WING HONG CONSTRUCTION LTD v. HUI CHI YUNG AND OTHERS

HCA 1423/2015

[2020] HKCFI 2985

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1423 OF 2015

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JUDGMENT

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CONTENTS

A.   INTRODUCTION.......................................................................... 1

B.    FACTUAL BACKGROUND......................................................... 5

B1.    Basis for findings.................................................................. 5

B2.    The parties............................................................................ 7

B3.    Dispute with Match Power.................................................... 21

B4.    The Major Arbitration and the TC Arbitration........................ 25

B5.    Interim payment applications brought by subcontractors........ 38

B6.    Loans from CNCG............................................................... 31

B7.    Wing Hong’s financial statements 2008-2010......................... 35

B8.    Tranche 1 hearing in the Major Arbitration (7 April 2008

          - 30 April 2008) and Settlement Offer (20 May 2008)............ 44

B9.    The Board Meeting, Loan Agreement and Floating Charge

          (31 May 2008)..................................................................... 48

B10.  The Partial Awards and the Transfers.................................... 56

B11.   Events following the Transfers and sale of Wing Hong to

          Keen Fortune (19 October 2010).......................................... 71

B12.   Litigation by subcontractors and solicitors............................ 79

B13.   Control of Wing Hong       .................................................. 83

B14.   Wing Hong’s audited financial statements for 2011-2013....... 93

B15.   Winding up......................................................................... 98

C.    MAIN ISSUES............................................................................ 100

C1.    The critical issues.............................................................   100

C2.    Threshold disputes on the Floating Charge........................    103

D.   ASSESSMENT OF FACTUAL DISPUTES AND WITNESSES... 136

D1.    General principles and approach.......................................... 136

D2.    Absence of witnesses and documents.................................. 139

D3.    General assessment of the witnesses.................................... 147

E.    THE CREDITORS’ INTERESTS DUTY..................................... 153

E1.    Basis of the duty................................................................. 153

E2.    Triggering the duty.............................................................. 158

E3.    Effect of the duty and the question of breach....................... 165

F.    WING HONG’S SOLVENCY..................................................... 173

F1.    General principles on assessment......................................... 173

F2.    Significance of financial support.......................................... 181

F3.    Overall position: continuous financial support...................... 198

F4.    Solvency as at 31 May 2008................................................ 224

F5.    Solvency during the Relevant Period.................................... 246

F6.    Balance sheet position......................................................... 262

F7.    Expert evidence.................................................................. 270

F8.    Doubtful solvency?............................................................. 275

F9.    Conclusion on solvency...................................................... 290

G.   WHETHER BREACH OF FIDUCIARY DUTIES......................... 291

G1.    State of play....................................................................... 291

G2.    In relation to the Floating Charge......................................... 293

G3.    In relation to the Transfers.................................................. 301

H.   KNOWING RECEIPT.................................................................. 311

I.     LOSS AND REMEDIES.............................................................. 312

J.     CPO S.60 CLAIM....................................................................... 314

K.   CONCLUSION............................................................................ 317

A.    INTRODUCTION

1.  Wing Hong Construction Limited (“Wing Hong”) was once a thriving construction company but now sits in liquidation. In this action, Wing Hong’s liquidators claim on its behalf against three former directors (the 1^st, 2^nd and 3^rd Defendants, together “the Defendant Directors”) and a former indirect parent company (the 4^th Defendant).

2.  The focal claim goes to alleged breaches of fiduciary duty and knowing receipt involving three transfers totalling HK$50.6 million (“the Transfers”). The Transfers were made when Wing Hong was allegedly insolvent or of doubtful solvency. There is an alternative claim under s.60 of the Conveyancing and Property Ordinance (Cap 219) (“CPO”), though this scarcely featured at trial.

3.  The trial ran for 12 days in total. The extended gap between the two main hearing periods, in November 2019 and July 2020, was partly due to the GAP (General Adjournment Period) in response to COVID-19. 

4.  The trial process has been much assisted by counsel: Mr Justin Ho acting as sole counsel for the Plaintiff, and Mr Paul Lam SC leading Mr Vincent Lung for the Defendants. Solicitors and counsel on both sides were excellent in organising the extensive trial materials and agreeing logistics. Mr Ho and Mr Lam SC presented their cases with clarity and rigour. I am grateful for all the assistance rendered.

B.    FACTUAL BACKGROUND

B1.    Basis for findings

5.  I will start with an overview of the factual background to the claims. This is largely based on the Agreed List of Facts jointly prepared by counsel and annexed to the Plaintiff’s written Closing Submissions (“Wing Hong’s Closing Submissions”).

6.  Where the overview departs from the Agreed List of Facts, it reflects my findings based on the evidence before me.

B2.    The parties

The Plaintiff, Wing Hong

7.  Wing Hong was incorporated in Hong Kong on 8 February 1994.

8.  The company was actively engaged in the construction business until at least 2005 and was the major trading subsidiary of the 4^th Defendant, China National Culture Group Limited (“CNCG”) until 19 October 2010.

9.  CNCG was until 2 September 2008 known as Wing Hong (Holdings) Limited and then as China Railsmedia Corporation Limited. As will be seen below, CNCG’s original name reflects its role as Wing Hong’s indirect parent company.

10.  Wing Hong’s financial, administrative, accounting and management functions were run from its registered office, which from 2 December 2006 to 11 April 2012 was also CNCG’s head office and principal place of business.

The 1^st Defendant, Hui Chi Yung

11.  The 1^st Defendant, Hui Chi Yung, was:

(1)  A director of Wing Hong from 7 April 1994 until 27 May 2011.

(2)  Wing Hong’s company secretary from 7 April 1994 until 14 June 2012.

(3)  An authorised signatory for Wing Hong’s bank accounts with Standard Chartered Bank (Hong Kong) Limited (“Standard Chartered Bank”) until that account was closed in October 2010, and with Dah Sing Bank until at least 1 December 2011.

(4)  An executive director, Chief Executive Officer and the Chairman of the Board of Directors of CNCG until his resignation on 5 February 2014.

(5)  One of the beneficiaries of the Wing Hong Trust, which indirectly held about 48.5% of the issued shares in CNCG through Rich Place Investment Ltd (“Rich Place”) and Wise Win Enterprises Ltd.

The 2^nd Defendant, Hui Chi Yang

12.  The 2^nd Defendant, Hui Chi Yang, is the 1^st Defendant’s brother and was:

(1)  A director of Wing Hong from 1 October 1996 until 21 January 2011.

(2)  An authorised signatory for Wing Hong’s bank account with Standard Chartered Bank until the account closed in October 2010 and its Dah Sing Bank until at least 24 February 2012.

(3)  Beneficially interested at all material times in some 2.85% of the issued shares in Wing Hong through his wholly-owned company, United Century Ltd.

The 3^rd Defendant, Yiu Kai Yeuk

13.  The 3^rd Defendant, Yiu Kai Yeuk (Raphael), was:

(1)  A Wing Hong director from 7 April 1994 until 13 July 2010.

(2)  An authorised signatory for Wing Hong’s account with Standard Chartered Bank until his resignation as a director of Wing Hong on 13 July 2010.

(3)  An executive director of CNCG from 2 September 2002 to 23 April 2010.

(4)  At all material times beneficially interested in about 4.19% of the issued shares in CNCG through his wholly-owned company, Million Honest Ltd.

The 4^th Defendant, CNCG

14.  The 4^th Defendant, CNCG, is a public company incorporated under Cayman Islands law on 27 August 2002. Its shares are traded on the Main Board of the Hong Kong Stock Exchange (Stock Code: 0745). As earlier noted, CNCG was originally known as Wing Hong (Holdings) Limited.

15.  From 9 September 2004 to 19 October 2010, CNCG indirectly held 100% of the shares in Wing Hong through two wholly owned subsidiaries:

(1)  Shing Tak Construction Company Limited (“Shing Tak”), which held approximately 99.99% of Wing Hong’s share capital.

(2)  Wing Hong Contractors Limited (“WH Contractors”), which held approximately 0.01% of Wing Hong’s share capital.

16.  Rich Place (together with Wise Win Enterprises) held 48.5% of CNCG’s shares on behalf of the Wing Hong Trust, and is referred to in various of Wing Hong’s financial statements as its ultimate holding company.

17.  Besides the 1^st and 3^rd Defendants, the only other executive director of Wing Hong at the relevant times was Hui Kau Mo, the 1^st and 2^nd Defendants’ father.

18.  Wing Hong and CNCG shared some common staff and management:

(1)  As detailed above, the 1^st and 3^rd Defendants were executive directors of CNCG for several years starting from April 1994 (until May 2011 in the 1^st Defendant’s case, and July 2010 in the 3^rd Defendant’s case).

(2)  Lee Wing Hon (Eric) was at all material times Wing Hong’s Electrical and Mechanical Manager and a member of CNCG’s senior management. 

(3)  Gina Wong, Edmund Li and Ray Sit were CNCG Financial Controllers at over different spans of the relevant period. They were responsible for overseeing the accounting and financial management of the Wing Hong Group (CNCG and its subsidiaries, including Wing Hong).

(4)  From December 2010, Ronald Sin Kwok Wai was the financial controller and company secretary of the Wing Hong Group, and Wing Hong’s finance manager from December 2010.

19.  Mr Liu Kwong Sang was and remains an independent non-executive director and chairman of CNCG’s audit committee since 6 September 2004.

20.  On 19 October 2010, Shing Tak and WH Contractors sold all their shares in Wing Hong to Keen Fortune Investments Limited (“Keen Fortune”) for a consideration of HK$100,000.

B3.    Dispute with Match Power

21.  In or around November 2001, Wing Hong was appointed main contractor for a major residential project at Beacon Hill Road, Kowloon (“Beacon Hill Project”) by Match Power Investment Limited (“Match Power”), a Cheung Kong group subsidiary.

22.  The Beacon Hill Project suffered various delays. The certified practical completion date was 21 May 2004. 

23.  Match Power withheld interim payments to Wing Hong in the sum of HK$120,459,396 on the basis of (among other things) alleged delay, defects and damage to trees, giving rise to litigation between the parties.

24.  As a result of the dispute, Wing Hong had to settle substantial expenses out of its own pocket.

B4.    The Major Arbitration and the TC Arbitration

25.  Wing Hong started arbitration proceedings against Match Power in respect of the Beacon Hill Project in May 2005 (“the Major Arbitration”).

26.  Around late 2006, Wing Hong also commenced arbitration proceedings against Clayton Power Enterprises Limited (another Cheung Kong group member at the time) and Cosmos Wide International Limited over a construction project in Tung Chung (“the TC Arbitration”).

27.  After the onset of the Major Arbitration and the TC Arbitration, most of Wing Hong’s financial resources were dedicated to dealing with those proceedings.

B5.    Interim payment applications brought by subcontractors

28.  Between 2001 and 2010, numerous interim payment applications were made against Wing Hong by its subcontractors. These subcontractors included:

(1)  Wai Tat Engineering Limited.

(2)  Luen Yick Engineering Company Limited (“Luen Yick”).

(3)  Wai Shun Ceiling Engineering Limited.

(4)  Sun Brave Limited.

(5)  Hing Luen Scaffolding Limited.

(6)  Paul Y. Interior Contractors Limited (“Paul Y”).

(7)  Brilliant Hope Engineering Limited.

(8)  Tat Lee Engineering (China) Limited.

(9)  Chevalier (Aluminium Engineering) Hong Kong Limited (“Chevalier”).

(10)  Wing Kwong Painting Company Limited (“Wing Kwong”).

29.  The above companies were all Wing Hong’s subcontractors in the Beacon Hill Project. They have submitted proofs of debt in Wing Hong’s liquidation for amounts claimed as due from Wing Hong. 

30.  All of these alleged debts were, at various times and to various extents, disputed by Wing Hong and were unresolved at the time of the Transfers.

B6.    Loans from CNCG

31.  From 2005, the CNCG made advances to Wing Hong by way of loans in order to meet certain of Wing Hong’s cash flow requirements.

32.  Wing Hong’s audited financial statements recorded the amounts due to an intermediate holding company (CNCG) as follows:

Financial statements	Year ended
	2006 (HK$)	2007 (HK$)	2008 (HK$)	2009 (HK$)	2010 (HK$)
Amounts due to an intermediate holding company	53,200,030	67,835,365	128,724,859	171,460,576	124,776,611

33.  These transactions have been summarised in an agreed consolidated schedule of transactions between Wing Hong and CNCG based on disclosed bank slips and cheques, which the parties agree are an incomplete record of their dealings during this time.

34.  In addition, the Defendants’ expert Mr Bruno Arboit has appended to his Report (1) a current account between Wing Hong and CNCG, and (2) a schedule of cash receipts and payments based on vouchers.  Wing Hong’s expert Mr Mat Ng did not dispute the appendices compiled by Mr Arboit, though Wing Hong does not admit the accuracy of the underlying information used to create the appendices.

B7.    Wing Hong’s financial statements 2008 – 2010

35.  Wing Hong’s audited financial statements for the financial years ended 31 March 2008, 2009 and 2010 recorded the following:

	Year ended
	31 March 2008 (HK$)	31 March 2009 (HK$)	31 March 2010 (HK$)
Assets	153,065,990	151,762,424	38,016,533
Liabilities	180,867,768	225,597,267	185,478,366
Net Assets	(27,801,778)	(73,834,843)	(147,461,833)
Revenue	4,077,902	5,038,104	7,729,248
Expenses	(38,916,268)	(50,992,349)	(40,726,276)
Impairment			(40,641,854)
Net Loss	(34,838,366)	(45,954,245)	(73,638,882)

36.  The financial statements for the financial year ended 31 March 2008 and 31 March 2009 were signed by the 1^st and 3^rd Defendants. The financial statements for the financial year ended 31 March 2010 were signed by the 1^st and 2^nd Defendants.

37.  The assets stated in Wing Hong’s financial statements for the years ended 31 March 2008 and 2009 included the sum of HK$120,459,396 withheld by a customer in respect of disputes with the company. That amount was subsequently written off by HK$40,641,854 during 31 March 2010 financial year.

38.  The liabilities stated in Wing Hong’s financial statements for the years ended 31 March 2008 to 31 March 2010 excluded contingent liabilities which were recorded in the notes to the financial statements on the basis of purported disputes.

39.  Note 3 of Wing Hong’s audited financial statements for the year ended 31 March 2008 states that:

“In order to maintain the working capital of the Company, the intermediate holding company has confirmed to provide continuing financial support to the Company to enable it to continue as a going concern and to settle its liabilities as and when they fall due. In the opinion of the directors, in light of the continual financial support from the intermediate holding company, the Company would have sufficient financial resources to satisfy its working capital needs for the foreseeable future. Accordingly, the directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis”.

40.  Note 3 of Wing Hong’s audited financial statements for the year ended 31 March 2009 states that:

“In order to maintain the working capital of the Company, the ultimate holding company has confirmed to provide continuing financial support to the Company to enable it to continue as a going concern and to settle its liabilities as and when they fall due. In the opinion of the directors, in light of the continual financial support from the ultimate holding company, the Company would have sufficient financial resources to satisfy its working capital needs for the foreseeable future. Accordingly, the directors are satisfied that it is appropriate to prepare the financial statements on a going concern basis”.

41.  For the years ended 31 March 2008 and 2009, Wing Hong’s auditors issued a disclaimer identifying “[s]ignificant uncertainty and limitation of audit scope relating to the recoverability of accounts receivable and arbitration” and “significant uncertainties relating to the going concern basis of the Company”.

42.  For the year ended 31 March 2010, Note 3 of Wing Hong’s audited financial statements states that:

“The financial statements have been prepared on a going concern basis as the ultimate holding company, Rich Place Investment Limited has confirmed to provide continuing financial support to the Company to enable it to continue as a going concern and to settle its liabilities as and when they fall due.”

