The New China Hong Kong Group Ltd (in Creditors’ Voluntary Liquidation) and Another v. Ng Kwai Kai, Kenneth and Others

CACV 41/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 41 OF 2011

(ON APPEAL FROM HCA NO. 519 OF 2010)

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BETWEEN

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Before: Hon Tang VP and Kwan JA in Court

Date of Hearing: 28 July 2011

Date of Judgment: 29 August 2011

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JUDGMENT

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Hon Tang VP:

Introduction

1.The factual background is complicated, fortunately, they are not in dispute and have been carefully set out in the judgment of Fok JA (sitting as an additional judge of the Court of First Instance) dated 11 February 2011.  With the benefit of the judgment, I can deal with the background briefly.

2.The proceedings concerned a 34.44% interest in the New China Hong Kong Highway Limited ("NCHK Highway").  NCHK Highway in turn owned a 60% of Sichuan Chengmian Expressway Co. Ltd ("Expressway Ltd").  Expressway Ltd was entitled to construct, manage and collect toll in respect of an expressway in Sichuan.

3.The 34.44% interest in NCHK Highway was represented by 1,639,391 shares in NCHK Highway ("the subject shares").  Those shares were at all material times vested in The NCHK Highway (Chengdu Mianyang) Limited ("NCHKCM") (the 5^th Defendant).

4.NCHKCM was in turn a wholly-owned subsidiary of The New China Hong Kong Development Limited ("NCHK Development") (the 2^nd Plaintiff). 

5.NCHK Development was itself a wholly-owned subsidiary of The New China Hong Kong Group Limited ("NCHK Group") (the 1^st Plaintiff).  The late Mr T.T. Tsui, a well-connected businessman, was a key shareholder of NCHK Group and head of its 5-member Executive Committee[1]. 

6.NCHK Group and NCHK Development have been in creditors' voluntary liquidation since 1 March 1999.

7.Essentially, the present proceedings by the NCHK Group and NCHK Development concern the disposal of the 34.44% interest prior to their liquidation.  First, by a Restructuring Agreement dated 27 January 1998, by which, inter alia, NCHK Group agreed to sell to Century City International Holdings Limited ("Century City") (the 3^rd Defendant) the entire shareholding in NCHKCM.  The Restructuring Agreement has been amended by a Supplemental Agreement dated 13 March 1998 and the 2^nd Supplement Agreement dated 3 April 1998 (the Restructuring Agreement thus amended was referred to subsequently as the Master Agreement).  This has been referred to as the "1^st Stage of Disposal".  This was completed on or about 14 April 1998, by which the shares in NCHKCM were sold to Evercheer Holdings Limited ("Evercheer") (the 2^nd Defendant).

8.A 2^nd Stage of Disposal took place when the Century City Group disposed of such interest commencing with an agreement dated 18 December 1998 made between Century City BVI Holdings Ltd ("CCBVI") (the 8^th Defendant), which held all the shares in Evercheer, as vendor and Crux Assets Limited ("Crux") (the 7^th Defendant) as purchaser.  Crux is a wholly owned subsidiary of Shenyin Wanguo (HK) Limited ("Shenyin Wanguo") (the 4^th Defendant).  The 2^nd Stage of Disposal was completed on 23 January 1999. 

9.At the time of both of 1^st and 2^nd Stages of Disposal the 34.44% interest had been pledged to China Everbright Financial Holdings Limited for a loan of $120,000,000.  The disposals were made subject to this pledge.

10.The present proceeding was commenced by the liquidators with a writ issued on 14 April 2010.  The Statement of Claim ("SoC") was dated 9 July 2010.

11.By summons dated 23 August 2010 ("the Summons"), the 2^nd, 4^th, 5^th and 7^th Defendants ("the relevant defendants") applied for an order that the writ of summons and the SoC, insofar as they concerned them, be struck out, inter alia, on the ground that they disclosed no reasonable cause of action against any of them.

12.Subsequent to the issue of the summons, the Plaintiffs amended their SoC which they were entitled to do without leave pursuant to The Rules of the High Court, Order 20, rule 3(1).

13.At the invitation of the parties, Fok JA regarded the amended SoC ("AmSoC") (which ran to 97 pages including its schedules) as the version of the pleading on which the Plaintiffs wished to proceed to trial, and hence, the subject of the summons.

14.On 11 February 2011, the learned judge struck out the writ and the AmSoC, and dismissed the action against the relevant defendants. 

The Appeal

15.This is the Plaintiffs' appeal.  Ms Linda Chan, SC, who did not appear below, appeared for the Plaintiffs, leading Mr Colin Wright.  Mr Rimsky Yuen, SC and Mr Samuel Chan appeared for the relevant defendants.

16.The Notice of Appeal was filed on 10 March 2011. There is a Supplemental Notice of Appeal which was filed on 7 July 2011, which had annexed to it a proposed Re-Amended Statement of Claim ("ReAmSoc") which has been expanded to 117 pages.  In the Supplemental Notice of Appeal, the Plaintiffs sought to rely on the ground that the action ought not to have been dismissed because "the Plaintiffs' causes of action were capable of amendment":

17.Ms Linda Chan informed us at the commencement of the appeal that she would not address us on the Re-AmSoC, since she took the view, rightly in my view, that whether leave to re-amend should be granted should be dealt with in the Court of First Instance.

