Joint and Several Liquidators of Hong Tak (Lin Fat) Home for The Aged Company Ltd (in Compulsory Liquidation) v. Lee Tao Ying and Another

HCCW 380/2020

[2025] HKCFI 2855

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 380 OF 2020

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J U D G M E N T

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A.  THE APPLICATION

1.The joint and several liquidators (“the Liquidators”)[1] of Hong Kong (Lin Fat) Home for the Aged Company Limited (“the Company”) bring this application under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).

2.In the crosshairs as Respondents are the Company’s two former directors, who were also the Company’s sole shareholders.  The 2^nd Respondent (“Ms Kwok”) is the daughter of the 1^st Respondent (“Madam Lee”).

3.Central to the application is the ‘creditor duty’ addressed in local and overseas authorities on the fiduciary duties of directors of insolvent or near insolvent companies, perhaps most extensively in the United Kingdom Supreme Court’s judgment in BTI 2014 LLC v Sequana SA and Ors [2022] UKSC 25.

4.The Liquidators’ case targets the Respondents’ alleged misconduct as the Company’s directors in resolving to declare dividends to themselves as shareholders (“the Dividend Resolution”) in the form of an interim dividend of HK$23,300 per share totalling HK$2,330,000 when the Company was insolvent (“the Impugned Dividends”). The Liquidators’ main contention is that the Respondents’ conduct breached the ‘creditor duty’.

5.The Liquidators seek the following relief:[2]

(1)  A declaration that the 1^st and 2^nd Respondents are guilty of misfeasance and breach of duty and/or breach of trust in relation to the Company in misapplying the Company’s property by way of the Impugned Dividends, (a) in circumstances where the Company was then insolvent and/or close to insolvency, failing to take into account the interests of the creditors; (b) and/or when the Company was out of capital; and/or (c) in breach of section 297 of the Companies Ordinance (Cap 622) and/or the Memorandum and Articles of Association of the Company.

(2)  An order that the 1^st and 2^nd Respondents do pay and/or restore to the Company HK$2,330,000 or such amount as the Court deems fit.

(3)  Compound or alternatively simple interest at the rate deemed fit by the Court.

(4)  An order that the 1^st and 2^nd Respondents do pay the Applicant the costs of the application.

B.  THE BACKGROUND

6.The following matters are undisputed between the parties or otherwise plain from the evidence, and I find them as facts in the case.   

7.The Company was incorporated in 2007 and engaged in the business of nursing homes and long-term care services for the elderly. The Respondents were at all material times the Company’s only directors and shareholders.

8.On 13 September 2018, Champion Motion Investment Limited (“Champion Motion”) brought a claim under DCCJ 4109 of 2018 (“the DCCJ Proceedings”) for inter alia rent arrears in the amount of HK$205,000 and damages against both the Company and the Respondents, though the latter were later removed as defendants following an amendment to the writ.

9.In the absence of any notice of intention to defend, Final and Interlocutory Judgment in the DCCJ Proceedings was entered against the Company on 16 April 2019 in the amount of HK$218,552.39 with further damages to be assessed and interest.

10.Due to the Company’s failure to settle the judgment debt in the DCCJ Proceedings, Champion Motion filed a petition to wind up the Company on 12 November 2020.  The winding up order was made on 10 February 2021.  The Liquidators were appointed on 11 January 2022.  

C.  PRINCIPLES ON DECLARATIONS OF DIVIDENDS WHILE INSOLVENT

11.The Liquidators contend that a company’s directors cannot properly declare dividends when the company is balance sheet or cash flow insolvent without having regard to the interests of the company’s creditors as a whole, and that doing so is a breach of the directors’ fiduciary duties. The Respondents do not dispute this.

12.In my view, the Liquidators’ position accords with the law in Hong Kong. In what follows, I will outline some key features of what has been typically referred to in the relevant caselaw as ‘the creditor duty’ or ‘the creditors’ interests duty’.  

C1.  Duty to consider creditor interests

13.It being undisputed that the Dividend Resolution was passed when the Company was insolvent,[3] I need not focus here on the more difficult, less settled position as to companies whose solvency is merely doubtful or at significant risk. As seen below, there remains some uncertainty in both English and Hong Kong law on the precise threshold for triggering any fiduciary duty of directors to consider the interests of creditors, short of actual insolvency. It is unsurprising that the precise boundaries await further mapping. As David Richards LJ (as he then was) noted in BTI 2014 LLC v Sequana SA [2019] 2 All ER 784 at §201,[4] the adoption of any legal test for triggering the “creditors’ interests duty” involves “a difficult amalgam of principle, policy, precedent and pragmatism”.

