RE HAWKINS DEVELOPMENT LTD

HCCW 215/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 215 OF 2007

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DECISION

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1.  This is a summons issued by Hawkins Development Limited (“the Company”) for an order that the amount the petitioner paid into court as security for costs be paid out to the Company in part satisfaction of the costs payable under the order dismissing the winding-up petition.

2.  I will first state the relevant facts in chronological order.

3.  On 17 October 2007, an order was made requiring the petitioner to pay into court $200,000 as security for the Company’s costs in the petition. On 16 December 2008, the court made a further order for security for costs in the Company’s favour of $500,000. The petitioner, which is a company incorporated in the British Virgin Islands, had complied with those orders.

4.  The petition was heard in August 2009 and it was dismissed on 21 August 2009. The petitioner was ordered to pay costs to the Company on an indemnity basis with certificate for two counsel.

5.  On 26 August 2009, the Company’s solicitors wrote to the petitioner’s solicitors asking if the petitioner would consent to an order for payment out of $700,000 in part satisfaction of the Company’s costs. The petitioner’s solicitors replied on 29 August 2009 stating that the petitioner was obtaining counsel’s opinion in respect of an appeal against the judgment dismissing the petition.

6.  No notice of appeal was filed by the petitioner subsequently against the judgment.

7.  On 8 September 2009, the Company issued the present summons, purportedly under Order 62 rule 9A of the Rules of the High Court. That rule was repealed and substituted by a new provision as part of the Civil Justice Reform. The Company’s solicitors informed the court by letter on 10 September 2009 it would invoke the inherent jurisdiction of the court in seeking the order. The hearing date of 11 September was vacated and the application was adjourned to today for argument.

8.  In the meantime, on 18 September 2009, the Company filed a bill of costs prepared by a law costs draftsman. The total amount of fees and disbursements amounted to $1,312,812.

9.  On 16 October 2009, the law costs draftsman engaged by the petitioner filed a list of objections to the Company’s bill of costs. The total amount objected to came up to $544,000. Assuming all the objections were upheld on taxation, the petitioner would still be liable to pay the Company $768,812, in excess of the total amount paid into court of $700,000.

10.  On 16 November 2009, the Company filed an application to set down its bill of costs for taxation. This was placed before the Registrar on 1 December 2009, for a direction to be made if there should be a provisional taxation without a hearing under Order 62 rule 21B(1), or an oral taxation hearing under rule 21C(1). The Registrar directed there should be a provisional taxation. Accordingly, a notice of setting down was issued on 1 December 2009 that the bill of costs was set down for provisional taxation before a Master on 3 February 2010 at 10 a.m. with 1 day reserved.

11.  The petitioner’s stance is that it should not have to make any payment towards costs until the taxation process is completed, with the provisional taxation before the taxing master in February 2010 or at a subsequent oral taxation hearing if one is applied for by a party under rule 21B(3), notwithstanding the amount of costs not in dispute exceeds the amount paid into court for security for costs, and there is ready cash to make a substantial part payment to avoid further accrual of interest at judgment rate.

12.  The only reason given by the petitioner for taking that position is that the court has no inherent jurisdiction to order it to do so, it being common ground there is no provision in the Rules of the High Court giving power to the court to make an order for interim payment of costs in proceedings that are not an interlocutory application.

13.  Leaving aside the question whether the court has power to make the order, I see no good reason to deprive the Company of the settlement in part of its costs until completion of the taxation process, when it is clear the undisputed amount would exceed the sums paid into court to meet the liability for costs.

14.  Mr Enzo Chow, who appeared for the petitioner in this application, submitted the court should have no inherent jurisdiction to make the order sought because:

(1)  inherent jurisdiction of the court is confined to making good procedural lacunae, there is no lacuna under the new provisions in Order 62 rules 21 to 21C of the Rules of the High Court; and

(2)  inherent jurisdiction may supplement but cannot be used to lay down procedure which is contrary to or inconsistent with a valid rule of the High Court, to order interim payment in the present circumstances is contrary to the express terms of Order 62 rules 21 to 21C.

15.  I do not understand Miss Elizabeth Cheung, who appeared for the Company, to have disputed the general principles embodied in Mr Chow’s submissions in (1) and (2). Of course, the Company does not accept there is no lacuna in the provisions of the Rules of the High Court or that the order sought is contrary to express provisions in the Rules.

16.  I have been referred by the parties to the influential article of Sir Jack I.H. Jacobs entitled “The Inherent Jurisdiction of the Court” [1970] CLP 23. Mr. Chow also cited the subsequent article of M.S. Dockray entitled “The Inherent Jurisdiction to Regulate Civil Proceedings” (1997) 113 LQR 120.

17.  It is not necessary to set out extracts cited by counsel from these articles, as the general principles on the nature of inherent jurisdiction and the limits of inherent jurisdiction are not in dispute. Inherent jurisdiction may be exercised to control the process of the court when it is just and equitable to do so, even in respect of matters which are regulated by statute or by rules of court, so long as this could be done without contravening any statutory provision.

18.  The old Order 62 rule 9A provided for the power of the court to make an interim payment of costs where the application or resistance to the application is frivolous or vexatious, or for any other reason the court in the circumstances of the case considers just. This provision was repealed and replaced by a new provision. Three changes were made. Firstly, this power applies to interlocutory applications only. Secondly, the power to make provisional summary assessments was widened and made more general, to enable the court to make such assessments where appropriate, for instance, where this is likely to save costs. Thirdly, the old provision was on the assumption there will be a full taxation at the end. Under the new provision, provisional summary assessments are made on the basis a taxation should not follow unless a significant difference of award is thought likely to result, with costs sanctions to discourage challenges unless they are likely to yield proportionate benefit to the challenger (Final Report of the Chief Justice’s Working Party on Civil Justice Reform, para. 545).

19.  The new Order 62 rule 21 provides for the mode of commencing proceedings for taxation. The party who has commenced taxation proceedings may apply to the taxing master to set down the taxation under rule 21A. Under rule 21B, the taxing master is given the discretion and power to tax the bill of costs without a hearing and make an order nisi as to the amount of costs allowed, unless the taxation is set down for hearing. Any party dissatisfied with the award is entitled to require an oral taxation hearing, but subject to possible costs sanctions if he fails to do materially better at the hearing. Under rule 21C, the taxing master also has power to set down for hearing the taxation of the whole or part of the bill of costs, if he is satisfied there is good reason to do so.

20.  In this situation, the Registrar has directed there should be a provisional taxation by a taxing master under rule 21B(1).

21.  I should also mention provisions are made in rule 22 to deal with delay in the service of a notice of commencement of taxation or in proceeding with taxation.

22.  Mr Chow submitted the provisions in Order 62 rules 21 to 21C are designed to tackle delay in taxation, that the procedure on taxation would be expedited, and there is no procedural lacuna for which inherent jurisdiction has to be exercised.

23.  I do not agree with the submission there is no procedural lacuna.

24.  There is a procedural lacuna in that the power to make provisional summary assessments under rule 9A applies only to interlocutory applications, and there is no power under rules 21 to 21C to make an interim payment of costs which in the opinion of the court approximates the costs that would be allowed on taxation at the provisional taxation or at a taxation hearing.

25.  I also do not agree with Mr Chow’s submission the order sought is contrary to the express terms in Order 62 rules 21 to 21C. I have come to the view there is a lacuna. I am satisfied the order sought by the Company does not contravene the provisions made in Order 62 in wording or in spirit.

26.  I do not think the limits to the exercise of inherent jurisdiction are made out as submitted by Mr. Chow. I do not however wish it to be thought that this inherent power may be exercised without restriction to order interim payment of costs in a broad range of situations. In my view, the court should act with circumspection in the exercise of this inherent power, as detailed and precise provisions have been made to deal with taxation of costs in Order 62. The inherent jurisdiction should only be exercised to deal with cases that genuinely come within a procedural lacuna, and that the circumstances are such that would merit intervention of the court to do justice between the parties or prevent abuse.

27.  In the present case, I am satisfied the criteria for the exercise of inherent jurisdiction are met. I order the total amount paid into court by the petitioner as security for costs, with all the accrued interest, be paid out to the Company in part satisfaction of the costs payable under the order of this court made on 21 August 2009.

28.  I order the petitioner to pay the Company the costs of this application, assessed on a gross sum basis at $27,000.

HCCW 215/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 215 OF 2007

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J U D G M E N T

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The petition and the statutory demand

1.  This is a creditor’s petition to wind up Hawkins Development Limited 順勤發展有限公司 (“the Company”) presented by Walford International Holdings Inc. (“Walford”) on the ground that the Company is unable to pay its debts. The Company was incorporated in Hong Kong. Walford was incorporated in the British Virgin Islands.

