RE HOP CHEONG BUILDING PRODUCTS LTD (IN LIQUIDATION)

HCCW 941/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 941 OF 1998

____________

____________

_____________

D E C I S I O N

_____________

1. This is an application taken out by the liquidators of Hop Cheong Building Products Limited (in liquidation) ("the Company") under section 199(1)(c) of the Companies Ordinance, Cap. 32, seeking an order that they do have leave to appoint Messrs Clifford Chance to advise and assist them on all matters arising out of the sale by the liquidators of the Company's 90% interest in Sanshui Hupchong Decoration Ceiling Co. Ltd ("the JV Company") to Sanshui Fung Hing Textile Manufacturing Co. Ltd ("Fung Hing"), such matters to include but not limited to defending any action brought against the Company by any party in connection with the sale including HCA No. 171 of 2003 ("the High Court Action").

2. For the background and details relating to the sale, I refer to the Reasons for Decision I gave earlier on 4 October 2002, paragraphs 4-7.

3. On 26 September 2002, I made an order that the costs of and occasioned by the liquidators in proceedings brought in the Foshan Intermediate People's Court ("the Mainland Action") by one of the contributories, Mr So King Kay, are to be costs of the liquidation and to be taxed and paid out of the Company's assets.

4. The present application is necessitated because of the High Court Action brought by Fung Hing against the Company on 14 January 2003, regarding the sale of the Company's interest in the JV Company. In that action, Fung Hing seeks rescission of the share transfer agreement entered into by the Company on the grounds of mutual mistake, total failure of consideration and non-fulfilment of conditions precedent.

5. On 5 February 2003, the liquidators filed an Acknowledgment of Service. The time for filing a defence in this action has been extended by consent to 12 March 2003.

6. On 30 January 2003, the liquidators wrote to the three contributories of the Company, Mr So, Mr Chow Cheong Wai and Mr Li Chin Pang Clement, who are also members of the Committee of Inspection, to ascertain whether the Committee of Inspection would agree to the defence of the action by the liquidators in the name and on behalf of the Company. In addition, as the liquidators anticipated that the amount of funds remaining in the estate of the Company is unlikely to be sufficient to cover the costs of defending the action, the Committee of Inspection was asked to provide additional funds to the liquidators for the purpose of funding the defence of the action. The Committee of Inspection was also asked to give consent to the appointment of Messrs Clifford Chance as solicitors for the liquidators for defending the action.

7. I should mention that Messrs Clifford Chance have been retained by the liquidators for the purpose of advising them and defending the Mainland Action.

8. Various responses were received from the members of the Committee of Inspection. Mr Chow agreed to defence of the High Court Action by the liquidators in the name and on behalf of the Company and to the appointment of Messrs Clifford Chance as the liquidators' solicitors. However, he would not provide any funding to cover the costs of defending the action.

9. As for Mr So who has also appeared at the hearing today, he has agreed to the liquidators defending the action in the name and on behalf of the Company, but asserts that the liquidators should defend the proceedings without the assistance of solicitors. Further, he is unwilling to provide any funding to cover the costs of instructing solicitors.

10. Mr So has written to the liquidators on 13 February 2003 and to the court on 3 March 2003 in which he set out his stance in this application. In short, he has alleged that the lack of funds in the estate of the Company for defending proceedings brought against the Company is due to the misconduct or dereliction of duty of the liquidators. He alleges that the liquidators had acted improperly in causing the Company to enter into the share transfer agreement with Fung Hing, and that was why he had brought proceedings against, inter alia, the liquidators in the Mainland.

11. Mr So is further opposed to the payment of the liquidators' legal costs out of the assets of the Company, alleging that excessive fees have been charged by the solicitors retained by the liquidators.

12. As for Mr Li, he had refused to respond initially claiming that he needed to seek legal advice. Later he wrote to the liquidators on 12 February 2003 and to the court on 3 March 2003. He queried why the liquidators should retain Messrs Clifford Chance to advise in the High Court Action, as the liquidators had retained another firm of solicitors in the past to advise them on the transfer of the Company's interest in the JV Company to Fung Hing. Further, he claimed that it was not appropriate that the costs of the liquidators in appointing solicitors should be paid out of the Company's assets for the same reasons as alleged by Mr So.

13. I have decided to approach the present application in this manner. Firstly, the action should be defended by the liquidators in the name and on behalf of the Company. That also seems to be the wishes of the members of the Committee of Inspection.

14. Secondly, it is desirable and appropriate that the liquidators should have the assistance of solicitors in defending the action on behalf of the Company. As for the choice of the solicitors, I agree with the liquidators that it may not be entirely appropriate for the solicitors who had advised them previously to act for them in defending the action, as the previous solicitors may be faced with a potential conflict of interest, in view of the allegations that have arisen regarding the validity of the sale. I note the concern of the members of the Committee of Inspection that the legal fees charged by the solicitors are or might be excessive. I wish to point out that bills submitted by the solicitors are subject to the scrutiny of the court and they would only be paid such fees as are allowed by the court.

15. Thirdly, it seems to me inappropriate to go into allegations of misconduct of the liquidators for the purpose of this application. These allegations are the subject of pending proceedings in the Mainland Action, they have yet to be established whether in the court in Foshan or in the Hong Kong court.

16. For the above reasons, I have come to the view that it would be appropriate to make an order as sought by the liquidators. I therefore order as follows:

(1) The liquidators have leave to appoint Messrs Clifford Chance to advise and assist the liquidators on all matters arising out of the sale by the liquidators of the Company's 90% interest in the JV Company to Fung Hing. Such matters to include but not limited to

(i) defending any action or legal proceedings commenced against the Company by any party in connection with the sale, including the High Court Action;

(ii) bringing any action or legal proceedings against any party on behalf of the Company in connection with the sale; and

(iii) negotiating and entering into any compromise or settlement with any party in connection with the sale.

(2) The costs of and occasioned by this application are to be costs of the liquidation.