The Joint and Several Liquidators of Days Impex Ltd (in Liquidation) v. Mahesh Nanik Dayaram
Read the full judgment text of HCCW 298/2011 on BabelCite. This High Court CFI judgment was delivered on 22 November 2024.
1. Days Impex Ltd (“ Days Impex ”) and Days International Ltd (“ Days International ”), which I shall refer to collectively as the “ Companies ”, were wound up in December 2011, both having been put into provisional liquidation in September of that year. In August 2011 Mahesh Dayaram (“ Mr Dayaram ”) and his father Nanik Dayaram were convicted of 9 counts of conspiracy to defraud by causing the Companies successfully to apply for, and the Companies to receive, import loans, which they knew were
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HCCW 298/2011 & HCCW 299/2011 [2024] HKCFI 3386 HCCW 298/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011 ____________________
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IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011 ____________________
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____________________ J U D G M E N T ____________________ Introduction 1.Days Impex Ltd (“Days Impex”) and Days International Ltd (“Days International”), which I shall refer to collectively as the “Companies”, were wound up in December 2011, both having been put into provisional liquidation in September of that year. In August 2011 Mahesh Dayaram (“Mr Dayaram”) and his father Nanik Dayaram were convicted of 9 counts of conspiracy to defraud by causing the Companies successfully to apply for, and the Companies to receive, import loans, which they knew were not to be used for their intended purpose. They were sentenced to 10 years imprisonment. They unsuccessfully appealed their convictions, and the Court of Final Appeal refused leave to appeal. In March 2017 the Liquidators of the Companies issued fraudulent trading and misfeasance summons (“Summonses”) against Mr Dayaram and another director of the Companies, Pitty Kwok, who had been acquitted of the charges brought against her. Mr Dayaram’s father had by this time died. The complaints advanced in the Summonses arise from the subject matter of the convictions. The applications against Ms Kwok were not pursued at trial. 2.The claims pursued in Summonses by the Liquidators against Mr Dayaram arising from the subject matter of the convictions are as follows:
3.The Summonses have proceeded slowly. The reason is that until August of 2023 Mr Dayaram was serving his sentence and he represented himself for the majority of the proceedings. I think it is fair to say that both the Liquidators and the Court have adopted an accommodating approach to Mr Dayaram’s requests for extensive periods to review and prepare documents to allow for the undoubted difficulties that he faced in addressing a claim involving a significant quantity of documents during the period in which he was representing himself. Mr Dayaram is obviously intelligent. He was able to understand the legal process and was particularly adept at finding infelicities in the Liquidators’ conduct of the Liquidations and exploiting them; suggesting that they were indicative of collusion of some sort between the Liquidators and the major creditors (banks) to manufacture a claim that might support an insurance claim. But this never went beyond conjecture and aspersions. 4.Mr Dayaram told me on several occasions that he believed he had a substantive defence to the claims and that the criminal convictions were wrong. Given the complexity of the claims, he needed time to obtain evidence that had not been put before the criminal court, which would allow him to advance the positive defence that he believed he had, but which had not been satisfactorily formulated and presented to the criminal court. As it transpired Mr Dayaram did not advance a positive defence in the sense of adducing new evidence that cast the evidence relied on by the Liquidators in a materially different light. The compelling inference is that Mr Dayaram was simply playing for time and that his protestations to the effect that there had been a miscarriage of justice were entirely disingenuous. For reasons that will become apparent in this judgment it seems to me quite clear that Mr Dayaram is dishonest and has consistently lied to this Court. He obviously feels no remorse for his wrong-doings and no embarrassment. Presumably he simply wants to delay the inevitable search by the Liquidators for assets to satisfy the judgment that he has always known would eventually be rendered by this Court and had no scruples about lying to do so. 5.Following receipt of Mr Dayaram’s Opening Submissions[1], which raised objections to the Applications based on their failure, so it was alleged, to comply with Rule 58 of the Companies (Winding-up) Rules, Cap. 32H (“Rule”), the Liquidators applied to amend the Summonses by interlocutory summonses dated 19 February 2024. The amendments that the Liquidators wished to make were to amend paragraph 1 to add details of why the Liquidators allege that the Applications were made fraudulently and to amend paragraph 2 to add an express allegation that the Companies were insolvent when Applications were made and that Mr Dayaram failed to act bona fide in the best interests of the Companies when making the Applications. In response Mr Dayaram issued summonses dated 22 February 2024 seeking the determination of preliminary issues, namely, whether:
6.I declined Mr Dayaram’s applications for determination of the preliminary issues, the reasons to be included in this judgement and the costs reserved. I made no order in respect of the Liquidators’ summonses. I give my reasons for the above orders in [79] to [83] after I have explained the claims that are advanced. Uncontroversial Background 7.As I have already mentioned a central component of these proceedings is that Mr Dayaram was convicted of 9 counts of conspiracy to defraud in HCCC 2/2014 (“Conviction”) in relation to the false invoices submitted to the banks in connection with the Applications[2]. I deal with the evidential relevance of the Conviction later in this judgment. 8.The business operated by the “Days” group of companies (“Group”) was first established in 1957 by Mr Dayaram’s grandfather as a sole proprietorship. In 1985, Mr Dayaram’s father, took over the business. Mr Dayaram worked with his father to run the Group. 9.The Group engaged in the import and export business, originally dealing in general merchandise sourced from China and sold to Africa, and later (since around 2000) focusing more on electronics. In addition, the Group also provided financing to buyers by utilising its credit facilities to obtain import loans and export loans. Its main operating subsidiaries were Days Impex and Days International.
10.Malkita was incorporated in Hong Kong on 21 March 1980. At all material times, its shareholders were (1) Mr Dayaram’s father and (2) Sheila Dayaram; and its directors were (1) Mr Dayaram’s father and (2) Pitty Kwok. 11.Two major buyers of the Group were Priya International LLC (“Priya”) and an individual named Sadrudin Sumar (“Sumar”). There is no dispute that Priya is a real company and Sumar is a real individual. 12.It appears from Days Impex and Days International’s audited financial statements that their business was substantial:
13.By 2011, Days Impex and Days International had access to credit facilities from The Hongkong and Shanghai Banking Corporation Ltd (“HSBC”), Hang Seng Bank Ltd (“HSB”) and Bank of Baroda (Hong Kong) Ltd (“BOB”) totalling at least HK$365 million plus US$11 million.
