THE JOINT AND SEVERAL LIQUIDATORS OF B+B CONSTRUCTION CO LTD (IN LIQUIDATION) v. ULRICH WEINMANN AND OTHERS

cacv 196/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 196 of 2004

(on appeal from HCCW NO. 114 of 2001)

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Kwan J given on 8 June 2004.  The matter before the judge was an application under section 221 of the Companies Ordinance, Cap. 32 (“the Ordinance”).  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  The applicants are the Joint and Several Liquidators of B+B Construction Company Ltd (In Liquidation) (“the company”).  In the course of acting as liquidators the applicants discovered that the company had been financed to the extent of HK$200 million by its immediate parent company Kin Ching China Ltd (“Kin Ching”).  Kin Ching had been one of a group of companies the ultimate parent of which was Bilfinger Berger AG.  In July 1995 the company executed the Deed of Undertaking (“the undertaking”) between itself, the Hong Kong Government and Kin Ching.  The purpose of the undertaking was to enable the company to meet the working capital requirements as a class C contractor.  The important provision of the undertaking was that Kin Ching undertook that it would not demand repayment of HK$200 million from the company or take any steps to enforce repayment of that sum whilst the deed continued.  Although there was a provision for termination on three calendar months’ notice, the liquidators have been unable to locate any form of notice that the undertaking had been terminated.

3.  The matter which concerns the liquidators has been referred to as the Transaction.  The Transaction appears to have taken place following events which evidently gave rise to considerable claims against the company in respect of damages and liability arising out of construction works that it had undertaken.  In summary, the Transaction involved the repayment to Kin Ching of a loan evidenced by a Loan Note.  There had then been the creation of a charge over what were, effectively, the only assets held by the company namely its plant and machinery.  There was then a subsequent sale of that plant and machinery to another subsidiary of Kin Ching, B+B Equipment Rental Limited, with the payment of the proceeds of that plant and machinery being transferred to Kin Ching.

4.  There were a number of difficulties which the liquidators encountered.  In particular the amount said to be owing as of July 1995, namely HK$200 million, did not reconcile with the known month-end balances and, apparently, the liquidators were unable to establish from the company’s books and records why that figure was used.  Also the figure of HK$360,792,000 referred to in the Loan Note did not match the amount outstanding at the end of April 1998 as set out in the liquidators’ analysis of current and loan accounts.  Their figure was HK$268,322,279.

5.  For a substantial period of its life the company traded profitably and was solvent.  Given the financing from its parent companies it was in a healthy state.  There would have been no reason to suppose that there would have been any difficulty.  That condition changed as a result of claims and other liabilities which arose out of substantial contracts which the company had undertaken.  It can be assumed for the purposes of these proceedings that had no other steps been taken the company would have become insolvent as a result of the events which had occurred. 

6.  It was in those circumstances that the Transaction took place.  On the face of the matter the liquidators considered that it was necessary for them to investigate the Transaction because the effect of it may have been to strip out the only real assets the company had and in doing so to transfer the proceeds to Kin Ching and to leave the other creditors of the company without recourse to any share in any of the assets which had been transferred.  On the basis that there were legitimate investigations to be made which the liquidators were not merely justified in making but, it might be said, would have been neglecting their duty if they did not make, they applied under the provisions of section 221 of the Ordinance in respect of the six respondents for the purposes of examining them about the Transaction. 

7.  The judge ordered that the 1^st to 4^th respondents should attend for the purposes of being examined on oath on all matters relating to the Transaction and in respect of the 5^th and 6^th respondents ordered that they should produce all documents in their custody or power relating to the company in so far as they relate to the Transaction.  Since the 2^nd respondent had not been served there was inserted in the order liberty to apply to set aside the order in so far as it related to the 2^nd respondent.

