Allied Ever Holdings Ltd v. Li Shu Chung and Others

CACV 11/2018

[2021] HKCA 577

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 11 OF 2018

(ON APPEAL FROM HCCW NO. 497 OF 2009)

________________________

________________________

Before : Hon Kwan VP, Cheung and Au JJA in Court

Date of Hearing : 2 March 2021

Date of Judgment : 27 April 2021

________________________

J U D G M E N T

________________________

Hon Cheung JA (giving the Judgment of the Court) :

I. The appeal

1.Luen Tat Watch Band Manufacturer Limited (‘Luen Tat’) was ordered to be wound up on 6 July 2010 (‘WU Order’).  Mr. David Yen and Mr. Stephen Liu of Ernst & Young Transactions Limited were appointed as the joint and several liquidators (‘the Liquidators’).  The Petitioner applied to stay the WU Order and to discharge the appointment of the Liquidators.  Deputy High Court Judge To (‘Judge To’) granted the application.  He further ordered the Liquidators to pay the Petitioner costs of the application on an indemnity basis with certificate for four counsel.  The Liquidators now appeal against the order discharging their appointment and against the order for costs made by Judge To.

II.     Background

2.The background of the case is succinctly summarised by Judge To as follows :

1)   The background to this longstanding matter was an attempt by the eldest son Li Shu Chung (‘Ken’) to oust his father the late Lee Sai Nam (the ‘Father’) and his siblings, Li Shu Hang (‘Richard’) and Li Sin Man (‘Seline’) from their Father’s Company [i.e. Luen Tat].  In HCA 1711/2009 (the ‘Main Action’), Deputy High Court Judge Leung (‘Judge Leung’) held that the Father was the absolute and beneficial owner of all the shares and profits of Luen Tat and its related company, Hong Kong Pak Tat Trading Company (‘Pak Tat’).  This fact was conclusively affirmed by the Court of Appeal in CACV 2/2016. 

2)   In 1972, the Father established Luen Tat as his flagship company in manufacturing watchband products.  As a result of subsequent restructuring, immigration planning and tax planning, 51% of the shares of Luen Tat were held by Ken’s corporate vehicle, Joesh Overseas Ltd with the remaining 49% held by Richard’s corporate vehicle, Full Moon Investments Holdings Inc.  All the shares were held on trust for the Father instead of for Ken and Richard beneficially.

3)  In 1981, the Father set up a sole proprietorship company, Pak Tat Trading Company (‘PTTC’), as the manufacturing arm of the business.  In 1992, through PTTC, the Father established Lianda Metal Watchband (Shenzhen) Co Ltd (‘Shenzhen Lianda’) in Shenzhen as the mainland manufacturing base for his watchband business.  PTTC was the registered shareholder of Shenzhen Lianda.

4)  In 2002, all the shares in PTTC were transferred to Pak Tat.  Thus Pak Tat replaced PTTC as the holding company of Shenzhen Lianda.  The transfer of PTTC’s shareholding in Shenzhen Lianda was approved by the Mainland authority.  On record, the consideration for the transfer was $53 million, but no payment was actually made.  The payment was entered in the books of Pak Tat as the Father’s shareholder’s loan.  The Father was the authorised representative of Pak Tat. He, Ken and Richard were its directors.  Initially, the Father was the 100% shareholder, but in September 2006, he transferred 50% of his shareholding to Ken as his nominee.

5)  In the same year, on the professional advice of David Cho (‘David Cho’) of Moores Rowland, now Mazars CPA Limited (‘Mazars’), Luen Tat implemented a re‑invoicing scheme to reduce its tax liability.  A new company Yuen Hing Enterprise Macao Commercial Offshore Ltd (‘Yuen Hing’) was incorporated in Macao, with Seline as the person in charge.  Under this re‑invoicing scheme, Luen Tat would place orders with Yuen Hing for the goods required in its business, and Yuen Hing would place back to back orders for the goods with Shenzhen Lianda.  Thus, Yuen Hing would invoice and receive payment from Luen Tat for the goods, with profits accruing to Yuen Hing.  Yuen Hing was therefore said to be the treasury of the Luen Tat group.

6)  Since then, Ken gradually ousted the Father and his siblings from the business and usurped the Father’s control of the Luen Tat group.  In August 2009, the Father commenced the Main Action against Ken and his son seeking, essentially, a declaration against them that their shares in Luen Tat and Pak Tat are held on trust for him.

7)  At the same time, the Father through his nominee, the Petitioner herein, petitioned to wind up Luen Tat. However, Ken caused a special resolution to be passed to wind up Luen Tat pursuant to section 177(1)(a) of the former Companies Ordinance. The WU Order was made with costs against Ken.  Mr. David Yen and Stephen Liu of Ernst & Young Transactions Limited were appointed as the joint and several Liquidators in 2010.  At the time, Luen Tat was substantially solvent.

8)  While Luen Tat was under liquidation, Ken and David Cho, accompanied by Mr. David Yen in his then capacity as provisional liquidator, made a report of tax evasion to the Inland Revenue Department against Luen Tat by using the re‑invoicing scheme.  Luen Tat was ordered to pay further tax and a penalty of $3.4 million. 

9)  In 2011, to protect his interest in Shenzhen Lianda, the Father petitioned the winding up of Pak Tat under HCCW 236/2011 on the basis of his shareholder’s loan of $53 million, i.e. the purchase price of PTTC’s 100% interest in Shenzhen Lianda owned by the Father through PTTC.  Ken resisted the petition alleging that he was the owner of 50% interest of both PTTC and Pak Tat.  On 1 December 2011, Harris J delivered judgment rejecting Ken’s case and issued a winding up order against Pak Tat.  The Liquidators were informed of this winding-up order by the liquidators of Pak Tat. 

10)  The Liquidators commenced four actions in 2012 against the Father, Richard, Seline, Ken and Yuen Hing to recover the penalty paid to the Inland Revenue Department and money paid to others under the re‑invoicing scheme.  On 15 November 2013, just a few months before the trial of the Main Action, upon the application of the Father, two of those actions, namely HCA 1428/2012 and HCA 2137/2012, were stayed pursuant to the order of Master Ho, pending resolution of the Main Action.  The Liquidators appealed.  On 25 July 2014, Deputy High Court Judge Poon (‘Judge Poon’) dismissed the appeal with costs to the Father’s camp holding, inter alia, that ‘the Liquidators’ Actions can serve little real purpose if the Father turned out to be the 100% owner of Luen Tat and its profits all along’. 

III.     Basis of application to remove

1)     The Petitioner’s grounds

3.1The Petitioner’s application to remove the Liquidators was based on six categories of the Liquidators’ misconduct as evidence of their taking side in favour of Ken and his camp against the Father and his camp and that their conduct has at least given rise, on reasonable grounds, to a perception of bias.  The six categories are :

(1)  Entertaining spurious proofs of debt from Ken and his associates;

(2)  False allegation of recently discovered hidden tax liability of Luen Tat;

(3)  Forgoing investigation against Ken and his camp;

(4)  Positively assisting Ken in the trial of the Main Action;

(5)  Insistence on continuing with the Liquidators’ actions against the Father and his camp; and

(6)  Enforcing the production order (‘Production Order’) against Seline.

3.2It is relevant to note that before the commencement of the present proceedings, the Petitioner’s solicitors on 15 December 2015 wrote to the Liquidators’ solicitors stating that the Petitioner intended to make an application to stay the WU proceedings and to remove the appointment of Liquidators.   They asked if the Liquidators were agreeable to the intended application so that the parties could make a joint or consent application to the Court.  On 6 January 2016, the Liquidators’ solicitors wrote back stating that the Liquidators did not agree to stay the winding‑up proceedings unless and until :

‘(1) your clients shall have fully complied with the Order of Deputy High Court Judge [Manzoni], SC dated 17^th June 2015 and pay our clients a sum which will enable our clients to make a distribution of 100% dividends to the outstanding creditors, namely, Sun Moral Limited and/or Wong Shun Chiu and Tang Tsan Man;

(2)   your clients shall have given an account in relation to Yuen Hing’s affairs and the whereabouts of the HK$25,602,977.76 paid by Luen Tat to Yuen Hing, the subject matter of HCA 1428/2012;

(3)   your clients undertake to the Court and to our clients as administrator(s) or executor(s) of the estate of Li Sai Nam to pay tax to be charged by the Inland Revenue Department upon receipt and investigation of the report to be made by our clients about the unreported tax issues of Luen Tat and let our firm stakehold a sum for paying the tax and penalty to be determined; and

(4)   your clients shall have paid the Liquidators a sum to settle the liquidation costs up to date.’

3.3On 16 January 2016, the Liquidators’ solicitors further set out the conditions for the Liquidators to agree to the intended stay application :

‘ (1) our clients intend that the Order pursuant to our Section 221 application be fully complied with, including the provision of documents, so that they can adjudicate the claims of Sun Moral Limited and/or Wong Shun Chiu and the claims of Tang Tsan Man, which aggregate about HK$4.6 million, and settle the dividends accordingly, if applicable;

(2)  the potential outstanding tax liability due to the IRD of approximately HK$24 million is settled;

(3)  an account on the whereabouts of HK$25.6 million paid by [Luen Tat] to Yuen Hing is given;

(4)  the outstanding liquidation costs for the period from 30^th August 2014 to 18^th December 2015 of approximately HK$l.9 million is settled; and

(5)  a sum of approximately HK$l million is provided to settle the estimated liquidation costs to negotiate with the IRD regarding the potential outstanding tax liability.’ 

2)     Judge To’s decision

3.4Judge To accepted the Petitioner’s case.  He held that the Liquidators although claiming to be neutral were, in fact, adopting an adversarial and sometimes even hostile position.  They were arguing that Luen Tat was massively insolvent and that the circumstances required that they remained in office to pursue the legal actions to recover assets for Luen Tat and to investigate its tax evasion activities and to uphold commercial morality and public interest.  He held that the Liquidators in contesting the application to remove them have been actively attempting to mislead the Court in relation to their position on hidden tax liability so as to boost their case that Luen Tat is massively insolvent.  Judge To held that the Liquidators were biased in favour of Ken and his camp in advancing Ken and Wong Shun Chiu (‘Wong’)’s claims under the proof of debt.  In so doing they turned a blind eye to the findings of the Courts. They invented cases for Ken and Wong which were never advanced.  They refused to investigate Ken’s misappropriation of funds from Luen Tat and they refused to take legal action against David Cho and/or Mazars. 

3.5Judge To held that the Liquidators were biased against the Father with reference to the series of legal actions they commenced against the Father and his camp.  They adopted a very high-handed and oppressive manner when they pursued these actions.  He held that their bias manifested itself as an abuse by them of the power entrusted to them as officers of the Court.  Their conduct put shame on the Court.

IV.     Grounds of appeal

4.The grounds of appeal may be summarised as follows :

1)  There was no jurisdiction to make the order discharging the Liquidators.

2)  There was breach of fundamental justice and fairness by not affording the Liquidators a proper opportunity to respond to the allegations.

3)  Judge To did not apply the legal principles concerning the duties and rights of the Liquidators or he had failed to apply the principles correctly.

