JOHN ROBERT LEES AND ANOTHER v. SHEE YIP SHING

HCCW 373/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 373 OF 2002

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REASONS  FOR  DECISION

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1.  On 2 February 2005, the liquidators of Promail International (HK) Limited (“the Company”) issued a summons under section 197 of the Companies Ordinance, Cap. 32.  In this summons, the liquidators sought an order that the property and assets of Shee Yip Shing, the respondent herein, including but not limited to the balances of the specified accounts with 7 banks, whether in the respondent’s own name or not, and whether solely or jointly held, be placed in the custody and control of the liquidators.

2.  Pending the hearing of that summons, the liquidators obtained an ex parte injunction before Reyes J on 2 February 2005 (“the ex parte injunction”) to restrain the respondent from disposing of the monies in the specified bank accounts.  On the same day, they took out an inter partes summons for continuation of that injunction pending the determination of the summons under section 197.

3.  At the return date of the inter partes summons on 4 February 2005, I made an order that the ex parte injunction be continued pending the determination of the section 197 summons.  I gave directions for evidence to be filed in the application and adjourned for argument the section 197 summons and the inter partes summons for continuation of the injunction.

4.  On 6 June 2005, on the application of the respondent, I varied the injunction to allow the respondent to draw a sum of $19,600.00 a month as his living expenses until after the determination of the section 197 summons and $80,000.00 towards his legal expenses in the liquidators’ summonses and his application for variation.

5.  The hearing on 3 August 2005 was the substantive hearing of the liquidators’ summons under section 197 and the inter partes summons for continuation of the injunction.

6.  At the conclusion of the hearing, I dismissed the section 197 summons with reasons to be handed down.  Before I go to the reasons, I would set out the background briefly. 

7.  The Company was incorporated in Hong Kong on 1 March 1999 with an issued capital of $2.00.  It was ordered to be wound up by the court on 10 July 2002.  On 21 March 2003, a regulating order was made under section 227A and the present liquidators were appointed.

8.  The police raided the offices of the Company in December 2000 and arrests were made.  In January 2002, the respondent, who was appointed a director in November 2000, and others were charged with conspiracy to defraud.  Among them was Tan Lam Chuan (“Mr Tan”), the major shareholder of the Company and also a director.  Consolidated charges were laid against the respondent, Mr Tan and 2 others in June 2002, that they had conspired to defraud such persons who might be induced to invest money with the Company by false and dishonest representations.  The case of the prosecution was that the Company operated 2 rebate schemes which it sold to participants with the promise of exceptionally high yield returns, on the representation that such high yield returns were due to the Company’s businesses in garment, food, department stores and supermarkets, when the Company did not in fact run any other business apart from the 2 rebate schemes.  On the investigation of the police, deposits of substantial sums were made into the accounts of the Company by the participants of the schemes.  Payments made out to participants for cash rebates would appear to be derived from the subscription fees of new participants. 

9.  It was clear that the Company could not possibly pay all the participants the profits promised to them.

10.  On 19 December 2000, a restraint order was made under the Organised and Serious Crimes Ordinance, Cap. 455 to restrain disposal of various assets of the Company and of various individuals, such assets included the balances held in the respondent’s bank accounts.

11.  The criminal trial of the respondent, Mr Tan and others took place in December 2004.  The respondent was acquitted and the others were convicted.  Due to the respondent’s acquittal, the restraint order against him must be discharged.  Hence, the liquidators applied for and obtained the ex parte injunction pending determination of their section 197 summons.

12.  The liquidators adduced evidence that between 19 April 2000 and 9 December 2000, payments totalling $5,378,316.33 were made from several bank accounts of the Company into the bank accounts of the respondent.

13.  Between March 2000 and the December 2000, a total of $34,688,607.00 was deposited into the respondent’s accounts with three banks.

14.  In the admitted facts in the criminal trial, these two matters were admitted by the respondent:

(1)	A total of $0.95 million in cash was withdrawn on 3 occasions from the Company’s bank accounts and the cash was paid over to the respondent at the bank.
(2)	On 24 October 2000, he opened an account with the Bank of East Asia Limited (“BEA”) and deposited $2 million.  He told the bank manager of BEA that he was the Company’s director and that the money belonged to the Company.  He later withdrew the sum of $2 million.

15.  The respondent was employed by the Company from early 1998 to late 2000.  He has not been employed since.  According to him, his monthly salary from the Company at the time was only $15,000, plus bonus payment, commission or rebate in the region of $120,000.00 to $130,000.00, as a result of his recruitment of new members to purchase the rebate schemes of the Company.  The respondent asserted in one of his affirmations that he earned between $135,000.00 to $145,000.00 a month.

