RE OCEAN TIME DEVELOPMENT LTD AND OTHERS

HCCW 334/2004
HCCW 336/2004
HCCW 338/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 334 OF 2004

COMPANIES WINDING-UP NO. 336 OF 2004

COMPANIES WINDING-UP NO. 338 OF 2004

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AND

HCA 1463/2005

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1463 OF 2005

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J U D G M E N T

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The applications before the court

1.  At this hearing, there were four applications before the court.  Three were applications by Grand Gain Investment Limited (“GGI”), made respectively in the liquidations of each of Tinson International Limited (“Tinson”), Goldgood Properties Limited (“Goldgood”) and Ocean Time Development Limited (“Ocean Time”) by summonses dated 12 October 2005, seeking leave to apply out of time to reverse the decision of the liquidators of each of those companies (in each case Mr Cosimo Borelli and Mr Kelvin Flynn) (“the liquidators”) by which the liquidators rejected proofs of debt submitted by GGI in each of the liquidations, and seeking the substantive reversal of such rejections.  In the case of Tinson, GGI also seeks leave to amend its proof of debt by reducing the amount claimed.  The fourth was an application by the liquidators, to strike out a claim made against them by GGI in HCA 1463 of 2005 in relation to certain matters done by them in their handling of the liquidation of Ocean Time.

The appeals against the rejection of GGI’s proofs of debt

2.  I shall deal first with the applications to reverse the liquidators’ decisions in respect of the proofs of debt filed by GGI in the three liquidations.

3.  Each of Tinson, Goldgood and Ocean Time is a company in which GGI and Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) were, directly or indirectly, interested.  GGI held 40% of the shares in Tinson (ZKHK holding the other 60%), which in turn held 98% of the shares in Ocean Time (the remaining 2% being held by a company unrelated to either GGI or ZKHK).  Ocean Time’s principal asset appears to have been property in the New Territories.  GGI held 30% of the shares in Goldgood (ZKHK holding the other 70%), which owned various assets.

4.  ZKHK was a “window company” for the Zhuhai Municipal Government.  It was wound up pursuant to the petition of Standard Chartered Bank presented on 12 August 2003.  The liquidators (who had earlier been appointed as provisional liquidators of ZKHK) were appointed its liquidators.  In the course of their conduct of the provisional liquidation and liquidation of ZKHK, they took steps to get in its assets.  These included putting various of ZKHK’s subsidiaries, including Tinson, Goldgood and Ocean Time, into liquidation.

5.  On 22 November 2004, GGI submitted a proof of debt in respect of each of Tinson, Goldgood and Ocean Time.  The proof of debt was in each case signed by one of its directors, a Madam Yu Hung Ping (“Madam Yu”).  GGI claimed to be a creditor of Tinson in the amount of HK$69,386,343.25 in respect of advances made by it to Tinson.  It claimed to be a creditor of Goldgood in the amount of HK$37,767,830.09 in respect of advances made by it to Goldgood.  Finally, it claimed to be a creditor of Ocean Time in the amount of HK$1,302,574.00 in respect of various payments of management fees and administration expenses paid by it on behalf of Ocean Time.  The proofs of debt were accompanied by a copy of the audited accounts of the companies concerned - in the case of Tinson and Ocean Time, for the year ended 31 March 1999, and in the case of Goldgood, for the year ended 31 March 1998.

6.  The liquidators were not satisfied with the proofs submitted by GGI.  On 1 February 2005, they wrote to GGI asking for further information and documentation to be provided in respect of each of the alleged debts.  GGI did not respond to the request, and the liquidators wrote again to GGI on 3 March 2005, stating that since no further information had been received, the liquidators would adjudicate the claims on the basis of the information provided to date.  Thereafter, on 30 March 2005, the liquidators sent GGI notices of rejection in respect of each of the proofs of debt.  However, GGI did not challenge the rejection of its proofs of debt until 12 October 2005, well after the expiry of the 21 day period provided for in rule 95 of the Companies (Winding-Up) Rules within which an aggrieved creditor can lodge an appeal against rejection as of right.

7.  Each of GGI’s applications for leave to appeal out of time and for the substantive reversal of the liquidators’ decisions was supported by an affidavit of Madam Chan Wang Yu (“Madam Chan”).  Madam Chan describes herself as an employee of the Grand Gain group of companies since 1995, whose duties involve “the handling of incoming faxes and correspondence and also dealing with the various accounting matters of [GGI]”.  She explains that while she remembers having seen the letters of 1 February 2005, which she passed on to Madam Yu for handling, she does not recollect ever having received the letters of 3 March 2005, or the notices of rejection dated 30 March 2005.  She says that by March 2005, Madam Yu had fallen out with Mr Lau Wong Fat (“Mr Lau”), the other director and main shareholder of GGI, and that Madam Yu may well have intercepted these documents to cause problems for GGI.

