De Coro Ltd ( in Liquidation) v. Luca Ricci
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HCA 594/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 594 OF 2010 ________________________ BETWEEN
______________________ Before: Deputy High Court Judge B Chu in Court Dates of Hearing: 8 August 2014 Date of Judgment: 14 August 2014 __________________ J U D G M E N T __________________ Introduction 1.The present action was taken out by the liquidators of the plaintiff company against a former shareholder and director for repayment of various sums said to be owing or belonging to the plaintiff company. 2.Leave had been obtained for service of the writ out of jurisdiction. The defendant was legally represented by solicitors Tanner De Witt since the filing of the acknowledgment of service of the concurrent writ on 1 September 2010. His solicitors applied on 2 July 2014 to cease to act, which was about 5 weeks before the commencement of the trial, and an order was subsequently granted by this court on 28 July 2014. Since then and up until the trial, there had been no new solicitors appointed to act for the defendant. 3.The directions for setting down were given in October 2013 and trial dates were fixed some time towards end of last year when the defendant was legally represented. The defendant and his 2 witnesses were, however, all absent at the trial. The trial nevertheless proceeded in absence of the defendant, as I was satisfied that the defendant was fully aware of the trial dates through his former solicitors. Background 4.The plaintiff company (“P”) was a limited liability company incorporated under the laws of Hong Kong on 11 December 1996, and its principal activities were the trading of sofas and investment holding. Basically, P produced leather sofas in Mainland China and sold its products all over the world[1]. 5.P was the holding company of at least 7 subsidiaries which included the following[2]:
6.The subsidiaries (i) to (iv) above were the manufacturing side of P, and were all incorporated and operated on Mainland China. The subsidiaries (v) and (vi) were involved in wholesale distribution of furniture in USA and/or Europe. 7.Prior to the date of the commencement of P’s winding up, the defendant Mr Luca Ricci (“D”) was its sole shareholder and one of its four directors. 8.According to P, a couple of years ago, D had also set up a manufacturing base in Cambodia under the name of De Coro (Cambodia) Ltd. 9.Although P was incorporated in Hong Kong, it did not seem to have conducted any business here. P had maintained an office in Fanling, which seemed to have performed only administrative functions, such as bringing cheques to bank[3]. It further appeared that D never lived in Hong Kong[4]. 10.Sometime in January 2009, P stopped operations in Mainland China. D had said he had to flee Mainland China, leaving all P’s records in its office in Shenzhen[5]. 11.On 16 February 2009, a winding up petition was presented in Hong Kong against P by an Italian bank Intesa Sanpaolo SPA, Hong Kong Branch (“Intesa”) under HCCW 93 of 2009[6]. As a result thereof, P was ordered to be wound up on 22 April 2009[7], and Messrs James Wardell (“Wardell”), Charles Chan, and Jackson Ip, all of CCIF Corporate Advisory Services Limited, were eventually appointed as the joint and several liquidators on 15 September 2009 (“Liquidators”)[8]. 12.It would appear that at about the same time as the winding up proceedings in Hong Kong, there were also proceedings issued by De Coro USA against D and/or DeCofin LLC, in two adversary proceedings in the United States Bankruptcy Court, namely Case No 09-10846 and Case No 09-10369 (“US Actions”). DeCofin LLC appeared to be a company of which D and/or his brother were shareholders[9]. In the US Actions, D had testified on 6 and 7 January 2010 in Greensboro, North Carolina, USA. 13.It further appeared that the Inland Revenue in USA had also filed a claim against P for taxes amounting to US$99m[10]. 14.In the present action, it was P’s case that by reason of a director’s loan agreement, or loan agreements previously entered into between P and D, and as confirmed by audited financial statements prepared by Messrs Ernst & Young (“E&Y”) for the year ended 31 December 2007, D was indebted to P as at that date an amount of HK$101,322,900 (“Loan”). The Loan was unsecured, interest-free and repayable on demand. 15.Further, P had held the following bank accounts:
16.It was P’s case that various sums were transferred from P’s above bank accounts to D or “Apiacas” or Orangefield Trust (Antilles) N.V., and D had said in the US Actions that “Apiacas bank account” was his bank account in Luxembourg (“Apiacas”)[11]. Having said this, D, however, had denied that he was a director or owner of the company called Apiacas Corporation N.V.[12] Anyway, the sums transferred out totalled US$283,218.82 and EUR 20,000 (“Transferred Sums”). 17.D had failed to repay or return the Loan, as a result of which, P issued the writ in these proceedings on 28 April 2010. P’s statement of claim had subsequently been amended to include a claim for the return of the Transferred Sums. 18.So far as the Loan was concerned, D admitted the amount stated in the audited financial statements was correct, but said there were 6 payments between 24 April 2008 to 31 October 2008 totaling about US$11.3m and EUR150,000, or a total of about HK$89,706,300 made on behalf of him to P in diminution of the Loan amount (“6 Payments”). It was D’s defence that he had made the 6 Payments solely to assist the cashflow of P. 5 of the 6 Payments were made by D in his own name and one was made in the name of Apiacas, from bank account/s held at ABN AMRO Bank. 19.Further, it was D’s defence that there was a royalty agreement dated 1 March 1998 between him and P (“Royalty Agreement”)[13] under which D had permitted P to use the trade mark “De Coro” in its business, which trade mark being solely owned by D. In support of his case, D had produced two alleged invoices addressed to P from D, dated respectively 31 May 2007 and 31 May 2008, for royalties due to be paid by P to D (collectively “2 Invoices”). 20.According to D, pursuant to the Royalty Agreement, the amount due from P to D as at 31 December 2007 was HK$67,386,446[14], which sum had remained due and owing. It was also D’s case that there would be further sums due from P to D during the period from 1 January 2008 to the date of commencement of the winding up proceedings ie 16 February 2009. 21.To summarise, D’s defence was thus of the Loan amount of HK$101,322,900, the amount of HK$89,708,300 should be taken into account, and the balance of HK$11,614,600 should be extinguished by being set off against the amount due from P to D pursuant to the Royalty Agreement. Further, D did not waive the remainder of the amount due to him of HK$55,771,846. 22.P denied that D was entitled to receive from it any dividends of royalties under the alleged Royalty Agreement, the authenticity of which P had challenged. 23.D had arranged for two of P’s former employees to each give a witness statement on his behalf in relation to the Royalty Agreement and/or the 2 Invoices, namely:
24.As mentioned earlier, neither of the above witnesses turned up at the trial. Preliminary Matter 25.P issued a summons on 14 July 2014 under Order 27 rule 4 of the Rules of the High Court, and applied for an order that it be released from any deemed admission of the authenticity of 3 items in D’s List of Documents, which were the Royalty Agreement, and the 2 Invoices (“O 27 Summons”). 26.The O 27 Summons was supported by Wardell’s 3rd affidavit filed on the same date. 27.At the trial, I gave an order as sought by P, and ordered P to pay D’s costs at HK$800. The reasons for my order will be set out hereinafter. 28.Both the O 27 Summons and Wardell’s 3rd affidavit were served on D’s former solicitors, who were still on record at the time. 29.Further, on 30 July 2014, I granted leave to P to serve on D (A) the trial bundles (“Documents (A)”) and (B) Order dated 30 July 2014, P’s Counsel’s opening submissions and list of authorities etc relating to the trial and the O 27 Summons (“Documents (B)”), out of jurisdiction by way of registered post or courier Service to :
30.P’s solicitors filed an affirmation of service on 7 August 2014 which indicated, among other things:
31.Documents (B) included P’s opening submissions, parts of which were in relation to the O 27 Summons. By reason of the successful service by courier of Documents (A) and Documents (B) on D at the Cambodian Address, I am satisfied that D should be fully aware of the O 27 Summons and its effect, which as I have said earlier, had been also served on his former solicitors. 32.Up until the trial, D had not filed any affirmation in opposition to the O 27 Summons. 33.Order 27 rule 4 states:
34.The time for the Company to serve a notice stating that it does not admit the Royalty Agreement and the 2 Invoices expired 21 days after inspection of the documents. 35.Although the Company did not serve a notice under Order 27 rule 4(2), as set out in Wardell’s 3rd affidavit, P had clearly and repeatedly questioned the authenticity of the Royalty Agreement and 2 Invoices as set out therein[16]. P had also made no admission to the Royalty Agreement and the 2 Invoices in its Re-Amended Reply filed on 14 Mary 2013. 36.D first pleaded the existence of the Royalty Agreement in its Defence filed on 29 September 2010, but there was no reference in the Defence in relation to the 2 Invoices. Then, subsequently, in D’s 1st affidavit filed on 28 February 2011 in support of D’s then application for security of costs against P, D had produced a copy of the Royalty Agreement and the 2 Invoices. 37.The Royalty Agreement was allegedly dated 1 March 1998, and signed by D as owner of the trademark “DeCoro”, and then again by D, as President of P, and there was also a signature by Prati, as witness. 38.Wardell’s 2nd affidavit was filed on 1 April 2011, in opposition to D’s 1st affidavit, and in his 2nd affidavit, Wardell had set out his reasons why the Liquidators were “very doubtful” of the authenticity of the Royalty Agreement. Further, in Wardell’s witness statement dated 1 August 2013, he had set out in detail the many inconsistencies in relation to the alleged Royalty Agreement and 2 Invoices. 39.At the trial, P’s Counsel Mr Patrick Siu also referred to a letter dated 12 January 2012 from the Liquidators to D, copied to his then solicitors, requesting for copies of invoices since 1 March 1998 (date of the Royalty Agreement) relating to alleged royalty payments by P, to which there was no reply at that time, which resulted in a further letter dated 14 March 2012, giving a deadline for D to provide the requested invoices, failing which the Proof of Debt sent by D on about 3 December 2010 to the Official Receiver’s Office[17] in the winding-up matter would be rejected[18]. D was not able to produce any other invoices apart from the 2 Invoices. 40.It is my understanding that D’s Proof of Debt was eventually rejected by the Liquidators. 41.It can be seen from the above that D should be fully aware of the importance of proving and/or producing the original of the Royalty Agreement and the 2 Invoices, and indeed that was why he had arranged witness statements from Prati and Andreani, in particular Prati, who was said to be a witness on the Royalty Agreement. 42.Mr Siu had referred this court to The World Food Fair Limited v Hong Kong Island Development Limited HCA 4602/2000, unreported, 8 August 2003. In this judgment DHCJ Carlson had referred to his earlier ruling on 20 January 2003 in the same case which released the defendant from any deemed admission of authenticity of the 1st plaintiff’s documents. Although a copy of the earlier ruling was not made available to the court[19], I am satisfied that this court has the power to release a party from any deemed admission of authenticity, and that a party can make such an application even during trial. 43.Having considered the above, and Mr Siu’s submissions, I granted P the order as sought in the O 27 Summons. The Issues 44.As set out by Mr Siu, there were only the following two issues to be resolved:
The Evidence 45.Wardell attended the trial to give oral evidence, and confirmed the contents of his witness statement, and had answered questions and/or clarified queries from this court, in particular about the 6 Payments. 46.I am aware that Wardell’s evidence was unchallenged. On observing his demeanour in giving evidence during the trial, I do not find that there was any reason as to why I should doubt his evidence, and I find him a credible and reliable witness. 47.D, Prati and Andreani each filed a witness statement. Mr Siu submitted that I should draw an adverse inference against D for failing to call oral evidence, and he had referred to Telings International Hong Kong Ltd v John Ho CACV 10/2010, unreported, 22 October 2010. The plaintiff in that case had filed several witness statements from two witnesses, one of whom also affidavits, but neither of the witnesses chose to give oral evidence at the trial. Nevertheless, the judge disbelieved all 5 witnesses called by the 3 defendants and concluded a sale and purchase agreement relating to the sale of the plaintiff’s share capital of one of its subsidiaries was a ‘solemn document’ and had to be given effect. 2 of the defendants appealed. 