Re Shun Kai Finance Co Ltd

HCCW 1325/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 1325 OF 2002

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AND

HCA 2180/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2180 OF 2011

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(HEARD TOGETHER)

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D E C I S I O N

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Introduction

1.Shun KaiFinanceCompany Limited (“Company”)was, prior to its winding up by order of the Court on 5 November 2003, a licensed money lender pursuant to the Money Lenders Ordinance, Cap 163. The Petition that led to the winding-up order was presented by Japan Leasing (Hong Kong) Limited (“JapanLeasing”),which itself had been a registered money lender prior to going into creditor's voluntary liquidation in September 1998.  On 14 April 2004 Kwan J, as she then was, appointed Chau Yin Fong and the Respondent as joint and several liquidators and a committee of inspection comprising of 2 members of the Company, Japan Leasing and a creditor, Fan Wong & Tso, who had been the Company's solicitors. On 29 April 2005, Ms. Chau ceased to be a liquidator and since that date the Respondent has been sole liquidator.  I shall refer to the Respondent as the “Liquidator”.

2.The Applicant, Yeung Pui Ying Anna, was a shareholder and director of the Company as was her Husband, Wong Shun.  It is her case that she and her Husband were the beneficial owners of the 90% of the Company’s issued shares and that her Husband controlled its affairs.

3.By an agreement dated 19 May 1993 (“MasterLoan Agreement”) Japan Leasing agreed to grant loan facilities to the Company, out of which the Company would grant loans to third party borrowers (“Sub‑Borrowers”).  The Master Loan Agreement provided that the money lent to Sub-Borrowers was to be secured by mortgages from the Sub‑Borrowers to the Company, who in turn would grant sub‑mortgages to Japan Leasing.  The Company also agreed in the Master Loan Agreement to assign its security granted to it by the Sub‑Borrowers to Japan Leasing to secure the loans by Japan Leasing to the Company.  The Master Loan Agreement also provided that Japan Leasing only had to account for any sums owed by Japan Leasing to the Company after payment of any sums due by the Company to Japan Leasing.

4.Between about the end of 1997 and the middle of 1998 Japan Leasing alleged that the Company had defaulted on its repayment obligations and sought to exercise its rights under the Master Loan Agreement and requested Sub-Borrower's to pay it directly rather than pay the Company. This affected the Company's cash flow.

5.On 15 August 1998 the Company issued proceedings against Japan Leasing in HCA 13826 of 1998 claiming damages from Japan Leasing for breaches of the Master Loan Agreement and procuring breaches of sub-mortgages by directing Sub-Borrowers to pay it directly (“Action”).

6.On 30 September 1998 Japan Leasing was placed in liquidation and liquidators appointed.  Japan Leasing denied the Company’s claims and filed a counterclaim.  Following the winding up of the Company on 5 November 2003 the action against Japan Leasing was stayed by virtue of section 186 of the Companies Ordinance.  At the time the Company went into liquidation it had account receivables of approximately $87,000,000.  It had liabilities of approximately $102,000,000 of which approximately $91,000,000 was owed to Japan Leasing.

7.The proceedings against Japan Leasing were settled on 23 December 2005 subject to the sanction of the Court which was given by Kwan J on 3 March 2006.  The settlement involved a payment by Japan Leasing of $4,000,000, settlement of expenses incurred in the liquidation and the Liquidator admitting a debt to Japan Leasing of $27,000,000, which was that part of the sums claimed by Japan Leasing which it appeared were owed to Japan Leasing and had been adjudicated by the Liquidator by December 2005.

8.The claims brought against the Liquidators seek to challenge that settlement.  Ms. Yeung alleges that the settlement was at a significant under value.  It is said that the settlement should have been in the sum of $90,000,000 with no allowance having been made for the debt of Japan Leasing.  It follows that Ms. Yeung asserts that the Company should have a surplus available to shareholders and, therefore, that she has a tangible interest in the liquidation.  This challenge is made by two separate proceedings:

(1) A claim under s276 of the Companies Ordinance (“s276 action”); and

(2) A common law claim for negligence (“common law action”).

9.The claims in the two actions are in almost identical terms.  There are, however, two material differences.  First, the Statement of Claim in the common law action also includes a claim against BDO Limited (“BDO Ltd”), of which Mr. Kong is a director, and the now dissolved partnership of BDO McCabe Lo & Company (“BDO partnership”) of which Mr. Kong was a partner.  Secondly, the Plaintiff in the common law action is described as “Yeung Pui Ying Anna (a minority shareholder on behalf of herself and all other member of Shun Kai Finance Company Limited (in liquidation).”  The claim has been framed as if it is a common law derivative action, although the Company is not a defendant.

