LIU HON YING t/a UNITED SPEEDOC CO v. HUA XIN STATE ENTERPRISE (HONG KONG) LTD AND ANOTHER

HCA1060/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1060 OF 2001

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J U D G M E N T

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Background

1. Manufacturers in Hong Kong with factories in the Mainland usually export goods via Hong Kong. This kind of transhipment would require certain certificates commonly called Form A and Certificate of Origin.

2. "Form A" is a Certificate of Reduction on export-tariff given by developed countries to developing countries (普惠制產地來源証). It is also called GSP Form or Certificate of Non-Manipulation in Form A. Certificate of Origin (產地來源証) ("C/O") is a Certificate of Origin of exported products.

3. In the Mainland, the issuing authority of this kind of certificates is China Commodity Inspection Bureau (中國商檢局) ("the Bureau"). In Shenzhen region, the authority is Shenzhen Import & Export Commodity Examination Bureau (深圳進出口商品檢驗局) ("the Shenzhen Bureau").

4. Application for these certificates from manufacturers in Hong Kong would involve sending the application from its Hong Kong office to Shenzhen for processing. After due certification they would have to collect and bring the same back to the Hong Kong office as part of the shipping documents for export or transhipment.

5. It was this delivery service of sending the application to the Shenzhen authority for certification and bringing back the necessary certificates after their issuance by the Shenzhen Bureau that the plaintiff company came into the scene. By an agreement dated 7 October 1989, the plaintiff company, United Speedoc Company, entered into an agreement with a company in Shenzhen by the name of China Commodities Import and Export Corporation Shenzhen ("CCIC Shenzhen") (深圳進出口商檢公司). CCIC Shenzhen is a direct subsidiary of the Shenzhen Commodity Inspection Bureau. Since the latter is an official administrative organisation of the Mainland, it could not directly take part in commercial activities. But the substance of the agreement was agreed between the plaintiff, Madam Liu, with four persons being heads and deputy heads of the Shenzhen Bureau. It was for a term of five years from November 1989 to November 1994.

6. The plaintiff's entitlement under the agreement was to have exclusive or monopoly right to receive applications for the aforesaid Form A and C/O and provide a speed post delivery service from Hong Kong to Shenzhen for processing and thereafter deliver the certificates back to Hong Kong for the collection of the applicants. The service is a speed-document delivery service and the process would just take about two days. Other speed post companies of course could perform the same service. But I said it was a monopoly because there and then the plaintiff was the only approved company in Hong Kong who would be accepted by the Shenzhen Bureau in the submission of application forms for certification.

7. By a supplemental agreement dated 12 November 1991, the contracting party CCIC Shenzhen was changed to Shenzhen Import and Export Commodity Examination and Technology Advisory Service Unit (深圳進出口商品檢驗技術諮詢服務站). It is not clear from the evidence before me why it was necessary to have such a change. The necessity of such a change was best known to the aforesaid Shenzhen Corporation and Bureau. Whatever the changes, it was basically the same group of persons or official posts in control of the certification.

8. The aforesaid business turned out to be quite lucrative. At one time the gross income from the applications each day could be more than $10,000 and the charge for each application was $125 for Form A and $45 for C/O. The Shenzhen Bureau later on incorporated a Hong Kong limited company by the name of Scenic View Enterprises Limited (怡景實業有限公司). The shareholders and directors of this company were the Head and Deputy Head of the Bureau at that time : Ma Ying-kang (馬應康) and He Ji-gang (賀繼剛). It was carrying on the same business as the plaintiff and in competition with her.

9. Eventually, through the mediation of the head of the Guangdong Commodities Inspection Bureau and the negotiation with Shenzhen Commodities Inspection Bureau, the plaintiff entered into a cooperation agreement with a designated company called Hung Tak Services Limited (鴻德服務有限公司) ("Hung Tak") to run this business of express delivery of Form A and C/O application. The plaintiff would be entitled to share 38% of the profit therefor. The agreement between the plaintiff and Hung Tak was for two years from 14 November 1994 to 13 November 1996. Hung Tak was established in June 1993 by an official sent by the Shenzhen Commodities Inspection Bureau by the name of Zhou Shu-da (周樹達).

10. However, Hung Tak only paid the profit due to the plaintiff for the first year but not the second year. Thus, the plaintiff commenced HCA385/1995 against Hung Tak on 11 January 1997 for breach of contract and for the recovery of the profit due and owing to the plaintiff.

11. On 19 July 2000, Deputy Judge Ronny Wong gave judgment for the plaintiff against Hung Tak in the sum of $2,943,729.80 with interests and costs of the action in the absence of appearance of Hung Tak at the trial. Although judgment was obtained against Hung Tak, the plaintiff could only recover $160,484.00 by way of garnishee proceedings on 21 September 2000 from the account of Hung Tak with its bank, leaving the outstanding judgment sum of $2,783,245.00 and interests from the date of the judgment up to the date of the writ in this action on 27 March 2001 in the total sum of $3,022,535.00 unpaid. According to the plaintiff Hung Tak should have at least $5 million gross income from the aforesaid delivery service. However all the monies of Hung Tak had mysteriously disappeared.

The present action

12. In this action the plaintiff claims against the 1st defendant ("Hua Xin") and the 2nd defendant ("China Inspection") respectively under the provisions of the Transfer of Business (Protection of Creditors) Ordinance, Cap.49 for the aforesaid judgment debts together with interests and costs owed by Hung Tak to the plaintiff. The primary case of the plaintiff is that from all the circumstances of the case there was a "transfer of business" from Hung Tak to Hua Xin and then from Hua Xin to China Inspection.

13. The plaintiff further claims against Hua Xin on the ground that Hung Tak and Hua Xin are one and the same company and their corporate veils should be lifted. In other words, Hung Tak and Hua Xin are in effect controlled by the same person or group of persons and given the real reason of the transfer (i.e. to evade liability to the plaintiff), their corporate veils should be lifted.

