CHEN MEI HUAN (ALSO KNOWN AS LIU MEI HUAN CHEN) v. SILVER FAITH HOLDINGS LTD AND OTHERS

HCCW 111/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 111 OF 2014

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1.  On 23 May 2014, the petitioner (“Ms Chen”) obtained an interim injunction restraining Silver Faith Holdings Limited (“the Company”), the 2^nd respondent (“Mr Ng”) and the 3^rd respondent (“Ms Ng”) from dealing with the assets of the Company and its property‑holding subsidiaries (“the injunction order”). The issue for decision is whether the injunction order should be continued until further order. At the conclusion of the hearing, judgment was reserved which I now give.

BACKGROUND

2.  Ms Chen and Mr Ng started cohabiting in 1992.  To all intents and purposes, they were ‘husband and wife’.  The relationship broke up 20 years later, in 2012.

3.  From about October 1997 until 22 March 2013, Ms Chen and Mr Ng each held one of two issued shares of the Company and were the Company’s only directors.

4.  Unbeknownst to Ms Chen, on 15 February 2013, CHK Business Development Limited replaced Mr Ng as company secretary, on 22 March 2013, 9,998 shares were issued and allotted to Mr Ng and on the same day Ms Ng being Mr Ng’s daughter was appointed a director of the Company. For convenience, Mr Ng and Ms Ng are hereafter collectively referred to as “the respondents”.

5.  Ms Chen complains that she had no notice of the meetings resulting in the dilution of her shares in the Company and the appointment of Ms Ng as a director and she was not present at any board or shareholders meetings where those issues were discussed.

6.  The Company is a property holding company.  Its main assets consist of a large number of shops in Shun Tak Centre (“STC”) as well as a few other properties elsewhere.  They are held by a number of subsidiaries:

(1) Tronken Enterprises Limited (“Tronken”) holding 77 units in STC;

(2) Superfaith Corporation Limited (“Superfaith”) holding 13 units in STC;

(3) Sheen River Investments Limited (“Sheen River”) holding 1 unit in STC; and

(4) Sheen View Enterprises Limited (“Sheen View”) holding 4 properties on Nathan Road.

7.  Ms Chen and Mr Ng also acquired a hotel in Macau in 1996 called New Century Hotel via a company called Peckson Ltd.  80% of the shares were initially allotted to Mr Ng and 20% to a company in Macau controlled by Dr Stanley Ho and his family.  Ms Chen and Mr Ng moved into the hotel shortly after its purchase. 

8.  On 4 October 2011, Mr Ng transferred all his shares in Peckson to Ms Chen in consideration of US$40,000.

9.  After the breakup of the relationship in about May 2012, Ms Chen continued to reside in the hotel save for a short period of time in the summer of 2012.

10.  Shortly after the collapse of their relationship in 2012, in July 2012, Mr Ng commenced an action against Peckson in the Eastern Caribbean Supreme Court in the BVI seeking a declaration that the transfer to Ms Chen was void and sought rectification of the register of members.  In November 2013, the court held Ms Chen to be the sole and legal beneficial owner of the shares since 4 October 2011.  An appeal is listed for hearing the week beginning 29 September 2014.

11.  On 2 May 2014, Ms Chen filed a petition seeking a winding up of the Company and alternatively a buyout order from Mr Ng on unfair prejudice and just and equitable grounds, the main complaints being dilution of Ms Chen’s shareholding from 50% to 0.1% and the appointment of Ms Ng to the board without Ms Chen’s consent.

12.  Shortly before the petition was filed, Ms Chen became aware of newspaper reports that Mr Ng had sold around 80 units in STC for a total consideration of $230 million (“the Garswell sale”).  It transpired that a provisional agreement for sale and purchase had been entered into on 10 April 2014 and registered at the Land Registry prior to the date the petition was presented.  Completion was scheduled for 27 May 2014.

13.  On 12 May 2014, after the petition had been presented, the respondents’ solicitors on a without admission basis advised that the respondents were prepared to consent to the relief sought in paragraphs (1), (2), (3) and (5) of the petition.  In other words, Mr Ng was willing to buyout Ms Chen’s share in the Company.

14.  While Ms Chen had no wish to prevent the completion of the Garswell sale, she wanted the net proceeds paid to stakeholders to prevent their dissipation.  After failing to obtain the respondents’ agreement, Ms Chen obtained the injunction order that safeguarded the net proceeds and prevented the respondents from dealing with the shares of the property holding subsidiaries or their assets.

WHETHER THE INJUNCTION SHOULD BE CONTINUED

15.  The sale proceeds from the Garswell sale were used to redeem and discharge the outstanding mortgage loans against the properties of Tronken, Super Faith and Sheen River.  The reason Mr Ng advanced for entering into the Garswell sale was to avoid foreclosure of the 80 units that were the subject of that sale and other units by the mortgagee banks but how Tronken came to be in that situation is entirely unclear.  The bank loans came to approximately $200 million.

