RE HUN KAI FINANCE CO LTD

CACV 31/2014 AND CACV 32/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 31 AND 32 OF 2014

(ON APPEAL FROM HCCW NO. 1325 OF 2002

AND HCA NO. 2180 OF 2011)

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HCCW 1325/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1325 OF 2002

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AND

HCA 2180/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2180 OF 2011

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BETWEEN

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(HEARD TOGETHER)

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J U D G M E N T

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Hon Kwan JA:

1. These appeals are in relation to two orders made by Harris J on 24 January 2014. In HCCW 1325/2002, he ordered that the misfeasance proceedings brought by Yeung Pui Ying Anna (“Ms Yeung”), a contributory of Shun Kai Finance Company Limited (“the Company”), against the liquidator Kong Chi How Johnson (“the Liquidator”), be dismissed. In HCA 2180/2011, he ordered that the common law derivative action brought by Ms Yeung against BDO Limited (of which the Liquidator is a director), BDO McCabe Lo & Company (a dissolved partnership of which the Liquidator was a partner) and the Liquidator be dismissed. He did so because he held that both actions have no prospect of success.

2. Ms Yeung brought these appeals against the above orders.  CACV 31/2014 relates to the dismissal of the misfeasance proceedings.  CACV 32/2014 is in respect of the dismissal of the common law derivative action.

The background

3. The relevant background matters may be first stated as follows.

4. The Company was ordered to be wound up by the court on 5 November 2003 on the petition of a judgment creditor Japan Leasing (Hong Kong) Limited (“Japan Leasing”), which itself had gone into creditor’s voluntary liquidation in September 1998.  Both the Company and Japan Leasing were licensed money lenders.

5. On 14 April 2004, Master S Kwang appointed the Liquidator and Ms Chau Yin Fong as joint and several liquidators of the Company and a committee of inspection comprising two members, Japan Leasing and another creditor Messrs Fan, Wong & Tso.  Ms Chau resigned and ceased to be a liquidator on 29 April 2005 and from then onwards the Liquidator has been the sole liquidator of the Company.

6. The Company had a nominal share capital of $6 million divided into 6 million shares of $1 each.  The amount of paid up capital is $1 million.  Ms Yeung and her husband Wong Shun (“Mr Wong”) held a total of 9,999 out of the 1 million shares.  They claim to be the beneficial owners of 90% of the issued shares and that Mr Wong controlled the affairs of the Company.

7. As stated in the judgment below:

“3. By an agreement dated 19 May 1993 (“MasterLoan Agreement”) Japan Leasing agreed to grant loan facilities to the Company, out of which the Company would grant loans to third party borrowers (“Sub‑Borrowers”). The Master Loan Agreement provided that the money lent to Sub-Borrowers was to be secured by mortgages from the Sub‑Borrowers to the Company, who in turn would grant sub‑mortgages to Japan Leasing. The Company also agreed in the Master Loan Agreement to assign its security granted to it by the Sub‑Borrowers to Japan Leasing to secure the loans by Japan Leasing to the Company. The Master Loan Agreement also provided that Japan Leasing only had to account for any sums owed by Japan Leasing to the Company after payment of any sums due by the Company to Japan Leasing.

4. Between about the end of 1997 and the middle of 1998 Japan Leasing alleged that the Company had defaulted on its repayment obligations and sought to exercise its rights under the Master Loan Agreement and requested Sub-Borrowers to pay it directly rather than pay the Company. This affected the Company's cash flow.

5. On 15 August 1998 the Company issued proceedings against Japan Leasing in HCA 13826 of 1998 claiming damages from Japan Leasing for breaches of the Master Loan Agreement and procuring breaches of sub-mortgages by directing Sub-Borrowers to pay it directly (“Action”).

6.  On 30 September 1998 Japan Leasing was placed in liquidation and liquidators appointed.  Japan Leasing denied the Company’s claims and filed a counterclaim.  Following the winding up of the Company on 5 November 2003 the action against Japan Leasing was stayed by virtue of section 186 of the Companies Ordinance.  At the time the Company went into liquidation it had account receivables of approximately $87,000,000.  It had liabilities of approximately $102,000,000 of which approximately $91,000,000 was owed to Japan Leasing.”

8. Pausing here, I would point out that the figures of account receivables and liabilities were taken from the statement of affairs submitted by the directors in September 2004.  They were signed by Ms Yeung and Mr Wong.  In §12 of his affirmation in July 2012, Mr Wong disputed the correctness of these figures claiming that he had given a verbal explanation to Chan Leung Lee, the Liquidator’s assistant, why they were not accurate in that the value of securities and redemptions had not been netted off.

