PEREGRINE INVESTMENTS HOLDINGS LTD (in liquidation) AND ANOTHER v. ASIAN INFRASTRUCTURE FUND MANAGEMENT CO LTD L.D.C. AND OTHERS

CACV 32/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 32 OF 2003

(ON APPEAL FROM HCA NO. 2853 OF 1998)

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J U D G M E N T

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Hon Rogers VP:

1. I have had the advantage of reading in draft the judgments of Woo VP and Cheung JA. Although I agree with the judgment of Woo VP I wish to add a few words of my own. It is unnecessary to repeat the facts contained in Woo VP's judgment. For convenience I will use the same abbreviations as have been used by Woo VP.

The nature of the 2nd plaintiff PII

2. Although Yuen J (as she then was) below rejected the arguments that PII was an agent or nominee of PIH in holding the shares in AIFMC that does not, as she so held, exhaust the significance of the relationship between PIH and PII. PII was a wholly owned subsidiary of PVC which in turn was a wholly owned subsidiary of PIH. As noted in paragraph 23 of the judgment below, PII had no staff, no office and no bank accounts (until 1998). PII's financial records revealed no expenses of its own.

3. As recorded in paragraph 24 of the judgment below, the AIFMC shares held by PII were paid for by PIH at a cost of $2,433,771.89. The subscription monies for the shares in the A Fund held by PII were paid for by PIH. In respect of both these amounts PII was debited with the sum via PVC. All the other expenses relating to the investment in AIFMC and the A Fund on the part of PII's shareholding were paid for directly by PIH and PII was debited via PVC. Although it was not explored fully in argument, in answer to a question from the court, Mr Thomas SC, who appeared on behalf of the defendants, stated that as far as was known PIH had never been repaid the amounts which were debited.

4. In those circumstances, PII was an asset of PIH. It had a value. That value was based upon the value of its shareholding in AIFMC and the A Fund. It is unnecessary to analyse whether the directors of PII should be considered as trustees, it suffices to say that they owed fiduciary duties to the company of which they were directors. Again, it is unnecessary to consider the difficulties which may be caused by creating a metaphysical entity (i.e. a company) to whom those duties were owed and in whose best interests directors must act. It suffices to say that directors must use their position and act and take decisions in the best interests of the company. Again, whether that is looked upon as being the metaphysical entity, or the members of the company as a corporate body, matters not.

5. Since the very existence of PII was to constitute an asset, it was the duty of the directors to maintain the value of that asset. In the course of argument, I ventured to suggest that it would have been outrageous if the directors of PII had sold the shares in AIFMC at par value in circumstances where the value of those shares was considerably greater than par value and there was no cause for the sale. On further reflection I can only say that the use of the word outrageous was a considerable understatement. The transfer of the shares in AIFMC at par value indisputably dealt a body blow to the value of the company and hence the value of the company as an asset of PIH. In so saying I have not lost sight of the fact that the shareholding of PII was in PVC. The fact that there are layers of subsidiary companies makes no difference.

6. Fraud on bankruptcy laws - the anti-deprivation principle

Bankruptcy is the creation of statute law. Although the concept of bankruptcy is derived from Roman law there is no such thing as a common law of bankruptcy. The earliest statute in England appears to have been in the reign of Henry VIII. One of the important early Acts appears to have been that passed in 1623, that is commonly referred to as 21 James I, c.19. Until the coming into force of the Act of 1861 bankruptcy only applied to traders.

7. An important feature of the bankruptcy regimes has been that where a debtor could not pay his debts or discharge his liabilities, the State, in the appropriate circumstances, would take possession of his property by an officer appointed for that purpose and the property would be realised and distributed in equal proportions amongst the persons to whom the debtor owed money or had incurred pecuniary liabilities.

8. As recorded in, for example, Halsbury's Laws of England, 1st Ed., Vol. 2, para 2:

"Under the successive Bankruptcy Acts the courts and judges who have administered them from time to time have laid down certain rules and principles governing the administration of the Acts, and many of those rules have become part of the established bankruptcy law of the country, although not in terms to be found in any Bankruptcy Act."

9. The concept of fraud on the bankruptcy laws appears to have been developed at an early stage. As explained in "The Law and Practice in Bankruptcy" Griffith 1867 Vol. 1, page 596:

"A covenant or bond, however, to pay money upon the contingency of the covenantor's or obligor's bankruptcy, even though given in consideration of marriage, is held in general a fraud on the bankrupt law, except so far as the value of the wife's fortune may extend."

10. That passage reflects the decision in, amongst many other cases, Lockyer v Savage (1733) 2 Str. 946. Indeed, there appear to have been a large number of cases where this same principle was applied. Many of those cases concerned settlements made on marriage whereby the husband attempted to protect his wife and children from consequences of any potential bankruptcy. Whilst, it would appear, that the courts would not permit enforcement of a settlement where a husband had sought to settle his own property on trustees on the basis that if he were to become bankrupt the benefit of that property would enure to his wife, the courts, at the same time, were prepared to relax matters to the extent that if part of the property which was so settled had originally come from the wife, that part of the property would be treated as the wife's property and not included in the prohibition.

11. The principle that the insolvent's property should not be excluded from the assets available for the creditors has been referred to as the prevention of fraud on the bankruptcy laws or, more recently, in many instances, the anti-deprivation principle. A number of cases involving the anti-deprivation principle were cited to this court in the course of argument. The earlier cases that were cited referred to the decision in Higinbotham v Holme (1811) 19 Ves 88. As I have already alluded to, there are many examples of the application of the anti-deprivation principle in the older cases going back much earlier than the Higinbotham case, nevertheless I consider it is sufficient to commence with a reference to that case.

The Higinbotham case

12. In that case, the husband had conveyed various freehold and leasehold estates to trustees. At the time of the settlement, the husband had had no intention of embarking on any trade. That point had some significance as regards the arguments in the case because, as noted above, it was not until the Act of 1861 that the bankruptcy laws were made applicable to those who were not engaged in trade. The settlement was for the husband for life and in the event of his death or bankruptcy there was to be an annuity in favour of the wife and another lady bearing the husband's surname, therefore, presumably, a sister or other relative. Despite having been educated for Holy Orders, the husband later entered trade as a cotton manufacturer and subsequently became bankrupt. Both ladies were still alive at the time and the wife took proceedings, along with her husband, for a declaration that she was entitled to the annuity. The objection taken on behalf of the creditors was first that the arrangement that the husband had made was a fraud on the bankruptcy laws. The footnote to the record of the argument on behalf of the defendant, presumably the trustee, refers to Section 11 of 21 James I, c.19. That section provided that if a bankrupt were in possession of goods or chattels with the consent of the true owner in such circumstances as he were the reputed owner, those goods and chattels could be sold by the Commissioners as if they formed part of the estate of the bankrupt.

13. The argument on behalf of the plaintiff was first that the husband had not been in trade at the time of making the settlement and secondly that there could be no objection taken that the husband had, despite the settlement, remained in possession of the freehold and leasehold estates because in many instances such estates may well belong to people who were not the visible owners i.e. the persons who were in possession. Whatever else might be said of that argument, it is clear that freehold and leasehold estates could hardly be described as coming within the category of goods and chattels. Hence section 11 would seem to have been inapplicable.

14. The Lord Chancellor, Lord Eldon, commenced his judgment by expressing sympathy for the plaintiff. He acknowledged that the husband had not been in debt at the time the settlement was made nor had he then intended to engage in trade. But he went on to say this:

"This Settlement looks forward to a Change of Intention, to the Purpose of becoming a Trader; and looks forward expressly to the possible Consequences of that Purpose; and so looking forward to such a Change of Purpose, and to such Consequences, it is a Limitation, by the Effect of which the Estate would go to the Creditors; that Change being adopted with the express Object of taking the Case out of Reach of the Bankrupt Laws; and as to the Consideration from the Covenant of the Father, which, though it may perhaps prove worth little or nothing, is to be regarded as a Consideration with Reference to all the Provisions of the Settlement, though undoubtedly an Annuity might have been provided by the Settlement for the Wife in all Events, yet it is not competent to a Party, giving a Consideration for a Contract, that is a direct Fraud upon the Bankrupt Laws, to have the Benefit of it. I cannot assimilate this to the Case of the Wife's Property limited until the Bankruptcy of her Husband; that is, where she reserves a Power over her own Property; ..."

15. It will be noted that the reference to "fraud upon the bankrupt laws" was a reference to the person who gives consideration for the contract being prevented from taking the benefit if it were a "fraud" on the law. It would, apparently, have been a "fraud" because the party taking the benefit would have taken the property "out of reach of the bankrupt laws". Clearly Lord Eldon was not referring to the husband taking a benefit but to the wife taking a benefit.

Whitmore v Mason

16. Lord Eldon's judgment was referred to some 50 years later by Page Wood VC in the case of Whitmore v Mason 2 J & H 204. That was a case involving a partnership. The bankrupt had been a partner, with a number of others, in a partnership concerned with working mines in Portugal. The mines were held in the name of one of the partners who carried on the business in his own name. The partnership deed provided that in the event of bankruptcy of one of the partners an account would be taken and evaluation made of the share and interest of that party in the mines except for the value of the leases, which was not to be taken into account. In the course of argument the Vice Chancellor quoted with approval a note which apparently appeared in a work by a Mr Swanston:

"The general distinction seems to be that the owner of property may, on alienation, qualify the interest of his alienee by a condition to take effect on bankruptcy; but cannot by contract or otherwise qualify his own interest by a like condition, determining or controlling it in the event of his own bankruptcy, to the disappointment or delay of his creditors. The jus disponendi, which for the first purpose is absolute, being in the latter instance subject to the disposition previously prescribed by law."

17. At page 1034 of the report the Vice Chancellor, in effect, repeated that statement, concentrating in that passage on the inability of an owner of property to make a contract which would alienate his own property only on his bankruptcy. On the next page however, he said:

"The rule is clearly laid down by Lord Eldon in the case of Higginbotham v. Holme (19 Ves. 88), that no one can be allowed to derive benefit from a contract that is in fraud of the bankrupt laws."