43.  For the financial year ended 31 March 2010, Wing Hong’s auditors issued a disclaimer of opinion, citing “material uncertainty which may cast significant doubt about Wing Hong’s ability to continue as a going concern”.

B8.    Tranche 1 hearing in the Major Arbitration (7 April 2008 – 30 April 2008) and Settlement Offer (20 May 2008)

44.  Proceedings for Tranche 1 of the Major Arbitration, concerning delay in works completion and claims on extension of time, were heard in April 2008.

45.  Following the Tranche 1 hearing, the parties’ respective positions were as follows:

(1)  Wing Hong claimed entitlement to the maximum net sum of HK$255,703,384.92.

(2)  Match Power claimed entitlement to the maximum net sum of HK$31,984,177.09.

46.  On 20 May 2008, Wing Hong received a written offer from Match Power to settle the claims in the Major Arbitration for HK$100 million.

47.  On 22 May 2008, Wing Hong rejected the settlement offer and counter-offered settlement of the matter for HK$240 million.

B9.    The Board Meeting, Loan Agreement and Floating Charge (31 May 2008)

48.  Wing Hong Board Minutes dated 31 May 2008 record a meeting that day attended by the 1^st Defendant (by phone) and the 3^rd Defendant.  The stated purpose of the meeting was to consider a possible loan agreement between Wing Hong as borrower and CNCG as lender (“the Loan Agreement”).

49.  According to the minutes, a draft loan agreement tabled at the meeting stated that the agreement would be conditional on the entering of a floating charge as security (“the Floating Charge”).

50.  The meeting minutes indicate that the directors approved entry into the Loan Agreement and that any one director was authorised to do so on behalf of Wing Hong.

51.  An unsigned copy of the Loan Agreement has been disclosed in these proceedings.

52.  No document purporting to create the Floating Charge has been disclosed.

53.  On 4 July 2008, the Companies Registry issued a certificate of registration in respect of a floating charge purportedly created on 31 May 2008.

54.  Wing Hong’s audited financial statements for the years ended 31 March 2008 to 2010 reported the amount owing to CNCG as either “unsecured and repayable on demand” or “unsecured and [having] no fixed terms of repayment”.

55.  On 25 July 2008, the 1^st and 3^rd Defendants signed Wing Hong’s audited Financial statements for the year ended 31 March 2008.

B10.    The Partial Awards and the Transfers

56.  Proceedings for Tranche 2 of the Major Arbitration, concerning Wing Hong’s claim for variations to the final contract sum and claim for loss and expense due to Match Power’s delay, were heard in September 2008.  Tranche 3 of the Major Arbitration, dealing with Match Power’s trees counterclaim and defects counterclaim, was heard later the same month.  

57.  On 19 March 2009, the 1^st Partial Award was handed down in the Major Arbitration, dealing with Tranche 1 issues (i.e. the delay in completion of the works and claims on extension of time). On these issues:

(1)  Wing Hong had alleged an entitlement to 355 days, in which case Match Power would not be entitled to deduct any liquidated damages for delay.

(2)  The arbitrator held that Wing Hong should be entitled to an extension of time of 154 days.

(3)  The arbitrator held that Match Power was entitled to withhold a sum of HK$70.35 million as liquidated damages for Wing Hong’s delay.

(4)  The precise amount to be reimbursed by Match Power was still subject to other matters in dispute and so the arbitrator did not quantify the sum due at that time.

58.  On 10 July 2009, the 1st and 3rd Defendants signed Wing Hang’s audited financial statements for the year ended 31 March 2009.

59.  On 11 July 2009, the 2^nd Partial Award was handed down, dealing with Tranche 2 issues (Wing Hong’s claim for variations to the final contract sum and claim for loss and expense due to Match Power’s delay) in full, as well as Match Power’s trees counterclaim from amongst the Tranche 3 issues:

(1)  Wing Hong was partially successful in relation to its claims for variations but the quantification of those matters was deferred for further determination.

(2)  Wing Hong’s claim for loss and expense caused by delay failed entirely, because Wing Hong had not complied with contractual provisions as to the provision of a detailed and substantiated claim for such a claim.

(3)  Wing Hong’s claim for an indemnity in respect of claims by nominated subcontractors failed entirely.

(4)  Match Power partially succeeded in its claims relating to trees, such that the Plaintiff was liable to pay HK$22,332,100.

60.  On 22 August 2009, the 1^st Interim Payment Order was made, requiring Match Power to pay Wing Hong HK$12,805,970.78.

61.  On 16 September 2009, Wing Hong received HK$4,994,821.30 pursuant to the 1^st Interim Payment Order (after deduction of legal fees).

62.  As at 18 September 2009, the positions of the parties in the Major Arbitration were as follows:

(1)  Wing Hong claimed entitlement to the maximum net sum of HK$88,846,492.43, in addition to the HK$12,805,970.72 already awarded (but excluding interests and costs).

(2)  Match Power claimed that no further sum was due to Wing Hong.

63.  On 18 September 2009, HK$5,000,000 was transferred from Wing Hong’s bank account at Standard Chartered Bank to CNCG at the instruction of the 1^st and 2^nd Defendants (“the 1^st Transfer”).

64.  On 11 December 2009, the 3^rd Partial Award (later corrected by a Correction to 3^rd Partial Award dated 5 January 2010) was handed down, dealing with other Tranche 3 issues (Match Power’s counterclaim in defects). Essentially:

(1)  Match Power was partially successful and was awarded the sum of HK$15,977,629.15.

(2)  Match Power was also held to be entitled to compensation in respect of certain preliminaries to “Able account” but the precise quantum was deferred for further determination.

(3)  Other defects claims (which were new claims added by late amendment by Match Power) were left over to a prospective Tranche 4.

65.  On 26 January 2010, the 2^nd Interim Payment Order was made.

66.  On 17 February 2010, Wing Hong received HK$46,752,011.01 pursuant to the 2^nd Interim Payment Order.

67.  As at 19 February 2010, the positions of the parties in the Major Arbitration were as follows:

(1)  Wing Hong claimed to be entitled to the maximum net sum of HK$26,116,852.21, in addition to the HK$59,557,981.79 already awarded to it (but excluding interests and costs).

(2)  Match Power claimed that no further sum was payable to Wing Hong.

68.  On 19 February 2010, HK$45,500,000 was transferred from Wing Hong’s bank account at Standard Chartered Bank to CNCG at the instruction of the 1^st and 2^nd Defendants (“the 2^nd Transfer”).

69.  On 10 March 2010, HK$100,000 was transferred from Wing Hong’s bank account at Standard Chartered Bank to CNCG at the instruction of the 1^st and 3^rd Defendants (“the 3^rd Transfer”).

70.  In total, HK$50,600,000 was transferred by the Transfers from Wing Hong to CNCG between 18 September 2009 and 10 March 2010 (“the Relevant Period”).

B11.    Events following the Transfers and sale of Wing Hong to Keen Fortune (19 October 2010)

71.  According to the minutes of a meeting of CNCG’s directors dated 31 March 2010, CNCG resolved to waive an amount of HK$134,756,941.41 accounts receivable from Wing Hong.

72.  The 1^st Defendant contends, but Wing Hong does not admit, that the minutes of the meeting should be dated one or two weeks before Wing Hong was sold to Keen Fortune.

73.  On 9 July 2010, the 1^st and 2^nd Defendants signed Wing Hong’s audited Financial statements for the year ended 31 March 2010. The value attributed to the “Receivable Under Dispute” in the Major Arbitration was reduced to HK$20,419,562.

74.  On 26 August 2010, Wing Hong and Match Power reached a settlement agreement to resolve outstanding matters in dispute (Tranche 4 issues) but excluding interest and costs, pursuant to which Match Power was required to pay HK$6,142,787.13 to Wing Hong, and additionally HK$15,363,307.80 in instalments to Wing Hong as Wing Hong completed certain repairs in accordance with the settlement agreement.

75.  On 19 October 2010, Shing Tak and WH Contractors transferred all their shares in Wing Hong to Keen Fortune for the stated consideration of HK$100,000.

76.  In its public announcement of the share transfer, CNCG reported that Wing Hong had net liabilities of about HK$23.9 million and that expenses incidental to the disposal were HK$150,000.

77.  On 11 April 2011, the Partial Award on Interests and Costs was handed down.

(1)  On 17 May 2011, the parties reached an agreement on the total interest payable. HK$30,521,788 was paid by Match Power to Wing Hong pursuant to the agreement on interest on the same day.

(2)  On 6 August 2012, the parties reached a settlement agreement on costs. HK$6 million was paid by Match Power to Wing Hong pursuant to the settlement agreement on costs on the same day.

78.  Wing Hong’s total established entitlement from Match Power as a result of the Major Arbitration was HK$102,222,556.92, inclusive of costs and interest, plus a further sum of HK$15,363,307.80 which would be released upon Wing Hong undertaking further defect rectification work.

B12.    Litigation by subcontractors and solicitors

79.  Between 2010 and 2013, the following occurred in relation to disputes between Wing Hong and its subcontractors:

(1)  On 3 February 2010, Tin Wo Engineering Company Limited (“Tin Wo”) obtained an interim award against Wing Hong. Wing Hong sought leave to appeal against the award but failed and was ordered to pay Tin Wo’s costs of and incidental to the proceedings on an indemnity basis.

(2)  On 17 January 2011, Shun Cheong Electrical Engineering Company Limited (“Shun Cheong”) filed a petition seeking Wing Hong’s winding up on the basis of a debt of HK$17,603,878.71 and on the basis that Wing Hong was insolvent. Evidence was filed in opposition by two members of CNCG’s senior management. The petition was eventually resolved after settlement negotiations by payment of HK$7,650,000 to Shun Cheong on 25 May 2011.

(3)  On 10 February 2011, Wing Hong settled a dispute regarding a debt due to Chevalier. The settlement involved the payment of at least HK$4,200,000, with additional amounts payable depending on what Wing Hong was able to recover as costs of the Major Arbitration. An outstanding sum of HK$200,000 is the subject of Chevalier’s proof of debt.

(4)  On 20 September 2012, Wing Kwong obtained an arbitration award against Wing Hong for HK$2,464,569.53 plus interest, out of a claim for the sum of HK$6,250,830.16. This award is the subject of Wing Kwong’s proof of debt.

(5)  On 30 June 2013, Paul Y obtained an arbitration award against Wing Hong in the sum of HK$4,723,681, plus interest of at least HK$2,883,892.69 and costs and later obtained Court judgment for the same sums. This award is the subject of Paul Y’s proof of debt.

80.  On 27 and 29 August 2013, Messrs Leung & Associates wrote to Wing Hong demanding payment of fees and later submitted a proof of debt seeking payment of HK$1,944,909.50 for unpaid bills dating back to 19 August 2008.

81.  On 29 October 2013, Messrs Pinsent Masons obtained judgment against Wing Hong for the sum of HK$508,053.51, plus interest and costs, in respect of unpaid legal fees. This sum is the subject of Pinsent Masons’ proof of debt. 

82.  A number of other proceedings brought by subcontractors against Wing Hong remain unresolved due to Wing Hong’s winding up.

B13.    Control of Wing Hong

83.  Following the sale of Wing Hong’s shares to Keen Fortune, the 1^st and 2^nd Defendants remained directors of Wing Hong until 27 May 2011 and 21 January 2011 respectively.

84.  On 11 January 2011, Mr He Cai Bin was appointed a director of Wing Hong.

85.  The 1^st and 2^nd Defendants remained bank signatories of Wing Hong’s bank accounts and signed various cheques on behalf of Wing Hong until at least December 2011 and 24 February 2012 respectively.

86.  Kofit Properties Limited (“Kofit”) was a wholly owned subsidiary of CNCG until the latter sold 100% of its shares to Keen Fortune on 3 December 2010.

87.  Following the sale of CNCG’s shares in Kofit, the 1^st and 2^nd Defendants signed cheques on behalf of Kofit until 18 October 2011 and 23 February 2012 respectively.

88.  Until 12 April 2012, Wing Hong and CNCG continued to operate out of the same address at Flat C, 3/F, Shing Lee Commercial Building, No. 8, Wing Kut Street, Central, Hong Kong.

89.  On 14 June 2012:

(1)  The 1^st Defendant ceased to be a company secretary of Wing Hong.

(2)  Mr He Cai Bin ceased to be a director of Wing Hong.

(3)  Ms Tang Chunju was appointed sole director of Wing Hong.

(4)  Main Sharp Limited was appointed secretary of Wing Hong.

90.  The 1^st Defendant, together with Lee Wing Hon (Eric), CNCG’s Electrical and Mechanical Manager, continued to assist Wing Hong in its defence to creditors’ claims in arbitration proceedings up to at least July 2012. 

91.  The 1^st Defendant was authorised to handle and sign any document for settling legal cost disputes in the Major Arbitration up to at least July 2012.

92.  Wing Hong’s bank statements for its HSBC and Dah Sing Bank accounts continued to be directly sent to CNCG’s principal place of business up until at least 5 February 2013 and 4 November 2014 respectively.

B14.    Wing Hong’s audited financial statements for 2011 – 2013

93.  After the Transfers and after Wing Hong was sold to Keen Fortune, Wing Hong’s audited financial statements for the financial years ended 31 March 2011, 2012 and 2013 recorded the following matters:

	Year ended
	31 March 2011 (HK$)	31 March 2012 (HK$)	31 March 2013 (HK$)
Assets	14,652,496	17,107,821	1,697,254
Liabilities	27,672,998	15,844,958	19,029,353
Net Assets	(13,020,502)	1,262,863	(17,342,099)
Net Profit/ Loss	134,441,331	14,283,365	(18,594,962)

94.  No contingent liabilities were recorded in any of the years ended 31 March 2011 to 31 March 2013.

95.  For Wing Hong’s financial statements for the year ended 31 March 2011, its auditors issued a “Qualified opinion arising from limitation of audit scope” and stated “No direct confirmation of the balances of accounts receivable, other receivable, accounts payable, other payable are available and the Company's record do not permit the application of other auditing procedures to the balances.”

96.  For Wing Hong’s financial statements for the year ended 31 March 2012 and 31 March 2013, Wing Hong’s auditors issued a qualified opinion and stated that:

“Direct confirmation from the company's bankers cannot be obtained. We express no opinion on the completeness of bank balances, bank loan, contingent liabilities, bills receivable and payable, if any, relating therefrom as stated in the statement of financial position.

No direct confirmation of the balances of other receivable, accounts payable, balances with related company are available and the company's record do not permit the application of other auditing procedures to the balances.

According to the information obtained, there were claims against the company settled through arbitration or negotiation of the company with the claimants. The accounts payable represents amount owing on works performed by sub-contractors that they failed to perform work or the amount withheld for payable due to counter-claims against the claimants involved. We are not able to express our opinion on adequacy of the balances as there is no direct confirmations from legal advisers available for the amount of outstanding and thus the possible contingent liabilities arising therefrom cannot be quantified.”

97.  In respect of Wing Hong’s financial statements for the year ended 31 March 2013, Wing Hong’s auditors also issued a disclaimer of opinion, stating:

“Because of the significance of the possible effect of the limitation in evidence to us, we are unable to form an opinion as to whether the financial statements give a true and fair view of the state of the company's affairs as at 31st March 2013, and of its loss and cash flows for the year then ended. In all other respects, in our opinion the financial statements have been properly prepared in accordance with the Hong Kong Financial Reporting Standard for Private Entities.

In respect of the limitation on our work relating to inventories and work in progress, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit and we were unable to determine whether proper books of accounts had been kept.”

B15.     Winding up

98.  On 17 October 2013, Chevalier presented a creditor’s winding up petition against Wing Hong.

99.  On 8 January 2014, Wing Hong was wound up in the High Court under the provisions of the Companies Ordinance (Cap 32).

