JOHN ROBERT LEES AND ANOTHER v. DRAGON INVESTMENT CO II LLC

HCA 1180/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1180 OF 2003

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J U D G M E N T

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1.  This is an application for summary judgment.  The plaintiffs and defendant are parties to an indemnity agreement by which the defendant agreed to indemnify the plaintiffs from liability incurred as provisional liquidators in a winding up.  Under the agreement the plaintiffs sue to recover an amount a little in excess of $9m.  Part of this has been taxed in the winding up action; as for the balance taxation is pending.  By this application the plaintiffs ask for judgment for the taxed amount less what has already been paid, and a declaration that the defendant be bound to pay the balance after taxation.

Background Facts

2.  The defendant was one of a number of investors in a foreign registered company called SinoAmerican Telecom Inc. (SinoAmerican).  By May 1998 SinoAmerican had become insolvent and unable to meet its debts.  A consortium of its creditors selected the defendant to petition for its winding up.  The plaintiffs were invited to take up the appointment of joint provisional liquidators, which they agreed to subject to the defendant indemnifying them from liability incurred over and above that recoverable from the debtor.

3.  The plaintiffs were duly made joint provisional liquidators by order of 14 May 1998.  That appointment lasted until 6 December 2000 when, following the liquidation of SinoAmerican, they were then made joint liquidators.  The indemnity agreement was signed on 16 June 1998, being a month after their initial appointment.  (A point is taken that this agreement post-dated the appointment, as I shall come to).  But meanwhile, the defendant obtained counter-indemnities from its co-creditors, thus to share out the defendant’s obligations owed the plaintiffs.

4.  During the course of their holding office, it so happened that the plaintiffs recovered nothing at all from the debtor company.  They looked to the defendant for their costs, disbursements and remuneration.  When the defendant declined to pay, the plaintiffs began this action in March 2003.  The sum of $5,930,101.50 was that which was taxed and approved by Kwan J., the judge having conduct of the winding up proceedings, by order of August 2004.  The sum of $528,343.25 having been paid, summary judgment for the balance taxed costs is sought, with a declaration for liability of the balance once that has been taxed.

Legal Principles

5.  Though sparingly exercised, the court does have power to make a declaration on an interlocutory application as long as it is a final one; see the White Book 15/16/7.  This is an application for a final declaration and I am satisfied I have the power.

6.  Otherwise, the legal principles for summary judgment are well known; when applied for the plaintiff is entitled to judgment on a bona fide claim unless the defendant can show a triable issue or an arguable defence.  Whilst the burden is thus on the defendant, he need show no more than that he has a credible defence which he should then be entitled to pursue; see, for example, the general commentary at the White Book 14/4/9, and Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225.

The Indemnity Agreement

7.  This document is central to the issues to be resolved; I reproduce it in full below.

“DRAGON INVESTMENT COMPANY II LLC

June 16, 1998

To:    John Lees and Desmond Chung Seng Chiong, both of 8/F Hong Kong Club Building, 3A Chater Road, and FH Securities Limited and FH Nominees Limited.

SinoAmerican Telecom Inc.

In consideration of your agreeing at the request of the undersigned to accept appointment as joint provisional liquidators of SinoAmerican Telecom Inc, the undersigned hereby undertake jointly and severally to indemnify you, your employees, your respective personal representatives, executors, administrators and successors in title and at all times to keep the same indemnified from and against any liability which may be incurred or suffered by you or to which you may be or become liable by reason solely of the appointment of yourselves as joint provisional liquidators as aforesaid or of your acting as such joint provisional liquidators including your appointment as directors and officers of SinoAmerican Telecom Inc. and/or its subsidiaries or Shenzhen Ligao Telecom Technology Limited to the extent that you are unable to recover the same from the assets of SinoAmerican Telecom Inc. and provided such liability shall not have arisen by your own negligence misconduct or default.

In particular (but without prejudice to the generality of the foregoing) the undersigned hereby agreed to indemnify you, your employees, your respective personal representatives, executors, administrators and successors in title in respect of any costs, joint provisional liquidator’s remuneration and joint provisional liquidators’ disbursement to the extent not paid out of the companies’ assets and undertake to provide funds to meet the abovementioned claims, costs and disbursements immediately upon demand, provided that such actions, suits, proceedings, claims, demands, costs, expenses and other liabilities shall not have arisen or been caused by your negligence, misconduct or default.

This indemnity shall be binding on our respective personal representatives, executors, administrators, and successors in title.

Dated this 16^th day of June 1998.

(Signed)
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James Collins-Taylor
Director”

The Defence Position ……

8.  …… derives from its proposition that there are serious issues of fact and of construction that have to be resolved.  These are matters which taken individually and together warrant an Order 14 application for summary judgment inappropriate.