2.  The petition is founded on a debt of HK$29,970,540.92. On 27 April 2007, Walford’s solicitors served a demand on the Company demanding payment of this debt under section 178(1)(a) of the Companies Ordinance, Cap. 32. It was stated that the debt was the outstanding principal sums together with accrued interest in respect of the indebtedness under the loan period from 1998 to 2005. The principal sums amounted to HK$22,846,008.59. Interest at the contractual rate was six per cent per annum.

3.  The petition was presented on 18 May 2007, one day before the three-week period stipulated by section 178(1)(a) to comply with the statutory demand had expired. It is common ground that as this statutory requirement was not met, Walford may not rely on the deeming provision that the Company is unable to pay its debts by virtue of the non-compliance with the demand (Re Lympne Investments Ltd. [1972] 1 WLR 523 at 526B to D).

4.  Mr Harris, SC, who appeared for Walford, asked the court to infer that the Company is insolvent as the debt which is not substantially disputed has remained unpaid (Ah Feng International Trading Ltd. v. Honour Link International Development Ltd. [1999] 3 HKC 116 at 123D to E; Re AuraSound Speakers Ltd. [2004] 3 HKLRD 502 at 515G to I, para. 51). That is a course open to me if I should find no bona fide dispute of the petition debt on substantial grounds. It is well established the onus of establishing this falls on the Company.

5.  Mr Coleman, SC, who appeared for the Company, submitted that the petition should be dismissed as an abuse of process. It was contended that the petition is redolent of bad faith and improper purposes. At the lowest, it is highly dubious whether any of the components making up the alleged indebtedness are real debts incurred by the Company at all. Further, even if the debts were genuine, the loan agreements were entered into without the authority of the Company and the loans are unenforceable as Walford is not a licensed money lender, unless the court is prepared to exercise its discretion under section 23 of the Money Lenders Ordinance, Cap. 163.

The approach in assessing evidence adduced

6.  The Company asserted that Walford’s claims are fictitious, and the documents adduced by Walford in support of its case are fabrications. These are serious allegations.

7.  Mr Harris referred the court to Lord Nicholls’ opinion in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586 D to H, in which it was held that the civil standard requiring proof on a balance of probabilities continues to apply where an allegation is made of criminal, or similarly serious, misconduct, but 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.

8.  Re H is concerned with the standard of proof to discharge the legal burden borne by a party. In this instance, the Company is not required to establish positively that Walford’s claims are fictitious. It would suffice if it could be shown there is substance in its allegations that may support such an inference. Mr Harris submitted the Re H principle is nonetheless applicable by analogy.

9.  In Nina Kung v. Wong Din Shin (2005) 8 HKCFAR 387, the Court of Final Appeal applied the principle in Re H by analogy where the court was concerned with the discharge of an evidential burden not a legal burden. Ribeiro PJ had this to say at para. 184:

“Nevertheless, in a case like the present, the Re H principle is applicable by analogy, operating not as defining a standard of proof, but imposing a standard of cogency which must be satisfied before evidence is considered sufficient to raise a case (here of forgery and of an associated conspiracy) for consideration by the court. When weighing up and assessing the probabilities in relation to the evidence adduced by the respondent as evidence of forgery, the court must bear in mind the seriousness of the misconduct alleged, recognizing that it carries an inherent degree of improbability."

10.  Mr Coleman has not submitted this approach is inapplicable in the present proceedings.

11.  I will adopt the same approach in weighing up and assessing the probabilities in relation to the evidence adduced in these proceedings, bearing in mind the seriousness of the misconduct alleged by the Company. The evidence must be sufficiently cogent for the court to come to a view that a dispute of substance is raised on the allegations of the Company.

12.  It is also pertinent to have regard to another part of the judgment in Nina Kung v. Wong Din Shin. Lord Scott said in para. 626 at 561B to C that evidence of propensity must go into the balance. So if an allegation of fraud is made against a person with a record of involvement in forgery or fraud, “the strength of the other evidence necessary to satisfy the balance of probability test is obviously less than would otherwise be required.”

14.  With that, I proceed to consider the evidence.

The affirmations filed

15.  Walford’s evidence is contained in three affirmations of Chu Ka Wah (“Chu”) and six affirmations of Leung Ka Ho (“Leung”). Chu is the general manager of Walford. Leung was appointed a director in April 2007, about the time of the statutory demand.

16.  The affirmations filed by the Company were made by Wong Kam Sang (“Wong”) and its solicitor Yeung Kwok Leung Leslie. Wong made three affirmations and the solicitor nine. I will have more to say about Wong’s role in the Company.

The Company and previous litigation

17.  The Company has a chequered history. Its ownership and control had changed not a few times and it has been the subject of much litigation in the past five years.

18.  The Company was incorporated on 17 January 1989, with an authorised capital of HK$10,000 divided into 10,000 shares of HK$1 each. It was acquired by Wong in 1996 as a corporate vehicle to hold 80% interest of a joint venture company incorporated in the PRC known as Liaoyang Shunfeng Iron and Steel Company Limited遼陽順鋒鋼鐵有限公司(“Shunfeng”). The remaining 20% in Shunfeng has all along been held by a partner in the PRC.

19.  The Company is at all times an investment holding company. It did not carry on business activity by itself.

20.  Shunfeng carries on the business of an iron-mining operation in the Liaoning Province. It owned six mines. Wong was appointed its legal representative and chairman of the board of directors.

21.  Wong was appointed as one of the four first directors of the Company in September 1989. When he acquired the Company in 1996, the other three directors resigned and Wong’s wife Madam Wong Lai Ching and his assistant Madam Liu Yong were appointed in their place.

22.  Prior to March 2000, 100 shares in the Company were issued. 80 shares were held by Madam Wong Lai Ching and 20 shares were held by Madam Liu Yong. Both held their shares on trust for Wong.

23.  In March 2000, all the 100 shares were transferred, 74 shares to Zhao Kai Investment Ltd (“Zhao Kai Investment”), one share to Yeung Wing Keung (formerly known as Yeung Kang Lam, also known as Wilson Yeung; “Yeung”), and the remaining 25 shares to Trengei Development Limited (“Trengei”), which is a company incorporated in the British Virgin Islands owned and controlled by Wong. The circumstances under which these transfers were made gave rise to litigation in HCA No. 1653 of 2004 (“HCA 1653/04”), which was taken on appeal in CACV No. 166 of 2006 (“CACV 166/06”). Wong claimed that he was lured by Yeung to transfer the 75% shareholding to Zhao Kai Investment and Yeung to hold as trustees for him so that Yeung could facilitate the listing of the shares of the Company on the Growth Enterprise Market Board of The Stock Exchange of Hong Kong Limited.

24.  According to the documents filed in the Companies Registry, Yeung was appointed a director on 18 January 1998, he resigned on 30 April 1999 and was re-appointed on 15 September 1999. The appointments of Yeung in 1998 and 1999 were most probably backdated, as it is apparent from the judgments in HCA 1653/04 and CACV 166/06 that Yeung had no involvement in the Company prior to March 2000. The Court of Appeal mentioned that the instruments of transfer of the 75 shares to Zhao Kai Investment and Yeung and related board minutes were backdated to January 1998, presumably to facilitate the listing of the shares of the Company, and an untrue statement on the transfer was submitted to the Stamp Duty Office stating that the Company had no trading and assets since incorporation.

25.  Apart from Yeung, his wife Madam Yau Wai Fan (“Madam Yau”) and his sister Madam Kan Sui Wan (“Madam Kan”) were purportedly appointed as directors of the Company on 18 January 1998. Madam Wong Lai Ching purportedly resigned as a director on the same day. These appointments and resignation were again most probably backdated, as in the case of Yeung.

26.  Wong fell out with Yeung in 2004 and demanded the return of the 75 shares in the Company. When his demand was not met, Wong and others issued the writ against Zhao Kai Investment, Yeung and others in HCA 1653/04 in October 2004 seeking the transfer of the 75 shares back to him. Zhao Kai Investment made a counterclaim against Wong for repayment of a loan of HK$4.2 million.

27.  On 14 July 2005, a board meeting and an extraordinary general meeting of the Company were purportedly held by which Madam Kan was invited to subscribe for shares in the Company and to take over the operation of the Company as its major shareholder and the board was authorised to approve the allotment of 9,900 shares in the Company to her at par. A return of allotment of 9,900 shares to Madam Kan, which was signed by Madam Yau, was filed on 18 July 2005.