Background

[2] shares so subscribed by NCHK Group through NCHKCM were the subject shares.

19.Presumably because the Par Shares represented a significant benefit to the NCHK Group as founding member the subscription agreement went on to provide (Clause 7(2)) for an escrow agreement dated 31 October 1994 ("the Escrow Agreement") to be made between NCHK Group, the Investors and Victor Chu & Co. ("the Escrow Agent") (the 6^th Defendant).  Briefly stated, under the Escrow Agreement, the shares to be placed in escrow totalled 599,291 shares ("the escrow shares") which comprised the Par Shares as well as 120,000 shares for which the full subscription price was payable. 

20.The Escrow Agreement also provided that any distribution of dividends attributable to the escrow shares would have to be paid into an escrow account. 

21.Depending on the circumstances, the escrow shares and the money in the escrow account ("the escrow money") would either be:

(a) taken entirely by the NCHK Group (Clause 5); or

(b) distributed among all shareholders (namely NCHK Group and the Investors) pro rata (Clause 6); or

(c) dealt with in accordance with what might be called a transitional mechanism under Clause 7.

22.Under the Escrow Agreement, NCHK Group and the Investors were the only persons entitled to receive the escrow shares and the escrow money upon the opening of the Expressway.  Clause 10 of the Escrow Agreement provided that:

"10. This Escrow Agreement shall not be capable of assignment by any party."

23.I turn to the learned judge's narration of the subsequent events:

"B2. The transfer by NCHK Group of the shares of NCHKCM to Evercheer

9. At some time before 1998, members of the Century City group of companies ('the CC Group') had advanced loans to NCHK Group. In consideration of these loans, NCHK Group had executed promissory notes of approximately HK$512 million in favour of members of the CC Group. Demand had been made on NCHK Group to honour the promissory notes but it was unable to do so.

10. Consequently, a debt restructuring agreement dated 27 January 1998 ('the Restructuring Agreement') was entered into by, amongst others, Century City International Holdings Limited ('Century City'), the 3^rd defendant in this action, and NCHK Group. Under clause 4.1 of the Restructuring Agreement, Century City International Limited ('CCIL') was to acquire the shares in NCHK Development or the shares in NCHKCM (a wholly-owned subsidiary of NCHK Development at that time). The shares in NCHKCM had been valued, as at 31 December 1997, at HK$812 million.

11. The Restructuring Agreement was varied by two supplemental agreements, dated 13 March 1998 and 3 April 1998 respectively. By clause 4 of the latter, which revised clause 4 of the Restructuring Agreement, CCIL agreed to procure a member of the CC Group to purchase the shares in NCHKCM.

12. Pursuant to the Restructuring Agreement as varied by the two supplemental agreements, a completion agreement dated 14 April 1998 ('the Completion Agreement') was entered into between NCHK Group and Evercheer Holdings Limited ('Evercheer'), the 2^nd defendant in this action. Under the Completion Agreement, the shares in NCHKCM were sold to Evercheer, which was wholly-owned by Century City BVI Holdings Limited ('CC BVI'), the 8^th defendant in this action, at a net consideration of HK$692 million.

13. Also on 14 April 1998, and as part of the debt restructuring arrangement, NCHK Group executed a Deed of Indemnity ('the 1^st Indemnity') in favour of CCIL and Evercheer which included the following provisions:

(1) Para. (C) of the recital:

'Pursuant to the provisions of the Escrow Agreement Victor Chu & Co. shall distribute the Escrow Shares pro rata among all the Investors under certain circumstances if it shall receive written instructions from all of the Investors stating, inter alia, that completion of the Chengdu-Mianyang Expressway has not occurred on or prior to 31 December 1998 ("Escrow Shares Distribution").'

(2) Para. (F) of the recital:

'Pursuant to the terms of the [Restructuring Agreement] [CCIL] has agreed to procure Evercheer to acquire the entire 34.44 per cent. shareholding interest which [NCHK Group] indirectly holds in [NCHK Highway] through an acquisition of the entire issued share capital of NCHKCM ('NCHKCM Shares') together with the right to and interest in all shareholders' loans advanced to NCHKCM at an aggregate net consideration of HK$692,000,000. …'

(3) Clause 1.1:

'NCHK [Group] agrees to indemnify and keep [CCIL] and Evercheer indemnified against any diminution in the value of the NCHKCM Shares arising as a result of the Escrow Shares Distribution together with any losses, liabilities, claims, costs and expenses incurred by either of them in connection with any such Escrow Shares Distribution …'

(4) Clause 1.4:

'Upon the occurrence of the events described in Clauses 5 and 6 and those described in Clauses 7(c) and 7(d) of the Escrow Agreement NCHK [Group] will pay to Evercheer (or as it shall direct) all sums distributed to NCHK [Group] by the Escrow Agent (other than the Accrued Amount or the balance remaining thereof).'

