THE OFFICIAL RECEIVER v. CHAN HING TO

CACV 222/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 222 OF 2007

(ON APPEAL FROM HCMP 925 OF 2005)

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J U D G M E N T

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Hon Cheung JA :

Appeal against disqualification from directorship

1. Mr. Chan Hing To (‘Mr. Chan’) was a former director of 18 companies which had been wound up between November 1999 and June 2001.  The 18 companies were under the control of Mr. Chan and they were used by him to operate a restaurant business known as the Farm House Restaurant which at one time had over 40 outlets in Hong Kong. 

2. The dates of presentation of the petition winding up and the dates of winding up of the 18 companies are as follows :

	Name of Company and Winding-up No.	Date of Presentation of the Petition	Date of Winding Up Order
1.	Citrend Services Limited 世璋服務有限公司 HCCW 417/2001	8 May 2001	2 June 2001
2.	Leader Team Limited 凌博有限公司 HCCW 238/2001	13 March 2001	16 May 2001
3.	Hero Good International Limited 致雄國際有限公司 HCCW 49/2001	15 January 2001	11 April 2001
4.	Telefortune Development Limited 遠福發展有限公司 HCCW 555/2000	22 June 2000	23 August 2000
5.	Hariford Development Limited 海福發展有限公司 HCCW 553/2000	22 June 2000	23 August 2000
6.	Top Ease Development Limited 高意發展有限公司 HCCW 481/2000	31 May 2000	2 August 2000
7.	Henmy Development Limited 享明發展有限公司 HCCW 480/2000	31 May 2000	2 August 2000
8.	Harvest Link Investment Limited 滿寧投資有限公司 HCCW 479/2000	31 May 2000	2 August 2000
9.	Take Ring Development Limited 德年發展有限公司 HCCW 478/2000	31 May 2000	2 August 2000
10.	Stable Gain Development Limited 穩溢發展有限公司 HCCW 477/2000	31 May 2000	2 August 2000
11.	Harvest Field Investment Limited 頤城投資有限公司 HCCW 476/2000	31 May 2000	2 August 2000
12.	Top Key Development Limited 高啟發展有限公司 HCCW 475/2000	31 May 2000	2 August 2000
13.	Sincere Best Development Limited 冠善發展有限公司 HCCW 473/2000	31 May 2000	2 August 2000
14.	Harvest Way Holdings Limited 豐威集團有限公司 HCCW 471/2000	31 May 2000	2 August 2000
15.	Busy Team Development Limited 常添發展有限公司 HCCW 142/2000	14 February 2000	5 April 2000
16.	Sure Time Development Limited 雄嘉發展有限公司 HCCW 135/2000	12 February 2000	5 April 2000
17.	The Farm House Restaurant Limited 農場餐廳有限公司 HCCW 1154/1999	28 December 1999	13 March 2000
18.	Source Wood Limited 源和有限公司 HCCW 801/1999	7 September 1999	24 November 1999

3. Mr. Chan himself was declared bankrupt on 14 March 2001 but was discharged from bankruptcy on 14 March 2005.

4. On 5 May 2005 the Official Receiver applied under section 168I(1) of the Companies Ordinance (‘the Ordinance’)(Cap. 32) for, among other things, an order to disqualify Mr. Chan from acting as a director of a company under Section 168H of the Ordinance.

5. Master K W Lung granted the order on 25 January 2006 and disqualified Mr. Chan from being, among other things, a director for a period of four years from 15 February 2006.

6. Mr. Chan appealed to Chung J who affirmed the decision of the Master and dismissed the appeal.

7. Mr. Chan now appeals to this Court.

Basis of disqualification

8. The Official Receiver relied on the following misconduct by Mr. Chan in support of the application to disqualify him, namely

(1)   Failing to submit statements of affair to the Official Receiver in breach of section 190 of the Ordinance in respect of ten companies;

(2)   Failing to keep books and accounts in breach of section 121 in respect of fifteen companies;

(3)   Failing to keep proper books and records for two years before the winding up of fifteen companies in breach of section 274;

(4)   Failing to lay out profit and loss account and balance sheets in annual general meetings in respect of 18 companies;

(5)   Non-cooperation with the Official Receiver and breach of duties in respect of four companies;

(6)   Non-compliance with statutory filing obligation in respect of three companies;

(7)   Engaged in transactions liable to be set aside under section 182 in respect of one of the companies known as Farm House Restaurant Ltd (‘Farm House’); and

(8)   Misuse of bank accounts in respect of Farm House.

9. The Master found that the allegations were all proved.  In fact Mr. Chan did not dispute the allegation contained in Items (1), (2), (3) and (6).  It is not necessary to go into details on these misconducts save to refer to a few of them. 

10.    In respect of breach of section 121 for failing to keep books and accounts, Mr. Chan was convicted under 15 summonses issued under that section.  He was also convicted under 15 summonses under section 274.  He was fined $100 for each of the summons.

