GMT INDUSTRIAL LTD v. FAN RONG LI and YAU PAUL as the Administrator of the estate of SELVAM SELVARAJ, deceased

HCA 546/2015

[2025] HKCFI 2141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 546 OF 2015

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J U D G M E N T

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Introduction

1.  The core dispute between the parties arose from the receipt of Mr Selvam Selvaraj (“Mr Selvaraj”)  of an amount of US$7 million from GMT Industrial Limited (“GMT”)  in 2004. GMT says it was a misappropriation of its assets.

2.  GMT is in voluntary liquidation on 3 November 2020 and Mr Cosimo Borrelli and Mr Simon Ma (collectively “the Liquidators”)  were appointed as its liquidators on or around 30 June 2021.

3.  On 19 May 2008, Mr Selvaraj passed away. His wife, Madam Fan, and Mr Yau were appointed as his joint administrators pursuant to the Letters of Administration granted in HCAG007043/2008 on 13 March 2009.

4.  Mr Yau ceased to be the administrator of Mr Selvaraj on 19 May 2017 and hence he was removed as a party to this action by the order of Master J Wong dated 21 March 2018. Thereafter, Madam Fan has been the sole administrator of the estate of Mr Selvaraj.

5.  In this action, the Liquidators are acting for GMT represented by Mr Tai. Madam Fan being sued as the administrator of the estate of Mr. Selvaraj act in person.

6.  At the trial, Mr Borrelli testified for GMT and Madam Fan testified for the estate of Mr Selvaraj.

Background facts

7.  The following background facts are either undisputed by Madam Fan or indisputable being evidenced by inconvertible documentary evidence.

8.  GMT is a family company founded in 1979 by the late Mr Karupaya Selvaraj (“the late Father”)  and his son Mr Selvaraj.  

9.  The late Father passed away on 22 February 2003. His two other sons Mr Mohan Selvaraj (“Mohan”)  and Mr Moorthy Selvaraj (“Moorthy”)  took over the management of GMT after the demise of Mr Selvaraj and became its directors.

10.  There were a lot of disputes between the shareholders of GMT leading to the presentation of a winding up petition by Moorthy. Eventually the shareholders of GMT passed resolutions for the winding up of GMT on 3 November 2020 and GMT was wound up voluntarily as a result.

11.  Upon the appointment, the Liquidators reviewed the accounting books and records of GMT to discharge their duties. They have found two payments to be suspicious. These two payments were made when Mr Selvaraj was managing director of GMT. First, a sum of US$2,000,000 was paid to him on 27 August 2007 and then another sum of US$5,000,000 was paid to him on 1 November 2007.

12.  These two payments (“the Payments”)  by way of transfer to Mr Selvaraj’s accounts, the subject matter of these proceedings, were evidenced by unchallenged contemporaneous documents. These documents include payment vouchers, a withdrawal slip, the bank passbook of GMT, the accounting documents of GMT including the Director Current A/C ledger and the Ka Wah Bank USD Saving Account ledger.

13.  By a letter dated 21 October 2014, China Citic Bank International Ltd, the bank of GMT, confirmed that the Payments were transferred to the bank account held by Mr Selvaraj.

14.  At all material times, until his death, Mr Selvaraj was one of the authorised signatories of GMT and could operate all the bank accounts of GMT.

15.  The Liquidators could not find any basis for the Payments from the books and records of GMT.

16.  On the other hand, the Liquidators found out that on or about 31 December 2004, when Mr Selvaraj was the managing director of GMT, he caused GMT to make certain accounting entries in the books and records of GMT to suggest that GMT was indebted to Mr Selvaraj for HK$38,283,114.45 (“the Alleged Indebtedness”).

17.  The Liquidators identified the following two dubious entries in the Ledger Report of Director Current Account making up the Alleged Indebtedness for the period from 1 January 2004 to 31 December 2004.

18.  First, there was a transfer of HK$16,998.114.45 of commission payable trf to the Director’s Current Account (also shown on an unsigned Journal Voucher dated 31 December 2004).

19.  Second, there was a transfer of HK$21,285,000 of account payable of “LENOXX” to the Director’s Current Account (also shown on another unsigned Journal Voucher dated 31 December 2004).   

