GUANGDONG (HK) INTERNATIONAL CO. LTD. v. GLEEFUL INVESTMENT LTD. and Others

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 258 OF 1994

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J U D G M E N T

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1. In the action the Plaintiff obtained on 15th March 1994 judgment in default against the 1st and 4th Defendants (which I shall respectively call 'Gleeful' and 'Taenfair') for $7.2m. On the basis of that judgment the Plaintiff issued a petition for the winding up of Gleeful and a winding-up order was made on 29th June 1994. The 2nd Defendant (Mr. Lai) in the action, who is a contributory and director of Gleeful, now applies for the judgment against Gleeful to be set aside and for the winding-up order to be stayed.

2. Mr. Lai and his wife, the 3rd Defendant in the action, were the only directors and shareholders of Gleeful. Mr. Lai managed and ran the company. Gleeful was a one project company. In 1987 it was engaged in a village development project in Junk Bay. Put shortly, this involved reaching agreements with a number of villagers by which Gleeful, in the name of each villager, would arrange for a new grant to allow the development of each villager's plot of land, construct a house on each plot and finally take an assignment of the house and land from each villager. Gleeful would pay all the costs and expenses involved together with a monetary consideration to each villager.

3. Because of the time involved, and because of the uncertainties of a new grant being allowed by the Government and of villagers changing their minds, such a development project is a high risk business although, if successful, productive of high profits. Gleeful needed finance. Mr. Lai conducted negotiations with Mr. Lui Zhong Guo (Mr. Liu) the then managing director of the Plaintiff. As a result the Plaintiff and Gleeful entered a joint venture agreement. That agreement (the Joint Venture Agreement) dated 11th August 1987 provided:

1. The parties would acquire Taenfair, the shares in which were to be divided 70/30 in favour of the Plaintiff and profits were to be distributed accordingly.

2. The Plaintiff would be responsible for all financing of the project including the cost of shares in Taenfair.

3. Neither the money to be advanced by the Plaintiff nor the interest thereon would be payable until the project was completed.

4. The price for each house and land was to be $360,000 plus the cost of construction plus the land premium.

5. Mr. Liu and Mr. Lai were to be managing director and vice managing director respectively of Taenfair, any additional directors to be appointed with the consent of both.

4. On 13th August 1987, Gleeful and Taenfair reached agreement (the Taenfair Agreement) that:

1. Gleeful would sell to Taenfair each house and plot of land at a price of $350,000 plus cost of construction plus land premium (the discrepancy in price between the two agreements remains unexplained).

2. Of each sum of $350,000, $200,000 was to be paid to Gleeful upon Gleeful signing a sale and purchase agreement with the villagers concerned; a further $60,000 on the issue of a new grant; and $90,000 upon completion.

3. Taenfair was to be responsible for financing construction of the houses and such money advanced by Taenfair to Gleeful should form part of the purchase price.

5. At about the same time, Gleeful entered into agreements with 36 individual villagers (the Village Agreements) which provided that:

1. The villager would execute any new grant in his favour and surrender it to Gleeful for safe custody.

2. Gleeful would construct a house on the land.

3. Upon completion of construction, the villager would sell the house and land to Gleeful at a price of $130,000 plus construction cost plus land premium.

4. The sum of $130,000 to be paid as to $40,000 (in some cases it appears $30,000) upon the signing of the village agreement and $90,000 upon assignment of the house and land to Gleeful. To enable Taenfair to comply with the requirement that it pay $200,000 to Gleeful upon the signing of the village agreements, the Plaintiff made available $7.2m through the solicitors then acting for all parties involved. $1.25m in total was paid to 36 villagers who had signed village agreements, $3.562m to Gleeful and $2.367m to Mr. Lai.

6. In the course of these dealings, Mr. Lai made a payment of $260,000 to Mr. Liu. Shortly after, Mr. Liu returned to China and was replaced by Mr. Huang Xi Jing (Mr. Huang). Either Mr. Huang or representatives of the Plaintiff confronted Mr. Lai about the project. At this meeting, either voluntarily or because he was threatened with a report to ICAC at a time whe he was planning to emigrate to New Zealand, Mr. Lai disclosed the payment which he had made to Mr. Liu. He signed two documents. One, in a personal capacity, in which he agreed to repay to the Plaintiff $7.59m being the $7.2m advance, plus an investment in another project but less the payment to Mr. Liu. Second, on behalf of Gleeful, acknowledging that the payment had been made to Mr. Liu 'representing (the Plaintiff) to pay up to the country'. It is not clear what that is supposed to mean but, according to an affirmation made by Mr. Lai in support of these applications, it is the way of doing business with China. In a later affirmation, Mr. Lai said that the payment was in fact for the institution in China which payment, he had been informed by Mr. Huang, had been rejected. I can only say that, while it is frequently reported that payments have to be made to smooth the progress of transactions with companies from China, it is not a practice of which, if commonly adopted, I can approve.

