ACTIVE BASE LTD v. RODERICK JOHN SUTTON AND OTHERS

HCCW 470/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 470 OF 2005

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D E C I S I O N

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The summonses

1.  I have before me two summonses issued by Active Base Limited (“Active Base”) on 26 January 2007 and 8 March 2007, pursuant to rule 95 of the Companies (Winding-up) Rules and section 200(5) of the Companies Ordinance, Cap. 32.  Active Base seeks the following orders:

(1) the decisions of the liquidators of Moulin Global Eyecare Holdings Limited (“Moulin”; formerly known as Moulin International Holdings Limited) in rejecting the proof of debt lodged by Active Base on 21 June 2006 in the liquidation of Moulin for HK$76,500,780.82 (“the Proof of Debt”) and in rejecting the claim of Active Base as a secured creditor over the assets of Moulin by virtue of a debenture dated 6 May 2005 (“the Debenture”) be reversed;

(2) a declaration that a loan agreement dated 24 February 2005 made between Moulin and Active Base (“the Loan Agreement”) for a loan of HK$50 million is valid and enforceable against Moulin and the liquidators;

(3) a declaration that the Debenture made between Moulin and Active Base to secure repayment of the loan of HK$50 million and interest thereon is valid and enforceable against Moulin and the liquidators; and

(4) as an alternative to (3), the time for registration of the Debenture in the manner required by section 80 of Cap. 32 be extended to 7 June 2005 on the grounds that the omission to register was accidental, and/or due to inadvertence and/or is not of a nature to prejudice the position of creditors or shareholders of Moulin and/or it is just and equitable to grant such relief.

2.  On 8 March 2007, I made directions that the summonses be tried with cross-examination of deponents of affirmations, as the accounts given by witnesses of Active Base and those of Moulin were irreconcilable and the conflicting versions cannot be resolved without cross-examination.  I also gave leave to Moulin and the liquidators to discontinue proceedings in HCA No. 1083 of 2005 (“the High Court Action”) and ordered that the costs of those proceedings be in the cause of the aforesaid summonses of Active Base in the winding-up proceedings.  The High Court Action was brought by Moulin against Active Base claiming declarations that the Loan Agreement and the Debenture are invalid and not enforceable against Moulin.  Pleadings have been filed, and lists of documents and witness statements have been exchanged in the High Court Action.  Subject to the attendance for cross-examination of all deponents and those who have made witness statements, I gave leave to Moulin and Active Base to adduce as evidence in the trial of the present summonses the documents disclosed and the witness statements filed in the High Court Action.  Directions were also given for the filing of further affirmations in the summonses.

3.  I will first set out the relevant background matters that are not controversial.

The Moulin Group

4.  Moulin was incorporated in Bermuda on 18 May 1993 and was the ultimate parent company of the Moulin group of companies.  It was a substantial multinational company engaged in the design, manufacture and sale of optical products.  It had described itself as the largest optical group in Asia and one of the top three eyewear businesses in the world in terms of manufacturing capabilities and distribution strength. 

5.  Since October 1993, the shares of Moulin had been listed on the Main Board of The Stock Exchange of Hong Kong Limited (“HKEx”).  Between February and May 2005, one-third of the shares of Moulin were held, directly or indirectly, by or for the benefit of members of the Ma family.  At that time, the interest of the Ma family in Moulin was held principally through their private company, Sharp Merit International Limited (“Sharp Merit”). 

6.  As in February 2005, there were ten directors in Moulin, five of them being members of the Ma family and their names and positions were as follows: Ma Bo Kee (chairman, president, executive director), Ma Bo Fung (vice chairman, executive director), Ma Bo Lung (vice chairman, executive director), Ma Lit Kin Cary (chief executive officer, executive director; “Cary Ma”) and Ma Hon Kin Dennis (executive director; “Dennis Ma”).  Ma Bo Kee, Ma Bo Fung and Ma Bo Lung are brothers.  Cary Ma and Dennis Ma are sons of Ma Bo Kee.  Ma Bo Lung and Dennis Ma were stationed at the Shanghai office of Moulin at the material time.  The other five directors of Moulin were Tong Ka Wai Dicky (executive director; “Dicky Tong”), Joseph Aloysius Barrett (executive director), Chan Wing Wah Ivan (independent non-executive director; “Ivan Chan”), Ng Tai Chiu David (independent non-executive director; “David Ng”) and So Kwan Hon Danny (independent non-executive director; “Danny So”).

7.  One of the major investments of Moulin was its acquisition of Eye Care Centers of America, Inc. (“ECCA”), the third largest operator of optical retail stores in the United States as measured by revenue.  Sometime before December 2004, Moulin entered into an agreement to acquire 56% interest in ECCA.  The transaction was signed in partnership with Golden Gate Capital, a San Francisco based private equity firm, which would own approximately 43% of ECCA.  Under the agreement, Moulin and Golden Gate Capital would purchase ECCA from the vendor at a total consideration of US$450 million.  The ultimate acquisition cost amounted to US$489 million and the purchase was completed on 1 March 2005.  It was in the public knowledge that the acquisition was due to be completed in the first quarter of 2005.

8.  Of the total consideration, US$149.7 million was financed by senior subordinated loans and US$165 million was financed by a senior credit facility arranged by JP Morgan Chase Bank N.A., which was secured on substantially all of ECCA’s assets.  The balance of the cost in the aggregate of US$171 million was required to be contributed by Golden Gate Capital and Moulin (through Ample Faith Investments Limited, an indirect wholly-owned subsidiary of Moulin; “Ample Faith”).  Between them, Moulin through Ample Faith was required to inject US$97.4 million in the form of equity contribution (US$73.4 million) and pro rata contribution to transaction cost (US$24 million).

9.  On 21 June 2005, a creditor’s petition was presented to wind up Moulin.  Provisional liquidators were appointed on 23 June 2005.  The winding-up order was made on 5 June 2006. 

10.  Throughout the period from 31 December 2004 to the date of the winding-up order, Moulin was insolvent.  The provisional liquidators had prepared an estimated balance sheet as at 31 December 2004 with a net liability position of HK$2.75 billion.  According to the present estimate of the liquidators, the likely shortfall between the amount owed to creditors by Moulin and the amount paid to creditors by way of dividend in the winding-up proceedings would be in excess of HK$2.36 billion.

Active Base

11.  Active Base was incorporated in Hong Kong on 23 February 2000.  It is a licensed money lender and its principal activity is the provision of loan financing.  It is a wholly owned subsidiary of Tomorrow International Holdings Limited (“Tomorrow”).  The shares of Tomorrow are listed on HKEx.  Chan Yuen Ming also known as George Chan or George Chen is the major shareholder of Tomorrow, holding 61.5% of its shares through a company beneficially owned by him.  Chan Yuen Ming has never been a director of Tomorrow or Active Base.

12.  At the material time in 2005, the directors of Active Base were Yau Tak Wah Paul, Louie Mei Po Yvonne (“Yvonne Louie”), Wong Shin Ling Irene (“Irene Wong”), and Tam Wing Kin.  All of them were also executive directors of Tomorrow.  Of the four directors of Active Base, Yvonne Louie and Irene Wong were primarily responsible for its lending activities.  Yvonne Louie was responsible for negotiating terms with the borrowers.  After the board of directors had made a decision on the loan, Irene Wong would be responsible for the execution. 

13.  In 2005, Yvonne Louie and Irene Wong had been engaged in the money lending business for ten years.  Prior to working for Active Base, they had both served as executive directors of D C Finance (Holdings) Limited (“D C Finance”; now known as SMI Corporation Limited).  Some of the subsidiaries of D C Finance, including Cornhill Development Limited (“Cornhill”), were engaged in money lending activities. 

14.  Apart from Tomorrow and D C Finance, by 2005, Yvonne Louie and Irene Wong had been directors of two other listed companies, being Swank International Manufacturing Company Limited (“Swank”) and Singapore Hong Kong Properties Investment Limited (now known as Landune International Limited).  Tomorrow acquired an interest in Swank in 2001 and disposed of it in June 2005.  Swank was in the business of the design, manufacture and sale of optical products, the same field of business as Moulin.  Chan Yuen Ming and his relatives was the controlling shareholder of all four listed companies during the time Yvonne Louie and Irene Wong served as executive directors in these companies. 

15.  The loans made by Active Base to its customers were mostly short-term loans.  Prior to February 2005, Active Base had not made any loan to any company in the Moulin Group.  It had made loans to Ma Bo Kee personally or to a private company of the Ma family, a matter that I will come to.

The case of Active Base

16.  It is the case of Active Base that in late February 2005, Ma Bo Kee approached Chan Yuen Ming for a loan.  Chan Yuen Ming declined to lend it himself but referred it to Yvonne Louie to consider if Tomorrow would be interested in lending.  Yvonne Louie discussed with Ma Bo Kee, who requested an urgent personal loan of HK$50 million for three months and indicated that the money was required to complete the acquisition by Moulin of ECCA which was to take place at the end of February 2005.  They discussed the terms for the loan but did not agree on who was to be the borrower.  Ma Bo Kee wanted a personal loan to himself but Yvonne Louie preferred to lend to Moulin.

17.  On or about 21 or 22 February 2005, there was another telephone discussion between Yvonne Louie and Ma Bo Kee in which Yvonne Louie insisted that Tomorrow was only prepared to lend to Moulin and would require as part of the security a debenture from Moulin and a post-dated cheque from Moulin.  They agreed on the interest rate of 1% per month and the number of shares in Moulin to be pledged as security.  At that time, Moulin’s share performance was good, it was over HK$6.00 per share, with a number of well-known funds holding its shares.  Ma Bo Kee requested Yvonne Louie to re-consider a personal loan to him and asked her to instruct a solicitor to begin drafting the documents in the meantime.   

18.  As time was tight, Irene Wong gave instructions to Active Base’s solicitor, Tso Hon Sai Bosco (“Bosco Tso”) of Bosco Tso & Partners, to prepare two alternative sets of legal documents for the loan of HK$50 million, one set was for a loan to Moulin, the other was for a personal loan to Ma Bo Kee.  Moulin was provided with copies of both sets of loan documentation in the course of negotiation. 

19.  On 23 February 2005, the directors of Active Base reached a decision to grant the loan to Moulin only.  Irene Wong informed Ma Bo Kee of this decision in the morning of 24 February 2005 and he accepted this.  He requested to sign the relevant documents in the afternoon the same day. 

20.  On 24 February 2005, the Loan Agreement for a loan of HK$50 million by Active Base to Moulin for three months was signed by Ma Bo Kee and Cary Ma on behalf of Moulin in the presence of Bosco Tso, and was affixed with the common seal of Moulin. 

21.  The loan to Moulin was secured by these seven forms of security given by Moulin, Sharp Merit, and by Ma Bo Kee, Cary Ma and Dennis Ma personally, all of which were executed in favour of Active Base on 24 February 2005:

(1) the Debenture made between Moulin as charger and Active Base as lender, by which a first floating charge was created over all the undertakings, property and assets of Moulin, signed by Ma Bo Kee and Cary Ma on behalf of Moulin and affixed with the common seal of Moulin; the Debenture was undated and was subsequently dated 6 May 2005 in the circumstances mentioned below;

(2) a cheque dated 24 May 2005 for HK$50 million in favour of Active Base signed by Ma Bo Kee and Cary Ma on behalf of Moulin together with the company chop;

(3) a share mortgage dated 24 February 2005 made between Sharp Merit as the mortgagor, Active Base as the lender and Moulin as the company over 10 million shares of Sharp Merit in Moulin (“the Share Mortgage”), together with the instrument of transfer, bought and sold notes and form of transfer, signed by Ma Bo Kee and Cary Ma on behalf of Moulin together with the company chop;

(4) a cheque dated 25 May 2005 for HK$50 million in favour of Active Base signed by Ma Bo Kee and Cary Ma on behalf of Sharp Merit;

(5) a guarantee dated 24 February 2005 made between Sharp Merit as guarantor and Active Base as lender (“the Sharp Merit Guarantee”), signed by Ma Bo Kee and Cary Ma on behalf of Sharp Merit together with the common seal of Sharp Merit;

(6) a joint and several personal guarantee dated 24 February 2005 executed by Ma Bo Kee, Cary Ma and Dennis Ma as guarantors and Active Base as lender (“the Personal Guarantee”); and

(7) two cheques dated 25 May 2005 for HK$50 million each in favour of Active Base issued by Ma Bo Kee and Cary Ma respectively.

