Alan C W Tang, Joint and Several Trustee in Bankruptcy of the Estate of Lo Siu Fai Louis v. John J Toohey, Joint and Several Liquidator of Global March Limited

HCCW000180/1998

HCCW 180/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 180 OF 1998

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Coram: Hon Kwan J in Chambers

Date of Hearing: 6 May 2004

Date of Decision: 13 May 2004

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D E C I S I O N

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1.This is an application made by the trustee in bankruptcy ("the trustee") of the estate of Lo Siu Fai Louis ("the bankrupt") under rule 95 of the Companies (Winding-up) Rules, in the liquidation of Global March Limited ("the Company"), to reverse or vary the decisions of one of the liquidators of the Company in respect of two proofs of debt.

2.The reliefs sought by the trustee, after taking into account the concessions made by Mr Eugene Fung on behalf of the trustee, are in these terms:

(1) the decision of the liquidator in rejecting the proof of debt of the bankrupt ("the bankrupt's proof") for the sum of HK$77,865,800.00 be reversed and the bankrupt's proof be ordered to be admitted in full; and

(2) the decision of the liquidator in rejecting the proof of debt of the bankrupt and Harvest Year Investment Limited ("Harvest Year") ("the joint proof") for the sum of HK$145,660,811.40 to the extent of HK$139,791,248.71 be varied and the joint proof be ordered to be admitted to the extent of HK$99,720,299.40.

The background

3.The Company was wound up by the court on 27 May 1998 on a creditor's petition presented by Jade Point International Inc. ("Jade Point") on 14 March 1998. Joint and several liquidators were appointed on 6 August 1998. The only business of the Company was to purchase and sell a substantial number of properties in Star House, Tsimshatsui, Kowloon.

4.The only registered shareholders of the Company at all times were the bankrupt (holding ten shares) and Harvest Year (also holding ten shares). The bankrupt held all his shares on trust for Jade Point. Harvest Year held seven out of its ten shares on trust for Jumbo Trade International Limited ("Jumbo Trade"). The name of Jumbo Trade was misstated as "Jumbo Trade Development Limited" in the declaration of trust made by Harvest Year, but it was eventually accepted by the trustee at the hearing that this was a misstatement and nothing turns on this. Harvest Year is wholly owned by the bankrupt beneficially and he is a director.

5.The liquidator had received four substantial claims by proof of debt. They were all in respect of outstanding shareholders' loans and were as follows:

(1) the bankrupt's proof which was rejected in full;

(2) the joint proof of which HK$5,869,562.69 was admitted;

(3) a proof of debt from Jade Point in the sum of HK$63,532,358.22, of which HK$42,873,647.00 was admitted (the rejected amount of HK$20,658,711.22 was in respect of interest claimed, for which insufficient documentary evidence was provided); and

(4) a proof of debt from Jumbo Trade in the sum of HK$63,330,097.20 and this has not yet been adjudicated pending the outcome of the present application.

6.There is only approximately HK$5.2 million in the estate for the liquidator to distribute to the creditors of the Company. The problem thus faced by the liquidator was how to deal with the claims of the bankrupt and Harvest Year on the one hand, which included in the joint proof a claim to the entire balance of the shareholders' loans, and the claims of Jade Point and Jumbo Trade to substantial portions of the shareholders' loans. Mr Paul Carolan, who appeared for the liquidator, has rightly put the prime question for consideration in this manner: who are truly the creditors of the Company in respect of funds advanced and outstanding as shareholders' loans and for how much in respect of each of them.

7.The claim in the bankrupt's proof was premised on the two statements of affairs of the Company submitted by the bankrupt and his brother as directors on 11 May 1999 and 18 December 1998 respectively. The bankrupt was stated to be an unsecured creditor in the amount of HK$77,865,800.00 and the consideration and nature of liability was described as "shareholder loan". The liquidator rejected the bankrupt's proof on the ground that the amount claimed had already been claimed in the joint proof and is therefore a duplicate claim. The trustee has not provided any documents to support his contention that the bankrupt's proof is separate and additional to the joint proof.

