The Joint and Several Liquidators of Joy Rich Development Ltd v. Chen Muhua (Aka Winky Chan) and Another

CACV 381/2022, [2024] HKCA 122

On Appeal From [2022] HKCFI 2584

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 381 OF 2022

(ON APPEAL FROM HCCW NO 146 OF 2013)

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BETWEEN

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J U D G M E N T

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Hon Chow JA (giving the Judgment of the Court):

INTRODUCTION

1.This is an appeal by the Liquidators of Joy Rich Development Limited (in liquidation)  (“the Company”)  against two orders made by Harris J (“the Judge”):

(1)  dismissing the Liquidators’ application for an order that they be allowed to take over the defence of a mortgage action against the Company; and

(2)  allowing the appeal of Chen Muhua (“CMH”, also known as “Winky Chan”)  and Chan Yuen Wa (“CYW”, together “the Chen Sisters”)  against the Liquidators’ rejection of their proofs of debt.

The Judge’s reasons for making the two orders are set out in a written decision dated 31 August 2022 (“the Decision”).

BASIC FACTS

(i)  The Company

2.The Company is an investment holding company incorporated on 15 July 2008.  Its only asset is a house at No 28 Middle Gap Road (“the House”), which it purchased in late 2008 for HK$110,000,000.  There is evidence that, in around 2019, the House had a value in excess of HK$750,000,000[1].  It would appear, however, that the value of the House has since gone down substantially.  At §7 of the Decision, the Judge states that the Liquidators have agreed with Fameway Finance Ltd (“Fameway”), a creditor of the Company, for the House to be marketed for sale at HK$450,000,000[2]. The Liquidators say that they have never reached any such agreement with Fameway.  For the present purpose, it is not necessary to resolve this issue because, according to the Liquidators, a report compiled by Jones Lang LaSalle Limited dated 22 December 2021 shows that the open market value of the House with vacant possession was HK$310 million and the forced sale value of the House was HK$248 million.  On any view of the matter, it is clear that the value of the House is now worth much less than HK$750 million.

3.CYW is the sole shareholder of the Company, and was its sole director between December 2008 and September 2012 when she was replaced by a person called Lu Bo Huai.  It is CYW’s case that she had little involvement in the operations of the Company, which were primarily handled by her sister CMH and a person called Lau Kwok Wah Benjamin, also known as Liu Yi Dong (“Ben Lau”).  CMH and Ben Lau had an intimate relationship at the time of the purchase of the House, and it was their intention to live there.  However, their relationship ended in late 2011.

4.On 5 June 2013, CYW presented a creditor’s petition to wind up the Company.  On 7 August 2013, the court made a winding up order against the Company upon CYW’s petition.  On the same day, James Wardell and Lui Chau Yuet (“the Former Liquidators”)  were appointed as joint and several provisional liquidators of the Company by the Official Receiver.  On 6 December 2013, they were appointed as joint and several liquidators of the Company.

5.On 25 February 2019, the Judge made an order removing the Former Liquidators as liquidators of the Company.  The reasons for that order are fully set out in the Judge’s Reasons for Decision dated 3 June 2019 ([2019] HKCFI 1236), and shall not be repeated here.

6.On 9 September 2019, the current Liquidators were appointed by the Judge as liquidators of the Company.

(ii)  The Company’s creditors

7.The Company’s creditors, or alleged creditors, consist of two camps[3]:

(A)  the Chen Sisters’ camp –

(1)  CMH – HK$101,647,589.04; and

(2)  CYW – HK$1,009,571;

(B)  Ben Lau’s camp –

(1)  Revelry Gains Limited (“RG”)  – HK$528,332,898.21;

(2)  Chinese Strategic Holdings Ltd (“CSH”), formerly known as China Railway Logistics Limited – HK$20,011,045[4]; and

(3)  Fameway, a subsidiary of CSH – HK$149,350,669.42[5].

(iii)  The Mortgage Action (HCMP 430/2013)

8.On 26 January 2011, The Building and Loan Agency (Asia)  Limited (“BLAA”)  entered into a loan agreement (“the Loan Agreement”)  with Greatstep International Ltd as borrower and the Company as guarantor.  The loan advanced by BLAA under the Loan Agreement was over $200 million, and was secured by a floating charge dated 26 January 2011 (“the Charge”)  over all the assets of the Company.  BLAA called in the loan on 19 December 2011 and required repayment of the outstanding amount by 28 December 2011.  No repayment was made.  Accordingly, the floating charge crystallized on 28 December 2011.

9.RG is a wholly owned subsidiary of BLAA.  On 1 March 2013, BLAA assigned its legal and beneficial rights in the Loan Agreement and the Charge to RG.

10.In March 2013, RG commenced an action in the High Court (“the Mortgage Action”)  against the Company to recover the outstanding loan secured by the Charge.  Consequent upon the making of the winding up order against the Company on 7 August 2013, the Mortgage Action was stayed pursuant to s 186 of the former Companies Ordinance (Cap 32).  On 21 July 2015, RG obtained leave to restore the Mortgage Action.

11.The Former Liquidators did not intend to resist the Mortgage Action due to (i)  a lack of funds, and (ii)  the failure or refusal of the Chen Sisters to provide them with relevant documents of the Company[6].  On 6 February 2017, the Chen Sisters applied to the Companies Court for leave to defend the Mortgage Action in the name and on behalf of the Company, contending that the Charge was liable to be set aside for the following reasons:

“a. [Ben Lau] was a shadow director of a web of companies including but not limited to Revelry Gains, BLAA and its parent company listed in Hong Kong, namely, The Hong Kong Building and Loan Agency Limited (‘HKBLA’), Fameway Finance Limited (‘Fameway’)  and its parent company listed in Hong Kong, namely, China Railway Logistics Limited (‘CRL’)  subsequently renamed as Chinese Strategic Holdings Limited (‘CSH’), Greatstep and the Company.

b. [Ben Lau] entered into the Loan Agreement and the Charge in breach of his fiduciary duties to Greatstep and the Company. BLAA, the lender, had knowledge of the breach.

c. The Charge is therefore avoidable at the instance of the Company.

d. The series of transactions entered into between the Company and BLAA were in fact arranged by [Ben Lau] being behind both HKBLA and CRL through his other companies and nominees. They were part of the fraudulent scheme in that Mr Lau siphoned off monies from BLAA/Fameway to his own pockets under the disguise of loan transactions with companies also controlled by him (Greatstep and the Company).”[7]

12.On 29 May 2017, Deputy High Court Judge Kent Yee allowed the Chen Sisters’ application (“the Yee Order”).  Although the Former Liquidators were made parties to the Chen Sisters’ application, it would be fair to say that the Former Liquidators did not raise any serious objection to the application.  Their primary concern was that the creditors of the Company should be protected against any unnecessary depletion of the assets of the Company arising from any unsuccessful attempt to defend the Mortgage Action.  Deputy High Court Judge Yee considered the voluminous evidence (including some 20 bundles of documents)  placed before him, and came to the following conclusion on the merits of the Chen Sisters’ intended defence on behalf of the Company to RG’s claim:

“I am not entirely without doubt about the validity of the purported defence, in particular given the Chen sisters’ own involvement in the alleged sham transactions. However, on the strict application of the test, the purported defence seems to have certain evidential foundation and it poses a serious question to be tried in respect of the enforceability of the Charge as against the Company. Thus far, I have heard nothing from [Ben Lau] and I believe a clearer picture would emerge in the course of the forthcoming hearing of the unfair preference and the misfeasance applications.”[8]

13.The leave granted by Deputy High Court Judge Yee was subject to the conditions, inter alia, that the Chen Sisters were to be solely responsible for their own costs and any adverse costs orders for defending the Mortgage Action in the name of the Company, and to provide a deed within 7 days indemnifying the Company against any future costs, charges, and expenses in connection with or arising out of the Mortgage Action.

