JOHN ROBERT LEES AND AND ANOTHER v. DESMOND CHUNG SENG CHIONG AND OTHERS

HCA 1180/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1180 OF 2003

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J U D G M E N T

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1.  This judgment concerns only the claim between the plaintiffs and the defendant.  It does not deal with the third party proceedings between the defendant and the various third parties.

2.  The plaintiffs were appointed joint provisional liquidators of Sino American Telecom Inc (“the Company”) by the court on 14 May 1998, upon the defendant’s petition for the winding up of the Company in HCCW329/1998.

3.  The plaintiffs’ claim against the defendant is for $5,401,758.19 being the balance of their fees as provisional liquidators which had been approved upon taxation by Kwan J, the Companies Judge, in August 2004 for payment out of the assets of the Company, but which were not met by such assets of the Company due to none having been recovered in the winding-up. 

4.  The basis of the plaintiffs’ claim against the defendant is an Indemnity Agreement given by the defendant, as the petitioning creditor, in favour of the plaintiff and dated 16 June 1998 which, on the plaintiffs’ case, indemnifies the plaintiffs (inter alia) as to their remuneration as provisional liquidators to the extent that the same cannot be recovered from the assets of the Company.

History and background of the Recovery Process by the provisional liquidators

5.  At the time of the winding-up petition, the Company had two wholly owned subsidiaries :

(a)  Remoco (Hong Kong) Limited (“RHKL”), and

(b)  Goldremart Holdings Limited (“GHL”).

6.  It was also generally acknowledged that the Company had or was shown to have three main assets as follows :

(i)  RHKL had entered a joint venture enterprise in the PRC resulting in a PRC company called Ligao Telecom Technology Company Ltd (“the Ligao JV”).  That was a joint venture between RHKL and Shenzhen Wanlitong Industrial Development Company Limited (“Wanlitong”), a company set up in Mainland China and controlled by the People’s Liberation Army.

(ii)  The Consolidated Financial Statements of the Company and its subsidiaries for the year ended 31 March 1997 showed that there were receivables identified to be valued at some US$3.2 million.

(iii)  GHL owned a 70% interest in a manufacturing plant in Mainland China held in the name of Goldremart (Longmen) Electronics Ltd, which was an equity joint venture in the PRC, of which 30% was held by Longmen County Foreign Trading General Company.  This manufacturing plant manufactured and sold telecommunication and audio products.

7.  Allen Yuen and parties related to him controlled some 88% of the issued shares of the Company.

8.  However, some time before the appointment of the plaintiffs as provisional liquidators in HCCW329/1998, a number of investors, including the defendant, had made large investments of some US$13 million into the Company and to whom the Company had issued convertible loan notes (“the Noteholders”) of which some US$10 million passed through RHKL to be used for the funding and development of the Ligao JV.

9.  Due to mismanagement of the affairs of the Company by Allen Yuen, the Noteholders had reasons to be concerned with their investments in the Company.  It was decided that a petition for winding up of the Company be presented to safeguard their interests and the defendant was chosen amongst the Noteholders to be the petitioning creditor.

10.  At the time when the plaintiffs were appointed provisional liquidators in May 1998, RHKL was having difficulty meeting its funding commitments under their joint venture agreement with Wanlitong.  RHKL was unable to arrange for such financing as it was insolvent both on a balance sheet and cash flow test.  As a result, Wanlitong was threatening to terminate the Ligao JV.

11.  It was also recognized by all concerned that if RHKL was liquidated, the Ligao JV would terminate and its value would be lost to RHKL and ultimately to the creditors of the Company.  To preserve the interests of the Ligao JV for future sale and to provide a clean vehicle for future funding, RHKL’s interest was transferred for a nominal sum to Remoco China Limited (“RCL”), a shelf company beneficially owned by RHKL.

12.  At the same time, the Noteholders were prepared to come forward to provide a line of credit to rescue the Ligao JV and keep it going.  The Noteholders no doubt realised that if the facility was not provided, their original investment in the Company would be lost.

13.  On the same day (i.e. 16 June 1998) that the defendant signed the Indemnity Agreement in favour of the plaintiffs, the rest of the  Noteholders provided counter-indemnities to ACL Holdings Ltd (“ACL”), the parent company of the defendant, by which they indemnified ACL for all losses, costs and expenses arising out of the Indemnity Agreement given by the defendant to the provisional liquidators.

(Add Seagroatt’s order and Le Pichon’s order in May 1998)

14.  In June 1998, after the winding up petition had been presented in HCCW329/1998, the court approved an application by the provisional liquidators to enable acceptance of funds from the group of Noteholders in respect of the Ligao JV up to US$3 million and for the transfer of RHKL’s interest in the Ligao JV to RCL.

15.  Phoenix Telecommunication Ltd (“Phoenix”) was incorporated on 10 June 1998 as a vehicle to provide funding for the Ligao JV.  The shareholders of Phoenix were made up mainly by that group of the Noteholders providing the funding.

16.  In late June 1998, an application by the provisional liquidators that they be permitted to accept the offer of Phoenix to purchase by way of private treaty the interest of the Company in (inter alia) all the shares of and its loans to RHKL and GHL was refused by Le Pichon J (as she then was), the Companies Judge at the time, being on the basis that what was proposed was effectively a scheme of arrangements but which by-passed the statutory requirements for such.

17.  That decision of Le Pichon J was appealed against by the provisional liquidators, but the appeal was dismissed by the Court of Appeal after hearing in July 1998.

18.  In August 1998, the court sanctioned a loan proposal whereby the Noteholders would extend the loan up to US$6 million to be provided by Phoenix for the purpose of fulfilling the funding obligations of the Ligao JV and to finance RCL.

