ZHANG FUZHU v. COSMIC DIGITAL TECHNOLOGY CO LTD

DCCJ 3468/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3468 OF 2008

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R U L I N G

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1.  The plaintiff claims for a sum of $400,000 being the value of four dishonoured cheques dated 30 March, 30 April, 30 May and 30 June 2008 respectively, each in the sum of $100,000 (hereinafter called “the cheques”) in purported payment of his salary for the period from March to June 2008.  The plaintiff claimed such salary was paid pursuant to an employment contract dated 1 September 2007 (hereinafter called  “the employment contract”) whereby the defendant employed the plaintiff as the general manager responsible for sale, administration and merchandising (hereinafter called “the post”) as from 1 September 2007 to 30 August 2009 at a monthly salary of $100,000 with one month’s salary as year-end bonus.

2.  On 6 September 2008 the plaintiff issued a summons for summary judgment and verified his claim by affirmation exhibiting the employment contract, the cheques and the relevant notices of dishonour, and a demand to the defendant from the plaintiff’s solicitors dated 4 August 2008. 

3.  On 30 September 2008 Master R Lai granted leave to the defendant to file affirmation in opposition within 21 days and the plaintiff to file affirmation in reply within 21 days thereafter, but directed that no further affirmation be filed and served without leave of the court.

4.  On 28 October 2008 the defendant filed an affirmation of Bruno Arboit (hereinafter called “Mr Arboit”).  Mr Arboit and Simon Richard Blade were on 21 May 2008 appointed as joint and several provisional liquidators (hereinafter called “the liquidators”) of Cosmic International Digital Technology Company Limited (in compulsory liquidation) (hereinafter called “Cosmic International”).  They were responsible for inter alia investigating the affairs of Cosmic International and its subsidiaries, and identifying and preserving any assets.

5.  Mr Arboit took steps to take control of the assets of Cosmic International including  its interest in the defendant as its wholly owned subsidiary by inter alia replacing the existing directors of the defendant with a corporate entity subject to the control of the liquidators, i.e. Manfell Limited.  Mr Arboit explained that as at 21 May 2008 the directors and shareholders of Cosmic International were Zhang Fuqing, brother of the plaintiff and husband of Deng Qianling, and Fung Lai-ping, wife of the plaintiff.  Up to 16 October 2007, the directors of the defendant were Zhang Fuqing, Fung Lai-ping, Deng Qianling and the plaintiff.   On 16 October 2007 Zhang Fuqing and Fung Lai-ping resigned, but Deng Qianling and the plaintiff remained as directors until they were replaced by Manfell Limited on 21 July 2008. 

6.  By letters dated 1 and 14 August and 16 September 2008, Mr Arboit requested the plaintiff and other former directors of Cosmic International and the defendant to provide him with the books and records of Cosmic International and the defendant, but he claimed he had yet to receive all the books and records, in particular, the cheque books from which the cheques were drawn.

7.  Mr Arboit claimed that the available records showed the plaintiff’s claim was inconsistent with the figures in the defendant’s management accounts, particularly as the management accounts did not appear to include any alleged salary accrual due to the plaintiff or any specific entry for alleged salary payments to the plaintiff.  Moreover, although the employment contract provided for a monthly salary of $100,000, the defendant’s bank statements from September 2007 to February 2008 did not appear to show any payments made by the plaintiff under the employment contract. 

8.  Mr Arboit pointed out that although the defendant had been trading and in operation since 23 May 2001, the available records did not show that there was the post prior to the entering into the employment contract.   Although the employment contract was approved by written resolution of the defendant dated 1 September 2007, there were no records or minutes that explained the need for the employment contract, why it was decided that the plaintiff and not someone else should be employed in such post or how his salary amount was arrived at.

9.  According to the various letters from the plaintiff and Zhang Fuqing dated 4 September 2008, it appeared that the defendant’s activities dwindled significantly after a major customer ceased trading with the defendant in August 2007.   Mr Arboit questioned how the defendant could enter into the employment contract with the plaintiff without proper justification. 