14.For already insolvent companies, Hong Kong law clearly recognises that directors have a fiduciary duty to consider the interests of creditors when making decisions that may affect the company’s financial position, at least where they know or ought to know the company is insolvent: see for instance Moulin Global Eyecare Holdings Ltd (in Liquidation) (Formerly Known As Moulin International Holdings Ltd) v Olivia Lee Sin Mei (2014) 17 HKCFAR 466 at §§40-57; Cyberworks Audio Video Technology Limited (In Compulsory Liquidation) v Mei Ah (HK) Company Limited [2020] HKCFI 398 at §§66-68; and Alltogether Land Co Ltd v China Create Capital Ltd and Another [2022] HKCFI 2726 at §33 (Linda Chan J).

15.The Hong Kong position on cases of actual insolvency largely aligns with the law addressed by the UK Supreme Court in BTI 2014 LLC v Sequana SA and Ors [2022] UKSC 25. The dispute there raised a range of issues “of considerable importance for company law”, and in particular whether for a company that is insolvent or “at some earlier point in the decline of its fortunes” the duty to act in the company’s interests should “be understood as a duty to act in the interests of the company’s creditors as a whole, or as a duty to take the creditors’ interests into account together with those of the members” (§1). The appeal was the first occasion on which such issues had reached the country’s highest court (§7).

16.All the members of the UK Supreme Court in BTI agreed that a duty on the part of directors to have regard to creditor interests did not arise on the facts of the case, where (amongst other features identified at §9) “the company was neither insolvent nor on the verge of insolvency at the time of the payment”, such that the appeal should be dismissed. The Court nonetheless proceeded to address a number of legal questions of general importance.

17.On what Lord Reed PSC identified as “the most fundamental” of such questions(§76), the Court affirmed that, for the purpose of the directors’ duty to act in good faith in the company’s interests, the relevant interests include in certain situations those of the company’s creditors as a whole. As emphasised at §11 of Lord Reed’s judgment, while such a duty is often referred to as a “creditor duty”, it remains a fiduciary duty owed to the company rather than one directly owed to creditors.[5] Where the duty applies, the scope of the interests to be considered “is extended so as to encompass the interests of the general body of creditors as well as the interests of the general body of shareholders” (§51, §77).

18.Lord Reed identified the rationale of the creditor duty at §48 of his judgment: in an insolvency scenario, “the company’s creditors as a whole become persons with a distinct interest…in its affairs, as they are dependent on its residual assets, or on the possibility of a turnaround in its fortune, for repayment”, in contrast to ordinary circumstances where “it is the shareholders whose interests are affected by fluctuations in [the company’s] profits and reserves, as they are the persons entitled to share in its distributions and its surplus assets” (§47).

19.In the judgment of Lord Briggs JSC (Lord Kitchin JSC concurring),[6] the “true principle” underpinning the creditor duty is that,

“creditors (or at least unsecured creditors) are not the main stakeholders in the company at any earlier date than when it goes into insolvent liquidation, at which point they acquire statutory priority in an entitlement to share pari passu in any distributions which that process may generate. It is that prospective entitlement which entitles them to have their interests considered, although not necessarily given paramountcy, when the onset of insolvency makes that prospect both much more likely and one which may be beyond the ability of the company to control, in the sense that insolvency immediately” (§192)

20.As the above passage reflects, there may be a range of circumstances prior to any insolvent liquidation of a company where the creditor duty arises. As to when the duty may arise short of actual insolvency, the Supreme Court recognised that this is more difficult to pinpoint. Lord Reed and Lord Hodge referred to the formulation “bordering on insolvency” with no evident discomfort (§48, §88, §94, §107). For his part, Lord Briggs specifically rejected a ‘real risk’ threshold, concluding (for reasons identified at §§191-198 of his judgment) that “a real risk of insolvency is not a sufficient trigger for the engagement of the creditor duty” (§199). Lord Briggs went on to emphasise at §199 of his judgment that:

“It is not necessary for this court therefore to decide whether any other trigger earlier than insolvency itself would be sufficient, any more that it was for the Court of Appeal…In my view any trigger earlier than actual insolvency needs clear justification”.

21.As noted, since (as further addressed below) the Company was actually insolvent at the time of the Dividend Resolution, it is likewise unnecessary in this case to determine the proper parameters and formulation(s) of the creditor duty outside actual insolvency, be they in terms of ‘bordering’, ‘probable’ or ‘imminent’ insolvency (these being possibilities referenced by the Supreme Court in BTI),[7] or of ‘doubtful solvency’ (see for example Alltogether (above) at §33 and Cyberworks (above) at §66, §69, §70).

