RE DAYS INTERNATIONAL LTD

HCCW 299/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 299 OF 2011

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D E C I S I O N

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Introduction

1.  I have before me 2 matters to determine.  First a summons issued by the Liquidators of Days International Limited, which is in compulsory liquidation (“Company”) for directions as to whether or not they should convene a further meeting of the first meeting of creditors to consider afresh its composition.  This issue arises as a result of a dispute between the liquidators and Global Empire Limited (“Global”), which claims to be the Company’s largest creditor and owed $419,645,000, but which had its debt valued at $1 for voting purposes at the first meeting of creditors.  The summons requires me to determine what value the debt should be valued at for voting purposes.

2.  Secondly, liability for the costs of the appeal of a decision of Master R Lai of 22 August 2012, which has been withdrawn.  This is a straightforward matter, which I deal with at the end of this judgment.

3.  At the hearing before me the Liquidators were represented by Ms Rachel Lam.  Global was represented by Mr Christopher Chain.

Background

4.  The debt allegedly arises in the following way.  The Company has two shareholders: Nanik Dayaram and Days International Limited, which is incorporated in the British Virgin Islands, and is owned or controlled by Mr Dayaram.  In addition to these two companies, Mr Dayaram owns or controls two further companies both named Days Impex Limited and incorporated in Hong Kong and Liberia respectively.  The Days group, which Mr Dayaram ran with his son Mahesh, traded electronic goods apparently successfully until about 2010 when the group encountered financial problems which has led to the Company and other members of the group being put into compulsory liquidation.

5.  Global is owned by Mr Surendar Kirpalani.  Mr Kirpalani explains that in the middle December 2011 he met Mr Dayaram on leaving a Hindu Temple they both attended.  Mr Dayaram and Mr Kirpalani are both Sindhis and acquainted socially.  Mr Kirpalani says that Mr Dayaram asked him if he was interested in a business deal.  The two of them went to a “cha chan teng” to discuss it.  Mr Dayaram proposed that one of his companies sell to Mr Kirpalani debt owed to it by another company for 5% of the value of the debt.  Mr Kirpalani said he was interested but would not commit more than $500,000 which he said in cross-examination was approximately 0.05% of his net worth.  They met again on 20 December 2011.  Mr Dayaram told him that the debt was about $5,000,000,000.  Mr Kirpalani said that he was only prepared to pay 1% for it and he would take all of it or nothing.  Mr Dayaram went away and thought about it and called on 28 December and agreed Mr Kirplanai’s offer.  They met again to discuss the terms and this resulted in the signing an agreement, prepared by Mr Dayaram, on 30 December 2011.  On 17 January 2012 a deed of assignment was signed purportedly assigning to Global the debts owed by the Company to Days International BVI and Days Impex Liberia.

6.  Mr Kirpalani says that he was not told at the time by Mr Dayaram how the debts came to be incurred and neither did he ask.  After the Liquidators valued the debts at $1 he did inquire.  He says Mr  Dayaram told him the following, which is contained in paragraphs 10 to 12 and 14 of Mr Kirpalani’s fourth affirmation:

“10. I understand that in the course of operations of the group of companies owned and operated by the Dayaram family, current accounts as to intra-group transfers of funds were kept between Days Impex Liberia, Days Impex HK, and the Company. On the whole, Days Impex Liberia was the “parent” company that would provide funding in the form of loans to both Days Impex HK (owned by Days Impex Liberia) and the Company (owned by Days International BVI) as “subsidiaries” within the same group.

11. Prior to 31^st March 2011, the arrangement that was historically in place was that loan funding was provided from Days Impex Liberia to the Company indirectly, through Days Impex HK. Under this historical arrangement, the flow of funds between the companies can be set out as follows:-

= Loan funding provided by Days Impex Liberia

= Current account between companies in the course of

day-day trading

12. As a result of this historical arrangement:-

 (i) At the end of every financial year, the Company would be left in a position of debt to Days Impex HK. However, the monies being transferred from Days Impex HK to the Company was actually loan funding originating from Days Impex Liberia.

 (ii) Therefore, bank transfers of funds would be made at financial year end for the purposes of regulating and adjusting the accounts and records of Days Impex Liberia, the Company, and Days Impex HK so that they reflected the actual position of funds between Days Impex Liberia as “parent” and the Company and Days Impex HK as “subsidiaries”.

 (iii) Specifically, Days Impex Liberia would transfer funds to the Company, sufficient for the Company to pay off its “debt” to Days Impex HK (which was actually the loan funding that had originated from Days Impex Liberia over the course of the year). Days Impex HK would then transfer the same funds back to Days Impex Liberia so that Days Impex HK would not be indebted to Days Impex Liberia for the loan funding that had actually been advanced to and for the benefit of Company.

