The Official Receiver v. Mak Wing Hung

HCMP004189/2002

HCMP 4189/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4189 OF 2002

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Coram: Hon Barma J in Court

Dates of Hearing: 22 September and 10 October 2003

Date of Judgment: 7 November 2003

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J U D G M E N T

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Introduction

1.This is an application by the Official Receiver, brought by way of Originating Summons issued on 15 October 2002, seeking a disqualification order under section 168H of the Companies Ordinance (Cap. 32) ("the Ordinance") against the Respondent, Mr Mak Wing Hung ("Mr Mak"). The disqualification order is sought on the basis of Mr Mak's conduct in relation to China Talent International Development Limited ("the Company"). Although Mr Mak was never formally appointed a director of the Company, it is the Official Receiver's case that he was a de facto director of the Company, and as such is liable to be made the subject of a disqualification order under section 168H.

2.Leave was granted to the Official Receiver to issue these proceedings out of time by Kwan J on 27 September 2002. Such leave was required because the Company had been placed into members' voluntary liquidation by a special resolution passed on 14 November 1997, following which a compulsory winding up order was made against it on 19 May 1999, on a Petition presented by the Commissioner for Inland Revenue. As the Company was, at the date of the winding up order, already in voluntary liquidation, its liquidation was deemed to have commenced on 14 November 1997, when the resolution to wind up was passed, by virtue of section 184(1) of the Ordinance. In consequence, the four year period within which disqualification proceedings are required by section 168I(2)(a) of the Ordinance to be brought expired on 14 November 2001.

3.The application was supported by two Reports of the Official Receiver respectively dated 15 October 2002 and 22 April 2003, and the affirmation of Chan Bik Yee Daisy ("Ms Chan"), a Treasury Accountant in the employ of the Official Receiver's Office dated 16 April 2003. In answer to the application, Mr Mak made an affirmation dated 12 February 2003, on which he was cross-examined at the hearing before me (this affirmation was in Chinese, and was orally translated by the court interpreter at the hearing). Following such cross-examination, Mr Mak (who acted in person) gave further oral evidence to clarify certain answers which he had given.

The background

4.The Company was incorporated in Hong Kong on 19 January 1997. At all material times since its incorporation, it had only two shareholders, Mainhurst International Limited ("Mainhurst") and Capita Management Services Limited ("Capita"), each of whom held one of its two issued shares. By two documents headed "Request for Provision of Nominee Services", both dated 1 February 1997 and signed by Mr Mak, Mr Mak agreed with Mainhurst and Capita that they should act as nominee directors and/or shareholders of the Company, and that in acting as such nominees they should act upon his instructions. Thereafter, Mainhurst and Capita were appointed directors of the Company on 3 February 1997, at all material times after which they were only two appointed directors of the Company. Further, by two declarations of trust, both dated 4 February 1997, Mainhurst and Capita declared that they held their respective shares in the Company on trust for Mr Mak. Mr Mak agreed that he was the sole beneficial shareholder in the Company, and that, notwithstanding that he was not a director of the Company, he took all decisions in relation to its business. There was also evidence in the form of letters from Mr Sze Ching-po ("Mr Sze") (an accountant who had, until his resignation on 20 October 1998, been the liquidator of the Company when it was in members' voluntary liquidation) to the Official Receiver in response to inquiries made by the Official Receiver, in which Mr Sze stated that various matters relating to the Company (namely, the making of the declaration of solvency at the time of the resolution to wind up, the entering into of the agency agreement referred to below, and dealing with inquiries by the Inland Revenue Department) had been done on the basis of (largely oral) instructions given by Mr Mak.