(5) Clause 3:

'NCHK [Group] undertakes to provide to Evercheer or as it shall direct originals (or, as appropriate, copies), of all documents and communications received by NCHK [Group] from the Escrow Agent. NCHK [Group] shall deliver to Evercheer or as it may direct any and all documentation received by NCHK [Group] representing or in respect of the Escrow Shares including, without limitation, any undated stock transfer forms and/or share certificates in respect thereof which may at any time come into the possession of NCHK [Group]. NCHK [Group] acknowledges that in no circumstances shall it or any of its subsidiaries be entitled to any interest in the Escrow Shares.'

14. The transfer of the shares in NCHKCM to Evercheer described above was referred to in the course of the hearing before me as the 1^st Stage of Disposal. It is addressed in paragraphs 22 to 33 of the draft AmSoc. In paragraphs 34 to 42 of the draft AmSoc, the plaintiffs advance a case that the transfer of shares in NCHKCM pursuant to the Restructuring Agreement, the Completion Agreement and the 1^st Indemnity constituted a disposition of property of the plaintiffs with intent to defraud their creditors contrary to s. 60 of the Conveyancing and Property Ordinance, Cap. 219 ('CPO').

B3. The subsequent disposal of Evercheer to Shenyin Wanguo

15. In late 1998, the CC Group was itself facing financial difficulties and required funds to discharge its indebtedness owed to other parties. Century City therefore approached Shenyin Wanguo (HK) Limited ('Shenyin Wanguo'), the 4^th defendant in this action, in October 1998 in respect of an intended sale of the NCHKCM Shares.

16. By a letter dated 11 December 1998, Shenyin Wanguo offered to buy the entire share capital of Evercheer. The term sheet setting out the terms of the offer identified the subject of acquisition as the entire issued share capital of Evercheer and the sole asset of Evercheer as the entire interest in NCHKCM 'which holds a 34.44% interest in [NCHK Highway]'.

17. Shenyin Wanguo's offer to purchase Evercheer from Century City was accepted and this led to an Agreement for the Sale and Purchase of Shares in Evercheer dated 18 December 1998 ('the Evercheer Sales Agreement') entered into between Crux Assets Limited ('Crux'), the 7^th defendant in this action, as purchaser and CC BVI as vendor.

18. Public announcements concerning the sale of the 34.44% interest in NCHK Highway were made by both Century City and Shenyin Wanguo on 4 January 1999.

19. On Crux's instructions, American Appraisal Hongkong Limited prepared an appraisal report dated 14 January 1999 to assess the fair market value of the 34.44% interest in NCHK Highway.

20. The Evercheer Sales Agreement was varied by three supplemental agreements respectively dated 28 December 1998, 31 December 1998 and 16 January 1999. Clause 5.02 of the Evercheer Sales Agreement set out various documents that CCBVI was to deliver at completion. By clause 2.04 of the second supplemental agreement, a letter of direction and declaration of trust were added as additional documents to be delivered at completion. By clause 2.04 of the third supplemental agreement, the letter of direction was replaced by a power of attorney. These documentary requirements for the declaration of trust and power of attorney were added on the advice of Messrs Baker & McKenzie, who were acting as solicitors for Shenyin Wanguo to conduct due diligence on the intended acquisition of the shares in Evercheer.

21. The sale of Evercheer to Crux was completed on 16 January 1999. After completion of the transaction, Century City issued a further public announcement dated 19 January 1999 explaining a revision in the consideration for its disposal of Evercheer.

22. Also after completion of the transaction, NCHK Group executed the Power of Attorney and Declaration of Trust, both dated 23 January 1999. By the Power of Attorney, NCHK Group irrevocably appointed Evercheer as its lawful attorney, amongst other things, to (1) receive all shares, monies (except the 'Accrued Amount' defined in the 1^st Indemnity), documents and notices under the Escrow Agreement, and (2) take any action for the purpose of exercising its rights under the Escrow Agreement (other than in relation to the Accrued Amount).

23. For its part, the Declaration of Trust stated:

'NCHK [Group] hereby declares that, in order to fulfil the terms of the Completion Agreement, the [1st Indemnity] and the Power of Attorney, any Escrow Shares or Escrow Monies or documentation relating thereto which, for whatever reason, is received by it, shall be held in trust for the benefit of Evercheer and that none of NCHK [Group] nor any of its nominees shall have any beneficial interest over the same. In such event, NCHK [Group] shall do all such things and execute all such documents as may be necessary to vest in Evercheer forthwith all legal and beneficial interest in, and physical possession of the certificates for, the Escrow Shares and full legal and beneficial interest in the Escrow Monies.

NCHK [Group] further undertakes that it shall not (as it is entitled to do so under the Escrow Agreement) nominate any party to receive the Escrow Shares or the Escrow Monies, other than Evercheer or such person as Evercheer shall direct.'

24. The sale of Evercheer to Crux described above was referred to in the course of the hearing before me as the 2^nd Stage of Disposal. It is addressed in paragraphs 71 to 95 of the draft AmSoc and the Power of Attorney and Declaration of Trust are addressed in paragraphs 96 to 110 of the draft AmSoc. In those latter paragraphs, various grounds are pleaded in support of the plaintiffs' case that the Power of Attorney and Declaration of Trust are invalid.

