WONG LUEN HANG AND ANOTHER v. CHAN YUK LUNG AND OTHERS

HCA 1265/2015

[2022] HKCFI 3763

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1265 OF 2015

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BETWEEN

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D E C I S I O N

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1.  There is before the court a Summons filed on 8 October 2021 by which the 3^rd, 4^th and 6^th Defendants (“Defendants”) ask for relief from sanction imposed under an unless order dated 11 March 2019 (“Unless Order”) debarring them from adducing any expert evidence at trial. The sanction was the consequence of the Defendants’ failure to file and serve their accounting expert report within 35 days from the date of the Unless Order. This is the second application of the Defendants for relief against such sanction.

The rival contentions

2.  The arguments in this application turn upon the conduct of the Defendants in failing to comply with the Unless Order. Before the procedural background is examined, it is useful to set out the rival contentions against which the facts will be considered.

3.  The Plaintiffs submitted that:

(1) The Defendants had had ample opportunities since May 2017 to consider the issue of adducing accounting expert evidence, and had multiple chances to get their house in order since September 2018;

(2) The Defendants made the 1^st Application for relief from sanction which was dismissed back in April 2020. They had waited for 1 ½ years before taking out this 2^nd Application;

(3) The Defendants had failed to provide any satisfactory explanation for their failure to comply with the Unless Order and/or their failure to take out this Application within a reasonable time;

(4) This Application was taken out at a very late stage of this litigation. The PTR of this case will take place on 17 April 2023 and the trial will commence on 10 July 2023. The granting of the relief sought may jeopardise these dates and cause serious prejudice to the Plaintiffs.

4.  On the other hand, the Defendants say, and had provided evidence in support, that the blame for the dilatory manner in which they had dealt with their expert evidence rests on the reprehensible conduct of a “senior legal executive” by the name of Lam Chi Man (“Lam”) who worked in the office of their previous solicitors, Messrs Henry Wan & Yeung (“HWY”).

5.  Lam, who had been handling this action on behalf of the 2^nd Defendant since 2014, was introduced to the Defendants by the 2^nd Defendant. After Lam and HWY were instructed by the Defendants on these matters in 2018, some of the communication between them and Lam were conducted via the 2^nd Defendant. It appears from the papers that after HWY were instructed by the Defendants, that firm was representing the 1^st to 6^th, 10^th and 11^th Defendants in this action.

Procedural background

6.  The relevant procedural background may be summarised as follows. Alongside with the same, the important events set out in the Defendants’ evidence will be referred to in square brackets.

7.  In early May 2017, the Plaintiffs invited, inter alia, the Defendants to agree on directions for the filing of expert evidence on the valuation of a Factory which was transferred to the 3^rd Defendant and a subject matter of this action. In response, the Defendants referred to an existing valuation report of the Factory by Dongguan City Dongqiping Assessment Co Ltd dated 8 April 2014 (“Dongqiping Report”) which they would rely on, and confirmed that they “will not adduce further expert evidence (regardless of being prepared by single or joint expert) …”.

8.  On 20 May 2017, the court gave directions for the Plaintiffs to adduce expert valuation evidence.

9.  [HWY was instructed to represent the Defendants in February 2018. The Defendants’ evidence suggested that HWY was instructed due to its connection with Lam, and Lam was the person who handled his action on behalf of the Defendants.]

10.  More than one year later and after the Plaintiffs’ expert report had been filed, on 19 June 2018, the Defendants applied for leave to adduce expert accounting evidence by Summons filed on that day. This was inconsistent with their previous stance.

11.  By an order dated 3 September 2018 (“Expert Directions”), the Defendants were granted leave to file their accounting evidence by 4 March 2019. The leave was actually granted in favour of the 1^st to 6^th, 10^th and 11^th Defendants who were all represented by HWY, but for the present purpose the other Defendants are not relevant. The Expert Directions set out the specific issues which the expert (“Yan”) had to address, namely, the accuracy of the Dongqiping Report and, if not accurate, the fair value of the Factory. The Directions expressly confined the expert evidence to such issues and “not the Plaintiffs’ expert reports already filed”.

12.  The Defendants failed to file their expert report by 4 March 2019.

13.  [By a letter dated 6 March 2019 to the 1^st and 2^nd Defendants, HWY advised that the valuation report was being prepared, but more time was required for which purpose an extension of time would be sought from the court.]

14.  On 11 March 2019, the Unless Order was made requiring the Defendants to file and serve their report within 35 days, ie, by 4 pm on 15 April 2019.

15.  [The Defendants got to know about the 15 April 2019 deadline from the 2^nd Defendant. The Defendants’ evidence was not clear as to precisely when they knew about it.]

16.  [On 15 April 2019, there was a meeting at Yan’s office attended by the 1^st, 2^nd and 6^th Defendants, Yan and Lam during which the 6^th Defendant discovered that there was no valuation of the Factory. Yan said that he not aware that such valuation was required and he would require more time to do so. Lam assured them that after the filing of Yan’s existing report, another report could be filed.]

17.  The Defendants were late in filing and serving their expert accounting report dated 15 April 2019 (“Defendants’ Report”). The evidence of the Plaintiffs was that the Defendants’ Report was filed and served at 5:12 pm on 15 April 2019[1].

18.  More importantly, the Defendants’ Report was not in compliance with the Expert Directions: (1) it addressed none of the stipulated issues; and (2) it only addressed matters which were expressly prohibited.

19.  On 25 April 2019, the Plaintiffs’ solicitors wrote to HWY recording that the Unless Order was not complied with and, as a result, the Defendants’ Report was inadmissible.

20.  On 16 October 2019, after some 6 months since the sanction under the Unless Order took effect, the Defendants took out an application by Summons seeking relief from sanction (“1^st Application”).

21.  By an order dated 22 April 2020, Master Hui dismissed the 1^st Application and ordered that the Defendants’ Report be expunged for the reasons set out in a letter dated 22 April 2020 that was sent to the parties. In particular, the learned Master took the view that the Defendants’ Report “is a complete disregard of the [Expert Directions] … [and] is not an expert report permitted by the [same]”.

22.  [Prior to the CMC for this action held on 10 September 2020, the Defendants discovered to their amazement the existence of the Unless Order and that of Master Hui. The Defendants decided to terminate the instructions to Lam (and HWY) and represented themselves.]

23.  At the CMC, the court noted the failure of the Defendants to file any accounting evidence. Leave was given to the Plaintiffs to set these matters down for trial, which is to commence on 10 July 2023 (to be heard together with HCA 1382/2011) with 28 days reserved.

24.  [New solicitors were engaged by the Defendants in November 2020.]

25.  More than a year after the CMC, on 8 October 2021 the Defendants took out this 2^nd Application seeking relief from sanction imposed under the Unless Order.

Applicable principles

26.  The proper approach in determining whether to grant relief from sanction for failure to comply with an unless order was set out by Lam VP (as he then was) in The IO of Yue Sun Mansion v Lake Side Elderly Centre Ltd, unrep, HCMP 556/2017, 25 October 2017, [12]:

“Order 2 Rule 5 directs the court to have regard to all the circumstances of the case including the matters set out at Rule 5(1) in an application for relief. Those matters, though helpful as a checklist of relevant factors, are not meant to be exhaustive. They serve to highlight the grant of relief is discretionary and one must have regard to the facts and circumstances of the case in the exercise of discretion bearing in mind the different interests and different factors involved. It is a multi-facet balancing exercise with no single factor being conclusive.”

