Mere Admission of Debt in Financial Records Insufficient to Warrant Summary Judgment; But Directors Beware When Signing Financial Reports, Take Heed of The Heading “Amounts Due From Director”

Our firm’s litigation team, led by Ben Chan and Wesley Pong, instructed Counsel Mr. Lawrence Cheung and Ms. Shirley Leung in representing the Defendant in Medishine Investment Limited (悅仁醫療投資有限公司) v Chiu Hon Ching (趙汗青) [2021] HKCFI 2900. The team successfully dismissed the Plaintiff’s appeal against the Master’s decision granting the Defendant unconditional leave to defend the action. 

While Directors must ensure audited financial statements give a true and fair view of the company’s financial position before adopting them, this case ruled that absent related consideration and evidence, a mere admission of debt under “amount due from a director” in financial statements would not always be a definitively enforceable debt. Such alleged debt may be insufficient in constituting conclusive evidence which warrants a summary judgment against the Director.

When faced with a mere admission of a debt in financial statements, litigators should therefore be mindful on the high threshold of obtaining summary judgement against a Defendant and advise clients against lightly applying for one. A full analysis of the other relevant facts involved must be done beforehand.

While the Defendant obtained its rightful unconditional leave to defend the action, a trial on the disputed issues remains unavoidable. The case serves as a reminder to Directors to be careful when signing financial statements of a company. Caution is advised when proceeds for acquiring share capital issued by the investment holding companies are paid elsewhere instead of injected back into the issuing companies. Directors should beware of how these investment proceeds are presented on financial statements and ensure that the information revealed on the financial statements does genuinely reflect the business arrangement and are accurate before adopting them.