7. Mr. Lai signed the documents in March 1989. In fact he was reported to ICAC later in the year when apparently Mr. Huang got wind of the fact that Mr. Lai was leaving for New Zealand. ICAC carried out an investigation. In October 1991, Mr. Lai was advised by ICAC that the investigation was complete and that no further action was justified. It is therefore curious, to say at least, that two years later Mr. Liu was arrested when he returned to Hong Kong and charged with receiving a number of corrupt payments from Mr. Lai, the $260,000 having apparently been made by way of several payments. The charges, it is fair to say, were eventually dismissed although not on the merits but because Mr. Liu, having been given bail, was unable to return from Hong Kong to China because of ill health, and also it is suggested because witnesses from New Zealand were unwilling to return to give evidence.

8. After the ICAC investigation, Mr. Lai and his wife emigrated to New Zealand where they are still living. Mr. Lai came to Hong Kong from time to time to attend to affairs with the villagers. The day-to-day running of Gleeful, in so far as there was any running at all, and of the project appears to have been left in the hands of Gleeful's solicitors. At least, it was to those solicitors that Mr. Huang looked for information about progress of the project. He did not, however, receive very much information.

9. In May 1992, 16 villagers received new grants. It seems, however, that they realised that Gleeful was going to get rather more out of their agreements than themselves. According to Mr. Lai, the villagers decided they would not honour their agreements, constructed houses by obtaining finance from other sources and ultimately, on 19th January 1994, commenced proceedings against Gleeful to have the Village Agreements declared unenforceable or rescinded on the basis that such agreements were in breach of public policy or made by mistake under the misapprehension that they could alienate their land in the manner agreed to. Gleeful entered a defence and counterclaim on 17th March 1994. Negotiations with the villagers in an effort to reach a settlement are on going. The negotiations now being conducted by the Official Receiver for Gleeful.

10. According to Mr. Lai, there is no indication that the other 20 villagers, who still await new grants, will not proceed with the village agreements. He estimates that there would be a profit of over $3m for each house so that there is every reason to stay the winding up and allow the project to continue. The Plaintiff, Taenfair and Gleeful will then earn substantial profits.

11. Meanwhile, in 1993 the Plaintiff had already lost patience with the project. Mr. Huang wanted a settlement with the villagers or repayment of the money it had advanced. It is the Plaintiff's case that there was difficulty in finding Mr. Lai at this time. At all events, on 9th August 1993 the Plaintiff's solicitors wrote to Gleeful asserting that Gleeful had failed to perform in accordance with the terms of the joint venture agreement, that this amounted to a wrongful repudiation of the agreement which repudiation was accepted, and that the Plaintiff had suffered substantial loss and damage for which proceedings would be instituted. The writ in the action was in fact issued the following day. It is endorsed with claims against:

Gleeful for

i) $7.2m money had and received

ii) Alternatively the same sum being money held on trust

iii) Further and/or alternatively damages for breach of the Joint Venture Agreement

Mr. Lai for

i) $7.2m being a balance of the sum payable under a promissory note (it is not in dispute that the promissory note is the document Mr. Lai signed in a personal capacity in March 1989)

ii) Alternatively $7.2m as a balance of the sum agreed to be payable by Mr. Lai to the Plaintiff on the basis of the same document.

iii) Alternatively damages for breach of that agreement

iv) Damages for breach of the same agreement in that he failed to provide securities

v) Damages for misrepresentation by which the Plaintiff was induced to enter the joint venture agreement.

vi) Damages for conspiring with the 3rd Defendant to injure the Plaintiff's business by unlawful means.

The 3rd Defendant (it is not necessary to set out the claims against her)

Taenfair:

As an alternative to the claims against Gleeful under i) and ii) above, $7.2m being the balance of a loan advanced between August 1987 and February 1988.

12. No further steps were taken by the Plaintiff until it changed its solicitors in November 1993. According to Mr. Edwin Yun, the sole proprietor of Yun and Company, the new solicitors, Mr. Yun decided that the existing claim against Mr. Lai was too complicated and a new action was commenced against Mr. Lai upon the so-called promissory note. A writ in Action 11634/93 (the new action) was issued on 23rd December 1993. I have to say I see no reason to doubt Mr. Yun's explanation. Mr. Yu, who appeared for the Plaintiff, said that it would enable the Plaintiff to proceed more easily against Mr Lai by way of O. 14.

