FU HAY KIN v. BELL'S CONSTRUCTIONS (ASIA) LTD AND ANOTHER

CACV 308/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 308 OF 2003

(ON APPEAL FROM HCMP NO. 163 OF 2003)

_________________________

_________________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Rogers VP:

1. This is an appeal from a judgment of Barma J given on 3 October 2003. The matter before the judge was an application on the part of the plaintiff for summary judgment against the 2nd respondent, pursuant to Order 28 rule 4(1) of the Rules of the High Court. The originating summons sought a declaration that the 2nd respondent should be personally responsible for all the relevant debts of the 1st respondent pursuant to section 168O of the Companies Ordinance, Cap. 32 ("the Ordinance").

2. The judge dismissed the plaintiff's application and ordered that the 2nd respondent should have his costs against the plaintiff payable in any event. At the conclusion of the hearing of this appeal this court dismissed the appeal and ordered that the costs of each party on this appeal should be costs in the originating summons.

Background

3. The 1st respondent is a company which was incorporated in October 1998 and went into Creditors Voluntary Winding Up on 17 January 2003. It is a wholly owned subsidiary of Bells Constructions & Technologies Pty. Ltd, which, apparently, carries on a substantial construction business in Tasmania, Australia. Originally the 2nd respondent was a director of the 1st respondent. However he resigned on 5 February 1999, because he had been adjudged bankrupt on 14 January of the same year. In addition to the 2nd respondent, another director of the 2nd respondent had been Keenestates (HK) Co. Ltd ("Keenestates"). At one stage the 2nd respondent had been a director of Keenestates but again he resigned as a director, but remained the company secretary. From the documents exhibited it appears that at least as at 31 December 1998, the 2nd respondent was the owner, whether beneficially or otherwise, of, effectively, all the shares of Keenestates.

4. The plaintiff in this matter was, apparently, a friend, or at least an acquaintance, of the 2nd respondent. In the course of argument we were told that he had been instrumental in persuading the plaintiff to work for the 1st respondent. The plaintiff's employment with the 1st respondent commenced on 1 March 2000. He was employed as a project manager.

5. Unfortunately the 1st respondent's business was not successful and we have been shown accounts demonstrating that over the course of its short lifetime it made a substantial loss. Whether that loss should have been as great as it was is a matter to which reference will be made below. As far as the plaintiff's financial dealings with the 1st respondent is concerned, it suffices to say that the plaintiff has obtained awards in the Labour Tribunal totalling $254,794.80. Those have gone unpaid.

6. Section 168O of the Ordinance, upon which the originating summons is based, reads, so far as is relevant to this case:

"(1) A person is personally responsible for all the relevant debts of a company if at any time-

(a) in contravention of a disqualification order or of section 156 he is involved in the management of the company; or

..."

7. Relevant debts are defined in subsection (3) as being those debts which have been incurred at the time when that person was involved in the management of the company.

8. Section 156(1) reads:

"(1) If any person being an undischarged bankrupt acts as director of, or directly or indirectly takes part in or is concerned in the management of, any company except with the leave of the court by which he was adjudged bankrupt, he shall be guilty of an offence and liable to imprisonment and a fine.

..."

9. Thus to make good his entitlement to relief under section 168O of the Ordinance, it is necessary for the plaintiff to show that the 2nd respondent has, despite the fact that he resigned as a director, been directly or indirectly taking part in or concerned in the management of the 1st respondent at the time when he was an undischarged bankrupt. There is no dispute that the 2nd respondent was an undischarged bankrupt during the whole of the time when the plaintiff was employed by the 1st respondent, hence no difficulty arises for that reason in respect of any remuneration to which the plaintiff is entitled, specifically the awards in the Labour Tribunal.

10. Mr Fu, who appeared in person and argued the matter very ably on his own behalf, relied in particular upon the case of Commissioner for Corporate Affairs v Bracht [1989] VR 821. That was a decision of Ormiston J sitting in the Supreme Court of Victoria. In the judgment, the judge examined many of the authorities which related to the interpretation of the word "management" insofar as it is used in provisions similar to sections 156 and 168O of the Ordinance. He observed at page 828, for example, that the provision was not confined to preventing persons acting who had been appointed a director, but was also directed to persons who were "occupying or acting in the position of director". He then went on to say that it was not the intention behind the legislation to deny a person in the prescribed categories the right to earn a living. He emphasised that the section was not directed to preventing such a person taking part or being concerned in the "business" of a company, that was a restriction often to be found in covenants in restraint of trade.