5.The only business that the Company appears to have transacted during its brief life was the purchase and subsequent on-sale of a piece of property known as the 1st floor of No. 2F Marble Road, North Point, Hong Kong ("the Property"). It purchased the Property from a Madam Cheng Wai Hae, entering into a sale and purchase agreement with her on 14 March 1997, at a price of $2.8 million. On 22 March 1997, it entered into a provisional agreement to sell the Property to a company called Rich Wealth (HK) Limited ("Rich Wealth"), at a price of HK$5.92 million. The purchase of the Property from Madam Cheng was completed by an assignment of the Property to the Company dated 10 April 1997, and the next day, 11 April 1997, the Company entered into a formal sale and purchase agreement with Rich Wealth. The sale of the Property to Rich Wealth was completed by an assignment dated 8 August 1997. As a result of these transactions, the Company made a gross profit of some $3.12 million in a short space of time.

6.It is also relevant to note that according to a receipt dated 15 August 1997 issued to the Company by Ani-Man Investments Limited ("Ani-Man"), the Company is recorded as having paid commission of some $1.6 million to Ani-Man for agency services said to have been rendered by Ani-Man to the Company in connection with the sale by the Company of the Property, apparently pursuant to an agency agreement between the Company and Ani-Man dated 15 January 1997 (before the Company was incorporated). Mr Mak was, according to documents filed with the Companies Registry, a shareholder and director of Ani-Man. I shall deal with the evidence in relation to the agency agreement and the supposed payment pursuant thereto later in this judgment, when considering the Official Receiver's complaint that the agency agreement between the Company and Ani-Man was a sham transaction, entered into to avoid paying profits tax on the full profits arising from the sale of the Property to Rich Wealth.

7.Apart from these transactions, there was evidence, which was not disputed by Mr Mak, that a total of $2.833 million was paid by the Company to Mr Mak between 16 April 1997 and 14 August 1997. These payments were made at times and in amounts which closely matched the dates on which payments were to be made by Rich Wealth to the Company under the sale and purchase agreement entered into on 11 April 1997.

8.After the completion of the sale of the Property to Rich Wealth, the Company does not appear to have carried on any further business, and it was placed into members' voluntary liquidation on 14 November 1997. As I have already noted, Mr Sze resigned as liquidator on 20 October 1998, and a compulsory winding up order was subsequently made on 19 May 1999. In the course of the winding up by the court, the Official Receiver acting as liquidator has recovered only $33.20 by way of assets, and has received proofs of debt totalling some $346,255. The Company is therefore clearly insolvent, notwithstanding that a declaration of solvency was made at the time of the resolution to wind up, on the basis of a statement of assets and liabilities which purported to show that the Company had no assets and no liabilities.

9.Following the making of the winding up order, it appears that no steps were taken by Mr Mak or the nominee directors of the Company to file a statement of affairs in respect of it, as required by section 190 of the Ordinance. On 11 July 2002, Mr Mak was publicly examined by the Official Receiver. Thereafter, leave was sought to issue these proceedings out of time, and such leave having been granted, these proceedings were instituted. It appears that it was not until 18 March 2003, over a month after Mr Mak filed his affirmation in response to the Official Receiver's Report in support of this application, when Mr Mak sent certain accounting records of the Company to the Official Receiver, that any accounting records of the Company were supplied to the Official Receiver.

The grounds relied on by the Official Receiver

10.Against this background, the Official Receiver contends that Mr Mak is unfit to be concerned in the management of a company, and that a disqualification order should be made against him. The grounds relied upon by the Official Receiver for this contention are as follows:-

(1) Mr Mak was responsible for the Company entering into a sham transaction, namely the agency agreement with Ani-Man, which was an artificial transaction purporting to appoint Ani-Man as the Company's agent for the sale of the Property at a commission of 30% of the gross sale price, with the dishonest intention of avoiding payment of profits tax on the sale of the Property;

(2) As an alternative to ground (1), if (which the Official Receiver did not accept) the sum of $1.6 million was in fact paid to Ani-Man under the agency agreement, that was a misfeasance and misapplication of the Company's funds by Mr Mak;

(3) The withdrawal of $2.833 million of the Company's funds by Mr Mak was for his personal use and was never repaid, and this constituted a misfeasance and misapplication of the Company's funds by Mr Mak;

