Revelry Gains Ltd v. Joy Rich Development Ltd and Others

HCMP 430/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 430 OF 2013

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D E C I S I O N

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1.Revelry Gains Limited (“Revelry”) brought this mortgagee action against Joy Rich Development Ltd (in liquidation) (“Joy Rich”) to recover a debt (“the Debt”) secured by the Deed of Charge dated 26 January 2011 (“the Charge”) and to enforce the Charge. The liquidators of Joy Rich (“the Liquidators”) having indicated that they do not contest this action, Madam Chen MuHua (“Madam Chen”) and Madam Chan Yuen Wa (“Madam YW Chan”) (collectively “C& C”) by their summons dated 18 September 2015 (“the Summons”) apply to intervene to conduct the defence on behalf of Joy Rich in this action. The Liquidators have indicated that they would take a neurtral position in this application.   

2.On 11 September 2014, DHCJ Le Pichon handed down a decision (“the Decision”) whereby the appeal out of time by Joy Rich from an order of Master De Sousa dated 24 September 2012 (“the EOT Order”) was dismissed. By the EOT Order, The Building and Loan Agency (Asia) Limited (“the BLAA”) was granted an extension of time of 28 days to register the Charge.

3.The background facts were fully set out in the Decision. I shall refer to the Decision for such background facts. I nevertheless shall outline the following essential facts for an easy understanding of this application. I shall also adopt the abbreviations used in the Decision in addition to those defined in this decision.

4.Madam Chen and Madam YW Chan are sisters. Madam YW Chan was the sole director from 3 March 2009 to about 1 September 2012 and the sole shareholder of Joy Rich. She however said that Madam Chen and Mr Lau instead of her handled the operations of Joy Rich and she had zero involvement.   

5.The Debt was extended under the Loan Agreement between the BLAA as borrower and Greatstep as borrower and Joy Rich as guarantor. The BLAA was a wholly-owned subsidiary of The Hong Kong Building and Loan Agency Limited, a listed company in Hong Kong. The Charge is a floating charge over the entire assets of Joy Rich. The principal asset covered by the Charge is the Property estimated to be worth HK$37 million as at 18 August 2014. Mr Lau and Madam Chen once cohabited at the Property.

6.The Debt eventually amounted to HK$200,712.328.77. Greatstep having defaulted repayment, the Charge crystallised on 28 December 2011 pursuant to the Loan Agreement. The BLAA registered a certificate of crystallization on 24 February 2012 and registered the same at the Land Registry on 29 February 2012.

7.On 14 March 2012, The BLAA presented a winding up petition under HCCW 80/2012 and Joy Rich make no effort to contest the same. Subsequently The BLAA decided not to proceed with the petition, which was therefore dismissed on 9 July 2012.

8.On 24 September 2012, Master de Sousa made the EOT Order subject to the usual proviso. The Charge was duly registered on 19 October 2012. A certificate of registration was issued.

9.Revelry is a wholly owned subsidiary of the BLAA. The BLAA assigned its legal and beneficial rights in the Loan Agreement and the Charge to Revelry on 1 March 2013. A notice of assignment was duly sent to Greatstep and Joy Rich on 5 March 2013.

10.On 5 June 2013, Madam YW Chan presented a petition to wind up Joy Rich as a creditor for HK$1 million plus and it was not opposed. As a result, a winding up order was made on 7 August 2013 on the basis of its insolvency. Liquidators were appointed 6 December 2013. The present action was stayed by reason of the winding up order pursuant to s.186 of the former Companies Ordinance, now renamed to be Companies (Winding-up and Miscellaneous Provisions) Ordinance, Cap.32 (“the Ordinance”).

11.On 20 March 2014, the Liquidators appealed to DCHJ Le Pichon to set aside the Order of Master de Sousa and the appeal was dismissed.

12.On 6 July 2015, the Liquidators issued unfair preference proceedings against C & C. On 8 August 2015, the Liquidators issued misfeasance proceedings against C & C.

13.Meanwhile, Revelry obtained leave to continue the prosecution of the present action against Joy Rich pursuant to s.186 of the Ordinance. In mid August 2015, the Liquidators indicated that they do not intend to resist the claim of Revelry.

The Application

14.Mr Bernard Man S.C., with Mr James Man, for C & C, explains that this application is necessitated by the Liquidators’ indication that they would not oppose the present action. He submits that C & C being creditors of Joy Rich as accepted by the Liquidators and Madam Chan being its sole shareholder, are plainly entitled to intervene to challenge the validity of the Charge so as to protect their financial interests.

