ARMITAGE BRIAN RODERICK v. CORROSION CONTROL INTERNATIONAL LTD

HCLA 1/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

LABOUR TRIBUNAL APPEAL NO. 1 OF 2007

(On appeal from Labour Tribunal Claim No. LBTC 4109 of 2005)

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J U D G M E N T

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Introduction

1.  This is the Defendant’s appeal against the Presiding Officer’s award dated 28 November 2006 (the “November Order”) entering judgment against the Defendant in the amount of $263,702.87 for the Defendant’s failure to comply with the Presiding Officer’s Order dated 3 October 2006 (the “October Order”) ordering the Defendant to pay the said sum into the Labour Tribunal as security on or before 7 November 2006.

2.  The Claimant is a shareholder and director of The III Millennium Limited, a corporation which is a shareholder of the Defendant.  Initially, he filed a claim against the Defendant for arrears of wages, wages in lieu of notice, annual leave pay, sickness allowance and reimbursements in the total amount of $263,702.87. 

3.  At the hearing on 8 February 2006 before Presiding Officer Clement Lee, the Defendant was represented by its director and shareholder, Mr Robinson.  Part of the Claimant’s claim was struck out upon the Defendant’s production of proof of payment.  Then, just as Mr Robinson began cross-examining the Claimant’s witness, Mr Mulligan who is a shareholder of the Defendant, the witness challenged the authority of Mr Robinson in representing the Defendant on the ground that the document purporting to authorise Mr Robinson to represent the Defendant was a fraudulent document.  The Presiding Officer readily seized the initiative to adjourn the hearing sine die pending the conclusion of criminal investigation by the police.  The Presiding Officer also advised Mr Mulligan and the Claimant that the High Court is the proper forum for a member of a corporation to intervene in the proceedings, pursuant to section 168BC of the Companies Ordinance. 

4.  Three important events took place during the adjournment.  Firstly on 12 April 2006, Sintabond Limited was incorporated.  The shareholders of Sintabond Limited are essentially the same shareholders as those of the Defendant, with the exclusion of The III Millennium Limited.  Secondly on 8 May 2006, the Defendant transferred its stock which was its only asset to Mr Robinson in the purported reduction of the amount of debt owed by the Defendant to Mr Robinson.  Thirdly on 10 May 2006, the Claimant amended his claim by reducing the amount to $190,062.87. 

5.  On 15 June 2006, the Claimant applied for security to be paid by the Defendant.  The application was heard before another Presiding Officer, Mr Brian Mak.  Presiding Officer Mak granted leave to the Claimant to restore the claim, but dismissed the application.  He then adjourned the hearing of the claim sine die with liberty to restore.

6.  On 3 October 2006, the Claimant renewed his application for security to be paid by the Defendant on the ground that the Defendant had disposed of its asset in order to avoid liability.  The application was heard before Presiding Officer Mak.  At that hearing, Presiding Officer Mak allowed the application and made the October Order pursuant to section 30 of the Labour Tribunal Ordinance.  The October Order is in the following terms: -

1)	The Defendant shall pay into the Labour Tribunal the amount of $263,702.87 as security on or before 7 November 2006;
2)	In default of payment, judgment shall be entered in favour of the Claimant as claimed;
3)	Conditional upon the Defendant paying into the Labour Tribunal the said sum of $263,702.87, the trial of the claim shall take place on 11 and 12 December 2006; and
4)	Costs reserved.

7.  The Defendant applied by letter dated 9 October 2006 for a review of the October Order.  The application was refused by the Presiding Officer without a hearing.

8.  The Defendant also made a formal application for review of the October Order.  The application was heard and dismissed by Presiding Officer Mak on 6 November 2006.

9.  On 13 November 2006, the Defendant renewed his application for review of Presiding Officer Mak’s Order of 6 November 2006, seeking until 30 November 2006 to make the payment.  The application was refused by the Presiding Officer on 20 November 2006 without a hearing.

10.  Eventually, upon the Defendant’s failure to pay the security into the Labour Tribunal by 7 November 2006, Presiding Officer Mak entered judgment in favour of the Claimant against the Defendant in the amount of $263,702.87 pursuant to the October Order.

