CHAN SUM TAI AND OTHERS v. CHAN SHIU KAU ANTHONY AND OTHERS

HCCW 373/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 373 OF 2007

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D E C I S I O N

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1.  This is an application by Luen Hing Fat Limited (“the Company”) for a validation order under section 182 of the Companies Ordinance, Cap. 32.  The Company has 45 shareholders, most of them are descendants of the founders who were clansmen.  On 20 August 2007, 11 shareholders, who hold 16.27% of the shares, presented a petition to wind up the Company on the just and equitable ground.  Alternatively, they seek an order that their shares be purchased under section 168A.  The 1^st to 4^th respondents comprise the board of directors.  They and their family members hold more than 55% of the shares.  There are other shareholders who have not been made parties to the petition.  The 5^th respondent is the Company.

2.  It is not in dispute that the Company is solvent and its financial position is healthy.

3.  In this application by the Company, it seeks an order to validate two dispositions :

(1)     the payment of interim special dividend to shareholders of $102 million as approved by the board of directors on 20 December 2007; and

(2)     the payment of $4,926,457.17, being deposits made by 6 shareholders with the Company from time to time as particularised in a schedule.

4.  The 2^nd payment is opposed by the petitioners.  They take the stance that the evidence adduced before the court is not sufficiently cogent and reliable for the court to authorise payment at this stage.  They also question the lawfulness of the payment in some instances.

5.  The Official Receiver agrees with the position taken by the petitioners as stated in the Official Receiver’s letter dated 5 May 2008.

6.  Mr Alfred Cheng for the Company indicated in his oral submissions today that I can make a validation order in respect of some of the payments sought and adjourn the rest of the summons for the Company to adduce further evidence to address the criticism of the petitioners.  I decline to take this course, bearing in mind that the present application and an earlier summons seeking validation of substantially the same payments have come before the court on 5 October 2007 and 4 March 2008 and today is in effect the 3^rd adjourned hearing.  The Company has had enough opportunity to address the inadequacy in evidence raised by the petitioners in their affidavits.

7.  I will first deal with the payment relating to interim special dividend for which the petitioners take a neutral position and the Official Receiver has no objection.  The interim dividend represents the bulk of the profit made by the Company in disposing of its most substantial asset, the Luen Hing Fat Building.  The sale of this building was the subject of an earlier summons for validation order issued on 25 September 2007.  By an order by consent made on 30 October 2007, the sale of the building to the purchaser under a sale and purchase agreement in June 2007 at $133 million was validated.  The sale was duly completed on 30 November 2007 and the net proceeds received by the Company was about $129 million.  On 20 December 2007, the board of directors passed a resolution to declare and distribute an interim special dividend for 2007 to the shareholders of $102 million out of the net proceeds of sale.  The directors are of the view that they have retained a sufficient margin from the net proceeds, taking into account the petition.  The board will consider the position again before the annual general meeting for 2008 when the amount of the final dividend for 2007 would be considered.

8.  It is within the power of the board of directors to pay to members such interim dividends as appear to the directors to be justified by the profits of the Company, under article 90 of Table A, 1950 ed, adopted by the Company as its articles of association.  The directors had in past general meetings promised shareholders to make distribution of special dividend after completion of the sale of the building and the Company has the practice of declaring and paying special dividends when it has excess surplus to do so.  The reasons given by the directors for declaring interim special dividend are reasons that an intelligent and honest man could reasonably hold.  I will validate the payment of interim special dividend sought in paragraph 1(a) of the summons.

9.  I turn to consider the other payment of $4.9 million odd sought to be validated.  This amount was the subject of the earlier summons for a validation order issued on 25 September 2007.  The amount sought to be validated on that occasion was a slightly smaller figure of $4.8 million.

10.  In the earlier summons, the amount was described as “the dividends declared and approved by the shareholders at the previous annual general meetings of the Company but which have not been claimed by the shareholders”.  Owing to the objection of the petitioners, that part of the summons was adjourned sine die with liberty to restore.  The petitioners have queried if $4.8 million were indeed owed to the 6 individuals as dividends in view of the small proportion of their shareholdings.

11.  Instead of restoring the earlier summons, the Company issued the present summons.  The amount now sought to be validated is increased to $4.9 million and the payment is described as “deposits made by shareholders with the Company from time to time”.

