if the company was insolvent or in a “very dangerous financial position” or in similar condition.  Thus in Facia Footwear Ltd (in administration) v Hinchliffe [1998] 1 BCLC 218, the whole group (and not just the company in question) was in a “very dangerous financial position” and its future probably depended on satisfactory refinancing arrangements becoming available (see p 228c).  In Re MDA Investment Management Ltd [2004] 1 BCLC 217, the company, which was “technically insolvent”, was “on any view in a dangerous financial position”; in fact, a winding-up petition had been presented by a creditor and an emergency board meeting was called at which the directors’ responsibilities in those circumstances were discussed (see §75).

321.  Within these proceedings, however, the Liquidator had abandoned any allegation that Wing Fai was insolvent or became insolvent during the material times.[94] In resisting the 2^nd respondent’s application to adduce expert evidence on the financial condition of Wing Fai, the Liquidator gave assurances that insolvency was “irrelevant”, it was “not an issue” and could “safely be taken to have been abandoned”.  Against that background, it seems to me unfair that the Liquidator has in effect tried to allege at trial that Wing Fai was insolvent.

322.  Set‑off would make a difference in legal rights and obligations mainly in the event of liquidation.  Thus if Fitzroya were to go into liquidation, then without the set‑off Wing Fai would have to pay its debt to Benefit in full and prove in the liquidation of Fitzroya; vice versa if Wing Fai went into liquidation.

323.  But it seems to me far-fetched to suggest that the liquidation of Wing Fai was in prospect or was something in the horizon as contemplated by the board of the Group companies or of Wing Fai as at November 2001, when the right of set-off was conferred.  Although the audited accounts for the financial year ended 31 July 2001 showed net liabilities of some $9.3 million, $172 million of the current liabilities was bank overdraft which was guaranteed by China Rich and mostly, if not entirely, secured by pledges of the Group’s deposits.  China Rich had given a letter of comfort agreeing to provide funds to enable Wing Fai to meet in full its financial obligations as they fell due for the foreseeable future.  In the event, as stated in §§296–300 above, the Group did indeed provide over $105 million in April and May 2002, enabling Wing Fai to repay its bank debts in full.  There was nothing to indicate that back in November 2001, Wing Fai was or would become unable to pay its debts as they fell due or that, prior to the sale, there was actually any debt that Wing Fai failed to repay when due.

324.  Vincent Lo did say he thought Wing Fai became insolvent in December 2001, due mainly to having under-priced some tenders, but the basis for that belief was unclear and given he had also said that he was not really involved in the finances of Wing Fai, and that it was common practice for under-priced (and therefore competitive) contracts to be made up for by subsequent claims and variation orders, little weight can be placed on this comment.  Furthermore, Vincent Lo considered that the company could go on and it appears that he only left Wing Fai in May 2002 because he did not trust Eric Chim.

325.  Eventually there was a winding-up petition against Wing Fai, but that was more than 2 months after it was sold to Eric Chim.  The petition debt was a relatively small sum of $1.46 million and there is material to suggest that Wing Fai was wound up because Eric Chim used for his own undisclosed purposes funds that had been paid to Wing Fai which he could and should have caused Wing Fai to pay to the petitioner, Enfield. 

326.  Further, according to the provisional liquidators,[95] between May and June 2002, Eric Chim apparently transferred sums totalling $4,593,500 from Wing Fai to Sino Glister.  Eric Chim had refused to explain those transfers.

327.  Subsequently, when provisional liquidators were appointed, they dismissed all the staff and closed down the business.  Three of the on-going projects were novated and the rest abandoned.  It would appear that the numerous sets of construction legal proceedings Wing Fai had been engaged in, which could lead to large swings in profitability, were not pursued.  Sub-contractors started to take matters into their own hands.  Further, most of the motor vehicles and plant and machinery disappeared and were never recovered.  The provisional liquidators reported Eric Chim had dissipated or misappropriated assets. 

328.  The Liquidators said that they had received claims of some $216 million but Vincent Lo was surprised as he thought that any net deficiency would have been in the region of $15 million.  With the sudden cessation of business of a construction company, it is not at all surprising that claims would fly in from all directions, including the ongoing construction projects and construction disputes from which Wing Fai had to pull out.  None of the proofs of debt lodged has been adjudicated.

329.  In these circumstances, the eventual winding‑up of Wing Fai could not be extrapolated backwards to show insolvency or a parlous financial condition as at November 2001.  The Liquidator has in my view failed to prove that the financial position of Wing Fai then was so “very dangerous”, “parlous” or “dire” as to give rise to duties in favour of creditors that precluded Wing Fai from entering into the Set‑Off Agreement or displaced the power of its shareholders to concur in it.

330.  Further, in any event, Benefit did not need Wing Fai’s consent to assign to Fitzroya the receivable from Wing Fai.  By clause 1 of the Set-Off Agreement, the Group companies, including Benefit, specifically assigned their rights in the inter-company balances to Fitzroya.  It seems at least arguable that notice to Wing Fai, needed for a legal assignment,[96] existed since Wing Fai was a party to the agreement.  Fitzroya therefore became the assignee of Benefit’s receivable from Wing Fai whilst being at the same time indebted to Wing Fai.  It is possible that the mutual debts could be subsequently set off even without Wing Fai’s agreement, though I express no concluded view on this which was only mentioned in passing during the trial.

(b)  Want of authority

331.  The second point raised against the Set‑Off Agreement (signed by the 3^rd respondent for Wing Fai) is that it was entered into without authority.  However, the Set-Off Agreement was a multilateral agreement involving both Benefit and China Rich, who were Wing Fai’s 100% parent companies.  Their concurrence in the agreement represented assent by Wing Fai’s 100% parents to it which could not therefore be said to be unauthorised: In re Duomatic Ltd, supra; Cane v Jones [1980] 1 WLR 1451.

332.  Further, the only two registered directors of Wing Fai, Vincent Lo and the 3^rd respondent, both assented to it, as did the 1^st and 2^nd respondents who were, on my finding, de facto directors at the time and who signed the agreement on behalf of other Group companies.

(c)  Disposition with intent to defraud creditors

333.  Thirdly, it is said that the Set-Off Agreement constituted a disposition to defraud Wing Fai’s creditors and was therefore void under s 60 of the Conveyancing and Property Ordinance (Cap 216) (though s 60 actually only renders a transaction voidable not void).   

334.  This is a serious allegation not only against the respondents here, but also Vincent Lo and the other parties to the Set‑Off Agreement.  None of them had had an opportunity to respond to this allegation in these proceedings.

335.  Leaving aside the question whether there was a disposition of property, the operation of s 60 is dependent upon establishing an intent to defraud creditors.  Since the Liquidator does not contend Wing Fai was actually insolvent or was rendered insolvent at the relevant times, the rule in Freeman v Pope[97] does not apply and hence, in the absence of any presumption, an actual intent to defraud must be shown as an inference to be drawn on the evidence: Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417, §88.

336.  No such inference should in my view be drawn. 

(1)  The Set-Off Agreement was considered by the board of China Rich, including Vincent Lo and at least one of the independent directors, Dr Wong King Keung Peter.[98] The implementation of the set-off was done pursuant to that agreement which had been properly considered and approved by the board of the listed parent company. 

(2)  There was commercial justification for it, which Vincent Lo found reasonable.  In particular, the implementation of the set‑off in March 2002 was unsurprising and, indeed, to be expected, as the Group prepared for the sale of the three construction companies.  As Kwan J (as she then was) said in Re Fitzroya Finance Co Ltd (unrep, HCCW 253/2003, 3 March 2004), at §23:

“The set off arrangements in the two‑stage process would appear to accord with commercial sense or common sense. Without the underlying set off arrangements as contained in the Schedule, and if the inter‑company debts were left as they were, immediately after the completion of the sale, the Construction Group under the new ownership could have claimed from Fitzroya the amounts outstanding just prior to the sale. The Group would have been exposed to an immediate liability to the Construction Group, notwithstanding that the Group had paid HK$104 million odd to discharge the outstanding banking facilities of the Construction Group. This was recognized by Master Woolley, that the whole picture has to be considered, when he gave unconditional leave to Fitzroya to defend in Wing Fai’s application for summary judgment”

What Master Woolley said on that earlier occasion was this:

“… if, as Mr Smith has pointed out, one looks at the whole picture of what was happening there – the sale of this company of Wing Fai and the clear evidence of an intention to draw a line under it – any other explanation than that there was an arrangement to set off all these debts so that there was just one neat figure left at the end to enable the sale and purchase agreement to take place, any other explanation isn’t just not making commercial sense, it doesn’t make commonsense.

I agree with the defendants that if there was some arrangement whereby this sale was to go through and all the debts were still outstanding, then clearly the sale would never have taken place. Nobody would have taken on this company in that state with a debt owed from it of 116 million and a debt owed to it of 38 million.”[99]

(3) There is no plea or proof that the inter-company balances were not genuine. The effect of the set-off was simply that Fitzroya (as assignee of Benefit) was paid the debt due to it, albeit by setting off the debt it owed Wing Fai.

(4) The set-off was a dollar-for-dollar netting off exercise and not a transaction at an undervalue. It does not affect the net asset position of Wing Fai. The set-off is not intrinsically a device to defraud creditors such as a gift or undervalued sale.

(5) On the basis that Benefit’s receivable from Wing Fai was assigned to Fitzroya, the effect of the Set-Off Agreement, with hindsight, was that instead of having to pay its debt to Wing Fai in full and prove for the receivable from Wing Fai in its liquidation, Fitzroya only had to pay Wing Fai the net balance. But there is nothing to suggest that, as at the date of the board meeting in November 2001, the Group’s directors anticipated Wing Fai would go into liquidation and intended this result: see §§323-329 above.

(6) A contractual set-off may enure to the advantage of a person having mutual credits and debts with a company which subsequently goes into liquidation. But it would only be a preference if, inter alia, the advantage would not otherwise have flown from the liquidation of Wing Fai — something the Liquidator has not attempted to show (see §330 above). It is therefore difficult to infer any preferential intent from the availability of set-off. In any event, a preference is a different matter from a disposition with intent to defraud creditors. In these proceedings, the Liquidator has not attacked the Set-Off Agreement as a preference; those in which he had[100] had ended without success.

337.  As stated above, there is no plea (nor can there be any, for the necessary parties are not here) to set aside the Set‑Off Agreement, which had been performed and acted upon.  In any event, I consider that the Liquidator has failed to establish the three grounds raised against it.  Accordingly, within this trial, one must proceed on the basis that there was an extant Set-Off Agreement pursuant to which the set‑off was implemented in March 2002 as described above.

M.  ISSUE 7 — QUANTUM

338.  S 276 ends with the words “as the court thinks just”.  They enable the court to do what it considers just in the circumstances of the case.  Once liability is established, s 276(1) confers a discretion on the court as to the precise order that would be appropriate, but not a discretion to grant relief against liability.  It is a discretion as to how much a respondent director should be ordered to pay so as to do what is just in all the circumstances: In re Loquitur Ltd [2003] 2 BCLC 442, §245; Revenue and Customs Commissioners v Holland, supra, §51, per Lord Hope.  In the words of Lord Scott of Foscote in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] 1 AC 1391 at §110,[101] it is a “judgmental discretion as to the quantum of compensation that would not in an ordinary damages action be applicable”.

339.  For the reasons set out under Issue 6 above, the correct exercise of the discretion is in my judgment not to order the respondents to pay anything.

340.  If this is wrong and the correct conclusion is that Wing Fai had suffered losses that were not made good, then the court would have to assess the quantum of loss attributable to each respondent.  This would be a difficult exercise because the Liquidator, despite invitations, did not advance any case or submissions as to what the respondents’ liability would respectively be if the case of joint and several liability was rejected.  In these circumstances I do not think I should attempt to deal with this question on a contingent basis.

341.  I should, however, mention that as regards the 1^st respondent, Mr Ng has pointed out that for each of the 6 relevant payments-out that could be attributed to him,[102] there was a corresponding payment‑in in an equivalent amount either on the same day or very close in time, as shown in the table below.

Payment out			Payment in
Date	No.	Amount ($)	Date	No.	Amount ($)
13/3/2001	FC-24	2,004,199.12	14/3/2001	FC-25	2,000,000
17/4/2001	FC-28	1,903,498.52	17/4/2001	FC-27	1,900,000
26/4/2001	FC-30	2,004,300.76	26/4/2001	FC-29	2,000,000
18/2/2002	KC-7	3,203,987.60	18/2/2002	KC-8	3,200,000
13/3/2002	KC-13	3,002,285.80	12/3/2002	KC-12	3,000,000
18/4/2002	KC-21	2,102,804.80	18/4/2002	KC-18	450,000
			18/4/2002	KC-19	200,000
			18/4/2002	KC-20	1,450,000

342.  Mr Ng argued that given the proximity in time between these payments‑out and payments‑in, they were referable to each other and should be netted off.  On this basis, there was no loss to Wing Fai caused by these 6 payments other than the very minor sums of bank charges and interest. This seems to me to be a cogent argument which I would be inclined to accept if necessary.

N.  ISSUE 8 — INTEREST

343.  In light of the conclusion above, the question of interest is academic.  In case I am wrong above, I deal with this question in this section.  The dispute between the parties on interest is two‑fold: (1) whether compound interest should be awarded (and, if so, with what rests); and (2) for what period should interest be awarded.

(1)  Whether to award compound interest

344.  The parties have proceeded on the basis that the court has jurisdiction in a misfeasance summons under s 276 to order compound interest.  I am content to proceed on this footing.

345.  Interest in a case such as the present is awarded not to compensate the plaintiff for loss of profit but to ensure as far as possible that the defendant retains no profit for which he ought to account: Wallensteiner v Moir (No 2) [1975] QB 373, 398H per Buckley LJ.

346.  On behalf of the Liquidator, Ms Chan submitted that compound interest should be ordered in this case because there was fraud perpetrated by the respondents, and there was indirect benefit obtained by the 1^st and 2^nd respondents at the expense of Wing Fai.[103]

347.  On the question of personal benefit, it is said that the 1^st and 2^nd respondents were shareholders of China Rich and in that capacity indirectly benefited from the use of Wing Fai’s funds by the China Rich Group.  However, while the 1^st respondent held 37.5% of the issued shares of China Rich, the 2^nd respondent was only a 3.17% shareholder as at July 2002.  Moreover, it does not appear that they have continued throughout to be such shareholders.  In any event, in the case of the 2^nd respondent, I do not think such a small shareholding justifies a finding of personal benefit to warrant the award of compound interest.  The 3^rd respondent was not a shareholder of China Rich at all.

348.  The Liquidator contended in closing submissions that the 1^st and 2^nd respondents also directly benefited because part of the funds received by Famous Capital and King Capital were used by them personally.  However, for the reasons given in §§262–263 above, it would in my view be unfair and wrong in principle to permit the Liquidator to make this allegation now.

349.  On the Liquidator’s case, the impugned transactions resulted in funds being borrowed from banks and channelled to Group companies for their purposes.  The Liquidator’s contention was that Wing Fai was operated by the respondents for the common good of the Group without regard to the interests of Wing Fai itself.  The money was taken out from Wing Fai’s banks and the banks were all repaid in full.  There was simply no case that the money was made use of by the respondents for their own benefit.

350.  In my view, the present case is on the facts different from China Everbright‑IHD Pacific Ltd v Ch’ng Poh (2002) 5 HKCFAR 630, where the defendant was held to have misappropriated the plaintiff’s funds to finance the purchase by the defendant’s own private company of shares in the plaintiff.

351.  Further, as I have already stated in §§262–264 above, while the 1^st and 2^nd respondent perpetrated a fraud vis-à-vis the banks, it has not been shown that they did so with the intention of depriving Wing Fai of property or funds.  Nor is this a case of money being obtained and retained by the respondents by fraud: Johnson v The King [1904] AC 817, 822; President of India v La Pintada Compania Navigacion SA [1985] AC 104, 116; Clef Aquitaine SARL v Laporte Materials (Barrow) Ltd [2001] QB 488, 506. 

352.  Even if the jurisdiction to award compound interest is engaged once there is fraud involved without proof of retention or personal use of the misapplied funds, I would not exercise the discretion to order compound interest.  Having regard to the very long period in question, compounding interest would lead to a disproportionate enlargement of the sums, which was called for neither by unjust enrichment (for none was proved as against the 2^nd and 3^rd respondents) nor by retribution for fraud (the 2^nd respondent having served her sentence).

(2)  For what period

353.  As Kwan J held in the respondents’ application for dismissal of the claim for want of prosecution, there was inordinate and inexcusable delay on the part of the Liquidators for about 25 months between 19 April 2006 and 22 May 2008.[104]  The claim should not attract interest during such a period of delay.

354.  For these reasons, if there was a monetary award to be made, I would have ordered simple interest to run from the date of the misfeasance summons to the date of judgment except for the period between 19 April 2006 and 22 May 2008 (both dates included).

O.  CONCLUSION AND ORDERS

355.  For the above reasons, in summary:

(1)  I find that the 1^st and 2^nd respondents were de facto directors between 26 July 2001 and April 2002 for the purposes of these proceedings.  All 3 respondents were therefore directors within the scope of s 276 during the period in which the impugned transactions took place. 

(2)  Of the 4 groups of disputed payments-out, I find that FC‑1 to FC–6 and FC–7 and FC–21 are not shown to represent payments‑out of Wing Fai’s funds but that FC–8, FC–11, FC–14, FC–15, FC–17 and FC–22 and FC–38 are. 

(3)  The respondents are responsible insofar as they procured the payments-out by signing the relevant documents as pleaded in the Schedule to the Re-Re-Re-Points of Claim, but they are not jointly and severally liable for all the payments otherwise. 

(4)  The purported underlying transactions for which the payments-out were made were fictitious, with Famous Capital and King Capital being companies directed by the Group’s staff.  In procuring or authorising the payments the respondents acted in breach of their duty as directors to Wing Fai including the duty to act in the best interests of Wing Fai and not to use their powers for improper purposes.  Although they acted for the benefit of the Group as a whole, they failed to have regard to the interests of Wing Fai separately. 

(5)  The 1^st and 2^nd respondents knew that the payments were being made for fictitious transactions, but it is not shown that the 3^rd respondent knew.  In this sense the transactions were dishonest as far as 1^st and 2^nd respondents were concerned, in particular because they involved deception knowingly practised on the banks.  It is not shown however that the respondents intended, through these transactions, to deprive Wing Fai permanently of funds or that Wing Fai should in the end be short-changed. 

(6)  There was no valid ratification of the directors’ acts by Benefit because the 1^st and 2^nd respondents only acted together in relation to a few of the payments, and in any event because the Duomatic principle had no application in respect of illegal and dishonest transactions such as those impuged in this case. 

(7)  Shortly after the sale of Wing Fai, the Group had brought back substantial funds to Wing Fai’s credit by discharging Wing Fai’s bank indebtedness which amounted to some $59 million beyond any net debt owed by Fitzroya to Wing Fai after a set-off of the inter-company balances and without recourse to Wing Fai.  As a result, the estate was replenished and Wing Fai did not suffer any unrecovered actionable loss.  The discretion under s 276 is to be exercised by not ordering any payment.

356.  Accordingly, for these reasons, the misfeasance summons is dismissed.  The question of costs is adjourned for further argument.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 735 OF 2002

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REASONS FOR RULING

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1.  On Day 9 of the trial, towards the close of the applicant’s case, I heard argument between the applicant and the 2^nd respondent about the admissibility of certain hearsay evidence, being essentially the statements of Ms Ip Ngai Man Julia and Mr Chim Kam Fai made to the Hong Kong Police and, additionally in the case of Mr Chim, the transcript of his interview by the staff of the liquidators of Wing Fai Construction Co Ltd. Although under s 47(2)(b) of the Evidence Ordinance (Cap 8) the decision could be made at the conclusion of the proceedings, ie at the time of judgment, I was urged by Mr Barlow SC to determine the matter then. I gave a ruling declining to exclude the evidence against the 2^nd respondent, with reasons to be given later. These are my reasons.

2.  On behalf of the 2^nd respondent, Mr Barlow SC referred to High Fashion Garments Co Ltd v Ng Siu Tong [2004] 1 HKLRD 928 and Cheung Wei Man Vivien v Centaline Property Agency Ltd (unrep, HCA 286/2000, 25 September 2003).  Both cases concerned the admission as hearsay evidence of an affirmation made in the proceedings, which as such was a document brought into existence by the relevant party solely for the purpose of the action.  The rule governing such an application is Order 38 rule 2 of the Rules of High Court (Cap 4A).  It was held that s 47 of the Evidence Ordinance was not to be used to circumvent the requirements and principles under Order 38 rule 2.

3.  The issue in the present case does not relate to any affirmation made in the proceedings.  There were indeed affirmations made by Mr Chim which were listed in the hearsay notice and a summons was belatedly issued by the applicant to adduce them as evidence under Order 38 rule 2 instead, but that application was later withdrawn (and with it, any attempt to rely on those affirmations).  We were here concerned instead only with the statements made by Mr Chim and Ms Julia Ip to the police and, in the case of Mr Chim, to the Liquidator’s staff at an interview in November 2002.

4.  By s 47 of the Evidence Ordinance the court is required, in civil proceedings, not to exclude evidence on the ground that it is hearsay unless it is objected to and “the court is satisfied, having regard to the circumstances of the case, that the exclusion of the evidence is not prejudicial to the interests of justice” (s 47(1)(b)).  The 1^st and 3^rd respondents had not objected to the admission of the evidence.

5.  Under Order 38 rule 21, where a party tenders a statement of a person as hearsay evidence without calling him, the court may allow other parties to call and cross‑examine that person.  None of the respondents had applied to call Mr Chim or Ms Julia Ip for cross‑examination under that rule.  I do not say that in every case a hearsay statement should be held admissible simply because the other side has not applied for cross‑examination of the maker of the statement, but it is part of the circumstances that I may take into account.  In fact I was told by counsel that Mr Chim could not be found by either side and so no subpoena could be served on him.  As regards Ms Julia Ip there was no direct explanation why she had not been called, though the applicant would raise no objection if she was to be called by the 2^nd respondent for cross‑examination.  Mr Barlow SC said she was in Hong Kong but Ms Chan SC was not in a position to confirm it.  Ms Chan SC submitted that the evidence of Ms Julia Ip was mainly relevant for establishing the applicant’s case as against the 1^st and 3^rd respondents, who had not made the same admissions as the 2^nd respondent. Although both Mr Chim and Ms Ip had given assistance to the liquidators, that happened in 2004.  The latest contact between the liquidators and Mr Chim that Mr Barlow SC could point to was in 2008.  The hearsay statements in dispute here had been with the 2^nd respondent for a long time, but (with the exception of the interview of Mr Chim) only came into the applicant’s possession two months before the trial, in August 2016. 

6.  I am mindful that serious allegations are being made against the respondents including allegations of fraud, and that in such cases the court will be reluctant to act on evidence untested by cross‑examination: see In re Smith and Fawcett Ltd [1942] Ch 304, 308.  But these concerns can in my view adequately be dealt with in the evaluation of the evidence, attributing such weight to the evidence in question as may be appropriate taking into account all the relevant factors including those set out in s 49 of the Evidence Ordinance.  In all the circumstances I was not satisfied that I should exercise my discretion to exclude the evidence altogether at this stage.  The question of weight of course looms large.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 735 OF 2002

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R E A S O N S   F O R   D E C I S I O N

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1. On 5 October 2016 the 2^nd respondent obtained from a Master two writs of subpoena ad testificandum directed to Mr Camille Jojo of Norton Rose Fulbright Hong Kong and Mr Thomas Fyfe of Summons & Simmons respectively, requiring them to testify at the trial of these proceedings. On 13 October, the first day of trial, Ms Chan SC who appeared for the Applicant (“the Liquidator”) objected to the admission of any evidence from the two solicitors. On 14 October, at the end of the opening, having heard arguments, I ruled that the proposed evidence should not be admitted and I set aside the subpoenas accordingly, for reasons to be handed down. These are my reasons.

2. The evidence sought to be adduced is in substance the witness statements and the transcript of the oral evidence of the two solicitors given in May 2012 in the context of an application by the 2^nd respondent herein (being one of the defendants to the criminal charges) to stay the criminal proceedings in DCCC 153/2010.  The gist of Mr Jojo’s evidence was that Mr Hill, the Liquidator, had in negotiations in October 2008 suggested that if the respondents were able to settle the civil claim by paying over $35 million, the Liquidator would be in a position to confirm with the Department of Justice that restitution had been paid and that the Liquidator had no further interest in pursuing the criminal complaint.  The gist of Mr Fyfe’s evidence was that the Liquidator’s solicitor Mr Bowers had, in February and March 2010, informed him in negotiations that the Liquidator was looking for a global settlement sum of $38 million and that Mr Hill could stay out of the jurisdiction, and hence out of reach of a subpoena, if a global settlement could be reached.

3. I should say at once that neither Mr Hill nor Mr Bowers was a party to or a witness in those criminal proceedings and had not had an opportunity of openly responding to or refuting the allegations made against them.

4. Given the timing of the subpoenas the question that immediately arose was: why were these attempts to adduce the evidence made at the eleventh hour?  Mr Barlow SC, for the 2^nd respondent, submitted that the materials in question were “unused materials” provided by the prosecution to the 2^nd respondent and, as such, subject to (or at least believed to be subject to) an implied undertaking by the 2^nd respondent not to use them for any purpose other than the criminal proceedings.  It was said that the 2^nd respondent was not released from the implied undertaking until August 2016.

5. I do not accept that explanation.  The materials were, as I understand the position, used in open court in the stay application and in the judicial review proceedings arising therefrom.  As the Court of Appeal held in Allied Group Ltd v Secretary for Justice (unrep, CACV 1/2003, 10 October 2003), the implied undertaking does not prevent the use of material which has become freely available by reason of having been referred to in open court and in judgments.  Furthermore, the transcript surely was not part of the “unused materials”.  It has not been shown on what basis the transcript of the hearing of the stay application could be said to be subject to an implied undertaking.

6. In any event, there is no property in a witness.  I cannot see what there was to preclude the 2^nd respondent from obtaining a statement from Mr Jojo and Mr Fyfe for use in these civil proceedings if it was felt that their evidence was relevant.  Both of them were solicitors who had acted for the 2^nd respondent.  In fact, Mr Fyfe was the solicitor in Messrs Simmons & Simmons handling these civil proceedings on behalf of the 2^nd respondent up to 2015. The witness statements in this case were exchanged in June 2014 when Mr Fyfe was acting for the 2^nd respondent.

7. To be fair, Mr Barlow did not submit that Mr Jojo and Mr Fyfe had refused to provide a statement voluntarily.  In fact he said that, for all he knew, they might be willing to testify, but the 2^nd respondent’s team thought that they would prefer to be subpoenaed.  It follows however that there is no good explanation why their evidence is being sought to be adduced at such a late stage, well past the deadline set by the unless order for exchange, or why no earlier notice or statement of the nature or gist of the evidence had been given to the Liquidator (even at the pre-trial review or in the 2^nd respondent’s opening submissions for trial).

8. In addition, I consider that the proposed evidence lacks relevance.  Mr Barlow submitted that it was relevant in two ways: first, to show that the Liquidator had been involved in impropriety in a case where equitable remedies for restitution are being sought.  Nothing however has been pleaded in this regard whether as an allegation of unclean hands or otherwise.  Secondly, he submitted that it was relevant to whether Mr Hill who had no relevant personal knowledge could give any evidence that was reliable.  This means that the point goes merely to credit, and then only with respect to a witness who, on Mr Barlow’s submission, has little relevant personal knowledge anyway regarding the matters in issue.  I do not think that this justifies admitting the proposed evidence.

9.  Ms Chan had also argued that the proposed evidence was protected by without prejudice privilege, given that the conversations, assuming they did take place as alleged, occurred in negotiations for a compromise of the proceedings.  Mr Barlow argued that the evidence would disclose unambiguous impropriety in that the Liquidator effectively offered to sabotage the prosecution in return for a settlement of the civil proceedings, and as such fell within the exception to the privilege: see Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at §§31-33; Crane World Asia Pte Ltd v Hontrade Engineering Ltd [2016] 3 HKLRD 640.  I did not find it necessary to rely on the privilege point to exclude the evidence and it is unnecessary for me to express any view on this matter.

Ms Linda Chan SC and Ms Theresa Chow, instructed by Howse Williams Bowers, for the applicant

Mr Ng Man Sang Alan and Mr Foster Yim, instructed by Wan Yeung Hau & Co, for the 1^st respondent

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by Haldanes, for the 2^nd respondent

The 3^rd respondent was not represented and did not appear

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 735 OF 2002

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__________________________________

R E A S O N S   F O R   D E C I S I O N

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1. On the afternoon of Day 1 of the trial of these proceedings (13 October 2016), the Applicant submitted and served 2 pages of "voluntary particulars" referring to two alleged additional payments out of the company's funds. I indicated that as the purported effect of the particulars would be to enlarge the alleged shortfall and the net loss claimed, it could not be done simply by giving voluntary particulars and that if the payments were to be pursued the claim had to be amended. On Day 2 of the trial, the Applicant applied to amend further his Re-Re-Amended Points of Claim for that purpose. Although no draft amended pleading was produced, I treated the application as being made essentially for the purpose of adding the two payments to the schedule to the Re-Re-Amended Points of Claim and amending the aggregate figures in paragraphs 18, 20 and 22, and paragraph 2 of the prayer for relief, of that pleading.

2. I dismissed the application for reasons to be handed down.  These are my reasons.  The application was in my view far too late.  There was no acceptable explanation for the lateness.  As Ms Chan SC confirmed, the documents relating to those two payments that the Applicant proposed to rely on had been in his possession since 2014.  The Points of Claim had since that time undergone two amendments, once in June 2015 and once in September 2016, specifically in relation to the payments out and payments in and the aggregate alleged shortfall.  There was no acceptable explanation why the two payments are only now, at the trial, proposed to be added into the claim. 

3. There was an order requiring all interlocutory applications to be taken out by some time in the summer of 2015.  There is no explanation why that was not complied with in relation to these two payments. Furthermore, the parties have each engaged accounting experts to review the documents and advise on whether individual payments in and payments out should be included.  This resulted in an agreed direction given on 18 August 2016 that the Applicant and the 2^nd respondent provide a set of schedules identifying the documents in the trial bundles which they contend relate to the payments and that they state whether the payments are admitted or denied with grounds for denying where appropriate.  The correspondence exchanged and the resultant schedules following that direction did not refer to the two additional payments in question.

4. Ms Chan argued that the additional two payments (which she proposed to number as 4A and 4B respectively) are similar in nature to items 1 to 6 in the existing list of payments relating to Famous Capital, and that the 2^nd respondent's defence or contention is likely to be the same as her case on those items and that there would therefore be no prejudice to her.  I do not agree.  Unless and until the 2^nd respondent, her legal and other advisers and accounting expert had been given a proper opportunity to examine all relevant documents, they could not be sure what their response should be.  But to require them to carry out that exercise in the middle of the trial, when a number of the applicant's witnesses had to be cross-examined, some of whom only recently subpoenaed or tendered for cross-examination, is itself prejudice.