27.  In Top One International (China) Property Group Co Ltd v Top One Property Group Ltd [2011] 1 HKLRD 606, Fok J (as he then was) held at [41]:

“… the exercise of the discretion to refuse an extension or to relieve a party from sanctions is not limited to cases of intentional and contumelious default. As directed by O.2 r.5 of the Rules of the High Court, the court should consider all the individual circumstances … Depending on the circumstances, failure to comply with one or a number of orders through negligence, incompetence or sheer indolence may be such as to lead the court to conclude there is an existence and degree of fault which warrants a refusal of an extension of time, so that relief from a sanction for non-compliance specified in a peremptory order … should not be granted. Any other conclusion would, in my opinion, be to ignore the positive duty placed on parties to assist the court to further the underlying objectives of CJR (O.1A r.3 of the [RHC]) and on the court to do so by actively managing cases (O.1A r.4(1) of the [RHC]).”

28.  “It is not in the interests of administration of justice to relieve a party from his obligation under an unless order save where the most compelling reason is advanced to exempt his failure”: see Yang Kerwin Catherine v Woo Ma Man[2019] HKCFI 3032 at [26], per P Ng J.

Analysis

29.  It should be said at the outset that the Defendants’ evidence that they were kept in the dark by Lam as well as being misled by him on the developments in these proceedings, in particular the production of expert evidence, was corroborated by not only the evidence of the 2^nd Defendant but also that of Yan.

30.  Further, there are documentary evidence, such as Whatsapp messages, which showed that Lam was stalling for time when chased repeatedly by the 2^nd Defendant on the progress of the expert report. It appeared that Lam did not have a good grasp on the details of this case, eg, he was apparently unaware of or had forgotten about the limitations prescribed in the Expert Directions and thus the preparation of the Defendants’ Report was a complete waste. Lam showed more interest in keeping this case, no doubt for financial reward, rather than providing a proper service to the Defendants and to ensure that their interests in these matters were protected.

31.  As regards the gap of 11 months from instructing new solicitors to the 2^nd Application (November 2020 to October 2021), I accept as reasonable the Defendants’ evidence that they had to seek legal advice and to have a proper expert report prepared by Yan, one which complied with the Expert Directions. Yan had to leave Hong Kong for England during May to August 2021. He was only back in action after quarantine in early September 2021. Given the difficulties caused by the Pandemic, I accept that there was no culpable delay in making the 2^nd Application, which is supported by a fresh report from Yan.

32.  In light of the above, unfortunate as it may be, justice demands that the Defendants should not be held responsible for the harsh consequence of the Unless Order. They should be given the opportunity to adduce the report on valuation of the Factory for the purpose of defending this action which involves allegations of fraud against them.

33.  As regard the adverse impact on the forthcoming trial, which is 7 months away, the issue identified by the Plaintiff concerns the meeting of their expert with Yan and the preparation of a joint report by them. I believe that those exercises can be completed before the PTR.

34.  For these reasons, I grant the order sought in paras 1 to 3 of the Summons. The Defendants have agreed to bear the costs of and occasioned by this Application, which I accept to be fair. Accordingly, I order that the costs of and occasioned by this Application be borne by the Defendants, to be taxed if not agreed.

35.  Finally, the parties should endeavour to agree directions for the preparation of the valuation evidence for trial (as identified in para 33 above) to be ready for review at the PTR. Draft agreed directions should be submitted to the court for approval by 2:30pm on 20 December 2022. Unreasonableness may be penalised on costs.

Mr Terrence Tai, instructed by Kobre & Kim, for the 1^st and 2^nd plaintiffs

Ms Wong Athena Hiu Hung, instructed by M.C.A. Lai Solicitors LLP, for the 3^rd, 4^th and 6^th defendants

HCA 1382/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1382 OF 2011

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AND

HCA 1265/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1265 OF 2015

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D E C I S I O N

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1.  The Plaintiffs (“Ps”) in the above actions have taken out the applications for an order for sequential trials of the actions before the same judge.  The evidence of each of the actions, so far as it is relevant, is mutually admissible.

2.  The Defendants (“Ds”) in HCA 1382/2011 (“the 2011 action”) are represented by the same firm of solicitors, namely Messrs. Cheung & Liu.  D5 is only a nominal defendant.[1]

3.  D1 and D2 in 2011 action do not oppose this application.

4.  D3 & D4 oppose this application.

5.  The solicitor acting for Ps has made an affidavit on 6 June 2016 in support of the applications.  Ps’ applications are pursuant to Hon. Cheung JA’s comments in a hearing for security for costs in CACV 194/2015.  The grounds in support of the applications, as stated in the affidavit, are that these two actions share the same factual background with substantial overlapping issues and they have similar legal representatives.[2]

6.  D3 and D4 oppose the application on two main grounds, viz.: (a) the 2011 Action and 2015 Action are wholly distinct actions and they should not be “tried together” (b) they would be prejudiced by the long delay if the 2 actions should be “tried together”. [3]

7.  For HCA 1265/2015 (“the 2015 action”), only D7, D8 and D9 oppose this application on the grounds as follows:

(a) Little “commonality” between the 2 actions.

(b) No saving of time and costs.

(c) The 2 actions are at very different stages.

(d) There was a delay of 7 months on the part of the Plaintiffs in taking out the present applications.

(e) The Plaintiffs brought the present applications with the ulterior motive of obtaining prejudicial evidence and findings against D1 and D2 in both actions in the 1^st trial, so as to use them in the 2^nd trial against them rather than to save time and costs.

(f) Cheung JA did not in fact suggest that the 2 actions should be consolidated.

The law and the relevant legal principles

8.  The Court has a discretion to make an order that the actions to be tried at the same time, or one immediately after another actions under O.4, r.9(1) of RHC where:

(a) That some common question of law or fact arises in both of them;

(b) That the rights to relief claimed are in respect of or arise out of the same transaction or series of transactions; or

(c) That for some other reason it is desirable to make an order for consolidation.

9.  Order 4, r. 9(2) provides:

“Where the Court makes an order under paragraph (1) that two or more causes or matters are to be tried at the same time but no order is made for those causes or matters to be consolidated, then, a party to one of those causes or matters may be treated as if it were a party to any of those other causes or matters for the purpose of making an order for costs against him or in his favour.”

10.  The main purpose of the Court to order consolidation is to save costs and time.  The Court has an unfettered discretion in deciding whether to make the order as requested.  There is no hard and fast rule for the exercise of discretion other than that it would be expedient and proper to make the order.  No order should be made without hearing all parties affected.  As a general principle, the court will take a practical and common sense approach to meet the justice of the situation, bearing in mind the underlying objectives under O.1A RHC, always recognizing that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.[4]

The factual background

11.  The facts of these actions are convoluted.  So far as the facts are concerned for these applications, they are distilled from Ps’ affidavits and written submissions and are necessarily brief for a clear perspective of the issues in dispute.

12.  The main disputes are between Ps and D1 and D2 in both actions.  Ps accused D1 and D2 of having breached fiduciary duties as directors and shareholders of Topmix (International) Company Limited (TICL) and Topmix Industrial Limited (TIL), which produce and sell carbon fibre automobile body parts.  Production is done by TIL’s factory in China (“the China Factory”). These companies are under the control of D1 and D2.

13.  In the 2011 action, Ps accused D1 and D2 of having set up two companies in China to which they diverted the raw material, production and business of TIL and the China Factory without Ps’ consent.  The profits of the diverted business were obtained by D3 and D4.

14.  The 2015 action was instituted as a result of discovery of information in the 2011 action where it was discovered that D1 and D2 had caused TICL and TIL to transfer their assets and business to another company Faithful Rainbow Limited, D3 in 2015 action.  They then cause another BVI company which they control to create sham proceedings and judgment against TICL and TIL with a view to winding them up.

15.  Ps therefore issued the 2015 action against D1, D2 and D3, with D4 to D9 being the conspirators in the transfer of the assets and the attempted winding up of TICL and TIL.  D4, D5 and D6 are the shareholders of D3.  D6, D8 and D9 are those behind the winding-up petitions.

