KONG PO KING v. CHAN KIN HANG, DANVIL

HCMP 230/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 230 OF 2009

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D E C I S I O N

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The question for determination

1.  This is an application to reverse or vary the decision of the liquidator of Supershine Limited (“the Company”), which was put into voluntary liquidation, to reject the proof of debt of Madam Kong Po King lodged on 14 August 2008, pursuant to rule 95 of the Companies (Winding-up) Rules.

2.  The proof of debt claimed $3 million as due from the Company to Madam Kong.  She provided no particulars of how and when the debt was incurred, and no details of any documents by reference to which the debt can be substantiated, contrary to the requirements in rule 82 of the Companies (Winding-up) Rules. 

3.  It is hardly surprising that her proof of debt was rejected by the liquidator, as conveyed to her in a notice dated 4 February 2009. 

4.  On an appeal against a liquidator’s decision in respect of a proof of debt, the court is not confined to the evidence then available to the liquidator.  The court is bound to decide the claimant’s rights in the light of all the evidence before it.

5.  The onus is on Madam Kong as the proving creditor to prove on the balance of probabilities a real debt is due to her.  It is the right and duty of a liquidator when examining a proof of debt, to require satisfactory evidence that the debt claimed is a real debt.  No judgment recovered against the company, no covenant given by or account stated with the company, can deprive the liquidator of this right.  He is entitled to go behind such forms to get at the truth (Trustee in Bankruptcy of Lo Siu Fai Louis v Toohey [2005] 4 HKC 51 at 56D, para. 13; Re Luen Cheong Tai Construction Company Limited, HCCW No. 190 of 2002, 4 June 2008, Kwan J, para. 13).

6.  The question for determination in this appeal is whether Madam Kong has discharged the onus of establishing the debt she claimed is a real debt on the balance of probabilities.  In her proof of debt, her claim was $3 million.  In her affirmation in reply filed in this appeal, she reduced her claim by half to $1.5 million.

7.  The liquidator submitted there was and still is insufficient substantiation of the alleged debt, whether this be $3 million or $1.5 million.

The background

8.  I will first set out the relevant background matters.

9.  Madam Kong is married to Chan Chi Ming.  Both of them have filed evidence in support of this appeal. 

10.  The Company was incorporated on 21 September 2001 in Hong Kong with an authorised share capital of $10,000 divided into 10,000 shares.  Its principal activity was the wholesale of diamonds.  It was put into voluntary liquidation in August 2008.

11.  The first shareholders and directors were Madam Lam Fung Ying, Chan Wai Tong and Cheng Chun Ming.  Madam Lam was a nominee of Chan Chi Ming.  She held 5,000 shares and later these shares were transferred to Madam Kong, again holding as a nominee for her husband.  Madam Kong also became a director in place of Madam Lam by 2007. 

12.  According to the affirmation of Chan Chi Ming, he decided to set up the Company with Chan Wai Tong and Cheng in 2001, but he did not wish his name to appear as shareholder or director, so he appointed Madam Lam and later his wife as his nominee, to supervise the operation of the Company on his behalf. 

13.  Chan Chi Ming was engaged in the business of wholesale and retail of jewellery.  At all material times, he was the owner of 50% of the issued shares of Wah Link Jewellery Limited (“Wah Link”) and one of its two directors.

Evidence in support of the claim adduced in the appeal

14.  According to the banking records of the Nanyang Commercial Bank (“the Bank”) produced by Chan Chi Ming for the relevant period in October and November 2001, these transactions took place:

(1)  on 15 October 2001, $1 million was transferred from the personal savings account of Chan Chi Ming with the Bank to a joint savings account of Chan Wai Tong and Cheng with the Bank;

(2)  on 1 November 2001, $1 million was transferred from the bank account of Wah Link with the Bank to the said joint account of Chan Wai Tong and Cheng; and

(3)  on 27 November 2001, $1 million was transferred from the said bank account of Wah Link to the said joint account of Chan Wai Tong and Cheng.

15.  It was alleged in the affirmation of Chan Chi Ming that in early October 2001, he (acting on Madam Lam’s behalf), Chan Wai Tong and Cheng held a directors’ meeting.  It was decided that the Company would require a loan of $3 million to set up business operations, to cover expenses in commencing business including renovation, payment of rent, and purchasing stock.  Chan Chi Ming believed the minutes for this meeting are in the liquidator’s possession.  The liquidator however made no mention of this in his affirmation filed in this appeal. 

16.  As for why the three sums of $1 million each were paid into the joint bank account of Chan Wai Tong and Cheng, Chan Chi Ming claimed this was because the Company was newly incorporated on 21 September 2001, and did not have its own bank account as yet. 

17.  It was alleged by Madam Kong and Chan Chi Ming in their affirmations that in early October 2001, an oral agreement was made between Madam Kong and her husband acting on behalf of the Company that she would lend $3 million to the Company, and “due to the financial arrangements of [Chan Chi Ming] and [Madam Kong]”, it was decided the money would be advanced from the bank accounts of Chan Chi Ming and Wah Link on her behalf.

18.  Two other documents were produced and relied on by Madam Kong. 

19.  First is a signed confirmation for audit purposes dated 10 April 2008 issued by the Company’s auditors stating that in the course of examination of the Company’s accounts, they found $3 million due to Madam Kong as at 31 August 2007, and she had signed on this document as confirmation. 

