RE HONG KONG PAK TAT TRADING CO (In compulsory liquidation) (the “Company”)

HCCW 236/2011

[2020] HKCFI 287

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 236 OF 2011

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D E C I S I O N

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The summonses

1.  There are principally 3 summonses taken out by the executors of the estate of the deceased petitioner before this court:

(1)  the summons dated 9 January 2017 (as amended with leave granted on 21 August 2019) for a stay of the compulsory winding‑up of Hong Kong Pak Tat Trading Co (“Pak Tat”) and the consequential discharge of the liquidators, Mr Terry Kan (“Mr Kan”) and Mr Kenneth Chen (“Mr Chen”), pursuant to s 209 of the Companies (Winding‑Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”), or for their removal pursuant to s 196 of the Ordinance, and an order that Mr Kan do personally pay the costs of the petitioner on an indemnity basis;

(2)  the summons dated 12 September 2017 for various directions to be given to the liquidators pursuant to s 199 of the Ordinance; and

(3)  the summons dated 4 October 2018 (as amended with leave granted on 21 August 2019) for an order under s 276 of the Ordinance that Mr Kan be ordered to return or account for the fees and expenses incurred in relation to a number of specified matters in the liquidation of Pak Tat, alternatively an order that Mr Kan be prohibited from receiving fees or reimbursement of expenses incurred in relation to those matters, and, further or alternatively, an order to set aside the assessment or taxation of the liquidators’ fees together with directions for their assessment on an inter partes basis.

Background

2.  The late Lee Sai Nam (“Lee Snr”) started a business of manufacturing watchband products and accessories in the 1950s. Subsequently a number of companies were set up for the purposes of the business.  Hong Kong Luen Tat Watch Band Manufacturer Ltd (“Luen Tat”), a Hong Kong company, was set up in 1972 and became the marketing arm of the business.  Pak Tat Trading Company, an unincorporated sole proprietorship of Lee Snr, was established in 1981 as the manufacturing arm.  In around 1992, a Mainland company, Lianda Metal Watchband (Shenzhen) Co Ltd (“Lianda”), was set up in Shenzhen as the manufacturing base.  In 2002, the limited liability company, Hong Kong Pak Tat Trading Company (ie Pak Tat, which is the subject company of these proceedings), was set up in Mauritius and registered in Hong Kong, incorporating the previously unincorporated business run in the same name, and became the holding company of Lianda. 

3.  Lee Snr and his wife had 4 children, 3 of whom became involved in the family business, namely, Ken Li, Seline Li and Richard Lee.  In around 2008, disputes arose between Ken Li on the one hand and Lee Snr, Seline Li and Richard Lee on the other, as to (among other things) their respective interests in the family companies.  In August 2009, Lee Snr commenced an action against Ken Li and his son Joseph Li, i.e. HCA 1711/2009, claiming that Ken Li’s shareholdings of 51% in Luen Tat and 50% in Pak Tat were held on trust for Lee Snr, whereas Ken Li counterclaimed against Lee Snr and additional defendants by counterclaim including Seline Li that, inter alia, the shares belonged to Ken Li beneficially.  Lee Snr and Ken Li were then each registered holder of 50% of the shareholding of Pak Tat.  They and Richard Li were the 3 directors of Pak Tat.

4.  Also in August 2009, Lee Snr caused a company of his, which was a shareholder in Luen Tat, to commence proceedings in the High Court to wind up Luen Tat on the just and equitable ground, whilst Ken Li also caused a special resolution to be passed for Luen Tat to be wound up.  The winding‑up order was granted, and Mr David Yen and Mr Stephen Liu of Ernst & Young Transactions Ltd were appointed joint and several liquidators of Luen Tat in 2010.

5.  In July 2011, Lee Snr himself, in the capacity of creditor, presented a petition for the winding‑up of Pak Tat in Hong Kong as a foreign company under s 327 of the Ordinance in these proceedings (ie HCCW 236/2011), on the ground of insolvency.  The debt relied upon was an indebtedness of HK$53m which was the consideration for the sale of the shareholding in Lianda in 2002 by the sole proprietorship to Pak Tat, which according to Lee Snr had never actually been paid by Pak Tat.  The winding‑up order was made by Harris J on 1 December 2011.  Mr Kan and Mr Chen, both then of Shinewing Specialist Advisory Services Ltd, were appointed joint and several liquidators of Pak Tat.  In around November 2012, Mr Chen was made to leave that firm, apparently in acrimonious circumstances.

6.  Subsequently, disputes also arose between Lee Snr, Seline Li and Richard Lee on the one hand, and Mr Kan on the other, in relation to the conduct of the liquidation of Pak Tat and the liquidators’ fees. 

7.  Lee Snr passed away in August 2014, shortly after the trial in HCA 1711/2009 concluded.  Seline Li and Richard Lee are the executors of the estate of Lee Snr (“Executors” and “Estate”).  The above summonses in these proceedings were issued on their behalf.

8.  On 9 December 2015, Deputy Judge Leung gave judgment in HCA 1711/2009 in favour of Lee Snr’s side, holding that the shares held by Ken Li (with some held by his son Joseph Li) in both Luen Tat and Pak Tat were held on trust for Lee Snr.  From this decision Ken Li lodged an appeal to the Court of Appeal (CACV 2/2016).  After a hearing in December 2016, the Court of Appeal gave judgment on 19 January 2017 dismissing Ken Li’s appeal.