4)  Judge To was in error in respect of his view on the six categories of complaints.

5)  Judge To misconceived the role of liquidators and misapprehended facts.

6)  Judge To was wrong in respect of the costs orders he made.

V.     Principles for removal of a liquidator for cause

5.1Judge To summarised the principles for the removal of a liquidator for cause.  These principles are not in dispute.  We will repeat them here.

‘ The legal principles applicable to removal of a liquidator for cause

3.  Under section 196, the court has wide discretion to remove a liquidator for cause shown.  The primary purpose of liquidation is for the general advantage of those interested in the assets of the company.  The interest of those who are interested in the assets of the company is the single most important factor to consider in an application for removal of the liquidator.  It is of such a paramount importance that a liquidator might be removed even if he was utterly without fault.  Thus a liquidator may be removed if the court is satisfied that his removal is for the general advantage of those interested in the assets of the company notwithstanding no personal misconduct or unfitness is established against him: Re Mainkey Development Ltd HCCW 1195/2000 (unreported), 10 November 2014, para 35, per Lam J and Re Keypak Homecare Ltd (1987) 3 BCC 558, at 564, per Millett J (as he then was).

4.  The next important justification for removal of a liquidator is the liquidator’s conduct.  A liquidator is an officer of the court.  He is subject to duties which the law regards as fiduciary.  He is entrusted with the repudiation of the court for the impartial and proper dispatch of those duties.  In that regard, no less standard is to be expected of him than of a court or a judge: Re Legend International Resorts Ltd HCCW 1139/2004 (unreported), 7 March 2011, at para 30, per Fok JA (as he then was).  Flowing from that standard is the duty to act fairly and honourably: Macau First Universal International Ltd v Ding Xiaohong (No 2) [2012] 2 HKLRD 494, at para 47.  This is a very strict obligation.  Not only must he act fairly, he must be seen to be fair. He must not only be independent but must also be seen to be independent and completely impartial: see Tracker Software International Inc v Smith (1997) 24 ACSR 644 and Re Winspower Ltd HCMP 621/2006 (unreported), 20 June 2006, at para 16.  In Re Legend International Resorts LtdSupra, at para 31, Fok JA (as he then was) said:

“[[31]] Where conduct of a liquidator has been such as to demonstrate that he has been biased against a particular creditor or at least to give rise to a perception, on reasonable grounds, that he was biased, or where his conduct has been such as to give rise to a real, and reasonable, loss of confidence in him by the creditor, the court may accede to an application to remove him: …. The court must make up its mind by looking at the overall picture, whether there is a manifested tendency of the liquidators to favour certain interests at the expense of others. If there is that perception, and if in the eyes of a reasonable observer there is not the carrying on of the liquidation to the general advantage of the persons interested in the winding up, the court may act: ….”

5.  Thus, a liquidator may be removed if he has been shown to have been bias, or to give rise on reasonable grounds to a perception of bias, or to give rise to a real and reasonable loss of confidence in him by the petitioner, creditor or contributories.

6.  Other  general  grounds  for  removal include misconduct; dereliction of duty; unfitness, inability or failure to carry out his duty; or loss of confidence in his professional judgment to such a degree as will forfeit the confidence of the court.  These may be proved by evidence of some breach of duty or want of efficiency or appearance of partiality or conflict of duty on the part of the liquidator.  The test is whether the liquidator’s conduct is such as will forfeit the confidence of the court.  But it also seems to be enough to show that winding up can be conducted more cheaply or more effectively by some other person: McPherson’s Law of Company Liquidation 3^rd ed, para 8-084.’

5.2Mr. Stewart Wong SC (together with Mr. Thomas Wong) for the Liquidators accepted that the Liquidators owed fiduciary duties and the duties to act honestly, with due care and diligence, and in good faith, to Luen Tat.  He elaborated further on the principles regarding the duties of the Liquidators and their removal.  Again these principles are not in dispute subject to the caution that some of the statements such as the Court must treat the Liquidators with tender consideration and that they are dealing with a difficult task must be read in the context of the case in which the statement was made.

1)  How liquidators’ duties were precisely carried out is, for the most part, entrusted to their good judgment (McPherson & Keay, The Law of Company Liquidation (4^th Ed) [9‑052]).  In particular, ‘[a] liquidator who exercises powers in good faith after taking proper advice is not open to challenge’ (McPherson & Keay [8‑049 fn 421]).

2)  ‘[T]he Court ought to be very tender with persons who are placed in the difficult positions of directors or liquidators, and should not judge their conduct in the light of subsequent events .… One does not wish to attribute to a liquidator the knowledge or the experience of the lawyer, but I think that one may reasonably ask from him the exercise of some common sense and judgment when he is placed in a difficulty.’(Re Windsor Steam Coal Company (1901) Ltd [1929] 1 Ch 151, CA, per Lord Hanworth MR at page 159).

3)  ‘In my judgment, the starting point for a liquidator should be one of neutrality, neither trusting nor distrusting directors and third parties, but forming a judgment based on information available… Moreover, a judgment to trust once made should not be not written in indelible ink and, if circumstances change, further careful and diligent enquiries may be called for to reaffirm or re‑evaluate the judgment to trust.  Such an approach is no more than is to be expected of any and every ordinary, skilled insolvency practitioner.’ (Re Mama Milla Ltd [2016] BCC 1 (Ch) [35]).

4)  In reviewing the liquidators’ exercise of their discretion under section 200(5) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the court will interfere only in two categories of case.  ‘[First] to bring itself within this sub‑section, an applicant has to show exceptional behaviour e.g. that the liquidator “has not exercised his powers in good faith or has acted in a way in which no reasonable liquidator could have acted” …  The second category arises when in the course of his administration the liquidator is called upon to give a ruling or to make a decision which directly affects a party’s rights. … They include such matters as decisions upon the voting rights of creditors or contributories and upon the admission and rejection of proofs.  It is significant that when considering and ruling upon such matters the liquidator must act even‑handedly as an impartial neutral’ (Eagle Queen Co Ltd v First Bangkok City Finance Ltd [1989] 2 HKLR 71 (CA), per Hunter JA [74]).  In considering whether to review a decision of a liquidator a court must bear in mind the fact that it is well established that the commercial decisions of liquidators are accorded great weight (McPherson & Keay, [9‑115, 9‑116]; Judd v Brown [1999] 1 FLR 1191 (CA), 1198).

5)  In respect of the Liquidators’ decisions to commence legal proceedings the principles are as follows :

(1)   a decision by liquidators appointed by the Court as to whether to commence proceedings in the name of the company is essentially a commercial decision which the liquidators are entrusted to take without obtaining sanction from the court or the liquidation committee;

(2)  in taking that decision, the liquidators should act in what they believe to be the best interests of the insolvent company and all those who have an interest in its estate;

(3)  the liquidators may, but are not obliged to, consult the creditors (or contributories) who have an interest in the estate;

(4)   the liquidators should normally give weight to the reasoned views of the majority of such creditors (or contributories), provided that they are uninfluenced by extraneous considerations;

(5)  if all those who are interested in the insolvent estate are fully informed and are unanimously of the same view, the liquidators should ordinarily give effect to their wishes;

(6)  the court should not generally become involved in giving directions to liquidators as to how to make commercial or administrative decisions; and

(7)  the court should not generally interfere with a commercial or administrative decision of liquidators after the event, unless it is a decision that was taken in bad faith or was a decision that no reasonable liquidator could have taken.

(Re Longmeade Ltd (in liq) [2017] 2 All ER 244 (Ch), [66]).

6)  ‘[a] liquidator’s functions include serving the wider public interest by investigating wrongdoing and reporting the same to the authorities so as to enable them to take appropriate action’ : David John Kennedy v Kelly Cheng (2009) 12 HKCFAR 601, per Bokhary PJ [35].

7)  In respect of the burden of proof imposed on an applicant to remove a liquidator, the principles regarding burden of proof are applicable.  In respect of drawing inference on serious misconduct, ‘… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities.  It was to be plainly established as a matter of inference from proved facts’ : HKSAR v. Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336 at [72] ‘When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability’ : Lee Ming Tee at [71].  See also A Solicitor (24/07) v Law Society of Hong Kong (2008) 11 HKCFAR 117, [72‑74] [116] and Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334, [78‑79]. In particular, a presumption of good faith in favour of the Liquidators exists (Judgment below [11]), and any inference of bad faith must be drawn ‘only where such inferences are compelling’ (Kwok Hiu Kwan v Johnny Chen [2020] HKCFI 324, [50]).  Where a liquidator has ‘honestly done [his] best but failed to discharge [his] duties by reason of their onerous and irksome nature, the Court will be slow to condemn or discharge [him]’ (Macau First Universal International Ltd v Ding Xiaohong (No 2) [2012] 2 HKLRD 494 [53]).

8)   The onus of proof will not be easy to discharge where the liquidator has become well acquainted with the business and affairs of the company or the process of winding‑up almost reached completion.  Also, the court does not lightly remove its own officer and will, inter alia, pay a due regard to the impact of removal on his professional standing and reputation (Re Legend International Resorts Ltd (in Liq), [33‑34]).  It should not be seen to be easy to remove a liquidator merely because it can be shown that in one, or possibly more than one, respect his conduct has fallen short of ideal.  Once a liquidation has been conducted for a time, no doubt there can almost always be criticism of the conduct (AMP Enterprises Ltd v Hoffman & Anor [2003] 1 BCLC 319 at [27] cited in Re Legend at [35]).

VI.     Jurisdiction and Fairness

1)     Lack of Jurisdiction

6.1The Liquidators submitted that the Judge did not have jurisdiction to remove them.  The summons issued by the Petitioner contained the following marginal note :

‘ SS.196, 209 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap.32); and the inherent jurisdiction of the Court’

6.2Section 196(1) of the former Companies Ordinance provides that :

‘ a liquidator appointed under section 194 may ... on cause shown, be removed by the Court’.

6.3Section 209(1) provides that :

‘ 209. Power to stay winding up

(1)   The court may at any time after an order for winding up, on the application either of the liquidator, or the Official Receiver, or any creditor or contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the court thinks fit.’

6.4The terms of the relief sought by the Petitioner are as follows :

‘ 1. The Winding-up Order herein made on 6^th July 2010 be stayed; and consequentially

2.  The appointment of the liquidators of [Luen Tat], namely Mr. Stephen Liu Yiu Keung and Mr.   David Yen Ching Wai (hereinafter the “Liquidators”), be discharged; and

3.  Costs of this application be borne by the Liquidators personally.’

6.5The thrust of the Liquidators’ case on jurisdiction is that they are not parties to the winding‑up proceedings, only Luen Tat is named as the respondent in the proceedings below and in the summons.  The Liquidators are the appointed agents by the Court and their only involvement is as agents or officers of Luen Tat.  The summons sought to stay the WU Order pursuant to section   209 and ‘consequentially’ to ‘discharge’ the Liquidators as liquidators of Luen Tat.  There was no application for their removal for cause.  As the Liquidators are not parties in their personal capacities, they are not entitled or expected to be heard upon the stay and discharge application or to advance or defend their personal interests.  The summons sought an order that the Petitioner’s costs ‘be borne by the Liquidators personally’ but the Judge lacked jurisdiction to make any such order by the above reasons and the provisions of section 52A(2) of the High Court Ordinance (‘HCO’) (Cap. 4) and Order 62, rule 6A(1) of the Rules of the High Court (‘RHC’) (Cap. 4A) which give power to award costs against a non‑party but only after he has been joined as a party.