19.  Difficulties were encountered by the plaintiffs in recovering the assets of the Company.  Many of the books and documents of the Company as well as its subsidiaries could not be located, having been removed and taken into Mainland China, despite some attempts by the plaintiffs to recover them from the Mainland.

20.  After some time, one of the Noteholders, namely, the Rana group representing Arab interests, refused to continue with any more funding other than what it was obliged to pay under its counter-indemnity.

21.  As a result, a rift gradually appeared between the defendant and the other Noteholders and they started to fall out some time in the earlier part of 2000.  This falling out between them resulted in Phoenix moving out of the defendant’s office.

22.  On 9 June 2000, the Company was wound up on the defendant’s petition and the provisional liquidators were appointed joint and several liquidators of the Company on 6 December 2000.

23.  The plaintiffs, in their capacities as either liquidators or provisional liquidators were unable to make any recoveries in respect of the assets of the Company.  Accordingly, the Company has not been able to meet the provisional liquidators’ fees and disbursements from the assets of the Company.

The plaintiffs’ claim

24.  As already stated, the plaintiff’s claim was brought against the defendant upon the Indemnity Agreement for the fees of the provisional liquidators.

25.  Such fees are quantified by the plaintiffs in the Schedule attached to the Re-amended Statement of Claim.  The gross fees amounted to HK$6,961,964.50.

26.  To that amount of gross fees, credit was given by the plaintiff for the sum of HK$528,343.31 as being payment already received by the plaintiffs.

27.  Upon taxation by the companies Judge, Kwan J, of the provisional liquidators fees, an amount of $1,031,863.00 was taxed off.  This therefore resulted in the sum of HK$5,401,758.19 being the amount now claimed by the plaintiffs from the defendant.

The defence raised

28.  A number of defences have been raised by the defendant to the claim of the plaintiffs.

29.  Firstly, the defence of past consideration was raised by the defendant (“the Past Consideration Defence”).

30.  Secondly, it was said that the plaintiffs’ own remuneration, the subject matter of the present claim, was not covered by the Indemnity Agreement and which therefore turns on the construction of the Indemnity Agreement (“the Construction Defence”).

31.  The other defences raised by the defendant are factual which fall into four main category and can be summarized as follows :

(a)  Has the work currently charged by the plaintiff (and now claimed from the defendant under the Indemnity Agreement) been properly charged to the liquidation of the Company or ought it properly to have been charged to other parties involved (“Defence of Work Not Properly Charged”)?

(b)  Ought the plaintiffs to have recovered more assets of the Company such that their fees could and should have been paid out of such assets recovered (“Defence of Recoverable Assets”)?

(c)  Were the fees incurred by the plaintiff incurred through negligence, misconduct or default of the plaintiff (“Defence of Negligence, Misconduct or Default”)?

(d)  Do the fees include unbillable and excessive time (“Defence of Unbillable work”)?

The Construction Defence

32.  This defence turns upon the construction of the Indemnity Agreement.

33.  The Indemnity Agreement is on the letterhead of the defendant addressed to the plaintiffs, FH Securities Limited and FH Nominees Limited, and dated 16 June 1998.  It provides as follows :

“Sino American Telecom Inc.

In consideration if your agreeing at the request of the undersigned to accept appointment as joint provisional liquidators of Sino American Telecom Inc, the undersigned hereby undertake jointly and severally to indemnify you, your employees, your respective personal representatives, executors, administrators and successors in title and at all times to keep the same indemnified from and against any liability which may be incurred or suffered by you or to which you may be or become liable by reason solely of the appointment of yourselves as joint provisional liquidators as aforesaid or of your acting as such joint provisional liquidators including your appointment as directors and officers of Sino American Telecom Inc. and / or its subsidiaries or Shenzhen Ligao Telecom Technology Limited to the extent that you are unable to recover the same from the assets of Sino American Telecom Inc. and provided such liability shall not have arisen by your own negligence misconduct or default.

In particular (but without prejudice to the generality of the foregoing) the undersigned hereby agreed to indemnify you, your employees, your respective personal representatives, executors, administrators and successors in title in respect of any costs, joint provisional liquidator’s remuneration and joint provisional liquidators’ disbursement to the extent not paid out of the companies’ assets and undertake to provide funds to meet the abovementioned claims, costs and disbursements immediately upon demand, provided that such actions, suits, proceedings, claims, demands, costs, expenses and other liabilities shall not have arisen or been caused by your negligence, misconduct or default.

This indemnity shall be binding on our respective personal representatives, executors, administrators, and successors in title.”  [emphasis added]

The Indemnity Agreement was signed by James Collins-Taylor in his capacity as director.

34.  It was submitted by the defendant that the Indemnity Agreement did not cover the joint provisional liquidators’ remuneration, which is what is being claimed by the plaintiffs herein.

35.  In this respect, it was submitted by the defendant that the Indemnity Agreement indemnifies the plaintiffs as to liabilities which they may personally incur or become liable for as a result of their accepting the appointment to be provisional liquidators which is clear from the wording of the first paragraph of the Indemnity Agreement and which does not extend to the payment of the plaintiffs’ own fees for carrying out their duties.

36.  It was also submitted that the Indemnity Agreement is not a guarantee of the Company’s obligations to the plaintiffs which is different from what is indemnified by the Indemnity Agreement and that the fees of the provisional liquidator are the obligation of the Company and are not usual for one to be “indemnified” in respect of one’s fees.

37.  The defendant further argues that the second paragraph, which begins with the words “In particular”, must be read as particularizing the first paragraph.  When so read, it cannot expand on what is limited by the first paragraph i.e. liabilities incurred as provisional liquidators.  Therefore where the second paragraph refers to “joint provisional liquidator’s remuneration” that can only be a reference to any remuneration which the joint provisional liquidators may incur or become liable to pay to others.