C.   MAIN ISSUES

C1.   The critical issues

100.  It is common ground between the parties that:

(1)  The Defendant Directors caused Wing Hong to make the Transfers to CNCG in purported payment of loans from CNCG.

(2)  CNCG is a company in which the Defendant Directors are indirectly interested.

101.  Against the background outlined in Section B above, the critical issues for determination may be distilled to these:

(1)  Whether (a) the purported creation of the Floating Charge on 31 May 2008; and/or (b) the Transfers themselves made over the Relevant Period (18 September 2009 to 10 March 2010), occurred when Wing Hong was insolvent or of doubtful solvency, so as to trigger the Defendant Directors’ duty to have regard to the interests of Wing Hong’s creditors.

(2)  If so, whether the creation of the Floating Charge and/or the making of the Transfers were in breach of the Defendant Directors’ duties to Wing Hong’s creditors.

102.  Wing Hong’s financial position at the time of the Floating Charge and the Transfers is centrally important to this case. Unless it is shown that Wing Hong was insolvent or of doubtful solvency at the material times, the main foundation for Wing Hong’s claims of breach and relief – the creditors’ interests duty – falls away. 

C2.    Threshold disputes on the Floating Charge

103.  The matter of the Floating Charge has been contested on multiple levels. In what follows, I trace through the primary lines of dispute and set out my views on some threshold issues in this regard.

Pleadings

104.  To begin with, the Defendants dispute whether Wing Hong has a properly pleaded case on the Floating Charge.

105.  The Defendants say that this aspect of Wing Hong’s case is an entirely new one, raised only its Reply, and follows on from several earlier shifts in stance. The following points are emphasised in their written Closing Submissions:

(1)  On the allegation that Wing Hong was insolvent or of doubtful solvency:

(a)  The crux of Wing Hong’s case is encapsulated in its Statement of Claim (“SOC”) at §19. The sole pleaded basis for alleging insolvency or doubtful solvency “at the commencement of the Scheme” is “in view of the indebtedness owing by [Wing Hong] at that time (as described in [Part C of the SOC])”. Part C of the SOC sets out 10 alleged creditors of Wing Hong that were allegedly not paid on time. Wing Hong is said to be indebted to these creditors to the tune of about HK$60 million.

(b)  So under the SOC, the only timeframe in which to consider Wing Hong’s solvency is the Relevant Period, and not any other period; and the only basis for considering Wing Hong’s alleged insolvency (or doubtful solvency) is with regard to the debts in Part C of the SOC.

(c)  In its Reply, Wing Hong attempts to expand the basis for contending insolvency or doubtful solvency during the Relevant Period (which was hitherto based on Part C of the SOC, and effectively a cash flow test) to also rely on Wing Hong’s audited financial statements for the years ended 3 March 2009 and 31 March 2010.

(2)  More importantly, Wing Hong raises for the first time in its Reply an entirely new claim concerning the Floating Charge, alleging that:

(a)  Wing Hong was already insolvent or of doubtful solvency on 31 May 2008, i.e. the date on which the Floating Charge was purportedly created.

(b)  The creation of the Floating Charge constituted a breach of the Defendant Directors’ fiduciary duties.

(c)  In the premises, Wing Hong is entitled to various remedies including a declaration that the Floating Charge is either void or voidable and that it be rescinded.

106.  Against this, Mr Ho points out that, whether raised for the first time in Reply or not, Wing Hong’s case on the Floating Charge has been squarely raised, and the parties had all along been proceeding on that basis from the time pleadings were closed up to the start of trial. Mr Ho cited various procedural steps which he says reflect that reality, including the preparation of the supplemental joint expert report to deal with the very question of Wing Hong’s solvency at the time of the Floating Charge’s purported creation.

107.  For his part, without formally withdrawing his pleadings objection, Mr Lam SC did not strongly press the point in closing and dealt very thoroughly with the evidence on the matter in the course of trial. In closing submissions, he fairly and realistically did not contend that his clients were seriously prejudiced at trial by any shifts or shortcomings in Wing Hong’s pleaded case.

108.  In the circumstances, I will proceed on the basis that Wing Hong’s case on the Floating Charge has been properly put in issue and should be substantively determined.

Existence of the Floating Charge

109.  For its part, Wing Hong’s first contention on the Floating Charge is stark: it says that no such charge was ever in fact created.

110.  The following points are made in Wing Hong’s Closing Submissions:

(1)  Wing Hong’s board meeting meetings dated 31 May 2008 refer to a loan agreement to be entered into between Wing Hong and CNCG in respect of loans advanced by the latter in the amount of HK$123 million to Wing Hong, to be secured by a Floating Charge; and to authorisation of Wing Hong to enter into the loan agreement.

(2)  The Defendants have however failed to disclose any document creating the Floating Charge. Further, the Loan Agreement copy disclosed by the Defendants is unsigned. There is therefore no contemporaneous documentation directly supporting the creation of the Floating Charge.

(3)  The fact that the particulars of a purported Floating Charge were registered with the Companies Registry on 4 July 2008 does not advance the Defendants’ case.

(a)  There is authority for the proposition that the validity of a charge is a matter for the chargor and chargee, and it is not for the Registrar of Companies to find facts or pronounce upon validity of a charge. In other words, the mere registration of a charge in the Companies Registry does not go to the accuracy of the particulars recorded: In re an application by Sun Hung Kai Bank Ltd for Judicial Review [1985] HKLR 312, 318B-D (Hunter J); also R v Registrar of Companies ex parte Central Bank of India [1986] 1 QB 1114.

(b)  This (Wing Hong submits) makes eminent sense, as otherwise any third party could seek to register a security interest with the Companies Registry and defeat the rights of a company’s creditors, despite the lack of any proper vetting and/or ability of the company to challenge its validity.

(4)  Further, the purported creation of the Floating Charge on 31 May 2008 is contradicted by Wing Hong’s audited financial statements for the years ended 31 March 2009 and 31 March 2010, where the loans advanced to Wing Hong by CNCG (described as an “intermediate holding company”) continued to be described as “unsecured”.

111.  Wing Hong contends that it is inherently unlikely for a transaction as significant as the Floating Charge to be simply overlooked by the Defendant Directors, or by CNCG’s directors, or by the auditors of Wing Hong and CNCG in two consecutive years.

112.  Wing Hong says that it is likewise inherently unlikely that CNCG, a listed company, would keep no signed copy of the Loan Agreement and no copy whatsoever of the Floating Charge. 

113.  Accordingly, Wing Hong invites me to instead infer that CNCG erroneously registered a charge which had not been duly created.

114.  The matters highlighted by Wing Hong are certainly relevant factors in the balance. In my assessment, though, it is on balance more likely that the Floating Charge was duly created on or about 31 May 2008, leading to its subsequent registration in July 2008.

115.  As the question goes to events of more than a dozen years ago, I have kept in mind the considerations outlined in Section D below on the proper approach to evidence in this trial.

116.  Although no copy of the Floating Charge has been located, a Form M1 to register the Floating Charge was presented to the Companies Registry on 4 July 2008 by solicitors acting on behalf of Wing Hong. The Registrar of Companies duly issued a certificate of registration of charge.

117.  These facts are consistent with the prior creation of the Floating Charge. Under section 80(1) of the predecessor Companies Ordinance (Cap 32), for registration purposes the original instrument must be supplied to the Registrar: Sun Tai Cheung Credits Ltd v AG [1987] HKLR 1010 (Privy Council) at 1014F. The certificate is conclusive evidence that all requirements under that Part of the Ordinance (including section 80) have been complied with: section 83(2) of the then Companies Ordinance.

118.  The 31 May 2008 board minutes also support the Defendants’ case. It is not Wing Hong’s case that the minutes of its board meeting, referring to the Loan Agreement and the execution of the Floating Charge, are a false document or record.

119.  Nor do I understand Wing Hong to contend that any of the Defendant Directors have deliberately advanced a false account of the Floating Charge’s creation, or presented any false instrument to the Registrar. 

120.  The execution of the Floating Charge was a condition precedent to CNCG’s granting of further loans under the Loan Agreement: see Recital (D). The Defendants’ witnesses explained that they had been advised that this should be done for the sake of good corporate governance: the amount of loans extended to Wing Hong up that point had become very substantial, and CNCG had some new investors whose interests should be taken into account.

121.  As Mr Lam SC submitted in closing:

(1)  If Wing Hong was already insolvent or likely to become insolvent as at 31 May 2008 (which the Defendants deny), that was all the more reason why it was clearly in Wing Hong’s best interests, and that of creditors as a whole, to execute the Floating Charge, so that it would continue to have CNCG’s financial support to meet its debts. 

(2)  If no Floating Charge was executed, Wing Hong would indeed be at an even greater risk of becoming actually insolvent and ceasing to be a going concern. The execution of the Floating Charge was to ensure that Wing Hong could continue to be a going concern (which it did) such that it may continue to pursue the Major Arbitration and other proceedings. 

122.  Mr Lam SC also points out that one of Wing Hong’s liquidators, Mr Michael Chan, readily accepted during cross-examination that the Floating Charge had been created. This to me is a factor carrying minimal weight, though it is consistent with Wing Hong’s overall focus as regards the Floating Charge at trial, which has been upon the significance of such a charge in terms of the Defendant Directors’ fiduciary duties, on the assumption that such a charge had indeed been effectively created.

123.  The creation of the Floating Charge is in my view also consistent with the overall financial relationship and arrangements between Wing Hong and CNCG leading up to and during the time of the Loan Agreement and the Transfers, which are further addressed below (Section F3).

124.  I have taken on board that the disclosed copy of the Loan Agreement is unsigned, and that the Defendants have not disclosed any copy of the actual Floating Charge. However, given the amount of time now passed, the changes of management and ownership in that time, and the generally sub-optimal record keeping for Wing Hong across the board (not only in this particular instance), I do not think these matters shift the balance in any decisive way.

125.  Wing Hong has in various parts in its case referred to the Defendants’ evidence that the Floating Charge was partly to enable CNCG to recover its loans in the event that Wing Hong were eventually “hived-off” from the Wing Hong Group and sold to an independent third party.

126.  Wing Hong does not dispute that this was in fact a key reason for the Defendants’ interest in arranging a floating charge, but contends that the Defendants’ witnesses made inconsistent statements regarding their intention to sell Wing Hong in or around April 2008. I shall address the alleged inconsistency in Section D below. But what can be seen for present purposes is that the possibility of Wing Hong being “hived-off” at some point in the future would have been a compelling reason for the company to take all due care in ensuring the creation of an effective Floating Charge.   

127.  Before going further, I note that even if CNCG erroneously registered a charge which had not in fact been duly created (this being Wing Hong’s preferred analysis, which for the reasons above I reject), this itself would still tend to affirm the Defendants overall case as to an ongoing relationship of financial support for Wing Hong by the Wing Hong Group and in particular CNCG. As Wing Hong accepted at trial, the Defendants do appear from May 2008 to have proceed on the understanding that a floating charge was effectively created. That is consistent with the Defendants’ case on the existence of arrangements for continued financial support at and going forward from that point in time, and CNCG’s commitment to keeping Wing Hong afloat. 

Consequence of Floating Charge if proper and effective

128.  On the footing that the Floating Charge was created on or about 31 May 2008, the critical issue is whether Wing Hong was insolvent or of doubtful solvency at that time.

129.  The matter is critical since, as Wing Hong has accepted, its claims effectively fall away if the Court finds that Wing Hong was not, at the relevant times, either insolvent or otherwise of doubtful solvency in the “likely” or “probable” sense addressed in Section E2 below. 

130.  In that situation, there would be no viable basis for impugning the validity of the Floating Charge on the grounds of breach of the creditors’ interests duty. The position was crisply encapsulated in Mr Ho’s oral closing: “I only get to the Transfers if the Floating Charge is set aside”. Putting the matter less crisply but more fully: on the footing that the Floating Charge was valid and enforceable, the Transfers would not be open to effective challenge, particularly since the payments would have been repayments of substantial loans due to CNCG as a secured and undisputed creditor, with the Floating Charge itself a condition for the continued provision of loans to Wing Hong under the Loan Agreement. I further address this aspect in Section G2 below.

131.  As I understand it, Wing Hong does not contend that the foregoing is wrong in principle, but it maintains that the Floating Charge is not valid and enforceable because no effective charge was, in fact, ever actually created.[1]

Alleged Scheme to defeat creditors’ interests

132.  While only briefly alluded to in Mr Ho’s oral closing,[2] I specifically reject the allegation, made in Wing Hong’s written Closing Submissions, that the “purported” creation of a Floating Charge was part of a deliberate scheme (“the Alleged Scheme”) on the Defendants’ part to in effect create a smokescreen or pretext to “strip” Wing Hong of “substantially all its available cash”[3] in the course of its recovery of proceeds of the Major Arbitration, “solely for the benefit of [CNCG], to the exclusion of [Wing Hong’s] general body of creditors”,[4] and with a view to avoiding investigation into the Defendant Directors’ conduct.[5]

133.  This claim of serious misconduct forms what Mr Lam SC describes as Wing Hong’s “conspiracy theory”, involving as it does the suggestion of a premeditated, co-ordinated and veiled attempt over several years to defeat the interests of Wing Hong’s unsecured creditors.

134.  In my judgment, the evidence fails to substantiate any such scheme to strip Wing Hong of its assets in a manner that would be, as Mr Lam SC put it, “on the boundary of [a] criminal act.” Mr Lam SC submits, and I agree, that the Alleged Scheme as articulated in Wing Hong’s Closing Submissions was not put to the Defendants’ witnesses in cross-examination – at least not in a way commensurate with the seriousness of the claim. This in turn may explain why the Alleged Scheme featured little, if at all, in Mr Ho’s carefully measured oral closing.

135.  I will later return (Sections F and G below) to this aspect of Wing Hong’s case, which features as a recurring theme in relation to both the question of Wing Hong’s solvency at material times and, assuming activation of the creditors’ interests duty, that of breach.

D.    ASSESSMENT OF FACTUAL DISPUTES AND WITNESSES

D1.    General principles and approach

136.  As Mr Ho submitted, the contemporaneous documentation is highly important in considering the factual contentions and the witness evidence in this case, particularly given the long passage of time (over a decade) between the material events and trial.

137.  The guidance of Legatt J (as he then was) in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3650 (Comm) at §22 is helpful here:

“… the best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely…in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”

138.  Other well-established principles on evidentiary assessment are cited in the parties’ closing submissions. My assessment of the factual witnesses and allegations in this case has been guided by such principles, and in particular those regarding:

(1)  The need for caution in the drawing of inferences from apparently faulty memories, problems in recollection or confusion as to the factual details of long ago events (Lam Rogerio Sou Fung v Tan Soon Gin George HCA 2576/2005, unrep. 5 May 2011, §34).

(2)  The need to consider the inherent probabilities of an event having occurred (Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, 596G), and the related requirement that there be cogent evidence commensurate with the seriousness of an allegation (Re a Solicitor (2008) 11 HKCFAR 119, §§64-84).  

D2.    Absence of witnesses and documents

139.  Wing Hong’s Closing Submissions include numerous points on adverse inferences that may in some circumstances be drawn (1) upon a defendant’s failure to call a material witness; and (2) where a defendant has elected to withhold material documentary evidence.

140.  Overall, I do not think that such points advance Wing Hong’s factual case very much.  

141.  On the calling of witnesses, it is true that the 2^nd Defendant, Mr Hui Chi Yang, was not called. Yet the significance of this decision is elusive even on Wing Hong’s case. It seems from the authorities that Wing Hong cites, such as Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD 296 at §34, that it is broadly urging me to allow adverse inferences against the Defendants “more easily” and inferences favourable to Wing Hong “more confidently” absent any compelling explanation for the decision.

