The Official Receiver v. Choi Wing Cheong

HCMP 1550/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1550 OF 2007

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BETWEEN

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Coram : Master Levy in Court

Date of Hearing:   23 July 2008, 29 August 2008, 12 September 2008

Date of Judgment  :   6 October 2008

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J U D G M E N T

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Introduction

1.By section 168H of the Companies Ordinance (“the Ordinance”), a court shall disqualify a director from acting as a director of a company if he were found to be “unfit to be concerned in the management of a company”.

2.On 16 August 2007, the Official Receiver brought the present application by filing the Originating Summons against Mr. Choi under section 168H after he had given the requisite notice in compliance with section 168P of the Ordinance.

3.Although Mr. Choi already filed the Acknowledgement of Service on 10 September 2007 indicating his intention to contest the application, the application was only concluded on 12 September 2008 after repeated delays caused by Mr. Choi in his repeated applications for time to file evidence and for time to prepare his submissions.  As Mr. Choi was acting in person, both Mr. Mok acting for the Official Receiver had been most accommodating by agreeing to allow him more time, and also by this court in granting him indulgences not usually available to, a represented party.  Hence, I have no doubt that Mr. Choi, though acting in person throughout the proceedings, has not been slightly disadvantaged through the lack of legal representation.

Background

4.The companies in question of which Mr. Choi was the director were Onward Tours Limited (“Onward Tours”), Onward Travel (Holdings) Limited (“Onward Travel”), Well Source (Asia) Limited (“Well Source”) and Target Land Estate Limited (“Target Land”) (collectively referred to as “the Companies”) which dates of incorporation were respectively 26 May 1978, 13 November 1987, 6 January 1997 and 9 June 1992.

5.Before Mr. Choi was adjudged bankrupt on 19 January 2004 upon a creditor’s petition filed on 27 August 2003, Mr. Choi had been the director of the Companies respectively on 19 November 1980, 13 November 1987, 7 January 1997 and 17 August 1992.

6.Whilst Mr. Choi was still the director of the Companies, each of the Companies was compulsorily wound up – Onward Tours was wound up on 27 October 2003 under Companies Winding-up no. 911 of 2003, Onward Travel on 3 November 2003 under no. 912 of 2003, Well Source on 19 January 2004 under no. 946 of 2003 and Target Land on 26 June 2006 under no. 196 of 2006.

7.After the Companies were wound up, the Official Receiver was appointed as the liquidator of Onward Tours, but outside liquidators were appointed as liquidators for the other three companies.

8.The total amounts of liabilities and the assets realized are set out below:

Companies	Liabilities (HK$)	Assets Realized (HK$)
Onward Tours	47,180,460.87	45,933.94
Onward Travel	20,913,076.78	Nil
Well Source	15,421,118.30	Nil
Target Land	9,420,355.61	Nil

9.In light of the figures set out in the table above, I am satisfied that the Companies are all insolvent – which Mr. Choi did not dispute – within the meaning of section 168H (2)(a)[1] of the Ordinance.

The Grounds of the Application

10.The Official Receiver says that Mr. Choi is unfit to be a company director on the following two grounds:

(a) Ground 1: Mr. Choi had failed to keep proper books of account as required by sections 121[2] and 274[3] as well as section 122[4] of the Ordinance.

(i) The Official Receiver alleged that apart from Onward Tours, all the other three companies failed to keep any books and accounts as statutorily required. 

(ii) As for Onward Tours, although some books were discovered, they were incomplete.  Mr. Choi was therefore prosecuted under two Magistrate summonses under sections 121 and 274 respectively on 5 November 2005. Mr. Choi pleaded guilty to both summonses, and was fined $2,000 for each summons.

(iii) Regarding the breach of section 122, the Official Receiver alleges that the Companies have failed to make up audited account for each year. 