9. The narrative in the judgment continued as follows:

“7. The proceedings against Japan Leasing were settled on 23 December 2005 subject to the sanction of the Court which was given by Kwan J on 3 March 2006[1]. The settlement involved a payment by Japan Leasing of $4,000,000, settlement of expenses incurred in the liquidation and the Liquidator admitting a debt to Japan Leasing of $27,000,000, which was that part of the sums claimed by Japan Leasing which it appeared were owed to Japan Leasing and had been adjudicated by the Liquidator by December 2005.

8. The claims brought against the Liquidator seek to challenge that settlement. Ms. Yeung alleges that the settlement was at a significant under value. It is said that the settlement should have been in the sum of $90,000,000 with no allowance having been made for the debt of Japan Leasing. It follows that Ms. Yeung asserts that the Company should have a surplus available to shareholders and, therefore, that she has a tangible interest in the liquidation. This challenge is made by two separate proceedings:

(1) A claim under s276 of the Companies Ordinance (“s276 action”); and

(2) A common law claim for negligence (“common law action”).

9. The claims in the two actions are in almost identical terms. There are, however, two material differences. First, the Statement of Claim in the common law action also includes a claim against BDO Limited (“BDO Ltd”), of which Mr. Kong is a director, and the now dissolved partnership of BDO McCabe Lo & Company (“BDO partnership”) of which Mr. Kong was a partner. Secondly, the Plaintiff in the common law action is described as “Yeung Pui Ying Anna (a minority shareholder on behalf of herself and all other member of Shun Kai Finance Company Limited (in liquidation).” The claim has been framed as if it is a common law derivative action, although the Company is not a defendant”.

10. The Liquidator issued a summons in each of the section 276 Action and the common law action on 30 March 2012 to dismiss the actions. Harris J’s decision granting the applications is the subject of these appeals.

CACV 32/2014 – THE SECTION 276 APPLICATION

The threshold requirement for misfeasance proceedings

11. Mr Duncan, SC[2] submitted for Ms Yeung on appeal that the judge had applied the wrong threshold test in dismissing the misfeasance proceedings brought under section 276, and this undermined the judgment in its entirety.  He contended the judge was wrong to apply the test that the evidence adduced by Ms Yeung did not reveal a “prima facie complaint” (§14), and this error was compounded when the misfeasance action was dismissed on the ground it had no “realistic prospect of success” (§30).  The correct test should be the applicable principles in determining a strike out application under Order 18 rule 19 of the Rules of the High Court: there should be no trial on affidavit; disputed facts are to be taken in favour of the party sought to be struck out; striking out should only be employed in plain and obvious cases; the claim must be obviously unsustainable, the pleadings unarguably bad, and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out (Hong Kong Civil Procedure 2015, vol 1, §18/19/4).

12. In support of this, Mr Duncan cited the decision of Chu J (as she then was) in The Liquidator of Wing Fai Construction Company Limited (In Compulsory Liquidation) v Yip Kwong Robert & Ors, HCCW 735/2002, 28 March 2011, which was given in an application to strike out a section 276 claim brought by the liquidator against former directors. The judge said this in §23:

“The relevant legal principles relating to striking out are not in dispute: see Hong Kong Civil Procedure 2011[3] vol 1 pp 394-395. It is sufficient for the present purpose to note that striking out should only be employed in plain and obvious cases and disputed facts are taken in favour of the party sought to be struck out. The burden lies on the applying party to show that the claim is obviously unsustainable and the pleadings unarguably bad.”

13. It should be noted that the relevant principles for striking out or dismissing a section 276 application were not in dispute in Wing Fai, nor was the point taken by former counsel appearing for Ms Yeung in the court below that the threshold test should be the striking out principles under Order 18 rule 19.

14. The relevant parts of section 276(1) read as follows:

“If in the course of winding up a company it appears that any person … [including a liquidator] has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of duty in relation to the company which is actionable at the suit of the company, the court may, on the application of the Official Receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct of [that person], and compel him to repay or 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.”

15. I agree with Mr Manzoni, SC[4] for the respondents that the reference to “it appears” in section 276(1) indicates there is a threshold requirement which the applicant must surmount before the court is obliged to “examine into the conduct” of a relevant person.  It does not matter whether that requirement is considered at a precursor stage to the enquiry (as was unsuccessfully argued by Mr Manzoni before the judge), or as part and parcel of the enquiry (as the judge had found in §14).

16. What then should be the proper standard of the threshold requirement?

17. This does not appear to have been considered by the English courts[5], but the Australian courts[6] have discussed this on more than a few occasions.  In Hall v Poolman (2009) 254 ALR 333, the Court of Appeal in New South Wales gave a summary of the relevant authorities at 350 to 351:

“[56] In Burns Philp Investment Pty Ltd v Dickens (1993) 11 ACLC 272 (BurnsPhilp), upon which the appellants relied in their written submissions, Young J said (at 273) that “the court must be given some material to suggest that it would be in the public interest to conduct an inquiry”, and this meant that the party seeking an inquiry “must put forward material which prima facie satisfies the court of that matter”. These observations were applied by Burchett AJ in Re Glowbind Pty Ltd (in liq); Takchi v Parbery (2003) 48 ACSR 456; [2003] NSWSC 1190 (Re Glowbind), the other case relied upon by the appellants. The appellants contended that the precondition is not met unless the court is satisfied that there is a prima facie case of failure to perform duties or observe requirements, suggesting some relatively onerous evidentiary burden for the person seeking an inquiry under subpara (1)(a).