8.Regarding the claim in the joint proof, there was no mention of this in either of the statements of affairs. The claim was based on the ledger on shareholders' loan account of the Company and that the bankrupt and Harvest Year were on record as the shareholders of the Company. As a matter of fact, the amount claimed being HK$145,660,811.40 represented the entire ledger balance of the shareholders' loan account, before the last debit entry of HK$8,625,350.51 made on 31 March 1998. The ledger on shareholders' loan account recorded the funds advanced to the Company for the acquisition of properties in Star House. The liquidator rejected the joint proof to the extent of HK$135,791,248.71 on these grounds:

(1) insufficient documentary evidence was provided to substantiate the claim of HK$135,415,898.20, with sole reliance on the balance of the ledger aforesaid. Further investigations of the liquidator have determined that contributions of HK$135,415,898.20 made to the Company and recorded in the ledger as having been made by Harvest Year were in fact made by other parties; and

(2) the trustee reversed a debit entry in the general ledger made on 31 March 1998 which reduced the shareholders' loan account by HK$8,625,350.51, being a void disposition made after the presentation of the petition. This entry should have been reversed to the extent that the disposition of HK$8,625,350.51 was recovered, i.e. HK$4,250,000.00, under a settlement reached in February 2003. Accordingly, an amount of HK$4,375,350.51, being the balance of the disposition still owing, has been reversed back by the liquidator.

The legal approach

9.It is provided in rule 95 of the Companies (Winding-up) Rules that if a creditor or contributory is dissatisfied with the decision of the liquidator in respect of a proof, the court may, on the application of the creditor or contributory, reverse or vary the decision. An application to the court under this provision is a hearing de novo to determine to what extent the applicant should be allowed to rank as a proving creditor; the court is bound to decide the rights of the applicant in the light of all the evidence which is before the court, and not merely to express a view as to whether the liquidator was right or wrong in rejecting the proof on the evidence then available to the liquidator when he rejected it (Re Kentwood Construction Ltd [1960] 1 WLR 646 at 647 to 648).

10.It is accepted by the trustee that the onus of proof is on him to show on a balance of probabilities that a real debt is due to the claimants in the bankrupt's proof and the joint proof (Re Adam Holdings Ltd [1985] 2 HKC 608 at 613B to G). The position of a liquidator in adjudicating a proof of debt is the same as that of a trustee in bankruptcy and as stated in Re van Laun [1907] 1 KB 135 at 162:

"The trustee's right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth ...".

The bankrupt's proof

11.As mentioned above, the two statements of affairs constituted the only evidence tendered by the trustee in support of the bankrupt's proof. In accordance with the prescribed form, the bankrupt and his brother verified on oath each of the statements of affairs to be "a full, true, and complete statement of affairs" of the Company on 1 December 1998. The trustee contended that there was no practical reason or commercial benefit for the bankrupt and his brother to fabricate a claim of the bankrupt under oath in the statements of affairs against a hopelessly insolvent company.

12.Reliance was placed by the trustee on section 282 of the Companies Ordinance, Cap. 32, which provides that "where a company is being wound up, all books and papers of the company and of the liquidators shall, as between the contributories of the company, be prima facie evidence of the truth of all the matters purporting to be therein recorded". As the statements of affairs were made pursuant to rule 39 of the Companies (Winding-up) Rules for the Official Receiver or the liquidators appointed in place of the Official Receiver, they constitute "books and papers ... of the liquidators" and are prima facie evidence of the truth of all the matters purporting to be recorded therein. Mr Fung submitted that the court should not go behind the two statements of affairs, which essentially amount to affidavit evidence, unless there is positive evidence to show that any of the matters affirmed is wrong and the burden is on the liquidator to adduce positive evidence to show that the claim of the bankrupt for shareholder's loan due to him in the sum of HK$77,865,800.00 as recorded in the statements of affairs is wrong.

