THE JOINT AND SEVERAL LIQUIDATORS OF DAYS INTERNATIONAL LTD (IN LIQUIDATION) v. MAHESH NANIK DAYARAM

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2025] HKCFI 4661

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

____________________

____________________

____________________

AND

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

____________________

____________________

____________________

(HEARD TOGETHER)

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D E C I S I O N

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Introduction

1.  The Respondent seeks a stay of execution of judgements dated 22 November 2024 (“PrincipalJudgement”), 24 January 2025 and 1 April 2025 (collectively “Judgments”) pending determination of the Respondent’s appeal by Notice of Appeal dated 29 April 2025.  The Respondent and Applicant were represented by Toby Brown and David Chen respectively.

Background

2.  The background to the applications is comprehensively explained in the Judgments.

Legal Principles

3.  The principles that guide the Court in determining an application for a stay are not controversial.  Counsel summarised them as follows in their Skeletons:

“In India Oversea Bank v Seabulk Systems Inc & Ors [2023] 4 HKLRD125, the Court of Appeal recited (at §23) the well-known principles set out in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84, per Ma J (as he then was) at §§9-10 (not provided):

a. The applicant is required to demonstrate a “good reason” for a stay of execution.

b. Generally speaking, the existence of merely an arguable appeal cannot by itself amount to a sufficient reason to justify a stay. It is the minimum requirement before a court would even begin to consider granting a stay.

c. In other words, if the court is not convinced that there exist arguable grounds of appeal, no stay will be granted however exceptional the circumstances may otherwise be justifying a stay of execution.

d. On the other hand, the existence of a strong appeal or a strong likelihood of success will usually by itself enable a stay to be granted because this would constitute a good reason for a stay.

e. In most cases, where the court is faced with simply the existence of an arguable appeal (i.e. one with reasonable prospects of success), it becomes necessary for the applicant to provide additional reasons as to why a stay is justified.

f. Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant.

g. In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.”

4.  In essence, the applicant must demonstrate a “good reason” for a stay of execution.  This means:

(1)  The existence of a strong appeal (i.e. strong likelihood of success); or

(2)  An arguable appeal coupled with additional reasons, e.g. the appeal would be rendered nugatory, or there will be a serious deleterious effect without a stay.

It follows that the existence of an arguable appeal is the minimum threshold to justify a stay of execution.[1]

The Argument

5.  The principal issue in the appeal is described in [41] of the Principal Judgment.  In short whether any order for payment pursuant to section 275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32, is limited to the amount of the increase in an insolvent company’s deficit following the occurrence of the matters for which the Respondent is found liable.  The Principal Judgment follows the approach of Kannan Ramesh J in Tendcare Medical Group Holdings Pte Ltd v Gong Ruizhong[2], namely, “once fraudulent conduct and the casual link between the conduct and the debts and other liabilities of the company are established, it seems to me that the liability ought to follow to the full extent of such and other liabilities.”  There is no authority in Hong Kong considering this issue.  I accept there is an arguable appeal on this point of law, but not a strong one.  However, it does not follow that because the court’s understanding of the application of section 275 was incorrect the quantification was wrong.  This would depend on whether the full amount of the debts and other liabilities of the subject companies exceeded the deficit and there are grounds for finding that a proportion of the amount adjudged to be payable can be characterised as punitive rather than compensatory and results in either creditors (possibly shareholders depending on the financial state of the company in question) receiving more than they would have received had the fraud not taken place, i.e., more than the loss caused.  This is said to be relevant because some of the payments obtained from banks as a result of the fraud were paid back to the banks.

6.  It seems to me that if section 275 operates as the Respondent contends, given the breadth of the language of section 275 (without any limitation of liability, for all or any of the debts or other liabilities of the company….), it is a matter relevant to the exercise of the court’s discretion under section 275 and in practice operates as possible defence to an applicant’s quantification.  In other words, an applicant can claim all the debts and liabilities of a company.  If a respondent to such a claim believes that an order for all debts and liabilities incurred because of a fraud perpetrated on creditors will result in payment of a sum, which exceeds the loss caused by the fraud, it is for a respondent not just to assert it but prove it, or at least adduce evidence that suggests that the applicant’s quantification is inappropriate.  The Respondent did not do this.  I was alive to the argument, but the Respondent proved nothing, which in my view justified the court quantifying the amount to be paid by him differently even if the Respondent is correct in his contention that the court should have regard to the extent to which the debts and liabilities exceed the loss caused.  The applicant does not at the outset (as the Respondent’s argument seems to require) have to prove the total debts and liabilities exceed the loss.

7.  The other grounds of appeal are no stronger.  Grounds 7 to 11 concern a preliminary issue summons.  To the extent that the grounds challenge my decision not to deal with the preliminary issues until the trial, they seek to overturn a case management decision and in my view are without any merit.  I decline leave to appeal.  This, however, seems largely academic because the substantive issues sought to be raised on a preliminary basis were dealt with at the trial.  It does not seem to me that leave is required to appeal them. In case I am wrong about that, I will grant leave to appeal.

Detriment

8.  The Respondent asserts that he cannot pay the judgment and that if it is enforced, he will be bankrupted.  I accept that this is likely.  The Respondent has adduced a contract of employment dated 1 April 2025 with TV Anywhere Ghana Ltd.  This will involve him being appointed a director of a local subsidiary.  His salary is US$120,000 per year.  He has also signed a Transaction Advisory Engagement dated 25 April 2025 to raise US$3 million in capital, with the Respondent being entitled to 5% of the sum raised as a transactions fee: potentially US$150,000.  He says that if he is bankrupted, he will by virtue of section 480 of the Companies Ordinance, Cap. 622, have to resign as a director and lose his job.  He does not address in his evidence the consequences for the Transaction Advisory Engagement.  Given his circumstances he will, he suggests, have great difficulty in obtaining comparable alternative employment.

9.  It seems to me incumbent on a party seeking a stay in circumstances such as the present to give a full and candid explanation of his financial position including job opportunities; which was the principle which guided Lok Jin Re Lee Chee Ho[3]:

“21. It is well-established that if a debtor’s reason for a stay pending appeal is that the levying of execution would have a serious deleterious effect on him, the court will require good and cogent evidence, such as production of documentary proof, in support of such a contention (see: Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 §9, Ma J (as he then was); and Leo Innotech (Holding) Ltd v Lee Shung Chi, HCA 474/2015, unrep, 13 October 2016, §4).”

10.  In the present case the Respondent should have filed evidence explaining what attempts he had made to find alternative employment, what he told TV Ghana about his circumstance and his family’s financial position.  The facts of this case are extreme.  The Respondent was convicted of a serious fraud.  I would have expected him to have discussed his position with TV Ghana.  It is difficult to envisage TV Ghana if they had been given an accurate description of the outcomes of both the criminal proceedings and the current Actions, not assuming that the Respondent would lose his appeal and, given what he has told the court, be bankrupted.  Evidence about this should have been filed.  In addition, as the Applicants point out, the Respondent clearly has access to money as he continues to live with his family in Villa Monte Rosa in Stubbs Road and his family was able to continue financing his children attending an international school during his imprisonment, possibly from a family trust.  I can see no reason to assume that the consequences for the Respondent are as he describes them.  It is clear that in conducting this case during his imprisonment he was playing for time, he told me (when he was appearing in person) of evidence he was seeking to obtain that would cast the case in a different light and hinted at conspiracies between the banks and the Liquidators to fabricate a case against him.  Nothing came of anything he told me.  Given his conviction and his conduct of the case before me, before ordering a stay I would have needed comprehensive and compelling evidence to demonstrate that his retention by Ghana TV was genuine, that Ghana TV was properly appraised of his circumstances and a detailed explanation of his finances.

11.  In my view, the Respondent has failed to demonstrate that if enforcement of the judgment is not stayed the financial consequences for him will be draconian and cause damage which cannot be remedied if he is successful.  Given the weakness of the appeal, this is not an appropriate case in which to stay enforcement pending an appeal of the Judgments.

Conclusion and Order

12.  I dismiss the stay application.  The Respondent is to pay the costs of the application forthwith, such costs to be taxed if not agreed.  The leave to appeal application I grant.  The costs be costs in the appeal.

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2025] HKCFI 1306

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

________________________

________________________

________________________

AND

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

________________________

________________________

________________________

(HEARD TOGETHER)

________________________

D E C I S I O N

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1.  On 22 November 2024 and 24 January 2025 I handed down my decisions in these proceedings.

2.  For the reasons explained in my decision dated 24 January 2025 one issue remained to be determined, namely, whether interest should be ordered and if so for what amount.  I directed that the parties serve further submissions.  Only the Liquidators did so.  The Liquidators have clarified that the sums ordered to be paid by Mr Dayaram in respect of unpaid import loans owed to banks is US$23,263,802.49 (in HCCW 298/2011)  and US$15,806,477.66 (in HCCW 299/2011).  This having been clarified and for the reasons given in my decision dated 24 January 2025 I will order that Mr Dayaram pays interest on those sums at 1% over Hong Kong prime from 12 December 2011 until the date of judgment and thereafter at the judgment rate until full payment.

3.  I will make the orders in the terms of [103] and [104] of my judgment dated 22 November 2024. I will also order that payment of the judgment shall be made within 28 days from the date hereof.

HCCW 298/2011 & HCCW 299/2011

(HEARD TOGETHER)

[2025] HKCFI 453

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

____________________

____________________

BETWEEN

____________________

AND

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

____________________

____________________

BETWEEN

____________________

(HEARD TOGETHER)

____________________

D E C I S I O N

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1.  On 22 November 2024 I handed down judgment after trial granting orders on a nisi basis because I wished to receive further written submissions in respect of bank interest and bank charges and a claim for interest on the sum awarded, which needed to be determined in order to finalise my decision. The following are my reasons and decision in respect of the outstanding matters.

2.  According to [48] of the judgment, the amount of the interest and bank charges is US$178,447.91. The said amount is derived from the Closing Submissions of the Liquidators dated 7 March 2024 (the “Closing”).

3.  Upon the Liquidators’ further review of the documents, they have realised that the sum suggested in the Closing (i.e. US$178,447.91) was calculated based on an old fund flow analysis which was outdated and superseded. According to the amended fund flow analysis, the correct interest and bank charges incurred by Days Impex and Days International as a result of the 161 Applications should be US$178,490.98.

4.  Mr Dayaram does not dispute these sums, although he points out that it is virtually impossible for him to check them. I will, therefore, order that the revised sum is paid by Mr Dayaram, namely, US$178,490.98.

5.  So far as interest is concerned the Liquidators seek in both proceedings interest from 12 December 2011 until 22 November 2024. Mr Dayaram disputes the entitlement to interest for reasons, which I explain in the following paragraphs. I would, however, note for some reason the Liquidators did not respond to the arguments advanced in Mr Brown’s written submissions. The following paragraphs largely repeat those submissions.

6.  The Liquidators have asked for interest “as the Court thinks just”. The Liquidators have not pleaded or stated in their submissions any basis for such an entitlement.

7.  Pre-judgment interest is typically awarded under section 48(1) of the High Court Ordinance, Cap. 4 while post judgment interest is typically awarded under section 50. Neither sections are referred to in the Summonses.

8.  Even if one assumes that the Liquidators are basing their entitlement to interests on section 48(1) (and they have not suggested they are nor is it accepted that they can now), then there is a difficulty. Section 48(1) provides that:

“Subject to rules of court, in proceedings (whenever instituted) before the Court of First Instance for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the Court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and— (Amended 25 of 1998 s. 2) (emphasis added)

(a) in the case of any sum paid before judgment, the date of the payment; and

(b) in the case of the sum for which judgment is given, the date of the judgment.”

9.  Mr Brown submits that applications under section 275 are not proceedings “for the recovery of a debt or damages” that would engage section 48(1) of the High Court Ordinance.

10.  In Re Overnight Ltd (in Liq.) (No.3)[1], having ordered the Respondents to make a contribution for fraudulent trading under section 213 of the Insolvency Act 1986 in an earlier judgment, Roth J ruled on the quantification of loss. He said at [6] that:

“[T]his is not an application whereby the liquidator is pursuing a cause of action…for a personal debt or damages owed by him to the company that would have engaged the regime for discretionary interest under s.35A of the SCA [the UK equivalent of s.48 of HCO]. It follows that the authorities under that provision have no direct application in the present case.”

11.  Mr Brown further argued that Roth J’s ruling that section 48 (as the equivalent section) is inapplicable must be correct in law and sound in principle for the following reasons:

(1) The obligation of the Respondent to be “personally responsible” for the company’s debt, arises as a result of section 275. It is a statutory invention and not a reflection of any pre-existing obligation to pay a debt or damages to the company as a result of a civil wrong committed against the company.

(2) Second, the right to contribution under section 275 does not accrue to specific individuals. When one speaks of a debt or damages, they involve a liability owed to a person, or a group of persons, as a result of a breach of contractual, tortious, or trust duties. However, section 275 can be invoked by a wide range of applicants, ranging from the Official Receiver, a liquidator, creditor, or contributory of the company, and the benefit of the contribution can be conferred to appropriate recipients the Court deems fit. This is echoed by Lord Denning’s speech in In re Cyona Distributors Ltd[2], concerning section 332 of the Companies Act 1948 (which contains the same wordings as section 275 of the Ordinance), that:

“The court has full power to direct its destination. The words are quite general: “all or any of the debts or other liabilities of the company as the court shall direct.” By virtue of these words the court can order the sum to go in discharge of the debt of any particular creditor; or that it shall go to a particular class of creditors; or to the liquidator so as to go into the general assets of the company, so long as it does not exceed the total of the debts or liabilities.” (emphasis added).

Similarly, Russell LJ held in Cyona Distributors at 907D that:

“I have no doubt that Eve J was correct in holding that the section was not one which conferred the benefit of any declaration exclusively upon defrauded creditors of the company. The present significance of those two cases is that it did not occur to anyone that there was a discretion in the court to decide who was to benefit from the declaration and in what proportions.”

(3) Perhaps the most significant feature that distinguishes a contribution under section 275 from a recovery of a debt and damages, lies in the manner of quantification:

(a) It is trite that damages and debt are remedies that are loss-based and compensatory in nature. However, as the Court held at [38] of the Judgment, section 275 “gives the court a wide power to order payment of such sum as it thinks appropriate, which could be more or less than the amount of the relevant debt.” It is also motivated by the policy reason that if the amount paid results in more becoming available for distribution to creditors, this is regarded as a beneficial result consistent with the general purpose of the insolvency regime and section 275 ([45] of the Judgment).

(b) It is also trite that there must be a factual and legal causation between the loss or damage, and the breach of duty by the wrongdoer (contractual, tortious or otherwise). Such requirements are much more relaxed when it comes to an order under section 275, see the Judgment at [41] and [45]; see also Bouchier v Booth[3]:

“Turning now to questions of causation, there was no attempt made before me to challenge the proposition that principles of causation play no part in determining the compensatory relief that may be granted under section 213; nor was it challenged that the decision to order wrongdoers to contribute to the assets of a company is a matter entirely at the discretion of the court.”

12.  For the above reasons, Mr Brown submitted that the Court’s discretion to grant interest under section 48(1) of the High Court Ordinance is not engaged in a section 275 application. Section 275 does not independently provide for interest on any sums ordered paid and the Liquidators do not assert to the contrary. I disagree.

13.  Roth J was considering a claim in respect of interest payable by the company to the HMRC, which was included in the claim under section 213 of the Insolvency Act 1986. It was, therefore, not a claim, which engaged section 35A of the Supreme Court Act and it seems that Roth J’s statement was a reference to this rather than a statement that a claim under section 213 could never attract an award of interest under section 35A.

14.  The issue is whether a judgment by the Court under section 275 that a respondent should pay a quantified part of the liabilities or debts of a company is a judgment for “debt or damages” under section 48. Section 48(1) is a provision, which is intended to allow the Court to order the payment of compensation for loss caused to a plaintiff by a delay in paying a debt or damages. The language of the section is precise. The relevant parts read: “… in proceedings …… before the Court of First Instance for recovery of a debt or damages there may be included in any sum for which judgment is given simple interest …… on all or part of the debt or damages in respect of which judgment is given”: emphasis added.

15.  Section 275 provides a mechanism for the Court to order that a respondent pays the company a sum in respect of its liabilities and debts, which will normally be the sums due to creditors. If a respondent is ordered to pay a company an amount, which is in respect of a debt owed by the company as a matter of language this might be said to be “recovery of a debt”: section 275. The same would be true if what was ordered was an amount making good the company for a liability to pay damages, which the Court has decided the respondent should be ordered to pay pursuant to section 275.

16.  As I have demonstrated as a matter of language section 48(1) can apply to section 275. In the present case as I understand it at least a substantial part of the claim was in respect of debts owed to banks. Mr Brown is correct that the Liquidators have not, however, made any effort to identify what part of the sum I have determined Mr Dayaram should pay is directly attributable to debts owed by the Company as opposed to a deficit, which has been created by the fraud, which I describe in my earlier judgment. I would like further submissions from the Liquidators on this issue and a breakdown of the amounts awarded in [103] of the judgment in accordance with this decision. I direct that the Liquidators provide further written submissions by 5pm on 14 February 2025 and Mr Dayaram, if he wishes, by 5pm on 7 March 2025.

17.  If I do order interest, it is agreed that the rate should be 1% over prime and I would order that interest is payable from the date of the winding up orders, namely, 12 December 2011.

Written submissions by Stephenson Harwood, for the liquidators (for both actions)

Written submissions by Mr Toby Brown, instructed by K B Chau & Co, for Mr Mahesh Nanik Dayaram (for both actions)

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2024] HKCFI 3386

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

____________________

____________________

BETWEEN

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

____________________

____________________

BETWEEN

____________________

(HEARD TOGETHER)

____________________

J U D G M E N T

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Introduction

1.  Days Impex Ltd (“Days Impex”) and Days International Ltd (“Days International”), which I shall refer to collectively as the “Companies”, were wound up in December 2011, both having been put into provisional liquidation in September of that year. In August 2011 Mahesh Dayaram (“Mr Dayaram”) and his father Nanik Dayaram were convicted of 9 counts of conspiracy to defraud by causing the Companies successfully to apply for, and the Companies to receive, import loans, which they knew were not to be used for their intended purpose. They were sentenced to 10 years imprisonment. They unsuccessfully appealed their convictions, and the Court of Final Appeal refused leave to appeal. In March 2017 the Liquidators of the Companies issued fraudulent trading and misfeasance summons (“Summonses”) against Mr Dayaram and another director of the Companies, Pitty Kwok, who had been acquitted of the charges brought against her. Mr Dayaram’s father had by this time died. The complaints advanced in the Summonses arise from the subject matter of the convictions. The applications against Ms Kwok were not pursued at trial.

2.  The claims pursued in Summonses by the Liquidators against Mr Dayaram arising from the subject matter of the convictions are as follows:

(1) Fraudulent trading pursuant to section 275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”): The Liquidators’ claims arise out of 161 import loan applications made from March to September 2011 (“Applications”), 88 of which were made by Days Impex and 73 by Days International. The Liquidators’ case is that the transactions underlying the Applications were fictitious, and the invoices and other documents submitted in support of the Applications were false. Mr Dayaram was a knowing party to the fraud and is liable for fraudulent trading under section 275 of the Ordinance.

(2) Breach of duty in procuring the Companies to make applications for import loans, misapplying the proceeds at a time when he knew or should have known that the Companies were insolvent thus reducing the monies available to the unsecured creditors of the Companies. The Liquidators claim compensation for breach of duty pursuant to section 276 of the Ordinance.

3.  The Summonses have proceeded slowly. The reason is that until August of 2023 Mr Dayaram was serving his sentence and he represented himself for the majority of the proceedings. I think it is fair to say that both the Liquidators and the Court have adopted an accommodating approach to Mr Dayaram’s requests for extensive periods to review and prepare documents to allow for the undoubted difficulties that he faced in addressing a claim involving a significant quantity of documents during the period in which he was representing himself. Mr Dayaram is obviously intelligent. He was able to understand the legal process and was particularly adept at finding infelicities in the Liquidators’ conduct of the Liquidations and exploiting them; suggesting that they were indicative of collusion of some sort between the Liquidators and the major creditors (banks) to manufacture a claim that might support an insurance claim. But this never went beyond conjecture and aspersions.