38.  In coming to a decision on the construction to the Indemnity Agreement, I cannot accept the arguments put forward by the defendant.

39.  True enough, the first paragraph is limited only to liabilities which may be incurred by the provisional liquidators.

40.  However, in so far as their argument goes in respect of the second paragraph, the words “In particular” are qualified by the words following which are in parenthesis namely “(but without prejudice to the generality of the foregoing)”.  To my mind, those qualifying words in parenthesis take the provisions in the second paragraph outside the limits of what is provided for in the first paragraph.

41.  That second paragraph covers “costs”, “joint provisional liquidator’s remuneration” and “joint provisional liquidators’ disbursement”.  They are therefore three specific instances for which provisions were made in the second paragraph but not necessarily limited to the scope of what is provided for in the first paragraph.

42.  Nor can I accept that the phrase “joint provisional liquidator’s remuneration” in the second paragraph means remuneration which the joint provisional liquidators may become liable to pay.  If that be the meaning given to it, then it would be covered either by the term “costs” or by “joint provisional liquidators’ disbursement” and would be superfluous and unnecessary.

43.  Neither do I accept the contention that the Indemnity Agreement, not being a guarantee, it is therefore not normal to indemnify the provisional liquidators their own remuneration, which is the obligation of the Company.  In this respect, I take the view that the Indemnity Agreement (where it relates to matters in dispute in this case) is not, in substance, so different from a guarantee.  Admittedly, the remuneration of the provisional liquidators would primarily be paid from the assets of the Company.  That would normally be so in every case.  What the Indemnity Agreement seeks to achieve is that, by it, the petitioning creditor agrees to indemnify the provisional liquidators for all its expenses, costs, liabilities, disbursements as well as the provisional liquidators own remuneration should it turn out at the end of the day that there is insufficient assets of the Company to meet same.  In that sense, it is no different from a guarantee.

44.  On a proper construction of the Indemnity Agreement, I hold that it covered the remuneration of the plaintiffs in their capacity as joint provisional liquidators upon being asked to assume that role by Mr Collins-Taylor on behalf of the defendant in the defendant’s petition for winding up of the Company.

The Past Consideration Defence

45.  The plaintiffs were appointed joint provisional liquidators of the Company on 14 May 1998.

46.  The Indemnity Agreement was dated 16 June 1998.

47.  The defendant, relying on the opening words of the Indemnity Agreement being “In consideration of your agreeing at the request of the undersigned to accept appointment as joint provisional liquidators of Sino American Telecom Inc….” and given the date of the Indemnity Agreement, submits that the consideration, being the appointment of the plaintiffs as joint provisional liquidators on 14 May 1998, that consideration for the Indemnity Agreement was past consideration.

48.  Firstly, as a matter purely of construction of the wording of the Indemnity Agreement, I am unable to accept that over-simplistic approach of the defendant.

49.  Although the words used in the Indemnity Agreement expressly referred only to the “appointment” of the plaintiffs as joint provisional liquidators, however, in the entire context of the Indemnity Agreement, that must be read to mean their appointment as well as their continuing in office as joint provisional liquidators.  Their appointment per se, would not have put them at risk of there being insufficient assets of the Company to meet their costs, expenses, liabilities, disbursement and remuneration at the end of the day and for which the indemnity of the petitioning creditor would be required.  That could only have come from their continuing and acting as joint provisional liquidators after their appointment as such.

50.  Once that premise is reached and the wording of the Indemnity Agreement is construed in that sense, the defence of past consideration falls away as can be seen from the passage in Chitty on Contracts : Vol. II, para. 44-021 which states :

“Guarantee of past and future transactions.  If the surety guarantees past transactions in return for an undertaking by the creditor to continue to deal with the debtor, or to grant him further credit, there will be good consideration.  In practice the surety frequently guarantees both past and future transaction in return for such an undertaking, and such a guarantee is good as to both sets of transactions, for consideration to be executed on the one side is at all events prima facie consideration for all that is done on the other, and all the promises are to be referred to all the considerations.”

51.  However, quite apart from the pure construction aspect as stated above, there is also evidence from the plaintiff, John Lees, to the effect that just before he stepped into court with Mr Collins-Taylor, the director of the defendant, on 14  May 1998, he had obtained from Mr Collins-Taylor an oral agreement that the defendant was prepared to give an indemnity to the plaintiffs indemnifying them for their costs expenses and fees for agreeing to act as the provisional liquidators in the matter and that subsequent Indemnity Agreement was the result of that oral agreement for an indemnity.

52.  In evidence Mr Collins-Taylor did not deny giving such an oral indemnity on 14 May 1998, but only said that he could not remember having done so.

53.  Quite apart from the fact that the evidence in this respect from Mr Lees was unchallenged by the defendant, I have no difficulty accepting that evidence of Mr Lees since it must be standard practice for one, being as experienced as he is in the field of liquidation, to request, even orally, for an indemnity from a petitioning creditor for his fees and disbursement, before accepting any request for appointment as a liquidator or provisional liquidator.

54.  Moreover, that is to some extent supported by the correspondence which showed that as early as 20 May 1998 the plaintiff had sent a draft Indemnity to ACL Asia Limited and which was copied to Mark Johnson, a partner of Messrs Herbert Smith, the solicitor acting for the defendant at the time.  The covering letter simply stated “As discussed, I attach a draft Indemnity for completion.”  The evidence in the case showed that the reason why it took so long for the Indemnity Agreement to be executed (i.e. 16 June 1998) was due to the fact that the defendant had to obtain counter-indemnities from the other Noteholders before it would sign the Indemnity Agreement to the plaintiffs.

