XCHRX CHAU HUNG KAU v. TEXGAR LTD. AND OTHERS

HCMP 1372/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1372 OF 2000

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REASONS FOR DECISION

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1. This is an application by summons of the Petitioner filed on 8 August 2000 for an order under O.30 r.1 of the Rules of the High Court for the appointment of receivers to collect and receive the debts and other assets of the 1st Respondent, Texgar Limited, and of the 3rd Respondent, Texgar (Holdings) Limited, until trial of the petition or further order. By a further summons dated 17 August 2000, the Petitioner sought leave to amend the summons of 8 August 2000 to provide specifically for directions to be given on the appointment of receivers, the provision of security by the receivers and their remuneration. In particular, it was sought to spell out that of the monies and assets to be received by the receivers, they are to pay into court a sum of HK$3,993,958.31 as per an order made by Yam J on 4 August 2000 in the circumstances I shall describe below. The Petitioner further sought leave to amend paragraphs 2 and 8 of the summons dated 17 August 2000 at the hearing before me on 16 January 2001. I have given leave to the Petitioner to amend the summons for the appointment of receivers as sought.

2. The Petitioner's summons was served on the 1st, 2nd and 3rd Respondents. On 27 November 2000, the 2nd Respondent, Mr Tsui King Yeung, and the 3rd Respondent filed Notices to act in person. At the hearing before me, upon the application of the 3rd Respondent, I gave leave for it to be represented for the purpose of this application by the 2nd Respondent, who is one of its directors. The 2nd Respondent has not sought to represent the 1st Respondent in this application.

3. At the conclusion of the hearing, I made an order appointing receivers of the assets of the 1st and 3rd Respondents pending trial of the petition with brief reasons. The following are the full reasons for my decision.

The substantive proceedings

4. On 13 March 2000, the Petitioner filed a petition under Section 168A of the Companies Ordinance against the 2nd and 3rd Respondents for minority shareholder relief alleging misconduct by the 2nd Respondent as a director of the 1st Respondent for breach of fiduciary duty, diversion of business of the 1st Respondent, and misappropriation of the assets of the 1st Respondent. It would appear from the petition that the Petitioner and the 2nd Respondent are the only directors and shareholders of the 1st Respondent and since about February 1993, the 2nd Respondent has been responsible for the day-to-day operation and management of the business of the 1st Respondent, which is trading in plastic products and the supply of wireless communication equipment. It is alleged that in July 1996, the 2nd Respondent wrongfully formed the 3rd Respondent, which is owned by himself, his wife and his brother, and that he had diverted the assets and business of the 1st Respondent to the 3rd Respondent and to other companies in China under the 2nd Respondent's control.

5. One of the allegations in the petition, which has been amended as a result of further information available to the Petitioner, is of particular relevance to the injunction orders obtained by the Petitioner and to the present application. This allegation relates to the proceeds of sale of a property at Flat 1, 11th floor, Block A, Ventris Place, Nos. 19-23 Ventris Road, Hong Kong ("the Property"). It was owned by the 1st Respondent and mortgaged to the China State Bank Limited to secure repayment of the money advanced under the banking facilities granted to the 1st Respondent. The Petitioner was and is at all times a joint signatory of the bank accounts maintained by the 1st Respondent. It is alleged that the 2nd Respondent had since October 1998 caused the 1st Respondent not to pay the mortgage instalments of the Property and to allow the mortgage to fall into default. As a result and with the connivance of the 2nd Respondent, the Property was sold by the bank under a mortgagee sale whereby the Property was sold to the 3rd Respondent in April 1999 at HK$7.8 million, which was below market price. Pursuant to the mortgagee sale, the bank received from the 3rd Respondent a sum in excess of the amount due under the mortgage and credited the same, which was approximately HK$4.2 million, to the 1st Respondent's account with the bank. To get over the difficulty that withdrawals from the 1st Respondent's bank account could only be made on the joint signatures of the Petitioner and the 2nd Respondent, the 2nd Respondent caused a bogus action to be brought against the 1st Respondent by the 3rd Respondent. This is HCA No.17117 of 1999.

