TSUI MEI YUK JANICE and WONG SUN KEUNG the Joint and Several Liquidators of HMV MARKETING LTD (in Voluntary Liquidation) v. PANORAMA CORPORATION LTD AND OTHERS

HCMP 784/2020

[2022] HKCFI 260

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 784 of 2020

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BETWEEN

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D E C I S I O N

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This Application

1.  By an Originating Summons dated 4 June 2020, the Plaintiffs as the Joint and Several Liquidators (“Ls”) of HMV Marketing Limited (“HMV”) applied for:

(1) A declaration that a transfer of HK$3,022,679.56 from HMV to the 1^st Defendant (“Panorama”) on 19 November 2018 (the “Transfer”) was an unfair preference under ss.266 and 266B of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”);

(2) A declaration that the 2^nd Defendant (“Mr Shiu”) and the 3^rd Defendant (“Mr Sun”) as directors of HMV were each guilty of misfeasance, breach of duties, and breach of trust and are liable to contribute to the assets of HMV pursuant to s.276 of the CWUMPO; and

(3) An Order that Panorama, Mr Shiu, and Mr Sun do jointly and severally pay to Ls and/or contribute to the assets of HMV for the Transfer.

2.  The Originating Summons referred to other reliefs, which Ls confirmed at the hearing to not pursue. Ls also made clear that their case against Mr Shiu and Mr Sun is confined to an alleged breach of fiduciary duty in their causing/approving the Transfer. The alleged misfeasance is misfeasance by reason of such breach of duty. Ls also formally dropped the claim for breach of trust.

The Objective Facts

3.  The objective facts are all reflected in documents and are not in dispute.[1]

4.  HMV operated the well-known HMV-branded retail and online stores in Hong Kong. The stores sold entertainment products, in particular CDs, VCDs, and DVDs. HMV was an indirect wholly-owned subsidiary of China Creative Digital Entertainment Limited, a company listed on the Stock Exchange of Hong Kong (“ListCo”).

5.  Mr Shiu was the chairman and an executive director of ListCo. Mr Sun was an executive director.

6.  Panorama was a program provider owning a movie library and supplying VCDs and DVDs. It had been one of the key suppliers to HMV for a long time. It was founded and until 2018 ultimately owned by Mr Fung Yu Hing Allan (“Mr Fung”).

7.  On 9 January 2017, ListCo through a subsidiary and Mr Fung entered into an agreement for Mr Fung to sell a 70% stake in Panorama to ListCo. The long-stop date, i.e., the date by which the transaction must be completed or the agreement would lapse, was 28 February 2017. But, as we will see, this would be extended for a lengthy period of time.

8.  HMV and Panorama continued their trading relationship. But, according to Ls and not disputed by the defendants, HMV itself was facing some difficulty and was already balance-sheet insolvent.

9.  For 2017, monthly sales by Panorama to HMV were around HK$200,000 to HK$250,000. It took HMV on average one to two months to settle the invoices. For January to April 2018, the aggregate sales were around HK$1 million. HMV settled the sum (save for part of the invoice for April) at the end of May 2018.

10.  According to Mr Shiu, in around July 2018, HMV experienced a more dramatic downturn in its business. Ls do not dispute this. Indeed, they go further to say, and the defendants do not dispute, that by mid 2018 HMV was cashflow insolvent.

11.  Part of Panorama’s invoice to HMV for April 2018 and all the invoices for May to November 2018 were not settled. The invoices showed a general increasing trend, peaking in October 2018 when the amount was around HK$940,000.

12.  On 1 November 2018,[2] ListCo and Mr Fung finally completed their transaction. Panorama became an indirect 70% subsidiary of ListCo. Mr Fung and his team, however, remained in management.

13.  On 19 November 2018, Mr Shiu and Mr Sun as directors of HMV caused/approved the Transfer, by which HMV settled the invoices from Panorama up to that time.[3]

14.  According to both Mr Shiu and Mr Fung, and not disputed by Ls, shortly after the Transfer, Panorama supplied a further HK$1,249,272 worth of stock to HMV.[4]

15.  On 18 December 2018, ListCo decided that HMV should, and HMV resolved to, enter into voluntary liquidation.

The Liquidators’ Case

16.  As Ls have shown and the defendants do not dispute, at the of the Transfer HMV was already insolvent.

17.  As Ls have identified and the defendants do not dispute, since Panaroma was “a person connected with” HMV and the Transfer did have the objective effect of preferring Panorama over other creditors, s.266(5) of the CWUMPO applies such that HMV is “presumed, unless the contrary is shown, to have been influenced, in deciding to [make the Transfer], by the desire [to prefer Panorama over others]”.

