Securities and Futures Commission v. China Metal Recycling (Holdings) Ltd and Others

HCCW 210/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 210 OF 2013

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Before: Hon Harris J in Chambers

Dates of Hearing: 14 - 15 October 2014

Date of Judgment: 12 November 2014

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J U D G M E N T

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The Application

1.On 4 April 2014 the 1^st Respondent (“Company”) issued a summons under section 196 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap. 32, for the discharge of the joint and several provisional liquidators of the Company, Cosimo Borrelli and Jocelyn Chi, appointed by me on 26 July 2013 (“Provisional Liquidators”).  In paragraph 2 of the summons the Company sought as an alternative to the provisional liquidation a reconstituted independent board to manage the Company pending the determination of the winding‑up Petition.  The summons was subsequently amended to seek in the further alternative an order that Osman Arab and Wong Kwok Keung of RSM Nelson Wheeler replace the Provisional Liquidators.

2.At the hearing before me the Company was represented by Paul Shieh SC and Zabrina Lau, the Petitioner by Horace Wong SC and Victor Dawes, the Provisional Liquidators by Linda Chan SC and Eva Sit and the 2^nd Respondent by Lawrence Li.

Introduction [1]

3.The Company is incorporated in the Cayman Islands and is registered under section 333 of the repealed Companies Ordinance, Cap. 32.  It is the holding company of a Group whose activities consist of purchasing scrap metal from suppliers and producing recycled scrap metal products as well as reselling, without further processing, scrap metal which members of the Group have purchased.  The Company was listed on the Main Board of The Stock Exchange of Hong Kong Limited on 22 June 2009. The initial public offering raised, net of expenses, HK$1,685,000,000.

4.The group was founded by the 2^nd Respondent, Mr. Chun Chi Wai, and his Wife, Ms. Lai Wun Yin.  The 3^rd Respondent is a company through which Mr. Chun holds 53% of the issued shares of the Company.  He was the Chairman of the Company’s board of directors and its chief executive officer.

5.Prior to the appointment of the Provisional Liquidators the Group was a sizable business venture.  The Company says, and I did not understand this summary to be disputed at the hearing before me, that it was the largest metal recycling company in the Mainland.  In 2012 it was ranked 221 largest company amongst business enterprises in the Mainland.  The  Group had a production capacity of about 5 million metric tons of scrap metal with production facilities in Tianjin, Baotou, Jiangyin Yangzhong, Ningbo, Wuhan, Guangzhou, Zhongshan and Hong Kong.  It  employed over 6,000 people.  Its customers included 9 major state‑owned steel enterprises, two major private steel enterprises and 6 major state‑owned copper enterprises.  Three of its subsidiaries had been appointed as 3 of the 4 state-designated scrap metal importers.  The Group was financially sound:

Date	Net assets	Net current assets
31.12.2011	HK$6,461,273,000	HK$5,562,130,000
30.06.2012	HK$7,222,964,000	HK$6,290,245,000
31.12.2012	HK$8,099,887,000	HK$6,682,018,000

6.On 22 December 2009 the Petitioner, the Securities and Futures Commission (“Commission”), began an investigation under section 182 of the Securities and Futures Ordinance, Cap. 571, into the suspected publication of false or misleading information inducing transactions in the shares of the Company during or around the period from 10  June to 17 November 2009.  The Commission formed the view that there were substantial overstatements of profits in the Prospectus for the Global Offering and the Company’s 2009 Annual Report.  The alleged overstatements arise as follows.  A number of purchases said to have been made in 2007 to 2009 by a subsidiary of the Company, namely, Central Steel (Macao Commercial Offshore) Limited (“Central Steel Macao”) from three suppliers, Lane Tone International Material Inc. (“Lane Tone”), Jason Metal Recycle Corp. (“Jason Metal”) and Cheung Fat Metal Recycling Company Limited (“Cheung Fat”), were not genuine transactions.  The Petition alleges that about 38%, 64% and 90% of the gross profits for the years 2007, 2008 and 2009 respectively, as reported in the Prospectus and the 2009 Annual Report, are fictitious.

7.The Commission believes that there were round robin transfers of funds in 2008 by virtue of the following transactions.  Central Steel Macao’s funds were paid out to the bank accounts of Lane Tone, Jason Metal and Cheung Fat, then to the bank accounts of two supposed customers of Central Steel Macao, Qi Le and Metallurgical, and then back to the bank account of Central Steel Macao. The amount of money that was allegedly circulated in this manner exceeded US$277 million.