(iv)  The Chen Sisters’ proofs of debt

14.It is the Chen Sisters’ case that the Company’s purchase of the House was financed by CMH.  On 8 January 2014, CMH lodged a proof of debt (“CMH Proof”)  in the liquidation of the Company for the amount of HK$131,956,197.06.  In the CMH Proof, it was stated that the debt was made to “[f]inance the operations of the Company in the past”.  The CMH Proof was supported by (i)  the balance sheet of the Company as at 31 March 2012 (“the 2012 Balance Sheet”)  in the audited financial statement of the Company for the year ended 31 March 2012 (“the 2012 Audited Financial Statement”), and (ii)  a letter dated 9 October 2013 (“the Auditor’s 1^st Letter”)  from Raymond Wong & Co, the Company’s former auditors.

(1)  In the 2012 Balance Sheet, under “Current liabilities”, there is an item called “Mortgage loans and other creditors” for the amount of HK$131,956,197.06.  In Note 10 to this item, it is stated that –

“The mortgage loans were secured by charging the company’s leasehold land and building to the finance companies and rates of interest payable on the loans ranged from 10% per annum to prime plus 8% per annum. The loans were fully repayable within twelve months and twenty four months”

(2)  In the Auditor’s 1^st Letter, the following is stated –

“As requested by the company’s director, Lu Bo Huai, we would hereby confirm that based on the company’s accountancy records available to us, there was an amount of HK$131,956,197.06 owing to Ms. Winky Chan (Ms. Chen Muhua)  as at 31 March 2012. The amount was unsecured and without any fixed terms of repayment.”

15.In light of queries raised by the Former Liquidators, CMH accepted, for the reasons explained at §§19-20 of her 10^th affirmation filed on 5 January 2022, that her claim should be reduced to HK$101,647,589.04 .

16.On 8 January 2014, CYW also lodged a proof of debt (“CYW Proof”)  in the liquidation of the Company for the amount of HK$1,009,571.28.  In the CYW Proof, it was stated that the debt was made to “[f]inance the operations of the Company in the past”.  The CYW Proof was supported by (i)  the 2012 Balance Sheet, and (ii)  a letter dated 21 October 2013 (“the Auditor’s 2^nd Letter”)  from Raymond Wong & Co.

(1)  In the 2012 Balance Sheet, under “Current liabilities”, there is an item called “Amount due to a shareholder” for the amount of HK$1,009,571.28.  In Note 8 to this item, it is stated that –

“The amount due to a shareholder is unsecured, non-interest bearing and has no fixed terms of repayment”.

(2)  In the Auditor’s 2^nd Letter, the following is stated –

“As requested by the company’s shareholder, Chan Yuen Wa, we would hereby confirm that based on the company’s accountancy records available to us, there was an amount of HK$1,009,571.28 owing to Ms. Chan Yuen Wa as at 31 March 2012. The amount was unsecured and without any fixed terms of repayment.”

17.The Former Liquidators accepted that the Chen Sisters were owed substantial sums, and admitted their proofs for voting purposes at the first meeting of creditors of the Company.  The Former Liquidators had not, however, ascertained the precise sums that they were willing to accept were due to the Chen Sisters.  In an affidavit filed by one of the Former Liquidators on 30 June 2015, the following was stated –

“8. At the time of the first creditors meeting dated 29^th October 2013 (the ‘First Creditors’ Meeting’), the proof of debt of Madam CMH for voting purposes was admitted in full. The claim of Madam CMH has been the subject of considerable investigation by the Liquidators since, and whereas I would state that Madam CMH is unlikely to have her full claim for HK$131,956,197.06 admitted, I can state with certainty that she would certainly have a valid proof of debt for a considerable sum.

…

13.  The Liquidators have been investigating the proof of debt of Madam CYW, and again, although the Liquidators have not adjudicated on the proofs of debt, I can say that although the claim for HK$1,009,571.28 is unlikely to be maintained, Madam CYW will certainly be entitled to claim in the Company’s liquidation for an amount, the exact sum being uncertain.”

18.As earlier mentioned, on 9 September 2019, the Liquidators were appointed as joint and several liquidators of the Company.  On 17 December 2021, the Liquidators rejected the CMH Proof and CYW Proof.

(1)  The following reasons were given by the Liquidators in the Notice of Rejection of the CMH Proof –

“Apart from a copy of letter dated 9 October 2013 (‘the Letter’)  issued by the auditor of the Company, namely Messrs Raymond Wong & Co, (‘the Auditor’), there is no further supporting document provided to prove your debt despite the [repeated] requests by the Liquidators.

In addition, it is [noted] that your supporting documents is contradictory to the Company’s audited financial statement as at 31 March 2012 (‘2012 Audited Accounts’)  and the records made available to us.

Moreover, it is further [noted] from the 2012 Audited Accounts that the Auditor were unable to obtain sufficient audit evidence to verify the accuracy and correctness of your claim of HK$131,956,197.06.

Given the above mentioned contradictory opinions found and in the absence of solid evidence supporting your claim, it has been rejected in full.”

(2)  The following reasons were given by the Liquidators in the Notice of Rejection of the CYW Proof –

“Apart from a copy of letter dated 21 October 2013 (‘the Letter’)  issued by the auditor of the Company, namely Messrs Raymond Wong & Co, (‘the Auditor’), there is no further supporting document provided to prove your debt despite [repeated] requests by the Liquidators.

In addition, it is [noted] from the Company’s audited financial statement as at 31 March 2012 made available to us that the Auditor was unable to form an opinion as to whether the balance sheet together with the notes thereon is properly drawn up so as to exhibit a true and correct view of the state of the Company’s affairs as at 31 March 2012.

Given the above audit opinions found and in the absence of solid evidence supporting your claim, it has been rejected in full.”

(v)  The Take Over Summons

19.On 12 August 2021, the Liquidators issued a summons (“the Take Over Summons”)  pursuant to s 200(3)  of the Companies (Winding-Up and Miscellaneous Provisions)  Ordinance, Cap 32, to apply for an order that (i)  the Yee Order be set aside, and (ii)  the Liquidators do take over the conduct of the Mortgage Action for the Company.

(vi)  The Proof Summons

20.On 5 January 2022, the Chen Sisters issued a summons (“the Proof Summons”)  pursuant to r 95 of the Companies (Winding-Up)  Rules, Cap 32H, to appeal against the Liquidators’ rejection of their proofs of debt.

THE DECISION

21.The Take Over Summons and Proof Summons were heard by the Judge on 29 July 2022.  By the Decision dated 31 August 2022, the Judge rejected the Take Over Summons, but allowed the Proof Summons.

22.The Judge’s reasons for rejecting the Take Over Summons were set out at §§15 to 16 of the Decision:

“[15] It is clear from [Deputy High Court Judge Kent Yee]’s decision that the application was opposed and that he made a decision on the merits. It seems to me that it is now too late to ask the court to overturn that decision unless it can be shown that there is a material change of circumstances that justifies it. In my view there is not. The fact that there has been a change of liquidators is not of itself a justification. It is difficult to discern a specific reason advanced for overturning the Deputy Judge’s decision other than the change in identity of the liquidators and also a desire on the part of the new Liquidators to assess the merits of the Company’s defence and decide whether or not to withdraw it. I do not see this as sufficient reason, particularly as the implication of the Liquidators’ evidence and the arguments advanced on their behalf by Mr Wong is that the Liquidators’ concerns about the merits of the Company’s Defence are similar to those advanced before [Deputy High Court Judge Kent Yee].

