HORACE YAO YEE CHEONG AND OTHERS v. PEARL ORIENTAL INNOVATION LTD

HCA916/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 916 OF 2006

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BETWEEN

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JUDGMENT

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1.  The plaintiffs claim against the defendant the judgment sums and interest thereon which they had obtained in HCA 1245 of 2004 against Dransfield Holdings Limited (“DHL”) as follows:

(a)      HK$1,509,128.18 and HK$54,246.58 in respect of the 1^st plaintiff;

(b)     HK$1,685,600.00 in respect of the 2^nd plaintiff; and

(c)     HK$3,697,274.26 in respect of the 3^rd plaintiff.

2.  There is no dispute that judgment was entered in favour of the plaintiffs respectively for the above amounts against DHL on 14 July 2005 upon application made by the plaintiffs for summary judgment in HCA 1245 of 2004.  There has been no appeal from that judgment.

3.  The basis of the plaintiffs’ claim against the defendant is that, for the reasons advanced by the plaintiffs (and which would be dealt with in detail later in this judgment), the court should lift and pierce the corporate veil between DHL and the defendant and find the defendant liable to the respective plaintiffs for the above judgment sums.

Background

4.  Prior to 1 January 2000 the 1^st plaintiff was the Deputy Chairman and CEO of DHL.  From 1 January 2000 until 3 October 2001, he was Chairman and CEO of DHL.

5.  The 2^nd and 3^rd plaintiffs are both BVI companies in the control of the 1^st plaintiff.

6.  During the time the 1^st plaintiff was associated with DHL he was owed director’s expenses and remuneration by DHL.  The 2^nd and 3^rd plaintiffs had also made advances as working capital and to discharge expenses of DHL which were due and owing to the 2^nd and 3^rd plaintiffs by DHL.  (Ultimately these formed the subject matter of the plaintiffs’ claim against DHL in HCA 1245 of 2004.)

7.  Up to 28 June 2002, DHL was a publicly listed company having logistics services as the substantial business of the DHL group.

8.  The audited consolidated financial report of the DHL group as at 31 March 2002 showed:

(a)      the DHL group had a net shareholders’ fund of HH$48,766,000.00 after deduction of all liabilities;

(b)     DHL had an amount due from subsidiaries in the sum of HK$524,973,000.00;

(c)     DHL had subsidiaries and an associate as shown in the “Particulars of Principal Subsidiaries for the year ended 31 March 2002” the more significant of which were:

(i)      Good Value Holdings Limited (“Good Value Holdings”), a wholly owned subsidiary incorporated in the British Virgin Island with a paid up capital of US$7.00 and which was holding all the issued shares of Victorison Logistic Service (Shenzhen) Company Limited which had a valuable bonded warehouse in Futian, Shenzhen; and

(ii)      Victorison Logistic Service (Shenzhen) Company Limited, a wholly owned subsidiary established under PRC laws with a paid up capital of HK$35,000,000.00.  It carried a profitable business of warehouse and delivery services, property and investment holding.  The bonded warehouse in Futian, Shenzhen which it held had an audited value of HK$121,633,000.00.

9.  On 28 June 2002, a Scheme of Arrangement was proposed and approved by the shareholders of DHL.  Under such scheme:

(a)      DHL would change its domicile from the Cayman Islands to Bermuda;

(b)     DHL would become a wholly owned subsidiary of the defendant;

(c)     shares of DHL would be subscribed by the defendant (a new company to be incorporated in 2002 for that purpose), which shares would be introduced on the Stock Exchange of Hong Kong in place of the issued shares of DHL;

(d)     the new company (i.e. the defendant) would subscribe for 2,682,515,000 shares at the price of HK$0.02 per share to raise HK$53,650,300.00; and

(e)      the group will focus management resources on its logistics and warehousing operation disposing of its non-core assets and businesses.

10.  The Scheme of Arrangement was completed on or around 26 or 27 August 2002.  Since then DHL became a wholly owned subsidiary of the defendant and was controlled fully by the defendant as an intermediate investment holding company of the group holding subsidiaries engaged in the following business:

(a)      logistic business as core with the bonded warehouse held by Good Value Holdings via Victorison Logistic Service (Shenzhen) Ltd located at Futian;

(b)     edible oil manufacturing and distribution business located at Shengyang, Lianing in the PRC which were to be refocused; and

(b)     trading activities relating to electrical appliances and wines and the operation of vending machines which were also to be refocused.

11.  At the time the Scheme of Arrangement was proposed, those debts, being the subject matter of the plaintiffs’ claim against DHL in HCA 1245 of 2004 were already owed to the plaintiffs by DHL.

12.  The debt due to the 1^st plaintiff in the sum of HK$1,509,128.18 was audited and confirmed in the Audit Confirmation dated 5 June 2002 issued by DHL shortly before the Scheme of Arrangement was proposed.