B4. The winding up of NCHK Group and the distribution of the Escrow Shares and subsequent litigation

25. On 1 March 1999, NCHK Group was placed into creditors' voluntary winding up and liquidators were appointed.

26. By letter dated 3 June 1999, Evercheer, in reliance on the terms of the Power of Attorney and the Declaration of Trust, instructed the Escrow Agent to release to Evercheer all the Escrow Shares, together with dividends and interest thereon. By letter dated 7 June 1999, the Escrow Agent sought instructions from the Investors as to whether to release all the Escrow Shares, with accrued dividends and interest, to NCHK Group or its nominee pursuant to clause 5 of the Escrow Agreement. By letter dated 28 June 1999, the Investors gave notice to the Escrow Agent pursuant to clause 6 of the Escrow Agreement, claiming that the conditions set out in that clause had been satisfied.

27. The Escrow Agent duly proceeded to act on Evercheer's instructions.

(1) On 7 July 1999, the Escrow Agent delivered to the Investors share certificates and instruments of transfer for a total of 392,871 shares in NCHK Highway ('the Investors' Escrow Shares') and paid a total of US$1,597,693.39 ('the Investors' Escrow Dividends') to the Investors.

(2) In reliance upon the Power of Attorney, the Escrow Agent distributed the remaining 206,420 Escrow Shares ('the Distributed Escrow Shares') to Evercheer or NCHKCM on 8 July 1999 and paid the sum of US$621,762.86 ('the Distributed Escrow Dividends') being accrued dividends on the Distributed Escrow Shares to Shenyin Wanguo on behalf of Evercheer on 20 July 1999.

28. A dispute arose in respect of the distribution of the Escrow Shares. NCHK Group and Evercheer commenced HCCL97/2000 against the Investors as well as another action against the Escrow Agent. In HCCL97/2000, NCHK Group and Evercheer contended that the conditions required for a distribution pursuant to clause 6 of the Escrow Agreement had not been satisfied. NCHK Group and Evercheer obtained judgment in HCCL97/2000 at trial but an appeal by the Investors in CACV24/2008 was allowed by the Court of Appeal. Prior to the hearing of a further appeal to the Court of Final Appeal in FACV7/2009, the dispute with the Investors was settled by an agreement dated 26 February 2010. The effect of the settlement agreement, in summary, is that 50% of the Escrow Shares (196,436 shares) ('the Recovered Escrow Shares') and 50% of the Escrow Monies (HK$5,292,842.45) ('the Recovered Escrow Monies') have been recovered and have now been paid into court pending the determination of the question whether NCHK Group is entitled to those Recovered Escrow Shares and Recovered Escrow Monies.

29. The distribution of the Escrow Shares and the previous litigation in respect of that distribution of the Escrow Shares are addressed in paragraphs 121 to 126 and paragraphs 134 to 137 of the draft AmSoc respectively.

30. In paragraphs 131 to 133 of the draft AmSoc, the plaintiffs plead that NCHK Group is entitled to the Distributed Escrow Shares and Distributed Escrow Dividends. In paragraphs 138 to 143 of the draft AmSoc, the plaintiffs plead that NCHK Group is entitled to the Recovered Escrow Shares and Recovered Escrow Monies.

B5. Subsequent events

31. In May 2000, Evercheer transferred all its shares in NCHKCM to its immediate parent, Crux.

32. In September 2009, NCHKCM and one of the Investors commenced proceedings in HCCW550/2009 pursuant to s. 168A of the CO in respect of NCHK Highway. On 4 May 2010, NCHK Group applied to be joined.

33. On 27 August 2010, NCHKCM entered into an agreement to sell, and completed the sale, of 1,040,100 shares in NCHK Highway and the Distributed Escrow Shares, a total of 1,246,520 shares, to Mega Speedy Investments Limited, a BVI company related to one of the Investors, for an amount in excess of HK$280 million in cash. The proceeds were transferred to Shenyin Wanguo as ultimate parent of NCHKCM. At the same time, the proceedings in HCCW550/2009 were settled. The plaintiffs claim that, given their entitlement under s. 60 of the CPO, they are entitled to trace into the proceeds of that sale."

The Claims

24.As the learned judge said the claim against the Applicants concerned:

1) the 1^st Stage of Disposal and asserted a claim under section 60 of the Conveyancing and Property Ordinance, Cap. 219 ("CPO");

2) the 2^nd Stage of Disposal and asserted claims, including a claim in conspiracy, based on the invalidity of the Power of Attorney and the Declaration of Trust;

3) the conduct of HCCL97/2000.

25.The application to strike out was essentially made on the basis that the claims against the Applicants were plainly and obviously hopeless and bound to fail.  The principles are well established, and it is unnecessary to repeat them.

Section 60 of CPO

26.On the Section 60 Claim, the learned judge concluded that the matters pleaded in the AmSoC were not sufficient to establish the requisite intent to defraud[3]. In particular, the learned judge said:

"61. To this end, it is necessary to summarise the case pleaded by the plaintiffs in this regard. In paragraphs 34 to 37 of the draft AmSoc, it is pleaded that the shares of NCHKCM were valuable property of the plaintiffs, that as a consequence of the 1^st Stage of Disposal the plaintiffs disposed of that valuable property in exchange for shares in Paliburg Holdings Limited ('Paliburg') which could not be disposed of for three years and that the plaintiffs were insolvent at the time of the transfer of the shares in NCHKCM to Evercheer.

