EAC TRANSPORTATION SERVICES (HONG KONG) LTD v. WAY-PROSPERITY CARGO SERVICES COMPANY LTD AND OTHERS

HCCW 286/2013

[2025] HKCFI 1233

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 286 OF 2013

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J U D G M E N T

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A.  INTRODUCTION

1.  This was the trial of the Petitioner’s summons dated 31 August 2017 in respect of alleged misfeasance under S.276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“the Summons”).

2.  The essential allegations relate to the business of the 3^rd Respondent, EAC Prosperity Logistics Enterprise Limited (“the Company”). In short, it is the Petitioner’s case that between 22 June 2011 and 15 May 2012, the 2^nd, and 4^th to 7^th Respondents, as directors of the Company, procured and/or caused the Company to enter into a series of agreements that involved payments to e-Prosperity Logistics Enterprise Limited (“e-Prosperity,” a company related to the said directors), the effect of which was to transfer the majority and core assets of the Company to e-Prosperity, in circumstances which were to the detriment of the Company.

3.  At the core of this dispute is a fight between the two original investors into the Company – the Petitioner on the one part (the owner and director of whom is a Mr Ricky Wong, defined below), and Mr Chan Fu Chuen, the 2^nd Respondent, on the other. The 4^th to 7^th Respondents are persons associated with the 2^nd Respondent, and together with the 2^nd Respondent are hereinafter referred to as being “the Respondent Directors & Shareholders”.

B.  BACKGROUND

4.  The following matters are agreed and/or not readily disputable.

5.  The Petitioner was incorporated in Hong Kong on 22 February 1994. Mr. Wong Sai Kay Ricky (“Ricky Wong”) is and was at all material times director of the Petitioner since July 1994.

6.  The 1^st Respondent was a company incorporated in Hong Kong on 26 July 1994. The 2^nd, 4^th to 6^th Respondents are and were at all material times four of the eleven shareholders of the 1^st Respondent. The 2^nd, 4^th and 5^th Respondents are and were at all material times also the directors of the 1^st Respondent. The 1^st Respondent at all material times represented and still represents the investment of the 2^nd Respondent in the Company.

7.  The Petitioner at the material times represented and still represents the investment of Ricky Wong in the Company.

8.  The Company was founded by Ricky Wong and the 2^nd Respondent in late 2003.

9.  The Company is a private company limited by shares incorporated in Hong Kong on 15 October 2003 under the Companies Ordinance (Cap.32) to do logistic business with its registered office situated at Flat 7, 4/F, Wing Hang Industrial Building, 13‑29 Kwai Hei Street, Kwai Chung, New Territories, Hong Kong. By a resolution passed on 3 December 2003, the Company changed its name from its previous name, namely EAC Prosperity Logistics Services Limited to its present one.

10.  The Company has an issued capital of $5,000,000.00 divided into 5,000,000 shares of HK$1.00 each. The shareholders of the Company and their respective shareholdings as at the date of the Petition were as follows:-

Shareholder	Number of shares held	% of issued share capital
The Petitioner	1,500,000	30%
The 1st Respondent	3,499,999	69.99998%
The 2nd Respondent	1	0.00002%
Total :	5,000,000	100%

11.  The Company commenced its business operations on or around 1 January 2004 and was engaged in providing transportation services. The Petitioner and the 1^st Respondent contributed share capital comprising cash (HK$1,020,000 from the Petitioner and HK$2,380,000 from the 1^st Respondent) and a fleet of over 100 vehicles/trailers in the proportion of 3/10 and 7/10 respectively.

12.  In 2004, the Company had six directors:-

(i)  Chan Fu Chuen, the 2^nd Respondent

(ii)  Cheng Ming Chai, the 4^th Respondent

(iii)  Lo For Kan, the 5^th Respondent

(iv)  Ricky Wong

(v)  Lai Wing Po (“Lai”)

(vi)  Lo Ho Biu (“Lo”)

Lai and Lo were nominated by the Petitioner/Ricky and the 2^nd, 4^th and 5^th Respondents were nominated by the 1^st Respondent. On 15^th October 2010, Lai and Lo ceased to be the directors of the Company.

13.  Ricky Wong was suspended from being the managing director of the Company on 18^th October 2010 and was dismissed from the position on 1^st April 2011.

14.  On 14^th July 2011, the 2^nd Respondent on behalf of the Board issued a notice of an extraordinary general meeting (“EGM”) which was scheduled to be held on 17^th August 2011 to consider the issue of whether Ricky Wong should be removed as a director. The said notice was received by Ricky Wong. A resolution was passed during the EGM to remove Ricky Wong as director of the Company on 17^th August 2011.

e-Prosperity Logistics Enterprise Limited

15.  e-Prosperity was incorporated as a limited company in Hong Kong on 22 March 2011 under the Companies Ordinance (Cap.32). e-Prosperity has an issued share capital of HK$10,000.00 divided into 10,000 shares of HK$1.00 each. The shareholders of e-Prosperity are and were at all material times the 4^th, 6^th and 7^th Respondents who hold 7,000, 2,000 and 1,000 shares in e-Prosperity respectively.

16.  The directors of e-Prosperity as at the date of the Petitioner were the 2^nd Respondent and the 4^th to 7^th Respondents.

The agreements between the Company and e-Prosperity

17.  By a sale and purchase agreement dated 22^nd June 2011 entered into between the Company as vendor and e-Prosperity as purchaser, the Company sold 110 vehicles, comprising of 43 tractors, 4 trucks, 1 private car and 62 trailer (“Fleet of Vehicles”) to e-Prosperity for the price of HK$5,500,000.00 (“SPA”). The Company remained solvent thereafter.

18.  By a “Private Car, Trucks, Tractors & Trailers Rental Agreement” signed on 28^th June 2011 and entered into between e‑Prosperity and the Company, it was agreed that the Fleet of Vehicles would be leased back by e-Prosperity to the Company at a monthly rental price of HK$83,416.00 (“Rental Agreement”).

19.  By a “Supplemental to The Vehicles Rental Agreement” dated 15^th August 2011 entered into between e-Prosperity and the Company, it was agreed that starting from September 2011, the monthly rental of the Fleet of Vehicles and an additional 3 units of tractors, 1 unit of private car (car plate no. HW448) with cross-border licence (中港牌) 粵 Z 4220 港 and 1 unit of 16 tonne box type lorry would be adjusted to be in the total sum of HK$183,416.00 (“1^st Supplemental Agreement”).

20.  A supplemental rental agreement dated 15^th May 2012 was entered into between e-Prosperity and the Company (“2^nd Supplemental Agreement”).

21.  Together, the Rental Agreement, the 1^st Supplemental Agreement and the 2^nd Supplemental Agreement are referred to as “the Rental Agreements”.

22.  The SPA and Rental Agreements were entered into by resolutions passed by the then directors of the Company (being 2^nd, 4^th to 7^th Respondents, who were also the only directors of e-Prosperity at the material times).

Miscellaneous matters

23.  From 2004 to 2011, Ricky Wong was the chairman of the Hong Kong Container Tractor Owner Association (“Owner Association”). Ricky Wong ceased to be the chairman of the Owner Association since 2012.

24.  Negotiations to terminate the cooperation between Ricky Wong and the 2^nd Respondent started in about 2009.

25.  On 21^st July 2011, the Petitioner commenced proceedings against the Company in the High Court under action no. HCA 1225/2011 and claimed for the total sum of HK$1,020,000.00.

26.  Regarding the cross-border licence place粵 Z 4220 港 (that was put on the vehicle HW448) referred to in paragraph 19 above, the market value as in 2020 was RMB1,000,000.00.

27.  The reasonable monthly rental value of the vehicle bearing licence plate no. NH3800 at the material time was HK$6,000.00, with the Company bearing the cost of repair/maintenance, licence and insurance.

C.  THE PARTIES’ RESPECTIVE CASES

28.  The Petitioner’s case, as set out in the Amended Points of Claim dated 29 March 2019 may be summarized as follows:

(1)  At the point of establishing the Company, the Petitioner and the 1^st Respondent contributed capital and/or assets proportionally in accordance with their respective shareholdings. This involved injection of various vehicles, the value of which totalled HK$1.5 million and HK$3.5 million respectively to the Company’s assets notwithstanding the registration names of the vehicles were not changed.

(2)  It is the Petitioner’s case that this injection of assets included the beneficial interest in the private car with licence plate HW448 and a cross-border licence plate粵 Z 4220 港 (“HW448” / “Private Car”), and that the subsequent change in registration of the said Private Car from the 1^st Respondent to e-Prosperity was carried out in breach of the 1^st Respondent’s fiduciary duty and in breach of trust as this was done with no consideration provided to the Company.

(3)  Owing to the removal of the directors from October 2010 onwards (paragraphs 12 to 14 above), the directors who were in Ricky Wong’s camp (including Ricky Wong himself) were not given any information regarding the negotiations and agreements that the Company entered into with e-Prosperity.

