Re Colgan Company Limited
Read the full judgment text of HCMP 1825/1984 on BabelCite. This High Court CFI judgment.
2. Colgan, for the purposes of the payments and the trust referred to in Paragraph 1 hereof do:
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HCMP001825/1984 CL-36 of 1984 Contempt of court - Disobedience of court order in civil proceedings - O.45 r.5. Application for committal - Onus and standard of proof. _________ The court had granted a mandatory injunction ordering the defendant development company to set up a trust fund of retention monies under a building contract in favour of the plaintiff construction company. That order having been served on two of the defendant company's directors, an application was made by the plaintiff company under O.45 r.5 to commit them for contempt when the defendant company failed to comply with the order. Held, (1) that the two directors could only be guilty of contempt of court if their conduct was wilful, and (2) that the proof of this lay on the plaintiff in the same way and to the same extent proof rests with the prosecution in a criminal case. Thus, there was no onus on the two directors to prove anything affirmatively, the onus throughout resting on the plaintiff to prove its case at the beyond reasonable doubt level. (In re Bramblevale Ltd 1970 1 Ch. 129 applied; Lewis v Pontypridd, Caerphilly and Newport Railway Company, Vo1 XI T.L.R. 203 distinguished.) CL-36 of 1984 IN THE SUPREME COURT OF HONG KONG HIGH COURT ___________ BETWEEN
AND BETWEEN:
___________ IN THE SUPREME COURT OF HONG KONG HIGH COURT MISCELLANEOUS PROCEEDINGS No.1825 of 1984 __________
_________ Coram: The Hon of Justice J.J. Rhind Date of hearing: 13.7.84, 16.7.84 & 17.7.84. Date of delivery: 31.7.84 at 9.00 a.m. in open court. ----------------------- JUDGMENT ----------------------- The present proceedings are a seqoul to the Order I made on the 23rd of May 1984 that until after trial of this action or further order an injunction was thereby granted requiring
into a separate bank account hereinafter referred to, Colgan thereafter to stand possessed of such sums in such account as trustees thereof to apply the same in accordance with the trust specified in Condition 30 (4) (a) of the Conditions. 2.Colgan, for the purposes of the payments and the trust referred to in Paragraph 1 hereof do:
3.an injunction is hereby granted restraining Colgan by its directors, officers, servants, or agents or any of them or otherwise howsoever from applying the trust monies as and when paid into a separate bank account otherwise than in accordance with the said trust. That Order was duly served upon Colgan and two of its directors, Mr. James Tien and Mr. Michael Tien, with a Penal Notice endorsed to the effect that unless Colgan and its directors obeyed the Order they would be guilty of contempt of court and liable to process of execution to compell them to obey the same. Neither Colgan, nor those two named directors have obeyed the Order by setting up a trust fund as directed. By the present proceedings, Concorde moves the court under Order 45 Rule 5 for the committal of the two directors for refusing or neglecting to obey the court's Order. There is also an application for leave to sequester the property of Colgan. The background to the present dispute is as follows. Concorde is a building construction company, whilst Colgan was the owner of a building site at 67 Repulse Pay Road. On the 24th March 1981, Concorde as the Main Contractor and Colgan as the Employer, entered into a building contract together for Concorde to build a block of flats to be known as "The Somerset" on Colgan's site at 67 Repulse Bay Road for the sum of $50,875,670.49. Their agreement was in the Standard Form of Building Contract for use in Hong Kong issued under the sanction of the Hong Kong Institute of Architects, the Royal Institution of Chartered Surveyors (Hong Kong Branch) and the Society of Builders, Hong Kong, 1976 Private Edition (with Quantities). Under that contract Colgan was required to pay Concorde under monthly interim certificates, but Colgan was empowered to hold back. 10% of the certified value as retention monies, subject to a limit of HK$2,427,183.52. The work progressed to the point where the Certificate of Practical Completion was issued on the 6th December 1982. By that stage, Colgan had paid Concorde a total of HK$41,810,000 under seventeen interim certificates. Already by then the limit of $2,427,183.52 for the retention fund had been reached. A further interim certificate, being number 18, for the sum of $1,110,000 was issued on the 20th December 1982. That was not honoured, nor was certificate number 19, dated the 21st February 1983, for an amount of $1.2 million. The failure of Colgan to honour those certificates prompted Concorde to lodge the writ which gave rise to the present action. Besides claiming the amounts contained in interim certificates numbers 18 and 19, Colgan also claimed HK$293,504.01 in respect of monies allegedly due for site formation and HK$7,366,927.99 in respect of alleged disruption and delay caused by Colgan in relation to the building work. Colgan's reaction has been to deny all of Concorde's claims, and to lodge its own Counterclaim. That