WONG LUEN HANG AND ANOTHER v. CHAN YUK LUNG AND OTHERS

HCA 1265/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1265 of 2015

__________________

__________________

________________________

D E C I S I O N

________________________

1. This was the application of Wong Luen Hang (“P1”) and Tsui Kwok So (“P2”) (collectively “the plaintiffs”) by summons dated 27 October 2015 for a receivership and management order in respect of the 3^rd defendant Faithful Rainbow Ltd (“D3”), the 10^th defendant Topmix (International) Company Ltd (“TICL”) and the 11^th defendant Topmix Industrial Ltd (“TIL”) for the protection and preservation of their assets and business pending the final determination of the present action. At the conclusion of the hearing judgment was reserved which I now give.

BACKGROUND FACTS

(A)   The parties

2. The shareholders of TICL and TIL (collectively “the Companies”) are the plaintiffs and the 1^st and 2^nd defendants, namely, Chan Yuk Lung (“D1”) and Chan Yuk Wai (“D2”) with each holding 25% of the share capital.

3. P1 is the father‑in‑law of P2.  D1 and D2 are brothers and the directors of the Companies.

4. TICL was incorporated in 1993 and carried on business producing and selling carbon fibre automobile body parts (“ABPs”).  TIL was incorporated in 2003 to carry on the same type of business and more specifically for servicing clients other than Amax Motor Inc (“Amax”) and its associated company Vis Racing Sports Inc (who were the major customers of TICL).  They were profitable businesses until about 2011.

5. ABPs for the Companies were manufactured at TIL’s factory on the Mainland (“the China factory”) which had 100 employees. D1 was in charge of the China factory and worked there.

6. P2 was also a director of the Companies until his removal in March 2006 when D1 and D2 (“the Chan brothers”) assumed complete control.  That marked the beginning of the deterioration in the relationship between the plaintiffs and the Chan brothers.

7. The 3^rd defendant (“D3”) was incorporated in Hong Kong in November 2011 and commenced the business of assembling automobiles in March 2012.  Its shareholders are Mak Wai Wing Clemens, the 4^th defendant (“D4”), Lam Kwok Kin, the 6^th defendant (“D6”) and You Lahua.

8. The 5^th defendant Chan Wai Hung (“D5”) was an employee of TICL until June 2011 and joined D3 in September 2012.

9. The 7^th defendant Ng Chun Kai (“D7”) is the sole director and shareholder of Myers Management Consulting Ltd (“Myers”) a BVI company incorporated on 23 November 2011.

10. The 8^th defendant Tse Wing Keung (“D8”) is the sole shareholder of a company called Xing Fu Securities Ltd (“XFSL”) and the 9^th defendant Tse Wing Hong (“D9”) is XFSL’s senior corporate adviser.

11. D4, D6, D7, D8 and D9 are friends or acquaintances of D2 and, as earlier noted, D5 was a former employee of TICL.

(B)   The breakdown in the relationship between the plaintiffs and the Chan brothers

12. P2’s removal from the board in March 2006 was allegedly for wrongful conduct leading to a loss of trust.

13. In December 2007 the plaintiffs brought a derivative action, HCA 2654 of 2007 (“the 2007 action”) on behalf of TICL complaining that the Chan brothers had improperly issued a $2.3 million credit note to Amax.  The 2007 action was unsuccessful both at first instance and on appeal.

14. In August 2011 the plaintiffs brought another derivative action, HCA 1382 of 2011 (“the 2011 action”) on behalf of TIL against, inter alia, the Chan brothers alleging that the Chan brothers had misappropriated monies and assets belonging to TIL, inter alia, through diverting TIL’s business to other companies they had set up.  The 2011 action is still ongoing.

15. The 2007 and 2011 actions not unnaturally soured the relationship between the plaintiffs and the Chan brothers even further and were perceived by the Chan brothers to be a continuing vendetta against them.  It is fair to say that the relationship has broken down.

