B.I.S. CONSULTANTS LIMITED v. DAO HENG BANK LIMITED

Civil procedure - appeal from order by Master for interim pavment of $212,050.42 - four alleged parallel or related Proceedings - whether corporate veil should be lifted to enable plaintiff and shareholder defendant in another action to be treated as one and the same Person and whether corporate veil of defendant and plaintiff in other action be lifted to show that each were subsidiaries of the same holding company and should be treated as the same - whether even if corporate veil lifted there was sufficient evidence of a debt due by plaintiff to shareholder defendant in other action which was suspectible of being subject to garnishee proceedings to be instituted by the plaintiff in the other action being the instant defendant's associated subsidiary - Held: 1. Insufficient relationship to justify twofold lifting of corporate veil; 2. Alternatively even if corporate veil lifted on facts unsatisfactory evidence of any debt and Court not disposed in exercise of its discretion to refuse interim payment; 3. Proper case for interim payment; 4. Appeal dismissed.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Miscellaneous Proceeding No. 2573 of 1987

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JUDGMENT

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1. This is an appeal from an order made by the Master on 24th October 1988 whereby pursuant to Order 29 Rules 10 and 12, the defendant was directed to make an interim payment in the sum of $212,050.42. That order represented another step in substantial litigation between the present and other parties in this and other litigation.

2. In summary it includes first High Court Action No. 5579 between Hong Leong Securities Ltd. and other plaintiffs and Graham Margot as 1st defendant and another defendant with whom I am not concerned. Secondly, High Court Action No. 5766 between Hong Leong Securities Ltd. and other plaintiffs and Graham Margot as 1st defendant. Thirdly, Miscellaneous Proceedings No. 2376 of 1987 which were the proceedings under which the present defendant, Dao Heng Bank Ltd. ('the Bank’) commenced to enforce its power of sale against the present plaintiff, B.I.S. Consultants Ltd. ('B.I.S.') in relation to a mortgage of certain residential premises at Repulse Bay. Fourthly, the present Miscellaneous Proceedings No. 2573 of 1987 whereby B.I.S. as plaintiff is proceeding against the Bank as defendant, to obtain an account of the proceeds of the mortgagee sale.

3. The immediate background to the present proceedings is that the plaintiff purchased the residential property at South Bay Gardens, Repulse Bay in which Margot resided while he was employed by Hong Leong Securities Ltd. To assist the purchase, the plaintiff obtained the mortgage from the Bank which is part of a financial group which includes Hong Leong Securities Ltd. Upon Margot ceasing to be employed by Hong Leong Securities Ltd. or shortly thereafter, payments to the Bank under the mortgage became in default.

4. In consequence of that default the Bank came to exercise its power as mortgagee to sell the property in respect of which Miscellaneous Proceedings No. 2376 was instituted. The property was sold on the 5th day of June 1987 and the proceeds were paid to the Bank as mortgagee on the 24th September 1987. However, the Bank did not promptly account for the proceeds of that sale to B.I.S. as mortgagor. As a consequence of that delay the present proceedings were commenced by B.I.S. for an account of the sale proceeds.

5. In these proceedings which have not yet been finally determined, it appears from the Master's findings to date, that after the mortgage debt and incidental expenses have been paid, there is a credit in favour of B.I.S. of $212,050.42. I would also record that Hong Leong Securities Ltd. successors purported to assign $250,000 of the judgment debt in its favour, in High Court Action No. 5766, to the Bank which in turn attempted in the present Proceedings, to deduct that sum from the net proceeds of the sale which would otherwise have been payable to B.I.S. as mortgagor. However, the Master rejected the Bank's attempt to have that sum deducted. Time for appeal from the Master on that issue has now expired.

6. I am satisfied that the sum of $212,050.42 is the proper sum available to B.I.S. from the proceeds paid to the Bank on the 24th of September 1987and that prima facie B.I.S. is entitled to an interim payment of that sum, in terms of Order 29. Having heard from Counsel, I am satisfied that Order 29 applies to originating summons proceedings as well as proceedings commenced or continued by way of writ.

7. In the other proceedings, High Court Action No. 5766, Margot obtained a stay of execution in respect of over $2 million due by him to the plaintiff, pending determination of damages in respect of an interlocutory injunction granted in High Court Action No. 5579 but later discharged at the trial. On 9th September 1988, a stay in High Court Action No. 5766 was removed on the plaintiff's application.

8. One purpose of the removal of that stay, according to an affidavit filed by Mr. Packwood, solicitor for the Bank in these proceedings, dated 22nd October 1988, was to enable it to garnishee a debt due from B.I.S. to Margot. The debt is alleged to be due on the basis that B.I.S. was the alter ego of Margot for the South Bay Gardens residential purchase and liable to account to Margot for the sum of $212,050.42. This is the sum already referred to which Hong Leong Securities Ltd. or its successor wished to garnishee in part payment of Margot's debt under High Court Action No. 5766.

9. A mere recital of the names of the parties in the various proceedings highlights the difference between the legal personalities involved. In the relevant proceedings, those personalities in the present proceedings are B.I.S. and the Bank while in High Court Action No. 5766 they are Hong Leong Securities Ltd. and Margot.

10. Mr. Barlow concedes that to succeed in this present appeal, he has to satisfy the Court that the corporate veil should be lifted. Indeed he further conceded in his submission and reply, that exercise would involve the two-fold lifting of the corporate veil, namely, that the separate legal personalities of B.I.S. and Margot on the one hand are in reality the same person while on the other hand, the Bank and the Hong Leong Securities Ltd. and its successor are in reality one and the same person.