16.  On 12 May 2014 the respondents’ solicitors Robert CC Ip & Co (“RCCI”) stated in its letter to the petitioner’s solicitors Robertsons that the property holding companies had throughout been financed by bank loans as well as by interest‑free loans provided by Mr Ng and that the companies had been running at a loss.

17.  On 15 May 2014 in its reply to a request for the production of audited accounts of the Company and other information, RCCI stated that the Company being a mere investment holding company had never prepared any audited accounts or management accounts and that director’s loans provided by Mr Ng were to the Company’s subsidiary Tronken.  The letter also stated that the bank loans amounted to approximately $200 million and that any surplus from the proceeds of sale would be “for repayment of all other liabilities including Director’s Loans and then to the shareholders”.

18.  It was not until 19 May 2014 that, inter alia, copies of Tronken’s audited accounts for the financial years ending 31 March 2012 and 31 March 2013 were made available to Ms Chen. As at 31 March 2013, the loan from a director, ie Mr Ng stood at over $383 million.

19.  The issue between the parties is extremely narrow and relates to the net proceeds of sale held by Robertsons as stakeholders of just over $26.6 million.  Absent the injunction order, the net proceeds would be applied to reduce the director’s loan of $383 million.  The only issue is whether the injunction order should be discharged or varied so as to allow the net proceeds to be so applied, Mr Ng being prepared to undertake not to dispose of any shares in the companies held by the Company and any assets held by the Company and its subsidiaries except the net proceeds due to Tronken.

20.  Mr Wong who appeared for the respondents submitted that repayment of a genuine debt does not constitute a dissipation of assets and that there is no reason why bona fide director’s loans should not be repaid in the ordinary course of business.  Further, the purpose of the injunction is not to provide the petitioner with security for her claim.  In any event, the continuation of the injunction order is unnecessary as Tronken still owns 4 units (recently been valued at just over $68 million) and there is no suggestion that Mr Ng does not have assets to finance the buyout that is the relief sought.

21.  Mr Dawes who appeared for Ms Chen accepted that the loans allegedly made by Mr Ng to Tronken are recorded in the Tronken’s financial statements but he raised doubts as to their veracity.  In any event, the injunction should not be varied/discharged because any payment made to Mr Ng would be objectionable on unfair preference grounds as Tronken appears to be insolvent.

Fraudulent preference

22.  The main items constituting Tronken’s current assets comprise “stock” valued at $85 million and almost $66 million lent to related companies.  Those loans are interest‑free and unsecured.

23.  Having regard to the date of the accounts, the “stock” referred to must have included the 66 units that formed part of the Garswell sale. Based on the latest annual returns available to Ms Chen, a table has been compiled of the Company and its subsidiaries as well as the identity of the properties held by each of them (if any).  Shown against Tronken are 8 units on the ground floor and 69 units on the 3^rd floor of STC.  66 of the 69 units formed part of the Garswell sale in April/May 2014.  That would leave Tronken with 11 units.

24.  The respondents have produced a valuation report dated 20 June 2014 that relate to 4 remaining units in STC having a value of just over $68 million.  The apparent discrepancy between 11 and 4 can be explained.  It lies in the fact that at the time the mortgages were to be redeemed, shop G02 had been or was about to be subdivided into 8 separate units identified in the property description appearing in the heading of the letter dated 26 May 2014 from the mortgagees’ solicitors.  The sub‑division added 7 units to the existing 4.  For reasons not readily apparent, the valuation report valued shop G02 as a single unit rather than 8 separate units.

25.  Be that as it may, Ms Chen does not accept the valuation.  In my view, Ms Chen cannot be criticised for taking that view given that the notes to the accounts show that the value of “stock” of $85 million as at 31 March 2013 was itself made by professional surveyors on “an open market value basis”.  Accordingly the value of Tronken’s current assets, is, at best, unclear.

26.  As for Tronken’s liabilities, the 2013 accounts show liabilities in excess of $387 million in addition to secured bank loans of approximately $267.5 million.  Even subtracting the bank liabilities which were settled out of the Garswell proceeds, Tronken’s remaining liabilities still exceed its assets rendering it ‘insolvent’.

27.  Mr Wong’s response to the fraudulent preference point in §10 of his written skeleton reads:

“10.1 After the Garswell Sale was completed on 27 May 2014, there is no suggestion that the Company has any other third party creditors apart from [Mr] Ng.  Hence, any future repayment to [Mr] Ng would not constitute a “preference”.  Indeed, the purpose of the Garswell Sale was to discharge all outstanding third party liabilities.

10.2 Given that the only major liability of Tronken is due to [Mr] Ng, it is incorrect to say that Tronken appears to be insolvent.