11. At page 829 Ormiston J judge then to say that:

"Whilst it is easy to exclude from the concept of management those activities of a corporation which consist in the carrying out of day to day routine functions in accordance with predetermined policies, whether they be clerical or involve the ordering or supplying of goods or services on its behalf, it is harder to fix on those elements which are critical to management. It cannot be confined to those matters performed by the board of directors or a managing director, for those are already the subject of the prohibition against acting as a director. The lower levels of administration comprehended by management must have some decision-making powers, but it cannot be thought that every branch or division manager has the relevant power of management."

The judge summarised his conclusion at page 830 where he said:

"It may be difficult to draw the line in particular cases, but in my opinion the concept of 'management' for present purposes comprehends activities which involved policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs."

12. Thus, as considered by Ormiston J in relation to the Australian legislation a person in a position of management was somebody who had a greater role than an employee in a responsible position and was somebody who was, in effect, or at least part of the directing mind of the company. Mr Fu did not appear to challenge that conclusion as such but argued that the judge below had been in error in relying upon the affidavits of Mr Ho and Mr Hopkins. Mr Fu pointed out that although these two affidavits were categorical in stating that the 2nd respondent had not been involved in the management of the 1st respondent, that assertion was clearly wrong. The affidavits had asserted that although the 2nd respondent had been the branch manager in Hong Kong, all management decisions were taken by the parent company in Australia. Mr Fu argued that without documentary evidence to support it, that assertion on its own should not be taken to have provided sufficient material upon which the court could hold that there was an arguable case on behalf of the 2nd respondent.

13. In my view, whether a defendant to a summary judgment application has to produce documentary evidence and, if he does, the extent and nature of such evidence are questions that are dependent upon the facts of each case. On the face of the matter, it cannot be said that the evidence produced is unbelievable and it is in my view sufficient to say that the 2nd respondent has established an arguable case.

14. However, Mr Fu went on to draw this court's attention to a number of matters in this case. In particular he drew attention to the accounts, for example for the period ended 30 June 2002. In addition to some more substantial projects it is clear that the 1st respondent undertook some rather minor work. Mr Fu argued that, in this respect, clearly the 2nd respondent must have taken some decisions of a management nature on his own. I consider that although there are grounds upon which the respondents' case can be questioned, at this stage it still could not be said as a matter of sufficient certainty for summary judgment that the respondents' case that the 2nd respondent was not engaged in management within the meaning as used in section 168O was clearly unarguable.

15. Mr Fu also drew our attention to aspects of the accounts that had been produced in proceedings relating to enforcement of the judgment against the 1st respondent. Large sums of money appear to have been paid to Keenestates and were entered in the books and general ledger of the 1st respondent as "Advance to Keenestates". Indeed in the Summary of the Companies Financial Information the directors' remuneration is put as being $2.6 million over the four years of 1999-2002. On a turnover of just over $10 million in those four years the 1st respondent made a loss of over $3.5 million.

16. Ms Kukreja, who appeared on behalf of the 2nd respondent, could not assist the court, despite an adjournment in order to take instructions, as to what the payments to Keenestates were and as to who authorised them. She relied upon the proposition that they fell within the general words of the affidavits averring that all management decisions had been taken by the parent company. For the purposes of considering the question of management it might be said that these payments and the way they have been entered into the books and general ledger of the 1st respondent clearly call for inquiry as to who authorised them, but there are other aspects. The 1st respondent only made a profit in one year, namely 2000, and that was a profit of a mere $11,684. In each of the other three years the 1st respondent made losses. In the years 2001 and 2002 those losses were very substantial. Two questions appear to arise out of this. The first is whether the payments to Keenestates should have continued at times when the financial position of the 1st respondent was clearly in a parlous state. Of course, this court is not seized of that question and there is no way in which this court could even begin to address it. The other question which immediately arises is as to why the entries in the general ledger were put as "Advance to Keenestates". These are, it seems to me, matters which clearly should be looked into. To that end, the Registrar will be requested to forward a copy of this judgment to the Official Receiver so that there can be some assurance that these matters will be looked into. If necessary, the Official Receiver, may wish to alert the Commissioner for Inland Revenue to ascertain whether the sums paid as directors remuneration were properly treated as that or were treated simply as advances as entered in the general ledger of the 1st respondent.

17. At the conclusion of the hearing this court made an order that the costs of this appeal should be made the costs in the originating summons. This was done in the light of the fact that the order in the court below was that the 2nd respondent should have his costs in any event. In view of the fact that this was a summary judgment application it would not be unusual for the costs be made costs in the cause and in the light of the fact that the matters relating to Keenestates and the amounts pertinent to the various contracts did not appear to feature in the court below, the fair order was to make costs in this court costs in cause without altering the costs in the court below.

Hon Le Pichon JA:

18. I agree.