PACIFIC HARBOR ADVISORS PTE LTD AND ANOTHER v. WINSON FEDERAL LTD AND OTHERS

HCA 1257/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1257 OF 2013

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J U D G M E N T
(Leave to Appeal)

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Introduction

1.  There are two applications before this court taken out by D3, one issued on 17 March 2015 for leave to appeal (“Leave Summons”) against a receivership order made by this court on 3 March 2015 (“Receivership Order”), and one issued on 5 May 2015 for stay of execution of the Receivership Order (“Stay Summons”).

2.  On 1 August 2014, this court handed down a judgment granting final judgment for all monetary claims, being loans totalling a total sum of US$38m plus interests in favour of Ps against the D1/Winson Federal and/or D2 the Executor of the estate of the deceased/Carlos   having executed 2 personal guarantees as security for the loans (“Main Judgment”), and that the 1^st, 2^nd, 3^rd, 4^th and 6^th defendant be given leave to defend on the rest of the Ps’ claims.

3.  I shall adopt the same abbreviations in the Main Judgment, unless otherwise indicated.

4.  After the Main Judgment, there were discussions by Ps with D2 and an agreement was in principle reached by October 2014 for the transfer of various assets of the Carlos’ estate (“Estate”) (principally the shares of D4 – D7 and SFIC Ltd) (“Settlement Proposal”).  However, the beneficiaries of the Estate, including in particular D3, opposed the Settlement Proposal, and according to Ps, they had written repeatedly to D3 asking him to assist with the appointment of Ps’ nominees to be the directors of D1, D4, D7 and SFIC Ltd, but D3 had refused to assist.

5.  This eventually led to Ps issuing an ex parte summons under Order 30 and Order 51 of RHC, and s 21L of the High Court Ordinance on 26 February 2015, for their Managing Director, namely Allderige, to be appointed the receiver and manager of the companies D1, D4, D6, D7 and SFIC Ltd.  The ex parte summons was heard before M Chan J who directed that it should be inter-partes.  The inter-partes summons was then filed later on the same day (“Receivership Summon”) and fixed for hearing before this court on 3 March 2015 (“03.03.15 Hearing”).

6.  The Receivership Summons was directed at D1, D2, D4 and D6.  Two affirmations of service were filed in connection with the service of the Receivership Summons and Allderige’s supporting 8^th affirmation on 26 February 2015, and service of Allderige’s 9^th affirmation on 27 February 2015, and further service of P’s skeleton submissions and hearing bundles on 2 March 2015.  All were served at the registered office of D1, D4 and D6, which were at the same address.  

7.  D2’s solicitors had also been notified of the Receivership Summons and they had written to the court, indicating that as D2 only obtained a Beddoe Order allowing him to defend the action and to receive and review all papers filed by the parties in the action, and as D2 had confirmed to Ps that he had no objection to the Receivership Summons, his solicitors asked to be excused from the 03.03.15 Hearing.  Such application was allowed by this court.

8.  The Receivership Summons was, however, not served on D7 a BVI company, nor SFIC Ltd, the PRC company which is the owner of the property in Shenyang (“Shenyang Property”) of the Project.

9.  Counsel Mr Hugh Kam appeared for Ps at the 03.03.15 Hearing.  D1, D4, and D6 were absent.  After hearing Mr Kam, and there being no opposition, the Receivership Order was made on the same day.

10.  Under the Receivership Order, Allderige was appointed as receiver and manager in respect of all shares in private and public companies owned by the Estate including D1, D4, D5, D6 and D7 (“Companies”) in or towards satisfaction of the moneys and interest due or will be due to Ps under any judgment in this action.

11.  The Leave Summons, as well as the Stay Summons were, however, not made by D2, against whom the Receivership Order was directed, but by D3, a beneficiary of the Estate.

12.  Senior Counsel Mr Edward Chan appeared with Mr Hugh Kam before this court for the present applications by D3, and Mr Earl Deng and Mr Au Lut Chi appeared for D3.

13.  There were two preliminary points raised by Mr Chan, namely (i) whether leave to appeal was necessary, and (ii) whether D3 had any locus standi to issue the two summonses.