10.3 The Company still holds landed properties of substantial value.

10.4 [Mr] Ng is free to deal with his right to demand payment from Tronken on his director’s loans and practically speaking, whether the Company is able to pay its debts as they fall due depends entirely on [Mr] Ng.

10.5 Accordingly, it is plain that the issue of unfair preference does not arise at all and has no relevance to whether an injunction ought to be granted.”

28.  The first point is contradicted by the latest available accounts in evidence.  They show third‑party creditors of almost $1 million.  As to the third point, the value of the remaining units remains controversial for the reasons explained earlier.

29.  The second and fourth points are difficult to follow: a debt remains a debt even if owed to a director.  The identity of the creditor does not negate the existence of the debt.  It is nowhere suggested that the director’s loan is to be or has been waived.  According to the 2013 financial statements (those being the latest in evidence) the Company is insolvent.  While Mr Ng may choose to keep the Company alive by not calling in the loans and in that sense he controls whether and if so when to ‘pull the plug’, third party creditors do not have that luxury and remain exposed.  The court cannot proceed on the basis that they have no exposure whatsoever since Mr Ng is under no obligation to them.  That it is unlikely that Mr Ng would choose to wind up the Company is beside the point.

30.  The statement in §10.5 depends entirely on the correctness or otherwise of the submissions made in §10.1‑10.4 of Mr Wong’s written submissions and carries no independent weight.  In the circumstances, the only conclusion is that the respondents have not provided a satisfactory answer on the issue of unfair preference.  That conclusion necessarily weighs against varying or discharging the injunction order.

31.  I now turn to consider the other issue arising.

The director’s loan

32.  The propriety of the director’s loan was a major feature of the debate on whether the injunction should be continued.  Mr Wong’s contentions may be summarised as follows:

(1) buyout is the primary relief the petitioner seeks;

(2) the relationship did not break up until May 2012 and prior to that the petitioner had all the accounts of Tronken;

(3) Tronken’s general state was reflected in its accounts pre‑2012 including the fact of the director’s loans and the fact that the units had not been rented out;

(4) no complaint had previously been made regarding those matters;

(5) if any of the director’s loans were improper, it is a matter that could be dealt with in the buyout valuation;

(6) Tronken’s properties were acquired for $700 million;

(7) the evidence supports the respondents’ case that it was Mr Ng rather than Ms Chen who had the funds; and

(8) although the petition was amended on 22 May, it made no complaint about the director’s loan.

33.  Not surprisingly, the petitioner takes issue with those submissions. The gravamen of the petition is the dilution of Ms Chen’s shareholding in the Company from 50% to 0.01% and indirectly (through the Company) of her indirect shareholdings in the Company’s subsidiaries, several of which held properties as well as her the change in directorship which effectively ensured that she would be out‑voted in all management decisions of the Company.

34.  Mr Ng’s evidence filed in opposition to the petition sought to justify the dilution and thus the change in management. It was said that it reflected his actual contribution in the acquisition of investments made by the subsidiaries.  But Mr Ng’s affirmation was not filed until 11 July 2014, more than two months after the date of the petition.

35.  Chronologically, the issue of Mr Ng’s loans as director first emerged after the financial statements for the years ended the 31 March 2012 and 2013 for Tronken were disclosed on 19 May 2013, several weeks after the date of the petition and very shortly before Ms Chen obtained the injunction order.  As already noted, Mr Ng’s evidence came much later.

36.  The allegations made in the petition concerning the dilution and the change in directorship issues being done surreptitiously behind Ms Chen’s back are not disputed.  Mr Ng’s conduct clearly requires some explaining.  On the other hand, the director’s loan allegedly made to Tronken (disclosed well after the filing of the petition) is highly controversial.

37.  Mr Wong’s principal contentions against a continuation of the injunction order are considered under the sub‑headings below.

          (a) Absence of complaint in the petition

38.  Mr Wong emphasised that while the petition has been amended, there are no complaints about the director’s loan.  In outline, Mr Dawes’ response to Mr Wong’s submission is that given the relationship between Mr Ng and Ms Chen over the two decades they lived together effectively as husband and wife, while Ms Chen was a director and 50% shareholder of the Company which was the holding company, she was not involved in the management and operations of the subsidiaries which she left to Mr Ng whom she trusted since she and Mr Ng had always treated the underlying assets in the subsidiaries as their joint investments.  Specifically, she never had the financial statements of the Company’s subsidiaries until their disclosure by Mr Ng during this litigation.

39.  Pausing there, it cannot be said at this stage that the evidence is not believable such that it should be ignored.  After all, Ms Chen was not a director of any of the subsidiaries but only of the holding Company.

40.  Ms Chen’s solicitors have prepared a schedule showing information extracted from financial statements of Tronken from 1992 to 2013.  Having perused this information, it is striking that:

(1) The highest annual rental income (if any) covered less than 8% of the bank loan interest payable.

