CHEN MUHUA (ALSO KNOWN AS WINKY CHAN) AND ANOTHER v. THE JOINT AND SEVERAL LIQUIDATORS OF JOY RICH DEVELOPMENT LTD

HCCW 146/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 146 OF 2013

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D E C I S I O N

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1.  This is another attempt of Madam Chen Muhua (“Madam Chen”) and Madam Chan Yuen Wa (“Madam Chan”), the Chen sisters, to defend the mortgagee action commenced by Revelry Gains Limited (“Revelry Gains”) under HCMP 430/2013 (“the Mortgagee Action”) against Joy Rich Development Limited (“the Company”) now being in liquidation after their intervention application was dismissed by this court by the decision dated 20 December 2016 (“the Decision”). I am given to understand that the Chen sisters’ renewed application to the Court of Appeal for leave to appeal against the Decision is being processed on paper.

2.  Upon Madam Chen’s petition, the Company was adjudicated to be insolvent and was wound up in August 2013. The Mortgagee Action was commenced in March 2013. The Liquidators of the Company indicated that they do not intend to defend the Mortgagee Action in August 2015. The Mortgagee Action was stayed as a result of the winding up of the Company pursuant to s186 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap.32 (“the CO”). With leave granted on 21 July 2015, Revelry Gains has restored the Mortgagee Action and there will be a hearing on 2 June 2017 before a master.

3.  By summons dated 6 February 2017, the Chen sisters apply for leave to use the name of the Company to defend in the Mortgagee Action for and on behalf of the company as defendant and, alternatively, a direction to the Liquidators to maintain and continue the defence in the Mortgagee Action.

4.  The present application is made pursuant to s200(5) of the CO. It provides,

“if any person is aggrieved by any act or decision of the liquidator, that person may apply to the court, and the court may confirm, reverse, or modify the act or decision complaint of, and make such order in the premises as it things just.”

5.  The decision of the Liquidators under complaint is their decision not to defend in the Mortgagee Action. Mr Kemp, for the Liquidators, explains that the Liquidators are prevented from defending the Mortgagee Action due to the lack of fund of the Company and the failure/refusal of the Chen sisters to provide documents of the Company which may shed light on the alleged misconduct of Mr Lau.

6.  In the Decision, I outlined the essential background facts of the Mortgagee Action. I shall refer to the Decision for such background facts and adopt the abbreviations used there in this document.

7.  Just to state the minimum here, by the Mortgagee Action, Revelry Gains seeks to enforce the Charge created in favour of its parent company, BLAA, over the entire assets of the Company to secure the Debt in the sum of over HK$200 million having been assigned the legal and beneficial rights in the Charge by BLAA. The principal target of the Mortgagee Action is the Property, which was said to be the sole asset of the Company with the forced sale value of HK$360 million in the decision of Harris J dated 7 April 2016 (“the April 2016 Decision”).

8.  At the intervention application, leading counsel for Revelry Gains and leading counsel for the Chen sisters made detailed submissions on the merits of the purported defence raised by the Chen sisters. Nevertheless, in the Decision, this court decided not to deal with the merits on the ground that the Chen sisters should not have invoked the court’s jurisdiction relating to joinders. This court also indicated that the examination of the merits should be carried out in an application in the winding up of the company. And this is the occasion.

9.  Mr Man, appearing as junior counsel in the intervention application and now on his own for the present application for the Chen sisters, makes a well-elaborated submission on the merits of the purported defence again.

10.  On the other hand, Mr Kemp, for the Liquidators, says little about the purported defence save that he describes it as spurious at the hearing. The prime concern of the Liquidators is that the creditors of the company should be well protected against any unnecessary depletion of the assets of the Company due to an unsuccessful attempt to defend the Mortgagee Action.