(4)  The SPA was thus entered into without Ricky Wong’s and/or Lai and Lo’s knowledge. It is the Petitioner’s case that HW448 was not included in the SPA.

(5)  As at the date of the entry into the SPA, the Respondent Directors were the only directors of the Company and e‑Prosperity. In addition, the 4^th Respondent held 70% and the 6^th and 7^th Respondents respectively held 20% and 10% of the shareholdings of e-Prosperity at the material time. The Petitioner’s case is thus that there was a clear conflict of interest in respect of the entry of the SPA between the Company and e-Prosperity.

(6)  It is further the Petitioner’s case that there was no commercial rationale for entry into the SPA, given the Company was solvent at the material time and did not have any cash flow difficulties. It is alleged that the SPA was entered into as a prelude to the subsequent agreements (The Rental Agreement, and the 1^st and 2^nd Supplemental Agreements), which would benefit e-Prosperity to the Company’s detriment.

(7)  Moreover, it is alleged that the purchase price set out in the SPA did not reflect the true value of the vehicles because there was no account taken of the potential “phase out compensation” that could accrue from the Government’s phase out scheme for tractors and trucks from 1^st July 2010 to 30^th July 2013. It is alleged that the 43 tractors would have been entitled to a total compensation amount of HK$8,278,000, and the 4 trucks to a total compensation amount of HK$622,100, and thus the consideration of HK$5.5 million was inadequate.

(8)  The Petitioner further alleged that the staged payments of the said consideration (three installments over two years from the completion date of the transaction) was wholly contrary to the supposed rationale underlying the SPA (namely, that there had been cash flow difficulty encountered by the Company). In the meantime, the vehicles were wholly transferred to e‑Prosperity without any kind of guarantee nor title retention strategy in case there was ever any default in payment. The Petitioner thus says that the terms of the SPA were wholly in e‑Prosperity’s favour, to the Company’s detriment.

(9)  For any and all of the above reasons, it is thus said that the Defendant Directors were in breach of their fiduciary duties when they caused the Company to enter into the SPA.

(10)  Furthermore, subsequent to the completion of the SPA, it is alleged that e-Prosperity was in default of payment, such that by the due date of the last installment, over HK$2 million was outstanding. It is the Petitioner’s case that the Defendant Directors did nothing to pursue payments or interest for the said delayed payments, and that their lack of action was similarly in breach of fiduciary and directors’ duties.

(11)  Subsequent to the above, by the Rental Agreement, the assets were leased back to the Company. The representatives who signed the Rental Agreement were significant shareholders of e‑Prosperity. The Petitioner alleges that the Rental Agreement was entered into in circumstances where there was conflict of interest with the 5 directors being in breach of fiduciary duty, and the said agreement was wholly for the best interest of e‑Prosperity at the expense of the Company.

(12)  Similar allegations are made in relation to the 1^st and 2^nd Supplemental Agreements.

(13)  By reason of the rental arrangements, the Company paid over HK$3.9 million in rent whereas the total purpose price by e‑Prosperity to the Company was HK$3.63 million.

(14)  The overarching allegation is that the suite of agreements were designed in a way so as to misappropriate the Company’s assets and/or to make secret profits at the Company’s expense.

29.  In consequence of the above, by the Summons the Petitioner seeks:

(1)  A declaration that the Respondent Directors & Shareholders are guilty of misfeasance and/or breach of duty and/or breach of trust in respect of the entry into the various agreements with e‑Prosperity, misapplication of funds in relation thereto, and making secret profits to the detriment of the Company;

(2)  An order for all necessary accounts and inquiries for ascertaining the sums which the Respondent Directors & Shareholders will be liable to contribute to the assets of the Company by way of compensation for such misfeasance and/or breach of duty and/or breach of trust;

(3)  An order for the Respondent Directors & Shareholders to jointly and severally contribute to the assets of the Company and do pay the liquidators by way of compensation for such misfeasance and/or breach of duty and/or breach of trust such sum as the court thinks just; and/or

(4)  An order for the Respondent Directors & Shareholders to jointly and severally pay to the Petitioner the costs of the application and the proceedings in HCCW 286/2013.

30.  The case of the Respondent Directors & Shareholders is set out in the Re-Amended Points of Defence dated 6 May 2019, and the key points may be summarized as follows:

(1)  The proportions of shareholdings are agreed but it was their case that Ricky Wong would contribute on the management / operation aspect of the Company.

(2)  They disagree that the Private Car formed part of the capital injected into the Company.

(3)  It is said that Ricky Wong engaged in various forms of misconduct including the following:

i.  Misappropriation of customer funds (the customer being “Carlsberg”) in a PRC account opened in the name of a 黃徳基 but which funds beneficially belonged to the Company.

ii.  Transferring the ownership of 6 of the tractors of the Company to Great Ascent Investment Limited (“Great Ascent”), in circumstances where there was a conflict of interest as he was related to the shareholders thereof by way of another business (Reason Power (Hong Kong) Limited). It is alleged that there was no prior notification to any of the directors of the Company and no money was paid by Great Ascent.

(4)  As a result, Ricky was suspended from his managing director role on 18 October 2010, and dismissed from that role by letter dated 1 April 2011. He was then removed as director in August 2011.

(5)  Lo and Lai resigned by themselves upon learning of the above alleged wrongdoing of Ricky and continued to work for the Company thereafter.

(6)  The SPA was required in or about June 2011 and had been approved by the Respondent Directors & Shareholders acting in the best interests of the Company. It is said that in February 2011, Shanghai Commercial Bank (“SCB”) had notified the Company that the Petitioner / Ricky had not provided documents sought, and that the credit facility of the Company would be cancelled. It was said that this credit facility was required in order to keep operations running. It is further said that around that time, Ricky had threatened through the Petitioner to wind up the Company, and that this would have a drastic and adverse effect. It is therefore said that the sale of the assets (which on their case did not include the Private Car) rendered the Company solvent.

(7)  It is said that the purchase price in the SPA was reasonable, that it had eventually been paid in full, and that it was previously held up because of the winding up petition.

(8)  It is further said that the lease back arrangements in the Rental Agreement was “necessary for continuing operation and business of the Company” and that the rental charged was “extremely low”.

(9)  It is then said that the lorry under the 2^nd Supplemental Agreement was not brand-new but was newly purchased, and that the rental value of the lorry corresponded reasonably with the age of the vehicle.

(10)  It is denied that there were any breaches of duty in relation to the above.

(11)  The crux of the case is that the arrangements under the suite of agreements was entered into by the Respondent Directors & Shareholders because they held an honest belief that this was the best way to “keep the operation and business of the Company when it was under the threat of Ricky / the Petitioner suing, winding up and causing credit facilities to be withdrawn by the bank.” It is further said that this sale created cash on hand to make a share buyback or buyout feasible “so that the business and operation of the Company would not be disrupted / jeopardized by the dispute between the said shareholders…”

(12)  There is, finally, a plea regarding relief from sanction under section 903 of the Companies Ordinance (Cap 622).

D.  AGREED ISSUES

31.  The following are the issues as agreed between the parties:

(1)  Whether the private car with licence plate HW448 and a cross-border licence plate粵 Z 4220 港was part of the capital injected by the 1^st Respondent into the Company?

(2)  In view of the consideration by the 2^nd, 4^th to 7^th Respondents at material time as pleaded in paragraph 13 of the Re‑Amended Points of Defence, whether the procurement and/or authorization of the SPA and the Rental Agreements were necessary for the continued operation of the Company?

(3)  Whether the 2^nd, 4^th to 7^th Respondents, at the time when the SPA was entered into on 22 June 2011, were aware or could anticipate that the Hong Kong Government would revise the incentive scheme to phase out diesel vehicles of earlier models where the eligible owners could apply for ex-gratia payment from 1 March 2014 onwards (“2014 Scheme”)?

(4)  Whether the consideration of HK$5.5 million under the SPA payable to the Company has been fully settled by e-Prosperity?

(5)  Subject to the answer to the Issue 1 herein, whether the 2^nd, 4^th to 7^th Respondents as ex-directors of the Company were deceiving the Company by causing the Company to lease the Private Car?

(6)  Whether the 2^nd, 4^th to 7^th Respondents as ex-directors of the Company were deceiving the Company by accepting a 15 years old lorry instead of one brand-new tractor? Whether leasing the said lorry can justify the increase of the monthly rent in the 2^nd Supplemental Agreement dated 15 May 2012? Whether the monthly rent in the 2^nd Supplemental Agreement dated 15 May 2012 in the sum of HK$200,000.00 for the fleet of vehicles covered therein was within market price?

