Re Landune International Ltd

Appeal by the company to Court of Appeal dismissed. Please refer to CACV225/2005 dated 11 January 2006

Case No.HCCW 1178/2004[2005] 4 HKLRD 46[2006] 1 HKLRD 39[2005] 1 HKLRD 39[2006] 1 HKC 517

Court

High Court CFI

Date14 Jul 2005

Judge—

Case Document

100%Judiciary

HCCW 1178/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1178 OF 2004

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IN THE MATTER of LANDUNE INTERNATIONAL LIMITED

and

IN THE MATTER of THE COMPANIES ORDINANCE, CAP. 32

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Before: Hon Kwan J in Chambers

Date of Hearing: 30 June 2005

Date of Handing Down of Decision: 14 July 2005

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D E C I S I O N

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1.This is a summons to strike out a creditor’s petition for winding up. The company in question is Landune International Limited (“the Company”), it is a listed company, formerly known as Singapore Hong Kong Properties Investment Limited. The petitioner, Cheung Chung Leung Richard, was a former director of the Company. He petitioned for its winding up on the basis of the non-payment of a debt of HK$1,177,500.00 due to him under a settlement agreement he reached with the Company dated 4 June 2004 (“the Settlement Agreement”). The Company does not dispute that this debt is due and payable, but has refused to pay on the ground that it has a bona fide and substantial cross claim against the petitioner far exceeding the petitioning debt. It seeks to strike out the petition on the basis that it has a serious and genuine cross-claim.

2.I will first set out the relevant facts in chronological order.

The facts leading to this application

3.The Company and its subsidiaries have been engaged in property holding and investment. During 25 September 1998 to 29 October 2001, Wong Wai Chi (“Mr. Wong”) was the chairman and managing director of the Company. The petitioner was an executive director from 1 October 1998 to 20 June 2003. He left the Company in June 2003.

4.On 28 April 2004, the petitioner brought a claim against the Company in the Labour Tribunal for arrears of wages, year end payment, director’s fees and remuneration during January 2001 to June 2003, in the amount of HK$2.6 million odd. In May 2004, the Company filed a statement in the Labour Tribunal admitting liability of HK$1.5 million odd. In June 2004, the Settlement Agreement was made by which the Company agreed to pay the petitioner, in full and final settlement of his claim, HK$1.57 million by four equal quarterly instalments of HK$392,500.00 each. The Settlement Agreement contained a provision that in the event of default of any instalment, the whole of the outstanding balance would be immediately due and payable.

5.The first instalment was paid on 15 June 2004. The second instalment, which was due on 15 September 2004, was not paid. On 24 September 2004, the petitioner’s solicitors served on the Company a demand for the outstanding balance of HK$1,177,500.00 under section 178(1)(a) of the Companies Ordinance, Cap. 32. As no payment was made, he presented this winding-up petition on 15 November 2004.

6.It was after the petition was presented that a writ was issued in HCA No. 2730 of 2004 (“the High Court Action”) on 2 December 2004. This is the cross-claim relied on by the Company to dismiss the petition. The writ was issued by Kailey International Limited (“Kailey”), a wholly owned subsidiary of the Company. The Company was not added as the 2^nd plaintiff in the High Court Action until 4 February 2005.

7.The Company’s summons to strike out the petition was issued on 22 December 2004.

The High Court Action

8.There are four defendants in the High Court Action. The 1^st defendant is Central Union (Asia) Holding Limited (“Central Union”). An executive director of Central Union, Hon Fong Ming Perry (“Mr. Hon”), is the 2^nd defendant. Mr. Wong is the 3^rd defendant and the petitioner the 4^th defendant.

9.As mentioned earlier, Mr. Wong and the petitioner were former executive directors of the Company. They were also the only executive directors of Kailey, both were appointed on 22 August 2000, when the Company acquired Kailey as a shelf company in anticipation of its purchase of an interest in a hotel in the People’s Republic of China (“ the PRC”), known as the Luoyang Golden Gulf Hotel (“the Hotel”). Kailey was incorporated in the British Virgin Islands. On 22 August 2000, the Company and Mr. Wong, with Mr. Wong holding his share on trust for the Company, acquired the two issued shares of Kailey. Mr. Wong ceased to be an executive director of Kailey on 29 October 2001, when he also ceased to be the chairman and managing director of the Company. The petitioner ceased to be an executive director of Kailey on 16 July 2002.