5. For these reasons I refused leave to amend.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 735 OF 2002

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D E C I S I O N

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1. Three applications came before me this morning:

(1) the applicant’s application for leave to amend the re‑amended points of claim, which has been disposed of without contest;

(2) the applicant’s application for leave to amend the amended points of reply to the points of defence of the 2^nd respondent; and

(3) the 2^nd respondent’s application for leave to adduce expert evidence at trial. 

2. The claim has a long history, which has been set out in the Court of Final Appeal’s judgment in Wing Fai Construction Company Limited v Yip Kwong Robert (2011) 14 HKCFAR 935, at paragraphs 2 to 15, and need not be repeated here. 

3. The claim was brought by the liquidator by way of a misfeasance summons issued on 30 August 2004 in the winding-up of Wing Fai Construction Company Limited (“Wing Fai”), a company which was wound up by order of the court on 9 December 2002, upon a petition presented on 6 July of the same year.  Points of pleadings in relation to the claim were ordered in 2004.  They have since been amended more than once. 

4. As the pleadings now stand, in broad terms, the applicant, the liquidator, alleges that the 3 respondents were directors or de facto directors or officers of Wing Fai at the material times.  Between May 1999 and April 2002, they procured payments of large sums of money from or on behalf of Wing Fai to two related companies, namely, Famous Capital Enterprises Limited (“Famous Capital”) and King Capital Engineering Limited (“King Capital”), either purportedly for goods purchased though in fact no such goods were delivered, or for no known consideration.  After taking into account the payments by those companies back to Wing Fai, there was still a substantial shortfall.  It is alleged that the respondents knew or ought to have known that no goods were delivered.  It is said that the payments were not made for any legitimate commercial or other purpose of Wing Fai’s business or interests, and that in authorising the payments out, the respondents were dishonest, guilty of misfeasance, in breach of duty and/or negligent.  As a result, Wing Fai has suffered loss.  There was originally a plea that Wing Fai was insolvent at the material times, but that plea has been abandoned – a matter that I need to return to since it is relevant to an understanding of the applications before me. 

5. For the 2^nd respondent’s part, she admits that Famous Capital and King Capital were related to Wing Fai and that neither company carried on any business at the time.  She admits that she was a director of Wing Fai until her resignation on 26 July 2011 but denies that she was thereafter a de facto director.  She admits procuring Wing Fai to make payments to Famous Capital and King Capital by cheques and letters of credit and that no goods were delivered in consideration.  She denies that she knew, but admits that she ought to have known, that no goods were in fact delivered to Wing Fai in consideration of the payments in question.

6. She avers that the letters of credit were a “method of obtaining finance on favourable terms for the China Rich Group, which included [Wing Fai] up until 22 April 2002” (the China Rich Group being the group of companies headed by China Rich Holdings Limited (“China Rich”)), and that she had always intended that Wing Fai should be indemnified by the China Rich Group in respect of debts incurred to relevant issuing banks to the extent that funds were utilised by other members of the group.  She avers that the letters of credit were all secured by cash deposits or guarantees given by China Rich, and that Wing Fai’s indebtedness to the banks was discharged by China Rich, Fitzroya Finance Company Limited or Benefit Holdings International Limited (“Benefit”) (Wing Fai’s immediate holding company), by no later than May 2002.  The 2^nd respondent avers that after various setting off, payments and the sale of Wing Fai to Sino Glister International Limited in April 2002, there was left an agreed net debt due from Wing Fai to Benefit of HK$40 million. 

7. The 2^nd respondent also avers that her conduct was ratified by Wing Fai’s directors and/or its shareholder Benefit, and/or the ultimate parent, China Rich.

8. The 2^nd respondent first took out a summons on 22 April 2014 for leave to adduce expert evidence in relation to the matters set out in the schedule to that summons.  The schedule contains 8 paragraphs of which paragraphs 1, 2, 3 and 5 are as follows:

“1) What was the value of each of the Company’s 30 payments to Famous Capital Enterprises Limited (“Famous Capital”) and King Capital Engineering Limited (“King Capital”) claimed by the Applicant liquidators in paragraph 18 to 22 of the Amended points of claim (“payments out”)?

2) What payments were made by Famous Capital and King Capital to the Company, whether directly or via intermediaries, in the period March 2001 to July 2002 (“payment in”)?

3) What is the net balance due to/from the Company after netting off all identified (direct or indirect) payments between the Company, on the one hand, and Famous Capital and King Capital on the other?

…

5) Was the Company insolvent at the time of and immediately after the Sale and Purchase Agreement was executed and took effect?”

9. At that time, the applicant objected to the 2^nd respondent’s application on various grounds.  In particular, in respect of the topic of insolvency, the applicant objected on the ground that the question of the solvency or otherwise of Wing Fai was irrelevant.  Thus Mr Hill, the sole liquidator of Wing Fai at the time, stated in paragraph 28 of his 4^th affidavit dated 10 June 2014 made in opposition to the 2^nd respondent’s application: 

“I do not see the relevance to this action of whether the Company was solvent or insolvent: the Respondents, or some of them at least, caused Famous and King to issue fictitious invoices and for the Company to issue fraudulent letters of credit to pay them, at a cost of millions of dollars to the Company. I cannot see how whether the Company was solvent or insolvent has any bearing upon the claim that is before this honourable court”,

though I should mention that in the affidavit Mr Hill went on to comment that Wing Fai was obviously insolvent.

10. When that summons came before me on 13 August 2014, the applicant’s position was stated by his solicitor in the following exchanges:

“Court: But it’s a matter for you. If you … continue to plead and insist on proving insolvency, I think Mr Fyfe has a point that it is something that he’s entitled to get an expert to speak about.

Mr Bowers: My Lord, I don’t really -- The liquidator doesn’t have to prove insolvency to prove his case against the respondents in the light of ...

……

Mr Bowers: My Lord, what I anticipate happening is that we can agree that we won’t be seeking to prove that the company was insolvent as at any particular date and it’s not an issue contested issue between the parties... All I can say is I can inform them that this is not an issue that we would be seeking to prove at trial.

Court: So you are saying that without … going through the formalities of the amended pleadings, Mr Fyfe can safely take it that that plea has been abandoned?

Mr Bowers:  Absolutely.”

The outcome of that hearing, so far as insolvency was concerned, was that it was agreed to be a non-issue, and that the amendment of the pleadings was left to the parties.  Paragraph 1 of the schedule was considered unnecessary, and paragraphs 2 and 3 were thought to be premature.  The whole summons was therefore adjourned sine die. Although it was indicated by the 2^nd respondent’s solicitor at that time that the summons would be revived very shortly pending further discovery, the question of expert evidence was not re-visited for a year. 

11. On 16 June 2015, after hearing the parties, I gave leave for the action to be set down for trial, not before March 2016, intending to leave sufficient time for any outstanding matters and preparation for trial.  I also set a deadline for issuing interlocutory applications.

12. On 26 June 2015, the applicant, with leave, re-amended his points of claim in various respects.  The opportunity was also taken formally to delete the allegations of insolvency from the points of claim.

13. On 12 August 2015, there was a summons taken out by the 2^nd respondent to amend the schedule to the summons for expert evidence to change certain details in paragraphs 1 to 3, and also to add paragraph 1A in the following terms:

“1A. What payments were made by the Company to Famous Capital, whether directly or via intermediaries, in the period between 6 May 1999 to 1 February 2002?”

Paragraph 5 on insolvency, among other paragraphs, was proposed to be deleted from the schedule.  This summons to amend the schedule was listed to be heard on 17 September 2015 but was, on the eve of the hearing, by a consent summons, adjourned sine die. 

14. There the matter was left, and nothing was heard from the 2^nd respondent about expert evidence, so far as the court and the applicant are concerned, until the day before the pre-trial review held on 18 August 2016, when her counsel by skeleton argument sought to revive the adjourned summons for leave to adduce expert evidence in respect of paragraphs 1A, 2 and 3 of the proposed amended schedule and also paragraph 5 of the unamended schedule (ie insolvency).  One of the reasons given on behalf of the 2^nd respondent for restoring the application was that, despite that the plea of insolvency had been abandoned from the points of claim, it still remained in certain paragraphs in the applicant’s points of reply.  At that hearing, Ms Linda Chan SC for the applicant indicated that she would abide by the concession made by the applicant’s solicitors in August 2014 and amend the points of reply accordingly. Given the lack of proper notice, the 2^nd respondent’s application for leave to adduce expert evidence was adjourned.  It has now been properly restored before me. 

15. As for the amendments of the points of reply, paragraph 4.1 of that pleading was contentious.  It read as follows:

“As reported in the audited financial statements of the Company for the year ended 31 July 2001 (“2001 Audited Accounts”), the company was insolvent in that it had net liabilities of HK$9,256,178, and had suffered a substantial loss of HK$46,065,120 in that year.”

I think that as such, it would be advancing a plea of insolvency, with the audited accounts being referred to as evidence.  I agree with the 2^nd respondent that it should properly be amended by deleting the words “was insolvent in that it”. Although the applicant did not agree to do so in the correspondence, Ms Chan at the hearing did not strenuously oppose that deletion. 

16. Mr Chan for the 2^nd respondent referred in the skeleton to certain other paragraphs of the points of reply, namely paragraphs 4.2, 4.4, 12.3(b), (c) and (f), that he objected to as being covered by the concession made in August 2014, but Ms Chan for her part does not agree.  There was no application to strike out and I did not think the objection should stand in the way of the amendment. Accordingly, I gave leave to amend.

17. Turning to the application for leave to file expert evidence, it seems to me that the 2^nd respondent has restored her application really far too late.  The summons was adjourned in August 2014; this is now September 2016, and the trial, set down for 10 days, will commence barely a month away on 13 October.  There are still a number of substantial steps to be taken by the parties pursuant to my directions given at the pre-trial review.  Anyone who has been involved in a major piece of litigation can testify as to how distracting and even potentially oppressive it could be for expert evidence to be permitted to be adduced for the first time so close to the trial.  Ms Chan has drawn my attention to the cases of Wong Sui Yeung v Chiu Kwong Wing [2005] 3 HKLRD 495, at paragraphs 25 to 26; Wu Chi Man v Moe Fang (unreported, HCA 607/2010, 26 February 2013), at paragraphs 28 and 34; and Elijah Saatori v Raffles Medical Group (Hong Kong) Limited (unreported, HCPI 1114/2006, 26 August 2016), at paragraphs 13, 18 and 19, all of which illustrate that on the ground of inordinate delay alone, the court may refuse leave to admit expert evidence. 

18. Further, I have made an order on 16 June 2015 that all interlocutory applications should be taken out within 28 days, which was extended by consent to 12 August 2015.  While her summons was technically issued within time, there is no explanation whatsoever why the 2^nd respondent has not restored her application until this August, just two months before the trial, which is wholly contrary to the spirit of my order and the ethos of proper and timely preparation for trial.

19. I also agree with Ms Chan that the expert evidence sought to be adduced is not essential for the fair disposal of the action.  First, the question of insolvency has formally disappeared from the record, based on the amendments to the points of reply to be made. 

20. As I have already mentioned, Mr Chan for the 2^nd respondent has referred to some further paragraphs in the points of reply, which make reference to the financial position of Wing Fai at the material times.  Those pleas were not objected to by the 2^nd respondent in the recent inter partes correspondence as being inconsistent with the abandonment of the plea of insolvency, but only in Mr Chan’s skeleton.  They had been there in the points of reply since that pleading was first filed in March 2014.  In any event, even in the absence of expert evidence, they seem to me to be of a nature that can be met by factual evidence.  The same factual matters, on the basis of which the expert will be expected to provide her opinion, which presumably will be in the factual evidence anyway, can be drawn to the attention of the trial judge.  Indeed, the 3^rd affidavit of Ms Mavis Tan, the proposed expert of the 2^nd respondent, dated 7 September 2016, which seems to be intended to outline her proposed evidence on the question of insolvency, demonstrates that there is nothing there that cannot be said by counsel for the 2^nd respondent in submissions based on the factual evidence. 

21. The same may be said with regard to the other category of expert evidence sought to be adduced, ie evidence on the payments into and out of Wing Fai.  These are questions of fact.  The parties’ accountants have been meeting with a view to narrowing down the differences.  The exercise seems to me to be one of analysing available documents in the light of the relevant factual background, knowledge about the companies concerned, and general commercial practice.  With accountants already working in the background, I do not see why evidence in the form of their opinion is essential in the trial.  The points that they may be able to make surely are points based on logic, inherent probabilities, general commercial practice and other pointers derived from the facts of the case, and are, as such, points that, once identified, can be made on the basis of the factual evidence without any expert report. 

22. Indeed, in the supporting affidavit of the 2^nd respondent’s former solicitors dated 22 May 2014, what was said was that the trial would take longer without forensic accountant experts because trial counsel would have to spend much time in written submissions and at trial on a detailed forensic analysis of the primary documents.  I am not sure there will actually be time saving in the trial if expert evidence is admitted at this stage, since the accountants are already working in the background and their efforts will be reflected in the presentation of the case.  But clearly this is not a case involving quantum physics or similar disciplines, where the opinion evidence is of such a kind that, without it, the court would not be in a position properly to assess and evaluate the evidence and come to the necessary findings one way or the other.

23. For these reasons, the 2^nd respondent’s application for leave to adduce expert evidence must be dismissed. 

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 735 OF 2002

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D E C I S I O N

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1. From the chronology of events and matters brought before the courts in these proceedings involving Wing Fai Construction Company Ltd ("Company"), the Liquidators and the three former directors who are named as respondents in these proceedings, it is hard to envisage that there can be further applications involving any new matters to be dealt with by the Court before the substantive determination of the real issues between the parties. Yet, there is before me an application by the Liquidators of the Company for leave to file an Amended Points of Claim, to pursue the misfeasance proceedings against the respondent directors under section 276 of the Companies Ordinance. The misfeasance proceedings had been initiated by a Summons issued as early as 30 August 2004 ("Misfeasance Summons"), supported by the 11th Affidavit of David John Kennedy ("Kennedy Affidavit").

2. The application for leave to amend was made by a summons for directions issued on 22 May 2008 ("Summons for Directions"). The Amended Points of Claim seek to make minor amendments, by inserting the amounts of the total payments made out of the Company's accounts by the respondents over the period from 8 March 2001 to 9 May 2002, which payments were claimed to have been made by the respondents in breach of their fiduciary duties as directors of the Company, in breach of duty, in breach of trust, dishonestly and constituting a misfeasance.  The respondents object to the amendments sought to be made to paragraph 21 of the Points of Claim, which refer to the respondents being "guilty of misfeasance, in breach of duty and/or negligence" in authorizing the allegedly wrongful payments to the two companies identified in the Points of Claim ("Famous Capital" and “King Capital”).  It is claimed that these amendments seek to introduce a new cause of action in negligence, which was time-barred by the time of the issue of the Summons for Directions in 2008.

Has a new cause of action being introduced?

3. In the Misfeasance Summons, the Liquidators seek a declaration that the respondents as former directors of the Company were guilty of misfeasance and/or breach of duty and/or breach of trust in relation to the Company in misapplying the money of the Company.  The Summons also seeks an order for accounts and inquiries to be taken for ascertaining the sums payable by the respondents by way of compensation for misfeasance and /or breach of duty and /or breach of trust.  

4. As Kwan J (as she then was) made it clear in one of the earlier decisions handed down in these proceedings on 23 September 2009, the amendments made to section 276 (1) of the Ordinance, and the substitution of "breach of duty" for "breach of trust", were for the purpose of bringing actionable negligence of directors within the scope of the section.  References made in the Summons to "breach of duty" on the part of the respondents accordingly extend to the claim of negligence.  

5. The Kennedy Affidavit filed in support of the Misfeasance Summons refers, in paragraph 56, to the respondents' common law duties owed to the Company, "to exercise appropriate care and skill in the exercise of their powers".  Paragraph 58 of the Kennedy Affidavit refers to the respondents’ breach of their common law and fiduciary duties, in dishonestly directing, authorizing and/or permitting transfer of funds through cheques and LC facilities to Famous Capital and King Capital.  Paragraph 121 of the Kennedy Affidavit also refers to the respondents' breach of duties of care and trust, causing a direct misappropriation of the Company's assets.  

6. Turning to the original Points of Claim in its un-amended form, it pleads in paragraph 4 the fact of the respondents being directors of the Company.  Paragraph 20 refers to a Schedule which sets out full particulars of the payments made from the Company's accounts to Famous Capital and King Capital, complained of by the Liquidators.  Paragraph 20(a) pleads "particulars of breach" of the respondents, in drawing cheques on the Company's bank accounts and procuring payments from the Company's credit funds to Famous Capital and King Capital, and further pleads that, given the relationship between the first and second respondents and the directors of Famous Capital and King Capital, the respondents "knew or ought to have known that no goods were delivered" to the Company.

7. Paragraph 20(b) pleads that the respondents authorized the payments to Famous Capital and King Capital in settlement of purported invoices, stated to be for the sale and delivery of goods, when they "knew or ought to have reasonably known" that no goods had been or were to be sold or delivered to the Company.

8. Paragraph 22 of the Points of Claim pleads that as a result of the matters referred to, the Company suffered loss and damage.  It is also pleaded in paragraph 23 that no resolution of the Company in general meeting had been cast to all the rise the payments to Famous Capital or King Capital, and that the payments were "made improperly and in validly and constitute a misfeasance and/or breach of duty and/or breach of trust in relation to the Company" on the part of the respondents as directors.  In the prayer of the Amended Points of Claim, the liquidators claim a declaration that the respondents as former directors were guilty of misfeasance and breach of duty and breach of trust in relation to the Company by making or causing the payments in question to be made.

9. Having considered the Summons, the Points of Claim, and the Kennedy Affidavit, I consider that the claim of negligence was included in the original claims made in the misfeasance proceedings brought against the respondents in 2004.  The amendments sought to be made to paragraph 21 do not add any new cause of action not already contained in the original Points of Claim.

10. Leading Counsel for the 2nd respondent relies on the judgment in Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 to argue that intentional and unintentional wrongdoing give rise to distinct causes of action, and that there is a sharp dividing line which separates cases of fraud and dishonesty from cases of negligence and incompetence.  

11. It was held in Paragon that for the purposes of Order 20 rule 5(2)(5), an amendment which sought to make a new allegation of intentional wrongdoing where previously no intentional wrongdoing had been alleged constituted the introduction of the new cause of action.  The sentiments expressed in the judgment of Millett LJ can be understood in the context of the facts of that case, where the plaintiffs sought to amend their claim of negligence, breach of fiduciary duty and breach of contract to allege fraud, conspiracy to defraud, fraudulent breach of trust and intentional breach of fiduciary duty.  It is well established that fraud must be distinctly alleged and proved.  As His Lordship pointed out in Paragon, dishonesty is not a necessary averment in a claim for breach of contract, and an allegation that the defendant "knew or ought to have known" is not a clear and unequivocal allegation of actual knowledge, and will not support a finding of fraud even if the court is satisfied that there was actual knowledge. It can hardly be disputed that a pleading that a failure to act is negligent cannot constitute a claim of dishonesty and fraud.  

12. That is not to say, however, that the facts pleaded in support of a claim of fraud and actual knowledge can never support any claim of negligence. In each case, the facts pleaded should be examined to ascertain whether the necessary ingredients are present to support the plea of the cause of action asserted.  In the words of Millett LJ, "a cause of action is defined by its factual ingredients, not by the name ascribed to it".  

13. On the face of the Points of Claim, paragraphs 18 to 20 set out the facts of the respondents' issuance of cheques and their procuring and authorizing payments to be made by the Company's letters of credit, the fact that no goods were delivered to the Company, and that (as claimed) the respondents knew or ought to have known that no goods were delivered or sold to the Company.  These paragraphs set out the facts and acts of which the Liquidators complain, irrespective of the label of breach of fiduciary duty and breach of trust ascribed to paragraphs 18 and 19.  Paragraph 20 sets out the fact relied upon by the Liquidators as giving rise to the respondents' knowledge that no goods were delivered, namely the relationship between the 1st and 2nd respondents and the directors of Famous Capital and King Capital.  In my view, considering the Points of Claim and the Kennedy Affidavit as a whole, the factual ingredients to support a claim of negligence are sufficiently pleaded and contained in paragraphs 4, 18 to 21 and 22 of the Points of Claim.  As Miss Chan for the Liquidators rightly pointed out, whether or not the Liquidators' claim of negligence can succeed on the facts as pleaded is another matter, for determination at trial.

Whether any new cause of action arising out of the same facts

14. Even if the respondents are correct, that the proposed amendments introduce a new cause of action not hitherto pleaded in the original Points of Claim and which is time-barred, I consider that the cause of action in negligence arises out of the same or substantially the same facts as the cause of action already pleaded.  

15. As Kwan J put it in her decision of 23 September 2009, the pivotal issue in these proceedings was clear from day one, and that is whether the money which passed from the Company to Famous Capital and King Capital arose out of genuine, bona fide commercial transactions involving the actual sale and purchase of goods.  The proposed amendments do not add any new facts.  The only facts relied upon to support negligence are the same facts relied upon to support the cause of action of misfeasance, breach of fiduciary duties, and breach of trust, as set out in paragraphs 18 to 21 of the Points of Claim.  The facts to support the claim, or inference, of dishonesty are separately set out in paragraphs 21(i) to (viii) of the original Points of Claim.  

16. I am satisfied that the amendments come within Order 20 rule 5 RHC, and can be allowed notwithstanding any time limitation defence that can be raised by the respondent directors.

Whether the claims are sufficiently particularized

17. The respondents have repeated arguments made before the courts on their unsuccessful applications for striking out allegedly un-particularized claims and for delay, and I do not consider it worthwhile to deal with these arguments again in detail.  Suffice it to say that for the reasons set out in paragraphs 5 to 8 above, the claim of negligence is sufficiently particularized.

18. I agree with Kwan J (as she then was), that there can be no doubt what the pivotal and the real issue is in these proceedings and in the Misfeasance Summons.  This was echoed by Chu J (as she then was) in paragraph 50 of her decision of 28 March 2011.  The respondents cannot be in any doubt as to the case they have to meet.  

Whether there is prejudice to the 2nd respondent

19. I would also adopt the remarks made by Kwan J in paragraphs 64 and 65 of her decision of 23 September 2009, in relation to the lack of prejudice to the 2nd respondent in the context of any delay there may be in the application for amendment of the Points of Claim.  There is no reason why the 3rd respondent could not have his witness statement or affirmation made at an early stage of the proceedings when his memory was unimpaired.  The same goes for any other relevant witnesses.  

20. I also take into consideration the fact that the nature of the Liquidators' amended case had been made known to the respondents as early as July 2005.  Although I accept that the application for amendment was not made until the Summons for Directions was issued in May 2008, the nature of the Liquidators' amended case cannot be said to have taken the respondents by surprise, or to be something for which preparation of the witnesses' statements could not have been made before.  

Conclusion

21. The Liquidators have a substantial claim against the respondents in the misfeasance proceedings.  In all the circumstances, I am satisfied that the amendment is necessary to dispose fairly of the cause, and grant leave to the Liquidators to file their amended Points of Claim.  

22. Leave is granted to the respondents to file their Amended Points of Defence within 28 days from the date of the handing down of this Decision.  Directions for discovery and exchange of witnesses statements are also granted in terms of paragraphs 41.1 to 41.5 of the Skeleton Argument of Leading Counsel for the Liquidators.  

23. I will make a costs order nisi that the costs of and occasioned by the amendments to the Amended Points of Claim are to be paid by the Liquidators to the respondents in any event, but the costs of and occasioned by the Summons for Directions, including the costs of the hearing on 7 May 2013 and the costs reserved at the previous hearings of the Summons for Directions are to be paid by the respondents to the Liquidators forthwith.  The costs of the hearing on 7 May 2013 are summarily assessed at $170,000.

HCCW735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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DECISION

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1.  By summons filed on 1 December 2009, the respondents applied to strike out the applicants’ Points of Claim and to dismiss the misfeasance proceedings brought against them by the liquidators of Wing Fai Construction Company Limited (“the Company”) under section 276 of the Companies Ordinance, Cap. 32, pursuant to Order 18 rule 19 of Rules of the High Court, cap. 4A.

Background

2.  The Company was in the business of engineering construction, industrial consultant services, engineering advisory services, contracting services.   Until 22 April 2002, the Company was a wholly owned subsidiary of Benefit Holdings International Limited, which is in turn wholly owned by China Rich Holdings Limited (“China Rich”).  China Rich is a listed company in Hong Kong. 

3.  On 22 April 2002, the Company was sold to Sino Glister International Investments Limited (“Sino Glister”).  

4.  On 6 July 2002, a creditor winding-up petition was presented against the Company.  Mr David Kennedy and Mr Cosimo Borrelli were appointed the provisional liquidators on the same day.  On 9 December 2002, the winding-up order was made.  Mr Kennedy and Mr Borrelli were appointed liquidators by the order dated 28 February 2003.  Mr Nicholas Hill was appointed as additional liquidator on 8 December 2004.  Mr Kennedy and Mr Borrelli resigned and ceased to be liquidators as from December 2004 and June 2009 respectively.  Mr Hill is therefore now the sole liquidator.

5.  The 1^st to 3^rd respondents were formerly the directors of the Company.  The 1^st and 2^nd respondents resigned on 26 July 2001.  The 3^rd respondent resigned on 22 April 2002. 

6.  As noted in Kwan J’s decision on the respondent’s first striking out application handed down on 7 October 2009 (at para.10), the liquidators only had limited financial information about the Company because the majority of the books and records had been removed or destroyed.  They had to reconstruct the financial records and information of the Company.  They had carried out private examination of the 1^st to 3^rd respondents and other individuals.  They had also requested the 1^st to 3^rd respondents to provide a statement of affairs under section 190(2)(a) of the Companies Ordinance, which request has not yet been complied with.

The misfeasance proceedings

7.  By summons filed on 30 August 2004, the liquidators brought misfeasance proceedings against the 1^st to 3^rd respondents.  They seek a declaration that the respondents were guilty of misfeasance and/or breach of duty and/or breach of trust in relation to the Company in misapplying the money of the Company:  

 (i)   by authorising payments by cheque and the purchase of letters of credit in the sum of HK$18,525,681.32 from the Company’s funds for the benefit of Famous Capital Enterprises Limited (“Famous Capital”) without consideration whereby the same became wholly lost to the Company; and

(ii)   by authorising payments by cheque and the purchase of letters of credit in the sum of HK$14,167,065.80 from the Company’s funds for the benefit of King Capital Engineering Limited (“King Capital”) without consideration whereby the same became wholly lost to the Company.”

8.  The summons also seeks an order that all necessary accounts and inquiries be taken for ascertaining what sums the respondents are liable to contribute to the assets of the Company by way of compensation for the misfeasance and/or breach of duty and/or breach of trust and an order that the respondents do jointly and severally contribute to the assets of the Company and pay the liquidators the said sums of HK$18,525,681.32 and HK$14,167,065.80 wrongfully paid by the Company.

9.  The application was supported by the 11^th affidavit of Mr Kennedy, which is a very substantial document comprising 63 pages and 57 exhibits in three lever arch files.

10.  On 10 September 2004, the liquidators voluntarily filed a Points of Claim.  Pursuant to the order made on the return date of the summons on 12 October 2004, the Points of Claim with the schedule attached were re-filed and re-served.  The re-filed Points of Claim form the subject matter of the present striking out application. 

11.  By the order dated 12 October 2004, the respondents were ordered to file and serve Points of Defence and evidence in opposition within 28 days.  Directions were also given for the filing of Points of Reply and evidence in reply within 14 days thereafter and also for the summons to be restored for hearing upon compliance with the above directions.

12.  On 23 November 2004, the respondents applied by summons seeking further and better particulars of the Points of  Claim and production of documents, with the liquidators on the other hand applying for an unless order on the filing and service of the Points of Defence.  Eventually on 8 December 2004, the liquidators provided further and better particulars of the Points of Claim by letter. 

13.  By an order made by consent, the respondents withdrew their summons for further and better particulars and discovery.  The order further provided for the liquidators to supply to the respondents the documents listed in the respondents’ summons once they obtained them from the banks.  The time for the filing of the Points of Defence was extended to 14 days from the date of the consent order, with leave to amend the Points of Defence (if so advised) following the receipt of the documents provided by the liquidators.  The time for filing and serving evidence in opposition was also extended to 14 days from the receipt of the documents from the liquidators.

14.  The respondents filed their Points of Defence on 23 December 2004.

15.  By letter dated 11 July 2005, the liquidators provided to the respondents the Affidavit of Mark Sebastian Pulvirenti exhibiting the documents obtained from various banks and also affirmations taken from three witnesses in May and June 2005. The letter also enclosed an amended Points of Claim.  The amendments are primarily to: (i) include an averment that the respondents were guilty of misfeasance, in breach of duty and/or negligent (in addition to the averment that they were dishonest) in authorising the payments to Famous Capital and King Capital; and (ii) amend the schedule by revising some of the figures and dates of the documentation for the payments to Famous Capital and King Capital and identifying which of the respondents signed the bank documents on behalf of the Company.  The liquidators requested the consent of the respondents to the filing of the Amended Points of Claim and the additional affirmations.

16.  The respondents’ solicitors replied by letter dated 18 July 2005.  It is a lengthy letter raising requests for further discovery of documents and particulars of the Points of Claim.  The requests for further and better particulars were repetitions of the requests made in 2004, to which the liquidators had already responded to in December 2004.  The letter set out the respondents’ comments to the liquidators’ answers, contending that they were inadequate.  Also enclosed with the letter was a nine-page long request for additional particulars.   

17.  The liquidators replied by letter dated 19 April 2006, stating that all documents received from the banks had been disclosed and the liquidators had no other documents in their possession. As to the requests for particulars, the liquidators pointed out that they had already been provided either in the Points of Claim, the 11^th Affidavit of Mr Kennedy or the three additional affirmations.  The liquidators nevertheless provided a formal set of answers to the respondents’ requests so as to avoid unnecessary delay to the proceedings. The liquidators further requested the respondents to confirm their agreement to the filing of the Amended Points of Claim and the three additional affirmations.  The respondents did not respond to this letter.  They did not make any further request for particulars or raise any complaint that the liquidators’ answers were in any way inadequate or deficient.  There was also no amendment to the Points of Defence.

18.  On 22 May 2008, the liquidators issued a summons for direction, seeking leave to amend the Points of Claim and to file the three additional affirmations and other directions.  Two days before the hearing of the summons, the respondents issued a summons to strike out the proceedings for want of prosecution.  The application was heard by Kwan J (as she then was).  By her Decision handed down on 7 October 2009, the respondents’ application was dismissed with costs.  The respondents’ appeal to the Court of Appeal was dismissed on 30 April 2010. Leave to appeal to the Court of Final Appeal was refused by the Court of Appeal.  The respondents have applied to the Court of Final Appeal for leave to appeal, the hearing of which is pending.

19.  In the meantime, the respondents issued the present application on 1 December 2009.  

The liquidator’s case

20.  The gist of the liquidators’ case against the respondents had been set out in paragraphs 15 to 21 of Kwan J’s Decision, which I respectfully adopt as follows:

“15. It was alleged by the liquidators in these proceedings that the respondents were involved in a conspiracy with related or associated persons and entities to defraud the Company and possibly the relevant banks of over HK$30 million, through a series of fake or sham letters of credit transactions, for goods that were never delivered and for which fake or sham invoices were issued by associated parties to the Company via the respondents. The period in which these transactions took place was from 14 February 2001 to 9 May 2002.

