The Official Receiver v. Samuel Ajmal Victor

HCMP 2426/2017

[2021] HKCFI 2441

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2426 OF 2017

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BETWEEN

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Before:  Master Lai in Court

Date of Hearing: 15 and 16 October 2020 and 11 January 2021

Date of Decision: 27 August 2021

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DECISION

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Introduction

1.This is the Official Receiver’s application for an order under sections 168D and 168H of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (the “Ordinance”) that the Respondent shall not without leave of the court be a director, liquidator of a company or be a receiver or manager of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a period between one year to 15 years. 

2.In support of this application the Official Receiver filed 4 reports on 30 October 2017, 12 February 2018, 31 July 2018 and 29 January 2020.  I shall refer to them in this Decision as “OR1”, “OR2”, “OR3” and “OR4” respectively. 

3.The Respondent filed 3 affirmations in opposition on 17 January 2018, 25 May 2018 and 21 January 2020.  I shall refer to them as “SAV1”, “SAV2” and “SAV3” respectively. 

4.The Respondent also filed affirmations of Kwok Kam Yuk Dominic (“Mr Kwok”) and Mukesh Mohan Mahtani (“Mr Mahtani”) both on 28 May 2018.  I shall refer to them as “KKYD” and “MMM” respectively. 

5.The Respondent gave oral evidence at the hearing and called Mr Kwok and Mr Mahtani to testify at the hearing.  At the hearing, the Respondent also produced the employment contracts of ASAP Transaction Processing Corporation Limited (the “Company”) with the Respondent, Mr Mahtani, Wong Yee Yung, Hans (“Hans”) and Leung Yin Ping, Locica (“Locica”) (the “Employment Contracts”).  He also produced an excel spreadsheet dated 6 February 2013 said to be records of subscription of shares of the Company in “Round 1.7” (the “Round 1.7 List”).  

6.The Official Receiver relied on her aforesaid reports for this application and did not call any witness to testify at the hearing. 

7.In para 5 of OR1, the Official Receiver summarized the allegations of unfitness against the Respondent as follows:

(1) Breach of director’s duty to ensure due payments of wages to the employees of the Company in accordance with the provisions of the Employment Ordinance (Cap 57) (the “EO”); and

(2) Breach of director’s duty to ensure due payment of mandatory provident funds contributions for an employee of the Company in accordance with the provisions of the Mandatory Provident Fund Schemes Ordinance (Cap 485) (the “MPFSO”).  

8.For the alleged breach of the MPFSO, the Official Receiver only referred to the Company’s failure “to make mandatory MPF contributions for its former employee, namely, Dayaram Daniel Victor [“Mr Dayaram”], for the period from May 2013 to September 2013” in para 22 of OR1. 

9.After hearing the oral evidence, I invited the Official Receiver to address the court at her closing submissions as to whether the MPFSO applied to Mr Dayaram’s employment with the Company at the material times as the evidence suggested that Mr Dayaram joined the Company after he reached the age of 65. 

10.In her letter dated 29 October 2020 sent to the court, the Official Receiver confirmed that Mr Dayaram was over 65 at the material times. As such, Mr Dayaram’s employment was not subjected to the MPFSO. The Official Receiver indicated that she no longer relied on the complaint on breach of the MPFSO against the Respondent. Miss Leung, counsel for the Official Receiver, confirmed this stance of the Official Receiver in the Official Receiver’s Closing Submissions (the “OR’s Closing Submissions”) but stated that the Official Receiver would refer to outstanding wages owed to Mr Dayaram and outstanding mandatory provident fund contributions owed by the Company in May and June 2013 as relevant background of the Company’s financial status and the conduct of the Respondent in managing the Company. 

11.In her letter dated 12 September 2017 (the “Enquiry Letter”), the Official Receiver stated that:

“6. Upon cessation of business of the Company, the wages of the former employees of the Company were remained outstanding for the period from 1 May 2013 to 27 September 2013. As the former employees were owed the shortfall, they filed claims against the Company for their outstanding wages and other termination payments at the Labour Tribunal in LBTC 3784/2013 and LBTC 3617/2013. … …”

12.Although the Official Receiver referred to arrears of wages and non-payment of other termination payments in the Enquiry Letter and OR1 as her complaint against the Respondent, the Official Receiver’s focus for this application was on non-payment of wages to employees. Evidence and submissions of the parties also focused on this issue. 

Agreed background and disagreed facts

13.The Company was incorporated on 28 April 2009 and engaged in information technology business. 

14.The Respondent was appointed as a director of the Company on 28 September 2009. By 4 October 2013, all other directors of the Company had resigned leaving the Respondent as the sole director. The Respondent also held 45,401 shares out of the 282,296 issued shares of the Company. The Respondent was holding about 16.08% of the issued shares of the Company at the material times. 

15.On 25 April 2019, the parties filed a joint statement setting out facts agreed by the parties and facts in dispute between the parties (the “Joint Statement”). In Part I of the Joint Statement, the parties set out matters which they agreed could be referred to at the hearing for this application. In Part II of the Joint Statement, the parties set out matters which they had disagreement as to whether the other side might refer to these matters at the hearing. 

16.The parties agreed that the Respondent was the Executive Chairman and Chief Executive Officer of the Company and was the final decision maker of the Company who had exercised control over all executive and financial matters of the Company.  (Para 8 of Section A of Part I of the Joint Statement)

17.Receiver and Manager were appointed to the Company on 11 October 2013 by a creditor. 

18.On 1 November 2013, the Respondent as the Company’s sole director initiated voluntary liquidation of the Company under section 228A of the Ordinance. Provisional liquidators were appointed to the Company. They were subsequently appointed as liquidators of the Company by a special resolution of the Company passed on 17 December 2013. 

19.In the Joint Statement it was agreed that the Company was insolvent when it was put into liquidation. As such, the Company was an insolvent company under the meaning of section 168H(2)(a) of the Ordinance. 

20.Some employees of the Company (the “Employees”) exercised their rights under section 10A of the EO and terminated their employment contracts with the Company due to non-payment of wages by the Company since May 2013. They served written notices of termination to the Company in September 2013. Thereafter, the Employees approached and sought assistance from the Labour Department in October 2013 and nine of them (including the Respondent) filed their claims at the Labour Tribunal. They were granted awards in the total sum of $5,100,541.49.  

21.It was also agreed that on 10 May and 1 August 2013, the Company issued letters to eight of the Employees (including Mr Dayaram) acknowledging shortfall of wages from January to June 2013 and claimed that the same would be paid by the Company in June or July 2013. The letters were signed by the Respondent. However, up till termination of their employment, such shortfall was still not paid. 

22.Although in OR2, the Official Receiver stated that “she has no comments on the Respondent’s education background, career development, sports and public services as stated in paragraphs 1 to 23 of [SAV1]”, the Official Receiver in the Joint Statement stated that she did not agree on the education and career background claimed by the Respondent. 

23.Although in OR1, the Official Receiver stated that: “The nature of business [of the Company] was engaged in information technology business”, the Official Receiver stated in the Joint Statement that she did not agree on the nature of the Company’s business. The Official Receiver further stated that she did not agree on the appointment and background of the Chief Financial Officer of the Company, ie Locica. 

24.The Official Receiver did not agree on the dealings between the Company and Optimizer HQ Limited (“Optimizer”) from May to September 2013 (the “Optimizer Deal”) as alleged by the Respondent. 

25.The Official Receiver also did not agree on the agreements alleged by the Respondent of the Employees agreeing to work in the Company with their wages payment being delayed (the “Oral Agreements”). 

26.The Official Receiver stated in Part II of the Joint Statement that the Official Receiver opposed to the Respondent referred to matters related to his personal background, the Optimizer Deal and the Oral Agreements but had not been referred to in the affidavits or affirmations filed by the Respondent. 

The Official Receiver’s case and evidence

27.The Official Receiver did not call any witness to testify at the hearing but relied on rule 4(2) of the Companies (Disqualification of Directors) Proceedings Rules (Cap 32K) (the “Disqualification Rules”) which provided that the reports of the Official Receiver should be prima facie evidence of any matter contained in it. 

28.The Official Receiver’s case was that the Respondent was most responsible for the mismanagement of the Company as he was the Executive Chairman, the Chief Executive Officer and one of the founders of the Company. In support of this contention, Miss Leung referred to the Joint Statement when the parties agreed that the Respondent was the final decision maker of the Company who had exercised control over all executive and financial matters of the Company. 

29.In OR1, the Official Receiver referred to two awards dated 11 and 23 December 2013 issued by the Labour Tribunal for the sums of $1,024,893.99 and $4,075,647.50 respectively (the “LT Awards”) to show that the Company failed to pay wages and other termination payments to nine of the Employees. The Company failed to pay the LT Awards. These Employees sought assistance from the Protection of Wages on Insolvency Fund Board (the “Fund Board”). The Fund Board paid $519,953.42 to seven of the Employees claimed at the Labour Tribunal (except the Respondent and Hans) and Mr Dayaram who had not claimed at the Labour Tribunal. 

30.The Official Receiver sent the Enquiry Letter to the Respondent on 12 September 2017 asking for an explanation for the Company’s failure to pay wages and termination payments to the Employees. 

31.The Respondent by his solicitors’ letter dated 28 September 2017 (the “Reply Letter”) claimed that the directors of the Company had been trying hard to find investors to invest in the Company and the Respondent believed that the Company could continue its business and with the investors’ funds, all wages of the Employees could be fully paid. However, the investors finally refused to invest which caused the collapse of the Company and also its failure to pay the wages to the Employees. 

32.The Official Receiver was of the view that it was the Respondent’s responsibility as director of the Company to ensure that he was fully aware of the Company’s financial position for meeting the obligations to the Employees under the EO. There was no defence by alleging that the Company failed to find investors thus causing non-payment of wages to the Employees taking into account of the long period of default and the substantial amount involved. 

33.The Official Receiver contended that the Respondent had breached his duty as director in charge of the Company to ensure due payment of wages to the Employees in accordance with the provisions of the EO. 

34.The Official Receiver pointed out that two investors, namely Knappstein Jorg Michael (“KJM”) and Optimizer had injected HK$5 million on 2 October 2012 into the Company and lent US$500,000 on 2 July 2013 to the Company respectively. The Official Receiver criticized the Respondent for failing to use the funds to pay wages in arrears since 2011 to the Employees till the Company was wound up. 

35.In OR2, the Official Receiver reiterated her stance in OR1 and expressed doubts on the Respondent’s allegation in SAV1 that the Employees agreed to work for the Company despite their wages being unpaid, ie the Oral Agreements. 

36.In OR3, the Official Receiver again expressed doubts on the Oral Agreements as alleged in SAV2, KKYD and MMM. 

37.In OR4, the Official Receiver disputed the facts claimed by the Respondent in SAV3 relating to his personal background. 

The Respondent’s case and evidence

38.The Respondent stated his personal background including his education, career and sports and public services in SAV1 and providing more details and supporting documents in SAV3. 

39.The Respondent stated in SAV1 that in 2013, before the other directors resigned, the Company was managed by five directors, namely Carlye Tsui, Peter McArthur, Hans, LadisLav Ondra and the Respondent. The Company also employed Locica as its Chief Financial Officer. The Respondent said that the Company was managed by a group of directors with vast experiences and reputations with support of an experienced Chief Financial Officer. The Respondent contended that all decisions of the Company were made jointly by the board and it was not true to say that the Respondent had exercised control over all executive and financial matters of the Company as alleged in OR1. 

40.The Company’s business required substantial investments in infrastructure, equipment and software development. Since its incorporation in 2009 until its winding up in 2013, the shareholders of the Company had injected more than HK$41 million into the Company which were used mainly in the operation of the Company. 

41.KJM was the last shareholder admitted to the Company on 2 October 2012 when the Company issued 14,286 shares to him. 

42.In about May 2013, the Respondent was approached by Mana Kumar (“Mr Kumar”), the Chief Executive Officer and director of Optimizer, who indicated interest in the transaction processing platform developed by the Company. After discussions, Optimizer proposed to acquire the business of the Company by way of an asset acquisition, with the maximum purchase consideration of US$500,000. 

43.By an email dated 29 June 2013, Optimizer sent to the Respondent an indicative offer dated 28 June 2013 (the “Offer”) and a statement of intent (the “Statement of Intent”) which indicated Optimizer’s intention to purchase all the Company’s intellectual property, including in particular the transaction processing platform. 

44.The draft agreement for sale and purchase of intellectual property of the Company provided, inter alia, that:

(1) Optimizer would acquire the trade debtors, inventories, customer lists, brand names, trade names, trademarks, and all intellectual property rights and property including but not limited to the transaction processing platform (aka ISO8583 switch);

(2) Optimizer would assume responsibility for certain employee entitlements and trade creditors subsisting as at the completion date; and

(3) Optimizer would lend US$500,000 to the Company as working capital upon guarantees from the Company’s directors / major shareholder. 

45.On 2 July 2013, Optimizer lent to the Company US$500,000 (the “Loan”) upon the security of the Respondent’s personal guarantee and the issuance of the Company’s debenture (the “Debenture”) in favour of Optimizer. The Loan was used to pay some creditors, some employees, and the Company’s operation costs. The Respondent said that the usage of the Loan was with mutual consent and agreement from Optimizer. 