(C)   Events after the 2011 action

16. These proceedings commenced on 9 June 2015, following the plaintiffs’ accidental discovery (in mid‑January 2015) of petitions presented by Myers on 2 January 2015 to wind up the Companies.  The plaintiffs were taken by surprise.  They had no inkling that the Companies were in financial difficulties.  No mention was made at the AGMs held on 31 December 2014 of the financial problems or of the fact that judgments had been obtained against the Companies or indeed that they had been served with statutory demands several weeks earlier.  The petitions led to follow‑up enquiries and investigations that uncovered four unsatisfied default judgments against the Companies that formed the basis of the petitions. 

17. After the commencement of these proceedings, the plaintiffs made an ex parte application on 24 September 2015 for a receivership order but the judge directed that the application should be heard inter partes. The Court of Appeal dismissed the plaintiffs’ appeal.

18. It is the plaintiffs’ case that the Chan brothers and their nominees and associates have engaged in wrongful acts to the detriment of the Companies. In broad outline, the thrust of the plaintiffs’ case is that:

(1)   the Chan brothers caused the Companies to enter into consultancy and accountancy services contracts with Myers as part of a scheme to bring about their demise by having a third party (Myers) obtain default judgments against, and wind up, the Companies (“the Myers arrangements”); and

(2)   the Chan brothers set up a shell company (D3) through nominees (D4 and D6) to take over all the assets of the Companies including Amax their largest client.

19. They view all this as “a destructive plot to kill [the Companies] after stripping them of their major assets and business, and having them transferred to their own company, [D3]” (plaintiffs’ reply submissions at §§7‑8).

20. Set out below is a chronological account of facts and events after the 2011 action pertinent to the matters arising in this application to provide a more comprehensive perspective or overview of events as they unfolded.

21. At the hearing, Mr Ronald Tang (with Ms Carmen Kei) appeared for the plaintiffs and Mr Hugh Kam (with Mr Solomon Lam) appeared for D1‑D6 and the Companies (hereinafter collectively referred to as “the defendants”).

CHRONOLOGY

22. On 1 December 2011 each of TICL and TIL entered into an agreement with Myers for the latter to provide business and management consultancy services at a monthly fee of $150,000 from 1 January 2012 to 31 December 2013.  The agreements were substantially similar.

23. At that time, the Companies operated from premises in Yuen Long described as a workshop and warehouse (“the Yuen Long premises”) while manufacturing was carried on at a factory in China that TIL maintained (“the China factory”).

24. On 21 January 2012 a fire broke out which allegedly caused extensive damage the Yuen Long premises.  The date is unclear but soon afterwards TICL took up a lease of premises in Kowloon City.

25. Then, on 1 April 2013, Myers was also retained to provide management and accounting services to the Companies for one year (from 1 April 2013 to 31 March 2014) at a monthly fee of $15,000 for each of the Companies.

26. In late 2013 the Companies failed to make payment of consultancy fees to Myers for the last two months of the consultancy period (October and November 2013).

27. Within a few months, on 27 February 2014, TICL transferred its light goods vehicle (“the 1^st vehicle”) to D3.

28. At about that time new premises had to be found as the Kowloon City lease was due to expire on 30 April 2014 and the landlord had refused to grant an extension.  D2 happened to mention this matter to D6 who (as will become apparent), apart from being a major shareholder of D3 and a friend of the Chan brothers, was also one of two sub‑contractors of Myers for services to be provided to the Companies under the consultancy agreements.

29. On 12 March 2014, D6 (on D3’s behalf) had secured a lease of a unit in Kwun Tong for three years commencing 1 May 2014 at $52,000 per month for D3 intended for use as D3’s showroom.  Discussions took place between D2 and D6 resulting in the grant of a one‑year licence by D3 to TICL to occupy the Kwun Tong premises at $68,000 a month as from 1 May 2014.  D4 stated in his affirmation that D3 and the Companies have been business partners since early 2012, the arrangement (as I understand it) being that D3 accepted orders from the Companies while the Companies assisted D3 in its marketing and sales.

30. On 1 June 2014 D1 signed a share purchase agreement on behalf of TIL agreeing to the sale of the entire share capital of a Dongguan company that held TIL’s China factory to D3 (acting through its corporate representative D4) for $5 million.  It would appear that what the Dongguan subsidiary held was a lease of the China factory rather than title to the factory itself.