9.  There have also been disputes between Lee Snr, Seline Li and Richard Lee on the one hand, and the liquidators of Luen Tat on the other.  In a decision dated 27 November 2017 in HCCW 497/2009, Deputy Judge To granted the Executors’ application for an order staying the winding‑up of Luen Tat and an order removing Mr Yen and Mr Liu as liquidators.  In the present applications, Mr William Wong SC, who appears for the Executors, has placed reliance on that decision but I have to bear in mind that neither Pak Tat nor Mr Kan was a party to those proceedings and that I have to adjudicate on the questions before me based on the evidence and arguments in these proceedings.

10.  Some of the issues debated concern a written sale and purchase agreement (“SPA”) entered into on 9 December 2016 by Mr Kan on behalf of Pak Tat to sell Pak Tat’s shareholding in Lianda to a third party called Shenzhen Youpeng Investment Co Ltd (“Youpeng”). Youpeng had in July 2017 commenced arbitration proceedings in the Shenzhen Court of International Arbitration (“SCIA”) seeking to enforce the SPA. These matters are described further below.

Proceedings on the summonses

11.  The summons for stay of the winding-up was issued on 9 January 2017 seeking only an order for stay, the discharge of the liquidators and that costs be provided for (“Stay Summons”).  On the first hearing on 27 April 2017, Harris J adjourned the summons to a date to be fixed.

12.  On 28 August 2017, Youpeng applied to intervene in the Stay Summons, for reasons explained below.

13.  On 12 September 2017, the Executors issued another summons in these proceedings, seeking orders that (1) Mr Kan and Mr Chen as liquidators of Pak Tat do reject the proofs of debt lodged by Ken Li, Luen Tat and one Wong Shun Chiu; (2) the SPA be declared void and/or ineffective and Mr Kan and Mr Chen be directed to exercise their best endeavours to set it aside; (3) Mr Kan and Mr Chen do authorise Richard Lee and Seline Li to have the conduct of the arbitration proceedings commenced by Youpeng in the SCIA or, in the alternative, Mr Kan and Mr Chen use their best endeavours to contest the arbitration proceedings; and (4) Mr Kan be directed to consult Mr Chen and to seek his consent before making any decision with regard to the administration of the affairs of Pak Tat; and (5) the costs of the application be paid by Mr Kan personally (“Directions Summons”).

14.  On 13 October 2017, by consent between the Executors and Youpeng, DHCJ To gave leave for Youpeng to intervene and ordered the Executors to serve all the papers on Youpeng.

15.  On 2 November 2017, on a hearing of the Directions Summons, DHCJ To directed that the application in that summons relating to the proofs of debt and to the SPA be adjourned for argument at the hearing on 2 May 2018 (which was the date apparently then scheduled for the hearing of the Stay Summons).  In relation to the arbitration proceedings in the SCIA, his Lordship directed that the Executors be authorised to make an application for filing a supplemental submission to the SCIA and to file that supplemental submission, and that Mr Kan do take reasonable and necessary steps to facilitate this (this direction was re-affirmed by DHCJ To as set out in the court’s subsequent letter dated 8 October 2018 in response to letters of Mr Kan seeking directions).  The court also directed Mr Kan to consult Mr Chen and to seek his consent before making any decision with regard to the administration of the affairs of Pak Tat.

16.  On 10 April 2018, the Executors issued a summons for leave to amend the Stay Summons to seek an alternative order that the liquidators be removed (instead of being discharged) and an order that Mr Kan pay the costs personally on an indemnity basis.

17.  It appears that because of the expansion of the matters to be argued and the materials filed, the hearing scheduled on 2 May 2018 was ordered by DHCJ Le Pichon on 23 April 2018 to be vacated with leave for the summonses to be re-fixed for hearing before a bilingual judge.

18.  On 4 October 2018, the Executors issued a further summons seeking an order under s 276 of the Ordinance that Mr Kan return and/or account for the liquidators’ fees and expenses incurred in relation to 9 specified matters, alternatively an order that Mr Kan be barred from receiving liquidators’ fees and expenses in relation to those matters, and for an order of costs against him personally on an indemnity basis (“Misfeasance Summons”).

19.  On 11 July 2019, the Executors issued a summons for leave to amend the Misfeasance Summons to seek, further or alternatively, an order that the assessment or taxation of the bills lodged by Mr Kan be set aside and/or re-opened.

20.  These summonses, together with a number of ancillary summonses for leave to file affidavits or affirmations, were listed for hearing together before me.  The applications for leave to amend and for the filing of evidence were uncontentious and orders were made accordingly at the hearing. What remain outstanding are therefore: (1) the Stay Summons as amended; (2) the Directions Summons, in so far as it has not been disposed of; and (3) the Misfeasance Summons as amended.

Application for stay of winding‑up

21.  It seems to me appropriate to deal first with the application for stay of winding‑up.  If a stay is granted, the liquidation will come to an end, the liquidators will be discharged as a consequence, and the application for directions to the liquidators concerning, inter alia, the proofs of debt, made in the alternative, will effectively become academic.

22.  Section 209(1) of the Ordinance provides as follows:

“ The court may at any time after an order for winding up, on the application either of the liquidator, or the Official Receiver, or any creditor or contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the court thinks fit.”

Section 209 has application to Pak Tat, an unregistered company within the meaning of Part X, by virtue of s 327(1) of the Ordinance.

