ADVANCE FINANCE LTD (IN LIQUIDATION) v. PANG SZE MUI LORETTA AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

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JUDGMENT

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1. I have before me a summons issued by the 1iquidators of the plaintiff company to continue a Mareva Injunction that was granted ex-parte by Macdougall J. on the 10th May 1985. The application is opposed by the 1st, 5th and 6th defendants whilst the-6th defendant has issued a summons which seeks inter a1ia to discharge the Order. There is also a summons issued by the 1st defendant to strike out the plaintiff's points of claim or in the alternative for certain paragraphs to be struck out.

Facts

2. The plaintiff was incorporated on the 15th December 1972 as a deposit-taking company. After the Deposit-taking Companies Ordinance was passed in April 1976 the plaintiff was registered as a deposit-taking company on the 9th June 1976. The plaintiff formed part of the Goodyear group of companies and became a subsidiary of the holding company Goodyear Investors Limited (GIL) in July 1981. There were 126 companies in the group.

3. The Goodyear group was a family group formed by Pang Kwok Chan, the patriarch of the Pang Family. He dominated the group until he died in March 1983. The 1st defendant was a daughter of Pang Kwok Chan. She was a director of GIL and was appointed to be the Chairwoman of this Company on the 4th August 1961. She was also a director of several other companies in the group. On the 1st April 1983 she became, a director of the plaintiff.

4. GIL is now in liquidation and at the date of liquidation the shareholders of the company were Modern Asia Company Limited (Modern Asia), Multigood Limited (Multigood) and the 5th defendant. The 1st defendant held one-third of the shares in Modern Asia and in Multigood. The 5th defendant was the Managing Director of GIL having been appointed a director on the 23rd November 1972 and the 6th defendant was also a director having been appointed on the 2nd July 1977. The Pang Family held 85% of the shares in G.I.L. The 5th and 6th defendants were directors of the plaintiff from 1974 until 1981. The 2nd, 3rd and 4th defendants were also directors of the plaintiff at various times but they are not concerned with the present summonses. The 7th defendant according to the points of claim was a company beneficially owned or controlled by the 2nd, 5th and 6th defendants whilst the 9th defendant was said to be beneficially owned or controlled by the 5th defendant.

5. A creditor's petition to wind up the plaintiff was presented on the 18th January 1984, and a winding-up Order was made on the 20th February 1984. Two accountants from Coopers and Lybrand were appointed in March 1984 to be the joint liquidators of the plaintiff.

6. Extensive enquiries were carried out by the liquidators after the making of the winding-up Order into the affairs of the plaintiff and the Goodyear group. The structure of the group which is set out in the second schedule to the points of claim is complex. Investigations revealed a complicated web of shareholdings and cross shareholdings through nominee companies.

7. After the completion of the investigations and obtaining Counsel's advice, the application for the Mareva Injunction was made on the 10th May 1985 and was granted against all the defendants restraining them from removing any of their assets to a sum below $233,232,000 on certain undertakings. An order for discovery was also made. The writ was issued on the following day, the 11th May 1985. The hearing of the inter partes summons came before Rhind J. on the 17th May 1985 and was adjourned to the 19th June 1985 after Orders were made varying the terms of the injunction in favour of some of the defendants including the 1st, 5th and 6th defendants to enable certain sums to be released for legal fees and living expenses. The points of claim were filed on the 1st June 1985. The 1st defendant's summons to strike out was issued on the 12th June 1985.

Summons to strike out

8. The summons to strike out the points of claim is made under Order 18 Rule 19 of the Rules of the Supreme Court and under the inherent jurisdiction of the court on the grounds that (a) they disclose no reasonable cause of action or (b) they are scandalous, frivolous and vexatious or (c) they may prejudice, embarrass or delay the fair trial of the action. In the alternative an order is sought to strike out certain paragraphs of the points of claim on the same grounds and on the additional ground that the paragraphs are irregular and do not comply with order 18 Rule 12 of the Rules of the Supreme Court, as particulars of the allegations of fraud have not been given.

Points of claim

9. In considering the application to strike out it must be assumed that the facts as pleaded in the points of claim are correct.

