ALLIED WELI DEVELOPMENT LTD (In Liquidation) AND ANOTHER v. CHUANG YUE CHIEN, EUGENE AND OTHERS

CAMP 114/2021

[2021] HKCA 1126

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 114 OF 2021

(ON AN INTENDED APPEAL FROM HCA NO 57 OF 2018)

________________________

________________________

J U D G M E N T

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Hon Yuen JA:

1.1.  This is an application by the 1^st defendant in HCA57/2018 for leave to appeal the decision of DHCJ Le Pichon (“the judge”)  given on 27 October 2020 (“the Decision”)  dismissing his application filed on 29 July 2019 for an order setting aside Master G Chan’s order made on 31 December 2018 renewing the validity of the writ in the above action[1] until 8 January 2020.

1.2  On 30 March 2021, the judge refused leave to appeal for reasons given in a written decision (“the Leave Decision”). 

1.3  On 13 April 2021, the 1^st defendant made an application to the Court of Appeal for leave to appeal.  Written submissions were filed.  Pursuant to Order 59 rule 14A Rules of the High Court, this court considered it appropriate to determine the application without a hearing on the basis of written submissions only. 

Background

2.  Very briefly, the background to this application is as follows.

3.1.  Allied Weli Development Ltd (“the Company”)  was incorporated in the BVI and registered as a non-Hong Kong company in Hong Kong[2].  It was part of a group of companies (some of which were listed)  which provided securities brokerage, fund management, property holding, investment advisory and consultancy services in Hong Kong.  From 1996 to 2009, the 1^st defendant was its permanent managing director.  He was beneficially interested in it for a period of time[3] after he ceased to be a director.

3.2.  In June 2011, a company called Penta Investment Advisers Ltd (“Penta”)  subscribed for new shares offered by a company in the Company’s group in an IPO underwritten by another company in the group.  The Company signed a Deed of Guarantee in favour of Penta. 

Demand by Penta against the Company

4.1.  In January 2012, Penta made a demand on the Company for a sum under the Deed of Guarantee.  The Company however denied that it was bound by the Deed.

4.2.  Shortly thereafter, between March and May 2012, the Company participated in a group reorganization, and the Company apparently divested itself of its assets by means of (a)  in specie distribution of dividend, (b)  transfer of assets including property, plant and equipment, and deposits, and (c)  assignments of receivables due to it. 

4.3.  It is alleged by the liquidators of the Company that as a result, the Company reduced its total equity from net assets of $2.86 billion as at 31 March 2012 to net liabilities of $156,436 as at 31 March 2013[4].

Proceedings by Penta

5.1.  In September 2012, Penta issued proceedings against the Company in HCA1656/2012.

5.2.  On 14 October 2014, Penta obtained judgment against the Company.  On 21 January 2015, damages were assessed at around $210 million. 

5.3.  On 23 July 2015, the Company’s appeals against liability and quantum (CACV222/2014 and CACV35/2015)  were dismissed by the Court of Appeal[5].  Reasons were given on 18 August 2015.  The court refused leave to appeal to the Court of Final Appeal on 11 December 2015.

6.1.  On 24 July 2015, Penta issued a statutory demand against the Company in the sum of around $234 million being the judgment debt together with interest.  The statutory demand was not satisfied. 

6.2.  On 29 October 2015, Penta presented a petition to wind-up the Company in HCCW337/2015.

7.  In the meantime (in August 2015), the Company moved its place of registration to the Marshall Islands, and the conduct of the Company’s management and business was moved to Taiwan and/or the Marshall Islands[6]. 

Winding-up Order

8.1.  On 22 February 2016, Harris J wound up the Company for reasons set out in a Decision of the same date. 

8.2.  On 11 July 2017, the Company’s appeal from the winding-up order (CACV58/2016)  was dismissed by the Court of Appeal[7].

Appointment of Liquidators

9.1.  In the meantime, on 8 July 2016, liquidators were appointed. However, they were not provided with any books or records of the Company.  When their staff visited the Company’s principal place of business, the staff there claimed that the Company had never operated from that address, and the liquidators’ staff were escorted out by security personnel[8].