10.One would not normally expect a member of a company in liquidation, even if solvent, to bring a derivative action because the company is in the control of a liquidator and the normal justification for bringing such an action, namely, that the company is in control of the alleged wrong-doers, commonly referred to as a “fraud on the minority”, does not apply[1]. The Applicant argues that she is entitled to bring a claim on behalf of the Company against the liquidator because he is in control of the Company and, therefore, the position is no different from the conventional case in which the alleged wrong-doers are those that control its board of directors.  In my view there is clearly a material difference.  The Company is in compulsory liquidation.  If a contributory considers that a liquidator has caused loss to a company he or she can make an application for relief to the Court under s276 of the Companies Ordinance, as, indeed, the Applicant has done in the alternative in the present proceedings.  This is recognised by Barma J (as he then was) in paragraph 57 of his judgment in Grand Gain Investment Limited and Cosimo Borrelli and another [2]. I do not, therefore, consider that a claim against a liquidator falls within an exception to the Rule in Foss v Harbottle [3] and in my view it cannot be pursued by a derivative action.

11.Insofar as it is suggested that a claim such as the present falls within the exceptions because the common law action includes claims against BDO Ltd and BDO partnership I disagree.  If there are prima facie claims against these two entities it seems to me that they should be pursued by High Court Action and the claim against the liquidator by way of misfeasance summons under s276.  The two can be heard together to ensure consistent results.  This presupposes that there are claims that can legitimately be brought against BDO Ltd and BDO partnership.  Their principal objection to the claims against them is that they are brought simply on the grounds that the Liquidator was employed by the former and a partner in the latter during the material periods and that as a result they are vicariously liable for his negligence.

12.I do not understand it to be in dispute that the common law action should only be struck out if I conclude that the claim against BDO Ltd and BDO partnership plainly has no prospect of success.  Neither party have been able to find a case in which the company of which a liquidator is an employee or partner have been held liable, or potentially liable, for a liquidator’s negligence in the course of his appointment.  The nearest that any case comes to addressing this issue is A&J Fabrications (Batley) Ltd v Grant Thornton[4], which Mr. Manzoni, who appeared for the Defendants/Respondent, brought to my attention.  The facts were, however, materially different.  In that case a major creditor of the company which was in liquidation approached Grant Thornton and entered into a written contract with them that an insolvency practitioner from the firm would be nominated as liquidator at a meeting of creditors and the creditor agreed to pay their fees.  The creditor was unhappy with the performance of the liquidator and sued Grant Thornton for breach of contract.  The facts of the present case are materially different.  The Liquidator was appointed personally (with Ms. Chau initially) by order of Kwan J on 14 April 2004.  I can see no basis for treating him as being appointed in his capacity as employee or partner of BDO Ltd or BDO partnership thus attracting to those two entities possible vicarious liability for his acts and omissions. The appointment by the Court is a personal appointment.  A liquidator is not appointed as the agent or representative of a company with which he is associated.  It does not seem to me that the fact that a liquidator may on occasions write on the stationary of the firm with which he is associated alters this fact and Mr. Swaine, who appeared for Ms. Yeung, advanced no reason for concluding otherwise.  In my view the common law action has no prospect of success and I strike it out.

13.The Liquidator seeks to strike out the s276 action on the basis that it has no prospect of success because it is misconceived as a matter of fact.  Section 276(1) provides:

“(1) If in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present officer or liquidator or receiver of the company, has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of duty in relation to the company which is actionable at the suit of the company, the court may, on the application of the Official Receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct of the promoter, officer, liquidator or receiver, and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, or breach of trust as the court thinks just.”

14.Mr. Manzoni submitted that the reference to “appears” in the section indicates that before a misfeasance summons can be advanced the Court needs to be satisfied that there is a complaint that needs determining. It does not seem to me that this follows from the wording of the section or that in practice anything turns on it.  In practice it will be open to a liquidator faced with a s276 summons to apply to have it struck out, in other words determined summarily in his favour, if he considers that the affirmation evidence filed by the applicant does not reveal a prima facie complaint.  If he accepts that there is a prima facie complaint that it requires a trial to determine, the summons will progress in the normal way.  It does not seem to me that either the wording of the section or practical considerations require a preliminary hearing to determine whether or not there is anything to investigate.

