TOPTRANS LTD v. DELTA RESOURCES CO INC AND ANOTHER

HCA 2061/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2061 OF 2003

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J U D G M E N T

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Introduction

1.  The history to this matter appears in my Ruling of 6 December when I gave Polo Resources Company Inc. (“Polo”) leave to intervene in this matter and I continued an injunction made by Reyes J. on 1 November 2004 (page 253) prohibiting Polo from removing from Hong Kong, 9 containers loads of leather held to its order at the port at Kwai Chung until the substantive hearing of the Plaintiff’s application to lift ‘the corporate veil’ of Polo that is said to be a façade for Delta Resources Company Inc. (“Delta”), the 1^st Defendant.  The allegation is that after Polo had been used as a façade Delta would fade away.  By resorting to this device Polo will have been used to assist Delta to avoid its obligations under its contracts with the Plaintiff.

2.  In terms of the present state of the action where the Plaintiff has a judgment against Delta, which it cannot enforce for want of assets, if the Plaintiff succeeds in lifting the ‘corporate veil’ of Polo it will ask the court to then give it leave to attach the writ of fi fa, which it has taken out, to the 9 containers owned by Polo (Polo says it only owns 7 of them) and thereby satisfy its judgment against Delta.

The Issues

3.  Mr Yau, who appears for Polo, has submitted that there are three issues to be addressed by the court, success on any one of which by Polo would be sufficient to have the injunction discharged and the 7 containers which belong to it returned.

4.  Firstly, Mr Yau says that there is a serious procedural defect in the obtaining of the injunction.  A Mareva Injunction needs to be attached to or at least flow from a cause of action pleaded against the party against to whom it is directed.  Typically, of course, it is directed against a defendant to an action as an interim measure preserving assets pending the hearing of the action.  A Mareva Injunction cannot operate in an independent vacuum – it derives from the action itself.  In this matter Polo is not a party, Delta is and the action itself is now complete save for enforcement of the judgment against Delta.  Polo is only before the court as a result of a Notice of Action served on it, which Mr Yau submits is a defective one, an inappropriate form having been used by the Plaintiff.  This latter point forming the second issue which Mr Yau wishes to raise.

5.  Lastly, he submits that even if these technical, but important points, do not avail him, the façade argument as an exception to Salomon v Salomon simply has not been made out on the evidence.  This of course is the issue that goes to the merits of the substantive application which I propose to take first.

The façade argument

6.  Mr Arthur Yip, for the Plaintiff, relies on the decision of the English Court of Appeal in Adams v Cape Industries (1990) 1 Ch 433, a report running to over 140 pages, whose effect has been succinctly explained in the latest edition of Gower and Davies “Principles of Modern Company Law” (7^th Edition) (185-187) and even more succinctly in Halsbury’s Laws of England Vol 7(1) 4^th Edition 2004 at para. 402.  The effect of the judgment is that the Court of Appeal accepted that there is one well-recognised exception to the rule prohibiting the piercing of the ‘corporate veil’.

“This exception today is generally expressed (and was in Cape) as permitting disregard of the Company when the corporate structure is a ‘mere façade concealing the true facts’ – ‘façade’ having replaced an assortment of epithets which judges have employed in earlier cases.  The difficulty is to know what precisely may make a Company a ‘mere façade’.  In general, the court felt that it was left with rather sparse guidance as to the principles which should guide the court in determining whether or not the arrangement of a corporate group involve a façade … but, unfortunately it declined to ‘attempt a comprehensive definition of those principles’.  It did, however, decide that one of Cape’s wholly owns subsidiaries … was a façade in the relevant sense (my emphasis).  Scott J. had found as a fact that arrangements made in 1979 regarding AMC and other companies concerned in the marketing of Cape’s asbestos ‘were part of one composite arrangement designed to enable Cape asbestos to continue to be sold in the United States while reducing, if not eliminating, the appearance of any involvement therein of Cape or its ‘subsidiaries’.  Although he had thought that motive was irrelevant, the Court of Appeal thought it might be highly relevant, though apparently this particular motive alone would not have sufficed to make AMC a mere façade.  What seems to have been regarded as decisive was the fact that AMC was not only a wholly owned subsidiary of Cape but also no more than a corporate name which Cape or its subsidiaries used on invoices.’ [See Gower and Davies Supra 185-186]”

7.  A brief recitation from Halsbury supra at para. 402 is also helpful.  Having stated the Salomon principle the learned editors observe that;

“There may however be cases … where the court will pierce ‘the corporate veil’, not because it considers it just to do so but because special circumstances exist indicating that it is a mere façade, concealing the true facts.  In identifying what is a mere façade, the motive of those behind the Company will be relevant.  The court will go behind the status of the Company as a separate legal entity distinct from its shareholders and will consider who are the persons as shareholders or even as agent directing and controlling the activities of the Company.  The device of a corporate structure will often have been used to evade limitations imposed on conduct by law and rights of relief which third parties already possess against a defendant, so justifying the court piercing the veil.”

