Choy Yau Keung v. Luckson Ltd. and Others

HCCW000643/2002

HCCW 643 & 644/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 643 OF 2002

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 644 OF 2002

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(Heard Together)

Coram: Deputy High Court Judge Barma, S.C. in Chambers

Date of Hearing: 27 November 2002

Date of Handing Down Judgment: 5 December 2002

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J U D G M E N T

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1.I have before me applications by Mr Choy Yau Sang, the Petitioner in two Petitions presented on 18 June 2002 seeking the winding up of Luckson Ltd and Shing Yip Ltd ("the Petitions"), for the appointment of provisional liquidators in respect of both companies pending the hearing of the Petitions. The Petitions were also before me for hearing, but have been adjourned to allow the 2nd and 3rd Respondents, Mr Ching Chau Chung and Mr Ching Chi Fai ("the Respondents") to file evidence in response to the Petitioner's allegations. As a result of the directions which I have given as to the further conduct of the Petitions, it does not seem likely that they will be heard until some time in the latter part of next year.

2.Luckson Ltd and Shing Yip Ltd ("the BVI companies") are both companies incorporated in the British Virgin Islands. They are registered as having a place of business in Hong Kong under part XI of the Companies Ordinance. The Petitioner and the Respondents are their only shareholders, each holding one third of the shares in each company. The BVI companies hold the entire share capital of two Hong Kong companies, Ever Rich (Group) Ltd and Ever Rich Printing Manufacturing Company Ltd ("ERG" and "ERP" respectively, collectively "the Hong Kong companies"), which until recently carried on an apparently substantial business of manufacturing and trading in plastic goods and products and making the packaging for them. The Hong Kong companies are the main assets of the BVI companies.

3.The precise background and nature of the relationship between the Petitioner and the Respondents and the reasons for the corporate structure which I have briefly described above are the subject of dispute, and will have to be determined when the Petitions are heard. For present purposes, it is sufficient to note that the Petitioner's case is that prior to the incorporation of the BVI companies in about 1996, he and the Respondents were equal shareholders in the Hong Kong companies, which were run by them as a quasi-partnership with all the shareholders participating in the management and decision making process of the Hong Kong companies. The Petitioner says that the BVI companies were incorporated at the suggestion of the Respondents, who assured him that after their incorporation and the transfer to them of the Petitioner's and the Respondent's shareholdings of the Hong Kong companies, all the companies would continue to be run on the same basis. This, says the Petitioner, was in fact the position until sometime towards the latter part of 2001. This is denied by the Respondents, who say that the Plaintiff was not involved in the running of the Hong Kong companies, as appears from an Amended Defence dated 24 May 2002 and an affirmation of Mr Ching Chau Chung dated 25 October 2002, filed in related proceedings which are mentioned later in this judgment.

4.There is also a dispute as to whether two other entities, Ming Fai Plastic Industrial Company (a Hong Kong firm) and Ming Fai Plastic Manufacturing Co. Ltd (a Mainland corporation) ("the Ming Fai entities"), which appear to operate a factory in Shenzhen in which products are manufactured for the businesses of the Hong Kong companies, are assets of the Hong Kong companies. The Petitioner claims that they are, having been set up at the expense of ERG following a decision by him and the Respondents to expand their business by establishing a factory on the Mainland. This is denied by the Respondents, who say that the Ming Fai entities are an entirely separate business which was set up by them and their relatives, in which the Petitioner and the Hong Kong companies had no interests.

5.According to the Petitioner, the relationship between the Respondents and himself broke down towards the end of 2001. The Petitioner alleges that at a time when it was proposed that ERG should be listed on the Hong Kong Stock Exchange, the proposed financial advisers for the listing application, Messrs Deloitte, Touche & Tohmatsu ("Deloitte"), discovered irregularities and inconsistencies in its financial records, leading to an internal investigation which resulted in the Petitioner becoming aware of a number of questionable dealings and transactions, about which he pressed the Respondents for explanations. According to the Petitioner, there followed between December 2001 and March 2002 a series of steps which had the effect of excluding him from the management of the Hong Kong and BVI companies, culminating on 7 March 2002 with the passing of resolutions removing him as a director of the BVI companies. Again, these matters are disputed by the Respondents.

