THE LIQUIDATOR OF WING FAI CONSTRUCTION CO LTD (IN LIQUIDATION) v. YIP KWONG ROBERT AND OTHERS

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 735 OF 2002

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J U D G M E N T

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TABLE OF CONTENTS

A.  INTRODUCTION

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

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

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

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

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

B.  THE BACKGROUND

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

Wing Fai

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

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

Registered directors of Wing Fai

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

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

The takeover of the Group

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

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

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

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

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

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

The respondents

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

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

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

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

Office premises

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

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

The payments‑out and payments‑in

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

Modus operandi of the letters of credit

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

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

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

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

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

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

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

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

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

Famous Capital

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

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

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

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

King Capital

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

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

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

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

Financial relations between Wing Fai and the Group

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

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

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

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

Set-off Agreement

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

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

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

Sale of Wing Fai to Sino Glister

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The liquidation of Wing Fai

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

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

The course of these proceedings

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

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

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

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

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

Criminal proceedings

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

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

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

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

Other proceedings

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

C.  THE PARTIES’ CONTENTIONS

(1)  The Liquidator’s case

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

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

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

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

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

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

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

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

(2)  The 1^st respondent’s case

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

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

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

(3)  The 2^nd respondent’s case

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

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

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

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

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

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

   Famous Capital

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

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

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

King Capital

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

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

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

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

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

(5)  The 3^rd respondent’s case

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

D.  THE ISSUES

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

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

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

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

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

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

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

(6)  whether Wing Fai sustained any loss;

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

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

E.  SUBMISSION OF NO CASE

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

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

F.  THE WITNESSES AND DOCUMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

G.  ISSUE 1 — DE FACTO DIRECTORSHIP

(1)  Scope of s 276

95.  S 276 provides:

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

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

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

(2)  Relevant capacity

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

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

(3)  Principles on de facto directorship

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(4)  Pleadings

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

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

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

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

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

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

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

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

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

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

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

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

(5)  Relevant facts and analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Authorised signatories of bank accounts

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

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

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

Cheques

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

“For and on behalf of

WING FAI CONSTRUCTION CO., LTD.

 

……………………………………………

   Director ”

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

Letters of credit documents

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

Letters to banks

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

Monthly progress meetings

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

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

Bond in favour of Hong Kong Housing Authority

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

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

Control of the Old Accounts post‑April 2002

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

(6)  Overall discussion

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

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

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

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

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

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

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

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

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

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

H.  ISSUE 2 — DISPUTED PAYMENTS-OUT

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

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

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

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

(2)  FC–7 and FC–21

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

(4)  FC–38

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(2)  FC–7 and FC–21

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

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

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

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

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

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

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

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

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

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

“Alternative Procedure

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(4)  FC–38

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

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

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

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

(5)  Overall

187.  Overall, therefore, I find that:

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

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

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

I.  ISSUE 3 — MAKING OR PROCURING TO BE MADE

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

(1)  Individual responsibility of directors

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

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

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

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

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

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

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

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

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

(2)  Relevant principles of pleading

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

(3)  Relevant procedural steps

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(4)  The pleaded case

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

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

“Breach of fiduciary duty/breach of trust

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

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

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

Particulars of breach

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

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

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

209.  §21 pleaded that:

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

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

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

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

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

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

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

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

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

(5)  Conclusion

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

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

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

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

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

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

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

J.  ISSUE 4 — BREACH OF DUTY AND DISHONEST MISFEASANCE

(1)  The underlying commercial transactions were fictitious

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(4)  Dishonesty vis‑à‑vis Wing Fai

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

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

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

K.  ISSUE 5 — RATIFICATION

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

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

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

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

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

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

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

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

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

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

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

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

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

L.  ISSUE 6 — LOSS AND DAMAGE

(1)  The approach

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

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

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

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

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

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

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

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

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

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

(2)  Uncertainties in relation to the payments

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

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

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

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

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

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

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

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

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

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

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

(a)  Set‑Off Agreement

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

“SET‑OFF OF INTER‑COMPANY CURRENT ACCOUNT BALANCES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(c)  Wing Fai suffered no loss as a result

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(a)  Breach of directors’ fiduciary duties

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(b)  Want of authority

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

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

(c)  Disposition with intent to defraud creditors

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

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

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

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

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

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

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

What Master Woolley said on that earlier occasion was this:

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

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

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

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

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

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

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

M.  ISSUE 7 — QUANTUM

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

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

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

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

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

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

N.  ISSUE 8 — INTEREST

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

(1)  Whether to award compound interest

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

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

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

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

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

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

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

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

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

(2)  For what period

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

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

O.  CONCLUSION AND ORDERS

355.  For the above reasons, in summary:

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

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

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

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

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

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

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

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