18.  Ls further argue that the objective facts show HMV must have desired or been influenced by a desire to prefer Panorama. There is, as Ls argue, no other way to explain the objective facts.

The Law on Unfair Preference

19.  Section 266 of the CWUMPO allows liquidators to apply to the court for an order to void an “unfair preference” given by the company to a person at a “relevant time” before the winding up of the company.

20.  Subsection (4) states that the court must not make an order to void an unfair preference “unless company was influenced, in deciding to give that unfair preference, by a desire to produce in relation to that person the effect as mentioned in [section 266A]”.

21.  Desire is subjective. It is a positive wish for a matter to occur. Importantly, it is different from intent. Intending a matter to occur is not equal to desiring it. A person can intend matter X to occur because he/she desires matter Y which happens to be incidental to matter X. This does not mean he/she desires matter X. See: Re MC Bacon Ltd [1990] BCLC 324 at 335E-336B. See also: Re Phantom Record Ltd, HCMP 2770 of 2003, 7 December 2006, per Kwan J (as she then was) at §87.

22.  Subsection (5) provides that where the company has given an unfair preference to a person connected with it, the company “is presumed, unless the contrary is shown, to have been influenced, in deciding to give [the unfair preference], by the desire mentioned in subsection (4).”

23.  The presumption is no doubt useful. It cannot be practical or fair for the liquidator to have to prove what the former management of the company subjectively desired. But the use of the presumption should not be overstated. It merely reverses the burden of proof. See: Trustees of the Property of Hau Po Man Stanley (in bankruptcy) v Hau Po Fun Ivy [2004] 3 HKC 461, per Lam J (as he then was) at §46.

24.  It is important to note, as it is too often forgotten: reversing the burden of proof does not alter the standard of proof. A director facing the presumption does not need to prove his defence to any standard higher than balance of probabilities. Moreover, the usual principles on assessing evidence continue to apply.

25.  Pursuant to s.266A, a company gives an unfair preference to a person if the person is a creditor or surety or guarantor and the company does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the company going into insolvency, would be better than that person would have been if that thing had not been done.

26.  Under s. 266B, the relevant period is 6 months before the date of the winding up of the company, or 2 years before the date if the person is a person connected with the company.

The Issue in Dispute

27.  Ls and the defendants are ad idem that the Transfer was in fact an unfair preference, that HMV was insolvent at the relevant time, and that Panorama was a person connected with HMV. The presumption in s.266(4) applies. The only issue between the parties is whether the defendants have overcome the presumption and showed that the company acting through Mr Shou and Mr Sun was not influenced by any desire to prefer Panorama.

28.  The parties further agree for this issue to be determined on the affidavit evidence alone. This is understandable and likely sensible, given that the amount in dispute is not very substantial. But it does cause some difficulty.

29.  I have read the affirmations filed by the parties carefully. In particular, I have borne in mind the sequence in which any point is raised, whether the other side has had an opportunity to respond and has done so, what evidence the other side could have gathered to refuted the point and whether it has done so. In the absence of cross examination, this is the fairest way to approach the evidence.

The Defendants’ Evidence

30.  Mr Fung and Mr Shiu both say in their affirmations that HMV and Panorama, whilst fellow subsidiaries of ListCo from 1 November 2018, maintained separate businesses and did not act in a concerted manner. This appears credible considering that Panorama was an established company, it had its own management team, its business was different from HMV’s, ListCo was interested in Panorama’s movie library, and Panorama became a subsidiary of ListCo only on 1 November 2018 and, even after that, Mr Fung remained a 30% shareholder.

31.  Ls do not dispute the above in their reply affirmation. Further, since Ls are in control of HMV, I would have expected Ls to cite evidence of collusion or coordination if there is any.

32.  Mr Shiu recalls that, in around July 2018, HMV experienced a further downturn. A number of its suppliers stopped doing business with it. Mr Fung says that he had heard the same from his sources. This again appears inherently credible. In particular, it is consistent with the fact that Panorama later supplied a substantially increased amount of stock to HMV (a matter which I will turn to below).

