When will the Court order disclosure of litigation-related information by liquidator to creditor?
Introduction
In a recent case China City Construction Holding Group Co., Ltd v Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of China City Construction (International) Co Ltd [2024] HKCFI 219, the Court of First Instance rejected an application by the Plaintiff, China City Construction Holding Group Co., Ltd, for an order of disclosure of information from the liquidators (the “Liquidators”) of China City Construction (International) Co Ltd (the “Company”).
The information sought primarily relates to other legal proceedings commenced by the Company or its subsidiaries (acting by their respective liquidators) to recover assets for distribution. In rejecting the Plaintiff’s application, the Court agreed with the Liquidators’ concern over the connection between the Plaintiff and the defendants (or at least some of them) in those legal proceedings involving the Company due to the facts and circumstances of the case, which will be further elaborated below.
Material background facts
Shareholding structure and assets of the Company
At all material times, the Plaintiff was the immediate sole shareholder of the Company. Up until 22 April 2016, the Company and China City Construction & Development Co, (Hong Kong) Ltd (“CCCD”) were both indirectly wholly-owned subsidiaries of a PRC company. It is the Plaintiff’s case that in April 2016, the group of companies was reorganised and since then there has been no connection between the Company and CCCD.
The Company owned 55% shares in a BVI company called Dingway Investment Ltd (“Dingway”), who in turn held a piece of land in Miami (“Land”) through 3 Delaware subsidiaries (“Company A to C”).
Liquidation of the Company and alleged dissipation of its assets
Beginning from around 2016, the Company was in financial difficulties. On 5 October 2018, CCCD commenced HCA 2343/2018 against the Company, asserting that the Company had been holding the shares in Dingway on trust for it since Dingway’s incorporation (“Trust Arrangement”). The Company’s directors took no step to defend the Company’s position in HCA 2343/2018 but instead passed a resolution on 18 October 2018 confirming the Trust Arrangement.
In January 2019, the Company went into creditors’ voluntary liquidation, and the Liquidators were appointed.
On 15 October 2019, Zeng Yuqi (“Zeng”), the 2nd defendant in the Relevant HCA (as defined below), then a director of the Company and a former director of CCCD, acted on behalf of Dingway and transferred its entire shareholding in Company A to CCCD for no consideration (“Transfer”). The transfer agreement was signed by Zeng on behalf of Dingway and Sze Wai Suen (“Sze”), the 3rd defendant in the Relevant HCA who was then a director of the Plaintiff’s indirect parent company, on behalf of CCCD.
In March 2021, Company C (titleholder of the Land) sold the Land to a third party for US$103 million. It was later discovered that part of the proceeds was transferred to various entities which Dingway had reasons to believe were conduits or nominees of CCCD.
Legal proceedings commenced to recover assets
On 24 January 2022, the Company (acting by the Liquidators) brought HCCW 30/2022 (the “Relevant HCCW”) to wind up Dingway. Provisional liquidators were appointed for Dingway to conduct necessary investigation for the above suspicious transactions. HCA 309/2022 (the “Relevant HCA”) was thus commenced. Dingway claimed that the transfer of Company A (and by extension, the Land) to CCCD was wrongful. CCCD relies on the Trust Arrangement as its defence.
Information sought by the Plaintiff
It was not disputed that the Plaintiff is the sole shareholder and the largest creditor of the Company. After commencement of the Relevant HCCW and the Relevant HCA, it requested the Liquidators to provide the following information:
1. the Liquidators’ plans, strategy, and views on merits as regards the Relevant HCCW and related legal proceedings in relation to the potential recovery of loss and damage suffered by the Company and/or reliefs (“Litigation Information”); and
2. the actual and estimated future legal costs and the funding arrangements and terms in connection with the Relevant HCCW and related legal proceedings (“Fees Information”).
The Liquidators declined the Plaintiff’s request on, among others, the following grounds:
1. the connection between the Plaintiff and the defendants in the Relevant HCA, including CCCD and Sze, giving rise to the risk that the information would be used against the interest of the Company;
2. lack of adequate explanation on the Plaintiff’s need for the information;
3. the terms of the funding arrangement are confidential as required by the funder.