14.From March to September 2011, Days Impex and Days International made the 161 import loan Applications to HSBC, HSB, BOB, DBS Bank (Hong Kong) Ltd (“DBS”) and Citibank, N.A. (“Citi”), obtaining in aggregate US$51,974,142 in loan proceeds.
15.The 161 import loan Applications form the subject matter of the summonses, and were admitted in HCCC 2/2014. HCCC 2/2014 16.In 2014, criminal proceedings (HCCC 2/2014) were commenced against Mr Dayaram, his father and Pitty Kwok, the 1st to 3rd Defendants respectively in HCCC 2/2014. They were each charged with 9 counts of conspiracy to defraud. The charges all arose from the Applications made during the period March to September 2011. Charges 1-6 concerned import loans while charges 7-9 concerned export loans. 17.As regards charges 1-6:
18.The prosecution relied on a report prepared by Yiu Suet-wing (“Ms Yiu”) dated 4 March 2013 (“Accountant Report”) titled “Accountant Report on Days Impex Ltd and Days International Ltd”. Ms Yiu was a treasury accountant in the Forensic Accountants’ Office of the Hong Kong Police Force. The Accountant Report analysed the fund flow arising from the Applications made by Days Impex and Days International during the period March to September 2011, namely, the 156 Applications which formed the subject matter of charges 1-6 (as set out in the paragraph above), plus an additional four loan applications made to DBS and one made to Citi. The latter five applications did not form part of any charge in HCCC 2/2014. The Accountant Report did not analyse the fund flow arising from the export loan applications which formed the subject matter of charges 7-9. 19.The Accountant Report concluded that:
20.As I have already mentioned following trial, Mr Dayaram and his father were convicted by a jury of 9 counts of conspiracy to defraud (i.e. the Conviction). On 11 August 2015, Mr Dayaram and his father were each sentenced to 10 years’ imprisonment. On 19 January 2017, the Court of Appeal dismissed Mr Dayaram and his father’s appeals against the Conviction in CACC 274/2015 (19 January 2017). On 12 April 2017, the Court of Final Appeal dismissed Mr Dayaram and his father’s Applications for leave to appeal against the Court of Appeals’ judgment. 21.Before explaining Mr Dayaram’s defence and the evidence that the parties have adduced I will explain the legal principles that govern the determination of the Summonses. I start with the evidential relevance of the Conviction and then address sections 275 and 276 of the Ordinance. Evidential relevance of the Conviction 22.Section 62 of the Evidence Ordinance (Cap 8):
23.Section 62 of the Evidence Ordinance therefore shifts the legal burden of proof to the defendant to prove that he did not commit the acts constituting the criminal offence for which he has been convicted. In addition, a conviction constitutes probative evidence of some weight. The weight to be given to a conviction within civil proceedings depends on the circumstances, including the circumstances of the conviction, e.g. the extent of the evidence led at trial, the cases presented by the prosecution and the defendant, and the nature of the arguments: China Everbright — IHD Pacific Ltd v Ch’ng Poh[3]. As might be expected a defendant seeking to overcome the presumption raised by a conviction faces an uphill struggle: Hunter v Chief Constaable of the West Midlands Police[4]. 24.The Conviction is a subsisting one in that it has not been overturned on appeal: Secretary for Justice v Wong Chi Fung[5]. Accordingly, under Section 62 of the Evidence Ordinance, in these proceedings Mr Dayaram is taken to have committed the offence which formed the subject matter of the Conviction, namely, 9 counts of conspiracy to defraud. 25.A conspiracy to defraud “is constituted by becoming a party to an agreement with another or others to use dishonest means: (a) with the purpose of causing economic loss to, or putting at risk the economic interests of, another; or (b) with the realization that the use of those means may cause such loss or put such interests at risk”: Chen Keen v HKSAR[6]. 26.It is the object of the conspiracy which forms the essential ingredient of the offence upon which the co-conspirators must find consensus: Chen Keen v HKSAR[7]. However, the means agreed or used by the conspirators may be a constituent ingredient of the conspiracy, and need to be proven: Chen Keen v HKSAR[8]. As Ribeiro and Cheung PJJ explain in at [54]:
27.In HCCC 2/2014, the indictment in respect of count 1 (“Indictment”) provided as follows:
The indictments in respect of counts 2-6, which all concerned import loans, were in similar terms. 28.The Indictment alleged that some specific dishonest means had been agreed upon by the defendants, namely, sub-paragraphs (i) and (ii) stated in the indictment. The dishonest means were essential constituent elements of the conspiratorial agreement alleged, and had to be proved as part of the agreed object of the conspiracy by the prosecution beyond reasonable doubt: Chen Keen v HKSAR [9]. 29.This is reflected in the trial Judge’s summing up. After explaining to the jury the legal ingredients of conspiracy, the Judge dealt with the offence of conspiracy to defraud:
30.The jury found Mr Dayaram (and his father) guilty of all 9 counts. In relation to counts 1-6 concerning import loan applications, the jury were sure that “there existed fictitious transactions with no underlying goods”, and Mr Dayaram was a “party to the agreement and that [he] intended the agreement to be carried out and [he] acted dishonestly”. As the Judge stated at the sentencing hearing:
31.As mentioned above, the 156 import loan applications constituting charges 1-6 form part of the 161 Applications. Accordingly, argue the Liquidators, by reason of the Conviction, the presumption in these proceedings is that Mr Dayaram and his father conspired to defraud the banks, dishonestly and falsely represented to the banks that Oscoda was a genuine supplier, and submitted false invoices purporting to show that the transactions underlying the 156 import loan applications constituting charges 1-6 were genuine. The Liquidators contend, in my view correctly, that the Conviction shifts the legal burden of proof to Mr Dayaram to show that:
The components of Fraudulent Trading 32.Section 275 of the Ordinance provides:
33.To succeed in its claim for fraudulent trading under section 275 of the Ordinance, the Liquidators must show that:
See: ADS v Wheelock Marden & Co Ltd[10]; also Bouchier v Booth[11]. 34.In Re Augustus Barnett & Son Ltd[12] it is explained that liability under (the English equivalent of) section 275 of the Ordinance would involve a finding that “someone has done an act which can be described as carrying on some business of the company and that in doing so he had an intent to defraud”. The words “defraud” and “fraudulent purpose” appearing in section 275(1) connote actual dishonesty. The required intent to defraud is subjective, not objective, and accordingly it is necessary to show that there was either an intent to defraud or a reckless indifference whether the creditors were defrauded: ADS v Wheelock Marden & Co Ltd[13]; approved by the CFA in ADS v Wheelock Marden & Co Ltd[14]. As regards a party’s knowledge of the fraud it includes a party shutting their eyes to the obvious because of a conscious fear that to inquire further will confirm a suspicion that wrongdoing has occurred: Morris v Bank of India[15]; affirmed on appeal: Morris v Bank of India[16]. 35.Section 275 is directed to the fraudulent carrying on of a business, not at the execution of individual fraudulent transactions while carrying on that business. Consequently, a director who causes a bogus transaction to take place might not necessarily be liable for fraudulent trading: Re Gerald Cooper Chemicals Ltd[17]. It is possible, however, that a business may be found to have been carried out with intent to defraud creditors, notwithstanding that only one creditor is shown to have been defrauded, and by a single transaction: Morphitis v Bernasconi[18]. What is recoverable under Section 275? 36.Once liability for fraudulent trading is established, the Court has a discretion to declare that the person found liable “shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct”: section 275(1) of the Ordinance. 37.As Lord Denning MR observed in In re Cyona Distributors Ltd[19], section 332(1) of the Companies Act 1948 (being the then English equivalent of section 275(1) of the Ordinance) “is deliberately framed in wide terms so as to enable the court to bring fraudulent persons to book. […] The sum may be compensatory. Or it may be punitive. The court has full power to direct its destination.” This echoes the statement of Maugham J in In re William C. Leitch Brothers, Ltd[20] at page 79 that in his view “s275 is in the nature of a punitive provision, and that where the Court makes such a declaration in relation to “all or any of the debts or other liabilities of the company,” it is in the discretion of the Court to make an order without limiting the order to the amount of the debts of those creditors proved to have been defrauded by the acts of the director in question, though no doubt the order would in general be so limited.” The import of this is that section 275 allows the court to order payment of a sum other than the amount of the debt arising by virtue of a transaction proceed to have been fraudulent. As Reyes J recognises in [6] of his judgment in Kong Mou Holdings Ltd v Cheung Shuen Lung[21] the rationale behind the section expressly empowering the court to order a different sum is that the loss that may have been caused by the fraud may be different from the value of the transaction found to infringe section 275. 38.In Morphitis[22], however, Chadwick LJ considered in [55] that section 213 of the Insolvency Act 1986 (the successor to section 332(1) of the Companies Act 1948) does not empower the Court “to include a punitive element in the amount of any contribution which, in the exercise of the power conferred by section 213(2) of the 1986 Act, a person should be declared liable to make to the assets of the company”. This was applied in subsequent authorities: see e.g. Biscoe v Milner[23]. This view is explained by the change in the wording of the relevant section. What was originally section 275 of the 1929 Act[24] (on which our section 275 is directly based), which became section 332 of the Companies Act 1948, was replaced by section 213 of the Insolvency Act 1986, which provides in sub-section (2) that a person knowingly a party to fraudulent trading may be declared “liable to make such contributions (if any) to the company’s assets as the court thinks proper”. It is immediately apparent why Chadwick LJ considered that this change in language indicated that an amount ordered to be paid should be limited to compensation and not contain a punitive element. That is not the case in Hong Kong where the original language is retained. Although, I think that it would be unlikely a civil court would order a payment part of which is purely punitive, it seems to me that Hong Kong’s section 275 gives the court a wide power to order payment of such sum as it thinks appropriate, which could be more or less than the amount of the relevant debt. However, the court has to approach the assessment of the amount to be paid in a principled way. 39.Mr Chen referred me to the Court of First Instance and Court of Appeal decisions in Bank of Credit and Commerce International SA (No. 15) v Morris [25][26]. In [121] Patten J describes (what was common ground) the purpose of section 213 of the Insolvency Act 1986 as to enable a liquidator to recover compensation from those who have knowingly assisted the fraudulent conduct of a company’s business. Mummery LJ agreed in [108]. This explanation of the purpose of section 213 is a natural interpretation of the language used in the section itself. However, as I have already explained Hong Kong has retained the language in the earlier Acts, which were the basis of the view expressed by Lord Denning. 40.It would seem to me that it would rarely be appropriate for the court to include a punitive element in the calculation of the amount to be paid. As this case demonstrates there are other forms of legal process, which are used to punish serious cases of fraudulent trading and I would not be inclined to increase the amount of any payment to include a punitive element in the present case given that Mr Dayaram was sentenced to a period of imprisonment as a consequence of the Conviction. So what approach should the Hong Kong court adopt? 41.Plainly, there must be some nexus between the loss caused to the creditors as a result of the fraudulent trading and the sum payable by the party liable for fraudulent trading: Morphitis[27]; Palmer’s Company Law (Volume 3) at [15.599.24]; Biscoe[28]. This was common ground before me. What is contentious is whether or not the fact that most of the import loans were used to repay existing debts, thus reducing what would otherwise have been the Companies’ deficits, should be taken into account. In other words, is the starting point the change in the Companies’ deficits attributable to loans, which were received, but not used to extinguish existing debts. The Liquidators argue that this is not the correct approach. They say that it is irrelevant that a part of the loan proceeds was used to discharge pre-existing debts of the companies and Mr Chen drew my attention to the decision of Kannan Ramesh J in Tendcare Medical Group Holdings Pte Ltd v Gong Ruizhong[29] in which he says this:
42.This approach has the attraction that it is easy to quantify the amount to be paid, because one only has to total up the amount of the debts directly attributable to the fraudulent acts. Conversely if one instead asks what was the increase in a company’s liabilities as a consequence of the fraudulent trading, it must at least be arguable that regard needs to be given to the financial impact, other than just any change in a company’s assets directly attributable to the receipt and use of the money received or used as a consequence of the fraudulent act. It may be that a company’s deficit increased or decreased and was different from the amount that it might otherwise have been as a consequence of its insolvency. 43.The English cases also approach the assessment of the amount to be paid by reference to the value of the fraudulent transactions. For example, in Morphitis[30] Chadwick LJ says this in [53]:
