KOO SZU HUNG v. CHANG CHING HSIN AND ANOTHER

HCCW 439/2021

[2025] HKCFI 620

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 439 OF 2021

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D E C I S I O N

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I. Introduction and Background

1.  This is an application by the 1^st Respondent, Chang Ching Hsin (“Chang”), a director of the 2^nd Respondent, T.D.C. Group (H.K.) Co. Limited (the “Company”), for a validation order under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (the “CO”).  The application seeks to validate retrospectively payments made to Chang since the presentation of the Petition as remuneration for his services to the Company.  The Petitioner, Koo Szu Hung (“Koo”), strongly opposes the application on the grounds that, in essence, Chang was never an employee of the Company and that the payments were not legitimate business expenses but rather an abuse of Chang’s position as a director to siphon off company funds.

2.  On 7 October 2022, a validation order was made by Linda Chan J by consent (the “October 2022 Order”), allowing the Company to continue making payments in the ordinary course of business.  At the hearing of the 2^nd CMC of the Petition on 31 January 2024, however, in the light of complaints raised by Koo, her Ladyship, inter alia, clarified that the October 2022 Order excluded Chang’s remuneration, but that he would be at liberty to apply for a validation order in respect of the same.  This clarification then led to Chang’s present application by Summons dated 31 May 2024. 

3.  At the outset, I bear in mind the observation made by Anthony Chan J in Re Asia Fortune Media Group Limited (unreported), HCCW 227/2015, 27 August 2015 at §15 that an application for a validation order should not be treated as full blown satellite litigation and should not normally be approached as an adversarial application: see also Re Emagist Entertainment Ltd [2012] 5 HKLRD 703 at §7 and Chan Mei Chun v K & A International Co Ltd & Anor (unreported) HCCW 317/2013, 27 November 2013 at §6. 

4.  Neither of the parties seriously disputed that this was the correct approach, and therefore, I do not intend to recite in detail in this Decision each of the arguments raised in the parties’ lengthy skeleton arguments, which I have considered. 

5.  In short, the Company was incorporated in Hong Kong and has offices in Hong Kong and Shenzhen.  Messrs Chang and Koo have been the only directors and shareholders of the Company since 2003, with Koo holding 53.5% of the shares and Chang holding 46.5%.

6.  The Company is (or was – see below) primarily engaged as a trading company and sourcing agent of a related company known as TDC USA Inc. and to serve American customers referred to the Company by the latter.  Prior to 2019, the Company had around 8 employees in its Hong Kong office and 13-15 employees in its Shenzhen office.  Since 2019, the number of staff in the Hong Kong office has been reduced to 3, including Chang.

7.  The relationship between Koo and Chang began to deteriorate around 2016.  Koo alleges that Chang wrongfully marginalised him from the Company’s management since 2016 and took control of the Company’s operations.  Koo further alleges that Chang engaged in various acts of mismanagement, including unauthorised use and withdrawals of funds from the Company and refusal to recognise certain invoices properly issued by TDC USA Inc., which then led to disagreements as to the Company’s financial statements.

8.  On 22 November 2021, Koo presented the petition to wind up the Company on the just and equitable ground. 

II. Applicable Principles

9.  The relevant principles are not in serious dispute.  Section 182 of the CO provides that any disposition of a company’s property made after the presentation of a winding-up petition is void unless the court orders otherwise.  The court has a discretion to grant a validation order if it is satisfied that the disposition is in the ordinary course of business and in the interests of the company.

10.  For a solvent company, the responsibility of managing its business is entrusted to its directors.  In a contributory’s petition, if (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company’s constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are which the court considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company.  See e.g. Re Raising Engineering Limited (unreported) HCCW 318/2014, 29 May 2015 at §3, citing Re Burton v Deakin [1977] 1 WLR 390 at 397G-H.  As Kwan J (as she then was) rightly observed in Re Wah Ying Cheong Company Limited (unreported) HCCW 225/1996, 14 March 2003, at §25, it is not the function of the Court in such circumstances to act as the company’s “de facto financial controller”.

11.  In relation to directors’ remuneration, if a director is carrying on the business of the company and providing services to the company, it would in general be appropriate to validate payments of their salaries or remuneration: see e.g. Re Mi Fung Beads Company Limited (unreported)HCCW 224/2004, 19 April 2004 at §25 per Barma J (as he then was). I would note in that case, however, that the company was on the evidence not only solvent but trading profitably (see §25).

12.  Similarly, in Re Everglory Energy Limited (unreported) HCCW 198/2016, 20 July 2016, Anthony Chan J noted at §16 that the Court could “…see no proper reason to exclude [director’s remuneration] from the scope of the validation order given the evidence that he is the only director managing the Company”. Again, the company in that case was not only solvent but had an ongoing business (see §7).