(b) Ground 2: Mr. Choi was in breach of section 190 of the Ordinance

(i) The Official Receiver alleges that after the Companies were wound up, Mr. Choi has failed to submit any statement of affairs as required by s.190 to the liquidators.

Evidence

11.The Official Receiver has altogether filed three reports and an affidavit of Treasury Accountant in support of the application.

12.Mr. Choi, after repeated delays, finally filed an affirmation in opposition on 25 August 2008.  The affirmation is in English and it is quite difficult to understand what Mr. Choi really meant at times.  In it, he explained that he had done everything to do a debt restructuring of Onward Tours.  He also mentioned the effect his personal bankruptcy on him, which led to the repossession of the office of Target Land and his residences.  He further stated that he had taken reasonable steps to keep books and accounts, and that as the Companies had no books and accounts, he was unable to comply with s.190 to submit the statement of affairs of the Companies.

13.At the hearing on 29 August 2008, Mr. Choi informed me that he in fact did not dispute that he had failed to keep proper books and accounts and audit reports under sections 121, 274 and 122 as well as to submit statement of affairs as statutorily required.  In spite of the admissions of the allegations, he however submitted that I should not disqualify him as disqualification is only for cases involving allegations of gross negligence or lack of probity.  I explained to him that the court would be bound to disqualify him should he be found to be unfit. Mr. Choi then argued that he had come across a case, which suggested that disqualification should only be confined to cases where a director is guilty of conduct of gross negligence or lack of probity.

14.As Mr. Choi was unable to cite any authority in support of his legal proposition, I adjourned to allow him to submit the authority together with his written submissions.

15.During the adjournment, Mr. Choi, instead of lodging his written submissions, and without the leave of the court, filed affirmations in two parts respectively on 5 and 8 September 2008. 

16.In the 5 September affirmation, contrary to the position he had taken in the last hearing, Mr. Choi stated that he would continue his objection to the application.  Apart from setting out the background of each of the Companies, Mr. Choi also said that of all the Companies, only Onward Tours was active, and Onward Travel and Target Land had no bank accounts or trading.  He further mentioned about a judiciary review proceedings regarding the winding up order of Well Source.

17.In the 8 September affirmation, Mr. Choi continued to contend the proceedings by generally repeating what he had already said in his last two affirmations such as the effect of his personal bankruptcy, the repossession of the office premises and his residences, the dormancy of some of the Companies.  He further exhibited three authorities[5] and submitted that he should not be held responsible for the collapse of the Companies and that the application should be dismissed.

18.At the resumed hearing on 12 September 2008, I granted leave to Mr. Choi to file the said September affirmations.

19.In the course of Mr. Choi’s submissions, instead of making submissions, he had again used the opportunity to give evidence from the bar table replying to the Official Receiver’s allegations.  I therefore asked Mr. Choi if he wished to give oral evidence under oath but warned him of the consequence of being cross-examined by Mr. Mok should he choose to take the witness stance.

20.Mr. Choi agreed to take the witness stance.

21.According to Mr. Choi’s evidence, before the Companies were wound up, he was actively managing all the Companies responsible for the day-to-day running of the business.  He explained that after he became a bankrupt, he could no longer act as the director.  Further, when the office of Target Land in Tsimshatsui was repossessed, he took all the books and accounts to his former residence at Red Hill Peninsular.  When the Red Hill property was repossessed, he further took the books to his residence at Happy Valley.  When the Happy Valley property was subsequently repossessed, he took some documents to Mainland China.

22.Mr. Choi’s evidence was repetitious. On the whole the tenor of his evidence appears to be a refusal to take any blame for having failed to comply with the statutory duties of keeping accounts and submitting statement of affairs after the Companies were wound up.

Discussion

23.In assessing the evidence filed in this case when deciding if the Official Receiver succeeds in proving the allegations against Mr. Choi, a civil standard of proof on the balance of probabilities is to be applied.

