Tele-art Inc. V.Tam King Ching Kenny and Another

HCCW 974/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 974 OF 2000

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BETWEEN

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Before: Hon Barma J in Chambers

Dates of Hearing: 27 and 28 February 2007

Date of Judgment: 22 June 2007

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J U D G M E N T

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Introduction

1.At this hearing, there were four summonses before me.  Three of them related to HCCW 974 of 2000, which is the winding-up proceeding in relation to Tele-Art Limited (“TAL”).  The remaining summons related to HCMP 26 of 2006, which is an application for the rectification of the register of members of the same company.

2.The three summonses relating to HCCW 974 of 2000 were:-

(1) An application under section 219 of the Companies Ordinance (Cap.32) (“the Ordinance”) by Tele-Art Inc. (“TAI”) a British Virgin Islands company, which was at one time the major shareholder in TAL (but which is no longer registered as a shareholder of TAL), and which is itself in liquidation, against the liquidators of TAL, seeking leave to inspect the books and papers of TAL.  The application was made by summons dated 13 August 2005.  The application was originally brought by Mr Glenn Harrigan, the liquidator of TAI, apparently in his personal capacity.  However, it was amended on 2 September 2006 to make it clear that the application was made by TAI.  Although at the hearing TAI contended that it was entitled to make the application in its capacity as a creditor of TAL (a capacity which was contested), when the application was first issued, it was contended that Mr Harrigan was entitled to make the application as TAI was a contributory of TAL.

(2) An application by summons dated 29 August 2006, issued by the Bank of China (Hong Kong) Limited (“BOC”) pursuant to Order 15 rule 6(2)(b) of the Rules of the High Court and the inherent jurisdiction, seeking to intervene and be joined as the 2^nd Respondent to TAI’s application with a view to opposing the application.

(3) An application by Mr Elmer Yuen and Ms Mimi Mi Wahng Yuen dated 23 February 2007 against the liquidators of TAL, also under section 219 of the Ordinance, seeking leave to inspect the books and papers of TAL.  This application was brought by the Yuens as contributories of TAL.  Although the summons was entitled as having been issued in HCMP 26 of 2006, it should properly have been issued in the winding up proceedings, and I have treated it as if it were an application in the liquidation of TAL.

3.The application in HCMP 26 of 2006 was an application by TAI against the liquidators of TAL, issued on 15 February 2007 pursuant to R.H.C. Order 24 rule 7, seeking an order for discovery against the liquidators.

4.At the hearing, I decided to hear argument in relation to BOC’s application for leave to intervene and in relation to TAI’s substantive application under section 219 together, as it seemed to me that the arguments in relation to both aspects of the matter overlapped to a substantial extent.  I also heard argument in relation the Yuen’s section 219 application.  The liquidators did not participate in this part of the hearing, as their stance on each of the summonses was neutral.  Having heard argument, I reserved judgment as to all three applications.  This is that judgment.

5.So far as the discovery application in HCMP 26 of 2006 was concerned, this was dealt with immediately after the argument on the various applications in HCCW 974 of 2000 concluded.  The liquidators did not oppose this application, subject to the scope of the order for discovery being more clearly defined, and appeared to deal with this aspect of the matter through solicitors (whom they were given sanction to instruct and appoint for this purpose).  Although it was initially opposed by the Yuens, it emerged that they were in fact prepared to agree to substantially the order sought so long as they were given discovery at the same time as TAI was.  In the event, the parties were able to agree substantially all of the terms of an order to resolve this application, and I made an order requiring the liquidators to give discovery of certain categories of documents to both TAI and the Yuens, subject to their being provided with security for their costs of making such discovery, as there were no appreciable assets of TAL available for this purpose.

The background to the section 219 applications

6.In order to appreciate the background to the section 219 applications, it is necessary to consider the relationship between the various parties to the application.  That relationship is complicated.  There are a number of aspects of it that are relevant to these applications.  Those aspects concern:-

(1) The shareholding history of TAL;

(2) The history of TAI’s shareholding in a company called Nam Tai Electronics, Inc. (“Nam Tai”);

(3) BOC’s position in the liquidations of TAL and TAI;

(4) TAI’s position in the liquidation of TAL;

(5) The procedural history of the section 219 applications; and

(6) The procedural history of HCMP 26 of 2006.

Shareholding history of TAI

The history of TAI’s shareholding in Nam Tai

(1) In about 1988, TAI acquired a 14.4% holding Nam Tai.

(2) TAI and Nam Tai’s relationship later soured, with litigation taking place between them concerning a proposed rights issue by Nam Tai.

(3) In November 1993, TAI pledged its shares in Nam Tai in favour of BOC as security for guarantees TAI had given BOC in respect of certain banking facilities granted by BOC to TAL at that time, pursuant to three facility letters and a loan agreement.  There were three guarantees, respectively dated 1, 2 and 10 November 1993.  The share charge was dated 10 November 1993, and gave BOC a first charge over 350,000 Nam Tai shares and a second charge over a further 350,908 Nam Tai Shares.  By a similar share charge, a Mr Robert Yuen, then a director of TAL, gave BOC a charge over 122,727 Nam Tai shares registered in his name but beneficially owned by TAI.  TAI confirmed its agreement to this charge by a Deed of Confirmation dated 4 May 1994.