4.  Mr Dayaram told me on several occasions that he believed he had a substantive defence to the claims and that the criminal convictions were wrong. Given the complexity of the claims, he needed time to obtain evidence that had not been put before the criminal court, which would allow him to advance the positive defence that he believed he had, but which had not been satisfactorily formulated and presented to the criminal court. As it transpired Mr Dayaram did not advance a positive defence in the sense of adducing new evidence that cast the evidence relied on by the Liquidators in a materially different light. The compelling inference is that Mr Dayaram was simply playing for time and that his protestations to the effect that there had been a miscarriage of justice were entirely disingenuous. For reasons that will become apparent in this judgment it seems to me quite clear that Mr Dayaram is dishonest and has consistently lied to this Court. He obviously feels no remorse for his wrong-doings and no embarrassment. Presumably he simply wants to delay the inevitable search by the Liquidators for assets to satisfy the judgment that he has always known would eventually be rendered by this Court and had no scruples about lying to do so.

5.  Following receipt of Mr Dayaram’s Opening Submissions[1], which raised objections to the Applications based on their failure, so it was alleged, to comply with Rule 58 of the Companies (Winding-up) Rules, Cap. 32H (“Rule”), the Liquidators applied to amend the Summonses by interlocutory summonses dated 19 February 2024. The amendments that the Liquidators wished to make were to amend paragraph 1 to add details of why the Liquidators allege that the Applications were made fraudulently and to amend paragraph 2 to add an express allegation that the Companies were insolvent when Applications were made and that Mr Dayaram failed to act bona fide in the best interests of the Companies when making the Applications. In response Mr Dayaram issued summonses dated 22 February 2024 seeking the determination of preliminary issues, namely, whether:

(1) the Summonses failed to comply with Rule 58;

(2) the Summonses failed to sufficiently particularise the alleged fraud said to give rise to fraud under section 275 of the Ordinance; and

(3) the Summonses failed to disclose any reasonable cause of action or validly constituted claim under section 275.

6.  I declined Mr Dayaram’s applications for determination of the preliminary issues, the reasons to be included in this judgement and the costs reserved. I made no order in respect of the Liquidators’ summonses. I give my reasons for the above orders in [79] to [83] after I have explained the claims that are advanced.

Uncontroversial Background

7.  As I have already mentioned a central component of these proceedings is that Mr Dayaram was convicted of 9 counts of conspiracy to defraud in HCCC 2/2014 (“Conviction”) in relation to the false invoices submitted to the banks in connection with the Applications[2]. I deal with the evidential relevance of the Conviction later in this judgment.

8.  The business operated by the “Days” group of companies (“Group”) was first established in 1957 by Mr Dayaram’s grandfather as a sole proprietorship. In 1985, Mr Dayaram’s father, took over the business. Mr Dayaram worked with his father to run the Group.

9.  The Group engaged in the import and export business, originally dealing in general merchandise sourced from China and sold to Africa, and later (since around 2000) focusing more on electronics. In addition, the Group also provided financing to buyers by utilising its credit facilities to obtain import loans and export loans. Its main operating subsidiaries were Days Impex and Days International.

(1) Days Impex was incorporated in Hong Kong on 3 April 1987. At all material times, its shareholders were (a) Days Impex Limited (incorporated in Liberia), (b) Mr Dayaram and (c) Sheila Dayaram (Mr Dayaram’s mother); and its directors were (a) his father and (b) Pitty Kwok.

(2) Days International was incorporated in Hong Kong on 25 March 1969. At all material times, its shareholders were (a) Days International Limited (incorporated in the BVI) and (b) Mr Dayaram’s father; and its directors were (a) his father and (b) Malkita Limited (“Malkita”).

10.  Malkita was incorporated in Hong Kong on 21 March 1980. At all material times, its shareholders were (1) Mr Dayaram’s father and (2) Sheila Dayaram; and its directors were (1) Mr Dayaram’s father and (2) Pitty Kwok.

11.  Two major buyers of the Group were Priya International LLC (“Priya”) and an individual named Sadrudin Sumar (“Sumar”). There is no dispute that Priya is a real company and Sumar is a real individual.

12.  It appears from Days Impex and Days International’s audited financial statements that their business was substantial:

	Days Impex		Days International
Year Ended	Turnover	Net Profit	Turnover	Net Profit
31 Mar 2005	$268,768,424	$553,301	-	($577,710)
31 Mar 2006	$325,756,630	$860,227	$8,433,619	($1,243,291)
31 Mar 2007	$314,834,350	$767,677	$85,638,682	$1,160,993
31 Mar 2008	$233,348,249	$520,181	$151,723,788	$13,367,956
31 Mar 2009	$179,815,760	$412,498	$152,335,851	$977,503
31 Mar 2010	$252,697,002	$662,106	$237,198,606	$1,762,009

13.  By 2011, Days Impex and Days International had access to credit facilities from The Hongkong and Shanghai Banking Corporation Ltd (“HSBC”), Hang Seng Bank Ltd (“HSB”) and Bank of Baroda (Hong Kong) Ltd (“BOB”) totalling at least HK$365 million plus US$11 million.

	HSBC	HSB	BOB
Days Impex	HK$155 million	-	US$6 million
Days International	HK$30 million	HK$180 million	US$5 million
Total:	HK$185 million	HK$180 million	US$11 million

14.  From March to September 2011, Days Impex and Days International made the 161 import loan Applications to HSBC, HSB, BOB, DBS Bank (Hong Kong) Ltd (“DBS”) and Citibank, N.A. (“Citi”), obtaining in aggregate US$51,974,142 in loan proceeds.

	Days Impex		Days International
	No. of loans	Amount	No. of loans	Amount
HSBC	46	US$15,950,103	11	US$4,121,809
HSB	22	US$4,835,593	45	US$16,820,351
BOB	15	US$4,169,904	17	US$4,996,563
DBS	4	US$996,934	-	-
Citi	1	US$82,885	-	-
Total:	88	US$26,035,419	73	US$25,938,723

15.  The 161 import loan Applications form the subject matter of the summonses, and were admitted in HCCC 2/2014.

HCCC 2/2014

16.  In 2014, criminal proceedings (HCCC 2/2014) were commenced against Mr Dayaram, his father and Pitty Kwok, the 1^st to 3^rd Defendants respectively in HCCC 2/2014. They were each charged with 9 counts of conspiracy to defraud. The charges all arose from the Applications made during the period March to September 2011. Charges 1-6 concerned import loans while charges 7-9 concerned export loans.

17.  As regards charges 1-6:

(1) Charges 1 and 2 concerned 57 import loan applications submitted by Days Impex and Days International to HSBC;

(2) Charges 3 and 4 concerned 67 import loan applications submitted by Days Impex and Days International to HSB;

(3) Charges 5 and 6 concerned 32 import loan applications submitted by Days Impex and Days International to BOB.

18.  The prosecution relied on a report prepared by Yiu Suet-wing (“Ms Yiu”) dated 4 March 2013 (“Accountant Report”) titled “Accountant Report on Days Impex Ltd and Days International Ltd”. Ms Yiu was a treasury accountant in the Forensic Accountants’ Office of the Hong Kong Police Force. The Accountant Report analysed the fund flow arising from the Applications made by Days Impex and Days International during the period March to September 2011, namely, the 156 Applications which formed the subject matter of charges 1-6 (as set out in the paragraph above), plus an additional four loan applications made to DBS and one made to Citi. The latter five applications did not form part of any charge in HCCC 2/2014. The Accountant Report did not analyse the fund flow arising from the export loan applications which formed the subject matter of charges 7-9.

19.  The Accountant Report concluded that:

“[…] the funds from the 161 import loans applied by Days Impex and Days International were first transferred to Oscoda. The funds were then routed through a remittance agent, WSEL, and transferred / remitted (sometimes via two related companies namely Days International (BVI) and Days Impex (Liberia) to:

57.1 the […] Companies;

57.2 repay previous export loans for Priya and Sadrudin (with Days Impex as the drawer of these export loans); and

57.3.1 repay previous import loans of the […] Companies.”

20.  As I have already mentioned following trial, Mr Dayaram and his father were convicted by a jury of 9 counts of conspiracy to defraud (i.e. the Conviction). On 11 August 2015, Mr Dayaram and his father were each sentenced to 10 years’ imprisonment. On 19 January 2017, the Court of Appeal dismissed Mr Dayaram and his father’s appeals against the Conviction in CACC 274/2015 (19 January 2017). On 12 April 2017, the Court of Final Appeal dismissed Mr Dayaram and his father’s Applications for leave to appeal against the Court of Appeals’ judgment.

21.  Before explaining Mr Dayaram’s defence and the evidence that the parties have adduced I will explain the legal principles that govern the determination of the Summonses. I start with the evidential relevance of the Conviction and then address sections 275 and 276 of the Ordinance.

Evidential relevance of the Conviction

22.  Section 62 of the Evidence Ordinance (Cap 8):

“(1) In any civil proceedings the fact that a person has been convicted of an offence by or before any court in Hong Kong shall, subject to subsection (3), be admissible in evidence for the purpose of proving, where to do so is relevant to any issue in those proceedings, that he committed that offence, whether he was so convicted upon a plea of guilty or otherwise and whether or not he is a party to the civil proceedings; but no conviction other than a subsisting one shall be admissible in evidence by virtue of this section.

(2) In any civil proceedings in which by virtue of this section a person is proved to have been convicted of an offence by or before any court in Hong Kong –

(a) he shall be taken to have committed that offence, unless the contrary is proved; and

(b) without prejudice to the reception of any other admissible evidence for the purpose of identifying the facts on which the conviction was based, the contents of any document which is admissible as evidence of the conviction, and the contents of the information, complaint, indictment or charge on which the person in question was convicted, shall be admissible in evidence for that purpose.”

23.  Section 62 of the Evidence Ordinance therefore shifts the legal burden of proof to the defendant to prove that he did not commit the acts constituting the criminal offence for which he has been convicted. In addition, a conviction constitutes probative evidence of some weight. The weight to be given to a conviction within civil proceedings depends on the circumstances, including the circumstances of the conviction, e.g. the extent of the evidence led at trial, the cases presented by the prosecution and the defendant, and the nature of the arguments: China Everbright — IHD Pacific Ltd v Ch’ng Poh[3]. As might be expected a defendant seeking to overcome the presumption raised by a conviction faces an uphill struggle: Hunter v Chief Constaable of the West Midlands Police[4].

24.  The Conviction is a subsisting one in that it has not been overturned on appeal: Secretary for Justice v Wong Chi Fung[5]. Accordingly, under Section 62 of the Evidence Ordinance, in these proceedings Mr Dayaram is taken to have committed the offence which formed the subject matter of the Conviction, namely, 9 counts of conspiracy to defraud.

25.  A conspiracy to defraud “is constituted by becoming a party to an agreement with another or others to use dishonest means: (a) with the purpose of causing economic loss to, or putting at risk the economic interests of, another; or (b) with the realization that the use of those means may cause such loss or put such interests at risk”: Chen Keen v HKSAR[6].

26.  It is the object of the conspiracy which forms the essential ingredient of the offence upon which the co-conspirators must find consensus: Chen Keen v HKSAR[7]. However, the means agreed or used by the conspirators may be a constituent ingredient of the conspiracy, and need to be proven: Chen Keen v HKSAR[8]. As Ribeiro and Cheung PJJ explain in at [54]:

“In a prosecution case where it is alleged that some specific dishonest means have been agreed upon as part of the conspiratorial agreement indicted, the indictment and the particulars must clearly inform the court and the defendants what the agreed dishonest means are said to be. The agreed dishonest means so pleaded constitute an essential constituent element of the conspiratorial agreement alleged and must be proved as part of the agreed object of the conspiracy by the prosecution beyond reasonable doubt.”

27.  In HCCC 2/2014, the indictment in respect of count 1 (“Indictment”) provided as follows:

“Particulars of Offence

Nanik Dayaram, Mahesh Nanik Dayaram and Kwok Kwai-wah, between the 24th day of March 2011 and 16th day of July 2011, in Hong Kong, conspired together and with other persons unknown to defraud The Hongkong and Shanghai Banking Corporation Limited (“the said Bank”), by dishonestly:

(i) falsely representing in the ‘Applications for Import Loan’ (‘the said import loan Applications’) that Oscoda Electronics Limited (‘the Drawer’) was the genuine supplier;

(ii) submitting false sales invoices which purported to show that there were genuine underlying sale and purchase transactions between the Drawer and Days Impex Limited;

thereby inducing the said Bank to approve the said import loan Applications and to release funds in the total sum of $15,950,103 United States currency to the Drawer.”

The indictments in respect of counts 2-6, which all concerned import loans, were in similar terms.

28.  The Indictment alleged that some specific dishonest means had been agreed upon by the defendants, namely, sub-paragraphs (i) and (ii) stated in the indictment. The dishonest means were essential constituent elements of the conspiratorial agreement alleged, and had to be proved as part of the agreed object of the conspiracy by the prosecution beyond reasonable doubt: Chen Keen v HKSAR[9].

29.  This is reflected in the trial Judge’s summing up. After explaining to the jury the legal ingredients of conspiracy, the Judge dealt with the offence of conspiracy to defraud:

“You can see from the particulars of Count 1 that the dishonest means allegedly used were essentially two-fold: (1) making false application; (2) submitting false invoices and inducing the bank to make payments. Proof against any particular defendant that he or she agreed to defraud by any one of these two matters is sufficient for conviction. Any one of the two dishonest means. […]

So the issue in relation to each of the defendants is whether the prosecution have proved for sure that there existed fictitious transactions with no underlying goods and that they were party to the agreement and that they intended the agreement to be carried out and they acted dishonestly.” (emphases added)

30.  The jury found Mr Dayaram (and his father) guilty of all 9 counts. In relation to counts 1-6 concerning import loan applications, the jury were sure that “there existed fictitious transactions with no underlying goods”, and Mr Dayaram was a “party to the agreement and that [he] intended the agreement to be carried out and [he] acted dishonestly”. As the Judge stated at the sentencing hearing:

“Two defendants have been convicted by a jury of nine counts of conspiracy to defraud. Evidence revealed during the trial indicated that in the beginning of 2011, companies owned and managed by both the defendants applied to various banks for increasing credit facilities. […]

Following the grant of these new credit facilities, false invoices and false bills of lading were submitted to banks to obtain loans. Soon, these loans became overdue and outstanding. As to where the proceeds of these loans had gone, the jury could only be sure of one thing, that the money did not go to any of the two defendants’ electronic goods businesses.”

31.  As mentioned above, the 156 import loan applications constituting charges 1-6 form part of the 161 Applications. Accordingly, argue the Liquidators, by reason of the Conviction, the presumption in these proceedings is that Mr Dayaram and his father conspired to defraud the banks, dishonestly and falsely represented to the banks that Oscoda was a genuine supplier, and submitted false invoices purporting to show that the transactions underlying the 156 import loan applications constituting charges 1-6 were genuine. The Liquidators contend, in my view correctly, that the Conviction shifts the legal burden of proof to Mr Dayaram to show that:

(1) the transactions underlying the 156 import loan applications were genuine; and/or

(2) he was not a party to the conspiratorial agreement to defraud; and/or

(3) he did not intend the agreement to be carried out; and/or

(4) he acted honestly.

The components of Fraudulent Trading

32.  Section 275 of the Ordinance provides:

“(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.”

33.  To succeed in its claim for fraudulent trading under section 275 of the Ordinance, the Liquidators must show that:

(1) certain business of the subject company was being carried on with intent to defraud creditors, or for any fraudulent purpose; and

(2) the defendant was knowingly a party to the carrying on of such business in such manner.

See: ADS v Wheelock Marden & Co Ltd[10]; also Bouchier v Booth[11].

34.  In Re Augustus Barnett & Son Ltd[12] it is explained that liability under (the English equivalent of) section 275 of the Ordinance would involve a finding that “someone has done an act which can be described as carrying on some business of the company and that in doing so he had an intent to defraud”. The words “defraud” and “fraudulent purpose” appearing in section 275(1) connote actual dishonesty. The required intent to defraud is subjective, not objective, and accordingly it is necessary to show that there was either an intent to defraud or a reckless indifference whether the creditors were defrauded: ADS v Wheelock Marden & Co Ltd[13]; approved by the CFA in ADS v Wheelock Marden & Co Ltd[14]. As regards a party’s knowledge of the fraud it includes a party shutting their eyes to the obvious because of a conscious fear that to inquire further will confirm a suspicion that wrongdoing has occurred: Morris v Bank of India[15]; affirmed on appeal: Morris v Bank of India[16].

35.  Section 275 is directed to the fraudulent carrying on of a business, not at the execution of individual fraudulent transactions while carrying on that business. Consequently, a director who causes a bogus transaction to take place might not necessarily be liable for fraudulent trading: Re Gerald Cooper Chemicals Ltd[17]. It is possible, however, that a business may be found to have been carried out with intent to defraud creditors, notwithstanding that only one creditor is shown to have been defrauded, and by a single transaction: Morphitis v Bernasconi[18].

What is recoverable under Section 275?

36.  Once liability for fraudulent trading is established, the Court has a discretion to declare that the person found liable “shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct”: section 275(1) of the Ordinance.

37.  As Lord Denning MR observed in In re Cyona Distributors Ltd[19], section 332(1) of the Companies Act 1948 (being the then English equivalent of section 275(1) of the Ordinance) “is deliberately framed in wide terms so as to enable the court to bring fraudulent persons to book. […] The sum may be compensatory. Or it may be punitive. The court has full power to direct its destination.” This echoes the statement of Maugham J in In re William C. Leitch Brothers, Ltd[20] at page 79 that in his view “s275 is in the nature of a punitive provision, and that where the Court makes such a declaration in relation to “all or any of the debts or other liabilities of the company,” it is in the discretion of the Court to make an order without limiting the order to the amount of the debts of those creditors proved to have been defrauded by the acts of the director in question, though no doubt the order would in general be so limited.” The import of this is that section 275 allows the court to order payment of a sum other than the amount of the debt arising by virtue of a transaction proceed to have been fraudulent. As Reyes J recognises in [6] of his judgment in Kong Mou Holdings Ltd v Cheung Shuen Lung[21] the rationale behind the section expressly empowering the court to order a different sum is that the loss that may have been caused by the fraud may be different from the value of the transaction found to infringe section 275.

38.  In Morphitis[22], however, Chadwick LJ considered in [55] that section 213 of the Insolvency Act 1986 (the successor to section 332(1) of the Companies Act 1948) does not empower the Court “to include a punitive element in the amount of any contribution which, in the exercise of the power conferred by section 213(2) of the 1986 Act, a person should be declared liable to make to the assets of the company”. This was applied in subsequent authorities: see e.g. Biscoe v Milner[23]. This view is explained by the change in the wording of the relevant section. What was originally section 275 of the 1929 Act[24] (on which our section 275 is directly based), which became section 332 of the Companies Act 1948, was replaced by section 213 of the Insolvency Act 1986, which provides in sub-section (2) that a person knowingly a party to fraudulent trading may be declared “liable to make such contributions (if any) to the company’s assets as the court thinks proper”. It is immediately apparent why Chadwick LJ considered that this change in language indicated that an amount ordered to be paid should be limited to compensation and not contain a punitive element. That is not the case in Hong Kong where the original language is retained. Although, I think that it would be unlikely a civil court would order a payment part of which is purely punitive, it seems to me that Hong Kong’s section 275 gives the court a wide power to order payment of such sum as it thinks appropriate, which could be more or less than the amount of the relevant debt. However, the court has to approach the assessment of the amount to be paid in a principled way.

39.  Mr Chen referred me to the Court of First Instance and Court of Appeal decisions in Bank of Credit and Commerce International SA (No. 15)v Morris[25][26]. In [121] Patten J describes (what was common ground) the purpose of section 213 of the Insolvency Act 1986 as to enable a liquidator to recover compensation from those who have knowingly assisted the fraudulent conduct of a company’s business. Mummery LJ agreed in [108]. This explanation of the purpose of section 213 is a natural interpretation of the language used in the section itself. However, as I have already explained Hong Kong has retained the language in the earlier Acts, which were the basis of the view expressed by Lord Denning.

