Luen Tat Watch Band Manufacturer Ltd v. Li Sin Man Seline and Another

HCA 1428/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1428 OF 2012

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AND

HCA 2137/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACITON NO 2137 OF 2012

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(Heard Together)

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D E C I S I O N

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INTRODUCTION

1.The Plaintiff is a company in liquidation.  Pursuant to the order of Harris J dated 6 July 2010, it was wound up under section 177(1)(a) of the Companies Ordinance, Cap 32.

2.The winding up of the Plaintiff was triggered by the dispute between 2 camps of its shareholders. There are pending actions between them in respect of their interests in a group of companies (“the Luen Tat Group”), including the Plaintiff.

3.Separately, the liquidator[1] of the Plaintiff (“the Liquidator”) instituted legal proceedings (HCA 1428/2012 and HCA 2137/2012) (“the Liquidator’s Actions”) against the Plaintiff’s directors and shareholders for, inter alia, an account of monies allegedly paid by the Plaintiff to another company, pursuant to a tax evasion scheme (“the Re-invoicing Operation”) perpetuated when the Plaintiff was under their control.  Besides, the liquidator also pursued against the directors for compensation representing the penalties paid by the Plaintiff to the Inland Revenue Department (“IRD”) for settlement of an intended prosecution in respect of the Re-invoicing Operation.

4.With regard to the legal proceedings between the shareholders, as there are several related proceedings involved, Harris J conducted a “global case management conference” in which he gave a series of case management directions, including an order that the trial on liability in respect of the counterclaim in HCA 1711/2009 (“the Main Action”) be split and firstly dealt with before quantum.  The learned judge also ordered that one[2] of the related actions be tried after the determination of HCA 1711/2009 and the other related actions[3].

5.In view of the learned Judge’s case management directions, one camp of the shareholders took the view that the Liquidator’s Actions should be stayed pending the outcome of the Main Action.  They took out a summons (“the Stay Summons”) before Master Au Yeung and on 16 January 2013, the learned master adjourned the summons for argument and ordered an interim stay of the Liquidator’s Actions pending determination of the summons.

6.On 23 April 2013, the Liquidator issued a summons to vary the interim stay of HCA1428/2012 (“the Variation Summons”) by permitting the Liquidator to apply for (i) adding Lee Sai Nam[4] as the 3^rd Defendant; (ii) leave to issue and serve the concurrent writ out of jurisdiction on the 2^nd Defendant; and (iii) interim tracing and preservation of assets and ancillary disclosure orders against the Defendants.

7.The 2 summonses were argued before Master Ho on 15 November 2013 and the learned Master made the following orders at the hearing:

(a) The interim stay of HCA 1428/2012 (“the Accounts Action”) be continued pending the trial of the Main Action;

(b) The interim stay of HCA 2137/2012 (“the Tax Penalty Action”) be continued pending the trial of the Main Action; and

(c) Paragraph 1(2)[5] of the Variation Summons be dismissed.

8.The matter before me is the Liquidator’s appeal against Master Ho’s said orders.

BACKGROUND

9.The Plaintiff is in the business of manufacturing and trading watchbands and stainless steel accessories.  It was established in the 1950s by Lee Sai Nam (“the Father”), the 4^th Defendant in the Tax Penalty Action.  The business eventually developed into one of substantial scale and is now carried on through the Luen Tat Group.  The Plaintiff is the marketing arm of the group.

10.The Father has two sons, Li Shu Chung (“Ken”) and Lee Shu Hang (“Richard”), and a daughter Li Sin Man (“Seline”).  Ken and Richard are the 1^st and 3^rd Defendants respectively in the Tax Penalty Action.  Seline is the 1^st Defendant in the Accounts Action and 2^nd Defendant in the Tax Penalty Action.

11.The winding up of the Plaintiff and the Main Action arose from an internal dispute amongst the family members, with the Father, Seline and Richard on one side; Ken and his son, Joseph, on the other.