The plaintiff's evidence

14. In respect of the transfer of business alleged by the plaintiff from Hung Tak to Hua Xin, the plaintiff called a witness Mr Chan Chi Yung (陳子雍). Mr Chan worked for Hung Tak since 20 September 1996, i.e. shortly before the contract between Hung Tak and the plaintiff expired by November that year. He dealt with customers' application for Form A and C/O and entered the data into the computer system which was linked up with the Bureau in Shenzhen. At that time, there were five other employees working in the office at Room 1504, Argyle Centre in Mongkok. They were Ms Suen Yin (孫妍) the general manager, Ms Yu King Tan (余景丹) the cashier, Ms Wong Ping (黃萍), Ms Wong Yuk Kam (黃玉金) and Mr Au Yeung Chi Kin (歐陽志堅).

15. In or about November 1996 (i.e. when the contract between Hung Tak and the plaintiff expired) Ms Suen directed the employees of Hung Tak to take down the Hong Kong telephone numbers of their customers when they submitted their applications. This sheet of daily record would be submitted to her at the end of the day by Mr Chan but before he did so, he copied down the telephone numbers of the customers first. At the direction of Ms Suen, both Mr Chan and Ms Wong Ping would then telephone their customers informing them that future application could be submitted at a company by the name of Hua Xin i.e. the 1st defendant. In fact when Ms Suen directed Mr Chan to telephone the customers, he was also told not to tell the customers directly over the counter. Hua Xin at that time was in Sai Yeung Choi Street which was just a street away from Hung Tak and it was about less than 100 metres away or less than 10 minutes' walk therefrom.

16. About one month later most customers of Hung Tak were transferred to Hua Xin and submitted their applications at Hua Xin instead of at Hung Tak. Since the customers of Hung Tak diminished, Ms Suen directed that Mr Chan and Ms Wong Ping should stay in Hung Tak whereas the other three staff i.e. Ms Yu King Tan, Ms Wong Yuk Kam and Mr Au-Yeung Chi Kin would be posted to Hua Xin instead. Ms Suen herself also left Hung Tak and went to work in Hua Xin as its manager. According to Mr Chan, Ms Suen said : "We would have to open another company call Hua Xin in the next street and you (i.e. Mr Chan) and Wong Ping would stay behind in Hung Tak."

17. Mr Chan said when Ms Yu King Tan went to Hua Xin and became the cashier there, she brought along the oval chop of Hung Tak and used it on the tickets of Hua Xin, which were sold to customers for processing F/A and C/O. That is why those tickets retained by the plaintiff which were bought in Hua Xin and produced to court, contained the chop of Hung Tak thereon. Not a single one ticket bore the oval chop of Hua Yin across the second and third portion of the ticket. No one could say in this court whether a similar chop of Hua Xin ever existed at any time.

18. After the aforesaid transfer of staff from Hung Tak to Hua Xin, Mr Chan was responsible for receiving application whereas Ms Wong Ping was the cashier receiving payments for the tickets at Hung Tak. The computer system including the computer terminal was transferred to Hua Xin which in turn was linked up to the Bureau. It was set up in Hua Xin by technician from CCIC Shenzhen. Accordingly Mr Chan would have to go to Hua Xin every day and enter the data into the computer for those applications submitted at Hung Tak. Early in the morning he would go to Hua Xin to collect the certificates for those customers who had submitted their application forms at Hung Tak so that Hung Tak's customers could collect the same at Hung Tak. From time to time, he also had to deliver the applications to Shenzhen when the driver of Hua Xin, a Mr Tung, was not available.

19. According to Mr Chan the staff of Hung Tak and Hua Xin were the same team of persons. Every month Mr Chan would go to Hua Xin and he received his salary in cash from Ms Suen.

20. From time to time one of the directors of Hung Tak would come down from Shenzhen to Hung Tak and she was Madam Chen Gui Rong who was the only witness for Hua Xin. Madam Chen was the vice general manager of Shenzhen Hua Xin State Enterprise Industrial Development Company (深圳華信國企實業發展公司), i.e. Hua Xin's Headquarter in Shenzhen. She joined Hung Tak as the general manager in September 1995 and she became a shareholder and director of Hung Tak from April 1996. She ceased to be a director by 23 May 1997 and she ceased to be a shareholder by February 1999. She was also the company secretary of Hung Tak from 1996 to 23 May 1997.

21. Madam Chen was also the general manager of Hua Xin, i.e. the 1st defendant herein. She was a subscriber shareholder and director of Hua Xin from November 1996 up to February 2001. According to Mr Chan, Madam Chen said that the necessity of asking the customers to go to Hua Xin was because of litigation.

22. By the end of 1998, the applications submitted at Hung Tak had diminished a lot and Wong Ping was instructed by Ms Suen to work at Hua Xin and Mr Chan stayed behind in Hung Tak. Thus he worked in Hung Tak alone for all the necessary jobs including receiving payments, depositing the payments into Hung Tak's account in the bank, delivering the applications to Hua Xin and entered the data into the computer, and thereafter from time to time, when required, delivered the documents to Shenzhen and back to Hong Kong. Further on the first day of each month he would have to submit a table of income to Ms Suen at Hua Xin and Ms Suen would submit the same to Hua Xin's headquarter in Shenzhen to a Ms Xiao Yan Sui (肖燕穗) who was the managing director in Shenzhen. In fact, Mr Chan would walk in and out of Hua Xin every day as a staff thereof, though officially he received his salary as an employee of Hung Tak. It is correct to describe him as an employee of Hung Tak who was also required at the direction of Ms Suen Yin to work in Hua Xin as well.