15.The claim is that the Liquidator committed misfeasance by causing the Company to enter into the deed of settlement dated 23 December 2005 and presumably, it not being asserted in the summons, seeking the Court’s sanction which was obtained from Kwan J on 3 March 2006.

16.A liquidator may compromise all claims subsisting between a company and a creditor or debtor subject to the approval of the committee of inspection, if there is one, or the Court under section 199(1)(f) of the Companies Ordinance. 

17.The power of a liquidator to compromise a claim is designed to achieve the efficient winding-up of a company.  Proper compromises should be facilitated rather than obstructed: see Elderslie Finance Corp Ltd v Newpage Pty Ltd (No 6) [5].

18.The approach of the Court when dealing with an application by a liquidator for sanction to compromise a claim was considered by Chadwick LJ (Aldous and Potter LJJ agreeing) in Re Greenhaven Motors Ltd [6] :

“In my view, the correct approach in cases under s. 167(1)(a) of the Act was identified by Lightman J in Re Edennote Ltd (No. 2) [1997] 2 BCLC 89 at p. 92g-h. He said:

‘Where a liquidator seeks the sanction of the court and takes the view that a compromise is in the best interest of the creditors, in any ordinary case, where (as in this case) there is no suggestion of lack of good faith by the liquidator or that he is partisan the court will attach considerable weight to the liquidator’s views unless the evidence reveals substantial reasons why it should not do so, or that for some reason or other his view is flawed.’

In deciding whether or not to sanction a proposed compromise the court must consider whether the interests of those, whether creditors or contributories, who have a real interest in the assets of a company in liquidation, are likely to be best served (i) by permitting the company to enter into that compromise with all the terms that it contains; or (ii) by not permitting the company to enter into that compromise. It is not for the court to speculate whether the terms of the proposed compromise were the best that could have been obtained; or whether the proposed compromise would have been better if it did not contain all the terms that it does contain; or whether there could have been a better compromise unless it is satisfied that, if the company is not permitted to enter into the compromise on the terms which the liquidator has negotiated there will then be better terms or some other compromise on offer, the decision is between the proposed compromise and no compromise at all.

In reaching that decision, the court may have to weigh the different interests of creditors and contributories and, perhaps, the different interests of preferential and non-preferential creditors … [T]he court will give weight to the wishes of creditors and contributories whose interests it has to consider, for the reason that creditors and contributories, if uninfluenced by extraneous considerations, are likely to be good judges of where their own best interests lie. For the same reason the court will give weight to the views of the liquidator, who may, and normally will, be in the best position to take an informed and objective view. But, as said, at the end of the day it is for the court to decide whether or not to sanction compromise.

… In cases … for which [the Liquidator] has obtained sanction of the liquidation committee … [i]t is right that the court should not interfere in such a case unless the liquidator is acting malafide or his decision is one which no reasonable liquidator could take.”

19.Similarly, in McPherson’s Law of Company Liquidation (3^rd Edition) (at 9.007) Professor Keay quotes from State Bank of New South Wales v Turner Corp Ltd [7] that:

“The role of the court in relation to this power is:

‘not of course a rubber stamp for whatever is put forward by the liquidator but it is not the role of the court to independently appraise the commercial soundness of the proposal. The court will not generally interfere unless there can be seen to be some lack of good faith, error in law or principle, or some real and substantive ground for doubting the prudence of the liquidator’s proposal.’

The reason for this is that a liquidator is best placed to assess a compromise proposal with regard to the interests of the creditors…”

20.Obvious considerations that are to be taken into account by a liquidator or the Court include the strengths of a claim, prospects of recovery and a company’s ability to finance either the prosecution or defence of legal proceedings.  By the very nature of the position of a company in insolvent liquidation, as the Company was at the material time, its ability to finance legal proceedings is commonly a very important consideration and the Court is frequently asked to sanction settlements on terms that reflect this and that are perhaps less favourable than a solvent and well resourced company might be prepared to agree.

21.The pleaded case deals with the issue of finance at paragraph 5 of the Points of Claim as follows:

“(i) The Liquidator incurred legal costs on behalf of the Company with the solicitors’ firm of Jones Day, amounting to HK$433,787.20 for the period 3June 2004 to 30 June 2006 and therefore would not have been unable to secure legal representation for the Company to pursue the Action against Japan Leasing.

(ii)   By his letter to Wong Shun, the Applicant’s husband, dated 29 September 2005, the Liquidator rejected a proposal made by the said Wong Shun to facilitate prosecution of the Action, but did not counter-propose, thereby evincing a predisposition not to allow the Company to pursue the Action.”