12.At present, the Father holds 49% of the shares of the Plaintiff via a company named Allied Ever Holdings Limited (“Allied Ever”) and the remaining 51% of the shares is held by Ken via Joseph and a company named Joesh Overseas Limited (“Joesh”).

13.In the Main Action, put it in simple terms, the Father says that the shares held by Ken are in fact held on trust for his benefits.  The Father seeks from the court a declaration to such effect and further, an order that the shares be transferred to him.  On the other hand, Ken denies the existence of any trust and counterclaims for a declaration that the shares he owned are for his own benefits.  Ken also claims against Seline and Yuen Hing Enterprise Macao Commercial Offshore Limited (“Yuen Hing”), a Macau company controlled by Seline, an account of profits received by Yuen Hing from the Plaintiff which are payable to him pursuant to an alleged oral agreement between the Father and him.  Yuen Hing is the 2^nd Defendant in the Accounts Action.

The Accounts Action

14.It is the Liquidator’s case that the Re-invoicing Operation was devised and implemented by the Father, Ken, Seline and Richard in 2002, purportedly upon the advice of their tax consultant, Moores Rowland.  As described in her written submission by Ms Audrey Eu SC, counsel for the Liquidator, the Re-invoicing Operation was implemented in the following way:

(a) The Plaintiff’s products were manufactured by Lianda Metal Watch Band (Shenzhen) Co Ltd (“Lianda”), an entity in the Luen Tat Group.  Goods manufactured by Lianda were supplied to Yuen Hing, which in turn supplied the goods to the Plaintiff at a higher price.

(b) The raw materials were purchased and imported by Lianda through its purchasing agent in Hong Kong. The finished products were delivered directly from Lianda to the Plaintiff in Hong Kong.  Upon delivery, Yuen Hing issued sales invoices to the Plaintiff, and the Plaintiff paid Yuen Hing to settle the invoices.

(c) Yuen Hing did not in substance generate profits by performing any bona fide function in the sale or supply of products manufactured by Lianda.  It employed only one clerical staff in Macau while its annual overturn was over $1 billion.  The products manufactured by Lianda were not shipped through Yuen Hing in Macau. Nor was consideration paid by Yuen Hing to the Plaintiff.

(d) The interposition of Yuen Hing between the Plaintiff and Lianda was a mere façade to conceal the fact that the funds diverted to Yuen Hing belonged to the Plaintiff.  The purpose of the Re-invoicing Operation was to book the Plaintiff’s profits offshore in order to avoid paying profits tax in Hong Kong.

15.The Liquidator alleges that, between 5 February 2009 and 31 May 2009, sums totalling $55,721,223.60 (“the Payments”) were paid by the Plaintiff to Yuen Hing under the Re-invoicing Operation.  The sums were therefore trust money held by Yuen Hing for the Plaintiff.

16.By the Accounts Action, the liquidator claims against Seline and Yuen Hing for an account of the Payments.  However, service of the process on Yuen Hing has not been successful. 

17.Seline filed a defence to the Accounts Action.  Her sole defence is that the Re-invoicing Operation was consented to and approved by the Father, who was the sole beneficial owner of all the profits of the Plaintiff, and therefore, by virtue of the Duomatic principle, the Plaintiff cannot now raise any complaint arising from the Re-invoicing Operation against the Defendants. 

The Tax Penalty Action

18.By a letter dated 15 May 2012, the Commissioner of the IRD claimed that the Plaintiff had made incorrect tax returns for the assessment years 2005/2006 to 2010/2011.  The Plaintiff eventually had to pay additional tax of totally $18.3 million of which $9.7 million relates to the Re-invoicing Operation. 

19.Besides, the IRD agreed not to prosecute the Plaintiff on the condition that the Plaintiff is to pay a penalty of $3.4 million (“Tax Penalty”).  The Plaintiff paid the said sum on 11 October 2012.