23. On or about 4 August 2000, (i.e. after the aforesaid judgment was obtained by the plaintiff against Hung Tak, who proceeded to execution thereon) when Mr Chan delivered the certificates to Hua Xin as usual, he was surprised that Ms Suen instructed him to stop receiving applications in Hung Tak and payment therefor. He was also asked whether there was any cash in the office and if so he should not deposit the same into the bank but to hand over all the cash to her. There and then Hung Tak had $40,000 in cash which represented the gross income for three days. At about 1:00 p.m. that day he handed over about $40,000 to Ms Suen and she signed a receipt therefor. Out of this sum of money she paid $6,950 to Mr Chan as his salary for the month of August.

24. On 8 August 2000 Ms Suen handed over the receipt she signed to Mr Chan for him to deliver the same to Madam Xiao in Hua Xin headquarter in Shenzhen.

25. One day before that i.e. on 7 August 2000 when the staff of the plaintiff's company came to submit their applications, Mr Chan told him that Hung Tak would stop receiving application and payment therefor. The plaintiff company had the habit of buying a number tickets in advance for the application and therefore all those tickets could not be used in Hung Tak anymore. Madam Liu and her husband therefore came and protested to Mr Chan. Mr Chan immediately telephoned Ms Suen. It was a Mr Zhu who received his telephone call and he told Mr Chan not to telephone Hua Xin anymore. Mr Zhu would ask Madam Xiao the managing director in Shenzhen to phone Mr Chan at Hung Tak. After ten minutes he received a phone call from Madam Xiao and Madam Xiao told him to ignore Madam Liu. He was asked to leave Hung Tak immediately and go to the headquarter of Hua Xin in Hong Wang Building in Tsim Sha Tsui. Whereupon Mr Chan said he would not go to the headquarter but would go to his wife in Shenzhen and that was agreed by Madam Xiao.

26. The next morning on 8 August 2000 Mr Chan went back to Hung Tak's office and Madam Xiao phoned him and told him to deliver all the documents, cheques, tickets' counterfoil and applications to her at Hua Xin's headquarter in Hong Wang Building in Tsim Sha Tsui. Mr Chan did what he was told and he was also told by Madam Xiao to go home and wait for further instructions. Mr Chan waited for three months with no further instruction so he went to Hua Xin's headquarter in Shenzhen and met Madam Xiao and Madam Chen. Eventually he got back his three months' salary and the lay-off payment. Thereafter he worked for about a year for the plaintiff company in her courier service and eventually he left the plaintiff company also.

Credibility of witnesses

27. Mr Chan gave evidence in court in a straightforward manner. His testimony was supported by documents. He answered all questions under cross-examination directly. When the defence witness Madam Chen Gui Rong for Hua Xin, the 1st defendant, gave evidence, she for the first time made very serious allegations against Mr Chan including forging documents and stealing company's documents. These allegations were never raised by her in her witness statement at all. They were not put to Mr Chan during his cross-examination either. I consider that Mr Chan is a credible witness, though he felt quite angry of the defendants in particular Madam Suen and Madam Chen when he was not employed by any of their companies any more. However I do not find any part of his evidence untruthful because of his anger against Hung Tak and Hua Xin.

28. Madam Liu, the plaintiff, gave evidence and she was cross-examined for more than one day. However not much challenge was made against the evidence she gave and her evidence is supported by documents such as the receipts or the tickets at D216-222B. The oval chop of Hung Tak on the tickets of Hua Xin was so obvious and there was no allegation of manipulation on the part of Madam Liu when she was cross-examined.

29. I accept the evidence of Mr Chan and Madam Liu and in particular in so far as they contradicted the defence witnesses.

30. On the contrary, Madam Chen's evidence was materially contradicted by documents. She made a number of unfounded allegations and she gave evidence with speculations. I find her demeanor to be evasive and she did not answer questions directly. One obvious example is her speculation without substantiated evidence about the tickets of Hua Xin bearing the chops of Hung Tak. In examination-in-chief, she sought to explain it by proposing two speculative alternatives, namely :

(1) That customer purchased the tickets from Hua Xin which were not stamped and use them in Hung Tak and therefore staff of Hung Tak put its chop onto the tickets of Hua Xin without noticing the wording since the two kinds of tickets were quite alike in terms of colour and format except the two words of either Hung Tak or Hua Xin;

(2) The chops were put by Chan Chi Yung on the tickets, and she was implying that this was done improperly in order to support the case of the plaintiff.

31. When she was cross-examined on these two possibilities, she then invented a third possibility that the chop of Hung Tak was put on the tickets after they were used.

32. However it is quite obvious that the two tickets at D-217 and D-222 were not used at all (as two portions of the tickets remained intact) and they did not bear the small round chop of Hua Xin stating in Chinese that the certificate had been collected (已領證). However each one of them bore the bigger oval chop of Hung Tak. Further, some of the tickets e.g. the lower one in D-216, which had been used with the little round chop of Hua Xin, the part of the oval shape clearly shows that the letter "k" meaning k in the word "Tak", suggesting it was the same Hung Tak's chop instead of Hua Xin. Further on the other hand those tickets produced by the plaintiff at 222B(1)-(21) were all tickets bought by the plaintiff from Hung Tak which could not be used due to the incident on 7 August 2000 as aforesaid. Not a single one of them bore a chop of Hung Tak at all, i.e. no chop was put in these two portions of the ticket.

33. Thus it is quite clear that the Hua Xin's tickets were used at Hua Xin and not Hung Tak as suggested by Madam Chen as after the collection of the certificates, Hua Xin's little round chop of receipt would be invariably put on Hua Xin's tickets. It was at this juncture that Madam Chen started to doubt about Mr Chan's character and alleged for the first time that he stole the companies' document and used Hung Tak's chop onto the used tickets of Hua Xin. Anyway Madam Chen just refused to accept the simple and most probable explanation from all the documentary evidence available to the court that it was Ms Yu King Tan who took the chop of Hung Tak along and used it on Hua Xin's tickets and that was why all Hua Xin's tickets bore the chop of Hung Tak. That was also why thereafter Hung Tak's tickets have no chop at all. In any event, all these allegations of Madam Chen were never put to Mr Chan at all.

