Pacific Electric Wire & Cable Co Ltd v. Texan Management Ltd and Others
Read the full judgment text of FAMV 5/2014 on BabelCite. This FAMV judgment was delivered on 14 October 2014 before Chief Justice Ma, Mr Justice Ribeiro PJ, Mr Justice Tang PJ.
Civil procedure – leave to appeal – Court of Final Appeal – section 22(1)(a) of Cap 484 – 'as of right' basis – whether claim involves property or civil right of value of $1,000,000 or more – narrow construction of statutory provision – shares in holding companies at apex of corporate network – liquidation value – quantification of claim – immediacy of financial effect – discretionary leave – great general or public importance – 'or otherwise' – miscarriage of justice – breach of fiduciary duty – constructive trust – piercing the corporate veil – nominee arrangements – Takeover Arrangement alleged to be fabrication – concurrent findings of fact – burden of proof on bona fide purchaser – pleadings – fraud – unpleaded alternative case – Top Selection's application for leave as of right dismissed because value of Blinco BVI and Patagonia shares not clearly quantifiable in sum of $1 million or more given complex inter-company transfers, set-offs, and loss of financial records – discretionary leave refused because proposed questions fact-sensitive and based on false premise that PEWC succeeded on unpleaded case – concurrent findings of trial judge and Court of Appeal that Takeover Arrangement was a fabrication upheld – costs order nisi against applicants in favour of PEWC.
Legal issues: Whether Top Selection's appeal qualifies as of right under section 22(1)(a) of Cap 484 · Whether leave to appeal should be granted on discretionary grounds
Outcome: Leave to appeal dismissed for both Top Selection Company Limited and Hu Hung Chiu on both the 'as of right' basis and the discretionary basis.
Cites 4 cases
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FAMV Nos. 5, 6, 7 & 8 of 2014 FAMV Nos. 5, 6, 7 of 2014 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION MISCELLANEOUS PROCEEDINGS NOS 5, 6 AND 7 OF 2014 (CIVIL) (ON APPLICATIONS FOR LEAVE TO APPEAL FROM CACV NOS. 94, 95 & 96 of 2012) ________________________ BETWEEN CACV 94/2012
________________________ BETWEEN CACV 95/2012
________________________ BETWEEN CACV 96/2012
________________________ FAMV No. 8 of 2014 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION MISCELLANEOUS PROCEEDINGS NO. 8 OF 2014 (CIVIL) (ON APPLICATION FOR LEAVE TO APPEAL FROM CACV NO. 93 of 2012) ________________________ BETWEEN
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________________________ DETERMINATION ________________________ Chief Justice Ma: 1.After hearing submissions on 3 October 2014, the Appeal Committee reserved its Determination on this leave application. The Determination in respect of Top Selection’s “as of right” claim is dealt with by Mr Justice Ribeiro PJ and the applications of Top Selection and Hu Hung Chiu for leave on the discretionary basis are dealt with by Mr Justice Tang PJ. Mr Justice Ribeiro PJ: 2.This is an application for leave to appeal to this Court brought by two defendants, namely Hu Hung Chiu (“Hu”) and Top Selection Co Ltd (“Top Selection”) against whom claims were successfully brought by the respondent company, Pacific Electric Wire & Cable Company Limited (“PEWC”), which was at the relevant time a listed Taiwanese corporation. A. The nature of the actions and decisions below 3.Three actions of great factual complexity were involved. In their bare essentials presently relevant, they were actions brought against Hu, then a director, an executive vice-president and the Chief Financial Officer of PEWC for breach of fiduciary duty, it being alleged that he made secret acquisitions of assets in Hong Kong using funds belonging to PEWC and funds raised by pledging PEWC’s credit as a note-issuer and guarantor, all without PEWC’s authority. The assets acquired include a substantial parcel of shares in a company called PacMOS Technologies Holdings Ltd listed on the Hong Kong Stock Exchange (“the PacMOS shares”); and properties referred to as the “South Horizons Properties” and the “Shouson Hill Property” respectively. Top Selection was sued as the vehicle which held the shares in two companies (Blinco Enterprises Ltd (“Blinco BVI”) and Patagonia Ltd (“Patagonia”) which sat at the apex of a network of companies (“the corporate network”) through which the aforesaid shares and properties were held. 4.Hu denied that the acquisitions were secret and averred that those assets had been acquired and held by the corporate network for PEWC beneficially with its