13.  The debt due to the 2^nd plaintiff in the sum of HK$1,685,600.00 was also audited and confirmed in the Audit Confirmation dated 22 May 2003 issued by DHL.

14.  The debt due to the 3^rd plaintiff in the sum of HK$3,697,274.26 was likewise audited and confirmed in the Audit Confirmation dated 24 April 2002 issued by DHL.

15.  As already stated above, the plaintiffs obtained judgment against DHL for the respective amounts stated in paragraph 1 herein in HCA 1245 of 2004 on 14 July 2005.

16.  On 26 July 2005, the then directors of DHL declared that DHL “cannot, by reason of its liabilities and other matters, continue its business and that it is advisable to wind up the same” and gave notice pursuant to section 241 of the Companies Ordinance calling for a creditors meeting to wind up DHL.

17.  On 29 July 2005, after the plaintiffs served a statutory demand on DHL, the defendant, by a Clarification Announcement, announced that it had already disposed of all its shareholdings in DHL to an independent third party on 23 July 2005.

18.  That independent party turned out to be Bestsign Enterprises Limited and the disposal of DHL by the defendant to Bestsign Enterprises Limited was for a consideration of HK$2.00.

The plaintiffs’ case and evidence

19.  The plaintiffs’ claim in this case is that it would be just for the court to lift the corporate veil between DHL and the defendant on the basis that during the time when DHL was a wholly owned subsidiary of the defendant, the defendant had by improper means stripped DHL of its valuable assets with a view to evading the liabilities owed by DHL to its creditors including the plaintiffs, which liabilities were already in existence before the Scheme of Arrangement was effected.

20.  The plaintiffs say that those liabilities of the plaintiffs were fully documented in the books and records of DHL such that the defendant must have been aware of them when it carried out due diligence to implement the Scheme of Arrangement.

21.  The evidence adduced and relied on by the plaintiffs in support of its case can be summarized as follows.

22.  As already stated, prior to 28 June 2002, DHL was a publicly listed company.  The last “audited” consolidated financial report of DHL showed the following as at 31 March 2002:

(a)      DHL group had a net shareholders’ fund of HK$48,766,000.00 after deduction of all liabilities;

(b)     DHL had an amount due from subsidiaries in the sum of HK$524,973,000.00;

(c)     DHL had subsidiaries and an associate, the more significant of which were:

(i)      Good Value Holdings, a wholly owned subsidiary incorporated in the British Virgin Islands with a paid up capital of US$7.00 and which held all the issued shares in Victorison Logistic Service (Shenzhen) Co. Ltd, which in turn had a valuable bonded warehouse in Futian, Shenzhen, in the PRC;

(ii)      Victorison Logistic Service (Shenzhen) Co. Ltd, a wholly owned subsidiary established under PRC laws with a paid up capital of HK$35,000,000.00.  It carried on a profitable business of warehouse delivery services, property and investment holding and was holding the bonded warehouse in Futian, Shenzhen, which had an audited value of HK$121,633,000.00

(iii)     Dransfield Food and Beverage Limited, a 95% owned subsidiary incorporated in Hong Kong;

(iv)     Dransfield Electronics Limited, a wholly owned subsidiary incorporated in Hong Kong; and

(v)     Well Assessed Limited, a wholly owned subsidiary incorporated in Hong Kong which was holding a property in Tai Kok Tsui, Hong Kong.

(d)     an associate, DF China Technology Inc., incorporated in the British Virgin Islands, whose shares were listed on the Nasdaq Smallcap Market.  The shares of DF China Technology Inc. which were held by DHL at that time had a market value of HK$8,597,000.00, but subsequently increased substantially.  When DHL’s partial interest in it was realized in about April/May 2003, it generated HK$16,208,000.00

23.  After the Scheme of Arrangement was completed on or about 27 August 2002, with DHL becoming a wholly owned subsidiary of and controlled fully by the defendant as an intermediate investment holding company of the group, DHL was no longer required to publish its individual financial statement but that its financial information being incorporated into the defendant’s consolidated financial statement could only be gleaned from that.

24.  The published unaudited consolidated financial statements of the defendant for the six months ended 30 September 2002 showed (inter alia):

(a)      the net loss for the period was reduced from HK$64,060,000.00 (in 2001) to HK$4,907,000.00; and

(b)     the group had an increased net asset value of HK$89,237,000.00.