10.It is alleged that as the most senior officers of the Company, Mr. Wong and the petitioner were in complete control of the Company and of Kailey at all material times.

11.On or before 1 September 2000, the Company, acting by Mr. Wong, entered into negotiations with Central Union for the acquisition of an interest in the Hotel. On 1 September 2000, at a meeting of the board of directors of the Company attended by only Mr. Wong and the petitioner, it was resolved that “the Executive Directors” be authorised to negotiate for the best terms on the proposed acquisition of an ultimate 40% interest in the Hotel for a consideration in the region of HK$120 million and to finalise with the relevant legal documentation.

12.On 6 September 2000, a sale and purchase agreement (“the Sale and Purchase Agreement”) was made. It was signed by Mr. Wong on behalf of Kailey as the purchaser. The vendor was Central Union. By the Sale and Purchase Agreement, Central Union agreed to sell to Kailey, at a total consideration of HK$120 million, (1) 57% of the entire issue share capital in Central Union (Asia) Hotel Management Company Limited (“CUAHM”), a company incorporated in the British Virgin Islands; and (2) 57% of a loan of HK$20,393,604.48, advanced by Central Union to CUAHM.

13.According to the recitals in the Sale and Purchase Agreement, warranted by Central Union as accurate in all respects, at the date of that agreement,

(1) Central Union was the beneficial owner of the entire share capital of CUAHM;

(2) the sole business of CUAHM was the holding of the entire share capital of Henan Central Union Computer Company Limited (“Henan Central Union”);

(3) Henan Central Union was a private limited company incorporated in the PRC, whose sole business was the holding of 70% of the shares in Luoyang Golden Gulf Hotel Company Limited (“LGGH”), also incorporated in the PRC; and

(4) the sole business of LGGH was the operation of the Hotel.

Thus, by acquiring 57% of the entire issued share capital of CUAHM, Kailey should hold ultimately 39.9% of the shares in LGGH, the entity which owned the Hotel.

14.It is also pertinent to note these provisions in the Sale and Purchase Agreement:

(1) completion was to take place 30 days after signing of the agreement;

(2) of the total consideration of HK$120 million, HK$80 million was to be paid as part payment of the purchase consideration upon the signing of the agreement and the balance of HK$40 million was to be paid on completion;

(3) completion was conditional upon these conditions being satisfied within 30 days from the date of the agreement or such later date as the parties may agree in writing: (a) Kailey being provided with a legal opinion issued by a qualified PRC lawyer on the good standing of Henan Central Union and LGGH; and (b) Kailey being satisfied at its absolute discretion with the results of a due diligence review of the legal, financial and operational position of CUAHM; in the event of the conditions not being fulfilled upon the time stipulated or the time extended, the sale and purchase in the agreement should become null and void;

(4) various warranties were given by Central Union in consideration of Kailey entering into the agreement and legal action may be taken by Kailey before or after completion for any material breach or non-fulfilment by Central Union of any of its representations, warranties, undertakings or agreements in the agreement; and

(5) within 30 days from the date of the agreement, Kailey was to procure its representatives to (a) review all books, records, accounts, contracts and other documentation of CUAHM, (b) review and verify the status, condition and ownership of the assets of CUAHM, (c) review the accuracies or otherwise of Central Union’s warranties and documents otherwise disclosed to Kailey.

15.On 7 September 2000, the Company issued two cheques to Central Union, signed jointly by Mr. Wong and the petitioner, for the amounts of HK$80 million and HK$40 million, being the total consideration payable under the Sale and Purchase Agreement. Both cheques were cleared on 8 September 2000 and thus the sale and purchase was completed.

16.On 20 September 2000, the Company issued a cheque in the amount of HK$2.4 million, again signed jointly by Mr. Wong and the petitioner, in favour of one Zhu Chaosong, as “commission fee” for “acquisition of shares interest of [LGGH]”, pursuant to a letter from Evido Group Limited to the Company dated 1 September 2000, even before the Sale and Purchase Agreement was signed. There was no board resolution of the Company authorising payment of such commission or any engagement letter indicating what work was performed by Evido Group Limited to each such commission.