46.After further negotiation, the Company and Optimizer signed a term sheet which was not a binding agreement on 14 September 2013 (the “Term Sheet”). The Term Sheet provided, inter alia, that:

(1) Optimizer would still be agreeable to negotiate with the Company to buy all the Company’s business assets at US$500,000; and

(2) Optimizer acknowledged those creditors as stated on the Term Sheet, but both the Company and Optimizer would negotiate with those creditors to work out the repayment schemes.

47.Further negotiation with Optimizer was not successful. The Respondent blamed KJM, who challenged the offer from Optimizer as being too low, for ruining the Optimizer Deal. On 8 October 2013, Optimizer issued a notice of default and on 11 October 2013 appointed receivers and managers of the charged assets of the Company under the Debenture. 

48.KJM also commenced HCA 1890/2013 (the “Action”) on 5 October 2013 against the Company and the Respondent for breach of warranties made under a share purchase agreement dated 1 October 2012. 

49.The Respondent disputed KJM’s claims against him as groundless but he was unable to produce the relevant documents for this application as he was bound by the consent order settling the Action to keep the settlement agreement and all pleadings, court documents of whatsoever nature strictly confidential.  

50.As all other directors of the Company had already resigned and there was no other way to save the Company, the Respondent filed the statement of voluntary winding up with the Companies Registry on 4 November 2013. 

51.The Respondent stated that when the Company started to have financial difficulty and could not pay the wages, all directors had frankly told the employees of the Company that they could leave if they wished. However, most of them chose to stay because of their common intention to save the Company. 

52.In SAV2, the Respondent stated that there were agreements between the Company and the Employees at the time that their wages payment would be postponed but the Employees would be paid once the Optimizer Deal came to fruition, ie the Oral Agreements. He further stated that because of the Oral Agreements, the Employees did not file any Labour Tribunal claims until after the Company was put under receivership. 

53.Mr Kwok joined the Company in April 2011 as project manager and was the Company’s Vice President of Risk and Compliance when he left on 11 September 2013.  In KKYD, Mr Kwok stated that in about the last 5 months before the Company commenced winding up, due to its financial difficulty, he was not paid his salary during that period. He was aware of the fact that the Respondent had endeavoured to raise fund for the Company and for its staff. He understood that his salary would be unavoidably delayed. As he supported the Company and the Respondent, he agreed orally with the Respondent that the Company could postpone the payment of his salary until the funds could be raised. 

54.Mr Kwok stated that during that period, he was well informed by the Company and the Respondent of the whole process of the fund raising between the Company and Optimizer. 

55.Mr Mahtani joined the Company on 12 April 2010 and worked as its Vice President of Sales and Marketing until he left on 27 September 2013. In MMM, Mr Mahtani gave evidence similar to that as stated in KKYD. 

Issues before the court

56.There is no dispute that the Company was insolvent when it was put into liquidation and that it had failed to pay wages and termination payments to the Employees in accordance with the provisions of the EO. 

57.The issues before the court for this application are whether in the circumstances of this case the aforesaid failure of the Company to pay wages rendered the Respondent, being a director of the Company at the material times, unfit to be concerned in the management of a company and a disqualification order pursuant to section 168H of the Ordinance shall be issued against him. 

58.I shall first make findings of fact whether the allegations of misconduct are made out. If so, whether the proven allegations would render the director unfit. If so, for how long should the director be disqualified. 

The legal principles

59.Section 168D of the Ordinance provides that the court is empowered to make a disqualification order against a person for a specified period between one year and 15 years prohibiting such person from serving as a director or provisional liquidator of a company, being a receiver or manager of a company’s property or from being in any way (whether directly or indirectly) concerned or take part in the promotion, formation or management of a company.  

60.Section 168H of the Ordinance provides that:

“(1) The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied –

(a) that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b) that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company.

(2) For the purpose of this section, a company becomes insolvent if –

(a) the company goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up; or

(b) a receiver of the company is appointed,

and references to a person’s conduct as a director of any company or companies include, where that company or any of those companies has become insolvent, that person’s conduct in relation to any matter connected with or arising out of the insolvency of that company.”

61.Section 168I(1)(b) of the Ordinance provides that if it appears to the Official Receiver that it is in the public interest that a disqualification order under section 168H should be made, an application for the making of such an order may be made by the Official Receiver. This application is a disqualification application made by the Official Receiver pursuant to section 168I(1) of the Ordinance.  

62.Section 168K of the Ordinance further provides that:

“(1) Where it falls to a court to determine whether a person’s conduct as a director of any particular company or companies makes him unfit to be concerned in the management of a company, the court shall, as respects his conduct as a director of that company or, as the case may be, each of those companies, have regard in particular:

(a) to the matters mentioned in Part I of the Fifteenth Schedule; and

(b) where the company has become insolvent, to the matters mentioned in Part II of that Schedule,

and references in that Schedule to the director and the company are to be read accordingly.”

63.Para 1 of Part I of the Fifteenth Schedule of the Ordinance refers to “any misfeasance or breach of any fiduciary or other duty by the director in relation to the company” which are the concerns in this case. 

64.The factors which the court may take into account when assessing whether a person is unfit to be a director are not confined to those listed in the Fifteenth Schedule of the Ordinance.  Any misconduct of the respondent qua director may be relevant to the finding of unfitness, even if it does not fall within a specific provision of the statute. (Official Receiver v Chu Wai Ling [2004] 1 HKC 556, Re Copyright Ltd [2004] 2 HKLRD 113)

65.There is no statutory provision setting out test for unfitness. However, some guidance can be derived from the following authorities:

(a) Unfitness is a question of fact or what has been referred to as a “jury question”. Statements in various cases as to the approach that should be adopted in deciding this question are but statement of useful guidance and should not be taken as judicial paraphrases of the words of the statute.  (Re Copyright Ltd (supra))

(b) In addressing the question of unfitness, the court is to decide whether the conduct of which complaint is made, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.  (Re Copyright (supra), Official Receiver v James Conard Louey & Another (unrep, HCMP 2770/2003, 7 December 2006)) 

(c) The conduct must be in breach of standards of commercial morality, or some really gross incompetence which persuades the court that it would be a danger to the public if he were allowed to continue to be involved in the management of companies.  (Re Dawson Print Group Ltd [1987] BCLC 601)

(d) Not every breach of duty or impropriety calls for a disqualification order. It would place directors of companies in an unfair and unrealistic position, and would involve going further than the applicable legislation or relative authorities contemplate, if every time a director was found to have failed in his duty, he was liable to be disqualified.  (The James Conrad Louey case (supra), Re Deaduck Ltd (in liquidation) [2000] 1 BCLC 148)

(e) The court is only concerned with whether the respondent’s past conduct as a director makes him unfit to be concerned in the management of a company. The court does not need to be satisfied of any propensity of him to misconduct himself in future.  (Re Peregrine Investments Holdings Ltd (unrep, HCMP 112/2002, 4 March 2009))

(f) The fact that other director(s) of the company was also culpable and should bear part of the blame is not an extenuating factor in assessing unfitness, although this may go to mitigation.  (Re Peregrine Investments Holdings Ltd (supra))

(g) There is no requirement in law that the grounds of “unfitness” must be connected with or arising out of the insolvency of the company.  (Re Regal Motion Industries Ltd [2005] 1 HKLRD 461)

(h) In assessing unfitness, only conduct of sufficient gravity would be taken into consideration.  Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. The conduct complained of must display a lack of commercial probity. (Re Lo-Line Electric Motors Ltd and Others [1988] Ch 477) Wrong commercial decisions taken in retrospect does not necessarily mean that there was incompetence or gross incompetence on the part of the director concerned.  (Re Copyright Ltd (supra))

(i) Where the case for a disqualification order is based solely on allegation of incompetence, the Official Receiver would need to satisfy the court that the conduct complained of demonstrates incompetence of a high degree.  (Re Copyright (supra)) The burden on the Official Receiver in establishing unfitness based on incompetence is a heavy one. The reason for that is the serious nature of a disqualification order. (Re Barings plc and others (No 5) [1999] 1 BCLC 433) 

(j) The court shall also give consideration to the nature of the business of the wound-up company. As the learned judge found in Re McNulty’s Interchange Ltd (1988) 4 BCC 533 at 536 that:

“The truth of the matter was that in the field of advanced technology there was a commercial invention which appeared to have a very good future, in relation to which there was a shortage of capital for research and development and the necessary finance, so it was thought, to cover that shortfall had been raised. It may be that wrong commercial decisions were taken. But I deplore the suggestion that a director who makes what in retrospect appears to be a commercial misjudgement is in some way acting in a manner which is culpable so as to justify disqualification … …”

66.The burden of proof is on the party seeking to establish that the statutory requirements for disqualification are satisfied, namely the Official Receiver.  (Re Verby Print for Advertising Ltd [1998] BCC 652) The standard of proof is the civil standard of balance of probabilities. The more serious the allegation, the more cogent the evidence the court will require. (Re Copyright (supra)) The grave nature of an allegation of unfitness has to be borne in mind when deciding if the allegation is made out. (Re Verby Print (supra)) The court has to be alert to the danger of hindsight when analyzing the position of the company concerned at the time and the signals then available to the directors in the period before the company became insolvent. The court must be careful not to fall into the trap of being too wise after the event.  (Re Living Images Ltd [1996] 1 BCLC 348)  

67.The court recognizes that the consequence of a disqualification order is serious; the order will prevent the respondent being concerned in the management of any company and involves a “substantial interference with the freedom of the individual” and the primary purpose of the jurisdiction for a disqualification order is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others.  (Re Copyright (supra)) 

68.The Ordinance imposes a duty on the court to disqualify unfit person to be director of companies. If the grounds for disqualification are established, the decision to disqualify is not a discretion but the period of disqualification within the statutory period of minimum one year and maximum of 15 years under section 168H(4) of the Ordinance is a matter of discretion. It must reflect the gravity of the offence and contain deterrent elements. The approach is to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for mitigation factors. Factors relevant to the period of disqualification were inter alia: (i) the likelihood of reoffending; (ii) the director’s general ability; (iii) his conduct as a director; (iv) his age and state of health; (v) the length of time he had been in jeopardy; (vi) whether he had admitted that his conduct rendered him unfit to be a director; and (vii) the length of his co-directors’ disqualification.  (Re Citrend [2008] 5 HKLRD 279)  

69.The following three broad categories of length of disqualification have been adopted by the court (Re Sevenoaks (Retail) Stationers Ltd [1991] Ch 164):

(1) The top bracket of disqualification for periods over ten years should be reserved for particularly serious cases.  These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again. 

(2) The minimum bracket of disqualification for five years or less should be applied where, though disqualification is mandatory, the case is, relatively, not very serious. 

(3) The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket. 

Discussion

70.The Official Receiver’s complaint against the Respondent in this case was for failure to pay wages for various periods in breach of the provisions of the EO. 

71.The Respondent relied on the Oral Agreements and the ongoing of the Optimizer Deal to submit that the Official Receiver’s compliant against him was unjustified. 

72.The Official Receiver relied on the LT Awards to substantiate her complaint against the Respondent. The Respondent was one of the Employees claimed at the Labour Tribunal. The Official Receiver did not rely on the Respondent’s own claim for this application. Amongst the various claims of other employees of the Company awarded by the Labour Tribunal, the following claims were relevant to the Official Receiver’s complaint:

(1) underpayment of wages for the period before January 2013 (the “Pre-2013 Period”);

(2) underpayment of wages for the period from 1 January 2013 to 30 April 2013 (the “1^st Period”); and

(3) arrears of wages for the period from 1 May 2013 to dates of termination in September 2013 (the “2^nd Period”). 

73.The Respondent took issue on the Official Receiver referring to matters pleaded by KJM in the statement of claim of the Action and the underpayment of wages to the Company’s employees for the Pre-2013 Period and the 1^st Period. 

74.Mr Wong for the Respondent complained that in OR1, the Official Receiver only took issue on the non-payment of wages for the 2^nd Period. He contended that the matters pleaded in the statement of claim of the Action had no relevancy to such complaint. As such, the Official Receiver should not be allowed to refer to the statement of claim of the Action in this application. 

75.Mr Wong submitted that the underpayment of wages for the Pre-2013 Period and the 1^st Period was not part of the complaint as set out in OR1 requiring the Respondent to answer. It was unfair to the Respondent for the Official Receiver to rely on these underpayment claims for this application at the hearing. 

76.Miss Leung relied on Re Copyright (supra), Re Bath Glass Ltd (1988) 4 BCC 130 and Re Barings plc (supra) to contend that any misconduct of the Respondent qua director might be relevant to the finding of unfitness, even if it did not fall within a specific provision of the statute and unfitness might be demonstrated by conduct which does not involve any breach of duty. 

