THE IMPERIAL GEMS & JEWELLERY FZCO v. EDWARD SIMON MIDDLETON AND OTHERS

HCCW 576/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 576 OF 2008

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D E C I S I O N

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1.  The company, Dianoor International Limited (“DIL”), is in compulsory liquidation in Hong Kong. It carried on business in the manufacture and trading of high value jewellery and gems. The respondents named in these proceedings are the liquidators of DIL.

2.  In March 2010, a company called The Imperial Gems & Jewellery FZCO (“TIGJ”) submitted to the liquidators a proof of debt for the sum of US$1,411,963.85.

3.  In June 2012 the liquidators rejected TIGJ’s proof in its entirety.

4.  By a summons taken out on 19 July 2012, TIGJ appeals against the rejection of its proof of debt, seeking an order that the proof be admitted in full or at such sum as the court may deem fit.  Pursuant to the directions given by the court on 25 July 2012, the evidence filed for that application comprises the following:

(1) TIGJ filed an affirmation of Mrs Hukum Sultana dated 8 September 2012 in support of its application.

(2) One of the liquidators, Mr Edward Middleton, made an affidavit dated 13 November 2012 in opposition to the application.

(3) TIGJ filed an affirmation made by Mrs Sultana on 2 January 2013 in reply.

5.  On 7 February 2013, the liquidators took out a summons seeking an order that the reading of Mrs Sultana’s first and second affirmations, including the exhibits, be conditional on the deponent appearing at the hearing of TIGJ’s summons and being the subject of cross‑examination. This application has come before me for hearing today.

6.  In order to understand the basis of the liquidators’ application, it is necessary to set out some background to the dispute.

7.  DIL was part of an international group of companies controlled by Mr Iqbal Mubarik.  The ultimate shareholder of DIL is a Bermuda company, 21st Century Holdings Limited, which is wholly owned by the IMK Family Trust, a trust settled by Mr Mubarik and his wife, Mrs Mubarak, in 1997.

8.  In July 1998, Mrs Mubarak presented a petition for divorce in England.  After a hearing on ancillary relief, in December 1999, Mr Justice Bodey ordered Mr Mubarik to pay a lump sum of GBP4,875,000 to Mr Mubarik, and periodical payments for her own benefit and the benefit of the children.  Mr Mubarik failed to pay the sums as required.  As a result, the English court made an order to vary for the benefit of Mrs Mubarak a post-nuptial agreement constituted by the IMK Trust.  On the back of that order, Mrs Mubarak applied to the court in Jersey, where the IMK Trust was established, for variation of the trust.  The Jersey court acceded to the application and ordered that the trust be varied so as to empower the trustee to pay the sums due to Mrs Mubarak out of the trust assets.  Two partners of KPMG were appointed receivers and managers of the IMK Trust.

9.  DIL, as an asset of the IMK Trust, was also put into receivership.  The three individuals who are now its liquidators were appointed its receivers and managers on 25 April 2008.  DIL was subsequently wound up on 23 December 2009 on a petition presented by its employees, who were owed unpaid wages.  The present liquidators were appointed as liquidators on 9 July 2010.

10.  The liquidators have deposed that they had received little or no help or co-operation from the directors and staff of DIL.  The two directors at all material times were Mr Hussein Wani and Mr Aiyer Vembu Subramaiam.

11.  As pointed out already, a proof of debt was submitted by TIGJ in March 2010 in the liquidation of DIL.  TIGJ’s registered shareholders are Mrs Hukum Sultana, who is Mr Mubarik’s sister, and one Mr Habib Ullah Khanayari, who is Mr Mubarik’s father.

12.  The proof, which is for the aggregate sum of over US$1.4 million, comprises the following four claims:

(1) Goods on assignment - Consignment Note 101/07 - US$994,630;

(2) Invoice DIL/01/2008 (three lots of gems) - US$49,833.85;

(3) Invoice DIL/02/2008 (ruby beads necklace) - US$200,000;

(4) TT sent advance against purchase of paintings - US$167,500.

13.  Of these, TIGJ has confirmed that it is not pursuing claim (4).  Claim (2) was admitted by the liquidators in full, but the amount was set off against the sum of US$202,450 admittedly due from TIGJ to DIL.  Only claims (1) and (3) remain contentious.