33.  Ls do not dispute the above. If anything, their case that HMV became cashflow insolvent in around mid-2018 supports what Mr Shiu and Mr Fung say.

34.  Mr Fung and Mr Shiu then explain that HMV had to look to Panorama as a supplier who was still willing to do business with HMV to supply more stock. This is well understandable. HMV’s key business was its retail stores. As Mr Shiu puts it, HMV was a “prominent music retailer with several flagship stores in Hong Kong”. It needed to show inventory. Empty shelves would be a sure way to hasten the perception of it being in some difficulty.

35.  Ls again do not dispute what Mr Fung and Mr Shiu say. They do not even suggest that HMV had other suppliers who would be willing to increase their supply.

36.  Mr Fung and Mr Shiu say it was in the above circumstances that Panorama “proposed” to HMV for HMV to settle the then outstanding invoices before Panorama deliver further supply.

37.  Ls argue that the above was not commercial pressure. They do not, however, dispute that it was Panorama which wanted settlement of its past invoices and that this led to the Transfer.

38.  Mr Fung and Mr Shiu both point out that, shortly after HMV settled the past invoices, Panorama delivered HK$1,249,272 worth of stock to HMV. As I noted earlier, historically Panorama had invoiced HMV around HK$200,000 to HK$250,000 per month. This increased to around HK$940,000 in October 2018. A delivery of HK$1,249,272 worth of stock is a yet further increase.

39.  Ls do not dispute these figures.

40.  There is one issue which I find potentially relevant. Mr Fung and Mr Shiu both explain that Panorama’s supply to HMV was shifting to “a consignment basis (as opposed to sale and purchase)”. But they do not say how much of the HK$1,249,272 was on a consignment basis and what “consignment basis” meant. Consignment can mean the goods stay as the consignor’s goods until sale. The term may also be loosely used to mean that the supplier would be paid only if and after the goods is sold.

41.  Panorama has lodged a Proof of Debt for HK$4,190,675.21, including the sum subject of the Transfer. Minus the Transfer, the amount claimed is HK$1,167,995.71. This suggests that the HK$1,249,272 worth of new stock did not remain as Panorama’s goods. In other words, by its delivery of stock, Panorama continued to expose itself to the risk that HMV may not be able to pay. Indeed, this is a point which Mr Fung and Mr Shiu seek to make in their affirmations.

42.  Ls have not disputed the point, nor made any point in its reply affirmations or submissions to the effect that, because the delivery of stock was on consignment, it can be seen HMV was seeking to protect Panorama from the potentiality or eventuality of its inability to pay.

43.  Lastly, Mr Shiu says that, as far as he can recall and estimate, from April to November 2018, HMV paid suppliers on normal commercial terms in excess of HK$30 million and paid rent, building management fees, and rates of at least another HK$20 million. He notes that the Transfer was only ~6% of this total.

44.  Being a small percentage of total payments made hardly tends show the Transfer to be not influenced by any desire to prefer. However, that there were other payments, especially to suppliers, does suggest that payment to Panorama as a supplier (especially as an important supplier) was normal in the course of HMV trying to continue business.

45.  Ls do not dispute Mr Shiu’s figures. Ls have not run any case – or produced evidence to suggest – that the payment to Panorama (with or without the further delivery of stock) was so out of line with the treatment of other suppliers (in particular any suppliers who were willing to continue to supply) that HMV was evidently desiring to prefer Panorama. Ls refer to the total outstanding payables. But this only shows HMV to be in debt and in financial difficulty. It does not in any way compare the treatments of Panorama versus other suppliers.

46.  Ls having been in control of HMV for some time and having gone through its finances, if there was any indication that the payment to Panorama was seriously out of line with the treatment of comparable others, they would no doubt have run their case and adduced evidence accordingly.

Ls’ Criticisms of the Defence

47.  In their affirmations and submissions, Ls make 5 criticisms of the defence case.

48.  First, Ls argue that there was no need for HMV to cultivate its relationship with Panorama and/or to settle the substantial debts since the two were under common control.

49.  This argument is misplaced. The defence case was never that HMV was under pressure to pay Panorama, or that Panorama threatened to cut the relationship absent payment. The defence case is that many other suppliers had deserted HMV. HMV needed stock to sustain its stores. It looked to Panorama. But it had already ran up the total due to Panorama. Panorama asked for settlement. HMV paid in order to facilitate its receipt of the further stock.