[57] However, Young J did not say that there must be a case of failure faithfully to perform duties or observe requirements proven to a prima facie evidentiary standard. That is plain from Burns Philp Investments Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280; 10 ACSR 626, where his Honour accepted a submission to the effect that the barrier over which the plaintiffs would have to pass to have an inquiry mounted was not a very high one, and that “all that was necessary for his clients to show was that there was a prima facie case that something needed to be investigated”: at NSWLR 287; ACSR 633.

[58] The Full Court of the Federal Court dealt with a similar submission in Leslie v Hennessy [2001] FCA 371 at [6] (Leslie). In a joint judgment, on appeal from Drummond J, Ryan, Dowsett and Hely JJ said:

[6] [W]e believe that both Young J [in the Burns Philp Investments (No 2) case] and Drummond J were describing something less formal than a prima facie case according to some evidential burden of proof. Their Honours both meant only that an applicant must show a suffıcient basis for making an order, that there is something which requires inquiry. The court then has a discretion which it must exercise. Many factors will be relevant to that exercise. They include the strength and nature of the allegations, any answers offered by the liquidator, other available remedies, the stage to which the liquidation has progressed, the likely amounts of money involved, the availability of funds to pay for any inquiry, the likely benefit to be derived from it and the legitimate “interest” of the applicant in the outcome. [Emphasis added.]

(See also Magarditch v Australia and New Zealand Banking Group Ltd (1999) 30 ACSR 265; [1999] FCA 35 at [91] per Einfeld J; Re Fox Home Loans Pty Ltd (in liq) [2005] NSWSC 1050 at [8] per Barrett J; Vink v Tuckwell (2008) 66 ACSR 30; [2008] VSC 100 at [76]–[77] (Vink) per Robson J; application for leave to appeal dismissed: Vink v Tuckwell (2008) 68 ACSR 265; [2008] VSCA 204.)

[59] We agree with these observations, subject to a qualification that we take to be implied in their Honours’ remarks, namely that the “sufficient basis” for making the order must relate to the matters concerning faithful performance of duties or observance of requirements that are stated in subpara (1)(a). Of course, the list of relevant factors set out in this passage does not purport to be comprehensive.”

18. Mr Duncan submitted the approach in the Australian cases should not be followed because the statutory provision in Australia is worded differently.  He pointed out the Australian provision is for the supervision of liquidators, whereas our section 276 may be invoked to inquire into the conduct of any person including a liquidator for misfeasance or breach of duty in relation to the company.  Further, the regulatory authority, the Australian Securities and Investments Commission (“ASIC”), is also empowered under the provision to inquire into the conduct of liquidators apart from the court.  The purpose of the Australian provision is to confer a regulatory and supervisory role on the court and ASIC regarding liquidators and the basis of intervention is broadly disciplinary (Hall v Poolman, §§[66] to [68]).

19. Mr Duncan made the point that even if the approach in the Australian cases is adopted, it would appear that the threshold requirement is a low one, as the complainant’s initial onus is only to establish a prima facie case that there is something which requires enquiry (Vink v Tuckwell, §[84]).  He also drew the court’s attention to Vink v Tuckwell at §[87], in which Robson J referred to Rule 23.01 of the Supreme Court (General Civil Procedure) Rules, which is the equivalent to our Order 18 rule 19 and he submitted that the court there was applying the same standard as the striking out principles.  See for instance the conclusion at §§[207] and [210] that although Robson J concluded the originating process “will very likely fail”, he was unable to find it “is bound to fail” and declined to strike out, dismiss or stay the process under the court’s inherent jurisdiction or the Rules of court “as an abuse of process or generally to protect parties from proceedings that are bound to fail”.

20. I accept there are differences between the Australian legislation and our section 276 as pointed out by Mr Duncan.  But I do not think they are material differences to warrant a different approach to be taken, if the approach is otherwise appropriate for section 276.  I also acknowledge there is no discernible difference between the strike out principles and the approach actually adopted by Robson J in Vink v Tuckwell, but it seems fairly clear from the summary of the cases given in Hall v Poolman that the applicable standard for the threshold requirement under the Australian legislation is not the standard for striking out.

21. It seems to me that the principles for striking out under Order 18 rule 19 are not the appropriate standard for the threshold requirement in a section 276 application. I say this for two reasons.

