RE HONGKONG GOODSTAR ENTERPRISE LTD

HCCW 53/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 53 OF 2012

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J U D G M E N T

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1.  The Company which is the subject of the application before me went into compulsory liquidation on 9 May 2012. It did so in the following circumstances. The Company was single purpose vehicle used by its sole shareholder and director, the Respondent, to invest in a property at Leon Court on Hong Kong Island. The property was purchased in 2010 for $42.8 million and sold later in that year, the sale completing on 5 January 2011, for $48 million. Its audited financial statement for the year ending 31 December 2011 shows this transaction generating a profit before tax of $4,585,143. Despite this the Company did not pay either of the agents involved in the transaction. The total amount due to them was in the order of $690,000. Savills (Hong Kong) Limited (“Savills”) was one of the agents. They invoiced their commission on the date of completion. They subsequently commenced proceedings for recovery of the sum due to them and entered judgment on 26 August 2011. This was not paid and a statutory demand was issued on 17 January 2012 and a petition on 24 February 2012.

2.  The proceeds of sale were used to repay a mortgage of $25 million.  The remainder was transferred to various other companies owned by the Respondent.  By April 2011 the Company had a zero balance in its bank account with HSBC.  That balance increased insignificantly during the following months as the account was used to pay small expense items that were funded by deposits.  By 31 October 2011 it had a balance of $8.94.  The Company used the services of 2 accounts clerks employed presumably by another company owned by the Respondent as there is no item in the accounts for salaries: Ms. Lo and Ms. Law.  The accounts they kept had an item for a director’s current account which showed that by the end of October 2011 the Respondent owed the Company approximately $3.2 million.  Self-evidently the Respondent had stripped the Company of all its cash rather than pay its 2 creditors and retain sufficient money to pay tax.

3.  The documents obtained by the liquidators contain management accounts and a board resolution both dated 31 October 2011, which purport to record the declaration of a dividend of $2,170,000 which was then used to reduce the amount in the director’s current account to $1,040,136.09.  On 14 August 2014 the liquidators issued a misfeasance summons pursuant to section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32, seeking a declaration that the Respondent was guilty of misfeasance in failing to have regard to the interests of creditors when there was a real risk of insolvency and in misapplying the money of the Company to pay a dividend and an order that the sum be repaid.  Section 276 is in the following terms:

“(1) If in the course of winding up a company it appears that any person who has taken part in the formation orpromotion of the company, or any past or present officer or liquidator or receiver of the company, has misapplied or retained or become liable or accountable for any money or property of the company, or beenguilty of any misfeasance or breach of duty in relation to the company which is actionable at the suit of thecompany, the court may, on the application of the Official Receiver, or of the liquidator, or of any creditor orcontributory, examine into the conduct of the promoter, officer, liquidator or receiver, and compel him to repayor restore the money or property or any part thereof respectively with interest at such rate as the court thinks just,or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication,retainer, misfeasance, or breach of trust as the court thinks just.

(2) The provisions of this section shall have effect notwithstanding that the offence is one for which the offendermay be criminally liable.”

4.  The liquidators’ claim can be summarised as follows.  It is obvious that the Company had sufficient funds to pay the agents.  The Respondent chose not to.  Instead he appropriated all its funds for his own use.  By October 2011 judgment had been entered against the Company.  He chose not to settle it.  He must have foreseen the possibility of the creditors putting the Company into liquidation and at some point in time caused the dividend to be declared (they do not accept that it was on 31 October 2011) with a view to reducing his debt to the Company.  As he could clearly have caused the debts to be settled it must be inferred that he had decided not to do so, which necessarily means he had decided not to repay the amounts that he owed the Company, which in practice amount to one and the same thing.  It follows that not only was the Company insolvent on a cash flow basis on 31 October, or whatever subsequent date the resolution was actually produced, but that it was necessarily insolvent on a balance sheet basis because the Respondent knew that the Company’s sole debtor, himself, did not intend to repay it.  In these circumstances it was a breach of his fiduciary duties to declare the dividends as he failed to have regard to the interests of creditors, who he was obliged to consider given that the Company was insolvent or close to insolvency[1]. His failure to do so caused loss by reducing the assets of the Company, namely, the debt owed by the Respondent to the Company which would otherwise have been available to pay its creditors and, in the event of a liquidation, the costs of the winding up so as to avoid assets that might otherwise have been available to pay creditors being depleted by those costs.

5.  A peculiar feature of this case, which at times has become a little artificial, has been the failure of the Respondent to file any evidence explaining why the Company did not pay the agents, why he did not repay the Company or why he decided to declare a dividend on 31 October 2011.  The evidence adduced before the Court points to the conclusion that the Respondent had the means to have paid the agents if he so wished.  The Respondent evidence in cross‑examination was no more illuminating.  He claimed to have relied entirely on the accounts clerks, in particular Ms. Law, and to have little if any recollection of any of the relevant matters.  He also said that he spent little time in the office because he was suffering from depression at the time and it was suggested that this and the medication he took accounted for his poor memory.  In re-examination he produced a letter from a psychiatrist which seemed to demonstrate he had been on medication.  It was entirely unsatisfactory that this case only emerged in cross‑examination; which was explained, it was suggested by Mr. Tsui who appeared for the Respondent, by his reluctance to talk about it.  If this were indeed the case and the Respondent had relied on his accounts clerks and his Wife, as he suggested in cross-examination, they could have given evidence to explain why the agents had not been paid, the Company not been put in funds and the dividend declared.

6.  The Respondent’s evidence can be approached in various ways.  If  the Respondent’s psychological condition meant that he could not focus satisfactorily on the affairs of the Company it might explain why matters were not dealt with properly, but it does not alter the fact that the Respondent, as director, took a decision to declare dividends at a time when it appears he did not intend to repay the Company so it could honour its commitments.  As it was, the amount shown in the accounts as owed by him was only paid after negotiation with the liquidators and by 12 instalments, which if that was genuinely the best the Respondent could do suggests that he was not in a position to put the Company in funds in October 2011.  Alternatively he is using his illness as an excuse and he simply conducted the Company’s affairs with no regard to the interests of its creditors and solely so as to protect his own interests.  In my view the latter explanation is more likely.  It seems to me inherently unlikely that the Respondent was capable of initiating and concluding the successful transaction in respect of Leon Court, it not being suggested anybody else did it, and not be capable of taking note that the agents were pursuing the Company for payment and that it needed to be put in funds.  It is far more likely, and I find, that the Respondent is simply an unethical businessman, who thought he could avoid paying the agents and that the declaration of dividend was instigated by him at some point in time, it does not matter when precisely, to reduce his debt to the Company.  What he underestimated was the lengths the creditors and liquidators would go to pursue him.

7.  Whichever the explanation it seems to me that the declaration of dividend was in breach of his fiduciary duties because at the time it occurred the Respondent knew the Company was in practice insolvent not only because it lacked cash but because, I think it is a compelling inference, he did not intend to repay the Company and was, therefore, insolvent on both a cash flow and balance sheet basis. This dividend caused loss to the Company because it reduced its assets available to creditors and it could not properly be declared unless the Respondent took steps to protect the interests of the creditors which he manifestly did not.

8.  I will therefore make an order that the Respondent pays the Company $2,170,000 plus interest.  I will hear counsel on the quantification of interest and costs.