16. The transactions took the form of supposed deliveries of asphalt, concrete mix and steel bars to the Company by Famous Capital and King Capital. The liquidators have obtained copies of numerous cheques and letters of credit documents signed by the respondents. They alleged that Famous Capital and King Capital were set up either at the direction or with the knowledge of some or all of the respondents for the purpose of obtaining funds from the Company through letters of credit to channel monies to other entities in the China Rich group. As a result, the Company had been drained of substantial funds in the three months leading up to its sale and the six months leading up to the appointment of provisional liquidators, that would have otherwise been available to meet at least partially the debts of creditors.

17. In paragraphs 18 and 19 of the points of claim, it was pleaded that in “breach of fiduciary duty and/or in breach of trust”,

(1) between 14 February 2001 and 9 May 2002, the 1^st respondent and/or the 2^nd respondent and/or the 3^rd respondent made or procured at least twenty-two payments by way of cheques and letters of credit, totalling at least HK$51,768,476.32 from available credit funds of the Company under their control to an account in the name of Famous Capital. These payments were purportedly in consideration for goods and allegedly delivered to the Company by Famous Capital. Despite various documents signed by the respondents as directors of the Company to the contrary, no such goods were delivered. Between 9 July 2001 and 28 January 2002, twenty-four payments totalling HK$33,242,795 were paid to the Company by twenty-four cheques, leaving a shortfall of HK$18,525,681.32 owing to the Company; and

(2) between 28 February 2002 and 9 May 2002, the 1^st respondent and/or the 2^nd respondent and/or the 3^rd respondent made or procured eleven payments totalling HK$26,217,065.80 from available credit funds of the Company under their control to an account in the name of King Capital. These payments were purportedly in consideration for goods allegedly delivered to the Company by King Capital. Despite various documents signed by the respondents as directors of the Company to the contrary, no such goods were delivered. Between 18 February 2002 and 18 April 2002, four payments totalling HK$12,050,000 were paid to the Company by four cheques, leaving a shortfall of HK$14,167,065.80 owing to the Company.

18. Particulars of all the payments and repayments were set out in the schedule to the points of claim.

19. It was further pleaded that the 1^st respondent and/or the 2^nd respondent and/or the 3^rd respondent were dishonest in authorising the payments to Famous Capital and King Capital and their dishonesty “is apparent or, alternatively, can be inferred from” matters pleaded in paragraph 21 of the points of claim.

20. In paragraph 23, it was alleged that no resolution of the Company in general meeting had been passed authorising the payments of the said sums to Famous Capital or King Capital or any sum and the said payments were made improperly and invalidly and “constitute a misfeasance and/or breach of duty and/or breach of trust” in relation to the Company on the respondents’ part as such directors.

21.  The liquidators claimed against the respondents the total sum of HK$32,692,747.12.”

Therespondents’ defence

21.  Kwan J’s Decision also summarized the respondents’ defence to the liquidators’ claim in paragraphs 28 to 32, which I also respectfully adopt as follows:

“28. It was denied that the respondents were de facto directors of the Company after their respective resignations as alleged. It was further denied that the Company was insolvent at all material times.

29. They made these averments:

(1) The acts performed by the 1^st and 2^nd respondents in relation to the Company were incidental to their respective positions in China Rich (as chairman of China Rich for the 1^st respondent, as chief financial officer of China Rich for the 2^nd respondent) and the position of the Company as a wholly-owned subsidiary of China Rich up to 22 April 2002.

(2) The 1^st to 3^rd respondents remained signatories of the Company’s bank accounts after 22 April 2002 subject to terms and conditions of the sale and purchase agreement between Benefit Holdings and Sino Glister, and that between 22 April 2002 and the presentation of the winding-up petition on 6 July 2002, a sum exceeding HK$10 million was transferred from accounts over which the respondents remained signatories into the Company’s bank account which was controlled by the director of the Company nominated by Sino Glister, Eric Chim, to the exclusion of the respondents.

30. Paragraphs 18 and 19 of the points of claim, which contained the material allegations of the liquidators, were not admitted, save that payments of at least HK$33,242,795 were made to the Company by Famous Capital and payments of at least HK$12,050,000 were made to the Company by King Capital. It was not admitted that the schedule to the points of claim constituted a complete listing of all payments and repayments between the Company, King Capital and Famous Capital.

31. The respondents admitted they signed various cargo receipts in respect of goods delivered to the Company’s construction sites, but averred that the receipts did not stipulate the goods were physically delivered by King Capital or Famous Capital.

32.  The respondents denied that Famous Capital and King Capital were not independent third parties in relation to the Company.  They averred the Company had traded with Famous Capital and King Capital as evidenced by documents exhibited to Mr Kennedy’s 11^th affidavit.” 

22.  As can be seen, the respondents basically put the liquidators to strict proof of their case against them.

Relevant principles

23.  The relevant legal principles relating to striking out are not in dispute: see Hong Kong Civil Procedure 2011 vol.1 pp.394-395.  It is sufficient for the present purpose to note that striking out should only be employed in plain and obvious cases and disputed facts are taken in favour of the party sought to be struck out.  The burden lies on the applying party to show that the claim is obviously unsustainable and the pleadings unarguably bad.  

The grounds for striking out

24.  The present striking out application is made on three broad grounds.  First, it is that the Points of Claim disclose no reasonable cause of action.  Second, the respondents say that the Points of Claim are embarrassing because they do not plead a case of fraudulent breach of fiduciary duty against each of the respondents, do not specify which acts of dishonesty are alleged against each respondent and have not pleaded the particularity required for a plea of fraud.  Third, it is said that the Points of Claim are an abuse of process because they allege fraudulent misfeasance against the respondents in the absence of knowledge and based on speculative inferences.  It is further said that the misfeasance proceedings are pursued vexatiously because of the contempt proceedings brought by the respondents against Mr Kennedy. 

Late application

25.  Before turning to the grounds for striking out, I will first deal with the issue of delay.  It is the liquidators’ argument that this is a belated application, being brought more than five years after the Points of Claim were filed in September 2004.  The liquidators say that if indeed the Points of Claim were so defective as to merit a striking out, the respondents would have noticed this right from the time the Points of Claim were filed.  Yet it is more than five years that the respondents saw a need to strike the Points of Claim out. The liquidators submit that the present application is a tactical move aiming to delay and obstruct the misfeasance proceedings.

26.  The respondents’ response is that the liquidators had failed to comply with the consent order dated 9 December 2004, under which they were to disclose to the respondents various documents once they were provided by the banks. It is further said that it was only in Mr Borrelli’s affidavit that the liquidators formally stated that they had no further documents, so that time should only starts to run against the respondents as from the filing of in January 2010.    

27.  This is hardly convincing.  The liquidators had in their letter dated 19 April 2006 made it beyond doubt that all documents received from the various banks had been provided to the respondents and there was no other document in their possession. The position of the liquidators was therefore known to the respondents in April 2006.  It matters not that this was stated in a letter and not on oath.  In any event, even accepting the respondents’ explanation that it was upon reading Mr Borrelli’s affidavit that they knew the liquidators had no further documents, there was still a delay of almost a year.  The respondents simply have no good reason for the long delay in bringing this striking out application.  This is particularly so having regard to the conduct of the respondents in these proceedings. After being provided with the first set of particulars in December 2004, the respondents agreed to withdraw their summons for further and better particulars.  Some six months later, however, the issue of particulars was revived when being served with further affirmations and documents and the proposed amendments to the Points of Claim.  Upon being served with another set of particulars by the liquidators’ letter dated 19 April 2006, the respondents were content not to raise any further requests or complaints on the Points of Claim until after the liquidators issued the summons for directions and their first application to strike out was unsuccessful.  Plainly, there is plenty of time and opportunity for the respondents to consider the Points of Claim and the liquidators’ claim and to launch a striking out application if they indeed feel aggrieved by the deficiencies in the Points of Claim.  I am inclined to agree with the liquidators that the respondents were prompted by Kwan J’s Decision to bring this application, which was to hold up the progress of the misfeasance proceedings.

28.  It is established law that striking out application should be made promptly. A late application will only be acceded to in the clearest circumstances: Poon Lai Bing v. Gold Dragon Ltd t/a Club Paris [2008] HKEC 16.  Accordingly, unless the respondents can demonstrate a clear and strong case for granting the relief sought, the court’s discretion should not exercised in their favour.   

A preliminary point  

29.  I turn now to deal with the grounds of the respondents’ application.  At the outset, it is necessary to recognize that these misfeasance proceedings were commenced by summons and the Points of Claim were preceded by the 11^th affidavit of Mr Kennedy, which set out in considerable details the liquidators’ case and evidence.  Accordingly, the court should not view the Points of Claim in isolation, but should consider them together with the 11^th affidavit of Mr Kennedy.  This is of particular relevance when considering the complaint that the Points of Claim fail to inform the respondents the case they have to meet.  Mr Barlow SC submits it is impermissible to look to Mr Kennedy’s affidavit in identifying the liquidators’ case.  It is said that the whole reason of Kwan J ordering the filing of Points of Claim was to tie the liquidators down to their case.  I do not accept this submission.  The order of 12 October 2004 only directed a re-filing and re-serving of the Points of Claim because the schedule was omitted from the version that the liquidators voluntarily filed on 10 September 2004.  There is, in any case, no indication that Kwan J intended that with the filing of Points of Claim, Mr Kennedy’s 11^th affidavit shall be excluded from the consideration of the court.  In fact, Kwan J accepted in her Decision that the liquidators’ case is set out in both the Points of Claim and Mr Kennedy’s 11^th affidavit and had looked at both documents in identifying the liquidators’ claim.    

30.  Further, an overall view of the liquidators’ claim should be taken in assessing the adequacy or otherwise of the Points of Claim.  The court should not be involved in a minute and meticulous scrutiny of the wordings used in the Points of Claim.  Hence, criticisms that the language of the Points of Claim lack precision and exaction (such as the averment in paragraph 21 that the respondents’ dishonesty is “apparent” or “can be inferred from” and the averments in paragraphs 14 to 16 that the respondents were in control of all the Company’s bank accounts when this was not really the case) will not assist the application.    

No reasonable cause of action    

31.  The respondents’ first ground is that the Points of Claim fail to disclose a reasonable cause of action.  It is said that the liquidators’ pleaded case is unarguable because: (i) at the time when the respondents were directors, their conduct and acts had been assented to by China Rich, which wholly owned the Company; (ii) when the respondents ceased to be directors, they owed no fiduciary duty to the Company; (iii) after the Company was sold, Eric Chim became the directing mind; and (iv) the reference to the respondents as de facto directors is erroneous because only directors owe fiduciary duty.    

32.  On the first point, Mr Barlow SC refers to the case of In re Duomatic Limited [1969] 2 Ch. 365 and the principle of implied ratification and argues that a director’s act in respect of his company, which is known and assented to by all the shareholders, is not misfeasance, irrespective of whether a general meeting has been held to approve it.  Mr Bartlett submits, and I agree, that for the principle of implied ratification to apply, the director’s act in question must be intra vires.  In Kinsela v. Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, which were misfeasance proceedings brought by the liquidators, the Supreme Court of Australian upheld the decision declaring a lease entered into between a company and its directors at a time when the company was in severe financial difficulties, even though the lease was not ultra vires and was unanimously approved by all the shareholders. In holding that the directors had acted in breach of their duty to the company in that the lease directly prejudiced the creditors of the company, Street CJ (at 731) quoted from the judgment of Cooke J (as he then was) in Nicholson v. Permakraft (NZ) Ltd (1985) 3 ACLC 453, 457-460.  After referring to In re Duomatic Limited and observing that the principle about assent has a particular application in matters of procedure, Cooke J stated:

“The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance, creditors are entitled to consideration, in my opinion, if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency …

… in such cases the unanimous assent of the shareholders is not enough to justify the breach of duty to the creditors. The situation is really one where those conducting the affairs of the company owe a duty to creditors. Concurrence by the shareholders prevents any complaint by them, but compounds rather than excuses the breach as against the creditors.”     

33.  The two cases and the passage of Cooke J quoted above were referred to and adopted by our Court of Final Appeal in Tradepower (Holdings) Ltd v. Tradepower (HK) Ltd (2009) 12 HKCFAR 417,468 at paras.129-130.  The Court of Final Appeal held that (at 467, para.128): “A ratifying resolution by a company’s members which would be capable of validating directors’ actions where the company remains perfectly solvent is ineffective where it is insolvent or in serious financial difficulties and where the effect of the directors’ action would be to prejudice its creditors.”   

34.  Mr Barlow SC does not dispute that different considerations will apply where the company is insolvent.  He however argues that the Company only got into financial difficulties after its sale in April 2002 and that before this the Company was paying its debts when they fell due. Whether the Company was solvent at the time when the transactions complained of were conducted is an issue in dispute.  For the purpose of this application, it has to be assumed in favour of the liquidators that they will be able to make good their case that at the material time the Company was already insolvent or in grave financial difficulties.  Further, without deciding the point, even if it is the case that the Company was able to meet its debts when they fell due, this fact is not conclusive of the issue of solvency.

35.  A further point is made that the Company was at the time of the payments in question indebted to China Rich; hence if these payments to Famous Capital and King Capital were, as the liquidators say, channelled back to China Rich, this would reduce the Company’s indebtedness.  In the circumstances, it is said, these were not acts prejudicial to the creditors of the Company.  The problem with this submission is that there was no suggestion, and it is not the respondents’ case, that China Rich had acknowledged a reduction in the Company’s liabilities to it.  More fundamentally, there were creditors other than China Rich.  

36.  On the second and third points, Mr Barlow SC points out that the alleged acts of misfeasance took place between 14 February 2001 and 9 May 2002 while the 1^st and 2^nd respondents ceased to be directors of the Company from 26 July 2001 and the 3^rd respondents from 22 April 2002.  It is further said that as from 22 April 2002, the Company was owned by its new owner. 

37.  The liquidators’ case is that notwithstanding their resignations, the respondents continued to carry out the functions of directors, remained in control of at least the finances of the Company and were responsible for bringing about the transactions and payments complained of.  It is pleaded that the respondents were de facto directors of the Company even after their resignation and after the sale.  The Points of Claim has set out the matters relied on for this averment and the 11^th Affidavit of Mr Kennedy has identified the evidence in support.  The majority of the acts complained of took place before the sale of the Company.  These include the application for the letters of credit, the signing of the cargo receipts and the drawing and payment of the cheques. The few acts that occurred afterwards relate to the retiring of the letters of credit.  In this connection, Mr Barlow SC has submitted that in remaining as signatories of the Company and in directing funds from the Company to Famous Capital and King Capital, the respondents were acting pursuant to the terms and arrangement under the sale and purchase agreement of the Company, although he would not say whether it is the respondents’ case that the payments to Famous Capital and King Capital, the subject matter of the claim, were also pursuant to the terms of the sale and purchase agreement.  Be that it is, for the purpose of this application, these disputed facts have to be assumed in favour of the liquidators.  That during part of the period in which the misfeasance acts occurred, the respondents had resigned from directorship is thus not fatal to the liquidators’ claim.  

38.  As to the fourth point, what was pleaded in the Points of Claim (at paras.12 to 13) is that the respondents owed fiduciary duties to the Company as director and/or officers of the Company and also as trustees of assets and properties of the Company that were in their possession, custody or control, including money standing to the available credit of the Company’s bank accounts.  It was further averred (at paras.18 and 19) that the respondents had acted in breach of fiduciary duty and/or in breach of trust by making or procuring to be made the payments from available credit funds of the Company under their control to respective accounts of Famous Capital and King Capital.  There is nothing improper in the averment that the respondents were de facto directors.  There is also no conflict between the averment and the claim of breach of fiduciary duty.  It should also be noted that the Points of Defence admit (at para.13(b)) that in as much as they were signatories to bank accounts of the Company, the respondents owed fiduciary duties towards the Company in respect of funds in such accounts. 

39.  In short, I am not persuaded that the respondents have demonstrated a plain and obvious case for striking out the Points of Claim on the basis of no reasonable cause of action.

Embarrassing pleading

40.  The respondents’ second ground for striking out is that the Points of Claim are embarrassing. A number of points are made under this ground. They are: (i) the mismatching of the relevant dates, namely, the dates when the misfeasance occurred and that dates of resignation of the respondents as directors of the Company; (ii) no individual case of breach of fiduciary duty or dishonesty is pleaded against each respondent; (iii) there is no plea of specific acts of alleged misfeasance against each respondent; (iv) there is no or no meaningful plea of individual fraudulent intent; (v) the Points of Claim fail to meet the basic requirements of pleadings; and (vi) in consequence, each of the respondents has no idea as to the case against him or her; what discovery should be required from the liquidators and what evidence and actions should be taken to prepare for trial.

41.  On the first point of mismatching of dates, this has been dealt with in paragraphs 36 and 37 above.  In brief, the Points of Claim have clearly pleaded that the respondents continued to act as directors and remained in control of the Company notwithstanding their resignations and even after the sale of the Company.  

42.  The second and third points under this ground can be taken together.  The respondents complain that no individual case of breach of fiduciary duty or dishonesty as well as no specific acts of misfeasance has been pleaded against each of them.  In paragraphs 18 to 21 of the Points of Claim, it is pleaded that the 1^st respondent “and/or” 2^nd respondent “and/or” 3^rd respondent had acted in breach of fiduciary duty and/or breach of trust and were dishonest in the manner as particularised in those paragraphs.  The respondents take exception to the words “and/or”.  From reading the whole of the Points of Claim, it can be readily seen that the liquidators’ case is that each of the respondent was in breach of fiduciary duty and acted dishonestly and the breach and dishonesty alleged against each of them arose in similar ways, namely, they had signed the applications for letters of credit, trust receipt documents, cargo receipts and also cheques, thereby caused the Company to pay by cheques or letters of credit for goods that were never delivered, a fact known to them.   

43.  As the exhibits to Mr Kennedy’s 11^th affidavit show, the applications for letters of credit, trust receipts, cargo receipts and cheques involved in the transactions in question were invariably signed by either two of the respondents. Mr Bartlett had attached to his submissions a schedule that helpfully summarizes the details of the transactions, including which of the respondents signed the bank and other documents for the transactions.  I accept that the Points of Claim by themselves may not have fully identified the role and involvement of each of the respondents in the transactions complained of. However, this is far from saying that the Points of Claim ought to be struck out as being embarrassingly vague or unclear.  In any event, the proposed amendments to the Schedule as per the Amended Points of Claim (which was served as long ago as July 2005) have identified which of the respondents was involved in executing the bank documents for the transactions in question.  Although the respondents do not consent to the amendments, the court is entitled to have regard to them when deciding whether the Points of Claim call for a striking out.     

44.  As to the fourth point, it is that the Points of Claim had not pleaded the individual fraudulent intent and the particulars for the plea. Reference was made to the case of Belmont Finance Corporation Ltd v. Williams Furniture Ltd & Others [1979] 1 Ch 250, in which it was held that in the context of a claim for breach of constructive trust on the basis of knowingly assisting a dishonest and fraudulent breach of duty, dishonest and fraud had the same meaning and that dishonesty or fraud had to be specifically and clearly pleaded. It was considered (at 274D) that an averment that the defendants were all material times aware, or ought to have been aware, of the design to misapply the company’s funds was insufficient for the purpose of pleading fraud. The case of ADS v. Wheelock Marden Co Ltd [1994] 2 HKC 264 at 269-270 was also cited for the requirements of pleadings and the principle that allegation of fraud must be pleaded distinctly and with the utmost particularity.  This is not controversial.    

45.  In the present case, the Points of Claim have contained specific pleas of dishonesty and knowledge.  The matters relied upon for the pleas were also pleaded in paragraph 21.  They include: (i) Famous Capital and King Capital were not independent third parties in that their directors were related to or associated with the 1^st and 2^nd respondents; (ii) Famous Capital admittedly never traded; (iii) Famous Capital and King Capital never traded with the Company and was unknown in the industry; (iv) the very large quantities of goods involved, which far exceeded the need of the Company; (v) the absence of information on the cargo receipts as to the address for delivery of the goods or the means of delivery; and (vi) the unusual feature of the repayments to the Company of some of the money it had paid out to Famous Capital and King Capital.  As to knowledge, although paragraph 20(a) and (b) pleaded that the respondents knew or ought to know that no goods or the goods purported to be sold and delivered to the Company were never sold or delivered, paragraph 20(c) had put the matter beyond doubt when it pleaded that the respondents acknowledged on behalf of the Company the delivery of the goods from Famous Capital and King Capital in the knowledge that the two companies had never made delivered the goods to the Company.    

46.  Mr Barlow SC has also cited several other authorities as illustrative or supportive of the submission that the Points of Claim is hopelessly embarrassing.  The first is Philipps v. Philipps (1878] 4 QBD 127, of which, it is said, the liquidators’ claim bears close resemblance. I am unable to accept this submission. In Philipps, the plaintiff, who sought to recover the land, made a general statement that by virtue of certain deeds, assurance, wills and documents in the defendant’s possession and control, he was entitled to possession of the land.  There was no description of the deeds or their purports.  The pleading was struck out as being embarrassing because, by the general statement, the plaintiff had failed to inform the defendant what his case was, thus prevented the defendant from properly meeting the claim.  Bramwell LJ was therefore of the view that it was a fishing statement of claim.  However, the Points of Claim here is far removed from it. 

47.  Mr Barlow SC also referred to the judgments of our Court of Appeal and of the Privy Council in Wharf Properties Ltd & Another v. Eric Cumine Associates Architects Engineers and Surveyors & Others [1989] 1 HKLR 12; [1991] 2 HKLR 154, and also the cases of C S Low Investment Ltd & Others v. Freshfields (a firm) [1991] 1HKLR 11 and Hong Kong Clearing Corp Ltd v. Yicko Futures Ltd [2006] 2 HKC 233. These cases were also relied upon for the third ground of abuse of process. 

48.  Wharf Properties Ltd is a very different case from the present.  While claiming very substantial amount of damages for breach of contract, the plaintiffs conceded they would not be able until the trial to provide the particulars required as to damages. It is not surprising that Pennington JA took the view (at 566H) that it was a piece of speculative litigation and that the Privy Council (at 164I) regarded the pleading as hopelessly embarrassing since the plaintiff had failed to particularise the nexus between the alleged breach and the delay that had given rise to the alleged damages.  Here, it is not the liquidators’ stance that they are unable to give the particulars of their case or that they are hoping to reformulate their case at the trial.  On the contrary, the Points of Claim have set out their case and the material facts relied upon.  It cannot be said that this is a piece of speculative litigation.  Similarly, the other two cases turn on their own facts and no general assistance can be derived from them.  

49.  Mr Barlow SC also places reliance on the case of Davey v. Garrett (1878) 7 Ch D 473 as holding that a defendant is entitled as of right to strike out an embarrassing pleading.  In my view, this is putting the case too high. What James LJ had stated, in the context of whether the appellate court should interfere with the discretion of the judge below on an interlocutory decision, is that a defendant may claim ex debito justitiae to have the plaintiff’s case presented in an intelligible form so that he may not be embarrassed in meeting it and that the court ought to be strict or even to severity in preventing oppressive pleadings.     

50.  The respondents have complained that they do not know what case to meet and how to prepare for the trial.  I do not accept these are genuine complaints.  The analysis above shows that from reading the Points of Claim and the 11^th affidavit of Mr Kennedy, it is clear what the liquidators’ case against the respondent is. As Kwan J observed in her Decision (at para.64), the pivotal issue in these proceedings is whether the money that had passed from the Company to Famous Capital and King Capital arose out of genuine, bona fide commercial transactions involving actual sale and purchase of the goods stated.  In addition, by July 2005, the liquidators had provided to the respondents all the affidavit evidence and documents they have.  Latest by April 2006, the liquidators had made it clear that they had no further documents in their possession. If the respondents genuinely have problems understanding the case against each of them or preparing for trial, it is most unlikely that they would have waited until December 2009 to mount this striking out application and only after the application to strike out for want of prosecution was unsuccessful.  

51.  I do not accept that the Points of Claim ought to be struck out as being embarrassing.

Abuse of process

52.  This brings me to the third ground relied by the respondents, which is that the Points of Claim and the misfeasance proceedings are an abuse of process. In essence, the respondents contend that this is a piece of speculative litigation and that the liquidators have no proper basis for their claim.  I do not agree.  Although the liquidators were not at the scene when the transactions complained of took place and that they did not have personal knowledge of the events surrounding the transactions, it is not the same as saying they have no case or do not know their case.  This will certainly not preclude them from bringing these misfeasance proceedings. The ultimate issue is whether there is proper basis and evidential support for the liquidators’ case.  Mr Bartlett submits, and I agree, that the liquidators have demonstrated an arguable case against the respondents, having regard to the 11^th affidavit of Mr Kennedy and the three affirmations from Miss Julia Ip, Mr Vincent Lo and Mr Eric Chim. The attack on the credibility of Mr Chim will only go to the assessment of his evidence at the trial.  As noted above, the present case is far removed from the situations in the cases of Wharf Properties Ltd, C S Low Investment Ltd and HKFE Clearing Corp Ltd, where the claims of the plaintiffs were found by the court to be speculative and without proper foundation.  

53.  The respondents also say that these proceedings are pursued vexatiously because of the contempt proceedings brought by the respondents against Mr Kennedy.  Apart from assertions in affidavits filed by the respondents, there is no cogent support for this contention. There is no basis for concluding that the misfeasance proceedings are not pursued for the interest of the general body of creditors of the Company.

54.  The ground of abuse of process is not made out.    

Conclusion

55.  For the reasons given above, I dismiss the respondents’ summons.  I also make an order nisi that the respondents pay the costs of the liquidators of the striking out application together with the costs of the two summonses filed on 3 and 19 May 2010 for leave to file further affidavits, to be taxed if not agreed.

The outstanding summonses

56.  In respect of the liquidators’ summons for directions and the summons seeking an Unless Order against the respondents on the filing of evidence in opposition, I make the following directions:

(1) The respondents shall indicate by letter to the liquidators within the next seven days whether they still contest the applications.

(2) If the respondents continue to contest the applications, and if the parties are in agreement that the applications may be disposed of by written submissions without a hearing, they shall endeavour to agree on the timetable for lodging and exchange of submissions and inform the court of their agreement by letter.  Otherwise, the summonses shall be restored for hearing of oral arguments. 

(3) If the respondents decide not to contest the summonses, the parties shall endeavour to agree the terms for disposing of the summonses, including the timetable for the further conduct of these proceedings.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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____________

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 735 OF 2002

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DECISION ON COSTS

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1.  At the close of the examination of Mr Johnny Chuang (“the Examinee”) pursuant to section 221 of the Companies Ordinance on 4 May 2005, the Joint & Several Liquidators (“the Liquidators”) made an application that the Examinee pays their legal costs incurred in the examination of the Examinee.  Mr Ridgeon, who appeared for the Examinee, opposed the application, indicating at the same time that he was not prepared to argue the matter and required time to prepare the submissions.  As a result, I adjourned the application and gave directions for the filing of written submissions.  Both sides had in accordance with the directions given, lodged and served their submissions.

The arguments

2.  The main argument that the Liquidators relied upon in seeking costs against the Examinee is the conduct of the Examinee.  It is said that the section 221 examination would not have been necessary but for the Examinee’s unreasonable refusal to attend an interview with the Liquidators.  The Liquidators draw support from the decision of Master Wolley ordering the directors of Wing Fai Construction Company Limited (“Wing Fai”) to pay the Liquidators the costs of their section 221 examinations, and the decision of Kwan J, upholding Master Wolley’s decision on appeal.

3.  The Examinee opposes the costs application, contending that he and the China Rich Group had legitimate concerns that the Liquidators would abuse the examination in order to gain an advantage in the litigations between the Liquidators and China Rich Group in circumstances where the Examinee had already outlined his evidence in an affirmation.     Wing Fai was a company within the China Rich Group.  The Examinee argues that there were good reasons why the examination should have taken place under the supervision of the court and he should not be penalized with an adverse costs order.  It is also argued that the position of the Examinee is different from that of the directors of Wing Fai and that the decision of Master Wolley does not bind this court.

Reasons for decision

4.  Costs is a matter of the court’s discretion.  I agree that in determining the costs order for a section 221 examination, it is highly relevant to establish the reasons that necessitate the examination.  The reasonableness or otherwise of the examinee’s conduct and his co-operation with the liquidators or the lack of it are therefore pertinent considerations.

5.  In the present case, the reasons and background leading to the Liquidators’ decision to examinee the former officers of Wing Fai had been summarized in paragraphs 3 to 8 of Kwan J’s decision of 12 March 2004, granting the Liquidators’ application to examine the Examinee subject to certain undertakings from the Liquidators (“Kwan J’s decision”).   It is of relevance to note that it has a difficult liquidation and the Liquidators had scanty information and documents about Wing Fai and its affairs.

6.  Paragraph 14 of Kwan J’s decision also set out the Examinee’s connection and employment with the China Rich Group.  Among other things, the Examinee was the company secretary of Wing Fai from 6 January 2000 to 12 December 2001.  He is a qualified accountant.  It transpired from his answers in the examination that before he joined the China Rich Group, he was employed by Deloittes and had been involved in auditing the accounts of the China Rich Group, including Wing Fai.  Further, in the course of his employment with the China Rich Group, he was responsible for consolidating the group accounts.  As such, one would have thought he should have come across the accounts of Wing Fai and would have some ideas about the financial and/or accounting affairs of Wing Fai.  Indeed, Kwan J found that the Examinee was involved in the drawing up of important financial documents for Wing Fai and that he is in a position to provide to the Liquidators material information relating to the financial affairs of Wing Fai.

7.  In the circumstances, it is only reasonable that the Liquidators wish to interview the Examinee for the purpose of seeking information and assistance.  The Liquidators first made the request to interview the Examinee by letter dated 13 November 2003.  The Liquidators indicated in the letter that the Examinee was entitled to be accompanied by a legal representative at the interview and that a list of questions and issues to be covered in the interview would be forwarded to him 48 hours prior to the time scheduled for the interview.

8.  The Liquidators received no reply to the letter and a chaser was sent on 3 December 2003.  By a letter dated 10 December 2003, the Examinee’s solicitors informed the Liquidators that the Examinee had on 26 November 2003 made an affirmation in HCCW 253/2003.  The letter further said that the Examinee was a witness of fact in proceedings relating to China Rich Group and its directors, and that the Liquidators were attempting to gain litigation advantage by abusing its powers under section 221.  The Liquidators were requested to supply a questionnaire to demonstrate that the questions intended to be put to the Examinee did not relate to the matters contained in his affirmation and the proceedings.

9.  The Liquidators responded by letter dated 11 December 2003, refuting the suggestion that they were abusing their powers and were seeking to gain a litigation advantage.  The Liquidators requested the Examinee to reconsider his position with regard to attending an interview, and undertook to provide to the Examinee a list of questions 48 hours prior to the interview.  The Liquidators indicated that if the Examinee did not agree to the request, they would proceed to make a section 221 application. 

