Re Gti Holdings Ltd

HCCW 51/2020

[2022] HKCFI 2598

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 51 OF 2020

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AND

HCMP 1556/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1556 OF 2020

________________________

________________________

Before:  Hon Linda Chan J in Chambers

Date of Hearing:  26 April 2022

Date of Order:  26 April 2022

Date of Reasons for Decision:  19 August 2022

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REASONS FOR DECISION[1]

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A.  INTRODUCTION

1.This case highlights the types of abuse which could be deployed by an insolvent company, with the assistance of provisional liquidators appointed by the court of the place of incorporation, to interfere with the rights of the creditors at the jurisdiction where the company has substantial connections, and to bypass the statutory scheme of winding-up in that jurisdiction.  It is regrettable to see that such abuse is undertaken by the provisional liquidators, who are under a duty to act in the best interest of the creditors as a whole and to act fairly and candidly when they report the state of the company to the court.  It is also a matter of concern to see that the solicitors and counsel engaged by the provisional liquidators in Hong Kong did not bring home to the provisional liquidators their duties owed to the creditors and to the court, and allowed them to act in breach of their duty to make full and frank disclosure when they made an ex parte application to the court for “recognition” of their appointment. 

2.On 22 November 2021, this Court made a usual winding-up order against the Company (“WU Order”)  whose shares were listed on the SEHK and had a principal place of business in Hong Kong where it carried on inter alia financing activities including issuing bonds governed by Hong Kong law.  The Company is grossly insolvent.  The Petition was presented in March 2020 and after multiple adjournments during a period of 20 months, the Company was still not able to satisfy the conditions imposed by the SEHK on resumption of trading or to put forward a scheme which had the agreement (in principle or otherwise)  of the requisite majorities of creditors.  In the meantime, the financial position of the Group has become much worse with its net deficiencies having been doubled.  The Company had no valid ground in opposition to the Petition and did not appeal against the WU Order. 

3.Nevertheless, the PLs[2] sought to reverse the findings in the Judgment through the backdoor by asking the Cayman court to re-open the issues already decided by this Court, and invited the Cayman court to conclude that the proposed Scheme is viable, that it would be in the best interest of the creditors for the PLs to remain in charge of putting forward the Scheme and that it would be appropriate for the Hong Kong court to recognise their appointment and confer extensive powers on them to carry on their work in Hong Kong.  The PLs managed to persuade the Cayman court to make the orders sought by engineering an “urgent” hearing and filing 2 affirmations which contained a number of representations not supported by any documents or were inconsistent with the evidence filed by the Company in opposition to the Petition.    

B.  BACKGROUND

4.The background of the Company, its dire financial position and the reasons for making the WU Order are set out in the Judgment and will not be repeated here. 

5.As a result of the WU Order, the Official Receiver (“OR”)  became provisional liquidator of the Company by virtue of s.194(1)(a)  of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  (“CWUO”).  The OR (and no one else)  may exercise the powers specified in Part 3 of Schedule 25 to CWUO.  She may also exercise the powers specified in Part 1 or 2 of Schedule 25 but only with the sanction of the court (s.199A of CWUO).    

B1.  S.227A application

6.Shortly after the WU Order, the Company managed to procure Mr Choi Yuk Chor (“Choi”), a bondholder to whom the Company owed HK$21.2 million, to apply by summons dated 6 December 2021 issued in HCCW 51/2020 (“HCCW”)  for a regulating order under s.227A of the CWUO on the ground that by reason of the number of creditors and shareholders, “it would not be practical and prohibitively expensive to summon the meetings of the creditors and contributories of the Company for the purpose of determining the appointment of a liquidator and a committee of inspection” (“s.227A application”).  As confirmed by subsequent events, the only purpose of the s.227A application was to ensure that the PLs could be appointed as liquidators of the Company. 

7.On 15 December 2021, this Court dismissed the s.227A application as it had not been demonstrated by Choi that there was sufficient justification to displace the usual requirement for the OR to convene meetings of creditors and contributories to ascertain their views on the appointment of liquidators and committee of inspection.  It also seems to me that the s.227A application was no more than an attempt to bypass the creditors’ statutory rights under s.206 of the CWUO for the following reasons:

(1)  As Choi knew full well, the Petitioner and the Supporting Creditors were parties in HCCW and were entitled to be served with the application and the supporting affirmation (“Choi 1^st”)  which had not been done.

(2)  The appointment of liquidators and committee of inspection are important decisions to be made by the creditors at the first creditors meeting. Even if there were any basis to think that a physical meeting could not be held (which had not been shown), there was no reason why the OR could not convene a meeting to be held through the use of modern technology in accordance with the articles of association of the Company or the relevant law.  There was no justification to bypass the creditors and appoint the PLs as liquidators at the behest of one creditor.

(3)  Despite having been appointed by the Cayman court as provisional liquidators for over 18 months, the PLs have not been able to put forward a scheme which had the support of the requisite majorities of creditors or to procure the Company to publish its audited financial statements as required by SEHK.  There was no reason to think that if the PLs were appointed as liquidators, they would be able to bring about any significant change to either of these matters.   

B2.  Representations made to the Cayman court

8.Notwithstanding the WU Order, the PLs continued to work with the directors of the Company and Mega Yield Enterprise Development Ltd (“Investor”)  which had been funding their work.  To ensure that they could remain in office, by summons dated 14 January 2022, the PLs invited the Cayman court to list the winding up petition filed therein (“Cayman proceedings”)  for hearing on 22 February 2022.  In the 7^th affirmation of Lai filed in the Cayman proceedings on 17 February 2022 (“Lai 7^th”), where he relied on his 5^th affirmation filed in the same proceedings on 14 January 2022 (“Lai 5^th”)  and through counsel’s submissions, the PLs made the following representations to the Cayman court:

(1)  Notices of the hearing had been given to the creditors by advertisement and post on 9 and 11 February 2022.  No creditor indicated that they would attend the hearing (Lai 7^th §§10-14).

(2)  The OR was notified of the hearing and stated that the appointment of the PLs by the Cayman court “has no effect on the winding-up of the Company in Hong Kong”.  The OR endeavoured to arrange the first meetings of contributories and creditors when the pandemic restriction in Hong Kong allow (Lai 7^th §§15, 17). 