Discussion

16.  On the question that there is not much commonality between these two actions, the defendants who are opposing the applications submit that since the parties, the locations of the business, the remedies asked for and the legal issues involved are quite distinct, there is very little common overlapping facts between these two actions.

17.  Even though there is very little common fact or law involved in these two actions, if one judge hears both actions one after the other or together, which the trial judge has the final determination, time for preparation for the case and the hearings of the separate trials will be saved.  As to what extent will costs and time be saved I have no submissions from any of the parties to assist me.  However, no one has argued against this simple feature, which is only common sense.

18.  As stated in the legal principles above, apart from saving costs and time, the Court has also to bear in mind the underlying objectives under O.1A RHC, always recognizing that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.[5]

19.  This is a fundamental reason for having case management for civil litigation, a fair trial being the cornerstone of our civil justice system.

20.  Any experienced legal practitioner will not lose sight of the reality of a trial in a civil action.  The Court will be eager to be apprised of the full scope of the facts from the parties through the evidence.

21.  Here, as I have said above, the main dispute will be between Ps and D1 and D2 in the 2011 action.  The disputes between them will be mainly factual.  The finding of the facts will determine the liabilities.  In the 2015 action, there are allegations of conspiracy between D1 and D2 with other defendants other than the companies, which Ps claim to sue on their behalf in these derivative actions.  Such allegations of conspiracy involve the fraudulent intention of D1, D2 and knowledge and agreement of the other defendants in the 2015 action.

22.  It is not disputed that the 2015 action was instituted as a result of discovery of information from the 2011 action.

23.  The finding of fact in the 2011 action will determine not only the act of D1 and D2, but also their integrity as shareholders and directors of TIL as Ps allege that they had diverted the company’s raw material, business and profits to other parties which they set up for that purpose.  Such evidence on the character of D1 and D2 will also be relevant for the court to assess their evidence, which they will give in the 2015 action.

24.  If these two actions are tried separately before different judges, it is simply inconceivable that in the trial of the action 2011, Ps’ counsel will not ask D1 and D2 on the transactions in the 2015 action as those transactions were discovered from the 2011 action.  In the circumstances, application will be made for such evidence in the 2011 action to be admissible in the 2015 action.  Likewise, if D1 and D2 succeed in the 2011 action, I believe they will also make the same application to the court.  For better case management of these two actions, it is desirable to resolve all these issues at this preparatory stage.  The question is whether they should be tried by the same judge; and if so, at what cost.

25.  For parity of reasons, the opposing defendants in the 2015 action will be interested in what evidence D1 and D2 will be giving in the 2011 action.  This may affect their evidence as well.  However, they are not obliged to do so.  They can elect to attend the trial in the 2011 action to hear the relevant parts of the evidence only at their own discretion.  They may simply not attend the hearing of the 2011 action at all.  They have the same liberty even if these two actions are ordered to be tried before the same judge one after the other, though they may be given the right to attend the trial of the 2011 action.

26.  The opposing defendants have no right to prohibit Ps or D1 and D2 from making application to the court for admission of the evidence in the 2011 action into the evidence of the 2015 action. The evidence of their character is clearly relevant to both actions for determination of whether their evidence is credible.

27.  On the question of the proposed order will cause the opposing defendants, especially those in the 2015 action to incur more costs as they are otherwise not obliged to attend the trial of the 2011 action, I consider that the order proposed will not oblige them to attend the trial of the 2011 action.  They will only be given the entitlement to attend the trial of the 2011 action.  They may elect not to attend at their discretion.  Of course, there will be direction that the evidence in 2011 action will be admissible in the 2015 action.  As discussed above, this is necessary as there will be common evidence on the conduct and character of Ps and D1 and D2 in the course of running the businesses in order to save costs and time for the trial of 2015.  Costs are at the discretion of the trial judge.  If the opposing defendants are successful in the 2015 action, they may ask for costs for attending the 2011 action against Ps.

28.  For the sake that a fair trial, I consider that there are good reasons for this Court to consider that these two actions should be tried by the same judge, whether at the same time or one after the other.

29.  However, I have to consider other objections raised by the opposing defendants.

30.  On the question of delay because the 2015 action cannot catch up with the 2011 action, which is ready to be set down for trial.  According to Ps, witness statements in the 2015 action have been ordered to be exchanged on 6 December 2016, less than two weeks from today.  The opposing defendants have no dispute about this timetable.  Further application for extension of time will be met with an “unless order” since the matter has entered into the stage of Case Management Conference.

31.  The opposing defendants also submit that there is an outstanding appeal by Ps in respect of their application for appointment of a receiver in the 2015 action.  The hearing date of the appeal has not yet known.  However, I do not consider the pending appeal or even the result of the appeal will affect the pleadings.  It is only an interim relief sought by Ps based upon the existing pleadings.  There is no evidence or reasons that the result of the appeal will affect the pleadings.  Ps agree that their appeal will not affect the progress of these two actions to trial.  They confirm that they will expedite the application and that they have no intention of using this appeal to delay the proceedings of the trials.

32.  On the question of delay in practical terms, I have today ascertained from the parties that the only outstanding matter in the 2015 matter is the exchange of the witness statements, which has been ordered to be done by 6 December 2016.  The opposing defendants submit that they may require an extension of time.  D3 and D4 in the 2011 action ask for 28 days, whereas D7 to D9 in the 2015 action ask for 42 days. Given the long period of time allowed for the parties to prepare the witness statements and taking into consideration that there had been amendments of the pleadings by Ps, I consider that the parties should have proceeded to prepare their witness statements before the amendments to the pleadings, which will only add to amendments to the witness statements.  Given the fact that the opposing defendants are so minded about the delay in the trial of the actions, I consider that 28 days will be extended to the parties, with an “unless order” imposed.  Although D3 and D4 in the 2011 action have asked for time to take out an application for expert evidence, they did not take out such application within the time allowed by the court which is in August this year.  I shall therefore take it that no application for expert evidence will be made in these two actions.  Taking all the time factors into consideration, even if I allow the applications, the delay will be about 3 months.

33.  On the question of late application, there is no statutory provision in respect of the time for such application to be made.  D7, D8 and D9 in the 2015 action rely upon Re Shui On Construction Co. Ltd. and Schindler Lifts (H.K.) Ltd. [1986] HKLR 1177 (HC).  This case held: “normal practice is to apply for consolidation of actions at a stage well before the close of pleadings.  Such an application should ideally be made at the earliest convenient moment”.  However, these two actions are not normal actions, particularly the 2015 action was instituted at the discovery stage of the 2011 action.

34.  Also, I had, in my previous Decisions, emphasized that delay should be considered within the context of the relevant authorities where trial dates had been fixed.  No trial date has been fixed for the 2011 action.  This is not even a relevant factor for this Court’s consideration in the exercise of my discretion.

35.  It is not necessary to place any weight on Hon. Cheung JA’s comment in my deliberation because the above reasons are sufficient for me to dispose of the applications.  Weighing the relevant factors in balance, for the sake of fair trial, these two actions should be listed before the same judge for disposal, either at the same time or one after the other.  Since Ps apply for the trials to be one after the other, I shall accede to their requests.  The ultimate decision must be that of the trial judge.