8.  Madam Chan’s affirmations went on to deal with the underlying merits of the debts.  In each case, she exhibited additional sets of audited accounts of the companies concerned, going back to the financial year ending on 31 March 1994 in the case of Tinson, and 31 March 1993 in the case of Goldgood and Ocean Time.  However, no audited accounts were produced for any period after 31 March 1999 in the case of Tinson and Ocean Time, or after 31 March 1998 in the case of Goldgood.  Where there was a difference between the balance shown in the latest available set of audited accounts and the amount claimed in the proof of debt, she sought to provide an explanation for the difference.  In the cases of Ocean Time and Goldgood, the amounts claimed in the proofs of debt exceeded the figure shown in the latest accounts.  Madam Chan stated that the additional amount represented management fees and administration expenses in the case of Ocean Time, and what were described as “miscellaneous advances” in the case of Goldgood.  In the case of Tinson, while the figure in the latest audited accounts of Tinson was slightly more than that in the proof of debt filed by GGI against it, Madam Chan explained that as Tinson had received a distribution in respect of its share of the compensation paid by the Government on the resumption of part the land owned by Ocean Time, credit would be given for this amount, so as to reduce the amount of the proof to HK$41,911,916.00.

Whether GGI should be given leave to appeal out of time

9.  At the hearing, Mr Carolan, appearing for the liquidators, indicated that while he was not in a position to consent to GGI being given leave to appeal against the rejections of the proofs of debt out of time, he would not make any submissions as to this, and would leave it to the court to exercise its discretion on this point, as all the material which was likely to be available for the purposes of determining the substantive appeal was already before the court.

10.  I am satisfied that it would be appropriate for me to exercise my discretion in GGI’s favour, so as to allow it to challenge the liquidators’ decisions despite the delay in doing so.  Madam Chan has put forward an explanation for the failure to respond promptly to the notices of rejection, and it seems to me most unlikely that GGI would have been likely to have intended to accept the rejection of its proofs of debt, having regard to the amounts involved, and also having regard to the fact that it has brought proceedings against the liquidators which are premised on its status as a creditor of Ocean Time and Tinson.  I therefore give leave to GGI to challenge the decisions of the liquidators to reject its proofs of debt in respect of each of Tinson, Ocean Time and Goldgood, notwithstanding that the time prescribed for doing so under Rule 95 of the Companies (Winding-Up) Rules has expired.

11.  I turn now to consider the merits of GGI’s appeals against the liquidators rejection of its proofs of debt.

The Tinson proof of debt

12.  I shall deal first with the position in relation to Tinson.  As I have noted, the amount for which GGI now seeks to prove has been reduced to HK$41,911,916.00.

13.  Mr Chan S.C., appearing for GGI, submits that in determining this question, the court is simply required to conclude whether, on a balance of probabilities, GGI has established that it is a creditor of Tinson.  In doing so, he says, the court should have regard to all of the evidence placed before it.  In this case, the evidence adduced by GGI consists of the audited accounts of Tinson and Madam Chan’s evidence as to why the amount shown in the audited accounts is to be reduced to that now claimed.  The audited accounts for the financial year ending on 31 March 1995 indicate that Tinson had debts of HK$127,196,113.00 and HK$72,206,961.00 respectively owing to its “holding company” and “a shareholder”.  As Tinson had only two shareholders, ZKHK holding 60% and GGI holding 40% of its shares, it followed that the debt owing to its “holding company” was owed to ZKHK, and the debt owing to “a shareholder” was owed to GGI.

14.  Mr Chan also points to the fact that Tinson’s issued share capital was relatively small (HK$1,000,000.00) in comparison with its assets (its investment in Ocean Time), so that absent any source of external funding (and there is no suggestion that there was any), the source of Tinson’s ability to provide funds to Ocean Time to enable Ocean Time to acquire its main asset must have been its shareholders, as indicated by its audited accounts.  Finally, Mr Chan drew my attention to Madam Chan’s evidence that the audited accounts were supplied to ZKHK regularly, and that it could be expected that ZKHK would have queried the accounts if they did not accurately reflect the loans by itself and GGI respectively.

15.  Against this, Mr Carolan submitted that the approach which should be adopted was as follows:-

(1) The onus of proof was on GGI to show that there was a real debt due to it;

(2) In determining whether or not to admit a proof of debt, the liquidators were not bound by the accounts, and could go behind them to form their own conclusions as to the existence or otherwise of a debt;

(3) The liquidators were not bound to assume that all relevant documents were available when the accounts were prepared;

(4) The liquidators were entitled to require satisfactory evidence of the debt proved for; and

(5) The evidence, such as it might be, had to be considered on its own merits.

