ARCHID GARMENT FACTORY LTD v. TSE YUET YU AND OTHERS

HCA 1504/2024

[2025] HKCFI 2933

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1504 OF 2024

_____________

BETWEEN

_____________

_____________

DECISION

_____________

1.   Introduction

1.1  These proceedings were commenced by the Plaintiff (“P”) against the 1^st to 5^th Defendants. By its summons dated 31 December 2024 (“Summons”), P seeks partial summary judgment of its claims against the 1^st and 2^nd Defendants (respectively “D1” and “D2” and collectively “Relevant Defendants”), namely:

(1) Final judgment against D2 for a declaration that D2 holds, and at all material times held, on trust for P, the Cambodian Property referred to in paragraph 34.1(a) of the Statement of Claim (“Relief No 1”);

(2) Final Judgment against D1 for an order demanding D1 to return to P forthwith the HK$2,000,000 she received from the Impugned Transfers referred in paragraph 122 of the Statement of Claim and interest as claimed (“Relief No 2”)[1];

(3) Interlocutory judgment against the Relevant Defendants for an order to return and deliver to P the Company Cars referred to in paragraph 144 of the Statement of Claim, and damages for their detention and/or conversion, and interest as claimed (“Relief No 3”).

1.2  The Relevant Defendants do not oppose the present application in respect of Relief Nos 1 and 3. The outstanding issue therefore is whether summary judgment ought to be granted in respect of Relief No 2.

1.3  At the hearing, P was represented by Mr Kalvin Chan (with Mr Patrick Chiu) and the Relevant Defendants by Mr Jackson Poon. As I am of the view that the issue of whether P is entitled to Relief No 2 should go to trial, the less I say about its merits the better. In what follows, I will set out my brief reasons for acceding to Mr Poon’s submissions that unconditional leave should be granted to D1 to defend P’s claim for Relief No 2.

2.   Background

2.1  The shareholders and directors of P are and were at all material times family members (by themselves or through their corporate vehicle). The shareholders of P are (1) Mr Tse Yat Wah (“Mr Tse”) as to 39%, (2) his wife Madam Cheung Yiu Kan (“Madam Cheung”) as to 15% and (3) Dimensional Developments Limited (“Dimensional”) as to 46%. Dimensional is the corporate vehicle of the Relevant Defendants. D1 and D2 are respectively Mr Tse’s younger sister and younger brother.

2.2  Prior to D1 and D2 being removed as directors of P on 7 June 2024, the directors of P were Mr Tse, Madam Cheung, and the Relevant Defendants.

2.3  As set out in P’s audited financial statements (“2023 AFS”) for the period ended 31 March 2023 (the latest audited financial statements adduced for present purposes), P’s principal activities were investment holding and trading of garment. At Note 14 thereof, the activities of P’s subsidiaries are set out. One of P’s subsidiaries was AYC Garment Factory Co Ltd (“AYC”), a Cambodian company, whose principal activity was the manufacturing of garment.

2.4  Following the removal of the Relevant Defendants as directors in June 2024, P commenced the present proceedings against the Relevant Defendants and the 3^rd to 5^th Defendants which are alleged to be corporate vehicles owned by or associated with D1 and/or D2. In addition to the claims for Relief Nos 1 to 3, P’s claims also include causes of action premised on improper emoluments, unauthorized foreign exchange speculation and concealment of resulting losses, secret profits, unauthorized and secret payments, misappropriation of P’s assets, and unauthorized loans. As mentioned above, the present application is part of the overall dispute between the parties.

2.5  In so far as relevant to P’s claim for Relief No 2, the material allegations are set out at Statement of Claim (“SOC”) §§112-143. In gist:

(1) On 11 April 2024, a sum of HK$1,000,000 was transferred from P’s bank account maintained at Nanyang Commercial Bank (“P’s NCB A/C”) to D1 (“1^st Impugned Transfer”);

(2) On 21 May 2024, another sum of HK$1,000,000 was transferred from P’s NCB A/C (“2^nd Impugned Transfer” and together with the 1^st Impugned Transfer collectively “Impugned Transfers”);

(3) P alleges at SOC §122 that at the time of the Impugned Transfers, P “was in doubtful solvency, of was likely to become insolvent” (“Core Allegation”);

(4) In support of the Core Allegation, reference is made at SOC §§123-126 to P’s audited financial statements for the years each ended 31 March 2016 to 31 March 2023 setting out the indebtedness and available cash and bank balances and decreasing turnover;

(5) P’s business had virtually ceased around March 2024, following which there was “little income or revenue” to P;