(4) TAL subsequently defaulted on its obligations to BOC, and by June 1996, BOC had realised a substantial portion of the Nam Tai shares charged to it to partially satisfy TAL’s debt to it.  As at June 1996, some 375,727 Nam Tai shares under the two share charges remained unsold.

(5) Shortly before this, in May 1996, FORFAS (an agency of the Irish Government) obtained a charging order over TAI’s shareholding in Nam Tai pursuant to a judgment it had obtained in an action which it had brought against TAI.

(6) About a year later, in May or June 1997, Nam Tai purchased FORFAS’ judgment debt, and having obtained an assignment of it to itself, petitioned for the winding up of TAI in the BVI, with a winding up order being made in July 1998.

(7) After the presentation of Nam Tai’s petition against TAI, but before the winding up order was made, the BVI court ordered the sale of the remaining charged Nam Tai shares at a minimum price of US$17 per share, with the proceeds to be paid first to BOC pursuant to its charges.  After BOC’s debt was satisfied, any balance of the sale proceeds remaining was to be paid to Nam Tai pursuant to the FORFAS charging order, the benefit of which had also passed to Nam Tai on the assignment by FORFAS to Nam Tai of its judgment debt against TAI.

(8) It proved impossible to sell all of the remaining charged shares at the required price.  A total of 308,227 shares remained unsold.  Unfortunately, due to an apparent oversight by the US Stock Transfer Corporation, the share certificates were not returned to BOC, but were forwarded to Nam Tai instead.

(9) Nam Tai then devised what was later described by the Privy Council as a scheme to destroy BOC’s security, by amending its articles of association to give it power to redeem shares held by any shareholder who was indebted to it.  Having amended its articles of association, Nam Tai purported to redeem 138,500 of the remaining shares, and to set off the redemption price against the judgment debt which it had acquired from FORFAS. 

(10) The then liquidator of TAI, Mr David Hague, challenged the purported redemption by Nam Tai in the BVI courts.  Before judgment was given, Nam Tai purported to redeem the remaining 169,727 shares.  The liquidator’s challenge was successful at first instance.  On appeal, however, the BVI Court of Appeal held that the redemption was valid, but that the proceeds should be paid to BOC pursuant to its charge.  The liquidator then appealed to the Privy Council.

(11) At the time that BOC issued its application to intervene in TAI’s application, the appeal to the Privy Council had not been heard.  However, it was heard and determined before this application came on for hearing.  The Privy Council allowed the appeal on 20 November 2006, holding that both redemptions were invalid, and ordered Nam Tai to reinstate the 308,227 shares (plus further shares accruing on them) and issue a share certificate to BOC showing BOC as the holder of such shares.

(12) As at the date of the hearing, Nam Tai had not complied with the order of the Privy Council.

(13) In April, some time after the hearing concluded, Nam Tai complied with Privy Council’s order by issuing the appropriate number of shares in itself to BOC.  However, it appears that BOC have not, to date, sold the shares.  There has been some dispute between BOC and TAI as to whether BOC has been sufficiently assiduous in its efforts to sell such shares pursuant to its charge, but I do not consider that this has any real bearing on the matters which I have to decide.

BOC’s position in the liquidations of TAL and TAI

8.TAL itself went into compulsory liquidation on 10 January 2001, a petition for its winding up having been presented on 23 October 2000.  Messrs Kenny Tam and Shun Lap Chi were appointed as its liquidators.  It appears that the liquidators have been unable to make any significant recoveries of assets, with the result that TAL has no assets to speak of.  The result has been that there has been little that the liquidators have been able to do by way of investigation into the causes of the failure of TAL, which had, prior to its liquidation, apparently had a substantial business.  Nor have they been able, for lack of resources, to consider in any meaningful sense whether there might be available claims which might have the effect of augmenting TAL’s estate.

9.In addition to the guarantees from TAI, BOC held a mortgage over certain properties owned by TAL.  These were sold, and BOC lodged a proof of debt in TAL’s liquidation for the balance of its claim against TAL.  As TAL has no assets to speak of, BOC has not received any distribution by way of dividend in the TAL’s liquidation.

