LEE SOW KENG JANET v. KELLY MCKENZIE LTD AND OTHERS

CACV 342/2003 & 375/2003

CACV 342/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 342 OF 2003

(ON APPEAL FROM DCCJ NO. 2303 OF 2002)

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J U D G M E N T

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Hon Woo VP:

1. I have read Le Pichon JA's judgment in draft and I entirely agree with it and the orders she proposes.

Hon Le Pichon JA:

2. On 29 July 2003 HH Judge H C Wong allowed the plaintiff's claim against the 1st, 2nd and 3rd defendants in the sum of $403,825.50 together with interest and costs of HCA No. 11828 of 1998 ("HCA 11828") and ordered that there be no order as to costs as between the plaintiff and the 4th defendant. In the first appeal (CACV 342), the 1st, 2nd and 3rd defendants seek to overturn the judge's order made against them and in the second appeal (CACV 375), the 4th defendant appeals against the costs order made.

Background

3. Linkwaters Investment Ltd ("Linkwaters") traded in the name of Kelly McKenzie and at all material times until 31 March 1998, was an employment consultant agency. The plaintiff was employed by Linkwaters and worked as a personnel consultant from February 1989. Under the contract of employment which was signed by the 2nd defendant on behalf of Kelly McKenzie, the plaintiff's employment could be terminated at any time by either of the parties by giving two months' written notice to that effect or two months' salary in lieu of notice. The plaintiff gave written notice on 27 October 1997 to terminate her employment effective 26 December 1997. On 12 December 1997, two weeks before the expiration of the two months' notice given by the plaintiff, she was summarily dismissed by Kelly McKenzie.

4. The plaintiff commenced High Court proceedings (HCA No. 11828 of 1998) against Linkwaters trading as Kelly McKenzie in July 1998, for outstanding commission and obtained judgment in default against Linkwaters for $100,000 on 30 November 2000. On 18 January 2001, the plaintiff obtained a further judgment in the sum of $303,825. This amount together with the earlier judgment for $100,000 are hereinafter referred to as "the judgment debt". When Linkwaters failed to make any payment to satisfy the judgment debt, the plaintiff successfully petitioned for its winding up on 12 February 2001.

5. Subsequent to the winding up proceedings, the plaintiff discovered that the 1st defendant, Kelly McKenzie Ltd, had been incorporated by the 2nd and 3rd defendants on 28 November 2000 which was a month after the plaintiff had given notice to Linkwaters to terminate her employment contract. The 2nd and 3rd defendants are sisters. At all material times, they were the controlling shareholders and directors of Linkwaters as well as the 1st defendant.

6. The plaintiff commenced the proceedings below against the defendants claiming that there had been unfair dealings between Kelly McKenzie (Linkwaters) and Kelly McKenzie Ltd (the 1st defendant), that the 1st defendant is a sham and a façade established by the 2nd, 3rd and 4th defendants to avoid payment of commission and other emoluments owed to her by Kelly McKenzie such that they became liable to her for the payment of the judgment debt.

The proceedings below

7. At the trial below, only the plaintiff gave evidence. The defendants offered none. The main issue before the judge was whether the court should lift the corporate veil and find the 1st defendant and its directors and the former directors of Linkwaters personally liable for the judgment debt.

8. The judge made the following factual findings:

.	the 2nd and 3rd defendants caused the 1st defendant to be incorporated 4 weeks after the plaintiff had given notice of resignation and 14 days before the plaintiff's dismissal by Kelly McKenzie
.	prior to 29 April 1998, the 2nd and 3rd defendants were the only directors and subscribers of both Linkwaters and the 1st defendant
.	until 5 March 2001 the only directors of the 1st defendant were the 2nd and 3rd defendants
.	the 2nd defendant ran both Linkwaters and the 1st defendant whilst the 3rd defendant worked part-time at Linkwaters
.	the 1st defendant took over the business of Linkwaters including the purchase of office equipment and as Linkwaters had always traded in the name of Kelly McKenzie, there was no loss of goodwill
.	the 2nd defendant resigned as director of Linkwaters on 29 April 1998 in favour of the 4th defendant who was an employee of both Linkwaters and the 1st defendant and transferred her share in Linkwaters to the 4th defendant on 13 July 1998
.	the 2nd defendant retired as director of the 1st defendant on 5 March 2001
.	Linkwaters chose not to defend HCA 11828 and allowed it to be wound up

In connection with this last point, it is relevant to mention that in fact those proceedings had been vigorously defended up until trial and the defendants had been legally represented until 7 September 2000, a few months before the default judgment. The 2nd defendant filed a witness statement on 21 February 2000 and on 7 March 2000, the 4th defendant filed an affidavit. Thus the decision not to defend resulting in a default judgment was likely to have been purely tactical.