6.6In our view, this is not a valid argument.  The question of jurisdiction was not raised before the Judge. The argument before him was on the construction of the terms of the summons and not on the issue of jurisdiction.  In any event the challenge is without merit.  In our view crucial issues like challenging the Court’s jurisdiction should be raised at the first available instance and the Court would discourage litigants from raising for the first time on appeal the issue of the Court’s lack of jurisdiction.  Further, under section 2 of HCO a party is defined as including every person served with notice of or attending any proceeding, although not named on the record.  The Liquidators are clearly a party under section 2.  They were named expressly in the summons which was served on them. The Liquidators instructed lawyers to oppose the application.  They filed affidavits on behalf of the Liquidators of Luen Tat.  They sought leave to file and serve additional evidence.  They filed submissions for the Liquidators prior to the Petitioner’s summons.  The Liquidators in the same WU proceedings had filed a section 221 summons in the name of ‘the joint and several Liquidators of Luen Tat’.  As can be seen from the cases of removal of liquidators under section 196 of the Companies Ordinance such as Re Mainkey Development Ltd (HCCW 1195/2000, unrep. 10.11.14); Re Keypark Homecare Ltd (1987) 3 BCC 558; Re Legend International Resorts Ltd (HCCW 1139/2004, unrep. 7.3.11), it was not necessary to separately join the Liquidators personally. 

6.7The Liquidators’ argument on section 52A(2) of HCO and Order 62, rule 6A(1) of RHC also missed the point.   These provisions deal with the situation where a successful party in a litigation seeks costs against a non‑party personally.  The present one is not such a case.  

6.8Further, the Court has inherent jurisdiction to remove liquidators in their capacity as officers of the Court for cause with costs.  As Lord Millett observed in Deloitte & Touche A.G. v Johnson and Another [1999] 1 WLR 1605 at 1612 :

‘ As liquidators of the company the liquidators are officers of the court. The court’s inherent jurisdiction to control the conduct of its own officers is beyond dispute.’

6.9See also McPherson & Keay, 4^th ed, 8‑039.  In Duffy v Super Centre Development Corporation Ltd [1967] 1 NSWR 382 Street J at [383] stated :

‘ The receiver and manager is appointed as an officer of the Court to undertake in that capacity the management of the business of the company as well, of course, as undertaking the care of the company’s assets. To the extent to which he makes decisions from time to time, they are in effect made under the authority of the Court itself, and they are subject to review and control by the Court should a proper case be made out requiring such intervention.’

6.10In our view, it is not necessary to join the Liquidators as parties before the summons can proceed against them.

2)     Breach of natural justice and unfairness

6.11The Liquidators also submitted that it was unfair to remove them because they were not aware of the true nature of the application.  They submitted that the summons did not seek any alternative to the stay and consequential discharge application – in particular it did not ask for an alternative order that the Liquidators be removed for misconduct and replaced with other liquidators which would have required or involved input from the Official Receiver – whom the Judge had excused from attending the hearing.  Nonetheless, at the 13 July 2017 hearing, Judge To permitted the Petitioner’s counsel (who had never applied to amend the summons) to deliver an argument that the Court should remove (but not replace) the Liquidators as liquidators due to allegations of bad faith and misconduct in office (the ‘Bad Faith Case’) that had been vaguely suggested with emotive attacks upon the Liquidators’ conduct of the liquidation, but which were made in the context of an application for stay and consequential discharge and hence irrelevant and inadmissible.  The Liquidators submitted that Judge To erred in evaluating the Bad Faith Case on affidavits and without affording the Liquidators a proper opportunity to respond to the allegations and without having first ruled on the various applications to rely on affidavits either in support of or in opposition to the summons orders made by the Judge.  They argued that the orders made by the Judge were unfair in that he made findings of egregious misconduct against the Liquidators without first having given a reasonable opportunity to them to answer the allegations, and proceeded to do so on affidavit evidence alone.  In particular, he made findings that the Liquidators were actively misleading the Court, when they had not been afforded a reasonable opportunity to refute the same.  In particular, the Liquidators relied on the fact that the allegation that the Liquidators had knowingly misled the Court on the hidden tax liability was not an allegation made in Seline Li’s 10^th affirmation filed in support of the summons. 

6.12In our view this submission is without merit.  Mr. David Yen’s 1^st affirmation filed in opposition to the Petitioner’s summons clearly indicated that the Liquidators were aware that the Petitioner’s application pursuant to sections 196 and 209 was on grounds of the Petitioner’s dissatisfaction with the Liquidators’ conduct in the liquidation.  He knew the nature of the misconduct charges and responded by a 55‑page affidavit to answer each of the charges.  In reply to Mr. David Yen’s 1^st affidavit, the Petitioner also filed further affirmations on 9 March 2017 (Seline 11 and Chung 1) to deal with various issues including the tax issue.  Mr. David Yen responded by his 2^nd affidavit on 23 June 2017 to these issues.  There is no question that the Liquidators were aware of the charges against them and had responded accordingly.

6.13The argument that the Liquidators were caught unprepared carried no force.  Former senior counsel for the Liquidators did not apply for any adjournment in order to prepare the Liquidators’ case fully despite Judge To asking if an adjournment was required.  The Judge was informed that the parties were ready to address the Court including the removal issue.  Senior counsel for the Liquidators then handed up a detailed seven‑page submission under the heading ‘THE PETITIONER’S STEALTH APPLICATION TO REMOVE THE LIQUIDATORS FOR CAUSE’ and argued against the removal. 

6.14Relying on Re Smith v. Fawcett Ltd[1942] Ch. 304 (CA), 308, the Liquidators argued that where the motive, bona fides or truthfulness of the Liquidators’ account of events is in issue, or where bad faith or similar inferences are sought to be drawn against the Liquidators, cross‑examination would be necessary.  But what happened was that the Liquidators did not apply to cross‑examine the witnesses for the Petitioner.  We agree with Mr. Wong Yan Lung SC (together with Mr. Alan Kwong and Mr. Martin Kok) for the Petitioner that as the Liquidators had already refuted in their affidavits the allegation of misconduct against them, it is difficult to see how the cross‑examination of the Liquidators would advance their refutation of the misconduct charges.

VII.     Appeal on the merits of the decision

1)     Overview

7.1Mr. Stewart Wong urged upon us to take an overview of the conduct of the Liquidators.  He submitted that the Liquidators’ dealings are reflected in their reports which except the last one predated Judge Leung’s judgment.  The issue is not so much whether the Liquidators were wrong or even negligent or whether this Court agrees with their contemporaneous reasons as reflected in the reports but rather, whether these reports show the Liquidators had properly and diligently discharged their duties.  He urged the Court to accept the Liquidators were discharging their duties fairly, neutrally, diligently, faithfully and professionally.  Their views may be incorrect and the Court or the Petitioner should not try to second guess their decision.  

7.2He submitted that the Liquidators were not favouring Ken.  They had rejected his proof of claim and also the proof of claim of his associates including Wong, sued him to recover the tax penalty paid and settling with him after rejecting an initial offer of his in another action.  The Liquidators had also raised in their reports the questionable conduct of Ken in respect of the deletion of data and reported it to the Commercial Crime Bureau.  The Liquidators also showed the problems they had with the Father’s camp.  At the same time the Liquidators could not be fairly criticised for being overzealous or too proactive in relation to discharging their duties in respect of the proofs of debt or insisting that a production order obtained by them should be fully complied with.  It would only add to the costs if the Liquidators insisted on a creditor discharging the burden of proof which is what the Petitioner suggests.

7.3He submitted that one should not consider the complaints against the Liquidators with the benefit of hindsight as of the date of the summons Judge Leung’s judgment was being appealed against.  It might be overturned.  Although by the time of the hearing before Judge To, the Court of Appeal had dismissed the appeal against Judge Leung’s judgment, the Liquidators’ alleged misconduct relied upon by the Petitioner remained as those before (save for the Liquidators’ subsequent consideration and admission of the proof of claim which was unaffected thereby).

7.4On the other hand, Mr. Wong Yan Lung submitted that ‘stripped of unmeritorious technical arguments’, this appeal is essentially an appeal against the exercise of discretion by Judge To which this Court should only interfere when the decision is plainly wrong.  When the Liquidators contended that Judge To had misapprehended facts and failed to take into account relevant matters, one has to bear in mind that the Judge did not need to refer to each and every piece of evidence or argument before him.  The omission does not mean he has failed to consider it.  In removal cases, the threshold is crossed where there is perception of bias or loss of confidence on reasonable ground, without proving actual misconduct.  Unless it can be shown that the Judge had gone ‘outside the proper ambit of his discretion his judgment would be unimpeachable in this court, even if we were minded to take a different attitude to that which he took.’ : Re David Gordon Associates (Social and Market Research) Ltd [1989] 1 WL 651217 [2] [4]; BMC (supra) at [82‑84].

7.5Mr. Wong Yan Lung submitted that Judge To held that each of the six categories of misconduct on its own is sufficient to justify removal (there is no appeal against this holding), as giving rise to bias, perception of bias, or the Petitioner’s loss of confidence in them.  In order to overturn the decision, the Liquidators have to show Judge To had erred in each category of misconduct.  The Liquidators have not appealed the Judge’s finding that the Liquidators were incompetent and/or biased in failing and/or refusing to take action against Ken regarding his wrongdoings of diverting away Luen Tat’s business.

2)     The six specific areas

7.6We will turn to the six specific areas relied upon by Judge To.

(1)     Entertaining spurious proofs of debts from Ken and his associates

i)     Ken’s proof of debt for $52.8 million

7.7In the Main Action the subject matters concerned the beneficial ownership of the shareholding in Luen Tat and Pak Tat, and the group’s profits and monies.  Judge Leung held that the Father was the sole beneficial owner of Luen Tat.  His judgment was confirmed by this Court.  Judge To summarised the background of this debt of $52.8 million :

‘ 43. In August 2016, eight months after the CFI Judgment was delivered dismissing his counterclaim for all profits of [Luen Tat], Ken lodged this proof of debt for $52,879,963.53. The basis of his claim is that the sales by [Luen Tat] to Apple Inc between April 2008 and June 2010 (the “profits of the Apple business”) belonged to him personally, but was booked to [Luen Tat’s] account.’

7.8This claim was the subject matter of Ken’s counterclaim for $25.6 million in the Main Action in 2009 and was rejected by Judge Leung. In the Main Action Ken claimed that he had a profit entitlement of $53.6 million kept in Yuen Hing’s account.  Judge Leung found that Ken’s case was false as there was no such profit being kept in Yuen Hing’s account; the Father had never admitted that there was such sum in Yuen Hing’s account; and Mazars’ calculation on which Ken’s case was based was misconceived.  He also dismissed Ken’s counterclaim for the balance of $25.6 million which was based on the difference of $53.6 million and $28 million that he had withdrawn for himself.  Judge Leung held :

‘ 220. Contrary to Ken’s suggestion, the Father did not admit that in his previous affirmation. This was the amount Ken claimed, and the Father deposed to nothing more than that.’