6.The Petitioner's first response to such exclusion was to issue proceedings on 8 March 2002 by way of writ (HCA 929 of 2002), in which relief was sought against the Respondents, the Hong Kong companies and the BVI companies, seeking (among other things) orders requiring them to reinstate him as a director of the BVI companies and to restore him to the management of the Hong Kong companies. This action remains on foot. It is based on substantially the same facts as are relied upon in the Petitions. Following the filing of an Amended Defence, from which it was clear that the matters referred to above were disputed, the Petitioner presented the Petitions, seeking the winding up of the BVI companies on the just and equitable ground, pursuant to section 327(3)(c) of the Companies Ordinance (relief under section 168A being unavailable in relation to the BVI companies), with a view to having part of their shareholding in the Hong Kong companies distributed to him, so that he would thereafter be in a position to be able to seek relief under section 168A in respect of the Hong Kong companies, or to seek their winding up.

7.Thereafter, on 26 June 2002, the Petitioner applied for the appointment of an interim receiver to manage and preserve the assets of the BVI companies. This application was to have been heard at the same time as the applications for the appointment of provisional liquidators, but was withdrawn by consent shortly before the hearing.

8.On 17 July 2002, the Respondents were appointed as additional directors of the Hong Kong companies, in addition to the BVI companies which had until then been the only directors of the Hong Kong companies.

9.On 25 October 2002, the Petitioner took out his application for the appointment of provisional liquidators in respect of the BVI companies. The application was supported by the Petitioner's 2nd Affirmation, which put forward evidence which appeared to suggest that two new Ming Fai companies (different from the Ming Fai entities which the Petitioner claims are assets of the Hong Kong companies) had been incorporated by the Respondents and associates of theirs, and that business of the Hong Kong companies was being diverted to the new Ming Fai companies. A third affirmation of the Petitioner was handed up without objection during the course of the hearing. This put forward further evidence of diversion of business and customers of the Hong Kong companies to the new Ming Fai companies.

10.Thereafter, the Respondents, as representatives of the BVI companies, made declarations of solvency in respect of the Hong Kong companies on 29 October 2002, and passed special resolutions for the voluntary winding up of the Hong Kong companies on 4 November 2002. As a result, the Hong Kong companies have, since 4 November 2002 been in members' voluntary liquidation. By ordinary resolutions passed on 4 November 2002, Messrs Lai Kar Yan Derek and Darach E Haughey, partners of Deloitte, were appointed liquidators of the Hong Kong companies.

11.In an affirmation of Mr Ching Chau Chung dated 25 November 2002 (filed in support of the Respondent's application for further time to file evidence in relation to the Petition), Mr Ching says that the Hong Kong companies were put into liquidation because the Petitions and the application for the appointment of an interim receiver had caused serious difficulties in relation to their business, and that it was thought that putting them into liquidation would best minimise the possibilities of loss to the parties. Mr Ching says also that the Respondents have no objection to the winding up of the BVI companies by the Court, but maintains that the allegations of the Petitioner are unfounded. As the parties are unable to agree on the factual basis on which the Court should proceed (the Respondents not being prepared to have winding up orders made in respect of the BVI companies on the basis of the Petitioner's allegations and the Petitioner not being willing to have the Companies wound up on some other agreed factual basis), the Petitions will have to be heard, and these disputes determined, in due course.

12.Against this background, Mr Lam, who appeared for the Petitioner, submits that it would be appropriate for the Court to exercise its discretion under section 193 of the Companies Ordinance by appointing provisional liquidators for the BVI companies, pending the hearing of the Petitions.

13.He submitted that the Petitioner could be expected to feel a legitimate sense of grievance at his exclusion from the affairs of the BVI and Hong Kong companies, and that the appointment of provisional liquidators would do much to assuage his concerns, since this would effectively enable the actions of Messrs Lai and Haughey to be supervised by the Court through the provisional liquidators of the BVI companies. Without the appointment of provisional liquidators, it was said, the liquidation of the Hong Kong companies would proceed "in private", away from the scrutiny of either the Petitioner or the Court. He suggested that there would be a benefit to be obtained from the addition of a second, independent view on matters.

