DRANSFIELD HOLDINGS LTD (in Liquidation) v. PEARL ORIENTAL OIL LTD

HCMP 1392/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1392 OF 2011

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J U D G M E N T

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1. This is the defendant’s application to strike out the amended statement of claim and dismiss the action.

2. The crux of the claim in the amended statement of claim is that on 23 August 2003, a company called Victorison (1988) Limited (“V1988”) transferred seven shares (“the 7 GV Shares”) of one Good Value Holdings Company (“Good Value”) to one China Merchants Dichain (Asia) Investment Holdings Limited  (now called Pearl Oriental Logistics Holdings Limited (“POLH”)) for US$7.  The seven shares were all the issued shares of Good Value.  The plaintiff (“DH”) says that this was a striping by the defendant of the assets it owned indirectly as the defendant held all the shares of and in POLH.

Background

3. DH is in liquidation and this action is brought by the liquidator on its behalf.

4. The facts of this case have been set out in the Court of Appeal’s judgment in Horace Yao Yee Cheong & Ors v Peal Oriental Innovation Ltd, CACV 146/2009 that was handed down on 13 April 2010.

5. The plaintiff, DH, was listed on the Hong Kong Stock Exchange.  Its business was varied and included logistics, trading, brewery and others.  It held all the shares in V1988 which in turn held the 7 GV Shares.  The only business of Good Value was to hold all the shares of one Victorison Logistic Service (Shenzhen) Company Limited (“Shenzhen Logistics”).  Shenzhen Logistics had a bonded warehouse in Futian district, Shenzhen.  The warehouse was a valuable asset and had been said to have a worth of HK$100,000,000 on as at 31 March 2002 (B3/712) and even HK$121,000,000.

6. Shenzhen Logistics was indebted to the Bank of East Asia Limited (“BEA”) for about HK$37,600,000 as at 18 December 2001.  BEA filed a petition in December 2001 with a court in Shenzhen for judgment on the loan.  The petition was settled on 5 February 2002.  Under the settlement, Shenzhen Logistics had to pay HK$10,000,000 to BEA by 30 April 2002 plus monthly payments of HK$700,000 each from 30 April 2002 until full repayment.  As at 30 April 2002, the total sum including interest outstanding to BEA was about HK$38,300,000.  The warehouse was used as security for the repayment of this debt (B3/585).

7. On 29 January 2003, Shenzhen Logistics entered into a loan agreement with Shenzhen Commercial Bank to borrow RMB60 million from the bank.  The warehouse was used as security for the loan (B4/1006, 1010, 1030 and 1034).  Since the warehouse was originally the security for the loan from BEA, part of the loan from Shenzhen Commercial Bank might have been used to pay off the BEA loan to release the warehouse for use as security for the latter loan. But there is no direct evidence on this.

8. On 28 July 2003, Shenzhen Logistics entered into another loan agreement with Guangdong Development Bank for a loan of RMB30,000,000.

9. One Mr Cheung Kwok Yu, the executive director, financial controller and company secretary of the defendant, made a 2nd affirmation which was filed on 2 April 2012 in support of the application to strike out. He said in para 11 of the affirmation that he had checked the records and confirmed that the 2 loans for RMB60,000,000 and RMB30,000,000 had been fully drawn down and were outstanding on 28 August 2003 when the 7 GV Shares were transferred by V1988 to POLH. 

10. DH’s business did not perform well in the 5 years up to 31 March 2001.  The net current liabilities of the DH group as at 30 September 2001 was approximately HK$146,600,000.  The net assets as at the same date was $114,900,000.

The scheme of arrangement

11. A scheme of arrangement was then made with the China Merchants Group.  Under the arrangement, the defendant herein was set up as a holding company of DH.  All the then existing shareholders of DH had their shares cancelled and were issued with the same quantity of shares of the defendant.  There were also new subscribers to the shares of the defendant who would invest more than HK$53,000,000 subscription money into the defendant in return for 59.3% of its shares.  Some HK$25,000,000 of the subscription money was used to repay part of the debt owed to DH’s bank.

12. One of the main reasons for the subscribers to enter into the scheme of arrangement was no doubt the desire to rescue DH’s warehousing and logistics business as operated by Shenzhen Logistics in Futian district, Shenzhen.  There was a letter by the Independent Financial Adviser which was included in a circular of DH to the shareholders and option holders. The letter referred to the warehouse pledged to BEA and that if DH could not pay HK$25,900,000 to BEA by 31 August 2002, BEA might take further enforcement action and the warehouse might be taken away (B3/613).  The letter further said that the intention of the subscribers was for DH to continue focusing on its logistics and warehousing operations after implementing the scheme (B3/615).

