ORIENT FOUNDATION CO LTD (In Liquidation) v. AU MEI YUNG BONNY

HCA 104/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 104 OF 2010

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BETWEEN

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J U D G M E N T

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Introduction

1.  These are Order 14 proceedings in which the Plaintiff, through its liquidator, is claiming for repayment by the Defendant of $2,049,178.17.

2.  The matter comes about it in this way.  Before it went into liquidation, the Plaintiff, a Hong Kong registered company which was wholly-owned by a Mr Lam Ching Sing and by his wife Madam Marian Chiu, was a watch manufacturer in the PRC.  The Defendant, who at the time that is relevant to this matter was a housewife, became acquainted with Mr Lam and Madam Chiu through her husband who is also a businessman and who had known Mr Lam for several years. 

3.  In about October 2008, Mr Lam approached the Defendant’s husband to ask for a loan.  Her husband told her that Mr Lam had said that he and his company (the Plaintiff) were facing short-term financial difficulties and needed cash to pay suppliers.  A further discussion was held later that month in Hong Kong at which all four of them was present.  At this meeting, Mr Lam told the Defendant and her husband that he and his wife were the only shareholders and directors of the Plaintiff and that they had substantial assets in Hong Kong and on the Mainland.  As the main shareholder and director of the Plaintiff, Mr Lam said that he had full control of its day-to-day affairs.  He also told them that he was in the process of negotiating a large overdraft with the bank and that he needed a cash loan of about RMB 2 million to tie him over.  All of this appears in the Defendant’s first affidavit sworn on 17 March this year [paras.7-14, pages 22-24].

4.  The way that the defendant describes it at para.10 [23] is that Mr Lam asked her for the loan.  She says that as she was only a housewife and not up with such matters she could not tell whether it was Mr Lam who would be borrowing the money or whether it would be the company (the Plaintiff).  He said that he would repay her the equivalent amount in Hong Kong dollars and requested that the loan be delivered to him in cash in RMB at Dongguan.

5.  Between October 2008 and March 2009 she says that Mr Lam borrowed from her a total of RMB 2,280,000.  He gave her receipts for these amounts which he signed [174-185].  She has also prepared a list [187] of the amounts lent and the date of each separate loan:

“	Amount
Date	(RMB)	Rate	Amount (HK)
10 October, 2008	¥200,000.00	1.136	HK$227,200.00
6 November, 2008	¥150,000.00	1.1373	HK$170,595.00
23 December, 2008	¥150,000.00	1.1423	HK$171,345.00
25 December, 2008	¥200,000.00	1.1423	HK$228,460.00
7 January, 2009	¥200,000.00	1.13435	HK$226,870.00
9 January, 2009	¥200,000.00	1.13485	HK$226,970.00
20 February, 2009	¥180,000.00	1.134	HK$204,120.00
6 March, 2009	¥300,000.00	1.1338	HK$340,140.00
27 March, 2009	¥200,000.00	1.13449	HK$226,898.00
10 April, 2009	¥200,000.00	1.13411	HK$226,822.00
24 April, 2009	¥300,000.00	1.3546	HK$406,380.00”

6.  In return, Mr Lam has caused the Plaintiff to repay the Defendant by a series of nine cheques drawn on its account which total the amount now sued for of HK$2,049,178.75.  The cheques, the amounts and the presentation dates are as follows:

“

Cheque No Cheque Presentation Date Amount (HK$) 335749  5 March 2009  219,383.25 335749  5 March 2009  219,383.25 335750  5 March 2009  300,768.00 335836 24 March 2009  229,338.00 335837 24 March 2009  380,742.00 335838 27 March 2009  254,402.50 335839 27 March 2009  169,065.00 335842 14 April 2009  193,806.40 335843 14 April 2009    95,976.00 335844 14 April 2009  205,697.60 335844 14 April 2009  205,697.60   Total 2,049,178.74

“

7.  It will be seen therefore that the Defendant is still owed $606,621.25 either by Mr Lam or the Plaintiff depending on the view one takes on the evidence as to who she had been extending the loans:

8.  A comparison of the dates of her loans and the Plaintiff’s cheques to her showthat by March and April 2009 she had continued to make loans whilst at the same time receiving cheques from the Plaintiff in part repayment.

The Plaintiff’s Liquidity

9.  The narrative of events can now be followed from the affidavit of Mr Sammy Choi dated 5 March 2010 [9-14].  He says that on 7 October 2009 the Official Receiver was appointed provisional liquidator of the Plaintiff and that on the same date the Official Receiver in turn appointed him and one of his partners to be the Plaintiff’s provisional liquidators.  What had happened was that on 3 August 2009 the Fubon Bank to whom the Plaintiff was indebted to the extent of HK$3,528,879.82 issued a winding-up petition upon which a winding-up order was made on 7 October 2009.