48.On appeal, Le Pichon JA, who gave the leading judgment, considered the question of the effect of the plaintiff failing to call any witnesses. The plaintiffs’ counsel had submitted that no adverse inference could be drawn from the fact that the witnesses were not called, and that if the witness was not called, the witness statements would simply be disregarded. Le Pichon JA did not accept such submissions, and was of the view that where in a case such as Telings where the plaintiff had failed to call relevant witnesses to give evidence notwithstanding the highly complex and at times wholly unexplained factual backdrop, every reasonable inference adverse to the plaintiff and in favour of the defendant should be drawn in determining each and every disputed fact[20]. The defendants’ appeal was eventually allowed and a retrial was ordered. 49.With what was said in Telings in mind, I turn to consider the evidence before this court. Discussion Issue 1: Had D made the alleged 6 Payments to P in diminution of the Loan? 50.P had filed a List of Documents and 4 Supplemental Lists, and had produced almost 400 pages of documents, most of which I understand the Liquidators had obtained from E & Y, P’s former solicitors Baker and MacKenzie, and banks. There were also 3 lever arch files of transcripts in relation to the depositions in the US Actions (“US Transcripts”). 51.According to the financial statements audited by E & Y for the year ended 31 December 2007, the amount due from D to the “Group” was HK$117,109,973, and the amount due from D to P, namely the Loan, was HK$101,322,900. Thus, it appeared the amount due to the other companies of the Group would be in the region of almost HK$15.8m. There was no definition of the “Group” in the audited financial statements, but as pointed out by Wardell at the trial, the 7 Subsidiaries were listed in note 15 to those audited financial statements and the Group should include P and at least the 7 Subsidiaries. 52.As seen earlier, the 4 subsidiaries on Mainland China were part of the 7 Subsidiaries, so was De Coro USA. 53.It was not really disputed by P that the 6 Payments were transferred from bank accounts held by D and Apiacas to P. 54.I note D’s case in respect to the 6 Payments was not inconsistent in that in the US Actions, D testified that he had made payments to P from his personal accounts of more or less US$11m and he had denied owing any money to P[21]. 55.However, as pointed out by Wardell at the trial, and as set out by Mr Siu in his closing submissions, as soon as the 6 Payments were made by D to P, the sums would be withdrawn from P[22]. 5 out of the 6 Payments were transferred to De Coro Industrial (Shenzhen) Co Ltd, and one Payment on 31 October 2008 was transferred from P to the lawyers of De Coro USA. 56.On the related copies of the SWIFT records for those outward remittances, the purpose of some of the remittances was stated to be for purchase /local/leather payment. 57.There was, however, no documentary evidence to support D’s contentions that the 6 Payments were made in diminution of the Loan. 58.Notwithstanding that 4 out of the 6 Payments were made in April and May 2008, thereafter on 1 July 2008, D had, however, signed a sole shareholder’s resolution of P resolving that the audited financial statements for year to 31 December 2007 were received and confirming the amount of the Loan as at that date (“Resolution”)[23]. As seen from the US Transcripts, D went to university in Florence and obtained a degree in economy[24]. Thereafter he had worked in his father’s sofa factory in Italy. At the time of his giving evident in the US Actions, he was 44 years of age. D is clearly an educated and experienced businessman. There was no reasonable explanation from D as to why he did not record on the Resolution any of those 4 of the 6 Payments made in April and May 2008 he/Apiacas made to P. 59.As set out earlier, apart from the Loan due to P, D also owed other companies within the Group about HK$15.8m, and the Group should include De Coro Industrial (Shenzhen) Co Ltd and De Coro USA. The amount was due from D personally to the Group. 60.In the consolidated trial balance as at 31 December 2005, it was recorded that P owed HK$2,860,155 to another company De Coro UK, but no money was owed to De Coro Industrial (Shenzhen) Co Ltd[25]. In P’s audited financial statements for the year ended 31 December 2005, this same amount was said to be owing to a related company, which appeared to be the De Coro UK. In any event, in the 2007 financial statements, there was no longer this entry, and there was no evidence to suggest that P had owed De Coro Industrial (Shenzhen) Co Ltd money. 