Beatrice Tsang Sau Hing and Another v. Yueng Man Loong Maxly and Others

HCCW 49-52/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2006

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BETWEEN

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HCCW 50/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 50 OF 2006

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BETWEEN

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HCCW 51/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 51 OF 2006

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BETWEEN

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HCCW 52/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 52 OF 2006

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----------------------

BETWEEN

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Before: Hon. Barma J. in Chambers

Dates of Hearing: 2-5 September 2008

Date of Judgment: 7 January 2009

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J U D G M E N T

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1.This was the hearing of applications by Beatrice and Luana Tsang by summonses dated 25 February 2008 seeking the removal of Messrs Derek Lai and Darach Haughey as provisional liquidators of Gold Pleasure Industrial Company Limited (“Gold Pleasure”), Boville Industrial Company Limited (“Boville”), Topville Industrial Company Limited (“Topville”) and Sunville Investment Company Limited (“Sunville”) (collectively, “the Companies”) pursuant to section 196(1) of the Companies Ordinance (“the Ordinance”).  There were also before the court ex parte summonses issued by the provisional liquidators on 30 May 2008 seeking a determination hearing pursuant to sections 194 and 206 of the Ordinance and rules 45(2) and (3) of the Winding-up Rules (“the Rules”), to resolve the question of whom should be appointed as liquidators of the Companies, which had been ordered to be wound up by my order of 21 December 2007, as there had been a divergence of views as to this at the first meetings of the creditors and contributories of the Companies that had been held on 26 February 2008.

2.On 1 February 2006, Beatrice and Luana Tsang presented petitions for the winding up of the Companies pursuant to section 177(1)(f) of the Companies Ordinance (Cap. 32) (“the Ordinance”).  They are the owners of 50% of the shares in each of the Companies (with the exception of Topville, where they held 42.3% of its shares), and are the daughters of Mr Tsang Hon Kong (“Tsang Senior”), who was one of the founders of the business that was carried on through the Companies.

3.The other shareholders in the Companies were all members of the family of Mr Yeung Tung Shing (“Yeung Senior”), another of the founders of the business.  Although the Yeungs held 57.7% of the shares of Topville, it was common ground that 15.4% of those shares were held by the Yeungs on trust for certain Taiwanese employees of Topville who had previously worked for another business operated by the two families in Taiwan.

4.Thus, the Tsangs and the Yeungs in fact had equal beneficial interests in each of the Companies.

5.The Companies had been set up between 1971 and 1989 by Tsang Senior and Yeung Senior to continue the operation of a successful business manufacturing and selling plastic inflatables, which they had originally carried on as a partnership formed some fifty-odd years ago.  In the mid-1980s, a second generation of Tsangs and Yeungs began to become involved in the business.  In Hong Kong, Mr Maxly Yeung came in to assist Yeung Senior, while Ms Beatrice Tsang came in to assist Tsang Senior.

6.In their petitions, the Tsangs complained that, because of the behaviour of the Yeungs from about early 2005 onwards, there had been a complete breakdown in the relationship of trust and confidence that had previously existed between themselves and the Yeungs.  Subsequently, in March 2007, the Yeungs cross-petitioned for the winding up of the Companies, or alternatively an order that the Tsangs should buy them out, alleging that the relationship between them had broken down because of wrongful behaviour on the Tsangs’ part.

7.At the same time as they presented their petitions, the Tsangs applied for the appointment of provisional liquidators to the Companies.  In the event, this application was not opposed.  After some discussion as to the identity of the provisional liquidators to be appointed, the parties agreed to the appointment of Messrs Derek Lai and Darach Haughey, partners in the accounting firm Deloittes, who had been put forward as candidates for that position by the Yeungs.  Neither Mr Lai nor Mr Haughey, nor their firm, had had any previous dealings with the Companies or their shareholders.

8.The petition was tried between May and July 2007.  By my judgment of 21 December 2007, I ordered that the Companies should be wound up on the Tsangs’ petitions.  A more detailed account of the relationship between the parties, and the difficulties that beset it in the final period, will be found in that judgment.

9.Upon the making of the winding up order, the provisional liquidators continued to act in that office, pursuant to section 194(1)(aa) of the Ordinance, until they (or other persons in their place) were appointed as liquidators.

10.Unfortunately, by this time, the Tsangs had become dissatisfied with the way in which the provisional liquidators had carried out their functions.  As a result, on 15 February 2008, their solicitors wrote to the provisional liquidators complaining about various respects in which it was said that the provisional liquidators had acted in breach of the terms of the order by which they were appointed, or otherwise in breach of their duties as provisional liquidators.  A total of twenty individual items of complaint were listed.  On 21 February 2008, the provisional liquidators responded by denying all of the Tsangs’ allegations without specifically addressing any of them, expressing the view that it would not serve any constructive purpose to do so.  As a result, the Tsangs brought these applications seeking the removal of the provisional liquidators.

11.The day after the Tsang’s applications were filed, the provisional liquidators held first meetings of creditors and contributories for each of the Companies.  As I have noted, there was a divergence of view expressed within each group on a number of matters that were before the meetings for decision.  In each of the meetings, votes were taken on the identity of the liquidators to be appointed, whether or not to appoint a committee of inspection (in respect of both creditors and contributories), the membership of the committee of inspection in each case, if one were to be appointed, and whether or not an application should be made pursuant to section 209A of the Ordinance to carry on the liquidation as if it were a creditors’ voluntary liquidation.  The outcome of the meeting, in relation to each of these matters, can be summarised as follows:-

(1)  In relation to the identity of the liquidators to be appointed, there were two sets of candidates, namely the provisional liquidators and Messrs Johnson Kong and Lo Siu Ki.  In each of the four companies, the majority of the creditors supported the appointment of the provisional liquidators as liquidators.  It would appear that in effect only the Tsangs and creditors aligned with them (such as Mr Dennis Chan and Mr Raymond Lo, who gave evidence on their behalf at the trial) favoured the appointment of Messrs Kong and Lo.  As for the contributories, in each case apart from Topville, the contributories were evenly divided.  In the case of Topville, the shareholding held by the Yeungs on trust for the Taiwanese employees was voted in favour of the appointment of the provisional liquidators as liquidators, so as to give rise to a majority in their favour.

(2)  In each case, there was unanimity or near unanimity in favour of the appointment of a committee of inspection, both on the part of the creditors and the contributories.

(3)  However, as to the identity of the members of such committee, there was a wide range of views.  In relation to the creditors, in general, one or more of the Yeungs received a high proportion of support, which was perhaps reflective of the fact that they were in most cases substantial creditors of the company concerned, whereas the Tsangs (Beatrice and Tsang Senior) and Mr Dennis Chan and Mr Raymond Lo generally received fewer votes, reflecting the smaller amount of debts owed to them.  In the case of Gold Pleasure, Boville and Topville, between one and three independent creditors (in the sense that there was no apparent connection between them and the contributories) were also nominated and received votes.  So far as the contributories were concerned, in each case, each of the contributories in effect nominated and voted for himself or herself.

(4)  On the final question, namely the making of an application under section 209A of the Ordinance, the vote among both creditors and contributories was split in the same way as the vote on the identity of the liquidators to be appointed.

12.In the light of the outcome of the meetings, the provisional liquidators sought the court’s determination as to the identity of the liquidators to be appointed for each company, and as to whether or not a committee of inspection should be appointed, and if so, the membership of such committee.