28.  On 25 July 2005, Madam Kan transferred all her 9,900 shares to Sunny Growth Enterprises Group Limited (“Sunny Growth”) at par value. Sunny Growth is a company incorporated in the British Virgin Islands. According to the evidence given by Chan Che Shing (“Chan”) at the trial in HCA No. 2036 of 2005 (“HCA 2036/05”), Sunny Growth was at all times fully owned by Chan and his son. However, Yeung had testified earlier at the trial in HCA 1653/04 that his brother Yang Fuqiang had an interest in Sunny Growth, see the judgment of Lam J in HCA 2036/05, paras. 100 and 108. Lam J was not satisfied that Yeung or his associates had no interest in Sunny Growth.

29.  On 25 August 2005, Yeung’s son and daughter were appointed directors of the Company.

30.  On 30 September 2005, Yeung resigned as a director of the Company. A bankruptcy order was made against him on 3 October 2005.

31.  On 17 October 2005, Wong and Trengei brought proceedings againt Yeung, Madam Kan, Zhao Kai Investment, Sunny Growth and others in HCA 2036/05, seeking relief that the allotment of the 9,900 shares be set aside for procedural irregularity and on substantive grounds that the allotment was made with the ulterior motive of defeating his claim in HCA 1653/04 by diluting his shareholdings in the Company. This action was also taken on appeal in CACV Nos. 131 and 133 of 2007.

32.  On 28 October 2005, Wong and Madam Liu Yong were removed as directors of the Company.

33.  On 1 November 2005, Joy Wave Investment Limited (“Joy Wave”) and Century World Corporation Limited (“Century World”) were appointed directors of the Company. Both are companies owned and controlled by Chan and his family members.

34.  On 11 April 2006, Deputy Judge L. Chan gave judgment in favour of Wong and other plaintiffs in HCA 1653/04. Yeung did not take part in the proceedings as he was a bankrupt but gave evidence for the other defendants. He was the only witness for the defendants. I will later set out the pertinent findings in that case.

35.  On 24 August 2006, the Company, which was then under the control of Yeung and Chan and their family members, issued a writ against Wong in HCA No. 1849 of 2006, claiming damages of over RMB 20 million being monies misappropriated from Shunfeng. After a defence was filed by Wong, no further steps were taken in this action.

36.  On 23 November 2006, Chan presented a petition to wind up the Company in HCCW No. 621 of 2006 alleging a debt to him of over HK$38 million under a Chinese loan agreement in December 2005 (which was after HCA 2036/05 was brought to set aside the allotment of shares) made between Sunny Growth, the Company and him. After an affirmation of Wong was filed in opposition disputing if the loans were genuinely made to the Company, Chan filed an affirmation in February 2007 stating that he decided to withdraw his amended petition as he wanted to conduct further investigation into the internal affairs of the Company and reserved his right to file a fresh winding-up petition. His petition was withdrawn and dismissed with costs to the Company on 12 February 2007.

37.  On 15 January 2007, Chan issued a writ in HCA No. 94 of 2007 against Chow Cheuk Lap, the senior partner of the firm of solicitors acting for Wong in various proceedings, claiming damages in the region of RMB 109 million for negligent misrepresentation of a legal opinion rendered by Mr Chow regarding the disputes of the shareholdings of the Company and the judgment in HCA 1653/04. The writ was never served and Chan discontinued the action on 30 January 2007 with costs to Mr Chow.

38.  On 31 January 2007, judgment was given in CACV 166/06 dismissing the appeal of the defendants in HCA 1653/04.

39.  HCA 2036/05 was tried before Lam J in March 2007 and judgment was given in favour of Wong and Trengei on 11 April 2007 setting aside the allotment of the 9,900 shares. The plaintiffs succeeded on procedural irregularity and on substantive grounds. It was held there was no commercial justification for the allotment of shares to Madam Kan and Sunny Growth was not a bona fide investor in the Company without notice. Lam J found an irresistible inference that the allotment was part of an overall effort by Yeung to prevent Wong from getting back control of the Company. In dismissing the appeal against Lam J’s judgment, the Court of Appeal stated in the Reasons for Judgment on 9 May 2008 that the notice of appeal in itself demonstrated the lack of merits and the appeals should never have been brought.

40.  On 16 April 2007, Line Power Limited and Trengei, which are companies beneficially owned by Wong, passed a shareholders’ resolution of the Company to remove as directors Yeung’s wife, sister, daughter and son, Joy Wave and Century World with immediate effect. Wong and Madam Liu Yong were re-appointed as directors with immediate effect. The company secretary was replaced. On 17 April 2007, Wong’s solicitors wrote to the former company secretary of the Company, which was owned by Yeung and his wife, demanding delivery up of all the documents of the Company.

41.  Wong was removed as the legal representative of Shunfeng in December 2005 but was able to resume control in December 2006. He discovered that a substantial number of documents and materials of Shunfeng including its books and accounts and bank statements were removed from its office premises. On 19 and 20 April 2007, the solicitors of the Company wrote to Chan, Yeung and their family members seeking delivery up of all the documents belonging to Shunfeng and the Company.

42.  The statutory demand in this petition was issued on 27 April 2007.

43.  To complete the picture about the changes in ownership and control of the Company, I should mention that according to the annual return filed by the Company dated 17 January 2009, Trengei and Line Power Limited had transferred all their shares in the Company on 12 September 2008 to Lead Success (Hong Kong) Limited. It is not known if the shares were transferred in a sale and purchase. Wong resigned as a director. Madam Liu Yong has remained as a director and two new directors have been appointed.

Walford

44.  Walford did not feature in any of the previous proceedings involving the Company as mentioned earlier. Wong claimed he has never heard of this entity prior to the receipt of the statutory demand. According to the affirmations filed on behalf of Walford, Yeung was the only named individual acting on behalf of the Company in all the dealings with Walford. Chu mentioned in his 3^rd affirmation that on a few occasions, there were “other representatives of the Company” appointed by Yeung to receive the loan amounts from Walford’s agent in Shenzhen, but Chu did not identify them by name or description. It has not been suggested that Wong should have known about Walford’s existence before the receipt of the statutory demand.

45.  Walford has no known place of business in Hong Kong. Until Leung was appointed as a director at about the time of the statutory demand, it had only one director Madam Chan Yuk Sim, who was the sole shareholder. According to the 2^ndaffirmation of Chu made in January 2008, Walford has “one issued share which was owned by Madam Chan at all material times”. Chu asserted Madam Chan Yuk Sim “had no dealings with the Company or Wong.”

46.  According to Chu, Walford was used as a vehicle for making loans to the Company. In 2000, due to the shortage of capital for the operations of Shunfeng, Yeung raised money from “a group of investors” who were satisfied with Shunfeng’s ability to repay debts. It was claimed it was “impractical” for each investor to enter into individual agreement with the Company for lending facilities of an unspecified amount of loans with different terms, so they used Walford as the contracting party to enter into a written lending facility agreement with the Company. Chu stated in his 1^st affirmation Yeung “was also one of those investors”. Chu also mentioned the way the lending facility worked was that whenever the Company needed money, it would make requests of loans from him, he would then ask “[Walford’s] shareholders or those investors” to prepare the money. This would seem to suggest Yeung was one of those who had lent money to the Company through Walford.

47.  In the 4^th affirmation of Leung filed in January 2009 in support of Walford’s application for time to comply with an order to give security for costs in these proceedings, he stated that he and one George Bai are the only directors of Walford. He exhibited the minutes of an annual general meeting of Walford in February 2006 and notices issued to all the shareholders in January 2009 showing there are eight shareholders of Walford. Other than his name and that of Chu, the given names of the remaining six shareholders were redacted and only their surnames were shown in the documents exhibited. Leung (who was apparently not a shareholder according to the minutes of 2006) and Chu, two persons who had made affirmations for Walford, are shareholders in 2009, although this was not disclosed in their previous affirmations. None of the shareholders to whom the 2009 notices were sent was surnamed Chan. It is not known if these shareholders hold shares in their own names or whether Madam Chan Yuk Sim or someone else holds the shares on trust for them. Leung also mentioned that a shareholder surnamed Yum, whose shareholding was more than 25% of the shares in Walford, was in the process of selling his shares to a buyer with completion expected in February 2009.

48.  Leung said the shareholders of Walford are private investors who wish to keep their identities confidential.

49.  In Leung’s 1^st affirmation, he gave as his address a property in Ma On Shan, which was owned by Yang Fuqiang. Chu explained that Leung was allowed to live in the property before it was put on sale as Leung’s father is a good friend of Yang Fuqiang.