55.  In accepting the evidence of Mr Lees on this issue, it must follow that the indemnity was given by the defendant to the plaintiffs orally and before their appointment by the court as provisional liquidators.

56.  Accordingly, I am not persuaded that the consideration given for the Indemnity Agreement was past consideration.

57.  For completeness sake, I should mention that it had been submitted by the defendant in final submission that Mr Lee’s evidence relating to there being a prior oral agreement was not the pleaded case of the plaintiff.  In so submitting counsel for the defendant had quite obviously overlooked paragraph 10 of the Reply in which the prior oral agreement was pleaded.

Defence of Work Not Properly Charged

58.  This defence was put along the following lines.

59.  Apart from the manufacturing plant held under GHL and the US$3.2 million receivables, the only other substantial asset was the Ligao JV held by RHKL.  RCL were incorporated to hold onto and to rescue the Ligao JV since the Ligao JV would be in jeopardy of termination if it remained with RHKL.  Phoenix was incorporated to fund RCL and the Ligao JV.  Such arrangements, it was submitted, was finally approved by the Court and implemented in August 1998.

60.  The defendant says that therefore by August 1998, the Ligao JV was secured and the status quo preserved, by which time some HK$2 million in fees had been incurred.

61.  Even giving allowances for work done in relation to the other assets, subject to the other defences raised, the defendant submits that the fees incurred up to January 1999 amounting to some HK$3,110,758.40 was a far cry from the amount now claimed by the plaintiffs.

62.  The defendant submits that the majority of the additional work billed by the plaintiffs was in fact work which ought to have been charged to RCL or to Phoenix such as work in relation to the Facility letter and the subsequent loan agreement.  Such work ought not to have been charged as being part of the provisional liquidation by the plaintiff.

63.  In a similar way, Messrs Herbert Smith had been asked to bill their fees to Phoenix and have been paid by Phoenix, so too the plaintiffs had been asked by letter dated 26 October 1998 from Phoenix to bill Phoenix for such work done.  That the plaintiffs have failed to do.

64.  The defendant submits that the failure of the plaintiffs to bill Phoenix for such work was due to a misapprehension by them that Phoenix was the alter ego of Mr Collins-Taylor or that Phoenix was the same as the creditors of the Company both of which were not in fact so.

65.  Quite apart from the above, the defendant further submit the following specific work was done by the plaintiff for the benefit of Phoenix and should have been billed to Phoenix, or as part of the provisional liquidation of RHKL or GHL :

(a)  the assumption of :

-the Star Telecom Overseas “STOL” debt;

-the KSat debt;

-the Glenayre Electronics debt;

(b)  the contesting of the debt of SEC Development at RHKL level after formation of RCL;

(c)  work done for RHKL after its winding up;

(d)  audit questions and draw downs for RCL; and

(e)  meeting of creditors of the Company and committee of inspection.

The above summarizes the position of the defendant in respect of the Defence of Work Not Properly Charged.

66.  I am unable to accept that submission of the defendant for the following reasons :

(a)  What was done by the plaintiff, even the work done in respect of RHKL, RCL or even Phoenix, were done by them in their capacity as provisional liquidators of the Company.  That was the only capacity in which the plaintiff could have done such work, they not having been engaged in any other capacity.

(b)  RHKL, RCL and Phoenix were so closely connected to the rescue operation put in place by the Noteholders in their attempt to salvage what they could from the Ligao JV, there can be no clear or distinct demarcation from the work performed by the plaintiff as provisional liquidators even if it such work was carried out for the benefit of either RHKL, RCL or Phoenix.

(c)  The plaintiffs had no locus to bill RHKL or Phoenix, even when requested by Phoenix to do so since what the plaintiffs did was done by them in their capacity as provisional liquidators and therefore the plaintiffs were quite properly advised by its solicitors not to have billed Phoenix for such work.

(d)  In coming to this conclusion for the reasons given above, I find support in the fact that the taxation of the plaintiff’s bill of costs by Kwan J, such charges of the plaintiffs now said to be work done for other parties were not taxed off.  In other words, that taxation by the Companies judge meant that the amount so taxed would have been paid out of the assets of the Company had any assets been recovered at the end of the day (and therefore were charges properly incurred as provisional liquidators remuneration in the winding-up).  Since, however, no such assets were recovered, the taxed amount falls within the ambit of the Indemnity Agreement subject of course to the misconduct and default proviso, which will be dealt with separately as a separate defence later in this judgment.

Defence of Recoverable Assets

67.  Complaint is made by the defendant that that none of the accounts receivable of some US$3.2 million shown in the accounts of the Company were recovered by the plaintiffs.  Alternatively it was said that an action against the auditors ought to have been brought.

68.  Complaint is also made that although GHL owned a manufacturing plant in Mainland China and which was valued at approximately some HK$6 million, once again nothing from that was recovered by the provisional liquidators and the manufacturing plant or factory seem to have vanished.

69.  Thirdly, it was also submitted that the Ligao JV, which was valued at between UD$30 to 35 million, nothing was recovered from it.

70.  Each of these three complaints will have to be dealt with on its own separately since the evidence differs in each case.

71.  Dealing first with the US$3.2 million accounts receivables.  This was an item shown in the Consolidated Accounts and Financial Statements of the Company and its subsidiaries.

72.  The evidence from John Lees was that he had obtained a list of the accounts receivables of RHKL as at 31 March 1996 from Arthur Anderson and had written to the debtors detailed in the list.  Those who replied either stated that they had paid all outstanding debts or that they had never done business with RHKL.