(4) Mr Mak failed to take reasonable steps to keep and preserve proper books of account that were necessary to give a true and fair view of the state of the Company's affairs and to explain its transactions, contrary to section 121 of the Ordinance;

(5) Mr Mak failed to submit to the Official Receiver a statement as to the affairs of the Company within 28 days of the making of the winding up order (or at any time thereafter), notwithstanding the obligation to do so pursuant to section 190 of the Ordinance; and

(6) Mr Mak, as a director of Ani-Man and All Time Property Management Limited ("All Time"), was responsible for the failure by those companies to file annual returns since 1997 and 1999 respectively, as required by sections 107 and 109 of the Ordinance.

Mr Mak as a de facto director

11.Before dealing with these grounds, it is convenient first to deal with the Official Receiver's contention that it is open to me to make a disqualification order against Mr Mak, notwithstanding that he was not a named director of the Company, by virtue of the fact that he was a de facto director of the Company.

12.Mr Mak did not seek to argue that de facto directors are not subject to the provisions of section 168H of the Ordinance. It seems to me that having regard to the purposes of section 168H, the word director in that section is properly to be construed as including any person acting de facto as a director of the company concerned, whether validly or invalidly appointed, or acting as a director without any appointment at all (see Re Lo-Line Electric Motors Ltd (1988) 4 BCC 415 at 422).

13.Nor did Mr Mak seek to argue that he was not, on the facts of this case, de facto acting as a director of the Company. As I have noted above, Mr Mak readily accepted that he took all decisions in relation to the business of the Company. That being so, and having regard to the agreements whereby the nominee directors and shareholders agreed to act in accordance with his instructions (which they appear in fact to have done, having regard to the responses of Mr Sze to the Official Receiver's inquiries), I have no doubt that Mr Mak did assume to act as a director of the Company, notwithstanding that he was not appointed as such, and that in these circumstances his conduct as such de facto director falls to be assessed in order to determine whether or not he has, by such conduct, demonstrated that he is unfit to be concerned in the management of a company.

14.It seems to me also, although Ms Lee, for the Official Receiver, did not put her case on this basis, that it could have been said that Mr Mak was a "shadow director" of the Company within the meaning of section 168C(1), in that he was clearly a person in accordance with whose instructions the directors of the Company were accustomed to act (having regard to the requests for nominee services which he had made to Mainhurst and Capita, and the evidence of Mr Sze as to those companies having acted as directors of the Company in accordance with the instructions of Mr Mak), and that as such shadow director, he was also liable to having a disqualification order made against him if the circumstances merited it, by virtue of section 168I(3) of the Ordinance.

15.Before leaving this aspect of the matter, I note that Mr Mak said, both in his affirmation and in his evidence before me, that although he accepted that he was a de facto director of the Company, he wished to stress that there was no dishonest intent in his remaining off the record so far as his involvement with the Company was concerned. He said that there was no sinister reason for his having taken this course, and that the reason why he did not wish to be openly associated with the Company was that he felt that this would enable the various sale and purchase transactions to proceed more smoothly, without causing any of the parties to them to be upset or unhappy at the outcome of such transactions.

16.As I understood Ms Lee's case for the Official Receiver, the fact that Mr Mak was a de facto director of the Company was not advanced as a ground, in itself, for making a disqualification order against him, but was simply put forward as the basis on which the court had jurisdiction to make such an order if the grounds relied upon were made out. Ms Lee did not suggest that there was any dishonest motive behind Mr Mak's making use of the nominee arrangements which I have described. That being so, I do not think it necessary to express any concluded views as to the reasons why Mr Mak might have chosen to arrange his affairs and those of the Company in the way that he did, so as to conceal (on the face of things) his involvement with the Company.

17.I turn now to consider the various grounds put forward by the Official Receiver for the making of a disqualification order against Mr Mak.