22. Firstly, as submitted by Mr Manzoni, there is an analogy between a derivative action and the procedure under section 276.  When a company is wound up by the court, it comes under the control of the court through the liquidator as an officer of the court, so the rationale for a derivative action (that the wrongdoer being in control of the company would not allow it to sue) does not apply.  As Barma J (as he then was) stated in Re Ocean Time Development Ltd, HCCW 334/2004, 1 June 2006 at §54:

“Where the company is still operating, it may be possible for an aggrieved shareholder to pursue a cause of action on its behalf by way of a derivative action where the company itself fails to do so. Where the company is in liquidation, a derivative action will no longer be available. However, a shareholder or creditor then has available to him the remedy provided by section 276 of the Companies Ordinance.”

23. The process under section 276 governs the situation in the course of winding up for the court to inquire into a wrong done to the company which is actionable at the suit of the company and to give such redress at the court thinks just.

24. In Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at §21, Ribeiro PJ drew a distinction between the threshold requirement for a plaintiff to establish a prima facie case in a common law derivative action, with a defendant’s application to strike out a plaintiff’s action on the ground that the loss claimed is merely reflective loss.  In the former situation, the plaintiff must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle (1843) 2 Hare 461.  In the latter situation, the burden is on the defendant to show that it is plain and obvious the losses are indeed reflective and the action is unsustainable.

25. As an application under section 276 is a remedy in the course of winding up equivalent to a derivative action, there is much to be said for adopting an approach similar to the test of a prima facie case for a derivative action.

26. Secondly, an application under section 276 involves the discretion of the court to be exercised in the course of winding up a company whether to inquire into the conduct complained of (“the court may … examine into the conduct of [that person]”).  Relevant factors for the exercise of that discretion would include at least the interest of those concerned in the winding up, and whether the inquiry is for the benefit of all concerned.  It does not appear to me conducive to the exercise of the court’s discretion to apply the principles for striking out as they are designed primarily to prevent abuse of the court’s process and would be unduly restrictive in this different situation.

27. For the above reasons, I am inclined to think that the appropriate standard of the threshold requirement should be a prima facie case, not in the sense of some formal evidential burden of proof, but it must be shown there is sufficient basis for the relief sought under section 276, that there is something which warrants an inquiry.

28. I do not think the judge was in error as to the standard of the threshold requirement, nor was he in error in not accepting what Mr Wong said in his affirmation at face value.  The judge was not required to assume every disputed fact in Ms Yeung’s favour as in the case of striking out a claim on the ground it is unsustainable.

29. I do not propose to deal with Mr Manzoni’s fallback argument that even if the appropriate standard is the standard for striking out under Order 18 rule 19, Ms Yeung’s application under section 276 is bound to fail as she has no locus standi to bring these proceedings.  This is premised on Ms Yeung having no right to invoke the assistance of the court under section 276 as the Company’s assets are insufficient to pay its debts and she could have no tangible interest in the result of the application as a contributory whose shares are fully paid up (Cavendish Bentinck v Fenn (1887) 12 App Cas 652 at 664 to 665).  This is disputed by Ms Yeung who asserted that the Company’s assets would have been in surplus for the benefit of contributories after payment of its creditors and winding up costs had the allegations against the Liquidator been made out, as noted by the judge in §8.  It is unnecessary to resolve this dispute for present purpose.

The judge’s exercise of discretion

30. It is pertinent to bear in mind that this appeal sought to impugn the exercise of the judge’s discretion under section 276 in refusing to allow an enquiry into the complaints against the Liquidator.  The judge had conducted a review of the exercise of discretion by the Liquidator in turn in causing the Company to enter into the deed of settlement to compromise the Action and to seek the sanction of the court in doing so.  In accordance with established principles, for the appeal court to interfere with the judge’s exercise of discretion, it must be established that the judge has misunderstood the law or the evidence or that the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible.

31. The Liquidator sought the approval of the court to compromise the Action under section 199(1)(f) of the Companies Ordinance.  There is no dispute as to how the court should approach such an application and I quote from the relevant cases:

“Where a liquidator seeks the sanction of the court and takes the view that a compromise is in the best interest of the creditors, in any ordinary case, where (as in this case) there is no suggestion of lack of good faith by the liquidator or that he is partisan the court will attach considerable weight to the liquidator’s views unless the evidence reveals substantial reasons why it should not do so, or that for some reason or other his view is flawed.” (Re Edennote Ltd (No. 2) [1997] 2 BCLC 89 at p. 92g-h, per Lightman J)