15.In his written submissions, Mr Man sets out the case of C & C in the following terms:

a.  Mr Lau was a shadow director of a web of companies including but not limited to Revelry, HKBAA, Greatstep and Joy Rich.

b.  The Loan Agreement and the Charge were created in breach of his fiduciary duties to Greatstep and Joy Rich and BLAA had knowledge of the breach.

c.  The Charge is therefore voidable at the instance of Joy Rich.

d.  The series of transaction entered into between Joy Rich and BLAA were part of the fraudulent scheme in that Mr Lau siphoned off monies from BLAA (a subsidiary of a listed company) to his own pockets under the disguise of loan transactions with companies also controlled by himself (i.e. Greatstep and Joy Rich)

16.Mr Man urges upon this court to grant leave for C & C to intervene so long as their case appears to be arguable. He submits that the applicable threshold should be a serious question to be tried, relying on Aliprandi v Griffith Ventures (1991) 9 ACLC 1530 and Eros Cinema v Michel Assad Nassar (1996) 14 ACLC 1374. Mr Man takes me through the evidence in support of C & C’s allegations in some detail to convince me that there is a viable defence.

17.Ms Chan together with Mr Chen for Revelry opposes this application on five broad grounds. First, she submits that the Liquidators’ decision not to defend the present action is binding on Joy Rich. Second, she submits that the court has no jurisdiction under O.15 r.6 to grant leave to C & C to defend the present action on behalf of Joy Rich. Third, C & C have yet to establish their claims and so they cannot be regarded as creditors of Joy Rich having any interests in the liquidation of Joy Rich. Fourth, C & C’s allegations afford no defence to the present action and lastly, the certificate of registration is conclusive.

18.Ms Chan starts off his submission by invitation of attention to the established and undisputed principles that once a winding up order is made, a statutory scheme for dealing with the assets of the company that is ordered to be wound up is brought into operation and a liquidator is exclusively charged with the statutory duty of dealing with the company’s assets in accordance with the statutory scheme. All powers of dealing with the company’s assets are exercisable by the liquidator for the benefit of those persons who are entitled to share in the proceeds of realization of the assets under the statutory scheme: Lord Diplock in Ayerst v C & K (Construction) Ltd [1976] AC 167 at pp.176E-177D.

19.With these statutory duties and powers, the Liquidators have the authority to act on behalf of Joy Rich and their decisions made in the course of the present action should normally be binding on Joy Rich. However, their actions and decisions are under the supervision of the court and open to challenge.

20.S.200(5) of the Ordinance provides that if any person is aggrieved by any act or decision of the liquidator, that person may apply to the court, and the court may confirm, reverse, or modify the act or decision complained of, and make such order in the premises as it thinks just.

21.In such applications, the applicants will need to demonstrate, before the court will interfere with the liquidator’s decision or act that the liquidator has either:-

(i)   Not exercised his power in good faith or has acted in a way in which no reasonable liquidator could have acted; or

(ii)  Made a ruling or decision in the course of the administration which directly affected a party’s right and has not acted even-handedly as an impartial neutral: per Yuen JA in Re CA Pacific Securities Ltd [2002] 3 HKLRD 586 at §24 and Fok J (as he then was) in Re Wickson Holdings Ltd [2011] 2 HKLRD 373 at §19(d).

22.Ms Chan submits that C & C should make an application pursuant to s.200(5) of the Ordinance in the course of the winding-up proceedings and the application should be made known to all the creditors, contributories and the Official Receiver since the outcome of such an application would affect their financial interests: Companies (Winding-up) Rules rr.4-7 and 14-17. She is clearly right.

23.On the other hand, the court’s power to order that a creditor or contributory of a company in liquidation be authorised to use the company’s name as a plaintiff is of respectable antiquity and is sanctioned by high authority: Aliprandi, 1532. There McLelland J adopted the approach described by the Privy Council in Llyod-Owen v Bull (1936) 4 DLR 273 in the following terms:

“A judge in winding up is the custodian of the interests of every class affected by the liquidation. It is his duty… to see to it that all assets of the company are brought into the winding up. In authorising proceedings, especially if they may or will involve some drain upon the assets, he must satisfy himself as to their probable success; where … they involve no possible charge on assets, he will nevertheless be careful to see that any action taken in the company’s name under his authority is not vexatious or merely oppressive.” (emphasis added)

24.In Cape Breton Company v Fenn (1881) 17 Ch.D. 198 (C.A.), Jessel M.R. made it clear that what indemnity should be given when granting leave to use the name of the company could only be decided upon an application in the winding-up considered in the proper way.