31. On 8 August 2014, Myers commenced four district court actions to recover unpaid fees (totalling approximately $1 million) due under the consultancy and accountancy agreements.  Two were against TICL and the remaining two against TIL.  

32. As a result of the failure of the Companies to give any notice of intention to defend, Myers obtained default judgments on 10 November 2014.  Myers then served statutory demands on the Companies.  As the debts remained unpaid, on 2 January 2015 Myers filed petitions to wind up the Companies causing their bank accounts to be frozen pending determination of the petitions.

33. Meanwhile, on 21 November 2014, a car (“the 2^nd vehicle”) belonging to TICL was also transferred to D3.

34. By late December 2014/early January 2015, due to TICL’s inability to pay the monthly licence fee for the Kwun Tong premises, the licence was terminated which meant that the Companies had to vacate them.

35. In mid‑January 2015 the plaintiffs accidentally discovered that petitions had been filed to wind up the Companies and began investigations that, inter alia, brought the default judgments and the Myers agreements to light.

36. The plaintiffs intervened in the District Court actions and, on 23 June 2015, succeeded in setting aside the default judgments.

37. On 29 June 2015, the petitions were dismissed.

38. Myers did not appeal the setting aside decision on the merits but obtained the deputy district judge’s leave to appeal his ruling relating to the plaintiffs’ common law right to intervene and defend the proceedings in a derivative capacity.  In the event, as Myers failed to provide security for costs for the appeal as required by the Court of Appeal, the appeal was dismissed.

THIS APPLICATION

(A)   The Myers arrangements

39. The plaintiff’s case is reflected in §6 of the Reasons for Decision of Deputy District Judge Ludwig Ng dated 6 July 2015 in the setting aside application:

“… the Chan brothers have been secretly engineering a scheme to bring about the demise of [the two companies] by wrongfully stripping [them] of their assets and business; and causing [Myers] to obtain default judgments against [the two companies] and petition to wind them up on the basis of some sham transactions.”

40. The plaintiffs highlighted what they considered to be “suspicious circumstances” concerning Myers, having obtained reports from inquiry agents retained to conduct surveillance of the activities of D4, D6 and D7.  In brief:

(1)   Myers was incorporated a week before the date of the consultancy agreements by its owner/controller D7, a childhood friend of the Chan brothers.

(2)   Myers did not have any office or business address or staff or any track record in providing business consultancy services.

(3)   D7 subcontracted the consultancy work in part to D6.  Myers subcontract with D6 is dated 1 April 2012.

(4)   Neither D7 (a construction site worker) nor D6 (who did not have a full‑time job) had any tertiary education or professional qualifications or track record of providing management consultancy work.

(5)   D7 worked at a construction site and D6 was a former customer of TICL (having previously operated a small business making fibreglass kiosks) and a friend of the Chan brothers.

(6)   Myers also subcontracted part of the consultancy work to XFSL.  (A curious feature is that the subcontract between Myers and XFSL is dated 1 November 2011 which preceded Myers’ own incorporation by some three weeks.)  

(7)   XFSL is controlled by D8 and D9 and does not have a place of business or staff.  Its business address is a village house in the New Territories where D9 and his family reside.

41. Those matters aside, the plaintiffs also question why the Companies that had a combined net profit of about $4 million only in 2011 and had been losing substantial amounts since then would have entered into consultancy agreements at a total cost of $3.6 million per year for two years.  It made little business sense.

42. In resisting the setting aside application, D7, D6 and D9 filed affirmations the thrust of which was that, as a team, they had the necessary experience and expertise to assist the Chan brothers in improving the performance and efficiency of the Companies by implementing an effective Enterprise Resource System and addressing factory production problems.   

43. In D2’s affirmation filed on 30 November 2015 he advanced a totally new reason for the consultancy agreements from that put forward for the setting aside application.  The new assertion is that Myers was specially formed to run the HK Productivity Council’s (HKPC) project for mass production of aircraft seatbacks for the Companies.