10.  Mr Arboit said that with no records of salary payments to the plaintiff prior to March 2007, the first actual ascertainable salary payment was by way of the first dishonoured cheque drawn on 30 March 2008, shortly after the winding-up of Cosmic International pursuant to a petition dated 13 March 2008.  Further, at about the time of payment of the cheques, the plaintiff, as director of the defendant, would have responsibility in overseeing the financial position of  the defendant, yet it appeared from Mr Arboit’s initial findings, the plaintiff allowed the cheques to be drawn to settle the outstanding salary at the time when there were insufficient funds. 

11.  Mr Arboit contended that it was questionable whether the employment contract was a genuine agreement entered into and made in the interest of the defendant.  He said that the circumstances seemed to suggest that the employment contract might have been “backdated” or was a sham agreement for the plaintiff to siphon assets from the defendant before the winding-up of Cosmic International.  Mr Arboit urged that there were serious questions to be dealt with at trial and proper discovery, adducing of evidence and examination of directors were required.

12.  The plaintiff’s affirmation reply was filed on 18 November 2008.  The plaintiff said that he arranged to deliver two box files of books and records of Cosmic International and over 40 carton boxes of books and records including unused cheques of the defendant that were in his possession to the liquidators in the last two months. 

13.  The plaintiff produced the balance sheet of the defendant as at 31 July 2008 with payroll accrual in the sum of $640,000, breakdown of directors’ salary accruals including the plaintiff’s salary accruals of $400,000 for March to June 2008, administrative expenses as at 31 July 2008 with directors’ remuneration in the sum of $1,640,000 and breakdown of directors’ salary. 

14.  The breakdown of directors’ salary showed that the plaintiff was paid a monthly salary of $50,000 for July and August 2007, a monthly salary of $100,000 for September 2007 to February 2008, and a 2007 year-end bonus of $100,000 in January 2008, all by cheques drawn from the defendant’s bank account and deposited into the plaintiff’s bank account.

15.  Further, by written resolution of the shareholders of Cosmic International dated 1 September 2007 and the written resolution of the sole director of the defendant of the same date, the employment contract was duly approved and entered into by the defendant.  The plaintiff claimed that he had performed his duties under the employment contract until his dismissal on or about 21 July 2008 so that he was entitled to salary whatever financial position the defendant might be in.  The defendant gave him the cheques respectively at the end of each month, from March to June 2008 in purported payment of his salary.   At his sole discretion and as requested by the other director Deng Qianling, the plaintiff did not present the cheques for payment for the time being.  After his employment was terminated and Deng Qianling was removed as director, he presented the cheques for payment to preserve his rights but they were all dishonoured.

16.  On 8 December 2008 the defendant issued a summons for leave to file and serve the second affidavit of Mr Arboit dated 5 December 2008.  Mr Arboit explained that by the time of the filing of his first affidavit, the liquidators still had not received information requested of the plaintiff in relation to the issues they had identified pertaining to the employment contract.  Further, in the course of investigating the plaintiff’s claim on the employment contract, the liquidators uncovered more evidence of a questionable transaction entered into by the plaintiff on behalf of the defendant.  Mr Arboit contended that such questionable transaction together with the circumstances under which the plaintiff’s claim was brought raised issues and questions which ought to be tried.

17.  Mr Arboit in the second affidavit reiterated some matters in his first affidavit which he said were important in determining whether or not the employment contract was genuine and/or entered into in the interest of the defendant.  If it were a sham agreement and/or not made in the best interest of the company, the alleged salaries would not have been paid and the plaintiff and the defendant would not have been indebted to the plaintiff as claimed.

