Secretary for Justice for and on behalf of the Architectural Services Department v. Sanko Technology Ltd. and Another

DCMP598/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 598 OF 2002

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R U L I N G

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1. I am grateful to both counsel, who have been able to identify the essential features of this dispute and the documents which relate to it from a great mass of paper that has been filed in this application. As a result, they were able to dispose of their arguments with commendable despatch.

2. This is an interpleader summons taken out by the Secretary for Justice on behalf of the Architectural Services Department, who hired a diesel generator from the 1st claimants, who are in dispute with the 2nd claimants as to its ownership.

3. At the first hearing of the summons on 26 March, I directed that the applicants should transfer the generator into the custody of the 2nd claimants, who were to store it pending this hearing.

4. On 25 April I heard a summons for third party discovery against a Mr Philip Liu, who is a director of the 1st claimants, for him to produce documents which were said to be or to have been in his possession and which might prove the ownership of this generator by the 1st claimants. In the event, I made no order on the summons when counsel for Mr Liu, who was instructed by the solicitors who were also solicitors for the 2nd claimants, made the concession that it was accepted by the 2nd claimants that initially this generator had been owned by the 1st claimants. Mr Liu had filed an affidavit to the effect that he did not have such documents in his possession, but given the concession, the 1st claimants had no reason to further pursue the application for discovery against him. That therefore disposed of the summons.

5. It is necessary to start with the background to the ownership of this generator and to trace how, according to the 2nd claimants, they came to own it by the time that the applicant had hired it from the 1st claimants. Save for the nature of Mr Philip Liu's conduct and the consequences of that conduct, much of what I am about to recount is not in dispute between the two claimants.

6. It is helpful to start with the dramatis personae. The 1st claimants have two subsidiaries, Sanko Air-conditioning Engineering Limited (SAC) and Sanko International Limited (SIL). Mr Alfred Tam is a shareholder and director of all three companies; Mr Antonio Liu is a shareholder and director of the 1st claimants and a director of SIL; Mr Philip Liu (no relation) is a director and shareholder of the 1st claimants; and Mr M.K. Lee, who has put in affirmations on behalf of the 1st claimants in support of its case on this interpleader, is also a director and shareholder of the 1st claimants.

7. Of these four persons, Mr Philip Liu is said to have acted in a way that was injurious to the interests of the 1st claimants. The manner of his alleged conduct is something that I must return to presently. His accusers in this respect are the other three persons whom I have referred to.

8. From 1999 until February 2000, a company called Wan Chun Trading Limited (WC), who are an associate company of the 2nd claimants, made loans totalling $17.7 million to SIL, SAC and the 1st claimants. $5 million of that total was lent to the 1st claimants. This loan was approved by the 1st claimants following a board meeting of the company on 10 July 1999. Amongst those attending that meeting were the two Mr Lius', Mr M.K. Lee, and Mr Alfred Tam, who signed the board minutes (see page 459 of the blue bundle).

9. Consequent upon that, an undertaking of loan repayment (as it is described) was drawn up on 13 July 1999 and signed on behalf of the 1st claimants by Mr Philip Liu and attested to by Mr Alfred Tam (see pages 461-464). A minor and, for present purposes, inconsequential amendment needed to be made to the agreement, and that was then re-executed by Mr Alfred Tam on behalf of the 1st claimants.

10. As appears from subsequent correspondence, this agreement came to be known and referred to as "the leasing agreement". Prior to this agreement, the 1st claimants, who owned and operated a plant hire business, including diesel generators, pledged 34 of these generators, which were referred to as "the renting machines", to WC as security for this loan. One of those 34 generators is the one that is the subject of this interpleader.

11. It then transpired that the 1st claimants, SAC and SIL were unable to repay WC the loans made by it. Of the 1st claimants' loan of $5 million, $3.5 million (in round figures) remained outstanding. Philip Liu and Antonio Liu wrote a letter to WC dated 29 June 2000 (pages 259-262), asking whether the loan might be restructured. They proposed that the outstanding amount should be written down to $3 million and that WC would take possession of the 34 generators. This proposal was rejected by WC (page 282).

12. On 2 July 2000, Philip and Antonio Liu wrote again, improving their proposal by adding that the 1st claimants would, having given the machinery to WC, then rent it back from WC and use it in the 1st claimants' business and pay a monthly hiring fee for the machinery to WC (see pages 287-288). This was then followed by a further refinement in a letter from Philip and Antonio dated 4 July (pages 290-291), which was acceptable to WC. See their letter to this effect dated 6 July 2000 (page 293). This restructuring was carried into effect by three letters dated 11 July. Alfred Tam signed for SAC (274-275); Antonio for SIL (477-478); and Philip for the 1st claimants (471-472).