44. Mr Tang who appeared for the plaintiffs submitted that the newly advanced reason is suspect in that, had it been true, that evidence would have been given by D7 (the sole director of Myers) when he filed evidence six months earlier in the setting aside application.  Further, the new assertion could only be pure fabrication in view of HKPC’s press release of 14 November 2011 (nine days before Myers’ incorporation) announcing the award of the contract to a consortium of six local companies.

45. In his account of Myers’ role (§§15‑18 of D2’s 2^nd affirmation), D2 did not address the press release as that was only raised after the date of his affirmation.  But D2 exhibited over 100 pages of e‑mail exchanges between the Companies and HKPC concerning the production of carbon composite seatbacks that, so far as one can tell, span a period from late 2010 through March 2012.  While a substantial part of the e‑mail exchanges occurred prior to 14 November 2011, a number took place after that date.  Had the award mentioned in the press release meant the completion of the entire project, one would not expect to see e‑mail exchanges on that subject after 14 November 2011, the date of the press release.  For that reason, I do not consider the press release dispositive on the issue as to whether the HKPC project was sheer fabrication.

(B)   The transfer of assets and business of the Companies to D3

46. D3 was incorporated in Hong Kong in November 2011.  Its sole director is D4 (who has a degree in engineering as well as a Master’s degree).  Its shareholders are D4 (25%), D6 (55%) and Lou Lahua (25%) with D4 being responsible for corporate matters and D6 overseeing production and technical matters.  Lou was a passive investor.  It commenced the business of assembling automobiles in March 2012 at the Yuen Long premises that had been the Companies’ workshop until the fire outbreak (at the suggestion of D6), accepted orders from the Companies who, according to D3, were “business partners” (see §29 above).  Again it was at D6’s suggestion that D4 agreed to the acquisition of the China factory in May 2014.

47. The plaintiffs have a different perspective of D4 and maintain that he works fulltime in a small food stall that he runs.  It would appear that the plaintiffs’ views of the activities of D4, D6 and D7 were gained through the reports of their inquiry agents.  But one should not lose sight of the fact that no findings have been made on the conflicting evidence. 

(1)   The vehicles and the China factory

48. It is not disputed that two vehicles belonging to TICL were transferred to D3, one in February 2014 and the other in November 2014.

49. On 1 June 2014 TIL’s China factory was transferred to D3 for $5 million (see §30 above).  D2’s explanation is that the lease was due to expire at the end of 2015 and with the increase in costs in the PRC it was decided that it would not be suitable for TIL to maintain its own production factory.  

50. While the agreement dated 1 June 2014 provided for payment to be made within three months of the date of the agreement, payment was in fact made in two tranches not only before the agreement came into existence but also well before they were due: $3 million was paid on 12 May 2014 and $2 million on 30 May 2014.  That is a very strange state of affairs but there are bank deposit slips that show payment into TIL’s account.

51. The Chan brothers deny any dissipation of assets on the basis that the transfers were arm’s length transactions and at market price.  

(2)   Business

52. As to the transfer of the Companies’ business, there is evidence that:

(i) Linda Poon (an employee of TICL) informed one of TICL’s customers by e‑mail dated 4 December 2014 sent from “topmix” that TICL would be changing its name to Faithful Rainbow Limited “with effect from 1 December 2014” and requesting the recipient to issue future orders “in the new Company name”.  Later e‑mails from her on 22 and 23 January 2015 were sent from her account at “faithful rainbow.com” and displaying the telephone and fax numbers of TICL.

(ii) Jeffrey Poon (the sales manager at D3’s showroom at the Kwun Tong premises and a former TICL employee) told a customer on 27 March 2015 that D3 was formerly known as “Topmix”.

(iii) Maggie Tsang who is D2’s sister‑in‑law in charge of the Yuen Long premises told customers that Topmix had changed its name to Faithful Rainbow.

53. The plaintiffs have also adduced evidence of shipment records of TICL showing regular shipments being made between September 2007 and 15 January 2015 when they suddenly ceased.  All shipments commencing 26 January 2015 were from D3.

54. By February 2015 the logo on the shop front of the Kwun Tong premises changed from “Topmix” to “Faithful Rainbow”.  There is also evidence the website and the Facebook page of the Companies have been transferred to D3.