22.As to what ‘insolvency’ itself means in this context, Lord Reed stated the following at §88 of his judgment:

“although the court heard no submissions on the point, I am inclined to think that the term can conveniently and aptly be understood in this context in accordance with the tests laid down in section 123(I)(e) and (2) of the [Insolvency Act 1986], ie cash flow or commercial insolvency, or balance sheet insolvency”.

23.Lord Reed’s view on the meaning of insolvency in this context aligns with the Hong Kong position as seen in Cyberworks (above) at §68, referring to the judgment of the English Court of Appeal in BTI; see also the discussion of the applicable cash flow and balance sheet tests and how those tests relate in Wing Hong Construction (In Compulsory Liquidation) v Hui Chi Yung & Ors [2020] HKCFI 2985, §§173-177, citing inter alia Re GW Electronics Company Ltd [2020] HKCA 180 at §29.2 (Yuen JA).

24.As to what if any knowledge on the part of directors is needed to trigger the creditor duty in relation to an insolvent company, the majority view of the Supreme Court BTI suggests that it is essential that the directors “know or ought to know” that the company is insolvent.  That this is not however the uniform or conclusive position is apparent from Lord Reed’s observations at §90 of BTI; part of a section headed “What are the circumstances in which the rule in West Mercia[8] applies?”.  Referring to the majority view of Lord Briggs (Lord Kitchen agreeing) and Lord Hodge as to knowledge, Lord Reed stated the following (§90):

“I am less certain than Lord Briggs JSC and Lord Hodge DPSC (paras 203, 231 and 238 below) that it is essential that the directors ‘know or ought to know’ that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable, but it is unnecessary and inappropriate to express a concluded view without the benefit of argument. It should be borne in mind that directors are under a duty to inform themselves about the company’s affairs (In re Westmid Packing Services Ltd (No 3) [1998] 2 BCLC 646, 653); and the rule in West Mercia will itself incentivise directors to keep the solvency of the company under careful review.”

25.In Hong Kong, the proposition that knowledge in the sense contemplated by the majority of the Supreme Court in BTI is required for the creditor duty to arise is likewise supported by authority, though again the position seems far from settled.

26.At §71 of Cyberworks (above) Coleman J concluded that “[o]n the authorities…once the directors of a company know or ought to know that the company is or is likely to become insolvent, the creditors’ interests duty is triggered”. It is however unclear to what extent the question of knowledge as a threshold legal requirement was specifically argued and considered by the court in that case.

27.There are however other Hong Kong authorities which recognise the existence of the creditor duty without expressly referring to any legal requirement of knowledge: see for example the judgment of Linda Chan J in Alltogether Land Co (above), and Harris J in Re Hongkong Goodstar HCCW 53/2012, unrep. 30 April 2015 (further discussed below),[9] though again it may be that the specific question of knowledge as a legal requirement was simply not in focus in either case.

28.As reflected in Lord Reed’s comments at BTI §90, the extent to which knowledge of insolvency bears on the scope and application of the creditor duty is an important legal question. But it is unnecessary to resolve the question here since, as seen below, the Respondents clearly knew or ought to have known that the company was insolvent by the time of the Dividend Resolution.

C2.  Application of creditor duty to dividends

29.That the creditor duty can cover decisions of directors with regard to otherwise lawful dividends would seem to flow naturally from the general principle that, when a company is insolvent, its directors must have regard to creditor interests as a whole when making decisions that may affect the company’s financial position.  Decisions to declare and pay dividends are ones that may significantly affect a company’s financial position.

30.This view is supported by the authorities. BTI 2014 LLC v Sequana SA was itself a case where the company’s directors had caused it to pay a substantial dividend to its parent company and sole shareholder. A main issue addressed in Lord Briggs’s judgment went to the question of whether the creditor duty “Can…apply to a decision of directors to pay a lawful dividend”, with Lord Briggs’s essential conclusion being that it can apply: see §§158-162. Lord Reed expressly agreed with that conclusion: §110. See also Lord Hodge at §247 and Lady Arden JSC at §§337-342.

31.That a similar position applies in Hong Kong is apparent from the judgment of Harris J in Re Hongkong Goodstar Enterprise Limited HCCW 53/2012, unrep.30 April 2015.

32.The circumstances of that case are similar to the present in several key respects. The company there (“HGEL”) went into compulsory liquidation in 2012 and was a single purpose vehicle used for property investment by its sole shareholder and director, the Respondent. HGEL was used to purchase a property in 2010 which was sold later the same year for a pre-tax profit of about $4.5 million.