44.Similarly, Patten J in Morris[31] at [121] states that “the defendant is liable to contribute to the losses to creditors which would have been avoid but for the transactions.” This is also consistent with the assessment of the amount to be paid being by reference to increase in the debt or liabilities directly attributable to the fraud rather than an increase in the loss to the company caused by the fraudulent trading more generally. 45.In my view, the correct approach is to assess the amount by reference to the amount of the debts directly attributable to the fraud unless a substantive reason is advanced for doing otherwise, and, generally, it will be for the fraudster to do so. This is justified not only be the reasoning of Kannan Ramesh J, but also as a consequence of the financial impact on a company of quantifying the amount as I have described. First, it seems to me that the alternative to the approach I have described must be an assessment of the financial loss caused to the insolvent company because of the fraudulent trading. This involves a potentially complicated assessment of what the deficit would have been, but for the fraudulent trading. The reason that I say this will be complicated, is because the impact may extend beyond the direct changes in a company’s asset position and extend, for example, to the consequence of the company being able to continue trading longer than would otherwise have been the case. If the legislature had this type of assessment in mind I would have expected the legislation to have used language other than “debts and liabilities”. It would have spoken in terms of loss to the company or deficits; language congruent with such an assessment. Secondly, assuming that the amount paid results in more becoming available for distribution to creditors than would be the case if credit is given for the use of the debts incurred by the fraudulent trading (e.g. the settlement of an existing debt) it seem to that this is a beneficial result as creditor receives a greater repayment than he would otherwise do. This is consistent with the general purpose of the insolvency regime and section 275 in particular. Even if as a consequence of the payment a company becomes solvent this still has the beneficial consequence of providing a return to the company’s shareholders. 46.In my view, unless good reason is demonstrated for doing otherwise the amount is to be calculated by reference to the amount of the debts incurred attributable to the fraudulent trading (in this case the proceeds of the Applications) less any of those debts that were repaid. In the present case 12 of the import loans were repaid. 47.In his Written Closing Submissions Mr Chen stated that the Liquidators were content to limit the claims against Mr Dayaram to the amounts set out in their letter to the court dated 18 May 2018, namely:
with interest from the date of the respective winding up orders. The following table sets out the changes in the amounts from the amounts sought in the summonses.
48.The changes in the sums claimed are attributable to the exclusion of the 12 import loans that were repaid and reducing the amount of the sums owed to each of the four banks by taking into account security that has been realised (in the case of HSBC and Heng Seng) and off-sets. The above figures thus represent the net amount claimed by the banks after credit is given for the settling of the debts due to them by the methods I have referred to. The precise details do not matter. That having been said the Liquidators invited me to ignore what they describe as concessions when conducting the legal analysis. By this I understand them to mean that although the amounts of the claims submitted by the banks have been reduced, the security and set-offs, which the banks have used to reduce their claims would have been available to the Companies if the Applications had never been made. This I understand, but the fact is that in [43] of the letter the Liquidators state quite clearly that they will apply to amend the Summonses to replace the claims that I referred to at the outset of this judgment with the figures I have just referred to for the reasons I have explained. One of Mr Dayaram’s complaints (which seems to me to be justified) was that having written to him and the court stating this the Liquidators did not amend the summonses and appeared at the outset of the trial to be intending to claim the full amount of the Applications. My legal analysis in relation to quantum has been directed to the principles, which govern the assessment of the amount to be awarded. This will normally be the amount of the debts incurred as a consequence of the fraud. Mr Dayaram had contended that credit should be given for any debts settled by realisation of security or some other method out of the assets available to the creditors, such as set-offs. This the Liquidators agreed in writing in May 2018. I will proceed to determine the amount to be paid on that basis. I will not give credit for the repayment of previous import loans, export loans (approximately, US$38.7 million) and money received pursuant to the Applications and retained by the Companies for the reasons I have explained earlier. I accept that the amount of the interest and bank charges (US$178,447.91) should be included. Section 276 of the Ordinance 49.The Summonses include a claim under section 276, but the claim pursued in Closing is limited to section 275. This seems to me correct. A claim under section 276 adds nothing given the facts and has invited controversy because Mr Dayaram was not a de iure director of either of the Companies and the Summonses did not particularise the grounds on which it was alleged he had a relevant duty to the Companies and how it had been breached. Given my findings in respect of the claim under section 275 it seems to me that no purpose is served by considering the claim under section 276 further. 50.I now turn to deal with the factual issues. Business Carried on with Intent to Defraud Creditors 51.The Group engaged in the import and export business, which had evolved over time commonly to include financing for a short period the purchase cost for buyers such as Priya and Sumar. How this operated is explained in [89]–[92] in which I quote from Mr Dayaram’s evidence in cross-examination during which he explained it. Applying for and obtaining bank loans was, therefore, one of the most significant aspects of the Group’s business. 52.The Conviction follows from the jury concluding that insofar as the import and export loan applications forming the subject matter of HCCC 2/2014 were concerned, Days Impex and Days International falsely represented to the relevant banks that Oscoda was a genuine supplier, and/or submitted false invoices which purported to show that there were genuine underlying sale and purchase transactions with Oscoda, thereby inducing the banks to make available to them over US$58 million in loan proceeds[33]. 53.The absence of any genuine transactions is further supported by the analysis of the fund flow arising from the Applications, which shows that the funds paid to Oscoda (the purported seller) were immediately channelled back to the Days Group, most of which were used to repay existing loan obligations.