55. D2’s explanation is that TICL’s inability to pay the licence fee meant that it had to vacate the Kwun Tong premises.  As the lease was vested in D3 there was nothing unusual about D3 retaking the premises.  As the Companies were not in a position to carry on business pending the winding up petitions they ceased operations.  Staff left and joined D3 which is a separate legal entity.

56. So far as Amax’s business is concerned, D2 stressed that the Amax contracts were non‑exclusive as Amax made it a point to spread its risks by placing orders with various suppliers, inviting attention to the fact that D3 did not supply Amax until 26 January 2015, after the Companies ceased operations.  It is to be noted that the audited financial statements refer to the Companies ceasing operations on 31 January 2015.  

(C)   Procuring the two companies to pay the Chan brothers’ personal legal fees

57. The point made here is that the 2014/2015 financial statements show the Companies as having incurred legal fees of over $2.8 million.  The only legal action on foot in that financial year was the 2011 action in which TIL was but a nominal defendant.  It was submitted that in the circumstances it is a reasonable inference that the Companies were made to pay for the personal legal expenses of the Chan brothers.

58. In response to queries raised by the plaintiff’s solicitors after the AGM held on 31 December 2015, the auditors state that TICL incurred legal fees for the financial year 2014/2015 of approximately $1.87 million for the 2007 action and $400,000 for the present action.  The Chan brothers have treated those legal fees as a debt owed by TICL to themselves by way of “amount due to directors”.  Significantly, as the present action did not commence until June 2015, there was no way that legal fees of $400,000 could have found their way into the 2014/2015 audited financial statements which ended on 31 March 2015.

59. The Chan brothers’ explanation is that the litigation has been going on for many years and it is hardly surprising that the legal bill should be of that order.  In my view that is no explanation.  Even if certain costs are inevitable, it does not explain how a bill of that magnitude could have been incurred when the relevant defendant is only a nominal defendant.  They should have been minimal.

60. Further, I agree with Mr Tang that a defendant director in a derivative action is not entitled to have his own legal fees paid by the company: Carlisle & Cumbria United Independent Supporters’ Society Ltd v CUFC Holdings Ltd [2011] BCC 855 at §§21 and 28.

61. In TIL’s case, the total amount of legal fees involved is approximately $600,000.  They were incurred for the 2011 action and the present action.  That again has been treated as a debt owed by TIL to the Chan brothers by way of “amount due to directors” and similar criticisms as for TICL can be made.

THE APPLICABLE LEGAL PRINCIPLES

62. It is common ground that in deciding whether or not to appoint a receiver on an interlocutory basis the court approaches the matter as it would to the grant of an interlocutory injunction.  The principles in American Cyanamide apply.

(A)   Whether there is a serious question to be tried

63. In light of the matters set out above, I do not consider that the reasons the defendants have proffered are sufficient by any means to meet the strong case made against them.  The plaintiffs have shown that there are serious issues to be tried as to:

(1)   whether the Chan brothers;

(i)   acted in breach of fiduciary duties or breach of trust breach of obligations as trustee in causing the assets and business of the two companies to be transferred to D3;

(ii)   procured the two companies to enter into sham transactions with Myers that caused debts to arise in favour of Myers designed to bring about the demise of the two companies by procuring Myers to present petitions to wind up the two companies;

(iii)  procured the two companies to pay the personal legal expenses of the Chan brothers in the 2007 and the 2011 actions as well as in the present action.

(2)   whether D3 holds the assets transferred to it as a constructive trustee for the two companies; and

(3)   whether D4 to D9 (inclusive) are liable to account to or compensate the two companies as constructive trustee for dishonest assistance in the breach of fiduciary duties, breach of trust, or breach of obligations as trustee on the part of the Chan brothers.

(B)   Whether there is a real risk of dissipation of assets

64. The first matter is to identify the assets of the Companies that are said to be in need of preservation and protection.  The plaintiffs have the burden of showing that there is a real risk that the assets of the Companies that have been transferred would be dissipated.  The assets specifically identified in the plaintiffs’ evidence fall under the following categories.