62. At paragraph 39 of the draft AmSoc, the plaintiffs plead that the shares in NCHKCM were sold at an undervalue and, at paragraph 40, that Century City was aware of the market value of the shares in Paliburg. It follows that it is the plaintiffs' case that Century City, the acquiring party in the 1^st Stage of Disposal, was aware of the undervalue in question. The plaintiffs then plead, in paragraph 41 of draft AmSoc, that the decision to transfer the shares in NCHKCM to Evercheer was not a bona fide business decision. In paragraphs 41(1) to (6), the plaintiffs plead facts from which they say it is to be inferred that the transfer was not bona fide.

63. Having considered the draft AmSoc, I agree with Mr Yuen's submission that, even taking the matters pleaded at their highest, the plaintiffs will not be able to establish the necessary intent to defraud creditors. In the first place, the only party who is said to have been aware of the alleged undervalue at which the shares in NCHKCM were transferred to Evercheer is Century City. It is not alleged that the plaintiffs were aware of this. In this context, it is to be remembered that the relevant intent to defraud must be that of the disponor, i.e. the plaintiffs, and not that of the recipient.

64. Secondly, the transfer of the NCHKCM shares to Evercheer had a clear commercial rationale being quite clearly part of a debt restructuring arrangement. This was an arrangement approved by NCHK Group's Executive Committee and, although the plaintiffs refer to the fact the approval was retrospective, its timing is not in itself demonstrative of a dishonest intent. There is no allegation otherwise that the members of the Executive Committee, which included an independent legal advisor and financial advisor, had any ulterior motive or dishonest intent when approving the restructuring."

27.Section 60 could be traced to the statute of 13 Eliz c 5 (the statute of Elizabeth), which it replaced on 1 November 1984.  Tradepower (Holdings) Ltd v Tradepower (HK) Ltd [2010] 1 HKLRD 674, a decision of the Court of Final Appeal, is a leading authority on section 60.  Tradepower was concerned with a disposition of assets for no consideration, made at the time when the disponor was insolvent.  Ribeiro PJ said:

"88. I would formulate the applicable rule for cases like Freeman v Pope as follows. Where it is objectively shown that a disposition of property unsupported by consideration is made by a disponor when insolvent (or who thereby renders himself insolvent) with the result that his creditors (including his future creditors) are clearly subjected at least to a significant risk of being unable to recover their debts in full, such facts ought in virtually every case to be sufficient to justify the inference of an intent to defraud creditors on the disponor's part. In cases falling outside the rule, that is, in cases where the disposition is made for valuable consideration, or where the disponor is not insolvent or where the disposition does not deplete the fund potentially available to the creditors, an actual intent to defraud creditors must be shown as an inference properly to be drawn on the available evidence before s. 60 is engaged.

……

91. … In my view, as a matter of Hong Kong law, section 60 is be construed in accordance with the rule in Freeman v Pope as formulated above. …"

28.As the learned judge has pointed out, and the documents showed, it is quite clear that the 1^st Stage of Disposal was part of a debt restructuring undertaken by the NCHK Group.  The NCHK Group was indebted to certain members of the Century City Group which held promissory notes issued by the NCHK Group or were otherwise creditors of the NCHK Group, and that they and other members of the Century City Group had demanded repayment for a total of HK$512 million, and that the parties had agreed to restructure the HK$512 million of indebtedness.  This case falls outside the rule in Freeman v Pope, so there is a need to establish an actual intent to defraud creditors.

29.Fok JA said:

"71. … the (AmSoC) do not positively assert that the transfer was unsupported by consideration. On the contrary, on its face, the Restructuring Agreement was supported by consideration. The liquidators’ assertion that they cannot ascertain if the Paliburg shares given in exchange for the shares in NCHKCM had any value at all is, in my opinion, simply too speculative to be allowed to form the basis of a claim to set aside a transaction under s. 60.

72. It follows that, so far as they are advanced against the Applicants, the plaintiffs’ claims in respect of the 1^st Stage of Disposal, based on s. 60 of the CPO, fall to be struck out."

30.It is to be noted that the Restructuring Agreement also referred to the fact that NCHK would issue a HK$200 million 3-year maturity convertible bonds convertible into shares to Mr T.T. Tsui (Clause 5).  Detailed terms of which were set out in Schedule 1 of the Restructuring Agreement.  And that Century International would procure a member of the Century City Group to advance HK$100,000,000 to Mr. Tsui to finance the subscription of these bonds (called the "Tsui Convertible Bonds"), on the terms of a loan agreement and certain security documents (Clause 5.2).