(3)  The Hong Kong court was notified of the hearing and did not provide any response (Lai 7^th §§16, 18). 

(4)  The Company’s auditors had completed the audit of the Company’s annual results for the 18 months ended 30 June 2021 in November 2021.  The audited results had been scheduled to be approved by the board of directors on 22 November 2021 but was suspended due to the WU Order (Lai 5^th §§28, 61; Lai 7^th §21)  (“1^st Representation”).

(5)  The publication of the audited results would be one of the PLs’ priorities.  The directors “are best-placed to comment on and approve the audited results” and had planned to approve them on 22 November 2021.  If the Cayman court appoint them as liquidators, they requested that “the [PLs], acting as agents of the Company without personal liability, be given the power to authorise the Company’s directors to approve the Company’s audited financial results (if so advised)” (Lai 7^th §§22-23)  (“2^nd Representation”).

(6)  If the PLs are appointed as liquidators, they intend to seek a “swift recognition” of their appointment in Hong Kong.  Their appointment as PLs was recognised by the Hong Kong court on 9 November 2020 following a letter of request issued by the Cayman court on 15 June 2020.  The Hong Kong law, as stated in their previous application for letter of request, will “similarly apply to the recognition of the [liquidators]” (Lai 7^th §§24-27)  (“3^rd Representation”).

(7)  The PLs believe that recognition of their appointment is important for the following reasons: (a)  to dispel the confusion over who has the authority to act on behalf of the Company; (b)  the time sensitivity of the proposed restructuring and investment opportunity; and (c)  running multiple processes and convening creditors’ and contributories’ meetings does not serve the interests of the Company’s creditors (Lai 5^th §87; Lai 7^th §28)  (“4^th Representation”). 

(8)  In light of the “recent improvements” in the 3 major business segments of the Group and the “expected development of the business of the Company”, the PLs agree with the Management that the implementation of the “Restructuring Plan”[3] “remains feasible and is likely to be beneficial to the creditors of the Company” with the continuous support of the Investor (Lai 5^th §§36, 63-69)  (“5^th Representation”).

(9)  The s.227A application had the support of 40 creditors (including Choi)  who held a total debt of HK$616 million representing 49% of the Company’s total liabilities.  These creditors considered that it is in the best interests of the creditors to have the Company wound up in Cayman Islands and supported the PLs’ appointment as liquidators (“6^th Representation”)  (Lai 5^th §§88, 95-96).   

(10)  This Court “overlooked” the “present and voting component of the 75% by value threshold for schemes of arrangement in both Hong Kong and the Cayman Islands.  Accordingly, disregarded the fact that only 54.4% by value of creditors have expressed a view to date and the fact that the overwhelming majority of that group wish to consider a restructuring” (“7^th Representation”)  (Cayman Judgment §13(d)).

9.Given the timing of the application, the short notice given to the creditors and the fact that most of the creditors are based in Hong Kong or in the Mainland, it would not come as a surprise to the PLs that no creditor attended the hearing on 22 February 2022. On the bases of the representations made by the PLs, Doyle J made a winding up order against the Company pursuant to s.92(d)  of the Companies Act (2021 Revision)  and the PLs were appointed as joint official liquidators of the Company (“JOLs”).

10.It is clear from the representations and submissions made to the Cayman court that the PLs did not regard the Judgment and the findings therein were binding upon them or the Company.  In Doyle J’s Reasons for Judgment dated 15 March 2022, Cause No. FSD 102 of 2020 (DDJ)  (“Cayman Judgment”), he set out “the surprise and concern of the Company and the [PLs]” over the WU Order made by this Court (§9)  and the “main concerns of the [PLs]” in respect of the WU Order and their arguments against this Court’s findings (§13).  As the hearing was uncontested, Doyle J essentially accepted all the arguments advanced by the PLs. 

11.It was not drawn to Doyle J’s attention that the PLs were parties[4] to the Petition, having made and filed 2 affirmations[5] in HCCW.  Even if the PLs claim that they are not parties, as provisional liquidators with powers to act on behalf of the Company, they must be privies of the Company for the purpose of issue estoppel (Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853, at 910; China North Industries Investment Ltd v Chum [2010] 5 HKLRD 1, at §§47, 75, 78-81).  As such privies, the PLs are bound by the findings in the Judgment.  This accords with the principle governing issue estoppel, which has recently been stated by Lord Reed and Lord Hodge in Test Claimants in the Franked Investment Income Group Litigation and others v Commissioners for Her Majesty’s Revenue and Customs [2021] 1 All ER 1001 (at §68)  as follows:

“Lord Sumption in Virgin Atlantic Airways (above), para [21], explained Lord Keith’s judgment in Arnold (above)  in relation to issue estoppel. In the case of that estoppel it was in principle possible to challenge a previous decision on an issue not only by taking a new point which could not reasonably have been taken in the earlier proceedings but also (in contrast to cause of action estoppel)  ‘to reargue in materially altered circumstances an old point which had previously been rejected’. In para [22] he stated that Arnold was authority for the following proposition:

‘(3)  Except in special circumstances where this would cause injustice, issue estoppel bars the raising in subsequent proceedings of points which (i)  were not raised in the earlier proceedings or (ii)  were raised but unsuccessfully.  If the relevant point was not raised, the bar will usually be absolute if it could with reasonable diligence and should in all the circumstances have been raised.’”

12.The same principle applies to judgment of a foreign court of competent jurisdiction which is final and conclusive on the merits.  In First Laser Ltd v Fujian Enterprises (Holdings)  Co. Ltd (2012)  15 HKCFAR 569, Lord Collins NPJ stated the principle in this way:

“44. At common law a judgment of a foreign court of competent jurisdiction which is final and conclusive and on the merits will be conclusive in Hong Kong proceedings if the parties are the same and the issue is identical: Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853. Lord Reid, at 918-919, said, however, that there were at least three reasons for being cautious in any particular case. First, it might not be easy to be sure that a particular issue has been decided or that its decision was a basis of the foreign judgment and not merely collateral or obiter. Secondly, it might be most unjust to hold that a litigant should be estopped from putting forward his case because it was impracticable for him to do so in an earlier case of a trivial character abroad with the result that the decision in that case went against him. Third, there could be no estoppel of this character unless the foreign judgment was a final judgment on the merits.