Reasons for the Receivership Order

14.  The Receivership Summons was issued under both Order 30 and Order 51. 

15.  Mr Kam appeared on behalf of Ps at the 03.03.15 Hearing.  In view of the fact that D7 and SFIC Ltd had not been served, and SFIC Ltd was not even a party to this action, I had indicated that I was not prepared to make any receivership orders as sought in the Receivership Summons, namely over all assets and businesses of the companies named therein, in particular in respect of D7 and SFIC Ltd, and that I would be prepared to consider a receivership order over the shares instead.

16.  Mr Kam then asked for the matter to be stood down for him to take instructions.  Subsequently, Mr Kam came back to court with a revised draft order for my consideration, and he confirmed what he was seeking in the revised draft order was for equitable execution under Order 51 against shares held by D2.  I had queries as to whether D2 should be notified, and understood from Ps that D2 would not have any objection.  I then made an order in terms of the revised draft order.

17.  No reasons had been handed down at the time.  I will give my reasons briefly hereafter.  

18.  The debt outstanding by D1 and/or D2 under the Main Judgement was huge and had been outstanding for over 5 years, and the Estate did not seem to have enough cash to make full payment of the judgment debt as it had just over HK$15m as at mid May 2014.  The Shenyang Property and/or the Project would seem to be the only valuable asset but it is outside jurisdiction.  The Shenyang Property was held by SFIC Ltd, a subsidiary of D7, and in turn D7 was held as to 21% by the Estate and 79% by D4, and D4 was in turn held 95% by the Estate and 5% by D3.  The financials of D4, D7 and SFIC Ltd were not clear and there were apparently huge liabilities.  Any execution by way of charging order on D2’s shares in D4 would likely to take time, as stated in Allderige’s 8^th affidavit. Although there were winding up proceedings against D1, appointing a provisional liquidator for D1 would involve a substantial amount of costs.  It further appeared that Ps had tried different means of trying to settle the judgment debt, but these had been to no avail.

19.  No doubt Allderige was an interested party, but there was no objection from D2, or any one else at the time, to Allderige being appointed the receiver, nor was any other receiver and manager put forward.  Allderige had said that he did not intend to seek remuneration in the performance of his role as a receiver and manager.

20.  I had considered the circumstances of this case and the submissions of Mr Kam at the 03.03.15 Hearing.  I made an order in terms of the revised draft order at the 03.03.15 Hearing, which was an order made under Order 51.

Whether Leave to Appeal was necessary

21.  Mr Deng submitted that the final judgment for monetary claims was only part of Ps’ claims against D1 and D2, and that there was no final order yet for the other claims against D2 in the amendment statement of claim, in particular, the specific performance of the share pledge agreements in relation to D4 and D6, which were part of the Securities for the 2 Loans.

22.  Mr Deng had referred to this court’s decision in the case of Zhang Xiuhong and Liu Wenchen and others, HCA 2118/2012, unrep, 06.08.13.  However, in that case, first of all, there was no issue as to whether leave to appeal was necessary, and secondly, the appointment of receiver was expressed to be made until final determination of the action or further order, and was clearly interlocutory.

23.  Had the Receivership Order been made under Order 30, it could be argued that the order was interlocutory, but the Receivership Order was made under Order 51 for equitable execution of a final judgment for monetary claims.  I take the view that it was not an interlocutory order, even though in the Receivership Order, costs were stated to be in the cause.

24.  In the circumstances, I am of the view that no leave is required to appeal against the Receivership Order.

Whether D3 had any locus in issuing his two summonses

25.  Mr Chan submitted that the Receiving Order was made in relation to D2’s shares as owner of the shares, and the administration of the Estate had not been completed, D3 would not have any beneficial interest in the shares.

26.  Mr Chan had referred to Commissioner of Stamp Duties v Livingston [1965] AC 694, where the widow of the deceased testator had died before administration of the testator’s estate had been completed.  It was held by the House of Lords, among other things, that in the case of an unadministered estate the assets as a whole were in the hands of the executor, his property, and until administration was complete it could not be said of what the residue, when ascertained, would consist or what its value would be, and that at the date of the widow’s death, there was no trust fund consisting of the testator’s residuary estate in which the widow could be said to have any beneficial interest because no trust had as yet come into existence to affect the assets of his estate[1].