13. The scheme became effective in August 2002.  DH’s listing status was withdrawn on 27 August 2002 and the defendant was given a listing status on 28 August 2002.  On 4 February 2003, the defendant incorporated POLH (then known as China Merchants Dichain (Asia) Investment Holdings Limited) as the flagship company for the logistics business in the defendant’s group.

Transfer of the 7 GV Shares from V1988 to POLH

14. On 28 August 2003, V1988 transferred the 7 GV Shares to POLH at US$7.  POLH then became the sole shareholder of Good Value which in turn held all the shares of Shenzhen Logistics.

Claim by Horace Yao and his companies against and winding up of DH

15. On 21 May 2004, one Horace Yao, the former Deputy Chairman and CEO of DH and his 2 companies sued DH in HCA 1245/2004 for outstanding director’s expense, remuneration and loans.  They obtained judgment in the action on 14 July 2005 for over HK$6,900,000.

16. On 23 July 2005, the defendant sold DH to 3rd parties for HK$2.  The defendant announced this sale on 29 July 2005.

17. On 26 July 2005, the directors of DH declared DH insolvent and nominated liquidators. 

18. On 27 July 2005, Mr Yao petitioned to wind up DH. A winding up order was made on 21 September 2005.

19. On 25 January 2006, the 1st creditor’s meeting of DH was convened.

Horace Yao and his companies claim against the defendant

20. On 27 April 2006, Mr Yao and his companies sued the defendant in HCA 916/2006 for payment of the judgment they obtained against DH in HCA 1245/2004.  The ground was that the defendant had wrongfully stripped off the assets of DH and hence should be liable for the liability of DH to Yao and his companies.  The assets referred to were mainly the 7 GV Shares.

21. On 1 May 2006, V1988 was struck off from the Registry of Corporate Affairs in the BVI for failure to pay the annual licence fee (A/36/para 7). 

22. On 22 May 2009, Suffiad J handed down a judgment in HCA 916/2006 in favour of Yao and his companies.

23. On 13 April 2010, the Court of Appeal handed down a judgment in CACV 146/2009 reversing the judgment of Suffiad J in HCA 916/2006. 

Sale of the 7 GV Shares to Full Wealth

24. On 27 November 2009, POLH entered into an agreement with a 3rd party, Full Wealth International Investment Holdings Limited (“Full Wealth”) for sale of the 7 GV Shares to Full Wealth.  The consideration was RMB93,000,000 or approximately HK$106,020,000.  Completion was to be no later than 18 February 2010 subject to the satisfaction of all conditions in the Sale and Purchase Agreement.

25. At the time of this agreement, POLH owed a bank about HK$53,260,000.  This debt was secured by the Futian warehouse of Shenzhen Logistics.  The agreement with Full Wealth provided that Full Wealth should pay off this debt out of the consideration of purchase and POLH would in the end receive from the sale a net sum of about HK$52,000,000 (B1/257-260).

The claim herein and the defendant’s striking out summons

26. On 22 July 2011, DH instituted these proceedings against the defendant by originating summons.

27. On 10 September 2011, the parties filed a consent summons which provided for DH to file a statement of claim.

28. DH filed the statement of claim on 10 October 2011 and re-filed the amended statement of claim on 11 October 2011.

29. The defendant then issued a summons under O 18 r 19 of the Rules of the High Court (“RHC”) and the inherent jurisdiction of the court to strike out the amended statement of claim and dismiss the action.

30. DH pleads in the amended statement of claim that Mr Yao learnt in HCA 916/2006 that DH had caused V1988 to transfer the 7 GV Shares to POLH at US$7 on 28 August 2003.  DH pleads that the US$7 consideration was provided by the defendant to it rather than by the defendant’s wholly owned subsidiary POLH to its wholly owned subsidiary V1988.  It further pleads that this consideration appears to be substantially lower than the value of the 7 GV Shares at the date of transfer.  It pleads in para 7 of the amended statement of claim certain facts in support of this assertion.  These facts are exactly the same ones referred to in paras 25 to 27 of Suffiad J’s judgment in HCA 916/2006.  These facts are:

(a)  In the Annual Report for 2003, the published audited consolidated financial statements as at 31 March 2003 of the defendant showed (inter alia):

(i)  DH was the only directly owned subsidiary of the defendant, which held 100% of DH’s share.  The principal activity of DH was investment holdings;

(ii)  100% of the shares of Shenzhen Logistics was indirectly held by the defendant.  The principal activities of Shenzhen Logistics were provisions of logistic services, property and investment holding;

(iii)  the leasehold land and buildings in the mainland for the group’s logistics operation had a value of HK$161,825,000.00;

(iv)  the 100%-owned bonded warehouse located at Futian contributed a substantial increase to the group’s revenue;

(v)  total assets of the group increased to HK$217,711,000 and the net shareholders’ fund after deduction of liabilities and minority interests amounted to HK$106,335,000 as in the Consolidated Balance Sheet;

(vi)  the defendant’s net profit increased to HK$13,453,000;

(vii)  the defendant had a net assets value of HK$58,606,000;

(viii)  the amount due from subsidiaries to the defendant amounted to HK$69,575,000;

(ix)  there was no disclosure of the existence and/or setting up of POHL in BVI on 4 February 2003; and

(x)  there was no disclosure that the 7 GV Shares were transferred to V1988 in March 2003 (which was later transferred to POHL on 28 August 2003 for only US$7).  (The 7 GV Shares were first transferred from DH to V1988 in Mary 1994.  They were transferred to BEA on 6 March 2002 as securities for lending.  They were released and transferred back to V1988 in March 2003.)

(b)  In the Annual Report of 2004, the published audited consolidated financial statements as at 31 March 2004 of the defendant showed (inter alia):

(i)  DH was the only directly owned subsidiary of the defendant, which held 100% of DH’s shares, and its principal activity was investment holdings;

(ii)  Shenzhen Logistics had its name changed to Dichain Logistics Service (Shenzhen) Co. Ltd (still referred to below as Shenzhen Logistics) and the defendant indirectly held 100% of its shares (through POHL). Its principal activities being provision of logistic services, property and investment holdings;

(iii)  part of the investment in DF China Technology Inc was realized and generated a gain of HK$16,208,000;

(iv)  the turnover of the bonded warehouse operation increased by 100% and the bonded warehouse in Futian contributed a substantial increase in the group’s revenue during the year;

(v)  the net profit for the year was HK$14,262,000 which was contributed to by the realization of part of the investment in DF China Technology Inc;

(vi)  the group had a consolidated total assets of about HK$243,000,000;

(vii)  apart from the bonded warehouse in Futian, there was no mention in the report as to whether the defendant held any property, plant or equipment;

(viii)  the defendant had a net asset value of HK$57,587,000;

(ix)  the amount due from subsidiaries to the defendant was HK$37,776,000;

(x)  there was however no mention made of:

(1)  either the existence or setting up of POHL (in its former name) in the BVI on 4 February 2003 as a 100% directly owned subsidiary of the defendant, which in turn held a string of subsidiaries;

(2)  that the 7 GV Shares were transferred to V1988 and then subsequently transferred to POHL (in its former name) on 28 August 2003 for US$7 only; or

(3)  that the bonded warehouse located at Futian was now held indirectly by POHL (in its former name) which operation had increased 100% and contributed a substantial increase to the defendant’s revenue.

(c)  In the Annual Report for 2005, the published audited consolidated financial statements as at 31 March 2005 of the defendant showed (inter alia):

(i)  the group had a consolidated total assets of about HK$243,009,000;

(ii)  the group had a consolidated total liabilities of HK$117,731,000;

(iii)  the core business of the group was its logistic business;

(iv)  DH was the only directly held 100% subsidiary of the defendant;

(v)  the indirectly held subsidiaries of the defendant consisted of (inter alia):

(1)  Shenzhen Logistics;

(2)  Guangzhou Dichain Logistics Co. Ltd., a 60% owned indirectly held subsidiary established under the laws of the mainland carrying on the business of logistics services;

(3)  Inner Mongolia Dichain Logistics Co. Ltd., another 60% owned indirectly held subsidiary established under the laws of the mainland carrying on the business of logistics services;

(vi)  there was no mention of the existence of POHL and no mention that the 7 GV Shares had been transferred to V1988, which later transferred them to POHL on 28 August 2003 for only US$7;

(vii)  the assets of the group under the logistics services segment had a value of HK$140,917,000 with liabilities of HK$3,920,000;

(viii)  no mention of the defendant holding any property, plant or equipment or the bonded warehouse at Futian;

(ix)  the amount due from subsidiaries of the defendant to the defendant was HK$49,567,000; and

(x)  the defendant had a net asset value of HK$82,084,000 shown in the balance sheet.

