The Official Receiver v. Chan Hing To
Read the full judgment text of CACV 222/2007 on BabelCite. This Court of Appeal judgment was delivered on 22 July 2008.
1. Mr. Chan Hing To (‘Mr. Chan’) was a former director of 18 companies which had been wound up between November 1999 and June 2001. The 18 companies were under the control of Mr. Chan and they were used by him to operate a restaurant business known as the Farm House Restaurant which at one time had over 40 outlets in Hong Kong.
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CACV 222/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 222 OF 2007 (ON APPEAL FROM HCMP 925 OF 2005) ----------------------
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---------------------- Before : Hon Cheung, Yuen JJA and Poon J in Court Date of Hearing : 25 June 2008 Date of Judgment : 22 July 2008 ---------------------- J U D G M E N T ---------------------- Hon Cheung JA : Appeal against disqualification from directorship 1.Mr. Chan Hing To (‘Mr. Chan’) was a former director of 18 companies which had been wound up between November 1999 and June 2001. The 18 companies were under the control of Mr. Chan and they were used by him to operate a restaurant business known as the Farm House Restaurant which at one time had over 40 outlets in Hong Kong. 2.The dates of presentation of the petition winding up and the dates of winding up of the 18 companies are as follows :
3.Mr. Chan himself was declared bankrupt on 14 March 2001 but was discharged from bankruptcy on 14 March 2005. 4.On 5 May 2005 the Official Receiver applied under section 168I(1) of the Companies Ordinance (‘the Ordinance’)(Cap. 32) for, among other things, an order to disqualify Mr. Chan from acting as a director of a company under Section 168H of the Ordinance. 5.Master K W Lung granted the order on 25 January 2006 and disqualified Mr. Chan from being, among other things, a director for a period of four years from 15 February 2006. 6.Mr. Chan appealed to Chung J who affirmed the decision of the Master and dismissed the appeal. 7.Mr. Chan now appeals to this Court. Basis of disqualification 8.The Official Receiver relied on the following misconduct by Mr. Chan in support of the application to disqualify him, namely
9.The Master found that the allegations were all proved. In fact Mr. Chan did not dispute the allegation contained in Items (1), (2), (3) and (6). It is not necessary to go into details on these misconducts save to refer to a few of them. 10.In respect of breach of section 121 for failing to keep books and accounts, Mr. Chan was convicted under 15 summonses issued under that section. He was also convicted under 15 summonses under section 274. He was fined $100 for each of the summons. 11.In respect of engaging in transactions that were liable to be set aside, Mr. Chan admitted that he had issued cheques of Farm House drawn on the accounts of three banks after he had knowledge of the service of petition for the winding up of Farm House. Mr. Chan was the sole signatory of the cheques. The amounts involved in respect of the three banks were $460,974.20, $797,088.07 and $985,706.88 respectively. The total amount was about $2.2 million. These cheques wee void under section 182. The explanation given by Mr. Chan was that he issued these cheques in order to save the restaurant business and not to deceive any one. The Master was of the view that the real issue was whether these were voidable transactions and he found that they were and Mr. Chan’s explanation did not provide a lawful reason for his action. 12.In respect of misuse of accounts, Mr. Chan had issued 48 cheques drawn on two bank accounts of Farm House (ten cheques on one account and thirty-eight cheques on the other) totaling $1.3 million. The cheques were dishonoured on presentation. The Official Receiver said Mr. Chan had issued the cheques without due regard to the likelihood of their being dishonoured on presentation. 13.Mr. Chan said that they were post-dated cheques. When he issued them he had no knowledge of the sudden change of the financial position of the restaurant business which was severely damaged by the Asian financial crisis that affected Hong Kong. This could not be a proper excuse because Mr. Chan must have realized at some stage that the cheques could not be met when they were to be presented on their due dates. Section 168H(1) of the Ordinance 14.Section 168H(1) is as follows :