8.The Commission has also investigated the books of the Group for the financial year 2012 and examined 342 bills of lading for the trades supposedly carried out by Central Steel Macao during that year.  This has led the Commission to conclude that there are serious doubts about the authenticity of these bills of lading and other transaction documents and, overall, about the genuineness of the trading transactions of Central Steel Macao.

9.The Commission also claims that its investigation has revealed certain connections among the 1^st Respondent and the entities that are supposed to be the principal suppliers and customers of Central Steel Macao.  These are described in paragraphs 42 to 51 of the petition.  For example, the expense for incorporating Cheung Fat, a supplier of Central Steel Macao, was apparently paid by a cheque issued by a BVI company called Worldwide International Inspection Ltd, but Mr Chun Chi Wai and his wife Madam Lai Wun Yin were the signatories of the current account of that company with the bank, and Madam Lai was stated in the bank account opening documents as the sole director and shareholder.  Cheung Fat’s office telephone number as stated in another set of bank account opening documents was the same as the number of Asia Steel (HK) Limited, a subsidiary of the 1^st Respondent.  The sole signatory of Cheung Fat’s bank account was one Mr Xie, who was also the sole signatory for the account of Metallurgical, a supposed customer of Central Steel Macao.

10.In January 2013, following a report published by the Glaucus Research Group that China Metal has deceived the market about the size of its business, trading in the company’s shares on the Stock Exchange was suspended.  As the conditions imposed by the Stock Exchange for resumption of trading have not been met, trading in the shares has remained suspended.

11.On 26 July 2013, pursuant to section 212 of the Securities and Futures Ordinance, the Commission presented a petition to the court for the compulsory winding up of China Metal on the ground that it is just and equitable that it should be wound up.  It is alleged in the petition that China Metal and Mr Chun have contravened, inter alia, section 300(1) of the Securities and Futures Ordinance in that China Metal had employed a “device, scheme or artifice with intent to defraud or deceive” and engaged in an “act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception” in making the Global Offer and inviting subscription for shares.

12.The petition states that:

“61. In light of the evidence of fraud and dishonesty on the part of the senior management of the Company, in particular the existence of records of fictitious transactions, forged documents, and round robin of funds …, the Commission has grave concerns about the Company and also lacks confidence in the conduct and management of the Company’s affairs. Such conduct, in the Commission’s view, amounts to intentional and dishonest deceit of the public. …”

“62. There is evidence to suggest that Chun was directly involved in it, and might have orchestrated, the fraud. …”

13.The petition concludes that:

“the affairs of the Company (i) have been mismanaged to such an extent which renders it desirable in the public interest to wind up the Company in order to protect the interest of the members of the Company and the general investing public and (ii) need to be thoroughly investigated as a matter of urgency in order to protect the interest of its public shareholders, creditors and other stakeholders”.

14.On the same day, on the ex parte application of the Commission, I appointed Mr Borrelli and Ms Chi as the Provisional Liquidators.  On 2 August 2013, their appointment was extended until further order of the court.  The order of appointment provides them with the power to take control of all of China Metal’s subsidiaries, whether in Hong Kong or otherwise.  They have also been appointed provisional liquidators of Central Steel Macao and another subsidiary of China Metal, namely, Huan Bao Steel Limited (“Huan Bao”), based on separate petitions for the winding-up of these two subsidiaries in Hong Kong.

15.At the end of July 2013, prompted by their concerns about payments of over HK$1 billion from the bank accounts of the Group immediately prior to their appointment, the provisional liquidators obtained an urgent Mareva injunction against Mr Chun and other defendants (including his wife and the suppliers and customers of Central Steel Macao mentioned above) up to the value of HK$1.68 billion, and caused a writ to be issued in the name of China Metal and Central Steel Macao against these defendants (HCA 1412/2013). 

16.A statement of claim was filed in HCA 1412/2013 on 4 October 2013.  Largely adopting the allegations in the petition presented by the Commission, it claims that Mr Chun, in fraudulent breach of his duties to the plaintiffs and with the assistance of the other defendants, orchestrated and controlled the fictitious transactions and round robin of funds.  The other defendants are sued for dishonest assistance in Mr Chun’s breach of duties and, together with Mr Chun, for conspiracy using unlawful means.  It is pleaded that Mr Chun and Wellrun are liable for knowing receipt of cash and scrip dividends equivalent in value to HK$0.8 million and HK$357.4 million, out of total dividend payments made by China Metal of HK$672.9 million in the years 2009, 2010 and 2011.

