CHARK FUNG SECURITIES CO. LTD. (IN LIQUIDATION) AND OTHERS v. MING FUNG GOLDSMITH AND OTHERS

CACV 124/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 124 OF 2000

(ON APPEAL FROM HCA NOS. 1360, 1361 AND 1362/1999

(CONSOLIDATED))

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J U D G M E N T

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Hon Rogers JA :

1. This is an appeal from a decision of Seagroatt J. The judge heard an appeal on an application for summary judgment over a period of 4 days in February and March. The reasons for the decision were handed down on the 24 March.

2. This action is a consolidated action. There were originally three separate actions with the two plaintiffs, Chark Fung Securities Company Limited ("CFS") and Kee Fung Sing International Finance ("KFS") suing Ming Fung Goldsmith in one action and Link Standard Limited in another. In the third action, "CFS" and "KFS" are joined by Ming Fung Bullion Company Limited ("MFB") as the 3rd plaintiff against Lau Miu King.

3. All three plaintiff companies are in liquidation. The Petitions for winding up the companies were presented by the Securities and Futures Commission on the ground that it was in the public interest. The winding up orders in respect of all three companies were made by Mrs Justice Le Pichon and Liquidators were appointed. The plaintiffs were previously engaged in the businesses of securities dealers, providers of finance to private investors and forex dealers respectively.

4. Mr. Chan Kwong Hung was the Managing Director and holder of 50 per cent of the shares in each of the plaintiff companies (and other linked companies). He is also one of the three partners in the 1st Defendant's business, the husband of the 2nd defendant and, with the 2nd defendant, a director and shareholder in the 3rd defendant company. The 3rd defendant was said to be a company which did not actively trade but its bank accounts featured in this case.

5. The plaintiffs' cases are based on the allegation that between 1 January 1997 and 25 May 1998, being the date of the winding up orders, there were substantial payments made to the defendants. In paragraph 7 of the Statement of Claim, it is said:

"These payments were identified by an investigation into the shareholders current account of the 2nd Plaintiff and a loan account in the name of Ming Fung Kam Yip Limited both of which appeared as assets in the balance sheet of the 2nd Plaintiff at the date of appointment of the provisional liquidators. The Management Accounts for the 2nd Plaintiff for the period from 1 January 1998 to 26 May 1998 show balances of HK$43,428,719.83 and HK$3,440,000.00 respectively in this regard."

6. Paragraph 8 went on:

"Whilst the general ledger of the 2nd Plaintiff indicated that the shareholders current account primarily comprised of amounts advanced to and withdrawn from the 2nd Plaintiff by Mr. Chan Kwong Hung, an investigation carried out by the Liquidators into the individual transactions making up the 2nd Plaintiff shareholders current account shows that this is not in fact the case. Similarly, an investigation by the Liquidators shows that the 2nd Plaintiff's balance sheet entry in respect of Ming Fung Kam Yip Limited does not reflect the true position."

7. The Statement of Claim then continued that copies of cheques and deposit slips supporting the transactions set out in the general ledger and shareholders current account had been obtained by the liquidators and that these showed that during the period of time in question, sums amounting to $5,260,000.00, $45,539,000.00 and $46,264,077.00 were advanced to the defendants.

8. It was on the basis of those figures that the plaintiffs' claims were brought.

9. The defendants admit they are properly accounting parties. It is said that because of the fact that Mr Chan and the 2nd defendant had substantial properties, they were able to obtain sizeable banking facilities. This, in turn, enabled the defendants and the 2nd and 3rd defendants, in particular, to give the plaintiffs access to cash immediately without having to wait for cheques or other forms of deposit to be cleared.

10. This, it is said, accounts for the somewhat extraordinary transactions which took place whereby very substantial sums of money were transferred into accounts in the name of the 2nd and 3rd defendants and then paid out. In short, the defendants' answer to the plaintiffs' claim is that there has been no proper allowance given for the sums paid back to the plaintiffs. It is said that some of that money was paid in cash and some by other forms of transfer. It is also said that there can be no justification in starting what is, in effect, an accounting exercise as of the 1 January 1997 but that the matter should be taken from the beginning. The management account is also challenged. It is pointed out that this was prepared after the commencement of the winding up and hence, by the liquidators and not by the management.

11. In each of the three actions, the Master gave leave to the defendants to defend conditional on a sum of money being paid into court. In High Court Action No. 1360 of 1999, the 1st defendant Ming Fung Goldsmith was required to pay in $2,500,000; in High Court Action No. 1361 of 1999, the 2nd defendant, Lau Miu King, had to pay in $4,290,000 and in High Court Action No. 1362 of 1999, the 3rd defendant, Link Standard Limited, had to pay in $2,234,650. On the appeal to the judge, the last two sums were increased to $5,000,000 and $2,500,000 respectively.

12. The Defendants now appeal against the orders contending that they should have unconditional leave to defend.

13. In my view, the state of this action dictates that there should be an account taken between the parties. It is simply impossible on the material which has been provided to produce a clear picture of exactly how much, if anything, is owing from any one party to another.

14. To the defendants' challenge that any computation in respect of amounts owing had to take into account the whole period of dealings between the parties and not merely that period after 1 January 1997, it was contended, on behalf of the plaintiffs, that the shareholders account was deficient in respect of matters prior to January 1997. This however cannot, it seems to me, be an answer where the shareholders account cannot, on any footing, be conclusive. Neither can it be an answer that the liquidators do not have resources to finance the cost of their going back further than 1 January 1997.