33.The proceeds of sale were used to repay a $25 million mortgage with the remainder transferred to other companies owned by the Respondent. Despite the successful sale, neither of the two property agents in the transaction were paid. According to accounts kept in relation to HGEL, the Respondent by the end of October 2011 owed the Company approximately $3.2 million. On the evidence before him, Harris J found that “[s]elf-evidently the Respondent had stripped the Company of all its cash rather than pay its 2 creditors and retain sufficient money to pay tax” (§2).

34.Savills (Hong Kong) Limited was one of HGEL’s two property agents. After HGEL failed to pay its invoiced commission amount, Savills commenced recovery proceedings with judgment entered in August 2011. This was not paid and a statutory demand was issued in early 2012 followed by a petition the next month.

35.HGEL’s liquidators obtained management accounts and a board resolution dated 31 October 2011, which purported to record the declaration of a dividend of $2,170,000, which was then used to reduce the amount due in the director’s current account to $1,040,136.09. The liquidators issued a misfeasance summons under section 276 the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) seeking “a declaration that the Respondent was guilty of misfeasance in failing to have regard to the interests of the creditors when there was a real risk of insolvency and in misapplying the money of [HGEL] to pay a dividend and an order that the sum be repaid”(§3).

36.Upon assessing the Respondent’s evidence at trial, including his alleged psychological state during the relevant period and various explanations as to why HGEL’s affairs were not properly dealt with, Harris J reached the following conclusion (at §7):

“Whichever the explanation it seems to me that the declaration of dividend was in breach of [the Respondent’s] fiduciary duties because at the time it occurred the Respondent knew the Company was in practice insolvent not only because it lacked cash but because, I think it is a compelling inference, he did not intend to repay the Company and was, therefore, insolvent on both a cash flow and balance sheet basis. This dividend caused loss to the Company because it reduced its assets available to creditors and it could not be properly declared unless the Respondent took steps to protect the interests of the creditors which he manifestly did not”.

37.The Respondent was ordered to pay HGEL $2,170,000 (equivalent to the amount of declared dividend) plus interest (§8).

D.  WHETHER BREACH OF FIDUCIARY DUTIES

D1.  The Company’s insolvency  

38.As noted in the Liquidators’ written closing submissions,[10] it is undisputed between the parties “that the Company was insolvent at least since 31 March 2019 (and in fact the Company had failed to pay already in April 2018” (emphasis original).

39.This tallies with the overall evidence at trial, including Ms Kwok’s own evidence,[11] that the Company had “ceased its business since 30 June 2018 on which date the Company’s Licence [to run a residential care home for the elderly] expired” (emphasis original) with a “complete termination” of the Company’s business from 30 June 2018 onwards and “no operating revenue…generated by the Company since then”. Ms Kwok’s account reinforces the picture as to Company’s position as at April 2019, when it was evidently unable to repay debts as they fell due – most notably the judgment debt in the DCCJ Proceedings.

D2.  Declaration of dividends

40.The Respondents do not deny the following as regards the Dividend Resolution:

(1)  The resolution is recorded in what are stated as the “Minutes of Directors’ Meeting of the Company held…on April 15, 2019 at 10:00 A.M.”.

(2)  The minutes are signed by Ms Kwok and Madam Lee, and purport to confirm their presence at the meeting. The minutes are further signed by Ms Kwok as Chairman of the Meeting.

(3)  As recorded in the minutes, the Dividend Resolution was unanimously passed in these terms:

“INTERIM DIVIDEND

RESOLVED that the payment of an interim dividend of HK$23,300.00 per share absorbing HK$2,330,000.00 to the shareholders of the Company registered in the books at the close of business on April 15, 2019 by crediting to the current accounts with directors on April 15, 2019 accordingly”.

41.The Impugned Dividends thus operated to credit the amount of HK$2,330,000 to the Company’s current accounts with its directors (the Respondents) on 15 April 2019.

42.The Respondents do not dispute that, according to the audited reports of the Company for the years of 2018 to 2020, a total amount of HK$2,050,000 was booked as “amount due from directors” across the period from April 2017 to June 2018. And there is no dispute that the Respondents signed various documents besides the audited reports, including a notice pursuant to section 383(5) of Cap 622, specifically acknowledging their debt to the Company.

