RE ARMOUR INSURANCE CO LTD

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING UP)

NO. CWU 139 OF 1990

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JUDGMENT

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1. I have before me a petition presented by the Registrar General on behalf of the Insurance Authority on the 10th May 1990 to wind up the Armour Insurance Company Limited (the company). Today, upon the application of Mr Rosenbert, who appeared on behalf of the petitioner, I made an order that the Commissioner of Insurance be substituted as the petitioner in view of recent legislation.

2. The company was incorporated on the 26th February 1974 with a nominal capital of $12,000,000 divided into 12 million shares of $1 each. The amount of capital paid up or credited as paid up is $10,000,000 according to the company's annual return made on the 31st October 1989. The share holders, according to that return were Ong Sing Hwa with one share and Shong Investments Ltd. with 9,999,999 shares. The three directors are Leong Fuen Yoong and Irene Sandra Ong, both of whom have addresses in Kuala Lumpur, Malaysia, and Lilian Andrea Ong who has an address in London. Various classes of insurance business are set out in the petition, the majority of which apparently comprise motor vehicle and employees' compensation.

3. The solvency position of the company set out in paragraph 11 of the petition shows a deficit as at the 31st March 1989 in a sum just below $700,000 and as at the 31st March 1990, a sum exceeding $13,000,000. Paragraph 12 states that the assets of the company did not exceed the amount of its liabilities by over $7,000,000 in the year ended 31st March 1989 and just below $12,000,000 as at the year ended 31st March 1990, being the relevant amount specified in section 10 of the Insurance Companies Ordinance (the Ordinance) and that therefore pursuant to section 42, the company is deemed to be unable to pay its debts within the meaning of sections 177 and 327 of the Companies Ordinance.

4. The petition then lists a number of obligations that the company has failed to comply with under the Insurance Companies Ordinance, these are :

The petitoner seeks, in the public interest, an order that the company be compulsorily wound up on the following grounds :-

There is also a contention by the petitioner that the company's financial position is such that it should not be allowed to carry on insurance business and runs a grave risk of default in its obligations to its policy holders and potential policy holders.

5. Paragraph 17 of the petition alleges that the company is unable to pay its debts and has failed to satisfy its obligations under the Ordinance and that it is expedient in the public interest that the company be wound-up.

6. The allegations contained in the petition are confirmed by affidavits made by Mr Mok Hin-Yin and Mr Lam Ka-tai of the Insurance Authority.

7. On the same day as the petition was presented, the Official Receiver was appointed to be the provisional liquidator.

8. A notice of opposition was filed on behalf of the company on the 8th June which is supported by two affirmations filed on the same day.

9. The first affirmation is by Mr Ong, one of the two shareholders, in which he says that he is the shareholder of 20% of the paid-up capital of Shong Investments Limited which owns all the shares in the company itself apart from his one share. He says the directors of the company are his wife and daughters but that he is the person who has been the Chief Executive since the company was incorporated. He goes on to deal with the history of the company and also refers to the procedure adopted for the sale of insurance policies by insurance agents. He claims in paragraph 4 that the company had control over the issue of its policies. In paragraph 5 he refers to the fact that the company in Hong Kong was run by the General Manager, Mr Alan Yim, who had been employed since its incorporation and was responsible for the day to day running of the business. In 1988 the company's financial controller was Scrandy Leung.

10. In paragraph 6 Mr Ong says that in late 1988 matters started to change for reasons which he is still unable to explain. He says Scrandy Leung left the company in January 1989 and that because the company lacked a financial controller the financial records of the company were not maintained.

11. In paragraph 7, he says that there was a dramatic increase in the number of policies issued and he noticed that the amount of claims received had also dramatically increased. Previously, he said that claims averaged about $300,000 per month, but in early 1989, they had gone up to about $2,000,000 per month. He goes on to say he gave certain instructions to Mr Alan Yim, whom he says had been a trusted employee of the company for 14 years and had, up to that time, been a satisfactory employee.