16.  Mr Carolan went on to submit that the liquidators were entitled to conclude that the audited accounts could not be relied upon as evidence of the existence of a real debt due from Tinson to GGI, having regard to the following matters:-

(1) The liquidators had not been given any explanation of how the debt arose, other than Madam Chan’s statement in her affirmation it was, in effect, a shareholder’s loan by GGI to Tinson.

(2) Mr Lau had been unhelpful in the course of the liquidators investigation of the affairs of the Zhu Kuan group, and had failed (despite an order for his examination being made under section 221 of the Companies Ordinance) to provide any meaningful information, books or records relating to companies in the Zhu Kuan group (including the three companies with which I am concerned).  The only evidence of the debt was the audited accounts which were signed by Mr Lau (who was himself ultimately beneficially interested in it, through his ownership of GGI) as a director of Tinson.

(3) On the basis of investigations made by the liquidators (details of which were not provided, the liquidators considered that there was reason to doubt the independence of the auditor who had audited Tinson’s accounts, as he appeared to have been closely involved in restructuring transactions involving Mr Lau and the Zhu Kuan group, and also to have had a wide-ranging relationship with GGI.  The auditor was also said to have, without any good explanation, destroyed various audit files certain companies in the Zhu Kuan group before the expiry of seven years from the carrying out of such audits.

17.  I do not think that Mr Chan dissented from the legal approach suggested by Mr Carolan, which is based on Re Adam Holdings Limited [1985] 2 HKC 608 and Louis Lo v Toohey [2005] 1 HKC 51 (Court of Appeal) and (unreported) HCCW 180/1998 13 May 2004, Kwan J.  His position was that applying that approach, the question of GGI’s status as a creditor of Tinson should be resolved in favour of GGI, for the reasons summarised in paragraphs 13 and 14 above.  He submitted that the second and third factors relied upon by Mr Carolan did not justify a conclusion that the audited accounts of Tinson, which were prepared some years before the Zhu Kuan group experienced the financial difficulties which ultimately resulted in its liquidation, could not or should not be relied upon as a true record of its indebtedness to GGI.

18.  In my view, Mr Chan is right.  While it is no doubt correct to say that the court is not bound to accept the accounts of a company at face value, it seems to me that, nonetheless, weight should be given to the fact that the accounts in question have been audited, a process which requires the auditor to satisfy himself that the accounts provide a true and fair view of the company’s financial position.  Where there is evidence to show that the accounts are, or may be, inaccurate, or to cast doubt on the way in which the auditor carried out his duties, this will be a factor to take into account.

19.  However, it seems to me that there is no evidence before me on which I could conclude that the audited accounts which have been put forward may be (still less, are) inaccurate or incorrect.  The position here is rather different in this respect from that in either Re Adam Holdings or Louis Lo v Toohey.  In Re Adam Holdings, it is not clear whether the court was considering audited accounts of the company, or ledgers which had been written up by its auditors.  Nonetheless, it is clear from Jones J’s summary of the evidence in relation to the various advances relied on in that case (at pages 610G to 612A of the judgment) that such evidence indicated that the advances were not made by the applicant in that case, but by other companies or entities associated with it.  In those circumstances, it is not surprising that Jones J did not think it right to rely on accounts which suggested that the loans had been made by the applicant.  In Louis Lo v Toohey, reliance was placed, not on audited accounts, but on statements of affairs made by the directors of the company, one of which was made by the director who was said to be a creditor, whose trustee in bankruptcy’s proof was rejected.  Such a document can clearly be regarded as being of less weight than audited accounts which are not contradicted by any contrary evidence.

20.  Quite apart from this, it seems to me that the objective circumstances mentioned in paragraph 14 above do support the conclusion that GGI is indeed a creditor of Tinson in the amounts indicated in Tinson’s audited accounts.  Moreover, the liquidators are also the liquidators of ZKHK, and in that capacity will no doubt have information as to whether or not ZKHK is a creditor of Tinson, and whether the amount of the debt due by Tinson to ZKHK corresponds with the figure for the loan from the holding company which appears in Tinson’s audited accounts.  If there was a basis for regarding that latter figure as inaccurate, and so to doubt the accuracy of the audited accounts, this would no doubt have been pointed out.

21.  Further, I do not think that either of the points made by liquidators as to their concern about the integrity of Tinson’s audited accounts would justify a conclusion that GGI is not, on the available evidence, a creditor of Tinson as it claims.

22.  As to the point concerning Mr Lau’s involvement in the affairs of Tinson, I do not consider that the fact that Mr Lau may have been regarded as uncooperative in relation to the liquidators inquiries into the affairs of the Zhu Kuan group can be a basis for inferring that the audited accounts of Tinson may be suspect.  Nor does the fact that such accounts were signed by Mr Lau give rise to valid grounds for suspicion.  The accounts were, according to Madam Chan, supplied to ZKHK, and were for a number of years accepted without demur.  It seems unlikely that ZKHK would have accepted the figures stated in the accounts if there was reason for them to think that they were inaccurate.

