Re Luen Yick Water & Drainage Works Ltd

HCCW209/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 209/2002

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Before:  Hon Barma J, in Chambers

Date of Hearing:  30 November 2005

Date of Decision:  30 November 2005

D E C I S I O N

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1.This is an application by the joint and several liquidators of Luen Yick Water & Drainage Works Limited (“the Liquidators” and “the Company” respectively) seeking an order, pursuant to section 199(1)(c) of the Companies Ordinance, that they be given leave to employ Messrs. Fairbairn Catley Low & Kong and counsel to assist them to recover, on behalf of the Company, the sum of HK$1.2 million from a Mr Ho Sing Kwong (“Mr Ho”).

2.The application is made because a majority of the Committee of Inspection (“COI”) - that is, three out of five members – were opposed to this proposal when the Liquidators initially sought the COI’s approval to employ solicitors and counsel for this purpose.  The COI consists of five creditors, Hyundai Engineering & Construction Limited (“Hyundai”), the Bank of East Asia Limited (“BEA”), Mr Lee Cheung-ching (“Mr Lee”), who was also a director of the Company prior to its liquidation, Ms Lam Ho-lin (“Ms Lam”) and Mr Lin Lam-yim (“Mr Lin”).  Hyundai and BEA are in favour of the proposal but the three individual members of the COI are not.  The Liquidators consider that there is reason to think that at least some of the individual members of the COI may not be acting in the best interests of the creditors as a whole and may, in one case, have a potentially conflicting interest in the matter.

3.At the hearing today, the Liquidators were represented by Mr Maurellet.  Mr Lee and Mr Lin appeared in person.  Ms Lam did not appear but purported to authorise Mr Lee to represent her.  It is not, in my view, possible for a litigant acting in person to authorise another person to act on his or her behalf.  As it happens, Mr Lee did not specifically address me on any matters contained in Ms Lam’s affirmation.  That said, I have had regard to the reasons for her position which she has set out in her affirmation and will deal with them below. 

4.The evidence before me consisted, on the Liquidators’ side, of three affirmations by Mr Briscoe.  Mr Briscoe assists the Lquidators in respect of this liquidation and has responsibility for the day-to-day conduct of it.  In addition, each of the members of the COI who are opposed to the application has filed an affirmation setting out his or her reasons for opposition.  As far as Mr Briscoe’s affirmations are concerned, the first two explained the reasons why the Lquidators thought that it would be in the interests of the Company’s creditors for them to take the proceedings proposed.  The third affirmation deals with the points that have been made by the opposing members of the COI. 

5.So far as the law is concerned, section 199(1) of the Companies Ordinance is, so far as material, in the following terms.  It reads:  “Subject to section 193(3)” - which is not relevant for present purposes - “the liquidator in a winding-up by the court shall have power with the sanction of either the court or of the Committee of Inspection” - then subparagraph (c) reads - “to appoint a solicitor to assist him in the performance of his duties.”  Its effect is to make it necessary for the Liquidators to obtain the sanction of either the COI or the court if they wish to appoint solicitors to assist them. 

6.It is clear from Re North-Eastern Insurance Company Limited [1915] 113 LT 989 that the court’s power to give sanction exists as an alternative and original power to give such sanction where the committee of inspection has refused it.  While the court will usually have regard to the opinion of the committee, it is in no way bound by it and will depart from that opinion if there are good reasons for doing so. 

7.In considering whether or not to give the sanction that is applied for, it is necessary first to consider the proposed claim against Mr Ho.  This relates to a payment of HK$1.2 million made by the Company to Mr Ho on 27 March 2002.  This was after the petition against the company was presented and served on the Company, both of these matters having happened on 22 February 2002.  As the payment was made after the presentation of the petition, it is void as against the Company as a disposition of its property made after the commencement of its winding-up, unless the court validates the payment (see section 182 of the Companies Ordinance (Cap. 32)).

8.When the Liquidators discovered that this payment had been made, they wrote to Mr Ho on 18 June 2004, advising him that this payment was void as against the Liquidators and requesting him to repay it. 