III. The Parties’ Positions

13.  In short, Chang’s position is that:

(1)  Although there is no written employment contract, he has been an employee of the Company since 2002 and has been receiving a monthly salary of HK$130,800 since 2011, with double pay in December, for his services as managing director.  He relies on a series of contemporaneous documents, including tax returns, MPF records, and letters to the Immigration Department to support his claim that he was employed by the Company.

(2)  The Company has continued to operate and generate income despite the winding-up petition, and that he has continued to perform his duties as managing director, including negotiating with clients, dealing with the Inland Revenue Department (IRD), and seeking new business opportunities.  He argues that the payments he has received since the presentation of the petition are thus in the ordinary course of business and in the interests of the Company.

(3)  Koo was aware of and did not object to his remuneration for many years.  He points to the Company’s audited financial statements, which were signed by Koo and recorded Chang’s remuneration as “director’s remuneration”.  Chang has also been paying salaries tax for the amounts he has received.

14.  On the other hand, Koo disputes Chang’s claim that he was an employee of the Company.  He argues that Chang’s remuneration was director’s remuneration, not salary, and that Chang was not entitled to pay himself without proper approval under the Company’s articles of association.  Koo relies on the fact that the Company had written employment contracts for its other employees, but no such contract exists for Chang.

15.  Koo further alleges that:

(1)  Chang has been abusing his position as a director to siphon off company funds, including by paying his wife, Madam Lydia Wang, a purported salary from the Company’s Shenzhen office.  Koo argues that Chang’s claim to be an employee is a recent fabrication, advanced only after Koo made it clear that Chang was not entitled to pay himself director’s remuneration without proper approval.

(2)  Koo also points to the fact that Chang’s solicitors initially argued that he was entitled to director’s remuneration, not salary, and only changed their position after Koo objected to the payments.  Koo argues that this shift in position is evidence that Chang’s claim to be an employee is an afterthought.

(3)  Koo further contends that Chang has been stalling the proceedings to prolong his control over the Company and continue making payments to himself and his associates.  He points to Chang’s refusal to sign the certificate of solvency, despite the Company being solvent, as evidence of his delaying tactics.

IV. Discussion

16.  As can be seen above, one of the primary issues in contention between the parties was whether Chang was an employee of the Company and therefore entitled to receive a salary, or whether his remuneration was merely director’s fees.  The significance of Chang’s status as an employee, if correct, is that his entitlement to salary would be contractual and he would be entitled to the protections of the Employment Ordinance (Cap 57) (“EO”), including the payment of wages until he has been duly terminated.

17.  As mentioned above, Chang has exhibited considerable contemporaneous documentary evidence dating back to the time he first joined the Company in late 2002 or early 2003, referring to Chang as being employed by the Company and receiving a monthly salary.  Ms Elizabeth Cheung[1], counsel for Koo, submits, however, that such references “…are the result of the loose and technically incorrect use of labels, with the terms “director’s fees” and “salary” having been used interchangeably by the Company’s clerical staff”. 

18.  Given the factual nature of the dispute, I do not think it right to form any concluded view as to whether Chang was an employee and whether his remuneration were salary or wages within the meaning of the EO.  These are issues (if at all) for trial of the petition.

19.  However, the indisputable fact of the matter is that Chang has been for many years been receiving a monthly remuneration for his services as a director of the Company. As mentioned above, Chang had been receiving his present level of remuneration, namely, HK$130,800 a month (with year-end double pay), since 2011.  Such payments were duly recorded in the Company’s audited financial statements.  Indeed, as Ms Cheung accepts, Koo and his legal representatives were well aware of such payments when he consented to the October 2022 Order.  Further, paragraph 6 of the Order provided the usual direction that Chang provide to Koo’s solicitors a schedule recording all payments made in the preceding calendar month 5 days after the end of the month.  Although there had been some grumbling from Koo’s solicitors concerning Chang’s continued remuneration in subsequent correspondence, it was not until the hearing in January 2024 that the matter was ventilated to the Court.

20.  While Ms Cheung disputes the precise nature of these payments, in my judgment, that does not obviate the payments as being made in the ordinary course of the Company’s business even after the presentation of the Petition, or that they were likely to injure the Company whilst the Company was still active. 

21.  Ms Cheung emphasised in her submissions Koo’s complaints of Chang’s mismanagement and misfeasance as set out in the petition.  These are of course disputed by Chang, and even taking them to their highest, I do not think that they are sufficient to deprive Chang of his remuneration for the purposes of section 182 of the CO. It seems to me that such disputes and any resulting remedies are matters for the trial of the petition, or possibly the liquidator, in the event the Company is wound up in due course.

