Active Base Ltd v. Roderick John Sutton and Others
Read the full judgment text of CACV 279/2008 on BabelCite. This Court of Appeal judgment was delivered on 21 May 2009.
1. This is an appeal from a judgment of Kwan J dated 4 June 2008 dismissing the plaintiff’s summonses and upholding the decisions of the liquidators in rejecting the plaintiff’s proof of debt and its claim as a secured creditor. At the conclusion of the hearing judgment was reserved which we now give.
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CACV 279/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 279 OF 2008 (ON APPEAL FROM HCCW NO. 470 OF 2005) ----------------------
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---------------------- Before: Hon Le Pichon JA, A Cheung and Poon JJ in Court Date of Hearing: 14 May 2009 Date of Handing Down Judgment: 21 May 2009 ---------------------- J U D G M E N T ---------------------- Hon Le Pichon JA: 1.This is an appeal from a judgment of Kwan J dated 4 June 2008 dismissing the plaintiff’s summonses and upholding the decisions of the liquidators in rejecting the plaintiff’s proof of debt and its claim as a secured creditor. At the conclusion of the hearing judgment was reserved which we now give. Introduction 2.The plaintiff is a licensed money lender. It submitted a proof of debt to the liquidators of Moulin Global Eyecare Holdings Ltd (“the company”) which was ordered to be wound up on 5 June 2006 upon a creditor’s petition filed on 21 June 2005. 3.The liquidators rejected the plaintiff’s proof of debt for approximately $76.5 million based on a written loan agreement dated 24 February 2005 between the plaintiff and the company and a debenture dated 6 May 2005 between the same parties. The plaintiff issued the summonses to challenge the liquidators’ rejection. 4.The judge dismissed the summonses. The present appeal challenges the dismissal on the grounds that (1) the plaintiff was put on inquiry of an irregularity, namely, that there was no properly notified board meeting to approve the loan agreement and the debenture (“the loan documents”) and to authorise the two executive directors (Ma Bo Kee and Cary Ma) who were signatories to the loan documents to execute the same; and (2) as regards the debenture, that it was invalid under section 267 of the Companies Ordinance, Cap. 32. Background 5.The company was a substantial multinational company engaged in the design, manufacture and sale of optical products. In October 1993, it obtained a listing on the main board of The Stock Exchange of Hong Kong Ltd. 6.In February 2005, one third of its shares were held, directly or indirectly, by or for the benefit of members of the Ma family. The interest of the Ma family was held principally through their private company Sharp Merit International Ltd (“Sharp Merit”). 7.At that time, the board consisted of 10 directors, 5 of whom were members of the Ma family, i.e. Ma Bo Kee (chairman, president, executive director), his brothers Ma Bo Fung and Ma Bo Lung (who were both vice chairman and executive directors), Cary Ma and Dennis Ma (Ma Bo Kee’s sons who were executive directors, Cary Ma being also the chief executive officer). Of the remaining five directors, two were executive directors and three were independent non-executive directors. 8.In late 2004, the company entered into an agreement in partnership with a private equity firm to acquire Eye Care Centres of America, Inc (“ECCA”), the third largest operator of optical retail stores in the US, for US$450 million plus transaction costs. The company’s share of the acquisition was to be 56%. It was public knowledge that the acquisition was due to be completed in the first quarter of 2005 and in fact, the purchase was completed on 1 March 2005. The acquisition was to be financed in part through borrowings but the equity injection required from the company for the transaction was US$97.4 million. 9.The plaintiff is wholly-owned subsidiary of Tomorrow International Holdings Ltd (“Tomorrow”), a company listed on the Hong Kong Stock Exchange. Its major shareholder was a company beneficially owned by Chan Yuen Ming (“Mr Chan”). Mr Chan has never been a director of Tomorrow or the plaintiff. At all material times Yvonne Louie (“Ms Louie) and Irene Wong (“Ms Wong”) were two of four executive directors of Tomorrow and the plaintiff. By early 2005 they had had some 10 years experience in the money lending business. 10.Prior to February 2005, the plaintiff had not had any dealings with the company but it had had dealings with Ma Bo Kee, having previously made three loans either to Ma Bo Kee personally or to a private company of the Ma family. All were short-term loans, with repayment within a few days. Those loans were made on 30 March 1998, 27 March 2002 and 30 December 2003 and had been handled by Ms Louie and Ms Wong for the plaintiff. 11.Sometime in the last week of February 2005, when Ma Bo Kee approached Mr Chan for a personal loan of $50 million, Mr Chan declined to lend it himself but referred the request to Ms Louie to consider if Tomorrow would be interested in making the loan. In a telephone conversation between Ma Bo Kee and Ms Louie, Ma Bo Kee asked for an urgent personal loan of $50 million for 3 months and indicated that the money was required to complete the company’s acquisition of ECCA scheduled to take place at the end of February. Ms Louie indicated that she preferred a loan to the company. In a subsequent telephone conversation, Ms Louie insisted that Tomorrow was only prepared to lend to the company and would require a debenture as part of the security. 