The Official Receiver v. Sit Johnny (Formerly Sit Ching)

HCMP177/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 177 OF 2003

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BETWEEN

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Before : Master S Kwang, in Court

Date of Hearing : 7 September  2005

Date of Judgment : 7 September 2005

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J U D G M E N T

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1.This is an application by the Official Receiver for a disqualification order against the Respondent, Mr Sit, Johnny, formerly Sit Ching, under section 168H of the Companies Ordinance.  The Respondent was, at the material time, a director of Sunny Finance Group Company Limited, which is the company in question.

2.After the Originating Summons was issued in January 2003, no acknowledgement of service was filed by the Respondent.  In the absence of the Respondent, the Originating Summons was heard, firstly, before Master Ho on 21 March 2003.  After hearing submissions from the Official Receiver, Master Ho granted a disqualification order against the Respondent for a period of four and a half years. 

3.Subsequently, in April 2003, the Originating Summons was returned to the Official Receiver’s Office marked “unclaimed by the recipient”.  Later, the Respondent was represented by solicitors and alleged that he did not receive the Originating Summons and indicated to appeal against the order. 

4.In June 2003, by consent of both the Official Receiver and the Respondent, the disqualification order granted by Master Ho on 21 March 2003 was set aside and directions were given for exchange of affidavit evidence between the parties.  After more than a year’s time for the parties to exchange affidavits, the matter came before Master Ho again for further directions on 22 July 2004.  Master Ho, at that hearing, adjourned the matter for full argument before a master in open court and gave further directions on cross-examination of witnesses.  Master Ho ordered that the Respondent shall attend the adjourned hearing for cross-examination, failing which, the Respondent’s affirmations shall not be used as evidence without leave of the Court.  Master Ho further ordered the Respondent to procure the attendance of the Respondent’s witnesses, Madam Yuen Loi-yi and Madam Zhao Ju to attend the hearing for the purpose of cross-examination, failing which, both the affirmations of Madam Yuen and Madam Zhao shall not be used as evidence without leave of the Court. 

5.The adjourned hearing was originally fixed before Master Hui on 27 January 2005.  Shortly before the hearing, the Respondent himself filed a notice to act in person.  On the day just before the adjourned hearing, the Respondent applied for legal aid.  A Memorandum for Application for Legal Aid was filed on 26 January 2005.  As a result of the Application for Legal Aid, the statutory stay applied.  The matter was further adjourned. 

6.In February 2005, the Legal Aid Department refused the grant of legal aid.  Despite the same, the Respondent applied for further legal aid on 17 February 2005, but again was eventually refused by the Legal Aid Department in May 2005. 

7.According to the records of the Court, the parties fixed the date of the adjourned hearing in April 2005.  The adjourned hearing was fixed on today.  A Notice of Adjourned Hearing was served, according to the report of the Official Receiver, on the Respondent by ordinary post on 14 April 2005.  The Notice of Adjourned Hearing was served on the Respondent at his address for service as stated in the Notice to Act in Person.

8.Obviously, the Respondent was aware of today’s hearing since he wrote, on 26 August 2005, to this Court with copies to the Official Receiver, seeking to adjourn the hearing on grounds that he purported to attend medical treatments in China.  On 31 August 2005, the Official Receiver indicated that they would not consent to the adjournment and to proceed with the matter.

9.On 1 September 2005, I directed that since the Official Receiver did not consent to the application for adjournment, if the Respondent wished to apply for adjournment, he had to apply formally, with supporting affirmations.  Apparently, the Court did not allow the adjournment at that stage and the Respondent should appear at today’s hearing.  No further contact was made by the Respondent to this Court or to the Official Receiver.  The Respondent was absent today without any explanation.  No formal application was made by the Respondent, by whatever means, for the adjournment of today’s hearing.  I consider that the Respondent has full knowledge of today’s hearing but chose not to appear.  He should have well in advance notice of today’s hearing when the matter was re-fixed in April this year.  He should have made proper arrangement for his own affairs so that he could attend the hearing today.

10.In light of the fact that this matter has dragged on for more than two years, from the very first date of the issue of the Originating Summons up to now, I consider that discretion should be exercised to proceed with the hearing of the application in the absence of the Respondent. 

