SHAGANG SHIPPING CO LTD v.SHUM MAN FU AND ANOTHER

HCCL 4/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 4 OF 2013

(Transferred from High Court Action No 628 of 2012)

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REASONS FOR JUDGMENT

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1.  In this action, the plaintiff (“Shipping”) seeks to recover from the 1^st defendant (“SMF”) the sum of US$6,661,946.57 (“Sum”).  The case against the 2^nd defendant has been settled shortly before trial. 

2.  The trial of this action turns upon the defence raised by SMF because there is no dispute to the basic facts of the Shipping’s claim, namely, (a) the Sum came from Shipping; (b) the Sum has been taken by SMF; and (c) at all material times, SMF was the Managing Director, and a fiduciary, of Shipping.  Given the acceptance of such basic facts, unless there is a valid defence to this action, Shipping must be entitled to various reliefs against SMF. 

3.  In a nutshell, SMF’s defence is that there was a set-off between the Sum and two amounts owed by the parent company of Shipping, Jiangsu Shagang Group Co Ltd (“JSG”), to him.  There are 2 key elements to this defence.  Firstly, whether there were debts owed to SMF. Secondly, if there were such debts, whether the set-off was properly authorised by Shipping. 

Background facts

4.  Pursuant to the directions of this court, a Revised Statement of Agreed Facts has been filed by the parties from which much of the background facts can be found. 

5.  Shipping was incorporated in Hong Kong in 2004.  It carries on the business of dry bulk cargo shipping.  SMF was its managing director from 12 March 2004 to 22 April 2011. During the period from 18 April 2007 to 22 November 2010, SMF was also a director of the 2^nd defendant (“Guofeng”), which was and is a Hong Kong company in the business of international trade and shipping. 

6.  There is dispute as to whether Shipping should be characterised as a joint venture company.  It is probably a matter of definition and I do not believe that it is a material issue.  The undisputed fact is that at all material times SMF owned a significant portion of the shares in Shipping, 32%. 

7.  During the period from 18 February 2004 to 13 June 2008, there were 3 shareholders of Shipping, namely, (a) Jiangsu Shagang International Trade Co Ltd (“JSIT”), (b) SMF and (c) Pacific Minerals Limited (“PM”), respectively holding 51%, 20% and 29% shares in that company.  JSIT was wholly owned by JSG, a company incorporated in the Mainland.  There were quite a few corporate entities under JSG and some of the details can be found in a Corporate Chart submitted pursuant to the directions of this court.

8.  On or around 13 May 2008, PM transferred 17% shareholding in Shipping to Shagang South-Asia (Hong Kong) Trading Co Ltd (“SS-A”) and 12% shareholding in Shipping to SMF.  SGS-A was also wholly owned by JSG.  As a result of these share transfers, JSG (through JSIT and SS-A) and SMF respectively owned 68% and 32% of the shares in Shipping. 

9.  There was another change in the corporate make-up of Shipping on 15 December 2008.  On that day, the shares in Shipping owned by JSG (through JSIT and SS-A) and SMF were transferred to Shagang Group (Hong Kong) Holdings Limited (“SHK”), ie, Shipping became 100% owned by SHK.  In turn, the shares in SHK were held by Shagang International (Hong Kong) Company Limited (“SI”) and Gain Park Holdings Limited (“GP”) respectively at 68% and 32%.  SI has been wholly owned by JSG since its incorporation on 16 July 2008.  SMF was and is the sole beneficial owner having full management and control of GP. 

10.  There is no controversy as to how the Sum came about and the matter can be stated briefly.  On or about 20 May 2008, Shipping as owner and Guofeng as charterer entered into a contract of affreightment (“Contract”) for the shipment(s) of iron ore from Brazil to China via vessels nominated by Shipping.  Pursuant to the Contract, freight and demurrage totalling the Sum was due from Guofeng in favour of Shipping on or before 19 October 2010. 

11.  Upon Shipping’s request, on 4 November 2011, Guofeng produced (a) a Loan Agreement dated 18 October 2010 (“Loan Agreement”), (b) an Addendum dated 15 November 2010 (“Addendum”) and (c) a tax invoice (“Tax Invoice”).  The first 2 documents were purportedly executed by SMF on behalf of Shipping. 

