RE FIDELITY DISTRIBUTORS (HONG KONG) LTD

HCCW 310/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 310 OF 2007

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D E C I S I O N

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1.  This is an application made ex parte by the provisional liquidators of Fidelity Distributors (Hong Kong) Limited (“the Company”) under section 200(3) of the Companies Ordinance, Cap. 32 and the inherent jurisdiction of the court, for an order to provide for the payment of the costs and expenses incurred in investigating and ascertaining the entitlement to a sum of US$25,766 (“the Subject Funds”) out of the Subject Funds, similar to an order I made in Re Cresvale Far East Nominees Limited, HCMP No. 3019 of 2004, 30 November 2004.

2.  Notice of this application was given to the only interested party, Fidelity Distributors, Inc (“FDI”), a corporation organised under the laws of the State of New York.

3.  The application could have been disposed of quite shortly, as I am in no doubt that relief should be granted to the provisional liquidators as sought. But in view of the correspondence exchanged between the provisional liquidators and the solicitors for FDI, and the submissions made by counsel of FDI in this application, I should give more detailed reasons to clear the air and, hopefully, direct this dispute on the right track.

4.  I first set out the relevant background matters.

5.  The Company was petitioned to be wound up by the Bank of China (Hong Kong) Limited on 9 July 2009. The winding-up order was made on 19 September 2007. The provisional liquidators were appointed by the Official Receiver on the same day under section 194(1A).

6.  The principal activity of the Company according to the latest audited financial statements for the year ended 31 December 2003 was general trading. The provisional liquidators have not been able to locate the directors of the Company. No statement of affairs of the Company has been submitted. No books and records of the Company are available to the provisional liquidators, other than what they have been able to obtain from external sources.

7.  On 21 September 2007, the solicitors for FDI wrote to the Official Receiver claiming that by a genuine mistake, FDI remitted the Subject Funds to the Company’s bank account with the Shanghai Commercial Bank Limited (“SCB”) and seeking return of the same to FDI.

8.  From October 2007 to December 2008, there was extensive correspondence between the solicitors for FDI and the provisional liquidators. In summary, the provisional liquidators sought documents and information from FDI for them to investigate FDI’s entitlement to the Subject Funds. They also sought and obtained documents from SCB. FDI’s solicitors provided the provisional liquidators some documents and information but steadfastly refused to provide any further documents asserting that they have submitted sufficient proof of FDI’s entitlement. The provisional liquidators’ solicitors took over the correspondence in January 2009.

9.  The provisional liquidators are clearly under a duty to investigate properly the claim of FDI to the Subject Funds. It is equally clear that costs and expenses in doing so have been incurred, and will continue to be incurred unless I were to rule today there ought to be no dispute to FDI’s entitlement. For reasons to be set out, I reject FDI’s contention there should be no dispute to its entitlement.

10.  Realisation of the assets of the Company by the provisional liquidators is nearly completed. The free asset of the Company, excluding the Subject Funds, available for distribution is nil. Hence, this application was taken out on 30 January 2009. The delay in dealing with this was due to the extensions of time obtained by FDI to file evidence in opposition in this application. In the end, FDI chose not to put in any affirmation by its director or responsible officer and only an affirmation was made by its solicitor, who is in no position to depose to matters not within his personal knowledge and who has not disclosed the source of his information and belief. That affirmation is wholly unsatisfactory.

11.  If the Subject Funds do form part of the free asset of the Company, there would be no problem in the provisional liquidators resorting to the Subject Funds to meet the costs and expenses incurred in investigating FDI’s entitlement thereto.

12.  However, if the Subject Funds should be held not to form part of the free asset, the provisional liquidators would have a problem as they are not allowed to use the free asset of the Company (which is nil anyway) to meet the costs incurred in connection with assets that do not form part of the estate of the Company (Re Berkeley Applegate (Investment Consultants) Limited (No. 3) (1985) 5 BCC 803 at 805D to G).

13.  The prudent thing for the provisional liquidators to do is to seek a form of order sanctioned in Re Berkeley Applegate (Investment Consultants) Limited [1989] 1 Ch 32, which was made in situation similar to the present circumstances in Re Telesure Limited [1997] BCC 580 and in Re Cresvale Far East Nominees. So if it should be found that the Subject Funds are trust assets (the Company would be holding the money on resulting trust for FDI if the money was remitted to the Company’s bank account by FDI by a mistake of fact), the provisional liquidators’ expenses in investigating FDI’s entitlement would be protected and could be paid out of the trust assets.

14.  The task of investigating properly FDI’s entitlement would have to be carried out by someone. It is only proper that the proper expenses in carrying out such work should be borne by the trust assets, if the Subject Funds should be held to be trust assets.

15.  Ms Rita So, who appeared for FDI, submitted that a Berkeley Applegate order should not be made, citing certain parts in paragraph 16 of my decision in Re Goodway Limited, HCMP No. 162 of 1998, 26 September 2008, which are lifted wholly out of context. Re Goodway has nothing to do with the expenses of liquidators or the provisional liquidators in investigating a claim to a fund said to be paid under a mistake of fact. I do not see how it may go against the obligation of the provisional liquidators to act with fairness and impartiality as an officer of the court to seek a Berkeley Applegate order in this instance.

16.  I fail to see the relevance of the other decision cited by Ms So, Re Crownhall Investment Limited [1992] 1 HKC 137, to this application.