Grounds of appeal

11.  The Defendant advanced eighteen grounds of appeal.  On 21 March 2007, I granted the Defendant leave to appeal against the award of Presiding Officer Mak on three grounds, namely: (1) that the Presiding Officer erred in law in the exercise of his discretion under section 30 of the Labour Tribunal Ordinance by ordering the security to be paid under the October Order; (2) that the security ordered to be paid under the October Order was in excess of the amount of claim; and (3) that the Presiding Officer erred in law in awarding a judgment sum in excess of the Claimant’s claim in the November Order.  The other grounds which I refused leave were essentially appeals against the finding of fact by the Presiding Officer.  Leave to appeal was granted on condition that the Defendant paid into Court the sum of $190,062.87 as security.  The security was duly paid on 11 April 2007.

12.  The appeal is against both the October Order and the November Order.  In essence, the basis of the appeal is that the November Order was made pursuant to the October Order which was made erroneously.  It is common ground that the Presiding Officer overlooked the fact that the Claimant had reduced the amount of his claim and ordered the Defendant to pay into the Labour Tribunal a security in excess of the amount of claim.  To that extent the October Order is wrong and cannot stand and this appeal must be allowed.  The next question is to what extent should I set aside the November Order, i.e., should the November Order be set aside in its entirety with the result that the claim should be remitted back to the Labour Tribunal for further conduct of the claim or should the award be reduced to the amount of claim as subsequently amended by the Claimant.

13.  The issue raised by this appeal is whether the Presiding Officer was right in ordering security to be paid pursuant to section 30 of the Labour Tribunal Ordinance as a condition of the adjournment under the October Order and in entering judgment under the November Order upon non-compliance of the October Order. 

Legal aid stay

14.  The appeal was set down for hearing on 29 August 2007.  As the Claimant applied for legal aid on 13 August 2007, pursuant to section 15 of the Legal Aid Ordinance, I granted the usual 42 days stay of the proceedings.  The hearing of this appeal was adjourned to 26 October 2007. 

15.  As at the date of the appeal hearing, no advice has been received from the Director of Legal Aid as regards the status of the Claimant’s application for legal aid.  However, the Claimant confirmed that he had attended the office of the Legal Aid Department just before the hearing and that his application had not yet been approved.  As this appeal is very straight forward and for reasons as will become obvious is bound to succeed, a further adjournment would only increase the parties’ costs and would not be in the best interest of both parties.  Accordingly, I proceeded to hear the appeal. 

The discretion to order payment of security under section 30 of the Labour Tribunal Ordinance

16.  Section 30 which provides for giving of security on adjournment reads:

“

Without prejudice to the generality of section 29A, the tribunal may, if it is of the opinion that an adjournment of the hearing of a claim may result in prejudice to a party because of the disposal or loss of control of assets by a defendant, grant an adjournment only on payment into the tribunal of such sum of money, or the giving of such other security for the payment of the amount of any award, as the tribunal may think sufficient.”

17.  Mr Wou, counsel for the Appellant, submits that the purpose of section 30 is to provide an injunctive relief to a party so as to prevent prejudice arising from an imminent dissipation of assets calculated to avoid liability.  He argues that the section envisages a causal connection between the adjournment and the prejudice, hence the prejudice must be one which is occasioned by an imminent rather than a past disposal or loss of control of assets.  He further submits that the Labour Tribunal ought to adopt a two-stage approach before exercising its power under the section.  Firstly, the Labour Tribunal ought to be satisfied that an adjournment was likely to cause prejudice to a party; and secondly that such prejudice would be occasioned by an imminent disposal or loss of control of assets.  On the basis of that construction, the discretion under the section may not be invoked where the disposal or loss of control of assets has already occurred before the question of adjournment comes to be decided.

18.  I have no doubt that the purpose of the section is to protect the interest of an employee by preventing the employer from dissipating his assets during the course of the proceedings with the result that the employee would be left with a judgment which is empty or worthless.  But on the clear words of the section, I am quite unable to read into the section a requirement that the disposal or loss of control of asset must be imminent.  The section is worded in simple language.  The discretion may be exercised if, in the opinion of the tribunal, an adjournment may result in prejudice.  The only other condition is that the prejudice must be one occasioned by disposal or loss of control of assets by the defendant.