(1)   Assets already dissipated

65. They include (i) the sale proceeds of the China factory of $5 million paid into TIL’s bank account in May 2014, (ii) receivables of $4,348,913 shown in the audited financial statements of TIL for the year 2013/2014 due from the China factory (but which the auditors queried as to their recoverability in view of the fact that the China factory had been sold to D3 on 1 June 2014), (iii) credit balances in the respective bank accounts of the Companies, and (iv) the sum of $2.8 million spent on legal expenses.

66. As regards the sum of $5 million, it was paid into TIL’s bank account in May 2014.  If any part of that sum remains, it should be reflected in TIL’s current bank balance.  If it were not, then it would be reasonable to infer that it has been expended.

67. So far as the receivables of $4.3 million are concerned, according to the audited financial statements for 2014/2015 they have been “fully settled”. In their letter dated 18 April 2015, the auditors explained in §5(a) that the amount of receivables was an advance payment or deposit made by TIL to the China factory in return for finished goods to be produced and supplied at a later date.  Those goods have been supplied since the date of the financial statements (in which the auditors had queried the recoverability of this amount) which explains the set‑off.  In view of that explanation, I do not consider that those receivables are assets that are in need of protection for present purposes.

68. I come to the credit balances shown in the bank accounts.  The 2014/2015 audited financial statements show that as at 31 March 2015 they stood at $739,364 for TICL and $39,770 for TIL.  The bank statements at 31 October 2015 show balances for those accounts reduced to $301,050 for TICL and $9428 for TIL respectively.

69. If, as stated in the audited financial statements, the Companies ceased operations on 31 January 2015, prima facie, those reductions ought not to have occurred.  But what is no longer standing in the credit balances of the accounts, including the sum of $2.8 million for legal expenses (see §57 above) must have been expended.

70. Thus the 4 items identified in §65 above relate to assets that have already been dissipated (save as to the credit balances that still remain in the bank accounts).  They are not assets that are at risk of dissipation if a receiver is not appointed, leaving aside the question of taking proceedings to recover such assets.

(2)   Assets that have not been dissipated

(a)   The land

71. In 2004 TIL acquired certain rights over a piece of land situated in front of the China factory (“the land”).  But short of inferring a risk of dissipation from past questionable conduct or low commercial morality, there is no evidence of any impending transaction.

(b)   Assets of the Companies transferred to and now held by D3

72. The remaining assets identified are said to be all the business and assets of D3 derived from the Companies’ assets, business, operation and customers which, on the plaintiffs’ case, are held by D3 as constructive trustee for the Companies.  However, it is not entirely clear if it is the plaintiffs’ case that D3 owns nothing in its own right on the basis that it never operated a separate business or only those not “derived” from the plaintiffs’ assets, business etc.  The possibility of a receivership order extending over assets other than the assets belonging to the Companies cannot be ignored and is of particular relevance on the issue of potential damage to D3.

(3)   Whether real risk of dissipation shown

73. D3 is a Hong Kong company.  There is no evidence of any past dissipation by D3 as distinct from the Companies.  D3’s business is largely local.  Its offices, staff, customers and operations are all primarily based here.  Mr Kam submitted that in those circumstances it is difficult to see a realistic likelihood of a disposition of assets and business outside the territory.  He further submitted that there is no evidence to indicate that there will be such dissipation otherwise than for entirely normal and proper commercial purposes or for reasons that are unjustifiable and otherwise than for fair market value.

74. I bear in mind that there must be “solid evidence” of the risk of dissipation.  A receivership order is a serious infringement of rights and is only justified on appropriately clear and strong facts and risks.  The standard of proof of the real risk of dissipation is relatively high: see Colman J in Laemthong International Lines Co Ltd v Artis [2005] 1 Lloyd’s Rep 100 at §60 citing Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272.  That standard is applicable to all applications whether inter partes or ex parte.

75. In the present case admittedly there are past questionable transactions.  However, I am not persuaded that there is “solid evidence” of the risk of dissipation on the facts as presented as distinct from inferring such a risk from the conduct or commercial morality of the defendants.