23.  The principles governing an application under s 209 for the permanent stay of a winding‑up are not in dispute; see Re Outboard Marine Corp Asia Ltd [2003] 1 HKLRD 585; Re Luen Tat Watchband Manufacturer Ltd (unrep, HCCW 497/2009, 27 November 2017), §2. It should, however, be pointed out in the present case that the power to grant a stay is discretionary, and that it is for an applicant to show why the winding‑up “ought to be stayed” and to make out a sufficient case for a stay that carries conviction.  In particular, it should be borne in mind that compulsory liquidation is not a mechanism that can be “switched off” simply in accordance with the wishes of the contributories themselves, even where the company is demonstrably solvent.  It is necessary to emphasise this because of the submission made on behalf of the Executors that on the basis that the Estate is the sole creditor and beneficial shareholder, it “is plainly entitled to resume control over Pak Tat”.[1]

24.  In his capacity as one of the liquidators, Mr Kan does not oppose the application for stay as such.  The Executors, however, contend that in reality Mr Kan has opposed the application by raising a number of matters.  This allegation will be dealt with below.  At this point I note that Mr Kan stated his neutral stance from the outset in his letter to Seline Li of 18 December 2015 as well as in his 2^nd affidavit filed on 21 April 2017 in these winding‑up proceedings, being the first one he made in response to the stay application.  Also, in his counsel’s skeleton argument lodged for the first call‑over hearing of the stay application before Harris J on 27 April 2017, it was stated that Mr Kan took a neutral stance and did not oppose the application, and that he would not take part in any further hearing of the application unless the court required his assistance.  At that hearing, Harris J gave directions which did require Mr Kan to file a skeleton argument at the substantive hearing of the stay application.

25.  Having considered all the relevant circumstances, it seems to me that subject to the conditions I shall mention below, the winding‑up of Pak Tat should be stayed pursuant to s 209.

26.  First, I recognise that whilst Pak Tat was wound up on the ground that it was unable to pay its debts, it was not wound up on a usual external creditor’s petition.  As stated by Harris J in his decision for the winding‑up of Pak Tat (at §6), Lee Snr sought to put Pak Tat into liquidation “as a means of resolving the larger disputes that he has with his son [Ken Li]”.  Lee Snr had hoped that pending the resolution of the dispute over the ownership of, inter alia, Pak Tat in HCA 1711/2009, the liquidators could take control of Pak Tat and protect it against Ken Li and his associates.  After that issue was resolved by Deputy Judge Leung in that action and then on appeal by the Court of Appeal in favour of Lee Snr, the Executors did not wish Pak Tat’s liquidation to continue.  Leaving aside the question whether there was any misconception on the part of Lee Snr’s camp in relation to a liquidator’s functions and duties, the fact is that the petitioner was also the sole beneficial owner of the shares of the company (as found in HCA 1711/2009).

27.  In the initial affirmation of Seline Li made in support of the stay application,[2] it was emphasised that the Estate was the sole shareholder and creditor of Pak Tat, and that the Estate’s wish ought to be respected.  In my view, this, in itself, would not have been adequate for granting a stay.  In particular, on the basis that Pak Tat owes HK$53m to the Estate without an equivalent quantity of assets and therefore appears to be insolvent, it would be wrong in principle to stay the liquidation without dealing with its indebtedness.  It was said in that affirmation of Seline Li that so long as the Estate was in control of Pak Tat, the Executors “would not seek to enforce payment of the indebtedness of the HK$53 million owed by Pak Tat”.  But it seems to me that on this footing, the indebtedness would nevertheless remain, and future creditors could potentially be prejudiced by trading with a company that was grossly insolvent (especially since there was no indication that the HK$53m debt would not be enforced by the Estate if Pak Tat went into liquidation again).

28.  At the hearing, when this was pointed out, Mr Wong, who appeared on behalf of the Executors, took instructions and indicated that the Estate would be prepared to waive the debt of HK$53m.  On this condition and on the basis of an appropriate undertaking to that effect, I am prepared to accept that this substantial debt of Pak Tat can be satisfactorily dealt with upon a stay.

29.  As to the other debts or potential debts of Pak Tat mentioned in Mr Kan’s 2^nd affidavit:

(1)  The claim of one Wong Shun Chiu for HK$36m had been dismissed by the relevant Mainland court in November 2016.  It is accordingly unnecessary to deal with it for the purpose of the application for stay.

(2)  As to the claim of Ken Li, originally for over HK$34m and revised in March 2017 down to HK$6.24m and the claim of Seline Li for HK$360,000, as I understand the Executors’ position, they are prepared to give a personal undertaking to satisfy any genuine claim, as adjudicated by the court if not admitted.  On that basis I am prepared to accept, in the circumstances, that these claims have been sufficiently provided for.