Counterclaim embraces (i) HK$2,082,049 for alleged defects in the building (ii) over $7,000,000 as liquidated damages for delayed completion (iii) over $11,000,000 for lost rental opportunities and (iv) HK$174,000 for compensation paid to tenants as the result of alleged defects in the building. Thus, the Counterclaim is for more than $20 million. Besides Concorde and Colgan, many other parties such as architects, engineers and sub-contractors have now been joined in the action, but, for present purposes, the court needs only concern itself with Colgan and Concorde. Colgan never set aside the retention monies in a segregated bank account. In fact, it never made any special provision for them at all. Nor was it asked to do so by Concorde until a letter was sent from Concorde's solicitors to Colgan's solicitors on the 20th February 1984, making such a request. Concorde's solicitors pointed to Clause 30(4) of the Building Contract of the 24th March 1981 as authority for its demand that Colgan should set up a separate trust fund of the retention monies. Colgan refused, contending that its own claim in respect of defects liability against Concorde over-topped Concorde's claim for retention monies. To see who was right, Concorde took out a summons seeking an Order from the court that Colgan should be required to set aside the retention monies in a segregated bark account pending the trial of the action or further order. That summons carte on for hearing before me. Both sides were represented by counsel, the arguments extending over the two days 8th and 9th of May. I reserved my decision till the 23rd May, when I delivered a judgment which gave rise to the Order which I set out in full at the beginning of this judgment. During that hearing, counsel for Colgan, who was different from the counsel now appearing, did not let fall any hint that his client was in financial difficulties and would not be able to comply with any Order I made, for the retention monies to be set aside in a trust fund. On the contrary, he went to the length of pointing out that as there was no evidence that Colgan was in financial difficulty, there would not seem any need to protect the retention monies through the device of a trust. That argument did not prevail with me and in my judgment I observed as follows:-
That completes the background to the present application. Not surprisingly, when, in the circumstances I have described, Concorde found that the court's Order of the 23rd May 1984 was not being obeyed by Colgan and its directors, Concorde jumped to the conclusion that here must be deliberate disobedience to the court's Order. Hence, the present motion for committal of the two named directors and the application for leave to sequester Colgan's assets. For Concorde to succeed on the present notions, it will have to prove at the criminal level of beyond reasonable doubt that there has been wilful refusal or neglect to obey the court's Order. That the standard of proof in criminal cases is the appropriate one for contempt proceedings is made abundantly clear by In re Brarmblevale Ltd. 1970 1 Ch.129. Adopting the criminal standard and onus of proof means that there is no persuasive burden on the defendant to prove anything. If there is a hypothesis which might reasonably be consistent with the defendant's innocence then he is entitled to be acquitted. That is what happened in the Bramblevale case. Contrary to what counsel for Concorde submitted, there is no onus on Colgan or its directors to prove anything affirmatively. At the most, there might be evidential burdens on them. Old cases like Lewis v Pontypridd, Caerphilly, and Newport Railway Company 1895, Vol. XI T.L.R. 203 can no longer be taken as Reliable guides. Cases from that era pre-date the landmark decision of DPP v Beard 1920 Appeal Cases, 479 where the "Golden Thread" principle of proof in criminal cases was definitively established. Has Concorde proved that Colgan and the two named directors are in contempt? That is the issue I have to decide. As at the 23rd May 1984, Colgan was devoid of both assets and income. In fact, it had a deficit of $43,899,385. Its only potential asset was its Counterclaim for approximately $20,000,000 against Concorde. Apart, perhaps, for the purpose of financing the legal costs of the pursuit of that Counterclaim, no lender could reasonably be expected to want to make advances to a company in Colgan's position. It just would not make commercial sense. Much reliance was placed by Mr. Barlow for Concorde on Lewis v Portypridd etc. where in the particular circumstances of that case the directors of a company were held to be in contempt for not raising a loan with which to obey a court Order. In the Lewis case, it so happened that the raising of a loan was a viable proposition, whereas in the case now before me, the raising of a loan for the purpose of fulfilling my order of the 23rd May 1984 is simply not a practical Possibility. True, Manhattan Garments Ltd., ("Manhattan") the parent company of Colgan continues to finance Colgan in this litigation, but that by no means implies that Manhattan would contemplate making money available to Colgan for any other purpose. Because it lacks the means to comply with my order, I