Everglory Energy Ltd (in Liquidation) and Aother v. Shih-hua Investment Co., Ltd
Read the full judgment text of HCA 105/2021 on BabelCite. This High Court CFI judgment was delivered on 19 October 2022.
1. This is the appeal of Shih-Hua Investment Co Ltd (“the defendant”) from the order of Master Lam dated 31 May 2022 (“the Order”). At the conclusion of the hearing, the decision was reserved which I now give.
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HCA 105/2021 [2022] HKCFI 3217 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 105 OF 2021 ________________
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_________________ D E C I S I O N _________________ 1.This is the appeal of Shih-Hua Investment Co Ltd (“the defendant”) from the order of Master Lam dated 31 May 2022 (“the Order”). At the conclusion of the hearing, the decision was reserved which I now give. 2.Everglory Energy Limited ((Company Registration No. 1794202 (In Liquidation) (“the Company”)) and Remedy Asia Limited (collectively, “the plaintiffs”) sought summary judgment (A) under RHC Order 14, rule 1 in respect of their claim for (i) US $2,973,187.36 for unpaid share capital; and (ii) a loan of US $3 million; and (B) pursuant to O 27, r 3 in respect of both claims. 3.Master Lam (A) dismissed the plaintiffs’ order 27 application; and (B) on the order 14 application, granted (i) summary judgment on the plaintiffs’ claim for unpaid share capital; and (ii) conditional leave to the defendant to defend the claim for the loan. OVERVIEW 4.The Company is a company incorporated in Hong Kong trading in liquefied petroleum gas (LPG) products. It has 2 shareholders, the defendant and Motivi Point Consultant Limited (“Motivi”), each holding a 50% interest. Motivi is controlled by Zhang Aidong (“Zhang”). 5.Until 19 January 2017, its directors were Zhang and the defendant. 6.The defendant’s complaints as against Zhang/Motivi are, inter alia, that it had been wrongfully excluded from participation in the management of the Company and deprived of proper access to the Company’s books and records since mid-2014; and forged accounts (by the use of a forged company chop of the defendant) have been created when the Company was under Zhang’s sole control. 7.Those disputes resulted in the following proceedings in Hong Kong and the BVI:
THIS APPEAL 8.The defendant seeks an order
RELEVANT BACKGROUND 9.Events material to the parties’ respective submissions are set out in chronological order below:
10.In relation to the 2013 board resolution, the defendant’s case is that there was a prior oral agreement between Zhang and Zhong that no payment was necessary at all. 11.At that time, Zhong was given to understand by Zhang that there was no commercial or practical need to raise any capital by allotment of shares in that the new allotment exercise was to make the Company “look good” to outsiders and that it had a lot of issued capital. Zhang further stated that
12.The matters referred to in §§10-11 above are collectively referred to as “the Representation”. (A) THE ORDER 14 APPLICATION 13.It is the defendant’s contention that there are triable issues and arguable defences to both claims such that the plaintiffs’ application should be dismissed, alternatively the defendant should have unconditional leave to defend on both claims.