9. Based on those facts, the judge concluded that the 2nd and 3rd defendants "had [diverted] the goodwill and business Linkwaters/Kelly McKenzie into the 1st defendant ... rendering Linkwaters without funds to pay the judgment debt." She also found that the 2nd and 3rd defendants who controlled both companies had no intention of paying the sum due under the judgment debt. The judge was of the view that the facts showed the conduct of the 2nd and 3rd defendants to be even more reprehensible than that in the case of Liu Hon Ying trading as United Speedoc Company v Hua Xin State Enterprise (Hong Kong) Ltd, HCA 1060 of 2001, unreported, 19 June 2003. She had no difficulty in finding the 1st, 2nd and 3rd defendants jointly and severally liable for the judgment debt.

10. So far as the 4th defendant was concerned, the judge found that he was an employee of Linkwaters and was at the time of its winding up one of the two directors and shareholders of Linkwaters. She found that he only became involved in Linkwaters after 13 July 1998 which was when the share in Linkwaters was transferred to him and that was 7 months after the debt to the plaintiff had been incurred. The 4th defendant was also an employee of the 1st defendant until his resignation shortly after the 1st defendant ceased trading in February 2001. On those facts, she dismissed the claim against the 4th defendant but made no order as to costs.

CACV 342

11. In her judgment, the judge set out at some length the applicable legal principles in respect of the lifting of the corporate veil. It was not suggested that the legal principles were wrongly stated; rather, the criticism related to the application of those principles to the facts. Mr Shum who appeared for the defendants invited this court to approach the matter afresh on the basis that it is in as good a position as the judge to draw the appropriate inferences from the established facts.

12. As I understand it, his contention was that in the absence of any stripping of the assets of Linkwaters, the court should be slow to find that the 1st defendant was a sham or façade. Mr Shum sought to suggest that the facts of the present case did not involve any asset stripping. However, he had to accept that the 1st defendant did take over the business of Linkwaters as an employment consultant agency and carried on the business that had previously been conducted by Linkwaters. In this connection, it should be noted that Linkwaters' business as from 1 April 1998 to 31 July 1998 was in "investment in property for rental income" and it became dormant thereafter. This emerges from the Report of the Directors in the accounts for the year ended 31 March 1999. It was argued that whilst there had been a transfer of goodwill, the plaintiff had not adduced any evidence of the value to be attached to the goodwill so transferred. Mr Shum suggested that the facts were consistent with a case of "abandoning ship" and whilst the name was used by the new entity, that alone was insufficient to establish a sham. A further point taken was that if it were appropriate to lift the corporate veil, that would only be as against the 1st defendant and not Linkwaters.

13. In my view, the point taken by Mr Shum regarding asset stripping was misconceived. The accounts of Linkwaters which were in evidence show that for the years ended 31 March 1994 to 31 March 1998, Linkwaters' annual turnover ranged between $6.5 million to $7.7 million. The company was plainly profitable and it would not be unreasonable, in those circumstances, to infer that there was value attached to its goodwill. Further, it should not be overlooked that Linkwaters traded under the name of Kelly McKenzie. It is no mere coincidence that the name of the 1st defendant is Kelly McKenzie Ltd. Indeed, in paragraph 8c of its defence, the defendants refer to the "goodwill and reputation ... established after eight years of business in the name of "Kelly McKenzie" and the reason for incorporating the 1st defendant was to forestall any move by a former employee who had been threatening to establish a recruitment business in competition to Linkwaters from using a name confusingly similar to "Kelly McKenzie". Having declined the opportunity of adducing evidence at trial, it is hardly open to the 1st, 2nd and 3rd defendants to change their tune and resile from their pleaded case as regards the value that they saw and recognised in the name 'Kelly McKenzie'.

14. There is one other matter which the judge did not mention in her judgment. It is clear from a perusal of the accounts for the year ended 31 March 1998 that not only was the plaintiff's claim in HCA 11828 not even recognised as a contingent liability (with the consequence that no provision had been made for it in those accounts), $3.7 million out of accumulated profits of approximately $5 million had been distributed by way of interim dividend during that accounting year and a further dividend of $1.33 million had been proposed which, if paid, would have virtually depleted all the accumulated profits.