17.Further, it is claimed that between 13 June and 29 July 2013, Mr Chun caused Central Steel Macao to remit approximately HK$1.96 billion to Cheung Fat and Pacific Metal, and that between 18 June and 24 July 2013, Mr Chun caused Central Steel Macao to remit a total of approximately HK$140 million to Healthy World and Gold Dragon.  These entities are all supposedly suppliers of Central Steel Macao, but the payments were not made for any legitimate commercial purpose. Essentially, it is alleged that in the short period leading up to the appointment of the Provisional Liquidators, Mr Chun wrongfully caused over HK$2 billion to be spirited away from the Group to those entities.

18.By way of relief, the plaintiffs claim against Mr Chun and his wife (i) an indemnity for any claims against China Metal arising from the initial public offering, the Prospectus and the 2009, 2010 and 2011 Annual Reports; (ii) equitable damages and/or compensation for breach of trust and/or fiduciary duty; and (iii) damages for conspiracy.  The plaintiffs claim against the other defendants principally for the sums of money remitted from the Group to them.

19.For his part, Mr Chun denies the alleged wrongdoing and denies that the transactions in question were fictitious.  He explains that Central Steel Macao was established as an offshore company for tax purposes.  He says that the allegedly suspicious matters identified by the Commission are explicable and satisfactory explanations had been given to the professionals during the due diligence and audit performed prior to the listing of China Metal.  He criticises the Commission for overlooking the fact that the entities Qi Le and Metallurgical did not always act as customers but also sometimes as agents or intermediaries for others in the scrap metal trading with the Group. 

20.He relies on the fact that as required by the Stock Exchange in 2013, Ernst & Young had been engaged by China Metal to conduct an independent forensic review, and was ready to issue its report vindicating his position but for the presentation of the petition herein.  He has also exhibited the draft audit report prepared by China Metal’s auditors in July 2013 which included an unqualified audit opinion.

21.Since their appointment the Provisional Liquidators have taken steps to investigate the Company’s affairs and take control of the Company and its various subsidiaries.  The Provisional Liquidators’ investigations suggest that the bulk of the Group’s assets are held in the Mainland through Mainland subsidiaries.  However, the Provisional Liquidators say that they have been met with consistent obstruction in their attempts to obtain information about the Mainland subsidiaries and to take control of them.  This is a subject to which I will return in more detail later in this decision.

22.Shortly after the presentation of the Petition three directors resigned from the Board of the Company.  Since 15 August 2013 the Company has only had four directors: Mr. Chun, Ms. Lai, Yan Qi Ping and Jiang Yan Zhang.  The Company contests the Petition. In paragraph 3(2) of the Company’s Points of Defence it says that by a board resolution passed on 15 August 2013 (in respect of which only Mr. Yan and Mr. Jiang voted) the Board determined that Mr. Yan be authorised to conduct the present proceedings on behalf of the Company.  It is also said by the Company that the discharge summons was issued on the instructions of Mr. Yan on the authorisation of the Board consisting of Mr. Yan and Mr. Jiang. 

23.The Company denies the allegations that transactions to which I have referred were fictitious although the defence in respect of the complaints will be advanced at trial (which is fixed to commence on 2 February 2015) by Mr. Chun.  The Company’s position is that even if the complaints are made out it would be neither just or equitable nor in the public interest to wind up the Company because the Commission’s complaints only relate to one part of its business and any wrong doing that has been orchestrated by Mr. Chun can be dealt with by excluding him from the operations of the Company. 

24.Although Mr. Shieh did not formally abandon the first part of the Company’s application, namely, the discharge of the provisional liquidation, and the reconstitution of the Board, it was not pursued before me.  I understood Mr. Shieh to recognise that it was not practical to identify a new board acceptable to the Commission prior to the trial.

25.The basis for applying to discharge the Provisional Liquidators is that rather than safeguard the assets of the Company and preserve the status quo pending the determination of the winding‑up Petition they have assumed that the Company will be wound up and adopted an unnecessarily aggressive approach to their tasks which has caused damage to the Group’s business and is inconsistent with their function. 

26.The particular matters of which complaint is made by the Company are grouped into five categories in Mr. Shieh’s written submissions.  At the hearing two of these were developed in oral submission.  As I understood it these are the matters, which the Company suggests are the clearest examples of action by the Provisional Liquidators which have caused damage to the Company and demonstrate that it is desirable that they are replaced.  If I am not so persuaded much of the force of the Company’s application falls away.