23.  So far as the role of Tinson’s auditors in the wider affairs of the Zhu Kuan group is concerned, the liquidators have not provided details of the investigations which have given rise to their stated concerns.  Moreover, the fact that the auditor may have been involved in restructuring efforts relating to the Zhu Kuan group (which took place from about 1999 onwards) does not, in my view, provide a sound basis for doubting the accuracy of accounts which were prepared for several years before then.  Nor, in my view, do the other aspects of the auditor’s involvement give rise to such concerns.  Apart from the fact that the accounts were not challenged by ZKHK at any time, it seems improbable that those in control of GGI would have had any reason to misstate the position in relation to loans by GGI to Tinson from as early as 1994 or 1995, a period when there would appear to have been no reason to suppose that ZKHK or other companies with which it was associated were likely to run into financial difficulties some years later.  Once this is accepted, it is clear from an examination of the audited accounts which are available that the figure stated in the accounts for the year ended 31 March 1995 is carried forward with minor variations through to the accounts for the year ended 31 March 1999.

24.  Thus, I do not consider that there are good grounds for questioning the accuracy or reliability of the audited accounts in this case.  That being so, I see no reason to do otherwise than to accept the audited accounts as evidence of a debt due from Tinson to GGI in the amount indicated in those accounts.  There being no evidence to the contrary, it follows that GGI has established, on a balance of probabilities, the debt proved for.

25.  There was a small reduction in the amount proved for as compared with the balance stated to be owing to GGI in the last available set of audited accounts.  While this is not explained, it is nonetheless a reduction, and is not one which I would regard as particularly material.  Further, GGI has provided an explanation for the reduction of the debt from the figure stated in its proof to the figure now claimed.  While it may be, as Mr Carolan said, that the way in which the repayment was effected was not entirely in accordance with best practice (in that it would appear that rather than leaving the resumption compensation proceeds in Ocean Time for onward distribution, they were simply distributed amongst its shareholders), I do not see that this alters the position so as to affect Tinson’s liability to GGI for such amount as remains due to GGI.

26.  I am therefore satisfied that GGI is a creditor of Tinson in the amount of HK$41,911,916.00 and would grant leave to GGI to amend its proof of debt in Tinson’s liquidation accordingly, reverse the decision of the liquidators rejecting such proof, and order the proof to be admitted to rank for dividend in the winding up of Tinson in the sum of HK$41,911,916.00.

The Goldgood proof of debt

27.  I turn next to consider GGI’s appeal in respect of its proof in the Goldgood liquidation.  The position here is very similar to that in relation to Tinson.  Again, the evidence adduced by GGI consists of the audited accounts of Goldgood and Madam Chan’s evidence as to why the amount shown in the latest available audited accounts is to be increased to that now claimed.  The audited accounts for the financial year ending on 31 March 1994 indicate that Goldgood had debts of HK$88,318,249.00 and HK$37,864,966.00 respectively owing to its “holding company” and “a shareholder”.  As Goldgood had only two shareholders, ZKHK holding 70% and GGI holding 30% of its shares, it followed that the debt owing to its “holding company” was owed to ZKHK, and the debt owing to “a shareholder” was owed to GGI.  Goldgood’s share capital was only HK$10,000.00, so that, as with Tinson, absent any source of external funding (and there is no suggestion that there was any), the source of its ability to acquire its assets must have been its shareholders, as indicated by its audited accounts.  Unlike Tinson, however, the audited accounts were signed not by Mr Lau, but by directors representing ZKHK’s interests.

28.  As with Tinson, it is possible to trace the amount disclosed in the audited accounts as being due to GGI through each set of audited accounts until the last available set, for the period ended 31 March 1998.  In those accounts, the debt is stated to be HK$36,965,867.00.  The amount of GGI’s proof, however, is for the slightly larger figure of HK$37,767,830.09.  Madam Chan ascribes the increase to miscellaneous advances by GGI to Goldgood and/or expenses paid by GGI for Goldgood after 31 March 1998.  However, no underlying documentation has been put forward in support of this assertion.

29.  Save in respect of the increase of HK$801,936.09 over the figure stated in the audited accounts for 31 March 1998, the arguments advanced by Mr Carolan and Mr Chan in respect of GGI’s proof of debt in the Goldgood liquidation were the same as those in respect of the proof of debt in the Tinson liquidation.  For the reasons which I have explained above, I am satisfied that GGI is a creditor of Goldgood in the amount of HK$36,965,867.00, as appears from Goldgood’s last available set of audited accounts.