45. The questions in the Carl Zeiss case related to identity of parties and issues, and to whether the judgment was final and conclusive, but the meaning of ‘on the merits’ arose in The Sennar (No 2) [1985] 1 WLR 490 … Lord Brandon said (at 499):

‘Looking at the matter negatively a decision on procedure alone is not a decision on the merits.  Looking at the matter positively a decision on the merits is a decision which establishes certain facts as proved or not in dispute; states what are the relevant principles of law applicable to such facts; and expresses a conclusion with regard to the effect of applying those principles to the factual situation concerned.’”

13.Even if the PLs considered that transnational issue estoppel might not apply to the Cayman proceedings, it would still be incumbent upon them, as officers of the court, to draw to the attention of the Cayman court that the findings in the Judgment had been made on the basis of the evidence filed on behalf of the Company.  This was particularly so when the PLs had since May 2020 been working closely with the directors of the Company and they shared the same views as the Management of the Company.   

14.On 1 March 2022, the Cayman court issued a letter of request to the Hong Kong court (“LOR”)  for the purposes of recognising the appointment of the JOLs such that the JOLs have and may exercise, to the fullest extent permitted by the Hong Kong law, the same powers as are available to them in accordance with Part II of the Schedule 3 to the Companies Act (2022 Revision), namely:

(1)  Power to take possession of, collect and get in the property of the Company and for that purpose to take all such proceedings as the JOLs consider necessary;

(2)  Power to do all acts and exercise, in the name and on behalf of the Company, all deeds, receipts and other documents and for that purpose to use, when necessary, the company seal;

(3)  Power to prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against that person’s estate, and to receive dividends in the bankruptcy, insolvency, sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent and rateably with the other creditors;

(4)  Power to draw, accept and make and indorse any bill of exchange or promissory note in the name and on behalf of the Company, with the same effect with the [sic] respect of the Company’s liability as if the bill or note had been drawn, accepted, made or indorsed by or on behalf of the Company in the course of its business;

(5)  Power to promote a scheme of arrangement;

(6)  Power to convene meetings of creditors and contributories; and

(7)  Power to do all other things incidental to the exercise of the JOL’s powers.

15.The LOR goes on to request the Hong Kong court to make, inter alia, an order that (1)  the JOLs have the power to authorise the directors to approve the audited financial results of the Company; (2)  the remuneration and expense of the JOLs be paid out of the assets of the Company in accordance with the applicable rules and regulations; and (3)  the JOLs be at liberty to engage counsel, attorneys and professional advisors in Hong Kong or elsewhere as they consider necessary and to remunerate them out of the assets of the Company.

B3.  Ex parte Application

16.On 18 March 2022, the JOLs placed an “Ex parte Summons” before Harris J seeking the following relief (“Application”):

(1)  the liquidation and appointment of the JOLs pursuant to the order of the Cayman court dated 22 February 2022 be recognised by the court (§1);

(2)  the order of Harris J dated 9 November 2020 shall cease to have effect from the date of the sealing of the order to be made by the court (§2);

(3)  the JOLs have and may exercise in Hong Kong the following powers:

“(a)  to do all things and take all steps necessary to implement a debt restructuring plan (the “Restructuring Proposal”)  for the Company, including but limited to promoting and implementing a scheme of arrangement in Hong Kong (the “Scheme”)and convening meetings of creditors and contributories, and for such purposes, to take up the role of the Company as the applicant in HCMP 2303/2020, which may include continuing with the said proceedings and attending the hearing scheduled on 29 March 2022 and any adjourned hearing(s)  thereof;

(b)  to deal with and/or issue all documents (including but not limited to the documents to be filed in the aforesaid HCMP 2303/2020 or any new or fresh proceedings for directions to convene the Scheme meeting or sanctioning the Scheme), and to take all steps and actions, in relation to, in connection with and/or incidental to the Scheme;

(c)  subject to the JOLs obtaining sanctions from the Cayman Court, to carry on all or any portion of the business of the Company so far as may be necessary for the beneficial winding-up of the Company and/or the implementation of the Restructuring Proposal;

(d)  to approve the audited financial results of the Company;

(e)  to operate and open or close any bank accounts in the name and on behalf of the Company for the purpose of collecting the assets and paying the costs and expenses of the JOLs;

(f)  to retain and employ barristers, solicitors or attorneys, accountants and/or such other agents or professional persons as the JOLs consider appropriate for the purpose of advising or assisting in the execution of their powers and duties and on such terms as they may think fit and to remunerate them out of the assets of the Company; and

(g)  to do all other things incidental to the exercise of the JOLs’ powers.”

(4)  the remuneration and expenses of the JOLs be paid out of the assets of the Company “in accordance with the applicable rules and regulations” (§4); and

(5)  the costs of the Application “be paid out from the assets of the Company as an expense of the liquidation” (§7).   

17.The Application is supported by the 2^nd affirmation of Lai dated 18 March 2022 (“Lai 2^nd”).

18.By letter dated 18 March 2022 Messrs Chungs Lawyers (“CL”)  sought directions from Harris J for a short hearing and permission to file the Application papers on the ground that “the JOLs urgently need to act on behalf of the Company to progress” the Scheme including the application to convene a scheme meeting in HCMP 2303/2020 scheduled to be heard before His Lordship on 29 March 2022.   

19.In the letter dated on 21 March 2022, Harris J made the following observations on the “Ex parte Summons”:

(1)  the OR should be notified of the Application and be represented at the hearing as she is the provisional liquidator of the Company in Hong Kong;

(2)  the originating summons to convene a meeting of creditors to consider the Scheme was issued on 17 December 2020.  In light of the Judgment, His Lordship takes the view that “it is more important that the application for recognition is considered thoroughly and with the input from the Official Receiver rather than for the application for leave to convene meeting to go ahead on 29 March 2022 in HCMP 2303/2020”;

(3)  directions will be made for determination of the Application when the OR has had the opportunity to state her preliminary views; and

(4)  the hearing on 29 March 2022 will likely be adjourned.  If the Scheme collapses as a result of that, it is a consequence of the “entirely unsatisfactory delay in bringing it before the court”.   