27.Before turning to consider the Company’s principal complaints I will address first the relevant legal principles and then the more general issue of the cooperation that the Provisional Liquidators have received from the Group, which in my view needs to be understood in order that the complaints are viewed in their proper context.

Relevant Legal Principles

28.The main reason for appointing a provisional liquidator over a company is to address a substantiated concern that the assets and affairs of the company are in jeopardy, pending the hearing of the petition: McPherson’s Law of Company Liquidation, 2^nd ed., §6.008, p.298. 

29.A further reason for appointing provisional liquidators is to enable the extensive statutory investigative powers to be activated at the earliest opportunity, with a view to ascertaining whether the company’s affairs have been conducted in a manner which may amount to fraudulent or wrongful trading: Ian Fletcher, The Law of Insolvency, 4^th ed., §21.055.  This was explained by Lightman J in Re Pinstripe Farming Co Ltd [1996] BCC 913, 917H-918A:

“It is my view inevitable that a winding-up order will be made on the hearing of this petition, and there is substantial public interest in a full independent investigation into the conduct of what is (at its best) a dubious and (at its worst) a dishonest investment scheme which has attracted substantial sums from the public. In a case such as the present the policy of the law must be to accelerate the inevitable, and in particular the commencement by the compulsory liquidator of his investigations. The urgency of the need for investigations is highlighted by a very recent affidavit of Mr Bott.”

30.Under section 196 of the Companies Ordinance, the Court has a wide discretion to remove or discharge provisional liquidators on cause shown.  In Re Liote Property Management Ltd [2006] 2 HKLRD 106 at 108G-I, Kwan J summarised the relevant principles for the removal of a provisional liquidator:

(1) Thecourthasa"widediscretion"underthe provisiontoremovethe provisional liquidator.  "Causeshown"is not limited to "misconduct orpersonalunfitness".

(2) In the exercise of this discretion, the court may take all the circumstances into consideration and if the court finds it desirable, on the whole, that a liquidator should be removed, the court may remove him.

(3) Fairness to the liquidator is relevant but the principal consideration is the substantial and real interest of the liquidation.

31.Similarly, in Re Legend International Resorts Limited (HCCW 1139/2004, 7 March 2011) at paragraphs 27 - 29, Fok JA stated the relevant principles as follows:

(1) It is well established that section 196 confers a wide discretion on the court to remove a provisional liquidator which is not dependent on the proof of any particular breaches of duty by the liquidator.

(2) It is not necessary to prove misconduct or personal unfitness on the part of the liquidator and it is sufficient if it can be shown that it is on the whole desirable that the liquidator be removed.

(3) It is clear that in removing the liquidator there need not be anything against the individual.

(4) Due cause is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed.

(5) The words of the statute are very wide and it would be dangerous and wrong for a court to seek to limit or define the kind of cause required and it may be appropriate to remove a liquidator even though nothing can be said against him, either personally or in his conduct of the particular liquidation.

32.The test is essentially a matter of fact in each case.  However,it is not necessary for the applicant to show that the liquidator has failed to act in an efficient, vigorous and unbiased manner, and is likely to continue to fail to do so in the future: Re Buildlead Ltd (No. 2) [2006] 1 BCLC 9 at §165 per Etherton J.

33.I accept Mr. Shieh’s submissions that these principles are equally applicable in the context of "public interest" petitions, such as that before me.  In Mandarin Resources Corporation Ltd, a petition in which the Commission also sought a winding up order against a listed company, [1997] HKLRD 405 at 408, Godfrey JA observed:

(1) In general, there are "no hard and fast rules" as to how a judge ought to exercise his discretion when called on to discharge provisional liquidators.

(2) The judge’s decision must depend on the view he forms as to whether, on the material before him, the balance of justice and convenience comes down in favour of granting or refusing the particular application in question.

Progress of the Provisional Liquidation

34.As will be apparent the Provisional Liquidators were appointed over a Hong Kong listed company with an active business carried on principally in the Mainland.  They were appointed because the Court was satisfied that the evidence before it demonstrated an arguable case, in fact a strongly arguable case, that the gross profit contained in the Prospectus and the 2009 Annual Report was significantly overstated with a view to mislead investors and was the result of serious dishonesty on the part of the senior management of the Company.  Details are set out in the Petition and the evidence filed in support of the application to appoint provisional liquidators, which included a detailed analysis by an independent forensic accountant, Mr. Kenneth Morrison.