25.  In the Annual Report for 2003, the published audited consolidated financial statements as at 31 March 2003 of the defendant showed (inter alia):

(a)      DHL was the only directly owned subsidiary of the defendant who held 100% of DHL’s shares and the principal activity of DHL was investment holdings;

(b)     100% of the shares of Victorison Logistics Service (Shenzhen) Co. Ltd was indirectly held by the defendant and the principal activities of Victorison Logistic Services (Shenzhen) Co. Ltd were provisions of logistic services, property and investment holding;

(c)     the leasehold land and buildings in the PRC for the group’s logistics operation had a value of HK$161,825,000.00;

(d)     the 100%-owned bonded warehouse located at Futian contributed a substantial increase to the group’s revenue;

(e)      total assets of the group was increased to HK$217,711.000 and the net shareholders’ fund after deduction of liabilities and minority interests amounted to HK$106,335,000.00 as shown in the Consolidated Balance Sheet;

(f)      the defendant’s net profit had increased to HK$13,453,000.00;

(g)     the defendant had a net assets value of HK$58,606,000.00;

(h)     the amount due from subsidiaries to the defendant amounted to HK$69,575,000.00

(i)      there was no mention or disclosure of the existence and/or setting up of one China Merchants Dichain (Asia) Investment Holdings Ltd in BVI on 4 February 2003; and

(j)      there was no mention or disclosure that the shares of Good Value Holdings were transferred to Victorison (1988) Ltd, (which was later transferred to China Merchants Dichain (Asia) Investment Holdings Ltd on 28 August 2003 for a consideration of only US$7.00).

26.  In the Annual Report of 2004, the published audited consolidated financial statements as at 31 March 2004 of the defendant showed (inter alia):

(a)      DHL was the only directly owned subsidiary of the defendant who held 100% of DHL’s shares, and its principal activity was investment holdings;

(b)     Victorison Logistics Service (Shenzhen) Co. Ltd had its name changed to Dichain Logistics Service (Shenzhen) Co. Ltd and the defendant indirectly held 100% of its shares, its principal activities being provision of logistic services, property and investment holdings;

(c)     part of the investment in DF China Technology Inc. was realized and generated a gain of HK$16,208,000.00;

(d)     the turnover of the bonded warehouse operation was increased by 100% and the bonded warehouse in Futian contributed a substantial increase in the group’s revenue during the year;

(e)      the net profit for the year was HK$14,262,000.00 which was contributed to by the realization of part of the investment in DF China Technology Inc.;

(f)      the group had a consolidated total assets of about HK$243,000,000.00;

(g)     apart from the bonded warehouse in Futian, there was no mention in the report as to whether the defendant held any property, plant or equipment;

(h)     the defendant had a net assets value of HK$57,587,000.00;

(i)      the amount due from subsidiaries to the defendant was HK$37,776,000.00;

(j)      there was however no mention made of:

(1)     either the existence or setting up of China Merchants Dichain (Asia) Investment Holdings Ltd in the BVI on 4 February 2003 as a 100% directly owned subsidiary of the defendant who in turn held a string of subsidiaries;

(2)     that the shares of Good Value Holdings were transferred to Victorison (1988) Ltd and then subsequently transferred to China Merchants Dichain (Asia) Investment Holdings Ltd on 28 August 2003 for US$7.00 only; or

(3)     that the bonded warehouse located at Futian was now held indirectly by China Merchants Dichain (Asia) Investment Holdings Ltd which operation had increased 100% and contributed a substantial increase to the defendant’s revenue.

27.  In the Annual Report for 2005, the published audited consolidated financial statements as at 31 March 2005 of the defendant showed (inter alia):

(a)      the group had a consolidated total assets of about HK$243,009,000.00;

(b)     the group had a consolidated total liabilities of HK$117,731,000.00;

(c)     the core business of the group was its logistic business;

(d)     DHL was the only directly held 100% subsidiary of the defendant;

(e)      the indirectly held subsidiaries of the defendant consisted of (inter alia):

i.        Dichain Logistics Services (Shenzhen) Co. Ltd;

ii.       Guangzhou Dichain Logistics Co. Ltd, a 60% owned indirectly held subsidiary established under PRC laws carrying on the business of logistics services;

iii.      Inner Mongolia Dichain Logistics Co. Ltd another 60% owned indirectly held subsidiary established under PRC laws carrying on the business of logistics services;

(f)      there was no mention of the existence of China Merchants Dichain (Asia) Investment Holdings Ltd, and no mention of the shares of Good Value Holdings having been transferred to Victorison (1988) Ltd, and later transferred therefrom to China Merchants Dichain (Asia) Investment Holdings Ltd on 28 August 2003 for only US$7.00;

(g)     the assets of the group under the logistics services segment had a value of HK$140,917,000.00 with liabilities of HK$3,920,000.00;

(h)     no mention was made of the defendant holding any property, plant or equipment or of the bonded warehouse at Futian;

(i)      the amount due from subsidiaries of the defendant to the defendant was HK$49,567,000.00; and

(j)      the defendant had a net assets value of HK$82,084,000.00 shown in the Balance Sheet.