20.Also on 21 March 2022, CL informed the OR of the Application and Harris J’s observations and provided copies of the Application and the supporting affirmation to the OR. 

21.In her letter dated 28 March 2022, the OR expressed her agreement that the hearing on 29 March 2022 should be adjourned and provided her preliminary views on the Application as follows:

(1)  The WU Order was made by this Court on 22 November 2021 and the OR became provisional liquidator of the Company;

(2)  A creditor had made the s.227A application on 6 December 2021, which was refused by this Court on 15 December 2021;

(3)  Owing to the 5^th wave of COVID, the OR had still not been able to convene the first meeting of creditors and contributories for the purpose of appointment of liquidators and committee of inspection.  The Company has 333 creditors of which 253 are bondholders;

(4)  The application to convene scheme meeting has been adjourned a number of times.  In the Judgment (§§18-19), this Court considered that the proposed Scheme is not feasible given that (a)  it lacked the support of 75% in value of the unsecured creditors, and (b)  the SEHK had not approved the listing of the new shares to be issued under the Scheme due to the absence of the latest audited financial statements; and

(5)  If the Scheme to be put forward is the same as the one considered by this Court, the Application is not desirable.  The OR is also concerned that the JOLs will seek further recognition with additional powers for the purpose of the winding up of the Company. 

22.In their letter dated 4 April 2022 to Harris J, CL asserted that before making the Application, the JOLs had written to “all creditors and petitioners known to [them]” and the OR to inform them of the Application, and the JOLs had received supports from 9 “independent unsecured creditors”, and their claim amounted to 29.47% of the total unsecured indebtedness of the Company, of which 24.12% is claimed by Champion Alliance Industries Limited (“Alliance”).  Alliance is the same creditor who holds certain security in respect of the debt[6].  CL reiterated the “urgency” of the Application and invited Harris J to give directions on the determination of the Application. 

23.On 8 April 2022, Harris J informed the parties that in light of the OR’s letter of 28 March 2022 and the history of the matter, the papers had been passed to this Court to deal with. 

24.By letter dated 12 April 2022, this Court directed the Application to be heard on 26 April 2022 as if it were made in HCCW so that the OR and all creditors who had filed notices of intention to appear could attend the hearing if they wished.  The Court required the JOLs and their legal representatives in charge of the Application to come forth and explain the following matters:

(1)  why the Application was made on an ex parte basis in HCMP 1556/2020 when the Company had already been wound up by the court in HCCW (“1^st question”);

(2)  why the Application was not made to the Judge who had been dealing with matters concerning the winding up of the Company (“2^nd question”); and

(3)  why the JOLs should not be personally liable for the costs occasioned by the Application in any event (“3^rd question”).

25.The matter then took a complete turn.  The JOLs no longer urged the court to deal with the Application on an urgent basis and, instead, abandoned the Application on the ground that the Investor had “decided not to fund the Application due to commercial concerns”.  In CL’s letter of 14 April 2022, the JOLs sought leave to vacate the hearing of 26 April 2022 and responded to the questions as follows:

(1)  1^st question: there was urgency in making the Application because (a)  “no one could represent the Company to progress the Company’s Scheme[7]” and (b)  the resumption deadline of 3 April 2023.  Notice of JOLs’ intention to make the Application was given to the creditors and petitioners on 16 March 2022;

(2)  2^nd question: it was “natural and appropriate” to make the Application to Harris J as (a)  the recognition order was made by His Lordship and the PLs were “required to go back to the Court under HCMP 1556/2020 to inform the court of the latest status and terminate the earlier recognition order granted by [Harris J]”; (b)  it has been the practice of the court that foreign insolvency office-holders are required to start miscellaneous proceedings when they apply for recognition and the position “remains the same” where there are ongoing winding up proceedings; (c)  the Application was made “in accordance with the directions of the Cayman Court”; (d)  the JOLs are not parties to and have “no natural standing” to issue the Application in HCCW; (e)  the 2 “live” proceedings (HCMP 1556/2020 and HCMP 2303/2020)  have since 2020 been handled by Harris J, whereas HCCW “had concluded”;

(3)  3^rd question: “Since the JOL’s costs of and occasioned by the Application are to be recovered from the investor[8]”, the JOLs invited the court “to make no order as to costs for the Application, especially given that the Application was intended to be made on ex-parte basis, and there is no other party under the Application”.  If the court considers it appropriate for the JOLs to pay the OR’s costs, the JOLs “agree to forthwith pay all the costs of and occasioned by the Application to the [OR], to be taxed if not agreed”. 

26.The complete volte-face on the part of the JOLs (and the Investor behind them)  shows that the JOLs would only pursue the Application if it is heard by their chosen Judge and outside the HCCW.  It is a matter of grave concern that the JOLs chose to act in this way.  On 19 April 2022, this Court directed the hearing to proceed for the purpose of determining the propriety of the Application and costs.  The legal representatives and the JOLs in charge of the matter are required to attend the hearing as they may be required to give evidence on oath in relation to the matters stated in CL’s letter of 14 April 2022.

C.  DISCUSSION

27.In his 2-page note, Mr Look Chan Ho, counsel for the JOLs, does not make any submissions on the merit (or lack of it)  of the Application.  Nor does he provide any further response to the 1^st to 3^rd questions other than asserting that (1)  the JOLs had no intention to undermine the WU Order or to engage in forum shopping; (2)  the Application was made in accordance with “the Court’s general practice” to make the application on an ex parte basis in miscellaneous proceedings; (3)  the creditors and the OR had been informed about the intended Application; (4)  the JOLs “sought powers limited to progressing the [Scheme]” and “never intended to seek further powers”; and (5)  the JOLs “confirm” that they “agree to bear all the costs of and occasioned by the Application in any event (including any costs of the [OR])”. 

28.Lai is the JOL in charge of the matters concerning the Company and made all the affirmations on behalf of the JOLs.  Mr Lawrence Chan (“Mr Chan”)  of CL is in charge of the Application.  Mr Ho is counsel advising the JOLs. 