35.The order that was made appointing the Provisional Liquidators was framed in conventional and wide terms.  No application has ever been made to change its terms.  Although Mr. Shieh is correct in the submission that the function of provisional liquidators is to protect the assets of a company and to maintain the status quo pending the determination of the petition I do not agree, as his submissions in this regard appeared to suggest, that they should not make any assumptions about the veracity of the complaints made in the petition and adopt a passive, reactive approach to their job.  In order for the Provisional Liquidators to decide how to approach their task they had to familiarise themselves with the complaints made against the Company and assess their implications for the task that they had to undertake.  I would have expected them to proceed on the basis that given the allegations made against the Company’s senior management they should take steps to secure control of the Company’s assets wherever located and to do so promptly.  I would have expected them to have approached their task with a healthy degree of skepticism.  I do not accept that to do so was contrary to the purpose of the order.  On the contrary in my view it was what was required in the circumstances of this case.

36.The Provisional Liquidators approach to their task was likely to be influenced by the degree of cooperation they received from management and the information that came to light as their investigations progressed.  I have dealt with a number of applications brought by the Provisional Liquidators against Mr. Chun requiring him to execute documents and assist the Provisional Liquidators in taking control of the Company’s subsidiaries in the Mainland.  It is quite clear that Mr. Chun has been uncooperative and has sought every excuse to avoid to assisting the Provisional Liquidators in taking control of the Company’s subsidiaries.  In paragraphs 111 to 118 of his 9^th affirmation Mr. Borrelli describes his attempts to obtain information from the two other directors of the Company.  They have provided no material assistance.

37.In paragraphs 73 of the Company’s written submissions it is suggested that the “Group’s existing senior management have always been willing to assist the Provisional Liquidators, so long as all the relevant legal procedures have been complied with.” In paragraphs 74 and 75 it is suggested that the failure of the Provisional Liquidators to have themselves appointed as legal representatives of the subsidiaries, which is necessary for them to take control of them, arises because “an order of the Hong Kong court, needs to be recognised by the PRC court before the PL order can take effect in Mainland China. Prior to that, the PLs do not have proper authority to take over the PRC subsidiaries and, likewise, they have no power to ask for the corporate documents, company chops and company seals of the PRC subsidiaries."  During Mr. Shieh’s submissions concerning the complaint made by the Company in respect of an instruction given by the Provisional Liquidators in a letter of 2 September 2013, which I deal with in detail in paragraphs 39 to 40, I asked what prohibition there was in the Mainland on the subsidiaries voluntarily assisting the Provisional Liquidators exercising the rights of the sole shareholder of the Company to become legal representative of the subsidiaries and take control of them.  Mr. Shieh accepted that there was none.  The reality is that the management of the subsidiaries have simply refused to cooperate.  The Court is asked to believe that this failure has nothing to do with Mr. Chun, Mr. Yan or Mr. Jiang.  Mr. Chun owns, through Wellrun, 53% of the Company that he established and controlled prior to the appointment of the Provisional Liquidators.  Mr. Chun’s suggestion that he has done what he can to assist the Provisional Liquidators but the subsidiaries management have simply ignored him is unbelievable.  The only sensible inference that can be drawn is that a conscious decision has been made by the management in conjunction with Mr. Chun to do what they can to prevent the Provisional Liquidators obtaining control of the Company’s assets in the Mainland.

38.Paragraph 74 also contains an inaccurate characterisation of what the Provisional Liquidators need to do and are doing in the Mainland.  The Provisional Liquidators have commenced proceedings in the Mainland for orders that recognise that they are in lawful control of the shareholders of the relevant Mainland companies.  They are not applying for some form of recognition order in the Mainland and as far as I am aware such a procedure does not exist.  I note at this juncture that in paragraph 65 of his 8^th affirmation that Mr. Chun says this:

“65.      On 4 July 2014, the Court of Appeal granted leave for me to appeal against the 23 June Order, which appeal is due to be heard on 22 October 2014. At the hearing of the application for leave to appeal on 4 July 2014, the Court of Appeal observed that the PLs’ application under the June Summons appears in substance to be for the purpose of “shortcutting” the proper procedure in the PRC to enable them to be registered as directors/legal representatives of the PRC Subsidiaries, and to circumvent the Confirmation Proceedings.”

This suggests that similarly misleading submissions were made to the Court of Appeal.

