Re Yick Fat Land Investment Co Ltd
Read the full judgment text of CACV 4/1969 on BabelCite. This Court of Appeal judgment was delivered on 10 June 1969.
1. The Yick Fat Land Investment Company Limited (hereinafter referred to as "the Company") was incorporated on 11th April 1963 as a private limited company. The nominal capital was $2,000,000 divided into 2,000 shares of $1,000 each. The names of the six shareholders (who were all well-known to one another) are Lai Shu Fat, H.L. Chung, K.Y. Chung, K.P. Chung, Szeto Yat and Madam Lai Yee. Under Article 14 of the Articles of Association the six shareholders were appointed directors of the company.
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IN THE SUPREME COURT OF HONG KONG (APPELLATE JURISDICTION) CIVIL APPEAL NO. 4 OF 1969 (On Appeal from Companies Winding Up No.4 of 1966)
Coram: Blair-Kerr. J. and McMullin, J. Date of Judgment: 10 June 1969 ----------------- JUDGMENT ----------------- 1. The Yick Fat Land Investment Company Limited (hereinafter referred to as "the Company") was incorporated on 11th April 1963 as a private limited company. The nominal capital was $2,000,000 divided into 2,000 shares of $1,000 each. The names of the six shareholders (who were all well-known to one another) are Lai Shu Fat, H.L. Chung, K.Y. Chung, K.P. Chung, Szeto Yat and Madam Lai Yee. Under Article 14 of the Articles of Association the six shareholders were appointed directors of the company. It appears that Lai Shu Fat was appointed Chairman and H.L. Chung was appointed General Manager. 2. The object was to acquire some old property in Waterloo Road, to develop the site by building thereon a 15-storey block of flats, to sell the flats, and thereafter to wind up the company. 3. The new building was completed about the middle of 1965; and, shortly after this, a dispute arose. K.Y. Chung and K.P. Chung (who are the appellants before this court) demanded to see the accounts of the company; and in January 1966 Lai Shu Fat supplied them with certain accounts in Chinese. This did not satisfy the appellants; and, on 17th February 1966, they filed a petition in which they sought an order that the company be wound up by the court. In this petition they alleged that there had been various breaches of the Articles of Association in that the accounts had never been audited and placed before the company in general meeting, and that they were consequently "completely in the dark" as to whether the company's business was being carried on at a profit or at a loss. The other four shareholders opposed the petition. Affidavits were filed by the appellants and Lai Shu Fat. The hearing of the petition took place before the late Mr. Justice Creedon. The appellants and Lai Shu Fat were cross-examined on the allegations in their affidavits; and on 23rd July 1966 Mr. Justice Creedon ordered that the company be wound up by the Court. The Official Receiver was appointed liquidator. 4. Pursuant to s.190 of the Companies Ordinance, a statement of the company's affairs was verified by the affirmation of Lai Shu Fat on 29th March 1967. In this document Lai solemnly declared that, to the best of his knowledge and belief, the Statement of Affairs was a full, true and complete statement of the affairs of the company as at the date of the winding-up order. On the same day (29th March 1967) H.L. Chung solemnly declared that he had perused the Statement of Affairs lodged by Lai Shu Fat and that, to the best of his information, knowledge and belief, this Statement contained "a full and accurate account of the company's affairs", Szeto Yat swore an affidavit in similar terms on 31st March 1967; and Lat Yee's solemn declaration is also dated 31st March, 1967. The two appellants did not verify the Statement. 5. The liquidator continued his investigations into the affairs of the company throughout 1967. The appeal papers indicate that he was supplied with a report dated 13th September 1967 by one of his investigating accountants (Mr. W.L. Tse) and that this report was forwarded to the appellants' solicitors by letter dated 22nd September 1967. The company was clearly solvent; and the time was approaching when a return of capital would have to be made to the shareholders. 6. However, by the end of 1967, it was evident that the shareholders were not in agreement as to the extent to which each shareholder was indebted to the company. The indebtedness arose in this way: some of the flats had been sold prior to the winding-up order and the purchase price of these flats had been received by individual shareholders; but they were not in agreement as to how it came about that individual shareholders had negotiated the various sales, and as to whether the liability of shareholders to the company was for the ...(illegibl) sale prices of the flats or for some ...(illegibl) figure allegedly agreed between them on some previous date. 7. In his report to the liquidator, Mr. Tse had written:-