14.Mr Lam initially appeared to say that provisional liquidators were needed because there was urgency arising from the evidence of diversion of business away from the Hong Kong companies. In this regard, I asked Mr Lam in the course of submissions what it was suggested that provisional liquidators would be expected to do in respect of this, or in relation to the voluntary liquidation of the Hong Kong companies. Mr Lam's frank response was that the Petitioner did not have any specific matter which it would expect the provisional liquidators of the BVI companies, if appointed, to do.

15.Nonetheless, Mr Lam submitted that it would be desirable to appoint provisional liquidators for the purpose of supervising, or perhaps more accurately, keeping an eye on, the liquidators of the Hong Kong companies. Mr Lam very fairly made it clear that he made no suggestion of impropriety against Messrs Lai and Haughey. Nor did I understand him to say that they would not act independently in carrying out their duties. However, Mr Lam did appear to suggest that there might be a perception of lack of independence on their part, having regard to the fact that they were appointed by the Respondents, without reference to the Petitioner. In this regard, I was referred to the observations of Hoffman J (as he then was) in Re Palmer Marine Surveys Limited [1986] 1 WLR 573, and of Ribeiro J (as he then was) in Re Goldcone Properties Limited [2000] 2 HKLRD 16, emphasising the importance of a liquidator being perceived to be independent.

16.Both of those were cases involving applications for the compulsory winding up of a company which was already in voluntary liquidation. In Re Palmer Marine Surveys the company was insolvent, and the overwhelming majority by value of the creditors favoured a compulsory liquidation, whereas a creditors voluntary liquidation was preferred by three creditors which were associated companies of the company in question, and seven small creditors who had given proxies to the sole director of the company. In the Goldcone case, it appears that there were in fact some complaints as to the way in which the liquidator appointed under the voluntary liquidation had conducted the liquidation, and concerns as to their impartiality. It is, however, well established that a provisional liquidator, like a liquidator, should be impartial and be seen to be so.

17.In this case, I am concerned first with the question of whether any appointment should be made in respect of the BVI companies, and only thereafter with deciding between rival candidates. In my judgment, that prior question is to be determined by the well-established principles set out in cases such as Re Union Accident Insurance Company Limited [1972] 1 All ER 1105 and Re Five Lakes Investment Co. Ltd [1985] HKLR 273. These establish that there are two matters for consideration. The first is whether the Petitioner has made out a good prima facie case for a winding-up order at the hearing of the petition this is not an issue here, since Mr Yuen, appearing for the Respondents, very properly accepted that such a prima facie case was made out here. The second matter for consideration is whether it is right that a provisional liquidator should, in all the circumstances, be appointed, this being a matter to be decided having regard to the commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances (see the Five Lakes case, at 285A-C). It was in relation to this aspect of the matter that Mr Yuen took issue with the Petitioner, submitting that the Petitioner had shown no need for such an appointment to be made, and that on the contrary, the making of an appointment would result in additional and unnecessary costs being incurred.

18.It is pertinent to note that even if such an appointment is made, it is not suggested that the liquidators of the Hong Kong companies will or should be ousted, having regard to Mr Lam's indication that provisional liquidators, if appointed, would not be expected to do any particular acts or take any particular steps in relation to the liquidation of the Hong Kong companies, or any other matters. That being so, I ask myself what useful purpose would be served by appointing provisional liquidators in respect of the BVI companies.

19.For my part, I can see none. The only purpose to be served in appointing provisional liquidators for the BVI companies appears to be to enable the Petitioner to see what, if anything, happens in the liquidation of the Hong Kong companies between now and the trial of the Petitions, notwithstanding that it is not suggested that Messrs Lai and Haughey are likely to act otherwise than fairly and conscientiously in carrying out their duties as such liquidators.

20.Against this, it should be borne in mind that at the conclusion of these proceedings, it is (at least) likely that the BVI companies will be wound up compulsorily, so that their liquidators will be subject to the Court's supervision. In the course of the liquidation of the BVI companies, the progress of the liquidation of the Hong Kong companies will inevitably be the subject of review and consideration, so that the actions of their liquidators will be scrutinised.

