Pacific Electric Wire & Cable Co Ltd v. Texan Management Ltd and Others

HCA 2203/2004

HCA 2746/2004

HCA 2763/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2203 OF 2004

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BETWEEN

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HCA 2746/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2746 OF 2004

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BETWEEN

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AND

HCA 2763/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2763 OF 2004

____________

BETWEEN

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(Heard together)

Before:  Hon Saunders J in Chambers

Dates of Hearing:  23-24 June 2008

Date of Decision:  4 July 2008

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D E C I S I O N

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Introduction:

1.On 18 January 2008, in a reserved judgment handed down by me, I made findings favourable to PEWC, consequent upon an application for summary judgement in each of the three actions.  In that judgment I reserved leave to apply in respect of the terms of the orders, and the identity of the particular defendants, against whom relief had been sought in the O 14 proceedings, and against whom PEWC sought orders, in the light of the judgment.

2.Now, PEWC has filed a summons in each of the three actions seeking orders in terms of a draft minute attached to each summons.  The parties were unable to reach agreement on the terms of the orders and I heard from counsel on the areas in which there was dispute.  Following argument, orders were made, essentially in terms of the summons in each case, but with minor amendments.

3.As there may be an issue on appeal in relation to the terms of the orders made, I now give my reasons for the orders made.

Transfers of property to PEWC or its nominee:

4.The primary relief sought in the statement of claim in each of the three actions was that there should be a declaration that certain defendants held the property in dispute on trust for PEWC, and orders that the relevant defendant should transfer to PEWC the relevant property.

5.Mr Westbrook said that PEWC was not entitled to seek orders relating to the transfer of either shares or property to “its nominee”.  I note that in the PacMos action the relief sought was an order for a declaration as to the property being held in trust, and an order for transfer to PEWC or its nominee of the PacMos shares.  In the South Horizons action the relief sought was again a declaration as to the property being held in trust, and an order for transfer of the relevant shares or property to PEWC, but not its nominee.  In the Shouson Hill action declarations of trust were sought, and an order of transfer of shares or property, again to PEWC, but again, not its nominee.

The concept of the use of a nominee:

6.It is perfectly normal today for corporate entities to hold property in special-purpose vehicles that are established for a single particular purpose, or established as a general asset holding companies.  Accordingly, there can be no commercial objection to the request by PEWC that, upon a finding that it is entitled to the property, the property should be vested in such a vehicle.  In this case PEWC asks that the property be vested in a wholly owned subsidiary, PEWC Asset Holdings Limited, (PAH).

7.Mr Westbrook did not suggest, as far as Hong Kong was concerned, all the property all being in Hong Kong, that there was any taxation or stamp duty reason why the property should not be vested in a nominee.

8.The argument was made in the skeleton, although not orally, that the transfer of property to a nominee was an attempt by PEWC to circumvent Taiwanese regulations.  No regulations were put before me and I do not understand the argument to be further pursued.

9.In the PacMos action, PEWC having sought by way of original relief the transfer of the relevant property to a nominee, all other matters aside, no objection could be taken to the order sought.  In the South Horizons action and the Shouson Hill action no order for transfer to a nominee was originally sought. 

10.Mr Westbrook argued that as the findings were made only in respect of PEWC, it was appropriate that orders should be made for transfer to PEWC.  The argument does not recognise that in each case the declaratory order sought, and undeniably available to PEWC on the findings made, was that the property in each case was held on trust for PEWC. 

11.Plainly, PEWC are entitled to call for the trust property to be transferred to them.  I see no reason why, all other matters aside, they should not ask that the property be transferred to a wholly owned subsidiary, or asset holding company.  That is particularly so in the light of the fact that no objection was taken at any stage to the relief sought in the Shouson Hill action.  No suggestion was made that there might be any reason at law, other than that transfer to a nominee was not originally sought, why the order sought should not be made.

12.The accounts for PAH were put before me.  The company has practically no liabilities, and although theoretically the shares owned in PAH by PEWC are liable to attachment, the prospect of enforcement action being taken by creditors of PEWC against PAH itself is so remote as to be safely disregarded.  I shall discuss this aspect in more detail later in this judgment.