10.  Mr Choi who has investigated the Plaintiff’s financial position says that the Plaintiff’s total indebtedness is HK$16,359,746.46.  In his second affidavit dated 13 April 2010 [33-39], he has prepared two tables.  The earlier one shows the Plaintiff’s bank balances as at 30 March 2009 and 30 April 2009.  The conclusion that he draws is that since March 2009, if not earlier, the Plaintiff had a negative cash balance:

“

Name of Bank Balance as at 31.03.2009 (HK$) Balance as at 30.04.2009 (HK$) Public Bank 126.92 126.92 (account closed at 25.11.2009) Citibank 1,000.00 (1.75) (account closed at 30.05.2009) ICBC 0 (account closed at 26.02.2009) 0 (account closed at 26.02.2009) Standard Chartered Bank 0 (account closed at 19.02.2009) 0 (account closed at 19.02.2009) DahSing Bank (2,523,345.14) (2,536,737.56) DBS (216,707.28) 36,165.14 (account closed at 22 July 2009)

“

He has also provided a table to show its total indebtedness:

“

Name of Creditor Nature of debt Amount Outstanding (HK$) Campell Group (Hong Kong) Limited Outstanding Invoices   302,000,00 Dah Sing Bank Ltd. Bank Loan 12,210,713.84 (11,196,924.33 + US$130,777.80 *) * Applying the exchange rate US$1 = HK$7.752 Mandatory Provident Fund Schemes Authority Outstanding mandatory contributions and surcharges 39,500.00 Lee Shuk Yung Unpaid wages 254,400.00 Hing Yip Watchstraps Manufacturing Limited Outstanding Invoices 24,252.80 Fubon Bank (Hong Kong) Limited Bank Loan 3,528,879.82 (HK$3,368,238.69 + US$20,722.54 *) *Applying the exchange rate US$1 = HK$7.752   Total : 16,359,746.46

“

Looking at this material and the relevant bank statements of the Plaintiff, Mr Choi has concluded that at the time when the nine cheques were paid to the Defendant by the Plaintiff it was an insolvent company.  He further observes in his first affidavit [para.6, page 11] that the nine cheques were all paid to the Defendant within five months of the winding-up petition against the Plaintiff being presented by the Fubon Bank.

How the Case is Put Against the Defendant

11.  Judgment is sought on three distinct bases any one of which, if shown to be unanswerable, would be sufficient for the Plaintiff to have its judgment.  I will give each separate consideration, having regard to the arguments for and against and come to a decision on each before moving on to consider the next one.

12.  The grounds for which judgment is claimed are firstly, that these being personal loans to Mr Lam by the Defendant, the Defendant has given no consideration to the Plaintiff for the nine cheques as a result of which she must be required to return the money.  In other words on the basis of an action for money had and received.

13.  Secondly, that the Plaintiff’s payments to the Defendant ought to be declared void because, given the Plaintiff’s financial position at the time when the cheques were paid to the Defendant, such payments were intended to be a fraud on the Plaintiff’s creditors.

14.  Finally, that the payment by the Plaintiff to the Defendant represent an unfair preference over the Plaintiff’s creditors and therefore should be set aside. 

Money Had and Received

15.  Such an action will lie in cases where money has been paid under a mistake of fact or compulsion, or as in this case, for consideration that has wholly failed.  The basis of the action is described in Goff & Jones, The Law of Restitution, 7th Edition, para.1-002:

“Quasi-contract is that part of restitution which stems from the common indebitatus counts for money had and received and for money paid, and from quantum meruit and quantum valebat claims. The action for money had and received lay to recover money which the claimant had paid to the defendant, on the ground that it had been paid under a mistake or compulsion, or for a consideration which had wholly failed. By this action the claimant could also recover money which the defendant had received from a third party, as when he was accountable or had attorned to the claimant in respect of the money, or the money formed part of the fruits of an office of the claimant which the defendant had usurped. The action also lay to recover money which the defendant had acquired from the claimant by a tortuous act; and, in the rare cases, where the defendant had received money which the claimant could identify as his own at the time of receipt and for which the defendant had not given consideration, the claimant could assert his claim by means of this action.” [Emphasis provided]

16.  The factual basis asserted by Mr Woo, for the Plain tiff, is that the amounts of cash lent by the Defendant were personal loans to Mr Lam and that it was for Mr Lam to re-pay these and not the Plaintiff (the company) which is a separate entity.  Whilst the cheques were paid by the company to the Defendant, she had never given any consideration to it for these cheques in consequence of which the liquidator can now demand the repayment of the amounts represented by these nine cheques.