[16]  In the circumstances I do not think that there is a legitimate basis to overturn [Deputy High Court Judge Kent Yee]’s decision and I will dismiss the Liquidators’ application…”

23.The Judge’s reasons for accepting the CMH Proof were set out at §§21 to 25 of the Decision:

“[21] … The large number of individual payments that make up this sum [HK$101,647,589.04] were made by six companies. Winky Chan explains in [17] and [18] of her 10^th affirmation why these payments were made:

‘17. As can be seen from the documentary records, the monies I injected into Joy Rich (as loans)  were paid via the following companies:-

(1)  Upper Run Investments Limited (‘Upper Run’);

(2)  Rose Bay Group Limited (‘Rose Bay’);

(3)  Gorgeous Overseas Limited (‘GOL’);

(4)  Famous Lion Group Limited (‘Famous Lion’);

(5)  Wisdom First Limited (‘Wisdom First’); and

(6)  Star Business Investment Limited (‘Star Business’).

18. As stated in paragraph 14 of my Witness Statement filed in the Mortgagee Action (see exhibit ‘CMH-32’), Upper Run and GOL were gifted by B Lau to me and were legally and beneficially owned by me; and hence they made payments on my behalf. Rose Bay, Wisdom First, Star Business and Famous Lion were companies owned and/or controlled by B Lau (as mentioned in paragraphs 15(5), 15(8), 18(11)  and 105(2)  of the said Witness Statement), but given my intimate relationship with B Lau at the material time, these companies also made payments to Joy Rich on my behalf. The important point is that none of Upper Run, GOL, Rose Bay, Wisdom First, Star Business, Famous Lion or even B Lau has ever filed any proof of debt against Joy Rich. Further, given the private arrangements between B Lau and me, I verily believe that none of Rose Bay, Wisdom First, Star Business, Famous Lion or even B Lau (not to say Upper Run and GOL)  would file any proof of debt at all in any event against Joy Rich.’

[22] The Liquidators take the view that the Company’s audited financial statement is qualified to such an extent that it cannot be relied on as substantiating the amounts owed to Winky Chan. However, as I understand their evidence they accept that the Company received HK$101,647,589.04 and that the underlying evidence demonstrates that of that sum HK$65,710,859.04 came from the six companies. The Liquidators say that they have no evidence connecting Winky Chan with those companies or the balance of HK$35,936,730; although neither the companies nor anybody else have submitted proofs of debt or communicated with the Liquidators in respect of these sums. The Company’s own journal vouchers and the cheque deposit advice show the names of five of these companies (in the case of the journal vouchers)  or abbreviations consistent with four of these companies being the payor and also bank statements of GOL and Famous Lion evidencing two payments to the Company totalling HK$5.5 million.

…

[24] The Liquidators have not applied to cross-examine Winky Chan on her evidence.

[25]  Winky Chan has been able to produce a significant quantity of documents from a number of the companies (Famous Lion, Rose Bay, Star Business and Wisdom First), which one would not expect her to have unless she had some involvement with them. It seems to me that the circumstances and the evidence adduced by Winky Chan establishes on the balance of probabilities that she is owed HK$101,647,589.04 by the Company…”

24.As regards the CYW Proof, the Judge’s reasons for accepting it were set out at §§26 to 30 of the Decision:

“[26] … The final item in the ledger is dated 31 March 2012 and is a repayment to the shareholder and shows a balance owed to CYW at 31 March 2012 of HK$1,009,571.28. This is the amount for which CYW has submitted the proof of debt that has been rejected by the Liquidators.

[27] The Liquidators have produced an account, which adjusts the entries in the ledger. There are two categories of adjustments. The first are reversals (totalling HK$4,716,180)  in respect of amounts treated in the ledger as paid by CYW on the Company’s behalf for which they say they have not found sufficient documentary proof substantiating the payments. The second category (totalling HK$3,671,608)  are debits in the ledger in respect of sums paid to CYW or for her benefit for which the Liquidators consider there to be insufficient documentary proof that the monies were paid to CYW or for her benefit. This adjustment operates in CYW’s favour. The adjustments result in a balance in the Company’s favour of HK$35,001.

[28] CYW relies on the ledger, which was audited. She says, correctly, that the auditor’s qualification dated 20 February 2013 in respect of the financial statement for the year ending 31 March 2013 only referred to uncertainty about the amount shown in the balance sheet, which was claimed by her sister Winky Chan. The item she claims appears under ‘current liabilities’ for ‘Amount due to a shareholder’ and was not the subject of the auditor’s qualification.

[29] The Liquidators’ reasons for questioning many of the items shown in the ledger are explained in [31.2]–[31.7] of the 3^rd affirmation of Chan Leung Lee. Winky Chan in her 12^th affirmation confirms the accuracy of the ledger, but states in [12] that two items HK$94,300 and HK$800,000 should not have been credited to her sister’s current account, which is why they have not been claimed. It seems to me that the position in respect of CYW’s proof is the same as that in respect of Winky Chan. It is necessary for CYW to prove on the balance of probabilities that the Company owes her the amount claimed. Although, the most straightforward way of doing so is to produce a complete paper trail this is not, as the Liquidators appear to have assumed, essential. If it is probable, as would appear to be the case, that the payments were made for the Company’s benefit and the Company’s sole director is confirming that they should be treated as sums owed to CYW and nobody else is claiming the sums are owed to them, it seems to me that this is sufficient to establish that the amounts claimed are probably due to CYW.

[30]  The only other ground of objection to CYW’s claim is reference by DHCJ Le Pichon in a judgment in HCMP 1857/2012 dated 11 September 2014 to which the Chen sisters were not parties to draft management accounts for the Company produced by Daniel So, who is associated with Ben Lau’s camp and had no role in the Company, purporting to show a shareholder owing the Company HK$83 million. The Previous Liquidators concluded the Chen sisters did not owe the Company this sum and I can see no credible evidence for concluding that they do. I will, therefore, make an order in the terms of [2] of the Proof summons.”

THE NOTICE OF APPEAL

25.The Liquidators were not satisfied with the Decision, and lodged a Notice of Appeal dated 14 September 2022.  The Notice of Appeal contains 2 grounds of appeal.  Ground 1 contends that the Judge erred in allowing the Proof Summons, while Ground 2 contends that the Judge erred in dismissing the Take Over Summons.

26.We shall first deal with Ground 2 before turning to Ground 1.

GROUND 2 – APPEAL AGAINST THE JUDGE’S REJECTION OF THE TAKE OVER SUMMONS

27.Under Ground 2, the Liquidators argue that[9]:

(1)  The Judge erred in considering that there must be a material change in circumstances since the making of Yee Order before the Companies Court could make an order allowing the Liquidators to take over the Company’s defence in the Mortgage Action.  The Judge should instead have approached the application by considering what is in the best interest of the liquidation process (Ground 2(1)).

(2)  In any event, there have been material changes of circumstances that justify the Take Over Summons, namely: (i)  the removal of the Former Liquidators and the appointment of the current Liquidators, who have taken a different view as to whether the Chen Sisters should be permitted to defend the Mortgage Action in the name of the Company, (ii)  the rejection of the CMH/CYW Proofs means that they have no locus standi to defend the Mortgage Action qua creditors; (iii)  the Mortgage Action has been left idle for 3 years while the Chen Sisters are in the driving seat, and both the plaintiff and defendant in that action have equal responsibilities in moving the case forward in the post CJR regime; and (iv)  the merits of the defence to the Mortgage Action advanced by the Chen Sisters for the Company must be assessed in the light of all the evidence now available (including lists of documents and witness statements which have been filed and exchanged since the Yee Order), and the Liquidators are the proper party to do so, given the admitted conflict of interest that the Chen Sisters have in defending the Mortgage Action (Ground 2(2)).

(3)  The Judge failed to realise that the exercise undertaken by Deputy High Court Judge Yee in his assessment of the merits of the defence on a preliminary basis is very different from the situation now before the Judge, when lists of documents and witness statements have already been exchanged, and the Liquidators will no doubt be in a better position to assess the merits of the Company’s defence.  Further, if the merits of the defence do not improve even after the exchange of lists of documents and witness statements, it is highly questionable why the defence must go on if, even at this stage, the defence remains only “arguable” (as in there is a serious issue to be tried)  (Ground 2(3)).