40.  It would seem to me that it would rarely be appropriate for the court to include a punitive element in the calculation of the amount to be paid. As this case demonstrates there are other forms of legal process, which are used to punish serious cases of fraudulent trading and I would not be inclined to increase the amount of any payment to include a punitive element in the present case given that Mr Dayaram was sentenced to a period of imprisonment as a consequence of the Conviction. So what approach should the Hong Kong court adopt?

41.  Plainly, there must be some nexus between the loss caused to the creditors as a result of the fraudulent trading and the sum payable by the party liable for fraudulent trading: Morphitis[27]; Palmer’s Company Law (Volume 3) at [15.599.24]; Biscoe[28]. This was common ground before me. What is contentious is whether or not the fact that most of the import loans were used to repay existing debts, thus reducing what would otherwise have been the Companies’ deficits, should be taken into account. In other words, is the starting point the change in the Companies’ deficits attributable to loans, which were received, but not used to extinguish existing debts. The Liquidators argue that this is not the correct approach. They say that it is irrelevant that a part of the loan proceeds was used to discharge pre-existing debts of the companies and Mr Chen drew my attention to the decision of Kannan Ramesh J in Tendcare Medical Group Holdings Pte Ltd v Gong Ruizhong[29] in which he says this:

“Once fraudulent conduct and the causal link between the conduct and the debts and other liabilities of the company are established, it seems to me that liability ought to follow to the full extent of such debts and other liabilities. If the fraudulent trader has caused the company to incur debts and liabilities which but for the fraudulent conduct would not have been incurred, it ought not to matter that the some of the proceeds thereof was used to benefit the company. The fact is that the fraudulent trader by his fraudulent enterprise caused the company to incur a debt by defrauding the creditor. The debt ought not have been incurred in the first place. It therefore seems incorrect to conclude that the personal liability of the fraudulent trader ought to be reduced by the extent to which a benefit has been obtained by the company from use of the proceeds of the fraudulent trading, or the extent to which such proceeds have been retained by the company.”

42.  This approach has the attraction that it is easy to quantify the amount to be paid, because one only has to total up the amount of the debts directly attributable to the fraudulent acts. Conversely if one instead asks what was the increase in a company’s liabilities as a consequence of the fraudulent trading, it must at least be arguable that regard needs to be given to the financial impact, other than just any change in a company’s assets directly attributable to the receipt and use of the money received or used as a consequence of the fraudulent act. It may be that a company’s deficit increased or decreased and was different from the amount that it might otherwise have been as a consequence of its insolvency.

43.  The English cases also approach the assessment of the amount to be paid by reference to the value of the fraudulent transactions. For example, in Morphitis[30] Chadwick LJ says this in [53]:

“An obvious case for contribution would be where the carrying on of the business with fraudulent intent had led to the misapplication, or misappropriation, of the company's assets. In such a case the appropriate order might be that those knowingly party to such misapplication or misappropriation contribute an amount equal to the value of assets misapplied or misappropriated. Another obvious case would be where the carrying on of the business with fraudulent intent had led to claims against the company by those defrauded. In such a case the appropriate order might be that those knowingly party to the conduct which had given rise to those claims in the liquidation contribute an amount equal to the amount by which the existence of those claims would otherwise diminish the assets available for distribution to creditors generally; that is to say an amount equal to the amount which has to be applied out of the assets available for distribution to satisfy those claims.”

44.  Similarly, Patten J in Morris[31] at [121] states that “the defendant is liable to contribute to the losses to creditors which would have been avoid but for the transactions.” This is also consistent with the assessment of the amount to be paid being by reference to increase in the debt or liabilities directly attributable to the fraud rather than an increase in the loss to the company caused by the fraudulent trading more generally.

45.  In my view, the correct approach is to assess the amount by reference to the amount of the debts directly attributable to the fraud unless a substantive reason is advanced for doing otherwise, and, generally, it will be for the fraudster to do so. This is justified not only be the reasoning of Kannan Ramesh J, but also as a consequence of the financial impact on a company of quantifying the amount as I have described. First, it seems to me that the alternative to the approach I have described must be an assessment of the financial loss caused to the insolvent company because of the fraudulent trading. This involves a potentially complicated assessment of what the deficit would have been, but for the fraudulent trading. The reason that I say this will be complicated, is because the impact may extend beyond the direct changes in a company’s asset position and extend, for example, to the consequence of the company being able to continue trading longer than would otherwise have been the case. If the legislature had this type of assessment in mind I would have expected the legislation to have used language other than “debts and liabilities”. It would have spoken in terms of loss to the company or deficits; language congruent with such an assessment. Secondly, assuming that the amount paid results in more becoming available for distribution to creditors than would be the case if credit is given for the use of the debts incurred by the fraudulent trading (e.g. the settlement of an existing debt) it seem to that this is a beneficial result as creditor receives a greater repayment than he would otherwise do. This is consistent with the general purpose of the insolvency regime and section 275 in particular. Even if as a consequence of the payment a company becomes solvent this still has the beneficial consequence of providing a return to the company’s shareholders.

46.  In my view, unless good reason is demonstrated for doing otherwise the amount is to be calculated by reference to the amount of the debts incurred attributable to the fraudulent trading (in this case the proceeds of the Applications) less any of those debts that were repaid. In the present case 12 of the import loans were repaid.

47.  In his Written Closing Submissions Mr Chen stated that the Liquidators were content to limit the claims against Mr Dayaram to the amounts set out in their letter to the court dated 18 May 2018, namely:

(1) Days Impex US$23,263,802.49; and

(2) Days International US$15,806,477.6624,446,960;[32]

with interest from the date of the respective winding up orders. The following table sets out the changes in the amounts from the amounts sought in the summonses.

Days Impex
Bank	Amount (Summons)	Amount (Letter)	Difference
HSBC	US$15,349,917	US$15,349,917	US$0
HSB	US$4,835,593	US$4,835,593	US$0
BOB	US$2,609,945	US$2,609,945	US$0
DBS	US$996,934	US$385,462.49	-US$611,471.51
Citi	US$82,885	US$82,885	US$0
Total:	US$23,875,274	US$23,263,802.49	-US$611,471.51

Days International
Bank	Amount (Summons)	Amount (Letter)	Difference
HSBC	US$3,842,019	$0	-US$3,842,019
HSB	US$16,820,351	US$12,021,887.66	-US$4,798,463.34
BOB	US$3,784,590	US$3,784,590.00	US$0
Total:	US$24,446,960	US$15,806,477.66	-US$8,640,482.34

48.  The changes in the sums claimed are attributable to the exclusion of the 12 import loans that were repaid and reducing the amount of the sums owed to each of the four banks by taking into account security that has been realised (in the case of HSBC and Heng Seng) and off-sets. The above figures thus represent the net amount claimed by the banks after credit is given for the settling of the debts due to them by the methods I have referred to. The precise details do not matter. That having been said the Liquidators invited me to ignore what they describe as concessions when conducting the legal analysis. By this I understand them to mean that although the amounts of the claims submitted by the banks have been reduced, the security and set-offs, which the banks have used to reduce their claims would have been available to the Companies if the Applications had never been made. This I understand, but the fact is that in [43] of the letter the Liquidators state quite clearly that they will apply to amend the Summonses to replace the claims that I referred to at the outset of this judgment with the figures I have just referred to for the reasons I have explained. One of Mr Dayaram’s complaints (which seems to me to be justified) was that having written to him and the court stating this the Liquidators did not amend the summonses and appeared at the outset of the trial to be intending to claim the full amount of the Applications. My legal analysis in relation to quantum has been directed to the principles, which govern the assessment of the amount to be awarded. This will normally be the amount of the debts incurred as a consequence of the fraud. Mr Dayaram had contended that credit should be given for any debts settled by realisation of security or some other method out of the assets available to the creditors, such as set-offs. This the Liquidators agreed in writing in May 2018. I will proceed to determine the amount to be paid on that basis. I will not give credit for the repayment of previous import loans, export loans (approximately, US$38.7 million) and money received pursuant to the Applications and retained by the Companies for the reasons I have explained earlier. I accept that the amount of the interest and bank charges (US$178,447.91) should be included.

Section 276 of the Ordinance

49.  The Summonses include a claim under section 276, but the claim pursued in Closing is limited to section 275. This seems to me correct. A claim under section 276 adds nothing given the facts and has invited controversy because Mr Dayaram was not a de iure director of either of the Companies and the Summonses did not particularise the grounds on which it was alleged he had a relevant duty to the Companies and how it had been breached. Given my findings in respect of the claim under section 275 it seems to me that no purpose is served by considering the claim under section 276 further.

50.  I now turn to deal with the factual issues.

Business Carried on with Intent to Defraud Creditors

51.  The Group engaged in the import and export business, which had evolved over time commonly to include financing for a short period the purchase cost for buyers such as Priya and Sumar. How this operated is explained in [89]–[92] in which I quote from Mr Dayaram’s evidence in cross-examination during which he explained it. Applying for and obtaining bank loans was, therefore, one of the most significant aspects of the Group’s business.

52.  The Conviction follows from the jury concluding that insofar as the import and export loan applications forming the subject matter of HCCC 2/2014 were concerned, Days Impex and Days International falsely represented to the relevant banks that Oscoda was a genuine supplier, and/or submitted false invoices which purported to show that there were genuine underlying sale and purchase transactions with Oscoda, thereby inducing the banks to make available to them over US$58 million in loan proceeds[33].

53.  The absence of any genuine transactions is further supported by the analysis of the fund flow arising from the Applications, which shows that the funds paid to Oscoda (the purported seller) were immediately channelled back to the Days Group, most of which were used to repay existing loan obligations.

(1) In preparing the Accountant Report, Ms Yiu was provided with, and reviewed, loan application forms for the Applications, remittance and transfer documents, loan repayment documents, and various bank statements evidencing the fund flow from the Applications.

(2) All of the loan proceeds from the Applications were first paid to Oscoda. The total amount received was US$51,973,934.89, being the total amount of the import loans (US$51,974,142) less bank charges (US$207.11)[34].

(3) All of the loan proceeds received by Oscoda were transferred to Wall Street Exchange Ltd (“Wall Street”), a remittance agent registered in Hong Kong, within a short period, i.e. on the same day or within a few days after Oscoda’s receipt[35]. Wall Street then received remittance or transfer instructions from Days Impex or Days International[36].

(4) Ultimately, all of the funds remitted from Wall Street were directly, or indirectly via two related companies within the Group, namely Days International Ltd (incorporated in the BVI) (“Days International BVI”) and Days Impex Ltd (incorporated in Liberia) (“Days Impex Liberia”) [37]:

(a) Transferred to Days Impex, Days International or other related companies and individuals (around 25.4%, or US$13.1 million);

(b) Used to repay previous export loans in respect of purported purchases made by Priya and Sumar, and drawn by Days Impex (around 45.8%, or US$23.8 million); and

(c) Used to repay previous import loans of Days Impex and Days International (around 28.8%, or US$14.9 million).

(5) In the Accountant Report, Ms Yiu traced the funds through “layers” of beneficiaries until the funds were used to repay previous loans. Some of the funds passed through five “layers” before they were eventually used to repay previous loans of Days Impex and Days International[38]. It should be noted, however, that Ms Yiu’s analysis was limited by the documents made available to her. It was only “[w]hen fund tracing could not be further performed for some beneficiaries in a particular layer or funds were used to repay import / export loans [that] those beneficiaries / beneficiary banks would be regarded as the Ultimate Beneficiaries in that layer”[39]. The Liquidators, therefore, contend that it is therefore possible that part of the funds received by Days Impex and Days International (and other related entities) approximating US$13.1 million were also used to repay previous loans.

54.  The immediate channelling of funds back to the Group to repay previous loans reflects a circular fund flow. Mr Chen in his Opening gives by way of example loan serial no. 6, which is analysed in the Accountant Report, which shows:

(1) The application for an import loan was made by Days International and concerned invoices no. OEL206363 and OEL206367, both dated 17 March 2011, issued by Oscoda in the amounts of US$134,400 and US$266,070 respectively (aggregating US$400,470);

(2) On 18 March 2011, Days International applied to HSB for an import loan of US$400,470;

(3) On 18 March 2011, HSB paid US$400,468.72 to Oscoda;

(4) On 21 March 2011, Oscoda transferred US$400,000 to Wall Street. After deducting bank charges, Wall Street received US$399,998.05;

(5) The amount received by Wall Street was converted into HK$3,117,760 and, upon Days International’s instructions, deposited into Days International BVI’s account on the same day;

(6) Days International BVI immediately transferred HK$3,100,000 to Days Impex Liberia, which transferred the same amount to Days Impex, which transferred the same to Days International;

(7) On 21 March 2011, Days International used the funds to repay a previous import loan in the amount of HK$3,181,225.

55.  The Liquidators have also carried out their own analysis of the fund flow. If the underlying transactions were genuine, the Liquidators say Oscoda being the supplier (seller) of goods would have used the funds paid to it from the import loans drawn by Days Impex and Days International for its own purposes. Oscoda would not immediately channel the funds back to the Group to enable the Group to repay existing loans.

56.  Having regard to the Conviction and the circular fund flow, the Liquidators contend that it is plain that the transactions underlying the Applications were fictitious and Oscoda was not a genuine supplier. The business of Days Impex and Days International was carried on with intent to, and did indeed, defraud creditors. It was also carried on for a fraudulent purpose, namely, to prolong the lives of the Companies by falsely representing to the banks that they remained engaged in substantial business, which has been described as a “conventional” case of fraudulent trading: Carman v The Cronos Group SA[40].

Mahesh Dayaram was Knowingly Party

57.  The Liquidators further argue that the Conviction shows that Mr Dayaram (1) was a party to the conspiratorial agreement (with his father) to defraud, (2) intended the agreement to be carried out, and (3) acted dishonestly. As the trial Judge said at the sentencing hearing in HCCC 2/2014:

“D2 [Mahesh Dayaram] was the head of the Finance Department. He was responsible for handling all the financial matters of the Days Group. The 2nd defendant participated in this conspiracy on a day-to-day basis. Bearing in mind that this was a family-run business, D2, in my view, undoubtedly, also stood to benefit hugely from this conspiracy.”

58.  Apart from the Conviction, the Liquidators point to the following matters as showing that Mr Dayaram was knowingly party to the fraud.

59.  First, Mr Dayaram and/or the Group controlled Oscoda, or at least knowingly acted in concert with Oscoda in perpetrating the fraud.

(1) Following their appointment as provisional liquidators of Days Impex and Days International on 14 September 2011, the Liquidators took possession of the Group’s and seised the Companies’ computers and books and records.

(2) The Liquidators carried out forensic analysis of the computers and identified four soft copies of internet banking transaction reference printouts concerning payments by Oscoda to Wall Street on 19 July 2010, 20 May 2011, 15 July 2011 and 18 July 2011 (“Oscoda Printouts”).

(3) The Oscoda Printouts were contained in a Lenovo laptop (“Laptop”) found in Mr Dayaram’s office when the Liquidators took possession of the office premises. The Laptop had four different login users, namely, (a) “MNDH”, (b) All Users, (c) Days Administration and (d) Sabina Dayaram. “MNDH” is short for “Mahesh Nanik Dayaram Hathiramani”, another name of Mr Dayaram. Sabina Dayaram is Mr Dayaram’s wife. Since the Laptop’s only two unique individual login users were Mr Dayaram and his wife, and it was found in Mr Dayaram’s office, it is reasonable to infer that the Laptop was primarily used by Mr Dayaram.

(4) Further, the Oscoda Printouts were stored under the username of “MNDH”, which suggests that Mr Dayaram downloaded the Printouts and saved them to the Laptop.

(5) The above shows that Mr Dayaram had access to Oscoda’s banking documents, which would not be possible unless he also had control over (or, at the very least, acted in concert with) Oscoda.

(6) Mr Dayaram’s control over Oscoda is consistent with, and further substantiated by, the circular fund flow identified above. After Oscoda received from the banks proceeds from import loans drawn by Days Impex and Days International, Oscoda immediately channeled the funds back to Wall Street, most of which were then used to discharge the Group companies’ existing debt obligations. Oscoda would not have paid the proceeds to Wall Street in such a manner if it were a genuine seller. The irresistible inference is that Mr Dayaram controlled Oscoda and procured the circular fund flow.

(7) Notably, all the funds deposited into Oscoda’s bank account from 10 March 2011 to 14 September 2011 were from bank loans drawn by Days Impex and Days International. The opening balance in the bank account on 10 March 2011 was US$14,805.90, and the closing balance as at 14 September 2011 was US$2,301.82. None of the funds from the bank loans were retained by Oscoda. In other words, from March to September 2011 Oscoda did not carry on any genuine business, but only participated in the fraud by holding itself out as a genuine supplier, and facilitating the circular fund flow.

60.  Second, Mr Dayaram knew that the Applications were being made to the banks.

(1) By 2011, Mr Dayaram was the head of the Accounts and Finance Department of the Group. He decided on the Group’s accounting and financial systems, and managed its daily cash flow, actual financials and banking relationships.

(2) Out of the 161 loan Applications, Mr Dayaram signed on 8 applications forms. While the other 153 loan application forms did not bear his signature, there is no doubt that Mr Dayaram knew that they were being made. He headed the Group’s Accounts and Finance Department, and must have instructed the accounting department staff (Donna Liu and Joyce Chau) to make the applications, including directing them on the application amount, and the credit line against which to draw.

61.  Third, Mr Dayaram knew about, and procured, the circular fund flow.

(1) Mr Dayaram was a signatory of all 18 bank accounts maintained by Days Impex, Days International, Days Impex Liberia and Days International BVI. He also monitored the Group’s cash flow on a daily basis.

(2) After the loan proceeds from the Applications were transferred from Oscoda to Wall Street, Days Impex and Days International facsimile instructions were given to Wall Street to transfer the funds. All the funds remitted out of Wall Street which arose from the Applications were based on such facsimile instructions. There were 152 such facsimile instructions, all of which were signed under the name of Mr Dayaram (though some of the actual signatures appear to belong to someone else).

(3) In addition, US$23.8 million was remitted from Wall Street to various banks to repay previous export loans drawn by Days Impex. These remittances were also made pursuant to facsimile instructions given by Days Impex HK under the name of Mr Dayaram.

(4) Even if Mr Dayaram did not sign certain facsimile instructions, he must have instructed the accounting department staff to prepare the instructions, and directed them on the identity of the recipient, and/or the export loan to repay.

Days Impex and Days International were Insolvent

62.  The Liquidators contend that the following matters demonstrate that each of Days Impex and Days International was insolvent by March 2011 when the first Application was made. Plainly, the Companies were insolvent at the time they were wound up and it seems to me that nothing of substance turns on when they probably became insolvent; a question, which in the case of a substantial business is often difficult to identify with precision. For the sake of completeness I will identify the matters relied on as demonstrating that the Companies were probably insolvent when the first of the Applications was made.

63.  First, as of 31 March 2011 Days Impex and Days International’s net asset deficiencies were US$39,124,287 and US$11,040,191 respectively.

64.  Second, as of 14 September 2011 (date of the presentation of the winding up petitions against the companies), Days Impex and Days International had total liabilities of HK$333,509,711 and HK$215,361,793 respectively.

	Days Impex	Days International
Bank Creditors	$331,661,506	$204,131,222
Trade Creditors	$4,354,537	$11,230,570
Employee Creditors	$1,493,666	-
Total:	$337,509,711	$215,361,793

65.  Third, the Companies were wound up on 12 December 2011. The principal basis upon which the companies resisted the winding-up orders was that Mr Dayaram’s father “wants to continue to try and negotiate with the principal banking creditors some form of restructuring to avoid a winding-up”: Re Days Impex Ltd[41]. The restructuring proposals had been rejected by the bank creditors. The Companies evidently could not pay their debts as they fell due.

66.  The Liquidators say that the Companies were propped up from March 2011, by the loan funds generated from the Applications and that the only sensible inference is that this is why the Applications were made. I agree.

Payments in Breach of Pari Passu Distribution not in Best Interests of Company

67.  The Liquidators contend that between March to September 2011, Days Impex and Days International made various repayments to the banks from the loans obtained as a result of the Applications and that this infringed the pari passu principle. However, this does not seem to me an issue that I need to consider given my decision in respect of the section 275 claim.