10.So far as TAI’s liquidation is concerned, BOC has not filed any proof of debt.  It has, however, responded to enquiries by TAI’s present liquidator, Mr Harrigan, as to the amount that is said to be owing by TAI to BOC.  Such information was initially supplied by letter dated 18 September 2003 from BOC’s then solicitors to Mr Harrigan.  Although it has been suggested in evidence filed by Mr Keith Ho, TAI’s solicitor in both HCCW 974 of 2000 and HCMP 26 of 2006 that BOC had thereby proved in TAI’s liquidation, I am quite satisfied that this is not the case.  Indeed this seems also to be Mr Harrigan’s perception of the position, as appears from his third report to the BVI court, where he makes it clear that BOC has not attempted to prove in TAI’s liquidation, but has supplied information concerning its claim at the liquidator’s request.  It also seems improbable, as a matter of commercial sense, that BOC would have proved in TAI’s liquidation, given that in the BVI, as in Hong Kong, a secured creditor can only prove in the liquidation of its debtor if it either values its security and proves for the balance, or gives up its security and proves for the whole of its debt.  Given that TAI, like TAL, had no assets to speak of, there would be little reason for BOC to have taken either of these courses, when it had valuable security in the form of its charge over TAI’s shareholding in Nam Tai.

11.BOC has also provided substantial further information concerning its claim against TAI, and the manner in which it has been calculated, in evidence filed by it in response to applications against it by Nam Tai and Mr Harrigan in the BVI courts, and in compliance with orders which have been made against it by those courts.  It does not seem that Mr Harrigan seriously disputes the accuracy of the calculations, although there appear to be some issues (such as the prices at which BOC realised the properties of TAL over which it held security) which have not yet been resolved.

TAI’s position in the liquidation of TAL

12.TAI has a contingent claim against TAL, in respect of the value of its Nam Tai shares that have been or will be sold by BOC pursuant to the share charges.  To date, it has not filed any proof in the liquidation of TAL.

The procedural history of the section 219 applications

13.As I have noted, TAI issued its summons for leave to inspect the books and papers of TAL on 13 August 2005.  At that time, the application was brought by Mr Harrigan, whose position as its liquidator was referred to in the title to the application.  At that stage, the application was made on the basis that TAI was a contributory of TAL.  It is accepted that the TAI’s application (and its proceedings in HCMP 26 of 2006) are funded by Nam Tai.  At this stage, the reason given for Mr Harrigan’s desire to inspect the books and papers of TAL was that this would assist Mr Harrigan in deciding whether or not any steps should be taken to challenge the validity of the transfer of TAI’s shareholding in TAL to Mr Yuen on 7 August 1998 pursuant to the stock pledge agreement.

14.TAL’s liquidators indicated that they took a neutral stance in relation to the application, but considered that notice of the application should be given to BOC.  This was done, and before the hearing of the application, BOC wrote to TAI’s solicitors and to the court drawing attention to the fact that TAI could not make the application as a contributory, given that it was not on the register of members of TAL, its shares having long since been transferred to Mr Yuen.

15.I heard TAI’s application on 30 August 2005.  As I did not consider that TAI could make the application as a contributory, being no longer on the register (whatever the causes for that might have been), I adjourned the application sine die, to allow Mr Harrigan to consider whether or not to take proceedings to have TAL’s register of members rectified so as to restore TAI to the register as a member in respect of the 153,999 shares which it previously held.

16.On 18 July 2006, TAI’s solicitor, Mr Ho, made a further affirmation in support of its section 219 application, in which he suggested that TAI had standing to make the application on the basis that it was a creditor of TAL, having regard to its contingent claim which I have described in paragraph 12 above.  In paragraph 12 of this further affirmation, Mr Ho set out a number of additional reasons why TAI wished to inspect TAL’s books and papers.  Apart from a desire to investigate the transfer of TAI’s shareholding in TAL to Mr Yuen (referred to in paragraph 12(i) of the affirmation), it was also suggested that this would allow TAI to investigate the amount claimed by BOC in its (TAI’s) liquidation (paragraph 12(a)), and that it would enable there to be an investigation of a range of matters concerning the affairs of TAL and the reasons for its failure, which might lead to claims being uncovered that could be pursued for the benefit of TAL’s unsecured creditors (paragraphs 12(b) to (h) and (j)).

17.The section 219 application was then restored for hearing before me on 1 September 2006.  Shortly before that hearing, BOC issued its summons seeking to intervene in the application.  In an affidavit of Mrs Daisy Tong, BOC’s solicitor, it was indicated that BOC sought a declaration that TAI is not entitled to participate in TAL’s winding up as a creditor in any way until all of TAL’s debts to BOC have been discharged by full settlement thereof.  BOC also sought orders that Mr Ho’s affirmation of 18 July 2006 be removed from the court file, that Mr Harrigan’s name be struck out as an applicant and replaced with TAI, that the section 219 application should be stayed pending the decision of the Privy Council on TAI’s former liquidator’s appeal to it in respect of the Nam Tai shares, and that Mr Harrigan should pay BOC’s costs of the application personally.

18.On 1 September 2006, I gave directions for the filing of evidence and for the further hearing of this application.

19.In the event, the point concerning Mr Harrigan’s replacement as the application by TAI was rendered otiose, as (following my decision in respect of a striking out application in HCMP 26 of 2006) leave was sought by Mr Harrigan himself to amend the title of the application in precisely the way that BOC had suggested it should be amended.  Similarly, the point in relation to the stay of the application fell away, as the Privy Council had already delivered its judgment by the time of the substantive hearing of this application.