(4)  There being no dispute that loans were in fact made to the Company, it is difficult to see what benefit the Company’s defence would yield to merely set aside the securities held by Fameway/RG when the Company will have to repay the loans actually advanced and such repayment will have to come from the sale proceeds of the House which is the only asset held by the Company (Ground 2(4)).

(5)  Contrary to §7 of the Decision, the Liquidators have never agreed with Fameway to market the House at HK$450 million. Further, according to a valuation report of the House compiled by Jones Lang LaSalle Limited dated 22 December 2021, the market value of the unencumbered leasehold property interest in the House with vacant possession is in the sum of HK$310 million, and the value in the event of a sale under repossession is HK$248 million (Ground 2(5)).

28.The Judge’s decision refusing to allow the Liquidators to take over the conduct of the Company’s defence in the Mortgage Action involves an exercise of discretion, or an evaluative judgment based upon a multi-factorial assessment of all relevant facts.  The Court of Appeal will not lightly interfere with such a decision unless the decision proceeded from some error of principle, or reliance on irrelevant considerations, or disregard of relevant considerations, or the decision is plainly wrong (see Tsit Wing (Hong Kong)  Co Ltd v TWG Tea Co Pte Ltd [2015] 1 HKLRD 414, at §§22-27; Re A (admission as barrister) [2018] 2 HKLRD 1245, at §19).

29.We shall first deal with Ground 2(1)  concerning the proper approach to the Take Over Summons that the court should adopt.  Mr Rimsky Yuen, SC (together with him, Mr Tony Ko)  submits that the Liquidators’ application is very much akin to an injunction application, and the Court should be more flexible in allowing a second application.  He further submits that the concept of material change of circumstances should not be applied at all, or should not be strictly applied as in interlocutory applications of other nature (such as applications for summary judgment, striking out, etc).  In support of the above submissions, he relies on Laemthong International Lines Co Ltd v Artis [2005] 1 Lloyd’s Rep 100, at §24; Woodhouse v Consignia plc [2002] 1 WLR 2558, at §§56-57; and China Money Asia Ltd v Yip Wai,HCA 131/2014 (unreported, 24 November 2017), at §18.

30.In Laemthong, a claimant, having twice failed in seeking, without notice, a worldwide freezing injunction against two defendants because the previous judges considered that there was not a sufficiently good arguable case, succeeded in its third application before Mr Justice Morison for a worldwide freezing injunction based on substantially the same grounds that were relied upon in the second application.  The two defendants then applied to set aside the freezing injunction on, inter alia, the ground that the claimant was not entitled to apply for a freezing order in circumstances where their application had previously been refused twice.  On the question of whether Mr Justice Morison had jurisdiction to hear the renewed application in the circumstances, Mr Justice Colman said the following at §24 of his judgment –

“… In the field of without notice applications for a pre-trial discretionary remedy, such as a freezing order, if a claimant's first application is refused, he may if he chooses, appeal to the Court of Appeal. That, at least, is clear. If, however, he then issues a second application to a judge, the judge would have to take a threshold decision, namely whether the character of the second application made it appropriate that he should entertain it. That would be a discretionary exercise. Normally a factor of great, if not determinative, weight would be whether on that second application new evidence or other matters were to be brought to the court’s attention which had not been before the court on the first application and which were substantially material to the exercise of the court’s discretion in favour of the claimant. In such a case the judge might conclude that the interests of justice under the CPR overriding objective outweighed the public policy considerations of conservation of judicial resources in the interests of other court users under the overriding objective. Where, however, a second application introduced nothing that was not before the court on the first application it would normally be the case that the discretion to hear that application would not be exercised in favour of the claimant. He had made the identical application on the same materials. That had been rejected and he had not availed himself of the opportunity to appeal that decision. Any further hearing would therefore simply be in substance an appeal from the first decision. In as much as it would simply be a re-run of the previous hearing in the hope that another judge would arrive at a different conclusion, it would be using a commercial judge to provide a facility which was properly the function of the Court of Appeal. That, in my view, would be an abuse of process in the sense that it would be an impermissible use of the resources of the court.” [emphasis added]

31.In Woodhouse, a claimant, having failed in its first application to lift the automatic stay of proceedings imposed by the transitional provisions in CPR Pt 51 and paragraph 19 of the Transitional Arrangements Practice Direction upon the coming into force of the Civil Procedure Rules 1998, made a second application to lift the stay based on evidence which had been available at the time of, but was not deployed in, the first application.  The automatic stay fell to be treated as a sanction “imposed for a failure to comply with any rule, practice direction or court order” within CPR r 3.9.  Brooke LJ, giving the judgment of the English Court of Appeal, stated that the fact that the evidence relied upon in support of the second application could and should have been put before the court in support of the first application was material to the exercise of discretion to grant relief from sanction conferred by CPR r 3.9(1).  This was because –

“[t]here is a public interest in discouraging a party who makes an unsuccessful interlocutory application from making a subsequent application for the same relief, based on material which was not, but could have been, deployed in support of the first application. In some contexts, this is partly because, as Chadwick LJ said in Securum Finance Ltd v Ashton [2001] Ch 291, there is a need for the court to allot its limited resources to other cases. But at least as important is the general need, in the interests of justice, to protect the respondents to successive applications in such circumstances from oppression. The rationale for the rule in Henderson v Henderson (1843)  3 Hare 100 that, in the absence of special circumstances, parties should bring their whole case before the court so that all aspects of it may be decided (subject to appeal)  once and for all is a rule of public policy based on the desirability, in the general interest as well as that of the parties themselves, that litigation should not drag on for ever, and that a defendant should not be oppressed by successive suits when one would do” (§55).

Nevertheless, he considered that “although the policy that underpins the rule in Henderson v Henderson has relevance as regards successive pre-trial applications for the same relief, it should be applied less strictly than in relation to a final decision of the court, at any rate where the earlier pre-trial application has been dismissed” (§56).  Brooker LJ also gave the following example: an application for summary judgment in a substantial multi-track case under CPR r 24 was dismissed, and the unsuccessful party then made a second application based on material that was available at the time of the first application, but which through incompetence was not deployed at that time.  He considered that if the new material made the case for summary judgment unanswerable on the merits (or was conclusive of the case), it would be correct for the court to allow the second application (possibly subject to an appropriate order as to costs and/or interest)  (§57).

32.In China Money Asia Ltd, a defendant made repeated applications to set aside a default judgment.  The first application was advanced on the ground that service was irregular, while the second application was advanced on the basis of the merits of the defence.  There was also a previous application to set aside a statutory demand served by the plaintiff based on the default judgment.  The earlier applications to set aside the default judgment/statutory demand were dismissed or withdrawn by consent. In relation to the second application to set aside the default judgment, the evidence intended to be relied upon by the defendant was or ought to have been available at the times of the previous applications, but was not raised then. Master Elaine Liu considered, amongst other cases, Laemthong and Woodhouse, and took the view that the second application should not be dismissed on the ground of abuse and the defendant should be given an opportunity to have his case heard after taking into account and balancing various competing interests referred to at §19 of her reasons for decision.

33.The above authorities show that the doctrines of res judicata, issue estoppel and Henderson v Henderson abuse are, in principle, applicable to interlocutory applications.  However, they are applied less strictly than in relation to a final decision.  Notwithstanding the dismissal or withdrawal of an earlier similar application, the court has a discretion to permit a second application to be made having regard to the interests of justice and the underlying objectives of the CJR.  Nevertheless, the court should not readily entertain a second application, for the reasons given by Brooke LJ at §55 of his judgment in Woodhouse.  In many cases, the applicant will have to show a material change of circumstances, or adduce some new material evidence which was not before the court in the previous application.  In the latter situation, an important consideration for the court’s exercise of discretion is whether the new evidence was or could, with reasonable diligence, have been available to the applicant at the time of the previous application.  These having been said, the court should take into account all relevant considerations in the exercise of its discretion whether to entertain a second application.