28.  The Interim Report of the defendant as at 30 September 2005 showed that none of the subsidiaries of DHL had been disposed of by the defendant, and the only subsidiary of the defendant disposed of during the period between 1 April and 30 September 2005 was DHL.

29.  The disposal of DHL was shown in the Interim Report as a gain of HK$19,711,000.00 indicating that at the time of the disposal, DHL was insolvent with a negative equity of HK$19,711,000.00.

30.  Based on the evidence adduced and the background as stated, it is the case of the plaintiffs that DHL could not have become dormant and insolvent by 23 July 2005 lawfully if its assets had not been stripped covertly and by concealment without full disclosure by the defendant.

31.  It was also contended by the plaintiffs that the DHL subsidiaries could not have been lawfully transferred out of DHL into any other company within the group without leaving substantial cash or cash value in DHL unless those transfers as in the present case were shams done covertly to evade the liabilities of DHL.

32.  In this respect, the plaintiffs, having amended their pleadings, points specifically to:

(a)      the HK$16 million realized from DHL’s disposal of its investment in DF China Technology Inc.; and

(b)     the transfer of Good Value Holdings Ltd for US$7.00;

as being instances of assets being stripped from DHL and/or improperly transferred out of DHL in order to evade the liabilities of DHL, including those liabilities owed to the plaintiffs in respect of the said judgment debts.

33.  The plaintiffs also rely on the concealment or lack of disclosure by the defendant in respect of the setting up of China Merchants Dichain (Asia) Investment Holdings Ltd to say that it was done covertly so that it would be kept away from the public and the creditors of DHL.

34.  Given the above, it is the plaintiffs’ case that this is a proper case for the court to lift the corporate veil between DHL and the defendant and thereby to find the defendant liable to meet the liabilities owed by DHL to the plaintiffs in the form of the judgment debts obtained by the plaintiffs against DHL in HCA 1245 of 2004.

The defence case and evidence

35.  The defence called one witness, Zhou Li Yang, who joined the defendant in 2002 and was appointed its Managing Director in 2004.  His evidence can be summarized as follows:

36.  The defendant was incorporated in Bermuda in 2002.

37.  The parent company of the defendant was DiChain Holdings Ltd, formerly known as DiChain System Ltd (“DiChain”) which was incorporated in Hong Kong in March 2000, the flagship of the China Merchants Group.

38.  DiChain acquired DHL in 2002.  The history leading up to that acquisition of DHL by DiChain was as follows.

39.  DHL was a listed company in Hong Kong whose principal business comprised of logistics business based in warehousing, edible oil business in PRC, trading activities relating to electrical appliances and wine, and the operation of vending machines in Hong Kong.

40.  Due to internal mismanagement, DHL suffered diminution in value of the group’s properties and operational losses.

41.  The audited consolidated balance sheet of DHL as at 31 March 2001 which showed audited net assets of about HK$176.3 million and unaudited adjusted net assets of about HK$81.9 million as at 30 September 2001 did not reflect the true status of DHL.  Those financial statements were prepared on a going concern basis and its validity depended on a number of factors.

42.  In fact, a loss of about HK$131.5 million was recorded for the year ended 31 March 2001 and the DHL group continued to record a loss of about HK$64.1 million for the six months ended 30 September 2001.

43.  Given such losses, DHL had net current liabilities of about HK$146.6 million and total current liabilities of HK$179.7 million mainly of bank loans of some HK$131.8 million for which it had a deadline to meet.

44.  To rescue its financial position, DHL had taken steps to dispose of its non-core businesses to cut losses.

45.  DiChain saw this as an opportunity to acquire and takeover DHL the main benefit being its listing status.  Furthermore, DiChain believed that the warehousing business of DHL would also be of benefit to the e-commerce based logistics management operations of DiChain.

46.  Therefore in January 2002 a Subscription Agreement was entered into by DiChain with DHL, which led to the Scheme of Arrangement by which DHL became a wholly owned subsidiary of the defendant.

47.  It is the evidence of Zhou that the Scheme of Arrangement has the benefit of segregating the defendant from the existing liabilities (both actual and contingent) of DHL.  Upon implementation of the Scheme of Arrangement, the defendant will be able to operate with the benefit of capturing the cash proceeds from the Subscription Agreement in itself and retaining the flexibility of assessing the existing operations’ merits and propects and implementing any restructuring of DHL’s operations where necessary while ring-fencing DHL’s liabilities from the defendant.

48.  The one exception was DHL’s liabilities to the bank which the defendant had guaranteed and anticipated.

49.  Due to the poor financial status of DHL, DiChain had requested restructuring of DHL to take place by way of the Scheme of Arrangement.

50.  When the Due Diligence Review was carried out, the findings covered matters which were, in the opinion of DiChain, potentially problematic because of possible mis-management and other deficiencies relating to the business of certain companies within the DHL group.