24.According to Rule 4(2) if the Companies (Disqualification of Directors Proceedings) Rules, the reports of the Official Receiver shall be prima facie evidence of the matters contained in them.

25.After having considered all the evidence of Mr. Choi contained partly in his affirmations and partly in his oral testimony, I find that the evidence against him is overwhelming.  Despite having been given numerous chances of raising his objections, Mr. Choi in fact has not adduced any evidence amounting to, in my view, a valid challenge to the allegations.

26.I have considered his evidence (as well as his submissions which were all mingled together), and find that his evidence was merely an attempt to explain why he was in breach of the statutory requirements in relation to the keeping of accounts and submission of the statement of affairs.

27.According to the undisputed evidence, after the issuance of the Originating Summons, the Official Receiver took possession of 3 boxes of accounting documents of Onward Tours from a warehouse previously rented by Onward Tours.  After the documents were examined, the Treasury Accountant found  “major accounting records of Onward Tours such as full set of general ledger after March 1997 and periodical financial statements after March 2001 are not available” (see Affidavit of Mak Fai Lar at paragraph 7).

28.I further find Mr. Choi’s oral evidence regarding how he had made all his effort to preserve the books and accounts of Onward Tours unconvincing.  According to him, he had removed about 7 books of documents from the Companies’ office when it was vacated.  When he was cross-examined why he did not submit the documents to the liquidator, he explained that he did not receive any requests from him to hand over the books and accounts. 

29.This explanation was clearly contradicted by the contemporaneous correspondence exchanged between the Official Receiver and Mr. Choi.  The correspondence shows that after Onward Tours was wound up, the Official Receiver had made repeated requests to Mr. Choi for delivery of assets, books and papers as well as submission of statement of affairs, and Mr. Choi had responded to the requests by – consistent with Mr. Choi’s conduct in this proceedings – continuously delaying the compliance.  Although the correspondence shows that Mr. Choi seemed to have made an attempt to comply with the requests, he had at the end failed to deliver (apart from the documents of Onward Tours referred to paragraph 27 above) any accounting documents or statement of affairs.

30.As for the other three companies, there were virtually no books or accounting records at all.

31.Further, in the Preliminary Examination of Onward Travel and Well Source, when Mr. Choi was asked in the standard questionnaires if he had kept proper books of accounts under section 121 or prepared audited accounts, he answered “No” to both questions.

32.As for the evidence regarding the breach of s.190, I am not inclined to accept Mr. Choi’s explanation that he could not comply with the requirement because he did not have the documents.  This cannot be a valid defence.  When Mr. Choi had failed to keep proper books and accounts as required by sections 121 and 122, it is inevitable that he would not have the necessary books and accounts to prepare the statement of affairs of the Companies.  It is not right to allow Mr. Choi to rely on his own default to excuse his misconduct.

33.I find it a fact that apart from Onward Tours in respect of which Mr. Choi had indeed, as shown by the correspondence, tried to submit the statement of affairs but failed, Mr. Choi did not submit any statement of affairs of the Companies.

34.I agree with Mr. Mok’s submissions that neither Mr. Choi’s bankruptcy nor his alleged attempt to rescue any of the Companies can amount to a valid challenge to the application.

35.I have also considered the legal authorities contained in his 8 September affirmation.  They are authorities on the general principles of disqualification and do not assist Mr. Choi at all.

36.In conclusion therefore, I am satisfied that both grounds of the application are proved.  I further find that Mr. Choi was a director while the Companies were clearly insolvent.

37.I find that Mr. Choi, as the director of the Companies actively managing their affairs, had failed to act responsibly by complying the accounting duties imposed on him.  Without sufficient accounting records, Mr. Choi would not have been able to make decisions whether to continue trading when the Companies were in financial difficulty.  Further, without any proper books and accounts, the liquidators’ efforts in preserving and realizing assets would have been greatly hampered.

