Re Wing Fai Construction Co Ltd

HCCW000735A/2002

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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Coram: Hon Kwan J in Chambers

Date of Hearing: 12 March 2004

Date of Decision: 12 March 2004

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D E C I S I O N

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1.This is an application under section 221 of the Companies Ordinance, Cap. 32 taken out by the liquidators of Wing Fai Construction Company Limited ("Wing Fai") on 6 January 2004. They seek an order to (1) examine orally Mr Johnny Chuang, a former company secretary of Wing Fai, "on matters relating to the trade, dealings, affairs and property of the Company"; and (2) for the production of "all books, papers, writings, and documents relating to the Company that are in his possession, custody or power".

2.The background to the application may be stated as follows.

3.On 6 July 2002, Mr Kennedy and Mr Borrelli both of RSM Nelson Wheeler Corporate Advisory Services Limited ("RSM Nelson Wheeler") were appointed provisional liquidators of Wing Fai. A winding-up order was made against Wing Fai on 9 December 2002. The provisional liquidators were appointed liquidators on 28 February 2003.

4.Prior to 22 April 2002, Wing Fai was a member of a group of companies known as the China Rich Group. The ultimate holding company is China Rich Holdings Limited ("China Rich"), which was incorporated in Bermuda and its shares are listed on the Hong Kong Stock Exchange. The intermediate holding company is Benefit Holdings International Limited ("Benefit"), which was incorporated in the British Virgin Islands. Benefit owned a number of subsidiaries including Fitzroya Finance Company Limited ("Fitzroya") and 3 construction companies ("the Construction Group") comprising:

(1) Wing Fai, which was wholly owned by Benefit;

(2) Wai Shun Construction Company Limited ("Wai Shun"), also wholly owned by Benefit; and

(3) Zhukuan Wing Fai Construction Company Limited ("ZWF"), which was a subsidiary of and was owned 51% by Wing Fai.

5.On 22 April 2002, Wing Fai and Wai Shun were sold by Benefit to Sino Glister International Investments Limited ("Sino Glister"). As a result of Wing Fai's sale, Sino Glister also acquired control of ZWF.

6.Wing Fai, Wai Shun and ZWF are all in liquidation. The liquidators appointed to these companies are all from RSM Nelson Wheeler.

7.When the provisional liquidators of Wing Fai were appointed in July 2002, the books and records of Wing Fai were "virtually non-existent". The liquidators found that peculiar, as before its sale to Sino Glister, which was only 3 months before the appointment of provisional liquidators, Wing Fai's business "represented approximately 90% of the turnover of the China Rich Group". The liquidators estimate there is likely to be a shortfall of assets to creditors in the region of HK$150 million.

8.Due to the lack of books and records, the liquidators instructed information technology specialists to examine Wing Fai's limited computer hard drive files. They were informed by the specialists that the computer systems had been tampered with before their appointment, in that only very minimal information was able to be located and the application software that enables users to access and retrieve the raw data in order to reconstruct such files had been deliberately deleted. It was only because of the skill and ability of the specialists to access raw data that the liquidators have been able to obtain some financial information of the company.

9.With this background, the liquidators had sought to examine a number of former officers of Wing Fai, including Yip Kwong Robert, Kam Shing and Kelly Cheng Kit Yin. I will return to the orders made as regard these former officers.

10.In the 1st report of the provisional liquidators to the creditors of Wing Fai dated 28 January 2003, they mentioned that litigation against the China Rich Group would appear to be the only means by which assets could be recovered for the benefit of the unsecured creditors. The relevant excerpt reads as follows:

"Successful recoveries against China Rich related companies/directors, in relation to a variety of potential actions, look to be the only real prospect of a dividend being available for unsecured creditors. These potential actions include:

.	Recovery under a letter of financial support provided to Wing Fai by China Rich;
.	Debt due from Fitzroya Finance Company Limited;
.	Recovery of HK$5 million from Benefit Holdings for funding of Wing Fai's share purchase;
.	Recovery relating to term deposits used to pay out an overdraft of Wai Shun, shortly prior to Wing Fai's/Wai Shun's sale, for no apparent consideration being provided to Wing Fai (which was guaranteed by China Rich);
.	Recovery of a substantial unfair preference payment to Benefit Holdings;
.	Transfer of assets out of Wing Fai in or about February 2002, with no apparent consideration being provided to Wing Fai;
.	Actions against China Rich directors in relation to the above issues.