Applicable principles

11.  In Re Wickson Holdings Ltd [2011] 2 HKLRD 373 at para.19, Fok J (as he then was) set out the requirements for the court to interfere with the liquidators’ decisions pursuant to s.200(5) of the CO in the following terms:

“the person aggrieved by the liquidator's decision will need to demonstrate, before the court will interfere with the liquidator's decision or act pursuant to s.200(5) of the Companies Ordinance, that the liquidator has either:

a. (i) Not exercised his power in good faith or has acted in a way in which no reasonable liquidator could have acted; or

b. (ii) Made a ruling or decision in the course of the administration which directly affected a party's right and has not acted even-handedly as an impartial neutral: see Eagle Queen Co Ltd v First Bangkok City Finance Ltd [1989] 2 HKLR 71 , 73H-74C (Hunter JA).”

(see also Re Hans Place [1993] BCLC 768 at pp.778-779)

12.  In the present case, the Chen sisters make no similar allegations, or any at all, against the Liquidators regarding their decision not to defend the Mortgagee Action. Since the Liquidators do not seriously insist on their decision and are agreeable to defending the Mortgagee Action so long as adequate protection is afforded to the estate of the Company, I am prepared to consider the Chen sisters’ application despite the lack of any criticisms of the Liquidators’ decision.

13.  The parties agree to the threshold to be met by the Chen sisters in this application. To justify leave to carry on the defence in the Mortgagee Action for and on behalf of the Company, the Chen sisters have to show that the purported defence is not vexatious or merely oppressive, or in other words, that it has some arguable foundation: Lloyd-Owen v Bull (1936) 4 DLR 273 (Privy Council) applied by McLelland J in Aliprandi v Griffith Vinters Pty Ltd (in liq) & Anor. (1991) 9 ACLC 1530 at p.1532.

14.  In Eros Cinema v Michel Assad Nassar (1996) 14 ACLC 1374, Simos J applied the test laid down by the Full Federal Court in Vagrand Pty Ltd (in liq) v Fielding (1993) 11 ACLC 411 at 416-417 in the following terms:

“Upon a close reading of the relevant authorities, it is apparent to us that the courts have not in fact required applicants for leave to demonstrate a prime facie case against the company in liquidation, in the technical sense of that term. They have required to be affirmatively satisfied that the claim has a solid foundation and gives rise to a serious dispute. Having regard to the course actually taken by the courts, the term prime facie case is misleading. Perhaps it should be avoided in the future.

The test which has actually been applied is akin to that now used in considering where the interlocutory relief should be granted: “a serious question to be tried”. …”

15.  In applying this test, Simos J made it clear that he did not consider “that it is necessary for an applicant to produce to the court evidence sufficient to establish affirmatively that the proposed proceedings will necessarily be successful. The Court is entitled to infer, if appropriate, from the evidence which is before the Court, that additional relevant evidence is likely to be or may be available from other sources for the hearing.”

16.  I agree with Mr Man that the threshold is low and the Chen sisters need only establish a serious question to be tried on a solid evidential foundation in their purported defence. Despite the lack of a well-reasoned submission in opposition, bearing in mind this threshold, I proceed to examine the merits of the purported defence to see whether there is a serious question to be tried and to ensure that the purported defence is not vexatious.

17.  The Chen sisters contend that the Charge is liable be set aside for the following reasons:

a. Mr Lau was a shadow director of a web of companies including but not limited to Revelry Gains, BLAA and its parent company listed in Hong Kong, namely, The Hong Kong Building and Loan Agency Limited (“HKBLA”), Fameway Finance Limited (“Fameway”) and its parent company listed in Hong Kong, namely, China Railway Logistics Limited (“CRL”) subsequently renamed as Chinese Strategic Holdings Limited (“CSH”), Greatstep and the Company.

b. Mr Lau entered into the Loan Agreement and the Charge in breach of his fiduciary duties to Greatstep and the Company. BLAA, the lender, had knowledge of the breach.

c. The Charge is therefore avoidable at the instance of the Company.

d. The series of transactions entered into between the Company and BLAA were in fact arranged by Mr Lau being behind both HKBLA and CRL through his other companies and nominees. They were part of the fraudulent scheme in that Mr Lau siphoned off monies from BLAA/Fameway to his own pockets under the disguise of loan transactions with companies also controlled by him (Greatstep and the Company).