19.  Accepting that the purpose of the section is to protect the interest of an employee and adopting a purposive approach, there is all the more no reason to give the section such a restrictive construction urged by Mr Wou.  In real situations, usually it is only after a claim has been set down for hearing that the dissipation of assets is discovered.  On Mr Wou’s construction of the section, the tribunal would be helpless no matter how obvious and mala fide the intention of the employer was in disposing of his assets.  The scenario suggested by Mr Wou could only occur under very fortuitous and limited circumstances.  For example, a hearing date has been fixed and at the date of the hearing, the employee presents evidence of the employer’s intended disposal of assets which has not yet taken place but would take place at a future date after the hearing; and the employer applies for an adjournment in order to allow time for the disposal to take effect.  If that is the true construction of the section, it is a piece of meaningless legislation.  It could not have been the intention of the legislature when enacting the section to afford protection to employees under such rare circumstances and to overlook the greater evil which was its undoubted intention to guard employees against.  The construction of the section submitted by Mr Wou negates the very purpose for which the section was enacted.

20.  I think the true construction of section 30 is that the discretion may be exercised simply if two conditions are satisfied.  These are: firstly, the tribunal forms the opinion that an adjournment of the hearing may result in prejudice to a party; and secondly that the prejudice is occasioned by disposal or loss of control of assets by the defendant.  There is no requirement that the disposal or loss of control of assets must be imminent or that the tribunal may not take into consideration disposal or loss of control of assets which had already been effected. 

21.  It should be noted that the discretion given to the tribunal under section 30 is a very wide and unfettered one.  Because the section provides that this power may be exercised if the tribunal forms an opinion that such prejudice would be occasioned by an adjournment, the test for prejudice is a subjective one.  Thus, unless there is a total lack of evidence of such prejudice, the opinion of the tribunal as to prejudice is unchallengeable.  However, any discretion of the tribunal must be exercised in accordance with legal principles and not arbitrarily.  It is impossible to set out all the factors to be considered in the exercise of the discretion because how the discretion is to be exercised depends on the circumstances of each case and such circumstances are numerous.  Essentially, the discretion is to be exercised on the basis of fairness to the parties after balancing the risk of depriving the claimant of the fruit of his litigation on the one hand against the prejudice to the defendant by being restrained from disposing of his assets on the other.  The usual factors to be put onto the weighing pans are the strength of the parties’ case, whether the disposal of assets is in the ordinary course of the defendant’s business, the availability of other assets of the defendant for satisfying judgment and the effect of the restrain to the defendant.

The October Order

22.  Having set out the relevant principles applicable to the exercise of discretion under section 30, I now turn to examine the Presiding Officer’s reasons for ordering payment of the security.  The reasons given by Presiding Officer Mak in paragraphs 11 to 15 of the Reasons for Decision are as follows: -

“	11.	Mr Robinson did not dispute the fact that the stock of the Defendant was transferred to him.  He sought to explain that the transfer had nothing to do with the present case, but it was only a step taken in order to make the accounts of the Defendant appeared healthier so that the Defendant would be in a better position to take in new investors.
	12.	Be that as it may, it did not alter the fact that the Defendant had thereby lost control of its assets.  The promise of Mr Robinson that he would sell the stock back to the Defendant when required did not in any way assist the Defendant in regaining control of the said stock.  According to the balance sheet of the Defendant as at March 2006, its current liabilities were $3,636,615.58.
	13.	The purpose of section 30 of the Labour Tribunal Ordinance is to protect the rights of a Claimant in the event of a disposal of assets by the Defendant.  The Defendant still has the right to defend the claim at the trial.
	14.	In exercising the power under the Labour Tribunal Ordinance, I must strike a balance between the right of the Claimant in obtaining the fruit of judgment on one hand and the right of the Defendant in defending the claim on the other.  I bear in mind that ordering the Defendant to pay into Court security would constitute a financial burden on the Defendant.
	15.	I consider that allowing the Defendant 35 days to pay into Court the amount claimed by the Claimant as security and at the same time fixing a date for trial of the claim would do justice to both parties.  The Defendant, however, must comply with the payment in condition otherwise it would defeat the whole purpose of section 30.  The trial was scheduled to take place on the 11th and 12th days of December, 2006.  In the event that the Defendant succeeds in its defence, its fund would only be withheld for 35 days, which in my view is reasonable in the circumstances.”