The last sentence of this passage is difficult to understand owing to the presence of the double negative. It may be that Mr. Tse intended to say: "It is unreasonable that ......", or that "it is perfectly reasonable that ......". 8. The liquidator appears to have understood the passage in the former sense because Mr. Tse's report was forwarded by him to the appellants on 22nd September with the following comments:-
9. It is not known when "the suggestion" referred to in the last paragraph was first made. However, on 18th October 1967, the appellants' solicitors wrote a lengthy letter to the liquidator. It began thus :-
10. The letter went on to say that each of the two appellants had been allocated two flats because each had contributed $200,000 towards the capital; that three of the flats had been sold by the appellants for less than the so-called "list price"; that the other flat had been sold by the Official Receiver for less than the "list price", and that the appellants were willing to make up "the deficit" between the "list prices" and the actual sale prices. The letter dealt with the position of the remaining directors in like manner; and in the last paragraph the appellants' solicitors said:-
11. On 27th February 1968 the Official Receiver submitted a report to the Court from which it appears that no proper books of account had been kept by the company; and that there had been breaches of the provisions of the Companies Ordinance and of the Articles of Association. In particular, no profit and loss accounts or balance sheets had been prepared prior to the winding-up order; and no annual general meetings had been held. The Official Receiver said that from the cash book it appeared that the shareholders had paid into the company's accounts the following amounts:-
12. Paragraph 3 dealt with the shareholding and drow the Court's attention to the position of a Mr. Osman Sadick who was manager of the Underwriters Bank Incorporated. Apparently, Lai Shu Fat and H.L. Chung had each borrowed $200,000 interest free from Mr. Sadick prior to the formation of the company, and Lai H.L. Chung had purported to issue share certificates in favour of Mr. Sadick as security for these loans. On or about 2nd September 1963 Lai Shu Fat repaid his personal loan of $200,000 and the shares were transferred from Mr. Sadick to Lai Shu Fat. 13. Paragraph 7 of the Oficial Receiver's report to the Court reads:-
Paragraphs 9, 10 and 11 of the Official Receiver's report read:-
The application was ex parte, and on 5th March 1968 Mr. Justice Creedon made an order in terms of sub-paras (a), (b) and (c) of para.10 of the report. 14. Mr. Nicoll, who appeared for the liquidator on this appeal, informed the Court that the ex parte application was actually made pursuant to s.200(3) of the Companies Ordinance. 15. The terms of the order of 5th March 1968 were communicated to the appellants' solicitors on 19th June 1968. On 30th January 1969, the appellants applied to Mr. Justice Huggins for an order that the ex parte order made by Mr. Justice Creedon on 5th March 1968 be set aside. Mr. Justice Huggins dismissed the appellants' application. From that decision the appellants have now appealed to this court. 16. At the commencement of the appeal Mr. Bernacchi, who appeared on behalf of the appellants, made it clear that his clients were not alleging mala fides or negligence on the part of the liquidator. He submitted, however, that the order of 5th March 1968 was premature; that although the liquidator had said in his report of 27th February 1968 that further investigations were proceeding into various matters connected with the affairs of the company and that he expected to be able to make a further report soon, the liquidator had not reported further to the court; that, on the papers before the court, there was evidence of suspicion which called for further investigation by the liquidator; that the court should direct the liquidator to make further enquiries of Mr. H.L. Chung and Mr. Sadick; and that, if he failed to obtain satisfactory answers to his questions, the liquidator should be directed to apply to court under s.221 of the Ordinance for Mr. H.L. Chung and Mr. Sadick to be summonsed for cross-examination before a judge. Mr. Ber acchi submitted that the ex parte order of 5th March 1968 should be discharged, or at least stayed, pending the result of the further investigation suggested. 17. The appellants submit that there are four matters which call for further investigation: (1) the contract for the construction of the 15-storey block entered into between the company and Hop Yick Tai Construction Co.; (2) the extent to which each ...