CHU CHUNG MING v. LAM WAI DAN AND ANOTHER

HCCW 605/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 605 OF 2009

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BETWEEN

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J U D G M E N T

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1.  On 25 February 2010 I made a validation order on the application of the 1^st Respondent the material provision of which is as follows:

“1.  Notwithstanding the presentation of the Petition, the following transactions may be performed at the bank accounts of the Company as per Schedule 1 to this Order (the “Company Bank Accounts”) until further orders by the Court and that in the event an order for the winding up of the 2^nd Respondent being made on the Petition herein, such transactions shall not be avoided by virtue of section 182 of the Companies Ordinance:

(a)	All incoming payments into the Company Bank Accounts, including but not limited to deposit of cheques, incoming payments by autopay and electronic fund transfers;
(b)	Payments out of the Company Bank Accounts up to a total sum of HK$770,000.00 per month BUT SUBJECT to approval by the Petitioner and the 1st Respondent by their joint signature;
(c)	Payments out of the Company’s Bank Accounts up to a total sum of HK$1,051,297.12 to the 1st Respondent BUT SUBJECT to approval by the Petitioner and the 1st Respondent by their joint signature and this payment shall be in addition to the monthly payment sum as stated in sub-paragraph (b) above.”

2.  On 19 April 2010 the 1^st Respondent issued a summons seeking an order that “The Petitioner and the 1^st Respondent do procure that all cheques in respect of payments covered by the validation order granted by Harris J. dated 25^th February 2010 to be duly signed as soon as practicable and in any event no later than 7 days from the date of provision of the invoices and/or receipts”. The 1^st Respondent also sought an order that a penal notice be added to the order. As is apparent from the terms of the proposed order the 1^st Respondent complains that the Petitioner is preventing payments that the court has determined should properly be made.

3.  The application first came before me on 22 April and I made directions for the filing of evidence. I also explained to Mr. Lau who appeared on behalf of the 1^st Respondent that it seemed to me that the application as framed in the summons and explained in his submissions filed for the hearing on 22 April was misconceived. I could understand the nature of the complaint, but I had doubts about whether the way in which the 1^st Respondent was attempting to remedy it was correct. The validation order that I had granted did not require the Petitioner to sign cheques. If the payments covered by the order were required in order for the Company’s business to continue operation it may well be that a director (which the petitioner is) complying with his fiduciary duty to act in the best interest of the Company should sign them. If he refused to do so thus breaching his fiduciary duty my view was that the correct course was for the 1^st Respondent to apply for a mandatory injunction that he sign the cheques. I asked Mr. Lau to consider this when advising on the further evidence that was to be filed and to consider whether or not the evidence filed was appropriate for a revised application.

4.  I would also add that as is apparent from the terms of the order which is quoted above that what was validated were payments up to HK$770,000 a month not particular items of expenditure. Sub-paragraphs 1(b) and (c) also state quite clearly that payments are subject to approval by the 1^st Respondent and the Petitioner. Therefore, the order that the 1^st Respondent seeks, namely, that the petitioner should sign “all cheques in respect of payments covered by the validation order” is inconsistent with the terms of the validation order as the validation order does not cover any particular payment.

5.  The 1^st Respondent filed further submissions for the hearing of the summons on 2 May 2010 which largely repeated the earlier submissions and added reference to 2 new cases, Credit Lyonnais v SK Global Hong Kong Limited CACV 167 of 2003 (in particular paragraph 2 of the Chief Judge’s judgment) and Ng Yat Chi v Max Share Ltd [2005] 1 HKLRD 473. It is suggested by Mr. Lau who appeared again for the 1^st Respondent that the relevance of these cases is that they demonstrate that in suitable cases the court has an inherent jurisdiction to make orders (and I quote from the Chief Judge’s judgment) “to avoid injustice, prevent abuse, preserve the dignity of the court or to facilitate the administration of justice”. In short he argued that the petitioner’s refusal to sign cheques caused injustice and was an affront to the court, which has granted a validation order in respect of the payments to which the cheques relate. He has not addressed my point that proper course is to proceed on the basis that the petitioner has breached his fiduciary duties. Instead Mr. Lau simply emphasises, as he did in his submissions at the previous hearing, that once the order was made it should have been complied with or appealed. He drew to my attention Kwan J.’s (as she then was) judgment in Re Thousand Bright Limited HCCW 175 of 2006.

