Registrar of Companies v. Wah Sang Gas Holdings Ltd and Others
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HCMP 1008/2006 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO. 1008 OF 2006 ____________
____________ BETWEEN
____________ Before: Hon Kwan J in Chambers Date of Hearing: 15 May 2007 Date of Decision: 15 May 2007 _____________ D E C I S I O N _____________ 1.This is the hearing of an originating summons issued by the Registrar of Companies against Wah Sang Gas Holdings Limited (“the Company”) and 3 of its directors on 19 May 2006, pursuant to section 306 of the Companies Ordinance, Cap. 32. 2.Under section 306, if a company or any officer of a company, having made default in complying with any requirement of Cap. 32, fails to make good the default within 14 days after service of the notice on the company or the officer requiring them to comply with that requirement, the court may, on application by any member or creditor or the Registrar of Companies, make an order directing the company and any officer to make good the default within such time as may be specified. 3.On 13 February 2006, notice under section 306 was served by the Registrar on the Company requiring the Company to make good its default in failing to comply with section 336(1)(a) and (b). On 26 April 2006, the Registrar served a similar notice under section 306 on 3 of the directors of the Company resident in Hong Kong, being the 2nd to 4th respondents. 4.As the notices were not complied with, the Registrar issued this originating summons to enforce compliance. The Registrar seeks an order that the Company and the 2nd to 4th respondents do within 14 days from the date of the order herein make good the default of the Company in failing to deliver to him the documents required by section 336(1) to be annexed to its annual return for the year 2004, namely:
The Registrar also seeks a costs order against all 4 respondents. 5.At the hearing today, Mr Beresford for the Registrar informed the court that he would not be seeking an order to make good the default of the Company against the 2nd respondent, as the 2nd respondent has resigned as a director from 1 February 2007, although the Registrar would still be seeking a costs order against him. 6.Section 336(1) requires an oversea registered company to deliver with its annual return to the Registrar copies of the documents set out in sub-sections (a) and (b), which are the documents referred to in the originating summons. It applies to the Company by virtue of section 336(6), as the Company would not be a private company within the meaning of section 29, nor, in the opinion of the Registrar, would it have substantially the same general characteristics as such a private company, because the shares of the Company are listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong Limited (“HKEX”). 7.I will first set out the matters leading to this application. 8.The Company was incorporated in Bermuda on 25 October 1999. It was registered under Part XI of Cap. 32 on 26 November 1999. It has established a principal place of business in Hong Kong. Its shares are listed on GEM since 16 March 2000. 9.Since 6 April 2004, trading of the Company’s shares has been suspended by HKEX at the direction of the Securities and Futures Commission (“SFC”), under section 8 of the Securities and Futures (Stock Market Listing) Rules, owing to concerns regarding the accuracy of profit levels reported and suspicious fund flows involving some of the Company’s subsidiaries in China, which affected the accuracy of financial information published previously by the Company. 10.After receipt of the suspension notice, the board of directors of the Company engaged PricewaterhouseCoopers (“PwC”) to investigate the suspected deficiency of financial control of the Company and to make a thorough evaluation of its management system. PwC found that the historical results and net assets of the Company and its subsidiaries were overstated as a result of fictitious connection fee income and gas sales. The final draft accounts for the year ended 31 March 2005 showed a deficit in shareholders’ funds amounting to approximately HK$202.7 million. 11.The board of directors has come to the view that a restructuring of the Company is unavoidable for its survival. If the SFC and HKEX should disapprove the restructuring project, the Company would be removed from GEM, most likely it would go into liquidation. 12.PwC were engaged to make recommendations to improve the Company’s financial reporting and compliance systems and procedures, to enable the Company to meet its obligations under the listing rules. 13.On 30 June 2005, the Company through its financial adviser first submitted a proposal for resumption of trading to the SFC and HKEX. Over a two-year period, the Company has communicated with the relevant authorities in meetings and by correspondence and submitted further documents and information and revised resumption proposals. To date, the proposal for resumption of trading has not been approved. It would appear that negotiations are ongoing. 