Re Liote Property Management Ltd

HCCW 94/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS

NO. 94 OF 2003

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Before: Hon Kwan J in Chambers

Date of Hearing: 21 March 2006

Date of Decision: 21 March 2006

Date of Handing Down of Reasons for Decision: 27 March 2006

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REASONS   FOR   DECISION

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1.There are 28 identical summonses issued by the Official Receiver in 28 winding-up proceedings, seeking the removal of the provisional liquidators to each of the companies and consequential orders upon the removal of the provisional liquidators.  The schedule attached to each of the summonses giving the proceedings number and the name of the company concerned is annexed as a schedule to this decision (“the Schedule”).  As the basis of application under each of the 28proceedings is the same, and common questions of law and fact arise in all the applications, they are heard together. 

2.The summons and the Official Receiver’s reports have been served on the individuals sought to be removed on 21 February 2006.  They have made no response to the application and have not attended the hearing.  I have made an order in each of the proceedings in the terms as sought by the Official Receiver at the end of the hearing and these are the reasons for decision.

3.I will first set out the background matters.  The 28 companies were ordered to be wound up in 2003 and 2004.  The Official Receiver and Messrs Charles Yeung & Co, certified public accountants (“the Firm”), had entered into a contract (“the Contract”) for the taking up of appointment as provisional liquidators under section 194(1A) of the Companies Ordinance, Cap. 32.  The Contract sets out the work required to be done by the appointment takers.  The Firm was awarded the summary liquidation of the 28 companies under the Contract. 

4.Yeung Wah Chou (“Yeung”) and H J Lie (“Lie”), both of the Firm, were appointed joint and several provisional liquidators for each of the companies under section 194(1A) between 7 April 2003 and 31 March  2004.

5.The Official Receiver is of the opinion that Yeung and Lie had failed to conduct the liquidation of the 28 companies efficiently and vigorously, there was serious misconduct on their part, they are not fit and proper persons to act as provisional liquidators or liquidators, and seeks the removal of Yeung and Lie and that others be appointed in their place.

6.The application for removal as provisional liquidators is made under section 196(1).  By this provision, a provisional liquidator or liquidator appointed under section 193 or 194 may be removed by the court “on cause shown”.  The burden is on the Official Receiver to show a good cause for removal.  This provision confers a wide discretion on the court.  “Cause shown” is not limited to misconduct or personal unfitness.  In the exercise of this discretion, the court may take all the circumstances into consideration and if the court finds it desirable, on the whole, that a liquidator should be removed, the court may remove him (In re Marseilles Extension Railway and Land Company (1867) LR 4 Eq 692 at 694, per Malins, VC).  “Fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation” (In re Adam Eyton, Limited (1887) 36 Ch D 299 at 306, per Bowen LJ).

7.The Official Receiver clearly has locus to apply under section 196(1), as a person who has “a legitimate interest in the relief sought” (Deloitte Touche A.G. v Johnson [1999] 1 WLR 1605 at 1611E), by reason of his statutory obligation to exercise supervisory control over the conduct of provisional liquidators and liquidators in a compulsory liquidation.

8.The Official Receiver has filed a detailed report on the conduct and performance of Yeung and Lie as provisional liquidators in the liquidation of the 28 companies. 

9.I make these findings on the evidence filed.

(1)   Yeung and Lie have failed to carry out work in accordance with clauses 3 and 4 of the Work Specification in the schedule to the Contract

10.Clause 3 provides, inter alia, that the appointment takers of the firm shall perform with professionally acceptable standards all such tasks as are necessary or may be required of a provisional liquidator under section 194(1A) and all other tasks or duties as may be imposed on them by the Official Receiver under the Contract.  Clause 4 provides that the appointment takers when appointed provisional liquidators shall apply to court within 3 months of the date of the winding-up order for a summary procedure order under section 227F, unless there is evidence the value of the asset of the company will exceed $200,000.00, in which case they shall forthwith and in any event not later than 8 weeks after the date of the winding-up order notify the Official Receiver of the same, and shall arrange to convene meetings of creditors and contributors under section 194(1)(b). 

11.Up to the date of the Official Receiver’s report on 17 February 2006, the Official Receiver has not been informed that the summary procedure order had been obtained in any of the 28 cases.  The Official Receiver made a search of the document index of the files in the High Court of each of the 28 cases on 24 January 2006.  This revealed there had not been any filing of a sealed summary procedure order in any of the cases.  Another search on 15 March 2006 yielded the same result.  The companies are still in provisional liquidation.

12.The search also revealed these matters:

-   in 3 cases only, applications for summary procedure were filed within 3 months after the date of the winding-up order, in accordance with requirements under the Contract;

-   in 4 cases, no application for summary procedure had been filed;

-   for the other 21 cases, applications for summary procedure order were filed more than 3 months from the date of the winding-up order, in breach of the requirements under clause 4 of the Work Specification in the schedule to the Contract, and the particulars are as follows:

(1)    in 6 cases, applications were filed within 4 to 6 months after the date of the winding-up order;

(2)    in 3 cases, applications were filed within 7 to 12 months after the date of the winding-up order;

(3)    in 12 cases, applications were filed more than one year after the date of the winding-up order.