20.The liquidator views that the Tax Penalty should be borne personally by those who were responsible for the Re-invoicing Operation, being an unlawful tax evasion scheme contravening section 80(2) and section 80(5) of the Inland Revenue Ordinance.

21.Under the Tax Penalty Action, the Liquidator sues on behalf of the Plaintiff damages from Ken, Seline and Richard for negligence and breach of fiduciary duties; and the Father and Yuen Hing for dishonest assistance of their breach of fiduciary duties.

MASTER HO’S DECISION

22.The learned Master held that the issues involved in the Accounts Action and Tax Penalty Action are not distinct or independent from the issues to be determined in the Main Action.  He considered that to allow the 2 actions to continue in parallel with the Main Action would create a risk of inconsistent findings of fact.  He viewed that there will be findings in the Main Action on (i) the adoption, design, operation and implementation of the Re-invoicing Operation, (ii) the Duomatic argument and (iii) the nature of the Payments, and these issues would overlap with issues in the 2 actions.

23.The learned Master accepted that if the court is to allow the Accounts Action to proceed, it would have the effect of negating the split trial order made by Harris J under the Main Action, as the accounting exercise under the Accounts Action is similar to the counterclaim made by Ken under the Main Action.

24.The learned Master applied the guiding principles on temporary stay of proceedings under Re Chime Corporation Ltd[6] and concluded that the interim stay of the proceedings should continue. 

25.With regard to the Variation Summons, the learned Master was not satisfied that there was an urgent case which justifies the variation of the stay order to allow the making of the proposed ancillary preservation and disclosure applications.

PRINCIPLES ON TEMPORARY STAY OF PROCEEDINGS

26.In Re Chime Corporation Ltd, Kwan J (as she then was) set out the principles governing the grant of a temporary stay of proceedings as follows:

“11.   The court has an inherent jurisdiction to regulate its own procedures, including jurisdiction to grant a stay in appropriate circumstances.  This is preserved and recognized by section 16(3) of the High Court Ordinance, Cap.4, which provides as follows: “Nothing in this Ordinance shall affect the power of the Court of Appeal or the Court of First Instance to stay any proceedings before it, where it thinks fit to do so, either of its own motion or on the application of any person, whether or not a party to the proceedings.”

12. Mr Brock submitted that a stay constitutes interference with the right of a litigant to conduct his litigation to a trial on the merits, it is not a step to be taken lightly, and the court should not grant a stay unless the action, beyond all reasonable doubt, should not go on… [authorities cited].

13. Mr. Potts, QC, for Mrs. Wang and CAL and Mr. Peter Ng, SC, for Chime and its two subsidiaries submitted that the authorities cited above would have no application here.  I agree.  In most of these authorities, the general approach referred to by Mr. Brock was adopted in the situation where a permanent stay was sought on various grounds, as when the action was not maintainable (in Shackleton v. Swift[7]), or for abuse of process (in Goldsmith v. Sperrings Ltd.[8] And Abraham v. Thompson[9]), or where the co-extensive power of the court to strike out a claim was invoked (as in Ha Francesa v. Tsai Kut Kan (No. 1) [10] and Re Ocean Palace[11]).  As for Schreiber v. The Federal Republic of Germany[12], this was where there was overlap of civil proceedings with related criminal proceedings, which is far removed from the situation I am concerned with.

14. The correct approach, as submitted by Mr. Potts and Mr. Ng, in an application for a temporary stay of proceedings is “to consider the balance of convenience and fairness as between the parties” (Alfred McAlpine Construction Ltd. V. Unex Corporation Ltd. (1994) 70 BLR 26 at 45C to D, per Glidewell LJ; applied in Clinton Engineering Ltd. V. B-tech (Holdings) Ltd. [2001] HKCU 1002 at para. 9 and SWE Ltd. V. Chong Lai Fun, HCA No. 1064 of 2004, 28 October 2004, Reyes J, pages 5 and 6; see also Halsbury’s Laws of Hong Kong, Vol. 5(2), footnote 7 to para. [90.0938]) and the court should exercise its discretion in such a manner “to ensure that its procedures are used in a logical, fair and cost-efficient manner” (SWE Ltd., page 5).  The question at hand is not a question of deprivation of the right of a litigant to proceed altogether, but a question of case management.”