Documents adduced by Walford in support of its claim

50.  Within a week the statutory demand was received, the Company’s solicitors wrote to Walford’s solicitors on 4 May 2007 stating that no demand for repayment of the alleged loan had been made before and requesting for all relevant documents in support of the loan, including documents evidencing the remittance of money to and receipt by the Company. No reply to this letter was given. The petition was presented on 18 May.

51.  Supporting documents of the petition debt were first adduced in Leung’s 2^nd affirmation filed on 24 July 2007 in reply to Wong’s 1^st affirmation in opposition. He produced these documents:

(1) six loan agreements in Chinese made between Walford as lender and the Company as borrower

One loan agreement was made for each year from 2000 to 2005. All were signed by Yeung on behalf of the Company in January of each year. The format, type font, and terms were identical, save as to the amount of the loan expected to be advanced for each period and the dates of the loan period. The loan period was from 1 January of each year to 31 December of the same year. The loan facility was stated to be required for the regular expenses and all operation capital of the Company and was to be drawn upon as and when required upon three days’ advance notice to Walford. Interest was to be calculated on the actual principal borrowed at six per cent per annum.

(2) six confirmation letters in Chinese from Walford to the Company and six letters in reply from the Company

Again, the terms of the six confirmation letters and the letters in reply were identical, except for particulars such as amounts, dates and document reference. The confirmation letters were dated in early January of each year commencing from 2001 and the replies were dated in mid January. The type font of these documents was the same as the loan agreements. The reply letters of the Company from 2001 to 2005 were signed by Yeung. The last reply in 2006 would appear to have been signed by Madam Kan, Yeung having ceased to be a director of the Company by then.

In each confirmation letter, Walford referred to the loan agreement of the particular year and stated the total amount of the principal loan owed by the Company for that year according to the calculation of Walford’s accountant. Walford notified the Company the total amount of the debt including interest and asked the Company to verify the amount and provide a written acknowledgment if there was no mistake within 14 days. The replies, which were apparently drafted by Walford for the Company’s signature, stated that upon verification of the person-in-charge of the Company, the outstanding principal and interest for each year was exactly the same as calculated by Walford.

(3) a confirmation for audit purposes

This document dated 27 November 2006 was issued by William M.L. Ho & Co. Ltd. (“William Ho”), certified public accountants, who were appointed as the Company’s first auditors on 1 September 2005. It was addressed to Walford and Walford had signed confirming that as found by William Ho, the balance due to Walford from the Company as at 31 December 2005 was HK$22,846,008.59.

52.  Upon considering Leung’s 2^nd affirmation, the Company’s solicitors immediately wrote to Walford’s solicitors on 25 July 2007 pointing out that only the loan agreements from 2000 and 2005 were produced whereas the statutory demand stated that the loan period was from 1998 to 2005 and sought clarification. On 3 August 2007, Walford’s solicitors provided these further documents to the Company’s solicitors:

(4) a loan agreement in January 2000, a confirmation letter and a reply letter in January 2001

The loan agreement stated that during 1998 to 1999, the Company was required to pay HK$6,900, as the business registration fee, operating licence and miscellaneous expenses and the agreement stated that the amount borrowed as at the time of the loan agreement in January 2000 was HK$7,648.24. The seven terms set out in this loan agreement were practically identical to those in the six loan agreements produced earlier. The confirmation letter and reply letter in 2001 were in respect of this advance and were largely similar to the set of confirmation and reply letters produced earlier. All three documents were signed by Yeung on behalf of the Company.

53.  In Chu’s 1^st affirmation filed on 27 November 2007, he mentioned that in respect of the loans made by Walford to the Company, the Company had issued to Walford a series of “Lending Notes” from time to time in the standard form of the Company. He did not exhibit these documents to his 1^st affirmation. It was not until he made his 3^rd affirmation on 12 May 2008 that he produced these documents, with the explanation that he did not realise they were not produced to his first affirmation until he had a discussion with Leung in May 2008:

(5) 66 loan receipts issued by the Company from January 2000 to June 2005

The loan receipts were for the total amount of HK$11,881,678.19 (equivalent to RMB 12,387,400). They were in identical format. Each stated that the Company required capital for the use of the current month’s expenses and it borrowed and received a cash loan in the amount as specified from Walford through a named agent of the latter. The loan receipt was signed by the Company as the borrower and Walford as the lender. Wong observed that the loan receipts were all signed on behalf of the Company by Yeung, his wife or his sister. This is not disputed by Walford.

54.  The same signatory on behalf of Walford signed all five items of documents mentioned above, a total of 81 documents. This unidentified individual was not Leung or Chu, as their signatures were different. Presumably, this person was not Madam Chan Yuk Sim either, as she “had no dealings with the Company or Wong”.

55.  Apart from the loan receipts, Chu has produced documents in his 1^st affirmation giving a breakdown of the petition debt.

Composition of the petition debt

56.  The principal sum of the petition debt being HK$22,846,008.59 was made up of these items according to a summary prepared by Chu:

(1) Consultancy fee of HK$10,044,000

The term “consultancy fee” was borrowed by Chu from Yeung. The total amount of HK$10,044,000 was made up of HK$139,500 a month for 72 months from January 2000 to December 2005. The Company gave a notice to Walford each year setting out its estimate of the average monthly expenses of the Company. The five expense notices were produced of amounts varying from HK$139,500 to HK$142,000. The notices were apparently signed by Yeung or his wife. The expenses included office rent and salaries. Chu understood from Yeung the “consultancy fee” was used to settle the liabilities of Shunfeng in the Mainland on behalf of the Company and the names of the staff stated on the expense notices were the staff of Shunfeng. There was also produced a debit note from Walford to the Company dated 31 December 2001 for “monthly consultant fee” of HK$139,500 and it was signed by the same unidentified individual on behalf of Walford.

(2) Consultancy fee of HK$5 million to Lee Tiong Hock

According to Chu, Shenyang Li Ang Investment Consultant Company Limited瀋陽利昂投資咨詢有限公司 (“Li Ang”) was the consultant of the Company and Li Ang requested the Company to pay HK$5 million as “contribution” to Shunfeng. Walford through Yeung paid the HK$5 million to Li Ang on behalf of the Company. Hence, the Company owed Walford HK$5 million.

In support of this item, Chu produced a letter from Li Ang to the Company dated 2 April 2000 stating that the Company was required to pay “initial deposit” of HK$5 million according to the agreement signed on the same date with Li Ang and the Company was requested to pay the sum by cheque to a Hong Kong resident Lee Tiong Hock. Chu also produced a bank statement of Yeung showing that HK$5 million was deposited on 12 April and a cheque was paid out on the same day. There was a copy cheque issued by Yeung on 10 April 2000 from his said personal account in favour of Lee Tiong Hock and a receipt signed by Robert Lee of the cheque on the same day. Lee Tiong Hock and Robert Lee would appear to be the same person.

(3) Accountancy fee paid of HK$1 million

Chu stated that Walford lent the Company HK$1 million as accountancy fees for the year 2000 and receipt of this amount was confirmed by the accountant firm Henny Wee & Co. (“Henny Wee”). He produced a debit note of Henny Wee in which it stated that partial payment in the total sum of HK$1 million was received on 22 April 2000 and 20 October 2000.

The Company’s solicitors have obtained further documents from Henny Wee regarding this partial payment. Payment was made by three cheques. Two were personal cheques of Yeung totalling HK$500,000 issued on 20 April 2000. The other cheque for HK$500,000 dated 7 October 2000 was drawn on the account of Winasia International Holdings Limited (“Winasia”). Walford did not claim to have any interest or connection with Winasia.

(4) Advance to Wong of HK$4.2 million

Chu produced two shareholder’s loan agreements in Chinese signed by Wong dated 14 and 21 July 2000 for the total loan amount of HK$4.2 million advanced to Wong. He claimed that these agreements clearly stated Wong “represented the Company to borrow the loan in the sum of HK$4,200,000 from [Walford].” These agreements did not contain any such statement. They stated Wong was one of the shareholders of the Company and he was borrowing the sums as stated from the Company. The borrower according to these agreements was not the Company and the lender was not Walford.

The sums that made up HK$4.2 million were paid by a remittance to an entity in Shunde City in Guangdong Province known as順華鋁幕墻制品有限公司, and by three cheques payable to one Wu Lui Hung (“Wu”). The remittance was made by a Hong Kong company bearing a similar name to the PRC entity known as Sun Wah Aluminium Windows & Curtain Wall Co. Ltd. (“Sun Wah”). Sun Wah would appear to be connected with Yeung as one of the cheques payable to Wu was issued by Sun Wah and it was signed by Yeung. The other two cheques to Wu were the personal cheques of Yeung.