13.It was, I think, common ground between Mr Neoh S.C., appearing for the Tsangs, and Mr Carolan, who appeared for the provisional liquidators that the Tsangs’ applications and the determination of the identity of the liquidators to be appointed would stand or fall together, in that, if it were determined that there was no sufficient cause shown for the removal of the provisional liquidators, there would be little reason to appoint other persons as liquidators in their stead.  The Yeungs were represented at the hearing by Ms Elizabeth Cheung, but made no substantive submissions and took a neutral stance in relation to the applications.

14.So far as the appointment of a committee of inspection and (if appointed) its membership were concerned, the parties appeared largely content to leave this to the court’s determination.  Mr Carolan did, however, submit that given the fact that there would be very few creditors unrelated to either the Tsangs or the Yeungs, it was questionable whether or not there was much point in appointing a committee of inspection at all.

15.Finally, in relation to the possibility of a section 209A application, Mr Carolan indicated that the provisional liquidators did not propose to pursue this, as they felt that given the cross-allegations by the Tsangs and the Yeungs against each other, it was likely that some amount of investigation would be called for, and that it would therefore be preferable for the companies to be wound up by the court rather than voluntarily.

16.So far as the Tsangs’ applications for removal of the provisional liquidators are concerned, these were each supported by affirmations of Beatrice Tsang dated 25 February 2005. The principal affirmation was her 16^th Affirmation in HCCW 49/2006 relating to Gold Pleasure, the matters therein deposed to being adopted in short affirmations filed in relation to each of the other three companies.  In that affirmation, she set out the following grounds for the removal of the provisional liquidators:-

(1)  It was alleged that the provisional liquidators had failed to act impartially, in that:

(a)  they had been much more readily responsive to allegations made by the Yeungs against the Tsangs than vice versa, pursuing (without making proper investigations) the Yeungs allegation that Tsang Senior had misappropriated monies belonging to the Companies from a joint account in his and Yeung Senior’s joint names (an allegation which I found in my judgment of 21 December 2007 to be unjustified, in that the monies in question were not monies of the Companies), but refusing to investigate or otherwise pursue complaints by the Tsangs against the Yeungs (some of which I had held to be wrongful conduct on the Yeungs’ part which justified the making of winding up orders in respect of the Companies);

(b)  they had made an application to sell Sunville’s main asset, the office premises used by the Companies in the Zung Fu Building, at the suggestion of the Yeungs, when there was no need for the Companies to raise additional funds, and despite the Tsangs’ opposition – it was suggested that this was out of an improper motive to raise funds to ensure that the Companies would be in a position to pay the provisional liquidators’ fees and expenses;

(c)  they had dismissed a driver employed to serve Tsang Senior without notice to the Tsangs, whereas they had continued to employ a driver employed to serve Yeung Senior;

(d)  they had been unwilling to disclose correspondence between themselves and the Yeungs, and to confirm whether or not they had been given any indemnity in respect of their fees by the Yeungs, despite repeated requests from the Tsangs; and

(e)  they had failed to prevent the Yeungs from making arrangements with customers for the payment of sums, which should have been paid to Gold Pleasure for goods supplied pursuant to orders placed with Gold Pleasure, to be made into a personal account of Yeung Senior, an arrangement which was said to put the proceeds of such payments at risk, and also to amount to a breach of PRC foreign exchange control legislation.

(2)  It was alleged that the provisional liquidators were lacking in experience in handling PRC related business, which was an important requirement given that the Companies’ main manufacturing facility was the joint-venture factory operated by the PRC company known as Dongguan Boville on the mainland.  This lack of experience was said to be demonstrated by:

(a)  an alleged failure to secure possession and control of the accounting documents and records of the joint venture, which was evidenced by their failure to assist the Tsangs in obtaining sight of such documents in the course of the winding up proceedings – this was said to show either that the provisional liquidators’ control over the affairs of the joint venture was seriously deficient, or alternative that they were acting in collusion with the Yeungs, and therefore biased;

(b)  an alleged failure to locate original lease documents relating to the land on which the joint venture factory was located, which were, it was said, important to prove the title of one or other of the Companies to the land in question – this was said to be another instance of failure to exercise effective control over the affairs of the joint venture;

(c)  an alleged failure to ensure that management accounts of the Companies and the joint venture were produced on a regular and timely basis;

(d)  an alleged failure to follow up with the PRC customs authorities as to the progress and outcome of an investigation instituted by those authorities into the affairs of the joint venture and its ordering of raw materials; and

(e)  an alleged lack of knowledge in relation to PRC foreign exchange control legislation, evidenced by the entering into of the arrangements referred to in sub-paragraph (1)(e) above.

(3)  It was further alleged that the provisional liquidators had failed to comply with the terms of the order by which they were appointed in a number of respects.  A total of 18 alleged failures were identified, almost all of which related to particular matters that the Tsangs had identified as matters which they considered called for investigation, explanation or action by the provisional liquidators in the course of the provisional liquidator up to the time at which the Tsang’s application was made.  These included complaints as to such matters as:

(a)  continued dealings with Sunco, a United States company through which products manufactured by Gold Pleasure were marketed and sold in the United States, and failing to take action to recover amounts owing by Sunco to Gold Pleasure on a timely basis;

(b)  failing to take prompt and effective steps to secure the release of the Zung Fu property from its mortgage to the Industrial and Commercial Bank of China (Asia) Limited (“ICBC”);

(c)  failing to investigate the position in relation to the “K Kwok” account (which formed the subject matter of one of the complaints in the petitions;

(d)  failing to look into a discrepancy between the value of stocks of raw materials, as valued in the books of the Companies and in the books of the joint venture;

(e)  failing to investigate an end of year adjustment to the value of inventory carried by the joint venture to which the Tsangs had drawn their attention;

(f)  the use, without apparent verification, of profit forecasts prepared by Maxly Yeung to justify continued trading by the Companies and the failure to take steps to reduce or close down the Companies’ operations;

(g)  failing to control the use of petty cash;

(h)  failing to look into and resolve issues raised by the Tsangs as to various aspects of the Companies accounts and records;

(i)  failing to provide the Tsangs with an explanation of the basis on which the Companies were continuing to take orders, or to provide the Tsangs with summaries of orders placed;

(j)  failing to obtain audited financial statements of the Companies on a timely basis;

(k)  failing to report to the court in respect of their actions on a timely basis and failing to provide full information as to their actions to the Tsangs on request.

17.The provisional liquidators sought to deal with each of these allegations in their evidence in opposition to the applications for their removal, which was filed on 30 May 2008.  The provisional liquidators also relied on the contents of their second report to the court in each of the provisional liquidations, filed some two weeks later, on 13 June 2008.

18.In response, the Tsangs filed further affirmations from Beatrice Tsang and Raymond Lo.  In these affirmations, they identified a number of further complaints, said to arise out of matters disclosed in the provisional liquidators’ second report, and from the provisional liquidators’ conduct of the first meetings of creditors and contributories on 26 February 2008.

19.In the light of these affirmations, the Tsangs, in written submissions filed on their behalf prior to the hearing, put their complaints in the following way:

(1)  The provisional liquidators had failed to exercise effective control over the joint venture.  In most respects, this complaint reflected complaints which had already been made, such as those relating to the failure to assist the Tsangs in obtaining sight of the joint venture’s accounts and records.  Complaint was also made that the provisional liquidators had failed to convene board meetings of Dongguan Boville, failed to take steps to remove Yeung Senior as its legal representative, and had in effect given the Yeungs a free hand in the running of its operations, without consulting the Tsangs or taking advantage of the facilities that would have been afforded to them by the Tsangs employment of Mr Dennis Chan and Mr Raymond Lo.