18. Clearly, here he was expressing the principle on the basis that the person who would otherwise benefit could not do so if he was deriving a benefit that had the consequence of depriving creditors of that to which they were entitled. The Vice Chancellor then went on to cite passages from the Higinbotham case which I have cited above.

19. What was at issue in the Whitmore case was the fact that the value of the leases was to be excluded in calculating what was to be allocated to the benefit of the creditors of the bankrupt. No issue was taken, and indeed it was approved, that a proper valuation of the remainder of the partnership should be made and held for the benefit of the creditors.

Ex parte Mackay, Ex parte Brown, In re Jeavons

20. Whitmore v Mason was followed, in 1873, by the case of Ex parte Mackay, Ex parte Brown, In re Jeavons (1873) 8 Ch App 643. In that case Jeavons had assigned a patent and reserved a royalty to himself and by a separate deed he had mortgaged an ironworks to the same parties. Half the royalties were to be kept by the mortgagees and it was further provided in a third deed that if Jeavons should become bankrupt the mortgagees could retain the whole of the royalties to satisfy the mortgage debt.

21. James LJ said at page 647 that he had no doubt that the provision purporting to give the assignees the right to retain the other half of the royalties in the event of Jeavons' bankruptcy was invalid. It was said that that was giving one creditor a preference over the others. He confined his observations to the preference aspect. It might be noted that that is now commonly referred to as fraudulent preference. In contrast, Mellish LJ's judgment, which has been cited in a number of cases, does not confine his statement to creditors but looks at the matter on the footing of anybody who obtains an advantage as a result of the bankruptcy that should have enured to the benefit of the creditors. After citing the passage from Higinbotham quoted above he went on at page 648:

"That is to say, as I understand it, a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property from being distributed under the bankruptcy laws."

22. Again, it hardly need be said that when referring to the advantage Mellish LJ could not have been talking about the bankrupt obtaining an advantage, since the bankrupt was not the person taking the advantage. Hence, the reference to the person making it part of his contract is not a reference to the bankrupt but a reference to some party who gains an advantage in defeasance of the bankruptcy laws.

Later cases

23. In the case of Borland's Trustee v Steel Brothers and Co. Ltd [1901] 1 Ch 279 Farwell J considered a provision in the articles of a company which provided that a shareholder would not be permitted to remain a shareholder should he become bankrupt and, in that event, his shares would be bought out at a price fixed in accordance with a formula contained in the articles. Farwell J considered that the mechanism provided in the articles would result in a fair price being given for the shares. Whilst acknowledging the applicability of the principle that there should not be a fraud on the bankruptcy laws, he considered that that principle was not applicable in that case only because the shares were being bought at a fair value. At the foot of page 292 he quoted from Page Wood VC in Whitmore v Mason:

"Where there is a bona fide intention to secure the going on of the concern, by the other parties handing over to the creditors all that the creditors ought to take, I cannot conceive there is any fraud on the bankruptcy laws."

24. In the more recent case of British Eagle International Air Lines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758, the House of Lords was concerned with the winding up of British Eagle and as to whether the arrangements which the airlines had made with IATA constituted a contracting out of the provisions of section 302 of the Companies Act 1948 and was contrary to public policy and, if so, the rules of the general liquidation should prevail over the clearing house arrangements.

25. Lord Cross, who gave the leading judgment, said at page 780 that the "contracting out", which was constituted by the "clearing house" arrangements, was contrary to public policy because it constituted what, in effect, was a "mini liquidation" that would prevail over the general liquidation provisions. In holding in favour of British Eagle, Lord Cross applied the principle to be derived from the cases dealing with fraud on the bankruptcy laws. In doing so he appears to have adopted the submission that "... the court can always refuse to give effect to provisions in contracts which achieve a distribution of the insolvent's property which runs counter to the principles of our insolvency legislation."

26. Lord Morris and Lord Simon, who gave dissenting judgments, accepted the existence of the principal of fraud on bankruptcy laws, otherwise called the anti-deprivation principle. They did not question the conclusion of the majority that contractual provisions were void if they had the effect of permitting an unequal division of property on liquidation. They held that the principle was not applicable in the circumstances of that case because there were no debtor/creditor relationship between the airlines themselves, but there were debits or credits in account with the clearing house or, alternatively, that the effect of the clearing house scheme was that when a debtor/creditor relationship arose it was immediately superseded so that only a debt to or from the clearing house could result: see page 768C.

The principle to be derived from the cases

27. In my view the principle to be derived from the cases was clearly enunciated by Page Wood VC in Whitmore v Mason and by Mellish LJ in Ex parte Mackay that no one can be allowed to derive a benefit from a contract that is in fraud of the insolvency laws. In the course of argument Mr Thomas reminded the court of the importance of identifying the legal reasoning which lay behind the various decisions and thus of identifying the ratio of the judgments in those cases. But in doing so his primary argument was that the principle of fraud on the bankruptcy laws only applied in cases where a bankrupt himself had dealt with his own property. In so arguing, in my view, Counsel fell into the very error that he was cautioning the court to avoid. It may be that the principle was applied in early cases where there had been marriage settlements. But it was clearly not confined to marriage settlements. Neither has the principle been applied to bankruptcy alone. It is equally applicable in cases of liquidation of companies. The mischief sought to be avoided by the application of the principle is that of permitting contractual arrangements taking effect which would give the contractors an advantage at the expense of creditors where there was an insolvency. In so saying I would not seek to paraphrase or rephrase the way in which the principle has been enunciated by for example Page Wood VC or Mellish LJ.

Does the principle of fraud on the bankruptcy law apply in the present case?

28. In my view, Yuen J was correct in applying the principle of fraud on the bankruptcy law in this case. PII was an asset of PIH. The only asset of PII, apart from any credit balance which there might have been in its favour, were the shares which were transferred at an admitted under value. Once the shares had been transferred, PII had no business and, in effect, its purpose for existence ceased. As a consequence, the value of PII was reduced to virtually nil. Whatever value that PII had as an asset should have been available to the creditors of PIH albeit indirectly as a direct asset of PVC, but it ceased to exist or, at any rate, was reduced by a very significant margin.

29. The other shareholders who benefited from receiving the shares, which PII had previously held, at an under value had done so as a result of their reliance upon and putting into operation of the provisions of clause 14 of the Managers Shareholders Agreement. There can be no doubt, in my mind, that, as a result, they sought and obtained an advantage which prevented the true value of PII being realised and distributed under the insolvency provisions. As was pointed out in the British Eagle case, it matters not that there might have been good commercial reasons for the other shareholders in AIFMC to want to enter a contract with the provisions of clause 14. The fact of the matter is that the contractual arrangements by which the shares held by PII were divided amongst the other contractors with only a nominal compensation to PII constituted an arrangement which deprived the creditors of PIH of the value of PIH's asset.

30. Neither do I consider that the arrangement can be saved by the argument that PII's interest in the shares was only a determinable interest. As was recognised in the passage in the work by Mr Swanston, which was quoted by Page Wood VC in Whitmore v Mason, an interest in property may be qualified by a condition which could take effect on bankruptcy. Examples of that are commonly found in leases but can also be found in articles of association. One such instance was in the case of Bombay Official Assignee v Shroff and others (1932) 48 TLR 443. In that case the Privy Council recognised that the interest which was acquired by a member of the stock exchange was an interest that was determinable on his bankruptcy. Of course, it is true that there were sound reasons why a stockbroker should not be permitted to remain a stockbroker after becoming bankrupt. But there is a clear distinction there, as was recognised by Mr Swanston, that an interest which a person has, cannot be qualified after the acquisition of that interest by determining or controlling it in the event of bankruptcy in such a way that creditors, who otherwise might have benefited, would be disappointed or delayed.

31. As was pointed out by the judge below in paragraph 52 of her judgment, the articles of association of AIFMC did not contain similar provisions to those contained in clause 14 of the Managers Shareholders Agreement. Although a unanimous shareholders agreement may have similar characteristics to the articles of association of a company, they are not the same nor do they have the same effect. One of the distinctions is clearly manifested in the present instance. The articles of association of AIFMC specifically provide for a transfer of shares on the bankruptcy of the member: see for example article 18 of the articles of association. The articles of association therefore did not bestow an interest that would be terminated on insolvency. What, therefore, the shareholders of AIFMC have done by clause 14 of the Managers Shareholders Agreement was to provide for alienation at an under value upon the happening of a bankruptcy with the consequent effects to which I have already referred.

32. The argument that the anti-deprivation principle only applies to instances where the owner of the property in question has made a contract in respect of his own goods is attractive, but in my view misses the point.

33. In the first place, the anti-deprivation policy looks to whether a person can insist on retaining an unfair advantage to himself at the expense of creditors in a bankruptcy. In any event, whether it is the insolvent himself, or itself, who disposes of his property or its value to the detriment of the creditors or whether it is a trustee of the insolvent's property or whether it is whoever is in charge of the insolvent's asset or the maintenance of the value of an asset for the ultimate benefit of the insolvent (in this case the directors of PII whose duty it was to maintain the value of PII for the ultimate benefit of PIH), matters not. It is the dealing with property the benefit of which the insolvent is ultimately entitled to and the diminution of the value therein that is important.

34. Whilst giving full recognition to the fact that a subsidiary company is a self-governing independent company, nevertheless, particularly in the present case, it is still an asset of the parent. PII might have been autonomous in one sense but it was not anarchistic. Even as a self governing asset, it was its responsibility, and that of its directors, to maintain its value. The same was, of course, true for PVC.

35. Insofar as the question of the bankrupt's property is concerned, obviously for the principle to be applicable, it is necessary that property, which would otherwise be available for the creditors in an insolvency, is removed from them. Naturally, that would be the insolvent's property or the value thereof that is removed. In the present case what has been removed from the creditors has been the value which PII had as an asset.