77.In Re Citrend (supra), Cheung JA stated that:

“21. The Court should adopt a commonsense, practical and flexible approach to case management and admit evidence which is of probative value in considering whether:

1. The director is unfit within the meaning of the Ordinance.

2. If so, the length of the disqualification.”

78.I have no disagreement with Miss Leung’s aforesaid proposition subject to a qualification that those matters relied on for the application have to be made known to the Respondent to allow reasonable opportunities for the Respondent to answer the case against him. As pointed out by Sir Nicolas Browne-Wilkinson VC in Re Lo-Line Electric Motors (supra) that the power to disqualify, if exercised, involved a substantial interference with freedom and penal consequences, natural justice required that a person facing disqualification should know the case he had to meet. If the Official Receiver changed her case without the Respondent being given proper notice of the new and modified allegations and an opportunity to put in evidence to meet the new charge, the court would not consider that charge in determining whether the Respondent should be disqualified as a director. 

79.The usual boundary of litigation in a writ action is defined by pleadings. In Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, Ma CJ said that:

“21. It should by now really be quite unnecessary to issue yet another reminder on the rationale behind pleadings. The basic objective is fairly and precisely to inform the other party or parties in the litigation of the stance of the pleading party (in other words, that party’s case) so that proper preparation is made possible, and to ensure that time and effort are not expended unnecessarily on other issues: Wing Hang Bank Ltd v Crystal Jet International Ltd [2005] 2 HKLRD 795, 799 [6(1)].”

80.Ma CJ further pointed out that in writ action where witnesses were involved, it would be the pleaded issues that defined the scope of the evidence. In the trial of a writ action where evidence was given by witnesses, it became extremely important that each side knew exactly what were the live issues. 

81.This application before me is not a writ action and no pleadings have been served. The parties’ respective cases were set out in the reports filed by the Official Receiver and affidavits/affirmations filed by the Respondent. However, I am of the view that the basic objective of fairly and precisely to inform the other party of one’s case so that proper preparation can be made shall still apply and the Respondent shall not be taken by surprise. 

82.Rule 4(1) of the Disqualification Rules provides that there shall, at the time when the summons is issued, be filed in court evidence in support of the application for a disqualification order and copies of the evidence shall be served with the summons on the respondent. Rule 4(3) of the Disqualification Rules further provides that in an application made under section 168I(1) of the Ordinance, there shall in the Official Receiver’s report(s) be included a statement of the matters by reference to which the respondent is alleged to be unfit to be concerned in the management of a company. 

83.As such, the Official Receiver is statutorily required to set out evidence in support of her complaint against the Respondent in this case in OR1 and to include in her reports a statement of the matters by reference to which the Respondent is alleged to be unfit to be a director. 

84.Dillon LJ held in Re Sevenoaks (supra) at 177 B-D that:

“The court has a discretion to allow the official receiver to rely on the altered or additional allegation provided that can be done without injustice to the accused director. What justice requires must depend on the circumstances of the particular case. In some cases it would be necessary for the official receiver to have given prior notice of the new allegation before the effective hearing of the disqualification application, and to raise it for the first time in the course of the hearing would be too late. In other cases, when a new allegation is raised for the first time in the course of the hearing, it may be appropriate to allow an adjournment for further evidence to be obtained. In yet other cases, particularly where the director is represented by experienced counsel, counsel may be able to take a new or altered allegation in his stride without any adjournment. But the paramount requirement on this aspect is that the director facing disqualification must know the charges he has to meet: see In re Lo-Line Electric Motors Ltd [1988] Ch 477, 486.”

85.Mr Wong did not seek adjournment of the hearing but sought leave to adduce the Employment Contracts and the Round 1.7 List as further evidence. Miss Leung did not oppose the Respondent adducing the aforesaid further evidence and I granted leave at the hearing for the Respondent to adduce these further evidence. Mr Wong further addressed the court on those matters in his submissions. 

86.I shall first deal with Mr Wong’s objection for the Official Receiver to refer to the statement of claim of the Action and the underpayment of wages for the Pre-2013 Period and the 1^st Period. After that I shall set out my findings on the Oral Agreements and the Optimizer Deal. I shall then set out my finding on the Official Receiver’s complaint against the Respondent for non-payment of wages for the 2^nd Period to see whether the Respondent is unfit to be concerned in the management of a company and a disqualification order shall be made against him. If so, for how long.  

The statement of claim of the Action

87.In Part II of the Joint Statement, the Official Receiver stated that in the hearing for this application she would refer to the various allegations against the Company and the Respondent made by KJM in the statement of claim of the Action. The Respondent objected. 

88.The Official Receiver contended that the Action was relevant in that it showed how the Respondent had run and managed the Company at the time of having financial difficulties and the Respondent’s misconduct in failing to protect the interest of the Employees. The Official Receiver pointed out that KJM injected $5 million into the Company on about 2 October 2012 but some of the Employees were not paid their full wages since 2011. Similar situation happened when Optimizer had lent the Company US$500,000 on about 2 July 2013 but some of the Employees had still not been paid their wages since 1 May 2013. 

89.The Respondent contended that the various allegations made by KJM against the Company and the Respondent in the Action were allegations of dishonesty and/or fraud which were not supported by evidence. They were mere unproven allegations and were irrelevant to this application. As the claims against the Respondent in the Action had been settled by a consent order which provided for all pleadings, court documents and other correspondence or documents of whatsoever nature in relation to the Action to be kept strictly confidential, the Respondent was not in a position to answer or adduce evidence to any of the allegations. Thus, any inclusion, reference and/or reliance of the allegations were highly unfair and prejudicial. 

90.The Official Receiver had in the Enquiry Letter enquired with the Respondent on the claims of KJM in the Action against the Company and the Respondent. The Official Receiver referred to the writ and the statement of claim of the Action in the Enquiry Letter. In OR1, the Official Receiver also referred to the writ and the statement of claim of the Action as part of the background information. 

91.However, in the part of “Evidence of Unfit Conduct” of OR1, the Official Receiver did not refer to the claims of KJM but only referred to breach of director’s duty to ensure due payment of wages to the Employees in accordance with the provisions of the EO and breach of director’s duty to ensure due payment of mandatory provident funds contributions in respect of Mr Dayaram in accordance with the provisions of the MPFSO. 

92.Miss Leung again referred to the allegations made in the statement of claim of the Action in her opening submissions. 

93.At the hearing, the Official Receiver did not adduce any evidence on the alleged dishonesty or fraud raised in the statement of claim of the Action and Miss Leung did not cross-examine the Respondent on these matters. Miss Leung made no reference to these matters pleaded in the statement of claim of the Action in the OR’s Closing Submissions. As such, the Official Receiver did not rely on the alleged dishonesty or fraud pleaded in the statement of claim of the Action for this application and I do not have to make any findings on these matters for the purpose of this application. 

94.The Official Receiver did refer to the investment of HK$5 million made by KJM in October 2012 to submit that there was no explanation as to why the Company did not pay the Employees their outstanding wages at the end of 2012 and why the Company had continued to delay payment of wages, even after the injection of a capital fund of HK$5 million by KJM. The investment of KJM into the Company in October 2012 is not in dispute. Such investment had been referred to in the Enquiry Letter and OR1. It had also been referred to in para 34 of SAV1. In referring to the investment of KJM to the Company to support her application, the Official Receiver does not have to rely on any disputed matters pleaded in the statement of claim of the Action. 

95.I see no valid ground to object to the Official Receiver referring to the investment of KJM in this application if such investment turns out to be relevant. 

Underpayment of wages claims

96.Mr Wong contended that the underpayment of wages claims for the Pre-2013 Period and the 1^st Period did not form part of the Official Receiver’s complaint for this application and the Official Receiver should not be allowed to rely on these underpayment of wages claims in support of this application. 

97.Miss Leung submitted that it was important for the court to be informed of the full background of the Company and the Respondent’s conduct relevant to the Official Receiver’s complaint. It was the Official Receiver’s duty to bring to the court’s attention the evidence relevant to any non-payment or underpayment of wages in this case. Miss Leung further submitted that the non-payment or underpayment of wages prior to May 2013 at the very least demonstrated that although the instances of non-payment of wages from May to September 2013 caused the Employees to terminate their employment with the Company, there were other instances of failure to pay wages committed by the Company under the management of the Respondent prior to May 2013.  

98.In OR1, the Official Receiver referred to the underpayment of wages for the 1^st Period as part of the background information for this application. 

99.In the Joint Statement, the parties agreed that the Company issued letters to the Employees on 10 May 2013 (the “May Letters”) and 1 August 2013 (the “August Letters”) acknowledging the shortfall of wages from January to June 2013 and claimed that the same would be paid by the Company in June or July 2013. The parties further agreed that the aforesaid letters were signed by the Respondent and up till termination of their employment, the Employees were still owed such shortfall. 

100.In the part of “Evidence of Unfit Conduct” in OR1, the Official Receiver referred to the Enquiry Letter requesting the Respondent to provide an explanation on the outstanding wages due by the Company to the Employees and the Reply Letter from the Respondent’s solicitors. The Official Receiver then set out her complaint on outstanding wages against the Respondent as follows: 

“19. As the total amount of wages in arrears and other termination payments owed to the former employees was substantial and period of default was almost 5 months’ time (i.e. from 1 May 2013 to 27 September 2013), the Official Receiver does not consider the Respondent’s explanation to be acceptable. … … It is therefore the Official Receiver’s case that the Respondent has breached his duty as director in charge of the Company to ensure due payment of wages and other termination payments to the employees in accordance with the provisions of the EO. As mentioned in paragraphs 14(iii) and 14(v) hereof, [KJM] had injected funds of HK$5,00,000.00 into the Company on 2 October 2012 and the Company had also borrowed USD500,000.00 from Optimizer on 2 July 2013. However, the Company still failed to pay the wages in arrears since May 2013 to the employees till the Company was wound up.” (Emphasis added)

101.This stance of the Official Receiver was reiterated in OR2 when the Official Receiver stated that:

“8. The Official Receiver’s application for disqualification against the Respondent was based on two allegations of misconduct as particularized in paragraphs 15 to 25 of [OR1]. The crux of the matter is whether the Respondent has breached his director’s duty to ensure due payments of wages and MPF contributions to the employees of the Company in accordance with the provisions of the EO and the MPFSO. As set out in paragraphs 16 to 19 of [OR1], the former employees were owed wages for 5 months (ie from 1 May to 27 September 2013) and other termination payments in the total amount of HK$5,100,541.49 according to [the LT Awards] which the amount is substantial.” (Emphasis added)

102.It can be seen that although OR1 referred to “wages in arrears and other termination payments”, the principal complaint of the Official Receiver as set out in OR1 was “breach of director’s duty to ensure due payments of wages to the employees in accordance with the provisions of the EO” and the specific period referred to in OR1 was from 1 May 2013 to 27 September 2013 (ie the 2^nd Period). Other than referring to the LT Awards and the underpayment of wages claims for the 1^st Period as background information, the Official Receiver made no further reference to the underpayment of wages claims for the Pre-2013 Period and the 1^st Period in other parts of her reports. The Respondent had not been asked to answer specifically these underpayment of wages claims in this application. 

103.The Official Receiver did refer to the LT Awards in her reports for this application and these underpayment of wages claims formed part of the LT Awards. Furthermore, the Official Receiver did specifically refer to the underpayment of wages for the 1^st Period as background for this application in OR1. In such circumstances, there was no surprise to the Respondent for the Official Receiver to refer to these underpayment of wages claims at the hearing for this application as background. As Kwan J (as she then was) pointed out in Re Copyright (supra) that:  

“29. Any misconduct of the respondent qua director may be relevant to the finding of unfitness, … … In assessing the question of unfitness, the court is to decide whether the conduct of which complaint is made by the Official Receiver, “viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies” ….”

104.I am of the view that although the underpayment of wages claims for the Pre-2013 Period and the 1^st Period did not form part of the Official Receiver’s complaint for this application, it is not doing any unfairness to the Respondent for the Official Receiver to refer to these underpayment of wages claims at the hearing as background and the court may take these matters into consideration when considering whether the Official Receiver’s complaint of unfitness in respect of non-payment of wages for the 2^nd Period is established under section 168H of the Ordinance. 

105.As I am of the view that these underpayment of wages claims do not form part of the Official Receiver’s complaint for this application, my findings on these claims (if relevant) shall only form background for this application. 

106.Mr Wong relied on Secretary of State for Trade and Industry v Bairstow [2004] Ch 1 to submit that factual findings in previous civil proceedings (ie the LT Awards in this case) were not admissible in subsequent disqualification proceedings as evidence of the facts so found. Miss Leung referred to Official Receiver v Stojevic [2007] EWHC 1186 (Ch) to submit that the Disqualification Rules provided that the written report filed by the Official Receiver should be treated as if it had been verified by affidavit by her and should be prima facie evidence of any matter contained in it. Such implied statutory exception to the hearsay rule rendered the LT Awards exhibited to OR1 admissible in this disqualification application.

107.In the Stojevic case, the court referred to judgment containing findings of primary and secondary fact and evaluative judgments. In the case before me, the LT Awards were obtained in default of the Company’s appearance in the proceedings in the Labour Tribunal. The Labour Tribunal made no findings of fact in the LT Awards. As such, the LT Awards are not to be taken as evidence to prove the truth of the claims covered by the LT Awards. 