12.  The Loan Agreement stated, inter alia, that :-

(i)  Party  A [Shipping] agrees that Party  B [Guofeng] is temporarily not required to pay Party A the freight in the sum of US$6,661,946.57 under the 8 October 2010 MV Nian Feng Hai Invoice (Clause 1);

(ii)   Party A shall borrow the sum of US$6,661,946.57 from Party B, and the term of the loan shall be 1 month. Party B agrees to lend the sum of US$6,661,946.57 to Party A by remitting the said sum to an account designated by Party A (the beneficiary being SHUM MANFU) in accordance with Party A’s instructions, and the term shall be one month (Clause 2);

(iii)   Upon the expiry of one month, Party A shall repay the loan advanced by Party  B in the sum of US$6,661,946.57.  Upon receipt of the repayment in full from Party A, Party B shall pay Party A the freight in the sum of US$6,661,946.57 under the 8 October 2010 MV Nian Feng Hai Invoice (Clause 3);

(iv)   If Party A fails to repay the loan advanced by Party B in the sum of US$6,661,946.57 after the expiry of one month, then Party B shall be deemed to have paid Party A the freight in the sum of US$6,661,946.57 under the 8 October 2010 MV Nian Feng Hai Invoice (Clause 4). 

13.  The Addendum provided, inter alia, that :-

(i)  Party A [Shipping] shall borrow the sum of US$6,661,946.57 from Party B [Guofeng], and the final repayment date shall be 30 June 2011.  Party B agrees to lend the sum of US$6,661,946.57 to Party A by remitting the said sum to an account designated by Party A (the beneficiary being SHUM MANFU) in accordance with Party A’s instructions, and the final repayment date shall be 30 June 2011 (Clause 2);

(ii) Party A shall repay the loan advanced by Party B in the sum of US$6,661,946.57 on or before 30 June 2011. Upon receipt of the repayment in full from Party A, Party B shall pay Party A the freight in the sum of US$6,661,946.57 under the 8 October 2010 MV Nian Feng Hai Invoice (Clause 3);

(iii) If Party A fails to repay the loan advanced by Party B in the sum of US$6,661,946.57 by 30 June 2011, then Party B shall be deemed to have paid Party A the freight in the sum of US$6,661,946.57 under the 8 October 2010 MV Nian Feng Hai Invoice (Clause 4);  

(iv) The loan advanced and the freight paid to Party A by Party B shall be interest-free (Clause 5). 

14.  The Tax Invoice shows that on 21 October 2010, the Sum was transferred by Guofeng to the SMF’s bank account held with HSBC in Hong Kong.  SMF admits that he received the Sum from Guofeng as a consequence of the Loan Agreement and the Addendum. 

15.  At the time when the Loan Agreement and the Addendum were executed by SMF, Shipping had 5 directors, namely, SMF, Mr Shen Wenming, Mr Wei Guo, Mr Shen Bin and Mr Wang Lizhong. 

16.  Articles 17 and 18 of the Shipping’s Articles of Association provide that its directors have power to borrow money on its behalf. 

17.  However, under the board resolutions of SHK and its subsidiaries (including Shipping) dated 28 February 2009, it was stated that any and all major decisions of Shipping, including but not limited to any financing, borrowing and/or provision of security or surety by Shipping, would require approval of the Board.  The board resolutions also provided that “any issues to be discussed at the board meeting must be submitted in writing together with all the relevant supporting documentation at least one week before the scheduled meeting.  For contracts with a term of one year or above, the period for submission of the same to the Board can be reduced to 3 days. Where a resolution is passed at the board meeting, the resolution shall be in writing and signed by the Chairman of the Board as the written authority for implementation.  In the absence of any approval or authorization from the Board of Directors, the Managing Director shall not override the authority of the Board and handle the aforesaid matters.” 

18.  There is no dispute that the obtaining of the Sum by SMF was not an act sanctioned by any resolution of Shipping’s Board of Directors. 

19.  SMF’s defence of set-off is related to 2 property transactions – 1 in Shanghai and 1 in Hong Kong.  According to SMF, money was owed to him by JSG arising from those acquisitions. The uncontroversial facts are as follows. 

Shanghai Ka Mei Er and the acquisition of the Shanghai Property

20.  Shanghai Ka Mei Er Investment Management Consultation Limited (“KME”) is a company incorporated in the Mainland and was formed on 27 December 2007 as a joint venture investment of JSG and SMF to acquire a landed property located in the Changning District of Shanghai known as “沙逊别墅” (“SH Property”). 