25.In McPherson’s Law of Company Liquidation (3^rd edn, 2013) at §7-83, the learned author said this about

“If a liquidator either believes that an action is too risky to pursue or he or she does not have sufficient funds, then despite the fact that the general principle is that when a company is in liquidation the person in whom the authority to bring proceedings on the part of the company is vested is the liquidator, a creditor or member who thinks that the action has merit and should be prosecuted, may apply to the court and seeking either permission to proceed on behalf of the company or an order directing the liquidator to proceed. The courts have power to accede to the former type of application under their general powers, the use of such power having a long lineage and being supported by high authority. If the former application is made then the applicant must be ready to accept all of the risks connected with the action. If this is the case then it is of no moment that the action would not be beneficial for the creditors and members of the company. The only real barrier to proceedings is, as with all actions, namely that the action must not be vexatious or oppressive.”

26.Indeed the court in the winding-up is tasked with the duty to prevent the company in compulsory liquidation to have its assets wasted in litigation. Hence, no action or proceedings shall be proceeded with or commenced against the company except by leave of the court subject to conditions: s.186 of the Ordinance.

27.It should also be noted that the intended opposite parties in the relevant proceedings are not privy to such applications. It is not for them to argue against the merit of the applicants’ claims/defence in such applications.

28.In the premises, even if I accept that Joy Rich has an arguable case to set aside the Charge, C & C should make a proper application in the winding-up of Joy Rich either to impugn the decision of the Liquidators or to apply for leave to defend the present action in the name of Joy Rich. This application is badly formulated and on this ground alone, it must be dismissed.

29.The next cogent ground put forth by Ms Chan is that O. 15 r.6 does not give this court the power to allow C & C to defend the present action on behalf of Joy Rich. This is not an ordinary joinder application. Here the defendant is in liquidation. The said provision does not cover this particular situation where an intervening party wants to step into the shoes of a company in liquidation in the proceedings to carry on the defence on its behalf when the liquidators decided not to do so. Indeed Mr Man has no answer to this challenge and he asks this court to exercise its inherent jurisdiction to allow C & C to intervene to defend the action.

30.Ms Chan further challenges the alleged status of C & C to defend the action in the name of Joy Rich. She casts doubt on their proofs of debt in the respective amounts of HK$1,009,571 and HK$131,956,197. Ms Chan further refers to a paragraph of the Decision where DHCJ Le Pichon had this to say about the alleged status of Madam Chan as a creditor of Joy Rich:

“It is to be noted that the draft management accounts as at June 2011 list as one of the defendant’s assets “Director’s current account”, the amount involved being just in excess of $83 million.  At that point in time and indeed since 3 March 2009, YW Chan was the defendant’s sole director and who, during her tenure as sole director, had shown zero interest in the defendant and its operations.  But by 5 June 2013, within a two-year period, YW Chan was able to transmogrify her status from that of debtor for $83 million to creditor for $1 million plus and present a petition to wind up the defendant based on an unpaid debt of approximately $1 million, that being the basis of the winding up order.”

31.Mr Man points out that C & C do not accept the truthfulness in the draft management accounts at all. They say that they were mere fabrication. He pertinently submits that C & C were not privy to the appeal which DHCJ Le Pichon was called upon to determine and the deputy judge did not hear from them before making this observation. Lastly, he highlights the Liquidators’ unequivocal statement that after considerable investigation, both C & C have a valid proof of debt for a considerable sum though their full claims would not be admitted.

32.I accept Mr Man’s submission. As the matter now stands, the Liquidators’ statement must be given due weight and the fact they issued misfeasance summonses against C & C does not alter the status of C & C. I can accept that C & C are creditors of Joy Rich. However, this does not remove the intractable problems of this application. 

33.Ms Chan further submits that Madam Chan cannot possibly have any standing to intervene qua shareholder by reason of the insolvency of Joy Rich. She refers to the dictum of Harman J in Re Corbenstoke Ltd (No.2) (1989) 5 BCC 767 for the proposition that when the company is insolvent, a contributory will by definition receive nothing and does not have an interest in the outcome of the liquidation. Hence, the learned judge held that the applicant had no locus standi as a contributory to make the application to remove the liquidator.