9.  Summarized, the issues are as follows:

Past Consideration

10.  The order appointing the plaintiffs and their acceptance of that are dated 14 May 1998, but the indemnity agreement was not entered into until 16 June, more than a month later.  The consideration for the indemnity is the acceptance of the appointment; yet that had already occurred.  The argument that the indemnity came into force as an oral agreement does not work, because the written document does not say that, nor is it pleaded.  And an Order 14 judgment cannot be granted on a basis other than that pleaded.  In any event Mr Lees in evidence refers to the agreement as having been entered into on the date of the document.

What is Covered?

11.  The plaintiffs sue for all of their costs and disbursements, including their own fees.  But the indemnity is limited to ‘liabilities which may be incurred or suffered’, and does not extend to guaranteeing the debtor company’s obligations to the plaintiffs.  By its wording the indemnity is against third party liability.  That does not include the plaintiffs’ fees, for which the plaintiffs themselves could not be said to be liable.

When Does the Indemnity Bite?

12.  By its express terms there are two limitations; the first, that the indemnity arises to the extent only that the plaintiffs are unable to recover from the assets of the debtor company, and secondly, that it will not meet such costs as may have been incurred as a result of negligence, misconduct or default.  There is a third and obvious limitation; namely, that it is to indemnify the plaintiffs in their capacity as joint provisional liquidators of the debtor and not for liability for other activity.

13.  The defendant’s evidence was adduced in an affidavit by its director Mr Collins-Taylor who, it can be seen, is the signatory on the indemnity.  He produced a report from a chartered accountant in practice that points to areas of prospective professional negligence as an explanation for the substantial costs incurred, together with the total absence of recovery from the debtor.  These include a failure to consider a suit against the Auditors, and the prospect that some of the work charged up to the company and by default the defendant should realistically have been charged to a third party, called for convenience Phoenix.

The Plaintiffs’ Response

14.  The past consideration argument is disingenuous.  There was an oral agreement confirmed only by the later document.  That is reflected in the wording.  The defendant obtained counter-indemnities from its fellow creditors, and otherwise conducted itself on the basis that there was a valid commitment.  This included sending ‘call’ letters to the other investor for funds to meet the joint liability.

15.  Furthermore, it was obviously a matter of common intention that the plaintiffs would be indemnified for work undertaken whilst in office in consideration for their taking up the appointment and thereafter holding such office.  On the facts the appointment and indemnity were in effect contemporaneous; as at the signing the work had hardly got under way.

16.  As to the argument that the indemnity does not cover their own fees, the plaintiffs respond that such an interpretation is absurd and flies in the face not only of commonsense, but also the words ‘joint provisional liquidator’s (sic) remuneration’ at paragraph 2.

17.  As to the limitations; the first, that the plaintiffs must first recover from the debtor company.  That there are no assets was because those that were said to exist turned out to be no more than worthless choses in action.  It was established to the satisfaction of the court in the winding up proceedings that there was and is nothing to recover; the defendant as petitioning creditor was aware of this.  In any event, the plaintiffs in their office of provisional liquidators were not appointed to wind up the company but to safeguard its assets.

18.  As to the allegation of prospective negligence; at no stage during the winding up proceedings was this put forward.  The defendant had the opportunity to do so but did not.  The court has approved the plaintiffs’ remuneration to the extent that there was a taxation.  As is usual, some of the expenditure was revised downwards and this was and is accepted by the plaintiffs.  Otherwise there was no tag.  Besides, the so-called expert report upon which the defendant invites the court to rely is based on speculation and innuendo, and, as submitted by Mr Barlow: ‘is tantamount to alleging that Kwan J failed to discharge her responsibility as Companies Judge to supervise the plaintiffs and, in particular, to scrutinize the plaintiffs’ remuneration.’

19.  The same approach can be said of the allegation that some of the work charged to the debtor company and the defendant might have been carried out for Phoenix.

The Result

20.  As the aforementioned reads there are a number material unresolved issues going to construction and matters of fact.

21.  On the prospective defence of negligence by the plaintiffs, they claim to have an absolute answer to the allegations of actual or prospective negligence or misconduct; that their performance was at all material times subjected to scrutiny by Kwan J.  That they passed muster under her watchful eye reveals the speciousness of these allegations.  But I accept that this was scrutiny undertaken in winding up proceedings in which emphasis is on the extent of allowable remuneration and would not have gone to issues of negligence unless of the most obvious kind.  In any event, the defendant as a separate contracting party in the deed of indemnity should not be estopped from mounting its own defence under this head.

22.  It is of course not within my province to consider the strength of a defence on those or any of the other grounds.  Suffice to say that, overall, I am satisfied that the defendant has done enough to show there are triable issues.  In the circumstances I give leave to the defendant to defend the action unconditionally.

23.  As for costs; these are nisi.  They are in the cause.