34.At §14(2)  of the Decision, the Judge stated the following:

“If a party seeks to re-litigate a matter which has been determined in a previous interlocutory decision by taking out a second application, the second application is liable to be dismissed by the court, on the ground that it constitutes an abuse of process. However, the court may conclude that there is no abuse of process and it will not be unjust or unreasonable to allow the second application to be heard:

(i)  if the ruling on the first application was not based on the merits of the issue but on a technical objection;

(ii)  if upon the first application the applicant had failed to prove essential facts by mistake or inadvertence;

(iii)  if there is new evidence that seriously justifies reconsideration of the issue; and

(iv)  if there is a material change of circumstances of a non-evidentiary nature.”

Although the Judge did say, at §15 of the Decision, that it seemed to him that “it is now too late to ask the court to overturn that decision unless it can be shown that there is a material change of circumstances that justifies it”, that statement should not be read out of context to mean that the Judge took the view that a second application could only be entertained if the applicant could show a material change of circumstances, or that a material change of circumstances was the only relevant consideration for deciding whether to entertain a second application, having regard to what the Judge had just said at §14(2)  of the Decision.  On the facts of the present case, none of the other considerations mentioned at §14(2)  of the Decision, or any other relevant consideration, was present, and it was in such context that the Judge considered that the Liquidators had to show a material change of circumstances to justify their application to take over the Company’s defence in the Mortgage Action.  Overall, we do not consider that the Judge committed any error of principle or approach in his consideration of the Take Over Summons.

35.We now turn to the other matters relied upon by the Liquidators in support of Ground 2.  We do not consider that those matters, whether taken singly or cumulatively, are sufficient to for us to interfere with the exercise of discretion by the Judge to reject the Liquidators’ application to take over the conduct of the Company’s defence in the Mortgage Action:

(1)  As regards the removal of the Former Liquidators and appointment of the current Liquidators under Ground 2(2), we do not see how a mere change in the identities of the liquidators, or the fact that the Former Liquidators and the current Liquidators have taken different views on whether the Chen Sisters should be permitted to defend the Mortgage Action in the name of the Company can amount to a material change of circumstances in the present case.  The current Liquidators are privies of the Former Liquidators.  Also, the court’s decision to remove the Former Liquidators had nothing to do with their stance regarding the Chen Sisters’ application for leave to defend the Mortgage Action in the name of the Company.

(2)  In respect of the rest of the matters raised in Ground 2(2)  and (3), it has not been shown that the delay in the progress of the Mortgage Action was caused by any default on the part of the Chen Sisters, or that the future progress of the Mortgage Action would be sped up by allowing the Liquidators to take over the conduct of the defence, or that the prospects or merits of the Chen Sisters’ defence have changed significantly in light of the evidence now available (including the discovery made and the witness statements filed in that action).  As regards the locus of the Chen Sisters as creditors of the Company, this is a matter which we shall address when we consider Ground 1 below.  We do not see that the Chen Sisters stand in a position of conflict vis-à-vis the Company insofar as the Company’s defence to the Mortgage Action is concerned.

(3)  In respect of Ground 2(4), the question of the Company’s liability, and the extent of such liability (if any), to repay the loan under the Loan Agreement are matters to be determined in the Mortgage Action.

(4)  Lastly, in respect of Ground 2(5), whether the Liquidators have in fact agreed with Fameway to market the House for sale at HK$450 million does not seem to us to be material to the question of whether the Court should make an order to allow the Liquidators to take over the conduct of the Company’s defence in the Mortgage Action.  It is not in dispute that the House is currently worth substantially less than its former valuation of HK$750 million, and will not be sufficient to pay off all the debts of the Company referred to in §7 above if they are admitted or proved in full.

36.There is a further reason why it would not be appropriate for the conduct of the Company’s defence of the Mortgage Action to be taken over by the Liquidators.  As mentioned by the Judge at §5 of the Decision, the Liquidators are currently funded or financed by CSH, which is in Ben Lau’s camp of creditors, while the plaintiff in the Mortgage Action is RG, another creditor in Ben Lau’s camp.  If the Company’s defence of the Mortgage Action is taken over by the Liquidators, there is reason to believe that they may discontinue the defence because of their preliminary view that the Company does not have a strong case[10]. Should the Liquidators eventually decide to discontinue the defence, the risk of a conflict of interest, and hence bias or apparent bias in such decision, is obvious.

37.In all, Ground 2 is rejected.  Having reached the above conclusion, it is unnecessary to further consider the Respondents’ Notice dated 23 September 2022.

GROUND 1 – APPEAL AGAINST THE JUDGE’S ACCEPTANCE OF THE CMH AND CYW PROOFS

38.Under Ground 1, the Liquidators argue that the Judge erred in allowing the CMH and CYW Proofs in the following aspects[11]:

(1)  The Judge failed to analyse the internal contradictions that existed in the Chen Sisters’ own evidence regarding the nature and amount of their proofs of debt (Ground 1(1)).

(2)  The Judge erred in applying Fielding v Hunt [2017] EWHC 247 (Ch), when the Chen Sisters could not even put forward a consistent case, and bearing in mind the burden was on them to support their claims (Ground 1(2)).

(3)  The Judge erred in his analysis that since (i)  the Liquidators had confirmed that the Company had received payments of HK$101,647,589.01 (comprising HK$65,710,859.04 from 6 companies and HK$35,936,730 from unidentified sources), (ii)  the internal vouchers of the Company recorded those as having been received from CMH, and (iii)  no party other than CMH had filed any proof of debt regarding those sums, those debts should be accepted as being proven on a balance of probabilities despite the lack of bank documents showing that the funds originated from CMH.  The Judge should have adopted a more cautious and detailed approach in admitting proofs of debt (Ground 1(3)).

(4)  CMH’s case that the 6 companies, namely, Upper Run, Rose Bay, GOL, Famous Lion, Wisdom First and Star Business, (collectively the “Paying Companies”), had made payment to the Company “on her behalf” was only introduced after the Liquidators had rejected her proof of debt. Despite repeated requests from the Liquidators for further proof beyond the audited financial statements of the Company, CMH failed to respond to such requests (Ground 1(4)).

(5)  The fact that CMH had produced a significant quantity of documents from 4 of the Paying Companies (namely, Famous Lion, Rose Bay, Star Business and Wisdom First), which one would not expect CMH to have unless she had some involvement with them, does not advance the matter further, given her own case that she was heavily involved with assisting Ben Lau in his business affairs (Ground 1(5)).

(6)  The Judge’s evaluation of the CWY Proof is similarly flawed.  A more cautious and detailed approach should have been adopted by the Judge in admitting proofs of debt (Ground 1(6)).

(7)  The Judge erred in placing reliance on the views expressed by the Former Liquidators as (i)  CMH’s case that the 6 companies had made payments to the Company on her behalf was not before the Former Liquidators, and (ii)  the Former Liquidators’ opinion was necessarily a preliminary assessment only, as made clear in §§10 and 13 of the 6^th Affirmation of James Wardell (Ground 1(7)).

39.Before we consider the above arguments of the Liquidators, we make two preliminary observations.  First, at §19 of the Decision, the Judge referred to the relevant principles for considering a dissatisfied creditor’s application to vary or reverse a liquidator’s decision in respect of a proof of debt as summarized by Coleman J at §20 of his judgment in Re Fortune King Trading Ltd [2020] HKCFI 353, as follows:

“(1)  An appeal under Rule 95 against a liquidator’s adjudication is a hearing de novo, at which the Court may confirm, reverse or vary the liquidator’s decision.

(2)  The purpose of the hearing is for the Court to determine to what extent the applicant should be allowed to rank as a proving creditor. Therefore, the Court is bound to decide the rights of the applicant in the light of all of the evidence which is before the Court, and not merely to express a view as to whether the liquidator was right or wrong in rejecting the proof on the evidence then available to the liquidator at the time he rejected it.