The Plaintiff therefore commenced an action challenging the Liquidator’s decision and seeking for disclosure of the information.
Legal principles
The Court set out, among others, the following established principles which may guide the Court in the exercise of its discretion:
1. The Court will not interfere with a liquidator’s decision unless it can be demonstrated that the liquidator has not acted in good faith, made an error of law or principle, has not acted impartially and even-handedly, or the decision is perverse;
2. The Court proceeds on the rebuttable assumption that the liquidator will normally be in the best position to take an informed and objective view as to what is in the best interests of the liquidation;
3. The commercial decision of liquidators, who is recognised as having both the qualifications and access to information, are accorded great weight;
4. The fact that the contributory thinks there is a better decision that might be made is not a ground for challenging a liquidator’s decision.
In respect of funding arrangement, it was held in earlier case that there is no legal justification, practical need or policy reason for a rigid rule that a liquidator must, notwithstanding the confidentiality clause in a funding agreement, disclose its terms to other creditors in order to be seen to be impartial.
Dismissal of the application
The Court, after considering the relevant circumstance, dismissed the application by the Plaintiff for, among others, the reasons below.
Lack of justification for the information
The Court found that it was not clear why the Plaintiff would require such information. The Company was badly insolvent and its main asset was represented by Dingway’s claim to recover the value of the Land. The fact that the Plaintiff did not have to fund the litigation itself but could take advantage of the fund and work of others was to most people in Plaintiff’s position an attractive proposition. It was therefore perplexing why the Plaintiff was investing resources to press for the information in question. This point had to be considered in conjunction with the Liquidator’s concerns over the connection between the Plaintiff and the defendants in the Relevant HCA.
Connection between the Plaintiff and the defendants in the Relevant HCA
It was not disputed that if there was indeed connection between the Plaintiff and the defendants in the Relevant HCA, there was plainly sensitivity in revealing the information sought which could be used to the detriment of the Company and Dingway. However, the Plaintiff’s case was that whatever connections it had with the defendants in HCA, in particular CCCD, had been severed since the corporate re-organization in April 2016.
Even putting the matter most favourably for the Plaintiff, the evidence demonstrated that the Liquidators’ concern about the connection was reasonable and it would not be prudent for them to disclose the information sought by the Plaintiff. The Court raised the following two persons as examples to demonstrate the connection:
1. Sze is the sole director of CCCD. She was also a director of China City Development Academy International Ltd (“CCDAHK”), a HK company which indirectly owns 100% of the Plaintiff, until 20 January 2022. Sze was centrally involved with the Transfer, signing documents on behalf of CCCD.
2. The Plaintiff is 49% indirectly owned by Beijing Tian Di Qun Ying Investment Co (“BTDQY”). Zhao Lang (“Zhao”) is the legal representative, manager and executive director of BTDQY, and has an indirect shareholding in it. He is also a director of CCDAHK, the indirect parent of the Plaintiff. However, Zhao was nominated by CCCD (through its control over the 45% shareholder of Dingway) to become directors of Dingway.
In the circumstances, the Court agreed that the Liquidators’ concern over the relationship between the Plaintiff and the defendants in the Relevant HCA was reasonable.
For the above reasons, the Court held that there was no sufficient reason for it to exercise its discretion in allowing the Plaintiff’s application.
Takeaway
From the above case, it can be seen that a creditor, even the largest creditor, does not hold an absolute right as to all information in relation to the liquidation process of the insolvent company. In the same vein, the liquidators do not necessarily have to, notwithstanding the confidentiality clause in the funding agreement, disclose its term in order to be seen as impartial.
If the liquidators decide not to disclose certain information, the Court will not interfere with the liquidator’s decision unless it can be demonstrated that the liquidator has not acted in good faith, made an error of law or principle, has not acted impartially and even-handedly, or the decision is perverse.
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. |
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Published by ONC Lawyers © 2024 |