27.The principles set forth above are sound and clear.  It is the court’s regulation of its own procedures in granting or not granting a temporary stay of proceedings and the consideration of which is to ensure that its procedures are used in a logical, fair and cost-efficient manner.  It is a question of case management.  These principles echo the underlying objectives under Order 1A of the Rules of the High Court (“RHC”), albeit that it has yet come into effect at the time of Kwan J’s decision.  There shall be little controversy on this being the correct approach.

28.Ms Eu, however, has the view that the above broad principles do not assist the court in deciding how to exercise its power to grant a stay. 

29.It is Ms Eu’s submission that, stay applications concerning prior determinative issues should be distinguished from cases concerning a mere overlapping of issues.  An action would be readily stayed if the resolution of the prior action would render the latter action wholly unnecessary.  Where a stay application is based on overlapping issues, as opposed to a prior determinative action, the court should be satisfied that there is sufficient commonality of issues between the actions in question.

30.Further, in exercising the discretion, the court should also bear in mind the principles in Eastman Chemical Ltd v Heyro Chemical Ltd[13] that, in granting an interim stay, the stay should not cause an injustice to the plaintiff and the applicant for a stay should satisfy the court that continuing the proceedings would be unjust.  Ms Eu referred also to China Asia Enterprises v Holiday Asia[14] where, in her submission, Poon J has applied the same principles in an application for interim stay of proceedings.

31.Mr William Wong SC, counsel for the Father, Seline and Richard, submitted on the other hand that there should not be an additional requirement as such.  He submitted that Eastman v Heyro is a totally different case having no application to the present one.  He drew to our attention that Eastman v Heyro wasnot cited in China Asia Enterprises v Holiday Asia and there was no detailed analysis of what issues were involved in the two relevant sets of proceedings in the judgment.

32.The question being, in considering whether to grant an interim stay of proceedings, apart from applying the test laid down under Re Chime Corporation Ltd, whether there is an additional requirement that the court should satisfy itself that the stay, if granted, would not cause any injustice to the plaintiff and that to continue the proceedings would be unjust.

33.The answer to the above question is not apparent from the authorities cited by both counsel.

34.In Eastman v Heyro, the plaintiff obtained an ex parte Marevainjunction against the defendant for sums owing under a distributor contract in aid of intended arbitration proceedings. The defendant opposed the continuation of the injunction and applied for its discharge.  Meanwhile, the plaintiff petitioned to wind up the defendant.  The plaintiff applied, before Deputy High Court Judge Lisa Wong SC, for a stay of the injunction and arbitration proceedings pending the hearing of the petition by the court.

35.In refusing the stay application, the learned Deputy Judge approached the matter “as one of principle that the lis alibi pendes-type[15] principles applied by Ma J (as he then was) in Linfield Ltd v Taoho Design Architects Ltd[16]are equally applicable[17]”.  The learned Deputy Judge acknowledged that in Linfield v Taoho, the multiple proceedings did not involve the same parties but the proceedings before her, while involving the same parties, are concerned with different issues.  However, the learned Deputy Judge had the view that the same principles are applicable and summarized those as follows:

“(1) The court must consider what would serve the ends of justice between the parties to the litigation and the administration of justice generally;

(2) A stay should not cause an injustice to the plaintiff/claimant;

(3) The applicant for a stay must satisfy the court that continuing the proceedings would be unjust; and

(4) Where a plaintiff commences proceedings as of right, he should not be deprived of the right to continue those proceedings in the absence of very good reasons to the contrary.”