Ground 1: Agency agreement a sham

18.The first ground arises out of the agency agreement which the Company is said to have entered into with Ani-Man. As I have noted, the Official Receiver's case is that the agreement with Ani-Man was a sham transaction, designed to avoid the payment of profits tax (whether in whole or in part) on the profits made by the Company as a result of its sale of the Property to Rich Wealth.

19.In order to deal with this ground, it is necessary to look at the evidence in relation to the Company's dealings in the property, and in relation to the agency agreement, more closely.

20.In his evidence before me, Mr Mak explained that in 1997, he was working as an estate agent. He said that he carried his estate agency business through Ani-Man. He explained that apart from the transactions involving the property, he in fact had been involved in a number of other transactions involving flats in the same building, No. 2F Marble Road, North Point. He said that Ani-Man had acted as agent in relation to a number of other transactions, by which Rich Wealth acquired other flats in the building. He said that from his knowledge of the property market in the North Point area, he realised that there was an opportunity for profit in relation to the Property, since he might be able to acquire it relatively cheaply, and then on sell it at a profit to Rich Wealth. He said however, that this would only come to fruition if Rich Wealth were able to acquire all the flats in the building, which it in fact did. I infer from this that Rich Wealth was, to Mr Mak's knowledge, interested in acquiring the whole of the building of which the Property was a part (there were a total of some five units in all), perhaps with a view to redeveloping it.

21.Mr Mak said that having it in mind to acquire the Property himself, for on sale to Rich Wealth at a significant profit, he felt that it would be better (for reasons to which I have already referred) if he were not obviously involved in the transaction, and hence decided to acquire the Company for the purposes of carrying out the purchase from the original owner, Ms Cheng, and the subsequent sale to Rich Wealth. In this objective, he appears to have succeeded, since the Company was able to acquire the Property for some $2.8 million, and on sell it very shortly afterwards at more than double the price which it had paid, earning a gross profit of more than $3 million.

22.So far as the agency agreement is concerned, information provided by Mr Sze by a letter to the Official Receiver dated 3 November 2000 indicated that the agency agreement was signed by Capita on behalf of the Company on the instructions of Mr Mak, and that it was signed by Mr Mak himself on behalf of Ani-Man. Mr Sze indicated that, although dated 15 January 1997, the agreement was actually signed in August 1997 and was back-dated on the instructions of Mr Mak, at the same time as Mr Mak signed the receipt dated 15 August 1997 by which Ani-Man acknowledged that it had been paid a sum of $1.6 million by the Company.

23.Mr Mak accepted that the agency agreement had been backdated. However, he insisted that it was, nonetheless, a genuine agreement. He explained that, in his view, there were two aspects to the dealings in the property. These were first, the purchase and sale, or investment aspect, which he said was carried out through the Company, and second, the agency, or arrangement aspect, which was carried out through Ani-Man. He asserted that Ani-Man had in fact provided agency services in respect of the transactions with which the Company was involved, and that it had been agreed that Ani-Man should be paid a commission of 30% of the gross sale price in respect of such services.

24.When cross-examined, Mr Mak agreed that he acted for both the Company and Ani-Man in agreeing the terms of the agency agreement. He accepted that the Company had not been acquired by him as at 15 January 1997 (indeed, it had not been incorporated as at that date), but insisted that agency work of some sort was being done by Ani-Man (through him) at that point in time. He said that it was slightly later, when he realised that there were prospects of being able to put the transactions in the Property together, that he decided to acquire the Company as the vehicle for such transactions, but that this did not detract from the reality of the agency, or the agency work done. He did not, however, provide any details of the nature of the agency work that was supposedly performed by Ani-Man on behalf of the Company. Nor did he provide any reason or justification for the level of commission being charged.