10.  By letter dated 15 December 2003, the Examinee’s solicitors repeated their request for a questionnaire for the purpose of considering the request to interview the Examinee.  Further correspondences were exchanged during which the Examinee maintained his stance that he would only consider whether to attend an interview after seeing a questionnaire from the Liquidators. 

11.  On 6 January 2004, the Liquidators applied under section 221 for an order to orally examine the Examinee.  Prior to that, examinations of three former officers of Wing Fai had commenced and adjourned part-heard.  Upon their application to stay their examinations on the ground that they were parties or material witnesses in proceedings that had commenced since the making of the examination orders, Deputy Judge To ordered on 9 February 2004 that the examination of one former officer should not proceed but the examinations of two other officers should proceed subject to undertakings from the Liquidators that they would not put questions on certain matters. 

12.  Prior to the hearing of the section 221 application against the Examinee, the Liquidators offered to provide undertakings limiting the scope of the examination, similar to those ordered by Deputy Judge To.  Shortly before the hearing of the application, the Examinee’s solicitors wrote to the Liquidators, requesting other undertakings as conditions to the Examinee consenting to attending an examination.  At the hearing on 12 March 2004, the Liquidators offered two further undertakings but refused the other undertakings requested by the Examinee.  In the end, Kwan J granted the order of examination along the line of the undertakings offered by the Liquidators.  The further undertakings sought by the Examinee were refused by Kwan J.  Kwan J ordered the Examinee to pay the Liquidators the costs of the application and two-thirds of the costs of the hearing.  One-third of the Liquidators’ costs of the hearing were disallowed as Kwan J considered that the Liquidators should have offered the two further undertakings before the hearing.

13.  I had gone into the events leading to the examination order against the Examinee at some length because it appears from the submissions that the Examinees and the Liquidators have different views on the circumstances surrounding the making of the order.  The events underlying the examination order are also important considerations in determining the costs issue. 

14.  In light of the events set out above, I agree that the Liquidators are justified in saying that the Examinee had not been co-operative, as a result of which they were driven to conduct an examination in court instead of holding a voluntary interview with the Examinee.  Having regard to the Liquidators’ offer to conduct the interview in the presence of the Examinee’s legal representatives and to provide a list of questions 48 hours before the interview, the Examinee had not acted reasonably in insisting on being provided with a questionnaire before he would consider the Liquidators’ request of an interview.   Indeed in the letter dated 15 December 2003 to the Liquidators, the Examinee’s solicitors acknowledged that the Liquidators were at liberty to approach the Examinee for assistance on a voluntary basis.  Notwithstanding that, the Examinee would not agree to a voluntary interview, and would only consider the request for interview after seeing the Liquidators’ questionnaire.  

15.  As to the Examinee’s concerns that the Liquidators might attempt to abuse the examination to gain a litigation advantage, they have to be assessed against a number of matters. 

16.  Firstly, the Liquidators’ request to interview the Examinee was made well before the Examinee made his affirmation of 26 November 2003, and the Examinee had not responded to the request until being chased up by the Liquidators.   Secondly, the Examinee was not a party to any proceedings brought by the Liquidators.  Any concern that the China Rich Group may have over the effect and implications of the interview or examination of the Examinee on litigations relating to China Rich Group and/or the directors is irrelevant to whether the Examinee should render assistance to the Liquidators for the present liquidation.  Thirdly, the dispute in the winding-up proceedings for which the Examinee made the affirmation was resolved in September 2003 before the Examinee’s affirmation was filed, and the petition was eventually dismissed by consent in March 2004.  Fourthly, the Liquidators have pointed out that despite claims of the Examinee being a material witness for China Rich Group, the Examinee had only made one affirmation and has not appeared thus far to be a witness in any of the proceedings.

17.  It must be recognized that whatever concerns the Examinee may have, they were not sufficient to defeat an examination order, as demonstrated by the decision and order of Kwan J.   The undertakings given by the Liquidators only show that the Examinee was entitled to seek some safeguards to the ambit of the questions to be put.  They do not justify the Examinee’s approach in insisting on being supplied with a questionnaire before considering whether to agree to an interview.  

18.  The upshot of all these is as the Liquidators contend, the examination proceedings were necessitated by the stance adopted by the Examinee.  The Liquidators were entitled to be legally represented at the examination.  The legal costs incurred by the Liquidators for the examination should therefore be borne by the Examinee.  There is no justification for disallowing any part of the Liquidators’ legal costs.

19.  Turning finally to the costs decision of Master Wolley in connection with the examinations of the other former officers, I accept they are not binding on me.  However, the decision is illustrative of the principle that the reasons necessitating the examination proceedings and the conduct of the examinee are relevant factors in the determination of costs.  While costs is a matter of discretion and each case has to be considered on its own facts, I am unable to see any material difference between the position of the Examinee and that of the other officers of Wing Fai.                 

Conclusions

20.   For the reasons above, I order that the Examinee pays the Liquidators their legal costs of the examination, including the costs of this application for costs, to be taxed if not agreed.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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Before: Hon Kwan J in Chambers

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R U L I N G  O N  C O S T S

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1.  On 23 July 2004, I ruled that the respondent, who is a joint and several liquidator of Wing Fai Construction Company Limited (“the Company”), has no case to answer in respect of any of the grounds in the Re-amended Notice of Motion and dismissed the application to commit him for contempt, after hearing submissions on this over 3 days.  The reasons are set out in the judgment I delivered.

2.  Mr Martin Rogers, appearing for the respondent, seeks costs against the applicants on an indemnity basis.  This is the primary position of the respondent.  If the court is not mined to order costs on an indemnity basis, the respondent’s secondary position is that the resulting shortfall in his costs should be paid from the assets of the Company.

3.  Mr Whitehead, SC for the applicants does not dispute that they should pay the respondent’s costs but said that this should be on a party and party basis. 

4.  The Official Receiver seeks an order for costs against the applicants on a party and party basis.  Further, irrespective of the basis upon which costs are to be awarded, the respondent is not entitled to recover his costs out of the assets of the Company.

5.  I should first deal with the point raised by the Official Receiver that the respondent is not entitled to be paid the shortfall of his costs out of the assets of the Company, as I am of view that that would have a bearing on the exercise of my discretion whether to give indemnity costs, despite Mr Whitehead’s submission to the contrary.  Whether liquidators should be personally left out of pocket with a costs order on the standard basis was regarded as a matter of significance when the court came to consider if indemnity costs should be awarded in Hill v O’Driscoll [1998] 1 HKC 436 at 436E, H to I.

6.  Miss Linda Chan for the Official Receiver drew my attention to Alsop Wilkinson v Neary [1996] 1 WLR 1220 in which Lightman J made a distinction between 3 types of litigation in which trustees might become involved at 1223H to 1224C:

“Trustees may be involved in 3 kinds of dispute.  (1) The first (which I shall call ‘a trust dispute’) is a dispute as to the trusts on which they hold the subject matter of the settlement.  This may be ‘friendly’ litigation involving e.g. the true construction of the trust instrument or some other question arising in the course of the administration of the trust; or ‘hostile’ litigation e.g. a challenge in whole or in part to the validity of the settlement by the settlor on grounds of undue influence or by a trustee in bankruptcy or a defrauded creditor of the settlor, in which case the claim is that the trustees hold the trust funds as trustees for the settlor, the trustee in bankruptcy or creditor in place of or in addition to the beneficiaries specified in the settlement.  The line between friendly and hostile litigation, which is relevant as to the incidence of costs, is not always easy to draw: see In re Buckton; Buckton v Buckton [1907] 2 Ch. 406.  (2) The second (which I shall call ‘a beneficiaries dispute’) is a dispute with one or more of the beneficiaries as to the propriety of any action which the trustees have taken or omitted to take or may or may not take in the future.  This may take the form of proceedings by a beneficiary alleging breach of trust by the trustees and seeking removal of the trustees and/or damages for breach of trust.  (3) The third (which I shall call ‘a third party dispute’) is a dispute with persons, other than in the capacity of beneficiaries, in respect of rights and liabilities e.g. in contract or tort assumed by the trustees as such in the course of administration of the trust.”

7.  A similar classification of 3 categories was given in McDonald v Horn [1995] 1 All ER 961 at 970j at 971c, per Hoffmann LJ. 

8.  In a third party dispute, trustees are entitled to be indemnified as to their costs of proceedings properly brought or defended, as they have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and to represent the trust in a third party dispute.  On occasions, trustees would make a Beddoe application to seek the authorisation of the court before they sue or defend, making full disclosure of the strength and weakness of their case, so as to avoid any argument that they might not be entitled to an indemnity for their costs.

9.  For a trust dispute, the modern view is that where there is hostile litigation between rival claimants to the trust estate, the trustee should remain neutral and if he does so, he will have his proper and necessary costs indemnified.  If the trustee should take an active part in litigation, and if he is successful, he may be entitled to costs out of the estate, for he has preserved the interests of the beneficiaries under the trust.  But if he should lose, he is not entitled to be indemnified for his costs, as the costs have been incurred in an unsuccessful attempt to prefer one class of beneficiaries to another (see Alsop Wilkinson at 1225C to F).

10.  In respect of a beneficiaries dispute, this is regarded as ordinary hostile litigation, so costs will follow the event and do not come out of the trust estate (Alsop Wilkinson at 1224G; McDonald v Horn at 971b)

11.  It is not always easy to tell the difference between the 3 situations, as is recognized in McDonald v Horn at 971c.

12.  Miss Chan submitted that this is a beneficiaries dispute.  In making this classification, one should not have regard to the capacity of the party who brought the proceedings against the respondent, but should have regard to the nature of the dispute, whether this concerns the administration of the estate of the Company.  Applying this test, she submitted that the costs should not come out of the assets of the Company for these reasons:

(1)            the application was made against the respondent personally;

(2)            the reliefs sought by the applicants were all directed against the respondent without any reference to the Company or its assets;

(3)            the application was not defended by the respondent “in the name or on behalf of the Company” (cf. section 199(1)(a) of the Companies Ordinance, Cap. 32); and

(4)            the matters complained of by the applicants all concerned the propriety of the actions taken by the respondent and were not concerned with the protection or preservation of the estate of the Company.

13.  Miss Chan also relied on O. 62 r. 6(2) of the Rules of the High Court which provides as follows:

“Where a person is or has been a party to any proceedings in the capacity of a trustee, personal representative or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of those proceedings, in so far as they are not recovered from or paid by any other person, out of the fund held by the trustee or personal representative or the mortgaged property, as the case may be; and the Court may otherwise order only on the ground that the trustee, personal representative or mortgagee has acted unreasonably or, in the case of a trustee or personal representative, has in substance acted for his own benefit rather than for the benefit of the fund.”

14.  She submitted that the respondent has not been a party to these proceedings “in the capacity of a trustee”, and that he “has in substance acted for his own benefit rather than for the benefit of the fund”.

15.  It is not in dispute that O. 62 r. 6(2) is not the only situation in which the court may order costs of a trustee to be borne out of the trust estate.

16.  Mr Rogers submitted that this is not a beneficiaries dispute, as neither of the applicants are creditors of the Company nor are they shareholders, although the entities controlled by the applicants are among the creditors of the Company.  Further, each of the four grounds relied on by the Official Receiver in the contention that costs should not come out of the assets of the Company would apply equally if proceedings were brought against a trustee by an entirely independent party.

17.  Besides, even if this were a beneficiaries dispute, it is not as if under no circumstances would a trustee be entitled to be paid his costs out of the estate.  Mr Rogers referred me to this passage in Lewin on Trust, 17^th ed., para. 21-89:

“A beneficiary who unsuccessfully sues trustees for breach of trust will normally be ordered to pay the costs of the trustees.  But costs may prove to be irrecoverable from the beneficiary, for example because he is impecunious or legally aided, or the costs recovered, assessed on the standard basis, may be less than the costs actually incurred by the trustees which would be allowed on the indemnity basis.  In such cases, the question arises whether the trustees must suffer the burden of their costs personally, so far as not recovered from the unsuccessful claimant.  Early cases suggest that trustees who successfully defend a claim against them for breach of trust are entitled to indemnity out of the trust fund in respect of such costs only if it can be shown that their defence is for the benefit of the trust.  Later cases show that this is too narrow a view and trustees in these circumstances, being guilty neither of breach of trust nor misconduct, are entitled to such costs by way of indemnity as incident to their administration of the trust, though in view of Part 48, rule 48.3 of the Civil Procedure Rules the court may in such a case order an assessment on the standard rather than indemnity basis.”

18.  So the situation may be the same as in a third party dispute, where a trustee successfully defends a claim of a third party and is entitled to retain out of the trust fund such of the costs which he is unable to recover against a third party with a costs order on a standard basis (see Lewin at para. 21-45).

19.  Mr Whitehead has adopted the same position as Mr Rogers in respect of the Official Receiver’s contention.

20.  I have doubts if the present proceedings could properly be regarded as beneficiaries dispute.  Even if these proceedings were beneficiaries dispute, it seems to me that Miss Chan is taking too narrow a view in submitting that the respondent was acting for his own benefit in resisting the application to commit him for contempt.  The complaints made by the applicants against the respondent were in respect of acts done by him in discharge of his obligations as a liquidator, either to further recovery for the benefit of the creditors of the Company, or to discharge his duties at common law or under the statute in the wider public interest in the liquidation of the Company.  The respondent was sued as an incident of being a liquidator of the Company.  I hold that he is entitled to recover any shortfall in his costs out of the estate of the Company.

21.  I turn to consider whether I should award costs on an indemnity basis.  If I should order costs on the standard basis, the shortfall would be borne by the creditors of the Company.  Is this just and fair in the circumstances?

22.  I have cited to me the relevant authorities, Overseas TrustBank Limited v Coopers and Lybrand (a firm) and Ors. [1991] 1 HKLR 177 at 182J to 183H and Choy Yee Chun v Bond Star Development Limited [1997] HKLRD 1327.  It is clear that the circumstances in which an indemnity award might properly be made are not confined to the circumstances such as those described in Overseas Trust Bank.

23.  The discretion of the court is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be “appropriate” (Choy Yee Chun at 1335C to E).  I was also reminded by Mr Whitehead that notwithstanding the court’s discretion is not so confined, there must still be “special and unusual features” (Choy Yee Chun at 1334G) to warrant an award of costs on an indemnity basis.

24.  I am inclined to think there are such special and unusual circumstances here.

25.  I do not think these proceedings can be termed ordinary hostile litigation.  This is unlike the situation in Overseas Trust Bank where a third party claim was struck out as oppressive and without foundation in law or fact.

26.  As pointed out in my judgment on the submission of no case, here an officer of the court is accused of having committed a criminal contempt of court and not because he has acted in breach of a court order or an undertaking given to the court.  I have found that the respondent has no case to answer on all of the complaints.  The proceedings to commit for contempt were shown to be misconceived and futile, with no reasonable prospects of success.

27.  It is in my view not relevant that leave was granted on an ex parte application to proceed with the application to commit the respondent for contempt, as the threshold for granting leave is a low one, and the court would only have the submission of one side, notwithstanding the duty to make full disclosure by the applicants.

28.  The applicants have chosen to play at high stakes notwithstanding they are seeking to commit for contempt on a novel situation, where there are serious disputes to say the least on the proper construction of the statutory provisions they relied upon, and in the face of the principle against doubtful penalisation in contempt proceedings.

29.  It is not fair in the circumstances that the creditors should bear the shortfall in the respondent’s costs.  I note that similar views were expressed in Hill v O’Driscoll at 436H to I. 

30.  I am given to understand that the respondent and members of his firm had incurred substantial time in responding to the proceedings to commit him for contempt.  He would not seek to recover these costs from the assets of the Company except for the disbursements.

31.  In my judgment, the respondent should not be left personally out of pocket for legal expenses and any shortfall should not be paid out of the assets of the Company at the expense of the creditors.  I rule in favour of the respondent that he should have an order in respect of his costs against the applicants on an indemnity basis.  This would also cover the costs of the application today. 

32.  As the Official Receiver only seeks a costs order on a party and party basis, I would accede to the application and order costs to be paid by the applicants to the Official Receiver on the standard basis.

33.  Mr Rogers has a further application under O. 62 r. 9A(1)(b) of the Rules of the High Court for an interim payment of costs “for any other reason that the Court in the circumstances the case considers just”.  The amount sought is in the total sum of HK$1,330,644.84.  This is made up of 90% of counsel’s fees and 50% of the profit costs of the solicitors.

34.  The application was resisted by Mr Whitehead on the ground that no special circumstances have been shown to justify such an unusual order; the respondent is in the same position as any other blameless litigant who is successful, and he would be compensated in interest on being kept out of his costs to await the process of taxation.

35.  In my view, the respondent cannot be regarded as being in the same position as any other blameless litigant.  These proceedings were brought against him in respect of the discharge of his duties as a liquidator.  I have ruled that he should be entitled to costs against the applicants on an indemnity basis.  The respondent is not seeking interim payment of the full amount of his costs but only in respect of part of his costs. 

36.  I think the circumstances are such as to justify an order for interim payment in the amount sought and I so order.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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J U D G M E N T

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A submission of no case

1. There is before me a submission of no case in an application to commit the respondent, David John Kennedy, for criminal contempt. The respondent is a member of the Hong Kong Society of Accountants and a director of RSM Nelson Wheeler Corporate Advisory Services Limited ("RSM"). He was and is at all material times a joint and several liquidator appointed by the court in the liquidation of Wing Fai Construction Company Limited ("the Company"). The application to commit the respondent for contempt was brought by two former directors of the Company, Kelly Cheng Kit Yin ("the 1st applicant") and Robert Yip Kwong ("the 2nd applicant").

2. On 20 April 2004, I gave leave under Order 52 rule 2 of the Rules of the High Court on the ex parte application of the applicants to apply for an order of committal against the respondent on the grounds disclosed in the statement filed by the applicants on 2 April 2004. That statement was amended pursuant to leave given on 2 July 2004.

3. These proceedings are exceptional in that an officer of the court is accused of having committed a contempt of court. It is not because he had acted in breach of a court order or an undertaking given to the court. The applicants' complaint arises from various uses that the respondent had made of the transcripts of evidence given by them in private examinations conducted under section 221 of the Companies Ordinance, Cap. 32, without obtaining the leave of the court under rule 62(2) of the Companies (Winding-up) Rules ("the Winding-up Rules"). They also complain of the reports made by the respondent directly to the Commercial Crime Bureau of the police ("the CCB"), instead of proceeding under one of the avenues open to a liquidator in a compulsory winding up as provided in Cap. 32.

4. At the conclusion of the applicants' case, Mr Yu, SC, who appeared for the respondent, submitted that there is no case to answer in respect of all of the grounds in the Re-amended Notice of Motion for one or more of the following reasons:

(1) On a proper construction of rule 62(2) of the Winding-up Rules, no leave of the court is required in respect of the various uses and disclosure of the transcripts of evidence by the respondent.

(2) On a proper construction of the statutory provisions in Cap. 32, the respondent is not prohibited from reporting possible criminal conduct directly to the police without first applying to the court for leave.

(3) If contrary to (1) and (2), there should be any doubt as to the legal position on these matters, the benefit of the doubt should go to the respondent.

(4) There is no basis on which the court may be satisfied beyond reasonable doubt as to the actus reus and mens rea of interference with the administration of justice, which is necessary in a criminal contempt.

(5) In any event, contempt proceedings should be the last resort. Even if the applicants' complaints were justified, they should have resorted to other measures instead of seeking to commit the respondent for contempt.

(6) The applicants have no locus to bring proceedings to commit the respondent for criminal contempt. The Secretary for Justice is the appropriate person to bring such proceedings.

5. Mr Yu's submission of no case is primarily based on the contention that as a matter of law, no case for contempt has been made out. Mr Whitehead, SC, who appeared for the applicants, accepted that as questions of law have been raised, they should be resolved at this stage of the proceedings.

6. Although the submission of no case was made by the respondent alone, I also have the benefit of submissions from the Official Receiver's counsel, Miss Linda Chan, on the law and practice in a number of areas.

7. I will first set out the relevant background matters.

The background and related proceedings

8. Until 22 April 2002, the Company was a subsidiary within the China Rich Group, the holding company of which is China Rich Holdings Limited ("China Rich"). China Rich is incorporated in Bermuda and listed on the main board of the Hong Kong Stock Exchange. The subsidiaries of China Rich are held through Benefit Holdings International Limited ("Benefit Holdings"). The applicants were directors of the Company until 26 July 2001 and are directors of China Rich at all material times.

9. On 23 November 2001, the Company was given a letter by the directors of China Rich confirming that the latter would continue to provide financial support to the Company for the foreseeable future. On 22 April 2002, Benefit Holdings sold its entire shareholding in the Company to Sino Glister International Investments Limited ("Sino Glister").

10. On 6 July 2002, Enfield Construction Company Limited, a former sub-contractor of the Company which was in liquidation, presented a winding-up petition against the Company in HCCW No. 735 of 2002. On the same date, the respondent and Cosimo Borrelli, also of RSM, were appointed the provisional liquidators of the Company. The Company was ordered to be wound up on 9 December 2002 and the provisional liquidators were appointed by the court as the liquidators on 28 February 2003.

11. A number of proceedings have been instituted by the liquidators on behalf of the Company and by various other parties, and are set out in a chronology annexed to the Amended Statement of the applicants. In most of these actions, an important issue in dispute relates to an alleged set-off agreement between China Rich and its various subsidiaries and the agreement between Benefit Holdings and Sino Glister for the sale of the shares of the Company. The proceedings relevant to the present application are described below.

12. On 12 July 2002, the respondent filed a winding-up petition on behalf of the Company in Bermuda against China Rich and obtained an order from the court in Bermuda appointing himself as the provisional liquidator of China Rich. On 13 July 2002, the Company obtained an interim injunction from the court in Hong Kong restraining the staff of China Rich from entering the office premises until 15 July 2002 when the Company's application for appointment of provisional liquidators of China Rich was to be heard in the Hong Kong court. Following a settlement reached by the Company with China Rich, the petition in Bermuda was withdrawn and the proceedings against China Rich in Hong Kong were discontinued.

13. On 2 August 2002, the respondent requested the applicants to attend a meeting with the liquidators of the Company for an interview regarding the affairs of the Company. After an exchange of correspondence between solicitors, the 1st applicant attended an interview with the liquidators accompanied by her then solicitors on 7 October 2002. As the respondent was not satisfied with the extent of the information provided by the 1st applicant at the interview, he sought and obtained an order on 25 March 2003 for the applicants and another former director, Kam Shing, to be examined under section 221. The applicants were summoned before the court to be examined on oath on 4 and 30 July 2003. The 2nd applicant was re-called for further examination on 16 and 17 February 2004. Transcripts of the applicants' depositions in the private examinations were made.

14. On 4 March 2003, the Company issued a writ in HCA No. 810 of 2003 against Benefit Holdings, the applicants and Kam Shing, for breach of the provision in section 47A of Cap. 32 against financial assistance by the Company for the purchase of its own shares by Sino Glister, and for breach of fiduciary duties at common law. A defence was filed and served on 17 April 2003. Lists of documents were exchanged in May 2003 and supplemental lists of documents were exchanged thereafter.

15. On 28 February 2003, a subsidiary within the China Rich Group, Wai Shun Construction Company Limited ("Wai Shun"), acting by its liquidators, being the respondent and Stephen Briscoe of RSM, presented a petition to wind up another subsidiary within the China Rich Group, Fitzroya Finance Company Limited ("Fitzroya"), in HCCW No. 253 of 2003. After an agreement was reached between Wai Shun and Fitzroya for an amount equivalent to the petitioning debt to be placed in an escrow account pending the determination of the dispute in separate proceedings, on 31 October 2003, Zhukuan Wing Fai Construction Company Limited ("Zhukuan Wing Fai", which was 51% owned by the Company), acting by its liquidators, Nicholas Hill and Stephen Briscoe of RSM, filed an application for Zhukuan Wing Fai to be substituted as the petitioner in the place of Wai Shun. The affidavit in support was made by the respondent. The liquidators of Zhukuan Wing Fai also sought the appointment of provisional liquidators for Fitzroya on 4 November 2003; that application was withdrawn on 7 November 2003. On 3 March 2004, an order was made dismissing the application of Zhukuan Wing Fai to be substituted as the petitioner and the petition was dismissed on 22 March 2004.

16. On 13 June 2003, the Company issued an application ("the unfair preference application") in HCCW No. 735 of 2002 against Benefit Holdings seeking a declaration under section 266 of Cap. 32 that payments of approximately HK$58 million made by the Company to Benefit Holdings be constituted unfair preferences. The respondent filed an affidavit in support of the application. Directions have been given in June 2003 for the filing of pleadings, evidence and discovery.

17. On 18 November 2003, the Company issued a writ against the 2nd applicant in HCA No. 4251 of 2003, claiming HK$1.6 million. An application was made for summary judgment in December 2003.

18. On 24 November 2003, the respondent sent a letter to the 1st respondent ("the 24 November 2003 letter") making various allegations against her including perjury in the private examination. The respondent further stated in that letter that he has "a duty under section 277 of the Companies Ordinance to report to the Court" if he suspected that a former director had committed a criminal offence and he "[is] now in the process of providing [his] evidence to the Court, with a view to obtaining instructions from the Court to refer the matter to the Department of Justice". The 1st applicant was requested by the respondent to respond to the allegations therein within 14 days.

19. On 5 December 2003, the 1st applicant issued the writ in HCA No. 4460 of 2003, being a defamation action against the respondent and RSM, claiming that the 24 November 2003 letter contained words defamatory of her and that it was published to others when it was faxed to her.

20. On 9 December 2003, the respondent wrote to the applicants' solicitors noting that no response was received from the 1st applicant to the 24 November 2003 letter and stating that he would make his report to the court regarding the matters set out therein based on the information then in his possession. The respondent did not proceed with his intended application to seek directions under section 277. On 20 January 2004, he made a report to the CCB of the allegations against the 1st applicant in the 24 November 2003 letter.

The grounds for committal

21. Six grounds for committing the respondent for contempt were advanced in the Re-amended Notice of Motion. The main grounds are the first three. They give rise to the remaining grounds. Mr Whitehead has not pursued the fourth ground, which he accepted is subsumed by the first three grounds.

22. The first ground is that the respondent has filed and/or opened to inspection the depositions of the applicants in the private examination without leave of the court. Eight instances were particularised of such conduct and they are as follows:

(1) In the unfair preference application against Benefit Holdings in HCCW No. 735 of 2002, the respondent filed his 2nd affidavit dated 25 September 2003. In it, he exhibited the entire transcripts of the private examination of the applicants held on 4 and 30 July 2003 and quoted extensively from the depositions of the 1st applicant in various paragraphs of his affidavit.

(2) In the winding-up proceedings against Fitzroya, the respondent made and filed an affidavit dated 4 November 2003 in support of the application of Zhukuan Wing Fai to appoint provisional liquidators for Fitzroya. In it, he made references to the transcript of the examination of the 1st applicant in paragraphs 23.2 and 23.5. Later, at the hearing of the application of Zhukuan Wing Fai to be substituted as the petitioner on 27 February 2004, the respondent included excerpts from the transcript of the 1st applicant's examination in the hearing bundle lodged by Zhukuan Wing Fai with the court.

(3) In the 24 November 2003 letter, the respondent made detailed references to the 1st applicant's depositions in her examination. The said letter was sent to the 1st applicant by fax and by post. It is alleged that other employees at the place of work of the 1st applicant had read the letter faxed to the 1st applicant.

(4) In HCA No. 4251 of 2003, the respondent filed his first affidavit on 19 December 2003. In exhibit 3 to his affidavit, he exhibited extracts from the transcript of the examination of the 2nd applicant.

(5) In HCA No. 4466 of 2003, being the defamation action brought by the 1st applicant, the respondent and RSM filed a defence on 16 February 2004. In it, parts of the transcript of the examination of the 1st applicant were set out.

(6) In HCCW No. 735 of 2002, the respondent filed his 7th affidavit on 20 January 2004 to oppose an application by the applicants and Kam Shing to stay the order for their private examination made on 25 March 2003. In it he stated that he had recently submitted a report to the CCB in relation to the matters contained in the 24 November 2003 letter, in which he had quoted extensively from the transcript of the examination of the 1st applicant.

(7) In HCA No. 810 of 2003, the respondent filed a further supplemental list of documents dated 3 March 2004. Extracts from the transcripts of the examination of the applicants on 4 and 30 July 2003 were disclosed in part 1 of schedule 1 thereto.

(8) In HCA No. 810 of 2003, the respondent filed his witness statement on 3 April 2004. In various paragraphs in his witness statement, he set out extensively parts of the transcript from the 1st applicant's depositions in her examination.

23. The second ground is that the respondent has further compromised the privacy and confidentiality of the private examinations of the applicants by providing written reports to the CCB on 20 January 2004 and 31 March 2004 in which he alleged that the 1st applicant had knowingly perjured herself in sworn testimony with the intention of defeating the claims of the Company, Wai Shun or Zhukuan Wing Fai against herself, other directors of China Rich, and companies related to China Rich, and with the intent to defraud the creditors of Wing Fai, Wai Shun and Zhukuan Wing Fai. He also alleged that the 1st applicant had, in the various proceedings between the parties, provided untrue, conflicting and inconsistent sworn evidence, both oral and written, and had perjured herself with the intention of defeating the claims of the Company and defrauding creditors. In these reports, references were made to the transcripts of the examinations conducted in July 2003. In each of the reports, the respondent has annexed a copy of the 24 November 2003 letter. In the report made on 31 March 2004, the respondent has annexed copies of the complete transcript of evidence of the applicants' examinations on 4 and 30 July 2003.

24. The third ground is that the respondent has circumvented the procedures in sections 191, 222 and 277 of Cap. 32 by submitting his said reports and the transcripts of the private examination direct to the CCB, thereby depriving the court of its opportunity to consider matters of possible criminal conduct of former directors and give appropriate directions as to the reference of possible criminal conduct against directors to the Secretary for Justice and depriving the applicants of the opportunity to exculpate themselves of any charges in the event that the court should order a public examination under section 222.

25. The fifth ground is that in the defamation action, the respondent has sought to advantage himself in circumventing the procedures laid down in sections 191, 222 and 277 of Cap. 32. Had such procedures been followed, the court might have refused to order a public examination under section 222, or exculpate the 1st applicant after a public examination, or to dismiss an application under section 277 or the Department of Justice might have decided not to prosecute the 1st applicant. Any of these results would have been detrimental to the respondent's defence in the defamation action.

26. The last ground is that the respondent has obtained to himself the advantage of using the applicants' depositions in the manner set out under the first ground. In consequence, the court has been deprived of the opportunity to give directions which might have impacted on the way in which these related civil proceedings are to be conducted, and the applicants have been deprived of the opportunity to be heard on such matters.

27. In respect of each of the above grounds, it is alleged that in consequence thereof, the respondent has interfered with the administration of justice.

The applicants' case

28. Before I consider the arguments advanced by Mr Yu on the submission of no case, to put his arguments in perspective, it is appropriate that I should set out the salient points made by Mr Whitehead in support of the applicants' case.