29.In view of the lack of meaningful submissions and in fairness to Lai and the legal representatives of the JOLs, at the hearing, questions relating to the Court’s concerns arising from the way in which the Application was made are directed to each of Lai, Mr Chan and Mr Ho.  They elect to provide their answers through Mr Ho. 

30.Having considered their answers given in correspondence and at the hearing, the history of the matter and the contents of Lai 5^th, Lai 7^th and Lai 2^nd, I have come to the firm view that the conduct of the PLs/JOLs has fallen far short of the standards one would expect from officers of the court in the following respects:

(1)  The misrepresentations made by the PLs when they applied to the Cayman court for orders appointing them as JOLs and seeking recognition of their appointment in Hong Kong (“Misrepresentations Issue”). 

(2)  The manner in which the JOLs made the Application to the forum of their choice (“Forum Shopping Issue”). 

(3)  The misrepresentations and material non-disclosures made by the JOLs when they made the Application on an ex parte basis (“Material Non-Disclosures Issue”).

31.The above conduct is serious and should not be overlooked by the court simply because the JOLs decided to abandon the Application or agreed to pay the costs occasioned by such Application.  It is for the court to uphold the high standards required of officers of the court, as they are the persons entrusted with the responsibility of protecting and furthering the interests of the creditors as a whole and are often conferred with extensive powers to facilitate the performance of their duties.

C1.  Duties of Provisional Liquidators / Liquidators

32.The principles are well established and may be summarised as follows:

(1)  The liquidator, whether he is treated as a trustee in the strict sense or simply as an agent, occupies a fiduciary position in relation to the company, its creditors and contributories.  This imposes certain obligations, which are strictly enforced by the courts, on the liquidator.  These include the liquidator is bound to act honestly and to exercise powers bona fide for the purpose for which they are conferred and not for any private or collateral purpose.  He must not allow his private interests to come into conflict with duties, and in discharging the duties he must at all times act with complete impartiality as between the various persons interested in the property and liabilities of the company (McPherson’s Law of Company Liquidation, 5^th ed., 2021, §8-049).

(2)  As officer of the court, the liquidator should maintain an even and impartial hand between all the individuals whose interests are involved in the winding-up.  It is his duty to the whole body of creditors, and to the court, and it is for the Judge to see that he does his duty in this respect (Re Contract Corporation; Gooch’s Case (1871)  7 Ch. App. 207, 211).

(3)  A liquidator must not only be independent but seen to be independent (Re Allebart Pty Ltd [1971] 1 NSWLR 24, §§30-31; Re Palmer Marine Surveys Ltd [1986] BCLC 106, at 111).

(4)  There is public interest in maintaining the public confidence in the independence of liquidators (Re Brian Cassidy Electrical Industries Pty Ltd (in liq)  & anor v Attalex Pty Ltd (1984)  9 ACLR 289, 303; Re Lowerstoft Traffic Services Ltd [1986] BCLC 81, at 84f-g; Re Pinstripe Farming Co Ltd [1996] 2 BCLC 295).

33.The above principles have consistently been applied by the Hong Kong court (Re Orient Power Holdings Ltd [2008] 2 HKLRD 494, §26(4), per Kwan J (as she then was)).  In particular, where the proposed liquidators accepted the appointment on the basis that their remuneration depends on the approval of a funder or that they are required to seek the approval of the funder before exercising any of their powers, it would give the appearance that they had subjected themselves to the control or influence of the funder, and it would not be appropriate for the court to appoint them as liquidators (Re Goodway Ltd [1999] 1 HKC 141, per Yuen J (as she then was)).

34.The JOLs have not disclosed to the Court the terms of the funding agreement entered into between the Investor and themselves which had apparently been sanctioned by the Cayman court.  As can be seen in their responses to the 1^st to 3^rd questions, when the propriety of the conduct of the JOLs was called into question, they resorted to the “direction” or “sanction” obtained from the Cayman court but did not disclose the evidence upon which they obtained such “direction” or “sanction”.  This illustrates the problem where foreign-appointed provisional liquidators/liquidators were given certain powers by the Hong Kong court through a recognition order obtained in miscellaneous proceedings (i.e. outside the winding-up proceedings)  and have carried out extensive work in the exercise of such powers.  In effect, they are able to act as provisional liquidators/liquidators in Hong Kong but are not subject to the supervision and control of the liquidators under the CWUO, or how they should be remunerated for their work carried out in Hong Kong. 

35.The problem is manifested in the present case.  As is clear from the evidence filed on behalf of the JOLs in the Cayman proceedings (Lai 5^th and Lai 7^th)  and the evidence filed in support of the Application (Lai 2^nd)  that Lai saw fit to ignore the Judgment and the findings contained therein and, instead, put forward the contrary views and contentions which the directors and/or the Investor wanted him to say.  This is despite the fact that such views and contentions are misleading or inaccurate (see sections C2 and C4 below).  When this concern is raised with Lai at the hearing, he is unable to offer any explanation other than asserting (through Mr Ho)  that the JOLs had no intention to mislead the courts.    

C2.  Misrepresentation Issue

36.The bases upon which the PLs sought the orders from the Cayman court were their views that (1)  the Scheme remained feasible and that it would be in the interests of the creditors to pursue the same; and (2)  only the PLs had the requisite knowledge and resources to pursue the Scheme including applying for directions from Harris J to convene meeting for the creditors to consider and approve the Scheme.  Even if the PLs’ views were well founded (which they are not), the obvious avenue available to the PLs would be to request the OR to appoint them as her special managers for the specific purpose of pursuing the Scheme.  Such avenue is envisaged in s.216 of the CWUO but never pursued.  Had the Cayman court been told by the PLs about the availability of this avenue, it would have no difficulty in concluding that there was no justification for the PLs to take the elaborate (and costly)  steps of seeking orders from the Cayman court for the purpose of pursuing the Scheme.