(7)  Subject to the finding of the foregoing issues, whether the 2^nd, 4^th to 7^th Respondents were in breach of any their fiduciary and/or director’s duties to the Company as specified in Annex I regarding (i) procuring, authorizing and partially enforcing the SPA and (ii) procuring and authorizing the Rental Agreement, the 1^st Supplemental Agreement and the 2^nd Supplemental Agreement?

(8)  In view of the answers to the aforesaid Issues, whether the Company sustained any loss?

(9)  If, which is denied, the 2^nd, 4^th to 7^th Respondents were found to be liable for any of the alleged misfeasance and/or breach of duty in relating to the Company resulting in loss to the same, whether they had acted honestly and reasonably and thereby ought fairly be excused from liability.

(10)  If, which is denied, the Company sustained loss and the 2^nd, 4^th to 7^th Respondents are found to be liable and are not entitled to relief from sanction under s.903 of CO, what is the quantum of liability?

Agreed Preliminary Issue

(11)  Whether paragraphs 5.1, 6.10, 7.1, 7.2, 7.7, 7.10, 7.11, 7.13 of the Liquidator’s Report dated 30.5.2018 should be expunged for being adversarial and/or that the Liquidator has not acted even-handedly as an impartial neutral person in making the comments therein?

32.  At trial, the Court heard from the following witnesses of fact:

(1)  The Petitioner, Mr Ricky Wong;

(2)  The 2^nd Respondent, Mr Chan Fu Chuen; and

(3)  Mr Wong Siu Wah Clarence (“Mr Clarence Wong”)

33.  The court further heard from:

(1)  Mr Liu Chi Tat Stephen (“the Liquidator” / “Mr Stephen Liu”), the Liquidator of the Company; and

(2)  Mr Kwok Kai Bun Benny (“Mr Benny Kwok”), a forensic accountant who on the Liquidator’s invitation had examined certain documents of the Company and sought to quantify the losses suffered as a result of the Agreements.

E.  RELEVANT LEGAL PRINCIPLES

Approach to witness and documentary evidence

34.  The following propositions are well-settled as regards the approach to witness evidence and documentary evidence:

(1)  The Court will have regard to the inherent probabilities of the parties’ respective cases, and the internal consistency of the witnesses’ evidence and their demeanor when testifying at trial. Further, the Court will have regard to the contemporaneous documents, circumstantial evidence tending to support one account rather than the other, and the overall impression of the character / motivation of the witnesses (Re B (Children) [2009] 1 AC 1).

(2)  The Court bears in mind not only the witnesses’ demeanor in court, but also the history of events, and the contemporaneous documents and the inherent probabilities of the witnesses’ accounts (Esquire (Electronics) Ltd v The Hong Kong and Shanghai Banking Corp Ltd [2007] 3 HKLRD 439 at 494C).

Alleged Misfeasance

35.  The Petitioner relies on the following propositions:

(1)  In the exercise of the powers as directors, the Respondents owed fiduciary duties to the Company, including the duty to act honestly and in good faith in the best interests of the Company, and not use their powers for improper purposes.

(2)  Where assets of the Company have come into their hands or which are under their control, they effectively owe the duties of a trustee (Selangor United Rubber Estates Ltd v Cradock (No 3) [1968 1 WLR 1555 at 1575-1576).

(3)  Where property has been wrongfully transferred away, the directors responsible therefor are obliged to make good the loss (Bishopsgate Investment Management Ltd v Maxwell [1993] BCC 120).

36.  The Respondent Directors & Shareholders rely on the following propositions: (to which there is no great exception taken by the Petitioner)

(1)  Insofar as possible the court does not interfere with decisions and transactions over which differences have arisen, which are largely matters of commercial judgment (Harlowe’s Nominee’s Pty Ltd v Woodside (Lakes Entrance Oil) Co NL (1968) 121 CLR 483, 493).

(2)  Fiduciary duties are not concerned with competence but with concepts of honesty and loyalty: Wang Pengying v Ng Wing Fai & Ors [2021] 1 HKLRD 997 ([2021] HKCA 100) at §74 (per Kwan VP).

(3)  The duty imposed on directors to act bona fide in the interests of the company is a subjective one. Where there is evidence of the director directing his mind to the interests of the company, the question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the best interests of the company. Rather, the question is whether a director honestly believed that his chosen course of act or omission was in the interests of the company. The key consideration pertains to the director’s genuinely belief: Regentcrest plc (in liq) v Cohen & Anor [2001] BCC 494 at §120.

(4)  Thus it is the director’s state of mind instead of a hindsight judgment on the relevant facts in place of the decision made by the directors at the time that is relevant. The Court need not consider whether it would have acted differently had it been in the position of the director at the relevant time: Francis Wessely v Richard White [2018] EWHC 1499 (Ch) at §§43-44. Further, the petitioner must prove that any alleged loss suffered by the Company were caused by such breaches: ibid at §45. The burden of proving both the alleged breach and loss falls squarely on the petitioner: ibid at §50

(5)  The Court has recognised that it is acceptable for directors to take measures, such as capital allotment, when faced with potential risk to the company which if materialised will result in the Company becoming insolvent or at least may become insolvent and go into liquidation: Fountain II Ltd v Ping An Securities Group (Holdings) Ltd [2020] 1 HKLRD 429 at §49. This was notwithstanding the petitioner’s assertion therein that such allotment is a scheme to dilute its (indirect) shareholding to avoid the removal of management personnel and that there was no evidence the company would be insolvent but for the allotment (ibid at §§9-14). It was further held that, it would be inappropriate for the Court to interfere with such decision(s) by the director(s) in the management of the company (ibid applying the case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821) and under the circumstances, it was insufficient to draw the serious inference that the directors were acting improperly by carrying out capital reorganisation in the Company: ibid at §§43-52.

(6)  Where the misfeasance complained of is dishonesty / fraud / conspiracy, the complaining shareholder must establish that the alleged breach of duty is deliberate and wilful in nature. It must be proved that there is an irresistible inference that there was such fraudulent or dishonest breach of duty which were ultra vires of the company’s powers, mere negligence is insufficient: Wang Pengying (supra) at §§73-74.

(7)  Insofar as loss and damages are concerned, as explained by the Court of Appeal in Waddington at §78, the applicable test for a claim for equitable compensation in respect of loss shown to have been caused by a breach of duty is the “but for” test. In other words, akin to the concept of restitution, it attempts to restore to the claimant what has been lost as a result of the breach. Loss or damage is not recoverable if it would have occurred in any event, i.e. without any breach on the fiduciary’s part.

Evidence of the Liquidator / Expert

37.  It has been suggested that the Liquidator / experts were not acting fully impartially in the course of giving evidence.

38.  The Respondent Directors & Shareholders refer to the following principles in support of such contention, the general principles of which again do not appear to be disputed by the Petitioner:

(1)  The duty of a liquidator to act impartially as observed by Mr. Justice Ribeiro PJ in Nam Tai Electronics Inc v Pricewaterhouse Coopers (2008) HKCFAR 62 at 86.

(2)  A liquidator must act fairly and honourably. This is a very strict obligation as he must not only act fairly and independently, but he must be seen to be fair, independent and completely impartial: DHCJ To J in Allied Ever Holdings Limited v Li Shu Chung & Ors (unrep., HCCW 497/2009, 27 November 2017) at §4.

39.  As to expert evidence as summarised in Wong Siu Wa v Win Sino Engineering Ltd [2018] HKCFI 1663 at §154, when assessing expert evidence, the following considerations are relevant:

“ (a) The mere expression of opinion or belief by a witness, however eminent, does not suffice.

(b) The court has to evaluate the witness and the soundness of his opinion.

(c) Most importantly this involves an examination of the reasons given for his opinions and the extent to which they are supported by evidence.

(d) The weight to be given to the opinion of an expert depends on:

(1) the internal consistency and logic of his evidence;

(2) the care with which he had considered the subject and presented his evidence;

(3) his precision and accuracy of thought as demonstrated by his answers;

(4) how he responds to searching and informed cross‑examination and in particular the extent to which a witness has conceived an opinion and is reluctant to re-examine it in light of later evidence, or demonstrates a flexibility of mind which may involving changing or modifying opinions previously held;

(5) whether or not a witness is biased or lacks independence”

F.  WITNESSES

40.  The evidence given by the witnesses spanned a range of disputes, not all of which were directly relevant to the agreed issues. In this section, I summarise the points covered by the witnesses and comment on the Court’s general impressions as to demeanour and credibility of the witnesses. In the subsequent sections, I will set out my views and findings on the evidence insofar as they relate to the issues.

Mr Ricky Wong

41.  Mr Ricky Wong gave evidence that largely tallied with the matters set out in the Amended Points of Claim (paragraph 28 above). In addition thereto, the following were notable aspects of his evidence:

(1)  At the outset of the cooperation, he was the managing director and was largely responsible for the daily running of the Company. Whilst important decisions would be run past the 2^nd Respondent (who at the time was based in mainland China), he held much of the day to day responsibilities for running of the Company.

