LAI KAM HUNG v. GUANGDONG (HK) INTERNATIONAL CO. LTD.

IN THE COURT OF APPEAL

1995, No. 103
(Civil)

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J U D G M E N T

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Bokhary, J.A.:

1. This appeal began as one from two Orders made by Mr Justice Barnett on March 31 this year: one made in an application by Mr Lai Kam Hung as a proposed intervener in an action; and the other in an application by him as a contributory in winding-up proceedings.

2. Principally, we are concerned with an individual and two companies. The individual is Mr Lai; and the two companies are: Guangdong (HK) International Company Limited (which I will call "Guangdong"); and Gleeful Investment Limited (which I will call "Gleeful").

3. Guangdong is the plaintiff in the action and the petitioning creditor in the winding-up proceedings.

4. Gleeful is the first defendant in the action and the company in the winding-up proceedings.

5. Mr Lai is the second defendant in the action. He and his wife are Gleeful's only directors and shareholders.

6. In the appeal, Mr Lai is the appellant while Guangdong is the respondent.

7. What had happened was, shortly stated, this. On March 15 last year, Guangdong obtained default judgment against Gleeful for $7.2 million. And on the 19th of that month, Guangdong served a statutory demand for that amount on Gleeful. Neither was the such demand met nor was the default judgment satisfied.

8. Relying on those two omissions to show that Gleeful was unable to pay its debts, Guangdong petitioned for Gleeful's winding-up on that ground.

9. The petition was presented on May 28 last year; and a winding-up order was made against Gleeful on the 29th of the following month.

10. By a summons taken out in the winding-up proceedings on December 9 last year, Mr Lai applied for an order that: (i) all further proceedings in the winding-up of Gleeful be stayed; (ii) the Official Receiver as liquidator be at liberty to take steps to set aside the default judgment against Gleeful; (iii) alternatively he, Mr Lai, be appointed the Official Receiver's agent to take such steps; (iv) there be further or the other orders or directions; and (v) time for him, Mr Lai, to submit a statement of affairs to the Official Receiver be extended to 28 days after the conclusion of the application to set aside the default judgment.

11. After that summon had been taken out, it was realised that the application ought to have been made by motion; and on January 26 this year a notice of motion seeking identical relief was taken out.

12. Then, on February 21 this year, Mr Lai took out a summons in the action seeking orders that: (i) the default judgment against Gleeful be set aside it; and (ii) he be at liberty to defend the action in Gleeful's name.

13. Both applications - that is to say the one by summons in the action and the one by summons and then by motion in the winding - proceedings - were heard together before Mr Justice Barnett on March 22 and 23rd this year. He gave judgment on March 31 this year dismissing both applications in toto and giving his reasons why. The Orders drawn up are the ones against which Mr Lai launched the present appeal.

14. But he no longer prosecutes his appeal in so far as it sought a setting-aside of the default judgment. That is because Mr Lai's counsel, assisted by some observations from the bench on the first day of the appeal, soon saw the difficulty of sustaining the judge's view that Mr Lai could apply in his own name for the setting-aside of the default judgment against Gleeful as opposed to securing the Official Receiver's consent to his doing so in Gleeful's name (against, of course, a proper indemnity to the Official Receiver). In the course of a number of short adjournments granted yesterday, such consent was obtained.

15. Thereupon, counsel for Guangdong received instructions - for practical reasons, he informed us - to consent to an application to be made by Gleeful to the High Court for the setting-aside of the default judgment against it. It is on the basis of that undertaking that Mr Lai ceased to prosecute his appeal in so far as it sought a setting-aside.

16. That leaves so much of the appeal as seeks a permanent stay of the winding-up against Gleeful.

17. Both Guangdong and the Official Receiver oppose such a stay. They oppose it on the basis of the principle laid down by Mr Justice Buckley in Re Telescriptor Syndicate Limited [1903]2 Ch 174 and recently applied in Re Lowston Limited [1991] BCLC 570 where, despite the setting-aside of the default judgment on the basis of which a winding-up order had been obtained, Mr Justice Harman carefully considered the way in which the company had been run in order to decide whether to let the winding-up continue or to stay it permanently.