(2)  The provisional liquidators had abdicated their responsibilities by giving the Yeungs a free hand to run the business of the joint venture, and by allowing the business of the companies to in effect be transferred to the joint venture, by permitting the Yeungs to deal with customers of the Companies through the joint venture rather than the Companies themselves, and allowing the Yeungs to collect monies payable by customers in a personal account of Yeung Senior.  This, too, was in my view a complaint which had already been made.  A new allegation was made in relation to the use of a company called Long Summer Limited (“Long Summer”), which was owned by the Yeungs, to act as the channel through which customers could carry on business with the joint venture.  This was a new allegation, but one the basis for which appeared only to have emerged after the initial evidence had been filed.  Further, it was complained that the provisional liquidators permitted Long Summer (and thus the Yeungs) to profit at the expense of the Companies and their creditors and shareholders, by allowing it to charge a 5% service charge on the value of all orders processed by it.

(3)  The provisional liquidators had acted negligently in carrying on the business of the companies despite the fact that they were loss making – this was also a matter that had previously been complained of.

(4)    The provisional liquidators had sought to justify the carrying on of business by claiming, in their second report, that during the period between their appointment and the making of the winding up orders, the Companies had made aggregate profits of HK$12 million, a figure which was only achieved through the use of questionable accounting adjustments.  This was a new complaint, but one which was based on matters that emerged from the provisional liquidators’ second reports of 13 June 2008.

(5)  The provisional liquidators had wrongly sought to treat the land and factory buildings on which the joint venture’s factory was erected, which belonged to Boville, as being assets of Gold Pleasure.  It was suggested that this might have been with a view to ensuring that Gold Pleasure (in respect of whose provisional liquidation the bulk of their fees had been incurred) would have more assets out of which to meet such fees.  This was again a new allegation, but one which emerged from matters stated in the provisional liquidators’ second reports.

(6)  The provisional liquidators had negligently continued to trade with Sunco – a complaint which had been made previously.

(7)  The provisional liquidators had not acted impartially, having regard to the matters mentioned in sub-paragraphs (1) and (2) above, and other matters which had been complained of earlier, such as the dismissal of Tsang Senior’s driver, and their willingness to pursue allegations by the Yeungs against the Tsangs, but not vice versa.

(8)  The provisional liquidators had failed to keep proper accounts for the Companies and the joint venture, in the respects mentioned in paragraphs 16(3)(c), (d), (e) and (g) above.

(9)  They had also failed to provide sufficiently regular reports as to their stewardship of the Companies, and had failed to supply regular management or other accounts so as to enable the parties and the court to be apprised of the Companies’ financial position.

(10)  The provisional liquidators had wrongfully tried to, in effect, pool the assets of the Companies, by seeking to sell the Zung Fu property owned by Sunville with a view to using the proceeds to pay for the operations of the other companies, and by making various adjustments to the inter company accounts by reversing accrued rental liabilities on the part of the other companies to Sunville, contrary to the long-established practice of the Companies.

(11)  Finally, the provisional liquidators had behaved improperly in a number of respects in relation to the conduct of the first meetings.

20.Shortly before the hearings, the provisional liquidators filed a third set of reports in relation to the Companies, and provided further information as to their financial position, consisting of audited and management accounts of the Companies and the joint venture which were not available at the time that their second reports were prepared.

21.Although Mr Carolan initially appeared to object to a number of the new complaints that were made by the Tsangs in the affirmations filed by them in reply, he accepted that insofar as the complaints arose out of matters emerging from information contained in the provisional liquidators’ evidence, or their second reports, the court should consider and deal with them in order to determine the applications before it.

22.Mr Carolan did, however, maintain an objection which he made to substantial parts of the affirmation of Raymond Lo.  The complaint was that significant passages in Mr Lo’s affirmation constituted expressions of  what appeared to be expert opinion, which should properly have been the subject of an application for leave to adduce expert evidence, if those passages were to be sought to be relied on.  It was also pointed out by Mr Carolan that even if there had been such an application, it was unlikely that Mr Lo would be regarded as an independent expert, given his involvement in these matters on behalf of the Tsangs – as an employee or consultant of theirs for the purpose of assisting them in the pursuit of their winding up petitions.  I think these objections were well founded.  In the event, Mr Neoh did not insist on relying on the passages objected to.

23.At the hearing, Mr Neoh sought to establish that the conduct of the provisional liquidators had been such as to demonstrate either that they had been biased against the Tsangs, or at least to give rise to a perception, on reasonable grounds, that they were so biased.  Alternatively, he submitted, their conduct while in office had been such as to give rise to a real, and reasonable, loss of confidence in them by the Tsangs.  Either of these grounds, he submitted, would be good reason to remove them from office.  I think that it is fair to say that in advancing these submissions, Mr Neoh adopted a somewhat more selective approach to the complaints which had been made, focussing in particular on a number of matters which I shall consider below, and placing relatively little emphasis on a number of other complaints which had been ventilated in the evidence filed on behalf of the Tsangs, and in the skeleton argument served prior to the hearing.

24.Mr Carolan submitted that under section 196(1) of the Ordinance, the power of the court to remove a liquidator or provisional liquidator from office arises only “on cause shown”, which does not equate to “if the court thinks fit”.  He reminded me that the burden is on the application to show cause why the liquidator should be removed from office (see Re Keypak Homecare Ltd [1987] BCLC 409, per Millett J (as he then was) at 415e-416f), and that I should bear in mind the dicta of Neuberger J in AMP Enterprises Ltd v Hoffman [2003] 1 BCLC 319, where he emphasised (at 326c-g) that it was not desirable that it should be seen as being easy to remove a liquidator simply because his conduct had fallen short of the ideal in one or a few respects, since it would often be the case that in any liquidation which had proceeded for some time, that something could be identified as an example of a respect in which things could have been done better or more effectively, and it was undesirable for liquidators to be too readily removed, since that would generally have undesirable consequences for the liquidation, in terms of cost and delay, and also in terms of causing liquidators and provisional liquidators generally to be more concerned to protect their own position than to pursue what they conceived to be the interests of the company in respect of which they had been appointed.

25.That said, however, as I understood Mr Carolan’s position, he accepted that if Mr Neoh succeeded in persuading me of either of those two grounds, it would be open to me to remove the provisional liquidators from office, provided that I was satisfied that it would be in the interests of the liquidation to do so.  He stressed that both a perception of bias, and a professed loss of confidence, had to be based on objectively reasonable grounds.  I do not think that Mr Neoh dissented from that.

26.As I have noted, Mr Carolan also submitted that even if either of these grounds was made out, it was also necessary to take into account the disadvantages that would arise from the removal of the provisional liquidators, in order to determine where the true interests of the liquidations lay – in this context, he submitted that it was legitimate to take into account the views expressed by the creditors at the first meeting of creditors, the likely saving in expense if the provisional liquidators were to remain in office, and the impact on the conduct of the liquidation of a change of office holders, and to weigh these matters against what might otherwise appear to be a suitable case for the exercise of the court’s power to remove the provisional liquidators.