54.The immediate channelling of funds back to the Group to repay previous loans reflects a circular fund flow. Mr Chen in his Opening gives by way of example loan serial no. 6, which is analysed in the Accountant Report, which shows:
55.The Liquidators have also carried out their own analysis of the fund flow. If the underlying transactions were genuine, the Liquidators say Oscoda being the supplier (seller) of goods would have used the funds paid to it from the import loans drawn by Days Impex and Days International for its own purposes. Oscoda would not immediately channel the funds back to the Group to enable the Group to repay existing loans. 56.Having regard to the Conviction and the circular fund flow, the Liquidators contend that it is plain that the transactions underlying the Applications were fictitious and Oscoda was not a genuine supplier. The business of Days Impex and Days International was carried on with intent to, and did indeed, defraud creditors. It was also carried on for a fraudulent purpose, namely, to prolong the lives of the Companies by falsely representing to the banks that they remained engaged in substantial business, which has been described as a “conventional” case of fraudulent trading: Carman v The Cronos Group SA[40]. Mahesh Dayaram was Knowingly Party 57.The Liquidators further argue that the Conviction shows that Mr Dayaram (1) was a party to the conspiratorial agreement (with his father) to defraud, (2) intended the agreement to be carried out, and (3) acted dishonestly. As the trial Judge said at the sentencing hearing in HCCC 2/2014:
58.Apart from the Conviction, the Liquidators point to the following matters as showing that Mr Dayaram was knowingly party to the fraud. 59.First, Mr Dayaram and/or the Group controlled Oscoda, or at least knowingly acted in concert with Oscoda in perpetrating the fraud.
60.Second, Mr Dayaram knew that the Applications were being made to the banks.
61.Third, Mr Dayaram knew about, and procured, the circular fund flow.
Days Impex and Days International were Insolvent 62.The Liquidators contend that the following matters demonstrate that each of Days Impex and Days International was insolvent by March 2011 when the first Application was made. Plainly, the Companies were insolvent at the time they were wound up and it seems to me that nothing of substance turns on when they probably became insolvent; a question, which in the case of a substantial business is often difficult to identify with precision. For the sake of completeness I will identify the matters relied on as demonstrating that the Companies were probably insolvent when the first of the Applications was made. 63.First, as of 31 March 2011 Days Impex and Days International’s net asset deficiencies were US$39,124,287 and US$11,040,191 respectively. 64.Second, as of 14 September 2011 (date of the presentation of the winding up petitions against the companies), Days Impex and Days International had total liabilities of HK$333,509,711 and HK$215,361,793 respectively.
65.Third, the Companies were wound up on 12 December 2011. The principal basis upon which the companies resisted the winding-up orders was that Mr Dayaram’s father “wants to continue to try and negotiate with the principal banking creditors some form of restructuring to avoid a winding-up”: Re Days Impex Ltd[41]. The restructuring proposals had been rejected by the bank creditors. The Companies evidently could not pay their debts as they fell due. 66.The Liquidators say that the Companies were propped up from March 2011, by the loan funds generated from the Applications and that the only sensible inference is that this is why the Applications were made. I agree. Payments in Breach of Pari Passu Distribution not in Best Interests of Company 67.The Liquidators contend that between March to September 2011, Days Impex and Days International made various repayments to the banks from the loans obtained as a result of the Applications and that this infringed the pari passu principle. However, this does not seem to me an issue that I need to consider given my decision in respect of the section 275 claim. The Defence 68.The Liquidators’ case is relatively easy to follow. At the various interlocutory hearings before me at which Mr Dayaram acted for himself I understood him to suggest that he was looking for evidence, which he believed would demonstrate that the import loans were made in respect of genuine transactions. Such evidence was never forthcoming. At trial Mr Dayaram was represented by Mr Toby Brown. Mr Brown raised a number of preliminary matters, which I deal with in the next section of this Judgment. 69.So far as the substance of the claims are concerned Mr Brown took the following points: First, the loans included in the Annex to the Days Impex Summons dated 9 March 2017 included four loans made by DBS and a loan by Citibank that were not included in the charges in HCCC 2/2104 and, consequently, section 62 of the Evidence Ordinance did not apply. This is correct, but in practice nothing turns on it. Given my finding of the relevance of the Conviction in respect of the remaining 156 Applications and my findings of fact on the fraudulent nature of the Applications and Mr Dayaram knowledge of them, nothing turns on this. If Mr Dayaram knew that the 156 Applications were bogus the suggestion that he did not know that the remaining 5 were also bogus is, in the context of a civil trial with the lower standard of proof, unsustainable. 70.Secondly, he emphasised the disciplined and cautious approach to be taken to the assessment of evidence in civil fraud cases. Mr Brown referred me to the judgment of Lam J (as he then was) in Wing Fai Construction Co Ltd[42] at[241]:
71.Thirdly, Rule 58 of the Companies (Winding-up) Rules, Cap. 32H required the grounds of the application to be stated in the summons and this has not been done. I address this argument in relation to the Liquidators’ applications to amend the Summonses. 72.Fourthly, that the Companies received a benefit from receipt of the import loans and this should be taken into account in quantifying any loss caused to the Companies and/or any compensation that should be paid by Mr Dayaram if he is found liable under either of the two heads of claim pursued by the Liquidators. I have already addressed this issue. 73.Fifthly, the Liquidators had not given credit, as they had agreed to, for by the repayment or application of security. As I have already explained this the Liquidators agreed to do during the trial. 