12.Nevertheless, Ma Bo Kee requested Ms Louie to reconsider a personal loan and, pending her decision, he asked that solicitors be instructed to prepare the loan documentation given the urgency for the loan. 13.Ms Louie discussed the matter with Ms Wong (who dealt with the execution side of loans) and the latter instructed Bosco Tso (“Mr Tso”)whose firm acted for the plaintiff, to prepare two sets of loan documents, one for a loan to the company and one for a personal loan to Ma Bo Kee. Mr Tso opened a file for the loan on 22 February 2005 and both sets of draft loan documentation (a company loan set and a personal loan set) were provided to the company in the course of negotiations. 14.The directors of the plaintiff made the decision that the loan should be granted to the company rather than to Ma Bo Kee personally sometime during the late afternoon of 23 February 2005. Ms Wong informed Ma Bo Kee of the decision in the morning of 24 February 2005. 15.The events of 23 and 24 February 2005 are important and need to be set out in some detail. 16.On 23 February,
17.Various events then took place on 24 February 2005:
18.Sometime before lunch on 25 February 2005, Ms Wong received from the company by fax, inter alia, four signed pages of the loan documents, complete with the signatures of the three absent Ma directors. Ms Wong executed the corporate loan documents on behalf of the plaintiff later that afternoon and the $50 million was transferred from Tomorrow’s bank account into Oaktree’s account. 19.The debenture executed by the company on 24 February 2005 was not dated until 6 May 2005 in circumstances that is immaterial for present purposes. It was sent to Mr Tso for registration but that was not done until the plaintiff’s present solicitors took the matter over and had it registered on 7 June 2005. 20.The minutes, in pertinent part, read as follows:
This appeal 21.The first issue to be considered in this appeal arises from the plaintiff’s contention that it was entitled to assume that the loan documents were validly executed and binding, relying on the bylaws and the “indoor management rule” in Royal British Bank v Turquand (1856) 6 E & B 327, Ex Ch, by which persons contracting with the company in good faith may assume that acts within its constitution and powers have been duly performed, and were never bound to inquire whether acts of internal management have been regular. 22.The judge held that the plaintiff was not entitled to rely on the apparent regularity of the execution of the loan documents on the basis that the plaintiff’s director Ms Wong and its solicitor Mr Tso were
23.Mr Shieh SC who appeared for the plaintiff submitted that the judge was wrong in reaching the conclusion that the plaintiff, through its agents, had been put on inquiry. Mr Shieh placed great reliance on the fact that they had been a time gap between the two telephone conversations that took place between Ms Lam and Ms Wong on 23 February 2005. While there was no evidence as to the duration of that interval, there was equally no evidence to suggest that it would not have been possible during that interval to have made arrangements for a board meeting to take place the following day. 24.It is not the plaintiff’s case that at the time he received instructions from Ms Wong to prepare the draft minutes, the board meeting had already occurred. Rather, it was a meeting that had yet to happen, the necessity of which depended on the plaintiff’s decision, yet to be taken, on whether the loan was to be a loan to the company. 25.When Mr Tso was asked to prepare draft board minutes, he knew that the company had been told to make arrangements for a board meeting, in case the loan was to be a company loan rather than a personal loan. The judge found that, at that time, Mr Tso was aware of the bylaws of the company governing its borrowing powers: either there had to be a duly convened board meeting with due notice given to all the directors or by way of a written resolution signed by all the directors. He was also aware that the listing rules required the company to have three independent non-executive directors. 26.Mr Shieh submitted that there was nothing “odd” about the fact that none of the non-Ma directors would attend the meeting to be held by way of a telephone conference which was permitted under the bylaws. He stressed that whether a director chooses to take part in a duly notified directors’ meeting (even one that did not require their physical attendance) depends on matters such as their degree of commitment, sense of priorities, degree of trust between the directors, business practice and a whole host of other matters which are beyond the scope of knowledge of outsiders. 