37.When asked by this Court as to why the PLs did not pursue or inform the Cayman court about the existence of such avenue, Lai, Mr Chan and Mr Ho all say that “it did not occur to anyone to ask the OR” about such appointment, “nobody thought of the idea of agency”, and they were not aware of any precedent where such appointment had been made in the past.  It is difficult to accept that Lai, Mr Chan and Mr Ho, who profess to have substantial experience in dealing with insolvency matters, did not know about the possibility of asking the OR to appoint the PLs as her special managers for the purpose of dealing with the Scheme.  This is particularly so when (1)  Mr Ho relies heavily on the “concept of agency” discussed in the authorities cited as “indirect” authorities in support of the Hong Kong court granting a recognition order after the Company had been wound up (see §44 below); and (2)  in Lai 7^th, the PLs specifically requested the Cayman court to allow them to appoint the directors as agents of the Company for the purpose of approving the audited financial results (see §8(5)  above). 

38.It seems to me that the time and costs involved in making the application to the Cayman court, followed by making the Application to Harris J could have been avoided had the PLs and their legal representatives paid heed to the statutory scheme under CWUO, rather than trying to find ways to bypass the same.  For this reason alone, I do not think that the PLs should be allowed to recover the costs of and occasioned by the Application (including the costs incurred in seeking the orders from the Cayman court)  from the assets of the Company.   

39.In addition to their failure to draw to the attention of the Cayman court the matters described in §§11-13 and 36 above, the PLs made the following misrepresentations to the Cayman court.

40.Contrary to the 1^st Representation, the audited results for the period ended 30 June 2021 had not been completed by the time the WU Order was made on 22 November 2021. 

(1)  In §11 of the 3^rd affidavit of Ng Kwok Hung Perry[9] filed in HCMP 2303/2020 on 5 November 2021 (“Ng 3^rd”), it was stated that the new auditors had been appointed on 15 October 2021 and it was “expected that the audited results [would] be published by the end of November 2021”.  The same fact was stated in §4(10)  of the skeleton of counsel for the Company filed for the hearing on 22 November 2021.  It was on these bases that this Court said, at §13(9)  of the Judgment, that the Company had been working with the new auditors appointed in October 2021 to finalise the results which, it was said, would be published in November 2021. 

(2)  When being asked to identify the evidence in support of his assertion, Lai is not able to point to any evidence, let alone the so-called “completed” audited results.  Instead, he asserts that the audit was completed in around mid-November 2021 but the “formal” audited results could not be issued until after the board had approved them.  If that were true, there was no reason why the Company did not say so in Ng 3^rd or at the hearing on 22 November 2021. 

(3)  When confronted with what was stated in Ng 3^rd and counsel’s skeleton, Lai claims that the JOLs were not involved in the preparation of Ng 3^rd and cannot recall whether he had possession of Ng 3^rd when he prepared his affirmations and it did not occur to “anyone” that they should check the wordings of Ng 3^rd “word for word”. 

(4)  Given that the PLs had all along been working closely with the directors and the proximity of time between Ng 3^rd and Lai 5^th and Lai 7^th, I do not accept Lai’s assertion that he was not aware of the state of the audited results as described in Ng 3^rd.  In any event, even if his assertion were true, it does not explain how Lai could make the 1^st Representation in the face of the (undisputed)  fact stated in §13(9)  of the Judgment. 

41.The 2^nd Representation is misleading.  Upon the WU Order made by this Court, the directors ceased to have any power to act for the Company, and only the OR (qua provisional liquidator)  has the power to approve the audited results of the Company as and when they are completed.  It has not been explained by the PLs the basis for asking the Cayman court to authorise the PLs to appoint the directors as agents to approve the audited financial results, or why it would be in the interests of the creditors for the PLs to do so without having to assume any personal liability.  This is particularly so when the PLs did not feel able to approve the accounts themselves, notwithstanding the fact that they had been appointed as PLs by the Cayman court for over 2 years. 

42.The 3^rd Representation is highly misleading, if not untrue.  As a result of the 3^rd Representation, Doyle J in the Cayman Judgment set out what he considers to be the law on the “primacy of the place of incorporation of a company in the context of winding up”[10] applicable to Hong Kong and made an order authorising the JOLs to take step to obtain “recognition” with the powers for them to act in Hong Kong.    

43.As the JOLs well knew, there is no precedent in support of the PLs’ bold assertion that Hong Kong court would recognise the liquidators appointed by a foreign court and confer powers on such liquidators to act in Hong Kong after the company has been wound up by the court and liquidator appointed in accordance with the CWUO.

44.At the hearing, Mr Ho is unable to point to any authority in support of the 3^rd Representation.  Instead, he contends that the authorities concerning ancillary winding up and the concept of agency, such as Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675; Re Irish Shipping and Re China Medical[11] are “indirect” precedents in support of the 3^rd Representation.  I do not think that these cases support the JOLs’ contention for the reasons explained in Re Up Energy Development Group Ltd [2022] HKCFI 1329, §§59-67 and §§71-80. 

45.When being pressed further, Mr Ho acknowledges that there is no precedent, whether in Hong Kong or in other common law jurisdictions, where the court made the order sought by the JOLs which has the effect of allowing foreign-appointed liquidators to act alongside with the liquidator appointed under the statutory scheme in the domestic jurisdiction (i.e. ancillary winding up).  Instead, he describes the Hong Kong jurisdiction on “recognition” as “unique”.  He says that when CL applied for directions from Harris J, they stated clearly that the issue involved in the Application is an “unprecedented one”.  This only goes to confirm that the 3^rd Representation is untrue.  The PLs ought to have informed the Cayman court that what they proposed to seek from the Hong Kong court is very different from their previous application for letter of request (which led to Harris J making the order recognising their appointment for restructuring purpose)  and is wholly unprecedented.  It is regrettable that the correct legal position had never been canvassed before Doyle J, and he was led to believe that the Hong Kong court would readily make the “recognition” order requested under the LOR, so that the PLs could represent the Company at the directions hearing before Harris J on 29 March 2022 and, thereafter, convene meeting of creditors for the creditors to consider the Scheme.   

46.The 4^th Representation is a deliberate misstatement for the following reasons.

47.First, the alleged confusion does not exist.  Upon the making of the WU Order, only the OR has authority to act on behalf of the Company in Hong Kong.  The directors ceased to have power to act for the Company.  Nor did the PLs have any power to act for the Company in Hong Kong as their appointment as provisional liquidators came to an end upon the winding up order made by Doyle J.  To the contrary, much confusion and uncertainty would ensue if the Hong Kong court were to recognise the JOLs as it would mean that they could in effect act as liquidators alongside with the OR, but are not subject to the provisions under the CWUO. 

