TRADEPOWER (HOLDINGS) LTD (IN LIQUIDATION) v. TRADEPOWER (HONG KONG) LTD AND OTHERS

CACV 101/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 101 OF 2008

(ON APPEAL FROM HCA NO. 1796 OF 2005)

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

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

 

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

J U D G M E N T

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

 

Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an application by the defendants for leave to appeal to the Court of Final Appeal under section 22(1)(a) and (b) of the Hong Kong Court of Final Appeal Ordinance.  At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  The plaintiff (“Holdings”) went into compulsory liquidation on 19 April 2000.  Its liquidators brought this action on its behalf to set aside a deferred shares scheme (“the scheme”) that had been implemented in September 1999 on the basis that the scheme constituted a disposition of the plaintiff’s property with intent to defraud creditors within section 60 of the Conveyancing and Property Ordinance.  This court allowed the plaintiff’s appeal from the judgment of Mr Recorder Jat SC and set aside the scheme.

4.  In 1994, the plaintiff acquired office premises and car park (“the properties”) financed, in part, by a mortgage.  Tradepower HK was the vehicle used for holding the properties.  At all material times, the plaintiff was the registered owner of 3749 out of 3750 of Tradepower HK’s “A” shares.

5.  The plaintiff, Tradepower HK and the second defendant Girvan Ltd (“Girvan”) were related companies: the fourth and fifth defendants (collectively “the directors”) owned the plaintiff and Girvan, and through the plaintiff, Tradepower HK.  The plaintiff and Tradepower HK were trading companies and Girvan was a real estate investment company.

6.  Until it ceased trading in August 1996, Tradepower HK made up the shortfall between the mortgage repayments and the rental income derived from the properties from its trading income.  Thereafter, the directors caused Girvan to fund Tradepower HK in respect of any shortfall.

7.  The scheme involved:

(1)   the conversion of the plaintiff’s 3749 “A” shares in Tradepower HK into “B” deferred shares with no voting rights and, for practical purposes, no prospects of any dividends or return of assets;

(2)   the acquisition by Girvan of the remaining 1 “A” share in Tradepower HK; and

(3)   the issue by Tradepower HK of 9 new “A” shares to Girvan.

Appeal as of right

8.  Mr Wright, who appeared for the defendants, relied on the recent judgment of the Court of Final Appeal in China Field Ltd v Appeal Tribunal (Buildings), FAMC 78/2008, unreported, 20 January 2009 and submitted that the claim or question involved in the intended appeal indirectly involves a claim to property, namely, the shares in Tradepower HK.  He contended that their value was equivalent to the net asset value of Tradepower HK and sought to rely on a valuation dated 16 February 2009 (made only four days before the appeal hearing) by W. H. Tang & Partners CPA Ltd, the auditors of Tradepower HK (“the auditors”).  The valuation in turn purported to rely, inter alia, on a “valuation of the properties” carried out by Savills also dated 16 February 2009.  The net asset value of the shares was stated to be of the order of $18.5 million and, hence, well in excess of $1 million.

9.  Mr Wright’s submissions face a number of difficulties, not least, because the auditors’ “valuation” sought to be relied on was highly problematic.  First, the “valuation” has no evidential value in that it took the form of a letter from the auditors and was not exhibited to any affidavit deposing to its truth.  This is surprising given the legal team representing the defendants.  Second, significantly, the instructions given to the auditors failed to disclose that on 12 November 2008, Girvan commenced an action against Tradepower HK, claiming beneficial ownership of the properties (“the 2008 action”).  The 2008 action, if successful, would obviously seriously affect the value of the shares in Tradepower HK since the properties constitute its main asset.  The auditors’ “valuation” did not take this matter into account.  In my view, the non-disclosure of this highly material fact is inexcusable and must be deprecated when it is appreciated that the same firm of solicitors is representing Girvan in the 2008 action and the present application.  Third, the so-called Savills’ “valuation” was nothing of the sort: Savills’ letter of 16 February 2009 described it as a “preliminary estimate of current market value …for indicative purposes”.  Yet, the auditors treated it as a proper valuation of the properties when it plainly was not.  Inevitably, this necessarily puts the net asset value the auditors ascribed to the shares in doubt.

10.  There is one further matter that could impinge on the net asset value of Tradepower HK and it is this.  Shortly after the date of the scheme, the defendants caused the properties to be charged to a bank for the liabilities of a related company called Hi-Performance Limited.  No information has been given as to the banking facilities granted which are secured by the charge.  Whilst the auditors reflected the amount of outstanding debts of approximately $783,000 (as confirmed by the bank) as a contingent liability, the fact is that the amount is capable of being increased at any time by Hi-Performance (which is not controlled by the plaintiff) making further drawings against its banking facilities and increasing Tradepower HK’s exposure.

11.  Thus, leaving aside the question whether the net asset value of Tradepower HK represents the value of its shares in the hands of the liquidators after the scheme is set aside, there is simply no credible evidence to show that the value of the shares in Tradepower HK in the hands of the liquidators is in excess of $1 million.  It follows that the defendants have not shown that they fall within section 22(1)(a) of the Ordinance so as to be entitled as of right to leave.

Questions of great general or public importance

12.  The defendants also seek leave under section 22(1)(b) of the Ordinance.  Two questions of great general or public importance are said to arise, one concerning section 60 of the Conveyancing and Property Ordinance and the other directors’ misfeasance.  However, both raise the same considerations: whether, in ascertaining the “intent to defraud creditors”, (1) the fact that “at the time of the transaction, the extent of the liability under [a claim made against the plaintiff] had not been ascertained”, and (2) the absence of “proof that the directors of the company believed, at the time of the transaction, that the other assets of the [plaintiff] would not be sufficient to meet the liability under the claim as and when such liability were ascertained”, are relevant considerations.

13.  As is apparent from my judgment (at §§ 26-27), the principles applied by this court were those stated in Freeman v Pope (1870) 5 Ch App 538 at 540-541.  Mr Wright did not challenge the correctness of those principles and accepted Freeman v Pope as good law.  In those circumstances, where the applicable test is not in doubt, the challenge to its particular application does not raise any question of great general or public importance and it is somewhat disingenuous of Mr Wright to suggest otherwise.

Conclusion

14.  I would refuse the defendants’ application for leave to appeal.  I would also propose that there be an order nisi of costs in favour of the plaintiff.

Hon Chung J:

15.  I agree with the judgment of Le Pichon JA.

Hon Rogers VP:

16.  There will accordingly be an order in terms of paragraph 14.