9.2.  The liquidators had to seek information about the Company and its activities from public records and the media.  They also wrote to a number of former directors of the Company (including the 1^st defendant)  asking for books and records of the Company in their custody.  They also asked them to provide statements of affairs, and sought responses to questionnaires prepared by the liquidators.  The liquidators also requested interviews with the former directors.  However, assistance was not forthcoming[9].

9.3.  In April 2017 however, the Company’s former auditors Jonten Hopkins (“JH”)  did provide the liquidators with the audited accounts and audit papers of the Company from 2011 to 2014[10].

Protective Writ

10.1.  At the end of 2017, the liquidators filed two writs (HCA2995/2017 and HCA2996/2017)  “to preserve potentially valuable claims while their investigations continued”[11].

10.2.  On 9 January 2018, the liquidators filed another writ in HCA57/2018 (“the Protective Writ”)  which consolidated further claims and defendants[12] with those in the 2017 writs. 

10.3.  The Indorsement of Claim in the Protective Writ includes claims for loss and damages, equitable compensation, accounts or inquiries, and restitution against the 1^st - 16^th defendants for breach of contract, breach of fiduciary duty (among other duties), and conspiracy etc, arising out of the execution and non-performance of the Deed of Guarantee, the reorganization and the apparent divesting of assets by the Company shortly after Penta’s demand under the Deed of Guarantee, the preparation of the Company’s financial statements for the years ended 31 March 2012-2014, fraudulent preference, and breach of statute etc.

10.4.  The claims against the other defendants were similar, except that they did not include claims relating to the preparation of the Company’s financial statements.

10.5.  The Protective Writ was intentionally not served on any defendants.   

Application under s.286B etc

11.1.  A few months later on 29 June 2018, the liquidators issued an application under s.286B[13] and s.286C of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance Cap.32, against eight individuals (including the 1^st defendant)  and a firm of solicitors, for an order for examination and provision of information.  This application was opposed. 

11.2.  It was heard by Recorder Jason Pow SC between March and September 2019. 

11.3.  According to the court file, the Recorder handed down judgment on 12 May 2021, and orders were made against all respondents (except for one who died during the period between hearing and judgment). 

Orders extending validity of the writ

12.1.  On 31 December 2018, on the liquidators’ ex parte application, Master G Chan gave an order renewing the writ for 12 months from 9 January 2019 (“the 1^st extension order”).  This was the order which the 1^st defendant sought to set aside in the summons referred to in para. 13 below.

12.2.  With the passage of time, two further extension orders were made, one on 31 December 2019 by Master D Ho renewing the writ for 12 months from 9 January 2020 (“the 2^nd extension order”), and the other on 25 January 2021 by Master J Wong further renewing the writ for 12 months from 9 January 2021 (“the 3^rd extension order”). 

1^st defendant’s application to set aside

13.  Meanwhile on 29 July 2019, the 1^st defendant applied by summons for an order to set aside the 1^st extension order.  The following grounds were set out in the summons:

“(1)  As at 31 December 2018, the Plaintiffs had failed to provide good reasons for the Court to extend the validity of the Writ until 8 January 2020[14].

(2)  The plaintiffs’ ex parte application for the Order incorporated material falsehoods and/or material non-disclosures concerning the 1^st Defendant”.

(Emphasis added).

The judge’s Decision

14.  The judge rejected both grounds advanced by the 1^st defendant.  She first set out[15], and then addressed, the ground that no good reasons had been provided for the grant of the 1^st and/or 2^nd extension orders[16], and secondly, the ground of material non-disclosure[17].

Application for leave to appeal

15.1.  The 1^st defendant first applied to the judge for leave to appeal.  This was refused for the reasons given in the Leave Decision.