74.Sixthly, that section 276 does not apply to shadow directors, which is the basis upon which the claim has been brought against Mr Dayaram and the Liquidators should not be allowed to reconstitute their case to purse him on the basis that he was a de facto director. Seventhly, Mr Dayaram denies that he was a de facto director. His position is that such tasks as he performed were part of his general finance role within the Group. Eighthly, if Mr Dayaram owed any relevant duties he did not breach them. Payments were made to banks to whom genuine debts were owed. Given my decision that the section 276 claim adds nothing, these issues fall away. 75.Ninthly, Mr Dayaram has all along disputed that the Lenovo Laptop the Liquidators say were used to produce the Oscoda printouts was his. The Liquidators say they have lost all the images from the Laptop including the image of the laptop. Mr Dayaram objects to reliance on the Laptop given the Liquidators’ failure to produce the documents he had sought in order to challenge the Liquidators’ case that he had produced the printouts taken from his Laptop. 76.Finally, Mr Dayaram says that the transactions underlying the import loans were genuine. Oscoda was a genuine company and had, for example, purchased Hyundai products, which were sold in the Brazilian market. 77.As is clear from this summary Mr Dayaram, whilst saying he believes the transactions to which the import loans were said (to the banks) to relate, were genuine, he has, as I have already observed, not adduced any substantive evidence to support this argument. It is difficult to believe that if the transactions had been genuine he would not have by the time this matter came on for trial have been able to find some documentary evidence or a witness, which demonstrated that at least some of the 161 transactions were genuine. Even assuming that at the criminal trial for some reason the need to do so had not been fully appreciated, it was clear from his affirmations and what Mr Dayaram told me at a number of the interlocutory hearings that he was fully cognisant of the need to do so if he was to satisfy me that the transactions were genuine. 78.It seems to me quite clear based on the evidence adduced by the Liquidators that the transactions were not genuine. The only remaining issue is his knowledge that the Applications were bogus. Before addressing that issue I will address the preliminary applications to which I have referred. The Preliminary Issue application and Amendments Summonses 79.As I have mentioned, Mr Dayaram issued on 22 February 2024 (the 2nd day of the trial) summonses seeking the determination of preliminary issues. It is uncontroversial that the court should only strike out a claim if it is clear and obvious that it will fail. Unsurprisingly, it is unusual for the court to entertain an application to strike out made during a trial[43]. In the present case, the delay is particularly remarkable, because the claim is a direct consequence of a successful prosecution that took place over 10 years ago and this application was commenced seven years ago. Plainly, Mr Dayaram understood the claim that was being advanced. Although, for most of the period up to trial he was unrepresented, he had legal representation between 12 December 2022 and 13 July 2023, including Mr Brown. The flaws in the Applications said to justify striking them out are not narrow highly technical points, they are broad and easy to understand. In short what is said is that the summonses:
80.The substantive parts of the Applications, including the proposed amendments, are in the following terms:
81.Rule 58 provides that applications under sections 275 and 276 of the Ordinance shall be made by summons in which it “shall be stated the nature of the declaration or order for which application is made, and the grounds of the application.” The summonses tell the reader what is sought: first, a declaration that Mr Dayaram was knowingly a party to the carrying on by the Companies of their businesses with intent to defraud creditors by procuring the Companies to apply for the import loans identified in the annex to the summonses; secondly, a declaration of misfeasance and/or breach of duty and/or breach of trust in respect of the Companies said to arise by procuring the Companies to apply for the import loans (which are identified in the attached schedule); and, thirdly, an order for the repayment of the sum identified and particularised in the annex. What, if anything, is missing? First, so argued Mr Brown, facts said to demonstrate why the applications for the import loans were fraudulent. It is correct that it is not stated that the Applications were knowingly not made for the purpose for which the banks were told that they were made. However, in the circumstances of this case to suggest that consequently Mr Dayaram did not know the case he had to meet is entirely artificial. Of course he knew, as was demonstrated by his conduct of the summonses, the submissions he made at interlocutory hearings and the failure of his legal team to suggest otherwise during the seven months in which he was legally represented. The omission is in the circumstances technical. Secondly, that paragraph 3, and I put this very briefly, does not demonstrate a breach causing harm to the Companies as the import loans were used to repay genuine debts to the lenders of the import loans. Mr Brown points that the Liquidators have sought to introduce for the first time in their Written Opening a claim that the Companies were insolvent at the time the import loans were used to repay the banks, and they infringed the pari passu principle because they benefit some creditors more than other categories of creditors, such as trade creditors and employees. 82.I will dismiss paragraph 3 of the preliminary issues summonses. I take the view that the complaint that Rule 58 had not been complied with did not justify dismissal of the relevant summonses and the complaint in respect of the claim that the banks had been preferred was more appropriately addressed within the trial. 83.I did not give leave to amend the Summonses. In the case of the proposed amendments to paragraph 1 it seems to me that they were not necessary as the trial had commenced. In respect of paragraph 2, in my view the proposed amendments were made too late. Either paragraph 2 was properly understood as advancing a claim that the banks had been preferred or it did not. As I have explained in my view the claim and thus the objection are academic. Witnesses 84.The Liquidators’ called three witnesses: Fok Hei Yu, Foreky Wong and Wan Wai Yuen . Mr Brown objected to Mr Wan giving evidence on the grounds that although he had filed an affirmation in the proceedings in opposition to Mr Dayaram’s 3rd discovery affirmation there was no indication prior to the Liquidators’ Written Opening being served that they intended to call him as a witness. As the Liquidators only wished to call him as they wanted to rely on his affirmation and my directions required the deponents to affirmations they wished to rely on to be available for cross-examination, I allowed the Liquidators to adduce his evidence at the trial and Mr Brown cross-examined him. Only Mr Dayaram gave evidence on his own behalf. Were the Transactions genuine? 