108.Furthermore, in the Stojevic case (supra), the learned judge pointed out at para 73 of the judgment that: “if any finding [in the judgment of relied on by the Official Receiver] is challenged and direct evidence is not adduced to support the finding, the disqualification court may decide not to follow or adopt the findings concerned.” The LT Awards are evidence showing that the Employees did claim underpayment of wages for the Pre-2013 Period and the 1^st Period against the Company and the Labour Tribunal did award such claims to the Employees. The claim forms filed by the Employees at the Labour Tribunal, like pleadings at common law “are not to be treated as positive allegations of the truth of the facts therein, for all purposes, but only as statements of the case of the party, to be admitted or denied by the opposite side, and if denied to be proved, and ultimately submitted for judicial decision.”  (Boileau v Rutlin (1848) 2 Exch 657 at 663)

Underpayment of Wages for the Pre-2013 Period

109.According to the LT Awards, the Company underpaid wages to Mr Mahtani, Locica and Hans for the Pre-2013 Period. 

110.The underpayment claim of Mr Mahtani was for the period from 1 July 2011 to 31 December 2012 for the sum of $15,000 for each month. 

111.The underpayment claim of Locica was for the period from 1 August 2012 to 31 December 2012. The amounts of her claim for underpayment of wages during this period varied from month to month.

112.The underpayment claim of Hans was for the period from 1 January 2011 to 31 December 2011 for the sum of $33,800 for each month.  

113.To answer the Official Receiver’s case on the alleged underpayment of wages to the Company’s employees for the Pre-2013 Period, the Respondent produced the Employment Contracts and the Round 1.7 List at the hearing. 

The claim of Mr Mahtani

114.The Respondent’s case was that Mr Mahtani’s claim for $15,000 per month from July 2011 to December 2012 was for the commission referred to in Mr Mahtani’s employment contract. However, such commission was payable to Mr Mahtani only when the Company achieved certain sale target but the Company had not achieved such sale target during Mr Mahtani’s employment with the Company. The Respondent referred to the “Commission” clause in the employment contract of Mr Mahtani which provided that:

“Commission of 1^st year revenue is 3% paid quarterly. 1^st year target revenue is HK$12,000,000 subject to review after 6 months.”

115.The Respondent said that the target revenue had subsequently been reduced to $6 million but the Company was still unable to meet the target. 

116.Mr Mahtani confirmed the aforesaid case of the Respondent when Mr Mahtani testified at the hearing. Mr Mahtani said that his underpayment of wages claim for the Pre-2013 Period was included in his claims at the Labour Tribunal by the Tribunal Officer after he provided information on his employment to the Tribunal Officer. He simply signed the claim form prepared by the Tribunal Officer. He agreed that it was a mistake to include such claim in his claim form filed with the Labour Tribunal.  

117.Miss Leung referred to one of the August Letters adjusting Mr Mahtani’s salary which stated that: “[Mr Mahtani’s] monthly guaranteed commission of HK$15,000 remains unchanged” to submit that Mr Mahtani’s monthly commission was “guaranteed” and not conditional upon meeting of the target revenue. Miss Leung’s aforesaid contention was contradicted by the oral evidence of the Respondent and Mr Mahtani as well as the employment contract of Mr Mahtani. The aforesaid letter said that the monthly commission “remains unchanged”. That letter was concerning with adjustment of Mr Mahtani’s salary. It did not mean to make changes to Mr Mahtani’s contractual commission entitlement. The sentence referred to by Miss Leung only confirmed that Mr Mahtani’s commission arrangement would remain unchanged. The reference to his commission as “guaranteed commission” is neither here nor there. It did not change Mr Mahtani’s entitlements under his employment contract with the Company. The letter only reiterated that Mr Mahtani would receive the “guaranteed commission” promised in his employment contract when the Company hit the target revenue and such contractual entitlement was not affected by the salary adjustment stated in the said letter. 

118.Miss Leung criticized Mr Mahtani as an unreliable witness for making untruthful claims at the Labour Tribunal or lying to this court to suit the Respondent’s case. Miss Leung also criticized the Respondent for failing to correct Mr Mahtani’s claim at the Labour Tribunal. She submitted that this casted doubt on the general credibility of Mr Mahtani and the Respondent.  

119.The Respondent was not representing the Company in the Labour Tribunal proceedings. As a co-claimant, the Respondent was not in a position to comment on how Mr Mahtani should put forward his claims at the Labour Tribunal.  

120.Mr Mahtani’s evidence and the Respondent’s case was supported by the terms of Mr Mahtani’s employment contract. Mr Mahtani’s evidence was that his claim for underpayment of wages for the Pre-2013 Period was made by mistake or miscommunication between him and the Tribunal Officer. 

121.The Official Receiver adduced no evidence to rebut the evidence of the Respondent and Mr Mahtani. I accept the evidence of the Respondent and Mr Mahtani on this matter which is supported by the employment contract of Mr Mahtani. I find that in the circumstances of this case, the Respondent had not committed any misconduct in respect of Mr Mahtani’s claim for underpayment of wages at the Labour Tribunal for the Pre-2013 Period. 

The claim of Locica

122.Locica claimed underpayment of wages from August to December 2012 in the total sum of $143,600. 

123.Miss Leung submitted that the Round 1.7 List showed that as at 6 February 2013, there were outstanding wages in the total sum of around $2 million owed by the Company to the Respondent, Hans and Locica. 

124.The Respondent’s case for Locica’s claim for underpayment of wages for the Pre-2013 Period was that in Locica’s employment contract there was a “Share Options” clause which provided that:

“Share Options: All employees are eligible to receive options to purchase shares in the company. The board of directors, in their absolute discretion, can designate shares to be available as share options and can designate the price and time at which these options can be exercised. The allocation of the option (right) to purchase shares to employees will be done by board of directors in consultation with management.”

125.The Respondent’s evidence was that the way in which employees exercised the share options was that their salaries (both past outstanding and future) might be used to convert into shares of the Company. The Respondent called this “sweat equity” and said that such “sweat equity” was common amongst startup companies as incentive for founding members who understood the risk of working in an innovation startup company but found the potential of shares in the company more valuable to them than direct salary payments. 

126.Mr Wong submitted that such share purchase by off-setting salaries could not be done regularly on a monthly basis and there was going to be time lapse between salary payment date and exercise of share option. The Respondent’s case was that it was accepted and agreed by Locica for parts of her salary to be outstanding, not being paid in moneys immediately but be used later for acquiring “sweat equity”. Mr Wong further submitted that this had to be a practice known to and voluntarily accepted by Locica who was the Chief Financial Officer with most knowledge of the financial situation and pay-roll of the Company.  

127.The Round 1.7 List showed that Locica had subscribed for 1,210 shares of the Company at the consideration of $302,500 in that allotment exercise and such consideration was off set from her salary. This lends support to the practice contended by Mr Wong. After the Round 1.7 shares allotment, Locica’s shareholding in the Company increased from 10,067 shares to become 11,277 shares. This shareholding of Locica was recorded in the annual return of the Company dated 28 April 2013. It is consistent with the suggestion that the Round 1.7 took place on about 6 February 2013. 

128.Locica’s claim for underpayment of wages for the Pre-2013 Period was from August to December 2012. As such, it should be balance of her unpaid wages after paying for her shares subscription in the Round 1.7 shares allotment. The Respondent’s case was that such balance wages were kept for future subscription of the Company’s shares. In Optimizer’s email dated 29 June 2013, the arrangement for “sweat equity shares” was also referred to. In that email, Optimizer agreed that the “sweat equity shares” for the Respondent, Hans and Locica would be HK$1.26 million. Locica would take 25%, ie HK$315,000, which was more than Locica’s claim for underpayment of wages for the Pre-2013 Period in the sum of HK$143,600. 

129.The Official Receiver adduced no evidence to rebut the Respondent’s case. The Respondent’s case is supported by Locica’s employment contract with the Company. The Round 1.7 List showed that the share option scheme did operate in the way as described by the Respondent. The aforesaid email from Optimizer also supported the Respondent’s case. I find that the Respondent has proved his aforesaid case on balance of probabilities in respect of Locica’s claim for underpayment of wages for the Pre-2013 Period. If the outstanding wages of Locica were kept by the Company with the agreement of Locica for future subscription of shares of the Company and the Company failed before the next allotment exercise, the Respondent cannot be said to be at fault in respect of this claim of Locica for underpayment of wages for the Pre-2013 Period. 

The claim of Hans

130.The Respondent’s case for the underpayment of wages claim of Hans for the Pre-2013 Period was that in the employment contract of Hans with the Company, there was provision providing for reduction of his monthly salary to $63,300 during the “business startup period”. Clause 2(a) of the employment contract of Hans provided that:

“During the business startup period, your salary will be reduced to $63,300 per month. The end of the startup period will be when the company has monthly cash flow and monthly profits sufficient to pay your otherwise contractual salary and have the company remain profitable. You understand that you and other employees will be accepting reduced salary for an indeterminate period of time and that the change to full salary will only occur when all such employees can change to full salary and have the company remain profitable.”

131.The Respondent’s evidence was that the Company had never made profit. As such, the amount of wages paid to Hans during the Pre-2013 Period were his “contractual reduced salary”. In his claim form filed in the Labour Tribunal, Hans confirmed that he had been paid $63,300 each month for the period from January to December 2011 claimed by him. His claim for $38,000 per month from that period was the difference between his “full salary” of $$97,100 and his “contractual reduced salary” of $63,300. 

132.Miss Leung criticized the Respondent for increasing the “full salary” of Hans over the years when Hans was actually paid the “reduced salary”. Miss Leung said that this was “to disregard the Company’s contractual obligations in relation to wages.” (See para 45 of the OR’s Closing Submissions”) With respect, I disagree. 

133.The increase of Hans’ “full salary” over the years would entitle Hans to receive a salary higher than his starting “full salary” (which was only $88,300 according to Hans’ employment contract) when the Company should become profitable. Before the Company became profitable, the parties agreed that the contractual obligation of the Company was to pay the “reduced salary”. I do not see how such arrangement was to disregard the Company’s contractual obligations in relation to wages when the Company’s contractual obligations in relation to Hans’ wages were to pay the “reduced salary” when the Company was not profitable and to pay the “full salary” when the Company became profitable.  

134.As in the case of Mr Mahtani, Miss Leung criticized the Respondent for not correcting Hans’ claim for underpayment of wages at the Labour Tribunal. The Respondent was not representing the Company in the Labour Tribunal proceedings. As a co-claimant, the Respondent was not in a position to comment on how Hans should put forward his claims at the Labour Tribunal.  

135.Miss Leung pointed out that the Respondent had also claimed at the Labour Tribunal against the Company based on his “full salary” instead of his “reduced salary”. She submitted that either Hans and the Respondent were in fact underpaid or the Respondent had knowingly claimed on the basis which he was not entitled to claim. She submitted that either case would cast doubt on the credibility of the Respondent. 

136.As to the assessment of the credibility and/or reliability of a witness’s evidence, Andrew Chung J had stated the following principles in Star Glory Investment Ltd v Kai Tuo (HK) Technology Co Ltd and Others (unrep, HCA 3523/2002, 123 August 2005) at para 12 of the judgment:

“There are two objective tests for assessing a witness’s credibility regarding a matter to which he has testified: -

(a) whether that part of his testimony is inherently plausible or implausible;

(b) whether that part of his testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable (an example often given of such evidence is contemporaneous documents).

Further, where it is shown that a witness has been discredited over one or more matters to which he has testified (using the above tests), this fact is relevant to the assessment of his overall credibility. Likewise, regards may be had to a witness’s motive for deliberately not giving truthful testimony. For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest.”

137.In Hui Cheung Fai v Daiwa Development Ltd (unrep, HCA 1734/2009, 8 April 2014) DHCJ Eugene Fung SC pointed out in para 77 of the judgment that: “Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.”

138.I do not rule out the possibility of the Respondent and even Mr Mahanti or Hans exaggerating their claims at the Labour Tribunal. I shall bear this in mind when considering their evidence but it does not mean that I shall reject all their evidence. The court has to assess their evidence on each issue in the context of all available evidence especially those contemporaneous documents. 

139.The Official Receiver adduced no evidence to rebut the Respondent’s aforesaid case on Hans’ underpayment of wages claim for the Pre-2013 Period. The Respondent’s aforesaid case was supported by the employment contract of Hans. I find that the Respondent has proved his case on balance of probabilities. I find that Hans had been paid his “contractual reduced salary” from January to December 2011. This was his contractual entitlement for salary for that period of time. 

140.As Hans had already received his contractual salary albeit “reduced” in 2011, I see no case in accusing the Respondent of committing misconduct in respect of Hans’ claim for underpayment of wages for the Pre-2013 Period. 

Underpayment of Wages for the 1^st Period

141.The Labour Tribunal had awarded underpayment of wages for the 1^st Period to the Employees claimed at the Labour Tribunal. 

142.According to the evidence adduced by the Respondent and his witnesses, the arrears of wages for the 1^st Period were in fact adjustments of wages promised by the Company to the Employees in May and August 2013 and the adjustments were agreed to have retrospective effect from 1 January 2013. Eight letters for salary increments signed by the Respondent were exhibited to OR1. They were the May Letters and the August Letters. The May Letters stated that the shortfall from January to April 2013 would be paid in June 2013 and the August Letters stated that the shortfall from January to June 2013 would be paid in July 2013. 