(illegibl) is indebted to the company in respect of flats "allocated" to them and sold by them; (3) the circumstances relating to the grant of interest-free loans by Mr. Sadick to Lai Shu Fat and H.L. Chung and a subsequent building mortgage for $1,000,000 by the company and Mr. Sadick as mortgagee; and (4) whether the company should have paid the vendor of the old buildings certain "balcony fees" due to Government. 18. As regards the building contract it is common ground that H.L. Chung is sole proprietor of the Hop Yick Tai Construction Co., that this company carried out the major portion of the building operations involved in the erection of the 15-storey block of flats and made some profit in so doing; that the Articles of Assocation of the Company did not authorise H.L. Chung to enter into contractual relations ...(illegibl) the company; and that the agreement between Hop Yick Tai Construction Company and the company was not reduced to writing. 19. Mr. Bernacchi submitted that although H.L. Chung was not absolutely prohibited from making a profit out of such a contract, it is now up to him to satisfy the liquidator that he had ...(illegibl) or implied authority for so doing; and that, having regard to the fact that the documents before the court would appear to indicate that H.L. Chung made a vast profit, the liquidator should have been slow to assume that Chung was given any authority to make a profit. 20. Mr.Bernacchi referred the court to a number of passages in the evidence recorded by Mr. Justice Creedon in support of his submission that H.L. Chung made an abnormally high profit from the building contract. For example the appellant K.Y. Chung, when asked when he first knew about the construction costs of the building, is recorded as having said:
and the appellant K.P. Chung is recorded as having said:
In another passage K.Y. Chung said that his recollection was that the construction costs would not exceed $1,000,000. Lai Shu Fat is recorded as having said that it was "agreed" that the cost of the new building would be $1,150,000; but he qualified that by saying that the verbal arrangement with Hop Yick Tai Construction Co. excluded a number of items such as "lifts, piling, etc." 21. The relevant portion of the Chinese accounts which were supplied to the appellants in May 1968 read:-
22. Items 4 - 11 in the above account total $1,338,415.50; and Mr. Bernacchi argued that if the contract with Hop Yick Tai Construction Co. was a fixed sum contract ($1,150,000) there had been an overpayment of $188,415.50; and that if the company was given an assurance that the building work would not exceed $1,000,000, H.L. Chung's profit would appear to have been at least $150,000 because Hop Yick Tai Construction Co. was in fact paid $1,150,000. 23. Turning now to the appellants' complaints regarding the manner in which the liquidator has calculated the indebtedness of each director to the company. The Liquidator had before him the letter of 18th October 1967 from the appellants' solicitors and the affidavits of all the directors (other than the appellants) as to the correctness of the figures in the Statement of affairs. There was also available to him an affidavit dated 6th May 1966 by LAI Shu-fat upon which he was cross-examined on the hearing of the winding-up petition. Paragraph 4 reads:
24. In 1963 LAI Shu-fat and H.L. Chung drew up a list of selling prices for the various flats in the building under construction. It appears that these so-called "list prices" were nothing more than what the directors estimated that they might be able to sell the flats for after completion of the building. 25. However, Mr. Bernacchi endeavoured to tie up the "list prices" ...(illegibl) the so-called "allocation" agreement. He said that in writing to the liquidator in September 1967 that "sometime in June 1965 it was verbally agreed that the premises should be allocated to the directors", the appellants' solicitors had made a mistake and that "1965" should have read "1963". 26. With all respect to counsel, I do not think that this Court can accept evidence of this nature from the Bar. There is no affidavit by the writer of the letter of 18th October 1967 that he had made a mistake in conveying his client's instructions; and there is nothing in the judgment of Mr. Justice Huggins to suggest that this submission was made to him. Whatever the agreement was, it would appear that it was reached in June 1965 after the building had been completed. 27. Mr. Bernacchi's next submission was that even if we assume that the agreement to "allocate" was in June 1965, the idea was that each director should be responsible to the company for the 1963 list prices and take his chance ...(illegibl) making a profit out of the sale of flats so "allocated" to him. 28. Mr. Bernacchi pointed to a number of passages in the evidence recorded before Mr. Justice Creedon which, he said, supported this view. For example, one of the appellants is recorded as having said:
Another witness is recorded as having said that he sold a flat "on legal advice"; and Mr. Bernacchi argued that he must have felt that he was beneficially entitled to the flat otherwise he would not have taken legal advice. Two further passages from the evidence of LAI Shu-fat were referred to by Mr. Bernacchi. The first passage reads:
The other passage reads:
Mr. Bernacchi laid stress on the use by LAI Shu-fat of the word "belonged" with reference to the "allocated" flats and argued that the use of such a word was inconsistent with the ownership of the flats remaining in the Company. 29. The appellants' complaint as regards Mr. Sadick is simply this: It is said that he has received about $115,000 by way of interest on the building mortgage. The appellants do not allege that the interest is excessive. They simply say that they do not know. They admit that they have made no inquiries at the land office to ascertain the terms of the building mortgage. But they say that because of the two interest-free loans to Lai and H.L. Chung Sadick should be further questioned by the liquidator or summoned for cross-examination before a judge. 30. As regards the Balcony Fees, it is common ground that a sum of $25,172.70 was paid by the company in July 1963, that is to say, three months after the company acquired the old property from the former owner. The receipt by Government is in the name of the former owner. In his report Mr. Tse says:-
The appellants say: this is the wrong way to look at the matter; that it is for Lai Shu Fat, who made this payment, to satisfy the liquidator that the company was under an obligation to pay the balcony fees; and that, if he is unable to do so, the liquidator should debit Lai's account with the sum of $25,172.70. 31. In his reply Mr. Bernacchi reverted to the evidence relating to the building contract and put forward what can only be described as an entirely new theory. He submitted that the truth of the matter may well have been that in 1963 the six directors agreed that H.L. Chung should construct this new building at cost and that his profit should be made out of the subsequent sale of the flats 'allocated' to him after the building had been completed. 32. That version of the agreement was not put forward by the appellants before Mr. Justice Creedon or put to Lai Shu Fat in cross-examination; and, if there had been any truth in it, one might have expected to see it put forward in the clearest terms in the letter of 18th October 1967. Not only did the appellants' solicitors not do so; but this theory was not mentioned in the court below, nor by counsel in opening his appeal in this Court. 33. The liquidator's attitude to the above criticisms of the manner in which he has conducted this winding-up is this: He says that he was under no statutory duty to seek the Court's specific approval to the distribution of capital in the manner decided upon by him; that the papers which he chose to place before the Court for the purpose of his application in February, 1968, do not, by any means, represent the results of all his inquiries; that in any event there is nothing before the Court to show that he has not investigated the four aspects of the winding-up to which the appellants have taken exception; and that he is under no obligation to disclose all or any other papers relating to his inquiries because the appellants have not produced any evidence to indicate that he has failed to perform his duties as liquidator. 34. In this case, what has to be kept clearly in mind is that it was the appellants who sought the assistance of the Official Receiver in the winding-up of the company because a dispute had arisen between themselves and their fellow-shareholders. They had contributed only one-fifth of the share capital; and in a voluntary winding-up they would have been outvoted by the other shareholders. Realizing, as they must have done, that there might well be differences of viewpoint to be resolved, they preferred that the winding-up should be carried out by an independent public officer under the supervision of the Court. They now come before the court and complain of the manner in which the Official Receiver has performed his duties. It is no good their saying that they do not suggest that the Official Receiver has been negligent. No other interpretation can be placed upon their submissions to this Court. 35. In regard to the building contract, the learned Judge said:-