12.  In the supporting affidavits filed by the Company, it is stated that the 6 shareholders, to whom the Company owes $4.9 million as at 31 December 2007, have maintained current accounts with the Company since the 1980s and they would deposit money into these accounts from time to time, including dividends declared by the Company and dividends declared by a related company of the Company in Macau called Luen Ying Tai Limited.  It is stated that the Company is a family run company and there is the practice of allowing shareholders to maintain current accounts with the Company to provide a convenience to them, as some of the shareholders live in foreign countries.  Of the 6 individuals in question, 2 live in Canada and 2 live in France.  They would withdraw money from the current accounts when they came to Hong Kong and they would also instruct the Company to remit monies to them from time to time.  The amounts due from the Company to these shareholders on their current accounts carry interest at 2.75% per annum, subject to adjustment in accordance with the HSBC interest rate payable on money deposited in a savings account.

13.  The Company has exhibited its general ledgers in respect of the current accounts of the 6 shareholders from the 1980s, and various vouchers, receipts and deposit slips of the transactions in these current accounts from 2001.

14.  The Company has explained on affidavit that for the deposit of dividends into these current accounts, there was no physical transaction of cash or cheques, so there would not be documentary evidence such as deposit slips or cheques; the documentary evidence in support of the deposit of dividends would only be found in the relevant entries in the general ledgers.

15.  The petitioners have done an analysis of the current accounts in the general ledgers.  It would appear that the components that made up the ending balances in the current accounts may be categorised as follows :

(1)  dividends

(2)  interest

(3)  director’s bonus

(4)  net deposits

16.  I will consider each of these components in turn.

17.  The petitioners’ position is that they have no objection to the Company paying out to these 6 shareholders’ dividends that had been declared in the past but were unclaimed by them, provided there is cogent evidence to show that such dividends were deposited into or credited to the current accounts.

18.  For the dividends deposited in the current accounts, as mentioned earlier, there was no physical transaction in the sense of cash or cheque paid into the Company’s bank accounts.  The only evidence of dividends deposited into these current accounts adduced by the Company was the entries in the general ledger.  In the period from the 1980s to 2000, the general ledger only recorded entries of deposits, withdrawals and the interest accrued.  In respect of a deposit or credit entry, it was not specified what the source of funds was, whether the money was unclaimed dividend or other payment made by the shareholder.  It was only in 2001 that the deposit entries in the ledger recorded which of the entries were in respect of unclaimed dividend.

19.  The petitioners do not dispute that for deposits recorded as money originating from dividends as from 2001, they may be regarded as such and the petitioners would have no objection to a validation order being made for such amounts.

20.  However, for all deposits prior to 2001, the petitioners’ approach in their analysis is that none of these deposits should be regarded as dividends.  Mr Cheng submitted that this analysis cannot be realistic, as it is clear that dividends had been declared since 1997 if not earlier.

21.  Mr Cheng may have a point there.  It could be that a part of the deposits, or even a substantial part of the deposits, from the 1980s to 2000 had originated from dividends.  My difficulty is that I am in no position to say what the amount or what the probable amount might be, on the evidence that the Company has chosen to place before the court, notwithstanding it has filed 3 affidavits in all since September 2007.  There was no attempt to explain the composition of the deposits made prior to 2001.

22.  Mr Cheng submitted that even if a validation order is made, if it should transpire there was abuse of power by the directors, or that the payment had been made in bad faith, a validation order would not preclude recovery by the liquidator if the Company should be would up.  I do not think it is satisfactory in the present circumstances to authorise payment at this stage, bearing in mind that 4 out of the 6 shareholders are resident abroad.  In respect of any amount that these shareholders fail to get a validation order, they can of course submit a proof of debt to the liquidator supported by proper evidence in the event that the Company is wound up.

23.  For the above reasons, I will only make a validation order in respect of the amounts that were recorded as deposits from dividends since 2001.

24.  The next component is interest.  As of 31 December 2007, the accrued interest on the balances of the current accounts amounted to over $2.94 million.  Insofar as interest on dividends and director’s bonus are concerned, it is accepted by Mr Cheng that the Company is not permitted to pay interest on unclaimed dividends and unclaimed director’s remuneration.  Article 96 of Table A, 1950 ed, provided that no dividend shall bear interest against the Company.

25.  Mr Cheng submitted here that the shareholders had claimed their dividends.  Once the dividends were claimed and in the event the shareholders chose to deposit their dividends with the Company, the Company must treat the funds as the shareholders’ own money and pay interest on the amount due to them.

26.  I do not think that is a valid argument.

27.  The evidence before this court is that the dividends were and are unclaimed, that was how the amounts were described in the summons issued in September 2007.  In paragraph 37 of the 1^st affidavit of the 2^nd respondent filed in support of that summons, he deposed to “dividends unclaimed by the relevant shareholders as at 31 August 2007”.