142.  However, as Mr Lam SC noted in his oral closing:

(1)  The Defendant Directors have filed and advanced a joint defence.

(2)  In the context of a board of directors with collective responsibility, there is nothing so peculiar to the 2^nd Defendant’s position that gives rise to a strong expectation that he gives evidence, for example as the only person qualified to explain the Floating Charge or the Transfers.

(3)  The 2^nd Defendant accepts that the success or failure of his case depends on whether the Court accepts the evidence of his co-directors.

143.  Even if evidence from the 2^nd Defendant might have further corroborated the accounts of the other Defendant Directors, or given Wing Hong a further opportunity to challenge their account, I do not think that this makes any decisive difference in the circumstances of this case. This is particularly so when Wing Hong does not squarely contend that the Defendant Directors lied on any material issue, and given its position that the factual issues in this case should be resolved with greater emphasis on the documentation rather witness recollections.    

144.  As to withholding of documents, Wing Hong’s Closing Submissions contend that:

(1)  The Defendants have without proper explanation failed to disclose any of the underlying accounting records in respect of Wing Hong or CNCG, including ledgers and management accounts.

(2)  The Court should therefore approach the 1^st and 3^rd Defendants’ explanations as to what they considered to be Wing Hong’s financial position at the material times with “great caution”, as they “took a deliberate decision, without explanation” to not disclose “the most fundamental and contemporaneous documents” (in particular management accounts) to reflect their actual intentions and views as regards Wing Hong’s financial position at the material times.[6]

(3)  The Court should infer that the Defendants did not disclose the relevant management accounts because those accounts were unfavourable to their case, i.e. they would have shown that Wing Hong was insolvent at the material times and/or contradict the explanations in their witness statements.

145.  In response, Mr Lam SC submitted that:

(1)  The Defendant Directors had long ceased to be Wing Hong directors by the time proceedings began.

(2)  For its part, CNCG had previously indirectly owned Wing Hong but held none of Wing Hong’s property, books and records following its sale to Keen Fortune in 2010.

(3)  Wing Hong had brought a specific discovery application in late 2016 against the Defendant Directors and CNCG for various classes of documents.

(4)  The Defendants had provided detailed responses by way of affirmation, variously providing documents confirmed to be within their possession, or otherwise confirming on oath that the specified documents were outside their possession, custody and power.

(5)  Wing Hong’s specific discovery summons was subsequently withdrawn by consent.

(6)  Even if there had been failure to fully comply with Hong Kong tax requirements to retain sufficient company records for 7 years (as Mr Ho put to witnesses in cross-examination), the fact remained that the Defendants had disclosed all relevant documents in their position.

(7)  There is no evidence that any of the Defendants deliberately destroyed or concealed any relevant accounting documents they had at the start of these proceedings.

146.  For the reasons outlined by Mr Lam SC, I agree that it would be inappropriate to draw adverse inferences against the Defendants on the basis of the gaps in accounting documentation flagged by Wing Hong.

D3.    General assessment of the witnesses

Wing Hong’s witnesses

147.  Wing Hong’s main factual witness was one of its liquidators, Mr Michael Chan. On the stand, Mr Chan forthrightly accepted his lack of first-hand or personal knowledge of Wing Hong’s affairs before his appointment as liquidator. I place no weight on Mr Chan’s evidence where it consists of opinions or commentary based on his reading of the documents relating to matters of which he had no personal knowledge. Mr Chan has however certainly assisted the trial process by producing various summary tables on matters such as Wing Hong’s audited financial results and cheque payments which were referenced several times at trial.

148.  Wing Hong’s remaining factual witnesses were sub-contractors who had claims against the company in relation to certain construction projects (primarily the Beacon Hill Project). There is nothing in this evidence to displace my findings on the key matters addressed below. Wing Hong has itself placed little if any reliance on the sub-contractor evidence in its trial submissions.

The Defendants’ witnesses

149.  The 1^st and 3^rd Defendants should mostly have direct personal knowledge of the relevant factual matters in this case. In considering their evidence, I have taken into account the points urged on me by Mr Ho in closing, inviting me to view their accounts with caution. These points include the similarity between some portions of their witness statements, instances of partial (Mr Ho says selective) recall of the details of the same event, the absence of the 2^nd Defendant as a factual witness (addressed in Section D2 above), and the 3^rd Defendant’s unprompted references during cross-examination to what Mr Ho contends are new matters not covered by the witness statements.

150.  In my assessment, however, neither party’s evidence was inconsistent – or as Mr Ho contended “at times blatantly self-serving” – to the extent of casting their fundamental honesty and credibility in doubt. 

151.  Overall, I find the 1^st and 3^rd Defendants to be generally credible witnesses. Alongside Mr Ho’s criticisms of their evidence, which I have borne in mind, I have also taken into account the following matters:

(1)  The considerable lapse of time between the events in question and trial. While it might be said that this renders their detailed recollection of past matters more open to question, it seems to me that their accounts (which are largely harmonious) are generally consistent with the available contemporaneous documents.

(2)  The 1^st and 3^rd Defendants’ demeanour on the stand. While far from dispositive in this case, their responses for the most part came across as thoughtful and candid, albeit (understandably) somewhat anxiously tendered when subject to Mr Ho’s intensive questioning. They were prepared at various points to frankly respond to pointed queries about their conduct, such as when I asked the 1^st Defendant why the directors persisted in engaging the same auditors notwithstanding his professed frustration with their performance – and he straightforwardly explained his reasoning, pointing to a number of pragmatic commercial considerations.  

(3)  As Mr Lam SC has emphasised, Wing Hong has advanced no positive case that the Defendants’ factual witnesses lied on any material issue.

(4)  The evidence of the 1^st and 3^rd Defendants is largely consistent with and corroborated by the witness evidence of Mr Liu Kwong Sang, particularly with regard to the inter-group loan and financing arrangements in relation to Wing Hong, which I address in Section F below. Mr Liu is a certified public accountant in Hong Kong with over 25 years’ of experience and an independent non-executive director of CNCG since 6 September 2004.

152.  Wing Hong’s main criticism of Mr Liu’s evidence is apparently that he was keen to distance himself from statements he had made in his witness statement regarding the reasons for the Floating Charge. Having reviewed his written statement and oral evidence on the matter, I see no critical discrepancy between the two accounts:

(1)  In his 2^nd Supplemental Statement at §13, Mr Liu stated that one main reason for the Floating Charge arrangement (others being internal control and corporate governance considerations) was to provide security to CNCG as lender to Wing Hong,

“in the event that [Wing Hong] is eventually hived-off from the Wing Hong Group and/or being sold to an independent third party (as CNCG already had plans to invest into a new business of media sales and marketing in the PRC at that time)”.

(2)  Under cross-examination, Mr Liu was initially hesitant when that proposition was put before him for confirmation, and said that at the time he “did not think about the sale of [Wing Hong]”. But after Mr Ho with customary fairness clarified that the proposition was taken from Mr Liu’s written statement, Mr Liu readily accepted that CNCG “was considering” a sale. In this connection, Mr Liu emphasised that the Floating Charge was accordingly a provision made “in the event” of Wing Hong being “eventually hived-off”.

(3)  Taken in the round, it seems to me that both on the stand and in his earlier statement, Mr Liu was merely saying that the Floating Charge was arranged to address the contingency of Wing Hong being sold, in circumstances where CNCG had already advanced substantial loans to it. At the same time, it was (according to Mr Liu) not the case that any specific sale to a given third party – whether already agreed or otherwise probable – was already in view. On my assessment of the evidence, such a sale was no more than one possibility for the future given CNCG’s broader PRC media investment plans.

(3)  Moreover, there is in my view nothing inherently suspect or improper in CNCG wishing to cater for the possibility of a future hiving-off as one contingency, or inconsistent between such a concern and a commitment to continued financial support for Wing Hong. Indeed, a natural view of the overall position is that the Floating Charge was a means of harmonising CNCG’s desire to both support its subsidiary while making responsible provision for its own position, so as to enable continued financial support.

(4)  In all, I do not consider that Mr Liu’s evidence on the Floating Charge or any other material issue casts doubt over his essential credibility as a witness and his general corroboration of the Defendants’ factual case. 

E.     THE CREDITORS’ INTERESTS DUTY

E1.    Basis of the duty

153.  I now come to the primary legal duty underpinning Wing Hong’s case, which both parties refer to as the creditors’ interests duty.

154.  While its precise contours are disputed, it is common ground that the duty is an incident of the general fiduciary duties owed to a company by its directors, and involves an obligation to consider the interests of the company’s creditors in certain situations – the paradigm instance being actual insolvency.

155.  The basis of the duty is explained in the oft-cited dictum of Street CJ in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, where the Chief Justice stated (at 730) that:

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when the questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration”.

156.  The duty provides a form of creditor protection, discouraging directors “from deploying company assets in ‘high risk, high reward’ investments in circumstances of insolvency, where shareholders might (given the protection of limited liability) be predicted to particularly favour such investments”: Goode on Principles of Corporate Insolvency Law (5^th edn. 2018), §14-21, p.757. A connected consideration is the difficulty which may arise in proving technical insolvency, and the concern that an overly narrow test would enable directors to escape responsibility too readily for risky dealings in financially precarious situations.  

157.  As Coleman J recently put it in Cyberworks Audio Video Technology Limited (In Compulsory Liquidation) v Mei Ah (HK) Company Limited [2020] HKCFI 398 at §66, where the creditors’ interests duty applies:

“The underlying principle is that directors are not free to take action which create a real, as opposed to remote, risk to the creditors’ prospects, without first having considered their interests rather than just those of the company and its shareholders. However, that does not give rise to any duty on the part of the directors directly owed to the creditors. Rather, the directors will owe a duty to the company to take care to protect the interests of the creditors: see Geraghty, Sinclair & Snowden ‘Company Directors: Law and Liability’ at §6.122”.

E2.    Triggering the duty

158.  The leading authority on when the creditors’ interests duty is triggered is the English Court of Appeal’s judgment in BTI 2014 LLC v Sequana SA [2019] 2 All ER 784.[7] 

159.  After canvassing a range of possible answers, David Richards LJ concluded at §220 of BTI that the trigger point is “when the directors know or should know that the company is or is likely to become insolvent”.

160.  Earlier in his judgment (at §201), the learned judge noted that the adoption of any legal test for triggering the creditors’ interests duty involves “a difficult amalgam of principle, policy, precedent and pragmatism”, and that the resulting legal position “will have very significant practical consequences for the conduct of business”

161.  The BTI formulation was recently applied in Hong Kong by Coleman J in Cyberworks (above) at §71. It is common ground between the parties that this test should govern the assessment of the Defendant Directors’ liability for breach of fiduciary duties.

162.  As explained in BTI at §218, a key reason why a threshold short of actual, established insolvency is justified is that the directors may often not know, nor be expected to know, that the company is actually insolvent until some time afterwards.

163.  On the “likely to become insolvent” trigger, the parties agree that “likely” in this context goes beyond the mere possibility of insolvency, and means “probable”: see BTI at §220 and Cyberworks at §68. So at its lowest reach, the triggering threshold for the creditors’ interests duty is where the directors objectively should know that the company’s insolvency is probable. It is unnecessary to prove actual knowledge of present insolvency. It suffices that a reasonable person in the directors’ position at the time would have appreciated that the company was likely to become insolvent.

164.  Here, Wing Hong seeks to cover all possible bases for the creditors’ interests duty by contending that at the time of the Floating Charge and the Transfers, the company was (1) as a matter of fact insolvent; or (2) the Defendants “at the very least knew or ought to have known that [Wing Hong] was likely to become insolvent”.[8] Both main scenarios involve an assessment of Wing Hong’s financial condition at the material times, which I address in Section F below.

E3.    Effect of the duty and the question of breach

165.  The existence of the creditors’ interests duty and its potential breach are separate matters. As Coleman J explained in Cyberworks at §72:

“The duty arises on a given set of facts, namely that the directors of a company know or ought to know that the company is or is likely to become insolvent. The duty, once it arises, cannot be ignored. But it might be addressed in a way which identifies that the duty has not been breached. Those ways might include looking at the bigger commercial picture and the commercial realities”.

166.  On commercial realities, it bears emphasis that:

(1)  In assessing an alleged breach of directors’ fiduciary duties, the court must guard against hindsight bias. As Professor Paul Matthews (sitting as a judge of the High Court of England and Wales) noted in Francis Wessely v Richard White [2018] EWHC 1499 (Ch) at §§43-44, drawing in part from Laddie J’s judgment in In Re Living Images Limited [1996] BCC 112 at 116:

“…Those statements and documents [disclosed to the court by the respondent directors and the Official Receiver] are analysed in the clinical atmosphere of the courtroom. They are analysed, for example, with the benefit of knowing that the company went into liquidation. It is very easy therefore to look at the signals available to the directors at the time and to assume that they, or any other competent director, would have realised that the end was coming. The Court must be careful not to fall into the trap of being too wise after the event.

…the conduct of the respondent must be judged as at the time that the acts complained of were committed, and in the context of how the situation appeared to the respondent then…”

(2)  The courts have “traditionally and properly been cautious in entering boardrooms and pronouncing upon the commercial justification of certain executive decisions”, with such caution particularly pertinent when the decision in question involves a “balance of commercial benefit and detriment”: Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555 at §154 (New South Wales Court of Appeal).

167.  Where group companies are involved, directors of an individual company are not entitled to “sacrifice” the interests of that company in order to promote the interests of other group companies even if they are also directors of them (Cyberworks §65).

168.  It is a generally accepted commercial reality, however, that group companies may often support one another in their financial and commercial arrangements. Actions carried out for the benefit for the group as a whole may potentially be regarded as benefiting one or more individual companies in the group: Lewis (above) at §148. 

169.  Commercial arrangements and dealings involving the interests of different group companies, or different creditors or shareholders of a particular company, are often not binary or zero-sum in nature but may involve an amalgam of benefits and detriments which enure to the overall advantage of all involved. 

170.  This aligns with Mr Lam SC’s submission (which Mr Ho did not dispute) that the creditors’ interests duty requires directors to consider the interests of all creditors as a whole, rather than the interests of different classes of creditors or individual creditors. As Mr Lam noted, the interests of different classes of creditors may be “inherently in conflict particularly in situations of (ex hypothesi) insolvency or probable insolvency”. 

171.  Where the creditors’ interests duty has arisen on a “doubtful” solvency basis, the law is presently unsettled on whether the creditors’ interests should be entirely paramount over those of other stakeholders of the company, or whether creditor interests need only be considered by the directors without being decisive. In BTI §222, David Richards LJ expressly refrained from reaching any settled view on the matter, while indicating (in my view correctly) that the degree to which creditors’ interests take priority over those of other stakeholders must ultimately depend on the facts of each case. The learned judge did however state that, where the company is actually insolvent, “it is hard to see that creditors’ interests could be anything but paramount”. 

172.  As to the proper vantagepoint for assessing breach, it is essentially uncontested that:

(1)  Where there is evidence of how the directors actually considered matters, a subject test generally applies and the key question is whether they genuinely believed their chosen course of action was in the best interests of the company, or where relevant its creditors.

(2)  If there is no evidence of actual consideration of best interests, the proper test is objective: could an intelligent and honest man in the position of a director of the company have reasonably believed in the circumstances that the transaction was for the benefit of the company / its creditors. In doing so, “the court does not substitute its own hindsight judgment on the relevant facts in place of the decision made by the directors at the time”, but “makes an objective judgment taking into account all the relevant facts known or which ought to have been known at the time”.

See Cyberworks §§69-70.