30.  The persons whose interests have to be considered on an application for a stay include also the liquidator.  As stated by Megarry J in In re Calgary and Edmonton Land Co Ltd [1975] 1 WLR 355 at 360D:

“By section 309, or costs, charges and expenses properly incurred in the winding up, including the liquidator’s remuneration, made payable out of the assets of the company in priority to all other claims. Where a liquidator has accepted offers on this footing, I cannot see that in normal circumstances it would be right to stay the winding up unless his special position had been fully safeguarded, either by paying him the proper amount for his expenses or by sufficiently securing payment. A liquidator who loses control of the assets by reason of a stay ought normally to be properly safeguarded in relation to his expenses.”[3]

31.  In this connection, there has been a considerable measure of agreement between the parties at the hearing and through written submissions thereafter.  The Executors have offered an undertaking to pay the liquidators’ fees payable to Mr Kan as determined by the court.[4] Given the amount involved and the time that has elapsed, and the Misfeasance Summons was only issued in October 2018 to which an application for setting aside or re-opening the previous assessments of fees and expenses was added in August 2019, it seems to me reasonable to require interim payment of at least part of the amount outstanding as a condition for a stay of the winding-up.  At the hearing, Mr Siu who appeared for Mr Kan indicated that Mr Kan would be content with payment of 50% of the taxed liquidators’ costs and expenses and an undertaking by the Executors to pay the remainder payable after determination by the court, with a cross-undertaking by him to repay any amount found to have been paid to him in excess of his entitlement.  This seems to me a reasonable proposal.  Even without the cross-undertaking, as Mr Kan accepts, there would be an obligation to disgorge any excess, and the cross-undertaking is offered to put the matter beyond doubt.  The total taxed bills amount to a little over $9m.  Approximately $1.83m is already held on account by Mr Kan from funds advanced by Lee Snr at an early stage.  The further interim payment in question is therefore $2.67m.

32.  The Executors contend that 60% of the liquidators’ taxed costs and expenses relate to the 9 matters that are the subject matter of the Misfeasance Summons, and that interim payment should not cover them, and that taking into account the amount already held on account, nothing should be paid further by way of interim payment.  I do not think that the mere issuance of that summons so long after the Stay Summons should deprive the liquidator of interim payment of fees and reimbursement of expenses which have been assessed by a Master of the High Court.  Further, of the 9 matters, one concerns the SPA in relation to which, it seems, at least some of the Executors’ criticisms may well be misplaced, as discussed below.  Another of the matters is the costs spent “to effectively oppose” the Stay Summons, but as concluded below, I consider that Mr Kan should have his costs in relation to the Stay Summons paid out of the assets of the company.  A third matter is Mr Kan’s summons dated 24 February 2015 heard by Anthony Chan J on 23 April 2015, but as Mr Wong disclosed on behalf of the Executors, there was an application at that hearing by Lee Snr and Richard Lee for an order that Mr Kan bear the costs personally but it was rejected by the judge, who ordered the costs to be paid out of the assets of Pak Tat. 

33.  I conclude therefore that as a condition for the stay of the winding-up to become effective, the Executors should procure that 50% of the taxed liquidators’ costs and expenses be paid and undertake to pay the remainder in accordance with the determination of the court on the Executors’ Misfeasance Summons.  I decline to order that Mr Kan be required to produce a bank guarantee to fortify his cross-undertaking.  I do not think the Executors’ reliance on the conduct or financial position of a partner or colleague of Mr Kan to be relevant or sufficient justification for such requirement.

34.  While Mr Kan’s 2^nd affidavit referred to certain statutory investigations into Pak Pat’s affairs, the Official Receiver by a letter dated 16 March 2018 indicated that she had decided not to take disqualification proceedings against the former directors (namely, Lee Snr, Richard Lee and Ken Li, arising from the Form D1 – Return of Directors filed by Mr Kan in June 2015 in relation to all 3 former directors). 

35.  I had also considered, from the perspective of public commercial morality, the potential concern arising from the “re-invoicing scheme” that involved (among others) Lianda – a wholly-owned subsidiary of Pak Tat, which eventually resulted in the Inland Revenue Department of Hong Kong imposing (apparently by way of settlement) a penalty of $3.4m on Luen Tat for tax evasion.[5] However, the Official Receiver has by a letter dated 15 August 2019 confirmed that she takes a neutral stance to the stay application.  Also, Mr Kan, as one of the liquidators, does not suggest that there is any further investigation in the liquidation that should be an obstacle to a stay of the winding-up.  In these circumstances, while tax evasion employing artificial devices (even if implemented with professional advice) should not be condoned, I do not consider this matter to be a reason now for refusing a stay of the winding-up.

36.  Given the breakdown of relationship between Mr Kan and the Executors, it seems to me preferable for the liquidation to come to an end and the affairs of Pak Tat to be handled by the Executors rather than by Mr Kan or by new liquidators to be appointed who would need much time and resources simply to familiarise themselves with the affairs of Pak Tat. Further, given that the Executors take the view that the SPA should be impugned but Mr Kan takes a different view, irrespective of whether one agrees with either view it is in my opinion a rational preference on the part of the Executors to be able to conduct by themselves the arbitration on behalf of Pak Tat against Youpeng.

37.  I should mention that Mr Chen has by letter to the Executors dated 16 April 2018 tendered his resignation as a liquidator of Pak Tat.  It seems to have been assumed by all parties that Mr Chen has thereby ceased to be a liquidator, but since he had been appointed by the court, r 154 of the Companies (Winding-up) Rules would suggest that meetings of creditors and contributories were needed to decide whether or not his resignation was to be accepted and, if accepted, a memorandum of the resignation would have to be filed with the Registrar of the High Court and notified to the Official Receiver before the resignation could take effect.

38.  To conclude, conditional upon the Executors’ undertakings referred to above and net payment of 50% of the taxed liquidators’ costs and expenses, there will be an order for a stay of the winding-up.

