EVERCHEER HOLDINGS LTD v. JAMES WARDELL AND OTHERS

HCMP 2388/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2388 OF 2011

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D E C I S I O N

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A. Introduction

1. On 21 November 2011 Evercheer Holdings Limited (“Evercheer) issued an originating summons under Rule 95 of the Companies (Winding‑up) Rules (“CWR”) challenging the decision of the liquidators of The New China Hong Kong Group Limited (respectively “Liquidators” and “NCHK Group”), which is in voluntary liquidation, rejecting a proof of debt submitted by Evercheer on 7 September 2011 (“Updated Proof of Debt”).  On 17 April 2012 the Liquidators issued a summons under Rule 96 of the CWR seeking to expunge an earlier proof of debt submitted by Evercheer dated 30 November 2001 (“Proof of Debt”).  The applications are mirror images of one another.  Evercheer was represented by Mr Rimsky Yuen SC and Mr Samuel Chan. The Liquidators were represented by Ms Linda Chan SC.

B1.  Background

2. Evercheer’s proof of debt relates to certain shares and incidental rights in a company which invested in an expressway in the Mainland.  Disputes concerning the shares and rights involving Evercheer, the NCHK Group (both prior and subsequent to its liquidation) and other parties have already given rise to previous High Court actions, namely HCCL 97 of 2000 and HCA 519 of 2010, both of which resulted in appeals to the Court of Appeal and, in the case of the latter, the Court of Final Appeal.  Later in this judgment I will address the decisions in the second of those actions to the extent that they bear on the applications before me.  Before doing so it is necessary to set out the circumstances in which the present dispute arises. These are complex and it is necessary to describe them in some detail.  The principal facts are not, however, in dispute.  Those occurring up to August 2010 are described by Fok JA in his judgment of 11 February 2011 in HCA 519 of 2010.  Both parties accept that the description is accurate and accordingly much of the following paragraphs of this section of my judgment are taken from Fok JA’s judgment.

B2.  Transfer of Shares in NCHKCM to Evercheer

3. On 18 March 1994 The New China Hong Kong Highway Limited (“NCHK Highway”) and Sichuan Chengmian Expressway Co Ltd established a Chinese‑foreign joint co‑operative enterprise (“CJV”)  The object of the CJV was the construction of the Chengdu‑Mianyang Expressway (“Expressway”).

4. The Expressway was to be funded by foreign capital and NCHK Highway was responsible for providing the necessary funding for its construction.  In order to raise the necessary capital, NCHK Group entered into a Subscription Agreement dated 15 October 1994 (“Subscription Agreement”) with various investors (“Investors”), under which NCHK Highway would offer 4,280,000 of its shares for subscription in order to raise funds for the construction of the Expressway.  The Investors were to subscribe for a total of 3,120,000 shares in NCHK Highway at US$25 each.  For its part, NCHK Group would, through a wholly‑owned subsidiary, subscribe for 1,160,000 shares in NCHK Highway at US$25 each and 479,291 shares in NCHK Highway at US$0.01 each, a total of 1,639,291 shares.

5. The wholly‑owned subsidiary through which NCHK Group subscribed for the non‑Par Shares and the Par Shares was The NCHK Highway (Chengdu Mianyang) Limited (“NCHKCM”).  The 1,639,291 shares so subscribed by NCHK Group through NCHKCM amounted to a total of 34.44 % of the entire issued capital of NCHK Highway. 

6. Pursuant to clause 7(2) of the Subscription Agreement, an escrow agreement dated 31 October 1994 (“Escrow Agreement”) was entered into, under which certain of the shares in NCHK Highway subscribed by the NCHK Group through NCHKCM (“Escrow Shares”) and the dividends and monies paid in respect of them (“Escrow Monies”) would be placed with Messrs Victor Chu & Co as escrow agent (“Escrow Agent”).  Under the Escrow Agreement, NCHK Group and the Investors were the only persons entitled to receive the Escrow Shares upon the opening of the Expressway.  NCHK Group’s rights under the Escrow Agreement were not capable of being assigned.  Of NCHKCM’s total shareholding in NCHK Highway of 1,639,291 shares, 599,291 shares were transferred to the Escrow Agent pursuant to the Escrow Agreement leaving 1,040,000 shares held by NCHKCM itself. 

7. At some time before 1998, members of the Century City group of companies (“CC Group”) had advanced loans to NCHK Group.  In consideration of these loans, NCHK Group had executed promissory notes of approximately HK$512,000,000 in favour of members of the CC Group.  Demand had been made on NCHK Group to honour the promissory notes but it was unable to do so.

8. Consequently, a debt restructuring agreement dated 27 January 1998 (“Restructuring Agreement”) was entered into by, amongst others, Century City International Holdings Limited (“Century City”) and NCHK Group.  Under clause 4.1 of the Restructuring Agreement, Century City International Limited (“CCIL”) was to acquire the shares in NCHK Development Ltd (“NCHK Development”) or the shares in NCHKCM (a wholly‑owned subsidiary of NCHK Development at that time).  The shares in NCHKCM had been valued, as at 31 December 1997, at HK$812 million. 

9. The Restructuring Agreement was varied by two supplemental agreements, dated 13 March 1998 and 3 April 1998 respectively.  By clause 4 of the latter, which revised clause 4 of the Restructuring Agreement, CCIL agreed to procure a member of the CC Group to purchase the shares in NCHKCM. 

10. Pursuant to the Restructuring Agreement as varied by the two supplemental agreements, a completion agreement dated 14 April 1998 (“Completion Agreement”) was entered into between NCHK Group and Evercheer.  Under the Completion Agreement, the shares in NCHKCM were sold to Evercheer, which at the time was wholly‑owned by Century City BVI Holdings Limited (“CC BVI”). 

11. Also on 14 April 1998, and as part of the debt restructuring arrangement, NCHK Group executed a Deed of Indemnity (“1^st Indemnity”) in favour of CCIL and Evercheer which included the following provisions:

(1)   Para (C) of the recital:

“Pursuant to the provisions of the Escrow Agreement Victor Chu & Co shall distribute the Escrow Shares pro rata among all the Investors under certain circumstances if it shall receive written instructions from all of the Investors stating, inter alia, that completion of the Chengdu‑Mianyang Expressway has not occurred on or prior to 31 December 1998 (‘Escrow Shares Distribution’).”

(2)   Para (F) of the recital:

“Pursuant to the terms of the [Restructuring Agreement] [CCIL] has agreed to procure Evercheer to acquire the entire 34.44 per cent. shareholding interest which [NCHK Group] indirectly holds in [NCHK Highway] through an acquisition of the entire issued share capital of NCHKCM (‘NCHKCM Shares’) together with the right to and interest in all shareholders’ loans advanced to NCHKCM at an aggregate net consideration of HK$692,000,000. . . .”