20.Shortly before the hearing, on 23 February 2007, Mr Yuen and Ms Yuen also issued an application for inspection of the books and papers of TAL.  The basis on which their application was made was that this was a more appropriate means to enable access to be had to such books and papers for the purposes of HCMP 26 of 2006.  They had in fact written to the liquidators of TAL asking for such an inspection on 10 November 2006, at which time the liquidator took (as he had done in relation to TAI’s application) a neutral stance, but asked for the application to be served on TAI.  At that stage, Mr Yuen decided not to press the matter, but to file such evidence as he could in opposition to TAI’s application for rectification of TAL’s register of members.  However, with the making by TAI of its discovery application in HCMP 26 of 2006, Mr Yuen seems to have reconsidered his position, and now says that it would be just to permit him and Ms Yuen to inspect TAL’s books and papers with a view to enabling them to file full(er) evidence in HCMP 26 of 2006.  His position was that this was more appropriate than giving TAI discovery in the context of HCMP 26 of 2006.

The procedural history of HCMP 26 of 2006

21.As will be apparent from the procedural history of the section 219 applications, HCMP 26 of 2006 had its genesis in Mr Harrigan’s unsuccessful attempt to obtain access to TAL’s books and papers on the basis that he (or rather, TAI) was a contributory of TAL.  The proceedings were brought pursuant to section 100 of the Ordinance in order to obtain a rectification of TAL’s register of members, so as to provide TAI with standing to pursue its section 219 application.

22.Mr Yuen sought to strike out the proceedings on various grounds.  I dealt with that application in my judgment dated 4 August 2006.  His application met with limited success, in that although the application was not struck out in its entirety, some amendments to it were required.

23.Thereafter, the parties filed evidence in respect of the application.  Following the filing of such evidence, TAI applied for discovery from TAL’s liquidators, who were respondents to the application (taking a neutral stance) by its summons dated 15 February 2007.

TAI’s section 219 application

The position as between TAI and BOC

24.BOC seeks to intervene in TAI’s section 219 application, and to oppose it.  Two questions therefore arise for determination:-

(1) Whether BOC should be permitted to intervene; and

(2) If so (and in any event), whether court’s discretion under section 219 should be exercised so as to permit TAI to inspect TAL’s books and papers.

25.Mr Jat SC, appearing for BOC, says that BOC should be permitted to intervene because:-

(1)	It is an undisputed creditor of TAL, and has lodged a proof of debt in TAL’s liquidation.  It is therefore entitled to be present and to be heard on TAI’s section 219 application.
(2)	More particularly, its interests are affected by TAI’s section 219 application, because in asserting itself to be a creditor of TAL so as to demonstrate its standing to make its section 219 application, TAI is:-
	(a)	acting in breach of the rule against double proof, which applies in all liquidations; and
	(b)	acting in breach of its express contractual obligations to BOC under the guarantees and the share charge.
(3)	TAI seeks to justify its application by suggesting that the amount claimed by BOC in its liquidation calls for investigation, when the amount owed to BOC is plain, and BOC has in any case not made any claim in TAI’s liquidation.
(4)	TAI is funded by Nam Tai, which has a history of vexatious activities against BOC (not least the scheme to destroy the value of its share charges).

26.Mr Jat goes on to submit that, assuming that BOC is allowed to intervene, TAI’s section 219 application should be dismissed because:-

(1)	TAI does not have standing to make the application, whether as a contributory or a creditor of TAL.  So far as standing as a contributory is concerned, TAI lacks such standing because it is not on the register of members of TAL.  And so far as standing as a creditor is concerned, it lacks such standing because it has not filed any proof in TAL’s liquidation, and, more importantly, could not file any proof (and any proof it filed would be bound to be rejected) having regard to:-
	(a)	the rule against double proof; and
	(b)	the terms of its obligations to BOC under the guarantees and the share charge.
(2)	To the extent that it asserts rights as a creditor, it is similarly in breach of both the rule against double proof and its contractual obligations to BOC.
(3)	It has failed, on the evidence, to make out any case for being permitted to inspect TAL’s books and papers.

27.For TAI, Sir John Swaine SC contends that it has standing as a creditor to make the application, as it is a contingent creditor of TAL given that once BOC realises all of the Nam Tai shares which had been pledged to it by TAI to support loans by BOC to TAL, it will be subrogated to BOC’s rights against TAL to the extent of the value of such Nam Tai shares.  Sir John also submitted that even if TAI was not at present in a position to lodge a proof of debt, having regard to the Privy Council judgment, and the evidence (not, I think, disputed by BOC) that it was probable that the Nam Tai shares to be restored to BOC would be more than sufficient to satisfy BOC’s claims against TAI (whereupon BOC would be obliged to withdraw its proof of debt in the TAL liquidation), it was only a matter of time before it would be in a position to do so, and that time was drawing ever closer.  In these circumstances, Sir John suggested that given that there were good reasons to allow TAI to inspect TAL’s books and papers, in that any potential claims uncovered might result in recoveries for TAL’s unsecured creditors (which presently stand to receive nothing from TAL’s liquidation), and the sooner this was put in train, the better.