The above issues, given the conduct of the related companies and directors to date, will almost certainly require litigation to be resolved."

11.There are currently more than 10 legal proceedings between the liquidators of the Construction Group and the companies and some of the directors in the China Rich Group. A list was given in Mr Kennedy's 6th affirmation and in an affirmation of Ms Cheng filed on 15 January 2004. For present purpose, it is material to mention only the proceedings which relate to two matters:

(1) a Set Off Agreement entered by the China Rich Group companies on 23 November 2001 ("the Set Off Agreement") prior to the sale of the Construction Group together with the terms and effect thereof; and

(2) matters leading to and arising from the Sale and Purchase Agreement by which the sale of the Construction Group was effected on 22 April 2002 ("the Sale and Purchase Agreement").

12.These relevant proceedings are:

(1) unfair preference proceedings brought by Wing Fai against Benefit in Wing Fai's liquidation in HCCW No. 735 of 2002;

(2) the adjudication of the proof of debt of Benefit in HCCW No. 735 of 2002;

(3) an application of ZWF to be substituted as petitioner in the winding up proceedings against Fitzroya in HCCW No. 253 of 2003. I should mention that I have dismissed this application in March 2004 but the liquidators of ZWF are of course not precluded from pursuing the debt demanded against Fitzroya in a writ action;

(4) an action brought by Wing Fai against Fitzroya to recover a loan in HCA No. 2570 of 2003. Wing Fai's application for summary judgment for part of the claim was unsuccessful and Fitzroya has served a defence in February 2004;

(5) an action brought by Wing Fai against Benefit and 3 directors for giving financial assistance to Sino Glister to fund the purchase of the Construction Group in HCA No. 810 of 2003;

(6) an application for an injunction against Wing Fai to restrain the presentation of winding up petition against various companies in the China Rich Group based on demands for debts in HCMP No. 4163 of 2003. This action has been concluded as the liquidators of Wing Fai have agreed to withdraw the demands for debts and given an undertaking to pursue their claim by writ actions.

13.I turn to Mr Chuang's involvement in Wing Fai and the relevant proceedings.

14.Mr Chuang joined China Rich in early 2000 as its Accounting Manager. In February to April 2000, he was transferred to GreaterChina Technology Group Limited ("GreaterChina") as its Qualified Accountant and remained as such until he left the employment of GreaterChina in August 2002. GreaterChina is not part of the China Rich Group. He was asked by Ms Cheng, the Chairman and Chief Executive Officer of GreaterChina and the Deputy Chairman and Chief Financial Officer of China Rich to assist her in accounting matters of the China Rich Group, usually in reviewing the consolidated accounts. In addition he was appointed company secretary of Wing Fai from 6 January 2000 to 12 December 2001. He was also company secretary of the following companies: China Rich, Benefit, Fitzroya, Wai Shun and ZWF.

15.Mr Chuang left his employment with GreaterChina on 16 August 2002 and he claims he has had no further dealings with the China Rich Group, until he was asked in November 2003 to make an affirmation for Fitzroya, which he did on 26 November 2003, in HCCW No. 253 of 2003, to resist ZWF's application to be substituted as petitioner to wind up Fitzroya. His affirmation contains evidence relating to the drafting, approval and signing of the Set Off Agreement and the Sale and Purchase Agreement, and the preparation of a schedule to the Sale and Purchase Agreement. It would seem that Mr Chuang had a substantial involvement in the Set Off Agreement. He was present at the audit committee meeting and the board meeting during which the mechanism of the Set Off Agreement was discussed. He drafted the Set Off Agreement on the instructions of the directors. As for the Sale and Purchase Agreement, his involvement was in the preparation of the schedule to that agreement, which he compiled from information given to him by the staff of China Rich. This schedule is of some importance to the relevant proceedings that I have mentioned. I have read Mr Chuang's affirmation which was not included in the hearing bundle for today.