27.I shall first examine the principal complaints made by the Tsangs against the provisional liquidators in respect of their conduct of the provisional liquidation of the Companies, and consider whether these complaints are justified, and do give rise to an objectively justifiable perception of bias on the part of the provisional liquidators, or to a similarly objectively justifiable loss in confidence in them.  To the extent that any such complaints are made out in this sense, I shall go on to consider whether or not they are such as would justify the court in removing the provisional liquidators from office, weighing against them such countervailing factors which might favour their retention as have been identified by Mr Carolan.

28.Before doing so, however, I think that it is necessary to recognise that the position in which the provisional liquidators found themselves was undoubtedly a difficult one, given the total breakdown in the relationship between the Tsangs and the Yeungs which had emerged by the time that the petition was presented and they were appointed.  The animosity and hostility between the two camps was such that it could be expected that almost any decision which had the appearance of taking the part of, or giving credence to the views of, one side rather than the other could be expected to provoke complaints, often vociferous, from the side which felt that its interests had been neglected.  The regular complaints and criticisms made (mostly by the Tsangs, no doubt because they were the parties no longer involved in the running of the business) amply demonstrate that this did in fact happen.

29.This is, I think, a factor that needs to be borne in mind when assessing the conduct of the provisional liquidators.  It does not, however, mean that every action or failure to act on the part of the provisional liquidators would necessarily be excused, or should be viewed with an unduly indulgent eye, bearing in mind that it is always open to provisional liquidators to seek, in appropriate cases, the guidance of the court as to how they should proceed where they are in doubt as to what is the best course of action to pursue.

30.The first main complaint identified by Mr Neoh related to the approach which the provisional liquidators took to the continuation of the business of the Companies and the joint venture.  This point, which combined parts of the complaint identified in paragraph 19(1) above with that noted in paragraph 19(2), had a number of strands to it:

(1)  First, it was submitted that the provisional liquidators should not have permitted the Yeungs to have continued to run the businesses of the Companies during the period between the presentation of the petitions and the making of the winding up orders, while excluding the Tsangs from involvement.  This, it was said, was evidence giving rise to a reasonable perception of bias, particularly as it amounted to a variation of the status quo which had obtained prior to the appointment of the provisional liquidators, which had involved the Yeungs taking responsibility for the operations side of the business (manufacturing, sales and marketing), and the Tsangs taking responsible for the financial and accounting side of the business.  It was, I think, also suggested that this amounted to an impermissible delegation by the provisional liquidators of their functions and duties to the Yeungs.

(2)  Secondly, it was said that it was unreasonable for the provisional liquidators not to have taken advantage of the facilities offered to them by the Tsangs’ employment of Mr Dennis Chan and Mr Raymond Lo, to have exercised a degree of oversight over the Yeungs in their running of the business.

(3)  Thirdly, it was said that whatever might be the position in relation to permitting the Yeungs to continue to operate the business of the Companies, the provisional liquidators should not, following the making of the winding up orders, have taken the view, which they said in their second report that they had taken, that on the making of the winding up orders “the Companies were not supposed to carry on business” (see paragraph 13 of the provisional liquidators’ second report in respect of Gold Pleasure), so as to justify their decision to effectively transfer the whole of the business which had previously been carried out by the Companies to the joint venture.

(4)    Fourthly, it was said that in any event, the provisional liquidators should not have agreed, without consultation with the Tsangs or the approval of the court, to permit customers to be told to pay monies payable in respect of orders placed by them to be paid into a personal account of Yeung Senior, so that in effect the business of the Companies (later carried on through the joint venture) was carried on through Yeung Senior.

(5)  Fifthly, it was said that the provisional liquidators should not have entered into the arrangement that they did with the Yeungs and Long Summer, whereby Long Summer (which was owned and controlled by the Yeungs) would be permitted to earn a commission of 5% on the total turnover of the business, an arrangement which was said to have been made without the knowledge of the Tsangs or the approval of the court.

31.I do not think that the first of these points is a matter which gives rise to a reasonable perception of bias, or to a reasonable loss of confidence in the provisional liquidators’ ability to discharge their functions and duties.

32.It is true that prior to the disputes between the two families arising, the way in which they had cooperated in running the business of the Companies was to have the Yeungs substantially responsible for the manufacturing and sales aspects of the business, while the Tsangs handled most matters of finance and administration.  On the face of it, therefore, the provisional liquidators’ decision to retain the services of the Yeungs to carry on the manufacturing and sales side of the business, while no longer receiving any significant assistance from the Tsangs in relation to the finance and administration side of things, would seem to be a departure from the status quo.

33.However, this complaint appears to me to lose sight of a number of important points.

34.First, although it may be fair to say that one of the reasons for appointing provisional liquidators, in the context of winding up proceedings arising out of shareholder disputes, is to hold the balance between the rival camps, this does not, I think, necessarily require that things be carried on precisely as before – in many cases, this will not be possible, given that the disputes will likely have arisen out of the way in which things were previously done

35.A more important function of provisional liquidators in this context is to enable the company or companies that are the subject of the proceedings to carry on business in a way that enables both sides to be reasonably satisfied that neither is taking advantage of its management position.  In many cases, it will be possible to avoid the appointment of provisional liquidators by leaving one or other side in control of the operations of the company, but coupling this with a framework for the provision of information so that the other side can monitor such operations – this will typically take the form of the grant of a validation order pursuant to section 182 of the Ordinance, coupled with provisions requiring the party running the business to provide financial (and sometimes other) information to the other party at regular intervals, and a right on the part of that other party to seek inspection of underlying documentation so as to verify the information provided if it is thought necessary to do so.

36.In this case, however, given the level of animosity and distrust that had built up as between the Tsangs and the Yeungs by the time of the presentation of the Tsangs’ petitions, that course was not one which was favoured by the Tsangs, and the appointment of provisional liquidators was, at the end of the day, concurred in by the Yeungs.

37.In these circumstances, I think it more appropriate to regard the function of the provisional liquidators as being to preserve, so far as possible, the value in the Companies, by enabling them to be operated in a way which enabled both sides to be satisfied that neither side was taking advantage of its position at the expense of the other.  In reality, in this case, this meant that the businesses should continue to operate in a way that meant that the Yeungs did not (and did not appear to) take advantage of their position of control over the manufacturing and sales process.  To a considerable extent (subject to what I shall have to say below in relation to the later arrangements by which payments were routed through the personal bank accounts of Yeung Senior and then through Long Summer) this would appear to have been achieved.  There has been little evidence to suggest that the Yeungs in some way abused their position while running the Companies so as to benefit themselves at the expense of the Tsangs.

38.Further, it does not seem to me that it was realistically possible to maintain the status quo in the way that the Tsangs suggest it should have been.  The fact was that Tsang Senior was, due to his illness, in no position to participate in the finance and administration functions of the business.  It was this inability on his part to continue to participate meaningfully in the business that had caused him to seek to retire from it, and to realise his interest in it – which was, as I have noted in my judgment of 21 December 2007, a major trigger for the problems that then developed.  Beatrice Tsang’s role, as I have also observed, was largely to assist her father, but in this, she did not, I think, have the same level of experience and expertise that would have made it desirable or appropriate for the provisional liquidators to maintain her position within the Companies.  By contrast, Yeung Senior and Maxly Yeung were, and had for many years, been heavily involved in the manufacturing and sales side of the business, and it was, I think, unsurprising that the provisional liquidators should have sought to retain the benefit of their knowledge and experience.