14.Mr Robert GM Chan, counsel for the defendant, submitted that his principal contention is that the plaintiffs do not show a clear case or a sustainable prima facie case for summary judgment. Secondly, the defendant has shown a believable case. 15.The Company’s claim as pleaded is based on an arrangement said to be discerned from the 2014 accounts and the ledger/accounts for 2015 that payment for the share allotment would be made by the shareholders applying future dividends against each shareholder’s outstanding share capital for their respective allotments, in addition to any other payments made by that shareholder[1]. 16.Not only is there is no plea of an agreement between the Company and the shareholders to that effect, there is no contemporaneous document supporting the existence of such an agreement. 17.Exhibited to the plaintiffs’ supporting affidavit of Bruno Arboit is a one-page document described as “Breakdown On Accounts for December 2015” (“the 2015 Breakdown”) the provenance of which is not stated: it is undated, not audited and contains obvious errors[2]. 18.The 2015 Breakdown bears a strong resemblance to various extracts from documents produced by JunHe acting for the Company on 3 June 2016 when the parties were at loggerheads. Interestingly, in all 3 accounting documents disclosed (“the June 2016 records”)[3], payment for the new allotments comes under the heading “Loans due from shareholders” while in the 2015 Breakdown it is characterized as “Share Capital receivable”. 19.The defendant’s evidence is to the effect that there was an oral agreement between Zhang and Zhong that no payment was necessary at all for the new allotments and the defendant signed the 2013 resolution on that basis. 20.As earlier noted, although the 2013 resolution stated that the share allotments were “subject to payment in full in cash upon allotment”, they were in fact made without any cash payments from the shareholders. 21.Consistent with the Representation, the Company’s annual returns and financial reports all state that the additional shares had been “fully paid”, “paid up” or “regarded as paid up” save for the 2014 audited accounts[4]. 22.Moreover, it is significant that the 2014 interim dividend was declared on 20 million shares. Pursuant to Article 119 of the Table A, only paid up or credited as paid up shares would be entitled to receive dividends. If consideration for the allotted shares remained due and payable, it is inexplicable why the Company would resolve to declare dividends on all 20 million shares. 23.In the BVI proceedings, Judge White stated as follows:
24.Judge White accepted[5] that there was sufficient evidence to raise at least a prima facie case as analysed by Mr Meeson, namely, that the shareholders treated the sums that each of them owed in respect of the relevant shares on allotment as having been discharged and in place of such obligations there being loan obligations. 25.It is noteworthy that the SOC makes no mention of any share allotment loan or of the 2013 accounts. 26.It was submitted that the plaintiffs have not shown a clear case for summary judgment based on the 2015 Breakdown. 27.Mr Sussex SC appeared for the plaintiffs, being the Company in liquidation and its funders. He emphasised that his instructions come from the liquidator of the Company who is seeking to realize a debt which appears from the books and records of the Company to be due and owing. They do not come from Zhang. 28.The Company’s case in relation to the new shares is that the return of allotments dated 17 September 2013 shows that 19 million new shares allotted to the shareholders were not paid up at the time of allotment. 29.The balance sheet of the 2013 accounts[6] shows the Company as having (in round terms) net assets of HK$256 million financed by its share capital[7] of HK $155 million comprising the 2013 allotment of 19 million ordinary shares with a value of HK $147 million and a HK $101 million surplus from its profit and loss account. 30.Its current assets included “trade and other receivables” of $444 million of which HK $147 million is an amount due from shareholders[8] corresponding exactly to the value of the 2013 allotment of 19 million ordinary shares. 31.As the 2013 accounts were approved and signed by the defendant, it must have known that there was an amount due in respect of the 2013 share allotment. 32.Section 170 of the Companies Ordinance, Cap 32 (“the CO”) provides as follows:
33.The Company submitted that given that section 170 was designed to enable the liquidator of the company to realize monies for the benefit of those entitled to prove in the winding up, it must be the case that it is the substance rather than the form that matters in ascertaining whether, in reality, there is an amount “unpaid on the shares”. 34.The plaintiffs submitted that section 170 triggers the obligation of present members of the Company to contribute in the winding up subject to the limitation imposed in subparagraph (d). That provision limits the amount of contribution to the “amount … unpaid on the shares”. Any accounting treatment by the shareholders cannot alter the fact that in reality there is an amount unpaid for the shares allotted in 2013. 35.It was further submitted that if, as Judge White appeared to accept the shareholders treated the indebtedness as an unpaid shareholders’ loan, it cannot make any difference. 36.The defendant’s stance was that there was no amount “unpaid” on the shares. There was no unpaid share capital debt as it had been treated by the shareholders as “discharged” and replaced by shareholders’ loans. 37.The short point is whether the plaintiffs’ construction is correct. There does not appear to be any case law on the proper construction of section 170. Although the defendant cited Re Greater Beijing Region Expressways Limited [2000] 2 HKLRD 776 at 781B-782D, that decision does not concern the point of construction that arises in the present case. 38.In the circumstances, the point of construction remains an open one. 39.The plaintiffs went on to submit that in any event the defendant’s version of events is implausible. 40.It is the defendant’s evidence[9] that at the time of the new allotment, the Company’s business was very profitable, referring to the 2013 accounts showing profits of HK $101 million. 41.The plaintiffs referred to the minutes of the 1st shareholders’ and 1st directors’ meeting of the Company held on 29 January 2015 and submitted that they show otherwise. It is recorded that Hua Xue Liang an associate general manager representing management reporting on the business conditions in 2013 had to explain why there was a shortage of funds for running the business in 2013. 42.Apart from the disclosure recorded in those minutes (which did not come to light until the meeting itself on 29 January 2015), there is nothing I have been shown to suggest that the defendant had knowledge of this state of affairs when he signed the 2013 resolution believing in and relying on the Representation. 43.As regards the 2015 Breakdown, I have already remarked on its strong similarity to parts of the June 2016 records. Although JunHe’s covering letter stated that those records were provided by the Company’s auditors who were then still engaged in the preparation of the accounts for 2015 (thus explaining their provenance), the same cannot be said of the 2015 Breakdown. 44.As noted in §18 above, the characterization of the shareholders’ loans as “Share Capital receivable” cannot be found in the June 2016 records and therefore the 2015 Breakdown must have come into existence after that date. I also note that it is the same document as that referred to in §13 (b) of the affirmation of Margaret Man Ting Wo filed in support inter alia of the plaintiffs’ service out summons. The 2015 Breakdown is there referred to as the ‘the Company’s breakdown of accounts for 2015’ but did not state where the document came from. 45.Insofar as the defendant had intimated that he had contributed in kind for the new allotment, it was not pursued at the hearing. The plaintiffs invited attention to the fact that had there been any contribution in kind[10], that would have been attributed a value and reflected in the accounts. In any event, that suggestion did not feature at the time of the BVI proceedings[11]. 46.In my view, the plaintiffs have not shown a clear case for summary judgment on the unpaid share capital. There are triable issues and the defendant must be given unconditional leave to defend.
47.The backdrop to the loan appears in §§49-52 of Zhong’s affidavit. His evidence is that by June 2014, in view of the surplus profit of HK $101 million at the end of 2013 and the fact that based on the financial and accounting information presented by Zhang to the effect that the Company was doing well in the 1st half of 2014, the 2014 interim dividend resolution was passed, declaring an amount equal to the amount of surplus profits made in 2013 to be the 2014 interim dividend. 48.Once declared, distribution of the interim dividend should follow. However, Zhang procrastinated on the basis that the Company was still waiting for the auditor’s preparation of the 2014 audited accounts. The defendant was unhappy with Zhang’s explanation because there had been a clear agreement and resolution between the shareholders and directors that an interim dividend be declared and that it would be payable on 16 June 2014. Moreover, as the dividend declared was equal to the amount of profit carried forward from 2013, it could be paid out even without a set of audited accounts for 2014. However, not being in control of the management, there was little Zhong could do except to keep on pressing for some payment pending completion of the 2014 accounts. 49.In November 2014, Zhong was provided with some provisional accounting documents that indicated that the Company had a net profit of over HK $42 million in the quarter ending 30 June 2014. The defendant was eager to get some payment. After some discussion, in January 2015, the parties reached a consensus that the defendant could withdraw some money first by way of a loan. That resulted in the email exchanges recorded §9 (v)-(vi) above. 