21.Moreover, I would expect that Messrs. Lai and Haughey will be aware (and if they are not already aware, will become aware) of the Petitions and the outstanding action, and the allegations which have been made in them as to the Hong Kong companies' ownership of the Ming Fai entities, as to the alleged irregularities in relation to the finances of the Hong Kong companies, and as to the alleged diversion of business away from the Hong Kong companies. These are clearly matters which, as liquidators of the Hong Kong companies they will have to look into, and take such action as they may think appropriate. It may be that in relation to most, if not all, of these matters, they will think it sensible or desirable to await the outcome of the trial of the Petitions, in which these matters seem likely to arise for determination by the Court.

22.In these circumstances, it seems unlikely that the liquidations of the Hong Kong companies are likely to be completed in the very near future. Even if they were, the actions of their liquidators would be recorded and capable of review by liquidators appointed in respect of the BVI companies. Although at one point Mr Lam sought to suggest on instructions that someone at Deloitte (who was not identified) had indicated to his instructing solicitors that the liquidation of the Hong Kong companies might be concluded fairly soon, he very properly did not press this point in the absence of a proper foundation for it and in the absence of any opportunity for Respondents to deal with it.

23.Having regard to these considerations, it does not seem to me that there is a proper basis for suggesting that there would be some real benefit to be obtained from being able to monitor the actions of the liquidators of the Hong Kong companies pending the hearing of the Petitions.

24.Nor was it suggested that there was any jeopardy to the assets of the BVI companies. Insofar as these consist of the Hong Kong companies and their underlying assets, these are now in the hands of Messrs Lai and Haughey, and cannot be regarded as being at risk. Mr Lam drew my attention to passages in the Petitions and the writ in the action suggesting that the BVI companies have substantial funds, but did not suggest (and there was no evidential basis for suggesting) that these were for some reason at risk.

25.Mr Lam also suggested that it would be preferable to appoint provisional liquidators (and to appoint persons other than Messrs Lai and Haughey) since they would have an edge in terms of independence. But where there is, on the Petitioner's own case, nothing specific that it is envisaged that such provisional liquidators would do, I find it difficult to see the relevance of this supposed edge. Moreover, having regard to the considerations mentioned in paragraphs 19 to 22 above, I must confess that I regard this "edge" as being one which has no solid foundation for it.

26.In the light of these considerations, I do not consider that any useful purpose would be served by appointing provisional liquidators for the BVI companies at this stage.

27.Moreover, it seems to me that the appointment of provisional liquidators for the BVI companies, whether they be the candidates proposed by the Petitioner, or Messrs Lai and Haughey (as suggested by Mr Yuen as his fall back position), would inevitably result in additional costs being incurred. In the event that someone other than Messrs Lai and Haughey were to be appointed, these would in my view be likely to be substantially increased, as it would be necessary for them to familiarise themselves with the background to the dispute if they were to properly perform the overseeing function which the Petitioner contends for. Although it may be fair to say that the BVI companies appear to be solvent and have substantial assets, this does not mean that they should be expended unnecessarily.

28.I therefore conclude that it would not be appropriate, in the circumstances of this case, to order that provisional liquidators be appointed in respect of the BVI companies.

29.So far as the costs of the application are concerned, it seems to me that the application was properly brought, but was subsequently overtaken by events. In these circumstances, I propose to make an order nisi that the Petitioner should have its costs of the Summonses in any event, other than the costs of today insofar as they are attributable to the Summonses, such costs to be taxed if not agreed. Insofar as any costs of today are attributable to the Summonses, such costs are to be paid by the Petitioner to the Respondents in any event, again to be taxed if not agreed.

Representation:

Mr Allen Lam, instructed by Messrs Andrew Lam & Co., for the Petitioner

Mr Rimsky Yuen, instructed by Messrs Lee Chan Cheng, for the 2nd and 3rd Respondents

Companies: Luckson Ltd, absent (in HCCW 643/2002)

Shing Yip Ltd, absent (in HCCW 644/2002)

Official Receiver: Excused from attending the hearing by letter dated 26 November 2002