39.I think it is also necessary to have regard to the fact that the two families were, by the time the provisional liquidators were appointed, at loggerheads, so that an attempt to retain both sides’ involvement in the business may well have had the effect of hampering, rather than promoting, its operation.

40.In these circumstances, I do not think that the decision on the part of the provisional liquidators to retain the services of the Yeungs, but not of the Tsangs, can be regarded as being indicative of a bias in favour of the Yeungs, or that it would be so regarded by an objective observer.

41.Nor do I think that the suggestion that the use of the services of the Yeungs to operate the business was something which amounted to an impermissible delegation by the provisional liquidators of their functions.  While it is correct to say that it is not permissible for a liquidator, or provisional liquidator, to make a general delegation of his duties to another (see e.g. Ah Toy v Registrar of Companies for the Northern Territory (1986) 10 ACLR 630), I do not think that deciding to allow the Yeungs to continue to operate the business of the Companies was such a delegation.  Having decided to continue the business of the Companies, it was necessary for someone to manage that business.  I do not think it realistic to suggest that the provisional liquidators should have done this personally – in cases in which there is a business to operate, it will generally be necessary for liquidators or provisional liquidators to make use of the services of others in the actual operation of the business.  In this case, the choice would appear to be between using the services of the Yeungs and installing new management, and I do not think that the decision to continue with the Yeungs was one which could be regarded as unreasonable or improper.

42.I do not think that the second point made by Mr Neoh is well founded either.  It should be remembered that both Mr Dennis Chan and Mr Raymond Lo were sought to be brought in by Beatrice Tsang in the month or two prior to the bringing of the petitions, and that their appointment had been vetoed by the Yeungs.  After the rejection by the Yeungs of their appointment, they continued to be employed by the Tsangs as consultants to them personally, and were later to give evidence for the Tsangs at the trial of the petitions.  Mr Lo in particular continued to work closely with the Tsangs throughout the period between the presentation of the petitions and their trial, and was heavily involved in the preparation of the evidence deployed by the Tsangs at the trial, and indeed for these applications.  Moreover, neither of them appears to have specific expertise or experience in the sort of business which the Companies carried on.  In these circumstances, I do not think that the provisional liquidators’ failure to avail themselves of their services or input is a matter which could be regarded as something which would lead a reasonable person to doubt the impartiality of the provisional liquidators, or to lose confidence in their ability to carry out their role.

43.In any event, given that Mr Lo continued to be employed by the Tsangs, it seems to me that the benefit of his services would in any event have been made available to the provisional liquidators in the sense that concerns or queries raised by him would undoubtedly have been conveyed to them through the Tsangs and their solicitors.

44.The third strand to this complaint relates to the decision by the provisional liquidators to bring an end to the operations of the Companies, and to, in effect, consolidate the business by operating it through the joint venture, Dongguan Boville.  It was complained that this was not in the interests of the Companies, as the Companies (apart from Sunville) had been the face of the business to its customers.  By ceasing to operate the Companies, and instead carrying on the business through the joint venture, this would mean that the goodwill of the Companies would be rapidly lost, so that they would no longer be saleable as going concerns.

45.The provisional liquidators’ response to this complaint is first, that the expressed concern is misplaced, and second, that in any event, on the winding up order being made, it was no longer appropriate for the Companies to continue in operation.

46.The provisional liquidators say that the expressed concern is misplaced because the consolidation of all operations in the joint venture does not really diminish the value that can be recovered from the business, because even though the individual operating companies (i.e. Gold Pleasure, Boville and Topville) may no longer be carrying on business and trading, and thus may lose some of their goodwill, the fact is that the same customers are continuing to trade with the joint venture.  Moreover, the reality is that if the business is to be sold as a going concern, the business of all three operating companies would have to be sold as a package, together with the manufacturing facilities held by the joint venture.  There is therefore no real difference between consolidating all operations in the joint venture and keeping things as they were, so far as the sale of the entire business as a single unit is concerned.

47.The provisional liquidators also contend that on the making of the winding up orders in respect of the Companies on 21 December 2007, it was no longer appropriate for them to continue the operation of the Companies, as opposed to the business (through the joint venture).  This was because, as the provisional liquidators stated in their Second Report, on the making of the winding up orders, the Companies “were not supposed to carry on business” (see paragraph 13 of the Second Report in respect of Gold Pleasure).

48.This statement was criticised by Mr Neoh as demonstrating a lack of understanding on the part of the provisional liquidators of their powers.  He said that they were clearly authorised by the order by which they were appointed to carry on the business of the Companies – see paragraph 3(c) of the order appointing them which stated that this power was to be exercised “so far only as may be necessary for the purpose of preserving the value of the [assets of the Companies]”.  Mr Carolan countered this criticism by contending that on the making of the winding up orders, the position changed, and the provisional liquidators, although continuing in office pursuant to section 194(1)(aa) pending the appointment of liquidators, had powers that were different to those which they had under the order by which they were appointed.

49.Mr Carolan’s argument ran as follows:

(1)  The provisional liquidators were originally appointed under section 193 of the Ordinance, subsection (1) of which provides that “… the court may appoint a liquidator provisionally at any time after the presentation of the petition”.  Their powers were limited by the order appointing them, pursuant to section 193(3), which states that “[w]here a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him”.

(2)  Thus, from their appointment on 17 February 2006, the provisional liquidators’ powers were as set out in the order of that date.  Relevantly, their power to carry on the business of the Companies was limited by reference to the necessity to do so for the purpose stated – namely, to preserve the value of the Companies’ assets.

(3)  However, on the making of the winding up order on 21 December 2007, the provisional liquidators ceased to be provisional liquidators appointed under section 193, and became provisional liquidators under section 194(1)(aa).

(4)  At this point, their powers were no longer governed by the order appointing them, but by the provisions of section 199 of the Ordinance.  In effect, they were a different “statutory animal”.  Under section 199(1)(b), the liquidator in a compulsory winding up (which includes a provisional liquidator), has power to carry on the business of the company only with the sanction of the court or the committee of inspection, and only “so far as may be necessary for the beneficial winding up thereof”, a purpose which Mr Carolan suggested was different to that identified in paragraph 3(c) of the order appointing the provisional liquidators.

50.Mr Carolan submitted that in this case, given that a winding up order had been made, there was no longer any necessity to carry on the business of the Companies for their beneficial winding up, as it was possible to preserve the value of the underlying business in the way that the provisional liquidators had decided.

51.With respect, I do not think that this argument is well founded.  It overlooks the fact that under section 194(1)(aa), a provisional liquidator appointed under section 193 continues (my emphasis) to act as such even after the winding up order is made.  In my view, the fact that he continues in office suggests that he does so with all the powers under the original order by which he was appointed, and I think that it would need clear words to justify some different conclusion.

52.There are no such clear words in the Ordinance.  On the contrary, as Mr Neoh pointed out, the powers of a liquidator (or provisional liquidator) which are described under sections 199(1) and (2) are both expressly made subject to section 193(3).  The implication of this is, I think, that such powers as are granted by the order appointing a provisional liquidator appointed under section 193, continue to exist until such time as a liquidator takes office.

53.But even if this were not right, it seems to me that there is little practical difference between the terms of the power to carry on business contained in the order appointing the provisional liquidators and the terms of section 199(1)(b).  I would have thought that where the carrying on of a company’s business is necessary to preserve the value of that business as a going concern, and thus preserve the value of the company’s assets, it would be appropriate to regard the carrying on of such business as being necessary for the beneficial winding up of the company, since the preservation of such value would ensure to the benefit of all parties (whether creditors, or in the case of a solvent company, contributories) interested in the company’s winding up.