43.In effect, the Impugned Dividends offset a substantial portion of the debt owed by the Respondents to the Company at the expense of creditors. From the contemporaneous financial records, the amounts due from the Respondents would have been the Company’s major asset at the time. This is broadly reflected inter alia in the Company’s Audited Financial Statements for the financial year ended 31 March 2020 (“AFS 2020”). Note 11 of AFS 2020 refers to an Interim Dividend of HK$23,000 per share totaling HK$2,333,000 (and records a Nil dividend for 2019).  At the same time, the amount due from directors recorded under ASSETS AND LIABILITIES is marked as going from HK$2,406,970.69 for 2019 to 0.00 for 2020.   

44.On the timing of the Dividend Resolution and the application of the Impugned Dividends, the Liquidators’ case is essentially that these actually occurred in or around November or December 2020 but were backdated to 15 April 2019 – the day before the judgment in the DCCJ Proceedings – in an attempt by the Respondents to advance their interests ahead of the Company’s creditors, and in particular the judgment creditor Champion Motion. 

45.For the Respondents’ part, while denying any deliberate attempt to frustrate the judgment in the DCCJ Proceedings or to write off any debt that they owed to the Company, their case as set out in their written Closing Submissions was that “the Declaration [of dividends] was made after the fact in or around November 2022, after the Liquidators had stepped in and started to investigate the accounts of the Company”.

46.In his oral closing for the Respondents, Mr Chok identified the reference to “November 2022” as a typo, and stated that the correct date should be November 2020. While it is open to the Respondents to formulate their case on timing as they wish, it is unclear how the Dividend Resolution, if made in 2020, could possibly have been “after the Liquidators had stepped in”, since that was in January 2022.[12]  But as will be seen below, neither timeline assists the Respondents in any event.

D3.  espondents in breach

47.To sum up the position up to this point, it is undisputed that (1) the Company was insolvent since at least March 2019; and (2) the Dividend Resolution was passed at a time when the Company was insolvent.

48.On (2), since it is common ground that the Company was insolvent from at least March 2019, the position would remain the same whether the Dividend Resolution was passed in 2020 or 2022. Indeed, even if the Dividend Resolution was passed on 15 April 2019 as stated in the relevant minutes, that still would have been at a time when the Company was insolvent.

49.The Respondents do not contend that the interests of the Company’s creditors were ever properly considered when the Dividend Resolution was considered and passed. They plainly did not do so.

50.It follows that, subject to the Respondents’ defence – and in particular the question of knowledge or intent addressed below – the Respondents breached their duty to consider the interests of the Company’s creditors in passing the Dividend Resolution at a time when the Company was already insolvent.

51.The gist of the Respondents’ defence is that:

(1)  They never borrowed money from the Company. AFS 2020 is in this regard not a true record of the Company’s financial position. The Respondents did not know that AFS 2020 and other financial records of the Company had marked them as debtors to the Company, despite having signed the same.

(2)  As to the Dividend Resolution, the Company’s accountants had asked the Respondents “to sign on a myriad of documents (in English)”, which they did sign, but merely by reason of their“trust” of the accountants’“professionalism” and not with any understanding of what they were signing save that they were “related to the financial affairs of the Company” and financial accounting matters.[13] 

52.Inasmuch as knowledge of the Company’s insolvency is required to trigger the creditor duty and/or to establish liability for its breach (see above), the Respondents notably have not denied having such knowledge. On the evidence before me, including Ms Kwok’s evidence that the Respondents were the ones overseeing the Company’s daily operations, her evidence that the Company had ceased operations and revenue generating activity from June 2018 onwards, and the basic fact that the Respondents were not only the Company’s sole shareholders but also its sole directors with duties to be familiar with the Company’s finances, the Respondents plainly knew or ought to have known that that the Company was insolvent by the time of the Dividend Resolution.

53.As seen above, the Respondents focus their efforts on contending that they never knowingly made the Dividend Resolution because they allegedly did not understand the documents they signed. Tied to this is their claim that what were regularly marked as amounts due ‘from’ directors in the Company’s financial reports were in reality dividends paid to them. According to Ms Kwok’s evidence, she “suspect[s]” that the Dividend Resolution was a device concocted by the Company’s accountants to “write off” what were inaccurately marked as amounts due from directors in the financial statements “in order to conclude the account”.[14]

54.I find the Respondents’ contentions wholly incredible. In particular:

(1)  I see no proper basis for doubting the basic reliability of the Company’s financial accounting records regarding the debts due from its directors, and in particular AFS 2020, which was prepared by an independent auditor and signed by the Respondents as directors of the Company. The Respondents have not put forward any coherent and credible account of why the Company’s independent professional auditors would over multiple years misunderstand, mischaracterise and/or misstate matters so fundamentally as to treat dividends apportioned to the directors (in their capacity as shareholders) as amounts owed by them.