17.In October 2001, at around the time Mr. Wong left the Company, Ha Shu Tong (“Mr Ha”) was appointed an executive director of the Company and of Kailey. He became the managing director of the Company in December 2001. He was given the task of reviewing the financial position and business development of the group and to formulate plans for debt restructuring and loan capitalisation.

18.On 26 July 2002, a joint public announcement was made by China Strategic Holdings Limited, China Land Group Limited and Ananda Wing On Travel (Holdings) Limited (“Ananda”). It was stated that Shropshire Property Limited (“Shropshire”), which was wholly owned by Ananda, had in June 2001 contracted with a party in the PRC to purchase a 60% equity interest in LGGH, the price to be payable in four instalments, and only the 4^th instalment in the sum of HK$46.2 million, which was due on 31 December 2002, had remained payable.

19.In August and September 2002, Mr. Ha wrote on behalf of the Company to Ananda setting out the nature of the Company’s interest in LGGH under the Sale and Purchase Agreement, which did not accord with the statement in the joint announcement, and requesting Ananda’s comments. In reply, Ananda informed the Company that the corporation which had agreed to dispose of the 60% interest in LGGH to Shropshire was Luoyang Power Supply Company (“LPSC”) and according to the records issued by the Administration for Industry and Commerce of Luoyang City (“the Luoyang AIC”) updated on 21 June 2002, LPSC still owned 70% interest in LGGH.

20.The Company commissioned an investigation into the ownership of the shares in LGGH, first by Henan Qian Wen Law Firm, then by Norton Rose and Zhong Lun Law Firm in Shanghai. On 11 March 2003, Norton Rose reported to the Company the results of the investigation. In summary, from 22 March 1999, when LGGH was incorporated, to 18 February 2003, when Zhong Lun Law Firm conducted a company search with the Luoyang AIC and examined the originals of the registration documents of LGGH, the shareholders of LGGH had remained the same; they were LPSC holding 70% of the shares and Luoyang Longyu Electricity Development Co. Limited (“Longyu”) holding 30%. On the legal opinion provided to the Company, Henan Central Union could not have a 70% interest in LGGH, notwithstanding there was a purported transfer agreement dated 22 September 1999 (“the Transfer Agreement”) under which LPSC and Longyu respectively agreed to sell and transfer 40% and 30% interest in LGGH to Henan Central Union. The company search result is conclusive as to the shareholding in LGGH; an intended transferee who does not register the transfer with the Luoyang authorities cannot become a shareholder and does not acquire any interest in LGGH. Whatever rights Henan Central Union might have under the Transfer Agreement, it has never had any shareholding in LGGH.

21.The Company made a report of the above matters to the Commercial Crime Bureau of the Hong Kong Police in March 2003. The Company engaged new solicitors in August 2004 to advise on the commencement of civil proceedings in relation to the Sale and Purchase Agreement. The writ with the statement of claim was issued on 2 December 2004.

22.In the amended statement of claim, it is alleged against Central Union and Mr. Hon that they made fraudulent representations to induce the Company and Kailey to enter into the Sale and Purchase Agreement, they must have known that Henan Central Union did not pay the price under the Transfer Agreement for the shares in LGGH and so did not hold 70% of the shares in LGGH.

23.As against Mr. Wong and the petitioner, it is alleged that each of them owed fiduciary duties to the Company and to Kailey as executive directors, that they had acted in breach of such duties and had conspired with Central Union and Mr. Hon to defraud the Company and Kailey and to conceal such fraud from these companies. There was no due diligence conducted before or after the completion, which took place only two days after the Sale and Purchase Agreement was signed. The materials and information made available to Mr. Wong and the petitioner were scanty and unsubstantiated. It is alleged that no honest director, with the experience of Mr. Wong or the petitioner, could have completed the sale and purchase of a substantial transaction of this nature in such circumstances.

24.Kailey claims against Central Union a declaration that it has validly rescinded the Sale and Purchase Agreement, alternatively rescission of the same, and return of HK$120 million. The Company and Kailey claim damages against all the defendants, including the petitioner.