“An approval under s 477(2A) [of the Corporations Law] empowers a liquidator to do what would otherwise be beyond power. … It is not the role of the court in an application for approval under s 477(2A) to make a commercial decision. That is for the liquidator. In such an application the court pays regard to the commercial judgment of the liquidator. … The court is not of course a rubber stamp for whatever is put forward by the liquidator but it is not the role of the court to independently appraise the commercial soundness of the proposal. The court will not generally interfere unless there can be seen to be some lack of good faith, error in law or principle, or some real and substantive ground for doubting the prudence of the liquidator’s proposal: Re Spedley Securities (in liq) (1992) 9 ACSR 83 at 85-6. … In most cases commercial considerations play an important role in whether a compromise is for the benefit of creditors.” (State Bank of New South Wales v Turner Corp Ltd (1994) 14 ACSR 480 at 483, per Tamberlin J)

“In deciding whether or not to sanction a proposed compromise the court must consider whether the interests of those, whether creditors or contributories, who have a real interest in the assets of a company in liquidation, are likely to be best served (i) by permitting the company to enter into that compromise with all the terms that it contains; or (ii) by not permitting the company to enter into that compromise. It is not for the court to speculate whether the terms of the proposed compromise were the best that could have been obtained; or whether the proposed compromise would have been better if it did not contain all the terms that it does contain; or whether there could have been a better compromise unless it is satisfied that, if the company is not permitted to enter into the compromise on the terms which the liquidator has negotiated there will then be better terms or some other compromise on offer, the decision is between the proposed compromise and no compromise at all.

In reaching that decision, the court may have to weigh the different interests of creditors and contributories and, perhaps, the different interests of preferential and non-preferential creditors … [T]he court will give weight to the wishes of creditors and contributories whose interests it has to consider, for the reason that creditors and contributories, if uninfluenced by extraneous considerations, are likely to be good judges of where their own best interests lie. For the same reason the court will give weight to the views of the liquidator, who may, and normally will, be in the best position to take an informed and objective view. But, as said, at the end of the day it is for the court to decide whether or not to sanction compromise.

… In cases … for which [the liquidator] has obtained sanction of the liquidation committee … [i]t is right that the court should not interfere in such a case unless the liquidator is acting mala fide or his decision is one which no reasonable liquidator could take.” (Re Greenhaven Motors at 643d to 644a, per Chadwick LJ)

32. The judge had clearly borne in mind the guidance in the above cases which were quoted in his judgment.  He also noted in §20:

“Obvious considerations that are to be taken into account by a liquidator or the Court include the strengths of a claim, prospects of recovery and a company’s ability to finance either the prosecution or defence of legal proceedings. By the very nature of the position of a company in insolvent liquidation, as the Company was at the material time, its ability to finance legal proceedings is commonly a very important consideration and the Court is frequently asked to sanction settlements on terms that reflect this and that are perhaps less favourable than a solvent and well resourced company might be prepared to agree.”

33. So for Ms Yeung to succeed on appeal, she must demonstrate that the judge was plainly wrong in his exercise of discretion in refusing to allow an enquiry into the complaints against the Liquidator to proceed, and that the judge was wrong in holding that the Liquidator had acted reasonably in causing the Company to enter into the deed of settlement.

The judge’s treatment of the evidence

34. Mr Duncan submitted that in holding that the Liquidator did not act unreasonably in entering into the deed of settlement, the judge had overlooked serious triable issues in that he had ignored or rejected substantial portions of Ms Yeung’s case contained in her husband’s affirmation.

35. In §§22 and 23, the judge considered the evidence on the offer of litigation funding for the Action.  In short, after writing to all the shareholders and all known creditors on 5 and 6 May 2005, the only offer received was a letter from Mr Wong of 1 September 2005 stating that “one of the shareholders” was willing to finance the litigation and proposed to buy the majority shareholding in a related company Shun Kai Investment Ltd (“SKIL”) for $1,000 for SKIL to take up the litigation on behalf of the Company.  It was proposed that SKIL would pay the legal fees and provide security for costs if ordered by the court and if the Action was decided in favour of the Company, SKIL would pay to the Company $8 million from the litigation proceeds, of which $4.2 million would be repayment for SKIL’s debt to the Company.  So the net sum that would be received by the Company from the Action, if it were successful, would be $3.8 million.

36. This offer was rejected by the Liquidator in his letter to Mr Wong on 29 September 2005 stating that he did not see “any real and immediate benefits to the other creditors until and unless the Action is won”, that the matter “can drag on for a very lengthy period of time with uncertainties”, and Mr Wong was asked to give a revised proposal with significantly improved terms within 14 days.

37. In §§24 and 25, the judge came to the view that the Liquidator’s reaction to Mr Wong’s offer was not unreasonable and saw nothing in Mr Wong’s evidence which suggests that the court could properly conclude that the Liquidator’s view about the credibility of Mr Wong’s offer was reached negligently or that the Liquidator’s decision was not within the scope of decision which one might reasonably expect a liquidator to reach in the circumstances of this case.