20.  The other document is the audited financial statements of the Company for the year ended 31 August 2007 issued on 14 April 2008.  Under current liabilities, there was trade and other payables of $12 million odd and according to note 16, this included “amount due to directors” of $3,282,530.38.  It was asserted that this figure included the $3 million advanced by Madam Kong to the Company.

A different case advanced in HCA No. 161 of 2009

21.  The papers for this appeal were filed on 10 February 2009. 

22.  On 20 January 2009, Chan Chi Ming had issued a writ against Cheng and Chan Wai Tong in HCA No. 161 of 2009, claiming, inter alia, $1.5 million as a loan he had agreed to advance to them.  The statement of claim set out particulars of the transfer of $3 million to the joint bank account of Cheng and Chan Wai Tong, and they are the same as the particulars of transfer of $3 million in the affirmation of Chan Chi Ming in this appeal. 

23.  The case of Chan Chi Ming pleaded in the statement of claim in the High Court action is inconsistent with the case put forward in this appeal, as supported by his affirmation, in these material respects:

(1)  of the $3 million, $1.5 million of which was a loan made by him to Cheng and Chan Wai Tong pursuant to an agreement made on 18 June 2001 between him and the borrowers;

(2)  the other $1.5 million represented his investment in the Company;

(3)  the agreement to lend $1.5 million to Cheng and Chan Wai Tong was subject to the term that these borrowers were to pay interest on the loan at 9% per annum as and from 1 January 2002 and they would be jointly and severally liable for repayment of the loan.

24.  Thus, in respect of $1.5 million, the identities of both the lender and the borrower were different from the case of Madam Kong in this appeal.  As for the remaining $1.5 million, this was alleged to be an investment of Chan Chi Ming, not a loan at all. 

A further version in the evidence in reply

25.  The liquidator filed evidence in this appeal and exhibited to his affirmation a copy of the statement of claim in the High Court action, stating that further evidence is required to clarify the situation in view of the different version regarding the alleged loan put forward in the High Court action.

26.  In reply to that, Madam Kong filed an affirmation on 1 April 2009 in which she claimed for the first time that “a sum of HK$1.5 million out of the said HK$3 million was agreed to be notionally treated as a loan to Chan and Cheng” and “it is inaccurate to describe the remaining HK$1.5 million of the HK$3 million advanced as [Chan Chi Ming’s] investment in the Company.  This remaining HK$1.5 million was a loan made by [her] to the Company.”

27.  Madam Kong said in her affirmation she was advised by her solicitors her proof of debt should be admitted in the amount of $1.5 million only, apparently on the basis of the $1.5 million she claimed to be a loan by her to the Company. 

28.  This version in her evidence in reply is different from the case of Chan Chi Ming in the statement of claim. 

A further different case advanced in HCA No 161 of 2009

29.  The statement of claim was amended on 30 April 2009, with a statement of truth signed by Chan Chi Ming that the facts stated in the amended statement of claim are true. 

30.  The amendments included the following:

(1)   it was alleged there was a term of the agreement reached by Chan Chi Ming with Cheng and Chan Wai Tong that Chan Chi Ming would be entitled from time to time to demand repayment of and the borrowers would be liable to repay the personal loan of $1.5 million and interest thereon immediately, which would appear to be inconsistent with another part of the pleading which stated that the borrowers agreed to repay when the Company is put into liquidation by whatsoever reason; and

(2)   the other sum of $1.5 million was a loan of Chan Chi Ming to the Company. 

31.  Contrary to Madam Kong’s affirmation in reply, Chan Chi Ming was alleged to be the lender of $1.5 million to the Company instead of her.

32.  The court was not provided with the defence filed by the defendants in the High Court action, so does not know what allegation or counter-allegation was made by Cheng and Chan Wai Tong. 

Decision

33.  There are no less than four conflicting versions put forward by Madam Kong and her husband regarding the identities of the lender, the borrower, and the loan amount. 

34.  The documentary evidence adduced does not amount to satisfactory evidence that the amount claimed is a real debt due from the Company to Madam Kong on the balance of probabilities.  The audit confirmation is just a self-serving statement.  The audited financial statement, with no breakdown or details of the amount due to directors of $3,282,530.38, is insufficient. 

35.  Even if payments were made by her husband and Wah Link on her behalf in 2001, there is no evidence to show that Madam Kong herself had ever repaid the monies advanced on her behalf to her husband or Wah Link.

36.  There is no evidence the monies paid into the joint bank account of Cheng and Chan Wai Tong were transferred to or used by the Company.

37.  I see no basis to reverse or vary the liquidator’s decision in rejecting the proof of debt.  The appeal is dismissed.

38.  Mr Chu for the liquidator seeks costs on an indemnity basis on the ground that the appeal is ill founded and misconceived.  I am inclined to agree this is an appropriate case to award costs on indemnity basis.  As I have stated, no less than four different versions had been advanced to the court by Madam Kong and her husband in this appeal and in the High Court action.  The appeal is hopeless and should not have been brought in the first place.

39.  I have considered a breakdown of the costs submitted by the liquidator’s solicitors.  Bearing in mind that the costs are to be awarded on an indemnity basis, I will take a more generous view regarding the time spent by the solicitors in communication with client and with the opposite party, and in the drafting and perusal of documents.

40.  The amount I have arrived at is $92,600, to be paid by Madam Kong as the liquidator’s costs on this appeal.