The Commissioner of Inland Revenue v. The Registrar of Companies and Another

HCMP004268/1998

HCMP 4268/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4268 OF 1998

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Coram : The Hon Mrs Justice Le Pichon in Court

Date of Hearing : 5 January 1999

Date of Judgment : 5 January 1999

Reasons Handed Down : 12 January 1999

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REASONS FOR JUDGMENT

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1. This is an application by the Commissioner of Inland Revenue for an order under section 290(1) of the Companies Ordinance to declare the dissolution of Mass Success Development Limited ("the Company") void. The 1st Respondent, the Registrar of Companies, did not oppose the application save as to the Chinese name of the Company were the court to make the declaration sought. The Commissioner's application was opposed by Cheung Hung Fong also known as Hung Fong Cheung and also known as Hung Fong Cheung, Luke, the liquidator of the Company. After hearing the parties, an order was made declaring the dissolution of the Company void. The reasons appear below.

Background

2. The Company commenced business in property dealing in October 1988. It allegedly ceased trading as from 1 April 1994. All properties purchased were treated as trading stock and profits realized were returned as assessable profits. There was no property sale for the years of assessment 1991/92 and 1992/93.

3. In June 1994, upon the Company's failure in filing a valid tax return for 1993/94, the Commissioner raised a provisional assessment showing assessable profits of $7.5 million. Upon receiving the Company's tax return showing an assessable profit of $5.7 million, the Commissioner granted a holdover of part of the tax in dispute. The Company's audited accounts for the year ended 31 March 1994 showed substantial net asset of about $3.8 million after having made provision for taxation of about $1 million.

4. On 29 September 1994, the 2nd Respondent in his capacity as manager of the Company informed the Commissioner that the directors had decided to wind up the Company voluntarily and to distribute the Company's assets to its two members of which the 2nd Respondent was one. The Commissioner was informed that no transaction had been entered into by the Company since 1 April 1994. The 2nd Respondent reiterated this statement in the 1994/95 tax return filed in his capacity as liquidator.

5. On 7 November 1994, the Company surprisingly went into voluntary liquidation pursuant to section 228A of the Companies Ordinance on the ground that it was unable by reason of its liabilities to continue business. The 2nd Respondent was subsequently appointed liquidator on 23 December 1994.

6. By letter dated 23rd March 1995, the Commissioner confirmed and proved for the balance of the tax due in the amount of $972,655 for the year of assessment 1993/94 which was final and conclusive.

7. On 20 July 1996, the 2nd Respondent filed the final return without notice to the Commissioner and the Company was dissolved three months later. A dividend of less than 1% of the outstanding tax proved was paid to the Commissioner on 20 August 1996.

8. On investigation, a number of irregularities emerged which, prima facie, suggested improper dealings with the Company's assets both before the commencement and in the course of liquidation. First, despite the representation made to the Commissioner that the Company had ceased business since 1 April 1994, it transpired that the Company disposed of its four remaining properties which were trading stock on 27 June 1994 at cost in the sum of $2.61 million to a "related" company, Chance Fair International Development Limited, of which the Company's then directors So Pang Gen and Choi Ting Ting were both directors and shareholders. Within several months of the sale, Chance Fair was able to mortgage two of the four properties for a total of $8 million. These transactions were prima facie not at arms length and suggested that the 2nd Respondent's representations that the Company ceased business as of 1 April 1994 to be untrue. Second, if it were true that the Company had ceased business since 1 April 1994, there can be no rational explanation as to why the Company had to go into voluntary liquidation pursuant to section 228A since, according to its audited accounts for the year ended 31 March 1994, it had net assets of $3.8 million before taking into account the provision of $1 million for tax. Third, the final account filed on 20 July 1996 contains no carry forward item to reflect the assets of the Company as at 31 March 1994. The final account contains two entries that require further investigation. It records a realization of $5 million from debtors in the PRC on 1 January 1996 and the payment on the same day of the same amount to "secured creditors in PRC". The audited accounts for the year ended 31 March 1994 did not show any secured debt and no charge against the Company's assets was registered with the Companies Registry. If the debt did exist, it could only have been created after 1 April 1994 which again proves that the 2nd Respondent's representation to be false. Further, the "secured" debt not having been registered would be void against the liquidator and the Commissioner as creditor. Prima facie payment of the 'secured' debt might constitute misfeasance on the part of the liquidator. In any event the 2nd Respondent as liquidator will have a great deal to explain in relation to the irregularities identified.

