XCHRX SPECIAL SONG LTD. (In Liquidation) v. LO SIU FAI LOUIS

HCCL 57/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.HCCL 57 OF 1999

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J U D G M E N T

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1. This is an Order 14 application by the plaintiff, in the form of its liquidator, having obtained leave from the Company Judge to commence this action against Louis Lo, a former director of the Company and seek, by way of summary judgment, the repayment of some $46 million which was said to be a loan to the defendant and the subject of an improper declaration of dividend.

2. As I have come to the view that summary judgment should not be given and the matter would have to go to trial, I would briefly give my reasons, but hopefully I would not descend too much into the detailed merits of the case.

3. I think there are three reasons why I come to the view that it is wholly inappropriate for summary judgment to be given in favour of the plaintiff. First, it is on the merits of the summary judgment. The facts of this case are not terribly complicated. What happened is that the Company in 1992 bought a property which was fully tenanted. The purchase price was $140 million, $60 million of which was put up by the Company and $80 million was borrowed from the bank. The loan arrangement with the bank was such that there was enough money coming in, such as the rental, to make the mortgage payments since the tenancy was for a period of six years.

4. It is significant that shortly after the purchase of the property, by letter of 9 June 1992, the Company wrote to the Inland Revenue informing them that the nature of the business of the Company was "property investment" instead of "general trading".

5. The next event was that about some 10 months later, the property market, to the surprise of everyone in Hong Kong, went up so much that the Company received an extraordinary attractive offer for the property to be sold at something like $480 million. However, the sale was made on terms that 20% in the purchaser company's interest should be taken up by the vendor, namely the plaintiff company. This caused a little bit of a problem. The upshot of this was the two partners, i.e. the two principal shareholders having beneficial interest in the plaintiff company, Mr Louis Lo and Mr Dennis Lo, considered that the offer was so attractive that it should be accepted, but they came to arrangements whereby dividends would be declared to reflect a sufficient part of the profit to be made, namely, in the sum of about $220 million, to be shared between the two shareholders, leaving behind some $47-$48 million in the Company which would enable the defendant to take up the 20% interest in Fair Star, the new purchasing company. That was how the sale of the property by the plaintiff company to Fair Star was structured.

6. The arrangement which I have referred to would thereby enable the Company to pay out a dividend of some $220 million, leaving a sum of some $47-$48 million in the Company.

7. There was a signed management account of December 1993 which shows a taxation figure of $47 million. The defendant's evidence is that he signed it by mistake; he did not read it as part of the large number of documents that he signed regularly; that that document was wrongly prepared by an unqualified accountant Miss Tam and that was how that document came into being.

8. The next stage was that the sum of $46.9 million was given as a loan by the Company to the defendant to enable him to take up his obligation under the new arrangement of the purchase of Fair Star.

9. We then move on to the end of 1994 when there was a special declaration of a second dividend whereby the defendant (by then the 100% shareholder) was to receive a dividend more or less about the same amount as the amount of money that he owed the Company. So the two set off each other. And it is this declaration of special dividend at the end of 1994 that is the subject of particular attack at the hearing today by Mr Westbrook on behalf of the liquidator. The gravamen of the attack is that the defendant knew that tax were payable in the sum of $47 million and that he quite improperly declared the dividend well knowing that the Company would have no other fund to pay the tax, and thereby put it out of the reach of the tax revenue the recovery of the sum of the tax of $47 million. That is said to be misfeasance or breach of duty.

10. The position, as I see it, is that there are too many factual aspects required to be investigated by the court before the court can in any way come to a view that the defendant knew that the tax of $47 million was payable, and therefore improperly and deliberately put that sum of money out of the reach of the Inland Revenue by the declaration of the dividend.

11. What caused the problem in this case is, of course, that Hong Kong is in some ways unique in the world in having no capital gains tax. The basis in Hong Kong of taxation of profits made from a property is that it is taxable if it is a trading profit, but it is not taxable if the profit is derived from investment. That is the reason why the letter of 9 June is of such importance. That letter, prima facie, is bona fide. That letter, together with the surrounding circumstances of the acquisition of the property, suggest that the property was intended to be acquired for a long term investment and, therefore the way the borrowing was organized around the long lease. There may have been a subsequent change of circumstances as to induce even an investment company to realize a substantial gain and sell the property. I think the affidavit evidence is very clear that the inducement and the profit was such that the directors of the plaintiff company felt that they should accept the offer and did.