14.  As to claim (1), TIGJ attached its consignment memo dated 6 August 2007 to its proof of debt.  The liquidators rejected the proof on the basis that there was insufficient proof of ownership and that there was evidence the consigned goods belonged to a third party. Mrs Sultana in her first affirmation explains that the consigned goods were previously owned by Kuwait Jewellery House (“KJH”) and consigned to DIL. In 2007, KJH was closing down its business and did not have cash to settle the debts owed to TIGJ totalling about 2.45 million DHS; that is, United Arab Emirates Dirham.  By agreement, these debts were partially set off by TIGJ purchasing from KJH the consigned goods in situ at the price of 187,707 Kuwaiti Dinar, which was equivalent to DHS2,435,121.

15.  In support of that explanation, in her first affirmation Mrs Sultana points out that TIGJ’s consignment memo dated 6 August 2007 was acknowledged by DIL with its stamp and signed by an officer of DIL.  She also exhibits copies of the following documents:

(1) TIGJ’s accounting ledger for the KJH account for the period between 1 November 2006 and 31 October 2007.

(2) KJH’s sales invoice dated 4 August 2007, together with copied images of the consigned goods.

(3) TIGJ’s internal purchase register and consignment ledger.

(4) DIL’s vendor consignment receipt dated 7 August 2007 whereby it is said DIL acknowledged its status as TIGJ’s consignee in respect of the consigned goods in question.  Mrs Sultana observes that this receipt was apparently signed by the same person who countersigned TIGJ’s consignment memo dated 6 August 2007.

16.  As to claim (3), TIGJ’s proof of debt has attached to it an invoice dated 10 February 2008 in the sum of US$200,000, and a corresponding purchase receipt voucher dated 12 February 2008 issued by DIL to TIGJ.  In their notice of adjudication, the liquidators rejected the claim on the ground that there was no evidence that the item was received by DIL.

17.  In her first affirmation Mrs Sultana says that the documentation submitted in support of claim (3) is the same as that for claim (2).  She finds it inexplicable that the liquidators have admitted claim (2) but rejected claim (3).  She further says that she has made recent enquiries with Dianoor Jewellery LLC (“DJLLC”) in Dubai.  She exhibits a letter making the enquiry and a letter from DJLLC dated 5 August 2012 which confirmed that they had received from DIL a ruby beads necklace similar to the one to which claim (3) relates on consignment basis in February 2008, and that they had subsequently returned it to DIL, confirmed in another letter to be on 26 March 2008.  Mrs Sultana observes that other than a clasp, the photographs in the enquiry and the response respectively show the same ruby beads necklace.  She exhibits a letter from DJLLC which states that the clasp belonged to DIL, which it had apparently combined with the necklace.

18.  In Mr Middleton’s eighth affidavit filed in response in November 2012, the liquidators set out various matters which have caused them to be suspicious and to remain unsatisfied with TIGJ’s proof of debt.  He queries why there was no written agreement in relation to the purchase by TIGJ from KJH of the consigned goods in situ.  He points out that some of the documents exhibited to Mrs Sultana’s first affirmation were not previously disclosed to the liquidators and that some of the documents, for example, letters from DJLLC, emanated from entities related to Mr Mubarik. He refers also to the history of the litigation between Mr Mubarik and his wife.

19.  In her second affirmation filed in January 2013, in relation to claim (1), Mrs Sultana explains that she did not attach all the documents to the proof of debt because she thought the consignment memo was sufficient, and TIGJ was not advised by its Dubai lawyers of the need to produce the further documents that were eventually exhibited to Mrs Sultana’s first affirmation herein.

20.  With respect to the absence of a written agreement for the purchase of the consigned goods in situ, she says it is not at all unusual in the jewellery trade for amounts owing between two parties to be settled or extinguished through another party.

21.  In relation to claim (3), she says that TIGJ did not perceive any need to submit any further evidence than the documents attached to the proof of debt.  She also questions the basis on which the liquidators have suggested that there is a close relationship between TIGJ and DJLLC, although it is to be noted that she does not deny that there exists a connection through the family relationships between the owners of TIGJ and the owners or ultimate controller of DJLLC.

