Re Fortune King Trading Ltd

HCCW 432/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 432 OF 2012

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1.This is an appeal by the Trustees in Bankruptcy (“the Trustees”) of Mr Luu Hung Viet Derrick (“Mr Luu”) against the Order of Master Hui dated 2 December 2013 refusing the Trustees’ application for leave under section 186 of the Companies Ordinance (now Companies (Winding‑Up and Miscellaneous Provisions) Ordinance), Cap 32 (“the Ordinance”), to continue HCA 1055/2012 (“the Action”).

Background facts

2.The material facts for the purposes of this appeal can be shortly stated.

3.Mr Luu was adjudged bankrupt on 8 February 2012.  The Trustees were appointed on 18 April 2012.  They commenced the Action on 18 June 2012 against a number of persons, including: (1) Mr Luu; (2) his wife Mdm Liu Ke Mian Lorraine (“Mdm Liu”); (3) Alphred Group Limited (“Alphred”); (4) Satisfactory Kingdom Holdings Limited (“Satisfactory Kingdom”) and (5) Fortune King Trading Limited (“Fortune King”).

4.By the Action, the Trustees seek declaratory and other relief mainly to the effect that Mr Luu was the beneficial owner of the property known as House 18, Severn 8, No 8 Severn Road, Hong Kong (“the Property”).  There are other claims, some related to the trust claim and some not, which I need not mention here.

5.Fortune King was the registered owner of the Property since 2007 until it sold the Property in June 2012. Fortune King was in turn wholly owned by Alphred, a BVI company.  At all material times from 2007 up to March 2012, Mr Luu and Mdm Liu were the only shareholders of Alphred, each owning 50% of its issued shares.  Mr Luu was appointed sole director of Alphred on 4 May 2007.  Mdm Liu was appointed a director on 20 January 2012 (after the presentation of the bankruptcy petition against Mr Luu, but before he was adjudged bankrupt).

6.The Trustees claim that Mr Luu provided the initial payment for the purchase of the Property in the sum of $21.8 million.  The remainder of the purchase price was financed by mortgages, and Mr Luu gave personal guarantees to the mortgagees.  He lived in the Property rent free.

7.By a special resolution dated 20 March 2012, Alphred transferred its shares in Fortune King to Satisfactory Kingdom, also a BVI company.  According to the papers before me, one Wang Ying owned/controlled Satisfactory Kingdom.  It is unclear what was the consideration for the transfer of Fortune King’s shares by Alphred to Satisfactory Kingdom, or whether there was any connection between Wang Ying on the one hand and Mr Luu or Mdm Liu on the other.  The Trustees allege that after the transfer of the shares in Fortune King to Satisfactory Kingdom, Mr Luu continued to reside at the Premises for some time without paying any rent.

8.The sale of the Property in June 2012 produced net proceeds of around $13.4 million.  The Trustees claim that Mr Luu was the beneficial owner of the Property; hence the estate rather than Fortune King should be entitled to the proceeds.  The proceeds have been paid into court pending resolution of the competing claims.

9.On 27 July 2012, Construction Limited (“Construction”) was added as the 6^th defendant in the Action on its own application.

10.In the meantime, Fortune King was wound up by the court on 30 January 2013 pursuant to a petition presented by Construction on 23 November 2012.  The petition was based on a judgment debt for $16.8 million which Fortune King did not dispute.  Construction is the only substantial creditor of Fortune King and is the only member of the committee of inspection.

11.As Mr Jose Maurellet, counsel for the Trustees, put it in his skeleton, the “real fight” is between the Trustees and Construction.  That is common ground, at least from the financial perspective.

Contentions

12.The Trustees’ main contention was that leave should be granted so that the trust claim can be more conveniently decided in the Action.  Mr Maurellet submitted that given the history of the matter and the positions taken by the relevant parties, a resolution of the beneficial ownership and entitlement to the proceeds by the court would be inevitable.  It would therefore be more appropriate that the claims be decided in a direct contest between the Trustees and Construction rather than by the Liquidators of Fortune King (“the Liquidators”).

13.Mr Maurellet bolstered his main submission by relying on the fact that the Liquidators did not oppose the application for leave.  It was said that the Liquidators’ stance indicated that they were not keen to resolve the trust claim without court assistance.  The availability of automatic discovery in the Action was another factor relied upon.

14.Mr William Wong SC (leading Mr Michael Lok) on behalf of Construction argued otherwise.[1]  Mr Wong submitted that the adjudication of the Trustees’ claim should take place in the liquidation.  To bolster his position, Mr Wong argued that the proprietary claim was hopeless; that even if there were an arguable case, it could be conveniently decided in the course of the liquidation; and there was no special circumstances justifying leave to continue the Action against Fortune King.

15.The Liquidators adopted a neutral stance on this appeal, as they did before the master.  Nevertheless, Mr Derek J Y Chan, counsel appearing behalf of the Liquidators on this appeal but not before the master, disclaimed any notion that the Liquidators were not keen to resolve the Trustees’ claim, as Mr Maurellet’s skeleton suggested.  Mr Chan clarified that the Liquidators were able (and in any event under a duty) to determine the Trustees’ claim and other claims according to the evidence and materials available to them in a fair and even-handed manner.  The Liquidators took a neutral position simply because they have not received sufficient materials for them to form a view on the Trustees’ claim.  At the same time, however, the Liquidators believed (I think reasonably) that it would be likely that one way or the other, resort to the court would be required in any event, although they shared Construction’s view that a full trial of the Action involving multiple parties would likely be more lengthy and costly than an adjudication in the liquidation and the (likely) subsequent application to the court arising from the Liquidators’ decision.