36.It appears that Re Chime Corporation Ltd was not cited to the learned Deputy Judge at the hearing and no reference has been made to the case in the judgment.  However, albeit that the lis alibi pendes-type principles were stated in the judgment, what the learned Deputy Judge had gone through in arriving at her conclusion not to stay the proceedings, was in fact, in my view,  a balancing exercise more akin to the principles enunciated in Re Chime.

37.In analysing whether to stay the injunction proceedings[18], that is, the discharge application of the defendant (which was the only outstanding matter in the injunction proceedings), the learned Deputy Judge emphasized the peculiar nature of the defendant’s right to apply for a discharge of a Mareva injunction obtained ex parte.  She gave much weight on the fact that Mareva injunction is “one of the law’s nuclear weapons” and having the injunction “hanging over one’s head is bound to be prejudicial one way or the other”.  She then had a thorough analysis on whether costs can be saved and concluded that it cannot, as substantial preparatory work for argument of the discharge application has already been incurred.  After referring to Order 1A of the RHC and the Civil Justice Reform, the learned Deputy Judge decided not to grant any stay of the injunction proceedings.

38.In China Asia Enterprises v Holiday Asia, although Eastman v Heyro was not cited, Poon J relied heavily on the principles under Linfield v Taoho in arriving at his Lordship’s decision.  Re Chime Corporation Ltd was also not considered.

39.On the other hand, it seems also that Linfield v Taoho was not placed before Kwan J in Re Chime Corporation Ltd, albeit that the subject matter before Ma J in Linfield v Taoho fell squarely on how the court should exercise its discretion under section 16(3) of the High Court Ordinance, Cap 4.

40.In my judgment, the approach adopted by Kwan J in Re Chime Corporation Ltd must be correct.  In the present days, it is not uncommon that there are at one time multiple proceedings pending involving the same or related parties, on the same or related subject matters.  Although the parties in each case might not be identical to that of the others, the decision of the court on some particular issues in a case might well affect how the parties conduct the other proceedings.  To stay one or some of the proceedings pending the results of others, in appropriate cases, is too obvious a choice for saving unnecessary costs and court resources.  As pointed out by the learned Judge in Re Chime Corporation Ltd, it is not a question of deprivation of the right of a litigant to proceed altogether, but a question of case management. 

41.The court’s discretion to order a stay is now expressly provided under Order 1B, rule (1)(e) of the RHC, as one of the court’s general powers of case management.  The court may by order stay the whole or part of any proceedings either generally, or until a specified date or event. This general power is not restricted in any way under the rule and not only applicable to situations where multiple proceedings exist.  In exercising such power, the court should consider the balance of convenience and fairness as between the parties, and to ensure that its procedures are used in a logical, fair and cost-efficient manner.

42.In my view, the right of a party to prosecute his case is but one of the factors for the court’s consideration in doing the balancing exercise.  It goes without saying that there must be good reasons to outweigh this right in order to justify a stay.  The result of one case being determinative to the other is obviously a good reason; and a substantial saving of legal costs, due to the existence of common issues or otherwise, may be another one. 

GROUNDS TO SUPPORT A STAY

Determinative effect

43.The main thrust of the Defendants’ argument in supporting a stay, as stressed by Mr Wong in his submission, is that the Liquidator’s Actions may entirely fall away after the resolution of the Main Action.

44.Different parties are involved in the Liquidator’s Actions and the Main Action.  The Plaintiff is not a party to the Main Action. Common issues, if any, determined in the Main Action will not bind the Plaintiff in the Liquidator’s Actions. 

45.However, Mr Wong submitted, the key issue to be resolved in the Main Action is the beneficial ownership over the Plaintiff.  If it is resolved in the Father’s favour, the Father would all along be the 100% owner of the Plaintiff and the Luen Tat Group.  The Father was having then the absolute power to deal with the company affairs and under the Duomatic principle, even if his decisions were not made formally, they were still binding on the Plaintiff.  If the Father approved and/or ratified the Re-Invoicing Operation, the Plaintiff could not and cannot have any cause of action in breach of duties against the then directors or employees of the Plaintiff, and even the Father himself.  That will be determinative of the Liquidator’s Actions.