full authority until, in February 1999, again with PEWC’s full authority, he had caused the shares in Blinco BVI and Patagonia to be lawfully transferred to Top Selection. This was done, he alleged, pursuant to a Takeover Arrangement entered into between himself and Robin Willi (“Willi”) in consideration of financial injections made by Willi to relieve financial pressures which PEWC and its subsidiary PCL Holdings Ltd (“PCHL”) were facing. It was thus Hu’s case that while the network of companies had initially been beneficially owned by PEWC, they had been lawfully transferred to Top Selection, a company owned by Willi, for the benefit of PEWC pursuant to the Takeover Arrangement. Top Selection’s own defence was accordingly that it was not a vehicle for receiving the proceeds of any breach of fiduciary duty by Hu, but an independent company beneficially owned by Willi, holding the shares of companies in the corporate network and the underlying assets, acquired by virtue of the Takeover Arrangement. 5.As the trial Judge, Reyes J, pointed out,[1] the validity of the Takeover Arrangement was therefore the crux of the case. After an 18 day trial, in a 138 page judgment in which his Lordship closely and comprehensively analysed and weighed up the evidence and the arguments, Reyes J concluded that while the allegation that the assets had been secretly acquired had not been made out:
And that:
In other words:
6.On the basis of those findings, Reyes J granted PEWC proprietary remedies in the following terms:
7.His Lordship also granted personal remedies requiring specified companies forming part of the corporate network to account for all monies, etc, received as a result of holding or having held the underlying assets.[11] 8.The Court of Appeal,[12] dealt in detail with six grounds of appeal advanced by Hu and Top Selection[13] challenging the findings made and inferences drawn by the Judge on key issues in the case, the burden of proof applied and findings of fraud made in the absence of supporting pleadings. Those challenges were all rejected so that concurrent findings have been made on the central issues of the case, in particular on the fact that the Takeover Arrangement was bogus, being a concoction of Hu and Willi to cover up Hu’s ownership and control through Top Selection of the companies and assets held through Blinco BVI and Patagonia. B. Top Selection’s application for leave to appeal on the “as of right” basis 9.Top Selection relies for this ground on the second limb of section 22(1)(a) of the Court’s statute[14] which states: (1) An appeal shall lie to the Court in any civil cause or matter
10.It submits that the proposed appeal comes within that provision since PEWC’s actions were brought to recover assets, namely the shares in Blinco BVI and Patagonia, which are companies which, through the corporate network, hold the PacMOS shares, the Shouson Hill Property and the South Horizons Properties, so that they are actions involving claims or questions to or respecting property or some civil right amounting to or of the value of $1,000,000 or more. 11.Top Selection adduced evidence to demonstrate that such assets are of the requisite value. The evidence was substantial. It relied on a short affirmation and a much longer affidavit (being expert accounting evidence comprising 22 pages with several exhibits). In reply, PEWC filed three affirmations (one comprising 18 pages with over 180 pages of exhibits, another to answer the expert evidence comprising 24 pages, and a third short affirmation). The bundle of documents used at the hearing contained 324 pages. B.1 The principles for grant of leave 12.Propositions derived from the established case-law bearing on this ground of application were summarised in Chinachem Charitable Foundation Ltd v Chan Chun Chuen[15] as follows:
13.So the first question is: what is the property or proprietary right claimed which is the subject-matter of Top Selection’s proposed appeal? The answer is: two shares in Blinco BVI and one share in Patagonia, as both parties agree. 14.This is therefore not a straightforward case of a claim to recover, say, a flat or a house, whose value is readily ascertainable and which will be the same whether viewed from the perspective of appellant or respondent. Top Selection’s shares in Blinco BVI and Patagonia each have a par value of US$1 so that it is necessary to inquire into their real value which in turn depends on assessing the value of the group of companies whose shares were held by them. That also is not straightforward since the capital of those companies was generally also nominal, so that any valuable properties held by them must have been acquired against some countervailing liability. Moreover, assessment of the assets and liabilities involved has been seriously hampered by the loss or destruction of financial records relating to the relevant companies. This is obviously important where the evidence indicates that there were numerous inter-company transfers, set-offs and so on, within the group. 