9.On 3 July 2004, solicitors representing Mr Ho wrote to the Liquidators seeking supporting documentation in relation to the payment.  This was provided on 12 July 2004.  It consisted of a copy of the cheque to Mr Ho by which the payment was made and a copy of the Company’s bank statement showing that the funds were paid out of its account (the payment was made before advertisement of the petition so that the bank would not have had notice of the presentation of the petition against the Company and might not therefore have yet frozen the Company’s account maintained with it).  Apart from these documents, the Company’s ledgers suggest that the payment represents repayment to Mr Ho of some $1.1 million advanced by him to the company by way of cash or payments made on its behalf, together with interest of some HK$100,000.  Copies of these ledgers were provided to Mr Ho’s solicitors subsequently. 

10.On 11 August 2004, Mr Ho’s solicitors wrote again to the Liquidators.  They claimed that the $1.2 million was not property of the Company, and also that Mr Ho merely received the money as a trustee for Mr Leong Chan-luk.  According to this letter, Mr Leong was a friend of Mr Ho’s, living in Macau, to whom Mr Ho lent the use of his bank account in Hong Kong for the purpose of making transfers of money.  I understand this suggestion to mean that Mr Ho made transfers into and out of his own bank account on behalf of Mr Leong.  It was said that Mr Leong told Mr Ho that he had lent 1.2 million to Mr Lee - the same Mr Lee who was a director of the Company and is a member of the COI - as a personal loan and asked Mr Ho to facilitate Mr Lee’s repayment of this loan by allowing the repayment to be made to Mr Ho’s bank account.  Mr Ho says that, on receipt of the sum, he remitted the whole amount to Mr Leong in cash.  Mr Ho says that he has since asked Mr Lee about this and has been told that the $1.2 million was in fact Mr Lee’s personal asset, that Mr Lee had borrowed HK$1.5 million from another friend, a Mr Tang, in order to effect the repayment to Mr Leong, and that he used the Company’s account only as a matter of convenience.  The letter from Mr Ho’s solicitors also stated that neither Mr Ho nor Mr Leong had had business dealings with the Company. 

11.Having received this explanation, the Liquidators investigated further.  On 30 November 2004, they wrote to Mr Ho’s solicitors to say that they were unable to accept the explanation put forward.  They referred to the current account between the Company and Mr Ho which appears in its ledgers, enclosing a copy of it, and stated their belief that the payment was in fact a repayment of a debt apparently due to Mr Ho.

12.So far as the position of Mr Tang was concerned, the Liquidators pointed out that there was also a current account between Mr Tang and the Company and that Mr Tang had claimed to be a creditor of the company for some HK$2.91 million.  This claim appears to be supported, at least to some extent, by the company’s ledgers, which show a net receipt by the company of $1.5 million on 26 March 2002, from Mr Tang, together with other payments received from Mr Tang or payments said to have been made by Mr Tang on behalf of the Company at various other times.  The Liquidators went on to say that they believed that the payment to the company of the $1.5 million by Mr Tang on 26 March 2002, being made on the same date that Mr Lee was said to have borrowed this amount from Mr Tang, was in fact a loan by Mr Tang to the Company. 

13.The Liquidators asked for documentation to substantiate the version of events put forward by Mr Ho, failing which, proceedings against him for recovery of the $1.2 million were threatened.  No response was received.  On 28 January 2005, the Liquidators wrote again to Mr Ho’s solicitors.  This resulted in a reply the same day, in which those solicitors indicated that they had no instructions to act for Mr Ho. 

14.At the hearing today, Mr Lee explained that he had, in the past, borrowed money for the Company’s purposes from Mr Leong and that all such borrowings and the repayments thereof were made through Mr Ho, thus apparently confirming this part at least of Mr Ho’s explanation.  Leaving aside the question of the ledger account in Mr Ho’s name, which might suggest the contrary - that is, that Mr Ho was not simply a conduit - the argument that he was no more than a conduit may or may not provide a defence to Mr Ho, as Mr Ho would, nonetheless, seem to have received property belonging to the Company after its liquidation.  The effect of this, however, is a matter for the Liquidators to consider, perhaps with the benefit of legal advice.  The Liquidators may also wish to consider whether any claim that is made should be made against Mr Ho alone, or against both Mr Ho and Mr Leong. 

