KING WONG DEVELOPMENT LTD AND ANOTHER v. T&L SECURITIES LTD AND OTHERS

HCMP 1921/2023

[2024] HKCFI 3038

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1921 OF 2023

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D E C I S I O N

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A.  THE APPLICATION

1.  By Amended Originating Summons dated 9 November 2023 (“Amended OS”), the Plaintiffs seek:

(1)  A declaration that (a) the 1^st Plaintiff (“KWD Ltd”) was entitled to vote at the general meeting of T&L Securities Limited (“the Company”) on 29 September 2023 (“the Meeting”), and is entitled to do so at all future creditors’ meetings of the Company in respect of the sum of HK$73,329,240.00 (“the Debt”); and (b) the rejection of KWD Ltd’s preliminary proof in respect of the Debt (“the Preliminary Proof”) for voting purposes by way of letter dated 28 September 2023 and/or at the Meeting was invalid.

(2)  Declarations that the 3^rd and 4^th Defendants were not entitled to vote at the Meeting and are not entitled to do so at all future creditors’ meetings of the Company at all, or in any event, in respect of no more than HK$1.

(3)  Relief ancillary to the above declarations, and in particular an order that the resolution at the Meeting to appoint the 2^nd Defendant (“FKL”) as liquidator of the Company be set aside.

2.  The Plaintiffs were represented at the hearing by Mr Alexander Tang and Mr Joshua Yeung, and the 2^nd Defendant (“FKL”) by Mr Paul Wong. I am grateful for the clear and focused oral submissions from both sides.

3.  The 3^rd and 4^th Defendants (respectively “Innovest Group” and “Legend Times”) did not appear at the hearing, having earlier written to FKL to indicate that, without accepting that the Plaintiffs’ allegations are correct, they would not participate in the proceedings for “the purpose of saving times [sic] and costs” and would “wholly respect any Court’s Order [sic] that will be made in due course”.

B.  THE BACKGROUND

4.  The Company was incorporated for the development of 11 houses (“the Development”) on Lot 868 of District Lot 1 in Nga Kau Wan (牙較灣), Lamma Island (“Lot 868”).

5.  Lot 868 was acquired by the Company from the HKSAR Government through land auction in September 1997 at the price of HK$64,000,000.00.

6.  For present purposes, there are three key persons connected with the Company and the Development.

7.  The first is Mr. Li Kin Keung (“Li”). The Plaintiffs are Li’s corporate vehicles. As already indicated the 1^st Plaintiff (KWD Ltd) claims to be a creditor of the Company. The 2^nd Plaintiff (“General-Lite Corp”) owns 40% of the Company.

8.  Next is Li’s former wife, Ms. Pu Mei Lee Teresa (“Pu”). Her corporate vehicle, Legend Times, owns 10% of the Company.

9.  Then there is Mr. Li Wang Pong Franklin (“Franklin”), an investor in the Development whose corporate vehicle, Innovest Group, owns 50% of the Company.

10.  The Plaintiffs’ case is that after Lot 868 was acquired, an oral agreement (“the Alleged Funding Agreement”) was made in or around September 1997 between Li (on behalf of KWD Ltd) and Pu and / or Franklin (on behalf of the Company) to the effect that:

(1)  KWD Ltd would be responsible for paying the construction and renovation costs of the Development.

(2)  The Company was to repay the costs paid out by KWD Ltd for the Development upon the sale of the houses on Lot 868.

11.  Earlier in their marital relationship, Li had entrusted the custody of his sole bearer share in General-Lite Corp to Pu.

12.  The relationship between Li and Pu later unravelled and they separated in around 2007.

13.  From around 2011/2012, a dispute arose between Li and Pu resulting in legal proceedings and judgment ultimately being given by Mr Justice Lok in favour of Li (HCA 341/2013 & HCA/2013, 15 May 2019) (“the 2019 Judgment”).