Whether BOC should be permitted to intervene

28.In my view, BOC is entitled to intervene and be heard in relation to TAI’s application under section 219.  This is for the following reasons:-

(1) The terms of the guarantees and share charge (which I shall set out and consider further below) given by TAI to BOC appear to me to give rise to an issue as to whether or not TAI is entitled to seek to participate in TAL’s liquidation before BOC has been paid in full everything that is owed by TAL to it.  Whatever might be the outcome of this argument at the end of the day, it seems to me to be one which is sufficiently seriously arguable as to entitle BOC to intervene so as to be enable to advance it in opposition to TAI’s application.

(2) It also seems to me that BOC’s argument as to TAI’s lack of standing on the basis of the rule against double proof is one which gives rise to the same basic issue.  As the party with the primary entitlement to prove in TAL’s liquidation (assuming that BOC is right in this argument), BOC has, in my view, a sufficient interest in the matter to justify its intervention.

29.Either of these grounds is sufficient to entitle BOC to intervene in TAI’s application.  I also think that BOC’s indisputable status as a proving creditor of TAL entitles it to attend at this application (although insofar as it relies only on this rule, it might not necessarily be entitled to the costs of its attendance).  See Rule 144(1) of the Companies (Winding-up) Rules (“the Winding-up Rules”), which provides that:-

“... every person whose proof has been admitted shall be at liberty, at his own expense, to attend proceedings, and shall be entitled, upon payment of the costs occasioned thereby, to have notice of all such proceedings as he shall by written request desire to have notice of ...”

30.So far as the remaining matters relied upon by Mr Jat are concerned, I think that these go more to the substantive merits of TAI’s application, and to the way in which the court should exercise its discretion, rather than to BOC’s standing to intervene in the application.

Substantive merits of the application

Whether TAI has standing to apply under section 219 ...

31.Section 219(1) of the Ordinance provides:-

“The court may, at any time after making a winding-up order, make such order for inspection of the books and papers of the company by creditors and contributories as the court thinks just, and any books and papers in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise.”

... as a contributory

32.For the reasons I have already explained in paragraph 15 above, I do not consider that TAI has standing to bring its application under section 219 as a contributory of TAL.

... or as a creditor

33.So far as its standing as a creditor is concerned, Mr Jat’s submission was that, whether because of the terms of the guarantees and share charge, or because of the rule against double proof, TAI was not entitled to prove in TAL’s liquidation, and any proof lodged by it would be bound to be rejected.  That being so, owing to its inability to prove in TAL’s liquidation, TAI could not be regarded as a creditor of TAL for any purpose of the winding up, including for the purpose of making an application under section 219.

Who is a creditor?

34.“Creditor” is nowhere explicitly defined in the Ordinance for the purposes of a winding up.  However, the status of a person as a creditor is of great importance in the context of a winding up.  As it is put in McPherson’s Law of Company Liquidation (1^st ed in England & Wales), at para 12.01:-

“The staus of creditor, like that of a contributory, confers in winding up a number of rights and powers that are of considerable importance.  A creditor ... is entitled to petition for winding up, to make applications to court in the course of the liquidation, and to attend and vote at meetings of fellow creditors.  Most important of all, however, is the right to prove and receive a dividend in winding up, and, although the [Ordinance] contains no definition of the term “creditor” for the purposes of winding up, it appears to proceed throughout on the assumption that a person who is entitled to prove is a creditor for all the purposes of the liquidation.  In determining, then, who is a creditor of the company it is necessary to inquire who may prove ...”

35.It seems to me that this is an accurate statement of the position.  Once a company is in liquidation, a dividend will only be paid to those who have been admitted to proof by the liquidator.  In some cases, the Ordinance or the Rules make it clear that a creditor’s right to do certain things are dependent on his having lodged a proof and/or his proof having been admitted (for example, this is necessary before a person is entitled to be counted towards the quorum of any meeting of creditors, or to vote at any such meeting - see Rules 123(1) and 124(1) of the Winding-up Rules).  In other parts of the Ordinance (such as section 219, or sections 275 and 276 which deal with fraudulent trading and misfeasance claims respectively, each of which can be brought by a creditor), the requirement for a proof to have been lodged and/or admitted is not spelt out.  However, given that the purpose of a winding up is to ascertain and realise the assets of a company for the benefit of its creditors (where it is insolvent), it seems to me to accord with common sense that only someone who has an interest in the distribution of the company’s assets at the end of the day should be regarded as having an interest in the conduct of the liquidation, or the prosecution of claims (such as those under section 275 or 276) which may result in recoveries for the benefit of the creditors.

36.In my view, therefore, the ability to prove in a liquidation is critical to a person’s status as a creditor for the purposes of the provisions of the Ordinance relating to winding up where that status is necessary for him to have standing to make an application or in some way to participate in the liquidation.

