THE JOINT AND SEVERAL LIQUIDATORS OF THE NEW CHINA HONG KONG GROUP LTD AND OTHERS v. LAM KING PUI KENNETH

HCMP 2180/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2180 OF 2005

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D E C I S I O N

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1.  This is an application by the liquidators of The New China Hong Kong Group Limited (“NCHK Group”), The New China Hong Kong Capital Limited, and The New China Hong Kong Finance Limited (“NCHK Finance”) (collectively “the Companies”) under section 221 of the Companies Ordinance, Cap. 32.  They seek an order against Lam King Pui Kenneth (“the respondent”) that he be orally examined and that he should produce documents relating to the Companies in his custody, control or power.

2.  The respondent was employed by Ernst & Young from July 1989 to March 1997.  Ernst & Young were the auditors of the Companies at all times.  Between July 1994 and March 1997, the respondent held the position of audit manager in the Audit & Advisory group of Ernst & Young.  He has no further connection with Ernst & Young after he left their employment in March 1997.

3.  The respondent has opposed this application in its entirety.

4.  I decline to order the respondent to produce documents in his possession, power or control.  He has stated on oath that he does not have in his custody, control or power any of the documents sought and that he did not take away any documents relating to the Companies when he left Ernst & Young in March 1997.  It seems to me pointless to make an order for production against him.

5.  I turn to the application to examine the respondent orally.

6.  The liquidators wish to investigate a transaction which was described as a triangular debt arrangement in the audit papers of Ernst & Young.  The companies involved in this debt arrangement were Century City Holdings Limited (“CCH”), Regal Hotels Limited (“RH”), NCHK Group, NCHK Finance and Topview Limited (“Topview”).  According to the audit papers, CCH and RH lent approximately HK$493 million to NCHK Group, that sum or thereabouts was on lent to NCHK Finance which in turn advanced it to Topview, to fund the acquisition of shares in Paliburg Holdings Limited and RH.  RH is owned and/or controlled by CCH.

7.  The liquidators have identified these 5 documents in the audit papers which disclosed the aforesaid debt arrangement:

(1) the Ernst & Young schedule of NCHK Group’s investment in subsidiaries as at 1995;

(2) the 1995 audit explanatory notes, stating that a triangular debt arrangement existed and that the auditors “do not consider there exists any recoverability problem”;

(3) Ernst & Young’s worksheet dated September 1996, stating that “per discussion with clients the loans were back to back loans which would not give rise to any recoverability problems”;

(4) Ernst & Young’s statement headed “Outstanding accounts receivable of NCHK Finance as at 31 December 1995”, which showed connection between the debts of Topview and NCHK Group, and stating that funding obtained from NCHK Group was wholly used to finance Topview; and

(5) Ernst & Young’s worksheet for the 1996 audit, stating that “back to back loan arrangement of Topview, Regal and PDL was made between the parties and no recoverability problem existed”.

8.  According to the liquidators, the respondent was employed by Ernst & Young as the audit manager for the 1995 audit of the Companies.  The liquidators believe the respondent to have been the author of all the Ernst & Young documentation referred to in (1) to (4) above, which were signed “Ken”.

9.  Hence, the liquidators say the respondent should have important information necessary to prove the debt arrangement.  They want to know from the respondent the basis for the respondent’s belief of the relationship between Topview and CCH/RH; specifically what he was told by the management, by whom and when; what documents were provided by the management, what documents were inspected; what audit work was carried out, what analysis was performed and what (if any) difficulties were encountered.

10.  I think these are legitimate areas of inquiry to be pursued by the liquidators regarding the debt arrangement.

11.  Subsequent to the first supporting affidavit of the liquidators, the respondent’s solicitors wrote to the liquidators’ solicitors complaining that the liquidators have failed to mention in that affidavit 3 relevant matters:

(1) the liquidators have commenced proceedings against Ernst & Young in HCCL No. 41 of 2004 for professional negligence in the audit of the Companies;

(2) the liquidators have served the writ on Ernst & Young; and

(3) the liquidators have determined that a claim exists against Ernst & Young.

12.  The respondent’s solicitors contended that the application against the respondent under section 221 is motivated by a desire to gain advantage in the existing proceedings against Ernst & Young and therefore an abuse of process.