46.With respect, I do not see it a valid argument. It is the Liquidator’s case that the Re-Invoicing Operation was for the avoidance of tax otherwise payable by the Plaintiff.  The operation was implemented by Ken, Seline and Richard using Yuen Hing as a vehicle.  And the Liquidator is now adding the Father as a defendant.  There is no issue as to whether the 100% shareholder(s) or owner(s) of the Plaintiff, be it the Father, Ken, or otherwise, having consented to the operation or not.  The basis of the Liquidator’s claim was not the validity of the operation but whether the implementation of the same was a breach of the fiduciary duties on the part of the defendants as directors or employees, or part of the joint enterprise to appropriate the Plaintiff’s assets. Whether the Father was the 100% shareholder and whether he would approve or ratify the operation is just neither here nor there.

47.There is nonetheless another aspect which the result of the Main Action might have impact on the Liquidator’s Actions that warrants more consideration.  Mr Wong submitted that, if the Father at the end of the day wins the battle, the Father will in any event seek to remove the Liquidator or otherwise stop pursuing the Liquidator’s Actions against the defendants.  Mr Wong further submitted that to allow the Liquidator to seek an account from the defendants, including the Father, the monies of the Plaintiff is a waste of costs and effort as it might turn out to be a meaningless exercise, only to burn away the Father’s money.

48.On this point, Ms Eu drew to our attention that it would not simply up to the Father’s choice whether to remove the Liquidator or not, even if he was and is the 100% owner of the Plaintiff.  Ms Eu helpfully referred us to ss 196 and 209 of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance, Cap 32.  Under s 196(1), the burden rested on an applicant seeking the removal of a liquidator to show cause and the court would not lightly remove a liquidator who had been in office for some time[19].

49.Rather than seeking to remove the Liquidator from its office, I should take what Mr Wong said to mean that the Father would apply to stay the winding up of the Plaintiff under s 209 of Cap 32 or the inherent jurisdiction of the court, should the trial judge in the Main Action decide in favour of the Father.  But in that case, the defendants will have to satisfy the court that the Plaintiff is not insolvent[20].

Overlapping of issues

50.In considering whether to grant a stay, the learned Master placed significant weight on the overlapping of issues between the Main Action and the Liquidator’s Actions.  He viewed that there will be findings in the Main Action on (i) the adoption, design, operation and implementation of the Re-invoicing Operation; (ii) the Duomatic argument; and (iii) the nature of the Payments, and these issues will overlap with the issues in the 2 actions.

51.Whilst I agree that there are certain nexus between the two sets of proceedings, I do not think there is a substantial overlapping of issues.

52.First of all, as I mentioned earlier, I do not find the Duomatic argument having any bearing on the Liquidator’s Actions. 

53.Secondly, regarding the Re-invoicing Operation, Mr Wong submitted that at the trial of the Main Action, the court will make findings of facts relating to the circumstances surrounding it and its legitimacy.  For instances, who implemented it, the reasons therefor, who agreed to it, and details of its operation.  This will, according to Mr Wong, substantially reduce the scope of factual disputes in the Liquidator’s Actions and a stay can save time and costs and avoid the risk of inconsistent judicial findings.

54.On this point, Ms Eu submitted that the only issues relevant to the Accounts Action are (i) whether the Payments were made by the Plaintiff to Yuen Hing; and (ii) whether the defendants are trustees for the Plaintiff in respect of the Payments who owe the Plaintiff a duty to account.  As for the Tax Penalty Action, the disputes in the Main Action in respect of the Re-invoicing Operation are narrow and only focus on the pre-implementation stages of the Operation, which will not have any material impact on the resolution of the Tax Penalty Action. 