15.However, that said, in the absence of any further explanation or information being forthcoming from Mr Ho, and in the light of the evidence which the Liquidators have referred to, it seems to me that the Liquidators have a respectable case for seeking repayment of the $1.2 million from Mr Ho.  As for the prospects of actually recovering this amount, or a substantial part of it, from Mr Ho, the Liquidators have ascertained that Mr Ho is a joint owner of a property in Hong Kong and there is, therefore, reason to think that he is worth powder and shot - that he is worth suing.  In these circumstances, one would have thought that it would be in the interests of the creditors of the Company for it to take action to recover this amount, particularly if the costs of doing so were not likely to be disproportionate to the amount at stake. 

16.Having said that, I turn to consider the reasons given by Mr Lee, Ms Lam and Mr Lin for opposing the giving of sanction.  I shall deal first with the position of Mr Lee.  In his affirmation dated 22 July 2005, he says that the Company is indebted to him for over HK$10 million, representing some 60% of the total indebtedness of the company to its creditors.  He does not deal, in his affirmation, with the relationship between the Company and Mr Ho, saying that this has been described in the previous letter from the solicitor (which I understand to be a reference to Mr Ho’s solicitors).  By contrast, as Mr Maurellet pointed out, in his reasons given to the Liquidators when declining to give his approval to the proposal, Mr Lee said that this was simply a normal business transaction of the Company.  This apparent discrepancy was explained by Mr Lee today.  He explained that he would borrow money for, or on behalf of, the Company from his friends, but that he would also be personally liable for such loans as a guarantor. 

17.Be that as it may, it would seem that there are some differences between the account put forward by Mr Lee, both in his affirmation and today, and that put forward by Mr Ho through his solicitors; not least in relation to Mr Ho’s assertion that he had no dealings with the Company, whereas Mr Lee’s evidence would suggest that he did have such dealings, whether as a conduit or otherwise.  Moreover, whereas Mr Ho suggested that the $1.2 million was not the property of the Company, Mr Lee’s explanation would seem to suggest that it was in fact money of the Company in the sense that it was received by the Company and intended to be used for its purposes. 

18.But even accepting that there might have been a loan from someone to the Company and that the payment was intended to be a repayment of it in the normal way, the position is, under the Companies Ordinance, that the normal way ceases to operate once a petition has been presented against a company.  Thus, repayments to a creditor after the presentation of a petition will be void unless validated, and if not validated are, prima facie, recoverable from the payee. 

19.Mr Lee goes on to say that he does not think that any recovery from Mr Ho is likely even if judgment is obtained, and that the long wait that is likely will result in great pressure being put on the creditors, such as himself, in terms of time and money.  He also relies on the fact that a majority of the COI was against the proposed proceedings as a reason for the Court not to grant the Liquidators’ application, and says that no other creditors have complained about this decision.  Finally, he suggests that the Court is not in a position to understand the true situation as between the COI and the Liquidators purely on the basis of the material disclosed for the purposes of this application. 

20.I do not consider that any of these reasons for opposing the Liquidators’ proposal are good ones.  The fact that Mr Lee may be the largest creditor of the company is no reason to allow his views to override the interests of the creditors as a whole particularly as, as I have already indicated, the Liquidators would appear, on the face of it, to have a respectable claim against Mr Ho. 

21.His suggestion that Mr Ho might not be worth suing might have been a valid reason for not taking action had it not been for the fact that the Liquidators’ investigations have revealed the existence of an apparently valuable property owned by Mr Ho. 