73.  A further difficulty faced by the provisional liquidators was the inability to locate any documentary evidence of the underlying transactions which made up the individual balances said to be outstanding.

74.  In this respect, Allen Yuen was examined pursuant to section 221 of the Companies Ordinance in an attempt to determine the location of the missing books and records of the Company and its subsidiaries and also for further information as to the assets of the Company.  When examined, Allen Yuen said that his brother Yuen Yuk Sang had arranged for all the books and records of the Company to be stored in China but when he requested that these be returned to the provisional liquidators many of these records were seized by the PRC Customs Department.

75.  The provisional liquidators, despite many attempts, failed to either contact or serve Yuen Yuk Sang with a Summons under section 221 for examination.

76.  Whatever books and records of the Company that were made available to the provisional liquidators were incomplete and insufficient to enable determination as to whether the balances attributed to debtors as Accounts Receivable were correct or could support recovery action against such debtors.

77.  A further complication which was known to Collins-Taylor was the fact that Collins-Taylor had discovered that Allen Yuen had instructed some of the debtors of RHKL to pay amounts invoiced by RHKL to third parties (including Allen Yuen and his brother in cash) rather than to RHKL’s bank accounts due to the fact that RHKL’s bank had obtained a garnishee order against RHKL’s bank account to satisfy a judgment it had obtained against RHKL.

78.  Given these circumstances, it is hardly surprising that the provisional liquidators were unable to make any recovery against the accounts receivables.  Moreover, the evidence showed that it was not due to any inaction on the part of the provisional liquidators which resulted in non-recovery of the accounts receivable.

79.  As a follow up to the failure to recover any of the US$3.2 million receivables reflected in the accounts of the Company, the defendant submits that alternatively the plaintiffs, as provisional liquidators, should have considered a suit against the auditors of the Company for negligent audit.  It was also submitted that had an action been instituted against the auditors, then some recovery would have been expected, but as matters turned out, nothing has happened at all.

80.  I cannot accept that the provisional liquidators were at fault in not bringing any action against the auditors for the following reasons :

(a)  To bring proceedings against the auditors would have required funding.  At the time all the funds put up by the Noteholders went towards securing the Ligao JV and there came a time when the Noteholders refused to put up any more funding.  In those circumstances there would not have been any funds to mount such an action against the auditors.

(b)  The US$3.2 million receivables were shown in the 1997 accounts.  Moores-Rowland had audited the 1996 accounts so there was no question of going after Moores-Rowland.  The 1997 accounts were alleged to have been audited by Arthur Andersen but no signed copy of the audited accounts from Arthur Andersen had ever been produced in evidence.  The defendant merely relied on a statement in the IPO) prospectus that Arthur Andersen had audited the 1997 accounts.  On the other hand, there was some suggestion that there was only a draft of the audited accounts prepared by Arthur Andersen but which had never been signed by them as auditors because the Company did not pay the audit fees.  In the absence of any signed audited accounts from Arthur Andersen being produced in evidence, I am unable to give weight to that one statement in the prospectus that Arthur Andersen had audited the 1997 accounts of the Company.

(c)  In any event, it would be a futile exercise to go after Arthur Andersen when it was insolvent.

(d)  To successfully sue the auditors for negligent audit, there has to be evidence of such negligent audit.  The mere fact that none of the US$3.2 million receivables recorded in the accounts could be recovered, does not necessarily per se point to a negligent audit.

81.  I turn now to deal with the assets of GHL.

82.  From the Consolidated Financial Statement of the Company dated 30 September 1997, it appears that GHL has a 70% interest in an equity joint venture in the People’s Republic of China.  Its partner in the joint venture is Longmen County Foreign Trading General Company which owns the other 30%.  GHL’s interest in the joint venture was estimated to be worth HK$6 million according to the Consolidated Financial Statement.

83.  It is common ground that nothing was recovered from such assets of GHL.

84.  The evidence from Lees was that in July 1998, after the provisional liquidators had been appointed, staff from the provisional liquidators together with an employee of RHKL visited the manufacturing plant where they spoke to a Zhu Huo Sheng, a director of Longmen, but was told that the Hong Kong partner of Longmen was Golden Source Electronics Limited and not GHL and that the chairman was one Franky Wong Sui Yuen.

85.  Thereafter the provisional liquidators tried to determine the actual position by attempting to contact Franky Wong but without success.

86.  Ultimately, since the main focus by the Noteholders and the funding coming through Phoenix was utilized for the Ligao JV, no further headway was made in respect of GHL in light of the difficulty face and therefore no recovery was made of any assets from GHL.

87.  Finally, in respect of the Ligao JV, reference has already been made in an earlier part of this judgment as to the history of the recovery process and its difficulty.

88.  When the Noteholders decided to stop providing any further funding to RCL to carry on the Ligao JV, and when the Noteholders fell out amongst themselves, it is hardly surprising that nothing could be salvaged from the Ligao JV, particularly when those assets were all situated in Mainland China and under the control of Wanlitong.

89.  The process of recovery of the assets of the Company had at all times been detailed and made known to the Companies judge in regular reports from the provisional liquidators. 

90.  In like manner, the petitioning creditor and in particular Collins-Taylor, being a director of the defendant, was kept informed of all that occurred.

91.  Far from levying any criticism against the provisional liquidators for what was done by them at the time, in fact the provisional liquidators were appointed to be the liquidators of the Company in December 2000 about six months after the winding-up order was made. 

92.  In light of the difficulties which could not be overcome by the provisional liquidators, I do not see that the failure to recover any of the assets of the Company can be laid at the door of the provisional liquidators as being negligence, misconduct or default on their part. 