F.    WING HONG’S SOLVENCY

F1.     General principles on assessment

173.  Whether a company was insolvent on a particular day is a question of fact to be objectively determined (Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417 at §91), though often “a difficult and imprecise one”: McPherson & Keay, The Law of Company Liquidation (4^th edn 2018), §3-038 at p.115.

174.  Insolvency may be described as the inability to pay debts when they fall due: Re Jackin Total Fulfilment Services Ltd [2008] 3 HKLRD 475 at §26 (DHCJ Jonathan Harris SC as he then was).

175.  In Re Aloha Coffee Ltd [2013] 1 HKLRD 356 at §21, Anthony Chan J noted that this formulation may be “deceptive in its simplicity”, and identified among the questions arising from it those of “…the meaning of ‘debts’ and to what extent, if at all, should one consider the debts which will become payable in the future”. He rounded out a consideration of the cash flow test for insolvency with these observations:

“22. I am quite happy to accept that the essential question is whether the company’s financial position is such that it can continue in business and still pay its way. It accords with common sense that one must look, with a commercial approach, at the company’s financial position as a whole. In this regard, I respectfully agree with what was said by Emmett J in Quick v Stoland Pty Ltd (1998) 29 A.C.S.R. 130 (Federal Court of Australia), which was quoted in Principles of Corporate Insolvency Law, para 4-16:

‘In answering these questions, the court looks at the company’s financial position taken as a whole. In Quick v Stoland Pty Ltd, Emmett J., discussing the comparable concept of insolvency under s.95A of the Australian Corporations Law (now the Corporations Act 2001 (Cth)), put the matter in the following way:

In order to determine whether the company was solvent at a given time, it would be relevant to consider the following matters:

• All of the company’s debts as at that time in order to determine when those debts were due and payable.

• All of the assets of the company as at that time in order to determine the extent to which those assets were liquid or were realisable within a timeframe that would allow each of the debts to be paid as and when it became payable.

• The company's business as at that time in order to determine its expected net cash flow from the business by deducting from projected future sales the cash expenses which would be necessary to generate those sales.

• Arrangements between the company and prospective lenders, such as its bankers and shareholders, in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a time later than the debts’.”

176.  The significance accorded to the company’s overall financial position, and a cash flow perspective, aligns with the Court of Appeal’s recent judgment in Re GW Electronics Company Ltd [2020] HKCA 180, where Yuen JA (giving the judgment of the Court) stated at §29.2:

“Insolvency may be tested by either the cash flow test (also called the commercial insolvency test) or the balance sheet test. The cash flow test is normally used and there is no reason why it should not be used in the present case. As Wilson LJ [now Lord Wilson SCJ] held in Paulin v Paulin [[2010] 1 WLR 1057, §41]:

‘It is well established that the inquiry into whether on the relevant date the bankrupt was able to pay his debts is an inquiry not into whether his liabilities exceeded his assets [‘balance sheet insolvency’] but into whether he could meet his liabilities when they were due [‘commercial insolvency’]’.”

177.  So both the balance sheet and cash flow tests may be utilised as part of a single exercise to determine a company’s solvency. Neither test is categorically conclusive – “they stand side by side” for answering the ultimate factual question of the company’s ability to pay its debts as they fall due: McPherson & Keay, The Law of Company Liquidation (4^th edn) at p.115.

178.  The experts engaged by the parties to address the question of Wing Hong’s solvency, Mr Mat Ng for Wing Hong and Mr Bruno Arboit for the Defendants, used both the balance sheet and cash flow tests.

179.  Both sides accept that the Court’s determination of Wing Hong’s solvency at the material times may be assisted, but is not bound, by the experts’ opinions on the matter.

180.  It was undisputed between the parties that it is ultimately for Wing Hong to adduce sufficient evidence to prove its case on its financial condition.

F2.     Significance of financial support

181.  Numerous authorities affirm and give guidance on the relevance of financial support to questions of solvency. Taking into account the existence of such support is clearly consistent with the need to consider a company’s solvency holistically and with its full financial circumstances in view.

182.  In Re a Company [1986] BCLC 261, addressing a submission that when the relevant company’s contingent and prospective liabilities were taken into account, it was “clearly insolvent in balance sheet terms”, Nourse J (as he then was) held at p.263 that:

“…So indeed it is if I treat the loans made by the associated companies as loans which are currently repayable. However, what I am required to do is to ‘take into account’ the contingent and prospective liabilities. That cannot mean that I must simply add them up and strike a balance against assets. In regard to prospective liabilities I must principally consider whether, and if so when, they are likely to become present liabilities. As to that, I have evidence from a director of the company, to the effect that there is no question of those loans being withdrawn. He has exhibited four loan agreements under which the loans are expressed not to be repayable until 30 June 1985. He adds that, although all of them bear interest, interest has so far been waived by the lenders and that they intend to continue to waive it. It seems to me, on the basis of that evidence, that if I take account of the prospective liabilities, I must approach the company’s financial position on the footing that those loans will not be called in until 30 June 1985, and possibly until later.

In those circumstances, I am in the end satisfied that the petitioner has not established that the company is unable to pay its debts, even taking into account its contingent and prospective liabilities.” (emphasis mine)

183.  In Quick v Stoland Pty Ltd (1998) 29 ACSR 130, Finkelstein J stated (at p.626, line 38):

“The inquiry whether there are reasonable grounds to expect that the company will not be able to pay its debts when due is a factual one to be decided in the light of all of the circumstances of the case…It is to be decided as a matter of commercial reality and this requires a consideration of the company’s financial condition in its entirety, including its activities, assets, liabilities, cash, money that it could procure by the sale of assets or by way of loan and its ability to raise capital…”

184.  That statement is consistent with Emmett J’s observation in the same case (quoted in the Re Aloha Coffee extract above) as to relevant matters for determinating whether a company was solvent at a given time. 

185.  In Re Jackin (above), in assessing the company’s solvency DHCJ Jonathan Harris SC took into account the parent company’s willingness to support its subsidiary’s financial position, noting that:

“…If the parent company is prepared to underwrite the debts due not only to JSM but also to the petitioner the Company’s debts will be settled as they fall due…” (§26)

186.  In Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555 at §93, the New South Wales Court of Appeal highlighted the need to be alive to commercial realities in assessing solvency, affirming Palmer J’s view at first instance that:

“Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable”.

187.  As regards borrowing, the court further held at §109 that:

“…there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt cannot be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company’s debts as and when they become due and payable”. (emphasis in original)

188.  In short, the question of solvency goes to the company’s financial capacity – its available financial resources – at a given point in time and this includes the company’s ability to borrow to repay debts as they fall due and payable. The prevailing commercial realities as regards any loan arrangement, including the terms of borrowing and any evidence as to the lender’s intentions, will be highly relevant in this regard.

189.  As the Court of Appeal in Lewis observed (at §110), where the context involves financial support from group companies, the court may take into account that the company,

“instead of having to resort to some outside lender, is in the fortunate position of having its fellow member of the group of companies to which it belongs, available in effect as banker to provide funds required to meet any shortfall.”

190.  The Court of Appeal in Lewis noted (at §113) that:

“In the present case, there was ample support for Palmer J’s regard to availability of funds from other companies in the group…sufficient to establish [the company’s] ability to pay its debts as and when they fall due. Importantly…it was [not] suggested that the funds made available, apparently repayable on demand, were to be regarded as immediately repayable so that [the lender company within the group] itself was a creditor whose debt could not be repaid as and when it was due and payable”.

191.  It is notable that the matters taken into account by Palmer J at first instance in Lewis included (as noted at §77 of the Court of Appeal judgment) the concession by the company’s directors that the company was unable to discharge all of its liabilities “except by means of advances from other companies in [the group]”, as well as their stance that,

“the ability and willingness of other companies in [the group] to make cash available to [the company] as needed and not to call up those advances except at times when [the company] was conveniently able to repay was a resource available to [the company] at all relevant times which must be taken into account when determining its solvency”.

192.  Returning to the judgment of the Court of Appeal in Lewis, it was noted there (at §112) with regard to the available evidence that:

“…An unsecured debt was payable on demand to the company’s director. The director gave evidence that he did not intend to demand repayment in the immediate future. The debt was therefore not regarded as due and payable. This was determinative of solvency. In substance, voluntary continuance of an unsecured borrowing brought solvency; it is difficult to see why the result would have been different if there had been acceptable evidence of voluntary provision of an unsecured borrowing.” (my emphasis)

193.  These authorities clearly show that a critical matter in considering Wing Hong’s solvency or likelihood of insolvency is the availability of financial support from Wing Hong’s fellow group companies, in particular its indirect parent CNCG, and the nature and effect of that support.

194.  This was essentially common ground between the parties. The experts agree that the availability of financial support would be the determinative factor in this case. Mr Mat Ng’s Expert Report of 24 April 2017 states (at §4.1.3) that:

“In considering whether a company has sufficient cash or other likely available funds to settle its debts, the company’s financial position must be considered and assessed as a whole. In order to determine whether a company was solvent at a given time, it is necessary to consider all realisable assets of the company together with any other available resources, such as prospective external borrowings and the company’s debts and obligations as at that time.”

195.  At §4.1.16 of the same report, Mr Ng considers whether Wing Hong had enough working capital to meet its current liabilities in terms of its ability “to obtain external financial support whenever it was needed, including from its holding company, for the forseeable future”.

196.  That is indeed the focal question as to Wing Hong’s solvency. As Mr Lam SC candidly put it in his oral closing:

“We frankly accept that without the financial support of the parent company [CNCG], the plaintiff would be in difficulties a long, long time ago.”

197.  In the coming sections, I will address the question of financial support along with other major perspectives on Wing Hong’s overall financial condition. 

F3.    Overall position: continuous financial support

The Defendants’ main theme

198.  Mr Lam SC distilled the main theme of the Defendants’ case into three words: continuous financial support.

199.  If shown on the evidence, such support is relevant in at least two respects:

(1)  The existence of continuous financial support would go a long way towards rebutting Wing Hong’s case that it was at the material times actually or likely to become insolvent.

(2)  Should the question of breach of duty by the directors arise (on the footing that the creditors’ interests duty was triggered), the existence of continuous financial support would be significant in assessing the directors’ state of mind and in determining whether their actions were reasonably taken in the best interests of the company or, so far as relevant as a separate category, the creditors.

200.  In my assessment, the evidence as a whole affirms the Defendants’ case on financial support. Before specifically addressing the position as at 31 May 2008 (when the Floating Charge was created), and at the time of the Transfers, I will first identify the main categories of evidence which cumulatively show that, as matter of commercial and practical reality up until at least the end of the Relevant Period, CNCG stood able and willing to provide funds to Wing Hong as needed.

Audited statements showing substantial advances from CNCG from 2005

201.  As detailed in Section B6 above, Wing Hong’s audited financial statements show that from 2005 CNCG made very substantial loans to Wing Hong to meet various cash flow requirements. There was a steep upward trend in the amounts loaned. For instance, the amount recorded as due to CNCG from Wing Hong increased from HK$53,200,030 for the year ended 2006 to HK$128,724,859 for the year ended 2008.

Audited statements containing confirmations and undertakings as to continued financial support

202.  As detailed in Section B7 above, for each of the years ended 31 March 2008, 2009 and 2010, Wing Hong’s audited financial statements recorded CNCG’s confirmation and undertaking inter alia “to provide continuing financial support to the Company to enable it to continue as a going concern and to settle its liabilities as and when they fall due”.

Loan Agreement documentation

203.  Several terms of the Loan Agreement are worth highlighting.

204.  Recital (B) records that:

“The Borrower [Wing Hong] is an indirect wholly-owned subsidiary of the Lender [CNCG] and as at 18^th April 2008, the Lender has advanced not less than HK$123,000,000 to the Borrower. The Borrower has requested the Lender to grant or to continue to grant the Loan (as defined below) to the Borrower subject to and on the terms and conditions specified in this agreement”.

205.  Recital (C) states:

“The Lender, at the request of the Borrower, is willing to grant or continue to grant to the Borrower the Loan to such extent and at such time as the Lender may in its absolute discretion from time to time deem fit subject to the terms and conditions specified in this Agreement”.

206.  “Loan” is defined in Clause 1.1 for the purposes of the Loan Agreement as meaning:

“all and any loans, advances, loan facilities and/or accommodation now or hereafter from time to time granted or to be granted by the Lender at the Lender’s absolute discretion to the Borrower or for the account of the Borrower or to any third party at the request or upon the guarantee or indemnity of the Borrower (either singly or jointly with any other parties) on such terms, in such manner and form and for so long and to such extent as the Lender may in its absolute discretion from time to time deem fit including, without limitation, the loan advanced by the Lender to the Borrower as at 18^th April 2008 in the amount of not less than HK$123,000,000.00”.

207.  As noted in Section C2 above, the Loan Agreement made it a condition precedent for the granting of the Loan that the Floating Charge be provided as security: Recital (D), Clause 2.1 and Schedule §1.

208.  The evidence of the 1^st and 3^rd Defendants in this regard, which I accept, is that the Loan Agreement and the creation of the Floating Charge were considered appropriate in circumstances (reflected inter alia in Recital (B) of the Loan Agreement) where Wing Hong had already received very substantial loans from CNCG, a publicly listed company, which was in the course of shifting into the Railsmedia business in Mainland China with the involvement of outside investors.

209.  As seen below, following the execution of the Loan Agreement and Floating Charge, CNCG continued to advance substantial funds to Wing Hong.

210.  Clause 2.2 of the Loan Agreement provides that the Loan is to enable the Borrower to:

“(i) repay and/or pay loans or credit facilities from banks, financial institutions or persons (other than the Lender) due or owing by the Borrower and all interests (if any) accrued thereon and other charges (if any) in connection therewith; and/or (ii) discharge all or any of its liability on or before the respective due dates from time to time for payment therefor or the respective deadlines from time to time imposed by the Borrower’s suppliers or creditors (collectively ‘the External Loan’) and shall not be used for any other purpose”.

211.  On repayment, §3.2(a) provides that, subject to contrary provisions specified there or elsewhere in the Agreement:

“the Loan and interest thereon or any part thereof shall be repaid by the Borrower forthwith upon the Lender’s demand at any time provide that if any Indebtedness shall remain outstanding or otherwise unpaid to the Lender on the Final Maturity Date, such outstanding or otherwise unpaid Indebtedness shall immediately become due and payable to the Lender without demand”.

212.  The Final Maturity Date is defined under §1.1 of the Loan Agreement provides as meaning,

“the day falling three months from 18^th day of April 2008 subject to such extension of time (if any) as the Lender may from time to time grant in its absolute discretion”.

Current account and vouchers

213.  The current account between Wing Hong and CNCG, and the voucher evidence of cash receipts and payments between the two companies (respectively summarised in Appendix 3A and Appendix 3B of Mr Arboit’s Expert Report of 24 April 2017) reflect both the advancement of substantial loans to Wing Hong from CNCG, and repayments by Wing Hong from time to time both before and after the time of the Transfers.

Bank statement records

214.  As summarised in a table prepared by Wing Hong titled “Consolidated Schedule of Transactions between P and D4”, the numerous loan advances made by CNCG to Wing Hong include the following, which were all made after the third of the Transfers in March 2010:

(1)  The sum of HK$1,350,000 on 15 June 2010.

(2)  The sum of HK$300,000 on 27 August 2010.

(3)  The sum of HK$100,000 on 14 September 2010.

(4)  The sum of HK$500,000 on 24 September 2010.

215.  As well as being consistent with the Defendants’ overall case on continuous financial support, these later payments support the Defendants’ case that there was no deliberate scheme by which CNCG only advanced funds to Wing Hong to enable it recover in the Main Arbitration and to make the Transfers for CNCG’s benefit, with the intention of cutting support once the Transfers were made.