22.  The relevant legal principles applicable in this sort of application are not in dispute.  In the leading authority of Wendy Wenta Seng Yuen v Philip Pak Yiu Yuen [1984] HKLR 431, Mr Justice Fuad, rejecting counsel’s submission that there was a general principle that cross‑examination on affidavit should not be ordered in any interlocutory proceedings unless special circumstances required it, stated as follows:

“As regard affidavits in general, there will be cases where the interests of justice dictate that a deponent should be subject to cross-examination. For example, where the motives of directors in exercising their powers is in issue, as in Smith v Fawcett [1942] 1 Ch 304. In other cases, in my judgment, the true rule must be that the court has an unfettered discretion to permit cross-examination on an affidavit but the applicant is not entitled to this right as of course. He has to establish that in all the circumstances of the case there is a good and sufficient reason for the application. He will not find this difficult where the evidence on the affidavit will result in what I might call a final order. He will find it more difficult in interlocutory matters, perhaps, for, as the judge below had in mind, great delay and expense might be entailed. It seems to me that what is essential for the applicant to show is that the proposed cross‑examination might be productive of a useful result at the stage that the application is made. If no reason can be suggested for supposing that the cross‑examination will then be helpful, the application will be refused in the discretion of the court, indeed, in certain circumstances it might be regarded as oppressive and, as such, an abuse of the process of the court.”

23.  This decision has been applied in subsequent cases, and in particular by the Court of Appeal in Waters v Malahon Credit Company Limited [2004] 2 HKC 94.

24.  The principles were also discussed by Sir Donald Nicholls, Vice-Chancellor, in Re Bank of Credit and Commerce International SA (No 6) [1994] 1 BCLC 450, a case which concerns the power to order cross-examination in an appeal to the court against a liquidator’s decision to reject a proof of debt.  There, the Vice‑Chancellor said at page 453:

“… I am unable to accept that there is a rule of universal application that failing some contrary sworn evidence, cross-examination of a deponent will not be ordered. The court will always be concerned to see that an order for cross-examination is not made needlessly or when it would be oppressive. The purpose sought to be achieved when cross-examination is ordered is that this is necessarily for fairly disposing of the particular issue. Whether it is so necessary will necessarily depend on the circumstances of the particular case. In cases where the other party is in a position to give evidence contrary to the deponent’s case and it chooses not to do so, the court will no doubt be slow to order cross-examination. The party who seeks cross-examination can be expected to put forward his own account of the facts in dispute of which he himself has knowledge. If he chooses not to do so and declines himself to give evidence and expose himself thereby to an application for cross-examination, the court may well be disinclined to order cross-examination of the deponent who has given evidence. But even in such a case no absolute rule can be laid down. The court retains a discretion, and it would be unwise to say that in such a case, cross‑examination will never be ordered. There must always be the exceptional case.

 The present case is of a different character.  The liquidators themselves have no knowledge of the arrangements between Mr Almerabi and Sheikh Khalid.  They are therefore not in a position to adduce evidence contradicting the evidence of Mr Almerabi. But that does not mean that Mr Almerabi’s evidence must therefore stand untested by cross‑examination, although here, as elsewhere, the court will take care to see that the request for cross-examination is not oppressive or vexatious.”

25.  Bearing these principles in mind, I am of the view that an order for cross-examination ought to be made in this case having regard to the circumstances of the case, including in particular the following:

(1) The proof of debt relates to connected transactions.  The claimant, TIGJ, is a company owned by the father and younger sister of Mr Mubarik, who is the ultimate owner and controller of the alleged debtor, DIL.  The directors at all material times of DIL were Mr Wani and Mr Aiyer.  Mr Wani, it appears, has been described as a cousin of Mr Mubarik.

(2) There are documents relied on by the claimant, TIGJ, that apparently emanated from other related companies such as the letters from DJLLC which, on the evidence, is part of the DIL group.

(3) The liquidators have received no assistance or co‑operation from the previous management and staff of DIL. Thus, they have obtained no independent confirmation of the matters asserted by TIGJ.

(4) As the liquidators have noted, although claim (1) relates to a purchase of certain consigned goods in situ, there was neither any written agreement evidencing the sale and purchase, nor correspondence in the form of letter, fax or email confirming the existence of such sale and purchase.