16.Thus, although Mr Chuang was not sued by the liquidators of the Construction Group (and the liquidators say they have no intention to sue him for recovery of any assets), he is likely to be a material witness for the China Rich Group in at least some of the relevant proceedings.

17.The liquidators deposed that according to the information received from Eric Chim Kam Fai, who controlled Sino Glister and was previously the Assistant General Manger of Wing Fai, Mr Chuang has "a very good knowledge of the financial and/or accounting affairs of Wing Fai". Mr Chuang has sought to play down the state of his knowledge in his affirmation filed herein on 13 February 2004, but I do not think that is entirely borne out by what he had deposed to in his earlier affirmation filed in HCCW No. 253 of 2003 that I have mentioned. I am satisfied that Mr Chuang is in a position to provide material information relating to the financial affairs of Wing Fai to the liquidators. Certainly he was involved in the drawing up of important financial documents for Wing Fai.

18.I should also mention that the liquidators first made their request to interview Mr Chuang by a letter dated 13 November 2003, which was before Mr Chuang had filed his affirmation in HCCW No. 253 of 2003.

19.In his oral submissions, Mr Maurellet, who appeared for the liquidators, has clarified for me the scope and nature of the inquiries that the liquidators would wish to pursue with Mr Chuang. This includes the general financial affairs and management of the company, the preparation of the accounts, the board meetings attended by Mr Chuang, other trade debts in the amount of HK$60 million that were not the subject of the Set Off Agreement, HK$40 million worth of construction materials not accounted for, and proofs of debt submitted to the liquidators not reconcilable with the accounts of Wing Fai.

20.Correspondence was exchanged between the liquidators and Mr Chuang's solicitors, who also acted for the companies in the China Rich Group in the various legal proceedings. The upshot of the correspondence in December 2003 was that the solicitors for Mr Chuang indicated that they would "strenuously oppose" any application to examine Mr Chuang orally. As a result, the present summons was issued on 6 January 2004 and adjourned for argument to today.

21.In January 2004, an application was issued by the three former officers that I have mentioned to stay the enforcement of an order to examine them orally made on 25 March 2003. Pursuant to that order, examinations were conducted before Master Woolley on 4 and 30 July 2003. The examination of Ms Cheng concluded on 30 July 2003 when the liquidators indicated that they had no further question for her. The examinations of Robert Yip Kwong and Kam Shing were adjourned. The application to stay the enforcement of the examination order was made on the ground that since the making of that order, a number of proceedings have been commenced in which these former officers are parties or material witnesses. At the hearing of the application before Deputy Judge To on 9 February 2004, it was ordered that the examination of Ms Cheng should not proceed and that the examinations of Robert Yip Kwong and Kam Shing should proceed subject to the undertaking given by the liquidators that they would not put questions to the former officers on the following matters:

(1) the Set Off Agreement and the terms and effect of it;

(2) matters leading to and arising from the Sale and Purchase Agreement;

(3) the solvency of the Construction Group before its sale in April 2002; and

(4) the extent to which Robert Yip Kwong, Kam Shing and Ms Cheng allegedly controlled and directed the affairs of the Construction Group before and after its sale in April 2002.

22.It is the position of Mr Smith, SC, who appeared for Mr Chuang, that the same undertakings offered by the liquidators before Deputy Judge To should be offered today if an order for examination is to be made. I understand Deputy Judge To would give reasons for his decision and that his judgment has yet to be handed down.

23.The liquidators are not willing to give the full undertakings as they had given before the Deputy Judge. The undertakings that they are willing to provide are as follows:

(1) they will not commence any recovery action or legal proceedings against Mr Chuang based on any evidence given by him at the oral examination;

(2) they will not utilise any evidence or information obtained in an examination herein in the winding up of ZWF or in any other liquidation (other than Wing Fai) being conducted by both or either of the liquidators or in which they are assisting;

(3) they will not question Mr Chuang in the examination on any of the following matters:

(a) the Set Off Agreement together with the terms and effect thereof; and

(b) the schedule to the Sale and Purchase Agreement save for reconciliation or comparison of the figures, in the financial records relating to the company in the possession of the liquidators, other than solely through affidavits or sworn testimony filed in court proceedings as of 11 March 2004.