39.It seems to me quite clear that the current directors of the Company have failed to provide the kind of assistance that my order required and the Provisional Liquidators need in order to carry out their function properly.  I will give one example of what seems to me to be their duplicity and the inherent untrustworthiness of Mr. Chun’s evidence.  In a letter of 20 March 2014 Hogan Lovells on behalf of the Provisional Liquidators wrote, in what was part of chain of correspondence, requesting amongst other things “With respect, the matters raised in our letter are simple, straightforward requests for assistance: either Mr Jiang and Mr Yan will agree to voluntarily comply, or they are not prepared to do so. As set out in our earlier correspondence, the provisional liquidators very much wish to enlist Mr Yan's and Mr Jiang's cooperation on a voluntary basis in the discharge of their duties."  Stevenson Wong & Co. replied on 21 March 2014 stating that “We are instructed that Mr. Yan has never been an authorised person of the bank accounts of the PRC Subsidiaries. ……. Further Mr. Yan has never been involved in the daily operation of China Metal Recycling (Holdings) Limited …or the PRC Subsidiaries”.  Mr. Yan was held out by the Company as being an independent non‑executive director and, that being so, the statement in Stevenson Wong’s letter was plausible.  However, during the course of their investigations the Provisional Liquidators found the following letter from Mr. Yan to Mr. Chun dated 15 January 2012 which in translation reads:

“I have worked in the Shanghai head office of China Metal for two years and have never asked for increase in salary. It is embarrassing to talk about my remuneration. For the following reasons, I request for an increase in my salary in Shanghai from RMB300,000 at present to RMB800,000 (excluding the salary for independent director). Please consider and comment whether this is appropriate.

….

3. ….

In these two years, apart from the duties of independent director, I introduced quarterly operational activities analysis and market guidance, and completed the formulation of “medium to long-term planning” and the compilation of “system management standards”, and took charge of electronic commerce development, employee education and training, new market investment survey and the handling of emergencies etc.

4. In the next two to three years, I will focus on helping you to do several tasks: (1) rationalize the operational structure and strengthen the main business; (2) complete development and commence operation of and derive profit from electronic commerce; (3) enhance the ability of branches to make profit independently; (4) develop disassembly of cars, ships and home electric appliances until it takes shape; (5) develop a strong risk control system and perfect system management; (6) improve employee training and set up an appraisal system; (7) endeavour to help you to make China Metal ranking among the top 500 enterprises in the world.”

40.This clearly suggests that the Company falsely and in breach of the Listing Rules held Mr. Yan out as an independent non‑executive director.  It also demonstrates that Mr. Yan gave false instructions to his solicitors and that he could, if he wished, provide information to the Provisional Liquidators about the Company’s affairs.  Mr. Chun attempts to explain away the embarrassing contents of this letter in his 8^th affirmation.  In paragraph 90 of his 8^th affirmation he says:

“The Group provided Mr. Yan with a room in its workplace in Shanghai at Mr. Yan’s request, since he would like to move his research office from Beijing to Shanghai. Mr. Yan visited often – I think partly because he had time and partly because he was genuinely interested in the scrap metal industry and for his research. But this does not mean he was, and at no time was he, a member of the Group’s staff or management.”

Self-evidently this is not the kind of arrangement that Mr. Yan is describing.  Mr. Yan himself has filed no evidence explaining his letter.

41.Mr. Borrelli in paragraphs 119 to 135 in particular of his 9^th affirmation describes in detail the Provisional Liquidators attempts to obtain information and assistance generally from the former directors and senior management of the Group.  When it suits the Company and Mr. Chun they describe the Group as a large and vibrant business venture, but nobody who was held out as managing its various activities seem to have been able to provide the Provisional Liquidators with the type of assistance that they required.

42.It is against this background of non-cooperation that the complaints against the Provisional Liquidators have to be assessed.  The first matter relied on by Mr. Shieh in his oral submissions was an instruction given by the Provisional Liquidators not to repay bank loans.

Provisional Liquidators’ letter of 2 September 2013

43.On 2 September 2013 the Provisional Liquidators wrote to the principal subsidiaries in the Mainland with various requests and instructions.  The letters were in the same terms. The material parts, in translation, read as follows:

“…On 11 August 2013, the new board of directors of CMR Guangzhou issued resolutions of board of directors (see Enclosure 4) consenting to the resolutions made by the shareholder of CMR Guangzhou on 11 August 2013, and removing the former general manager and engaging Cosimo Borrelli as new general manager, and consenting to completion of the relevant registration and filing procedures for the changes.

We hereby write to CMR Guangzhou and you requesting for compliance with the arrangements set out in the shareholder’s resolutions and letters of removal and appointment, proper work handover and assistance in completing the registration and filing of the changes.