61.Out of the outward transfers of the 6 Payments, the last one was made to the lawyers of De Coro USA, and not P’s lawyers. Thus, it would seem to be a payment by D to or on behalf of De Coro USA. 62.There was no evidence as to how De Coro Industrial (Shenzhen) Co Ltd made use of the money received from 5 of P’s 6 Payments. As submitted by Mr Siu, one possibility was that it could have gone back to D, and in this connection, Mr Siu had referred to the evidence of one Heath Martin Corso, one of De Coro USA’s staff in the US Actions. Mr Corso’s evidence was that D had made payments in the USA with the intent to hinder, delay or defraud creditors of De Coro USA, as D had directed De Coro USA to make transfers to multiple banks in Mainland China and a transfer made to one bank would be hidden from another[26]. 63.It appeared from the 2007 financial statements that as at 1 January 2007, the amount due by D to P was only HK$16,665,307, and to the Group only HK$23,562,296[27]. By year end, the amount had increased by almost HK$85m to HK$101,322,900 for P, and increased by about HK$94m to HK$117,109,973 for the Group. When asked by De Coro USA’s lawyer to explain why, D said he did not know and D had been asked to produce his personal financial information to substantiate either payments or cash D received from P or that he paid back to P from 2006[28] onwards. 64.From the US Transcripts, it would appear that there were also 4 or 5 sums transferred out of P to DeCofin LLC for D’s personal account, one in November 2007 and the rest in 2008[29] 65.As mentioned earlier, D did not challenge the amount of the Loan as at 31 December 2007. The burden was on D to prove to this court’s satisfaction on a balance of probabilities that the 6 Payments paid/ transferred by him/Apiacas and the outward remittances immediately following were made by him on behalf of P, and in diminution of the Loan. 66.D had chosen not to attend the trial to confirm his witness statement, nor to explain various inconsistencies pointed out by Wardell, notwithstanding that he did testify in the US Actions in January 2010. It was not sufficient for D to merely say there were inward remittances from him to P, as such remittances were almost immediately transferred out. They could be D repaying monies owing to the subsidiaries in Mainland China. There was no proper explanation nor supporting evidence in his witness statement, in particular how De Coro Industrial (Shenzhen) Co Ltd made use of those sums. In light of the many transactions/transfers between D and P and/or other companies in the Group, I accept Mr Siu’s submission that an adverse inference should be drawn against D that the 6 Payments were not in diminution of the Loan by D’s failure to attend trial. 67.In any event, even if one is not to draw any adverse inference, the bank statements and the SWIFT records clearly showed that D was using P as a conduit for those 6 Payments, and there was no sufficient evidence that the 6 Payments were injections into P for its own use. 68.Further, as mentioned earlier, notwithstanding D claiming he had injected funds into P in 2008, that there seemed to have also been various withdrawals out of P to DeColfin LLC for D’s personal account, and also as set out in P’s statement of claim, there had been also the Transferred Sums. 69.In light of all the above, I conclude that D had not discharged its burden in proving that the 6 Payments were indeed repayments by D towards the Loan, or in any other way injections into P for P’s use, which should go towards the diminution of the Loan. Issue 2: Had P and D actually entered into the alleged Royalty Agreement and had D actually issued the alleged 2 Invoices? 70.As mentioned earlier, P was released from any deemed admissions of the authenticity of the Royalty Agreement and the 2 Invoices. 71.The burden was on D to prove the existence of the Royalty Agreement and the 2 Invoices. 72.So far as Prati’s witness statement was concerned, Prati was not a director of P at the alleged date of the Royalty Agreement[30]. D was one of two directors at that time, the other director being a Mr David Lam. Although D held 51% of P’s issued shares at that time, there were 4 other shareholders. There was no satisfactory explanation from D as to why Prati was a witness to the Royalty Agreement, and not the other director. There was no director’s minutes or board resolution showing that the Board had approved or ratified P in entering into the Royalty Agreement with D. In any event, Prati did not appear at the trial to confirm his witness statement. I do not propose to give any weight to his evidence. 