39.  Given that, as a consequence of the stay, the liquidators will be discharged from their office, it seems to me unnecessary to deal with the Executors’ application to remove the liquidators for cause. Mr Wong submitted that even where a stay was granted, the court should nevertheless remove Mr Kan in order to reflect its disapproval of his conduct, even though Mr Wong accepted such a course should be reserved for extreme situations.  However, the Executors have issued the Misfeasance Summons which remains to be dealt with.  Further, the application to remove the liquidators was only added by amendment to the Stay Summons on the first day of the hearing before me; no affirmation was specifically filed for the intended application for removal setting out the proposed grounds; and no notice of the grounds relied upon was given until the lengthy written submissions of the Executors were lodged shortly before the hearing.  In these circumstances it seems to me undesirable for this court to go on to deal with the removal application unnecessarily.

Costs of the Stay Summons

40.  It is submitted on behalf of the Executors (and sought by the Stay Summons as amended) that Mr Kan should be ordered to pay their costs of the stay application personally on an indemnity basis. Requiring Mr Kan to pay the costs, let alone on an indemnity basis, would be an unusual order that needed to be justified on special grounds involving relevant personal culpability on the part of Mr Kan as a liquidator.  The Executors do indeed level serious allegations against Mr Kan but their submissions have tended to lump together disparate matters picked from different stages in the course of the liquidation.  It seems to me that in the present context, one should primarily focus on Mr Kan’s stance in and response to the stay application itself.

41.  As stated above, Mr Kan has from the outset expressly stated that he takes a neutral stance towards the stay application. He stated in his 2^nd affidavit that he would give evidence on relevant matters with regard to the stay application and also, to the extent necessary, clarify certain matters having regard to the allegations made against him by Seline Li in her affirmation.

42.  There can be no real objection in this context to the liquidator setting out the background of the company and its winding‑up, the progress of the liquidation and the assets and liabilities.  These are matters generally relevant to an application for stay of the winding‑up of a company.

43.  So far as the liabilities are concerned, the Executors have criticised Mr Kan for having referred to the proof of debt filed by the liquidators of Luen Tat for the HK$53m which the Estate also claims to be owed by Pak Tat.  As I understand it, the point raised by the liquidators of Luen Tat was that on Lee Snr’s own evidence, the funds used to set up Lianda were sourced from Luen Tat’s retained earnings, and that this gave rise to a possible claim by Luen Tat in relation to the unpaid consideration for the transfer of Lianda to Pak Tat in 2002. 

44.  In riposte to that claim, the Executors say that it was clear from three previous decisions of the court that the debt was owed to Lee Snr.  However, in none of those proceedings was Luen Tat a party, and so it seems to me, with respect, that those decisions are not binding on Luen Tat or its liquidators.  Further, in Harris J’s decision to wind up Pak Tat, it appears that the issue was whether or not HK$53m had ever been injected in Lianda (see §10 of the judgment).  There was no issue as to where, as between Lee Snr personally and Luen Tat, the funds had come from.  The same may be said in relation to the judgment of Deputy Judge Leung in HCA 1711/2009, in which the protagonists were primarily Lee Snr and Ken Li, and it was not an issue whether the sum of HK$53m invested in Lianda came from Lee Snr personally or from Luen Tat.  After all, it seems clear that at the time when Lianda was set up, Lee Snr was in total control of Luen Tat.  Indeed, in §136 of his judgment, Deputy Judge Leung said:

“ In any event, it does not assist Ken by asserting that the investment was made by Luen Tat. … At no time was Ken the beneficial owner of the shares in Luen Tat, and there was no factual basis for Ken to assert any entitlement to share the profits of Luen Tat by reference to beneficial ownership of the company. Unless Ken was somehow otherwise entitled to share the profits of Luen Tat, that Luen Tat made the investment into establishing the Shenzhen base did not in real sense differ from the Father’s investment, albeit sourced from Luen Tat. It should be noted that, and it was un‑contradicted evidence of the Father, that in 1990s and before any re‑invoicing operation was put in place, all the moneys of Luen Tat were kept in the personal account of the Father, and he would take the money to the Mainland for the Shenzhen project. …”

45.  This passage shows, in my view, that Deputy Judge Leung did not regard it to be a significant issue before him as to where, as between Lee Snr and Luen Tat, the HK$53m had come from.  He considered that it would not assist Ken Li even if the money had come from Luen Tat.  That paragraph was also quoted by the Court of Appeal which concluded that the judge had addressed Ken Li’s argument about the source of the money: see §§6.8‑6.9 of the Court of Appeal’s judgment in CACV 2/2016 dated 19 January 2017.  Accordingly, I am, with respect, unable to accept Mr Wong’s submission for the Executors that there is res judicata, binding on Luen Tat, that the $53m was sourced from and owed to Lee Snr personally.

46.  In any event, from the point of view of Mr Kan, he was faced with a proof of debt lodged by the professional liquidators of Luen Tat as well as a proof lodged by Lee Snr at the time for the same sum.  I do not think it can be concluded that Mr Kan acted mala fide or irresponsibly in referring to these claims in his 2^nd affidavit and pointing out that they were competing and completely overlapping claims.  It would be open to the Executors, as applicants for a stay, to show the court why a stay should nevertheless be granted, such as on the basis of an undertaking to make provision for the debt.  It was only after Luen Tat’s liquidation had been stayed by order of DHCJ To in November 2017 that Luen Tat confirmed, by solicitors’ letter dated 9 February 2018 to Mr Kan, that its proof of debt lodged in Pak Tat’s winding‑up was withdrawn.