31. DH then pleads that because of the close relationship between DH and the defendant, it is inferred that the defendant through its directors also controlled DH, Good Value and Shenzhen Logistics and was aware of the true value of the 7 GV Shares and that their transfer to POLH was at a value very much below the true value.  It is also to be inferred that because of the substantial liabilities of DH as disclosed in the statement of affairs, which far exceeded the remaining assets, the defendant made the transfer (supposedly by procuring V1988 to make it) with the intent of depriving the creditors of DH of the full value of the 7 GV Shares. 

32. At the end of the hearing, DH also suggested a re-amendment to the amended statement of claim to plead that the corporate veils of the defendant, DH, Good Value and Shenzhen Logistics should be lifted because of their close relationship and the way the 7 GV Shares were transferred.  DH thus claims for the setting aside of the sale of the 7 GV Shares pursuant to section 60 of the Conveyancing and Property Ordinance, Cap 219.  Further or alternatively, DH claims that the sale of the 7 GV Shares at US$7 was an unfair preference of the defendant and thus invalid under section 266 of the Companies Ordinance, Cap 32 in conjunction with section 51B(6) of the Bankruptcy Ordinance, Cap 6.  It seeks from the defendant the HK$106,020,000 that POHL received from Full Wealth for the sale of the 7 GV Shares.

The principles governing striking out pleadings

33. I remind myself of the principles governing striking out applications.  Paragraph 18/19/4 of the Hong Kong Civil Procedure 2012 says that it is only in plain and obvious cases that the court should exercise its summary powers to strike out the endorsement on any writ or any pleading under the rule in O 18 r 19 of the RHC.  Disputed facts are to be taken in favour of the party sought to be struck out.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  If any defect in the pleadings can be cured by amendment, the pleadings should also not be struck out.

Grounds for striking out the s. 60 of Conveyancing and Property Ordinance claim

34. Section 60 of the Conveyancing and Property Ordinance provides:

“60. (1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

35. Regarding DH’s claim under section 60, the defendant makes four grounds to strike it out.  The ground are:

(1)  No cause of action lies against the defendant.

(2)  DH has no cause of action.

(3)  There is no basis to allege there was a transfer at an undervalue.

(4)  Section 60 of the Conveyancing and Property Ordinance provides the disposition is voidable, but the 7 GV Shares have been sold to Full Wealth, an independent third party at arm’s length.

First ground - no cause of action lies against the defendant – lifting of corporate veil

36. For the first ground, Mr Lam, leading counsel for the defendant, submitted that the disposition of the 7 GV Shares was not made to the defendant, but to its wholly owned subsidiary POLH.  There is therefore no cause of action against the defendant section 60.

37. Mr Wong, counsel for DH responded by saying that POLH was 100% owned by the defendant and POLH’s only business was to hold the 7 GV Shares.  (However, there is, as a matter of fact, an organisation chart of the defendant updated to 31 May 2005 (B4/1001) which shows that POLH was at the top and holding the shares of a number of companies appearing to be engaged in logistics and other businesses.  Hence, it was not simply used to hold the 7 GV Shares.)

38. Mr Wong then further submitted that even if POLH was also a holding company in the defendant’s group (i.e. holding shares of other subsidiaries of the defendant’s group), it was 100% owned by the defendant.

39. He further submitted that POLH was only the alter ego of the defendant.  The sole purpose for incorporating it was to strip the assets of DH step by step.  The transfer of the 7 GV Shares to it at US$7 was a transfer at gross undervalue.  That was so in the light of the value of the warehouse owned by Shenzhen Logistics and the sale of the 7 GV Shares to a third party in 2010 for HK$106,020,000.

40. The existence of POLH and the transfer by V1988 of the 7 GV Shares to it were not disclosed in the defendant’s annual report for 2004.

41. Mr Wong further submitted that the corporate veil between DH and the defendant should be lifted.  The legal consequence of that would be the discarding of the separation of legal personalities between the defendant and POLH.  The creditors of DH as represented by its liquidator could then pursue the defendant to recover the proceeds of sale of the 7 GV Shares. 