 (iv) The management chose to use actual bank transfers to achieve this purpose rather than doing so on paper because (1) the bank did not charge any transaction fee for the transfers; and (2) the actual transfers having been made and thereby recorded as part of the bank's records, it would then be easier for the auditors to track the funding position between the companies.

 (v) The entirety of these operations was clearly and transparently recorded in the ledger of the companies (as will be seen below). When it had become apparent that this historical arrangement was cumbersome and clumsy due to the sheer amount of loan funding that Days Impex Liberia was required to provide, the practice was changed (as will also be seen below).

….

14. Taking the financial year ended 31^st March 2010 as an example:

 (i) It can be seen from the Company's ledger that on 31^st March 2010，a sum of US$397,700 (amounting to HK$3 million odd) and 17 sums of US$800,000 (amounting to HK$6,200,000 each) were transferred by Days Impex Liberia to the Company. The total sums transferred were about HK$108 million odd.

 (ii) The sum of US$397,700 was used to clear the US dollar debt owed to Days Impex HK by the Company, with the result that the outstanding US dollar indebtedness of the Company to Days Impex HK became zero.

(iii) The 17 sums of US$800,000 (HK$6,200,000) were used to clear the HK dollar debt owed to Days Impex HK by the Company, with the result that the outstanding Hong Kong dollar indebtedness of the Company to Days Impex HK became zero.

(iv) In other words, at the same time that the Company incurred liability to Days Impex Liberia for the HK$108 million odd transferred, a corresponding liability to the same sum to Days Impex HK was extinguished.

(v) As of 31^st March 2010，prior to the transfer of HK$108 million odd, the current account of the Company with Days Impex Liberia had a credit of HK$95 million. It can be seen that, save for one or two isolated instances, Days Impex Liberia did not transfer monies to the Company directly; loan funding went to the Company through Days Impex HK.

(vi) After the transfer of HK$108 million (and 1 or 2 other miscellaneous transactions later), the net amount owed by the Company to Days Impex Liberia is HK$16,275,000 (i.e. what Global Empire claims as "Debt 1").

(vii) As the Company's trading is, in reality, funded by the loan funds ultimately originating from Days Impex Liberia, it is not in any way improper that, after the account regulating exercise is done, Days Impex Liberia has changed from a debtor to a creditor of the Company. Days Impex HK at the same time ceased to be a creditor of the Company.

(viii) There is now shown to me and produced marked "SMK-10" tables extracted from the Company's ledger with an added "balance" column which more clearly illustrates the matters described above.”

7.  The affirmation also explains how the sum of $419,645,000, which Global says has been assigned to it, is calculated.

8.  The Liquidators decided to value Global’s debt at $1 for two reasons. First, because they were not satisfied that the Company did owe these sums.  It is their view, for reasons I address later in this judgment, that  no such debt exists and that the transfers of money between the companies which allegedly gives rise to the debt are fraudulent.  Secondly, they were not satisfied that the assignment is genuine and that Global is a genuine independent creditor.   Before turning to consider the reasons that the Liquidators took the view that they did I will consider the relevant legal principles.

Legal Principles

9.  The decision to admit or reject a proof for voting purposes under Rule 128 of the Companies (Winding-Up) Rules at the first meeting of creditors is not a final determination of the creditor’s claim to prove in the liquidation.   It is a preliminary assessment and it is not uncommon for a liquidator who has doubts about a debt to value it a $1 for voting purposes.  The test which a liquidator should apply when assessing a proof for voting purposes is whether, on balance, the claim against the company is established and, if so, in what amount[1].  I agree with Mr Chain that this involves a relatively broad, macroscopic assessment.