6. It is alleged by the Petitioner that a wholly fictitious cause of action was asserted by the 3rd Respondent against the 1st Respondent in HCA No.17117 of 1999 being that loans were allegedly made by the 3rd Respondent to the 1st Respondent in the sum of approximately HK$4.5 million. In November 1999, the 2nd Respondent caused the 3rd Respondent to obtain a default judgment against the 1st Respondent for the amount as claimed. The 2nd Respondent then caused the 3rd Respondent to apply for a garnishee order in respect of the credit balance in the 1st Respondent's bank account of HK$4.2 million. An order nisi was obtained in December 1999 and it was made absolute on 19 January 2000. On the same date, the bank paid over the entire credit balance in the 1st Respondent's account to the 3rd Respondent pursuant to the garnishee order absolute. The Petitioner was unaware of the collusive proceedings as no report of the High Court action was made by the 2nd Respondent to the Petitioner at any time.

7. Notwithstanding the payment by the bank of the entire credit balance in the 1st Respondent's account to the 3rd Respondent, the 2nd Respondent had deposed in his first affirmation in these proceedings on 31 March 2000 that the net balance of the proceeds of sale of the Property in the total sum of about HK$4.3 million "are still kept in the accounts of the 1st Respondent with the China State Bank Hong Kong Branch." It was only after the 2nd Respondent had filed his second affirmation of 5 May 2000 that the Petitioner discovered the proceeds of sale had been paid to the 3rd Respondent as a result of the steps described above. If the allegations of the Petitioner regarding the "bogus" action are established, to borrow the expression of the Court of Appeal in Mandarin Resources Corporation Limited v. David Cheng Heng Soon & Ors Civ App No.146 of 1987, 28 April 1988, the 2nd Defendant had perpetrated a scheme of "fraudulent ingenuity" on the Petitioner and the 1st Respondent.

8. In the re-amended petition, the Petitioner seeks relief against the 2nd, 3rd and 4th Respondents on the basis that they are liable as constructive trustees to the 1st Respondent for all sums wrongfully diverted from the 1st Respondent. I understand from Mr Barlow, who appeared for the Petitioner in this application, that the petition is ready to be set down for trial after the present application has been dealt with, pursuant to the directions given by the Companies Judge.

The interlocutory injunctions

9. The Petitioner first obtained a prohibitory injunction against the 2nd Respondent restraining the 2nd Respondent or through the 3rd or 4th Respondents from further misappropriating the assets and business of the 1st Respondent. This order was made by Le Pichon J (as she then was) on 26 May 2000.

10. On later discovery, the Petitioner became aware of misappropriation of the proceeds of sale of the Property and the manner in which the credit balance of the 1st Respondent was paid by the bank to the 3rd Respondent as described above. As a result, and after a contested hearing before Yeung J on 16 June 2000, an order was made that the 2nd and 3rd Respondents were jointly to pay into Court within 21 days the sum of HK$4,293,958.31 to abide by any further order in the proceedings ("the first injunction order"). Yeung J further ordered the 2nd Respondent to serve an affidavit providing discovery of, inter alia, all trading, banking and corporate documents of the 3rd and 4th Respondents by 7 July 2000.

11. On 5 July 2000, the 2nd and 3rd Respondents filed a summons returnable on 7 July 2000 seeking to vary the first injunction order on the ground of impecuniosity. The 2nd Respondent also filed his fifth affirmation purporting to set out the entire financial position of himself and the 3rd Respondent to support their application. On 7 July 2000, Yam J made an order to vary the first injunction order reducing the amount to be paid into court from HK$4,293,958.31 to HK$300,000.00 and extending the time of payment into court to 14 July 2000. The variation was made on the basis that the 2nd Respondent had fully disclosed to the court the financial position of himself and the 3rd Respondent and that HK$300,000.00 was the entire sum available to the Respondents for making a payment into court. Yam J also extended time for the 2nd Respondent to comply with Yeung J's order to make discovery to 21 July 2000. On 14 July 2000, the 2nd and 3rd Respondents paid into court HK$300,000.00.

12. The Petitioner subsequently discovered that the affirmation placed by the 2nd Respondent before Yam J on 7 July 2000 was untrue in that there were other bank accounts maintained by the 2nd and 3rd Respondents not disclosed to the court. On 4 August 2000, the Petitioner applied to Yam J ex parte on notice to the Respondents for an order to vary the order of 7 July 2000. Yam J made an order that was in effect to restore the first injunction order in that the 2nd and 3rd Respondents were required to jointly pay a further sum into court of HK$3,993,958.31 within seven days ("the second injunction order"). Further, he granted an injunction restraining the 2nd and 3rd Respondents from dealing with the property and assets of the 1st and 3rd Respondents until the determination of an inter partes summons to be issued forthwith by the Petitioner seeking appointment of a receiver over the assets and undertakings of the 1st and 3rd Respondents and he ordered the 2nd Respondent to serve an affirmation within three days after service of the order on him of all the assets held by 2nd and 3rd Respondents.