18. In short, Guangdong and the Official Receiver say that as things now appear it is in the legitimate interests of all concerned, including the general public, that the affairs of Gleeful be investigated in a winding-up.

19. It is necessary studiously to avoid saying anything which might prejudice the position of any party in regard to any part of this somewhat complicated case in future. And if in avoiding that, what I say is not as full or as well expressed or even as coherent as it might otherwise be, that cannot be helped.

20. That said, I turn to the background to say only this. Lying in the background is a development in Junk Bay of the kind sometimes called an "indigenous villagers' development". The project was one upon which Gleeful had embarked in the 1980's and for which it sought financing. That brought in Guangdong for the purpose of providing finance and to participate in the project. A company by the name of Taenfair Industries Limited (which I will call "Taenfair") was used as a joint-venture company owned as to 70% by Guangdong and as to 30% by Gleeful.

21. The project is now, if not defunct, then in a very different state from what was originally envisaged. And this is a project, Mr Lai admits, into which Guangdong has injected into $7.2 million but out of which it has so far got nothing. That kind of money, needless to say, attracts considerable interest over a period of time; and considerable time has elapsed since it was injected into the project. Exactly what rights and liabilities arise out of the foregoing, Guangdong certainly has an interest, either direct or indirect, in the affairs of Gleeful.

22. In the statement of affairs eventually provided by Mr Lai to the Official Receiver, the $7.2 million is shown as a liability of Gleeful to Taenfair. Also, counsel for Mr Lai concedes that Guangdong has an arguable albeit vigorously disputed claim against Gleeful running into many millions of dollars.

23. Under the stewardship of Mr Lai (and I suppose his wife), Gleeful seems to have been dereliction of its duty under section 121 of the Companies Ordinance, Cap. 32, in regard to the keeping of proper books of accounts. And they as directors seem to have been in dereliction of their duty under section 122 of that Ordinance in regard to the laying of accounts before Gleeful in general meeting.

24. Mr Lo for the Official Receiver says to this Court that he cannot tell whether Gleeful is solvent or insolvent and that that inability is due to the fact he has received little or no information from Mr Lai. He says that Mr Lai has kept him in the dark, and observes that it may well be in Mr Lai's interest to keep him in the dark.

25. In such a situation as the present one, the proper approach for a court is to ask itself whether it is satisfied that it is right to stay winding-up proceedings, and to refuse a stay where there are material matters as to which it has doubts. It seems to me, as things stand, that the affairs of Gleeful call for an investigation of the kind which would take place in the course of a winding-up.

26. I am not persuaded that it would be right to grant a permanent stay. And the result is this: part of the appeal is no longer pursued; and the rest of it, in my view, fails after argument. Accordingly, I would dismiss the appeal.

Godfrey, J.A. :

27. The judge did not consider whether to exercise his discretion to order a stay of the winding up of Gleeful Investment Ltd ("Gleeful"). Before us, the application for a stay was opposed by the petitioner on whose claim against Gleeful the winding up order was made, and by the Official Receiver, who submitted that there were matters relating to the conduct of the business and affairs of Gleeful which appeared to require investigation before he could decide what stance he should adopt : compare In Re Telescriptor Syndicate Ltd [1903] 2 Ch 174, cited by my Lord, Bokhary, J.A. We must now, in these circumstances, exercise the relevant discretion for ourselves.

28. For my part, although Miss Alice Mok for Mr. Lai, a member of the company bravely argued otherwise, I am not persuaded that we should exercise our discretion in favour of granting a stay. I too would dismiss this appeal.

Ching, J.A. :

29. I agree that the appeal in so far as the permanent stay is concerned should be dismissed and I have nothing to add.

[ARGUMENT ON COSTS]

Bokhary, J.A.:

30. Nobody asks us to disturb the order for costs made below. It stands. As to the costs of the appeal, we order that Mr Lai pay Guangdong and the Official Receiver their taxed costs of the appeal.