22.  Also on 24 February 2005, the following documents were signed by Ma Bo Kee and Cary Ma and given to Active Base:

(1) minutes of a board meeting of Moulin held by telephone conference on 24 February 2005 (“the Board Minutes”) and attended by the five directors of the Ma family, in which it was recorded that the directors had considered the Loan Agreement, the Debenture and the Personal Guarantee and they passed resolutions that Moulin was to enter into the Loan Agreement with Active Base and to provide the collateral in the form of the Debenture, that the common seal of Moulin be affixed on the Loan Agreement and the Debenture and any two directors be authorised to sign the same and the notice of drawing, and that the legal advisers of Active Base be authorised to register the Debenture with the Companies Registry of Bermuda and the Companies Registry of Hong Kong;

(2) written resolutions of all directors of Sharp Merit to provide the Sharp Merit Guarantee and the Share Mortgage (“the Written Resolutions”);

(3) a letter of authorisation dated 24 February 2005 (“the Authorisation Letter”) signed by Ma Bo Kee and Cary Ma on behalf of Moulin together with the company chop of Moulin, by which Moulin irrevocably authorised, instructed and directed Active Base “to complete, date and put into effect the Debenture … executed by [Moulin] in triplicate in escrow under and pursuant to the Loan Agreement, and in such manner as [Active Base] may in its absolute discretion consider appropriate”; and

(4) a notice of drawing dated 25 February 2005 (“the Notice of Drawing”) signed by Ma Bo Kee and Cary Ma on behalf of Moulin together with its company chop, by which Active Base was directed to pay HK$50 million to the bank account of Oaktree Investments Limited (a subsidiary of Moulin; “Oaktree”). 

23.  The outstanding signatures on the Board Minutes, the Written Resolutions and the Personal Guarantee were obtained and faxed from Moulin to Active Base after 12 noon on 25 February 2005.  After all the signatures were received, Irene Wong and Yvonne Louie gave instructions to transfer HK$50 million from the bank account of Tomorrow to Oaktree’s bank account.  The actual transfer was made after 2 p.m. on the same day.

24.  Although the Debenture was executed on behalf of Moulin on 24 February 2005, it was not dated until 6 May 2005 when Irene Wong recalled that she had forgotten to date it and she dated it 6 May 2005 on the advice of Bosco Tso.  The dated Debenture was sent to Bosco Tso & Partners for registration at the Companies Registry.  This was not done by early June 2005 when Active Base decided to retain its present solicitors, Messrs. Vincent T.K. Cheung, Yap & Co., to handle the matter.  The Debenture was registered by the present solicitors of Active Base on 7 June 2005, two weeks before the commencement of the winding up of Moulin.  The Registrar of Companies issued a certificate on that day pursuant to section 83(2) of Cap. 32, certifying that the “Debenture dated 6 May 2005 and created by [Moulin] in favour of [Active Base] was registered pursuant to Section 80.”

Moulin’s default and demise

25.  Under the Loan Agreement, the loan was due for repayment on 24 May 2005.  Moulin failed to pay the monthly interest due on 24 March 2005 and 24 April 2005 and the principal on 24 May 2005. 

26.  Trading in Moulin’s shares on HKEx was suspended on 18 April 2005 at its request due to the delay in the publication of the 2004 annual results.  Its auditors, Deloitte Touche Tohmatsu, resigned on the same day.  In a public announcement made on 28 April 2005, Moulin announced that due to the delay in the publication of its results for the year ended December 2004, the proposed issue of convertible bonds by Moulin (the proceeds of which estimated at HK$306 million were intended to be used to retire a portion of its bank debt) would not proceed as certain conditions precedent under the subscription agreement could not be fulfilled.  In the same announcement, Moulin also disclosed the concerns raised by its former auditors regarding the sufficiency of and access to audit evidence, the errors in accounting treatment, whether Moulin had proper internal controls, and questions on the authenticity of twelve sets of supporting documentation. 

27.  On 6 May 2005, Anglo-Chinese Corporate Finance Limited (“Anglo-Chinese”) was appointed as the independent financial adviser of Moulin at the behest of its bank creditors to assist Moulin to resolve its financial difficulties.  Richards Butler was retained as the legal adviser of Moulin on the recommendation of Anglo-Chinese on 23 May 2005.  

28.  Anglo-Chinese compiled a full list of the bank creditors of the Moulin Group for the purpose of negotiating a standstill arrangement with those creditors.  The list made no reference to Active Base.  On 9 May 2005, a steering committee of the bank creditors was formed to oversee Moulin’s discussion with the bank creditors regarding the group indebtedness.  Ferrier Hodgson was engaged by the steering committee as independent financial adviser to review the operation of the Moulin Group. 

29.  On 30 May 2005, Bosco Tso & Partners issued demand letters on behalf of Active Base to Moulin, Sharp Merit, Ma Bo Kee, Cary Ma and Dennis Ma for repayment on or before 2 June 2005 of the outstanding principal and interest under the Loan Agreement. 

30.  On 31 May 2005, Moulin made a public announcement that on 29 April 2005 the Moulin Group was in technical default of its banking arrangements involving credit facilities of some HK$750 million, that a steering committee of the bank creditors had been formed on 9 May 2005, and that discussions on standstill arrangements with the bank creditors were underway. 

31.  Cary Ma passed a copy of the demand letter of 30 May 2005 to Anglo-Chinese.  On 2 June 2005, Anglo-Chinese and Richards Butler met with Cary Ma and Don Lee, the financial director of the Moulin Group, to discuss the demand letter and other matters.  After the meeting, Richards Butler wrote to Bosco Tso & Partners on behalf of Moulin on the same day requesting for copies of the Loan Agreement and all related documents surrounding it, including any security and/or guarantees. 

32.  On 3 June 2005, Active Base presented the four cheques issued by Moulin, Sharp Merit, Ma Bo Kee and Cary Ma for payment.  All were dishonoured.

33.  The present solicitors of Active Base provided Richards Butler with copies of the Loan Agreement, the Share Mortgage, the Sharp Merit Guarantee, the Personal Guarantee, the Notice of Drawing and the Debenture on 7 June 2005.  They served statutory demands under the Bankruptcy Rules on Cary Ma, Ma Bo Kee and Dennis Ma on 7 and 8 June 2005, demanding payment of the debt owed by Moulin as guaranteed by them under the Personal Guarantee.

34.  On 8 June 2005, Richards Butler replied to the letter of Active Base’s solicitors putting on record that prior to receipt of their letter dated 7 June 2005, Moulin had no record of the Loan Agreement or of the Debenture.  Richards Butler went on to assert that the Loan Agreement and the Debenture were invalid and of no effect based on its review of the files and register of Moulin and enquiries with the Ma family, and enclosed a copy of a loan agreement dated 24 February 2005 between Active Base as lender and Ma Bo Kee as borrower which was signed by Ma Bo Kee but was not executed by Active Base.

35.  Active Base’s solicitors wrote to Richards Butler the next day refuting the allegations and providing further documents in support of its case, being the post-dated cheque issued by Moulin as security and the Authorisation Letter. 

Moulin’s case in the High Court Action

36.  On 9 June 2005, Moulin brought the High Court Action against Active Base challenging the validity of the Loan Agreement and the Debenture.  It denied that it was indebted to Active Base and alleged the following in its pleadings:

(1) there was an agreement between Active Base and Ma Bo Kee by which Active Base agreed to advance HK$50 million to him personally for three months, and that interest on the loan would be met by the assignment to Active Base of 1.1 million shares in Moulin;

(2) at the meeting on 24 February 2005, both sets of loan documents prepared by Bosco Tso & Partners (one set for the personal loan to Ma Bo Kee and the other for a loan of the same amount to Moulin) were signed by Ma Bo Kee and Cary Ma.  The other members of the Ma family who were directors also signed relevant documents for both sets of loan documents subsequently.  All the Ma family directors did so without prior review of the documents and without the benefit of legal advice.  The two sets of loan documents executed were void for uncertainty as to the identity of the actual borrower;

(3) the corporate loan documents were signed by members of the Ma family without proper authority and were void for want of authority.  The Bye-laws of Moulin governing such transactions were breached, to the actual or constructive knowledge of Active Base, and the transactions, had they been genuine, would have breached the listing agreement of Moulin with HKEx which required Moulin to comply with the Rules Governing the Listing of Securities of The Stock Exchange of Hong Kong Limited (“the Listing Rules”);

(4) the corporate loan documents were vitiated by lack of consideration afforded to Moulin and misrepresentation surrounding the documentation signed by the Ma family.  When the staff of Moulin requested copies of all the loan documents after signing, Irene Wong only permitted copies of the personal loan documents to be made, stating that that was because the loan was a personal loan to Ma Bo Kee and that the corporate loan documents would be cancelled or destroyed after the transaction was completed;

(5) the Debenture was executed on 24 February 2005 but was mis-dated as 6 May 2005 and as it was only registered at the Companies Registry on 7 June 2005, it was registered out of time; and

(6) if the Debenture were only created on 6 May 2005 as alleged by Active Base, it is void pursuant to section 267 of Cap. 32 in that it was created within 12 months of the filing of the petition for winding up of Moulin, and Moulin was not solvent immediately after the creation of the Debenture and no cash was paid by Active Base to Moulin at the time of or subsequently to the creation of and in consideration of the Debenture.

The liquidators’ adjudication of the Proof of Debt

37.  By the notice of adjudication of proof of debt dated 4 January 2007, the liquidators rejected the Proof of Debt in its entirety.  Apart from considering the documents annexed to the Proof of Debt, the liquidators have taken into account the pleadings filed on both sides, the documents disclosed in discovery, the affirmations and witness statements in the High Court Action, together with any other documents referred to in the notice of adjudication. 

38.  Having regard to the legal advice received by the liquidators that the Debenture is invalid or unenforceable in any event by virtue of sections 80 and 267 of Cap. 32, the liquidators came to the view that the Debenture, even if valid, did not confer any rights or entitlement additional to the Loan Agreement which may be relevant for the purpose of considering the Proof of Debt.  Upon the making of the winding-up order, all the assets of Moulin fell into its estate without any contest from Active Base in the sense that it has lodged a proof of debt on 21 June 2006 instead of trying to appoint a receiver.  They reasoned that as the HK$50 million concerned was paid to Oaktree and not to Moulin, unless the Loan Agreement is enforceable, Active Base would have no claim against Moulin.

39.  The liquidators concluded that the Loan Agreement is not an enforceable contract for these reasons.

40.  Firstly, they opined that the preparation of two sets of inter-changeable loan documents has to be credibly explained by Active Base, as this was unusual and irregular conduct and may suggest, at face value, that Active Base was equipping itself with loan documentation that would enable it later to elect which party it would choose to characterise as the actual borrower.  They took the view it was inherently unlikely to go to all the time and trouble, not to mention expense, to prepare two sets of elaborate and sophisticated loan documents with all the related requirements, if an entire set of documents was not going to be required. 