27.  Mr Chan also referred to Re Yuen Kiu Kwan, HCMP 414/2009, unrep, 17.04.09, a case where an originating summons was taken out by the administrator of the estate, for registration as a member of the respondent companies as successor-in-title to the deceased, and the applicant Ms Lo applied to join as a party to the originating summons, as she claimed to be the sole beneficiary to the deceased’s estate.

28.  It was said by S Kwan J, as she then was, that during the period of administration of the estate, Ms Lo had no legal or equitable interest in the assets comprised in the estate.  Her only right, as a putative legatee, was to have the estate duly administered by the administrator in accordance with law, and whatever property that came to the administrator in his office came to him in full ownership, without distinction between legal and equitable interest, and the whole property was his, and the administrator was to hold the property for the purpose of carrying out his duties and functions as the administrator, subject to the direction of the court[2].

29.  Mr Deng had relied on Order 15 rule 14(2) of RHC.  Order 15 rule 14 states as follows:

“(1) Any proceedings, including proceedings to enforce a security by foreclosure or otherwise, may be brought by or against trustees, executors or administrators in their capacity as such without joining any of the persons having a beneficial interest in the trust or estate, as the case may be; and any judgment or order given or made in those proceedings shall be binding on those persons unless the Court in the same or other proceedings otherwise orders on the ground that the trustees, executors or administrators, as the case may be, could not or did not in fact represent the interests of those persons in the first-mentioned proceedings.

(2) Paragraph (1) is without prejudice to the power of the Court to order any person having such an interest as aforesaid to be made a party to the proceedings or to make an order under rule 13. ”

30.  Although D3 is a party to the action, he was not a party to the Receivership Summons.  There had been no application for joinder by D3 to the Receivership Summons.

31.  Mr Deng submitted that the court had inherent jurisdiction to join D3, an ultimate beneficiary in the Estate, and that on behalf of D3, he made such oral application during the hearing before this court, and that there was no prejudice to Ps.

32.  Mr Deng then sought to draw an analogy based on insolvency law, that the shareholders and directors of a company under a receiving order would retain residual powers of management, including the power to institute proceedings challenging the validity of a debt, or the appointment of the receiver and to continue to act as monitors of the stewardship of the company’s affairs.  He further submitted that the appointment of a receiver should have no significant legal effect on the members’ ownership of the company’s shares that were subject to receivership, and that the companies could not, as a matter of principle, be disabled or disbarred from appealing the very order that had caused it to fall under administrations.

33.  Mr Deng had referred this court to Re Land and Property Trust Co Plc [1991] BCC 446 in which there was a petition by a creditor who had presented a winding–up petition against the Land and Property Trust Co plc (LP&T) and had petitioned for an administration order.  The person entitled to appear on the petition for an administration order took an objection to the locus standi of the petitioner, based on the proposition that a shareholder, a member or a contributory who presented a petition must both allege in the petition and show by evidence that he would receive a tangible share of a surplus on a winding up.

34.  As Harman J said, such a proposition was based on what Sir George Jessel MR had said in Re Rica Gold Washing Co (1879) 11 CHD 36, namely that a man could only come to the courts for relief if he had a proper cause of action, using that phrase in its widest meant, that was, a ‘sufficient interest’ in the outcome of the action to warrant his joining other persons and taking the court’s time to decide the matter raised[3].

35.  Harman J had also referred to what Oliver J had said in Re Chesterfield Catering Co Ltd [1997] Ch 373 when referring to a ‘sufficient interest’ and what was said by Jessel MR, that in order to establish his locus standi to petition a fully paid shareholder must show that he would, as a member of a company, achieve some advantage, or avoid or minimise some disadvantage, which would accrue to him by virtue of his membership of the company.  

36.  Mr Deng had relied on what was said by Harman J to support his argument that a member of a company would have residual powers to contest proceedings, and thus D3, being a member of D4 and through D4, D7, would have residual powers.

37.  However, as pointed out by Mr Chan, D3’s membership in the Companies was “neither here nor there”, as the Receiving Order was made against D2, and not the Companies.  

38.  Mr Deng had also referred the court to 2 judgments in the case of Lau Yu Shing v Chan Wing Hung Philip, one in the Court of Appeal, namely [2014] 2 HKLRD 688 and also the CFI unreported judgment, HCMP 263/2010, 28.01.11 where it was held that ultimate beneficiaries of an estate should be entitled to tax a bill arising between the solicitor and the client administrator, even though they were only third party beneficiaries.  The defendant’s appeal was subsequently dismissed by the Court of Appeal.

