PARK CHUL SOO v. SWEE KHENG BUILDING MATERIAL CO LTD

CACV 318/2018

[2019] HKCA 361

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 318 OF 2018

(ON APPEAL FROM APPLICATION TO SET ASIDE A

STATUTORY DEMAND NO 37 OF 2017)

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J U D G M E N T

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Hon Cheung JA:

1.  I agree with the judgment of Yuen JA.

Hon Yuen JA:

2.  This is the Applicant Park Chul Soo’s appeal from the Judgment of Ng J (“the judge”) given on 19 June 2018 (“the Judgment”) dismissing his application filed on 4 December 2017 to set aside a statutory demand (“SD”) issued against him by Swee Kheng Building Material Co Ltd (“the Company”) on 18 October 2017 which was served on him on 16 November 2017. 

Background

3.  The Company was incorporated in 2004.

-  Shareholding

4.1.   Mr Park is a shareholder of the Company.  As at 2010, he held 49.67% of the shares, Mr WS Lim held 49.83% and Madam No Chin Yong Sin held 0.5%. 

4.2.   On 27 August 2015¹, Madam No transferred her shares to Mr Park and Mr WS Lim; thereupon Mr Park held 49.92% and Mr WS Lim held 50.08%.  Subsequently, Mr WS Lim transferred 0.04% to his father Mr BY Lim. 

4.3.   As can be seen below², it is significant that until 27 August 2015, Madam No was a shareholder of the Company.

-  Directorships

5.1.   As at 2010, Mr Park was a director of the Company until he ceased to be a director on 31 July 2017.  His wife was also a director from 2010 until she ceased to be a director on 28 July 2013.

5.2.   Mr WS Lim was a director throughout the period from 2010 to date, but Mr BY Lim was not appointed a director until July 2017.  However, it would appear from the contemporaneous correspondence that Mr BY Lim was actively involved in the operation of the Company well before he was appointed a director.  The effect of this involvement will be discussed later³.  His wife Sharon Foo was the Company’s accountant.  

6.  Mr Park controlled a company called Sing Sing Engineering Co Ltd (“Sing Sing”), while Mr BY Lim controlled a company called Swee Kheng Contracting Co Ltd (“SKC”). A company called Swee Kheng Building Material Co Ltd (“SKBM Sing”) was also incorporated in Singapore.  

The SD

7.  As mentioned above, on 18 October 2017 the Company issued an SD against Mr Park in the sum of $1,843,427.  The Company relied on the following admissions from Mr Park regarding the debt. 

-  Audit confirmations

8.  On 21 April 2016, Mr Park signed an audit confirmation for the Company’s auditors confirming that the sum of $1,843,427 was due by him as at 30 June 2015.  A year later, on 4 May 2017 Mr Park signed another audit confirmation confirming that the same sum was due by him as at 30 June 2016.  Both audit confirmations indicated that no sum was due by the Company to him. 

-  Audited financial statements

9.  Further, the Company’s audited financial statements for the years ended 30 June 2015 and 30 June 2016 also contained that sum as “amount due by director” named as Mr Park.  The amount due was unsecured, interest free and repayable on demand. The audited financial statements were signed by Mr Park as director.  It is significant that these disclosures were made pursuant to the statutory requirement in s.383(1)(d) Companies Ordinance Cap.622.

10.  The Company submits that these are clear and weighty admissions by Mr Park of his indebtedness to the Company in the said sum of $1,843,427. 

11.1.   Pausing here, it would be noted that Mr Park had signed

(i) an audit confirmation dated 27 April 2015 for the balance due from him to the Company as at 30 June 2014, and

(ii) the Company’s audited financial statements for the year ended 30 June 2014,

in which the balance due from him to the Company was $1,322,962. 

11.2.   In other words, according to these documents, during the financial year 30 June 2014 to 30 June 2015, his indebtedness to the Company increased by about $520,000. 

Response to the SD

12.1.   After the SD was served, Mr Park’s solicitors wrote to the Company’s solicitors on 27 November 2017 alleging, among other things, that the Company was indebted to Mr Park for at least $1,580,000 being his outstanding salary for 79 months (from January 2011 to July 2017) at $20,000 pm. 