(2)  This changed subsequently when the 2^nd Respondent began to interfere in the daily running of the Company. The parties’ relationship grew more strained and in or about April / May 2010, discussions began on potential buy out by either side.

(3)  He denied the various allegations of wrongdoing by the Respondents. This included inter alia addressing his cooperation with other parties in opening up the business of Green Express Limited, which was a company that would provide a service of consolidating cargoes in containers and moving them from the Mainland to Hong Kong. The rationale was that small companies would utilize these services because they would not themselves have access to container movers. However, this business was never operational.

(4)  Insofar as the complaint about the Carlsberg funds were concerned (paragraph 30(3)i above), this was part of a practice that was always known to the Company – an arrangement of convenience that had built up as the Company did not have a bank account in the PRC but the customer in question (Carlsberg) wished nevertheless to make deposits there. Mr Ricky Wong would receive those deposits and thereafter arrange for them to be transferred to the Company later. In the period of fallout between the Petitioner and the Respondent Directors & Shareholders, there was some dispute over the amounts remaining in the PRC bank account. However, this was eventually resolved.

(5)  The Great Ascent arrangement (paragraph 30(3)ii above), was a means of securing a loan of HK$2,000,000 for the Company with preferable interest rates, and done by him in the best interests of the Company. The arrangement allowed the Company to buy back the six tractors at a consideration of HK$10, upon the loan being repaid. (He contrasted this with the Agreements, which had no such provision for buyback, discussed further below).

(6)  He denied having ever received any request for documents from SCB.

(7)  As to the demand for the return of the loan of HK$1.02 million to the Company, he explained that since he had been kicked out of the board (from 17 August 2011) and the cooperation had effectively ended, he felt he ought to be repaid. This was the context in which he through the Petitioner had threatened to wind up the Company.

42.  On the whole, I found Mr Ricky Wong to be a credible and honest witness. His demeanour was generally upfront and believable. His explanations and answers to questions in cross-examination were measured and given in a way which appeared frank and open. Insofar as any further explanations and evidence on specific issues are relevant, those are discussed with reference to the specific issues.

Mr Chan Fu Chuen

43.  Mr Chan’s witness statement was very brief, essentially only referring to and adopting the witness statement of Mr Clarence Wong. In the circumstances, the assessment of his evidence relates to the evidence given by Mr Clarence Wong (discussed below).

44.  In any event, upon observing his cross-examination, I found Mr Chan to be an unreliable witness. His demeanour was evasive, and he often gave answers which were indirect or equivocal. He also gave evidence which was inconsistent with that in Mr Clarence Wong’s evidence, notwithstanding he had adopted such statement in its entirety.

Mr Clarence Wong

45.  Mr Clarence Wong only joined the Company in or about October 2010. Hence, whatever information he had regarding events which preceded his joining were, he said, told to him by Mr Chan. He gave evidence for the other Respondent Directors & Shareholders as well.

46.  In his evidence, he largely mirrored and elaborated on the matters set out in the Re-Amended Points of Defence (paragraph 30 above). In addition thereto, the following were notable points in his evidence:

(1)  He discussed the operation of Green Express Limited as being a catalyst (in around 2009) for the parties to negotiate terminating cooperation by the end of 2010.

(2)  He referred to the Great Ascent incident as being an incident where Mr Ricky Wong had arranged for a sale and leaseback of six tractors without notifying / seeking approval from the board of directors. He then alludes that there was a suspicion that “Ricky might have benefitted” from this (but without any clear indication of how he would benefit). He said that the whole arrangement looked like a sham. Regardless, he acknowledged that the six tractors had been returned in late October or early November of 2010.

(3)  He reiterated the allegation of misappropriation in relation to the Carlsberg funds, noting that the funds were repaid after the litigation had been commenced against Ricky Wong and he had paid the relevant sum into court in about Feburary 2013.

(4)  He refers to various instances when Mr Chan reported Mr Ricky Wong to the police (for the Great Ascent incident and the allegation of misappropriated PRC funds) both in Hong Kong and the PRC.

(5)  He then discussed the alleged failure of Mr Ricky Wong to cooperate with provision of updated documents to SCB, which led to the threat of cancellation of the overdraft facility of HK$1.5 million of the Company.

(6)  He referred to the threat by Mr Ricky Wong to wind up the Company (which also, he said, would put an end to the Company as SCB would cancel the overdraft facility.)

(7)  Referring to these incidents, and the fact that the parties were in the course of negotiating potential buy out, he then explained that the SPA and Rental Agreements were thought to be “the best way to move forward” so as to “realize enough cash so that the Company could afford among other things to pay off either shareholder … to leave Ricky with no further excuse in bothering the Company.” It was said the e‑Prosperity was set up with this end goal in mind, “to ensure that the operation of the Company would not be interrupted or the Company put to an end.”

47.  On the whole, I found Mr Clarence Wong to be an unreliable witness. The parts of his witness statement which spoke to events preceding his joining were all hearsay, so his take on those matters were of limited assistance, particularly when seen in light of the 2^nd Respondent’s lack of his own evidence on these issues. Insofar as those events in which Mr Clarence Wong was personally involved, there were also parts which were inconsistent with the evidence given by Mr Chan. Furthermore, his demeanour was evasive and lacking openness.

G.  DISCUSSION ON THE ISSUES

48.  Much evidence was received during the course of the trial, and much ink has been spilled by counsel on both sides to analyse the evidence and the issues. I have reviewed both the evidence and the submissions in depth. In this section, I address the disputes between the parties as to each issue and summarise the key matters which I consider relevant and have taken into account in arriving at a finding on each of those issues.

Preliminary Issue

49.  The preliminary issue as to the expert can be disposed of quickly. I do not consider there is any merit in the suggestion that the Liquidator acted unfairly. The opinions in the paragraphs sought to be expunged were just that – opinions. I have perused the same in context and had the opportunity to test it against the evidence. The Liquidator and Mr Benny Kwok both gave evidence and were cross examined. I found them both to be reliable, impartial witnesses. I do not consider the relevant paragraphs ought to be expunged, and I have proceeded to consider the Liquidator’s evidence on the basis that it is open to the Court to receive and consider with reference to all of the other factual evidence placed before the Court at trial.

Issue 1: Whether the private car with licence plate HW448 and a cross-border licence plate粵 Z 4220 港was part of the capital injected by the 1^st Respondent into the Company?

50.  The dispute between the parties is relatively simple – The Petitioner’s version, as supported by Mr Ricky Wong’s evidence, was that the Private Car had been injected beneficially into the Company from the outset, albeit the title had not changed hands. As against this, the Respondent Directors & Shareholders say (via Mr Chan / Mr Clarence Wong) that the car was never part of the assets injected, laying emphasis on the fact that title was not transferred.

51.  There are three categories of evidence relating to this issue:

(1)  The oral evidence by Mr Ricky Wong on the one hand, who essentially says that the intention and reality all along was that the Private Car (with the cross-border licence) was injected to and did form part of the assets of the Company. This is to be contrasted with the version given by Mr Chan and Mr Clarence Wong, who say that it did not form part of the Company’s assets.

(2)  The contemporaneous lists which had been prepared in or about (or shortly after) the time of setting up the cooperation between the parties.

(3)  The evidence of subsequent dealings with the assets.

52.  The witness evidence was tested alongside the contemporaneous documents which appear to have been prepared around the time of commencement of the parties’ cooperation, which included the following:

(1)  A document entitled “Debit Note” dated 1 January 2004, which was on the letterhead of the 1^st Respondent, marked to the attention of the Company. Affixed to this document on the last page was the chop of the 1^st Respondent, and the signature appears to be that of Lo For Kan, who at the material time was a director and shareholder of the 1^st Respondent. In the description in the note, it refers to “Sale of tractors, trailers, goods vehicles, private cars and cross-border licence to your Company as follows…”, followed by a list of vehicles. Included within that list was the Private Car, identified by the plate HW448, with a listed value of HK$250,000 (to reflect, the Petitioner says, the value of the cross-border licence; whereas the Respondents say that the Private Car with the cross-border licence would be worth much more than this). Various other Trailers and vehicles were also listed individually, with assigned values thereto. The total ascribed value of all the vehicles listed was recorded and rounded up to HK$3.5 million.

(2)  The document appears alongside inter alia a single page document which lists out “Tractors and Private car” which total HK$1.5 million. Affixed to this one page document is the chop of the Petitioner, signed by Mr Ricky Wong.

(3)  A 2-page list which has at the top the name of the Company, followed by a description of “Equipment List” and the date 1^st January 2004. The list below it sets out various vehicle registration numbers, the manufacturing year of the vehicle, the value and identifying the party transferring (WP for the 1^st Respondent, ETS for the Petitioner). The list also includes the HW448 Private Car, valued at HK$250,000. (The Petitioner’s evidence was that this list had been prepared by him for internal accounting purposes).