85.Plainly the Conviction evidences that the import loans were not obtained to finance genuine commercial transactions. The Accountant Report demonstrates that the import loans were paid to Oscoda, who in turn paid the remittance agent, Wall Street, which transferred the money back to the Companies. The Liquidators have undertaken the same exercise and reached the same conclusion. This is consistent with (a) the import loans not having been sought and used to finance genuine commercial transactions, (b) the representations that were made to the banks in order to obtain the import loans being false, (c) and this being known to those aware that the loans were circulated in the way I have described and largely used to settle existing loans from the banks. 86.The fund flows analysed in the Accountant Report and the Liquidators evidence are the principal component of the Liquidators’ case against Mr Dayaram. The analysis points compellingly that to the conclusion that the import loans were not sought in respect of genuine transactions. To undermine this conclusion, it is necessary to show either that the fund flow analysis is wrong or that the payments from Oscoda to Wall Street and then to the Companies were made to settle a genuine debt owed to the Companies by Oscoda or a third party for whom Oscoda was making the payments. There is no attempt in Mr Brown’s closing to undermine the fund flow analysis. It was Mr Dayaram’s evidence that he did not know Oscoda remitted funds to Wall Street until he was shown the records in the criminal trial. He has not advanced any reason at this trial for Oscoda doing so. Mr Dayaram has sought to challenge the Liquidators’ case that the 161 Applications were not genuine by explaining the Companies’ business model. He has produced only one set of documents dealing with one transaction to illustrate what he says was taking place. This consisted of (using Mr Brown’s description in his oral opening) a page that looks like a cover page to a “jacket”, which contained documents relevant to a particular transaction, a sales confirmation note, a Days Impex purchase contract, an Oscoda invoice, a Days Impex invoice and a back sheet. These show Days Impex purchasing on 14 March 2011 DVD players from Oscoda for US121,240 on FOB terms and selling them on the same date to Tiger Import in Paraguay for US$127,302 payment due within 120 days. There are no receipts or records of money transfers and no shipping advice, bills of lading or evidence of emails or letters passing between the parties. I also note that the documents do not identify the make of the DVD players. Mr Dayaram was unable to answer detailed questions about the transaction because it was his evidence that he did not deal with sales or transportation. 87.Mr Brown summarises Mr Dayaram’s explanation for the absence of documents consistent with the loans being for genuine sales by the Companies to Oscoda in one short paragraph in his Written Closing Submissions:
88.Mr Brown was correct in his observation in closing that the business model Mr Dayaram described “is not easy to understand to those unfamiliar” with it. In my view this is clearly because it was not what was occurring during the relevant period. 89.Mr Dayaram explained what he said was taking place in cross-examination. The Companies business model had evolved since his Grandfather established it, and now primarily involved the Companies’ customers sourcing good themselves and the Companies providing trade finance to bridge the difference in terms between those offered by suppliers and required by customers (e.g. a supplier, such as Oscoda, wanting to be paid within 30 days and the customer wanting 90 days credit). The 161 transactions that are the subject matter of the Applications fall into this category. Mr Dayaram explained how the model worked in cross-examination as follows:
90.I note that it was Mr Dayaram’s evidence that the purchase contract with the supplier (he gives Oscoda as an example) is an internal document, which Oscoda is not asked to sign. This begs the question: what contracts were the Companies making? Mr Dayaram’s answer was this:
91.If this is correct the Companies were not buying the goods from Oscoda. It was Mr Dayaram’s evidence that the bill of lading would probably rarely pass through the Companies hands:
92.In these situations, as I understood Mr Dayaram’s evidence, it would be Oscoda who, probably by email, told the Companies that goods had been shipped in order that the Companies could invoice their customers (such as Priya) and start the credit period running. The relevance of this evidence was that it is said to explain why the Companies did not have the type of documents, including bills of lading, that one would expect them to have if they were genuinely purchasing goods as a principle in respect of which import loans were sought. Another category of documents that one would have expected to see is receipts issued for payment made by customers such as Priya. There are none. Mr Dayaram’s explanation was that the statement with the client would record payment and that separate receipts were not issued. 93.The next issue that Mr Dayaram was required to address in cross-examination was the funds flow. I did not understand Mr Dayaram to be disputing the funds flow. The gist of his evidence was that he did not know that Oscoda remitted the funds to Wall Street until he was shown the records at the criminal trial. The Liquidators’ case is that this is untrue as demonstrated by the information on the Lenovo Laptop, a subject I return to later. 94.Even if Mr Dayaram’s explanation of what had historically commonly been the Companies business model is correct it does not explain the fund flow and undermine the obvious conclusion to be drawn from it, namely, that the 161 transactions were not genuine. 95.Mr Dayaram suggests that the transactions are likely to have been genuine because there is evidence that there was Hyundai stock purchased through the Companies in Brazil at about the relevant time. However, none of the Oscoda invoices record any of the 161 transactions being in respect of Hyundai products. This is in contrast to other suppliers (12 in number) whose invoices identify, as one would expect, the manufacturer. It seems to me that Mr Dayaram’s evidence falls far short of demonstrating reason to think that some, let alone all, of the 161 transactions were in respect of Hyundai products that were shipped and ended up in Brazil. 96.The Liquidators also point out that none of the buyers paid for any of the 161 purchases. Twelve import loans were settled before the Companies went into liquidation, but none were settled by the buyers. They were settled by using the Companies fixed deposits under lien with the Bank of Baroda or out of the Companies’ funds. 