30.  Mr Carolan submitted that even if I were to conclude that the audited accounts constituted sufficient evidence of the indebtedness of Goldgood to GGI, I should hold that GGI had not discharged its burden of proving that Goldgood was indebted to it in respect of the balance of HK$801,936.09, as the only evidence that GGI had put forward as to this was the bare assertion of Madam Chan that this amount represented payments made to or for Goldgood by GGI.  Mr Carolan pointed out that Madam Chan did not appear to hold a particularly senior position within GGI, and that GGI had not provided any documentation to support her assertion.

31.  In my view, the position in relation to the additional HK$801,936.09 is different to that in relation to the amount recorded in the audited accounts.   In the case of the amount recorded in the accounts, the fact that the accounts have been audited indicates that the company’s books and records have been examined by its auditors, and that they are satisfied that the accounts have a proper foundation and represent a true and fair view of the company’s financial position.  By contrast, where there are no audited accounts to support the alleged debt, it is, I think, incumbent on a party claiming to be a creditor of a company in liquidation to put forward some other material to support its claim.  Here, all that Madam Chan is able to say is that the additional amount arises from payments made to or for Goldgood by GGI.  In her affirmation, she gives as her source of knowledge her personal knowledge, and the books and records of GGI.  However, for reasons which have not been explained, no such books and records have been provided in support of this part of the debt claimed by GGI.  I think it also fair to say that Madam Chan’s description of her role in GGI is not one which suggests that she necessarily had a close personal involvement in the transactions which might have given rise to the additional amount.  She provides no details of when further payments might have been made, of their individual amounts or of their particular purpose.  In these circumstances, I do not consider that GGI has discharged the burden which it carries of establishing that Goldgood is in fact indebted to it in respect of this additional sum.

32.  I would therefore vary (but not reverse entirely) the decision of the liquidators rejecting GGI’s proof of debt in Goldgood’s liquidation, and order the proof to be admitted to rank for dividend in the winding up of Goldgood in the sum of HK$36,965,867.00.

The Ocean Time proof of debt

33.  Turning finally to GGI’s proof of debt in relation to Ocean Time, the position is again broadly similar to that in relation to Tinson.  The evidence adduced by GGI consists of the audited accounts of Ocean Time and Madam Chan’s evidence as to why the amount shown in the latest available audited accounts is to be increased to that now claimed.  The audited accounts for the financial year ending on 31 March 1994 indicate (in the balance sheet) that Ocean Time had debts of HK$91,570.00 owing to “related companies”.  Note 8 to the accounts makes it clear that this amount was owing to GGI (whereas the previous year, the debts to related companies consisted of two smaller amounts owing to GGI and a related company Grand Gain Holdings Limited.  Ocean Time’s balance sheet also recorded liabilities to its “holding company” and “a shareholder”, these being Tinson and the other shareholder holding a 2% interest in Ocean Time.  Ocean Time’s share capital was only HK$10,000.00, so that, as with Tinson and Goldgood, there being no evidence of external sources of funds, the source of its ability to acquire its property must have been its shareholders, as indicated by its audited accounts.  The balance sheet of Ocean Time was, in general, signed by two directors, these being Mr Lau, and one other director who represented ZKHK’s interests.

34.  As with Goldgood, there was a difference between the amount of the debt disclosed in the latest available audited accounts of Ocean Time (those for the year ended 31 March 1999), and the debt proved for.  While the latest audited accounts recorded a debt of HK$875,155.00 owing to “a related company”, the amount of the proof was for HK$1,302,574.  Madam Chan ascribes the increase to further management fees payable to GGI and administration expenses paid by GGI on behalf of Ocean Time.

35.  Mr Carolan also made one additional submission in relation to the proof of debt in the Ocean Time liquidation.  This was that there was insufficient evidence to identify the “related company” to whom the debt stated in the audited accounts for the year ended 31 March 1999 was owed.  This submission was made on the basis that, while GGI was a related company of Ocean Time, Ocean Time had other related companies as well, including Grand Gain Holdings Limited, with which (according to the accounts) it had an agreement for the provision of management services.  It was therefore, said Mr Carolan, unclear whether the related company recorded as a creditor of Ocean Time was in fact GGI.

36.  It is fair to say that looking at the audited accounts for the year ended 31 March 1999 in isolation, there might be some doubt as to the identity of the “related company” referred to as being a creditor of Ocean Time.  However, when one examines the audited accounts from the year ended 31 March 1994 until the year ended 31 March 1999, it becomes apparent from the notes to the accounts that the “related company” is in fact GGI, as the accounts in each year provide the prior year figure for the item in question, and by comparing the figures in each set of accounts, it is possible to ascertain that the amount recorded in the 31 March 1999 accounts relates to the same related company from year to year, going back to the HK$91,570.00 mentioned in the audited accounts for the year ended 31 March 1994.