13.I am unable to accept these submissions. Section 282 merely creates a rebuttable presumption and it has very little application to the adjudication of a proof of debt. If it were to apply in the manner as contended by the trustee, this would make a mockery of the power and duty of a liquidator to properly investigate claims before accepting or rejecting a proof of debt. Further, it would be turning the requirement that it is for a claimant to show a genuine debt on satisfactory evidence on its head, as all that he would have to do is to rely on the statement of affairs or some other "books and papers of the company" and throw the burden on the liquidator to demonstrate that his proof should not be admitted.

14.Much the same argument was raised in Re Adam Holdings, supra. There, the presumption relied on by the claimant was the maximomnia praesumuntur rite esse acta. In rejecting this argument, Jones J had this to say at 614F to H and 615B:

"By invoking the maxim the applicant contends that by production of the documents available a presumption arises which is rebuttable that the documents establish the validity of the claim. However, a creditor is not entitled to say this is all the evidence that I have and because the best evidence has been lost or destroyed my claim should be admitted. The Official Receiver is not obliged to assume that when the accounts were prepared all the vouchers and other documents were available to the accountants. If this submission were to be accepted the Official Receiver's powers of investigation would be severely curtailed. The Official Receiver is under a public duty to investigate claims, and to be satisfied on the evidence that there is a genuine debt due. The burden remains with the applicant to establish proof of the claim on the balance of probabilities on the evidence that is produced. The evidence must be considered on its own merits. No question of a presumption can arise in this situation. In my judgment the maxim has no application to a proof of debt. ...

It is therefore necessary to look at the evidence upon which the claim is based to determine whether the onus of proof has been discharged by the applicant."

15.Using the same approach, I look at all the evidence to see if the trustee has discharged his onus of proof that the claim in the bankrupt's proof is a genuine debt. I have no hesitation that he has not done so. The ledgers of the Company contained no entry at all made in the bankrupt's name of any shareholder's loan due to him. As mentioned earlier, the amount claimed in the joint proof represented the entire ledger balance in respect of the shareholders' loan account before the last debit entry made on 31 March 1998. There is a complete lack of evidence to substantiate the claim in the statements of affairs of any advance made by the bankrupt to the Company with an outstanding amount. On the contrary, according to the director's loan account in the ledgers of the Company, HK$4,691,712.10 is due and owing from the bankrupt to the Company.

16.The trustee further contended that the liquidator had used the figure of HK$42,624,999.00 listed in the statements of affairs as a shareholder's loan due to Jade Point to arrive at the amount of HK$42,873,647.00 as the admitted part of Jade Point's debt, thereby indicating that the liquidator had relied on the statements of affairs in adjudicating the proof of debt in another instance. It was argued that the liquidator had adopted a "double standard" in not using the same approach in determining the bankrupt's proof. There is no merit in this contention. The liquidator was able to verify the figure for Jade Point's claim in the statements of affairs by the books and records of the Company and other contemporaneous documentary evidence, which was not the case for the bankrupt's proof.

17.For the above reasons, the application to reverse or vary the decision in rejecting the bankrupt's proof must be dismissed.

The joint proof

18.As mentioned earlier, the reason for rejecting HK$135,415,898.20 of the amount claimed in the joint proof was that contributions made to the Company in this amount recorded in the general ledger as having been made by Harvest Year were in fact paid by other parties. The trustee has attacked the decision on the basis there was insufficient evidence to rebut the presumption in section 282 (that the ledger showed advances made by and an amount due to Harvest Year as shareholder's loan and constituted prima facie evidence) for the liquidator to arrive at the determination that the advances were made by other parties. As I have stated, this is turning the presumption on its head. The burden is on the trustee to establish on the balance of probabilities that the claim in the joint proof is due to the bankrupt and Harvest Year.

19.The liquidator had carried out an analysis of the available evidence regarding shareholders' loans and produced a schedule setting out the adjustments that should be made to the shareholders' loan accounts as payments made by other parties and giving reference to the relevant evidence. It is pertinent to note that apart from these payments made by other parties, the liquidator had not found any evidence of other payments or source of funds provided in respect of the shareholders' loans.