The Defence

68.  The Liquidators’ case is relatively easy to follow. At the various interlocutory hearings before me at which Mr Dayaram acted for himself I understood him to suggest that he was looking for evidence, which he believed would demonstrate that the import loans were made in respect of genuine transactions. Such evidence was never forthcoming. At trial Mr Dayaram was represented by Mr Toby Brown. Mr Brown raised a number of preliminary matters, which I deal with in the next section of this Judgment.

69.  So far as the substance of the claims are concerned Mr Brown took the following points: First, the loans included in the Annex to the Days Impex Summons dated 9 March 2017 included four loans made by DBS and a loan by Citibank that were not included in the charges in HCCC 2/2104 and, consequently, section 62 of the Evidence Ordinance did not apply. This is correct, but in practice nothing turns on it. Given my finding of the relevance of the Conviction in respect of the remaining 156 Applications and my findings of fact on the fraudulent nature of the Applications and Mr Dayaram knowledge of them, nothing turns on this. If Mr Dayaram knew that the 156 Applications were bogus the suggestion that he did not know that the remaining 5 were also bogus is, in the context of a civil trial with the lower standard of proof, unsustainable.

70.  Secondly, he emphasised the disciplined and cautious approach to be taken to the assessment of evidence in civil fraud cases. Mr Brown referred me to the judgment of Lam J (as he then was) in Wing Fai Construction Co Ltd[42] at[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 …’”

71.  Thirdly, Rule 58 of the Companies (Winding-up) Rules, Cap. 32H required the grounds of the application to be stated in the summons and this has not been done. I address this argument in relation to the Liquidators’ applications to amend the Summonses.

72.  Fourthly, that the Companies received a benefit from receipt of the import loans and this should be taken into account in quantifying any loss caused to the Companies and/or any compensation that should be paid by Mr Dayaram if he is found liable under either of the two heads of claim pursued by the Liquidators. I have already addressed this issue.

73.  Fifthly, the Liquidators had not given credit, as they had agreed to, for by the repayment or application of security. As I have already explained this the Liquidators agreed to do during the trial.

74.  Sixthly, that section 276 does not apply to shadow directors, which is the basis upon which the claim has been brought against Mr Dayaram and the Liquidators should not be allowed to reconstitute their case to purse him on the basis that he was a de facto director. Seventhly, Mr Dayaram denies that he was a de facto director. His position is that such tasks as he performed were part of his general finance role within the Group. Eighthly, if Mr Dayaram owed any relevant duties he did not breach them. Payments were made to banks to whom genuine debts were owed. Given my decision that the section 276 claim adds nothing, these issues fall away.

75.  Ninthly, Mr Dayaram has all along disputed that the Lenovo Laptop the Liquidators say were used to produce the Oscoda printouts was his. The Liquidators say they have lost all the images from the Laptop including the image of the laptop. Mr Dayaram objects to reliance on the Laptop given the Liquidators’ failure to produce the documents he had sought in order to challenge the Liquidators’ case that he had produced the printouts taken from his Laptop.

76.  Finally, Mr Dayaram says that the transactions underlying the import loans were genuine. Oscoda was a genuine company and had, for example, purchased Hyundai products, which were sold in the Brazilian market.

77.  As is clear from this summary Mr Dayaram, whilst saying he believes the transactions to which the import loans were said (to the banks) to relate, were genuine, he has, as I have already observed, not adduced any substantive evidence to support this argument. It is difficult to believe that if the transactions had been genuine he would not have by the time this matter came on for trial have been able to find some documentary evidence or a witness, which demonstrated that at least some of the 161 transactions were genuine. Even assuming that at the criminal trial for some reason the need to do so had not been fully appreciated, it was clear from his affirmations and what Mr Dayaram told me at a number of the interlocutory hearings that he was fully cognisant of the need to do so if he was to satisfy me that the transactions were genuine.

78.  It seems to me quite clear based on the evidence adduced by the Liquidators that the transactions were not genuine. The only remaining issue is his knowledge that the Applications were bogus. Before addressing that issue I will address the preliminary applications to which I have referred.

The Preliminary Issue application and Amendments Summonses

79.  As I have mentioned, Mr Dayaram issued on 22 February 2024 (the 2^nd day of the trial) summonses seeking the determination of preliminary issues. It is uncontroversial that the court should only strike out a claim if it is clear and obvious that it will fail. Unsurprisingly, it is unusual for the court to entertain an application to strike out made during a trial[43]. In the present case, the delay is particularly remarkable, because the claim is a direct consequence of a successful prosecution that took place over 10 years ago and this application was commenced seven years ago. Plainly, Mr Dayaram understood the claim that was being advanced. Although, for most of the period up to trial he was unrepresented, he had legal representation between 12 December 2022 and 13 July 2023, including Mr Brown. The flaws in the Applications said to justify striking them out are not narrow highly technical points, they are broad and easy to understand. In short what is said is that the summonses:

(1) Fail to state the basis on which the relief is sought; and

(2) As the claim is one of dishonesty this omission falls foul of the well-established and important requirement that the factual basis for so alleging must be clearly and precisely stated in the document containing the claim.

(3) The failure to advance with proper clarity a claim that the sums were paid to the banks after the Companies became insolvent and infringe the parri passu principle.

80.  The substantive parts of the Applications, including the proposed amendments, are in the following terms:

“1. A declaration that the Respondent was knowingly a party to the carrying on of the business of Days International Limited (the ‘Company’) with intent to defraud creditors of the Company by procuring the Company to apply for import loans aggregating US$24,446,960 (the ‘said Sum’) over the period March to September 2011 (details of which are set out in the Annex hereto) (the ‘said Import Loans’) and/or misapplying the said Sum, on the grounds that:

(1) the business of the Company, by the Company and/or the Respondent dishonestly (a) falsely representing in the ‘Applications for Import Loan’ submitted for the said Import Loans that Oscoda Electronics Ltd (‘Oscoda’) was the genuine supplier, and/or (b) submitting false sales invoices in connection with the said Import Loans which purported to show that there were genuine underlying sale and purchase transactions between Oscoda and the Company, was carried on with intent to defraud creditors or for a fraudulent purpose; and

(2) the Respondent was knowingly a party to the carrying on of such business in such manner;

2. A declaration that the Respondent as an officer of the Company was guilty of misfeasance, breach of duty and/or breach of trust in relation to the Company by procuring the Company to apply for the said Import Loans and/or misapplying the said Sum, on the grounds that the Company was insolvent when the said Import Loans were obtained, and the Respondent failed to act bona fide in the best interests of the Company in misapplying the said Sum;

3. An order that the Respondent do pay the Applicants the said Sum or such amount as the Court deems fit, with interest at such rate as the Court thinks just;”

81.  Rule 58 provides that applications under sections 275 and 276 of the Ordinance shall be made by summons in which it “shall be stated the nature of the declaration or order for which application is made, and the grounds of the application.” The summonses tell the reader what is sought: first, a declaration that Mr Dayaram was knowingly a party to the carrying on by the Companies of their businesses with intent to defraud creditors by procuring the Companies to apply for the import loans identified in the annex to the summonses; secondly, a declaration of misfeasance and/or breach of duty and/or breach of trust in respect of the Companies said to arise by procuring the Companies to apply for the import loans (which are identified in the attached schedule); and, thirdly, an order for the repayment of the sum identified and particularised in the annex. What, if anything, is missing? First, so argued Mr Brown, facts said to demonstrate why the applications for the import loans were fraudulent. It is correct that it is not stated that the Applications were knowingly not made for the purpose for which the banks were told that they were made. However, in the circumstances of this case to suggest that consequently Mr Dayaram did not know the case he had to meet is entirely artificial. Of course he knew, as was demonstrated by his conduct of the summonses, the submissions he made at interlocutory hearings and the failure of his legal team to suggest otherwise during the seven months in which he was legally represented. The omission is in the circumstances technical. Secondly, that paragraph 3, and I put this very briefly, does not demonstrate a breach causing harm to the Companies as the import loans were used to repay genuine debts to the lenders of the import loans. Mr Brown points that the Liquidators have sought to introduce for the first time in their Written Opening a claim that the Companies were insolvent at the time the import loans were used to repay the banks, and they infringed the pari passu principle because they benefit some creditors more than other categories of creditors, such as trade creditors and employees.

82.  I will dismiss paragraph 3 of the preliminary issues summonses. I take the view that the complaint that Rule 58 had not been complied with did not justify dismissal of the relevant summonses and the complaint in respect of the claim that the banks had been preferred was more appropriately addressed within the trial.

83.  I did not give leave to amend the Summonses. In the case of the proposed amendments to paragraph 1 it seems to me that they were not necessary as the trial had commenced. In respect of paragraph 2, in my view the proposed amendments were made too late. Either paragraph 2 was properly understood as advancing a claim that the banks had been preferred or it did not. As I have explained in my view the claim and thus the objection are academic.

Witnesses

84.  The Liquidators’ called three witnesses: Fok Hei Yu, Foreky Wong and Wan Wai Yuen . Mr Brown objected to Mr Wan giving evidence on the grounds that although he had filed an affirmation in the proceedings in opposition to Mr Dayaram’s 3^rd discovery affirmation there was no indication prior to the Liquidators’ Written Opening being served that they intended to call him as a witness. As the Liquidators only wished to call him as they wanted to rely on his affirmation and my directions required the deponents to affirmations they wished to rely on to be available for cross-examination, I allowed the Liquidators to adduce his evidence at the trial and Mr Brown cross-examined him. Only Mr Dayaram gave evidence on his own behalf.

Were the Transactions genuine?

85.  Plainly the Conviction evidences that the import loans were not obtained to finance genuine commercial transactions. The Accountant Report demonstrates that the import loans were paid to Oscoda, who in turn paid the remittance agent, Wall Street, which transferred the money back to the Companies. The Liquidators have undertaken the same exercise and reached the same conclusion. This is consistent with (a) the import loans not having been sought and used to finance genuine commercial transactions, (b) the representations that were made to the banks in order to obtain the import loans being false, (c) and this being known to those aware that the loans were circulated in the way I have described and largely used to settle existing loans from the banks.

86.  The fund flows analysed in the Accountant Report and the Liquidators evidence are the principal component of the Liquidators’ case against Mr Dayaram. The analysis points compellingly that to the conclusion that the import loans were not sought in respect of genuine transactions. To undermine this conclusion, it is necessary to show either that the fund flow analysis is wrong or that the payments from Oscoda to Wall Street and then to the Companies were made to settle a genuine debt owed to the Companies by Oscoda or a third party for whom Oscoda was making the payments. There is no attempt in Mr Brown’s closing to undermine the fund flow analysis. It was Mr Dayaram’s evidence that he did not know Oscoda remitted funds to Wall Street until he was shown the records in the criminal trial. He has not advanced any reason at this trial for Oscoda doing so. Mr Dayaram has sought to challenge the Liquidators’ case that the 161 Applications were not genuine by explaining the Companies’ business model. He has produced only one set of documents dealing with one transaction to illustrate what he says was taking place. This consisted of (using Mr Brown’s description in his oral opening) a page that looks like a cover page to a “jacket”, which contained documents relevant to a particular transaction, a sales confirmation note, a Days Impex purchase contract, an Oscoda invoice, a Days Impex invoice and a back sheet. These show Days Impex purchasing on 14 March 2011 DVD players from Oscoda for US121,240 on FOB terms and selling them on the same date to Tiger Import in Paraguay for US$127,302 payment due within 120 days. There are no receipts or records of money transfers and no shipping advice, bills of lading or evidence of emails or letters passing between the parties. I also note that the documents do not identify the make of the DVD players. Mr Dayaram was unable to answer detailed questions about the transaction because it was his evidence that he did not deal with sales or transportation.

87.  Mr Brown summarises Mr Dayaram’s explanation for the absence of documents consistent with the loans being for genuine sales by the Companies to Oscoda in one short paragraph in his Written Closing Submissions:

“Mahesh Dayaram has taken the Court through an Import Loan where the customer is sourcing the goods. The reason it is a simple transaction in terms of document has been explained; the document heavy part would be between Priya/Sumar and Oscoda. All the Companies needed was a contract (i.e. the sales confirmation), an invoice to the ultimate customer and an invoice from Oscoda. The banks only needed the invoice from Oscoda (save for HSBC, which also required the sales confirmation).”

88.  Mr Brown was correct in his observation in closing that the business model Mr Dayaram described “is not easy to understand to those unfamiliar” with it. In my view this is clearly because it was not what was occurring during the relevant period.

89.  Mr Dayaram explained what he said was taking place in cross-examination. The Companies business model had evolved since his Grandfather established it, and now primarily involved the Companies’ customers sourcing good themselves and the Companies providing trade finance to bridge the difference in terms between those offered by suppliers and required by customers (e.g. a supplier, such as Oscoda, wanting to be paid within 30 days and the customer wanting 90 days credit). The 161 transactions that are the subject matter of the Applications fall into this category. Mr Dayaram explained how the model worked in cross-examination as follows:

“Q. With Oscoda?

A. I don’t know whether it's with Oscoda or it’s directly with the factory. I’m not privy to that information.

Q. Okay.

A. So, I mean, he may be at the factory in China, he may be wherever, he could be sitting in his office. I don’t know where he is but he's basically negotiating, communicating with somebody and then comes to making a deal, basically, and when that's done and he has completed that and a number of other transactions, then he would give my father a spreadsheet which says, basically this is the product that I am purchasing, this is the quantity, this is the unit price, this is the expected delivery and this is the client to which it’s going to be shipped to and it needs to be invoiced.

Q. What client is that?

A. So, for example, Priya is in Dubai so he is a trader as well. He has clients all over South America or Europe or wherever it is, so he sold the goods to a client, right? So like this morning my counsel went through a file where there was a buyer, Tiger, so that would have been one of his clients. So that’s the client that we are going to invoice. So from that spreadsheet that we have, we have now got to enter that data into our system, okay, so basically, we have to make a confirmation note which is between us and the final customer, Priya’s customer, okay, and we have to send that off for signature which will go off with, like, a dozen or two dozen orders at the same time. We will then make a purchase contract internally in our system which we do not send to Oscoda for signature, it’s an internal document. Basically we cannot raise a purchase contract in our system unless we have got a confirmation note because our business model is we only buy what we have already sold. We don’t buy and then start selling. So there has to be a sale first, or it could be simultaneously so they are issued basically on the same day, in this case, and that's put in our system and the reason it’s put in our system is then what happens is that if we have to print reports, for example we have to print reports about how many shipments we have on order because we have to gauge financing lines, et cetera, et cetera, and we also know how many sales we offer in May, April, June, et cetera. So if we don’t put that order into our trading system we can’t get any reporting. But we don’t rely on that purchase contract because when we sign a contract with a non-direct buying relationship we depend on that contract for delivery. So if someone delivers a wrong product, delivers a late product or doesn’t deliver the product there are certain terms and conditions we rely on. But since we are not negotiating the deal and since if the shipment gets delayed, if the shipment is wrong, it’s defective, we are not responsible. So it’s between Priya and in this case Oscoda to figure out how they are going to compensate each other. As far as we are concerned, if the shipment doesn’t get made we don’t finance it, we are not going to take the next step. So that’s where it stops as far as we are concerned. So we put that document in there and it's unsigned, it’s an internal document.

Then when the shipment does get effected the supplier, Oscoda, will provide the invoice and we will then provide that -- well, it has to go to the bank for payment, at which time the shipping department or Ms Kwok will contact either myself or my assistant to say, ‘We have this amount that needs to go into the bank for an import loan’. They may not specify the supplier, and ‘Where is there an open space?’ It won't be just one invoice, it will be maybe four or five invoices at one time and we will tell them -- basically, I will decide, I may tell my assistant to let Ms Kwok know or whatever, ‘This is where we put them in’.”

90.  I note that it was Mr Dayaram’s evidence that the purchase contract with the supplier (he gives Oscoda as an example) is an internal document, which Oscoda is not asked to sign. This begs the question: what contracts were the Companies making? Mr Dayaram’s answer was this:

“Q. In terms of contractual relationships, so forget about the internal document that you just referenced, the purchase contract, in terms of actual contractual relationships who would Priya contract with?

A. I don’t know, probably with Oscoda.

Q. Either Oscoda or the factory?

A. Or the factory. I don't know the answer to that question.

Q. So it’s either Oscoda or the factory?

A. Yes.

Q. Who would Days enter into a contract with?

A. Well, on paperwork they are entering a contract with Oscoda but we are not actually signing a contract and we are not being bound by any terms and they are not bound by anything.

Q. Let’s forget about the -- your counsel used ‘notional’. Let’s forget about the internal purchase contract that you referenced. So Days would enter into a contract with the end customer?

A. Yes.

Q. That’s by way of the confirmation –

A. That’s correct.”

91.  If this is correct the Companies were not buying the goods from Oscoda. It was Mr Dayaram’s evidence that the bill of lading would probably rarely pass through the Companies hands:

“A. That depends. In a direct buying situation where we are arranging the freight forwarder or the shipping company that would be part of our job but before customers started choosing their own suppliers they started choosing their own freight forwarders. That was the first step in how customers got involved in our business, because they found forwarders in their countries that said, ‘Look, we know you are buying a lot of cargo. If you give us the business we will pick up your cargo from wherever the factories are in the world and your point of contact is just us.’ So the customers would tell us, ‘Okay, you ship with this forwarder or they will tell the factory directly the goods were picked up by this forwarder and they would settle the freight directly. In the olden days we chose the freight company, we paid the freight. So when you say in a direct buying, does it involve us dealing with the bill of lading, it depends if we choose the freight forwarder, yes. If we don’t choose the freight forwarder -- and in this case Priya had its own freight forwarder -- we don’t deal with the bill of lading.

Q. So in this direct buying relationship there would be minimal if any communication between Days and Oscoda?

A. There would be minimal.”

92.  In these situations, as I understood Mr Dayaram’s evidence, it would be Oscoda who, probably by email, told the Companies that goods had been shipped in order that the Companies could invoice their customers (such as Priya) and start the credit period running. The relevance of this evidence was that it is said to explain why the Companies did not have the type of documents, including bills of lading, that one would expect them to have if they were genuinely purchasing goods as a principle in respect of which import loans were sought. Another category of documents that one would have expected to see is receipts issued for payment made by customers such as Priya. There are none. Mr Dayaram’s explanation was that the statement with the client would record payment and that separate receipts were not issued.

93.  The next issue that Mr Dayaram was required to address in cross-examination was the funds flow. I did not understand Mr Dayaram to be disputing the funds flow. The gist of his evidence was that he did not know that Oscoda remitted the funds to Wall Street until he was shown the records at the criminal trial. The Liquidators’ case is that this is untrue as demonstrated by the information on the Lenovo Laptop, a subject I return to later.

94.  Even if Mr Dayaram’s explanation of what had historically commonly been the Companies business model is correct it does not explain the fund flow and undermine the obvious conclusion to be drawn from it, namely, that the 161 transactions were not genuine.

95.  Mr Dayaram suggests that the transactions are likely to have been genuine because there is evidence that there was Hyundai stock purchased through the Companies in Brazil at about the relevant time. However, none of the Oscoda invoices record any of the 161 transactions being in respect of Hyundai products. This is in contrast to other suppliers (12 in number) whose invoices identify, as one would expect, the manufacturer. It seems to me that Mr Dayaram’s evidence falls far short of demonstrating reason to think that some, let alone all, of the 161 transactions were in respect of Hyundai products that were shipped and ended up in Brazil.

96.  The Liquidators also point out that none of the buyers paid for any of the 161 purchases. Twelve import loans were settled before the Companies went into liquidation, but none were settled by the buyers. They were settled by using the Companies fixed deposits under lien with the Bank of Baroda or out of the Companies’ funds.

97.  Plainly the matters to which I have referred do not explain the fund flow. It seems to me quite clear, and I find, that the 161 transactions were not genuine and that the Applications for the associated import loans were fraudulent and obtained to defraud the Companies creditors in particular the banks from which they were obtained.