(C)   Whether there is no or no current effective protective regime and some form of interim protection should be given to preserve the status quo

76. The defendants have offered to provide undertakings not to deal with the assets of the Companies and D3 other than in the ordinary course of business and for fair market value until final disposition of this action or further order of the court.  That is a matter that the court must take into consideration in its assessment of the risk of dissipation.

77. The plaintiffs highlighted the fact that no offer of undertaking of any kind was given until receipt of the written submissions of their counsel on 22 February 2016.  That may be so but that is no reason for the court to disregard the offer now on the table.

78. The plaintiffs consider that the undertakings do not offer sufficient protection.  It was said that the misconduct of the Chan brothers, if proven as alleged, is akin to theft and if no receiver is appointed, the Chan brothers would remain in sole control of the Companies and D3 without supervision and the Companies would suffer irreparable damage that cannot be compensated for by damages.  It was said that there would be no means of policing and monitoring compliance with the undertakings. 

79. But at the forefront of their submissions is the complaint that D3 has adduced no evidence on the nature of the business and operation it is running, what assets it is holding, or how its business and operation would be adversely affected by the appointment of interim receivers and managers.  If no appointment were made, the court would continue to be kept in the dark as to why the Companies’ assets and business were transferred and what has become of them.

80. While the undertaking offered follows the wording of the undertaking given in Macau First Universal International Limited v Ding Xiaohong & Others, unreported, CACV 193 of 2011, 31 July 2012 at §22(3) which the Court of Appeal (at §42) considered offered “considerable protection”, Mr Tang submitted that the factual matrix of that case was materially different.  Macau First was not a dispute between two shareholders over the control of the companies, but a dispute as to who is the sole beneficial owner of the companies.  Where the parties are both directors/shareholders of a company, who both have a stake in the company and who are jockeying for its control, any transfer of the company’s funds by a shareholder/director to another company belonging to himself would be viewed with concern: see Macau First at §§8 and 41.  The Court of Appeal did not elaborate further as to whether that difference necessarily renders the undertaking inadequate.

81. Mr Tang then referred to Michel Hazan v HK Sindy Footwears Ltd, unreported, HCMP 1240/2006, a case where the applicant, one of two shareholders of X, having commenced proceedings under s168A that he be bought out and another writ action concerning his alleged 50% interest in Y a related company, applied for the appointment of interim receivers.  The plaintiffs relied on that decision for the proposition that undertakings to keep proper books and accounts of the Companies and not to dispose of the Companies’ funds and assets otherwise than in the ordinary course of business are insufficient.

82. In that case, immediately prior to the commencement of the proceedings the plaintiff had been actively involved in managing and running X’s business together with his co‑owner with whom he had been cohabiting until they fell out.  In the present case, the plaintiffs have not been involved in managing the business of the Companies since P2 was removed as director almost 10 years although they remain as 50% owners of the Companies.  The reality is that for almost a decade the Chan brothers have been in sole control of the Companies and of their books and accounts.

83. The passage in HK Sindy Footwears on which the plaintiffs rely has to be understood in the context of the facts pertaining in that case. Those facts are very different from the present case and what is appropriate in one factual situation may not be in a different factual situation.  The adequacy of protection presently offered must be assessed against the facts of this case and not some other case involving a different set of facts.  

84. On the plaintiffs’ case, the Chan brothers are the real owners of D3 which they set up (through nominees) as the recipient of the assets and business that they intended to and have stripped away from the Companies.  Presumably the purpose of this elaborate plot is to steal the plaintiffs’ share of the business for themselves and continue to exploit and carry on the “old” business but without having to account to or share profits with the plaintiffs.  In that scenario, what would be the point of the Chan brothers destroying the very business they set out to “steal” for themselves in the first place?  When the Chan brothers themselves have a 50% stake in the assets transferred, the notion that they would run down the business or to dissipate any of the assets does not seem to make any sense.  

85. For the reasons given, I consider that the undertakings offer adequate protection.

(D)   The risk of damage if the appointment is made and whether it can be adequately compensated by a cross undertaking in damages

86. As earlier noted, it is not entirely clear if it is the plaintiffs’ case that D3 owns nothing in its own right or only those not “derived” from the plaintiffs’ assets, business etc.  As there is some indication of business dealings between D3 and the Companies prior to the transfers in 2014, even if the plaintiffs were to prevail at the end of the day the possibility of some part of D3’s business was not derived from the Companies cannot be excluded at this stage.  Plainly the risk of damage to D3’s own business is a relevant consideration.