(2) The director’s loan for 1992 to 1994 of over $265 million was repaid in full in 1994/5.

(3) There was no rental income shown for the properties at all for the years 1995 to 2000.

(4) For 1995/96 the director’s loan would not have been necessary but for loans made to related companies.

(5) The related companies that benefited most from loans made Tronken appeared to be either wholly or substantially owned by Mr Ng (such as Silver Faith Development Limited (in which the Company appeared to have no more than a 0.0001% interest) to whom for the year ended 31 March 2013 almost $47 million had been lent).

(6) Mr Ng was effectively the sole decision maker not only on the amount of the loan from him to Tronken but also the amount of loans from Tronken to the related companies for any particular year.

In those circumstances, it is difficult not to agree with Mr Dawes that the picture that emerges from Tronken’s accounts (adopting Mr Dawes’ terminology) does not “square”.  Tronken’s modus operandi does not appear to make sense.

41.  Another puzzling feature is the fact that by the time of redemption, ie the Garswell sale, Tronken’s bank loans had decreased to around $200 million: see §17 above.  That would represent a 25% reduction from $267.5 million. The source of funds applied to reduce the bank loans has not been explained.

42.  In my view, the fact that no amendments have yet been made in the amended petition relating to the director’s loan is understandable.  A half‑baked amendment would attract judicial disapproval.  The petitioner has had little time to carry out investigations since the accounts only became available on 11 July 2014.  The absence of an amendment to date is not a matter of significance when the facts disclosed cry out for an explanation.

          (b) Financial contributions

43.  As to Ms Chen’s financial contributions, Mr Wong relied heavily on the judgment given in the BVI on 14 November 2013 which is pending appeal.  The judge found that she did not have the means to have put up $100 million towards the acquisition of a hotel in Macau in 1996.  He also disbelieved her evidence that she was a lady of immense wealth in her own right at the time she met Mr Ng.

44.  Ms Chen’s evidence is to the effect that she did provide a significant amount of funding to Tronken.  After the falling out between Ms Chen and Mr Ng, not only was Ms Chen denied access to the office at STC where some records were kept, Mr Ng also took away a lot of documentary records from her, including all the money deposit slips, receipts showing payments made to Mr Ng and his related companies.  That is part of the explanation for the paucity of documentation to substantiate contributions made prior to 2011.  Ms Chen accepts that as Mr Ng was her lover she did not systematically keep detailed records of when and how much money she had lent him.

45.  A few of the records Ms Chen was able to keep showing her financial contribution in about 2011 were exhibited by way of example including amounts of $800,000, $760,000 and $15.15 million needed for restructuring the loans mentioned below.  It was her evidence that she continued to arrange for monies to be deposited into Mr Ng’s bank accounts towards the monthly instalments of $3.72 million after the Tronken, Sheen River and Superfaith loans were restructured in 2011.  Receipts that support this (from the second half of 2011 as well as the first few months of 2012 before the breakup) are in evidence.

46.  Looking at that evidence in the round, although she is unable to put a precise figure forward, I do not consider that at this stage it could be said that Ms Chen had made no financial contribution at all and that Mr Ng was responsible for all the funding for the properties acquired by the subsidiaries.

          (c) Relief sought

47.  While the primary relief sought in the petition is a buyout, the basis of the petition was share dilution constituting unfair and prejudicial conduct.  But evidence that emerged in response to the petition itself has given rise to other concerns mentioned above.  In my view, those concerns cannot simply be dismissed because they have not yet been articulated by way of pleadings.

48.  If what is sought is a buyout and the matters complained of can be taken into account in the valuation of shares, an injunction will prima facie not be necessary: Re Wako Giken (HK) Co Ltd [2010] 4 HKLRD 121 at §12.  That prima facie rule can be displaced if circumstances so warrant as was the case on the facts of Wako itself.  In that case there were concerns that given the claims against the 1^st respondent and the value of the company that the 1^st respondent might not be able to afford the buyout in which case there was a real possibility that the company would be wound up if the petition was successful at trial.

49.  In the present case, Mr Ng was apparently willing to buyout Ms Chen’s shares but the offer was withdrawn when Ms Chen insisted on the net proceeds being held by stakeholders.  Now that the financial position of Tronken as at 31 March 2013 has been disclosed, a buyout may not be meaningful.  More importantly, the present case is complicated by a real possibility of a winding up order having to be made at the end of the day.  If there are circumstances that require investigation, a buyout may not be the appropriate relief.  

CONCLUSION

50.  This is an unusual case.  Arguably, the fraudulent preference point alone would justify the continuation of the injunction order.  But given the issues that have emerged from the evidence before the court, I have little doubt that the balance must lie in favour of its continuation.

51.  There is to be in order nisi that the costs of this application be in the cause with a certificate for two counsel.