51.  It was also considered by the Independent Financial Adviser that in the circumstances DHL found itself in, liquidation would be the most probable outcome without a feasible rescue operation.  Therefore without implementing any restructuring and reactivation proposal, DHL would not be able to continue as a viable business and will not be in a position to meet its financial obligation.

52.  Accordingly, between June and August 2002, the defendant acquired DHL as its wholly owned subsidiary by the implementation of the Scheme of Arrangement.  Thereafter, the shares of the defendant were introduced into the Stock Exchange of Hong Kong in place of the issued shares of DHL.

53.  Pursuant to the Scheme of Arrangement and with a view to enhance the defendant’s overall business performance, the defendant started to restructure the group by disposing of all the non-operating, non-core and non-performing business including the subsidiaries.  The logistics business of the group, being its core business was also restructured.

54.  This was done firstly, by setting up the flagship of the logistic business with the incorporation of China Merchants Dichain (Asia) Investment Holdings Limited in February 2003 (later known as Pearl Oriental Logistics Holdings Limited).

55.  Secondly, the shares of Good Value Holdings, which were held by Victorison (1988) Limited at the time when the Scheme of Arrangement was implemented, were subsequently transferred to Pearl Oriental Logistics Holdings Limited with a view to reallocate the business of the group in a more sensible way.

56.  Thirdly the non-core business of DHL were disposed of.  The food and beverage business of DHL were sold to third parties.  The electrical appliances business were also disposed of.

57.  DHL’s investment in DF China Technology Inc. was realized generating some HK$16 million in 2004, but that money generated was still well below the liabilities owed by DHL to its creditors.  On 15 May 2002, the defendant had assigned HK$25,793,446.86 (being part of the subscription proceeds) to the Bank of East Asia for repayment of loans owed by DHL and its subsidiaries to the Bank.

58.  As a matter of fact, DHL had been insolvent since 2004.

59.  The liquidator of DHL has examined the statement of affairs of DHL to ascertain its truthfulness and accuracy and has raised no query on same.

60.  To explore other viable investment, Pearl Oriental Logistics Holdings Limited acquired 60% interest in Guangzhou DiChain Logistics Co. Ltd (“Guangzhou DiChain”) in November 2004.  This substantially increased its presence in the logistics business in PRC.  The acquisition was done via DiChain Logistics Services (Shenzhen) Co. Ltd, by which time it had ceased to be a subsidiary of DHL after the restructuring of the defendant.  The acquisition was a reasoned commercial step taken by Pearl Oriental Logistics Holdings Limited to expand its logistics business.

61.  To further expand its logistics business, Inner Mongolia DiChain Logistic Co. Ltd was also incorporated in January 2005.  95% of its shares were held by Guangzhou DiChain.  Inner Mongolia DiChain Logistics Co. Ltd is not a subsidiary of DHL by reason of the restructuring of the defendant.

62.  After the restructuring of the defendant, DHL became a dormant company having no real commercial activity and suffering losses.  The only value DHL had to the defendant (or anyone acquiring it) was that it may be a tax benefit.  It was therefore commercially sound to dispose of DHL.

63.  Accordingly, DHL was disposed of on 23 July 2005 to Bestsign Enterprises Limited and Yu Gui Xiang at a consideration of HK$2.00.  The sale of DHL by the defendant was part of the defendant’s commitment to transform and consolidate the defendant’s business which started in 2002.

64.  The disposal of DHL was carried out for commercial reasons unconnected with the judgment debt of the plaintiffs.

Assessment of the evidence and finding of fact

65.  It seems clear enough from the evidence of Zhou that from the outset the defendant had embarked upon the acquisition of DHL under the Scheme of Arrangement with a view to acquiring all the benefits it can from DHL, including its listing status, but at the same time segregating from itself the liabilities incurred by DHL.  It seems that the only exception were the bank loans to DHL which the defendant had guaranteed to repay.  As for the other liabilities of DHL, such as the debts owed by DHL to the plaintiffs and which were unsecured, the view taken by the defendant was that such liabilities would be “segregated” from the defendant, probably on the basis that those were the debts previously incurred by DHL, a different and separate legal entity from the defendant, and therefore not the responsibility of the defendant.

66.  The case of the plaintiffs was that in taking such a course, the defendant had stripped DHL of its assets in a wrongful manner.

67.  In this respect, the plaintiffs have now narrowed their case (after amendment) by pointing to two instances of asset stripping of DHL.

68.  Firstly, the realization of DHL’s part interest in DF China Technology Inc. for some $16 million and secondly, the transfer of Good Value Holdings which held the bonded warehouse located in Futian and which was audited at a value of HK$121,633,000.00.

69.  In so far as the realization of DHL’s part interest in DF China Technology Inc. is concerned, it is not disputed by the defendant that that had generated some $16 million.