11.    In respect of engaging in transactions that were liable to be set aside, Mr. Chan admitted that he had issued cheques of Farm House drawn on the accounts of three banks after he had knowledge of the service of petition for the winding up of Farm House.  Mr. Chan was the sole signatory of the cheques.  The amounts involved in respect of the three banks were $460,974.20, $797,088.07 and $985,706.88 respectively.  The total amount was about $2.2 million.  These cheques wee void under section 182.  The explanation given by Mr. Chan was that he issued these cheques in order to save the restaurant business and not to deceive any one.  The Master was of the view that the real issue was whether these were voidable transactions and he found that they were and Mr. Chan’s explanation did not provide a lawful reason for his action.

12.    In respect of misuse of accounts, Mr. Chan had issued 48 cheques drawn on two bank accounts of Farm House (ten cheques on one account and thirty-eight cheques on the other) totaling $1.3 million.  The cheques were dishonoured on presentation.  The Official Receiver said Mr. Chan had issued the cheques without due regard to the likelihood of their being dishonoured on presentation.

13.    Mr. Chan said that they were post-dated cheques.  When he issued them he had no knowledge of the sudden change of the financial position of the restaurant business which was severely damaged by the Asian financial crisis that affected Hong Kong.  This could not be a proper excuse because Mr. Chan must have realized at some stage that the cheques could not be met when they were to be presented on their due dates.

Section 168H(1) of the Ordinance

14.    Section 168H(1) is as follows :

‘ The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied ─

(a)  that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b) that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company’  (emphasis supplied).’

15.    Section 168K(1) refers to the matters set out in Parts I and II of the Fifteenth Schedule as those that the Court shall have regard in determining the unfitness of the person.

The appeal

16.    Mr. Chan no longer challenges the order to disqualify him.  His appeal is focused on the length of the disqualification.  He emphasized on the delay by the Official Receiver in applying for disqualification and the effect of the Asian financial crisis on his business.  He also asked for no order as to costs of the application because he was unable to pay for the Official Receiver’s costs.  He would face another possible bankruptcy if he was ordered to pay the costs.

Principles on disqualification

17.    The following are the relevant principles relating to application to disqualify a person to be a director as can be gathered from authorities such as Sevenoaks Stationery (Retail) Ltd. [1991] Ch. 164, Re Lo-Line Electric Motors Ltd [1988] BCLC 698 and Secretary of State for Trade & Industry v Griffiths & Ors. Re Westmid Packing Services Ltd (No. 3) [1998] BCC 836.  These cases have been applied in Hong Kong cases such as In the Matter of Peregrine Investments Holdings Ltd (In Liquidation) (HCMP 112/2002, Decision of Kwan J dated 8/10/2004), 破產管理署署長v. 梁海，梁楊麗玲 (unreported, HCMP 917/2003， Decision of Kwan J dated 20.7.2006) and In the Matter of Chark Fung Securities Company Limited (In Liquidation) (HCMP 3294/2004, Decision of Barma J dated 5/12/2006).

1) Rationale behind disqualification

18.    The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others.  Therefore, the power is not fundamentally penal.  But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual.  It follows that the rights of the individual must be fully protected.  Ordinary commercial misjudgment is in itself not sufficient to justify disqualification.  In the normal case, the conduct complained of must display a lack of commercial probity, or an extreme case of gross negligence or total incompetence.

19. It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realize that these are inescapable personal responsibilities.

2) Delay in application for disqualification

20. Often a considerable period of time lapsed between the conduct complained of, its discovery and the disqualification proceedings actually coming to court.  One result of delay when it does occur is that there are occasions when disqualification must be ordered even though, by reason of the director’s recognition of his previous failings and the way he has conducted himself since the conduct complained of, he is in fact no longer a danger to the public at all.  In such cases it is no longer necessary for the director to be kept ‘off the road’ for the protection of the public but other factors come into play in the wider interests of protecting the public, i.e. a deterrent element in relation to the director himself and a deterrent element as far as other directors are concerned.

3) Evidence

21. The Court should adopt a commonsense, practical and flexible approach to case management and admit evidence which is of probative value in considering whether

1.   The director is unfit within the meaning of the Ordinance.

2.   If so, the length of the qualification.

4) Approach to length of disqualification

22. The decision to disqualify is not a discretion but the period of disqualification within the statutory period of minimum one year and maximum of 15 years under section 168H(4) is a matter of discretion.  It must reflect the gravity of the offence.  It must contain deterrent elements.

23. The approach is to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for mitigation factors.

5) Three categories of length of disqualification

24. Regard may be made to the three broad categories of length of disqualification :

(1) The top bracket of disqualification for periods over ten years should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.

(2) The minimum bracket of two to five years’ disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.

(3) The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket.

6) Relevant factors

25. There is no precise or exhaustive test but the following are relevant :

(1)    Is the director likely to offend again?

(2)    His general ability.

(3)    His conduct as a director.

(4)    His age and state of health.

(5)    The length of time he has been in jeopardy.

(6)    Whether he has admitted that his conduct renders him unfit to be a director.

(7)    The length of disqualification of his co-directors.