41.  Secondly, they considered the version of events put forward by Irene Wong and Bosco Tso to be untrue and that the contrary account of events given by Ma Bo Kee, which was an admission against his own interest and corroborated by Cary Ma and the former staff of Moulin, to be true, after assessing matters of inherent likelihood and contemporaneous documents.  They were of the opinion that Active Base’s version of events concerning the undated Debenture is unbelievable and the Authorisation Letter was not coincidental. 

42.  Lastly, they did not see how Active Base could claim that the loan to Moulin was authorised in the manner required by Moulin’s Bye-laws.

43.  As for the claim for interest up to the date of the winding-up order on 5 June 2006, including default interest, in the amount of HK$25,000,780.82, the liquidators decided that even if Active Base had been entitled to prove, it would only be entitled to prove for the principal of HK$50 million plus interest up to the date of presentation of the winding-up petition, which was 21 June 2005.

The witnesses in these proceedings

44.  Active Base called three witnesses in support of its case.  They are Yvonne Louie, Irene Wong and Bosco Tso.  Chan Yuen Ming, who has given a witness statement, was not called. 

45.  Moulin and the liquidators filed affidavits and adduced witness statements from a total of eleven witnesses.  Of these deponents and witnesses, only six were called.  They are Roderick John Sutton (one of the joint and several liquidators and an executive director of Ferrier Hodgson), Michael Ross David Pepper (a partner of Richards Butler), Dicky Tong, David Ng and Ivan Chan (three former directors of Moulin), and Kan Siu Yim Katie (the former company secretary of Moulin; “Katie Kan”).

46.  The liquidators have issued nine writs of subpoena against the former directors and former staff of Moulin.  They have not been able to serve the writs on Ma Bo Kee, Cary Ma, Danny So and Ng Hoi Sze Rose also known as Linda Ng (the former financial and account secretary of Moulin; “Linda Ng”), and are thus unable to rely on their witness statements adduced in these proceedings owing to the directions I made in March 2007. 

47.  Richards Butler obtained a draft unsigned statement from Lam Yuk Wah Michelle (“Michelle Lam”), who was also subpoenaed.  She is the sister-in-law of Ma Bo Kee and had acted as the treasurer of the Moulin Group.  She attended court in answer to the subpoena but was not called as a witness.  The liquidators have brought civil proceedings against her and she is the subject of investigation by the Commercial Crime Bureau of the Hong Kong Police.  I was given to understand that the liquidators decided not to call her after all, as she has shown an unwillingness to assist and has claimed that she is unable to remember anything. 

48.  The liquidators relied on the affirmations made by Cary Ma, Linda Ng and Ma Bo Kee in June and September 2005 in other proceedings, being the application of Cary Ma to set aside the statutory demand served on him by Active Base (HCSD No. 15 of 2005) and an application for summary judgment by Active Base against Cary Ma on his dishonoured cheque for HK$50 million (HCA No. 1480 of 2005).  These affirmations were put to Active Base’s witnesses in cross-examination.  I will deal with the question of what weight, if any, should be attached to the affirmations of these absent witnesses.

49.  The evidence before this court is different from the evidence considered by the liquidators in material respects.  The liquidators did not have the benefit of cross-examination in resolving the conflicting versions given by Active Base and Moulin.  They had taken into account the witness statements of those witnesses of Moulin who did not attend for cross-examination, as well as a draft witness statement of Michelle Lam.  These statements were excluded as evidence in this court.  Further, additional documents were produced in the course of these proceedings.

The approach on appeal against the adjudication of a proof of debt

50.  In determining whether to admit or reject a proof of debt, it has been said that a liquidator acts in a quasi-judicial capacity (Tanning Research Laboratories Inc. v O’Brien (1990) 169 CLR 332 at 388 to 389).  An appeal against the liquidator’s adjudication under rule 95 of the Companies (Winding-up) Rules is a hearing de novo.  In such a proceeding, a liquidator who defends his decision to reject a proof is no longer acting in a quasi-judicial capacity but is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable.  He is a party litigant though he is required to act fairly in conducting the litigation (Tanning Research Laboratories, supra. at 341).

51.  In hearing the appeal, the court is bound to decide the rights of the claimant in the light of all the evidence before it, and not merely to express a view whether the liquidators were right or wrong in rejecting the proof of debt on the evidence then available before them.  The onus of proof is on the claimant to show on a balance of probabilities that a real debt is due to him (Alan C.W. Tang, joint and several tee in bankruptcy of the estate of Lo Siu Fai Louis v. John J. Toohey, joint and several liquidator of Global March Ltd. [2005] 4 HKC 51, paras. 11 and 12).

52.  Insofar as the claim of Active Base is resisted on the ground that the liability to which the proof relates is not enforceable against Moulin under the general law and are grounds of defence available to the company, the liquidators stand in the same position vis-à-vis Active Base as does Moulin (Tanning Research Laboratories, supra. at 342).

53.  It is otherwise if a liquidator supports his rejection of a proof of debt in reliance on a ground which allows him, and him alone, to go behind a judgment, an account stated, a covenant or an estoppel on which the company’s liability is founded (In re Van Laun; Ex parte Chatterton [1907] 2 K.B. 23 at 31; In re Exchange Securities Ltd. [1988] Ch. 46 at 59 to 60).  In these instances, the liquidator is armed with grounds for rejecting a proof of debt additional to any grounds available to the company under the general law.  As stated by the majority of the High Court of Australia in Tanning Research Laboratories, supra. at 339:

“The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability. … But this general rule is qualified.  As the parties whose interests are affected by admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors and contributories may be unjustly affected.  A liquidator may properly reject a proof of debt if the liability, though enforceable against the company, is not a true liability of the company but is founded merely on some act or omission on the part of the company which unjustly prejudices the interests of the creditors or contributories in the assets available for distribution.”

54.  The occasions when it is right to reject a proof in respect of what is not a true liability of the company may not be susceptible of exhaustive definition (Tanning Research Laboratories, supra. at 340).

The broad issues in dispute

55.  In determining whether the liability referred to in the Proof of Debt is a true liability of Moulin enforceable against it, the broad issues I am required to resolve may be stated as follows:

(1)    was an agreement made between Active Base and Ma Bo Kee for a personal loan to him;

(2) were the corporate loan documents vitiated by misrepresentation surrounding the documentation signed by the Ma family directors;

(3) were the corporate loan documents signed by the Ma family directors without prior review of the same and the benefit of legal advice;

(4) were both sets of loan documents signed by Ma Bo Kee and Moulin in February 2005 in an attempt of Active Base to obtain an illegitimate form of double security;

(5) was the corporate loan vitiated by the lack of consideration afforded to Moulin;

(6) were the corporate loan documents signed by the Ma family directors without proper authority, whether actual or ostensible;

(7) did Active Base waive its right to enforce the Debenture;

(8) was the Debenture void under section 80(1) of Cap. 32 on the ground it was registered out of time;

(9) was the Debenture void under section 267 of Cap. 32 in that it was not within the exception as cash was not paid to the company at the time or subsequently to the creation of, and in consideration for the charge; and

(10)   if the Debenture was void under section 80(1), should the court exercise its discretion under section 86 of Cap. 32 to extend time for registration of the Debenture.

Findings on the sequence of events in 2005

56.  Before I analyse the broad issues in dispute, it would be convenient to set out my findings of fact on the sequence of relevant events in 2005.  The findings are made from contemporaneous documentary evidence and the oral evidence not in dispute and are as follows:

(1) In late February 2005, Ma Bo Kee telephoned Chan Yuen Ming to seek a personal loan and Chan Yuen Ming handed over the call to Yvonne Louie.  In another telephone discussion between Ma Bo Kee and Yvonne Louie on 21 or 22 February 2005, Ma Bo Kee asked for a personal loan and Yvonne Louie indicated she preferred a loan to Moulin with a debenture as part of the security.  She discussed with Irene Wong and the latter instructed Bosco Tso to prepare two sets of loan documents, one for a loan to Moulin and one for a loan to Ma Bo Kee. 

(2) Bosco Tso opened the file of his firm for the Active Base loan on 22 February 2005.

(3) Katie Kan certified copies of these statutory records of Moulin on 23 and 24 February 2005: certificate of incorporation, business certificate, certificate of incorporation on change of name, and special resolutions relating to amendments to Moulin’s Bye-laws together with the Bye-laws. 

(4) Cary Ma and the registered agent of Sharp Merit certified copies of the statutory information and records of Sharp Merit on 23 and 24 February 2005. 

(5) The statutory records of Moulin and Sharp Merit were provided by Moulin and Sharp Merit to Irene Wong on or after 23 February 2005 and she in turn provided them to Bosco Tso between 23 and 25 February 2005.

(6) Michelle Lam faxed to Irene Wong a list of the ten directors of Moulin on 23 February 2005 and Irene Wong sent this by fax to Bosco Tso. 

(7) Also on 23 February 2005 at 4:59 p.m., Irene Wong received a fax from Moulin giving the bank account details of Oaktree, which was to receive the proceeds of the loan.  She faxed this document to Bosco Tso the same day.

(8) Some time before lunch on 24 February 2005, Michelle Lam fixed with Irene Wong the time for the execution of the loan documents at around 4:30 p.m. that day and that the loan would be drawn down on 25 February 2005.  Irene Wong informed Bosco Tso of this by telephone. 

(9) Some time after 1:55 p.m. on 24 February 2005, Irene Wong faxed to Bosco Tso copies of the documents she had received from Moulin, being its business registration and the Hong Kong identity cards of Cary Ma and Dennis Ma.

(10)   In the afternoon of 24 February 2005, Bosco Tso finalised the draft loan documents.

(11)   Irene Wong and Bosco Tso attended the offices of Moulin for the execution of the loan documents in the late afternoon or early evening of 24 February 2005.  Ma Bo Kee, Cary Ma, Michelle Lam and Linda Ng were present at this meeting.  Irene Wong was told that for those directors who were not in Hong Kong, they could sign the documents and fax the signed pages back to Hong Kong.  She agreed to this but made clear that she would require all documents to be signed before money would be advanced.  Irene Wong collected the original of all the corporate loan documents executed by Ma Bo Kee and Cary Ma, the share certificates of 10 million shares held by Sharp Merit in Moulin and the four post-dated cheques of HK$50 million issued by Moulin, Sharp Merit, Ma Bo Kee and Cary Ma. 

(12)   From 12:27 p.m. to 12:29 p.m. on 25 February 2005, Irene Wong received from Moulin by fax seven signed pages of two sets of loan documents, complete with the signatures of the three absent Ma directors – Dennis Ma, Ma Bo Fung and Ma Bo Lung.  Three pages related to a personal loan to Ma Bo Kee, being a written resolution of Sharp Merit, the execution page of a personal guarantee of Dennis Ma, and the second page of a memorandum from Active Base to Dennis Ma pursuant to section 20 of the Money Lenders Ordinance, Cap. 163.  Four pages related to a loan to Moulin, being the Board Minutes, the Written Resolutions and the execution page of the Personal Guarantee.  Irene Wong faxed all the seven pages she received from Moulin to Bosco Tso.

(13)   In the afternoon of 25 February 2005, Irene Wong executed the corporate loan documents on behalf of Active Base witnessed by Bosco Tso.  She did not put a date on the Debenture.  Neither Active Base nor Bosco Tso & Partners had ever provided Moulin with a set of the corporate loan documents executed by Active Base on 25 February 2005.  No one had arranged for a copy of the Board Minutes to be passed to Katie Kan, for the same to be placed in the minute book of Moulin as required under its Bye-laws.