17.  Mr Wong, on the Defendant’s behalf, says that Mr Lam was the alter ego of the Plaintiff.  The Plaintiff, as a corporate entity, was indistinguishable in reality from him and that one can pierce and look through the corporate veil and look at the substance of these transactions.  A loan to Mr Lam was therefore a loan to the Plaintiff and what the Plaintiff was doing was repaying that loan.

18.  Whilst I have been very helpfully referred to much law on this aspect of the matter as to the Saloman v Saloman principle regarding the distinct and separate nature of a body corporate and other technical submissions, which is all very well, the fact remains that ultimately this issue needs to be determined on the evidence which at this stage is not possible as a paper exercise.

19.  Firstly, it is reasonably clear that when Mr Lam was asking for these loans, he was asking for them qua director and shareholder of the Plaintiff in order to inject money into the coffers of his ailing company.  He chose to ask for cash, no doubt to avoid direct payments by cheque into the Plaintiff’s bank accounts, which given the state of those hard-pressed bank accounts would have meant that he could not have used all or any of the Defendant’s loans to pay the Plaintiff’s suppliers because the cheques would have gone to reduce overdrafts on those accounts.

20.  It is highly arguable in my judgment that all of the cash that the Defendant handed over to Mr Lam was deployed for the benefit of the Plaintiff which he was fighting to keep afloat.  On this basis, the evidence in its current state has amply persuaded me that the Defendant, in providing this cash to Mr Lam for the benefit of the company, had given perfectly good consideration to the Plaintiff for the amounts that were repaid to her by the Plaintiff as represented by its nine cheques and that the defendant is in fact a good and valid creditor of the Plaintiff in its liquidation to the extent of $606,621.25 which remains outstanding and owing to her.

21.  The final determination of this issue will require the trial judge to attend to the evidence and decide how the cash handed over by the Defendant was disposed by Mr Lam.  At this stage there is an abundance of evidence to show that he deployed it for the company’s purposes and that when he asked the Defendant for the loan, he was doing so not in any private or personal capacity but as agent of the Plaintiff to receive the money on its behalf and to use it on its behalf.  The issue stated in this way can only be resolved following a conventional trial.

22.  In saying this, I am very conscious that at this stage, there is evidence going the other way and that the Defendant’s argument and her proposed defence and counterclaim do not entirely follow the analysis and line of reasoning which I have adopted in the preceding paragraphs.  Nevertheless, at the end of the day I need to look to the evidence as it stands and in my judgment there is an eminently triable issue as to whether these were loans by the Defendant to the company through the conduit of Mr Lam, it principal shareholder and director.  Viewed in this way, there is no need to attend to a complicated analysis of whether the corporate veil needs to be pierced or anything of that sort.  In saying this, I have not lost sight of the fact that it was Mr Lam who signed the receipts for the cash payments, apparently in his own name and this evidence will no doubt need to be weighed by the trial judge in his assessment of all of the evidence.

23.  Accordingly, on this ground the Defendant has shown in a triable issue and must have unconditional leave to defend.

Were These Dispositions With Intent to Defraud Creditors

24.  This ground is based on section 60, Conveyancing and Property Ordinance (Cap.219) which provides that:

“(1) Subject to subsections (2) and (3), every disposition of property made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent of defraud creditors.  (Amended 31 of 1988 s.22)”

The test which is to be adopted in order to decide whether there has been an intention to defraud under section 60 is that in Freeman v Pope [1870] 5 Ch App 538 and adopted in the recent decision of the Court of Final Appeal in Tradepower (Holdings) Ltd (in liquidation) v Tradepower (Hong Kong) Ltd & Ors [2010] 1 HKC 380.  The judgment of the court was given by Ribeiro PJ who at para.88 [415-416] formulated the matter in this way:

“88. I would formulate the applicable rule for cases like Freeman v Pope as follows. Where it is objectively shown that a disposition of property unsupported by consideration is made by a disponsor when insolvent (or who whereby renders himself insolvent) with the result that his creditors (including his future creditors) are clearly subjected at least to a significant risk of being unable to recover their debts in full, such facts ought in virtually every case to be sufficient to justify the inference of an intent to defraud creditors on the disponor’s part. In cases falling outside the rule, that is, in cases where the disposition is made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before s.60 is engaged.”

