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Tele-art Inc. (In Liquidation) v Tam King Ching Kenny And Shum Lap Chi, The Joint And Several Liquidators Of Tele-art Ltd (In Liquidation) And Another

Judgment Cited authorities 7 Cited in Precedent Map Related
Vincent
Judgment Date19 March 2008
Year2008
Judgement NumberCACV234/2007
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV000234/2007 TELE-ART INC. (In Liquidation) v. TAM KING CHING KENNY and SHUM LAP CHI, THE JOINT AND SEVERAL LIQUIDATORS OF TELE-ART LTD (In Liquidation) AND ANOTHER

CACV 234/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 234 of 2007

(on appeal from HCCW NO. 974 of 2000)

______________

BETWEEN

TELE-ART INC. (In Liquidation) Applicant
and
TAM KING CHING KENNY and
SHUM LAP CHI, THE JOINT AND SEVERAL LIQUIDATORS OF TELE-ART LIMITED (In Liquidation) 		1st Respondent
BANK OF CHINA (HONG KONG) LIMITED 2nd Respondent

______________

Before: Hon Rogers VP and Le Pichon JA in Court

Date of Hearing: 13 March 2008

Date of Judgment: 13 March 2008

Date of Handing Down Reasons for Judgment: 19 March 2008

____________________________

REASONS FOR JUDGMENT

____________________________

Hon Rogers VP and Le Pichon JA:

1. This was an appeal from a judgment of Barma J given on 22 June 2007. The judge had had a number of applications before him at the hearing. The matter in respect of which this appeal was brought was an application by the appellant under section 219 of the Companies Ordinance Cap. 32 (“the Ordinance”) seeking leave to inspect the books and papers of Tele-Art Ltd, which had previously been a subsidiary company of the appellant. The judge dismissed the appellant’s summons with the consequential order as to costs.

2. After the notice of appeal had been filed in respect of this appeal, the appellant issued a further summons under section 219 and, last November, obtained the order for inspection that it had sought on the application that Barma J. In view of the fact that the appellant has now succeeded in obtaining the order for inspection, which is what is sought by the notice of appeal, there is now no substantive order which this court could make or, indeed, can be asked to make. In the circumstances this appeal had become purely academic. This court, therefore, did not hear argument as to the merits of the original application before Barma J and the appeal therefrom but dismissed this appeal with reasons to be given in writing, which we now give.

Background

3. A summary of the history of the various matters leading up to these proceedings is derived from the judgment of Barma J, the Privy Council judgment in Hague v Nam Tai Electronics Inc. (reported in [2006] UKPC 52, [2007] 2 BCLC 194) and the papers filed in the appeal.

4. As a preliminary matter, as matters stood at the substantive hearing below, in the liquidation of Tele-Art Ltd, the Bank of China was a secured creditor and the appellant, through the guarantees and share charges given to the Bank of China, had a contingent claim against Tele-Art Ltd in respect of the value of its Nam Tai shares that had been or would be sold by the Bank of China pursuant to the share charges. There was however another dimension created by Nam Tai’s funding of the appellant in respect of (inter alia) these proceedings, bringing into focus as part of the relevant background its dealings with the Bank of China over the charged Nam Tai shares.

The context

5. In 1993, the appellant charged and pledged 700,908 Nam Tai shares to the Bank of China to secure facilities to be granted by the Bank of China to Tele-Art Ltd. Due to Tele-Art Ltd’s defaults, the Bank of China sought to realise the shares so charged. While the shares contained certain restrictions, under the applicable US securities law, the Bank of China was nonetheless able to realise a certain amount of shares from time to time and it is common ground that by early June 1996, only 375,727 shares remained charged. The restriction period expired at about this time and those shares were sent to Nam Tai for removal of the restrictive legends.

6. At the time the share charges were granted, the appellant would appear to have been in financial difficulties for, on the very same day, an Irish government agency obtained a judgment against the appellant in the BVI High Court for approximately US$800,000. In May 1996, FORFAS, another Irish agency, acquired the debt and obtained a charging order absolute in respect of that debt which included a “Stop Notice” restricting the transfer of the Nam Tai shares.

7. In August 1996, the Bank of China again requested Nam Tai to remove the restrictive legends on the shares sent in June 1996 but Nam Tai was unwilling to do so without a further court order dissolving the charging order. This resulted in proceedings to establish the priority of the Bank of China. At that stage, in excess of HK$57 million remained owing to the Bank of China. While those proceedings were pending, in May 1997, Nam Tai acquired the FORFAS’ judgment debt and, on 27 June 1997, Nam Tai petitioned for the winding up of the appellant in the BVI.