13. Subsequent to Yam J's order, the Petitioner issued a summons for the appointment of receivers on 8 August 2000 and this is the application I am concerned with. On 9 August 2000, the 2nd and 3rd Respondents filed a summons returnable on 11 August 2000 seeking (i) an extension of time for the Respondents to file a new application to discharge the second injunction order as to the amount required to be paid into court; and (ii) an order that the enforcement of the second injunction order be held in abeyance until the said application for discharge was disposed of. That application was heard by Seagroatt J on 11, 14 and 15 August 2000 during which the 2nd Respondent gave oral evidence and was cross-examined by the Petitioner's counsel. Seagroatt J dismissed the application of the 2nd and 3rd Respondents having come to the view that the 2nd Respondent was an evasive and unsatisfactory witness and that the court still did not have a clear picture of the financial position of the 2nd and 3rd Respondents notwithstanding that ample opportunity had been given to the Respondents to make disclosure.

14. On 1 September 2000, Yam J gave leave to the Petitioner to commence contempt proceedings against the 2nd Respondent for failing or refusing to comply with the first and second injunction orders. I understand from Mr Barlow that the contempt proceedings have been adjourned.

15. Up to present, the second injunction order has not been complied with. There is no appeal in respect of the second injunction order and that order has not been stayed by the Court.

The present application

16. The purpose of the Petitioner's application for the appointment of receivers is to safeguard the assets of the 1st Respondent, which had been transferred to the 3rd Respondent, pending the trial of the petition and to give efficacy to the first and second injunction orders. The power to make such an order is provided in Section 21L of the High Court Ordinance, Cap.4 in which it is stated that the High Court may by order (whether interlocutory or final) appoint a receiver in all cases in which it appears to be just or convenient to do so. Mr Barlow pointed to the history of these proceedings, the evidence of misappropriation by the 2nd Respondent, the false evidence on affidavit being the first affirmation of the 2nd Respondent made on 31 March 2000 regarding the proceeds of sale of the Property, the finding of Seagroatt J that he was an unsatisfactory witness, and the scheme of "fraudulent ingenuity" perpetrated by the 2nd Respondent as described above. It was submitted that these matters have demonstrated that the assets of the 1st and 3rd Respondents are in jeopardy and that it would be appropriate to appoint receivers to take interim custody of the assets of the 1st and 3rd Respondents in the circumstances.

17. The 2nd Respondent has opposed the application on behalf of the 3rd Respondent. He has disputed the Petitioner's allegations of the fraudulent scheme concerning the sale of the Property and the institution of the High Court action against the 1st Respondent which resulted in the garnishee order. I understand from the 2nd Respondent that this contention was also made on the Respondents' behalf at the hearing before Yeung J who made the first injunction order. Yeung J had apparently taken the view that the Petitioner had made out a good prima facie case of collusive proceedings which the 2nd Respondent has caused to be brought against the 1st Respondent. I am of the same view.

18. The 2nd Respondent further submitted that an order appointing receivers of the assets of the 3rd Respondent would serve no useful purpose. Firstly, he stated that he would not act contrary to the order of the Court not to dispose of the assets of the 3rd Respondent regarding the Property and the monies representing the proceeds of sale. Secondly, he claimed that all the information regarding the various companies had been provided to the Petitioner. The 3rd Respondent only has two landed properties, one being the Property and the other being a property in Beijing which was under mortgage. The 3rd Respondent has not been in business for eight months since its bank account or accounts were frozen after the institution of these proceedings. He claimed that the 3rd Respondent has substantial liabilities and it has simply no assets to comply with the second injunction order. The 3rd Respondent has an overdraft with a bank to the extent of some $9 million, it has a loan or grant of HK$2 million from the Government made under a scheme for small and medium business enterprises, and it is indebted to a company in Macau to the extent of HK$1.8 million. Thirdly, the 2nd Respondent expressed doubt whether the receivers would be able to gather in the debts of the 3rd Respondent as the 3rd Respondent's business was to supply telecommunication equipment to military and security forces in China. He did not think the receivers would be able to approach these authorities for payment of the sums owed by them to the 3rd Respondent.

