Lee Sow Keng Janet v Kelly Mckenzie Ltd And Others

DCCJ 2303/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2303 OF 2002

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JUDGMENT

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1. The Plaintiff was an employee of an employment consultant agency known as Kelly McKenzie (hereinafter called "Kelly McKenzie"), the trading name of a limited company called Linkwaters Investment Ltd. (hereinafter called "Linkwaters"). She was employed and worked as a personnel consultant from February 1989 to 24 December 1997. The terms of her employment are set out in the February 1989 agreement signed by the 2nd Defendant on behalf of Kelly McKenzie as the employer and the Plaintiff as the employee (hereinafter called "the employment contract").

2. On 27 October 1997, the Plaintiff resigned from Kelly McKenzie by a letter of the same date giving two months' notice under the terms of the employment contract. It is undisputed that on 12 December 1997 during the time the Plaintiff was serving her two months' notice, she was summarily dismissed by Kelly McKenzie.

3. The Plaintiff started proceedings in the High Court under HCA 11828 of 1998 for commission owed to her by Kelly McKenzie (Linkwaters) and obtained judgment in default against Linkwaters for $100,000.00 on 30 November 2000 and a further judgment for $303,825.00 on 18 January 2001. Unfortunately, the judgments were not satisfied and the Plaintiff petitioned for the winding up of Linkwaters Investment Ltd. on 12 February 2001. She obtained an order of winding up on 25 April 2001 in HCCW No. 147 of 2001.

4. Subsequent to the said winding up proceedings, the Plaintiff discovered the 1st Defendant was incorporated on 28 November 2000 by the 2nd and 3rd Defendants who were also the directors and shareholders of Linkwaters. Sometime in 1998 the 2nd Defendant transferred her share in Linkwaters to the 4th Defendant who had also become a director of Linkwaters in 1998.

5. The Plaintiff claims that there were unfair dealings between Kelly McKenzie (Linkwaters) and Kelly McKenzie Limited (1st Defendant) in the two years prior to the winding up of Kelly McKenzie (Linkwaters). She further alleged that the 1st Defendant is a sham and a façade established by the 2nd, 3rd and 4th Defendants to avoid payment of the commission and other emoluments owed to her by Kelly McKenzie.

6. The Plaintiff claims that four Defendants are liable to her for the payment of the judgment debt in HCA No. 11828 of 1998.

7. In their defence, the Defendants denied the incorporation of the 1st Defendant was related to the Plaintiff. It claims that the 1st Defendant was incorporated to preserve the good will and reputation of Kelly McKenzie when a former employee resigned on 8 October 1997 who threatened to establish an employment recruitment business in competition with Linkwaters. The Defendants denied any unfair trading or sham alleged by the Plaintiff. They further claim that the Plaintiff has failed to particularise the grounds of her claim of unfair trading and sham.

8. The Plaintiff gave evidence at the hearing and confirmed the evidence in her witness statement of 31 December 2002. The Defendants called no evidence in rebuttal.

The issue

9. The issue in these proceedings is mainly whether the Court should lift the corporate veil and find the 1st Defendant liable and its directors and the former directors of Linkwaters liable personally for the judgment debt in HCA 11828 of 1998.

The Law

10. According to Palmer's Company Law Vol. 1 paragraph 2.1519 - 2.1520 in respect of lifting the corporate veil :

"Looking behind the company's legal persona. Lifting the veil

It may be convenient to list briefly the main instances in which modern company law disregards the principle that the company is an independent legal entity. Generally speaking, the courts are more inclined, in appropriate circumstances, to "lift the veil" of corporateness where questions of control are in issue than where a question of ownership arises. In practice, the ability to choose between the application of the rule in Salomon 's case and the jurisdiction to pierce the veil of corporateness gives the courts a considerable degree of discretion and enables them to do justice and to decide individual cases in accordance with equitable considerations. But it should be emphasised that the rule in Salomon 's case is still the principle and the instances of piercing the veil are the exceptions, though their number is growing.

The corporate veil is lifted in the following cases :

1. Where companies are the relationship of holding and subsidiary (or sub-subsidiary) companies, the Act requires, in principle, group accounts.

8. The courts have further shown themselves willing to "lift the veil" where the device of incorporation is a façade or sham and no unconnected third party is involved. So, where a transport company sought to obtain licences for its vehicles, which it was unlikely to obtain if it made application on its own behalf, by causing the application to be made by a subsidiary company to which the vehicles were to be transferred, the court refused to treat parent and subsidiary as independent bodies, and decided the application on the basis that they were one commercial unit. Similarly, where a vendor of land sought to avoid an action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere "sham" and made an order for specific performance against both the vendor and the company. Where a bankrupt obtained credit for himself through the "charade" of a company, he committed an offence under what is now section 360(1)(a) of the Insolvency Act 1986, although normally the offence is not committed if the credit is obtained for another person. However, the court does not have the power at common law to remove the corporate veil simply because the company was involved in some impropriety not linked to the use of the corporate structure or because the interests of justice so require."

11. Yam J. In the recent case of Liu Hon Ying trading as United Speedoc Company v. Hua Xin State Enterprise (Hong Kong) Limited and Anor. (HCA 1060 of 2001) (judgment handed down on 19 June 2003) found on the facts that :-

"78. Hua Xin was incorporated and commenced business in November 1996, after the debt was incurred and owed by Hung Tak to the plaintiff and at the time when the plaintiff started claiming against Hung Tak for the debt. The uncontradicted evidence of Chan Chi Yung shows that the common controller behind the two companies gradually channelled Hung Tak's business and assets to Hua Xin."

He further held in paragraph 79-80 at page 29-30 of his judgment that :

"Since Hung...