(3)  A liquidator who defends his decision to reject a proof is no longer acting in a quasi-judicial capacity, but is cast in the role of an adversary.

(4)  The onus of proof is on the applicant to show on a balance of probabilities that a real debt is due to him.

(5)  The requirement for a liquidator or trustee in bankruptcy in admitting or rejecting a proof is to require some satisfactory evidence that the debt on which the proof is founded is a real debt, and this is a relatively low threshold. Nevertheless, the liquidator or trustee is entitled to go behind mere form so as to get at the truth.

(6)  On an appeal against the rejection of a proof, the applicant’s burden is to prove a real debt, to be established by credible evidence.

(7)  Hence, there may be cases, for example where probative evidence is scarce, where the incidence and standard of proof has some significance. The burden remains with the applicant to establish proof of the claim on the balance of probabilities on whatever evidence is produced.

(8)  The applicant is not entitled to say that his claim should be admitted because this is all the evidence that he has and because the best evidence has been lost or destroyed. Even in such a situation, the burden remains with the applicant to prove his claim on the balance of probabilities on the evidence as is produced.

(9)  But the Court is not bound to accept at face value any accounts of a company previously prepared, and is entitled to go behind them to form its own conclusion as to the truth.  Even if the accounts in question have been audited, where there is evidence to show that the accounts are or may be inaccurate, or to cast doubt on the way in which the auditor carried out his duties, this will be a factor to take into account.”

The above principles are accepted and adopted by the Liquidators in the present appeal[12].

40.Second, the Judge decided to admit the CMH Proof (to the extent of HK$101,647,589.04)  and the CYW Proof (to the extent of HK$1,009,571.28)  because he was satisfied, on the evidence before him and on the balance of probabilities, that CMH and CYW were owed those sums by the Company. The Liquidators’ appeal against the Judge’s decision is an appeal against a finding of fact made by the primary judge.  Although the Judge’s finding was not based on oral evidence given by witnesses, but on evidence in written form (including affirmations and other documentary evidence), the Court of Appeal’s approach to an appeal against such a finding is well settled.  The Court of Appeal “should be reluctant to interfere with the judge’s evaluation of the evidence, unless it is demonstrated that the judge had fallen into palpable errors in the findings of fact.  The appellate process is not designed to give a litigant a platform to repeat submissions made in the court below on the evidence and factual aspects in the hope of persuading the appeal court to come to a different view from the primary judge” (see Re Cheung Kwan [2021] HKCA 282, at §33; WYSL v FHCBA[2019] HKCA 814, at §42).

41.We shall first deal with Ground 1(2), which raises an issue concerning the scope of the principle in Fielding v Hunt. Mr Yuen argues that the Judge erred in applying Fielding v Hunt, his reliance on it was misplaced, and he was unduly affected by the lack of cross-examination.  Mr Yuen further submits that the purpose of cross-examination is to facilitate the fair disposal of the issue(s)  involved, and whether or not it is necessary to have cross-examination depends on the circumstances of the case.  He contends that, in the present case, no cross-examination was necessary because:

(1)  as the burden of proof rested on the Chen Sisters, the lack of cross-examination would not remedy the deficiencies or inherent nature of their evidence; and

(2)  given the internal inconsistencies and inherent defects of CMH’s case, the court was entitled to rule that CMH failed to discharge her burden of proof without cross-examination.

42.Like the present case, Fielding v Hunt concerned an appeal by two creditors (the Fieldings)  against the decision of a liquidator (Mr Hunt)  to reject their proof of debt.  One of the issues in that case was whether there was an agreement to convert a particular loan into share capital.  The creditors and their witnesses asserted that there was no such agreement.  The liquidator was unable to give direct evidence to contradict their evidence (and in that sense, there was no direct conflict of evidence to be resolved), but challenged the evidence as being inconsistent with the contemporaneous documents and inherent probabilities.  The liquidator decided, however, not to apply to cross-examine the creditors and the witnesses on the basis that: (a)  there was no fundamental disputes of fact as between the parties; and (b)  the documents upon which both parties relied were not in dispute, and contended that the court was entitled not to accept the evidence of the creditors and their witnesses where that evidence was inconsistent with the contemporaneous documents and inherent probabilities.  The question which the court (His Honour Judge Stephen Davies)  had to decide was whether it was open to him to reject the evidence of the creditors and their witnesses without them having been cross-examined on that evidence.  The judge quoted and adopted the following statements of principle by Rimer J in Long v Farrer [2004] EWHC 1774 (Ch):

“[57] … It is, I believe, by now familiar law that, subject to limited exceptions, the court cannot and should not disbelieve the evidence of a witness given on paper in the absence of the cross-examination of that witness. The principle has traditionally been stated in relation to statements made under oath or affirmation, but it was not suggested to me that it does not apply equally to a witness statement. I will refer to three authorities.

[58] First, in In re Lo-Line Electric Motors Ltd and Others [1988] Ch. 477, an application by the Official Receiver to disqualify the respondent, Mr Browning, from acting as a director, Sir Nicolas Browne-Wilkinson V-C said at 487B:

‘Conflicts of evidence

In the present case there are many factual issues on which the evidence given by Mr Browning in his affidavits directly contradicts allegations made against him by the official receiver. Yet he has not been cross−examined. In my judgment proceedings for disqualification are no different from any other court proceedings: it is not possible for the court to disbelieve evidence given on oath in the absence of cross−examination of the witness. I therefore proceed on the footing that Mr Browning’s evidence is correct.’

…

[59] Re Keypak Homecare Ltd (No. 2) [1990] BCC 117 was another director’s disqualification case. Harman J said at page 122G:

‘As it seems to me, the conflicts of evidence which arise in this case cannot be resolved in the absence of cross−examination. Mr Millett submitted that I could choose which affidavit I should prefer. In my judgment that is not a possible exercise. When a judge is confronted with paper evidence only which contradicts each other he is left with no option but to say that he cannot identify which of the conflicting stories is correct, and he cannot disbelieve a statement put upon oath without cross-examination, unless some contemporary document plainly contradicts the affidavit evidence.’

Harman J was, therefore, not even prepared to give the respondent the benefit of the dispute raised by the conflict.

[60] Thirdly, in Re a Company (No 006685 of 1996) [1997] 1 BCLC 639 (an application to restrain the advertisement of winding up petition on the ground that the petition debt was said to be the subject of substantial dispute), Chadwick J said, at page 648:

‘… I accept that any court, and particularly the Companies Court, should not seek to resolve issues of fact without cross-examination where there is credible evidence on each side. But I do not accept that the court is bound to hold that there is a need for a trial in circumstances in which, on a proper understanding of the documents, the evidence asserted in the affidavits on one side is simply incredible…’

[61] The basic principle is, therefore, not an unqualified one. In particular, paper evidence which is manifestly incredible can be disregarded or disbelieved. But it will require a fairly extreme case for untested paper evidence to be rejected on that basis.” [our emphasis]

43.At §§2.12 to 2.14 of his judgment, His Honour Judge Stephen Davies set out his conclusion:

“[2.12] By reference to that summary of the relevant principles, and accepting that the basic principle is as summarised by Rimer J in Long v Farrer, I am satisfied that Mr Briggs’ approach is the correct one. I accept that the liquidator and his witness Mr Andersen are not giving witness evidence directly contradicting the witness evidence given by and for the Fieldings. However the question is nonetheless whether I can make adverse findings against the Fieldings which would involve rejecting their witness evidence without that evidence being tested by cross-examination.

[2.13] I accept that it would be unfortunate in cases such as the present if requests were made for cross-examination of witnesses in every case where there was some dispute of fact simply out of an abundance of caution… I also accept the benefit of cross-examination may be limited, and that in many cases where the judge does hear oral evidence he or she proceeds to decide the issue on the basis of his or her assessment of the reliability to be attached to the witness evidence when set against the contemporaneous documents and the inherent probabilities, without necessarily paying very much regard to the oral evidence given by the witness under cross-examination.