22.The Liquidator had written to all the creditors asking if they were willing to fund the litigation against Japan Leasing but none had responded positively.  The only expression of interest was from Mr. Wong.  The Liquidator explains why he rejected Mr. Wong’s offer in paragraphs 26 to 28 of his first affirmation:

“26. I set out details of Mr Wong’s funding proposal in paragraph 28 of My First Affirmation. Mr Wong submitted his proposal to me in September 2005 and claimed that he was acting on behalf of the shareholders of the Company. His offer involved SKIL (which, as mentioned in paragraph 18.b. above, is a related company) pursuing the Proceedings on behalf of the Company. It was proposed that SKIL would pay the Company a nominal sum of HK$1,000 immediately and undertake to pay an additional sum of HK$8,000,000 to the Company as and when the Company was successful with its claims in the Proceedings. The additional sum of HK$8,000,000 was to include the repayment of a loan from the Company to SKIL of HK$4,200,000. Therefore, the net amount that would be paid to the Company by SKIL was HK$3,800,000, assuming the Company was successful in continuing the Proceedings.

27. During my negotiations with Mr Wong in September 2005 through my assistant I asked Mr Wong to set up a meeting with the shareholders of the Company, as he claimed to be representing them, so that we could discuss the offer further. Mr Wong refused to organise such a meeting. After considering Mr Wong’s offer I wrote to him on 29 September 2005 and asked him to significantly improve its terms. One of the factors that I had in mind at the time, if we were to set in place a funding package to enable the Company to progress the Proceedings, was to try to ensure that the funding package was sufficient to cover not only the cost of pursuing the Proceedings through to trial but also to pay any adverse costs award or other sum that the Company might be required to pay to satisfy a security for costs order. I did not receive a revised offer from Mr Wong. Pages 122 to 124 comprise true copies of Mr Wong’s offer letter to me dated 1 September 2005 and my response dated 29 September 2005.

28. I was not confident of Mr Wong’s ability to provide funding in the manner he proposed because he already owed the Company over HK$15,000,000 (see paragraph 18.a. above); I was also aware of his indebtedness to various third parties. I did not therefore consider Mr Wong’s offer to be commercially sound or likely to result in any feasible agreement to fund the Proceedings. For these reasons I did not pursue Mr Wong’s offer further. As mentioned in paragraph 18.a. above Mr Wong failed to pay the sum of HK$4,000,000 to the Company and was subsequently adjudicated bankrupt on 6 October 2006.”

23.Mr. Wong’s offer was contained in a letter dated 1 September 2005, and I note in passing that he was bankrupted on 6 October 2006, the material parts of which read as follows:

“One of the shareholders will buy the majority shareholdings of Shun Kai Investment Ltd. and propose to take up the litigation of HCA No.13826 of 1998 on behalf of Shun Kai Finance Co. Ltd. details as follows:-

(1) Purchase price $1,000

(2) Shun Kai Investment Ltd. will pay for the legal fees and instruct Sir John Swaine as leading Counsel for the case.

(3) Shun Kai Investment Ltd. will provide security for costs if required by Court.”

(4) Shun Kai Investment Ltd. will pay Shun Kai Finance Co. Ltd. a total sum of $8,000,000 from the Litigation Proceeds should the case be on our favour. This $8,000,000 includes repayment of $4,200,000 loan being advanced by Shun Kai Finance Co. Ltd. to Shun Kai Investment Ltd. during the period from 1994 to 2001.

(5)      The Liquidators of Shun Kai Finance Co. Ltd. undertake not to wind up Shun Kai Investment Ltd. prior to the conclusion of HCA No.13826 of 1998.”

24.It seems to me that the Liquidator’s reaction to this offer was not unreasonable.  Mr. Wong’s response is that his offer did not say he would personally be paying the fees he referred to.  However, the fact is that neither did he explain how the vague arrangement he proposed, which did not address the Liquidator’s own fees or that of solicitors, was to be financed.  His evidence filed in these proceedings in relation to this subject is an exercise in obfuscation and fails to explain in detail who and how the financing was to be provided.  The fact that it does not do so and that Mr. Wong went bankrupt tends to suggest that the Liquidator’s sceptical view of the offer was justified.

25.The Liquidator had to form a view as to whether or not pursuit of a claim against Japan Leasing was viable.  For the Applicant’s claim to succeed it would be necessary for the Applicant to demonstrate that a reasonable liquidator in the position of the Liquidator would not have formed the commercial conclusion that he did.  It is not sufficient to establish that another liquidator might have responded differently to Mr. Wong’s offer or taken a different commercial view.  I can see nothing in Mr. Wong’s evidence which suggests that the Court could properly conclude that the Liquidator’s view about the credibility of his offer was reached negligently.  It seems to have fallen within the scope of decision, which one might reasonably expect a liquidator to reach in the present case.