31.Thus, as was pointed out in the affirmation of Mr Kenneth Ng Kwai Kai (“Mr Ng”) dated 5 October 2010 (the 1^st Defendant in these proceedings) the restructuring :-

"31. … also involved the advancement of loan by a subsidiary of Century City to TT Tsui to enable him to inject new funds into the New China Group. …"

32.This is supported by the minutes of a meeting of the Executive Committee of the Board of Directors of NCHK Group held on 26 February 1998 produced by the liquidators.

33.Furthermore, the Presentation[4] stated at page 6 in para. 3 that:

"… the Key Shareholders (there described as 'Century City International Holdings (CCIH)' and Dr. T. T. Tsui, (p. 2), provided further financial support of HK$249 million to the Group during 1998 in an effort to maintain the Group's operations."

34.It went on to say:

"These funds have been used by the Group to meet demands by various Financial Creditors during 1998. However, in the absence of further support from the Key Shareholders, the Group now has insufficient liquid assets to meet the most recent margin loan calls and is in a critical financial position."

35.Furthermore, the 1^st Stage of Disposal was referred to in the Presentation under "3                   Background to the Group's Financial Crisis", where it said the NCHK Group held approximately 106 million shares in Paliburg, obtained at a price of HK$6.50 as consideration for the NCHK Group's disposal of the Sichuan Cheng Mian Expressway in April 1998.  The Paliburg shares "had been pledged to 10 lenders to secure loans to the Group"[5].

36.There were thus ample support for Fok JA's conclusion that the 1^st Stage of Disposal was not made with the intent of depriving creditors of timely resource to property, as Ms Chan has contented.

37.Mr Yuen SC submitted that an essential element of establishing the necessary intent to defraud under section 60 is the retention of benefit in the asset disposed of by the debtor.  Mr Yuen submitted that the failure to plead and prove a retention of any benefit at the 1^st Stage of Disposal is automatically fatal to their claim to set that transaction aside under section 60.

38.With respect, I am in full agreement with Fok JA that whilst the retention of the benefits in the assets disposed of may well be a strong indicator of an intent to defraud creditors, it does not follow in the case where consideration at an undervalue was given for disposition, no matter how great the undervalue, the disposition can only be set aside under section 60, where the disponor has retained a benefit in the assets disposed of[6].

39.Given that there is no arguable case on section 60 against the relevant Defendants, I go on to consider the Plaintiffs' case based on breach of fiduciary duties and knowing receipt, on the supposition that there might be an arguable case against the other defendants or some of them[7].  I agree with Mr Yuen that taking the Plaintiffs' case at its highest, Evercheer is the second type of "trustee" explained by Lord Hoffmann NPJ in Peconic Industrial Development Ltd v Lau Kwok Fai (2009) 12 HKCFAR 139 at para. 19 and is not a constructive trustee within the meaning of the laws of Limitation. Thus the cause of action of knowing receipt pleaded against Evercheer in para. 41 of the AmSoC is plainly time-barred, since both the 1^st and 2^nd Stages of Disposal took place more than 6 years before the action was commenced.  Accordingly, the only appropriate order to make is to strike out such a claim.  See Ronex Properties Ltd v John Laing Construction Ltd and others [1983] QB 398 at pages 405, 407 and 408.

2^nd Stage of Disposal

40.The complaint revolved around a Power of Attorney and a Declaration of Trust.  The Power of Attorney executed by NCHK Group dated 23 January 1999, authorized Evercheer as Attorney to do the following things:

"1. to receive all shares, monies (other than the Accrued Amount (as this term is defined in a deed of indemnity dated 14 April 1998 between ourselves, the Attorney and Century City International Limited)) and documentation and notices relating thereto which are to be sent to us pursuant to the provisions of the escrow-agreement dated 31 October 1994 between us and the other shareholders of The New China Hong Kong Highway Limited (the 'Escrow Agreement');

2. to acknowledge receipt of the same;

3. to do all other acts and things and to take any other action in connection with the receipt of the same; and

4. to take any action and sign any document for the purpose of exercising our rights under the Escrow Agreement (other than in relation to the Accrued Amount referred to in paragraph 1 hereof).

We confirm that we would ratify any such action on our behalf by the Attorney.

The authority herein contained shall not be revocable without the written consent of the Attorney."

41.The Declaration of Trust is dated 23 January 1999, where relevant it reads:

"Under a power of attorney of even date attached hereto (the 'Power of Attorney'), NCHK has appointed Evercheer as its attorney for the purposes of, inter alia, receiving all shares, monies (other than the Accrued Amount) as this term is defined in a deed of indemnity dated 14 April 1998 between NCHK, Evercheer and Century City International Limited) and documentation and notices relating thereto which are to be sent to NCHK pursuant to the provisions of the Escrow Agreement.

NCHK hereby declares that, in order to fulfil the terms of the Completion Agreement, the Deed of Indemnity and the Power of Attorney, any Escrow Shares or Escrow Monies or documentation relating thereto which, for whatever reason, is received by it, shall be held in trust for the benefit of Evercheer and that none of NCHK nor any of its nominees shall have any beneficial interest over the same. In such event, NCHK shall do all such things and execute all such documents as may be necessary to vest in Evercheer forthwith full legal and beneficial interest in, and physical possession of the certificates for, the Escrow Shares and full legal and beneficial interest in the Escrow Monies."

