EX PARTE THE TRUSTEE OF THE PROPERTY OF THE ABOVE NAMED BANKRUPTS, THE OFFICIAL RECEIVER v. SPRINGBOK SHIPPING (HK) LTD AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

IN BANKRUPTCY

NO. 69 OF 1992

AND

NO. 71 OF 1992

-----------------

-----------------

-----------------

DECISION

-----------------

1. This is an application by the Respondents to vary Orders which I made ex parte on the 6th October 1995. The ex parte orders were made against 6 Respondents. They were of the Mareva variety and contained ancillary orders, primarily relating to disclosure.

2. Underlying the Respondents' case is the submission that although the Applicant may have a case for relief in the nature Mareva injunctions the Orders granted went too far in some respects in that they covered things which on the Applicant's case were either beyond what it was entitled to or were unnecessary.

The Facts

3. It is necessary to give a brief overview of the facts of the case. In doing so I should emphasise that this is on the basis of the evidence at present. It is therefore only a provisional assessment based on the current state of the evidence.

4. The Bankrupts in this case are a Mr. Tay, and a Sze. Together with a Mr. Hung they had been running what is called the Dawin Group of companies. Mr. Tay seems to have been the leading protagonist. Indeed, I would go so far as to say that it seems to be primarily Mr. Tay against whom the allegations are made. There were apparently complaints as to their management of the companies, to put it at its lowest. In order to allay the anxiety that this was causing, these gentlemen signed a promissory note on the 7th December 1989 for $12 million in favour of Dawin Holdings Ltd. That was to mature on the 31st December of the following year.

5. It is said that in the intervening year these gentlemen, and again primarily Mr. Tay, made preparations with a view to making their assets "judgment proof". Central to these preparations was, apparently, the 1st Respondent.

6. The 1st Respondent is a trading and shipping company. It also owns significant property. It had been set up in 1986. It only had 2 shares one was held by Mr. Tay and the other by Mr. Sze. Madam Lim, the 4th Respondent, who is Mr. Tay's wife became a director of the 1st Respondent in 1988. However, it seems that she has never taken any part in the running of the business.

7. The steps that are said to have been taken include the purchase of a flat in Begonia Mansions in the names of the 4th Respondent's and Sonia Tay, the 5th Respondent, who is Mr. and Mrs. Tay's daughter. It is said that the money for this was remitted from Liechtenstein. The remittance was part of a larger amount, the bulk of which ended up as payment for allotment of shares in the 1st Respondent. Those shares were allotted to Choi Hak Shun, the 2nd Respondent.

8. There is no direct evidence that this was Mr. Tay's money. It is said to have been Mr. Tay's money because he had once expressed Liechtenstein to be a banking location which he favoured. The conclusion that it was his money that was remitted is on the face of it more probable than the 5th Respondent's version that the money came from her Uncle overseas, who was so taken by his niece that he gave her the money for the down payment on the flat and apparently many of the instalments. It is also more probable than Mr. Choi's version. Mr Choi is said to be a man of limited means. Mr. Tay's share in the 1st Respondent was transferred to him in March 1990. He apparently has given the explanation at his examination, in 1994, that the money to pay for the allotment of the remainder of his shares had come from a friend Mr. C.B. Lim. I do not intend to dwell on Mr Choi's explanation. For the purposes of this hearing it can be said that it was not very satisfactory. That, of course, does not mean that what is said against Mr. Choi is necessarily true. However, I consider it right to proceed on the basis that it is at least arguable that the shares allotted to Mr. Choi were paid for with Mr. Tay's money.

9. Not only was money remitted from Liechtenstein but Mr. Tay's house in Singapore was sold in July 1990. The proceeds ended up being used, apparently, for the allotment of shares in the 1st Respondent to Kwang Feng Ltd., the 3rd Respondent. That allotment took place in January 1991. The 3rd Respondent is owned by a Mr. Edward Tan and his wife who live in Singapore. The shares in the 1st Respondent were transferred to Mr Tan in September of last year. Again I feel I need say no more than that I consider there is at least an arguable case that those shares belong to Mr. Tay.