18.  There are a large number of documents included in 20 bundles placed before this court. Some of such documents in the form of affirmations were created in another set of proceedings. Mr Man refers extensively to those documents to support his contention that Mr Lau was behind such companies including the parent companies of BLAA and Fameway and that Mr Lau were the shadow directors of BLAA and Fameway. The allegations are not straightforward and the alleged connections are not immediately transparent.

19.  Mr Man places particular reliance on the ability of Madam Chen, by reason of her intimate relationship with Mr Lau, to produce a number of documents relating to certain overseas companies or statements of securities accounts evidencing Mr Lau’s shareholdings in and/or control of HKBLA and BLAA.  In particular, Madam Chen was even able to produce a complete set of board minutes of HKBLA and BLAA, which are not in the public domain.

20.  On the other hand, Mr Man deals with the evidence of Daniel So filed for the purpose of the intervention application. Daniel So is and was a director of HKBLA and Revelry Gains and executed a number of documents with the Company on behalf of HKBLA and Revelry Gains. Daniel So categorically denies any involvement of Mr Lau in the affairs of HKBLA and BLAA, let alone being their shadow directors.

21.  Mr Man takes this court through certain evidence in contradiction to Daniel So’s evidence. Of particular note are the transcripts of certain recorded telephone conversations. Daniel So featured in one of these conversations. The purpose of his reference to the transcripts is to show that Mr Lau was indeed the shadow directors of all the companies involved in the creation of bogus loan agreements. Some people in the legal profession are also implicated. Mr Man relies on all these to persuade me that the Charge was not created in the ordinary business of the Company to secure genuine debts and that Revelry Gains has a meritorious case to set aside the Charge.

22.  The Chen sisters’ contentions have to be considered against the following background facts:

a. Madam Chan was the sole shareholder and de jure director of Greatstep and was the sole de jure director of the Company from 5 December 2008 to 1 September 2012.

b. The Company acquired the Property on 22 December 2008 through Madam Chan with the funds of Madam Chen. The single purpose of the Company is to hold the Property and it does not carry on any business.

c. Madam Chen and Mr Lau were in a relationship and they cohabited at the Property. Madam Chan executed the Charge on behalf of the Company.

d. The Charge was created to secure the Debt extended to Greatstep.

e. On 6 July 2015, the Liquidators commenced unfair preference proceedings against the Chen sisters.

f. On 28^th August 2015, the Liquidators commenced misfeasance proceedings against the Chen sisters.

g. On 6 February 2017, the Chen sisters took out an Originating Summons against Mr Lau for contribution to their liability under both the unfair preference and the misfeasance proceedings, which will be dealt with together in December 2017.

23.  I am not entirely without doubt about the validity of the purported defence, in particular given the Chen sisters’ own involvement in the alleged sham transactions. However, on the strict application of the test, the purported defence seems to have certain evidential foundation and it poses a serious question to be tried in respect of the enforceability of the Charge as against the Company. Thus far, I have heard nothing from Mr Lau and I believe a clearer picture would emerge in the course of the forthcoming hearing of the unfair preference and the misfeasance applications.

24.  This being my preliminary view, I should in principle allow the Chen sisters to defend the Mortgagee Action for and on behalf of the Company. The remaining question is how the Company could be sufficiently indemnified.

Conditions to be imposed

25.  The Liquidators highlight the fact that certain conditions were imposed in Aliprandi and Eros Cinema Pty Ltd. with the grant of leave. The Liquidators invite this court to consider the following conditions which are modelled on those conditions to be imposed on the Chen sisters if leave is granted for them to use the name of the Company to defend the Mortgagee Action:

(1) the Chen sisters be solely responsible for their own costs and any adverse costs orders for defending the Mortgagee Action in the name of the Company.

(2) A deed duly executed by the Chen sisters be provided to the Liquidators within seven days indemnifying the Company against any future costs, charges, expenses in connection with or arising out of the Mortgagee Action.

(3) an amount of HK$500,000 (“the Amount”) be paid by the Chen sisters to the Liquidators within seven days thereafter, to be applied to any such costs, charges or expenses if and when incurred. The Liquidators have the liberty to apply to the court for further sums of money to be paid by the Chen sisters for the same purpose.