14.  The 2019 Judgment featured inter alia:

(1)  A dispute over the beneficial ownership of General-Lite Corp which held (and still holds) a substantial minority interest in the Company. This was identified in the Judgment as the “Main Issue in HCA 873/2013” (see heading at p.46).

(2)  A denial by Pu that KWD Ltd had paid for the construction and renovation costs of the Development pursuant to the Alleged Funding Agreement.

(3)  Findings by Lok J against Pu on the question of funding, and in particular these findings at §88 and §150 of the Judgment:

“88. From the evidence, it is also clear that King Wong [i.e. KWD Ltd] was involved in both projects. King Wong injected lands into the Linkan Development Project in 2007. According to Li, which is supported by the Ledger Documents, King Wong also paid for the construction and renovation costs of the 11 houses of the Lot 868 Project in the total sum of over $70 million. Indeed, there was no suggestion in the cross-examination of Li that anyone other than King Wong paid for such expenses.

150…Li has also given clear evidence that King Wong paid for the construction costs for the 11 houses of the Lot 868 Project in the total sum of over $70 million. No contrary case has been put to Li during cross-examination. There was some suggestion that Li did not prepare the Ledger Documents himself, but that alone cannot destroy the credibility of Li’s evidence. Li’s case is that the payment was made pursuant to a cooperation agreement with Franklin Li and Pu for this project. If Li had no interest in the Lot 868 Project, there would be no reason for King Wong to pay for the construction costs.”

15.  After concluding that Li was the beneficial owner of General-Lite Corp (see Judgment §§44-49, §§163-169 and §187), Lok J ordered that Pu re-transfer the sole share in General-Lite Corp back to Li.

16.  Upon regaining control of General-Lite Corp, Li was able to obtain certain financial documents of the Company, which led to further and repeated inquiries from Li to the Board of the Company. Li says these inquiries were met with “radio silence”.

17.  On 13 December 2021, Li (via General-Lite Corp) took out an application against the Company in HCMP 2113/2021 for production of records and documents relating to what Li considered highly suspicious transactions (“the Suspicious Transactions”) with regard to the Company, involving inter alia a series of bank and shareholder loans and the payment of purported management fees.

18.  The application for production was set against a backdrop where, a few months earlier (in September 2021) the Development had been sold for HK$280,000,000.00, with a significant part of the sale proceeds applied in purported repayment of shareholder loans allegedly owed to Innovest Group and Legend Times.

19.  The production application was resolved in Li’s favour, this time by DHCJ Au-Yeung (as he then was) in his judgment dated 7 October 2022 (“the Production Judgment”).

20.  The Production Judgment includes these factual findings:

“6. The factual matters which I set out below are undisputed or indisputable. ...

…

12. In around 2004, construction work for the Development began. The construction cost of the Development was funded partly by a construction loan and partly by King Wong Development Ltd (‘King Wong’), a company through which Bobby Li (and others) conducted property development business.

…

14. In relation to the funding from King Wong, King Wong has paid for the construction and renovation costs of the Development throughout the years in the total sum of over $70 million ($28.6 million as construction costs and $44.7 million as renovation costs).”

21.  The Plaintiffs allege that, despite the DHCJ Au-Yeung’s order for production, the Company has to date still refused to give full disclosure of documents related to the Suspicious Transactions.

22.  On 2 August 2023, the directors of the Company (i.e. Innovest Group and Legend Times) put the Company into voluntary liquidation pursuant to section 228A of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”), with FKL made provisional liquidator.

23.  On 10 August 2023, KWD Ltd filed the Preliminary Proof for voting purposes. Appended to the Preliminary Proof were an array of ledgers of KWD Ltd, which on its case had been contemporaneously prepared by its accounting staff over the years as records of the construction and renovation costs for the Development in those periods (“the Ledger Documents”). The total amount recorded in the Ledger Documents across the years 2006 to 2013 was HK$73,329,236.56.

24.  On 28 September 2023, one day before the creditors’ Meeting, FKL by letter of that date stated without further explanation that, having considered the information provided by KWD Ltd, the Debt was “wholly rejected”.