(2)  It is also highly unlikely that any such errors would go unnoticed in all that time by the Respondents, who were experienced in the Company’s affairs and had ready access to outside professionals and legal advice, as seen inter alia from Whatsapp messages between Ms Kwok and the Company’s auditor Mr Cheung Yin Ching. Indeed prior to these proceedings, and even after the appointment of the Liquidators, the Respondents never complained or contended that the financial accounting records they signed were inaccurate or that they had not understood what they were signing. The accuracy of such records is supported by other contemporaneous documents including the Notices of Director’s Remuneration Given Under Section 385(5) of the Companies Ordinance (Cap 622) which again were signed by the Respondents, and which reflect substantial and increasing amounts owed by the Respondents in the relevant period.

55.In my assessment, Ms Kwok’s witness evidence and the Respondents’ overall case on this front lack credibility and should be rejected:

(1)  In particular, Ms Kwok’s evidence is highly unconvincing and often inconsistent on key matters such as her understanding of English and the degree of trust she placed on Mr Cheung as the Company’s auditor. Ms Kwok’s claims on these matters do not stand up in the face of the contemporaneous records and the witness evidence of Mr Cheung, whose contrary testimony as to the Respondents’ involvement with and understanding of the Company’s finances was in my view straightforward and credible. It bears emphasis that Mr Cheung was and is a professional auditor with nothing apparent to gain from deliberately misstating the position as the Respondents’ indebtedness to the Company in the AFS 2020 or from lying on oath regarding his handling of the Company’s accounts and his dealings with the Respondents.

(2)  As Mr Cheung recounted, at no time did the Respondents ever suggest that they did not understand English or anything in the audited financial statements. Mr Cheung was also clear in his testimony that the Respondents had never raised questions or complaints to him on any aspects of the Company’s audited financial statements. There is certainly no record of any such queries or complaints having been raised.  

(3)  As also noted by Mr Cheung, Ms Kwok’s claim that the amounts recorded as owed by the Directors were in fact ‘bonus’ dividends linked to their work is undermined by both the lack of any supporting record in their respective employer returns and by the lack of any board resolutions to such effect.

(4)  Though of lesser significance given the earlier timeframe, I likewise accept the evidence at trial of the Company’s auditor for the years ended 31 March 2018 and 31 March 2019, Mr Law Chi Shing. Overall, Mr Law’s evidence is corroborative of the Liquidators’ case on the indebtedness of the Respondents to the Company and contrary to the Respondents’ claims, including their claims of ignorance and non-involvement with regard to the Company’s financial and accounting arrangements.

(5)  I have also taken into account evidence in the form of Whatsapp messages between Ms Kwok and Mr Cheung, particularly after the Respondents each received letters from the Liquidators dated 22 July 2021 demanding reimbursement of HK$2,330,000 for the Impugned Dividends. The Liquidators’ letters referred to the dividend distribution disclosed in the AFS 2020, “which was settled during the said financial year”, and pointed out that that Respondents were at the material times aware of the legal claim against them in the DCCJ Proceedings. The ensuing Whatsapp discussions between Ms Kwok and Mr Cheung are in my view inconsistent with the stance now taken by the Respondents.  In particular:

(a)  For the WhatsApp messages on 23 July 2021 between Ms Kwok and Mr Cheung, while Ms Kwok denied that the Respondents had wrongly taken from the Company by way of the Impugned Dividends (audio message at 14:06 on 23 July 2021), Mr Cheung replied at 14:07 on 23 July 2021 that the Respondents indeed took money from the Company every year and the Impugned Dividends were used to offset the money taken by the Respondents.

(b)  If the Respondents’ case were true,they could and in my view very likely would have immediately sought to correct Mr Cheung’s understanding. Instead, the Respondents proceeded to sign a draft letter to the Liquidators circulated by Mr Cheung at 16:05 on 23 July 2021, which recorded and confirmed the payment of a “final dividend at April 15, 2019”.

(6)  This brings me to the question of whether the Respondents were blindly trusting in Mr Cheung at the material times. The Respondents contend that it was “in light of the ignorance of Madam Kwok and Madam Lee, and Madam Kwok’s over-reliance on Mr Cheung” that “Madam Kwok and Madam Lee signed various documents to confirm the debt nature of their routine withdrawals from the Company”,[15] and that “they never intended to declare the HK$2.33M Dividends as they were only asked to send [sic] a myriad of documents to conclude the account, one of which turns out to be the Impugned Board Resolution” as part of “an accounting technique manoeuvred by Mr Cheung”.[16]Again Ms Kwok’s evidence on such matters has been inconsistent and is in my view wholly unconvincing.