(14)   Yvonne Louie and Irene Wong gave written instructions on behalf of Tomorrow to its bank to transfer HK$50 million to the account of Oaktree.  The transfer was made before 2:30 p.m. on 25 February 2005.

(15)   Active Base did not issue any invoice or any demand in writing or take action to enforce its security when interest was not paid on the due dates on 24 March 2005 and 24 April 2005.  The first time Active Base made a claim in writing for repayment of its loan was by the letters of demand of Bosco Tso & Partners dated 30 May 2005, six days after the repayment of the principal was due.

Was there an agreement for a personal loan to Ma Bo Kee

57.  The main evidence in support of the contention that there was an agreement for a personal loan to Ma Bo Kee came from the affirmations of Cary Ma, Linda Ng and Ma Bo Kee made in other proceedings in June and September 2005.  Mr. Barlow, SC appearing for the liquidators, urged me to accept their evidence because they comprised admissions against interest in the case of Ma Bo Kee and Cary Ma and that Linda Ng is not a member of the Ma family and should have no vested interest in the outcome.  Further, the affirmations were made close to the events in question.  Miss Linda Chan, appearing for Active Base, asked me to reject the affirmations of all three who did not attend for cross-examination and whose witness statements made in the High Court Action could not be relied on.  She submitted that fairness requires these affirmations in the other proceedings (largely identical to their witness statements in the High Court Action) should not be given any weight.

58.  Mr. Barlow recognised that the affirmations of these witnesses cannot be considered without reserve, in the light of the evidence of Mr. Sutton, who has no illusion about the past conduct of Ma Bo Kee and Cary Ma.  The liquidators’ extensive investigations have revealed information suggesting that the senior management of Moulin had committed serious breaches of duty involving sham transactions, financial misreporting, and document falsification, concealment and destruction.  The liquidators’ findings to date were set out in the 2^nd affirmation of Mr. Sutton filed in March 2008.  The investigations indicated that from as early as 1999, the senior management had engaged in sham transactions and financial misreporting which had the effect of concealing the true financial position of the Moulin Group by artificial inflation of the cash reserves.  The Moulin Group would appear to have obtained funds under trade finance facilities through the use of falsified invoices in the names of “friendly suppliers” and these round-robin transactions involved Moulin Optical Manufactory Limited (an indirect wholly-owned subsidiary of Moulin, “MOML”; subsequently known as Moulin Global Eyecare Trading Limited) and Oaktree.  Some of the Group’s most substantial debtors based in North America appeared not to exist. 

59.  Following investigation by the Commercial Crime Bureau and the execution of search warrants at the offices of some of the Moulin Group companies and residential properties of certain officers and employees of the group, Ma Bo Kee, Cary Ma, Michelle Lam and Linda Ng were arrested in July 2005.  They were released on bail and police investigation is continuing.

60.  In view of the very serious allegations of widespread fraud and mismanagement throughout the Moulin Group by the senior management, I cannot see how I can safely accept part of evidence of the Moulin witnesses without the benefit of cross-examination, particularly when Ma Bo Kee and Cary Ma have evaded service of the subpoena and Michelle Lam, although served with the subpoena, chose not to co-operate.  I am sceptical if Michelle Lam is really unable to remember anything at all about the transaction three years ago, given her involvement in the matter as the treasurer according to undisputed evidence. 

61.  Further, I do not agree with the liquidators that the assertion of a personal loan to Ma Bo Kee should be regarded as an admission against the interests of Ma Bo Kee and Cary Ma. 

62.  When Cary Ma informed Anglo-Chinese and Richards Butler after receiving the demand letter of Active Base dated 30 May 2005 that the loan of Active Base was a personal loan to his father, this must be viewed against the considerable financial pressure applied by the bank creditors on the Moulin Group at that time.  The Group was then seeking a standstill arrangement with the bank creditors.  At the meeting on 2 June 2005, Mr. Pepper was asked by Anglo-Chinese to investigate if there was any loan made by Active Base to Moulin as alleged in the demand letter and whether any security was given for such loan.  As Mr. Pepper noted in the notes he made for that meeting, the bank syndicate would not like to learn of the existence of a HK$50 million loan to Moulin, especially with security attached.  That must also have been obvious to Cary Ma and Ma Bo Kee. 

63.  As for the affirmations of Cary Ma and Linda Ng, they were made in Cary Ma’s application to set aside a statutory demand served on him by Active Base based on his liability as a guarantor of Moulin’s debt in the Loan Agreement.  Cary Ma also made affirmations to oppose Active Base’s application for summary judgment against him on his dishonoured cheque given as security for the loan to Moulin.  He was seeking to impugn the Loan Agreement to avoid his personal liability.  It was not against his interest to contend that there was a personal loan to Ma Bo Kee.  I cannot safely regard Linda Ng as entirely non-partisan, bearing in mind that she was a subordinate of Michelle Lam and had a long association with the Moulin Group. 

64.  Ma Bo Kee’s affirmation in September 2005 was made for the purpose of resisting the application for summary judgment against Cary Ma on dishonoured cheque.  By then, the pleadings in the High Court Action had been filed.  He was merely giving a version consistent with Moulin’s case.  I do not think it was necessarily against his self-interest to do so. 

65.  Other than the affirmations of the absent witnesses, the personal loan documents adduced by Moulin are the only evidence in support of a personal loan.  None of these documents were executed by Active Base.  Further, as pointed out by Miss Chan, the documents required to be executed by the borrower and Sharp Merit as guarantor for the personal loan were not even complete.  There was no notice of drawing in relation to a personal loan signed by Ma Bo Kee, no memorandum in compliance with section 20 of Cap. 163 signed by Sharp Merit in acknowledgment.  I agree with her the suggestion that Active Base would agree to advance a personal loan to Ma Bo Kee when all the requisite documents had not been signed by Ma Bo Kee and Sharp Merit does not make sense. 

66.  In the absence of cogent evidence, I decline to find there was a personal loan to Ma Bo Kee. 

The relevance of previous loans

67.  Before I move on to the next issue, it is appropriate that I should address the relevance of the previous loans.  The facts I find, largely on unchallenged evidence, may be stated as follows:

(1) As mentioned earlier, Active Base had not made any loan to any company in the Moulin Group prior to February 2005.  The liquidators’ investigations have uncovered three previous loans to Ma Bo Kee personally or to a private company of the Ma family by Cornhill and Active Base, all handled by Yvonne Louie and Irene Wong for the lender.  They were all for very short terms, with repayment within a few days.  All three advances were made shortly before the end of the financial year of the Moulin Group. 

(2) The first of these previous loans was made on 30 March 1998 by Cornhill to K.F.L. Holdings Limited (“KFL”), a company of the Ma family, for HK$100 million, at an interest rate of 28% per annum, repayable on or before 2 April 1998.  The financial year-end for Moulin at that time was 31 March.  In the loan facility letter and the memorandum of agreement dated 30 March 1998, the security for this loan was stated as a share mortgage given by KFL in favour of Cornhill in respect of 200 million shares in Moulin and a personal guarantee of Ma Bo Kee in favour of Cornhill.  Contrary to Irene Wong’s evidence, I find that additional security, not disclosed in the loan documents, was taken by Cornhill for this loan, being three cheques of HK$100 million each post-dated to 2 April 1998 and issued by KFL, Moulin, and MOML.

(3) The next loan was made on 27 March 2002, four days before the financial year-end of Moulin, in the sum of HK$16,851,800.00.  The amount was advanced by Active Base and deposited into the bank account of MOML, from which four cheques were drawn to settle trade finance loans advanced to the Moulin Group by a bank.  It was admitted by Irene Wong in cross-examination that the loan was made to Ma Bo Kee or to a private company of the Ma family. 

(4) The last of these loans was made on 30 December 2003, one day before the financial year-end of the Moulin Group on 31 December 2003.  Active Base made a loan of HK$12 million to Ma Bo Kee personally or to a private company of the Ma family.  The cheque of Active Base was deposited into the bank account of Oaktree and the funds were paid out to Ma Bo Kee on 2 January 2004.

68.  The liquidators formed the opinion that these short-term loans obtained near the financial year-end of Moulin were used by the senior management to artificially inflate the Moulin Group’s cash reserves and/or to conceal the extent of the Group’s liabilities.  I understand the liquidators have brought proceedings against one of the auditor firms of Moulin for negligence in carrying out the audit in that they had failed to detect financial misreporting and fraud and had given unqualified audit opinion, and are undertaking investigations in relation to the role of another firm of auditors.  Both auditors are reputable firms of certified public accountants. 

69.  Mr. Barlow has prayed in aid the previous loans as some kind of similar conduct against which he invited the court to draw adverse inferences against Active Base in the transaction in February 2005.  He said it was significant to bear in mind that prior to February 2005, all previous loans handled by Yvonne Louie and Irene Wong for the lender were made to Ma Bo Kee personally or to a private company of the Ma family.  In the loan in March 1998, security in the form of post-dated cheques was obtained from Moulin and MOML even though neither was a borrower or guarantor.  Further, such additional security was not disclosed in the loan documents.  He submitted that such additional security was taken by Cornhill or D C Finance as a kind of “reserve security”, and that was similar to what Active Base is alleged to have done in February 2005 in procuring the Ma family directors to execute the corporate loan documents as “reserve security” and in suppressing and concealing these documents until Active Base made its written demand on 30 May 2005. 

70.  I decline to draw such inference from the previous loans as submitted by Mr. Barlow.  I must guard against “indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question” (Nina Kung v. Wong Din Shin (2005) 8 HKCFAR 387 at 441I, para. 185).  I will have more to say about the matter of drawing inferences.  For present purpose, suffices it to say that the hypothesis put forward by Mr. Barlow that “reserve security” was taken for the loan in March 1998 remains in the realm of conjecture, and is not properly grounded in the primary facts found.  It cannot be a proper foundation for a justifiable inference that “reserve security” was similarly taken for the loan in February 2005.

71.  There is no available documentary evidence showing that Active Base was aware that the funds advanced in the previous loans would be applied by the senior management in breach of duty, as Mr. Sutton has acknowledged.  There is some force in Miss Chan’s argument that it would be extraordinary to suppose that a third party lender like Active Base should be able to make the connection that the previous loans were for the purpose of assisting Moulin to inflate the financial results in its year-end accounts, when the former auditors and members of the audit committee of Moulin, who were charged with the duty of reviewing the financial statements, did not make any such connection.  There is no solid foundation to implicate Irene Wong or Yvonne Louie in any wrongdoing in extending loans to Ma Bo Kee or a private company of the Ma family in the previous known instances.  Yvonne Louie was not even cross-examined on the propriety of the previous loans.

72.  Mr. Sutton accepted in cross-examination that he was not suggesting that a lender, which had advanced personal loans to the chairman of a company, could not at a later stage properly make a loan to the company itself.  He opined that a lender should be suspicious in dealing with Moulin and ask why the company should borrow, considering that it had HK$800 million cash according to the last published financial statement being the 2004 interim accounts.  However, it must be borne in mind that Active Base was not alone in lending substantial amounts to Moulin at the time.  Quite a number of banks were in the same boat. 

73.  As I see it, the only relevance of previous loans goes to the credibility of Irene Wong, who was cross-examined at some length about them.  She was taken aback when she was confronted with documents for the 1998 loan, after she had denied that she was involved with any previous loan apart from the advances made by Active Base.  Some of her answers were vague and guarded.  They may be considered as lacking in credence or evasive.  But I take into account the element of surprise, and she was asked about a transaction ten years ago with very little opportunity to refresh her memory.  Even though some of her answers here were unsatisfactory, I decline to infer from that alone other parts of her evidence must be treated with reservation. 