15.2.  The 1^st defendant then applied to the Court of Appeal for leave to appeal.

Discussion

The Law

16.1.  It is well-established that leave to appeal may be granted if the court is satisfied that (a)  the appeal has a reasonable prospect of success, or (b)  there is some other reason in the interests of justice why the appeal should be heard. 

16.2.  As for (a), it is not enough that the appeal is arguable or not fanciful, as the applicant must show that he has reasonable (though not necessarily probable)  prospects of success.  As for (b), the applicant must show that there is an issue of considerable public importance for the court to exercise its discretion to grant leave. 

17.1.  The law regarding the exercise of the power to extend the validity of a writ was clearly set out by the House of Lords in Kleinwort Benson Ltd v Barbrak Ltd[18] and adopted by this court[19] in Chow Ching Man and others v Sun Wah Ornament Manufactory Ltd and others[20]. 

17.2.  The rule governing the exercise of that power (Order 6 rule 8(2)[21] of the Rules of the High Court)  should be construed on a 2-stage approach.  At stage 1, the court must be satisfied that there is good reason to extend time; if this stage is passed, then at stage 2, the court exercises its discretion considering all relevant circumstances, including prejudice and hardship.  The 2-stage approach was set out in detail in the 1^st defendant’s skeleton submissions before the judge[22]. 

17.3.  However in Chow Ching Man, Bokhary JA[23] recognized that “there can be a degree of overlap between the two stages. ... such overlap does not undermine the two-stage approach.  It merely shows that the two stages are not watertight compartments for all purposes”[24], and Liu JA quoted the following passage from Lewis v Harewood[25]:

“Matters relevant at stage two are not, however, irrelevant at stage one. There is a degree of overlap, and a judge addressing the inquiry at stage one is entitled and bound to take into account any matters which appear to him to be relevant to the issues of good reason and satisfactory explanation, notwithstanding that the same matters will also be relevant (assuming it arises at all)  to the exercise of his discretion at stage two”.

17.4.  The reference to “satisfactory explanation” in the above quotation applies only to applicants who only applied for extension after the writ has ceased to be valid and the limitation period has expired, what Lord Brandon termed Category (3)  cases in Kleinwort Benson[26].  This is not our case.

17.5.  Category (1)  cases are where the application for extension is made when the writ is still valid and before the limitation period has expired[27].  Category (2)  cases are where the application for extension is made when the writ is still valid, but the limitation period has expired[28]. 

17.6.  In our case, the Deed of Guarantee was executed by the Company in June 2011 and the reorganization and divesting transactions took place in March - May 2012. Assuming a 6-year limitation period, the cause of action relating to the execution of the Deed of Guarantee would have been statute-barred in June 2017 and that relating to the reorganization and divesting transactions would have been statute-barred in March-May 2018.  So on that scenario, this case would fall within Category (2), hence the discussion of the limitation defence in Batchelor I.  

Proposed grounds of appeal

18.  Coming to the proposed grounds of appeal, grounds (1)  - (4)  can be conveniently discussed together.  The 1^st defendant submits in these grounds that the judge had failed to follow and apply the law as stated in Chow Ching Man, had incorrectly placed the burden on him, failed “to recognize the court’s lack of jurisdiction to grant an extension order which would permit the prolongation of the plaintiffs’ existing abuses of the court’s processes (including their warehousing of their speculative Writ in order to permit them to search for a fraud case not known to exist)”[29], and failed to recognize that the plaintiffs did not have adequate reasons for seeking an extension.    

19.1.  As for ground (1), the judge was clearly aware of the law.  The 2-stage approach in Chow Ching Man was set out extensively in the submissions before the judge.  The judge must also have read Kleinwort Benson in detail as she quoted passages from that authority in the Decision[30] which had not been cited in either Chow Ching Man or China Medical Technologies Inc (in liquidation)  v Bank of China (Hong Kong)  Ltd[31](the latter case having been heavily relied on in the 1^st defendant’s submissions)[32].