(6) By 23 January 2024, P was indebted to various banks in the total sum of HK$80,906,025.80 (“Jan 2024 Indebtedness”);

(7) P had to resort to selling properties owned by D5 and Way Profit Ltd (“Way Profit”) in April and May 2024 to reduce the Jan 2024 Indebtedness;

(8) P was unable to pay its debts after June 2024 as they fell due and further loans had to be obtained from Madam Cheung and third parties;

(9) As at the issuance of the SOC, P’s indebtedness to its banks stood at around HK$68,000,000;

(10) At the time of the Impugned Transfers, D1 knew or ought to have known of the Core Allegation, namely that D was in doubtful solvency or was likely to become insolvent and D1 made the Impugned Transfers in breach of what was referred to at the hearing as the Creditors’ Interests Duty.

3.   D1’s case

3.1  It is D1’s case that she had advanced a sum of HK$2 million to P on or about 27 February 2024 (“D1’s Advance”). For present purposes, it is common ground between the parties that there is a triable issue as to whether D1’s Advance was (according to D1) used to defray salaries and payments required to terminate the works employed by AYC. Indeed, it is D1’s evidence that another sibling, Mr Tse Yat Yeung (“Yat Yeung”) had lent to P a further sum of US$16,000 for the foregoing purpose, and there is no dispute that Yat Yeung was repaid by P on 20 May 2024.

3.2  D1’s evidence is that there was an established practice for family members to advance loans for P’s operational needs. In D1’s affirmation, it is said that:

“[21] As the Plaintiff was at all material times a family-run business, whenever it faced cash flow needs, shareholders and directors such as [Mr Tse], [Madam Cheung], [and the Relevant Defendants] along with other family members working at the company have lent the Plaintiff our own personal funds to assist with the Plaintiff’s operational needs.

[22] The Plaintiff’s accounting department has always repaid these urgent loans from family members as soon as the company had sufficient cash.

[25] On about 21 May 2024, an online meeting was called by [Mr Tse] which was attended by his sons…., D2, [P’s accounting staffs] and [D1]. At the time, [D1] was in Cambodia and [D2] was in Mainland China. During the course of the Meeting, [D1] was informed that Yat Yeung had been fully repaid and so [D1] naturally enquired about when [D1] would be repaired the remaining HK$1 million. In the course of this meeting, [Mr Tse] (as one of the Plaintiff’s directors) had agreed that the Plaintiff would immediately repay the remaining HK$1 million to [D1]. [D1] crave leave to refer to Exhibit TYY-2 being the copy of the relevant WeChat records.

[27] In gist, [the Impugned Transfers] transferred to [D1] was repayment of the [D1’s Advance] to the Plaintiff in order to pay the severance due to its factory workers in Cambodia. In accordance with the well-established practice and understanding amongst the family members involved in the plaintiff’s business, [D1] had agreed to advance [D1’s Advance] and such sums would be repaid once the Plaintiff had sufficient funds.”

4.   Submissions advanced by P and D1

4.1  At the hearing, the position taken by P is that the Creditors’ Interests Duty is a legal knockout point such that D1’s factual case, even if it amounts to a triable issue, does not avail D1.

4.2  Counsel for P principally relies on the recent Supreme Court case of BTI 2024 LLC v Sequana SA & Ors [2022] UKSC 25. Mr Chan refers to the headnote for the following propositions:

“that in certain circumstances when a company was financially distressed the directors’ fiduciary duty to the company to act in its interests was modified to include a duty to act in the interests of the company’s creditors as a whole; that the rationale for that rule was premised on a shift in the economic interest in the company, and consequently in the distribution of the risk of loss, from the company’s shareholders as a whole to include the company’s creditors as a whole; that such a shift occurred, and hence the modified duty arose, when (per Lord Reed PSC and Lady Arden) the company was insolvent, bordering on insolvency or it was probable that the company would enter into an insolvent liquidation or administration, or (per Lord Hodge DPSC, Lord Briggs and Lord Kitchin JJSC) the directors knew or ought to have known that insolvency was imminent or it was probable the company would enter into an insolvent liquidation or administration; that when the modified duty arose directors were required (per Lord Reed PSC, Lord Hodge DPSC, Lord Briggs and Lord Kitchin JJSC) to take into account and give appropriate weight to the interests of the company’s creditors, and to balance them against shareholders’ interests where they might conflict, or (per Lady Arden) not materially to harm creditors’ interests; that, thus, where an insolvent liquidation or administration was inevitable, the shareholders ceased to retain any valuable interests in the company, with the consequence that the creditors’ interests became paramount; that the modified duty was consistent with the shareholder ratification principle, there being no power to ratify transactions entered into when the company was insolvent, and also with statutory provisions relating to wrongful trading and preferences…”