34. Further, Madam Chen was confronted with documents proving her involvement in Hung Tak's business after 23 May 1997 when earlier she said she had already left Hung Tak. These were document at D265 to 269 being record of salaries paid to Chan Chi Yung from April to December 1997. In fact, these documents bore the signatures of Madam Chen, Madam Suen and Madam Xiao as well. Letters from Hung Tak's solicitors (D165-170) sent to Hung Tak between March 1997 and February 1998 were also stated to her attention as the deputy general manager of Hung Tak. She could offer no credible explanation for Suen Yin's similar involvement after 1 April 1997 in Hung Tak's business and Suen Yin's involvement in Hua Xin's business before that day at D213, being a receipt issued to Hua Xin's customer for annual Inspection that was signed apparently by Madam Suen as the authorized signature of Hua Xin on 26 March 1997.

35. For the aforesaid reason, I would reject the evidence of Madam Chen.

36. The 2nd defendant China Inspection called two witnesses, Mr Zhu Ding Min (朱定敏) and Ms Chung Siu Yin (鍾小燕). Their evidence however cannot assist the 2nd defendant's case. Mr Zhu admitted in his evidence that China Inspection did not have the business in relation to Shenzhen before July 2000. He also admitted that Hua Xin virtually handed over everything in the office together with the tenancy with the landlord at Sai Yeung Choi Street to China Inspection in July 2000.

37. Madam Chung's evidence is in fact irrelevant. Her witness statement at first would give an apparent impression that China Inspection carried on the courier service of Form A and C/O relating to the Shenzhen area prior to 1 July 2000. However as confirmed by Mr Zhu and later on by her in the witness box that that was not the case. In her statement she did not distinguish the area of delivery service provided by China Inspection in different periods of time. Eventually, she admitted in cross-examination that China Inspection had not carried on any service of delivering Form A and C/O for Shenzhen area prior to 1 July 2000. Her other evidence is not relevant to the present case.

The findings of facts

38. From the evidence given by credible witnesses and document before me, I would first of all give a summary of all the findings of facts which I would accept hereinbelow.

39. From 1989 to 1994, the plaintiff was the only company conducting delivery service of Form A and C/O to Shenzhen by virtue of the agreement dated 7 October 1989 and the supplementary agreement dated 12 November 1991 between the plaintiff company and CCIC Shenzhen.

40. Between November 1994 and November 1996, Hung Tak and the plaintiff were running the aforesaid business under an agreement between them in November 1994.

41. Hung Tak however conducted the said business through and/or together with Hua Xin from November 1996 to about July 2000 and Hung Tak's business was gradually and continuously transferred to Hua Xin.

42. Since about July/August 2000, China Inspection became the only company in Hong Kong conducting the said business after Hua Xin.

43. One of the main reasons for the incorporation of Hua Xin was that they wanted Hua Xin to do the business previously conducted by Hung Tak. This was confirmed by the evidence of Madam Chen Gui Rong. Madam Chen also stated that Hua Xin had other businesses, but that was irrelevant for the purpose of considering whether there was a transfer of business from Hung Tak to Hua Xin.

44. Madam Chen also confirmed that the ultimate controlling shareholder of Hung Tak and Hua Xin is the same unit in Shenzhen, i.e. Shenzhen Hua Xin.

45. The identity of the shareholders and directors of Hung Tak and Hua Xin are in substance identical save for the mysterious Mr Lam Wang Man (林宏敏). Mr Lam was on record a subscriber shareholder and director of Hung Tak but not Hua Xin and that was the only difference between the two companies' shareholders and directors. Madam Chen confirmed in her evidence that Mr Lam was not involved in any management or work of Hung Tak. Although Madam Chen said that Mr Lam made investment by purchasing the 25% shares of Hung Tak and she had given Mr Lam dividends of Hung Tak amounting to several hundreds of thousand (she did not recall exactly how much), she did not produce a single piece of documentary evidence to support the said two payments despite her confirmation that there should be documentary evidence with the common controller of Hung Tak and Hua Xin in Shenzhen.

46. From all the circumstantial evidence of this case, I do accept the plaintiff's submission that Mr Lam was just a nominee. Madam Chen agreed under cross-examination that every one of them from Shenzhen was holding the shares of Hung Tak as a nominee only for and on behalf of the unit in Shenzhen who had nominated them to hold the share, i.e. CCIC Shenzhen. The scale of business was just a small service company implying that it required no substantial investment. In any event, Shenzhen Hua Xin could afford to set up this small scale operation without the assistance of Mr Lam at all. (Madam Chen, at one time, was apparently about to say she thought it was necessary to have a Hong Kong resident as a shareholder). There was, therefore, no reason to invite Mr Lam to be a shareholder of the company which would give away 25% profit to him when he had no other contribution to the business at all. Almost all customers came from the plaintiff and in any event, customers would have to go to Hung Tak anyway since by then it was, at the material time, the only approved company by CCIC Shenzhen. That privilege was the main selling-point of Hung Tak bestowed upon it by CCIC Shenzhen. There is no reason why Mr Lam should be given a substantial portion of the share in this lucrative business.

47. There was no evidence that Mr Lam had actually invested in Hua Xin by paying for his shares or received any dividends therefor when such evidence could readily be available from the controlling shareholders behind Hung Tak and Hua Xin as aforesaid.

48. If Mr Lam was actually a beneficial owner, there was no reason for him not to defend the trial of the 1997 action on 17 July 2000 thus risking to lose all his investment to the plaintiff. In fact from the documents before me and in particular solicitors acting for Hung Tak at that time in the litigation, Mr Lam never featured as a person to be notified of the progress of the litigation even though he was a Hong Kong resident. If he was actually a beneficial owner, there was no reason why he was not called by Hua Xin to give evidence in this trial and to produce documents to support his contribution to his shareholdings in Hung Tak, and the dividends he received from Hung Tak from time to time.

49. Thus the evidence would strongly support the plaintiff's allegation that Mr Lam was in fact just a nominee for the controlling person behind the shareholders i.e. CCIC Shenzhen who also controlled Hua Xin.