18.  Mr Arboit addressed three areas in his second affidavit. 

19.  First, Mr Arboit said that the liquidators sought clarification from the former directors of the defendant regarding such issues by letters by the defendant’s solicitors to the plaintiff and other former directors of the defendant dated 15 October 2008 on (a) the duties of the post and the name of the previous general manager with copies of relevant employment contracts; (b) copy supporting documents showing regular monthly salary payments to the plaintiff and Deng Qianling and all used and unused cheque books of the defendant; and (c) the nature of the defendant’s business and number of staff employed before the sale of its interests in “廣東佳彩數碼科技有限公司” (hereinafter called “Cosmic GD”).

20.  It was said that there was no substantive reply except for letters claiming that they did not understand English and required a full translation.  Mr Arboit submitted that such purported reason was utterly incredible.  The plaintiff was previously in control of the defendant which conducted major transactions with foreign companies (for example, its major customer), and which would have required correspondence in English.  Further, the plaintiff could have instructed solicitors to assist him in translating the letters or sought assistance from professional translators.  Mr Arboit contended this was a tactical move to delay or hamper the liquidators’ investigations, so it was important for the plaintiff to be interrogated or cross-examined at trial, and full discovery be made regarding the nature of the employment contract.

21.  I pause here to say that the letter from the defendant’s solicitors dated 15 October 2008 could really have been raised in Mr Arboit’s first affidavit filed on 28 October 2008.  This was not done, and no satisfactory explanation was given.  As for the reply from the directors, although they were given after 29 October 2008, the liquidators had actually received the request for English translation prior to 12 November 2008 (see letter from the defendant’s solicitors to the plaintiff’s solicitors dated 12 November 2008).  The liquidators also received the reply from the plaintiff’s solicitors that they had no instructions to act on the matter on 18 November 2008, and further replies from the directors of 20 and 24 November 2008 requesting for English translation.  Such correspondence was available to the liquidators some time ago and I find  there is no sufficient explanation for not giving earlier intimation to the plaintiff that further evidence will be adduced in opposition if not the full affidavit.

22.  Secondly, Mr Arboit’s second affidavit went on to give further background as to the Cosmic group of companies.  Cosmic International was the parent company of the defendant who wholly owned all the shares of Cosmic GD previously.  Cosmic GD was a wholly owned foreign entity in the PRC that manufactures electronic products and owned manufacturing factories in the PRC.  Since Cosmic International and the defendant had no other significant assets, the main business hinged on the business of Cosmic GD.

23.  On 15 June 2007 Golden Take Limited, the petitioning creditor of Cosmic International, issued legal proceedings against Cosmic International for a sum exceeding $6 million plus damage to be assessed.  Judgment was entered on 30 January 2008.  Shortly thereafter, on 4 February 2008, the plaintiff on behalf of the defendant entered into a Sale and Purchase Agreement for the sale of the entire shareholding of Cosmic GD to Rise Rainbow Investments Limited (hereinafter called “Rise Rainbow”),  a company upon the liquidators’ investigation appeared to be controlled by the parties related to the plaintiff, the directors of the defendant and Cosmic International.  Rise Rainbow’s director was Zhang Fulai, the brother of the plaintiff.  The accounts as at 31 December 2007 showed that Cosmic GD had assets in excess of RMB 40 million, but the consideration for the sale of the shares of Cosmic GD was only RMB 15 million.  Mr Arboit claimed it appeared that the plaintiff had caused the defendant to sell Cosmic Group’s most significant asset at a substantial undervalue in attempt to siphon assets out of Cosmic Group before the judgment creditor could enforce judgment against Cosmic International.  There was no independent valuation report regarding the value of Cosmic GD’s shares or any evidence indicating the defendant had sought offers from other third parties willing to purchase the shares. 

24.  Mr Arboit argued that it would appear from the above background that the plaintiff might be initiating the current claim in order to enter judgment against the defendant and then seek to wind up the company before investigation regarding the sale of Cosmic GD’s shares could be made and/or further action taken by the liquidators. 