24.There is no dispute as to the legal principles governing the exercise of the discretion of the court in an application for an examination order under section 221. The matter in contention is how the principles should be applied here.

25.In the exercise of the discretion, the court must carefully strike a balance between the applicant's reasonable requirements and the need to avoid making an order which is wholly unnecessary, unreasonable or oppressive to the person concerned. The burden is on the applicant to satisfy the court, after balancing all the relevant factors, that there is a proper case for such an order to be made.

26.It is recognized that relevant to the balancing exercise is the risk of oppression where there is litigation or potential litigation against a proposed examinee or a third party with which he is connected in which proceeding he is likely to be a witness (see Cloverbay Ltd v. BCCI Ltd [1991] Ch 90; Re J N Taylor Finance Pty Ltd [1999] 2 BCLC 256). If liquidators are permitted to subject a witness or potential witness to an oral examination to ascertain if they have a claim or to strengthen their prospects in litigation, this would give them an advantage not enjoyed by ordinary litigants.

27.In Cloverbay, Sir Nicolas Browne-Wilkinson VC (as he then was) had this to say at 102A to F and 103C to E:

"It is clear that in exercising the discretion the court has to balance the requirements of the liquidator against any possible oppression to the person to be examined. Such balancing depends on the relationship between the importance to the liquidator of obtaining the information on the one hand and the degree of oppression to the person sought to be examined on the other. If the information required is fundamental to any assessment of whether or not there is a cause of action and the degree of oppression is small (for example in the case of ordering premature discovery of documents), the balance will manifestly come down in favour of making the order. Conversely, if the liquidator is seeking merely to dot the i's and cross the t's of a fairly clear claim by examining the proposed defendant to discover his defence, the balance would come down against making the order. Of course, few cases will be so clear: it will be for the judge in each case to reach his own conclusion.

That said there are a number of points which in my judgment should be borne in mind in exercising the discretion. First, the reasons for the inquisitorial jurisdiction contained in section 236 of the Act of 1986 is that a liquidator or administrator comes into the company with no previous knowledge and frequently finds that the company's records are missing or defective. The purpose of section 236 is to enable him to get sufficient information to reconstitute that state of knowledge that the company should possess. In my judgment its purpose is not to put the company in a better position than it would have enjoyed if liquidation or administration had not supervened. In many cases, an order under section 236 may have the result that the company is in such improved position e.g. an order for discovery of documents made against a third party in order to reconstitute the company's own trading records may disclose the existence of claims which would otherwise remain hidden, but that is the result of the order not the purpose for which it is made ...

Fourth, although the section treats the production of documents and the oral examination of witnesses together, an order for oral examination is much more likely to be oppressive than an order for the production of documents. An order for the production of documents involves only advancing the time of discovery if an action ensues: the liquidator is getting no more than any other litigant would get, save that he is getting it earlier. But oral examination provides the opportunity for pre-trial depositions which the liquidator would never otherwise be entitled to: the person examined has to answer on oath and his answers can both provide evidence in support of a subsequent claim brought by the liquidator and also form the basis of later cross-examination. In my judgment this greater risk of oppression when examination of witnesses is ordered calls for a more careful approach to such orders than to orders for the disclosure of documents."

28.I also find the following extracts in the judgment of Mance LJ in Shierson v. Rastogi [2003] BPIR 148 to be of assistance:

" [57] There is a critical difference between an application made for such a purpose [to obtain advantage in current civil proceedings] and an application for examination required in order to enable the liquidator to fulfil his general duties as liquidator to reconstitute, investigate and understand the company's affairs and to get in its assets. This distinction is drawn even in relatively early authority, such as Re Spiraflite Limited [1979] 1 WLR 1096 where at 1100 B-C Megarry J said:

'What must primarily be considered is why the liquidator is seeking the order. The essence of the matter is that the powers given by the section are given to the court in order to enable the liquidator the better to discharge his functions as such: they are not given in order to enable a liquidator to improve his prospects of litigation success by giving him rights that other litigants lack, even if he is a liquidator.' ...