10.  I also agree with Mr Chain that the court when called upon to determine a challenge to a liquidator’s decision to admit or reject a proof for voting purposes is not deciding whether the liquidator made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court[2]. However, I do not accept that this requires the court to undertake a different exercise to the one undertaken by a liquidator.  The court should also undertake a broad, macroscopic assessment.  It cannot be sensible at the earliest stages of a liquidation of a company, which may prove to have very little assets, to require the liquidator or the court to be drawn into an application which involves considerable work for the purposes of determining whether or not a proof should be admitted for voting purposes[3]. It does not seem to me that there is anything unfair in this.  A creditor such as Global which has an unusually complex and problematic debt cannot reasonably expect the limited resources of an insolvent company to be expended, on an expensive review of its debt before a Committee of Inspection has even been elected.  Mr Chain disputed this.  He argued that because the grounds for valuing the debt at $1 were fraud it was necessary for the Liquidators to adduce evidence of sufficient cogency to just rejecting the proof on this ground. Mr Chain argued that it is well established the “the more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it”[4]. This is, of course, correct, but I do not accept Mr Chain’s assertion that it is necessary for the Liquidators to have looked at each individual transaction that allegedly goes to make up the debt and satisfied themselves that there was good reason to think that in each case there was evidence of fraud before valuing the debt at $1 or, that unless they adduce evidence in these proceedings addressing each transaction and demonstrating it is fraudulent the court should direct a new meeting of creditors at which Global’s debt is valued at $419,645,000.  In my view what is required at this stage is for the court to make a relatively broad brush assessment of the value at which the debt should be admitted mindful of the fact that as the grounds for rejecting it are fraud the evidence at this stage must be more compelling than would otherwise be the case.

The debt

11.  A large number of rounds of evidence were filed by the Liquidator and Global: Mr Kirpalani filed six affirmations.  In addition affirmations were filed by Nanik and Mahesh Dayaram.  On 18 December 2012 I ordered, amongst other things, that the various deponents attend for cross‑examination.  Before the hearing it became clear that the Dayarams’ affirmations would not be relied on and the Liquidators issued subpoenas for them to attend.  At the commencement of the hearing before me they applied to set them aside.  I rejected that application.  They, however, declined to answer questions when they came to be cross‑examined on the ground that it might incriminate them for reasons which go to the reasons why the Liquidators valued the debt at $1. Both Nanik and Mahesh Dayaram have been charged with fraud in relation to the debt.  There was some debate before me as to what any adverse inferences could be drawn from their failure to answer questions about the debts.  Mr Chain submitted that the court could not automatically draw adverse inferences and whether or not the court should do so was a fact sensitive decision which would depend on the circumstances of each case[5].  This I accept.  For the reasons explained in the following paragraphs of this judgment I have reached the conclusion that the Liquidators correctly valued the debt at $1 and there is no new evidence which justifies me now reaching a different decision.  Those reasons do not rely on the drawing of any adverse inferences of arising from the Dayaram’s asserting privilege against self‑incrimination.  However, it does seem to me that the court is entitled to draw the inference from their assertion of privilege that there is something unsatisfactory about the way in which the debt allegedly came to be incurred and that inference bolsters my conclusion.

12.  During the hearing it became clear that the determination of one issue would effectively decide the summons.  It was this.  In his third affirmation Mr Fok explains this in paragraphs 2.6 to 3.4:

“2.6 The evidence I provide below goes into some detail to show that the flow of funds from Days Impex Liberia to the Company (directly or indirectly) likely formed part of a larger chain of payments pursuant to an import loans fraud involving the Days groups of companies. It has become necessary for me to adduce this evidence to reply to Mr Kirpalani's evidence in his Sixth Affirmation purporting to show that payments from Days Impex Liberia to the Company (direct or indirect) were for the purpose of Days Impex Liberia advancing loan funds to the Company. The matters set out below demonstrate that this allegation is disingenuous. Further, I note that Mr Mahesh Dayaram, Mr Nanik Dayaram，Ms Pitty Kwok，Mr Anil Dayaram and Ms Shelia Dayaram were recently (about 22 April 2013) provided with specific information by the Commercial Crime Bureau regarding the allegations in connection with the charge of conspiracy to defraud being made against them. The Liquidators therefore now consider it appropriate to refer to these facts in this affirmation without jeopardising the criminal investigation against these individuals.

3. DEBT 3 FY11/12

3.1 I refer to the table exhibited at “SMK-23” to Mr Kirpalani’s Sixth Affirmation setting out payments from Days Impex Liberia to the Company for the period April 2011 to September 2011. As described above, Mr Kirpalani relies on the information contained in this table as evidence for the contention that during this period Days Impex Liberia advanced loan funds directly to the Company in the amount of about HKD92 million.

3.2 The Liquidators believe that every single payment identified in the table at “SMK-23” does not represent the legitimate advance of loan funds by Days Impex Liberia to the Company. Rather, the Liquidators believe that:

(a) Each payment was made pursuant to an import loans fraud carried out by the controllers of the Days group of companies.

(b) In respect of each payment, the ultimate source of those funds was not Days Impex Liberia, but rather the draw-down of an import loan by either Days Impex (HK) or the Company pursuant to sales invoices from a supplier, being Oscoda Electronics Limited (Oscoda).