13.For the 4 cases where no application was filed, the Official Receiver has never been notified by Yeung or Lie if the value of the assets exceeds $200,000.00 or of any reason why an application has not been filed. 

(2)     Yeung and Lie have failed to comply with clauses 7(b) and (c) of the Special Conditions of the Contract

14.Clause 7(b) provides that the appointment takers are excepted to complete the case by obtaining a release order from the court under section 205 in an expeditious and professional manner; if the case cannot be completed within one year of appointment, a report is required to be submitted by them to the Official Receiver before the expiration of the first year of appointment giving an explanation why the case cannot be so completed.  By clause 7(c), the appointment takers are required to submit accounts to the Official Receiver under section 203 of Cap. 32 and to submit with the first accounts under section 203 a progress report giving details on what has been done, what needs to be done, and an indication with reasons on whether or not the case can be completed within one year of appointment.

15.The Official Receiver had sent numerous reminders to Yeung and Lie asking for submission of a progress report in respect of each of the 28 cases.  Except in HCCW No. 766 of 2003 where the reminder was met with the submission of a progress report on 3 March 2004, the Official Receiver did not receive any reply from Yeung or Lie. 

16.For 18 cases where an application for the summary procedure order had been filed, it does not appear from the search of the court files by the Official Receiver there had been any progress of the applications since the filing.  In HCCW No. 94 of 2003, the search showed there had been some follow-up actions but the last follow-up action stopped at 18 August 2004 until 20 January 2006 when an application for the summary procedure order was again filed.  In HCCW Nos. 258 of 2003 and 348 of 2003, there was only one follow-up action in July 2003 shortly after the first filing, and it does not appear there was any further progress.  In HCCW Nos. 410 of 2003, 724 of 2003 and 1194 of 2003, there had not been any follow-up action since the first filing in 2003 and early 2005 until mid January 2006 when an application for the summary procedure order was again filed.

17.A progress report was submitted in only 12 cases.  In HCCW No. 766 of 2003, the progress report was submitted 11 months after the date of appointment.  For the other 11 cases, the progress reports were submitted within 3 months after the date of appointment.  However, the progress reports were not submitted with accounts required by section 203 in accordance with the requirement under the Contract, but were submitted with a premature request for payment of subsidy under the Contract.  In 11 cases, Yeung and Lie confirmed in the progress report that the cases could be completed within one year of the date of their appointment.  According to clause 7(d) of the Special Condition to the Contract, completion of a case means obtaining a release order from the court under section 205, but a sealed summary procedure order had not even been obtained for these cases.

18.The liquidation of none of the 28 cases was completed within one year of appointment.  The Official Receiver did not receive a report explaining why not, as required under clause 7(b) of the Special Condition to the Contract. 

(3)   Yeung and Lie have failed to comply with the statutory duties of a provisional liquidator

19.Under section 203(1), every liquidator (other than the Official Receiver) of a company wound up by the court shall, at such times as may be prescribed but not less than twice in each year during the tenure of office, send to the Official Receiver an account of receipts and payments as liquidator. 

20.In all the 28 cases, Yeung and Lie had failed to submit accounts to the Official Receiver at least twice in each year during the tenure of their office in accordance with section 203(1).

21.In 9 cases, only one account was submitted since their appointment.  The accounts submitted were incomplete, the Official Receiver had raised comments and Yeung and Lie had made no reply.

22.In all the other cases, no accounts under section 203 were submitted.  The Official Receiver sent periodic reminders asking for the submission of accounts and did not receive any response.

(4)   Yeung and Lie have failed to allow the Official Receiver to audit the accounts under section 203(3A)

23.In view of the lack of progress and unsatisfactory conduct in the liquidation of the companies, the Official Receiver decided to exercise his power under section 203(3A) to audit the accounts of the 28 cases.  4 cases were initially identified for a field audit.  Since September 2005, the Official Receiver had liaised with Yeung in an attempt to arrange a field audit.  The date was postponed several times to accommodate the Firm but to no avail.  Eventually, the Official Receiver informed the Firm on 4 January 2006 that a field audit would be conducted on 6 January 2006.  When the case officers of the Official Receiver attended the office of the Firm on that day, they found the main entrance closed.  Another visit was made on 13 January 2006.  An employee of the Firm declined to provide the books to the Official Receiver for audit.

(5)   There has been lack of response from Yeung and Lie to reminders and enquiries from the Official Receiver

24.Apart from the incidents mentioned above of the failure to respond to the enquiries of the Official Receiver, there are these further incidents. 

25.In mid September 2005, the Official Receiver received a letter dated 14 September 2005 from Messrs Deacons, the solicitors for the petitioning creditor in HCCW No. 302 of 2003, complaining that they had written many letters to the Firm asking for an update of the progress of the liquidation of Karting Mall (Hong Kong) Limited since November 2004 and had received no reply.  On 21 September 2005, the Official Receiver asked Yeung and Lie to give a reply to Messrs Deacons within 14 days.  A reminder was sent by the Official Receiver on 25 October 2005.  On 6 November 2005, Yeung replied to the Official Receiver stating that the Official Receiver should reply to Deacons instead of asking the provisional liquidators to handle this, as the Official Receiver had not paid any remuneration to the provisional liquidators. 