38. There is nothing about any of the complaints made on appeal – that the Liquidator did not expressly raise his concerns about funding with Mr Wong or any other shareholder, that Mr Wong was never asked to organise a shareholders’ meeting to discuss his offer, or that Mr Wong had asked the Liquidator through the latter’s assistant to counter-propose or to wait for the result of a trial of the Action by Mr Wong and Ms Yeung, who were the other plaintiffs in the Action.  These assertions, even if true, were wholly immaterial.  For the reasons given in §24 of the decision, the Liquidator was entirely entitled to come to the view that Mr Wong’s offer was not commercially sound or unlikely to result in any feasible agreement to fund the Action and could not reasonably be criticised for not pursuing the offer further.

39. In §26, the judge regarded it material that Japan Leasing was in liquidation and there was good reason for the Liquidator to proceed on the assumption that even if it were successful in the Action, this “might not realise much for creditors”.  Mr Wong deposed that he learnt from lawyers that Japan Leasing had paid all of its creditors “and had funds in surplus”.  The Liquidator accepted that Japan Leasing had paid all of its creditors in its liquidation.  Mr Duncan submitted the judge should have found a triable issue on the prospects of substantial recovery in the Action.

40. I do not agree with this. Firstly, on the available materials, there was nothing to suggest that Japan Leasing was in a financial position to pay very substantial damages if the Company should succeed in the Action.  Secondly, in any event, the highest offer the Liquidator received from Japan Leasing was $4 million, and he did not have sufficient funding to continue to pursue the Action.  It is not in dispute that the offer of Japan Leasing was a “take it or leave it” offer.  Thirdly, whether Japan Leasing could pay very substantial damages was entirely immaterial.  On Mr Wong’s offer, all that the Company would receive, if it should succeed in the Action, was $4.2 million which would go to repay SKIL’s debt to the Company, and $3.8 million.  The Liquidator could hardly be criticised for accepting Japan Leasing’s offer of an immediate payment of $4 million with no condition attached.

41. In §§29 and 30, the judge considered the Liquidator’s reasons why he took the view that the Company’s claim in the Action of $190 million was speculative and grossly inflated.  The complaints are that the judge ignored or failed to understand the explanation in Mr Wong’s affirmation how this figure was computed and he ignored Mr Wong’s assertion that the Company would cover substantial damages for the loss of opportunity under the Home Ownership Scheme as this new product was “a real and tested proposition”.

42. There is nothing to suggest that the judge had misunderstood the relevant evidence on both sides.  The fact that he did not mention Mr Wong’s explanation did not mean he had not considered it.  In any event, the pertinent consideration is whether the Liquidator had acted reasonably in coming to the view that the Company’s claim of $190 million was grossly inflated and speculative.  On the information available to the Liquidator at the time, he had good reasons to come to the view that it was.

43. The next complaint is that the judge failed to appreciate the effect of the judgment of Recorder E Chan, SC on 28 March 2001 in two actions brought by Japan Leasing against the Company (HCMP 3604/1999 and HCMP 4999/1999) to recover possession of two properties (“the Properties”) being the subject of sub-mortgages to Japan Leasing and to obtain an order for sale.  Mr Duncan submitted the effect of this judgment is that until the adjudication of the Action, Japan Leasing was prevented from claiming that any of the loans and interest claimed by Japan Leasing against the Company were due and from claiming possession of any of the properties sub-mortgaged to it, as Japan Leasing was in liquidation and there was a mandatory statutory set off for mutual dealings by virtue of section 264 of the Companies Ordinance and section 35 of the Bankruptcy Ordinance and only the net amount after the set off was recoverable. In light of this judgment, it was contended that there was no justification for the Liquidator to deliver vacant possession of the Properties to Japan Leasing as part of the settlement.  The Liquidator admitted he did not consider this judgment in light of the lack of funding to pursue the Action.

44. There is nothing in this complaint.  The judge specifically referred to the effect of this judgment in §27 and came to the view in §31 that this judgment should not be regarded as depriving Japan Leasing of the right to prove for its contingent claims in the Company’s liquidation, as this judgment only went to the point in time at which certain of the claims of Japan Leasing could be admitted, namely, after the determination of the Action.  What the Liquidator did was merely to assume (and which the judge held to be perfectly proper) that in part the claims of Japan Leasing would be admitted in due course, when he considered the offer to settle the Action.

45. As for delivering vacant possession of the Properties to Japan Leasing, it was the Liquidator’s commercial judgment there was little benefit in retaining possession.  The Liquidator had understood from Japan Leasing there was little or no equity value in the Properties.  He did not consider it necessary to incur significant time investigating the extent of the Company’s liabilities in respect of the Properties for lack of funding.