10. The result of these transactions which I have sought to summarise very briefly is that the Mr. Tay the bankrupt, is living in comparative affluence. He resides with his wife and daughter at Begonia Mansions. He has at his disposal the use of 2 cars. A Bentley Mulsanne purchased by the first Respondent in 1993 and a BMW purchased by the 6th Respondent. A great deal of suspicion overhangs the provenance of the mortgage instalments which are paid in respect of the residence. In the meantime the 1st Respondent goes from strength to strength in business terms with its turnover appreciating considerably.

11. One matter which I would refer to briefly are the premises which are owned in the name of the 1st Respondent. There are 3 flats on 2 floors in Bupa Centre. These were purchased in 1989 with a mortgage from the bank. It is fortunate that the value of these seems to have appreciated considerably. At this stage of the proceedings I do not consider that there is anything untoward in the manner of their purchase. Whilst it might legitimately be argued on the basis of the evidence as it stands to date that the 1st Respondent itself is an asset of Mr. Tay, I see nothing to suggest that the Bupa Centre assets of the 1st Respondent are Mr. Tay's assets as opposed to the 1st Respondent's. There is nothing as it seems to me to suggest that Mr. Tay allowed his own money to be used to enable the purchase of the Bupa Centre premises. The purchase money seems to have come as I say from the 1st Respondent's assets and finance. Whilst the purchase took place shortly before the signing of the promissory note again I do not consider that the surrounding facts give rise to the drawing of an inference at this stage that there was anything surreptitious or underhand in the purchase.

The Applications to vary

12. In view of the multiplicity of the parties and the different circumstances pertaining to them and the different nature of the applications made I propose to consider the applications in relation to each Respondent in categories.

1st Respondent

13. The Order made against the 1st Respondent was to prevent it from charging or drawing down further sums on the security of the Bupa Centre properties and the On Shun Building. Whilst it is not in terms the same as a Mareva injunction it amounts to much the same thing in view of the fact that the 1st Respondent in effect runs its business on the basis of money borrowed on the security of its property. The exact terms of that injunction were:

14. The 1st Respondent seeks the variation of that to allow it to operate. The evidence as to the 1st Respondent's activities come primarily from its accounts. From what I can determine it is operating successfully. Its turnover, as I have already indicated, has increased substantially over the years.

15. As I have indicated I consider that the Bupa Centre properties were purchased by the 1st Respondent in the normal way and I do not consider that there is anything that can be said at the moment about their acquisition which shows that they should be regarded as belonging to Mr. Tay. With regard to the On Shun premises the evidence on this is that it was acquired at an undervalue from Mr. Hung, the other bankrupt. For that reason the Official Receiver has indicated his intention to apply to set aside the transfer to the 1st Respondent. In those circumstances, although there is clearly suspicion that Mr. Tay has rather more to do with that transaction than meets the eye, there is no direct evidence from which I consider that I should draw the inference that the On Shun property should be safeguarded to meet the claims of the present Applicant who is the trustee of Mr Tay and Mr. Sze. If the Official Receiver is successful in his application to set aside the conveyance no doubt even further applications will be made. In the meantime I am satisfied that the position is adequately safeguarded.

16. There are suspicious circumstances that occurred particularly in and about 1990 with regard to the 1st Respondent's accounts. In particular, from the accountant's working papers it has been found that substantial credit balances appeared in favour of a number people as set out in paragraph 24 of Mr. Woodehouse's affidavit. Some of Mr. Tay's money also appears to have been channelled through the 1st Respondent for example relating to part of the payment for the Begonia Mansions.

17. Mr. Fitzpatrick on behalf of the Official Receiver sought to support the Mareva Injunction and the ancillary order on the basis that 1st Respondent was used by Mr. Tay as the repository for all or at least a substantial proportion of his assets and that as such the 1st Respondent should be regarded as trustee holding all its assets for the Applicant. I do not consider that is made out at all. On the basis of the voluminous evidence that has been presented I consider that there has been at least an arguable case made out that the 1st Respondent was an asset of Mr. Tay and probably the major asset. As Mr. Poon pointed out, thought, that is a very different thing from saying that all the assets of the 1st Respondent belong to Mr. Tay. A shareholder has no right to the assets of the company in which he holds the shares even if he is to be regarded as the sole shareholder. He may have a right to those assets if it can be shown that the company is holding them on trust for him. This might arise if there has been a transfer from the shareholder at an undervalue or for nil consideration. That has not been shown here. Neither do I lose sight of the fact that the shareholder has rights to the proceeds on a winding-up.