Carrying on business with intent to defraud creditors

98.  As I have explained in [32] to [35] Section 275 is engaged where it is demonstrated that a company’s business has been carried out with the intention to defraud creditors. Carrying on business is broadly defined and encompasses one transaction provided it can properly be described as a fraud on a creditor perpetrated while carrying on business. As Mr Dayaram explained in his evidence the Companies business model had evolved to include financing. He described this part of the business succinctly in cross-examination: “So the customer will say, ‘Okay, I am choosing the supplier and I need you to finance a transaction which means when the goods are ready you pay for it and then you ship it’”. I do not understand there to be any dispute about this or that the 161 transactions come within the part of the business activity which Mr Dayaram was describing. In my view, and I so find, the Companies were clearly “carrying on business” in the sense required for section 275 to be engaged.

Mr Dayaram’s knowledge of the fraud

99.  In order to make the orders sought against Mr Dayaram pursuant to section 275 of the Ordinance it is not sufficient that I am satisfied that the import loans were obtained fraudulently. I need to be satisfied that Mr Dayaram was knowingly a party to the Companies carrying on their businesses in the fraudulent manner that I have found to have taken place. I have explained what has to be demonstrated in [34].

100.  Mr Dayaram says that he believes the 161 transactions were genuine (which I have not accepted) and that he certainly was not aware at the time that the import loans were not for genuine transactions. The Liquidators say that he clearly must have known what was taking place and that he was orchestrating the circular fund flow, which was an integral part of the fraud. His own evidence was that he was the head of the Accounts and Finance Department, and responsible for “the monitoring of the financials of the [Days Group, and] decided on the accounting / financial systems, including managing daily cash flow, actual financials and banking relationships” [44]. He decided which credit line to utilise, which credit line to repay, and the order of repayments[45]. Thus, when the Group received an invoice for payment, Mr Dayaram would “advise the caller [from the shipping department] which bank to place the import loan in” [46]. The 161 Applications must have been made under his instructions, or at least with his prior knowledge[47]. After the funds were remitted to Wall Street, the Group gave fax instructions to Wall Street to direct their onward transfers. Despite his attempts to distance himself from these fax instructions[48], it is clear that Mr Dayaram, taking into account the banks’ requests and the utilisation of each credit line, decided on the order of repayment.

101.  It would seem plain that Mr Dayaram not only knew that monies were being received from Wall Street, but was frequently giving instructions as to which accounts Wall Street should remit the monies and what liability the payment was to settle. He must have been aware that Wall Street was making payments it had received from Oscoda and that his evidence that he did not is a lie. It seems to me that the only sensible inference that can be drawn is that he at least knew that payments were being made by Oscoda to Wall Street and hence understood that they were not made in respect of genuine transactions or, more likely, he was orchestrating the fraudulent scheme to keep the Companies afloat[49]. I reach this conclusion without relying on the Liquidators’ evidence in relation to the Laptop, which I have referred to in [59].

Disposition

102.  I will make the following orders on a nisi basis, as I would like further submissions on how the interest and bank charges of US$178,447.91 (referred to in [48]) should be allocated in paragraph 2 of the order set out below and on interest. The Parties are to serve written submissions addressing these matters by 5pm on 6 December 2024 in paper and digital forms.

Order in HCCW 298 of 2011

103.  The following orders:

(1) A declaration that the Respondent was knowingly a party to the carrying on of the business of Days Impex Limited (“Company”) with intent to defraud creditors of the Company by procuring the Company to apply for import loans aggregating US$23,875,274 (“said Sum”) during the period March to September 2011 and misapplying the said Sum.

(2) The Respondent shall pay the Liquidators the sum of US$23,263,802.49 plus interest and bank charges of [to be completed] by 5pm on 20 December 2024 or such other date as the Liquidators and the Respondent agree in writing or is ordered by the Court.

(3) Interest.

(4) A costs order nisi that the Respondent pay the Liquidators’ costs including the costs of the Respondent’s summons dated 22 February 2024 forthwith on an indemnity basis, such costs to be taxed if not agreed. There be no order as to the Liquidators’ summons dated 19 February 2024.

Order in HCCW 299 of 2011

104.  The following orders:

(1) A declaration that the Respondent was knowingly a party to the carrying on of the business of Days International Limited (‘Company’) with intent to defraud creditors of the Company by procuring the Company to apply for import loans aggregating US$24,446,960 (‘said Sum’) during the period March to September 2011 and misapplying the said Sum.

(2) The Respondent shall pay the Liquidators the sum of US$15,806,477.66 plus interest and bank charges of [to be completed] by 5pm on 20 December 2024 or such other date as the Liquidators and the Respondent agree in writing or is ordered by the Court.

(3) Interest.

(4) A costs order nisi that the Respondent pay the Liquidators’ costs including the costs of the Respondent’s summons dated 22 February 2024 forthwith on an indemnity basis, such costs to be taxed if not agreed. There be no order as to the Liquidators’ summons dated 19 February 2024.

Mr David Chen, instructed by Stephenson Harwood, for the liquidators (for both actions)

Mr Toby Brown, instructed by K B Chau & Co, for Mr Mahesh Nanik Dayaram (for both actions)

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2023] HKCFI 2054

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

____________________

____________________

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

____________________

____________________

____________________

(HEARD TOGETHER)

____________________

D E C I S I O N

____________________

1.  I have a summons before me issued in both winding-up petition: HCCW 298/2011 and HCCW 299/2011 seeking an extension of the time for the Respondent Mr Dayaram to file his evidence in opposition to the Liquidators’ applications. The last order that I made on 31 March 2023was an Unless Order.

2.  Mr Chen has identified a number of technical deficiencies in the application Mr Dayaram is representing himself. Notwithstanding the matters identified by Mr Chen I will extend time until 21 August 2023.  I would emphasise and have emphasised to Mr Dayaram in court that he should assume that unless he files his affirmation in accordance with the new direction he will not be able to file an affirmation in opposition to the Liquidators’ summonses.

3.  The order that I make will be in the followings terms. Notwithstanding the order of 31 March 2023, there be an order that unless the Respondent file and serve his evidence in opposition to the Liquidators’ summonses by 5pm on 21 August 2023, he be barred from filing an affirmation in opposition.

4.  The remainder of the order will be in the same terms as the summonses.  The summonses were listed to be heard at the same time as the case management conference arranged for today.  There is no need for me to make any directions in respect of case management issues other than the one I have just dealt with, save that the costs of the case management conference be costs in the cause.

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2023] HKCFI 726

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

____________________

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

____________________

____________________

(HEARD TOGETHER)

____________________

D E C I S I O N

____________________

1.  The Liquidators of the two companies, the subject of the two winding up proceedings, have issued summonses in both proceedings under section 275 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance, Cap 32, against Mahesh Nanik Dayaram and Pitty Kwok Kwai Wah for their involvement in alleged frauds of the companies’ creditors. I have two summonses before me issued in both proceedings by Mr Dayaram. The first seeks to strike out the 4^th affirmation of Foreky Wong (“Wong (4)”) filed on behalf of the Liquidators in both proceedings (“Strike Out Summonses”). The second seeks certain records of computer forensic work carried out by the Liquidators.

Strike out application

2.  The 4^th affirmation of Mr Wong deals with four matters. First, the background to the proceedings including the successful prosecutions of Mr Dayaram and his Father for fraud. The matters that constitute the fraud also form the basis for the Liquidators’ applications, which are explained in earlier decisions ([6]–[14]). The second concerns an alternative way of quantifying the adverse financial consequences for creditors of Mr Dayaram’s and Ms Kwok’s alleged breaches of duty as a shadow director of the companies, namely, the increase in net deficiency ([16]–[22]). Thirdly, quantification of the sums which Mr Dayaram and Ms Kwok allowed the Companies to be paid in breach of the pari passu principle ([23]–[33]). Fourthly, the final paragraph, which contains some evidence about interests, but is mainly submission ([36]).

3.  The criticism of the affirmation divides into two types. First, [16]–[22] and [36] consist of either submission or summaries of evidence in earlier affirmations. Secondly, [16]–[22] consist of figures, which the Liquidators having read Mr Dayaram’s evidence in support of his strike out application concede are not accurate. It might be thought even if Mr Dayaram’s complaints are factually correct they did not justify the applications as it is common for affirmations to contain summaries of previous evidence and submissions and if anything it is to Mr Dayaram’s tactical advantage to be able to rely on Wong (4) as demonstrating that the Liquidators’ figures are not reliable. It would appear that the catalyst for the applications is partly at least that Wong (4) was framed as it was in order that it could be relied on in an application for a Mareva injunction in Canada to freeze certain assets of Mr Dayaram’s Wife. Mr Dayaram takes the view that this was improper and in the case of the IND claim prejudiced his and his Wife’s ability to defend the application in Canada.

4.  It is correct that an affirmation or witness statement should contain only matters of which the witness is able to give admissible evidence relevant to either the interlocutory application before the court or at a trial. It is not the purpose of either an affirmation or witness statement to make submissions or argue a party’s case. I have commented previously on the increasing frequency of the court being presented with affirmations, particularly, from solicitors, which contain little admissible probative evidence, but are long on the solicitor’s views on an aspect of the case.

5.  Wong (4) is a little different from the common example of what might be called commentary by affirmation as Mr Wong is part of the Liquidators’ team and he is explaining a case, which is not derived from any witnesses’ first-hand knowledge of relevant contemporaneous events, but the forensic process which the Liquidators rely on in support of their application. It is also relevant that the Liquidators’ application has moved slowly in no small part because Mr Dayaram has been in prison until August of last year and this has hampered the application proceeding expeditiously. That and Mr Dayaram taking issue with many aspects of the application and its conduct has resulted in the proliferation of affirmations, which might have been thought to justify introducing the calculations with a section summarising the claim and its genesis. I would note that Mr Dayaram has been representing himself until very recently. Mr Brown who appeared for him had only been instructed shortly before the hearing. Be that as it may [16]–[22] and parts of [36] are not strictly admissible evidence that Mr Wong can give.

6.  The application to strike out Wong (4) is brought under Order 41, rule 6 of the Rules of the High Court (“RHC”) on the grounds that it is scandalous, irrelevant or otherwise oppressive. The relevant principles were summarised by Barma J in Re Linea Trading Company Limited[1] as follows:

“4. …

(1) Scandalous has the same meaning in Order 41 rule 6 as it does in Order 18 rule 19 dealing with the striking out of pleadings. Thus, degrading, indecent and offensive charges made in an affidavit will be regarded as scandalous if they are irrelevant or inadmissible in evidence to prove any material allegation in the petition (see e.g. Cashin v Cradock (1877) 3 Ch 376; Christie v Christie (1873) LR 8 Ch App 499, in the context of striking out a pleading);

(2) Matters which are material will not generally be struck out even if they are offensive, although where unnecessary detail is given, that may be susceptible to being struck out (see e.g. Blake v Albion Assurance Society (1846) 45 LJCP 663, also in the context of striking out of pleadings).

(3) Irrelevant matter may be struck out even if not scandalous (Re J (An Infant) [1960] 1 All ER 603).

(4) It is wrong to include argumentative material in affidavits and such material may be struck out (see e.g. Deak v Deak Perera Far East Limited [1991] 1 HKLR 551).

(5) The court may take one of three approaches to an affidavit in which there is scandalous, irrelevant or oppressive matter:-

(a) It may decline to strike the matter out, on the basis that it is capable of excluding such material from its mind when deciding the issues which arise for decision; or

(b) It may think it appropriate to strike out some or all of the material complained of; or

(c) It may, in an extreme case, order the entire affidavit to be taken off the court file.

Which of these courses is adopted will depend on the circumstances of the case, regard being had to the nature and extent of the objectionable material.”

7.  In my view whilst a large part of [6]–[14] and [36] are not probative of a fact which has to be determined in order to adjudicate the case it cannot be said that they are irrelevant because they do explain the background to the claims against Mr Dayaram and the circumstances in which they have come to be brought. It would be unusual for a party not to introduce its case by reference to facts that set the scene and explain how the parties come to find themselves in court. It is correct that [6]–[14] are repetitive of other evidence that has been filed, but that hardly makes it oppressive as it avoids the necessity of going back to other affirmations for the same information. As I have already mentioned the decision to apply for Wong (4) to be struck is partly at least motivated by Mr Dayaram’s belief that the affirmation was framed with a view to it being shown to the court in Canada and influencing their determination of the application for a Mareva injunction. For example, the description of the criminal proceedings, complains Mr Dayaram, is not evidence admissible in the current proceedings to prove the alleged wrongs. Mr Dayaram suspects the description was included simply as prejudice designed to influence the Canadian court’s deliberations. It is correct that the findings in the criminal proceedings cannot be relied on to prove the factual case advanced by the Liquidators in the present proceedings. However, they are relevant to explain the circumstances in which the Liquidators have come to make the applications; in other words they are relevant background.

8.  Mr Dayaram’s objection to [16]–[22] is also partly driven by what he believes was misleading evidence formulated to aid the application in Canada. He believes this because in his evidence he demonstrates, which the Liquidators in response have accepted, that a number of the figures in these paragraphs are wrong and when corrected a small net surplus rather than deficiency is demonstrated. Mr Brown in his submissions on behalf of Mr Dayaram argued that if the evidence is admitted to be wrong it should be struck out. He contended that the correct way to look at the matter was to ask whether if Mr Dayaram had had the opportunity to contest the evidence’s admission (which I accept in practice he was not) and he had demonstrated that the figures contain material mistakes, which called into question the conclusion that the matters complained of produced an increase in net deficiency would the Court have allowed the evidence to be admitted? This is not a case in which the Court is being asked to adjudicate a dispute on figures in advance of the trial he argued, the Liquidators accept that the figures are wrong and, therefore, the evidence is objectionable. I accept that there is force in the argument, however, Mr Brown accepted that there was nothing to prevent the Liquidators recasting the figures and calculations and seeking leave to file a new affirmation. As I suggested to Mr Brown I would have thought that Mr Dayaram might be better having the evidence on the court file so he can refer to the mistakes in the future. I will, however, strike out [16]–[22] as I accept that if they had been objected to when the Liquidators sought to introduce it, I would probably have required the mistakes to be corrected before admitting the new affirmation.

9.  I understood Mr Brown to tacitly accept that [22]–[33] maybe considered by Mr Dayaram to be wrong, but this is not accepted by the Liquidators and the resolution of that dispute is a matter for trial not a strike out application.

10.  In conclusion I will strike out [16]–[22]. I will make a costs order nisi that the costs are Mr Dayaram’s costs in the Liquidators’ Summonses dated 9 March 2017 in HCCW 298/2011 and 8 March 2017 in HCCW 299/2011 (“Liquidators’ Summonses”). Although he has been partly successful it does not seem to me that the application has served much by way of useful purpose and this in my view is the appropriate costs order in the circumstances.

Discovery application

11.  Mr Dayaram’s discovery applications in both proceedings (“Discovery Summonses”) are more straightforward. Of the three categories of documents sought, the banking documents have been provided and the images of the data on the hard disks of 20 computers have been lost. The only remaining category are records of the Liquidators’ computer forensics. Mr Dayaram’s Discovery Summonses sought extensive discovery of this latter category:

“Any documents (including letters, faxes, email communications, file notes, meeting attendance notes and phone call records) in respect to the computer forensics work performed by Patrick Ma, Leslie Leong and Josh Wan (or other individuals) of the Respondents [Liquidators], including but not limited to:

(i) Previous versions of ‘File Note dated 7 March 2013 (revised)’ with reference ‘File Note-Cargo-PM-07Mar13’;

(ii) Individual source documentation prepared when each device was forensically imaged which recorded the ‘Computer Image ID’, ‘Custodian’s Name’, ‘Computer Type’, ‘Computer Description’ and ‘Staff responsible for imaging, i.e. Acquired by’ information; and

(iii) Any working papers or notes used or created contemporaneously while computer forensics work was being performed.”

12.  As it transpired what Mr Dayaram was interested in obtaining was the contemporaneous notes which record the information which was then summarised in the File Note referred to in the paragraph of his summonses which I have quoted. This is relevant says Mr Dayaram because he disputes that, as he understood the Liquidators to allege, one of the notebooks they found at the companies’ offices, which contains data, which supports their application, was his. Essentially what he wishes to ascertain is what records were made when the Liquidators’ staff entered the companies’ offices and identified the personal computers and notebooks in the office from which they subsequently copied the data on their hard drives. Once it became clear that this is what was sought (following receipt of Mr Brown’s skeleton argument and the exchanges before me) the Liquidators agreed to provide them as well as undertaking that they will notify Mr Dayaram’s legal team if they locate the computer images that appear to be have been lost during a move of office.

13.  I will, therefore, order that the Liquidators provide by 4:30pm on 17 March 2023 or such other time as the parties agree a list of the documents in their possession, custody of power relating to the identification and recording by the Liquidators or their staff of the computers in the offices of Days Impex Limited and/or Days International Limited in or about 2011 and 2012 and copying of the data on the hard disks of such computers. I will make a costs order nisi that the Liquidators pay Mr Dayaram’s costs of the Discovery Summonses dated 11 March 2022 in any event.

Case Management Directions

14.  I made the following directions on 19 December 2022:

(1)  The Respondent, Mahesh Nanik Dayaram, has leave to file evidence in opposition to the Liquidators’ Summonses of 9 March 2017 by 4:30pm on 17 March 2023.

(2)  The Respondent, Pitty Kwok, has leave to file further evidence in opposition to the Liquidators’ Summonses of 8 March 2017 by 4:30 pm on 17 March 2023.

(3)  There be a CMC at 10am on 31 March 2023.

(4)  If the Respondents wish to apply for an extension of time for filing of evidence they must file a summons and supporting evidence by 21 March 2023 and a skeleton argument by 24 March 2023. The Liquidators should file any skeleton in response by 28 March 2023.

(5)  Liberty to Pitty Kwok to apply.

(6)  Costs in the cause.

15.  I would note that Ms Kwok, who has had to date a relatively passive role in the proceedings and was acquitted at the criminal trial indicated that she may wish to apply to strike out the claim against her on the grounds that the delay in proceeding with this matter has prejudiced her. Ms Kwok is not legally represented and I suggested to her that if she wishes to make such an application she should contact the Office for unrepresented litigants, who hopefully could provide her with some assistance.

Mr David Chen, instructed by Stephenson Harwood, for the liquidators (for both actions)

Mr Toby Brown, instructed by Lee Law Firm, for Mahesh Nanik Dayaram (for both actions)

Ms Pitty Kwok Kwai Wah appeared in person (for both actions)

Attendance of the Official Receiver was excused

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2021] HKCFI 3763

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

____________________

_________________

D E C I S I O N

_________________

1.  On 8 and 10 March 2017 the Liquidators of Days International Limited and Days Impex Limited (“Companies”) issued summonses in the respective winding up proceedings of these two Companies seeking the following relief pursuant to sections 275 and 276 of the Companies (Winding Up and Miscellaneous Provisions)Ordinance (Cap 32) (“Ordinance”):

(1)     A declaration that the Respondent was knowingly a party to the carrying on of the business of Days Impex Limited (the “Company”) with intent to defraud creditors of the Company by procuring the Company to apply for import loans aggregating US$23,875,274 (the “said Sum”) over the period March to September 2011 (the “said Import Loans”) and/or misapplying the said Sum;

(2)     A declaration that the Respondent as an officer of the Company was guilty of misfeasance, breach of duty and/or breach of trust in relation to the Company by procuring the Company to apply for the said Import Loans and/or misapplying the said Sum;

(3)     An order that the Respondent do pay the Applicants the said Sum or such amount as the Court deems fit, with interest at such rate as the Court thinks just;

(4)     Alternative to (3) above, an order that the Respondent do contribute the said Sum or such amount as the Court deems fit to the assets of the Company;

(5)     Further or other relief; and

(6)     Costs of and incidental to this Application be to the Applicants.

2.  The Respondent issued on 22 July 2021 summonses in both proceedings (“Disposal Summonses”).  The Respondent seeks the determination of preliminary issues with a view to striking out the Liquidators’ applications on the grounds that the Liquidators have failed to establish that the Respondent was a director or an officer of the Companies.

3.  It would appear that the applications were issued because the Respondent has assumed that sections 275 and 276 apply only to directors or other office holders of a company.  The reason for this is that the heading of section 275 reads as follows: “responsibility of directors for fraudulent trading” and section 276 is headed “power of court to assess damages against delinquent officer, etc”.