10. The points of claim include allegations of breaches of fiduciary duty and tortious conspiracy which resulted in the dishonest misapplication of the plaintiff's funds. Damages are therefore claimed against the directors as constructive trustees. In particular reliance is placed by the plaintiff upon sections 22 and 23 of the Deposit-taking Companies Ordinance. Section 22 prohibits deposit-taking Companies from lending more than 25% of the company's paid-up capital and reserves to any person or company or any group of persons or companies controlled by that person or company. Section 23 prohibits deposit-taking Companies from granting loans or other facilities which are unsecured, to one or more private companies in which the directors of the deposit-taking Company have an interest either as a director, partner, manager or agent when the aggregate of such loans exceeds 10% of the paid-up capital and reserves of the deposit-taking Company. A breach of these sections amounts to a criminal offence.

11. Section 31 of the Ordinance provides for the liability of directors if an offence is committed by the Company with their consent, connivance or neglect.

12. By paragraph 27 of the points of claim it is alleged that the directors of the plaintiff were guilty of breaches of fiduciary duty between the 30th March 1981 and the 13th January 1984 together with the 5th and 6th defendants when they were not directors of knowingly granting and afterwards permitting to be outstanding advances, loans or credit facilities to GIL and other companies in the Goodyear group or which were under the control or influence of GIL in sums which were known or should have been known by the directors to have been in excess of 25% of the plaintiffs paid-up capital and reserves. That on the 18th January 1984 these loans constituted 85% of the plaintiff's paid-up capital and reserves. It is therefore alleged that the actions of the directors together with the assistance of the 5th and 6th defendants constituted misfeasance and breach of trust.

13. Although the 1st defendant was only a director during the period from the 1st April 1983 to the date of the winding-up order nevertheless it is claimed that she is liable because she permitted the earlier loans to remain outstanding. The plaintiff asserts that the loans were either made without security, with inadequate security, or were originally secured, but later became inadequately secured or unsecured. The points of claim also aver that the statutory returns required to be made to the Commissioner of Deposit-taking Companies (the Commissioner) and financial statements did not disclose the true lending picture of the plaintiff. Damages are claimed in the sum of $225,752,000 and consequential Orders are sought for accounts.

14. Mr. Ching who appeared on behalf of the 1st defendant attacked the pleading mainly on the grounds that the facts to substantiate the allegations had not been set out. He said that the pleading is bad and cannot be cured by giving particulars. By way of illustration he commented that no reference is made to the acts that it is alleged were committed by the 1st defendant, what role she took as a director, how many loans were made and when, and by the failure to identify the persons who signed the returns and other documents required to be submitted to the Commissioner. Certain paragraphs were criticised for their irrelevance imprecision or ambiguity and others on the grounds that no damage flowed from the allegations. In support of his submission Mr. Ching referred me to a number of cases including Philipps v. Philipps (1878) 4QB 127, Bruce v. Odhams Press Limited (1936) 1 All E.R. 287, Astrovlanis Compania Naviera S.A. v. Linard (1972) 2 Q.B. 611 and Palamisto General Enterprises S.A. v. Ocean Marine Insurance Company Limited (1972) 2 Q.B. 625. In the first case Cotton L.J. had this to say at p.139: -

"What particulars are to be stated must depend on the facts of each case. But in my opinion it is absolutely essential that the pleading, not to be embarrassing to the defendants, should state those facts which will put the defendants on their guard and tell them what they have to meet when the case comes on for trial."

Mr. Kaplan, Counsel for the plaintiff, argued that the defendant should formulate a request for further and better particulars.

15. Mr. Ching argued that the directors are not trustees of the monies held by them but only trustees of the powers of the company and the allegations made that the defendants were constructive trustees were merely included to provide a base for an attempt to trace. He maintained that unless monies can be identified in the hands of the 1st defendant, and there is no allegation to this effect, there can be no tracing. Accordingly, he submitted that the allegations with regard to constructive trust amounted to a fishing expedition. Although Mr. Ching asserted that the 1st defendant could not have been a conspirator before she became a director, nevertheless, it is quite clear that she could have joined the conspiracy at a subsequent time and with full knowledge of the unlawful agreement. If a conspiracy had already been formed, and the 1st defendant joined later she will be equally liable. Conspiracy is merely an agreement between two or more persons to commit an unlawful act. It is rare that a direct agreement between conspirators can be proved with the result that it is usually established by inference. The plaintiffs seek to prove conspiracy by virtue of the 1st defendant's position as a director of the plaintiff and the other companies in the group and her shareholdings in Modern Asia and Multigood.