18. As such, therefore, I consider that the primary argument put forward by the Applicant for the injunction is misconceived. Nevertheless, as I have said if one regards the 1st Respondent as being a major asset to which the Applicant is entitled to have recourse; then I consider it appropriate that the position be safeguarded. As I have said there are a number of instances where the transactions of the 1st Respondent are open to a great deal of query. I approach this matter on the basis that I consider it clearly arguable that those who are running the 1st Respondent are doing so at the behest of Mr. Tay. The operations appear to be successful at the moment. It seems to me that in any trading situation there is always a balance to be made between taking a business risk and recklessness. In the present situation there is also the position to be catered for that false book entries may be made indicating balances in favour of people not entitled to them.

19. I consider that in the circumstances of this case since the shares in the 1st Respondent appear to be a very major part of the property which can arguably be said to belong to Mr. Tay there are clearly grounds for saying that it is appropriate to allow the joinder of the 1st Respondent and the imposition of some form of Mareva injunction relief designed to preserve the value of the company and thus its shares.

20. With an individual or a company whose function is simply to hold property, the imposition of an injunction preventing the disposal of assets may be a matter which can be imposed and regulated without causing undue damage. In respect of a company whose purpose and function is to trade and whose existence clearly depends on continuing the business, I find the matter more difficult. Whilst the Applicant is prepared to leave the control of that company in the hands of others it must to, a certain extent, abide by the commercial risks inherent in that. I consider that the Applicant has made matters more complicated in a number of respects by not taking steps to try and wrest control of the 1st Respondent into his own hands.

21. I agree with Mr. Poon that it is inappropriate to injunct dealing in the assets named in paragraphs 1 and 2 of the Order namely the premises and the car. These have not been shown to belong to Mr. Tay. On the present state of the evidence I do not, as I say, draw the conclusion that the Applicant has a claim over them per se. On the other hand they together form a major part of the net worth of the 1st Respondent. It is, it seems to me, impracticable to grant an injunction relating to the net worth of the company. That no doubt varies from time to time. In the circumstances of this case I consider that practical protection of the value of the 1st Respondent can be achieved by limiting the borrowings that it may make. That in itself would only be effective provided the major asset remained in the ownership of the 1st Respondent. The overall effect is possibly similar to that of the Order already made but the means by which that effect is achieved is different.

22. I consider that there is a balance which must be struck. In striking that balance I bear in mind that I have been given relatively little information by the 1st Respondent about its activities and in particular its capital requirements. I consider that the 1st Respondent should be permitted to extend its borrowings up to $500,000 above the amount at which they stood on the date the original injunction was granted namely the 9th October 1995. Included in the Order will be a provision that the 1st Respondent shall give the Applicant 7 days notice in writing prior to disposing of any interest in any of the properties. There must of course be liberty to apply.

23. I do not propose to continue any Order in respect of the Bentley motor car. There are 2 reasons. In the first place from the evidence about it I am not prepared to draw the inference, and it must be an inference as there is no direct evidence, that the Bentley was purchased with Mr. Tay's money. It seems to have been purchased out of the trading profits of the 1st Respondent. Moreover, I regard it as a wasting asset. I understand that it is now approximately 8 years old. It might seem therefore it is at a stage where it is losing value and the time when it would gain value because of its age is still many years off. Whilst it might be said that quality cars are reliable and do not break down, it is also true that a considerable amount of money is required to keep them in a state where they will not break down. Thus if the 1st Respondent sees fit to dispose of it I, for one, do not see that I should make any order to stop that.

Application by the 3rd Respondent

24. The 3rd Respondent seeks the discharge of the whole of the ex parte Order made on the 6th October. I consider that this can be dealt with shortly.