50.  Ls’ argument might be valid if (a) ListCo would have directed Panorama to help HMV with a delivery of stock regardless; or (b) HMV’s business was so hopeless that there could not have been a genuine wish for stock to sustain its stores. There is no evidence of either scenario. Indeed, scenario (a) is contradicted by the matters discussed in paragraphs 30 to 31 above. In particular, Mr Fung remained a 30% shareholder of, and he and his team were still running, Panorama. I do not see how ListCo could have simply directed it to help HMV against its interest. As for scenario (b), it is contradicted by the matters in paragraphs 32 to 45 above.

51.  Ls cite Re Sweetmart Garment Works Ltd [2008] 2 HKLRD 92. This does not assist. In that case, the defence positively alleged that the company entered into a mortgage to preserve its relationship with the bank. Barma J (as he then was) then pointed out at §§30-31 that this was unrealistic and nonsensical since the company could not have continue its business for any longer time and the mortgage was not given in return for any tangible benefit. The case does not establish any requirement that there must be some desire to cultivate the relationship or pressing need to pay.

52.  Second, Ls point to the timing, namely that HMV had been in difficulty for some time, that the Transfer was on 19 November 2018 and, that within a month, on 18 December 2018, ListCo decided HMV should go into voluntary liquidation.

53.  Ls argue that this timing justifies an inference that ListCo and HMV already knew that HMV “was hopelessly insolvent around the time of the Transfer, and steps had to be taken to produce a favourable result to [Panorama].” I disagree. As I mentioned above, the matters in paragraphs 32 to 45 above run counter to such an inference.

54.  Third, Ls refer to the substantial total outstanding payables. As I explained earlier, this only shows HMV to be in debt and in financial difficulty. It does not compare the treatments of Panorama versus other suppliers.

55.  Ls did not expressly argue, but may be taken to imply, that the timing and other circumstances combine to be suspicious and suggestive of a desire to prefer. I would agree. But that would be before and without taking into account the defendants’ evidence. One cannot use the suspicion to counter positive evidence.

56.  There is one potential spin on timing and circumstance which I have wondered about.

(1) After HMV first experienced difficulty and was balance sheet insolvent, it took longer to settle Panorama’s invoices.

(2) During this time, ListCo had committed to but was awaiting to complete its acquisition of Panorama. It might have been in ongoing negotiation with Mr Fung, not least for repeated extension of the long-stop date.

(3) On 1 November 2018, the acquisition was finally completed.

(4) On 15 November 2018, ListCo issued some shares to Mr Fung.

(5) On 19 November 2018, HMV made the Transfer.

(6) From ListCo’s perspective, the Transfer meant it would enjoy (via Panorama) an indirect 70% interest in the money. Since HMV was already at least balance sheet insolvent, this means ListCo benefited to the tune of around ~HK$2.1 million.

(7) On the other hand, before completion of the acquisition on 1 November 2018, ListCo could not be sure that it would benefit from any payment by HMV to Panorama.

57.  This spin somewhat focuses on the proximity in timing of the Transfer following ListCo’s formal acquisition of Panorama. Alas, it is not how Ls have presented their case. In any event, for this to succeed would require inferences which, in the absence of evidence, I am unable to draw.

58.  Fourth, Ls assert that “there was never any credible evidence suggesting any genuine commercial pressure exerted by [Panorama] … nor did [HMV] need to make the Transfer in order to enable [it] to survive the financial difficulties.”

59.  This is a variation of Ls’ first argument. For similar reasons, I disagree with it.

60.  Ls additionally refer to 4 pieces of litigation, 2 of which were before the Transfer. Counsel in written submissions argues that this shows a contrast between HMV’s payment of Panorama (without any pressure) and its treatment of those 4 creditors (resistance to payment).

61.  The argument cannot be heard. When Ls referred to the pieces of litigation in their reply affirmation, it was not at all clear what point was sought to be made. There was not even an attempt to compare any of those other creditors with Panorama. The exhibited writs suggest they are not comparable.

62.  I compliment the cleverness of Counsel. But I also wonder if it may reflect that Counsel sees the need to say something about how the treatment of Panorama was out of line, and the best he could do was a point which was not intended, or at least not made clear, in the affidavit evidence.

