All Overseas Ltd and Another v. Wylie Industrial Ltd and Others

HCA 405/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 405 OF 2003

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BETWEEN

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Coram : Before Master M. Yuen in Chambers

Date of Hearing : 13 December 2007

Date of Judgment : 28 January 2008

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J U D G M E N T

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1.There are 2 summonses to attend to in this hearing.  The 1^st summons was taken out on 30 July 2007 by the 2^nd plaintiff for summary judgment to be entered against the 1^st , 2^nd and 3^rd defendants.  The 2^nd summons was an application made by the 1^st defendant on 6 December 2007 for stay of the present proceeding on the ground that the 1^st defendant is facing a winding-up petition due to be heard on 30 January 2008.

2.The events evolved out of the purported enforcement of a share mortgage in a loan transaction.  

3.The lender of this loan was Chelton Finance Limited (hereinafter called “Chelton Finance” for short).

4.The borrowers of this loan were Best Result International Limited (hereinafter called “Best Result” for short) and Great Luck Holdings Limited (called “Great Luck” for short). Best Result and Great Luck, two BVI companies, were the only 2 registered shareholders of Billion Top Garment Limited (called “Billion Top” for short which is the 2^nd plaintiff in the present proceeding) at the time of the signing of the share mortgage on 11 January 2002. Mr. HAU Wing Lam and Great Wealth Trading Limited (called “Great Wealth” for short) were the only directors of Billion Top between 11 January 2002 and 26 January 2002.

5.According to this share mortgage of 11 January 2002, Best Result and Great Luck pledged the shares in Billion Top to Chelton Finance to secure a loan of HK$600,000 from Chelton Finance.  Clause 2 of the share mortgage provided documents in escrow were to be deposited with Chelton Finance.  The documents deposited included: (i) share certificates; (ii) related instruments of transfer and contract notes duly signed in blank by Best Result and Great Luck in favour of Chelton Finace or its nominees; and (iii) duly signed undated resignations of the 2 directors of Billion Top: Mr. HAU Wing Lam and Great Wealth.

6.On 26 January 2002 All Overseas Limited (called “All Overseas” for short which is the 1^st plaintiff in this action) was registered as a director of Billion Top with the Companies Registry, while HAU resigned from his directorship on the same day.  In the defence filed in HCA-4515/02 Chelton Finance challenged the validity of the appointment of All Overseas as a director of Billion Top.

7.The loan was not repaid. On 31 August 2002 Best Codes Nominees Limited, purporting to act as the company secretary of Billion Top, gave notice to the Companies Registry that (i) Great Wealth resigned from its secretary post; (ii) Great Wealth, Mr. HAU Wing Lam and All Overseas resigned from their directors posts; and (iii) Best Codes Nominees was appointed secretary of Billion Top.

8.By a notification dated 25 September 2002 Lau King Fai (hereinafter called “Lau” who is the 2^nd defendant in this action), purported to act as the director of Billion Top, gave notice to the Companies Registry that LAU and Li Hui Zhang (hereinafter called “Li”) were appointed directors of Billion Top on 25 September 2002.

9.On 26 November 2002 Best Codes Management Limited acting on behalf of Best Codes Nominee Limited sent an undated fax to the solicitors of All Overseas to inform All Overseas that All Overseas had been removed from its director post of Billion Top by a special resolution passed at an extraordinary general meeting of Billion Top held on 31 August 2002.

10.By an agreement for sale and purchase as well as an assignment dated 19 November 2002 Lau signed on behalf of Billion Top to sell the workshop B-9 on the 2^nd floor of Block B of the Hong Kong Industrial Centre at 481-491 Castle Peak Road, Hong Kong (hereinafter called “the Workshop” for short) to Wylie International Limited (called “Wylie” for short which is the 1^st defendant in this action) for HK$2.7 million.