Before completion of work handover and the registration procedures for the changes, and without further notice from the directors of CMR Investments and the new legal representative of CMR Guangzhou, you and the former management personnel of CMR Guangzhou:

1. should not dispose of any assets, submit any application for approval and change and consent to any asset disposal and application for approval and change made by any subordinate companies;

2. should make payment to external parties, incur expenses and sell and dispose of assets only in the ordinary course of business. Save in the ordinary course of business, CMR Guangzhou should not make any payment to external parties, incur any expenses and dispose of any assets;

3. should not borrow from external parties or repay any loans, and should hold all income and receipts in the existing bank accounts and should not transfer them to other accounts;

…

6. should complete the registration procedures for the changes by close of business on Tuesday, 10 September 2013.

…

Should you have any queries, please contact Ms Chi Lai Man Jocelyn or Mr Kevin Song.”

The Company argues that paragraph 3 was fairly read as an instruction that the subsidiaries should not repay any interest or principal of any outstanding loan.  The reaction of the Guangzhou subsidiaries (Guangzhou Yatong Metal Co. Ltd, Guangzhou Asia Steel Co. Ltd, and Zhongshan Yatong Metal Materials Co. Ltd) was to go straight to the Bank of China and tell them that their management had been told not to repay any loans.  This is evidenced by minutes of a meeting held on the following day.  As a consequence, it is suggested by the Company, on 13 September 2013 Bank of China made a successful reorganization application to Guangzhou City Intermediate People’s Court.  The application contains amongst its reasons for making the application reference to the Provisional Liquidators’ instruction.  Similar applications were made by other banks.

44.The Company says that after the Provisional Liquidators were appointed, but prior to the letters being sent, the banks seem to have been content to allow the existing facilities to remain in place and in the case of China Construction Bank, Bank of Beijing, Bank of Tianjin and China Merchants they were prepared, on 9 August 2013, to enter into a restructuring of the debt of China Metal Recycling (Tianjin) Investment Co. Ltd.  The Company suggests that the Provisional Liquidators’ instruction was inappropriate and the proximate cause of banks deciding to take steps to appoint administrators over some of the subsidiaries.

45.The Provisional Liquidators say that this is incorrect.  Ms.  Chan took me through documents to demonstrate that: (1) public announcements made following the appointment of the Provisional Liquidators would have alerted the banks to their appointment and the reasons for it; (2) the Provisional Liquidators  had written to the banks on 2 August 2013 informing them that their investigations had revealed information that indicated that funds obtained through fraudulent activities might be being used to fund subsidiaries; and (3) that the banks had taken steps to safeguard their exposure to the Company and its subsidiaries both before the Petition was issued and in the period after it was issued but before the letter was written. 

46.In addition she took me through the progress of proceedings commenced by the Provisional Liquidators against various recipients of payments totaling approximately HK$2 billion from Central Steel Macau which the Provisional Liquidators consider were prima facie fraudulent.  Default judgments have been entered against a number of the defendants to those proceedings.  This demonstrates, Ms. Chan argued, that the Provisional Liquidators’ concerns about the use to which the Groups funds were being used were justified as was the letter of 2 August 2013 and the subsequent letter of 2 September 2013.

47.This I accept, but it seems to me that there is a more basic objection to the Company’s complaint.  The letter of 2 September 2013 did not require the subsidiaries’ management to inform the banks immediately that they would cease servicing their debt. Although I accept that paragraph 3 directs that loans should not be repaid, given the contents of paragraph 2 it seems to me unclear that the subsidiaries were being directed to cease repayment of interest.  What, however, is in my view quite clear from the letter is that it was intended that there would only be a short period in which loans would not be repaid while the process of appointing Mr. Borrelli as legal representative was completed.  As Mr. Shieh accepted there was no impediment to the subsidiaries taking the steps that were requested of them by the Provisional Liquidators.  They  chose not to do so.  They also chose not to clarify with the Provisional Liquidators whether interest on loans should be paid and whether they should speak to the banks. More fundamentally they had a choice: either comply with the Provisional Liquidators’ request in which case there was no reason to think that there would be a problem with the banks or, ignore the request in which case there was no reason for them not to repay loans.  Either way it seems to me to be clear that the Provisional Liquidators’ letter was not the cause of any problems with the banks.  It was the behavior of the subsidiaries’ management.

Huan Bao

48.The second complaint concerned the closing down of the business of a Hong Kong subsidiary, Huan Bao, which at the time of the appointment of the Provisional Liquidators had two recycling and processing plants at Chai Wan and Tsing Yi respectively. However, the  site at Chai Wan was in the process of being closed down: on 5 June 2013 Huan Bao had given 3 months notice of termination of the licence to occupy the site that it had been granted by the Government.

