KONG MOU HOLDINGS LTD v. CHEUNG SHUEN LUNG AND OTHERS

HCCW 391/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 391 OF 1999

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J U D G M E N T

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1. The Applicant is a creditor of Goldcone Properties Limited ("the Company") (in liquidation) in the amount of about $15 million. On 7 April 2004 the Applicant came before me by Summons of the same date to apply, among other things, for variation of the Mareva granted by Yam J on 17 March 2004 so as to require the disclosure by the Respondents of all their assets, whether in Hong Kong or not, having a value of $5,000 or more, up to a total sum not exceeding $50,289,260 ("Sum X"). Sum X is the amount claimed by the Applicant against the Respondents pursuant to Companies Ordinance (Cap. 32) ("CO") ss. 266, 275 and 276. It is the amount said to have been lost to the Company as a result of alleged acts of fraud, fraudulent preference and misfeasance by the Respondents as directors of the Company. The Applicant says that it is claiming Sum X for the benefit of the Company, including the general body of its creditors.

2. The Mareva had managed to catch a substantial number of assets belonging to the Respondents, including real properties ("the properties"), shares ("the shares") in a listed company (E C Founder) and cash in bank accounts. There is a dispute as to whether the assets taken together attain a value equivalent to Sum X. The Applicant says that the assets are substantially less than Sum X, while the Respondents say that the assets are reasonably valued at Sum X or possibly more. Because the Applicant claims that there is a substantial deficit between the value of the assets and Sum X, it asks for variation of the Mareva to enable the Applicant to ascertain the Respondents' assets outside Hong Kong for the purposes of making up the perceived deficiency in value.

3. At the hearing on 7 April 2004 I queried whether CO ss. 266, 275 and 276 allowed the Applicant to claim substantially more than the $15 million for which the Company stood indebted to it. It seemed to me then wrong as a matter of general principle that, as against another party, a person should be entitled to claim more than the loss or damage which he has actually suffered. I did not raise the question to re-open the issue whether the Mareva should have been granted at all. It is too late for that. The matter has already been ventilated before Yam J at an inter partes hearing. I was instead concerned that, if the Applicant was at law entitled to claim no more than $15 million, it should not be allowed to vary the Mareva in the manner contended so as to freeze assets up to the value of Sum X. This is because by any measure the assets already frozen have a value in excess of $15 million. I invited counsel to draw my attention to relevant authorities one way or the other on the point raised by me and adjourned the matter to today for further argument.

4. Mr Horace Wong (appearing for the Applicant) argues that, because under CO s. 275 any proceeds recovered by a liquidator, creditor or contributory go to the general body of creditors for distribution among them pari passu, it follows that a liquidator, creditor or contributory should not be limited to recovery of the amount due to him but should be able to claim as much as possible of the loss caused to the company by the relevant wrongful acts of its directors.

5. Mr Daniel Fung SC (appearing for the 1st, 2nd, 3rd, 4th and 6th Respondents) submits on the contrary that a creditor claiming against directors under CO s. 275 is not a trustee or even in a position analogous to a trustee. That is plain, Mr Fung says, from authorities such as Re Cyona Distributors Ltd [1966] 1 Ch 889 and Re Esal (Commodities) Ltd [1997] 1 BCLC 705. If the creditor is not a trustee, why should he be able to claim more than the loss which he has actually suffered contrary to well-established general principle? If CO s. 275 meant to change that general principle, one would expect (Mr Fung argues) much clearer words in the provision to that effect. There are no such words.

6. In my view Mr Wong is right. The text of CO s. 275 does not set any limit on the relief available to an applicant. The Court may:-

"if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct" .

There are no words, for example, specifically restricting a creditor or contributory to the loss which either has suffered. Indeed, it is unclear how a contributory can be said to have suffered any particular loss otherwise than by reference to the total amount which a company is able to recover from its debtors including any directors sued under CO s. 275.

7. Even if one were to accept the general principles for which Mr Fung has contended (namely, that a party is normally restricted to recovery of his own loss), I do not think that the general principle is violated by Mr Wong's construction of CO s. 275. Once it is accepted (as Mr Fung accepts) that any recovery by the creditors must be held for the general body of creditors, an individual creditor (let alone a contributory) applying under CO s. 275 would not be able to recover any personal loss fully unless as much as possible of the liability of a director under CO s. 275 were recovered. I do not think it is an answer to this point to say (as Mr Fung does) that it is the nature of a winding up that creditors are often unable to recover 100%.