25.  The Meeting on 29 September 2023 was chaired by FKL. Li attended as proxy of KWD Ltd. At the Meeting, FKL inter alia:

(1)  refused to allow KWD Ltd to vote with reference to the Debt, stating without elaboration that the underlying documents did not support the Debt;

(2)  allowed Innovest Group and Legend Times to vote in respect of the full sum of their purported debts, in the respective amounts of HK$10,157,462.00 and HK$9,881,962.00; and

(3)  allowed General-Lite Corp to vote in respect of the full sum of its debt in the amount of HK$1,100,000.00, which arose out a costs order in favour of General-Lite Corp in the Production Judgment.

26.  On this basis, FKL was purportedly appointed liquidator of the Company.

27.  KWD Ltd subsequently received a letter from FKL dated 6 October 2023 enclosing a “Notice of Rejection of the Debt” dated 5 October 2023 (“the Notice”). The Notice states as follows:

“ Take notice that, as the Liquidator of the above-named company, I have this day rejected your claim concerning the alleged construction project in the sum of HK$73,329,236.56 against the company wholly, on the following grounds:-

(1) There is no Judgment or pending legal action against the Company supporting the alleged debts;

(2) There is no clear and sufficient evidence showing that the Company should be liable. For example, there is no written contract or relevant documents showing the Company could have obligations to pay or settle your claim;

(3) There is no proper explanation on how and why the Company should be liable. I have considered the USB containing enormous documents and all relevant information provided by you. However, there is no basis to infer that the Company should be liable;

(4) There is no records of the Company in the past years showing that this alleged debts ever existed.

And further take notice that subject to the power of the Court to extend the time, no application to reverse or vary my decision in rejecting your proof will be entertained after expiration of 21 days from this date.”

28.  This led to the filing of the original OS on 27 October 2023, which was replaced by the Amended OS on 9 November 2023.

C.  KEY PRINCIPLES

29.  I proceed on basis of the following undisputed legal principles for adjudicating a debt for voting purposes as summarised by Linda Chan J in Re Pan Sutong [2023] 5 HKLRD 337 at §29 (emphasised words mine):

“(1) The general scheme underlying the operation of the rule is that the chairman has power to admit or reject a proof, and his decision is subject to appeal. If in doubt, the chairman shall mark the vote as objected to and allow the creditor to vote. The chairman must look at the claim, if it is plain or obvious that it is good, he admits it, if it is plain or obvious that it is bad he rejects it, if there is a question or a doubt, he shall admit it but mark it as objected (Re Power Builders (Surrey) Ltd [2009] 1 BCLC250,§11, per Lewison J).

(2) The decision to admit or reject a proof for voting purposes at the first meeting of creditors is not a final determination of the creditor’s claim to prove in the liquidation (Re Days International Ltd [2014] 1 HKLRD 20, §9, per Harris J).

(3) An appeal under rule 99L is the mechanism by which an objection to a proof may be tested. What is at issue at this stage is the validity of the proof for the purposes of voting, not for the purposes of participating in a dividend. A subsequent meeting (or the liquidator) may take a different view of the validity of the proof (Re Power Builders,§13).

(4) On an appeal, the chairman’s decision may be reversed or varied without impugning the correctness of the chairman’s decision at the time of the meeting. In scrutinising the claim, the court is not confined to the material that was before the chairman. The court examines the evidence placed before it and comes to a conclusion whether, on balance, the claim against the company is established. In an appropriate case, resolution of the issue may depend upon oral evidence and cross-examination, but the issue remains the same (Re Power Builders, §§14-16).

(5) The court should undertake a broad, macroscopic assessment of the value at which the debt should be admitted. It cannot be sensible at the earliest stage of liquidation, 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 (Re Days, §10).