25.Mr Mak was asked about the circumstances in which it was decided that an agency agreement of some sort should be signed. He said that at some time between January and March 1997, after he had acquired the Company, but before it entered into the sale and purchase agreement of 14 March 1997 by which it agreed to purchase the Property from Madam Cheng, he asked his accountant, Mr Sze, for advice as to the sale and purchase of the property. He sought, he said, advice in relation to accounting and tax. Mr Mak says that he told Mr Sze that he was going to buy a property, and expected to make a substantial profit out of it, and asked how he could arrange matters so as to save paying some tax on the profit. He said that Mr Sze told him that since the Company itself did not have many expenses, it would be difficult to save much tax, but that perhaps Mr Mak could obtain a commission, which would be an expense of the Company. Mr Mak said that since Ani-Man had its own expenses, he felt that it would be in order for Ani-Man to charge commission.

26.When asked why the agreement was not in fact entered into before the Property was bought and resold, Mr Mak responded that as it was uncertain whether or not the deal would go through successfully, he decided to wait until everything had been sorted out before getting the agency agreement signed and put in place. Although in the event this was not done until August 1997, after the on sale of the Property to Rich Wealth had been completed, the agency agreement was, said Mr Mak, a genuine agreement between the Company and Ani-Man.

27.It was pointed out to Mr Mak that on the basis of the agreement, the commission charged should in fact have been some $1.776 million. He was asked why the receipt from Ani-Man only reflected a payment of $1.6 million. Mr Mak said that this had been agreed by Ani-Man and the Company (in both cases acting through himself), and was simply a matter of rounding off the figures to a round number.

28.Mr Mak was then asked whether money was actually paid to Ani-Man. He said that it was. He was asked how such money was paid, and said that it would have been by cheques. He was then asked to identify the entry or entries in the Company's account bank account that related to payment of commission by the Company to Ani-Man, but was unable to do so. In the end, he said that payments were made by the Company to himself personally, although as agent for Ani-Man. When asked to identify such payments, he was again unable to do so. No combination of the various cheques drawn in his favour by the Company between April and August 1997 totalled $1.6 million. In these circumstances, I find that there was no payment of any sum, let alone a sum of $1.6 million by the Company to Ani-Man.

29.Based on this evidence, Ms Lee submitted that there could be no doubt but that the agency agreement was a sham, and was simply a device to avoid paying profits tax on the entirety of the profit which the Company had earned from its dealings in the Property. Ms Lee drew my attention to the definition of a "sham" by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802C-E, where he said:-

"... if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."

30.In my view, it is quite clear that the agency agreement was a "sham" in this sense. It was intended by Mr Mak, the Company and Ani-Man that the agency agreement (and the receipt from Ani-Man to the Company) should give the appearance that there existed legal rights and obligations between Ani-Man and the Company by which Ani-Man should be entitled to receive, and the Company obliged to pay, a commission at the rate of 30% on the gross sale price of the Property, and that such agreement had been made in or about mid-January 1997. However, the true position was that no such agreement had been made, and no such rights and obligations created, whether in January 1997 or at any other time.

31.I think that this conclusion is inevitable, having regard to the facts that:-

(1) no payment was ever in fact made by the Company to Ani-Man in any amount, let alone the $1.6 million payment of which the receipt purported to be evidence;

(2) no payments were identified which were been payments by the Company to Mr Mak on behalf of Ani-Man, let alone payment (whether by one or more payments) of the $1.6 million

32.It seems to me that these facts indicate that there was at no time any intention on the part of either the Company or Ani-Man that any commission should be paid by the Company to Ani-Man in respect of the sale of the property to Rich Wealth, contrary to the evidence of Mr Mak, which I reject.

33.Moreover, the discrepancy between the terms of the agreement, by which $1.776 million should have been paid by way of commission and the terms of the receipt which (contrary to the facts) purported to evidence payment of $1.6 million were not, to my mind, satisfactorily explained by Mr Mak. In my view, the discrepancy is strongly suggestive of a decision on the part of Mr Mak to set the amount of the supposed commission after the completion of the transactions in question. This, too, suggests that the agency agreement was not a genuine agreement between Ani-Man and the Company for the performance of services by Ani-Man for which it should be remunerated.

