ANGLO STARLITE INSURANCE CO LTD (In Liquidation) v. TRIPLE INVESTMENTS LTD AND OTHERS

HCA 394/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 394 OF 2010

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D E C I S I O N

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1.  There are three appeals by Mrs Minoo Atmaram Balani. Master Hui made three orders on 11 October 2010 joining her as a defendant in three actions namely, as the 3rd defendant in HCA 394 and HCA 395 both of 2010 and as the 5th defendant in HCA 397 of 2010. These actions are bought by the liquidators of Anglo Starlite Insurance Company Limited (“ASI”) which had carried on insurance business in Hong Kong under the Insurance Companies Ordinance, Cap.41. Mrs Balani was joined together with her husband, her son and others as additional defendants. After obtaining the Master’s orders, the plaintiff made some minor revisions to the draft statements of claim and filed them in these actions. Mrs Balani now appeals to have these orders set aside. I will deal with these appeals one by one.

HCA 394/2010

2.  In HCA 394/2010, the plaintiff is suing the 1st defendant, Triple Investments Limited (“Triple”) for repayment of HK$7,850,000 paid by ASI to Triple by seven cheques dated between 2 April 2003 and 2 March 2004.

The statement of claim

3.  The plaintiff pleaded in the statement of claim that Mr and Mrs Balani were at all material times two of the directors and controllers of ASI within the meaning of section 9 of Insurance Ordinance.  Section 9 of the Ordinance defines a controller of an insurance company to mean its managing director, a chief executive or a person in accordance with whose instructions the directors of the company are accustomed to act. 

4.  The plaintiff also pleaded that their son, Mr Balani Junior was at all material times, a Deputy General Manager and de factor director of ASI. 

5.  Triple has issued and allotted 5,000,000 shares.  Each of Mr and Mrs Balani has one share and was and is a director of Triple.  Mr Balani Junior owns 2,499,999 shares and was and is also a director of Triple.  The remaining 2,499,999 shares are and were at all material times registered in the name of Mr Chotirmal, the son-in-law of Mr and Mrs Balani. 

6.  The plaintiff pleaded that Mr and Mrs Balani and Mr Balani Junior, as de jure or de factor directors of ASI, held jointly or severally or directly or indirectly a controlling interest in Triple within the meaning of section 157H of the Companies Ordinance.

7.  The plaintiff further pleaded that Mrs Balani had, together with other directors of ASI, caused or knowingly permitted ASI to make the said payments to Triple.  These payments were not recorded in ASI’s books or accounts.  They were not authorised by any resolution of the board. They did not have any discernible commercial purpose or benefit to ASI and ASI had no obligation to make them to Triple.  There was also no consideration from Triple for them and they were prohibited by section 157H of the Ordinance.

8.  The plaintiff further pleaded that Mrs Balani and the other directors, in causing or knowingly permitting these diversion or misappropriation of ASI’s assets, had acted in dishonest or fraudulent breach of their fiduciary duties to ASI as they knew that the payments were contrary to ASI’s interest or were recklessly indifferent as to whether they were so.

9.  The plaintiff also wants to hold Mrs Balani liable for the payments under section 157I of the Companies Ordinance on the ground that she knew or turned a blind eye to the circumstances giving rise to ASI’s contravention of section 157H.

The affidavits

10.  Both Mr and Mrs Balani filed affirmations to oppose the application to join them as defendants.  Mr Balani said in his affirmation that the proposed claims against him and his wife were time barred and lack of particulars of fraud.  He said his wife was only a director of ASI and Triple but with no executive role and had never undertaken any executive duties in either company.  She was and is a housewife.  She looked after the family and worked as a volunteer for two charities.  She had no decision making role in ASI and did little or no work in relation to its affairs.  He did not inform her and she did not know about the operation of the business, financial affairs or the accounts of both companies.  In discharging her duties as a director of the two companies with a non-executive role, she relied wholly on his advice and instruction.

11.  He also said that his son, Mr Balani Junior was not a de facto director of ASI.  He said his son had immigrated to Dubai in February 2002 when he was 26 years old and had little or no involvement in the business or operation of ASI.

12.  Mrs Balani repeated the things said by her husband in her affirmation.

13.  The plaintiff responded by an affidavit of Mr Blaauw, one of the liquidators of ASI.  He referred to his investigations as a liquidator of the company and his findings.