13.  In the liquidators’ affidavit in reply, they sought to address this complaint.  They explained why they had not disclosed the proceedings against Ernst & Young, as they are expressly prohibited from doing so under the confidentiality agreement reached with Ernst & Young on 20 July 2005.  The respondent’s solicitors knew about this as they are also the solicitors for Ernst & Young.

14.  Further, the liquidators say that the debt arrangement impacts upon other aspects of the liquidations other than the claims against Ernst & Young.  The liquidators are considering whether to reject the proof of debt submitted by CCH regarding the loan from CCH and RH to NCHK Group.  They say this was the “primary reason” for this application, as the debt arrangement would appear to lack genuine substance and the debts owed by NCHK Group could possibly be set off against the debt owed by Topview to NCHK Finance.

15.  There was subsequent correspondence between the solicitors after this affidavit in reply.  I do not propose to go into the letters in detail.

16.  The respondent has advanced these reasons why an order for examination should not be made against him.

17.  Firstly, he has stated on oath he has no recollection of the matters upon which the liquidators would wish to carry out inquiries, so an oral examination would be unnecessary and nothing meaningful can be gained by the exercise.

18.  Miss Linda Chan submitted for the liquidators that this assertion is unbelievable, given the magnitude (the debt was HK$493 million) and extraordinary nature of the arrangement (no other triangular debt arrangement or back to back loan arrangement had been made by the Companies).  Further, even if the respondent has no present recollection, this does not mean he would not be able to give useful information to the liquidators, after he has been shown the full set of working papers to refresh his memory.

19.  Even before the respondent had seen any documents, he had written to the liquidators’ solicitors in June 2005 stating that he “cannot recall any of the audit works of the NCHKG which was almost 10 years ago”.  The summons was then issued in October 2005 and the respondent served with the supporting evidence.  In his affirmation in opposition of one and a half pages, the respondent dealt with what he knew and remembered about the audit work in paragraphs 6 and 7, having, as he said, reviewed the audit work papers exhibited by the liquidators.

20.  I think the liquidators are justified not to accept the respondent’s assertions of little recollection at face value, having regard to the cursory and perfunctory manner in which the respondent chose to deal with his involvement as the audit manager of the Companies in the 1995 audit.  I am sceptical if the respondent has made any or any genuine effort to refresh his memory with the documents exhibited.  I am not persuaded that an oral examination would serve no useful purpose here.

21.  Secondly, the respondent’s counsel Mr Maurellet submitted that it is not shown that any input from the respondent would be relevant to the “primary reason” for the application according to the liquidators’ affidavit in reply, which is for the adjudication of the proof of debt of CCH regarding the loan made by CCH and RH to NCHK Group.  Hence, reasonable requirement for the oral examination has not been made out.

22.  Miss Chan submitted that it is “self evident” if the loan due by NCHK Group to CCH/RH was a back to back loan, it is only right that the proof of debt of CCH should be rejected.

23.  Mr Maurellet submitted it is not apparent that the proof of debt of CCH should be rejected, if the liquidators should take the view there was a back to back loan.

24.  This is not the time or place to resolve this.

25.  More pertinent to the present application is that the liquidators should make inquiry if there was indeed a back to back loan.  This seems relevant to the adjudication of the proof of debt.  The liquidators would require assistance to investigate the background and basis of the debt arrangement, to satisfy themselves that CCH is entitled to lodge the proof of debt.

26.  I do not think it material that other inquiries that the liquidators may wish to pursue may not be strictly relevant to the adjudication of the proof of debt.

27.  I would also say this, the inquiries the liquidators would wish to pursue with the respondent could well be relevant to the action for professional negligence against Ernst & Young.  That alone does not make the application oppressive.  I do not think this is a case of dotting the i-s and crossing the t-s.  The statement of claim has not even been served in that action.

28.  For the above reasons, I make an order for oral examination against the respondent.  I order that the examination of the respondent is to be conducted before a Master of the High Court and that a date is to be fixed for the hearing with 3 hours reserved.  As for the costs of this application, I see no reason why costs should not follow the event, as the liquidators have been substantially successful in this application.