143.Miss Leung pointed out in her cross-examination of the Respondent that there was a clear discrepancy on the date of the August Letters as it was impossible for the Company to promise on 1 August 2013 to pay the shortfall in July 2013. She suggested that it was more likely that the August Letters were issued in July instead of August. The Respondent did not disagree with Miss Leung and I accept Miss Leung’s suggestion as logical.  

144.As Mr Wong for the Respondent rightly pointed out that the alleged underpayment of wages for the 1^st Period stemmed from the increment of salary after 10 May 2013, any allegation that the Company should have paid such salary in January to April 2013 was illogical. He submitted that the underpayment of wages claims for the 1^st Period should be dealt with together with the arrears of wages claims for the 2^nd Period. 

145.As the underpayment of wages claims for the 1^st Period arose from commitments made by the Company after 10 May 2013, the investment of KJM in October 2012 would have little relevancy as no evidence had been adduced to show that the investment of KJM in October 2012 had not been fully utilized by the Company by May 2013. The fact that the May Letters and the August Letters put end of June and July 2013 respectively as the target dates of payment for these retrospective salary adjustments suggested that the funds from KJM had already been exhausted and the Company was looking at the funds expected to be generated by the Optimizer Deal to fulfil its commitments to the Employees. 

146.The Respondent’s case was that the salary adjustments were offered as reward and incentive to important staff who had to be retained as they were essential to keep operation and consistency of the Company. The continuity had to be maintained as and when the Optimizer Deal was closed. 

147.Miss Leung submitted that at the time of salary increment, Mr Mahtani’s wages had not been duly paid and he had already agreed to stay with the Company without getting his salary. Mr Mahtani’s evidence was that the salary increment was to assure him that when funds came to the Company, he would be compensated. Miss Leung contended that the salary increment was not provided to Mr Mahtani as an incentive to retain him. I do not agree. 

148.Although Mr Mahtani’s wages were then outstanding and he was still working for the Company when he was given the salary increment by one of the August Letters, this does not mean that he would stay with the Company until successful conclusion of the discussions with outside investors. By promising to compensate him when funds came to the Company, it would certainly provide more incentive for Mr Mahtani to stay with the Company until funds were successfully raised by the Company.  

149.The salary increments were promised to the Employees in anticipation of a successful deal with outside investors. When the Company agreed with the Employees for the wage adjustments in July/August 2013, the Company was already in arrears of wages to the Employees. The ability of the Company to honour its promise of the wage adjustments wholly relied on a successful deal with outside investors. 

150.The August Letters stated that the increased wages would be paid in July 2013. As discussed above, it is likely that the August Letters were mistakenly dated and the discussions had to be prior to July 2013. At that time the Respondent was quite optimistic on the Optimizer Deal and he was attempting to secure better salaries for the Company’s employees when their employment would be transferred to Optimizer upon successful closing of the Optimizer Deal. As such, the claims for underpayment of wages for the 1^st Period by the Employees at the Labour Tribunal were not caused by the Company not paying full wages to the Employees at the material times but caused by the retrospective effect of the arrangements. Such underpayment was not caused by mismanagement of the affairs or finance of the Company. Instead, it was the result of an unsuccessful attempt of the Respondent to secure better employment terms for the Employees upon a successful Optimizer Deal which never occurred. 

151.In para 67 of the OR’s Closing Submissions, Miss Leung submitted that the salary increments for the 1^st Period were “to deceive Optimizer and to inflate the salaries of the employees, so that Optimizer had to pay more for future salaries if it were to take over the Company and retain the same staff.”  

152.Miss Leung referred to the evidence of Mr Kwok when he said that the Respondent approved his performance and when the Company was sold to Optimizer, he would also be transferred to Optimizer with the same salary. Miss Leung submitted that Mr Kwok’s salary was increased so that he could receive an increased salary from Optimizer after the take-over. This confirmed her aforesaid submissions.  

153.I am of the view that it is unfair to the Respondent if the Official Receiver may rely on the aforesaid allegation for this application. Mr Wong rightly pointed out that such allegation was never stated in any of the Official Receiver’s reports and such allegation was never put to the Respondent. This serious allegation of deception had never been put to the Respondent at any stage of the proceedings before the OR’s Closing Submissions. The Respondent had not been given any opportunities to answer such serious allegation made against him. 

154.The Respondent’s evidence was that the first batch of salary increment took place on about 10 May 2013. It was more than one month before the Offer was received on 29 June 2013 although according to the Respondent’s evidence discussions with investors (including Optimizer) had been going on for a while. In the Statement of Intent accompanying the Offer, Optimizer stated that it intended to keep and maintain as much of the operational team members of the Company as possible. It was expressly stated that: “however, the final decision is subject to further meeting discussion in Singapore on or around the 10th of July 2013.” The Statement of Intent stated further that: “Optimizer intends to make every reasonable consideration toward offering appropriate positions with revised job descriptions, performance objectives, KPI Scorecards and remuneration plan for the executive team.” (Emphasis added) 

155.When the Company granted salary increments to the Employees, there was no commitment from Optimizer that it would take up all the Employees at the salary promised to them by the Company. The adjustments at most were attempts to place the Employees at a better position of negotiation. To say that the salary increment exercise was an exercise to deceive Optimizer is far-fetching and not supported by evidence. 

156.The Respondent’s evidence was that Optimizer had conducted interviews with individual employees of the Company to decide who would be taken on board if the Optimizer Deal should succeed. Whether Optimizer would take on a particular employee and on what terms were matters to be discussed between Optimizer and the employee concerned and to be decided by Optimizer. The final say was with Optimizer. This is not a case where Optimizer was obliged to take on all the employees of Company at their then employment terms (including wages) with the Company. In fact, in the Offer, it was stated that one of the key assumptions for the Offer was that: “All operating costs including staff costs and property rental costs reflect market rates”. It is an over-simplification to suggest that by adjusting the salary of the Employees before completion of the Optimizer Deal, the Employees would get the “adjusted salary” if they successfully transferred to Optimizer.

157.This serious allegation was made without supporting evidence and without affording a reasonable opportunity for the Respondent to respond to. It will do gross injustice to the Respondent if the Official Receiver may rely on such allegation for this application. I reject this contention of Miss Leung. 

The Oral Agreements

158.The Respondent alleged that the Employees had agreed with the Company to delay payment of their wages until conclusion of the Optimizer Deal. In SAV2, the Respondent stated that “there was in fact an agreement between the Company and the employee at the time that their wages payment would be postponed, but the employees would be paid once the Optimizer deal comes to fruition”.  (Para 6 of SAV2)

159.The Respondent’s evidence was that he had met the employees of the Company and up-dated them on the progress of the Optimizer Deal. The Respondent’s case was that the employees of the Company were being informed of the financial situation of the Company and the progress of the Optimizer Deal. Some chose to stay and help the Company during its difficulties. Other decided to leave and the Company had paid their employment entitlements. For those employees who chose to stay, they agreed that the Company would pay their wages once the Optimizer Deal was concluded and the funds come in. The Respondent stated in SAV2 that because of their agreement with the Company for postponing of wages payment, the employees, including himself, did not file any Labour Tribunal claims until after the Company was put under receivership. 

160.The Respondent gave evidence on the Oral Agreements at the hearing and called Mr Kwok and Mr Mahtani to testify at the hearing on the Oral Agreements. 

161.The Respondent’s case was that there were a series of “townhall” meetings before the Company failed to pay the May 2013 wages to its employees. All employees were present at those meetings when he informed the employees that the Company was unable to pay their wages. The evidence of Mr Mahtani and Mr Kwok confirmed such meetings. Miss Leung took issue on the difference in their evidence in respect of the dates of the meetings and whether the meetings were attended by all employees. 

162.Bearing in mind that the meetings were held more than seven years before the hearing and there were more than one such meetings, I am of the view that it is too harsh to require the witnesses to recall the exact details of the meetings including their dates and people attending. In fact, different witnesses might be referring to different meetings when answering questions at hearing. I do not see that the discrepancies on details of the meetings between the evidence of the witnesses have much significance. The common point is that they all confirmed that there were such meetings. 

163.Miss Leung submitted that the Company failed to pay the Employees’ wages since May 2013 and the Offer only came on 29 June 2013. She queried: “How could the employees be confident about the Optimizer deal before May 2013, to an extent that they agreed to stay with the Company without being paid?” The evidence of the Respondent was that he was in discussion with various investors including Optimizer in May 2013. Miss Leung raised her said query relying solely on the progress of the Optimizer Deal was taking the matter out of context. As submitted by Mr Wong in his closing submissions “the employees voluntarily stayed at the Company because they believed in the prospect of the Company”, the Optimizer Deal was one of the factors which became the dominant factor after May 2013. 

164.Miss Leung contended that the “voluntariness” of the employees to stay employed with the Company despite the non-payment of wages was highly questionable. She criticized the Respondent of calling only Mr Mahtani and Mr Kwok to testify at the hearing. She contended that they could only speak for themselves and it did not mean that other employees who filed claims with the Labour Tribunal were equally informed and voluntarily stayed with the Company. Miss Leung also tried to cast doubt on the evidence of Mr Kwok by pointing out that Mr Kwok was still working for the Respondent as a consultant but yet agreed that there was nothing to suggest that Mr Kwok would lie in favour of the Respondent because of their working relationship. Without more specific supporting facts, I am of the view that Miss Leung’s aforesaid remark on Mr Kwok’s evidence is not fair to Mr Kwok. 

165.Miss Leung further submitted that the employees of the Company in fact did not have a “free choice”. They could only choose to stay or leave the Company, but in either situation, they would not be paid the wages in May 2013 until an indefinite date. It is right to say that the employees of the Company could only choose to stay or leave the Company in May 2013. This is the unfortunate hard fact of life. However, Miss Leung’s contention that if they chose to leave, “they would not be paid the wages in May 2013 until an indefinite date” is not supported by evidence. The evidence before me showed that all employees who chose to leave the Company in May 2013 were fully paid and none of them lodged any claims with the Labour Tribunal. 

166.As pointed out below, the Official Receiver well knew that the Respondent’s case was that the Employees agreed to work in the Company despite their wages being unpaid. Yet, the Official Receiver chose to adduce no evidence to rebut the Respondent’s case. As such, the court will have to make findings based on available evidence before the court. 

167.Miss Leung queried the existence of the alleged Oral Agreements and criticized the Respondent for not mentioning the alleged Oral Agreements before SAV2. Miss Leung submitted that in the Reply Letter and in SAV1, the Respondent only referred to the failure of the Optimizer Deal as the cause for the Company failing to pay its employees.  

168.Of course it was the failure of the Optimizer Deal which sealed the fate of the Company. It is not surprising to see the Respondent explaining the collapse of the Company by reference to the failed Optimizer Deal. However, as pointed out by Mr Wong, the Respondent did refer to the arrangements of the Oral Agreements in SAV1 when the Respondent stated in para 62 that: “When [the Company] started to have financially difficulty and could not pay the wages, all directors had frankly told the employees that they could leave if they wished. However, most of them chose to stay because of their common intention to save the company.” The Official Receiver understood the Respondent’s aforesaid case as “the employees agreed to work in the Company despite their wages being unpaid” (emphasis added) although the Official Receiver considered such agreement “is bare allegation and is irrelevant” (para 9 of OR2). The Official Receiver clearly read the Respondent’s case on the Oral Agreements from SAV1. Miss Leung’s aforesaid criticism is without merits. 

169.When the Official Receiver stated in para 6 of OR3 that: “The Respondent has for the first time alleged that there was an agreement to postpone wages in the Respondent’s Supplemental Affidavit [ie SAV2].” The Official Receiver seemed to have forgotten her aforesaid comments made in OR2. 

170.Mr Wong submitted in his opening submissions that the Oral Agreements had the effect of varying the wage period of the employees concerned. As such, wages of these employees would not due until after the end of the “varied” wage period. This contention of Mr Wong was not supported by evidence of the Respondent and his witnesses given at the hearing and Mr Wong did not pursue this line of argument further in his closing submissions. I find that there was no agreement to vary the wage period of the Employees reached between the Company and the Employees in May 2013.  

171.Miss Leung referred to HKSAR v Kwan Wah Medicine Co Ltd [2004-2005] HKCLRT 469 to submit that agreement made privately between an employer and an employee which was purely civil in nature could not override an offence under section 63C of the EO for failing to pay wages within the time limit prescribed by section 23 of the EO. 

172.The Kwan Wah Medicine Co Ltd case was a criminal case against the company as employer. The key issue before the court in that case was whether the Commissioner for Labour could still lay a charge under sections 23 and 63C of the EO despite the existence of an agreement on the payment of outstanding wages whereas the issue before me in this case is the significance of an agreement to defer payment of wages (if exist) to the fitness of the Respondent to be a director in the context of a complaint of misconduct based on non-payment of wages by the Company. I do not find the Kwan Wah Medicine Co Ltd case of assistance to the Official Receiver’s case. 