Halsbury makes reference to examples such as Re a Company (1985) BCLC 333 CA where a chain of companies was used to dispose of assets otherwise susceptible to a Mareva Injunction was treated in the same way as the owner would have been.  In the instant case Mr Yip is inviting me to do the same thing by asking me to treat Polo’s containers as part and parcel of Delta’s assets, being part of the overall assets of the Polo/Delta group of companies controlled by the 2^nd Defendant.

Control and Motive

8.  Two crucial ingredients need to be present before such an application can even get off of the ground.  Firstly, that there must be common control of the company which is said to be the façade for the other company or companies which are the contracting companies, in this case Delta.  Mr Yau, on behalf of Polo, makes the concession which I think he must on all of the evidence, that the 2^nd Defendant Mr Daniel Wong is the common controller of both Delta and Polo.  That being the case I now only need to examine the evidence to decide whether the motive for the use of Polo is to take attention away from Delta, causing it to fade away leaving Polo with the assets and none of the liabilities because it is not the contracting party on paper, this being Delta and Mr Daniel Wong as the guarantor of Delta’s obligations.

The evidence

9.  The starting point to all of this is of a harmonious relationship between old business associates, Mr Wong Pak Wai of the Plaintiff and Mr Daniel Wong, the 2^nd Defendant.  The evidence is that they trusted each other and that several Letter of Credit transactions which are described in the Statement of Claim in my Ruling of 6 December were negotiated successfully and without mishap.

10.  Polo began to operate actively on 10 June 2002, although it had been incorporated the previous year.  The evidence in support of the case comes from Mr Wong Pak Wai’s 5^th Affirmation which starts at page 353.  Most of this evidence I have to say is really related to the issue of control which has now been admitted by Mr Yau.  In relation to contract TD0219, whilst the contract itself is signed by Delta and Mr Daniel Wong as guarantor the instruction to open the Letter of Credit was given by Polo and the shipping documents were also sent by Polo.  Both companies, of modest enough size, employed common staff.  By then Mr Darren Wong, Mr Daniel Wong’s son, who had recently graduated from university and who Mr Daniel Wong hoped would take over the running of his business, came on to the scene.  He was gradually being introduced into the day to day operations of the companies and his father was introducing him to the various ‘players’ that he would have to deal with and come into contact with during the course of business trading various commodities, mostly leather.  The exhibits to Mr Daniel Wong’s 5^th Affirmation show clearly that the two companies that he controls and uses to conduct his business were used interchangeably in communicating with the Plaintiff.  For example, where there was a discrepancy on the Letter of Credit Mr Daniel Wong accepted the discrepancy.  There is a faxed copy of a banking document from Delta to the Plaintiff recording the acceptance of the discrepancy.  A particularly good example of interchangability concerns an email from Polo asking the Plaintiff to confirm instructions with Delta’s agent, a Mr Yeung, of Champion Leather.  This referred to what was to be done with certain containers under contract TD0219.  Polo indicated that Delta would reimburse the Plaintiff in respect of local charges.  On other occasions Mr Daniel Wong would personally give instructions to the Plaintiff.  On one occasion he instructed the Plaintiff to release documents to Mr Yeung of Champion Leather and sent a copy of the instructions to his son Darren and to Polo’s staff.  Darren would on occasions write to the Plaintiff wearing a Delta ‘hat’ although he was really part of the Polo side of things.  On another occasion Delta asked the Plaintiff to deal with Suzette Chan, who would write to the Plaintiff as a Polo employee.  Daniel Wong also wrote to the Plaintiff to say that Suzette would be dealing with all incoming and outgoing Chinese faxes.

11.  From this evidence, which really shows that both Delta and Polo are Mr Daniel Wong’s alter ego, Mr Yip submits that the function of Polo was simply a façade to hide the dealing.  In truth, nothing was being hidden.  Both Delta and Polo are façades in the literal sense, rather than, for the moment, the legalistic Adams v Cape [supra] sense.  Both are companies that Mr Daniel Wong used to conduct his business.  They were and are his corporate persona.  There is nothing clandestine about this.  He had set out his stall with the Plaintiff and Mr Wong Pak Wai about how he hoped to operate with his son Darren gradually being introduced into the business, shown the ropes, with the view to eventually taking over.  The Plaintiff knew where it stood.  It had a binding contract with Delta guaranteed by Mr Daniel Wong.  The operation of the contracts were performed interchangeably by Polo and Delta through common staff and by Mr Daniel Wong and Darren.  One can also observe from faxed letters sent by Daniel Wong that he was obliged to apologize if he got behind on paper work and on payments due to pressure of work and travel abroad.