No repayment demands / flexible arrangement

216.  The matters above, and in particular the formal loan documentation, should also be considered alongside the realities on the ground with regard to how the companies actually treated the loans.

217.  As the authorities considered in Section F2 above affirm, in addition to the fact of any available loan facilities and their terms – which may themselves be significant evidence of the company’s financial capacity – it is also important to have regard to how such loans were actually dealt with as part of the assessment of “the company’s financial condition in its entirety”, as the Finkelstein J put it in Quick v Stoland Pty Ltd (above).

218.  Accordingly, even if loans from CNCG would, narrowly viewed, constitute liabilities on the part of Wing Hong, it is right to consider whether the company was in fact required or likely to be required to repay them shortly or within some definite timeframe. Even for loans stated as repayable on demand, which may appear in the balance sheet as “current liabilities”, it is important to have regard to the lender’s actual mindset and conduct – for instance, whether it actually sought or intended to demand repayment; or whether it was instead prepared to defer or even waive repayment depending on circumstances, including needs of the borrower or the wider group.

219.  The evidence to hand shows that Wing Hong inter-group loan arrangements were handled in a fairly fluid and flexible manner:

(1)  The evidence indicates, and the Defendants readily accepted, that Wing Hong did make voluntary repayments from time to time. Those payments have not been linked to any demands issued by CNCG. There is no evidence of CNCG demanding repayment of any particular sum from Wing Hong at any specific point in time.

(2)  This accords with the 1^st and 3^rd Defendants’ witness evidence to the effect that CNCG as parent company would readily lend money to Wing Hong, with Wing Hong making repayments to CNCG from time to time when it was in funds for which it had no immediate need – with the understanding and expectation that loans would again be advanced by CNCG as and when Wing Hong required.

(3)  While the formal terms of the Loan Agreement set a Final Maturity Date of three months from 18 April 2008, the term of the Loan was effectively extended beyond that date. This is reflected in Wing Hong’s 2009 audited financial statement, and likewise those for 2010, which record the amounts due to CNCG as being repayable on demand.

220.  These matters reinforce the Defendants’ case that there was in substance and reality major financial support from CNCG.

221.  Keeping the inter-group dimension in view, the matters flagged by Wing Hong, including any duty on the 1^st Defendant’s part as director, CEO and Chairman of CNCG to seek repayment as soon as possible, or the manner in which the loans were described in some of the audited financial statements, are not inconsistent with the fact of continuous financial support from CNCG. In my assessment, these matters do not in any event suffice to outweigh the evidence that such support existed and was substantial.

222.  At trial, Mr Bruno Arboit was cross-examined as to the low credit balance maintained in Wing Hong’s bank accounts. Although the matter is far from dispositive either way, I tend to agree with Mr Lam SC’s submission that it is in fact a point favouring the Defendants:

(1)  The accounting records show a consistent pattern featuring repayments by Wing Hong to CNCG whenever possible (but not otherwise), which in turn is consistent with the Defendant Directors’ case that Wing Hong sought to keep minimum cash so as to reduce interest payable to CNCG, at least until 1 October 2009 when (according to the 1^st Defendant) CNCG decided to make the loans interest free to further alleviate Wing Hong’s financial burden.

(2)  At the same time, the practice did not bring about any significant pattern of overdraft or deficit throughout the period insofar as bank statements are now available.

(3)  The foregoing is best explained by the Defendants’ account, namely that CNCG effectively acted as Wing Hong’s banker in providing a revolving overdraft facility, and CNCG has always been willing, ready and able to cover Wing Hong’s debts and liabilities that have become due and payable.

223.  I also bear in mind the absence of any substantial evidence that Wing Hong was in fact unable to settle any particular debt or liability in the period from May 2008 until at least the last Transfer in March 2010. The essential question here is one of resources: what available means did Wing Hong have to meet its cash needs from time to time? For these purposes, resources are not limited to cash in the company’s bank accounts, but include matters such as the available funds of other companies in the same group. This aspect is further considered in the sections that follow.

F4.    Solvency as at 31 May 2008

224.  As earlier noted, Wing Hong’s solvency specifically as at 31 May 2008 goes to the validity of the Floating Charge, and in turn the viability of Wing Hong’s case against the Defendant Directors for breach of fiduciary duties in effecting the Transfers.

225.  In my judgment, when Wing Hong’s financial position is considered as a whole, it was neither insolvent nor of doubtful solvency as at 31 May 2008.

226.  The starting point is that, as analysed in Section F3 above, Wing Hong had the benefit of CNCG’s continuous financial support at the material time. The primary dimension here is the Loan Agreement, which as seen above was entered into against a historical background of very substantial financial assistance to Wing Hong by CNCG before 31 May 2008, and which provided a recast foundation for financial support beyond that date.

227.  The Defendants accept that the Loan Agreement was subject to various terms and conditions including the execution of the Floating Charge and that there was an increase in the interest rate for some later periods. But they maintain that the execution of the Loan Agreement was a clear undertaking by CNCG to provide continuous financial support to Wing Hong.

228.  In my judgment, the Loan Agreement reflected CNCG’s commitment, starting well before and continuing up to May 2008, to supporting Wing Hong financially, coupled with the recognition that Wing Hong’s hefty indebtedness (not less than HK$123m) by that stage warranted a revised lending framework going forward.

229.  The Loan Agreement strongly indicates that Wing Hong had the financial capacity to meet debts falling due in the periods both immediately preceding and after its execution: as reflected in the terms of that agreement, CNCG stood prepared (and was well able) to provide such financial support as was necessary from time to time to enable Wing Hong to continue as a going concern.

230.  This ties with what was expressly affirmed in Wing Hong’s 2007 audited financial statements regarding CNCG’s forward-looking commitments as regards Wing Hong’s financial condition:

“In order to maintain the working capital of the Company, [CNCG] has confirmed to provide continuing financial support to the Company to enable it to continue as a going concern and to settle its liabilities as and when they fall due”. (my emphasis)

231.  Pausing here and considering the position from a balance sheet perspective (further addressed in Section F6 below), it should be noted that:

(1)  As at 31 May 2008, only the 2007 audited financial statements were available: the 2008 audited financial statements for Wing Hong are dated 25 July 2008.

(2)  On the face of the 2007 audited financial statements, Wing Hong was balance sheet solvent at 31 March 2007.

232.  For the period between 31 March 2007 and 31 May 2008, the Defendants accept that Wing Hong’s financial position seemingly deteriorated, while noting that it is unclear on the available accounting records what precisely happened in this period. As they point out, what is clear is the fact of CNCG’s continued financial support for Wing Hong in that period, with the Loan Agreement marking a new phase in that arrangement. The Defendants further highlight Mr Mat Ng’s acceptance under cross-examination that there is evidence of financial support until at least 18 September 2009 (the start of the Relevant Period), which of course includes the period up to 31 May 2008.

233.  While the Loan Agreement provided that the loans would be due three months from 18 April 2008, it has already been noted that the “Final Maturity Date” was defined in the Loan Agreement as “three months from 18^th day of April 2008 subject to such extension of time (if any) as the Lender may from time to time grant in its absolute discretion” (emphasis mine).

234.  As to the position as at 18 July 2008, it is apparent that CNCG in fact extended the loans and adjusted the interest rate. As stated in the 2009 audited financial statements:

“On 31 March 2009, the intermediate holding company decided to resume the original interest rate (prime rate plus 3%) of the loan for the period 18 July 2008 to 31 March 2009. Interest at overdue default rate will be charged since 1 April 2009.”

Wing Hong’s 2010 audited financial statements record that the loans then became interest-free and repayable on demand, which again reflects the extension of the due date for repayment well beyond 18 July 2008.

235.  I accept the Defendants’ case that, as at 18 July 2008, when the loan was supposedly repayable pursuant to the Loan Agreement subject to extension, there were good commercial reasons why it was in the interests of Wing Hong, CNCG, and the group as a whole, for CNCG to continue financial support for Wing Hong.

236.  In particular, the Major Arbitration was at that time still at an early stage. I note here that:

(1)  As recorded in the 2008 and 2009 audited financial statements, the opinion of Wing Hong’s directors, based on legal advice, was that Wing Hong had a strong claim and Match Power’s counterclaim was unmeritorious. This supports the Defendant Directors’ case that they honestly and reasonably believed that Wing Hong would in due course receive substantial sums in the Major Arbitration, and in turn reinforces the view that Wing Hong was, with CNCG’s assistance, able to continue as a going concern.

(2)  For its part, while contesting whether the result was to render it cash flow solvent as at 31 May 2008, Wing Hong accepts that as at that date, CNCG “had provided the Loans to [Wing Hong] for the purposes of meeting certain expenses, most significantly legal fees incurred in the Major Arbitration”.[9]

237.  On the other hand, there is in my assessment no substantial evidence to show that, as of 31 May 2008, Wing Hong had liabilities that had to be settled immediately or imminently; or if there were any, that it was financially unable to do so.

238.  Wing Hong broadly asserts, mainly with reference to legal fees said to be owing to two firms of solicitors, and the claims of various subcontractors, that the CNCG loans were only used to pay “select” creditors, leaving Wing Hong without “enough cash to pay its other creditors”. That is in my view insufficient to show that Wing Hong was in fact unable to pay any immediate or imminent liabilities.

239.  Wing Hong’s contention loses sight of the fact that the Defendants’ primary case on solvency is not based on the amount of cash Wing Hong had to its name at any given time, but on CNCG’s fundamental commitment to enabling Wing Hong to pay its debts as and when necessary to proceed as a going concern. Moreover, there were no loan term restrictions on which creditors could be repaid with funds loaned by CNCG.

240.  This accords with the undisputed position that CNCG was, at the least, concerned that Wing Hong could meet its legal fees in the Major Arbitration. Given that concern, it would make little sense for the Defendant Directors and CNCG to sit by and let Wing Hong become vulnerable to winding up or related actions by other creditors, given the likely adverse impact of such actions upon Wing Hong’s ability to pursue the Major Arbitration. The more likely position is that CNCG would if necessary have enabled Wing Hong to meet the demands of other creditors where these were uncontested and incapable of deferment.

241.  As to the 10 alleged debts totalling HK$59,817,461 which featured centrally in Wing Hong’s pleaded claim (“the 10 Pleaded Debts”), but which were not the focus of Wing Hong’s case at trial, these do not support Wing Hong’s case on insolvency or likely insolvency as at 31 May 2008.

242.  As the Defendants point out, among the 10 Pleaded Debts, only two were recognised as contingent liabilities in the audited financial statements for the subsequent years: 

(1)  First, on 12 March 2009 Luen Yick commenced litigation against Wing Hong over certain construction works for which Luen Yick was subcontactor. However, it was stated in the 2009 audited financial statements that, based on legal advice, the directors considered that Wing Hong had valid defences.

(2)  Second, on 26 January 2010, Paul Y commenced arbitration proceedings against Wing Hong. But again, the 2010 audited financial statements (prepared in July 2010) record that, based on legal advice and “since the proceedings were then at an early stage, and the amount of liability could not be measured with sufficient reliability”, it was considered unnecessary to make any provision.

(3)  Wing Hong does not presently contend that the advice it received about Luen Yick’s and Paul Y’s claims was incorrect or wrongly relied upon by the Defendant Directors.

243.  The remaining 8 Pleaded Debts were not only seriously disputed in the material period but the alleged creditors in respect of each debt had not even begun any litigation or arbitration against Wing Hong in pursuit of those amounts as of the end of March 2010.

244.  I should also record that:

(1)  The 3^rd Defendant, who gave detailed evidence on the 10 Pleaded Debts, was not cross-examined on the particulars of the debts.

(2)  Mr Mat Ng expressly affirmed at trial that he did not seek to contend that Wing Hong was insolvent as at 31 May 2008 by virtue of the 10 Pleaded Debts.[10]

245.  In sum, with the 10 Pleaded Debts being at the time strongly disputed, and the disputes unlikely to be resolved anytime soon after 31 May 2008, the debts clearly do not show that Wing Hong was insolvent or likely to be insolvent as at 31 May 2008.

F5.    Solvency during the Relevant Period

246.  As seen above, the available evidence shows CNCG’s willingness to provide Wing Hong with continuous and substantial financial support before, during and after the Relevant Period. This strongly militates against the claim that Wing Hong was in that time insolvent or likely to become so.

247.  Focusing on the Relevant Period and the Transfers, several matters merit specific mention.

The Major Arbitration and timing of the Transfers

248.  The Transfers were made shortly after Wing Hong’s receipt of partial awards from the Major Arbitration. Wing Hong essentially contends that these repayments were a watershed in the completion of the Alleged Scheme, after which CNCG withdrew its financial support.

249.  In my view, the evidence favours the Defendants’ contrary case that the repayments did not represent or imply CNCG’s withdrawal of financial support, and that financial support in fact continued through this period:

(1)  The Defendants’ witnesses firmly maintained that the repayments were not made as a result of CNCG’s demands. Their consistent evidence, in their statements and on the stand, was that CNCG in fact never made any demand for repayment of its loans to Wing Hong.

(2)  The Defendants’ witnesses testified that the repayments were a matter of Wing Hong’s initiative and were made to reduce the overall interest payable to CNCG. They also said that CNCG would and could make further advances as and when necessary. Consistent with this is the evidence of other advances during the Relevant Period, sandwiched between the three Transfers:

(a)  The current account shows there were further loans between the first of the Transfers on 30 September 2009 and the third Transfer on 10 March 2010.

(b)  The vouchers show that there were advances after each Transfer, including after the third Transfer on 10 March 2010.

(3)  As seen in Section F3 above, the documentary evidence shows that the Transfers were not the first or the only time that Wing Hong made repayments in CNCG’s favour but formed part of a wider historical pattern. The overall pattern features both advances to and repayments from Wing Hong over an extended period, consistent with a longstanding and dynamic support arrangement for Wing Hong in a group setting.

250.  In any event, while there may be a range of credible reasons as to why CNCG would not have demanded repayment from Wing Hong, and why Wing Hong would have been content to voluntarily repay sums to CNCG when its cash situation allowed, the more important fact is that no demand was actually made.

251.  Returning to the Major Arbitration, the Defendants further submit that at the time of the Transfers, Wing Hong anticipated soon receiving further significant sums, in particular interest and costs from the Major Arbitration:

(1)  The 3^rd Defendant estimated a total sum of HK$71 million to be further received from the Major Arbitration. 

(2)  This finds support in the fact that, not very long after March 2010, Wing Hong’s solicitors on 9 July 2010 advised that Wing Hong could expect to recover HK$62 million as interest and costs, and may explain why it was stated in the 2010 audited financial statements that in the opinion of the directors and upon legal advice, Wing Hong had “a very good prospect” of recovering interest and costs.

252.  The Defendants submit, and I agree, that the anticipation of significant further sums from the Major Arbitration further erodes Wing Hong’s claim that the Defendant Directors knew or should have known that the company was or was likely to become insolvent. As Mr Lam SC emphasised, it is beside the point whether the estimates of these potential receipts were fully accurate or not: absent cogent reasons for rejecting the estimates as wildly optimistic, they support the view that there were at the material time reasonable grounds to believe that there would soon be significant recoveries which could be used to settle Wing Hong’s liabilities (if any) if and when necessary. 

Subsequent events

253.  It was uncontroversial between the parties that evidence of events after a given period may be relevant to assessing the company’s solvency within that period.

254.  To illustrate this, Mr Lam SC cited the first instance judgment in Lewis v Doran (2004) 208 ALR 385 (discussed in Section E3 above). In considering whether the company in that case was insolvent as at 1 November 1994, Palmer J took into view a wide array of events after that date. Noting with regard to these matters that “none of the usual indicia of insolvency” were present (§75), he concluded on the facts (§76) that:

“In short, for slightly more than 3 years after 1 November 1994 [the company] continued to subsist, paying its external debts with the assistance of funds provided by other companies in the Doran Group, without any complaint from its creditors or financiers”.