29. A private examination conducted under section 221 has long been recognised as an extraordinary process and the court "must be astute to prevent any oppressive, vexatious or unfair use" by the liquidator of this process (In re Rolls Razor Ltd (No. 2) [1970] 1 Ch. 576 at 592C, per Megarry J). Mr Whitehead submitted that the most significant aspect of such an examination is the abrogation of the privilege against self-incrimination. In England, the abrogation of the privilege by sections 235 and 236 of the Insolvency Act 1986 (equivalent to our section 221) was authoritatively established by the decision of the Court of Appeal in Bishopsgate Investment Management Ltd v. Maxwell [1993] Ch. 1. In Hong Kong, the first reported decision that the privilege has been impliedly abrogated by section 221 would appear to be my decision in Weihong Petroleum Co. Ltd [2002] 1 HKLRD 541. This has been followed in Re Asher & Co. (Hong Kong) Ltd., HCCW No. 150 of 1998, 30 June 2003, Deputy Judge To.

30. In In re Arrows Ltd (No. 4) [1995] 2 A.C. 75 at 93F and G, Lord Browne-Wilkinson, having mentioned that it was held in Bishopsgate that the privilege against self-incrimination was overridden by statute, went on to say as follows:

"In sum, therefore, a person examined under section 236 can be compelled to give self-incriminating answers which are admissible against him in criminal proceedings. However, the record of his answers is not available to outsiders without an order of the court under rule 9.5(4) of the Rules of 1986".

31. In C. A. Pacific Finance Ltd (in Liquidation), HCCW No. 36 of 1998, 21 November 2001, the court was concerned with the question whether a public examination under section 168IA(1) of Cap. 32 for the purpose of disqualification proceedings should be adjourned as the examinee had a pending criminal appeal. Yuen J took the view that the concerns of the examinee that the evidence he was to give in the examination might be used by the prosecution if a re-trial should be ordered in his criminal trial would be addressed if a private examination was to be conducted under section 221 instead of a public examination. In ordering a private examination to be held, Yuen J emphasised that such an examination would be conducted in private, as under rule 62(1) of the Winding-up Rules, only the Official Receiver or liquidator or their counsel or solicitors may attend the examination. The judge also stated that under rule 62(2), "the notes of the depositions of a person examined under Section 221 shall not be filed or be open to the inspection of any person except the Official Receiver or Liquidator unless and until the court shall so direct and the court may, from time to time, give such general or special directions as it shall think expedient as to the custody and inspection of such notes and the furnishing of copies of or extracts therefrom", and hence, "there would not be any fear that the prosecution would simply by attending the examination be able to obtain the answers of [the examinee] to any questions that may be put to him in a Section 221 examination" (paragraphs 15, 16 and 18 of the decision).

32. Similarly, in Weihong Petroleum, supra., in holding that the privilege against self-incrimination is not available in an examination under section 221, I had mentioned the provision in rule 62(2) of the Winding-up Rules as a safeguard to an examinee at 546F.

33. Mr Whitehead contended that the purport of rule 62(2) is clear. As an officer of the court, the liquidator is permitted to attend the private examination and given access to the depositions of evidence. He is entrusted with the privacy of the examination and the evidence given under compulsion. Although under rule 62(1), he "may take notes of the examination for his own use", the "notes of the depositions of a person examined under section 221" referred to in rule 62(2) are somewhat different. Mr Whitehead submitted that the notes of depositions in rule 62(2) are of a similar nature and status to the record of an examination conducted under section 236 of the Insolvency Act and that the provisions in rule 9.5 of the Insolvency Rules are similar to our rule 62. Rule 9.5(1) provides that the record of examination shall not be placed on the court file unless the court otherwise directs; rule 9.5(2) provides that the record is not open to inspection without an order of the court by anyone other than a person who made, or was entitled to make, an application for examination under section 236; and rule 9.5(4) provides that the court may give directions as to the custody and inspection of the record of examination, and as to the furnishing of copies of, or extracts from, the record. Mr Whitehead relied in particular on the following passages in the judgment of Lord Browne-Wilkinson in In re Arrows Ltd (No. 4), supra. at 104C to E and G to H:

"I prefer the view of Vinelott J Rule 9.5(4) of the Rules of 1986 confers on the court a discretion to decide who can inspect the records of the section 236 examination. In my judgment this is not mere machinery. The extraction of private and confidential information under compulsion from a witness otherwise than in the course of inter partes litigation is an exorbitant power. It is right that such information should not be generally available but should be used only for the purposes for which the power was conferred. Although, as will appear, in my view there are severe limitations on the way in which such discretion can be exercised where prosecuting authorities are involved, it is important that no doubt should be cast on the discretion of the court to decide who shall have access to such information. ...

Insolvency is a process conducted by, or under the control of, the court acting through its officers, the liquidators. Documents held by liquidators are held by them to the order of the court. In my judgment a statute would need to use very clear words if it is intended to override the powers of the court to control the use of property under the administration of the court, including documents."

34. Mr Whitehead submitted that the notes of depositions referred to in rule 62(2) are property of the court and are subject at all times to the control of the court. The deployment by the respondent of the notes of depositions of the applicants as particularised in each of the eight instances in the first ground in the Re-amended Notice of Motion would require the permission of the court under rule 62(2).

35. As for the reports made by the respondent to the CCB, the view that the respondent had formed of possible criminal acts on the part of the 1st applicant was based on the evidence she gave in the private examination. In such circumstances, the respondent is subject to the control of the court if he should wish to report possible criminal conduct to the appropriate authorities. Mr Whitehead submitted that clear guidance is given in various provisions in Cap. 32 as to what a liquidator should do in this situation. The respondent could have proceeded under section 191(2) and reported his opinion of fraud to the court; he could also have proceeded under section 277 for directions (which the respondent intended to do initially but abandoned after the 1st applicant has brought the defamation action). Section 191(3) provides that the court shall have the power to order a public examination under section 222 where a report of fraud is made. Section 277(1) provides that where a liquidator in a compulsory winding up has applied for directions and if it appears to the court that any past or present officer or member of the company has been guilty of a criminal offence, the court may refer the matter to the Secretary for Justice. Mr Whitehead contended that section 277(1) anticipates that the applicants would be entitled to be heard on the application before the court is to form a view whether to refer the matter to the Secretary for Justice and where a public examination is ordered under section 222(1), the applicants may apply to the court to be exculpated from any charges made or suggested against them under section 222(6).

36. Mr Whitehead relied on the following statement of Lord Browne-Wilkinson in In re Arrows Ltd (No. 4), supra. at 102H to 103A:

"... in a compulsory winding up, if it appears to the liquidator that a criminal offence is being committed he must report the matter to the court (section 218(3)) which can direct the liquidator to refer the matter to 'the prosecuting authority' (section 218(1))". (Emphasis supplied)

37. I should point out that section 218(1) of the Insolvency Act is the equivalent to our section 277(1). Section 218(3) has no equivalent in Cap. 32, it provides that in the case of a winding up by the court, if it appears to the liquidator, not being the official receiver, that any past or present officer of the company, or any member of it, has been guilty of a criminal offence in relation to the company, the liquidator shall report the matter to the official receiver, not to the court as paraphrased in the above extract.

38. Mr Whitehead emphasised that in a compulsory liquidation it should be the court's decision, not the liquidator's decision, whether possible criminal conduct would require investigation by the appropriate authorities. He cited Re Peregrine Fixed Income Ltd (in Liquidation) [1998] 4 HKC 151, in which the court considered an application to convert a compulsory winding up into a creditors' voluntary winding up under section 209A of Cap. 32 and Le Pichon J had this to say about compulsory liquidations at 159C to D:

" ... liquidations that are of public concern and/or which require further investigation or, put shortly, where impropriety or wrong-doing cannot be ruled out, should remain under the court's control."

39. As regards the respondent's deployment of the applicants' transcripts in various civil proceedings, Mr Whitehead submitted that the principles relevant to whether an order for private examination should be made where proceedings have been commenced against the person sought to be examined are just as relevant to this situation in that a private examination should not be used as a means of improving the liquidator's position in subsisting litigation over and above the ordinary advantages available to an ordinary litigant, citing In re Bletchley Boat Co. Ltd [1974] 1 WLR 630 at 637B to F; Re Spiraflite Ltd [1979] 1 WLR 1096 at 1098A and 1099H to 1100B; and In Re Castle New Homes Ltd [1979] 1 WLR 1075. So if the respondent had sought leave to deploy the transcripts in various civil proceedings under rule 62(2), the court would need to consider the above principles afresh in each instance (notwithstanding these principles might have been considered at the time when the court decided to make an order for examination) and provide the applicants an opportunity to be heard on each occasion. Rule 62(2) is not mere machinery and leave of the court is in no way automatic. A pertinent example of the impropriety of deploying the transcripts was the witness statement filed by the respondent in HCA No. 810 of 2003 in April 2004, when that action had reached an advanced stage and the applicants would have strong grounds in opposing leave on the basis that the respondent should not be given an unfair advantage beyond that available to ordinary litigants.

40. Mr Whitehead contended that section 5(1) of the Judicial Proceedings (Regulation of Reports) Ordinance, Cap. 287 would not have provided a defence to the respondent. This section provides that the publication of information relating to proceedings before any court sitting in private shall not "of itself" be contempt of court except in the instances set out in (a) to (e). The exception in (e) is "where the court, having power to do so, expressly prohibits the publication of all information relating to the proceedings or of information of the description which is published". Effect must be given to the words "of itself", the publication is not of itself a contempt of court but it may be if coupled with something else (In re F (orse. A) (A Minor) [1977] Fam. 58 at 88B). Further, the exception in (e) would apply. Here, the filing or inspection of the notes of depositions is expressly prohibited by rule 62(2) unless and until the court shall direct otherwise. The Winding-up Rules are made under section 296(1) of Cap. 32 and section 296(2) provides that "all rules and orders made under this section shall be judicially noticed, and shall have effect as if enacted by this Ordinance." As the express prohibition is already contained in rule 62(2), the court would not need to make an express prohibition. Furthermore, the publication to the CCB was contrary to the statutory regime in Cap. 32 which provides for the circumstances and methods by which the liquidator must seek directions or instructions from the court before making a report to the Department of Justice.

41. The respondent was aware of rule 62(2) at all relevant times. To establish contempt, it must be proved beyond reasonable doubt that he knew of the prohibition to publish without leave (assuming the applicants were right about the construction and effect of rule 62(2)) or that he must be taken to have known that what he published without leave was prohibited by law. Mr Whitehead has prayed in aid the following dicta:

"Seeing that the offence is of such wide scope, it seems to me that a person is only to be found guilty of it if he has published information ... in circumstances in which he knows that publication is prohibited by law, ... or recklessly in circumstances in which he knows that publication may be prohibited by law, but nevertheless goes on and publishes it, not caring whether it is prohibited, or not. As if he said: 'I don't care whether it is forbidden, or not. I am not going to make any inquiries. I am going to publish it.' Proof of this state of mind must be up to the standard required by the criminal law. It must be such as to leave no reasonable doubt." (In re F (orse. A) (A Minor), supra. at 90A to C, per Lord Denning MR)

"The essential vice lies in knowingly interfering with the court's documents. This is as much an interference with the administration of justice as knowingly interfering with the court's officers. The boundary line is to be drawn at the point where there has been a taking of information from documents in the custody of the court knowing that leave was needed and that it had not been obtained. In such cases there is an act of interference with the judicial process; there is also an intention to interfere, because the act was done with knowledge that it was a contravention of the prescribed judicial process." (Dobson v. Hastings [1992] Ch. 394 at 404H to 405A, per Sir Donald Nicholls V-C)

42. He submitted that the respondent's conduct in dealing with the transcripts of evidence without the control of the court is "knowingly setting at nought one of the court's procedures devised to strike a balance between the various factors which pull in different directions in all court processes" (Dobson v. Hastings, supra. at 404B). The respondent has displaced a safeguard provided by law to an examinee in a private examination in which the privilege against self-incrimination has been abrogated. This would be severely prejudicial to the administration of justice and it is reasonably necessary to proscribe such conduct as a contempt of court (Dobson v. Hastings, supra. at 404C to F; Attorney-General v. Leveller Magazine Ltd [1979] 440 at 450C to D, per Lord Diplock).

43. It was contended that both the actus reus and mens rea for criminal contempt have been established, drawing on the wording and reasoning in the speeches in Attorney General v. Punch Ltd [2003] 1 AC 1046 at 1056B to 1059A, 1062D to 1064F, 1066C to D, 1071G to 1072C. The respondent had deployed the transcripts of evidence without leave of the court in breach of a statutory provision. The actus reus lies in thwarting the statutory provision by destroying the confidentiality of the material which it was the purpose of the statutory provision to preserve. The mens rea is established in that the respondent must have appreciated that by deploying the transcripts without leave, he was doing precisely what he was prohibited from doing by statute, and that is knowing interference with the administration of justice.

The purpose of a private examination

44. It is obvious from Mr Whitehead's submissions that there is no reported case in respect of an application made by a liquidator (as opposed to an outsider) under rule 62(2) for leave to use the notes of the deposition of an examination conducted under section 221 by a court order for the purpose of discharging his own duties (as opposed to the purpose or benefit of an outsider), whether in Hong Kong or in England, where there were substantially similar provisions to our rule 62 before the enactment of the Insolvency Rules in 1986. That this may be a novel situation does not mean there cannot be contempt of court, if the statutory provision clearly contains the prohibition as contended by the applicants. Naturally, the court should exercise "great care" and "much caution" in this situation (Dobson v. Hastings, supra. at 404C).

45. Miss Chan referred me to one instance where the Official Receiver had applied for leave to use the transcript of a private examination for the discharge of his own duties. That was an application made in Re C. A. Pacific Finance Ltd (in Liquidation) on 2 September 2002 and the circumstances were special, as the Official Receiver as well as the liquidators had given an undertaking to the court, at the time the order for private examination was made, not to disclose the contents of the examination or any documents provided in the examination to any third party other than the officers of the Official Receiver and his legal and accountancy advisers "except with the prior written consent of [the examinee] or the leave of the court" (see paragraph 17 of the decision on 21 November 2001). She submitted that to require the liquidator to seek leave (whether ex parte or in an inter partes hearing as envisaged by Mr Whitehead) every time he wants to use the information obtained under section 221, when such use would involve the disclosure of information to a third party, would appear to defeat the purpose for which the order for examination was granted.

46. Before I go to the proper construction of rule 62, which is central to Mr Yu's submission of no case, it is pertinent to bear in mind the purpose of an examination conducted under section 221. It is also necessary to consider the genesis and reason for the enactment of rule 62. I do not agree with Mr Whitehead that it is not helpful to look at the purpose of section 221 and one would only need to focus on the "machinery" as provided in rule 62(2) to see whether there was interference with the machinery and thereby interference with the administration of justice. I do not think the passages cited by Mr Whitehead in Attorney-General v. Leveller Magazine Ltd at 473G and Attorney General v. Punch Ltd referred to earlier are entirely apposite to the present situation. The judges there were concerned with the situation where the alleged contemnor was accused of interfering with the administration of justice in acting in breach of a court order or ruling. One can see why it would not be necessary to ascertain the purpose of the judge in making the order in order to find whether an act is a frustration of the court order, as one would only need to look at the terms of the order to find out what is prohibited, "the purpose of the order and its terms are co-extensive" (Attorney General v. Punch Ltd., supra. at 1056E, 1062D to F, 1063H).

47. In our situation, there is no court order but a statutory provision. One cannot find a frustration of the purpose of the statutory provision without ascertaining what that purpose is. Before a view can be formed if the respondent has interfered with the administration of justice by destroying the confidentiality of the transcripts, it is necessary to ascertain if it is the purpose of the statutory provision to impose an obligation of confidentiality and, if so, the nature and scope of that obligation. Mr Whitehead has contended that the actus reus of the respondent's contempt lies in the destruction of the confidential material which is the purpose of rule 62(2) to preserve. Rule 62(2) cannot be construed in isolation without regard to related provisions such as section 221 and rule 62(1). As stated by Bokhary PJ in Medical Council of Hong Kong v. Chow Siu Shek (2000) 3 HKCFAR 144 at 154B to C:

"When the true position under a statute is to be ascertained by interpretation, it is necessary to read all of the relevant provisions together and in the context of the whole statute as a purposive unity in its appropriate legal and social setting. Furthermore it is necessary to identify the interpretative considerations involved and then, if they conflict, to weigh and balance them."

48. With that, I turn to the purpose of an examination under section 221. Mr Yu has helpfully summarised the relevant propositions and they are not in dispute. The authorities show that:

(1) The object of an examination under section 221 is to assist a liquidator to discover the truth of the circumstances connected with the affairs of the company in order that the liquidator may be able, as effectively and with as much expedition as possible, to carry out his function as liquidator.

(2) The object of such an examination is not limited to reconstituting the state of the company's knowledge or to getting in of any assets of the company available in the liquidation.

(3) There is public interest involved in ensuring that the liquidator should obtain information required for the discharge of his duties.

(In re Rolls Razor Ltd [1968] 3 All E R 698 at 700A to B, per Buckley J; Re King's Dyeing & Weaving Factory Ltd [1987] HKLR 507 at 514A; British & Commonwealth Holdings plc v. Spicer & Oppenheim [1993] AC 426 at 439C and G, per Lord Slynn of Hadley; Re Weihong Petroleum Co. Ltd., supra. at 544C to H).

49. Mr Yu pointed out that in In re Pantmaenog Timber Co. Ltd [2004] 1 AC 158 at 163C, Lord Hope of Craighead took as a starting point the "self-evident" proposition that the powers conferred by section 236 of the Insolvency Act are "solely for the better discharge by the liquidator of his functions in the winding up". The question of principle raised in that case was whether the powers conferred by section 236 can lawfully be exercised "solely or principally to obtain evidence for use in disqualification proceedings; or whether their exercise is confined to cases where such use is at most incidental to the recovery and distribution of the company's assets among its creditors and contributories" (at 167G to H). The House of Lords held that the former is permissible under section 236. The reasoning may be gathered from these extracts:

"A narrow interpretation of section 236, confining its reach to information which the office-holder needs to get in the property of the company, would increase the risk that instances of commercially culpable conduct will go unpunished. That would not serve the public interest, and it is hard to believe that it was intended by Parliament." (para. 15 at 165C to D, per Lord Hope)

"From the earliest days of the joint stock company the liquidator has exercised functions which serve the public interest and not merely the financial interests of the creditors and contributories. The Cork Committee (Cmnd 8558) observed (in para 192 of its report) that: 'The law of insolvency takes the form of a compact to which there are three parties: the debtor, his creditors and society.' In consequence insolvency proceedings 'have never been treated in English law as an exclusively private matter between the debtor and his creditors; the community itself has always been recognised as having an important interest in them.' (Para 1734) ...

Section 236 contains no express limitation on the purpose for which it may be invoked. Of course it may be invoked only for a legitimate purpose in relation to the company which is being wound up, and the court, which has discretion to make or refuse an order, should be astute to see that the powers conferred by the section are not abused. It would plainly be an abuse to use those powers for a purpose which is foreign to the functions of the applicant in relation to the company which is being wound up. But I reject the unspoken assumption that the functions of a liquidator are limited to the administration of the insolvent estate. This is only one aspect of an insolvency proceeding; the investigation of the causes of the company's failure and the conduct of those concerned in its management are another. Furthermore such an investigation is not undertaken as an end in itself, but in the wider public interest with a view to enabling the authorities to take appropriate action against those who are found to be guilty of misconduct in relation to the company. ..." (para. 52 at 173C to D and para. 64 at 177E to G, per Lord Millett)

"... winding up has, and has had almost throughout the history of company law, a dual purpose. One purpose is the orderly settlement of a company's liabilities and the distribution of any surplus funds, prior to the company being dissolved. The other is the investigation and the imposition of criminal or civil sanctions in respect of misconduct on the part of persons (especially directors of an insolvent company in compulsory liquidation) who may be shown to have abused the privilege of incorporation with limited liability. The first function is primarily a concern of a company's creditors and shareholders; the second function serves a wider public interest." (para. 77 at 180F to G, per Lord Walker of Gestingthorpe)

50. Thus, the powers conferred by section 221 are for the better discharge of the liquidator's wider statutory functions in relation to the company being wound up. The same conclusion was reached by Yuen J, before the House of Lords decision came out, in a ruling in C. A. Pacific Finance Ltd (in Liquidation) on 6 November 2001. The information thus obtained in the examination may be used by the liquidator for a legitimate purpose in relation to the company in the wider public interest. The duty of the liquidator to investigate the affairs of the company has been described in some leading textbooks in these terms:

"One of the primary functions of the liquidator is to investigate the affairs of the company, including its promotion and formation and the conduct of its business in the past. This must be done not only for the reason that it is necessary in order to enable discharge of the liquidator's duty of locating and collecting the assets of the company, but also because it may lead to a public examination or prosecution of delinquent officers of the company; which it is part of the liquidator's duty to set in motion." (McPherson, The Law of Company Liquidation, 4th ed., page 358; emphasis supplied)

"Part of the liquidator's job is also to investigate the causes of failure and to take appropriate steps to bring to book any delinquent directors." (Goode, Principles of Corporate Insolvency Law, 2nd ed., page 101; emphasis supplied)

51. I was also referred by Mr Yu to these provisions in Cap. 32 relating to the liquidator's duty to report misconduct of directors to illustrate the general principle as regards the liquidator's duties:

"168I. Applications to court under section 168H: reporting provisions

(3) If it appears to -

(a) the liquidator of a company that is being wound up by him; ...

that the matters listed in section 168H(1)(a) and (b) may apply to a person who is or has been a director of that company, he shall forthwith report the matter to the Official Receiver who may report the matter to the Financial Secretary." (Emphasis supplied)

"277. Prosecution of delinquent officers and members of company

(2) If it appears to the liquidator in the course of a voluntary winding up that any past or present officer or member of the company has been guilty of any offence in relation to the company for which he is criminally liable, he shall forthwith report the matter to the Secretary for Justice, and shall furnish to the Secretary for Justice such information and give to him such access to and facilities for inspecting and taking copies of any documents, being information or documents in the possession or under the control of the liquidator and relating to the matter in question, as he may require." (Emphasis supplied)

52. In the above provisions, the law compels the liquidator to report forthwith. Neither section contemplates the liquidator applying to court for leave or directions before making his report to the Official Receiver or the Secretary for Justice. Mr Yu submitted that the fact that section 277(2) refers specifically to voluntary winding up does not mean that the liquidator in a compulsory winding up would not be entitled or authorised to make a report to the appropriate authority, applying similar reasoning to that of Dillon LJ in In re Arrows Ltd (No. 4) [1993] Ch. 452 at 469D to E, in the context of section 218 of the Insolvency Act. It would be absurd to suggest that whereas under section 277(2) there is a duty to report on the part of a liquidator in a voluntary winding up, a liquidator in a compulsory winding up could be cited for contempt if he should report without first seeking directions from the court under section 277(1). I will come back to this point when I consider the alleged contempt in circumventing the procedures in sections 191, 222 and 277(1) in the respondent making a report directly to the CCB.

The proper construction of rule 62(1) and (2)

53. I turn to the construction of rule 62(1) and (2) of the Winding-up Rules. I set out the provisions for ease of reference:

"62. Depositions at private examinations

(1) The Official Receiver or liquidator may attend in person, or by counsel or by solicitors employed for the purpose, any examination of a witness under section 221 of the Ordinance, on whosesoever application the same has been ordered, and may take notes of the examination for his own use, and put such question to the persons examined as the court may allow.

(2) The notes of the depositions of a person examined under section 221 of the Ordinance, or under any order of the court before the court, or before any officer of the court, or person appointed to take such an examination (other than the notes of the depositions of a person examined at a public examination under section 222 of the Ordinance) shall not be filed, or be open to the inspection of any creditor, contributory, or other person, except the Official Receiver or liquidator, or any provisional liquidator other than the Official Receiver, while he is acting as provisional liquidator, unless and until the court shall so direct, and the court may from time to time give such general or special directions as it shall think expedient as to the custody and inspection of such notes and the furnishing of copies of or extracts therefrom."

54. To construe these provisions, it is necessary to have regard to their genesis. The provision was first introduced into the Companies (Winding-up) Rules in England in 1895. The enactment came about as a result of the decision in In re Standard Gold Mining Co. [1895] 2 Ch. 545.

55. Down to 1892, the practice in bankruptcy and winding up in England was the same in that the depositions in a private examination were considered private documents and it was not the practice to file them until it would no longer be injurious to expose them to disclosure, the reason being that the examination was held in order to obtain information for the trustee or liquidator so that he might decide whether he would commence proceedings and to allow inspection would often defeat the whole object of having a private examination (In re Merchants' Fire Office [1899] 1 Ch. 432 at 433 and 434; Learoyd v. Halifax Joint Stock Banking Co. [1893] 1 Ch. 686 at 693). Admitted creditors of a company had no general right to attend a private examination (In re Greys Brewery Co. (1883) 25 Ch. D. 400; Norwich Equitable Fire Insurance Co. (1884) 27 Ch. D. 515). There was a practice in bankruptcy and winding up that although the witness examined was allowed to have the professional assistance of counsel or solicitor, his solicitor was not allowed to take notes of the examination (Re Greys Brewery Co., supra. at 405; Re Merchants' Fire Office, supra. at 435). Depositions in a private examination were protected by privilege from disclosure by the trustee or liquidator in subsequent litigation (Learoyd v. Halifax Joint Stock Banking Co.; North Australian Territory Co. v. Goldsborough, Mort & Co. [1893] 2 Ch. 381 at 387).

56. Provisions were then introduced in rules 11 and 32 of the Companies (Winding-up) Rules 1892. They provided that all depositions and other proceedings in the High Court in a winding up matter were to be kept on the file of proceedings and every contributory creditor whose claim had been admitted was entitled to inspect the file of proceedings. In In re Standard Gold Mining Co., Vaughan Williams J held that he must give effect to these provisions, however inconvenient it might be and notwithstanding it would be inconsistent with the earlier practice. Thus, everything placed on the file of proceedings, including depositions in a private examination, was open to inspection as of right by a contributory or creditor. The judge expressed the view at 550 that it was "extremely inconvenient that the practice should be in this state" and that "the Court ought to have a discretion in the matter" whether inspection should be allowed.

57. To address the above concern, a new rule was made being the Companies (Winding-up) Rule, November 1895 (In re Merchants' Fire Office [1899] 1 Ch. 432 at 433; Buckley on the Companies Acts, 11th ed., page 844; Palmer's Company Precedents, 17th ed., page 474). Paragraph (1) of the rule provided that "notwithstanding anything contained in the Companies Winding-up Rules, 1890-1892, the notes of the depositions of a person examined under s. 115 of the Companies Act, 1862, or under any order of the Court, or before any officer of the Court, or person appointed to take such an examination (other than the notes of the depositions of a person examined at a public examination under s. 8 of the Companies (Winding-up) Act, 1890), shall not be placed on the file of proceedings, or be open to the inspection of any creditor, contributory, or other person, except the official receiver or liquidator, unless and until the Court shall so direct, and the Court may from time to time give such general or special directions as it shall think expedient as to the custody and inspection of such notes and the furnishing of copies of or extracts therefrom." The provision had appeared in subsequent enactments of the winding-up rules in England in substantially the same terms and the latest version was rule 74 of the Companies (Winding-up) Rules 1949 which provided as follows:

"74.	(1)	The Official Receiver may attend in person, or by an assistant Official Receiver, or by counsel or by solicitors employed for the purpose, any examination of a witness under section 268 of the Act [i.e. the provision for private examination], on whosoever application the same has been ordered, and may take notes of the examination for his own use, and put such questions to the persons examined as the Court may allow.
	(2)	The notes of the depositions of a person examined under section 268 of the Act, or under any order of the Court before the Court, or before any officer of the Court, or person appointed to take such an examination (other than the notes of the depositions of a person examined at a public examination under section 270 of the Act) shall be forthwith lodged in the Chambers of the Registrar but shall not be filed, or be open to the inspection of any creditor, contributory, or other person, except the Official Receiver or Liquidator, or any Provisional Liquidator other than the Official Receiver, while he is acting as Provisional Liquidator, unless and until the Court shall so direct, and the Court may from time to time give such general or special directions as it shall think expedient as to the custody and inspection of such notes and the furnishing of copies of or extracts therefrom."

58. Rule 62 in our Winding-up Rules was based on rule 72 of the English Rules in 1929. Having regard to the historical background, the purpose of the statutory provision of not filing the notes of the depositions in a private examination becomes apparent. It was to protect the privacy of the information obtained by the liquidator in the discharge of his functions. I would agree with Mr Yu's observation that the provision was directed at third parties including the examinee, not the liquidator, and that the rule was for the protection of the liquidator, rather than the person to be examined. An illustration of this may be found in In re Merchants' Fire Office (decided after the rule in 1895 had come into force), in which an examinee was allowed to see his own deposition on showing good reason and upon an undertaking to use best endeavours to prevent the communication of his deposition to other defendants in the proceedings or their legal advisers. Thus, in Re King's Dyeing & Weaving Factory Ltd., supra. at 514H to I, Jones J stated that "an examinee must have good reasons why he or she should be entitled to have a copy of the transcript" as "the proceedings are confidential" and he declined to order that the examinees be supplied with copies of the transcript where no reasons had been put forward. Similarly, in In re London and Northern Bank Ltd [1902] 2 Ch. 73, a solicitor who attended a private examination to protect a witness was required to give an undertaking not to disclose to any one, without leave of the court, any information he might obtain in the examination.

59. When the provision in the English Rules was replaced by rules 9.4 and 9.5 of the Insolvency Rules 1986, the broad purpose for the enactment of the new procedural provisions would appear to remain the same as before, as could be seen from the following observations of Dillon LJ in In re Arrows Ltd (No. 4), supra. at 467D to F:

"Indeed the confidentiality is not for the protection of the person being examined but for the protection of the office-holder. The particular purpose of the provision in rule 9.5 of the Insolvency Rules 1986 that the transcripts of section 236 examinations are not to be placed on the court file is, I apprehend, to ensure that a person whom the office-holder suspects the company may have a claim against, e.g. for fraud on the company or theft, is not to be able by searching the court file and reading the transcripts of the examinations of other persons to see how strong the office-holder's case may be. Each person examined will of course have a copy of the transcripts, which he will have signed, of his own examination. But any further disclosure by the office-holder, e.g. to a director who has been examined under section 236, will follow the ordinary course, in civil proceedings, by discovery, exchange of witness statements and so forth, if the office-holder brings civil proceedings against him."

60. I was also referred by Mr Yu to three Australian decisions. The first two are of the Supreme Court of the New South Wales, Equity Division. The earlier decision is that of Needham J in Re Buchanan Enterprises Pty. Ltd & the Companies Act (1982) 6 ACLR 733 and the other decision is that of Young J in Plantara Pty. Ltd & the Companies Code, 31 October 1986, Lexis transcript. The relevant rule in the first decision was rule 126 of the Companies Rules 1968 (NSW) and this provided that "subject to the [Companies Act 1961 (NSW)] Act, and unless the judge or, where the master or other officer of the Court has jurisdiction, the Master or such officer shall otherwise direct: ... (b) after the original notes have been signed by he witness they shall be lodged forthwith in the Equity Office but shall not be filed or be open to the inspection of any creditor, contributory or other person except the liquidator his counsel or solicitor or, in a case where the Registrar or duly authorised officer of the Registrar is the applicant for the examination, the Registrar or duly authorised officer of the Registrar." The relevant rule in the second decision, being Part 80, rule 62(8) of the Supreme Court Rules, was of similar effect.