50.While in Ms Song’s email the relevant offset provision is translated as “shall be offset with any dividends payable to shareholders”, in the defendant’s email written at Ms Song’s request, it is translated as “shall be offset with any dividends paid by [the Company to the defendant] in the future”. 51.The defendant’s case based on Zhong’s evidence is that it is entitled to have 2014 interim dividend applied against the loan. The plaintiffs disagreed and submitted that the emails were addressing prospective dividends to be paid in the future. Plainly what was actually agreed cannot be determined in the absence of viva voce evidence. 52.In so far as it was said that the defendant has already had the benefit of the 2014 interim dividend through it having been applied to offset the unpaid share capital, that point has already been addressed: there is no evidence to support any agreement to that effect and the 2015 Breakdown is clearly problematic. 53.In my view, the defendant must be granted unconditional leave to defend the loan. (B) THE ORDER 27 APPLICATION 54.The plaintiffs’ case is based on ‘admissions’ by the defendant’s counsel in the BVI proceedings, relying on the extract from the transcript of the Decision by Judge White. The defendant’s written submissions put up a strong case that the subject matter of the admission was the shareholder’s loan applied to discharge the amount due for the new allotment. 55.As noted in §24 above, Judge White accepted[12] that there was sufficient evidence to raise at least a prima facie case that the shareholders treated the sums that each of them owed in respect of the relevant shares on allotment as having been discharged and in place of such obligations there being loan obligations. 56.The “loan” under consideration in the extract from the Decision on which the plaintiffs rely is in fact the “share allotment loan”. Therefore, what the defendant’s counsel could not really argue was a liability to repay under the share allotment loan and not the share capital which had been treated as fully paid. 57.As to the share allotment loan, Judge White held there to be a bona fide and substantial dispute as to whether those sums were due and payable apart from the issue of authority. 58.I am far from persuaded that there was any admission by the defendant’s counsel during the BVI proceedings that there was an obligation to pay up on the shares as distinct from potential liability in respect of the share allotment loan but whose terms “require explanation in oral evidence”. 59.At the hearing, Mr Sussex wisely intimated that he was ‘not pushing’ the order 27 application and made no oral submissions on it. CONCLUSION 60.Accordingly, in relation to the plaintiffs’ summons for summary judgment, the defendant’s appeal is allowed in respect of the unpaid share capital claim and the Order is varied in respect of the loan such that leave to defend is unconditional. In all other respects the Order is affirmed. 61.There is to be an order nisi of costs in favour of the defendant with certificate for counsel, such costs to be summarily assessed and payable forthwith. It is further directed that the defendant lodge its statement of costs within 7 days of this Decision, the plaintiffs their objections within 14 days thereafter and the defendant its reply (if any) within 7 days thereafter. 62.Summary assessment will take place in Chambers.
Mr Charles Sussex SC and Mr Toby Brown, instructed by Lau, Horton & Wise LLP, for the 1st – 2nd plaintiffs Mr Robert G M Chan, instructed by Alvan Liu & Partners, for the defendant [1] See the Statement of Claim (“SOC”) at §5. [2] They relate to USD equivalent to various sums expressed in HKD. [3] See B4/60/1013-1015. [4] The 2014 accounts simply state that "since 3 March 2014, the concept of authorised share capital no longer exists … the [Company's] share no longer have a par or nominal value … There is no impact on the number of shares in issue or the relative entitlement of any of the members as of this transition". Cf. The Company’s 2014 annual return made up to 31 August 2014 and dated 1 September 2014 signed by Zhang stated that the USD20 million for 20 million issued shares has been "Paid up or Regarded as Paid up". [5] Tr. p. 23, ll. 8-11 and p. 25, ll.10-12. [6] This covered period from 31 August 2012 (the date of incorporation) to 31 December 2013. [7] According to Note 12 of the 2013 accounts, the 20 million ordinary shares making up the Company 's share capital were "Issued and fully paid". [8] See Note 8 to the 2013 accounts which states that "amounts due from shareholders … are interest-free and unsecured, and there is no fixed repayment term". [9] See Zhong’s affidavit dated 27 July 2022 at §20. [10] This notion was part of the Representation: see §11. [11] The evidence of contribution in kind did not appear until Zhong’s affidavit (at §16) but the same does not feature in §15 of Yang’s affirmation filed in the BVI proceedings in 2016 which is otherwise identical in substance. [12] Tr. p. 23, ll. 8-11 and p. 25, ll.10-12. | ||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 105/2021