(3)   Clause 1.1:

“NCHK [Group] agrees to indemnify and keep [CCIL] and Evercheer indemnified against any diminution in the value of the NCHKCM Shares arising as a result of the Escrow Shares Distribution together with any losses, liabilities, claims, costs and expenses incurred by either of them in connection with any such Escrow Shares Distribution (“Indemnified Loss”) ”

(4)   Clause 1.2:

“All sums payable under Clause 1.1 shall be payable forthwith following the Escrow Shares Distribution. For the purpose of quantification of diminution of the value of the NCHKCM Shares under the indemnity in Clause 1.1, the value of the NCHKCM Shares shall be considered to be HK$596,099,411, which is based upon the projected value of the underlying assets of NCHKH as at 31 December 1997 as set out in the report prepared by American Appraisals dated 12 March 1998 and annexed hereto marked “A”. Any diminution in value of the NCHKCM Shares shall be calculated by Century International on the following basis:-

1.2.1	Number of Escrow Shares distributed to Investors x	HK$812,000,000”
	1,639,391

(5)   Clause 1.4:

“Upon the occurrence of the events described in Clauses 5 and 6 and those described in Clauses 7(c) and 7(d) of the Escrow Agreement NCHK [Group] will pay to Evercheer (or as it shall direct) all sums distributed to NCHK [Group] by the Escrow Agent (other than the Accrued Amount or the balance remaining thereof).”

12. I shall refer to transfer of the shares in NCHKCM to Evercheer as the “1^st Stage of Disposal”. 

B3.  Transfer of ownership of Evercheer to Shenyin Wanguo

13. In late 1998, the CC Group was itself facing financial difficulties and required funds to discharge its indebtedness owed to other parties.  Century City therefore approached Shenyin Wanguo (HK) Limited (“Shenyin Wanguo”), in October 1998 in respect of an intended sale of the NCHKCM Shares. 

14. By a letter dated 11 December 1998, Shenyin Wanguo offered to buy the entire share capital of Evercheer.  The term sheet setting out the terms of the offer identified the subject of acquisition as the entire issued share capital of Evercheer and the sole asset of Evercheer as the entire interest in NCHKCM “which holds a 34.44 % interest in [NCHK Highway]”.  Shenyin Wanguo’s offer to purchase Evercheer from Century City was accepted and this led to an Agreement for the Sale and Purchase of Shares in Evercheer dated 18 December 1998 (“Evercheer Sales Agreement”) entered into between Crux Assets Limited (“Crux”), as purchaser and CC BVI as vendor.  Public announcements concerning the sale of the 34.44 % interest in NCHK Highway were made by both Century City and Shenyin Wanguo on 4 January 1999. 

15. On Crux’s instructions, American Appraisal Hongkong Limited prepared an appraisal report dated 14 January 1999 to assess the fair market value of the 34.44 % interest in NCHK Highway. 

16. The Evercheer Sales Agreement was varied by three supplemental agreements respectively dated 28 December 1998, 31 December 1998 and 16 January 1999.  Clause 5.02 of the Evercheer Sales Agreement set out various documents that CCBVI was to deliver at completion.  By clause 2.04 of the second supplemental agreement, a letter of direction and declaration of trust were added as additional documents to be delivered at completion.  By clause 2.04 of the third supplemental agreement, the letter of direction was replaced by a power of attorney.  These documentary requirements for the declaration of trust and power of attorney were added on the advice of Messrs Baker & McKenzie, who were acting as solicitors for Shenyin Wanguo to conduct due diligence on the intended acquisition of the shares in Evercheer. 

17. The sale of Evercheer to Crux was completed on 16 January 1999.  After completion of the transaction, Century City issued a further public announcement dated 19 January 1999 explaining a revision in the consideration for its disposal of Evercheer. 

18. Also after completion of the transaction, NCHK Group executed a Power of Attorney and Declaration of Trust, both dated 23 January 1999 (“Power of Attorney” and “Deed of Trust”) required by the second supplemental agreement and the third supplemental agreement.  By the Power of Attorney, NCHK Group irrevocably appointed Evercheer as its lawful attorney, amongst other things, to (1) receive all shares, monies (except the “Accrued Amount” defined in the 1^st Indemnity), documents and notices under the Escrow Agreement, and (2) take any action for the purpose of exercising its rights under the Escrow Agreement (other than in relation to the Accrued Amount). 

19. The Declaration of Trust stated:

“NCHK [Group] hereby declares that, in order to fulfil the terms of the Completion Agreement, the [1^st Indemnity] and the Power of Attorney, any Escrow Shares or Escrow Monies or documentation relating thereto which, for whatever reason, is received by it, shall be held in trust for the benefit of Evercheer and that none of NCHK [Group] nor any of its nominees shall have any beneficial interest over the same. In such event, NCHK [Group] shall do all such things and execute all such documents as may be necessary to vest in Evercheer forthwith all legal and beneficial interest in, and physical possession of the certificates for, the Escrow Shares and full legal and beneficial interest in the Escrow Monies.

NCHK [Group] further undertakes that it shall not (as it is entitled to do so under the Escrow Agreement) nominate any party to receive the Escrow Shares or the Escrow Monies, other than Evercheer or such person as Evercheer shall direct.”

20. I shall refer to the sale of Evercheer to Crux described above as the “2^nd Stage of Disposal”.

B4.  Distribution of Escrow Shares

21. On 1 March 1999, NCHK Group was placed into creditors’ voluntary winding up and the Liquidators were appointed. 

22. By letter dated 3 June 1999, Evercheer, in reliance on the terms of the Power of Attorney and the Declaration of Trust, instructed the Escrow Agent to release to Evercheer all the Escrow Shares, together with dividends and interest on them.  By letter dated 7 June 1999, the Escrow Agent sought instructions from the Investors as to whether to release all the Escrow Shares, with accrued dividends and interest, to NCHK Group or its nominee pursuant to clause 5 of the Escrow Agreement.  By letter dated 28 June 1999, the Investors gave notice to the Escrow Agent pursuant to clause 6 of the Escrow Agreement, claiming that the conditions set out in that clause had been satisfied. 

23. The Escrow Agent proceeded to act as follows:

(1)   On 7 July 1999, the Escrow Agent delivered to the Investors share certificates and instruments of transfer for a total of 392,871 shares in NCHK Highway (“Investors’ Escrow Shares”) and paid a total of US$1,597,693.39 (“Investors’ Escrow Dividends”) to the Investors. 

(2)   In reliance upon the Power of Attorney, the Escrow Agent distributed the remaining 206,420 Escrow Shares (“Distributed Escrow Shares”) to Evercheer or NCHKCM on 8 July 1999 and paid the sum of US$621,762.86 (“Distributed Escrow Dividends”), being accrued dividends on the Distributed Escrow Shares, to Shenyin Wanguo on behalf of Evercheer on 20 July 1999.

