XCHRX MAK WING KUAM v. THE OFFICIAL RECEIVER AND LIQUIDATOR

HCCW 38/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 38 OF 1993

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DECISION

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1. This is an application under rule 95 of the Companies (Winding-Up) Rules by the Applicant Mr Mak Wing Kuam, who claims to be a creditor of Mercury Shipping Company Limited ("Mercury"), for an order to reverse the decision of the Official Receiver, Mercury's liquidator, rejecting his proof of debt.

2. The application was heard in chambers, following the procedure established in National Wholemeal Bread and Biscuit Company [1892] 2 Ch 457, a decision concerning rule 106 of the Companies Winding Up Rules 1929, on which rule 95 of the Hong Kong Companies (Winding-Up) Rules was modelled.

Mercury and Golden Abacus

3. The relevant background is as follows. In September 1979, the Applicant commenced employment as Chief Accountant of Mercury.

4. He claims in his 1st affirmation that starting in 1985, he also performed the duties of chief accountant for a company called Golden Abacus Co. Ltd although he was not paid anything for his services from 1985 to September 1992.

5. According to the company returns for Golden Abacus exhibited to the Applicant's 1st affirmation, this company was a subsidiary of Mercury in 1986. In 1987 however, Mercury transferred its shares to a Liberian company called Argus Co. Inc., although a subsidiary of Mercury held 1 share. It is not disputed however that both Mercury and Golden Abacus were controlled ultimately by Nedlloyd Lines.

6. According to the Applicant's 1st affirmation, Golden Abacus owned a tanker between 1985 and 1988, but in 1988 it sold the tanker, and from 1988 to September 1992, it was dormant. It must follow from this that even if the Applicant had performed the duties of chief accountant for Golden Abacus, those duties for the period from 1988 to September 1992 would have been minimal.

7. The Applicant alleged that his employment with Mercury ended in September 1992, and that thereafter he was employed by the "re-activated" Golden Abacus at an average salary of $50,000 a month. The allegation that his employment with Mercury ended in September 1992 is inconsistent with his proof of debt which asserted that as at 10 March 1993, he was as Chief Accountant of Mercury entitled to termination pay for a period "accruing from 18 September 1979" without reference to any cessation of that period in September 1992.

Winding up of Mercury

8. In February 1993, a creditor presented a petition for the winding-up of Mercury. On 10 March 1993, Mercury was ordered to be wound up.

Applicant's proof of debt against Mercury - March 1993

9. On the same day (10 March 1993), the Applicant submitted his proof of debt against Mercury claiming "termination pay". The basis of calculation was said to be "consistently the same as applying to all the staff members alike", with a formula expressed as follows:- "[last salary x year of service (full year basis) + 1/2 month salary (pro rata bonus) + leave pay (18 days) + 1 month salary (1 month notice)]".

10. According to the Applicant, that was not severance pay calculated by reference to the Employment Ordinance, but by reference to an oral promise made by an executive of Nedlloyd Lines, about which Mercury's managing director told the staff. According to paragraph 11 of the Applicant's 1st affirmation, the promise, made by Nedlloyd's Financial Director, was to the effect that all staff members of Mercury would receive severance pay on the basis of 1 month's salary for 1 year's service with ex-gratia pay if necessary.

11. The amount of termination pay claimed by the Applicant against Mercury in his proof of debt was $790,510.00.

Other staff members' proofs of debt against Mercury - March 1993

12. On the same day (10 March 1993), 5 other staff members of Mercury lodged proofs of debt against it. They were Sanjiv Bhargava, Monica Lau Kwan Yee, Anita So Mui Hing, Chan Pui Yee and Leung Kum Sing.

13. All the proofs stated the basis of calculation in identical terms and applied the identical formula, although the amounts claimed as termination pay were of course different, depending on the period of employment and the individual's salary.