I entirely agree. What has to be remembered is that in 1963 these six directors were on friendly terms. Although they chose to avail themselves of the benefits of limited liability conferred by the Companies Ordinance, their whole attitude throughout the life of the company was that they were in partnership with one another. No attempt was made by any of them to comply with the Articles of Association or with the provisions of the Companies Ordinance. They did not record their discussions in a minute book; but clearly they met frequently. Each director was perfectly well aware of what was going on in regard to the acquisition of the old building and the development of the site. It is ridiculous for the appellants to say that they were left completely in the dark. 36. For myself, I accept Mr. Nicoll's statement that the papers before this Court do not by any means represent the whole of the Official Receiver's inquiries in connection with this winding-up. But, even on the material before this Court, I should have thought that it was obvious that the figures discussed in 1963 were nothing more than vague estimates of the cost of constructing the new building, that the scope of the contract was never defined with precision, and that the appellants (who were themselves building contractors) well knew that H.L. Chung would make a profit out of the contract and that they tacitly agreed to his so doing. 37. As regards the 1965 agreement to "allocate" the flats, the Official Receiver has obviously gone into this question and resolved it in a way favourable to the respondents. But, even on the material before this Court, I do not think that the evidence supports the appellants' contention that the idea was that each director should be responsible to the company for the 1963 "list price" and take such profit as he might by private trading of the flats. Looking at the matter purely from the point of view of inherent probability, having regard to the fact that the agreement was in June 1965, is it likely that four months after the "run" on the banks, these directors would have entered into an arrangement to take their chance of a profit by selling flats on a falling market? I do not think so. 38. As regards the position of Mr. Sadick, Mr. Bernacchi agreed that further investigation might reveal nothing; yet the appellants ask this court to order the Official Receiver to embark on what may turn out to be a fruitless investigation. They do not allege that the Official Receiver has not already checked the terms of the building mortgage at the Land Office; and they admit that they have not taken the trouble to do so themselves. 39. As regards the balcony fee, Mr. Lim for the respondents submitted that this was clearly a fee due to Government for permission to build a balcony in the new building, and that the fact that the receipt from Government is in the name of the former owner merely suggests that permission to erect this balcony was given to the former owner. Be that as it may, I see no reason why this court should not assume that the Official Receiver has satisfied himself that the payment by the company was a proper one. 40. The appellants knew perfectly well in June 1968 that the Official Receiver intended to distribute the capital. It was open to them then to write to him and suggest that he should invoke s.221 of the Companies Ordinance with a view to having H.L. Chung and Osman Sadick cross-examined by the Court. There is no evidence that they did so; and whatever may have been said concerning s.221 in the proceedings before Mr. Justice Huggins, it is clear that no application under that section was made by them to the learned Judge. 41. The appellants have now applied to this court under s.221 for an order that H.L. Chung and Osman Sadick be summoned for cross-examination before a judge; and in my view the application should be rejected. No case has been made out to justify this court taking the unusual step of intervening in a winding-up and ordering the Official Receiver to pursue a particular course of action. 42. I need hardly say that the Official Receiver is an officer of the court, and that in a winding-up he acts under the general supervision of the court. But this court will not question decisions made by him in the course of a winding-up unless there is some evidence that he has failed in some way or other to perform his duties. I agree entirely with the learned judge that the Official Receiver must be assumed to have done his duty and that anyone who says that he has not done so must produce some evidence to this effect. 43. In my view the appeal should be dismissed. 44. As regards costs, I see no reason to differ from the view taken by the learned judge in the court below; and I would order that the appellants pay the costs of this appeal, such costs to be taxed on a common fund basis.
10th June, 1969. Representation: Bernacchi, Q.C. & Asome (Hastings & Co.) for Appellants. Benjamin Liu (Hon & Co.) for Respondents. Nicoll for Official Receiver & Liquidator. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||