13. On 24th December 1993 the writ in the new action was served on Mr. Lai at his old address in Hong Kong, notwithstanding the fact that it was known to Mr. Huang that Mr. Lai had emigrated to New Zealand and that there had been difficulty in finding him in Hong Kong. On 20th January 1994, judgment in default was obtained against Mr. Lai in the new action. On 4th February 1994, a bankruptcy notice against Mr. Lai was issued by the Plaintiff. On 26th February 1994, the writ in the action was served against Gleeful and Taenfair by post at their respective registered offices.

14. The bankruptcy notice came to Mr. Lai's attention because it was published in Target and brought to his attention by colleagues. There ensued correspondence between the respective solicitors. I was taken through this correspondence in some detail by Mr. Mok, who appeared for Mr. Lai, because it was his complaint that the Plaintiff's solicitors in this correspondence were evasive and generally acting mala fide. I do not propose to rehearse the correspondence here. Suffice it to say that, in all the circumstances, I am quite satisfied that the complaint is unjustified. While the Plaintiff's solicitors may not have disclosed in minute detail all that was taking place, they were certainly not hiding the fact that proceedings against Gleeful and Mr. Lai were either contemplated or afoot.

15. On 15th March 1994, the Plaintiff entered default judgment against both Gleeful and Taenfair for $7.2m. On 19th March 1994 the Plaintiff issued a statutory demand for $7.2m to Gleeful.

16. On 29th March Mr. Lai applied to set aside the judgment which had been entered against him in the new action. That was due to be heard on 9th June. In the meantime, on 28th May, the Plaintiff issued a petition to wind up Gleeful upon the basis of the default judgment and statutory demand, and on 1st June issued a bankruptcy petition against Mr. Lai. Both these proceedings were to be heard on 29th June. The petition was served on Gleeful by leaving it at its registered office.

17. On 9th June, the default judgment against Mr. Lai was set aside and the bankruptcy petition was subsequently withdrawn. The petition to wind up Gleeful was not, however, withdrawn and a winding-up order was made on 29th June.

18. On behalf of the Plaintiff, it was submitted by Mr. Yu that Mr. Lai had no interest which would entitle him to make the application to set aside the judgment against Gleeful. Although not conceding the point, Mr. Mok accepted that there is no authority to suggest that a mere contributory has sufficient interest to intervene on behalf of or through a company. He also accepted that a mere commercial interest in the outcome of the proceedings is insufficient. He argued, however, that in all the circumstances of the case, not least Mr. Lai and his wife being the only contributories of Gleeful and the way in which the cases of both Gleeful and Mr. Lai are intertwined, sufficient interest has been established. In this he was supported by Mr. Lo, the liquidator of Gleeful, who pointed out that Mr. Lai, as a contributory, is entitled to apply to stay the winding-up proceedings. As the winding-up is based upon the default judgment which is under attack, Mr. Lai's interest flows from one to the other.

19. I am satisfied that Mr. Lai does have sufficient interest to entitle me to exercise my discretion in his favour if I think it right so to do. There are no clear guidelines as what constitutes sufficient interest. In my view, the principle is best expressed by Kerr L.J. in Sanders Lead Co. Inc. v. Entores Metal Brokers Ltd. [1984] W.L.R. 453 a decision involving Ord. 15 r.6(2). Whilst that rule relates to the joinder of a party, it is difficult to see how any real distinction can be made between the principle applicable there and that applicable to Order 13 r. 9 which relates to the setting aside of a judgment entered in default. At p. 461 Kerr L.J. said:

"In my view the rule requires some interest in the would-be intervener which is in some way directly related to the subject matter of the action. A mere commercial interest in its outcome, divorced from the subject matter of the action, is not enough. It may well be impossible, and would in any event be undesirable, to attempt to categorise the situations in which the interests of would-be interveners are sufficient to satisfy the requirements of the rule."

20. Mr. Mok argued that the judgment obtained against Gleeful was irregular. He said, first, that it was well-known to Mr. Huang that Mr. Lai had effectively left Hong Kong and that the company, in so far as it was operational at all, was operational through the solicitors. Service, however, was by way of post at the registered office of Gleeful. That service, however, was ineffective because the writ was returned to the Plaintiff's solicitors.

21. There was some confusion about service. What happened in the end was this. The service clerk, using both belt and braces, despatched copies of the writ both by ordinary post and by registered post. The registered post was, however, returned to the solicitors on 3rd march 1994 on the basis 'no such company'. The ordinary post was not returned. The plaintiff's solicitors, therefore, knew or should have been aware of the returned post before application was made for judgment on 15th March.