7.9Ken appealed against the dismissal of his counterclaim but then abandoned it and was ordered to pay indemnity costs.  By these findings, there was no $53.6 million profit being kept in the account of Yuen Hing.

7.10Judge To held that this proof of debt not only bears the hallmark of a recent concoction, but speaks volumes of Ken’s bad faith.  Luen Tat was ordered to be wound up in July 2010.  Judgment in the Main Action was delivered in December 2015.  But Ken did not lodge this proof until August 2016 which was more than eight months after Judge Leung dismissing his counterclaim.  Judge To held that any reasonable liquidator would have respected Judge Leung’s judgment and rejected Ken’s claim as bogus.  But, instead of paying heed to Judge Leung’s judgment, the Liquidators kept this proof alive for nine months.  Then, Mr. David Yen provided arguments for Ken that he could be entitled to claim as a former employee and/or agent, when such arguments were not even pursued by Ken himself.  In January 2017, the Court of Appeal dismissed Ken’s appeal and upheld all the findings of Judge Leung.  By this time instead of respecting the two judgments of the Court, the Liquidators two months before the hearing before him on 13 July 2017 wrote to Ken asking for documentary proof in support of his debt.  The Liquidators argued that they had to investigate into this outstanding proof as a ground for resisting the application to stay the WU Order.  Judge To held that this was a tactical move to keep Ken’s proof alive and to justify their continuation in office. Judge To held :

‘ 51. ... Were they negligent and/or incompetent in not issuing this requisition [i.e. request for documentary evidence from Ken] earlier? Was the requisition a mere show to justify their stay in office? Obviously, their intention was to fortify Ken’s case and to create a reason for their continuation in office. As officers of the court, the Liquidators’ duty was to give effect to the order of the court. Their repeatedly ignoring the findings of both the Court of First Instance and the Court of Appeal, their advancing a new argument to justify Ken’s claim, which argument was not even raised by Ken himself, and their attempt to fortify Ken’s claimtantamount to annulling the findings of the court. On any view, such conduct demonstrated that they were determinedly biased in favour of Ken against the Father and his camp. They have forgotten that they are officers of the court and are now pursuing their own agenda and the interest of their new master. Their conduct certainly gives rise to a real and reasonable loss of confidence in them by the contributories.’

7.11In respect of the proof of debts generally, the Liquidators submitted that :

(1)  In order to properly adjudicate the proofs of debt, they had acted quasi‑judicially and were bound to examine every proof lodged.  The proof of debt being based on a judgment does not prevent or relieve the Liquidators from performing this duty.  It is wrong for Judge To to regard the Liquidators’ performance of duty as giving rise to an inference of bad faith including castigating the Liquidators for not rejecting the proofs of debt without assessment and creating reasons for their continuation in office;

(2)  Judge To in holding that the Liquidators wrongly entertained the proofs of debt and deployed tactical moves intending to keep proofs alive, failed to consider the facts that the Liquidators’ task of adjudicating the proofs of debt were made difficult by Luen Tat’s practice of informal handling of finance and the difficulties in obtaining information from the Father’s camp.  Their actions were justified by Judge Manzoni’s decision and he was satisfied that Luen Tat’s funds and operations and its associated entities were connected and it would not be appropriate for the Liquidators simply to reject the proofs of debt without seeking a production order. 

(3)  The Liquidators were required to consider the claims proactively and Judge To was wrong to treat such conduct as indicating bias.

7.12Specifically in respect of Ken’s proof of debt, the Liquidators argued that Judge To was wrong to assume that the Liquidators were optimistic that Ken’s appeal would be allowed.  The Liquidators made no such statement.  They submitted that Judge To failed to consider the reasons given by them in their report (dated 25 November 2016 at [3.4]) for their view on the new proof of debt by Ken and erred in drawing adverse inference against them on a matter which involved commercial judgment.  Further, Judge To erred in drawing adverse inference against them from their writing to Ken by letter dated 17 May 2017 wherein they merely asked Ken to provide additional supporting document to support his contention that he had previously been entitled to receive the profits of Luen Tat in the past as a basis for concluding that the Liquidators did so to prolong their continuation in office or were biased in favour of Ken.

7.13The Liquidators’ preparedness to keep an open mind on a new proof of debt which called for reconsideration and conduct in obtaining further information in the light of new development was wrongly relied on to draw an adverse inference that they wanted to create a reason for their continuation in office. 

7.14The Liquidators argued that Judge To in [49‑50] of his judgment misread and erred in considering that Judge Leung’s judgment or the Court of Appeal’s judgment in the Main Action in favour of the case of the Father against Ken dictated the rejection of the new proof of debt of $52.8 million as neither judgment considered let alone ruled on whether Ken was entitled to all or part of the claimed profits on the currently claimed basis; the judgments’ finding that Ken was not entitled to all of Luen Tat’s profits as between him and the Father as a matter of agreement does not mean that he was not entitled to any as between himself and Luen Tat, particularly where Ken’s counterclaim was up to November 2008, whilst Ken’s proof of debt claimed for the Apple profits from April 2008 only; independent of the Main Action judgments, the Liquidators were obliged to consider and adjudicate on Ken’s proof of debt independently and impartially; and as Luen Tat (let alone the Liquidators) was not a party to the Main Action, no res judicata arose.

7.15In our view the first point to note is that Judge To did not wrongly assume the Liquidators were of the view that Ken’s appeal was likely to be successful.  He was merely repeating the Liquidators’ statement that Ken was optimistic about his success in overturning Judge Leung’s judgment.  The Liquidators in their 25 November 2016 report at [3.4 a] stated that :

‘ Deputy High Court Judge Leung found that [the Father] is the 100% beneficial owner of [Luen Tat] and that Ken Li merely held his shares on trust. We are therefore inclined to reassess whether Ken Li’s claim should be in a capacity as a former employee and/or agent of [Luen Tat] or as a former owner of [Luen Tat]. If he were a beneficial owner of [Luen Tat] then Ken Li should only receive his share of the profits from the declaration of dividends. However as is the case now, Ken Li is not considered a beneficial owner of [Luen Tat], then he may depending on the facts be entitled to some profits and/or remuneration.’

7.16With respect, this was precisely what the Judge said that the Liquidators had not been neutral and were biased in favour of Ken because they were advancing a new case for Ken in respect of agency and employee for his proof of debt when such basis of his entitlement was not even relied upon by him before Judge Leung and the Court of Appeal.  In our view, considering the timing of the lodging of this proof of debt and the Liquidators’ response, Judge To was correct to hold that it was spuriously based on profits of the Apple business with no supporting documents.  We reject the Liquidators’ argument that Judge To misread the judgments in the Main Action.  Ken’s counterclaim in the Main Action included an account for 100% of Luen Tat profits as from December 2008 which included the Apple profits from April 2008 and not just up to November 2008.  Instead of rejecting this claim in the light of Judge Leung’s judgment, the Liquidators continued to ask for document saying that it might be meritorious.  Relying on this proof of debt as showing that Luen Tat was insolvent, Judge To was clearly entitled to find that the Liquidators were entertaining a spurious proof of debt in furtherance of their own interest and by their conduct gave rise to a real and reasonable loss of confidence in them by the contributories.  As the Petitioner pointed out, the Liquidators of Pak Tat rejected this proof in no time.  The judgments of Judge Leung and this Court are, of course, not sacrosanct and the Liquidators were clearly entitled to examine the proof of debt afresh.  But to put forward new basis for the claim when Ken had not even advanced it himself reflected a biased approach of the Liquidators.  The Liquidators had been selectively proactive which was to be contrasted with their inaction in respect of the intended action against Ken which we will address later.  We agree with Judge To’s criticism of the Liquidators.

ii)     Sun Moral’s proof of debt for $2.4 million

7.17Sun Moral Ltd (‘Sun Moral’) is a company owned and controlled by Wong.  On 13 August 2012, it filed a proof of debt for $3,273,725.56 in respect of alleged quality control services provided to Luen Tat.  The supporting evidence consisted mainly of an invoice in the sum of $2,416,091.45 dated 31 October 2009 issued to Luen Tat in respect of services rendered between April 2008 and October 2009.

7.18Judge To held that this invoice is blatantly bogus.  First, Sun Moral was only incorporated in September 2009 and could not have rendered services since April 2008.  Second, Luen Tat did not carry out any manufacturing activities.  The services if they have been rendered were to Shenzhen Lianda and not Luen Tat.  The Liquidators then suggested that the proof be filed jointly by Wong and Sun Moral or by Wong via Sun Moral.  This suggestion was contradicted by documents filed by Sun Moral itself.  There was not an iota of evidence in the documents submitted to suggest that Wong was the rightful claimant.  In fact, Wong was not even a shareholder of Sun Moral.  The Liquidators sat on this proof for five years.  Then, despite all these defects, particularly the bogus nature of the claim of $2,416,091.45, the Liquidators admitted this proof shortly before the hearing on 13 July 2017. The Judge held that the Liquidators’ decision on this debt was perverse.

7.19The Liquidators submitted that Judge To only stated that the Liquidators admitted Sun Moral’s proof of $2.4 million when, in fact, they admitted $2.6 million.  He criticised the Liquidators for admitting a proof of debt by Wong through his corporate vehicle Sun Moral without having considered the reports dated 3 May 2013, 11 October 2013, the judgment of Judge Manzoni dated 17 June 2015 and the fact that the Liquidators had previously admitted a similar proof by Wong through Sun Moral for $0.6 million.  They argued that Judge To failed to consider the evidence as regards the veracity of the proof of debt by Sun Moral/Wong for $2.6 million which were provided to the Liquidators subsequent to their initial rejection of this proof and erred in drawing adverse inference against them on a matter which involved commercial judgment.

7.20In our view Judge To did make a mistake in the figures of $2.4 million instead of $2.6 million. However, this is not a material error.  What is important is whether his view that the Liquidators’ decision was perverse is plainly wrong.  The debt was for the service charge which appeared in the invoice and not for share of profit as alleged by the Liquidators.  In any event, Judge To held that the invoice was bogus because the claim for service charges was before the incorporation of Sun Moral.  The Liquidators were unable to adjudicate on this debt for five years because of its many defects.  Yet they suddenly admitted this debt before the hearing.  The Liquidators submitted that if that was the position, it was because Seline had not supplied the information as requested by the Liquidators.  With respect, as the Petitioner submitted, the lack of response from Seline could not be the proper basis for the Liquidators to suddenly accept this debt because the reason for the Liquidators’ application for the Production Order from Judge Manzoni was that they did not have enough information to determine the validity or accuracy of the Sun Moral/Wong’s claim.  It is strange that the failure of Seline to respond would somehow enable the Liquidators to admit the debt.  The timing of the Liquidators admitting this debt is again a factor that Judge To could properly rely on as a basis of his decision. 

iii)     Wong’s proof of debt for $36 million

7.21Judge To summarised this proof of debt as follows.  In March 2016, Wong filed this proof for $36 million in respect of one quarter of the capital investment used to acquire land held by Shenzhen Lianda.  This claim was based on two Chinese notes dated 1994 and 1995.  Judge Leung’s judgment had put it beyond doubt that Luen Tat had no interest in the shares of Pak Tat or Shenzhen Lianda.  In the Court of Appeal, Ken tried to rely on the same two Chinese notes to support his case that Wong was, in fact, a part shareholder of Shenzhen Lianda.  This was rejected by the Court of Appeal.