20.  According to the Ledger Report of Commission Payable for the period from 1 January 2004 to 31 December 2004, a debit of HK$16,998,114.45 as “Commission payable trf to Director Current Account” on 31 December 2004 was recorded.

21.  Further, it was found that a closing balance of HK$25,426,603.52 was recorded in the “Director Current A/C” ledger in 2004 and a sum of HK$25,767,484.05 was recorded as an “Amount due to a director” in the 2004 Audited Financial Statements.

22.  There is a difference of HK$340,880.53 between the aggregate of these two amounts and the Alleged Indebtedness. This amount was recorded as being owed by the Father’s estate to Mr Selvaraj in the 2004 financial year and is reflected in the opening balance of the “Director Current A/C” ledger in 2004.

23.  The Liquidators are unable to find any accounting documents of GMT substantiating all these entries. The basis of the commission payment is unknown.

24.  On the other hand, according to the Ledger Report of “LENOXX” for the period from 1 January 2004 to 31 December 2004, there are no transaction recorded except for a debit of HK$21,285,000 as “Account payable trf to Director Current Account” on 31 December 2004.

25.  The Liquidators could only locate 11 invoices in the books and records of GMT. Out of those 11 invoices, there is only one invoice dated 7 February 2005 numbered 23638 issued by GMT to Lenoxx Electronics (Aust)  Pty Ltd (“the Lenoxx Invoice”)  for 1160 pieces of GMT170B (CD5100)  5 Disc CD Micro System Digital PLL AM/FM Radio with Station Presets, CD-R/RW Readable, with Remote Control in the amount of US$63,800.

26.  The Lenoxx Invoice post-dated the accounting entry indicating an indebtedness owed to Mr Selvaraj on or about 31 December 2004 instead of February 2005.

27.  The Liquidators found a debit note issued by Lenoxx to GMT dated 26 April 2005 (“the Lenoxx Debit Note”). In the Lenoxx Debit Note, Lenoxx charged GMT a sum of $2,000,000 (currency not specified)  for “Faulty Goods delivered during the year 2004 & 2005 at 15% of goods sold”.

28.  The Lenoxx Debit Note was sent with a covering email by Mr George Marcus who was purportedly the director of Leonxx to Mr Selvaraj. The content of the Lenoxx Email is as follows,

“Over past 2 years we have purchased goods to the value $15,000,000.00 from your company. When I negotiated unit price you assured me of the quality of the goods and assured me that your unit prices may be a little higher than other suppliers but you include strict QC during production.

I have now reviewed the return that I receive from customers on your products and they are 15% of the goods sold. If they were 3% I would not complain but at 15% I have no choice but to submit to you a debit note for recovery of returns.

Accordingly, please find attached debit note which is submitted reluctantly but as a necessity.”

29.  The Liquidators could only identify one transaction in the books and records of GMT recorded as “Sales Return for Lennox HK$621,462.58”. However, there cannot be found any supporting document substantiating the payment of HK$621,462.58 to Lenoxx.

30.  The Liquidators made enquiries with Mohan. Mohan was appointed as a director of GMT after the death of the Father. He remained actively involved in the business and had knowledge of the operations of GMT. However, Mohan knew nothing about the substantial commission claimed to be payable to Mr Selvaraj.

31.  Further, Mohan had no knowledge of any claims made by Lennox for defective goods and was certainly not aware of any reimbursement or compensation being made to Lenoxx. He did not understand why any reimbursement to a customer in respect of goods sold by GMT would be first made by Mr Selvaraj. Mohan does not believe that such reimbursement was payable in the first place and in any event could not have been settled by Mr Selvaraj.

32.  The Liquidators managed to contact Mr Mottel Krasnjanski (“Mottel”)  who is a partner of Lenoxx. They had a telephone conversation with Mottel on 13 September 2023 and the content was recorded contemporaneously in a telephone note. Mottel confirmed that Lenoxx Debit Note had been issued to GMT demanding compensation of faulty goods of US$2 million but neither GMT nor Mr Selvaraj had paid any part of the amount of US$2 million demanded. Since then, Lenoxx has ceased its business relationship with GMT.