11.By an agreement dated 25 November 2002 Wylie signed an agreement to sell the Workshop to the 3^rd defendant, Fortune Winner Corporation Limited (called “Fortune Winner” for short).  This subsequent sale to Fortune Winner was not completed as the 3^rd defendant became aware of the present proceeding.

12.Billion Top, under its new management team, also entered into an agreement with Chelton Finance to settle the repayment of an outstanding loan owing by Billion Top to Chelton Finance.  This loan was secured by a 2^nd mortgage over the Workshop.  The outstanding loan sum formed the basis of a petition for winding-up brought by Chelton Finance against Billion Top in HCCW 1034/2002.  This winding-up petition was subsequently settled.

13.On 29 November 2002 All Overseas took out a civil suit in HCA 4515/2002 to sue Best Code Nominees, Lau King Fai, Li Hui Zhang and Chelton Finance. In this action All Overseas sought the declaration of the court that (i) Lau is not and was never a director of Billion Top; (ii) an injunction to restrain the defendants to act as company secretary or director of Billion Top; (iii) a declaration that the EGM on 31 August 2002 is void; and (iv) a declaration that All Overseas is the director of Billion Top.

14.On 28 February 2006 All Overseas obtained leave of the Court to add Best Result, Great Luck and Chelton Finance as the 2^nd plaintiff, the 3^rd plaintiff and the 4^th defendant in HCA-4515/02.

15.On 22 March 2006 the Court of Appeal gave judgment in CACV 329/2005 (on appeal from the Order 14/14A determination in HCA 4515/2002) and ruled: -

(i)	Chelton Finance was not entitled to convene an extraordinary general meeting of Billion Top without first having the shares of Best Result and Great Luck transferred to and registered in the name of Chelton Finance Limited and its nominees;
(ii)	Chelton Finance cannot have the shares of Best Result and Great Luck transferred to and registered without applying to the old/existing board of directors (as at 30 or 31 August 2002);
(iii)	a declaration that Best Codes Nominees is not and never was the company secretary, and that Lau and Li are not, and never were the directors of the company;
(iv)	an injunction to restrain the 1st defendant (Best Code Nominees), the 2nd defendant (Lau King Fai) and the 3rd defendant (Li Hui Zhang) and each of them whether by themselves, their servants or agents or otherwise howsoever from holding themselves out and acting as, in the case of the 1st defendant, company secretary, and in the case of the 2nd defendant and the 3rd defendant, directors of Billion Top;
(v)	a declaration that the EGM of 31 August 2002 is void.

16.On 1 November 2006 the defendants’ application for leave to appeal to CFA against the CA decision in CACV 329/2005 was refused.

17.On 15 December 2006 by consent of parties, the defendants were given leave by the Court of Final Appeal to appeal to the CFA (case ref: FAMV-46/06) on condition that the defendants paid into court on or before 28 December 2006 a sum of HK$250,000 as security for costs, in default of which the defendants’ application for leave to appeal to CFA and to adduce additional evidence in the appeal would be dismissed.

18.The amount of security for costs was not paid by the defendants and the defendants’ application for leave to appeal was dismissed on the defendants’ default of payment of security for costs in FAMV-46/06.

19.There has been a chain of litigations taken out between the parties and the related individuals or companies:-