17.  To recap, even if I were to rule in favour of FDI at this hearing that it is indeed entitled to the Subject Funds, I am inclined to think the circumstances are appropriate for an order to be made along the lines of Re Cresvale Far East Nominees as sought by the provisional liquidators in paragraph 1 of the summons. The opposition to the application is misconceived.

18.  I turn to consider the matters relied on by FDI to contend that there should be no dispute to its entitlement to the Subject Funds.

19.  Much was made by FDI in the correspondence of its solicitors and in Ms So’s submissions of these events:

(1) The Subject Funds were remitted by FDI to the Company’s account at SCB on 11 May 2007.

(2) The payment was converted into Hong Kong dollars and credited into the Company’s account at SCB on 14 May 2007.

(3) On 15 May 2007, FDI through its bank in the United States, Keybank National Association (“Keybank”), informed SCB that the remittance was in error.

(4) On 22 May 2007, Keybank sent another text message to SCB requesting the latter to consider the remittance null & void as payment was sent in error and asking SCB to urgently return the funds.

(5) SCB’s position was that the remittance was completed in strict and full accordance with the instruction it received and it is not obliged or legally entitled to rescind the transaction as requested.

(6) The winding-up petition was presented by a creditor of the Company on 9 July 2007.

(7) SCB informed FDI’s solicitors of the winding-up petition on 20 August 2007.

20.  It was contended on behalf of FDI that the request for return of the money remitted was made promptly, and this took place well before the presentation of the petition and before FDI was made aware of the petition.

21.  To substantiate its case that the money was made by mistake, FDI asserted, by the letter of its accountant dated 17 December 2007 that prior to October 2005, it used the Company as a supplier but had ceased doing business with the Company in October 2005. Instead, in September 2005, FDI began doing business with a new supplier named Fidelity Distributors (Asia) Limited (“FDA”).

22.  The provisional liquidators noted a number of matters in the available documents and information that warrant further investigation. There was the similarity in the names of the Company, FDI and FDA. The provisional liquidators needed to know the relationship, if any, between these entities with similar names. As mentioned earlier, they have no books and records of the Company and have not been able to locate the directors. FDI’s solicitors had sought to explain why FDI chose to deal with FDA instead of the Company. One of the reasons given was that the name of FDA closely resembled the Company and it was considered this arrangement “would cause least speculation from [FDI’s] clients in term of supply chain integrity.” This explanation naturally raised the question of what connection there was between these entities with similar names, which has not been answered satisfactorily in the long letters of FDI’s solicitors.

23.  The provisional liquidators also noted from the remittance advices supplied by SCB that the last payment received by the Company from FDI was on 7 July 2005, excluding the remittance of the Subject Funds on 14 May 2007, whereas FDI had been doing business with the Company up to October 2005, according to the letter provided by FDI’s accountant. There was apparently no payment for services rendered by the Company to FDI from 7 July 2005 to October 2005. The provisional liquidators have requested for documents from FDI being statements showing sales and payments between FDI and the Company in 2005, including invoice numbers, amounts and dates of remittance. This was refused by FDI’s solicitors.

24.  The provisional liquidators reasoned that if remittance was indeed an error and that payment should have been made to FDA (I note in the letter of FDI’s accountant, it was not even asserted that FDA was the intended recipient of the Subject Funds, FDA was only stated to be the new supplier), there should be documents from FDI to FDA in respect of the transaction for which payment was made, such as invoices to be paid, payment vouchers that authorised the payment, the application to remit the Subject Funds, and documents showing why the mistake had occurred. The provisional liquidators sought from FDI documents regarding the application for the transfer of the Subject Funds, both the internal documents and documents with the banks. This was turned down by FDI’s solicitors.

25.  I consider the above requests for documents and further information by the provisional liquidators entirely reasonable. The requests should have been complied with. If that had been done, much time and expenses would have been saved. The position of FDI’s solicitors, that they are not required to provide further documents and information because FDI is not making a claim by the proof of debt procedure in the liquidation, is untenable. FDI would only have itself to blame for not being able to recover the Subject Funds after more than two years of its first demand. The escalation of expenses in investigating FDI’s entitlement, leading to the depletion of the Subject Funds, does not seem to me to be occasioned by the provisional liquidators.

26.  I reject FDI’s contention that there is no dispute as to its entitlement to the Subject Funds.

27.  Ms So asked the court to give directions to determine the entitlement to the Subject Funds if I should find a dispute.

28.  The ball is in FDI’s court. If it is serious about pursuing its entitlement, it should provide further information and documents to the provisional liquidators as mentioned above without delay. If it is unable to provide documents, it should at least provide a full explanation of the entire circumstances in which the remittance was alleged to be made in error, and explain why it or the original intended recipient is unable to come up with supporting documents.

29.  The provisional liquidators’ solicitors have indicated to FDI’s solicitors in their letter dated 21 January 2009 that the provisional liquidators would re-consider FDI’s claim if it is able to provide more concrete information with evidence. That is a reasonable position. I hope FDI and its solicitors would make an equally reasonable response, in the light of this decision.

30.  If the dispute cannot be resolved, after further information and documents are provided, either party may bring the matter back to the court. It would not be appropriate to give directions at this stage.

31.  There will be an order in terms of paragraph 1 of the summons, so the costs and expenses incurred up to today including the costs of today’s application will be borne by the Subject Funds. But if there is any further litigation to resolve the dispute over FDI’s entitlement to the balance of the Subject Funds, this will be hostile litigation, and the provisional liquidators should look to their costs in the hostile litigation from FDI.