25.The petitioner filed his defence in March 2005. In summary, he pleaded that he was mainly responsible for the internal management of the Company and it was Mr. Wong who had assumed the principal executive duties in business development of the Company and was instrumental to the negotiation and execution of most of its business transactions. He was merely informed by Mr. Wong of the latter’s negotiation in investing in the Hotel and provided with some documents relating to the Hotel and LGGH. Mr. Wong informed the petitioner that all aspects of the proposed acquisition of an interest in LGGH had been thoroughly checked by PRC lawyers retained by him and completion was intended to take place immediately after the execution of the Sale and Purchase Agreement. The petitioner had no reason to suspect the truthfulness of what Mr. Wong told him or the documents Mr. Wong showed him or to question the judgment of the latter. He had acted reasonably, bona fide and to the best interest of the Company and Kailey.

Inability to litigate the cross-claim

26.On behalf of the petitioner, Mr. Lawrence Ng submitted that to justify the dismissal of a winding-up petition based on an undisputed debt by relying on a cross-claim, one of the elements required to be established is that the cross-claim is one that the company has been unable to litigate. As this element is not satisfied here, on this ground alone, the application to dismiss the petition must fail. Furthermore, the cross-claim could and should have been raised in the Labour Tribunal proceedings, it is an abuse of the process of the court for the Company to raise it now. He cited the decision of the Court of Appeal in SY Engineering Co. Ltd., CACV No. 1896 of 2001, 27 February 2002, at paragraphs 15 and 16, in which Le Pichon JA stated as follows:

“For a court to reject a petition because of the existence of an unlitigated cross-claim it has to be shown, inter alia, that the cross-claim is genuine and one of substance and that the company must have been unable to litigate it. See In Re Bayoil S.A. [1999] 1 BCLC 62. On the evidence, the company is clearly not able to establish those requirements. This is not a case where it has been unable to litigate the cross-claim.”

27.Mr. Ng also relied on an earlier judgment of Le Pichon J (as she then was) in Re Silk Plan Ltd., HCCW No. 890 of 1998, 3 March 1999, the relevant parts of which on page 4 read as follows:

“The other relevant authority is Re L.H.F. Wools Ltd. [1970] 1 Ch 27 which, inter alia, held that the modern practice is that where a company had a genuine and serious cross-claim against the petitioning creditor which it had not reasonably been able to litigate, the petition should usually be dismissed or stayed. This ruling was recently considered and applied by the Court of Appeal in In re Bayoil S.A. [1999] 1 WLR 147 at 154C.

Whilst no cross-claim has been advanced in this case, even if one had been advanced, it is difficult to see how the Company could show that it had not reasonably been able to litigate the cross-claim: it had every opportunity, but failed, to do so.”

28.There is however another line of English cases (Montgomery v. Wanda Modes Ltd. [2002] 1 BCLC 289 at paras. [28] to [34]; Re a debtor (No. 87 of 1999) [2000] BPIR 589) to the following effect:

(1) The requirement that the debtor must not have been able to litigate his cross-claim was not part of the ratio decidendi of Re Bayoil S.A. On a closer analysis of the cases considered by Nourse LJ in Bayoil, this requirement was either not in issue (as in Bayoil itself andin L.H.F. Wools) and so was not an element that the court needed to consider, or was not considered and not met (as in Re Portman Provincial Cinemas Ltd. [1999] 1 WLR 157n). There was nothing in Portman to suggest that the cross-claim could not have been litigated and decided well before the petition came to be presented, and had it been held by the court that inability to litigate the cross-claim was indeed a requirement, the court would most certainly have acceded to the winding-up petition instead of dismissing it.

(2) The reference in Bayoil to this requirement would appear to have been derived from the headnote in L.H.F. Wools, not from any specific passages in the judgments in that case (see Bayoil [1999] 1 WLR 147 at 154B). There is nothing in the judgments in L.H.F. Wools to support that proposition in its headnote.

(3) There is no significant difference in the application of the principles established in Bayoil in a winding-up petition and in personal insolvency.

(4) The delay to litigate a cross-claim is not by itself a bar to the dismissal of a petition.

(5) This does not mean that this kind of delay would have no scope for consideration in the context of the principles established in Bayoil. “Delay in putting forward a cross-claim may lead to an inference that it is not put forward in good faith, but only as a pretext in an attempt to stave off bankruptcy” (Garrow v. Society of Lloyd’s [2000] Lloyd’s Rep IR 38, per Robert Walker LJ; Hurst v. Bennett [2001] 2 BCLC 290 at para. [19], per Arden LJ). Or this might cover the type of situation which arose in Re Douglas (Griggs) Engineering Ltd. [1963] 1 Ch 19 (also referred to in Re Silk Plan Ltd., which was similar on the facts), in which the company had a perfectly good opportunity of bringing a counterclaim in the action brought by the petitioning creditor and having the matter litigated but did not choose to do so.