14.  He said in para. 11 of his affidavit that he had found documents showing Mrs Balani’s direct involvement with the management of ASI.  The board minutes show that Mrs Balani had attended regular board meetings of ASI between 1981 and 1995 (except 1994) and from June 2010 onwards (except 2004 and 2008).  I note from the table of meetings produced by Mr Blaauw that she only attended one meeting in 2003 which was on 24 September and the two payments before and after this meeting were of HK$1,000,000 each on 4 September 2003 and 18 December 2003.

15.  Mr Blaauw also referred to the financial reports of ASI.  The reports for the years ended 31 December 2003, 31 December 2004, 31 December 2007 and 31 December 2008 all state that Mrs Balani was one of the directors and controllers of the company.

16.  The employer’s returns filed by ASI with the Inland Revenue Department state that Mrs Balani for the year of 1 April 2007 to 31 March 2008 was a director of ASI and had received HK$780,000 salary and HK$1,200,000 housing benefits.  These payments were larger than those paid to Mr Balani.  The return for 1 April 2008 to 31 March 2009 shows that she had received HK$960,000 salary and HK$1,207,500 housing benefit for her directorship.  The records of ASI also show that her salary for her directorship as at 5 May 2009 was HK$80,000 per month and she was the second highest paid employee of ASI.  

17.  She also attended the board meetings and AGMs of Triple in 2008 and 2009 and signed its balance sheet for 2009.  These facts therefore cast doubt on the allegations of Mr and Mrs Balani that Mrs Balani was not involved and had no knowledge of the businesses, operations and accounts of ASI and Triple.

18.  Though Mr Balani Junior has not been served with the proceedings, Mr Blaauw also responded to the allegations made by Mr and Mrs Balani in relation to him.  Mr Blaauw said in para. 17 of his affidavit that the employer’s returns filed by ASI with the IRD for the years of assessment of 1998/1999 to 2006/2007 state that Mr Balani Junior was the Deputy General Manager (Administration).  His salary ranged from HK$20,000 per month to HK$50,000 per month.  For the years when ASI made the payments in question to Triple, his salary was HK$20,000 per month. 

19.  There were also two letters dated 20 August 2003 and 9 November 2005 from ASI to the Ministry of Foreign Affairs of the central government and the Hong Kong Immigration Department respectively saying that Mr Balani Junior was the Deputy General Manager of ASI and was required to travel frequently to China and other countries for insurance business purposes.

20.  The financial reports of ASI for the years ended 31 December 2003, 31 December 2004, 31 December 2007 and 31 December 2008 also state that Mr Balani Junior was one of the controllers of ASI.  Mr Blaauw thus concluded that Mr Balani Junior did have a significant role in the management and operation of ASI.  

21.  Mr Balani Junior was also a shareholder and director of Triple and had attended its board meetings and AGMs in 2008 and 2009.

22.  On the issue of limitation, Mr Blaauw relied on section 20(1)(a) of the Limitation Ordinance which provides:

“(1) No period of limitation prescribed by this Ordinance shall apply to an action by a beneficiary under a trust, being an action-

(a)    in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy.”

The submissions of Mrs Balani

23.  Counsel for Mrs Balani submitted that I should not look at Mr Blaauw’s affidavit but should only consider the statement of claim.

24.  Regarding limitation, counsel referred to section 20(1)(a) of the Ordinance Counsel and submitted that this section only applies to fraudulent breaches of existing trusts, not constructive trusts which came into existence by reason of the alleged fraudulent acts.  The question is whether the plaintiff has made out a claim that Mrs Balani was a party or privy to a fraudulent breach of an existing trust.  Counsel submitted in the negative.  The reasons put forward by counsel are that there is no allegation by the plaintiff that Mrs Balanai had caused the payments to be made.  The allegations that she had knowingly permitted the payments are inconsistent with the facts that these payments were without valid authorisation of the board and not recorded in the books.  These facts are instead consistent with Mrs Balani’s case that she had no knowledge of such payments.  There are also no particulars pleaded to support the allegation that she had knowingly permitted the payments or had turned a blind eye to their being unlawfully made or she had acted in dishonest or fraudulent breach of her fiduciary duties to ASI.  Counsel thus submitted that there is no cause of action for the joinder of Mrs Balani.

25.  Regarding the claim under section 157H, counsel submitted that Mr Balani Junior was neither a de jure or de factor director of ASI.  Therefore, his shareholding in Triple should be excluded for the purpose of section 157H.  Mr and Mrs Balani together only hold two shares in Triple which is not a controlling interest and section 157H would not be invoked.  In support of the allegation that Mr Balani Junior was not a director of ASI, counsel relied on the allegations of Mr and Mrs Balani that Mr Balani Junior had immigrated to Dubai in February 2002 and had no position in ASI or any involvement in its business.