70.  While it seems to be implied in the witness statement of Zhou (which he adopted as his evidence-in-chief) that the $16 million may have been utilised to repay the bank loans (or a part of it) which DHL had obtained, there is no documentary evidence to substantiate that to be in fact the case.

71.  However, when Zhou was cross-examined on where that $16 million had gone to, his answer was that he did not know since he was not involved with financial matters at the time and that it was a Mr Fan Di who was responsible for financial matters.

72.  As for the bonded warehouse in Futian, it can be seen from the Annual Report 2005 of the defendant that the bonded warehouse in Futian was, at the time of that Annual Report, owned by DiChain Logistics Services (Shenzhen) Co. Ltd, a wholly owned subsidiary of the Group.  It was also reported that the Group was able to record a substantial increase of nearly 28% in its bonded warehouse revenue.

73.  In his evidence, Zhou had never disputed the audited value of the bonded warehouse to be HK$121,633,000.00.

74.  At the time of the Scheme of Arrangements, the bonded warehouse in Futian was held by Victorison Logistics Services (Shenzhen) Co. Ltd which was wholly owned by Good Value Holdings.

75.  After the defendant had acquired DHL, Good Value Holdings was transferred on 28 August 2003 to China Merchants DiChain (Asia) Investment Holdings Ltd for US$7.00.

76.  The name of Victorison Logistics Services (Shenzhen) Co. Ltd was changed to DiChain Logistics Services (Shenzhen) Co. Ltd.

77.  In the absence of any explanation from the defendant, the evidence as presented, shows that Good Value Holdings was transferred to China Merchants DiChain (Asia) Investment Holdings Ltd for just US$7.00 when the wholly owned subsidiary of Good Value Holdings was holding the bonded warehouse in Futian worth over HK$121 million.

78.  There were also some parts of the evidence of Zhou which I found to be quite unsatisfactory.

79.  Zhou could not furnish any reason why in all the reports put out by the defendant up to 2005 there was no mention in any of those reports of China Merchant DiChain (Asia) Investment Holdings Ltd.

80.  Zhou also had to concede that in the Consolidated Balance Sheet of the Group contained in the Annual Report 2005 of the defendant, and which was signed by him as director, there was only mention made of DHL being a 100% directly owned subsidiary of the Group but no mention made of China Merchant DiChain (Asia) Investment Holdings Ltd which was also a wholly owned subsidiary of the Group.

81.  Moreover, this was despite the fact that at the time of the 2005 Annual Report, DHL was, according to Zhou, already insolvent, but that China Merchant DiChain (Asia) Investment Holdings Ltd owned Good Value Holdings as well as DiChain Logistics Services (Shenzhen) Co. Ltd which had substantial assets in the form of the bonded warehouse in Futian.

82.  Once again Zhou could give no reasons why there was no mention of China Merchant DiChain (Asia) Investment Holdings Ltd, despite its substantial assets holding.

83.  Zhou was also unsure whether the defendant had paid off any of the liabilities of DHL apart from repaying the bank loans.

84.  When cross-examined on the two Balance Sheet of DHL (as at 31 March 2004 and 2005) relied on by the defendant (Tab 36 and 37 of the Core Bundle) which purported to show that DHL’s liabilities were in excess of $19 million and $36 million respectively for those two years, Zhou had to agree that both Balance Sheets were unsigned and could only say that they were prepared by someone from the defendant’s Finance Department.  Moreover, he was unable to give any details or particulars as to the contents thereof.

85.  When cross-examined on the disposal of DHL to Bestsign, Zhou had to agree that it took place on a weekend (i.e. 23 July 2005 being a Saturday).  He further agreed that in the following week there was an announcement to the effect that DHL was insolvent and that a creditor’s meeting was called for.  When asked why that was so, Zhou could only answer by saying “No comment”.

86.  Zhou was also unable to say whether there was any Board resolution passed by the defendant as to selling off DHL, but thinks that there should be, although none was produced in evidence.

87.  Given the state of the evidence as referred to above, I make the following findings of fact.

88.  It is clear from Zhou’s evidence that from the outset, apart from the bank loans obtained by DHL which the defendant had undertaken to repay, the defendant had no intention of meeting other liabilities of DHL upon its acquisition of DHL via the Scheme of Arrangements.  Nor was anything done by DHL to pay off its existing liabilities.

89.  It is also clear from Zhou’s evidence that DHL was still solvent at the time it was acquired by the defendant.  Zhou had agreed to that in his cross-examination by the plaintiffs’ counsel.

90.  If it was only the evidence of the $16 million odd generated from the disposal of DHL’s part interest in DF China Technology Inc., it would not be sufficient for me to come to the conclusion that there had been improper asset stripping by the defendant of DHL by reason of the fact that there is some evidence before the court that DHL’s liability exceeded the amount of the $16 million, even though Zhou’s evidence could not satisfactorily explain where the $16 million had gone to or how it was used.