11.In this case, the Official Receiver has filed various reports in support, but the main factual issue relied upon by the Official Receiver was stated in his first report filed in March 2003, together with the Affirmation of the Treasury Accountant, Miss Daisy Chan.  The Respondent has filed two affirmations.  In addition, there were two affirmations filed by Madam Yuen and Madam Zhao in support of the Respondent’s opposition. 

12.In light of the order made by Master Ho in July 2004, since both the Respondent and his witnesses failed to attend today’s hearing and tender themselves for cross-examination by the Official Receiver, I have decided to exclude the admission of such affirmations as evidence in this application.  When I made this decision, I also considered the submissions of the Official Receiver that part of the contents of those affirmations would need to be cross-examined and credibilities of the witnesses will be in issue.  The evidence contained in the affirmations of the witnesses would be contradicted by documents.  In the circumstances, unless the witnesses could be properly cross-examined by the Official Receiver, I take the view that the Court should not admit their evidence on its face value.  As a result, there was no evidence from the Respondent’s side to contradict the allegations of the Official Receiver. 

13.The company in question, Sunny Finance Group Company Limited, was incorporated in Hong Kong on 6 October 1994.  It was wound up by this Court in March 1999 upon petition by a creditor.  Before its winding-up, it maintained a business address in Hong Kong at 28th Floor, Entertainment Building, Queen’s Road Central.  It was alleged by the Respondent that accounting records were kept at that address at all material times.

14.According to the reports of the Official Receiver, total proof of debt filed in the winding up of the company amounts to more than HK$91 million, but assets so far realised by the Official Receiver amount to only HK$2,000-odd.  No doubt, for the purposes of section 168H(1)(a), the company was clearly insolvent since its assets are insufficient for payment of its debts and liabilities.  There is no dispute that the company was insolvent while the Respondent was a director of the company.  What the Official Receiver is required to establish is that the conduct of the Respondent as a director of the company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company. 

15.A Disqualification Order is mandatory if the requirements of section 168H(1) are satisfied.  The grounds of objection relied upon by the Official Receiver are as follows:  the Respondent caused or procured the misappropriation and/or misapplication of moneys of the company in breach of fiduciary duties owed to the company. 

16.I accept the evidence from the Official Receiver that, in July 1997, there was a sum of US$250,000 remitted from the company’s account to the Respondent himself, his wife and his two daughters for personal use.  Admission was made by the Respondent himself during his public examination by the Official Receiver.  It is clear from his evidence that it was not used as a director loan and the money was disbursed to the Respondent without the consent of all other directors at the time prior to the effect of the payment.  There was no resolution recovered by the Official Receiver or submitted by the Respondent to support the use of the company money for the personal benefit of the Respondent and his family.  So this is an obvious situation whereby company’s property and company’s money was used by the Respondent as director of the company for his personal purpose without obtaining prior consent of all other creditors, or by resolutions of the Board of Directors, and he was in breach of his fiduciary duties owed to the company.

17.Furthermore, the Official Receiver alleged that the Respondent failed to keep himself informed of the financial position and affairs of the company in breach of his fiduciary duties owed to the company.  On this, the Official Receiver relied upon the fact that the Respondent could not explain or give proper explanation as to the payment of US$4 million from the company’s account to Guangdong Eel which is apparently a wholly-owned subsidiary company, incorporated in the PRC, of the company.  The Respondent sought to reply upon explanations given by one of his co-directors, Madam Zhao.  But even relying upon the explanation of Madam Zhao, there are a number of unexplained transactions.  The company originally disbursed a sum of US$7 million to Guangdong Eel, and approximately US$3 million was returned to the company,. leaving a balance of US$4 million with the subsidiary Guangdong Yu.  The US$4 million was exchanged by Guangdong Eel for RMB33.5 million.  There was only documentary evidence in respect of two out of the 13 reported money exchanges.  Out of the use of RMB33.5 million, 5.3 million was evidenced by written documents and explanations of use.  RMB6 million was without any documentary support and explanation for its use.  For the remaining RMB20 million, there was no explanation at all as to the use of the money. 