25. The first part of the Order prevented the 3rd Respondent from dealing with the shares which it held in the 1st Respondent. There were clearly grounds for seeking the Order in the first place. Mr. Tan Cher Sia who claims to be the person behind the 3rd Respondent has made an affirmation in these proceedings. It is concisely stated that the shares in the 1st Respondent were held as bare trustee for Mr. Tan and they have now been transferred to him. Whatever the correctness of the underlying transaction it seems that the shares have indeed been transferred. I regard the effect of that part of the Order as spent. Nevertheless, I do not think it right to discharge it. The whole arrangement is shrouded in obscurity. The Official Receiver is at pains to argue that it is part of an intricate web designed to leave Mr. Tay living in comparative luxury whilst his debts go unpaid. It is said with considerable substantiation that the original payment for the shares in the 1st Respondent came not from Mr Tan but from the sale of Mr. Tay's house in Singapore. The true facts have yet to be unravelled. Until this Court has been able to make concluded findings of fact as to ownership of all assets there must be a danger of some of the assets slipping out of the insolvency net. In the meantime, I do not see any necessity in discharging this Order. If it has anything to bind on, so much the better. If all the shares have indeed irrevocably been transferred then there is nothing now for the injunction to bite on.

26. The disclosure part of the Order seems to me be have been complied with by the Affirmation of the 19th October 1995. The fact that the affirmation has been provided subsequent to the making of the Order does not, it seems to me, constitute good grounds for discharging the Order. I see no purpose in requiring a yet further affidavit.

Application by the 6th Respondent

27. The 6th Respondent also seeks the discharge of the whole of the Order made against it.

28. The first part of the Order prevented the 6th Respondent from disposing of a BMW motor car. The second part required disclosure by the 6th Respondent of all its assets.

29. At its inception the 6th Respondent appears to have been another of Tay's companies. The evidence at the ex parte stage presented the company as being owned by the 2nd and 7th Respondents. Again, it was not difficult to see that the inference could be drawn that it was a subterfuge for disguising the fact that Mr. Tay was the true owner of the company. That inference was all the easier to draw on the basis that Mr Tay had claimed to be currently employed by the 6th Respondent. Moreover the major point made about the company was that it owned the BMW car which seemed to have been something primarily there for Mr. Tay's benefit.

30. The evidence now shows that 9998 shares were issued and allotted to yet another company, Springbok Group Ltd and now all the shares in the 6th Respondent were either owned directly by or held in trust for Springbok Group Ltd. Whether that latter company is really another asset of Mr. Tay will no doubt fall to be determined at a later date. Whilst the Applicant has pointed to some factors which would give rise to such a suspicion I have to say that at the moment I am not prepared to draw that inference.

31. Be that as it may, it emerges from the documents which have been filed that the 6th Respondent is a trading company. The BMW was from the accounts only recently purchased and there is no reason to suppose it was purchased other than from company profits i.e. the fruits of the company's efforts. The basis for saying that there is a tracing claim against the BMW as being one of Mr. Tay's assets seems to stem from the history of the company and the fact that the car is at his disposal. At this stage, suspicious though the circumstances may be, I do not consider it right to draw the inference that the BMW is in reality an asset held for Mr. Tay.

32. Moreover, as with the Bentley, the wisdom in preventing a sale of the BMW is not something which appeals to me. Its cost appears to have been $420,000 and the book value is being depreciated at a straight line 20%, i.e. $84,000 per year. Whilst the depreciation allowance may be generous, it is still reflective of the depreciating nature of the value of the asset. To compel the company to keep it in aid of helping Mr. Tay's creditors seems to me to be folly. If the car is sold the value will still be there unless, of course, it is lost in trading. If and in so far as the 6th Respondent is allowed to trade whether or not under the aegis of the Applicant, the risk of trading losses being made is something that will always be there.

The Disclosure Orders

33. Against each of the Respondents broad disclosure orders have been made. The Orders require each of the Respondents to identify and disclose all their assets within the jurisdiction. The Respondents seek to have those Orders discharged. It will be more convenient to deal with the different Respondents in groups. I would say as a general proposition that such Orders may be appropriate where the person of whom the disclosure is required has himself incurred the primary liability but, at first blush, they do seem somewhat broad when it is remembered that the individuals themselves have incurred liability primarily as the holders of assets of another who has incurred such liability.

34. I have already dealt with the position of the 3rd Respondent as regards the disclosure and in view of what has happened I do not propose to discharge it or to make any further Order.