4.3  As will be seen from the first underlined passage above, there is a difference of opinion as to when the modified duty to act in the interests of the company’s creditors as a whole (ie the Creditors’ Interests Duty) arises. The differences in the opinions are recently noted in Joint and Several Liquidators of Hong Tak (Lin Fat) Home for the Aged Company Limited (in Compulsory Liquidation) v Lee Tao Ying & Anor [2025] HKCFI 2855 §§14-28. In particular, Recorder Abraham Chan SC observed as follows:

“[20] As the above passage reflects, there may be a range of circumstances prior to any insolvent liquidation of a company where the creditor duty arises. As to when the duty may arise short of actual insolvency, the Supreme Court recognised that this is more difficult to pinpoint. Lord Reed and Lord Hodge referred to the formulation “bordering on insolvency” with no evident discomfort (§48, §88, §94, §107). For his part, Lord Briggs specifically rejected a ‘real risk’ threshold, concluding (for reasons identified at §§191-198 of his judgment) that “a real risk of insolvency is not a sufficient trigger for the engagement of the creditor duty” (§199). Lord Briggs went on to emphasise at §199 of his judgment that:

‘It is not necessary for this court therefore to decide whether any other trigger earlier than insolvency itself would be sufficient, any more that it was for the Court of Appeal…In my view any trigger earlier than actual insolvency needs clear justification’.”

4.4  As regards the factual dispute on whether Mr Tse had agreed to the 2^nd Impugned Transfer, Mr Chan submits that BTI is an authority of the proposition that even if Mr Tse did do so, such agreement would not in law amount to a defence by reason of the second underlined passage at §4.2 above.

4.5  On D1’s part, Mr Poon submits that there is plainly a triable issue as to whether the Creditors’ Interests Duty had been triggered in the present case, pointing out that there is no evidence on the financial position of P as at or around the time of the Impugned Transfers.

5.   Analysis

5.1  In my view, D1 has surmounted the burden of demonstrating that there is a triable issue or that for some other reason there ought to be a trial (Hong Kong Civil Procedure 2025 Note 14/4/9B), in particular on whether the Creditors’ Interests Duty was engaged in the present case, irrespective of which of the tests set out in BTI is to be adopted.

5.2  As pointed out above, the 2023 AFS is the latest financial statements adduced for present purposes. The 2023 AFS was prepared on a consolidated basis, and whilst a small loss was sustained in the relevant period (HK$282,425), the group as a whole was far from being balance sheet insolvent. The net assets were stated to be in the sum of HK$115,164,340.08, which has already taken into account bank loans in the sum of [HK$44,349,389.64 (Trust Receipt Loans) + 26,968,356.52 (Bank Loans) + HK$35,387,101.17 =] over HK$106.7 million. It is true that Note 22, which is the balance sheet of P itself, shows that P was balance-sheet insolvent to the tune of around HK$13.2 million, the 2023 AFS was prepared on a going-concern basis as the members had agreed to provide adequate funds for the company to meet its liabilities as they fell due (Note 2).

5.3  When pressed at the hearing, counsel for P submitted that D1 should be aware of the Core Allegation at the latest by August 2023. He refers to the signed minutes of a meeting of P’s group (not P) which took place on 27 August 2023 which was attended by, inter alia, Mr Tse, Madam Cheung and the Relevant Defendants (“2023 Minutes”). It is pertinent to note the following matters:

(1) It was acknowledged that the group had bank indebtedness in excess of HK$155.8 million;

(2) The incoming cashflow in the immediate future was around HK$73.5 million, making the unmet indebtedness HK$82.3 million (“2023 Unmet Indebtedness”), not including the operational expenses for the next few months (但未計算未來數月公司營運和工廠開支);

(3) Importantly, in respect of the 2023 Unmet Indebtedness, it was envisaged that the group would repay the same by disposing of its assets (所以，餘下的債務需要積極地賣去公司資產來填補欠下的銀行數和利息).