26.On 11 January 2006, the Official Receiver asked Yeung and Lie to give an answer regarding their failure to complete the liquidation of the 28 cases, their failure to submit accounts under section 203, their failure to allow the Official Receiver to conduct a field audit, and the details of the staff of the Firm.  No reply was received.

27.On the basis of the above findings, I agree with the Official Receiver that the performance and conduct of Yeung and Lie as provisional liquidators in the 28 summary liquidations are so unsatisfactory as to justify their removal. 

28.Upon the removal of Yeung and Lie, under section 194(1)(e), the Official Receiver shall by virtue of his office be liquidator during any vacancy.  By section 194(2), where the Official Receiver is liquidator, he may, at any time, apply to court for the appointment of a person as liquidator in his place.  The Official Receiver proposes to nominate the appointment takers of the next firm in the Panel A roster to be the joint and several provisional liquidators of the 28 companies in the place of the Official Receiver.  The Official Receiver has approached KPMG, being the next firm under the roster of the Panel A Scheme and sought their consent to take up the summary liquidations of the 28 companies if they were so appointed.  Edward S Middleton and Jacky Chung Wing Muk of KPMG have given their consent to act as joint and several provisional liquidators.

29.KPMG have drawn the attention of the Official Receiver to their previous appointment as reporting accountant to Karting Mall (Hong Kong) Limited, one of the 28 companies.  The engagement was to carry out an independent business review of this company in 2002 and the exercise was completed in September 2002.  This was not an audit.  The final fee note of KPMG remains unpaid and KPMG had written off the debt in February 2003.  They confirmed they had not taken any legal action against the company and will not seek to claim in the liquidation if appointed.  KPMG do not think their previous engagement would impair their objectivity in the proposed appointment.

30.The Official Receiver has also considered the issue of potential conflict of interest in the guidelines set out in the Hong Kong Institute of Certified Public Accountants Supplement to Statement 1.203 “Professional Ethics, Integrity, Objectivity and Independence in Insolvency” issued in August 1994.  The Official Receiver does not think objectivity could reasonably be seen to be compromised by reason of the previous engagement of KPMG.  In any event, if a real and actual conflict of interest should arise subsequently, KPMG could apply to the court for directions.

31.I am satisfied it would be appropriate to appoint Mr Middleton and Mr Chung as provisional liquidators in replacement.  The Official Receiver also seeks an order under rule 167(1) of the Companies (Winding-up) Rules for delivery of books and papers kept by Yeung and Lie relating to their office as provisional liquidators of the 28 companies to the new provisional liquidators.  It is proper to make this order as well.

32.The order I have made is as follows:

(1)   all the 28 summonses under the proceedings as listed in the Schedule be listed together and heard at the same time;

(2)   in respect of the 27 proceedings itemised 2 to 28 in the Schedule, leave be granted for the filing of the Official Receiver’s report and evidence under HCCW No. 94 of 2003 in support of each of the applications;

(3)   Mr Yeung Wah Chou and Mr H J Lie both of Messrs Charles Yeung and Co, certified public accountants, be removed as provisional liquidators of each of the 28 companies in the Schedule;

(4)   Mr Edward S Middleton and Mr Jacky Chung Wing Muk both of KPMG be appointed the joint and several provisional liquidators of each of the 28 companies in the Schedule;

(5)   the renumeration of Mr Edward S Middleton and Mr Jacky Chung Wing Muk, as the joint and several provisional liquidators of each of the companies, shall be charged on a time-cost basis or such other basis as may be determented by the court under section 196(2) of Cap. 32 and be paid out of the assets of the company concerned;

(6)   Mr Edward S Middleton and Mr Jacky Chung Wing Muk do within 21 days from the date of this order give security to the satisfaction of the Official Receiver as provided by section 195 of Cap. 32;

(7)   notice of the order for the appointment of the replacement provisional liquidators be advertised by the newly appointed provisional liquidators in one issue of an English newspaper and in one issue of a Chinese newspaper published and circulating in Hong Kong and be gazetted by the Official Receiver;

(8)   Mr Yeung Wah Chou and Mr H J Lie shall deliver over to the new provisional liquidators all books kept by them and all other books, documents, papers and accounts in their possession relating to the office of provisional liquidators of the companies;

(9)   the Official Receiver’s costs of and occasioned by this application assessed in the sum of $4,687.00 in respect of each of the 28 proceedings on a gross sum basis be paid by Mr Yeung Wah Chou and Mr H J Lie; and

(10)   there be liberty to apply.

Miss Polly Yip of the Official Receiver, for the Applicant

Mr Yeung Wah Chou and Mr HJ Lie, acting in person, absent

HCCW No. 94/2003

Schedule

List of 28 Companies