47.  Mr Kan’s 2^nd affidavit referred to Wong Shun Chiu’s claim for HK$36m, which was in fact the subject matter of a proof of debt.  But he also stated there that Wong’s claim had been rejected by the Longgang court in the Mainland (in November 2016) and that it was unlikely that the claim would be sustained.[6] It is impossible to conclude from this that Mr Kan was trying to obstruct the Stay Summons.

48.  Mr Kan’s 2^nd affidavit referred to a claim lodged by Ken Li which was originally for over HK$34.4m, being allegedly his share of the profits of Luen Tat that were injected into Pak Pat or Lianda as loans.  In the light of the judgment in HCA 1711/2009 and in the appeal therefrom, Mr Kan said in his 2^nd affidavit that Ken Li’s claim “should be bound to fail”.  However, Ken Li revised his proof of debt on 6 March 2017 and replaced his original claim with a claim for remuneration as former director in the amount of HK$6.24m, though he had not yet at that time provided the supporting documents or any shareholders’ approval of the remuneration.  I do not think Mr Kan can be faulted for referring in his 2^nd affidavit to this claim.  It is clearly a relevant matter for the court to know in relation to an application for stay of winding‑up.

49.  The Executors submit that Mr Kan should have rejected Ken Li’s revised proof.  It should be noted, however, that when that revised claim was lodged, the Executors had already issued their Stay Summons.  Mr Kan has explained in his 3^rd affidavit that in those circumstances, and in view of the limited liquid funds in the liquidation, he took the view that he would not devote substantial time and effort to investigating and adjudicating upon, inter alia, Ken Li’s proof.  In fact, in an application for a stay of winding‑up, it is possible for a shareholder‑applicant to offer to make provision for outstanding proofs such as by giving appropriate undertakings, which is what the Executors had eventually done.  I do not think that this matter is a reason for ordering Mr Kan personally to pay the costs of the Stay Summons.

50.  In his 2^nd affidavit Mr Kan also included evidence concerning the liabilities of Lianda and the sale of the land held by Lianda.  According to his affidavit (and this court need not make any findings on these events so far as they are disputed):

(1)  There were claims (some of them based on judgments given by Mainland courts) by third parties against Lianda totalling over RMB32m (before interest and costs).

(2)  The creditors had applied to the Mainland courts, by way of enforcement of their debts, for an order for sale of Lianda’s assets by auction.  One of the 4 pieces of land held by Lianda had already been ordered to be sold by auction in March 2014.  On 21 December 2015, a court in Dapeng notified Mr Kan that all of Lianda’s properties including both land and machinery had been seized for enforcement.  In May 2016, the machinery was sold by auction.

(3)  Based on the valuation carried out by the Mainland courts, the remaining 3 pieces of land, if sold by enforcement auction, would only yield RMB28m.  If the properties were not sold at the first auction, the reserve price would be lowered by 20% at the next.

(4)  Mr Kan therefore liaised with the Mainland courts for settlement proposals.  In this context, Mr Kan began to canvass interest from third parties for the remaining land held by Lianda.  In July 2016, he sent to the Executors’ solicitors documents showing interest of certain prospective buyers in acquiring the land.  The Executors did not respond to those proposals.

(5)  In October 2016, Mr Kan asked the Executors and Ken Li respectively whether they would be interested to purchase the property of Lianda that a Shenzhen court was proposing to sell by auction.  The Executors did not respond to this suggestion.

(6)  Mr Kan then managed to obtain a postponement of the enforcement auction to December 2016.  Meanwhile he proceeded to obtain a valuation of the properties which indicated a value of approximately RMB44m.  He also managed to obtain 4 written offers to purchase Lianda’s landed properties or the shares in Lianda, one of which was made by a company called Shenzhen You Fu Investment Co Ltd.

(7)  On 14 November 2016, at a hearing convened to discuss the progress of settlement proposals, the Dapeng court required both Mr Kan (acting for Pat Tat) and a Mainland lawyer instructed by Seline Li on behalf of Lianda to submit settlement proposals.  The Executors’ side did not submit any proposals.

(8)  In early December 2016, Shenzhen You Fu Investment Co Ltd was shortlisted as the purchaser and negotiations were held with the assistance of Mainland law firms acting for each side.  Eventually, on 9 December 2016, Mr Kan on behalf of Pak Tat entered into the SPA to sell the shareholding in Lianda to Youpeng, which is an affiliated company of Shenzhen You Fu Investment Co Ltd and an independent third party as far as the Pak Tat liquidation is concerned.

(9)  On 3 and 11 January 2017, Mr Kan set up meetings with the lawyers instructed by Seline Li to provide them with details of the SPA and to seek her support for the completion of the SPA.

51.  Some of these are disputed by Seline Li but for present purposes the court is only concerned with the question of the costs of the Stay Summons which does not require the resolution of all the factual disputes. 

52.  The principal terms of the SPA, an agreement between Pak Tat (signed by Mr Kan as liquidator on its behalf) and Youpeng, are as follows:

(1)  Pak Tat would sell its equity interest in Lianda to Youpeng for RMB14,340,000 in cash.  Youpeng would acquire ownership of Lianda and thereby indirectly the 3 pieces of land.

(2)  Youpeng would pay all the claims against Lianda in the Shenzhen courts including interest and costs, which came to a total amount of over RMB32m.

(3)  Youpeng would not rely on any representation or warranty by Pak Tat about Lianda, and would not make any claim against Pak Tat in connection with any possible or potential debts or liabilities of Lianda.