Defence of Negligence Misconduct and Default

93.  As a general proposition, the defendant submits that as opposed to there being no recovery for any of the three main assets above, the provisional liquidators, in spending some HK$10.5 million in fees is, on its own, evidence of negligence.

94.  In a more specific way, the defendant points to the fact that although in the case of the Ligao JV, some steps were taken by the provisional liquidators in an attempt to secure that asset, and by August 1998, RCL had taken over control of the Ligao JV from RHKL and that Phoenix was also put in existence to fund the Ligao JV, no such attempt was made by the provisional liquidators to secure the asset (i.e. the manufacturing plant or factory) of GHL in which the Company held a 70% interest.

95.  The defendant also complained of the negligent handling of the affairs of the Company by the solicitors instructed by the plaintiff, as was said by the plaintiff in the taxation proceedings.

96.  Other areas which the defendant points to the negligence of the plaintiffs are :

(a)  misconceived RHKL and GHL applications;

(b)  additional funding for Ligao JV and RHKL and also additional expenses caused by the need for an emergency application to court; and

(c)  misconceived business sale application in which Rogers VP disallowed the costs of the appeal.

97.  In so far as this defence is concerned, the defendant takes the stance that the taxation by the Companies judge will not have taken into account any such negligence, misconduct or default on the part of the provisional liquidators since that would be outside of the scope of the taxation process.

98.  Dealing first with the general point submitted by the defendant that negligence of the plaintiff is shown by the spending of HK$10.5 million in fees when no assets whatsoever were recovered in the winding up, the difficulties faced by the provisional liquidators in so far as recovery of assets are concerned have already been dealt with earlier in this judgment.

99.  In so submitting, the defendant is effectively attempting to evoke the maxim of res ipsa loquitur, which, in my view, is not applicable to the present case given the circumstances.

100.  I am therefore unable to accept that by incurring fees of HK$10.5 million and failing to recover any assets of the Company is, per se, negligence by the plaintiff.

101.  As for the inability to recover the assets of GHL which is said to have a 70% interest in Goldremart Electronics (Longmen) Ltd which in turn owns a manufacturing plant in the PRC, this has already been dealt with earlier in this judgment as well as the difficulties faced by the provisional liquidators, not the least of which was the conflict as to whether the joint venture partner of Goldremart (Longmen) Electronics Ltd was GHL or whether it was Golden Source Electronics Ltd.  Such difficulty was further complicated by the fact that much of the books and records of GHL could not be recovered by the provisional liquidators having been removed to the PRC, and later allegedly seized by PRC customs officials.

102.  Given such difficulties, it is hardly surprising that nothing was recovered in respect of the assets from that joint venture.

103.  I therefore do not accept the submission of the defendant that this showed negligence on the part of the plaintiffs as provisional liquidators.

104.  Thirdly, dealing with the defence put forward that the plaintiffs were negligent in instructing Messrs Lui and Carey as solicitors in the winding-up, or that the plaintiff failed to properly supervise them in the liquidation, I do not accept that submission of the defendant for the following reasons.

105.  The plaintiffs being the provisional liquidators in the winding-up, are qualified accountants by profession.  Messrs Lui and Carey are a reputable firm of solicitors well-known in taking on liquidation and winding-up work.  The fact that the plaintiffs instructed Messrs Lui and Carey as their solicitors in the winding up cannot itself be evidence of negligence on the part of the plaintiff.

106.  Moreover, as qualified accountants, it does not fall upon the plaintiffs to supervise Messrs Lui and Carey in carrying out their work as solicitors since their respective professions are quite different.  There is no suggestion that any improper instructions had been given by the plaintiffs as provisional liquidators to Messrs Lui and Carey which would amount to negligence on the part of the plaintiffs.

107.  If there were specific instances of mishandling of any legal matters by Messrs Lui and Carey in the performance of their work as solicitors in the provisional liquidation, which, even if the same amounted to negligence on the part of Messrs Lui and Carey, they, as professional solicitors would be the ones to answer for such negligence, and not the plaintiffs who had instructed them.

108.  I therefore cannot accept that the plaintiffs should be liable for any mishandling or even negligence by Messrs Lui and Carey.

109.  Turning now to deal with the specific matters alleged, firstly, the misconceived RHKL and GHL applications.

110.  In her Order dated 25 May 1998, Le Pichon J (as she then was) ordered that the provisional liquidators be not entitled to charge any fees for the application to wind up RHKL and GHL.

111.  When Mr Lees was asked in cross-examination whether this Order of Le Pichon J was put before Kwan J at the taxation of the plaintiffs bill, he was not able to give any answer one way or the other.

112.  When further asked by his own counsel in re-examination whether the plaintiffs had charged for such work, that question was never properly answered by him.  Instead the answer which he gave was to the effect that Kwan J did tax off a substantial amount for the plaintiff’s remuneration for the month of May 1998.

113.  In evidence, however, is a letter from Messrs Minter Ellison, the former solicitors of the plaintiffs, dated 6 February 2003 which states that the fees charged by the plaintiffs for “work performed by them in respect to the liquidation of Remoco Hong Kong Limited (“Remoco”) and the proposed liquidation of Goldremart Holdings Limited are in all respects reasonable and in the circumstances should be covered by Dragon’s indemnity.”  That letter goes on to state that “The fees charged by our clients in respect to this work amounted to HK$88,862.”

114.  Given the Order of Le Pichon J, these fees should never have been charged by the plaintiffs as provisional liquidators, and to this extent, will have to be deducted from the claimed amount.