24. A dispute arose in respect of the distribution of the Escrow Shares.  In November 2000 NCHK Group and Evercheer commenced HCCL 97 of 2000 against the Investors as well as another action against the Escrow Agent.  Evercheer sued in its own name as assignee of the right that had accrued in favour of NCHK Highway.  NCHK Group was a nominal plaintiff suing by its attorney. Evercheer, pursuant to its Power of Attorney and as trustee pursuant to the Deed of Trust, conducted the action without reference to the Liquidators.  In HCCL 97 of 2000, NCHK Group and Evercheer contended that the conditions required for a distribution pursuant to clause 6 of the Escrow Agreement had not been satisfied.  NCHK Group and Evercheer obtained judgment in HCCL 97 of 2000 at trial but an appeal by the Investors in CACV 24 of 2008 was allowed by the Court of Appeal.  Prior to the hearing of a further appeal to the Court of Final Appeal in FACV 7 of 2009, the dispute with the Investors was settled by an agreement dated 26 February 2010.  The Liquidators were informed of the settlement discussions.  The agreement contained the following recital, which the Liquidators accept is accurate.

“Notwithstanding that there may be outstanding disputes and possible claims between the 1^st plaintiff and the 2^nd plaintiff and others (save for the defendants); and entirely without prejudice to the Liquidators’ and to the 1^st plaintiff’s position generally as against the 2^nd plaintiff and others (save for the defendants); and in particular to the Liquidators’ and/or the 1^st plaintiff’s interests in and/or claims to the shares and dividends which form the subject matter of FACV 7/2009 as against the 2^nd plaintiff and others (save for the defendants); and to the question of the validity or invalidity of the Power of Attorney and Declaration of Trust dated 23 January 1999 (and any claims arising therefrom) as against the 2^nd plaintiff and others (save for the defendants), the Liquidators have confirmed to the parties that (i) the Liquidators have no objection to Messrs Fred Kan & Co entering into and signing this Settlement Agreement on behalf of the 1^st plaintiff; and (ii) the Liquidators consent to an Order being made by the court in terms sought in the Consent Summons referred to in clause 2 below.”

25. The effect of the settlement agreement, in summary, is that 50 % of the Escrow Shares (196,436 shares) (“Recovered Escrow Shares”) and 50 % of the Escrow Monies (HK$5,292,842.45) (“Recovered Escrow Monies”) have been recovered and were paid into court pending the determination of the question whether NCHK Group is entitled to those Recovered Escrow Shares and Recovered Escrow Monies. 

B5.  NCHK Group’s action against Evercheer

26. On 14 April 2010, NCHK Group and NCHK Development commenced HCA 519 of 2010 against, inter alios, Evercheer and Shenyin Wanguo to recover the Investors’ Escrow Shares and Investors’ Escrow Monies.  In respect of the 1^st Stage Disposal, the reasons were as follows:

(1)  the disposition of NCHKCM Shares to Century City was made by TT Tsui and RHC Chan (and other members of the executive committee of NCHK Group) in breach of their fiduciary duties owed to NCHK Group;

(2)  Century City and Evercheer were knowing recipients of, and are liable to account for, the NCHKCM Shares to NCHK Group; and

(3)  alternatively, if the agreements through which NCHK Group disposed of NCHKCM Shares to Evercheer were binding upon NCHK Group, they were dispositions to defraud creditors of NCHK Group and NCHK Development under s 60 of the Conveyancing and Property Ordinance (“CPO”)

27. In respect of the 2^nd Stage Disposal, the reasons were as follows:

(1)  the Power of Attorney and the Deed of Trust were invalid as voluntary dispositions of property under s 60 of the CPO, or constituted fraudulent preferences;

(2)  the Deed of Trust did not give Evercheer any proprietary right over the Escrow Shares and Escrow Monies; and

(3)  if and insofar as the Power of Attorney and the Deed of Trust were executed by NCHK Group by way of security, by omitting to state such security in the Power of Attorney Evercheer has surrendered such security for the general benefit of the creditors by virtue of rule 84 of the CWR.

28. Fok JA struck out the Statement of Claim[1] and dismissed the action against Evercheer, Shenyin Wanguo, NCHK Highway and Crux on 11 February 2011 on the grounds that:

(1)  The claims in respect of the 1^st Stage Disposal based on s 60 of the CPO were unsustainable as the matters pleaded in the draft Amended Statement of Claim were not sufficient to establish the necessary intent to defraud.

(2)  The clear purpose of the Power of Attorney and the Deed of Trust was “to prevent the liquidators from effectively asserting the rights under the 1^st Indemnity”. Upon completion of the 1^st Stage Disposal, NCHK Group ceased to have any interest in the 34.44 % equity in NCHK Highway.  There was nothing further to dispose of by the execution of the Power of Attorney and the Deed of Trust and, accordingly, s 60 of CPO cannot apply.  For the same reasons, there is no basis for a claim for fraudulent preference. 

(3)  The Power of Attorney was executed not for the benefit of NCHK Group but for Evercheer to secure the object of the arrangement, namely to ensure that whatever was to be distributed by the Escrow Agent would be distributed to Evercheer and not to NCHK Group.  The Power of Attorney was an authority or power coupled with an interest and therefore irrevocable.

(4)  The claim based on rule 84 must fall away in light of the conclusions on s 60 of the CPO and s 266 of the Companies Ordinance.

29. By a Judgment dated 29 August 2011, the Court of Appeal dismissed NCHK Group and NCHK Development’s appeal and upheld Fok JA’s Judgment, holding that:

(1)  The matters pleaded in the Amended Statement of Claim were not sufficient to establish an actual intent to defraud creditors and, as such, there is no arguable case to impugn the 1^st Stage Disposal under s 60 of the CPO.

(2)  The claim for knowing receipt against the relevant defendants is time‑barred.

(3)  The Escrow Shares had been disposed of under the 1^st Stage Disposal and Evercheer became their beneficial owner.  The execution of the Power of Attorney and the Deed of Trust was merely confirmatory and there was no disposition of any property.

(4)  The Liquidators’ contention that by submitting a Proof of Debt, Evercheer had elected to give up its interests in the Escrow Shares was not a point raised in the court below and should not be allowed to be made on appeal.

(5)  There was no determination on whether the causes of action pleaded in a draft Re‑amended Statement of Claim were sustainable.  Evercheer accepted that the plaintiffs may issue fresh proceedings to pursue the new claims raised in the draft Re-amended Statement of Claim.

C.  Proofs of Debt

30. On 30 November 2001 Evercheer (when it was under the control of the Century City Group) submitted the Proof of Debt to the Liquidators pursuant to the Deed of Indemnity for the loss occasioned by the wrongful distribution of the Investors’ Escrow Shares and Investors’ Escrow Dividends and the legal costs incurred up to November 2001.  The Liquidators’ solicitors, Johnson Stokes & Masters, informed Evercheer that the Liquidators intended to agree the claim under the Proof of Debt, although the claim would have to be reduced if Evercheer was successful in HCCL 97 of 2000. 

31. After Fok JA struck out the Liquidators’ claim in HCA 519 of 2010 (but before the hearing of the appeal to the Court of Appeal), the Liquidators’ solicitors, which by then had changed to Stephenson Harwood & Lo (“SHL”), wrote on 26 May 2011 to Evercheer’s solicitors informing them that Evercheer’s Proof of Debt had been admitted in its entirety as unsecured debt. On 21 June 2011, the Liquidators wrote to Evercheer informing it that it was entitled to receive a dividend in a total amount of HK$7,679,472.99 pursuant to 2 Notices of Dividend dated 21 June 2011.  This represented 3.7% of the total indemnity claim of HK$207,557,324.  Evercheer did not accept the adjudication or the dividends.  By letter dated 27 June 2011, Evercheer stated that it “would take the appropriate action on the [Proof of Debt] after the final disposal of [NCHK Group’s] appeal”.