28.  Section 170(1)(g) provides that in the event of a company being wound up, a sum due to any member of a company in his character of a member, by way of dividends, shall not be deemed to be a debt of the company.  To get out of this provision, and for interest to be payable on these unclaimed dividends, there must be some evidence to show that the moneys due from the Company were not due to these shareholders as members, but the character of the money was changed to a loan from these shareholders to the Company.  This could be done in one of two ways :

(1)     there was an agreement expressed or implied between the Company and these shareholders creating a loan with respect to the unclaimed dividends; or

(2)     with the passage of time, these shareholders must be taken to have been recognised as being in the same position as if the dividends had been paid and then paid back to the Company as a loan (Re LB Holliday & Co Ltd [1986] BCLC 227).

29.  I am unable to discern from the available evidence any agreement, expressed or implied, to convert the unpaid dividend into a loan to the Company, which seems to be the case advanced by Mr Cheng.  Even if there were such an agreement, the agreement must be supported by consideration moving from the Company.  The case of Re Associated Electronic Services Pty Ltd [1965] Qd. R. 36 cited by Mr William Wong for the petitioners is squarely on this point.  Assuming an agreement had been made to convert the unpaid dividend into a loan to the Company and if the Company had promised to repay the amount of dividend deposited in the current accounts on request, this would create an immediate debt.  But the declaration of the dividend had already created a debt immediately payable by the Company to the shareholders (Re Severn and Wye and Severn Bridge Railway Co Ltd [1896] 1 Ch 559).  So the position of the parties was exactly the same.  The Company was doing no more than promising something it was already bound to do and such a promise was no consideration for any alleged contract.

30.  Mr Cheng contended there was consideration moving from the Company in that interest was paid by the Company on the unpaid dividends, but that is just begging the question.  The question here is whether there is legal justification for paying the interest under consideration.

31.  Besides, according to the general ledgers, there does not seem to be any actual payment of interest alleged to have accrued from time to time.  There were only withdrawals of various amounts not corresponding to the interest accrued by these shareholders. 

32.  The same reasoning applies to interest on the unclaimed director’s bonus.

33.  I hold that no interest is payable in respect of dividends and director’s bonus that made up part of the balances in the current accounts.

34.  That leaves the interest on the net deposits.  As mentioned earlier, for deposits made prior to 2001, I am in no position to come to any view what amount of deposits had originated from dividends and what amount had come from other payments paid into the Company’s bank accounts by the shareholders.  It is not possible to work out the interest that should accrue on the net deposits, leaving aside for the time being the discrepancy in the interest rates charged before and after July 2006.

35.  For the above reasons, I decline to validate any amount in respect of the interest component.

36.  The next component is director’s bonus.  Only one of the 6 shareholders, Chan Shiu Kau Anthony, the 1^st respondent herein, was in receipt of such payment.  The amount from 2001 to 2007 came up to $311,000.  I have no idea if any of the deposits of the 1^st respondent in the years before 2001 might have originated from director’s bonus.

37.  The petitioners’ position is that they have no objection to validate this item provided that bonuses had been approved by the Company in general meeting.

38.  I decline to make a validation order for this item in the absence of evidence on approval in general meeting.  In any event, as explained below, the 1^st respondent’s negative balance in his net deposits is sufficient to set off his unpaid dividend and unpaid director’s bonus, so no payment should be made to the 1^st respondent by the Company at this stage.

39.  The last component is net deposits.

40.  In the petitioners’ analysis, they have netted off the deposits against the withdrawals made by these shareholders from time to time.  Of the 6 shareholders, 3 have negative balances in that the amounts withdrawn have exceeded the deposits.  In respect of 2 of them, being the 1^st respondent and Chan Wing Kin, the negative balance is greater than the amount payable to them on account of dividends and director’s bonus, so no payment should be made to them at this stage.

41.  For 2 of the shareholders with net deposits of $1,190,490.46 and $703,244.61, I note that substantial deposits were made before 2001.  I appreciate that if the deposits had originated from dividends, there would be no physical transaction, so primary evidence might be lacking.  There should at least be some evidence to explain the source of these deposits.  I find this unsatisfactory.  I am not prepared to make a validation order regarding these amounts.

42.  To recapitulate, the amounts I will validate in respect of paragraph 1(b) of the summons are as per the amounts set out in paragraph 22 of the 5^th affirmation of the 1^st petitioner :

(1)     for Chan Che Shun - the amount validated is $184,800.00

(2)     for Chan Che Keung – the amount validated is $187,055.90

(3)     for Chan Che Wai – the amount validated is $202,400.00

(4)     for Chan Che Shing – the amount validated is $31,200.00

43.  I order the Company to pay the petitioners’ costs of the hearing today in any event.  For the costs of the summons and the first hearing in March this year, I order costs to be in the cause of the petition.