JOHN ROBERT LEES AND ANOTHER v. DRAGON INVESTMENT COMPANY II LLC

CACV 91 /2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 91 OF 2006

(ON APPEAL FROM HCA 1180 OF 2003 )

______________________

----------------

JUDGMENT

----------------

Hon.  Yuen JA:

1.  This is an appeal from a decision of Deputy Judge Gill giving unconditional leave to the Defendant to defend the Plaintiffs’ action, which was based on an indemnity for remuneration and disbursements in connection with their work as provisional liquidators of a company of which the Defendant was the petitioning creditor.  

Background

-  The Company

2.  The company in question was called Sino-American Telecom Inc ("the Company").  It had run into financial difficulties.  The Defendant was one of its creditors. 

3.  The Company’s assets comprised its holdings in two subsidiaries, viz. Remoco (Hong Kong) Ltd ("Remoco HK") and Goldremart Holdings Ltd ("Goldremart"). 

- Remoco HK had interests in a joint venture company in the PRC.

- Goldremart’s assets included a manufacturing plant in the PRC.

According to the audited accounts (which were not subject to qualification by auditors), as at year end 31 March 1997 the Company and its subsidiaries had receivables of US$3.2m net.  

-  Appointment of Plaintiffs as joint provisional liquidators 

4.  On 14 May 1998, the Defendant presented a petition for the winding-up of the Company.  By an order made the same day, the Plaintiffs were appointed joint provisional liquidators of the Company.  They became full liquidators by an order made in December 2000. 

- The indemnity document

5.  On 16 June 1998, a document was signed by the Plaintiffs and the Defendant.  This document has been set out in full in para. 7 of Deputy Judge Gill’s judgment and I shall not reproduce it here.

6.  Essentially, the first paragraph said that in consideration of the Plaintiffs agreeing at the request of the Defendant "to accept appointment" as joint provisional liquidators of the Company, the Defendant undertook to indemnify the Plaintiffs against

"any liability which may be incurred or suffered ... by reason of the appointment of yourselves as joint provisional liquidators as aforesaid or of your acting as such joint provisional liquidators ... to the extent that you are unable to recover the same from the assets of [the Company] and provided that such liability shall not have arisen by your own negligence misconduct or default".  (Emphasis added).

The second paragraph said

"In particular (but without prejudice to the generality of the foregoing) [the Defendant] hereby agreed to indemnify you ... in respect of any costs,  joint provisional liquidators’ remuneration and joint provisional liquidators’ disbursement to the extent not paid out of the companies’ assets ... provided that such ... costs, expenses and other liabilities shall not have arisen or been caused by your negligence, misconduct or default". 

7.  "Counter-indemnities" were obtained by the Defendant from other creditors. 

- Subsequent events

8.  Subsequently Remoco HK and Goldremart were put into liquidation.  A new company called Phoenix Telecommunication Ltd ("Phoenix") was set up as a vehicle to provide funds for the PRC joint venture.  However it seems to be common ground that little if anything has been recovered in the liquidation of the Company.    

Claim by Plaintiffs for indemnity

9.  For the period of provisional liquidation, the Plaintiffs claimed

- remuneration of nearly $7m. and disbursements of about $158,000, of which about $6.4m was outstanding,  and

- outstanding solicitors’ fees of nearly $2.6m.

10.  In June 2003, the Plaintiffs issued a writ against the Defendant for the total sum of about $9m.  The Statement of Claim (para. 3) pleaded a cause of action founded on

"an agreement made in writing between both Plaintiffs and the Defendant dated 16 June 1998 (‘the Indemnity Agreement’) made in consideration of both Plaintiffs agreeing at the request of the Defendant to accept appointment as Joint Provisional Liquidators of the Company..."  (Emphasis added).

No amendment was made to this pleading in the Amended Statement of Claim filed in October 2004.

Summons for stay pending taxation and approval

11.  In October 2003, the Defendant issued a summons asking for a stay of the claim pending (1) taxation of the solicitors’ costs and (2) approval by the Companies Judge of the Plaintiffs’ remuneration as joint provisional liquidators of the Company.