15.It is against that background that Top Selection relies on expert evidence from Catherine Jean Williams (“Ms Williams”) who had given evidence on behalf of the other corporate defendants at the trial. PEWC call into question the impartiality of Ms Williams and rely on the evidence of their expert, Mr Yuen Tsz Chun (“Mr Yuen”) to challenge the soundness and correctness of the opinion advanced by Ms Williams. 16.The object of Ms Williams’s evidence is to show that the value of the shares in Blinco BVI and Patagonia plainly exceeds $1,000,000 for the purposes of section 22(1)(a). She states that her approach is to ascertain the liquidation value of the group of companies which ultimately holds the PacMOS shares, the Shouson Hill Property and the South Horizons Properties. Her methodology is explained as follows:
17.She provides as her exhibit “CJW-3”, a corporate chart showing the companies forming part of this group (“the Williams Group”), to which I shall return. Taking the current market value of the PacMOS shares and the abovementioned properties as totalling HK$2.32 billion as at April 2012, Ms Williams concludes that taking all relevant liabilities of the Williams Group into account, the liquidation value of the Blinco BVI and Patagonia shares “is at least HK$1.685 billion, subject to the addition of assets and deduction of liabilities of” those companies and of All Dragon, another holding company in the group. She acknowledges that there are potential liabilities of Blinco and Patagonia totalling HK$296.3 million which would reduce the liquidation value of the shares to $1.385 million (subject to the adjustments mentioned), but suggests that her report establishes that the value of the assets claimed vastly exceeds the HK$1,000,000 threshold requirement under section 22(1)(a). 18.In our view, Mr Yuen’s report compellingly exposes what may be serious flaws in Ms Williams’s approach. It is striking how Ms Williams has performed her analysis of the group’s liquidation value defining for her own purposes, the companies comprised in that group, narrowing it down to companies with a direct or indirect interest in the three underlying assets mentioned. Thus, she excludes PCHL from the Group even though PCHL has throughout featured as an important company in the corporate network. Perhaps more fundamentally, she excludes PEWC as a member of the group even though the evidence shows that PEWC was the source of massive financing for almost all the acquisitions in the corporate network. 19.Mr Anthony Neoh SC[16] attacks this as a fundamental flaw in Ms Williams’s methodology. Since we are concerned with ascertaining the value of the assets which are the subject-matter of the claim, namely, the Blinco and Patagonia shares at the apex of a corporate network, he submits that the assets and liabilities of all the companies in the corporate network must be taken into account. This is especially so since (i) they are in turn companies with only nominal amounts of capital and therefore had to have financed any assets held by incurring corresponding liabilities; and (ii) since the evidence disclosed complex inter-company transfers, set-offs and other financial dealings among members of the entire group. The evidence moreover shows that PEWC was an essential member of the group, being a beneficial shareholder in Blinco BVI and Patagonia and a lender to the many asset-acquiring companies in the corporate network. 20.There is plainly force in Mr Neoh’s criticism. Adopting a liquidation valuation from a shareholder’s perspective, vertically linking Blinco BVI and Patagonia to particular assets while ignoring horizontal and diagonal cross-liabilities in the group and ignoring what the position would be in the group’s consolidated accounts, must (Mr Neoh submits) produce a suspect valuation of the shares of the holding companies at the apex of the corporate network. This is especially so since the shareholder is not regarded as PEWC but, contrary to the concurrent findings of the Judge and the Court of Appeal, Willi. 21.As already mentioned, the attempt to establish the value of the holding companies’ shares is made particularly difficult by the denuded state of the financial records of certain companies in the group, in particular CPE, the group treasury company. Nevertheless, on the available materials, Reyes J made a number of findings that PEWC was the source of finance for substantial acquisitions by companies in the group. For instance, his Lordship found that “despite having been booked by PCHL as loans from Blinco HK, in all likelihood the internal funding used for the South Horizons Properties ultimately came from PEWC.”[17] He also pointed to evidence that the acquisition of the PacMOS shares was ultimately funded by PEWC redeeming fixed rate notes which it had guaranteed.[18] He pointed to the evidence of Larry Horner that :