[2.14] However whilst in some cases the result of oral evidence and cross-examination is that the credibility of a witness is destroyed, in other – albeit perhaps fewer – cases what is on paper a rather implausible account is considered by the judge to be credible after hearing cross-examination, particularly perhaps having regard to factors such as the internal consistency of the evidence given by the witness, to further explanations which the judge considers to be credible given by the witness when pressed on a point, or perhaps simply the overall impression made by the witness on the judge. It is the loss of this opportunity to explain his or her evidence in a way which the judge regards as credible which arises if the witness is not cross-examined or at least offered the opportunity to explain any particular matters upon which the other party intends to rely in inviting the court to disbelieve his or her evidence on that point. It follows, it seems to me, that although the matter is always highly fact-sensitive and no hard and fast rule can be laid down, in general the benefit of the doubt must be given to the witness in such cases, and his or her evidence should only be disbelieved if it can properly be regarded as incredible.” [our emphasis]

44.In short, the relevant principle is that generally, a witness’s evidence given on paper should not be disbelieved or disregarded without cross-examination unless the evidence is incredible.

45.Mr Yuen places emphasis on the rationale behind the principle mentioned by His Honour Judge Stephen Davies at §2.14 of his judgment, namely, the loss of an opportunity for a witness to explain his or her evidence in a way which a judge may regard as being credible which would arise if the witness is not cross-examined or offered the opportunity to explain any particular matters upon which the other party intends to rely in inviting the court to disbelieve his or her evidence on that point.  We do not consider that the rationale qualifies the scope of principle.

46.In the present case, the Judge stated the relevant principle at §20 of the Decision as follows: “If a liquidator contends that the evidence on oath of a proving creditor on an important factual dispute should be disbelieved, they ought to apply to cross-examine the creditors.  If a liquidator decides not to do so, the liquidator is not entitled to invite the Court to disbelieve the creditor’s evidence unless the evidence is of ‘an incredible or romancing character’”.  The Judge’s statement of principle is in line with the principle as stated by Rimer J in Long v Farrer and His Honour Judge Stephen Davies in Fielding v Hunt, and is, in our view, correct.  

47.We do not accept the broad submission at §1(2)  of the Notice of Appeal that Fielding v Hunt is inapplicable because the burden was on the Chen Sisters to prove their claims, a point repeatedly emphasised by Mr Yuen in the course of his submissions.  There is no dispute that the burden remained throughout on the Chen Sisters to prove their claims on the balance of probabilities, and the Judge was well aware of that matter. However, the burden of proof and the principle in Fielding v Hunt should not be conflated.  The former goes to the question of which party bears the obligation to establish a case or the facts upon a particular issue to the requisite standard of proof, while the latter goes to the question of the circumstances in which a party may invite the court to reject the evidence given by a witness of the opposite side without cross-examination.  We shall further consider the application of Fielding v Hunt to the present case when we deal with the other matters relied upon by the Liquidators in support of Ground 1.

48.Under Ground 1(1), the Liquidators argue that the Judge erred in failing to analyse the internal contradictions in the Chen Sisters’ evidence regarding the nature and amount of their proofs of debt.  In so far as the CMH Proof is concerned, Mr Yuen mainly relies on the following inconsistencies or alleged inconsistencies in CMH’s evidence:

(1)  (i)  in CMH’s witness statement filed in the Mortgage Action, she stated that she injected money into the Company for the purpose of paying off a mortgage loan of HK$100,000,000 advanced by Eternal Rich China Limited (“Eternal Rich”)  to the Company, (ii)  in the CMH Proof, it was stated that her loan to the Company was to “[f]inance the operations of the Company in the past”, and (iii)  in the Auditor’s 1^st Letter, it was stated that “… the amount was unsecured and without any fixed terms of repayment”; however Note 10 to the 2012 Balance Sheet (relating to the item “Mortgage loans and other creditors”)  stated that “[t]he mortgage loans were secured by charging the company’s leasehold land and building to the finance companies and rates of interest payable on the loans ranged from 10% per annum to prime plus 8% per annum.  The loans were fully repayable within twelve months and twenty four months”;

(2)  the accounts show that it was CYW (not CMH)  who repaid (at least a part of)  the mortgage loan;

(3)  there were significant changes of CMH’s case after her proof of debt had been rejected by the Liquidators, including (i)  the reduction in the amount of the claim from HK$131,956,197.06 to HK$101,647,589.04 due to sums transferred from Ben Lau’s account to hers, and (ii)  the new allegation that monies were injected by her through the Paying Companies; and

(4)  the qualification expressed by the former auditors concerning the item “Mortgage loan and other creditors” in the 2012 Balance Sheet.

These complaints are elaborated in §§12 to 15 of Mr Yuen’s Skeleton Submissions for the Liquidators dated 7 November 2023.  There are other complaints relied upon by the Liquidators in respect of the CMH Proof and the CYW Proof which we will deal with under Grounds 1(3)  to (7)  below.

49.On behalf of the Chen Sisters, Mr Bernard Man, SC (together with him, Mr Jonathan Ng)  submits that the Judge was entitled to conclude that there was credible evidence to prove the debt of HK$101,647,589.04 owed by the Company to CMH in view of the following facts and matters: (i)  the debt was supported by the Company’s ledger accounts and journal vouchers, which had been relied upon by the Former Liquidators in their misfeasance claim against the Chen Sisters, (ii)  the Company’s current account with CMH and the journal vouchers show that CMH injected a total of HK$101,647,589.04 into the Company via the Paying Companies, (iii)  it is common ground that at least a total sum of HK$65,717,589.04 was paid by the Paying Companies to the Company, and as for the remaining amount which the Liquidators dispute the identity of the payor in 14 transactions, there is ample evidence to show that they were paid by the Paying Companies, (iv)  there is also ample evidence to show that the payments were made by the Paying Companies on behalf of CMH, and (v)  the Former Liquidators had concluded that while CMH was unlikely to have her full claim for HK$131,956,197.06 admitted, they could state with certainty that she would certainly have a valid proof of debt for a considerable sum.  Mr Man further submits that the minor inconsistencies in the evidence of CMH relied upon by the Liquidators cannot possibly assist them in the absence of cross-examination of CMH[13].

50.Having considered the underlying materials referred to by Mr Man which we do not propose to set out in detail in this judgment, we consider that it was well open to the Judge, for the reasons he gave at §§22 to 25 of the Decision, to come to the view that the circumstances and evidence adduced by CMH established on the balance of probabilities that she was owed HK$101,647,589.04 by the Company.

51.As regards the inconsistencies or alleged inconsistencies in CMH’s evidence referred to in §48 above, while we accept that there are matters which may require explanations or clarifications, we do not consider CMH’s evidence to be incredible.  On the contrary, her claim that she was owed HK$101,647,589.04 by the Company was supported by substantial documentary evidence (including the Company’s internal ledger accounts, journal vouchers, cheques, and deposit slips/advices)  and other evidence referred to and relied upon by the Judge.  The inconsistencies or alleged inconsistencies in CMH’s evidence relied upon by the Liquidators to challenge the CMH Proof are, we consider, precisely the sort of matters that ought to have been put to CMH in cross-examination so that she would have a fair opportunity to deal with them.  In the absence of such cross-examination, Mr Man is, understandably, handicapped to a certain extent in his answer to the points raised by the Liquidators, and has only been able to offer some limited responses, including the following:

(1)  the fact that CMH had given further elaborations, after the rejection of her proof of debt by the Liquidators, that the payments were made by the Paying Companies on her behalf (and not by her directly)  cannot be said to a shift of her case – the central theme of her case had always been that she provided the funds[14];

(2)  the description in the CMH Proof that the loan made by her was to finance the Company’s operation is consistent with the fact that the payment was used to repay the mortgage loan owed by the Company to Eternal Rich (which was part of the Company’s operation)[15];

(3)  the fact that CYW had made an interest payment (of HK$1 million)  to Eternal Rich on the mortgage loan for the period from 6 March 2009 to 4 April 2009 does not mean that CMH did not finance the Company in repaying the mortgage loan[16]; and

(4)  the sums transferred from Ben Lau’s account was irrelevant as CMH no longer pursues the debt in respect of those sums[17].