16.  The liquidators stated that although the respondent has not been convicted of conspiracy to defraud, it was established at the criminal trial that fraud was perpetrated by some of the principals of the Company, including Mr Tan.  The directors, including the respondent, were acting in breach of their fiduciary duties in operating an unlawful business.  Monies transferred out of the Company’s accounts not in operation of genuine business and paid into the respondent’s accounts were funds transferred in breach of trust.  The respondent, as the recipient, knew or must have known that he had no legal right to receive the payments.  Thus, the property transferred to him in breach of trust was held by him as constructive trustee.  The balance of $5.3 million odd in the respondent’s bank accounts is the property of the Company.

17.  Of the $5.3 million odd deposited into the respondent’s bank accounts, the aggregate balance remaining at present is only about $2.2 million odd.

18.  The respondent has made 3 affirmations in opposition.  In additional, he produced affirmations from Mr Tan, the account clerk of the Company Wong Yu Fai Angel, and three individuals who had invested in the rebate schemes of the Company.

19.  The respondent asserted that the $5.3 million odd deposited into his accounts is his own money.  Of the other substantial sums that had been paid into his accounts by the Company, he had already returned to the Company all these other sums that did not belong to him.  He explained that on some occasions, cheques were paid into his account merely out of convenience.  He would cash the cheque, hand over the funds to Angel Wong and she in turn would distribute the cash to the participants of the rebate schemes for payment to them of bonus, commission or cash rebates.

20.  The respondent claimed that the $2 million paid into his BEA account was not the money of the Company but had belonged to 2 other companies, Master Pro Holdings Sdn Bbh in Brunei and Pro-mail Worldwide Malaysia Sdn Bhd in Malaysia.  He denied that he had told the bank manager of BEA that the money belonged to the Company and claimed that he had not even spoken to the manager.

21.  Mr Tan asserted in his affirmation that of the amounts that made up the $5.3 million in the respondent’s bank accounts, he could identify 10 payments as payments of the respondent’s monthly salaries, commission, cash rebates or bonus and that these monies do not belong to the Company.  Mr Tan supported the respondent’s version that the $2 million paid to the respondent in October 2000 was for “extra bonus”.

22.  Mr Harris for the liquidators attacked the quality of the evidence filed by the respondent and laid emphasis on the absence of any documentary evidence on the respondent’s alleged entitlement to substantial bonus payments.  All that we have are just the assertions of the respondent, Mr Tan and Angel Wong.  Notwithstanding this, I do not think I can make a finding on the affidavits alone that the version of the respondent and those who gave affidavits on his behalf should all be rejected, or that the respondent must have the requisite knowledge to make him a constructive trustee.  I find that there is a dispute as to the Company’s entitlement to the funds in the respondent’s bank accounts.

23.  The liquidators’ application was made under section 197.  This provision reads as follows:

“197.  Custody of company’s property

Where a winding-up order has been made or where a provisional liquidator has been appointed, the liquidator, or the provisional liquidator, as the case may be, shall take into his custody, or under his control, all the property and things in action to which the company is or appears to be entitled.”

24.  The provisions equivalent to section 197 in the English legislation are found in the Companies Act 1929 section 189, the Companies Act 1948 section 243, and the Insolvency Act 1986 section 144(1).

25.  I do not think the liquidators’ application should be made under section 197, as this provision does not empower the court to act.  The appropriate provision is section 211 of Cap. 32 and this provides as follows:

“211.  Delivery of property to liquidator

The court may, at any time after making a winding-up order, require any contributory for the time being on the list of contributories, and any trustee, receiver, banker, agent or officer of the company to pay, deliver, convey, surrender, or transfer forthwith, or within such time as the court directs, to the liquidator any money, property, or books and papers in his hands to which the company is prima facie entitled.”

26.  The provisions equivalent to section 211 in the English legislation are found in the 1929 Act section 204, the 1948 Act section 258, and the 1986 Act section 234(2).

27.  It is clear from the opening words of section 211 (“the court may… require”) that it is this provision which gives the court the power to act.

28.  The effect of sections 197 and 211 are clearly set out in Gore-Browne on Companies, 45^th edition, vol. 2, para. 58[2A].  Section 144(1) of the 1986 Act (our section 197) is to impose a duty on the liquidator or provisional liquidator to take custody and control of “all the property and things in action to which the company is or appears to be entitled”.  Section 234 of the 1986 Act (our section 211) gives power to the court to enforce delivery to the liquidator or provisional liquidator of any of the property, books, and papers to which the company appears to be entitled.