173.Miss Leung challenged the evidence of the Respondent and his witnesses on details of the discussion in those meetings and whether the alleged agreements, if existed, were of legal effect. She picked on the difference between “Optimizer deal comes to fruition” stated by the Respondent and “until funds could be raised” stated by Mr Mahtani and Mr Kwok in their oral evidence. Miss Leung submitted that this specific condition dictated the timing of the breach of the alleged Oral Agreements, if any. I see no merits in such contention. We are not dealing with a claim for breach of the Oral Agreements. The central theme of those “townhall” meetings was that the employees would get pay when the Company got funds from investors. Whether such funds came from Optimizer or other investors was irrelevant. The Respondent’s evidence was that there were other negotiations but only Optimizer became serious and that since May 2013 the whole focus was on the Optimizer Deal. 

174.Miss Leung submitted that: “The content of the Alleged Oral Agreement is significant, and if the Respondent and his other witnesses could not come to a consensus on the exact term, there could not have been a valid agreement between the parties.” (Para 77(2) of the OR’s Closing Submissions)   In putting forward this contention, Miss Leung had missed the focus. As stated above, we are not dealing with a claim to enforce the Oral Agreements. Whether the Employees and the Company had reached legally binding and enforceable agreements is beside the point. Our concern is not on the legal validity or enforceability of the Oral Agreements. We are concerning with the circumstances under which the Company failed to pay wages for the 2^nd Period to the Employees and the responsibility of the Respondent as a director of the Company for such failure of the Company. Our concern is whether the Respondent’s conduct displayed a lack of commercial probity, gross negligence or total incompetence. Whether the Oral Agreements would be void under provisions of the EO or whether such agreements would be accepted as valid defence to prosecution against the Company for offences under the EO or whether the Oral Agreements were legally valid and enforceable is neither here nor there. 

175.Miss Leung queried the existence of the Oral Agreements on the grounds that such agreements were not reduced into writing and not referred to in the salary increment letters. From the evidence adduced before me, I am of the view that the Oral Agreements were only understanding between the Respondent and the Employees that the Employees would not strictly insist on their legal entitlements to wages payment for the time being pending negotiation between the Company and outside investors and the Employees might put such arrangements to an end at any time. The option was in the hands of the Employees. As it was just an understanding between the parties, the fact that the Oral Agreements were not reduced into writing or mentioned in the salary increment letters is neither here nor there. 

176.Miss Leung submitted that in July 2013, the Company had already failed to pay the Employees’ wages for the months of May and June. If the Employees ever agreed that the Company could defer the payment of their wages, the August Letters would make no sense as it was never mentioned that their respective salary (increased or otherwise) would be postponed. Miss Leung further queried that if there were Oral Agreements to postpone payment of wages of the Employees until the Optimizer Deal came to fruition, why would the wages shortfall for the 1^st Period be payable in June or July? The evidence of the Respondent was that there were discussions with various outside investors including Optimizer in May 2013. The Company might expect to conclude one of the deals by end of June 2013. 

177.If one looks at the progress of the Optimizer Deal at the material times discussed below, one will not be surprised to see the Company promising in July 2013 payment at the end of July 2013. Optimizer made the Offer to the Company in June 2013 and paid the purchase price in the form of a loan to the Company in July 2013. The Optimizer Deal looked very promising in June/July 2013. In the email attaching the Offer, Optimizer stated that: “we appreciate your immediate need for the funds so as soon as we receive your confirmation of the signed agreements attached together with your board/directors resolution and directors consent letters, we will get onto it over the weekend, and finalise all contacts [sic], register the securities, and proceed with the advancing of funds during the course of this coming week.” As such, it was not surprising for the Respondent to expect the Optimizer Deal to come to fruition in July 2013. 

178.It is not a case “for the Company to withhold payment of the substantial bulk of the wages due, and agree to pay the wage shortfall in June or July.” (Para 77(4)(b) of the OR’s Closing Submissions) With a successful Optimizer Deal, the Company’s financial problems would be over. All outstanding wages including the promised salary increments would be settled. 

179.In the notices of termination issued by the Employees to the Company, they all relied on section 10A of the EO to terminate their employment with the Company. Section 10A of the EO provides that an employee may terminate his contract of employment without notice or payment in lieu of notice if any wages are not paid within one month from the due date and the contract shall be deemed to be terminated by the employer by wages in lieu of notice. This shows that the Employees were aware of their statutory rights under section 10A of the EO and there is no suggestion that the Employees were not aware of their such rights until September 2013. In SAV2, the Respondent stated that it was because of the Oral Agreements that the Employees did not file any claims at the Labour Tribunal until after the Company was put under receivership. The Official Receiver adduced no evidence to rebut the aforesaid evidence of the Respondent. The fact that the Employees were fully aware of their rights under section 10A of the EO but did not exercise their such right until September 2013 lends support to the Respondent’s case on the Oral Agreements. 

180.I find that the Respondent has proved on balance of probabilities that the Employees continued to work for the Company after May 2013 understood and agreed that their wages would be paid only when the Company managed to get further investments, be it from Optimizer or other sources. They agreed deferring payment of their wages and such deferment could be terminated at any time chosen by the Employees. It can be seen from the LT Awards that the dates of termination of employment claimed by the Employees were different. Six of them worked to 27 September 2013. The other three worked to 10, 11 or 19 September 2013. They all left when they learned that the Optimizer Deal had fallen through. 

The Optimizer Deal

181.The Respondent’s case was that he had been negotiating with Optimizer since May 2013. Optimizer agreed in principle to purchase the assets of the Company with purchase consideration of US$500,000 and to assume responsibility for the Company’s employees and trade creditors. 

182.Optimizer issued the Offer on 29 June 2013 stating that Optimizer would “assume responsibility for certain employee entitlements and trade creditors subsisting as at the completion date” of the Optimizer Deal. This would include transfer of key employees and the assignment or novation of material supplier and customer contracts. 

183.In the Statement of Intent, Optimizer stated that it intended to keep and maintain as much of the operational team members as possible and to preserve as much of the management team as feasible. The Offer stated that: “Target completion date is assumed to be within 6 weeks of this agreement [ie the Offer] being executed.” The Offer imposed a condition of “agreeing to formal sale documentation – by 31 August 2013”. As such, in late June 2013, the Optimizer Deal was scheduled to complete before mid-August 2013 and latest by 31 August 2013. 

184.On 2 July 2013, Optimizer paid the Company US$500,000 as loan upon the security of the Respondent’s personal guarantee and the issuance of the Debenture in favour of Optimizer. Part of the fund was used to pay off liabilities and salaries owed by the Company. The Respondent contended that paying urgent accounts payable was necessary to keep the Company afloat such that the Optimizer Deal could be achieved. 

185.Negotiation with Optimizer continued in July and August 2013. Two series of meetings were held between the Company and Optimizer in Singapore on 11 July 2013. In an email dated 14 July 2013, the Respondent reported to the shareholders of the Company that: “One series of meetings was to follow up on Optimizer’s offer to acquire all ASAP’s [ie the Company’s] assets for consideration of US$500,000 plus Optimizer paying off all of ASAP’s historic liabilities.” The Respondent further reported that: “In addition to the US$500,000, the balance of the purchase price that Optimizer offered to pay to acquire the ASAP assets is the amount of the remaining ASAP liabilities, which is approximately an additional US$2.5 million. This series of meetings was focused on a line by line review and discussion of each ASAP liability.  At the end of those meetings Optimizer agreed on the ASAP liabilities list in the aggregate amount of US$2.5 million, detailed payment scheduled is being worked out right now. That payment, together with the use of the US$500,000 will pay off all ASAP’s outstanding liabilities.” 

186.The Respondent’s case was that a meeting was held in Hong Kong around 2 days before 13 August 2013 between the Respondent and Mr Kumar when Optimizer agreed to take up certain liabilities of the Company including staff salaries but Optimizer changed its mind in mid-August. However, the parties were still discussing actively on the terms of the sale and purchase agreement. In an email dated 13 August 2013, the Respondent informed Mr Kumar that the Company’s lawyers would soon sending Optimizer the marked up copies of the sale and purchase agreement. 

187.After further negotiation, the Term Sheet was signed by the Company with Optimizer on 14 September 2013 as a basis for negotiating a sales and purchases of business assets by Optimizer. The Term Sheet summarized the principal terms of the proposed sales and purchases of business assets of the Company and provided that the sales and purchase agreement should be executed within 14 days of execution of the Term Sheet, ie by 28 September 2013. The Respondent’s case was that the liabilities which Optimizer acknowledged in the Term Sheet included salaries and severance payment to general staff and management to be paid in full. Details of which were set out in Schedule A to the Term Sheet which was stated: “To be paid in full”. The Term Sheet provided for Optimizer and the Company to work together with each other’s full cooperation and use their respective reasonable endeavors to negotiate for the satisfaction of the Company’s liabilities as per the Company’s books on such terms and conditions as were satisfactory to Optimizer and the Company in all respect. 

188.The Respondent’s case was that negotiation of the Optimizer Deal failed by around 25 September 2013 when shareholders of the Company did not approve the Optimizer Deal and Optimizer did not agree to further improve its offer. Optimizer issued default notice under the Debenture on 8 October 2013 followed by appointment of receivers on 11 October 2013. It became the last straw that broke the camel’s back.  

189.The Official Receiver adduced no evidence to rebut the Respondent’s evidence. Miss Leung took issue on the date when the Respondent commenced negotiation with Optimizer and invited the court “to find that the Respondent’s evidence in relation to Optimizer’s deal is so inconsistent that it could only be a fabrication during cross-examination to suit his case.” (See para 93 of the OR’s Closing Submissions)

190.The aforesaid contention of Miss Leung is totally misconceived. It is never the Official Receiver’s case that the Optimizer Deal did not exist. The Offer was dated 28 June 2013. The parties had to be in negotiation for some times before Optimizer would sign the Offer on 28 June 2013 and paid US$500,000 to the Company on 2 July 2013. It does not matter whether the parties started the negotiation in late 2012, early 2013, March 2013 or May 2013. The fact is that when the Company was unable to pay the May 2013 salaries to the Employees, the Company had been discussing with Optimizer on the Optimizer Deal. 

191.I find that the Optimizer Deal was under active negotiation latest from May to mid-September 2013 when the Term Sheet was signed. In early July and even by mid-September 2013, the prospect of a successful deal was still good, otherwise, Optimizer would not have paid the whole agreed purchase consideration as loan to the Company on 2 July 2013 and signed the Term Sheet on 14 September 2013. It only turned sour after 14 September 2013. According to the Respondent, it was around 25 September 2013 when he realized that the Optimizer Deal failed. 

Non-payment of wages for the 2^nd Period

192.The complaint was on the Company failing to pay wages for the 2^nd Period. There is no dispute that the Company did owe wages to the Employees for the 2^nd Period. There is no dispute that wages due to the Employees are preferential debts in liquidation. However, there is no authority to support the proposition that failure to pay wages by a company per se justifies granting a disqualification order against the company’s director(s). Miss Leung contended that wages payment was protected by the EO. Not only that claim for outstanding wages was a preferential debt in liquidation, non-payment of wages was a criminal offence under the EO. She further referred to HKSAR v Li Fung Ching Catherine [2012] 3 HKLRD 377 to submit that concern to maintain the company’s operation was not a “reasonable excuse” under section 23 of the EO for failing to pay wages to the company’s employees. 

193.I accept that willful non-payment of wages without reasonable excuse is a criminal offence under the EO and to keep the operation of the company may not be accepted as a “reasonable excuse” in answering charges under the EO. However, unlike various provisions of the Ordinance and the Companies Ordinance (Cap 622), non-payment of wages is not one of the specific matters listed in the Fifteenth Schedule of the Ordinance to which the court is directed to have particular regard for a disqualification application. As pointed out by Jonathan Parker J in Re Barings plc (supra) at 486 f-g that:

“It is, I think, possible to envisage a case where a respondent has shown himself so completely lacking in judgment as to justify a finding of unfitness, notwithstanding that he has not been guilty of misfeasance or breach of duty. Conversely, in my judgment, the fact that a respondent may have been guilty of misfeasance or breach of duty does not necessarily mean that he is unfit.”

194.Although in considering the question of unfitness, the court must have regard (among other things) to any misfeasance or breach of any fiduciary or other duty by the director concerned in relation to the company, it is neither the sole nor a sufficient consideration for the court to make a disqualification order against the director. Breach of provisions of the EO by a company does not by itself mandate a disqualification order against its director. It is only a relevant conduct for consideration. In this case, I note that no prosecution actions under the EO had been taken against the Respondent. 

195.The fact that claim for outstanding wages is a preferential debt in liquidation also will not by itself warrant a disqualification order. In Re Dawson Print Group (supra) at 604-605, Hoffmann J (as he then was) held that the fact that some of the debts owed were statutory preferential debts, such as taxes of various sorts, did not in itself prove that there had been a breach of commercial morality that made the director concerned unfit to be involved in the management of a company. 

196.As Neuberger J (as he then was) pointed out in Re Verby Print (supra) at 666 that:

“In this connection, the mere fact that a director of a company has caused or permitted something to happen which was wrong or merits censure, does not of itself mean that he is unfit to be a director of a company. That is clear as a matter of principle. It is also clear from the passages I have cited from the judgment of Dillon LJ in Sevenoaks.”