36. I have no hesitation in concurring with Woo VP that this appeal should be dismissed.

Hon Woo VP:

Background

37. The 1st plaintiff ("PIH") was incorporated in Bermuda. In the early 1990s, PIH carried on business primarily in Hong Kong, operating as a merchant and investment bank. It was at the head of a group of over 250 companies commonly referred to as "Peregrine". The companies in the group were, according to the nature of the business, divided into five streams, namely, securities, corporate finance, fixed income, fund management and direct investment. PIH's role was treasurer or banker for the companies in the group.

38. The 2nd plaintiff ("PII"), was one of the companies in the Peregrine group involved in direct investment. PII was incorporated in the British Virgin Island ("BVI") in August 1994. There was only one issued share of PII, which was acquired by Peregrine Venture Capital Limited ("PVC") in September 1994. PVC, another BVI company, was also a wholly-owned subsidiary of PIH.

39. In about 1993, Peregrine intended to set up an infrastructure fund in Asia with the purpose of achieving long-term capital appreciation. Peregrine approached Mr William Liley who had substantial experience in infrastructure projects in the United States, the Middle East and Asia. Mr Liley was put on the Peregrine pay roll, he operated out of a Peregrine office, and his expenses were paid by Peregrine upfront.

40. It was learned that Frank Russell Company, which was a respectable investment adviser for pension funds in the United States, had a similar idea of setting up a China infrastructure fund. Peregrine and Frank Russell Company joined forces.

41. Mr Liley got together a team of personnel to source investment opportunities and potential investors. The potential investors included a company connected with Mr George Soros, the Asian Development Bank and the International Finance Corporation, a division of the World Bank.

42. Throughout the initial period of organization, Peregrine provided logistical support and office accommodation and paid necessary expenses upfront until the fund came into existence. PIH was also responsible for the Placing Memorandum. It played a leading role in the setting up of the fund.

43. On 9 November 1993, the Asian Infrastructure Fund ("the A Fund") was incorporated in the Cayman Islands. Its sponsor was PIH, with the 3rd defendant, Frank Russell Investments (Cayman) Ltd ("Frank Russell") as a co-sponsor. The A Fund was to be managed by a management company, the 1st defendant, Asian Infrastructure Fund Management Company Limited, L.D.C. ("AIFMC") which was incorporated on 15 March 1994 in the Cayman Islands.

44. According to the Placing Memorandum, AIFMC would have the sole investment discretion for the A Fund, and would make all decisions affecting assets in the fund's portfolio under the supervision of the fund's Board and in accordance with the fund's stated policies. However, in reality it was intended that all day to day work in the management of the fund would be undertaken by AIFMC's wholly-owned subsidiary the 7th defendant ("AIFAL"), a company incorporated in Hong Kong. There were no Peregrine personnel in AIFAL, which employed Mr Liley and his team.

45. The Fund Shareholders Agreement for the A Fund was executed on 28 October 1994. The initial capital commitment was US$250 million. PII's shares in the A Fund only amounted to 4% of the fund.

46. On the other hand, there were six shareholders in AIFMC: PII holding 31.5%, the 2nd defendant SFM Advisory Holdings, L.P. ("SFM"), a company associated with Mr Soros, holding 30.25%, the 3rd defendant Frank Russell holding 19%, the 4th defendant the International Finance Corporation holding 9.5%, the 5th defendant the Asian Development Bank holding 4.75%, and the 6th Defendant Remedial Management Limited (a company owned by Mr Liley) holding 5%.

47. Of these AIFMC shareholders, PII, Frank Russell, International Finance Corporation and the Asian Development Bank were shareholders of the A Fund. Asian Infrastructure Development Fund Limited, an affiliate of SFM, was also a shareholder of the A Fund. Mr Liley and the 6th defendant (his company) did not own any shares in the A Fund.

48. The par value of the shares of AIFMC allotted to PII was US$3,150, but PII had received dividends in 1996 and 1997 totalling over US$5 million. These shares held by PII in AIFMC ("the Shares") were the subject matter of the action before Yuen J (as she then was).

49. For the purpose of the action, it was common ground between the parties that the subscription money for the Shares in the sum of HK$2,433,771.89 (or US$314,925) was paid by PIH on 27 October 1994, but PII was debited with the amount via PVC. The subscription monies for the shares in the A Fund held by PII were also paid for directly by PIH, and PII similarly debited. All other expenses relating to the investment in AIFMC and the A Fund on the part of PII's shareholding were paid directly by PIH, and PII debited via PVC.

50. It was also agreed between the parties that PII had no staff, no office, and no bank accounts (until 1998), and that its financial records reviewed no expenses of its own.

51. The key documents governing the relationship between the various parties to the A Fund and AIFMC were all executed on 28 October 1994. They included the following:

(a)	Fund Shareholders Agreement - made between the A Fund, PIH as sponsor and Frank Russell as co-sponsor, and the shareholders of the Fund. Clause 15.5 provides that "each of the sponsor and the co-sponsor shall not, and shall procure that its affiliates shall not, transfer or dispose of the shares [in the Fund] or its shares in the manager [AIFMC] ... without a super majority consent". "Affiliate" was defined in this agreement as a subsidiary or holding company. Therefore, PIH was PII's affiliate and vice versa within the meaning of the agreement.
(b)	Management Agreement - made between the A Fund and AIFMC providing for the appointment and function of AIFMC, its powers, obligations and remuneration.
(c)	Investment Advisory Agreement - whereby AIFMC appointed AIFAL as its investment adviser to render investment advice in connection with the A Fund.
(d)	Managers Shareholders' Agreement - made between AIFMC, PII and the other shareholders of AIFMC, ie the 2nd to 6th defendants. PIH was not a party. This is the most important document with regard to this appeal.

52. Clause 9 of the Managers Shareholders' Agreement made provisions for the transfer of interests in the shares of AIFMC. Clause 9.1 provided that a shareholder should not transfer any of its shares until after the earlier of the end of the Commitment Period and the date on which AIFMC deemed the Fund being fully invested or being committed to invest. The prior written approval of the majority of the non-transferring shareholders was required for a transfer. In case of an intended transfer, clause 9.2.1 provided that the sale price should be the "the fair price of the shares being sold on a going concern basis between a willing seller and a willing buyer", as determined by an independent chartered accountant. An offer should then be made to the other shareholders pro rata to their commitments, the offer being open for acceptance within a period of 30 business days after the determination of the sale price. If the shares were not taken up by the other shareholders, the proposing transferor would then be at liberty to transfer the shares to the proposing transferee at a price not less then the sale price as determined.

Clause 14 of the Managers Shareholders' Agreement

53. The action and this appeal relate to the terms and effect of clause 14 of the Managers Shareholders' Agreement. The relevant parts of clause 14 read as follows:

"	14.2	If a Shareholder (the "Defaulting Shareholder") and/or any affiliate thereof which is a party to the Fund Shareholders Agreement:
		14.2.1	commits a material breach of its obligations under this Agreement and/or under the Fund Shareholders Agreement ....;
		14.2.2	makes an assignment for the benefit of creditors generally or fails to pay its debts generally as they become due; or
		14.2.3	suffers any distress, execution, sequestration or similar process levied, ... ; or a petition is presented or an order is made or a resolution is passed for the winding-up of the Defaulting Shareholder or such Affiliate;
		then any of the other Shareholders (a "Non-Defaulting Shareholder") may serve a notice in writing (a "Default Notice") to the Defaulting Shareholder. The Default Notice shall unconditionally constitute the Company [AIFMC] as the agent of the Defaulting Shareholder for the sale of the Sale Shares as defined below in accordance with the provisions of this clause.
	14.3	Within 30 days of receipt of a Default Notice the Company shall make an offer to the Non-Defaulting Shareholders by notice in writing (the "Transfer Notice") to sell to the Non-Defaulting Shareholders pro rata to their Commitments the Shares of the Defaulting Shareholder and any Affiliate of the Defaulting Shareholder at the par value thereof (in either case these Shares are referred to as the "Sale Shares"). To the extent that any Non-Defaulting Shareholder does not take up its pro-rata entitlement to purchase the Sale Shares such Non-Defaulting Shareholder may at its sole discretion transfer its entitlement to the other Non-Defaulting Shareholder(s).
	14.4	With 30 days of receipt of the Transfer Notice the Non-Defaulting Shareholders shall notify the Company whether they wish to purchase the Sale Shares in accordance with the terms of the Transfer Notice.
	14.5	Within seven days of the Non-Defaulting Shareholders notifying the Company that they wish to purchase the Sale Shares pursuant to Clause 14.4 the Defaulting Shareholder or the Company on its behalf shall execute the necessary instruments of transfer of the Sale Shares in favour of the other Shareholder(s) as the case may be against payment in full of the price for the Sale Shares and the Company will enter the purchaser's name in the register of members of the Company as the holder of the Sale Shares.
	14.6	If the Company does not receive offers from the Non-Defaulting Shareholders for all the Sale Shares it may offer the unsold Sale Shares to any other person at the par value thereof and on terms no more favourable than those offered to the Non-Defaulting shareholders."

54. The Managers Shareholders' Agreement provided that the governing law was the law of England. For all intents and purposes of the action and this appeal, it is not in dispute that the law of Hong Kong is to be treated in all respects as the law of England.

Subsequent events

55. In the years following the establishment of the A Fund, AIFMC was successful and paid substantial dividends to its shareholders. Dividends amounting to US$5 million were paid in March and August 1996 and February and September 1997 for the Shares held by PII. The evidence showed that these dividends were paid directly into the bank account of PIH, that PIH was debited and PVC was credited with such dividends, and that PVC was then debited and PII was credited with such dividends.

56. On 13 January 1998, a petition for the winding up of PIH was presented in Hong Kong. A similar petition was presented in Bermuda on 19 January 1998.

57. On 13 January 1998, the court in Hong Kong appointed three partners of PricewaterhouseCoopers as joint professional liquidators of PIH. This was followed by a similar appointment by the court of Bermuda on 19 January 1998.

58. On 15 January 1998, SFM served a default notice on PII "under section 14.2 of the [Managers Shareholders'] Agreement ... for the reasons stated under section 14.2.3 with respect to [PIH]".

59. A circular of 20 January 1998 issued by AIFAL to the directors of the A Fund noted the appointment of liquidator for PIH and that the liquidator had already indicated that he would be disposing of PII's interest in the A Fund.