12. But that does not seem to me to suggest that the Company was not an investment company, in fact even the document heavily relied on by Mr Westbrook at pages 117 and 118 of the Bundle, the management account, shows clearly that the properties were investment properties. Of course, there is also internal conflict in that document where there is a $47 million figure shown for taxation. I said it is internal conflict because if it is an investment company, then there should not be a taxation provision of $47 million.

13. So there is every reason to believe that the defendant did not know that profits were payable and there is plenty of affidavit evidence in the defendant's affidavits where he said he did not.

14. Mr Westbrook invites me to say that is all incredible; that is all moonshine. But if someone had said on affidavit that he has taken legal advice and that is consistent with contemporaneous actions both of the letter of 9 June as well as of his financial arrangement, how can I at this stage in summary form say it is all moonshine and incredible. I, of course, agree that there are aspects of the case which calls for question marks such as, for example, he says "I signed the document of the management account wrongly"; and his subsequent act in offering to pay, but these are matters which really ought to go to trial and to be investigated rather than it being said "these provide the basis for the court to form a firm view that there can be no basis for argument" and with all other relevant material being lightly brushed aside.

15. So notwithstanding the able submissions made to me on the merits of the matter, I regret to say that this is not a case where summary judgment ought to be given.

16. I have, however, a second and a stronger reason why I think, as a matter of principle, this is a case where summary judgment should not be given. There is a statutory route by which misfeasance can be brought to the attention of the court and recovery made by way of section 276 of the Companies Ordinance. In The Right Hon. G.A.F. Cavendish Bentinck, M.P. v. Thomas Fenn (1887) 12 App Case 652 (HL) and In re Canadian Land Reclaiming And Colonizing Company (1880) 14 Ch D 660, the statutory route was said to be by way of summary procedure and this is also the view expressed in Tomasic & Tyler, Hong Kong Company Law (1999 Ed.), para. I [12078], under the section 'Overview'.

17. If there is a summary procedure, statutorily laid down, whereby the legislative intention was the Company Judge, in the course of winding-up, can give remedy, then it seems to me that it is quite wrong to by-pass that procedure and to come before the court by way of a separate action. I do not condemn the separate action but what I do condemn or disapprove of is a separate action by way of a summary application under Order 14 to seek the same summary remedy. The only remedy we are talking about now is one arising out of misfeasance or breach of duty, not in relation to money having been received or for the recovery of loan. That procedure is readily available from a specialist judge pursuant to section 276 and in my view, it is wholly wrong in such a situation for a liquidator to apply by way of Order 14. One of the matters, for example, which points to the disadvantage of the present procedure is that it gives the liquidator two bites : he goes by way of summary procedure, if he fails, then pursue the action; whereas under section 276, he wins or he fails and that would be the end of it. A former director would in fact be vexed twice by Order 14 whereas under section 276, he would only have to face litigation once.

18. In my view, it is wholly inappropriate, in these circumstances, to apply by way of Order 14.

19. The third reason that I believe summary judgment should not be given in this case is what is debated to be the fetter under Order 14 rule 1(2)(b) which restricts the application to cases based on fraud. There is a debate between the parties as to whether this is a case which strictly comes within the rules, or comes within the case of Derry v. Peek (1889) 14 App Cas 337, or it is mainly a case which has elements of dishonesty but not caught by the exception in the rules.

20. It seems to me that it is unnecessary, having regard to the debate between the parties as to the way the case is framed, to determine whether it is strictly caught by the rules or not caught by the rules. For the purposes of today, I am willing to assume that Mr Westbrook is right and that it is not strictly caught by the rules. But, nevertheless, the nature of the case that he is relying on has all the elements of dishonesty. Knowledge is in fact the cardinal element of his case and I have come to the view that knowledge has not been made out. In that sort of a case where there is a large element of dishonesty and improper behaviour, it seems to me whatever may be the technical aspect of whether it comes within the statutory exception, that it is not a suitable case where the court ought to give summary judgement. In my view, the matter ought to be fully ventilated in open court by way of a full trial.

21. For those three reasons, therefore, I have come to the conclusion that this is not a case where summary judgment ought to be given. In my view, the application ought to be dismissed with costs to the defendant.