Section 290 of Cap.32

9. This section provides that :

"Power of court to declare dissolution of company void

(1) Subject to subsection (1A), in the case of a company which has been dissolved under section 226A, 227, 239 or 248, the court may at any time within 2 years of the date of the dissolution, on an application being made for the purpose by the liquidator of the company or by any other person who appears to the court to be interested, make an order, upon such terms as the court thinks fit, declaring the dissolution to have been void, and thereupon such proceedings may be taken as might have been taken if the company had not been dissolved.

....."

The essential ingredients for the exercise by the court of its powers under section 290(1) are satisfied in the present case : the Company was dissolved pursuant to section 248; the present application was made within two years of the date of dissolution; and the Commissioner as creditor of an undisputed debt is an interested person for the purposes of section 290(1). See In re Belmont & Co. Ltd. [1952] 1 Ch 10. The revival of the Company would enable the Commissioner to pursue the unsatisfied tax due by the Company.

10. Prima facie, there are the makings of misfeasance proceedings against the 2nd Respondent as to the disbursement made to the "secured" PRC debtors as well as the conduct of the liquidation and against the former directors as to the disposal of the four then remaining properties of the Company at cost which was substantially below their market value. Action can thus be taken under section 276 against any past director or liquidator who has misapplied or who retained or become accountable for any money or property of a company which has been wound up, or who has been guilty of any misfeasance or breach of duty in relation to the company, to compel the director and/or the liquidator to repay or restore the relevant sum of money or property and under section 79M to recover from a company's members the unlawful distributions made in contravention of Part IIA of Cap.32. If the Company did cease business as of 1 April 1994, then either the net assets totalling $4.8 million have been distributed (wrongfully) to its members or they have been improperly appropriated or applied.

The 2nd Respondent's opposition

11. The only ground relied upon by the 2nd Respondent is that if the Company were to be restored, there will not be the minimum number of directors or members since the relevant corporate directors and members had been dissolved. The 2nd Respondent filed an affidavit to the effect that at the date of its dissolution, the Company's only directors and shareholders were King Seed Development Limited and Midland Associates Limited, both of which were dissolved on 20 and 25 July 1997 respectively under section 290A for failing to file returns. However, according to the last annual return made up to 6 September 1994 and presented to the Companies Registry on 17 January 1996 by the 2nd Respondent in his capacity as liquidator, the Company's shareholders were himself holding one share and King Seed holding two shares.

12. As to the question of who the directors were prior to the dissolution of the Company, the picture is a confusing one. There are a number of Form X(ii)s filed with the Companies Registry which overlap and are inconsistent. This is set out in the second affirmation of Fong Ka Tsun filed on behalf of the Commissioner. This is a matter that requires further investigation as it would appear that certain of the filings made must have been made without any basis. To the extent that any filing made misrepresented the facts, those responsible ought to be made to account. It is to be noted that the shareholders and directors of both King Seed and Midland were the 2nd Respondent and Score Management Limited. The 2nd Respondent is also one of two shareholders and directors of Score Management Limited.

13. In my judgment, there is nothing in section 290(1) to restrict the exercise of the court's discretion such that unless there are a minimum number of members, the court cannot declare a dissolution void. The 2nd Respondent was unable to cite any authority in support of his proposition that the court may not exercise its powers under section 290(1) if at the date of the revival, there is not the minimum number of members and directors. Under the scheme of the Companies Ordinance, a company which does not have the statutory minimum number of directors or members does not, per se, result in its being "illegal" or non-existence. Instead, the existing member or director may be penalized under sections 31 and 153. Further, it is a ground for a winding-up petition. The 2nd Respondent's objection is thus wholly misconceived.

14. Having regard to the apparent irregularities that have taken place, this matter ought to be referred to the Official Receiver for further action and I so direct.

15. A consequence of declaring the dissolution of the Company void and reviving the Company is that the 2nd Respondent would remain as liquidator of the Company. At the hearing, counsel for the Commissioner did not specifically address the court on this issue although it is obviously clear that having regard to the matters set out above, the Commissioner would wish to seek to remove the 2nd Respondent from the office of liquidator. Having regard to the irregularities set out in detail above, it would not be in the interest of the Company for the 2nd Respondent to continue in the position of liquidator. I note that in the list of authorities submitted for the Commissioner, there is reference to the case of Commonwealth of Australia v. O'Reilly [1984] 8 ACLR 804. Plainly, the court may, as part of consequential relief, remove the 2nd Respondent from office as liquidator. However, in the present case, no one has been put forward to take up that appointment. In the circumstances, I will entertain an application on short notice to remove the 2nd Respondent as liquidator and to appoint a new liquidator in his place.

Representation:

Mr Herbert Li, SGC of Department of Justice, for the Applicant

2nd Respondent in person, present