48.Second, the proposed Scheme is found to be not feasible for the reasons stated in §19 of the Judgment.  In the Cayman Judgment, Doyle J came to a different view on the feasibility of the Scheme, in reliance on the 5^th, 6^th and 7^th Representations.

49.By the 5^th Representation the PLs asserted that there had been “recent improvements” in the operations of the Group.  However, if one reads the figures in §§63-66 of Lai 5^th carefully, it can be seen that the so-called improvements did not exist because after taking into account the “unallocated expenses” and “finance costs” associated with the 3 selected business segments, they suffered a net loss of HK$25,810,352 for the 3-month ended 30 September 2021.  It was highly misleading for the PLs to focus only on the increase in revenue and gross profit in the 3-month period without taking into account the expenses and finance costs in carrying on such business.   

50.The main plank of the 6^th Representation is that at least 40 creditors (including Choi)  who held a total debt of HK$616 million or 49% of the Company’s liabilities supported the s.227A application, the Scheme and the PLs’ appointment as liquidators.  However:

(1)  If one reads Choi 1^st (relied on in Lai 5^th and Lai 7^th), there was in fact no reference to the alleged support, let alone from 40 creditors.  Worse still, the so-called list of supporting creditors relied on by Lai is no more than a list containing 40 names and was not signed by anyone.  There was no evidence to show that these named creditors (assuming they are creditors of the Company)  had in fact given their support to the s.227A application, the Scheme or the appointment of the PLs as liquidators at all.

(2)  It could not have escaped the attention of the PLs that it was necessary to ascertain and obtain letters of support duly signed by the creditors as Lai had exhibited letters of support signed by the relevant creditors[12] to his affirmation filed in HCCW on 7 August 2020 showing their stance back in August 2020. 

(3)  By contrast, the Supporting Creditors had by themselves or through their solicitors filed notices of intention to appear in and support the Petition[13]. 

51.The 7^th Representation appears to be based on the arguments advanced by counsel on behalf of the PLs, which Doyle J found in favour.  However:

(1)  It was not drawn to the attention of Doyle J that in fact, the 7^th Representation was not supported by any assertions contained in Lai 5^th and Lai 7^th.  It is not clear how the PLs could, without any evidence, suggest that the Scheme would receive the support from creditors holding 75% in value of the unsecured indebtedness. Nor did the PLs identify any basis for speculating that some of the creditors may not attend and vote at the meeting at which the Scheme is to be considered. 

(2)  As stated in the preceding paragraph, there was no evidence showing the alleged support from 40 creditors, still less the assertion that the “overwhelming majority of that group [of creditors] wish to consider a restructuring” stated in §13(d)  of the Cayman Judgment.

(3)  It was also not drawn to Doyle J’s attention that the burden was on the Company opposing a winding up to satisfy the court that the proposed Scheme had to be approved by 75% in value of the creditors at each class meeting[14].  As Alliance (whose claim accounts for 17% of the total indebtedness)  holds security, it may be said that its rights are so dissimilar from the rights of other unsecured creditors and cannot sensibly consult together with a view to their common interest at the same meeting (UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin (2001)  4 HKCFAR 358, §27).  If and insofar as Alliance elects to retain the security it holds and applies it to repay the debt due, the amount of its claim against the Company will have to be reduced by the value of the security.

52.Lastly, the assertion that recognition of the PLs’ appointment in Hong Kong would avoid the need for “running multiple processes and convening creditors’ and contributories meetings” (last part of the 4^th Representation)  is wholly without basis.  Upon the WU Order, the winding up of the Company will have to be carried on in accordance with the CWUO.  The PLs have not explained how the recognition of their appointment would have the effect of obviating the need to convene creditors’ and contributories’ meeting in Hong Kong. 

C3.  Forum Shopping Issue

53.Since the WU Order and the s.227A application were dealt with by this Court, it would be natural and, indeed, necessary, for the same judge to deal with the Application.  This was particularly so when the JOLs sought to rely on the representations set out in Lai 2^nd, many of which were inconsistent with or contradictory to the findings in the Judgment and the reasons for dismissing the s.227A application. 

54.The events described in §§18 - 26 above show that the JOLs would only pursue the Application before Harris J. This is reinforced by their decision to abandon the Application as soon as Harris J transferred it to this Court.

55.Mr Ho contends that there was no intention whatsoever to forum shop or undermine the WU Order relying on the following matters:

(1)  The court’s general practice in respect of recognition of foreign officeholders which, he says, requires the applications to be made on an ex parte basis in miscellaneous proceedings, instead of any existing winding-up proceedings.[15]

(2)  On 16 March 2022, the JOLs provided written notices to all creditors of the Company known to them and the OR about the intended Application.

(3)  In CL’s letter dated 18 March 2022 seeking directions from Harris J, they expressly stated that the WU Order had been made by this Court on 22 November 2021.

(4)  In the Application, the JOLs sought powers limited to progressing the Scheme.  The JOLs never intended to seek further powers.

(5)  Any intended limited or temporary stay application with respect to the WU Order (after the Application is granted)  would need to be made by a creditor under HCCW, and thus the matter would probably come before this Court.

56.I am unable to see how any of the above points could justify the JOLs’ act in engaging in forum shopping for the following reasons:

(1)  The cases cited by Mr Ho all concern with applications made before the companies were wound up by the Hong Kong court.  As stated in §§43 - 45 above, there is no precedent where the court grant the recognition order sought by the JOLs.  Indeed, it was precisely because of the novel nature of the Application that Harris J was not prepared to deal with the Application on an ex parte basis. 

(2)  It is well settled that the making of a winding-up order brings into operation a statutory scheme for dealing with the assets and affairs of the company (Ayerst v C&K (Construction)  Ltd [1976] AC 167, at 176E-177D, per Lord Diplock).  Winding up proceeding is a class remedy designed to protect and serve the interests of the creditors as a whole.  Consistent with this, the Companies (Winding-Up)  Rules (Cap. 32H), which apply to all companies being wound up, require applications to be made in the same winding-up proceedings (e.g. rules 1, 7-14).  There is no basis or justification for the JOLs to make the Application outside the HCCW.  This is particularly so when, as the JOLs well knew, the Application if allowed would have the effect of undermining the WU Order and the statutory scheme of winding up. 