(6) If the creditor made out a clear prima facie case to support its contention that the amount claimed was due, it is for the party disputing the debt to put forward specific evidence or legal arguments as to why the whole or part of the amount claimed was not due (Revenue and Commissioners v Maxwell [2010] EWCA Civ 1379, §§65-67, per Lord Neuberger)”.

30.  While in Re Pan Sutong the Court was directly concerned with Rule 99L of the Bankruptcy Rules (Cap 6A), as noted at §28 of the judgment the same legal principles apply to the winding-up context.

31.  As the learned judge went on to hold at §31(5) of the same judgment, under Rule 99L (and again likewise in the winding-up context) what is a required is “a summary procedure” where the court “is to carry out a macroscopic review and assessment of the arguments and evidence adduced by the parties and decide whether the objection raised by the applicant is well-founded”.

D.  ASSESSMENT

32.  In my view, KWD Ltd was clearly entitled to vote at the Meeting with reference to the Debt.

33.  In particular, on a broad macroscopic summary assessment, the Debt for the purposes of KWD Ltd’s entitlement to vote as a creditor is amply established given:

(1)  The judicial findings noted in Section B above, namely those in the 2019 Judgment and the Production Judgment regarding KWD Ltd’s substantial funding of the costs of the Development, and in particular Lok J’s evident acceptance of the credibility of Li’s case as to the both the payments made by KWD Ltd for the construction costs, and the reason for those payments – i.e. “a cooperation agreement with Franklin Li and Pu for this project”: 2019 Judgment §148, §150.

(2)  The contemporaneous evidence identified by KWD Ltd in support of the Amended OS, including (a) the Ledger Documents, (b) a range of accounting vouchers and receipts collected by KWD Ltd (“the Voucher Documents”) which indicate, at least facially, that KWD Ltd did indeed make substantial construction and renovation payments in relation to the Development, and (c) the reflection of the amounts recorded in the Ledger and Voucher Documents in underlying accounting documents which appear to have been contemporaneously prepared by KWD Ltd when the Debt was incurred.

34.  The foregoing readily supports KWD Ltd’s stance that it made substantial payments for the construction of the Development, and that the making of such payments in turn supports the likely existence of the Alleged Funding Agreement.

35.  At the least, it cannot be said in the light of the above that the Debt is so plainly and obviously bad that it should be rejected out of hand, and KWD Ltd precluded from voting as a creditor. In coming to this view, I have taken into account the points raised by and on behalf of FKL in opposition to the Amended OS, which do not in my assessment come close to displacing this core conclusion.

36.  The Debt should therefore have been admitted at the Meeting.

37.  As the Debt would undisputedly have overtopped all other votes, FKL’s appointment can be set aside on this basis. It is in the circumstances unnecessary for me to decide whether, as the Plaintiffs contend, the 3^rd and 4^th Defendants were in fact not entitled to vote on the appointment of FKL.

E.  RELIEF

38.  For the above reasons, and having considered the parties’ submissions on the appropriate relief to be granted on the footing that the Debt should have been admitted at the Meeting, I will grant the following relief as sought in the Amended OS (using the abbreviations applied throughout this Decision):

(1)  A declaration that (a) KWD Ltd was entitled to vote at the Meeting, and is entitled to do so at all future creditors’ meetings of the Company in respect of the Debt, and (b) the rejection of the Preliminary Proof for voting purposes by way of letter dated 28 September 2023 and/or at the Meeting was invalid.

(2)  A declaration that FKL’s rejection of the Preliminary Proof by the Notice is void and invalid.

(3)  An order that the resolution passed at the Meeting to appoint FKL as liquidator of the Company be set aside.

(4)  An order that Mr Sung Lee Ming Alfred of 14/F, Lockhart Centre, 301-307 Lockhart Road, Wan Chai, Hong Kong be appointed as liquidator of the Company.

(5)  Costs of the application be paid by the Defendants to the Plaintiffs to be taxed if not agreed, with certificate for two counsel.

39.  For the avoidance of doubt, any costs payable in relation to FKL’s position should be paid out of the assets of the Company rather than by him personally.