(4)  The Petitioner’s case was that these documents showed that HW448 was clearly included in the assets injected, whereas the Respondents’ case was that these were merely preparatory lists for discussion purposes.

53.  Subsequently:

(1)  The original car under the HW448 licence (a Mercedes Benz) was replaced (to a BMW). This was purchased by Mr Chan, and the title was not transferred to the Company, nor was the purchase price covered by the Company.

(2)  At the time when parties were negotiating potential buy out in about 2010, there had been another list prepared for valuing the assets of the Company. This did not include the HW448 car. It was Mr Ricky Wong’s evidence that when preparing this list, he had inadvertently neglected to include all private cars in that list (including one which he himself used, as opposed to the HW448 one which was used by Mr Chan). His explanation was that the list was a mere proposal that was never finalized or accepted.

(3)  The Private Car was not included in the SPA, but was then included in the arrangement between the Company and e‑Prosperity for the 1^st Supplemental Agreement. (In this regard, Mr Chan confirmed that no consideration was paid by e-Prosperity to the 1^st Respondent for this transfer).

(4)  In the affirmation of Mr Clarence Wong filed on November 2017, there is reference to “Ricky and Chan each [injecting] a car for use” at the beginning of the cooperation. It is further said that “Ricky’s car was scrapped in around late 2010 or early 2011 so it was no longer relevant, Chan’s car was sold under the Sale and Lease Back Scheme but was replaced by a new one later since Chan’s car was too old. The replacement by a new one was reflected in the increase in rental value of the Equipment.” There was some dispute over which car this referred to – HW448 (the Petitioner says that this was the natural inference) or another vehicle with the licence plate ML9575 (which had been included in the earlier lists referred to at paragraph 51 above).

54.  On balance, after reviewing the available documentation and considering the parties’ alternate explanations, I find in favour of the Petitioner’s case. The Private Car under licence plate HW448 formed part of the assets of the Company as had been injected by the 1^st Respondent. I find Mr Ricky Wong’s version to be more believable in this respect, and his version is further supported by the existing documentation which was prepared at the material time of injection of assets. This is not negated by the change of vehicle in 2009, as the intention of the parties did not appear to be that the Company needed to actually pay for the vehicles injected. Each party had injected a vehicle into the asset of the Company for private use, so the one under HW448 was that which represented Mr Chan’s injection.

Issue 2: In view of the consideration by the 2^nd, 4^th to 7^th Respondents at material time as pleaded in paragraph 13 of the Re-Amended Points of Defence, whether the procurement and/or authorization of the SPA and the Rental Agreements were necessary for the continued operation of the Company?

55.  Paragraph 13 of the Re-Amended Points of Defence suggests in essence that the SPA and Rental Agreements were “the best way in the circumstances to keep the operation and business of the Company when it was under the threat of Ricky/Petitioner in suing, winding up and causing credit facilities be withdrawn by the bank.” It is said that the arrangement realised cash to make share buy back a possibility when the parties had been negotiating.

56.  The actual substantive effect of the SPA and the Rental Agreements were clear. Ownership of assets that previously belonged to the Company were transferred outright to e-Prosperity, and then by the leaseback arrangements, money that had been earmarked as consideration for the sale (but to be paid in stages) was by and large utilized to pay for the use of the very same assets that had been so transferred. Whilst the title to the assets were transferred immediately, payment was to be made in stages, and there was no form of security in the meantime. The staged payments were also interest free. The increase in rental via the series of Rental Agreements also meant that the cost of doing business continued to increase without any substantive ownership of the underlying vehicles.

57.  The justification put forward by the Respondent Directors & Shareholders for entering this arrangement is premised upon the suggestion that the Petitioner had been engaged in detrimental acts towards the Company – these acts namely being: (1) setting up Green Express, which would allegedly damage the Company’s interests as a competitor; (2) the alleged misappropriation of the Carlsberg funds; (3) the allegation that Mr Ricky Wong had failed to respond to SCB’s request to provide the Petitioner’s business registration certificate in order to disrupt the Company’s banking facilities; (4) the threat to wind up the Company on the basis of the shareholders’ loan of HK$1,020,000; and (5) the Great Ascent incident, allegedly being a means by which the Company’s assets were siphoned away. (The relevant evidence in relation to these incidence has been covered above within the summaries of the witnesses’ evidence above.).

58.  The Respondent Directors & Shareholders then say that because of these alleged misdeeds, they held a genuine belief that they needed to take these steps to enter into the SPA and the Rental Agreements in order to ensure that the Company could continue to operate.

59.  I do not accept the Respondent Directors & Shareholders’ position or justification in respect of this issue.

60.  First and foremost, the arrangement itself was not on its face helpful or beneficial to the Company. The net effect of the suite of agreements was that the Fleet of Vehicles were gone and the business as previously operated no longer was. The Company then had to pay rental (on an increasingly expensive basis for supposed additional vehicles) to continue to run its business. Unlike the arrangement with Great Ascent, there was no buyback provision, which meant that there was no avenue by which the Company could obtain the Fleet of Vehicles back. In that sense, the suggestion that this was somehow a protective mechanism entered into for and on behalf of the Company’s best interests falls wholly flat.

61.  Mr Clarence Wong and the 2^nd Respondent at various points in their evidence said that this was for the good of the Company, but then were unable to explain precisely how so when the reality was that all of the significant assets were shifted over to e-Prosperity. There was a constant repetition of the perceived need to take care of the employees and their livelihoods. But that ultimately does not answer the fact that the Company’s key assets had been transferred away from it. It also goes against the basic understanding which any company director ought to have that corporate entities are separate legal personalities and the assets of one company are not the same as the assets of another. There was a consistent and repeated conflation of the idea of the ‘business’ of the Company being somehow transferred to or protected by this arrangement when the reality is that there plainly was no such protective effect.

62.  Furthermore, the whole process of entering into the agreements was replete with conflicts of interest. As demonstrated in the cross‑examination of Mr Clarence Wong and the 2^nd Respondent, when entering into the agreements, no steps were taken to address the overlap of directorships and the decision making process in such conflictual circumstances. Nor was there any in depth attempt to address the obvious detriment to the Company that would arise as a result of the arrangements. The form of the agreements themselves are telling – by way of illustration, the 1^st and 2^nd Supplemental Agreements were recorded in the form of letters from e-Prosperity to the Company stating that “as per our mutual agreement…” but then only signed by a director of e-Prosperity. One might say from reading the contemporaneous documentation that the process was driven from the perspective of e-Prosperity rather than the Company.

63.  Secondly, the various justifications relied upon by the Respondent Directors & Shareholders read more as an ex post facto amalgamation of factors to try and justify the actions taken rather than matters which support beliefs genuinely held:

(1)  I accept the evidence that Green Express was never operational, and that in any event it was not in direct competition with the Company.

(2)  I accept Ricky Wong’s explanation regarding the arrangement for the Carlsberg funds, and note that in any event these were eventually remitted back and the litigation settled.

(3)  I note that there is a lack of clarity as to whether Ricky Wong ever actually received any request from SCB in the first place, and in any event, there was no indication that either Clarence Wong or the 2^nd Respondent had chased Ricky Wong on this issue. Furthermore, it is unclear on the documentary evidence whether SCB had actually indicated that banking facilities would be withdrawn.

(4)  I accept Ricky Wong’s reasoning for the Great Ascent arrangement and note in particular the building in of the buyback arrangement for $10-. Even if the Company was in need of funds, this represented a much better basis upon which to make such arrangements that safeguarded its interests.

(5)  Insofar as the threat of winding up – I accept that the Petitioner did take this step. However, this was part and parcel of the actions that the respective sides were taking in view of the disputes that had already accumulated by that point in time. It does not, of itself, justify the supposed belief that the Respondent Directors & Shareholders say that they held.

64.  Finally, I note that the 2^nd Respondent himself had acknowledged in evidence that this was a step taken in order to apply pressure in ongoing negotiations with the Petitioner.

65.  In the circumstances, I find that the SPA and the Rental Agreements were not, contrary to the Respondent Directors & Shareholders’ case, necessary for the continued operation of the Company. I find that they were a means adopted by the Respondent Directors & Shareholders to divert the Company’s assets into the hands of e-Prosperity at the Company’s expense.

Issue 3: Whether the 2^nd, 4^th to 7^th Respondents, at the time when the SPA was entered into on 22 June 2011, were aware or could anticipate that the Hong Kong Government would revise the incentive scheme to phase out diesel vehicles of earlier models where the eligible owners could apply for ex-gratia payment from 1 March 2014 onwards (“2014 Scheme”)?

66.  The Petitioner’s case in relation to this issue is that the Respondent Directors & Shareholders were aware or could have anticipated that the 2014 Scheme would be implemented, such that the HK$5.5 million consideration under the SPA was at an undervalue. On the other hand, the Respondent Directors & Shareholders say that they were unaware of and/or could not have anticipated the implementation of the 2014 Scheme as at the date of the SPA.