Draft Defence

12.  In November 2003, a draft Defence was exhibited by the Defendant which set out the following main points:

(1)    as the Indemnity Agreement was made in June 1998 in consideration of the Plaintiffs’ acceptance of appointment as joint provisional liquidators of the Company which had occurred in May 1998, the consideration was past and the Agreement was therefor unenforceable for want of consideration (“the past consideration defence"); 

(2)    even if the Indemnity Agreement covered expenses for which the Plaintiffs may be liable, it did not cover the Plaintiffs’ own remuneration, because the ambit of the indemnity was set out in the 1^st paragraph of the Agreement which did not include the Plaintiffs’ own remuneration.  Although the 2^nd paragraph did refer to the Plaintiffs’ remuneration, that should be read in context of the 1^st paragraph to mean third party remuneration for which the Plaintiffs were liable and excluded their own remuneration (“the exclusion of own remuneration defence”);

(3)    some of the Plaintiffs’ work for which remuneration and fees were claimed was work done for the liquidation of Remoco HK and/or Goldremart, or was work done for Phoenix, and was not for the liquidation of the Company (“the non-Company work defence”); 

(4)    in any event, the Indemnity Agreement expressly provided that the Defendant’s liability for indemnity was only to the extent that the Plaintiffs were unable to recover from the assets of the Company, and more assets should have been recovered (“the recoverable assets defence”);

(5)    the Indemnity Agreement also contained an express proviso: that liability did not arise by the Plaintiffs’ ‘negligence misconduct or default’, and the Plaintiffs had been negligent or in default in failing to recover more assets for the Company (such as suing its auditors since the Plaintiffs say that some of "the amounts shown to be owed by debtors were fictitious") and in failing to properly supervise their solicitors who incurred substantial charges (“the negligence defence”).

13.  In the draft Defence, there were repeated statements that the Defendant was "not able to properly particularize the allegation until the Plaintiffs provided proper particulars of what work they have in fact done, and how much they have charged for it".

14.  However, the Defendant has subsequently filed affidavits seeking to substantiate or add to the allegations in the draft Defence. 

15.  Although the Defendant has not filed a revised draft Defence (which it was not obliged to do as a matter of procedure) and has continued to use the draft Defence (exhibited in November 2003) as a ‘skeleton’ for its allegations, I do not agree with Mr Barlow counsel for the Plaintiffs that allegations in the affidavits not pleaded or particularized in the draft Defence should be ignored.  In my view the court should consider the entirety of the material put before it in Order 14 proceedings, and Mr Barlow’s references to cases of strike-out where insufficient particulars have been pleaded are with respect inapplicable to this stage of the proceedings.

Sum approved by court for provisional liquidators’ remuneration

16.  It would appear that the summons for a stay (referred to in para. 11 above) was not heard. 

17.  As events transpired, Kwan J finished her consideration of the Plaintiffs’ remuneration in August 2004 and approved the sum of about $5.9m for payment out of the company’s assets (if any).

Taxation of solicitors’ costs

18.  As for taxation of the solicitors’ costs, that has apparently not been finalized.

Order 14 application

19.  The Plaintiffs then applied for summary judgment in the sum of about $5.9m approved by Kwan J "being a part of the total amount claimed by the Plaintiffs under the Indemnity Agreement" and a declaration that the Defendant was bound to indemnify them for the costs and disbursements incurred pursuant to the Indemnity Agreement including solicitors’ costs and disbursements.

Deputy Judge Gill’s judgment

20.  In his judgment, Deputy Judge Gill set out the applicable legal principles and the arguments for and against summary judgment.  It has not been suggested that the judge misunderstood the applicable legal principles or misapprehended the material facts.

21.  In the section of his judgment entitled “Result”, Deputy Judge Gill decided:

“20. As the aforementioned reads, there are a number [of] material unresolved issues going to construction and matters of fact.

21. On the prospective defence of negligence by the plaintiffs, they claim to have an absolute answer to the allegations of actual or prospective negligence or misconduct; that their performance was at all material times subjected to scrutiny by Kwan J.  That they passed muster under her watchful eye reveals the speciousness of these allegations.  But I accept that this was scrutiny undertaken in winding up proceedings in which emphasis is on the extent of allowable remuneration and would not have gone to issues of negligence unless of the most obvious kind.  In any event, the defendant as a separate contracting party in the deed of indemnity should not be estopped from mounting its own defence under this head.

22. It is of course not within my province to consider the strength of a defence on those or any of the other grounds.  Suffice to say that, overall, I am satisfied that the defendant has done enough to show there are triable issues.  In the circumstances I give leave to the defendant to defend the action unconditionally”.

Discussion

22.  It is well-established that on an Order 14 application, where a judge has decided on the evidence that there is a triable issue on a question of fact, as opposed to a question of law or a question of construction, it would be unlikely for an appellate court to reverse a judge’s order:  see the judgment of this court (Litton VP, Godfrey and Liu JJA) in Strong Base Services Ltd v Geroma Electronic Ltd [1996] 2 HKC 94.

23.  It is clear from the passages in Deputy Judge Gill’s judgment quoted in para. 21 above that he decided that there were triable issues going to (1) construction and (2) questions of fact. 