25.  In my view, there is also no sufficient evidence before this court that the above information was available to the liquidators at a late stage or after Mr Arboit’s first affidavit.  In his first affidavit he exhibited a letter from the plaintiff dated 4 September 2008 enclosing the deliberation of the Board of Directors of the defendant in relation to the sale of the shares of Cosmic GD that set out the directors’ perception as to the value of the shares of Cosmic GD.  It is plain that the sale and purchase transaction allegedly relating to the most significant asset of Cosmic International and the defendant was known to the liquidators some time before Mr Arboit’s first affidavit.  The absence of any independent valuation or other offers would have been apparent then.  There was no satisfactory explanation for the lateness.

26.  Thirdly, Mr Arboit stated there were further irregularities in relation to the cheques that indicated the employment contract was likely to be a sham agreement and/or not entered into in the best interest of the defendant. 

27.  By a letter dated 25 July 2008 to the liquidators, the plaintiff said he was owed 5 months’ salary from March to July 2008.  But in the present action, the cheques only covered salary for March to June 2008.  Up to 25 July 2008 the cheques were not presented for payment, so there was no reason for the plaintiff to claim as he did in his letter of 25 July 2008 that the defendant owed him salary.  To date, the liquidators were not provided with the relevant cheque stubs despite request.

28.  On 8 August 2008, i.e. shortly after the liquidators took control of the defendant, the plaintiff issued the present action.  But it was most telling to note that according to Mr Arboit the defendant did not present the cheques for payment until 29 July 2008 when, to their full knowledge, the cheques could not be honoured.

29.  None of the above matters in relation to the cheques were new, and no satisfactory explanation was given why these matters were not dealt with in Mr Arboit’s first affidavit. 

30.  Mr Tang, counsel for the defendant, in his written submissions invited me to consider the following reasons for the lateness.  It was said that the plaintiff thwarted the liquidators’ every attempt to obtain information necessary to defend the present claim, and communication dragged on until 1 December 2008.  It was discussed about, practically speaking, the liquidators had the relevant information by 24 November 2008 at the latest.  Mr Tang then submitted that the liquidators took time to investigate and digest the defendant’s affairs before they could come up with Mr Arboit’s second affidavit, partly in reply to the plaintiff’s affirmation in reply dated 18 November 2008. 

31.  In my view, if on review of the plaintiff’s affirmation in reply, it was considered a reply by affidavit was necessary, then earlier intimation could have been given and certainly it should not have been done only on Friday, 5 December 2008, leaving the plaintiff with only two working days to consider and deal with the matter before the hearing today.  I do not consider the fact that Cosmic International was in liquidation and the defendant was in de facto liquidation offers sufficient excuse for the delay.  The fact that the liquidators did not have so much of a free hand as normal directors still required them to proceed with due promptness on the material and information available to them when they must have been well aware that the hearing of the summary judgment application was imminent. 

32.  In a nutshell, I am not persuaded that the defendant offered any good or satisfactory reason for the lateness in the application for leave to adduce further affidavit evidence in opposition to the summary judgment application.  Indeed, Mr Tang in his oral submissions accepted that some matters could have been raised earlier and that, with hindsight, it could have been done better. 

33.  But Mr Tang argued that the plaintiff could not have been taken by surprise because the contents of the second affidavit of Mr Arboit and exhibits thereto were either within the plaintiff’s personal knowledge or have previously been communicated to him.  A large part was simply to recount what took place between the parties.  I disagree.  Even if the communications between the parties were known to the plaintiff, until 5 December 2008 when Mr Arboit’s second affidavit was served on his solicitors, the plaintiff was unaware that the defendant would rely on those matters to oppose the summary judgment application, and there was no reasonable time for the plaintiff to deal with those matters by affidavit in reply prior to the hearing today.

34.  Mr Leung, counsel for the plaintiff, opposed the defendant’s application for leave to rely on the second affidavit of Mr Arboit.  He argued that due to the extreme lateness of such affidavit, the plaintiff would suffer significant prejudice if leave were granted to the defendant to rely on such affidavit.  It would entail an adjournment and the plaintiff’s application for seeking judgment for his good claim would be deferred. 