15.Section 168K(1) refers to the matters set out in Parts I and II of the Fifteenth Schedule as those that the Court shall have regard in determining the unfitness of the person. The appeal 16.Mr. Chan no longer challenges the order to disqualify him. His appeal is focused on the length of the disqualification. He emphasized on the delay by the Official Receiver in applying for disqualification and the effect of the Asian financial crisis on his business. He also asked for no order as to costs of the application because he was unable to pay for the Official Receiver’s costs. He would face another possible bankruptcy if he was ordered to pay the costs. Principles on disqualification 17.The following are the relevant principles relating to application to disqualify a person to be a director as can be gathered from authorities such as Sevenoaks Stationery (Retail) Ltd. [1991] Ch. 164, Re Lo-Line Electric Motors Ltd [1988] BCLC 698 and Secretary of State for Trade & Industry v Griffiths & Ors. Re Westmid Packing Services Ltd (No. 3) [1998] BCC 836. These cases have been applied in Hong Kong cases such as In the Matter of Peregrine Investments Holdings Ltd (In Liquidation) (HCMP 112/2002, Decision of Kwan J dated 8/10/2004), 破產管理署署長v. 梁海，梁楊麗玲 (unreported, HCMP 917/2003， Decision of Kwan J dated 20.7.2006) and In the Matter of Chark Fung Securities Company Limited (In Liquidation) (HCMP 3294/2004, Decision of Barma J dated 5/12/2006). 1) Rationale behind disqualification 18.The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, or an extreme case of gross negligence or total incompetence. 19.It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realize that these are inescapable personal responsibilities. 2) Delay in application for disqualification 20.Often a considerable period of time lapsed between the conduct complained of, its discovery and the disqualification proceedings actually coming to court. One result of delay when it does occur is that there are occasions when disqualification must be ordered even though, by reason of the director’s recognition of his previous failings and the way he has conducted himself since the conduct complained of, he is in fact no longer a danger to the public at all. In such cases it is no longer necessary for the director to be kept ‘off the road’ for the protection of the public but other factors come into play in the wider interests of protecting the public, i.e. a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned. 3) Evidence 21.The Court should adopt a commonsense, practical and flexible approach to case management and admit evidence which is of probative value in considering whether
4) Approach to length of disqualification 22.The decision to disqualify is not a discretion but the period of disqualification within the statutory period of minimum one year and maximum of 15 years under section 168H(4) is a matter of discretion. It must reflect the gravity of the offence. It must contain deterrent elements. 23.The approach is to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for mitigation factors. 5) Three categories of length of disqualification 24.Regard may be made to the three broad categories of length of disqualification :
6) Relevant factors 25.There is no precise or exhaustive test but the following are relevant :
(7) Citation of cases 26.Each case has to be decided on its own facts. So long as a period of disqualification is justified under one of the three broad categories of tariff, the citation of other cases on the period of disqualification will, generally speaking, be unnecessary. Appeal on discretion 27.Like all appeals on the exercise of discretion, the Court of Appeal will only interfere when it is shown that the discretion was wrongly exercised. Time limit to bring the application 28.There is a preliminary matter that needs to be addressed first. It is about the time limit to bring the application. Under section 168I(2)(a) of the Ordinance, except with the leave of the Court, the application to disqualify a director must be made before the expiry of the four-year period starting from the commencement of the winding up of the company. By virtue of section 184(2), the commencement or the winding up is deemed to have commenced on the date of presentation of the winding up petition. 29.The Master held that all the applications for the 18 companies were brought within time. 30.This is, however, not the case. The position is that, (as accepted by Ms Sara Tong, counsel for the Official Receiver who only appeared in the appeal) there was only one application made in respect of one company namely, Citrend Services Limited (‘Citrend’). The application was made within the four year period. No other application was made in respect of the remaining 17 companies. In respect of Citrend, the misconducts by Mr. Chan were in respect of Items (1), (2), (3), (4) and (6). 