54.I therefore do not think, as the provisional liquidators appear to have done, that they were, in effect, required to cease carrying on the business of the Companies on the making of the winding up orders, as they suggested in paragraph 13 of their Second Report.  That said, however, I do not regard this error in relation to their perception of their powers as a matter which would lead a reasonable person to lose confidence in the provisional liquidators to such an extent as to justify their removal.

55.As to the decision itself, while it seems to me that it would have been open to the provisional liquidators to continue to operate the businesses of the Companies as they had been from the time of their initial appointment, the decision to cease operations by the Companies and consolidate them under the joint venture, when viewed against the background of the apparent misapprehension by the provisional liquidators of their powers, was not, I think of itself indicative of any bias in favour of the Yeungs.  Given the mistaken view that had been taken of their powers, the operation of the business through the joint venture was a middle way that would enable the value of the business to be preserved, while operating within the perceived constraints of their powers.

56.However, I have to say that it was unfortunate that the provisional liquidators did not think it necessary or appropriate to communicate this decision, and their reasons for it, to the Tsangs from the outset.  Given that one of the purposes of their appointment was to seek to preserve the value of the Companies by allowing them to continue to operate in a way which would provide some level of comfort or confidence on the Tsangs’ part that their interests and concerns were not being altogether ignored, it would, I think, have been greatly preferable for the provisional liquidators to have been more readily communicative towards the Tsangs of their decisions and the reasons for them.  This is a matter which assumes a much greater significance in relation to the remaining strands of this complaint.

57.Those strands relate to the decision on the part of the provisional liquidators first to channel receipts and payments in respect of the operation of the business through the personal accounts of Yeung Senior, and subsequently, at the request of the Yeungs, to operate the business through Long Summer, at a charge to the business in the form of a 5% commission or handling fee based on turnover.

58.Neither of these matters appears to have been communicated to the Tsangs at or around the time that the decision was made.  Nor was any application made to the court for directions.  The Tsangs now complain that the first decision, to channel receipts and payments through the personal bank account of Yeung Senior was improper, in that it meant that the provisional liquidators had foregone the control that they should otherwise have had over such receipts and payments, and that the second decision was improper for the same reasons and also because it enabled the Yeungs to profit at the expense of the Companies.  A further complaint is that these decisions demonstrated a bias on the part of the provisional liquidators in favour of the Yeungs.  Finally, it is said that these actions on the part of the provisional liquidators have led to a justifiable lack of confidence in them on the part of the Tsangs.

59.The provisional liquidators say that these decisions were made for good reasons, in that, having come to the view that the business operations of the Companies should be handled through the joint venture after the making of the winding up orders, it was necessary for arrangements to be made to enable the joint venture to carry on the business.  This would have necessitated the setting up of a branch office in Hong Kong, with power to open and operate its own bank accounts.  In view of the need to act immediately, in order to avoid delays and interruptions to the continuation of business, it was decided to accept Yeung Senior’s offer to provide temporary funding and to channel payments and receipts through his personal bank accounts, rather than to apply to the Mainland authorities for permission to set up a branch office with its own financial arrangements in Hong Kong.  As for the later decision to operate the business through Long Summer, this was something that was done because Maxly Yeung had indicated that this was necessary.  The 5% commission was not intended by either the provisional liquidators or the Yeungs to give a profit to the Yeungs, but to cover the costs of operation of Long Summer and was subject to further negotiation if the provisional liquidators felt the charge was excessive.

60.Further, the provisional liquidators say that they and their staff did monitor the movements of funds through Yeung Senior’s and later Long Summer’s accounts, and are satisfied that all payments and receipts have been properly accounted for, and that there has been no loss to the business as a result of these arrangements.

61.However, even assuming for present purposes that this was the case, it seems to me that in acting as they did, the provisional liquidators fell short of the standards to be expected of them in a number of respects.

62.First, it seems to me that it was, to say the least, ill advised of the provisional liquidators to accept Yeung Senior’s offer without consultation with the Tsangs, particularly given the breakdown in the relationship between them.

63.While the position might have been one which was regarded as requiring a prompt resolution, once the (in my view, mistaken) decision was taken to cease to operate the Companies after the making of the winding up orders, it seems to me that it would have been possible for the provisional liquidators to have promptly informed the Tsangs of the problem that they had identified, and of the means by which they proposed to address it.  This would have enabled the Tsangs to raise such objections as they might have to the proposals.  Had objections been raised (as one expects they would have been), steps could have been taken to address them, or to explore alternative solutions as a matter of urgency.

64.Moreover, if necessary, an application could have been made to the court for directions.  If it was felt that the exigencies of the situation demanded the adoption of the proposals, it remained possible, and in my view, appropriate, for an application for directions to be made at the earliest convenient opportunity.

65.It does not seem that any of these steps were taken.  However, given the state of the relationship between the Tsangs and the Yeungs, it was, I think, clearly necessary for the provisional liquidators to have been careful to ensure that where a significant change to the way in which the business of the Companies was to be carried on was envisaged, both parties should have been given an opportunity to consider and comment on the course of action proposed.  This was particularly so where the course proposed had the appearance of placing the Yeungs in a position of substantially greater control over the assets of the business.

66.I therefore think that in making the first decision to accept Yeung Senior’s offer of temporary funding, and to permit the use of his personal accounts for the purposes of the business to be operated by the joint venture, but failing to consult or keep the Tsangs informed of it, the provisional liquidators did act in a way which caused the Tsangs reasonably to lose confidence in them, and indeed, to have reasonably grounds for considering them to be biased in favour of the Yeungs.

67.As for the second decision relating to the use of Long Summer, the position is, I think, a fortiori.  This method of carrying on business suffered from the same drawbacks and perceived disadvantages of the earlier decision to make use of the personal accounts of Yeung Senior, as Long Summer was controlled by the Yeungs.  But beyond this, it also gave the Yeungs additional remuneration and potential profit which they had not previously had.  While the course adopted might conceivably have been one which could have been commercially justified, on the basis that some such arrangement would eventually have to have been entered into, whether with a related party such as the Yeungs, or an outside party, the decision to adopt it without consultation with the Tsangs, or the approval of the court, whether in advance or soon after the event, was in my view also a matter which would have justifiably led the Tsangs to lose confidence in the provisional liquidators or to consider that they were biased in favour of the Yeungs.

68.Thus, I have come to the conclusion that in these last two respects, the Tsangs have established valid grounds for the removal of the provisional liquidators from office.

69.In saying this, I do not suggest that the course adopted has necessarily caused any (or at any rate, any significant) loss to the Companies.  It may well be that the provisional liquidators are right in saying that all funds passing through the personal accounts of Mr Yeung, and later through Long Summer, have been satisfactorily accounted for.  It may also prove to be the case that the amount of additional expense, over and above such expenses as would have had to be incurred in making alternative funding and payment and receipt arrangements for the joint venture in Hong Kong, was minimal or insignificant.  However, I think that it is must be borne in mind that an important (and perhaps the most important) function of the provisional liquidators in this case was to enable the business of the Companies to be carried on in a way that enabled both parties to the dispute to be reasonably confident that neither was benefiting at the other’s expense, and that payments and receipts were in order and properly monitored.  By accepting the suggestions of the Yeungs without consulting the Tsangs, or seeking the court’s approval, the provisional liquidators acted in a way that compromised this function.  Unless there are strong countervailing factors established, it seems to me that these grounds should lead to an order for the removal of the provisional liquidators from office.

