XCHRX POLISPHERE LIMITED (In Liquidation) v. FOO WAN KONG

1996, No. HCA5234

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

______________

______________

______________

J U D G M E N T

______________

1. This is an appeal from an order made by Master Jennings on the 19th of November 19996 that judgment be entered against the defendant herein in the sum of $3,500,000 together with interest at judgment rate from the date of writ to the date of judgment, and thereafter from judgment to payment, and costs. The order was made pursuant to Order 14 of the Supreme Court Ordinance. The Defendant, now the Appellant in these proceedings, seeks unconditional leave to defend this action.

2. Since 1987 the Appellant and one Cheung Ki Fai have both been directors and shareholders of the Respondent herein with the Appellant holding the office of Chairman of the company whilst Cheung Ki Fai was the managing director responsible for the day to day running of the Respondent. In the period from 1987 the Appellant and Cheung Ki Fai set up further companies to conduct related businesses.

3. In the accounts of the Respondent for the period ended 31st of July 1990 it can be seen that as at the 1st of August 1989 Cheung Ki Fai was indebted to the Respondent in the sum of $185344 and the Appellant was indebted in the sum of $30000. There is no suggestion that these sums were other than a debt owed by each to the Respondent. By the 31st of July 1990 the position in the same accounts was that Cheung Ki Fai was indebted to the Respondent in the sum of $3,121,833 and the Appellant was indebted to the Respondent in the sum of $3,500,000. Those accounts were approved by both Cheung Ki Fai and the Appellant on the 13th of August 1991. The above sums shown to be owed by Cheung Ki Fai and the Appellant were in a section of the accounts headed "LOANS TO OFFICERS" and in the notes to the accounts note 8 reads -:

LOANS TO OFFICERS

They are in the form of interest-free current accounts, with no security and specific terms of settlement. No provision for non-payment has been made in the accounts as the directors regard that the advances are fully recoverable on demand.

4. In respect of those accounts for the period ended the 31st of July 1990 each of the Appellant and Cheung Ki Fai signed a "Confirmation of Loans to Officers" acknowledging the loan to each of them as set out in those accounts.

5. In the accounts of the Respondent for the period ended the 31st of July 1991 the entry for loans to officers as at the 31st of July 1991 shows that Cheung Ki Fai was indebted to the Respondent in the sum of $5,032,135 and the Appellant was indebted to the Respondent in the sum of $3,500,000. As with the accounts for the period ended the 31st of July 1990 they were signed by the Appellant and by Cheung Ki Fai as directors and contained the same note as the earlier accounts as to the view taken of the ability of the Respondent to recover the loans to officers.

6. In respect of the accounts for the period ending the 31st of July 1991 there was produced to me the minutes of a meeting of the directors of the Respondent on the 24th of October 1992 in which it is noted that the accounts are approved. Further a "Letter of Representation" from the directors to the auditors was approved at that meeting containing at paragraph 15 an acknowledgement that there was due from the directors to the Respondent an amount of $8,532,135.28 (corresponding to the amount shown as LOANS TO OFFICERS in the accounts for the period ended the 31st of July 1991). The letter of representation was signed by the Appellant and Cheung Ki Fai. The minute notes that at that meeting decisions were taken "After detailed and careful consideration as well as full enquiry into the records of the company, it was unanimously resolved that the letter be formally approved and issued to the auditors." Those minutes were signed by the Appellant as the chairman of the board of the Respondent. To this point it is clear that the Appellant, Cheung Ki Fai and the Respondent were all claiming the sums involved were loans by the Respondent to the Appellant and Cheung Ki Fai repayable on demand. At this point any examination of the accounts and records of the company clearly reflects that the Appellant was indebted to the company in the sum of $3,500,000.

7. The first and only indication in the records of the company that these sums were not loans to the directors is contained in the minutes of a meeting of the board of directors of the Respondent held on the 10th of December 1992 signed by the Appellant at which both the Appellant and Cheung Ki Fai were noted as present. Those minutes purport to record that of the amount owed by each director the sum of $3,500,000 in respect of each was as to $500,000 share capital taken up in another company owned by the directors and as to the balance in respect of each director a transfer of liabilities from a further company owned by the directors. The last paragraph of the minutes reads -:

It was resolved that the above transaction in the books of Polisphere Limited was in fact representing the actual investment made by Polisphere Ltd. in those related companies. The reason for charging to the director's current A/CS was purely the way to simplify the accounting records. The company should have no rights to demand settlement from both of the directors namely Mr. Foo Wan Kong and Mr. Cheung Ki Fai.

8. The Appellant relies wholly on these minutes together with his affirmed evidence that he left the running of the Respondent to Cheung Ki Fai and relied upon a misrepresentation by Cheung Ki Fai that the entries in the books of the Respondent did not reflect the true situation for some reason relating to tax. It is apparent that by the time this meeting was held the Respondent was in financial difficulties and indeed a petition to wind up the Respondent was filed on the 14th of July 1993.

9. My attention is drawn to the authority of Re Safe Rich Industries Ltd. CA No. 81 of 1994 where Bokhary JA affirmed the proposition that in an appeal of this nature the judge does not embark upon a mini-trial on the affidavits but looks at the evidence before him to determine whether the defendant's assertions are believable.

10. In the evidence before me the Appellant is a businessman who in addition to his involvement in the companies related to the Respondent was the managing director of another large company. He was experienced in commercial matters. For a number of years he attended meetings, affirmed accounts, confirmed his borrowings from the Respondent and approved a letter of representation to the auditors of the Respondent setting out those loans. It seems to me that if he had been told that the books of the company did not reflect the true position to the tune of more than $8,000,000 for tax purposes that when he carried out the "full enquiry" into the records of the Respondent referred to in the minutes of the meeting of the 24th of October 1992 it would have been unthinkable that he would authorise the issue of the letter of representation to the auditors. Common sense dictates that the meeting of the 10th of December 1992, which purported to change the nature and meaning of what had been incorporated approved and audited into the books of account of the company at a time when the collapse of the company was possible if not foreseeable, was no more than an effort by the directors to avoid having to repay sums they owed to the company.

11. The Appellant has shown no credible grounds why the order of Master Jennings should be disturbed and this appeal is dismissed.

12. Costs of this appeal for the Respondent herein.