20.The evidence in respect of payments made by Jumbo Trade is straightforward. There was a letter from the Company to Jumbo Trade dated 7 November 1995 confirming that the amount of shareholder's loan due from the Company to Jumbo Trade as at 31 March 1995 amounted to HK$55,630,097.20. Another letter from the Company to Jumbo Trade dated 6 October 1995 acknowledged receipt of HK$7,700,000.00 on 4 October 1995, "being shareholder's loan for Star House Investment". These two sums made up the claim for HK$63,330,097.20 in the proof of debt lodged by Jumbo Trade.

21.Further, there was a letter dated 22 December 1999 from the bankrupt and Harvest Year to the liquidator in which they disclaimed their interest in the amount of HK$41,630,097.20 in respect of the advances made by them as revealed in the statements of affairs, as the said sum was "actually and truly advanced by Jumbo Trade International Limited as shareholder's loans to the Company". The sum of HK$41,630,097.20 was made up of four advances (HK$16,852,203.00 on 2 February 1994, HK$9,079,179.00 on 22 March 1994, HK$6,619,536.00 on 1 May 1994 and HK$9,079,179.20 on 1 August 1994) and formed part of the amount of HK$55,630,097.20 due to Jumbo Trade as at 31 March 1995 as acknowledged by the Company.

22.I am unable to see in what way it could be said that the liquidator was wrong in determining that in respect of HK$63,330,097.20 in the joint proof, the trustee has not adduced satisfactory evidence to show that this amount is owed to Harvest Year and the bankrupt.

23.As for Jade Point, it had sued the bankrupt in High Court Action No. 569 of 2000 ("the High Court Action") on the ground that in 1994, Jade Point at the request of the bankrupt agreed to and did advance loan capital to the Company for the purchase of various properties in Star House, subject to two conditions: (1) the bankrupt was to personally undertake as a primary obligation to repay to Jade Point all principal and interest outstanding in respect of the loans advanced by Jade Point; and (2) the bankrupt was to hold upon trust in favour of Jade Point ten shares in the Company comprising 50% of its issued share capital. Jade Point alleged that it had advanced to the Company HK$78,679,547.00, of which HK$35,803,400.00 was repaid by the bankrupt. Further, the bankrupt had issued a cheque of HK$78,000,000.00 in March 2002 in favour of Young Brothers Development Company Limited ("Young Brothers"), the parent company of Jade Point, in payment of the outstanding principal and interest. When the cheque was dishonoured, judgment for HK$78,000,000.00 was entered by consent against the bankrupt on 10 May 2002. The trustee pointed to the above to say that these matters showed that the payments made by Jade Point were not loans to the Company but "personal loans to the Bankrupt himself". This is to ignore completely Jade Point's case in the High Court Action as pleaded, which was not disputed by the bankrupt.

24.Mr Fung made a belated concession of not disputing four transactions, which the liquidator had determined as payments made by Jade Point or Young Brothers (three credit entries of HK$12,970,256.00 on 21 March 1994, HK$12,940,512.00 on 1 August 1994, HK$20,000,000.00 on 30 September 1994 respectively, and one debit entry of HK$5,000,000.00 on 3 August 1995). He submitted that the two remaining transactions determined as payments by Jade Point or Young Brothers were without basis. These transactions related to (1) an amount of HK$23,280,055.00; and (2) an amount of HK$9,456,480.00.

25.For the amount of HK$23,280,055.00, there was a cheque for this amount dated 17 March 1994 issued by Joyca Limited (which was wholly owned by Jade Point) to the bankrupt. He acknowledged receipt in writing the same date stating that the cheque was "the first payment of Jade Point International Inc. for 10% of Star House investment". He also signed a promissory note on the same date in which he promised to pay this amount on demand to Young Brothers. Mr Fung submitted that these documents merely showed payment of the said sum to the bankrupt and did not show payment to the Company.

26.For the amount of HK$9,456,480.00, there was a fax dated 31 May 1994 from Grand Duke Group to Young Brothers requesting the latter to issue a cheque for this amount "payable to Louis Lo Siu Fai". A similar submission was made that this document only showed payment to the bankrupt, not to the Company.