37.It is clear that TAI has not to date lodged any proof in the liquidation of TAL.  It is also clear that it is not presently in a position to do so.  This is so for both of the reasons identified by Mr Jat.

The rule against double proof

38.First, it seems to me to be clear that the rule against double proof means that TAI cannot, until BOC has been paid in full what it is owed by TAL, lodge a proof in TAL’s liquidation, and that if it tried to do so, TAL’s liquidators would be bound to reject such a proof.  This principle mandates that only one proof may be lodged for what is, in substance, the same debt, so that where a surety has a right of indemnity against the company as principal debtor, he is not entitled to prove in respect of that right until the creditor of the company has been paid in full.  The principle is based on simple notions of fairness, which call for regard to be had to the substance of a particular situation, and not the form.  There would be obvious unfairness to other creditors if both a principal creditor and a surety were entitled to prove for and receive a dividend in respect of what is in substance a single debt.  In Re Polly Peck International plc [1996] 2 All ER 433, Robert Walker J described and summarised the rule as follows (at p.441f-g and 442c-h):-

“The rule against double proof is a long-standing principle of the law of bankruptcy, and has applied in the winding up of companies since the Companies Act 1862 (see Re Oriental Commercial Bank, ex p European Bank (1871) LR 7 Ch App 99).  It has often been described in terms of straightforward and obvious fairness, depending on substance, not form.”

...

“Much the commonest situation in which the rule against double proof applies is that of suretyship.  Indeed it has been said that it applies only in a situation which actually is, or is analogous to, that of suretyship (the latter category includes the old cases on negotiable instruments considered in Re Oriental Commercial Bank ex p European Bank).  It is therefore convenient to set out some very elementary rules as to suretyship, shorn of complications arising from the provision of security or from the Ellis v Emmanuel distinction.  In what follows, C is the principal creditor, D the principal debtor, and S the surety (and all are companies).

(1) So long as any money remains due under the guaranteed loan, C can proceed against either D or (after any requisite notice) S.

(2) If D and S are both wound up, C can prove in both liquidations and hope to receive a dividend in both, subject to not recovering in all more than 100p in the pound.

(3) S’s liquidator can prove in D’s liquidation (under an express or implied right of indemnity) only if S has paid C in full (so that C drops out of the matter and S stands in its place).

(4) As a corollary of (3) above, S’s liquidator cannot prove in D’s liquidation in any way that is in competition with C; though S has a contingent claim against D (in the event of C being paid off by S), S may not make that claim if it has not in fact paid off C.

“The situation in (2) above is what insolvency practitioners call a ‘double-dip’, which is permissible; the situation in (4) above is the simplest case of what would be double proof, which is not permissible.

“So far as the basis of the rule needs (or indeed allows of) further explanation it is that the surety’s contingent claim is not regarded as an independent, free-standing debt, but only as a reflection of the ‘real’ debt – that in respect of the money which the principal creditor had loaned to the principal debtor.”

39.The present case falls squarely within situations (3) and (4) identified by Robert Walker J.  In my view, on this ground alone, it is clear that TAI is not entitled to prove in TAL’s liquidation at present, and will not be able to prove until after BOC has been paid in full.  Once BOC has recovered the debt owed to it by TAL in full, BOC will be bound to withdraw its proof, and TAI will then be free to lodge its own proof and be recognised as a creditor of TAL.  Until then however, it cannot, in my view, be recognised as a creditor of TAL.

40.Sir John contended that:-

(1) A contingent creditor could be a creditor, for the purposes of winding up and is entitled to lodge a proof of debt in the winding up;

(2) It was not necessary, before a creditor could exercise his rights under section 219, for him to have lodged a proof in the winding up;

(3) In the circumstances of this case, having regard to the fact that it was inevitable that TAI would be entitled to lodge a proof in the future (and possibly the very near future), it was appropriate to recognise it as a creditor for the purposes of section 219.

41.I accept, as did Mr Jat, that a person with a contingent claim is capable of being a creditor for the purposes of winding up.  That this is so appears from the fact that a contingent creditor has locus to petition for the winding up of a company (see section 177(1) of the Ordinance), and also from the terms of sections 263 and 264 of the Ordinance, and section 34 of the Bankruptcy Ordinance (Cap.6), the provisions or which are incorporated into the scheme of proof of debts in a liquidation by section 264 of the Ordinance.  Each of these latter sections makes it clear that a contingent debt is capable of being proved for in liquidation.

42.However, it does not follow that because a contingent creditor can prove in a company’s liquidation, all contingent creditors are ipso facto entitled to prove and be admitted to proof.  The rule against double proof provides a clear example of a situation in which a person may have a contingent claim against a company in liquidation, yet be unable to lodge a proof in respect of it, and so lack standing as a creditor for the purposes of the provisions of the Ordinance dealing with liquidations.