67.  The relevance of this is because the eventual 2014 Scheme that was implemented had far more advantageous terms than the one in existence in 2010 (“2010 Scheme”). The 2010 Scheme was in place from 1 July 2010 to 30 June 2013 and applied to replacement of Euro II diesel commercial vehicles by new commercial vehicles. Whereas the eventual 2014 Scheme extended to a broader range of vehicles and also, there was a vast increase in the ex gratia payment amount for the phased out vehicles and owners were not required to replace their old ones with new ones.

68.  As expanded upon in evidence:

(1)  Ricky Wong said that industry insiders were aware or could anticipate as at the time in or around the entry into the SPA the existing scheme at the time of the SPA would be revised.

(2)  The record of the LegCo sub-committee’s discussion in March 2010 showed that there was discussion of the 2010 Scheme but not any definitive discussion of any future revised scheme.

(3)  The contemporaneous documentation from the government’s side shows that there was ongoing discussion about this but no definitive policy shift in 2010.

(4)  It was around 2013 that the Government began to propose suggestions which resembled the 2014 Scheme, and even then, it had to go through the relevant processes in the Legislative Council before any date for implementation would be set.

69.  In the circumstances, I do not consider there to be merit in the Petitioner’s case in this regard. There was no basis upon which the Respondent Directors & Shareholders (or anyone else, for that matter) could have reasonably known or anticipated that the incentive scheme would be revised to the 2014 Scheme terms as at the date of the SPA.

Issue 4: Whether the consideration of HK$5.5 million under the SPA payable to the Company has been fully settled by e-Prosperity?

70.  The key source of information on this was a report from the liquidator Mr Stephen Liu (“Liquidator’s Report”) dated 30 May 2018.

71.  There is no dispute that according to the SPA the total purchase price was HK$5.5 million, to be paid by three instalments:

(1)  The first instalment of HK$1.925 million (i.e. 35% of the purchase price) was to be paid on the completion date;

(2)  The second instalment of HK$1.925 million was to be paid within one year of the completion date; and

(3)  The balance of HK$1.65 million was to be paid within two years of the completion date.

72.  The actual transfer of the vehicles took place on 1 July 2011, which meant that the last instalment would be due on 30 June 2013.

73.  The Liquidator’s investigations as assisted by Mr Benny Kwok (including considering the bank statements of the Company and reconstructing the accounts) found that:

(1)  Upon considering the ledgers from 1 July 2011 to 30 September 2013, the trial balances as at 31 December 2011, 31 December 2012, and 31 December, and bank statements from July 2011, it was found that from 4 July 2011 to 26 September 2013, e-Prosperity paid a net total of HK$3.63 million to the Company for the purchase price.

(2)  Later on in the report, it is detailed that in terms of monthly rental, the payments that could be identified from the Company’s bank statements from 5 September 2011 to 10 September 2013 totalled HK$3,917,576.00.

(3)  Having reviewed the financial position of the Company before, during and after the SPA and Rental Agreements, there was no observable improvement in the cash position for the Company. Rather, the net fund flow was from the Company to e-Prosperity. (deducting the purchase price payments from the rental yields a net fund flow of HK$0.28 million in favour of e-Prosperity).

74.  By his report dated 30 May 2018, the Liquidator further observed inter alia that:

(1)  E-Prosperity repeatedly failed to settle the obligations as at the relevant due dates.

(2)  The ownership of the fleet (comprising 110 vehicles) was transferred to e-Prosperity shortly after the completion date (1 July 2011). However, as at the due date of the first instalment nothing had been paid. By 4 July 2011, instead of HK$1.925 million, only HK$300,000 was transferred. The first instalment amount was not fully settled until January 2013.

(3)  Thereafter, even by the time of the winding up petition in 7 October 2013, there was still a substantial amount outstanding (if deducting the HK$3.63 million that could be traced from the HK$5.5 million, then it would be HK$1.87 million outstanding).

(4)  There was no record of there ever having been attempts to pursue payment from e-Prosperity.

(5)  Inquiries had been made of the 2^nd Respondent and Clarence Wong (in their capacity as ex-directors of the Company) as to the above position, including in relation to the overdue instalments and whether they had taken any steps to pursue the same. Their reply that at the time of the petition “the amounts … were not due” and that e-Prosperity “desire to have it settled when the liquidator stepped in and deal with all payments and receivables in one go.”

(6)  This answer was simply wrong, since the last instalment was due by 30 June 2013.

75.  In addition to the above, the Respondent Directors & Shareholders drew the Court’s attention to the following, querying the amounts outstanding:

(1)  In the Statement of Affairs dated 31 May 2014, the amount receivable from e-Prosperity totalled HK$2,137,475.00, comprising HK$1,790,000.00 as the balance of sale proceeds yet to be paid, and HK$347,475.00 being cash advances that had been made to e-Prosperity. A few pages on from this record, there is a page setting out Trade Creditors, and e-Prosperity is listed as such creditor for the total amount of HK$800,000, comprising 4 months of outstanding rent (from 1 July 2013 to 1 October 2013).

(2)  In a report dated 28 April 2016 (being the second and final report to creditors and shareholders), the Liquidator had recorded that e-Prosperity owed outstanding sales proceeds to the Company, and that “An amount of approximately HK$1.2 million was successfully collected.” The amount is further detailed as “debt recovery” of HK$1,193,355.30 (paid in April 2015) in the final account rendered by the Liquidator.

(3)  In the evidence given (whether the report or in cross- examination), the Liquidator “never alleged that the balance of the purchase price has not been fully settled”.

76.  On the basis of the above, the Respondent Directors & Shareholders suggest that the Petitioner has failed to discharge its burden of proving that the $5.5 million had not been fully settled.

77.  The best available evidence is what the Liquidator has analysed and been able to reconstruct from the documents. In the circumstances, I find that whilst the consideration for the SPA was paid woefully late, the best available evidence from the Liquidator’s own final report is that the debt had been recovered and settled by April 2015, as reflected in the final report and account dated 28 April 2016.

Issue 5: Subject to the answer to the Issue 1 herein, whether the 2^nd, 4^th to 7^th Respondents as ex-directors of the Company were deceiving the Company by causing the Company to lease the Private Car?

78.  As I have found above in Issue 1, the Private Car was originally part of the assets of the Company.

79.  This being the case, the arrangement in the 1^st Supplemental Agreement was redundant and ought not to have been entered into insofar as the Private Car was concerned.

80.  On the basis of the objective circumstances, I consider it a reasonable inference that this step of allegedly putting in the Private Car into the pool of rental assets via the 1^st Supplemental Agreement (when in fact it was already an asset of the Company to begin with) was part and parcel of the overall tactics adopted to inflate the rent being charged by e‑Prosperity against the Company, such that further resources could be drained from the Company in favour of e-Prosperity. The observations above in relation to Issue 2 continue to apply herewith.

81.  I thus find in favour of the Petitioner on this issue.

Issue 6: Whether the 2^nd, 4^th to 7^th Respondents as ex-directors of the Company were deceiving the Company by accepting a 15 years old lorry instead of one brand-new tractor? Whether leasing the said lorry can justify the increase of the monthly rent in the 2^nd Supplemental Agreement dated 15 May 2012? Whether the monthly rent in the 2^nd Supplemental Agreement dated 15 May 2012 in the sum of HK$200,000.00 for the fleet of vehicles covered therein was within market price?

82.  Whilst the framing of this issue is somewhat convoluted, what it in essence goes to is the various facets of the 2^nd Supplemental Agreement. The evidence demonstrates that the 2^nd Supplemental Agreement was in relation to an old lorry and not a brand new one (as confirmed by the Liquidator’s investigations). There is no reasonable dispute about this fact. As a result of the entry into the 2^nd Supplemental Agreement, the monthly rental for the entire fleet increased to HK$200,000 per month (up from the HK$183,416 in the 1^st Supplemental Agreement), representing an increase in over HK$16,000 for the addition of one old vehicle.

83.  The Petitioner makes various points regarding the increasingly unfair nature of the arrangement, highlighting in particular the increment of increase for one vehicle as being disproportionate (considering the whole fleet was over 100 vehicles and was previously agreed to be HK$183,416 prior to the addition of the 15 year old lorry). The point is also made that the Company was already required to bear the insurance, licence fees and maintenance costs of the vehicles, which was substantial (figures from the audited financial statements suggest that the repair and maintenance averaged approximately HK$2 million a year; licence costs were around HK$1 million per year, and insurance ranged between HK$160,000 to HK$498,000 in any given year).