197.As such, the non-payment of wages complaint against the Respondent has to be considered in the whole circumstances of this case. The relevant issue is whether this was caused by the Respondent’s lack of commercial probity, gross negligence or total incompetence in managing the affairs of the company.  

198.The Respondent sought to argue that decisions of the Company were not decided by him solely but were collective decisions of the board of directors. However, in the Joint Statement, it was agreed that the Respondent was the final decision maker of the Company who had exercised control over all executive and financial matters of the Company. The evidence adduced by the Respondent and his witnesses also showed that the Respondent was the key person engaged in negotiation of the Optimizer Deal for the Company. He was also the key person in holding the “townhall” meetings with the Employees. Salary increment of the Employees in May and August 2013 were approved by him and all salary increment letters were signed by him. As pointed out by Miss Leung in para 23 of the OR’s Closing Submissions:

“On the evidence, [the Respondent’s] leading role was manifested in the email communication amongst the shareholders and also the senior staff of the Company. The Respondent was consulted by Locica Leung on key decisions such as which creditors to be paid, whether to settle outstanding MPF payments, which employees’ wages to be paid, etc.”

199.The Respondent might not be able to approve the Optimizer Deal by himself without support of the Company’s other directors and shareholders but I have no doubt that he was the key person in the management of the affairs of the Company. The Respondent adduced no evidence to show that other directors were actively involved in the non-payment of wages to the Employees, the central issue of complaint for this application. In any event, even if there were other directors who were also responsible for the non-payment of wages to the Employees, this is not an extenuating factor in assessing unfitness.  (Re Peregrine Investments Holdings Ltd (supra))

200.Miss Leung submitted that KJM had invested HK$5 million in the Company in October 2012; the Company had received cash in the total sum of about HK$1.6 million from the Round 1.7 shares subscriptions in February 2013; and had borrowed US$500,000 from Optimizer in July 2013. Miss Leung contended that the Respondent was free to dispose of the Loan and did not require Optimizer’s approval as alleged by the Respondent. Yet the Company still failed to pay outstanding wages to the Employees. Miss Leung contended that the Company was kept alive during these times at the expense of the Employees. She relied on Re Sevenoaks (supra) to submit that it was impermissible for the Respondent to make a deliberate decision to pay only those creditors who pressed for payment, and to take unfair advantage of the forbearance of the Employees. She referred to Re Ixoyc Anesis (2014) Ltd [2019] BCC 404 and Re Verby Print (supra) when the courts held that a director decided to pay only those creditors who pressed for payment and who needed to be paid to keep the business going to the detriment of another class of creditors was capable of amounting to conduct rendering a person unfit to be a director of companies. 

201.The Company has been put into liquidation. The liquidators should have all books and records of the Company. The Official Receiver should have access to the Company’s books and records. It was not the Official Receiver’s case that the Respondent had misapplied any funds of the Company. Miss Leung’s complaint was that the Respondent did not put paying the Employees as the top priority. 

202.In SAV2, the Respondent stated that part of the Loan was used to pay employees alongside some creditors and operation costs with the consent and agreement from Optimizer. The Respondent’s case was that: “Optimizer had made it very clear that the application of the USD500,000 from Optimizer loan had to be done in discussion with Optimizer, and it was not possible for the Company to dictate where and/or how to use such sums” (para 22(b) of SAV2). 

203.Miss Leung criticized the Respondent for adducing no document showing Optimizer’s control on usage of the Loan. There was no dispute that $1,814,278 (about 47% of the Loan) was paid directly to a creditor of the Company by Optimizer. This lends support to the Respondent’s case that Optimizer did have certain control on the disposal of the Loan though it might not go to dollar and cent. I do not think that Optimizer would agree to allow the Company to have total free hands to apply the Loan to wholly pay its employees leaving essential suppliers for the Company’s continuous operation unpaid. If so, it would mean that the Company’s operation could not be continued and Optimizer was providing the Loan to the Company simply for the Company to close down its operation. This does not make any commercial sense to Optimizer. In fact, in the Offer it was expressly stated that: “The purpose of the exclusivity agreement is to enable ASAP [ie the Company] to receive the US$500,000.00 as per the deal sheet. This will enable ASAP to deal with its current cash and working capital requirement while it enables OHQ [ie Optimizer] to prepare legal docs for the S&P agreement for the acquisition of ASAP assets on various understandings being contemplated.” (Emphasis added) It is quite clear that the Loan was meant to sustain the operations of the Company and could not be applied solely to pay the outstanding wages of the Company’s employees. 

204.When the funds generated by the Company were insufficient to fully repay all its outstanding liabilities, the directors of the Company had to make a management decision in apportioning the available funds. There is no hard and fast rule for such apportionment. These are management decisions which people charged with the responsibilities of management of a company have to make day in and day out. 

205.I agree with Mr Wong that the following observation of Park J in Re Continental Assurance Co of London plc (in liquidation)(No 4) [2007] 2 BCLC 287 at 409 in the context of wrongful trading is particularly apt for the case before me:

“281 An overall point which needs to be kept in mind throughout is that, whenever a company is in financial trouble and the directors have a difficult decision to make whether to close down and go into liquidation, or whether instead to trade on and hope to turn the corner, they can be in a real and unenviable dilemma. On the one hand, if they decide to trade on but things do not work out and the company later rather than sooner, goes into liquidation, they may find themselves in the situation of the respondents in this case – being sued for wrongful trading. On the other hand, if the directors decide to close down immediately and cause the company to go into an early liquidation, although they are not at risk of being sued for wrongful trading, they are at risk of being criticised on other grounds. A decision to close down will almost certainly mean that the ensuing liquidation will be an insolvent one. Apart from anything else liquidations are expensive operations, and in addition debtors are commonly obstructive about paying their debts to a company which is in liquidation. Many creditors of the company from a time before the liquidation are likely to find that their debts do not get paid in full. They will complain bitterly that the directors shut down too soon; they will say that the directors ought to have had more courage and kept going. If they had done, so the complaining creditors will say, the company probably would have survived and all of its debts would have been paid. Ceasing to trade and liquidating too soon can be stigmatised as the cowards’ way out.”

206.In this case, the Respondent took the view that: “The only reasonable option before us was to settle such urgent account payables as agreed with Optimizer and as much as necessary to keep the Company afloat on one hand, whilst proceeding with the Optimizer deal such that Optimizer can assist assume responsibility for the Company’s liabilities in the long run.” (Para 22(d) of SAV2) This is not a case of simply keeping the Company alive at the expense of the Employees. This is a case with a view to fully settle the Employees’ wages if the Optimizer Deal could be closed successfully.

207.As pointed out by the learned judge in Re Ixoyc Anesis (supra) at 428:

“100. There is a tension, or potential tension, between, on the one hand, criticizing a director for causing or permitting a company to trade with insufficient working capital and, in the result, trading at the expense of creditors or some class or classes of creditors, while the company is in jeopardy, and, on the other hand, the stifling of business enterprise and initiative, which benefits from the protection that limited liability provides. It is partly for this reason that, so far as is material to the present case, it is not sufficient to merit disqualification that the director has caused a company to finance its current trading activities by using moneys which it has collected by way of VAT and PAYE and which it is liable to pay over to HMRC. This is so even if, in consequence, those moneys become overdue for payment, and ultimately, because the company is unable to meet its current and accruing liabilities, are irrecoverable on an insolvent liquidation.”

208.As Hoffmann J (as he then was) stated in Re Dawson Print Group (supra) at 324-325 that:

“In most of these cases [ie companies in creditors voluntary winding up] the failure of the company is likely to be due to mismanagement in one form or another on the part of the directors. Some, of course, are struck by unavoidable misfortune, but mismanagement is a very common occurrence. It seems to me that if that sort of mismanagement in itself were a ground for making a disqualification order under sec 300 [of the Companies Act 1985] the effect of the section would be quite arbitrary; … … There must, I think, be something about the case, some conduct which if not dishonest is at any rate in breach of standards of commercial morality, or some really gross incompetence which persuade the court that it would be a danger to the public if he were to be allowed to continue to be involved in the management of companies, before a disqualification order is made.”

209.Although outstanding wages due to employees are preferential debts enjoying priority in distribution in liquidation, I am not aware of any statutory obligations requiring the directors to put payment of employees’ wages as the top priority in their daily management of their companies. In Re Dawson Print Group (supra), Hoffmann J expressed the view to the effect that it was no more culpable to use moneys which should have been paid to the Crown to finance the continuation of the business of an insolvent company than it was to use for that purpose moneys which were owed to commercial creditors notwithstanding the fact that withholding taxes held in the hands of the company were in the nature of trust moneys. Such view found support in Re Sevenoaks (supra). As such, the wages of employees though enjoy various statutory protections under labour laws and insolvency laws shall not be treated differently in the context of a disqualification application. 

210.I do not agree with Miss Leung that if the Respondent did not apply the limited available funds to fully pay the outstanding wages to the Employees, the Respondent was trying to save the Company at the expense of the Employees. The matter has to be viewed in the circumstances of the particular case. The test is whether the management decision made in apportioning the limited available funds displayed a lack of commercial probity, gross negligence or total incompetence on the part of the decision maker in the circumstances of the case. In this case, funds from Optimizer were available in the context of the on-going Optimizer Deal. If the Respondent applied the Loan to fully pay off the Employees, the Company would have no fund to continue its operation and would have to close down. This would kill the Optimizer Deal immediately. If the Optimizer Deal would be killed immediately, would Optimizer agree to make the Loan available to the Company? Or as suggested in para 22(c) of SAV2: “if we use the full sum to pay the employees which the Official Receiver seems to suggest we should have, the Company will have failed to pay its urgent account payables, will most likely have been sued, and would perhaps be an act of deceiving and/or defrauding Optimizer by receiving the loan whilst allowing the Company to fail”. 

211.In Re Ixoyc Anesis (supra) and Re Verby Print (supra), the courts were concerning with a policy of unfair discrimination by paying one class of creditors to the detriment of another.  

212.In Re Verby Print, the court found that the directors concerned deliberately refrained from paying Crown debts and thereby secured an advantage to themselves in respect of their personal guarantees by preferring the bank to other creditors including, in particular, the Crown.  

213.In Re Ixoyc Anesis, the court found that the implementation of the policy of failing to pay the Crown debts effectively persisted throughout the entire life of the company and unfairly discriminated against the tax authorities. The learned judge pointed out in Re Ixoyc Anesis that it was not sufficient to merit disqualification that the company financed its trading activities by using moneys collected by way of withholding taxes which were liable to pay to the tax authorities. It was the permitting a company by a policy to engage in unfair discrimination between creditors which warranted a disqualification order. The concern of the court was the policy of unfair discrimination. As Dillion LJ pointed out in Re Sevenoaks (supra) at 183 E-G:

“But what is relevant in the Crown’s position is not that the debt was a debt which arose from a compulsory deduction from employees’ wages or a compulsory payment of VAT, but that the Crown was not pressing for payment, and the director was taking unfair advantage of that forbearance on the part of the Crown, and, instead of providing adequate working capital, was trading at the Crown’s expense while the companies were jeopardy. It would be equally unfair to trade in that way and in such circumstances at the expense of creditors other than the Crown.” (Emphasis added)

214.Neuberger J (as he then was) also pointed out in Re Vergy Print (supra) at 665 that:

“Without there having been a policy of discrimination, it is difficult to see how the discrimination could be unfair, and it is necessary for the discrimination to be unfair, as I read the judgment of Dillon LJ [in Re Sevenoaks], before it can give rise to a finding of unfitness.”

215.In the case before me, I find that there was understanding between the Company and the Employees that payment of their wages would be deferred until the Company successfully obtained funding for its operation. The Employees had been informed of the progress of the Optimizer Deal and of its failure. This is not a case of the Respondent taking unfair advantage of forbearance of the Employees. In the circumstances of this case, I do not see that the Company had been trading at the expense of the Employees or had implemented a policy of unfair discrimination against the Employees. 

216.The Respondent stated in para 18 of SAV2 that: “but for Optimizer’s unexpected pulling out of its purchase of Novapay [ie the transaction processing platform developed by the Company], [the Company] would not have failed to pay its employees, who would instead have received a pay raise”. The Respondent submitted in para 19 of SAV2 that: “we at the Company were trying the best we can to make the best-informed decision we were able to make for the Company and for the employees” and “it would have been equally if not more irresponsible for the Company to give up developing Novapay and/or the Optimizer deal at the first sight of difficulty. If we did that, the employees would have lost their jobs immediately”.

217.Mr Wong referred to Official Receiver v Chow Tung Shan [2019] HKCFI 2658 to contend that no disqualification order should be made against the Respondent in this case. In the Chow Tung Shan case, DHCJ MK Liu found that the complaint of non-payment of wages as ground for disqualification against the director was not proved. His Lordship explained his aforesaid finding in para 30 of the judgment as follows:

“In late 2013, Mr Chow realized that the Company was in financial difficulties and he was trying to solve the problem by finding investors. He did find an investor, and he had secured a promise of injecting fund into the Company from the investor. Relying upon this promise, Mr Chow allow the Company to continue to operate in January 2014 and February 2014. At the end, he was let down by that investor. When it became clear that the investor would not honour his promise, Mr Chow immediately stopped the operation of the Company on the very next day. While it may not be wise to solely reply upon an oral promise made by a single investor, I cannot say that the reliance itself is any unbecoming conduct. As said by Cheung JA in Re Citrend Services Ltd:

“Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, or an extreme case of gross negligence or total incompetence.””