(4)  By a side letter entered into between the same parties on the same date of 9 December 2016, Youpeng undertook to exercise its power as shareholder of Lianda (after being registered as such shareholder pursuant to the SPA), at the option of Pak Tat, to cause Lianda to transfer its receivables from 5 specified companies to Pak Tat for the nominal consideration of RMB1. 

53.  At the time of Mr Kan’s 2^nd affidavit, Youpeng had already paid the sum of RMB14,340,000 in two tranches which has been held in escrow pending completion of the SPA.

54.  Since Lianda is Pak Tat’s sole substantial asset, I do not think that Mr Kan could be criticised for putting in his 2^nd affidavit the details of its recent disposal by way of the SPA, or in mentioning what remained to be done under the SPA and the implications of a stay in that regard.[7]

55.  It is clear that the Executors did not like the SPA.  Many allegations have been raised by them against the SPA and against Mr Kan for entering into it.  It is unnecessary to go into and make findings on each and every point.  It is in my view sufficient for present purposes to say the following.

56.  First, it is said that it involves a transaction at an undervalue.  In particular, it is said that a subsequent deal found by the Liquidation Committee of Lianda (“LC Agreement”), which was a sale of the landed properties of Lianda to a third party for RMB50m, was preferable.  However, it seems to me that the nature and structure of the two transactions are quite different.

(1)  The SPA is a sale of Pak Tat’s interest in Lianda and, if successfully completed, would result in Pak Tat receiving RMB14.34m in cash and Youpeng taking up the known debts of Lianda (of more than RMB32m) as well as the responsibility for dealing with any unknown potential debts and liabilities of Lianda.  On the Executors’ own case, Lianda apparently owes another RMB8m to Richard Lee which represents the funding provided by him towards the legal expenses of Lianda or its Liquidation Committee.

(2)  The LC Agreement, however, is a sale by Lianda of its landed properties for RMB50m.  Pak Tat would only derive an interest from it indirectly via its holding in Lianda.  There would be value in that holding only to the extent of any surplus remaining after payment of Lianda’s known and potential debts.  (At the hearing, the Executors’ counsel stated they did not know whether there would be a surplus after payment of Lianda’s liabilities.)  For example, if Lianda has liabilities of RMB32m, the remaining assets would be RMB18m; if, as the Executors now say, there are additional debts owed by Lianda to Richard Lee of RMB8m, there would only be RMB10m left for distribution or return to Pak Tat.  Any benefit to Richard Lee, in this context, cannot be taken into account by Pak Tat’s liquidators as a benefit to Pak Tat.  Indeed, it could arguably be a breach of duty to Pak Tat for its liquidators to prefer another deal to the SPA on the ground that such other deal would result in greater recovery for the creditors of Lianda even though it would yield less to Pak Pat. 

(3)  Accordingly, to say that the consideration under the LC Agreement in the sum of RMB50m was far greater than the cash consideration under the SPA in the sum of RMB14.34m, is, with respect, not a meaningful statement, and certainly not in itself a valid comparison of the benefit to Pak Tat under the two transactions.

57.  The Executors have adduced no valuation evidence to show that the SPA was undervalued for Pak Tat.  On the evidence, it seems to me the Executors have fallen far short of showing that the SPA represented a transaction at an undervalue.  It has also been alleged by the Executors that Youpeng was acting in concert or in collusion with Mr Kan or Ken Li.  This is a very serious allegation, but it seems to me there is no real evidence to support it.

58.  It is said that the Executors were “kept in the dark” and that the SPA was entered into “insidiously”.  As to this, it should be noted that it is not a condition for the exercise of the power of sale that the liquidator notifies the creditors or contributories.  The power to sell assets is not a power the exercise of which requires the sanction of the court or of the committee of inspection under s 199(3) of the Ordinance and Schedule 25, Part 3, item 1.  There is of course no rule against consulting the creditors or contributories, and a liquidator who has obtained their prior consent will have thereby protected himself against ex post facto criticism of the sale, but this is a far cry from saying that it is misconduct to sell assets without consultation with the creditors or contributories. 

59.  The SPA has also been attacked and criticised by the Executors on the ground that it was signed by Mr Kan alone without the involvement of Mr Chen.  I do not propose to delve into the disputes between Mr Chen and his former firm and partners including Mr Kan.  Mr Chen has not filed any evidence in these proceedings but has provided a letter to the Executors dated 16 April 2018 to which Mr Kan has not had a proper opportunity of responding.  This court is not, on the present applications, in a position to resolve the factual disputes between the two liquidators themselves; nor can I take the statements of Mr Chen in his letter at face value in so far as they are contentious. 

60.  As far as legal power is concerned, however, it should be noted that Mr Kan and Mr Chen have been appointed joint and several liquidators of Pak Tat.  Prima facie this means that they are conferred with powers that can be exercised by them jointly, i.e.  powers in which each joins in the exercise, but also powers that can be exercised by them severally — i.e. “powers which each may exercise independently of the other”: Kendle v Melsom (1998) 193 CLR 46, §5. This is recognised as a possible course by s 196(4) of the Ordinance, which provides that if more than one liquidator is appointed by the court, the court shall declare whether any act required or authorised to be done by the liquidator is to be done by all or any one or more of the persons appointed. 

61.  For all these reasons I do not think that the Executors have made out a case for a special order that the costs of the Stay Summons be paid by Mr Kan personally.  It seems to me the appropriate order of costs is that the Executors bear their own costs and that Mr Kan’s costs be paid out of the assets of Pak Tat.