15. Taking all the circumstances into account, I agree that the judge was perfectly justified in lifting the corporate veil. As to the submission that even if that were the case, it would not justify lifting the corporate veil of Linkwaters so as to attach liability to the 2nd and 3rd defendants, Mr Shum appears to have misunderstood what lifting the corporate veil involves. The whole point of the exercise where the facts so warrant is to go behind the veil or façade to identify the person or persons in control: the real question is one of control. The judge found, and there was ample evidence to support it, that the 2nd and 3rd defendants "orchestrated" the entire "show" including the deliberate decision not to defend HCA 11828 and ultimately letting Linkwaters go into liquidation, the diversion of the goodwill and business of Linkwaters to the 1st defendant and the depletion of the accumulated profits of Linkwaters through dividend payments to ensure that Linkwaters had no funds with which the judgment debt could be satisfied. Thus the intention to evade liability on the part of the 2nd and 3rd defendants could not have been clearer.

16. Mr Shum sought to isolate the dividend payments from the other matters and submitted that the remedy open to the plaintiff lies in insolvency law. It was suggested that it would have been open to the liquidator to take proceedings for fraudulent preference. Mr Shum appeared to suggest that if the facts make out a corporate wrong for which there is a statutory remedy, then somehow lifting of the corporate veil would not be appropriate. If indeed that was his proposition, it was not supported by any authority. For my part, I do not see that one precludes the other. The whole point of piercing the corporate veil is to look through the façade to those who were exercising real and actual control behind it. In the present case, the judge said this:

"it is clear to me the 2nd and 3rd Defendants were the controllers behind Linkwaters/Kelly McKenzie and the 1st Defendant, both being vehicles used by them to run their employment agency business."

17. Given that conclusion, with which I fully agree, I see no legal reason why the 2nd and 3rd defendants cannot be made liable for the judgment debt which they sought to evade. I should add that contrary to Mr Shum's submission, the pleadings make it clear that the plaintiff's claims against the 2nd and 3rd defendants were not merely as agents but also as principal in respect of the tortious act committed. I would therefore dismiss this appeal. I would also make an order nisi that the costs of this appeal be to the plaintiff.

CACV 375

18. This was the 4th defendant's appeal on the costs order made by the judge below. The main criticism levelled at the order made was that the judge failed to state any reasons for departing from the usual order of costs following the event. It was said that the plaintiff effectively failed to make out her case against the 4th defendant and, in the absence of special reasons, the 4th defendant should be entitled to his costs.

19. The role of the 4th defendant has already been touched upon. See paragraphs 8 and 10 above. As noted above, he became a director of Linkwaters when the 2nd defendant resigned on 29 April 1998. Prior to that date, he was an employee. Then on 13 July 1998, the share in Linkwaters held by the 2nd defendant was transferred to him. The circumstances of the transfer are obscure but the effect was that he became a 50% owner of Linkwaters, since only 2 shares have ever been issued. So by the time the plaintiff commenced HCA 11828 by issuing a writ on 17 July 1998, he was not only a director but also a shareholder. As such, he would have be en aware of the proceedings and the plaintiff's claim. Indeed, the court file shows that he filed an affidavit in that action on 7 March 2000.

20. The internal accounting records of Linkwaters show that on 31 July 2000, a dividend in the sum of $220,000 was paid to the 2nd defendant. It is clear from the accounts ended 31 March 1999 that for that accounting year Linkwaters suffered a loss. It became dormant as from 1 August 1998 and there is no suggestion that circumstances changed thereafter. By 31 March 2000, Linkwaters had an accumulated losses of approximately $600,000. Yet, 4 months later, it saw fit to make the dividend payment to the 2nd defendant. It is to be noted that the 4th defendant was one of two directors of Linkwaters at this time. Then, on 30 June 2001, the 4th defendant signed a statement of affairs following the winding up of Linkwaters which made no mention of the judgment debt which by that date had been in existence for some months.

21. In my view, the plaintiff cannot be criticised for having made the 4th defendant a party to the proceedings given his interest in the company as director and shareholder which preceded the date of the proceedings and continued thereafter. Whilst it would have been desirable had the judge stated reasons before departing from the normal rule, for my part, the 4th defendant's conduct in the whole affair was such that the judge would have been perfectly justified to exercise her discretion to make the order that she did. For these reasons, I would dismiss the appeal of the 4th defendant. I would also make an order nisi that the costs of the appeal be to the plaintiff.

Hon Sakhrani J:

22. I agree.