13.For these reasons I approved orders permitting the transfer of the property to a nominee.

Orders in the event of disobedience:

14.Mr Westbrook argues that the power to order an act to be done the expense of a disobedient party under O 45 r 8, can only be exercised once there has been an act of disobedience.  The terms of the order sought anticipate disobedience, and the order permitting documents to be signed by the Registrar will operate only if there is an act of disobedience. 

15.In my view it is perfectly reasonable for a plaintiff who anticipates disobedience to an order to seek to have an order made in anticipation, if for no other reason than to save time and expense.  In my experience it is not at all unusual for such orders to be made, particularly where there is, as here, evidence upon which it may be said that the plaintiff may reasonably anticipate disobedience.  In the present case there are real questions as to who the lawful directors of various of the defendant companies are, and many of those companies and their directors are located outside Hong Kong. 

16.If the order to transfer property is complied with, then the order anticipating disobedience becomes mere surplusage and no harm has been done.  If the order to transfer property is not complied with, PEWC should not be forced to wait even longer to enjoy the fruits of the action, by having to bring further interlocutory proceedings to achieve enforcement orders.

17.It is right that these orders were not originally sought in the statements of claim.  They are machinery orders and there is no sensible reason why a successful plaintiff should not invite the court, at the conclusion of the action, to make such orders.

An account in respect of the sale of 10 million PacMos shares:

18.Originally there were some 154 million PacMos shares.  Ten million shares were sold, leaving 144 million shares.  As well as the transfer of the 144 million shares, the draft order seeks an account in respect of the proceeds of sale of those 10 million shares.  Mr Westbrook complains that no relief was sought in the O 14 summons in this respect, nor did the judgment deal with this issue.

19.I am satisfied that the matter was dealt with in the statement of claim.  The statement of claim, in paragraphs 8, and 27, dealt with the acquisition of 155 million PacMos shares.  Paragraph 59 dealt with the sale of the 10 million shares, and alleged that Messers Hu, Tung, Sun and Ma were liable to account for the proceeds of that sale.  Although they were the individuals who effected the sale, it is clear that it was Texan who was the vendor.

20.That Texan had acquired 155 million shares was recognised in paragraph 128 of the judgment.  While the sale of the 10 million shares was not specifically referred to it is absolutely plain from the judgment that the whole of the shares were acquired in circumstances in which Texan held all 155 million shares in trust for PEWC.

21.It must follow in those circumstances that PEWC are entitled to an account for the proceeds.  Orders for accounts are machinery orders and have been properly sought summons filed following the findings me.

Orders against All Dragon:

22.In relation to the PacMos action, and the South Horizons action, Mr Westbrook complains that no findings have been made against All Dragon which would justify any orders.

23.At paragraph 141 of the judgment I found that the acquisition of the PacMos shares was funded entirely by PEWC.  It is abundantly clear from the preceding paragraphs that that finding related to the acquisition of shares both by Texan and All Dragon.  That alone is sufficient to justify the order sought in the PacMos action.

24.Paragraph 199 of the judgment makes it clear that PEWC must succeed against All Dragon and the South Horizons action.

25.It is plain from the terms of the judgment, particularly paragraphs 5 and 269-275, that the whole of the property in dispute was found to have been acquired in circumstances in which it was held in trust for PEWC by which ever particular corporate entity ultimately became the owner.  It was not necessary in the judgment to repeat the sequence of events in relation to each individual item of property.  I am satisfied that it is clear that the findings were compendious findings, dealing with the whole of the property sought by PEWC to be recovered.  In those circumstances an omission in the judgment of a particular reference to a particular item of property does not prevent PEWC seeking appropriate orders at this stage of the proceedings.

The applications for a stay:

26.The defendants represented by Mr Westbrook and Mr Smith apply for a stay of execution in relation to the foregoing orders.  In the dealing with this application I adopt the principles set out by Ma CJHC in Star Play Development Ltd v Bess Fashion Management Company Ltd, (unreported HCA 4726/2001, 7 June 2002), and re-affirmed in Wenden Engineering Service Company Ltd v Lee Shing Yue Construction Company Ltd, (unreported HCCT 90/99, 17 July 2002).