(7) Citation of cases

26. Each case has to be decided on its own facts.  So long as a period of disqualification is justified under one of the three broad categories of tariff, the citation of other cases on the period of disqualification will, generally speaking, be unnecessary.

Appeal on discretion

27. Like all appeals on the exercise of discretion, the Court of Appeal will only interfere when it is shown that the discretion was wrongly exercised. 

Time limit to bring the application

28. There is a preliminary matter that needs to be addressed first.  It is about the time limit to bring the application.  Under section 168I(2)(a) of the Ordinance, except with the leave of the Court, the application to disqualify a director must be made before the expiry of the four-year period starting from the commencement of the winding up of the company.  By virtue of section 184(2), the commencement or the winding up is deemed to have commenced on the date of presentation of the winding up petition.

29. The Master held that all the applications for the 18 companies were brought within time.

30. This is, however, not the case.  The position is that, (as accepted by Ms Sara Tong, counsel for the Official Receiver who only appeared in the appeal) there was only one application made in respect of one company namely, Citrend Services Limited (‘Citrend’).  The application was made within the four year period.  No other application was made in respect of the remaining 17 companies.  In respect of Citrend, the misconducts by Mr. Chan were in respect of Items (1), (2), (3), (4) and (6).

31. It is, of course, true that under section 168H(1)(b), the Court, apart from taking into account the director’s conduct in the insolvent company, can take into account his conduct as a director ‘of any other company or companies’.  On this basis the Court could take into account Mr. Chan’s conducts in the other 17 companies even though the Official Receiver did not bring any section 168I application in respect of these companies.  For a similar view on the comparable section 6 of the United Kingdom Company Directors Disqualification Act 1986 upon which section 168I was based, see Mithani : Directors’ Disqualification at paragraphs [360]-[370].

The proper approach

32. This, however, raises a fundamental question as to the approach by the Master.  Although the title of the proceedings only identified Citrend, both the First Report of the Official Receiver in support of the application and the Official Receiver’s submission before the Master had not made clear that Citrend was used as the ‘lead’ case.  Instead, reading the judgment of the Master (and for that matter Chung J) the Court was asked to consider the application as if the application was brought in respect of all 18 companies.

33. Even if the Court is entitled to consider the conduct of the director in the other companies there must be a difference in the weight to be attached to those conducts.  By the time the Citrend application was lodged, more than four years had elapsed since the commencement date of the winding up of these companies.  If the Official Receiver wished to apply in respect of these companies, he must obtain leave of the Court who has to consider matters such as length of delay, whether the delay is justified and merits of the application.  If the Court refuses leave, the conduct in these companies will not be considered as the basis for disqualification.  Yet by simply using one company as a ‘lead’ case, the Official Receiver could without obtaining permission from the Court rely on Mr. Chan’s conduct in these companies.  On this ground alone, when the Court considers the issue of disqualification both in terms of the decision to disqualify and its length, it should ensure that there is a difference in the weight to be attached to the conducts in companies where the time limit had expired.  In my view, lesser weight should be attached to those conducts.

34. In the normal course of events one would expect the substantial allegations against the director would be found in the ‘lead’ case.  But this is not the situation here.  The substantial allegations were found in the other 17 companies.

35. In this case the most serious allegations of Mr. Chan’s misconduct were in respect of Farm House.  The time limit to lodge the section 168I application expired on 27 December 2003.  This is nearly one and a half years before the present application on 5 May 2005.  For the 13 companies whose petition was presented in February, May and June 2000 respectively, the time limit had also expired about one year before the present application.

36. Due to no fault of the Master, no differentiation was made by him on this issue.  This is, with respect, a wrong approach.  Because of this, my view is that this Court is entitled to exercise the discretion afresh on the length of the disqualification which is the only issue before the Court.

Mr. Chan’s ability and conduct and effect of financial crisis

37. Mr. Chan is nearly 50 years of age.  He was obviously a person of ability.  He was a very enterprising person who like many of the entrepreneurs in Hong Kong built up a thriving business from scratch.  He was affected by the Asian financial crises which hit the post 1997 business environment of Hong Kong.  However, at the same time he clearly had misconducted himself as a director.  The overall misconduct of Mr. Chan was serious.  His misconduct not only affected the internal management of the companies but also prejudiced creditors who were unable to recover their money from the companies. 

38. However, by the time of the present application in May 2005, many of the more serious allegations had already taken place more than five years ago.  To his credit he recognized his wrongdoing.  In Court he expressed his regret in not being able to repay his creditors.  He is determined and has made real efforts in starting afresh.  He has also done voluntary work for the community after the failure of his business.  With this experience it is unlikely that he would offend again.  These are mitigating factors.

Length of disqualification

39. In my view public interest is served by a disqualification period of three and a half years.

Conclusion

40. I will accordingly allow the appeal and substitute the length of disqualification to that of three and a half years starting from 15 February 2006.

Costs

41. I will make no order as to costs in respect of the costs below and the appeal.

Hon Yuen JA :

42. I agree.

Hon Poon J :

43. I agree.