84.  The Respondent Directors & Shareholders on the other hand say that the original rental as agreed was “well below market price” and that the increase to HK$200,000 was still lower than the common market prices of the vehicles. By way of comparison, it is said that the HK$200,000 meant that each vehicle rented for approximately HK$2,000 per month, whereas there is an attempt to rely on figures drawn from a website (rentaltruck.hk) which tended to indicate that the market prices of certain other vehicles were HK$8,880 to HK$14,400 per month. It was said that in “usual commercial transactions” there would also need to be HK$8,000 to HK$10,000 security deposit paid to secure the rental of the vehicle. It is further said that the low rental (HK$2.4 million a year) would not cover the running costs of maintaining the vehicles – and therefore it would not make sense for e-Prosperity to bear the same.

85.  The exercise sought to be performed by the Respondent Directors & Shareholders is somewhat artificial and problematic for several reasons:

(1)  The printouts of from the website they rely on can hardly be taken to be representative and the Court cannot know whether these sample rental figures are accurate. They have not been presented by any expert or independent party in the field.

(2)  The appeal to the ‘below market price’ rationale doesn’t answer the issue in the first place that the overall arrangement was detrimental to the interests of the Company and a means to divert the assets into the hands of e-Prosperity at the Company’s expense (as already discussed above).

(3)  Similarly, the appeal to the running costs and the supposed loss that would accrue to e-Prosperity fails to address this very same overarching issue.

86.  In the circumstances, I find in favour of the Petitioner on the various issues, viz. the use of the 15 year old lorry in the 2^nd Supplemental Agreement to boost the rent was disingenuous; it did not justify the increase in rental. The Respondent Directors & Shareholders’ submissions fail to take into account the broader issues with the fundamental problems underlying the SPA and Rental Agreements (as already discussed above).

Issue 7: Subject to the finding of the foregoing issues, whether the 2^nd, 4^th to 7^th Respondents were in breach of any their fiduciary and/or director’s duties to the Company as specified in Annex I regarding (i) procuring, authorizing and partially enforcing the SPA and (ii) procuring and authorizing the Rental Agreement, the 1^st Supplemental Agreement and the 2^nd Supplemental Agreement?

87.  The duties specified in Annex I of the List of Issues are as follows:

(1)  Not to act with conflict of interest;

(2)  Not to make a profit at the expense of the Company;

(3)  To act in the best interests of the Company; and

(4)  To act with diligence.

88.  Reference is made to the discussion above.

89.  In their submissions addressing this issue:

(1)  The Respondent Directors & Shareholders make the point that the determination of this issue ought to turn on their subjective belief rather than their competence, such belief being judged based on their mindset as lay persons without any legal training.

(2)  They then refer to the Liquidator’s evidence that he did not have a view as to whether the arrangement was for an improper purpose or not, that the consideration was a reasonable sum given it was higher than some market valuations, the funds were a receivable of the Company, and he did not have any opinion that the Company had encountered any liquidity issues after the entry into the agreements.

(3)  They also appeal to the fact that they had not acted ultra vires in making the arrangements for the agreements.

(4)  There is then a repetition or further explanation of the alleged rationale behind the agreements, saying that the Company was subject to liquidity issues, there was a threat to the operations, there was no buyer that could take up the fleet, the parties were negotiating exit arrangements, and funds were required for any potential buy out, and therefore the sale was a means by which to get funds to facilitate such buyout.

(5)  It is then said that this course of action and rationale is supported by the contemporaneous documents (pointing to a few select solicitors letters exchanged in the heat of the disputes).

(6)  Blame is then sought to be put on the Petitioner for having initiated the winding up proceedings, saying that had the winding up proceedings not been instituted, “the Company’s business had all along been and would have continued to be operated by the Company and not e-Prosperity”.

90.  I do not accept the Respondent Directors & Shareholders’ submissions. I find that there has been clear conflict of interest in entering the relevant arrangements, and that the Respondent Directors & Shareholders did not act in the best interests of the Company. In addition to the observations above, specifically in relation to the submissions made by the Respondent Directors & Shareholders in relation to this issue (summarized at paragraph 89 above):

(1)  They ought to have been well aware of the basic problems surrounding conflict of interest when it came to the Company and the overlapping structures with e-Prosperity. They did nothing to counter this or guard against this conflict. Even lay persons who are competent directors would have been well aware of this.

(2)  The Liquidator’s views as to the propriety of the arrangement are neither here nor there. It is for the Court to determine whether the duties have been breached. The fact that the consideration was within market range does not account for the particular circumstances of this case and the obvious intent, as already found above, to put the assets of the Company into e-Prosperity in a manner which was to the Company’s detriment.

(3)  Whether or not they had not acted ultra vires is a separate question. It does not negate the breaches.

(4)  The alleged rationale behind the agreements rings hollow. The reasoning already covered above applies with equal force here.

(5)  The contemporaneous letters from the solicitors were and are self-serving. I place no weight on them.

(6)  Finally, the suggestion that the Company’s business would have continued to be operated by the Company is simply disingenuous when steps were taken consistently over a period of time to disrupt and divert the very business over to e-Prosperity.

91.  I thus find in favour of the Petitioner on this issue.

Issue 8: Whether the Company sustained any loss?

92.  The evidence and position on loss is unfortunately not very coherent. The Petitioner relied on the evidence of the Liquidator in order to support its assertion that there has been loss caused. The Liquidator had brought in Mr Benny Kwok to assist in quantifying the alleged losses, given this was not the Liquidator’s area of expertise.

93.  The essential conclusions drawn by Mr Kwok and the Liquidator are as follows.

94.  Insofar as the periods of loss assessment and the specific heads of loss are concerned:

(1)  The consideration for the SPA was set at “normal market levels” except for any adjustments which might become necessary in respect of insurance, repairs and maintenance and annual licence fees; and the potential opportunities of disposing of the vehicles under the 2014 Scheme.

(2)  The monthly rents and other terms in the Rental Agreements were generally set at “normal market levels” except for adjustments to be based on insurance, repairs and maintenance and annual licence fees; and the potential opportunities of disposing of the vehicles under the 2014 Scheme.

(3)  The first loss period covered the 2.5 years between 1 July 2011 (the completion date of the SPA) and 31 December 2013 (“1^st Loss Period”). During this period, rents were paid (albeit late), and there was a receivable which represented the outstanding unpaid balance of the consideration as at the end of this period.

(4)  At the end of this period, there was an outstanding contractual obligation and unpaid rents. However, he disregarded such unpaid rents.

(5)  He considered that lessors typically would cover insurance, repairs and maintenance and annual licence fees as a package in “many vehicle leasing arrangements” and that if the lessee were required to cover such fees then this would be a form of loss. On such basis, he considered such fees shouldered for the 1^st Loss Period to be a head of loss.

(6)  Another head of loss during the 1^st Loss Period he identified was the interest expenses on the bank overdraft of the Company, which he says could have been avoided if e-Prosperity had complied with the payment schedule as stipulated in the SPA.

(7)  He then further considered the 2^nd Loss Period – which encompassed “the opportunities and financial benefits that the Company has foregone subsequent to the 1^st Loss Period.”. The loss in this respect was referable to the notional participation of the Company in the 2014 Scheme, as well as the scrap value of the vehicles.

95.  As a result of his approach summarized above, in terms of actual figures Mr Kwok’s opinion was that during the 1^st Loss Period, there were the following items of loss:

(1)  Net cash outflows incurred by the Company as a result of the SPA and Rental Agreements – HK$287,576

(2)  The outstanding amount due from e-Prosperity to the Company – HK$1,870,000

(3)  Repair and maintenance costs – HK$5,688,671

(4)  Bank overdraft interest expenses – HK$112,626

(5)  Licence expenses – HK$988,147

96.  In terms of the 2^nd Loss Period, Mr Kwok assumed that the application under the 2014 Scheme would have been made and would have been successful for 47 vehicles (out of the 110 vehicle fleet) which were eligible. On such basis, he opined that there were the following items of loss:

(1)  Possible ex-gratia payments for 47 eligible vehicles – HK$8,900,100

(2)  Possible scrap value upon disposal of the 110 vehicles – HK$1,469,833

97.  Following the receipt of the evidence at trial, the Petitioner’s original position in closing was:

(1)  To accept there was likely an adjustment that needed to be made in relation to the figure due from e-Prosperity to the Company by around HK$200,000 (owing to an oversight on one line item which Mr Kwok had missed).

(2)  To maintain the position regarding the other amounts in the 1^st Loss Period.

(3)  And insofar as the 2^nd Loss Period, to “ask the Court to adopt [Mr Kwok’s] assessment with adjustment within 30% deviation,” this adjustment being based on “uncertainty” arising out of lack of clarity as to whether the Company would actually have participated in the 2014 Scheme and/or taken steps subsequent thereto which would have led to the relevant figures as put forward.