70.A second major complaint voiced by Mr Neoh on behalf of the Tsangs related to the provisional liquidators decision to carry on the business of the Companies, when (it was said) they were loss-making, and thus likely to cause a diminution of the value of the assets available for ultimate distribution among the creditors and contributories.  Coupled with this complaint was a complaint in relation to the suggestion by the provisional liquidators in their Second Report that the continued operation of the Companies during the course of the provisional liquidation had resulted in a profit of some HK$12 million being generated, as the net assets of the Companies had increased by this amount.

71.The suggestion that such a profit had been generated was a somewhat surprising one, given that management accounts supplied at an earlier stage of the provisional liquidation indicated that the businesses had been running at a loss.  However, a closer reading of paragraph 4.2 of the provisional liquidators’ Second Report discloses the basis on which such a “profit” arose.  Paragraph 4.2 states that the financial statements from which the “profit” appears were prepared in a manner similar to that normally adopted by the Companies, subject to certain adjustments.  One of the adjustments which had been made was to enable the results to be viewed from the perspective of the provisional liquidators, by adopting realisable value as the basis for valuing opening stock as at 17 February 2006, when the provisional liquidators assumed office.  This realisable value was said to have been based on an independent valuation.

72.It eventually transpired that the valuation in question had been made in June 2008, by valuers who had not in fact had sight of the stock in question (the stock having in fact been utilised in the course of manufacturing over the previous year or more).  The valuation was carried out on the basis of a forced liquidation value of the stock, and resulted in the opening stock in the books of Gold Pleasure, Boville and Topville being written down by a total value of HK$44 million.  The effect of this writing down was to reduce the cost of the goods sold over the period by this amount, as the stock would previously have been carried in the books of the Companies at cost.  As a result, the net income of the Companies was similarly increased by HK$44 million.  Without the adjustment to the opening value of such stock, the Companies would have been recorded as incurring a loss on their operations of at least HK$32 million (rather than the suggested profit of HK$12 million).

73.Mr Neoh criticised this approach at two levels.  First, he said that the valuation by the valuers was of doubtful assistance, given that it was made some 16 months or more after the date as at which the stock was to be valued, and moreover was made without sight of the stock being valued, as the stock had in fact long since been utilised in the course of the Companies’ business.  Second, and more important, he said that it was simply incorrect for the provisional liquidators to have adopted the forced sale value of the stock as its opening value, given that the stock was never in fact intended to be sold on this basis, but was all along intended to be used to generate sales for the Companies, which was what in fact happened.  It should therefore, he said, have been accounted for in the usual way – by taking its value at cost.

74.Mr Carolan sought to justify the provisional liquidators’ approach to the valuation of the stock by reference to statements in Tolley’s Liquidation Manual to the effect that an insolvency practitioner’s definition of profit or loss differs from that of other accountants.  This arises from the fact that where a liquidator takes office, if he does not carry on the business of the company of which he is liquidator, he will have to dispose of the materials in hand as scrap.  He is therefore justified in treating the cost of materials in hand as being their scrap value, a measure which will typically enhance the level of the profit earned by turning the materials into finished products and selling them as such.  However, it is also stated in the same text that this approach will cease to apply once the liquidator has to buy in components himself – in this case, the cost to be adopted will be the cost of the components.

75.In the present case, it is clear that the Companies had to buy in additional materials in order to continue manufacturing.  This being so, I do not think that it was correct to write down the value of the stock to its forced sale value for the purpose of ascertaining the level of profits made by the continued trading during the course of the provisional liquidation.  The suggestion in the Second Report that the Companies’ operations during the course of the provisional liquidation had resulted in an improvement to their net asset position was therefore inaccurate. Further, it does seem to me that the utility of a valuation prepared so long after the event was, at best, doubtful.

76.Mr Neoh also contended that this was a further ground for loss of confidence by the Tsangs’ in the provisional liquidators.  Although I do not think that the provisional liquidators were actively seeking to mislead the Tsangs or the court into thinking that they had achieved what would have been a remarkable profit for the Companies during their administration of the Companies’ affairs, as the nature of the adjustments made was disclosed in the Second Report, it does seem to me that the making of this error was something which would justify some loss of confidence in the provisional liquidators on the part of the Tsangs, although if this were the only matter of complaint that was made out, it may not have justified their removal.

77.So far as the decision to carry on business itself is concerned, I do not think that, on the material available, it has been shown that this was a decision for which the provisional liquidators should be criticised.  The alternative to carrying on business at the time of their appointment would have been to cease business, a course which would almost certainly have resulted in a massive loss of value, and which would have been unlikely to have been for the benefit of any of the parties.

78.A further complaint by the Tsangs was that the provisional liquidators had wrongfully sought to treat the factory premises used by the joint venture as an asset of the joint venture, rather than of Boville, which was the party which had obtained the leases of the land on which the factory facilities were built.  The suggestion was, I think, that this was an attempt to channel the asset represented by the factory into the joint venture, and thus into Gold Pleasure, which was in effect the 100% owner of the joint venture, with a view to securing a greater level of assets out of which the provisional liquidators’ fees could be paid.  However, having regard to the conflicting legal opinions as to the ownership of the factory buildings and the land on which they stood from Chinese lawyers instructed by the Tsangs and the provisional liquidators respectively, I am not satisfied that in expressing the views that they did as to the ownership of these assets, the provisional liquidators were acting in any way improperly.

79.The next complaint made against the provisional liquidators was that they had failed to exercise proper control over the joint venture – but as I have noted in paragraph 17(1) above, the gist of this complaint related to various complaints made by the Tsangs in the course of the provisional liquidation, concerning matters such as the provisional liquidators failure to enable the Tsangs to inspect the documentation of the joint venture, or to take steps to have Yeung Senior replaced as the legal representative of the joint venture by a representative of the provisional liquidators.  As to this, I do not think that the provisional liquidators should be regarded as being at fault.  Their reluctance to take on the position of legal representative, with the additional responsibilities under Mainland law entailed by this, is understandable.  As for the obtaining of documentation, the provisional liquidators were, I think, entitled to take into account what were said to be difficulties created by the Mainland joint venture partner.  Although it transpired at trial that these were little more than an excuse seized upon by Yeung Senior to refuse to allow the Tsangs to inspect the documentation of the joint venture, it does not seem to me that the liquidators should have realised this to be the position on the basis of the material then available to them.

80.As for the complaint about continued trading with Sunco, this was a matter that was brought before the court on an application by the Tsangs, when the matter was considered, and continued trading was permitted.  Having been dealt with in that way, I do not think that the provisional liquidators should be criticised for continuing to trade with Sunco, which was after all jointly owned by the two families, and which was the main channel through with the Companies sold their products in the United States.

81.So far as the alleged failure to act independently and impartially is concerned, this has been considered as part of the first complaint, which I have found to be made good, in relation to the course adopted in relation to the use of Yeung Senior’s personal account, and the use of Long Summer, for whose services the Yeungs obtained a 5% service charge.  So far as the other complaints are concerned, such as that relating to the termination of the services of Tsang Senior’s driver, these are matters which are in my view of a relatively minor nature, and which, in any event, do not strike me as an example of bias, given that Tsang Senior was no longer contributing to the business or able to work for it.