60. On 5 February 1998, AIFMC sent a transfer notice to the other shareholders offering the Shares at par value.

61. On 9 February 1998, PIH's provisional liquidators informed AIFMC that they would challenge any attempt to transfer the Shares. Notwithstanding, on 10 February 1998, the Shares were purportedly transferred at par value to the other shareholders (the 2nd to 6th defendants) by means of various notices and instruments of transfer signed by AIFMC as agent for PII.

62. On 13 February 1998, PII was informed of the transfers which were for the total consideration of US$3,150.

63. On 24 February 1998, the court in Hong Kong gave leave to PIH's provisional liquidators to commence action. The next day, a writ was issued in the present action.

64. On 18 March 1998, PIH was wound up by the court. On 3 April 1998, a receiver ad litem was appointed to assume the conduct of the action on behalf of plaintiffs.

The judgment of Yuen J

65. The parties went before Yuen J on the question of liability only. Several issues were raised for the judge's determination, namely,

(1)	Did PII hold the Shares merely as a bare trustee or nominee of PIH such that the Shares were in fact PIH's own property?
(2)	If the answer to (1) is yes, was the transfer of the Shares a disposition within the meaning of section 182 of the Companies Ordinance, Cap 32 and thus void?
(3)	Irrespective of the answers to (1) and (2), was clause 14 pursuant to which the transfer of the Shares was effected void for being contrary to the anti-deprivation principle under the common law?
(4)	Was there a conspiracy by the defendants to injure the plaintiffs by procuring and/or effecting the transfer of the Shares?

66. In her judgment handed down on 6 January 2003, the judge held that PII was not a bare trustee or nominee of PIH in respect of the Shares. But for this finding, the judge would have held that the transfer of the Shares in February 1998, albeit in pursuance of a contractual right, would have been a disposition of PIH's property under section 182 of the Ordinance and therefore void (para 126 of the judgment).

67. After a detail discussion of the law and the facts, the judge concluded on issue (3) as follows:

"162. In conclusion, on this issue, I find it is clear on the law and the evidence that cl. 14 had the effect of depriving an insolvent company of the value of its property on insolvency to the detriment of its creditors, and as such, public policy requires that it be declared void."

68. On issue (4), the judge also found that there was a combination of the defendants in the series of events on or after 13 January 1998 to transfer away the Shares, and that the intention was to injure PIH by effecting the loss of its valuable shares (para 166 of the judgment).

69. The judge therefore declared

(1)	Clause 14 of the Managers Shareholders' Agreement dated 28 October 1994 entered into amongst the 2nd plaintiff and the 1st to 6th defendants is void and of no effect insofar as it purports to allow the defendants to transfer the Shares at par value by virtue of the presentation of the winding up petition or the making of a winding up order against the 1st plaintiff.
(2)	The transfer of the Shares in favour of any of the 2nd to 6th defendants pursuant to the said clause 14 is void and of no effect.

70. She also ordered that the 1st to 7th defendants do pay damages for conspiracy, such damages to be assessed, and there be liberty to apply.

71. She made an order nisi that the costs followed the event, ie that the 1st to 7th defendants bear the 1st and 2nd plaintiffs' costs of the action to be taxed if not agreed. Subsequently, the judge also rejected the application of the defendants to vary the costs order nisi, and made the order absolute.

72. Against the judge's decision in applying the anti-deprivation principle and declaring clause 14 as void, her finding that there was a conspiracy by the defendants to injure the plaintiffs and her order as to costs, the defendants now appeal.

The anti-deprivation principle

73. A number of grounds are raised relating to the ambit of the anti-deprivation principle, in reliance of which the judge held that clause 14 of the Managers Shareholders' Agreement was void and of no effect insofar as it purported to allow the transfer of the Shares at par value.

74. Mr Thomas SC, for the defendants, contends that the principle as set out by the judge in paragraphs 127 and 130 of her judgment does not correctly state the law. The two relevant passages in the judgment read:

"127.	... as a matter of public policy, the court would regard as void a provision that an insolvent person's property is to be confiscated or is to pass to another where that would deprive his creditors of the full value of that property."
"130.	... at common law, the court would, as a matter of public policy, strike down any provision diminishing the value of assets available to creditors of a company upon its insolvent liquidation."

75. The crux of the arguments raised by Mr Thomas is that the principle only applies to avoid the deprivation of the property owned by the insolvent that results from a contractual promise made by the insolvent himself. Put simply, Mr Thomas' arguments are that for the principle to apply, the property affected must be the property of the insolvent, and the principle only strikes at the contractual promise made by the insolvent himself that has the effect of deprivation. In the present case, so the arguments run, as the Shares belonged to PII, a company with a legal personality separate from PIH, albeit a wholly-owned subsidiary of PIH, and also because clause 14 was made by PII and not PIH, the principle should have no application. I consider these arguments fallacious.

The insolvent's agreement relating to his own property

76. Mr Thomas refers us to Whitmore v Mason (1861) 2 J&H 204 at 212-213 (a partner agreed to his shares in the partnership going over to his co-partners on his bankruptcy), Ex parte Mackay (1873) 8 Ch App 643 at 647-648 (a borrower contracted with the lender that the royalties of the patent he had sold to the lender that would otherwise be payable to him would be retained by the lender upon his (the borrower's) bankruptcy), Ex parte Jay (1879) 14 Ch D 19 at 25-26 (a builder agreed with the owner of the land on which he was to build houses that upon his bankruptcy all the building materials on the land should become absolutely forfeited to the owner), Borland's Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 at 290-291 (a shareholder's agreement to sell his shares to other shareholders at a fair value in case of his bankruptcy - agreement held not void), British Eagle International Airlines Ltd v Comp Nationale Air France [1975] 1 WLR 758, 780 (clearing house arrangements made by the insolvent company with 74 other airline operators held to be void), In re Frechette (1982) 138 DLR (3d) 61, 68-69 (a shareholders' agreement to allow other shareholders to purchase a bankrupt shareholder's shares at 80% of the price on a voluntary sale) and Canadian Imperial Bank of Commerce v Bramalea Inc (1995) 33 OR (3d) 692, 695 (a partnership agreement allowing an insolvent partner's share to be purchased by the other partners at a price below market price). Mr Thomas stresses that in all these cases where the anti-deprivation principle was applied, it involved the insolvent's own property to be acquired at an undervalue by others to the agreement to which the insolvent himself was a party.

77. Mr Thomas further submits that the most recent formulation of the principle is to be found in Money Markets International Stockbrokers Ltd (in liquidation) v London Stock Exchange Ltd [2001] 4 All ER 223 at 255b-c, where Neuberger J summarised the relevant propositions:

"(1) A person cannot validly arrange his affairs so that what is already his own property becomes subject to being taken away in the event of his insolvency."

78. However, it is to be noted that the passage cited was only one of the propositions that Neuberger J said were extracted from the authorities. Neuberger J continued at p 255f-g:

"(7) The court will scrutinise with particular care a deprivation provision which would have the effect of preferring the person to whom the asset reverts or passes, as against other unsecured creditors of the insolvent person whose estate is deprived of the asset pursuant to the provision." (emphasis added)

79. The proposition was obviously based on the observation of Lord Cross in British Eagle that Newberger J referred to in para 101 at p 250h:

"... one must look at the effect of the deprivation provision, and whether, if it applies in the context of insolvency, it is contrary to public policy in the light of bankruptcy laws."

80. Although it is true that the cases cited by Mr Thomas related to the insolvent's own agreement to give away or deplete his own property that was struck down by the courts, it does not necessarily mean that Yuen J was wrong to hold that:

"... at common law, the court would, as a matter of public policy, strike down any provision diminishing the value of assets available to creditors of the company upon its insolvent liquidation." (para 130 of the judgment)

81. Mr Tong SC, for the plaintiffs, submits, and I consider correctly, that those cases are merely specific examples of how the law acts in furtherance of the public policy and they do not represent the complete embodiment of the public policy itself. Mr Thomas has not been able to refer us to any authority indicating that the principle has no application where the deprivation provision is not made by the insolvent himself or is unrelated to the property vested in the insolvent.

82. Yuen J's statement of the principle can find support in Bramalea where Blair J in the Ontario Court accepted as correct the submission of counsel that does not restrict the application of the principle only to an agreement made by the insolvent or only to property vested in the insolvent that:

"A provision in an agreement which provides that upon an insolvency, value is removed from the reach of the insolvent person's creditors which would otherwise have been available to them, and places that value in the hands of others - presumably in a contract other than a valid secured transaction - is void on the basis that it violates the public policy of equitable and fair distribution amongst unsecured creditors in insolvency situations."

83. In re Frechette at p 68, Meyer J dealt with the provision of 20% discount of the value of the shares as follows:

"Although the clause would be perfectly valid were such a difference in price not provided for, it is obviously unconscionable that the trustee of a bankrupt shareholder should receive less than the true value of the shares, while under other circumstances the actual value is payable."

84. That was referring to the effect of the provision and it does not seem that the public policy was only applicable to an agreement made by the bankrupt that affected the bankrupt's own property.

85. In Whitmore v Mason, Ex parte Mackay and Ex parte Jay, the courts invariably referred to Higinbotham v Holme 19 Ves. 88 for the statement of the anti-deprivation principle, which addressed mainly the effect of the provision giving benefit to the contracting parties who would be benefited to the detriment of the creditors of the bankrupt rather than who made the provision or to whom the property affected belonged. Higinbotham related to a marriage settlement made by a husband that an annuity would be created in favour of his wife upon his embarking on trading and becoming bankrupt. The Lord Chancellor said at p 92:

"... it is not competent to a Party, giving a Consideration for a Contract, that is a direct Fraud upon the Bankruptcy Laws, to have the Benefit of it."