29.I had considered the two lines of authorities in Re Keen Lloyd Resources Ltd. [2004] 2 HKC 33 at paras. 8 to 14 but did not find it necessary to decide whether the requirement of inability to litigate the cross-claim was not part of the ratio decidendi of Bayoil and the incorporation of this requirement in SY Engineering was likewise obiter. Subsequent to my decision in Keen Lloyd, the English Court of Appeal in Popely v. Popely [2004] EWCA Civ 463 considered the question if inability to litigate should be part of the requirement in the principles established in Bayoil. After reviewing the authorities and noting the uncertainty expressed as to this requirement in Re a Debtor (No. 87 of 1999) and Montgomery v. Wanda Motors, Jonathan Parker LJ (with whom the other members of the court agreed) reached this conclusion at paras. 123 and 124:

“[123] In this connection, however, I must return briefly to the requirement expressed by Nourse LJ in Re Bayoil S.A. [1999] 1 WLR 147 to the effect that the cross-claim must be 'one which the [debtor] has been unable to litigate'. As to that, I respectfully share the concerns of Rimer J in Re a Debtor (No 87 of 1999) [2000] BPIR 589 (quoted in para. [64] above) and of Park J in Montgomeryv Wanda Modes Ltd. [2003] BPIR 457. I respectfully agree with their view that Nourse LJ's reference to this requirement probably derives from the terms of the headnote to the report of Re L.H.F. Wools Ltd. [1970] 1 Ch 27.

[124] Be that as it may, I do not in any event understand Nourse LJ to be intending to lay down any absolute requirement to the effect that the debtor must demonstrate that he has been unable to litigate his cross-claim. Rather, I understand Nourse LJ to be doing no more than indicating that where, as in Re L.H.F. Wools Ltd. [1970] 1 Ch 27, there has been delay in the prosecution of the cross-claim the delay must not be such as to throw real doubt on the genuineness of the cross-claim …”

30.I consider SY Engineering does not bind me on the issue whether inability to litigate a cross-claim is by itself a bar to the dismissal of a petition as the relevant dicta were obiter on this issue and founded on dicta in Bayoil which were not part of the ratio decidendi. I adopt the approach and reasoning in the subsequent English decisions as stated above.

31.This is not to say delay is not a factor to be considered, obviously it is important in the circumstances here.

32.Mr. Ng’s strongest point on delay is this. This is not a case of mere delay. Here, the petitioner had brought a claim against the Company in the Labour Tribunal in April 2004 for HK$2.6 million. The Company admitted liability for salaries, director’s fee and reimbursement of HK$1.5 million in a statement filed in May 2004, entered into the Settlement Agreement with the petitioner in June 2004 to pay HK$1.57 million by instalments (the Company was then represented by a different firm of solicitors), paid the first instalment in June 2004, and only defaulted when the second instalment was due in September 2004. One would have expected the Company to raise the substantial claim for damages against the petitioner when it was faced with a claim in the Labour Tribunal. So why did the Company choose to enter into the Settlement Agreement and refrain from litigating on this until August 2004 when it retained new solicitors to advise on the commencement of proceedings?

33.The petitioner left the Company in June 2003 and brought his claim against the Company ten months later. I can disregard the delay before June 2003. A report was made to the Commercial Crime Bureau in March 2003 and as at the date of Mr. Ha’s latest affirmation in June 2005, investigation by the Bureau is continuing. The Company had consulted the Bureau whether commencement of civil proceedings against the relevant persons involved in the Sale and Purchase Agreement would affect the criminal investigation. The Company also sought further legal advice on the commencement of civil proceedings. Mr. Ha claimed that as it was decided not to alert the petitioner, the Company settled the claim in the Labour Tribunal and paid the first instalment to him. It was not until August 2004 that the Company retained its present solicitors to advise on instituting civil proceedings.