Four receipts were also produced, signed by Wong, his assistant Madam Liu Yong and Wu. The receipts signed by Madam Liu and Wu acknowledged that the monies would be passed on to Wong for the payment of salaries of employees of Shunfeng.

(5) Salaries paid of HK$845,766 and

(6) Other expenses paid of HK$1,756,242.59

No documents in support of these two items were produced by Walford. Chu merely stated Walford lent such sums to the Company based on the Company’s information and receipts shown to Walford and Walford settled the sums on the Company’s behalf. He asserted all the receipts were kept by the Company and the Company should have records of the same.

57.  I have mentioned earlier the letters sent by the Company’s solicitors in April 2007 after Wong regained control of the Company to various parties seeking delivery up of all documents and records of the Company and Shunfeng. To complete the picture, I should add that on 22 May 2007, the Company, Wong and others brought proceedings against Yeung, Century World, Joy Wave and four others in HCA No. 1083 of 2007 (“HCA 1083/07”) seeking delivery up of all books and documents of the Company and Shunfeng and other relief. A summons for an interlocutory injunction for delivery up of the documents was issued in June 2007 and was adjourned for argument. Chan claimed that in February and March 2007, he had delivered audit reports of the Company, bank statements of the Company, account records of the Company including the relevant vouchers and the common seal of the Company to a deputy director of Shunfeng at the request of the Mainland partner of Shunfeng, to assist with investigation by the Public Security Bureau, and he did not instruct his staff to make copies of the documents delivered up.

58.  It is readily apparent from Chu’s evidence that Walford’s loans to the Company were for the payment of operating and other expenses of Walford and Shunfeng during 2000 to 2005. If Walford’s case had rested there, and there is no other evidence, I would not have thought that the available evidence is sufficiently cogent for consideration by the court of the serious allegation made by the Company that the loans were bogus.

59.  Mr Coleman submitted forcefully that the situation before this court is one where Walford, whose name has never been mentioned during all the years of hostile litigation between Yeung and Wong, suddenly appeared out of nowhere to petition for the winding up of the Company for an indebtedness on the basis of documents signed by Yeung and his associates on behalf of the Company when they were found in previous litigation to be in wrongful control. The provision of the expenses of the Company and Shunfeng had been canvassed in evidence in previous litigation. Not only did Yeung not mention Walford, his evidence was contrary to the case now put forward by Walford. Evidence of propensity must go into the balance in assessing and weighing the evidence now adduced before this court.

Evidence and findings in previous litigation

60.  First and foremost, most of the evidence given by Yeung and Chan in HCA 1653/04 and HCA 2036/05 was rejected. Yeung was a defendant in each. He did not give evidence in the latter action and chose to sit in the public gallery while his wife who had a sketchy picture based on what she heard from him gave evidence and this was criticised by Lam J. It is notable in the two judgments that the defendants were roundly criticised by the court for not calling witnesses who could and should have testified on pertinent issues in the trials.

61.  Deputy Judge Chan formed a poor view of Yeung as a witness. Yeung claimed 75% of the shares of the Company were transferred to him and Zhao Kai Investment to hold on trust for an investor called Zhao Ahping (“Zhao”). He said in cross-examination Zhao was merely representing “a group of investors” of which his elder brother Yang Fuqiang was a member. Later he said Zhao had emigrated in 2003 and had given everything to Yang Fuqiang. The judge doubted if Zhao had existed at all.

62.  It is not clear if the “group of investors” mentioned by Yeung was the same “group of investors” who used Walford as a vehicle for making loans to the Company according to Chu’s affirmation filed in the present proceedings. Whereas Yeung said in evidence that Yang Fuqiang was a member of the group of investors, Chu said in his affirmation Yeung was one of investors in the group that Chu referred to.

63.  Yeung’s case in HCA 1653/04 was that in return for the transfer of 75% shares in the Company to Zhao, Zhao assumed the funding obligations for the mining operation of Shunfeng, and of the listing of the Company in the GEM Board, and for the advancement of a loan of HK$4.2 million to Wong. These were the same purposes for which Walford had purportedly made advances to the Company and Shunfeng through Yeung.

64.  Yeung gave evidence he told Wong that Wong had to pay no less than HK$5 million as listing expenses and these expenses might exceed HK$10 million if there should be complications. He said if Wong was not able to raise these expenses, there might be investors who would be interested in entering into a joint venture with him and in that event Wong had to transfer a substantial part of his shareholdings in the Company to the investors for the intended listing. At Wong’s request, Yeung found Zhao as an investor and Zhao asked him not to disclose his identity to Wong. Zhao agreed to advance to Wong a loan of HK$4.2 million to enable Wong to pay the wages in arrears of workers of Shunfeng, who had threatened to go on strike. Zhao also agreed to be responsible for paying the daily operation costs of Shunfeng after the transfer of the shares. Wong accepted the offer of Zhao and the share transfers were made.

65.  However, Yeung did not adduce a single piece of paper showing the involvement of or payment by Zhao of the reimbursement of listing expenses. He admitted that despite having agreed to do so, Zhao had not paid any money to Shunfeng for whatever purpose.

66.  Yeung tried to explain this by saying that after the making of the agreement to facilitate the listing of shares, Shunfeng had produced sufficient income to fund its operation, thus no money was required to be provided by Zhao. This is very different from the evidence now produced by Walford by which advances were made to the Company, and most of the supporting loan documents were signed by Yeung on the Company’s behalf.

67.  Deputy Judge Chan did not accept Yeung’s evidence that Shunfeng had no need for finance, having considered the accounts of Shunfeng produced by Wong. The judge found this to be a “blatant lie” fabricated by Yeung as he could not explain why Zhao had injected no money into Shunfeng for years despite Yeung’s allegation that Zhao had assumed funding obligation. Yeung held a degree in MBA in an American University and had controlled two companies listed on the Main Board of The Stock Exchange of Hong Kong Limited.

68.  The evidence now produced by Walford – the loan agreements, the 66 loan receipts, the confirmation letters and replies, the audit confirmation – would have been a good, if not complete, answer to the doubt cast on Yeung’s allegation about the funding obligation. Instead of telling a blatant lie there was no need of funding, Yeung could have produced the documents now produced by Walford to support his case that he was instrumental in obtaining funding for the operations of the Company and Shunfeng, if those documents were in existence. Yeung and his associates were in control of the Company at the time of the trial in April 2006. They would have access to the documents of the Company, if there were in existence such documents of the Company in the loan transactions it had with Walford as alleged.

69.  The judge found on the evidence that only a few sums totalling slightly over HK$1 million were incurred by Yeung personally for the listing. He accepted Wong’s evidence that Yeung had promised to be responsible for all listing expenses, and Yeung was to be remunerated by 1% of the shares of the Company if the listing should be successful.

70.  As the judge did not elaborate on the details regarding the expenses of over HK$1 million incurred by Yeung personally for the listing, I cannot be absolutely sure if these expenses had included the HK$1 million paid to Henny Wee by the two personal cheques of Yeung and a cheque of Winsasia. I note that one of the debit notes of Henny Wee addressed to Yeung subsequently provided to the Company’s solicitors in December 2007 was for the sum of HK$1,601,236 and that was for professional services rendered in reviewing the books and records of Shunfeng, preparing its accounts, and carrying out the audit of its accounts in accordance with generally accepted accounting principles and auditing standards in Hong Kong for the years of 1997 to 1999. A deposit of HK$500,000 was stated to have been paid for this debit note. I think it is probable that the accounting and auditing work done in relation to Shunfeng was for the listing of the Company, otherwise there was no need to ensure that generally accepted standards in Hong Kong were to be met for this Mainland entity.

71.  If the accounting fee paid to Henny Wee of HK$1 million should form part of the listing expenses, Yeung would be personally responsible for them, as held by the court. This finding is inconsistent with and contrary to the case now advanced by Walford, that it had advanced money to the Company to pay the accountancy fee of Henny Wee.

72.  As for the HK$5 million paid to Robert Lee, Yeung had produced an agreement he entered into on the Company’s behalf with Robert Lee on 28 February 2000, by which the Company agreed to pay Robert Lee HK$5 million to engage a reputable valuer in the Mainland to complete the report of the revaluation of Shunfeng and in the event the valuation was found satisfactory. In cross-examination, Yeung changed his evidence and said the sum was not paid to Robert Lee for any valuation but was for him to negotiate a discount of certain fees for some design work. The judge remarked that not a sheet of paper was produced to prove what Robert Lee had done to earn HK$5 million, notwithstanding eight affirmations made by Yeung. The court declined to accept that the HK$5 million paid to Robert Lee had anything to do with the listing of the Company’s shares.