43.As to Sir John’s submission that a contingent creditor who has not proved in the liquidation can nonetheless apply under section 219, because that section does not state in terms that a proof must first be lodged before a creditor has standing to apply pursuant to it, I do not think that this submission meets to difficulty that is created for TAI by the rule against double proof.  The question is not, in my view, so much one of whether a proof has been lodged, as one of whether a proof can (or can successfully) be lodged by the person claiming to be a creditor.  There may be situations in which a creditor has not lodged a proof for good reason, but where a person claiming to be a creditor is unable to lodge a proof which will eventually be admitted, I do not see how he can be considered to be a creditor for the purpose of the liquidation in question.

44.Sir John cited a number of authorities with a view to showing that a contingent creditor could be a creditor for the purposes of the Ordinance winding up, and that the lodging of a proof was not necessarily a prerequisite of recognition as a creditor.  In my view, none of the authorities cited require me to reach a different conclusion on this point.

45.As to his suggestions that it would be startling that a contingent creditor should be able to petition for the winding up of a company, yet be unable to participate in the winding up, and that no proof of debt could be lodged at this stage, no winding up order having been made, it seems to me that the absence of a proof follows from the fact that no winding up order will have been made at this stage.  Further, this example begs the question of whether a contingent creditor whose claim is subject to the rule against double proof would be able to successfully present a winding up petition – no authority was cited to show that this could be done.

46.Sir John also pointed to the fact that a contingent creditor could apply for the restoration to the register of a company that has been struck off (as is illustrated by e.g. Harvest Lane Motor Bodies Limited [1969] 1 Ch 457 – but in such cases, there is no liquidation, and no process of filing of proofs, as the company no longer exists.  The purpose of giving a creditor or contingent creditor the right to apply in such a case is to enable him to pursue his claim against the company, which no longer exists.  I do not see that this line of authority provides much assistance here.

47.Finally, Sir John referred me to Premium Vegetable Oils Sdn Bhd v ICG Systems Sdn Bhd, an unreported decision of the High Court of Malaysia dated 1 August 2006.  In that case, it was held that a contingent creditor had standing to bring a fraudulent trading claim against directors of a company in liquidation, notwithstanding that the creditor had not filed any proof of debt.  However, it is pertinent to note that it appears from paragraph 25 of the judgment that there appears to have been no opportunity for the creditor in question to file a proof of debt, which is not the case here.  More pertinently, however, there does not appear to have been any suggestion that the rule against double proof was engaged in that case (or for that matter, in any of the other authorities cited for TAI).

48.Finally, I do not think that the fact that TAI may (or will) at some point in the future have standing to make the application provides any reason for acceding to it at the present time, when it clearly lacks such standing.

49.For all of these reasons, I am satisfied that TAI is not presently in a position to file an admissible proof of debt in TAL’s liquidation, and is therefore not a creditor of TAL for the purposes of section 219, and lacks the necessary standing to apply under section 219.  Accordingly, its application must be dismissed.

The terms of the guarantees and share charge

50.I think that the same result is reached by the alternative route advanced by Mr Jat – that the terms of the guarantees and share charge given by TAI to BOC preclude it from proving in the liquidation of TAL, and thus preclude it from being considered to be a creditor of TAL so as to have the necessary standing to make the application.

51.Clause 15 of each of the first two guarantees, clause 9.1 of the third guarantee and clause 16.1 of the share charge executed by TAI all provide that until BOC has been paid in full all sums owing to it by TAL, it shall not be entitled to exercise any of its rights of subrogation or in any way to claim against TAL, or prove in its liquidation in competition with BOC.

52.It seems to me that these provisions clearly constitute negative covenants by TAI which prevent it from proving in TAL’s liquidation until BOC has been paid in full (see Re SSSL Realisations (2002) Limited [2006] Ch 610 at paragraphs 57 to 59 of the judgment).

53.Mr Swaine suggested that in seeking to obtain inspection of TAL’s books and papers, there was no question of TAI competing with BOC, in that such an inspection was not inimical to BOC’s rights as a creditor of TAL.  He emphasised that TAI did not seek to prove in the liquidation of TAL or claim any dividend until BOC was paid in full.  However, it seems to me that the right of TAI to inspect TAL’s books and papers is dependent on it being able to establish that it is in fact a creditor of TAL, and that this is where the difficulty lies from TAI’s point of view.  If, because it is not able to make any claim against TAL, or to lodge any proof against it, because of the negative covenants which it has given in favour of BOC, I do not see how TAI can be said in any meaningful way to be a creditor of TAL for the purposes of the latter’s liquidation.  In order to establish that it is a creditor of TAL, it is necessary for TAI to assert a right to be paid, and in asserting such a right, it will inevitably be doing so in competition with BOC, contrary to the terms of the guarantees and the share charge.

54.I therefore think that for this reason also, TAI is unable to establish that it is a creditor of TAL, and therefore lacks the standing to make this application.

Assertion by TAI of rights as a creditor is also a breach of rule against double proof, and of the negative covenants

55.It seems to me that these arguments are simply another way of putting the arguments as to standing, and do not add anything to it.  However, for the reasons I have given above, I am satisfied that TAI is unable to assert itself to be a creditor of TAL, having regard to the rule against double proof, and to the negative covenants in the guarantees and share charge which have been referred to above.