82.As for the accounting complaints, I do not think that the complaints in relation to the alleged failure to investigate the K Kwok account or the stock adjustments is a matter that would have led to an objectively justifiable loss of confidence in the provisional liquidators.

83.As for the failure to provide regular reports, I think it is fair to say that it would have been preferable for the provisional liquidators to have provided updated management accounts and reports of their activities and decisions to the parties on a more regular basis than they in fact did.  That said, however, it is not a matter that I would have regarded as justifying their removal, all other things being equal.

84.I do not find the suggestion of unauthorised pooling of assets to be made out.  The only aspect in respect of which this was pursued was in relation to the application for leave to sell the Zung Fu property.  However, this was approached in what seems to me to have been an entirely proper way, in that an application for leave to sell was made to the court.  I do not accept the suggestion that the provisional liquidators were moved to make this application for improper reasons – the only basis for this suggestion was an e-mail from Maxly Yeung to the provisional liquidators which appeared to suggest that the proceeds of sale of the property should be sufficient to generate funds to secure payment of the provisional liquidators fees, but there does not appear to have been any follow up to this suggestion, and there is no evidence emanating from the provisional liquidators’ side to suggest that they ever pursued it.  On the contrary, the evidence available did suggest that the property had appreciated in value, and I do not think that it was unreasonable for the provisional liquidators to have made the application as they did.

85.Finally, as to the provisional liquidators’ conduct of the meetings, although I tend to think that it would have been preferable for more information to have been provided to those in attendance than the bare minimum required by the Winding Up Rules, I do not think that the failure to do this is a matter that would justify the removal of the provisional liquidators from office.  Nor do I think that the provisional liquidators’ decisions as to the amount in respect of which the Tsangs and creditors associated with them should be permitted to vote is such a matter, as it does not seem to me that the provisional liquidators have acted otherwise than in good faith in coming to those decisions.

86.Thus, although many of the complaints originally made were not pursued at the end of the day, and a considerable number of the complaints that were pursued are not matters that I would regard as well founded or, even if well founded, such as would justify the removal of the provisional liquidators, I have come to the view that the decisions to seek funding from the Yeungs, and to operate the business through Yeung Senior’s personal accounts, and later through Long Summer on terms involving a benefit to the Yeungs, without informing the Tsangs or seeking the sanction of the court, would justify an order for removal.

87.It is then necessary to weigh the removal of the provisional liquidators from office against the disadvantages that might arise as a result of their removal.  Such disadvantages include the additional cost and expense that would arise as the result of the introduction of new liquidators, and any other disadvantages that might arise to the orderly conduct of the liquidation.  Having considered the submissions of Mr Carolan, I am not satisfied that these perceived disadvantages are sufficient to tip the balance in favour of the retention of the provisional liquidators as liquidators.  It would appear that the main task for the liquidators will be to conclude the sale of the business of the Companies, in whatever form, on the best terms now achievable.  I do not see any reason why new liquidators could not carry out this task.  Similarly, while there will be some additional cost involved in the introduction of new liquidators to the liquidation of the Companies, I think, having regard to the justifiable loss of confidence in the provisional liquidators as a result of their decision to route payments and receipts through Yeung Senior and Long Summer without consultation with the Tsangs or application to and approval by the court, this is a price that will have to be paid.

88.I have also considered Mr Carolan’s submission that the views of the Tsangs should be given relatively little weight, since they were in a small minority when the creditors of the Companies voted on the question of who should be appointed liquidators.  However, it is necessary to bear in mind that a large measure of the votes in favour of the provisional liquidators continuing in office came from the Yeungs, and that most of the other creditors were suppliers and customers who had been dealing with the Companies which were, at the time of the meetings, still being run with the substantial involvement of the Yeungs.  In these circumstances, and given that the provisional liquidators’ actions which I have found to have justified their removal related to an important aspect of their functions so far as the two main protagonists in these proceedings are concerned, I do not think that this is a matter which should cause me to refuse to remove the provisional liquidators from office despite cause having been shown for doing so.

89.In the result therefore, I have come to the conclusion that it would be appropriate to remove the provisional liquidators from office.  As there was no objection voiced to the other candidates for the office of liquidator, Messrs. Kong and Lo, I shall appoint them to be the liquidators of the Companies.

90.I should just add that Mr Carolan did also submit that the applicants had no locus to apply for the removal of the provisional liquidators qua contributories, since the Companies appeared to be insolvent (so that it would only be the creditors who had a real interest in the identity of the provisional liquidators.  However, Mr Carolan did acknowledge that Beatrice Tsang was a creditor of the Companies, apart from Topville, and thus appeared to have the necessary standing to make the application for removal, at least in relation to the other three companies.

91.At the end of the day, Mr Carolan did not press this point in relation to Topville, as I think he accepted that if the provisional liquidators were to be removed from office in the case of the other companies, there would be no point in treating one company differently from the other three.

92.So far as the question of the appointment of a committee of inspection is concerned, it seems to me there would be little point in appointing a representative of the Tsangs and the Yeungs to such a committee – having regard to the relationship between them, their appointment is likely to be a recipe for stalemate.  Bearing this in mind, and given that there are few independent creditors (i.e., those unrelated to the Tsangs and the Yeungs) who have been proposed to serve on any committee of inspection as may be appointed, it seems to me that there is little to be gained from appointing a committee of inspection in respect of any of the Companies.

93.I shall therefore make the following orders:

(1)  On the Tsangs applications for removal of the provisional liquidators, an order will be made removing the provisional liquidators;

(2)  On the provisional liquidators determination application:

(a)    It is determined that Messrs Kong and Lo should be appointed liquidators of the Companies; and

(b)   It is determined that no committee of inspection should be appointed in relation to any of the Companies.

94.So far as costs are concerned, although the Tsangs have succeeded in their application, I think it necessary to bear in mind that a number of the grounds originally advanced for the removal of the provisional liquidators were not ultimately seriously pursued, and also that only a limited number of the grounds actually pursued have been found to justify the removal of the provisional liquidators from office.  It is also appropriate to take into account the fact that substantial parts of the evidence of Mr Lo were inadmissible and of no real assistance for the purposes of these applications.  Taking these matters into account, I shall make an order nisi that that provisional liquidators are to pay the Tsangs 75% of their costs of these applications, and that they are not to be entitled to recoup themselves out of the assets of the Companies in respect of these costs, or their own costs of the applications.

95.Finally, I should make it clear that although I have found that the provisional liquidators conduct has fallen short of what was to be expected of them in a way that has justified their removal from office, it is much less readily apparent that their conduct has resulted in any significant loss to the estates of the Companies.  It will therefore be necessary for the liquidators who have now been appointed to give careful consideration to whether or not any such loss has in fact been suffered, and to the costs and benefits involved before expending the Companies’ assets on potentially expensive investigations and proceedings in relation to such matters.

Mr Anthony Neoh SC and Mr. William Wong, instructed by Messrs Spencer Lee & Co, for the Petitioners in HCCW49-52/2006

Ms Elizabeth Cheung, instructed by Messrs S K Wong & Co, for the 1^st–4^th Respondents in HCCW 49-52/2006

Mr Paul Carolan and Mr Eugene Kwok, instructed by Messrs Cheung, Tong & Rosa, for the Provisional Liquidators

Attendance of the Official Receiver excused