am satisfied that Colgan cannot be regarded as in contempt. Nor has any contempt been established against either James Tien or Michael Tien, the two named directors. It was suggested on behalf of Concorde that if a "lifting the veil" exercise was carried out in relation to Colgan, the court would behold a state of affairs where the economic realities meant that Colgan and the two named directors were in contempt. Besides being directors of Colgan, Mr. James Tien and Mr. Michael Tien are also directors of Manhattan. Mr. Litton for Colgan and its two named directors did not want me to "lift the veil" but, as events turned out, his clients had nothing to fear from what lay revealed once the veil was drawn aside. Manhattan and its directors could be seen to have acted wholly honourably and reasonably in their dealings with the subsidiary, Colgan. Colgan is a "shelf-company" with a capital of $10,000 After buying the site at 67 Repulse Bay Road for $61,000,000 on the 26th October 1979, Manhattan transferred it to Colgan for the same price on the 12th May 1980. Colgan was the vehicle selected by Manhattan for the development of 67 Repulse Bay Road as a block of flats which were to be rented out. The whole development was to be carried out with bank finance. The Chartered Bank made a facility of $135,000,000 available for this purpose. Of that amount, $80,000,000 was spent on the land, including a conversion premium, and the balance of $55,000,000 was spent on the actual building of "The Somerset". There is no need for me to go into the loan documentation. That will all be found described in the Appendix which I am attaching to this judgment to show the salient important events in chronological order. The whole of the $135,000,000 loan facility from the Chartered Bank was applied to this development at 67 Repulse Bay Road. None of that money was diverted to Manhattan for its own purposes. There is no suggestion that, at any stage, Manhattan "milked" Colgan of any of its assets, or as a parent in any way took advantage of its subsidiary. In March 1983, Colgan became primarily liable for the whole $135,000,000 loan facility made available by the Chartered Bank, but that was perfectly fair as Colgan was the owner of the site at 67 Repulse Bay Road together with the building which had been erected on it with that loan facility. Far from Manhattan taking advantage of Colgan, Manhattan had assisted Colgan and incurred liabilities by guaranteeing the loan facility of $135,000,000. Moreover, Manhattan has allowed to Colgan to become its debtor to the extent of $33,163,776. Despite all the assistance Manhattan has given to Colgan, Colgan has,nonetheless, finished up insolvent and bereft of both assets and income. This, however, is not due to any fault on Manhattan's part, but is attributable to the general turn-down in the Hong Kong property market since 1982, as well as to the high interest rates that have prevailed since this development was undertaken. Colgan planned the development on the assumption interest rates would not exceed 11% but they have soared way beyond that. Colgan is not the victim of an exploiting parent, but of adverse business conditions. Colgan is no longer the owner of ''The Somerset". That property now belongs to Cali Enterprises Ltd., ("Cali") another subsidiary of Manhattan. There is nothing sinister about Colgan transferring this property to Cali: it was certainly not an "asset-stripping" exercise. "The Somerset", once completed, never generated enough income by way of rent to service the loan which Colgan had taken for this development. Throughout 1983, Colgan continued to get ever deeper into debt as interest on its loans exceeded rental income. For tax purposes, Manhattan decided to make use of the losses Colgan was suffering. On the recommendation of Schroders and Chartered Ltd., its merchant bankers, Manhattan decided at the end of August 1983 to transfer "The Somerset'' from Colgan to Cali. Colgan had already sustained losses of over $35,000,000. This opened up the possibility of Colran being used as a "tax loss company", the idea being that if Colgan were to be used for some profitable form of trade, the profits could be set off against existing tax losses. Moreover, the losses reaulting from the continuing excess of finance charges ever rental form “The Somerset" could be used in the same way. The result of all this was that on the 31st December 1983 "The Somerset" was transferred from Colgan to Cali for a consideration which was described as "nil". However, Cali assumed liability for the mortgage debt of $135,000,000 on "The Somerset" in favour of the Chartered Bank. As at the time of the transfer, "The Somerset" was worth no more than $114,000,000, Colgan did well from the deal which relieved it of a burden of $135,000,000. Why I say "The Somerset" was worth less than $114,000,000 is that Jones Lang Wooton had valued "The Somerset" at $114,000,000 in May 1983, an estimate which they then reduced to $100,000,000 in March 1984. Cali becoming the owner of "The Somerset'' furnishes the explanation of how it is that funds have been forthcoming of recent times to carry out repairs on "The Somerset". Even after the transfer of "The Somerset" to Cali, Manhattan