39.  Mr Chan had distinguished the facts of the present case from the Lau Yu Shing case.  The plaintiffs in the Lau Yu Shing case were beneficiaries to the estate of an ancestor, and there was a deed of family arrangement dividing among the 8 fongs which included the plaintiffs.  As can be seen from the earlier judgment of DHCJ Q Au-Yeung, as she then was, each of the 8 fongs were already beneficial owners of the lands allocated to it under the deed, and further limited grants of letters of administration had already been granted to the plaintiffs in respect of immovable property, although there had not been vesting.  It was held that the plaintiffs did have locus to take out the application to ask the defendant solicitor to render a bill of costs for work done for them.

40.  At present, the Estate was said to be insolvent, and D3 did not seem to have disputed it.  D2 had already made partial payment of about HK$10m towards the judgment debt.  Mr Chan had submitted that D3 could not stop the Estate from paying its debts, in particular under a final judgment.

41.  Mr Deng had submitted that the appointment of a receiver should have no significant legal effect on the company’s members or shareholders, and had relied on the Court of Appeal judgment in Compania Sud Amerciana de Vapores SA v Hin-Pro International Logistics Ltd, unreported, CACV 243/2014, 11.03.15, when the CA when considering whether the directors had to apply for leave to defend to the receivers appointed, had said that the receivership order, properly construed, did not require leave to be obtained before the company itself could resist proceedings, and went on to say that those principles were well-established and accord with common notices of fairness and justice, and it was difficult to see why a company faced with litigation should not be free to defend itself as best as it could, particularly where orders with potentially draconian effects had been made against it[4].

42.  As pointed out by Mr Chan, it would have been open for D2, the Executor, to appeal, but he did not.  

43.  Having considered Mr Chan’s submissions, I have come to the view that D3 does not have any locus to appeal against the Receivership Order.

Leave Summons

44.  To summarise, in light of what I have said above, I am of the view that the Receivership Order was not an interlocutory order, and no leave to appeal is required from this court.  Even if leave is required, I am of the view that D3 does not have any locus to appeal against the Receivership Order.

45.  Having decided in Ps’ favour on these two preliminary points, the Leave Summons in my view must fail.

46.  In any event, I am not satisfied that the appeal has merits.   There were 4 main grounds in the amended draft notice of appeal, which amendments were opposed to by Mr Chan as there had not been a summons to amend.  The complaint in Grounds 1 and 3 was that the Receivership Order was too wide, ie the order should have been against the Companies and not the D2’s shares in the Companies, and there was also a complaint that the order was wrong in that receivership should be concerned with powers of management and not with the transfer of ownership and control.

47.  The matter of whether it should be the Companies or the shares was canvassed during the hearing.  Further, the shares are assets of the Estate/D2, and in my view should be the right target for the equitable execution.

48.  As for Ground 2, the complaint was that there was insufficient evidence for real risk of dissipation.  The evidence had been set out in Allderige’s 8^th affidavit.  D3 had filed a 4^th affirmation on 6 May 2015 said to be in support of the Leave Application and the Stay Application, and had attempted to reply to the Allderige’s allegations of dissipation of assets in D1.  This affirmation was filed two months after the Receivership Order.  In any event, the Receivership Order was made under Order 51 of RHC, and not under Order 30 .

49.  As to Ground 4, whether Allderige should have been appointed as the Receiver, in my view, it is unlikely that Allderige would sell the Shenyang Property at an undervalue since Ps would wish to recover as much of the judgment debt as possible.  Further, from the evidence, all along, it was Ps which were clearly anxious to proceed with the matter, and there was no evidence that Ps would hold off from selling because this would allow interest to accrue.  D3 had alleged that Allderige had been incompetent and unprofessional.  As I have said, there had been no other receiver put forward by D2, nor by any one else at the time, who would be willing to be appointed and no information as to what charges would be involved or who would be responsible for such charges. In fact, even up to now, there had been no suitable alternative put forward by D3.

50.  Having considered both Counsel’s submissions, I am not satisfied that the appeal has a reasonable prospect of success, or there are other reasons in the interests of justice why the appeal should be heard.