22. The authorities on the question of service by post and the regularity of judgments were reviewed by Hunter J.A. in Honour Finance Co. Ltd. v. Tsui Mei Mei [1989] 2HKLR 146. I am satisfied that the law is that, where service is effected by post then, if the writ has not been returned by the Post Office before judgment has been obtained, service is deemed to have been good and the judgment regular. If, however, the writ is returned by the Post Office before judgment has been obtained, there can be no question of service having been effected whether a company or an individual was the subject of proceedings.

23. The present case is something of a half way house because the writ served by ordinary post was not returned and it is common ground that the address used was and still is the registered office of Gleeful. Accordingly, said Mr. Yu, there has been good service.

24. I am not persuaded of that. The Plaintiff's solicitors knew before judgment was applied for that the writ sent by registered post had been returned. At the very least, a question mark should have been raised in their minds particularly having regard to the history of Mr. Lai and Gleeful. They should at least have double checked the address of the registered office with the Companies Registry. The writ could then have been served by a process server leaving it at the registered address. An affidavit of service disclosing the details of what had taken place should have been filed. The Court would then have been in a position to judge whether or not service had been satisfactorily effected. All too often, I am afraid, affidavits of service are regarded as little more than a formality which can be dealt with in a fairly perfunctory manner. That is a wholly wrong attitude to adopt and anyone thinking in those terms should be disabused of them. Service of proceedings, particularly the originating document, is vital. It has to be communicated, and shown to be communicated, to the person to whom it is directed. The Court has to be satisfied as to that communication. It is for the Court, and not the process sever or solicitor handling the case, to decide whether or not service has been achieved. It is, therefore, necessary to disclose any difficulties or unusual circumstances that may arise when service is being attempted.

25. I acknowledge, of course, the peculiar nature of a limited company and the need to have an address at which it can be found or served. I accept that a limited company cannot evade service or other obligations or liabilities simply by, as Mr. Lai put it, closing down the office.

26. Further, in the correspondence between solicitors to which I have already referred, on 14th March 1994, the date upon which preparations were being made to obtain judgment, the Plaintiff's solicitors wrote to the solicitors acting for Gleeful in the villagers action asking whether they had instructions to act for the company 'in our client's proceedings against it'. It would not have been difficult to have enquired about Gleeful's registered office.

27. In the circumstances, I am satisfied that the judgment was an irregular one.

28. Next, Mr. Mok argued that the judgment itself is inherently irregular. He said that judgment was obtained against both Gleeful and Taenfair when the claim against Taenfair was pleaded in the alternative. How, he asked, could there be judgment against both companies in such circumstances. There seems to be some merit in that. I note that Mr. Yu did not address me on the point.

29. Mr. Mok then argued that there are defences available to Gleeful on the merits. As far as money had and received is concerned, he said that apart from the letter before action, which was for loss and damage, there has been no demand for the money. In any event, the money was advanced from the Plaintiff to Taenfair and from Taenfair to Gleeful. Accordingly, if there is to be any claim at all on this basis against Gleeful it should be by Taenfair. Even assuming that the Plaintiff can make a direct demand against Gleeful, the Plaintiff and Gleeful were parties to a joint venture on which the money was spent. Upon termination of that joint venture by repudiation and acceptance, it is not open to the Plaintiff to demand repayment of its contribution. In any event, the Plaintiff had undertaken in the joint venture agreement not to demand repayment until completion of the project.

30. In the meantime, said Mr. Mok, Gleeful is, or was until the winding up order was made, defending the action brought by the villagers. It is therefor difficult to see how Gleeful could be said to be in breach of the joint venture agreement.

31. Mr. Mok also enquired how there could be any question of the money being held on trust by Gleeful for the Plaintiff. In addition to the points he had already made, he said that as long as the Taenfair agreement remained in existence, the $7.2m was Gleeful's money to be used in any way in which it liked. To date, he said, nothing had been done to put the Taenfair agreement to an end.

32. Mr. Yu met both points. He said that the money was part of the financing arrangements and therefore paid for the purpose of the project. However, some $5.9m was received by Gleeful or Lai, disappeared, and remains even now unaccounted for. No justification had been put forward as to why that money should have been retained by Gleeful and Mr. Lai. It would not be until the project was complete that the Plaintiff and Gleeful could take their profits, if any, in accordance with the joint venture agreement. At the very least, therefore, the $5.9m was money had and received.

33. Mr. Yu further argued that Gleeful is in breach of its obligations under the Joint Venture Agreement. He said that there must be an implied obligation in that agreement, in order to give it business efficacy, that Gleeful should get on with the project. That, he said, is mirrored in clause 4 of the Taenfair agreement where Gleeful undertook diligently to carry out the construction of the houses. He asked how Gleeful was performing that obligation when Mr. Lai had gone abroad and had closed down Gleeful leaving the solicitors to do the best they could.