HCCW 1034/2002	In September 2002 Chelton Finance presented a petition to wind up Billion Top. All Overseas caused Billion Top to oppose the petition.  The winding up petition was dismissed with costs against Chelton Finance.
HCA 4515/2002	On 29 November 2002 All Overseas sought the declaration from court, inter alia, to declare Lau, Best Codes Nominee Limited and Li are never directors of Billion Top.
	On 22 March 2006 Court of Appeal in CACV 329/2005 declared that Lau and Li are not and never were the directors of Billion Top.
	The defendants’ application for leave to appeal to the Court of Final Appeal in respect of the determination of the Court of Appeal in CACV 329/2005 was dismissed on 29 December 2006 for the defendants’ failure to pay security for costs.
	On 13th August 2007 the defendants made applications for consolidation of the 3 cases HCA 4515/2002, HCA 405/2003 and HCA 742/2006 and for amendment of the pleadings in HCA 4515/2002.  On 3rd December 2007 Chelton Finance further made application to stay the proceeding. These 3 summonses were heard by Madam Registrar Au-yeung on 10 December 2007.  On 13 December 2007 Madam Registrar ordered the proceeding in HCA 742/2007 to be stayed. She also granted leave to the defendants in HCA 4515/2002 to withdraw their applications to amend their pleadings in HCA 4515/2002 and to consolidate the 3 actions.
HCA 4779/2002	On 21 December 2002 Fortune Winner took out a writ to sue Wylie for specific performance.
HCA 405/2003	On 29 January 2003 All Overseas took out the present action to sue Wylie, Lau and Billion Top for (i) a declaration that the sale of the workshop is null and void, (ii) a declaration of the assignment dated 19 November 2002 signed by Lau on behalf of Billion Top is null and void; (iii) a declaration that Wylie is not and never was the owner of the workshop; and (iv) an injunction to restrain Wylie from disposing or dealing with the workshop.
	After the CFA determination in FAMV-46/06, All Overseas obtained leave of the court on 11th June 2007 to remove Billion Top from the defendants list and to rename it as the 2nd plaintiff in this action. Fortune Winner was also added to the action as the 4th defendant.
HCA 742/2006	On 3 April 2006 Billion Top, Best Result and Great Luck brought proceeding against Chelton Finance to seek, inter alia, a declaration that the plaintiffs are entitled to redeem the share mortgage on payment of HK$964,275 and HK$780,100.

20.The plaintiff now seeks the order of the court for summary judgment in the following terms: -

(a)	a declaration that an agreement for sale and purchase dated 19 November 2002 signed by Lau on behalf of Billion Top for the sale of the Workshop to the 1st defendant is null and void;
(b)	a declaration that an assignment dated 19 November 2002 purportedly executed by the Lau on behalf of Billion Top for assignment of the property to the 1st defendant is null and void;
(c)	a declaration that the 1st defendant is not and never was the owner of the property;
(d)	an order that the registration of the following memorial be vacated: - (a) memorial 8818201 registering the sale and purchase agreement; (b) memorial 88833834 registering the assignment; (c) memorial 8829828 registering the sale and purchase agreement; and (d) memorial 8838332 registering the writ of summons; and
(e)	final judgment against the 1st defendant for possession of the property.

21.Wylie made crossed application on 6 December 2007 for stay of the plaintiffs’ summary judgment application until conclusion of the hearing of a compulsory winding-up petition filed against 1^st defendant by Treasure Dragon Industrial Limited. Hearing of this winding-up petition was scheduled for 30 January 2008.

Summary Judgment application under Order14

22.The present summons filed on 30 July 2007 was first fixed for hearing before Mr. Justice Stone.  On 28 September 2007 Stone J ordered the plaintiff’s summary judgment application to be adjourned to be heard by a Master, hence the present hearing.

23.Mr. Chain, counsel on behalf of the plaintiff submitted to court,

(a)	It is the final adjudication of the Courts of Hong Kong that Lau King Fai is not and was not a director of Billion Top. It follows therefore the purported agreement to sell as well as the purported assignment of the workshop signed by Lau King Fai were null and void.
(b)	Lau King Fai was bound by the judgment given in CACV 329/2005 and the matter is res judicata between Lau and All Overseas.
(c)	Fortune Winner (the 3rd defendant in the present action in HCA 405/2003) had indicated a neutral stance and that it has no objection to judgment to be entered as claimed.
(d)	The transaction cannot be salvaged by the bona fide purchaser claim of Wylie because: -
	(i)	the burden is on the 1st defendant to show it is a bona fide purchaser: Chan Chun Chung v PBM (2004) 7 HKCFAR 178 at 183-184. The 1st defendant has failed to satisfy that burden.
	(ii)	The purported sale of the workshop by Lau on behalf of Billion Top could not possibly have been a bona fide purchase without notice for the 1st defendant was just another corporate vehicle of Mr. So Day Wing, the person operating Chelton Finance, and the 1st defendant did not pay for the alleged “purchase”.  The payment of part of the purchase price of HK$2 million for the Workshop came from the bank account of Mr. So’s wife.