The 1st Respondent

35. The 1st Respondent seeks to discharge the Order for disclosure on the basis that although it is, in itself, arguably an asset of the Bankrupt Mr. Tay its own assets have not been shown to belong to him as opposed to the Company. That in itself would appear to accord with the facts as they emerge at present. Moreover, on the basis of what is said in SCF Finance v Masri [1985] 1 WLR 876 3 things must be shown in order to satisfy the test of discovery in aid of a Mareva injunction against a company. The first is that there are insufficient assets of the Defendant to satisfy the outstanding judgment, the second is that the Company is under the control of the Defendant and the third is that the Company has acted as the repository of the assets of the Defendant. The Respondents' argument was that in so far as there were assets of the Bankrupts these were primarily the Companies and the Applicant was fully protected.

36. Whilst I see the force of the argument that the assets are all covered in view of the fact that they are primarily held within the Company or are otherwise covered by injunctions which are not resisted, I see the need for some form of disclosure order to aid the injunction which I am prepared to grant. Whilst the Applicant may have secured or at least be in a position to secure effective control over the shares of the Company there is still as I have alluded to already a danger in view of the fact that the Company is allowed to trade. Nevertheless, it seems to me that it is excessively onerous to grant a disclosure order which covers all the company's assets in circumstances where the company is an active trading company. If the existing state of affairs is to be allowed to continue then the risks inherent in that will have to borne. I consider it is appropriate nonetheless to require the 1st Respondent to give disclosure of its major assets in order to try and hold the balance to ensure that there is no large scale dissipation of assets prior to conclusion of the proceedings. The disclosure required under paragraph 3 should in my view be limited to assets worth more than $50,000.00. It will further be unnecessary for the 1st Respondent to deal with the 4 properties that were listed in the original paragraph 1 of the Order or the Bentley car since enough is known of these already.

The personal Respondents

37. In respect of the personal Respondents it is said that the subject matter of the proprietary claims against them are all subject to injunctions and will be available to satisfy any judgment. That seems to me to be correct. But there is in any event a further point which also indicates to me that disclosure orders against these parties are unnecessary particularly in the breadth which I gave at the ex parte hearing. These are of course bankruptcy proceedings. The Applicant has at his disposal the added armoury of examination under Section 29 of the Bankruptcy Ordinance. There has been extensive use of those powers already. The information which the Applicant seeks seems to me far more appropriate to be sought on such applications rather than in ancillary orders to a Mareva Injunction which are there first and foremost to ensure the proper effectiveness of the injunction order rather than to unearth evidence to be used to found further claims which the submissions on behalf of the Applicant would lead to the belief is, at least, a primary object of the exercise.

The 6th Respondent

38. As I have outlined the case in respect of the 6th Respondent is far more tenuous than that against the 1st Respondent. The only asset of the 6th Respondent in respect of which a claim was made was the BMW motor car. As I have indicated this seems to me on the basis of what is known at present to have been acquired on the strength of earnings of the 6th Respondent and I do not see it right at the moment to draw the inference that the car was bought with Mr Tay's (or Mr Sze's) money. I do not consider at the moment therefore that I should allow what is the heavy burden of making an affidavit of disclosing all assets to be placed on the 6th Respondent.

Amendment to the Notice of Motion

39. The Applicant seeks to amend the Notice of Motion by adding prayers for relief in respect of a number of other matters. Whilst I see the force of the Respondents' arguments that there is apparently no evidence to support the claims upon such amendments are based, I do not think it is right at this stage not to allow the amendments. The amendments really are more in the nature of brief endorsements on a Writ rather than pleadings. The stage for detailed evidence has not yet come. The claims in any event are really so joined with other claims that have been made and will in any event be litigated that I look upon them as no more than an encapsulation of the way that the ultimate relief sought may be framed. I do not propose to debar the Applicant at this stage from adding these prayers.

40. Whilst apologising to the parties for the time which it has taken me to produce this Decision which has been necessitated primarily by the need to devote sufficient continuous periods of attention to the papers, it has, I hope, resulted in a slightly shorter decision than otherwise might have been the case. I shall make an Order Nisi that costs shall be in the cause and I shall ask Counsel to try and agree a draft Order to submitted to me. In default of agreement the matter can be mentioned before me.