There is no dispute that the Defendant transferred its stock to Mr Robinson on 8 May 2006.  The Presiding Officer rejected Mr Robinson’s explanation that the transfer was for window dressing purpose in order to attract new investors and that Mr Robinson would sell the stock back to the Defendant whenever necessary.  He then balanced the right of the Claimant to the fruit of judgment against the Defendant’s right to defend the claim.

23.  Mr Wou submits that as the disposal of the Defendant’s stock took place on 8 May 2006 after the proceedings had been adjourned sine die and some five months before Presiding Officer Mak made the October Order, there was no evidence of any imminent disposal or loss of control of assets.  Indeed, it appears from paragraph 12 of the Reasons for Decision that the Presiding Officer considered the fact that the Defendant had lost control of the assets decisive.  Obviously, the Presiding Officer had not directed his mind to the fact that there was no evidence of imminent disposal or loss of control of asset as the disposal or loss of control had already taken place.  But on the true construction of section 30, there was no need for him to.

24.  Mr Wou submits that prior to the hearing on 3 October 2006, the hearing of the claim had been adjourned sine die and it was not open to the Presiding Officer to order payment of security as a further condition for setting down the claim to trial.  This argument is highly technical, but equally technical is the answer.  Presiding Officer Clement Lee adjourned the hearing sine die on 8 February 2006 and so did Presiding Officer Mak on 15 June 2006.  However, the proceedings were restored upon the Claimant’s application for security on 3 October 2006.  Once the proceedings were restored, it was open to Presiding Officer Mak to adjourn the hearing of the claim, which he did, to 11 December 2006.  In my view, it did not matter whether the adjournment was granted upon the application of the Claimant or the Defendant or at the motion of the Presiding Officer.  The power was exercisable by the Presiding Officer when granting the adjournment.  As long as an adjournment may result in prejudice to a party because of the disposal or loss of control of the asset by the Defendant, the Presiding Officer may exercise the discretion.

25.  Mr Wou argues that there is no evidence to suggest that the transfer of stock to Mr Robinson had resulted in any prejudice, that the Defendant intended to dispose of any further assets and that the disposal was to avoid liability or to cause prejudice to the Claimant.  He further argues that the Presiding Officer made no finding of prejudice in his Reasons for Decision.  Hence, he submits that the Presiding Officer erred in law in exercising the discretion under section 30.

26.  Though the Presiding Officer did not expressly find what was the prejudice, it is implicit from the above passages in his Reasons for Decision that the prejudice was the transfer of stock from the Defendant which could otherwise be used to satisfy judgment if obtained by the Claimant.  I disagree with Mr Wou’s submission of lack of evidence of prejudice.  The operation of the Defendant was financed by loans from its directors and shareholders, principally Mr Robinson.  The balance sheet of the Defendant as at 31 March 2006 shows that the Defendant owed Mr Robinson $6,588,011.72 and had a net current liabilities of $4,921,568.33.  The balance sheet also shows an inventory of a value of $1,638,356, but the stock had since been transferred to Mr Robinson.  Apart from equipment of a book value of $180,814.78 and some furniture of negligible value, the Defendant had no asset to satisfy judgment if obtained.  The shareholders of the Defendant incorporated Sintabond Limited to the exclusion of The III Millennium in which the Claimant is a shareholder.  Sintabond Limited trades in the product bearing the trademark as “Sintabond” used to be sold by the Defendant.  Mr Robinson’s explanation of the purpose of the transfer of stock is not a convincing one.  A well-informed potential investor would examine the balance sheet and accounts of the Defendant and consider the net financial position of its assets and liabilities.  The stock transfer did nothing to improve the net financial position of the Defendant.  The Presiding Officer is entitled to reject Mr Robinson’s assertion that he would sell the stock back to the Defendant if required.  After all, that promise cannot be binding on Mr Robinson.  Looking at the totality of the evidence, there is evidence on which the Presiding Officer can reasonably infer that the stock transfer was not effected in the ordinary course of business of the Defendant but was effected with the intention of defeating the Claimant’s claim should he obtain judgment.  This is the prejudice which is implicit from the reasons given by the Presiding Officer.  As I have already said, unless in the total absence of evidence, the subjective opinion of the Labour Tribunal of prejudice is beyond challenge.