4.  The body of the two sections, however, clearly extend the application of the provisions beyond that of individuals who are directors or what as a matter of conventional company law taxonomy would be described as officers of companies.  Section 275(1) is in the following terms:

“(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

(1A) On the hearing of an application under subsection (1) the Official Receiver or the liquidator, as the case may be, may himself give evidence or call witnesses.”

5.  It is, in my opinion, therefore, quite clear that section 275, unlike the section, which it replaces, applies to persons other than directors. It clearly extends to any individual who was knowingly party to the carrying on of the business with an intent to defraud creditors or others or for any fraudulent purpose.  The Respondent was not a de iure director (I ignore the question of whether it extends to a shadow director) of the Companies and assuming that he had to be in order for section 275 to be applicable, the Respondent would be correct that the claim against him under section 275 would be unsustainable.  However, this is not the case.  What his precise position was within the Company is in itself irrelevant.  What is relevant is whether there was an intentional scheme or actions to defraud creditors or others and, if so, whether he was knowingly a party to it.  My understanding was that by the end of the hearing the Respondent (who appeared in person) accepted that his original argument that presumed section 275 only applied to directors was probably wrong.  The applications before me was to decide if there should be a preliminary issue to determine the applicability of section 275.  Ordering the trial of a preliminary issue rather than all issues being dealt with together is exceptional[1].  Given the complexity of the claim under section 275, it seems to me quite clear that it is not suitable for determination separately and in advance of a trial of the entire application.

6.  Section 276(1) and (1A) is worded differently:

“(1) If in the course of winding up a company it appears that any of the persons specified in subsection (1A) has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance, breach of duty or breach of trust 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 person, and compel the person 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, breach of duty or breach of trust as the court thinks just.

(1A) The following persons are specified for subsection (1)—

(a) a person who is or has been an officer of the company;

(b) a person who is or has acted as a provisional liquidator or liquidator of the company;

(c) a person who is or has acted as a receiver or manager of the property of the company;

(d) a person, other than a person falling within paragraph (a), (b) or (c), who is or has been concerned, or is taking or has taken part, in the promotion, formation or management of the company.”

7.  Section 276(1) applies to any person who satisfies the definition of “officer”.  Officer is defined in the section 2 of the Ordinance to include a director or manager of the company.  “Manager” is also defined.  It means a person, who is under the immediate authority of the board of directors and exercises managerial functions.

8.  The Respondent argues that he was not a manager and, therefore, section 276 cannot apply to him.  It seems to me that on the basis of the evidence that has been filed, that this is also not an issue suitable for determination as a preliminary issue.  It is clear from the Respondent’s own evidence that he certainly had some managerial functions in the Companies, which he argues were controlled by his Father.  The Respondent was also convicted of nine counts of conspiracy to defraud arising from the subject matter of the Liquidators’ claims.  He and his Father’s appeal was dismissed.  Leave to appeal to the Court of Final Appeal was also dismissed.  In these circumstances it also seems to me clear that this claim is not suitable for determination in advance of a full trial.

9.  I, therefore, dismiss the Respondent’s two Disposal Summonses. I will make a costs order nisi that the Respondent pays the Applicants’ costs forthwith with a certificate for counsel, such costs to be taxed if not agreed.

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)
[2020] HKCFI 549

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 298 OF 2011

____________________

____________________

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 299 OF 2011

____________________

____________________

____________________

(HEARD TOGETHER)

_____________________

D E C I S I O N

_____________________

Introduction

1.  The Respondent in these two misfeasance proceedings, Mahesh Dayaram, has issued two summonses in identical terms seeking discovery from the Applicants, the Liquidators of Days Impex Limited and Days International Limited, pursuant to RHC O24 r7.

2.  In August 2015 Mr Dayaram and his Father, Nanik Dayaram, were convicted of nine counts of conspiracy to defraud following a     trial in HCCC 2/2014 and sentenced to 10 years imprisonment (“Convictions”).  Their appeals against the Convictions to both the Court of Appeal and the Court of Final Appeal were unsuccessful.

3.  Mr Dayaram is acting for himself [1].  He has appeared before me at a number of case management hearings.  He is clearly an intelligent man.  Mr Dayaram has been able to produce a clear and comprehensive skeleton argument running to some 50 pages despite the restrictions he is under in Stanley Prison. Although not a lawyer my impression is that Mr Dayaram has sufficient understanding of the court process to present the present applications and manage the civil proceedings he faces competently.  I have made allowances in the directions I have made for the progress of the proceedings generally, and this application in particular, to take into account that Mr Dayaram is not a lawyer and is in prison.  The Liquidators have cooperated by generally agreeing to the directions Mr Dayaram has proposed and preparing hearing bundles, although Mr Dayaram is the applicant in the present summonses.

4.  The style and contents of this decision are aimed at ensuring that so far as possible Mr Dayaram understands both the decision and my reasoning.  I have endeavoured to keep it as brief and simple as possible.

Background

5.  The background to the misfeasance proceedings is as follows.  Much of this section is taken from Mr Chen’s useful summary in his skeleton argument:

(1)  The Convictions concerned false invoices and false bills of lading submitted to various banks for a total of 174 import and export loan applications.

(i)  The funds from the import loans were purportedly used to fund the purchase of goods by the Group from Oscoda Electronics Ltd (“Oscoda”).  In support of the applications for import loans, sales invoices from Oscoda were submitted to the defrauded banks and, after each successful application, the funds were released to Oscoda.

(ii)  The funds from the export loans were purportedly used to fund the sale of products by Days Impex to Priya International LLC (“Priya”) and Sadrudin Sumar (“Sadrudin Sumar”).  Bills of lading were issued by Opus Container Lines S. A. (“Opus”) and sales invoices between Days Impex and Priya or Sadrudin Sumar were submitted to the banks in support of the export loan applications.

(2)  The companies obtained over US$50 million in loan proceeds from the 174 loan applications.  The Commercial Crime Bureau analysed the fund flow arising from 161 loan applications and observed a circular fund flow pattern.  The Liquidators also carried out an independent analysis of the fund flow arising from 161 loan applications and similarly observed a circular fund flow pattern.

(3)  In the criminal proceedings, the prosecution’s case was that the underlying sale and purchase transactions giving rise to the 174 loan applications were fictitious, and the invoices, bills of lading and other documents submitted to the banks in support of the loan applications were false.  As regards the trading entities, the prosecutions’ case was that Oscoda was not a genuine supplier, Priya and Sadrudin Sumar were not genuine purchasers, and that Opus did not exist and the related bills of Opus were false.

(4)  The misfeasance proceedings concern 161 import loan applications (“Loan Applications”).  The Liquidators’ case is that Mr Dayaram acted in breach of his fiduciary duties owed to the companies by submitting or procuring the companies to submit false invoices and false bills of lading to various banks in support of the Loan Applications.  The scope of the misfeasance proceedings largely overlap with the scope of the criminal proceedings: 156 out of 161 Loan Applications formed part of the 174 loan applications being the subject matter of the Convictions.

	HCCW 298 (Days Impex)		HCCW 299 (Days International)
Bank	No. of Loans	Charge	No. of Loans	Charge
HSBC	46 import loans	1 and 2	11 import loans	1 and 2
HSB	22 import loans	3 and 4	45 import loans	3 and 4
BOB	15 import loans	5 and 6	17 import loans	5 and 6
DBS	4 import loans	Not charged
Citibank	1 import loan	Not charged
Total:	88 import loans		73 import loans

(5)  The principal issue that arises for determination in the misfeasance proceedings is whether the transactions underlying the Loan Applications were genuine.  Various sub-issues arise, including the fund flow pattern of the proceeds from the Loan Applications, and if the fund flow was circular, whether the circular fund flow could be justified.

6.  Mr Dayaram does not accept that the transactions underlying the Loan Applications are false. His application for discovery is directed to producing documents that he believes will demonstrate this.  Necessarily he suggests that the transactions were not adequately or competently explored by his counsel during the criminal trial.

The Relevant Legal Principles

7.  Mr Dayaram’s skeleton argument contained extensive citation of authorities explaining the principles that govern discovery applications and how those principles in practice are applied by the courts.  As I explained to Mr Dayaram judges are very familiar with the principles and it is not necessary to delve into them in any depth.  I summarise them in the following paragraphs by using Mr Chen’s summary of the principles in his skeleton argument, with the exception of [8], which refers to an authority relied on by Mr Dayaram, which neatly sets out my approach to the application, which to use layman’s language, has been to give Mr Dayaram the benefit of the doubt:

(1)  The Summonses are issued under RHC O24 r7 and the inherent jurisdiction of the court.  The principles governing RHC O24 r7 are as follows (see Hong Kong Civil Procedure 2020 §24/7/2):

(i)  There is no jurisdiction to make an order for specific discovery under RHC O24 r7 unless there is sufficient evidence or prima facie case that: (a) the documents or classes of documents exist which the other party has not disclosed; (b) the documents relate to a matter in issue in the action; and (c) the documents are in the possession, custody or power of the other party.

(ii)  Once it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order discovery.

(iii)  The Court will not make an order unless the discovery sought is necessary either for disposing fairly of the cause or matter or for saving costs.

(iv)  The Peruvian Guano test remains the test of relevance.  A document is relevant if:

(a) it is reasonable to suppose that it contains information which may, not must, either directly or indirectly enable the party requiring the same either to advance his own case or to damage the case of his adversary; or

(b) it is a document which may fairly lead the party to a train of inquiry which may have either of those two consequences.

(v)  For the purpose of discovery, the pleadings have to be looked at broadly.

(vi)  The order must identify with precision the documents or categories of documents which are required to be disclosed, for otherwise the person giving discovery may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(vii)  Notwithstanding the Peruvian Guano test, “fishing” is not allowed, and discovery should not be oppressive.

(viii)  The respondent may answer an application for specific discovery by an affidavit stating that he does not have the documents, and this will be conclusive at the interlocutory stage.

(2)  It is insufficient for an applicant to allege that the respondent has or had documents: a prima facie case must be made out for (1) existence, (2) possession, custody or power, and (3) relevance of the specified documents.

(3)  Where a request for a class of documents is made, the class must not be defined or described so widely so as to include documents which are not relevant to the issue.  The prerequisites for the invocation of RHC O24 r7 must be established in respect of the class described as a class, not as regards some in the class only. Further, a party applying for discovery cannot simply seek “all documents bearing upon an issue or showing a particular thing”, for such documents merely bear on an issue but do not form a class                    of documents which is discoverable under RHC O24 r7:     Li Tak Yee Samuel v Societe Generale Bank and Trust (unreported, HCA 2478/2009, 16 April 2013) at §§36–39 per Anthony Chan J.

8.  Mr Dayaram referred me to the decision of Stone J in Vashdev Essardas Mahbubani t/a Vashi's Export Co v Motis Exports Ltd and Others [2] in which the judge says this:

“... As no doubt will become known by commercial practitioners, my attitude, as Judge presently in charge of the Commercial List, is that in general discovery is a good thing, and that in cases of doubt I am more likely to lean in favour of discovery than against it. In this connection I am reminded of one of the broad principles of the common law as expressed by Lord Justice Bingham (as he then was) in the case of Ventouris v. Mountain [1991] 1 WLR 607 at 611H, where the learned Lord Justice observed as follows:

‘Our system of civil procedure is founded on the rule that the interests of justice are best served if parties to litigation are obliged to disclose and produce for the other party’s inspection all documents in their possession, custody or power relating to the issues in the action. This is not of course a necessary rule but it is firmly established here.  It is not however an absolute rule, as exceptions such as legal professional privilege and public interest immunity demonstrate.  Nonetheless, disclosure being generally regarded as beneficial, any exception has to be justified as serving the public interest which gives rise to the exception ...’”

9.  As I noted in [7] this reflects my own approach, which means that I have tended to lean in Mr Dayaram’s favour.  I now turn to consider the specific categories of documents that have been sought.

Banking documents — [1(a)]

10.  The Liquidators agree to give discovery of the documents sought in this paragraph.

Communications concerning fraud insurance policies — [1(b)]

11.  Mr Dayaram seeks:

“(b) Any and all documents (including letters, faxes, email communications, meeting attendance notes and phone call records) in respect to Fraud Insurance Policies and/or Fraud Insurance Claims by HSBC, HASE, BOBI, DBSB, CITI and UCOB, including but not limited to:

(i)  HSBC and HASE (‘HSBC Group’) Fraud Insurance Policy;

(ii)  HSBC Group Fraud Insurance Submitted Claims; and

(iii)  HSBC Group Fraud Insurance Payments Received.”

12.  Mr Dayaram seeks these documents, because he assumes that the criminal prosecutions were in some way procured by HSBC in order to enable them to make a claim under fraud insurance that HSBC has.  It would appear to be a central feature of Mr Dayaram’s defence that the case against him and his Father, which led to the Convictions and the present proceedings, are a consequence of dishonesty on the part of those advancing the claims.  So by way of example in [16] of his 1^st affirmation Mr Dayaram says this when dealing with the application for discovery of the fraud insurance policies: “As this was the PL’s first assignment for HSBC, FHY [Mr Fok] promised HSBC a criminal conviction and therefore had to obtain the conviction at any cost, including but not limited to lying under oath and/or withholding material information.”.  Mr Dayaram provides nothing remotely approaching direct evidence for these serious allegations. Much of his application seems premised on his (prospective) ability to construct from information that may be gleaned from facts contained in the documents that he seeks facts and matters from which the inference of a dishonest conspiracy to obtain the Convictions can be made.

13.  The Liquidators, through the affirmation evidence of Mr Fok, deny Mr Dayaram’s allegations.  Mr Fok says on oath that the Liquidators have not seen any such insurance policies and I cannot see why one would expect them to do so.  It is well established that a statement on oath that a party does not have in their possession, custody or power a document is conclusive [3].  That disposes of the application in [1(b)].

Communications with former clients or vendors of the companies —   [1(c) & (d)]

14.  This paragraph seeks disclosure of all documents with former clients and vendors of the Companies. Their relevance is said to be that they will help show whether the underlying transactions were genuine.  Although Mr Dayaram does not demonstrate what in such of these documents as exist might contain information that shows the transactions were relevant, as the genuineness of the transactions are in issue I will make an order for discovery of these documents.

Documents relating to recovery actions in respect of the Companies assets — [1(e)]

15.  If Mr Dayaram caused or permitted the companies to enter into bogus trade finance with HSBC thus causing loss, the fact that the Liquidators recovered monies on behalf of the companies from genuine debtors of the companies in itself is irrelevant to either an assessment of Mr Dayaram’s breach of duty or the loss it caused.  I note that Mr Dayaram has not adduced any evidence to suggest that anything was recovered from entities said to be customers under the impugned transactions.

Documents relating to the proceeds of the sale of carparks — [1(f)]

16.  Mr Dayaram is seeking documents which show how the proceeds of the sale of carparks not paid to creditor banks under the mortgages that they had over some of the 112 carparks apparently owned by Days International Hong Kong were dealt with.  This simply has nothing to do with the issues that arise in the misfeasance proceedings.

All documents seized by the Liquidators from the offices of the companies after their appointment — [1(g)]

17.  Clearly Mr Dayaram is not entitled to an order in these terms.  He is only (at its widest) entitled to all documents that have been seized that are relevant (in the sense explained in [7] and [8]) to the issues in the proceedings.  Mr Dayaram frames his application for these documents in his 1^st affirmation in terms of an entitlement to look at the documents and assess whether any are relevant.  The Liquidators could, if it was practical, give Mr Dayaram access to the documents and let him get on with checking them, but this is not the criteria for assessing whether an order under RCH O24 r7 should be made.  Under rule 7 a party is entitled to discovery of a class of documents defined with adequate precision by its nature [4].  A party cannot simply ask for everything the other party may have on the basis that amongst the documents there may be, or even likely be, some relevant documents.  Mr Dayaram has not made any effort to identify what classes of documents within the 600 boxes of files he suggests have been seized he wishes disclosed.

Conclusion

18.  In respect of the summons in each winding up proceeding I will make an order in the terms of paragraph 1(a), (c) and (d).  I will not deal with inspection in this decision.  I invite the Liquidators in the first instance to write informing me and Mr Dayaram of the approximate quantity of documents they will disclose (in the case of class 1(a) I understand Mr Dayaram has already been provided access to the documents) and how long it will take to compile them. Mr Dayaram can then write informing me of how he wishes inspection to be dealt with bearing in mind he is in Stanley.

19.  Given my decision and the reality of Mr Dayaram’s position I will make a costs order nisi that there be no order as to costs.

HCCW 298 & 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 298 OF 2011

____________

____________

____________

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 299 OF 2011

____________

____________

____________

(Heard together)

____________________

D E C I S I O N

____________________

1.  There are two summonses issued by the respondent, (1) for production of documents, ie audit working papers for 5 years; (2) time summons to extend time for her to file an affirmation in opposition.

Background

2.  Days Impex Limited (“Days Impex”) and Days International Limited (“Days International”) were wound up on 12 December 2011.  The current liquidators were appointed on 22 August 2012.

3.  The liquidators’ case is that the operations and affairs of the 2 companies involved circular fund flows between them.  Funds applied for from various banks were channelled through different entities and companies, including Days Impex and Days International.  The funds were eventually used to repay loans previously obtained and part of the money was spent by companies within the Days Group or related individuals.  Their case was premised on false import or export loan applications by the Days companies. 

4.  Officers of the companies, Mahesh Dayaram and Nanik Dayaram, were convicted of conspiracy to defraud in relation to false invoices and other documents submitted for applying for bank loans.  The respondent, Ms Kwok, was acquitted in the criminal trial.

5.  The liquidators took out a summons on 9 March 2017, seeking a declaration that Ms Kwok was knowingly a party to the carrying on business of Days Impex and Days International, with intent to defraud creditors by procuring the companies to apply for substantial loans.  The liquidators also seek a declaration that Ms Kwok, as an officer of the company, was guilty of breach of duties, misapplication of the bank loans and an order for her to pay the liquidators such sums.

Production Summons

6.  Ms Kwok seeks audit working papers for 5 financial years, from 2005 to 2010.  Her purported defence is that she had signed the audited financial statements but never the working papers.  She does not now have documents to prove her case and she would need documents to prepare her affirmation in opposition.  The liquidators oppose the application for production on the ground of irrelevance. 

7.  I agree with the liquidators’ stance.  The liquidators’ claim against Ms Kwok was based on the period of March to September 2011, in which her alleged breaches of duties arose.  Accordingly, the audit working papers for the period 2005 to 2010 are irrelevant to the liquidators’ summons.  Further, if the alleged defence was true, all that Ms Kwok would need to do is to say she had never signed the supporting audit working papers, leaving the liquidators to produce any signed working papers to contradict her version.

8.  I dismiss the production summons on the ground of irrelevance.

Time Summons

9.  The respondent had already received the papers in June 2017.  She had been given one extension by the liquidators, by correspondence, for three months.  This accordingly is her second request for extension of time for another 3 months.  In the course of the oral submission, Ms Kwok even asked for an extension of 6 or 9 months.

10.  I appreciate that the case may not be easy for Ms Kwok.  She has no lawyers on record.  The reason for the time extension is that she needed to acquire documents from various sources, including transcripts, and she may have to read some of the 600 boxes of documents seized by the liquidators.

11.  Till this date, I have not seen Ms Kwok make attempts to obtain the relevant transcripts, whether from her former solicitors in the criminal trial or the court.  She estimated that out of the 60 days of criminal trial, about 10 to 15 days’ transcripts would be required.  However, she has done nothing to identify those 10 to 15 days.  She is well advised to proceed to obtain a CD of the proceedings in the criminal trial and pick the relevant days of transcript evidence to be transcribed by the court as soon as possible.

12.  As for the 600 boxes of liquidators’ documents, it is not for Ms Kwok to fish for evidence without even stating her affirmation in opposition.  The necessary documents in support of the liquidators’ case have already been given to her as exhibits to the liquidators’ affirmations.  I will not exclude the possibility that with a proper affirmation in opposition and with sufficient identification of relevant documents, the court will permit Ms Kwok to file a further affirmation or a further summons for production of documents should circumstances require.  But as of the present, I require Ms Kwok to file an affirmation in opposition to the liquidators’ summons as soon as possible.