21.  According to the sale and purchase agreement between Shanghai Xingxing Construction and Development Company (“Xingxing”) and KME, the purchase price for the SH Property was RMB 80 million. In addition, KME agreed to pay RMB 40 million to Xingxing as compensation for the gardening, landscaping and decorations, etc, carried out by it. 

Instant Gain and the acquisition of the Harbour Road Property

22.  Shagang Shipping BVI (“SBVI”) was incorporated in the BVI on 12 September 2006.  From 9 May 2007 to 28 November 2008, SBVI wholly owned Instant Gain Management Ltd (“IG”).  IG was used to acquire and hold a landed property in Hong Kong located at 25/F, Harbour Centre, 25 Harbour Road (“Harbour Rd Property”). 

23.  The total costs of the acquisition of the Harbour Rd Property amounted to HK$139,877,566.50, of which HK$66,900,000.00 was financed by a mortgage loan granted by HSBC.  As for the balance of the acquisition costs in the sum of HK$72,977,566.50, the deposits in the total sum of HK$13,381,550 were paid by Shipping on behalf of IG on around 7 and 23 May 2007, and the remaining amount was financed by SBVI, which advanced a sum of US$8,000,000 (HK$62,504,000) to IG on 28 June 2007. 

24.  After its acquisition, the Harbour Rd Property was partly used as an office for Shipping, and some units were let for rental income to cover mortgage repayments and other expenses. 

25.  On or about 29 November 2008, SBVI transferred its shareholding in IG to SHK, so that as from that date IG became wholly owned by SHK. 

The issues

26.  As indicated in paras 2 and 3 above, the issues in this action are not complicated.  There are, however, considerable amount of details concerning the payments made for the purchase of the SH Property and the Harbour Rd Property and the alleged debts owed by JSG to SMF.  However, for reasons stated below, it is unnecessary to deal with those details. 

The Trial

27.  This trial took the normal course up to the close of Shipping’s case after 5 days of evidence.  Altogether 6 witnesses were called to give evidence for Shipping.  After Shipping had closed its case, and much to the surprise of those representing Shipping and this court, Mr Ramanathan SC, who appeared for SMF with Mr Tsoi, informed the court that SMF, his only witness, was unable to attend the trial to give evidence.  Accordingly, the case for the defence was closed without adducing any evidence. 

28.  Mr Ramanathan was given the opportunity to consider whether he could resist a judgment to be given in favour of Shipping in light of the development.  Quite fairly, Mr Ramanathan indicated that he was not in a position to advance any argument to resist a judgment in terms of a debt due from SMF to Shipping. 

29.  However, Mr Ramanathan resisted any judgment on the basis of breach of fiduciary duty on the part of SMF.  It was submitted that SMF was given a free hand in running Shipping and that the taking of the Sum was within the scope of the authority he had. 

30.  I am unable to see any merit in the argument.  In my view, a director acting in a fiduciary capacity (like SMF) is obliged to demonstrate why he was entitled to take away money belonging to the company which he was entrusted to run.  In the absence of any proper justification, the director must be in breach of his fiduciary duty to the company.  There is no such justification in this case and there is no escape from the finding of breach of fiduciary. 

31.  For completeness, I should say that, with the exception of Mr Shen Bin, I am impressed by the credibility of Shipping’s witnesses (1 of the witnesses was not cross-examined).  I should mention in particular Ms Zhu Jianhong’s evidence because she was tasked with the investigation of SMF’s dealings in respect of the SH Property and the Harbour Rd Property.  Apart from being a convincing witness, her evidence is well-supported by the documents.  None of the witnesses had made any concession under cross-examination which detracted from Shipping’s case.  There is no doubt in my mind that Shipping’s case against SMF has been solidly proven. 

Judgment

32.  In the premises, I gave judgment in favour of Shipping as follows:

(i)  A declaration that the Loan Agreement and the Addendum were executed by SMF in breach of his fiduciary duty owed to Shipping;

(ii)   Payment of the Sum by SMF to Shipping;

(iii)   An account of the profits derived from the Sum and received by SMF in breach of his fiduciary duty;

(iv)   An order for payment of all such sums as shall be found due to Shipping pursuant to (iii) above;

(v)   Compound interest on the Sum at prime plus 1% from 21 October 2010 until payment. 

Costs

33.  Ms Cheng SC, who appeared for Shipping with Mr Lai, asked for costs to be awarded on indemnity basis.  For 2 reasons, I agree with Ms Cheng.  Before I set out those reasons, I should mention that there was an unsuccessful application (“Application”) by SMF to adjourn this trial made on 23 June 2014 (see Decision of that date (“Decision”)).  The basis of the Application was that SMF was under a criminal investigation in the Mainland and that his bail conditions did not allow him to come to Hong Kong. 