86. Mr Thomas' argument is that if the property deprived is not the property of the insolvent company the anti-deprivation principle does not normally apply, because there is no deprivation. This is tantamount to saying that since the property that is disposed of is not within the reach of section 182 of the Companies Ordinance because it is not legally vested in the insolvent company, the common law anti-deprivation principle similarly has no application. In my view, however, if the subject matter is an asset of the company, although not strictly property of the company within the ambit of section 182, if the effect of a contractual provision is to deprive the company of it or reduce its value to the detriment of the company's general creditors in insolvent liquidation, that must equally be contrary to the public policy of equitable and fair distribution amongst unsecured creditors in insolvency.

87. Even though the insolvent company is not a party to the contract providing for the deprivation of the company's assets, the deprivation is still contrary to the public policy. The law should not be deprived of its effect or efficacy if a device has been designed to deprive a company of its property or asset without the company getting involved as a contracting party to that device. Take for example a situation where the insolvent company is a holding company by owning all the shares in various wholly-owned subsidiaries. If each of the subsidiaries were to enter into an agreement to strip itself of its own assets upon the winding up of the company, the company would have no asset for distribution to its general creditors, even though the company might have used the loans from the creditors for the acquisition of all the shares of the subsidiaries.

88. Another example is that if a husband and a wife were each to establish a company, the husband contributing to the entire share capital of Company A for it to acquire property and the wife contributing to the entire share capital of Company B for it to acquire property, and the two companies agreed with each other that in case of bankruptcy of the husband or the wife, the properties belonging to the company owned by the bankrupt would be transferred to the other company for little but legally adequate consideration. If the defendants' propositions are correct, this simple arrangement would avoid the application of the anti-deprivation law. This cannot be right.

89. Another simpler example can be posed by a question: When a parent company is being wound up for insolvency, is its subsidiary entitled to give away valuable property vested in the subsidiary or dispose of it at an undervalue? These examples expose the absurdity of Mr Thomas' propositions.

90. The above examples also apply to dismantle the proposition that the anti-deprivation principle does not apply where the property taken away or affected is not the property of the insolvent company but that of a subsidiary. The proposition relies on the strict application of the separate corporate entity principle (to which I shall return later) which does not, in my view, obliterate, or even blur, the reality that the properties of the subsidiary are assets of the company, and upon winding up are available for distribution to the company's creditors. Any deprivation of such properties would reduce the assets of the company for fair distribution and is obviously against the public policy.

91. Similarly, if either of the defendants' propositions were allowed to hold good, there would be nothing to stop subsidiaries, with the acquiescence of the holding company which faces the possibility of being wound up for insolvency, from contracting away their assets in favour of some of the holding company's creditors, to avoid the rule against fraudulent preference.

92. Even though in the cases cited by Mr Thomas, the contractual provision was made by the insolvent or bankrupt and the property affected was the property of the insolvent or bankrupt, it does not mean that the anti-deprivation principle cannot apply where the property, though legally or beneficially did not belong to the insolvent or bankrupt, is part of the assets of the insolvent or bankrupt. Nor does it mean that insofar as the contractual provision that has the effect of depriving the insolvent of its assets was not made by the insolvent, the anti-deprivation principle does not apply. It would be more absurd if the insolvent's assets were less protected for distribution to its general creditors where the assets are taken away by virtue of an agreement to which the insolvent is not a party than where the insolvent is a party.

The bona fides and fairness of the contractual provision

93. Mr Thomas stresses that clause 14 was a bona fide and fair agreement amongst all shareholders of AIFMC. He also refers us to the circumstances when clause 14 was agreed in that the Shares (as other shares in AIFMC) did not have a readily ascertainable value at the time, that the value of such shares depended at all times on the ability of the particular shareholder to continue to contribute to the reputation, management and business of AIFMC, that the acquisition of the Shares depended on the status and ability of PIH to contribute to the reputation, management and business of AIFMC, and that the insolvency of any shareholders was contemplated as would cause damage to the goodwill of AIFMC and the interest of the remaining shareholders.

94. Mr Thomas also attempts to persuade us on the very important principle of freedom of contracting. The freedom to contract is well recognised even in cases where the anti-deprivation principle was applied. In Whitmore v Mason, Wood V-C said at p 212:

"... in forming a partnership, each partner is making a bargain with the rest, and has a right to stipulate for such privileges as he can obtain ...."

However, he went on at p 213:

"you cannot withdraw any advantage available for your creditors in the event of bankruptcy, ... The rule is clearly laid down by Lord Eldon in the case of Higginbotham [sic] v. Holme (19 Ves. 88), that no one can be allowed to derive benefit from a contract that is in fraud of the bankruptcy laws."

95. Similarly in Ex parte Jay, Cotton LJ observed at p 26:

"This case is governed by the decision of Lord Eldon in Higinbotham v. Holme, that there cannot be a valid contract that a man's property shall remain his until his bankruptcy, and on the happening of that event shall go over to some one else, and be taken away from his creditors ... though the contract is good as between the parties to it, it is on principle void in the event of the builder's bankruptcy."

96. In re Frechette at p 69, Meyer J stated:

It may be true that the discount of 20% provided for by the shareholders in the event of the possible bankruptcy of one of their number was agreed upon in good faith. Nevertheless, in the event of a bankruptcy, such a provision must be considered to have been without consideration, and merely a kind of conditional gift to one's fellow shareholders because of one's association with them in a closely held company."

97. In British Eagle, at page 780H, Lord Cross of Chelsea said:

"... But what the respondents are saying here is that the parties to the 'clearing house' arrangements by agreeing that simple contract debts are to be satisfied in a particular way have succeeded in 'contracting out' of the provisions contained in section 302 [of the Companies Act 1948] for the payment of unsecured debts 'pari passu'. In such a context it is to my mind irrelevant that the parties to the 'clearing house' arrangements had good business reasons for entering into them and did not direct their minds to the question how the arrangements might be affected by the insolvency of one or more of the parties. Such a 'contracting out' must, to my mind, be contrary to public policy." (emphasis added)

98. Arguments relating to the importance of the freedom of contract were raised in Bramalea but were rejected (see p 693 of the report).

99. Indeed, in Ex parte Mackay at p 648, Sir G Mellish LJ made the following observation of the principle:

"It is certainly remarkable that there is apparently no reported case in which this has been decided with reference to a creditor in an ordinary mercantile transaction; but that seems to me an a fortiori case. In the simple case of a man lending a sum of money on mere personal security, and making a bargain that, in the event of his debtor becoming bankrupt, he should then have a security upon a certain portion of his property, it would really be an absurd contention that he should be allowed to have the benefit of the security under the bankruptcy law."

100. When Mr Thomas talks about the status and ability of PIH to contribute to the reputation, management and business of AIFMC and that PIH's insolvency would cause damage to the goodwill of AIFMC, I cannot help wondering whether he is saying that the transfer of the Shares by the defendants was aimed at compensating the remaining shareholders for the demolition or diminution of the reputation of AIFMC resulting from the insolvency of PIH or in the alternative to punish PII for its affiliate PIH's failing to continue with such contribution because it was being wound up.

101. I am firmly of the view that the bona fides of the parties to clause 14 or that its operation was fair and equal amongst all shareholders of AIFMC is not at all relevant to the application or otherwise of the anti-deprivation principle.

Separate corporate entity

102. Mr Thomas also argues that the anti-deprivation principle should not apply in the present case because of the importance attached by the courts to the principle of separate corporate personality. His contention is that it is not open to a court to disregard the separate corporate personality principle and to treat a closely integrated group of companies as a single economic unit on the basis of perceived injustice. He cites Re Polly Peck International Plc [1996] 2 All ER 433 (proof of debts against a parent and a subsidiary that were both in liquidation) and Adams v Cape Industries Plc [1990] 1 Ch 433. In the former case, Robert Walker J said at p 448f-g:

"... the authorities to which I have already referred show that substance means legal substance, not to economic substance (if different), and that (as Lord Wilberforce said in Ford & Carter Ltd v Midland Bank Ltd) the separate legal existence of group companies is particularly important when creditors become involved."

103. In Adams, the Court of Appeal stated at p 536G:

"... save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1987] A.C. 22 merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities."

104. Mr Thomas also relies on Prudential Assurance Co. Ltd v Newman Industries Ltd. (No. 2) [1982] Ch 204, at 223-224, where it was held that where the only cause of action was vested in a company, a shareholder of the company could not sue for loss of share value consequent upon the company's loss. In my view, this is clearly so, but it does not affect the application of the anti-deprivation principle in the present case because it has never been disputed that the plaintiffs could sue in the present circumstances and where the Shares that the defendants transferred to themselves were worth very much more than the par value.

105. Mr Tong has also drawn our attention to the facts that strongly point against the non-application of the anti-deprivation principle. Although PIH was strictly and technically speaking not a signatory to the Mangers Shareholders' Agreement, all the parties and PIH were aware that PII was but a corporate vehicle used by PIH to hold PIH's interest in AFIMC and PII was intended to enter into a bargain which would directly affect PIH's interest. PII was incorporated at the late stage of the arrangements to set up the A Fund, and the other partners to the arrangements regarded PIH as their partner and co-owners of AIFMC. PII played no role at all in the setting up of the A Fund or AIFMC. It is therefore unrealistic to insulate PII from PIH.

106. It was, indeed, based on the separate legal personality of companies that the judge rejected the plaintiffs' case that PII was the nominee or bare trustee of PIH in PII's holding of the Shares. However, Mr Tong stresses that he is not asking this Court to pierce the corporate veil. He is relying on the fact that the Shares held by PII were an asset of PVC and in turn an asset of PIH, which would but for clause 14 be available for pari passu distribution to PIH's general creditors. Clause 14 had the effect of diminishing the value of the asset to the detriment of the creditors. The court does not pierce the corporate veil to give effect to the anti-deprivation principle in striking down clause 14. I agree.