32. At the hearing before the Court of Appeal the Liquidators produced a Re-Amended Statement of Claim, which pleaded that the filing of the Proof of Debt amounted to an election whereby Evercheer had elected to pursue its contractual claim against NCHK Group and thus was estopped from asserting any proprietary claim  In paragraph 57 of his judgment Tang VP said this:

“I do not accept that by making a Proof of Debt, at the time when the claim in respect of the escrow shares in HCCL 97/2000 had not been adjudicated upon, could be regarded as an election by Evercheer to give up its interests in the escrow shares in the event that they had been wrongly distributed to Investors.”

The Vice President went on to point out that this assertion had not been advanced before Fok JA and should not be allowed to be made on appeal.  It is, however, relevant that in his judgment at paragraphs 100 to 101 Fok JA says, in regard to his conclusion that the 1^st Indemnity was not liable to be set aside under s 60 of the CPO in respect of the 1^st Stage Disposal, that the entire interest in the NCHK Highway shares had been disposed of by the 1^st Stage of Disposal.

33. After the Court of Appeal delivered its decision upholding Fok JA’s decision, Evercheer submitted the Updated Proof of Debt to the Liquidators on 7 September 2011.  In the Updated Proof of Debt, Evercheer gave credit for the 50% of the Investors’ Escrow Shares and Investors’ Escrow Dividends recovered from the Investors as a result of the settlement of FACV 7/2009.  Evercheer claimed an “Indemnified Loss”, as defined in the 1^st Indemnity, of HK$138,578,526 and the interim dividends in the total sum of HK$5,127,405.47 based on the adjusted Indemnified Loss.  The HK$138,578,526 is made up as follows:

(1)  HK$97,295,410 for diminution in value of NCHKCM Shares pursuant to clause 1.2 of the 1^st Indemnity, following the settlement with the Investors which required Evercheer to give up 50% of the Investors’ Escrow Shares; and

(2)  HK$41,283,116 for loss of 50% of the Investors’ Escrow Dividends and interest accrued thereon up to February 2010, which were released to the Investors pursuant to the settlement in March 2010.

34. On 31 October 2011 the Liquidators wrote to Evercheer stating that the Proof Debt had been admitted on the basis that Evercheer had “elected” to pursue its contractual claim under the 1^st Indemnity and given that Evercheer had chosen to asset a proprietary right over the Investors’ Escrow Shares, the admission “is now considered to be improper and should be expunged pursuant to Rule 96 of the Companies (Winding‑up) Rules”.  In their Notice of Adjudication of Proof of Debt of 31 October 2011, the Liquidators also assert that Evercheer had without the consent of the Liquidators given up 50% of the Investors Escrow Shares and Investors’ Escrow Dividends.

D.  Principles Applicable in appeal against a decision by a liquidator

35. Ms Chan summarised the relevant principles, which I did not understand Mr Yuen to dispute, as follows. 

36. First, the onus is upon the purported creditor to prove on the balance of probabilities that a real debt is owed to it as required by rule 4(2) of the Proof of Debts Rules (Cap 6E): Alan C.W. Tang, joint and several trustees in bankruptcy of the estate of Lo Siu Fai Louis v. John J. Toohey, joint and several liquidator of Global March Ltd[2].

37. Secondly, the liquidator in adjudicating a proof of debt is under a duty to go behind a judgment, an account stated, a covenant or an estoppel on which the company’s liability is founded (In re Van Laun; Ex parte Chatterton[3]; In re Exchange Securities Ltd[4]). In these instances, the liquidator is armed with grounds for rejecting a proof of debt additional to any grounds available to the company under the general law.  As stated by the majority of the High Court of Australia in Tanning Research Laboratories Inc.[5]:

“The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability. … But this general rule is qualified. As the parties whose interests are affected by admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors and contributories may be unjustly affected. A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution.”

38. The rationale behind this principle is that the duty of the liquidator is to ensure that the assets of the insolvent company are distributed amongst those who are justly, legally, and properly creditors: In re Van Laun; Ex parte Chatterton[6].

39. However, it is important to understand that the qualification to which I have referred is not a licence for a liquidator to reject a proof on the basis of his own subjective view as to what is fair as between the general body of creditors and the person submitting the relevant proof of debt.  Brennan and Dawson JJ go on to say this in the passage of their judgment in Tanning Research Laboratories Inc. following that referred to above:

“In this respect, there is no reason to distinguish between the position of a liquidator and that of a trustee in bankruptcy: see Ayerst v C. & K. (Construction) Ltd. (52). In In re Van Laun; Ex parte Chatterton (53), Buckley L.J. said:

“Whether the creditor alleges that there has resulted, and that he relies upon an account stated, or a covenant entered into by the debtor, or a judgment which he has obtained, the principle, I apprehend, is exactly the same, and is this – that the trustee is not the person who has stated the account, is not the covenantor, is not the judgment debtor, but is entitled to say, ‘It is my business to see that those who seek to rank against this estate are persons who are really creditors of that estate.’ If there be a judgment it is not necessary to shew fraud or collusion. It is sufficient, in the language of Lord Esher, to shew miscarriage of justice – that is to say, that for some good reason there ought not to have been a judgment. Exactly the same, I think, is true of an account stated or of a covenant.”

The same approach is equally applicable to estoppels which would defeat the distribution of assets among the true creditors of the company: In re Exchange Securities Ltd. (54); and cf. In re South American and Mexican Co.; Ex parte Bank of England (55). The occasions when it is right to reject a proof of debt in respect of what is not a true liability of the company may not be susceptible of exhaustive definition. Perhaps some guidance may be found in the terms employed by Barwick C.J. in Wren v Mahony (56), in reference to the grounds on which a court of bankruptcy will go behind a judgment:

“Circumstances tending to show fraud or collusion or miscarriage of justice or that a compromise was not a fair and reasonable one, in the sense that even if not fraudulent it was foolish, absurd and improper, or resulted from an unequal position of the parties (see In re Hawkins; Ex parte Troup (57)) offer occasions for the exercise by the Court of Bankruptcy of its power to inquire into the consideration for the judgment.”

It is not necessary in this case to determine the scope of this qualification. It suffices to note that it qualifies the principles governing the admission or rejection of a proof of debt by arming the liquidator with grounds for rejecting a proof of debt additional to any grounds available under the general law.”

40. Put shortly what is required to justify a liquidator rejecting a proof of debt in respect of a claim enforceable against a company is the presence of some fact or matter, which viewed objectively renders admitting the proof of debt clearly inequitable as against the interests of the general body of creditors.  Something more that a bad bargain is required.