Whether there are grounds for the making of an order

56.Had TAI been able to establish its standing as a creditor of TAL, I would, on balance, have been inclined to exercise my discretion under section 219 to allow it to inspect the books and papers of TAL.  I would not, however, have been inclined to do so on the basis of either of the grounds identified in paragraphs 12(a) and (i) of Mr Ho’s affirmation of 18 July 2006.  As to the former, Sir John accepted that in the light of the evidence filed in response to it by BOC, this was a weak ground.  As to the latter, I do not see that there is likely to be much benefit to the liquidation in the purpose stated.  However, it does seem to me (and Mr Jat accepted that this was the case on the face of the purposes stated) that the remainder of the purposes identified could result in benefit to the unsecured creditors of TAL.  Mr Jat suggested, however, that it was at best speculative whether or not any benefit would accrue.  That is, broadly speaking, true.  However, given that there appears to have been no real investigation of the causes of TAL’s failure, or into its affairs, due to the constraints under which the liquidators of TAL have operated due to their lack of funds, it seems to me to be reasonable for TAI to wish to have these matters looked into.

57.Nonetheless, for the reasons I have already given, TAL does not in my view have the standing to make its application under section 219, which must therefore be dismissed.  Unless and until BOC has recovered everything that it is owed by TAL in full, TAI will not be in a position to assert its status as a creditor of TAL.

The Yuens’ application under section 219

58.The Yuens are clearly contributories of TAL, appearing as they do on its register of members.  They therefore have the necessary standing to make this application.

59.BOC did not make submissions in relation to the Yuens’ application, and the liquidators of TAL took a neutral stance, requesting, however, that provision should be made for their costs of providing inspection.

60.Having considered the application, I have come to the view that I should not exercise my discretion to make the order sought by the Yuens.  I have come to this view because it seems to me that the purpose for which the Yuens seek inspection of the books and papers of TAL is a limited one, which does not engage the interests of the liquidation, or the creditors or members of TAL generally.  It is not made for the purpose of benefiting TAL’s members or creditors, but to enable the Yuens to obtain information to be used in their own defence in HCMP 26 of 2006.  It seems to me that that objective does not require general access to be given to all the books and papers of TAL, and could have been met just as well (and in a more appropriately focussed way) by an application for discovery in those proceedings.  Given that an order for such discovery has now been made in favour of both TAI and the Yuens in HCMP 26 of 2006, I do not see that there is any useful purpose to be served by ordering that the liquidators of TAL should in addition provide the Yuens with a general inspection of its books and papers.

61.For these reasons, I would also dismiss the application by the Yuens for inspection of TAL’s books and papers pursuant to section 219 of the Ordinance.

Other matters raised by BOC

62.As noted in paragraph 17 above, in addition to resisting TAI’s application, BOC suggested that Mr Ho’s second affirmation should be taken off the court file.  The affirmation has been used in evidence in these proceedings, and I can see no pressing reason for it to be removed.

63.BOC also sought an order for costs against Mr Harrigan personally.  At that stage, BOC was concerned as to whether or not Mr Harrigan had the authority to bring the application on behalf of TAI.  Since then Mr Harrigan has obtained an order of the BVI court expressly authorising the bringing of the section 219 application.  I therefore do not think it necessary to make any costs order against Mr Harrigan personally.

Disposition and costs

64.I shall therefore make an order in terms of paragraph 1 of BOC’s summons dated 29 August 2006, and dismiss TAI’s summons dated 13 August 2005 and the Yuens’ summons dated 23 February 2007.  So far as costs are concerned, I shall make orders nisi as follows:-

(1)	On TAI’s summons dated 13 August 2005:-
	(a)	TAI is to pay BOC’s costs of and occasioned by the summons, including all previously reserved costs, to be taxed on the party and party basis if not agreed, with certificate for two counsel; and
	(b)	there will be no order as to costs in respect of any costs incurred by the Yuens in respect of this summons.
(2)	On BOC’s summons dated 29 August 2006, TAI is to pay BOC’s costs of the summons, to be taxed on the party and party basis if not agreed, with certificate for two counsel.
(3)	On the Yuens’ summons dated 23 February 2007, having regard to the fact that minimal time was spent on this, and the fact that the Yuens obtained substantially what they were seeking by the discovery order in HCMP 26 of 2006, I think that the appropriate order would be that there should be no order as to costs.

Sir John Swaine, SC leading Mr Jose-Antonio Maurellet, instructed by Messrs Wilkinson & Grist, for the Applicant

Mr Jat Sew-Tong, SC leading Mr Godfrey Lam, instructed by Messrs Deacons, for the Bank of China (Hong Kong) Limited

Mr John Brewer, instructed by Messrs Weir & Associates, for Mr Elmer Yuen and Ms Mimi Mi-Wahng Yuen

The Joint & Several Liquidators, absent

Attendance excused, for Official Receiver