IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1423 OF 2015
||WING HONG CONSTRUCTION LIMITED
(In Compulsory Liquidation)
||HUI CHI YUNG
||HUI CHI YANG
||YIU KAI YEUK (RAPHAEL)
||CHINA NATIONAL CULTURE GROUP LIMITED
|Before: Mr Recorder Pow SC in Chambers
|Date of Hearing: 10 July 2017
|Date of Judgment: 18 August 2017
1. This is an appeal against a Master’s decision dismissing the defendants’ application for security for costs against the plaintiff which is a private company in liquidation.
2. At the material time, the 1st – 3rd defendants were directors of the plaintiff which was an active participant in the construction industry.
3. The 4th defendant was a listed company on the main board of the Hong Kong Stock Exchange. At the material time, the 4th defendant was the indirect wholly-owned parent company of the plaintiff. The 4th defendant held the entire issued share capital of the plaintiff through two wholly-owned intermediate holding companies, namely Shing Tak Construction Company Limited (“Shing Tak”) and Wing Hong Contractors Limited (“WH Contractors”).
4. On 19 October 2010, Shing Tak and WH Contractors transferred all of their shares in the plaintiff to Keen Fortune Investments Limited (“Keen Fortune”). Since then, there was a new management operating the plaintiff.
5. Winding-up order was made against the plaintiff on 8 January 2014. The present action was instituted by the liquidators in the name of the company on 26 June 2015.
6. The plaintiff’s case can be summarized as follows:
(1) the cause of action against the 1st – 3rd defendants is based on alleged breach of fiduciary duties as directors;
(2) it is alleged that during the period from 18 September 2009 to 10 March 2010 (the “Relevant Period”), the 1st – 3rd defendants caused the plaintiff to dispose of substantial assets to the 4th defendant for no legitimate commercial purpose or justification (“the Scheme”);
(3) at the commencement of the Scheme in September 2009, the plaintiff was insolvent or alternatively of doubtful solvency in that it was indebted to its creditors in the sum of at least HK$59,817,461;
(4) The Scheme involved 3 transfers from the plaintiff to the 4th defendant for no legitimate commercial purpose or justification:
(i) HK$5 million on 18 September 2009;
(ii) HK$45.5 million on 19 February 2010; and
(iii) HK$100,000 on 10 March 2010 (“the 3 Transfers”);
(5) the 1st – 3rd defendants have personal interest (directly or indirectly) in the 4th defendant;
(6) the cause of action against the 4th defendant is based on “knowing receipt”; of the 3 Transfers; and
(7) the plaintiff also seeks declaration for the avoidance of the 3 Transfers pursuant to section 60 of the Conveyancing and Property Ordinance (Cap 219) as dispositions with the intent to defraud creditors of the plaintiff.
7. The main plank of plaintiff’s case is that as of September 2009, the company was either insolvent or of doubtful solvency. It was also alleged in the alternative that the plaintiff was rendered insolvent by reason of the 3 Transfers. The 1st – 3rd defendants are alleged to have been aware of such financial condition of the plaintiff at the time of the transfer. The plaintiff relies heavily on the financial statements of the plaintiff for the years ended 31 March 2008; 2009 and 2010.
8. The defendants deny that the plaintiff was insolvent or of doubtful solvency at or around the Relevant Period. In particular, they pointed out that:
(1) the list of creditors were all sub-contractors of the plaintiff in the Beacon Hill property development project in which the plaintiff was the main contractor and the developer was the Cheung Kong group;
(2) at the Relevant Period, the 1st – 3rd defendants genuinely/reasonably did not regard these sub-contractors as creditors either because payments had not been duly certified; that the plaintiff had contra-charges and/or cross-claims against them; that parties had already been engaged in litigation or arbitration; or that final account had not yet been settled such that liability would just be contingent;
(3) the 3 Transfers were genuine partial repayments of inter-companies loans provided by the 4th defendant to the plaintiff throughout a number of years and were hence legitimate and justifiable;
(4) the 4th defendant had been the single largest creditor of the plaintiff throughout its financial history. As of April 2008, the 4th defendant had already advanced not less than HK$123 million to the plaintiff to finance its operations. Given their parent-subsidiary relationship, there was a common understanding that the plaintiff would make repayments to the 4th defendant as and when the plaintiff’s financial conditions permitted. Consequently, when the 1st – 3rd defendants considered the financial condition of the plaintiff, they would exclude the amount due to the 4th defendant;
(5) in 2004, Cheung Kong refused to settle the plaintiff’s interim bills in the Beacon Hill Project. In 2005, the plaintiff commences arbitration proceedings. In 2006, arbitration proceedings were also commenced by the plaintiff against another developer within the Cheung Kong Group in relation to another project in Tung Chung. The 4th defendant had been injecting funds to the plaintiff from time to time to support its operation and its arbitration proceedings.
(6) On or around 19 March 2009, 11 July 2009 and 11 December 2009 respectively, 3 partial awards were granted in favour of the plaintiff in the Beacon Hill arbitration. Two interim payment orders were issued by the arbitrators on 22 August 2009 and 26 January 2010. Between September 2009 and February 2010, the plaintiff received the first 2 tranches of payment under the partial awards totalling HK$59.55 million;
(7) around that time, the plaintiff was also expecting further recovery from the Beacon Hill arbitration proceedings as well as from the Tung Chung arbitration proceedings. The plaintiff was also expecting final payment in relation to a project in Lai Chi Kok;
(8) the 3 Transfers were effected as partial repayment to the 4th defendant. The 1st Transfer was made soon after the first order of interim payment. The 2nd and 3rd Transfers were made after the second order of interim payment. At that time, the 1st – 3rd defendants were also anticipating recovery of interest and legal costs in millions. The plaintiff was also successful in obtaining an interim award of over HK$9 million in the Tung Chung arbitration. They were also expecting final payment of over HK$23 million in the Lai Chi Kok project;
(9) in the circumstances, the 1st – 3rd defendants reasonably and genuinely considered the plaintiff to be solvent, acted in good faith and in the best interest of the plaintiff to effect the 3 Transfers;
(10) when the shares of the plaintiff were sold to Keen Fortune in October 2010, due diligence was conducted. Financial information recording the 3 Transfers were provided to Keen Fortune which never raised query;
(11) the operation of the plaintiff was profitable for the years ended 31 March 2011 and 31 March 2012. The profit in 2011 was over HK$130 million and that for 2012 was over HK$14 million; and
(12) it was only 4 years after the change of ownership and management of the plaintiff that it became insolvent and wound up in 2014.
The Application for security for costs
9. The defendants’ application for security for cost is made pursuant to section 905 of the Companies Ordinance (Cap 622) which reads:
“ 905. Costs in action by company etc.
(1) This section applies where —
(a) a company is a plaintiff in an action or other legal proceedings; and
(b) it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.
(2) Without limiting the powers of the court under any other Ordinance, the court may —
(a) require sufficient security to be given for those costs; and
(b) stay all proceedings until the security is given.”
10. By reason of the fact that the plaintiff is a company in liquidation, there is a presumption that the plaintiff is insolvent and unable to pay the defendants’ costs (see Re Grand Pacific Hotel Ltd 1 HKLRD 1025 at §9). The plaintiff has not attempted to rebut this presumption. In fact the liquidators confessed that the plaintiff has no assets available to satisfy any order of payment of security. By parity of reasoning, they confessed that the plaintiff is unable to pay the defendants’ costs if the latter succeed in their defence.
11. The plaintiff opposes the application on 4 grounds:
(1) it has a strong case;
(2) an order for security will stifle its claim;
(3) plaintiff’s impecuniosity was...