8.  On this appeal Ms Chan, who appeared on behalf of all the respondents, save the 2^nd respondent, argued two main points.  In respect of the 1^st, 5^th and 6^th respondents it was said that the orders should not have been made because those respondents resided outside the jurisdiction.  The point was put on the basis that although the court had “hearing jurisdiction” it did not have “order jurisdiction”.  The argument was put in two ways.  First it was said that a court did not have any compulsive power under section 221 to compel the foreigner, who resided abroad, in respect of whom an order has been made to attend either abroad or in Hong Kong to be examined and secondly it was said that it was an infringement of the sovereignty of the foreign country that an order should have been made by the court.  The other point taken was that it was a wrong exercise of the discretion that an order for examination should have been made in the present circumstances.

Jurisdiction

9.  In support of the argument, Ms Chan relied in the first place upon the case of In re Tucker (R.C.) (A bankrupt), ex parte Tucker (K.R.) [1990] 1 Ch 148.  The court of appeal there was considering section 25 of the Bankruptcy Act 1914 and as to whether the registrar should have made orders giving leave to serve a summons under that section outside the jurisdiction and in the alternative whether an order should be made compelling the attendance of the debtor’s brother in Belgium at a court in Belgium for the purpose of being examined.  The court came to the conclusion that on the construction of the section the court did not have power to order a person who was not in England to be brought before the court.  In those circumstances the orders granting the trustee in bankruptcy leave to serve the summons was bad.  The other point argued in that case was irrelevant for the purposes of this case since there is no suggestion that there should be an order that an examination should take place in Germany, unless the respondents so wish.  The judgment in that case also relied on the decision of In re Drucker (No. 2) ex parte Basden [1902] 2 KB 210.  That decision related to an application under section 27 of the Bankruptcy Act 1883 and as to whether an order for examination should be made of the bankrupt’s mother who was a foreigner residing in Switzerland.  The order sought in that case was that the examination should take place in Switzerland.  Again the court considered that there was no jurisdiction to make an order for examination in any place that was not within the jurisdiction of the British Crown.

10.  Interestingly, that line of authorities was not followed in the decision in McIssacs and Wilson, Petitioners 1995 SLT 498.  That was a decision of Lord Cameron given in the Outer House and he held that under the provisions of section 236 of the Insolvency Act 1986 the power to summon “any person” to appear extended to persons who were outside the jurisdiction.  In coming to his decision Lord Cameron said that In Re Tucker should be read in the context of the particular statutory provision.

11.  Whatever the approach of courts might have been a hundred years ago in relation to examination of persons under the provisions of the Bankruptcy Act then in force, whether those persons were directly involved in events which took place in the United Kingdom or not, it seems to me that the provisions in relation to section 221 of the Ordinance have to be read in their context.  In the first place they relate to examination of officers of Hong Kong companies.  A person becomes an officer of a Hong Kong company by choice.  If he chooses to become an officer of a Hong Kong company he must abide by Hong Kong company law.  By its nature Hong Kong trade has been extensively international.  To suggest that a court should refrain from making an order for examination of an officer of a Hong Kong company under section 221 in circumstances where it otherwise would be appropriate to do so, simply on the basis that he is resident abroad flies in the face of any concept of corporate governance as it is understood.  As has often been said, the purpose of an examination under section 221 is to assist the liquidators in order to enable them to fulfil their general duties to reconstitute, investigate and understand the company’s affairs and get in its assets.  A person, whether a foreigner or not, who becomes an officer of a Hong Kong company knows full well that it will be his obligation to assist a liquidator in all relevant respects should the company go into liquidation. 

12.  It is an undoubted fact that section 221 does not provide any compulsive power in respect of persons who are resident abroad.  The provisions of the Ordinance do not extend to enabling the examination to take place compulsorily abroad.  It may also be said that contempt proceedings could not be taken if the officer does not return to Hong Kong.  But those factors do not prevent it from being the officer’s duty to assist the liquidator.  It is the court’s function to make it clear that that is the officer’s duty.  The person may be abroad at the time the order is made.  Given the fact that he has chosen to be an officer of a Hong Kong company he may well return to Hong Kong in which event the examination can take place.  If he wilfully refuses to assist the liquidator in the proper function of the liquidator’s duties that may well be a matter which can be taken into account in other circumstances, for example, if it ever came about that an application were made to disqualify a person from being a director. 