16. The matter of constructive trust was explained by Buckley L.J. in Belmont Finance Corporation v. Williams Furniture Limited and Others (No.2) (1980) 1 All ER 393 at 405: -

"I now come to the constructive trust point. If a stranger to a trust (a) receives and becomes chargeable with some part of the trust fund or (b) assists the trustees of a trust with  knowledge of the facts in a dishonest design on the part of the trustees to misapply some part of a trust fund, he is liable as a constructive trustee (Barnes v. Addy (1874) LR 9 Ch. App. 244 at 251 - 252 per Lord Selborne LC).

A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands Allotment Co. (1894) 1 Ch. 616 at 631, 638, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has, some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v. Wakefield Waterworks Co. (1875) L.R. 20 E.q. 474 at 479, where he said:

        'In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee."

17. There is uncontradicted evidence that loans in breach of the Ordinance were made with the result that the 1st defendant would be a constructive trustee for any funds misapplied. Tracing will be one of the forms of relief available if the plaintiff should succeed in establishing breach of trust. The plaintiff will then be entitled to an Order for account and enquiries to ascertain what happened to the funds that have been misapplied.

18. Counsel for the plaintiff asserts that sufficient particulars have been given to enable the defendant to respond and that only in plain and obvious cases can an application to strike out succeed see Wenlock v. Moloney (1965) 1 W.L.R. 1238 and Drummond-Jackson v. B.M.A. (1971) 1 W.L.R. 688. Irrelevant matters and the fact that no damage can flow from certain paragraphs do not justify an application to strike out. In essence therefore the application is based upon lack of particularity.

19. A director is required to act for a proper purpose. Upon the evidence if it is accepted, the loans made and allowed to remain outstanding were in breach of the provisions of the Deposit-taking Companies Ordinance so that the directors may be liable under section 31 of the Ordinance. Mr. Kaplan places great reliance upon the case of Belmont Finance Corporation v. Williams Furniture Limited and others (No. 2) (1980) 1 All E.R. 393 to which I have already referred. In this case there was a breach of section 54(1) of the Companies Act 1948 which made it unlawful for a company to give any financial assistance for the purpose of ... a purchase ... made ... by any person of or for any shares in the company. In his judgment at p.404 Buckley L. J. said: -

        "The unlawful purpose in this case was the provision of financial assistance in contravention of s.54 of the 1948 Act. That the purpose of the sale of Maximum to Belmont was to enable Mr. Grosscurth to pay ?89,000 to City for the share capital of Belmont was known to all concerned. For reasons which I gave in my judgment on the earlier appeal in this action, the alleged conspiracy sued on must, in my view, have preceded the signing of the agreement, but its object is made clear by the agreement, namely that Belmont should give the financial assistance to Mr. Grosscurth which the carrying out of the agreement would afford him. Williams and City were parties to the agreement and so, in my opinion, are fixed with the character of parties to the conspiracy. Moreover, Mr. James knew perfectly well what the objects of the agreement were. He was a director of both Williams and City. Mr. Harries and Mr. Foley, who also knew the objects of the agreement, were a director and the secretary respectively of City. Mr. Foley was also the secretary of Williams. Their nowledge must, in my opinion, be imputed to the companies of which they were directors and secretary, for an officer of a company must surely be under a duty, if he is aware that a transaction into which his company or a wholly-owned subsidiary is about to enter is illegal or tainted with illegality, to inform the board of that company of the fact. Where an officer is under a duty to make such a disclosure to his company, his knowledge is imputed to the company (Re David Payne & Co. Ltd. (1904) 2 Ch. 608, Re Fenwick, Stobart & Co. Ltd.) (1902) 1 Ch. 507. In these circumstances, in my opinion, Williams and City must be regarded as having participated with Mr. Grosscurth in a common intention to enter into the agreement and to procure that Belmont should enter into the agreement and to procure that Belmont should enter into the agreement and that the agreement should be implemented. That Mr. Grosscurth was a party to that common intention is, in my opinion, indisputable."

20. By analogy with that case the plaintiff has shown a perfectly good cause of action for the 1st defendant as a director is prima facie responsible for the illegal scheme of lending that has been pleaded. I do not consider that the exact role taken by the 1st defendant need be set out for the allegations speak for themselves. In my judgment the points of claim have been sufficiently pleaded to enable the 1st defendant to understand the nature of the plaintiff's case which she has to meet. Accordingly, I am unable to accede to the application to strike out the points of claim with the result that the 1st defendant's summons will be dismissed.