34.Further, it seems to me that the evidence which Mr Mak gave in relation to the circumstances in which the agency agreement came to be concluded and performed is deeply unsatisfactory, in that he was unable to say when exactly such agreement was concluded in the terms that were recorded in the document that was backdated to 15 January 1997, and failed to give any clear explanation of the work that he did on behalf of Ani-Man as the supposed agent.

35.Having regard to the fact that Mr Mak (as he accepted) was behind both the Company and Ani-Man, it strikes me as being highly artificial to suppose that he throughout carefully divided his actions between those undertaken on behalf of Ani-Man qua agent, and those undertaken on behalf of the Company.

36.In these circumstances, I conclude that there was in fact no substance to the agency agreement, and that it was intended by Mr Mak to suggest (contrary to the reality) that there was a genuine agreement for the performance of services by Ani-Man on behalf of the Company, and was therefore a sham. I have no doubt that the reason for the arrangement was, as Mr Mak stated, to reduce the amount of profits tax payable in respect of the profit earned by the Company on the sale of the Property to Rich Wealth. However, for the reasons that I have explained, I do not accept that it was a genuine agreement which could properly be relied upon for that purpose. It seems to me that it would have been perfectly possible for Mr Mak to have dealt with the property through Ani-Man had he wished to, and this would no doubt have enabled any expenses incurred by Ani-Man in respect of its other business to have been set off against the profits from the sale of the Property. However, this would very likely have revealed his involvement in the transactions to both Madam Cheng and Rich Wealth, and Mr Mak having chosen to conceal his involvement in the purchase and sale of the property, it seems to me that he cannot seek, by means of the purported agency agreement, to evade the payment of the appropriate amount of profits tax on the gain made by the Company.

37.I therefore conclude that the first ground relied upon by the Official Receiver, which involves an element of deception on the part of Mr Mak, is made out. I do not accept Mr Mak's contention that he had no intention of evading taxes that were properly due - the fact that he did not seek to evade the entire amount of tax payable, but only some part of it, does not make his behaviour any the less deserving of censure.

Ground 2: Misfeasance - payment of $1.6 million to Ani-Man

38.In the light of my finding that there was in fact no payment by the Company to Ani-Man of $1.6 million, it seems to me that the alternative basis of complaint by the Official Receiver in relation to the agency agreement does not arise. As no money was paid to Ani-Man, there could be no misfeasance in respect thereof.

Ground 3: Misfeasance - withdrawal of $2.833 million by Mr Mak

39.I turn now to the third ground relied upon by the Official Receiver, namely, misfeasance in relation to the total sum of $2.833 million paid by the Company to Mr Mak between April and August 1997. There was no dispute that the cheques by which these payments were effected were all signed by Mr Mak, who was the only signatory on the Company's bank account. Mr Mak was asked about these payments in the course of his public examination on 11 July 2002. At that time, he said only that he took the money for his own use.

40.However, in his affirmation filed in opposition to these proceedings, Mr Mak said that the money was in fact used for investments. In his oral evidence, he said that of the $2.833 million, approximately $1 million was lost in investments, over a period of time, in listed securities in Hong Kong, a further $1 million was invested in a Chinese factory on the mainland operated by a friend of his, and the remainder was used by him for his own purposes. When pressed by Ms Lee, he was initially unable to give details of the share investments, but said that they were mostly blue-chips, like HSBC. When the hearing was adjourned, Mr Mak had the opportunity to provide some material in relation to such share investments. These showed that no HSBC shares had been purchased, but that there were some blue-chip shares, in the form of Hang Seng Bank shares. Mr Mak, without going through the documents which he had found, said that the losses incurred were gradually built up over a period of time, as a result of the deterioration in the Hong Kong stock market from mid 1997 onwards. So far as the investment in China was concerned, he was unable to provide much detail as to the nature of the investment, although he said that the factory dealt in general items, such as clothing and metal tools, and that it was located in Dongguan. He said that he had no evidence of the investment, not having obtained any share certificates or other documentation in relation to his acquisition of a 50% share in the factory, and that he simply trusted his friend, who had since disappeared.