61. In Re Buchanan Enterprises, following the private examination of the examinees, the liquidator commenced proceedings against them for recovery of money and filed affidavit evidence setting out part of the examination of the examinees. Two of the examinees applied to the court for permission to inspect the depositions of their evidence and of their spouse's evidence in the examination. The approach in In re Merchants' Fire Office was followed. It was held that the usual practice is that the court would make an order permitting a witness to inspect a transcript of his evidence where in substance it is necessary in the interest of fairness that that be done. The applicants were allowed to inspect at that stage only those portions of the transcripts of their own evidence which had been quoted in the liquidator's affidavits. Whether they should be granted leave to inspect other parts of the transcripts not quoted by the liquidator was deferred until after they had filed evidence setting forth a defence to the liquidator's claim.

62. Similarly, in Plantara Pty. Ltd, there was an application by the examinees to inspect a transcript of their private examination where criminal proceedings were brought against them and the prosecution had intended to rely on the transcript. The applicants' solicitor needed to see the transcript before a deposition was to be taken from a witness in the criminal trial. Access to the transcript was given to the solicitor and the counsel to be instructed, upon their undertaking not to disclose the document to any other person. Young J referred to the principle adopted in In re Fire Merchants' Office and Re Buchanan Enterprises and said as follows:

"The reason behind the rule [i.e. the rule with its genesis in the English Rules in 1895] is, as clearly appears from the authorities, that the transcript of the private examination is really the private notes of the liquidator and the purpose of the examination is to permit the liquidator to carry out his duties in the winding up, so that any publication of them is really authorisation of the publication of the liquidator's private papers. The court permits it only when it is necessary in the interests of fairness to do it."

63. The third Australian decision is that of the Supreme Court of South Australia in Re Southern Equities Corporation Ltd (in Liquidation) (1997) 24 ACSR 582 and (1997) 25 ACSR 394. There, the examinee was subject to a court order not to disclose the fact of the private examination. A question was raised whether the liquidator was in breach of the court order in including the information obtained in the examination in a statement of claim filed on behalf of the company and a subsidiary. Both Debelle J at first instance and the appellate court rejected the contention that the liquidator was under an implied obligation of confidentiality by virtue of the court order. Mr Yu submitted that this is analogous to the present situation and relied on the following passages in the judgments:

"The orders as to confidentiality bind the examinee but do not bind the liquidator. The liquidator is at liberty to use the information and documents obtained in whatever manner he believes will assist his administration of [the company] for the benefit of its creditors. For example, he is at liberty to use information or documents obtained in earlier examinations concerning the affairs of [the company] when examining persons later summoned for examination. The practice of using information obtained in earlier examinations to examine persons in later examinations is commonplace when a liquidator's enquiries require the examination of more than one person. Further, to take an absurd example, the liquidator could, if he wished, make a general disclosure of the information he has obtained to later examinees and so negate whatever benefits are available to him by dint of the orders as to confidentiality. In short, the orders as to privacy and confidentiality were made to protect and enhance the liquidator's examination and to protect and enhance his capacity to get in the assets of [the company]. The orders should not be used to subvert the examination of later witnesses. The orders were made for the liquidator's benefit and did not impose any obligation of confidence upon him." (at 24 ACSR 597, per Debelle J)

"An order made upon the application of a liquidator for an examination in private is made for the purpose of assisting the liquidator in the liquidator's administration of the corporation. It cannot be said that, because the liquidator seeks and obtains an order that the examination be held in private, that the liquidator is thereby prevented from communicating any of the documents or information obtained in that examination to any other person. That result would interfere with the liquidator's administration of the corporation rather than to assist it. Of course the liquidator could not use the information other than in the course of his or her administration of the corporation. To use the information otherwise would tend to suggest that the examination was conducted for an improper purpose.

In my opinion the order ... did not prevent the liquidator from publishing the contents of documents or information obtained in the examination to other persons for the purpose of the liquidator's administration of the corporation and in particular for the purpose of getting in the assets of [the company].

It follows, for reasons I have earlier expressed the liquidator was not prohibited from publishing information obtained in the examination to [the subsidiary] because such publication was in the best interests of [the company], the company subject to the liquidator's administration." (at 25 ACSR 434, per Lander J)

64. The above construction of the nature and purpose of the obligation of confidentiality in rule 62(2) of the Winding-up Rules is reinforced by the following considerations.

65. Firstly, consistently with the objective of a private examination, it must be lawful for a liquidator to use the notes of the depositions in a private examination to discharge his duties as liquidator. The authority to use such notes of depositions must be coupled with the authority of incidental disclosure for a legitimate purpose, such as the obtaining of legal advice or the recovery of assets or setting in motion appropriate steps to bring to book delinquent directors. In none of the authorities referred to above was there any suggestion to the effect that the relevant statutory provision would require the liquidator to obtain leave from the court before using or incidentally disclosing the notes of private examination in discharge of his duties in the liquidation.

66. Re Esal (Commodities) Ltd [1989] BCLC 59 is a useful case in point, decided at a time when rule 74 of the Companies (Winding-up) Rules 1949 was still in force. There, the question was whether it was proper for the liquidators of a parent company to disclose information obtained in a private examination to the directors or liquidators of its subsidiaries, the liquidators having made a compromise not to disclose such information except with the consent of the solicitors of the examinee or under a court order. Dillon LJ said at 64i that if the documents had been disclosed in the ordinary procedure of an examination under section 561 of the Companies Act 1985 or its predecessor being section 268 of the Companies Act 1948, he had "no doubt ... that [the liquidators] could use those documents without further order of the court". At 65b to c, he stated that "it would be fully open to the liquidators of the parent company to make documents obtained under s. 561 available to the directors or liquidators of the subsidiaries to assist them in getting in assets or defending assets for the ultimate benefit not merely of the subsidiary, but also of the parent company itself" and that is "common practice".

67. Secondly, the provisions in rule 62(1) and (2) should be read as a whole. Rule 62(1) (the equivalent in the 1949 Rules has not been retained in rule 9.5 of the Insolvency Rules 1986) expressly permits the liquidator to "take notes of the examination for his own use". It does not require the liquidator to seek leave of the court before using or incidentally disclosing the notes of the examination, such as in using the notes to cross-examine the examinee in subsequent proceedings, or in seeking legal advice. Mr Yu asked rhetorically what is the rhyme or reason for differentiating between the notes of examination under rule 62(1) (which could be used by the liquidator without reference to any one), and the "notes of the depositions" in rule 62(2) (which, as contended by the applicants, would be subject to stringent control and leave of the court is required on every occasion if the liquidator should wish to use or disclose them). Miss Chan supported the submission of Mr Yu that it would make no sense to differentiate between the notes in rule 62(1) and (2).

68. Mr Whitehead has sought to differentiate the provisions in rule 62(1) and (2) on these grounds:

(1) The notes of the examination in rule 62(1) refer to the private jottings or personal notes of the liquidator of the proceedings in the examination whereas the "notes of the deposition" in rule 62(2) refer to the record of the sworn evidence given by the witness in the examination. Under section 221(2) of Cap. 32, it is provided that "the court may examine [the examinee] on oath ... either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them."

(2) The terms used in the two statutory provisions are different. It is a rule of statutory interpretation that where different words are used in a provision, although practically synonymous in ordinary use, they are to be given different meanings, as a variation in the term used is prima facie taken to denote a different meaning (Gibson v. Skibs A/S Marina and Orkla Grobe A/B and Smith Coggins Ltd [1966] 2 All ER 476 at 478B to C; Bennion on Statutory Interpretation, 4th ed., pages 995 to 996).

69. I do not regard these as sufficiently cogent reasons for construing rule 62(2) in a manner that is inconsistent with rule 62(1), with the purpose of a private examination, and with the purpose behind the rule as to confidentiality. The rule of statutory interpretation referred to by Mr Whitehead is but a prima facie rule, the courts have also recognised the possibility that different words were used by the drafter of legislation without any intention to change the meaning, on account of "elegant variation" so as "to improve the graces of the style and to avoid using the same words over and over again" (Hadley v. Perks (1866) LR 1 QB 444 at 457; Bennion, op. cit. at page 995). I agree with Mr Yu that in construing a statutory provision, it is more important to look at the purpose and objective of the enactment. The practice nowadays is that the liquidator would either engage his shorthand writer or use the recording and transcription service of the court to prepare the depositions of a person examined. There is hardly any real distinction between the two to justify treating one as personal notes and the other as a court document.

70. As for the dicta of Lord Browne-Wilkinson in In re Arrows Ltd (No. 4) at 104C to E and G to H set out in the earlier part of this judgment and other dicta in the decision relied on by Mr Whitehead, such dicta should be read with regard to the following matters and what was actually decided:

(1) The case was not a situation in which the liquidator sought leave to use or disclose the transcripts of a private examination for the discharge of his own duties in the liquidation. There was a request made to the liquidators by an outsider, the Serious Fraud Office, for the transcripts of the examination, to be used in criminal proceedings. What was said about the discretion of the court to decide who should have access to the transcripts and the power of the court to control the use of documents held by liquidators should be read in that light. The dicta were not said with regard to the relationship between the liquidator as an officer of the court and the court.

(2) At the start of the examination, which was after the examinee was arrested and charged, the judge presiding over it had given a direction that in the event the Serious Fraud Office should inform the liquidators of its intention to serve a notice requiring the latter to produce the transcripts, the liquidators were required to apply to the court for directions or determination as to whether and if so how they should deal with the transcripts and respond to the Serious Fraud Office. Hence, the liquidators made an application pursuant to the court order.

(3) On the liquidators' application for directions, the judge directed that the transcripts were to be released to the Serious Fraud Office upon an undertaking by the latter not to use the same in evidence against the examinee, save in the circumstances specified in section 2(8) of the Criminal Justice Act 1987, which would effectively prevent the use of the transcripts by the prosecution unless the accused should elect to give evidence at the trial. The question on appeal was whether it was a wrongful exercise of the discretion by the Companies Court to seek to prevent the use by the Serious Fraud Office of the transcripts in criminal proceedings. It was held that although the Companies Court would have a discretion under rule 9.5 of the Insolvency Rules whether to authorise the unconditional release of the transcripts by the liquidators to outsiders, it was an improper exercise of the discretion and it should have been left to the judge at the criminal trial to decide whether the admission of the transcripts would prejudice a fair criminal trial.

(4) The statement of Lord Browne-Wilkinson at 102A that the record of an examination under section 236 "is not part of the liquidator's private records but is subjected to special statutory provisions relating to its custody and release" must be read with regard to rules 9.4 and 9.5. There is no provision in the Insolvency Rules equivalent to our rule 62(1), with its emphasis that the notes of examination are for the own use of the liquidator.

71. In construing the purpose and effect of rule 62, I do not think the abrogation of the privilege against self-incrimination should be used as an interpretative factor. For one thing, the abrogation of the privilege was not the purpose for the enactment of the rule. Besides, in both public and private examinations, the privilege has been abrogated. This is not to say an examinee would have no protection on the use or disclosure of the transcripts of a private examination, as he may seek undertakings or ask the court to impose conditions on the liquidator before an order for examination is made or at the time of the examination if it is contended that the examination may be oppressive without appropriate undertakings or directions from the court. Examples are found in the cases mentioned earlier: In re Arrows Ltd (No. 4); C. A. Pacific Finance Ltd.; Re Esal (Commodities) Ltd.

72. I also do not think the principles relevant to whether an order for examination should be made where proceedings have been commenced (in In re Bletchley Boat Co. Ltd and other cases cited by Mr Whitehead as mentioned earlier) would provide support to the contention that a liquidator is required to seek leave under rule 62(2) before he is permitted to use the transcripts of examination in other proceedings. The court has drawn a clear distinction between the purpose or objective of seeking a private examination and the result of the order for examination, as can be seen from the following extracts in these authorities cited by Mr Yu:

"In many cases an order under section 236 may have the result that the company is in such improved position e.g. an order for discovery of documents made against a third party in order to reconstitute the company's own trading records my disclose the existence of claims which would otherwise remain hidden. But that is the result of the order not the purpose for which it is made." (Cloverbay Ltd. v. B.C.C. I. Ltd. [1991] Ch. 90 at 102E to F, per Sir Nicolas Browne-Wilkinson V.-C.)

"Mr Hollington's main submission was that now that proceedings against the respondents have been commenced, it would be oppressive to make an order which would have the effect of giving accelerated discovery and which might result in the disclosure of information beyond that to which an ordinary litigant would be entitled. In my judgment, that misconceives the position. ... although the information revealed may assist the company's case in the action that has been commenced that will be an incidental consequence of inquiries which, in my view, are plainly necessary if the liquidator is to discharge his duty of discovering whether there are grounds for commencing proceedings ... against the respondents under s 214." (Re Brook Martin & Co. (Nominees) Ltd. [1993] BCLC 328 at 335a to e, per Vinelott J)

"The decision in Cloverbay dispelled the notion that a primary test of the availability of the section is whether or not the liquidator has reached a firm decision to sue. Further, in examining the availability of the section for the purpose of reconstituting the state of knowledge that the company should possess (not the only purpose for which the section is available, as Bishopsgate Investment Ltd. v. Maxwell [1993] Ch. 1 later made clear), the Vice-Chancellor drew a distinction similar to that made by Megarry J [in Re Spiralflite Ltd. [1979] 1 WLR 1096] between applications for the (impermissible) purpose of improving the position in current civil litigation against the proposed examinee and applications for a permissible purpose which may at the same time have the result of improving the liquidator's position in other respects: see at p. 102D to E." (Shierson v. Rastogi [2003] BPIR 148 at para. 58, per Mance LJ)

73. As I have mentioned earlier, Miss Chan for the Official Receiver has also submitted that it is contrary to existing law and prevailing practice if a liquidator or the Official Receiver is required to apply for leave every time he wishes to use the information obtained in a private examination in the discharge of his duties where such use would involve the disclosure of information to a third party. The impracticality of such a requirement was expressed in the New Zealand decision of Re Baird (A Bankrupt) [1994] 2 NZLR 463 at 469 as follows:

"A contrary interpretation [of section 68(7) of the Insolvency Act 1967; which provided that save with the consent of the court, on the application of the Official Assignee and subject to such conditions as the court may prescribe, it shall not be lawful for any person to publish a report of a private examination] would have a serious impact on the work of the Official Assignee and of this Court. It would mean that whenever an Official Assignee wished to summarise or quote, or to append the whole of the transcript of a private examination under s 68 or documents obtained in the course of it, in his report to the Court under s 69(3) or s 109(2) or to use an extract from such a transcript in the course of his examination of the bankrupt in a public or private examination or of another person in a private examination he would require to obtain the consent of the Court before doing so. In the case of use of the transcript for the purpose of the examination of a bankrupt, the need to apply would present no great problem because it could be made in the course of the examination. In the case, however, of incorporation in his report of information obtained from a private examination in any of the ways I have described and in the case of use of an extract from the transcript in the private examination of another person, there would be need for an application to the Court before the Official Assignee could proceed. This could delay the proceeding and lessen its effectiveness." (per Master Kennedy-Grant)

74. If the applicants were to be provided with the opportunity to object on every occasion that the respondent should wish to use the transcript in the liquidation or in proceedings incidental to the liquidation, the respondent would be required to indicate in each instance which part of the transcript he wanted to use and for what purpose, and the court were to consider whether it would be oppressive to grant leave at every stage of the proceedings brought against the examinee, the effectiveness of a private examination would be seriously undermined.

75. For the above reasons, I find that on a proper construction of rule 62(2), no leave of the court is required in respect of the uses and disclosures of the transcripts of the examination by the respondent for the discharge of his duties in the liquidation.

The specific instances of disclosure

76. I turn to the eight instances of disclosure alleged in the first ground of the Re-amended Notice of Motion. It would be convenient to group them into these four categories:

(1) the instances in (1), (2), (4), (7) and (8) mentioned in paragraph 22 of this judgment, they are steps taken by the respondent in proceedings brought on behalf of the Company or a subsidiary of the Company to recover assets;

(2) the 24 November 2003 letter;

(3) the defence filed by the respondent and RSM in the defamation action; and

(4) the reports to the CCB.

77. In respect of the first category, I find that the use of the transcripts in each instance came within the terms of rule 62 and no leave of the court was required on a proper construction of the provision. The contents of the transcripts were relevant to the issues in the proceedings concerned. The use of materials in the winding up of related companies which is in the interest of the creditors of the parent company was canvassed in Re Esal (Commodities) Ltd as mentioned earlier.

78. The 24 November 2003 letter was addressed to the 1st applicant. It was written for the purpose of giving the 1st applicant an opportunity to respond to the respondent's allegations arising out of the contents of her examination. This was a legitimate use of the transcripts by the respondent and leave of the court was not required.

79. As for the defence filed in the defamation action, Miss Chan submitted that this was use of the transcript in a personal action between the liquidator and the examinee and the use of the information was not for the purpose of the liquidation. Miss Chan also made the point that to the extent that the 1st applicant had, in the statement of claim in the defamation action, made reference to various parts of the 24 November 2003 letter which in turn referred to the contents of the examination, the confidentiality attached to that information had been destroyed. Mr Yu relied on the principle that the duty of confidence owed by one party to another would be treated as waived by the latter in bringing proceedings against the former so as to make a fair adjudication impossible without such waiver. He submitted that as the 1st applicant had opened up the issue in the defamation action whether she had perjured herself in the examination, she would have no right to complain if the respondent sought to defend the action by reference to the contents of the examination. I accept the submissions of Miss Chan and Mr Yu. The respondent's use of the information in justifiable defence of his reputation cannot be treated as a contempt of court (Scott v. Scott [1913] A.C. 417 at 444, 448 to 449, per Earl Loreburn).

80. For the reports to the CCB in which the respondent made references to the examination and provided copies of the transcripts, this was done in discharge of the respondent's duty at common law as confirmed by the House of Lords in In re Pantmaenog with a view to enabling the authorities to take appropriate action against a former officer who may be shown to have committed misconduct. The disclosure was for a legitimate purpose in relation to the liquidation of the Company.

The alleged circumvention of statutory provisions

81. There is another complaint regarding the reports to the CCB, premised on the allegation that the respondent had circumvented the procedures laid down in sections 191(2), 222 and 277(1) in making a report directly to the CCB without first seeking directions from the court and thereby giving the applicants an opportunity to be heard. Mr Yu submitted that on a proper construction of these provisions, there is no prohibition of a liquidator in a compulsory winding up to report to the police possible criminal conduct of a former officer of the company without leave of the court.

82. I accept Mr Yu's submissions on this. The applicants' contention is simply not borne out by the provisions in Cap. 32. I have already set out the provisions in sections 168I(3) and 277(2), which require the liquidator to report forthwith to the appropriate authority in certain situations, without first seeking directions from the court.

83. Section 191(2) provides as follows:

"The Official Receiver or liquidator may also, if he thinks fit, make a further report, or further reports [to the court], stating the manner in which the company was formed and whether in his opinion any fraud has been committed by any person in its promotion or formation, or by any officer of the company in relation to the company since the formation thereof, and any other matters which in his opinion it is desirable to bring to the notice of the court."

84. The above is clearly not a mandatory provision requiring the liquidator to make a report of fraud to the court alone. It is not necessary for me to refer to section 222, which is triggered by section 191(3).

85. Section 277(1) is in these terms:

"If it appears to the court in the course of a winding up by the court that any past or present officer or member of the company has been guilty of any offence in relation to the company for which he is criminally liable, the court may, either on the application of any person interested in the winding up or of its own motion, direct the liquidator to refer the matter to the Secretary for Justice."

86. Again, it is quite impossible to spell out from the above provision an implied prohibition that the liquidator in a compulsory winding up is not allowed to report a possible criminal act to the police. I also agree with Mr Yu the reason for the different provisions in section 277(1) and 277(2) (which imposes on the liquidator in a voluntary winding up a mandatory obligation to report to the Secretary for Justice) is to ensure that in a voluntary winding up, where the liquidator would be acting under the control of the members or creditors, possible criminal conduct would be brought to the attention of the court or the relevant authority.

87. It is also pertinent to have regard to this dictum of Lord Browne-Wilkinson in In re Arrows Ltd (No. 4), supra. at 102G:

"In my view, where information has been obtained under statutory powers the duty of confidence owed on the Marcel principle [Marcel v. Commissioner of Police of the Metropolis [1992] Ch. 225] cannot operate so as to prevent the person obtaining the information from disclosing it to those persons to whom the statutory provisions either require or authorise him to make disclosure."

88. In the present case, the respondent was authorised under rule 62 to make disclosure of the transcripts to the CCB. He was not required to report to the police, but he was authorised in doing so.

The principle against doubtful penalisation

89. If I were wrong about the proper construction of the relevant statutory provisions, there is real doubt whether these provisions should be construed in the manner as contended by the applicants. The nature and scope of the prohibition allegedly contained in the statutory provisions are obviously open to dispute. In the circumstances, I should apply the principle against doubtful penalisation and give the benefit of the doubt to the respondent.

90. The principle has been described as follows in Bennion, op. cit. at page 705:

"It is a principle of legal policy that a person should not be penalised except under clear law (in this Code called the principle against doubtful penalisation). The court, when considering, in relation to the facts of the instant case, which of the opposing constructions of the enactment would give effect to the legislative intention, should presume that the legislator intended to observe this principle. It should therefore strive to avoid adopting a construction which penalises a person where the legislator's intention to do so is doubtful, or penalises him or her in a way which was not made clear."

See also R v. Bristol Magistrates' Court, ex parte E [1998] 3 All ER 798 at 804h; Halsbury's Laws of England, 4th ed. reissue, vol. 9(1), para. 472.

91. An example in which the principle was applied in a case of contempt is Grand Union Insurance Co. Ltd v. Clyde & Co. [1988] HKC 464. Mayo J dismissed the motion as the prohibition to publish matters which the court had decided should be kept confidential must be in clear terms and it was not enough to say an obvious inference should be drawn from the terms of the order. All that the judge had ordered in the previous case was that the file should be marked "confidential" in the registry, it was not expressly ordered that no one should publish information relating to the proceedings.

92. Dicta to the same effect are found in following cases:

"My Lords, in cases where courts, in the interests of the due administration of justice, have departed in some measure from the general principle of open justice no one ought to be exposed to penal sanctions for criminal contempt of court for failing to draw an inference or recognise an implication as to what it is permissible to publish about those proceedings, unless the inference or implication is so obvious or so familiar that it may be said to speak for itself." (Attorney-General v. Leveller Magazine Ltd., supra. at 453F, per Lord Diplock; see also 462B to F, per Lord Edmund-Davies)

"The court must ensure that the language of its order makes plain what is permitted and what is prohibited. That is a well established, soundly-based principle. A person should not be put at risk of being in contempt of court by an ambiguous prohibition, or a prohibition the scope of which is obviously open to dispute." (Attorney General v. Punch Ltd., supra. at 1055F, per Lord Nicholls of Birkenhead)

"Moreover, if there is room for genuine doubt about what the court's purpose is, the party charged with contempt is likely to escape liability for want of the necessary mens rea. That is why it is so important to define the purpose of the interlocutory injunction correctly." (Attorney General v. Punch Ltd., supra. at 1072B to C, per Lord Hope).

The actus reus and mens rea of criminal contempt

93. With the last dicta of Lord Hope, I go to consider the actus reus and mens rea of a criminal contempt. It is Mr Yu's contention that the court cannot be satisfied beyond reasonable doubt both of the actus reus and mens rea of interference with the administration of justice, which is necessary to establish a criminal contempt.

94. It is not necessary to repeat the views I have reached on the proper construction of the various statutory provisions, save to say that on that basis, there is no question of establishing the actus reus or the mens rea in the present case. I turn to the additional points made by Mr Yu in this regard.

95. For the actus reus, I was referred to the following passage in Attorney-General v. Newspaper Publishing Plc. [1997] 1 WLR 926 at 936B to D:

"We do not accept that any conduct by a third party inconsistent with an order of the court is enough to constitute the actus reus of contempt. Where it is sought to impose indirect liability on a third party, the justification for doing so lies in that party's interference with the administration of justice. It is not in our view necessary to show that the administration of justice in the relevant proceedings has been wholly frustrated or rendered utterly futile. But it is, we think, necessary to show some significant and adverse effect on the administration of justice. Recognising that the restraints upon freedom of expression should be no wider than are truly necessary in a democratic society, we do not accept that conduct by a third party which is inconsistent with a court order in only a trivial or technical way should expose a party to conviction for contempt." (per Lord Bingham of Cornhill C.J.)

96. In Pelling v. Hammond, 9 June 2000, Lexis transcript, the Queen's Bench Division dismissed an application for permission to bring proceedings for contempt. The above dicta of Lord Bingham were referred to. The alleged contempt was the disclosure of the transcripts relating to proceedings under the Children Act 1989, which was prohibited under section 12(1)(a) of the Administration of Justice Act 1960 (the equivalent provision in Hong Kong is section 5(1) of Cap. 287 mentioned earlier). In the case of some of the respondents, it was held that the disclosure was only an interference in the most technical sense and the actus reus was not established. Otton LJ noted that the recipients of the transcripts were confined to lawyers acting for the Circuit Judge whose decision was the subject of judicial review, the members of the Divisional Court in the judicial review proceedings, and the applicant himself who participated in the judicial review. At no point were the contents of the transcripts referred to in open court.

97. Mr Yu submitted that the court could not be satisfied that any of the disclosures made by the respondent would amount to a significant interference with the administration of justice, even if one were to assume against the respondent that the disclosures complained of were prohibited by statute. I am inclined to agree. The filing in court of affirmations, a defence, a list of documents, a witness statement did not involve publication of the transcripts to the public or a section of the public. The disclosure was to the other parties to the various civil proceedings, previously involved in some way with the affairs of the Company or the liquidation, being the related companies, the applicants themselves, another former director, RSM, and the lawyers acting for the respective parties in those proceedings. The 24 November 2003 letter, as already noted, was addressed to the 1st applicant alone. Only the disclosure to the CCB could be said to be publication to an outside party not previously concerned.

98. Further, it has not been made clear in what respects the respondent was alleged to have significantly interfered with the administration of justice in each of the five grounds set out in the Re-amended Notice of Motion, or in respect of each of the eight instances particularised under the first ground. It is not sufficient merely to assert, at the end of each paragraph, that in consequence of the act complained of, the respondent has interfered with the administration of justice. No evidence has been led by the applicants to demonstrate any significant and adverse impact on the administration of justice as a result of the acts complained of. It was not suggested by the applicants that the respondent did not necessarily believe he had grounds when he reported to the CCB. I fail to see how in that situation reporting to the CCB could be interference with the administration of justice. I am also unable to see how it is that the respondent has advantaged himself in allegedly circumventing statutory procedures by reporting directly to the CCB. One would expect the CCB not to act on the respondent's reports without proper investigation and prosecution would not be brought if there were insufficient evidence.

99. I also agree with the submission of Miss Chan that the publication is not caught by exception in (e) under section 5(1) of Cap. 287, contrary to the contention of the applicants. This exception applies "where the court, having power to do so, expressly prohibits" publication. In section 2 of Cap. 287, "court" is defined to mean "any court, tribunal or person having by law power to hear, receive and examine evidence on oath." Thus, the exception in section 5(1)(e) only applies to a situation where the court seized of the matter has expressly made an order to prohibit the publication of the information relating to the proceedings in private. It has no application where the prohibition to publish is contained in a statute.

100. Regarding the mens rea for a criminal contempt, Mr Yu submitted that nothing short of an intention to interfere with the administration of justice would suffice. He has referred to the following authorities in support:

"In order for conduct to constitute a criminal contempt of court at common law, an actus reus and mens rea must both be present. In broad terms, the actus reus of contempt is conduct which interferes with or impedes the due administration of justice. It appears that, at common law, only intentional acts may constitute criminal contempts; and that what is required is an intention to interfere with or impede the course of justice." (Halsbury's Laws of England, 4th ed. reissue, vol. 9(1) at para. 405)

"... in cases of criminal contempts ... there has been an increasing insistence that only an intention to interfere with the administration of justice will suffice." (Arlidge, Eady & Smith on Contempt, 2nd ed., para. 3-237)

"... the conduct complained of is specifically intended to impede or prejudice the administration of justice. Such an intent need not be expressly avowed or admitted, but can be inferred from all the circumstances, including the foreseeability of the consequences of the conduct. Nor need it be the sole intention of the contemnor. An intent is to be distinguished from motive or desire: see per Lord Bridge of Harwich in Reg. v. Moloney [1985] A.C. 905, 926." (Attorney-General v. Newspaper Publishing Plc. [1988] Ch. 333 at 374H to 375A, per Sir John Donaldson M.R.)

101. In Dobson v. Hastings, supra. at 408D and 409A to B, even though the editor knew that the newspaper was in possession of information to which access was restricted by some form of prohibition, he had understood that the information was already widely available and as he did not believe there was a legal impediment to publication, there was no intention to interfere with the administration of justice and the mens rea for contempt was not established.

102. It is not sufficient to show that the respondent knew of the statutory provisions concerned. What has to be shown is that he knew of the prohibition. Where there is genuine doubt as to the ambit and nature of the prohibition, one harks back to the dicta of Lord Hope in Attorney General v. Punch Ltd cited earlier. Besides, there is no evidence of any intention of the respondent to circumvent any statutory procedure; the evidence led only showed that the respondent had changed his mind about proceeding under section 277(1). I am not satisfied that mens rea would have been established in this situation.

Contempt as last resort

103. There is a further principle that contempt proceedings should only be brought as a last resort when no alternative powers of the court could be invoked (G v. S. (2001) 4 HKCFAR 419 at 427F, per Nazareth NPJ; In re an application by Liu Lee Yuk-ching [1982] HKLR 399 at 411F, per Hunter J; Dobson v. Hastings, supra. at 403G to H, per Sir Donald Nicholls V.-C).

104. Here, there are clearly steps that the applicants could have taken without resorting to an application to commit the respondent for contempt, even if their complaints were justified. As pointed out by Miss Chan and Mr Yu, there are provisions in Cap. 32 that the applicants could have prayed in aid: section 193(3) (where a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him); section 196(1) (a liquidator appointed under section 194 may, on cause shown, be removed by the court); section 200(5) (if any person is aggrieved by any act or decision of the liquidator, that person may apply to the court, and the court may confirm, reverse, or modify the act or decision complained of, and make such order in the premises as it thinks just); and section 204(1) (the Official Receiver shall take cognizance of the control of liquidators of companies which are being wound up by the court and if a liquidator does not faithfully perform his duties and observe all the requirements imposed on him by statute, rules or otherwise with respect to the performance of his duties, or if any complaint is made to the Official Receiver by any creditor or contributory in regard thereto, the Official Receiver shall inquire into the matter and take such action as he may think expedient). As the liquidator of a company wound up by the court, the respondent is at all times subject to the control of the court.

105. Further, where documents have been improperly filed in civil proceedings, and where the aggrieved party is a party to the relevant proceedings, he may apply to expunge or remove the document from the court file. Here, one or both of the applicants were parties in HCA No. 4251 of 2003, HCA No. 810 of 2003, and the defamation action. Indeed, an application was taken out by the 1st applicant to strike out the defence filed in the defamation action on the ground that the inclusion of certain parts making reference to the transcripts without leave was in contravention of rule 62(2) and an abuse of the process of the court.