Stay Summons

51.  The legal principles for stay applications are trite.  As submitted by Mr Chan, the courts’ approach is “to consider the balance of convenience and fairness as between the parties”[5].

52.  D3 did not issue the Stay Summons until 5 May 2015, about two months after the Receivership Order, notwithstanding he filed the Leave Application on 17 March 2015.

53.  On his own evidence, he was made aware of the Receivership Summons and the Receivership Order on the same day, namely 3 March 2015, after the hearing.

54.  After the 03.03.15 Hearing, Allderige had caused resolutions to be passed on the same day resolving the appointment of 4 new directors to D5 and D6.  Further on 5 March 2015, Ps’ solicitors had attended the registered office of the Companies and took away company documents.

55.  Allderige had also caused a shareholders’ general meeting of D4 to be held on 6 March 2015.  D3 had in fact instructed a partner of his present solicitors, as his proxy to attend the said meeting.  Ps had produced a transcript of the meeting of D4 on 6 March 2015.  There were 4 new directors appointed to D4 on 6 March 2015.

56.  D3 would have known the effect of the Receivership Order and that Allderige was appointed the receiver and manager of shares held by the Estate, latest within 2 to 3 days after the Receivership Order was made, if not on the same day.

57.  There had been no satisfactory explanation on the part of D3 for the delay in issuing the Stay Summons.  Although there was quite a lot going on after the Receivership Order, and a new legal team coming in, I do not find that these were good reasons for the delay, in particular when the Leave Summons had been taken out on 17 March 2015.  Mr Deng argued that any delay would not prejudice Ps, but as pointed out by Mr Chan SC, there would be prejudice as Ps had been spending money every day after the Receivership Order. 

58.  I have already said I am not satisfied that the appeal against the Receivership Order has merits, or that D3 has the locus. I accept what was submitted by Mr Chan, staying the Receivership Order would mean that Ps would no longer be able to manage the Shenyang Property, and given D3’s refusal to do so, there would likely to be a continued diminution of the value of the property, and even the possibility of a complete confiscation without compensation, and Ps would then not be able to recoup any more of the judgment debt.  Staying the Receivership Order would also delay the sale of the Shenyang Property.

59.  Mr Chan SC further submitted that there would be no prejudice to D3 in allowing the Receivership Order to continue running, since the operation would involve no incurrence of any costs on his part, and in fact he could benefit as the maintenance of the Shenyang Property would enable it to be sold at the highest price possible, and also lead to maximum residual income possible for him and the other beneficiaries.

60.  Having considered all the circumstances, I am not prepared to grant a stay pending appeal against the Receivership Order as sought in the Stay Summons, in particular when leave to appeal had not been granted.

61.  Just 3 days before the hearing before this court, D3 suddenly issued an originating summons on 12 May 2015 under HCMP 1149/2015 to seek an extension of time to serve a Notice of Appeal against the Main Judgment, based on new evidence in the form of a recording of a conversation between Ps’ former associate director Ang and Vincent’s mother Ruby.  This originating summons has been fixed for hearing before this court on 19 June 2015.

62.  At the present hearing, D3 seemed also to be applying for a stay pending the determination of this originating summons, but no proper application had been taken out in this regard.

63.  Further, “matters which have occurred since the date of the judgment or order” under Order 45 rule 11 of RHC has been said to refer to “matters which went to the validity of the judgment and which, if established before the Court, might justify the court in saying that this was a judgment which on the material now before it, it would not allow to be executed”[6].

64.  D3 has yet to satisfy this court that the recorded conversation would affect the validity of the Main Judgement.  Having considered the present material before this court, I am not persuaded that I should grant a stay pending the determination of D3’s originating summons in HCMP 1149/2015.

65.  To conclude, I dismiss the Stay Summons.

Order

66.  My order is thus:

(i) D3’s summons issued on 17 March 2015 for leave to appeal against the Receivership Order be dismissed;

(ii) D3’s summons for stay of execution of the Receivership Order be dismissed.

67.  As for costs, I see no reason as to why costs should not follow the event, to be taxed with certificate for two Counsel and paid forthwith.  This is an order nisi, which shall be made final after 21 days.

68.  Lastly, I thank all Counsel for their submissions and assistance to the Court.