13.  Finally on this aspect Ms Chan sought to rely upon the case of Mackinnon v Donaldson, Lufkin and Jenrette Securities Corporation and others [1986] 1 Ch 482.  That case related to an order which had been made under section 7 of the Bankers’ Books Evidence Act 1879.  To that extent what was said in the case was only of peripheral relevance.  The passage relied upon at page 493 did not support the respondents’ argument.  That passage was to the effect that only in exceptional circumstances should the court impose a requirement upon a foreigner and in particular a foreign bank to produce documents, the principle being that a State should refrain from demanding obedience to its sovereign authority by foreigners in respect of their conduct outside the jurisdiction.  As already explained, the position here is markedly different.  The orders are sought in respect of officers of Hong Kong companies.  Even further, they are sought in respect of actions which have taken place in Hong Kong.

14.  In those circumstances, I consider that it is a travesty of the principles upon which the Companies Court should operate that it should decline to make an order under section 221 simply on the basis that the person in respect of whom the order is to be made is resident abroad.  Put in another way it would constitute the grossest encouragement for recalcitrant directors to “skip” the jurisdiction, a matter which is all too easy in Hong Kong.

15.  The 1^st, 2^nd and 5^th respondents were officers both of the company and of Kin Ching.  The 6^th respondent was not an officer of the company but he was an officer of Kin Ching.  In my view, there were no grounds on the basis of “order jurisdiction” to refuse to make an order against those respondents.  I would go further there was every reason to do so.

Discretion

16.  The other major ground relied upon by Ms Chan was based in large part upon the fact that, on 10 June 2004, a writ had been issued by the liquidators against, amongst others, the respondents; that was two days after the judgment in the court below.  The writ was general in its terms but related to the Transaction and sought declarations that the defendants in the action had knowingly assisted in the carrying on of the business of the company with intent to defraud creditors.  There were various claims outlined in the writ including claims for damages, accounts of profits and equitable compensation.  It was clear that the writ left open the way for strong assertions of fraud when the statement of claim comes, if it does so, to be filed.  It was said that the liquidators had suppressed the fact that they intended to make claims against the respondents and that in those circumstances the respondents had not been in a position to address the court on the question of oppression or prejudice.  It should be observed that there was evidence filed on behalf of the liquidators that the writ in the action had been issued on legal advice in order to prevent the possibility of the claims being statute barred.  The evidence also stated that the liquidators had not even now formed a concluded view as to whether to pursue any claims as set out in the writ and, if so, against which parties.  It is said that the liquidators were of the view that such a decision could only be made after they had concluded their investigations, or at least advanced them further, into the Transaction.  For the respondents’ part, Ms Chan said that this evidence was not accepted by the respondents.  However, the matter could be taken no further than that.

17.  It must be emphasised that the decision as to whether to order examination under section 221 of the Ordinance or to make any other order under that section is a matter of discretion for the judge.  Whereas the judge below did not of course know of the existence of the writ, in paragraph 99 of the judgment, the judge referred to the fact that there may be possible claims against the directors for breach of duty and against Kin Ching and B+ B Equipment Rental Limited in respect of defrauding creditors.

18.  Previously, in applying sections equivalent to section 221 it had been a rule of thumb that the court was most unlikely to grant an order once it had been decided that proceedings should be commenced against the persons in respect of whom an order was sought.  The manner in which the discretion is now regularly exercised was summarised by Mance LJ in the case of Shierson v Rastogi and others [2003] 1 WLR 586 at paragraph 56-58:

“	56	For liquidators to seek an examination under section 236 in order to gain advantage, or to ascertain whether or not they have a claim, in current civil litigation against the proposed examinee seems bound to offend against elementary fairness.  Not surprisingly, there are authorities refusing applications made in such circumstances.  The Cloverbay Ltd case [1991] Ch 90 itself was a case where the aim was to examine two of BCCI’s officers in order to ascertain whether the company had a good claim against BCCI, or whether BCCI had a good defence, in separate legal proceedings.  It differed therefore from the present case, both in that the order was sought against third parties and in the avowed purpose for which it was sought.  In re Metropolitan Bank (Heiron’s Case) (1880) 15 Ch D 139 exemplifies a refusal for a similar reason to allow examination in relation to a director - the liquidator wished to examine him in order to ascertain whether it was worth proceeding with a civil action already commenced against him.
	57	There is a critical difference between an application made for such a purpose and an application for examination required in order to enable the liquidator to fulfil his general duties as liquidator to reconstitute, investigate and understand the company’s affairs and to get in its assets.  This distinction is drawn even in relatively early authority, such as In re Spiraflite Ltd (Note) [1979] 1 WLR 1096, where Megarry J said, at p 1100:
		‘	What primarily must be considered is why the liquidator is seeking the order.  The essence of the matter is that the powers conferred by the section are given to the court in order to enable the liquidator the better to discharge his functions as such: they are not given in order to enable a litigant to improve his prospects of litigious success by giving him rights which other litigants lack, even if he is a liquidator.’
		Megarry J also suggested that, once proceedings had been commenced, ‘the effect of making an order under the section would normally be [unless it was suspended] to improve the liquidator’s position qua litigant’, and that ‘in many cases there will be much overlapping and ... it will be impossible wholly to disentangle motives and purposes’, but went on:
		‘	I do not, of course, say that an order under the section will always be refused once the writ has been issued or served, any more than I say that it will always be granted if no writ has been issued or served.  In every case the court must be astute to avoid the section being used in any oppressive, vexatious or unfair way.’
	58	The decision in the Cloverbay Ltd case [1991] Ch 90 dispelled the notion that a primary test of the availability of the section is whether or not the liquidator has reached a firm decision to sue.  Further, in examining the availability of the section for the purpose of reconstituting the state of knowledge that the company should possess (not the only purpose for which the section is available, as Bishopsgate Investment Management Ltd v Maxwell [1993] Ch 1 later made clear), Sir Nicolas Browne Wilkinson V-C [1991] Ch 90, 102D-E drew a distinction similar to that made by Megarry J between applications for the (impermissible) purpose of improving the position in current civil litigation against the proposed examinee and applications for a permissible purpose which may at the same time have the result of improving the liquidator’s position in other respects.”

19.  In exercising the discretion, the judge took into account the relevant matters, and came to the conclusion that “The circumstances here are compelling, there is clearly a need of further investigation.”  The judge discounted the suggestion that the application was a “fishing expedition”, by which was meant that it was an attempt to secure evidence and concessions for use in a case to be brought against the respondents.  The judge also considered very carefully as to whether there was an alternative method of investigation and reached the conclusion that there was not.  The judge considered that it was appropriate to have oral examinations and considered that it was very likely that proceeding by questionnaire and answer would only lead to endless exchanges between the parties.  The judge carefully considered the circumstances of each of the respondents and in doing so reached the decision that the 5^th and 6^th respondents should be required to produce documents whereas the other respondents should be required to attend for examination.

20.  It must be borne in mind that when considering the exercise of discretion by a judge, this court must look to see whether grounds for reviewing the exercise of the discretion exist.  If they do not, this court should not exercise any discretion itself or otherwise usurp the function of the judge.  In my view there are no grounds for interfering with the decision of the judge.

21.  I would therefore dismiss this appeal and make an order nisi of costs in favour of the applicant and the Official Receiver, such costs to be borne by the 1^st, 3^rd, 4^th, 5^th and 6^th respondents.  Mr Beresford, who appeared on behalf of the Official Receiver, requested that the costs in favour of his client should be assessed on a gross sum basis.  The amount requested was $76,000.  Since this amount appears to be very reasonable and there was no objection on behalf of the respondents, there should be an order to that effect.

Hon Le Pichon JA:

22.  I agree.

Hon Sakhrani J:

23.  I also agree.