13.  Appreciating the difficulties to her as a litigant in person and the volume of documents now relied on by the liquidators, I will give her 4 months’ extension but on an unless order basis.  In other words, unless, by 4 pm on 15 March 2018, Ms Kwok files and serves her affirmation in opposition to the liquidators’ summons, she will be barred from doing so.

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 299 OF 2011

_________________

_________________

_________________

D E C I S I O N

_________________

1.  On 18 June 2014 Global Empire Limited issued a summons seeking to reverse the liquidators’ decision dated 28 May 2014 rejecting Global Empire’s proof of debt lodged on 29 November 2012 for approximately HK$419,645,000. The circumstances in which Global Empire suggested that this debt was owed to it are explained in my decision dated 11 November 2013.

2.  To cut a relatively complex story short, Global Empire’s claim relates to an alleged assignment of debt to it by the Dayarams in connection with a company called Days International Limited.  The Dayarams were charged and convicted of fraud in relation to the affairs of the company and in particular the circumstances in which the alleged debt was created. 

3.  As my earlier decision explains, the circumstances in which it is suggested that Global Empire came to acquire the debt and indeed the genuineness of the debt itself are, to put it at its lowest, highly questionable and given the conviction of the Dayarams and the failure of their subsequent appeal, it is quite clear that the suggestion that Global Empire is owed any money by the company as a result of the assignment is bound to fail.

4.  As a consequence, Global Empire has agreed to withdraw its summons appealing the liquidators’ decision and pay the costs, the only issue is whether or not the costs should be paid on an indemnity basis as the liquidators seek.  It seems to me to be quite clear that Global Empire’s appeal of the liquidators’ decision was pure chutzpah and it had no realistic prospect of success and should never have been brought.  I will therefore order that the costs are assessed on an indemnity basis.

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 299 OF 2011

____________

____________

_________________

D E C I S I O N

_________________

1.  I have before me a summons issued by the Liquidators of Days International Limited (“Company”) pursuant to section 221(3) of the Companies (Winding-up and Miscellaneous Provisions) Ordinance, Cap 32, for an order for the production by the Bank of East Asia Limited (“Bank”) of:

“... monthly account statements of all accounts for the period from January 2004 (being the month of incorporation of Oscoda Electronics Limited (incorporated in the BVI)) until December 2011 (being the month of the Company’s winding up) which Oscoda Electronics Limited has with the Respondent that are in the Respondent’s possession, custody and control.”

2.  Oscoda Electronics Limited (“Oscoda”) is incorporated in the British Virgin Islands.  It has one director: Ms Wy‑yuen Sung. It is not known who the registered shareholder or shareholders are.

3.  The Liquidators seek production because it is believed, for credible reasons, that Oscoda was the conduit for a fraud perpetrated by the owners of the Company, which involved the drawing down of import loans by the Company pursuant to banking facilities granted to it, and the money drawn down then being circulated through Oscoda and back to the Company.  The owners of the Company, Nanik and Mahesh Dayaram, were convicted of nine counts of fraud arising from this scheme.

4.  I am satisfied that the Liquidators reasonably require the documents. The more difficult question is whether or not the documents that the Liquidators seek come within section 221(3) which provides that:

“(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.”

5.  Section 221(3) is worded differently to section 221(1) that empowers the court to order the examination of officers and others “capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company”.  The impact of the difference in wording on the scope of what documents can be obtained is considered in detail in Kwan J’s judgment in Weihong Petroleum Co Ltd (No 2)[1] and my judgment in China Medical Technologies Inc[2].  I will not repeat what is said in those two judgments here.  I concluded in para 49 of China Medical Technologies that section 221(3) was narrower in scope than section 221(1) and that whether a document was “relating to a company” is to be determined using a common sense approach, which is essentially commercial and one that a layman will normally be able to understand[3].

6.  In the present case the Liquidators argue that the reality of the fraud perpetrated by the Dayarams means that the flow of money between the Company and Oscoda should be viewed as one matter and that viewing the factual components of the fraud as being in some way distinct is artificial.  Thus, so the argument develops, Oscoda’s bank statements recording receipts and payments forming part of the circulation of money from and back to the Company can properly be viewed as “relating to the Company”, which was the principal corporate vehicle used to perpetrate the fraud.  I agree.

7.  I will make an order that the Bank produces the documents sought. The Bank has quite properly pointed out that not all payments made by Oscoda were to the Company or those associated with the Dayarams and that some protocol is required for excluding unrelated documents or information in documents.  The precise terms of order should be agreed between the Liquidators and the Bank and failing agreement the matter can be referred back to me in writing.  The costs of the Liquidators and the Bank shall be paid out of the assets of the Company.

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 299 OF 2011

___________________

__________________

________________

D E C I S I O N

________________

1.  This is the Liquidators’ application by Summons dated 29 August 2014 (“Summons”) for an order that Global Empire Ltd (“Global Empire”) do within 14 days provide security in the sum of HK$883,500 for the Liquidators’ costs in respect of Global Empire’s Summons dated 18 June 2014 appealing against the Liquidators’ decision in rejecting Global Empire’s proof of debt (“Appeal”).

Background

2.  Days International Ltd (“Company”) was wound up by the Order of Mr Justice Harris made on 12 December 2011.  The Liquidators were appointed on 22 August 2012.

3.  On 9 November 2012, the Liquidators issued a summons for directions (the “Directions Summons”) as to whether or not they should convene a further creditors’ meeting to consider afresh its composition.  The application was made because dispute arose between the Liquidators and Global Empire as to the valuation of Global Empire’s proof of debt for voting purposes – the proof was for the sum of HK$419,645,000 which the Liquidators valued at $1.  The Directions Summons was heard in July 2013 by Mr Justice Harris.

4.  By a decision handed down on 11 November 2013 (“Decision”), the court ordered that there should not be a further meeting of the Company’s creditors.

5.  On 13 March 2014, the Liquidators applied by summons (“Third Party Costs Application”) to join Mr Kirplani, who was and is a director and shareholder of Global Empire, as a respondent in these proceedings for the purposes of costs only, and that Mr Kirplani shall bear the Liquidators’ costs of the Directions Summons to an extent equal to that borne by Global Empire.

6.  On 19 March 2014, Mr Kirplani consented to being joined as a respondent herein for the purposes of costs only.

7.  By Notice of Adjudication of Proof of Debt dated 28 May 2014, the Liquidators rejected Global Empire’s proof of debt in its entirety.

8.  On 18 June 2014, Global Empire issued a summons for the Appeal pursuant to rule 95 of the Companies (Winding-up) Rules, Cap 32H.  The application is supported by the 7^th affirmation of Mr Kirplani.

9.  On 29 August 2014, the Liquidators issued the Summons.  By a letter dated 7 October 2014, Mr Kirplani has confirmed that he is willing to give an undertaking to pay any costs which may be ordered against Global Empire by the court in these proceedings (“Undertaking”).  This has been confirmed in the 8^th affirmation of Mr Kirplani filed in opposition to this Summons.  However, the Liquidators have refused to withdraw the Summons.

10.  The Third Party Costs Application was heard on 16 October 2014 by Mr Justice Harris, who accepted Mr Kirplani’s undertaking to pay the Liquidators’ costs of the Direction Summons for which Global Empire is liable.

Security for costs

11.  The Liquidators rely upon s 905 of the Companies Ordinance, Cap 622 (“Ordinance”) which empowers the court to make an order requiring security be given for a defendant’s costs where :

(a) the plaintiff in the action or legal proceedings is a company; and

(b) it appears by credible testimony that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.

12.  The arguments in this application are fairly narrow.  There is no dispute that the Global Empire itself will not have the means to pay the Liquidators’ costs in the event that the Appeal is dismissed.  However, Global Empire says that in light of the Undertaking, the Liquidators have failed to demonstrate that it will be unable to pay the costs ordered against it.

13.  Secondly, Global Empire argues that the skeleton bill of costs produced by the Liquidators in support of the Summons is over generalised and excessively ambitious.  It is open to the court to either dismiss the Summons outright or reduce the quantum of security to a reasonable amount.

Global Empire’s ability to meet a costs order

14.  I accept the submission of Mr Lam, who appeared for Global Empire, that in order to establish jurisdiction for ordering security under s 905 of the Ordinance, the Liquidators are required to show that Global Empire will be unable, and not may be unable, to meet its debts when a costs order is made against it : KJM Industries Ltd v JPM Resources (HK) Ltd [2005] 4 HKC 100, §11. 

15.  Mr Lam further submitted that in ascertaining whether a company will be unable to pay the costs, the court will inquire as to whether any other individual or entity would fund the payment of those costs and have the means to do so.  Reliance was placed on 2 authorities : (a) Wheelock Marden v Aktieselskabet Dansk Skibfinasiering [1991] 1 HKC 194 at 197 and (b) Jade Plan Assets Ltd v Lau Kim Hung, unrep, HCA 910/2007, 9 January 2008 at §41.

16.  On the other hand, Mr Chen, who appeared for the Liquidators, argued that as a matter of statutory construction of s 905 the court is only concerned with the ability of the plaintiff company to meet an adverse costs order.  The Undertaking is irrelevant for the present purpose. 

17.  I agree with Mr Chen on the construction point. It appears to me quite plain that if Global Empire has to rely upon Mr Kirplani to meet an adverse costs order, it must follow that the jurisdictional basis of this application (Global Empire will be unable to pay the Liquidators’ costs in the event that the Appeal failed) has been established. 

18.  In respect of the 2 authorities relied upon by Mr Lam, it should be said that neither Wheelock Marden nor Jade Plan Assets was concerned with an application under s 905 of the Ordinance (previously s 357).  The courts were not concerned with the effect of a third party undertaking on the plaintiff company’s ability to pay the defendant’s costs as a jurisdictional threshold under s 905 of the Ordinance. 

19.  Further, Wheelock Marden is an exceptional case.  The Court of Appeal (at 196G-197G) endorsed the judge’s view that the plaintiff foreign company was effectively backed by the Danish government, which would no doubt discharge or cause to be discharged an adverse costs order against the plaintiff.  The application under O 23, r 1 was therefore dismissed.

20.  In Jade Plan Assets, the 1^st defendant sought security for costs against the 2^nd plaintiff (being a company resident out of Hong Kong) under O 23, r 1.  The court dismissed the application on the basis that a co-plaintiff was resident in Hong Kong whose case would likely stand or fall together with the 2^nd plaintiff’s and who would be able to pay off any costs order against the 2^nd plaintiff (see paras 38 to 42).  This was thus an application of a well-settled rule that order for security for costs will not be made against a foreign plaintiff if there are one or more co-plaintiffs resident in the jurisdiction who rely upon the same cause of action (see Hong Kong Civil Procedure 2015, rubic 23/3/5).

21.  However, I am unable to agree with Mr Chen that the Undertaking is irrelevant for the present purpose.  In my view, it goes to the exercise of the unfettered discretion of the court in this application (see E-Global Ltd v Trenda Ltd [2012] 2 HKLRD 1211, §9).  Hence, the issue becomes whether it is demonstrated that Mr Kirplani will be in the position to meet a costs order made against Global Empire in the Appeal. 

22.  In the circumstances of this case, it would not be right to require the Liquidators to show that Mr Kirplani will not be in such a position.  This will be a highly difficult task and one which sits uncomfortably with what should be relatively straightforward interlocutory application.  The burden must rest on Global Empire to persuade the court that Mr Kirplani will be in such a position.  After all, this is the foundation of Global Empire’s resistance to this application.  

23.  I regret to say that the evidence of Mr Kirplani in respect of his means consists of nothing more than bare assertions that he is a man of substantial means.  No bank statement or financial document has been adduced by Mr Kirpalani as evidence.  It is incorrect for Mr Kirplani to say that the Liquidators have accepted that he is a man of substantial means (para 6(b) of his 8^th affirmation).

24.  I have not overlooked the fact that the Decision referred to Mr Kirplani’s evidence to the effect that he was a wealthy businessman.  However, I must be guided by the evidence adduced in this application. 

25.  In the premises, I am unable to see any reason why this court should exercise its discretion against the Liquidators. 

Quantum of security

26.  I have been asked by Mr Lam to have regard to the dicta of the court in Hero Rich International Ltd v Benefun International Holdings Ltd,unrep, HCA 1433/2009, 7 October 2009 at §38:

“To facilitate the court's decision on the appropriate amount of security, the applicant's legal representatives must provide a realistic estimate of the time and costs likely to be incurred in each stage of the proceedings which must bear some logical correlation to the complexity of the case and the issues involved. Otherwise, the court is deprived of the assistance that it rightly expects. As has been remarked before, if the skeleton bill is unhelpful and the court in doing its best orders an amount which is on the low side, the applicant only has itself to blame : seeSunchaseat §11 per Rogers VP, approving Suffiad J’s judgment at first instance.”

27.  Further, when faced with an unhelpful and especially overly ambitious skeleton bill, the court is entitled in an appropriate case to dismiss the application on this ground alone : Hero Rich, at §39.

28.  There is in support of this application a skeleton bill of costs (“Bill”) adduced by the Liquidators.  There is substance in Mr Lam’s criticisms of the Bill for being uninformative.   For example, there is no indication of the seniority of the counsel intended to be instructed for the Appeal or any breakdown for the counsel fees of HK$250,000 attributed to the hearing in terms of brief fee and refresher rate.  I should mention that the Bill was criticised as being inadequate during the directions hearing of this Summons back in October 2014.  However, the Liquidators have decided not to improve the same. 

29.  Mr Chen sought to defend the adequacy of the Bill by referring to the complexity of the matters to be ventilated in the Appeal.  It is the Liquidators’ case that the loans to the Company, which made up the debt in question, were in fact circular payments made to facilitate an import loan fraud.  It was said that the work involved in the Appeal is laborious and complicated.  The Directions Summons took no less than 3 days to resolve with cross-examination.  There is, however, no agreement on the length of the Appeal or whether it will involve any cross-examination. 

30.  It was submitted by Mr Chen that in Hero Rich, the defence had not yet been filed and the court therefore did not have a clear idea about the issues of the case.  In the present case, the court has a better appraisal of the issues involved in a discrete appeal. 

31.  I am inclined to agree with Mr Lam that the fact that the parties are familiar with the issues in the Appeal (the Directions Summons canvassed largely the same issues as in the Appeal) means that (a) more details and/or breakdowns can be provided in the Bill and (b) the court should be provided with evidence on the costs so far incurred as guidance. 

32.  I have also been reminded by Mr Lam that the Liquidators are only entitled to sufficient, but not complete, security in respect of their costs in the Appeal. 

33.  The court normally takes a broad brush approach on the quantum of security.  Whilst the court would not encourage any unnecessary inflation of legal costs with the provision of lengthy skeleton bill of costs, the court must be given adequate assistance.  Although I have no difficulty accepting that the issues in the Appeal are complex, the Liquidators should have heeded the criticisms on the inadequacy of the Bill.

34.  Doing the best I can in the circumstances, I reduce the amount of security to HK$500,000. 

Conclusions

35.  I make an order in terms of para 1 of the Summons with an amendment over the amount of security.  In addition, I make the ancillary order sought in para 30 of Mr Chen’s skeleton argument, which is not disputed by Mr Lam.  Further, I make an order nisi that the costs of this Summons be to the Liquidators, to be taxed if not agreed.

36.  Last but not least, I am grateful to counsel for their assistance in these matters.

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 299 OF 2011

______________________

______________________

_______________

DECISION
_______________

1.  On 11 November 2013, I delivered Reasons for Decision in respect of two summonses that had been issued in these winding up proceedings.  The  material one was an application by the Joint and Several Liquidators for directions as to whether or not they should convene a further meeting of creditors and if they were to do so, whether or not the debt of Global Empire Limited (“Global”) should be valued at $1 as it had been at the first meeting, or valued at its full value as claimed, of $419,645,000.

2.  I determined the application in the liquidators’ favour, in other words, I found that they did not need to convene another meeting and that they had properly admitted the Global proof at $1.  I made a costs order that the liquidators’ summons be paid by Global.

3.  I have three applications before me in respect of costs.  The first, issued by Global, is for an order that the liquidators’ costs be paid out of the assets of the company.  The second has been issued by the liquidators and is for an order that the costs be paid by Global on an indemnity basis.  The third also issued by the liquidators, was for an order that Mr Kirpalani, the sole shareholder of Global, be liable for such costs order as the court makes against the company.

4.  At the outset of the hearing, Mr Kirpalani, who appeared in person, very fairly accepted that he should pay any costs order against Global, and that matter can be disposed of by an undertaking to that effect.

5.  So far as the application made by Global is concerned, in my opinion the position is as follows: Mr Chain argued on behalf of Global that the liquidators’ application was a common type of administrative application made in liquidations, the costs of which should be borne, at least the costs of the liquidators should be borne, out of the assets of the estate.  In other words, I should not approach costs on the basis that this was adversarial litigation. Mr Chain referred me to the decision of Mr Justice Richards in Riddell v McGrath.

6.  I accept, of course, that this is an accurate statement of the court’s common practice, however it does seem to me, for reasons which will be apparent on the reading of my November Reasons for Decision, that the character of this particular dispute was adversarial in nature and in my view, it is appropriate that the unsuccessful party, namely Global, pays the costs.

7.  So far as the remaining application is concerned, namely that the costs be paid on an indemnity basis, in my opinion the position is more complicated.  As is apparent from paragraph 13 of my Reasons for Decision, the principal reason for me determining the liquidators’ summons in their favour was because of the contents of the third affirmation of Mr Fok Hei Yu which was filed and served on 8 July 2013.  This, for the first time, provided information that the liquidators had been given by the CCB which explained why they took the view that it was strongly arguable that the underlying debt, which had been assigned to Global, was not genuine.

8.  The court has a broad discretion to order indemnity costs although the authorities establish that in order for that discretion to be exercised, some special or unusual feature must be identifiable: Town Planning Board v Society of Protection of the Harbour (No. 2) (2004) 7 HKCFAR 114 at 123 to 124 per Li CJ; also Libertarian Investments Ltd v Thomas Alexej Hall (unreported, FACV 14/2012, 11 March 2014) at para 6 per Ribeiro PJ.

9.  Pursuit or defence of a claim which a party has been properly advised should be understood to have minimal prospects of success, is capable of constituting an unusual feature which justifies making an indemnity costs order, (see for example re Fountain Selected Meats).

10.  Although, for the reasons explained in my November Reasons for Decision, I accept the liquidators’ submissions that there was some reason to be sceptical about the nature of the agreement entered into by Global to purchase debt from the company’s shareholder, Mr Dayaram, it does not seem to me that the evidence justifies the court concluding that, in the early stages of this application, Mr  Kirpalani would have been told enough by Mr Dayaram to appreciate that  the  liquidators’ view that the debts might be bogus, was quite probably correct.  I  accept, however, that once Mr Fok’s third affirmation had been served, its contents had been digested by Global’s legal advisers and communicated to Mr Kirpalani, it should have been appreciated that the prospects of establishing that the liquidators’ approach to the valuation of the debt was wrong, was minimal.

11.  I do, however, also accept that there is some force in Mr Chain’s submission that Mr Fok’s third affirmation, which was served on 8 July, was sufficiently close to the hearing date (the hearing lasted from 23 to 25 July) that it was unsurprising that Global continued to contest the summons.  The short point being that by that stage, the matter had proceeded so far that it was not unreasonable for Global to take the view that it might as well “have a go”, as Mr Chain put it.

12.  In my view, the correct way to deal with this particular issue is as follows.  It seems to me that it would not be appropriate to penalise Global by ordering indemnity costs up to the date on which Mr Fok’s third affirmation was filed. It seems to me that a certain amount of time has to be allowed for the contents of that affirmation to be digested and for instructions to have been taken.  I accept that the process of determining whether or not to continue to contest the liquidators’ application in the face of Mr Fok’s third affirmation would probably have been difficult and was, no doubt, complicated by the fast approaching hearing date and the fact, for example, that it may have been that counsel’s brief had already been delivered.

13.  I think, taking into account those factors, the correct order is that the costs of the liquidators’ summons up to and including 20 July is paid on a party and party basis and the costs thereafter, paid by Global on an indemnity basis. So far as today’s hearing is concerned, I will order that the costs are paid by Global on a party and party basis.  It would seem to me that that last order is probably appropriate in the round.