Payment by 6 cheques - July 1993

14. It is common ground that 4 months later, by a series of 6 cheques all dated 29 July 1993 and drawn by Golden Abacus on its bank account, all these 6 individuals were paid various amounts slightly in excess of the amounts claimed in their respective proofs of debt.

15. The Applicant received a cheque for $804,195. He accepts that he had received this amount. It is also not disputed that he was one of the signatories to this cheque, as well as to the other 5 cheques in the series. He alleged however during submissions that he had signed 10 cheques in blank before commencing sick leave in May 1993. I shall assume for present purposes that the 6 cheques were included in the 10 blank cheques that he had pre-signed.

Issue - was payment made on behalf of Mercury?

16. The issue in the present case is whether that payment had been made by Golden Abacus on behalf of Mercury. If so, that would dispose of any entitlement of the Applicant to termination pay, and his proof of debt should be rejected.

17. By a decision dated 15 July 2000, the Official Receiver as Mercury's liquidator rejected the Applicant's proof of debt. This is the subject matter of the Applicant's application under rule 95 of the Companies (Winding Up) Rules.

18. In the light of the matters set out below, I agree with the Official Receiver that (i) as far as the other 5 individuals were concerned, it is clear that the payments made by Golden Abacus on 29 July 1993 were on behalf of Mercury, and (ii) the fact that the payment to the Applicant was made on the same day and covered by the same payment voucher as the other 5 individuals leads to the inexorable conclusion that the payment to the Applicant was also made on behalf of Mercury.

Applicant's evidence

19. The Applicant has said in his 1st affirmation that when he returned to the office of Golden Abacus (the office for Mercury having closed down) on his discharge from hospital at the end of July 1993 although he was still on sick leave, Mr Gualt Ytsma (who was managing director of Golden Abacus and who had been managing director of Mercury) told him that his employment as chief accountant with Golden Abacus had been terminated.

20. According to the Applicant's 1st affirmation, Mr Ytsma gave him the cheque for $804,195 and said to him that the sum was for "the complimentary payment with due regard to [the Applicant's] financial situation, the preservation of commercial secrecy ... and the compensation for the past services between 1985 and 30 September 1992 without any salary or dividend from Golden Abacus". The Applicant said in his affirmation that he had signed a statement acknowledging receipt of the cheque as "the termination payment with Golden Abacus and confirming no further employment related claim against Golden Abacus in future".

The "statement"

21. However, no such statement has been found notwithstanding extensive inquiries made by the Official Receiver with Golden Abacus, which has continued in Hong Kong. On the contrary, Golden Abacus has asserted that its payments to the Applicant and the other 5 individuals were made on behalf of Mercury, and has put in a proof of debt including those amounts albeit only on 21 March 2000.

Witness

22. Mr Ytsma has retired from Nedlloyd and the Applicant has said that he is not aware of his present address. The Official Receiver has not obtained a statement from Mr Ytsma on the present issue either.

Evidence before July 1993 that Mercury termination pay would be provided by third party

- Interview with Ytsma

23. However, in a note made by the Official Receiver's representative of an interview with him on 6 April 1993, he (Mr Ytsma) had informed the Official Receiver's representative that Nedlloyd Lines (HK) Ltd had issued letters to Mercury's employees to guarantee the payment of all moneys due by Mercury to them, the employees would not make any application to the Protection of Wages on Insolvency Fund Board, and Nedlloyd Lines (HK) Ltd would be subrogated to their rights in case there were assets available for distribution.

24. In other words, in April 1993, Mercury's managing director had indicated to the company's liquidator that termination pay for Mercury staff would be provided for by a third party.

- Letter from Nedlloyd

25. There is one example of Nedlloyd's "letters to Mercury's employees" referred to in Mr Ytsma's interview. In a letter dated 19 March 1993 from the Financial Controller of Nedlloyd Lines Hong Kong to Mr Bhargava, it is stated :-

"We understand that an agreement has been reached that you will receive severance pay and pro-rata bonus in the amount of HK$280,500 [i.e. the amount stated on Mr Bhargava's proof of debt against Mercury 9 days earlier] on the date you will be retrenched by Mercury Shipping Co Ltd and on the condition that you will give your full co-operation until your last date of employ with the Company.