The status and character of the owner of the property

107. Mr Thomas suggests that there is an exception to the applicability of the principle, which is stated to be the status and character of the owner of the property. This contention is derived from what was said by Neuberger J in Money Markets at respectively p 253b-f and p 255f, as follows:

"[110] Clearly, there must be cases where, for one reason or another, not so far considered a deprivation provision will be upheld. There may in exceptional cases be a public policy reason for upholding a deprivation provision. Cases which would more frequently occur are those where the right or property subject to the deprivation provision has no value, or (in many cases) if it is incapable of assignment, or depends on the character or status of the owner. In such cases, a deprivation provision would, as I see it, normally be enforceable in the event of the insolvency of the owner. If the asset has no value, or if it is incapable of transfer, then it could scarcely be said to be to the detriment of the creditors of the owner if he was deprived of the assets. Similarly, if the ownership of the asset depends on the personal characteristics of the owner, it is difficult to see how objection could be taken to a power to take away the asset, not least because it would be inherently unsuitable to be retained for the benefit of his creditors. An example which springs to mind would be membership of a club. Coming closer to the facts of the present case, the loss of membership of a financial institution, such as a stock exchange, where one has failed to meet one's debts or has gone bankrupt cannot, in my view, be said to fall foul of the principle. Membership of such an exchange turns on the personal attributes and acceptability of a particular individual, and expulsion of the grounds of not honouring financial obligations (or, indeed, insolvency) would seem to be almost an inevitable incident of membership.

[111] It is presumably for this sort of reason that no argument was advanced in Shroff's case, or indeed in this case, to support the contention that loss of membership of a stock exchange on the grounds of failure to honour obligations, or bankruptcy, could be challenged. In the instant case, and, I think, in Shroff's case, it was accepted that a person's membership of such an exchange depends on his personal characteristics, and is in any event not transferable."

"[118] ... (8) Where the deprivation provision relates to an asset which has no value, or which is incapable of transfer, or which depends on the character or status of the owner, then it will normally be enforceable on insolvency."

108. Mr Thomas also draws support from Bombay Official Assignee v Shroff (1932) TLR 443. Money Markets concerned the B shares of a member of the London Stock Exchange and the B shares were forfeited upon that member's bankruptcy, while Shroff related to the forfeiture of a member's card in a brokers' association by the association upon his insolvency. In both cases, the court held that the anti-deprivation principle had no application. In Money Markets, the main basis for Neuberger J's decision was the nature and character of the London Stock Exchange that in the case of a defaulting member being expelled from membership, no interest in his share remained in him and none could pass to his assignee. In Shroff, the Privy Council opined that

"... the real answer to this contention of the appellant in the nature and character of the association as they have described it whereby in the case of a defaulting member who is expelled from the association no interest in his card remains in himself, and none that can pass to his assignee, whether his expulsion does or does not take place before the commencement of his insolvency."

109. While the nature and character of the association was looked into by the courts in both cases, the ratio of the decisions, in my view, is that the bankrupt or insolvent had no interest in the "right or property" or it could not be transferred because the interest originally conveyed to the bankrupt or insolvent was an interest that was determinable on the member's bankruptcy, or that the "asset" had in reality no value or incapable of transfer.

110. Mr Thomas refers us in some detail to the facts of this case. PIH's involvement in the establishment of the A Fund, its and other shareholders' participation in the A Fund and AIFMC was important for giving the fund the confidence needed for investment purposes. Until the expiry of the "Commitment Period", the shareholders should not leave the fund and if a shareholder became insolvent, its shares in AIFMC should be transferred to the other shareholders at par value so as to compensate the other shareholders for the loss of that shareholder's support.

111. In my judgment, however, the facts of this case, as urged upon us by Mr Thomas, do not satisfy the conditions for the non-application of the anti-deprivation principle. While Mr Thomas stresses that the shareholders of AIFMC formed a sort of a financial club and the members of this financial club were qualified for joining by reason of their personal characteristics which would help make the club prosperous, I consider that these attributes alone do not entitle the court to uphold the deprivation provisions in clause 14. The Shares were purchased for valuable consideration far exceeding their par value. It is common ground that they were worth far greater than the par value. They were not something worthless to PIH or PII, nor were they not transferable in the sense as in Money Markets or Shroff. They were not a determinable interest upon the insolvency of a party to the Managers Shareholders' Agreement or upon the insolvency of the party's affiliate. As the judge correctly pointed out in her judgment:

"	155.	In the present case, the shares in AIFMC had their own free-standing value at all times. It is correct that a transfer under cl. 9 could not be effected without consent until after the stated period, but that did not mean that until then, the shares had no value. Substantial dividends had been received since the time of allotment, many times more than the par value, and it is agreed that the current value at trial was also higher than the par value.
	156.	There was no evidence that the other shareholders would not have consented to their voluntary transfer, as was done with shares in the A Fund. Even if no consent was forthcoming, there was no obstacle to the shares being retained by PII, collecting dividends which could be passed to PIH for the benefit of the creditors, until the expiry date of the stated period, at which time they could be voluntarily transferred."

Whether the Shares were "assets"?

112. Mr Thomas attempts to challenge the judge's holding that the operation of clause 14 to transfer the Shares amounted to a deprivation of PIH's assets by making the following proposition: even if the Shares were to be realised at the full value, whether such realisation would ultimately have inured to the benefit of PIH would depend on the financial condition of the intermediate holding company, PVC. I am afraid that this proposition does not avail the defendants because there was no evidence of PVC being insolvent and its property and assets, including the Shares owned by PII, would be insufficient to cover its debts, so as to leave nothing for PIH, and therefore PIH's general creditors, or the Shares would be of no value to PIH.

113. In my judgment, the grounds to challenge the judge's ruling and reasoning on the application of the anti-deprivation principle fail.

Conspiracy

114. Mr Thomas' only attack on the judge's finding of a conspiracy is based on the suggestion that the conspiracy found by her was one to use unlawful means and not a conspiracy to injure. He submits that the judge found the defendants liable on a conspiracy to use unlawful means and that was what the plaintiffs relied upon in paragraph 22 of the re-amended statement of claim. The correctness of this submission is, to say the least, doubtful.

115. Paragraph 22 of the re-amended statement of claim reads:

"Further and by reason of the matter aforesaid, between about 15 January 1998 and 18 February 1998, the Defendants unlawfully conspired to injure the Plaintiffs by procuring and/or effecting the transfer of the Shares from PIIL [ie PII] to the other shareholders at par value as aforesaid."

116. This seems to me to be a plea of conspiracy to injure, and not a conspiracy to use unlawful means as suggested, although the pleading under that paragraph of "particulars of illegal acts" based on the contravention of the public policy by way of the anti-deprivation principle might have caused a little confusion.

117. On the topic, the judge said:

"	163.	Finally there is the issue of conspiracy. It should be noted that one of the parties to this cause of action was AIFAL, a Hong Kong company, which had taken an active role in effecting the transfer of shares.
	164.	The elements of the cause of action of conspiracy have been clearly set out in Lornho v Fayed [1992] 1 AC 448. In the present case, I find there was a combination of the defendant parties in the series of events on and after 13 January 1998 to transfer away PII's shares in AIFMC.
	165.	The overt and unlawful acts undertaken were the acts effecting the purported transfer of the AIFMC shares in breach of the anti-deprivation principle and the public policy referred to in the earlier parts of this judgment.
	166.	The intention was to injure PIH by effecting the loss of its valuable shares, although another purpose may also have been to further their own interests by dividing amongst the other shareholders more than 30% of the shares in a valuable company at negligible cost. The injury caused is obvious. PII (and by virtue of the diminution of the value of its shareholding, PIH) has at least suffered the loss of dividend income from the shares in AIFMC.
	167.	I do not consider that the defendants have set up any defence of good faith when the possibility of a challenge by the liquidators had been brought to their attention before the execution of the Managers Shareholders Agreement, and it would appear that the parties chose to leave the warning unheeded.
	168.	Further, the fact was that as shown by Mr Rule's letter dated 13 January 1998, the effect of PIH's insolvency on the A Fund and AIFMC was minimal."

118. Mr Thomas argues that the use of the term "unlawful" acts by the judge in para 165 of the judgment was wrong. He contends that even if clause 14 is void on the ground that it is contrary to the anti-deprivation principle as being against public policy, the making of the agreement containing clause 14 and the carrying into effect of clause 14 to transfer the Shares cannot properly be described as "unlawful" or the use of "unlawful means". He relies on Mogul SS v McGregor Gow [1892] AC 25 at 39 per Lord Halsbury LC, at 45-47 per Lord Bramwell, at 51 per Lord Morris, and at 58-59 per Lord Hannen; Davies v Thomas [1920] 2 Ch 189 at 197-199 per Lord Sterndale MR and at 201-203 per Warrington LJ; and Dunlop v Woollahra Municipal Council [1982] AC 158 at 170-171 per Lord Diplock. However, the judge's finding was very clearly stated in para 166 of her judgment that the conspiracy was one with the intention injure PIH and PII.

119. Mr Thomas submits, correctly, that to establish a conspiracy to injure, the plaintiffs are required to establish a predominant purpose on the part of the defendants to injure. But he contends that the judge had made no such finding. The fact was, despite of the expressed opposition by the liquidators to the transfer of the Shares, the defendants nevertheless effected the transfer. As said above, Mr Thomas' submission is that the value in the shares of AIFMC depended at all times on the ability of the shareholders to continue to contribute to the reputation, management and business of AIFMC, and that there were good reasons for the imposition of clause 14. It could, of course, be said that the defendants intended by the transfer to benefit themselves because they would thereby obtain the Shares at a gross undervalue. The facts surrounding the circumstances of the carrying of clause 14 into effect, as opposed to the circumstances when clause 14 was made, are most relevant to the consideration of the intention and purpose of the defendants when they effected the transfer of the Shares. The judge did take into account these facts in support of her finding that there was a conspiracy to injure. When, in para 168 of her judgment, she referred to the letter of 13 January 1998 to the shareholders of AIFMC written by its managing director Mr Rule, stating the effect of PIH's insolvency on the A Fund and AIFMC being minimal, she was clearly rejecting the defendants' alleged purpose of obtaining compensation by putting clause 14 in operation. This was tantamount to a finding of a predominant purpose to injure PII and PIH who was in the course of being wound up and therefore failed to continue with such contribution.