49.The Company complains that the Provisional Liquidators proceeded to shut down Huan Bao’s operations.  It says that the Provisional Liquidators made no attempts to establish from Huan Bao’s management what their plans for the company where and why the Chai Wan site was to be vacated.  It says that if they had done so they would have been told that the plan was to move the operation to Tsing Yi.  As it was the Provisional Liquidators shut down a perfectly viable business.  It seems to me that there is nothing in this complaint.

50.The Provisional Liquidators say that at the time they took over control of Huan Bao they found nothing to suggest that it was intended to move the operation at Chai Wan to another site.  I asked Mr. Shieh if there were any documents of any kind recording Huan Bao’s management, or the Company’s board of directors’ plan for Huan Bao (none having been exhibited to any of the affirmations).  He told me that there appeared to be none.  I would have expected there to have been some document recording a decision to shut down Chai Wan and move the operations to Tsing Yi if this is what had been decided.  The Company’s evidence in this regard is contained in the 6^th affirmation of Mr. Yan, who says that this is what he was told by Mr. Li Kwok Fai.  Mr. Li has also filed an affirmation in which he describes himself as the person who was responsible for Huan Bao’s operations.  Mr. Li’s evidence is striking more for what it does not tell the Court then for the information which it does purport to provide:

(1) Mr. Li does not deal with the decision to close the Chai Wan site.

(2) He describes in paragraph 13 Huan Bao as a “healthy and sustainable company” and in paragraph 5 as having “great potential”. He does not explain why its turnover had declined from HK$127.9 million for the financial year ending 31 December 2012 to HK$14.7 million in 2013 and it had made a loss of HK$4.2 million in the first 6 months of 2013.

(3) Mr. Li’s explanation of Huan Bao’s business makes no reference to the fact that approximately 90% of its sales were to an associated company, Guangzhou Asia Steel, and that it appears to have had only 3 independent third party customers.

51.Mr. Li’s evidence is self-evidently an incomplete and partial description of Huan Bao’s business in 2013.  Mr. Borrelli explains in his 9^th affirmation that the Provisional Liquidators did not find Mr. Li very cooperative.  It is clear from Mr. Borrelli’s evidence that if Mr. Li knew of a plan to reorganise Huan Bao’s business he had every opportunity to explain it to the Provisional Liquidators. It seems to me clear that he did not and that the most likely explanation for closing Chai Wan was a sharp decline in Huan Bao’s business.  This conclusion is supported by the fact that at the end of 2012 Huan Bao ceased to rent a vessel to deliver scrap metal from Hong Kong to Guangzhou, which employees of Huan Bao told the Provisional Liquidators was done because of a decline in sales to Guangzhou Asia Steel, which the Company should have been able to explain but about which it has filed no evidence.  Mr. Borrelli says this was consistent with the shipping agent’s subsequent explanation for the cancellation of the charter.

52.On 19 August the landlord of the Tsing Yi site gave Huan Bao notice of termination of the licence in respect of that site.  I can see no reason in the circumstances to criticise the Provisional Liquidators’ decision to sell Huan Bao’s assets and close its business.

Conclusion

53.These were the two complaints which Mr. Shieh chose to emphasise because the Company takes the view that they are the clearest examples of the Provisional Liquidators’ failure to carry out their functions properly.  For the reasons I have explained I see nothing of any substance in these criticisms.  The application to remove the Provisional Liquidators seems to me to be a transparent attempt to delay so far as possible the Provisional Liquidators obtaining control of the subsidiaries pending determination of the winding-up Petition; a process which would be slowed materially if they were to be replaced with new insolvency practitioners.

54.I will dismiss the application.  I will make a costs order nisi that Mr. Yan pays the Commission and the Provisional Liquidators’ costs on an indemnity basis as in my view the application was clearly brought in bad faith.  The Provisional Liquidators foreshadowed an application to make Mr. Chun liable for any adverse costs order.  I will leave them to consider that further.

Mr Horace Wong SC and Mr Victor Dawes, instructed by Securities and Futures Commission, for the petitioner

Mr Paul Shieh SC and Ms Zabrina Lau, instructed by Chong & Partners, for the 1^st respondent

Ms Linda Chan SC and Ms Eva Sit, instructed by Hogan Lovells, for the Provisional Liquidators

Mr Laurence Li, instructed by Li & Partners, for the 2^nd and 3^rd respondents

Attendance of the Official Receiver was excused