12.  It seems clear to me that things went wrong after a failed venture to import white yams from Brazil into the PRC.  This ‘project’ involved Mr Daniel Wong in considerable logistical effort in the sense of having to go to China to speak to prospective importers, as well as expense.  A brochure was prepared by Mr Daniel Wong with input from Mr Wong Pak Wai.  In the event it all came to nothing.  Mr Daniel Wong’s case, as put in cross-examination to Mr Wong Pak Wai, is that he lost US$700,000 in wasted expenses.  This amount is not accepted, by any means, although Mr Wong Pak Wai accepts that some expense, largely travel and hotel expenses, would have been involved.  Mr Daniel Wong blames Mr Wong Pak Wai for this failure and Mr Wong Pak Wai says that the reason why it all went wrong was that Daniel Wong was proposing prices ten times higher than the prevailing market rate for white yams.  Whichever is right does not matter but it is clear that Daniel Wong blames his namesake for these losses and it may be that by not paying on these Letters of Credit he is trying to set off some of these losses by laying them at Mr Wong Pak Wai’s door through the Plaintiff company.  Whether I am right or wrong in this analysis does not matter – the fact is Delta should have paid and they now have a judgment against them.

Conclusion

13.  Given the nature of the evidence – the clearest control of both companies (Delta and Polo) by Mr Daniel Wong – does this also mean that the motive is there?  Does this amount to control in the ‘relevant sense’ as in Adams v Cape Industries?  The answer to each case will differ according to the evidence as it bears on the particular case.  In this matter I do not believe that this has been made out by Mr Yip.  This is ‘mere’ control without the requisite motive that Delta should fall away, as Mr Yip describes it.  Whenever a party corporate or individual, contracts with a limited liability company a risk is taken that the company may prove to be insolvent or unwilling to meet its obligation, although its controllers, be they individuals or associated companies, may be good for the contracted amount.  In my judgment some element of ‘shenanegans’ must be demonstrated to justify the piercing of ‘the veil’.  This is what the authorities would appear to require.  None is present here – there has been no manipulation in this case – and it is this that Mr Yip contends for.  The Plaintiff chose to contract with Delta and very successfully at first.  It became apparent that Mr Daniel Wong for convenience and nothing more sinister than that, decided to engage both his companies in carrying out these transactions.  The Plaintiffs had the clearest indication of that.  Unfortunately, at present they appear to have a hollow judgment against Delta and Mr Daniel Wong because they have nothing of their’s to bite on.  By virtue of a piece of good opportunism they have got their hands on these containers belonging to Polo – and I don’t use the expression opportunism perjoratively, but unfortunately they have failed on the evidence to show exceptional circumstances which would justify a piercing of the ‘corporate veil’.  In these circumstances there can be no justification for maintaining the injunction which must be discharged forthwith.  The money paid into court to fortify the undertaking in damages must also be returned to the Plaintiff.

The other issues

14.  This is sufficient to dispose of the matter but in the event of an appeal I ought to briefly indicate how I would have found had I been required to on the other issues raised by Mr Yau.

15.  I am persuaded by him that conceptually speaking, if I can so express it, this proceeding has been misconceived.  It is not appropriate to come in this way by Mareva in support of service of a Notice of Action as part of fi fa proceedings against containers belonging to a non-party to the action.  It seems to me that the correct route should have been by separate action to pierce Polo’s corporate veil with the Mareva to hold the containers pending trial of that action brought as an adjunct to the action.  The Mareva as constituted in this form is at best inappropriate, standing really in a vacuum, which is not how it is intended to operate.  The remedy was not constituted as an emergency measure to support a writ of fi fa against a non-party to an action.  I am fortified in that view by the fact that in all the cases to which reference has been made these were all self contained actions to pierce the veil.  And so the current matter has in my judgment been procedurally defective and was therefore amenable to be struck down on that ground.  It is this procedural misconception by the Plaintiff that has caused Mr Yip to have the struggle with a valiant attempt at adapting the court forms to suit his purposes.  This simply was never a viable option.  For these additional reasons the application would have failed, although I have really contented myself to deal with the matter on its merits.  Whichever way one views it and in whatever order one takes the objections they have succeeded and, inevitably, with costs to include any costs that may have been reserved.  The order for costs will be an order nisi in the usual way.