Executors’ summons for directions

62.  By their Directions Summons dated 12 September 2017, the Executors seek certain orders and directions relating to the liquidation of Pak Tat.  The order sought in relation to the proofs of debt (paragraph 1(1) of the Directions Summons) is in the nature of directions to the liquidators and, as such, is alternative to an order staying the winding‑up.  If an order for stay is granted, as concluded above, such proposed direction becomes academic.  It is accordingly unnecessary to consider the application for that direction.  Accordingly no order is made on paragraph 1(1) of the Directions Summons.

63.  But there is in addition in that summons an order sought that the SPA “be declared void and/or ineffective, and Kenneth Chen and Terry Kan be directed to exercise their best endeavour to set aside the … SPA”.

64.  As stated above, on 13 October 2017, by consent, Youpeng was given leave to intervene in these proceedings.  At the hearing before me, Mr Anson Wong SC who appeared on behalf of Youpeng made clear that it was neutral in relation to the disputes between the Executors and Mr Kan, and that its only concern was that its rights under the SPA should not be prejudiced by any order of the court in these proceedings such as the proposed declaration sought by the Executors mentioned above.

65.  In my view the Executors’ application in the Directions Summons for the declaration in question was misconceived.

66.  The application was made under s 199(3) of the Ordinance for directions.  Yet Youpeng was not initially a party to the winding‑up proceedings.  It was not a proving creditor or contributory in the liquidation of Pak Tat.  The Executors themselves did not make Youpeng a party to the Directions Summons or serve it on Youpeng.  On that basis I cannot understand how the Executors could have thought that they could on such an internal summons obtain a declaration that the SPA was void or ineffective.  The case of Re Edennote Ltd [1996] 2 BCLC 389, relied upon by the Executors, is a very different case.  There the liquidator caused the asset concerned to be assigned to a person who was both an unsecured creditor and a contributory of the company in liquidation.  The asset assigned was a cause of action the company had against one of the applicants who were also unsecured creditors.  There was no defence raised that the assignee was a bona fide purchaser for value without notice — a point that the court found important to emphasise at the outset (see p 391h).

67.  After Youpeng was joined as a party to the summons on its own application, it was clear from the matters it raised that a declaration of voidness or invalidity of the SPA could not be made summarily on a summons in the liquidation but would need to be tried. 

68.  But it is clear that no such trial could properly take place on the Directions Summons or indeed in the winding up proceedings in Hong Kong, since there is no dispute that the SPA contains an arbitration clause and that, moreover, the claim by Youpeng for enforcement of the SPA had been referred to the SCIA in July 2017 and there are ongoing arbitral proceedings covering the question of the validity of the SPA which is governed by Mainland law.  Indeed, DHCJ To had on 2 November 2017 given directions enabling Seline Li and Richard Lee to file submissions in the SCIA arbitration on behalf of Pak Tat.  In these circumstances, it is in my view plain that this court should not entertain any application in these proceedings such as for the declaration of voidness sought by the Executors. 

69.  There seems to be an allegation that Youpeng was not an independent third party but was acting in collusion with Mr Kan or Ken Li.  As I have already said above, there is no real evidence for this serious allegation.  As regards the commercial merits of the SPA, I refer to the discussion above.  Suffice it here to say that there is nothing in that respect to show that Youpeng is not an independent, bona fide purchaser.

70.  For these reasons, paragraph 1(2) of the Directions Summons (i.e. the application for declaration) is to be dismissed.

71.  As to costs, I note that Youpeng applied on 28 August 2017 to intervene in these proceedings, before the Executors took out the summons for, inter alia, the declaration.  At that stage Youpeng did not have the papers or knowledge of the precise scope of the application being made, and was concerned that its interests might be affected by an order to stay the winding‑up of Pak Tat.  It applied to intervene to ascertain whether its interests would be affected and to ensure that the court was apprised of its position.  In fairness it seems to me there was no reason why the Executors should bear Youpeng’s costs at that point in time.

72.  In the light of Youpeng’s application for intervention, however, on 12 September 2017, the Executors took out their summons and sought, inter alia, the declaration of voidness or ineffectiveness of the SPA.  This was relief targeted directly at the SPA itself to which Youpeng was a party.  Youpeng had every reason to wish to oppose such relief, which was its primary concern in these proceedings from then on, as was made clear in Cai Weihong’s 2^nd affirmation for Youpeng dated 26 March 2018.  Despite that affirmation, the Executors did not at any time withdraw the application for the declaration. 

73.  In these circumstances, I consider it just and reasonable, and there will be an order, that (i) there should be no order as to costs as between the Executors and Youpeng up to 12 September 2017; (ii) the Executors should pay Youpeng’s costs after 12 September 2017 forthwith, with a certificate for two counsel, to be taxed if not agreed; and (iii) the liquidators’ costs, if any, relating to paragraphs 1(1) and 1(2) of the Directions Summons be paid out of the assets.

Misfeasance Summons

74.  The Misfeasance Summons was amended only at the hearing before me to include an application for an order to set aside or re-open the previous assessments of the liquidators’ bills.  There was no serious dispute that it would be appropriate for the entire summons to be adjourned for hearing separately, with costs reserved.  Accordingly, the parties should confer and try to agree any necessary procedural directions, failing which a directions hearing should be scheduled.

Attendance of the Official Receiver was dispensed with