18.As a director of the company, the Respondent should have known the nature and purposes of the payment of the US$4 million from the company to the subsidiaries.  In the absence of any credible explanations by the Respondent, I am prepared to accept the Official Receiver’s submission that the Respondent is unable to account for the said sum and he would be responsible for the misapplication of the money of the company.  Furthermore, the Respondent, being a director of the company at the material time, has plainly failed to discharge his duty as a director to keep himself abreast of the affairs of the company when a substantial amount of the company’s money was disbursed to a subsidiary.

19.In addition, there was evidence to show that large numbers of cash payments were made by the company which the Respondent did not precisely know the nature or the purpose of such payments and the Respondent has to rely simply on his co-director, Madam Zhao, to provide the answer.  These transactions were highlighted at paragraph 31 to 34 of the first report of the Official Receiver at page 24 to 25 of the bundle.  I am not going to repeat those transactions and explanation here.  Suffice to say that the Respondent was not informed as to the financial affairs of the company and was unable to provide explanations as to those cash transactions by himself. 

20.The Official Receiver also relied upon the criminal convictions of the Respondent of offences under section 121 and section 274 of the Companies Ordinance in failing to maintain proper books and accounts of the company.  On his own plea of guilty to the offences charged, he was convicted.  He did not present to the Court any reasonable excuse for committing the offences.  The convictions are clearly relevant to the Court to consider the conduct of the Respondent.  Obviously, from these convictions, it is beyond doubt that the Respondent, as a director, failed to maintain proper books and accounts of the company for the purpose of compliance with his duty under section 121 and 274 of the Companies Ordinance.

21.So far the Official Receiver recovered no books and accounts of the company from the Respondent or his co-directors.  Since the evidence of the Respondent was excluded, simply there is no explanation as to the whereabouts of the books and accounts and there is no evidence as to how the Respondent and his co-directors have the accounts. 

22.I further accept evidence from the Official Receiver that the Respondent failed to submit a statement of affairs of the company as required under section 190 of the Companies Ordinance.  Request was made by the Official Receiver, as the Provisional Liquidators, for the Respondent to submit a statement of affairs.  However, over five years since the first request was made, up to now, no statement of affairs of the company was submitted.  Without the statement of affairs, no doubt the liquidators would have difficulties to administer the estate of the company. 

23.In addition, I accept the evidence from the Official Receiver that the Respondent, being a director of the company, and another three companies, failed to submit annual returns.  Under sections 107 and 109 of the Ordinance, they impose a duty on the companies to file annual returns with the Companies Registry.  Non-compliance with the requirements would amount to a criminal offence. 

24.According to the report of the Official Receiver, which I accept as evidence in this case, the Respondent, as director of Sunny Ocean Communications (Hong Kong) Company Limited, failed to file any return for eight years for the period from 1990 to 1998; Sunny Ocean Sun-Sun Printing Limited, for a period of 10 years, from 1995 to the date of the report; and New Ideal Holdings Limited, for a period of four years from 2001 to today.  This misconduct of the Respondent should be considered by this Court in addition to that misconduct as alleged by the Official Receiver and established by evidence in respect of the company in question. 

25.As to the applicable law, Counsel for the Official Receiver has already set out the same in his written submission and I accept that those case authorities referred in the written submission represent the established principles.  Section 168K of the Ordinance requires the Court, in considering whether to grant a Disqualification Order and in determining whether a person is unfit to be concerned in the management of a company, has to consider those matters specified in the 15th schedule of the Companies Ordinance.  Judging from the misconduct as established by evidence of the Official Receiver, I am satisfied that paragraphs 1, 2, 3(b), (f), (h) and paragraphs 4 of Part I of the 15th Schedule, and paragraph 5(a), (da) and paragraph 1 of Part II of the 15th Schedule are satisfied.  Furthermore, I have also considered that misconduct in relation to other matters mentioned in the report of the Official Receiver.

26.In conclusion, I find that all the allegations of the Official Receiver are established against the Respondent so as to render him unfit to be concerned in the management of the company.  As a result, it is mandatory for this Court to make a Disqualification Order against the Respondent.  In considering the appropriate period of disqualification against the Respondent, I bear in mind that the objective of the order is to protect the public against the future conduct of companies by persons whose past record as director of insolvent companies have shown them to be a danger to the creditors and others, and the period should have a deterrent effect.  Furthermore, the Court should also bear in mind the gravity and the persistence of the complaints made by the Official Receiver and the seriousness of the breach involved.  I also bear in mind the guidelines and tariff laid down by the English Court of Appeal in Re Sevenoaks Stationers Retail Limited which applied in Hong Kong  in many previous case authorities. 