8. Mr Fung stressed that a creditor was not a trustee. But, even if that were the case, I do not see how that advances his argument in light of what I have just said about a creditor being unable to recover fully unless as much as possible is obtained from recalcitrant directors of what they owe a company.

9. I appreciate that Mr Wong's reading of CO s. 275 is not without its difficulty. For example, assume creditor A sues a director under CO s. 275 for the whole of an amount allegedly due to a company and not just the debt due to creditor A. What happens if creditor A fails, is creditor B able to sue the directors again on the same claim? Cannot creditor B say that he was (for instance) unaware of creditor A's proceedings and so should not be bound by them? What is to stop directors from being vexed by the same litigation over and over again as many times as there are creditors prepared to stake money on a claim against the directors? This is a serious question. But ultimately I do not think that it falsifies Mr Wong's argument. For example, it is always open for directors (if concerned by the point) to apply to join the company by its liquidators to any action by creditor A. That will ensure that creditor A's action, whatever its outcome, will be binding on the company as a whole (including the general body of its creditors). I note that a like suggestion of joinder was made by Lord Denning MR in Cyona at 902G.

10. I think that a similar argument applies in respect of CO s. 276, which refers equally to an application by a liquidator, creditor or contributory.

11. CO s. 266(1) does not specify who may bring an action to recover monies paid out as a fraudulent preference. It is worth noting that CO s. 266(1) simply stipulates what appears to be a self-executing result if the conditions set out in the section are met. A transaction "shall ... be deemed a fraudulent preference of ... creditors and be invalid accordingly". I do not see why, as a matter of first impression, a creditor should not be able to rely on the automatic result stipulated in support of a relevant claim. I think therefore that it is strongly arguable that CO s. 266(1) allows a creditor (among others) to bring an action based on that section's deeming provision and the consequent invalidity visited on a fraudulent preference. In light of what I have already decided in connection with CO ss. 275 and 276, the precise ambit of CO s. 266(1) is not something which I have to determine definitively today. This is because the claim under CO s. 266(1) is only one of alternative bases of the Applicant's claim. The other alternatives are CO ss. 275 and 276. Whether or not CO s. 266(1) permits a creditor to bring a claim, the Applicant's claim for a Mareva cannot at this interlocutory stage be dismissed as bad in law.

12. I add by way of footnote that I do not think that the reference in CO s. 266B to Bankruptcy Ordinance (Cap. 6) s. 50 ("BO") for the purposes of equating the definition of "fraudulent preference" under the CO with "unfair preference" in the BO assists on the question before me. It does not follow from the definition that the procedure for making good a fraudulent preference under the CO should be taken as identical to that for remedying an unfair preference under the BO.

13. But that is not the end of the matter as far as the application to vary the Mareva goes. The application hinges as well on the factual question whether the assets caught by the Mareva's existing terms are sufficient in all the circumstances to secure the Applicant in the event that its claim is successful. I indicated to Mr Wong that, as a matter of discretion, I would not be minded to order a variation enabling the Applicant to discover overseas properties sufficient to make up a deficiency, if the valuation evidence did not show a significant difference between the assets subject to the Mareva and Sum X.

14. Valuation is not rocket science. Valuers can reasonably differ among themselves as to how much real property is worth. It seems to me that, save for the Wing Ming properties, the evidence from Jones Lang La Salle relied on by the Respondents is not unreasonable. If one instead uses the Applicant's valuation for the Wing Ming properties and assumes a value of HK$0.30 (as suggested by Mr Wong) for the shares, one arrives at a valuation of about $46.36 million for the properties and shares. This does not include cash amounts subject to the Mareva held in the Respondents' bank accounts. I have not been told of the precise cash amount subject to Mareva.

15. It seems to me that in the round a difference between Sum X and the assets subject to the Mareva of somewhere between $3 to $4 million is not significant in the scale of things. This is especially so where the value of the shares and the properties may fluctuate up and down from to day to day. In the round, it seems to me that the Applicant is adequately secured at the present time. I therefore decline to vary the Mareva to allow for discovery of further assets in order to top up an alleged gap in relation to Sum X. That would be an unnecessary intrusion into the Respondents' affairs at this stage. Accordingly, the interim reliefs claimed by §§1(iii) and 2 of the Applicant's Summons dated 7 April 2004 are refused.

16. I shall now hear the parties on costs and any consequential orders.