GMT’s pleaded case

33.  The pleaded case of GMT is that the Payments were actually Mr Selvaraj’s misappropriation of its fund. They were purportedly made without any valid resolutions in the absence of any knowledge let alone consent of GMT’s board of directors. The Payments served no discernible commercial purpose or benefit to GMT. Nor was GMT under valid obligation to make the Payments to Mr Selvaraj or in receipt of any valid consideration from Mr Selvaraj or any other party for the Payments. Lastly, there was no proper purpose for the Payments to be made save to benefit Mr Selvaraj solely to the detriment of GMT.

34.  GMT avers that the misappropriation of Mr Selvaraj represents a dishonest act of Mr Selvaraj or his breach of fiduciary duties and/or trust owed to GMT as its director.

35.  Such fiduciary duties include a duty to act in good faith and in the best interests of GMT, a duty not to act for a purpose collateral to the purposes conferred by the Articles of Association of GMT and a duty not to act so as to place himself in a position in which his personal interest did or might conflict with the interests of GMT.

36.  On the other hand, GMT alleges that Mr Selvaraj caused certain false accounting entries to be made in the books and records of GMT to show that GMT was indebted to him. GMT avers that it was never its practice to pay commission to its directors and such purported commission was given in the absence of authorisation and consent by the board of directors. Moreover, there is a complete lack of documents such as invoices and receipts to support such commissions.

37.  The entries concerning the alleged payment to Lennox are also false in that there was no payment made to Lennox by GMT or Mr Selvaraj and there is no document evidencing such a payment at all.

38.  On the basis of these allegations, GMT claims against Mr Selvaraj the following relief:

(1)  A declaration that the Payments were made without proper authority of GMT and/or were otherwise in breach of fiduciary duties owed by Mr Selvaraj to GMT;

(2)  A declaration that the said breach of fiduciary duty was fraudulent and dishonest;

(3)  A declaration that Mr Selvaraj at all material times held and after his death, his estate has been holding the Payments on constructive trust for GMT;

(4)  A declaration that Mr Selvaraj and his estate are not entitled to set off the amounts claimed as payable to him in the falsified books and records against sums due from Mr Selvaraj to GMT;

(5)  An order for an account and making of all necessary inquiries in respect of the Payments and such benefits or profits (if any)  derived from or accrued in relation to the same;

(6)  An order for restoration and/or repayment for the Payments or such sum as shall be found due upon the taking of the accounts and making of the inquiry;

(7)  Equitable compensation or equitable damages to be assessed for Mr Selvaraj’s breach of fiduciary duty;

(8)  Interest; and

(9)  Costs.  

Purported defence

39.  A defence was filed on 3 June 2015 when the defendant was legally represented (“the Defence”). The Defence consists of little more than bare denials and non-admissions. There is no positive case at all.

Relevant legal principles

40.  It is trite that a director owes fiduciary duties to his company and such duties include all those pleaded in the Statement of Claim: see §35 above. See also Law of Companies in Hong Kong (4^th ed)  at §8.008.

41.  Misappropriation of company’s assets is undoubtedly a breach of fiduciary duties apart from a criminal offence.

42.  It is well-settled that directors are treated as trustees of assets which are in their hands or under their control: Liu Hsiao Cheng v Wong Shu Wai [2018] 1 HKLRD 1087 at §§30-31 per Lam VP (as he then was).

43.  Mr Tai helpfully refers to JJ Harrison (Properties)  Ltd v Harrison [2002] 1 BCLC 162 in which Chadwick LJ explained the creation of a construction trust arising from misappropriation or misuse of the company assets in the following terms (§29),

“…a director, on appointment to that office, assumes the duties of a trustee in relation to the company's property… his obligations as a trustee in relation to that property predate the transaction by which it was conveyed to him. The conveyance of the property to himself by the exercise of his powers in breach of trust does not release him from those obligations. He is trustee of the property because it has become vested in him; but his obligations to deal with the property as a trustee arise out of his pre-existing duties as a director; not out of the circumstances in which the property was conveyed.”

44.  Further, in GHLM Trading v Maroo [2012] 2 BCLC 369 at §149, Newey J (as he then was)  said this,

“…once it is shown that a company director has received company money, it is for him to show that the payment was proper. In a similar way, it seems to me that, where debit entries have correctly been made to a director’s loan account, it must be incumbent on the director to justify credit entries on the account. That conclusion makes the more sense when it is remembered that the director: (a)  will have been (one of those)  responsible for the management of the company’s business, and (b)  will have had a responsibility for ensuring that proper accounting records were kept…”.