12.2.   Mr Park’s solicitors alleged that there had been an agreement between Mr BY Lim and Mr Park in December 2010 that they would withhold receiving their salaries to reduce the Company’s expenses, until such time as the Company returned to a profitable position.  However in breach of that agreement, without the consent of the directors and against Mr Park’s objection, in July 2012 Mr BY Lim withdrew $406,000 from the Company as his withheld salary, and thereafter continuously withdrew $50,000 pm as his salary.

12.3.   Accordingly, Mr Park’s solicitors alleged that he was also entitled to his withheld salaries which he calculated at the minimum sum of $1,580,000 (on the basis of $20,000 pm).   

Issues before the judge

13.  Thereafter, both sides filed affirmation evidence for the hearing before the judge. Essentially, two grounds were advanced on behalf of Mr Park for the SD to be set aside. 

14.1.   First, under s.48(5)(a) of the Bankruptcy Rules Cap. 6A (“the BR”), Mr Park submitted that he had a counterclaim, set-off or cross-demand by way of the withheld salaries which equaled or exceeded the amount of the debt specified in the SD. 

14.2.   It would be noted however that if the withheld salaries were calculated at $1,580,000, that would not be sufficient to equal the amount of debt of more than $1.8m.  According to Mr Park’s affirmation, he “reserved the right” to claim a higher amount as Mr BY Lim had received a salary of $50,000 pm from August 2012 and “we had previously been paid the same salary”⁴.  However, the fact that they had previously been paid the same salary does not mean (and there was no evidence to the effect) that the Company had bound itself to pay both persons exactly the same salaries at all times in the future.

14.3.   The Company also adduced evidence that on 22 October 2012, Mr Park withdrew $3.45 million from the Company purportedly to pay Sing Sing.

15.1.   Secondly, under s.48(5)(b) of the BR, Mr Park submitted that the debt is disputed on substantial grounds. 

15.2.   Mr Park’s case was that there was in fact no loan from the Company to him of $500,000 which increased the amount of his indebtedness between the financial years 2014 and 2015. 

15.3.   He agreed that the Company did pay him $500,000 on 4 March 2015, but he alleged there was an accounting error in the Company’s documents, as that payment was not a loan, but a repayment from the Company to him of an identical sum which he had lent it two months earlier, in January 2015.  (At first⁵ he said he had lent that sum to the Company on 8 January 2015.  Subsequently⁶, he said he had lent that sum to the Company on 20 January 2015). 

15.4.   Mr Park sought to explain his signature on the audit confirmations and financial statements by saying that although there were arguments between himself and Mr BY Lim, they “were still in a business partnership and so I [Mr Park] had signed all the Audited Accounts on trust”⁷.

The judge’s Judgment

16.  The principles of law to be applied on an application to set aside an SD are well-established and were succinctly set out in §§12-15 of the Judgment which will not be repeated here. 

17.  In relation to the 1^st ground, the judge decided the matter could be dealt with shortly on the basis that there was no resolution of the board or unanimous consent of the shareholders for the unpaid salary claimed by Mr Park, and that even if Mr BY Lim had agreed to pay Mr Park a salary, it would not bind the Company as Mr BY Lim was not a director of the Company at the relevant time⁸.

18.  In relation to the 2^nd ground, the judge noted that Mr Park had not explained why he did not rectify, or raise objection to, the alleged accounting error in the audit confirmations and audited financial statements for the financial years ended 30 June 2015 and 30 June 2016.  In any event, the judge noted that even if the sum of $500,000 were deducted, there was still an outstanding debt of $1.3 million.  (Of course, this was on the basis that the judge had rejected Mr Park’s 1^st ground based on his unpaid salary of at least $1,580,000). 

Appeal

19.  Mr Park appealed.  The Company filed 2 Respondent’s Notices to affirm the Judgment on other grounds.

Discussion

-  1^st ground

20.  As for the 1^st ground for setting aside the SD, the judge was right to hold that as Madam No was a shareholder at the time and there was no evidence that she had agreed to the matter, the Duomatic⁹ principle would not apply to bind the Company because the matter had not been agreed on unanimously by all shareholders.

21.1.   The judge was also right in saying that there was no written board resolution in which the Company agreed that Mr Park’s salary was to be withheld pending the Company’s return to profit. 