(a)  Initially Ms Kwok under cross-examination agreed that, in July 2021, she trusted Mr Cheung fully. After Ms Kwok was asked why it was that she still would have trusted Mr Cheung if (as she contended) she only signed on the Dividend Resolution upon his request – which then led to the Liquidators’ demand for reimbursement – she changed tack, saying in effect that she was by then already questioning Mr Cheung’s reliability. But when asked why it was that the same period, when Mr Cheung said to Ms Kwok during their Whatsapp exchanges that the Respondents owed the Company money, she did not confront or seriously query Mr Cheung on his alleged prior assurances that the Dividend Resolution was simply a matter of accounting procedure, Ms Kwok then reverted to saying that this was because she trusted him.

(b)  In my judgment, considering Ms Kwok’s answers along with the evidence as a whole, it is far more likely that Ms Kwok acted as she did before and initially after the Liquidators started challenging the Impugned Dividends for the simple reason that the Respondents had knowingly incurred the indebtedness recorded in the audited financial statements, and knowingly arranged for the Impugned Dividends in an attempt to escape that indebtedness.    

56.It is in any event important to recognise that the Respondents’ factual claims, even if credible, do not suffice to absolve them of responsibility as directors. Whatever the Respondents’ actual knowledge or understanding as to (1) their indebtedness to the Company according to its financial records, and (2) the true nature and effect of the Dividend Resolution, I consider that, having signed off on the relevant documents in their capacity as directors, the Respondents cannot effectively shift blame by relying on any alleged error or ignorance as to the content of those documents to avoid liability for breach of the creditor duty.

57.One can start here with Ribeiro PJ’s observations in a much-cited passage from Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at §84:

“Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity”.

58.These observations are my view normally applicable to the signing by company directors of audited financial statements and board minutes. This includes the recognition that there may be certain circumstances where an avowal of a signed document is factually and legally justified.  But in the circumstances of the present case, where the Respondents undisputedly knew that they were signing important documents in their capacities as company directors, and were as directors subject to fiduciary duties of reasonable diligence and care, including the duty to stay properly informed of the Company’s financial affairs (see Lord Reed in BTI (above) at §90, citing In Re Westmid Packing Services Ltd (No 3) [1998] 2 BCLC 646, 653), any alleged ignorance on their part as to the Company’s true financial position, the state of its accounts, or the nature and effect of the Dividend Resolution, does not in my view prevent a finding that they breached the creditor duty. Likewise, that the Respondents had allegedly acted in accordance with arrangements proposed by their accountants or auditors does not in my judgment absolve them of what would otherwise be a clear breach of the creditor duty. At the least, the Respondents in this case ought to have known of the matters they now profess ignorance of.

59.In sum, on an overall assessment of the evidence, I find that the Respondents knew or in any event ought to have known of: (1) the Company’s insolvency when the Dividend Resolution was passed; (2) the fact that they were regarded by the Company and recorded in the Company’s audited financial statements as substantially indebted to the Company; and (3) the nature and intended effect of the Dividend Resolution when they signed it, and in particular the effect of crediting to the directors a sum that would substantially offset the amount recorded in the Company’s accounts as owed to it by them.

60.In these circumstances, and applying the legal principles identified in Section C above, I find that the Respondents in passing the Dividend Resolution without proper regard to the interests of the Company’s creditors acted in clear breach of the creditor duty. This is so even assuming (without finding) that it is essential for the purposes of the creditor duty that the directors know or ought to know that the company is insolvent or bordering on insolvency (c.f. Lord Reed at §90 of BTI).

61.While much effort was expended at trial on behalf of the Respondents in contending that the Company’s accountants and auditors acted dishonestly and/or carelessly in relation to the Company’s accounts and the making of the Dividend Resolution, the evidence does not in my view substantiate these serious allegations against independent professionals. Just as fundamentally, as explained above, the alleged fault of the accountants and auditors in the present case is any event no answer to the existence and breach of the Respondents’ own fiduciary duties to the Company, and in particular the creditor duty.

62.It is unnecessary for me to decide more categorically as to whether there are circumstances in which material inaccuracies in company financial records and/or failures on the part of outside professionals engaged by the company – where properly proven – may provide a defence for directors alleged to have breached the creditor duty. For the reasons above, there is no viable defence on such lines in this case.