11. I accept the tendency in recent years of an increased willingness on the part of the Court's to lift the corporate veil. But the fundamental principle remains that incorporated bodies have a separate legal and equally that the subsidiaries of a holding company as between the holding company and also as between their fellow subsidaries have a separate legal personality. However there have, of course, been statutory inroads into the concept of separate legal personality, earlier in revenue law and more frequently perhaps now in the company legislation. In addition to statutory empowering provisions which allow the corporate veil to be lifted, the common law has in relation to fraud and other cases been prepared, in appropriate circumstances, on the particular facts, from time to time to lift the corporate veil.

12. Mr. Barlow citing the English Court of Appeal judgment, Canada Enterprises Corporation Ltd. v. McNab Distilleries Ltd. (1981) Com. L.R. at p. 167 submits that there is a similar close relationship between the present four parties I have named in the instant Hong Kong proceedings, as there were in that case before the Court of Appeal. Reference was also made to Orri v. Moundreas (1981) Com. L.R. at p. 168, a decision of Mustill J., as he then was, in which he recognises the power of the Court to lift the corporate veil in accordance with the principle enunicated in Canada Enterprisees Corporation v. McNab Distilleries Ltd.

13. Mr. Pirie has referred d me to Spry 'Principles of Equitable Remedies' (3rd Edn.) at page 172 and submits that, by analogy, the propositions in relation to equitable set off are also relevant to considering whether or not there was a sufficiently close relationship between Margot and the companies here, to entitle the Court to lift the corporate veil. I recognise that the requirement at p. 175 of Spry for such a close relationship corresponds in principle, with one of the findings in the Canada Enterprises Corporation Ltd. v. McNab Distilleries Ltd. namely, Cairns L.J.'s second proposition relating to the connection between the claim and the cross-claim even though such a connection might not be able to be framed in law.

14. I am satisfied that the two authorities cited by Mr. Barlow are distinguishable on the facts for there seems to me to be a far closer business connection between the legal entities in the Canada Enterprises Corporation case than the related parties in the proceedings now before me.  There are, of course, other distinguishing facts which importance, such as the absence in the Canada Enterprises Corporation case of consideration. In determining whether or not to lift the corporate veil, I take all these matters and also the submissions of both counsel into account. Having done so I am satisfied that there was not a sufficient relationship between the parties, on the evidence before me, to allow me to lift the corporate veil.

15. If I am wrong in that conclusion, then before exercising my discretion under Order 29, it is proper to consider further all the surrounding circumstances. These include the purpose, disclosed in Mr Packwood's affidavit, that the Bank's associated company, namely, Hong Leong Securities Ltd. or its successor, propose to garnishee the debt which it is alleged is owing by B.I.S. to Margot.

16. Mr. Pirie, submits that there is no debt which is susceptible of being subject to garnishee proceedings and pointing to Godfrey J.'s judgment delivered on 15th Apri1 1987 in the High Court Actions 5579 and 5766 of 1988, he contends that there is a sum of $254,176.15 available by B.I.S. against Margot by way of set off, if in fact there were a debt due by B.I.S. to Margot. I take into account, in considering that submission, Mr. Barlow's emphatic submission to the contrary, that as B.I.S., and Margot are in reality the same persons, Margot put B.I.S. in funds to satisfy the judgment debt of $254,176.15 paid by B.I.S. to the plaintiffs in High Court Action 5579.

17. Turning to the exercise of my discretion under Order 29, I am satisfied that the plaintiff has complied with Rule 12(a) in that it has obtained an order for an account to be taken and the net certifiable in that account amounts at least to the sum of $212,050.42. Mr. Barlow has conceded that he is not relying on set off or any of the other matters expressly set out in the final paragraph of Rule 12 namely, cross-claim or counterclaim and that the matter is entirely one for my general discretion. However, Mr. Pirie submits that the Court's discretion, which must, of course always be judicially exercised, is restricted by the terms of Rule 12.

18. When I review the position before me, I am satisfied that the evidence advanced by the appellant in support of the order it now seeks, does rely upon the existence of a debt due by B.I.S. to Margot. However, in the principal affidavit filed by the plaintiff, namely, Mr. Packwood's affidavit of the 22nd of October 1988, there is merely a bare allegation that such a debt exists which is little more than an averment which might be contained in a pleading. However, Mr. Barlow has reminded me that the affidavit incorporates by reference the prior affidavit of Mr. Packwood sworn on the 5th day of September 1988. That affidavit is at least open to the inference that such a debt does exist between B.I.S. and Margot. Having considered the evidence which is alleged to support the existence of such a debt, I am not satisfied that the evidence goes quite that far.

19. Therefore, it seems to me, that there is insufficient evidence before this Court to satisfy itself that there is a debt susceptible of substaining garnishee proceedings. I recognise that if there were such evidence, it is not for this Court at this stage, to enter into the question of whether Hong Leong Securities Ltd. or its successor could successfully pursue garnishee proceedings against B.I.S. under Order 49. It is sufficient for me to find that I am not satisfied there is sufficient evidence that such proceedings could be pursued.

20. Taking all those matters into account, I propose in the light of the findings I have made and the law to which I have referred to, to rule that this is not a proper case for the exercise of my discretion in favour of the appellant. This is a proper case for interim payment.

21. The appeal is accordingly dismissed. Are there any submissions as to why costs should not follow the event?

Counsel : No.

Court : The defendant is ordered to pay the plaintiff's costs; to be taxed if not agreed.