19.2.  In ground (1)  itself, the 1^st defendant has not set out why he says the judge had failed to apply the law.  On the contrary, it is clear that the judge was well aware of the need for good reason before the court could exercise its power to grant an extension.  The judge listed the challenges faced by the liquidators in §54 of the Decision, and held[33] that faced with those challenges, and before the conclusion of the s.286B application, the liquidators did not have sufficient information to proceed with the claims at the time, constituting good reason giving the court jurisdiction to extend time.  

20.  As for ground (2), there is nothing in the Decision which showed that the judge had placed the burden on the 1^st defendant.  It is unfair for the 1^st defendant to criticize the judge for “adopting a reverse-onus analysis” when what the judge did was directly engaging with the points that he had specifically raised in his summons.

21.  As for grounds (3)  and (4), the 1^st defendant is in effect challenging the judge’s finding that there was good reason giving the court jurisdiction to extend time.  He emphasized the expiry of the limitation period, but that was an issue of which the judge was explicitly aware[34].  The judge was also aware of the 1^st defendant’s allegation of “warehousing” of litigation and of his criticism of the plaintiffs’ conduct in searching for a case of fraud and dishonesty which the 1^st defendant says is not known to exist[35].  In this connection, the judge considered the evidence listed in §66 of the Decision before holding that this evidence demonstrated the liquidators’ need to look beyond the de jure directors for light to be shed on the circumstances in which the Company divested itself of $2.86 billion of assets.  The 1^st defendant has not suggested that the judge had misapprehended any material fact in that list.  This was cogent evidence which the judge was entitled to consider as constituting good reason giving the court jurisdiction to extend time for the liquidators to renew the validity of the Protective Writ.  Grounds (3)  and (4)  must therefore be rejected.

22.1.  In ground (5), the 1^st defendant submits that the judge had treated the application for extension as if it were an application by liquidators to the companies court judge for directions, and that HCA57/2018 was ordinary hostile litigation in which the court should not favour liquidators.

22.2.  There is nothing in the Decision which indicates that the judge was treating the application as if it were an application by liquidators for directions.  As discussed earlier, the judge was well aware of the need to be satisfied that there was good reason giving the court jurisdiction to extend time for the validity of the Protective Writ to be renewed.  But the judge was not (and should not be)  blind to (1)  the fact that the 1^st plaintiff was a company in liquidation, (2)  the evidence that the liquidators had not been provided with the Company’s books and records, and (3)  the evidence that assistance from the former directors had not been forthcoming.  As the House of Lords held in Kleinwort Benson, whether there was good reason to exercise the power to extend the validity of a writ depended on all the circumstances of the particular case[36].

23.  1.  In ground (6), the 1^st defendant submits in effect that the judge was wrong to have distinguished the present case from China Medical Technologies, where this court[37] dismissed an appeal from Au-Yeung J who had refused to renew a writ against a bank after Harris J the companies judge had decided (in a substantially overlapping matter)  that liquidators already had enough information to make an informed decision as to whether to proceed with the claim against the bank.

23.2.  As the judge rightly held, the passages in China Medical Technologies relied on by the 1^st defendant “cannot be applied in a vacuum, devoid of context”[38].  In that case, Harris J had already dismissed the liquidators’ s.221 application as he found they did not need any more information.  After reviewing the evidence, Au-Yeung J came to the same conclusion. 

23.3.  In contrast, in the present case, the liquidators were faced with the fact that there was a drastic downturn in the Company’s fortunes shortly after the creditor’s demand, but they had insufficient information about the reasons for the transactions leading to that downturn due to the absence of cooperation from the former directors, whether de jure or de facto[39].  The judge also noted that if the liquidators had enough information, they would not have needed to have embarked on the s.286B application[40], a costly and time-consuming exercise in face of opposition from the respondents.

23.4.  As events transpired, the orders sought in that application have since been granted by Recorder Pow, meaning that the Recorder was satisfied that the information sought was reasonably required by the liquidators.  This corroborates the judge’s decision in the present case that the facts here point to a different result from that in China Medical Technologies.