115.  Secondly, complaint is made by the defendant that after Beeson J had approved an application for additional funding for the Ligao JV, and the terms of the facility and funding documentation had already been substantially agreed between Messrs Herbert Smith (the defendant’s solicitors) and Messrs Lui and Carey, the solicitors for the provisional liquidators, Ms Mabel Lui, a partner of Messrs Lui and Carey then advised that the Loan Agreement was in fact incorrect and needed to be completely changed.  This redrafting not only caused significant delay but also incurred substantial extra expenses.  Ultimately the revised Loan Agreement was approved by Barnett J on 8 August 1998 which also incurred extra legal fees since counsel had to be instructed to appear.

116.  Mr Collins-Taylor in his evidence says that such extra work and extra expenses caused were quire unnecessary and would have been avoided if the plaintiff had properly supervised Messrs Lui and Carey in their work.  He further estimated that about 60% of the plaintiffs’ fees for their work was wasted and should be deducted.

117.  As already stated above, I do not accept that the plaintiffs, as provisional liquidators, are under any duty to supervise Messrs Lui and Carey in carrying out their work as solicitors.

118.  Moreover in the absence of any evidence as to what had been revised or changed in the Loan Agreement, it is not possible for me to come to any determination as to whether the advice of Ms Mabel Lui was or was not properly or correctly given.

119.  In the circumstances I cannot accept this as a valid complaint by the defendant.

120.  As for the misconceived business sale application in which Rogers VP disallowed the costs of the appeal in any winding up, it should be noted that Rogers VP (unlike Le Pichon J in her order dated 25 May 1998 relating to the misconceived RHKL and GHL applications) did not specifically make any order that the provisional liquidators be not entitled to charge any fees for that application relating to the business sale.

121.  Furthermore, in the absence of any evidence otherwise, I can only assume that the cost order made by Roger VP disallowing the cots of the appeal in any winding up would have been in the court file relating to HCCW329/1998 and would have been known to Kwan J when she carried out the taxation relating to the winding up of the Company in HCCW329/1998.

122.  Quite apart from the above, I also accept the evidence of Mr Lees that after Le Pichon J had dismissed the initial application relating to the business sale, it was Collins-Taylor of the defendant together with Phoenix, Messrs  Lui and Carey and also the defendant’s solicitors Messrs Herbert Smith who had advocated an appeal to the Court of Appeal and that the counsel ultimately instructed for that appeal was even nominated by Messrs  Herbert Smith.  This is reflected by the documentary evidence and the correspondence.

123.  In the circumstances I do not see that it is now open to the defendant to turn around and complain about the dismissal of the appeal or to lay the blame for that upon the plaintiffs.

124.  I am therefore not prepared to accede to the defendant’s contention on this point.

Defence of Unbillable Work

125.  From about the end of 1998, the practice of the plaintiffs when issuing bills of costs would include items which are “unbillable”.  This practice was adopted by them as a result of the decision of Le Pichon J (as she then was) in the Peregrine case [1998] 2 HKLRD 670.

126.  The complaint by the defendant here is that prior to such practice being adopted by the plaintiff, there is no item in their bills for “unbillable” work.  It is submitted by the defendant that therefore it means that prior to such practice being adopted by the plaintiffs, they have in fact been charging for work which they are not entitled to charge for.

127.  The defendant further submits that by comparing on a percentage basis the overall reduction in the earlier months is significantly less than for the later months where “unbillable” items are included in the bills of the plaintiffs which shows that the plaintiffs did not apply the strict approach advocated by the courts in Peregrine and this was not pointed out to Kwan J on taxation.  The defendant is not bound by such taxation and is obliged (if at all) to indemnify only amounts which are properly billed.

128.  In deciding on this submission by the defendant, I note that the defendant, in making the submission, concedes that such “practice” of including items which are “unbillable” only arose as a result of the decision in the Peregrine case.  Prior to that decision there was no such practice.

129.  The suggestion by the defendant that therefore prior to such practice being adopted by the plaintiffs, they must have been charging for work which they were not entitled to charge for is refuted by the evidence of Lees that although there was no such “practice” of including an item of “unbillable” work, those work were not charged for.  It was simply that the “unbillable” work was not itemized.

130.  In any event, the short answer to the defendant’s submission on this point must be the fact that the plaintiff’s bill had been taxed by the Companies Judge.

131.  If there was anything improper about the plaintiff’s bill, that would have been dealt with by the Companies judge on taxation.

132.  Accordingly, in my view, this point is a non-starter and I do not accept any of the submission by the defendant on this defence.

Other matters raised in submission by the defendant

133.  It was pleaded in paragraph 16 of Amended Defence that the sum of HK$819,997.78 had been advanced to the plaintiff by Phoenix on account of the plaintiffs’ fees and disbursements (including Messrs Lui and Carey’s costs) and that this amount had been paid by the plaintiffs to Messrs Lui and Carey.

134.  It is now contended by the defendant that following agreement between the plaintiff and Messrs Lui and Carey whereby Messrs Lui and Carey agreed that the plaintiff were under no liability to Messrs Lui and Carey for their costs and disbursements relating to the provisional liquidation of the Company, the plaintiff should have recovered this amount from Messrs Lui and Carey and which should be set off against the plaintiff’s claim against the defendant.

135.  I am unable to accept that contention by the defendant for the following reasons.

136.  Firstly, since it was pleaded in paragraph 16 of the Amended Defence that this amount of HK$819,997.78 had been advanced to the plaintiffs by Phoenix on account of the plaintiff’s fees and disbursements (including Messrs Lui and Carey’s costs), the plaintiffs cannot be faulted for paying this amount over to Messrs Lui and Carey as being fees owed to Messrs Lui and Carey in the provisional liquidation.

137.  Secondly, this amount having come from Phoenix, and not from the defendant, there is no proper basis for the defendant to claim a set off in respect of that amount.