22.Again, in the context of Hu’s allegation that Willi had provided cash injections as part of the Takeover Arrangement, Reyes J found that in relation to an alleged injection of HK$80 million into PCHL, at least $55 million ultimately came from PEWC, which was also the “more probable source” of the remaining $25 million.[21] These findings illustrate the complex nature of the liability picture for the group as a whole and the importance of the role played by PEWC. 23.Indeed, the evidence at trial suggested that senior officers of PEWC had raised approximately HK$5.2 billion between 1990 and 1998 by means of bank borrowings and the issue of fixed and floating rate notes. Mr Yuen suggests that the HK$5.2 billion so raised had “most probably [been] advanced to the Blinco and Patagonia Group”. If so, they would have incurred liabilities to PEWC of a very substantial magnitude which would have to be taken into account in considering the group’s liquidation value. 24.At the hearing, Mr Yu SC disputed the existence of potentially huge liabilities not taken into account. He pointed to the absence of debt enforcement actions by external creditors against members of the corporate network as suggesting that the liability position has adequately been taken into account, justifying Ms Williams’s conclusion as to the minimum value of the shares. However, Mr Neoh countered that the absence of external creditor enforcement proceedings was entirely explained by the fact that PEWC had paid off the external debts incurred by companies in the corporate network, with PEWC taking their place as creditor. 25.Mr Yu endeavoured to argue that whatever doubts there might be around the edges, there was at the core, sufficient evidence to satisfy the Court that the Blinco and Patagonia shares must be worth at least $1 million. Mr Yu, however, expresses the view that “the Blinco and Patagonia Group could well have a deficiency in assets once the HK$5.2 billion of PEWC’s funding is taken into account and there would potentially be no residual value to the shares of Blinco BVI and Patagonia”. He emphasises that without the full set of financial records of the relevant companies showing how the funds were channelled to pay for acquisitions and what countervailing liabilities were incurred, the valuation opinion of Ms Williams lacks any sound foundation. B.2 Conclusion regarding “as of right” 26.It is of course neither possible nor necessary for this Appeal Committee presently to make any findings or reach firm conclusions as to the actual valuation of the shares in Blinco BVI and Patagonia which are the subject of PEWC’s claim against Top Selection. I do not doubt that cogent arguments can be made on both sides. But what the controversy between the parties plainly shows is that it cannot by any means be asserted that the value of the claim is clearly quantifiable in the sum of $1 million or more. Nor is it the case that the Court’s order for Top Selection to transfer those shares to PEWC had the immediate effect of conferring or imposing on PEWC and Top Selection a financial benefit or detriment in an ascertained or readily ascertainable quantified amount. To translate the value of the shares from their US$3 par value to a real value, there is clearly a need for further adjudicatory processes requiring the resolution of contentious questions as to the proper methodology and as to what conclusions can properly be drawn, given the seriously depleted state of the group’s financial records. Such processes of assessment, quantification or apportionment are likely to be extremely difficult and may, in some cases, be virtually impossible. Even with the extensive evidence before us, it could not be shown that the requisite value of $1 million or more was reached. In truth, the evidence only served to underline the sheer difficulty or impossibility of the exercise. This is not the type of case the “as of right” procedure was meant to cover. 