42.Fok JA has rejected the Plaintiffs' submissions[8].  I am in respectful agreement.

43.The Plaintiffs' case has been put in different ways.  First, it was suggested that the Power of Attorney and the Declaration of Trust had disposed of the escrow shares and its related dividends. 

44.The liquidators' argument must be rejected.  It is plain[9] that the escrow shares had been disposed of under the 1^st Stage of Disposal, in other words, prior to the execution of the Power of Attorney or the Declaration of Trust.

45.Ms Chan SC has rightly accepted that if, as a result of the 1^st Stage of Disposal (and/or the 2^nd Stage of Disposal), the relevant defendants had become the beneficial owner of the entire 34.44% shares, the fact that the Plaintiffs were entitled to be delivered the escrow shares and dividends by the Escrow Agent under the Escrow Agreement, cannot affect the beneficial interest of the relevant defendants in those shares.  Nor the fact that the Escrow Agreement "shall not be capable of assignment by any party"[10].

46.The Plaintiffs' argument seemed to stem from a misreading of the 1^stDeed of Indemnity.  The Plaintiffs seemed to think that under the 1^st Deed of Indemnity, the Plaintiffs had been given a choice of either returning the escrow shares or by providing Paliburg shares.  But that is a clear misreading of the Deed of Indemnity.  Under the 1^st Deed of Indemnity NCHK Group agreed to complete the sale of NCHKCM shares and to indemnify Evercheer against diminution in value of NCHKCM shares if the escrow shares were distributed to the Investors.

47.Recital (A) of the 1^st Deed of Indemnity recited that NCHKCM was the holder of 1,639,391 shares which represented 34.44% in NCHK Highway, and in Recital (F):

"(F) Pursuant to the terms of the Master Agreement Century International has agreed to procure Evercheer to acquire the entire 34.44 per cent shareholding interest which NCHK indirectly holds in [NCHK Highway] through an acquisition of the entire issued share capital of NCHKCM ('NCHKCM Shares') together with the right to and interest in all shareholders' loans advanced to NCHKCM at an aggregate net consideration of HK$692,000,000. …"

48.Then it went on to state that NCHK Group agreed to indemnify and keep Century City International Ltd and Evercheer indemnified against any diminution in the value of the NCHKCM Shares arising as a result of the escrow shares being distributable and distributed to the Investors, according to the following formula:

"1.2 All sums payable under Clause 1.1 shall be payable forthwith following the Escrow Shares Distribution. For the purpose of quantification of diminution of the value of the NCHKCM Shares under the indemnity in Clause 1.1, the value of the NCHKCM Shares shall be considered to be HK$596,099,411, which is based upon the projected value of the underlying assets of [NCHK Highway] as at 31 December 1997 as set out in the report prepared by American Appraisals dated 12 March 1998 and annexed hereto marked 'A'. Any diminution in value of the NCHKCM Shares shall be calculated by [Century City International Ltd] on the following basis:-

1.2.1 Number of Escrow Shares distributed to Investors x HK$812,000,000"
                                        1,639,391

49.Ms Chan SC then argued that the Declaration of Trust and the Power of Attorney had disposed of choses in action which were valuable. It is said that the choses of action included the right to enforce the Escrow Agreement.  It is unrealistic to say that such choses of action had any value since, Ms Chan accepted, as she must, that when the escrow shares were recovered, they would be held for the relevant defendants.

50.Mr Wright added to the submission by saying that essentially the choses of action was a right to refuse to cooperate with the relevant defendants, unless it was made worth the Plaintiffs' while to do so.  Thus he said the Plaintiffs were in a position to "extract" (Mr Wright's word) money from the relevant defendants.

51.I do not believe that is right.  I believe it is inconceivable that any reputable liquidators would so behave.  Given that the relevant defendants are the beneficial owners of the shares, the liquidators would only provoke unnecessary litigation by refusing to do what is sensible.  No court would sanction liquidators engaging in what is in effect blackmailing conduct.

52.Indeed, Mr Yuen has referred us to a letter from the liquidators' then-solicitors Messrs Johnson Stokes & Master dated 14 February 2001, saying that the liquidators, in my view, entirely properly,

"… will be delighted to assist you and your clients provided a complete indemnity is given in respect of all costs which the liquidators may incur as a consequence of such assistance. …"

53.Further, it is relevant to note the following clauses in the Restructuring Agreement:

"13 EFFECT OF COMPLETION

The Warranties and all other provisions of this Agreement insofar as the same shall not have been performed at Completion shall not be extinguished or affected by Completion or by any other event or matter whatever except by a specific and duly authorised written waiver or release by [Century City International Ltd].

……

19 FURTHER ASSURANCE

19.1 Each party undertakes to the other that it shall use its reasonable endeavours to procure that any necessary third party shall execute such documents and do such acts and things as may be reasonably required or necessary or desirable to carry into effect or to give legal effect to the provisions of this Agreement and the transactions or arrangements hereby contemplated.

19.2 Mr. Tsui undertakes to [Century City International Ltd] to procure the due and timely compliance and performance by NCHK of its obligations under this Agreement."