41. I now turn to consider the basis of Evercheer’s claim. 

E.  Evercheer’s Claim

42. As is explained above the Escrow Agreement provided that in the event that the Expressway was not completed by 31 December 1998 the Investors could instruct the Escrow Agent to distribute the Escrow Shares pro rata amongst the Investors.  The effect of such a distribution would be to dilute NCHKCM’s interest in NCHK Highway.  The 1^st Indemnity provided that in the event that this occurred NCHK Group would indemnify Evercheer for the resulting diminution in value of NCHKCM’s interest in NCHK Highway: clause 1.1.  The amount to be indemnified was to be calculated by a pre‑agreed formula: clause 1.2.  The 1^st Indemnity also provided for Evercheer to be indemnified for any reduction in the dividends received as a consequence of the distribution of the Escrow Dividends: clause 1.3.

43. As explained in paragraphs 39 to 41 of Stone J’s judgment in HCCL 97 of 2000 the Expressway was open in a “modified form”^[7] for traffic and toll collection on 21 December 1998.  It was for this reason that NCHK Group and Evercheer disputed the Investors’ right to obtain distribution of the Investors’ Escrow Shares and Investors’ Escrow Dividends; which was the dispute that gave rise to HCCL 97 of 2000.  If, however, the Investors were correct it followed that the 1^st Indemnity was engaged.  The Proof of Debt contained a claim under the 1^st Indemnity for the diminution in value of NCHKCM’s interest in NCHK caused by the distribution of the Investors’ Escrow Shares and Investors’ Escrow Dividends.

44. The settlement in February 2010 of the claims that gave rise to HCCL 97 of 2000 resulted in the Investors’ Escrow Shares and Investors’ Escrow Dividends being distributed equally between NCHK Group and Evercheer, on the one part, and the Investors on the other part.  It followed that the amount of the indemnity sought in the Proof of Debt filed by Evercheer had to be adjusted down.  This resulted in the submission of the Updated Proof of Debt referred to in paragraph 30 above.

F1.  Liquidators’ Case

45. Evercheer’s claim is easy to understand and prima facie appears to be valid.  This is, presumably, why initially the Liquidators admitted the Proof of Debt.  The reason why they have come to change their mind was summarised by Ms Chan in her skeleton argument as follows:

“40.1 According to its case advanced to and accepted by the Court, Evercheer had prior to NCHK Group’s liquidation acquired all the NCHKCM Shares and, through NCHKCM, the proprietary rights over all the Escrow Shares and the Escrow Monies. NCHK Group was thenceforth the trustee of Evercheer in respect of all the Escrow Shares and Escrow Monies. There was no basis for Evercheer to claim against NCHK Group for any loss or damages arising out of their property.

40.2 The ‘loss’ of 50% of the Investors’ Escrow Shares and Investors’ Escrow Monies was as a result of the commercial decision made by Evercheer to settle with the Investors. The Liquidators never agreed that Evercheer should settle with the Investors by giving up 50% of the Investors’ Escrow Shares and Investors’ Escrow Monies or that Evercheer could claim its ‘loss’ against NCHK after the settlement.

40.3  The Liquidators admitted the POD on the basis that Evercheer had by its conduct in filing the POD and refusing to withdraw it for over 10 years elected to pursue its contractual claim under the 1^st Indemnity against NCHK Group. Evercheer did not accept that it had made an election or the Liquidators’ adjudication made on such basis.  In light of the CA Judgment, the basis upon which the Liquidators admitted the POD is vitiated.  It follows that the adjudication in May 2011 should be expunged.”

F2.  Did Evercheer lose its rights under 1^st Indemnity when it acquired rights to NCHKCM Shares and Escrow Shares?

46. The first contention fully developed is this.  Evercheer acquired all rights and interests in the Escrow Shares and Escrow Monies under the 1^st Stage Disposal by virtue of, amongst other agreements, the 1^st Indemnity. The 1^st Indemnity, the Power of Attorney and the Deed of Trust were executed because the rights under the Escrow Agreement were not assignable and to ensure that all rights under the Escrow Agreement were transferred to Evercheer.  At the time the Escrow Agent distributed the Escrow Shares and Escrow Monies to the Investors, NCHK Group was a mere trustee for Evercheer of such rights as accrued to it under the Escrow Agreement.  This is consistent with the principle that where a debt is assigned in breach of a non‑assignment clause, the effect of the assignment is to create a trust of the debt in favour of the assignee who, being unable to collect the debt from the debtor, will usually be content to treat the assignment as relating to the collected proceeds in the hands of the assigner^[8].

47. Having acquired all substantive rights over the Escrow Shares and the Escrow Monies by virtue of, amongst other agreements, the 1^st Indemnity, it is not open to Evercheer, argues Ms Chan, now to assert a right to an indemnity under the 1^st Indemnity.

48. Ms Chan further submitted that the correctness of this argument is demonstrated by the principle of insolvency law, namely, that assets held by a company on trust do not form part of its distributable assets in its liquidation.  It follows, so the argument goes, that a company in liquidation cannot be liable for any loss attributable to an asset, which does not form part of its estate.

49. It seems to me quite clear that the Liquidators’ argument is misconceived.  The shares in NCHKCM were transferred to Evercheer pursuant to a restructuring of NCHK Group’s debt.  It was assumed for the purposes of the restructuring that those shares had a particular value, namely, HK$596,099,411.  This is expressly stated in clause 1.2 of the 1^st Indemnity. The purpose of the 1^st Indemnity, which was not itself necessary in order to transfer NCHKCM’s proprietary rights in respect of the Escrow Shares and the Escrow Monies to Evercheer[9], was to provide a mechanism to compensate Evercheer in the event that the Expressway was completed late resulting in a distribution of the Escrow Shares and Escrow Monies to the Investors with a resulting diminution in value of NCHKCM’s interest in NCHK Highway.  I can see no inconsistency at all between (1) the acquisition of the shares in NCHKCM and the right to the Escrow Shares and Escrow Monies and (2) a claim under the 1^st Indemnity for the diminution in value of the 34.44% shareholding in NCHK Highway in the event that the Expressway was completed late resulting in the distribution of the Escrow Shares and the Escrow Monies to the Investors.  The fact that NCHK Group had divested itself of any interest in NCHKCM, the Escrow Shares or the Escrow Monies is irrelevant to the enforceability of the 1^st Indemnity. It seems to me that the argument that by seeking to obtain the Escrow Share and Escrow Monies in HCCL 97 of 2000 Evercheer lost its rights under the Indemnity is unsustainable. 

50. In so far as it is suggested that whatever Evercheer’s strict legal rights against the Company are, the Liquidators quite properly rejected the proof on the basis that it was an inequitable transaction, which unjustifiably prejudices creditors, I disagree.  It seems to me that following the striking out of NCHK Group’s claims in HCA 519 of 2010 there remains no grounds for suggesting that 1^st Stage Disposal was not itself a genuine attempt to restructure NCHK Group’s debt or that the 1^st Indemnity was anything other than a bona fide commercial attempt by CC Group to maintain the value of its security for the sums that had been advanced. 