5.4  It appears from the 2023 Minutes that, inter alia, the following resolutions were passed:

“[1] [Mr Tse] 提出公司可能將會結束，現在各股東須就這方向達成協議，重整所有資產，先盡快還清所有銀行債務，所剩餘的其後將分回給各人，完成解散公司程序。” (emphasis added)

5.5  I note that the 2023 Unmet Indebtedness is largely consistent with the Jan 2024 Indebtedness. For present purposes, the important point to note is that, according to the 2023 Minutes, Mr Tse himself took the view that the disposal of assets by the group would result in a surplus after paying off the 2023 Unmet Indebtedness which would then be distributed back to the shareholders.

5.6  The foregoing view taken by Mr Tse himself is, to say the least, not inconsistent with the 2023 AFS (on a consolidated basis).

5.7  In particular, according to Note 18 of the 2023 AFS, the group had account receivables from related parties[2] in the sum of approximately HK$100 million and the related parties included Way Profit and D5. Therefore, the sale of properties owned by Way Profit and D5 in April and May 2024 (§2.5(7) above) appears to be part of the asset-disposal plan to repay the 2023 Unmet Indebtedness.

5.8  On the material before me, there is no suggestion that the financial position has drastically changed from the position set out in the 2023 Minutes. No accounts of P or the group (management account or otherwise) have been adduced.

5.9  As has been pointed out by Lord Briggs at BTI, the content of the Creditors’ Interests Duty is a fact-sensitive question:

“[173] Secondly, practical common-sense points strongly against a duty to treat creditors’ interests as paramount at the onset of what may be only temporary insolvency, still less at some earlier moment, such as when insolvency is imminent. Why should the directors of a start-up company which is paying its debts as they fall due but is balance sheet insolvent by a small margin abandon the pursuit of the success of the company for the benefit of its shareholders? And why should the directors, faced with what they believe to be a temporary cash-flow shortage as the result of an unexpected event, like the present pandemic, give up the pursuit of the long-term success of a fundamentally viable, balance sheet solvent, business for the continuing benefit of shareholders?

[175] Thirdly, insolvency of either the balance sheet or commercial kind does not of itself advance the status of creditors beyond being contingent main stakeholders. The contingency remains liquidation (when the statutory priority of creditors cuts in) rather than insolvency (when it does not). For as long as there remains light at the end of the tunnel, that contingency may never occur. It follows that the justification for the recognition of the creditor duty which has thus far prevailed in the United Kingdom does not go so far as to render creditors’ interests necessarily paramount upon insolvency.

[176] In my view, prior to the time when liquidation becomes inevitable and section 214 becomes engaged, the creditor duty is a duty to consider creditors’ interests, to give them appropriate weight, and to balance them against shareholders’ interests where they may conflict. Circumstances may require the directors to treat shareholders’ interests as subordinate to those of the creditors. This is implicit both in the recognition in section 172(3) that the general duty in section 172(1) is “subject to” the creditor duty, and in the recognition that, in some circumstances, the directors must “act in the interests of creditors”. This is likely to be a fact sensitive question. Much will depend upon the brightness or otherwise of the light at the end of the tunnel; ie upon what the directors reasonably regard as the degree of likelihood that a proposed course of action will lead the company away from threatened insolvency, or back out of actual insolvency. It may well depend upon a realistic appreciation of who, as between creditors and shareholders, then have the most skin in the game: ie who r who risks the greatest damage if the proposed course of action does not succeed.”

5.10  In the present case, there is plainly a triable issue on whether there is, using Lord Briggs’ phraseology, “light at the end of the tunnel”, namely the disposal of assets agreed at the meeting on 27 August 2023 (1) would be sufficient to pay off the bank creditors and (2) would even result in a surplus which can be distributed to the shareholders. As such, it seems to me that there is a triable issue as to whether the Creditors’ Interests Duty was engaged at the time of the Impugned Transfers. I note in particular that there is no suggestion that any winding-up petition against P has been presented, nor has P’s counsel pointed to any documentary evidence to show that the bank creditors’ had, at the material time (in particular at the time of the Impugned Transfers), threatened proceedings.

6.   Conclusion

6.1  For the above reasons, I grant unconditional leave to D1 to defend P’s claim for Relief No 2.

6.2  By agreement, I enter judgment in respect of P’s claims for Relief Nos 1 and 3.

6.3  As regards costs, there is an agreement between counsel that:

(1) No costs are sought in respect of P’s application for Relief No 1;

(2) The Relevant Defendants are to pay to the costs of the P’s application for Relief No 3 which was estimated to be a third of the costs of the Summons.

6.4  I therefore make the following costs order nisi:

(1) No order as to costs in respect of Summons §1;

(2) The costs in respect of Summons §2 be in the cause;

(3) The Relevant Defendants do pay to P the costs of Summons §3, to be taxed if not agreed.