22.  That said, there was a material change in circumstances once the Company ceased to be actively trading.  Although Chang contends that he has all along continued to perform his duties as managing director since the petition, he accepts that “the last shipment [of goods by the Company] was made in around April 2023”. Although he “continued to look for business opportunities for the Company… the Company was unable to find further clients despite my efforts…there were no more trading business after April 2023.” He further contends that this “…does not mean that there was no attempt to procure new business (albeit failed in the end).  In August to October 2023, I have attended the United States to meet a number of potential clients for potential business opportunities… Unfortunately, the above business opportunities did not mature into actual business relationship, such that the last trading business of the Company remained around April 2023.”

23.  According to Koo, and this does not seem to be seriously disputed by Chang, it was not until the hearing before Linda Chan J on 31 January 2024 that Chang confirmed through his counsel, Mr Kurt Ng, in response to queries raised by her Ladyship, that the Company had no further trading since March 2023 (which Chang subsequently clarified to be April 2023). 

24.  As a director of the Company, Chang owes fiduciary duties to the Company and must act in its bona fide best interests.  Whilst I accept that after October 2023, Chang continued to be involved in the affairs of the Company, including negotiating with the IRD and dealing with the Company’s failure to file its audited financial statements on time, as well as overseeing a lease of its property for HKD 12,500 a month (until its termination in April 2024), there was a significant change in the nature of the Company’s affairs and his role.  Indeed, by November 2023, Koo and Chang had reached a preliminary agreement for the Company to be wound up voluntarily, which led to Linda Chan J directing on 31 January 2024 that counsel for both parties report on the status of the preparation of the proposed member’s voluntary liquidation.

25.  In the circumstances, there is some force to Ms Cheung’s submissions that after the Company ceased trading, the Company no longer required Chang acting full time and being paid his usual remuneration, which was not an insubstantial sum. The Company employed and continues to employ a part-time accountant, who would have been able to handle or at least substantially assist in the outstanding issues of the Company’s financial accounts and negotiations with the IRD.  It should also be borne in mind that Chang was not merely a director of the Company but was the only other shareholder of the Company with Koo, and hence, it was in his own interests that the remaining affairs of the Company, which are principally administrative in nature, be conducted in an orderly manner.

26.  By the end of October 2023, in the light of the fact that the Company was unable to generate any further business for some 6 months despite Chang’s apparent efforts (leaving aside the lease, which was not substantial) and that a winding up petition had been presented, it was incumbent upon Chang, as a director of the Company, and indeed its managing director, to seriously consider whether it was still in the interests of the Company to continue employing him or paying him a substantial remuneration for his services.  Even if he believed himself to be an employed director, given that there is no written employment contract, his employment would have been on a month-to-month basis, and hence, his employment would have been terminable on one month’s notice. 

27.  He should thus have informed and consulted with Koo as to the state of the Company’s affairs and whether the Company still required the services of a full-time managing director at the same level of remuneration, and failing agreement between the parties, further directions should have been sought from the Court, notwithstanding the October 2022 Order.  However, as mentioned above, it was not until the hearing before her Ladyship in January 2024 that Chang confirmed to Koo and the Court that the Company had ceased trading in March or April 2023.

28.  Taking matters in the round, I am not satisfied that it could reasonably be said that it was necessary or expedient in the interests of the Company for Chang to be continued to be paid his monthly remuneration of HKD 130,800 beyond the end of November 2023, at least without obtaining the informed consent of Koo (which would not have been forthcoming) or further directions of the Court. 

29.  Finally, as to Ms Cheung’s complaints of Chang’s conduct leading to the supposed delay in the progress of the Petition or the voluntary winding up of the Company, in the light of my reasons above, even if such complaints were made out, I do not believe that they would have any material effect upon the exercise of my discretion in the circumstances of this case.

V. Conclusion

30.  For the reasons above, I make a validation order for Chang’s remuneration up to the end of November 2023 but decline to validate any payments of the same made thereafter.  I will leave it to the parties to work out the amounts and the precise form of the order.

31.  I should also mention that at the hearing, in response to queries by the Court, Chang gave an undertaking through Mr Ng that he would sign the certificate of solvency, which seems to have been holding up the voluntary winding up of the Company.  There has been subsequent correspondence from the parties to the Court as to the performance of that undertaking, including the form of the certificate signed by Koo.  It seems to me that any issues arising from the compliance or otherwise of that undertaking should be addressed in a proper Summons to be issued before the Companies Judge, and I say no more about it here. 

32.  As to costs, as neither of the parties has been entirely successful in the application, the fairest order should be that the costs of the Summons be in the cause of the petition.   I make an order nisi accordingly.  Last but not least, I thank both teams of counsel for their assistance.