Laches

21. Mr. Ching submitted that the ex-parte injunction should not have been granted as the application had not been made promptly. There was a delay of almost fifteen months from the date of the winding-up Order on the 20th February 1984 to the date of the issue of the ex-parte summons on the 10th May 1985. Miss Fu for the 5th defendant argued that if an allowance is made for the investigation period, the plaintiff should have been ready, in any event, to commence proceedings by January 1985. However, it is evident from the affidavit of Mr. Chalmers, one of the partners of Coopers and Lybrand that extensive enquiries had to be made into the affairs of the plaintiff and the Goodyear group of companies. The structure of the group is complex involving as I have said 126 companies whilst the shareholdings and cross shareholdings of the Fang family through nominee companies is also very complicated. In my experience as a judge in the Companies Court a considerable period of time was necessary in this case to unravel the skein before the true picture could emerge. I am quite satisfied that in the particular circumstances of this case which are unusual there was a perfectly reasonable explanation for the delay. Once the evidence had been obtained the plaintiff proceeded with due expedition. I do not therefore accept the submission that the ex-parte injunction should not have been granted on the grounds of delay.

Mareva Injunction

22. It is accepted that the test adopted by the Court of Appeal in England in Ninemia Maritime Corporation v. Trave Schiffahrtsgesellschaft m.b.H. UND CO. K.G. (1983) 1 W.L.R. 1412 before a Mareva Injunction is granted is correct. Kerr L.J. had this to say at p.1422:-

"In our view the test is whether, on the assumption that the plaintiffs have shown at least ''a good arguable case," the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiffs would remain unsatisfied."

I shall now turn to the issue of a good arguable case, and then to the question of real risk.

Good arguable case

23. Although the 1st defendant has denied the plaintiff's allegations, I am satisfied for the reasons that I have given on the summons to strike out that there is a good arguable case against the 1st defendant.

24. Again with regard to the 5th and 6th defendants I am satisfied that where the allegations have been made jointly against them and the 1st defendant, the plaintiff has established a good arguable case. There is additional evidence against the 5th and 6th defendants which relates to a loan of $1,950,000 made on the 13th January 1984, five days before the presentation of the winding-up petition by the plaintiff to Significant Investment Limited (Significant), a wholly owned subsidiary of GIL. The loan was made to enable Significant to purchase three million shares in Goodyear Estates Limited (GEL) from the 7th defendant a company in which the 5th and 6th defendants had an interest. Of the purchase monies the 7th defendant lent $1,625,000 to the 8th defendant and $325,000 to GIL. The 8th defendant used the funds to settle debts that they owed to the plaintiff and GIL whilst the balance was lent to the 9th defendant. It is alleged that the 9th defendant is controlled by the 5th defendant. The 9th defendant used the funds to settle debts owed by the 2nd defendant to the plaintiff and GIL. According to the plaintiff the transaction resulted in Significant which has no assets becoming a debtor of the plaintiff in place of the 8th and 9th defendants who possessed assets at the time. It is therefore alleged that the 5th and 6th defendants together with other defendants acted in breach of their fiduciary duty and are accountable as constructive trustees to the plaintiff for the loss sustained. In the alternative the transaction has been pleaded as a fraudulent preference and as an act that was intended to defraud the plaintiff.

25. On the 18th January 1984 the 5th defendant held 15% of the shares in GIL. Both the 5th and 6th defendants deny all the allegations of fraud that have been made against them in the points of claim. Having regard to the available evidence I am satisfied that a good arguable case has been made out against the 5th and 6th defendants.

Real risk

26. In his affidavit Mr. Chalmers alleges that if judgment is obtained against the 1st, 5th and 6th defendants they are likely to be made bankrupt. He further contends that having regard to their past conduct relative to the breaches of sections 22 and 23 of the Ordinance and their roles in submitting false returns to the Commissioner and the preparation of false or misleading accounts for the plaintiff and for GEL and also the roles of the 5th and 6th defendants with regard to the Significant transaction there is a real risk that these defendants may dissipate their assets or transfer them out of the jurisdiction.