Were the corporate loan documents vitiated by misrepresentation

74.  The misrepresentation alleged by Moulin in the High Court Action was to this effect.  When the staff of Moulin requested copies of all the loan documents after signing, Irene Wong only permitted copies of the personal loan documents to be made, stating that the loan was a personal loan to Ma Bo Kee and the corporate loan documents would be cancelled or destroyed after the transaction was completed.  There is no evidence to support this allegation as the only mention of this was in the draft witness statement of Michelle Lam, who was not called to testify in these proceedings.

75.  I note that in his closing submission, Mr. Barlow was driven to contend that the corporate loan documents might have been signed with the “reluctant acquiescence” of the Ma family directors.

Were the corporate loan documents signed without prior review and the benefit of legal advice

76.  Ma Bo Kee and Cary Ma claimed in their affirmations made in other proceedings that they did not review the documents Bosco Tso presented to them at the meeting on 24 February 2005 to ascertain the nature of the documents before they signed.  They alleged Bosco Tso did not explain the documents to them nor did they obtain any legal advice for the documents.  Cary Ma said he was accustomed to signing whatever documents were presented to him to sign by people whom he had entrusted with preparing the documents due to his heavy workload as the chief executive officer of a big listed company.  Even though he signed on a large number of signature pages at that meeting, he did not ascertain he had only signed documents necessary to effect the personal loan to Ma Bo Kee. 

77.  No explanation was proffered from any of the witnesses of Moulin why Katie Kan was asked to certify the corporate documents of Moulin if the intention was that only documents for a personal loan would be executed.  Katie Kan was also responsible for the safe keeping of the common seal of Moulin.  She was not able to explain how the common seal came to be affixed on the Loan Agreement and the Debenture, and could only surmise that Ma Bo Kee, Cary Ma or the treasury department might have asked her for it.  She said she would not have made any enquiry why the common seal was needed if any of the above had asked her for it. 

78.  It would be stretching belief to suppose that somehow, it had escaped the attention of every one – Ma Bo Kee, Cary Ma, Michelle Lam and Linda Ng – that the documents executed at Moulin’s office on 24 February 2005 were for a loan to Moulin, particularly as they had seen the common seal and company chop affixed to some of these documents and the signatures of Ma Bo Kee and Cary Ma appeared next to the common seal or in between the company chop.  

79.  I reject the contention that Ma Bo Kee and Cary Ma did not know they had executed documents relating to a loan to Moulin on 24 February 2005.

Were both sets of loan documents signed in an attempt to obtain an illegitimate form of double security

80.  Mr. Barlow asked the court to draw these adverse inferences against Active Base from its conduct:

(1) that the personal loan documents were executed by Cary Ma and Ma Bo Kee on 24 February 2005 in the presence of Irene Wong and Bosco Tso – from the evidence that on 25 February 2005 Moulin faxed to Active Base seven signed pages of two sets of loan documents, complete with the signatures of the three absent Ma directors, of which three pages related to a personal loan to Ma Bo Kee, and Irene Wong faxed all seven pages she received from Moulin to Bosco Tso;

(2) that Active Base had procured the Ma family directors to execute also the corporate loan documents on 24 February 2005 as “reserve security” which was to be kept secret until the right opportunity arose – from the evidence that Active Base did not issue any invoice or any demand in writing or take any action to enforce its security when interest was not paid on the due dates on 24 March 2005 and 24 April 2005, against public knowledge of the deteriorating financial position of Moulin as appeared from public announcements on 18 and 28 April 2005;

(3) that Active Base had concealed and suppressed the corporate loan documents – from the evidence that Moulin provided the Authorisation Letter authorising Active Base to date the Debenture, that the Debenture was not dated when it was executed by Irene Wong on 25 February 2005, and that neither Active Base nor Bosco Tso & Partners had ever provided Moulin with a set of the corporate loan documents executed by Active Base on 25 February 2005; and

(4) that Irene Wong wrongfully dated the Debenture “6 May 2005” on Monday 6 June 2005 – from the evidence that the first demand in writing for repayment on the Loan Agreement was on 30 May 2005, that the four post-dated cheques taken as security were presented for payment on Friday 3 June 2005 and were dishonoured on the same day or the following day, that Bosco Tso & Partners were replaced by the present solicitors for Active Base, and that the new solicitors were instructed to register the Debenture and this was done on 7 June 2005.

81.  Miss Chan relied on the statements of Ribeiro PJ in Nina Kung v. Wong Din Shin, supra. at 441I to 443F, paras. 185 to 187 of the need for a “disciplined approach” to the drawing of inferences, in particular for inferences for fraud or serious misconduct to be drawn only where such inferences are compelling, reflecting the principle in Re H & Others (Minors) (Sexual Abuse: Standard of Proof) [1996] 563 at 586E to H that when assessing the probabilities, the court will have in mind as a factor that the more serious the allegation the less likely it is that the event occurred and the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.

82.  Mr. Barlow submitted that the above approach of the Court of Final Appeal in Nina Kung v. Wong Din Shin should have no application to the present situation as that approach was premised on the basis that “many hypotheses may be put which the evidence does not exclude positively” (at 442A, in which dicta of the High Court of Australia in Luxton v. Vines (1925) 85 CLR 352 at 358 were cited).  In that situation, to give rise to a reasonable and definite inference, the circumstances appearing in evidence “must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture” and “it is not permissible merely to choose what may be considered to be the more likely of two guesses if neither is properly justified by the primary facts found” (at 442C to F, paras 185 and 186).

83.  In the present proceedings, he contended that the evidence does not involve multiple hypotheses.  There are only two logical possibilities to choose from, and each would necessarily involve dishonest or fraudulent conduct, namely, that either (1) the Ma family had uplifted the two sets of documents on 23 February 2005 and used the set of personal loan documents to defraud Active Base by trying to substitute the identity of Active Base’s debtor from Moulin to Ma Bo Kee; or (2) Active Base surreptitiously prepared and engineered the execution of two sets of loan documents to acquire an illegitimate form of double security by equipping itself with loan documentation that would enable Active Base later to elect which party it would characterise as the actual borrower.

84.  I do not read the approach of the courts in Luxton v. Vines and Nina Kung v. Wong Din Shin as being premised on and confined to a situation where the evidence has thrown up multiple hypotheses.  Even though there may be only two hypotheses to choose from, a disciplined approach is nevertheless required for a reasonable and definite inference to be drawn, particularly as both hypotheses would involve fraud or serious misconduct.  It is not permissible to choose between guesses, even where the possibilities are not unlimited, on the ground that one guess may seem more likely than the other (see the dicta of Dixon CJ in Bradshaw v. McEwans Pty. Ltd., unrep., High Court of Australia, quoted in Nina Kung v. Wong Din Shin at 442G to H).  I do not regard each of the above inferences put forward by Mr. Barlow as sufficiently compelling, or that the primary facts found would provide a logical and reasonable justification for concluding that a definite conclusion might affirmatively be drawn.  Further, even if I were to reject one of the two possible inferences as posited by Mr. Barlow, it does not follow that I must be driven to accepting the other inference.  Each must be considered and assessed on its own. 

85.  I will give an example to illustrate the difficulty of drawing a proper and definite inference in the circumstances of this case. 

86.  One of the primary facts found is that on 25 February 2005, Moulin faxed to Irene Wong seven signed pages of two sets of loan documents, of which three pages related to a personal loan to Ma Bo Kee and four pages related to a loan to Moulin, and Irene Wong faxed all seven pages she received to Bosco Tso.  On the basis of this primary fact, Mr. Barlow submitted it might be inferred that the personal loan documents were executed by Cary Ma and Ma Bo Kee on 24 February 2005 in the presence of Irene Wong and Bosco Tso.  This seems to me to be akin to surmise.  Having rejected this inference, it does not follow that the opposite inference should be drawn.  If the Ma family were minded to defraud Active Base by trying to substitute the identity of the debtor from Moulin to Ma Bo Kee, it is difficult to see why, before the proceeds of the loan were received by Oaktree, Moulin should fax the three pages of personal loan documents executed by the Ma family to Active Base. 

87.  I recognise the validity of the liquidators’ position it was unusual for Active Base to cause two sets of loan documents to be created for different borrowers and this called for a credible and cogent explanation.  Given that the loan documents were required to be ready within a short time, the liquidators queried why Active Base had adopted a course involving twice the work and twice the legal fees.  The point was also made that before the loan to Moulin was approved, Active Base did not conduct any due diligence.

88.  It is not in dispute that time was tight for the loan documents to be prepared.  On the evidence adduced by Active Base, no firm agreement was reached with Ma Bo Kee that the loan was to be made to Moulin until it was some time before lunch on 24 February 2005 and the documents were executed later that day.  If Bosco Tso were not instructed to prepare two sets of loan documents early on, it would not have been possible for the documents to be executed within such a short time once the identity of the borrower was ascertained.  I do not think the explanation given was inherently unlikely or unbelievable.

89.  As for the absence of due diligence, Yvonne Louie gave evidence that since 2001, she began to pay attention to newspaper reports and other public channels about Moulin’s business and strategic moves, as Moulin was the leader in the same field of business as Swank, in which Tomorrow had acquired a controlling interest, even though she did not see things in minute detail.  That was why she did not find it necessary to conduct due diligence in relation to Ma Bo Kee or Moulin before the loan was approved.  Further, due to the short period of the loan granted, it was not the practice of Active Base to review the security provided by the borrower or to check from time to time whether the value of the security would be deteriorating.  I accept her evidence in this respect. 

90.  Irene Wong and Bosco Tso gave evidence that before advancing the money, they did not clarify with Moulin why it had sent signature pages from both sets of loan documents on 25 February 2005.  Bosco Tso’s main concern was that the outstanding signatures for the corporate loan documents had been obtained, and he did not regard the signed pages of the personal loan documents as relevant or significant.  I do not find his explanation incredible. 

91.  Mr. Barlow attacked the explanation given by Irene Wong why Bosco Tso was asked to prepare the Authorisation Letter.  He submitted it was more likely than not it was obtained for a purpose, not as asserted by her that she remembered a similar document in previous transactions without being able to recall the reason for it and asked Bosco Tso to prepare one such in case.  Having obtained the Authorisation Letter, it was too much of a coincidence that she had somehow forgotten to date the Debenture notwithstanding she was told by Bosco Tso on 25 February 2005 it must be registered within five weeks until she remembered to do so on 6 May 2005 and the Authorisation Letter just came in handy. 

92.  Bosco Tso gave evidence he did not discuss with Irene Wong why the Authorisation Letter was required, he simply acted on her instructions.  He said she called him on 6 May 2005 seeking advice what to do as she had forgotten to date the Debenture.  He advised her to date it the current date and send it to him for registration.  Somehow, his staff did not arrange for registration for a whole month after receiving the document from Active Base. 

93.  The Authorisation Letter was meant to be used, otherwise the Debenture would not have the date left blank, unlike the other documents prepared by Bosco Tso which had the dates typed in.  I have reservations about Irene Wong’s evidence of the reason for obtaining the Authorisation Letter.  Even so, it does not follow that I must subscribe to the theory this was a plan to obtain an illegitimate form of double security in having two sets of loan documents in place.  On the available evidence, I do not think it appropriate to hypothesize what could be the reason behind the Authorisation Letter. 

94.  Mr. Barlow pointed out there is discrepancy in the evidence of Irene Wong and Bosco Tso as to when the latter was told that the loan documents were to be executed by the borrower.  Bosco Tso said in cross-examination there was an earlier telephone conversation he had with Irene Wong on 23 February 2005 when he was told about the likely dates of execution and drawdown, being 24 and 25 February respectively, which was not mentioned in Irene Wong’s evidence or in his witness statement.  This would mean that he had inserted the drawdown details of the loan plus 67 specific references to 24 or 25 February into the two sets of the personal and corporate loan documents sometime after 4:59 p.m. on 23 February 2005, for these documents to be collected by Moulin from his receptionist by 7 p.m.