73.As for Andreani, she did not witness the signing of the Royalty Agreement. She did not explain when she first saw the Royalty Agreement. She claimed she assisted in preparing the 2 Invoices and did not say how she got the information for preparing the 2 Invoices. As she also failed to attend trial to confirm her witness statement, I again give no weight to her evidence. 74.Mr Siu listed no less than 11 reasons in his closing submissions as to why D’s evidence in relation to the Royalty Agreement and the 2 Invoices should not be considered. 75.Suffice to say, Wardell confirmed during the trial what he had said in his witness statement that the Liquidators could not find the original of the Royalty Agreement among P’s permanent files, audit working files and tax files. There was no mention of the Royalty Agreement in the audited financial statements of P. D himself had given an inconsistent account on how the alleged royalties were booked, and in any event, there was no supporting documents as to the inclusion of the alleged royalties being under “selling and distribution costs” or “costs of sales”. 76.More importantly, in my view, D had failed to mention the Royalty Agreement/outstanding royalties in email correspondence between the Liquidators and D in March 2009[31], .nor was there any mention of outstanding royalties in his affidavit filed in connection with the winding up proceedings HCCW 93 of 2009[32]. In his testimony in the US Actions when he testified that the Loan should be reduced after 2007 due to his payments in 2008, he made no mention of any outstanding royalties due to him from P[33]. D did mention in his testimony that he owned the trade mark “De Coro” worldwide in a vague manner. It was not clear where the registrations of the mark were and in respect of what. In the distribution agreement between P and De Coro USA, P had granted a “royalty free licence to use the marks within the territory” to De Coro USA. When D was asked by De Coro USA’s Counsel whether P owned any trademarks, D’s reply was again vague, namely he did not think so. There was no mention of P having to pay D for use of any trade marks. 77.For all those reasons set out above and further by Mr Siu, which I accept, I am of the view that D had not discharged the burden on him in proving the existence of the Royalty Agreement and the 2 Invoices. The Transferred Sums 78.The Transferred Sums took place between May 2008 to about March 2009, and were made to D, or Apiacas Corporation N.V. or Orangefield Trust (Antilles) N.V. In particular, it seemed one amount of US$14,723.01 was transferred from P’s Intesa USD account for the purpose of Apiacas Corporation tax assessment 2004 and 2005, notwithstanding in the US Actions, D had said he did not know who the owner of Apiacas was. D’s evidence in his witness statement was simply these were not sums advanced to him, but to other entities, without explaining why those payments were authorised by him to be made to those two entities. In my view, they were repayable by him. Conclusion 79.Having considered the above, I reject D’s defence and enter judgment against D in terms of P’s prayer of relief [34]. 80.I also order D to pay P the costs of this action including all costs reserved, to be taxed if not agreed.
Mr Patrick Siu, instructed by Stephenson Harwood, for the plaintiff The defendant was not represented and did not appear [1]D1:19, lines 10-12 [2] B1:221 [3] D1:35, line 25 [4] D1:12, lines 1-6 [5] D1:30, line 13 [6] C:1-5 [7] C:20-24 [8] C:25-27 [9] D1:211, line 1 [10] D1:56, lines 13-16 [11] D1:48, lines 11-25 [12] D2:251, lines 15-25 [13] E:1 [14] See Proof of Debt at B1:241-245, and Royalty Agreement at B1:2470 [15] D1:141, lines 18-25 [16] Para 9, A:67-77 [17] B1:241 [18] B2:285-286 [19] According to P’s Counsel, Mr Siu, the ruling on 20 January 2003 appeared to be an oral ruling only; see also para 27/4/1, Hong Kong Civil Procedure 2014, Vol 1 [20] Paras 78-81, per Le Pichon JA [21] D1:46 [22] D2:314-321, D2:252 [23] B1:233 [24] D1:16-17 [25] B1:56 [26] D3:534-535 [27] B1:222 [28] D1:82-83 [29] D1:214-221 [30] B1:47-48 [31] B1:237-240 [32] C:32-47 [33] D1:45-47 & 79-81 [34] A12-13 |
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