8. The proceedings taken by the Bank of China to establish its priority culminated in an order made in September 1997 by the BVI court, discharging the charging order absolute, staying the winding up of the appellant and ordering that the shares in Nam Tai be sold at a minimum price of US$17 to repay the indebtedness owing to the Bank of China and the balance to Nam Tai as judgment creditor through its acquisition of the FORFAS judgment debt.

9. However, it only proved possible to sell 67,500 of the 375,727 Nam Tai shares pursuant to the BVI court order. Unfortunately, in April 1998, the transfer agent mistakenly forwarded to Nam Tai instead of the Bank of China the balance of 308,227 shares remaining unsold.

10. The appellant was wound up by the BVI court in July 1998 on Nam Tai’s petition and Mr David Hague was appointed liquidator. The position was therefore that both the Bank of China and Nam Tai were creditors of the appellant, the Bank of China holding security over the appellant’s shares in Nam Tai and Nam Tai itself being unsecured.

11. Nam Tai then devised a scheme which would result in the Bank of China being deprived of the security of at least a large part of the shares. It involved altering Nam Tai’s articles of association to create a special power to redeem the shares of judgment debtors and to offset the value of the redeemed shares against the judgment debts.

12. Mr Hague, the then liquidator of the appellant, commenced proceedings in the BVI to restrain redemption of the Nam Tai shares and challenged the redemption made in January 1999 whereby Nam Tai purportedly redeemed 138,500 of the Nam Tai shares and set off the redemption price against the FORFAS judgment debt it had acquired (“the first redemption”). The liquidator succeeded at first instance but pending that decision, a second redemption was effected. In April 2004, the BVI Court of Appeal held that the redemptions were valid but that the Bank of China was a secured creditor and ordered Nam Tai to pay the redemption price and dividends declared to the liquidator of the appellant. There was then an appeal to the Privy Council. All told, that litigation took almost 8 years to resolve. On 20 November 2006, the Privy Council held that the redemptions were nullities and ordered Nam Tai to rectify its register of members to reinstate the purportedly redeemed shares (plus further shares accruing on them) and to reinstate the Bank of China as the registered holder of those shares. Lord Hoffmann in giving the advice of the Privy Council said that Nam Tai had “devised a scheme to destroy the Bank’s security”.

13. As at the date of the substantive hearing below, that is to say, at the end of February 2007, Nam Tai had not complied with the order of the Privy Council that had been made some three months earlier. Nam Tai only complied with the order on 13 April 2007 by issuing the appropriate number of shares in itself to the Bank of China. However, because there were “restrictive legends” endorsed on the back of the share certificate so issued, that posed difficulties in the way of realisation of the security that had to be resolved and it was not until September 2007 that the Bank of China was able to fully realise its security by selling part of those Nam Tai shares to discharge all outstanding indebtedness.

The section 219 application

14. It is against that backdrop that the question that eventually arose for determination by the judge has to be viewed. For reasons that appear below, that question did not surface until July/August 2006.

15. Tele-Art Ltd went into liquidation on 10 January 2001. Some 4½ years later, in August 2005, the liquidator of the appellant took out a summons for leave to inspect the books and papers of Tele-Art Ltd on the basis that the appellant was a contributory of Tele-Art Ltd (“the first summons”). The appellant itself had been in liquidation since July 1998. When the first summons came before Barma J on 30 August 2005, it was adjourned sine die to enable the appellant’s liquidator to consider his position as the appellant was not on the register of members of Tele-Art Ltd. That led to HCMP 26 of 2006 commenced in January 2006 for the rectification of the share register of Tele-Art Ltd in order to provide the appellant with standing to pursue its section 219 application. As recorded by the judge, it is accepted that Nam Tai funded both sets of proceedings.

16. Almost a year after the first summons was first taken out, in July 2006, the appellant (again funded by Nam Tai) revived the first summons on the basis that it was the contingent creditor of Tele-Art Ltd through its right to seek an indemnity from Tele-Art Ltd under the guarantees and share charges. It was at this stage that the Bank of China sought to intervene by issuing its summons of 29 August 2006. Directions were then given so that the appellant’s substantive application under section 219 and the Bank of China’s summons to intervene could be heard together.

17. As a result of the...

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