106. Thus, in this instance, the court would have at its disposal other sanctions for ensuring that justice is done between the applicants and the respondent and to regulate the conduct of the respondent as an officer of the court. There is simply no need to resort to contempt proceedings.

Locus to bring proceedings for criminal contempt

107. Mr Yu further submitted it is doubtful if the applicants would have locus to bring proceedings for criminal contempt.

108. A similar argument was raised in Dobson v. Hastings, supra. at 411D to H that only the Attorney-General can initiate contempt proceedings where the contempt being alleged is not that of breaching or assisting in the breach of a court order or undertaking by a person involved in litigation (a civil contempt), but an act which significantly interferes with the administration of justice (a criminal contempt), as it is the exclusive right of the Attorney-General to represent the public interest. Sir Donald Nicholls V-C regarded this as a "far reaching argument" and was not persuaded that the matter was as "cut and dried" as presented by the respondents. He noted that in Pickering v. Liverpool Daily Post and Echo Newspapers Plc. [1991] 2 A.C. 370 at 425A to C, Lord Bridge of Harwich regarded this as a difficult point, on which the Attorney-General should be heard, and as this important point called for far more extensive treatment he did not decide the point as it was not necessary for the application before him.

109. Mr Whitehead did not argue the matter fully, save to draw my attention to the dicta of Lord Cross in Attorney-General v. Times Newspaper Ltd [1974] A.C. 273 at 326E to 327A. Having expressed the view that it is "most desirable" anyone who thinks that a criminal contempt has been or is about to be committed should, if possible, place the facts before the Attorney-General for him to consider if the matter should be brought to the attention of the court, Lord Cross went on to say as follows:

"Of course, in some cases it may be essential if an application is to be made at all for it to be made promptly and there may be no time for the person affected by the 'contempt' to put the facts before the Attorney before moving himself. Again the fact that the Attorney declines to take up the case will not prevent the complainant from seeking to persuade the court that notwithstanding the refusal of the Attorney to act the matter complained of does in fact constitute a contempt of which the court should take notice. Yet again, of course, there may be cases where a serious contempt appears to have been committed but for one reason or another none of the parties affected by it wishes any action to be taken in respect of it. In such cases if the facts come to the knowledge of the Attorney from some other source he will naturally himself bring the matter to the attention of the court."

110. Other than Dobson v. Hastings and Pickering v. Liverpool Daily Post, the point was also left open in Chief Constable of Leicestershire v. Garavelli [1997] E.M.L.R. 543 at 556 to 557 and Pelling v. Hammond. So in England, there remains a degree of uncertainty as to the limits of the locus standi of individual litigants or other interested parties to initiate proceedings for criminal contempt (Arlidge, Eady & Smith, op. cit., para. 2-194 and 3rd cumulative supplement to the 2nd ed., para. 3-169).

111. I have not been referred to any local decision in which the question of locus to move for criminal contempt was raised. This is a difficult and important question and it is clearly desirable that the Secretary for Justice should be heard before the point is to be decided.

112. As I have come to the view that there are sufficient reasons to dismiss the application to commit the respondent for contempt, it is unnecessary to resolve the question of locus for present purpose.

Conclusion

113. The respondent succeeds on the submission of no case to answer in respect of all the grounds alleged in the Re-amended Notice of Motion. I dismiss the application to commit him for contempt. I will hear counsel on costs and any consequential directions.

Representation:

Mr Robert Whitehead, SC and Mr Eugene Yim, instructed by Barlow Lyde and Gilbert, for the Applicants

Mr Benjamin Yu, SC, instructed by Clifford Chance, for the Respondent

Miss Linda Chan, for the Official Receiver

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 735 OF 2002

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Coram: Hon Kwan J in Court

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R U L I N G

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1. I am asked to give a ruling on a point of procedure in an application by Kelly Cheng Kit Yin and Robert Yip Kwong to commit David John Kennedy for contempt.

2. Ms Cheng and Mr Yip are former directors of Wing Fai Construction Company Limited ("the Company"). Mr Kennedy is a joint and several liquidator of the Company. The point of procedure involved is whether Mr Kennedy has an absolute right to withhold his evidence until after making his submission of no case to answer, or whether the court should have a discretion to put Mr Kennedy to his election whether to adduce evidence before ruling on his submission of no case.

3. These are the two alternatives posed before Knox J in Barclays de Zoete Wedd Securities Limited v Nadir, 27 February 1992 Lexis transcript. It was not suggested in Barclays, nor has it been suggested in the present case, that a respondent in contempt proceedings is in all cases bound to be put to his election before a ruling is given on the question whether or not there is a case to answer.

4. It has not been finally resolved in England if a respondent in this situation is entitled, without being put to his election, to make a submission of no case. In In re B (A Minor)(Contempt of Court: Affidavit Evidence) [1996] 1 WLR 627 at 638H, Wall J expressed the view on an obiter basis that a respondent has such a right, but given the conflicting authorities on the point, this would need to be resolved by a higher court. See also Arlidge, Eady and Smith on Contempt, second edition, para 15-39.

5. The state of the English authorities may be summarised as follows.

6. In In re W (Wards)(Publication of Information) [1989] 1 FLR 246, a submission of no case was made by various respondents. Sir Stephen Brown P ruled there was no case to answer in respect of some and ruled that there was a case to answer in respect of other respondents. The latter class of respondents then called evidence. The judge did not apply the rule in civil proceedings that the court will decline to rule on a submission of no case unless the defendant or respondent makes it clear he will not call evidence. There was no discussion in In re W why the respondents were entitled to withhold their evidence until after a ruling was made on the submission of no case.

7. There were then two decisions of Scott J (as he then was), neither decision was reported in full and I take the extracts of these decisions from In re B and Barclays.

8. In Savings and Investment Bank Limited v Gasco Investments (Netherlands) BV (No. 2)(1986) 136 NLJ 657, Scott J said that a respondent to a committal application for contempt is:

"entitled, without being put to election, to make a submission of no case at the end of the plaintiff's evidence. In ordinary civil cases a defendant cannot make a submission of no case to answer except on being put to his election himself to call no evidence. In criminal cases, on the other hand, a submission of no case can be made at the end of the evidence for the prosecution without the defendant being put to any such election. The criminal rule has been adopted for the purposes of committal applications."

9. It was observed by Wall J in In re B that although Savings and Investment Bank went on appeal, the Court of Appeal did not comment in terms upon the passage cited above.

10. The other decision is Bhimji v Chatwani, reported in [1991] 1WLR 989 but not on this point. The relevant passages in Scott J's judgment quoted in Barclays read as follows:

"Applications for committal for contempt of court have, it is plain, a quasi-criminal character. The respondents are at peril of punishment, whether by imprisonment, or by fine, or merely by condemnation in costs (see In re Bramblevale [1970] Ch 128). But the present proceedings, whatever their quasi-criminal character may be, are not criminal proceedings; they are civil proceedings (see Savings and Investment Bank Limited v Gasco NV)(No 2) [1988] Ch 422).

Some of the rules that apply to criminal trials, designed for the protection of defendants and to ensure that the innocent are not convicted, have been imported into proceedings for contempt. For example, the criminal standard of proof, beyond all reasonable doubt, is required to establish contempt. The right of a respondent to a committal application to submit no case to answer without being put to his election as to whether he will or will not call evidence applies too, but there is no need in my opinion to commit for contempt rigorously to follow as if by rote every single rule of procedure and practice applicable to criminal trials."

"Adverse comment on the absence of explanation cannot be made at a stage before the opportunity to give evidence has arrived. The defendants are entitled to submit no case to answer without being put to their election. In many cases the evidence in support of the application might be insufficient to justify allowing the application to proceed any further, but in a case where the inference to be drawn from the absence of explanation might be sufficient to turn the scale, in my judgment a no case to answer submission should not be accepted."

11. As pointed out by Knox J in Barclays, these explicit statements of Scott J, that a respondent to a committal motion is entitled to submit no case to answer without being put to his election, were made without giving any reason or citing any authority in support. They are nevertheless statements of law which command respect.

12. The next decision is Barclays, in which Knox J declined to follow the approach of Scott J. It was held whether a respondent should be put to election on a submission of no case is a matter of discretion for the judge. The proceeding before Knox J was one of civil contempt. He took the view that in proceedings for civil contempt, and as these are civil proceedings, where there is justification for importing protections devised by the criminal law for the benefit of the accused, they will be imported. He distinguished between two sets of circumstances under which a respondent may submit he has no case to answer. The first is where it is argued that even accepting the applicant's evidence at face value, no case has been established in law. The second is where the evidence led by the applicant is so unsatisfactory or unreliable that the court should find the burden of proof has not been discharged. Knox J went on to say as follows:

"On balance I have reached the conclusion that the civil procedure is adequate to give a respondent all proper protection. The procedures of striking out and preliminary points of law cover the category of case where it is submitted that even if the applicant's evidence is accepted, still in law there is no case to answer. It is only in regard to those cases where what is said is that the evidence is not strong enough that the respondent runs a risk of having to decide whether or not to give evidence before submitting there is no case to answer. But it is notable that even if the criminal procedure is adopted what is involved is not a balancing exercise of the evidential strength, but an assessment whether there is any evidence upon which the court, properly directing itself, could find that a contempt has been established.

The risk of causing an injustice by requiring a defendant either to take a preliminary point by way of striking out or preliminary issue, or to have all the evidence on both sides heard at once, if he wishes to give evidence, if one takes into account the residual judicial discretion is in my view very slight indeed. Effectively, what the respondent is being asked to do is to challenge the validity of factual evidence against him if there is to be such a challenge in one stage and not in two. The disadvantages of the two stage process discerned in Alexander v Rayson do apply to contempt proceedings and are not, in my judgment, outweighed by such risk as there is involved in putting a respondent to his election."

13. The last case is In re B. Wall J reviewed all the authorities referred to above. He followed the approach in In re W and the two decisions of Scott J. The reasons for doing so were given only briefly, no doubt because the point did not arise directly in the instant case, and he said as follows at 638H:

"In my judgment, a respondent's right to make a submission of no case without being put to an election seems to me to follow logically both from Comet Products UK Limited v Hawkex Plastics Limited [1971] 2 QB 67 and from the unqualified terms of RSC, Order 52 rule 6 (4)."

14. The extracts in the judgment of Comet Products cited earlier by Wall J are to the effect that a respondent to a motion to commit for contempt is not a compellable witness and cannot be compelled to submit to cross-examination on an affidavit he has filed until such affidavit has been deployed in evidence.

15. Order 52 rule 6 (4) then found in the English Rules of the Supreme Court (the provision in Hong Kong is the same), read as follows:

"If on the hearing of the application the person sought to be committed express a wish to give oral evidence on his own behalf, he shall be entitled to do so."

16. I gather that the underlying rationale of Wall J is probably encapsulated in this statement expressed earlier at 638A:

"In committal proceedings it is clear that the court must always permit but cannot compel a respondent to give evidence: RSC Order 52 rule 6(4); Comet Products UK Limited v Hawkex Plastics Limited [1971] 2 QB 67."

17. Mr Whitehead, SC who appeared for the applicants, submitted that the approach in Barclays should be followed. Mr Yu, SC, who appeared for Mr Kennedy, naturally relied on In re B. In the alternative, Mr Yu submitted take that if it should be held that the court has a discretion whether to put Mr Kennedy to his election, the discretion should be exercised against putting him to such an election. Three reasons were advanced for this.

18. Firstly, the present application is a motion to commit for criminal contempt, not a case of civil contempt, so Barclays is distinguishable on that basis. Secondly, Mr Yu informed the court that in his submission of no case, he is not asking the court to form a view on the quality of the evidence such as that the applicants' evidence is unsatisfactory or unreliable and that the burden of proof has not been discharged. His primary contention would be, as a matter of law, no case for contempt has been made out. He would also submit that no evidence has been adduced to prove the essential elements in the alleged charges, and both the actus reus and mens rea have not been established. Thirdly, there is no possible prejudice to the applicants if the respondent is not put to such an election.

19. Here, the choice is between an absolute right of the respondent in withholding evidence on his submission of no case or a discretion in the court whether to put the respondent to his election on a submission of no case.

20. I am more inclined to agree with the reasoning in Barclays, although I recognize that Barclays is not directly applicable as it is a case of civil contempt. I am also mindful of the decision of Gall J in Secretary for Justice v Apply Daily Limited and Another [2002] 2 HKC 739. In that case, Gall J dismissed an application for a Norwich Pharmacal type of order in proceedings for criminal contempt, holding at 748G that the distinction between civil and criminal contempt exists and that the criminal law should prevail as to the procedure to be applied in respect of criminal contempt.

21. I would have liked more time to reflect on this point, which I do not find to be an easy one. For present purpose, I propose to resolve the matter in this way: I rule that Mr Kennedy is not required to elect whether to give evidence on a submission of no case. It is unnecessary to form a definite view if that is because he has an absolute right to withhold evidence in that situation or whether it is because of the exercise of the discretion of the court in his favour.

22. Assuming against Mr Yu that Mr Kennedy would have no absolute right to withhold evidence on a submission of no case, I would still have exercised my discretion in favour of not requiring him to make an election whether to adduce evidence.

23. I think there is a lot to be said of the undesirability of asking the court to express an interim view on the quality of the evidence where a submission of no case is made on the basis that the evidence adduced by the applicant is unsatisfactory or unreliable. If that is the basis for submission of no case, the assessment of the quality of the evidence should be done in a one-stage process instead of in two stages. That may be a reason for the exercise of the court's discretion to require a respondent to make an election whether to give evidence. Here, that is not the basis for Mr Yu's submission of no case. So much of the objection that may be taken if the respondent is not required to make an election is not present.

24. As a result of this ruling, the court would be inconvenienced to some extent in that these proceedings may have to be adjourned pending the outcome of the submission of no case, but I do not consider that to be a factor to influence the exercise of the discretion against the interest of Mr Kennedy. I also do not think it relevant in the exercise of my discretion that Mr Kennedy has not resorted to other avenues that may be open to him, such as a striking out application or an application to set aside the ex parte order or taking a preliminary point of law.

Representation:

Mr Robert Whitehead, SC & Mr Eugene Yim, instructed by Messrs Barlow, Lyde & Gilbert, for the Applicants

Mr Benjamin Yu, SC instructed by Messrs Clifford Chance, for the Respondent

Miss Linda Chan, for the Official Receiver

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

____________

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_____________

D E C I S I O N

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1. This is an appeal from an order made by Master Woolley dated 17 February 2004 as to the costs of an examination conducted under s. 221 of the Companies Ordinance, Cap. 32.

2. I will first give the relevant background matters.

3. On 6 July 2002, provisional liquidators were appointed for Wing Fai Construction Company Limited ("the Company"). The Company was ordered to be wound up on 9 December 2002 and liquidators were appointed by the court on 28 February 2003.

4. As early as 2 August 2002, the provisional liquidators had written to three former directors of the Company, Yip Kwong Robert, Cheng Kit Yin Kelly and Kam Shing, requiring each to attend an interview to assist the provisional liquidators in their investigation of the affairs of the Company.

5. Cheng and Yip declined to do so on 6 August 2002. The provisional liquidators informed these individuals by letter the next day that they would apply for an examination under section 221 and seek costs against them.

6. On 12 August 2002, the solicitors for Cheng and Yip (who also acted for Kam subsequently) suggested that written answers be provided to a questionnaire in lieu of an interview. This was turned down by the provisional liquidators.

7. On 27 August 2002, the provisional liquidators supplied to the solicitors for the former directors a list of questions they intended to ask at the interviews and proposed dates for the interviews on 3 and 4 September 2002. No response was received from the solicitors until after the proposed dates had lapsed. Eventually, the solicitors agreed with the provisional liquidators for the former directors to attend interviews on 7 and 8 October 2002.

8. Only Cheng attended the interview on 7 October 2002. Kam did not attend, citing ill health. He also failed to attend on the alternative date on 11 October 2002, and sent a message that he was not in Hong Kong. Yip's interview was postponed by agreement to 11 October 2002 but he did not attend and no notification was given for his absence.

9. On 15 October 2002, the provisional liquidators wrote to the solicitors for Yip and Kam stating that if there was no confirmation these persons would attend interviews, they would apply under section 221.

10. On 3 March 2003, a summons was issued by the liquidators against all three for examination under section 221 and production of documents relating to the Company.

11. An order for an examination was made by Deputy Judge To on 25 March 2003. He also ordered costs of and occasioned by that application to be paid by the three persons to the liquidators.

12. The examination took place before Master Woolley on 4 July 2003 and on 30 July 2003, it was adjourned part-heard to dates to be fixed and costs were reserved. Only the examination of Cheng was completed.

13. On 15 January 2004, the former directors issued a summons to stay the execution of the examination order before the examination was to resume before the Master on 16 and 17 February 2004, on the basis that because of litigation since commenced by the liquidators in which the former directors would be material witnesses, it would be oppressive for the examination to be continued. On 9 February 2004, Deputy Judge To made these orders on certain undertakings given by the liquidators to restrict the scope of the examination:

(1) the summons for stay be dismissed;

(2) the examination of Yip and Kam was to resume on 16 February 2004;

(3) the examination of Cheng should not proceed; and

(4) the costs of the application for stay be reserved until after reasons for decision in the application have been handed down.

14. On 16 February 2004, the examination resumed before Master Woolley and at the conclusion of the examination on 17 February 2004, he made these orders as to costs:

(1) the legal costs of the examination including the previous hearing carried out pursuant to the Order of Deputy Judge To dated 25 March 2003 be paid by Kam and Yip jointly and severally to the liquidators, to be taxed if not agreed; and

(2) no order as to costs in respect of the examination of Cheng carried out pursuant to the said Order of Deputy Judge To.

15. Kam and Yip have appealed against that order. They contended there should be no order as to the costs of their examination.

16. Mr Maurellet, who appeared for the liquidators, referred me to the following passage in Hong Kong Civil Procedure 2004, Volume 1, paragraph 58/1/6 as to the principle the court should apply in an appeal on costs from a master:

"In general, a judge in chambers will not allow an appeal from a master's costs order unless it is unreasonable or the master erred in law: Hoddle v. CCF Construction [1992] 2 All ER 550 Morland J; see also Lessy S.A.R.L. v. Pacific Star Development Limited and Another [1997] HKLRD 1248; China Venturetechno International Company Limited v. New Century Chain Development Company Limited (trading as Century Chain Property Agency) [1996] 2 HKLR 18; see also Paul Y - ITC Construction Limited v. Kin Shing Company Limited [1999] 1HKC 511 at 515 per Sakhrani J: 'as this is an appeal as to costs only from the discretion of the master, such application should not be allowed unless it can be shown that the order made by the master was unreasonable or erred in law, i.e. if he either failed to take into account proper matters or took into account matters that should not have been taken into account.'"

17. Mr Smith, SC, who appeared for the appellants, has not submitted that these principles are incorrect. So it is for him to show that the costs order of the Master was unreasonable or that the Master had erred in law in that he had failed to take into account proper matters or had taken into account irrelevant matters.

18. As I understand his submission, Mr Smith has not contended that the court has no power to order costs of the examination to be borne by an examinee. I was referred to my previous decision in Re Weihong Petroleum Company Limited, HCCW No. 19 of 1998, 11 February 2003. I stand by the ruling there that the court does have jurisdiction to award costs in this situation, notwithstanding there is no provision in our legislation equivalent to Rule 9.6(1) of the Insolvency Rules 1986 in the United Kingdom. The jurisdiction to award costs in proceedings for examination is founded on section 52A(1) of the High Court Ordinance, Cap. 4, which applies to this situation by virtue of Rule 210 of the Companies (Winding-up) Rules. I have noted section 52A(2) which provides that: "Subject to specific provision made in this or any other Ordinance (other than subsidiary legislation) nothing in subsection (1) shall authorize an award of costs against a person who is not a party to the relevant proceedings." It cannot be disputed that the court has jurisdiction to award costs in an application for an order under section 221 against a person sought to be examined under that provision and who has opposed the application unsuccessfully. The examination conducted pursuant to the order made merely flows from the application to examine the person concerned. It is part and parcel of the same proceedings. I note also in the interpretation provision in section 2 of Cap. 4 that "party" is defined to include "every person served with notice of or attending any proceeding, although not named on the record".

19. Here, I am concerned with whether the Master has rightly exercised his discretion in making the costs order.

20. Mr Smith prayed in aid the dictum of Hoffmann J (as he then was) in In re Aveling Barford Limited [1989] 1 WLR 360 at 366F, in which he said that an order under section 236 of the Insolvency Act 1986, which is equivalent to our section 221, would seem to have "stronger analogies with a subpoena duces tecum or ad testificandum", by which a citizen is required to perform a public duty in aid of the administration of justice, than with a Norwich Pharmacal order or Mareva injunction affecting a third party at the instance of a private litigant. From that dictum, Mr Smith argued that the court does not ordinarily order costs against witnesses, or against a person not a party to the proceedings. He also referred to the Hong Kong Civil Procedure, Volume 1, paragraph 62/2/5 in which section 52A(1) of Cap. 4 was cited.

21. The dictum in In re Aveling Barford, which was to the effect whether an order under section 236 of the UK Act has closer analogy with a subpoena or with other forms of order, was said in the context whether it should be presumed that a respondent in proceedings under section 236 is entitled to be indemnified against his costs of complying with the order. I do not think anything more should be read into it.

22. Mr Smith also referred me to the commentaries in Muir Hunter on Personal Insolvency at paragraph 7-1203, Butterworths's Annotated Ordinances of Hong Kong (Cap. 32), paragraph 221.15 and Hong Kong Company Law by Tomasic & Tyler at paragraph [10555-10575], to make the point that Rule 9.6(1) was introduced into the insolvency legislation in the UK as a new provision. He suggested that this showed it was not the usual or general practice to award costs of the examination against a person who had failed to co-operate and thus rendered it necessary for an examination order to be sought.

23. I am unable to regard that as a matter of great weight. I am uncertainly not prepared to draw any inference as to whether that was the general practice as to costs in the examination proceedings in the UK or in Hong Kong as contended by Mr Smith. What matters is that the court has an undoubted discretion to award costs in this situation, and provided that the discretion is exercised judicially according to rules of reason and justice, whether this conforms with the general practice is, in my view, a matter of secondary consideration.

24. Next, Mr Smith submitted that if any order as to costs of the examination should be made, it should be made by the tribunal seized with the application for an examination order, as envisaged in Rule 9.6(1) of the Insolvency Rules. I do not think there should be any hard and fast rule when such an order should be made, whether at the conclusion of the hearing of the application for an examination order, or at the conclusion of the examination itself. Even if an application for the costs of an examination is made to the judge when the order for examination is made, the judge may wish to reserve this to the tribunal hearing the examination. It would all depend on the circumstance of each case. In the present case, I do not think Master Woolley was disadvantaged in any way in dealing with the submissions made to him regarding costs, as the history of the matter was set out clearly and extensively in the correspondence placed before him.

25. Mr Smith then submitted that the Master had taken matters he should not have taken into account. This is a variant of the point he has made earlier. The decision to award costs against the appellants was not based on anything that occurred in the course of the examination but was based on the appellants' conduct in failing to attend interviews with the liquidators which led to their application for an examination order. Mr Smith submitted that such conduct was a matter for the judge who heard the application for an order to examine the appellants, and Deputy Judge To in his order dated 25 March 2003 had already ordered the costs of and occasioned by the application to be paid by the examinees to the liquidators.

26. I fail to see why the appellants' conduct, which necessitated the examination proceedings, was an irrelevant matter when the court came to consider the costs in respect of the examination. The liquidators had to come to court to obtain an order for examination, because of the failure of the appellants to co-operate and attend interviews on a voluntary basis. I have already set out the events leading to the application for the examination order. Only the legal costs incurred in respect of the examination were awarded against the appellants. The liquidators did not seek their own costs and expenses, which would have to be incurred even if the appellants had co-operated, and that would be met out of the assets of the estate.

27. Mr Smith also argued that the Master had taken irrelevant matters into account in that Mr Maurellet, who also appeared before the Master, had taken the Master to correspondence that had to do with the undertaking eventually provided by the liquidators when Deputy Judge To dealt with the stay application. I have read the transcript of the proceedings before the Master, and noted that Mr Smith had submitted that such correspondence was irrelevant to the application before him. From the reasons given by the Master for his decision, it did not appear he had taken into account the correspondence relating to the undertaking.

28. Lastly, Mr Smith submitted that why the liquidators were required to have their own lawyers at the examination of the appellants in February 2004 was because of the undertaking given by the liquidators as a result of the stay application in January 2004, not because of the appellants' failure to attend interviews on a voluntary basis, as otherwise the liquidators could have conducted the examination without counsel. I do not think I should conjecture if the liquidators could or could not have done the examination on their own if they had not given the undertaking. The fact remains that they had to obtain a court order for an examination, and it is not unusual or improper for liquidators to instruct counsel to conduct an examination in court on their behalf.

29. For the above reasons, I dismiss the appeal with costs. I make a gross sum order in respect of the liquidators' costs in this appeal, and I have assessed their costs at HK$31,500.

Representation:

Mr Clifford Smith, SC, instructed by Barlow, Lyde & Gilbert, for the Appellants

Mr Jose-Antonio Maurellet, instructed by Tanner De Witt, for the Respondent

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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D E C I S I O N

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1. This is an application under section 221 of the Companies Ordinance, Cap. 32 taken out by the liquidators of Wing Fai Construction Company Limited ("Wing Fai") on 6 January 2004. They seek an order to (1) examine orally Mr Johnny Chuang, a former company secretary of Wing Fai, "on matters relating to the trade, dealings, affairs and property of the Company"; and (2) for the production of "all books, papers, writings, and documents relating to the Company that are in his possession, custody or power".

2. The background to the application may be stated as follows.

3. On 6 July 2002, Mr Kennedy and Mr Borrelli both of RSM Nelson Wheeler Corporate Advisory Services Limited ("RSM Nelson Wheeler") were appointed provisional liquidators of Wing Fai. A winding-up order was made against Wing Fai on 9 December 2002. The provisional liquidators were appointed liquidators on 28 February 2003.

4. Prior to 22 April 2002, Wing Fai was a member of a group of companies known as the China Rich Group. The ultimate holding company is China Rich Holdings Limited ("China Rich"), which was incorporated in Bermuda and its shares are listed on the Hong Kong Stock Exchange. The intermediate holding company is Benefit Holdings International Limited ("Benefit"), which was incorporated in the British Virgin Islands. Benefit owned a number of subsidiaries including Fitzroya Finance Company Limited ("Fitzroya") and 3 construction companies ("the Construction Group") comprising:

(1) Wing Fai, which was wholly owned by Benefit;

(2) Wai Shun Construction Company Limited ("Wai Shun"), also wholly owned by Benefit; and

(3) Zhukuan Wing Fai Construction Company Limited ("ZWF"), which was a subsidiary of and was owned 51% by Wing Fai.

5. On 22 April 2002, Wing Fai and Wai Shun were sold by Benefit to Sino Glister International Investments Limited ("Sino Glister"). As a result of Wing Fai's sale, Sino Glister also acquired control of ZWF.

6. Wing Fai, Wai Shun and ZWF are all in liquidation. The liquidators appointed to these companies are all from RSM Nelson Wheeler.

7. When the provisional liquidators of Wing Fai were appointed in July 2002, the books and records of Wing Fai were "virtually non-existent". The liquidators found that peculiar, as before its sale to Sino Glister, which was only 3 months before the appointment of provisional liquidators, Wing Fai's business "represented approximately 90% of the turnover of the China Rich Group". The liquidators estimate there is likely to be a shortfall of assets to creditors in the region of HK$150 million.

8. Due to the lack of books and records, the liquidators instructed information technology specialists to examine Wing Fai's limited computer hard drive files. They were informed by the specialists that the computer systems had been tampered with before their appointment, in that only very minimal information was able to be located and the application software that enables users to access and retrieve the raw data in order to reconstruct such files had been deliberately deleted. It was only because of the skill and ability of the specialists to access raw data that the liquidators have been able to obtain some financial information of the company.

9. With this background, the liquidators had sought to examine a number of former officers of Wing Fai, including Yip Kwong Robert, Kam Shing and Kelly Cheng Kit Yin. I will return to the orders made as regard these former officers.

10. In the 1st report of the provisional liquidators to the creditors of Wing Fai dated 28 January 2003, they mentioned that litigation against the China Rich Group would appear to be the only means by which assets could be recovered for the benefit of the unsecured creditors. The relevant excerpt reads as follows:

"Successful recoveries against China Rich related companies/directors, in relation to a variety of potential actions, look to be the only real prospect of a dividend being available for unsecured creditors. These potential actions include:

.	Recovery under a letter of financial support provided to Wing Fai by China Rich;
.	Debt due from Fitzroya Finance Company Limited;
.	Recovery of HK$5 million from Benefit Holdings for funding of Wing Fai's share purchase;
.	Recovery relating to term deposits used to pay out an overdraft of Wai Shun, shortly prior to Wing Fai's/Wai Shun's sale, for no apparent consideration being provided to Wing Fai (which was guaranteed by China Rich);
.	Recovery of a substantial unfair preference payment to Benefit Holdings;
.	Transfer of assets out of Wing Fai in or about February 2002, with no apparent consideration being provided to Wing Fai;
.	Actions against China Rich directors in relation to the above issues.

The above issues, given the conduct of the related companies and directors to date, will almost certainly require litigation to be resolved."

11. There are currently more than 10 legal proceedings between the liquidators of the Construction Group and the companies and some of the directors in the China Rich Group. A list was given in Mr Kennedy's 6th affirmation and in an affirmation of Ms Cheng filed on 15 January 2004. For present purpose, it is material to mention only the proceedings which relate to two matters:

(1) a Set Off Agreement entered by the China Rich Group companies on 23 November 2001 ("the Set Off Agreement") prior to the sale of the Construction Group together with the terms and effect thereof; and

(2) matters leading to and arising from the Sale and Purchase Agreement by which the sale of the Construction Group was effected on 22 April 2002 ("the Sale and Purchase Agreement").

12. These relevant proceedings are:

(1) unfair preference proceedings brought by Wing Fai against Benefit in Wing Fai's liquidation in HCCW No. 735 of 2002;

(2) the adjudication of the proof of debt of Benefit in HCCW No. 735 of 2002;

(3) an application of ZWF to be substituted as petitioner in the winding up proceedings against Fitzroya in HCCW No. 253 of 2003. I should mention that I have dismissed this application in March 2004 but the liquidators of ZWF are of course not precluded from pursuing the debt demanded against Fitzroya in a writ action;

(4) an action brought by Wing Fai against Fitzroya to recover a loan in HCA No. 2570 of 2003. Wing Fai's application for summary judgment for part of the claim was unsuccessful and Fitzroya has served a defence in February 2004;

(5) an action brought by Wing Fai against Benefit and 3 directors for giving financial assistance to Sino Glister to fund the purchase of the Construction Group in HCA No. 810 of 2003;

(6) an application for an injunction against Wing Fai to restrain the presentation of winding up petition against various companies in the China Rich Group based on demands for debts in HCMP No. 4163 of 2003. This action has been concluded as the liquidators of Wing Fai have agreed to withdraw the demands for debts and given an undertaking to pursue their claim by writ actions.