95.  It is not impossible for Bosco Tso to insert the missing details in the two sets of loan documents in the space of two hours.  However, he could not explain satisfactorily why, on 23 February 2005, Irene Wong could have told him that the execution and drawdown would be on different dates.  There was no reason for her to think why these steps could not be done on the same day, but for the fact that it was only some time before lunch on 24 February 2005 that Michelle Lam fixed with Irene Wong that the loan documents were to be executed at around 4:30 p.m that day.

96.  I have doubts if the two sets of loan documents, with the specific date references in place, were provided to Moulin in the evening of 23 February 2005 as Bosco Tso had testified.  The personal loan documents were provided to Moulin, but I would not go further and surmise when that was done or in what circumstances.

97.  I decline to find that Active Base arranged for both sets of loan documents to be executed in an attempt to obtain an illegitimate form of double security.

Was the corporate loan vitiated by the lack of consideration afforded to Moulin

98.  I have found that Tomorrow transferred HK$50 million to the account of Oaktree by bank transfer on 25 February 2005.  This was fresh money advanced by Active Base pursuant to the Loan Agreement.  According to Yvonne Louie, the stated purpose for which the loan from Active Base was required was to complete Moulin’s acquisition of ECCA.  I have no reason to reject her evidence.  Further, in Mr. Pepper’s notes of the meeting on 2 June 2005, it was reported to him that the loan of HK$50 million was used for the acquisition of ECCA.

99.  Mr. Sutton gave evidence it is not possible to trace the ultimate destination of the HK$50 million transferred to the bank account of Oaktree.  According to his investigation, although Oaktree held a moneylender’s licence, it had no legitimate business and its primary purpose was a conduit for money to flow through to facilitate the trade finance fraud mentioned earlier.  At around the time the HK$50 million was paid into Oaktree’s account, there was another substantial receipt of HK$75 million.  The loan proceeds of Active Base became mingled with other temporary receipts and temporary payments of Oaktree before going through an inter-company loan account to MOML, the treasury company in the Moulin Group.  Six withdrawals, including an amount of HK$49.9 million, came out of the balance of HK$151 million in the Oaktree account.  Although Mr. Sutton conceived that some of the loan proceeds might have gone ultimately to Ample Faith, the entity through which Moulin injected its equity contribution of US$97.4 million in acquiring ECCA, he was unable to say how much of the loan proceeds, if any, was deployed in this way.

100.  Active Base had no reason to think that the proceeds were not used for the purpose for which the loan was obtained.  It had deposited the proceeds to the designated bank account of a wholly owned subsidiary of Moulin as directed by the borrower.  I do not think it material that a tracing exercise could not be carried out to determine if any part of the proceeds of the loan was used ultimately in the ECCA acquisition.  I decline to hold that the corporate loan was vitiated by lack of consideration afforded to Moulin.

Were the corporate loan documents signed by the Ma family directors without proper authority

101.  The next broad issue is whether the corporate loan documents were executed by the Ma family directors without proper authority.  Miss Chan submitted that they were executed with actual authority.  Alternatively, the Loan Agreement and the Debenture were executed in compliance with Bye-laws 104(2) and 134(1) of Moulin and, as such, were deemed to have been validly executed by the company and binding on the company.  Further, as the Loan Agreement and the Debenture were executed as a deed, they were deemed to have been duly executed pursuant to section 20 of the Conveyancing and Property Ordinance, Cap. 219.  In the further alternative, it was contended that the loan documents were executed with apparent or ostensible authority in that Moulin had, by its representations and conduct, represented to Active Base that Ma Bo Kee and Cary Ma had been authorised to execute the documents on behalf of Moulin, which representations and conduct were relied on by Active Base and Moulin was estopped from denying the validity of the Loan Agreement and the Debenture.

Moulin’s Bye-laws

102.  I will first set out the Bye-laws of Moulin relevant to these proceedings:

“General Powers of the Directors

104.  (2) Any person contracting or dealing with the Company in the ordinary course of business shall be entitled to rely on any written or oral contract of agreement or deed, document or instrument entered into or executed as the case may be by any two of the Directors acting jointly on behalf of the Company and the same shall be deemed to be validly entered into or executed by the Company as the case may be and shall, subject to any rule of law, be binding on the Company.”

“Borrowing Powers

110.  The Board may exercise all the powers of the Company to raise or borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to [the Companies Act 1981 of Bermuda, as amended from time to time; “the Act”], to issue debentures, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.

113.  (2) The Board shall cause a proper register to be kept, in accordance with the provisions of the Act, of all charges specifically affecting the property of the Company and of any series of debentures issued by the Company and shall duly comply with the requirements of the Act in regard to the registration of charges and debentures therein specified and otherwise.”

“Proceedings of the Directors

114.  The Board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it considers appropriate.  Questions arising at any meeting shall be determined by a majority of votes….

115.  A meeting of the Board may be convened by the Secretary on request of a Director or by any Director.  The Secretary shall convene a meeting of the Board of which notice may be given in writing or by telephone or in such other manner as the Board may from time to time determine whenever he shall be required so to do by the President or Chairman, as the case may be, or any Director.  Any Director may waive notice of any meeting either prospectively or retrospectively.

116.  (1) The quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be two ….

(2) Directors may participate in any meeting of the Board by means of a conference telephone or other communications equipment through which all persons participating in the meeting can communicate with each other simultaneously and instantaneously and, for the purpose of counting a quorum, such participation shall constitute presence at a Meeting as if those participating were present in person.

119.  A meeting of the Board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in or exercisable by the Board.

122.  A resolution in writing signed by all the Directors except such as are temporarily unable to act through ill-health or disability, and all the alternate Directors, if appropriate, whose appointors are temporarily unable to act as aforesaid shall (provided that such number is sufficient to constitute a quorum and further provided that a copy of such resolution has been given or the contents thereof communicated to all the Directors for the time being entitled to receive notices of Board meetings in the same manner as notices of meetings are required to be given by these Bye-laws) be as valid and effectual as if a resolution had been passed at a meeting of the Board duly convened and held….”

“Minutes

133.  The Board shall cause Minutes to be duly entered in books provided for the purpose:

…

(b) of the names of the Directors present at each meeting of the Directors and of any committee of the Directors;

(c) of all resolutions and proceedings of each general meeting of the Members, meetings of the Board and meetings of committees of the Board.”

“Seal

134.  (1) The Company shall have one or more Seals, as the Board may determine. … The Board shall provide for the custody of each Seal and no Seal shall be used without the authority of the Board or of a committee of the Board authorised by the Board in that behalf.  Subject as otherwise provided in these Bye-laws, any instrument to which a Seal is affixed shall be signed autographically by one Director and the Secretary or by two Directors or by such other person (including a Director) or persons as the Board may appoint, either generally or in any particular case, save that as regards any certificates for shares or debentures or other securities of the Company the Board may by resolution determine that such signatures or either of them shall be dispensed with or affixed by some method or system of mechanical signature.  Every instrument executed in manner provided by this Bye-law shall be deemed to be sealed and executed with the authority of the Board previously given.”

“Authentication of Documents

135.  Any Director or the Secretary or any person appointed by the Board for the purpose may authenticate any documents affecting the constitution of the Company and any resolution passed by the Company or the Board or any committee, and any books, records, documents and accounts relating to the business of the Company, and to certify copies thereof or extracts therefrom as true copies or extracts …”

“Signatures

163.  For the purpose of these Bye-laws, a cable or telex or facsimile transmission message purporting to come from a holder of shares or, as the case may be, a Director or alternate Director … shall in the absence of express evidence to the contrary available to the person relying thereon at the relevant time be deemed to be a document or instrument in writing signed by such holder or Director or alternate Director in the terms in which it is received.”

The actual authority case

103.  The power to borrow money and to charge any property of Moulin is conferred by Bye-law 110 on the board of directors.  The board can act in one of two ways, in a duly convened meeting at which a quorum is present (Bye-laws 115, 116 and 119) or by a circular resolution signed by all the directors (Bye-law 122).  Active Base relied on the Board Minutes as evidence of actual authority conferred on Ma Bo Kee and Cary Ma to execute the Loan Agreement and the Debenture.  It was stated in the Board Minutes that the meeting was held by telephone conference and attended by the five directors of the Ma family.  The meeting was quorate and directors may participate by telephone conference by virtue of Bye-law 116(2).  The Board Minutes were signed by Ma Bo Kee and Cary Ma on 24 February 2005.  The other three directors of the Ma family signed subsequently.  The signed copy with their signatures was faxed to Moulin’s Hong Kong office on 25 February 2005, and this is permitted under Bye-law 163.

104.  Notice of a meeting of the board of directors must be given to all the directors, for business done at a meeting of which some of the directors had no notice is invalid (Re Portuguese Copper Mines (1889) 42 Ch D 160; Young v. Ladies’ Imperial Club [1920] 2 KB 523).  Proper notice is a prerequisite of a validly constituted meeting (Barren v. Potter [1914] 1 Ch 895).  If no period of notice is prescribed by the articles, the period must be fair and reasonable and past practice is an important factor in determining this (Toole v. Flexihire Pty. Ltd. (1991) 6 ACSR 345 at 461).

105.  Katie Kan was not told of the purported board meeting in the Board Minutes.  She gave evidence that at no time during February 2005, or indeed at any other time, did she notify the board of directors of Moulin of any meeting to be called for the purpose of considering and approving a loan or debenture between the company and Active Base.  There was no record of any such board meeting in the minute book.  She also said that when she convened a board meeting, she would email each of the directors (there were ten directors at the material time) with notice of the meeting and agenda and later follow up with a telephone call or, for the executive directors working in Moulin’s Hong Kong office, with a personal visit.  That was her practice even for urgent meetings when only very short notice could be provided, such as the board meeting on 11 April 2005 when notice was given for a meeting held on the same day. 

106.  Katie Kan’s evidence was confirmed by Dicky Tong (an executive director), David Ng and Ivan Chan (two of the independent non-executive directors).  All three were not made aware of any board meeting intended to be held on 24 February 2005 and no notice of such meeting was received by them.  These directors further stated that they would not have approved the Loan Agreement and Debenture unless they had first satisfied themselves the terms were appropriate and in the best interest of Moulin and all relevant obligations of Moulin under the Listing Rules had been met.  Although a director may waive notice of any meeting either prospectively or retrospectively under Bye-law 115, there is no evidence that any of these directors had ever waived their right to receive notice.  I find that no notice of the purported meeting in the Board Minutes was given to all the directors.  As there was no properly notified board meeting, the case of express actual authority conferred on Ma Bo Kee and Cary Ma to execute the Loan Agreement and the Debenture is not made out. 

107.  Miss Chan contended in the alternative there was implied actual authority conferred on Ma Bo Kee and Cary Ma to execute the documents.  Authority to perform acts which are reasonably incidental to the proper performance of an agent’s duties will be implied unless expressly excluded and an agent who, on previous occasions, has been allowed to exceed the actual authority originally conferred on him may thereby have acquired actual authority to continue so to act.  The difficulty with that contention is that the borrowing power and the power to issue debentures is conferred on the board alone by virtue of Bye-Law 110, and it would be inconsistent with this provision to imply that some of the directors could exercise such powers without the authority of the board.  Active Base, through Bosco Tso, would have knowledge of this, as Bosco Tso had a copy of the Bye-laws when he prepared the loan documents and the draft Board Minutes.  It has been the case of Active Base all along that Bosco Tso was aware of the contents of the Bye-laws prior to the execution of the loan documents, in that Active Base has throughout placed specific reliance on Bye-laws 104(2) and 134(1).