7.22The Liquidators sat on this proof because it was Ken’s case that he and the Father each owned 50% of the interest in Shenzhen Lianda through Pak Tat.  The Liquidators kept this proof alive.

7.23In May 2017, just two months before the hearing before Judge To, the Liquidators asked Wong for and obtained a copy of the judgment from the People’s Court in Shenzhen (‘the Shenzhen Court’) in respect of Wong’s similar claim filed in Shenzhen in 2013.  That action was dismissed by the Shenzhen Court on 4 November 2016.  In rejecting Wong’s claim, the Shenzhen Court held that the co‑operative agreement dated 7 June 2012 between Ken and Wong which was purportedly entered into to ‘ratify’ the fact that Wong had part interest in the factory premises of Shenzhen Lianda, was unreliable, especially as Ken was in litigation with his Father in Hong Kong.  Judge To commented that this showed that Ken and Wong had been in cahoots with each other all along.

7.24Despite the Liquidators receiving confirmation from the Shenzhen judgment that Wong was not credible, the Liquidators still kept the proof alive and relied on Wong’s explanation that he had sued the wrong party in Shenzhen.  The Liquidators were relying on this proof as evidence that Luen Tat was substantially insolvent so as to resist the stay application.  It was only at the hearing before Judge To that counsel for the Liquidators stated that the Liquidators were inclined to reject this proof.  Judge To had strong comments on the Liquidators’ conduct.

‘ 60. ... David Yen’s affidavit stands as evidence of his perverse conduct from which the inference of bad faith and bias in favour of Ken’s camp may be drawn. It shows that these officers of the court were prepared to ignore the findings of this court and the Court of Appeal so long as it suited their purpose to do so. They went all out of his way trying to nullify the findings of these courts to assist Wong, a known associate of Ken. That was done for the purpose of keeping this blatantly unmeritorious claim alive so as to justify their continuation in office. They have obviously put their personal interest before those who are ultimately interested in the asset of the company placed in their control. They are in breach of their fiduciary duty. They are bias and have lost their independence. Their conduct gives rise to a real and reasonable loss of confidence in them. Their conduct has forfeited the confidence of the court.’

7.25The Liquidators submitted that Judge To wrongly drew adverse inference against them in their conduct as liquidators in respect of the new claim from Wong notwithstanding that they had consistently stated that they were inclined to reject the proof and had merely raised queries with Wong in relation to his proof.  Former senior counsel for the Liquidators submitted in their written submission before Judge To that ‘the Liquidators are now considering [Wong’s] claim, but are inclined to reject it’. 

7.26In our view Judge  To had not ignored this indication.  His comment was that this claim should have been rejected a long time ago by reason of the Main Action, yet the Liquidators still kept this proof alive until the hearing before him.  His criticism of the Liquidators’ conduct is justified.

iv)     The worst and best case scenarios

7.27In the course of the Liquidators’ submissions, reference was made to Schedule 1 of Mr. David Yen’s 1^st affidavit which showed the worst and best case liquidation scenarios.  The worst case scenario included the proofs of debt by Sun Moral/Wong, Tang, Wong and Ken. Further, the tax liabilities and tax penalties were also included in the worst case scenario. 

7.28In the best case scenario the proofs of debt of Wong/Ken were not taken into account.  The tax liabilities and tax penalties (the latter of a lesser amount) were still included.  The Liquidators submitted that even if the tax liability and tax penalty are not to be taken into account in the best case scenario, the balance is still a negative $14.4 million. This point, in fact, had been considered by Judge To :

‘ 111. On the question of solvency, the court is entitled to form a provisional view based on the documentary evidence whether a proof of debt is substantiated. The court is in a much stronger position than the liquidator in determining this question. An application to stay should not be deferred merely by reason of the liquidator failing or neglecting to make an adjudication on a proof of debt. In fact, except for Ken’s latest proof which the Liquidators have rejected, the Liquidators have been sitting on the other two proofs for years. Having discounted these three proofs of debt, I find that [Luen Tat] is marginally solvent. However, to err on the safe side, I would require an appropriate undertaking as a condition precedent for the grant of an order to stay the WU Order.’

7.29The other two proofs of debt referred to by Judge To were in respect of Wong’s $36 million and Ken’s $52.8 million.  As Judge To had already required the Petitioner to furnish an undertaking for the purpose of staying the WU Order, the Liquidators had not shown the relevance of referring to this Schedule.

(2)     False allegation of recently discovered tax liability of Luen Tat

7.30The background to the tax liability issue has been set out in [18] and [21] of Judge To’s judgment and repeated in [2] of this judgment.  The Liquidators claimed that they had recently discovered Luen Tat’s further ‘hidden’ tax liability of $24 million to $72 million. They argued that this ‘hidden’ liability would render Luen Tat massively insolvent and hence justified the dismissal of the application to stay the WU Order and their continuation in office to investigate this ‘recent hidden’ tax liability, to preserve commercial morality and protect public interest.  That was one of their reasons for refusing to consent to a stay of the WU Order on a no costs basis.  The Liquidators alleged the discovery was that Shenzhen Lianda had maintained two sets of management accounts, discrepancies between the expenses according to these two sets of accounts and the discrepancies between Shenzhen Lianda’s financial statements and Yuen Hing’s financial statements.  This was the same argument put forward by Ken in opposing the stay application. 

7.31Judge To held that this could not be a ‘recent’ discovery because in September 2010, Ken and David Cho, accompanied by Mr. David Yen in his then capacity as provisional liquidator, reported the re‑invoicing scheme to the Inland Revenue Department.  David Cho had explained in detail how the re‑invoicing scheme worked and produced the two sets of accounts.  The existence of the two sets of accounts was evidenced in the Note of Interview prepared by the interviewing assessors dated 1 September 2010.  The two sets of accounts and the discrepancies created therefrom must have been considered by the Inland Revenue Department when assessing the further tax and penalty.  David Cho had told the assessors about the two sets of accounts kept by Shenzhen Lianda; that its sales and purchases were understated to match the local customs declarations; and that additional expenses in Shenzhen Lianda’s internal management accounts were booked under Yuen Hing.  That resulted in a full and final settlement by Luen Tat paying $18.3 million additional tax and $3.4 million penalty in May 2012.  Then two and half years later, in October 2014, the Liquidators suddenly alleged that further tax evasion activities had occurred by reason of the discovery of the discrepancies of the account. 

7.32In March 2016, when asked to consent to stay the WU Order, the Liquidators opposed and insisted on, inter alia, the Petitioner paying the Liquidators $24 million to settle the ‘potential’ hidden tax liability, and another $1 million as liquidation costs to negotiate with the Inland Revenue Department.

7.33In November 2016, the Liquidators relied heavily on the hidden tax liability to oppose the Petitioner’s application.  In the affirmations of Seline and the Petitioner’s expert Elaine Pui (née Chung) both filed on 9 March 2017, the Petitioner specifically stated that the Liquidators were using this hidden tax liability issue to ‘stir up issues so that they can continue to remain in office’ and had acted mala fide. Between March and July 2017, the Liquidators had four months to adduce whatever detailed evidence to rebut these allegations of serious misconduct. 

7.34In June 2017 which was about a month before the hearing before Judge To, the Liquidators wrote to the Inland Revenue Department inviting them to investigate and to lodge a fresh proof of debt in relation to the tax liability of Luen Tat.  At the hearing before Judge To, senior counsel for the Liquidators accepted that the Liquidators having reported the matter to the Inland Revenue Department recently, the issue if unresolved could be dealt with by Luen Tat’s directors themselves upon a stay of the WU Order.  He accepted that the ‘recent hidden’ tax liability issue could not be a ground for resisting the application to stay.

7.35Judge To stated that :

a)  October 2014 was just three months after the Liquidators’ appeal to uplift the stay of two of their actions against the Father, Richard and Seline was dismissed by Deputy Judge Poon and while the trial of the Main Action was progressing in parallel;   

b)  for the two and half years between October 2014 and June 2017, the Liquidators just sat on what they alleged to be an important matter of commercial morality and great public interest which caused Luen Tat to be massively insolvent as to justify their further investigation and continuation in office; and

c)  the Liquidators had not challenged the expert’s opinion which was adduced by the Petitioner that it is extremely unlikely that Luen Tat would face further tax liability and penalties. 

7.36Judge To held that :

‘ 73. The Liquidators and Ken were just re‑dressing those same stale matters as if they were recent discoveries. This ground of objection was not made bona fide. The Liquidators, David Yen in particular, were deliberately misleading this court by not disclosing the fact that he was at the interview with the Inland Revenue Department and that he knew full well about the two sets of accounts six to seven years ago. Then they concocted this “recent hidden” tax issue to justify their continuation in office. Not only was their conduct improper, it is evidence on which the inference that these officers of the court were attempting to mislead the court in order to support their objection to a stay of the WU Order and to justify their continuation in office may be drawn. This is also evidence of their bias against the Father and self‑interest in their performance of their public duty which justifies their removal from office.’

7.37The Liquidators argued that Judge To was wrong on the tax issue for the following reasons.  He confused between, on the one hand, the discrepancies between Yuen Hing’s expenses in its audited financial statements and, on the other hand, the fact that Shenzhen Lianda kept two sets of accounts.  He wrongly assumed that the ‘further tax evasion’ had already been disclosed in 2010.  This was wholly unsupported by any evidence. In particular, paragraph 15 of the Note of Interview dated 1 September 2010 merely referred to Luen Tat’s maintaining two sets of accounts, not the said discrepancies.  He wrongly assumed that the expert’s evidence was unchallenged by the Liquidators.  The Liquidators’ performance of their duties, following discovery of matters leading to reasonable suspicion and reporting to tax authority of suspected tax fraud, bearing in mind the wider public interest that might render a company insolvent i.e. being a matter that was directly relevant to the application, was taken by Judge To as deliberately misleading the Court for their self‑interest.  Indeed, even the Petitioner welcomed the Liquidators’ report to the Inland Revenue Department on 9 June 2017.  Judge To in drawing adverse inference against them for arguing that Luen Tat might be exposed to further potential tax liabilities, had failed to consider that the Inland Revenue Department had the right to re‑open its case against Luen Tat in relation to tax liabilities and penalties if the settlement was obtained by misrepresentation of facts to the Inland Revenue Department, at any rate within ten years after the relevant assessment year.

7.38The Liquidators submitted that in the light of the above, with the hidden tax liability being genuinely raised, they could not be criticised for insisting that it be taken care of in the light of the potential insolvency of Luen Tat.  Any purported findings of the Judge as to the existence or merits of this potential liability were also wrong and must be set aside. 