50. All staff of Hung Tak had worked for Hua Xin since Hua Xin's incorporation and establishment in running of the business. Suen Yin and four other staff were transferred to work in Hua Xin. Later on, Ms Wong Ping also left Hung Tak and worked in Hua Xin. Chan Chi Yung himself in fact worked in both Hung Tak and Hua Xin and at a later stage he appeared in Hua Xin's office to work more frequently than before as aforesaid. Even Madam Chen herself who had worked for Hung Tak was also transferred to work for Hua Xin and there was evidence that she worked for both companies like Madam Suen Yin in the transitional period. In other words, Suen Yin worked for Hua Xin even before her transference to it on 1 April 1997 and both Madam Suen and Madam Chen worked for Hung Tak even after 23 May 1997 up to at least the end of that year. They were in charge of the previous 1997 action for and on behalf of Hung Tak until at least February 1998. Thus it was not only the plaintiff as a customer had treated Hung Tak and Hua Xin as one and the same entity, the staff team and Hung Tak's solicitors also treated the two companies as one.

51. The computer terminal and its systems was in fact an essential and important equipment for the business of Hung Tak. Madam Chen confirmed in her testimony that by the end of 1996, the computer of Hung Tak was transferred to Hua Xin. This collaborated with the evidence of Chan Chi Yung that after Hua Xin was incorporated, he had to bring Hung Tak's documents to the office of Hua Xin to enter the data into the computer.

52. The tickets sold by Hung Tak and Hua Xin are almost the same but for the companies' name on top. The staff of Hua Xin even used the chop of Hung Tak on the tickets of Hua Xin. The system of work used by Hung Tak and Hua Xin was the same. The telephone number and fax number of Hung Tak were used by Hua Xin.

53. The customers of Hung Tak and Hua Xin are the same. On the evidence of Chan Chi Yung, Hung Tak telephoned their customers and asked them to go to Hua Xin instead of Hung Tak and this piece of evidence has not been contradicted by anyone from the defence. Suen Yin, according to Madam Chen, could be called by the defence and she was not called to give evidence.

54. The proceeds of the business of Hung Tak were clearly passed directly to Hua Xin at the instructions of Suen Yin. Further, from the evidence of Chan Chi Yung, Hung Tak in fact ceased business after the last act of transfer of cash from Hung Tak to Hua Xin by Chan Chi Yung to Suen Yin on or about 8 August 2000. This happened after the protest made by the plaintiff on or about 7 August 2000 after the plaintiff had obtained judgment against Hung Tak on 19 July 2000.

55. Further a previous letter from Hung Tak's solicitors dated 18 February 1997 disclosed that they were asked to process the documentation and resignation of Madam Chen as director of Hung Tak. This was probably raised as part of the scheme to give up Hung Tak.

56. By a receipt dated 12 July 2000 issued by China Inspection to Hung Tak, China Inspection acknowledged receipt of a sum of $360,000 for Hung Tak's payment of purported rent of the joint office at Argyle Centre from 1 January 1997 to 31 December 1999. There was no satisfactory explanation of the reasons for such an one lump sum payment for the rental for these three years which was more than six months after the end of 1999. This would be possible only when the two companies were closely related. The payment was actually made just five days before the trial of the 1997 action and this cannot be purely coincidental. By such payment, valuable cash assets was transferred from Hung Tak to China Inspection and this would conveniently avoid payment resulting from the anticipated default judgment. I said "anticipated default judgment" because I would infer that it would not be the case that Hung Tak just decided not to appear at the trial on the very day of the trial. I made the aforesaid findings and inference in spite of the fact that one document shows that the agreement to pay $10,000 rental per month was dated in 1996. However the agreement did not provide for late payment up to six months after the expiry of the three years period.

57. Consequently, the aforesaid facts supported the inference that the transfer of business from Hung Tak to Hua Xin continued until August 2000 and the intention of the common controller behind Hung Tak and Hua Xin was to evade liability of Hung Tak owed to the plaintiff. The business records of Hung Tak, such as the receipts in relation to the applications for Form A and C/O, were passed by Hung Tak to Hua Xin.

58. In or about July 2000, Hua Xin in turn ceased business or announced that it would cease business and handed over everything which was necessary for the continuation of the same business to China Inspection. According to the evidence of Mr Zhu, on 1 July 2000 China Inspection used the office of Hua Xin at Sai Yeung Choi Street whilst the tenancy agreement was still in the name of Hua Xin. All the furniture and fittings of Hung Tak's office in Sai Yeung Choi Street remained unchanged including the computer system and they were used by China Inspection without a break.

59. Further, all the staff of Hua Xin including Suen Yin and four other staff became employees of China Inspection in July 2000. Although it was the case for the defence that severence payment were made to those staff by Hung Tak and in turn Hua Xin because of the changes of employment from Hung Tak to Hua Xin and later from Hua Xin to China Inspection, not a single piece of document was ever produced by either one of them and there was no discovery of such documents at all.

60. Significantly a notice dated 26 June 2000 was issued to the customers in the name of Hua Xin inviting them to go to China Inspection for the same kind of business or application after 1 July 2000. The 1st defendant Hua Xin in its defence denied issuing such a notice. However Madam Chen the only witness for Hua Xin eventually admitted that she could not say that the staff of Hua Xin had not issued such a notice. She could only say that she had not issued such a notice herself and had not instructed her staff to issue the same. She was, admittedly, not in Hong Kong frequently and was not here in June 2000 when the notice was given freely at the counter and obtained by the plaintiff. The notice itself is an important evidence to show that there was a direct transfer of business from Hua Xin to China Inspection.