(3)  Contrary to Mr Ho’s contention, the powers sought by the JOLs in the Application were not limited to progressing the Scheme (see §16 above).  They go far beyond the powers necessary for pursuing the Scheme.

C4.  Material Non-Disclosures Issue

57.The principles are stated in Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, 1356F – 1357B and may be summarised as follows:

(1)  In making an ex parte application, the applicant is under a duty to make a full and fair disclosure of all the material facts.

(2)  The material facts are those which it is material for the judge to know in dealing with the application as made.  Materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers.

(3)  The applicant must make proper inquiries before making the application.  The duty of disclosure therefore applies not only to material facts known to the applicant but also to any additional facts which he would have known if he had made such inquiries.

(4)  The extent of the inquiries which will be held to be proper, and therefore necessary, must depend on all the circumstances of the case including (a)  the nature of the case which the applicant is making; (b)  the order for which application is made and the probable effect of the order on the defendant; and (c)  the degree of legitimate urgency and the time available for the making of inquiries.

58.In Lai 2^nd, the JOLs made the following representations:

(1)  The 1^st Representation concerning the audited results for the 18-month ended 30 June 2021 (Lai 2^nd §14).

(2)  The 4^th Representation as the basis for suggesting that the Application was urgent (Lai 2^nd §§35-39).

(3)  The 5^th Representation on the Operation and Financial Status of the Company and the feasibility of the Restructuring Plan (Lai 2^nd §§24-25).

(4)  The 6^th Representation in respect of the 40 creditors (Lai 2^nd §§21-22, 26(1)-(2)).

(5)  The OR indicated that “it would be challenging for them [sic] to arrange a creditors’ meeting with hundreds of creditors (especially in light of the various pandemic safety restrictions still in place)  and that alternative arrangement might be able to be coordinated between the Provisional Liquidator and the JOLs if a winding up order would be made by the Cayman Court as soon as possible”.  The PLs therefore invited the Cayman court to consider granting a winding up order so as “to progress the restructuring and/or ensure consistency of the status of the Company in the place of incorporation” (Lai 2^nd §§26(4), 27)  (“8^th Representation”).

(6)  The JOLs are aware of their duty to give full and frank disclosure and will update the court should there be any new developments in relation to the Application (Lai 2^nd §40). 

59.In Lai 2^nd the JOLs simply exhibited the Judgment and did not refer to any of the findings therein.  Nor did the JOLs draw to the attention of the court that the 1^st, 4^th, 5^th and 7^th Representations contained in Lai 5^th (upon which the JOLs relied in Lai 2^nd)  were inconsistent with or contradictory to the findings in the Judgment.  This was all the more important when the Application was made to Harris J who was not privy to the Judgment. 

60.When being asked to explain why the JOLs did not refer to the inconsistencies between the 1^st, 4^th, 5^th and 7^th Representations and the findings in the Judgment, and why Mr Chan and Mr Ho as the JOLs’ legal representatives did not bring to the attention of the court such inconsistencies in their submissions, Lai, Mr Chan and Mr Ho all say that their intention was not to question the Judgment in any way or to try to contradict any factual findings therein, but to deal with the facts at the time the Application was made.  I am unable to accept their explanation.  As stated in §§8 - 10 above, it is clear from Lai 5^th, Lai 7^th and the Cayman Judgment that the JOLs did exactly what they now try to disavow namely, to question the Judgment and contradict the findings therein. 

61.For the reasons stated in §§40, 46 – 50 and 52 above, the 1^st, 4^th, 5^th and 6^th Representations are highly misleading or are untrue. 

62.As regards the 8^th Representation, it is made without any factual basis and is incorrect.  As Ms Maureen Chan, solicitor for the OR, points out at the hearing, the OR is not aware of any precedent where the court recognises and gives powers to foreign liquidators to act independently of the provisional liquidators/liquidators appointed under the CWUO, and is concerned about the status of the “recognition” order sought by the JOLs and the statutory regime of winding up in Hong Kong.  The OR notes that although the JOLs claim that the Application is only concerned with the Restructuring Plan, if the proposed Scheme falls through, it is not clear what would remain in terms of the overall liquidation, and the OR agrees with the observation of Harris J that the Application needs to be considered thoroughly.  The OR is also concerned that if (as it appears to be the case)  the proposed Scheme is the same as the one considered by this Court, it is doubtful that the recognition order sought by the JOLs would be beneficial to the creditors of the Company.   

63.For the above reasons, there have been serious breaches of the duty of full and frank disclosure when the JOLs made the Application on an ex parte basis.  The breaches are egregious and could only have been made by the JOLs deliberately.

D.  COSTS

64.On the basis of the confirmation made by Mr Ho on behalf of the JOLs that they agree to bear all the costs of and occasioned by the Application in any event, including any costs of the OR, I made the following orders:

(1)  The costs of the OR including the costs of the hearing in the sum of HK$29,000 be paid by the JOLs forthwith; and

(2)  The remuneration of the JOLs, and the costs of and occasioned by the Application be paid by the JOLs personally, and the JOLs are not entitled to recover such costs and remuneration from the assets of the Company.

65.Mr Ho does not oppose the above costs order. 

66.It seems to me that in light of the misconduct on the part of the JOLs set out above, this is a case where the Court should exercise the discretion to disallow the JOLs’ right to receive remuneration and to recover any costs incurred in making the Application from the assets of the Company.  The latter order is made despite the JOLs’ agreement to bear all the costs of and occasioned by the Application in any event, to ensure that the JOLs will not look to the assets of the Company to pay their costs.  This is because Order 62 rule 6(2)  of the Rules of the High Court provides that where a person is or has been a party to any proceedings in the capacity of trustee, he shall, unless the court otherwise orders, be entitled to the costs of those proceedings, in so far as they are not recovered from or paid by any other person, out of the fund held by the trustee.

Mr Look Chan Ho, instructed by Chung’s Lawyers, for the Joint Official Liquidators

Ms Maureen Chan, of Official Receiver’s Office, for the Official Receiver