F3.  Did the settlement of Evercheer’s claim to the Investors’ EscrowShares discharge 1^st Indemnity?

51. The second ground for rejecting the Proof of Debt or the Updated Proof of Debt is the settlement of FACV 7 of 2009.  The Liquidators say that although they did not object to the settlement and consented to the terms of the consent summons disposing of the appeal to the Court of Final Appeal, this cannot be construed as consenting to the terms of settlement itself.  Evercheer’s decision to give up 50% of the Investors’ Escrow Shares and the Investors’ Escrow monies amounts to a material variation of the terms of the 1^st Indemnity which is prejudicial to NCHK Group without NCHK’s consent.  The prejudice being the resulting claim under the 1^st Indemnity.  The consequence is that NCHK Group’s obligations under the 1^st Indemnity are discharged, because the obligations under the 1^st Indemnity are of the type to which the Rule in Holme v Brunskill^[10] applies:

“The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self‑evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration .... but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.”

Ms Chan also referred me to Law of Guarantees, Andrews & Millett, 5^th ed, §§9-023 to 9-028.

52. A liquidator may re-open a compromise which was not entered into bona fide between a creditor and a company, but he cannot challenge it on the grounds that it was too advantageous a settlement^[11].  It is not suggested by the Liquidators that the settlement was entered into in bad faith.  There is nothing in the papers before me to suggest that it was anything other than a sensible commercial compromise.  Presumably, if the Liquidators had been concerned that the settlement was not bona fide they would have expressed this concern at the time they were asked to sign the consent summons disposing of the appeal to the Court of Final Appeal.  This issue, therefore, has to be assessed on the basis that the settlement is unimpeachable.

53. Two questions arise for determination.  First, is the 1^st Indemnity a contract of guarantee that attracts the Rule in Holme v Brunskill? Secondly, if it is, was the settlement a material change in the terms of the contract the performance of which is guaranteed?

54. Clauses 1.1 and 1.2 of the 1^st Indemnity are set out in paragraph 11 of this judgment.  It is clear from these provisions that the NCHK Group were agreeing to indemnify Century City and Evercheer against any diminution in the value of the NCHKCM’s shares.  NCHK Group was not guarantying the performance of any person under a contract.  It was not, for example, guarantying that the Expressway would be completed by 31 December 1998.  An essential characteristic of a contract of indemnity is that the indemnifier agrees to assume a primary liability completely independent of any liability, which arises under the contract the performance of which it concerns^[12].  This is different from a contract of guarantee in which the guarantor promises to pay the creditor if the debtor defaults.  The principle on which the Liquidators rely applies to a contract in which there is a principal contract the performance of which is guaranteed.  It does not apply to a contract of indemnity of the sort with which I am concerned in which NCHK Group has agreed to indemnify a diminution in value of an asset (the 34.44% shareholding in NCHKCM) rather than the performance of a party to a contract.  Clearly clauses 1.1 and 1.2 of the 1^st Indemnity did not involve NCHK Group guarantying performance of any party to the Escrow Agreement.  The indemnity under these clauses would have been engaged if the Expressway had been unarguably completed after 31 December 1998 and there had been no question of any party acting in breach of the Escrow Agreement.

55. If, however, the Rule in Holme v Brunskill does apply, it is necessary to consider whether or not there has been a material variation to the terms of the contract with which it is concerned, namely, the Escrow Agreement without the agreement of NCHK Group. 

56. The Liquidators’ solicitors were told about the proposed settlement in a telephone conversation on 18 January 2010.  On 20 January 2010 Fred Kan & Co (“Fred Kan”) wrote to SHL telling them what was being negotiated and informing them that they would be sent a draft settlement agreement once the principal terms had been agreed.  SHL replied on 21 January 2010 saying, amongst other things, that the Liquidators should be involved in the negotiations, although it is not explained what role it was anticipated they would play.  Fred Kan replied on 26 January 2010 stating Evercheer would agree to a settlement on a 50:50 basis.  SHL replied on 27 January 2010 in short saying, as I read the letter, that the Liquidators would not agree this and repeated the request to be involved in the negotiations.  Fred Kan wrote on 28 January 2010 explaining that counsel, John Jarvis QC, had advised orally on the settlement and included an email from him dated 28 January 2010 saying it was a “very good settlement indeed”.  Fred Kan offered to obtain a written advice from Mr Jarvis if the Liquidators agreed to pay his fees.  SHL replied on 29 January 2010.  They did not address the proposal to obtain a written advice from Mr Jarvis.  They made various amendments to the draft consent summons that they had been sent.  The letter ends by stating: “Subject to the above and the terms of the enclosed draft amended Order being accepted, our client does not object to the settlement of FACV 7/2009. We would add that the settlement is at your clients’, as well as the Defendants’ own risk.”  Considerable further correspondence and emails followed considering, amongst other things, the execution of a deed or agreement recording the terms of settlement and the release of undertakings given to the Court concerning the release of the Investors’ Escrow Shares and Investors’ Escrow Monies.  On 24 February 2010 SHL wrote to Fred Kan stating:

“Notwithstanding that there may be outstanding disputes and possible claims between the 1^st Plaintiff and the 2^nd Plaintiff and others (save for the Defendants); and entirely without prejudice to the Liquidators’ and to the 1^st Plaintiff’s position generally as against the 2^nd Plaintiff and others (save for the Defendants); and in particular to the Liquidators’ and / or the 1^st Plaintiff’s interests in and / or claims to the shares and dividends which form the subject matter of FACV 7/2009 as against the 2^nd Plaintiff and others (save for the Defendants); and to the question of the validity or invalidity of the Power of Attorney and Declaration of Trust dated 23^rd January 1999 (and any claims arising therefrom) as against the 2^nd Plaintiff and others (save for the Defendants), we enclose the following:

1. Revised Settlement Agreement; and

2.  Revised Order.”

57. SHL had amended recital (I) to the draft settlement agreement to read:

“Notwithstanding that there may be outstanding disputes and possible claims between the 1^st Plaintiff and the 2^nd Plaintiff and others (save for the Defendants); and entirely without prejudice to the Liquidators’ and to the 1^st Plaintiff’s position generally as against the 2^nd Plaintiff and others (save for the Defendants); and in particular to the Liquidators’ and / or the 1^st Plaintiff’s interests in and / or claims to the shares and dividends which form the subject matter of FACV7/2009 as against the 2^nd Plaintiff and others (save for the Defendants); and to the question of the validity or invalidity of the Power of Attorney and Declaration of Trust dated 23^rd January 1999 (and any claims arising therefrom) as against the 2^nd Plaintiff and others (save for the Defendants). The the Liquidators have confirmed to the parties that (i) the Liquidators have no objection to Messrs. Fred Kan & Co. entering into and signing this Settlement Agreement on behalf of the Plaintiffs including the 1^st Plaintiff; and (ii) the Liquidators consent to an Order being made by the Court in terms sought in the Consent Summons referred to in clause 2 below.”