21.2.   However, with respect, that is not the end of the matter.   A board may make a valid decision even though it does not exist in written form.  In Runciman v Walter Runciman plc, Simon Brown J (as he then was) held¹⁰:

“That directors, provided they act unanimously, can act informally appears clearly established - Re Bonelli’s Telegraph Co. Collie’s Claim (1871) LR 12 Eq 246 and Charterhouse Investment Trust Ltd v Tempest Diesels Ltd (1985) 1 BCC 99, 544 so decide, the latter on the basis that informal acquiescence by other board members in an otherwise unauthorised agreement by one of their number binds the company”.

22.1.   In this respect, the judge held that even if Mr BY Lim had agreed that Mr Park’s salary would be withheld pending a return to profit, it would not bind the Company as Mr BY Lim was not a director of the Company at the relevant time¹¹. 

22.2.   However with respect, it would appear that the judge had not considered Mr BY Lim’s own evidence that he and his wife “were the actual persons in control of the Company”¹².  The other directors at the time, Mr BY Lim’s son and Mr Park’s wife, have not filed any evidence challenging that assertion. 

22.3.   As such, there is sufficient evidence that Mr BY Lim could have been a de facto director, i.e. a person who is not formally invested with office, but what he actually does amounts to taking important decisions affecting the company and seeing that they are carried out¹³.  Accordingly, it is seriously arguable that the agreement made between Mr BY Lim as de facto director and Mr Park, with the acquiescence of the other directors, was binding on the Company.  With respect, the judge’s “short answer”¹⁴ cannot dispose of Mr Park’s 1^st ground.

23.  It is therefore necessary for this court to delve further into the materials regarding this 1^st ground.  

24.  There is indeed some contemporaneous evidence supporting Mr Park’s allegation of an agreement that Mr BY Lim and he would withhold their salaries pending the Company’s return to profit.  On 2 December 2010, Mr BY Lim said in an email to Mr Park¹⁵:

“The amount that I suggested to be deducted from you and I are almost equivalent to the amount you suggested, the deducted salary of ours can be returned when stable profit is realised”.

25.1.   At a later stage, on 6 June 2012 Sharon Foo asserted in an email to Mr Park that the agreement was that Mr BY Lim was entitled to claim his withheld salary because the Company had showed profit, but that Mr Park was not so entitled, because SKBM (Singapore) had not yet showed profit.  After setting out the email in the preceding paragraph, she wrote this:

“Kindly refer to the below email between BY & yourself.

BY suggested to sacrifice his salary to maintain the staffs salary for the time being, and both of you had agreed that THE SALARY WILL RETURNED WHEN STABLE PROFIT IS REALIZED.

THE AUDITED ACCOUNT FOR SKBM (HK) SHOWED PROFIT FOR THE YEAR ENDED 30 JUNE 2011, AND KEN’S ANTICIPATED CASH FLOW SHOWED A GOOD PROFIT MARGIN FOR CURRENT JOB, so BY is entitle to back pay his salary, the withdrawal of he [sic] salary is from the profit and not from the shareholder capital.

If SKBM (S) is making a profit with your management, you are entitle to draw back the same too. ...” (Emphasis added in italics).

25.2.   Despite this last assertion from Madam Foo, it is not clear from the correspondence in the bundles before us (which contain incomplete emails) that the agreement to withhold salaries distinguished between the Company in Hong Kong and SKBM (Singapore).  In fact, Mr BY Lim’s email of 2 December 2010 was written in the context of the cost of living in Hong Kong, and suggested that they should both withhold their salaries until profits are achieved so as to keep the staff in Hong Kong.  

26.  In conclusion, there is sufficient material for present purposes for Mr Park to mount the argument that he had only agreed with the Company to withhold his salary in conjunction with Mr BY Lim, so that when the latter withdrew his withheld salary on the basis that the Company had showed a profit, Mr Park was also entitled to claim his salary as well.

27.1.   However, that is still not the end of the matter.  The Company alleged that Mr Park had, without prior notice or consent of anyone at the Company, withdrawn $3.4 million from the Company’s account between 22-24 October 2012.  Mr Park does not dispute that, but says that it was in repayment of a debt owed by the Company to Sing Sing which funds the latter needed urgently, as per his contemporaneous email of 22 October 2012 to Mr BY Lim and Madam Foo. 