61. China Inspection, in fact, in its original defence admitted that Hua Xin had prepared such a notice in Chinese dated 26 June 2000, but averred that the said notice was prepared by Hua Xin without the prior knowledge or consent of China Inspection. However, at the trial, China Inspection, the 2nd defendant, then applied to withdraw such an admission and amend its Defence. An affidavit was eventually filed by Zhu Ding Min and he explained that since the notice was in the name of the 1st defendant, the 2nd defendant just assumed that it was a notice of the 1st defendant. In fact, the 2nd defendant has no knowledge that the 1st defendant did prepare and send out such a notice to its customers.

62. In the end, the plaintiff did not seek to cross-examine Mr Zhu in this respect and did not raise any further objection to the application to amend the defence. However, I am not impressed with the explanation given by Mr Zhu in his affirmation. The 2nd defendant's defence was actually filed on 25 April 2001 before the 1st defendant's defence filed on 15 May 2001. From the close connection between the 1st and 2nd defendants and in particular the 2nd defendant took over the entire office and staff of the 1st defendant, I cannot seriously accept that the 2nd defendant did not find out from the 1st defendant and its staff whether they had issued such a notice dated 26 June 2000 before they filed their defence and before they made this admission that the 1st defendant did prepare such a notice but it was done without their knowledge or consent. In any event, the business of the 1st defendant was carried on by the 2nd defendant after the 1st defendant ceased its business and prior to that, i.e. 1 July 2000, the 2nd defendant had not conducted any business for the delivery of Form A and C/O for Shenzhen area. Further, China Inspection continued to use the same telephone number and fax number of Hua Xin after 1 July 2000.

Transfer of business

63. From the evidence and inferences as set out hereinbefore, it is clear to my mind that the business of Hung Tak was gradually and continuously transferred to Hua Xin during the period from the end of 1996 to August 2000, as evidenced by the unchallenged evidence of Chan Chi Yung. Hua Xin actually commenced business, at least partly, as a device to evade the existing liability of Hung Tak. The business was then transferred from Hua Xin to China Inspection in or about July/August 2000.

64. In the present case, all the companies involved were effectively controlled by the same ultimate controller : Hung Tak and Hua Xin through Shenzhen Hua Xin which in turn was controlled directly by the PRC Quality Supervision and Inspection and Quarantine Bureau, who was also the owner of China Inspection. Thus there are much stronger overall indications of transfer than the previous authorities in Hong Kong where transfers were found by the court. It is somewhat in line with the Chinese saying: "Whether it is from the left pocket or the right, it is still the same group of persons."

65. Hua Xin denied the transfer and relied on a number of points : it alleged that the background reason to set up Hua Xin was to conduct a bigger scale of business by Hua Xin which was solely owned by Shenzhen Hua Xin. It also asserted that customers had a free choice whether to make their application in Hung Tak or Hua Xin.

66. China Inspection alleged that they took up the delivery service conducted by Hua Xin in July 2000 because of the Documents of Reforms issued by the Central Government Department (D227 and D235). However under the Ordinance, the intention and reason for the transfer is not a pre-requisite condition and the existence of an open market for the customers is irrelevant. In fact, the customers in the present case did not have a real choice since Hua Xin at one time was the only entity in Hong Kong authorized to conduct the subject business and, later on, the 2nd defendant, China Inspection. The aforesaid Documents only provided a better understanding in respect of the background for the transfer and against such a background, there is even more reason to find there was a wholesome transfer.

67. I shall set out the background of the Ordinance, Cap.49 and consider the legal positions as raised by the parties here.

The Ordinance, Cap.49

68. The Ordinance was enacted in 1980 and originated from the old Fraudulent Transfers of Businesses Ordinance with the same chapter number 49, which came into force in 1923. It has been said that :

"... the new Ordinance was modification of the old one and for the purposes of this case it is a valid exercise to seek guidance from cases arising out of the old Ordinance in interpreting its provisions. ..."

Per Mayo J (as he then was) in Man Yee (a firm) and Others v. Chi Tao Enterprises Company Limited trading as Kam Tao Restaurant [1986] HKLR 171, at 175B.

69. The preamble of the Ordinance provides as follows :

"To protect creditors on the transfer of businesses, to provide for the liability of transferees of business, the manner in which such liability may be avoided and for matters incidental thereto ..."

Thus the mischief that the Ordinance seeks to prevent is for transferee to take advantage of the assets, goodwill and other benefits from the transfer business while at the same time shedding its responsibility of the business, thus prejudicing the creditors of the business. It has been decided in BNP Paribas v. GC Luckmate Trading Limited [2003] 1 HKLRD 307, CA (per Mayo VP) that :

" 16. What had happened in the instant case was that a decision had been made by those in effective control of the situation that a purely notional figure should be placed upon the consideration for the right of the defendant to continue what was in practical terms APT's business and nothing was paid to the creditors.

17. In other words, they were able to take advantage of the assets and goodwill of APT's business, while at the same time shedding the responsibility for the liabilities of the company.

18. This was exactly the mischief which the Ordinance was intended to prevent."

70. The Ordinance was applied where a business has been transferred without the prescribed notice, whether or not fraud has been perpetrated. An intention to defraud is not a requirement under the old and the new Ordinance. It is the possibility of prejudicing the creditors upon the transfer that the legislature seeks to protect against.

71. Thus a creditor is not required to prove fraudulent intent on the part of the transferor. In Elson-Vernon Knitters Limited v. Sino-Indo-American Spinners Limited [1972] HKLR 468, Huggins J, as he then was, said at p.471 :

"... At one stage I thought it might be right to regard the Legislature as having intended to create a kind of statutory fraud, but I think the better view is that the Ordinance is not so much concerned with overcoming the effects of transfers which are shown to be fraudulent as with discouraging transfers which may be fraudulent. I adopt the words of Lindsell, J. in Union Trading Co. Ltd. v. The Kwok Man Chau Ka :-

' There can be no dispute that the aim of the Ordinance, as indicated by its title, was to prevent the transfer of his business by one man to another in any such way as might defraud his creditors and leave them without a remedy, or, to put it in other words, to prevent a man from secretly divesting himself of his business assets, on his possession of which his creditors relied in giving him credit and to which they would otherwise have had recourse if he could not meet his liabilities.'