34.Looking at the matter in the round, I am not persuaded that the Company’s conduct is such as to cast real doubt on the genuineness of its claim arising out of the Sale and Purchase Agreement, even though there was no explanation in the evidence filed by the Company why it was thought that the petitioner should not be alerted to the claim that might be made against him, particularly as the petitioner was already aware (as asserted by Mr. Ha) during his service with the Company that the Company was taking steps to enforce the rights in the transaction concerning Kailey’s interest in the Hotel. I bear in mind that the Company had made a report of fraud to the Commercial Crime Bureau for quite some time, and there is an ongoing criminal investigation. Whether the petitioner is implicated in the criminal investigation remains to be seen. The claim in the civil proceedings is not entirely straightforward and it would take time to collect information and obtain legal advice. I also have regard to the amended statement of claim and the defence filed by the petitioner in the High Court Action, and the documents adduced by the Company showing the information available when it commenced investigation and the further information obtained during its investigation.

35.Further, in all the circumstances, I do not think it would constitute an abuse of the process of the court for Kailey and the Company to bring a subsequent action for damages against the petitioner and others, when this was not raised as a counterclaim or set-off in the Labour Tribunal proceedings brought by the petitioner against the Company, and where there is no bar in the Settlement Agreement (made only between the Company and the petitioner) for the Company to pursue any other action against the petitioner arising from his employment or directorship with the Company. The House of Lords in

Johnson v. Gore Wood & Co. [2002] 2 AC 1 had rejected a dogmatic approach in favour of a “broad, merits-based judgment, which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before” (at 31D to E, per Lord Bingham of Cornhill). It is wrong to hold that merely because a matter could have been raised in earlier proceedings it should have been raised.

The no reflective loss principle and lack of mutuality

36.Next, Mr. Ng submitted that the Company’s cross-claim in damages against the petitioner would be defeated by the principle against recovery of reflective loss, in that any loss suffered by the Company would merely be reflective of the loss suffered by Kailey and it is Kailey alone that would be allowed to claim for such loss to the exclusion of the Company.

37.The no reflective loss principle was authoritatively discussed by the House of Lords in Johnson v. Gore Wood, supra. at 35E to 36E per Lord Bingham, 61G to 67C per Lord Millett. I propose to set out only a few extracts from the speeches:

“These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222-223, Heron International, particularly at pp 261-262, George Fischer, particularly at pp 266 and 270-271, Gerber and Stein v Blake, particularly at pp 726-729. (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195-196, George Fischer and Gerber. (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.” (at 35F to 36A)

“The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.” (at 62E to F)

“Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company's funds and which the company would not have sustained itself.

The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.” (at 66G to 67C)”

38.For present purpose, I would assume that the Company does have a cause of action against the petitioner independent of Kailey. I turn to consider “whether the loss claimed [by the Company] appears to be or is one which would be made good if [Kailey] had enforced its full rights against the party responsible [i.e. the petitioner], and whether … the loss claimed is ‘merely a reflection of the loss suffered by [Kailey]’” (Johnson v. Gore Wood, supra. at 36D).

39.It is not in dispute that the Company provided the entire funding for Kailey to enter into the Sale and Purchase Agreement, for which the consideration of HK$120 million was paid. The Company also paid a commission of HK$2.4 million for the acquisition. Kailey took the shares in CUAHM and the loan assigned by Central Union as the legal and beneficial owner. The petitioner deposed that the payment of HK$120 million was booked by the Company as a shareholder’s loan to Kailey and corresponding entries were made in the books of the Company and of Kailey in respect of this loan. In the annual report of the Company for the year ended December 2000, the loan to Kailey was apparently classified as part of the “investment in subsidiaries” under the non-current assets of the Company in the balance sheet. The same accounting treatment was given to this in the annual report for the following year.

40.In the affirmation of Mr. Ha filed in reply, he merely denied the petitioner’s assertion that the Company is unable to sue for its loss which is reflective of Kailey’s loss and reiterated that Kailey was acquired as a shelf company in anticipation of the purchase of an interest in LGGH and that the consideration for the acquisition was provided entirely by the Company. That is neither here nor there. Mr. Ha did not deal with the accounting treatment concerning the Company’s investment in subsidiaries as alleged, nor did he explain if the Company has suffered any loss in addition to or distinct from any loss suffered by Kailey as a result of the wrongs alleged against the defendants in the High Court Action for fraudulent misrepresentation, breach of fiduciary duty, and conspiracy to defraud.

