CHAU HUNG KAU v. TEXGAR LTD. AND OTHERS

HCMP1372/2000

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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JUDGMENT ON MOTION

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1. This is a motion brought by the petitioner herein ("the applicant") for an order of committal against Tsui King Yeung, the 2nd respondent herein ("C1") in his personal capacity and as director of Texgar (Holdings) Limited, the 3rd respondent herein ("C2") for his refusal or neglect to comply with the Orders of Yeung J granted herein on 16 June 2000 and of Yam J granted herein on 4 August 2000.

2. The Notice of Application for leave to apply for order of committal, the Statement in support, the Notice of Motion and the supporting affirmations had all been served on C1 and C2. At the time when the aforesaid Orders of Yeung J and Yam J were made and at the commencement of these committal proceedings on 1 September 2000, C1 and C2 were legally represented. They began to act in person after 27 November 2000. At the hearing of the motion, C1 appeared in person.

Background

3. The applicant brought the Petition herein under section 168A Companies Ordinance for minority shareholder's reliefs on the basis of certain alleged misconduct on the part of C1 as a director of the 1st respondent herein ("the Company"). One of the allegations concerns a sum of $4.2 million, being the balance of the proceeds of sale of a property owned by the Company and mortgaged to China State Bank Limited. The applicant's allegation is that C1 had caused C2 to institute a bogus action against the Company (HCA No.17117 of 1999) and proceeded to obtain judgment in default. Thereafter, C2 obtained a garnishee order on C2's bank account, thereby obtaining the $4.2 million.

The motion

4. On 16 June 2000, after a contested hearing before Yeung J, an order was made requiring C1 and C2 to jointly pay into court the sum of $4,293,958.31 to abide by any further order of the court. The order further provides that :

"The 2nd Respondent shall within 21 days from the date hereof serve upon the Petitioner an affidavit wherein he shall provide a list of the following documents of the 3rd and the 4th Respondents from the date of their establishment of business to date;

(a) trading transaction, financial arrangements, payment of any fees and charge or any other amounts, between the 1st Respondent and the 2nd, 3rd and 4th Respondents; and

(b) audited financial statements, profit and loss accounts, books records and management accounts, bank statements with the China State Bank Limited and other banks, credit and other bank facilities, letters of credit, shipping documents, purchase orders and sales confirmations."

("the 1st Disclosure Order").

5. On 7 July 2000, C1 and C2 obtained from Yam J an order reducing the amount to be paid into court to $300,000. Yam J also extended the time for complying with the 1st Disclosure Order to 21 July 2000. C1 and C2 paid $300,000 into court on 14 July 2000.

6. The applicant subsequently discovered that C1 and C2 had not disclosed in the affirmation they filed for the hearing before Yam J some other bank accounts they held. Accordingly, on 4 August 2000, the applicant applied ex parte on notice to vary the Order made on 7 July 2000. Yam J made an order which in effect was to restore the first injunction order by requiring C1 and C2 to jointly pay into court within seven days a further sum of $3,993,958.31. Yam J also ordered C1 and C2 to make disclosure in the following terms :

"Within three days after this order has been served on the 2nd Respondent, the 2nd Respondent must serve on the Petitioner's solicitors an affirmation informing the Petitioner of all assets held by the 2nd and 3rd Respondents, including all monies held in Bank accounts, and whether in their own name or not, and whether held solely or jointly."

("the 2nd Disclosure Order").

7. These orders were all served on C1 and C2 duly endorsed with penal notice. The time for complying with the two disclosure orders and for making payment into court have long expired. Save a sum of $4,000 paid on 16 August 2000, neither C1 nor C2 has paid the whole sum of $3,993,958.31 into court. C1 does not dispute this.

8. C1 had, in his personal capacity and as a director of C2, filed a total of six affirmations since the making of the injunction orders, the last one filed on 10 October 2000 was to oppose the applicant's application for appointment of Receiver to C2.

9. The applicant contends that notwithstanding these affirmations, C1 and C2 have not fully complied with the two disclosure orders. The inadequacies of C1's affirmations are set out in the 4th affirmation of Yip Wai Shing filed in support of the motion, in particular paragraphs 13, 17 and 21. The categories of documents which the applicant says are within the ambit of the two disclosure orders, but have not been disclosed had also been set out in two letters dated 1 August 2000 and 17 August 2000 (second letter) from the applicant's solicitors to the solicitors then acting for C1 and C2.

10. C1 disagreed that the two disclosure orders have not been complied or complied in full. He has filed no affidavit on the motion. He also elected not to give any evidence at the hearing of the motion. The only evidence before the court on this disputed point is therefore the affirmation in support of the motion and the several affirmations filed by C1 in connection with the disclosure orders.