We hereby guarantee that in the event that Mercury Shipping Co Ltd or Golden Abacus Co Ltd fail to pay you the above amount upon your fulfilling the above conditions, we shall be responsible for the payment to you." [my emphasis]

26. Thus, there was clear documentary evidence even before any payment was made that Mercury termination pay might be paid by Golden Abacus, and failing that, by Nedlloyd.

27. As a matter of completeness, I have noted that the Applicant has alleged during his submissions that this letter was a personal undertaking obtained by Mr Bhargava from Nedlloyd.

28. However, it is to be noted that in his interview in April 1993, Mr Ytsma had informed the Official Receiver's representative that Nedlloyd had written letters to Mercury's employees to guarantee payment, and in any event, no evidence has been proffered to explain why Mr Bhargava should have been singled out for special treatment by Nedlloyd.

29. It is clear from the above evidence that before July 1993, Nedlloyd had indicated that Golden Abacus or Nedlloyd itself would pay Mercury's termination pay.

Contemporaneous evidence in July 1993 that payment on behalf of Mercury

30. There is also clear contemporaneous evidence in July 1993 which lead inexorably to the conclusion that the payment from Golden Abacus to the Applicant was made on behalf of Mercury.

- Payment Voucher

31. First, there is a Payment Voucher of Golden Abacus dated 30 July 1993 which states :-

"Please pay Staff Members (SB, MWK, LKY, SMH, CPY, LKS) [the initials of the 6 individuals]

Hong Kong Dollars One million four hundred eighteen thousand nine hundred and ninety four only

Being payment of staff termination pay".

The numbers of the 6 Golden Abacus cheques (including the one to the Applicant) were recorded on the voucher, and approval of payment was given by 2 persons as indicated by 2 sets of initials.

32. The voucher did not identify the company for which this was "staff termination pay" but it is clear from the following matters that this must have been Mercury.

- Leung Kum Sing - never employed by Golden Abacus

33. First, it is to be noted that of the 6 individuals who were paid by the series of 6 cheques from Golden Abacus, Leung Kum Sing was never an employee of Golden Abacus. The Applicant accepts that Leung had been employed by Mercury only. Therefore, Golden Abacus could not have been paying him (Leung) termination pay for employment with it (Golden Abacus).

34. Further there is a statement signed by Leung on Mercury letter-paper which stated the period of his employment by the company (1/1/1990 to 31/7/1993), and which contained a breakdown of the amount of the cheque (being for severance pay, bonus, annual leave and salary in lieu of notice) and the number of the cheque (within the series of the 6 cheques).

35. It is therefore clear that Leung Kum Sing was getting his cheque from Golden Abacus as termination pay from Mercury. In light of this, it would be reasonable to interpret the payment voucher as meaning that the termination pay was for his employment "with Mercury". Payment of the Mercury termination pay by Golden Abacus would also be consistent with Nedlloyd's letter in March 1993 and Mr Ytsma's statement made at his interview with the Official Receiver's representative 3 months earlier in April 1993.

- Monica Lau, Anita So, Chan Pui Yee - employment with Golden Abacus after July 1993

36. As for these individuals, the Applicant has said in his 1st affirmation that they were still in the employ of Golden Abacus after July 1993.

37. Since this is the case, Golden Abacus would also not have been paying them "termination pay" for its own account. The Applicant has not been able to suggest any reason why these persons were given money by the company and why the company would have described such payments as termination pay when they were continuing to be employed by it.

38. The only reasonable inference would again be that the termination pay was for the cessation of their employment with Mercury, as was the case with Leung Kum Sing. This has also been confirmed by a letter dated 24 May 2000 from Miss So who was the Assistant Accountant of Golden Abacus at the time of payment.