46. There is also nothing in the complaint that the Liquidator wrongly admitted $27 million of the proof of debt of Japan Leasing for $91 million.  This did not affect the interests of other creditors at all, as it was a term of the settlement that Japan Leasing would be excluded from any dividend distribution in the liquidation of the Company until all other adjudicated creditors had been repaid in full.  So the sum of $4 million received under the settlement was ring-fenced from Japan Leasing.  And as the sum of $4 million was clearly insufficient to pay the other adjudicated creditors in full, the admission of $27 million of the proof of debt of Japan Leasing was, as the Liquidator has put it, “purely academic”.

47. As for the complaint that the Liquidator had given no or little weight to the opinion of Sir John Swaine, SC obtained by Ms Yeung and Mr Wong in May 2005 regarding the prospects of success of the Action, in §28 the judge accepted for present purposes that the Liquidator, who had no other legal advice, should have taken that legal opinion at face value.  But this is hardly material to the commercial judgment of the Liquidator, in view of the lack of litigation funding, and there was no other compromise on offer.

48. The judge has dealt with all the main complaints alleged against the Liquidator.  It is not necessary to deal with each and every complaint raised by Ms Yeung.  Suffice it to say that none of the other complaints not mentioned specifically by the judge is sufficient to cast doubt on his exercise of discretion in refusing to allow an enquiry to proceed.  Nor is there anything in the available materials that would cast doubt on his good faith and prudence in reaching the settlement, as contended on behalf of Ms Yeung.  There is no basis to interfere with the judge’s exercise of discretion in dismissing the section 276 application.

49. Subject to one remaining ground of appeal, which relates to an application to bring a statutory derivative action under section 168BC[7] to be discussed subsequently, the appeal in CACV 32/2014 should be dismissed.

CACV 31/2014 – THE COMMON LAW DERIVATIVE ACTION

The claim against the Liquidator

50. As mentioned earlier, the common law derivative action in HCA 2180/2011 was brought as a derivative action (even though the Company is not named as a defendant) against BDO Ltd, BDO partnership and the Liquidator, to pursue a claim in respect of an alleged wrong by the Liquidator to the Company.

51. The judge dismissed the claim against the Liquidator for the reason given in §10 of the judgment, namely, that a claim against a liquidator does not fall within an exception to the rule in Foss v Harbottle and it cannot be pursued by a derivative action.  No ground of appeal was advanced in respect of this ruling.  The judge is entirely correct to rule in the way he did, see Re Ocean Time Development Ltd at §54.  The dismissal of the claim against the Liquidator in the common law derivative action must stand.

The claim against BDO Ltd and BDO partnership

52. The only ground upon which the appeal was brought relates to vicarious liability against BDO Ltd and BDO partnership.  The judge held in §12 that the claim against these defendants based on vicarious liability plainly has no prospect of success, as the Liquidator was appointed to this office personally by a court order and the judge could see no basis for treating him as being appointed in his capacity as employee or partner of BDO Ltd or BDO partnership.

53. Without even considering the merits or otherwise of the claim of vicarious liability, as the claim in the common law derivative action is dismissed against the Liquidator, and the recourse against the Liquidator cannot be pursued by a derivative action at common law, a claim in the common law derivative action against any person who is vicariously liable for the Liquidator’s actions must likewise fail.

54. For this reason, the appeal in CACV 31/2014 must be dismissed.

The application to bring a statutory derivative action

55. This leaves the application of Ms Yeung by a summons issued in December 2012 in the winding-up proceedings for leave to bring a statutory derivative action on behalf of the Company against BDO Ltd, BDO partnership and the Liquidator in respect of the same complaints made in the common law derivative action.  According to Mr Duncan, this application was brought to obviate any requirement in the section 276 proceedings that Ms Yeung must show the claimed compensation would bring about a surplus available to the contributories after the creditors were paid in full.

56. Mr Duncan submitted that a parallel statutory jurisdiction exists by virtue of section 168BC (Waddington v Chan Chun Hoo, §27 per Ribeiro PJ), there is no requirement in that provision that the company in question should not be in liquidation, and the requirements under that provision were satisfied on the facts.  He contended that where the judge entertained any doubt as to the availability to Ms Yeung of section 276, he should have acceded to her application to bring a derivative action under section 168BC, given that she has satisfied all of the requirements under that provision.

57. Mr Duncan further submitted that the judge should have applied the “close connection” test in Lister v Hesley Hall Ltd [2002] 1 AC 215 at 230D §28 per Lord Steyn and Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 at 377E §23 per Lord Nicholls, and the proper question to ask is whether the Liquidator’s alleged misfeasance was so closely connected with the acts he was authorised to do that the wrongful conduct may fairly and properly be regarded as done by the Liquidator while acting in the ordinary course of the business of the BDO partnership and his employment with BDO Ltd.

58. The judge did not make any order on that summons of Ms Yeung and did not refer to the application to bring a statutory derivative action in his decision.  So we do not have the benefit of the judge’s views whether a statutory derivative action could be brought for a wrong done to a company when the company is in liquidation.