37.  Apart from this point, the arguments in relation to GGI’s proof of debt in the Ocean Time liquidation were the same as those in relation to its proof in the Goldgood liquidation.  For the reasons which I have give in relation to the proofs in relation to Tinson and Goldgood, I am satisfied that it would be right for me to find that GGI has proved that it is a creditor of Ocean Time for the amount of HK$875,155.00 as shown in the latest set of audited accounts which are available, but not for the additional sums claimed in its proof of debt.

38.  I would therefore vary (but not reverse entirely) the decision of the liquidators rejecting GGI’s proof of debt in Ocean Time’s liquidation, and order the proof to be admitted to rank for dividend in the winding up of Ocean Time in the sum of HK$875,155.00.

Costs of the appeals against rejection of the proofs of debt

39.  So far as the costs of these applications are concerned, having regard to the fact that the three applications were heard together, and that GGI was substantially, but not wholly, successful in its appeals, I shall make an order nisi that the liquidators should pay to GGI 90% of GGI’s costs of the appeals, such costs to be taxed on the party and party basis if not agreed.

The liquidators’ application to strike out GGI’s claim

40.  Having dealt with GGI’s appeals against the liquidators’ rejection of its proofs of debt in the Tinson, Goldgood and Ocean Time liquidations, I turn to consider the liquidators’ application to strike out the statement of claim in HCA 1463 of 2005.

41.  This action concerns the sale by the liquidators, as liquidators of Ocean Time, of property owned by Ocean Time in Yuen Long in the New Territories.  The principal complaint is that the liquidators failed in their duty to obtain a proper price for the sale of this property, which was the principal asset of Ocean Time, in that they sold it in January 2005 at substantially less than its true value, selling it for a price of HK$53,000,000.00 when it was in fact worth much more - HK$126,000,000.00 according to a valuation report obtained by GGI.

42.  GGI’s statement of claim pleads (in paragraphs 3 and 4) that Ocean Time was indebted to GGI and Tinson (which was itself indebted to GGI), and that GGI was also a member of the Committee of Inspection in the liquidations of both Ocean Time and Tinson.  It then alleges (in paragraph 5) that because of this, the liquidators owed a duty of care towards GGI arising from their position of liquidators of the two companies.  The scope of the duty is then pleaded (in paragraph 6), as including requirements that the liquidators should act in good faith towards the creditors and Committee of Inspection members; that they should obtain the best price when realising assets of the companies; that they should take steps to ensure that this was achieved; that they should inform the creditors and Committee of Inspection members of the progress of the liquidations; that they should not withhold information concerning the liquidation or otherwise deceive or mislead the creditors or members of the Committee of Inspection.

43.  It is then pleaded that Ocean Time’s property was sold by the liquidators at a substantial undervalue at the end of January 2005.  It is also alleged that the liquidators misled GGI by informing it in January 2005 that the land had been sold, when in fact no sale and purchase agreement was executed until 26 April 2005, thereby depriving GGI of the opportunity to locate and introduce a buyer who was prepared to pay a higher price.  These acts are pleaded (in paragraph 14) as constituting breaches by the liquidators of the duty of care alleged and particularised in paragraphs 5 and 6 of the statement of claim. It is said (in paragraph 15) that GGI has in consequence suffered loss and damage.  Although the loss and damage allegedly suffered is not particularised, it would seem that what the pleader (who, I should point out, was neither Mr Chan nor Mr Godfrey Lam, who appeared with him before me) had in mind was the additional amount that GGI could have expected to obtain by way of dividend in either the Ocean Time or Tinson liquidation had the liquidators achieved the sale price of HK$126,000,000.00 (or any price in excess of HK$53,000,000.00) as it is said they should have done.

44.  The statement of claim concludes by claiming damages, or alternatively an order requiring the liquidators to pay HK$73,000,000.00 to Ocean Time, interest, further or other relief and costs.

45.  Although the application to strike out was founded on various limbs of RHC Order 18 rule 19(1), namely sub-paragraphs (a), (c) and (d) thereof, at the hearing, Mr Carolan was content to make the application on the basis of RHC Order 18 rule 19(1)(a) - i.e. on the basis that the statement of claim disclosed no reasonable cause of action.  The alternative relief sought by the summons, of determination of questions of law pursuant to RHC Order 14A rule 1, was also not pursued.  In the circumstances, I shall proceed on the assumption (which may or may not ultimately be a good one) that GGI will be able to establish the facts which it alleges in its statement of claim.

46.  Mr Carolan submitted that GGI’s claim was plainly and obviously unsustainable in the light of the decision of the English Court of Appeal in Kyrris v Oldham [2004] 1 BCLC 306, in which it was held that absent some special relationship, an administrator owed no common law duty of care to unsecured creditors in relation to the conduct of his administration, as his position was analogous to that of a director conducting the company’s affairs.  It was also held that the applicable statutory provisions enabled the court to compel an administrator to provide compensation in the event of misfeasance or breach of fiduciary or other duty to the company, so that it was not open to an individual creditor to bring a claim for losses caused to the company in liquidation.