27.The amounts of HK$23,280,055.00 and HK$9,456,480.00 made up in part the advances of Jade Point to the Company in the total sum of HK$78,679,547.00, as appeared from the Amended Statement of Claim in the High Court Action. These were payments made in respect of the Star House investment, which was carried out under the name of the Company, in which the bankrupt held 50% of the issued share capital on trust for Jade Point. The bankrupt had confirmed orally in interviews with the liquidator's staff that advances were made by Young Brothers for the funding of the Star House investment, which was the only investment undertaken by the Company. Furthermore, the statements of affairs submitted by the bankrupt and his brother stated that a shareholder's loan was made by Jade Point in the amount of HK$78,677,047.00 and that an amount of HK$42,624,999.00 was due after taking into account repayments of HK$35,803,400.00 and cash at bank of HK$248,648.00. Jade Point's claim against the bankrupt and the consent judgment in the High Court Action mentioned earlier are consistent with its proof of debt in the liquidation of the Company. Jade Point's proof of debt as a judgment creditor in the bankruptcy of the bankrupt is also consistent, as Jade Point is not precluded by the bankrupt's personal liability from claiming as a creditor of the Company in respect of the shareholders' loan.

28.There is no basis to support the contention of the trustee that the two transactions of HK$23,280,055.00 and HK$9,456,480.00 were payments made to the bankrupt and not payments made to the Company.

Reversal of the debit entry of HK$8,625,350.51

29.The second ground for rejecting in part the joint proof related to the debit entry of HK$8,625,350.51, which came about in this way. In January 1998, the Company sold 21 properties in Star House and the solicitors acting for the Company in the sale held net proceeds of HK$14,777,462.33. On 15 January 1998, the solicitors received instructions from the Company to pay HK$8,625,350.51 of the net proceeds to Messrs Hampton Winter & Glynn ("HWG"), who acted for Helena Cheng (the former wife of the bankrupt) in seeking ancillary relief from the bankrupt, in settlement of Ms Cheng's claim for maintenance against the bankrupt. On 23 March 1998, HWG paid the said sum to Ms Cheng. The payment was made after the presentation of the petition to wind up the Company on 14 March 1998. There was a reduction in the shareholders' loan account by the sum of HK$8,625,350.51 by a debit entry on 31 March 1998, reducing the balance from HK$145,660,811.40 to HK$137,035,460.89.

30.The liquidators took the view that the payment of the said sum by HWG to Ms Cheng constituted a disposition of the Company's property that was void by virtue of section 182 of Cap. 32 and that HWG and Ms Cheng, as the recipients of the said sum, were jointly and severally liable to repay the amount to the Company. In April 2000, the liquidators made demands against HWG and Ms Cheng for repayment and subsequently obtained sanction from the court to commence proceedings against them under section 182. An alternative claim was made that the sum had been advanced by way of loan from the Company to the bankrupt unlawfully in breach of section 157H(2) of Cap. 32, such advance having been known to HWG at the time as HWG prepared the relevant resolutions of directors and shareholders of the Company and the disposition was accordingly void.

31.In February 2003, the parties reached a compromise at HK$4,250,000.00 (inclusive of interest and costs) in full and final settlement of the liquidators' claims against HWG and Ms Cheng and sanction was granted by the court for the settlement. The liquidators received the settlement sum in April 2003.

32.In the joint proof, the trustee reversed the debit entry of HK$8,625,350.51 and claimed the former balance of the shareholders' loan outstanding. The liquidator took the view that as HK$4,250,000.00 has been recovered in the settlement in respect of the void disposition, this amount can be reversed from the shareholders' loan account as the trustee had done in the joint proof. However, the balance of the payment of HK$4,375,350.51 should not have been reversed and the balance of the shareholders' loan account should be adjusted to HK$141,285,460.89. Accordingly, a sum of HK$5,869,562.69 has been admitted as an ordinary debt in respect of the joint proof (HK$145,660,811.40 - HK$135,415,898.20 - HK$4,375,350.51 = HK$5,869,562.69). If the bankrupt and Harvest Year were to repay the balance of the void disposition and contribute the sum of HK$4,375,350.51 to the assets of the Company, the admitted sum in the joint proof would be revised to become HK$10,244,913.20 (HK$5,869,562.69 + HK$4,375,350.51).