36.  As to the costs of these applications, Ps ask for costs of this hearing only and the costs of the applications should be in the cause.  The opposing defendants argue that the costs of the whole application and the hearing today should be in the cause, whereas D7 to D9 in the 2015 action submits that there should be no order as to costs.  They rely upon the authorities submitted by Ps: Komal Patel and others v Chris Au and others (unreported, HCA 183/2014 and HCA 2063/2015, 14 January 2016 by Zervos J. in chambers), Big Island Construction (HK) Limited v Wu Yi Development Company Limited and others (unreported, HCA 1957/2005 and others, 10 April 2008 by Chu J. (as she then was)) and Re The Prudential Enterprises Ltd and Lee Tak (or Tuck) Yan and others vs The Prudential Enterprises Limited and others (unreported, HCCW 594/1999 and others, 19 August 2003 by Chu J. (as she then was)).  First of all, I consider that this Court is bound by those decisions though costs are at the court’s discretion.  Ps submit that the judges had not segregated the costs of the applications and the costs of the hearings.  The opposing defendants submit that the judges must have included the costs of the hearings as well.  Ps submits that the Court should adopt the treatment of costs as for the application of amendment.  I consider that there is a difference between these two applications, one being for leave for the applicant to amend the pleadings for the benefit of the applicant, whereas the other is for the mutual benefit of having the most appropriate mode of trial.  I have to assume that the judges must have the treatment of costs for amendment in mind when they made the orders as they did.  In the circumstances for consistency, I follow the higher courts’ decisions and make an order that the costs of the applications including the costs for the hearing today be in the cause of the actions, with certificates for one counsel.  However, I wish to make it clear here that this decision on costs is as a result of the previous Decisions of the other courts and that Ps do not make further submissions on them.  This decision is not binding upon other cases.

The order

37.  This Court shall grant an order in terms of the Ps’ summonses and the costs are as per paragraph 37 above

38.  By consent, the Case Management Conference for the 2011 action on 8 December 2016 be vacated and the Case Management Conference be adjourned to 27 March 2017 to be heard together with the 2015 action.

HCA 1265/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1265 of 2015

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REASONS FOR DECISION

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1.  This was the application of the plaintiffs (“the applicants”) for leave to appeal the Decision dated 11 March 2016 dismissing their application to appoint receivers and managers in respect of the 3^rd defendant (“D3”), the 10^th defendant Topmix (International) Company Ltd (“TICL”) and the 11^th defendant Topmix Industrial Ltd (“TIL”). At the conclusion of the hearing leave was refused with costs to the respondents to the application (“the respondents”). The reasons appear below.

2.  It is common ground that as this application seeks to overturn the exercise of the court’s discretion, the well‑known principles in HadmorProductions Ltd v Hamilton [1983] 1 AC 191, 220B–F apply.

3.  The applicants’ intended draft notice of appeal sets out 6 groundsas follows:

(1)  The Judge erred in finding that there was no risk of dissipation of assets.

(2)  The Judge erred in finding that the undertakings offered by D1, D2, D4, D5 and D6 were adequate protection in respect of any loss which TICL and TIL might suffer.

(3)  The Judge erred in finding that there would be a risk of uncompensatable loss if receivers were appointed.

(4)  The Judge erred in finding that, if receivers were not appointed, the losses of TICL and TIL were compensatable by an award of damages.

(5)  The Judge erred in finding that receivership is only granted if the court “is convinced of its necessity” and/or when “a compelling case” is made out.

(6)  The Decision was made in breach of natural justice.

4.  Ms Kei who appeared for the applicants rested on the draft notice of appeal and the short submissions that summarised the main thrust of the draft notice.  When asked to identify her two best points, reference was made to certain paragraphs of the Decision that were said to illustrate grounds 1, 2 and 6.

No risk of dissipation of assets

5.  It was said that the court was in error in concluding (at §75) that there was no solid evidence of dissipation on the facts as presented.  A number of disparate examples were mentioned including the following but the common thread was elusive.

6.  Attention was directed to §§68 – 69 concerning the issue of depletion of the applicants’ bank balances between March and October 2015.  That was said to be an instance of past dissipation. Then there was a reference to §§54 – 55 relating to TICL’s alleged inability to pay licence fees for the Kwun Tong premises as a reason for the termination of the licence, suggesting that given the court’s conclusion as to depletion of bank balances and the amounts standing in those accounts in March 2015, the lack of funds to defray licence fees could not have been true.

7.  As to the depletion of bank balances per se, that was a post‑cessation of business event that plainly was compensable by damages.  At the hearing, it was not put as a matter relevant to a consideration of the cessation of business that had already taken place.  Cessation flowed from the statutory demands made in late 2014 and the winding up petitions presented in January 2015 causing, inter alia, the accounts of TICL and TIL to be frozen.

8.  But the drift of the submission was that having found instances of past dissipation the court had asked itself the wrong question.

9.  The applicants’ position verged on saying that once the court finds that there are serious issues to be tried and there are instances of past dissipation and low commercial morality, the court has to conclude that there is a real risk of dissipation and any other conclusion would be illogical.  In other words, in those circumstances, the court must exercise its discretion in the applicants’ favour and make an appointment.  That cannot be correct since an exercise of discretion necessarily engages a balancing exercise involving an array of relevant factors.

10.  In any event, the court has set out its reasons and having reconsidered the Decision in light of the draft notice, I stand by them.

Undertakings as sufficient protection and natural justice

11.  On the issue of sufficiency or otherwise of the undertakings, the applicants merely repeated the arguments made at the hearing in February.  I see no reason to resile from what is stated in the Decision in that regard.

12.  It then emerged that it was relevantto the applicants’ breach of natural justice complaint which, on its face, was difficult to comprehend given that Mr Tang, counsel for the applicants, did make an oral reply at the hearing to the respondents’ submissions.  Not only did his oral reply last 20 minutes, it supplemented the applicants’ written reply dated 24 February 2016 running to 22 pages excluding the four-page chronology.  Noteworthy is the fact that §§30 – 38 were in response to the ‘undertakings’ point.

13.  It emerged from the applicants’ oral submissions that it is not said that the court refused to hear the applicants’ counsel or stopped counsel from making submissions at the hearing.  The plaintiffs’ counsel apparently drew an inference or gained an impression (whether from exchanges between the court and counsel and/or the court’s remarks made in the course of the hearing) that the court was in agreement with the applicants on the issue of insufficiency of the undertakings proffered by the respondents.  It was said that that impression caused Mr Tang not to make further submissions to persuade the court of the insufficiency of the undertakings and to cut short his reply.  That was said to amount to a breach of natural justice, equivalent to “depriving” the applicants of the opportunity to make a reply.

14.  Putting the matter bluntly, the complaint underlying ground 6 is not far short of saying that the court had somehow misled Mr Tang.  I consider the complaint borders on the absurd and should not be dignified by further comment.

HCA 1265/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1265 of 2015

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D E C I S I O N

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1. This was the application of Wong Luen Hang (“P1”) and Tsui Kwok So (“P2”) (collectively “the plaintiffs”) by summons dated 27 October 2015 for a receivership and management order in respect of the 3^rd defendant Faithful Rainbow Ltd (“D3”), the 10^th defendant Topmix (International) Company Ltd (“TICL”) and the 11^th defendant Topmix Industrial Ltd (“TIL”) for the protection and preservation of their assets and business pending the final determination of the present action. At the conclusion of the hearing judgment was reserved which I now give.

BACKGROUND FACTS

(A)   The parties

2. The shareholders of TICL and TIL (collectively “the Companies”) are the plaintiffs and the 1^st and 2^nd defendants, namely, Chan Yuk Lung (“D1”) and Chan Yuk Wai (“D2”) with each holding 25% of the share capital.

3. P1 is the father‑in‑law of P2.  D1 and D2 are brothers and the directors of the Companies.

4. TICL was incorporated in 1993 and carried on business producing and selling carbon fibre automobile body parts (“ABPs”).  TIL was incorporated in 2003 to carry on the same type of business and more specifically for servicing clients other than Amax Motor Inc (“Amax”) and its associated company Vis Racing Sports Inc (who were the major customers of TICL).  They were profitable businesses until about 2011.

5. ABPs for the Companies were manufactured at TIL’s factory on the Mainland (“the China factory”) which had 100 employees. D1 was in charge of the China factory and worked there.

