The Official Receiver v. Chow Tung Shan
Read the full judgment text of HCMP 1334/2018 on BabelCite. This High Court CFI judgment was delivered on 30 October 2019.
1. On 18 July 2019, Master KH Hui acceded to the application (“the Disqualification Application”) made by the Official Receiver (“the OR”) and ordered that the Respondent (“Mr Chow”) should not, without leave of the Court, be a director of a company, a liquidator of a company, a receiver or manager of a company’s property, or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a period of 1 year. The learned master als
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HCMP 1334/2018 [2019] HKCFI 2658 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 1334 OF 2018 ______________ BETWEEN
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________________________ D E C I S I O N ________________________ INTRODUCTION 1.On 18 July 2019, Master KH Hui acceded to the application (“the Disqualification Application”) made by the Official Receiver (“the OR”) and ordered that the Respondent (“Mr Chow”) should not, without leave of the Court, be a director of a company, a liquidator of a company, a receiver or manager of a company’s property, or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a period of 1 year. The learned master also ordered Mr Chow to pay costs of the application to the OR. On 9 August 2019, Mr Chow lodged an appeal against this decision (“the Master’s Decision”) by filing a Notice of Appeal. 2.An appeal against a disqualification order made by a master against a company director is governed by Order 58 and should be made to a judge of the Court of First Instance[1]. It is trite that an appeal within the ambit of Order 58 would be dealt with by a hearing de novo, as if the matter came before the judge for the first time. 3.By virtue of Order 58 rule 1(3), an appeal against the Master’s Decision should be lodged within 14 days after the Master’s Decision was given. The Notice of Appeal was filed just over 1 week after the deadline stipulated in the rule. Accordingly, Mr Chow would need to seek leave to appeal out of time, and may only proceed with the appeal if such leave is given. 4.As to whether leave to appeal out of time should be given to Mr Chow, the OR adopts a neutral stance. However, I would not grant leave to appeal to Mr Chow merely because the OR is neutral on this. I have to examine the evidence in accordance with the well-established principles and decide whether leave should be given. The matters to be considered in an application for leave to appeal out of time are as follows:
5.After the hearing before the learned master, Mr Chow filed further affidavits in opposition to the Disqualification Application made by the OR. These affidavits cannot be evidence in the appeal hearing (if leave to appeal out of time is granted) unless some special grounds are shown[5]. I am of the view that no special ground has been shown. Accordingly, in considering the merits of the appeal, these affidavits cannot be evidence. BACKGROUND 6.I would first set out the factual ground which is not in dispute. 7.Asia Global Holdings Limited (“the Company”) traded under the name Le Beaumont Language Centre, running various language centres in Hong Kong. Prior to the cessation of its business in February 2014, it had 1 centre in Causeway Bay (“the CWB Centre”). It closed another centre in Tsim Sha Tsui (“the TST Centre”) in January 2014. 8.Mr Chow was a director of the Company since 3 April 2007. He was also a shareholder of the Company. There is no dispute that Mr Chow was fully responsible for the management of the Company. There were two other directors of the Company, Mr Ng Ying Kit and Mr Chan Siu Cheong Nelson. They ceased to be directors on 25 April 2014. As a matter of fact, both of them had no involvement in the management. 9.On 15 February 2014, the Company ceased business. 10.On 4 February 2015, in HCCW 251/2014, a winding-up order was made against the Company. On 4 February 2015, Mr Mat Ng and Mr John Robert Lees (“the Liquidators”) were appointed as the joint and several provisional liquidators of the Company by the OR, and they were subsequently appointed as the liquidators pursuant to an order made by the Court on 3 June 2015. 11.According to the Statement of Affairs affirmed by Mr Chow dated 27 April 2015, the total amount of liabilities of the Company was HK$5,348,207. The creditors include:
12.The Company went into liquidation at a time when its assets were insufficient for the payment of its debts, and was hence insolvent within the meaning of s.168H(2)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUO”). 13.On 30 July 2018, the OR issued to Mr Chow a notice under s.168P of CWUO of her intention to apply for a disqualification order against him. THE DISQUALIFICATION APPLICATION 14.In order to succeed in the Disqualification Application, the OR has to show:
15.There is no dispute that the first 2 requirements have been met. The issue is whether the 3rd requirement has been established by look at the evidence before the court. 16.The OR relies on four grounds of unfitness in support of the Disqualification Application, which are as follows:
17.Each of these grounds will be examined in turn in this decision. THE PRINCIPLES 18.In accordance with s.168K of CWUO, in determining whether a person’s conduct makes him unfit to be concerned in the management of a company, the court shall have regard to the matters mentioned in Parts I and II of Schedule 15 to the Ordinance. Those matters include:
19.Although the court has to consider the factors in Schedule 15, the court may take into account other factors when assessing whether a person is unfit to be a director not confined to those listed in that schedule[13]. 20.Mr Julian Lam, counsel for the OR, has helpful summarized the guidance from the authorities on the question of unfitness, and I accept his submissions. The guidance from the authorities is as follows:
21.In respect of the duty to keep proper books of account,
22.The standard of proof is the civil standard of balance of probabilities. The more serious the allegation, the more cogent the evidence the court will require[25]. THE EVIDENCE 23.The OR has filed 3 reports in support of the disqualification application. By virtue of rule 4(2) of the Companies (Disqualification of Directors) Proceedings Rules, these reports are prima facie evidence of the matters contained therein. Mr Chow has filed 4 affidavits in opposition prior to the hearing before the master. All these are the evidence in relation to the Disqualification Application. ANALYSIS Liquidators’ view 24.In these proceedings, Mr Chow has put forward an argument that these proceedings should not have been brought, for the Liquidators have not filed any report under s.168I(3) of CWUO or otherwise made any critical comments on his conduct. 25.Mr Lam submits that the Liquidators’ view is in fact irrelevant. The OR has an independent role and responsibility in company insolvencies to conduct investigations and bring proceedings against directors if seen fit. Whilst the OR would obviously pay attention to any report from the liquidators, the liquidators’ subjective views or assessments cannot curtail or diminish the OR’s investigations; and a fortiori they cannot affect the court’s determination. In my judgment, Mr Lam’s submissions must be correct. 26.Mr Lam further submits that in relation to s.168I(3), if it appears to the liquidator that the conditions for disqualification under s.168H apply to a director, the liquidator has an obligation to report the matter to the OR. This is a reporting provision only, the purpose of which is to ensure that the OR is informed about any wrongdoing. The fact that the wrongdoing of the director concerned was not stated in the liquidators’ report does not mean that wrongdoing did not occur. I agree. Ground 1 – Non-payment of wages 27.Nearly all the non-payment of wages occurred in January and February 2014. As a result, 20 employees of the Company filed their claims in the Labour Tribunal, and the total of the amounts claimed was HK$1,004,024.04. Their claims were allowed by consent in the Labour Tribunal. 28.The OR’s case is that by late 2013, the Company was already in financial difficulties. Mr Chow should have decided not to operate any further, for he knew or ought to have known that the Company would not be able to operate further in reality. By allowing the Company to operate further in January and February 2014, Mr Chow has failed in discharging his director’s duties. 