7.39In our view, Judge To’s criticism of the Liquidators was clearly supported by reference to the timelines that Judge To had referred to and the timing of their referral of the hidden tax issue to the Inland Revenue Department again. 

7.40The Liquidators alleged in Mr. David Yen’s 2^nd affidavit that ‘the customs price arrangement’ was only ‘recently disclosed’ in the expert’s March 2017 affirmation.  It is plainly misleading for the Liquidators to state that this was a recent discovery by reference to the expert’s March 2017 affirmation when all that she talked about was that the customs price arrangement was based on what had already been disclosed to the Inland Revenue Department in 2010.

7.41The Liquidators alleged the undisclosed tax liability was based on the discrepancy between the Shenzhen Lianda’s accounts and Yuen Hing’s accounts, namely comparing Shenzhen Lianda’s external and internal accounts on the one hand and Yuen Hing’s accounts on the other hand.  There was a shortfall of $137 million.  In theory, Yuen Hing’s expenses should be the same as the Shenzhen Lianda’s sales. 

7.42However, as pointed out by the Petitioner this theory was wrong because Yuen Hing had paid for additional expenses not covered in Shenzhen Lianda’s sales including the difference between the customs price and actual price of raw materials, materials and tools bought in Hong Kong, materials and tools paid in Hong Kong money and staff costs.  The Liquidators knew that these expenses had been incurred, in fact, as recorded in [17] of the judgment of Judge Manzoni :

‘ 17. ... The liquidators have negotiated a reduction of the tax claim, as a result of which [Luen Tat] was required to pay only HK$13.1 million. This reduction was achieved because the liquidators persuaded the IRD to take into account the liabilities of the Group which had been booked through the financial statements of Yuen Hing on the basis that Yuen Hing paid for the operational expenses of the Group.’

7.43Judge To’s acceptance of the expert’s opinion cannot be faulted as he held :

‘ 71. ... The Liquidators also offered no evidence of intervention by the Inland Revenue Department since their last reporting of the “recent hidden” tax liability in June 2017. This supported the expert evidence of Elaine Pui.’

7.44Further, Judge To was correct to say that the expert’s evidence was not challenged because the Liquidators did not challenge her evidence.  In Mr. David Yen’s 2^nd affidavit which was filed three and a half months after the expert’s opinion, the Liquidators also did not challenge that opinion before the Judge. 

7.45The unreasonableness of the Liquidators’ stance can also be gathered from their insistence on conditions in order to stay the WU Order and the eventual concession by their former senior counsel at the hearing on the tax issue.

7.46In our view the Liquidators’ handling of the tax issue by reporting it again to the Inland Revenue Department on the eve of the hearing below reflected most badly on their conduct as liquidators.  This went beyond the ambit of a commercial decision that one would usually defer to a liquidator.  With the information that the Liquidators already had on this issue, their conduct in raising a stale claim with the Inland Revenue Department clearly showed that they were biased towards the Petitioner.  Judge To’s criticism of the Liquidators on this issue cannot be faulted.  The criticism was valid irrespective whether they had any intention to mislead Judge To or not.

(3)     Forgoing investigation and claims against Ken’s camp
 i)     Ken’s misappropriation of $28 million

7.47In the Main Action Ken argued that he had caused a total sum of $28 million to be paid out of the group to his personal account as his profits entitlement, which were arranged with Seline’s knowledge.  He claimed that it was part of the profits of $53.6 million kept by Yuen Hing.  The Father said that that was misappropriation of Luen Tat’s money, and the sum of $28 million was used to form part of his claim against Ken.  This claim, however, was dropped to avoid complication by reason that it should be a matter for Luen Tat’s liquidators after their appointment. Ken also argued that $25,602,977.76 (being the balance of the profits of $53.6 million less $28 million) which belonged to him was converted by the Father or Seline and retained in Yuen Hing’s bank account.  They were said to be accountable to him for such sum as constructive trustees.  Judge Leung had found there was no $53.6 million profit kept with Yuen Hing and dismissed Ken’s counterclaim.

7.48On this basis, Ken had misappropriated the sum of $28 million from Yuen Hing, which he caused Seline to pay to him. However, the Liquidators took no action against Ken to recover this sum and had instead insisted on pursuing the Father and Yuen Hing for the balance of $25.6 million allegedly kept in Yuen Hing’s account.

7.49Judge To held :

‘ 75. ... The Liquidators’ action in the face of the court’s findings was absurd. It demonstrates irrational preference in favour of Ken and against the Father. It also gives rise to loss of confidence in the Liquidators by the Petitioner.’

7.50The Liquidators submitted that Judge To wrongly assumed that it was open to them as liquidators of Luen Tat to take action against Ken in respect of an alleged misappropriation of $28   million from Yuen   Hing. In fact, they as liquidators of Luen Tat would have no locus to take action against Ken when such misappropriation was against Yuen Hing, and not Luen Tat.

7.51In our view, the starting point is that, as found by Judge Leung, there was no $53.6 million in existence and there was no idle cash being kept in Yuen Hing’s account because it was needed for expenses and distributions. Relying on this fictitious $53.6 million, Ken misappropriated $28 million of Luen Tat’s money: $4 million directly from Luen Tat and $24 million drawn by eleven cheques from Yuen Hing.  Judge Leung held in [220] of his judgment that Ken was able to retrieve the money from Yuen Hing allegedly in partial settlement of his share of profits only after ensuring that it was put in funds by Luen Tat.  With this clear finding, the Liquidators took no action against Ken to recover the $28   million belonging to Yuen   Hing.  The Liquidators’ argument that they had no locus to sue Ken because the $28 million was Yuen Hing’s money and not Luen Tat’s money is clearly not sustainable in the light of these findings.  In any event, the locus argument was not raised below. The Liquidators are now barred from raising this argument because of the Flywin principle.  The Judge had not forgotten that the Liquidators had also previously rejected Ken’s proof and also had sued Ken.  This, as the Petitioner submitted, paled in comparison with the other actions taken by the Liquidators in this case.  Again by reference to the stance of the Liquidators in the pre‑litigation correspondence, Judge To’s finding that the Liquidators’ action demonstrated an irrational preference in favour of Ken and gave rise to loss of confidence in the Liquidators by the Petitioner cannot be faulted.

ii)     Ken’s misappropriation of $30 million

7.52Luen Tat’s record showed that Ken had withdrawn from it $30 million to pay his son Joseph.  Upon being challenged by the Father, Ken replied after three months that the money was for ‘normaldirector’s account reserved for urgent expenses.’ The Liquidators refused to commence any action against Ken to recover this sum.  They were unable to provide the Father with any details of urgent expenses or evidence showing such expenses were incurred. 

7.53Judge To held :

‘ 76. ... Even assuming it was within the director’s discretion to apply company’s funds for urgent expenses, the Liquidators’ failure to make investigation in what they alleged to be a massively insolvent company for the purpose of recovering its assets is inexplicable. Their inaction in the total absence of supporting evidence that such an enormous sum had been incurred on unexplained urgencies gives rise to doubts as to their impartiality or professional competence; or at least a loss of confidence in the Liquidators by the Petitioner.’

7.54The Liquidators submitted that Judge To failed to have regard to the fact that the Liquidators had reported to the Court and put in evidence to explain that after investigation it was found that the $30 million had been used by Ken to finance Luen Tat’s operation when its bank accounts were frozen. 

7.55In our view, the Liquidators’ argument that Ken had used $30 million to finance Luen Tat’s operation missed the point because the complaint was that Ken was unable to provide any details or evidence that the alleged expenses had been incurred. Judge To had not ignored any evidence.  His comment that the failure by the Liquidators to investigate this matter was pertinent and cannot be faulted.  

iii)     Ken’s wrongful deletion of Luen Tat’s data

7.56The Liquidators in their report of 9 December 2011 stated that Ken had taken deliberate measures to destroy and conceal the data on Luen Tat’s computers which were ‘essential to resolve [Luen Tat’s] tax issues and to ascertain the extent of the asset dissipation and business diversion’.  Later, they changed their stance and said it could not be confirmed who deleted the data.  In an update to the Committee of Inspection dated 4 March 2011, the Liquidators reported :

‘ … two of the computers’ hard disks had been removed and mass deletion had been carried out on several other computers to permanently remove the information on these computers. Also, a few of the computers had newly installed operating systems shortly before the appointment of the provisional liquidators. The installation had the effect of wiping out information in those computers.

It is probable that there was a deliberate attempt to destroy [Luen Tat’s] [computer] records to facilitate the transfer of [Luen Tat’s] business to other parties [and] the loss of [Luen Tat’s] [computer] records has adversely affected its ability to pursue its other potential claims and as a result, suffered damages.’

7.57Despite having the computers the Liquidators did not attempt to retrieve the information from them.  Eventually when these computers were passed to Richard pursuant to a Court order, he was able to reconstruct 480,000 files within two weeks using a software that only cost $2,000.  The reconstructed files revealed, inter alia, that Ken had misappropriated the sum of $30 million from Luen Tat and evidence supporting transfer of its business to companies owned and controlled by Ken.

7.58Judge To commented that the Liquidators were aware of the tampering of the computers, the purpose of which was to destroy Luen Tat’s records in order to facilitate the transfer of Luen Tat’s business to other parties.  But the Liquidators refused to refer the matter to the Commercial Crime Bureau until a very late stage.  Judge To held :

‘ 79. ... Who else but Ken could have been responsible for removing the hard disks and deleting [Luen Tat’s] data from its computers and replacing its system with a new one? If the Liquidators’ inaction was intentional, it must because they were protective of Ken and were therefore bias in favour of him. If it was not, they were hopelessly negligent and incompetent. Either way, it would justify their removal on grounds of bias or loss of confidence in their professional competence.’

7.59The Liquidators rejected Seline’s request in January 2017 to forward Luen Tat’s papers to the Commercial Crime Bureau to reopen the investigation against Ken.  Judge To held :

‘ 80. ... Why should the Liquidators refrain from referring it to the police? What was the objection to let the professionals make investigation into these prima facie criminal activities? Why should they protect Ken from possible prosecution? Their refusal is contrary to the “commercial morality and public interest” stance they took in insisting to remain in office to investigate in a stale and settled tax issue seven years ago which they dress up as “recent hidden” tax liability. Their refusal is in stark contrast with the very oppressive manner they conducted the litigations against the Father and his camp. Their behaviour left me in no doubt that they were protective of Ken and were heavily bias in favour of him against the Father. They were not acting in the best interest of [Luen Tat] but in Ken’s best interest. They have forgotten they are officers of the court and have acknowledged Ken as their new master. They have forfeited the confidence of this court.’

7.60The Liquidators submitted that they had written to the Commercial Crime Bureau prior to their report dated 3 May 2013 about Luen Tat’s affairs including the deliberate destruction of Luen Tat’s computer records.  The Liquidators submitted that Judge To was wrong to say that they had refused to refer the matter to the Commercial Crime Bureau until a late stage because they had already made such a report prior to their report dated 3 May 2013 about Luen Tat’s affairs including the deliberate destruction of Luen Tat’s computer records.  Richard accepted that they were not complaining that the Liquidators had not earlier forwarded the documents to the Commercial Crime Bureau. 