27.In particular I have regard to the following passage from Star Play at p 7:

“10    Ultimately, the court embarks on a balancing exercise and uses its commonsense, but bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success: see Winchester Cigarette Machinery, per Ralph Gibson LJ.” (The emphasis is mine).

Merits of the appeal:

28.In considering the merits of the appeal an assessment must be made as to whether or not there is a strong appeal, or a strong likelihood that the appeal would succeed, either of which will usually by itself be enough to justify the grant of a stay of execution.  On the other hand, if there is merely an arguable appeal, something more must be shown by the applicant for the stay to justify the order for stay.  In most cases the contention will be that the appeal will be rendered nugatory in the absence of a stay.

29.Mr Neoh sensibly acknowledged that there was an arguable appeal.  That must be right.  The points involved, particularly in the area of resulting and constructive trusts are difficult, and there are competing lines of authority.  But that said, Mr Neoh is right when he says that the points to be taken on appeal merely repeat those argued at first instance.

30.In order to elevate the status of the grounds of appeal to the higher level of a strong appeal or a strong likelihood that the appeal would succeed, Mr Westbrook relies upon an intended application to the Court of Appeal to adduce further evidence.  Such an application must meet the conditions laid down in Ladd v Marshall [1954] 1 WLR 1489, [1954] 3 All ER 745 CA.

31.The first of those conditions is that it must be shown that the evidence could not have been obtained with reasonable for use at the trial.  In my view the defendants face a serious hurdle in meeting this condition. 

32.The source of the new evidence is Mr Hu.  Mr Hu has adopted the tactical position that he would not involve himself in this litigation, even to the extent of declining to instruct his Hong Kong solicitors to accept service proceedings.  He did this while he pursued an appeal against leave to serve out of the jurisdiction, and, as I understand it, a forum non conveniens argument, his position being necessary as to do otherwise may amount to a submission to the jurisdiction.  He has failed in all respects in this satellite attack on the proceedings.

33.Mr Hu is now being pursued by PEWC for the cost of these proceedings in his capacity as a current director of Gold Global, Haddowe, Casparson, Greateam and Harmutty, the BVI entities who still hold the various real estate and the PacMos shares ultimately at issue in these proceedings.  These five companies, together, acting in the only way they can, through their directors, instructed solicitors and counsel and took a comprehensive position in resisting the application for a summary judgement.

34.Mr Hu now chooses to involve himself in the proceedings, filing an affidavit in opposition to the application for costs.  On the one hand he asserts that he has never taken part in the day-to-day business in respect of those companies, saying they are managed by Mr Yip Chi-hung and Mr Chung Chi-ling.  But at the same time he says Mr Yip and Mr Chung would inform him of major business decisions made by them.  It is clearly arguable from that assertion that he was taking part in the management of the companies which must include, at least arguably, the conduct of these proceedings, undoubtedly a subject which falls in the category of “major business” as far as the companies are concerned.

35.In those circumstances it seems to me that there is a very strong argument available to PEWC to contend that all of the information sought to be put before the court as further evidence was available to the corporate defendants, who now seek to rely upon it, through their directors.  If that is the case then the defendant appellants are unlikely to be able to satisfy the first condition required to be met in a Ladd v Marshall application.

36.It is not necessary for me to reach any conclusion on the matter.  It is sufficient to say that I see the argument being sufficiently strong against the admission of new evidence that I am unable to say that the existence of the application to be brought before the Court of Appeal elevates the strength of the grounds of appeal to the higher level. 

37.I accordingly consider the application to stay upon the basis that there are arguable grounds for the appeal.  In those circumstances the starting point favours the refusal of a stay, and the burden is on the defendants to demonstrate that the balancing exercise should be tilted in favour of a stay.

Will refusal of a stay render the appeal nugatory:

38.The argument mounted by both sets of defendants was that a refusal to stay would potentially render the appeal nugatory.

39.At the centre of this argument was a contention that PEWC was insolvent, and that there was a real risk that should property be transferred to PEWC in pursuance of the judgment, in the event of the appeal succeeding, that property may have been attached by creditors, and may not be able available to be returned to the defendants.