29.Mr Chow explained that he was finding investors to inject funds into the Company in late 2013, and he was able to secure an investor in December 2013. That investor agreed to inject HK$2,000,000 into the Company, and would issue a cheque to pay the money on 8 January 2014. However, for some reason, the cheque was not issued on 8 January 2014. On 14 February 2014, the investor backed out and refused to honour his promise. As a result, the Company ceased business on 15 February 2014. With the benefit of hindsight, Mr Chow said that he should not solely rely upon a promise made by a single investor. 30.I have no reason to doubt the truthfulness of Mr Chow’s explanation. In the light of his explanation, in my judgment, Ground 1 is not proved. In late 2013, Mr Chow realized that the Company was in financial difficulties and he was trying to solve the problem by finding investors. He did find an investor, and he had secured a promise of injecting fund into the Company from the investor. Relying upon this promise, Mr Chow allowed the Company to continue to operate in January 2014 and February 2014. At the end, he was let down by that investor. When it became clear that the investor would not honour his promise, Mr Chow immediately stopped the operation of the Company on the very next day. While it may not be wise to solely rely upon an oral promise made by a single investor, I cannot say that the reliance itself is any unbecoming conduct. As said by Cheung JA in Re Citrend Services Ltd[26]:
31.Ground 1 is not made out. Ground 2 – Failure to pay MPF Contributions 32.It is indisputable that between the period of 1 January 2013 to February 2014 – over a year – the Company failed to pay both the employer’s and employees’ portion of the MPF contributions for 33 of its employees, totalling HK$341,842.99. There were late payments of HK$138,390.90 in May and June 2014, but the sum of HK$203,452.09 (with HK$1,422.90 in surcharges) remains outstanding. 33.In my view, in respect of the failure under this ground, Mr Chow has not put forward any satisfactory explanation. Mr Chow said that he was unaware of the non-payment of the MPF contributions at the material times. However, this is not a defence. As a director, Mr Chow had the duty to ensure the Company to make the MPF Contributions. I note that no action has been taken by the Mandatory Providence Fund Schemes Authority against the Company or Mr Chow. However, this also cannot be a defence to the Disqualification Application made by the OR under this ground. 34.It is well established that a director’s failure in ensuring the company to make MPF contributions is a ground for making a disqualification order against that director. See OR v Ng Tin Ming[27]; OR v Ko Kok Hong[28]. 35.Ground 2 is proved. Ground 3 – Failure to take out valid employees’ compensation insurance 36.The Company failed to take out an insurance policy for one employee in August 2012. Mr Chow did not deny this. He explained that the Company had an insurance agent taking care of all insurance issues, but that insurance agent overlooked the matter. The Company had rectified the situation as soon as it was discovered. 37.Ground 3 is proved. However, this is a minor matter. The OR is not saying that this ground alone would justify a disqualification order. The OR is using this as an example showing that Mr Chow’s failure to take the Company’s statutory obligations sufficiently serious, and the cumulative effect of this ground and other grounds would justify a disqualification order. Ground 4 – Failure to keep proper accounting records 38.The OR’s case is that Mr Chow has failed to cause or procure the Company to keep proper accounting records. According to the evidence produced by the OR, the OR could not find the audited financial statements or management accounts for the period from 1/2011 to 2/2015 and the general ledgers for the whole period of the relevant 7 years (ie from 2/2008 to 2/2015) in the Company’s accounting documents received by the OR. 39.It is not disputed that the Company’s accounting documents were delivered by Mr Chow to the Liquidators in 2015. In early 2016, the Liquidators sent the accounting documents to the OR. 40.Mr Chow’s case is that the Company has kept all the necessary accounting documents. He had sent the accounting documents to the Liquidators. After that, the Liquidators raised a query for 2 missing reports. Subsequently, the 2 reports were also sent to the Liquidators. The Liquidators did not raise any further query. Mr Chow’s argument is that had the Company really failed to keep some important accounting records as alleged by the OR, no doubt the Liquidators would have had pointed out the deficiency and asked Mr Chow to supply the missing documents. However, save and except the query for the 2 reports mentioned in the above, there is no other query from the Liquidators. 