6. P2 was also a director of the Companies until his removal in March 2006 when D1 and D2 (“the Chan brothers”) assumed complete control.  That marked the beginning of the deterioration in the relationship between the plaintiffs and the Chan brothers.

7. The 3^rd defendant (“D3”) was incorporated in Hong Kong in November 2011 and commenced the business of assembling automobiles in March 2012.  Its shareholders are Mak Wai Wing Clemens, the 4^th defendant (“D4”), Lam Kwok Kin, the 6^th defendant (“D6”) and You Lahua.

8. The 5^th defendant Chan Wai Hung (“D5”) was an employee of TICL until June 2011 and joined D3 in September 2012.

9. The 7^th defendant Ng Chun Kai (“D7”) is the sole director and shareholder of Myers Management Consulting Ltd (“Myers”) a BVI company incorporated on 23 November 2011.

10. The 8^th defendant Tse Wing Keung (“D8”) is the sole shareholder of a company called Xing Fu Securities Ltd (“XFSL”) and the 9^th defendant Tse Wing Hong (“D9”) is XFSL’s senior corporate adviser.

11. D4, D6, D7, D8 and D9 are friends or acquaintances of D2 and, as earlier noted, D5 was a former employee of TICL.

(B)   The breakdown in the relationship between the plaintiffs and the Chan brothers

12. P2’s removal from the board in March 2006 was allegedly for wrongful conduct leading to a loss of trust.

13. In December 2007 the plaintiffs brought a derivative action, HCA 2654 of 2007 (“the 2007 action”) on behalf of TICL complaining that the Chan brothers had improperly issued a $2.3 million credit note to Amax.  The 2007 action was unsuccessful both at first instance and on appeal.

14. In August 2011 the plaintiffs brought another derivative action, HCA 1382 of 2011 (“the 2011 action”) on behalf of TIL against, inter alia, the Chan brothers alleging that the Chan brothers had misappropriated monies and assets belonging to TIL, inter alia, through diverting TIL’s business to other companies they had set up.  The 2011 action is still ongoing.

15. The 2007 and 2011 actions not unnaturally soured the relationship between the plaintiffs and the Chan brothers even further and were perceived by the Chan brothers to be a continuing vendetta against them.  It is fair to say that the relationship has broken down.

(C)   Events after the 2011 action

16. These proceedings commenced on 9 June 2015, following the plaintiffs’ accidental discovery (in mid‑January 2015) of petitions presented by Myers on 2 January 2015 to wind up the Companies.  The plaintiffs were taken by surprise.  They had no inkling that the Companies were in financial difficulties.  No mention was made at the AGMs held on 31 December 2014 of the financial problems or of the fact that judgments had been obtained against the Companies or indeed that they had been served with statutory demands several weeks earlier.  The petitions led to follow‑up enquiries and investigations that uncovered four unsatisfied default judgments against the Companies that formed the basis of the petitions. 

17. After the commencement of these proceedings, the plaintiffs made an ex parte application on 24 September 2015 for a receivership order but the judge directed that the application should be heard inter partes. The Court of Appeal dismissed the plaintiffs’ appeal.

18. It is the plaintiffs’ case that the Chan brothers and their nominees and associates have engaged in wrongful acts to the detriment of the Companies. In broad outline, the thrust of the plaintiffs’ case is that:

(1)   the Chan brothers caused the Companies to enter into consultancy and accountancy services contracts with Myers as part of a scheme to bring about their demise by having a third party (Myers) obtain default judgments against, and wind up, the Companies (“the Myers arrangements”); and

(2)   the Chan brothers set up a shell company (D3) through nominees (D4 and D6) to take over all the assets of the Companies including Amax their largest client.

19. They view all this as “a destructive plot to kill [the Companies] after stripping them of their major assets and business, and having them transferred to their own company, [D3]” (plaintiffs’ reply submissions at §§7‑8).

20. Set out below is a chronological account of facts and events after the 2011 action pertinent to the matters arising in this application to provide a more comprehensive perspective or overview of events as they unfolded.

21. At the hearing, Mr Ronald Tang (with Ms Carmen Kei) appeared for the plaintiffs and Mr Hugh Kam (with Mr Solomon Lam) appeared for D1‑D6 and the Companies (hereinafter collectively referred to as “the defendants”).

CHRONOLOGY

22. On 1 December 2011 each of TICL and TIL entered into an agreement with Myers for the latter to provide business and management consultancy services at a monthly fee of $150,000 from 1 January 2012 to 31 December 2013.  The agreements were substantially similar.

23. At that time, the Companies operated from premises in Yuen Long described as a workshop and warehouse (“the Yuen Long premises”) while manufacturing was carried on at a factory in China that TIL maintained (“the China factory”).

24. On 21 January 2012 a fire broke out which allegedly caused extensive damage the Yuen Long premises.  The date is unclear but soon afterwards TICL took up a lease of premises in Kowloon City.

25. Then, on 1 April 2013, Myers was also retained to provide management and accounting services to the Companies for one year (from 1 April 2013 to 31 March 2014) at a monthly fee of $15,000 for each of the Companies.

26. In late 2013 the Companies failed to make payment of consultancy fees to Myers for the last two months of the consultancy period (October and November 2013).

27. Within a few months, on 27 February 2014, TICL transferred its light goods vehicle (“the 1^st vehicle”) to D3.

28. At about that time new premises had to be found as the Kowloon City lease was due to expire on 30 April 2014 and the landlord had refused to grant an extension.  D2 happened to mention this matter to D6 who (as will become apparent), apart from being a major shareholder of D3 and a friend of the Chan brothers, was also one of two sub‑contractors of Myers for services to be provided to the Companies under the consultancy agreements.

29. On 12 March 2014, D6 (on D3’s behalf) had secured a lease of a unit in Kwun Tong for three years commencing 1 May 2014 at $52,000 per month for D3 intended for use as D3’s showroom.  Discussions took place between D2 and D6 resulting in the grant of a one‑year licence by D3 to TICL to occupy the Kwun Tong premises at $68,000 a month as from 1 May 2014.  D4 stated in his affirmation that D3 and the Companies have been business partners since early 2012, the arrangement (as I understand it) being that D3 accepted orders from the Companies while the Companies assisted D3 in its marketing and sales.

30. On 1 June 2014 D1 signed a share purchase agreement on behalf of TIL agreeing to the sale of the entire share capital of a Dongguan company that held TIL’s China factory to D3 (acting through its corporate representative D4) for $5 million.  It would appear that what the Dongguan subsidiary held was a lease of the China factory rather than title to the factory itself.

31. On 8 August 2014, Myers commenced four district court actions to recover unpaid fees (totalling approximately $1 million) due under the consultancy and accountancy agreements.  Two were against TICL and the remaining two against TIL.  

32. As a result of the failure of the Companies to give any notice of intention to defend, Myers obtained default judgments on 10 November 2014.  Myers then served statutory demands on the Companies.  As the debts remained unpaid, on 2 January 2015 Myers filed petitions to wind up the Companies causing their bank accounts to be frozen pending determination of the petitions.

33. Meanwhile, on 21 November 2014, a car (“the 2^nd vehicle”) belonging to TICL was also transferred to D3.

34. By late December 2014/early January 2015, due to TICL’s inability to pay the monthly licence fee for the Kwun Tong premises, the licence was terminated which meant that the Companies had to vacate them.

35. In mid‑January 2015 the plaintiffs accidentally discovered that petitions had been filed to wind up the Companies and began investigations that, inter alia, brought the default judgments and the Myers agreements to light.

36. The plaintiffs intervened in the District Court actions and, on 23 June 2015, succeeded in setting aside the default judgments.