33.Mr Fung submitted that there is no basis for the liquidator to insist on the reduction of HK$4,375,350.51 from the joint proof for these reasons.

34.It is common ground that the payment of HK$8,625,350.51 was a void disposition, there being no validation order in respect of the payment. "Void" in the context of section 182 means void for all purposes related to or incidental to the administration of the winding up of the company (see comparable legislation as construed in National Acceptance Corporation Pty. Ltd v. Benson (1988) 12 NSWLR 213 at 215F to G, 221E to F, and 229C to D; andMond v. Hammond Suddards [1996] 2 BCLC 470 at 474a to c). Accordingly, the effect of section 182 is that there was no debit entry of HK$8,625,350.51 in the Company ledgers, it should be regarded as if that sum were never paid out from the Company and the subsequent settlement did not affect this.

35.Mr Carolan did not dispute the effect of the above authorities. He submitted that the situation here is governed by the principle that the claimants in the joint proof should not rank as creditors for distribution, unless and until the shortfall of HK$4,375,350.51 is restored to the Company, praying in aid the broad equitable principle that "a person entitled to participate in and bound to contribute to the same fund cannot receive the benefit without discharging the obligation" (dictum of Swinfen Eady J in Re Rhodesia Goldfields Ltd [1910] 1 Ch 239 at 246 applied in Re Davies Chemists Ltd [1992] BCC 697 at 698G to 699C).

36.Mr Fung's answer was that the above principle should have no application to the present situation as the recipients of HK$8,625,350.51 were HWG and Ms Cheng, not the bankrupt or Harvest Year. I do not think the equitable principle was to be restricted in that manner. It is true that in Re Davies Chemists, the person who had caused the fund to be depleted by the costs of getting in the assets (and was therefore under an obligation to contribute to the fund for distribution) was the same person who had received the cheque which was the void disposition. However, what matters for the application of this equitable principle is whether the person who claims a benefit out of a fund is liable to contribute to it in some way.

37.In my judgment, the bankrupt and Harvest Year are so liable, whether on the case of the liquidators or on the case of the respondents, Ms Cheng and HWG, in the proceedings commenced under section 182. I have set out earlier the case of the liquidators and their alternative case under section 157H(2). Ms Cheng's defence was a denial that the amount of HK$8,625,350.51 was paid to her and an assertion that the said sum was a loan made by the Company to the bankrupt lawfully and that the Company was not entitled to repayment under section 157I(1). HWG's defence was that sections 157H(2) and 157I should have no application and they averred that the directors and shareholders of the Company had passed the relevant resolutions authorising HWG to pay the said sum to Ms Cheng or to her order. In the letter of the liquidator to the trustee dated 19 February 2003, the liquidator identified various payments which appeared to be fraudulent preferences made by the Company to various third parties associated with the bankrupt as advances to the third parties and the bankrupt in the aggregate sum of HK$14,693,017.00 (including the amount of HK$8,625,350.51) and were subsequently, with the consent of Harvest Year, set off against the amount owed by the Company to Harvest Year.

38.In any event, as already mentioned the bankrupt is indebted to the Company for HK$4,691,712.10 for director's loans made by the Company to him during 1995 to 1998 as shown in the general ledger. Unless this amount due is repaid, the bankrupt is not entitled to any dividend distribution, applying the above equitable principle.

39.I do not think the liquidator had applied any wrong principle in law in taking the stance adopted.

Orders

40.For the above reasons, I dismiss the application made by the trustee. I make an order nisi that the trustee should pay the costs of the liquidator in this application. Whether the trustee should be authorised to recover those costs out of the estate of the bankrupt is a separate matter.

Representation:

Mr Eugene Fung, instructed by Messrs Johnson, Stokes & Master, for the Applicant

Mr Paul Carolan, instructed by Minter Ellison, for the Respondent.

Appeal by the applicant dismissed by Court of Appeal. Please refer to CACV177/2004 dated 3 October 2005