26.It also seems to me to be material that Japan Leasing was in liquidation and, therefore, there was good reason for the Liquidator to proceed on the assumption that even if it were successful the litigation against Japan Leasing might not realise much for creditors. 

27.In these circumstances it seems to me unsurprising that the Liquidator would have been inclined to settle the claims with Japan Leasing on what he took the view were, all things considered, the best commercial terms.  The thrust of Ms. Yeung’s evidence and argument before me, namely, that the Liquidator was faced with assessing a claim which had the support of both an opinion from Sir John Swaine SC and a decision by Recorder Edward Chan SC in HCMP 3604 and 4999 of 1999; (the latter being helpful because it established that it was only after the determination of the Action that an account between the Company and Japan Leasing could be finalised and that Japan Leasing were consequently prevented from asserting a right to claim that any loans and interest were due in December 2005) and thus the claim should have been viewed, as I understand the argument, as very strong, approaches the matter with a wholly unjustifiable level of optimism.

28.I accept for present purposes that the Liquidator, who had no other legal advice, should have taken Sir John Swaine’s opinion at face value.  In paragraph 6 of that opinion he concludes that “… we consider that Shun Kai has a reasonable chance of prevailing in its claim for breach of the Governing Agreement and, assuming that satisfactory proof is furnished at trial, in succeeding as well on the collateral oral agreement”. I note that the collateral oral agreement was very much fact sensitive and more generally that the opinion falls far short of advice that the claim was straightforward and highly likely to succeed.

29.The offer that the Liquidator was considering was, and this is not disputed, a “take it or leave it” offer of $4,000,000.  It is clear from his evidence that the Liquidator considered for reasons explained in his affirmation that the Company’s claim that it was owed $191,000,000 by Japan Leasing was speculative and grossly inflated.  He points out that as is explained in the Particulars of Damage the sum claimed was calculated by taking the average gross profit for the years 1995 to 1996 and 1996 to 1997 of, it is asserted, $10,000,000 and multiplying it by ten and producing $100,000,000.  The Liquidator explains in his evidence that the net profit for these two years shown in the audited financial statements averaged $918,396.  It would seem fairly obvious that the Company would be unlikely to be able to recover more than the net profit. I note that in the years 1998 onwards the Company made a net loss.

30.The other element of the claim was described as follows in paragraph A(iv)(b):

“The opportunity to undertake new business, including its new Home Ownership Scheme Loan product (of which the Defendant, through Mr. Ronald Leung, was aware prior to the Defendant’s aforementioned breaches). In this regard, the 1^st Plaintiff will contend that its new Home Ownership Scheme Loan product would have earned for the 1^st Plaintiff a further annual gross profit of HK$9,000,000 (assuming 100 new loans of HK$500,000 earning the 1^st Plaintiff an interest differential of 1.5% per month); and”

This is entirely speculative and I find it entirely unsurprising that the Liquidator approached it with caution. 

31.It seems to me that the above matters fully justified the Liquidator forming the view that he did.  I do not consider that Ms. Yeung’s claim has any realistic prospect of success and I would dismiss the s276 Action.  I would, however, address one further matter which bolsters that view.  The Liquidator also took into account that Japan Leasing was claiming $91,000,000 of which the Liquidator thought that at least $27,000,000 was properly admitted.  I do not read Recorder Chan SC’s decision as depriving Japan Leasing of the right to prove for these sums in the liquidation of the Company.  His decision only went to the point in time at which certain of those claims could be admitted, namely, after the determination of the Action.  It seems to me that it was perfectly proper in considering the offer for the Liquidator to take into account Japan Leasing’s claims and to assume that in part they would be admitted in due course.  This being the case it seems to me that it becomes even harder to criticise the Liquidator.

32.In conclusion, I dismiss both the common law action and the s276 action and order that Ms. Yeung pay the Respondent and the Defendants their costs to be taxed if not agreed. 

Mr John J E Swaine, instructed by Tsang, Chan & Woo, for the applicant (in HCCW 1325/2002) and the plaintiff (in HCA 2180/2011)

Mr Charles Manzoni SC, instructed by Kennedys, for the respondent (in HCCW 1325/2002) and the 1^st to 3^rd defendants (in HCA 2180/2011)