41.Mr Mak asserted that these investments were made by him on behalf of the Company, with a view to earning further profit for the Company. However, he produced no evidence to show that any investments made were in the name of the Company. I see no reason why, had the investments truly been by the Company, they could not have been made in its own name, and I therefore reject Mr Mak's suggestion that these were investments made on behalf of the Company.

42.That being so, it seems to me that the Official Receiver is right in saying that Mr Mak has taken substantial amounts of the Company's funds for his own use, and not having repaid such amounts to the Company, has misappropriated them and is guilty of misfeasance in relation to the Company's funds. I therefore find that the third ground relied upon by the Official Receiver is also made out.

43.I would also add that it is disturbing to note that Mr Mak seems to have thought it in order to extract effectively the whole of the Company's funds for his personal use and investment, when he must have known that there was a liability on the part of the Company for profits tax (albeit the amount of such profits tax might turn out to be lower, by reason of the purported agency agreement, than it should have been). Although this was not explored with him during cross-examination, it is also a cause for concern that Mr Mak should have given instructions for the Company to be placed into voluntary liquidation on the basis that it was solvent, when he must have known that there was a potential liability on its part for profits tax, with no assets out of which such liability could be met.

Ground 4: Failure to keep proper books of account

44.Initially, the Official Receiver's complaint was that no books of account having been recovered in respect of the Company, it was to be inferred that no such books had been kept. However, on 18 March 2003, Mr Mak belatedly provided to the Official Receiver's Office a set of accounting records in respect of the Company. These were examined by Ms Chan, who concluded that there had been a failure to keep proper books and records, in that there was no bank book, which should have recorded receipts and payments into out of the Company's bank account and their purpose. There was therefore no explanation of the purpose of the various cheques drawn in favour of Mr Mak. In addition, the receipts for expenses which had been disclosed did not cover all of the expenses recorded in the audited financial statements of the Company, in particular, two payments of $25,000 apparently made to professional firms in respect of preparation of commercial agreements.

45.Mr Mak agreed with Ms Chan that the company's accounting records were deficient. However, he said that the major withdrawals were in fact the payments to himself, which he had used in the manner described above, and that the other payments, the nature of which he could not recall, were relatively minor matters. He also sought to deflect responsibility for any deficiencies in the Company's accounting records onto its accountants, Messrs Tommy C P Sze and Co, saying that he left all of the Company's accounting matters to that firm, and that he had handed over everything that they had returned to him after Mr Sze resigned as liquidator of the Company.

46.I do not think that it is open to Mr Mak to brush off his responsibility for the keeping of proper books and records in this way. Although it may well be that some reliance may be placed on professional accountants and auditors, it seems to me that it nonetheless remains the responsibility of a Company's directors to ensure that proper financial records are kept. I am therefore satisfied that this ground, too, is made out.

Ground 5: Failure to submit statement of affairs

47.Mr Mak accepted that no statement of affairs had been submitted. However, he said that he may not have received correspondence from the Official Receiver, as he had moved home and offices several times in the last few years. He also said that he had now handed over all the financial records of the Company that he had received from its accountants.

48.This does not constitute a reasonable excuse for the failure to provide a statement of affairs. Even as at today, no statement of affairs has been provided to the Official Receiver in respect of the Company. The statement of affairs is required at the outset of a liquidation so that a liquidator is able to form a view as to the Company's assets and liabilities - without it, the task of the liquidator is made much more onerous.

49.I am therefore satisfied that this ground, too, is made out.

Ground 6: Failure in to file annual returns for other companies

50.Mr Mak did not dispute this ground, and I therefore find it established. However, it is fair to say that Ms Lee accepted that this was not, in itself, a particularly serious matter.

