WONG SUN KEUNG AND ANOTHER v. LABOUR BUILDINGS LTD AND OTHERS

HCMP2544/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2544 OF 2009

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REASONS  FOR  DECISION

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1. This is an application by the plaintiffs in the capacity of the receivers of the property situated at No. 11 Changsha Street, Mongkok, Kowloon, Hong Kong (Kowloon Inland Lot No. 7339) (“the Property”).  In short, the plaintiffs want to trace the assets of the 1^st defendant (“LBL”) and defend LBL in the winding up proceedings in HCCW721/2009.  On 22 January 2010, I granted the application with costs to be paid out of the assets of LBL.  I will set out my reasons therefor herein below.  

Background

2. By a debenture dated 8 April 2008 made between LBL and the 3^rd defendant (“Winland”), Winland agreed to provide credit facility of up to $104,000,000 and LBL agreed, inter alia, to have a legal charge entered in favour of Winland on the Property.  Sections 10, 11 and 12 of the debenture further provided that Winland can appoint a receiver when LBL defaults.  The receivership can subsist as long as LBL is in default of :

“… any principal, interest, arrangement fee, Commitment Fees or any other sum payable hereunder or on any account whatsoever between the Borrower [LBL] and the Lender [Winland] on the date on which the same is due and payable hereunder or thereunder, or in the case of any sum expressed to be payable on demand, forthwith of such demand for the payment thereof being made.”

3. By a deed made on 10 July 2009, LBL, Winland, China States Limited (“China States”) as transferor of a hotel licence (H3334) and a Madam Lin Pai Ching (“Lin”) as attorney for China States, agreed to perform a series of transactions in the hope of discharging the legal charge in favour of Winland on the Property and to enable LBL to sell and give good title in the Property to the 2^nd defendant (“Star Rainbow”).  Star Rainbow was also the designated transferee of the hotel licence under the deed.  Under the Provisional Agreement for sale and purchase, LBL was the vendor and Star Rainbow was the purchaser of the Property.  The purchase price was $147,000,000 and after a series of deductions (including the legal fee payable to Messrs David W.T. Chan & Co., who act for LBL), $133,830,000 was made payable to Winland.

The issue

4. The primary issue is whether LBL is indebted towards Winland as of the date of hearing.  None of the parties challenged the authority of the receivers in performing the acts sought in the application.  Therefore, if LBL is indebted towards Winland, it follows that the receivers have the necessary power to perform those acts sought in this application under the debenture whenever it is necessary to do so.

5. Under the agreement dated 7 August 2008, clause 10.3 provided that LBL should repay the principal ($104,000,000) and the interest ($2,080,000 x 4) before 7 December 2008.  Clause 5.2 further provided that the interest accrued on any sum not being paid on the due date shall be 4% per month on the basis of a 30-day month.

6. The plaintiffs submitted that LBL still owed $26,262,101 towards Winland as on 17 December 2009.   It is regrettable that neither Mr William Wong, counsel for the plaintiffs nor the receivers provided any formula as to the calculation for that amount.  Mr Wong further submitted that even if LBL were to be believed and that interest should be taken as 2% (instead of 4%, which the plaintiffs maintain) LBL would still owe Winland some money.  Again Mr Wong did not provide any formula to support that contention. 

7. Although the extent of the outstanding amount is not the primary issue, it is nevertheless important for the plaintiffs to establish that LBL is indeed indebted towards Winland.  I am surprised that neither Mr Wong nor the plaintiffs (in their First Report) made any effort to support their calculation.  However I am satisfied that even by the most generous formula, LBL still owes some money to Winland.

8. As on 7 December 2008, LBL was liable to pay Winland $112,320,000 (page 3 of the agreement dated 7 August 2008).  Winland received $150,000 and $100,000 as partial interest on 16 December 2008 and 29 May 2009 (respectively) and will receive $133,830,000 from the sale of the Property to Star Rainbow.  This leaves ($133,830,000 + $150,000 + $100,000 – $112,320,000) $21,760,000 for the repayment of interest accrued from 7 December 2008 to 17 December 2009.  Excluding 7 December 2008 but including 17 December 2009, there were 374 days during this period.  Ignoring the effect of compounding interest, the total interest payable for the principal under a 2% interest rate would be ($104,000,000 x 2% x 374/30) $25,930,666.67, which is larger than the residual amount of $21,760,000 calculated above.

9. Therefore prima facie LBL was indebted to Winland as on 17 December 2009, although the exact amount has not been fully determined at this stage. 

10. Mr David Chan, solicitor acting for the 1^st defendant, contended that Winland had at various points given up the outstanding amount in the $104,000,000 loan.   Reliance was sought from clause 13 of the deed dated 10 July 2009 to prove that Winland was willing to accept $133,830,000 as full and final settlement of all claims under the $104,000,000 loan.  That clause provides “Winland covenants and agrees that it shall not make any claims for any monies received by LBL in any legal action arising from or pertaining to the YH SP Agreement.”  The “YH SP Agreement” arose from a previously unsuccessful attempt to sell the Property.  However clause 6 expressly provides that :

“Nothing herein contained shall prejudice each of the parties’ rights against others or any of them from any other liabilities that it may have apart from receipt of the payment of the sums contained in clause 3 herein.”,

I therefore do not give weight to this part of Mr Chan’s submission.

11. Accordingly I hold that LBL was still indebted to Winland as of the date of hearing.  The receivers have been properly appointed and it has the necessary power under the debenture dated 8 April 2008 to carry the acts sought in the application.

Real issues to be investigated

12. Although this is not strictly necessary to the determination of the current application, I would add that there are real issues that the receivers should inquire.  From the “First Report of Receivers”, paras. 18 to 23 of Section B suggest that important assets in LBL had been transferred to other companies and that there were only a few thousand dollars in LBL bank accounts.

13. Another irregularity is the representation of LBL by Mr Chan, whose firm Messers David W.T. Chan & Co. is entitled to $2,000,000 as legal costs under the deed made on 10 July 2009.  Thus this firm became a creditor of LBL.  There is apparently a conflict of interest between Mr Chan and LBL.  His representation in the proceedings that led to the winding up petition of LBL should be scrutinised.

Conclusion

14. I have found that even by the most generous formula to LBL, there is still money owed by LBL under the loan agreement.  The exact amount of unpaid interest remains to be identified, but for the purpose of this application it is enough that LBL owes some money.  Once there is a debt, it necessarily follows that the Receivers have been properly appointed.  There is no dispute as to whether the Receivers are entitled to those powers sought in this application under the debenture. 

15. I am also of the view that there are real and substantial issues that call for investigation.  The alleged diversion of valuable assets away from LBL, coupled with the representation by Mr Chan, are issues that can significantly affect the ability of LBL in meeting its liability.  I cannot see how the other judgment creditors can be adversely affected by an inquiry to these important issues.