108.  Furthermore, the grant of implied actual authority is subject to the implied restriction that the agent must not act dishonestly or otherwise in breach of fiduciary duties (Hopkins v. TL Dallas Group Ltd. [2005] 1 BCLC 543 at 573b to e, paras.[88] and [89]).  Here, the officers of Moulin who were involved in making arrangements for the loan from Active Base, being Ma Bo Kee, Cary Ma and Michelle Lam, had deliberately (I so infer) caused no notice of the board meeting to be given to the other five directors, who are not of the Ma family, to exclude them from considering if the Loan Agreement and Debenture should have the approval of the board.  I do not consider Ma Bo Kee and Cary Ma should have implied actual authority to execute the loan documents in these circumstances.

The due execution case

109.  Active Base argued in the alternative that it was entitled to assume that the Loan Agreement and the Debenture were validly executed and binding on Moulin for these reasons:

(1) the documents were signed by two directors jointly on behalf of Moulin and, as such, were deemed to be validly executed by and, subject to any rule of law, binding on the company pursuant to Bye-law 104(2);

(2) the documents were executed under seal and, as such, were deemed to be executed with the authority of the board of directors previously given pursuant to Bye-law 134(1);

(3) the documents were executed as a deed and section 20(1) of Cap. 219 provides in favour of a person dealing with a corporation in good faith that a deed shall be deemed to have been duly executed by the corporation, if the deed purports to bear the seal of the corporation affixed in the presence of and attested by, inter alia, two directors; and

(4) as a third party lender dealing with Moulin, Active Base was entitled to rely on the rule in Royal British Bank v. Turquand (1856) 6 E&B 327, also known as the “indoor management rule”, by which persons dealing with a company in good faith may assume that acts within its constitution and powers have been duly performed and are not bound to inquire whether acts of internal management have been regular.

110.  The above propositions are all subject to the condition that Active Base was dealing with Moulin in good faith and did not know or was not put on inquiry of the irregularity that there was no properly notified board meeting to approve the Loan Agreement and the Debenture and to authorise Ma Bo Kee and Cary Ma to execute the same.  A person contracting with a company cannot presume in his favour that things were rightly done if inquiry he should have made would inform him that they were wrongly done (Morris v. Kanssen [1946] AC 459 at 475; Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation [1986] 1 Ch 246 at 284C to 285B; Northside Developments Proprietary Ltd. v. Registrar-General (1989-1990) 170 CLR 146 at 160 to 161).

111.  The rationale of the Turquand rule and its application to lending institutions had been explained by Mason CJ in Northside Developments Proprietary Ltd., supra. at 164 to 165 in this way:

“What is important is that the principle and criterion which the rule in Turquand’s Case presents for application give sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes.  The precise formulation and application of that rule call for a fine balance between competing interests.  On the one hand, the rule has been developed to protect and promote business convenience which would be at hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments.  On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies.  Agency principles aside, to hold that a person dealing with a company is put upon inquiry when that company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is, in my opinion, to strike a fair balance between the competing interests.  Indeed, there is much to be said for the view that the adoption of such a principle will compel lending institutions to act prudently and by so doing enhance the integrity of commercial transactions and commercial morality.”

112.  I have found that on 23 February 2005, Michelle Lam faxed to Irene Wong a list of the ten directors of Moulin and Irene Wong sent this by fax to Bosco Tso.  Bosco Tso also knew it is a requirement of the Listing Rules that for a listed company, the board of directors must have at least three independent non-executive directors.  He was told by Irene Wong to draft for Moulin the minutes of a board meeting of Moulin passing resolutions to enter into the Loan Agreement and the Debenture and to authorise any two directors to sign the same.  Furthermore, he was informed that the board meeting was to be held by telephone conference on 24 February 2005 and that only the five Ma family directors would attend.  He was not asked to draft a notice for the board meeting.  When he went to Moulin’s office with Irene Wong at the late afternoon or early evening of 24 February 2005 for the execution of documents by Moulin, he was told by Michelle Lam that the board meeting had already been held.  He did not ask Michelle Lam at what time the board meeting was held that day.

113.  Bosco Tso made no inquiries of any one if notice of the board meeting was given to all ten directors.  When he was told that only the five Ma family directors would be attending a board meeting to be held by telephone conference, he did not ask about the other five directors, in particular the independent non-executive directors.  He claimed it was not a matter for him as to who would attend and his only concern was whether there was a quorum. 

114.  Irene Wong confirmed that she was aware that if Moulin wished to enter into the loan transaction with Active Base, the transaction must be approved by the board of directors.  She passed on the fax of Michelle Lam with the names of the ten directors to Bosco Tso.  She knew of the requirement for Moulin to have at least three independent non-executive directors as a listed company.  She knew also that only the five Ma family directors would take part in the board meeting by telephone conference, as she passed on this information to Bosco Tso to prepare the draft Board Minutes.  She did not make inquiries why the other five directors were not included in the meeting, claiming that the draft Board Minutes had been checked by Bosco Tso and it was his responsibility to attend to this. 

115.  The Ma family directors’ move to exclude the other half of the board from the purported board meeting should be viewed against the background that Bosco Tso was instructed to draft two sets of loan documents and it was not known until 24 February 2005 whether the loan would be made to Moulin or to Ma Bo Kee personally.  Furthermore, given that the meeting was intended to be held by telephone conference, it was odd, to say the least, that none of the other directors, who happened not to be of the Ma family, would not attend.

116.  If Bosco Tso and Irene Wong did not have actual knowledge the board meeting was not validly constituted, they were aware of facts which made it obvious that the purported board meeting might not have been properly notified, making it imperative for them to seek an explanation from Moulin before proceeding further.  They had been put on inquiry of the irregularity.  There was something intrinsically suspicious that Moulin had requested Active Base to prepare board minutes to be signed only by the directors related to Ma Bo Kee, who had requested for the loan to be made to him personally until he was turned down.  In failing to make inquiry at any time if notice of the board meeting was given to all the directors, Bosco Tso and Irene Wong were simply turning a blind eye to suspicious circumstances.

117.  Miss Chan relied on dicta in Barclays Bank plc v. Quincecare Ltd. [1992] 4 All E R 363 at 376e to f and 377b to f and Macmillan Inc. v. Bishopgate Investment Trust plc (No. 3) [1995] 1 WLR 978 at 1014G to 1015D to contend that the law does not impose too burdensome an obligation of inquiry on the lender, and that trust, not distrust is the basis of dealings with the customer or borrower.  I have borne in mind the guidance in the cases and the need to strike a fair balance between the competing interests mentioned earlier.  I do not think an inquiry in the present circumstances whether notice of the board meeting was given to all the directors would have hampered unnecessarily the effective transacting of lending business, or reduced greatly the benefit of the indoor management rule. 

118.  I hold that Active Base was not entitled to rely on the apparent regularity of execution of the Loan Agreement and the Debenture by virtue of Bye-laws 104(2) and 134(1), section 20(1) of Cap. 219, or the Turquand rule.

The apparent authority case

119.  In the further alternative, it was contended for Active Base that it could rely on the apparent authority of Ma Bo Kee and Cary Ma to execute the corporate loan documents.  Apparent or ostensible authority is the authority of an agent as it appears to others (Hely-Hutchinson v. Brayhead Ltd. [1968] 1 QB 549 at 583, per Lord Denning, MR).  It looks at the relationship between the third party and the principal and can lead to an outcome where a company is bound even though it has not actually authorised the agent.  Where an agent is acting within the usual authority of a person in his position, the third party will normally not be expected to inquire as to the details of his authority unless the transaction is abnormal or there are other circumstances giving rise to suspicion (Hopkins v. TL Dallas Group Ltd., supra. at 574b, paras.[92] and [94]).

120.  The four conditions for apparent authority were set out in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. [1964] 2 QB 480 at 506 by Diplock LJ, as he then was:

(1) a representation was made by the principal to the third party that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced;

(2) such representation was made by a person who had actual authority to manage the business of the company either generally or in respect of those matters to which the contract relates – an agent cannot by his own acts confer upon himself ostensible authority (Armagas Ltd. v. Mundogas SA [1986] AC 717);

(3) the third party was induced by such representation to enter into the contract, that is, he in fact relied upon it; and

(4) under its memorandum or articles of association, the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.

121.  Miss Chan submitted that the four conditions for establishing apparent authority are met in the present case.  She argued that there was a representation by the board of directors in the Board Minutes that any two directors had the authority to sign the Loan Agreement and the Debenture.  I have held earlier there was no properly notified board meeting.  Hence, there was no representation made by the board in the Board Minutes.  Ma Bo Kee and Cary Ma could not by their own acts confer on themselves ostensible authority.

122.  Miss Chan submitted further there was a representation that Ma Bo Kee and Cary Ma had authority to act in that the board of directors had, by conduct, allowed them to deal with all matters relating to fund raising and borrowing loans for Moulin including the question of fund raising pertaining to the acquisition of ECCA, without raising any protest or query.  Active Base had not made any loans to Moulin in the past, so there was no course of dealing between them.  There is no evidence that Active Base had knowledge that the board had allowed Ma Bo Kee and Cary Ma to deal with all matters relating to borrowing as alleged.  No proper inference can be drawn that Active Base was induced by this alleged representation or had relied on this in entering into the transaction with Moulin.   

123.  Furthermore, as I have held, Bosco Tso and Irene Wong were aware of circumstances giving rise to suspicion whether notice was given to all the directors for the meeting for which Active Base was asked to prepare the Board Minutes.  They were put on inquiry if the directors purported to have been authorised in the Board Minutes to execute the loan documents did have the authority claimed, and had turned a blind eye to suspicious circumstances.  In this situation, Active Base cannot rely on the appearance of authority of Ma Bo Kee and Cary Ma to execute the documents.

124.  The case on apparent authority also fails.  Thus, Active Base is unable to bring itself within any one of the three bases on which it contended that the Loan Agreement and the Debenture were executed with proper authority.  For this reason, the Loan Agreement and the Debenture are not valid and enforceable against Moulin and the liquidators were correct in rejecting the Proof of Debt.

125.  It is not strictly necessary to consider the issues that follow.  But in case I should be wrong if the corporate loan documents were executed without proper authority, and as detailed submissions were made to me, I will deal with them all the same.

Did Active Base waive its right to enforce the Debenture

126.  This issue may be dealt with shortly.  Under clause 19.02 of the Debenture, it was provided that “no failure or delay by the Lender in exercising or enforcing any right, remedy, power or privilege hereunder shall operate as a waiver thereof.” Active Base did not waive its right to enforce the Debenture.

Was the Debenture void under section 80(1) of Cap. 32

127.  Under section 80(1), every charge created by a company to which the section applies shall, so far as any security on the company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor unless the particulars of the charge, with the instrument by which the charge is created or evidenced, are delivered to the Registrar of Companies for registration within five weeks after the date of its creation.  Notwithstanding that the Debenture was subsequently dated 6 May 2005 by Active Base, it is now common ground that the Debenture was created on 24 February 2005, when the Debenture was delivered by Moulin to Active Base in escrow with the Authorisation Letter (assuming the corporate loan documents were signed with proper authority) (Alan Estates Ltd. v. W. G. Stores Ltd. [1982] 1 Ch 511 at 520F to G, 521A to C, 528B to C; Esberger & Son Ltd. v. Capital and Counties Bank [1913] 2 Ch 366 at 372).  The Debenture was not delivered to the Registrar for registration until 7 June 2005, outside the five-week period required by statute.