continued to act like a responsible parent towards Colgan : it still guaranteed the loan facility of $135,000,000 from the Chartered Bank. Having assigned "The Somerset", Colgan reached its present position of having neither capital nor income; only debts. There can be no suggestion that Colgan divested itself of "The Somerset" as a means of defeating Concorde's demand for the setting up of a trust fund. Concorde's demand was not made till February 1984, whereas the assignment to Cali was completed in December 1983. Nothing I have seen behind "the veil''inclines me to the view that the court should put pressure on Manhattan to make good the defaults of Colgan. James Tien and Michael Tien, as I have said, are directors of both Colgan and Manhattan. Concorde seek to force Manhattan to make a further loan to Colgan so that Colgan can fulfil my Order of the 23rd May 1984. The court sees no justification for trying to require James and Michael Tien to get Manhattan to make a further loan to Colgan. Concorde was in no way deceived in its dealings with Colgan. It was always a matter of public record that Colgan was a company with a capital of only $10,000. Concorde chose to do business with Colgan without requiring any guarantee or performance bond from the parent, Manhattan. In such circumstances, I see no reason now why Manhattan should, in effect,:lave to assume liability. Manhattan has used company law concepts in a wholly legitimate way. Manhattan wanted to embark upon a project to develop a property. It wanted to limit its liability. It used a subsidiary. In that way, the parent planned to limit its risk if the project went wrong. Concorde, which is itself a limited company, must have known it was dealing with another limited company, and must be taken to have understood what is meant by limited liability. As Mr. Litton was quick to point out, the court's Order was never directed to Manhattan, only to Colgan. If the court's Order had been directed to Manhattan it might well be that as a matter of business reality, Manhattan would have complied. Manhattan is far from being a free agent, though. Manhattan is heavily in debt to various banks, including the Chartered., Operating on an overdraft, Manhattan's cheques are only met if its bankers approve he item of expenditure. Rather than see Manhattan forced into liquidation for the comparatively small amount of approximately $2.4 million involved in the present action, Manhattan's bankers probably would grant credit for that amount if Manhattan were liable to pay it, but the bankers could not be expected to approve a gratuitous payment for the benefit of Colgan. Concorde has failed utterly to satisfy me that it was within the power of either James Tien or Michael Tien to raise a loan for Colgan. It has to be remembered that as directors of Manhattan, they have to act with good faith in the best interests of Manhattan. How it could be in the best interest of Manhattan to make a loan to Colgan for Concorde's benefit I fail to see. Even without the obstacle of the approval of Manhattan's bankers, I do not think that James Tien or Michael Tien could be faulted for failing to cause Manhattan to make the loan to Colgan which Concorde seeks. What Concorde are, in effect, asking me to do is not only to lift the veil, but also to ignore the whole concept of limited liability. Concorde wants James Tien and Michael Tien to pay from their personal fortunes, if necessary. For a start, there is no evidence that they have personal fortunes, but even if they do, Concorde has failed to establish any basis on which it should have access to their personal wealth. Concorde has failed to establish the element of wilfulness in relation to the conduct of either James Tien or Michael Tien. They have been revealed as the directors of a company, Colgan, which simply could not raise tile resources to meet my Order. I think I should also point out in their favour that when they can satisfy a court Order, they have the propensity to do so. Another of their companies was ordered to set up a trust fund at the behest of Concorde, and, having the resources, it duly did so. For the sake of completeness, I should add that, from my observation of them while being cross-examined on their affidavits, I found both Mr. James Tien and Mr. Bertram Young, the accountant of Manhattan, to be witnesses of truth. My final observation is that the present proceedings would probably never have been brought if Colgan had made the court aware of its insolvency at the time when I heard the application for the setting up of the trust fund. By failing to come out straight away with the truth about its financial situation, Colgan has allowed a pall of suspicion to develop. That was really most unfortunate because, in fact, it had nothing to hide. My Order is, therefore, that the contempt proceedings stand dismissed against both James Tien and Michael Tien, and leave is refused for a writ of sequestration to issue against Colgan.
Representation: Mr. Barrie Barlow (instructed by Masons & Marriott) for Concorde. Mr. Henery Litton Q.C. with Mr. Winston Poon (instructed by McKenna & Co.) for James Tien, Michael Tien & Colgan. Appendix
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