218.Miss Leung sought to distinguish the present case from the Chow Tung Shan case (supra) by submitting in the OR’s Closing Submissions that:

“112. In this regard, the present case is very different from the circumstances in Official Receiver v Chow Tung Shan. The director in that case secured an investor in December 2013, who agreed to inject HK$2m into the company and would issue a cheque to pay the money on 8 January 2014. With such sum, the company would be able to pay the employees’ wages in January and February 2014. However, for some reason, the cheque was not issued as promised, and on 14 February 2014, the investor backed out. Immediately, on 15 February 2014, the company ceased business.

113. In the present case, the Respondent never secure any promise from Optimizer except that it would provide USD500,000 in early July 2013 to the Company as a loan. The Respondent even said that the funds could not all be applied to pay employees’ wages because Optimizer had to approve the use of the funds. The Company’s prospect in paying its employees was not looking any better even with Optimizer’s offer coming in.” 

219.Mr Wong put forward a different analysis in the Respondent’s Supplemental Note for Closing as follows:

“26. Not only is the [Official Receiver] unable to distinguish the current case from Chow Tung Shan, it is submitted that there are important favourable factors here which were absent in Chow Tung Shan:

a. in Chow Tung Shan, even the [Official Receiver’s] case was that “Mr Chow should have decided not to operate any further”, not “failure to pay” simpliciter. This is logical, because having no staff at all essentially means closing of business in all reality;

b. there were no elements of discussions and consulting of employees’ wishes and giving employees free-choice as was present in the current case, which goes to honesty and respect of employees’ interest;

c. there were no elements of the director in question providing personal guarantee, as well as not taking the Optimizer shares to insist on employees and creditors being paid, as was present in this case;

d. arguably the Respondent’s Optimizer Deal was even more substantiated and likely to succeed than that in Chow Tung Shan. Optimizer Deal concerns purchase of Novapay, a valuable asset. Optimizer actually paid US$500,000, signed the Indicative Offer, the Deed of Arrangement and the Debenture, with rounds of discussions, details of assets and employees transfer and employees interviewed. In Chow Tung Shan it was just an oral promise to inject funds and that was found to be enough.”

220.The complaint against the Respondent in this case is very similar to the complaint for non-payment of wages against the director in the Chow Tung Shan case. I prefer the analysis of Mr Wong to that of Miss Leung for the Chow Tung Shan case. The following views expressed by the learned judge in Re Dawson Print (supra) may also apply to this case before me:

“Having regard to the negotiations which were going on at the time for a government guaranteed loan for [the company] and which appeared to give rise to the possibility of funding which would save the companies, I do not think it could be said that the respondent was reckless in carrying on that business until the time came when they went into liquidation.” (at p 605 c-e)

221.Mr Wong further referred to Secretary of State for Trade and Industry v Gash and others [1997] 1 BCLC 341 to submit that the law does not impose on directors a statutory duty to ensure the company does not trade at a loss. Directors may properly take the view that it is in the interests of the company and its creditors that some loss-making trade should be accepted in anticipation of future profitability. 

222.I agree that the test for finding unfitness is whether the director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation.  (See Re Hawkes Hill Publishing Co Ltd [2007] BCC 937 and the Chow Tung Shan case (supra))

223.The Respondent’s case was that the business of the Company was with high potential. Novapay, the e-payment system developed by the Company, was one of the few advanced e-payment system in Hong Kong in the fintech market in 2012-2013. After winding-up of the Company, the system could still be sold at about US$600,000 under a force sale situation. 

224.I have found that the Optimizer Deal was still under active negotiation during the 2^nd Period. I have also found that the Employees who continued to work for the Company in the 2^nd Period knew the financial situation of the Company and had agreed to have payment of their wages being deferred to the Company getting further investment or to an earlier date chosen by them. The Employees were not “involuntary creditors” as the tax authorities referred to in the various English cases cited to me. 

225.I have also found that up to at least 14 September 2013 (ie the date of signing of the Term Sheet) the Optimizer Deal still had good prospect of success and the Company would be able to pay the outstanding wages to the Employees upon completion of the deal. The Respondent realized failure of the Optimizer Deal by 25 September 2013. He promptly informed the Employees and they terminated their employment with the Company latest on 27 September 2013. The Respondent also took prompt actions to put the Company into liquidation.  

226.In the circumstances of this case, I do not see that the Respondent’s conduct in managing the affairs of the Company displayed a lack of commercial probity, gross negligence or total incompetence warranting the issuance of a disqualification order against him. 

227.Miss Leung submitted that the fact that the Company was a “start-up” companies in information technology industry should not be accepted as a reason for underpayment or non-payment of wages to its employees. 

228.I agree that the EO applies equally to all sectors in Hong Kong and it does not distinguish any specific industry or provide exemption for the protection of employees on the basis of business nature. However, employment contract is nevertheless one type of contracts albeit with certain protection to employee provided by the EO. The EO is to offer certain protection to employee by imposing certain minimum employment benefits in favour of the employee into the employment contract. It does not mean to replace the employment contract. Subject to the provisions of the EO, the rights and obligations of the parties to an employment contract are still to be determined by the parties to the contract. To understand the contractual agreements or arrangements reached by the parties, the business nature of the Company might be relevant. 

229.As in this case, the Oral Agreements and the arrangement for the Company withholding salary payment of senior management have to be understood in the context of the business nature of the Company and the particular circumstances of the Company at the material times. These are relevant matters for the court to consider whether the Respondent’s conduct in managing the affairs of the Company displayed a lack of commercial probity, gross negligence or total incompetence. 

230.Miss Leung took issue on the Respondent’s evidence that he was in discussion with other investors before May 2013 and there were term sheets signed with other investors but had not previously mentioned or produced these other term sheets. The Respondent explained that this was because the focus of this case was on the Optimizer Deal. Miss Leung contended that: “If there were other potential investors who could have provided funds to the Company during the time when the Company was unable to pay wages, there was no reason why the respondent failed to mention the same in his reply letters to the Official Receiver and his affirmation evidence.” 

231.I do not see such criticism of Miss Leung as fair criticism. In the Reply Letter, the Respondent’s solicitors told the Official Receiver that: “The shareholders and board members had been looking for investors since about 2010”. “As all directors, in particular [the Respondent], had been trying hard to find investors such as OPTIMIZER HQ and/or Michael Knappstein to invest in the Company, the directors believed that the Company could continue its business and with the investors’ fund, all staff’s wages could be fully paid. However, the investors finally refused to invest caused the collapse of the Company and also its failure to pay the wages to the staff.” (Emphasis added) This part of the Reply Letter had been cited in OR3. Although the Respondent did not specifically refer to term sheets being signed with other investors, the Official Receiver all along knew that the Respondent’s case was that the Company had been sourcing funds from various investors in the material times, only that the Optimizer Deal was the one which made good progress before it was failed in September 2013.   

232.In SAV1, the Respondent had also mentioned that he had told Optimizer “about the proposal that some shareholders of [the Company] would try to raise additional funds to invest in [the Company], which would be together with Optimizer investing funds in [the Company].” (Emphasis added) (See para 45 of SAV1) The Official Receiver’s reading of SAV1 also did not support Miss Leung’s aforesaid contention when the Official Receiver stated in para 10 of OR2 that: “Furthermore, the Respondent’s explanation that the directors had been trying hard to find investors such as Optimizer to invest in the Company and believed that the Company could continue its business with the investors’ funds so that all the staffs’ wages could be fully paid is unacceptable,” (Emphasis added) 

233.The Respondent also stated in para 7 of SAV2 that:

“a. Throughout the period, the employees had been candidly informed of the financial difficulty faced by the Company, and the situation regarding the Optimizer deal under and/or my efforts to raise additional funds to support the Company;”

“d. Regrettably the Optimizer deal and /or my efforts to raise additional funds failed. … …;” (Emphasis added).

234.The Company was hungry for funding at that time. It was only logical that the Respondent would have been sourcing funds from all possible sources. As the Optimizer Deal was the only deal which came so close to success with Optimizer actually providing funds to the Company and the Respondent’s evidence was that after May 2013 he only focused on the Optimizer Deal, it was not surprising for him not mentioning in details discussions with other investors which did not have concrete results. 

235.Miss Leung also took issue on whether the Respondent had provided personal guarantee for the Loan. The Official Receiver exhibited to OR1 a copy of the Deed of Arrangement (the “Deed”) pursuant to which Optimizer advanced the Loan to the Company. Copy of the Deed produced was executed by the Respondent but not by Optimizer. The Deed named the Respondent as “the Guarantor”. Clause 11.1 of the Deed provided that: “The Guarantor unconditionally and irrevocably guarantees payment of all moneys owed under this [Deed] by the [Company] (the “Secured Money”) to [Optimizer] and the performance of all other obligations of the [Company] to [Optimizer].” 

236.On the one hand, Miss Leung stated that: “It is not disputed that Optimizer and the Company entered into the Deed of Arrangement, upon which the Company borrowed USD500,000 from Optimizer.” (See para 99 of the OR’s Closing Submissions) On the other hand, she doubted whether the Respondent had actually executed any personal guarantee to secure the Loan from Optimizer. She submitted that: “In the absence of any properly executed guarantee, the Respondent now attempts to rely on it to show that he had been personally involved in the Optimizer deal and had acted in the best interest of the Company even to the detriment of himself. Such allegation can hardly be supported by evidence.” (See para 101 of the OR’s Closing Submissions) 

237.The Deed executed by the Respondent as the Guarantor clearly included a personal guarantee of the Respondent. Whether the Respondent had executed a separate document called “personal guarantee” made no difference. In his email dated 14 July 2013 reporting meetings with Optimizer in Singapore to the Company’s shareholders, the Respondent reported that: “Optimizer has already made the first payment of US$500,000 to ASAP [ie the Company] for the asset consideration. The payment was guaranteed by a Personal Guarantee by Ajmal [ie the Respondent].” The fact that the Loan was guaranteed by the Respondent’s personal guarantee was supported by contemporaneous documents. Miss Leung’s aforesaid contention is simply groundless speculation with no merits. 

238.Miss Leung further took issue on no enforcement actions had been taken by Optimizer to enforce the Respondent’s personal guarantee against the Respondent. Mr Wong had rightly pointed out that the Loan was also secured by charge on the Company’s assets which included the e-payment system developed by the Company which was sold for US$600,000 in the Company’s liquidation. The sale proceeds of the Company’s charged assets would be sufficient to repay the Loan and there would not be necessary for Optimizer to call upon the Respondent’s personal guarantee. 

239.Miss Leung submitted that the fact that the Respondent might have executed a personal guarantee to secure the Loan was irrelevant as the Official Receiver’s complaint against the Respondent in this application did not concern the Respondent’s personal dealings with Optimizer. I do not agree. The personal guarantee provided by the Respondent to secure the Loan was not “personal dealings” between the Respondent and the Optimizer. It was part of the Optimizer Deal. The fact that the Respondent had acted to his own detriment for the benefits of the Company and its employees is relevant for assessing whether the Respondent’s conduct in managing the affairs of the Company demonstrated a lack of commercial probity. Miss Leung was right in saying that the Respondent being one of the founders, the key director and the second largest shareholder of the Company, clearly had significant personal interest in the Company. The essential point is that the Respondent did not put his personal interest ahead of or at the expense of the interest of the Company and its employees. It is noted that the Labour Tribunal had also awarded the Respondent’s claims for more than $1.2 million. The Respondent did not manipulate his position as director of the Company to pay his own wages leaving the Employees unpaid. This is not a case where the director concerned put his personal interest ahead of the interest of the company, its creditors and employees or conducted the affairs of the company to the detriment of its general creditors for the benefit of himself. In the words of Harman J this “is not a case of a man who has taken no risks himself and has not exposed himself in the matter and who has cynically exploited creditors.” (Re Douglas Construction Services Ltd and Another [1988] BCLC 397 at 402i) 

Conclusion and costs

240.I find that the Official Receiver fails to establish a case of disqualification against the Respondent in the circumstances of this case. With this finding, I do not need to consider the issue on length of disqualification order. As such, I dismiss this application of the Official Receiver by originating summons. 

241.Costs shall follow event. As pointed out in Re Copyright (supra) that although there was a public interest involved in this type of proceedings, there was no justification for a special costs rule in this type of litigation. As such, I make an order nisi that the Official Receiver shall pay the costs of this application (including all costs previously reserved) to the Respondent, to be taxed if not agreed. Such order nisi shall become absolute 14 days after the date of this Decision unless any party applies to vary the same within this 14-day period. 

Miss Eva Leung instructed by the Official Receiver, the Applicant

Mr Adrian Wong instructed by Tse Yuen Ting Wong for the Respondent