34. Mr. Yu added that, although the Plaintiff appeared to have had considerable control by virtue of its role prescribed by the joint venture agreement, in fact Taenfair was nothing more than a conduit for the money. There was nothing to show that the Plaintiff was aware of the provisions in the Taenfair agreement under which Gleeful was to be paid a substantial portion of the purchase price in respect of each house, but required only to disperse a small portion of that to the villagers.

35. Finally, Mr. Yu said that Mr. Lai had admittedly paid $260,000 to Mr. Liu. Whether or not that was corrupt it was certainly an improper payment. The law, he said, is that any contract made by an agent under the influence of bribery or, to the knowledge of the other contracting party, in violation of his duty to his principal, is voidable by the principal.

36. Mr. Mok met the last point by saying that the important word is "voidable". Once the Plaintiff, through Mr. Huang, knew of the improper payment it was incumbent upon it to make an election, namely to avoid the contract or to affirm it at that stage. Plainly, the contract was affirmed because, while Mr. Huang came to know of the payment in 1989, it was not until 1993 that the Plaintiff sought to bring an end to it. That, I am satisfied, must be right.

37. As far as $5.9m is concerned, Mr. Mok said that the money did indeed belong to Gleeful for Gleeful to do with it as it pleased. He pointed to the terms of the two agreements. He said that the purchase price was entirely separate from the cost of construction and land premium. Once Taenfair paid Gleeful and Gleeful had paid that which was then due to the villagers, the balance belonged to Gleeful as its profit on the transaction. In effect, Gleeful was able to take two profits; first, on the difference between the purchase price payable by Taenfair to Gleeful and by Gleeful to the villagers. Second, from the profits available once the project had been completed. Accordingly, there was no reason to say that that money was in some way earmarked for the project and somehow held in trust. There was no need for Mr. Lai or the Plaintiff to explain or account for the money.

38. I see the force of those arguments. However, it is plain that the intention of the Plaintiff and Gleeful was to carry out a village development. To that end, the Plaintiff was supplying the finance and, if the development was a success, the Plaintiff, because it was carrying the financial risk, would take the lion's share of the profit. The money being advanced by the Plaintiff was intended to further the purpose of the joint venture. It was plainly not intended to provide Gleeful or Mr. Lai with an immediate windfall profit of several million dollars. I am therefore not prepared to accept that Gleeful has a real prospect of success on this basis.

39. It is clear, however, that the money paid by Gleeful to the villagers was properly expended and cannot be recovered on the basis of money lent or held on trust. It could only be recovered by way of damages. It is plain therefore that the judgment which has been obtained is for a sum in excess of that to which the Plaintiff is now entitled.

40. Setting aside the judgment, which is both irregular and for an excessive amount, still remains a matter of discretion. I have to consider, therefore, whether I should exercise my discretion in Mr. Lai's favour, set aside the judgment and give him leave to defend on behalf of Gleeful. I am satisfied I should not so exercise my discretion. The project is plainly at an end whatever optimism Mr. Lai may retain. The only asset which Gleeful has, therefore, is the possibility of some payment by way of settlement or otherwise from the villagers' action. I am told by the liquidator that all he has found is a cash balance of $183 while the only other creditor is the Commissioner of Inland Revenue seeking some $4,000. Otherwise the liquidator has been unable to obtain any other information about the company.

41. It seems to me that it would be a waste of in immense amount of time and costs to reopen the proceedings between the Plaintiff and Gleeful when, at the end of the day, the Plaintiff will in any event be entitled to recover the money it advanced for the purpose of the project less any amounts properly expended thereon, together with the now very considerable interest. Further, it seems to me that Mr. Lai is a man of very dubious qualities. He does not seems to me to be a person to whom there should be entrusted conduct of heavy litigation. However, the matter need not necessarily rest there. The liquidator can, if he thinks fit, pursue the same course as that sought by Mr. Lai. As Mr. Lai has, through counsel, indicated that he is prepared to put up security for costs if required as a condition of being given leave, no doubt he will be prepared to fund the liquidator if the liquidator decides that he should seek to re-open the matter.

42. In these circumstances, the application in the action is dismissed. I make an order nisi that Mr. Lai is to pay costs of both the Plaintiff and the liquidator.

43. I do not, in the circumstances, need to consider whether the winding-up order was obtained irregularly nor to consider the principles which a stay should be granted or refused. That application is dismissed with a like order nisi as to costs.