Where a business has been transferred without the prescribed notice it matters not whether any fraud has been perpetrated: that might have been the intention and it was the mere possibility of fraud which exercised the minds of the Legislature."

72. Thus liability is created by the Ordinance on the transferee of businesses by section 3(1). "Transfer" is defined in section 2 and "business" is defined in the same section as "a business, or any part thereof, consisting of a trade ..."

73. The manner in which statutory liability of the transferee may be avoided is by way of giving statutory notice as provided under sections 4 and 5.

74. Furthermore, the transferee is entitled to be indemnified by the transferor in respect of a statutory liability under section 6 so that in any event the transferee would not be left without recourse. Of course, that is on the basis that the transferor still exists with assets to indemnify the transferee.

75. In deciding whether there was a transfer, it is well established that the correct approach is for the court to look at the situation as a whole. The transfer of any assets is naturally evidence indicative of a transfer of business but it is not enough per se. The identity of the transferor and transferee being the same person or related persons, making use of the same premises, the same staff team, goodwill of the transferor, machinery and equipment, the nature of their businesses continued to be carried on by the transferee as compared with that of the transferor, the method of the transfer (if any notice to clients were issued) and the intention of the transfer would all be relevant factors to be taken into account. (See the cases of Man Yee (supra) and Elson-Vernon Knitters (supra) and Howard Williams Burdett v. Emsworth Limited, HCA3546/1977, unreported.)

76. The transfer from Hung Tak to Hua Xin and later from Hua Xin to China Inspection contained all the aforesaid relevant factors. Thus from the aforesaid findings of facts, I am satisfied there is no more or no less a transfer of business from Hung Tak to Hua Xin and later on from Hua Xin to China Inspection. These two successive transfers fit squarely into the indicia of "transfer of business" as provided by the Ordinance and the cases decided thereunder.

Lifting the corporate veil

77. It is also the plaintiff's case that Hua Xin commenced business, at least partly, as a device to evade the existing liability of Hung Tak, and thus for the purpose of this action, the corporate veil of Hung Tak and Hua Xin should be lifted. The shareholders, directors and controllers of Hung Tak and Hua Xin are identical but for one Mr Lam Wang Man, as aforesaid. Mr Lam, as I have found hereinbefore, was a mere nominee. Even Madam Chen for Hua Xin admitted that Mr Lam was not involved in any control or management of work of Hung Tak. The ultimate controller of Hung Tak and Hua Xin is the same person and that is Shenzhen Hua Xin State Enterprises Industrial Development Company Limited, i.e. Shenzhen Hua Xin. Furthermore, as shown in the evidence before the court, the assertion that Mr Lam is truly a 25% beneficial owner of Hua Xin is totally devoid of substantiation and is against the circumstances of the case.

78. Hua Xin was incorporated and commenced business in November 1996, after the debt was incurred and owed by Hung Tak to the plaintiff and at the time when the plaintiff started claiming against Hung Tak for the debt. The uncontradicted evidence of Chan Chi Yung shows that the common controller behind the two companies gradually channelled Hung Tak's business and assets to Hua Xin.

79. Thereafter in July 1997, Hung Tak chose not to appear at the trial of the 1997 action to defend their allegedly meritorious case. Madam Chen said Hung Tak believed that the plaintiff's claim is laughable. If Hung Tak truly believed that to be the case, there was absolutely no reason for them not to defend the case. Madam Chen offered the explanation that the people in-charge of Hung Tak had to attend the "three talks movement - 三講活動". This, to my mind, is a carefully prepared excuse made up by her for the first time since all the material witnesses could have attended the trial for Hung Tak whereas the directors in the PRC need not come to Hong Kong as they would not be in a position to give any useful and relevant evidence on its behalf. Since Hung Tak and Hua Xin was under the same common controller behind, the only reasonable inference is that the common controller had already decided to give up Hung Tak and the business was therefore diverted to Hua Xin.

80. In the premises, I accept the plaintiffs' submission that this is a classical case where Hua Xin's corporate veil should be lifted so that Hua Xin is to be treated in law as the same entity as Hung Tak. The legal test in this area is whether the company was used as a device to conceal true facts and thereby devoid or evade liability. The present situation falls squarely within the situation anticipated by law to lift the corporate veil. It has been said that :

" Using a corporate structure to evade legal obligations is objectionable. The courts' power to lift the corporate veil may be exercised to overcome such evasion so as to preserve legal obligations. But using a corporate structure to avoid the incurring of any legal obligation in the first place is not objectionable. And the courts' power to lift the corporate veil does not exist for the purpose of reversing such avoidance so as to create legal obligations."

Per Bokhary JA (as he then was) in China Ocean Shipping Co. v. Mitrans Shipping Co. Ltd [1995] 3 HKC 123, at 127.

81. In Re H and others (restraint order: realisable property) [1996] 2 All ER 391 CA in England, it has also been held that :

"Where a defendant had used the corporate structure as a device or façade to conceal his criminal activities, the court could lift the corporate veil and treat the assets of the company as the realisable property of the defendant under the 1988 Act. On the facts, there was a prima facie case that the defendants controlled the two companies, that the companies had been used for the fraudulent evasion of excise duty on a large scale, that the defendants regarded the companies as carrying on a family business and that they had benefited from company cash in substantial amounts; and further no useful purpose would have been served by involving the companies in the criminal proceedings. In all the circumstances it was therefore appropriate to lift the corporate veil and treat the stock in the companies' warehouses and the companies' motor vehicles as realisable property held by the defendants. ..."

82. Further, it was held in Trustor AB v. Smallbone and others (No.2) [2001] 1 WLR 1177 (per Sir Andrew Morritt VC)that :

"... the court was entitled to pierce the corporate veil and recognise the receipt of a company as that of the individual or individuals in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of that individual or those individuals; ..."