54.The execution of the Power of Attorney and Declaration of Trust are in complete accordance with these provisions.  They facilitated Evercheer recovering the escrow shares.  With respect, I agree their execution was (as the learned Judge rightly held) merely confirmatory and there was no disposition of any property.  Section 60 has no application, nor does section 266 of the Companies Ordinance (Cap. 32) or Rule 84 of the Companies (Winding-Up) Rules (Cap. 32H).

55.Another point relied on is that Evercheer had given up the escrow shares when it submitted a Proof of Debt.  The Proof of Debt is dated 30 November 2001.  The context of the Proof of Debt can be gathered from a letter of Messrs Victor Chu & Co. as Escrow Agent dated 7 July 1999 by which, purportedly under Clause 6 of the Escrow Agreement, the escrow shares of 599,291 shares were distributed as to 392,871 shares to the Investors, and 206,420 shares to the founding member.

56.The Proof of Debt was in respect of 392,871 shares distributed to the Investors, and the amount was HK$194,591,316 which was calculated in accordance with the formula in Clause 1.2.1 in the Deed of Indemnity, being:

392,871 Escrow Shares distributed to Investors x HK$812,000,000
                                        1,639,391

57.I do not accept that by making a Proof of Debt, at the time when the claim in respect of the escrow shares in HCCL 97/2000 had not been adjudicated upon, could be regarded as an election by Evercheer to give up its interests in the escrow shares in the event that they had been wrongly distributed to the Investors.

58.Mr Yuen also made the point that this point was not raised in the hearing below.  Had it been raised before, the Defendants would have adduced more evidence to deal with this since, although filed on behalf of Evercheer, it was filed at a time when Evercheer was not under the control of Shenyin Wanguo.  Thus, this point should not be allowed to be made on appeal.  I agree.

Conduct of the 2000 HCCL Action

59.I agree with Mr Yuen that once the court rejects the claim in respect of the Declaration of Trust and Power of Attorney, NCHK Group was only a nominal plaintiff.  In such circumstances, it is difficult to see how a duty would arise.  As the learned judge rightly held, the Power of Attorney was given for the benefit of Evercheer and not for the benefit of the Plaintiffs.  Nor should I be taken to accept that, in any event, even assuming that any lawyer had been negligent in the conduct of the 2000 HCCL Action, any of the relevant defendants could be vicariously liable.

Lack of authority

60.This relates principally to the Declaration of Trust and Power of Attorney.  The learned judge dealt with this in paras. 82-97 of the judgment.  With respect, I agree with the learned judge. 

61.Ms Chan submitted that the learned judge was wrong to hold that the relevant defendants are entitled to rely on the indoor management rule because the question of whether a third party dealing with a company is entitled to rely on the indoor management rule is a question of mixed fact and law (Rolled Steel Products (Holdings) Ltd. v British Steel Corporation and others [1986] 1 Ch 246 (CA) at 285, per Slade LJ).  It is not a matter which the Court can decide summarily.  She submitted that a person may be put on inquiry by the very nature of the transaction as where the transaction is entered into for purposes apparently unrelated to the company's business or that there is no indication that the company stands to gain from the transaction (Northside Develovments Proprietary Limited v Registrar-General (1989-1990) 170 CLR 146 at 154-155, 160-161 per Mason CJ, 182-183 per Brennan J, 205-206 per Dawson J).  The learned judge should have directed himself that the relevant defendants would only be able to rely on the indoor management rule if, after investigating the circumstances under which the Power of Attorney and Declaration of Trust were made, there were nothing which put them on notice of the irregularity of the transaction.

62.With respect, since the Power of Attorney and Declaration of Trust had done no more than to facilitate the enforcement of the right to the escrow shares, I see nothing in this point.  It is difficult to see what loss the Plaintiffs could be said to have suffered. 

Re-AmSoC

63.For the above reasons, I believe that the learned judge was completely right in striking out the Plaintiffs' claims against the relevant defendants.

64.Ms Chan, however, submitted that instead of dismissing the action, the learned judge ought to have considered whether the claim could have been saved by amendments.  The Supplemental Notice of Appeal has supplied a drafted Re-AmSoC.  Ms Chan had not addressed us on the Re-AmSoC.  She took the view, rightly so, in my view, that whether or not they should be given leave to re-amend should be dealt with at first instance.  The Plaintiffs had not informed the learned judge that they might wish to further amend their SoC. Indeed, the AmSoC was produced not long before the hearing before the learned judge.

65.That being the case, I see no reason why we should set aside the order that the action be dismissed.  Mr Yuen submitted that the Plaintiffs may issue fresh proceedings to pursue their claim.  I say nothing about that.

Disposition

66.So for the above reasons, I would dismiss the appeal and make an order nisi that the relevant defendants are to have the costs of the appeal, to be taxed unless agreed.

Hon Kwan JA:

67.I agree with the judgment of the Vice-President.

Ms Linda Chan, SC and Mr Colin Wright, instructed by Messrs Stephenson Harwood, for the Plaintiffs

Mr Rimsky Yuen, SC and Mr Samuel Chan, instructed by Messrs Fred Kan & Co., for the 2nd, 4th, 5th and 7th Defendants