11. The 5th affirmation filed on 6 July 2000 is the first of the affirmations filed by C1 pursuant to the two Orders granted by Yeung and Yam JJ. In this affirmation, C1 set out his and C2's financial position with a view to persuade the court to reduce the amount ordered to be paid into court by Yeung J. Subsequent events show that C1 had failed to make full disclosure of his and C2's bank accounts and financial position, a matter which C1 does not dispute. In paragraph 20 of the affirmation, C1 stated that a list of the documents will be exhibited in his 6th affirmation in compliance with the 1st Disclosure Order.

12. In the 6th affirmation also filed on 6 July 2000, C1 disclosed a total of 16 invoices issued by C2 and the Company to the 4th respondent herein in the years 1996, 1998 and 1999 and 4 Documentary Credits issued also in 1996, 1998 and 1999. C1 stated in this affirmation that he would try to ascertain further documents as required by the 1st Disclosure Order. In his 7th affirmation filed on 21 July 2000, C1 exhibited further documents comprising 7 Documentary Credits, 9 invoices from a Tait Electronics Limited to the Company, 27 invoices from Tait Electronics Limited to C2, 9 invoices from the Company to the 4th respondent and 32 invoices from C2 to the 4th respondent. These documents cover the years 1994, 1995, 1997 and 1998. In the last paragraph of the affirmation, C1 stated that the 4th respondent had ceased business since January 1999. It is however to be noted that the invoices exhibited in the 6th affirmation include 3 invoices dated 8 and 9 February and 4 May 1999 from C2 to the 4th respondent.

13. C1 filed his 8th affirmation on 10 August 2000 in purported compliance with the 2nd Disclosure Order. He set out therein various bank accounts held solely or jointly by him. He referred to his 5th affirmation in dealing with the bank accounts and assets of C2. He also disclosed that C2 holds 100% interest in a mainland company called Guangzhou Texgar Telecommunications Engineering Co. Ltd ("廣州德士嘉通訊工程有限公司") ("GTTE"), and 50% of the shares in an associated company called Texgar Technology Limited ("TTL"). C1 claimed that C2 had made no capital contribution to GTTE and TTL was dormant. No document in relation to these companies was however exhibited. C1 further stated that he would provide further information after going through the records.

14. Then in the 10th affirmation filed on 10 October 2000 for the purpose of contesting the appointment of receiver to C2, C1 disclosed further bank documents relating to C2, invoices from C2 to the 4th respondent, financial statement of C2 for 1999 to 2000, Employer's Tax Returns in relation to his income and records of his bank accounts in Guangzhou, balance sheet and financial statements of the 4th respondent for the period ending August and June 2000 respectively, statement of account dated 21 August 2000 of GTTE and financial statements of GTTE for the year ending 31 July 2000. Again, it is noteworthy that the invoices from C2 to the 4th respondent, said to have ceased business since January 1999, extended into June 1999.

15. It is apparent from a reading of C1's affirmations that the two disclosure orders have not been complied in full. In particular, the audited financial statements, books, records and management accounts of C2 and the Respondent have not been disclosed at all. The bank documents, shipping documents and sales documents that were disclosed are clearly selective. I have no doubt that C1 and C2 :

(1) have failed to comply with the Order of Yam J made on 4 August 2000 in that the full sum of $3,993,958.31 has not yet been paid into court notwithstanding that the time for so doing had expired by 11 August 2000, and

(2) have failed to fully comply with the 1st and 2nd Disclosure Orders.

16. By way of submissions, C1 had advanced a number of matters relating to the relationship between the applicant and him, the background leading to their joint enterprise and the endeavours he had put into the Company to make it a reputable and profitable concern as well as the reasons for the failure to disclosure in his 5th affirmation the two bank accounts maintained with HSBC and Nanyang Commercial Bank, which led to the Order of 4 August 2000. These may well be relevant to the substantive proceedings on the Petition, but have little to do with the motion before this court.

17. Insofar as the order for payment in, C1 seems to be suggesting that he and C2 are at the present moment financially unable to do so, but it is expected that after collecting the trade debts and receivables, C2 may be able to do so in the second half of this year. The issue of impecunoisity is not borne out by any evidence before this court. The 5th affirmation in which C1 attempted to set out his financial position has been shown to be incorrect and unreliable. This court cannot act on the words of C1 made by way of submissions. As to the prospect of C2 to meet the Order, there is the 1st Report of the Receivers which gives some support to this. If indeed C1 is financially incapable of meeting the Order, the proper course is to depose to the same on affirmation giving full and frank particulars of his financial means. This was not done. Indeed, shortly after the Order of 4 August 2000, C1 and C2 had applied to vary it in respect of the amount to be paid into court. C1 was cross-examined at the hearing of the application. In the end, Seagroatt J refused the application, and further made adversed findings against C1's credibility. Seagroatt J concluded that C1 was neither truthful nor forthcoming with regard to the financial matters of C2 and himself. I do not consider that the matters raised in C1's submissions as justifying or explaining the failure to make the payment into court as ordered. I am satisfied beyond reasonable doubt that C1, in his personal capacity and as director of C2, is guilty of contempt of court in failing to pay into court the full sum of $3,993,958.31 by 11 August 2000.