31.It is, of course, true that under section 168H(1)(b), the Court, apart from taking into account the director’s conduct in the insolvent company, can take into account his conduct as a director ‘of any other company or companies’. On this basis the Court could take into account Mr. Chan’s conducts in the other 17 companies even though the Official Receiver did not bring any section 168I application in respect of these companies. For a similar view on the comparable section 6 of the United Kingdom Company Directors Disqualification Act 1986 upon which section 168I was based, see Mithani : Directors’ Disqualification at paragraphs [360]-[370]. The proper approach 32.This, however, raises a fundamental question as to the approach by the Master. Although the title of the proceedings only identified Citrend, both the First Report of the Official Receiver in support of the application and the Official Receiver’s submission before the Master had not made clear that Citrend was used as the ‘lead’ case. Instead, reading the judgment of the Master (and for that matter Chung J) the Court was asked to consider the application as if the application was brought in respect of all 18 companies. 33.Even if the Court is entitled to consider the conduct of the director in the other companies there must be a difference in the weight to be attached to those conducts. By the time the Citrend application was lodged, more than four years had elapsed since the commencement date of the winding up of these companies. If the Official Receiver wished to apply in respect of these companies, he must obtain leave of the Court who has to consider matters such as length of delay, whether the delay is justified and merits of the application. If the Court refuses leave, the conduct in these companies will not be considered as the basis for disqualification. Yet by simply using one company as a ‘lead’ case, the Official Receiver could without obtaining permission from the Court rely on Mr. Chan’s conduct in these companies. On this ground alone, when the Court considers the issue of disqualification both in terms of the decision to disqualify and its length, it should ensure that there is a difference in the weight to be attached to the conducts in companies where the time limit had expired. In my view, lesser weight should be attached to those conducts. 34.In the normal course of events one would expect the substantial allegations against the director would be found in the ‘lead’ case. But this is not the situation here. The substantial allegations were found in the other 17 companies. 35.In this case the most serious allegations of Mr. Chan’s misconduct were in respect of Farm House. The time limit to lodge the section 168I application expired on 27 December 2003. This is nearly one and a half years before the present application on 5 May 2005. For the 13 companies whose petition was presented in February, May and June 2000 respectively, the time limit had also expired about one year before the present application. 36.Due to no fault of the Master, no differentiation was made by him on this issue. This is, with respect, a wrong approach. Because of this, my view is that this Court is entitled to exercise the discretion afresh on the length of the disqualification which is the only issue before the Court. Mr. Chan’s ability and conduct and effect of financial crisis 37.Mr. Chan is nearly 50 years of age. He was obviously a person of ability. He was a very enterprising person who like many of the entrepreneurs in Hong Kong built up a thriving business from scratch. He was affected by the Asian financial crises which hit the post 1997 business environment of Hong Kong. However, at the same time he clearly had misconducted himself as a director. The overall misconduct of Mr. Chan was serious. His misconduct not only affected the internal management of the companies but also prejudiced creditors who were unable to recover their money from the companies. 38.However, by the time of the present application in May 2005, many of the more serious allegations had already taken place more than five years ago. To his credit he recognized his wrongdoing. In Court he expressed his regret in not being able to repay his creditors. He is determined and has made real efforts in starting afresh. He has also done voluntary work for the community after the failure of his business. With this experience it is unlikely that he would offend again. These are mitigating factors. Length of disqualification 39.In my view public interest is served by a disqualification period of three and a half years. Conclusion 40.I will accordingly allow the appeal and substitute the length of disqualification to that of three and a half years starting from 15 February 2006. Costs 41.I will make no order as to costs in respect of the costs below and the appeal. Hon Yuen JA : 42.I agree. Hon Poon J : 43.I agree.
Ms Sara Tong, instructed by Official Receiver’s office, for the Applicant Respondent, in person, present |
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