41.On the available information, I am inclined to think that the losses claimed to have been suffered by the Company, whether as a result of the diminution in value of Kailey, the inability of Kailey to pay dividends or other distributions to the Company, or the inability of Kailey to repay to the Company the funds advanced to acquire the assets owned, which turned out to be worthless, would appear to be: (1) losses suffered by the Company in its capacity as a shareholder in Kailey or as a creditor of Kailey; and (2) “would be made good if [Kailey] had enforced its full rights against the party responsible”. This is caught by the principle of no recovery for reflective loss. As for the commission paid by the Company, which the petitioner did not say was part of the shareholder’s loan advanced to Kailey and the Company had failed to address at all, I just have no information at this stage to come to any view if it could properly be regarded as a loss in addition to and distinct from any loss of Kailey.

42.Mr. Erik Shum, who appeared for the Company, took the point that the principle of no reflective loss should not apply where the cross-claim is not pursued by the Company in its capacity as a shareholder of Kailey. This is not a valid argument. The authorities are all against him. This is clear from the speech of Lord Millett in Johnson v. Gore Wood, supra. at 63F, 65C to E, 65H to 66D, 67B to C, 67F to G, and subsequent decisions of the English Court of Appeal that applied Johnson v. Gore Wood (Ellis & Anr. v. Property Leeds (UK) Ltd. [2002] 2 BCLC 175, where the claimant was suing in the capacity as a director and not merely qua shareholder; and Gardner v. Parker [2004] 2 BCLC 554 at 571h to 573a, where it was held that the rule against reflective loss would apply where the shareholder is basing his claim not as such but in some other capacity, as an employee or creditor of the company). Gardner v. Parker is also authority for the proposition that the rule would apply to any claim for compensation, whether the cause of action is in common law or in equity, such as a claim for breach of fiduciary duty. The foundation of the rule is the need to avoid double recovery; it is not concerned with barring causes of action, but with barring recovery of certain types of loss.

43.In the course of the argument, I had raised with Mr. Shum the possibility of circumventing the rule against reflective loss by contending that Kailey was and is merely a nominee for the Company in acquiring and holding the asset, and that the separate corporate personalities might be disregarded. A similar argument was raised before Barma J in Waddington Ltd. v. Chan Chun Hoo Thomas & Ors., HCA No. 3291 of 2003, 29 April 2005, at paras. 38 and 39, but not actively pursued.

44.On reflection, I do not think the corporate veil should be pierced so readily on the available evidence. I note from the annual reports of the Company that had been adduced that it had 26 wholly owned subsidiaries in 2000 and 21 wholly owned subsidiaries in 2001. One of them was Kailey. In all but one instance, the principal activities of these wholly owned subsidiaries were property investment or investment holding. It would appear to be the practice of the Company to use a wholly owned subsidiary to carry on separate business activities or hold separate assets. There is nothing to suggest that the use of Kailey in the transaction in question was any different from other instances. The use of such a corporate structure may have the advantage of insulating the holding company to some extent from the effects of unfavourable performance in the investments in subsidiaries. There may also be tax considerations. These are all legitimate reasons why a holding company should use subsidiaries to carry on different aspects of the business activities of the group. There is no reason why an asset of Kailey, in the form of the cross-claim against the petitioner, should be considered an asset of the Company, when the Company and Kailey have been treated as separate entities with separate businesses when this suited their purpose otherwise. I agree with the approach of Barma J that in the absence of clear and cogent evidence, the court should not be too ready to disregard the separate legal personality of companies within a group and treat a subsidiary as nothing more than a nominee of the parent company in holding an asset.

45.I accept the submission of Mr. Ng that the principle of no reflective loss applies. On the available material, the Company is debarred from recovering damages against the petitioner in the High Court Action. The only proper plaintiff to claim against the petitioner is Kailey. As there is a lack of mutuality in that the same two parties are not involved in the claims with each having an interest in the claimed amounts in their own right, the cross-claim in the High Court Action may not be relied upon to dismiss the winding-up petition (Re The Sun’s Group Ltd. & Anr. [2004] 3 HKLRD 65 at paras. 40 to 43, 49).