26.  Furthermore, counsel submitted that even if section 157H is invoked, it is still necessary to prove that Mrs Balani knowingly and wilfully authorised or permitted the payments before she could be held liable under section 157I(4)(b) of the Companies Ordinance.  But there are no particulars in the statement of claim to support such allegation.

27.  Section 157H(2)(c) and section 157I(4)(b) provide:

“157H (2) A company shall not, directly or indirectly-

…

(c) if any one or more of the directors of the company holds (jointly or severally or directly or indirectly) a controlling interest in another company-

(i) make a loan to that other company;

157I (4) Without prejudice to any liability imposed on directors of companies otherwise than by this subsection, a director of a company that has entered into a transaction or arrangement in contravention of section 157H shall be liable-

…

(b) jointly and severally with any other director liable under this subsection, to indemnify the company for any loss or damage resulting from that transaction or arrangement,

if-

(i)  he knowingly and wilfully authorized or permitted the transaction or arrangement to be entered into;”

The plaintiff’s submissions

28.  Counsel for the plaintiff in reply pointed out that there is no dispute that Mrs Balani was a director and controller of ASI within the meaning of section 9 of Insurance Ordinance.  Counsel also referred to and relied on Mr Blaauw’s affidavit on Mrs Balani’s involvement in ASI’s affairs.  Counsel submitted that the degree of involvement in the affairs of ASI (as referred to in para. 11 of Mr Blaauw’s affidavit) and in particular her knowledge of the payments in question are matters of evidence that need not be pleaded. 

29.  Counsel said whether the appeal should be allowed is just like whether the claims against Mrs Balani should be struck out and that the act of striking out should only be exercised in plain and obvious cases.

30.  I note that the plaintiff has pleaded in para. 8 of the statement of claim that Mrs Balani and the other directors/controllers had caused or knowingly permitted the payments.  The plaintiff has further pleaded in para. 14 that Mrs Balani in her capacity as a director well knew or alternatively turned a blind eye to the payments being made without any valid authorisation of the board or any record in the accounts or the fact that they were not for any discernible commercial purpose or benefit to ASI.  In causing or knowingly permitting the payments being so made, she and her fellow directors/controllers well knew that or were recklessly indifferent as to whether the payments were contrary to ASI’s interests.  Mrs Balani had therefore acted in dishonest or fraudulent breach of trust.

31.  However, no particular has been pleaded to support the allegations in para. 8 of how Mrs Balani had caused on knowingly permitted the payments or from which the allegations can be inferred.  There is also no particular pleaded to support the allegations in para. 14 that she knew or had turned a blind eye to how and why the payments were made or that the payments were contrary to ASI’s interest or from which these allegations can be inferred.  Counsel maintained that the pleading of Mrs Balani as a director and controller of ASI and a director of Triple and that Triple was a company belonging to her son and son-in-law are sufficient particulars, because the liquidators have no direct knowledge of her involvement.  But counsel also made it clear that, at least for the matters pleaded in para. 14, the plaintiff is not relying on knowledge deemed to Mrs Balani merely by virtue of her having been a director of ASI.

32.  Regarding the limitation point, counsel maintained that there has been pleaded against Mrs Balani a case of dishonest or fraudulent breach of trust in relation to the payments.  Hence section 20(1) (a) applies.

33.  Finally, on the claim based on the section 157H, counsel referred to para. 17 of Mr Blaauw’s affidavit and submitted that the matters stated therein are sufficient particulars and can be copied to the statement of claim, if need be.

Analyses and decision

34.  I agree with counsel for the plaintiff that if I should allow the appeal, the effect is equivalent to striking out the plaintiff’s claim against Mrs Balani.  I therefore should not confine myself to the statement of claim and should also consider the affidavits.  If the claim can be made good with further and better particulars, it should also not be struck out (see para. 18/19/4 of Hong Kong Civil Procedure 2001). 

35.  However, I also agree with counsel for Mrs Balani that there are insufficient particulars to support the allegations in paras. 8, 14 and 17 of the statement of claim.  The allegations are too general.

36.  Mrs Balani is entitled to know from the statement of claim the matters that the plaintiff intends to establish so as to prove the allegations made against her or to have those allegations inferred. This is particularly so for allegations of dishonest or fraudulent breach of trust.  She is entitled to know about them so as to defend herself.  She may also plead in the defence her positive case, if any, against them.  They are the matters contained in para. 11 of Mr Blaauw’s affidavit.  They are the particulars from which the facts alleged may be inferred.  But it is insufficient to state them only in an affidavit.  There cannot be joinder of issues on the affidavits.  They should be pleaded in the statement of claim so that Mrs Balani can deal with them in her defence.  There will then be joinder of issues after the filing of the Reply, if any.