24.The 2^nd plaintiff accepts that the 1^st defendant ought to be given credit in respect of the payment Wylie paid to the bank for the discharge of the Workshop mortgage in the sum of about HK$2.1 million.  The 2^nd plaintiff argued the 2^nd plaintiff is, however, entitled to set off this sum of HK$2.1 million against the 2^nd plaintiff’s claim against the 1^st defendant in respect of the rental the 1^st defendant collected from the tenants of the workshop since November 2002.  In light of the pending winding up petition against the 1^st defendant, the 2^nd plaintiff accepts that the reliefs prayed in paragraphs (3) to (7) of the Order 14 summons could be adjourned sine die with liberty to restore.

25.The 1^st defendant opposed the plaintiffs’ application for the following reasons: -

(a)	the factual matrix between all the pending High Court actions are intertwined.  One ought not consider the claim in HCA 405/2003 in isolation without reference to the other litigations.
(b)	It is wrong for the plaintiffs to suggest the purchase of the property by the 1st defendant was not a bona fide transaction without notice of the plaintiffs’ claim by simply relying on the fact that the 1st defendant is controlled by a friend of Mr. So Day Wing.  There is no evidence to suggest the 1st defendant is the corporate vehicle of Mr. So.
(c)	The HK$2 million part payment of the purchase price of the Workshop was a loan from the ex-wife of Mr. So while the balance of the HK$700,000 was paid by cash.
(d)	Leave to defend ought to be given unless there clearly is no defence to the claim of the plaintiffs, as Court of Appeal had refused to decide in a summary application under O.14A the issue about the proper appointment of All Overseas, and the issue about the identify of the directors of Billion Top has not been finalised.
(e)	Besides Treasure Dragon Industrial Limited has presented a winding-up petition against Wylie, all further proceeding against the 1st defendant ought to be stayed for no creditor, save in exceptional circumstances, ought to be allowed any priority over the other creditors.  If the plaintiffs have a good claim against the 1st defendant, they would equally have a good claim against the liquidator in winding-up, the plaintiffs would not suffer any prejudice with a stay pending resolution of the winding-up petition. The court ought therefore preserve the status quo of the parties by granting a stay.

26.The 2^nd defendant opposed summary judgment to be made against him as he assumed no personal liability when he acted as a director of Billion Top in signing the agreement for sale and purchase and the ultimate assignment to Wylie.

27.The 3^rd defendant does not contest the plaintiffs’ application on condition that no order for costs shall be made against it.

28.In reply Mr. Chain said the bona fide purchaser concept has no application and does not assist the 1^st defendant as the 1^st defendant has not acquired any legal title over the property.  Nor could the 1^st defendant enlist help from the apparent or ostensible authority principles since the 2^nd defendant was never clothed with either power when signing the agreement or the assignment.

Stay of Proceeding?

29.A stay of proceeding would be automatic upon the granting of a winding up order.  Upon the presentation of a winding up petition, the order of stay of proceeding is an exercise of the judicial discretion of the court.  Stay would usually be granted with the following objectives in mind: the need to maintain status quo of all creditors of the company so as not to give undue priority to any creditor to the prejudice of the others; the need to minimize costs; not to reduce the size of the estate in the event of the granting of a winding-up order; and not to bring about injustice to the parties.