- Sanjiv Bhargava - only employment with Mercury terminated by July 1993

39. As for this individual, the Applicant has alleged in his 1st affirmation that he (Mr Bhargava) "also worked for Mercury and Golden Abacus, received two termination payments from both Golden Abacus and Mercury. One was on 29 July 1993 and the other was on a day in October 1994".

40. Even if Mr Bhargava did receive 2 termination payments, one on 29 July 1993 and the other in October 1994 (for which there is no documentary evidence), the evidence before the Court leads to the conclusion that the payment on 29 July 1993 (i.e. the cheque covered in the same voucher as the Applicant's cheque) was termination pay for his employment with Mercury, and not with Golden Abacus. This is because he had claimed termination pay from Mercury by July 1993 whereas there is no evidence that his employment with Golden Abacus had been terminated by that date

- Conclusion regarding the 5 individuals

41. It would thus be seen that for 5 of the 6 individuals who had lodged proofs of debt against Mercury in March 1993 and who were paid by the Golden Abacus series of cheques on 29 July 1993, the only reasonable inference from the evidence, both before and after July 1993, is that the payment was termination pay made on behalf of Mercury.

- Identical position of the Applicant

42. I agree with the Official Receiver, Mercury's liquidator, that the Applicant's position must have been the same, given that the payment to him had been referred to collectively by the words "staff termination pay" in one payment voucher.

43. The Applicant submitted that it was not proper accounting practice to have 1 payment voucher for 6 cheques, and that there should have been 1 payment voucher for each cheque (although I note the same practice had been adopted for payment of salaries by Golden Abacus in January 1993 and by Mercury in February 1993, as disclosed in the documents exhibited as OR-5 to the Official Receiver's 1st report).

44. Be that as it may, it remains the fact that all 6 payments were treated identically by the person who prepared the voucher, they were approved accordingly, and thus all 6 cheques were paid by Golden Abacus for an identical purpose. Since it is clear from the other 5 cases that that purpose was termination pay on behalf of Mercury, it would follow that the Applicant's payment was also for that purpose unless there is cogent evidence that militates against that conclusion.

45. The Applicant sought to allege that his was a special case. However there is no contemporaneous documentary evidence on which he has relied to show that his case was different from the others.

46. He could not offer any explanation for, or breakdown of, the not insubstantial payment of $804,195. The Applicant was not able to say how much of that was, or could be, attributable to payment for his services for Golden Abacus from 1985 to September 1992. As noted above, Golden Abacus had been dormant from 1988 to September 1992, so in effect there was really only a period from 1985 to 1988 when the Applicant was content not to ask for any salary from Golden Abacus separate from that of Mercury.

47. As for payment for the "preservation of commercial secrecy", the Applicant has not deposed to any special matters prompting Golden Abacus's payment for his silence other than an employee's normal duties to keep his employer's business matters confidential.

48. Finally, as to the explanation that part of the payment was an "ex gratia" payment to take account of his financial situation which presumably meant the fact that he had been seriously ill, it would have been illogical, or at least. unlikely for Nedlloyd, who had undertaken to pay termination pay for Mercury staff, and Golden Abacus, who had actually made payment to the other 5 Mercury staff, to single out the Applicant for non-payment of the termination pay to which he was entitled, whilst being paid an indeterminate "ex gratia" payment by Golden Abacus.

49. It is also relevant to note that even though the Applicant had known of Nedlloyd's undertaking (as shown in his 1st affirmation), he did not at any stage pursue Nedlloyd on its undertaking to pay termination pay on behalf of Mercury. This omission on his part is consistent with the position that he had received termination pay by way of the Golden Abacus cheque on 29 July 1993.

Order

50. In the circumstances, the Official Receiver was entitled to reject the applicant's proof of debt and I would dismiss the application.

51. As for costs of the application, I would make an order nisi that the Applicant bear the costs of the application. Under O. 42 r. 5B of the Rules of the High Court, that order shall become absolute 14 days after the date of this Decision unless an application has been made to vary that order.