255.  Later in his judgment (§§107-108, §§112-113), Palmer J elaborated on why this kind of hindsight is proper and invaluable in cases like the present:

“107. The question of a company’s solvency may arise retrospectively or prospectively. The question arises retrospectively where, for example, a liquidator is seeking to recover an unfair preference or to set aside an insolvent transaction so that the issue is solvency as at a date prior to the winding up. The question may arise prospectively where a company is sought to be wound up in insolvency and the company’s ability to pay its debts must be determined not only by reference to debts payable as at the date of trial but also by reference to its ability to pay debts which will fall for payment some time in the near future.

108. Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts’ opinions as to the implications of balance sheets, the court’s task in assessing insolvency as at the alleged date should not be very difficult.

…

112. So, where retrospective insolvency is in issue, the court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor’s “own monies”. To look at what actually happened avoids the possibility that the court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts.” (emphasis mine)

256.  These observations align with the principles in Sections F1 and F2 above and are in my view apt for this case.

257.  The Defendants mainly rely on events after 10 March 2010 (the end of the Relevant Period) up to October 2010 and submit that these confirm:

(1)  That CNCG’s undertaking to provide Wing Hong with continuous financial support was genuine.

(2)  That the degree of financial support given to Wing Hong was indeed sufficient to enable it to meet its liabilities as they fell due.

258.  The Defendants highlight the following matters:

(1)  As stated in Wing Hong’s 2010 audited financial statements:

“The financial statements have been prepared on a going concern basis as the ultimate holding company, Rich Place Investment Limited, has confirmed to provide continuing financial support to the Company to enable it to continue as a going concern and to settle its liabilities as and when they fall due.”

(2)  The banking documents and payment vouchers show that, from 15 June 2010 to 24 September 2010, CNCG further advanced a total of HK$2.25 million to Wing Hong. Wing Hong contends that these cash advances were “minor” and alleges that the 1^st and 2^nd Defendants “had an obvious motive to avoid [Wing Hong’s] winding up for as long as possible to (a) avoid investigation in their conduct as directors…and (b) collect and distribute the remaining proceeds from the Major Arbitration as they saw fit”.[11] But the serious allegation as to the 1^st and 2^nd Defendants motives was not put to them at trial and is in my judgment unsubstantiated.

(3)  Insofar as Wing Hong relies on the fact that after the Transfers it owed CNCG (as at 31 March 2010) as much as HK$124 million, there is no evidence that CNCG demanded, or was likely to demand, repayment of any part of the outstanding sum by that time or any time shortly after. In fact, upon the sale of Wing Hong to Keen Fortune:

(a)  The entire outstanding loan due to CNCG of HK$134,756,941.41 was written off. 

(b)  The amount written off was higher than the amount of loans outstanding as at 31 March 2010, which supports the proposition that significant amounts continued to be advanced to Wing Hong after the Transfers.

(4)  I pause here to note that, in taking into account this part of the Defendants’ case, I also bear in mind Wing Hong’s contention that the loan was not written off as a “gift” to Wing Hong, but because CNCG did not consider it recoverable. This and several other connected points as to the Defendants’ true mindset were put to Mr Arboit in cross-examination. I agree with Mr Arboit’s basic response, namely that Wing Hong’s points at best neutralise the significance attributed by the Defendants to the writing-off of the loan with the sale to Keen Fortune; they do not show that the financial support was until that point illusory or only pursuant to a plan to hive-off Wing Hong right after recovering Major Arbitration proceeds.

(5)  As the 3^rd Defendant recounted at trial, Wing Hong had around 200 suppliers and creditors at the time and settled all of its liabilities to them, save and except the 10 Pleaded Debts considered above.

259.  As a further reality check against Wing Hong’s case, the Defendants also invite me to consider several additional matters after March 2010, which I understand are factually uncontested and are in any case clear:

(1)  While CNCG naturally stopped providing further financial support after Wing Hong was sold, that was only some time in October 2010, and even after that there was every indication that Wing Hong continued as a going concern.

(2)  On 19 May 2011, Wing Hong received over HK$30 million as interest from the Major Arbitration. On 14 April 2012, Wing Hong received HK$4.3 million in the TC Arbitration. In July 2013, Wing Hong received HK$6 million in legal costs in the Major Arbitration.

(3)  The gradual improvement of Wing Hong’s financial position was reflected in the 2011 and 2012 audited financial statements. These showed that after Wing Hong was sold to Keen Fortune, it managed to generate profits in both years and returned to a net asset value as at 31 March 2012. 

(4)  There is no evidence that, even after March 2010, Wing Hong was unable to meet any liability when it became due. On 17 January 2011, a winding up petition was presented by Shun Cheong against Wing Hong, based on an underlying debt of around HK$25M. The petition was dismissed by consent on 1 June 2011, after Wing Hong paid HK$7.65M to Shun Cheong. That was the only occasion when Wing Hong was alleged by a creditor to be insolvent other than the petition in 2013 which ultimately led to its winding up.

(5)  The financial information provided to Keen Fortune for its potential acquisition of Wing Hong duly recorded the Transfers. Wing Hong’s new board also had full access to its books and accounts. There were never any complaints raised about the Transfers by the new board. 

(6)  The winding up petition ultimately leading to Wing Hong’s liquidation was presented on 17 October 2013 – more than five years after 31 May 2008, and three-and-a-half years after the Relevant Period.

260.  By these lights, the claim that Wing Hong was insolvent since May 2008 or otherwise at the time of the Transfers; and remained so up until its ultimate winding-up in 2013, strikes me as implausible and difficult to reconcile with the commercial realities on the ground throughout that time.

261.  Overall, I consider that the span of events after the Relevant Period reinforces the conclusion – which in my judgment is sufficiently clear even without these latter matters – that Wing Hong was neither insolvent nor likely to become insolvent at the time of the Transfers, and even more so at the time of the Floating Charge in 2008.

F6.    Balance sheet position

262.  As discussed in Section F1 above, the balance sheet test provides a relevant but non-exhaustive viewpoint on the overall question of Wing Hong’s solvency.

263.  The parties’ experts agree that a company is insolvent on a balance sheet basis if its liabilities exceed the realisable value of its assets. In other words, a company with insufficient realisable assets to meet all of its liabilities and obligations is balance sheet insolvent.

264.  Mr Ho emphasised the following points on Wing Hong’s balance sheet position, which I accept and have taken into account in assessing its solvency:

(1)  There is no dispute between the parties that on the face of the audited financial statements for 2008, 2009 and 2010, Wong Hong was insolvent on the balance sheet test for the corresponding financial years:

(a)  As at 31 March 2008, Wing Hong’s audited financial statements recorded net liabilities of HK$27.8 million.

(b)  As at 31 March 2009, Wing Hong’s audited financial statements recorded net liabilities of HK$73.8 million.

(c)  As at 31 March 2010, Wing Hong’s audited financial statements recorded net liabilities of HK$147.4 million.

(2)  Both experts proceeded on the basis that the audited financial statements were accurate.

(3)  In the 2008 and 2009 audited financial statements, (a) contingent liabilities were excluded (these were only disclosed in the notes); and (b) reference was made to an account receivable in the sum of HK$120.4 million, the recoverability of which the auditors expressed significant concerns over. Yet even so, the 2008 and 2009 audited financial statements disclosed a net liability position.

265.  Pausing here, I do not understand Mr Arboit’s position to be that Wing Hong was not balance sheet insolvent at the material times in 2008 to 2010. I agree with Mr Ho that any such position would be untenable in the face of the available financial statements and records. But as Mr Ho fairly noted in his written closing, it seems that what Mr Arboit really contends is that the balance sheet test should not be the only means of assessing Wing Hong’s solvency. 

266.  Mr Ho also heavily emphasised the fact that the relevant financial statements were all audited by professional auditors and then signed and approved by the Defendant Directors. He rightly notes that, in principle, the very purpose of audited accounts is to furnish a true and fair view of a company’s financial position.   

267.  I agree that Wing Hong’s audited financial statements are due significant weight. Even so, I am not prepared in this case to treat the statements as being decisive as to Wing Hong’s overall financial condition:

(1)  The aspects of the audited financial statements relied on by Wing Hong go primarily to its balance sheet position. But as seen in Sections F1 and F2 above, the law clearly does not treat a company’s balance sheet position as necessarily conclusive or of primary weight as to its actual financial condition. Instead, the balance sheet and cash flow tests may be considered alongside each other as part of a global assessment of the company’s financial condition.

(2)  It is unnecessary here for me to express any firm view on whether the law in this context recognises the cash flow test as generally more appropriate or helpful than the balance sheet test, and the connected question of whether, by its nature, the concept of insolvency as the inability to pay debts when they fall due “places emphasis on the cash flow test”. Both these propositions were urged upon me by Mr Lam SC in his closing submissions. As seen in Section F1 above, Yuen JA did state in Re GW Electronics Company Limited at §29.2 that the cash flow test is “normally used” to test for insolvency. But considered against her preceding statement that insolvency “may be tested by either the cash flow test…or the balance sheet test”, the learned judge’s comment strikes me as more an observation as to practice than a firm normative prescription or statement of preference. 

(3)  What is clear and sufficient for the present is that, as a matter of principle, the assessment of a company’s solvency in cases like this is in no way confined to what a balance sheet test may yield. The court’s consideration of a company’s financial reality is not restricted to what may be expressed or depicted within the four corners of its audited financial statements.

(4)  To resolve whether the company was (or was likely to be or become) insolvent on a given day, its position must be considered in the light of its full commercial realities, including the nature and extent of any financial resources, including loans. This may in many cases involve a wide-ranging inquiry into numerous dimensions of the company’s financial dealings and arrangements. I note that both experts in this case did consider materials besides the audited financial statements, including other financial records and various witness statements.

(5)  As regards loan arrangements, the extent to which a loan is currently repayable, without any intention of the lender to withhold demand for repayment, is clearly relevant to whether the company is in that period capable of meeting its liabilities: see for example Nourse J’s observations in Re a Company [1986] BCLC 261 (at p.263), set out in Section F2 above.

(6)  In a related vein, a loan may be properly stated in a particular way (for example as a “current liability”) within the static confines of a company’s audited financial statements – and yet at the same time be properly considered, for the purposes of the court’s global assessment of the company’s financial position in a given period, as an available resource counting positively towards a conclusion of solvency. In this latter respect, the court may have regard to the more fluid dynamics and concrete realities of the company’s relations with its lenders, particularly those within the same corporate group.

(7)  As the Defendants submitted, the exclusive application of a balance sheet test to situations involving financial support by loans may be misleading. If the financial support is by way of a loan rather than an outright gift, then on the face of the balance sheet it will normally be reflected as a current liability, when as a matter of commercial reality it may stand as a substantial available resource.

(8)  In the instant case, I have found that there is substantial evidence of financial support for Wing Hong from CNCG over the material periods, providing Wing Hong with sufficient financial resources to meet its liabilities as they fell due.

(9)  As with the New South Wales Court of Appeal’s assessment of the company in Lewis (above) at §112, the evidence here favours the view that CNCG’s financial support “brought solvency” to Wing Hong.

(10)  In reaching this view, I have considered the various disclaimers of opinion by Wing Hong’s auditors for the financial years of 2008, 2009 and 2010. For instance, for the financial year ended 31 March 2010, the auditors referred to “material uncertainty which may cast significant doubt about Wing Hong’s ability to continue as a going concern”. While relevant to the assessment of solvency, I do not think such disclaimers are sufficient to displace my overall conclusion on the matter. Among other things, it is relevant to keep in mind that:

(a)  The auditors’ views were expressed in the particular context and for the purposes of the audited financial statements, which involve a significantly less wide-ranging and definitive assessment than that required of the Court in a dispute like the present.

(b)  Even on their own terms, the identification of the possibility of “significant uncertainty” or “significant doubt” as to Wing Hong’s ability to continue as a going concern do not amount to a settled view on the auditors’ part that Wing Hong was likely to be insolvent.

268.  When it comes to Wing Hong’s solvency as at 31 May 2008, the overall picture is particularly favourable to the Defendants, given that its recorded net liabilities as at March 2008 were HK$28.8 million –comparatively much less than the recorded liabilities in following years –and bearing in mind CNCG’s then freshly configured commitment (by way of the Loan Agreement) to continue its longstanding financial support, which by April 2008 was to the tune of some HK$123 million.

269.  In sum, while accepting that Wing Hong’s balance sheet position over the relevant periods is a significant factor in the mix, it is in my judgment outweighed by the full array of evidence as to Wing Hong’s solvency.

F7.   Expert evidence

270.  The experts in this case each utilised both the cash flow test and the balance sheet test in considering Wing Hong’s solvency without exclusive reliance on either.

271.  While counsel did not heavily rely on the experts’ evidence in their closing submissions, I have in accordance with the well-established principles in this regard (summarised in cases such as Wong Siu v Win Sino Engineering Ltd [2018] HKCFI 1663, §154 and Peace Mark (Holdings) Ltd v Chau Cham Wong Patrick HCAL 2371/2009, unrep. 2 November 2017, at §15, §18) taken their views into account in reaching my own.

272.  For the reasons arrayed above, my conclusion largely aligns with that reached by Mr Arboit, whose analysis has in turn provided some reinforcement for my own assessment.

273.  Mr Ng accepted that financial support is relevant in principle to Wing Hong’s cash flow position. As I understood it, Mr Ng did not dispute that Wing Hong had received substantial amounts by way of financial support from related entities, at least up to the time of the Floating Charge. His main response was, however, that such support “did not improve the solvency of the Plaintiff as it was not provided as a gift and was instead recorded in the Audited Financial Statements as a liability”: Joint Expert Report at §6.2.

274.  While it may be correct that the nature and terms of the financial support given to Wing Hong were such that it did not improve Wing Hong’s balance sheet position, the support received did in my view substantially improve its cash flow position, and is a key factor in favour of the Defendants’ case on solvency.

F8.    Doubtful solvency?

275.  My assessment of Wing Hong’s solvency covers the distinct dimension of whether Wing Hong, even if not strictly insolvent, was at least of doubtful solvency. In my judgment, Wing Hong was not of doubtful solvency in the required sense, namely that the Defendant Directors at the material times knew, or ought reasonably to have known, that Wing Hong was likely to become insolvent.

276.  While the observations set out in Sections F1-F7 above generally apply to the question of doubtful solvency, the following matters are worth specifically highlighting in this regard.

277.  I have borne in mind that the trigger point for the creditors’ interests duty based on doubtful insolvency is, by definition, lower than that for actual insolvency.

278.  I have also not lost sight of Wing Hong’s focal contention here, which is that the company was as at 31 May 2008 at least of doubtful solvency because “a reasonable person would have known that [Wing Hong’s ability to pay its debts by reason of the Loans] would cease immediately upon [it] recovering the proceeds after the Arbitration, whereupon it would be hived off and no further Loans would be extended to it”.[12]

279.  Mr Ho emphasised, and I accept, that doubtful solvency does not always require that the company was likely to become starkly insolvent in the imminent future, as opposed to more gradually and “perhaps over a considerable time” (BTI (above) at §219).

280.  Still, Wing Hong has in my judgment failed to show on the evidence that its insolvency was, as at 31 May 2008, objectively probable or likely.

281.  As I have earlier found, the evidence does not establish the serious matter of a deliberate scheme on the Defendant Directors’ part to recover proceeds from the Major Arbitration solely for CNCG’s benefit, to the exclusion of Wing Hong’s general body of creditors. It is particularly unlikely that such a scheme was formulated and in motion by May 2008, more than two years before the sale to Keen Fortune in October 2010, and over five years before Chevalier’s winding up petition.