73.  Yeung’s different versions as to why HK$5 million was paid to Robert Lee, which were all rejected by the court, are again different from Chu’s affirmation in the present proceedings as to the purpose of the payment allegedly made through Yeung.

74.  Regarding the loan of HK$4.2 million, this was the subject of the counterclaim of Zhao Kai Investment against Wong in HCA 1653/04. Wong’s evidence was that this was a loan to him from Yeung. Yeung gave evidence he advanced the loan on behalf of Zhao. The court doubted the existence of Zhao and there was no evidence to support the claim of Zhao Kai Investment so its counterclaim was dismissed. Yeung had never mentioned the loan was advanced to the Company, as opposed to Wong personally, nor did he say the lender was some entity other than Zhao or Zhao Kai Investment. The two shareholder’s agreements agreement signed by Wong as borrower in July 2000 produced in the present proceedings do not support Walford’s case that it was the lender.

75.  It is pertinent to have regard to the fact that a year after the commencement of HCA 1653/04, and before the action was tried, Yeung and his associates went through with an allotment and transfer of shares designed to prevent Wong from getting back control of the Company, even if he should succeed in his claim in HCA 1653/04. As found by Lam J in HCA 2036/05, notice of the shareholders’ meeting to consider the allotment of shares was purportedly given to Wong by sending him a blank piece of paper by post, and this was part of the steps in the overall plan of Yeung to apply for the public listing of the Company and to strip Wong of his control.

76.  Yeung or his associates caused the Company to enter into a loan agreement with Chan and Sunny Growth on 3 December 2005 by which loan capital of US$5 million was agreed to be injected into the Company. Chan claimed to have injected substantial funds into the Company on various dates since June 2006 (which was after judgment was given in HCA 1653/04) and demanded for repayment of his loan on 2 November 2006. He presented a winding-up petition against the Company on 23 November 2006, which was withdrawn as mentioned earlier.

77.  Chan’s evidence was held to be even more unreliable than Yeung’s wife. Lam J found it incredible that a bona fide investor would have continued to make capital injection into the Company as Chan had allegedly done, given the outcome of the judgment in HCA 1653/04 in April 2006. He found it would make more sense if the funds were coming from a source connected with Yeung.

78.  The present proceedings is the second attempt to wind up the Company, on the basis of yet another set of loan agreements Yeung had caused the Company to enter into, with a lender whose name was not mentioned in prior litigation in all the evidence given of the funding or capital injected into the Company at various times. With such history, there is every reason why the documentary evidence adduced by Walford should not be taken at face value.

Other evidence in the present proceedings

79.  But that is not all. There are other unsatisfactory features about the evidence in the present proceedings.

80.  Firstly, there was the method of providing funding to the Company for the operation expenses of Shunfeng every month from January 2000 to June 2005 as evidenced by the 66 loan receipts. According to Chu, sums in cash in RMB were brought by Walford’s agent to China every month and lent to the Company for the monthly expenses of the Company and Shunfeng in China. The minimum amount brought by courier was RMB 145,000. The maximum amount was RMB 350,000. The reason for this arrangement was because the Company did not have any bank account in Hong Kong or China. On each occasion, it was usually Yeung who would contact Chu stating what amount was proposed to be drawn down from Walford’s facility. Chu would arrange for the cash to be delivered by Walford’s agent directly to Yeung on most occasions, and to other representatives as appointed by Yeung on a few occasions, in Shenzhen.

81.  Although the Company might not have opened a bank account (this would seem to conflict with Chan’s evidence in HCA 1083/07 as Chan stated he had delivered up the bank statements of the Company to the Mainland partner of Shunfeng), it is clear from the evidence that Yeung had bank accounts at his disposal, whether personal or otherwise. There were also occasions in which Yeung had, by remittance or by cheques drawn on various bank accounts, made various payments purportedly for the purpose of the Company, such as the HK$5 million paid to Robert Lee, the HK$1 million to Henny Wee, and a total of HK$4.2 million to Wong.

82.  I do not understand why the monthly expenses allegedly lent to the Company could not have been paid into a designated bank account of Yeung but was given to Yeung in cash in Shenzhen. It could not have been a safe or reliable way to carry such a substantial amount of RMB to Shenzhen each month. Further, nothing is known about the bank account from which the money was withdrawn. A very substantial part of the petition debt, to the tune of over HK$11 million, spanning over a period of five years, was not supported by any document emanating from a bank.

83.  Secondly, Mr Coleman directed my attention to the date of the confirmation for audit purposes issued by William Ho and signed by Walford. On this same date, being 27 November 2006, all the audited financial statements of the Company, commencing from its incorporation on 17 January 1989 down to 31 December 2005, were issued and signed at one go by Century World and Joy Wave, the companies controlled by Chan, on behalf of the Company. In the ordinary course of things, it would be unlikely that a confirmation for audit purpose would be signed and returned to the auditors so quickly for the auditors’ report, the directors’ report and the accounts to be finalised and signed all within the same day.

84.  The Company lodged a complaint against William Ho to the Hong Kong Institute of Certified Public Accountants in December 2007 that the auditors did not perform adequate audit work in relation to the liability of HK$22,946,008 included in the financial statements for the year ended 31 December 2005. After investigation, the Institute replied in November 2008 that “while a case has been shown against [William Ho], it is considered not of sufficient gravity to warrant further investigation or disciplinary action”. The Institute decided not to pursue the complaint further and issued a disapproval letter to William Ho advising them to exercise due care and to have proper regard to the legal and professional standards expected of them in conducting their professional work.

85.  In the circumstances, I feel unable to attach much probative value to the audited accounts, which are heavily qualified, with a disclaimer by the auditors that they are unable to form an opinion whether the financial statements give a true and fair view of the Company’s affairs as at the end of each of the accounting periods.

86.  Thirdly, those of the documents that purported to evidence transactions between the Company and Walford prior to March 2000 would seem dubious. As the court had held in HCA 1653/04, Yeung had no involvement in the Company prior to March 2000. Yeung purportedly entered into two loan agreements on behalf of the Company with Walford both dated 3 January 2000, one for facilities to the extent of HK$13 million commencing 1 January 2000, and the other for a loan of HK$7,648.24. It is not apparent why two separate loan agreements, containing practically identical terms, should be prepared for two agreements dated the same date.

87.  Loan receipts were issued by the Company dated 5 January 2000 and 5 February 2000 for cash advances of RMB 150,000 and RMB 155,000 purportedly delivered by two different agents of Walford to, presumably, Yeung in Shenzhen. If these documents were not back-dated, explanation is required why Walford should be lending money to the Company prior to Yeung’s involvement with the Company.

88.  As for the loan of HK$7,648.24, according to Chu’s 2^nd affirmation, this came from HK$6,900 advanced by Walford to Yeung for setting up the Company in or about 1998 and was treated as a loan to the Company. Again, explanation is required why Walford should be lending money to Yeung way back in 1998 for the purpose of the Company, whether it was for setting up as alleged by Chu, or for paying business registration fee and other expenses as stated in the loan agreement.

If the debts were genuine

89.  Mr Harris submitted there was clearly a need for funds to support the operations of Shunfeng. He queried how the Company could manage to finance the mining operation of Shunfeng from 2000 and 2005 without external funding and pointed out Wong has adduced no evidence on this in the present proceedings. I am mindful of the criticism by Court of Appeal in CACV 166/06 that the document produced by Wong to support his allegation he had made capital injections into Shunfeng of RMB 3.3 million in 2003 and of RMB 4.14 million in 2004 was of “extremely doubtful reliability”.

90.  Mr Harris reasoned that if Yeung was engineering control of the Company and Shunfeng because the mining enterprise of the latter had value, it is not surprising that Yeung was arranging sources of finance which allowed the mining operations to continue.

91.  I have little reason to doubt the need for funding. The question is whether the financing was provided by Walford as claimed. Walford would have no locus to present the winding-up petition against the Company if it is not a creditor. It is not sufficient to establish that the Company must have owed money to someone.

92.  The identities of the group of investors that had provided funding to the Company and Shunfeng have been kept opaque deliberately from day one, so much so that the court in HCA 1653/04 doubted the existence of Zhao, who was alleged by Yeung to represent a group of investors. In HCA 2036/05, the court was of the view that the monies injected by Chan into the Company was likely to have come from a source connected with Yeung. It is not known who was behind this source of funding. Equally little is known of the persons who held interests in Walford, alleged for the first time to be a corporate vehicle used by a group of investors to make loans to the Company. No documents emanating from a bank have been produced in the present proceedings showing the actual payment of funds by this group of investors behind Walford, other than some personal cheques of Yeung, and cheques or remittance by entities apparently connected with Yeung being Winasia and Sun Wah.