22.So far as the suggestion that there may be a long wait for payment is concerned, I see no reason why proceedings against Mr Ho should be unduly lengthy.  Even if there is some delay, the possible recovery is such that it would seem to be in the interests of the creditors to pursue the claim.  I do not understand why this should place any stress or pressure on the creditors.

23.The fact that the majority of the COI has refused sanction is not a matter which is binding on the Court, particularly if the Court is of the view that the sanction has been refused without proper regard for the interests of the creditors as a whole. 

24.The fact that no other creditors appear to have complained is not a matter of any particular weight as there is nothing to suggest that other creditors have been consulted or are aware of this matter. 

25.Finally, so far as the question of the relationship between the Liquidators and the COI is concerned, this is not, in my view, a matter which can or should be taken into account for these purposes.  No details of this relationship or the problems arising in relation to it are given by Mr Lee, and there is no reason to suppose that this has anything to do with the proposed proceedings against Mr Ho.  If there are thought to be other grounds for complaint against the Liquidators, it is open to any aggrieved creditor to make such application as he thinks appropriate. 

26.Further, despite the Liquidators’ concerns about Mr Lee’s position being clearly stated at the outset, Mr Lee has not addressed them.  Given the nature of the explanation put forward on behalf of Mr Ho, it would seem at least possible that if Mr Ho is required to repay the Company, he, or perhaps Mr Leong, might have a claim against Mr Lee, either on the basis that the loan was one made personally to Mr Lee and not to the Company, or on the basis that Mr Lee had guaranteed the Company’s debts.  In these circumstances, Mr Lee’s position in relation to the matter would not appear to be wholly disinterested. 

27.Turning to Ms Lam, her reasons for opposing the application were stated to be as follows.  Having stated that the Company is indebted to her in the amount of $2 million, she says that she agrees with the views of Mr Lee and Mr Lin.  She suggests that the question of which solicitors, if any, should be employed should be determined by way of open tender.  She queries how the actions to be taken by the Liquidators and solicitors will be monitored.  She expresses dissatisfaction with the Liquidators’ performance in relation to attempts to recover outstanding payments said to be owed by Hyundai, and opposes the employment of Messrs Fairbairn Catley Low & Kong on the basis of a conflict of interest of which she gives no particulars.  Her position is that the Liquidators should simply distribute the assets available as soon as possible and bring the liquidation to an end. 

28.Again, none of these matters appear to me to be good reasons for not bringing a claim against Mr Ho, having regard to the apparent strength of that claim.  So far as the choice of solicitors is concerned, this, and the manner in which it is decided upon, are primarily matters for the Liquidators.  There is no suggestion that Messrs Fairbairn Catley Low & Kong are not competent to deal with the proposed action.  Although Ms Lam refers to a conflict of interest, she gives no explanation of the nature of that conflict. 

29.Mr Briscoe has also stated that Fairbairn Catley Low & Kong were not involved in the negotiations with Hyundai which related to one of two contracts between Hyundai and the company.  So no conflict can arise out of that matter.  Further, so far as the position in relation to the negotiations with Hyundai are concerned, the question of whether the outcome was reasonable or proper from the point of view of the creditors is not a matter which has any relevance to the question for consideration today.  Even if there were some basis for thinking that the Liquidators had not handled that matter as well as they might have done - and I add that there is no basis for that suggestion on the material before me - that would be a matter for complaint against the Liquidators, as to which the COI, or a creditor, can take such steps as they think fit.  It would not bear on the question of whether or not the Liquidators should pursue Mr Ho for an amount which appears to be due from him to the Company.  I therefore do not think that these reasons stand in the way of the Court making the order sought by the liquidators. 