38.Having found the grounds proved, I would now consider if Mr. Choi is unfit to be a director.  I have considered Mr. Choi’s conduct separately in respect of each of the Companies and his overall conduct when acting as a director of all the 4 Companies. I have also considered all the factors listed in Schedule 15 of the Ordinance and taken all the relevant circumstances into consideration.  I find that Mr. Choi’s evidence of objections is merely mitigation rather than a reasonable excuse.  I have given allowance for his probable lack of sophistication in presenting his evidence as a result of his appearance in person.  However apart from the appearance of clumsiness, I find that Mr. Choi is on the whole able to present his case properly without much difficulty. 

39.All in all, Mr. Choi is not an uneducated man.  I was told that he was educated up to Form 7 level.  Indeed, he has been able to conduct the entire proceedings in English.  He should therefore have sufficient intellect and knowledge to understand the importance of the duty as a director.  However I find that he has failed to comply with the most fundamental duty required of him by law.

40.To conclude therefore I find him not competent to act as a director or engage in the management of a company.

41.Having found that Mr. Choi is not fit to be concerned in the management of a company, I am statutorily bound to make a disqualification order against him.

Period of Disqualification

42.Subject to the minimum and maximum disqualification period as specified in section 168H(4) of the Ordinance, the length of disqualification is left to my discretion.  The English case of Re Sevenoaks Stationers (Retail) Limited [1990] BCC 765 is the leading authority of categorizing the period of disqualification into three brackets.  In this application, Mr. Mok is contented with the period at the minimum bracket, and submits for a disqualification period of 2.5 years.

43.As mentioned above, I am not impressed by Mr. Choi’s explanation.  Although Mr. Choi has sought to challenge the applications, I think his evidence is in fact a mixture of objections and mitigations.  I am therefore prepared to accept his evidence as mitigation when exercising my discretion concerning the length of disqualification.

44.The Companies Mr. Choi managed were engaging in travel business, and the only active company was Onward Tours.  Despite his intelligence and education, Mr. Choi did not appear to have much idea as to where the company records were kept or the concept of according importance to the keeping of these documents.  His lack of insight to the responsibility required of him as a director probably contributed to the collapse of the Companies with total liabilities amounting to about $140 million.  Thus said, I should however take into account of (though irresponsible I have found him to be) the absence of allegation of either fraud or misappropriation of company funds.  This should be a factor weighed in his favour.

45.Having considered the matter in the round, I find that Mr. Choi’s conduct should be at the lower end of the minimum bracket of the scale of seriousness, and impose a period of disqualification of 1 year and 9 months.

Order

47.I make an order that Mr. Choi shall not, without the leave of the court be:

(1) A director of a company;

(2) A liquidator of a company;

(3) A receiver/manager of a company’s property; or

(4) In any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of a company for a period of 1 year and 9 months, beginning on the 21^st day of this order (pursuant to Rule 10 of the Ordinance).

48.I further grant an order nisi that Mr. Choi do pay the costs of the application, including all costs reserved, to be taxed if not agreed.  The costs order shall become an absolute order unless an application is made to vary the order nisi within 14 days of the handing down of this judgment.

Mr. F. Mok of Official Receiver for the Applicant

Mr. Choi Wing Cheong, the Respondent, appearing in person

[1] Section 168H(2)(a): “For the purpose of this section, a company becomes insolvent if the company goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.”

[2] Under section 121, the company is required to keep proper books of account with respect to (a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company.

[3] Under section 274 imposes liability on the officer of a company if the company fails to keep proper books and account 2 years immediately before the commencement of the winding up of the company.

[4] Under section 122, the directors of every company is required to lay before the company at its annual general meeting “a profit and loss account …”

[5] The Secretary of State for Trade and Industry v Bairstow [2003]EWCA Civ.321, The Official Receiver v Chan Hing To (unrep) CACV 222 of 2007 and The Official Receiver v Chan Chun Yan & ano. (unrep), HCMP 2602 of 2002.