91.  However, that is not the only evidence from the plaintiffs to support their case of asset stripping of DHL by the defendant.  The further and more important evidence in that respect concerns the disposal of Good Value Holdings for a mere US$7.00 when it was holding the bonded warehouse in Futian which had an audited value of some $121 million odd.

92.  Given the above, I have come to the conclusion that the big picture painted from that evidence shows a deliberate and systematic stripping of the assets of DHL by the defendant after its acquisition by the defendant.

93.  Not only was it done deliberately and systematically, but that the evidence also show it to have been done improperly and wrongfully.

94.  There is nothing wrong with group restructuring provided that it is carried out properly.

95.  What is impermissible is that assets be stripped away from one entity without proper or sufficient value being given for such assets and at the same time the existing liabilities of that entity (or at least a part of them) are not met and the creditors left high and dry.

96.  On the evidence before me, that was what was being done or caused to be done to DHL by the defendant, being the parent company with full control over DHL.  When DHL was stripped bare of its valuable assets, it was sold off for HK$2.00 as a dormant or insolvent company.

97.  From the evidence it must also be clear that the motive for the improper asset stripping of DHL was to put it beyond reach of the other creditors of DHL (i.e. other than the banks) including the plaintiffs since from the outset, the defendant had no intention of paying off even the existing liabilities of DHL other than to the banks.

98.  As for the two Balance Sheets relating to DHL for the years ended 31 March 2004 and 2005 respectively which the defence relied upon to say that DHL was already insolvent in 2004, I am unable to attach any weight to these two documents for the following reasons.

99.  These two documents were unsigned.  There is no evidence as to who prepared them, when they were prepared or for what purpose they were prepared.  Zhou’s evidence was simply that they were prepared by someone in the defendant’s Finance Department.

100.  No one, certainly not Zhou, could give any details of the particulars stated on these two sheets of paper.  Therefore it must follow that there is no telling whether the particulars stated on these two sheets included or was a result of the asset stripping of DHL.  How those figures came about is therefore wholly unknown.

101.  Given the above, I decline to attach any weight to these two documents and their contents.

102.  Quite apart from the asset stripping of DHL, no other explanation has been put before the court by the defendant as to how DHL changed from being solvent in 2002 (at the time of its acquisition by the defendant) to being insolvent (as alleged by the defendant) in 2004.

103.  In this respect, there is much to be said for the point taken by the plaintiffs that even if there were transfer of assets away from DHL during the so-called restructuring of the defendant’s group of companies, had proper value been given for such transfer of assets out of DHL, it would be unlikely for DHL to have become insolvent in such a short period of time.

104.  I further find from the evidence adduced that there was concealment from the public eye such asset stripping of DHL by the defendant.

105.  In the absence of any explanation put forward by the defendant, it is strange to say the least that in its Annual Report for both 2004 and 2005 mention is made only of DHL as a wholly owned subsidiary when, according to Zhou’s evidence, DHL was by 2004, already insolvent.  Yet no mention was made of China Merchants DiChain (Asia) Investment Holdings Ltd which owned Good Value Holdings, as well as DiChain Logisitics Service (Shenzhen) Co. Ltd which was then holding the valuable bonded warehouse in Futian.

Defence contention re lifting corporate veil

106.  It was submitted by Mr Bell, counsel for the defendant, that even if I were to find that there was asset stripping, as a matter of law the corporate veil cannot be lifted or pierced in the present case.

107.  In this respect, Mr Bell referred me to chapter 7 paragraph 9C of Gore-Browne on Companies which states as follows:

“It would seem that the veil of incorporation will only be pierced or circumvented by the UK courts so as to treat the rights and liabilities of a company and its parent (or indeed any members) as one for any purpose in just three circumstances:

(1)     where the construction of a statute, contract or other document requires such an approach;

(2)     where the company is a mere façade for some fraud or improper purpose;

(3)     where the company is an authorized agent of its parent or other members.”

108.  Mr Bell further submitted that from the passage cited above, criteria (1) and (3) can have no application to the present case.

109.  In this respect the defendant points to the fact that the debts owed to the plaintiffs were liabilities of DHL incurred by DHL well before the defendant was even incorporated therefore there can be no question that DHL was acting as the agent of the defendant when the debts were incurred by DHL.

110.  It was also submitted that in so far as criteria (2) is concerned, DHL could not have been used as a mere façade for the defendant either because the defendant had not even been incorporated when the debts to the plaintiffs were incurred by DHL.

111.  Mr Bell argues that since the debts were always those of DHL, none of the three circumstances identified in Gore-Browne above can properly apply.