58. Mr Wardell explains in paragraph 57 of his affidavit:

“I should explain that use of the phrase “not object” was intentional. It was used to indicate that the Liquidators did not consent to the settlement. It obviously was impossible for the Liquidators to consent when they had been excluded from the litigation (which had lasted for 10 years) as explained above and from the Evercheer’s and the Investors’ settlement negotiations. The Liquidators as a result had no idea whether the settlement terms were fair, why a 50:50 split had been proposed or otherwise. As far as I was concerned, the phrase “not object” showed that the Liquidators’ took a neutral stance to the settlement terms which given their lack of involvement was all they could do.”

59. I think there are a number of difficulties with this evidence.  First, is Mr Wardell’s description of the context in which the expression “not object” came to be used.  It was obviously thought by the Liquidators that the settlement of the case against the Investors affected NCHK Group otherwise they would not have been interested in its terms.  When they were asked to agree to a settlement on a 50:50 basis they asked for the advice on which Evercheer had relied in determining that this was a sensible compromise.  They were given an email from John Jarvis QC stating that it was a very good settlement for Evercheer.  If they had wanted to understand why Mr Jarvis took this view they could have taken Fred Kan up on their offer to obtain an advice from him. There is no explanation of why they did not do this.  This would have been a cheaper and quicker option than obtaining an opinion from another counsel who did not have Mr Jarvis’ knowledge of the case.  It is not suggested, and could not sensibly be suggested, that they thought Mr Jarvis could not be trusted to provide a genuine opinion.  Neither is it suggested that they needed more than counsel’s opinion in order to make an informed decision whether to support the settlement.  The Liquidators are experienced professionals who must be taken to understand the type of considerations that are taken into account when determining the terms on which to settle litigation.  They must have appreciated that the process is not an exact science and that if Mr Jarvis thought that the terms of settlement were very good it was rather more likely than not that it was at least a sensible commercial compromise.  They have never suggested that it was not.

60. Secondly, there is the language that was used by SHL.  It is, of course, correct that SHL did not write that the Liquidators “consent” to the terms of settlement.  However, ‘the Liquidators do “not object”’ does not mean the same, as Mr Wardell appears to suggest in the 2^nd sentence of paragraph 57 of his affirmation, as the ‘the Liquidators do “not consent”’. If a person in response to a request says that he does “not consent”, he clearly indicates his disagreement to the subject of the request.  If instead he says that he does “not object” to it, he indicates that he does not disagree to it.  That is not, as Mr Wardell suggests in the final sentence of paragraph 57, the same as saying I am “neutral”.  The Liquidators are sophisticated professionals who were being advised by solicitors.  If they had intended it to be understood that they were “not consenting” SHL should have said this.  Mr Wardell’s evidence invites the rather unattractive interpretation that SHL were consciously using ambiguous language with the dual aim of avoiding the Liquidators appearing obstructive, but leaving room to advance the present argument.  In my view if this was the case it was inappropriate.

61. It seems to me that considered in context the use of the expression “not object” must be understood as the Liquidators indicating that they did not disagree to the terms of settlement.  How does this impact on the application of the Rule in Holme v Brunskill?

62. The Rule requires the surety to be informed of the proposed change to the contractual arrangement, which he guarantees and asked if he, to use the language of Holme v Brunskill, consents to it or not.  This does not mean that the surety has to use the word “consent”.  What is required is that by word or deed he indicates whether he agrees or disagrees.  If he does not respond to the question at all he would be taken not to have agreed. If, however, he uses language such as “I do not disagree”, in my view whether this is to be taken as indicating sufficient consent to oust the Rule in Holme v Brunskill requires the Court to consider what the reasonable person would have taken the surety to mean in the circumstances of the particular case. 

63. In the present case in my opinion what the Liquidators must be taken to have been indicating is that although they were not prepared to endorse the commercial terms of the settlement they did not object to the replacement of the rights and obligations under the Escrow Agreement with the rights and obligations under the Settlement Agreement.  This in my view is sufficient to oust the application of the Rule in Holme v Brunskill.

64. Mr Yuen argued this issue differently.  He submitted that this was a case of approbation and reprobation.  The Liquidators having said that they did not object to the settlement cannot later change their position.  If I had not reached the conclusion in the previous paragraph I would have agreed with Mr Yuen’s submissions for essentially the same reasons that in my judgment the Liquidators agreed to the replacement of the rights and obligations under the Escrow Agreement with the rights and obligations under the Settlement Agreement.

F4.  The Second Indemnity

65. The remaining issue concerns the 2^nd Indemnity.

66. On 30 December 1998 Century City executed a Deed of Indemnity (“2^nd Indemnity”) agreeing to indemnify Crux and Evercheer against any diminution in value of the shares in NCHKCM or in Evercheer arising as a result of the distribution of the Escrow Shares to Investors.  On 19 May 2000 Century City, CCBVI, Crux and Evercheer entered into an agreement to settle Century City’s liability under the 2^nd Indemnity.  Pursuant to that agreement, the rights of Evercheer and Crux to be indemnified by Century City were extinguished. Century City was to pay HK$238 for the each of the Investors’ Escrow Shares. Clause 3.3 states that Century City had paid HK$12,721,308.25 in respect of its liability by the date of the agreement.  Clause 4.1 gave Evercheer the right, all the time Crux or Shenyin maintained an interest in NCHK Highway, to require Crux to purchase Escrow Shares that it acquired ownership of in the future at HK$238 per share.  As I understand the clause it envisages Evercheer taking action to recover the Investors’ Escrow Shares.

67. In paragraphs 30 and 31 of his affidavit Mr Wardell states that pursuant to the 2^nd Indemnity Crux and Evercheer have already received HK$98,213,795 from Century City in respect of the Investors’ Escrow Shares. The Liquidators argue that credit needs to be given for this sum as the creditor is only entitled to prove for a “real debt” owed to it^[13].

68. Evercheer dispute this for 2 reasons.  First, it says that Crux and Evercheer have received value of HK$61,750,901.25 not HK$98,213,795.  Secondly, it says that Evercheer’s claim under the 1^st Indemnity is a claim for damages and that NCHK Group is not entitled to deduct the proceeds received under the 2^nd Indemnity from the amount payable under the 1^st Indemnity.  I deal with each of these points in turn.

69. I do not understand the Liquidators to dispute Evercheer’s calculation of the figure of HK$61,750,901.25 as far as it goes.  However, there is one part of that calculation, which they suggest is not complete.  I shall summarise as succinctly as is possible what was a relatively complicated arrangement.

70. In 2004 Century City’s indebtedness under the 2^nd Indemnity together with CC Group’s indebtedness to Shenyin Group and other creditors was restructured globally.  As part of that restructuring Century City was to allot to the Shenyin Group a total of 2,651,472,241 convertible preference shares (“CP Shares”).  The CP Shares were valued at HK$154,570,000 as at 30 September 2004 by an independent valuer.  The amount payable to the Shenyin Group in connection with the 2^nd Indemnity at the time was HK$126,156,883.  The number of the CP Shares allotted to the Shenyin attributable to amounts due in connection with the 2^nd Indemnity was 841,045,887, which had a value as at 30 September 2004 of HK$49,029,539. Thus say Evercheer they have only received HK$12,721,308.25 plus HK$49,029,539, totalling HK$61,750,847.25 in connection with the 2^nd Indemnity.