Discussion

45.  The receipt of the Payments by Mr Selvaraj is well-documented. I accept Mr Tai’s submission that Madam Fan has the evidential burden to give a legitimate reason for such a receipt of the Payments.

46.  Madam Fan had worked in GMT as a shipping clerk for 18 years until the death of Mr Selvaraj. She has no personal knowledge of Mr Selvaraj’s dealings with the assets of GMT and the accounting matters of GMT. She did not know the Payments until the solicitors of GMT approached her. Nor did she know anything about the entries in the books and records of GMT.

47.  There is an email sent by Madam Fan to the Liquidators dated 21 July 2021 (“the July 2021 Email”). There, Madam Fan explained the Payments. In regard to the alleged payment of commission in the sum of HK$16,998,114.45 in 2004, Madam Fan provided the following explanation,

“The amount was pay (sic)  for family expense, deceased father’s estate duty, deceased father’s personal salary tax, Mohan (Leaves)  unpaid his purchasing to GMT invoice.

Accountant emailed to Mr Selvaraj said that the above payment can not be showed in Audit report,

Suggested “commissioned due to Mr Selvaraj” instead.

Deceased father estate duty, grant no.: HCAG 006305/2005 HK$11,861,628.62

Deceased father personal salary tax 6HI-XA8001828(T)0 HK$1,538,640.00

Mohan (Leaves)  purchased merchandise, did not pay to GMT HK$2,775,476.50

Family expense: Mother, Mohan, Moorthy, Shiva, Selvam HK$822,368.90

The payment was consented by both directors: Selvam, Mohan

The financial statements were approved by board of directors.”

48.  It is noteworthy that this explanation had never been given in the Defence and her witness statement before the July 2021 Email came into being. Alarmingly, in cross-examination, Madam Fan accepted that this explanation was her fabrication only. This inevitably causes irreparable loss to her credibility.

49.  Madam Fan is unable to produce any evidence to show that Mr Selvaraj was entitled to the sum of HK$16,998,114.45 as his commission. Nor is she able to challenge the evidence of Mr Borrelli either by way of cross-examination or adducing contrary evidence. There is no reason why this court does not accept the investigation result of the Liquidators and reject the allegation of commission payable to Mr Selvaraj.

50.  In the July 2021 Email, Madam Fan gave another piece of false information relating to the alleged payment of HK$21,285,000 to Lenoxx in 2004. She referred to a number of invoices but only one of them related to Lenoxx. No reference to any commission payable to Lenoxx can be found in the invoice.

51.  The allegation of commission payment to Lenoxx has never been pleaded or mentioned in Madam Fan’s witness statement. It is not supported by any documentary evidence and it is contradicted by the evidence of Mr Borrelli relating to his enquiries with Mottel.

52.  Mr Tai draws to my attention that the “Lenoxx” ledger account which records this HK$21,285,000 entry is not the account containing the records of GMT’s business transactions with Lenoxx. It is a separate account labelled “Lenoxx” with a single entry of HK$21,285,000 and its transfer to the director’s current account. This is suspicious indeed.

53.  Madam Fan also alleges that the sum of US$2 million received by Mr Selvaraj represented the payment to Lenoxx as compensation for faulty goods delivered. Her allegation is made solely on the basis that there was a demand of such an amount in the Lenoxx Debit Note. She asserted that if the demand had not been satisfied, Lenoxx must have taken enforcement action against GMT. Madam Fan could not point to any documentary evidence of such a payment to Lenoxx.

54.  This assertion is made in complete disregard of the unchallenged and uncontradicted evidence that Mottel indicated to the Liquidators that Lenoxx has not received any payment from GMT or anyone in satisfaction of the Lenoxx Debit Note.

55.  I refuse to accept her assertion and do not believe that Mr Selvaraj ever paid Lenoxx anything pursuant to the Lenoxx Debit Note.

56.  Now I turn to Mr Selvaraj’s receipt of US$5 million. No explanation for such a receipt can be found in the Defence or the witness statement of Madam Fan.