27.In the light of the established construction of section 22(1)(a) as summarised in Chinachem Charitable Foundation Ltd, I would hold that Top Selection’s case for leave as of right has not been made out. I have read in draft and respectfully agree with the Determination of Mr Justice Tang PJ. Mr Justice Tang PJ: 28.I agree with Ribeiro PJ that Top Selection, is not entitled to appeal as of right. I am further of the view that neither Top Selection nor Hu should be granted leave to appeal on any other basis. I gratefully adopt his lordship’s summary of “the nature of the actions and decisions below” in paras 3 to 8 above. 29.Essentially, these proceedings were concerned with the beneficial ownership of the shares in Blinco BVI and Patagonia (the shares). PEWC’s case was that as a result of the breach of fiduciary duties by Hu, the shares became vested in Top Selection, which was controlled by Hu. The defence of Hu and Top Selection was that Willi was a bona fide purchaser for value of these shares from PEWC by virtue of a Takeover Arrangement[22]which was evidenced by three letters,exchanged between Hu purporting to act on behalf of PEWC and Willi, whereby PEWC divested its interests in the shares in favour of Willi for valuable considerations. 30.The trial took place before Reyes J. PEWC’s case at trial was that the Takeover Arrangement was a concoction. After a careful examination of the evidence the learned judge concluded:
31.The Court of Appeal dismissed Hu and Top selection’s appeals. Thus, there were concurrent findings of fact. 32.It is against such background that I consider the questions which are said to be of great general or public importance, namely, (1) Whether it is open to a court to give judgment in favour of a party who has failed in its pleaded case, but on an alternative case which has not been pleaded; (2) whether the rejection of a positive case by the defendant can supplant the lack of a positive finding in favour of the plaintiff. 33.These questions can be dealt with together. They are fact sensitive, moreover, they are based on the false premise that PEWC succeeded on an alternative case which it had not pleaded. The reference to PEWC’s pleaded case was a reference to PEWC’s denial of the existence of the Takeover Arrangement and PEWC’s allegation that if it existed it was a fraudulent scheme to secretly divest PEWC’s interests in the shares with no consideration or at gross undervalue, as well as PEWC’s allegation that it was unaware that its resources had been used without its knowledge or authority to acquire the assets represented by the shares. The learned judge rejected PEWC’s case that it was unaware of the acquisitions, but found that the Takeover Arrangement was a fabrication. This finding was open to the learned judge. At trial, the common case of Hu[23] and Top Selection[24] was that the plaintiff was originally the beneficial owner of the shares but that the plaintiff no longer owned the shares because of the Takeover Arrangement. Upon the finding that the Takeover Arrangement was a fabrication, it followed that the beneficial interest in the shares remained with PEWC. There was no other relevant basis to deny PEWC judgment.[25] Had PEWC’s denial of the knowledge of acquisitions been accepted by Reyes J, other remedies might have been open to PEWC. But the rejection of this part of PEWC’s case would not per se affect its beneficial interest in the shares, which were, ex hypothesi, acquired with its knowledge and authority, and for its benefit. 34.The applicants also relied on the “or otherwise” ground. They said there was a miscarriage of justice. This complaint is also tied up with their claim that PEWC had succeeded on an unpleaded case which should have pleaded in the alternative. The alternative case being that, if the assets were acquired with its knowledge or authority, their disposal was unauthorized. But, PEWC’s case was that there was no disposal at all and that they were beneficially entitled to the shares, and the alleged disposal, namely, the Takeover Arrangement, was a concoction. That was so found by the learned judge and confirmed by the Court of Appeal. 35.The applicants repeated before us arguments before the Court of Appeal that the learned judge had reversed the burden of proof and that the evidential burden was on PEWC to prove that the three letters were forgeries or that the Takeover Arrangement was a fabrication. But as the Court of Appeal rightly pointed out Chan Chun Chung & Another v PBM(HK)Ltd (2004) 7 HKCFAR 178 is authority for holding that the burden was on Top Selection to show that it was a bona fide purchaser without notice. The burden was not on PEWC to disprove the alleged disposal. Moreover, it did not matter because “64 … since the judge had found the evidence was ‘overwhelming’ and pointed to a clear conclusion there was no Takeover Arrangement.” 