Re Tsz Wan Shan Ltd (in Liquidation)

HCCW 306/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 306 OF 2006

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Before: Hon Harris J in Chambers

Date of Hearing:  9 February 2010

Date of Judgment:  24 February 2010

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J U D G M E N T

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1.I have before me an application issued on 17 June 2009 by Luk Ngai Ling to reverse a decision dated 27 May 2009 rejecting a proof of debt by Lau Siu Hung one of the joint and several liquidators of the Company.

2.The proof of debt was for HK$4,250,727.50, which the applicant says was the sum advanced by her as a director’s loan to the Company, which had been established by her and her sister. The last audited financial statement for the Company is for the year ending 30 June 2005 and shows the director’s loan as being HK$8,501,455. The applicant says that the loan arose as a result of payments made by her and her sister in respect of the Company’s expenditure. The payments were made out of a joint account in their name and one other director and used to fund the Company’s business and those of other companies operating related businesses, namely, old people’s homes.

3.The original proof of debt was supported by only one document: the audited financial statement for the year ending 30 June 2005. This was rejected by the liquidator on the ground that the audited financial statement was not sufficiently reliable evidence that the sum claimed was due to the applicant. As the matter progressed other issues arose. The applicant says that much of the expenditure giving rise to the debt was in respect of what has been called messing expenses, which was primarily food and associated items. Whilst such expenses incurred by members of staff are fully documented with invoices and receipts in the case of the expenses recorded in the Company’s transfer vouchers as being paid by the 2 directors there are no such invoices or receipts. This only added to the liquidator’s concern that the claim was not being fully documented. He had another further concern, namely, the equal division of the director’s loan. The applicant had not established that she in fact paid half the expenses recorded as a director’s loan.

4.When the application commenced I asked the parties why this matter had come to court at all as so far as I could see from the Court file the liquidation had only realised something in the order of HK$11,000 on the sale of the Company’s assets and on the face of the matter the application was pointless. Initially neither party was able to give me an explanation although on pressing it became apparent that the liquidator had obtained a judgment against an unrelated company for HK$3,000,000 and was pursuing other actions against the applicant’s sister and a company owned by the applicant and her sister. Mr. Chung who appeared on behalf of the liquidators was unable to give me any information about the claims. It appears that the applicant is pursuing her claim in order that she can recover some of the money she says was advanced by her in the event that anything is recovered by the liquidator.

5.The parties agree that this is a consideration de novo of the applicant’s claim. I need to be satisfied on the balance of probabilities that the sum claimed is due. During his address to the court Mr. Chung clarified the liquidators’ position in respect of the claim. It is as follows:

(i)  the liquidator is not asserting the directors’ loan account is bogus;

(ii)  however, the liquidator has not seen any contemporaneous documents which clearly demonstrate any payments made by the directors on behalf of the Company, such as receipts, and does not feel he can properly admit the proof debt in these circumstances; and

(iii)  the liquidator does not have a positive case to advance to suggest that what the applicant says is unreliable.

6.The liquidators were particularly concerned that the applicant sought to rely on audited financial statements, which contained an auditors report in slightly unusual terms although not in a respect, which I consider material. They did not consider it safe to rely on the financial statements alone to prove the debt. Mr. Chung drew my attention to the judgment of Kwan J (as she then was) in Kong Po Kong v Chan Kin Hang, Danvil (HCMP 230/2009 11 September 2009). In paragraph 34 Kwan J. refers to an audit confirmation as a self-serving document and suggests, so Mr. Chung reads the paragraph, as calling into question the evidential value of an audited financial statement when it comes to proving a director’s loan. In my view paragraph 34, particularly, when read in the context of what is said by her Ladyship in the previous paragraph does not suggest that an audited financial statement has little or no evidential value when it comes to proving debts recorded in it. It is evidence, the question is how much weight should it be given.

7.The audited financial statements from the commencement of the business sometime in 1999 consistently record directors’ loans of in the order of HK$8,000,000 to HK$11,000,000. There is no reason to think that right from the outset the directors caused inflated loans to be recorded. It is not in dispute that the Company was one of a number of companies owned equally by the applicant and her sister operating old people’s homes in various parts of Hong Kong, although I have not been given any details about them. It seems inherently likely that the applicant and her sister being the owners of the Company would have financed its establishment. The fact that they financed it out of a joint bank account of which they were the beneficial owner and into which they say, and this is not disputed, they placed surplus funds available from the more profitable companies to finance their businesses generally does not seem to me surprising, neither is it particularly surprising that they now have difficulty reconstructing which of them withdrew particular sums from the joint account to pay for the Company’s expenses.

8.I can understand the liquidator’s concern that he had not been provided with any supporting documents. However, the liquidator is not asserting that there is any reason to think that the accounts have been fabricated. I think his approach is most appropriately characterised as putting the applicant to strict proof of her claim. Taking into account the consistent inclusion of the directors’ loan in the financial statements, the commercial background to the establishment and operation of the Company, the evidence of the sister which corroborates the applicant’s version of the arrangements between them I am satisfied that the applicant has proved on the balance of probabilities the debt claimed.

9.I will therefore make an order that the applicant’s proof of debt for HK$4,250,577.50 be admitted. I make an order nisi that becomes absolute if not challenged within 14 days of the date of handing down of this decision that the applicant’s costs be taxed and paid out of the assets of the Company.

Mr Tommy Lo, instructed by Messrs Jimmie KS Wong & Partners, for the Applicant, Luk Ngai Ling

Mr Jerry Chung, instructed by Messrs Johnnie Yam, Jacky Lee & Co, for the Respondent