120. Notwithstanding, Mr Tong points out that what he presented before the judge and what he is relying on now as the plaintiffs' case is an unlawful conspiracy to use unlawful means and not a conspiracy to injure. He submits that the judge found an unlawful conspiracy to injure, in the sense that unlawful means had been used. His reasoning is that the series of acts of the defendants to effect the transfer of the Shares on and after 13 January 1998 were unlawful acts of depriving the plaintiffs of valuable assets without justification. The justification raised by the defendants was reliance upon clause 14 that was against the anti-deprivation principle and void. It followed that the transfer and the combination by the defendants to effect the transfer was unjustified and therefore void and illegal against the rights of PII and PIH. The cases of Mogul, David v Thomas and Dunlop are distinguishable in that while the first two of those cases related at most to a combination in restraint of trade and the last one related to a void resolution made in a local government's planning scheme, those were not unlawful acts. The defendants in those cases did not commit any unlawful acts to take away the plaintiffs' properties, which was what had happened in the instant case.

121. I agree. The unlawful acts complained of in the present case are those effecting the transfer of the Shares at a gross undervalue, despite the protest of the plaintiffs. The taking away of the Shares in such circumstances was illegal and the combination by the defendants to effect the transfer was likewise illegal.

122. The ground of appeal against the finding of an unlawful conspiracy to injure fails.

Costs

123. Mr Thomas refers us to the principles regarding to the award of costs as enunciated in Re Elgindata Ltd (No. 2) [1992] 1WLR 1207 at 1214A-D, where Nourse LJ said:

"The principles are these. (i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party's costs. Of these principles the first, second and fourth are expressly recognised or provided for by rules 2(4), 3(3) and 10 respectively. The third depends on well established practice. Moreover, the fourth implies that a successful party who neither improperly nor unreasonably raises issues or makes allegations on which he fails ought not to be ordered to pay any part of the unsuccessful party's costs. ..."

124. Mr Thomas relies on the third principle. He submits that the plaintiffs had caused a significant increase in the length or cost of the proceedings below by raising section 182 of the Companies Ordinance and the proposition that the Shares were held by PII as a bare trustee or nominee of PIH. These issues had caused a significant increase in the length and costs of the proceedings, and the plaintiff failed on these issues.

125. In this regard, the judge in her decision of 28 January 2003 stated:

"2. I have been referred to the principles in Re Elgindata Limited (No. 2) [1992] 1 WLR 1207 at 1214 and the more recent dicta of Lord Woolf MR in AEI v Phonographic Performance Ltd [1999] 1 WLR 1507 at 1523. The issue really is whether the costs that have been incurred by the Plaintiffs could be segregated into discrete issues for the purposes of variation of the costs order nisi.

3. At first I was tempted to consider that the costs of the expert evidence called at the trial should be extrapolated. However, having considered paragraph 19 of the Statement of Claim which was denied completely in paragraph 16 of the Defence, I do not think that there has been such a clear segregation in the evidence and the submissions regarding the various issues that had to be analysed and considered in this trial that I can or should or would in the exercise of my discretion vary the costs order nisi."

126. Mr Tong refers us to the written skeleton arguments of both parties before the judge to satisfy us that she clearly had the principles of Re Elgindata in mind when dealing with costs. He also refers us to various matters supplementing or clarifying what the judge had said. First, the issues of nomineeship and trusteeship (the failed issues) were but arguments alternative to the anti-deprivation principle on which the plaintiffs relied to sustain their claim. The claim was to seek to set aside the transfer of the Shares, which the defendants had until judgment persistently contested. There was no other claim raised by the plaintiffs who eventually succeeded on the basis of the anti-deprivation principle but not the failed issues. On the other hand, the defendants failed in their contention before the judge that the transfer of the Shares did not effect any disposition of property within section 182 of the Companies Ordinance because the transfer was pursuant to a contractual provision. The failed issues were inevitably bound up with the issue of whether PIH was directly concerned with the transfer, including the matrix of facts relating to the proper understanding of the arrangements made between PIH and the other parties to the Managers Shareholders' Agreement for PII to take up the Shares in AIFMC. The expert's report adduced by the plaintiffs was not directed solely at the issue of whether PII held the Shares as nominee or bare trustee for PIH. Rather, the evidence, both factual and expert, had always proceeded in tandem on both issues of the ownership of the Shares and the impact of the transfer on the assets of PIH.

127. Moreover, a substantial part of the plaintiffs' costs of the action is represented by the plaintiffs' costs occasioned by the 1st to 6th defendants' application to set aside the service of the writ out of jurisdiction and the 7th defendant's application to strike out the statement of claim, which applications were eventually abandoned on terms that the plaintiffs' costs be in the cause.

128. While Mr Thomas's submission that the plaintiffs had raised issues that had taken time in the proceedings below and had failed in such issues has some merit, I am not persuaded to the conclusion that the Judge had exercised her discretion wrongly in taking into account what had happened before her at the trial of which she had intimate knowledge. I am not disposed to hold that she had erred in principle.

129. In the circumstances, I would refuse to interfere with the costs order.

Conclusion

130. For the above reasons, I would dismiss the appeal with costs.

Hon Cheung JA:

A narrow issue

131. This appeal raises a very narrow issue, namely, whether the principle that there cannot be a fraud of the insolvency law or a violation of the policy of the insolvency law can apply to a situation where the insolvent person did not personally enter into arrangements concerning the disposal of his own property in the event of his insolvency.

The origin of the principle

132. From the cases cited to us, the principle was first raised in Higinbotham v. Holme (1812) 19 Ves. 88 where the question was on the validity of a marriage settlement entered into by a man to settle his properties to his trustees in favour of his wife and children with the provision that the properties were not to be divested in the event of his bankruptcy. Lord Eldon V.C. held that,

"This settlement looks forward to a change of intention, to the purpose of becoming a trader; and looks forward expressly to the possible consequences of that purpose; and so looking forward to such a change of purpose, and to such consequences, it is a limitation, by the effect of which the estate would go to the creditors; that change being adopted with the express object of taking the case out of reach of the bankrupt laws; and as to the consideration from the covenant of the father, which, though it may perhaps prove worth little or nothing, is to be regarded as a consideration with reference to all the provisions of the settlement, though undoubtedly an annuity might have been provided by the settlement for the wife in all events, yet it is not competent to a party, giving a consideration for a contract, that is a direct fraud upon the bankrupt laws, to have the benefit of it." (emphasis added)

133. In Whitmore v. Mason (1861) 2 J&H 204 the deed of partnership provided that in the event of the bankruptcy or insolvency of a partner, his share in one of the partnership properties should go over to his co-partners. Page Wood V.C. relying on Higinbotham held that,

"... no one can be allowed to derive benefit from a contract that is in fraud of the bankruptcy laws."

134. He further stated that,

".... no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors."

135. In Ex parte MacKay (1873) LR 8 Ch. App. 643 where A. sold a patent to B. in consideration of B. paying royalties to A. B. at the same time lent A. ￡12,500. It was agreed that B. should retain one-half of the royalties, as they became payable, towards satisfaction of the debt, provided that, if A. became bankrupt or made an arrangement with his creditors, B. might retain the whole of the royalties in satisfaction of the debt. A. became a liquidating debtor.

136. James L.J. held that,

"... a man is not allowed, by stipulation with a creditor, to provide for a different distribution of his effects in the event of bankruptcy from that which the law provides. It appears to me that this is a clear attempt to evade the operation of the bankruptcy laws."

137. Mellish L.J., after referring to Lord Eldon's judgment in Higinbotham held that,

"That is to say, as I understand it, a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws."

138. In Ex parte Jay, In re Harrison (1880) 14 Ch. D. 19, James L.J. after referring to the MacKay line of cases held that,

"The principle of those decisions is this, that a simple stipulation that, upon a man's becoming bankrupt, that which was his property up to the date of the bankruptcy should go over to some one else and be taken away from his creditors, is void as being a violation of the policy of the bankrupt law."

Disposal at an undervalue

139. In Borland's Trustee v. Steel Brothers & Co. Ltd. [1901] 1 Ch. 279 Farwell J. also considered the Whitmore and Jay line of cases. He held that the principle there did not apply to that case where the articles of a company contained provisions compelling a shareholder to transfer his shares to a particular person at a particular price in the event of his bankruptcy.

140. The shareholder became bankrupt and the directors served notice on him pursuant to the articles. The bankrupt's trustee in bankruptcy challenged the validity of the articles on, among other things, the ground that these provisions constitute a fraud on the bankruptcy law. Farwell J. held that,

"If I once arrive at the conclusion that these provisions were inserted bona fide-and that is not contested-and if I also come to the conclusion that they constitute a fair agreement for the purpose of the business of the company, and are binding equally upon all persons who come in, so that there is no suggestion of fraudulent preference of one over another, there is nothing obnoxious to the bankruptcy law in a clause which provides that if a man becomes bankrupt he shall sell his shares."

141. However, he recognized that,

"If I came to the conclusion that there was any provision in these articles compelling persons to sell their shares in the event of bankruptcy at something less than the price that they would otherwise obtain, such a provision would be repugnant to the bankruptcy law."

142. The question of an agreement disposing the bankrupt's share at an undervalue was raised in two Canadian cases. In Re Frechette (1982) 138 DLR (3d) 61 the shareholders of a company agreed amongst themselves that upon the bankruptcy of any shareholder, the other shareholders were entitled to purchase his shares at 80% of the amount of their value as fixed by a formula for setting the price on a voluntary sale. A shareholder became bankrupt and the other shareholders tendered the 80% to the trustee. On a motion by the trustee to recover the 20% balance, it was held by the Quebec Superior Court that the trustee was entitled to succeed. There was nothing objectionable in the agreement to sell the shares on bankruptcy, but the reduction of the price was contrary to the policy of the Bankruptcy Act, R.S.C. 1970, c. B-3, for it had the effect of depriving the trustee of the true value of the shares.

143. In Canadian Imperial Bank of Commerce Et Al. v. Bramalea Inc. Et. Al (1995) 33 OR (3d) 692 a partnership agreement provided that, in the event of the insolvency of one of the partners, the non-insolvent partner may purchase the interest of the insolvent party at a price below market value.