Fitness

51.Any misconduct on the part of Mr Mak qua director is relevant to the question of whether or not such misconduct renders him unfit to be involved in the management of a company, whether or not it falls within any of the specific items mentioned in section 168K(1) and the Fifteenth Schedule to the Ordinance (see Re Bath Glass Ltd (1988) 4 BCC 130, at 133). The court's function is to decide whether such misconduct "viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies" (Re Grayan Building Services Ltd [1995] BCC 554).

52.In my view, the first, third, fourth and fifth grounds relied upon by the Official Receiver, and which I have found to be established, are matters of such seriousness that they render Mr Mak unfit to be concerned in the management of a company.

53.The first ground involves, as I have noted, an element of deception. That is a serious matter, and is one which, of itself, would justify the making of a disqualification order against Mr Mak. As to the third ground, it seems to me that the matters which have been established indicate that Mr Mak has wholly disregarded the interests of the Company's creditors in the way in which he has dealt with its funds. This is also, to my mind, a serious matter. Both of these grounds also indicate that Mr Mak was in the habit of treating the companies of which he was a shareholder and director (whether directly or through nominees) and their assets as effectively his own. This inability to distinguish between the assets of the companies and his personal assets, which Mr Mak now says he appreciates (although he did not before), is also a matter which I consider falls far below the standards of probity and competence to be expected of company directors.

54.It seems to me that although the fourth and fifth grounds relied upon are somewhat less serious, they too, render Mr Mak unfit to be concerned in the management of a company, since they indicate an abdication, on his part, of the responsibilities of a person in the position of a director with respect to a company's financial records.

55.So far as the sixth and final ground is concerned, I am of the view that, on its own, it would not have justified the making of a disqualification order.

56.Mr Mak urged on me that I should not make any order of disqualification, since this would seriously affect his ability to make a living. However, as I am satisfied that Mr Mak is, for the reasons given, unfit to be concerned in the management of a company, I have no alternative but to make a disqualification order against him (see Re Bath Glass Ltd (supra), at 132).

Period of disqualification

57.Under section 168H(4), the minimum period of disqualification is one year and the maximum period of disqualification is 15 years. Ms Lee referred me to the judgement of the English Court of Appeal in Re Sevenoaks Stationers (Retail) Ltd [1990] BCC 765, in which Dillon LJ suggested that this range could be divided into three brackets, reflective of different degrees of seriousness of the grounds proven against a respondent director. That approach was followed in Hong Kong by Kwan J in Re Observers Travel Enterprise Co Ltd (unreported, HCMP 3049 of 2000, 31 January 2001).

58.Ms Lee suggested that in this case, the nature of the complaints against Mr Mak fell within the middle bracket (calling for a period of disqualification of between 6 and 10 years), where the matters established are serious, but not so serious as to justify a period of disqualification of over 10 years. In my view, this is correct - as I have indicated, the first and third grounds in particular demonstrate a serious lack of probity on the part of Mr Mak, and taking all the grounds into account, including those which are, of themselves, somewhat less serious, it seems to me that an appropriate period of disqualification would be seven years.

59.I therefore make an order that Mr Mak shall not, without the leave of the court, be a director of a company or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a period of seven years effective from the beginning of the 21st day after the date of this order.

Costs

60.The Official Receiver seeks costs against Mr Mak. I can see no reason why costs should not follow the event in the ordinary way, and I therefore make an order nisi that Mr Mak should pay the Official Receiver's costs of this application, inclusive of all reserved costs, together with the costs of the application for leave to issue these proceedings out of time, which were ordered by Kwan J when granting such leave on 27 September 2002 to be in the cause of the disqualification proceedings, to be taxed if not agreed.

Representation:

Ms Fiona Lee, for the Official Receiver, for the Applicant

The Respondent, Mak Wing Hung, in person