47.  In coming to this conclusion, Jonathan Parker LJ in Kyrris v Oldham applied by analogy the earlier decision of the English Court of Appeal in Peskin v Anderson [2001] 1 BCLC 372, a case concerning fiduciary duties owed by directors to individual shareholders, to the question of whether administrators owed duties to individual creditors.  In Peskin v Anderson, it was held that where special circumstances existed in the facts of the particular case, directors might owe fiduciary duties to individual shareholders, but absent such special circumstances giving rise to a fiduciary relationship between himself and a shareholder, a director would owe fiduciary duties to the company alone.  It is to be noted that in paragraph 32 of the judgment in Peskin v Anderson, Mummery LJ noted the observations of Millett LJ (as he then was) in Stein v Blake (No. 2) [1998] 1 BCLC 573 to the effect that where such a direct fiduciary relationship existed, the shareholder might be able to recover for losses caused to him directly (as opposed to losses suffered by him by reason of a diminution in the value of his shareholding in the company).

48.  In this case, Mr Carolan submitted, no special circumstances were pleaded so as to indicate any basis for concluding that there was any scope for any duty of care owed to GGI as an individual creditor, in addition to that owed by the liquidators to Ocean Time, the company in liquidation.  Mr Carolan submitted that if GGI considered that the liquidators were in breach of their duties towards Ocean Time, the proper course would be for them to take out proceedings for misfeasance, seeking compensation on behalf of Ocean Time, pursuant to section 276 of the Companies Ordinance.

49.  Mr Chan, for his part, submitted that there were circumstances in which a liquidator had been held to owe duties to an individual creditor, drawing my  attention to Pulsford v Devenish [1903] 2 Ch 625 and James Smith & Sons (Norwood) Ltd v Goodman [1936] Ch 216.  However, as Jonathan Parker LJ pointed out in Kyrris v Oldham, in both of those cases, the company had, by the time the action was commenced, been dissolved, so that there was (on the court’s construction of the equivalent of our section 276) no longer any scope for misfeasance proceedings to be brought against the liquidator concerned.

50.  In my view, neither of these cases assists Mr Chan here.  In Pulsford v Devenish, a company was placed into voluntary liquidation, and the liquidator failed to inform its creditors of the liquidation and distributed the company’s assets to its contributories without regard to the position of the creditors.  It is scarcely surprising that the creditors should, in that situation, have been found to have a right to claim against the liquidator, whom the court regarded as being under an absolute duty to apply the companies property in accordance with the statutory scheme, a duty which survived the dissolution of the company.  It will also be noted that the nature of the creditors’ loss in that case was personal to them - there would appear to have been no element of loss to the company itself, there being no suggestion that any of its assets had been realised for less than proper value.

51.  The position in James Smith & Sons v Goodman was very similar, in that the liquidator there distributed its assets without making provision for the claim of a particular creditor for future rent under leases owned by the company of which the creditor was the lessor.  Again, the company was dissolved with no dividend having been paid to the particular creditor.  It is again easy to see that the creditor should have been permitted to claim against the liquidator, and moreover, that his claim was personal to him, and was in no way a reflection of losses suffered by the company.

52.  Mr Chan also submitted that the claims made by the statement of claim extended beyond a claim for negligent breach of duty of care, and included claims that involved breaches of fiduciary duty, misrepresentation or deceit, and wrongful non-disclosure.  I confess that this is not entirely clear on the pleading, which appears to treat all of these matters as particulars of breach of the duty of care which is alleged.

53.  However, even assuming in GGI’s favour that the statement of claim should be read as one alleging either breach of fiduciary duty or misrepresentation, it seems to me that there remains a fundamental difficulty in GGI’s path.  This is that however one looks at it, the nature of the losses allegedly suffered by GGI are entirely reflective of losses suffered by Ocean Time as a result of the sale of its principal asset at an alleged undervalue.  There is nowhere any suggestion of any loss on the part of GGI above and beyond the losses which it would suffer as a consequence of the sale of the property at less than proper value.  That being so, such losses are in my view clearly irrecoverable as a matter of law, by reason of the “no reflective loss” rule which has been reiterated by the House of Lords in Johnson v Gore Wood & Co. [2002] 2 AC 1.  That rule makes it clear that where a plaintiff suffers loss by reason of a diminution in the value of a company in which he is interested (and it matters not for present purposes whether he is interested in that company as a shareholder or as a creditor), the proper complainant is the company itself, and not the plaintiff.

54.  Where the company is still operating, it may be possible for an aggrieved shareholder to pursue a cause of action on its behalf by way of a derivative action where the company itself fails to do so.  Where the company is in liquidation, a derivative action will no longer be available.  However, a shareholder or creditor then has available to him the remedy provided by section 276 of the Companies Ordinance.