(c) The funds drawn down on these import loan accounts would be circulated through a variety of entities, some of which were entities outside the Days group of companies, back to the Company via Days International BVI and Days Impex Liberia. Specifically:

(i) On the drawing down of the import loan, the bank conferring the loan would pay the funds into Oscoda’s bank account.

(ii) Oscoda would then transfer all the funds received from the import loan without any deduction to a money changer (usually Wall Street Exchange Ltd (HK) (Wall Street Exchange)). Instructions would then be given to Wall Street Exchange directing them to convert the funds into Hong Kong dollars and deposit them into the account of Days International BVI.

(iii) On receipt of the funds from Wall Street Exchange, Days International BVI would transfer the funds without any deduction to Days Impex Liberia.

(iv) Days Impex Liberia would transfer these funds (sometime with and sometimes without deduction) to the Company.

(v) The Company would then usually use the funds received from Days Impex Liberia to repay other import loans as they fell due.

3.3 Set out below is a diagrammatic depiction of this flow of funds. The amounts referred to in the diagram refer to the example set out at paragraph 3.5.

 

 

3.4 The Liquidators’ belief set out above is based on analysis conducted by the Liquidators together with analysis conducted by the Commercial Crime Bureau that has been made available to the Liquidators. The Liquidators have prepared a further table based on the CCB Analysis in respect of the payments from Days Impex Liberia to the Company identified in “SMK-23” to summarise the flow of funds described in the CCB Analysis. There is now produced and shown to me and marked exhibit “FHY-24” this table prepared by the Liquidators (Liquidators’ Summary FY11/12). Part 1 of the Liquidators’ Summary FY11/12 relates to the CCB Analysis and is organised as follows:

(a) The leftmost column contains a reference number that corresponds with the “Sr No” that identified a particular payment from Days Impex Liberia to the Company in “SMK-23”.

(b) The next column contains a reference to the relevant “Fund Flow No” column in the CCB Analysis (the leftmost column in that table).

(c) The remaining columns of the table detail the flow of funds as described in the CCB Analysis.”

13.  As is apparent from paragraph 3.4 that Mr Fok’s conclusion that the debt is bogus is based to a large part on information provided to him by the CCB, which is not before the court.  Mr Chain argued with admirable energy that as the information provided by the CCB is not before the court the matters relied on by the Liquidators as justifying their decision is second hand hearsay and should be given no weight.  Mr Chain did, however, concede that if I took a different view then that determined the matter because he accepted that if regard was had to the CCB’s analysis, and the analysis done by Mr Fok based in large part on it, the reasons for valuing the debt at $1 were compelling.

14.  It seems to me that there is no sensible reason to ignore the evidence contained in Mr Fok’s third affirmation and it seems to me clear that there is every reason to doubt the validity of the debt.  In my view the Liquidators quite properly valued it at $1 and no reason has been advanced  before me which would justify me taking a different view.  Having so concluded it is not necessary for me to consider the genuineness of the assignment, but as this issue was dealt with at the hearing before me I think it is desirable that I do.

15.  Global’s explanation for how it came to acquire the debt is very simple and I have explained it earlier in this judgment.  Ms Lam explored this with Mr Kirpalani in cross-examination.  Mr Kirpalani’s evidence was largely consistent with the evidence in his affirmation, although he did change his evidence during cross-examination on who produced the assignment and how it came to be signed.  More importantly in my view his story is simply unconvincing.  He would appear on his own evidence to be a wealthy businessman.  He would have the court believe that he was prepared to risk about $500,000 by purchasing distressed debt about which he not only knew nothing, but did not try to find out anything.  He gave no reason why he did not ask for more information.  It is apparent from the evidence that Mr Kirpalani and Mr Dayaram have filed in connection with this application that they have cooperated closely and that Mr Dayaram would like Mr Kirpalani on the Committee of Inspection where he would hold the majority of debt and be able to influence the conduct of a liquidation in which serious issues concerning the Dayarams’ conduct arise.  I agree with the Liquidators that in these circumstances a representative of Global on the Committee of Inspection would not be appropriate.

16.  I will, therefore, order that there should not be a further meeting of the Company’s creditors and that the costs of the Liquidators’ summons of 9 November 2012 be paid by Global.

17.  There remains the costs of the Notice of Appeal issued by Global in respect of Master R Lai’s decision of 22 August 2012 refusing Global leave to file and rely on Mr Kirpalani’s second affirmation for the purposes of the hearing before him.  The second affirmation was out of time.  It seems to me that the Master’s decision was perfectly reasonable.  In fact Mr Chain did not make any submissions in relation to the costs of the Appeal, which I order that Global pay the Liquidators.