13. I turn to Mr Chuang's involvement in Wing Fai and the relevant proceedings.

14. Mr Chuang joined China Rich in early 2000 as its Accounting Manager. In February to April 2000, he was transferred to GreaterChina Technology Group Limited ("GreaterChina") as its Qualified Accountant and remained as such until he left the employment of GreaterChina in August 2002. GreaterChina is not part of the China Rich Group. He was asked by Ms Cheng, the Chairman and Chief Executive Officer of GreaterChina and the Deputy Chairman and Chief Financial Officer of China Rich to assist her in accounting matters of the China Rich Group, usually in reviewing the consolidated accounts. In addition he was appointed company secretary of Wing Fai from 6 January 2000 to 12 December 2001. He was also company secretary of the following companies: China Rich, Benefit, Fitzroya, Wai Shun and ZWF.

15. Mr Chuang left his employment with GreaterChina on 16 August 2002 and he claims he has had no further dealings with the China Rich Group, until he was asked in November 2003 to make an affirmation for Fitzroya, which he did on 26 November 2003, in HCCW No. 253 of 2003, to resist ZWF's application to be substituted as petitioner to wind up Fitzroya. His affirmation contains evidence relating to the drafting, approval and signing of the Set Off Agreement and the Sale and Purchase Agreement, and the preparation of a schedule to the Sale and Purchase Agreement. It would seem that Mr Chuang had a substantial involvement in the Set Off Agreement. He was present at the audit committee meeting and the board meeting during which the mechanism of the Set Off Agreement was discussed. He drafted the Set Off Agreement on the instructions of the directors. As for the Sale and Purchase Agreement, his involvement was in the preparation of the schedule to that agreement, which he compiled from information given to him by the staff of China Rich. This schedule is of some importance to the relevant proceedings that I have mentioned. I have read Mr Chuang's affirmation which was not included in the hearing bundle for today.

16. Thus, although Mr Chuang was not sued by the liquidators of the Construction Group (and the liquidators say they have no intention to sue him for recovery of any assets), he is likely to be a material witness for the China Rich Group in at least some of the relevant proceedings.

17. The liquidators deposed that according to the information received from Eric Chim Kam Fai, who controlled Sino Glister and was previously the Assistant General Manger of Wing Fai, Mr Chuang has "a very good knowledge of the financial and/or accounting affairs of Wing Fai". Mr Chuang has sought to play down the state of his knowledge in his affirmation filed herein on 13 February 2004, but I do not think that is entirely borne out by what he had deposed to in his earlier affirmation filed in HCCW No. 253 of 2003 that I have mentioned. I am satisfied that Mr Chuang is in a position to provide material information relating to the financial affairs of Wing Fai to the liquidators. Certainly he was involved in the drawing up of important financial documents for Wing Fai.

18. I should also mention that the liquidators first made their request to interview Mr Chuang by a letter dated 13 November 2003, which was before Mr Chuang had filed his affirmation in HCCW No. 253 of 2003.

19. In his oral submissions, Mr Maurellet, who appeared for the liquidators, has clarified for me the scope and nature of the inquiries that the liquidators would wish to pursue with Mr Chuang. This includes the general financial affairs and management of the company, the preparation of the accounts, the board meetings attended by Mr Chuang, other trade debts in the amount of HK$60 million that were not the subject of the Set Off Agreement, HK$40 million worth of construction materials not accounted for, and proofs of debt submitted to the liquidators not reconcilable with the accounts of Wing Fai.

20. Correspondence was exchanged between the liquidators and Mr Chuang's solicitors, who also acted for the companies in the China Rich Group in the various legal proceedings. The upshot of the correspondence in December 2003 was that the solicitors for Mr Chuang indicated that they would "strenuously oppose" any application to examine Mr Chuang orally. As a result, the present summons was issued on 6 January 2004 and adjourned for argument to today.

21. In January 2004, an application was issued by the three former officers that I have mentioned to stay the enforcement of an order to examine them orally made on 25 March 2003. Pursuant to that order, examinations were conducted before Master Woolley on 4 and 30 July 2003. The examination of Ms Cheng concluded on 30 July 2003 when the liquidators indicated that they had no further question for her. The examinations of Robert Yip Kwong and Kam Shing were adjourned. The application to stay the enforcement of the examination order was made on the ground that since the making of that order, a number of proceedings have been commenced in which these former officers are parties or material witnesses. At the hearing of the application before Deputy Judge To on 9 February 2004, it was ordered that the examination of Ms Cheng should not proceed and that the examinations of Robert Yip Kwong and Kam Shing should proceed subject to the undertaking given by the liquidators that they would not put questions to the former officers on the following matters:

(1) the Set Off Agreement and the terms and effect of it;

(2) matters leading to and arising from the Sale and Purchase Agreement;

(3) the solvency of the Construction Group before its sale in April 2002; and

(4) the extent to which Robert Yip Kwong, Kam Shing and Ms Cheng allegedly controlled and directed the affairs of the Construction Group before and after its sale in April 2002.

22. It is the position of Mr Smith, SC, who appeared for Mr Chuang, that the same undertakings offered by the liquidators before Deputy Judge To should be offered today if an order for examination is to be made. I understand Deputy Judge To would give reasons for his decision and that his judgment has yet to be handed down.

23. The liquidators are not willing to give the full undertakings as they had given before the Deputy Judge. The undertakings that they are willing to provide are as follows:

(1) they will not commence any recovery action or legal proceedings against Mr Chuang based on any evidence given by him at the oral examination;

(2) they will not utilise any evidence or information obtained in an examination herein in the winding up of ZWF or in any other liquidation (other than Wing Fai) being conducted by both or either of the liquidators or in which they are assisting;

(3) they will not question Mr Chuang in the examination on any of the following matters:

(a) the Set Off Agreement together with the terms and effect thereof; and

(b) the schedule to the Sale and Purchase Agreement save for reconciliation or comparison of the figures, in the financial records relating to the company in the possession of the liquidators, other than solely through affidavits or sworn testimony filed in court proceedings as of 11 March 2004.

24. There is no dispute as to the legal principles governing the exercise of the discretion of the court in an application for an examination order under section 221. The matter in contention is how the principles should be applied here.

25. In the exercise of the discretion, the court must carefully strike a balance between the applicant's reasonable requirements and the need to avoid making an order which is wholly unnecessary, unreasonable or oppressive to the person concerned. The burden is on the applicant to satisfy the court, after balancing all the relevant factors, that there is a proper case for such an order to be made.

26. It is recognized that relevant to the balancing exercise is the risk of oppression where there is litigation or potential litigation against a proposed examinee or a third party with which he is connected in which proceeding he is likely to be a witness (see Cloverbay Ltd v. BCCI Ltd [1991] Ch 90; Re J N Taylor Finance Pty Ltd [1999] 2 BCLC 256). If liquidators are permitted to subject a witness or potential witness to an oral examination to ascertain if they have a claim or to strengthen their prospects in litigation, this would give them an advantage not enjoyed by ordinary litigants.

27. In Cloverbay, Sir Nicolas Browne-Wilkinson VC (as he then was) had this to say at 102A to F and 103C to E:

"It is clear that in exercising the discretion the court has to balance the requirements of the liquidator against any possible oppression to the person to be examined. Such balancing depends on the relationship between the importance to the liquidator of obtaining the information on the one hand and the degree of oppression to the person sought to be examined on the other. If the information required is fundamental to any assessment of whether or not there is a cause of action and the degree of oppression is small (for example in the case of ordering premature discovery of documents), the balance will manifestly come down in favour of making the order. Conversely, if the liquidator is seeking merely to dot the i's and cross the t's of a fairly clear claim by examining the proposed defendant to discover his defence, the balance would come down against making the order. Of course, few cases will be so clear: it will be for the judge in each case to reach his own conclusion.

That said there are a number of points which in my judgment should be borne in mind in exercising the discretion. First, the reasons for the inquisitorial jurisdiction contained in section 236 of the Act of 1986 is that a liquidator or administrator comes into the company with no previous knowledge and frequently finds that the company's records are missing or defective. The purpose of section 236 is to enable him to get sufficient information to reconstitute that state of knowledge that the company should possess. In my judgment its purpose is not to put the company in a better position than it would have enjoyed if liquidation or administration had not supervened. In many cases, an order under section 236 may have the result that the company is in such improved position e.g. an order for discovery of documents made against a third party in order to reconstitute the company's own trading records may disclose the existence of claims which would otherwise remain hidden, but that is the result of the order not the purpose for which it is made ...

Fourth, although the section treats the production of documents and the oral examination of witnesses together, an order for oral examination is much more likely to be oppressive than an order for the production of documents. An order for the production of documents involves only advancing the time of discovery if an action ensues: the liquidator is getting no more than any other litigant would get, save that he is getting it earlier. But oral examination provides the opportunity for pre-trial depositions which the liquidator would never otherwise be entitled to: the person examined has to answer on oath and his answers can both provide evidence in support of a subsequent claim brought by the liquidator and also form the basis of later cross-examination. In my judgment this greater risk of oppression when examination of witnesses is ordered calls for a more careful approach to such orders than to orders for the disclosure of documents."

28. I also find the following extracts in the judgment of Mance LJ in Shierson v. Rastogi [2003] BPIR 148 to be of assistance:

" [57] There is a critical difference between an application made for such a purpose [to obtain advantage in current civil proceedings] and an application for examination required in order to enable the liquidator to fulfil his general duties as liquidator to reconstitute, investigate and understand the company's affairs and to get in its assets. This distinction is drawn even in relatively early authority, such as Re Spiraflite Limited [1979] 1 WLR 1096 where at 1100 B-C Megarry J said:

'What must primarily be considered is why the liquidator is seeking the order. The essence of the matter is that the powers given by the section are given to the court in order to enable the liquidator the better to discharge his functions as such: they are not given in order to enable a liquidator to improve his prospects of litigation success by giving him rights that other litigants lack, even if he is a liquidator.' ...

[62] There is no justification for any suggestion that the purpose of the examination under s. 236 of the 1986 Act is to obtain any advantage in the current civil proceedings. That is also to view the matter from the wrong perspective. The nature of the application and evidence in its support shows that its purposes are both more fundamental and more wide-ranging. They are to reconstitute the company's records, to understand its affairs and, with that understanding, to identify its assets wherever they may be, including any causes of action against anyone whoever they may be. It is true that, in the course of any examination on these matters, information may well be forthcoming that will bear on, or expand the scope of the current civil proceedings against the directors. But that will be an incidental consequence or effect of an examination which is needed in order to enable the liquidators to perform their functions generally: see Re Brook Martin & Co.(Nominees) Ltd [1993] BCLC 328 at 335. While any effect on the civil proceedings should be taken into consideration when deciding whether to make an order for an examination, I have no doubt that in this case the need to have an examination, if the liquidators are to fulfil their functions generally, outweighs any such consideration."

29. I think it right in the circumstances that the liquidators should offer the undertaking not to question Mr Chuang on the Set Off Agreement. As regards the other matter they have offered not to question Mr Chuang, the wording of this undertaking appears to be somewhat different from the undertaking offered to Deputy Judge To, in that the present undertaking relates only to the schedule to the Sale and Purchase Agreement whereas the undertaking before the Deputy Judge related to matters leading to and arising from the Sale and Purchase Agreement, which of course includes the schedule to that agreement.

30. Leaving aside for the time being the qualification which the liquidators seek to make to that undertaking, I see no reason why they should not be restricted in their questioning of Mr Chuang in the same way as in their undertaking given to the Deputy Judge. It does seem to me that if the liquidators are to question Mr Chuang further on the Set Off Agreement or on matters leading to and arising from the Sale and Purchase Agreement, they are seeking to dot the i's and cross the t's as Mr Chuang has already given a fairly detailed affirmation in HCCW No. 253 of 2003 on his knowledge and involvement in these matters. As for the qualification that the liquidators seek to make to the undertaking in respect of the schedule to the Sale and Purchase Agreement, namely that they be allowed to question Mr Chuang for the purpose of the reconciliation of the figures in the financial records, this seems to me to be a limited qualification and is reasonably required for their investigation of their accounts of the Company. I am therefore not minded to exclude this from the inquiries of the liquidators.

31. It is submitted by Mr Smith that matters relating to the solvency of the Construction Group before its sale to Sino Glister and the extent to which the three former officers had controlled the Construction Group before and after the sale are relevant issues to the proceedings or potential proceedings that I have identified. This is not disputed by Mr Maurellet. However, I am inclined to agree with Mr Maurellet here that these matters should not be excluded from the scope of the liquidators' investigation with Mr Chuang, as they are necessary to enable the liquidators to acquire an understanding of the company's affairs and management and that is essential for the discharge of the liquidators' obligations, even though it may be an "incidental consequence" that the liquidators should gain information on issues relevant to some of the proceedings against the China Rich Group and the former directors.

32. For the above reasons, I will make an order for the examination of Mr Chuang, subject to the undertakings that should be given by the liquidators in the manner that I have indicated earlier.

33. An order for production of documents is sought against Mr Chuang, I am not minded to so order. Mr Chuang left his employment with GreaterChina in August 2002 and has had no further dealings with the China Rich Group. He has deposed that he does not have in his possession, power or custody any of the documents of Wing Fai. I have no reason to think otherwise.

34. As to costs, the liquidators should have all their costs of issuing the application up to the hearing today. Regarding the costs for the hearing today, I am minded to award only part of the costs to the liquidators. I bear in mind that it was only on 9 March 2004 that they received an offer from Mr Chuang to subject himself to examination on the basis of similar undertakings offered by the liquidators to Deputy Judge To. However, the liquidators should have expected from the hearing before the Deputy Judge on 9 February 2004 that a similar stance might well be taken by Mr Chuang. It was only at the hearing today that the liquidators offered to give an undertaking along the same lines but restricted to two out of the four matters in their previous undertaking.

35. In the circumstances, I think it fair to deprive them of part of their costs. I order two-thirds of the costs of today be borne by Mr Chuang.

Representation:

Mr Jose-Antonio Maurellet, instructed by Messrs Tanner De Witt, for the Joint & Several Liquidators

Mr Clifford Smith, SC instructed by Messrs Barlow Lyde & Gilbert, for the Respondent

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 735 OF 2002

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Before: Deputy High Court Judge To in Chambers

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D E C I S I O N

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Introduction

1.  On 25 March 2003, I made an order (the “Examination Order”) that Mr Kam Shing, Ms Kelly Cheng and Mr Robert Yip (the “Examinees”) be examined pursuant to section 221 of the Companies Ordinance in relation to the affairs of Wing Fai Construction Co Ltd (“Wing Fai”) by its liquidators (the “Liquidators”).  Pursuant to that order, the examinations were conducted before Master Woolley on 4 July and 30 July 2003.  The examination of Ms Kelly Cheng was concluded on 30 July 2003 and that of Mr Robert Yip commenced and was then adjourned to 16 February 2004.  By a summons dated 15 January 2004, the Examinees make the present application under Order 45 rule 11 for a stay of execution of the Examination Order on the ground that matters have occurred since the date of that Examination Order which rendered the examination of the Examinees or further examination oppressive.

2.  The application is supported by the affirmation of Ms Kelly Cheng dated 14 January 2004.  The principal ground relied upon by the Examinees is that since the date of the Examination Order there have come into being a number of new actions or proceedings in respect of which the Examinees are either parties or material witnesses.  In addition to these proceedings, the proceedings in High Court Action No HCA 810 of 2003 in which the writ was issued before the Examination Order has progressed to the stage where witness statements are due to be exchanged.  The Examinees are parties to that action. As against these objections, the Liquidators offered an undertaking not to question the Examinees in relation to any action commenced by Wing Fai or its Liquidators where the Examinees are parties to that action or to question the Examinees in relation to evidence that they have filed in any action continuing against companies in the China Rich Group. 

The law

3.  The law applicable to such an application has been succinctly and correctly summarised by Mr Smith, SC, for the Examinees.  This is as follows.  Order 45 rule 11 gives the Court discretion to order a stay of an order where facts or matters have come into existence since the date of the order which might have prevented the order being made: see Du Pont v ENKA [1988] RPC 497 at 509.  The order which is sought to be stayed is an examination order made under section 221 of the Companies Ordinance.  It is well established law that this section is not intended to give the liquidator advantages denied to the ordinary litigant: see Re Esal (Commodities) Ltd (No.2) [1990] BCC 708 at 722C, per Millet J and Re North Australian Territory Co (1890) 45 Ch 87 at 92-93.  Hence, the courts are reluctant to make an examination order when litigation is pending against an intended examinee: see Re Bletchley Boat Co Ltd [1974] 1 WLR 630 at 637, Re Bishopsgate Investment [1994] BCC 732 at 739E, per Hoffmann J (as he then was) and Re Atlantic Computers [1998] BCLC 200 at 208E.  The principles in Re Bletchley Boat Co Ltd have been affirmed by the House of Lords in British & Commonwealth Holdings PLC v Spicer and Oppenheim [1993] AC 426 at 439F.  It has since been consistently regarded as oppressive for the court to order an examination of potential witnesses or parties under the equivalent of section 221 where litigation has been commenced.

4.  Applying these authorities to an application for stay of an examination order, the issue the Court has to consider is this.  The examination having been ordered and begun, the burden is on the Examinees to show the continuation of the examination in the circumstances is oppressive so that had the new proceedings been taken out at the time of the application for examination, the Court would not have ordered examination of the Examinees.

Background

5.  Up until 22 April 2002, Wing Fai was a member of a group of companies (the “China Rich Group”) owned by China Rich Holdings Limited (“China Rich”).  China Rich is a Bermudan company listed on the main board of the Hong Kong Stock Exchange.  It operates through a number of subsidiaries.  The intermediate holding company for the China Rich Group is Benefit Holdings International Limited (“Benefit”).  Until 22 April 2002, China Rich had three construction companies, namely, Wing Fai, Wai Shun Construction Company Limited (“Wai Shun”) and Zhukuan Wing Fai Construction Company Limited (“Zhukuan Wing Fai”).  Wing Fai and Wai Shun were 100% owned by Benefit, while Zhukuan Wing Fai was owned as to 51% by Wing Fai.  All these three construction companies are in compulsory liquidation.  Wing Fai was sold to one of its employees in April 2002.  The Examinees were the persons in control of Wing Fai prior to the sale and were suspected to be in control of Wing Fai even after the change of ownership.  On 6 July 2002, Mr Borrelli and Mr Kennedy, both of RSM Nelson Wheeler Corporate Advisory Services Limited (“RSM”) were appointed as joint and several provisional liquidators of Wing Fai.  A winding up order was subsequently made on 9 December 2002 for Wing Fai to be compulsorily wound up.  A further order was made on 28 February 2003 confirming the appointment of Mr Borrelli and Mr Kennedy as joint and several liquidators of Wing Fai (the “Liquidators”).  On 20 July 2003, Mr Borrelli and Mr Briscoe also of RSM were appointed as liquidators of Wai Shun.  On 6 August 2003, Mr Hill and Mr Briscoe, both of RSM were appointed as liquidators of Zhukuan Wing Fai.

6.  It would be convenient at this stage to refer to Ms Kelly Cheng’s allegation that the Liquidators having obtained their appointments on the basis of a debt of just $1.4 million owed to Enfield Construction Company Limited, attempted to wind up China Rich in Bermuda and Hong Kong and then to issue winding up petitions against both Zhukuan Wing Fai and Wai Shun so as to secure RSM’s appointment as liquidators for these two companies and then embarked on eleven sets of proceedings against the China Rich Group and the Examinees, including the New Proceedings relied upon for the application to stay the examination.  Her suggestion of conspiracy or oppression is groundless as the winding up petitions against Zhukuan Wing Fai and Wai Shun were not issued by the Liquidators, but respectively by a former employee of Zhukuan Wing Fai on 13 December 2002 (who was legally aided) and by Taskforce Collections Inc on 3 September 2002.  Furthermore, the appointments of liquidators for Zhukuan Wing Fai and Wai Shun were not sought by the Liquidators but were made by the Official Receiver under the “Panel T” rotor scheme.  Even if that might be a deliberate choice of the Official Receiver, it involved no input from the Liquidators.  

7.  Since 2 August 2002, the Liquidators made numerous attempts to meet with the Examinees for the purpose of obtaining information about the affairs and property of Wing Fai.  All those attempts were unsuccessful.  The Liquidators experienced inordinate delays and refusals.  This necessitated the Liquidators making an application under section 221 of the Companies Ordinance.  The application was contested.  I granted the Examination Order on 25 March 2003 with costs against the Examinees, which have not yet been settled. 

8.  The first available hearings were set down on 4 and 30 July 2003.  Thus, it took the Liquidators a year to examine two of the three Examinees with the third having yet to be examined at all.  The examination could not be concluded on 30 July 2003 and was adjourned to a date to be fixed.  Unfortunately a date was fixed for October 2003 without consultation with the Liquidators’ diary.  That necessitated a postponement to 16 and 17 February 2004, a further delay of six months.

The new proceedings

9.  Mr Smith, SC, relied on six of the eleven sets of proceedings referred to by Ms Kelly Cheng in support of the application for stay.  The first of these is a summons issued under these proceedings in which the Liquidators sought a declaration that purported payments in the sum of $58,784,000 allegedly made by Wing Fai to Benefit constituted preference and an order that Benefit repay the said sum to the Liquidators.  Pursuant to the direction of Kwan J, the parties filed points of claim, points of defence and reply.  The proceeding has reached the stage of exchange of list of documents.  The Examinees’ main objection is that they will be witnesses for Benefit in that proceeding and it is inappropriate for the Liquidators to be given the opportunity to cross-examine the Examinees on sworn evidence pursuant to section 221 of the Companies Ordinance in relation to matters in that proceeding.  I think the undertaking by the Liquidators would adequately safeguard the interests of the Examinees in those actions.  It would not be oppressive or prejudicial to the Examinees if the examination is to continue.

10.  The second set of proceedings is an action in defamation in High Court Action No 4460 of 2003 taken out by Ms Kelly Cheng against the Liquidators in relation to Mr Kennedy’s letter of 24 November 2003 in which Mr Kennedy commented that he considered Ms Kelly Cheng had perjured herself in both the current proceedings and her section 221 examination and that she had manipulated documentation to support her various claims in the various proceedings for the purpose of defrauding creditors of Wing Fai.  Ms Kelly Cheng’s objection is that Mr Kennedy had no evidence in support of his allegation and it would be inappropriate to proceed with the examination as she is a party and witness to that action.  As against that, Mr Kennedy’s reply is that he stood by his comments and had submitted a report to the Commercial Crime Bureau of the Hong Kong Police for their further investigation and he has no interest in further examining Ms Kelly Cheng in relation to any alleged criminal offences.  Though Mr Kennedy was referring to “alleged criminal offences” and not to the defamation action, as Mr Kennedy’s allegation that Ms Kelly Cheng had committed criminal offences formed the basis of the defamation action, it is clear that Mr Kennedy has no intention to cross-examine her in relation to matters relevant to that action.  There is neither prejudice nor oppression if the examination is to continue.

11.  The third set of proceedings is an application by Benefit dated 25 September 2003 for an order that the decision of the Liquidators in rejecting the amended proof of debt of Benefit filed in the liquidation of Wing Fai for the sum of $40,000,000 to the extent of $39,000,000 be overturned and the said amended proof of debt be ordered to be admitted in full.  The Examinees’ objection is that Ms Kelly Cheng, being a director of Benefit, is a crucial witness in that application and has filed affidavit evidence for the purpose of the application.  Hence, it would be inappropriate for her to be examined under section 221.  However, the hearing of that summons has been adjourned sine die on 14 October 2003 at the request of Benefit.  In my view, the Examinees’ as well as Benefit’s interest would be adequately safeguarded by the undertaking offered by the Liquidators.

12.  The fourth set of proceedings is an application for substitution as petitioner on alleged indebtedness.  This application is related to a petition by the liquidators of Wai Shun to wind up Fitzroya Finance Company Limited (“Fitzroya”), another wholly owned subsidiary of Benefit.  Ms Kelly Cheng is a director of Fitzroya and has filed an affirmation to oppose the petition.  Whatever the merit of that set of proceedings, it has nothing to do with Wing Fai and is irrelevant for the purpose of the present application to stay.

13.  The fifth and sixth set of proceedings were respectively an action by Wing Fai against Fitzroya in respect of a loan and an application for injunction by Business Rootis Ltd, China Rich Properties Ltd and Evergreen Club Ltd against Wing Fai.  These proceedings have been concluded and are therefore have no bearing on the application to stay.

High Court Action No HCA 810 of 2003

14.  In addition to the new proceedings, Ms Kelly Cheng referred to High Court Action No. HCA 810 of 2003.  This action was commenced on 4 March 2003 before the date of the Examination Order.  In this action, the Liquidators claim against each of the Examinees for financial assistance under section 47A of the Companies Ordinance and for damages in common law regarding the disposal by the China Rich Group of its interest in Wing Fai. The Examinees’ objection is that they are parties to the action which has now progressed to the stage where witness statements are due to be exchanged.  As the Examinees will be witnesses in that action, their interests would be adequately protected by the Liquidators’ undertaking.

Conclusion

15.  The primary duty of liquidators is to put the affairs of the company in order and to carry out the liquidation in all its various aspects as effectively as possible, with as little expense as possible and with as much expedition as possible.  For that purpose, they have to get in the assets of the company for the benefit of creditors and decide whether proceedings should be instituted for the recovery of property or damages from third parties. Usually, liquidators are strangers to the affairs of a company which has become insolvent.  When they take possession of the company, books, accounts and records are often incomplete or unavailable.  Often the insolvency may be the result of misconduct or impropriety, rather than mis-management, on the part of those concerned with the management of the company who have obvious motives of being uncooperative with the liquidator’s inquiries.  Likewise, others who are wholly innocent of any wrongdoing may have motives for concealing what was done.  Very often, the information or documents sought are peculiarly within the knowledge or control of these persons, who because of their personal interest are most unlikely to be willing to cooperate with the investigation of the liquidator.  For such inquiries, time is of the essence.  The longer it takes to find out the true state of affairs of the company, the more remote is the chance of recovering the company’s assets and collecting its debts.  Hence, section 221 empowers the court to summon before it and examine any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the dealings affairs or property of the company.

16.  The Liquidators wish to examine the Examinees on a wide range of issues involving the affairs of Wing Fai.  There is no need for me to rehearse the reasons why the Examination Order was made.  Wing Fai was controlled by the Examinees at least until its sale in April 2002.  There is evidence which suggests the Examinees were still in control of Wing Fai even after the sale.  In less than three months after the sale, there were unsecured debts owing to third party unsecured creditors to the extent of $200 million.  There is evidence which suggests that documentation has been manipulated for the purpose of defrauding Wing Fai’s creditors. Thus unless these persons are examined, there is no way the Liquidators can carry out the liquidation in all its various aspects as effectively as possible, with as little expense as possible and with as much expedition as possible.

17.  The Examinees had never been co-operative with the Liquidators.  It had taken the Liquidators a year to have the opportunity of having the Examinees examined.  The examination of one of the Examinee was concluded, while that for another has just begun.  The Examinees have had notice of the upcoming hearing dates for five months.  Yet, it was until a matter of weeks before the hearing that they raised concerns about the appropriateness of the examination.  Two sets of the new proceedings relied on by the Examinees have been completed, while another set had nothing to do with the Liquidators.  The Examinees’ grounds for stay based on these sets of proceedings are not genuine.  Their application to stay bears all the hallmarks of a delaying tactic. 

18.  Of the remaining three sets of proceedings, it is true that the Examinees would be witnesses or are parties.  To that extent, it would be oppressive for them to be examined under section 221 in matters relevant to these proceedings.  However, their interests would be adequately protected by the undertaking offered by the Liquidators.  Having considered the public interest that liquidators should be able to carry out the liquidation as effectively as possible, with as little expense as possible and with as much expedition as possible and the interest of the Examinees, I consider the balance would be best struck by allowing the examination to continue upon the undertaking offered by the Liquidators.   Had all these matters been before me last March when I ordered the examination, I would nevertheless have made the order upon the undertaking of the Liquidators. Accordingly, upon the undertaking of the Liquidators, I refuse the Examinees’ application to stay. 

19.  Had the Examinees promptly complied with the Liquidators’ request for information, the section 221 application would not have been necessary.  Even if it was, the examination would have been concluded before the new proceedings were instituted and this application would never have been made.  The Examinees are trying to take double advantage of their own delay to put an end to the examination.  Their application is unmeritorious.  Accordingly, I dismiss their application for stay with costs.  I make a cost order nisi that the Examinees shall bear the costs of the Liquidators.

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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D E C I S I O N

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1. This is an application for interim payment made by the provisional liquidators who were appointed by an order made on 6 July 2002. The summons asks for interim payment to be made to the provisional liquidators limited to 80% of the invoices issued by RSM Nelson Wheeler Corporate Services Limited ("Nelson Wheeler") representing the provisional liquidators' costs, charges and expenses, together with the costs, charges and expenses of all persons retained or employed by the provisional liquidators and all other costs and expenses incurred in the course of the provisional liquidation, out of the assets of the Company, upon the undertaking by Nelson Wheeler and the provisional liquidators to repay to the administration of the Company any shortfall should the invoices be reduced on taxation.

2. It would appear that this summons is not the first time that the provisional liquidators have applied to the court for an order of this kind. I note in the correspondence file that on 4 September 2002, the solicitors for the provisional liquidators had written to the clerk of Suffiad J, who made the order appointing the provisional liquidators, seeking a similar order. That application was dismissed by Suffiad J on paper on 9 September 2002. The summons I am dealing with was issued on 23 October 2002.

3. It would appear from the supporting affidavit that the basis for making this application is that, according to the experience of the provisional liquidators, the Taxing Master's Office would take about 5 months to tax the bills submitted by the provisional liquidators. Because of this delay due to the workload in the Taxing Master's Office, the provisional liquidators have sought interim payment up to 80% of their bills.

4. I must point out that if there is this kind of delay as alleged by the provisional liquidators, there are ways and means open to them to ask the court to expedite the matter. What seems to me to be unacceptable is that even before they have submitted the bills for taxation, they ask for an order of interim payment. I was referred by Mr De Witt, who appeared for the provisional liquidators, to the order for interim payment made in Re Peregrine Investment Holdings Limited. It was submitted that this case provided a precedent of allowing interim payment to be made to the provisional liquidators on account of their fees, upon their undertaking to repay any shortfall if the bills should be reduced on taxation.

5. As I have pointed out to Mr De Witt, in the Peregrine matter, the provisional liquidators were kept out of their fees for a much longer period. This case is not authority for the practice adopted here, which is to ask for interim payment even before a bill is submitted to the court for taxation.

6. I should add that in the supporting affidavit, the bills of the provisional liquidators were not exhibited, I was only handed those bills dated 31 July 2002 and 31 August 2002 by Mr De Witt this morning. I am of the view that it would be wholly inappropriate for an order for interim payment to be made in this case and I dismiss the application.

7. I make no order as to the costs of this application.

Representation:

Mr I DeWitt, of Messrs Tanner De Witt, for the Provisional Liquidators.

The Official Receiver, attendance excused.