24.1.  In ground (7), the 1^st defendant submits that having decided that the court did have jurisdiction to exercise the power to extend the validity of the writ, the judge erred in failing to address or exercise the discretion by failing to assess and decide the balance of hardship between the plaintiffs and the 1^st defendant. 

24.2.  This ground should be rejected.  First, it is worth noting that the 1^st defendant’s summons[41] sought an order to set aside the extension on the specific ground that the plaintiffs “had failed to provide good reasons for the court to extend the validity of the writ” (emphasis added), which is an explicit reference to only stage 1 in the two-stage approach.  There was no reference at all to stage 2.  The skeleton argument before the judge confirms this was the subject matter of this part of the summons[42]. 

24.3.  Secondly, this court has not been taken to any evidence before the judge of any specific hardship that has been suffered by the 1^st defendant[43].  In ground (7), the 1^st defendant relies on the time taken by the petitioning creditor and the liquidators and the alleged “litigation misconduct by ... abuses of processes”.  These arguments were considered and rightly rejected by the judge at §§41-43 of the Decision.  The judge was also aware of the limitation defence, recognizing that this was a Category (2)  case but deciding in the exercise of the court’s discretion that an extension was appropriate[44].  As for the general hardship that comes with having a writ being issued but not served on an individual, the judge noted in the Leave Decision that it was one of several factors that the court had taken into account in the balancing exercise performed when deciding whether to exercise its discretion[45].

25.1.  Finally, in ground (8), the 1^st defendant submits that the plaintiffs had “concealed” matters material to the effect on him individually of an order extending the validity of the writ.

25.2.  The judge discussed the 1^st defendant’s submissions of the plaintiffs’ failure to disclose the speculative nature of the claim against him in §§64-69 of the Decision.  In particular, the judge took into account the 1^st defendant’s “fingerprints” in the Company’s dealings.  These included the fact that in July 2012, well after he ceased to be a director of the Company, the 1^st defendant actually offered to compensate Penta[46]. 

25.3.  The 1^st defendant also submits that the plaintiffs had failed to disclose to the master that an extension of 12 months would not have been sufficient.  However, it should be noted first, that O.6 r.8(2)  does not permit extension for a period of more than 12 months, but does not prohibit successive extensions.  Secondly, as the judge correctly noted, that submission is only made with the benefit of hindsight, and matters such as the court’s diary was not within the plaintiffs’ control[47]. 

25.4.  As for the limitation defence, it is correct that the liquidators did not identify in Batchelor I the period referable to the 1^st defendant individually, but what the liquidators had done was to draw the court’s attention to the various limitation periods referable to the reorganization and divesting transactions[48] from which claims for breach of duty, constructive trust, conspiracy etc would flow[49], the execution of the Deed of Guarantee, withdrawals from bank accounts and provision of letters of support[50], and fraudulent preference[51].  The liquidators frankly admitted that they were not yet in a position to particularize precisely which claims may be asserted against each specific defendant[52], but in light of the evidence regarding the lack of books and records, the 1^st defendant’s “fingerprints” in the Company’s dealings well after he ceased to be a director, and the former directors’ lack of cooperation, the judge was entitled to conclude that there had been no material non-disclosure by the plaintiffs on the impact of the extension on the limitation defence of the 1^st defendant individually.    

26.  For the above reasons, I cannot see any of the proposed grounds of appeal having a reasonable prospect of success.  Further the 1^st defendant’s contention that the appeal should be heard in the interests of justice is essentially a rehash of some of those grounds.  I do not see how the interests of justice would be served in the court hearing such an appeal.

Order

27.1.  I would refuse the 1^st defendant’s application for leave to appeal with costs to the plaintiffs.  The plaintiffs’ statement of costs is reasonable save for the claim of 3.5 hours by the solicitors for the preparation of documents. I would summarily assess the costs at $79,000.

27.2.  As the application was totally without merit, I would make an order under O.59 r.2A(8)  of the Rules of the High Court that no party may request the determination to be reconsidered at an oral hearing inter partes. 

Hon Chow JA:

28.  I agree.