27.2.   The Company’s position is that even if there had been an agreement for the return of withheld salary to Mr Park, that was “overtaken” by Mr Park’s withdrawal of the $3.4 million¹⁶. However, this confuses the Company’s rights and liabilities vis-a-vis Mr Park with its rights and liabilities vis-a-vis Sing Sing.  The Company did not allege that Mr Park’s unauthorised withdrawal of the $3.4 million amounted to a breach of fiduciary duty on his part¹⁷ and it is notable that no part of this sum was treated by the Company as a debt from Mr Park.  Accordingly, the withdrawal of the $3.4 million in favour of Sing Sing does not appear at this stage to provide a set-off for the unpaid salary of $1.58 million. 

28.  However, as discussed earlier¹⁸, this amount does not equal the debt specified in the SD.  It is therefore necessary for Mr Park to satisfy the court that he has substantial grounds to dispute the debt of $500,000 for his 2^nd ground.

- 2^nd ground

29.  Mr Park alleged that the transfer of $500,000 from the Company to him on 4 March 2015 was a repayment of a loan which he had made to it.  However, this allegation is fraught with difficulty. 

30.1.   First, his case in his 1^st affirmation was that he had advanced a loan of $500,000 to the Company on 8 January 2015.  However, it is clear from the Company’s G/L Account Activity Detail Report¹⁹ that the transfer of $500,000 to the Company on that date was booked under “SKC C/A”.  In his 2^nd affirmation, Mr Park then changed his case and said that his loan to the Company of the same amount was made on 20 January 2015, not 8 January 2015.

30.2.   It is correct that on 20 January 2015, a sum of $500,000 was overdrawn from Mr Park’s bank account by way of a cashier order in favour of the Company. However, in the Company’s G/L Account Activity Detail Report²⁰, this was booked under “Sing Sing C/A”.  In fact, evidence adduced by Mr Park himself contradicted his case that this was a loan from him personally.  Mr Park exhibited²¹ an email to him dated 29 January 2018 from Kenny Leung, whom he identified as the previous accountant of the company.  In the email, Mr Leung corroborated the fact that the sum was a loan, not from Mr Park, but from Sing Sing:

“I would like to point out that Mr Park Chul Soo, a director of Sing Sing deposited amounting to HK$50,000.00²² on 20^th January 2015, to the bank of [the Company] was a loan from Sing Sing to [the Company]...”. (Emphasis added).

30.3.   Accordingly, Mr Park has not been able to adduce sufficiently satisfactory evidence to show that he had personally made a loan to the Company of $500,000 in January 2015, for which the transfer of $500,000 to him in March 2015 was “repayment”.

31.1.   Moreover, there is contemporaneous evidence that he had received the sum of $500,000 as a personal loan.  On 24 February 2015, Mr Park sent an email to Madam Foo saying:

“Please let the check for my personal loan HKD500,000 to following account: ...”.

It would be noted that there is no reference to “repayment”.

31.2.   After approval by Madam Foo, a sum of $500,000 was paid by cheque no. 769009 to Mr Park’s account, as shown in the Company’s G/L Account Activity Detail Report²³.

32.1.   Most significantly, the audit confirmation for the year ended 30 June 2015 signed by Mr Park²⁴ showed an increase in the sum due from him to the Company of about $500,000²⁵.  This was followed by the Company’s audited financial statements for that year, as well as the audit confirmation and the Company’s audited financial statements for the following year.

32.2.   Mr Park’s case was not that he had not noticed this increase in the sum recorded as being due from him, but that he signed the audit confirmations “on trust”.  However, it has to be said that in the context of Mr Park’s less than easy relationship with Mr BY Lim since 2012, and his personal financial difficulties as shown in the emails, one would have expected Mr Park to be especially sensitive to any increase (let alone an increase of nearly 40%²⁶) in the sum recorded as being due from him to the Company.  One would have expected him to object to it and insist on investigating and rectifying what he now alleges to be an “accounting error”.  That was not done at all, not only when the “error” first appeared, but also when it was repeated in the following year.

33.  Accordingly, I respectfully agree with the judge that Mr Park has failed to discharge the burden of showing that there is a genuine triable issue regarding the nature of the payment of the $500,000.  Therefore, even assuming in Mr Park’s favour that he is entitled to set-off the alleged unpaid salary of $1,580,000, there remains a balance owing by Mr Park to the Company which fulfils the requirement of s.6(2)(a) Bankruptcy Ordinance Cap.6. 

Order

34.  That being the case, the appeal should be dismissed with an order nisi that the Applicant pay the costs of the appeal.

Hon Au JA:

35.  I agree with the judgment of Yuen JA.