87. Mr Kam submitted that the powers sought amount to a complete takeover not only of the Companies but also of D3.  The plaintiffs have intimated that they (in the shape of P2 and his wife who had previously worked at the Companies) are ready to assist the receivers in operating the business.  On the footing that an appointment is made, the plaintiffs in assisting the receivers will gain unlimited and untrammelled access to all information concerning D3’s own business including customer databases, financial details, sensitive business/research plans when, on the Chan brothers’ case, D3 and the Companies are business rivals and it remains a possibility that the plaintiffs may not prevail at the end of the day.

88. Pausing here, I make two observations: first, as to the assistance the plaintiffs could potentially render, it is to be noted that the plaintiffs (or more accurately P2) has not been involved in running the Companies since 2006 when P2 was removed from the Companies’ boards.  That was a decade ago which, on any view, is a significant period of time.  It is unclear whether P2 has kept up with that particular manufacturing sector and trading in automobile parts, or, expressed in laymen’s terms, is “up to speed” with how those pertinent sectors have evolved and developed.

89. Second, in §53 of the plaintiffs’ reply submissions, it was suggested that the proposed receivers and managers “would manage the business with the assistance of the existing management and employees”.  The “existing” management would include D2 who currently is its director of operations.  The notion that D2 and P2 would both be involved in the running the business is a non‑starter given the history of animosity and hostility between the two camps and, in my view, a sure recipe for disaster. 

90. Moreover, that the appointment of receivers is likely to impact adversely on the reputation of a company is a view that is widely held and a reality in the commercial world.  It creates a negative impression and is generally not well perceived.  How severe the impact is likely to be in any particular case is necessarily fact‑sensitive.

91. In the present case, there is evidence to the effect that Amax’ business model is that it acquires goods from a number of manufacturers to spread out risk.  TICL was not its exclusive manufacturer.  The possibility of business being easily diverted to competitors is there.

92. There is also the consideration of the costs of the receivership.  At the rate the 2011 action has progressed, any appointment of receivers is likely to last for at least several years.  As a practical matter, it is not evident how the receivership is to be financed and funded.   

93. The Companies (which have not been in operation since February 2015 as a result of the petitions) have been suffering losses since 2012.  The audited financial statements of the Companies for 2014‑2015 show a combined loss of approximately $11.5 million.  Currently they are not generating any income, much less any profit.  Such cash assets as have been identified of the order of $300,000 (assuming they have not been expended) are unlikely to go very far.

94. As to the plaintiffs’ cross undertaking as to damages, D3’s position is that the loss or damage to goodwill and reputation sustained as a result of receivership and loss of business opportunities are not readily quantifiable.  There is certainly an element of truth in the submission.  In that context, the cross undertaking will not have the effect of making D3 whole in the event that the plaintiffs do not ultimately prevail in their action.

95. If no receiver is appointed, the loss the plaintiffs would suffer is the risk of dissipation of assets of the Companies.  Should that occur, it might lead to a tracing exercise and possibly more proceedings to recover the wrongly dissipated assets, in other words, more legal costs.  On that basis, the loss sustained is compensable.

CONCLUSION

96. The appointment of a receiver is recognised to be an extremely drastic remedy.  Because of its intrusiveness, the courts have tended to regard the remedy as one of last resort.  It is only granted if the court is convinced of its necessity and not otherwise.  The court’s jurisdiction is to be exercised with great circumspection.

97. What is really at stake is control over the Companies and D3.  That is the subject matter of the underlying action and one that should be resolved in due course.  In the absence of a compelling case of dissipation of the Companies’ assets being made out, it would be wrong to accede to the application.

98. Having regard to all the matters set out above, I do not consider this to be an appropriate case for the appointment of receivers and managers.  Accordingly, the plaintiffs’ summons is dismissed with an order nisi that the costs be to the defendants, with certificate for two counsel, such costs to be taxed if not agreed.