13. Each of them, as required by WC, also signed a personal guarantee in respect of each of the three debtor companies (see pages 295-301, 306-312 and 317-323). WC took possession of the 34 generators, and also took over the lease of the warehouse where they were kept. Some of the warehouse staff who the 1st claimants had laid off also joined WC so as to continue to run the 1st claimants' old plant hire business for WC.

14. From about July/August 2000, WC started to operate this plant hire business, hiring generators to various customers (see pages 505-506). WC then carried out an internal transfer of these 34 generators to the 2nd claimants, who are an associated company of WC. The business appears to have continued without mishap for some time.

15. In March 2001, the 1st claimants carried out some maintenance work for one of the 2nd claimants' machines, being one of the 34 generators transferred by the 1st claimants to WC. The relevant invoice for this repair issued by the 1st claimants to the 2nd claimants is at page 503.

16. Pausing there, this, according to the 2nd claimants, is how they came to own the 34 generators, including the one which is the subject of this interpleader.

17. Turning to this particular generator, the 1st claimants hired it from the 2nd claimants in August 2001. This is well documented by a "delivery note and an invoice" (see pages 108, 112-113, 115-116, and 110). The 1st claimants then, in the course of its business, in turn hired it to the ASD (see pages 23-24, 27, 30-35). All of these immediate transactions are said to flow from the agreement transferring ownership of the 34 from the 1st claimants to WC by virtue of the documents of 6 July 2000 and 11 July 2000 which I have already specifically drawn attention to.

18. From this, the 2nd claimants say that the matter is perfectly clear, and that consequently there can be no answer to their well-documented case. Ms Chyvette Ip, for the 1st claimants, submits that for reasons which I will need to consider in a moment, the matter is far from clear. It cannot be disposed of summarily on paper - it should be set down for trial with oral evidence. Alternatively, I should adjourn the summons generally to await the outcome of a High Court action involving the 1st claimants and Mr Philip Liu, wherein the 1st claimants are suing Mr Liu for misfeasance in his capacity as one of their directors.

19. In this litigation, he is accused of having carried out these alleged transactions - that is to say, transferring the 34 generators to WC - behind the backs of the board of the 1st claimants and at a gross undervalue. She submits that this action, once tried, will have the effect of arriving at the truth behind the series of events that I have just recounted, and that she expects the 1st claimants to succeed. That action will therefore determine whether these agreements transferring the generators to WC should be set aside. In that event, the fate of this one generator will also be determined.

20. Mr Ronald Tang, on behalf of the 2nd claimants, counters this by saying that it would be quite wrong to wait for the resolution of what may prove to be a complex, expensive and time-consuming action which has barely got off the ground. Why, he asks rhetorically, should this one generator worth $100,000 lie idle when there is at present ample evidence to justify the disposal of this summons in the 2nd claimants' favour?

21. In support of her submission that the evidence is not sufficiently clear-cut to be determined summarily, Ms Ip relies on the third affidavit of Mr Lee Man-keung filed in the High Court action, which contests that the other directors of the 1st claimants were aware that these transactions with WC were ongoing. Lack of knowledge by the board, if proved, would be fatal to the transfer of the 34 generators. She also points to the inherent probabilities of the matter. Is it likely, she asks, that the board knew of these matters and consented to them? Would they consent to transfer 34 machines that could be rented out at $20,000 a month each, generating as much as $8 million income per annum for the 34, for a mere $3 million valuation? These are matters which she says merit serious consideration and which can only be resolved by hearing live evidence from the various witnesses. A summary disposal would therefore not be appropriate.

22. When I look at the contemporaneous documents which brought these transactions into existence, I am bound to say that they all appear to be above board. Mr Philip Liu was acting together with co-directors and shareholders of what are associated companies. The prospect that these transactions were carried out behind the backs of the other directors is so unlikely as to be discounted.

23. As to the question of an undervalue in the transfer of these generators, it should be remembered that the 1st claimants were in dire financial straits. Their bargaining position was perilous. They were bound to get the best bargain that they could reasonably obtain in order to keep themselves afloat. The prospects of doing any better would appear to have been negligible. WC held all the cards. This meant that the debt could be repaid, and that the 1st claimants could at least continue to trade, albeit by hiring plant themselves in order to hire that plant on to their own customers.

24. The ownership of the 2nd claimants has been clearly made out. All the evidence of ownership is before me. Accordingly, there will be a declaration to the effect that this generator, being one of the 34, is in the ownership of the 2nd claimants. It follows that it is both unnecessary and that no useful purpose can be served in adjourning this summons pending the outcome of the High Court action.

25. I will also make an order nisi that the 1st claimants should pay the costs of the applicant and of the 2nd claimants.