42. I do not quite understand the meaning of the discarding of the legal personalities between the defendant and POLH.  Neither of the two companies is the holding company of the other.  They are both held by the defendant. 

43. Mr Wong also submitted that the veil between the defendant and POLH should be lifted so that the defendant would become the unfairly preferred creditor.

44. For lifting of corporate veil, Mr Wong referred to Gore-Browne on Companies generally and submitted that the court would lift the corporate veil to prevent the corporate form from being used for the purpose of fraud or as a vehicle to evade an existing or other legal obligations.

45. He also referred to four cases summarized in Kensington International Ltd. V. Republic of Congo(formerly the People’s Republic of the Congo)[2005] EWHC 2684 (Comm) at paras. 177 to 190where the corporate vehicles had been used to conceal the true facts and the corporate veils were lifted:

(i)  In Gilford Motor Co Ltd v Horne [1933] Ch 935 an individual bound by a non-solicitation covenant after the termination of his employment set up a business through a limited company.  The individual was held to be in breach of covenant, notwithstanding the interposition of the company, because the company was formed as the device or mask to “the effective carrying on of a business of” the individual in breach of the covenant:  see Ibid 956, 965 and 969.

(ii)  In Jones v Lipman [1962] 1 WLR 832 an individual had contracted to sell land.  In order to avoid his liability, he transferred the land to a company he had acquired for the purpose.  A decree of specific performance was made against both the individual and the company on two grounds.  The first was that the individual had sufficient control of the company to compel it to perform the contract.  The second, following the principle applied in Gilford Motor Co Ltd v Horne, was that the company was the creature of the first defendant, “a device and a sham, a mask which he holds before his face in an attempt to avoid recognition in the eye of equity”:  see Ibid 832, 836.

(iii)  Lyolds Bank Ltd v Marcan [1973] 1 WLR 1387 is a classical case exemplifying the meaning of impropriety.  Here, the judge found that there was dishonesty by a mortgagor who, knowing of the bank’s application for possession of the property, granted a lease to his wife for a term of twenty years with the intention of depriving the bank of the ability to obtain vacant possession of the property as and when a possession order was made.

“if he disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor”.

(iv)  In Trustor AB v Smallbone (No 2) [2001]1 WLR 1177 at §23,a managing director of a company transferred the company’s assets to another company which he owned and controlled, which then distributed some of these assets to the managing director, his wife and a further company under his control.  Summary judgment was ultimately given against both the managing director and the distributing company for all the amounts which that particular company had received, notwithstanding that the managing director himself had not received the totality.  Sir Andrew Morritt, the Vice Chancellor said:

“In my judgment the court is entitled to pierce the corporate veil and recognise the receipt of the company as that of the individual in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individuals.”

46. I am also asked to consider Lee Sow Keng Janet v Kelly McKenzie [2004] 3 HKLRD 517.  In this case, the shareholders and directors of a company incorporated a new company to take over the business of the first company to evade the liability of the first company to a former employee. 

47. Furthermore, Bokhary JA (as he then was) said in China Ocean Shipping Co v Mitrans [1995] 3 HKC 123 at 127 that:

“Using a corporate structure to evade legal obligations is objectionable. The courts’ power to lift the corporate veil may be exercised to overcome such evasion so as to preserve legal obligations. But using a corporate structure to avoid the incurring of any legal obligations in the first place is not objectionable.”

48. Mr Wong then submitted that in the present case, the defendant has used POLH as a corporate vehicle to conceal from its creditors and the public both its intention and conduct in stripping off DH’s assets by the transfer of the 7 GV Shares to POLH at US$7.  As part of the façade, the defendant implemented the scheme of arrangement which, on the face of it was an exercise that would only dispose the non-core assets of DH, but with the hidden intention of stripping off DH’s assets.  Having gained complete control of DH, the defendant, in its capacity as DH’s 100% shareholder, then transferred its valuable assets into the secret company POLH which was outside the DH group but also 100% owned and controlled by the defendant.

49. The question is therefore whether POLH was merely a “device” or “stratagem”, a “mask”, a “cloak” or a “sham” used by the defendant to evade the defendant’s obligations.  Mr Wong’s submissions are to construct an argument that POLH was used as a sham device to receive the 7 GV Shares.  It was used as a sham to keep the transfer from the public eye as the transfer was not disclosed in the defendant’s annual reports.  Hence, POLH was incorporated for no genuine commercial purpose but only for evading the liability of the defendant which may arise if the 7 GV Shares should have been transferred to the defendant direct.