41.Mr Lam submits that the paper trail strongly indicates that the Liquidators had passed all the papers in their possession to the OR. Having examined those papers, the OR finds that the Company’s account records are incomplete. The OR would not speculate as to why the Liquidators did not make any further query, but the Liquidators’ assessment is not binding upon the OR. The OR has the duty to make its own investigation and assessment. 42.Here, the problem is no documentary evidence showing what documents have been delivered by Mr Chow to the Liquidators at the very beginning. It is not known whether the documents now found to be missing by the OR are among the papers delivered by Mr Chow to the Liquidators or not. Further, the documents found to be missing by the OR are some important accounting documents. It is improbable that the absence of these documents in the Company’s accounting records would escape the Liquidators’ attention. With all these in mind, I accept Mr Chow’s submissions on this issue. 43.On the balance of probabilities, I am not satisfied that the OR has proved Ground 4. Ground 4 is not established. Length of the Disqualification Period 44.In assessing the length of the disqualification period, I bear what has been said by Cheung JA in Re Citrend[29] in mind:
45.In Re Citrend, the Court of Appeal has given guidance on the approach to length of disqualification. In that case, Cheung JA said:
46.In this case, only Grounds 2 and 3 are established. As said in the above, Ground 3 is a minor matter. In respect of Ground 2, Mr Chow has arranged partial payments of the outstanding MPF contributions in May and June 2014. I note that Mr Chow intends to restart his business. However, I am also aware of the fact that he is now 74 years old. Bearing all these in mind, I am of the view that this is not a serious case and the minimum period of disqualification specified in s168H(4) would be sufficient, ie 1 year. No extension of time 47.Having considered the Disqualification Application as if the matter came before me for the first time, my conclusion and the master’s conclusion on the application are the same. In other words, in my judgment, Mr Chow’s appeal has no merit and cannot succeed. That being the case, granting leave to appeal to Mr Chow would serve no useful purpose. 48.Although the OR has taken a neutral stance on whether extension of time should be granted, since there is no merit in Mr Chow’s appeal, I decline to grant leave to appeal out of time to Mr Chow. DISPOSITION 49.I refuse to grant leave to appeal out of time to Mr Chow and dismiss Mr Chow’s appeal. Costs should follow the event. I order that costs of the appeal be paid by Mr Chow to the OR, and those costs be summarily assessed at HK$60,000. 50.I thank counsel for the helpful assistance rendered to the Court.
Mr Julian Lam instructed by the Official Receiver, the Applicant The Respondent appeared in person [1] Official Receiver v Brown Colvin Morton [2019] 2 HKLRD 166 [2] Postwell Ltd v Cheng Kap Sang [2004] 2 HKLRD 355, [33(1)] and [33(2)] [3] Ditto, [33(3)] and [39] [4] Ditto, [33(4)] [5] Order 58 rule 1(5) [6] s.168H(1)(a) of CWUO [7] s.168H(1)(a) [8] s.168H(1)(b) [9] §1 of Part I [10] §3 of Part I [11] §1 of Part II [12] §5 of Part II [13] OR v Chu Wai Ling [2004] 1 HKC 556, [20] [14] Re Copyright Ltd [2004] 2 HKLRD 113, [28] [15] Re Copyright, [29]; OR v James Conrad Louey (HCMP 2770/2003, 7 December 2006), [68] [16] Re Copyright, [30] [17] Re Dawson Print Group Ltd [1987] BCLC 601, 604 [18] Re Copyright, [31] [19] Re Copyright, [31] [20] OR v Louey, [68] [21] Re Deaduck Ltd (in liquidation) [2000] 1 BCLC 146, at 168, cited with approval in OR v Louey at [68] [22] Secretary of State for Trade and Industry v Walker [2004] ScotCS 25, [2], cited with approval in OR v Louey at [67] [23] Re Regal Motion Industries Ltd [2005] 1 HKLRD 461, [26] [24] Re Emperor Hotel Management Co Ltd (No 2) [2003] 1 HIKLRD 621, [21] [25] Re Copyright, [32] [26] [2008] 5 HKLRD 279, [18] [27] (HCMP 2441/2007, 4 February 2008), [35] [28] (HCMP 1155/2006, 15 September 2006), [14] – [15] [29] [2008] 5 HKLRD 279 | |||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCMP 1334/2018