7.61We agree with Judge To’s criticism of the Liquidators.  The reluctance to refer Ken’s misconduct on the destruction of the computer records again to the Commercial Crime Bureau was to be contrasted with their readiness to refer to the Inland Revenue Department once again on a stale tax claim.  Seline’s request in 2017 for the Liquidators to provide the documents to the Commercial Crime Bureau was on the basis that it had informed her that there had been a change of personnel in the investigation team.  It was willing to follow up the investigation but as the papers had already been returned to the Liquidators, it had difficulties in conducting the investigation.  It asked Seline to request the Liquidators to provide the papers to it.  Judge To was clearly entitled to rely on this reluctance as a further example of their bias in favour of Ken and their antagonism towards the Father and his camp.

iv)     Ken’s diversion of Luen Tat’s business and staff

7.62Judge Leung found that shortly after Ken had ousted the Father from Luen Tat in June 2009, Ken started to divert the business and staff of Luen Tat to other companies controlled by him.  This was borne out by the documents retrieved from Luen Tat’s computers.  As early as 2013, the Petitioner had written a detailed letter to the Liquidators pointing out, inter alia, the diversion of business.

7.63The Liquidators took no action against Ken.  On the diversion of business Judge To held :

‘ 81. ... The only explanation they proffered was that [Luen Tat’s] profit margin and profits had improved. Such explanation is illogical and wholly unacceptable. The Liquidators’ inaction is evidence of their bias and incompetence. It also gives rise to a perception that they were biased and gives rise to a real and reasonable loss of confidence in them by the Petitioner.’

7.64There is no appeal by the Liquidators against this finding.  This is clearly a matter that Judge To could properly rely on in arriving at his decision.

v)     No action against Mazars for professional negligence

7.65Judge To held that the Liquidators must know, in view of David Cho’s admission in Mr. David Yen’s presence during the interview with the Inland Revenue Department, that David Cho/Mazars were the architects of the re-invoicing scheme.  David Cho/Mazars owed contractual and common law duty of care to Luen Tat.  They could have absolutely no defence to an action by Luen Tat for professional negligence.  They would have been the most ideal and cost effective targets for recovery as they were probably covered by insurance.  The Liquidators must know that Luen Tat had a meritorious and indefensible claim against David Cho/Mazars for professional negligence.  Yet the Liquidators took no action against David Cho/Mazars for professional negligence.  He held :

‘ 83. ... Their refusal to bring any action against David Cho and/or Mazars and their silence in the face of Seline’s accusation of biasspeaks volumes of their bad faith, self-interest, bias and persecution against the Father and his camp.’

7.66The Liquidators submitted that Judge To wrongly assumed that Luen Tat had a cause of action against Mazars for the tax advice when there was no evidence before the Court as to what advice was actually given by Mazars and whether such claim would be statute‑barred.  They submitted that the Liquidators did not even have a copy of the advice given by Mazars save a draft, and in the absence of knowing exactly the contents of the final advice and what caveats or disclaimers, they cannot be criticised for not embarking on litigation the chances of success were difficult to gauge.  As Judge Leung and Court of Appeal judgments did not make any specific finding in these respects, it is unhelpful to refer to the evidence adduced at the Main Action’s trial.

7.67The Petitioner argued that the Liquidators did not complain before Judge To that there was no evidence as to what advice was given by David Cho/Mazars or that the action against Mazars had been time‑barred.  This offended the Flywin principle.  Further, the Liquidators’ argument is unmeritorious because the evidence showed that David Cho was the author of the invoicing scheme by reference to the Inland Revenue Department’s Note of Interview.  The Liquidators were aware of those involvements because Mr. David Yen had also attended the Inland Revenue Department interview and the Liquidators’ staff had attended and monitored the Main Action.  The time‑bar argument is unmeritorious because the Liquidators admitted that Luen Tat only paid the tax penalty of $3.4 million on 11 October 2012 and Luen Tat’s cause of action in negligence only accrued then.  The Liquidators could have taken action against Mazars throughout their tenure. 

7.68We granted leave to the parties to file further submissions on the transcript of David Cho’s evidence in the main trial.  The Petitioner submitted that he had already referred to the evidence as indicated above. The Liquidators stated that the Petitioner has still failed to produce or even point out any copy of Mazars’ actual advice to Luen Tat or the precise contents of any such advice or any admission as to any such contents by or on behalf of Mazars. 

7.69In our view, the decision not to sue David Cho/Mazars must be a commercial decision within the discretionary power of the Liquidators.  Questions of costs and the chance of success against a professional accountant are clearly relevant factors in deciding whether to sue or not to sue.  An intended action against David Cho/Mazars is quite unlike the other issues that Judge To had addressed because in respect of the other issues of the Liquidators’ bias in favour of Ken and his camp and their bias against the Father and his camp, they had the benefit of the judgments of Harris J, Judge Leung and this Court.  The appropriateness of their action and omission can be properly assessed by reference to, inter alia, these judgments.  We are not prepared to say that the decision not to sue David Cho/Mazars is irrational that justifies the removal of the Liquidators.

(4)     Assisting Ken in the trial of the Main Action

7.70The Petitioner alleged that the Liquidators assisted Ken in his conduct of the trial of the Main Action against the Father and charged fees against Luen Tat.  The Liquidators sent a manager to attend court throughout the trial of the Main Action.  In the middle of the trial, the Liquidators even compiled and provided, on an urgent basis, detailed accounting documents in support of Ken’s case.  Judge Leung refused to allow Ken to adduce these documents.  He observed that those voluminous documents were not primary documents but secondary documents specifically compiled by the Liquidators for Ken’s use.  On this issue Judge To held :

‘ 86. The Main Actionwas a litigation between the Father and Ken. [Luen Tat] was not a party, though the shares in [Luen Tat] and its profits were the subject matter of that litigation. [Luen Tat] had no direct or indirect interest in that litigation or its outcome. Whoever succeeded or lost in that litigation would be of no consequence to [Luen Tat]. The Liquidators should not have assisted any party in that litigation and had no right to charge [Luen Tat] for providing assistance to Ken. That incident evidenced the Liquidators’ bias in favour of Ken against the Father, even to the extent of using [Luen Tat’s]resources to fight the private battle of Ken in a shareholder’s dispute which has nothing to do with [Luen Tat]. ...’

7.71The Liquidators submitted that Judge To had wrongly and unfairly criticised them for rendering assistance to Ken and he had failed to have regard to the fact that the assistance was minimal and mechanical, and the Liquidators as liquidators were equally prepared to assist the other parties to the litigation if similar requests had been made.  The documents supplied to Ken comprised of a single summary sheet prepared by the Liquidators and printouts from Luen Tat’s general ledgers only. 

7.72We disagree with the Liquidators.  As pointed out by the Petitioner the one‑page summary was the product of a tailored and labour‑intensive exercise to sift through all of Luen Tat’s ledgers between 2008 and 2009 in order to identify what were alleged to be payments by Luen Tat to Yuen Hing.  It involved going through and checking against the relevant primary documents represented by the different entries of the invoices printed out in the following pages.  The summary was not a primary document.  Even the following pages of entries were not primary documents (provided by Ernst & Young as backdrop).  The contents had to be verified which would take a long time, necessitating the adjournment of trial. It was done during the trial at short notice to rebut Seline’s evidence, with reference to trial transcript.  It was done specifically according to Ken’s request for that purpose (not for any other liquidation related purpose).  In our view, the Judge was correct on his view.

(5)     Insistence on continuing legal actions against the Father and his camp  

7.73Judge To referred to the series of actions commenced by the Liquidators against the Father and his camp and against the Father, Richard, Seline and Yuen Hing for account of money allegedly paid by Luen Tat while under their control to Yuen Hing through the re-invoicing scheme.

i)    On 10 August 2012, the Liquidators commenced action in HCA 1428/2012 claiming against the Father, Richard, Seline and Yuen Hing for account of a sum of $53 million allegedly paid by Luen Tat while under their control to Shenzhen Lianda through the re‑invoicing scheme [90]. 

ii)  In HCA 2137/2012 and two other actions, the Liquidators also sought to recover the tax penalty paid as result of the re‑invoicing scheme against the directors of Luen Tat, including members of the Father’s camp and Ken [94].

iii)  They also commenced proceedings in HCA 1952/2012 against the Father, Ken, Richard and his company Radar International (HK) Limited (‘Radar’) for misappropriating the assets of Luen Tat. 

7.74On 15 November 2013, the Father obtained an order from Master Ho staying HCA 1428/2012 and HCA 2137/2012 pending the trial of the Main Action which was scheduled to commence on 11 March 2014 which was only four months ahead.  The Liquidators appealed.  By the time the appeal was heard, the hearing of the Main  Actionhad commenced.  The two sets of proceedings were proceeding in parallel.  The Liquidators were represented bysenior counsel in the appeal which lasted three days.  Up to that stage, the legal fees incurred exceeded $7.6 million while the Liquidators’ own fees amounted to $18 million.  On 25 July 2014, in dismissing the Liquidators’ appeal, Judge Poon held :

‘ 66. … The Liquidators’ Actions can serve little real purpose if the Father turned out to be 100% owner of the [Company] and its profits along.

67.  On the other hand, the Father’s concern about his money to be spent for no reason is not unreal. … if the Father is successful in asserting his right as the 100% owner of the [Company] in the Main Action, it would mean that such costs will be paid out of his pocket in any event.’

7.75Judge To recognized that when the Liquidators were appointed in 2010 they were strangers to the affairs of Luen Tat and it was reasonable for them to place trust and confidence in Ken who was the director then in charge of Luen Tat.  Judge To further proceeded on the basis that the recovery actions were taken by the Liquidators in good faith for the interests of those who were interested in the assets of Luen Tat namely, the contributory whom they thought was Ken.  But he held that things took a drastic change in December 2015 with the delivery of Judge Leung’s judgment.  By then the Liquidators ought to know that they had ridden on the wrong train.   Judge To held ：

‘ 89. ... Then, despite the finding of the Court of First Instance that the Father was the 100% beneficial owner of [Luen Tat] and whose interest it was their duty to protect, they still obstinately insisted to remain in office to pursue those actions against the Father. And now, despite the Court of Appeal has confirmed all the findings of the Court of First Instance, they still refused to resile from that position. They merely say that they are maintaining a neutral position and leave it to the parties to persuade the court. In other words, if they are allowed to remain in office, they will continue prosecuting those actions against the Father and continue to use [Luen Tat’s], ie the Father’s, funds to fight the action against the Father for the Father’s benefit. That is their position now before me.’

7.76Referring to Judge Poon’s comment in the Liquidators’ appeal against the order for stay of the actions, Judge To held :

‘ 96. Deputy High Court Judge Poon’s observations were full of common sense and realism. I cannot help asking what is the urgency in lifting the stay? There is nothing to suggest that the Father will dissipate his assets and render any judgment against him nugatory. Why can’t the Liquidators wait for just four months to see how the trial in the Main Action went? Why can’t they wait till after delivery of judgment in the Main Action? Why should they incur such hefty costs on a non-cost effective procedure without even waiting for the outcome of the Main Action? Why should the Liquidators conduct these proceedings in such an oppressive manner?