50. Mr Lam, SC, for the defendant replied that the corporate veil of POLH should not be lifted by the mere fact that it was wholly owned by the defendant.  This must be correct.  Otherwise, the statutory provision allowing all the shares of a company to be owned by a sole shareholder will be defeated.

51. Mr Lam further submitted that even if POLH had no apparent business than the holding of the 7 GV Shares, it still did not make POLH a sham.  This is also correct.  Even POLH had no other business but the holding of the 7 GV Shares, it does not mean that it was a cloak or sham for evading a liability in law.  Furthermore, POLH in fact was an intermediate holding company holding the shares of a number of companies in the defendant’s group.  There is no basis to say that it was a cloak or sham engaged for no purpose but to evade the defendant’s legal liability. 

52. There is likewise no basis to say that POLH was only the defendant’s alter ego and the sole purpose of incorporating it was for stripping the assets of DH step by step.  It is just an assertion by DH.  The fact that the plaintiff’s only allegation of stripping is the transfer of the 7 GV Shares also makes the general allegation of stripping of assets step by step a hollow one.

53. Regarding the allegation that the transfer of the 7 GV Shares at US$7 was a transfer at gross undervalue in the light of the value of the warehouse owned by Shenzhen Logistics and the subsequent sale of the shares at HK$106,020,000 in 2010, I think there is credible evidence that Shenzhen Logistics had outstanding debts of at least about RMB 90,000,000 at the time of the transfer in August 2003.  Even if the transfer was at an undervalue, it was not as gross as what the plaintiff suggests.  Furthermore, an undervalue transfer may be the basis of a claim against POLH, but cannot without more justify the lifting of the corporate veil of POLH so as to make the defendant liable.

54. Finally, there is the allegation that the existence of POLH and the transfer of the 7 GV Shares to it were not mentioned in the defendant’s annual report.  However, the plaintiff does not allege that the defendant has thereby flouted any disclosure requirement.  The Court of Appeal has said in the judgment in CACV 146/2009 that the defendant had made all necessary disclosures in the accounts and reports. 

55. Since the defendant was not guilty of any non-disclosure and POLH was not a mere cloak or sham, I see no reason why the defendant should be held liable in conjunction with POLH for the transfer of the 7 GV Shares at alleged gross undervalue.

56. I do not think the plaintiff can make out a case that POLH was used as a sham to keep the transfer of the shares at US$7 from the public eye and hence a vehicle for the defendant to evade the liability that may arise from the transfer at alleged gross undervalue.  I therefore hold in favour of the defendant on the first ground of attack.  This is enough to strike out the plaintiff’s claim made pursuant to section 60 of the Conveyancing and Property Ordinance.  But I will also consider the second ground of attack.

Second ground - DH has no cause of action.

57. The defendant’s second ground is that DH itself has no cause of action.  The simple reason being that it was just a shareholder of the transferor V1988, but not the transferor itself.  If the transfer was with intent to defraud creditors, it was to defraud the creditors of V1988 and DH is not claiming to be one of them. 

58. The claim by DH, being the 100% shareholder of V1988, is also a claim for reflective loss.  It is unsustainable (see Johnson v Gore Wood & Co [2002] 2 AC 1 at 35E to 36B).  I also refer to Waddington Ltd v Chan Chun Hoo Thomas (2008) 11 HKCFAR 370 where Lord Millet, NPJ said in para. 82:

“82. I explained the rationale of the principle in Johnson v Gore Wood & Co (supra) at p 62, where I said:

If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders.  Neither course can be permitted.  This is a matter of principle; there is no discretion involved.  Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

59. Mr Wong for the plaintiff however submitted that under section 60 of the Conveyancing and Property Ordinance, if a disposition is made with intent to defraud creditors, it may be set aside on the application of any person adversely affected by it save against a bona fide purchaser for value without notice of the intent.  He seeks to rely generally on Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417 to support this proposition.  However, I do not think Tradepower has given any blessing to a shareholder to bring a claim under section 60 to compensate his reflective loss in the shares of the disposing company.  I therefore hold against the plaintiff on the second ground as well.  This is again enough on its own to strike out the plaintiff’s claim as based on section 60 of the Conveyancing and Property Ordinance.

60. Having found for the defendant on the first and second grounds, I do not think it necessary to deal with the remaining two grounds.