40.The Annual Report of PEWC for the year 2007 has been put before me.  Only a few pages of that Report have been translated, but they are sufficient to show that the liabilities of PEWC exceeded its assets at the end of that year by some NT$321 million, (HK$82.5 million).  It is accordingly right that PEWC is technically insolvent. 

41.Were that the only fact available in this respect I would have felt obliged to refuse to stay, for in those circumstances the risk of attachment must be great.  Mr Neoh however says I should look at the whole picture, and not simply the bottom line.  He draws my attention to a number of factors revealed in the accounts, or facts which also ought to be taken into account.

42.First, he reminds me that, on the basis of the judgment, the cause of the deficit may be said to be the pilfering of assets from PEWC by various of the defendants in this litigation.  This fact is acknowledged in the auditor’s report and is recognised by the auditor as being the reason why the liabilities exceeded the assets. Once PEWC is found to be the owner of the property in dispute, the net value of the company is increased by some HK$200 billion.  The reintroduction of those assets to the company turns it into a very wealthy company.  Limited weight can be placed on this factor however because the point is to an extent circular.  However the company ceases to be technically insolvent.

43.Second, he reminds me that the assets contained in the balance sheet are at book value and, in so far as they comprise real estate or other depreciated items, it may be reasonably anticipated that the true value substantially exceeds the book value.  No suggestion is made that in the relevant period that has been any revaluation of assets which might otherwise counter this point.

44.Third, Mr Neoh provides me with a translation of the cash flow statement of PEWC which demonstrates a positive net cash position, provided by operating activities and investing activities, of NT$793 million, a decrease in borrowings of NT$636 million, and a cash and cash equivalents available at the end of the year of NT$219 million.  This does not take into account earnings from the USA subsidiary of PEWC, said to be a further US$500 million. Thus, while PEWC may be technically insolvent it has a positive cash flow and is cash rich.  There is no suggestion that it is not able to meet its current liabilities when they fall due.

45.Fourth, Mr Neoh points out that the chairman’s report acknowledges that the company has been able to continue its activities because it had has had the continuing support of its bankers throughout the relevant period.  There is no reason to expect that the support of those bankers will not continue.

46.Finally, Mr Neoh points out that from a negative equity of NT$2,344.8 million in 2003, PEWC has, 4 years later, by 2007, reduced its negative equity to NT$321 million.

47.I am satisfied that while PEWC may be technically insolvent it is a company which has a positive cash flow position, is operating at a net profit annually, is meeting its current liabilities when they fall due, is progressively reducing its overall deficit, and has the continuing support of its bankers.  These circumstances lead me to conclude that the risk of attachment by creditors, of assets in the hands of PEWC is not real, but merely theoretical.

48.In those circumstances I am satisfied that there is no real risk of the appellants’ rights being rendered nugatory by there being no stay.

Prejudice in relation to accounts and inquiries:

49.It was argued, particularly by Mr Westbrook, that the absence of a stay of the orders for accounts and enquiries would create significant prejudice to the defendants. 

50.First it is said that there would be a significant waste of money in taking accounts or making enquiries unnecessarily, if the appeal were to succeed.  In fact, the defendants would suffer no financial loss in this respect were the appeal to succeed for PEWC would be obliged to refund to the defendants any costs involved.  PEWC is fully aware of this obligation, and is prepared to take the risk.

51.Although subsequently overturned in the substance of the action, I am satisfied that the following statement of Swinfen Eady J in Coleman & Co Ltd v Stephen Smith & Co Ltd [1911] 2 Ch 572 at 580 remains good law:

“It is not the practice of Court to stay such an account, unless irreparable injury would otherwise be caused: Nerot v Burnard (1826) 2 Russ 56, 38 ER 257; Hyam v Terry (1880) 29  WR 32.  The plaintiffs will proceed with the account at their own risk as to costs.  It would unduly protract litigation if an account could not be proceeded with until after the decision of the ultimate appeal in the case.”

That statement is equally valid in this case.

52.Second, it is said that if the accounts or enquiries are to proceed PEWC may gain an “unfair advantage” in the future conduct of the litigation.  I am satisfied there would be no unfair advantage.  The taking of accounts simply establishes what happened to the funds, information that both sides are entitled to know, and which the defendants would be obliged to establish even if the litigation were to proceed.