30.On 30 January 2008 when the winding-up petition of the 1^st defendant was heard, all proceedings would be stayed should a winding-up be granted. Alternatively if no winding-up order was made, there would not be a need for the stay of the present proceeding.  

31.To examine the interest in the workshop, one is examining the legal position of the parties created by way of their agreement and their assignment back in 2002, which was well before the presentation of the winding-up petition.

32.With the judgment of the Court of Appeal, Lau is not a director of Billion Top. His purported execution of the sale and purchase agreement on behalf of Billion Top could not have been a valid one.  Whatever beneficial right Chelton Finance might have over the shares of Billion Top and the Workshop owned by Billion Top could not be back dated in time to 2002 to rectify the 2^nd defendant’s act which was done without legal validity at the time.  Hence the conveyance and assignment of the land interest concerning the Workshop is not rectifiable.

33.I accept the concept of bona fide purchase has no application here as the shield is only applicable when a valid legal interest had been transferred to Wylie in the land transactions in 2002.  The turquand rule would not have assisted Wylie either as the capacity of the 2^nd defendant in purporting to act on behalf of Billion Top is not a matter of the internal management or procedural irregularity.  Rather it was the legal capacity of the director. In Morris v Kanseen [1946] AC 459 the House of Lords held that s.285 of the Companies Act 1985 (the equivalent of s.157 of the Companies Ordinance Cap 32 in Hong Kong) did not help the appellant in the action because the section only entitles a person to treat a transaction as binding on the company if the transaction is entered into by the directors who were properly appointed in substance, and the defect in their appointment was merely procedural.  

34.As a consequence, Wylie has no legal title over the Workshop. The legal interest over the Workshop does not form part of the estate of Wylie even assuming a winding-up order would be granted on 30 January 2008.

35.I do not find the case of Hua Rong Finance [2001] 3 HKLR 623 directly relevant since Hua Rong Finance was dealing with a deception scenario which is completely different from the present fact circumstances.

36.Ownership is obviously inclusive of both legal and beneficial interests.  Whether Chelton Finance has a beneficial interest to compel the directors of Billion Top to assign all shareholdings of Billion Top to Chelton Finance or its nominee and whether Wylie has any beneficial interest over the Workshop would be the issues to be adjudicated in HCA-742/2006. To grant the plaintiff an outright order for possession and to declare the 1^st defendant never has any beneficial interest over the Workshop would have deprived the 1^st defendant and Chelton Finance a claim of right over the share mortgage agreement and the sequential land sale transaction.

Orders of the Court

37.Summary judgment is granted in favour of the plaintiffs against the 1^st and 3^rd defendants as prayed in reliefs (a), (b) and (d) in paragraph 1 of their O.14 summons. No order is made against the 2^nd defendant as the 2^nd defendant was acting as a director, i.e. in the capacity of an agent of the disclosed principal, of Billion Top in signing the agreement and the assignment.

38.As the winding-up petition of the 1^st defendant is due to be heard in 2 days’ time, I do not find it necessary to grant any stay of the present proceeding.

39.Since the plaintiffs succeeded in obtaining half of the reliefs sought, costs order nisi is granted as follows:-

(a)	Half of the costs of the present application is awarded in favour of the plaintiffs against the 1st defendant;
(b)	Half of the costs of the present application shall be costs in the cause of the action.

Addendum

[I] Dramatis Personae

Chelton Finance Limited (Lender)

Best Code Nominees Limited

Best Code Management Limited

Lau King Fai

Li Hui Zhang

Wylie International Limited (Buyer of Workshop from Chelton)

Fortune Winner Corporation Limited (Buyer of Workshop from Wylie)

[II] Chronology of Events

Mr. Benjamin Chain instructed by Messrs So, Lung & Associates for Plaintiff

Mr. Leung Yin Kwong instructed by Messrs Fong Yin Cheung & Co. for the 1^st Defendant

Mr. Alexander Wong instructed by Messrs Kwan & Chow for the 2^nd Defendant