14.In the meantime, on 25 October 2004, the Company filed its annual return for the financial year of 2004 without any associated accounts, in contravention of the requirement under section 336(1). The board of directors had received draft auditors’ report from PwC for the year of 2004 by the 2nd quarter of 2005, the accounts were prepared on a going concern basis on the premise that the restructuring project would be approved by the SFC. If the restructuring project were disapproved, substantial adjustments would need to be made to the accounts. 15.Apparently, the board of directors does not want a “going concern” qualification to the accounts, so the finalisation of the accounts has been held up. The board claims that the matter is out of the Company’s control. 16.The Company’s position is that once the SFC has approved the restructuring project, PwC would sign the auditors’ report without delay, the Company would file all the outstanding documents in the originating summons as soon as reasonably practicable once the auditors’ report has been signed. 17.On 13 July 2005, the Registrar of Companies issued a summons in the magistrates’ court against the Company for failure to file the said accounts by 29 October 2004. On 22 August 2005, the Company admitted the facts and pleaded guilty to the default and to continuing default for 251 days up to 6 July 2005. 18.The magistrate adjourned sentencing for several months to enable the Company to file the associated accounts. At the adjourned hearing on 19 December 2005, the Company appeared without having filed the associated accounts and was fined. 19.As mentioned earlier, the Registrar of Companies issued 2 notices under section 306 against the Company and 3 of the directors in February and April 2006. 20.The Company’s solicitors wrote to the Registrar on 27 February 2006 giving an explanation why the Company claimed it is not able to file the accounts in question until it has completed its restructuring and resumed trading of its shares and requested an extension of time for 3 months. This was rejected by the Registrar who replied he has no statutory power to grant any extension. 21.The originating summons first came before this court on 15 November 2006 and was adjourned to today. 22.A week before the adjourned hearing, the Company filed further affirmations. What happened is that the Company has filed some accounts for the year of 2004 and now claims that the default has been cured. 23.It has also adduced legal opinion from Bermudan lawyers that under Bermudan law, the Company is not required to file any accounts with the Registrar of Companies in Bermuda. 24.On 10 May 2007, the Company delivered to the Registrar of Companies for registration a copy of a profit and loss account for the financial year ended 31 March 2004 and a balance sheet as at 31 March 2004, certified by its chief executive officer who is also one of the directors. The Company has claimed that the accounts were filed in compliance with section 336(1)(a) and explained this was not done earlier because the board of directors had misunderstood the accounts could only be filed after they have been audited. 25.The Company and the other respondents seek a dismissal of the originating summons. A number of points were made by Ms Shine on their behalf. In summary, it was contended that the Company is no longer in default of its statutory obligation, that the Company is unable to file other accounts and reports sought in the originating summons, and that the court should exercise its discretion in favour of the Company and dismiss this application. 26.The first and main contention was that the respondents have now complied with the obligation to file accounts under section 336(1), by virtue of the accounts filed on 10 May 2007. 27.The accounts required to be prepared and delivered to the Registrar of Companies for registration under section 336(1)(a) are required to be “in such form and containing such particulars and including copies of such documents as the company is required to prepare by the law for the time being applicable to the company in the place of its incorporation or origin”. 28.Here, the Company is not required by the law of its place of incorporation, being the Companies Act 1981 of Bermuda, to file any accounting reports, including its balance sheet, its profit and loss account, its group accounts and its directors’ report or auditors’ report with the Registrar of Companies in Bermuda on an annual basis or as at the end of the last financial year of the Company. 29.In this situation, section 336(4) applies to the Company. This sub-section provides as follows:
30.The meaning and effect of section 336(4) is clear. 31.Under section 336(4)(b), express provision is made that the Company must deliver to the Registrar for registration a report by qualified auditors on its balance sheet and profit and loss account. Furthermore, by virtue of section 336(4)(a), the Company is required to prepare and deliver to the Registrar for registration a balance sheet and profit and loss account in such form and containing such particulars and including such documents as the Company would have been required to prepare if it were a company incorporated under this Ordinance. 32.If the Company were incorporated under Cap. 32, it would be required to comply with the provisions in sections 129C, 129D and 124. I set out the relevant provisions as follows:
33.The unaudited accounts filed with the Registrar on 10 May 2007 are clearly not in compliance with section 336(1)(a) and (b). The balance sheet and profit and loss account were merely certified by a director who is the chief executive officer. They were not approved by the board of directors. No group accounts were delivered. No directors’ report or auditors’ report were attached to the accounts. 34.Ms Shine submitted that the Company, as an oversea company, is not required to prepare and file accounts in compliance with the provisions in Part IV of Cap. 32, including the provisions mentioned above. I disagree with this. As I have said, the meaning and effect of section 336(4) is clear and does not admit of any other interpretation. 35.Ms Shine did not deal with section 336(4) in her written submission, but in her oral submission today she contended that this sub-section is irreconcilable with section 336(1), because some of the documents mentioned in section 336(1)(a) and the auditors’ report in section 336(1)(b) are qualified by the words “if any”. I cannot see how these words could be indicative of an irreconcilable meaning. Even if on one view these sub-sections could be read in the way as suggested by Ms Shine, this is not the only possible interpretation. The court should not readily construe sub-sections within a statutory provision as irreconcilable or inconsistent unless such a conclusion is clear. 36.Ms Shine further submitted that as accounts of some kind have been filed by the Company on 10 May 2007, if the Registrar should be of the opinion that these accounts do not sufficiently disclose the Company’s financial position, he may give notice to the Company under section 336(2) requiring the Company to deliver to him for registration a balance sheet and profit and loss account within such period, containing such particulars and including such documents as he may require. She contended that as the Registrar has not as yet given any notice under section 336(2), whether the accounts filed on 10 May 2007 are sufficient or not is not a matter for determination in this originating summons. 37.I reject this submission, which is equally devoid of merits. 38.It is squarely raised in the present application whether the Company has complied with its obligation to make good its default in failing to deliver to the Registrar for registration the documents required under section 336(1). Besides, the accounts filed in May 2007 are clearly not in compliance with section 336 and the Registrar has indicated his position by counsel. The sub-sections in section 336 including sub-sections (2) and (4) should be read as a whole and ancillary to the provision in sub-section (1). 39.Next, it was contended by the Company that it is unable to file the auditors’ report and audited accounts until the outcome of its application to the SFC for resumption of trading of its shares is known. 40.I note that PwC have not filed any affirmation, only a letter from them is adduced, in which they stated that when there are no more material adjusting events after the balance sheet date, they can issue the finalised auditors’ report. I do not regard this as an inability to provide the auditors’ report. The only reason why the auditors’ report cannot be finalised is because the directors wish to avoid a qualification by the auditors that the Company is not a going concern. The directors are hoping that this may be avoided if the restructuring project is approved by the SFC. 41.As submitted by Mr Beresford, the financial statements are required to show a true and fair view of the position of the Company at the time, and that cannot depend on the subsequent restructuring 3 years after the accounting period. 42.Lastly, Ms Shine submitted that the discretion under section 306 should be exercised in not directing the Company to make good its default. She pointed to the ongoing negotiations with SFC, that the Company was already convicted and fined in the magistrates’ court, that the Company has filed unaudited accounts in May 2007 and will file accounts with a directors’ report and auditors’ report attached when the SFC has approved the restructuring and resumption proposals. 43.I am not persuaded I should exercise my discretion in the manner as urged by counsel. The conviction in the magistrates’ court is not relevant, that dealt with past conduct. I am concerned with future conduct, the Company is still in default of its legal obligations. I do not agree it would be oppressive in the circumstances to order the Company and its directors to comply with their obligations under section 336. 44.I will grant the relief as sought in the originating summons. Instead of 14 days, I will give the Company, the 3rd and 4th respondents a period of 28 days from today to make good the default. 45.I order the costs of the application to be paid by the 1st to 4th respondents jointly and severally on a party and party basis.
Mr Roger Beresford, instructed by the Registrar of Companies, for the Applicant Ms Lynda Shine, instructed by Messrs Woo, Kwan, Lee & Lo, for the 1st to 4th Respondents |
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