55.With respect, I agree with Ms Eu.  There are in fact not much dispute on the mechanism and purpose of the Re-invoicing Operation, both in the Main Action and the Liquidator’s Actions.  What would be explored in the Main Action regarding the Operation which is relevant to the issues in the Liquidator’s Action would be perhaps whether the Operation was implemented with the advice of the tax consultant and the respective roles of the defendants in the implementation.  These limited areas, in my view, will not materially affect the scale of the Liquidator’s Actions and not much extra costs will be incurred even if they are to be tried again in the Liquidator’s Action. 

56.Concerning the nature of the Payments, Mr Wong submitted that Ken in the Main Action counterclaims for restitution of a sum of HK$25,602,977.76 which is, down to dollar and cent, the exact same sum claimed by the Liquidators in the Accounts Action, forming part of the Payments. Moreover, Ken in the Main Action alleges that a sum of HK$28 million paid to him by Yuen Hing represented partial settlement of his entitlement to the Luen Tat Group’s profits.  However, it is the Liquidator’s case that they have investigated Ken’s receipt of the sum of HK$28 million from Yuen Hing and they are satisfied with Ken’s explanation that he used the money to settle the Plaintiff’s expenses.  Mr Wong submitted that, the liquidator may have to reconsider their position after the determination of this issue in the Main Action.

57.In the Statement of Claims of the Accounts Action, apart from seeking an order for an account, the Plaintiff also asks for the “repayment or restitution of the said Sums held by [Yuen Hing]” and “the said Sums” was defined as “sums of not less than HK$25,602,977.76 in total held by [Yuen Hing] … out of the [the Payments].”  Ms Eu stressed that the Liquidator is chasing after a sum not less than HK$25,602,977.76 which is not the same sum referred to by Ken in the Main Action.  The Accounts Action is actually for, Ms Eu submitted, an account of the balance of the Payments which should not be less than the sum admitted by the Father to be held in Yuen Hing’s account, i.e., not less than HK$25,602,977.76.

58.With respect to Ms Eu, the fact that the exact amount was referred to in both actions is not a coincidence.  Ken obviously takes a different stance regarding the nature of the said sum in the Main Action from what the Liquidator understood his stance to be in the Accounts Action.  I agree with Mr Wong that the court might give a finding as to the nature of the said sum in the Main Action and the Liquidator will be duty bound, in my view, to reconsider their position, as to what extent they are to ask Ken to account for the said sum in the Accounts Action.

DISCUSSION

59.The Plaintiff was wound up as a consequence of the petition of Allied Ever, a company controlled by the Father holding 49% of the shares of the Plaintiff.  Although the winding up order was made pursuant to a special resolution of the Plaintiff under section 177(1)(a) of Cap 32, the primary grounds relied on by the Father in the petition was Ken’s alleged maltreatment of the Father and misuse of the Plaintiff’s assets.  The winding up of the Plaintiff was not a result of insolvency or probable insolvency of the Plaintiff, but the disputes amongst its shareholders.

60.From the evidence adduced by the Liquidator, the Plaintiff is at present solvent, albeit that as time passes it might no longer be able to settle further liabilities or expenses, for instances, the expenses for the liquidation and legal costs.

61.As I mentioned above, in considering whether to grant an interim stay of proceedings pending determination of parallel proceedings, sufficient weight should be given to the plaintiff’s right to prosecute his case.  However, a liquidator plaintiff’s such right is of a peculiar nature.  The liquidator is not carrying on proceedings for its own benefit but for the benefits of the company, the creditors and the contributories.  In considering whether to institute or carry on legal proceedings, a liquidator should assess what benefits, if any, the legal proceedings can bring to these parties.  If after due assessment little benefits can be generated when compared to the costs to be incurred in carrying on the proceedings, a prudent liquidator should consider not instituting or carrying on the legal proceedings.