37.  Since there are materials that can be pleaded as particulars to support the allegations in paras. 8 and 14 of the statement of claim, I would not allow the appeal for lack of particulars or on the ground of limitation.  I would however direct the plaintiff to amend the statement claim within the next 14 days by pleading the matters deposed to by Mr Blaauw in para. 14 of his affidavit as particulars for the allegations in paras. 8 and 14.

38.  Regarding the claim pursuant to section 157H, I take the same view and would direct the plaintiff to plead the matters in para. 11 of Mr Blaauw’s affidavit as particulars of Mrs Balani’s knowledge as alleged in para. 17(a) of the statement of claim. 

39.  I further direct the plaintiff to plead the matters in para. 17 of Mr Blaauw’s affidavit as particulars in support of the allegation that Mr Balani Junior was at all matter times a de jure or de facto director of ASI.

HCA 395/2010

40.  The plaintiff in this action is seeking to recover US$1,297,635.58 which was paid to Mr Balani on 13 September 2007. 

41.  The payment arose as follows as pleaded in para. 8 of the statement of claim:

“(a) On or about 11 September 2007, Mr Balani entered into a personal loan facility with HBZ Finance Limited (‘HBZ’) for a sum of US$1,300,000 (the ‘Loan Facility’);

(b) On the same day, the funds granted pursuant to the Loan Facility were, upon the instructions of Mr Balani, remitted by HBZ into the bank account of one Orsini Middle East (Limited Liability Company) (‘Orsini’) with Habib Bank AG Zurich Dubai (account number …);

(c) On 13 September 2007, Orsini remitted the sum of US$1,297,665 to ASI’s bank account at DBS Bank (Hong Kong) Limited (account number …)(the ‘DBS Account’) in payment for 10,000,000 ordinary shares of HK$1.00 each in ASI being issued to Mr Balani Junior (the ‘Share Acquisition’);

(d) By a board resolution dated 13 September 2007, ASI approved the Share Acquisition; and

 (e)    By an application for telegraphic remittance on 13 September 2007, Mr Balani and the 5th Defendant Kai Boon Cheong caused ASI to transfer the sum of US$1,297,635.58 from the DBS Account received from Orsini to HBZ in partial repayment of the Loan Facility on behalf of Mr Balani (the ‘Repayment’).”

Mr Balani Junior is and was at all matter times a director/shareholder and managing director of Orsini.   

42.  Since this action was started on 17 March 2010, the issue of limitation does not arise.

43.  The plaintiff pleaded in para. 9 of the statement of claim that the Repayment was without any resolution of the board of ASI and it did not have any discernible commercial purpose of benefit to ASI and ASI had not receive any consideration and was under no obligation to pay it.  The Repayment also amounted to ASI’s provision of financial assistance to Mr Balani Junior to acquire the shares of ASI in contravention of section 47(A) of the Companies Ordinance.  If the Repayment was a loan to Mr Balani, it was also made in contravention of section 157H of the Ordinance.

44.  The plaintiff pleaded in para. 10 that Mrs Balani and the other directors of ASI knew or turned a blind eye to the wrongful making of the Repayment which was in contravention of section 157H as pleaded in paras. 8 and 9.  They also knew that the Repayment was contrary to the interests of ASI or were recklessly indifferent as to whether it was so. In causing or knowingly permitting it to be made, they were in dishonest or fraudulent breach of their fiduciary duties to ASI.  Alternatively, they were in negligent breach of their duties as they knew about the wrongful payment but took no step to stop it or to recover it or to report the matter to the authorities.  The plaintiff further seeks to hold Mrs Balani responsible under sections 157H and 157I of the Companies Ordinance. 

45.  There is again no particular to support the allegations of knowledge or turning a blind eye or reckless indifference.

46.  Mrs Balani made an affirmation to oppose her joinder.  She again said she and her son had no executive role or involvement with the business and operation of ASI.  She also said the draft statement of claim had no particulars of fraud. 

47.  The plaintiff again filed an affidavit of Mr Blaauw where he repeated in para. 10 of what he had said in para. 11 of his affidavit filed in HCA 394/2010 except that he referred to Mrs Balani’s attendance of a board meeting of ASI on 25 October 2007 which was close to 13 September 2007 when the Repayment was made.