57.  Madam Fan in cross-examination repeatedly claimed that there was a family arrangement for the use of US$5 million. Mr Selvaraj had already made the distribution of the amount among the family members though there is no collaborative evidence of such a distribution nevertheless.

58.  Curiously enough, in the July 2021 Email, Madam Fan alleged that the entire sum was still in the bank account of Mr Selvaraj despite the alleged distribution.

59.  Again the alleged family arrangement cannot be found in the Defence and the witness statement of Madam Fan. I am unable to accept this late allegation.  

60.  In any event, the sum was the property of GMT. The alleged family arrangement could not provide any justification for Mr Selvaraj’s misappropriation of the assets of GMT.

61.  Madam Fan places substantial reliance on the Audited Financial Statements of GMT for the year ended 2004 (“the 2004 Audited Financial Statements”). She submits that they were approved by the directors of GMT and thus the legitimacy of the Payments should be beyond reproach.  

62.  I find no merit in her submission. First of all, the balance sheet in the 2004 Audited Financial Statements shows that the amount of HK$25,767,484.05 was recorded as “Amount due to a director” (“the Due Amount”). In the balance sheet in the Audited Financial Statements for the year ended 2007 (“the 2007 Audited Financial Statements”)  shows that the Due Amount still existed in 2006 but disappeared in the year of 2007.

63.  It is true that two of the then directors of GMT signed the 2004 and 2007 Audited Financial Statements. For the former, it was signed by Mr Selvaraj and Mohan.

64.  These records, however, cannot sufficiently prove the Alleged Indebtedness absent any underlying accounting documents in support. They, per se, could not justify the Payments either. I accept the evidence of Mr Borrelli that the veracity of the Audited Financial Statements is seriously doubtful in light of the paucity of accounting evidence to substantiate the entries and records. I am unable to accept such entries and records as proven.

65.  Madam Fan also complains about the delay in the commencement of this action. As rightly pointed out by Mr Tai, no limitation issue is pleaded in the Defence and in any event, no limitation period is applicable to a claim for recovery of trust property misappropriated/misused by a trustee: section 20(1)(b)  of the Limitation Ordinance, Cap. 347.

66.  I find Mr Borrelli to be a truthful witness and I appreciate the difficulties of the Liquidators’ investigation into the financial affairs of GMT. I am convinced that neither the Payments nor the Alleged Indebtedness are genuine and proven.

Conclusion and orders

67.  For the reasons given, I am satisfied that the Liquidators have proved the claim of GMT against Mr Selvaraj and his estate on the balance of probabilities. I find that Mr Selvaraj misappropriated US$7m of GMT in breach of his fiduciary duty as a director of GMT with the dubious entries in the books and records of GMT. This is a clear case of breach of trust. There is no defence at all. I enter judgment against the estate of Mr Selvaraj.

68.  Accordingly, I make the following order:

(1)  A declaration that Mr Selvaraj misappropriated the Payments in breach of his fiduciary duty;

(2)  A declaration that Mr Selvaraj and his estate are not entitled to set off any amount alleged to be payable to Mr Selvaraj;

(3)  A declaration that Mr Selvaraj and his estate do hold the amount of the Payments and the traceable proceeds and substitutes thereof on constructive trust for GMT.

(4)  All necessary accounts and inquiries to enable GMT to trace and recover the Payments and such traceable proceeds and substitutes thereof (together with all accrued interest);

(5)  An order for the estate of Mr Selvaraj to deliver up or transfer to GMT of all assets or monies found due (including interest thereon)  upon the taking of the said accounts and inquiries. 

(6)  Equitable compensation:-

(a)  In the sum of US$2,000,000 with interest thereon at HSBC prime rate plus 1% from 27 August 2007 to date of judgment and at judgment rate thereafter until full payment.

(b)  In the sum of US$5,000,000 with interest thereon at HSBC prime rate plus 1% from 1 November 2007 to date of judgment and at judgment rate thereafter until full payment.

69.  There is no reason why costs should not follow the event. I make a costs order nisi that costs of this action including all costs reserved be to GMT, to be taxed if not agreed.

70.  It remains for me to thank Mr Tai for his fair and helpful submissions.