71. In her written supplemental submissions Ms Chan submits that “Evercheer has not explained what is the value of the ‘CC Convertible Preference Shares’ at the time it submitted the Updated POD, which should be the relevant date for giving credit of the amount recovered by Evercheer”.  As a statement of fact that is correct.  However, Evercheer’s position is that it does not have to give credit for the amount it received pursuant to the 2^nd Indemnity. If the Liquidators take the view that credit has to be given then I would have expected them to calculate what that amount is.  Century City’s shares trade on The Stock Exchange of Hong Kong Limited and their price on the date (7 September 2011) the Updated Proof of Debt was submitted is publicly available.  On page 70 of the public announcement referred to in Mr Lee’s 2^nd affirmation explaining the calculation of the valuation of the CP Shares, and which is exhibited to it, there is an explanation of how the value he has used was calculated, namely, by Sallmanns (Far East) Limited using the binominal option pricing method.  It would have been quite possible for the Liquidators to have calculated the value using this method as at 7 September 2011.  The position, therefore, at the end of the hearing before me was that I have one figure to use, that of Evercheer, if I accept that a deduction should be made for the value received under the 2^nd Indemnity.

72. On 4 May, a week after the hearing had finished, I received a letter from SHL purporting to provide a calculation of the value received by Shenyin under the 2^nd Indemnity as at 7 September 2011. The letter ends inappositely “Should you have any questions regarding the above, please contact Mr Ian Childs at 2533 2884”.

73. Fred Kan wrote on 7 May objecting to the Court having regard to this attempt to adduce further evidence by letter after the hearing had concluded.  They referred to the judgment of Leong CJHC in 陳梓深及趙麗華對金源洋樓業主立案法團[14], which was followed by Lam J, as he then was, in Ng Yat Chi v China Resources (Holdings) Ltd & others[15] in which he states that it is inappropriate and unfair for a party to unilaterally put additional material before the Court after a hearing had been completed and that the Court would not take it into account.  It my view this is clearly correct.  It may be open to a party after a hearing has been completed to apply for leave to file further evidence and have the hearing resume, but the way SHL has proceeded is obviously inappropriate and I have not taken into account the contents of their letter.

74. I now turn to consider the second question, namely, whether the amounts received pursuant to the 2^nd Indemnity should be deducted from the amount claimed in the Updated Proof of Debt.  Mr Yuen submitted that it should not.  The relevant principles he argued are as follows.  An assured’s right to sue under an indemnity sounds in damages[16].  In cases where insurance has been taken out the proceeds of the insurance are not deducted from the damages.  This principle is not confined to cases of insurance, but extends to other cases where similar compensation is paid to a claimant.  In other words, a claimant may recover damages if he is entitled to have, or has had, that loss compensated by a third party under a separate contractual arrangement.  I accept that as a statement of general principle this is correct and I did not understand Ms Chan to dispute it[17].  The focus of the Liquidators’ case is rather different.

75. Ms Chan’s argument was, first, that as a matter of necessary implication the 1^st Indemnity must have been intended by the Parties to extend only to actual loss and, secondly, that Evercheer’s claim for sums already recovered by it under the 2^nd Indemnity was not “a real debt owed to it” and thus the Liquidators are right to reject it.

76. The 1^st Indemnity was intended to compensate Evercheer in the event that the Investors obtained a distribution of the Escrow Shares and Escrow Monies, which would result in a dilution in the value of NCHKCM’s interest in NCHK Highways.  The 1^st Indemnity talks in terms of Evercheer being “indemnified against any diminution in the value of the NCHKCM Shares”: clause 1.1.  Clause 1.2 provides a formula for calculating the diminution, which is based on an assumed value of the NCHKCM Shares in April 1998.  The formula provides no means for adjustment in the event of a change in value of the shares.  Clauses 1.1 and 1.2 do not use language which suggests that an adjustment is to be made to the assessment of the amount to be paid by NCHK Group to Evercheer in the event of clause 1.1 being engaged to reflect the loss actually suffered by Evercheer in the event of a distribution of the Escrow Shares.  In considering Ms Chan’s argument it is in my view relevant that the 1^st Indemnity is a sophisticated legal document drafted by highly experienced commercial lawyers, Linklaters.  It does not seem to me, therefore, that it is a necessary implication that the calculation under clause 1.2 should be adjusted in the event that Evercheer also happened to receive payment from another source to compensate it for the diminution in the value of the NCHKCM Shares in the event of a distribution of the Escrow Shares to Investors.

77. The 2^nd argument takes us back to the principle discussed in paragraphs 36 to 40.  There was no fraud or dishonesty involved in Evercheer obtaining the 1^st Indemnity.  Perhaps if NCHK Group’s solicitors had insisted on a qualification being included in clause 1.2 of the sort that Ms Chan sought to argue should be implied Evercheer might have agreed, but this is pure speculation.  What is clear is that the 1^st Indemnity and the 2^nd Indemnity were both given as part of broader, sophisticated restructurings of debt and the Court and the Liquidators are not in a position to assess how the Parties assessed the commercial aspects of these restructurings and whether it is fair to characterise part of the sums claimed under the 1^st Indemnity as not real debts of NCHK Group.  In any event the Liquidators’ argument amounts to asserting that the 1^st Indemnity was a bad bargain and as I explained in paragraph 40 that is not enough to justify rejecting a proof of debt.

78. It follows that in my judgment the amount included in the Updated Proof of Debt should not be reduced by the amount recovered under the 2^nd Indemnity.

Claim for balance of interim dividend distribution

79. The calculation of indemnified loss contained an item “Loss arising from the Escrow Shares Distribution (including dividend and interest accrued distribution to the Investors)” of HK$41,283,116.  The Liquidators object to the inclusion of interest on the grounds that interest is not claimable after the date of the winding up of NCHK Group.

80. Evercheer says that the Liquidators have misunderstood the calculation they were given.  Mr Yuen points out that the sum of HK$41,283,116 represents the balance payable in respect of a distribution of 50% of the dividends deposited with the High Court in connection with HCCL 97 of 2000 as demonstrated by the correspondence included with the Updated Proof of Debt and that the reference to interest is simply the interest that had accrued on this sum while deposited in the High Court.  Evercheer had included in its Updated Proof of Debt the 50% that it did not receive.  Precisely what element is interest is unclear.  However, I agree with Mr Yuen that this is irrelevant as all Evercheer has claimed is the sum that it would have received but for the distribution of 50% of the Investors’ Escrow Dividends to Investors.

Conclusion

81. In conclusion I hold that the rejection of the Updated Proof of Debt should be reversed.  The Liquidators summons of 17 April 2012 should be dismissed.  So far as costs are concerned I will make a costs order nisi that the costs should be paid by the Respondents to the Originating Summons and the summons of 17 April 2012.  If either party wishes to challenge that order they should inform the Court in writing within 14 clear days of the handing down of this judgment.