Wing Hong Construction Ltd v. Hui Chi Yung and Others
Read the full judgment text of HCA 1423/2015 on BabelCite. This High Court CFI judgment was delivered on 30 November 2020.
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).
Cited by 2 cases · Cites 10 cases
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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 ________________________
________________________ Before: Deputy High Court Judge Abraham Chan, SC in Court Dates of Hearing: 5 - 8, 11 - 13 November 2019, 14 - 17 and 31 July 2020 Date of Judgment: 30 November 2020 ______________ JUDGMENT ______________
A. INTRODUCTION.......................................................................... 1 B. FACTUAL BACKGROUND......................................................... 5
C. MAIN ISSUES............................................................................ 100
D. ASSESSMENT OF FACTUAL DISPUTES AND WITNESSES... 136
E. THE CREDITORS’ INTERESTS DUTY..................................... 153
F. WING HONG’S SOLVENCY..................................................... 173
G. WHETHER BREACH OF FIDUCIARY DUTIES......................... 291
H. KNOWING RECEIPT.................................................................. 311 I. LOSS AND REMEDIES.............................................................. 312 J. CPO S.60 CLAIM....................................................................... 314 K. CONCLUSION............................................................................ 317 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 1st, 2nd and 3rd Defendants, together “the Defendant Directors”) and a former indirect parent company (the 4th 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. 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. 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 4th 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 1st Defendant, Hui Chi Yung 11.The 1st Defendant, Hui Chi Yung, was:
The 2nd Defendant, Hui Chi Yang 12.The 2nd Defendant, Hui Chi Yang, is the 1st Defendant’s brother and was:
The 3rd Defendant, Yiu Kai Yeuk 13.The 3rd Defendant, Yiu Kai Yeuk (Raphael), was:
14.The 4th 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:
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 1st and 3rd Defendants, the only other executive director of Wing Hong at the relevant times was Hui Kau Mo, the 1st and 2nd Defendants’ father. 18.Wing Hong and CNCG shared some common staff and management:
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. 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:
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. 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:
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:
36.The financial statements for the financial year ended 31 March 2008 and 31 March 2009 were signed by the 1st and 3rd Defendants. The financial statements for the financial year ended 31 March 2010 were signed by the 1st and 2nd 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:
40.Note 3 of Wing Hong’s audited financial statements for the year ended 31 March 2009 states that:
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:
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”. 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:
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 1st Defendant (by phone) and the 3rd 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 1st and 3rd 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 1st 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:
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 2nd 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:
60.On 22 August 2009, the 1st 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 1st 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:
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 1st and 2nd Defendants (“the 1st Transfer”). 64.On 11 December 2009, the 3rd Partial Award (later corrected by a Correction to 3rd Partial Award dated 5 January 2010) was handed down, dealing with other Tranche 3 issues (Match Power’s counterclaim in defects). Essentially:
65.On 26 January 2010, the 2nd Interim Payment Order was made. 66.On 17 February 2010, Wing Hong received HK$46,752,011.01 pursuant to the 2nd Interim Payment Order. 67.As at 19 February 2010, the positions of the parties in the Major Arbitration were as follows:
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 1st and 2nd Defendants (“the 2nd 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 1st and 3rd Defendants (“the 3rd 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 1st 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 1st and 2nd 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.
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:
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. 83.Following the sale of Wing Hong’s shares to Keen Fortune, the 1st and 2nd 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 1st and 2nd 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 1st and 2nd 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:
90.The 1st 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 1st 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:
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:
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:
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). 100.It is common ground between the parties that:
101.Against the background outlined in Section B above, the critical issues for determination may be distilled to these:
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. 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:
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:
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:
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:
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:
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 2nd 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:
143.Even if evidence from the 2nd 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:
145.In response, Mr Lam SC submitted that:
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 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. 149.The 1st and 3rd 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 2nd Defendant as a factual witness (addressed in Section D2 above), and the 3rd 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 1st and 3rd 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:
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:
E. THE CREDITORS’ INTERESTS 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:
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 (5th 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:
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:
166.On commercial realities, it bears emphasis that:
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:
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 (4th 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:
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:
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 (4th 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:
183.In Quick v Stoland Pty Ltd (1998) 29 ACSR 130, Finkelstein J stated (at p.626, line 38):
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:
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:
187.As regards borrowing, the court further held at §109 that:
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,
190.The Court of Appeal in Lewis noted (at §113) that:
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,
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:
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:
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:
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 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:
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”. 203.Several terms of the Loan Agreement are worth highlighting. 204.Recital (B) records that:
205.Recital (C) states:
206.“Loan” is defined in Clause 1.1 for the purposes of the Loan Agreement as meaning:
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 1st and 3rd 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:
211.On repayment, §3.2(a) provides that, subject to contrary provisions specified there or elsewhere in the Agreement:
212.The Final Maturity Date is defined under §1.1 of the Loan Agreement provides as meaning,
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. 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:
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:
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 1st 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:
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:
231.Pausing here and considering the position from a balance sheet perspective (further addressed in Section F6 below), it should be noted that:
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 18th 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:
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:
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:
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:
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:
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:
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. 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:
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:
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:
258.The Defendants highlight the following matters:
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:
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. 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:
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:
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. 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. 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:
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.
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. 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 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 3rd 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:
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:
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:
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:
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. 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. 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. 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.
Mr Justin Ho, instructed by Lipman Karas, for the plaintiff Mr Paul Lam SC leading Mr Vincent Lung, instructed by Ince & Co, for the 1st - 4th defendants [1] See Wing Hong’s Reply Note dated 31 July 2020, §19.1. [2] In the context of a submission that it was unnecessary for Wing Hong to establish the matter as its primary case is on the basis of the no conflict duty. [3] Wing Hong’s Closing Submissions at §6.3(b). [4] Wing Hong’s Closing Submissions at §6.2. [5] Wing Hong’s Closing Submissions at §244. [6] Wing Hong’s Closing Submissions §84. [7] The case is currently on appeal to the Supreme Court. According to the Supreme Court website, the case has been adjourned and provisionally relisted for 4 and 5 May 2021. [8] Wing Hong’s Closing Submissions §6.4. [9] Wing Hong’s Closing Submissions §189. [10] Transcript Day 10, pp.33:4-43:10 [11] Wing Hong’s Closing Submissions §244. [12] Wing Hong’s Closing Submissions at §137. [13] Wing Hong’s Closing Submissions at §321 (and similarly §6.3(b)). [14] Wing Hong’s Closing Submissions §324.2. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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