282.  On this footing, there is no sound basis for concluding that Wing Hong’s (1) eventual disposal, (2) loss of financial support from CNCG, and (3) ultimate insolvency, should have been recognised by a reasonable person in the Defendant Directors’ position as the likely outcome of the circumstances then prevailing, rather than (at very highest) one amongst a range of possibilities existing at that time.

283.  Nothing in the contemporaneous documents, including the terms of the draft Loan Agreement and the Floating Charge, restricted the purposes and duration of financial support for Wing Hong to the Major Arbitration or similar disputes. There is likewise nothing to show that the Loans were immediately repayable upon Wing Hong’s recovery of funds in litigation, regardless of whether that would render Wing Hong unable to meet other liabilities as they fell due.

284.  In such circumstances, it would in my judgment be open to a reasonable person in the Defendant Directors’ position to see the overall financial support arrangements at the time as being as of indefinite duration, particularly since:

(1)  As at May 2008, the Major Arbitration was still at an early stage. There was at that point no definite timeline for what was a fairly complex and multi-faceted dispute, and no major recoveries had been achieved. In the event, the Major Arbitration was not resolved until 2012.

(2)  The evidence given by the Defendants’ witnesses is that there was no clear intention to sell off Wing Hong until 2009, which is consistent with the available documents including the audited financial statements.

285.  A reasonable person in the Defendant Directors’ position would in my view have been mindful that the very purpose of the Loan Agreement and Floating Charge was to allow Wing Hong to continue as a going concern, with a primary focus of the company at the time being recoveries in the Major Arbitration.

286.  Seen from that angle, the likely effect of the Loan Agreement and the Floating Charge was clearly to enable CNCG’s continued financial support of Wing Hong, which would objectively render it less likely to become insolvent than otherwise. Against this, there was no objective basis at the time to compel a reasonable person to conclude that Wing Hong was likely to cease receiving such support, and then fall insolvent, merely because the company was then focused on litigation rather than construction. There was likewise nothing at the time to compel a reasonable person to conclude that the litigation would end within some discernible timeframe, and that this would necessarily bring CNCG’s support of Wing Hong to a close.

287.  I do not think that it suffices for Wing Hong to contend, especially in the absence of the Alleged Scheme, that CNCG’s financial support was bound – at sometime or other – to cease; whether because the existing litigation would surely one day end, or because CNCG’s desire to sell Wing Hong to a suitable buyer would surely one day come to fruition.

(1)  As I have noted, the law on doubtful solvency does not necessarily require a claimant to show that insolvency is imminent, rather than likely over a more gradual or extended period. On the other hand, it cannot in my view be right to find that a company is necessarily of doubtful solvency simply because, at that point in time, the financial support it needs to continue as a going concern does not stand (as Mr Ho put it) on a “forever and a day” basis with no conditions whatsoever.

(2)  While the law in this area is still developing, David Richards LJ in BTI (§201) was in my view right to emphasise that any legal test for triggering the creditors’ interests duty involves “a difficult amalgam of principle, policy, precedent and pragmatism”, and that the resulting legal position “will have very significant practical consequences for the conduct of business”.

(3)  In my judgment, it is clearly insufficient and undesirable for the creditors’ interests duty to be triggered where the event of a particular company’s insolvency might be merely said – like death and taxes – as likely (or indeed certain) to come “sooner or later”, without any reasonably discernible time horizon.

288.  Standing back, and keeping in mind the need for judicial caution in pronouncing upon the soundness of a commercial or strategic corporate assessment made by directors in challenging conditions, many years after the event, the circumstances in which the Defendant Directors found themselves were in my view insufficient to trigger the creditors’ interests duty on a doubtful solvency basis. All things considered, I find that Wing Hong has not shown that a reasonable person in the Defendant Directors’ position would necessarily have considered, at the time the Floating Charge was executed, that Wing Hong was likely to become insolvent.

289.  As to the position at the time of the Transfers, I do not understand Wing Hong to be advancing a specific case on doubtful solvency in this regard. In any event, for the reasons set out in Section F5 above, any such a claim is in my view untenable.

F9.    Conclusion on solvency

290.  Drawing together all the threads, my overall conclusion is that Wing Hong was neither insolvent nor of doubtful solvency as at 31 May 2008 or when the Transfers were made in the Relevant Period.

G.    WHETHER BREACH OF FIDUCIARY DUTIES

G1.    State of play

291.  It follows from the above conclusion that no creditors’ interests duty arose on the part of the Defendant Directors. As such, Wing Hong’s case on breach of duties must fail.

292.  Given my firm finding on the absence of material duties, I do not propose to extend an already lengthy judgment with a detailed assessment of what the legal position would be had Wing Hong’s case on solvency or doubtful solvency prevailed. My essential views on the matter may instead be shortly summarised as follows.

G2.    In relation to the Floating Charge

293.  As earlier noted, the execution of the Floating Charge was a condition precedent to Wing Hong obtaining further loans from CNCG under the Loan Agreement. The support obtained in turn enhanced Wing Hong’s ability to meet liabilities as they fell due and to continue to pursue the Major Arbitration and other proceedings.

294.  Inasmuch as Wing Hong was in dire financial straits as at 31 May 2008, an intelligent and honest person in the Defendant Directors’ position may well have considered it beneficial to Wing Hong’s creditors as a whole for it to receive financial support, so as to increase its ability to continue as a going concern, not least so as to maximise its ability to recover major sums in the Main Arbitration and other legal proceedings.

295.  The Floating Charge was effectively part of a package deal in which CNCG agreed to provide continuous financial assistance, on certain conditions. There is no evidence of any other entity such as a bank or third party which was willing to provide comparable assistance. In my assessment, if no Floating Charge was executed, Wing Hong would have been at even greater risk of insolvency.

296.  As earlier stated, I do not accept any suggestion (to the extent still maintained on Wing Hong’s part) that the Floating Charge was part of the Alleged Scheme, i.e. a pre-meditated plan “to strip P of its assets by causing it to make the Transfers to CNCG, contrary to the interests of P’s general body of creditors”.[13] Any such case on pre-meditation is particularly hard to sustain with regard to an intention to hive-off in May 2008, which was long before the eventual sale to Keen Fortune in 2010 (see further Section G3 below) and the ultimate resolution of the Major Arbitration in 2012.

297.  In a related vein, Wing Hong has not alleged in this action that the Defendant Directors were in breach of fiduciary duties merely in rejecting the settlement offer from Match Power which Wing Hong received on 20 May 2008. In matter of fact, the case was not settled until much later.

298.  Considering the full circumstances of the arbitration proceedings, and the 3^rd Defendant’s evidence that discussion of the Floating Charge began before the settlement offer was made, the rejection of the settlement offer does not in my view further Wing Hong’s claim that, in their handling of the Major Arbitration and the loan arrangements in that period, the Defendants were concerned only to benefit CNCG to the exclusion of Wing Hong’s general body of creditors. 

299.  I do not accept that an intelligent and honest person standing in the Defendant Directors’ shoes would necessarily have seen any material divergence between the proposed course involving the Floating Charge and the interests of Wing Hong’s creditors. In my view, a reasonable perspective on the matter at the time would have been that there was a common interest in enabling Wing Hong to continue to receive financial support given the imperatives of the Major Arbitration, and keeping in mind that the likely alternative was for Wing Hong to instead go quickly insolvent in the absence of further financial support from the Wing Hong Group.

300.  In sum, on the essential basis that the Floating Charge was of net benefit to Wing Hong’s ability to continue indefinitely as a going concern (as it in fact did for several years afterwards), Wing Hong has in my view no viable claim for relief against the Defendant Directors for breach of fiduciary duties.

G3.    In relation to the Transfers

301.  There being no basis for impugning the Floating Charge, there can similarly be no viable claim for breach of duty by reference to the Transfers.

302.  As mentioned in Section C2 above (under the heading “Consequence of the Floating Charge”), Wing Hong rightly accepts that its claims in respect of the Transfers effectively fall away if the Floating Charge was valid and enforceable at the time. In those circumstances, the Transfers would be appropriate given CNCG’s status as a secured creditor in respect of substantial sums, and also:

(1)  The connected reality that the ongoing lending arrangement with CNCG was critical to Wing Hong’s ability to continue going forward.

(2)  The earlier mentioned fact that the repayments would help to reduce the overall amount of interest payable to CNCG, which stood ready to provide further financial support to Wing Hong as and when required.

303.  There is certainly nothing to show that the Defendant Directors believed that the Transfers were actually against the best interests of Wing Hong or its creditors as a whole. In particular, the total evidence does not in my view establish any claim that the Defendant Directors at the time believed that, after repayment was made through the Transfers, a withdrawal of financial support would then inexorably follow.

304.  The Defendants also submit that any contention that the Transfers were a preference towards CNCG as part of the Alleged Scheme to hive-off Wing Hong is not established by the evidence. I agree:

(1)  The Defendants’ witnesses gave evidence to the effect that an intention to sell Wing Hong for business diversification reasons formed in 2009. But there is no evidence that any purchaser had already been identified by the time of the Transfers, or that any sale of Wing Hong was imminent. Instead, Wing Hong continued even after the Transfers to receive loans from CNCG while the search for a buyer continued.

(2)  The fact that the loans later advanced were of a lesser amount than the Transfers is of limited if any significance. As earlier found, the general arrangement was for loans to be advanced to Wing Hong based on need. Financial support only stopped, as expected, after the sale of Wing Hong in October 2010.

(3)  Bearing in mind that the court should be normally be wary, many years after the event, to enter the boardroom to pronounce on whether a decision such as the one to dispose of Wing Hong was commercially justified or sound (Lewis (NSWCA) (above) at §154), I see no cogent reason to doubt the Defendants’ position in this regard.

(4)  Returning to the claim that the Defendants from the start intended (under the Alleged Scheme) to pocket recoveries from the Main Arbitration and then funnel these to CNCG under the guise of the Floating Charge, this sits ill with the reality that Wing Hong was sold before the recovery of interest and costs in the Main Arbitration, which had before the sale been estimated as involving – and in 2011 did come out to be – a substantial sum. According to the helpful summary annexed to Wing Hong’s Closing Submissions, this included an agreed total interest sum to Wing Hong by Match Power of HK$30,521,788 paid on 17 May 2011, and HK$6,000,000 by way of legal costs paid by Match Power to Wing Hong on 6 August 2012.  

305.  Mr Lam SC further cites the following matters to reinforce his clients’ position that Wing Hong’s sale was for genuine and proper commercial reasons, based on diversification of CNCG’s business: 

(1)  The decision to diversify was first reflected in CNCG’s 2008 Annual Report dated 31 March 2008, where the change of CNCG’s name from Wing Hong (Holdings) Ltd to China Railsmedia Corporation Ltd was explained as being in order to “symbolise a fresh start”.

(2)  Similarly, CNCG’s 2009 Annual Report noted that the name change “signified our Group to enter the media business”. CNCG’s 2010 Annual Report, dated 9 July 2010 (around 3 months before the sale of Wing Hong) stated CNCG’s intention to “[continue] to scale down the building construction and renovation business, mainly due to keen competition and the escalated level of costs, which drive down the profit margin.”

(3)  CNCG’s announcement dated 19 October 2010, a public document issued under the Listing Rules issued by the Hong Kong Stock Exchange, set out the commercial reasons for the disposal. 

306.  It is also relevant to bear in mind that if Wing Hong had, as I have found, a solid assurance of continuous financial support from CNCG, then the actions and decisions of its directors in making the Transfers must be objectively understood and assessed in that light.

307.  All told, even assuming that the creditors’ interests duty was triggered, Wing Hong has not in my judgment shown that the Transfers were made in breach of duty by the Defendant Directors, whether as a matter of their conscious intentions, or from the perspective of a reasonable person in their position. 

308.  That is so whether the operative duties are framed primarily by reference to the creditors’ interests duty (this being the threshold duty in the present context), the duty to act bona fide in the best interests of Wing Hong’s creditors, the duties to act without conflicting interests and for proper purposes, or otherwise. 

309.  Simply put, the Transfers were (like the Floating Charge) part of a series of arrangements enabling the continued provision of financial support to Wing Hong, in circumstances where (as the Defendants accept) the absence of such support would have left Wing Hong in dire financial straits. For the reasons addressed above, I find these overall arrangements were to the substantial benefit of Wing Hong and its creditors as a whole.

310.  Specifically in relation to Wing Hong’s case on the no conflict duty:

(1)  Wing Hong contends, contra the Defendants’ stance, that the no conflict duty (like the proper purposes duty) is not merely a facet of the duty to act in the best interests of the company.

(2)  As I understand it, Wing Hong’s position is that the matter turns more specifically on whether an intelligent and honest person in the Defendant Directors’ position,

“would have appreciated that in considering the Floating Charge, the interests of [Wing Hong’s] creditors and [CNCG] did not align, in that [CNCG] was obtaining a right of priority over [Wing Hong’s] creditors in respect of the HK$123m it had advanced to [Wing Hong] as Loans”.[14]

(3)  Wing Hong says “Yes” to that question. For the reasons set out above, this is to my mind an overly atomised way of viewing the matter. It pays insufficient attention to the reality that Wing Hong was critically dependent on CNCG’s continued support for its basic financial survival, whether in order to press on in the Main Arbitration or for any other purpose. As I see it, the interests of Wing Hong’s creditors and CNCG did materially align in these circumstances. Or to adopt Mr Ho’s phraseology, there was in the circumstances no “real sensibility of conflict” in light of the immediate imperative of continuing as a going concern.  

(4)  In any event, to the extent that Wing Hong maintains (as it seemed to during oral closing submissions) that the Defendant Directors still acted in technical breach of the no conflict duty in failing to expressly declare their interests to Wing Hong’s creditors for their views and agreement before entering into the Floating Charge, the short answer is that this position is indeed at best wholly technical, there being nothing to show that such a breach caused recoverable losses to Wing Hong (see Section I below), and no allegation that any of the Defendant Directors personally profited from that course.

H.    KNOWING RECEIPT

311.  There being no relevant breaches of fiduciary duty, Wing Hong’s case against CNCG for knowing receipt of assets traceable to the breach of such duties must fail.

I.    LOSS AND REMEDIES

312.  Given my findings on the absence of breach, there is no basis for Wing Hong’s case on loss or its pleaded remedies against the Defendants, including recovery of the sum of HK$50.6 million as the amount of the Transfers and/or equitable compensation.

313.  In particular, on the basis that the Transfers were for the repayment of genuine loan amounts advanced to Wing Hong, the company cannot be said to have suffered any loss because of the Transfers, which would have had the effect of extinguishing its current liabilities to the same amount.

J.    CPO S.60 CLAIM

314.  As noted at the outset, Wing Hong’s case under CPO s.60 was hardly pressed at trial.

315.  The CPO s.60 claim is based on the same sets of dealings as targeted in Wing Hong’s case on breach of fiduciary duties, but with the added challenge of establishing an actual intent to defraud creditors on the part of the Defendant Directors.

316.  Given my findings on the absence of any breach of fiduciary duties by the Defendant Directors, Wing Hong’s s.60 claim must also fail.

K.    CONCLUSION

317.  Wing Hong’s claims are accordingly dismissed.

318.  As attested by the ample references to them in this judgment, counsels’ extensive written and oral submissions have been very helpful indeed. While not every fine point taken by the parties has necessarily been explicitly addressed above, they have been taken into account in reaching my conclusion.

319.  On costs, counsel had earlier agreed and proposed that the matter be reserved for further submissions following the main judgment.

320.  I accordingly direct that, absent agreement on costs, the Defendants are to file and serve written costs submissions within 14 days of this judgment, with Wing Hong’s costs submissions to be filed and served within 14 days of receiving the Defendants’ submissions. The Defendants shall then have 7 days from receipt to file and serve a brief reply.