63.  Fifth, Ls criticizes the defence for giving a late explanation.

(1) Ls wrote to the defendants on 23 July 2019 for particulars of the Transfer and reasons as to “why [Panorama] shall have a higher priority than the general creditors”, and/or to demand payment in the amount of the Transfer. Mr Shiu’s reply was not entirely the same as his defence now.

(2) Ls faults the defendants for delay and needing extension of time to file their affirmations.

64.  I do not think any weight can be placed on the latter. As for the former, I have read Ls’ letters and Mr Shiu’s reply carefully. Whilst I agree Ls that the reply was not entirely the same, it was also not altogether different.

65.  There are aspects of the defence case which Mr Shiu could be faulted for not having mentioned in his reply, e.g., other suppliers having deserted HMV, and the subsequent delivery of stock. But considering that he was replying in person and in somewhat of a vacuum of information, a failure to mention some matters cannot be viewed too suspiciously.

66.  The way Ls put the question may also have led to the approach of the reply. All in all, I do not see sufficient cause to reject the defendants’ affidavit evidence. What Ls complain of may have implications for costs, which I will deal with later.

Misfeasance and Breach of Duty

67.  Ls’ allegations against Mr Shiu and Mr Sun for misfeasance and breach of duty under s.276 of the CWUMPO are, as their Counsel puts it, “intertwined” with their case on unfair preference.

68.  Thus, my findings above on unfair preference to a large extent, if not entirely, dispose of the allegations of misfeasance and breach of duty.

69.  Counsel for Ls make an additional point that Mr Sun did not file any affidavit evidence and Mr Shiu in his affirmations did not explain how he (or Mr Sun) took into account the interest of creditors.

70.  However, Ls have not raised such a point in their affirmations. In their first affirmation in support of their application, they first expressly put their case on misfeasance and breach of duty as consequential to their case on unfair prejudice. They recite the duties which a director owes to a company.

71.  Ls then allege that Mr Shiu and Mr Sun procured the Transfer knowing “such Transfer can prejudice the position of the general and/or unsecured creditors”. This is a truism; every payment to one can prejudice the position of others. At most the point would be understood as a repeat of Ls’ case on unfair preference.

72.  Under the umbrella of the above truism, Ls make 4 further allegations. Firstly, Ls say Mr Shiu and Mr Sun knew HMV was insolvent. This is not denied.

73.  Secondly, Ls say Mr Shiu and Mr Sun had interest and roles in ListCo, and “there is clearly incentive and/or desire … to commit the wrongdoings of unfair preference”. This is another repeat of Ls’ case on unfair preference.

74.  Thirdly and fourthly, Ls fault Mr Shiu and Mr Sun for failing to preserve assets and for acting without honest belief. The allegations are conclusory. They do not further matters, especially when made in affidavit evidence. At most they invite denials. Mr Shiu and Mr Sun could not be expected to respond by detailing how they made efforts to preserve overall assets and how they were honest.

75.  Allegations, especially when made in affidavit evidence for a matter to be determined without a trial, must be made with particulars and in sufficient particularity before any criticism can be leveled at the opposite side for not adducing meaningful substantive evidence in response.

76.  I do not think Ls have made out a case against Mr Shiu or Mr Sun on misfeasance or breach of duty.

Conclusion and Costs

77.  In sum, I decline to grant Ls’ application.

78.  As for costs, I begin with what Lam J (as he then was) said in Hau Po Man at §46: one must be careful with relying on the presumption about desire to give unfair preference. Where a defendant shows otherwise, he would normally be entitled to costs.

79.  The circumstances of this case have some special features.

(1) Ls wrote to the defendants as early as in July 2019. Only Mr Shiu replied. The reply was short and scant on details.

(2) As matters proceeded, the defence went some way beyond the initial reply. Important details were raised late.

(3) To a very large extent, the defendants benefited from this case being determined without a trial, and Ls not having had a full opportunity to test the defence evidence.

(4) Ls had the particular difficulty that the defence case was fully revealed only in the affirmations in opposition, by which time there was a timetable or time pressure to proceed to hearing. It appears from Ls’ reply affirmation that they conscientiously tried to avoid expanding the scope of evidence, which would likely have caused endless rounds of affirmations.

80.  In all the circumstances, I make an Order nisi that there be no order as to costs.

81.  I thank counsel and solicitors on both sides for their assistance.