83. By reasons of my findings of facts hereinbefore, I consider that the present case falls squarely within the situation anticipated by the law to lift the corporate veil. Hua Xin was not incorporated to avoid liability (which in any event, is not the case put forward by Hua Xin) but to evade the liability of Hung Tak to the plaintiff. Therefore, Hua Xin should be made liable for Hung Tak vis-a-vis the plaintiff irrespective of the application of the Transfer of Business Ordinance in any event.

Further defences

84. The 1st defendant Hua Xin further raised the defence that the action of the plaintiff against it was time-barred by virtue of section 9 of the Ordinance. Section 9 provided that the claim of the creditor against the transferee should be within one year from the date of transfer. As found by this court hereinbefore, the transfer from Hung Tak to Hua Xin is a continuous process. On or about 7 and 8 August 2000, Chan Chi Yung was still passing Hung Tak's money and business records to Madam Suen Yin in the office of Hua Xin. Thus the act of transfer was still continuing there and then. In the premises, the plaintiff's claim against Hua Xin is within one year from the date of the last transfer of business and it is not time-barred under the Ordinance.

85. Alternatively, since I have found that Hua Xin should be liable for the debt of Hung Tak by reason of the lifting of the corporate veil, no limitation defence under section 9 is available to the 1st defendant.

86. The 1st defendant further asserted that had there been a transfer of a part of business of Hung Tak to Hua Xin, Hua Xin is only liable for such debts incurred by Hung Tak arising out of such business which was transferred but not otherwise. However, section 3 provided that :

"... whenever any business is transferred, ... the transferee shall ... become liable for all the debts and obligations [of the transferor]."

The aforesaid case of Man Yee (a firm) and Others v. Chi Tao Enterprises Company Ltd trading as Kam Tao Restaurant (supra) also decided to the same effect.

87. The only available defence founded on transfer of a part of a business is section 3(2), but that is not applicable here. The 1st defendant in any event did not plead section 3(2) as its defence. This subsection is irrelevant here anyway. The entire business of Hung Tak, as I have found in relation to the delivery service of Form A and C/O for Shenzhen area, was transferred to Hua Xin. Thus Hua Xin, the 1st defendant, did not in any event put forward any evidence that only part of the business of Hung Tak was transferred.

88. The 1st defendant also raised the defence that the judgment debts and interests and costs arising out of the 1997 action did not accrue until the judgment by which time the 1st defendant had already ceased the business and therefore the 1st defendant could not have been liable. However, all debts and obligations of Hung Tak were to be shouldered by the 1st defendant under the Ordinance and the debts in fact arose out of Hung Tak's breach of the 1994 Agreement to share the 38% profits to the plaintiff regarding the years of 1995 to 1996. It is therefore irrelevant as to when the 1st defendant ceased the business.

89. The 2nd defendant raised the defence to the effect that the transfer of business from Hung Tak to Hua Xin is time-barred under section 9 which has already been rejected by the court as aforesaid. Alternatively, on the proper construction of the Ordinance, the plaintiff submitted that section 9 only operates to bar an action against the transferee personally and it does not in any way seek to extinguish the liability of the transferee or to cause such liability to cease. I accept the plaintiff's submission. Under the same Ordinance when the legislature intends that the statutory liability shall cease, meaning that the transferee shall be free from such liability, it will expressly provide that such liability "shall cease" as in section 4(3) by giving of the notice of transfer.

90. Section 9 is distinguishable from the express provision of extinguishment of a registered owner's title to landed property under section 17 of the Limitation Ordinance which is over and above section 7 of that Ordinance which provides for limitation to commence action. The scheme therefore would positively extinguish title to land of a registered owner by the lapse of time.

91. In the premises under the scheme of the present Ordinance, the statutory liability of transferee continues in law but only that by section 9 no action by creditors could be instituted against the transferee in the courts of law. Thus the effect of the Ordinance would be effective when there were successive transfers with no statutory notice being given because of deliberate concealment or otherwise. The creditors may find themselves unable to sue the 1st transferee due to the lapse of time which may be for no fault on their part. However, they should be able to catch the last transferee if the actions against the previous transferees could not be pursued by reason of the time-bar provided under section 9.

92. Thus even if the plaintiff's action against the 1st defendant has been time-barred, the 2nd defendant, being the transferee of the 1st defendant's business, would still be liable for the liability of the 1st defendant.

93. In the final submission, the 1st defendant seeks to reduce its liability under the Ordinance by inviting the court to take into account Hung Tak's counterclaim in relation to the seven cheques in the 1997 action in which the counterclaim had been dismissed. It was based on the strength of the vague evidence of Madam Liu of the plaintiff to the effect that "the cheques would be payable upon Hung Tak having paid the plaintiff". Thus the 1st defendant submitted that Hung Tak had to satisfy the judgment debt upon which the plaintiff would have to pay the cheques as set off in diminution of the judgment sum. However, although Hung Tak's debt has been passed onto Hua Xin by operation of the Ordinance, Hung Tak's right to ask for payment under the cheque has not been passed to the 1st defendant Hua Xin by the same Ordinance. It was for Hung Tak to claim against the plaintiff for those cheques which they failed to do so by not appearing at the trial and its counterclaim has already been dismissed by the Court. This situation was created by Hung Tak and Hua Xin and the plaintiff was not responsible for it.

Conclusion

94. Both the 1st and 2nd defendants are liable to the plaintiff for the outstanding judgment debt together with interests and costs obtained against Hung Tak, less the sum of money recovered through the garnishee proceedings. However, the plaintiff calculated all outstanding interests up to the date of the trial and I consider that the interests should only be calculated to the date of the writ.

95. Accordingly, I gave judgment for the plaintiff in the sum of $3,022,535 only together with costs of the 1999 action, to be taxed if not agreed, and interests at 9% per annum from the date of the writ to date of judgment. The plaintiff was also awarded costs of this action against the 1st and 2nd defendants, to be taxed if not agreed.