112.  Mr Bell further relies on the decision in Jones v Lipman [1962] 1 WLR 832 that the law requires the company to be used as the alter ego of the defendant when in that case the company was described as “a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eyes of equity.”

113.  Further reliance was sought by the defendant on the decisions in:

(a)      Salomon v A. Salomon and Co. Ltd [1897] AC 22;

(b)     Ord v Belhaven Pubs [1998] BCC 607; and

(c)     Adams v Cape Industries plc [1990] Ch 433

to the effect that as a matter of law, courts are not entitled to lift the corporate veil against a defendant company, which is a member of a corporate group, merely because the corporate structure has been used so as to ensure that the legal liability will fall on another member of the group rather than the company.

Decision

114.  One common thread which has run through all the cases in which the courts have seen fit to lift or pierce the corporate veil is that there must be some impropriety, wrongdoing, concealment, sham or fraud involved.

115.  This can readily be seen in the words of Hobhouse LJ in the case of Ord v Belhaven Pubs when he said at page 615:

“On the question of lifting the corporate veil, the Court of Appeal in Adams v Cape Industries plc [1990] BCLC 479 at 519-520, [1990] Ch 433 at 544 expressed themselves similarly, but it is clear that they were of the view that there must be some impropriety before the corporate veil can be pierced.”

116.  Indeed, it was due to lack of any impropriety in Salomon v A. Salomon and Co. Ltd, Ord v Belhaven Pubs and Adams v Cape Industries plc that the courts in those cases declined to lift or pierce the corporate veil, thereby distinguishing those decisions from the present case.

117.  In the present case, on the facts as found, the impropriety which the plaintiffs relied on was the asset stripping of DHL by the defendant within the group.  Valuable assets of DHL which were transferred to the defendant or its other subsidiaries within the group but without proper value being given to DHL for the transfer out of its assets, thereby effectively putting such assets out of reach of the plaintiffs (by way of execution) after the plaintiffs had obtained judgment against DHL.

118.  In bringing this claim against the defendant, the plaintiffs are asking the court to lift the corporate veil between DHL and the defendant, (see paragraph 22 of Amended Statement of Claim) in other words, to treat DHL and the defendant as being the same entity and for the defendant to meet that liability which was originally that of DHL’s.

119.  I find no merit in the submission of the defendant, that because the liability relating to the debts in question had always been the liability of DHL incurred by DHL even before the defendant was incorporated, and not a liability of the defendant, that should prevent the court form lifting the corporate veil.

120.  Indeed, it is because the liability was originally that of DHL, but the defendant, had by its wrongdoing or impropriety in stripping DHL of its assets so as to put them beyond the reach of DHL’s creditors, the plaintiffs being such, that is the very basis upon which the plaintiffs have to seek the court’s assistance in piercing the corporate veil to make the defendant liable.

121.  Neither do I find any merit in the submission that DHL was not and could not have been used as a façade by the defendant to avoid its own liability.

122.  I would prefer to adopt the words of Bokhary JA (as he then was) in the case of China Ocean Shipping Co. v Mitrans Shipping Co. Ltd [1995] 3 HKC 123 at 127 where he said:

“Using a corporate structure to evade legal obligation is objectionable.  The courts’ power to lift the corporate veil may be exercised to overcome such evasion so as to preserve legal obligations.  But using a corporate structure to avoid the incurring of any legal obligation in the first place is not objectionable.  And the courts’ power to lift the corporate veil does not exist for the purpose of reversing such avoidance so as to create legal obligations.”

123.  Coming back to the present case, after the defendant acquired DHL, it sought to evade the existing liabilities of DHL (apart from the bank loans) vis-à-vis DHL’s creditors including the plaintiffs by stripping DHL of its assets without given proper value to DHL for them and transferring those assets to others within the group, thereby putting them out of reach of the creditors of DHL.

124.  In the final analysis, I am persuaded by the submission of Mr Wong who appeared for the plaintiffs that this is a proper case in which to lift and pierce the corporate veil and thereby to treat the defendant as being the same entity as DHL for all the reasons given above.

Judgment

125.  Accordingly, there will be judgment in favour of the plaintiffs against the defendant as follows:

(1)     Judgment to the 1^st plaintiff for the sums of HK$1,509,128.18 and HK$54,264.58 together with interest thereon at judgment rate from 14 June 2005 until payment.

(2)     Judgment to the 2^nd plaintiff for the sum of HK$1,685,600.00 together with interest thereon at judgment rate from 14 June 2005 until payment.

(3)     Judgment to the 3^rd plaintiff for the sum of HK$3,697,274.26 together with interest thereon at judgment rate from 14 June 2005 until payment.

(4)     Such costs as were given to the plaintiffs by orders of the court in HCA 1245 of 2004.

Costs

126.  There will be a costs order nisi that the defendant do pay to the plaintiffs their costs of this action to be taxed if not agreed.