34.I do not doubt the soundness of the proposition. However, I note that in those authorities cited to me including Aliprandi, applications were indeed made by contributories of companies in compulsory liquidation and their locus were never in dispute.

35.I do not think I need to resolve this issue as it is only an academic question in light of my foregoing conclusions.

36.Now I turn to the attack on the purported defence suggested by C & C. As shown in established authority, the threshold to show merits is not a high one and Mr Man has made a persuasive submission on why the Charge is liable to be declared void. Nevertheless I do not intend to deal with the merit of the case of C & C at all here. As noted above, this exercise should be carried out in another application in the winding up of Joy Rich. The companies court will examine the merit of the proposed defence with full arguments advanced by the relevant parties.     

37.By the same token, I express no view on the applicability of the doctrine of res judicata in the wider sense. I should not deal with this debate on this occasion at all.

38.Lastly, I should briefly deal with the certificate of registration relating to the Charge. Ms Chan submits that it is conclusive evidence of the validity of the Charge and in this connection, she relies on the holding of DHCJ Le Pichon in the Decision that the certificate of registration is conclusive and beyond recall. Hence Ms Chan submits that the validity of the Charge is above challenge once the certificate of registration was issued.

39.I have some difficulties in accepting this submission.

40.It is imperative to find out the context of the conclusion of the deputy judge. The deputy judge first set out the relevant provision, namely, s. 83(2) of the Ordinance (Now s.344(4) of Cap.622):

“The Registrar shall issue a certificate with his signature or printed signature, certifying the registration of any charge registered in pursuance of this Part, and the certificate shall be conclusive evidence that all the requirements of this Part with respect to registration have been compiled with.”[1]

41.The deputy judge then turned to decisions relating to similar provisions in other jurisdictions. First she referred to Exeter Trust Ltd v Screenways Ltd [1991] BCC 477 (C.A.). There, Nourse LJ dealt with a question on s. 401(2)(b) of the Companies Act 1985 which provides a certificate of the registration of a charge created by a company is “conclusive evidence that the requirements of this Chapter as to registration have been satisfied.” By virtue of this provision, Nourse LJ held that it was not possible to go behind the certificate which was conclusive proof not only that particulars had been delivered within the period limited by the order extending time but also that the order itself had been obtained.

42.The deputy judge then went on to refer to two other cases very briefly and come to the conclusion that the certificate of registration is conclusive and beyond recall.

43.I do not think the deputy judge meant to say that the conclusiveness of the certificate of registration can be extended to the validity of the Charge itself. It is clear from the wordings of the provisions that the certificate of registration can be conclusive proof only insofar as the matters relating to the registration are concerned. With the certificate of registration, the Charge is not invalidated as against the Liquidators and the creditors of the company by reason of any matters relating to its registration.

44.I would add that a certificate of registration is issued by the Registrar of Companies upon satisfaction of all the registration requirements. He knows little about the underlying transactions and surrounding circumstances of the creation of the charge. It cannot be reasonably expected from him to issue a certificate to be conclusive proof of the validity of the charge itself. 

Conclusion and Order

45.For the reasons stated above, I can conclude that the application of C & C is made on the wrong basis. This should never be a joinder application under O.15 r.6. The application must be dismissed.

45.Ms Chan asks for indemnity costs on the basis that this application is a classic satellite litigation. It is a waste of time and costs and serves to delay the action only.

46.However forceful her submission is, I do not have such a strong feeling against the application. I cannot say at this stage that the contentions of C & C are mere moonshine. The Liquidators takes a neutral position in this application. However, it is clear to me that C & C should attempt to challenge the validity of the Charge in a proper manner if they so wish and this joinder application should not have been made in this action. Revelry is unnecessarily involved and should be entitled to recover its costs from C & C on an indemnity basis.

47.In the premises, I dismiss the Summons with a costs order nisi that costs of and occasioned by the Summons be paid by C & C to Revelry on an indemnity basis to be taxed if not agreed by a taxing master with certificate for two counsel.

48.Lastly, I thank all senior counsel and counsel for their very helpful assistance.

Ms Linda Chan, S.C. and Mr Vincent Chen, instructed by Leon Lai & Co. for the Plaintiff

Mr Bernard Man, S.C. and Mr James Man, instructed by K & L Gates for 1^st and 2^nd Intended Interveners