93.  In the special circumstances of this case, and because of the Yeung factor, I am satisfied on the evidence before me a cogent case commensurate with the gravity of the allegation is made out by the Company so that a dispute of substance is raised if the debts of Walford were indeed genuine. I have heeded the warning about drawing inferences on the basis of circumstantial evidence. For present purpose, it is not necessary to draw definite inferences or come to firm conclusions as to liability. It would suffice if the Company has established a bona fide dispute on substantial grounds that the debts claimed were not genuine.

94.  For this reason alone, the petition of Walford should be dismissed. Walford should have pursued its claims against the Company by a writ action.

95.  The Company raised two other grounds of opposition, on the supposition that the debts of Walford were genuine. I will consider them as well.

If Yeung had ostensible authority

96.  It was accepted on behalf of Walford that Yeung, as a director, did not have actual authority, whether express or implied, to borrow money from Walford on the Company’s behalf. There were no directors’ meetings held in connection with any of the loan agreements and no board resolutions authorising any of the loans or Yeung to sign the loan agreements or the use by Yeung alone of the Company seal. That leaves ostensible authority. There was also no dispute that a director does not automatically have ostensible authority to borrow money on behalf of a company.

97.  For the argument of ostensible authority to succeed, the four conditions stated in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. [1964] 2 QB 480 at 506 would need to be satisfied:

“(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) that such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.”

98.  The issues here turned on the first three requirements and whether there was anything to put Walford on enquiry so that it was not entitled to presume that Yeung had authority to borrow money for the Company.

99.  Mr Harris contended that a representation was made in this instance, and it was made by conduct, by the board of directors permitting Yeung to act in the management or conduct of the Company’s business, thereby representing to all persons dealing with Yeung that he had authority to enter on behalf of the Company “contracts of a kind which an agent authorised to do acts of the kind which he [was] in fact permitted to do usually enters into in the ordinary course of such business” (Freeman & Lockyer, at 505). Here the Company needed external finance and the other directors must have been aware that some form of external funding had been obtained. Mr Harris submitted it is disingenuous of the Company to suggest that it did not permit Yeung to do what it must have known was necessary.

100.  According to the 2^nd affirmation of Chu, Yeung, who was known as a very successful businessman in Hong Kong, showed him and the unidentified investors some documents in support of his fund raising plan and these included some company documents and public documents from the Companies Registry showing “his ownership and control over the Company”. Further, Yeung offered them “business incentives” and introduced them to government officials and local businessmen in the Mainland. And the investors took those matters into account before they agreed to lend money to the Company through Walford.

101.  Of the documents shown to the investors by Yeung, Chu exhibited an appraisal report of a firm of accountants in the Mainland on the mines of Shunfeng and a geological report. Chu did not specify what were the company and public documents showing Yeung’s ownership and control over the Company. Yeung merely held one share in the Company and was a director. Zhao Kai Investment held 74 shares. According to Yeung’s evidence in HCA 1653/04, Zhao Kai Investment was incorporated in the British Virgin Islands and was owned by Yang Fuqiang, not Yeung.

102.  Chu made a repeated assertion in his 2^nd affirmation that “[Walford] was given to know that [Yeung] was in fact the majority owner and the person in control of the Company.” But he did not give details as to who on behalf of Walford had that understanding or how Walford was able to have that understanding.

103.  There is no evidence from Yeung in the present proceedings in support of the contentions made by counsel. Chu’s evidence on how Walford came to lend to the Company came nowhere near to establishing a case of ostensible authority of Yeung or that those acting on behalf of Walford had relied on Yeung’s ostensible authority.

104.  It is not necessary for the Company to establish that Walford’s case on ostensible authority of Yeung is bound to fail. It would suffice if a bona fide dispute is raised on this on substantial grounds. I hold that this requirement is satisfied.

If the loans were caught by the Money Lenders Ordinance

105.  Walford was and is not a licensed money lender. If it should come within the definition of “money lender” in Cap. 163 and the loans were not exempted loans, the loans are not recoverable by virtue of section 23 unless the court is prepared to exercise its discretion under the proviso to section 23 to allow enforcement of the loan agreements to the extent that the court considers equitable.

106.  In section 2 of Cap. 163, a “money lender” is defined to mean “every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business, but does not include … (b) as respects a loan specified in Part 2 of Schedule 1, any person who makes such loan”. Of the “exempted loans” provided for in Part 2 of Schedule 1, paragraph 5 reads as follows: “A loan made by a company or a firm or individual whose ordinary business does not primarily or mainly involve the lending of money, in the ordinary course of that business.”

107.  Walford was a corporate vehicle used for the purpose of making loans to the Company, according to the evidence of Chu. On the face of it, Walford was engaged in the business of making loans. Mr Harris submitted that the loans to the Company should be regarded as exempted by virtue of paragraph 5, as Walford did not have an ordinary business that primarily or mainly involved the lending of money, since it was just a single purpose vehicle for the purpose of making loans to only one borrower. It seems to me seriously arguable whether a company established for the purpose of lending money to just one borrower over a five-year period could be regarded as having an ordinary business that involved primarily or mainly the lending of money.

108.  Mr Harris further submitted that even if the loans were not exempted, it is inherently highly unlikely that a trial judge would refuse to apply the proviso in section 23 and hold that no part of the loans should be recoverable.

109.  Mr Coleman submitted there must be a triable issue if the proviso under section 23 would go in favour of Walford, and for that to be determined, the trial judge would need to take into account all the circumstances which could be only be known after a trial and the usual consequences of discovery and evidence (Cheung Chow v. Cheung Ng Sheung Steven, CACV No. 119 of 1993, 24 November 1993).

110.  I am inclined to agree with Mr Coleman. On the assumption that the debts were genuine, it does not seem to me the court has been given a full account of the circumstances in which the loans were made. Further, nothing is known as to the source of the funds by which the loans were made, other than the personal cheques of Yeung, and cheques and remittance by entities apparently connected with Yeung.

111.  I hold that the Company has raised a bona fide and serious dispute on the money lender argument as well.

Conclusion and orders

112.  For the above reasons, I dismiss the winding-up petition of Walford.

113.  The Company seeks an order that its costs in these proceedings should be paid by Walford on an indemnity basis, on the ground that the petition was presented when Walford was well aware of a dispute of its debts on substantial grounds so that the petition was an abuse of the process of the court (Re Hyundai Engineering & Construction Co. Ltd. [2002] 2 HKLRD 71).

114.  As I have come to the view there is a substantial dispute if the debts of Walford were genuine, it is difficult to escape the conclusion that the petition was presented in the knowledge of a serious dispute of the debts. I make an order nisi that Walford is to pay the costs of the Company in this petition on an indemnity basis, with a certificate for two counsel.

HCCW 215/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 215 OF 2007

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D E C I S I O N

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1.  This is an application by a petitioner in a winding-up petition for an extension of time to comply with an order I made on 16 December 2008 to provide security for costs.  The petitioner, Walford International Holdings Inc., was ordered to pay into court $500,000 within28 days of the order, or withinsuch further time as the court may for special reasons allow, and in the event such security is not provided withinthe time stipulated, the petition do stand dismissed withoutfurther order.

2.  The present summons for extension of time was filed on 12 January 2009.  The petitioner seeks an order that time be extended to 9 March 2009.

3.  On 13 January 2009, I granted an interim stay of the order made on 16 December 2008 pending the determination of the present summons, on the undertaking of a director of the petitioner, Leung Ka Ho, to provide a personal guarantee as security for the Company’s costs up to $250,000 until 9 March 2009.

4.  This application is opposed by Hawkins Development Limited (“the Company”), the subject of the winding-up petition.

5.  What I need to consider here is whether special reasons are made out for further time to be granted pursuant to the order of 16 December.

6.  Mr Paul Lam for the Company referred me to Pine Enterprises Limited v Cyber Strategy Limited, CACV No. 116 of 2008, 12 December 2008, and emphasised the need for a party seeking to justify an extension of time to provide security for costs for “special reasons” to adduce sufficient evidence, see paragraphs 16 to 18 of the judgment.  He criticised the evidence adduced on the petitioner’s behalf and submitted that it is insufficient, lacking in particulars, with no documents in support in a number of respects.