34.  The first reason for awarding costs of the action on indemnity basis is that both Shipping and the court were misled into believing that SMF would give evidence in this trial.  I need only refer to the Revised Timetable which was lodged with the court pursuant to its directions.  In that document, it was clearly provided that SMF would be giving evidence.  On the first day of this trial, the court was informed by Ms Cheng as follows:

“… the 1^st defendant confirmed that he would come to give evidence in Hong Kong, and he would be available round about 7 August, which is, according to the agreed provisional timetable that the parties used.”

35.  As explained below, this piece of information is at best misleading.  In the course of the trial, the Revised Timetable was further revised on 4 occasions.  Each version of that document suggested that SMF would give evidence. 

36.  After the close of Shipping’s case, Mr Ramanathan informed the court that in fact SMF was only hoping to attend this trial.  He was pursuing an application to the Public Security Bureau (“PSB”) to allow him to come to Hong Kong.  However, that application was unsuccessful eventually. 

37.  On giving evidence via video-link, which was explored in the course of the Application, Mr Ramanathan informed the court that the PSB had refused to give permission for that also, although they had declined to provide a decision in writing in that regard. 

38.  I agree with Ms Cheng that the explanations advanced on behalf of SMF lack credibility.  To begin with, there is not 1 word of evidence put before the court in support of what has been said.  After the dismissal of the Application, and no doubt wishing to know in advance of the trial whether SMF was going to give evidence (including whether he would give evidence via video-link), letters were written by those representing Shipping to SMF’s solicitors to elicit the answer.  Shipping was informed in clear terms that SMF would attend this trial to give evidence. 

39.  I am unable to see why, if SMF was merely applying to vary his bail conditions to enable him to come to Hong Kong, that piece of information should be withheld from Shipping.  Equally, I do not see why the PSB would refuse to provide a written confirmation concerning SMF’s application to give evidence by way of video-link.  If that be the case, it is very surprising that SMF did not see fit to adduce evidence to explain the matter given that the deficiency of his evidence was the subject matter of adverse comment in the Decision.  I am unconvinced that SMF was unable to give evidence via video-link (see also para 6 of the Decision).

40.  The second reason for making an indemnity costs order is that the trial is a waste of resources.  As this court has indicated at the beginning of the trial, this case is about the validity of SMF’s defence.  Mr Ramanathan accepts that in the absence of any evidence from SMF Shipping is at least entitled to a money judgment against him.  Had the true position been known from the outset, Shipping might have adopted a different position regarding this trial, and this court might have insisted that SMF should open this trial. 

41.  I decline Shipping’s application that the costs of this trial be borne by SMF and his solicitors jointly and severely.  The application is not without force.  However, I may be too lenient to the professionals, but I am not entirely satisfied that this unusual order is fully justified. 

42.  Finally, I order that the costs of hearing bundles, save the core bundles produced by SMF’s solicitors, be borne by Shipping’s solicitors personally.  I do so to reflect a serious breach of Practice Directions 5.6 (which have been in place since 2009) in terms of the amount of papers contained in the bundles.  In UES International (HK) Ltd v Maritime Maruba SA, HCA 632/2011 (19 November 2013), paras 18-20, I explained why similar Practice Directions should be adhered to, the widespread infringement and the need for the court to uphold the Practice Directions.  Regrettably, those observations have continued to be ignored. 

43.  For the same reasons, the costs of SMF’s core bundles should be borne by his solicitors. 

44.  I should make 2 further observations concerning the hearing bundles.  Firstly, the course of the trial demonstrates that only the documents contained in the 4 core bundles were relevant.  In other words, the hearing bundles could have been considerably reduced in size, thereby saving unnecessary costs.  Secondly, the core bundles contain a considerable amount of material and much of which are clearly not central to the dispute in question.  These deficiencies reflect an ignorance of the provisions of Practice Directions 5.6 (see paras 1 and 2).  It would not be right for the court to continue to tolerate such deficiencies. 

45.  In the premises, I order that the costs of this action as against SMF, with the exception of the hearing bundles, be borne by him on indemnity basis with a certificate for 2 counsel.  The costs of the hearing bundles, with the exception of SMF’s core bundles, be borne by Shipping’s solicitors.  The costs of SMF’s core bundles be borne by his solicitors.