128.  It was however contended by Active Base that by virtue of section 83(2), the certificate of registration issued by the Registrar of Companies on 7 June 2005 under that provision is conclusive evidence that the requirements of Cap. 32 as to registration of charges, including the compliance with the time limit, have been met.  The provisions in Part III of Cap. 32, including section 83(2), apply to charges on property in Hong Kong created by a company incorporated outside Hong Kong which has a place of business here, by virtue of section 91.

129.  Miss Chan relied on In re C.L. Nye Ltd. [1971] Ch 442 as a case directly on the point.  There, an undated executed charge was delivered to the bank’s solicitor, it was stamped twenty days later, but was mislaid and not discovered until three months later.  The solicitor inserted the date of discovery as the date of execution and lodged the charge for registration, when the statutory time limit for registration had expired.  The charge was registered and a certificate was issued under section 98(2) of the Companies Act 1948, equivalent to our section 83(2).  The court below ruled that the charge was void against the liquidator, since the bank could not rely on the certificate and take advantage of its own wrong.  This was reversed on appeal.  In dismissing the liquidator’s application for rectification of the register, the English Court of Appeal confirmed the conclusive effect of the certificate, notwithstanding that the problem arose because of the negligence or omission of the bank’s solicitor.  The court did not consider the reason behind the failure to comply with the registration requirement to be relevant or applicable to disapply the conclusive effect of the certificate, even though the misdescription of the subject matter of the charge was due to the fault of the bank’s solicitor (at 469H to 470D, 475B to E, 477B to C).

130.  As pointed out by Miss Chan, the decision in Nye was supported by authorities decided both before and after it: In re Yolland, Husson & Birkett Ltd. [1908] 1 Ch 152; National Provincial and Union Bank of England v. Charnley [1924] 1 KB 431; In re Eric Holmes (Property) Ltd. (in liquidation) [1965] 1 Ch 1052; In re Mechanisations (Eaglescliffe) Ltd. [1966] 1 Ch 20; R v Registrar of Companies, ex p Central Bank of India [1986] 1 QB 1114; Re Lin Securities (Pte) Ltd. [1988] SLR 340; Exeter Trust Ltd. v. Screenways Ltd. [1991] BCLC 888; and United Overseas Bank Ltd. v. The Asiatic Enterprises (Pte) Ltd. [1999] 4 SLR 226.  The certificate and its conclusive effect provided in the statute are to protect the chargee (Charnley, supra. at 447 to 448).

131.  Miss Chan referred me to obiter dicta in various cases which suggested that different considerations would apply where the party submitting the documents and particulars for registration has committed a fraud: Charnley, supra. at 454, per Atkin LJ; Nye, supra. at 474F to G, per Russell LJ; Central Bank of India, supra. at 1177F to G, per Slade LJ and 1183B, per Dillon LJ; Sun Tai Cheung Credits Ltd. v. Attorney-General of Hong Kong [1987] 1 WLR 948 at 952H to 953B, per Lord Templeman.  Miss Chan suggested that the various dicta on the fraud issue might be reconciled with the decisions in Eric Holmes and Nye if “fraud” in this context is treated as meaning more than just submitting a charge for registration knowing that wrong information is given.  What is required should be a positive intention to defraud the Registrar of Companies or the creditors dishonestly, such as when a party provided false information knowing that he is not entitled to be registered and did so seeking to defraud creditors.  In that situation, the parties who actually suffered damage by the fraud would have a remedy against that person.  In this case, Active Base was not acting fraudulently in the sense suggested above. 

132.  Miss Chan also made the point that there is no legislative intent in the relevant provisions to protect the company in question, which remains bound by the debenture.  Here, Moulin knew that the Debenture was executed in escrow with authority given to Active Base in the Authorisation Letter to complete and insert a date later on.  Further, Moulin failed to have the Debenture registered pursuant to section 80(1) as it was obliged to do under section 81(1).  

133.  Mr. Barlow had no quarrel with Miss Chan’s submission that by virtue of section 83(2), the certificate conclusively deemed “all the requirements of [Part III of Cap. 32] with respect to registration have been complied with”.  He reasoned however the effect of this provision is to deem conclusively that the Debenture was created on a date within the five-week period of its registration on 7 June 2005, i.e. on a date between 25 April 2005 and 7 June 2005, notwithstanding it was actually created on 24 February 2005.  I agree with him. 

134.  Mr. Barlow further submitted that it does not avail Active Base even if it should be held in its favour that the Debenture was not void under section 80(1), as the Debenture was void under section 267 and none of the authorities cited by Miss Chan would assist Active Base with the statutory bar under section 267.

135.  I am in agreement with Mr. Barlow’s submission on section 267.  It is not necessary for me to express any view on Miss Chan’s suggestion how the “fraud” issue in this context should be reconciled in various cases and address this issue in the present fact situation.

Was the Debenture void under section 267 of Cap. 32

136.  Under section 267, where a company is being wound up, a charge which, when created, was a floating charge on the undertaking or property of the company and which was also created within twelve months of the commencement of the winding up shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, “except to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge”, together with interest on that amount at the rate specified in the charge or at the rate of 12% per annum, whichever is less.

137.  Mr. Barlow’s argument is as follows.  The Debenture was created within twelve months of the commencement of the winding up of Moulin and is caught by section 267.  Mr. Sutton has deposed that the Company was not immediately solvent after the creation of the Debenture and there is no challenge to this.  The only question is whether the Debenture is within the exception to that provision.  As mentioned earlier, the effect of the conclusive deeming provision in section 83(2) is that the Debenture was created on a date between 25 April 2005 and 7 June 2005.  The HK$50 million was advanced by Active Base by payment into Oaktree’s account on 25 February 2005, well before 25 April 2005.  There is a lapse of two months between the payment of cash and the creation of the Debenture.  No cash was paid to Moulin at the time of or subsequently to the creation of the Debenture on or after 25 April 2005, and in consideration thereof.

138.  Neither Mr. Barlow nor Miss Chan has addressed the court on the case law on this point, although Miss Chan has referred me to an extract in Hong Kong Company Law Handbook, 9^th ed., para. [267.05].

139.  The equivalent provisions in the English Companies Acts 1908 to 1948, which contained the same phrase “at the time of or subsequently to the creation of, and in consideration for, the charge” had been considered by the English courts, see In re Columbian Fireproofing Co. Ltd. [1910] 1 Ch 758 and on appeal [1910] 2 Ch 120.  It was held that the words “at the time of” the creation of the debenture do not mean contemporaneously with, immediately in exchange for the security, on the stroke of the clock or even within the same twenty-four hours.  Whether payment of cash was at the time of creation of the charge is a question of fact under all the circumstances of each particular case and what is the real substance of the transaction.  Neville J. said in [1910] 1 Ch at 765 that the word “time” in this connection “must always be to some extent indefinite, for the creation of the security and the payment of the money cannot be simultaneous”.

140.  In Columbian Fireproofing, the debenture was executed within 11 days from the date of the agreement to give security on a future date.  In a later case, Re F & E Stanton Ltd. [1929] 1 Ch 180, the delay was much greater in that no less than 54 days elapsed after the first advance and five days after the last advance, before the debentures were executed.

141.  The English statute has since been amended in that the exception is changed to read: “the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge” (section 245(2) of the Insolvency Act 1986).  This new provision was first considered in Power v. Sharp Investments Ltd. [1992] BCLC 636 and on appeal [1994] 1 BCLC 111.  In the English Court of Appeal, Sir Christopher Slade reviewed the previous decisions which were not binding on the court due to the amendment of legislation.  The salient propositions in that part of his judgment (with which Ralph Gibson LJ agreed in the entirety and Nolan LJ agreed subject to the reservation at 128e to h) may be summarised as follows:

(1) There is little material difference between the words “at the time of or subsequently to the creation of” in the old section and the words “at the same time as, or after, the creation of the charge” in the new section.  If the approach of Neville J and the Court of Appeal in Columbian Fireproofing was correct in relation to the old section, there is no sufficient reason why that approach should not be followed in applying the new section (at 122c to d).

(2) The approach in Columbian Fireproofing was wrong for two reasons:

(a)    It was based on the proposition that “a payment made on account of the consideration for the security, in anticipation of its creation and in reliance on a promise to execute it, … is made at the time of its creation within the meaning of the section” (per Neville J at [1910] 1 Ch at 765).  This proposition appears to treat the question whether the advance was in consideration for the charge as determinative of whether it was made “at the time of the charge”.  The words “at the time of, or subsequently to the creation of … the charge” were clearly included by the legislature for the purpose of excluding from the exemption the amount of moneys paid to the company before the creation of the charge, even though they were paid in consideration for the charge.  These words would have been surplusage if any other construction were to be adopted (at 122e to g).

(b)   The courts in Columbian Fireproofing failed to pay due regard to an important distinction between the two classes of case mentioned by Buckley J in Re Jackson & Bassford [1906] 2 Ch 467 at 476 to 477: (i) where the promise to execute a debenture creates a present equitable charge and is thus registrable; and (ii) where the promise to execute a debenture at some future time does not create a present equitable right to security, which would not require registration.  In the case in (i), the charge has already been created and is immediately registrable, other creditors will have had the opportunity to learn of its existence, and the delay between the advances made in reliance on the promise to execute a debenture and the execution of the formal instrument of charge is immaterial.  The temporal requirements of the relevant exemptions in section 212 of the 1908 Act and section 245 of the 1986 Act will be satisfied.  In the case in (ii), the existence of the promise to execute a debenture at some future time is irrelevant for the purpose of applying section 212 of the 1908 Act or section 245 of the 1986 Act and the statutory provisions governing the registration of charges.  If the making of the advance precedes the formal execution of the debenture by any time whatsoever, unless the interval is so short that it can be regarded as de minimis, the temporal requirements of the relevant exemptions in section 212 of the 1908 Act and section 245 of the 1986 Act cannot be satisfied (at 122g to 123b).

142.  I respectfully agree with this reasoning.  There is no injustice to the lender as it is always open to him not to lend until the charge has actually been executed (at 123h).

143.  There can be no suggestion here that a presently existing charge was created by the resolution in the Board Minutes.  It is the case of Active Base that the advance was secured, inter alia, by the Debenture, which was conclusively deemed to have been created on a date between 25 April 2005 and 7 June 2005.  The interval between payment of the money and the creation of the charge cannot be regarded as de minimis.  Here, the reason why the Debenture was conclusively deemed to have been created on a date that was not the date of actual execution was due entirely to the acts or omissions of Active Base.

144.  Active Base is unable to bring itself within the exception in section 267.  I hold that the Debenture is invalid under section 267.

Should the court exercise its discretion under section 86 of Cap. 32

145.  In view of the decision I have reached that the Debenture is invalid under section 267, there is no need to consider if discretion should be exercised under section 86(1) to extend time for registration of the Debenture.  In any event, as submitted by Mr. Barlow, the application to extend time is incompetent.  This was conceded by Miss Chan in her closing submission.  The opening words of this provision would preclude such an application, as under this provision, the discretion to extend time may be exercised if the court is satisfied, among other things, that “the omission to register a charge within the time required by this Ordinance” was accidental, or due to inadvertence or to some other sufficient cause, or not of a nature to prejudice creditors or shareholders, or that on other grounds it is just and equitable to grant relief.  Here, the Debenture is already registered and is conclusively deemed to have been validly registered as a debenture created on or after 25 April 2005.  Even if relief were to be granted, it is unlikely that the Registrar of Companies would allow re-registration of a debenture that is already registered.

Conclusion and costs

146.  For the above reasons, I dismiss the two summonses of Active Base and uphold the decisions of the liquidators in rejecting the Proof of Debt and in rejecting the claim of Active Base as a secured creditor.

147.  Costs of the applications should follow the event.  I make an order nisi that Active Base is to pay the costs of the respondents.