25.  Mr Woo submits that all the considerations identified by Ribeiro PJ have been made out and that in consequence the payments are voidable which by this action, the Plaintiff now seeks to avoid and have the amounts represented by its cheques repaid to it.

26.  Having regard to the fact that I have already held that there is ample evidence worthy of a trial that the Defendant has given good and valuable consideration in the previous section of my judgment, this basis for summary judgment must fail.  Accordingly, on this ground as well the defendant will have unconditional leave to defend.

The Payments are an Unfair Preference of the Plaintiff’s Creditors

27.  It is this ground that has caused most controversy and resulted in an exchange of further submissions in writing as to whether the court has jurisdiction under Order 14 to hear such an application which is brought under sections 266 and 266B, Companies Ordinance.  It is submitted that these payments by the Plaintiff have had the effect of preferring the Defendant over the Plaintiff’s other creditors and that the court should make an order restoring the position to what it would have been but for the unfair preference, which would mean an order that the Defendant repay the money which will then be paid out to all the creditors within the ambit of the Plaintiff’s liquidation.

28.  Before I consider the question of jurisdiction, I ought to observe that rather late in the day, the Defendant’s solicitors wrote to the court to say that in their view, Order 14 could not apply to this case in general.  The submission was based on Order 14 itself where r.2(b) excludes Order 14 proceedings in cases of inter alia “an action which includes a claim by the Plaintiff  based on an allegation of fraud”.  I am satisfied that the “fraud” referred to in the sub-rule does not include a fraudulent preference of another creditor under section 266.  Reliance has been placed by the Plaintiff, and rightly so, on the case of Pacific Electric Wire and Cable Co. Ltd v Harmutty Ltd [2009] 3 HKLRD 94.  It is plain from the judgment of Rogers VP that “dishonesty” means deliberate dishonesty which is not the allegation being made against the Defendant in this case.  The Vice-President said this about the status of a fraud on the minority:

“34. The Southland case [Tan Eng Guan And Another v Southland Co Ltd and other [1996] 2 HKLRD 117] involved an allegation of fraud on the minority. That is a very different form of claim to an action for deceit. If Godfrey JA was simply saying that fraud on the minority was not encompassed by the word ‘fraud’ in Order 14 r.1(2)(b), then I have no difficulty whatsoever in agreeing with him. If, however, he was attempting to say that despite the fact that claims in an action were based on allegations of fraud which encompassed deliberate dishonesty, Order 14 r.1(2)(b) did not apply to other claims in the action, then I consider he was clearly wrong … [Emphasis provided]”

Based on this case, I hold that Order 14(2)(b) does not exclude section 266 cases and given that no deliberate dishonesty is being alleged, this is the end of the matter on this point.

29.  The more substantial jurisdictional objection relates to RHC O.1 r.(2) which provides that:

“(i) the RHC shall not have effect in relation to winding up proceedings of the Companies Ordinance, and in the present case, to s.266 of the Ordinance.

(ii)       further or in the alternative the court has no jurisdiction over subject matters of winding up proceedings.”

Mr Wong, on the Defendant’s behalf, submits that in such circumstances, Order 14 cannot be applied.  The basis of the submission is that the Companies Ordinance and the winding-up rules made under it provide a comprehensive specialist code under which litigation relating to a company’s liquidation is to be conducted.

30.  He has referred to substantive law made under section 266 which says that fraudulent preference in that section is given the meaning ascribed to it in section 50, Bankruptcy Ordinancewhich is in this terms:

“(3) For the purposes of this section and sections 51 and 51A, a debtor gives an unfair preference to a person if –

(a) that person is one of the debtor’s creditors or a surety or guarantor for any of his debts or other liabilities; and

(b) the debtor does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the debtor’s bankruptcy, will be better than the position he would have been in if that thing had not been done.

(4)     The court shall not make an order under this section in respect of an unfair preference given to any person unless the debtor who gave the unfair preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (3)(b).”

The point that Mr Wong is seeking to make is that an enquiry of the sort contemplated by an allegation of fraudulent preference does not lend itself to the procedure of an Order 14 application for summary judgment so that it is not surprising that the RHC themselves [O.1 r.2 in this instance] specifically exclude winding-up proceedings.

31.  Mr Woo, for the Plaintiff, says that there are instances of this court hearing a section 266 application by way of an action begun by writ.  He has cited, by way of example, the case of BNP v Sam Wah Hing [1985] 2 HKC 499, which was an action (by writ) in which the Plaintiff bank had sought declarations that none of the sums paid to it by one of the Defendants constituted fraudulent preferences.  Whilst that is so, it does not begin to provide an answer to the question whether Order 14 excludes winding-up proceedings.  I am content that a party may come by writ, as was the case in BNP v Sam Wah Hing supra, but that case involved a trial in open court and not an Order 14 proceeding.