30.Finally, as far as Mr Lin is concerned, his reasons for opposing the appointment of solicitors to pursue the claim against Mr Ho are that the Liquidators’ performance since their appointment has been poor, with recovery of only some $779,000-odd out of debts allegedly due to the company of over $14.8 million, and they have only recovered some $700,000, having incurred expenses of more than that amount.  He specifically complains about the settlement reached between Hyundai and the Liquidators which he says produced only $40,000 when the company had claims in excess of $10 million against Hyundai.  He says he did not know of the settlement until February 2005 and that the Liquidators acted without consulting the COI in relation to this, and seeks production of documents relating to this claim and its settlement.  He says that, given that the claim against Mr Ho is for a smaller amount and involves more complicated questions, he does not favour bringing proceedings.  He also says that as Mr Ho is only a joint tenant of the property of which he is a registered owner, it is unlikely to produce any recovery as it is unlikely that the Liquidators will be able to sell it to meet the claim.  He also expressed the view that, in the light of Mr Ho’s explanation that he was only an agent for Mr Leong, the claim should be made against Mr Leong, against whom the prospects of recovery are even worse since he is not resident in Hong Kong, and not against Mr Ho. 

31.At today’s hearing, Mr Lin made it clear that his main complaint was as to the handling of the Hyundai matter which had led to a loss of confidence in the Liquidators on his part.  However, again, I do not see that any complaint as to the handling of a different claim against another creditor, or another debtor, is relevant to the question which I have to decide, for the reasons I have given.  Moreover, it would appear that Mr Lin was in fact sent a letter, which was sent to all members of the COI, in November 2004, explaining the proposed settlement and asking for their comments and approval.  He raised no queries at the time, although it may be that, although the letter was sent, he may not have received it.  But the settlement was, in any event, approved by four out of five members of the COI. 

32.As far as the dissatisfaction with the Liquidators’ conduct is concerned, I must say that there does not appear to be any solid foundation for the complaint that the Liquidators have sought to sideline the COI or keep them uninformed.  As to the recoveries made to date, the fact that such recoveries have been low is not itself evidence of poor performance on the part of the Liquidators as there are many factors that could influence the outcome of attempts at recovery.  Mr Lin also complained that he was not consulted about the Hyundai settlement when he was the only person who was a subcontractor and thus had knowledge of conditions at the site.  However, Mr Lee is a director of the company - or was a director - and would presumably have been in a position either to give information if it was needed, or to express a view as to the propriety of the settlement.  Further, although the company may have had a claim against Hyundai, there were also cross-claims by Hyundai against the company, and all of these would have had to be taken into account in coming to any settlement on the particular contract.  As I have noted, Mr Lee, who was a director of the company, approved the settlement.

33.For the reasons I have explained, the handling of the Hyundai claim is not a matter which bears on the question of whether or not proceedings should be brought against Mr Ho.  As to the likely costs and benefits of the proceedings proposed, the Liquidators have indicated that, while the costs will depend on how much resistance is put up by Mr Ho, the Liquidators do not anticipate that the costs will exceed 10 per cent of the amount of the claim.  The Liquidators appear to have sufficient funds in hand to cover the costs of making the claim. 

34.In the circumstances, while recovery cannot be assured, it would seem to be in the interests of the creditors as a whole to take action against Mr Ho.  I therefore do not think that Mr Lin’s reasons for opposing the appointment of Fairbairn Catley Low & Kong to pursue the claim against Mr Ho are such as to prevent the Court from granting the order sought.

35.I am therefore satisfied that it would be proper for the Liquidators to seek to pursue the claim against Mr Ho and to employ solicitors and counsel for this purpose, and shall make an order in terms of the Liquidators’ application.

(Submissions on costs)

36.In ordinary litigation, the losing party usually has to pay the costs of the winning party but, in this case, I have taken account of the reasons that have been put forward, and although I have not accepted those reasons for rejecting the Liquidators’ application, it seems to me that Mr Lee and Mr Lin were acting in good faith as to what they thought was the right thing to do and so, although they have been unsuccessful, I do not propose to order them to pay any costs.  The costs will simply have to be paid out of the company’s assets. 

1st Applicant, absent

Mr Jose Antonio Maurellet, instructed by Fairbairn Catley Low & Kong, for the 2nd Applicant

1st and 2nd Respondents, absent

Lee Cheung-ching, Contributory, in person

Lin Lam-yim, Creditor, in person