37. On 29 June 2015, the petitions were dismissed.

38. Myers did not appeal the setting aside decision on the merits but obtained the deputy district judge’s leave to appeal his ruling relating to the plaintiffs’ common law right to intervene and defend the proceedings in a derivative capacity.  In the event, as Myers failed to provide security for costs for the appeal as required by the Court of Appeal, the appeal was dismissed.

THIS APPLICATION

(A)   The Myers arrangements

39. The plaintiff’s case is reflected in §6 of the Reasons for Decision of Deputy District Judge Ludwig Ng dated 6 July 2015 in the setting aside application:

“… the Chan brothers have been secretly engineering a scheme to bring about the demise of [the two companies] by wrongfully stripping [them] of their assets and business; and causing [Myers] to obtain default judgments against [the two companies] and petition to wind them up on the basis of some sham transactions.”

40. The plaintiffs highlighted what they considered to be “suspicious circumstances” concerning Myers, having obtained reports from inquiry agents retained to conduct surveillance of the activities of D4, D6 and D7.  In brief:

(1)   Myers was incorporated a week before the date of the consultancy agreements by its owner/controller D7, a childhood friend of the Chan brothers.

(2)   Myers did not have any office or business address or staff or any track record in providing business consultancy services.

(3)   D7 subcontracted the consultancy work in part to D6.  Myers subcontract with D6 is dated 1 April 2012.

(4)   Neither D7 (a construction site worker) nor D6 (who did not have a full‑time job) had any tertiary education or professional qualifications or track record of providing management consultancy work.

(5)   D7 worked at a construction site and D6 was a former customer of TICL (having previously operated a small business making fibreglass kiosks) and a friend of the Chan brothers.

(6)   Myers also subcontracted part of the consultancy work to XFSL.  (A curious feature is that the subcontract between Myers and XFSL is dated 1 November 2011 which preceded Myers’ own incorporation by some three weeks.)  

(7)   XFSL is controlled by D8 and D9 and does not have a place of business or staff.  Its business address is a village house in the New Territories where D9 and his family reside.

41. Those matters aside, the plaintiffs also question why the Companies that had a combined net profit of about $4 million only in 2011 and had been losing substantial amounts since then would have entered into consultancy agreements at a total cost of $3.6 million per year for two years.  It made little business sense.

42. In resisting the setting aside application, D7, D6 and D9 filed affirmations the thrust of which was that, as a team, they had the necessary experience and expertise to assist the Chan brothers in improving the performance and efficiency of the Companies by implementing an effective Enterprise Resource System and addressing factory production problems.   

43. In D2’s affirmation filed on 30 November 2015 he advanced a totally new reason for the consultancy agreements from that put forward for the setting aside application.  The new assertion is that Myers was specially formed to run the HK Productivity Council’s (HKPC) project for mass production of aircraft seatbacks for the Companies.

44. Mr Tang who appeared for the plaintiffs submitted that the newly advanced reason is suspect in that, had it been true, that evidence would have been given by D7 (the sole director of Myers) when he filed evidence six months earlier in the setting aside application.  Further, the new assertion could only be pure fabrication in view of HKPC’s press release of 14 November 2011 (nine days before Myers’ incorporation) announcing the award of the contract to a consortium of six local companies.

45. In his account of Myers’ role (§§15‑18 of D2’s 2^nd affirmation), D2 did not address the press release as that was only raised after the date of his affirmation.  But D2 exhibited over 100 pages of e‑mail exchanges between the Companies and HKPC concerning the production of carbon composite seatbacks that, so far as one can tell, span a period from late 2010 through March 2012.  While a substantial part of the e‑mail exchanges occurred prior to 14 November 2011, a number took place after that date.  Had the award mentioned in the press release meant the completion of the entire project, one would not expect to see e‑mail exchanges on that subject after 14 November 2011, the date of the press release.  For that reason, I do not consider the press release dispositive on the issue as to whether the HKPC project was sheer fabrication.

(B)   The transfer of assets and business of the Companies to D3

46. D3 was incorporated in Hong Kong in November 2011.  Its sole director is D4 (who has a degree in engineering as well as a Master’s degree).  Its shareholders are D4 (25%), D6 (55%) and Lou Lahua (25%) with D4 being responsible for corporate matters and D6 overseeing production and technical matters.  Lou was a passive investor.  It commenced the business of assembling automobiles in March 2012 at the Yuen Long premises that had been the Companies’ workshop until the fire outbreak (at the suggestion of D6), accepted orders from the Companies who, according to D3, were “business partners” (see §29 above).  Again it was at D6’s suggestion that D4 agreed to the acquisition of the China factory in May 2014.

47. The plaintiffs have a different perspective of D4 and maintain that he works fulltime in a small food stall that he runs.  It would appear that the plaintiffs’ views of the activities of D4, D6 and D7 were gained through the reports of their inquiry agents.  But one should not lose sight of the fact that no findings have been made on the conflicting evidence. 

(1)   The vehicles and the China factory

48. It is not disputed that two vehicles belonging to TICL were transferred to D3, one in February 2014 and the other in November 2014.

49. On 1 June 2014 TIL’s China factory was transferred to D3 for $5 million (see §30 above).  D2’s explanation is that the lease was due to expire at the end of 2015 and with the increase in costs in the PRC it was decided that it would not be suitable for TIL to maintain its own production factory.  

50. While the agreement dated 1 June 2014 provided for payment to be made within three months of the date of the agreement, payment was in fact made in two tranches not only before the agreement came into existence but also well before they were due: $3 million was paid on 12 May 2014 and $2 million on 30 May 2014.  That is a very strange state of affairs but there are bank deposit slips that show payment into TIL’s account.

51. The Chan brothers deny any dissipation of assets on the basis that the transfers were arm’s length transactions and at market price.  

(2)   Business

52. As to the transfer of the Companies’ business, there is evidence that:

(i) Linda Poon (an employee of TICL) informed one of TICL’s customers by e‑mail dated 4 December 2014 sent from “topmix” that TICL would be changing its name to Faithful Rainbow Limited “with effect from 1 December 2014” and requesting the recipient to issue future orders “in the new Company name”.  Later e‑mails from her on 22 and 23 January 2015 were sent from her account at “faithful rainbow.com” and displaying the telephone and fax numbers of TICL.

(ii) Jeffrey Poon (the sales manager at D3’s showroom at the Kwun Tong premises and a former TICL employee) told a customer on 27 March 2015 that D3 was formerly known as “Topmix”.

(iii) Maggie Tsang who is D2’s sister‑in‑law in charge of the Yuen Long premises told customers that Topmix had changed its name to Faithful Rainbow.

53. The plaintiffs have also adduced evidence of shipment records of TICL showing regular shipments being made between September 2007 and 15 January 2015 when they suddenly ceased.  All shipments commencing 26 January 2015 were from D3.

54. By February 2015 the logo on the shop front of the Kwun Tong premises changed from “Topmix” to “Faithful Rainbow”.  There is also evidence the website and the Facebook page of the Companies have been transferred to D3.

55. D2’s explanation is that TICL’s inability to pay the licence fee meant that it had to vacate the Kwun Tong premises.  As the lease was vested in D3 there was nothing unusual about D3 retaking the premises.  As the Companies were not in a position to carry on business pending the winding up petitions they ceased operations.  Staff left and joined D3 which is a separate legal entity.

56. So far as Amax’s business is concerned, D2 stressed that the Amax contracts were non‑exclusive as Amax made it a point to spread its risks by placing orders with various suppliers, inviting attention to the fact that D3 did not supply Amax until 26 January 2015, after the Companies ceased operations.  It is to be noted that the audited financial statements refer to the Companies ceasing operations on 31 January 2015.  