18. As for the 1st and 2nd Disclosure Orders, C1 maintains that he has fully complied with them. He further stated that he had in his 10th affirmation exhibited the financial documents of GTTE. The fact is : this 10th affirmation was only filed in October, months after the time for complying with the 1st and 2nd Disclosure Orders had expired. Secondly, the significance of GTTE, namely, that it was formed to take over the business and staff of the 4th respondent, only came to light at the hearing before Seagroatt J during C1's cross-examination. Up to that stage, no document relating to GTTE had been disclosed. Thirdly, the documents of GTTE disclosed in the 10th affirmation are limited to bank statement and financial statement. This is hardly sufficient. I do not accept that this is a full and complete disclosure. In his submissions before this court, C1 claimed that GTTE had ceased operation and is not allowed to trade. No supporting evidence has been placed before the court. In my judgment, it is beyond reasonable doubt that C1 is in default of the two disclosure orders and the non-compliance amounts to contempt on C1's part.

Sentencing

19. In sentencing, counsel for the applicant draws my attention to Stone J's judgment in Abu Dhabi National Tanker Co. v. Lam Ming Chi [1998] 4 HKC 320 where it was pointed out that the prime consideration in sentencing contempt is the "signal importance of demonstrating to litigants that the orders of these courts are to be obeyed" : at page 336E. I respectfully agree. I accept counsel's submissions that a short term of imprisonment is an appropriate sentence here. In particular, it will serve to bring home to C1 and litigants in general that disobedience of court orders, albeit made in civil proceedings, are not trivial matters, and that court orders are not to be selectively interpreted and carried out by litigants to suit their own convenience.

20. As to the duration of the imprisonment, counsel for the applicant referred to three Hong Kong cases in which directors were committed for contempt : Pappadis v. Chan Shing Sheung Barry [1989] 2 HKLR 511, Cartier International BV v. Kaybee [1985] HKLR 127 and Excel Nobel Development Limited & Ors v. Wah Nam Group Limited and Matthew Chan Kwok Choi (unreported) HCA No.12439/1999). The sentences imposed ranged from 14 days plus a fine to one month imprisonment. In the recent case of Excel Nobel Development Limited & Ors, Beeson J imposed a 21 days imprisonment on a director who failed to comply with a disclosure order in aid of mareva injunction. There the director had failed to make a full disclosure and the disclosure was late by three weeks. The present case is more serious in that apart from the delay and failure to make full disclosure, C1 had also failed to comply with the order to make payment into court. Further, through his failure to make full disclosure, C1 had once misled the court into varying the amount to be paid into court. On the other hand, I note from the 1st Receiver's Report that it is very probable that C2 will be able to pay into court the full sum ordered in the near future, after collecting its trade debts and receivables.

21. C1 had advanced nothing by way of mitigation. While maintaining that there has been full compliance with the Orders, C1 stressed that he had co-operated fully with the Receivers of C2. He also claimed that the prospect of C2 collecting its debts and complying with the order of making payment into court will be jeopardized if he were to be imprisoned. It is true that the Receivers had stated in their 1st Report that C1 had been co-operative. Counsel for the applicant however put forward a draft 2nd Report in which it was suggested that C1 has ceased to be co-operative and had declined to provide information as to the business contacts of C2's customers, claiming that these are confidential information. C1 explained to this court that it will tantamount to divulging national secrets if he were to disclose the details of the business contacts, which relate to the military forces in the mainland. In determining the length of the sentence, I had disregarded the contents of this draft 2nd Report principally because it is in a draft form and little weight can be attached to it. Further, while co-operation with the Receivers will work to the benefit of C1 in determining the sentence, any refusal to co-operate should not be considered as an aggravating factor in these committal proceedings.

22. Having regard to the circumstances and the nature of the breach, I consider that 21 days imprisonment is the proper sentence to be imposed. Accordingly, I order that C1 be committed to imprisonment for 21 days for the contempt he commits both in his personal capacity and as a director of C2. I also order that C2 pays the applicant the costs of these committal proceedings on an indemnity basis, to be taxed if not agreed and paid forthwith.