(5) The liquidators submit that there are matters raising concern in the evidence put forward by TIGJ in the form of Mrs Sultana’s affirmations.  Mr Sheppard, who appears on behalf of the liquidators, points, by way of example, to what he describes as an anomaly in the explanation put forward by Mrs Sultana in relation to claim (3).  It appears from TIGJ’s invoice to DIL that the ruby necklace was sold to DIL on 10 February 2008, and from the purchase receipt voucher, that it was received by DIL on 12 February 2008.  It appears from the letters of DJLLC to TIGJ dated 5 and 30 August 2012, however, that the necklace was immediately consigned by DIL to DJLLC on 12 February 2008 but returned to DIL on 26 March 2008.  Mr Sheppard says it is hard to accept without question that DIL found a clasp from its own stock and attached it to the necklace and sent it back to Dubai, all within one day.  Mrs Sultana says that the enquiry with DJLLC was prompted by a staff member of TIGJ recalling having seen a similar item displayed in DJLLC’s shop window.  Mr Sheppard says it is remarkable that a staff member happened to have seen the necklace in DJLLC’s shop window in Dubai during the 40‑odd days between 12 February and 26 March 2008 and happened to recall this four and a half years later in 2012 to enable TIGJ to be prompted to make the enquiry with DJLLC.

(6) The liquidators point out that although the documents put forward by TIGJ now appear to have been dated in the contemporaneous period of time, they were not disclosed or provided to the liquidators in the correspondence between the liquidators and TIGJ in which the liquidators, in their then capacity as receivers and managers of DIL, made requests to TIGJ for the provision of documents to support the claims which are now made in the proof of debt.  In relation to these concerns, Mr Hew who appears for TIGJ says that the claim by TIGJ is largely documentary, and that there is nothing to suggest that Mrs Sultana knows anything beyond what is already apparent from the documents.  He says therefore that there is no purpose in ordering Mrs Sultana to be cross-examined.  I have to say I do not accept that Mrs Sultana’s knowledge is necessarily as limited as that.  She is one of the two directors of TIGJ and one of its two shareholders. There is no suggestion that she is or has been a passive or sleeping director not carrying out any duties.  On the contrary, her affirmations were made based on her own personal knowledge unless otherwise stated in those affirmations. Moreover, in her third affirmation at paragraph 12, Mrs Sultana says:

“As directors of TIGJ, my father and I are actively involved and participate in TIGJ’s business and operations and are well known in the jewellery world.”

(7) There has been a persistent attempt by Mr Mubarik, with the assistance of at least Mr Wani, to prevent Mrs Mubarak from obtaining independent affluence despite the orders for ancillary relief given by the English court.  In that regard, the liquidators have drawn my attention to the judgments of the English court.  In particular, in a decision of the Court of Appeal of England and Wales dated 17 July 2007 in  Mubarak v Mubarak [2007] EWCA Civ 879, Lord Justice Wall said at paragraph 2:

“The case of Mubarak v Mubarak has, I regret to say, become notorious, and, in my judgment, represents a serious blot on the otherwise carefully written pages of family jurisprudence.  Its level of notoriety is measured by the terms in which Lord Justice Thorpe refused permission to appeal.  The application falls to be considered in the context of over seven years of litigation rightly described by Mr Justice Holman as “titanic”.  The husband is and has been for years in contempt.  He cynically incurs and discharges massive litigation bills with, as I infer, the intention of depriving the wife of her entitlement to independent affluence.  This court should not encourage or collude in his apparent strategy.”

And also in paragraph 31:

“At this point it is, I think, necessary, and therefore needs to be stated again, that this is not a case of cannot pay, it is a case of will not pay, and one of the worst of its kind.”

I am not of course for a moment suggesting that TIGJ or Mrs Sultana are guilty of having conspired with Mr Mubarik in his attempt to evade the court’s orders, but these events have naturally and, in my view, justifiably, heightened the concern on the part of the liquidators to ensure that the claim put forward by TIGJ, a related company, is properly tested and scrutinised.

(8) I also bear in mind that the evidence which the liquidators seek to have tested by cross-examination is being filed in support of an appeal against a rejection of proof of debt which will lead to a final adjudication of the rights and obligations between DIL and TIGJ.

26.  Finally, I note that Mrs Sultana has not put forward any personal circumstances suggesting that an order for cross‑examination would cause any hardship.  All that is said is that it would lead to unnecessary expense and inconvenience.  This is of course not a reason in itself for ordering cross-examination, but in light of the factors that I have already mentioned, and in the absence of any substantial countervailing reason mitigating against the liquidators’ application, I am of the view that this is an appropriate case in which to make the order sought.