55.  Mr Chan suggested that there were a number of reasons why the rule should not apply in this case, namely:-

(1) that while the “no reflective loss” rule had a place where the company was still a going concern, there should be no objection to recovery of “reflective losses” once a company was in liquidation, since it was then only a matter of time before it would be dissolved, and thus, as it was possible for a creditor to sue a liquidator once dissolution had taken place, there was no reason why he should not be permitted to do so earlier, provided that dissolution was only a matter of time (as was the case here);

(2) that there was a difference between cases of negligence or non-deliberate wrongdoing, and cases where the wrongdoing was deliberate, as in the case of a claim for deceit, which was raised in this case on the facts pleaded in the statement of claim; and

(3) where dissolution was a foregone conclusion there was no risk of double recovery.

56.  Mr Chan also suggested that where the wrongful act was deliberate, the claim should not be struck out even if “reflective losses” were not recoverable, as it would be open to the court to award nominal damages.

57.  I do not think that these reasons are well founded.  So far as Mr Chan’s first reason is concerned, it remains the case that the loss allegedly suffered by GGI is purely reflective of the loss suffered by Ocean Time.  When a company is in liquidation, control of its affairs passes from its directors to its liquidators.  If the liquidators decide against pursuing a claim apparently open to the company, that is as much a decision on behalf of the company as a decision by its directors to the same effect while it is a going concern.  In any event, the shareholder or creditor who is aggrieved by the decision of the liquidator can pursue the matter, if necessary by bringing misfeasance proceedings against the liquidator pursuant to section 276 of the Companies Ordinance.

58.  As to the second argument, this, with respect, fails to recognise that the objection to recovery of “reflective losses” arises from the nature of the losses themselves, and not from the nature of the act or omission said to give rise to liability.  Indeed, in Prudential Assurance Company Limited v Newman Industries Limited (No. 2) [1982] Ch 204, one of the first authorities in which the non-recoverability of “reflective losses” was extensively discussed, the example was given of a person who was persuaded by a deceit practised upon him to part with the key to a safe deposit box holding substantial assets of a company in which he was interested.   Notwithstanding that the deceit must have involved a deliberate dishonest act on the part of the person responsible for it, the Court of Appeal was clearly of the view that there was no basis for recovery on the part of the shareholder on whom the deceit was practised.

59.  As to the third argument, it does not, in my view, follow that simply because dissolution will take place sooner or later, there is no risk of double recovery.  If a creditor were permitted to bring proceedings in respect of reflective losses against a liquidator, and recover for himself, there would, until the company is actually dissolved, remain the possibility that another creditor might seek to take misfeasance proceedings against the liquidator in respect of the same matter.  In such a case, the risk of double liability on the part of the liquidator, and potentially double recovery on the part of the creditor, would seem to be a real one.

60.  Finally, as to the suggestion that the claim should not be struck out because of the possibility of an award of nominal damages, I do not consider that nominal damages would be available in respect of a claim in tort.  The general rule in relation to tort claims is that damage is the essence of the tort, so that in the absence of damage the tort is not complete, and not actionable.

61.  Mr Chan also referred to the fact that the statement of claim contained a prayer seeking recovery on behalf of Ocean Time.  I do not see that this assists GGI.  First, there is no factual basis pleaded in the body of the statement of claim to support a claim to relief on behalf of Ocean Time.  There is no allegation that Ocean Time (as distinct from GGI) has suffered loss.  In any event, such a claim for relief is more typically to be found in a derivative action, which this claim does not purport to be.  Moreover, it seems to me that the appropriate vehicle for such a claim, if one is to be made, would be an application pursuant to section 276 of the Ordinance, which would be open to GGI, as I have held it to be a creditor of Ocean Time.

62.  For these reasons, I am satisfied that GGI’s claim against the liquidators is plainly and obviously unsustainable, and should be struck out.

63.  Mr Chan suggested that, even if GGI’s claim were struck out, it might be appropriate to afford GGI an opportunity to offer an amendment rather than to dismiss the action here and now.  However, no such amendment has been proferred.  Nor has any form of possible amendment been suggested by Mr Chan.  On the basis of the matters pleaded, I have some difficulty in seeing what claim might be advanced that would not suffer from the defect of offending against the rule against recovery of reflective losses.  That being so, I am satisfied that the appropriate consequence of striking out GGI’s claim is that its action should be dismissed.

64.  I shall therefore order that GGI’s statement of claim in HCA 1463 of 2005 is to be struck out, and that its action against the liquidators should be dismissed.

65.  So far as costs are concerned, I shall make an order nisi that the costs of the striking out application and of the action are to be paid by GGI to the liquidators, to be taxed on the party and party basis if not agreed.