27.At the same time, for the benefit of the Respondent, despite the fact that he was absent today, I also need to see whether there would be any available information or matters which may tend to support any mitigation on his part.  In this, I considered a letter produced from the Official Receiver at page 277 of the bundle, which is a letter from the then solicitors of the Respondent, Messrs Solomon C Chong & Co., to the landlord’s solicitors, Messrs Philip K H Wong & Kennedy Wong & Co.  The letter purported to seek clarification from the landlord’s solicitors as to the whereabouts of the books and records of the company.  It seems that more than one year after the Official Receiver had made request for the filing of the statement of affairs, the Respondent did attempt to locate the whereabouts of the books and records. 

28.Furthermore, in this case there was no allegations of fraud and dishonesty on the part of the Respondent.  I have also considered the age of the Respondent, which is about 62, and his alleged health condition.  While the evidence of the Respondent’s witnesses was excluded by this Court for the purpose of considering the substantive application, for those which I think are not contradicted by the evidence of the Official Receiver so far, I would try to find some information which may tend to assist the Respondent in mitigation so as to be fair to the Respondent, despite the fact that he was absent today.

29.I bear in mind that one of the witnesses, Madam Yuen, was the ex-wife of the Respondent.  She divorced the Respondent in 1993.  Despite the divorce, Madam Yuen would like to say, in her affirmations, something favourable to the Respondent in support, in my view, of mitigation.  At page 84 of the bundle, Madam Yuen stated that the Respondent had been working hard to perform his duty and to comply with the Official Receiver’s request through various means and paying for all expenses incurred by me.  And also, she said: 

“Since 1998, the Respondent had been working diligently with a positive manner to start all over again. Over the past few years, I saw him try his best endeavour to re-establish his business to earn money to repay his personal debt and to strive for a prosperous future. Any other persons has suffered such a huge financial blow would have collapsed both mentally and physically.”

And Madam Yuen truly believed, after all the mis-happening occurred to the Respondent, he should have learned his lesson and act prudently in future.  So to that extent, Madam Yuen being the ex-wife of the Respondent, tried to say something in support of the Respondent’s mitigation. 

30.At page 94 of the bundle, the affirmation of Madam Zhao Ju, the ex-co-director of the Respondent, also had something to say on the character of Mr Sit, the Respondent.  She said the Respondent had tried his best efforts to comply with the Official Receiver’s request all these years.

“It’s the one that withstands the pressure, whereas myself and Mr Chow has been left untouched.  The Respondent has been a responsible, prudent person to the company and business, even though he may not have acted perfectly, but he is better than many people who have lost confidence and collapsed.  The Respondent has been working very hard, trying each and every effort to regroup himself, re-establish his business to pay off the old debt due to his friends and relatives, and to rebuild his business.”

She continued to say: 

“The Respondent has suffered a great deal in the past, both financially and mentally and he has learned his lesson well.  The society should encourage him to regain his strength, to rebuild his confidence and career, rather than penalise his failure of complying with the report which has not his assigned duties.  It was agreed between Mr Shu, the Respondent, Mr Chow and myself, that Mr Chow would be responsible for the site operations supervising the production, manufacturing, packaging and the workers, marketing, exporting, etc. in Wuzhou(?), while I am responsible for the administrating the books, records and accounts.  Failing to produce the financial report is my fault, not on the Respondent or on Mr Chow’s part.”

31.In this case, I agree with the counsel for the Official Receiver that the starting point for the period of disqualification in this case would be the top end of the minimum bracket.  Taking into account the age, family background, health condition of the Respondent, and the mitigations put forward by the witnesses of the Respondent, I consider that the appropriate period for disqualification in this case is 4 years.

32.As a result, I make the following order:  Usual Disqualification Order be granted against the Respondent for a period of 4 years, effective from the beginning of the 21st day after the date of this order. 

(Submissions on costs)

33.The costs of this action, including costs of today’s hearing and the hearing on 22 July 2004, be to the Applicant, to be taxed if not agreed.

Representations:

Mr Jin Pao, instructed by the Official Receiver’s Office

The Respondent, in person, absent