Grounds for striking out the s. 266 of Companies Ordinance and s. 51B of the Bankruptcy Ordinance claim

61. Regarding the claim under section 266 of the Companies Ordinance in conjunction with section 51B(6) of the Bankruptcy Ordinance, Mr Lam also submitted that DH has not pleaded any cause of action against the defendant.

62. Section 50(1) and (3) of the Bankruptcy Ordinance provide:

“(1) Subject to this section and sections 51 and 51A, where a debtor is adjudged bankrupt and he has at a relevant time (defined in section 51) given an unfair preference to any person, the trustee may apply to the court for an order under this section.

…

(3) For the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if-

(a) that person is one of the debtor's creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor's bankruptcy, will be better than the position he would have been in if that thing had not been done.”

63. Section 266 of the Companies Ordinance applies section 50 of the Bankruptcy Ordinance to companies.  Section 266(1) provides:

“(1) Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company within 6 months before the commencement of its winding up which, had it been made or done by or against an individual within 6 months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference, shall in the event of the company being wound up be deemed a fraudulent preference of its creditors and be invalid accordingly …”

64. The period of 6 months in section 266 is extended by section 266B to 2 years for a person who is an associate of the company.  Section 266B provides:

“(1) On and after the day section 36 of the Bankruptcy (Amendment) Ordinance 1996 (76 of 1996) (the “amending Ordinance”) comes into operation (on 1 April 1998 by L. N. 158 of 1998), where the winding up of a company commences on or after that date-

…

(b)  a reference in section 266 of this Ordinance to a period of 6 months shall be deemed to be a reference to a period of-

(i)  6 months; or

(ii) 2 years in the case of a person who is an associate as provided for in section 51B, of the Bankruptcy Ordinance (Cap 6) (the "principal Ordinance").”

65. “Associate” is defined in section 51B(6) of the Bankruptcy Ordinance as:

“(6) A company is an associate of a debtor if that debtor has control of it or if that debtor and persons who are his associates together have control of it.”

66. Mr Lam submitted that there was no unfair preference by DH in favour of the defendant for three reasons.

67. The first reason is that the transfer of the 7 GV Shares was not by or against DH which was the company being wound up.  They were transferred by V1998.  Hence, DH cannot rely on section 266 of the Companies Ordinance to say that any of its creditors had been put into a better position within the meaning of section 50(3) of the Bankruptcy Ordinance.  This submission is clearly correct.  I also see no basis for lifting the corporate veil of V1988 so that DH and V1988 can be treated as one and the same entity.  There is no suggestion that V1988 had been used to hold the 7 GV Shares for any improper purpose or that it was cloak or sham.

68. Secondly, POLH was not a creditor of DH nor a surety or guarantor of its debts.  Hence, it cannot be argued that POLH had been unfairly preferred by DH within the scope of section 50(3) of the Bankruptcy Ordinance.  I also agree with this submission.

69. Finally, Mr Lam submitted that the 7 GV Shares were transferred to POLH on 28 August 2003 and the petition to wind up DH was presented on 27 July 2005.  The petition was thus presented more than 6 months after the transfer.  POLH was also not an associate of DH within the meaning of section 51B(6) of the Bankruptcy Ordinance as DH was not in its control at anytime.  Hence, the period of 24 months in section 266B(1)(b)(ii) of the Companies Ordinance does not apply.  I also accept this submission as correct.

70. For these reasons, DH’s claim under section 266 of the Companies Ordinance in conjunction with section 51B(6) of the Bankruptcy Ordinance has no merit at all and should be struck out.

71. The amended statement of claim also mentioned about some shares of DF China Technology Inc that were held by DH.  These shares were disposed of in the financial year of 2004 which generated a gain of HK$16,208,000.  These matters were pleaded as one of the causes that produced the profits for the year of 2004 and were reported in the defendant’s 2004 annual report.  No claim has been made by DH in relation to these shares or their disposal.

Decision and costs order nisi

72. I also reject the proposed re-amendment to the amended statement of claim to plead the lifting of the corporate veils, as it does not make the action sustainable.  In the light of the above analysis and findings, I strike out the amended statement of claim and dismiss the action.

73. Finally, I make a cost order nisi requiring DH to pay the costs of this application and the action to the defendant to be summarily assessed if not agreed.

74. The defendant has filed a bill of costs.  The plaintiff’s solicitors shall serve a list of objection, if any, on the defendant’s solicitors within the next 21 days.  There shall be a hearing for summary assessment to be fixed at 9:30 am.