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 299 OF 2011

____________

____________

_______________

D E C I S I O N

_______________

Introduction

1.  I have before me 2 matters to determine.  First a summons issued by the Liquidators of Days International Limited, which is in compulsory liquidation (“Company”) for directions as to whether or not they should convene a further meeting of the first meeting of creditors to consider afresh its composition.  This issue arises as a result of a dispute between the liquidators and Global Empire Limited (“Global”), which claims to be the Company’s largest creditor and owed $419,645,000, but which had its debt valued at $1 for voting purposes at the first meeting of creditors.  The summons requires me to determine what value the debt should be valued at for voting purposes.

2.  Secondly, liability for the costs of the appeal of a decision of Master R Lai of 22 August 2012, which has been withdrawn.  This is a straightforward matter, which I deal with at the end of this judgment.

3.  At the hearing before me the Liquidators were represented by Ms Rachel Lam.  Global was represented by Mr Christopher Chain.

Background

4.  The debt allegedly arises in the following way.  The Company has two shareholders: Nanik Dayaram and Days International Limited, which is incorporated in the British Virgin Islands, and is owned or controlled by Mr Dayaram.  In addition to these two companies, Mr Dayaram owns or controls two further companies both named Days Impex Limited and incorporated in Hong Kong and Liberia respectively.  The Days group, which Mr Dayaram ran with his son Mahesh, traded electronic goods apparently successfully until about 2010 when the group encountered financial problems which has led to the Company and other members of the group being put into compulsory liquidation.

5.  Global is owned by Mr Surendar Kirpalani.  Mr Kirpalani explains that in the middle December 2011 he met Mr Dayaram on leaving a Hindu Temple they both attended.  Mr Dayaram and Mr Kirpalani are both Sindhis and acquainted socially.  Mr Kirpalani says that Mr Dayaram asked him if he was interested in a business deal.  The two of them went to a “cha chan teng” to discuss it.  Mr Dayaram proposed that one of his companies sell to Mr Kirpalani debt owed to it by another company for 5% of the value of the debt.  Mr Kirpalani said he was interested but would not commit more than $500,000 which he said in cross-examination was approximately 0.05% of his net worth.  They met again on 20 December 2011.  Mr Dayaram told him that the debt was about $5,000,000,000.  Mr Kirpalani said that he was only prepared to pay 1% for it and he would take all of it or nothing.  Mr Dayaram went away and thought about it and called on 28 December and agreed Mr Kirplanai’s offer.  They met again to discuss the terms and this resulted in the signing an agreement, prepared by Mr Dayaram, on 30 December 2011.  On 17 January 2012 a deed of assignment was signed purportedly assigning to Global the debts owed by the Company to Days International BVI and Days Impex Liberia.

6.  Mr Kirpalani says that he was not told at the time by Mr Dayaram how the debts came to be incurred and neither did he ask.  After the Liquidators valued the debts at $1 he did inquire.  He says Mr  Dayaram told him the following, which is contained in paragraphs 10 to 12 and 14 of Mr Kirpalani’s fourth affirmation:

“10. I understand that in the course of operations of the group of companies owned and operated by the Dayaram family, current accounts as to intra-group transfers of funds were kept between Days Impex Liberia, Days Impex HK, and the Company. On the whole, Days Impex Liberia was the “parent” company that would provide funding in the form of loans to both Days Impex HK (owned by Days Impex Liberia) and the Company (owned by Days International BVI) as “subsidiaries” within the same group.

11. Prior to 31^st March 2011, the arrangement that was historically in place was that loan funding was provided from Days Impex Liberia to the Company indirectly, through Days Impex HK. Under this historical arrangement, the flow of funds between the companies can be set out as follows:-

= Loan funding provided by Days Impex Liberia

= Current account between companies in the course of

day-day trading

12. As a result of this historical arrangement:-

 (i) At the end of every financial year, the Company would be left in a position of debt to Days Impex HK. However, the monies being transferred from Days Impex HK to the Company was actually loan funding originating from Days Impex Liberia.

 (ii) Therefore, bank transfers of funds would be made at financial year end for the purposes of regulating and adjusting the accounts and records of Days Impex Liberia, the Company, and Days Impex HK so that they reflected the actual position of funds between Days Impex Liberia as “parent” and the Company and Days Impex HK as “subsidiaries”.

 (iii) Specifically, Days Impex Liberia would transfer funds to the Company, sufficient for the Company to pay off its “debt” to Days Impex HK (which was actually the loan funding that had originated from Days Impex Liberia over the course of the year). Days Impex HK would then transfer the same funds back to Days Impex Liberia so that Days Impex HK would not be indebted to Days Impex Liberia for the loan funding that had actually been advanced to and for the benefit of Company.

 (iv) The management chose to use actual bank transfers to achieve this purpose rather than doing so on paper because (1) the bank did not charge any transaction fee for the transfers; and (2) the actual transfers having been made and thereby recorded as part of the bank's records, it would then be easier for the auditors to track the funding position between the companies.

 (v) The entirety of these operations was clearly and transparently recorded in the ledger of the companies (as will be seen below). When it had become apparent that this historical arrangement was cumbersome and clumsy due to the sheer amount of loan funding that Days Impex Liberia was required to provide, the practice was changed (as will also be seen below).

….

14. Taking the financial year ended 31^st March 2010 as an example:

 (i) It can be seen from the Company's ledger that on 31^st March 2010，a sum of US$397,700 (amounting to HK$3 million odd) and 17 sums of US$800,000 (amounting to HK$6,200,000 each) were transferred by Days Impex Liberia to the Company. The total sums transferred were about HK$108 million odd.

 (ii) The sum of US$397,700 was used to clear the US dollar debt owed to Days Impex HK by the Company, with the result that the outstanding US dollar indebtedness of the Company to Days Impex HK became zero.

(iii) The 17 sums of US$800,000 (HK$6,200,000) were used to clear the HK dollar debt owed to Days Impex HK by the Company, with the result that the outstanding Hong Kong dollar indebtedness of the Company to Days Impex HK became zero.

(iv) In other words, at the same time that the Company incurred liability to Days Impex Liberia for the HK$108 million odd transferred, a corresponding liability to the same sum to Days Impex HK was extinguished.

(v) As of 31^st March 2010，prior to the transfer of HK$108 million odd, the current account of the Company with Days Impex Liberia had a credit of HK$95 million. It can be seen that, save for one or two isolated instances, Days Impex Liberia did not transfer monies to the Company directly; loan funding went to the Company through Days Impex HK.

(vi) After the transfer of HK$108 million (and 1 or 2 other miscellaneous transactions later), the net amount owed by the Company to Days Impex Liberia is HK$16,275,000 (i.e. what Global Empire claims as "Debt 1").

(vii) As the Company's trading is, in reality, funded by the loan funds ultimately originating from Days Impex Liberia, it is not in any way improper that, after the account regulating exercise is done, Days Impex Liberia has changed from a debtor to a creditor of the Company. Days Impex HK at the same time ceased to be a creditor of the Company.

(viii) There is now shown to me and produced marked "SMK-10" tables extracted from the Company's ledger with an added "balance" column which more clearly illustrates the matters described above.”

7.  The affirmation also explains how the sum of $419,645,000, which Global says has been assigned to it, is calculated.

8.  The Liquidators decided to value Global’s debt at $1 for two reasons. First, because they were not satisfied that the Company did owe these sums.  It is their view, for reasons I address later in this judgment, that  no such debt exists and that the transfers of money between the companies which allegedly gives rise to the debt are fraudulent.  Secondly, they were not satisfied that the assignment is genuine and that Global is a genuine independent creditor.   Before turning to consider the reasons that the Liquidators took the view that they did I will consider the relevant legal principles.

Legal Principles

9.  The decision to admit or reject a proof for voting purposes under Rule 128 of the Companies (Winding-Up) Rules at the first meeting of creditors is not a final determination of the creditor’s claim to prove in the liquidation.   It is a preliminary assessment and it is not uncommon for a liquidator who has doubts about a debt to value it a $1 for voting purposes.  The test which a liquidator should apply when assessing a proof for voting purposes is whether, on balance, the claim against the company is established and, if so, in what amount[1].  I agree with Mr Chain that this involves a relatively broad, macroscopic assessment.

10.  I also agree with Mr Chain that the court when called upon to determine a challenge to a liquidator’s decision to admit or reject a proof for voting purposes is not deciding whether the liquidator made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court[2]. However, I do not accept that this requires the court to undertake a different exercise to the one undertaken by a liquidator.  The court should also undertake a broad, macroscopic assessment.  It cannot be sensible at the earliest stages of a liquidation of a company, which may prove to have very little assets, to require the liquidator or the court to be drawn into an application which involves considerable work for the purposes of determining whether or not a proof should be admitted for voting purposes[3]. It does not seem to me that there is anything unfair in this.  A creditor such as Global which has an unusually complex and problematic debt cannot reasonably expect the limited resources of an insolvent company to be expended, on an expensive review of its debt before a Committee of Inspection has even been elected.  Mr Chain disputed this.  He argued that because the grounds for valuing the debt at $1 were fraud it was necessary for the Liquidators to adduce evidence of sufficient cogency to just rejecting the proof on this ground. Mr Chain argued that it is well established the “the more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it”[4]. This is, of course, correct, but I do not accept Mr Chain’s assertion that it is necessary for the Liquidators to have looked at each individual transaction that allegedly goes to make up the debt and satisfied themselves that there was good reason to think that in each case there was evidence of fraud before valuing the debt at $1 or, that unless they adduce evidence in these proceedings addressing each transaction and demonstrating it is fraudulent the court should direct a new meeting of creditors at which Global’s debt is valued at $419,645,000.  In my view what is required at this stage is for the court to make a relatively broad brush assessment of the value at which the debt should be admitted mindful of the fact that as the grounds for rejecting it are fraud the evidence at this stage must be more compelling than would otherwise be the case.

The debt

11.  A large number of rounds of evidence were filed by the Liquidator and Global: Mr Kirpalani filed six affirmations.  In addition affirmations were filed by Nanik and Mahesh Dayaram.  On 18 December 2012 I ordered, amongst other things, that the various deponents attend for cross‑examination.  Before the hearing it became clear that the Dayarams’ affirmations would not be relied on and the Liquidators issued subpoenas for them to attend.  At the commencement of the hearing before me they applied to set them aside.  I rejected that application.  They, however, declined to answer questions when they came to be cross‑examined on the ground that it might incriminate them for reasons which go to the reasons why the Liquidators valued the debt at $1. Both Nanik and Mahesh Dayaram have been charged with fraud in relation to the debt.  There was some debate before me as to what any adverse inferences could be drawn from their failure to answer questions about the debts.  Mr Chain submitted that the court could not automatically draw adverse inferences and whether or not the court should do so was a fact sensitive decision which would depend on the circumstances of each case[5].  This I accept.  For the reasons explained in the following paragraphs of this judgment I have reached the conclusion that the Liquidators correctly valued the debt at $1 and there is no new evidence which justifies me now reaching a different decision.  Those reasons do not rely on the drawing of any adverse inferences of arising from the Dayaram’s asserting privilege against self‑incrimination.  However, it does seem to me that the court is entitled to draw the inference from their assertion of privilege that there is something unsatisfactory about the way in which the debt allegedly came to be incurred and that inference bolsters my conclusion.

12.  During the hearing it became clear that the determination of one issue would effectively decide the summons.  It was this.  In his third affirmation Mr Fok explains this in paragraphs 2.6 to 3.4:

“2.6 The evidence I provide below goes into some detail to show that the flow of funds from Days Impex Liberia to the Company (directly or indirectly) likely formed part of a larger chain of payments pursuant to an import loans fraud involving the Days groups of companies. It has become necessary for me to adduce this evidence to reply to Mr Kirpalani's evidence in his Sixth Affirmation purporting to show that payments from Days Impex Liberia to the Company (direct or indirect) were for the purpose of Days Impex Liberia advancing loan funds to the Company. The matters set out below demonstrate that this allegation is disingenuous. Further, I note that Mr Mahesh Dayaram, Mr Nanik Dayaram，Ms Pitty Kwok，Mr Anil Dayaram and Ms Shelia Dayaram were recently (about 22 April 2013) provided with specific information by the Commercial Crime Bureau regarding the allegations in connection with the charge of conspiracy to defraud being made against them. The Liquidators therefore now consider it appropriate to refer to these facts in this affirmation without jeopardising the criminal investigation against these individuals.

3. DEBT 3 FY11/12

3.1 I refer to the table exhibited at “SMK-23” to Mr Kirpalani’s Sixth Affirmation setting out payments from Days Impex Liberia to the Company for the period April 2011 to September 2011. As described above, Mr Kirpalani relies on the information contained in this table as evidence for the contention that during this period Days Impex Liberia advanced loan funds directly to the Company in the amount of about HKD92 million.

3.2 The Liquidators believe that every single payment identified in the table at “SMK-23” does not represent the legitimate advance of loan funds by Days Impex Liberia to the Company. Rather, the Liquidators believe that:

(a) Each payment was made pursuant to an import loans fraud carried out by the controllers of the Days group of companies.

(b) In respect of each payment, the ultimate source of those funds was not Days Impex Liberia, but rather the draw-down of an import loan by either Days Impex (HK) or the Company pursuant to sales invoices from a supplier, being Oscoda Electronics Limited (Oscoda).

(c) The funds drawn down on these import loan accounts would be circulated through a variety of entities, some of which were entities outside the Days group of companies, back to the Company via Days International BVI and Days Impex Liberia. Specifically:

(i) On the drawing down of the import loan, the bank conferring the loan would pay the funds into Oscoda’s bank account.

(ii) Oscoda would then transfer all the funds received from the import loan without any deduction to a money changer (usually Wall Street Exchange Ltd (HK) (Wall Street Exchange)). Instructions would then be given to Wall Street Exchange directing them to convert the funds into Hong Kong dollars and deposit them into the account of Days International BVI.

(iii) On receipt of the funds from Wall Street Exchange, Days International BVI would transfer the funds without any deduction to Days Impex Liberia.

(iv) Days Impex Liberia would transfer these funds (sometime with and sometimes without deduction) to the Company.

(v) The Company would then usually use the funds received from Days Impex Liberia to repay other import loans as they fell due.

3.3 Set out below is a diagrammatic depiction of this flow of funds. The amounts referred to in the diagram refer to the example set out at paragraph 3.5.

 

 

3.4 The Liquidators’ belief set out above is based on analysis conducted by the Liquidators together with analysis conducted by the Commercial Crime Bureau that has been made available to the Liquidators. The Liquidators have prepared a further table based on the CCB Analysis in respect of the payments from Days Impex Liberia to the Company identified in “SMK-23” to summarise the flow of funds described in the CCB Analysis. There is now produced and shown to me and marked exhibit “FHY-24” this table prepared by the Liquidators (Liquidators’ Summary FY11/12). Part 1 of the Liquidators’ Summary FY11/12 relates to the CCB Analysis and is organised as follows:

(a) The leftmost column contains a reference number that corresponds with the “Sr No” that identified a particular payment from Days Impex Liberia to the Company in “SMK-23”.

(b) The next column contains a reference to the relevant “Fund Flow No” column in the CCB Analysis (the leftmost column in that table).

(c) The remaining columns of the table detail the flow of funds as described in the CCB Analysis.”

13.  As is apparent from paragraph 3.4 that Mr Fok’s conclusion that the debt is bogus is based to a large part on information provided to him by the CCB, which is not before the court.  Mr Chain argued with admirable energy that as the information provided by the CCB is not before the court the matters relied on by the Liquidators as justifying their decision is second hand hearsay and should be given no weight.  Mr Chain did, however, concede that if I took a different view then that determined the matter because he accepted that if regard was had to the CCB’s analysis, and the analysis done by Mr Fok based in large part on it, the reasons for valuing the debt at $1 were compelling.

14.  It seems to me that there is no sensible reason to ignore the evidence contained in Mr Fok’s third affirmation and it seems to me clear that there is every reason to doubt the validity of the debt.  In my view the Liquidators quite properly valued it at $1 and no reason has been advanced  before me which would justify me taking a different view.  Having so concluded it is not necessary for me to consider the genuineness of the assignment, but as this issue was dealt with at the hearing before me I think it is desirable that I do.

15.  Global’s explanation for how it came to acquire the debt is very simple and I have explained it earlier in this judgment.  Ms Lam explored this with Mr Kirpalani in cross-examination.  Mr Kirpalani’s evidence was largely consistent with the evidence in his affirmation, although he did change his evidence during cross-examination on who produced the assignment and how it came to be signed.  More importantly in my view his story is simply unconvincing.  He would appear on his own evidence to be a wealthy businessman.  He would have the court believe that he was prepared to risk about $500,000 by purchasing distressed debt about which he not only knew nothing, but did not try to find out anything.  He gave no reason why he did not ask for more information.  It is apparent from the evidence that Mr Kirpalani and Mr Dayaram have filed in connection with this application that they have cooperated closely and that Mr Dayaram would like Mr Kirpalani on the Committee of Inspection where he would hold the majority of debt and be able to influence the conduct of a liquidation in which serious issues concerning the Dayarams’ conduct arise.  I agree with the Liquidators that in these circumstances a representative of Global on the Committee of Inspection would not be appropriate.

16.  I will, therefore, order that there should not be a further meeting of the Company’s creditors and that the costs of the Liquidators’ summons of 9 November 2012 be paid by Global.

17.  There remains the costs of the Notice of Appeal issued by Global in respect of Master R Lai’s decision of 22 August 2012 refusing Global leave to file and rely on Mr Kirpalani’s second affirmation for the purposes of the hearing before him.  The second affirmation was out of time.  It seems to me that the Master’s decision was perfectly reasonable.  In fact Mr Chain did not make any submissions in relation to the costs of the Appeal, which I order that Global pay the Liquidators.

HCCW298/2011
HCCW299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 298 OF 2011

____________________

____________________

(HEARD TOGETHER)

______________

D E C I S I O N

______________

1.  I have two winding-up petitions before me relating to two associated companies. Both petitions were issued on 14 September 2011 by the Hongkong & Shanghai Banking Corporation Limited.

2.  In HCCW298/2011, the debt relied on is HK$5,001,930.75 and US$19,330,077.17, plus interest which is continuing to accrue.  A statutory demand was served in respect of that debt on 12 August 2011.  In HCCW299/2011, the debt that is due is HK$33,288,589.76 and US$3,855,400.83, plus interest which is continuing to accrue.  The statutory demand in respect of that debt was also served on 12 August 2011. 

3.  It was suggested at one point to me this morning that, in the case of HCCW298/2011, there was a question concerning whether, at the moment, anything is actually due to the Petitioner.  It transpired, when I questioned how the calculation of the figures which are contained in paragraph 7 of the third affirmation of Mr Dayaram, was arrived at that it appears to have been a rather fanciful calculation which assumes that the company is entitled to treat as deductible from the amount claimed by HSBC the valuation of the property over which it has security.  Self-evidently, until that property is actually sold and security realised, the full amount claimed by HSBC is due and payable.  There is also a suggestion that there are some other amounts which should have been set off.  But even if those deductions which relate to the relationships between the relevant company and its associated companies are correct, then HSBC is still a creditor which is entitled to present a winding-up petition.

4.  The principal basis upon which I was asked today by Mr Sheppard, who appeared on behalf of the Companies, not to make winding-up orders was that Mr Dayaram, the ultimate beneficial owner of the Companies, wants to continue to try and negotiate with the principal banking creditors some form of restructuring to avoid a winding-up.

5.  Miss Lam, who appeared today on behalf of HSBC and the provisional liquidators, told me, on instructions, that all the proposals which had been received by HSBC from Mr Dayaram, up to and including proposals made on 8 December 2011, have been considered by the banking creditors who make up the large majority of the creditors of the two Companies and, other than in the case of Bank of Baroda, have been rejected.

6.  In these circumstances, I can see no legitimate reason for not granting the normal winding-up orders sought by the Petitioner in both cases.

Ms Rachael Lam, instructed by Messrs Allen & Overy, for the Petitioner (in both cases)

Mr Andrew Sheppard, instructed by Messrs Tanner De Witt, for the Companies (in both cases)

Messrs Deacons, for Ramesh Hathiramani, a potential purchaser of the shares of the Companies, absent

Ms Vivian Yeung, instructed by the Official Receiver’s Office