12. In paragraph 8, he says Mr Alan Yim did not apparently carry out his instructions, but that he engaged in an enormous expansion of the company's business. He had apparently agreed to pay commission to some insurance agents at a rate of 47% of the premium which is in excess of the customary rate paid in the market. That instead of providing agents with unsigned policies as had been the case before, Mr Yim had allowed agents to have signed policies which meant that the agent could actually write a policy on his own initiative for an insured and the company would be bound as there were no means of controlling what the insurance agents were doing. Significantly, he says, this was a potential recipe for diaster because it was a licence for fraud.

13. Paragraph 9 states that in about May 1989, the company managed to hire a new financial controller by the name of Timothy Tam, but that by this stage the books and records of the company had not been written up for several months. He agrees that in as late as September 1989, the financial records of the company were in a disordered state.

14. In paragraph 10, he says as a result of the Insurance Authority initiating an investigation into the company that he came to Hong Kong in October 1989 when he immediately instructed Mr Yim to stop writing compulsory insurance policies and commented that the problem that had bedevilled the company was because of lack of proper accounts which meant that it is very difficult to ascertain the financial state of the company. He says that the audit for the year ended 31st March 1989 has still not been completed. This delay has arisen as a result of the chaotic state in which the books and records of the company were allowed to develop after the departure of the financial controller Scrandy Leung in 1989.

15. In paragraph 11, he says that the company complied immediately with all the requirements imposed by the Insurance Authority. Of the sum of $35 million required to be deposited with the Insurance Authority he states that $28 million has been transferred and comments upon arrangements to be made for depositing the balance. However at the end of the day, it is clear that this requirement has not been complied with. He agrees with the factual matters referred to by Mr Mok in his affidavit and finally concludes in paragraph 13 that he accepts that throughout 1988 and 1989, there was a lack of "hands-on" control of the company by himself, but that he is confident that his nephew who is a specialist in the rescue of insurance companies, will be able to run off the company's business in a way which is in the best interests of the creditors and shareholders of the company and that when this has been done, he hopes the company can be restored to its position as a respectable insurance company in Hong Kong.

16. The second affirmation is by Mr T.S. Chan who says that he is a solicitor and advocate admitted to practise in the High Court of Malaysia. He says that his field of speciality is that of corporate restructuring and in particular, the restructuring of insurance companies. He makes reference to an oral proposal to Mr Roger Houghton in May this year with regard to the running off of the business, but by that time the Official Receiver had been appointed to be the provisional liquidator of the company and employed Mr Houghton for this purpose.

17. In paragraph 9 he says that the shareholders of the company are prepared to inject the necessary capital into the company to ensure that it is solvent on any test, but the shareholders are not prepared to write a blank cheque in the sense that they undertake to inject unlimited funds. That without access to the books and records, he and the shareholders are unable to estimate what the capital injection should be. He then makes an allegation that the Official Receiver has refused access to the books and records of the company. He also says :-

"At its most basic, one has a company which is alleged to be insolvent although it is conceded on all sides that there is no adequate financial information to determine the actual assets and liabilities of the Company. The shareholders of that Company indicate that they are fully prepared to inject funds into the Company save only that they do not wish to have any contractual commitment which may be unlimited but wish to be given an opportunity to review the books and records in order to ascertain the financial status of the Company."

He does not accept that the company is insolvent on any test, whether of a commercial or insurance nature. He says that neither the creditors nor the shareholders would benefit from a liquidation as there is no reason why the company's business cannot be properly run off in the context of a reorganisation in which event, it is hoped, that the company can trade again in the future.

18. From the evidence, it is clear that no defence to the petition has been revealed. However, Mr Poon, counsel for the company has sought an adjournment so as to afford his client an opportunity to have access to the documents that are in the hands of the Official Receiver and thereafter to file evidence in opposition to the petition. This application has been opposed and in particular, Mr McInnes for the Official Receiver has said upon his investigation of the records that the company is insolvent.

19. In my judgment, in the absence of any semblance of a defence put forward today, the petitioner is entitled ex debito justitiae to an order to wind up the company on the grounds of its insolvency and having regard to its failure to comply with the obligations made by the Insurance Authority. Accordingly, I am unable to accede to the application made on behalf of the company and there will therefore be the usual compulsory winding-up order with costs.