63.Lastly, the Respondents’ reliance on the ‘Duomatic principle’ is in my view untenable. Citing the well-known principle of assent in In Re Duomatic Ltd [1969] 2 Ch 365, 373,the Respondents essentially argue that their acts as directors had been approved and adopted by the Company’s sole shareholders, i.e. themselves. In other words, the Respondents contend that the Liquidators cannot bring the present claim against them as directors for breach of duty because their acts as shareholders were the acts of the Company.

64.For the Duomatic principle to apply, the decision of the shareholders to assent to some matter “must be honestly made at a time when the company was solvent”: Capital Century Textile Company Limited v Li Dianxiao & Anor [2021] HKCFI 2216 at §95 (Lisa Wong J); see also, on the honesty requirement, Liquidator of Wing Fai Construction Ltd (in liq) v Yip Kwong Robert and Others[2018] 1 HKC 472 at §§269-271 (G Lam J as he then was). In my view, these constraints on the applicability of the Duomatic principle are in harmony with the functions of the creditor duty and the general fiduciary duties of company directors.  

65.In the present case, any assent on the part of the Respondents as shareholders to the Dividend Resolution was at a time when the Company was insolvent. Further, it is (to say the least) doubtful that the Respondents were acting in a bona fide and honest manner with regard to the Dividend Resolution and the Impugned Dividends. As such, the Duomatic principle does not assist the Respondents in this case.  

E.  RELIEF

66.The Liquidators’ case is that the Respondents in declaring the Impugned Dividends reduced the assets of the Company in the amount of $2,330,000 by writing off their debts due to the Company. The Liquidators’ Closing Submissions contend that “[b]ut for the HK$2.33M Dividends, these amount could be recovered from the Respondents and be used for the benefit of creditors in the event of winding up”. [17]  

67.Section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) empowers the Court to:

“…compel the person [who has acted wrongfully in relation to the company] to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, breach of duty or breach of trust as the court thinks just”.

68.Mr Chok for the Respondents helpfully flagged the guidance of G Lam J (as he then was) in Liquidator of Wing Fai Construction Ltd (in liq) (above) at §338:

“S 276 ends with the words ‘as the court thinks just’. They enable the court to do what it considers just in the circumstances of the case. Once liability is established, s 276(1) confers a discretion on the court as to the precise order that would be appropriate, but not a discretion to grant relief against liability. It is a discretion as to how much a respondent director should be ordered to pay so as to do what is just in all the circumstances: In re Loquitur Ltd [2003] 2 BCLC 442, §245; Revenue and Customs Commissioners v Holland, supra, §51, per Lord Hope. In the words of Lord Scott of Foscote in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] AC 1391 at §110,101 it is a ‘judgmental discretion as to the quantum of compensation that would not in an ordinary damages action be applicable’.”

69.As I have found, the Impugned Dividends operated to credit the amount of HK$2,330,000 to the Company’s current accounts with its directors in circumstances where inter alia a total amount of HK$2,050,000 had been recorded in the Company’s accounts as amounts owed by the same directors, and the judgment debt in the DCCJ Proceedings remained unpaid.

70.Addressing a similar situation in Re Hongkong Goodstar Enterprise Limited HCCW 53/2012, unrep.30 April 2015, Harris J ordered the respondent director to pay the sum of HK$2,170,000 – equivalent to the amount of dividend he had declared – plus interest, noting that the dividend “caused loss to the Company because it reduced its assets available to creditors” (§7).

71.The Respondents do not contend that there is any material difference in the practical effect of the Dividend Resolution in this case and the dividend declared in Re Hongkong Goodstar. In terms of reducing the scope for creditor recovery, the essential impact is alike.

72.Practically speaking, even if the Dividend Resolution could somehow be treated as void, such that the sums earlier identified in the Company’s accounts as due from the Directors remain debts owed to the Company, that would require separate proceedings to claim directly for the debt.  Even if that were technically viable, I see no reason for requiring the Liquidators to take such a circuitous route, which would likely cause considerable prejudice to the liquidation process in terms of cost and delay.

73.Inasmuch as relevant to any question of loss, the Respondents have in my view failed to demonstrate that, contrary to what the signed audited financial statements and other contemporaneous evidence clearly indicate, they did not in fact owe substantial amounts to the Company at the time when the Dividend Resolution made.

74.All things considered, the just and proper relief is in my view for the Respondents to pay the Company the amount of $2,330,000 with interest. It seems to me that costs should follow the event but as requested by the parties I will make the costs order on a nisi basis.

75.Absent agreement, the parties are directed to file written submissions of no more than 5 pages on the proper rate of interest and the question of costs within 14 days of this judgment.