35.  However, lack of a good reason for the lateness of the application to adduce and rely on Mr Arboit’s second affidavit is only one factor to be considered.  Likewise, even if there is lack of any specific prejudice to the plaintiff, it is not necessarily determinative or conclusive.  The discretion whether to allow further evidence is a general one in which all the circumstances will be taken into account.  Ultimately, it is a balancing exercise and the court must exercise its discretion in a fair manner having regard to all the circumstances and the explanation given (see Ketteman v Hansel Properties [1987] 1 AC 189, 220 and Sir Thomas Bingham MR in Costellow v Somerset County Council [1993] 1 WLR 256, 263 – 264). 

36.  At issue here is the relevance of the three areas canvassed in Mr Arboit’s second affidavit to the summary judgment application.  I have no doubt that the third point is relevant as it deals with the cheques and the plaintiff’s pre-action demand for salary.  In respect of the first and second points, it is the defendant’s case that the plaintiff’s lack of co-operative response to the liquidators’ enquiries pursuant to their investigations as well as his overall conduct as director of the defendant at the relevant time in effecting the sale of the most significant asset of the defendant at a substantial undervalue were suggestive of questionable conduct of the plaintiff, which the liquidators say went to support their belief that the employment contract was a sham agreement to siphon to assets of the defendant.

37.  I note that Mr Leung in his submissions to oppose the defendant’s application did not argue that these matters were irrelevant.  In my view, I cannot say that at this stage, before hearing argument and submissions on the summary judgment application, that the contents of Mr Arboit’s second affidavit are wholly irrelevant to the issues.  I bear in mind that the defendant is relying on the Miles v Bull ground in saying that summary judgment is inappropriate, i.e. that even if the defendant were unable to pinpoint any precise issue or question in dispute which ought to be tried, there was some other reason for trial, and that the defendant properly required to interrogate and cross-examine the plaintiff. 

38.  Whilst I bear in mind the convenience of the court in progressing the case quickly, and the interest of justice in the efficient despatch of hearings generally, I do not see any irreparable prejudice that may be suffered by the plaintiff that cannot be remedied by an adjournment and costs. 

39.  In all the circumstances, looking at the matter in the round, I am of the view that it is just to allow the defendant to rely on the second affidavit of Mr Arboit.  I do not consider that such affidavit is so arguably irrelevant for the purpose of the Order 14 application that it should be shut out, or that the plaintiff would suffer such disadvantage sufficient to justify the refusal of the further evidence.  I therefore grant leave to the defendant to file and serve the second affidavit of Mr Arboit and for abridgement of time for service of the defendant’s summons dated 8 December 2008.

 (Discussion an formal order, consequential directions and costs)

40.  The defendant’s application for leave was late and I have found that the reason for the lateness was unsatisfactory.  Mr Tang asked me to bear all the circumstances in mind, and I have done so including the reasons that I have explained in my ruling.  I am of the view that a just order is for the defendant to bear costs.  I order that the defendant do pay the costs of the defendant’s summons dated 8 December 2008 and costs thrown away by the adjournment of today’s hearing of the summary judgment application, with certificate for counsel.  Given that this is a matter within a small compass, I consider gross sum assessment of costs would be appropriate, and I will deal with it in a moment.

41.  I give directions for the adjourned hearing first.  The hearing for argument of the plaintiff’s summons dated 6 September 2008 be adjourned and heard by a district judge in chambers, open to the public, at 9.30 am on 3 February 2009 at Court No.8 with three hours reserved. 

(Parties agree on quantum of costs)

42.  I make the formal order on costs now.  The defendant do pay costs of the defendant’s summons dated 8 December 2008 and costs thrown away by the adjournment of the hearing today in respect of the plaintiff’s summons dated 6 September 2008 to the plaintiff, agreed by the parties to be $25,000 inclusive of counsel’s fees.