97.  ... From the very care-free manner in which the Liquidators incurred costs in these proceedings, it can be inferred that they were eager to create work for themselves regardless of the interest of [Luen Tat].  That, at least, gives rise to a perception that the Liquidators had put their personal interest before [Luen Tat’s] and gives rise to a loss of confidence in them by the Petitioner.

98.  The Liquidators conducted these two litigations in a most oppressive manner.  ... All these three sets of proceedings were proceeding in parallel.  I have already found ample evidence of their bias in favour of Ken against the Father.  This incident further fortifies that finding.  From their conduct, it can even be inferred that the Liquidators were acting in concert with Ken to put pressure on the Father. Even though the Father won that appeal, effectively he was the one who was to pay every party’s costs, including the Liquidators’ own costs.’

7.77In January 2015, the Liquidators commenced HCA 220/2015 action against Yuen Hing claiming that a sum of $25.6 million sitting in the bank account of Yuen Hing came from and belonged to Luen Tat.  The basis of their claim was Mazars’ report prepared for Ken and an alleged admission by the Father in his affirmation.  As pointed out earlier, Judge Leung dismissed Ken’s claim on this sum and found that the Father had never made any such admission as alleged by Ken and that Mazars’ calculation was fundamentally flawed because it was based on a misinterpretation of the Father’s ledgers. 

7.78Judge To held :

‘ 101. ... Why should the Liquidators seek to remain in office against the will of the Father solely for the purpose of recovering money from the Father to return to the Father or his estate or for the benefit of the creditors with spurious claims which the Liquidators sat on for years without making an adjudication? Their rationale is just a load of non‑sense.’

7.79The Liquidators submitted that the Liquidators had obtained the requisite sanction to commence and properly commence the legal actions.  In respect of HCA 1428/2012 they submitted that Judge To had wrongly confused this claim with the issue between Ken’s camp and the Father’s camp as regards the sum of $53 million.  This action was not in relation to the claim of $53 million allegedly paid by Luen Tat to Shenzhen Lianda but in relation to a claim for an account of the whereabouts of actual payments of not less than $25.6 million (out of the unaccountable $53 million) paid by Luen Tat to Yuen Hing based on Luen Tat’s books and accounts due to the re‑invoicing operation (‘the Account Action’). 

7.80In respect of HCA 220/2015 the Liquidators submitted that it was the Accounts Action’s ‘reincarnation’ so far as Yuen Hing was concerned, as the former had not been served out of jurisdiction on Yuen Hing in time (and the Father’s camp had refused to accept service on its behalf).  The Father’s claim that ‘cash in Yuen Hing would not have remained idle in the bank account’ was not inconsistent with Luen Tat having actually paid such money to Yuen Hing beforehand, such that the Account Action remained justified and the Liquidators cannot be criticised for having it provided for as part of the condition of agreeing to a stay (in light of the potential insolvency of Luen Tat).  Judge To had misunderstood the judgments of Judge Leung and Court of Appeal in terms of relevance and what was actually found. 

7.81In respect of HCA 1952/2012 and 1996/2012 the Liquidators submitted that Judge To wrongly understood they were in relation to tax liability claims (Judgment, [94]); when, in fact, they were unrelated (HCA 1952/2012: non‑arm’s length transactions between Luen Tat and Radar/Richard; HCA 1996/2012: Luen Tat’s improper disposal of Flat 5B to Richard). 

7.82Concerning the Liquidators’ application for lifting the stay in the Accounts Action and HCA 2137/2012 (the Tax Penalty Action), Judge To wrongly and unfairly criticised the Liquidators for seeking to lift the stay.  He failed to consider the Liquidators had obtained legal advice from both solicitors and leading counsel.

7.83We agree with the Petitioner’s submission that it is plain that from a reading of the statement of claim in HCA 1428/2012, although the nature of the claim was dressed up as an Accounts Action, it was based on the fictitious $53.6 million Ken alleged as the amount representing Luen Tat’s accumulated profit kept in Yuen Hing’s account which he said he was 100% entitled to as agreed with the Father and also the Father’s alleged admission of $25.6 million being held in Yuen Hing’s account.  Based on the findings of Judge Leung, there could not be any legitimate basis by the Liquidators against the Father and Yuen Hing for the sum of $25.6 million which Ken alleged to be the balance of his fictitious accumulated profit of $53.6 million after withdrawing $28 million from Yuen Hing’s account.  The Liquidators chose to ignore these findings.  Judge To’s criticism that the Liquidators had ignored the findings by Judge Leung and Court of Appeal judgments was amply justified. 

7.84We accept that Judge To in [91] of his judgment seems to have mistaken that HCA 1428/2012 was the action whereby the Liquidators claimed $53 million against Pak Tat.  But in our view, this does not distract from Judge To’s criticism of the Liquidators in commencing HCA 1428 of 2012.  

7.85In respect of the Liquidators’ submission that Judge To had mistaken that the two actions he mentioned in [94] of his judgment were actions relating to tax, our view is that Judge To had not made any mistake.  The two actions were HCA 1952/2012 and HCA  1996/2012. Judge To did not identify the two actions as tax actions.  On the contrary, he had expressly mentioned the nature of the claim in HCA 1952/2012.

7.86The Liquidators’ contention that the application to lift the stay was advised by counsel was not raised in the Court below and they are bound by the Flywin principle and are not entitled to raise this point on appeal.  In any event, this contention is not supported by evidence.  The report of the Liquidators of 27 February 2014 stated that ‘in consultation with counsels and [solicitors], the Liquidators opine that the Decision was erroneous where Master A. Ho should have also given weight to the following... .’ 

6)     Exaggerating the alleged non-compliance of the Production Order against Seline

7.87The Liquidators relied on the breach by Seline of the Production Order made by Judge Manzoni as a ground for resisting the stay application.  They argued that the Production Order would never be enforced if the WU Order was stayed.  According to the Liquidators, the Father’s camp was unco‑operative and failed to produce documents to enable them to investigate the affairs of Luen Tat.  The order was issued pursuant to section 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance to enable them to adjudicate on the claims of Sun Moral, ‌Wong and Tang.  Then, when the Liquidators were about to apply for a peremptory order to compel Seline to comply with the Production Order, the Petitioner took out the present application to stay the WU Order.

7.88Judge To held that the Liquidators’ argument was a sheer exaggeration in an attempt to justify their remaining in office.  He held :

‘ 125. Starting with the presumption of good faith, I could not see anything wrong with the Liquidators’ attempt to enforce the production order. But taking a deeper view of the matter, I do not consider it an action which I would endorse.’

7.89The Liquidators submitted that Judge To wrongly and unfairly criticised and inferred bad faith and bias against the Liquidators when all that the Liquidators had done was discharging their duty of candour by informing and explaining on affidavit to the Companies Court of Seline’s obvious breaches of Judge Manzoni’s Order by her failure to produce any or any sufficient document relating to Luen Tat’s affairs as ordered. 

7.90We do not find Judge To’s decision on the Production Order to be plainly wrong.  Judge To recognised that the Liquidators had a duty to seek production of documents but his criticism on the Liquidators was justified having regard to the fact that the Liquidators had sat on the matter for two years and having regard to the development of events. As the Petitioner submitted, the Production Order was of a very limited scope, being related to two proofs of debt by Sun Moral and/or Wong and Tang.  Seline gave some credible reasons for the delay and had repeatedly sworn on oath that she did not have the documents sought.  She could not produce what she did not possess.  Second, the Liquidators had just informed the Petitioner that they had admitted the proof of debt by Sun Moral and/or Wong.  That being the case, Seline must have supplied sufficient material to enable that adjudication to be made.  The only outstanding information required related to Tang’s proof.  To withhold the information would be contrary to the Petitioner’s interest.  Thus, if she had information about Tang’s proof, there was no reason why she would not have produced it.  As to Tang’s proof of debt, now that the Father had been found to be the 100% beneficial owner of Luen Tat, Tang’s claim could be pursued through the usual litigation and proper discovery procedure.  Earlier Judge To had commented on Tang’s proof of debt as follows :

‘ 61. Tang Tsan Man (“Tang”) was the factory manager of Shenzhen Lianda. He was Ken’s associate. Together, they ousted Richard from Shenzhen Lianda. In February 2013, he lodged a proof of debt for $2 million, being 5% of the annual profit [Luen Tat] on the basis of an alleged profit sharing agreement starting from 2005.

62.   Tang put forward no evidence in terms of payment records or tax returns.  He alleged that the agreement was approved in writing at the directors’ meeting of [Luen Tat].  That agreement never featured in the trial of the Main Action during which considerable time was spent on how the profits of [Luen Tat] were to be distributed between the Father, Ken and the other family members.  Tang alleged default in payment since 2009, but he only lodged the proof in 2013.  The claim appeared suspicious.’ 

VIII.  Conclusion

8.1Although we disagree with Judge To on one of the matters relied by him as misconduct of the Liquidators, we accept that there are ample grounds for him to come to his decision to remove the Liquidators.  We recognize that the removal of liquidators will only be based on the exceptional behaviour of the Liquidators which the Petitioner had to establish.  However, in this case, we have to say that the conduct of the Liquidators in respect of the tax issue is most extraordinary.  Their different treatment of Ken and the Father cannot be properly explained on the basis of a commercial decision particularly in the light of the judgments of Harris J, Judge Leung and this Court.  They went out of their way to justify their entertaining the proofs of debt of Ken and his associates and their continuous pursuit of the claim against the Father could not possibly be based on legitimate grounds.  Their biased approach is apparent if the issues are properly analysed as Judge To had done below.  We are not prepared to say that just any single act of misconduct will be sufficient to justify removal. It really depends on the relevance and complexity of the issues.  However, in this case, the instances of misconduct whether individually or by reasons of their cumulative effect do portray the lack of neutrality of the Liquidators which justified their removal. 

8.2Ultimately, the decision to remove is an exercise of discretion by Judge To.  What the Liquidators had done in this appeal is to invite this Court to carry out the balancing exercise by ourselves.  This is not the correct approach in an appeal against the discretionary judgment.  As repeatedly said, the appellate court is not to exercise the discretion afresh unless it can be shown that decision below is plainly wrong or that the judge had failed to take into account relevant considerations or had taken into account irrelevant considerations or had erred on principles.  The fact that the judge did not refer to each and every piece of evidence placed before him or each and every argument run before him does not mean that he as a professional judge has forgotten any of them or has failed to take them into account where appropriate.  In the present case, the Liquidators have not established the threshold that Judge To had erred in the exercise of his discretion.  We are of the view that Judge To’s decision to remove the Liquidators was correct and accordingly, the appeal is dismissed.

IX.      Costs

9.  The Liquidators requested the issue of costs to be dealt with on paper upon receipt of this judgment.  Accordingly, we direct the Petitioner to file and serve its written submissions on costs within ten days and the Liquidators to file their submissions within ten days thereafter.  The submission is limited to five pages.

Mr. Stewart Wong SC and Mr. Thomas Wong, instructed by Hogan Lovells, for the Appellants

Mr. Wong Yan Lung SC, Mr. Alan Kwong and Mr. Martin Kok, instructed by Joseph SC Chan & Co., for the Petitioner