36.I will take note of two other arguments. First, it was said that PEWC had not pleaded fraud but Reyes J found that Hu was fraudulent. The plaintiff’s case, as the learned judge pointed out, was that the Takeover Arrangement was a concoction. In its Amended Reply to the Re-Amended Defence of Hu[26] PEWC denied the existence of the Takeover Arrangement. PEWC also denied that the three letters said to evidence it, were produced contemporaneously with the dates shown. It also pleaded that if the Takeover Arrangement existed it was a fraudulent scheme to secretly divest the plaintiff of its interest in the shares, and that there was no consideration. A clear allegation of fraudulent conduct had been pleaded although the word “fraud” was not used. The Court of Appeal said: “There is no need to plead the logical and natural result which followed from the finding that there was no Takeover Arrangement.” With respect, I agree. 37.Another complaint was that Reyes J had failed to have proper regard to his rejection of PEWC’s case that it was unaware of the acquisitions. It was said “the whole case should have taken on a completely different complexion.” There is nothing in this point, with respect, the learned trial judge dealt with the Takeover Arrangement in detail and with great care. He found that it was a belated fabrication to hide Hu’s control and ownership of Top Selection. His findings were subjected to vigorous attack in the Court of Appeal. The Court of Appeal confirmed Reyes J’s findings. The evidence was overwhelming that the Takeover Arrangement was a fabrication. 38.For these reason, I would dismiss Hu and Top Selection’s applications for leave to appeal and make a cost order nisi against them in favour of PEWC, such costs to be taxed unless agreed. Chief Justice Ma: 39.I agree with both Determinations and accordingly, the application is for leave is dismissed. We make an order nisi that the applicants pay the costs of and occasioned by this application. Any submissions as to costs should be made in writing and lodged with the Registrar within seven days of the date of this Determination. In default of such submissions, the order as to costs is to stand as an order absolute without further direction.
Mr Robert WhiteheadSC, Mr Steven Kwan and Mr Vincent Chen, instructed by Haldanes, for the applicant in FAMV Nos 5-7/2014 Mr Benjamin Yu SC, and Ms Rachel Lam, instructed by Munros, for the applicant in FAMV 8/2014 Mr Anthony Neoh SC, Mr Eugene Fung SC, Ms Barbara Wong and Mr Jonathan Chang, instructed by Lo & Lo, for the respondent in FAMV Nos 5‑8/2014 [1] HCCL16, 17 and 18/2009 (12 April 2012), §223. [2] Judgment §526. [3] Judgment §533. [4] Judgment §534. [5] Judgment §538. [6] Judgment §539. [7] Judgment §540. [8] Judgment §541. [9] Judgment §544. [10] Judgment §545. [11] Judgment §§549-550. A finding of liability and remedies granted against another defendant, Robert Ma Kam Fook were reversed in the Court of Appeal and do not concern us. [12] Lam VP, Kwan and Fok JJA, CACV 90, 91, 93, 94, 95 and 96/2012 (17 September 2013); Kwan JA delivering the principal judgment. [13] Summarised at Court of Appeal §34. [14] Cap 484. [15] (2011) 14 HKCFAR 798 at 811 to 812, §20. [16] Appearing with Mr Eugene Fung SC, Ms Barbara Wong and Mr Jonathan Chang. [17] Judgment §105. [18] Judgment §§143-147. [19] PacMOS’s former name. [20] Judgment §147. [21] Judgment §§444 and 445. [22] In Hu’s pleadings he used the expression Takeover Arrangement, Top Selection used the expression “Takeover Agreement” to denote the same transaction or series of transactions. [23] 19.2, of Hu’s Re-Amended Defence in HCCL18/2009, where Hu pleaded “it is averred that, before PEWC entered into the Takeover Arrangement … the worldwide subsidiaries of PEWC … included Blinco, Patagonia and PCHL and their subsidiaries”. [24] 3(3)(c) and (d) of its Re-Re-Re-Amended Defence in HCCL18/2009, in particular at (d) where Top Selection averred that Willi acquired the shares as a bona fide purchaser by virtue of the Takeover Arrangement. [25] Other arguments such as, that it was unconscionable for PEWC to sue Hu (para 586), illegality under Taiwanese law (593), were rejected by Reyes J. [26] In HCCL18/2009, para 43-45, para 41-43 in PEWC’s Amended Reply to Top Selection’s Re-Re-Amended Defence made the same points. |
Cases cited in this judgment
Further hearings and rulings under FAMV 5/2014