(C)   Procuring the two companies to pay the Chan brothers’ personal legal fees

57. The point made here is that the 2014/2015 financial statements show the Companies as having incurred legal fees of over $2.8 million.  The only legal action on foot in that financial year was the 2011 action in which TIL was but a nominal defendant.  It was submitted that in the circumstances it is a reasonable inference that the Companies were made to pay for the personal legal expenses of the Chan brothers.

58. In response to queries raised by the plaintiff’s solicitors after the AGM held on 31 December 2015, the auditors state that TICL incurred legal fees for the financial year 2014/2015 of approximately $1.87 million for the 2007 action and $400,000 for the present action.  The Chan brothers have treated those legal fees as a debt owed by TICL to themselves by way of “amount due to directors”.  Significantly, as the present action did not commence until June 2015, there was no way that legal fees of $400,000 could have found their way into the 2014/2015 audited financial statements which ended on 31 March 2015.

59. The Chan brothers’ explanation is that the litigation has been going on for many years and it is hardly surprising that the legal bill should be of that order.  In my view that is no explanation.  Even if certain costs are inevitable, it does not explain how a bill of that magnitude could have been incurred when the relevant defendant is only a nominal defendant.  They should have been minimal.

60. Further, I agree with Mr Tang that a defendant director in a derivative action is not entitled to have his own legal fees paid by the company: Carlisle & Cumbria United Independent Supporters’ Society Ltd v CUFC Holdings Ltd [2011] BCC 855 at §§21 and 28.

61. In TIL’s case, the total amount of legal fees involved is approximately $600,000.  They were incurred for the 2011 action and the present action.  That again has been treated as a debt owed by TIL to the Chan brothers by way of “amount due to directors” and similar criticisms as for TICL can be made.

THE APPLICABLE LEGAL PRINCIPLES

62. It is common ground that in deciding whether or not to appoint a receiver on an interlocutory basis the court approaches the matter as it would to the grant of an interlocutory injunction.  The principles in American Cyanamide apply.

(A)   Whether there is a serious question to be tried

63. In light of the matters set out above, I do not consider that the reasons the defendants have proffered are sufficient by any means to meet the strong case made against them.  The plaintiffs have shown that there are serious issues to be tried as to:

(1)   whether the Chan brothers;

(i)   acted in breach of fiduciary duties or breach of trust breach of obligations as trustee in causing the assets and business of the two companies to be transferred to D3;

(ii)   procured the two companies to enter into sham transactions with Myers that caused debts to arise in favour of Myers designed to bring about the demise of the two companies by procuring Myers to present petitions to wind up the two companies;

(iii)  procured the two companies to pay the personal legal expenses of the Chan brothers in the 2007 and the 2011 actions as well as in the present action.

(2)   whether D3 holds the assets transferred to it as a constructive trustee for the two companies; and

(3)   whether D4 to D9 (inclusive) are liable to account to or compensate the two companies as constructive trustee for dishonest assistance in the breach of fiduciary duties, breach of trust, or breach of obligations as trustee on the part of the Chan brothers.

(B)   Whether there is a real risk of dissipation of assets

64. The first matter is to identify the assets of the Companies that are said to be in need of preservation and protection.  The plaintiffs have the burden of showing that there is a real risk that the assets of the Companies that have been transferred would be dissipated.  The assets specifically identified in the plaintiffs’ evidence fall under the following categories.

(1)   Assets already dissipated

65. They include (i) the sale proceeds of the China factory of $5 million paid into TIL’s bank account in May 2014, (ii) receivables of $4,348,913 shown in the audited financial statements of TIL for the year 2013/2014 due from the China factory (but which the auditors queried as to their recoverability in view of the fact that the China factory had been sold to D3 on 1 June 2014), (iii) credit balances in the respective bank accounts of the Companies, and (iv) the sum of $2.8 million spent on legal expenses.

66. As regards the sum of $5 million, it was paid into TIL’s bank account in May 2014.  If any part of that sum remains, it should be reflected in TIL’s current bank balance.  If it were not, then it would be reasonable to infer that it has been expended.

67. So far as the receivables of $4.3 million are concerned, according to the audited financial statements for 2014/2015 they have been “fully settled”. In their letter dated 18 April 2015, the auditors explained in §5(a) that the amount of receivables was an advance payment or deposit made by TIL to the China factory in return for finished goods to be produced and supplied at a later date.  Those goods have been supplied since the date of the financial statements (in which the auditors had queried the recoverability of this amount) which explains the set‑off.  In view of that explanation, I do not consider that those receivables are assets that are in need of protection for present purposes.

68. I come to the credit balances shown in the bank accounts.  The 2014/2015 audited financial statements show that as at 31 March 2015 they stood at $739,364 for TICL and $39,770 for TIL.  The bank statements at 31 October 2015 show balances for those accounts reduced to $301,050 for TICL and $9428 for TIL respectively.

69. If, as stated in the audited financial statements, the Companies ceased operations on 31 January 2015, prima facie, those reductions ought not to have occurred.  But what is no longer standing in the credit balances of the accounts, including the sum of $2.8 million for legal expenses (see §57 above) must have been expended.

70. Thus the 4 items identified in §65 above relate to assets that have already been dissipated (save as to the credit balances that still remain in the bank accounts).  They are not assets that are at risk of dissipation if a receiver is not appointed, leaving aside the question of taking proceedings to recover such assets.

(2)   Assets that have not been dissipated

(a)   The land

71. In 2004 TIL acquired certain rights over a piece of land situated in front of the China factory (“the land”).  But short of inferring a risk of dissipation from past questionable conduct or low commercial morality, there is no evidence of any impending transaction.

(b)   Assets of the Companies transferred to and now held by D3

72. The remaining assets identified are said to be all the business and assets of D3 derived from the Companies’ assets, business, operation and customers which, on the plaintiffs’ case, are held by D3 as constructive trustee for the Companies.  However, it is not entirely clear if it is the plaintiffs’ case that D3 owns nothing in its own right on the basis that it never operated a separate business or only those not “derived” from the plaintiffs’ assets, business etc.  The possibility of a receivership order extending over assets other than the assets belonging to the Companies cannot be ignored and is of particular relevance on the issue of potential damage to D3.

(3)   Whether real risk of dissipation shown

73. D3 is a Hong Kong company.  There is no evidence of any past dissipation by D3 as distinct from the Companies.  D3’s business is largely local.  Its offices, staff, customers and operations are all primarily based here.  Mr Kam submitted that in those circumstances it is difficult to see a realistic likelihood of a disposition of assets and business outside the territory.  He further submitted that there is no evidence to indicate that there will be such dissipation otherwise than for entirely normal and proper commercial purposes or for reasons that are unjustifiable and otherwise than for fair market value.

74. I bear in mind that there must be “solid evidence” of the risk of dissipation.  A receivership order is a serious infringement of rights and is only justified on appropriately clear and strong facts and risks.  The standard of proof of the real risk of dissipation is relatively high: see Colman J in Laemthong International Lines Co Ltd v Artis [2005] 1 Lloyd’s Rep 100 at §60 citing Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272.  That standard is applicable to all applications whether inter partes or ex parte.

75. In the present case admittedly there are past questionable transactions.  However, I am not persuaded that there is “solid evidence” of the risk of dissipation on the facts as presented as distinct from inferring such a risk from the conduct or commercial morality of the defendants.

(C)   Whether there is no or no current effective protective regime and some form of interim protection should be given to preserve the status quo

76. The defendants have offered to provide undertakings not to deal with the assets of the Companies and D3 other than in the ordinary course of business and for fair market value until final disposition of this action or further order of the court.  That is a matter that the court must take into consideration in its assessment of the risk of dissipation.

77. The plaintiffs highlighted the fact that no offer of undertaking of any kind was given until receipt of the written submissions of their counsel on 22 February 2016.  That may be so but that is no reason for the court to disregard the offer now on the table.