59. Mr Manzoni submitted that if a derivative action is not available at common law where the company is in liquidation, the same rationale should apply to a statutory derivative action and there is no basis for extending the remedy of a statutory derivative action in this situation.

60. The requirements for granting leave are set out in section 168BC(3), of which subsections (a) and (b) read as follows:

“The court may, on the application of a member of a specified corporation, grant leave for the purpose of sub-s (1) if the court is satisfied that:

(a) it appears to be prima facie in the interest of the specified corporation that leave be granted to the applicant;

(b) if the applicant is applying for leave to bring proceedings under sub-s (1)(a), there is a serious question to be tried and the specified corporation has not itself brought the proceedings”.

61. The effect of these provisions was stated by Ribeiro PJ in Waddington v Chan Chun Hoo at §28.

62. In respect of subsection (3)(a), the requirement at common law of showing prima facie that the case falls within a relevant exception to the rule in Foss v Harbottle has been jettisoned by the statutory scheme, and the court now has a discretion to decide whether the proceedings are prima facie in the interest of the company. “In exercising its discretion, the court is effectively deciding, on the basis of criteria laid down by statute, whether the plaintiff should exceptionally be allowed to sue in place of the company which is normally the proper plaintiff, rendering the common law exceptions to the rule in Foss v Harbottle otiose in this context. The discretion is also obviously a safeguard against vexatious and inappropriate proceedings by disgruntled members.”

63. Subsection (3)(b) makes the grant of leave to bring a statutory derivative action conditional on the court being satisfied that “there is a serious question to be tried”.  The more stringent requirement at common law of a prima facie test regarding the sustainability of the company’s cause of action has been modified by the adoption of a lower threshold of “a serious question to be tried”.

64. For the purpose of this appeal, it is not necessary to come to a firm view whether a statutory derivative action is available where the company is in liquidation.  The rationale advocated by Mr Manzoni may not apply to the present situation, as, under the statutory scheme, it is no longer necessary to show that the case falls within a relevant exception to the rule in Foss v Harbottle.  I shall assume, without deciding, that leave may be granted to bring a statutory derivative action notwithstanding that the company is in liquidation, and consider whether it is prima facie in the interest of the company to allow such an action to be brought.

65. As noted by the judge, the claims in the section 276 action and the common law derivative action (also the statutory derivative action, which the judge did not consider) are in almost identical terms.  The only material difference is that in the derivative action, there are claims against BDO Ltd and BDO partnership on the basis of vicarious liability for the alleged wrongdoing of the Liquidator.  The judge has exercised his discretion to dismiss the claim against the Liquidator in the section 276 action for the reasons fully canvassed in the earlier parts of this judgment.  In light of all those reasons, with which I agree, if the judge were to exercise his discretion under section 168BC(3)(a), I have little doubt he would have exercised his discretion in the same way and come to the decision that it would not be prima facie in the interest of the Company to allow Ms Yeung exceptionally to sue in place of the Company.

66. The claim based on vicarious liability does not alter the situation, as it is premised on wrongdoing being established against the Liquidator.  Hence, it is not necessary to come to a definite view whether BDO Ltd and BDO partnership should be vicariously liable for any wrongdoing of the Liquidator if the close connection test is to be applied, although I am more inclined to the view that as the Liquidator was appointed in his personal capacity and not in his capacity as an employee or partner of BDO Ltd or BDO partnership, and discharged his duties in that office as an officer of the court, it would not be fair and just to hold the employer or partnership vicariously liable as the Liquidator owed no duties to his employer or the partnership in the performance of his duties.  This is analogous to the situation of an employer company nominating its employees to act as directors of its subsidiary.  As the employees were acting as directors in their individual capacity and not as employees of the parent company and owed no duties to the employer in the performance of their duties as directors, the employer was not vicariously liable for their wrongdoing (Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 at 222B to F).

67. For the above reasons, I would reject the ground of appeal that the judge should have granted leave to Ms Yeung to bring a statutory derivative action.

Conclusion and order

68. For the above reasons, I would dismiss both appeals of Ms Yeung and order her to pay costs to the respondent or respondents in each appeal, with a certificate for two counsel.

Hon Chu JA:

69. I agree.

Hon McWalters JA:

70. I agree.

[1] Both parties have no objection that I should hear these appeals.

[2] Appearing with Mr Cao Yuan Shan

[3] This should be a reference to Hong Kong Civil Procedure 2010

[4] Appearing with Mr Justin Ho

[5] The equivalent provision is section 212(3) of the Insolvency Act 1986

[6] The equivalent provision is section 536 of the Corporations Act 2001. Section 536(1) reads:

“Where: (a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing:

(i) a requirement of the Court; or

(ii) a requirement of this Act, of the Regulations or the Rules; or

(b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties;

the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.”

[7] Now sections 732 and 733 of the Companies Ordinance, Cap 622