32.  It seems to me that whilst there is nothing to prevent a party, as part of the process of winding-up a company, to come by way of writ and that a High Court Judge has available to him all the jurisdictions given to the High Court, the exclusion of winding-up proceedings from Order 14 is not something that can be overlooked both as a matter of procedure and of jurisdiction under Order 14.  In such circumstances, Mr Wong must be right in submitting that I am not able to consider this part of the claim under section 266 within the terms of this summons.  The Plaintiff is therefore free, if it wishes, to continue with this action (started by writ) for the relief it seeks by conventional trial or to discontinue and proceed in the Companies Court under the rules of that jurisdiction for the declarations and consequent relief that it says that it is entitled to.

33.  This being my view, the application for summary judgment based on section 266 must fail in limine. 

34.  Nevertheless, in the event that I am wrong to have come to this conclusion, I propose to say how I would have found on the merits within Order 14.

35.  In this regard, Mr Woo has referred to the state of the Plaintiff’s finances at the time that the nine cheques were drawn on its bank account so that the Defendant could be repaid in part what was owing to her.  From that evidential base, he submits that inevitably these payments must have had the effect of preferring the Defendant over the other creditors.  The elements of what needs to be proved in such circumstances were discussed by Barma J in Re Sweet mart Garment Works Ltd [2008] 252.  The headnote sufficiently reproduces the facts and the principles that need to be applied:

“The subject Company went into compulsory liquidation on a creditor’s petition presented on 28 September 2005. On 19 November 2005, a bank in Hong Kong (the Bank) exercised its rights and took possession under a mortgage of a pleasure craft (the vessel) granted by the Company on 15 August 2005. The vessel was sold and a sum was realised after the deduction of sales expenses. On 14 May 2007, the Company’s liquidators (the applicants) issued a summons seeking a declaration that the mortgage granted by the Company constituted an unfair preference in favour of the Bank and that it was accordingly void. The applicants also sought an order that the Bank should pay the sale proceeds of the vessel, together the accrued interest, and costs.

Held, declaring that the mortgage was an unfair preference and granting the order sought:

(1) In deciding whether a transaction would be set aside as an unfair preference, two elements were required to be established: (i) a desire of the company to produce the effect of improving the creditor’s position in an insolvent liquidation, and (ii) that such desire had influenced the decision of the company to enter into the transaction. Re MC Bacon Ltd [1990] BCLC 324 and Re Phantom Records Ltd; sub nom Official Receiver v James Conrad Louey & Anor [2006] HKCU 2023 (HCMP 2770/2003, Kwan J, 7 December 2006, unreported) applied (paras.14-15).

(2) Desire was a subjective state of mind, and was different from intention which was objective, in that a person was taken to intend the necessary consequences of his actions. There was often no direct evidence of the requisite desire. Its existence might be inferred from all the relevant circumstances. The requisite desire, if present, must be one of the factors which operated on the minds of those who made the decision. It needed not be the only factor or even the decisive one. Re MC Bacon Ltd [1990] BCLC 324 and Re Phantom Records Ltd; sub nom Official Receiver v James Conrad Louey & Anor [2006] HKCU 2023 (HCMP 2770/2003, Kwan J, 7 December 2006, unreported) applied (paras.14-15).

(3) A preference would normally escape consure if there was a good explanation for it having been made, which could consist of the fact that the preference was made in response to pressure being placed on the debtor by the creditor, whether such pressure be commercial or moral.  Re Fairways Magazines Ltd [1993] BCLC 643 and Re Hau Po Man Stanley [2005] 2 HKC 227 applied (para.16).”

A reading of these passages is enough to demonstrate how fact sensitive an enquiry of this sort is, indeed as Mr Wong has pointed out, in the Companies Court when such a declaration is sought there is provision for cross-examination of witnesses whereas it is the essence of an Order 14 proceeding that the forensic process is one restricted to a consideration of the evidence on paper (the affidavits and their exhibits).

36.  It seems to me that on this occasion, had I been put to it, I would have been forced to the conclusion that the evidence would have needed the examination of the witnesses by oral process.  I would not have been prepared to draw the inferences that would be required only on the state of the evidence as it is in its present form.  The Defendant would have been entitled to unconditional leave to defend on this limb as well.

37.  Accordingly, the result is that overall the Defendant must have unconditional leave to defend and that this application must fail.

Costs

38.  I will make an order nisi that the costs of the summons should be the Defendant’s in the cause.