48.  Counsel on both sides repeated their arguments on the sufficiency or otherwise of particulars of fraud in the statement of claim. 

49.  For the same reasons I have given in HCA 394/2010, I would also dismiss this appeal.  I also direct the plaintiff to amend the statement of claim by pleading the matters in para. 10 of Mr Blaauw’s affidavit as particulars of the allegations in para. 10 of the statement of claim.

HCA 397/2010

50.  This is an action by ASI to recover monies payable for its shares allotted and recorded as fully paid up shares.  These allotments were made to Mr Balani, Mr Balani Junior, Ms Balani, the daughter of Mr and Mrs Balani, and Mr Chotirmal, their son-in-law. 

51.  There were three allotments to Mr Balani made between April 2002 and January 2003 for 15 million shares of ASI at a consideration of HK$15,000,000.  

52.  There were 10 allotments to Mr Balani Junior made between July 2000 and August 2004 for 47 million shares at HK$47,000,000.  Five of these allotments were made after 17 March 2004 and the issue of limitation does not arise in respect of them. 

53.  There were three allotments to Ms Balani made between April 2001 and April 2003 for 10 million shares at HK$10,000,000. 

54.  Lastly, there were two allotments to Mr Chotirmal in December 2000 and December 2001 for 8 million shares for HK$8,000,000. 

55.  Each of these allotments was made pursuant to a share application signed by the allottee and countersigned by Mr Balani or his fellow director, the 7th defendant, on behalf of ASI and recording receipt of the allotment monies.  Each of them had also been approved by a purported board resolution signed by Mr Balani as chairman and recorded in the share register as fully paid up.

56.  The plaintiff’s claim against Mrs Balani, as pleaded in paras. 15(c), 16(c), 17(c) and 18(c) of statement of claim, is that she was a director of ASI and well knew or had turned a blind eye to the fact of no allotment money having been received by ASI for all these allotments, and notwithstanding such knowledge, she caused or knowingly permitted the shares to be recorded in the share register as fully paid up.  These amounted to dishonest or fraudulent breaches of her fiduciary duties to ASI.  However, there is again no particular pleaded to support these allegations of knowledge or turning a blind eye or knowingly permitting the commission of the wrongs.

57.  Mrs Balani also made an affirmation to oppose her joinder.  She repeated that she was a housewife and had no role to play in the business and operation of ASI.  Her son had also immigrated to Dubai and had no role to play in ASI either.  She also attacked the draft statement of claim for want of particulars of fraud.

58.  Mr Blaauw also made an affidavit to respond.  He repeated in para. 10 of what he had said in para. 11 of his affidavit filed in HCA 394/2010 except that he referred to Mrs Balani’s attendance of two board meetings on 21 June 2002 and 24 September 2009 which were about the time of some of the allotments.

59.  Counsel on both sides made the same arguments on particulars of fraud and limitation.  The plaintiff also relies on section 20(1) (a) of the Limitation Ordinance.

60.  Counsel for Mrs Balani made a further point that the shares allotted by ASI had never been the assets of ASI and she could not be held liable to ASI for wrongful disposal of these shares.  However, this is a misconceived point.  I agree with counsel for the plaintiff that the claim is for the allotment monies which had never been received but recorded as having been received.  The rights to receive these monies are certainly the assets of ASI.  ASI is not seeking to set aside the allotments either.

61.  For the same reasons I gave in HCA 394/2010 and HCA 395/2010, I also dismiss this appeal.  I also direct the plaintiff to amend the statement of claim by pleading the matters in para. 10 of Mr Blaauw’s affidavit as particulars of the allegations in paras. 15(c), 16(c), 17(c) and 18(c) of the statement of claim.

Costs orders nisi

62.  I now turn to costs.  Though the plaintiff has succeeded in opposing the three appeals, its success is a qualified one.  The claims against Mrs Balani are all based on dishonest or fraudulent breach of trust, but no particulars are pleaded.  They are only contained in the affidavits of Mr Blaauw.  This is improper. 

63.  Mrs Balani’s complaints for want of particulars of fraud are justified.  However, she has taken a wrong move in appealing against the Master’s orders.  She should have applied for further and better particulars. 

64.  In the circumstances, I make the same costs order nisi for the three appeals that Mrs Balani do pay 50% of the costs of the appeal to the plaintiff.  I also certify the matters fit for one counsel.  These costs are to be assessed by me summarily at a 9:30 a.m. hearing to be fixed by the parties and be payable forthwith upon assessment.