27.  In considering the exercise of his discretion, the Presiding Officer proceeded to balance the rights of the Claimant in obtaining the fruit of judgment against the right of the Defendant in defending the claim.  Presiding Officer Mak was not the Presiding Officer who heard the evidence on 8 February 2006.  But presumably when referring to the Claimant’s right to judgment, Presiding Officer Mak must have somehow formed a preliminary view of the strength of the parties’ case by reading the statements of the parties and perhaps the transcript of the hearing before Presiding Officer Clement Lee and was determined to shut the Defendant out unless it paid the security.  If, indeed that was his view of the strength of the parties’ case, I do not wish to differ.  But, with respect to the Presiding Officer, the balancing exercise he purportedly took was faulted.  Section 30 only empowers the tribunal to grant adjournment on payment of security but does not empower the tribunal to enter judgment upon failure to comply with the payment condition.  In balancing the Claimant’s right to the fruit of judgment against the right of the Defendant to defend in the purported exercise of his discretion under section 30, the Presiding Officer was jumping ahead to consider whether to exercise his discretion under section 29A to enter judgment upon non-fulfilment of the condition.  That approach was faulted.  What he should have balanced at that stage was the risk of depriving the Claimant of the fruit of his litigation (in that connection strength of the parties’ case was one of the factors to be considered) on the one hand against the prejudice to the Defendant by being restrained from disposing of its assets on the other (including factors such as, whether the disposal of asset was in the ordinary course of business, whether there were other assets available to satisfy judgment and the effect of the restrain on the Defendant).  The evidence shows that the transfer of stock to Mr Robinson was not in the ordinary course of business of the Defendant.  There is also evidence on which the inference could be drawn that the Defendant’s business would be taken over by or transferred to Sintabond Limited.  In the light of the evidence, had the Presiding Officer properly directed his mind, he must have exercised the discretion to order payment of security. 

28.  Had the Presiding Officer ordered the correct amount of security to be paid, the exercise of his discretion under section 30 could not have been questioned.  Nevertheless, the Presiding Officer was not solely to blame.  I have carefully read the transcript of 3 October 2006.  The focal point of the argument was the transfer of stock to Mr Robinson.  The amount of security to be paid was not argued, though Mr Robinson mentioned that the Claimant’s claim had been reduced.  However, when Presiding Officer Mak made the October Order, neither parties drew his attention to the amended claim.  In the circumstances, I do not think it appropriate to set aside the October Order merely because the wrong amount of security was ordered and also to set aside the November Order as a consequence.  I shall next consider whether the Presiding Officer was right in entering judgment under the November Order for the Defendant’s non-compliance with the October Order, assuming that the proper amount of security had been ordered.

The discretion to enter judgment under section 29A

29.  Judgment was entered against the Defendant in default of payment of the security pursuant to the October Order and section 29A of the Labour Tribunal Ordinance.  Section 29A provides: -

“	(1)	The tribunal may at any time, either of its own motion or on the application of any party, adjourn the hearing of a claim on such terms as it thinks fit.
	(2)	If any party fails to comply with the requirements of any term that may have been imposed on him under subsection (1), the tribunal may dismiss the claim, stay the proceedings or enter judgment against him as the tribunal may think appropriate.”

30.  The tribunal’s jurisdiction to enter judgment under section 29A(2) upon non-fulfilment of conditions imposed under subsection (1) is also exercisable upon a party’s failure to comply with payment of security imposed under section 30.  However, the jurisdiction is a discretionary one and not mandatory.  Thus, while the tribunal has power to enter judgment for non-fulfilment of conditions or non-payment of security ordered, the tribunal’s discretion to enter judgment may only be exercised in accordance with legal principles and not arbitrarily.  A person has an indisputable right to institute legal action against a defendant who equally has an indisputable right to defend the proceedings against him.  These rights are not to be taken away arbitrarily.  The tribunal may not impose unreasonable conditions, including financial ones which a party cannot comply and then drive him out of the judgment seat by purported exercise of discretion under section 29A(2). 