97.Plainly the matters to which I have referred do not explain the fund flow. It seems to me quite clear, and I find, that the 161 transactions were not genuine and that the Applications for the associated import loans were fraudulent and obtained to defraud the Companies creditors in particular the banks from which they were obtained. Carrying on business with intent to defraud creditors 98.As I have explained in [32] to [35] Section 275 is engaged where it is demonstrated that a company’s business has been carried out with the intention to defraud creditors. Carrying on business is broadly defined and encompasses one transaction provided it can properly be described as a fraud on a creditor perpetrated while carrying on business. As Mr Dayaram explained in his evidence the Companies business model had evolved to include financing. He described this part of the business succinctly in cross-examination: “So the customer will say, ‘Okay, I am choosing the supplier and I need you to finance a transaction which means when the goods are ready you pay for it and then you ship it’”. I do not understand there to be any dispute about this or that the 161 transactions come within the part of the business activity which Mr Dayaram was describing. In my view, and I so find, the Companies were clearly “carrying on business” in the sense required for section 275 to be engaged. Mr Dayaram’s knowledge of the fraud 99.In order to make the orders sought against Mr Dayaram pursuant to section 275 of the Ordinance it is not sufficient that I am satisfied that the import loans were obtained fraudulently. I need to be satisfied that Mr Dayaram was knowingly a party to the Companies carrying on their businesses in the fraudulent manner that I have found to have taken place. I have explained what has to be demonstrated in [34]. 100.Mr Dayaram says that he believes the 161 transactions were genuine (which I have not accepted) and that he certainly was not aware at the time that the import loans were not for genuine transactions. The Liquidators say that he clearly must have known what was taking place and that he was orchestrating the circular fund flow, which was an integral part of the fraud. His own evidence was that he was the head of the Accounts and Finance Department, and responsible for “the monitoring of the financials of the [Days Group, and] decided on the accounting / financial systems, including managing daily cash flow, actual financials and banking relationships” [44]. He decided which credit line to utilise, which credit line to repay, and the order of repayments[45]. Thus, when the Group received an invoice for payment, Mr Dayaram would “advise the caller [from the shipping department] which bank to place the import loan in” [46]. The 161 Applications must have been made under his instructions, or at least with his prior knowledge[47]. After the funds were remitted to Wall Street, the Group gave fax instructions to Wall Street to direct their onward transfers. Despite his attempts to distance himself from these fax instructions[48], it is clear that Mr Dayaram, taking into account the banks’ requests and the utilisation of each credit line, decided on the order of repayment. 101.It would seem plain that Mr Dayaram not only knew that monies were being received from Wall Street, but was frequently giving instructions as to which accounts Wall Street should remit the monies and what liability the payment was to settle. He must have been aware that Wall Street was making payments it had received from Oscoda and that his evidence that he did not is a lie. It seems to me that the only sensible inference that can be drawn is that he at least knew that payments were being made by Oscoda to Wall Street and hence understood that they were not made in respect of genuine transactions or, more likely, he was orchestrating the fraudulent scheme to keep the Companies afloat[49]. I reach this conclusion without relying on the Liquidators’ evidence in relation to the Laptop, which I have referred to in [59]. Disposition 102.I will make the following orders on a nisi basis, as I would like further submissions on how the interest and bank charges of US$178,447.91 (referred to in [48]) should be allocated in paragraph 2 of the order set out below and on interest. The Parties are to serve written submissions addressing these matters by 5pm on 6 December 2024 in paper and digital forms. Order in HCCW 298 of 2011 103.The following orders:
Order in HCCW 299 of 2011 104.The following orders:
Mr David Chen, instructed by Stephenson Harwood, for the liquidators (for both actions) Mr Toby Brown, instructed by K B Chau & Co, for Mr Mahesh Nanik Dayaram (for both actions) [1] Dated 14 February 2024, the Liquidators’ Opening Submissions were served on 31 January 2024. [2] The Conviction covered 156 out of the 161 Applications. [3] [1999] 2 HKLRD 555 at 560C-G per Yuen J (as she then was). [4] [1982] AC 529 at 544 per Lord Diplock. [5] [2018] HKCA 670 at [9(1)] per Poon JA. [6] (2019) 22 HKCFAR 248 at [40] per Ribeiro and Cheung PJJ. [7] Supra at [45]. [8] Supra at [52]. [9] Supra at [54]. [10] [1989] 2 HKC 273 at 278E per Jones J. [11] [2023] EWHC 3195 (Ch) at [23] per Deputy Judge Charles Morrison. [12] [1986] BCLC 170, Hoffman J (as he then was). [13] [1998] 3 HKC 153 (CA) at 168B per Godfrey and Liu JJA. [14] (2000) 3 HKCFAR 70. [15] [2004] 2 BCLC 279 at 297g per Patten J. [16] [2005] 2 BCLC 328 (CA). [17] [1978] Ch 262 at 267 per Templemen J. [18] In re Cooper Chemicals Ltd [1978] 1 Ch 264; approved in Morphitis v Bernasconi [2003] Ch 552, (CA) [46]. [19] [1967] 1 Ch 889 at 902B. [20] [1932] 2 Ch 71, [1933] 1 Ch 261. [21] (Unrep., HCCW 391/1999, 15 April 2004) at [6] per Reyes J. [22] Supra. [23] [2022] 1 BCLC 368 at 408 ([235]) per Meade J. [24] Before that section 75 of the Companies Act 1928 [25] (CA) (supra) at 356a, g per Mummery LJ. [26] Supra at 351e per Patten J. [27] Supra at 578 ([53]). [28] Supra at [235]. [29] [2021] SGHC 80 at [140]. [30] Supra [31] Supra. [32] These are the sums claimed in the Summonses. [33] The US$58 million takes into account the export loans which constituted charges 7-9. These export loans were not analysed in the Accountant Report, and do not form part of the claims in these proceedings. [34] Accountant Report [36]. [35] Accountant Report [36.1]. [36] Accountant Report [38]. [37] Accountant Report [55]. [38] Accountant Report [50]. [39] Accountant Report [37.4]. [40] [2006] BCC 451 at 457H per Evans-Lombe J. [41] (Unrep., HCCW 298/2011, 12 December 2011). [42] [2018] 1 HKC 472. [43] Tang Wai Cho v Tang Wai Leung [2011] 1 HKLRD 1, [8]. [44] 17th Affirmation of Mahesh Dayaram [13]. [45] Transcript Day 8 (4 March 2024) p.64 lines 1-8. [46] Examination-in-chief of Mr Mahesh Dayaram in criminal proceedings lines G-O. [47] Transcript Day 8 (4 March 2024) p.93 lines 14-16. [48] Transcript Day 8 (4 March 2024) pp.108-111. [49] I reach this conclusion without relying on the Liquidators’ evidence in relation to the Laptop I have referred to in [59]. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCCW 298/2011