78. The plaintiffs consider that the undertakings do not offer sufficient protection.  It was said that the misconduct of the Chan brothers, if proven as alleged, is akin to theft and if no receiver is appointed, the Chan brothers would remain in sole control of the Companies and D3 without supervision and the Companies would suffer irreparable damage that cannot be compensated for by damages.  It was said that there would be no means of policing and monitoring compliance with the undertakings. 

79. But at the forefront of their submissions is the complaint that D3 has adduced no evidence on the nature of the business and operation it is running, what assets it is holding, or how its business and operation would be adversely affected by the appointment of interim receivers and managers.  If no appointment were made, the court would continue to be kept in the dark as to why the Companies’ assets and business were transferred and what has become of them.

80. While the undertaking offered follows the wording of the undertaking given in Macau First Universal International Limited v Ding Xiaohong & Others, unreported, CACV 193 of 2011, 31 July 2012 at §22(3) which the Court of Appeal (at §42) considered offered “considerable protection”, Mr Tang submitted that the factual matrix of that case was materially different.  Macau First was not a dispute between two shareholders over the control of the companies, but a dispute as to who is the sole beneficial owner of the companies.  Where the parties are both directors/shareholders of a company, who both have a stake in the company and who are jockeying for its control, any transfer of the company’s funds by a shareholder/director to another company belonging to himself would be viewed with concern: see Macau First at §§8 and 41.  The Court of Appeal did not elaborate further as to whether that difference necessarily renders the undertaking inadequate.

81. Mr Tang then referred to Michel Hazan v HK Sindy Footwears Ltd, unreported, HCMP 1240/2006, a case where the applicant, one of two shareholders of X, having commenced proceedings under s168A that he be bought out and another writ action concerning his alleged 50% interest in Y a related company, applied for the appointment of interim receivers.  The plaintiffs relied on that decision for the proposition that undertakings to keep proper books and accounts of the Companies and not to dispose of the Companies’ funds and assets otherwise than in the ordinary course of business are insufficient.

82. In that case, immediately prior to the commencement of the proceedings the plaintiff had been actively involved in managing and running X’s business together with his co‑owner with whom he had been cohabiting until they fell out.  In the present case, the plaintiffs have not been involved in managing the business of the Companies since P2 was removed as director almost 10 years although they remain as 50% owners of the Companies.  The reality is that for almost a decade the Chan brothers have been in sole control of the Companies and of their books and accounts.

83. The passage in HK Sindy Footwears on which the plaintiffs rely has to be understood in the context of the facts pertaining in that case. Those facts are very different from the present case and what is appropriate in one factual situation may not be in a different factual situation.  The adequacy of protection presently offered must be assessed against the facts of this case and not some other case involving a different set of facts.  

84. On the plaintiffs’ case, the Chan brothers are the real owners of D3 which they set up (through nominees) as the recipient of the assets and business that they intended to and have stripped away from the Companies.  Presumably the purpose of this elaborate plot is to steal the plaintiffs’ share of the business for themselves and continue to exploit and carry on the “old” business but without having to account to or share profits with the plaintiffs.  In that scenario, what would be the point of the Chan brothers destroying the very business they set out to “steal” for themselves in the first place?  When the Chan brothers themselves have a 50% stake in the assets transferred, the notion that they would run down the business or to dissipate any of the assets does not seem to make any sense.  

85. For the reasons given, I consider that the undertakings offer adequate protection.

(D)   The risk of damage if the appointment is made and whether it can be adequately compensated by a cross undertaking in damages

86. As earlier noted, it is not entirely clear if it is the plaintiffs’ case that D3 owns nothing in its own right or only those not “derived” from the plaintiffs’ assets, business etc.  As there is some indication of business dealings between D3 and the Companies prior to the transfers in 2014, even if the plaintiffs were to prevail at the end of the day the possibility of some part of D3’s business was not derived from the Companies cannot be excluded at this stage.  Plainly the risk of damage to D3’s own business is a relevant consideration.

87. Mr Kam submitted that the powers sought amount to a complete takeover not only of the Companies but also of D3.  The plaintiffs have intimated that they (in the shape of P2 and his wife who had previously worked at the Companies) are ready to assist the receivers in operating the business.  On the footing that an appointment is made, the plaintiffs in assisting the receivers will gain unlimited and untrammelled access to all information concerning D3’s own business including customer databases, financial details, sensitive business/research plans when, on the Chan brothers’ case, D3 and the Companies are business rivals and it remains a possibility that the plaintiffs may not prevail at the end of the day.

88. Pausing here, I make two observations: first, as to the assistance the plaintiffs could potentially render, it is to be noted that the plaintiffs (or more accurately P2) has not been involved in running the Companies since 2006 when P2 was removed from the Companies’ boards.  That was a decade ago which, on any view, is a significant period of time.  It is unclear whether P2 has kept up with that particular manufacturing sector and trading in automobile parts, or, expressed in laymen’s terms, is “up to speed” with how those pertinent sectors have evolved and developed.

89. Second, in §53 of the plaintiffs’ reply submissions, it was suggested that the proposed receivers and managers “would manage the business with the assistance of the existing management and employees”.  The “existing” management would include D2 who currently is its director of operations.  The notion that D2 and P2 would both be involved in the running the business is a non‑starter given the history of animosity and hostility between the two camps and, in my view, a sure recipe for disaster. 

90. Moreover, that the appointment of receivers is likely to impact adversely on the reputation of a company is a view that is widely held and a reality in the commercial world.  It creates a negative impression and is generally not well perceived.  How severe the impact is likely to be in any particular case is necessarily fact‑sensitive.

91. In the present case, there is evidence to the effect that Amax’ business model is that it acquires goods from a number of manufacturers to spread out risk.  TICL was not its exclusive manufacturer.  The possibility of business being easily diverted to competitors is there.

92. There is also the consideration of the costs of the receivership.  At the rate the 2011 action has progressed, any appointment of receivers is likely to last for at least several years.  As a practical matter, it is not evident how the receivership is to be financed and funded.   

93. The Companies (which have not been in operation since February 2015 as a result of the petitions) have been suffering losses since 2012.  The audited financial statements of the Companies for 2014‑2015 show a combined loss of approximately $11.5 million.  Currently they are not generating any income, much less any profit.  Such cash assets as have been identified of the order of $300,000 (assuming they have not been expended) are unlikely to go very far.

94. As to the plaintiffs’ cross undertaking as to damages, D3’s position is that the loss or damage to goodwill and reputation sustained as a result of receivership and loss of business opportunities are not readily quantifiable.  There is certainly an element of truth in the submission.  In that context, the cross undertaking will not have the effect of making D3 whole in the event that the plaintiffs do not ultimately prevail in their action.

95. If no receiver is appointed, the loss the plaintiffs would suffer is the risk of dissipation of assets of the Companies.  Should that occur, it might lead to a tracing exercise and possibly more proceedings to recover the wrongly dissipated assets, in other words, more legal costs.  On that basis, the loss sustained is compensable.

CONCLUSION

96. The appointment of a receiver is recognised to be an extremely drastic remedy.  Because of its intrusiveness, the courts have tended to regard the remedy as one of last resort.  It is only granted if the court is convinced of its necessity and not otherwise.  The court’s jurisdiction is to be exercised with great circumspection.

97. What is really at stake is control over the Companies and D3.  That is the subject matter of the underlying action and one that should be resolved in due course.  In the absence of a compelling case of dissipation of the Companies’ assets being made out, it would be wrong to accede to the application.

98. Having regard to all the matters set out above, I do not consider this to be an appropriate case for the appointment of receivers and managers.  Accordingly, the plaintiffs’ summons is dismissed with an order nisi that the costs be to the defendants, with certificate for two counsel, such costs to be taxed if not agreed.