138.  I therefore do not find any merit in the contention by the defendant on this point.

139.  It was also submitted by the defendant that an explanation ought to be given by the plaintiffs for the difference in the figure (HK$696,622.36 amended to HK$528,343.31) as being the amount already received by the plaintiff.  These two figures appear in the Schedule attached to the plaintiff’s Re-amended Statement of Claim where the original figure of $696,622.36 has been amended to $528,343.31 as being payment received by the plaintiffs.

140.  In fact, the explanation sought by the defendant had been given by the plaintiffs and is contained in paragraph 49 of the witness statement of John Robert Lees in which it was stated that the larger of the two sums had been applied against outstanding disbursements of HK$168,279.11 thus resulting in the smaller of the two figures which would be applied against outstanding fees.  Mr Lees had adopted his witness statement as his evidence at the trial.

141.  If further explanation was sought on what was stated in paragraph 49 of that witness statement, Mr Lees could have been cross-examined on that.

142.  I do not find any merit in this point taken by the defendant in the way that it had been taken.

Application for fresh evidence after trial

143.  The trial of this matter ended on 16 July 2008 and judgment in the matter was reserved.

144.  Before judgment could be given, on 24 October 2008, the defendant took out a Summons seeking to adduce fresh evidence.  That application was opposed by the plaintiff and ultimately the application had to be argued before me on 27 November 2008.

145.  The fresh evidence which was sought to be adduced is a judgment of United States District Judge Crotty dated 3 October 2008.  Although there was also a witness statement of Collins-Taylor annexed to the Summons taken out by the defendant, that witness statement does no more than refer to that part of the proceedings at trial in which the defendant says that the judgment of District Judge Crotty is made relevant.

146.  The matter arose in this way.

147.  When Collins-Taylor gave evidence, he made reference in chief to a claim being brought against him in New York by one or more of the Noteholders.  In relation to those proceedings brought against him in New York, Collins-Taylor said that they had been substantially dismissed in a December 2004 judgment.

148.  Collins-Taylor was then cross-examined by Mr Barlow for the plaintiff who took issue with Collins-Taylor words “substantially dismissed” in describing the New York proceedings.

149.  An application was made by Mr Barlow for the court to order Collins-Taylor to produce a copy of the December 2004 judgment to substantiate what he said of those proceedings.  That application of Mr Barlow was not acceded to by me for reasons already given, which, in essence was that what was said by Collins-Taylor and those questions asked of him in cross-examination relating to the December 2004 judgment in the New York courts go only to credibility and not to any substantive issue in the present case.

150.  Ultimately Mr Barlow was able to obtain from the internet a copy of the December 2004 judgment referred to by Collins-Taylor in his evidence.

151.  In final submission, one of the matters submitted by Mr Barlow was that Collins-Taylor had not been truthful with the court when he said that the New York proceedings had been substantially dismissed by the December 2004 judgment when that judgment showed only a part of the claim had been dismissed by the rest was still to be determined.

152.  The present application by the defendant seek to show that by the judgment of District Judge Crotty given in October 2008, all the outstanding matters against Collins-Taylor has now been dismissed in the New York proceedings.

153.  I am unable to accede to the application of the defendant for fresh evidence for the following reasons.

154.  Firstly, that judgment of District Judge Crotty has no bearing on any substantive issue in this case.  If at all it goes only to credibility of Collins-Taylor.

155.  Secondly, even in so far as credibility goes, I have to agree with Mr Barlow that where credibility of Collins-Taylor is concerned, the answers given by him under cross-examination were given relating to the December 2004 judgment.  Those answers and therefore his credibility cannot be affected ex post facto by a subsequent judgment given in October 2008.

156.  For the above reasons, the defendant’s application for fresh evidence to be adduced after trial is refused.

Overview of credibility on defences raised

157.  Quite apart from the specifics of each of the defence raised by the defendant as dealt with above, I have also taken a general view of the credibility of the evidence from the defendant pertaining to all the defences raised in the matter.

158.  Not only is it incredible that the defendant is able to raise almost every conceivable defence possible in this matter in the way that they have been put forward, I also find it incredible that when the defendant issued its call letter on 10 February 1999 demanding payment from the counter-indemnifiers for the defendant’s liability for the provisional liquidator’s fees and disbursements up to the end of October 1998 and also when they issued the second call letter on 25 October 2002 again demanding payment from the counter-indemnifiers for the defendant’s liability to the provisional liquidators for their costs and expenses up to the conclusion of the provisional liquidation, there was not the slightest suggestion of any of the matters now given in evidence by Collins-Taylor relating to any of the defence raised.

159.  Moreover, the defendant was all along being advised by their legal advisers, Messrs Herbert Smith in every step of the way during the provisional liquidation and that the defendant, together with the other Noteholders, were the driving force behind the provisional liquidators in all the steps taken during the provisional liquidation to the extent that if those steps had proven successful, it would have been beneficial to all of the Noteholders including the defendant in the liquidation process.

160.  For the defendant now to turn around and put all the blame for the failed liquidation as well as the remuneration of the provisional liquidators and other expenses incurred on the shoulders of the provisional liquidators I find such evidence to be incredible and unbelievable.

Conclusion

161.  In the circumstances there will be judgment in favour of the plaintiff against the defendant for the sum of HK$4,952,869.25 being the amount claimed but reduced by HK$88,862.00 as per paragraph 113 above.

162.  Interest on the judgment sum will be awarded at 1% over prime rate from time to time prevailing from the date of the Writ until date of judgment and thereafter on the judgment sum at judgment rate from time to time prevailing until payment.

Costs

163.  There will be a costs order nisi that costs of this action be paid by the defendant to the plaintiff, to be taxed if not agreed, and such costs to include the costs of the application and hearing for fresh evidence by the defendant.