98.  The Respondent Directors & Shareholders on the other hand, say that there was no loss at all:

(1)  They disputed that the repair and maintenance and licence expenses should necessarily be borne by e-Prosperity. They referred to Mr Kwok’s acknowledgment in cross-examination that not every agreement would necessarily be structured this way, and that therefore the assumption adopted by Mr Kwok for this head of loss was erroneous.

(2)  In any event, they say those expenses would still have been incurred if the SPA and Rental Agreements had not been entered into, and therefore, these heads of loss do not satisfy the “but for” test.

(3)  As to the figures for the net cash outflows and outstanding amounts due from e-Prosperity, these were no longer valid. Again, reliance is placed on the evidence given in cross- examination to such effect, where Mr Kwok said that he had relied on the papers available at the time. The Liquidator had accepted payment apparently in settlement of the amount outstanding (paragraph 75 above), but Mr Kwok apparently was not involved in this process and had not been informed of the same in conducting his investigation into this issue – hence the tallies of the fund flows ended in 2013 and were not updated to reflect any further credits thereafter.

(4)  As to the overdraft interest, it was suggested that the Company had had an ongoing use and reliance of the overdraft facility. The same point is made that it therefore does not satisfy the “but for” test.

(5)  As to the 2014 Scheme and possibilities arising thereunder, it had been established that the said scheme was not in existence at the time of the SPA, and that this was not the applicable scheme to be considered. Insofar as the 2010 Scheme might have been applicable, this had not been analysed by Mr Kwok. As a result, no loss was proven in relation to possible participation in either scheme.

(6)  Similarly, the point is made again regarding the “but for” test, the suggestion being that “the Company could not obtain any ex-gratia payment if it did not retain ownership of the [vehicles]” and if it did, then it would be bound to incur the repair and maintenance and licence fees. As a result “it would be wrong in law to hold the Directors liable for both the alleged loss of opportunities from ex-gratia payments as well as the foregoing expenses.”

(7)  This was not a case where the Company had suffered loss such that it needs to be put back into its original position. Referring to the conclusion that the SPA had been at normal market values (as opined by Mr Kwok), they suggest that even if any loss assessed for the lost opportunities were to accrue, the consideration amount ought to be deducted therefrom as being monies gained for the transfer of the fleet in the first place.

(8)  The transfer price further crystalised the value as at the date of the SPA, guarding against future depreciation of the vehicles.

99.  Having considered the above, and the parties’ respective submissions, I find as follows:

(1)  I am persuaded by the Respondent Directors & Shareholders’ submissions on the net cash outflows and the amount allegedly outstanding. Whatever the position might have been prior to the winding up, the Liquidator’s final accounts show that this was ultimately settled. There was some lack of clarity in the evidence, and the Petitioner was unable to provide its own independent analysis. Based on the evidence given in Court, the Liquidator finalised the accounts on the basis that the debt had been settled.

(2)  I am persuaded by the Respondent Directors & Shareholders’ submissions in respect of the repair and maintenance costs, as well as the licence expenses. Whilst Mr Kwok’s assumptions as to general practice of leasing arrangements might be supportable, the heads of loss would not be sustained in a “but for” scenario. Had the series of agreements not been entered into and the vehicles remained the Company’s, they would have had to cover these very same costs.

(3)  Whilst I have some sympathy for the Company insofar as the overdraft interest expenses are concerned, the evidence to demonstrate this as a head of loss is also incomplete. It is true that the payment of the consideration under the SPA was woefully late, as summarized in the Liquidator’s report, whereas by and large the rental payments were made on time each month. Overall, there was not any improvement in the cashflow position of the Company after the SPA, the Rental Agreements essentially setting off (or in fact funding) the consideration to be paid. Whatever supposed benefit that was meant to have arisen therefrom thus did not materialize. However, as accepted by Mr Kwok in cross-examination, the Company had always utilized the overdraft facility, and this head of loss arose from an assumption he made and was a hypothetical. There are no calculations demonstrating that the overdraft interest was necessarily caused or deepened by virtue of the breaches. Whilst one might surmise this was the case, the evidence did not go so far as to actually show that if, for instance, the consideration had been paid on time, the overdraft interest would necessarily have been avoided. There is thus a missing evidential step proving the loss.

(4)  Insofar as the loss for the 2^nd Loss Period, I do not consider either the notional possibility of the participation in the 2014 Scheme nor the scrap value payments to be sustainable.

(5)  For the 2014 Scheme, the evidence is clear that as at the date of the SPA in June 2011 there was no clear indication that the scheme along the terms which were more favourable was definitively in sight. It might have been different, for instance, if there had been concrete terms already proposed and there were better indications as to a timeline for implementation of the same. But the evidence does not show as such. The Respondent Directors & Shareholders are correct, furthermore, that there is no evidence on what benefits or payments to the Company might have materialized from participation in the 2010 Scheme which was the operative one at the time of the SPA. Even if one might have taken the dates of the subsequent supplemental rental agreements as being relevant, this does not shift the analysis. There is thus no basis upon which to quantify notional participation in either scheme – 2010 or 2014. This head of loss is not established.

(6)  As to the scrap value, this is also not established. The evidence shows that the HK$5.5 million was within the range of fair consideration for the vehicles themselves on a liquidation basis. The Company having already received this amount of consideration for the vehicles themselves (albeit woefully late), to then award them the scrap value of the same would be a form of double recovery.

100.  I therefore find that there are no heads of loss and damage which are established.

Issue 9: Did the Respondent Directors & Shareholders act honestly and reasonably and ought they be excused from liability?

101.  I have found that the directors were plainly in breach of their duties. I also disbelieve them when they say that they genuinely considered that the course of action taken by them was the best option to take / available at the time to safeguard the Company. However, because I have found that there is no loss or damage demonstrated by the Petitioner, it becomes unnecessary to consider this issue further.

102.  I would mention that had there been such loss and damage demonstrated, I would have found that the Respondent Directors & Shareholders ought not be excused from liability.

Issue 10: What is the quantum of liability if the Company sustained loss and Respondent Directors are found liable but not entitled to relief from sanction under S.903?

103.  The answer to this issue is the same as that to Issue 9 above.

Post Script on quantum

104.  During Closing Submissions, I noted to the Petitioner that whether in the written opening or the written closing, the position on the actual quantum which the Petitioner wished the Court to find in respect of loss and damage was not made clear. I had thus invited the Petitioner to set out a table which specified the amounts being argued for.

105.  What the Court received subsequently was a table, but alongside that, a set of further submissions, approaching the explanations as to quantification of loss and damage along lines which were rather different to that originally set out in the Liquidator’s Report and the framework therein.

106.  I reproduce below the table as received by the Court:

	Scenario One	Scenario Two
	Follows the Summary of loss assessment of Benny Kwok	Without ex-gratia payments as losses of opportunities
1	HK$10,369,933 (HK$8,900,000 + HK$1,469,000 = HK$10,369,933) Possible ex-gratia payments to the owner of the 47 eligible vehicles and possible scrap value to the owner of the 110 vehicles	HK$7,720,000 The market value of the 110 vehicles
2	HK$112,000 Bank overdraft interest expenses	HK$112,000 Bank overdraft interest expenses
3	-HK$1,582,424 (HK$3,917,576 – HK$5,500,000) The rent paid by the Company deduct the total Purchase price received by the Company	-HK$1,582,424 (HK$3,917,576 – HK$5,500,000) The rent paid by the Company deduct the total Purchase price received by the Company
4	RMB 1,000,000 (around HK$1,099,585)	RMB 1,000,000 (around HK$1,099,585)
	Market value of the cross‑border licence 粵 Z 4229 and GW448	Market value of the cross‑border licence 粵 Z 4229 and GW448
Total amount	HK$9,999,094	HK$7,349,161

107.  As can be seen from the above, there are new elements and approaches which are being factored into the attempted calculation and quantification of loss. To summarise:

(1)  I have already found against Items 1 and 2 in either scenario.

(2)  I have found against Item 3 in view of the more updated position on settling of the consideration as discussed above.

(3)  Item 4 is new and was not a head of loss and damage ever relied upon. I do not consider it appropriate as a matter of evidence or the approach to the issue to entertain it at this late stage.

Conclusion

108.  I therefore find that whilst the Respondent Directors & Shareholders had indeed breached their duties – egregiously, I might add – in respect of the entry into the various agreements with e-Prosperity, there is no head of loss or damage ultimately proved by the Petitioner. The summons will thus be dismissed.

109.  Insofar as costs are concerned, however, I make an order nisi that there be no order as to costs. If one peruses the papers, takes stock of the evidence, considers the time spent at trial on the submissions and cross-examination of witnesses, it will be apparent that the key issues of both breach and loss took up considerable substantive argument and time. The defence of the Respondent Directors & Shareholders insofar as the breaches of duty were concerned were wholly unmeritorious. On the other hand, there was also considerable time and evidence expended on the issue of loss and the various heads thereof. All things being equal, and in the particular circumstances of this case, the Court does not consider either side should be awarded their costs.