27.While it may not be out of the ordinary for a board meeting convened at short notice that only some of the directors would be able to attend, there are a number of unusual features in the present case. The judge found that the stated purpose of the loan requested from the plaintiff was for completing the acquisition of ECCA. So seemingly, it was for a legitimate purpose. But the request for this urgent loan for the stated purposed was for a personal loan and not, as one would expect, a loan to the company. Moreover, Ma Bo Kee persisted with that request despite receiving, in Mr Shieh’s words, “short shrift” from the plaintiff. (The reason has emerged from the liquidators’ investigations. The ECCA transaction contained a negative pledge provision. Had a debenture been created, it would have meant the company actually defaulting before it could complete the transaction.) 28.In the context of the company’s acquisition of ECCA which, on any view, was a major transaction, a personal loan simply does not make any sense involving, as it must, the notion that Ma Bo Kee would somehow be on-lending the loan to the company. It is this aspect that has to be borne firmly in mind. In my view, at a minimum, it called for a heightened level of alertness and caution. 29.Given that backdrop, the instructions to prepare draft board minutes for an intended board meeting to take place by telephone conference at which, seemingly coincidentally, the available directors were to be exclusively Ma directors, take on a completely different hue. I agree with the judge that there was something “intrinsically suspicious” about the instructions. In my view, her conclusion that Ms Wong and Mr Tso were simply turning a blind eye to suspicious circumstances by refraining from or failing to make any inquiry at any time as to whether due notice had been given to all the directors is unassailable. Whether the debenture was void under section 267 30.The winding up petition was filed on 21 June 2005. Section 267 renders invalid any floating charge created within 12 months of that date unless it is proved that the company immediately after the creation of the charge was solvent “except as to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge”. 31.In considering the meaning of “the time …the creation of …the charge”, the provisions of section 80(1) and 83(2) of the Companies Ordinance are of relevance. 32.Section 80(1) renders void against the liquidator any security on the company’s property that is not registered within 5 weeks after the date of its creation. Under section 83(2), a certificate issued by the registrar under that section “shall be conclusive evidence that all the requirements … with respect to registration have been complied with”. 33.As earlier noted, the debenture was created on 24 February 2005 and was subsequently dated 6 May 2005 by the plaintiff. It was delivered to the registrar for registration on 7 June 2005. The registrar issued a certificate stating:
34.It is settled law that it is not permissible to go behind a certificate issued pursuant to section 83(2) and that it is conclusive. See In re C L Nye Ltd [1971] Ch 442. 35.The issue for determination in the present case is whether the exception in section 267 applies and that requires a determination of the date the charge was created. Mr Shieh submitted that, factually, the debenture was signed on 24 February 2005 and the monies were paid over the following day and that, accordingly, the exception applies. In other words, for the purposes of section 267, in deciding when the charge was created, the court should not have regard to the certificate issued pursuant to section 83(2). 36.Mr Shieh submitted that the policy considerations behind the two sections (i.e. section 83(2) and section 267) are very different. The former provides for a register which is conclusive so that persons dealing with the company will not be misled. They will know from the register what charges already exist. The deeming effect is to protect the chargee who would then be able to deal with his security. It was said that the policy considerations behind section 267 are entirely different and the provision is meant to prevent directors or controllers of companies from making last-minute debentures in favour of themselves. To my mind, it would be exceedingly odd if in ascertaining the date of the creation of the debenture for the purposes of section 267, a date different from that appearing on the certificate were to be adopted. 37.I do not consider Mr Shieh’s submissions to be correct. A certificate issued pursuant to section 83(2) must be conclusive as to all matters appearing on the certificate. I derive support for this view from the following passage from the judgment of Harman LJ in the Nye case (at 470D):
38.In my view, the debenture is conclusively deemed to have been created on 6 May 2005. In this respect and to this extent I differ from the judge who held that it was created on a date between 25 April 2005 and 7 June 2005 but it does not affect the correctness of her conclusion that the debenture is invalid by reason of section 267. Conclusion 39.For all those reasons, I would dismiss the appeal. I would also propose that there be an order nisi of costs in favour of the liquidators. Hon A Cheung J: 40.I agree. Hon Poon J: 41.I agree. Hon Le Pichon JA: 42.There will accordingly be an order in terms of paragraph 39.
Mr Paul Shieh SC, instructed by Messrs Vincent T.K. Cheung Yap & Co., for the Applicant/Appellant Mr Barrie Barlow SC, instructed by Messrs Richards Butler, for the 1st & 2nd Respondents/Respondents Appeal dismissed: see FACV14/2009 dated 26 November 2009 |
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