31.  While it is proper and appropriate for the tribunal to specific the sanction for non-fulfilment of conditions whether under section 29A(1) or section 30, the sanction must be appropriate or its imposition in accordance with legal principles.  The tribunal is under a duty to inquire into any claim.  Judgment without inquiring into the merit goes against this very basic duty of the tribunal.  In my view, in the majority of cases, the starting point of any sanction would be to bar the defaulting party from doing what he sought to do by the adjournment, for example, adducing evidence from a witness who was not available, but not to bar him from the entire conduct of the proceedings.  If the party in default is the claimant, this may effectively result in dismissal of the claim.  If the party in default is the defendant and no arguable defence has been pleaded, judgment is also justified.  But if an arguable defence has been advanced, it is usually inappropriate to enter judgment merely because of non-fulfilment of conditions.  Under those circumstances, such sanction should not have been specified in the order and if specified should not have been imposed when the discretion calls to be exercised.  A claimant is not entitled to judgment without proving his case.  The tribunal cannot be spared of its inquisitorial duty without being satisfied that the claim is supported by credible evidence.  Of course, where the default has been contumelious or repeated or the default has resulted in prejudice to the other party, the considerations are different.  In this regard, I would suggest that under usual circumstances, the sanction to be specified in an order under section 30 should be worded in permission term and not mandatory term.

The November Order

32.  In the present case, the Defendant has pleaded an arguable defence.  In the course of the hearing on 8 February 2006, part of the Claimant’s claim was struck out. The adjournment was occasioned by the Claimant who sought to challenge the validity of Mr Robinson’s authority in representing the Defendant at the hearing and wished to make a criminal complaint against Mr Robinson.  The Defendant is effectively a partnership corporation between Mr Robinson, the Claimant and others.  Mr Robinson funded the Defendant’s operation with a loan of over $6.5 million.  Neither the Claimant nor The III Millennium Limited made any advances to the Defendant.  The Claimant’s dispute as to Mr Robinson’s authority is dubious and his criminal complaint is probably an act of harassment.  The Defendant did not seek to do anything by the adjournment.  This should have some bearing on the way the discretion was to be exercised and the type of sanction to be specified in the order.  In my view, the sanction ordered by the Presiding Officer in the October Order was inappropriate and his exercise of discretion under section 29A in entering judgment under the November Order is erroneous.

Conclusion

33.  For the above reasons, the November Order cannot be saved even by amending the judgment sum.  It must be set aside.  For that reason, it is also futile to allow any part of the October Order to stand.  Although Presiding Officer Clement Lee had heard some of the evidence, the claim has not been determined on its merit.  There was no finding of fact by Presiding Officer Clement Lee.  It is not open to me to make any finding of fact.  The claim must be remitted back to the Labour Tribunal for the proceedings to be continued.  Presiding Officer Mak thought it was appropriate to have the further conduct of the proceedings before him.  Thus, the appropriate course is for me to set aside the October Order and the November Order; and remit the claim back to the Labour Tribunal for the proceedings to be continued before Presiding Officer Mak.  It will then be open to Presiding Officer Mak to make such directions as to the further conduct of the claim as he thinks fit.  Having considered all the evidence available, I think the Presiding Officer was right in ordering payment of security.  It is therefore appropriate for the security paid into the High Court to continue to be held as security under section 30 of the Labour Tribunal Ordinance.  I trust that the Presiding Officer will ensure that in the event that the Claimant succeeds in the claim, such amount of the security shall be released to the Claimant for the purpose of satisfying judgment only after reducing for the costs of this appeal, if such costs remain unpaid.

34.  Accordingly, I allow the appeal.  I set aside the Presiding Officer’s Order dated 3 October 2006 and his Order dated 28 November 2006.  The claim shall be remitted back to the Labour Tribunal before Presiding Officer Mak who shall give directions as to the further conduct of the claim.  The security paid into the High Court shall continue to be held as security under section 30 of the Labour Tribunal Ordinance and to be disposed of by the Presiding Officer in such manner as he thinks fit upon resumption of the proceedings in the Labour Tribunal.  The Claimant shall pay the Appellant’s costs, such costs are to be taxed if not agreed.