144. Blair J. held that the provision was void. He stated that,

"While some of the older authorities in which this principle was first developed involved factual situations where the property itself was to be conveyed, to the detriment of creditors as opposed to the issue evolving around the question of price or value to the creditors, I am satisfied that the principle which underlies the notion is the deprivation of the creditors' interests in a bankruptcy as a result of a contractual provision that is triggered only in the event of bankruptcy or insolvency and which results in property that would otherwise be available to the bankrupt and the creditors, for its value, being diverted to which is in effect, a preferred unsecured creditor." (emphasis added)

Insolvency of corporation

145. Whilst the principle originated from the bankruptcy law, it has been extended to insolvency of corporations. In British Eagle International Airlines Ltd. v. Compagnie Nationale Air France [1975] 1 W.L.R. 758, airline operators established a clearing house arrangement for the purposes of settling debits and credits when the members performed service for one another. One of the operators i.e. British Eagle went into liquidation and the liquidator claimed against another operator i.e. Air France the value of the services rendered by the British Eagle after adjusting the value of service provided by the Air France. Lord Cross referred to Mackay and held that,

"But what the respondents (Air France) are saying here is that the parties to the "clearing house" arrangements by agreeing that simple contract debts are to be satisfied in a particular way have succeeded in "contracting out" of the provisions contained in section 302 for the payment of unsecured debts "pari passu." In such a context it is to my mind irrelevant that the parties to the "clearing house" arrangements had good business reasons for entering into them and did not direct their minds to the question how the arrangements might be affected by the insolvency of one or more of the parties. Such a "contracting out" must, to my mind, be contrary to public policy."

146. In Money Markets International Stockbrokers Ltd. (in liquidation) v. London Stock Exchange Ltd. and Another [2001] 4 All ER 223, Neuberger J. interpreted what Lord Cross said as meaning that one must look at the effect of the deprivation provision, and whether, if it applies in the context of an insolvency, it is contrary to public policy in light of the bankruptcy law.

147. The 'deprivation' provision was also discussed in Golden Sand Marble Factory Ltd. v. Easy Success Enterprises Ltd. & Another [1999] 2 HKC 356 and Fraser and others v. Oystertec plc and others [2003] All ER (D) 46.

Rationale of the principle

148. It is clear that the rationale of principle is to ensure that the assets of an insolvent is made available for distribution to its creditors who will share it on an equal footing. I am happy to accept that this is a matter of public policy in light of the insolvency law. But what is equally clear is that this public policy is developed from a situation of an insolvent making provisions prior to his insolvency in respect his own property. In such a situation the public policy will interfere and set aside the transaction made pursuant to the arrangement of the insolvent and another party. This is no doubt a drastic measure but is nonetheless an acceptable one because the court is only interfering with an arrangement that had been made personally by the insolvent who had put his assets out of the reach of the creditors.

149. However, there has never been a case, like the present case, where the insolvent had not made an arrangement in respect of his own property and yet the principle was nonetheless applied. Although in both Higinbotham and MacKay there were statements which seemed to refer to a wider principle that no one can have the benefit from a contract that is a fraud on the bankruptcy law, the courts there were really concerned with an arrangement made by the bankrupt himself. These statements were made in respect of the corollary of the situation, namely, how the other party to the transaction would be affected when there was a fraud of the bankruptcy laws. The courts held that they could not take the benefit of the arrangement. They were not propounding a free standing principle which would apply whenever the property of a bankrupt is affected as a result of his bankruptcy irrespective of whether the bankrupt has made the arrangement himself or not.

150. Likewise the cases on the disposal of the insolvent's assets at an undervalue were merely illustrations of the original principle. They did not articulate a free standing wide principle which is to be applied as soon as the value of the insolvent's property is affected by an arrangement not entered into by him personally.

151. In this case the contract was not made by PIH in respect of its property but was made by PII, which is not being liquidated, concerning the disposal of its own property, namely, its shares in AIFMC in the event of liquidation of PIH. One would have thought that this fact alone would have taken the case away from the application of the principle. After all there is another equally important facet of public policy, namely freedom of contract. As Jessel M.R. said in Printing and Numerical Registering Co. v. Sampson (1875) L.R. 19 Eq. 462 at 465,

"It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider-that you are not likely to interfere with freedom of contract."

This observation is particularly appropriate when the inference is in respect of a contract made by another party.

PIH's argument

152. In a very attractive argument, Mr. Tong S.C., counsel for PIH, relied upon a passage in Chitty on Contracts, 28th Ed., Vol. 1, Para. 17-003 and submitted that since the Court is concerned with public policy, then the application of the principle should not be immutable and should evolve according to the needs of the situation. He submitted that one of the assets of PIH is the shares in PII (via PVC). If there is no Clause 14, upon liquidation, PIH can dispose of this asset by selling off either PII or causing PII to sell the shares. The proceeds of sale can then be available to PIH for the benefit of its general creditors or that PIH can continue to share in the dividends declared by AIFMC in the same way as it did in the past. With the operation of Clause 14, the shares had been forfeited for negligible value and PIH suffered a loss. This consequence is no different in effect from what the creditors suffered in Bramalea or Jay.

Shareholder's right

153. Indeed the case of George Fischer (Great Britain) Ltd. v. Multi Construction Ltd., Dexion Ltd. (third party) [1995] 1 BCLC 260 established that a shareholder in a company is entitled to recover damages for a diminution in the value of its shareholding in the company or in the distribution by way of dividends or otherwise of profits of the company, where such diminution results from loss inflicted on the company by the defendant's breach of its contract with the company. This principle is expressly recognized by the House of Lords in Johnson v. Gore Wood & Co. (a firm) [2001] 2 W.L.R. 72.

Group companies

154. It is also recognized that companies of a group are treated together for the purpose of its general accounts, balance sheet, and profit and loss account (see D.H.N. Food Distributors Ltd. v. Town Hamlets London Borough Council [1976] 1 W.L.R. 852. There is evidence that in this case a dollar loss to PII would result in a dollar loss to the balance sheet or profit of PIH i.e. its holding company. It is accepted by Mr. Thomas S.C., counsel for defendants, that PIH suffered economic loss as a result of the transfer of PII's shares at an undervalue.

Interference with contractual obligations

155. However, I am unable to accept the arguments of Mr. Tong. What PIH is seeking to do here is not to sue for the diminution in the value of its shares in PII but to interfere with a contract of which it is not a party and to set aside the transactions that had been carried out pursuant to the contract. In my view this is such a huge leap from the original basis of the principle that this should only happen by way of legislative intervention and not through decisions of the courts. After all, despite the fact that PII is a wholly owned subsidiary of PIH, it is nonetheless a separate legal entity.

156. No doubt PIH was the original sponsor of AIFMC and in the pre-agreement discussion the co-sponsor and the partners had always regarded PIH to be their actual counterpart. But PIH had chosen to use PII to be the corporate vehicle to hold the shares in AIFMC and it has to live with this consequence. The judgment showed that PIH was the head of a group which consisted of more than 250 companies. These in turn were divided into five streams according to the nature of their business, namely, securities, corporate finance, fixed income, fund management and direct investment.

157. The legal advice given in November 1994 to the parties of the Managers Shareholders' Agreement in respect of the validity of the forfeiture of PII's shares on the occurrence of certain events was a general one. It did not specifically deal with the situation that the provisions may be void at the instigation of PIH.

158. PIH had at the trial argued that PII was merely a nominee or a bare trustee for its assets. If PII was merely the nominee or bare trustee of the PIH, the latter's case may be stronger in the sense that the arrangement concerning the disposal of PII's shares was entered into by PII on behalf of PIH and the property that was affected actually belonged to PIH. But Yuen J. (as she then was) had found against PIH on this issue. This being the case it is an extremely bold step for PIH to intervene in the contractual provisions made between a separate legal entity and its partners.

159. As Slade L.J. pointed out in Adams v. Cape Industries Plc. [1990] 1 Ch. 433 at 536 the law for better or worse, recognizes the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.

160. It is accepted that public policy can be developed according to new situations and I would not go into the academic argument of whether the court is being asked in this case to develop the public policy or to create a new one, the difference of which is said to be "wafer-thin" (Chitty para. 17-004). What is clear is that this is obviously an area where the whole spectrum of the ramifications of interfering with the subsidiary's contractual undertaking with a third party should be fully explored instead of being dealt with on a case by case basis.

161. Much as I like to see the liquidators of PIH being able to recover the full value of its assets, for the reasons I have given, I am unable to extend the principle to the present case.

162. Having reached this view, it is not necessary for me to deal with the question of whether, in any event, the principle would not be applicable because of the special characteristics of the venture between PII and its partners.

The conspiracy

163. I will briefly deal with the case on conspiracy. The conspiracy relied upon by the plaintiffs was a conspiracy by the defendants to use unlawful means thereby causing damage to the plaintiffs.

164. The word "unlawful" is capable of two meanings. First, it is used to describe acts that are void and incapable of giving rise to legal right or obligation. Second, it is used to describe acts which are contrary to law or illegal : see Mogul Steamship Company Limited v. McGregor Gow and Co. and others [1892] A.C. 25 (per Lord Halsbury L.C. at page 39) and Dunlop v. Woollahra Municipal Council [1982] A.C. 158. (per Lord Diplock at page 171.)

165. In the context of a conspiracy to use unlawful means to cause damage to others it must be the commission of acts bearing the second meaning which will provide a cause of action to the party that has suffered loss as a result of the conspiracy. In this case the defendants obtained the shares from PII by relying on Clause 14. If the provisions in Clause 14 are to be treated as void, their reliance on this clause cannot be described as an agreement to do an illegal act. It may be unlawful within the first meaning of the words as described in Mogul Steamship Company Limited but certainly the act cannot be regarded as being illegal. In my view the PIH had not proved a cause of action in conspiracy against the defendants.

Conclusion

166. For my part I would allow appeal by the defendants with costs of the action and the appeal.

Hon Rogers VP:

167. The appeal will therefore be dismissed and there will be an order nisi of costs in favour of the plaintiffs.