(1) Defences of construction

24.  There were two defences of construction: i.e. the past consideration defence and the exclusion of own remuneration defence. 

25.  As for the exclusion of own remuneration defence, if this had been the only issue between the parties, then I would agree with Mr Barlow that this court could (and indeed should) decide the matter - one way or the other - at this stage instead of allowing the issue  to proceed to trial, so as to save time and costs.  However, as will be seen, this is not the only defence.

26.  As for the past consideration defence, it is the Plaintiffs’ own case that this is not simply a matter of construing the language within the four corners of the Indemnity Agreement. 

27.  If it were simply a matter of construing the language in that narrow literal way, then there may well be substance in the past consideration defence, because according to the Statement of Claim, this was an  agreement ‘made in writing’ on 16 June 1998 and the only stated consideration for the Agreement was the Plaintiffs’ agreement ‘to accept appointment’ as joint provisional liquidators.  That appointment had in fact been made on 14 May 1998, so the agreement to accept appointment must have occurred at the latest on 14 May 1998, i.e. before the agreement was made in writing on 16 June 1998.  Indeed Mr Lees himself said in his affidavit made on 17 December 2004 (para. 4)

"On16 June 1998 after the appointment of the Plaintiffs as Joint Provisional Liquidators we entered into an Indemnity Agreement with the Defendant ...".  (Emphasis added).

28.  It is true that the Plaintiffs rely on construction of the document in its factual matrix, and in Mr Lees’ 5^th affidavit made on 5 October 2005, he has alleged that there was an earlier oral agreement of indemnity of which the Agreement was merely a memorandum, an allegation which had not been pleaded in the Statement of Claim.  But it is therefore clear that even on the Plaintiffs’ own case, the past consideration defence is not a matter of construction which can be determined without decisions having to be made on issues of fact.

(2) Defences involving questions of fact

29.  The other defences clearly involve issues of fact.  The Plaintiffs’ response was that Kwan J’s approval was a complete answer to these defences.  I would respectfully agree with Deputy Judge Gill that whilst the judge’s approval may be one piece of evidence supporting the Plaintiffs’ claim, it is not a complete answer. 

30.  First, this is not a simple guarantee case.  The Defendant has independent contractual defences by reason of the provisos in the Agreement.

31.  Secondly, the normal purpose of the process in winding-up whereby provisional liquidators seek approval from the court for their remuneration is to enable the court to be satisfied that the sum requested can properly be paid to them out of the company’s assets (if any).  It does not appear that Kwan J was made aware of any other purpose for the exercise in the present case.  Consequently (as in the usual case) the judge’s attention would have been directed towards seeing whether less billable work could have been done.  This is borne out in the present case by the letter from Kwan J’s clerk dated 26 September 2003 inviting comments from the Plaintiffs on proposed reductions for "work of a purely clerical nature", "work of a non-productive nature", "travelling time", "internal meetings" etc., in other words, checking if work ought to have been done in less time, or if work ought to have been done by a lower fee-earner, etc.  The judge’s attention would not have been directed towards issues such as whether the provisional liquidators should have done something more, such as instituting proceedings against auditors, or (if the Plaintiffs say that would not have been possible as there were insufficient funds in the provisional liquidation) consulting creditors to see if there were other funding options.

32.  As for Mr Barlow’s argument that the Defendant could have ‘intervened’ when Kwan J was considering the provisional liquidators’ request for approval, I am not persuaded that it could have done so.  Mr Barlow has referred me only to s.255 Companies Ordinance, a general section which does not appear to provide the relevant platform for ‘intervention’ by the Defendant, who as I have said is pursuing contractual defences of its own in these proceedings.  Further, if the Defendant had sought to influence the judge during the exercise undertaken e.g. by writing to her as Mr Barlow suggested, it is likely that Kwan J would first have considered whether she could proceed at all with the exercise on paper, and even if so, it is likely that she would have required a proper joinder of specific issues. 

Result

33.  In the circumstances, once Deputy Judge Gill decided on the evidence that there were triable issues of fact, there was no ground for interfering with his discretion.  It is not a question of whether the members of this court might have made the same order as the judge, had we been dealing with the Order 14 application at first instance.  The judge’s discretion has to be respected. 

34.  Finally as to the question of conditional leave, it is inconceivable that the judge would not have been aware of the option of conditional leave.  I am sure if he considered that the circumstances warranted it, he would have ordered conditional leave.  But once he reached the decision that there were triable issues of fact, unconditional leave was the only proper order to make. 

Order

35.  I would dismiss the appeal with an order nisi that the costs of the appeal be paid by the Plaintiffs.

Hon Sakhrani J:

36.  I agree.