6.  It is my view the 1^st Respondent’s analysis is wrong. It is quite correct that if the petitioner objected to the validation order he should have appealed it. However, it does not follow that if the petitioner refused to sign cheques that the 1^st Respondent’s remedy is to return to court and say because of this fact alone he is entitled to what amounts to a mandatory injunction. The order is not directed to the petitioner it is a decision by the court that in the event that the Company is wound up expenses up to the specified amounts approved by both directors of the Company will not be void. Nothing which was said in by Kwan J. in Re Thousand Bright Limited or the other judgment of her Ladyship referred to by Mr. Lau, namely, Re CEO Investment Limited HCCW 344 of 2006 suggest that the granting of a validation in itself imposes a legal obligation upon a director of a company to facilitate payments covered by the order. Mr. Lau suggests in paragraph 23 of his skeleton argument that the terms sought in the summons are not uncommon and have been adopted in other validation orders. He was not, however, able to give me any examples, although he suggested that he had been told that the order in Re Thousand Bright Limited included such a provision although this is not apparent from the judgment, and I have not seen such orders included as an adjunct to a validation order. The decisions in Credit Lyonnais v SK Global Hong Kong Limited and Ng Yat Chi v Max Share Ltd do not justify granting an injunction without the normal criteria being satisfied in particular the infringement of a right or obligation. That is not to say that such criteria cannot be satisfied in the present case if the application is properly formulated.

7.  It is unfortunate that after I have specifically explained to Mr. Lau how I thought the 1^st Respondent should probably proceed to solve the problem of which he complains the application has not been reformulated, at least in the alternative. I asked why this had not been done and Mr. Lau’s answer was that it would have taken too long to recast the application. As it is I do not have an application before me for the grant of an injunction to require the petitioner to comply with his fiduciary duties and sign cheques in respect of particular payments indeed I do not have an application for an order that Petitioner sign cheques in respect of any particular payments.

8.  I was told by both Counsel that only 1 cheque has been signed for HK$6,000 in respect of a payment to an ex-employee. Mr. Lo who appeared for the Petitioner argued that this was because the 1^st Respondent had failed to answer the Petitioner’s queries concerning the payments the 1^st Respondent wishes to make. It is correct that the 1^st Respondent’s solicitor’s letter of 13 April 2010 in answer to the Petitioner’s solicitor’s letter seeking information rather unhelpfully contained a refusal to provide information and appears to have been written on the assumption that despite the wording of the validation order the Petitioner was not entitled to approve in any meaningful sense the payments. Thus a stalemate was reached.

9.  My impression is that neither party trusts the other and the spirit of cooperation necessary in order for them to agree things is absent. This being so it might have been better if the Petitioner had actively contested the application for a validation order rather not object to it so long as it included a provision that all payments are subject to his agreement and perhaps at least in respect of expenses already incurred it would have been better if the 1^st Respondent had sought a validation order in respect of particular items without any right of approval by the Petitioner, but be that as it may the present position is that there is a dispute about what payments should be made.

10.  In my view the 1^st Respondent has not framed his application in an inappropriate way and neither party have approached this application in a manner which lends itself to the Court deciding whether or not the Petitioner is prima facie in breach of his fiduciary duties, an issue which would involve a rather wider investigation of the factual disputes in the case than either Counsel envisaged exploring in the present application before me. I do not think it would be appropriate for me to try and reformulate the application for the 1^st Respondent and do its legal team’s work for it. I therefore dismiss the application with an order nisi that the 1^st Respondent pay the Petitioner’s costs in any event. This order will become absolute within 7 days of the handing down of this decision unless either party notify the Court in writing that they wish to challenge it.

11.  If the parties are incapable of agreeing the payments amongst themselves the 1^st Respondent will have to issue another particularised application for an order than not only are payments in respect of particular items validated but that the Petitioner signs cheques in respect of them.