7.  The special reasons relied on by the petitioner are as follows:

(1) there was a resolution of the petitioner’s shareholders passed on 8 February 2006 that for expenses of the petitioner over $200,000, the directors of the petitioner must obtain the approval of shareholders making up 75% of the entire shareholding of the petitioner before payment is to be made by the directors; and

(2) one of the shareholders of the petitioner, Mr Yum, whose shareholding is more than 25%, is in the process of selling his shares to a buyer, completion is to take place on 16 February 2009.

8.  In support of these special reasons, Leung Ka Ho has filed evidence to depose to these matters:

(1) He was informed of the order of 16 December on 18 December 2008 and he had a telephone conference with the other director, George Bai, who resides in the United Kingdom, on 2 January 2009.  He was reminded by Mr Bai of the shareholders’ resolution aforesaid.  It was agreed by the two of them that he should issue formal notices to all the shareholders before 3 January 2009 to obtain their approval to provide security for costs at $500,000.  The minutes of the annual general meeting of the shareholders of the petitioner held on 8 February 2006 and the board meeting by telephone conference on 2 January 2009 were produced.

(2) On 3 January 2009, he sent out the notices to 8 shareholders, one being himself.  The 8 notices were produced, but the names of 6 shareholders were covered up in the exhibits leaving only the surnames. On the same day, only he and another shareholder Chu Ka Wah returned the reply slip to the notice, giving approval to pay the security for costs.  Their shareholding is less than 15%.

(3) On 8 January 2009, he sent further notices to the shareholders who had not responded, to chase for a reply. These notices were produced.

(4) On 12, 14 and 16 January 2009, reply slips were received from 3 other shareholders and they were exhibited.  One of them, a Mr Tong, refused to give consent to pay security for costs.  The other 2 shareholders agreed.  The total percentage of shares those who has approved has gone up to 37%.

(5) The purchaser of Mr Yum’s shareholding would meet with Chu Ka Wah on 12 February 2009 to obtain information about the present proceedings before the completion of the purchase of Mr Yum’s shareholding on 16 February 2009.

9.  Leung Ka Ho has offered to provide a personal guarantee to pay the Company’s costs to the extent of $250,000 up to 9 March 2009, when it is envisaged that all the required approvals from shareholders could be obtained.  The petitioner’s solicitors have prepared a draft guarantee for this purpose.  He has produced a bank statement of his account in China showing a credit balance of RMB 250,000 as of 30 January 2009.  Further, he has offered to deposit $100,000 within 5 days hereof with the petitioner’s solicitors to hold as stakeholder until 9 March 2009 for the purpose of covering the Company’s costs if the petitioner is unable to pay $500,000 into court as security, subject to the condition that his total personal liability does not exceed $250,000.

10.  Unless there is good reason to think that the matters alleged in Leung Ka Ho’s evidence are not credible, I am inclined to think there are special reasons here to warrant the exercise of my discretion to extend time.

11.  Mr Lam for the Company submitted that the shareholders’ resolution is dubious, as in an earlier affirmation made by Chu Ka Wah on the petitioner’s behalf, Chu had deposed that Madam Chan Yuk Sim was the sole shareholder of the petitioner holding 1 share issued in 1995.  No shareholder surnamed Chan was among those to whom Leung Ka Ho sent out the notices on 3 January 2009.  Chu, who purportedly chaired the shareholders’ meeting of the petitioner on 8 February 2006, did not mention in his affirmation there were 8 shareholders.  Leung Ka Ho did not mention in his affirmations if these shareholders are legal registered shareholders, or whether some one is holding the share or shares on their behalf.  He merely asserted that the shareholders are not fictitious but are private investors who wish to keep their identities confidential.  He chose not to explain the apparent discrepancy between his affirmations and the affirmation of Chu and the shareholding structure of the petitioner.  Mr Robin D’souza informed the court on instructions today that the shareholders referred to in the affirmations of Leung Ka Ho are beneficial shareholders.

12.  The evidence as to the shareholding in the petitioner is not satisfactory.  This could be due to a misguided desire to keep confidential the identities of the real investors in this company incorporated in the British Virgin Islands.  On balance, I am inclined to think that there are a number of individuals who hold beneficial interest in the share or shares of the petitioner.  On the available evidence, I am not prepared to conclude that all the documentary evidence adduced by Leung Ka Ho should be rejected and his evidence disregarded as incredible.  I appreciate the position at law that a resolution of these individuals, who would appear not to be registered shareholders of the petitioner, may not impose a valid restriction on the authority of the directors of the petitioner.  If the directors are forced by circumstances to make a payment for security of costs to preserve the petitioner’s right to litigate, they may be required to shoulder personal liability pursuant to the resolution.  This may be harsh on the directors.

13.  I should strike a balance between what would be oppressive to the petitioner and what would give the Company a sufficient measure of security.  I decide to exercise my discretion to extend time.

14.  Extension of time is given to comply with the order to give security to 9 March 2009 on these conditions:

(1) Leung Ka Ho is to execute the draft personal guarantee exhibited to his 2^nd affirmation within 3 days hereof; and

(2) he is to pay $100,000 to the petitioner's solicitors as stakeholder within 5 days hereof, to be applied pursuant to the terms of his personal guarantee, provided that his maximum liability thereunder does not exceed HK$250,000.

15.  I order the costs of this application be to the Company in any event.

HCCW 215/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 215 OF 2007

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D E C I S I O N

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1.  This is an application of Hawkins Development Limited (“the Company”) for security for costs to be provided by the petitioner in a winding-up petition.

2.  There is no issue that the petitioner Walford International Holdings Inc., being a company incorporated in the British Virgin Islands and not registered under Part XI of the Companies Ordinance, Cap. 32 with no known business activities, should provide security for costs.

3.  The present summons issued on 10 October 2008 is the second time that the Company seeks security in this petition.  In a previous application taken out in August 2007, an order was made by consent on 17 October 2007 that the petitioner was to provide security of $200,000.  This amount was paid into court on 29 October 2007.

4.  The Company in its supporting affirmation seeks further security of about $1.7 million, on the basis that the estimated costs of the entire proceedings would amount to $1.9 million and giving credit to $200,000 already paid.  Since then, on 4 December 2008, the Company has revised its estimate, taking into account the criticisms made to the skeleton bill of costs in the petitioner’s affirmation in opposition, and adjusted its estimated costs of the entire proceedings to $1 million.  The Company now seeks further security of $800,000.

5.  The petitioner has filed evidence opposing the application on the basis that the previous assessment of a reasonable amount of security for costs agreed by the parties at $200,000 should still hold good, and that all of the work done or estimated to be done in the new skeleton bill of costs prepared for this application had already been covered in the first skeleton bill prepared for the application last year.  Mr Stanley Siu who appeared for the petitioner made much of the fact that in the first skeleton bill, the total amount of costs was estimated at $440,000 only.

6.  I do not think the petitioner’s stance is a realistic position.  The matters raised in dispute in the petition are now much wider as compared to the state of affairs in October 2007.  The hearing time of the petition fixed at 3 hours in November 2007 was revised to one day in February 2008 and then to two days in September 2008.  I do not regard this as a run-of-the-mill creditor’s petition with relatively straightforward issues.

7.  I am inclined to think additional security should be provided.  The question is how much.  The petitioner has offered to pay additional security of $100,000 and contended that this should be sufficient security.

8.  The further security I am going to order should be sufficient security.  It is not meant to be complete security.  My estimate is made on the basis of costs that could reasonably be expected to be allowed on taxation on a party and party basis of work done by suitable counsel and solicitors reasonably competent to handle the litigation for the Company.

9.  I would take a broad-brush approach, and not scrutinise the skeleton bill item by item.

10.  On the Company’s present estimate, a rough breakdown of the total costs of $1 million is as follows:

(1)  past costs and disbursements up to September 2008 – $400,000;

(2)  estimated solicitors’ costs from September 2008 to conclusion of proceedings – $100,000 to $150,000; and

(3)  estimated counsel’s fees from September 2008 to conclusion of proceedings – $450,000 to $500,000.

11.  I would estimate the total costs at $700,000.  So the additional security I would order the petitioner to provide is $500,000.

12.  I order all proceedings in this petition to be stayed except for the purpose of the petitioner providing further security for costs of the Company in this petition by making a payment into court of $500,000 within 28 days hereof, or within such further time as the court may for special reasons allow, and in the event such further security is not provided within the time stipulated, the petition do stand dismissed without further order, with costs to be taxed and paid by the petitioner to the Company.

13.  I order the costs of this application up to 4 December 2008 (when the Company informed the petitioner’s solicitors by letter that the Company would accept additional security of $800,000) be in the cause of the petition.

14.  For the costs of the hearing today, I order costs to be paid by the petitioner to the Company in any event.