62.Ms Eu submitted that the Liquidator has a duty to the public to proceed with the Liquidator’s Actions as there involved misfeasance of the directors of a company.  However, in my view, public interest has already been looked after as the Liquidator has accounted for the unpaid taxes and penalties by paying the same to the IRD.

63.The Plaintiff is a separate legal entity. However, should the Father be held as the 100% shareholder of the Plaintiff in the Main Action, no other individual in reality will be interested in the defendants’ accounts for the monies of the Plaintiff allegedly paid to Yuen Hing, except perhaps apart from the Father himself.  But the Father has now indicated clearly that he is not going to pursue such course.  In that case, what the Liquidator now insists on doing would then serve little purpose, unless the protection of creditors’ interest otherwise renders it necessary.

64.Although the defendants did not adduce evidence to prove the Plaintiff’s solvency so as to convince this court that the Father has a high chance in applying for a stay of the winding up petition,  there is equally no evidence to suggest that any interest of the creditors would be prejudiced should the petition be stayed in the end.  Bearing in mind that the petition was but a result of a dispute between the shareholders, it would not be unfair to say that there is no prima facie evidence that creditors’ interest will be prejudiced.

65.The Plaintiff was a going concern generating considerable profits before it was wound up.  Apart from the disputes between the shareholders there was nothing to raise any doubt on its solvency.  It is Mr Wong’s submission that the Plaintiff will remain solvent in the near future and I have no reasons to question this. After the dispute on ownership is resolved, particularly if it is resolved that the Father was the 100% owner, there is in my view a high chance that the Plaintiff will maintain its profitability.  I do not see a real chance that any creditors’ interest would be prejudiced by halting the Liquidator’s Actions then.

66.It is Ms Eu’s forceful submission that the Liquidator has a public duty to perform.  However, as I mentioned above, the interest of the public has been looked after by the Plaintiff’s payment of the additional tax and penalty.  The Liquidator’s Actions can serve little real purpose if the Father turned out to be the 100% owner of the Plaintiff and its profits all along. 

67.On the other hand, the Father’s concern about his money to be spent for no reason is not unreal.  The costs of the Liquidator and the legal costs in pursuing the Liquidator’s Actions will in the end either be paid by the Plaintiff or the defendants (including himself, Seline and Yuen Hing), and if the Father is successful in asserting his right as the 100% owner of the Plaintiff in the Main Action, it would mean that such costs will be paid out of his pocket in any event.

CONCLUSION

68.I do not view that substantial costs can be saved by the determination of the overlapping issues in the Main Action.  Nor do I view that the result of the Main Action would be determinative in terms of res judicata or issue estoppel. 

69.However, as was discussed under paragraphs 53 to 61 hereinabove, the result of the Main Action may affect whether the Liquidator’s Actions are to be pursued at all.  For these reasons, I find that the more logical, fair and cost-effective way to manage the Liquidator’s Actions is to continue their stay pending outcome of the Main Action.

70.In relation to the Variation Summons, I share the learned Master’s view that the Liquidator demonstrated no urgency and necessity to proceed with the interim tracing and preservation of assets and the ancillary disclosure orders, in view of the lapse of time since the Liquidator’s taken out of the actions.

71.The Plaintiff’s appeal to Master Ho’s orders is therefore dismissed.

72.I make a costs order nisi that costs of this application be to the Defendants, to be taxed if not agreed.  This costs order nisi will be made absolute upon the expiry of 14 days from the date of this decision.

Ms Audrey Eu, SC and Mr Jason Yu, instructed by Henry Wai & Co,for the Plaintiff in HCA 1428/2012 and HCA 2137/2012

Mr William Wong, SC and Ms Frances Lok, instructed by Joseph S C Chan & Co, for the 1^st Defendant in HCA 1428/2012 and the 2^nd, 3^rd and 4^th Defendants in HCA 2137/2012