15. The main burden of the defendants' case is that there were continual transfers of money between the plaintiffs and the defendants. Money had to be transferred between the plaintiffs' accounts and the accounts of the 2nd and 3rd defendants and very often, had to be transferred between companies and different businesses within the group. The defendants contend that the plaintiffs' claim was based on an analysis and re-construction made by and on behalf of the liquidators. It is said that it is not complete. With some force, the defendants demonstrate that the plaintiffs' case changed not only upon the commencement of the proceedings whereby the sum claimed was reduced but that after filing the defence, the plaintiffs conceded that the defendants might have a defence in respect of some $16 m. and that there were further investigations being made in respect of a further sum of $10 m. Indeed, the initial sum sued upon can only be a fraction of the total sum of the payments of probably in excess of $280 m. passing from the plaintiffs to the defendants. The obvious and only conclusion being that the liquidators accept that there were substantial transfers from the defendants back to the plaintiffs and that the liquidators have concentrated their attention on some accounts only.

16. In broad terms, the plaintiffs' counter to the allegations that the defendants should be given credit for sums which are identified in schedules C, D, E and F of the defence is that even taking that into account, there are still substantial sums unaccounted for and in particular, some $30 m. or more which, even on the defendants' case, would only be accounted for as cash payments.

17. Mr Harris, on behalf of the plaintiffs, sought to cast doubt on the suggestion that cash withdrawals from the 2nd defendant's bank accounts had been paid to the plaintiffs. He argued that it was impossible to find correlating entries in the copies of the statements of the plaintiffs' bank accounts which were exhibited, which correlated to the cash sums withdrawn as shown in the 2nd defendant's Heng Seng Bank deposit accounts. That may be correct. But it seems to me that there are two answers to that.

18. First, the plaintiffs' bank statements which were exhibited are by no means on their face either in themselves complete nor even more importantly, are they statements of all the plaintiffs' bank accounts. There are a considerable number of other bank accounts of the plaintiffs.

19. In the second place, it is the defendants' case that it would be necessary to examine the various vouchers which were prepared in the plaintiffs' organisation at the time the payments were made because many of the payments were split into small amounts. It is the defendant's complaint that these vouchers have not been made available to them. Whether those vouchers are now available is perhaps doubtful, although it does appear from a letter of 10 June of this year, which was included in the court bundles, that the liquidators have discovered relevant documents relating to payments into the defendants' accounts.

20. For my part, I find it impossible in this case to ascertain what, if any, amount is owing by the defendants or any of them to the plaintiffs or any of them. This matter, in my view, needs to be examined with a proper account being taken. I would reiterate the comments on the judge below where he said that the position was obscure.

21. The judge below decided the case essentially on the basis that the defendants' case was unbelievable. He drew strong inferences from the fact that the defendants had not produced banking documents which they should have obtained from their banks. For example, there were substantial payments into the Heng Seng Bank saving accounts of the 2nd defendant and there were cheques or other formal transfers from that account but copies of relevant documents were not available. In the absence of those documents, the judge drew the inference that the defendants' and Mr Chan's statements as to the way in which the bank accounts were operated could not be believed.

22. I find myself in this difficulty that although the use of the 2nd and 3rd defendants' bank accounts in the way admitted by the defendants was far from what could be described as normal commercially, it is impossible on the papers to come to any concluded view that the defendants were dishonest. Indeed, Mr Harris did not seek to aver dishonesty, although he was prepared to refer to what could only be regarded as suspicious surrounding circumstances. Whilst, of course, a defendant is required to demonstrate that he has a defence, care must be taken that an order 14 application is not turned into a mini (or major) trial. In my view, in expecting the bank and other documents to be exhibited, the court was expecting too much on a summary judgment application. It would be no part of a court's function in considering a summary judgment application to conduct an account.

23. In a situation where the liquidators of the plaintiff companies have now conceded that credit should be given in respect of very substantial sums for which credit was not previously given and which arose in the same way in which the defendants say the remaining amounts can be accounted for, I find it difficult to alight on any sum which can be pointed to as owing. I am troubled by the fact that the liquidators' calculation of the sum owing only starts at 1 January 1997; that the liquidators appear to have confined their attention to only some accounts and that there are clearly likely to be many other relevant vouchers and other documents which should be considered.

24. Our attention has been drawn to the note in the Supreme Court Practice 1999 14/4/13 headed "Question for account". This indicates that "leave to defend should be given where there is reasonable ground for an inquiry or account in order to ascertain the amount recoverable". It also indicates that "judgment may be given for part of the total sum which may be found to be due on an account, where it is clear that there is no defence as to that part, with unconditional leave to defend as to the balance". Interim payments can also be ordered.

25. In this case, there is no dispute between the parties that an account is necessary. Whilst it would not, it seems to me, be impossible that where an account is appropriate, leave to defend should be made conditional upon the payment into court of a particular sum, it seems to me that that could only be done where it can be said that there is a particular sum which would be relevant to the making of such an order. In other words, a sum which the court is almost sure is an accurate calculation of what must be owing and the defence in respect of it is shadowy. This to me is not such a case. There can be no identification of the sum involved. Furthermore, this is a case where the documentation is likely to be massive and costly to prepare. The court should not, in the circumstances of this case, demand that the defendants "prove" their defence. The account will be complex and possibly difficult. It will also require oral evidence. It is inappropriate to turn an Order 14 application into a lengthy account.

26. In my view, this appeal should be allowed and unconditional leave to defend should be given but that the matter should proceed immediately to the taking of an account of the sums which are due and owing from the defendants to the plaintiffs and a summons for directions in that respect should be taken out immediately so that the sums owing can be ascertained. There should be an order nisi that the defendants should have their costs here and below.

Hon Ribeiro JA :

27. I entirely agree and cannot usefully add anything.