(4) the Liquidators be entitled to be informed by the Chen sisters from time to time as to the progress of the proceedings. More specifically:

(a) the Chen sisters be obliged to provide copies of all future documents (including but not limited to orders, affirmation and exhibits) in connection with the Mortgagee Action to the Liquidators as and when such documents are filed and/or received.

(b) the Chen sisters be obliged to inform the Liquidators as soon as practicable any hearing dates in the Mortgagee Action and the outcome of any hearings and interlocutory applications.

(c) the Liquidators and their legal advisers be allowed to attend any hearings in connection with the Mortgagee Action under a watching brief.

(d) any costs and expenses (including legal costs) incurred by the Liquidators under this paragraph 4 be covered by the indemnity given by the Chen sisters referred to in paragraph 2 above.

(5) the Chen sisters shall not compromise with Revelry Gains in the Mortgagee Action without first obtaining an approval from the court.

(6) the Chen sisters to pay into court and amount as a security to cover interests of the Debt accruing at HK$82,484.52 per day from the Liquidators’ decision not to contest the Mortgagee Action in mid August 2015.

26.  Mr Man indicates that the foregoing conditions are in principle acceptable by the Chen sisters except the provision of watching briefs to the Liquidators and their legal advisers and the security to cover post-liquidation interest of the Debt. He also indicates the Chen sisters’ preference to pay the Amount to the court instead of the hands of the Liquidators and on this the Liquidators do not have strong view. I am accordingly happy to accept the Chen sisters’ position.

27.  For the attendance of the Liquidators and their legal advisors in the future hearings of the Mortgagee Action, I do not think it is of absolute necessity given the required disclosure of the information by the Chen sisters to the Liquidators in respect of the Mortgagee Action. There may be occasions where the Liquidators feel obliged to attend the hearings nevertheless. I agree with Mr Man that such costs should be taxed, if not agreed, in the liquidation to be indemnified by the Chen sisters.

28.  That brings me to the more controversial topic, namely, post-liquidation interest on the Debt. Mr Man’s primary position is that no such interest would accrue after the winding up of the company in view of its insolvency. In any event, Mr Man argues that it is unreasonable for the Liquidators to ask for an indemnity in respect of the interest on the Debt.

29.  In the winding up of a company, a secured creditor may appropriate the proceeds of realisation of his security but the net proceeds of the realisation must not be applied to interest accrued thereafter: see Halsbury’s Laws of Hong Kong Vol.15 (2^nd Edn., 2015) at [95.1389]. This proposition is derived from Re London, Windsor and Greenwich Hotels Company [1892] 1 Ch. 639, to which Mr Man also refers this court.

30.  There, Stirling J referred to the dictum of James L.J. in Re Savin (1872) 7 Ch App 760 as follows:

There is a general rule in bankruptcy - whether a right and a reasonable rule or not - that there is to be no proof in bankruptcy for interest subsequent to the bankruptcy. There was also a rule in bankruptcy, that a creditor holding a mortgage security is to make up his mind whether he will rely upon his security or give it up and come in and prove with the other creditors. This rule was relaxed in favour of the creditor by a rule that his security might be sold, and then he was to apply the realised proceeds in payment of his debt. On this rule a judicial decision was made nearly eighty years ago, that the proceeds of the sale were, in case of deficiency, to be applied in payment of principal and interest up to the date of the bankruptcy, and up to the date of the bankruptcy only; and then the creditor was to prove for the residue of his debt, which, of course did not include any interest subsequent to the date of the bankruptcy.

31.  Mr Man further refers this court to In re Dynamics Corporation of America (in liquidation) [1976] 1 WLR 757 where the same dictum of James L.J. was cited. The particular significance of this authority is that there Oliver J cited In re Humber Ironworks and Shipbuilding Co. (1869) L.R. 4 Ch. App. 643 where Selwyn L.J. applied the same principle to the liquidation of a company. Selwyn L.J. also explained the theory behind the general rule, that is to say that the liquidation and distribution are to be treated as notionally simultaneous, in the following terms,

“ … Justice, I think, requires that … no person should be prejudiced by the accidental delay in which, in consequence of the necessary forms and proceedings of the court, actually takes place in realising the assets; but that, in the case of an insolvent estate, all the money being realised as speedily as possible, should be applied equally and rateably in payment of the debts as they existed at the date of the winding up.”