27. The 1st defendant in her affirmation in reply says that she graduated from the School of Interpretation at the University of Geneva in 1970 and in 1973 commenced a permanent contract as a simultaneous interpreter at the United Nations in New York which position she held for seven years. She returned to Hong Kong in February 1982 and has lived here since that time. The 1st defendant's husband was a doctor in private practice in New York, but he gave up that practice to join the 1st defendant in Hong Kong and is now employed at the Faculty of Medicine at the Chinese University where he has a three year contract which commenced in January 1983. However, he hopes to obtain permanent employment there. The 1st defendant lives in rented accommodation in Kadoorie Avenue with her two children who attend school in Hong Kong. Although the 1st defendant lived in the United States for several years she says that she regards Hong Kong to be her home and has no intention to leave in the forseeable future. She denies that she has dissipated any of her assets and has no intention to do so. The 1st defendant does not dispute that she was a director of the plaintiff and other companies in the Goodyear group nor has she denied her shareholdings in Modern Asia and Multigood. The plaintiff has no information as to the assets of the 1st defendant nor has the 1st defendant supplied any details in her evidence.

28. The 5th defendant says that his family is in Hong Kong although his children are or will be going to study abroad. He provides no information with regard to his assets.

29. At the time when he affirmed his affirmation on the 15th May 1985 the 6th defendant was employed as a Senior Deputy Manager by Banque Nationale de Paris. However, since these proceedings began the 6th defendant has had his employment terminated. He says that Hong Kong is his home and he lives here with his wife and children. The 6th defendant has provided some information with regard to his assets which relates to his bank accounts. He has denied an allegation that was made by Mr. Chalmers that he helped Pang Kwok Chan to build up the Goodyear group.

30. The approach of the courts in England to the risk of removal of assets was adverted to by Mustill J. at first instance in Ninemia Maritime Corporation v. Trave Schiffahrtsgesellschaft m.b.H. UNK CO. K.G. (unreported) 10th May 1983:-

        "It is not enough for the plaintiff to assert a risk that the assets will be dissipated. He must demonstrate this by solid evidence. This evidence may take a number of different forms. It may consist of direct evidence that the defendant has previously acted in a way which shows that its probity is not to be relied upon. Or the plaintiff may show what type of company the defendant is (where it is incorporated, what are its corporate structure and assets, and so on) so as to raise an inference that the company is not to be relied upon. Or, again, the plaintiff may be able to found his case on the fact that inquiries about the characteristics of the defendant have led to a blank wall. Precisely what form the evidence may take will depend upon the particular circumstances of the case. But the evidence must always be there."

31. The evidence in this case reveals that the 1st, 5th and 6th defendants were directors of the plaintiff which is now in liquidation and were directors of other companies in the Goodyear group when large sums by way of illegal loans were made. Although the defendants have denied dissipating their assets or having removed then out of the jurisdiction and have made no efforts to leave Hong Kong, nevertheless, each one has an opportunity to do so. The assets can be removed from Hong Kong with the greatest of ease. The plaintiff has no information with regard to the assets of the 1st and 5th defendants and they have volunteered no evidence. Only the 6th defendant has made a limited disclosure of his assets.

32. The sole purpose or justification for the Mareva order is to prevent the plaintiff from being cheated out of the proceeds of the action should it be successful by the defendants either transferring their assets abroad or dissipating their assets within the jurisdiction see PCW (Underwriting Agencies) Ltd. v. Dixon and another (1983) 2 All ER 158 and Z Ltd. v. A (1982) 1 All ER 556.

33. In coming to a decision whether the injunction should be continued I bear in mind that the onus is upon the plaintiff to establish that there is a real risk and that a Mareva injunction is not to be used for the purposes of security. On the whole of the evidence available, there have been serious breaches of trust which could render the defendants liable to prosecution for criminal offences. In my judgment there is every reason to believe that if I refuse to continue the injunction there is a real risk that a judgment in favour of the plaintiff would remain unsatisfied. Accordingly I consider that it is just and convenient that an order be made that the injunction be continued against the three defendants.

34. Mr. Bokhary, Counsel for the 6th defendant, submitted that the plaintiff's undertaking for damages should be fortified but I do not consider that this application is justified. The proper course is for the 6th defendant to apply, if he thinks fit, for security for costs. In the circumstances, the 6th defendant's summons will be dismissed.

Discovery

35. There is abundant authority for the court to make an Order for discovery to give effect to a Mareva Injunction see Mediterranea Raffinera Siciliana Petroli S.p.A. v. Mabanaft G.m.b.H. (unreported), December 1, 1978; Court of Appeal (Civil Division) Transcript No. 816 of 1978, Bankers Trust Co. v. Shapira and others (1980) 1 W.L.R. 1274, and A and Another v. C and Another (1981) I Q. B. 956. Having regard to all the circumstances I am of the opinion that this is an appropriate case for an order for discovery to be made. As to the terms of the order for discovery I will hear the parties further and also on the matter of costs.