The above responses made by Mr Man on behalf of CMH seem to us to have force.

52.Insofar as the former auditor’s qualification concerning the item “Mortgage loan and other creditors” in the 2012 Balance Sheet is concerned, that was a matter which the Judge was fully aware of.  However, the Judge relied, not on the 2012 Balance Sheet, but on other evidence and materials before him to find that CMH had established, on the balance of probabilities, her claim to the extent of HK$101,647,589.04.

53.In all the circumstances, we consider that the principle in Fielding v Hunt applies to the criticisms by the Liquidators of CMH’s evidence raised under Ground 1(1).

54.In respect of Ground 1(3), we consider that the Judge was entitled to take into account the following matters, namely, (i)  the Liquidators had confirmed that the Company had received payments in the total sum of HK$101,647,589.01 (comprising HK$65,710,859.04 from the Paying Companies and HK$35,936,730 from unidentified sources), (ii)  the internal vouchers of the Company recorded that the sums were received from CMH, and (iii)  no party other than CMH had filed any proof of debt regarding those sums, when deciding whether to accept her proof of debt (notwithstanding the absence of bank documents showing that the funds originated from CMH).  Further, the Judge did not rely solely on the internal vouchers and/or the absence of any other claimants to find in favour of the CMH Proof.  He also took into account other matters (including CMH’s sworn evidence on affirmation, the absence of cross-examination on her evidence, and the fact that CMH was able to produce a significant quantity of relevant documents from 4 of the Paying Companies[18])  to come to the conclusion that CMH had established on the balance of probabilities that she was owed HK$101,647,589.04 by the Company.  We do not see that the Judge committed any palpable error.

55.The matters relied upon by the Liquidators under Ground 1(4), namely, (i)  CMH’s case that the Paying Companies had made payment to the Company “on her behalf” was only introduced after the Liquidators had rejected her proof of debt, and (ii)  despite repeated requests from the Liquidators for further proof beyond the audited financial statements of Company, CMH failed to respond to such requests, are matters which go to the credibility of CMH’s claim.  The Liquidators ought to have cross-examined CMH on those matters if they wished to challenge her claim.  The Liquidators did not do so.  Further, they are not of such significance that would cause us to interfere with the Judge’s finding of fact that the Company was indebted to CMH to the extent of HK$101,647,589.04.

56.In respect of Ground 1(5), we consider that the Judge was entitled to take into account the fact that CMH had produced a significant quantity of documents from 4 of the Paying Companies, namely, Famous Lion, Rose Bay, Star Business and Wisdom First, which the Judge considered one would not expect CMH to have unless she had some involvement with them, when considering whether to uphold the CMH Proof.  Mr Yuen says that this fact does not advance the matter further, given CMH’s own case that she was heavily involved with assisting Ben Lau in his business affairs.  In our view, this is a point which goes to the assessment of the evidence, and falls within the province of the Judge as the primary decision-maker.

57.In respect of Ground 1(6)  concerning the Judge’s acceptance of the CYW Proof, Mr Yuen submits that the Judge failed to pay heed to the inconsistencies pointed out by the Liquidators in the CYW Proof, in particular:

(1)  Since, on the Chen Sisters’ case, CYW had no real involvement in the affairs of the Company and had no real interest in the House, it was highly questionable why she would advance a substantial amount to the Company.

(2)  CYW had not made any affirmation to verify her case, and there was no explanation why she failed to do so.  Thus, the Court is entitled to an draw adverse inference against CYW.

(3)  The Chen Sisters have not provided any satisfactory answer to the observations by Deputy High Court Judge Le Pichon at §73 of her decision dated 11 September 2014 in HCCW 1887/2012.  That decision concerned the Company’s appeal against the order of Master de Sousa dated 24 September 2012 granting an extension of time for BLAA to register the Charge under the Companies Ordinance.  At §73 of her decision, Deputy High Court Judge Le Pichon made the following observation:

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

(4)  There was a sum of HK$800,000 which was transferred by one Mr Pius Li to CYW for her personal use, but was (incorrectly)  booked in CYW’s current account as a credit in her favour.  This further demonstrates the unreliability of the Company’s accounts.

58.In our view, none of the above submissions has merit:

(1)  In respect of §57(1)  above, the Liquidators’ query does not give rise to any “inconsistency” in the CYW Proof.  It does not follow from the fact that CYW had no real involvement in the affairs of the Company or interest in the House that she did not advance funds to the Company.  Her claim is supported by the Company’s ledger and the 2012 Balance Sheet.  The former auditors’ qualification of the 2012 Audited Financial Statement did not relate to the item (Amount due to a shareholder)  relied upon by CYW[19]. The Judge was entitled to place weight on the Company’s 2012 Balance Sheet in his consideration of the CYW Proof.

(2)  In respect of §57(2)  above, there is nothing in the Companies (Winding-up)  Rules which requires a proving creditor to personally make an affirmation to support an appeal under Rule 95.  We see no reason why it was objectionable for CMH to make an affirmation on behalf of CYW in support of the latter’s appeal, or why the Court should draw any adverse inference against CYW in the circumstances.

(3)  In respect of §57(3)  above, the Judge was fully aware of the point made by Mr Yuen.  However, he took into account the Former Liquidators’ conclusion that the Chen Sisters did not owe the Company the said sum of HK$83 million, and found that there was no credible evidence for concluding that they did[20].  The Judge was entitled to take that view, which cannot be said to be plainly wrong.

(4)  In respect of §57(4)  above, CMH in her 12^th Affirmation filed on 25 April 2022 accepted that the sum of HK$800,000 paid by Perfect Start Limited (of which Mr Pius Li was a director and sole shareholder)  to the Company on 12 April 2020 was for CYW’s personal use, and stated that the said sum of HK$800,000 was subsequently transferred to CYW on 24 March 2021, and hence CYW did not claim that sum under the CYW Proof[21].  In the Shareholder’s Current Account of the Company, there was a credit entry of HK$800,000 on 12 April 2010 and a corresponding debit entry of HK$800,000 on 24 March 2011, and thus there was no net change in the amount due to the Shareholder (CYW)  by the Company.  The Judge apparently accepted CMH’s explanation in respect of this matter[22].  The Judge was entitled to take that view, which cannot be said to be plainly wrong.

59.Lastly, in respect of Ground 1(7), we consider that the Judge was entitled to take into account the view reached by the Former Liquidators that the Chen Sisters were owed substantial sums in reaching his conclusion to admit their proofs of debt.  The fact that (i)  CMH’s case that the 6 companies had made payments to the Company on her behalf was not before the Former Liquidators, and (ii)  the Former Liquidators’ opinion was a preliminary assessment, went to the weight that might properly be given to the Former Liquidators’ view, and was a matter for the Judge to consider.

60.In all, Ground 1 is rejected.

DISPOSITION

61.The Liquidators’ Notice of Appeal dated 14 September 2022 is dismissed with an order nisi that the Chen Sisters shall have the costs of the appeal, to be taxed if not agreed, with certificate for 2 counsel.  The above costs order shall become absolute unless an application to vary the same is made within 14 days from the date of this judgment.

Mr Rimsky Yuen SC and Mr Tony Ko, instructed by V Hau & Chow, for the Applicant (Appellant)

Mr Bernard Man SC and Mr Jonathan Ng, instructed by Jones Day, for the 1^st and 2^nd Respondents