19. I am unable to accept the 2nd Respondent's submissions. The fact remains that since the second injunction order was made in August 2000, no attempt whatsoever have been made by the 2nd and 3rd Respondents to comply with it by making any further payment into court. I am far from assured that the 2nd and 3rd Respondents have made a full and frank disclosure of the assets of the Respondents notwithstanding the tenth affirmation of the 2nd Respondent filed on 10 October 2000. The 2nd Respondent has not given any explanation why he had made a false affirmation in his first affirmation filed on 31 March 2000 regarding the proceeds of sale of the Property. There is prima facie evidence of a scheme of "fraudulent ingenuity", which if unchecked, could be repeated. The 2nd Respondent has not satisfied me that the 3rd Respondent would suffer hardship or prejudice as a result of an interim order appointing a receiver over the assets of the 3rd Respondent. On the available evidence, the 2nd Respondent has failed to satisfy me that the 3rd Respondent is so impecunious that the appointment of receivers to take interim custody of 3rd Respondent's assets would be a wholly fruitless exercise. In my judgment, it would be just and inconvenient to grant an order appointing receivers over the assets of the 1st and 3rd Respondents as the Petitioner has shown a need for protecting the assets of these companies from jeopardy pending the trial of the petition.

The orders

20. For the above reasons, I have made an order in these terms:

(i) Nicholas Timothy Cornforth Hill and Wong Tak Man, Stephen, both of Nelson Wheeler Corporate Advisory Services Limited of 7th floor, Allied Kajima Building, 138 Gloucester Road, Wanchai, Hong Kong on first giving security to the satisfaction of the court be appointed as joint and several receivers ("the Receivers") of the assets of the 1st and 3rd Respondents to receive all debts now due and owing to and all other money, assets, properties and effects of the 1st and 3rd Respondents until trial of the petition or further order;

(ii) the 1st, 2nd and 3rd Respondents do execute and procure to be executed and done all such documents, acts and things as may be necessary or desirable to be executed and done by them for the purpose of effecting as soon as possible the receiving of all debts now due and owing to and all other money, assets, properties and effects of the 1st and 3rd Respondent referred to in paragraph (i) above;

(iii) in the event that the 1st and/or 2nd and/or 3rd Respondents fail or omit to execute any of the documents mentioned in paragraph (ii) above, the Registrar or any one of the Masters of the High Court be appointed pursuant to Section 25A of the High Court Ordinance (Cap.4) for the purpose of executing such documents;

(iv) the Receivers do out of the money, assets, properties and effects received by them (after deducting such amounts necessary to discharge their remuneration and costs as hereinafter provided for) pay to the court as payment into court a sum of HK$3,993,958.31 as per the Order dated 4 August 2000 of Yam J and such further sums to the Petitioner from time to time together with interest pursuant to Sections 48 and 49 of the High Court Ordinance (Cap.4) pursuant to any further orders to be made by the court;

(v) the Receivers do within seven days give security to the extent of HK$200,000.00 by bank guarantee or insurance bond in a form to the satisfaction of the Registrar of the High Court and have such guarantee or bond lodged in court but in case that the Receivers shall not have given security within the time aforesaid or within such further time as the court shall allow their appointments as such receivers shall at the expiration of such time forthwith suspend;

(vi) the remuneration of the Receivers be charged on a time cost basis at the standard scale of fees as agreed from time to time between the Official Receiver and the Hong Kong Society of Accountants under the administrative scheme of contracting out of non-summary court winding-up cases to accountants and be paid out of the assets of the 1st and 3rd Respondents;

(vii) the costs and disbursements incurred by the Receivers including the costs and disbursements in passing their accounts and in obtaining their discharge shall be taxed and assessed by the Master and shall be primarily payable out of the sums received by the Receivers;

(viii) the costs of the Petitioner of these proceedings be paid as hereinafter directed out of the money, assets, properties and effects to be received by the Receivers;

(ix) in the event that the sums received by the Receivers are insufficient to discharge their remuneration, a Master of the High Court shall issue a certificate stating the amount of the deficiency and the amount of deficiency so certified shall be paid by 2nd and 3rd Respondents to the Petitioner;

(x) there be liberty to apply; and

(xi) the Petitioner is to have his costs of this application to be paid in the manner as stated in paragraphs (viii) and (ix) above.