[62] There is no justification for any suggestion that the purpose of the examination under s. 236 of the 1986 Act is to obtain any advantage in the current civil proceedings. That is also to view the matter from the wrong perspective. The nature of the application and evidence in its support shows that its purposes are both more fundamental and more wide-ranging. They are to reconstitute the company's records, to understand its affairs and, with that understanding, to identify its assets wherever they may be, including any causes of action against anyone whoever they may be. It is true that, in the course of any examination on these matters, information may well be forthcoming that will bear on, or expand the scope of the current civil proceedings against the directors. But that will be an incidental consequence or effect of an examination which is needed in order to enable the liquidators to perform their functions generally: see Re Brook Martin & Co.(Nominees) Ltd [1993] BCLC 328 at 335. While any effect on the civil proceedings should be taken into consideration when deciding whether to make an order for an examination, I have no doubt that in this case the need to have an examination, if the liquidators are to fulfil their functions generally, outweighs any such consideration."

29.I think it right in the circumstances that the liquidators should offer the undertaking not to question Mr Chuang on the Set Off Agreement. As regards the other matter they have offered not to question Mr Chuang, the wording of this undertaking appears to be somewhat different from the undertaking offered to Deputy Judge To, in that the present undertaking relates only to the schedule to the Sale and Purchase Agreement whereas the undertaking before the Deputy Judge related to matters leading to and arising from the Sale and Purchase Agreement, which of course includes the schedule to that agreement.

30.Leaving aside for the time being the qualification which the liquidators seek to make to that undertaking, I see no reason why they should not be restricted in their questioning of Mr Chuang in the same way as in their undertaking given to the Deputy Judge. It does seem to me that if the liquidators are to question Mr Chuang further on the Set Off Agreement or on matters leading to and arising from the Sale and Purchase Agreement, they are seeking to dot the i's and cross the t's as Mr Chuang has already given a fairly detailed affirmation in HCCW No. 253 of 2003 on his knowledge and involvement in these matters. As for the qualification that the liquidators seek to make to the undertaking in respect of the schedule to the Sale and Purchase Agreement, namely that they be allowed to question Mr Chuang for the purpose of the reconciliation of the figures in the financial records, this seems to me to be a limited qualification and is reasonably required for their investigation of their accounts of the Company. I am therefore not minded to exclude this from the inquiries of the liquidators.

31.It is submitted by Mr Smith that matters relating to the solvency of the Construction Group before its sale to Sino Glister and the extent to which the three former officers had controlled the Construction Group before and after the sale are relevant issues to the proceedings or potential proceedings that I have identified. This is not disputed by Mr Maurellet. However, I am inclined to agree with Mr Maurellet here that these matters should not be excluded from the scope of the liquidators' investigation with Mr Chuang, as they are necessary to enable the liquidators to acquire an understanding of the company's affairs and management and that is essential for the discharge of the liquidators' obligations, even though it may be an "incidental consequence" that the liquidators should gain information on issues relevant to some of the proceedings against the China Rich Group and the former directors.

32.For the above reasons, I will make an order for the examination of Mr Chuang, subject to the undertakings that should be given by the liquidators in the manner that I have indicated earlier.

33.An order for production of documents is sought against Mr Chuang, I am not minded to so order. Mr Chuang left his employment with GreaterChina in August 2002 and has had no further dealings with the China Rich Group. He has deposed that he does not have in his possession, power or custody any of the documents of Wing Fai. I have no reason to think otherwise.

34.As to costs, the liquidators should have all their costs of issuing the application up to the hearing today. Regarding the costs for the hearing today, I am minded to award only part of the costs to the liquidators. I bear in mind that it was only on 9 March 2004 that they received an offer from Mr Chuang to subject himself to examination on the basis of similar undertakings offered by the liquidators to Deputy Judge To. However, the liquidators should have expected from the hearing before the Deputy Judge on 9 February 2004 that a similar stance might well be taken by Mr Chuang. It was only at the hearing today that the liquidators offered to give an undertaking along the same lines but restricted to two out of the four matters in their previous undertaking.

35.In the circumstances, I think it fair to deprive them of part of their costs. I order two-thirds of the costs of today be borne by Mr Chuang.

Representation:

Mr Jose-Antonio Maurellet, instructed by Messrs Tanner De Witt, for the Joint & Several Liquidators

Mr Clifford Smith, SC instructed by Messrs Barlow Lyde & Gilbert, for the Respondent