29.  Thus, the liquidator’s application should have been made under section 211.

30.  Mr Harris cited Re London Iron & Steel Co Ltd [1990] BCLC 372 as authority for the proposition that the court may order property to be handed over to receivers even though there is a dispute as to ownership.  This case was decided under section 234 of the 1986 Act.  Warner J held that the decisions decided under the previous legislation (Re Vimbos Ltd [1900] 1 Ch 470; Re Palace Restaurants Ltd [1914] 1 Ch 492) and the views of the leading textbooks (Buckley on the Companies Act, 14^th edition, page 623; Halsbury’s Laws, 4^th edition, vol. 7, para. 1183; Gore-Browne on Companies, 44^th edition, vol. 2, para. 34.5.2; and Atkins’ Encyclopaedia of Court Forms, 2^nd edition, vol. 10, page 186) on the procedure in section 258 in the 1948 Act, which was replaced by section 234 in 1986, are no longer applicable, due to the change of wording in section 234.  Moreover, even though a dispute of fact may arise as to the true ownership of the property in question, a respondent to the application would be adequately protected in the section 234 procedure by Part 7 of the Insolvency Rules, as those rules provide that all the procedures necessary for resolving a dispute as to fact would be available as in an action commenced by writ.

31.  Re London Iron & Steel was considered by our Court of Appeal in Re Crownhall Investments Ltd [1992] 1 HKC 137.  There, the application made under section 211 was objected to by the respondent on jurisdictional grounds, one being that the procedure was not applicable where the company’s entitlement to the property was in dispute.  The Court of Appeal held that the procedure established by Re Palace Restaurants since 1914 have been accepted too long for our courts to depart from what the authorities have so clearly established and Re London Iron & Steel, which was decided on new legislation and therefore distinguishable, has not changed the position.

32.  The proper use of our section 211 was set out in the 44^th ed of Gore-Browne in the extract referred to earlier as follows:

“But the power [under section 258 of the 1948 Act] must not be stretched beyond its natural and intended limitations, so as, for example, to attack ordinary debtors of the company or third parties who have indirectly obtained company’s moneys; nor may the court or liquidator enforce payment or delivery where the obligation, and therefore the liquidator’s right, is in dispute.  Although such disputes are often determined, with the third party’s consent, on a summons in the winding up, there is no power to compel submission to this procedure.  The liquidator’s proper course is to take action in the ordinary way, and for this purpose, he exercises his power to bring an action or other proceedings in the company’s name and on its behalf.  This he may do without sanction in a voluntary winding up, but only with the sanction of the court or the liquidation committee in a winding up by the court.”

33.  I am bound by the decision of the Court of Appeal.  I hold that the summary procedure under section 211 is not available in this instance where there is a dispute as to the ownership of the property.

34.  Mr Victor Cheung, who appeared for the respondent, informed the court that the respondent would not submit to this procedure.  I have therefore dismissed the liquidators’ summons under section 197, which should have been made under section 211.

35.  Upon my dismissal of the summons, Mr Harris applied for an order that the ex parte injunction be continued upon the liquidators’ undertaking to issue a writ action for recovery of the money against the respondent and to issue an inter partes summons in the intended High Court action for an injunction in substantially the same form as the ex parte injunction.

36.  I have given leave to the liquidators to commence the High Court action and accepted an undertaking of the liquidators in these terms:

“The liquidators do undertake to issue legal proceedings against the respondent for payment by him to the Company for monies in the bank accounts listed in paragraph 1 of the ex parte injunction by 12 September 2005 and to issue within 7 days thereafter an inter partes summons for an injunction in substantially the same form as the ex parte injunction.”

37.  I am satisfied on the evidence before me that the liquidators have an arguable case against the respondent for recovery of the sums in his bank accounts and that it is appropriate to grant injunctive relief to restrain disposal of the assets pending the determination of the inter partes summons to be issued as the liquidators have undertaken to do.  I have therefore ordered that the ex parte injunction be continued, upon the liquidators’ undertaking aforesaid, pending the determination of the inter partes summons to be issued in the proposed High Court action, subject to the variation that the respondent is to be at liberty to withdraw from his bank accounts a periodical sum of $19,600.00 a month as his daily living expenses until after the determination of the inter partes summons. 

38.  On the question of costs of the section 197 summons, although this summons is dismissed, I think it is justified for the summons to be issued initially.  The point regarding the inappropriateness of this procedure was not taken by the respondent at all, and it was raised only by the court at the hearing on 3 August 2005.  Furthermore, as submitted by Mr Harris, the liquidators did have some justification to proceed with the summary procedure on the evidence filed by the respondent in May 2005.  It was only in late June 2005 that the respondent put in further supporting evidence from Mr Tan, Angel Wong, and others.  In these circumstances, I only awarded the costs of the hearing of 3 August 2005 to the respondent, to be paid out of the assets of the Company.  I further ordered that the liquidators’ costs of the section 197 application are to be paid out of the assets of the Company.

39.  In respect of the inter partes summons for continuation of the injunction, I ordered that the costs of that application, including all costs reserved, are to be costs in the cause of the writ action to be commenced by the liquidators pursuant to their undertaking.