Read the full judgment text of HCA 1412/2013 on BabelCite. This Court of First Instance judgment was delivered on 25 February 2021 before Deputy High Court Judge MK Liu.
Civil action – Company law – Directors' duties – Breach of fiduciary duty – Fictitious transactions and round robin scheme – Hong Kong listed company (China Metal Recycling (Holdings) Limited) and its Macau subsidiary (Central Steel) – Winding-up on public interest ground – Liquidators' action against former Chairman/CEO/majority shareholder (Chun Chi Wai), his wife and non-executive director (Lai Wun Yin), and connected corporate entities – Whether directors breached fiduciary duties by orchestrating and participating in large-scale fraud through fictitious scrap metal trading transactions financed by circular fund flows between 2007 and 2013 – Whether dividends totalling HK$672.9 million declared for FY2009-FY2011 were unlawful as paid out of capital or loss flowing from breach of fiduciary duty – Whether June/July 2013 payments of HK$1.96 billion from Central Steel to Cheung Fat and Pacific Metal constituted misapplication of corporate assets – Whether third party defendants (Cheung Fat and Wellrun) liable for dishonest assistance, knowing receipt and/or unjust enrichment – Whether unlawful act conspiracy established – Application of Hong Kong law to claims against Hong Kong and BVI third party defendants – Whether the s.62 Evidence Ordinance Conviction of Lai for conspiracy to defraud the Stock Exchange could be relied upon in civil proceedings despite pending appeal – Whether indemnity costs justified – Held: Plaintiffs' case established against Chun, Lai, Cheung Fat and Wellrun – The duties of directors include duties to act bona fide in the interests of the company, to act for proper purposes, not to misapply corporate assets, and the no-conflict duty – Directors' duties arise from the law of the place of incorporation (Cayman and Macanese law, materially the same as Hong Kong law) – Once a prima facie case of misapplication is shown, the evidential burden shifts to the director to demonstrate propriety of the transaction – Capital preservation rule prohibits distribution of capital to shareholders unless authorized by statute – FY2010 and FY2011 Dividends were paid out of capital and were unlawful – FY2009 Dividends constituted loss flowing from Chun and Lai's breaches of fiduciary duty on a 'but for' basis – The four requirements of dishonest assistance (assistance in breach of fiduciary duty, with causative impact, dishonesty by ordinary standards, resulting loss) were satisfied against Cheung Fat and Wellrun – The six requirements of knowing receipt (trust property, transfer in breach, receipt by defendant, receipt for own benefit, requisite knowledge) were satisfied – A third party recipient without authority from the principal may be liable in restitution for unjust enrichment where an agent acts in furtherance of his own interests to the detriment of the principal – Unlawful act conspiracy requires combination, intention to injure, concerted action, unlawful means and resulting loss – Hong Kong law applies to third party claims as the presumption that foreign law is the same as lex fori is not displaced for common law doctrines, and the events substantially occurred in Hong Kong – Compound pre-judgment interest at prime plus 1% is the normal order where a fiduciary has misapplied company money – Indemnity costs justified by Chun's absconding and contumelious breaches of Mareva injunctions, Lai's obstruction of trial dates and unmeritorious late applications, and Cheung Fat's refusal to provide discovery – Outcome: Chun and Lai jointly and severally liable to pay HK$672.9 million equitable compensation to China Metal for Dividends; Cheung Fat and Wellrun jointly and severally liable for the same amount on dishonest assistance basis; Chun and Wellrun liable to account for HK$0.8 million and HK$357.4 million respectively in dividends received as constructive trustees; Chun liable to pay HK$1,960,887,984.44 equitable compensation to Central Steel for the June/July 2013 Payments; Cheung Fat liable for HK$1,215,099,463.37 on knowing receipt, unjust enrichment and dishonest assistance bases; all liabilities joint and several; costs on indemnity basis with certificate for two counsel.
Legal issues: Breach of directors' fiduciary duties by Chun and Lai in respect of Fictitious Transactions and Round Robin Scheme · Liability for unlawful payment of dividends out of capital · Liability of Cheung Fat for dishonest assistance, knowing receipt and unjust enrichment · Liability of Wellrun for dishonest assistance and knowing receipt · Unlawful act conspiracy against Chun, Lai, Cheung Fat and Wellrun · Whether the June/July 2013 Payments constitute a misapplication of Central Steel's assets · Application of Hong Kong law to claims against foreign third parties (Cheung Fat and Wellrun) · Award of compound interest and indemnity costs
Outcome: Judgment for the Plaintiffs against the 1st, 2nd, 5th and 13th Defendants on all claims. Chun and Lai liable for breach of fiduciary duty; Cheung Fat and Wellrun liable for dishonest assistance. The Plaintiffs are entitled to equitable compensation, account of profits, and restitution.
Cited by 72 cases · Cites 8 cases