32.  Mr Man submits that the estate of the Company is clearly insolvent. As stated in the April 2016 Decision, both Revelry Gains and Fameway are secured creditors of the Company. The current debt of Revelry Gains stood at HK$283,361,816.49 whereas that of Fameway stood at HK$98,234,621.92. The total indebtedness relating to these two secured creditors already exceeds the forced sale value of the Property. Hence there is no issue of any post-liquidation interest payable to Revelry Gains.

33.  In any event, if post-liquidation interest do accrue on the debts to both Revelry Gains and Fameway and in the former case at the hefty daily rate suggested by the Liquidators, the amount of interest payable would have become enormous by now due to no fault of the Chen sisters.

34.  On the contrary, Mr Kemp submits that the Company is solvent and that post-liquidation interest will accrue until repayment in full.

35.  For the former submission, Mr Kemp submits that the Property has been occupied by Mr Lau pursuant to a tenancy granted to a corporation. No rent has ever been received, however. Thus, he says there is a possible claim against the tenant for arrears in rent. I am not impressed by such a claim and it does not appear to me that the Liquidator can recover any substantial amount from the defaulting tenant in the absent of cogent evidence.

36.  Mr Kemp further submits that the Liquidators may be able to recover substantial sums from the Chen sisters in the unfair preference and misfeasance proceedings. I am not in a position to assess the chance of recovery. On the evidence now available to me, the Company is clearly insolvent.

37.  Mr Kemp next refers to me Re Choi Lai Ming, ex p Official Receiver [2006] 1 HKLRD 7 where Barma J (as he then was) dealt with the question of post-bankruptcy interest. The Official Receiver as the bankrupt’s trustee in bankruptcy made a submission that there should be no post-bankruptcy interest payable to the government. The judge said this,

“As to the other point, Ms Chan submitted that by reason of s 71 of the (Bankruptcy) Ordinance and r 17 of the Bankruptcy (Proof of Debts) Rules, it was not open to the Government to continue to charge interest on the outstanding downpayment loan after Mr Choi was made bankrupt. Section 71 provides that interest on a debt is provable as part of the debt except insofar as it is payable in respect of any period after the commencement of the bankruptcy. In my view, that section has no application to the position of a secured creditor if he does not prove in the bankruptcy. In that situation, he has no need to prove for the interest on the debt, and can rely on his security to recoup himself both in respect of principal and interest. This is the position in New Zealand (see Lamont v Bank of New Zealand [1981] 2 NZLR 142), and I am not aware of any contrary authority in Hong Kong.”

38.  Mr Man’s retort is that the Judge did not refer to any of Re London, Windsor and Greenwich Hotels Company, In re Dynamics Corporation of America (in liquidation) or In re Humber Ironworks and Shipbuilding Co.  at all. He is right.

39.  Interesting as the arguments sound to this court, I need not form any view on this issue particularly in the absence of the contribution of Revelry Gains to the debate. It is premature to decide on whether Revelry Gains can lay their hands on the Property for recovery of any post-liquidation interest. It is unclear to me whether they would insist on such interest too.

40.  However, in the event such interest is payable out of the sale proceeds of the Property and the estate of the Company is depleted as a result without good reasons due to the purported defence, it is only just that the Chen sisters may be required to indemnity the estate of the Company against payment of such interest covering a certain period of time.

41.  Thus, I do not think it is right to require the Chen sisters to pay into court any amount as a security to cover post-liquidation interest on the Debt. It suffices to require them to give an indemnity in the deed against any such post-liquidation interest for such period that the court deems just and appropriate.

Conclusion and orders

42.  For the reasons given, I accept the application of the Chen sisters with the conditions discussed above to be imposed upon them. I direct that the Chen sisters’ legal representatives do prepare shot minutes of order to give effect to this decision.

43.  On the issue of costs, I agree with Mr Man that costs of this application should be reserved. This is my costs order nisi.

44.  It remains for me to thank both Mr Man and Mr Kemp for their quality submissions.