53.As to the inquiries, again the information sought is nothing more nor less than would be required to be supplied in the course of the litigation, if it were to proceed.  Mr Westbrook suggests that some documents may be disclosed in the course of accounts or enquiries that might be privileged.  That of course is not the case.  Nothing in an order for accounts or inquiries encroaches into a right of privilege which may still be claimed.

54.If the concern is as to PEWC finding documents presently held by the Receiver, which ought not to be disclosed to PEWC, then the appointment of the Receiver is a sufficient protection.  It is the Receiver who now holds the documents and he is able to act as an appropriate filter.  Plainly he would not allow the inspection of documents by one side without first notifying the other.  In the event of any dispute between the two as to entitlement to inspect, the Receiver will be able to seek the directions of the court.  There is no risk of prejudice to the defendants.

55.Finally, the argument is made, on paper, but not pursued orally, that in order for an inquiry into the directorships of the BVI companies would constitute an impermissible attempt to us to discover the shareholders of those companies, at which shareholding is not presently a matter of public record. 

56.The argument that it is impermissible is dependent upon BVI law which entitles such companies to secrecy in respect of its shareholding.  While a BVI company may be entitled, in the BVI, to such secrecy, there is no equivalent provision in Hong Kong entitling any company, wherever incorporated, to such secrecy.  There is nothing in the law of Hong Kong to prevent the court from ordering a company to disclose its shareholders or directors.  Any BVI law to the contrary is simply not applicable in Hong Kong; see e.g. Brannigan v Davison [1997] AC 238.

The undertakings offered:

57.Finally, Mr Neoh offers certain undertakings designed to give further protection to the defendants in the event that there is no stay.  These undertakings are offered because Mr Neoh correctly recognises that, just as with the appointment of the Receiver, it is appropriate for the court to ensure that the assets are appropriately preserved.

58.The first undertaking is as to the properties and shares.  The undertaking offered is that the properties or shares will not be disposed of, nor pledged nor otherwise dealt with, without the leave of the court, until all appeals have been concluded.  The second is an undertaking in relation to shares, applicable particularly in respect of PacMos, not to exercise any of the rights of a shareholder without the prior approval of the court.

59.Mr Westbrook says that as the giving of the undertakings are tantamount to a stay, then there ought to be a stay.  While superficially attractive, the argument fails to recognise the presumptive right of a plaintiff to the fruits of his judgement pending an appeal.  If I were to refuse to order a stay of the orders for accounts and inquiries at this stage I would be disregarding the presumption, plain from the formulation of O 59 r 13, that a plaintiff is entitled to the fruits of his judgement pending an appeal.

Conclusion:

60.For forgoing reasons I refuse to grant the stay sought.  Pending the approval of the appropriate undertakings by me, the orders made pursuant to the judgment will lie in court and may not be acted upon by PEWC.  Upon approval of the undertakings the judgment may be sealed.

61.Mr Westbrook indicates that should there be no stay, an application will be made to the Court of Appeal and so he asks for a stay to permit such an application to be made.  The orders made in this ruling, including the refusal to grant a stay, will be stayed for a period of 14 days from sealing, to permit an application to be made to the Court of Appeal.

62.I will hear the parties if required on costs.

Mr Anthony Neoh SC and Ms Barbara Wong, instructed by Messrs W K To & Co., for the Plaintiff in all actions

Mr Simon Westbrook SC and Mr Jeevan Hingorani, instructed by Messrs Laracy Gall, for the 1^st, 3^rd, 4^th, 5^th, & 7^th Defendants in HCA 2203/2004; and the 1^st, 2^nd, 3^rd, and 8^th Defendants in HCA 2746/2004; and the 1^st, 2^nd, 3^rd, 12^th, 13^th, 14^th, 15^th, 16^th, and 17^th Defendants in HCA 2763/2004

Mr Clifford Smith SC and Ms Rachael Lam, instructed by Messrs Tanner de Witt, for the 18^th and 19^th Defendants in HCA 2763/2004

Mr Edward Alder, instructed by Messrs Kennedys, for the Joint and Several Receivers