Applicable principles

16.Counsel were agreed on the applicable principles.  They referred me to two judgments of Kwan J (as she then was) in Re B+B Construction Co Ltd, HCCW 114/2001 (unreported, 4 April 2003) at §§5‑7 & 9 and Re Keen Lloyd Resources Ltd, HCCW 1134/2002 (unreported, 21 May 2004) at §§20‑21.  In short:

(a) The key question is “what is the appropriate method for determining the proposed claims—is it separate proceedings or is it the winding-up process”?

(b) Whether to grant leave depends on what is right and fair in the circumstances of the case and this involves a balancing exercise: if leaving the issue to be determined by the liquidators is less expensive and quicker than an independent action it may be more convenient that way and leave may be refused.

(c) On the other hand, proceedings will be allowed to continue when it is the most convenient method of trying a question, especially where the question raises substantial issues of disputed facts or matters of law of complexity.

(d) For the purpose of determining whether leave should be granted, it is unnecessary to investigate the merits of the claim, so long as the claim is not clearly unsustainable. 

Discussion

17.Mr Wong, on behalf of Construction, contended that the Trustees’ claim was unarguable.  He submitted, in substance, that the use of a limited company to purchase properties was commonplace in Hong Kong.  The shareholders would typically provide the down payment/deposits—which would be treated as shareholders’ loans—and mortgagees often required personal guarantees from the shareholders. That, Mr Wong argued, was basically what had happened here.

18.Moreover, Mr Wong reminded me that the sale of the Property took place after Alphred had transferred the shares in Fortune King to Satisfactory Kingdom.  Whether that share transfer was suspicious or not was irrelevant to the sale of the Property by Fortune King.

19.I can see the force of Mr Wong’s argument.  However, at this stage, and without all the material evidence, I am not prepared to say that the Trustees’ claim is unarguable.  There are, in my view, some unusual features in this case which warrant more matured consideration.  For obvious reasons, it is undesirable to go into the details for the purposes of disposing of this appeal.  I would mention, by way of example only, the transfer of the shares of Fortune King to Satisfactory Kingdom, which is currently shrouded in secrecy, and the fact (if it be proved) that Mr Luu continued to live in the Property after the share transfer. The clarification of these matters may (I put it no higher than that) tend to support the Trustees’ case.

20.That said, I am not convinced that leave should be granted.

21.Ultimately, the Trustees’ claim appears to me to be relatively straight forward, and I do not see why the Liquidators cannot form a view one way or the other relatively quickly.

22.In this connection, I bear in mind that the Liquidators have stated that they are able—and indeed duty bound—to form a view on the Trustees’ claim according to the evidence and materials presented to them in a fair and even-handed manner.  I see no reason to doubt that.  I also place reliance on the Liquidators’ view that a full trial of the Action, involving as it does multiple parties and matters not directly relevant to the beneficial ownership issue, is likely to be more costly than adjudication in the liquidation.

23.I am fully conscious that the court would probably be involved, either because the party aggrieved by the Liquidators’ decision on the Trustees’ claim would most likely apply to the court under section 200(5) of the Ordinance, or the Liquidators would apply for directions as to the disposal of the proceeds under section 200(3). But, as Mr Wong rightly pointed out, at that stage the issues are likely to be more focused and would probably involve only the Trustees and Construction.  It would probably take less time, hence costs, than a full-blown action involving many parties.

24.In short, I am not convinced that the facts and circumstances of this case warrant the granting of leave to the Trustees to pursue the Action.

Disposal

25.Accordingly, the appeal is dismissed.  I also make an order nisi that the Trustees shall pay the Liquidators’ and Construction’s costs of the appeal on a party and party basis, to be taxed if not agreed.

Postscript

26.During the hearing, a question arose as to whether there was any specific procedure under the Winding-Up Rules governing how the Liquidators were to determine the Trustees’ trust claim.  In the course of his submissions, Mr Wong referred me to Company Law in Hong Kong, Insolvency, 2014 §2.014, which discussed an unreported judgment of Barma J (as he then was) in Re Guangdong International Trust & Investment Corporation Hong Kong (Holdings) Limited, HCMP 1942/2002, 24 March 2005.  He suggested that the Trustees could file a proof of debt in the liquidation, as was apparently done in the GITIC case.  I found that suggestion somewhat surprising, although in the end it was unnecessary to delve into whether that proposition was correct as no one suggested that the Liquidators could not entertain or determine the Trustees’ claim.  Anyway, as no copy of the GITIC case was available at the hearing, Mr Maurellet asked for leave to file written submissions on that case once he had had an opportunity to consider it.  I acceded to that request and gave leave to all parties to file written submissions on that narrow point.

27.Counsel for the Liquidators and for the Trustees then lodged succinct and helpful written submissions, for which I am grateful.  Both of them submitted that the GITIC case does not support the proposition that the use of the proof of debt procedure was appropriate for a trust claim, because no issue arose in that case and Barma J did not have to consider the question.  I think they are probably right, but it is unnecessary for me to decide that question in this appeal.

28.Counsel for Construction, on the other hand, lodged a lengthy written supplemental submissions running to 16 pages, accompanied by 16 additional authorities.  The supplemental submissions canvassed a large number of points, including further submissions on points already argued at the hearing, and mostly on matters beyond the leave given.  I am sorry to say that I derived little assistance from those submissions.  Irrespective of what may be the final costs order, I would ask the taxing master when taxing the costs of this appeal to pay specific attention to whether any of the costs arising from Construction’s supplemental submissions should be allowed.

Mr William Wong SC & Mr Michael Lok, instructed by Joseph CT Lee & Co, for the petitioner

Mr Jose-Antonio Maurellet, instructed by Tanner De Witt, for the trustees

Mr Derek JY Chan, instructed by Sanny Kwong & Co, for the liquidators